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Q3 2014 · Earnings Call Transcript

Oct 30, 2014

Executives

Paul A. Johnson - Vice President of Investor Relations Benjamin G.

S. Fowke - Chairman, Chief Executive Officer and President Teresa S.

Madden - Chief Financial Officer and Senior Vice President

Analysts

Julien Dumoulin-Smith - UBS Investment Bank, Research Division Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division Angie Storozynski - Macquarie Research Travis Miller - Morningstar Inc., Research Division Paul B. Fremont - Jefferies LLC, Research Division Christopher Turnure - JP Morgan Chase & Co, Research Division Greg Gordon - ISI Group Inc., Research Division Paul T.

Ridzon - KeyBanc Capital Markets Inc., Research Division Michael J. Lapides - Goldman Sachs Group Inc., Research Division Steven I.

Fleishman - Wolfe Research, LLC Paul Patterson - Glenrock Associates LLC Ashar Khan Andrew Levi Kit Konolige - BGC Partners, Inc., Research Division

Operator

Good day, and welcome to the Xcel Energy Third Quarter 2014 Earnings Conference Call. Please note, today's call is being recorded.

At this time, I would like to turn the conference over to Mr. Paul Johnson.

Please go ahead, sir.

Paul A. Johnson

Good morning, and welcome to Xcel Energy's 2014 Third Quarter Earnings Release Conference Call. Joining me today are Ben Fowke, Chairman, President and Chief Executive Officer; Teresa Madden, Senior Vice President and Chief Financial Officer; Dave Sparby, Senior Vice President, Group President and President and CEO of NSP-Minnesota; Scott Wilensky, Senior Vice President and General Counsel; George Tyson, Vice President and Treasurer; Jeff Savage, Vice President and Controller.

This morning, we will review our third quarter results, discuss our strategic plans, update you on recent business developments and regulatory developments, discuss our 2014 and 2015 guidance, and our updated capital plan. Slides that accompany today's call are available on our web page.

In addition, we will post a brief video on our website of Teresa Madden summarizing our financial results. 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 in our filings with the SEC. I'll now turn the call over to Ben.

Benjamin G. S. Fowke

Well, thank you, Paul, and good morning. I'm going start by highlighting some of the key takeaways from the quarter, and then Teresa will provide more details on some of these items.

Overall, we had a solid quarter with ongoing earnings of $0.73 per share, compared with $0.77 per share last year. Weather was the biggest driver for the quarter, with an adverse impact of $0.07 per share.

Based on our year-to-date performance, we're on track to achieve our 2014 ongoing earnings guidance, and we're tightening our range to $1.95 to $2.05 per share. In addition, we are positioned to meet our objective of limiting O&M increases to 2% to 3% for 2014.

We are also introducing our 2015 EPS guidance range of $2 to $2.15 per share, solidly within our 4% to 6% earnings growth objective. Our guidance ranges are based on several key assumptions, as described in our earnings release including constructive outcomes in our regulatory proceedings.

We're also providing you with our new 5-year capital plan, which totals $14.5 billion. Our updated capital forecast drives rate-based growth by about 4.7% using 2014 as the new base.

So with 9 months of 2014 completed, we are on track to deliver earnings within our guidance range for the 10th consecutive year. Beyond 2014, we are confident that our strategic plan will continue to grow EPS and our dividend at 4% to 6% annually.

And that plan begins with a robust capital investment program coupled with an improving regulatory environment. Today, as you know, we're not currently earning our authorized ROEs.

This is especially true in NSP-Minnesota and SPS. We believe we can close that gap over the next several years.

To this end, we are formally introducing a goal of reducing overall regulatory lag by 50 basis points by 2018. In addition, we're establishing a goal of deriving 75% of our revenue from multi-year plans by 2017.

So in Minnesota, along with working to resolve the current rate case, we are collaborating with stakeholders on ideas for a longer term, more performance-based rate compact, and we're discussing alternatives to filing a 2016 rate case. And we're looking ahead to the legislative session when some of these ideas may surface.

At SPS, we're working with stakeholders and planning to introduce legislation that would reduce regulatory lag and allow us to continue to make investments that will support the tremendous growth we're experiencing in the region. We continue to make significant investments at SPS, and we are planning to file a Texas retail rate case in December of this year.

While constructive regulatory frameworks are important keys to our success, we also recognize that we need to diligently manage our cost. Our O&M objective is to keep our cost increases in line with expected sales growth.

Now, this will be achieved by continued standardization and streamlining of our work processes. We made significant improvements in the last few years, and we're beginning to reap those results.

We're also implementing new systems that will leverage and expand those results while also meeting both the challenge and the opportunity associated with transitioning a retiring workforce. Those efforts, combined with stabilization of nuclear and pension costs will position us well to limit O&M increases to 0% to 2% annually.

I also believe we have some upside opportunity to expand our capital investments beyond the $14.5 billion we just announced. We have fantastic opportunities right in our backyard and I've challenged my team to pursue them.

Look for us to expand our regional presence in the disciplined and thoughtful manner you've come to expect from us. Our plans focus on transmission and natural gas.

We have extensive experience in these areas and both offer the opportunity for placing assets under federal regulation. With respect to transmission, we've recently achieved milestones in the development of our transcos with the filing of our federal applications.

At the same time, we are pursuing new projects through our operating companies in states that offer a right of first refusal or other favorable frameworks. This 2-pronged strategy gives us the flexibility to pursue projects in a way that makes the most sense for the situation offering advantages as we compete for the right to construct under FERC Order 1000.

While we're in the early days of pursuing growth in natural gas, we see great opportunities for new infrastructure and increased use of our existing assets. We have a solid track record in our natural gas business that we plan to leverage and expand.

Look for us to build natural gas infrastructure in our regions and consider new upstream investments. In addition, we are preparing to explore with our regulators the possibility of rate-basing natural gas reserves to take advantage of the current low prices for our customers, while also creating a new investment opportunity.

