Xcel Energy Inc (XEL) — Q4 2015 Earnings Call Transcript

Good morning and welcome to Xcel Energy's 2015 year-end earnings release conference call. Joining me today are Ben Fowke, Chairman, President and Chief Executive Officer; and Teresa Madden, Executive Vice President and Chief Financial Officer. In addition, we have other members of the management team in the room to answer questions as needed. This morning, we will review our 2015 results, and update you on recent business and regulatory developments. Slides that accompany today's call are available on our website. In addition, we'll post a brief video of Teresa summarizing financial results later this morning. In addition, we recently launched an Investor Relations app, so you can download for free in the app store. The app allows you to use your mobile devices conveniently to access our Investor Relations material. As a reminder, some of the comments during today's conference call 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. With that, I'll turn it over to Ben.

Well, thank you, Paul, and good morning everyone. I'll begin by reviewing some of the highlights from 2015. We had another successful year at Xcel Energy delivering ongoing earnings of $2.09 per share despite some challenging weather, weak sales and some regulatory setbacks. We have now met or exceeded our earnings guidance for 11 consecutive years. We also increased the dividend by 6.7%, and raised the dividend growth objective to 5% to 7%. And this marks the 12th consecutive annual dividend increase. Finally, we maintained our strong credit ratings and delivered a 3.8% total return in 2015, outperforming most of the utilities and moving to a premium valuation. We had a busy and overall successful regulatory calendar, resolving rate cases in Minnesota, Colorado, South Dakota, Wisconsin and Texas in addition to the Monticello prudence review. In 2015, we continued to pursue multi-year compacts, which support our strategic plan and provide certainty to the company, our customers and our shareholders. We were successful in implementing a second three-year plan in Colorado, and we followed a comprehensive multi-year plan in Minnesota. We were also encouraged by the legislation that was passed in Minnesota and Texas, which provides us with additional tools to reduce regulatory lag. In Minnesota, we filed a bold resource plan that will achieve a 60% carbon reduction by 2030. This plan advances the addition of renewables on our system, preserves the liability while ensuring customer benefits and affordability, creates ownership opportunities for us and positions us well to meet the requirements of the EPA's Clean Power Plan. We are encouraged by the broad stakeholder support that we've received. In 2015, we continued to demonstrate strong operational performance, particularly in storm restoration. For example, in December, SPS experienced a horrific winter storm with sustained winds between 50 miles to 80 miles per hour, a low zero wind chill, wide-out conditions and inaccessible roads due to 6-foot to 10-foot snow drifts. Now, even with these challenging conditions, we were able to restore service to 84% of our customers within 12 hours and 98% of our customers within 24 hours. This remarkable feat was accomplished as a result of our proactive planning, which began days before the event, and of course our dedicated employees who sacrificed time with families during the holidays. Our industry-leading storm response was recently recognized by EEI, which gave us their Emergency Recovery Award for our response to severe weather in Minnesota that impacted 250,000 customers just last summer. In 2015, our employees not only provided best-in-class storm response, but also achieved record levels of safety, resulting in an eighth consecutive best year ever. Safety is a critical priority to Xcel Energy, and we're committed to sending all employees home every day without an injury. Clearly, we believe there is a strong correlation between safety and employee engagement and productivity. We also had an excellent start to the construction of the 200-megawatt Courtenay wind project in North Dakota. We expect the wind farm to be in service by year-end ahead of schedule and on budget. Moving to 2016, earlier this week, the PSCO filed an application with the Colorado Commission to establish a framework for potential investments in natural gas reserves. This filing proposes a plan to take advantage of historically low natural gas prices, provides a long-term hedge against market fluctuations and offers predictable natural gas prices, with long-term benefits for our customers. The Colorado Commission will have 240 days to reach a decision on the regulatory framework. If the commission approves the framework, we would then seek approval for a potential investment, assuming it is beneficial for our customers. It's important to recognize that market conditions need to be conducive for an investment to be made. But having an established framework in place will allow us to be opportunistic. As a reminder, the potential investment for rate basing of natural gas reserves is not included in our base capital forecast and represents another growth initiative as part of our upside capital forecast. Finally, while Teresa will go into more detail, I wanted to address the high-level impact of the extenders' bills. Based on our initial analysis, we find it to be a net positive, despite some reduction in the rate base growth, and here is why. First, we don't anticipate a material impact on EPS for the 2016 to 2018 timeframe. This is due to multi-year plans and the existing NOL tax positions at our major jurisdictions. Second, beyond the 2018 timeframe, the bill reduces revenue requirements and lowers bill increases for our customers. This reduces regulatory risk, which increases our ability to close the ROE gap. Frankly, I believe it gives us an opportunity to go beyond the 50 basis points of ROE improvement. It also increases headroom for additional capital investments. Finally, we view the extensions of PTC and ITCs favorably, as they make large-scale renewables become even more affordable for our customers. As a result, we continue to be very confident in our ability to deliver ongoing earnings consistent with our 4% to 6% EPS growth objective. So with that, I'll turn the call over to Teresa to provide more detail on our financial results and outlook in addition to our regulatory update. Teresa?

