Xcel Energy Inc.

Today, ladies and gentlemen, and welcome to the Xcel Energy first quarter 2020 earnings conference call. Questions will only be taken from institutional investors. Reporters can contact Meteor Relations for inquiries, and individual investors and others can reach out to Investor Relations. Thank you. Today's conference is being recorded. At this time, I turn the conference over to Paul Johnson, Vice President of Investor Relations. Please go ahead, sir.

Thank you. Good morning, and welcome to Xcel Energy's 2020 first quarter earnings conference call. Joining me today are Ben Folk, Chairman, Chief Executive Officer, Bob Frenzel, President and Chief Operating Officer, and Brian Van Abel, Executive Vice President and Chief Financial Officer. This morning, we'll review our 2020 first quarter results, share business developments and regulatory developments, discuss how we're managing through uncertainty around coronavirus. There's an expanded list of slides today that accompany our call 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 than those anticipated are designated in our earnings release and our findings at the FCC. 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'm now turning the call over to Ben. Well, thank you, Paul, and good morning, everyone. You know, as I reflect back on the past few months, my heart really goes out to the individuals and families impacted by the coronavirus, the devoted healthcare professionals so bravely serving our communities and the businesses across all sectors experiencing tremendous economic challenges. At Xcel Energy, we understand how critical our work is to the health and safety of our communities and local businesses. I'm so pleased with how our employees and industry have responded during this unprecedented time, working to keep people safe, delivering reliable service to customers, and providing support to those in need as we've done for over 100 years. I also want to thank our employees for their dedication, spirit, and creativity in finding ways to support our communities and stimulate local economic growth. Now turning to the quarter. We've gotten off to a solid start, booking 56 cents per share for the first quarter of 2020, compared with 61 cents per share last year. We believe we can take actions that will allow us to weather the impacts of COVID-19, and as a result, we are reaffirming our 2020 guidance. Brian will discuss the financial results in more detail. At Xcel Energy, we're taking significant strides to help our customers and protect our employees. while continuing to deliver critical energy services. Some of our actions include we're committing to not disconnecting residential customer service and arranging payment plans if they're having difficulty paying their bills. In Minnesota, we are proposing to reduce our approved fuel forecast by $25 million to give immediate relief to our customers. We stepped up our charitable giving and are helping our communities during this time of need. and we are working closely with our regulators and state and local leadership to identify constructive solutions to support our communities and customers. We're keeping our employees safe by implementing work from home policies, providing personal protection equipment, and following CDC social distancing guidelines, and enhancing cleaning practices, conducting temperature checks at critical facilities, segregating crews, and staggering work times. To ensure continued reliability, we've implemented business continuity plans, which allows us to prioritize work and are prepared to sequester critical employees on site if necessary. From a financial standpoint, we've enhanced our liquidity and developed contingency plans to mitigate the impact of COVID-19. Finally, we expect to be part of a solution to help get the economy back on its feet by continuing to invest in our communities through our capital expenditure programs that create jobs and drive demand for equipment and supplies. While this is a fluid situation with considerable uncertainty, Xcel Energy has always shown a remarkable dedication to serving our customers during difficult times, and this set of challenges is no exception. Moving on to business development, We recently announced the opportunistic sale of the Mankato natural gas plant for $680 million. You recall we originally proposed this acquisition as a fully regulated asset. However, when the Minnesota Commission rejected this proposal, we acquired Mankato as a non-regulated asset and stepped into the power purchase agreement. While we thought Mankato would provide significant long-term value, especially as we shut down coal assets, We heard from several investors that having a non-regulated asset clouded the Xcel Energy story. As a result, when several potential buyers expressed interest in acquiring the plan, we decided to sell it and preserve our status as one of the very few fully regulated pure-play utilities. And since the earnings were back-end loaded, we don't expect the sale to materially impact our earnings projections. And while it was not part of the rationale for the sale, the transaction will improve our liquidity in these uncertain times. We will use the proceeds to reduce funding needs and improve our credit metrics. In addition, we will book a game which we will use to fund charitable giving efforts including supporting COVID-19 relief efforts throughout our communities. Finally, we recently announced some important promotions as part of our succession plan. Bob Frenzel was named President and Chief