Xcel Energy Inc.

Today, ladies and gentlemen, welcome to Xcel's Energy's year-end 2020 earnings conference call. Today's conference is being recorded. Questions will 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 Paul Johnson, Vice President of Investor Relations. Please go ahead.

Good morning and welcome to Xcel Energy's 2020 year-end 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 2020 results and share recent business and regulatory developments. 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 SEC filings. Today, 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 the earnings release. I'm going to go off script for a section which sounds a little bit dangerous, but in December, The utility that I've recognized Ben Folk as utility executive of the year for his environmental leadership. You know, Ben was the architect of our steel-for-fuel strategy at Excel. He's also the one that drove us to be the first utility to declare that we have an objective 100% carbon-free by 2050. This is a well-deserved and overdue award. With that, I'll turn it over to Ben. Oh, well, Paul, I'm blushing, man. You know, like that old saying, never get off the billiard ball, never get off script. I'm not quite sure what that means, but I'll just take it. That's from a podcast now. Anyway. Okay. All right. So I'm not going to go off script, and I'm going to thank everybody and welcome you to our call. You know, last year was certainly a challenging year, but our employees came through delivering on our financial and operational objectives while mitigating the impacts of COVID and helping our communities. Overall, 2020 was truly a stellar year. We executed on our business continuity plans as we kept employees and customers safe while providing reliable customer service. We're helping to jumpstart the economy through our capital investment programs, which create jobs and investment in our communities. And we stepped up our commitment to charitable giving to support those in need, including donating a gain of almost $20 million from our sale of the Mankato facility. We had a long and impressive list of accomplishments in 2020. Let me share a few of them. We delivered EPS of $279 in 2020, which is the 16th consecutive year of meeting or exceeding our earnings guidance. We raised our annual dividend by $0.10 per share, which is the 17th straight year we've increased our dividend. And we achieved a total shareholder return of just over 7.8%, which was the second highest TSR for our peer group. Our O&M declined almost 1% as we took actions to mitigate the impacts of COVID. The Minnesota Commission approved our wind-repowering proposal, and I request to acquire the Maurer Windfly. And finally, we resolved multiple rate cases during the pandemic. Now turning to our investment plans, the Minnesota Commission recently approved our 650-megawatt wind-repowering proposal with $750 million of rate-based investments. The wind portfolio is projected to provide customer savings of more than $160 million over the life of the assets. It'll create jobs, jumpstart the economy, and reduce carbon. In addition, we're also proposing to acquire a repowered 120 megawatt wind farm PPA buyout for about $210 million. Now, this project was initially submitted as part of the Minnesota Relief and Recovery RFP but the repowering didn't result in customer savings. However, we worked with the party on the terms, and the project is now expected to provide customer savings over the life of the asset, so we'll move forward with it. We also plan to file our Minnesota solar proposal later in the quarter. This project consists of 460 megawatts of solar facilities near our retiring Sherco coal plant, which takes advantage of existing transmission. We've fine-tuned our projections, and now expect an estimated investment of $550 million. This lower cost provides more benefit to our customers. We have requested a commission decision on both projects in the third quarter and are confident the commission will see the consumer benefit. As part of our strategy to lead the clean energy transition, we're also working to electrify the transport sector. In 2020, we announced the goal to enable 1.5 million electric vehicles in our service territory by 2030. We have programs and filings underway in various states and our transportation electrification plan in Colorado was just recently approved. And we continue to achieve important milestones in our nation leading wind expansion program with the completion of six projects in 2020. These projects represent nearly 1500 megawatts of capacity and were completed under budget. In addition, we have approximately 800 megawatts of wind projects under construction, which are expected to be completed in 2021. We're excited to continue the clean energy transition, which will result in significant customer savings and carbon reductions. We also have a strong year operationally. For example, our nuclear routine continues to make great strides in transforming performance while reducing costs. the fleet achieved a capacity factor of over 96% in 2020, even with a refueling outage during COVID. We have one of the top-performing nuclear fleets in the country, as rated by both the NRC and INCO. And in addition to strong performance, we have continued to lower our cost structure, with O&M costs declining by more than 5% in 2020. And this is the sixth straight year of declining O&M costs in our nuclear operations. I'm extremely proud of the effort and the results of our nuclear employees and their leadership in our industry. Beyond our strong financial and operational performance, I'm also very proud of our ESG leadership. In 2020, we estimate that we reduced carbon emissions by about 50% from 2005 levels, and we remain on track to achieve an 80% carbon reduction by 2030. We announced our plans to convert the Harrington coal plant in Texas to natural gas by the end of 2024. Working with our co-owners, we announced the proposed early retirement of the Craig and Hayden coal plants in Colorado. We will address the remaining coal plants in Colorado in our resource plan filing at the end of March. We're also making significant strides to improve ESG compliance, transparency, and disclosure as we issued our TCFD risk assessment, our natural gas report on our plans to reduce greenhouse gases in our LDC, and our green bond impact report. We earned another perfect score on the Human Rights Campaign's Corporate Equality Index and remain among the best places to work for LGBTQ equality. All of this adds up to an outstanding ESG record, which is integrated into our strategy and increasingly important to investors. I'm really pleased with our accomplishments and looking forward, I'm excited about the opportunities we have in 2021 and beyond. With that, I'll turn it over to Brian.