Thanks, Ben, and good morning. My comments today will focus on full-year 2015 results. We had another strong year and delivered 2015 ongoing earnings of $2.09 per share compared with $2.03 in 2014. The key takeaway is that we implemented significant cost initiatives and management actions to offset negative weather, sluggish sales, and certain unfavorable regulatory outcomes, allowing us to deliver earnings within our guidance range. The following key drivers positively impacted earnings: electric rate increases in riders, a lower earnings test refund in Colorado, and reduced O&M expenses. These positive factors were partially offset by several items. We experienced unfavorable weather, which reduced earnings by $0.07 per share, compared with last year and reduced earnings by $0.04 per share when compared to normal weather conditions. In addition, we had higher depreciation, property taxes, and interest expense, as well as lower AFUDC. Turning to sales, our weather-normalized electric sales were down 0.2% for the year. The decline was primarily attributable to the impact of lower oil and natural gas prices and lower use per customer. This was partially offset by strong customer additions of nearly 1%. The economies in our service territories remain healthy with average unemployment of 3.4% compared to the national rate of 5%. While sales declined slightly in 2015, we are expecting modest sales growth of 0.5% to 1% in 2016. Our projections are based on the following factors. 2016 is a leap year, and the extra day accounts for 0.3% of growth. In addition, growth in the number of customers is projected to outpace the decline in use per customer, providing positive growth in residential sales. Finally, several large C&I customers experienced reduced load in 2015 that we expect to stabilize. We did see growth for other C&I customers, but at a slower rate. O&M expenses decreased $4.7 million or 0.002 in 2015, exceeding our guidance range of an increase of 0% to 2%. As I previously mentioned, we experienced some headwinds during the year, and the management team responded by reducing costs to deliver earnings consistent with investor expectations. These actions demonstrate our commitment to bending the cost curve and meeting our financial objectives. Now, I'll provide an update on several regulatory proceedings. Additional details are included in our earnings release. Yesterday, the Commission ruled on our Colorado natural gas rate case. While a written order has yet to be issued and we haven't had a chance to fully analyze the results, we wanted to give you a high-level overview of the verbal decision. The Commission largely approved the ALJ-recommended decisions with a couple of changes. Key decisions include a single-year rate plan versus our request for a multi-year plan, a three-year extension of the PSIA prior, and ROE of 9.5% and an equity ratio of 56.5%. We will file an 8-K with more details after we have fully analyzed the results. In our Texas electric rate case, the Commission ordered a rate decrease of $4 million, compared with our request for a rate increase of $42 million. The Commission's decision was very disappointing and significantly lower than the ALJ recommendation. Key elements include rejection of SPS's request for post-test-year capital additions. This allows us to be of SPS's proposed known and measurable adjustment for updated allocation factors between customer classes related to load reductions of a wholesale customer effective June 2015. This allowance of incentive compensation and a reduction in the equity ratio. We've been very upfront that the earned ROEs need to improve at SPS. And while we made improvements in the earned ROE, we are still not earning at an acceptable level. As you know, it is a high priority for us to close the ROE gap. We have filed a hearing and plan to file a new rate case this quarter that will incorporate provisions of the recently passed legislation designed to reduce regulatory lag. As a reminder, this new legislation provides for the inclusion of post-test-year capital additions, timelier implementation of new rates, and enhanced recovery for new natural gas plant investments. We believe this will help us achieve more constructive outcomes in the upcoming case. In November, we filed a multi-year rate case in Minnesota that provides for various implementation alternatives. In December, the commission approved our 2016 interim rate request of approximately $164 million. The commission approved a decision on our proposed 2017 interim rates and indicated NSP Minnesota could resubmit its interim request in the third quarter for consideration. The procedure schedule has been established which provides for a final decision in June of 2017. However, as part of the schedule, we outlined the path for meaningful settlement discussions, which may shorten the timeline to reach resolution in the case. Next, I'd like to discuss the impact of the recently passed five-year extension of bonus depreciation. At our Analyst Meeting in December, we provided our updated five-year base capital forecast of $15.2 billion. The extension of bonus depreciation will reduce the rate case CAGR by approximately 70 basis points to 80 basis points resulting in the rate base growth of about 3.7% for our base capital plan. While bonus depreciation reduces rate-based growth, it also reduces the impact on the customer bill and creates more headroom for potential investments. At our Analyst Meeting, we also presented an upside scenario to our capital forecast, which included incremental investment for renewables related to the Minnesota resource plan, distribution grid modernization, and natural gas reserves in Colorado. In addition, earlier this week, we announced our energy future plan in Colorado, which creates further investment opportunities. As a result, we have increased our upside capital forecast to $2.5 billion. This forecast reflects potential investments having a reasonable probability of coming to fruition over the next five years. The upside capital forecast of $17.7 billion over the five-year timeframe results in an annual rate base growth of approximately 5.5% including the impact of bonus depreciation. As a result of our robust capital investment opportunity and our actions to improve our ROE, we remain very confident in our ability to deliver on our 4% to 6% earnings growth objective, even with the impact of the bonus depreciation extension. In summary, 2015 was another excellent year for Xcel Energy. We delivered earnings within our guidance range for the 11th consecutive year, we increased our dividend for the 12th straight year, we initiated cost management actions, which resulted in a decline in O&M expenses, new legislation was passed in Minnesota and Texas, which will provide more tools to reduce regulatory risk, we resolved regulatory proceedings in numerous jurisdictions. We filed a resource plan in Minnesota with significant carbon reduction, we are reaffirming our 2016 ongoing earnings guidance of $2.12 to $2.27 per share. Finally, we are well-positioned to deliver on our value proposition, which includes earnings growth of 4% to 6% annually and dividend growth of 5% to 7% annually with a payout target of 60% to 70%. Operator, we'll now take questions.

