Good day, welcome to the Xcel Energy First Quarter 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Paul Johnson, Vice President of Investor Relations. Please go ahead, sir.
Good morning, welcome to Xcel Energy's 2019 First Quarter Earnings Conference Call. Joining me today are Ben Fowke, Chairman, President, and Chief Executive Officer, and Bob Frenzel, Executive Vice President and Chief Financial Officer. In addition, we have other members of the management team available to answer your questions. Be aware, there are slides that accompany today's call available on our website. 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. On today's call, we will discuss certain metrics that are non-GAAP measures, including ongoing earnings and electric and natural gas margins.
Information on the comparable GAAP measures and reconciliations are included in our earnings release. I'll now turn the call over to Ben.
Well, thank you, Paul, good morning. Today, we reported first quarter earnings of $0.61 per share compared to $0.57 per share last year. We're pleased with the strong start to the year, we're well-positioned to deliver on our 2019 guidance and our long-term financial objectives. Let me start with some quick highlights from the quarter. In February, we increased our quarterly dividend by $0.025 per share or 6.6%. This represents an annualized increase of $0.10 per share, which is a step-up over historic levels of $0.08 per share.
We also continue to make strong progress on our steel for fuel strategy, with almost 3,000 megawatts of new wind that has received regulatory approval and is moving forward in the construction process. In Colorado, the commission approved our certificate of need for our Cheyenne Ridge Wind Project based on a constructive settlement, which includes a construction cost cap and a customer protection mechanism. We will recover cost upon completion through riders until the next rate case after the project goes into service. Our Hale project in Texas is on track with construction expected to be completed in June on time and within budget. We are waiting for final generation interconnect studies and agreements for our Sagamore project in New Mexico and our Crowned Ridge 3 project in Minnesota. We expect construction to begin later this year.
All of our other wind projects are in various stages of permitting and construction and will be completed as expected between 2019 and 2021. These projects highlight the excellent planning, construction, and project management skills of our employees. In December, we were the first utility in the U.S. to announce plans to achieve an 80% carbon reduction by 2030 and 100% carbon-free electricity by 2050. We're excited to work with stakeholders as we continue the clean energy transition while providing reliable service and keeping bills low. The legislative session is still ongoing in most of our states. We continue to work with stakeholders on various legislative initiatives that would impact the utility sector. In Texas, there are bills under consideration that would provide the right of first refusal on new transmission projects and rider recovery for new generation and AMI investment.
The outlook for these proposals is positive and points to a more constructive regulatory environment in Texas. In New Mexico, the Energy Transition Act was signed into law by the governor in March. This law targets a 50% renewable portfolio standard by 2030 and 100% carbon-free electricity by 2045. We believe we are well-positioned to meet the 2030 milestone. In Colorado, there's proposed legislation that codifies our plans to achieve 100% carbon-free electricity by 2050 and 80% carbon reduction by 2030. In addition, the bill is expected to provide for voluntary securitization as an option, and it targets utility ownership of 50% of all generation and provides customer protections. We're proud to be leading the clean energy transition and support these bills, which are consistent with our carbon reduction objectives and provide positive benefits for our customers and our shareholders.
This is another example of our strong alignment with policymakers in our states. I also want to recognize the efforts of our employees as they work through the polar vortex and the bomb cyclone that hit our various states. They did a great job working in extreme conditions to restore service in record time. I'll now turn the call over to Bob, he'll provide more detail on the quarterly results and our regulatory plans.
Thanks, Ben. Good morning to everyone. We had a strong first quarter with earnings of $0.61 per share compared with $0.57 per share in 2018. Most significant earnings drivers for the quarter include higher electric and natural gas margins, which increased earnings by $0.15 per share, including the impact of favorable weather and various regulatory outcomes, and riders to recover our capital investments, partially offset by wind production tax credits that flow back to our customers. In addition, our lower effective tax rate increased earnings by $0.06 per share. However, the majority of the lower effective tax rate is due to an increase in production tax credits, which flow back to our customers through electric margin and tax reform impacts, both of which are largely earnings neutral.
