Xcel Energy Inc.
Q2 2006 Earnings Call Transcript

Published: 1 Aug 2006

[Operator:]

At this time, I would like to welcome everyone to the Xcel Energy Second Quarter 2006 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question and answer session. At that time we will only take questions from analysts and institutional investors. Any other questions from the news medium can direct their questions to the Investor Relations Department. If you have a question at that time simply press * then the number 1 on your telephone keypad. And if you would like to withdraw your question, press * then the number 2. Thank you, I will now like to turn the call over to Mr. Richard Kolkmann. Sir, you may begin your conference.

[Richard Kolkmann:]

Thanks Matthew and welcome to Xcel Energy's Second Quarter 2006 Earnings Release Conference Call. I'm Dick Kolkmann, Managing Director of Investor Relations, and with me is Ben Fowke, Vice President and Chief Financial Officer of Xcel Energy. We also have several others here to help provide answers to your questions. Some of the comments that will be made contain forward-looking information. Significant factors that could cause results to differ from those anticipated are described in our earnings release and Xcel Energy filings with the Securities and Exchange Commission. With that, I'll turn the call over to Ben.

[Benjamin Fowke:]

Thanks Dick and welcome everyone. Xcel Energy recorded earnings from continuing operations of $0.24 per share for the second quarter of 2006. This compares with $0.19 per share for the second quarter of 2005. Total earnings for the second quarter 2006 were $0.24 per share compared with $0.20 per share for 2005. Our earnings from continuing operations increased by $0.05 per share for the quarter, largely due to higher electric retail margins which increased earnings by $0.10 per share, a lower effective tax rate which increased earnings by $0.02 per share, and other items that together increased earnings by about $0.01 per share. These positive factors were partially offset by lower short-term wholesale margins which decreased earnings by $0.06 per share, higher utility O&M expenses which decreased earnings by $0.01 per share, and higher depreciation expense which decreased earnings by $0.01 per share. That summarizes our second quarter 2006 results. Now, let's look into the details. Our base retail electric utility margins increased by $71 million or $0.10 per share for the quarter, largely driven by rate increases and weather. Electric margin grew by $54 million from various rate increases. This includes $40 million from the interim rate increase in Minnesota, $9 million from the implementation of the MERP rider, and $5 million for an electric rate increase in Wisconsin. Weather was also a positive factor. We experienced warmer than normal temperatures in Minnesota, Texas, and Colorado in June. As a result, our electric margin increased by $8 million compared with last year. On a year-to-date basis, our weather adjusted sales growth was a solid 1.8%, which is slightly higher than our annual assumption range of 1.3% to 1.7%. While we’re not adjusting our sales growth assumptions, we view this as a positive trend. While we’re on the topic of retail margin let me update you on a complaint filed with the FERC by several customers served by SPS. The dispute relates to whether fuel cost of certain wholesale customers should be based on system average cost or incremental fuel cost. In May 2006, and contrary to the position of FERC staff, an Administrative Law Judge recommended among other things that SPS recalculate its fuel cost billings to reduce fuel and purchase energy cost for certain customers. While we think the ALJ recommendation is incorrect, if the FERC was to affirm the ALJ’s findings, the potential refund exposure could be up to $50 million. We do not think this is likely because we made wholesale firm power sales consistent with the FERC pricing policies for long-term sales. That said, during the quarter we accrued $4 million giving us a total reserve of $7 million for the potential liability based on our assessment of the FERC rules as it applies to both base rate and fuel item. We intend to vigorously challenge the ALJ’s recommendations with the FERC. Moving on to short-term wholesale margins, for the quarter our margins declined by approximately $43 million compared with last year. In the second quarter, we recorded two adjustments which impacted short-term and energy trading margins. First, we reduced short-term wholesale margins by $13 million for a year-to-date adjustment for customer sharing in Minnesota under the proposed settlement agreement. This adjustment did not affect net income because the impact of the sharing agreement was already reflected in our accrual for interim rates. This is merely a reclassification to present the results consistent with the settlement agreement. Turning to operating expenses, our second quarter O&M expenses increased $5 million or 1.3%. This increase was in line with our expectations. Based on our most current projection, we believe that our 2006 O&M expenses should increase 3% to 4% over 2005 levels, which is consistent with our guidance assumption. Now that said, we will closely monitor the continued hot weather and its potential impact. We will spend the necessary dollars to maintain our system. In the second quarter, depreciation expense increased $10 million or 5%, driven by increased capital spending and changes in decommissioning accruals. There is no change in our guidance assumption for depreciation. In the second quarter of 2006, we had an effective tax rate of 17.3%, compared with an effective tax rate of 24.1% in 2005. The lower effective tax rate in 2006 increased quarterly and year-to-date earnings by approximately $0.02 per share and was driven by two items

[Operator:]

At this time, I would like to remind everyone, in order to ask a question, please press * then the number 1 on your telephone keypad. Please limit your questions to one per caller, and if you have a followup question you may re-enter the queue. Again that’s * then the number 1 if you have a question, and we’ll pause for just a moment to compile the Q&A roster. Our first question comes from Paul Rizdon.

