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Xcel Energy (NYSE:XEL)

Barclays Capital Energy-Power Conference

September 5, 2012, 12:25 p.m. ET


Teresa Madden – SVP, CFO


Unidentified Analyst

Teresa Madden

With that, let's go ahead and get started. Hopefully, many of you probably are familiar with Xcel Energy, but I thought in terms of background, I'll just review some of kind of the basics about us. We're a fully regulated utility. We operate in eight states; NSP, Minnesota, and PSCo contribute the largest portion to our earnings. PSCo the last couple years has been a greater contributor, but it will vary depending on rate cases and terms of the overall contribution.

We do have 3.4 million customers and 1.9 million gas customers. And back to our footprint, we do think that the large eight stage region does actually diversify for risk and it can be risk related to weather. Although I'll be the first to say it's been warm all year, warm in the winter, warm in the summer across our jurisdictions. Regulatory risks because the regulatory compacts are different in each of our jurisdictions or even the local economies so again just to set up the framework.

And turning to our strategy and just to back up, our overall goal and objective is to provide a 10% total return. And we think there's three areas of focus in terms of that. If we have all of these executing on all cylinders relative to them and they are interrelated, we will be able and we do have a past practice or history of achieving the 10% total return. And I'm just going to walk through each of the majors areas and talk about in terms of our past track record and as we look to the future.

So stay colder again if we get our customers providing clean, reliable, safe energy at a reasonable cost will be more effective in terms of obtaining construction regulations all coupled with an investment pipeline, which actually drives our earnings growth.

So starting with stay colder alignment and a couple areas around stay colder alignment, I'm sure you're all aware, we'll very proud of our environment leadership. You can see from an energy supply perspective in terms of the progress we've made since 2005. If we look to 2005, a small grain sliver of the renewables were at 3%. We're at about 10% right now. We have over 4,000 megawatts of wind on our system. Our coal is declining. And by 2015, we expect to be at the 17% level. So we've made significant progress and expect to continue.

We have pretty strong renewables; I would say a high level of renewable portfolio standards. In Colorado as well as Minnesota, they need to be 30% from renewables by 2020. But we think we're well on track to achieve that.

Continuing on the environmental theme, you can see our emissions reductions have been significant since 2005. And we've been trending down. Again, this isn't just the renewables coming onto our system. We've really started early in terms of plant retrofit primarily in Minnesota, which were completed in the later part, between 2005 and 2010, 11 [inaudible].

We also have many more plans. The next biggest area is clean air, clean jobs in Colorado, which we had some legislation passed in 2010. We have our plan. And as I said, we're executing on that.

So moving from the environmental theme, but under stay colder alignment, we have operational excellence. And this is really our reliability metrics in terms of our customers. Again, that clean, safe, reliable energy is very important to our customers. You can see our trend. Since 2007, we have been tracking down. I will just point in terms of Arcadia, over there on the far right hand, in 2011, we did a hiccup. We had some unusual weather in 2011. First in Minnesota in the summer, we had a tornado actually in Minneapolis in the northern part, which just wiped out a several block area. And so of course, service was out. In Colorado, we had early winters storms. In October, we had two of them, so outages with that. But we able to restore service in record time. So from a reliability perspective, we think we are clearly on track.

Of course in terms of the cost to our customers or their bills, we have been executing major construction programs over the past several years. And we have been able to bring these construction programs in on budget and on time, which helps us then manage the overall bill impact. You can see how we compare to the national average in all of our major jurisdictions. We're below our national average.

Our customers also where we had the opportunity would like to have choice in terms of demand side management programs. We probably have some of the most mature demand side management programs in the U.S. particularly our CIT programs in Minnesota. We are paid incentives relative to those programs. Last year, 2011, it was a contribution of $71 million to our earnings. Overall, we believe we've avoided building 3,200 megawatts of generation.

On the renewable side, we also have voluntary wind source program in our major jurisdictions, so if customers want to be more green, they can opt for that. And we also have customer incentives available for residential or small businesses that want to put rooftop solar on either their home or their business.

So what does that all translate in terms of value to our customer? You can see our customer satisfaction residential has continually picked up. And last year, we were at a 93% all time high. Our customer complaints in 2008 have actually declined 80%. We've really focused on improving our processes around dealing with the customer, which has helped achieve that level.

So that's typically our stay colder alignment. Now I'll move to the second area. Again, you'll see clearly how these are all interrelated. We do have a robust capital pipeline. Our budgets between 2012 and '16, we're planning to spend $13.4 billion. I put it into the three buckets, transmission, generation, and if we take distribution adding the nuclear, those really are 90% of the spend, with the nuclear, the natural gas, sorry.

Transmission, about 30% is primarily represented by our large projects like CapEx 2020, which is in Minnesota well under way. It's over $1 billion.

Generation, that clean air, clean jobs, which I talked about in terms of the retrofit in Colorado, we also have the up rates we're finishing, the Monticello up rate, which will be done in the first quarter of 2013. And then we have Prairie Island, the life extension as well as the up rate.