So in addition to being on track for the year, we have plans in place to deliver solid earnings growth for the years ahead. So with that, I'll turn the call over to Teresa.

Teresa S. Madden

Thanks, Ben, and good morning. We're pleased to report another solid quarter with ongoing earnings of $0.73 per share, compared with 2013 third quarter earnings of $0.77 per share.

The biggest driver of the difference was weather. 2013 third quarter results included a positive weather impact of about $0.05 per share, compared with cooler-than-normal weather in 2014 that resulted in a negative impact of $0.02 per share.

Other drivers include improved electric and gas margins resulting from rate filings in several jurisdictions, as well as higher rider revenues. Partial offsets were higher property taxes and depreciation expense.

These cost increases were expected and are consistent with our financial plans. Let me start by providing an update on sales in the economies in our local service territories.

We continue to experience positive year-to-date sales trends with weather-normalized retail electric sales increasing 1.4% and firm natural gas sales up 4.8% through September. While the third quarter had some variations, year-to-date sales continued to exceed our original expectations for the year.

Let me provide a little more detail on the sales growth by company. Beginning with SPS, year-to-date weather-adjusted retail electric sales increased 2.3%, driven by growth in the C&I class.

Oil and Gas exploration in the Permian Basin continues to benefit the service territory. Sales at NSP-Wisconsin increased 3.3%, due to strength in the C&I sales that resulted from a large pipeline customer that has been operating at full capacity this year and continued growth in the sand mining industry.

PSCo sales increased 1.3%, which was primarily attributable to strength in the C&I class resulting from a new food manufacturing company and growth in the energy sector. Finally, NSP-Minnesota sales increased 0.7%, driven by growth in the number of residential and small C&I customers and increased usage by the small C&I class.

Economic conditions are generally stronger across the Xcel Energy region, compared with the nation as a whole. The consolidated unemployment rate in our service territory of 3.7% remains well below the national average of 5.7%.

In addition, the number of jobs in our region grew 2.3% year-to-date, compared with 1.9% for the nation. We are pleased with the better-than-expected sales growth but continue to maintain a relatively conservative forecast and are assuming electric weather-adjusted sales growth of about 1% for both 2014 and 2015.

Focusing more specifically on third quarter earnings. Ongoing electric margin increased $8 million for the quarter.

Key drivers included: implementation of final and interim rates, which increased margin by $39 million; nonfuel riders increased margin by $13 million; and improved wholesale results increased margin by $7 million. These positive factors were partially offset by an unfavorable quarterly weather variance of $56 million as well as other items.

The electric margin results reflect an estimated reserve for the Minnesota rate case and an estimated customer refund liability, to capture the impact of sharing earnings above the authorized ROE at PSCo. Turning to the natural gas side of the business.

Margin increased by $8 million. This was largely due to revenue from our pipeline integrity rider, which is designed to recover our ongoing gas infrastructure investment.

O&M expenses decreased $7 million or 1.2%, primarily driven by lower employee benefit costs and moderating nuclear costs. For the year, O&M is up 2.8% within our original guidance assumption of an increase of 2% to 3%.

It is worth noting that O&M was highest in the fourth quarter of 2013 due to incremental spending on our system after a hot summer. As a result, we expect that our 2014 fourth quarter O&M will come in lower than last year.

More importantly, we're introducing 2015 O&M guidance of 0% to 2%, consistent with our long-term objective. Finally, other taxes increased about $13 million or 12%, largely driven by higher property taxes in Minnesota and Colorado.

Next, I'll comment on several regulatory proceedings. Additional details are included in our earnings release.

Minnesota, we completed hearings for our electric rate case in August and successfully narrowed the differences on several key issues between the company and the Department of Commerce, the primary intervener. The important takeaway is that we continue to make progress and have limited the material remaining issues to ROE, certain labor and benefit expenses, as well as depreciation expense in 2015.

As a result, we have revised our 2-year request to $248 million. The remaining key dates are the ALJ report due in late December, with deliberations and a commission decision scheduled for March of 2015.

We also completed hearings in the Monticello Prudence Review and believe that we presented a strong case focused on key things, including the investment was prudent, it was essential that the work be done right, and we made reasonable decisions during the course of the project. Importantly, the surrounding communities and our customers have a largely rebuilt, safe, and efficient source of carbon-free, low-cost power for many years to come.

We look forward to the ALJ's order in late December with deliberations and a commission decision scheduled for March of next year. We remain confident that we will reach a constructive outcome in both the Minnesota rate case and the Monticello Prudence Review.

In our Colorado electric rate case, we're seeking an increase in annual revenue of approximately $136 million or 4.8%. In addition, we have introduced a Clean Air-Clean Jobs investment rider that would cover 2016 and 2017.

Our objective is to establish a multi-year regulatory plan that provides certainty for PSCo and its customers. Key dates are staff and intervener testimony on November 7, rebuttal testimony on December 17, hearings in late January, and interim rates will be effective in mid-February with a final commission decision in the second quarter of 2015.

In Texas, we reached a settlement, which will increase annual revenue by $37 million or 3.5%. The Texas commission is expected to rule on the settlement later this year.

In Wisconsin, we reached an agreement with the commission staff that resolved all contested issues and provides for a revenue increase of $16 million. ROE, capital structure and rate base are not issues that were being considered in this case.

We expect a final commission order by year end. It is still early in the South Dakota rate case process, and there is no news to report.

However, we continue to anticipate resolution early next year. Finally, as we continue to invest in reliability and new infrastructure in our Colorado gas business, it is important that we recover these investments in a timely manner.

As a result, we are planning to file a natural gas case early next year. This morning, we are narrowing our 2014 ongoing earnings guidance to $1.95 to $2.05 per share and are introducing our 2015 earnings guidance of $2 to $2.15 per share.

