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Xcel Energy Inc. (NYSE:XEL)

Q4 FY07 Earnings Call

January 30, 2008, 10:00 AM ET

Executives

Paul A. Johnson - Managing Director, IR

Benjamin G.S. Fowke III - VP and CFO

George E. Tyson II - VP and Treasurer

Scott Wilensky - VP, Regulatory Affairs

Analysts

Daniele Seitz - Dahlman Rose

Dan Jenkins - State of Wisconsin Investment

Reza Hatefi - Polygon Investments

Travis Miller - Morningstar

Operator

Ladies and gentlemen thank you very much for standing by and welcome to the Xcel Energy 2007 year-end earnings conference call. During today's presentation all parties will be in a listen-only mode and following the presentation the conference will be open for questions. [Operator Instructions] I would now like to turn the conference over to Paul Johnson, Managing Director of Investor Relations. Please go ahead sir.

Paul A. Johnson - Managing Director, Investor Relations

Thank you and welcome to Xcel Energy's 2007 year-end earnings release conference call. I am Paul Johnson, Managing Director of Investor Relations. With me today is Ben Fowke, Vice President and Chief Financial Officer of Xcel Energy and several others who are here to help answer your questions. Today we plan to cover our 2007 year-end results and accomplishments. Please note there are slides that accompany the conference call, which are available on our web page. Let me remind you that some of our comments may contain forward-looking information. Significant factors that could cause results to differ from those anticipated are described in our earnings release and our filings with the SEC.

Today, our discussion will focus on ongoing results, which we believe represents the fundamental earnings call of Xcel Energy. Before I turn the call over to Ben, I will cover our overall financial results and how we calculate ongoing earnings.

We are pleased to report that 2007 ongoing earnings per share, which exclude the impact of our discontinued company-owned life insurance program or COLI came in at $1.43 per share, which compares with ongoing earnings of a $1.30 per share for 2006. In 2007, we reached a settlement resolving our dispute with the IRS regarding our COLI program. As a result we surrendered our COLI policies last year and don't expect any further tax benefits of our costs associated with COLI in the future. The net impact of the COLI settlement and earnings associated with the program were $0.08 per share reduction in 2007 GAAP earnings. In contrast, the COLI program contributed earnings of $0.05 per share to 2006 GAAP earnings.

In addition, in 2006 we had $0.01 of earnings from discontinued operations due to regulatory reseves for cost estimates. Our GAAP earnings, which include the impact of COLI and discontinued operations, were $1.35 per share in 2007 compared to $1.36 per share for 2006.

With that I will turn the call over to Ben.

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Thanks and welcome everyone. As Paul mentioned our 2007 ongoing earnings per share were $1.43, which exceed our earnings guidance range of $1.38 to $1.42 per share. This compares with ongoing earnings of $1.30 per share in 2006. The $0.13 per share increase is largely due to higher electric retail margins, which increased earnings by $0.31 per share and higher natural gas margins, which increased earnings by $0.08 per share. These positive factors were offset by higher utility O&M expenses, which decreased earnings by $0.14 per share, higher financing costs, which decreased earnings by $0.04 per share, lower short-term wholesale margins, which decreased earnings by $0.02 per share, and other items including higher depreciation and a higher effective tax rate, which reduced earnings by $0.06 per share. Well, that summarizes the year-end results.

So let's walk through some of the details starting at the top of the income statement. Our retail electric utility margins increased by $219 million or $0.31 per share for the year largely driven by rate increases and sales growth. Electric margin grew by $141 million from various rate increases, including $112 million from the electric rate increases in Colorado and $29 million from the MERP rider. We also had strong sales with weather adjusted electric sales growth of 1.7%, which increased electric margin by $49 million. Weather also had a positive impact with warmer summer temperatures increasing electric sales and margins by $16 million. These positive components were slightly offset by a few items. Most notably, increased capacity cost reduced electric margin by $27 million. For more information please refer to the electric margin table in our earnings release.

