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Here’s the entire text of the Q&A from Xcel Energy’s (ticker: XEL) Q3 2005 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Question-and-Answer Session

Operator

Operator Instructions Your first question comes from the line of Daniele Seitz with Maxcor Financial.

A - Ben Fowke

Hi Daniele.

Q - Daniele Seitz

Hi. I was just was wondering, you obviously are anticipating not so great earnings in the fourth quarter. Is this mostly stemming from how your O & M or there are other issues like tax rates and things like that?

A - Ben Fowke

Well, part of it is when you compare it to where we were in the fourth quarter of 2004, we have recognized $0.08 in tax benefits. We don't anticipate doing that in this last quarter of 2005. O & M trends will roughly continue at the levels we have seen. Short-term wholesale margins will be less than what we saw last year. All of those things contribute to our estimate that will be in the lower half of earnings guidance range, Daniele.

Q - Daniele Seitz

Okay. Just one quick one, you mentioned that you are going to offer a sharing mechanism for wholesale sales. Could you tell us what is a normal contribution to earnings for wholesale sales? That you are going to be offering as sharing?

A - Ben Fowke

Are you asking what wholesale margins contribute to earnings this year?

Q - Daniele Seitz

Yes. And, well, since it only relates to one jurisdiction, I thought that's what you are going to be offering.

A - Ben Fowke

Well, we have the overall earnings in the press release, Daniele, and for the full nine months, it's roughly around $60 million. The lion's share of that is related to the NSP territories. So the sharing mechanism will greatly affect the lion's share of those margins.

Operator

Your next question comes from the line of Ashar Khan with SAC Capital.

Q - Ashar Khan

Good morning, Ben.

A - Ben Fowke

Hi, Ashar.

Q - Ashar Khan

Ben, this is in reference to '06 and if you can just help me out with my analysis, I might have something, if there's a rationale behind it. As I look at it, in your assumptions, we are expecting a shortfall from the short-term wholesale is 15 to 30, so if I take the midpoint, $22 million or so. And then $40 million in higher depreciation if I'm right, if you take out the $60 million. So that's about $62 million. And then there's about $10 million to $15 million of higher interest expense that gets to you $75 million and then, of course, negate the AFUDC by 10, so back to kind of like the 60, 65. So if I'm saying to myself and I know Merc added and all that but if I'm saying to myself that the rate cases have to contribute something in the $80 million to $90 million dollar revenue line item, for next year, all the rate cases combined, am I in the right ballpark, or am I missing something? For the earnings to show up higher. I just wanted to see if I'm doing something wrong in my math from what you have provided.

A - Ben Fowke

Well, the cost increases you talked about, many of those costs will be included. The increases will be included in the rate case filings, I think you picked up on that. I think Ashar, at this point I don't want to handicap what is in our guidance range. I don't think that's probably what we should be doing while we're in the middle of rate cases. I suggest that what you do is you should look at where we have been earning on we have that in some of our investors relations material and one of the appendixes, and just draw your own conclusions based upon the ROEs that we are requesting.

Operator

Operator Instructions Your next question is from the line of Paul Patterson with Glenrock Associates.

Q - Paul Patterson

Hi, guys. Just a quick question on taxes. What is your expected effective tax rate for 2006, and I'm sorry if I somehow forgotten about this research tax pay if you could just explain how much that is and what that is related to?

A - Ben Fowke

Well, to answer the first part of your question, the assumption that the effective tax rate will be 27% to 29%, Paul, the research and the experimentation tax credits are credits based upon a portion of the capital you spend on qualified capital expenditures. It can range from planned improvements to in some cases, even software. It really just depends, but it's a fairly elaborate process to quantify the amount you spent and then you get a piece of that through the crediting process. Those research and experimentation credits that we picked up in the third quarter equalled about $3.3 million, and they related to the '03 and '04 calendar years.

Operator

Your next question comes from the line of Elizabeth Parrella with Merrill Lynch.

Q - Elizabeth Parrella

Yes, thank you. Just continuing the discussion on the tax credits, you also mentioned the NOL carry backs.

A - Ben Fowke

Yes.

Q - Elizabeth Parrella

Does that account for the other, I guess it would be $7.7 million? Could you go into that a little bit?