[Paul Rizdon:]

Good morning. I have a question on the tax item reducing the effective tax rate, is that going to be an ongoing thing, I was a little confused about that?

[Benjamin Fowke:]

The $0.04 of the capital loss carry forwards, which we recognized this quarter, you should view that as a one-time event; $0.02 of that was offset by an interim tax adjustment that we were required to make under APB 28, the accounting for taxes. So, together, I view that as a one-time event.

[Paul Rizdon:]

The $0.02 net was one time?

[Benjamin Fowke:]

The $0.02 net was one time, yes.

[Operator:]

Our next question comes from Daniele Seitz.

[Daniele Seitz:]

Hi, so you are going back to a normal tax rate of 24% or so?

[Benjamin Fowke:]

Well, for this year Daniele, for our effective tax rate assumption we think the range now will be in the 24% to 26% range.

[Daniele Seitz:]

I’m sorry I should have mentioned that, I was talking about 2007, are you going back to a normal tax rate or is your tax rate still going to be relatively low?

[Benjamin Fowke:]

No, because these are one time items we’ll issue that assumption with our 2007 guidance, but it will be more of a normal effective tax rate.

[Daniele Seitz:]

Okay, may I ask another one, just a quick question? You mentioned that you had made some reserves of $7 million during the quarter, is this also a sort of one time or do you anticipate to continue reserving up to $50 million?

[Benjamin Fowke:]

Well, if you look at one times, we talked about the positive tax benefits. For your point, we made a $4 million accrual which brought the reserve up to $7 million year-to-date for the SPS issue from a rate and fuel case item. I think that you should view that as one time. We’ll obviously have to monitor the litigation going forward. In addition, Daniele, we took at a $6 million charge this quarter for the FERC recommendation to reallocate cost associated with some financial transactions made under MISO. I think you should view that as a one time item as well.

[Daniele Seitz:]

Okay, so in the case of FERC you are not going to continue reserving for that?

[Benjamin Fowke:]

We will continue to assess the liability but that’s not the plan.

[Daniele Seitz:]

Okay, great, thank you so much.

[Operator:]

Our next question is from Elizabeth Parrella.

[Elizabeth Parrella:]

Thank you and I apologize if you addressed this in your prepared remarks; I had to join the call a little bit late. In the Minnesota rate case, what’s the amount that you’re currently booking the revenues at and how much did you book in the second quarter?

[Benjamin Fowke:]

It’s $65 million I believe year-to-date and $40 million for the three months ended June 30th.

[Elizabeth Parrella:]

And what kind of rate is that say relative to where the ALJ is for example? You told us what it was in the first quarter, I’m not sure if you’re still booking at that level though?

[Benjamin Fowke:]

It’s roughly equivalent to the ALJ recommendation, Elizabeth.

[Elizabeth Parrella:]

Okay, with respect to the CapEx 2020, I think you said $700 million of CapEx, your share of this program, could you give us an idea as to kind of when you start spending on that and how it looks roughly by year?

[Benjamin Fowke:]

I don’t know if I have a year-to-year breakout, we might have some additional detail, I don’t have with me. But, the expenditures really start in the latter part of the decade, the ’09 and ’10 and then continue for ’11, ’12, and ’13, and Elizabeth as you know that’s about the time that our CapEx expenditure for Comanche 3 will be ramping down.

[Elizabeth Parrella:]

Okay, thank you.

[Operator:]

Our next question is from Paul Debbas.

[Paul Debbas:]

Hi, given the better weather and the lower tax rate, why haven’t you raised the guidance?

[Benjamin Fowke:]

Paul, we haven’t done that because as you probably know the third quarter for us is our busiest earnings season and as I mentioned on the call it’s also when we will get a final ruling on this significant rate case in Minnesota. So, I think it makes a lot of sense to get through the summer and see how we did with the rate case, and then if need be update you on our guidance range on the third quarter call.

[Paul Debbas:]

Thank you.

[Operator:]

Our next question is from Ashar Khan.

[Ashar Khan:]

My question has been answered, thanks.

[Operator:]

Okay, we have a followup question from Paul Rizdon.

[Paul Rizdon:]

It’s kind of on Paul Debbas’ question, when you give your guidance are you treating the $0.02 tax benefit as an unusual item or is that embedded in the guidance?

[Benjamin Fowke:]

When we reaffirm guidance, were you talking about ’07 now?

[Paul Rizdon:]

’06.

[Benjamin Fowke:]

No, it’s embedded.

[Paul Rizdon:]

And any progress with the IRS?

