Xcel Energy Inc (XEL) — Q1 2020 Earnings Call Transcript

Thank you. Good morning. And welcome to Xcel Energy's 2020 first quarter earnings conference call. Joining me today are Ben Fowke, Chairman, President and Chief Executive Officer; Bob Frenzel, Executive Vice 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 development 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 from those anticipated are designated in the 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 will now turn the call over to Ben.

Well, thank you, Paul, and good morning, everyone. 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 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 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 $0.56 per share for the first quarter of 2020 compared with $0.61 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 committing to not disconnecting residential customer service and arranging payment plans for those having difficulty paying their bills. In Minnesota, we are proposing to reduce our approved field 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. 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 protective equipment, following CDC social distancing guidelines, 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 allow us to prioritize work, and are prepared to sequester our 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 the 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've heard from several investors that having a non-regulated asset clouds the Xcel Energy story. As a result, when several potential buyers expressed interest in acquiring the plant, we decided to sell it and preserve our status as one of the very few fully regulated pure-play utilities. Since the earnings were back-end loaded, we don't expect the sale to materially impact our earnings projections. 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. Additionally, we will book again 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. 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 consistent strong financial results. While I don't plan to retire anytime soon, these promotions reflect the deep bench strength and thoughtful plan 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.

Thanks, Ben, and good morning everyone. We achieved solid results, recording $0.56 per share for the first quarter of 2020 compared to $0.61 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 resulted in a $0.04 per share unfavorable comparison. Significant earnings drivers for the quarter include lower O&M expenses which increased earnings by $0.03 per share and our lower effective tax rate which also increased earnings by $0.03 per share. However, the majority of the lower effective tax rate is due to an increase in production tax credits sold back to customers through electric margin and tax reform impacts, both of which are largely earnings neutral. Offsetting these positive drivers were lower margins due largely to unfavorable weather, which reduced earnings by $0.03 per share and which offsets riders and regulatory outcomes. Increased depreciation and interest expense, reflecting our capital investment program reduced earnings by $0.05 per share and other items combined decreased earnings by $0.03 per share. Next, I want to discuss the potential impact of COVID-19 and the actions we are taking to mitigate our range of outcomes. Starting with sales, our first quarter of 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 in first quarter sales as the economic shutdown started in mid-March, so we did not experience the full monthly impact. From 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, where almost all of our states were under relatively strict shelter in place orders. Residential sales increased by 3.2% while C&I sales declined by 13.7%, leading to a total retail electric sales decline of 9.6% on a weather-adjusted basis. Keep in mind we have a sales 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. 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, resulting in a sales decline of approximately 2% compared to 2019. Our base case, which we are reaffirming our earnings guidance on, assumes a severe impact through the second quarter with a slower U-shaped recovery, resulting in a sales decline of approximately 4% on a year-over-year basis. Finally, the severe scenario assumes a prolonged severe impact lasting through the third quarter followed by a protracted L-shaped recovery, 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 believe the base case scenario is the most likely outcome or at least within the band around the sales impact we've outlined, and we have incorporated a base case into our guidance assumptions. There is considerable uncertainty on what will actually occur, particularly the duration of the downturn and the lingering effects. We feel 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 who are having difficulty paying their bills. While it is difficult to project where we'll land, bad debt expense increased by approximately $20 million during the 2008 to 2009 crisis 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 to decline by 4% to 5% in 2020, which should offset the impacts of COVID-19 in the base scenario. We 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 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; however, we have not had any material impact on our supply chain with the exception of our wind farms. In mid-April, we were informed of supply chain disruptions that will likely result in delays in the completion of two of our wind farms until 2021. We are monitoring the situation closely and are striving to complete the project 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% PTC benefits even if they are completed in 2021. Lastly, on the topic of COVID-19 and liquidity, we are 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. Finally, we issued an equity forward last year, which we expect to settle later this year, providing 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 flexibility on issuance timing to ensure that 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 reflecting a rate increase of approximately $31 million, ROE of 9.45%, an equity ratio of 54.8%, and acceleration of depreciation on the Tolk 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. 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%. It is early in the process so there's not much to report, but the procedural schedule hasn’t set with new rates expected to become effective in November based on statutory requirements. In terms of the 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 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. Additionally, 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 short-term and long-term for both our customers and investors. Our contingency plans will not offset the severe scenario, which would likely result in earnings below our 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 by 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're executing our strategy extremely well, and we remain positive about the opportunities ahead for the benefit of our customers, communities, and shareholders. 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.

I wanted to just get an update at a high level in terms of the opportunity for additional PPA buyouts. Just what are you seeing in terms of the opportunity, or is that sort of a little bit on pause just given the COVID-19 dynamics? And just curious at a high level what your views are on that opportunity?

We're all focused on COVID-19, but we're still running a business and still looking for opportunities. Brian, do you want to give a little more detail?

