Xcel Energy Inc.

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

Thank you. Good morning and welcome to Xcel Energy's 2020 Third Quarter 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 will review our third quarter results, share recent business and regulatory developments, provide 2021 guidance in our updated five-year financial plan. Slides that accompany today's call are available on our website. As a reminder, some of the comments during today's 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 findings with the SEC. Today we will discuss certain metrics that are non-GAAP measures, including ongoing earnings, electric and natural gas margins. Information on comparable gap measures and reconciliations are included in our earnings release. With that, I'll turn the call over to Ben Foulkes. Well, thank you, Paul, and good morning, everyone. We had another strong quarter, booking earnings of $1.14 per share for the third quarter of 2020, compared with $1.01 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 narrowing our 2020 guidance range to $2.75 to $2.81 per share. Consistent with our third quarter tradition, we have provided our updated base investment plan, which reflects $22.6 billion of capital expenditures over the next five years. This represents rate-based growth of 6.3% off the 2020 base year. This represents our base capital forecast. In addition, we've identified potential incremental CapEx of $1.4 billion associated with the Minnesota Relief and Recovery Proposal, which, if approved, would drive rate-based growth of 6.9%. We're also initiating 2021 guidance of $2.90 to $3 per share, which is consistent with our 5% to 7% long-term EPS growth objective. We're very excited about our plan, which provides significant customer value, keeps bills low, and delivers attractive returns for our investors. We also continue to help our customers and protect our employees during this pandemic. We've stepped up charitable giving to help our communities, including donating the game from the sale of our Mankato facility. For more details, see our slides. Our business continuity plans have been executed extremely well, including the completing of a refueling outage at our Prairie Island Mutual facility. We're keeping employees safe while providing reliable customer service. And we're helping to restart the economy through our capital investment programs, which create jobs in our communities. Earlier this year, the Minnesota Commission opened a relief and recovery docket and invited utilities to submit potential projects that will create jobs and jumpstart the economy. In September, we filed a repowering proposal that includes four Xcel Energy wind farms of approximately 650 megawatts with $750 million of capital investment. In addition, the proposal includes 67 megawatts of repowered PPA extensions. The portfolio is projected to provide customer savings of over $160 million over the life of the assets. We've requested a commission decision on the wind proposal by year end. We're also proposing 460 megawatts of solar facilities near our retiring Sherco coal plant to take advantage of the existing transmission. The project represents an estimated investment of $650 million. We plan to file our solar proposal in early 2021 an anticipated decision in mid-21. We are confident the Commission will see the customer benefits of these projects. We continue to make progress on our PPA buyout strategy. In August, the Minnesota Commission approved our request to acquire the 99-megawatt Maurer wind farm after it is repowered. Maurer is currently a PPA. In addition, we filed to buy out the KEPCO solar facility in Colorado. While the $41 million investment is relatively small, the PPA is out of the money and the buyout will save our customers $38 million over the 11 years. I think this is another example of our keeping bills low priority. We continue to make strong progress on our wind development initiatives. In August, our 500 megawatt Cheyenne Ridge wind farm went into operation. Cheyenne Ridge was completed ahead of schedule and under budget. Since we began operations, we set a record with 70% of hourly load coming from wind generation in Colorado. We also reached an agreement to acquire a 74 megawatt solar facility in Wisconsin for approximately $100 million. We expect a commission decision later in 2021, and this will be our first universal scale solar rate-based investment. I'm also excited to announce that Xcel Energy, was recently awarded a $10 million DOE grant for an innovation pilot to produce carbon-free hydrogen at one of our nuclear power plants. We're partnering with the Idaho National Lab and others to use excess electricity and steam to separate the hydrogen and oxygen molecules in water using a high-temperature electrolysis process, which is 30% more efficient and a sustainable way to produce hydrogen. And while it's not currently economical, we think hydrogen has long-term potential to be a carbon-free form of dispatchable generation, which will allow the country to achieve its carbon goals while maintaining reliability. I want to wrap up with a couple of comments on electric vehicles. We recently announced our vision to enable 1.5 million EVs in our service territory by 2030. We spent the last few years working with our commission on programs that will enable EVs in our service territory and help turn this vision into reality. Electrification of the transport system will reduce carbon and save our customers money. I'm also proud of the recent award we received from Fort Knightly, which declared our EV program the smartest transportation electrification project as part of its smartest utility projects in 2020. We've developed an EV subscription that makes it easier for customers to have charging stations installed at their homes and to be charged a monthly rate for off-peak usage, which can save customers money and makes more efficient use of the electric grid. So before I do turn it over to Brian for more detail on financial results and outlook, I just want to say that, as you probably know, the Southeast is wrestling with Hurricane Zeta and its widespread outages. And the Southwest is working around the clock restoring our customers from the damages due to Winter Storm Billy. Our customers over the past three days have restored two-thirds of 145 customers in SPS that have been out as a result of this ice storm. I know there are hundreds of thousands out there in other parts of the Southwest that are out. And I'm just so proud of our team for focusing on our customers in these adverse conditions, and I'm proud of the industry. We have a history of mutual aid, It's been never more evident than storm recovery in these last two events and, quite frankly, the entire year. So with that, I will turn it over to Brian. Thanks, Ben, and good morning, everyone. We had another strong quarter, booking $1.14 per share for the third quarter of 2020, compared with $1.01 per share last year. Most significant earnings drivers for the quarter include the following. Higher electric margins increased earnings by $0.20 per share, primarily driven by riders and rate outcomes. O&M expenses were flat for the quarter, primarily driven by our cost management efforts. The lower effective tax rate increased earnings by $0.07 per share. As a reminder, production tax credits lower the ETR. However, PTCs are flowed back to customers through lower electric margin and are largely earnings neutral. Offsetting these positive drivers were increased depreciation and interest expense, which reduced earnings by $0.12 per share, reflecting our capital investment program. And in addition, other items combined to reduce earnings by $0.02 per share. Next, I want to discuss the status of COVID-19 impacts in our mitigation efforts. As expected, COVID-19 had an adverse impact as third quarter weather-adjusted electric sales declined by 2.4%. However, these impacts were better than projected in our guidance assumptions We now assume annual electric sales will decline approximately 3% for 2020. 