[Benjamin Fowke:]

No, nothing really, are you talking about the Coley litigation?

[Paul Rizdon:]

Yes.

[Benjamin Fowke:]

Nothing really to report there. We filed a second motion for summary judgment. That will be heard later this month, no timetable on when we’ll get a decision on that. And as you probably know the trial itself is scheduled to start beginning of ’07. We expect to have an answer two to three months later.

[Paul Rizdon:]

Okay, thank you again.

[Operator:]

Your next question is from Daniele Seitz.

[Daniele Seitz:]

I recall that’s more long term, but when do you think of planning for additional capacity either in Minnesota or Colorado, and is there a procedure that you have to go through?

[Benjamin Fowke:]

We went through in Colorado, Daniele, the least cost planning process a couple of years ago and Comanche 3 came out of that along with more commitments to wind and other things. Here in Minnesota we’re in the middle of that resource planning process and working very closely with the commission and staff to develop recommendations. Preliminary recommendations are more wind production, increase in base load capacity of 375 megawatts…I believe we said we need that by 2014, and we’re looking at other aspects of the resource plan too. So, we’re right in the midst of it here in Minnesota.

[Daniele Seitz:]

And do you at least know the special requirement in terms of how much you are supposed to build relative to what you are supposed to purchase, because I’m assuming the wind production, would you be a builder or would you just buy it?

[Benjamin Fowke:]

Well that remains to be seen. Historically we’ve been a buyer, not a builder.

[Daniele Seitz:]

Right, there is no requirement as to the level of purchase power that you will prefer?

[Benjamin Fowke:]

No, clearly what you do is justify the least cost.

[Daniele Seitz:]

Okay, thank you.

[Operator:]

Once again if you do have a question that’s * and then the number 1 on your telephone keypad. And our next question comes from Nathan Judge.

[Nathan Judge:]

Hello, I wanted to just ask a question about the wholesale commodity trading margins. I know there’s quite a bit going on there including sharing and I guess, if I understand the text correctly, there is some depression of margins as you didn’t have as much availability to sell into wholesale market. It looks a bit weak especially considering that you’re looking for $10 million to $20 million from that business for the full year, could you go into greater detail that is in line with your expectations?

[Benjamin Fowke:]

For the six months, even with the reclassifications associated with the partial settlement, Nathan, which I can run through with you if you’re not familiar with it, we’re at $14 million, so I think the range is pretty appropriate. You know, we’re having a very hot summer and it’s not a lot of capacity when you’re meeting your own customer needs.

[Nathan Judge:]

So, the commodity trading margin of negative 8 in the short term wholesale margin is 4, as I understand it’s pretty much in line with your expectations?

[Benjamin Fowke:]

It is, just remember as I mentioned on the call, you have to back out those adjustments that we made, the big adjustment being the space for reclassification, the year-to-date reclassification which reflects the settlement agreement we entered into in Minnesota, where for the last several years the majority of our short-term wholesale trading margins have come from.

[Nathan Judge:]

So, if I were to look at what that was perhaps a year ago, again is that 24/7 with readjustments or it would only impact this year?

[Benjamin Fowke:]

Only this year.

[Nathan Judge:]

Okay, thank you.

[Operator:]

And your next question is from Dan Jenkins.

[Dan Jenkins:]

Good morning. Just looking at your sales growth on a normalized basis in the quarter, the commercial and industrial were weaker than what they were in the first quarter, I was wondering if you could talk about that a little bit, what’s going on.

[Benjamin Fowke:]

Dan, I think what you really have to do is look at the year-to-date trend. You may recall in the last quarter I mentioned don’t read too much into the stronger than anticipated sales that we saw in the first quarter of 2006 compared to 2005. You’re always going to have some noise in the system quarter to quarter. We were implementing last year a billing system, so that potentially can SKU the data even more than you typically see quarter to quarter. So, I would stick with the six months’ trend as something more indicative of what we expect for the full year.

[Dan Jenkins:]

So, 1.9, you would expect the second half would be like?

[Benjamin Fowke:]

We haven’t changed our assumption, but we do think that’s far more indicative than the quarterly results.

[Dan Jenkins:]

Okay, thank you.

[Operator:]

Once again, ladies and gentlemen, if you have a question please press * then the number 1 on your telephone keypad.

[Richard Kolkmann:]

This is Dick Kolkmann. I understand that some of you have experienced some disconnects on the call today, we apologize for that. The call will be available for replay probably in a couple of hours. So, if you have any questions, you’ve missed anything just give Paul Johnson or myself a call.

[Dan Jenkins:]

I apologize for that too, but I thank you for participating on the call today and again if you have any followup questions, Dick and Paul will be here to help you. Thanks everyone.

[Operator:]

Ladies and gentlemen, this concludes today’s teleconference. You may now disconnect.