A - Ben Fowke

It accounts for, I think the exact number, Elizabeth, is $6.6 million and that, typically, you could only carry back losses two years, but there are some exclusions for expenditures made that are nuclear related that allow to you carry it back up to ten years. We did the work this year and we were able to take the deduction and hence the $6.6 million I mentioned.

Q - Elizabeth Parrella

Okay. And just a quick follow-up on that. Or, did all the tax credits, are they all at the utility? You mentioned there's this benefit or timing difference at the parent, which accounted for the positive swing at the parent. Is any of it showing up at the parent company or is that something else that's going on there.

A - Ben Fowke

No, I think most of that, I think all of it, of the $0.03 that I referred to is at the operating utilities. What's happening at the holding company is the interim tax accounting that we did it to make sure that our effective tax rate for the quarter and the nine months approximates where we think we will be for the full year.

Operator

Your next question is from the line of David Frank with Pequot Capital.

Q - David Frank

Good morning. Ben, could you remind me again, if the FASB rule is implemented beyond certain tax issues, if it was implemented today, would you meet the probability threshold, or is it likely that you would not meet the probability threshold?

A - Ben Fowke

Well, I mean, again, I don't know what's, where the FASB is ultimately going to come out because of the amount of opposition we saw but, if we were talking about this last quarter, I would have told you that it was unlikely that we would meet the FASB standard as the exposure draft discussed, and what that meant, David, is, we would not be able to record tax benefits going forward and that you would have to reverse out the benefits you recognized previously. You basically need a should opinion from a law firm, in our understanding, of what the exposure draft suggested, and you probably know, getting a should opinion from a law firm is extremely difficult. But, again, there was more than 100, I think the number was like 110 comments on this exposure draft. They were almost all opposing the exposure draft. I think we'll see some significant changes, but we'll have to wait and see.

Operator

You have a follow-up question from the line of Ashar Khan with SAC Capital.

Q - Ashar Khan

Ben, why the Merc, if I'm looking at your new numbers, the significant changes been in the Merck spending that's going down '06 versus your previous number at least from the Merrill Lynch conference page I have. Can you tell me why that difference occurred is happening?

A - Richard Kolkmann

Some of it is timing, Ashar. I would have to look at some of the details. We were able to actually buy some secondary markets and that sort of thing that might have helped that. But the bottom line is most of that will just be timing.

Operator

Your next question is from the line of John Hanson with Imperium.

Q - John Hanson

Good morning.

A - Ben Fowke

Hi.

Q - John Hanson

Yes. Could you comment a bit about the coal rail supply situation as you are going into winter and the wholesale power market situation out your way?

A - Ben Fowke

Let me answer the first part of your question. Since May, and that's really when these rail problems surfaced for us, we have been receiving our nominations probably at the 80% to 85% level. So we have been mitigating the reduced deliveries within our operating plants, switching fuels where possible, doing some other things to make sure our coal piles are acceptable levels. Those levels are currently across the system, they average in the low to mid-20s. We ultimately would like to see that being the 30-day level. Now, as you go into the fall, we typically take down some of our coal plants for routine maintenance. That should give us an opportunity to increase those coal levels to the 30-day level where we typically like them to be. But we're going to keep watching it. It can change week-to-week, and overall, it's been at that 80% to 85% delivery level, as I mentioned. The second part of your question was wholesale margins? Are you still there, John?

Operator

Operator Instructions

Q - John Hanson

It has to do with the power prices and the given coal and gas situation, just what is the general markets on power that may be selling into that.

A - Ben Fowke

I think, you know the notion on the amount of power prices has increased this year. We actually think it will increase next year, but we have seen a compression on the sparks spreads which is probably more important. We see, again, we make most of our margins in the Miso region. And we have seen with the new market rules, the evolving cost allocations, with the compressed spark spreads we see a decline in margins next year and for the balance of this year. Does that answer your question, John?

Operator

Your next question comes from the line of Reza Hatefi with Zimmer Lucas Partners.

A - Ben Fowke

Hi, Reza.

Q - Reza Hatefi

Good morning, how are you? Could you expand a little bit on your O & M increases? I guess you are guiding 3% to 4%. I missed what the reasons were and I guess you kind of mentioned that they are going to, these increases are going to be somewhat offset by the coming rate cases and what you are going to ask for them. I guess one concern I have is how would it be effective with the timing of the test years and so forth. I guess Minnesota is forward test year and Colorado has it get historic, but that will be in '06. So in effect you would kind of take care of the high increases you will see in '06.