Higher natural gas margins, which increased $53 million or $0.08 per share also had a positive impact. The most significant factors on the natural gas side were rate increases in Colorado, Minnesota, and North Dakota, which increased margin by $21 million. In addition colder winter temperatures increased gas margins by $16 million compared with 2006. Sales growth, transportation margins, and other miscellaneous items increased natural gas margins by a total of $16 million.

As I mentioned, weather was a positive driver for both electric and gas margin. Actual temperatures in 2007 increased gas and electric earnings by a total of $0.06 per share compared with normal weather or $0.04 compared with 2006. The positive weather impact helped to offset over $30 million of reserves and disallowances that we experienced at SPS in 2007.

Turning to operating expenses, O&M expenses increased $100 million or 5.7% in 2007, largely driven by higher operating at our generating plants, higher labor and contracting cost, and increase in our conservation programs and donations both of which had revenue offsets. In addition, we had some one-time credits, which reduced O&M expenses in 2006 such as the reversal of a regulatory reserve for nuclear private fuel storage cost that are now recovered from customers. In addition, gains on sales of assets also reduced O&M expenses in 2006.

As you may have noticed, our O&M expenses came in a bit higher than our guidance range. As we done in the past, we took advantage of the increased earnings from weather to spend additional O&M dollars. This allowed us to deliver strong earnings while maintaining our system. We expect O&M expenses this year to increase by 2% to 3%.

Moving on, a depreciation expense was relatively flat increasing only $5 million in 2007 but this is an indicative of a trend. Normal depreciation increases were largely offset by the Minnesota Commission’s approval of our filing to extend a depreciable life of our Monticello nuclear plant by 20 years and by adjustments to depreciable lives from the Texas rate case settlement. Both of which combine to reduce depreciation expense by approximately $45 million for the year. We anticipate depreciation expense will increase $60 million to $70 million in 2008, reflecting our growing capital investment program.

Finally, let me touch on taxes. Our effective tax rate for 2007 based on GAAP results was 33.8% compared with 24.2% in 2006. Part of the difference is due to COLI. In addition, in 2006 we recognized approximately $30 million of tax benefits relating to the utilization of capital loss carry forwards and a reversal of a regulatory tax reserve. So, that's a more detail look at our financial results. Next I'd like to summarize some of our significant 2007 accomplishments.

Well, let's start with COLI. In 2007 we reached a settlement that resolved our longstanding COLI dispute with the IRS in a positive manner. The COLI situation presented a significant financial risk that we were happy to say we have eliminated. On the regulatory front we completed rate cases that provided more than $100 million of rate relief including electric cases in Texas and Wisconsin and natural gas cases in Colorado, Minnesota, North Dakota, and Wisconsin.

As many of you know our SPS operating company has underperformed financially for several years. In 2007, we were able to resolve field disputes in Texas, enhance settlements pending approval in New Mexico, and with our largest wholesale customer at the FERC. While we still have some outstanding issues with other wholesale customers at the FERC we have reduced our exposure and have set the stage for improved financial performance at SPS. We also filed a couple of other cases in 2007 that will have an impact in 2008 including a request to increase electric rates by above $20 million in North Dakota and a request to increase electric rates in New Mexico by about $17 million.

In 2007 we also filed resource plans in both Colorado and Minnesota that provide the foundation for our strategic initiatives over the next decade. In general, the plans demonstrate how we can meet energy demand and legislative requirements while reducing overall carbon emissions in a cost-effective manner. For example, our resource plan in Minnesota would reduce carbon emissions by 22% in 2020 from 2005 levels. It would add 26,000 megawatts of new wind generation by 2020. It would extend the lives of our nuclear plants and expand capacity by 230 megawatts. It would increase the capacity of our Sherco plant by 80 megawatts while making significant reductions in overall sulfur dioxide, nitrogen oxide, and mercury emissions from the facility. And finally the plan would add approximately 2,300 megawatts of new natural gas-fired generation.

