Xcel Energy Inc (XEL) — Q2 2021 Earnings Call Transcript

Thanks Nicole. Good morning, and welcome to Xcel Energy's 2021 second quarter earnings conference call. Joining me today are Ben Fowke, Chairman, 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 2021 results and share recent business and regulatory developments. Slides that accompany today's call are available on our website. As a reminder, some comments made 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 non-GAAP measures, including ongoing earnings, electric and natural gas margins. Information on compatible GAAP measures and reconciliations are included in the earnings release. In addition, please note this is Ben Fowke's last earnings call. He will retire as CEO in August but will continue as Executive Chair of the Board. Ben has been an outstanding CEO and will be missed. I'll now turn the call over to Bob.

Thank you, Paul and good morning everybody. Before we dive into quarterly results, I just want to take a few minutes to recognize Ben and thank him for his leadership. He's been a leader at Xcel Energy for two decades as Treasurer, CFO, President, Chief Operating Officer, and then CEO and Chairman of the Board. Since he assumed the CEO role in 2011, we've been a national leader in reliability, customer service, and safety, all hallmarks of excellent utility operations, and our operational performance has improved over that period. For example, we transformed our nuclear plants into one of the top-ranked fleets in the nation, while lowering our cost structure by 20%. Under Ben's leadership, we delivered for the environment, became a national leader in wind energy, highlighted by our steel for fuel strategy. We've tripled our total wind capacity from 3,400 megawatts to over 10,000 megawatts and our owned wind growing from 300 megawatts to more than 4,000 megawatts. We've significantly reduced the level of coal in our fuel mix from 50% to 21%, and we reduced our carbon emissions by 51% compared to our 2005 baseline. We were the first major U.S. utility to establish a 100% carbon-free goal while remaining a stalwart champion for reliability and affordability. We've delivered excellence for our financial stakeholders as well. We've tripled Xcel Energy's market cap from $12 billion to $37 billion, and our stock prices increased from $24 per share to almost $70 per share, reflecting a total shareholder return of 300% and outpacing our peer group. We've met or exceeded our earnings guidance every year and increased our dividend in line with our earnings growth. Beyond Xcel Energy, Ben's recently served as Chairman of EEI, leading through pandemic uncertainties, driving focus on the need for increased levels of research and development for new technologies, and inspiring his peers to define diversity and inclusion priorities for their organizations. He's had a tremendous run as CEO and will leave a lasting legacy at Xcel Energy, for the utility industry, and I would go so far as to say for the country. So thank you, Ben. And congratulations on your upcoming retirement in August. I look forward to your continued leadership at the Board level and partnering with you on important federal policy efforts related to infrastructure and clean energy. Looking ahead, I am honored with the opportunity to lead this great company, and I recognize the LeBron James-sized shoes that I'm filling. Since joining Xcel Energy five years ago, Ben and I have worked closely on the development and execution of our strategy, and that will not change. We'll continue to lead the clean energy transition, enhance our customers' experience, and will constantly work to keep our customers' bills low and deliver an affordable product. We've had a fantastic leadership team and significant bench strength, and I'm confident in our ability to capitalize on the growth opportunities in front of us while maintaining our commitment to reliability and affordability. I'm excited about our growth opportunities over the next decade, driven by our generation resource plans, transmission expansion, distribution investments, and our electric vehicle vision. As we move forward, innovation is more critical than ever as we prepare to move from 80% carbon reduction by 2030 to 100% carbon-free electricity. I'll be focused on clean technologies in both our electric and our natural gas businesses as well as how we engage with customers in new ways through a more flexible grid. I also expect innovative work practices will continue to drive efficiency and produce strong operational results. Safety is another area where I plan to help drive innovation. As one of our core values, safety is already a priority, but we can do even better. I want us to move beyond traditional metrics and embrace a heightened focus on prevention and culture change, eliminating the most serious events by encouraging trust, transparency, and learning. In the coming months, I look forward to continued engagement with our customers, our communities, our regulators, our investors, and of course, our workforce. We have the best employees in the business, and I'm proud of what we've accomplished, and I'm excited for the future successes that we'll achieve together. To our investors, we appreciate the trust that you place in us, and we'll continue to be good stewards of your investments. Now, turning to the quarter. Today, we reported solid quarterly earnings of $0.58 per share compared to $0.54 per share last year. We're off to a good start, and we are reaffirming our 2021 guidance. We made significant progress on various regulatory initiatives, including three constructive rate case settlements that Brian will discuss in more detail. Additionally, we've advanced our plans for adding incremental renewables. In Wisconsin, the commission approved our proposal for the 74-megawatt Mustang solar project for $100 million, which will be the largest solar facility in Western Wisconsin. In June, the Minnesota Commission approved our proposal to buy out a repowered 120-megawatt wind farm PPA for $210 million from ALLETE. This repowered project will save our customers money while extending the life of a renewable energy resource. The Minnesota Commission continues to evaluate our $575 million proposal to build a 460-megawatt solar facility that takes advantage of existing transmission as we phase out of coal. We are confident the commission will see the customer and economic benefits and expect a decision later this year or early in Q1 of next year. Additionally, as part of our continued commitment to foster a skilled and diverse workforce, we proposed a training program in Minnesota to help those in underrepresented communities develop the skills to succeed in energy-related construction careers. Program graduates will have the opportunity to be considered for participation in our Sherco solar proposal and other future projects. In June, we filed an alternative Minnesota resource plan, which achieves an 85% carbon reduction by 2030. This proposal removes the Sherco combined cycle from consideration and replaces it with two combustion turbines. The key components of the revised plan include an early retirement of both the King and the Sherco three coal units in 2028 and 2030, respectively; a life extension for our Monticello nuclear plant; construction of new transmission lines to take advantage of the interconnection rights from the retiring coal units; and the addition of 3,150 megawatts of universal solar, 2,650 megawatts of wind, 800 megawatts of new hydrogen-ready CTs, 300 megawatts of repowered blackstart CTs, 1,900 megawatts of flexible peaking resources, and 250 megawatts of new storage. We provided the commission with an outstanding resource plan that will reduce carbon while maintaining reliability and customer affordability. We expect a decision on the Minnesota resource plan later this year or early next. In addition, we continue to make good progress and are in the discovery phase of the Colorado resource plan and associated transmission power pathway project. We expect the commission decision on both proposals in early 2022. Between the Minnesota and Colorado resource plans, we anticipate adding nearly 10,000 megawatts of new renewables to our system to meet our 80% carbon reduction goal by 2030. With that, I'll turn it over to Brian.

