Xcel Energy Inc.

Good day and welcome to the Xcel Energy second quarter 2020 earnings conference call. 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. Today's conference is being recorded. At this time, I'd like to turn the conference over to Paul Johnson, Vice President of Investor Relations. Please go ahead, sir.

Good morning and welcome to Xcel Energy's 2020 Second Corridor Earnings Conference Call. Joining me today are Ben Folk, Chairman and Chief Executive Officer, Bob Frenzel, President and Chief Operating Officer, Brian Van Abel, Executive Vice President and Chief Financial Officer, and Amanda Rome, Executive Vice President and General Counsel. This morning we review our second quarter results, share recent business and regulatory developments, and discuss how we're managing true uncertainty around COVID. Slides that accompany today's call are available on our website. As a reminder, some of the comments we made during today's call may contain forward-looking information. Significant factors that could cause results different from those anticipated are described in our earnings release and our SEC filings. Today we will discuss certain metrics that are non-GAAP measures, including items, ongoing earnings, electric and natural gas margins. Information on comparable GAAP measures and reconciliations are included in our earnings release. And I'll turn the call over to Ben Folk. Well, thanks, Paul, and good morning, everyone. We had a strong quarter, booking earnings of 54 cents per share for the second quarter of 2020, compared with 46 cents per share last year. Our year-to-date earnings are on track with our financial plan, and we are mitigating the impact of COVID-19. As a result, we are reaffirming our 2020 guidance. We continue to help our customers and protect our employees during the pandemic. We're stepping up our charitable giving to help our communities Our business continuity plans have been executed extremely well. We're keeping employees safe while providing reliable service to our customers. And we're helping to restart the economy through our capital investment programs that create jobs in our communities. Earlier this year, the Minnesota Commission opened a relief and recovery docket and invited utilities in the state to submit potential projects that would create jobs and help jumpstart the economy. In June, we filed a plan that proposes $3 billion of capital investment. This includes approximately $1.8 billion of incremental CapEx for wind repowering, a 460 megawatt solar facility, expanded EV infrastructure, and about $1.2 billion of accelerated transmission, distribution, and natural gas investments. We recently announced a solicitation for repowering of wind projects in that are either owned by Xcel Energy or under PPAs. We estimate 800 to 1,000 megawatts of potential repowering projects and expect to make a commission recommendation by year-end. We're also proposing options to mitigate customer bills. Overall, feedback has been very positive, and we look forward to working through the process with the commission. Now, as you might have heard, the U.S. Treasury recently announced a one-year extension of the Safe Harbor for renewable projects. When projects that began construction in 2016 now have until the end of 2021 to complete construction and receive PTCs at the 100% level. While we were confident that our projects would qualify for 100% PTC level regardless of this change, the extension assures this benefit for our customers should any projects slip into 2021. Importantly, this change also presents the opportunity to move Dakota range from the originally planned 80% PTC level to 100% PTC level. While this will not impact earnings, it will significantly reduce costs, which is a great outcome for our customers. Advancing our strategic priority of leading the clean energy transition, we and our co-owners recently announced the early retirement of the second coal unit at Craig. While we only have a small ownership stake in Craig, we are proud to help drive the early retirement of another coal unit. We're also making significant strides to improve ESG transparency and disclosure. We recently issued our TCFD report and risk assessment, which describes the resilience of our climate strategy using different scenarios. The addition of this report enhance our disclosures and results in a full TCFD compliance for Xcel Energy. Another strategic priority is to keep our customer bills low. As a result, it was very satisfying to see that SPS's electric rates in Texas and New Mexico were the lowest in the country for 2019, as recently reported by S&P Global. Providing strong customer service and reliability at an attractive price is a hallmark of Xcel Energy, and we're very proud of this recognition. We're also excited that after 10 years, we've reached a settlement agreement with Boulder that will result in a new franchise agreement and also a partnership to explore grid-side options to meet our carbon goals. The approval process for the settlement will include a vote by city council in August, a ballot referendum, and vote by the people of Boulder in November. If approved, the franchise will go into effect in January of 2021. Finally, I was recently elected chairman of EEI. It will be an honor to lead the industry in such an important and challenging time. And I tend to focus on three areas. My first priority is the industry's ongoing COVID-19 response related to the workforce, customers, and recovery from the pandemic. Second, I intend to focus on clean energy innovation. I'm asking EI to develop federal and state policy proposals that will bring dispatchable zero-carbon technologies into the marketplace to enable the industry to meet our long-term carbon goals. Finally, I've asked EI to focus on what our industry can do to promote racial justice and increasing our commitment to advance diversity and inclusion. Like our country, our entire industry has been shaken by the death of George Floyd. Mr. Floyd died only a few miles from our corporate headquarters, and Minneapolis was the first city to experience widespread protest and rioting. I think as a society, we have a lot of work to do. We need to look hard at ourselves, our unconscious biases, and our business practices They have some hard questions about how we can improve our diversity. I'm confident that Xcel Energy can play a leadership role in driving positive change for our country and our communities. So with that, let me turn the call over to Brian. We'll provide more detail on our financial results and our outlook. Brian?