Our guidance ranges are based on several key assumptions as described in our earnings release, including constructive outcomes in our regulatory proceedings. It is worth noting that our 2015 guidance assumptions include sales growth of about 1% and O&M growth of 0% to 2%.

In addition, we are introducing our refreshed 5-year capital base plan of $14.5 billion, an increase of $400 million from our last plan. Our capital forecast includes $4.5 billion for transmission investment, which has a high level of certainty.

This base plan drives an overall rate base compound average growth rate of about 4.7% from 2014 to 2019. Our projected transmission investment drives rate-based growth of about 10% during this 5-year period.

It is important to note, as Ben indicated, that our forecast doesn't include any potential incremental growth investments in natural gas assets and does not assume success in any competitive transmission RFPs that are expected to be issued over the next 5 years. On the financing front, we recently amended our credit facilities.

While the basic terms and conditions didn't materially change, we extended the maturity until 2019 and increased the overall borrowing limits by $300 million to $2.75 billion. Looking forward, we are planning to issue $1.85 billion of debt in 2015.

We have debt issuances planned for each operating company and at the holding company. The details are included in our earnings release.

As a reminder, we don't plan to issue any equity beyond our DRIP and benefit plan through 2019. Finally, we are pleased with the recently approved 10-year franchise agreement and the Clean Energy partnership with the city of Minneapolis.

These agreements enhance our long-standing partnership with the city and demonstrate our commitment to environmental leadership by providing our customers with more options. With that, I'll wrap up my comments.

With 2014 coming to a close, we're pleased to narrow our guidance range and are on track to deliver earnings within our range for the 10th consecutive year. Our 2015 guidance of $2 to $2.15 per share is solidly within our 4% to 6% earnings per share growth objective and is supported by our $14.5 billion capital plan.

We continue to experience better-than-expected sales growth with year-to-date weather-adjusted retail electric sales growth of 1.4% and weather-adjusted firm natural gas sales growth of 4.8%. We are making progress on the regulatory front and expect to reach constructive outcomes in our major jurisdictions in the coming months.

We continue to expect 2014 O&M expense to grow 2% to 3% and 2015 O&M to be flat to up to 2%, consistent with our original guidance assumptions. And finally, we are well positioned to deliver an attractive long-term value to our shareholders by growing earnings and our dividend, 4% to 6% annually.

So operator, with that, we'll now take questions.

Operator

[Operator Instructions] We'll take our first question from Julien Dumoulin-Smith with UBS.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Ben, I just wanted to follow-up here, firstly on the oil and gas side, if you could expand a little bit. What service territories would this potentially include and how big of a program are we talking about?

Just, if you can give us little bit of a sense here with the timeline and magnitude?

Benjamin G. S. Fowke

Well, it's really, we're -- this is Ben, Julien. We are focused in our footprint.

As you know, we're on the periphery of the Dakotas in the Bakken, and we're well on the oil patch in New Mexico and Texas and, of course, there's the DJ in Colorado. So all of those have infrastructure needs.

We're focused on the gas side, we're focused on the ability to work our existing assets, harder than we work them today and being more of a regional player. And as I said on the call, it's early days.

So really what I've asked my team to do is just explore those possibilities, be more proactive, try to leverage our buying power. We buy about $1.2 billion to $1.5 billion of natural gas every year.

So I think there's opportunities there, and we're going to look for them. None of that's in our forecast, as Teresa mentioned.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Right, absolutely. And then secondly, going back to Minnesota, if you don't mind, on the rate recovery potential, I mean, could you elaborate a little bit more on the timeline and ultimately what kinds of mechanisms you'd specifically be looking forward to improve the construct?

Benjamin G. S. Fowke

You mean with the alternatives that we're talking about?

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Yes, exactly, just kind of lay out the timeline for each one, to what extent one might impact the other, just from an implementation time perspective?

Benjamin G. S. Fowke

I think they're wrapped around, moving to a longer multi-year compact, recognizing that the peak for our investment cycle is in 2015 and then it starts to -- the need for a rate release starts to levelize off. So the longer the rate pact -- compact, the more we can implement rate mitigation tools that would smooth that impact.

So -- I mean that would be the focus along with discussing longer term with the commission, the overall policy goals that the state has, particularly on environmental side along with some opportunities that we have we believe that you could be more creative and drive value both for customers and reduce rates and also value for the shareholders. So -- and as you might know, Julien, there is work groups, the E21 work team for example, in Minnesota that are looking at the same thing.

We've got these goals in the future, and our utility, Xcel Energy, needs to play a big part of that, and, of course, alternative regulation then is a natural byproduct of that.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Absolutely. And then lastly, could you elaborate a little bit on logo [ph] trends and what we could see out of the IRP in, I suppose, early next year?

I'm kind of thinking here about the decision with Black Dog to kind of kick that down the road a little bit? What's the thought process?

Benjamin G. S. Fowke

I mean, I think -- I mean the last thing you want to do is throw a party and nobody comes, right? So we're seeing an increase in sales, but, I mean, the fact of the matter is, if you look at plans for solar and other aspects of our business, you want to be careful about adding anymore generation to your system and we're just saying that needs to be pushed out, and we need to be thoughtful about it.

And we're in good shape today. And so -- so Black Dog is still on the table as are the other programs, but increasingly it looks like it's further out in the future.

Julien Dumoulin-Smith - UBS Investment Bank, Research Division

Okay. No real surprises out of the IRP in many regards?

Benjamin G. S. Fowke

No. No real surprises.

And of course, everybody, including us, is waiting for the final EPA rules to come out too, so there is a lot of things that are swirling around, and I think time is on our side to get clarity on those things.

Operator

And we'll take our next question from Ali Agha with SunTrust.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Ben or Teresa, I mean, putting the context, the 50-basis-point improvement challenge that you've given the team. Give us some context in terms of, as we stand here today, how big is the regulatory lag in your system and also remind us that 50-basis-point improvement would have equate to how much in terms of incremental earnings on an annual basis?