A - Ben Fowke

Well, you are right, Minnesota is a forward test year. North Dakota is a forward test year. Wisconsin is forward test year. Colorado is historically an historic test year. We are looking at the potential when we file in the spring of this year, to look forward or to at least use a lot of knowns or measurables. So you potentially do have a good portion of those increased expenses picked up through the rate filings that I mentioned. If you stick with an historical test year, and you can get some known immeasurables, the vast majority of those expenses get picked up. If you can it and you get more of an historical approach, then there's some slippage there.

Q - Reza Hatefi

Now, can you, is this also going to be sort of an ongoing O & M rate or going into like '07, '08, how should we think about O & M growth?

A - Ben Fowke

Well, some of these that are pushing our expenses up are things like pension, medical, post-retiree benefits, those things don't turn around on a dime. We will continue to look at our programs and look for opportunities to reduce those costs, but I don't see a silver bullet for those kinds of expenses. I think if you, our expenses have increased in the last few years. But I think if you put it in perspective, we still compare very favorably to our peers. Our overall energy prices have, again, are also very favorable to our peers. So, we have been investing not only in capital, and you have seen that and that was part of the build of the core strategy but it's necessary to make sure that we are running a good reliable, efficient system, and we are going to get, hopefully good rate relief on that and I anticipate that we will, and that's just part of running, I think, a good system but that doesn't mean we don't look for cost takeout opportunities, regularly.

Operator

Your next question comes from the line of Elizabeth Parrella with Merrill Lynch.

Q - Elizabeth Parrella

Yes. Just following up on your fourth quarter comments. I know you mentioned higher O & M expenses it just seems even notwithstanding a big tax benefit contribution last year, you did have mild weather last year. You had a refueling outage, you had the accruals of the FTS fuel case. It just seems like you are looking for a fairly significant decline kind of embedded in your guidance comments. I'm just wondering if there's anything else that we ought to be thinking about in terms of the fourth quarter number.

A - Ben Fowke

I don't think anything I haven't mentioned. O & M, we will continue to see pressure there. We talked about some of the reasons. I mentioned the charitable contribution of $5 million we made, some of the increases in O & M expenses related to bad debt and legal accruals and that sort of thing. Depreciation continues to tick up. We do anticipate the short-term margins will be low in this last quarter. And, again, Elizabeth, I know you have mentioned it, but we won't have the tax benefits in the fourth quarter of this year that we enjoyed last year. So I think that makes the, that was the reason why we said we would end up in the lower half of our range.

Q - Elizabeth Parrella

Okay. If I could ask just one other question. On the TRB situation, other than the fact that it might have cost you some opportunities on the short-term wholesale side, was there any financial impact in the quarter in terms of fuel expense, etc?

A - Ben Fowke

Well, indirectly, Elizabeth, and some increased working capital needs but the fuel expenses, we have good recovery mechanisms for that. It probably has also impacted to some degree our ability to earn at the upper limit our ECA mechanism in Colorado.

Operator

Your next question comes from the line of Greg Orrill with Lehman Brothers.

Q - Greg Orrill

Thanks very much. Coming back to the bad debt expense issue, I was just wondering if you might be able to talk a little bit more about what you are assuming for '06, where in particular it might be hurting you, and if there's any regulatory relief?

A - Ben Fowke

The fact that we have forward tests here creates the possible for regulatory relief in our bad debt expense. We, at this point, think that bad debt expense, the upward trend that we saw this year, and the levels we saw this year will probably be about the levels we see next year as well. I think specifically, if you look at where we've seen some issues this year in Colorado, there, I think of all of our territories, that's probably the territory that has seen the most economic slowdown. You see that in some of the sales growth, the sales growth there as been relatively flat for the year. But the other thing that's happened across all of our- territories is I think you have seen an acceleration of bankruptcy filing as people got ahead of the new bankruptcy laws and have filed. So that should be behind us, as we end this year. So all of those things considered, we will continue to be in a high fuel environment, and I think bad debt expense will be at the levels that we saw this year.

Operator

Thank you. You have a follow-up question from the line of Ashar Khan of SAC capital.

Q - Ashar Khan

Ben, how should we look if weather had been normal this year, what earnings would have been. I know you said that weather helped about $0.04 above normal, but you also said that you did much more O & M because of the thing. So could you just mention what would have been the earnings if you had a normal summer?