In Colorado, our resource plan would reduce carbon emissions by at least 10% by 2017 and put PSCo on a path to reduce CO2 emissions by up to 20% by 2020. The plan would increase wind resources by 800 megawatts by 2015. It would acquire approximately 25 megawatts from a central solar facility with plans to bring in a plant of up to 200 megawatts as technology develops. And finally, it would replace four coal burning units with a highly efficient natural gas generating facility reducing carbon emissions by 1.4 million tons each year. Both resource plans in Minnesota and Colorado increased our use of renewable energy and not only reduce carbon emissions but also reduce our reliance on coal and natural gas. The plans also reflect our desire to earn a larger percentage of the incremental generation coming on to our system, which we think will benefit both customers and shareholders.

With that in mind we moved forward on the ownership fund in 2007. In Minnesota, we signed a contract to build a 100-megawatt wind farm. All of the permits are in place for the wind farm and it should be completed this year. The project is recoverable through a proposed renewable rider in Minnesota. We also recently issued an RFP in Minnesota for an additional 500 megawatts to 750 megawatts of wind generation with potential ownership of up to 500 megawatts. In Colorado, we expect to issue an RFP this quarter. In the meantime we file to expand our Port Saint range [ph] facility to include two natural gas combustion turbines. This project will place the PPA and increase capacity by almost 300 megawatts.

Another significant accomplishment in 2007 was the progress we made on our major construction projects including our emission reduction effort in Minnesota and our Comanche 3 construction in Colorado. We completed the first stage of the Minnesota effort with the King plant upgrade, while construction of the Comanche 3 project is more than 40% complete. Both projects remain on track and very close to their original budgets.

In 2007, we saw an improvement in our credit ratings, despite volatility in the credit enhancing markets. Credit quality, strong balance sheet and conservative financial management have always been important to us even when they were in vogue. Today those qualities are critical. Last September S&P upgraded the credit ratings of Xcel Energy and its subsidiaries by one notch citing our strengthening business profile and support of regulation in our key states as the basis for the upgrade. Of course financing is more difficult in the current environment, for that reason I am pleased to say we completed a very successful issuance of $400 million retail hybrid security that receives partial equity treatment from the rating agencies. The timing, structure, and size of the deal gives us great flexibility in 2008 and keeps us on track to execute our financing plan.

In spite of the slow down in the national housing market and the potential for a recession, we continue to forecast sales electric growth of 1.8% to 2.2% in 2008. We are fortunate to have a economic diversity across our service territories. For example, we have experienced growth in the energy and agricultural sectors that offsets the slowdown in the general economy.

In summary, 2007 was another outstanding year. In addition to delivering earnings results above the high-end of our guidance range and increasing the dividend. Xcel Energy enjoyed many successes during the year that position the company for continued profitable growth in 2008 and beyond. We continue to protect long-term earnings growth of 5% to 7% and we are reaffirming our 2008 earnings guidance range of $1.45 to $1.55 per share.

With that let's open it up for questions.

Question and Answer

Operator

Thank you sir. [Operator Instructions] First question comes from the line of Daniele Seitz with Dahlman Rose. Please go ahead.

Daniele Seitz - Dahlman Rose

Hi, thank you. Congratulations and I just was wondering, have most of the plans and RFPs that you have already started considering your Phase II of the construction program, is that agreed upon by all jurisdictions already and do you anticipate to actually recover those cost in the same way you have recovered the first series of projects?

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Well, yes. The twist… you are referring to the RFPs that with wind generation, Daniele?

Daniele Seitz - Dahlman Rose

Right.

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Yes, well, we do expect favorable recovery. In the past, most of that wind generation was recovered through capacity cost recovery and since we are now looking at ownership it will be a different recovery mechanism. In Minnesota that’s a forward-looking rider recovery. The RFP has been issued; we received a good response to that. It is very similar to… the recovery by the way is very similar to the CapEx 20-20 program. And in Colorado where the RFP is yet be issued we expect it will come out the first half of this year. That recovery will be based upon legislation that was passed that encourages the Commission to give us favorable recovery similar to recovery that we have already received for transmission in Colorado, does that help you?