As we think about it, we're in regular contact with our counterparties. Obviously, there could be potential here as you see what's happening. If any of them have an interest in selling, we're certainly regular in contact. We have our proceeding of the Mower acquisition in front of the commission, and we hope to see a decision on that in Q2 or Q3. We're also looking at how we use the ERP and our IRP processes to help jumpstart some of that too. Our discussions around our acquisitions in Minnesota focus on how we can better improve the process with the department and our stakeholders to ensure that we're bringing it forward and having a comprehensive discussion. So we're certainly active on that stage. We've talked before; it continues to be part of our plan, but we don't include any of that in our base capital plan.

And just maybe at a high level in terms of resource planning. How do you think about the opportunity for further acceleration of renewables? I guess on the positive side, renewable costs keep dropping. There's always a potential for tax credits to get extended. The wind credit got extended again last year. On the negative side, I guess you have demand uncertainty from COVID. In Texas, we have uncertainty around the status of the energy sector overall. But how do you think about the potential for additional renewables growth and additional shutdowns of some of your coal assets? Do you feel about the same as you did before? Are there reasons to be more bullish or more cautious? How would you think about that?

I guess the short answer is probably a little more bullish. The costs, as you mentioned, Stephen, continue to come down. Our fuel strategy continues to be economically attractive. I think the test of that was the ability to get our renewables approved in Texas and in New Mexico on economic terms. I think another element that makes me bullish is that we can partner with our states and commissions and state administrations to be part of the solution in getting people back to work. This potentially allows us to accelerate some of our capital opportunities. Using that to bring on more renewable energy at a great price point will actually help save customers’ money and employees’ jobs. Not unlike when we had the Great Recession; many times I've had people working in our labor unions thank me and the company for continuing to go forward with projects. This was often the only job they had. That's something to be really proud of, and I think we can replicate that again.

I was wondering if you could just give a view of where you guys see yourself with earnings guidance range in any of this base scenario?

I guess first I would say take a look at our track record over the last 15 years. I think we've demonstrated that we can deliver within the earnings guidance range; typically that's been at the middle or above. So we're quite proud of that, and we expect we'll be able to do that this year. If you look at what we've done in the past and our track record, on the first quarter earnings call, we don't give any additional guidance on whether we're going to be at the bottom, the top, or whatever. So that's the first quarter. We're confident that in the base case scenario we'll be in the earnings guidance range. As the months and quarters roll on as we've done in the past, we will potentially provide more color on it.

And then just preliminary sales data for April. Do you have a sense of which states are seeing more weakness than others, just understanding that you have decoupling in Minnesota and some protection in Colorado as well?

David, regarding your question about which states were affected, what the divergence in the states for April. I think we saw the most resiliency on the C&I side in SPS, and probably the biggest impact on the C&I side in Minnesota and Wisconsin, the northern territory. Part of what we saw in Minnesota is that we did have a combined heat and power plant go online in May of last year. That's part of what we look at month over month, but overall, the commentary indicates the greatest weakness in C&I side was in Minnesota and Wisconsin and less so in SPS; Colorado is roughly in the middle.

And then the last question I had is just I think you said the equity forward that you expect to settle around year-end, but just on the Mankato sale. Does that impact the equity plans at all, either for this year or next? Just kind of what you guys weighed out last year?

No, it doesn't. When I say we'll use it to reduce our financing costs for this year, but we don't expect to not sell our equity forward this year. We do plan to settle it, but what Mankato does is really an infusion of cash of $650 million. It'll provide some additional headroom for capital investment if we have an opportunity to potentially accelerate investments. It really helps our communities and customers, along with regulators to accelerate some of the rebound from this crisis. So I think it gives us just an additional capital headroom. As we think about longer term, we'll reevaluate that and our overall financing plans as we get to Q3 and lay out a new five-year capital plan.

And I think the final question is the two renewable projects you've mentioned that could flip into '21, which ones were those?

Those are the two Minnesota wind farms that we're looking at. We've taken a very conservative approach and made sure we've had all the documentation since 2016. We’ve maintained continuous efforts since then. We're highly confident even if they do slip a month or two into 2021 that they will qualify for 100% PTCs.

Just wanted to start off by asking, do you have any regulatory obligations or guarantees associated with the wind that could impact our earnings because of the project delay into '21?

We have no obligations in terms of getting in service in 2020, and we're certainly working towards that, and that's our goal. In terms of obligations and timing, we don't. There are obligations in terms of overall cost gaps, but we're certainly working to mitigate any impacts on that as we start to see delays in schedule. We're certainly working with our suppliers and our plant contractors to ensure that we bring it in under the original order PTC cost cap.

Yes, so we're pretty comfortable with that, Jeremy.

In addition, the SPS has projects that we have 100% PTC guarantees, but again we think that those are getting into construction by the end of the year, and we're fairly confident in 100% PTC.