Teresa S. Madden

Yes, sure. Ali, we generally are running at a 75 to 100 basis points in terms of the GAAP, and as you know that it varies by company.

If we would achieve or assuming when we ultimately, because it is our target to achieve the 50 basis points, it could improve our earnings growth by about 75 to 80 basis points.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Okay. Because, as you point out, the target on the rate base is 4.7%.

So to get higher or even to the higher end of your range, obviously, regulatory lag reduction has to be a key component mathematically to get there?

Teresa S. Madden

And that's exactly why we're focusing on that. So..

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Yes. Second question on load growth.

If I look at the trend that you've reported to us for Xcel as a whole, weather-normalized, there's been actually a slowing down in the growth rate in each of the last 3 quarters, 2% in the first quarter, 1.4% and now 0.9%. Can you talk a little bit more about that in terms of what's happening to cause that load growth to slow down, as we've gone through the year?

Teresa S. Madden

Well, Ali, why don't I start and then Ben can jump in. I mean, early, if we focus first on '14, and we talked about this before early in the year, we had extreme cold weather, and we're concerned that early on in our weather-normalized growth that we potentially have still a little weather trapped in there.

We all know that, that process of estimating is not perfect. If we look at this quarter in terms of the electric residential, it looks like we have declines in 3 of our 4 systems.

If we go to last year, we had very hot weather when we picked up the $0.05, and we think potentially in that period we had some weather potentially trapped in our weather-normalized growth. So when we look at them period-over-period, we think that's partly driving those declines in the quarter.

So long and the short of it, we're seeing some weather variations that we think could be causing this, but if we turn to our electric and commercial and industrial growth, we see that still as very solid across our system. And it's different reasons for each system.

Benjamin G. S. Fowke

Ali, I would just -- I think Teresa captured it, I mean I think you have to focus on year-to-date and year-to-date is ahead of our expectations. We're also seeing what we believe is household formation in both Minnesota and Colorado, and we saw customer growth of just under 1%.

So I mean that's a really good trend in our minds. So again, I think, we're in good shape with sales.

I mean, sales -- it's a different world, obviously, than where we would have been a decade ago, but good customer growth, good economies, diversified economies that all bodes well for the future, I believe.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

And then, Ben, your comment about focusing more on the gas side of the business and looking for growth there. Would that also include potential acquisitions of other LDCs out there that may be complementary to your system?

Is that one of the strategies as well?

Benjamin G. S. Fowke

Well, we don't really comment on M&A and what I would tell you is that things are pretty pricy out there. So I think it's -- the team is going to focus on what I would call taking our organic presence, what we have, our growth, our customer needs and trying to make sure that we work those opportunities harder.

And so, you're looking at pipelines, you're looking at storage, you're looking at what's happening in our region as coal plants retire and get closed and gas plants get built. Those are the kinds of opportunities that, I think, will drive value for us, Ali.

And again, we're going to be very disciplined about it. I mean, we've got $14.5 billion of identified opportunities, so we can be pretty picky.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

My last question, Ben, on the Minnesota rate case. When you look at where the differences currently lie between where you are and where the UC [ph] is right now, can you just quantify for us how much dollar terms are those differences and if you took ROE out of the equation, how much of a gap that would equate to?

Benjamin G. S. Fowke

Well, I think, we've narrowed the gap and, as Teresa mentioned, it's just in a few areas now that we've got differences in labor and pension and sales.

Teresa S. Madden

Yes, I mean, they're not significant. Right.

Benjamin G. S. Fowke

I mean I think it's important to recognize that while we have a sales difference that we've got a true-up mechanism, so it's pretty neutral.

Paul A. Johnson

And Ali, there is a schedule in the earnings release that details our position and the DOC position by line, so you can look through that.

Operator

And next, we'll move on to Angie Storozynski with Macquarie.

Angie Storozynski - Macquarie Research

I actually have just one question. So given the formulaic nature of your ROE in Minnesota and the fact that the rate case is still pending and that the 10-year treasury yield is again below 2.3%, are we risking yet another downward adjustment to the ROE?

Benjamin G. S. Fowke

Well, I mean, I think the testimony has all been filed. So I think the opportunities to reopen that are pretty limited, and I'm looking at my regulatory team, they're nodding their heads, yes.

That is true.

Teresa S. Madden

So they're downward, really the 9.64.

Unknown Executive

And it's also been briefed. So we're pretty well down that schedule.

Operator

And next we'll move on to Travis Miller with Morningstar.

Travis Miller - Morningstar Inc., Research Division

I wonder if you could discuss a little bit about how any kind of political changes next week might affect pending regulations, pending programs that you're looking at in several states. Just anything along those lines that might be material depending on outcomes in your 2 states?

Benjamin G. S. Fowke

There's an election? There's an election happening next week?

[indiscernible] In all seriousness, we've got some pretty tight elections, the race for governor in Colorado is pretty tight. If the Republican candidate wins, probably we could anticipate some changes to the commission.

Nothing near term. The other thing that we will look for in Colorado is, it's possible that the Senate, which is now Democratic might go Republican.

And if that happens, of course, you just -- any legislation that comes out would be more bi partisan. In Minnesota, I don't think it's too much of an election as far the governor's races goes, but it is possible that the House could go Republican, and again that would impact any kind of legislation that comes out again it will be more bi partisan in nature.

Clearly, there's some big Senate races, particularly in Colorado. But by and large, I don't think you would see any immediate impacts.

As you know, we -- I think we have got a great track record of working with both sides of the isle.

Travis Miller - Morningstar Inc., Research Division

Sure. Can you remind me what's the Colorado regulatory commission turnover or that relationship there with the governor that you mentioned?

Benjamin G. S. Fowke

Okay. Well, you mean -- there's 3 commissions.

The governor gets to report those. Are you talking about Colorado, Travis?

Travis Miller - Morningstar Inc., Research Division

Colorado, yes.