Daniele Seitz - Dahlman Rose

Yes, it does. And in terms of the next to recover the complete cost of the coal plant of Comanche 3, when do you think that this major rate case will come through?

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Well, our plans right now are to file a rate case in Colorado this year. We will look forward test here. We already have established Daniele that for the coal plant, QUIP [ph] was recovered on a forward-looking basis when we follow general rate case. So, we already know how we will receive that recovery when we file the rate case and then we will also look for forward recovery on the other capital expenditures that we are making, that are not already covered by some form of enhanced recovery.

Daniele Seitz - Dahlman Rose

Will the plant almost be completely recovered by the time you get the rate increase or will you need another…?

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Yes, it will be very, very close because on a forward basis that would take you through '09 and that's about when the plant comes online.

Daniele Seitz - Dahlman Rose

Great. Thanks.

Operator

Thank you. [Operator Instructions] Next question comes from the line of Dan Jenkins with State of Wisconsin Investment, please go ahead sir.

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Hi Dan.

Dan Jenkins - State of Wisconsin Investment

Hi good morning. First of all, I was just wondering if you could comment on, you mentioned a little bit that you're seeing some favorable results in energy and agricultural sectors, I was wondering if you could talk about if you're seeing anything else from the economic slowdown we are seeing in the nationwide economy in your service areas?

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Yes, Dan we are seeing some slowdown particularly on the residential, on the construction sectors, lower housing starts, that sort of thing but by and large the slack created there has been taken out by the energy sector, it's very strong and at SPS it is very strong, at PSCo, agricultural sector is very strong in Minnesota. We are also seeing I think perhaps because of the weaker dollar more increases in some of our larger C&I customers related to exports, paper mills for example which are not an insignificant business within the NSP region. So that seems to be taking up that slack.

We are fortunate, as I mention in our prepared remarks that we really do have a lot of economic diversity across our service territories and we have good economies. Many Fortune 500 companies for example up here in Minnesota that I think that are… that create nice diverse C&I class for us. Now all of that said, we will continue to monitor sales as we always do as a nation and we are no exception to that, see how the recession may or may not play out.

Dan Jenkins - State of Wisconsin Investment

Okay, also I was wondering, I haven’t had the chance to go all the way through the release, so may be it's in there but did you lay out what your CapEx budget is going to be for '08?

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

We’ve laid that out, previously it is about $2.1 billion. There really hasn't been any change to that Dan since we updated you last on the third quarter and then we had an Analyst Day that basically didn't change anything other than move in 2008, the Fort St. Vrain project from potential CapEx into committed CapEx.

Dan Jenkins - State of Wisconsin Investment

Okay, then the last one I was wondering is, you mentioned you did that hybrid financing, what kind of financing do you expect say for the first and for the year? Are you going to need to come to markets again there?

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Well, I think we have George Tyson, our Treasurer here. Let me… I believe in Xcel is NSP Minnesota. Overall for the year Dan we were looking at about $600 million of debt retirements and probably new issuance is of $1.2 billion to $1.4 billion. George is NSP-Min, the next one up.

George E. Tyson II - Vice President and Treasurer

Yes that's correct, we plan on doing that prior to the end of the first quarter.

Operator

Thank you and the next question comes from the line of Reza Hatefi with Polygon Investments, please go ahead.

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Hi Reza.

Reza Hatefi - Polygon Investments

Thank you Hi, how are you guys?

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Good.

Reza Hatefi - Polygon Investments

I am sorry if I missed this earlier but your current plans are still to sell a Colorado rate case in the summer to be effective in mid '09 and the current… then my second question is I guess how the process is going, may be a little more detail on potentially having a forward test here?

