This excerpt taken from the XEL 10-K filed Feb 23, 2007.
Xcel Energys strategy, called Building the Core, is to invest in the core utility businesses and earn a reasonable return on invested capital. Were a vertically integrated utility and intend to stay that way. Investments of approximately $9 billion are planned over the next five years in our core operations to grow our business in response to growing customer demand and environmental initiatives. The need for additional energy supply is expected throughout our service territory. Many of the states in which we operate are considering renewable portfolio standards, requiring incremental investment in wind generation and transmission facitlities. Additionally, we continue to focus on enhancing electric system reliability including making significant investments in transmission and distribution systems. These customer driven requirements create investment opportunities for us.
The strategy of Building the Core has three phases. The first phase is obtaining legislative and regulatory support for large investment initiatives prior to making the investment. To avoid excessive risk for the company, it is critical to reduce regulatory uncertainty before making large capital investments. We accomplished this for both the MERP in Minnesota and the Comanche 3 coal plant in Colorado. Transmission legislation has been passed in Minnesota, allowing that states regulatory commission to approve recovery for transmission investments without filing a general rate case. In Texas, the legislature authorized annual recovery for transmission infrastructure improvements. Both legislative initiatives support necessary new investment in our transmission system.
The second phase is making those investments. In a normal year, we spend approximately $1 billion on capital projects. In addition to a base level of capital investment, we expect to have significant investment opportunity. Among those opportunities are:
· approximately $1 billion through 2010 for MERP, a project to convert two aging coal-fired plants to natural gas plants and to install pollution control equipment at a third coal plant;
· approximately $1 billion through 2010 for Comanche 3, a project to build a coal plant in Colorado;
· a proposed $1 billion through 2015 to extend the lives and increase the output of our two nuclear plants, Monticello and Prairie Island;
· a proposed $900 million investment through 2012 to add capacity and reduce emissions at our Sherco coal-fired plant;
· a planned investment by the CapX 2020 coalition of utilities of $1.3 billion between 2008 and 2012 to expand the transmission system in the upper Midwest, of which our share of the investment would be approximately $700 million, representing the first phase of CapX 2020; and
· the potential of building an IGCC plant in Colorado and owning wind generation.
As a result of these investments, as well as continued investments in our transmission and distribution system, we expect that our rate base, or the amount on which we earn a return, will grow annually by more than 5 percent on average.
The third phase is earning a fair return on utility system investments. To this end, our regulatory strategy is to receive regulatory approval for rate riders as well as general rate cases. A rate rider is a mechanism that allows recovery of certain costs and returns on investments without the costs and delays of filing a rate case. These riders allow for timely revenue recovery and are good mechanisms to recover the costs of large projects or other costs that vary over time. As an example, a rider for MERP went into effect in January 2006, allowing us to earn a return on the project while the facility is being constructed.
General rate cases have been filed to increase revenue recovery in most of the states in which we operate. In 2006, several rate cases were filed as part of our regulatory strategy. These rate cases, and others planned for 2007, are some of the building blocks of our earnings growth plan. Following is the current status of these initiatives:
· Constructive decisions were received in the Minnesota electric rate case, Colorado natural gas rate case and Wisconsin electric and natural gas cases, which increased revenue in 2006.
· A constructive decision was received in the Colorado electric rate case, which will increase 2007 revenue. (see Factors Affecting Results of Continuing Operations for the further discussion)
· An electric rate case was filed in Texas and gas rate cases in Minnesota, Colorado and North Dakota were filed. We expect decisions in these cases later this year, which should increase revenue in 2007 and 2008.
· Later this year, we plan to file electric and gas cases in Wisconsin and will consider filing cases in other states. If successful, these cases should increase revenue and earnings in 2008.
Our regulatory strategy is based on filing reasonable rate requests designed to provide recovery of legitimate expenses and a return on utility investments. We believe that our commissions will provide reasonable recovery, and its important to note that our financial plans include this assumption. Recent constructive results, along with past rulings, are evidence of reasonable regulatory treatment and give us confidence that we are pursuing the right strategy.
With any strategic plan, there are goals and objectives. We feel the following financial objectives are both realistic and achievable:
· Annual earnings-per-share growth rate target of 5 percent to 7 percent;
· Annual dividend increases of 2 percent to 4 percent; and
· Senior unsecured debt credit ratings in the BBB+ to A range.
Successful execution of our Building the Core strategic plan should allow us to achieve our financial objectives, which in turn should provide investors with an attractive total return on a low-risk investment.