Thank you. Good morning.

Good morning, Ali.

Good morning, Ben, Teresa. As you mentioned in 2015 on an ongoing basis, the OpCo are we weather normalized 9.07%. Can you just remind us what the weighted average authorized ROE is just to get a sense of what is the lag as we've exited 2015? And then what's baked into earned ROE in your 2016 guidance?

Well, we'll start with the weighted average, in terms of authorized ROEs, it's about 9.8%. And when we look to 2016, we see three of our utilities earning right around the 9%, low 9% and some of them a little stronger than that. I will say we have some lag in Texas, our Texas company, somewhat related to what came out of that case. But, you know we're filing a new case. And so, we do still think we're on target to achieve our 50-basis point closure by 2018, Ali.

Yeah. But in general though, is 2016 earned ROE on average similar to 2015, when you put it all together?

And we would expect to see some improvement in it.

Okay. And then separately just for 2016, as you mentioned the Texas case was disappointing, looks like Colorado guess if they followed the ALJ to the large extent seem to below what should have been asking for. What kind of headwinds does that create for us for 2016? And at this point, is that putting us more in the lower half of the range, or how should we be thinking about the implications?

I mean, Ali, we were pretty pragmatic when it comes to handicapping, what we put out on the forecast. So, I don't think it has much of an impact at all.

Okay. And last question, when at the earliest should we start to see some of the growth CapEx and rate base implications start to move into your current base case plans?

Ali, we filed the energy – we're going to file a resource plan later in the year in Colorado, and that's where you'll start to see the energy future plans, but I mean they will probably be most eminent – probably be in the backend of our capital forecast. But Ali, let me just reiterate, you've got solid transparency for the first three years. Bonus depreciation is not having an impact on us in the first three years, and we explained the reasons why for that. You look at years, four and five, and what I see and why I'm bullish on what happened with the extenders' pillars. I see reduced regulatory risk, which I think gives us upside to exceed our GAAP closure on ROE of 50 basis points. I see more affordable customer bills, and I think that plays well to our multi-year plan discussions here in Minnesota. But then as an environmental leader that we've been, and with the amount of the renewables that are now being made so much more affordable by the ITC and PTC extension, I think we're being conservative, but I think we can capture with credibility that capital upside. I mean, there's a lot of renewables that are going to be built in our jurisdiction, and if we follow good policy mandates and do it with large-scale renewables, it's going to be very affordable, and you're basically going to trade off natural gas expense for renewables. And we're really excited about it, and I think it's going to – it's done a lot for us. And so, I guess you know, we would be the first utility to talk about the impacts of bonus depreciation and we've been thinking about how we would turn that into an upside for us, and I'm really confident in our plans.

Thank you.

Hey, Julien.

Hi, Julien.