Operating Officer and Brian Van Abel was named Executive Vice President and Chief Financial Officer. Bob has been our CFO for the past four years and has extensive experience in the industry prior to joining Xcel Energy. While Brian has had increasing roles in finance, including treasurer, financial planning and analysis, and corporate development. Both Bob and Brian are extremely intelligent and talented employees who have been instrumental in developing and executing our strategy and delivering our consistently strong financial results. And while I don't plan to retire anytime soon, These promotions reflect the deep bench strength and thoughtful planning we have at Xcel Energy. So with that, let me turn the call over to Brian, who will provide more detail on our financial results and outlook, along with our actions to mitigate coronavirus impacts. Brian? Thanks, Ben, and good morning, everyone. We achieved solid results, recording 56 cents per share for the first quarter of 2020, compared to 61 cents per share last year. The majority of the quarterly deviation is driven by weather. We experienced warmer than normal winter weather this year compared with cooler than normal weather last year, which results in a $0.04 per share unfavorable comparison. Most significant earnings drivers for the quarter include lower O&M expenses increased earnings by $0.03 per share. Our lower effective tax rate increased earnings by $0.03 per share. However, the majority of the lower EPR is due to an increase in production tax credits, which flow back to customers through electric margins and tax reform impacts, both of which are largely earnings neutral. Offsetting these positive drivers were lower margins due largely to unfavorable weather, which reduce earnings by 3 cents per share, and which offsets riders and regulatory outcomes. Increased depreciation and interest expense, reflecting our capital investment program, reduced earnings by 5 cents per share, and other items combined, decreased earnings by 3 cents per share. Next, I want to discuss the potential impact of COVID-19 and the actions we are taking to mitigate a range of outcomes. Starting with sales, our first quarter weather and leap year adjusted electric sales declined by 1.1%, while natural gas sales increased by 0.4%. The coronavirus crisis had a minor impact on first quarter sales. The economic shutdown started in mid-March, so we did not experience the full monthly impact. For March, our total residential sales increased slightly, while C&I sales declined 4%, resulting in a total retail electric sales decline of 3% on a weather-adjusted basis. However, a better reference point on the monthly COVID-19 impact is what we saw in our preliminary April numbers, in which almost all of our states were under relatively strict shelter-in-place orders. Residential sales increased 3.2%, while C&I sales declined 13.7%, and total retail electric sales declined 9.6% on a weather-adjusted basis. And keep in mind, we have a sales throughout mechanism for all electric classes in Minnesota and decoupling for the electric residential and non-demand small C&I classes in Colorado. This covers about 45% of our total retail electric sales. And to help us prepare financially for the pandemic, we developed three sales scenarios as outlined in our presentation. The mild scenario assumes a severe impact through May, followed by a relatively quick recovery in the third quarter. This results in a sales decline of approximately 2% compared to 2019. Our base case, and the case in which we are reaffirming our earnings guidance around, assumes a severe impact through the second quarter with a slower U-type shift recovery with lingering effects for the rest of 2020. This results in a sales decline of approximately 4% on a year-over-year basis. Lastly, the severe scenario assumes a severe impact last through the third quarter followed by a protracted L-type shape recovery. This is a challenging scenario with a deeper and longer bottom in our base case, resulting in a sales decline of approximately 8% for the year. We use these scenarios as we develop our contingency plans. We view the mild and severe case scenarios as having a low probability of occurring. We think the base case scenario is the most likely outcome, or at least within the band around the sales impact we've outlined, and have incorporated the base case into our guidance assumptions. There's considerable uncertainty on what will actually occur, particularly the duration of the downturn and the lingering effects. We're also confident in our ability to mitigate what we view as the most likely scenario, and the April sales results came in slightly better than our forecast, giving us greater confidence. We're also closely monitoring our bad debt expense and working with our customers on payment plans if they're having difficulty paying their bills. While it is difficult to project where we'll land, bad debt expense increased approximately $20 million in the 2008 to 2009 time period as a reference point. Additionally, our commissions in Wisconsin, Texas, and Michigan have issued orders to track and defer pandemic-related expenses. We've also filed for deferred accounting treatment of incremental COVID-19-related expenses, including bad debt in Minnesota, Colorado, New Mexico, North Dakota, and South Dakota. We are implementing contingency plans to reduce our overall cost structure and mitigate the impact of COVID-19. Some of these actions include cost reductions related to employee expenses, consulting, variable