Benjamin G. S. Fowke

Yes. And so you have a Republican in Vod [ph] and then you have 2 Democrats.

And I don't -- Dave or Scott, I don't think either of them are up for election and Vod, potentially has some confirmation issues but that would be about it.

Unknown Executive

Commissioner Powell would be the next commissioner up in '15.

Benjamin G. S. Fowke

In '15?

Teresa S. Madden

Yes.

Benjamin G. S. Fowke

Yes.

Operator

And we'll take our next question from Paul Fremont with Jefferies.

Paul B. Fremont - Jefferies LLC, Research Division

I guess my first question is, if you take the 4.7% and the opportunities that are not included in that, what do you think the 4.7% could move to? Could it move up 100 basis points?

Or just -- what type of incremental do you see as potential opportunity?

Teresa S. Madden

Paul, at this point, I think it's just early on. We are just starting to investigate and pursue these.

So I think it would be premature for us to give a number at this point, but we clearly do think there is opportunity.

Paul B. Fremont - Jefferies LLC, Research Division

Okay. And I guess, there was a recent piece out by Moody's on rates.

And, I guess, also in the AEP earnings call, they indicated that they had looked pretty hard at our REIT structure, and I think they elaborated a number of obstacles or problems that they found with the structure. Have you guys taken a look at REITs and come to any conclusions?

Benjamin G. S. Fowke

Well, I think, we're a little bit more early days on those sorts of things. We are interested in any structure that could be a win for customers and shareholders, but our focus right now is primarily on getting those transcos formed and making sure that we obtain rights to build the transmission that, that's in our region, either through the opco structure or transco structure.

Where it goes from there is way early for us.

Teresa S. Madden

That's right. I mean, we would agree that REIT structure is complex and the first step is getting the transcos up, off the ground.

Paul B. Fremont - Jefferies LLC, Research Division

And then my last question. You've talked about dividend growth of 4% to 6%, EPS growth of 4% to 6%.

I think previously you talked about sort of a targeted shareholder return level of 10%. Is that 10% still part of your broad target?

Teresa S. Madden

That's been a while since we talked about the 10%, we just -- we, overall, think, we provide an attractive return to our shareholders. But it's been a while since we've been, probably about 18 months or even past on that about...

Unknown Executive

It's been a couple of years, Paul. I mean, obviously, if the stock prices moved up the dividend yield has declined, which makes it a little bit more difficult to get to a 10% total return based on 4% to 6% growth.

So it's really more of a math situation.

Operator

And we'll take our next question from Chris Turnure with JPMorgan.

Christopher Turnure - JP Morgan Chase & Co, Research Division

Can you talk a little about the nature of deciding to pull forward some CapEx or at least increase CapEx in the near term in '15 and '16, in particular, and what was behind that? And then also, could you give us a little bit more granularity, if you could, on catching up on lag?

You mentioned that the 50 basis points is your goal by 2018. But kind of how do we get from here to there?

Is it lumpy? Is it consistent?

What are we looking for?

Benjamin G. S. Fowke

Let me take the -- that second question. I will let Teresa address the first.

I mean, the -- it's going to be more. It's not going to be next year.

It takes time for these things to get traction. But you get the traction by having multi-year plans in place and we want to have all of our major jurisdictions with multi-year compacts in place and then disciplined cost control.

And if you put those 2 together, and I think, we've got both of those in motion, then you're going to reduce regulatory lags significantly, and that's really what the plan is.

Teresa S. Madden

In terms of just variations in the near term, we have increased our estimates in terms of electric and distribution, investment spend, and some of that is really been driven by higher levels of new customer growth. So those are the primary variations.

Christopher Turnure - JP Morgan Chase & Co, Research Division

Okay. And then my follow-up is on the Minnesota cases for next year.

You have a $0.15 range in your EPS guidance. I understand that some of that range is going to be due to Minnesota, obviously.

It's not just a point estimate that you have internally. Could you give us any kind of indication that would allow us to figure out the EPS change that's attributable to that alone?

Teresa S. Madden

[indiscernible] I think it'd be better to say, it's not just the Minnesota because Colorado we also have a pending case that's relatively large there. So between the 2 of them, that's creating the range.

So I think we would just prefer to leave it at that for right now.

Christopher Turnure - JP Morgan Chase & Co, Research Division

Okay. But the range is -- or the bulk of the range can be attributed to regulatory situations?

Teresa S. Madden

Yes.

Operator

And our next question comes from Greg Gordon with ISI.

Greg Gordon - ISI Group Inc., Research Division

My question is who's worse, the Vikings or the Jets?

Unknown Executive

Oh, it has to be the Jets, for sure.

Unknown Executive

You will see that on December 7, by the way.

Greg Gordon - ISI Group Inc., Research Division

Yes, we'll actually find out the answer to that question, won't we? The...

Benjamin G. S. Fowke

Greg, I wanted to tell you, I really enjoyed you morning joke, by the way.

Greg Gordon - ISI Group Inc., Research Division

The -- my question is on the dividend. I know that you raise the dividend above the long term 4% to 6% aspiration earlier this year.

Your payout ratio is still below, what I would consider, the peer group average, although, obviously, you could slot different companies in and out of that. And your cash flow profile looks pretty good relative to the way you've portrayed it in your -- even in your updated release today.

Is there still a possibility over the next several years that we might get one or more sort of out of trend line dividend increases as you try to move back to an industry average payout?

Benjamin G. S. Fowke

Well, I mean, I -- the objective is a long-term objective. So you can always have some lumpiness.

And we recognize we have financial flexibility, Greg. But I really think when you do your modeling, you ought to just stick with what we're telling you and it's 4% to 6%.

Teresa S. Madden

Yes. I agree.

Operator

And next we'll go onto Paul Ridzon with KeyBanc.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Your $14.5 billion does not include net gas reserves or FERC 1000 opportunity, correct?