Offsetting these positive drivers were increased depreciation interest and other taxes reflecting our capital investment program, which reduced earnings by $0.11 per share, and higher O&M expenses, which decreased earnings by $0.06 per share. Please note that we've calculated the EPS deviations for both years presented based on a blended statutory tax rate of 25% following the implementation of tax reform. Turning to sales, our weather-adjusted electric sales increased 0.5% in the first quarter, reflecting continued strong customer growth, partially offset by lower use per customer. Weather-adjusted natural gas sales increased 2.5% for the quarter as a result of strong customer growth and higher use per customer. For 2019, we're still anticipating relative flat consolidated electric sales, which reflects some discrete known declines in large customer usage and expectations of lower use per customer in the residential sector.
For natural gas, we expect slightly positive sales in 2009, reflecting continued growth in C&I and residential loads. Turning to expenses, our O&M expenses increased by $40 million, reflecting costs from substantial winter storms, the in-servicing of the Rush Creek Wind Project, higher business systems and benefit costs, and the timing of plant overhauls. Over the last five years, we've increased our rate base by approximately 7% annually while keeping O&M expenses relatively flat. Over the same time period, customer expectations and risk aversion have increased. As a result, we're increasing our O&M spending in strategic areas to enhance the customer experience, increase cybersecurity, and reduce systematic risk in our operations. We remain committed to our long-term objective of improving operating efficiencies and taking other costs out of the business for the benefit of our customers.
Therefore, we've raised our 2019 O&M guidance, which reflects a decline of approximately 2% from 2018 levels. We expect to offset the impact of the slightly higher O&M and are confident in our ability to deliver earnings in our guidance range consistent with our plan. Next, let me provide a quick regulatory update. In March, SPS reached a settlement with the New Mexico Commission, resulting in a revised rate order, which eliminated the retroactive TCJA refund, increased the equity ratio to 53.97% from the previously authorized 51%, and increased the ROE to 9.56% from the previously authorized 9.1%. The revised order is expected to increase annual revenue by $4.5 million, effective in March of 2019. We believe this is a constructive settlement and a sign of progress in New Mexico.
In addition, we're planning to file electric cases in Colorado later in the second quarter, Texas and New Mexico this summer to recover our investment in the Hale Wind Project, as well as other SPS capital projects, and Minnesota in November. With that, I'll wrap up. In summary, we had a strong first quarter. We increased our dividend for the 16th straight year. We reached constructive settlements in our rate case in New Mexico and in the CPCN proceeding for our Cheyenne Ridge Wind Project. There's constructive legislation that's being considered in our various states, and we are well-positioned to deliver on our 2019 ongoing earnings guidance range of $2.55-$2.65 per share, our 5%-7% earnings growth objective, and our 5%-7% dividend growth objective. This concludes our prepared remarks. Operator, we'll now take questions.
Questions will only be taken from institutional investors. Reporters can contact media relations with inquiries, and individual investors and others can reach out to Investor Relations. If you would like to ask a question, please signal by pressing *1 on your telephone keypad. If you are using speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press *1 to ask a question. We'll pause for just a moment to allow opportunity to signal for questions. We'll take our first question from Jonathan Arnold with Deutsche Bank. Please go ahead.
Hey, Jonathan, are you there?
Yeah. Can you hear me?
Yep. We can now.
Yeah. Thank you. I just wanted to ask about the update you gave on O&M, which obviously, I think you'd been saying you expected to go back to 2017 levels. Now you're saying just down 2%. That would still put you at 2.3, roughly, in aggregate, which was the run rate you were talking about last quarter. Just can you clarify, are you talking about more of a structural uplift, some of these customer experience investments, or are we really sort of increasing one area and saving elsewhere?
Well, first of all, I guess I would say, Jonathan, we are ahead of plan, and that's a good thing, despite the additional O&M that Bob described. We continue to take out costs out of our business smartly. We're reinvesting some of those cost savings into things that I think are really important for our customers. Improving the customer experience is part of that, reducing systematic risk in areas of cybersecurity, gas safety, proactively implementing best practices for wildfire risk. I think these are things that are important, and we're putting a little more money in that than we originally planned.
When we look ahead to 2019, or rather, yep, 2020, I think you can expect us to keep O&M relatively flat with where we end up in 2019.