Thanks Bob and good morning everyone. We had a good second quarter, recording $0.58 per share compared with $0.54 per share last year. The most significant earnings drivers for the quarter include the following: higher electric and natural gas margins increased earnings by $0.19 per share, primarily driven by riders and regulatory outcomes to recover our capital investments. Additionally, a lower effective tax rate increased earnings by $0.06 per share. As a reminder, production tax credits lowered the effective tax rate. 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 expenses, which reduced earnings by $0.09 per share, reflecting our capital investment programs; increased O&M expenses, which reduced earnings by $0.07 per share; and lower AFUDC decreased earnings by $0.05 per share, largely due to placing several large wind farms into service last year. Turning to sales, weather-normalized electric sales increased by 5.3% in the second quarter. This reflects a comparison to last year when the pandemic restrictions in our states were at their highest levels, and our sales were most suppressed due to COVID impacts. Our year-to-date weather and leap year-adjusted electric sales increased 1.6%. We continue to anticipate modest annual weather-adjusted sales growth of approximately 1%. Shifting to expenses, O&M increased $50 million for the quarter, which largely reflects the timing of expenses between the two periods. Last year, we had significant O&M reductions in the second and third quarters to offset the impact of lower sales from COVID, while the fourth quarter was at higher levels. The quarterly O&M comparisons will be chunky this year. In terms of regulatory filings, we reached constructive settlements in three rate cases. In Wisconsin, we agreed to a rate increase of $66 million over 2022 to 2023 based on an ROE of 9.8% in 2022, 10.0% in 2023. In New Mexico, we agreed to a rate increase of $62 million, reflecting an ROE of 9.35%. In North Dakota, we agreed to a rate increase of $7 million based on an ROE of 9.5%. We anticipate commission decisions in these cases later this year. In July, we filed a Colorado electric rate case, seeking a net rate increase of $343 million based on an ROE of 10% and an equity ratio of 55.6% and the 2022 forecast test year. The rate case is largely driven by capital investment, and we anticipate a commission decision in the spring of 2022. We also have a pending Texas electric rate case. We're seeking a net rate increase of $74 million after reflecting fuel savings and PTCs from the Sagamore wind farm. The request is driven by capital investment and is based on an ROE of 10.35% and an equity ratio of 54.6%. Commission decision is expected in the first quarter of 2022 for the surcharge back to March 2021. As for future filings, we anticipate filing a Minnesota electric rate case in November with interim rates going into effect in January of 2022. We also plan to file a Minnesota natural gas case later this year. To summarize, we received commission approval for the Mustang solar project and the ALLETE wind PPA repowering buyout. We provided an alternative to our Minnesota resource plan, which will deliver 85% carbon reduction by 2030, providing transparency into our long-term opportunities. We reached constructive rate case settlements in Wisconsin, New Mexico, and North Dakota, and filed our Colorado electric rate case. We reaffirmed our 2021 guidance range. Finally, we remain confident we can deliver long-term earnings and dividend growth in our 5% to 7% objective range. Before we open up for questions, I'll turn it over to Ben for some closing comments.