Teresa S. Madden

That's correct.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

And what do you have in there as far as place holder for EPA regs yet to be determined?

Teresa S. Madden

We don't have -- I mean, in the left -- in the end of the period, we do have some dollars, but not for investment spend depending on how those rules come out.

Benjamin G. S. Fowke

Yes. I mean, I think, that said, we've been working an environmental plan with our states.

Clean Air, Clean Jobs is a great example of that. So we'd have been kind of planning for these regulations in our CapEx.

Fundamental CapEx reflects the fact that we're moving to a more carbon-light world. In fact, as you know, we have reduced carbon from an '05 baseline by 30%, by 2020.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

What's your annual net gas procurement? And what percent might you want to have locked in through reserves?

Benjamin G. S. Fowke

Well, I think, we -- between the LDC and the electric operations, it's somewhere around 400 BCF.

Teresa S. Madden

That's correct.

Benjamin G. S. Fowke

So you can do the math on that. As far as what we would want to see, I mean, that's too early to tell.

I mean, I think if you can smooth volatility, if you can lock in good pricing, if the commission get comfortable with the approach, we'll do as much as they would like to see us do, and we'll do as little as they want to see us to do as well. But I think, it's -- I think the pricing and timing is pretty opportunistic right now.

So we want to definitely have those conversations.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

Where are you in that conversation? Has it started yet or just very preliminary?

Benjamin G. S. Fowke

Well, we're beginning -- I would say preliminary would be -- is how I would categorize it.

Operator

And next we'll move on to Michael Lapides with Goldman Sachs.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

A couple of questions. One on Colorado.

I'm struggling a little bit to understand the electric rate case process, really. In your electric rate case increase request, and meshing that with what's happening in the annual earnings test.

Meaning you've given the $46 million refund obligation from the 2013 test and now you're recognizing an estimate or an accrual for $52 million. It almost seems that -- and maybe I'm misunderstanding it or maybe it's just due to something like what, abnormal weather, but it almost seems like you're earning a pretty good return there and even above authorized, according to these earnings tests.

And yet, you're coming in and asking for a decent-sized rate increase to go along with that. Help me kind of true those up, if you don't mind.

Benjamin G. S. Fowke

I would. Teresa, help me out here.

But there's 2 key drivers to why we are filing the rate case. It's the capital recovery of the Clean Air Clean Jobs Act and there's property taxes.

So those are -- and part of that is, I think, a reversal of some things we've been deferring under the multi-year plan that we're under. So those are the 2 drivers, Michael.

And if we can get those -- that recovery, then I think we can be positioned to do a settlement.

Teresa S. Madden

Right. I mean, Michael, when you think about the timing of the infrastructure build in Colorado, I mean, it's in the process of being completed, and it has to be done by 2017, so it's going in service.

So therefore, we need the rate increase up to this point. We've have had AFUDC offsets, so that's causing the driver, and just as Ben indicated, along with property taxes.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Got it. And speaking of property taxes, you talked about a very -- in your 2015 guidance, about a sizable increase, almost $80 million at the mid-point and property taxes.

Where is the bulk of that happening? I mean, that's like a 15% year-over-year increase.

Teresa S. Madden

Well it's exactly what Ben was talking about in the -- 2012 through '14 settlements in Colorado. We had a mechanism where we deferred and then we were starting to amortize.

But it's every year -- we start an amortization just 3 years, so the numbers have grown, and we're seeing a peak in that. So that, again, is driving that -- one of the drivers of that rate increase.

Benjamin G. S. Fowke

Along with just increased rate base and the associated taxes that go with that. So you get a -- it's a twofold-type thing.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Okay. But it's not just -- I mean, Colorado has got the reversal of the amortization, but the other jurisdictions just kind of have a normal taxes of an income tax and property tax growth rate?

Teresa S. Madden

Right. Yes.

Benjamin G. S. Fowke

Yes.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

Got it. And finally, in the Minnesota rate case, I mean, we're in late October right now, last to -- second to last day.

How much -- if I remember correctly, so you asked for roughly $142 million for 2014. How much of that is already in rates?

So if they give you the $140 million -- $142 million for 2014, what's the real step up versus what's actually in rates today?

Teresa S. Madden

What's in rates right now is we are collecting at the interim rate level, it's actually $127 million. So, I mean, we've gone through and assessed where we think we are at on the various issues and basically -- and set up some reserves related to that.

But it's still early because we are not done with the case.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

But if you get the $142 million, what it effectively means is it's a $15 million step up from what's currently, and effectively, the run rate you've had in revenues in Minnesota year-to-date?

Teresa S. Madden

I'm not sure I am quite following your question, Michael.

Michael J. Lapides - Goldman Sachs Group Inc., Research Division

I can -- I'll follow-up with Paul offline.

Unknown Executive

I think -- Is he talking about the '15 step in? Well, anyway we'll follow-up.

Teresa S. Madden

Yes.

Benjamin G. S. Fowke

Okay. So...

Operator

And next we will move on to Steven Fleishman with Wolfe Research.

Steven I. Fleishman - Wolfe Research, LLC

So I have a couple of questions. First on the 50 basis point ROE improvement that you're targeting.

Is that something that we should consider as part of your 4% to 6% growth plan? And to achieve that?

Or is that something that could allow you to do better?

Benjamin G. S. Fowke

Well, I mean, as Teresa said it's 75 to 80 basis points. And -- so that's certainly is going to -- all things equal, would move us up, if you combine that with the rate base.

Steven I. Fleishman - Wolfe Research, LLC

Right. And then the other target in terms of kind of the multi-year plan.

Can you repeat, Ben, specifically what your objective there is? And when we think about Minnesota, just -- is this something that could be resolved within the context of the current case?

Or is it -- you had mentioned something about legislation. So I'm trying to kind of understand like the timeline for -- I know we have a 2-year plan, potentially, in Minnesota, but it seemed like you were talking even more than that?