Now we have peeled out, maybe you've probably seen this the past, the Casper spend. In this budget, we $470 million. This is in XPS. With the recent overturning of that rule, we are basically back evaluating in terms of what would be the need and the timing relative to that spend. We always had assumed we would have some spend in this, but it was in the latter part of our ten year forecast. And Casper moved it up starting in 2012. So more to come on that. We plan to update our capital forecast at the end of the fourth quarter. So we'll have more in terms of our overall plan with that.

This gets the capital spend slightly, just a different view. You can see that we peak in 2013 with $3.3 billion. I think this is important to know as we go forward and we talk about our dividend and our ability to achieve our overall 10% return as we look beyond 2014 and forward.

And then the last piece of our back to our achievement of our strategy, it's constructive regulation. And here we can see in terms of closing the regulatory gap, our most recent achievement has been with the multi-year, which was approved in Colorado. This is in our electric case. It's for '12, '13, and '14. We have a $73 million increase in '12, and then it steps up in each of the years. We think this is really advantageous. We do have our projected sales. It's really the onerous is on our back to actually be assured that we achieve overall and we help close that gap. We have a lot of riders in place. We've worked very hard over the years to put those riders in place to be assured a timely recovery. You can see the realm of them, renewables, environmental, transmission. Our most recent one was the PSIA, which is the gap distribution rider, which was approved in 2011 in Colorado in the latter part of the year. In the Colorado, the multi-year approach, we do plan to pursue that. I guess I'll talk about that in a minute in terms of our regulatory plans as we go forward.

So turning to just where we're at in all our rate cases, I'll start with the remainder of 2012. Basically, we finished off 2012. We have one open issue with Smart Grid City. And that is actually – maybe I should back up and say, we have a $45 million investment. We're recovering $27. Some of the interveners actually saw Office of Consumer Council is concerned with what was they believe promised relative to the in-home devices. And think they haven't really been developed to the level they would have expected. The long and the short of it, we've gone through the hearing processes before the ALJ. We would expect to have a final ruling or I should say an ALJ recommendation either later this month, early October, but we'll know by the time we get to the end of the year where we're at on that issue. We think our arguments are strong in terms of the value that the investment in Smart Grid City has provided to public service of Colorado.

Pending rate cases, these are the ones that have actually been recently filed, Wisconsin, just about a $40 million request. That was June 1st. I would just note on the gas side, it's about $6 million. This is only related to the $6 million in environmental cleanup of an NGP site in Ashland, Wisconsin. We just recently went into an agreement or a settlement with the EPA to complete that cleanup. And we're proposing a multi-year actually recovery of that cleanup cost.

South Dakota, that was one that was closed out in terms of 2011 in early June. We were very disappointed with ROE, which is 9.25. So the end of June, we immediately refiled in terms of another request with the South Dakota commission.

As we look forward, we do have a pretty full docket or plans in terms of rate cases. Starting with the Minnesota electric rate case, back to things that we closed out, we had a property tax deferral request. In terms of 2012 property taxes, that was denied. At certain points, we had talked about filing this case early. We decided probably the risks were greater of filing early and having a split test year, so we're going back to our standard filing probably around the first of November within ARM rates effective the first of the year. We do intend to pursue a multi-year settlement. But the case will be based on a 2013 forward test year. We think that the complications of filing a multi-year, we don’t want to risk having [inaudible] rates go into effect, so we plan to follow the PSCo model where we filed the base case and then work with parties to achieve a settlement. Now would it look exactly like the Colorado settlement, you know, it's too early to say. Could be two years, could be three years, but that's our overall goal. You can see we have the list here of other cases that we'll be filing in the fourth quarter or potentially early '13.

So with that, where does that leave us in terms of our overall attractive return? You can see we have a long solid track record. Our earnings growth objectives have been 5% to 7%. And you can see since 2005, we have achieved that with a compound average growth rate of 6.6%, and dividend 2% to 4% and we've been at 3.3%.

But just continuing on attractive return in terms of our overall earnings guidance, we have achieved our guidance since 2005. And then I'll just add a note. It's not real explicit in this, but just as yesterday when we filed this presentation with the SEC, we have had a caveat on our 2012 guidance of $1.75 to $1.85 that we would be in the lower half of the guidance range. We have removed that caveat and we just did that as of yesterday. A couple things, I mean frankly, we have several cost management initiative programs in place. They are taking hold as we had anticipated. And frankly, some positive weather impacts in June and July have put us in a better position as we look forward to the end of the year. So we're happy to be in that position.

So as we look forward in terms of our total return objectives and maybe you likely have seen this, between 2005 and 2013 and back to that capital spend while we have the large capital expense, we would expect overall 2010 or 10% total return to be achieved by 7% earnings growth and 2% to 4% dividend growth if it results in a yield of about 4%.

When we get beyond 2014 depending on circumstances as our capital moderates down, our rate base growth increases would moderate as well. We see opportunity at that point depending on several factors whether it's the economy, or sales, or any of those that we could have an opportunity to increase our dividend because actually, our case flow is expected to improve.

So that's our path forward. And that's essentially, that's our story. So does anybody have any questions?