And just a cleanup question, Slide 17. It seemed like AFUDC equity ticked up a bit there. Just wondering if you could give a little bit more color on that?

Yes, our regional guidance has indicated some delays in a few projects. One notable example is the Blazing Star 1 wind farm, which we started operations for in April but faced delays due to winter weather. This is one aspect contributing to the situation. Overall, both the wind farm and other investments we're pursuing played a role. Additionally, we have taken measures to enhance our liquidity, which has resulted in a slightly higher AFUDC rate.

This is Alex McKerrell calling in for Julian. My first question is about your rate case filings for this year. I was wondering if you have any updates on whether or not you could potentially push out Minnesota again or potentially push out Colorado? And maybe how you're thinking about using existing trackers to track that rate base instead?

We recognize that these are challenging times, and we do like to work with our regulators in advance. In both Colorado and Minnesota, we have invested in infrastructure and assets that our customers value and our regulators support. Like in the past, we believe there are mechanisms that will allow us to avoid filing those rate cases. You can be assured that those conversations are happening with the staff at the commissions as applicable in the respective states. We hope to avoid filing those cases, and we probably have more information for you on the second quarter call later this year.

My second question and last question, just about your CAGR over time. I was wondering if you're still anticipating potentially reaching the upper end of that long-term guidance?

Yes, I think it's a great question. As I talked about it with an earlier question, look at what drives our 5% to 7% growth: investing in projects and opportunities that align with our states, communities, regulators, and legislators. I don't see that changing and don't see changes to our CapEx forecast going forward. That’s what drives the growth, and that’s where we'll get it from.

One of the things we've done as a company is prepare for stormy days on sunny days. We've got great dry powder on our balance sheet. Brian mentioned other steps we took. We also continue to invest in our system, keeping it strong and reliable. That allows us to weather situations like this and potentially come back stronger and partner with our states to jumpstart the economy when we all get through this.

A question on the contingency plans. How much of these contingency plans have you been able to accomplish so far? We've been talking about this for the first four or five months of the year. Any change in the CapEx plan within those contingency plans? I think you just answered no, but just want to clarify the O&M side and then the CapEx side.

We've really seen no plans in our CapEx for this year. The O&M side, this crisis hit relatively recently, so we are working through all those plans. We have a plan for the balance of the year in terms of implementing them. When we think about the O&M contingency plans we're putting in place, we've implemented a hiring freeze, are looking at reducing employee expenses, and targeting 4% to 5% to mitigate that base case scenario. We do have the ability to flex all those, but it's a little worse. The actions you’re seeing will be evenly spread throughout the year.

And then on renewable development. How much are those delays project-specific and how much are you seeing just across the entire industry supply chain issues or other financing delays, construction delays, stuff like that industry-wide versus the couple of projects you mentioned?

We work with our OEM vendors as well as our balance of plant providers to execute the schedules. We have seen some supply chain disruptions that started when China shut down for a while. We've had mild disruptions from other plants where we get some of our components. We think that's an industry-wide phenomenon. As Brian mentioned, we've tracked our costs diligently. We're confident in our ability to meet the safe harbor provisions for achieving 100% PTC. These projects were originally scheduled to be later in this year anyway. We're trying actively to complete them in 2020; however, there's the potential they slip into '21. It’s not catastrophic, it’s just mild; we just happen to have these later dated projects.

We're very confident. I've worked with outside firms to know we’ll pass the continuous efforts test.

Any difference you're seeing between solar and wind in terms of what you just talked about with supply chain and other logistics?

Right now, Travis, we're only building wind farms on our own balance sheet. I haven't seen or heard a lot of solar delays. There are a couple of public force majeure filings on some solar farms around the country, but I can't speak with any authority on the solar side.

I was curious if you could provide a little bit more color on the supply chain disruptions we've been talking about, particularly with these two wind farms. What have you seen in the supply chain? Do you expect that the issues might also impact other areas, maybe traditional power generation, transmission, and distribution businesses where it might affect the availability of parts and things like that as we move forward and the lockdowns and disruptions continue? Thank you.

We haven't seen any supply chain disruptions on any of our other components other than maybe toilet paper and hand sanitizer and face masks. On the wind farms themselves, many components are manufactured overseas and assembled here. Depending on the progress of the pandemic in those countries, we’re facing two, three, or four-week delays in various places, which can add up to a six, seven, or eight-week delay on our projects, which is enough to push them back across the timeline. We're seeing constraints on the OEM side, and we're experiencing logistics constraints around ports and parts transport. It’s not catastrophic, just mild and something we are closely monitoring. As Ben and Brian have said, we're confident in our ability to qualify for the PTCs at 100%, and we're working diligently with our vendors and transportation providers to get all the components here and constructed by year-end.

Yes, thank you. And thank you for all participating in our earnings call this morning. Please contact our investor relations team for any follow-up questions, and have a good day. Thank you.