compensation, deferral of certain work activities, and the implementation of a hiring freeze. Based on our contingency plans, we now expect annual O&M expenses will decline 4% to 5% in 2020, which would offset the impacts of COVID-19 in the base scenario. We also have plans in place to ensure that we can implement additional contingency plans if the negative impacts of COVID-19 exceed our base case scenario. However, there are limitations to what we can offset. We will focus on providing strong customer service and reliability, and we will not make short-term decisions that have a negative long-term impact on our customers or shareholders. Turning to supply chain, the situation is fluid, but we have not had any material impacts to our supply chain with the exception of our wind farms. In mid-April, we were informed of supply chain disruptions, which will likely result in delays in the completion of two of our wind farms into 2021. We are monitoring the situation closely and are striving to complete the projects this year. However, we have fully documented our activities since 2016 and have maintained continuous efforts since then, so we are confident these wind farms will qualify for 100% PHC benefit, even if they are completed in 2021. The last topic I want to cover on COVID-19 is liquidity. We're in a very strong position after enhancing liquidity in March by entering into a $700 million term loan with attractive terms, and we issued a $600 million 10-year holding company bond. We now have available liquidity of approximately $3.1 billion. In addition, the sales proceeds from the Mankato plant will increase liquidity by approximately $650 million. And finally, We issued an equity forward last year, which we expect to settle later this year and will provide another approximately $740 million in cash. In total, this will provide liquidity of nearly $4.5 billion. We also plan to issue $1.9 billion of operating company debt throughout the year. As a result of our enhanced liquidity, we have the flexibility on issuance timing to ensure the capital markets are accessible at attractive terms. For more detail on liquidity, please see our earnings release. Next, let me provide a quick regulatory update. We have three rate cases pending and the coronavirus has not resulted in any material delays in regulatory proceedings. In New Mexico, we reached a constructive unanimous settlement that reflects a rate increase of approximately $31 million, a ROE of 9.45%, an equity ratio of 54.8%, and acceleration of depreciation on the Tote coal plant to reflect an earlier retirement. We are awaiting a hearing examiner recommendation and commission decision. In Texas, SPS and intervening parties have reached an unopposed constructive settlement agreement in principle. We are working with parties to document and file the settlement, which we expect to appear shortly. We anticipate a commission decision in the third quarter. In February 2020, we filed a natural gas case in Colorado seeking a net rate increase of $127 million. based on an ROE of 9.95% and an equity ratio of 55.8%. This is fairly early in the process, so there's not much to report, but the procedural schedule has been set with new rates expected to become effective in November based on statutory requirements. In terms of earnings, there is considerable uncertainty around the coronavirus impacts. Therefore, we have implemented contingency plans to manage our cost structure and made regulatory filings that will help to offset the impact of COVID-19. As a result, we still expect to deliver 2020 earnings within our original guidance range of $2.73 to $2.83 per share based on our base case scenario, which we think is the most likely scenario. In addition, we can implement additional O&M contingency plans if the COVID-19 impacts exceed the base case. However, there are limitations to what we can offset as we balance the short-term and long-term for both our customers and investors. Our contingency plans are not offset the severe scenario, which would likely result in earnings of lower guidance range, but we feel the severe scenario has a low probability of occurring. With that, I will wrap up. We have implemented steps to mitigate the impact of COVID-19. We sold the Mankato facility for a modest gain. We increased our dividend 6.2%. We reached constructive rate case settlements in New Mexico and Texas. We remain committed to delivering on our 2020 guidance and our long-term earnings and dividend growth within our 5% to 7% objective range. We continue to provide reliable energy service to our customers while ensuring the safety and well-being of our employees and communities. Despite the near-term economic challenges, we are executing our strategy extremely well and we remain positive about the opportunities in front of us for the benefit of our customers, communities, and shareholders. And finally, We believe we can help rejuvenate our local economies and work with our regulators and state leadership to help our communities and customers recover from the crisis. We're looking forward to being part of the solution. This concludes our prepared remarks. Operator, we will now take questions.

Thank you. Ladies and gentlemen, if you would like to ask a question, you may do so by pressing star 1 on your telephone keypad. Please make sure the mute function on your phone is turned off so the signal can be read by our equipment. Star 1 for questions. We'll pause a moment to assemble the queue. We'll take our first question from Stephen Byard with Morgan Stanley. Please go ahead.