Benjamin G. S. Fowke

Yes. I mean, I -- well, first of all, the goal would be to continue the multi-year approach in Colorado.

Then in Minnesota, to work with the commission to go into a longer-term plan. We do believe we have some flexibility to go longer.

And the legislative side of that, that I mentioned would be to provide the commission some additional support and guidance, and also take that broader approach to where the state wants to head as far as its own energy policy, so that -- does that give you some...

Steven I. Fleishman - Wolfe Research, LLC

No, that's helpful. I guess, my question then would be, is that something that can be done in time by the legislature in context of this current pending case or something kind of later on?

Benjamin G. S. Fowke

Well, I think you could introduce it as part of the -- when the commission hears this current case. So it's not directly related, but it can be correlated, if you will.

Steven I. Fleishman - Wolfe Research, LLC

Okay, okay. And then just in the -- one thing that has been an improvement from when you laid out this plan last year is the -- I think you have a reduced amount of equity issuance?

Teresa S. Madden

Correct.

Steven I. Fleishman - Wolfe Research, LLC

Than you had. So in the context of your 4% to 6% and the like, is that -- I mean, that -- maybe that just changed you within the range, but is there offsets to that, that are negatives that you still in the 4% to 6%?

Or -- it didn't really seem to kind of change you within that range, I guess, is my question, so.

Teresa S. Madden

I mean, I would say, it keeps us within the range. I don't think there's necessarily offsets that you're suggesting.

Benjamin G. S. Fowke

I mean, as we -- look, we do everything we can to. We, obviously, want to be at the top of that range.

And everything goes right. Of course, you can always be outside of it.

But, as we all know, you always get thrown curve balls, too. So -- and we still have a little bit of dilution to our direct plans.

That's pretty minor these days, but it's still there. So solid execution of all of these things we talked about, including the incremental caps spend and that would be icing on the cake.

It would be certainly positive for our growth rate.

Operator

And our next question comes from Paul Patterson with Glenrock Associates.

Paul Patterson - Glenrock Associates LLC

Just to -- I'm sorry, if I'm a little slow on this. But I'm not completely clear as to what -- I mean, you guys have been trying to reduce regulatory lag for some time.

And what is it that makes you guys feel more confident about it? Is it because of the legislative efforts you might be making?

Is it because you're getting better response in terms of people seeing things your way on the regulatory side? What is it, just if you could break it down?

Or just, simply, what do you think it is that's going to be making this more successful in terms of the efforts you've already made?

Benjamin G. S. Fowke

Sure. Well, let's look at why we've had regulatory lag.

I think that's probably a good place to start, and we've had a lot of capital spend as you know. And most of that spend has not been recovered through a multi-year compact.

So that puts natural pressure on you. There has been a recession, sales have been flat, that's put pressure on you.

We've had higher pension expenses as we worked off those market losses. And from an accounting perspective, that puts pressure on you.

And so all of that has created lag. And then you look forward and you realize we have a multi-year compact in Colorado, we're hoping to renew that, we want to enter into a similar type of arrangement in Minnesota.

You combine that with the fact that post '15, while we still have a good pipeline of opportunities, the acceleration smooths out, so the capital spend and associated recovery smooths out a bit. Our own internal efforts to manage cost and still achieve the reliability and safety goals we have through standardization, they are starting to take hold.

So you combine what's happened in the past and then you look towards the future, when it looks like sales are rebounding as well. So you put all those factors together, and I think that puts us in pretty good shape.

Perhaps not right away but within fairly short order to start closing that gap.

Paul Patterson - Glenrock Associates LLC

Great. That's very helpful.

And then just to clarify a few things. The upstream rate based opportunities, when you think you might be able to tell us more about it?

I know you guys are in preliminary discussions. When do you think we might learn more about how those discussions are going?

Benjamin G. S. Fowke

I really -- I'd love to give you a timeframe, but I would -- I don't have that because it's -- again, we are in early days. So as the opportunities arise and as the math pans out then we'll talk about it.

Paul Patterson - Glenrock Associates LLC

Okay. And just to clarify, are you guys -- you guys are not interested in upstream non-rate based opportunities, is that right?

Or, I mean -- or are you, perhaps have a...

Benjamin G. S. Fowke

Well, it could be -- I'm sorry to cut you. It could be a FERC rate base.

But we're not interested in merchant type.

Paul Patterson - Glenrock Associates LLC

You're not interested in being an EP company?

Benjamin G. S. Fowke

Right.

Teresa S. Madden

No.

Paul Patterson - Glenrock Associates LLC

Okay. I just want to make sure.

And then the RFPs in the FERC Order 1000. Again, when might be we hear more about what you guys might be involved in there?

Any sense as to -- like just sort of a rough timeframe as to when we might hear more about that?

Teresa S. Madden

Well, the RFPs and STP are, I mean, they are going to issue them early next year. So we are anticipating a 90-day bid process.

And then those who choose to participate they will be evaluated by the STP at that time. So mid to later next year.

Benjamin G. S. Fowke

Yes. As you know the Integrated Transmission Plan 10 came out.

It was about -- I think it was 40-odd projects about, roughly estimated $450 million. The next step will be the near-term plans that come out.

And then what we anticipate, as Teresa mentioned, probably later in '15 is another Integrated Transmission plan 10-year look, which would incorporate some of the considerations under the 111(d) rules. I think that's what the timeframe is.

Operator

And our next question comes from Ashar Khan with Visium.

Ashar Khan

I just wanted to get a little bit sense -- when at mid-point, if I'm right -- when we started off this year it was, like, 197, 198 and the mid-point, if I am right, is around 2.7, 2.8, which is, like, $0.10 increase, if I'm doing my math correct, around 5% increase in EPS. But then when I look up your last slide where you gave us the rate base, which was at the Wolfe conference, the rate base for '15 was estimated at 22.4.