Hey, good morning, guys. Well actually let's kick it off just going back to that last question a little bit. Just kind of definitively in terms of timing there for the growth CapEx. Is there kind of a year in which you would frame this, I mean – perhaps let me frame it this way: NOLs obviously in the near-term limit you might be impacting the bonus depreciation. Do you need to wait for the cash tax benefits to extend hours within the five-year period, or how are you thinking about the timing of that growth CapEx, given the cash tax position?

I'm Julien, and in terms of – we don't think that this is dependent on the cash tax position by any means, and we do think the CapEx probably would start in the middle of, I would say, the 2018 timeframe, so – and we think we'll be well positioned. We have some time because of the NOL situation and the multi-year plan has been described. So we think that we have a lot of opportunity and that's probably when it would start.

And just to be clear, if I hear you right, it would also be dependent upon getting approvals in specifically in Colorado?

Well, yeah, I mean it's...

The upside CapEx.

I mean, well, it's not only in Colorado, I mean it's also in Minnesota. And then remember, we talked about how we would pursue a capital upside forecast at our Analyst Day. And what we've done is with the filing of the Colorado Energy plan have updated that capital forecast, because we didn't have renewables from Colorado in that Analyst Day presentation, and we should and I'm confident that you're going to see more renewables because of the ITC, PTC being extended. And in fact, if you think about it, the PTC does phase down quicker than the ITC. So if you were staging it, you'd probably focus on more wind initially. And you know, you've got to look at the NOLs too, as I think Teresa was talking about at the OpCo level, specifically then it rolls up to the Holdco. I think what you're referring to, Julian, is maybe some – you know, if you don't have a tax appetite, some of those things get put on the balance sheet for a period of time, and they do. But that's okay. I mean, it turns around and we're very much prepared to wait for that turnaround, because these opportunities I think are extremely compelling, realistic, and they're right in front of us, and they are organic growth.

Maybe just to supplement that in terms of your question about the regulatory process and if you just – just related to Minnesota. When we went through the last resource planning process of the four wind farms, I mean we're owning three of those for wind farms, so we think they are very supportive in terms of ownership in Minnesota, and Colorado more to come, but we're very confident.

Yeah. Great, Teresa.

And actually just to get a little clarity on the renewable spend, are you feeling confident about your ability to continue to own solar rate base projects as you proposed back of the requirement?

Yeah. I mean again I think these things are affordable and we always pursue things with the impact on the consumer. And even with low natural gas prices, what we're seeing with wind, and now with the extension of the PTC says, a) it's a good deal for consumers. Same with solar, I mean, as you know, large-scale solar is a better deal for all customers than rooftop, but – and I think there is an appetite for that.

Got it. But even relative to PPA option.

Well, a PPA in my mind is kind of like the decision between whether you own a car or lease a car, right. And typically, you can – with PPAs, the cost of ownership is lower in the early years, but as that lease expires and then you got to re-up it, it becomes more expensive. So, when you do a total revenue requirements over the expected life of the asset, it's typically more beneficial to own the asset. And I think our commissions recognize that and I think they are supportive to Teresa's point of us owning more renewables.

Thank you.

Hey, Greg.

Hey.

Hey, good morning. All my questions have been asked. Just getting a little bit more into the details of how bonus impacts you. Can you repeat what's your authorized return is in your electric deal in Colorado and how much regulatory lag you're currently experiencing there?

Our overall authorized return in Colorado is 9.83% and remember we have the band of about 65 basis points. Up to this point, we have been through 2015, we have been in a refund position, but we will be entering our second year of the three-year plan and we do think there's some headroom there. So, anyway, that's where we're at.

Okay. So in that – in Colorado in particular, bonus depreciation wouldn't necessarily – would only hurt you if it puts you into a refund position vis-à-vis having a lower rate base number, right?

Well, it's – I don't think that's really entirely true, Greg, because we've been in a refund position. As Teresa mentioned, we just entered our second three-year approach, and that plan required us to do some work to earn that ROE, and bonus depreciation on the multi-year will help us earn that authorized ROE more readily. And then of course...

No, that's exactly my – that's exactly my point. That it's not necessarily going to hurt you, if you were...

I misspoke too. So yeah, exactly.

Okay.

In that view, it's tougher to get to the – into a sharing position now, because the plan is a little more difficult, because you've got more spending. So, it only puts you back into a refund position, if you over earn, which is less likely under this plan. And therefore, you might not have as tangible impact in Colorado, as it wouldn't necessarily in Minnesota, where your – whatever the new rate plans are going to be, it'll be in there, right.