Well, thanks Brian and good morning everyone. It's really been an amazing decade as CEO, and before that, as CFO. I'm really proud of the tremendous accomplishments we made as a company. I'm extremely proud of the incredible efforts and contributions our employees make in serving our customers and our local communities. I've also enjoyed the interactions I've had with our investors and the financial community. I appreciate your interest in the company, your feedback and your suggestions, and I'm going to miss that. Now it's really hard to retire from a role that I've truly enjoyed, but I'm leaving the company in great hands. I know that Bob, Brian, and the rest of the management team will continue to do an outstanding job leading Xcel Energy well into the future. I also plan on attending EEI this fall, and I look forward to seeing a lot of you there. So, thank you all. And with that, operator, let's open it up for questions.

Hi good morning. Ben, congratulations and best of luck moving forward.

Thank you very much. I appreciate it.

I just want to start off, I guess, with the renewables. And if you could expand on how the pipeline looks for incremental renewables after that Sherco and wind repowering? And also, I guess, how local stimulus efforts might influence this going forward?

Hey Jeremy, good morning. It's Bob, and thanks for the note this morning. Yes, we filed resource plans in both Colorado and in Minnesota. As we work through those proceedings, I’d say by first quarter next year, we'll have real visibility into the outcomes of both of those. We'll move forward with what we'll call resource acquisition plans where we propose projects and solicit input from others for projects coming. If your question is around where we are in the renewable recovery plan in Minnesota, particularly, the four wind repowerings were approved in December. The ALLETE repowering project was just approved in June, and we still have the Sherco solar project that is proposed and we hope for approval by end of this year or maybe early next.

Got it. That's helpful. Thank you. Maybe just pivoting over to Uri, if we could. Just want to see the early stages of your Winter Storm Uri recovery proceedings, how they're progressing, and what changes, if any, do you expect operationally going forward?

Sure. We have approvals in, I think, four of our states at this point, and we're still working through proceedings in three others. I think the largest of those is both Minnesota and Colorado. We're still working through those proceedings, as well as Texas. Our expectation is we acted in accordance with all regulatory regulations, prior policies, and procedures. So we do expect a full recovery of our incurred costs on Winter Storm Uri. I think looking forward, Colorado has opened a docket to explore alternate mechanisms for us and others in the state to look at, and they've proposed an alternative. We've commented; it's a Notice of Proposed Rulemaking (NOPR), so they're looking for inputs, and we've commented on the NOPR. We expect some resolution and some hearings in that process in the third or fourth quarter of this year.

Got it. That's helpful. I'll leave it there. Thank you.

Thank you.

Hey Julien, good morning.

Hey good morning and congrats, Ben. It's been a pleasure. I will see you soon, I'm sure.

Thanks.

I look forward to seeing you at EEI. If I can briefly address the transmission side, you previously mentioned the potential expansion in Colorado over time. Obviously, you're seeking approval for the first phase as indicated in the prepared remarks. Can you provide updates on potential co-ownership partners and the overall expansion of your initiatives?

Yes. Certainly happy to. But before I get started, I actually think the congratulations are in order for you, and I look forward to your pending next year. So, congrats.

Thank you so much. I sincerely appreciate that.