For '14, was at 20.7. So that was like nearly an 8%, 8.2% increase in rate base.

It was the strongest rate base growth in the horizon of the 5-year forecast. So what I'm trying to equate is, what is happening that we're losing -- if rate base numbers are still correct and they haven't changed, why is the 8.2% increase in rate base, '15 versus '14, getting diluted to 5% increase in EPS during the 2 years?

Teresa S. Madden

Well, Ashar, I would say our rate base growth-- I mean, it is moderating because we're coming through some major spend. I mean, our nuclear spend is essentially completed.

So we're expecting it to moderate back, so you're seeing some of that -- of the past rate base growth. But as we look forward, we talked about what we would anticipate going forward, which would align with our earnings growth that we're talking about.

Benjamin G. S. Fowke

I would say we'd probably -- it would have to go through a lot of the timing expectations and everything else, but...

Teresa S. Madden

Exactly.

Benjamin G. S. Fowke

Probably be better to do that offline.

Unknown Executive

Well, and, plus, Ashar, it does reflect the timing of rate cases and what we request in rate cases. Clearly, in Minnesota, we've got a step increase for 2015, but doesn't cover all the capital that's being spent.

So things like that are what drive that, we think we've issued 2015 guidance that is realistic for us and that's what we've put out there.

Ashar Khan

Okay. I'll try come offline and try discuss it.

Because I just thought it was -- when you have a higher rate base growth and you have equity needs, you have kind of toned down since the last time I just don't understand why the growth rate is not higher in '15 versus '14, in commensurate to the rate base?

Unknown Executive

We will talk about it offline.

Operator

We will take our question from Andy Levi with Avon Capital Advisors

Andrew Levi

I guess, most questions have been asked. I guess, I mean, if you get to the top end of the your range, though, then just back on an assurance question, and then you're kind of close to that kind of that growth rate 2015.

But anyway -- just on the 4% to 6%. It just seems, I guess, with all the things that have occurred, whether it's lack of issuing shares and all the other things that you've outlined over the last several months, including today, would it be fair to say that you're a lot more confident about being able to achieve the top end of your range over the next few years?

Teresa S. Madden

I mean, Andy, we have a range and we are within the range, and we're confident we'll achieve within the range.

Andrew Levi

But no difference of being able to be more confident on the top end?

Benjamin G. S. Fowke

Well, we are going to do everything to be on the top end, but, I mean, I think, Teresa said it, and I mean, we're keeping with the 4% to 6% growth from both the dividend and EPS.

Operator

And we have a follow-up question from Paul Ridzon with KeyBanc.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

I just had -- want to make sure I understand your -- the impact of the lag reduction. If you start with the ballpark 10% ROE and you reduce lag by 50 basis points, that's 5% improvement.

So is that 75 to base -- 75 to 80 basis points just that compounding over 5 years to get to 5%. Is that the right way to look at it?

Teresa S. Madden

Well, maybe. I mean, if we start, I wouldn't start with that 10%.

I would start with -- the regulated utilities are earning more around 9% at that level. So I think that would change your math, just your starting point, which would follow -- would fall out from that.

Paul T. Ridzon - KeyBanc Capital Markets Inc., Research Division

So the 75 to 80 is potentially incremental to the 4% to 6%? Or gets you firmly within the 4% to 6% and then, by year 5, you've probably maxed out the opportunity?

Teresa S. Madden

We would be close, assuming whatever our authorized are -- we are holding our authorized at the same level right now.

Operator

And our next question comes from Kit Konolige with BGC.

Kit Konolige - BGC Partners, Inc., Research Division

I just wanted to inquire what your major states are doing or what you're doing with the regulators and legislators there on the response to 111(d)? Are you working closely with them to propose responses?

Can you give us any sense of -- obviously, it's early in the process but any sense of where things might be headed and, in particular, the possible impact on your operations?

Benjamin G. S. Fowke

Yes, I mean, we're definitely working close with our -- all of our stakeholders in all of our key states and our goal -- and our senators and our governors are very much on board with this is that-- as was mentioned in the preamble 111(d) Xcel Energy's model utility on how things get done, achieving environmental objectives and keeping costs affordable for consumers, but we are disappointed that we're not getting the credit we believe we deserve for the early action that we have taken. So [indiscernible] But we are disciplined that we're not getting the credit we believe we deserve for the early action that we've taken.

So there is lobbying on their end, we are lobbying through the industry groups, we are doing out reach ourselves with the EPA, and we are going to work as hard as we can to get the final rules shaped in a way that I think is more equitable to those companies and those states that have been out front and moving towards where the EPA wants to take us. So very much engaged all the way down the line.

Kit Konolige - BGC Partners, Inc., Research Division

And do you have any clarity at this point on the potential for shutting down some of the coal plants, et cetera, in addition to the ones that are, obviously, previous EPA rules have impacted?

Benjamin G. S. Fowke

Yes. I mean, I think you really got to wait for the final rules.

As you know, the EPA came out with, what is it, a notice of data availability yesterday or the day before. That suggest -- that maybe there's some of the interim targets the 2020 targets maybe there's a glide path there, maybe there's some flexibility on the base [indiscernible].

But not much more clarity than that.

Operator

And we have a follow-up question from Ali Agha with SunTrust.

Ali Agha - SunTrust Robinson Humphrey, Inc., Research Division

Just one clarification, Ben or Teresa. The 4% to 6% EPS growth, let's say, over the next 5 years, does that continue to assume a 1% growth in weather normalized electric sales?

Or do you have a different growth number going forward?

Teresa S. Madden

No. That's basically what we're assuming.

That's correct, Ali.

Operator

And that will conclude today's question-and-answer session. At this time, I would like to turn the conference back over to our speakers for any additional or closing remarks.

Teresa S. Madden

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

Benjamin G. S. Fowke

Thank you.

Teresa S. Madden

Thank you.

Operator

And this will conclude today's conference. We thank you for your participation.

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