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 C&I classes in Colorado. This covers about 45% of our total retail electric sales. Since sales have come in better than projected and weather has been favorable, we have adjusted our O&M contingency plans accordingly. We continue to closely monitor bad debt expense and work with customers on payment plans. At this point, we expect bad debt expense will increase approximately $25 million over normal levels, which remains in line with previous forecasts. We have received approval to defer certain pandemic-related expenses in all states, except for North Dakota, where our request remains under commission review. We've also made strong progress on reducing O&M expenses to mitigate COVID-19 impacts. Based on our year-to-date results and updated sales projections, we now expect annual O&M expenses will decline 1% to 2% in 2020, compared to our initial guidance of a 2% increase. Next, let me provide a quick regulatory update. In Texas, the Commission approved our rate-case settlement that reflects an electric rate increase of $88 million, an ROE of 9.45% and equity ratio of 54.6% for AFEDC purposes, and acceleration of the depreciation life of the total coal plant. In October, the Colorado Commission accepted the ALJ's recommended decision to approve our natural gas rate case settlement without modification, reflecting a net rate increase of $77 million, an ROE of 9.2%, an equity ratio of 55.6%, and a historic test year with an adjustment for the Tungsten to Blackhawk project. We view both the Texas and Colorado decisions as constructive regulatory outcomes. My preference is to avoid rate cases when possible. So in July, we filed for rider recovery of our wildfire and advanced grid investments in Colorado instead of filing a comprehensive rate case. The riders will cover 2021 through 2025 and provide regulatory flexibility. We're still in the early phases of these proceedings. In September, we filed a 2021 stale proposal in Minnesota as an alternative path to the rate case we plan to file in early November. We expect the Commission to decide in December whether it will accept the stay-out or proceed with a multi-year rate case. And as Ben noted, we're initiating our 2021 earnings guidance range of $2.90 to $3 per share, which is consistent with our long-term EPS growth objective of 5% to 7%. Our 2021 EPS guidance is based on several assumptions that are detailed in our earnings release. I want to highlight several of these items here. We assume constructive regulatory outcomes in all proceedings. We anticipate modest impacts from COVID-19. We project electric sales growth of approximately 1%, which reflects modest recovery over the COVID-depressed sales levels in 2020. We expect O&M expenses to increase approximately 1%, which reflects increased costs for new wind projects and lower O&M levels in 2020 due to COVID mitigation. Please note that wind O&Ms are covered through regulatory mechanisms in most jurisdictions and is offset by field savings. And finally, we anticipate an effective tax rate of approximately negative 9%, largely driven by increased levels of wind PTCs, which are credited to customers and generally have no mature impact on earnings. In our earnings release, you'll find more detail about our updated $22.6 billion five-year base capital forecasts. The base forecasts reflect significant grid investment including our advanced grid initiative and additional investment in the transmission system to maintain asset health and reliability and enable renewable generation. It also includes a modest level of renewables, expenditures to improve the customer experience, and a natural gas combined cycle plant at our Sherco facility to ensure reliability as we have proposed to retire all of our Minnesota coal plants by 2030. Our base capital plan results in annual rate-based growth of approximately 6.3% using 2020 as a base. We also have potential incremental capex of approximately $750 million for wind repowering projects and $650 million for a solar facility, which are pending commission approval as part of the Minnesota Relief and Recovery filing. We're confident the commission will see the customer benefits of these projects. If approved, rate-based growth would be 6.9%. In addition, we think there is other potential upside capex that could materialize in the future. Our capital investment plan supports our 5% to 7% long-term earnings growth objective, and our goal is to deliver EPS and dividend growth in the upper half of the range. We've also updated our financing plan, which reflects a combination of internal cash generation and debt issuances to fund the majority of our capital expenditures. In addition, We expect to issue $250 million of equity and $400 million of drip and benefits equity, consistent with our previous forecasts. Importantly, the financing plan maintains our current credit metrics. We anticipate that the incremental capital, if approved by the Minnesota Commission, will be financed with approximately 50% equity and 50% debt. This incremental equity will allow us to fund accretive capital investments, which will benefit our customers while maintaining solid credit ratings and favorable access to the capital markets. And with that, I'll wrap up. We're effectively mitigating COVID-19 impacts. We continue to provide reliable service to our customers while ensuring the safety and well-being of our employees and communities. The Colorado and Texas commissions approved our constructive rate case settlements. Our relief and recovery proposal in Minnesota will create jobs, help rejuvenate our local economies, and result in significant customer benefits. We narrowed our 2020 guidance range to $2.75 to $2.81 per share, based on solid year-to-date results and progress on contingency plans. We announced a robust updated capital investment program that provides strong, transparent rate-based growth and significant customer value. We initiated 2021 earnings guidance of $2.90 to $3 per share, consistent with our long-term objective. And finally, we remain confident we can deliver long-term earnings and dividend growth within our 5% to 7% objective range. This concludes our prepared remarks. Operator, we will now take questions.

Ladies and gentlemen, if you would like to ask a question, please signal by pressing star 1 on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Again, please press star 1 to ask a question. Our first question today comes from Julian DeMullen-Smith of Bank of America.