Your comments on, despite the higher expense still being in the guidance range, is embedded within that a comment that you're skewing a little lower in the range than you might have otherwise been, or am I reading too much into that?
No, absolutely not, Jonathan. We're ahead of our internal plans as of right now.
Okay, perfect. Thank you.
We'll now take our second question from Ali Agha with SunTrust. Please go ahead.
Thank you. Good morning.
Morning, Ali.
Morning. First question. There's been some opposition to the Mankato acquisition as you filed for approval for that. Can you just give us an update and your current confidence level of getting that approved?
Yeah. Ali, it's not really unusual in these sorts of situations for the department to have negative comments, not only with us, but other utilities in the state. I think what you'll find, and if history is any guide, is as we give the department more information so they can better model the customer benefits, you start to see the comments be more supportive. We believe that this is of great economic benefit to our customers. I think it's an important asset for us to own for the long term. We ultimately think this gets approved.
The timing, I believe, is June also. Is that right?
Yeah, I believe that's right.
Okay. Also, can you remind us currently, what's the regulatory lag in the system? Have you reached a point where the rest of it is just structural or is there any further improvement potential on either front? Are we there?
Yeah. We've achieved the 50 basis points objective, Ali. There's some opportunity for improvement, but to your comment, you're starting to get to the point where we've got most of it is structural lag at this point.
I see. Last question. Apart from calling out O&M being maybe slightly higher for this year than budgeted, are there other movements in your basic assumptions for the year, either positive or negative to be aware of? Just specifically on O&M, again, I don't know if I picked it up, but what kind of incremental spending are we thinking about this year versus what you had previously assumed?
Hey, Ali, it's Bob. We've had favorable weather through the 1st quarter and favorable sales for the 1st quarter, we think there's some benefit there to offset some of the higher expenses that Ben mentioned. We also have an expectation for slightly lower interest expense through the year than we'd given original guidance for. As he mentioned in the previous question, that we are above our internal forecast for the year, we feel confident in our ability to deliver earnings within our range.
Okay. Bob, just to clarify, you're talking about O&M being down 2% versus 2018 as your base assumption for the year. What was it before that? Just to give a sense of how much it's changed.
Yeah, we've been guiding to flat to 2017, the guidance, we're probably 2% above 2017 levels or 2% below 2018 levels as guidance for 2019.
I got you. Thank you.
It appears there are no further questions at this time. Mr. Frenzel, I'd like to turn the conference back to you for any additional remarks.
Well-
It appears that it looks like there's one more call.
One there.
Yeah, we do seem to have another question that just joined from a Julien Dumoulin-Smith with Bank of America. Please go ahead.
Julien, we could never not let you get a question in.
Hey, sorry, this is actually Richie here on Julien's team.
Oh, well, I'm going to see you later, Richie.
Just had a quick question on the Texas rider legislation. How meaningful is the improvement in regulatory lag there if that legislation passes, given the Sagamore plant is coming online in 2020?
Remember, we already have a settlement deal for our wind assets. Look, it's helpful. It's helpful as that system continues to grow and with really good sales, I would expect that we're going to need more generation, potentially both fossil and renewables, that's a great thing to have along with the rider for the investment in the smart meters that we're looking to do. It's going to help. Again, I think the environment at SPS is getting better. Hey, Richie, it's Bob. Just to add on to what Ben said, we're expecting to file rate cases in Texas and New Mexico to support the investment. We expect our Hale Wind Project to go in service next month, or sorry, early June, and we'll put those into rates almost immediately based on the settlement mechanisms that Ben mentioned.
In addition to the wind, we'll also get the rest of the capital in Texas in service in more real time. That's all part of the wind settlement agreement. I think the AMI and the generation potential riders that are working through legislation would further increase as we seek to do AMI and additional generation in the next decade.
Got it. Thank you. That's very helpful. That's all I had.
All right. Thank you.
It appears there are no further questions at this time. Mr. Frenzel, I'd like to turn the conference back to you for any additional remarks.
Thanks for participating in our call this morning, and please feel free to contact our Investor Relations team with any follow-up questions.