Yeah. So said in another way, we think it makes – the bonus depreciation in Colorado makes it easier for us to achieve our valve ROEs in Colorado. In Minnesota, you're in an NOL position for the next few years. And then years four and five, you start to come out of that, and Greg, what that says to me is, I think it makes the five-year multi-plan even more attractive today, than it was prior to that extension. And so, we'll see where that goes. But I mean, it's – again, that's why we think this gives us a positive versus a negative.

Yeah. All right. Thanks and good luck in the Super Bowl.

Thanks Greg.

Yeah, go Broncos, where did you bring that up, Greg, and I'm sorry about your New York Jets.

Yeah, hi. Good morning.

Good morning.

Good morning. So the $900 million for the – I think that's for the Colorado that you added. Can you give us maybe a little thought on what you're assuming in there, in terms of 2,000 megawatts, is it mainly for the 1,000 megawatts of wind or you assuming like you win half of it or how are you getting to that?

Yes, you got it and you take... entire spend of the 1,000 megawatts, which I think is 600 wind, 400 solar. And we assume we get half of it.

That's exactly right. Yep.

Okay. That's easy enough. Second question is just and I apologize to beat this horse to Paul, but I know you're talking about the benefits after 2018 of the kind of the bonus and rate headroom and all those things, but just to make sure understand, if the NOL benefit is gone then the bonus impact is actually bigger after 2018? So obviously, you have more rate headroom, but it also impacts rate base more. Or if I'm not right.

Yes.

Well. I mean, I think that's – go ahead, Teresa.

No. I mean I think you're right. I mean in terms of as we tailor down, I mean in the latter part, but that I mean two things and I think Ben described it, since we're in the NOL and we're going to be in the NOL in Minnesota for the first couple of years, we have time to work through some of these things and we have opportunity potentially for investments, upside investments which we've talked about in terms of our resources. So, yeah, we think...

Right.

With modernization you talked about that at the Analyst Day. So yeah, we think...

Then you have the – so you're right. Obviously your point is that you've got a line of sight on project opportunities and then it fits well within your rate headroom kind of limitations and all that stuff to fill that in do things that you want to do, so okay.

Yeah. I think that's exactly right. And it goes beyond 2018, frankly beyond 2020 you just look at what we're doing here in Minnesota. There's a tremendous amount of renewables, grid modernization, there's a lot of work that to be done and Steve I think the limiter has always been what are -- what is the pace of rate increases. And so, we have always had more capital opportunities than we've executed on, because we're mindful of what happens when you are in front of the regulator asking for more than a modest rate increase. So I think this actually very much facilitates our strategic plans and keeps that affordability equation where it needs to be. So, that's why we think it's positive.

Exactly.

Okay. And then on the Minnesota rate case, could you maybe just give a little more color on how likely you see chances for settling that, given I know there are a lot of involvement in getting the legislation done to begin with it.

What's the begin – it always takes two to settle, right. I mean so and we do had time scheduled over the summer for that. I think that's a good sign. I think that if you look at the case, it's about straightforward issue you can get. So, you know I'm cautiously optimistic that we can get something done. It would make sense to get something done, and got Marvin McDaniel, Chris Clark if you want to add anything to that, you're on the front lines.

That is to add, I think you're right. I think we have a great opportunity and we look forward to working with parties to see what we can accomplish.

Yeah, you said you agree with it.

Good morning. How are you?

Hey, Paul.

Good morning, Paul.

Just you've been over it, and I apologize I wasn't quick enough. You went over the sales growth forecast, I think with 50 basis points and was that right that included leap year or exclude? It did include leap year. And what were the other things that were driving it as well?

Yes. Our guidance is 0.5% of 1%. The leap year is 0.3% and we are seeing customer growth of about 1% across our system. And we are seeing – if we look at the last two quarters, well, on an annual basis in terms of use per customer, particularly in our residential class, we are showing a decline in our larger jurisdictions. The last two quarters, we have actually seen that plateau. And so, we don't expect to see this continue. I mean two quarters is not necessarily a trend, but we do expect that to levelize. So, we are expecting to see some improvement. And then, specifically to some of our large C&Is where we do see some decline, we see that's going forward that we don't expect that to continue. We see some stabilization with where they will be at in 2016 as well.

Okay. Most of my questions have been answered. Thanks so much.

All right. Thank you.

Thanks, Paul.

Well, thank you all for participating in our earnings call this morning. Please contact Paul Johnson and the IR team with any follow-up questions, and thanks very much.

And go Broncos.

Go Broncos. Yeah.

Thanks everyone. Bye-bye.

Thank you.

Thanks.