A - Ben Fowke

Well, Ashar, we manage the business with all the component parts. So when you have favorable weather, you do look for opportunities to spend money where it's needed and it, as I mentioned on the call, our plants can use the O & M. They have been run hard. We want to make sure, they produced wonderfully over the last several years. And we want to make sure that they continue to perform that way in the future. So I would say roughly we spent between the plant and some other investments in O & M around our system, probably $0.02 to $0.03 of additional O & M this year that perhaps we wouldn't have spent if we hadn't had favorable weather.

Q - Ashar Khan

Okay. And then can I just follow up, if I have my numbers right, the short-term wholesales and all of that are running right now for the nine months $36 million less from last year and your projection is $40 million to $50 million for the full year, so it's expected another $9 million or $10 million shortfall in the fourth quarter; is that correct?

A - Ben Fowke

I think that's the way that numbers add up and basically I think short-term wholesale margins have been behaving about how we expected coming into the year.

Operator

Your next question is from the line Daniele Seitz with Maxcor Financial.

Q - Daniele Seitz

Just a short question here. The TRB situation, could you give us a sense of when does it ever end and is there some progress report that you get on that?

A - Ben Fowke

Well, we stay in very close contact with the railroads. I mean, it's very important to us. They continue to repair the rail beds and the line, Daniele, and we're entering the summer season here and, or rather the winter season. And so some of that repair work will cease. I think we're probably going to be looking at some kind of reduced delivery into next year, perhaps, as late as the second quarter of 2006, but, again, we're just, we're going to mitigate and monitor it and we'll make sure that we have adequate coal to run our plants.

Operator

Today's final question will come from the line of David Frank with Pequot Capital.

Q - David Frank

Yes, Ben, I wanted to ask you if you have heard any more comments out of Representative Frangas, is there any risk in Colorado, you think of a political backlash or was that just some opportune advertise comments

A - Ben Fowke

David, you are coming in and out. Could you just repeat the question one more time?

Q - David Frank

Yes, I was asking about risks for political backlash in Colorado. I think across the country we are seeing a lot of politicians comment or opine on rising energy rates. I think specifically, there was a representative in your region, Jerry Frangas, who made some comments earlier this month, or last month, are there any politicians getting involved in this process, or

A - Ben Fowke

Well when fuel rises, I think you are always going to increase the political and the media scrutiny and activity. I don't think you can have a build to core strategy if you are not comfortable with your commissions, that your commissions are what will ultimately set the rate that need to attract the capital, if we didn't think they were going to make the right decisions and we think they will. Overall, I think the politics in our service territories have been very supportive of our strategy. If you look at some of the things we have accomplished and I know you have heard me talk about it repeatedly, but, getting debt, imputed debt recognized in Colorado, getting rider recovery in Merc, getting transmission legislation in Minnesota, those are really positive things that say that, we have forward looking commissioners and legislators. So you are going to have noise. And you are going to have people coming out of the woodwork, but we think we are in a good environment and from our perspective too, I think we have done some of the right things by helping out some of those customers that are that we know will be hurt the most in this coming heating season by making some of those charitable contributions I have referred to.

Operator

At this time, there are no further questions. Do you have any closing remarks?

Ben Fowke, VP and Chief Financial Officer

I do. First, I want to thank you all for participating in our earnings call this morning. I look forward to meeting with many of you at EEI in early November. In addition we are hosting an analyst meeting in New York City on November 29th. At the meeting, we plan to review our 2006 operating plans, and update you on our Minnesota rate case and other regulatory initiatives. We hope to see you there. If you have any follow-up questions in the meantime, Dick Colton and Paul Johnson will be available to take your calls. Thank you for your participation today.

Operator

Thank you for participating in today’s Xcel Energy third quarter 2005 earnings conference call. This call will be available for replay beginning at 1 p.m. eastern time today through 11:59 p.m. eastern time on Saturday, October 29, 2005. The conference ID number for the replay is 9828840. Again, the conference ID number for the replay is 9828840. The number to dial for the replay is 1-800-642-1687, or 706-645-9291. This concludes today's conference. You may now disconnect.

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Source: Full Transcript of Xcel Energy’s 3Q05 Conference Call - Q&A (XEL)

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