Thanks, Ben, and good morning, everyone. We had another strong year, booking $2.79 per share for 2020 compared with $2.64 per share last year. The most significant earnings drivers for the year include the following. Higher electric margins increased earnings by $0.32 per share, primarily driven by riders and rate outcomes. Higher AAPVC increased earnings by $0.08 per share due to large projects under construction, including our wind generation. Lower O&M expenses increased earnings by $0.02 per share, driven by our cost management efforts. And finally, a lower effective tax rate increased earnings by $0.22 per share. As a reminder, production tax credits lower the ETR. However, PQCs are flowed back to customers through lower electric margin are largely earnings neutral. Offsetting these positive drivers were increased depreciation and interest expense, which reduced earnings by $0.36 per share, reflecting our capital investment program. Other taxes, primarily property taxes, reduced earnings by $0.06 per share. And finally, other items combined reduced earnings by $0.07 per share. Turning to sales, as expected, COVID had an adverse impact as weather and leap year adjusted electric sales declined by about 3%. For 2021, we don't anticipate a full shutdown of the economy like we experienced last spring. Instead, we expect a slow recovery of lingering impacts throughout the year. As a result, we anticipate modest weather-adjusted sales growth of approximately 1% off of depressed 2020 sales levels. As a reminder, we have a sales growth 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. Shifting to expenses, we showed strong cost management by reducing O&M nearly 1% to mitigate the adverse COVID impacts. We expect O&M expenses to be relatively flat in 2021, reflecting incremental costs for our new wind farms offset by a decline in base O&M. Next, let me provide a quick regulatory update. In December, the Minnesota Commission approved our 2021 stale proposal as an alternative to our filed rate case. We view this as a constructive outcome that will allow us to focus on the Minnesota Resource Plan and other policy initiatives in 2021. In January, we filed a New Mexico rate case seeking a rate increase of approximately $88 million or a net rate increase of $48 million after reflecting the fuel savings and PTCs from Sagamore Wind Farm. The net increase is driven by investment, transmission, and distribution due to the significant growth in New Mexico since the last case. The request is based on an ROE of 10.35%, an equity ratio of 54.7%, a retail rate base of $1.9 billion, and a historic test year. It also includes changes in depreciation to reflect the early retirement of our coal plant. The decision and implementation of final rates is anticipated in the fourth quarter of this year. We also plan to file a Texas rate case later in the quarter. Both cases were required as a part of the approval of our wind projects at SPS. In November 2020, we filed a request in North Dakota seeking an electric rate increase of approximately $22 million. This is our first rate case in North Dakota in eight years. The request is based on an ROE of 10.2%, an equity ratio of 52.5%, a rate base of $677 million, and a forecast test year. Interim rates were implemented in January, and the decision is expected later this year. And in February, we will file a transmission expansion plan in Colorado to increase capacity to enable the addition of renewables to the system. We will also file a resource plan in Colorado at the end of March. It will include proposed plans for remaining coal plants in the state, as well as additional renewable resources as we work to reduce carbon emissions at least 80% by 2030. The transmission expansion and resource plan will provide transparency into our long-term opportunities and will likely lead to robust capital investment in the second half of the decade. We expect the decisions on both the transmission expansion and the resource plan by early 2022. As Ben mentioned, the Minnesota Commission approved our wind repowering proposal. As a result, we're moving these wind projects into our base capital forecasts, which now reflects rate-based growth of 6.6%. We also have potential incremental capex of approximately $210 million for the PPA buyout and $550 million for the Sherco Solar Facility. If approved, rate-based growth would be 6.9%. Accordingly, we have updated our capital tables and our financing plans are detailed in our earnings release. We anticipate that the incremental capital, if approved by the Minnesota Commission, would 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 our solid credit metrics and favorable access to the capital markets. And with that, I'll wrap up with a quick summary. We continue to provide reliable service to our customers while ensuring the safety and well-being of our employees and communities. We effectively mitigated COVID impacts and delivered earnings within our original guidance range for the 16th consecutive year. We increased our dividend for the 17th consecutive year. We continue to execute on our steel-for-fuel strategy by adding nearly 1,500 megawatts of owned wind in 2020. The Minnesota Commission approved our wind repowering proposal and the acquisition of the Maurer Wind Farm, both of which will provide significant benefits to our customers. The Colorado Commission approved our transportation electrification plan. We enhanced our ESU disclosures and made further progress through this coal exposure in delivering our carbon reduction goals. We resolved multiple regulatory proceedings, We've reaffirmed our 2021 earnings guidance of $2.90 per share to $3 per share. And finally, we remain confident we can deliver long-term earnings and dividend growth within our 5% to 7% objective range. With that, that concludes our remarks, and operator will now take questions.