On transmission, particularly in Colorado, we have introduced a forward-thinking plan. Traditionally, generation would be prioritized first, followed by the necessary transmission. However, we believe that significant transmission needs to be constructed to alleviate congestion and support the essential renewables required for the clean energy transition. In Colorado, we have proposed what we call the Power Pathway, which is essentially a comprehensive network of transmission lines across the Eastern Plains to connect the abundant solar and wind resources in the area with the load centers mainly in Denver and the I-25 corridor. This initiative is progressing alongside the Colorado resource plan, with both on separate but parallel tracks. We anticipate that both will reach resolution by late this year or early next year. Regarding the base plan, I see it as our approach to construct the main infrastructure. However, we also need to create additional infrastructure, such as on and off-ramps. The cost for the main transmission freeway is approximately $1.7 billion. Additionally, we must ensure voltage and VAR stability. Once we determine where the generation resources will be located, we will develop support along that network to integrate those transmissions with the broader electric system. This incremental planning will vary based on the specific resources identified. As I mentioned earlier, we expect to finalize the first phase of the resource plan in the first quarter of next year. Following that, we will proceed to resource acquisition, where we will specify the exact resources and locations, allowing us to provide a clearer, more detailed estimate of the overall costs beyond the base system. Does that make sense?

Yes, totally. I get it. Excellent. If I can pivot to a slightly related question, if you don't mind. What are you seeing in terms of the impacts across your portfolio here vis-à-vis inflation, cost structure, logistics? Just as you guys look at your renewable build here and perhaps some of the timing on, for instance, Sherco here? Perhaps not necessarily related, but as you think about some of those decision-making truths.

Hey Julien, it's Brian. Good to hear from you. Yes. Certainly, we're seeing inflation. If you're just looking at the headlines, right, we're not immune to some of the headlines that everyone is seeing. For us, it's inflationary pressures of commodities such as steel, copper, and labor. We think it's transitory in nature. I think we’ve found that it was pretty easy to shut down the economy, and it's a lot more challenging to restart the economy from the supply chain and the demand that has followed the shutdown of the economy, something that we are focused on and proactively managing from a supply chain perspective. I don't see any significant impacts as we sit here today. Now, specifically, if I want to touch on a couple of the major projects we have in flight. The four wind repowerings that we have, we feel really good about those in Minnesota. Now, those are partial repowerings, so I think blades in the inside of the nacelles. We're not replacing the steel towers. We're not facing steel price risk there. So, we don't really face any significant inflationary pressures on those, and feel good about that. The large-scale solar farm that we have in front of the Minnesota commission, I'm sure everyone is aware of the solar panel pricing that has been increasing this year. We look at that; we have a lot of flexibility in terms of construction and when we place that in service in terms of what year. So, we feel really good about that project, too. Overall, something we're certainly focused on and watching, but don't see any real impacts as we sit here today.

Awesome. And just to clarify from your guide here, the shift in O&M is offset by the gas sales? Just some more nuance there for 2021.

The shift, I would say, gas sales, certainly good to see an uptick in gas sales from 0% to 1%. But if you remember, gas is a pretty small piece of our business, so a 1% change in gas margins is about $4 million. I wouldn't say it necessarily fully offsets it.

Okay, fair enough. Hey thanks again guys. We'll see you soon.

Thank you.

Thank you. A couple of questions, one on transmission to follow up on some of those points. It looks like in your presentation, you highlight $300 million of CPCN for that project. It looked like previously, there was a $250 million number that was out there for the May Valley-Longhorn expansion. Are you seeing cost inflation on that particular project? Or is there another dynamic that may cause the change in number?

No. Look, I think we're still in very early innings on sort of exact routings and pathways. I wouldn't read too much into that, Ryan.

Are there various ways that project can be built out, or is it clear how the project will be contracted?

We haven't completed local permitting yet and there are many local land processes we need to navigate. We're still in the early engineering stages of that project. It's crucial for us to ensure that the transmission and generation developments occur simultaneously. Over time, as we improve our engineering and gain better insights into the land processes, we'll have more specific routes. There's still a significant range of potential capital expenditures for this, largely depending on the final routing and land approval costs. Therefore, I wouldn't put too much emphasis on that specific leg extension.

Okay. And then lastly, in terms of some of the recent legislation in Colorado pertaining to gas, are you anticipating any material impact to your business around some of the recent SB21-246 and the 1238 and 1286 and some of the others that have recently passed?

Can you repeat those again, Ryan? That's quite a list of bill numbers. Let me discuss the clean heat plan in Colorado and the innovative gas act that was also approved in Minnesota. Both of these bills acknowledge that we are in the early stages of reducing emissions from the gas LDC businesses, similar to our experiences in the mid-90s with renewables. The technology is still developing, and the solutions are relatively costly. However, we recognize the importance of taking initial steps. The legislation in both states reflects this understanding. We are conducting pilot programs, introducing new technology, and exploring beneficial electrification and energy efficiency programs, which may not be fully compatible with current regulations. These legislative measures facilitate some innovation on the gas LDC side. The legislation also emphasizes the need to maintain reliability and affordability. Each state approaches this slightly differently, but Colorado has a cap and requires regulatory approval for plans. Minnesota also requires regulatory approval for pilots, ensuring they are cost-effective and beneficial for our customers. We were involved in both pieces of legislation and are collaborating with regulatory agencies to develop the regulations for them. We will actively propose initiatives to help our customers lower their emissions in each state. There is indeed an opportunity here, and we will continue to engage with our commissions and stakeholders.