Thanks, Ben, and good morning, everyone. We're in a strong quarter, booking 54 cents per share for the second quarter of 2020 compared with 46 cents per share last year. The most significant earnings drivers for the quarter include the following. Lower O&M expenses, primarily driven by our cost management efforts, increased earnings by $0.05 per share. Higher electric margins increased earnings by $0.02 per share, which reflects riders and rate increases that offset a negative $0.07 per share impact from declining sales, largely due to COVID-19. Higher APDC equity increased earnings by $0.03 per share. And finally, our lower effective tax rate increased earnings by $0.07 per share. However, the majority of the lower ETR is due to an increase in production tax credits, which flow back to customers through electric margin and is largely earnings neutral. Offsetting these positive drivers were increased appreciation and interest expense, reflecting our capital investment program and other items, which combined reduced earnings by $0.09 per share. Next, I want to discuss the status of COVID-19 impacts on our mitigation efforts. As expected, COVID-19 had a major impact on second quarter sales. Our second quarter weather-adjusted electric sales declined by 7.1%. However, these impacts are better than projected in our base case scenario, which is embedded in our guidance assumptions. On a weather-adjusted basis, April retail electric sales declined 9.6%. May showed improvement as retail electric sales declined 6.7%, and June showed further improvement as retail electric sales declined 4.7%. This monthly trend reflects the economic shutdown that started in mid-March and the gradual opening up of the economy in May and June. As a reminder, we have a sales true-up mechanism for all electric classes in Minnesota and decoupling for the electric, residential, and non-demand small CNI classes in Colorado. This covers about 45% of our total retail electric sales. Since second quarter sales came in better than projected in our base case scenario, we have additional cushion should an economic relapse occur or the recovery falter. Conversely, If sales continue to come in better than expected, we'll adjust our contingency plans accordingly. We're also closely monitoring bad debt expense and working with customers on payment plans. While it is difficult to project where we'll land, bad debt expense increased approximately $25 million in the 2008-2009 time period as a reference point. Our commissions in Minnesota, Wisconsin, Texas, New Mexico, and Michigan have issued orders to defer pandemic-related expenses. We also reached a settlement in Colorado with the staff and OCC that would allow us to defer COVID-19 related bad debt expense pending a commission decision. Finally, our filings in North Dakota and South Dakota remain under commission review. We've also made strong progress in our efforts to reduce O&M costs to mitigate the impacts of COVID-19. Based on our contingency plans, we expect annual O&M expenses will decline 4% to 5% in 2020, which would offset COVID-19 impacts in the base case scenario. We're also prepared to implement additional contingency plans if the impacts exceed our base case scenario. But as we discussed in the first quarter, there are limitations to what we can offset. We remain focused on providing strong customer service and reliability and will not make short-term decisions that have a negative long-term impact on our customers or shareholders. The last COVID-19 topic I want to cover is liquidity. We finished our planned debt issuances for the year, and we were able to access the capital markets on strong terms and issue bonds at record low coupons. We also closed on the sale of the Mankato Energy Center, which provided approximately $650 million of cash proceeds after carving out the gain for charitable contributions. As a result, we now have available liquidity of approximately $4.5 billion. And finally, we issued an equity forward last year, which we expect to settle later this year, bringing our total liquidity to approximately $5.2 billion. Next, let me provide a quick regulatory update. In New Mexico, the Commission approved our constructive settlement that reflects a rate increase of $31 million, a ROE of 9.45%, an equity ratio of 54.8%, and accelerated depreciation of the total coal plant to reflect an earlier retirement. In Texas, We reached a constructive, unopposed black box settlement, which reflects an electric rate increase of $88 million, an ROE of 9.45%, and an equity ratio of 54.6% for APDC purposes, and acceleration of the depreciation life of the total coal plant. We anticipate a commission decision in the third quarter. And in July, we also reached a constructive settlement in our Colorado natural gas rate case, which reflects a net rate increase of $77 million, ROE of 9.2%, an equity ratio of 55.6%, and a historic test year of an adjustment for the Tungsten to Blackhawk project. We anticipate a commission decision later this year. On our last call, we discussed our preference to avoid rate cases when possible, especially in light of COVID-19. So we recently filed for ride recovery of our wildfire and advanced grid investments in Colorado instead of filing a comprehensive rate case. riders will cover 2021 through 2025 and provide regulatory flexibility and as part of our minnesota relief and recovery filing we expressed our interest in seeking an alternative path to avoid a rate case filing this year we think this would be a constructive outcome for all parties we've had initial discussions and we'll keep you posted with that i'll wrap up we're effectively mitigating covid 19 impacts We continue to provide reliable energy service to our customers while ensuring the safety and well-being of our employees and communities. We reached constructive settlements in our Texas and Colorado rate cases. We avoided an electric rate case in Colorado by filing for wildfire and advanced grid riders. We filed our relief and recovery proposal in Minnesota, which will create jobs, help rejuvenate our local economies, and result in significant customer benefits. We announced the early retirement of another coal plant and achieved TCFD full compliance. We reached a settlement with Boulder that should end their municipalization efforts. We are reaffirming our 2020 guidance range of $2.73 to $2.83 per share based on our solid year-to-date results and progress on contingency plans. And finally, we remain committed to delivering long-term earnings and dividend growth within our 5% to 7% objective range. This concludes our prepared remarks. Operator, we will now take questions.