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Well, Rez, first of all I think it is later in the year probably more towards the fourth quarter. The progress… we have been working on this for quite a while now. So we're feeling very comfortable that from a technical data quality perspective we will have what we need there. We’ve had multiple dialogs with the staff regarding their requirements and reasons why our forward test here is so important particularly when you are growing rate base. So not too much new to report there other than I think we just continue to make steady progress and we recognize how important it is and I think the Commission realizes that it is important as well.

Reza Hatefi - Polygon Investments

Are you the first and only company that is seeking forward test here in the state?

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Well, we are by far the largest utility in the State of Colorado. So I believe we will be the first one to seek that.

Reza Hatefi - Polygon Investments

And what has been sort of their commentary in terms of plusses and minuses as far as letting the forward test being the new standard, is it just the fact that they historically haven't used one and does they need to get comfortable with it?

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Well, I think that is generally the case. We are asking for a change of President but I think there’s very good reasons. We’ve got Scott Wilensky here who is our VP of Regulatory Affairs. I think you met Scott at the Analyst Day. Scott, do you want to add some color to that?

Scott Wilensky - Vice President, Regulatory Affairs

I think that is a fair characterization. It's been… it’s a change in precedent; it's not the norm. I mean there has to be confident that the date we provide is accurate given them assurance but it is a reasonable forecast of our costs going forward. That's where we’ve spent a lot of time trying to work with folks on and make sure that they can get comfortable not just with the concept but also with the quality of the data that supports it.

Reza Hatefi - Polygon Investments

I appreciate that. Just lastly, in Minnesota the new rates, you’ll file at the beginning of '09 and the new rates will be effective January 1, 2009 interim rates that is?

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Well yes, that would be the plan but I think the interim rate filings needs to be approved as well, is that correct Scott?

Scott Wilensky - Vice President, Regulatory Affairs

Not in Colorado.

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

I think he said Minnesota.

Scott Wilensky - Vice President, Regulatory Affairs

[inaudible]

Reza Hatefi - Polygon Investments

Yes.

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Okay. Is that right Reza, you were talking about Minnesota?

Reza Hatefi - Polygon Investments

Right, Minnesota.

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Rest of the way it works in Minnesota is you make the filing and then 60 days after the filing, rates are eligible to put in place.

Reza Hatefi - Polygon Investments

Okay, great. Thank you very much.

Operator

Thank you. The next question comes from line of Travis Miller with Morningstar. Please go ahead.

Travis Miller - Morningstar

Good morning.

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Hi Travis.

Travis Miller - Morningstar

Hi. Quick question again about these rate cases. If we continue in this period of low interest rate environments that we have been in for the last couple of years what impact do you think that could have on both your outstanding rate cases and future, next year or two rate cases that are you going to file?

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Well, you know we have been in a low interest rate and environment for several years now and we have had pretty good success getting I think constructive outcomes in our filings. So a low interest rate environment is not something that’s new to us. I think the other thing I would keep in mind specifically this time period which as we all know can change on a dime is the… while the treasury rates are low, the credit spreads are significantly wider than where they have been. So I don't really think there has been much of a change in what the actual corporate kind of rate is. So Travis, you know it's something that if we… if rates continue to fall yes I think that could put some pressure on us but I really have to tell you we've filed rate cases where treasury rates are lot lower than they are now and it will come out pretty good.

Travis Miller - Morningstar

Okay. Great. Thanks a lot.

Operator

Thank you. At this time there are no further questions. Please go ahead.

Benjamin G.S. Fowke III - Vice President and Chief Financial Officer

Well, okay. If there’s no further questions I appreciate everybody attending the call. If you do have any questions, do not hesitate to call, Paul and the IR team and they’ll get you some answers. Thanks everyone.

Operator

Thank you. Ladies and gentlemen this does conclude the Xcel Energy 2007 year-end earnings conference call. You may now disconnect and thank you for using the AT&T teleconferencing.

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