Question-and-Answer Session

Unidentified Analyst

As we look at the, you know, at the capital pipeline which is really robust certainly for the remainder of this five year period, what does that imply in terms of customer rate inflation as you push through these rate cases, and what do you think the upper threshold is that’s acceptable from a customer’s standpoint?

Teresa Madden

Well we definitely think double digits is not going to be (inaudible). I would say we would like to keep them lower, you know, 3 to 5% has been are historical trend. We might be slightly higher than that. We do have the advantage right now with low gas prices, low gas prices we actually think this is a good time to be making infrastructure is excellent, because the wallet share would potentially be smaller in terms of the overall impact.

Unidentified Analyst

All right. With the expected capitalist spending program, what kind of risk growth do you expect over the next three to five years?

Teresa Madden

In terms of we expect to continue rate based growth of about the still at the 7% over the total five year period. At the latter part, at least right now once we get through sort of the big (inaudible) whether it’s on the nuclear upgrades or Clean Air (inaudible) the retro fits of the plant. We would expect that to moderate down.

Unidentified Analyst

So, when you talk about beyond 2014, you expect higher dividend growth, is that because of higher payout ratio?

Teresa Madden

It would be higher payout ratio. We’re about in the 60% range now, but we see opportunity at that point because we won’t be in such a significant construction program. But, you know, as I qualified it, you know, we need to see where we’re at in 2014.

Unidentified Analyst

So, with the 470 million dollars removed from the Casper spending, how does that play into your thoughts around the 800 million dollar projected need for equity over the timeline? I’m just going to guess that that’s all part of what’s under review between now and the fourth quarter?

Teresa Madden

Yes. And I would say, when you say “removed”, maybe not …

Unidentified Analyst

Pushed out, yes.

Teresa Madden

Maybe pushed out. I mean we do, as I said, we always assumed we were going to need to do the retro fit on those plants. So, the equity, all of that will come in terms of that full evaluation. But, at this point we’re still evaluating that.

Unidentified Analyst

And my second question is, separate just in the subject of South Dakota, I know it’s a small jurisdiction, but the 9 ¼ is obviously disappointing. Are you all having conversations with the regulator there, or making some sort of headway with changing expectations, or changing sort of the relationship there?

Teresa Madden

I mean clearly we’re having conversations with all the parties, because were disappointed, you know. It’s having the level of infrastructure investment we have and a 9 ¼ return, just doesn’t work very well. Fortunately it is a small jurisdiction.

Unidentified Analyst

So, a question about your renewable investment. How do you think about your renewable investment going forward? I know it’s a lot of state based rules, but you know, production, tax credits, could go away this year, the election is vital to what happens as renewables. How do you guys think about renewables as we go forward?

Teresa Madden

Well you know, in terms of that capital spend, we don’t have any renewables in that capital spend. We’re buying all our renewables on the go-forward. I mean, we do own our two wind farms. In terms of what we support, you know, the PTC going forward, yes, because we think it’s good for the customer, but ultimately, you know, there’s probably other platforms that before us and Washington that are more important, you know the dividend, the bonus depreciation is an issue that provides us some concern. So, you know, it won’t change at least our capital investment profile.

Unidentified Analyst

Can you give us an overview on the economy in Colorado and Minnesota?

Teresa Madden

Our local economies are actually, we would say, are better than the U.S. economies. Unemployment is lower, relative to the 8%. In terms of our customers we’re actually seeing, you know, our large customers are actually our sales are improving. In Colorado, you know, one of our largest customers is the Rocky Mountain Steel, which is a steel mill. When the economy turned, when they went down to one shift, and they are not back up to full speed. We have a larger (inaudible) mine now, which obviously is a component in terms of the production of steel. So, we’ve seen just recently more of a turn there.

Same with in Minnesota, although a little bit slower, it’s more in our large customers. I will say in Minnesota we did have a paper manufacturing company just recently they had an explosion and they have decided to close down that facility. So, we’ll see some adverse there. But aside from that, we’re seeing improvement in Minnesota. But the residential, I mean, they’re still kind of very moderate.

Unidentified Analyst

Back to the CapEx, and the slowdown that you see in the outer portion of your five year plan. You’ve done some of your own wind, but a lot of your renewables are purchase power related?

Teresa Madden

That’s correct.

Unidentified Analyst

Do you anticipate more cellphone renewables in the future, and what’s your view on solar, as that starts to roll of the (rooftop)?

Teresa Madden

In terms of cellphone, we don’t have any plans. I think probably what potentially could happen is those that we’re buying from, like the Calpine assets that we could have some opportunities to purchase some of those that we’re buying from. So, as we move forward on that, I would see that scenario more than anything else in terms of wind. You know solar is really not cost effective. There’s been improvement in the technology, and it’s particularly not cost effective without all the rebates. But we do see it’s improving. Maybe somewhere in the future, that will be on the horizon, but not for us right now. So, we don’t see that, especially if we have so much wind available, that would just be lower in our hierarchy.

Anything else? Well thanks. Appreciate the opportunity and thanks Dan.

Unidentified Analyst

Thank you very much Teresa.

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