I appreciate it.

You bet.

Hey good morning. I echo the congrats to Ben. Just one question for me. As you guys make progress working through your Integrated Resource Plans (IRPs) in Colorado and Minnesota and then the transmission opportunities as well, it just seems like there's a lot of incremental capex opportunities above some of the more basic blocking and tackling. Just how would you kind of characterize that within the context of the kind of 5% to 7% growth targets you've targeted here recently?

Hey David, thanks for the question. This is Bob. I guess similar to Julien I might have to start with congratulations to you for your recent achievements yourself. So, we have two of those on the call today.

Thank you.

In terms of incremental capital, yes, I think there are some projects still out there that we're working through regulatory processes on, the largest of which is the Sherco solar, which we talked about. I think longer-term, we've got base proposals on our resource plans and for our transmission planning. Stuff that's not included in the near-term is obviously MISO and SPP transmission expansion plans, which are generally outside of our five-year forecast but definitely in sort of a 10-year vision forecast. We expect our base rate base growth plan to be right around 7%. Any incremental projects that could take us above that, we'd expect to keep our 5% to 7% earnings growth rate; we can reevaluate that regularly, and we do. Right now, we're just comfortable with being at the high end of our guidance range.

Yes. And Dave, I'd just add to that. I think what you hear from us is that we're really focused on providing our investors with that long-term transparency as we work through our resource plans in Minnesota and Colorado this year, looking at almost 10 gigawatts of renewables by 2030 between those two. Plus the associated transmission that comes in Colorado and what we could expect to see out of MISO here is giving investors that transparency into extending and really feeling good about the long-term growth rate, not just over the next five years but through the decade. That's something we're focused on.

Great. Thank you for the color.

Hey good morning Paul.

Hey good morning. Congratulations Ben.

Thanks so much.

There have been some comments from Colorado commissioners regarding rates and their cumulative impact. You mentioned on the call that you don't see any significant issues and believe the current inflation problems are likely temporary. However, I am curious about your goals, which seem to be to keep expenditures somewhat below the rate of inflation. Are we still on track to meet those goals across different jurisdictions? Has there been any change in this outlook due to the temporary factors or anything else we should consider?

Paul, it's Bob, and I'll let Brian chime in if I miss anything. In particular, with respect to Colorado, I think our customers' bills in Colorado are about a third, 35% less than the national average and have been basically flat for the past five years. Although we filed a rate case out there, we expect even after the rate case, they're still going to be 25% below the national average.

If we got everything we asked for.

Yes, if we got everything in the case that we asked for, they'll still be 25% below the national average. Your longer-term question is, do we think we continue this transition to a cleaner energy economy cost affordably? The answer is yes. The impacts we're seeing from inflation are likely still transitory. Some macro economists would sort of agree with that comment. We think we can transition our states at less than the rate of inflation over the next 10 years to an 80% carbon reduction. Colorado, in particular, will achieve 85% carbon reduction, less than the cost of inflation. Our strategic thesis holds, and we don't see this current economy restarts derailing our longer-term plans.

Yes. And I would say, you see that in our resource plans, right? Where we kind of show the bill impacts over the next decade in both Colorado and Minnesota. We run those resource plans with current tax policy. There's a lot of discussion in D.C. about a long-term extension of federal tax credits around clean energy, and we fully support Senator Wyden's Clean Energy for America Act. When we run that analysis, that's really good for our customers in terms of those extensions of credits. It only brings down the cost as we make this transition.

Okay. Just to clarify, your long-term inflation expectations are still around 2%, correct?

Yes, longer term.

Okay. Awesome. Thanks so much guys.

You bet.

Ben, I just wanted to dial in to congratulate you. Known you for a long time, and the company did wonderfully well and hope Bob can continue in that spate. So, congrats again. If I can ask one industry question. I know you've been heading the EEI and trying to get the nuclear PTCs across the board in the legislative front. Could you give us any update where we stand on that endeavor?

Well, it will likely be part of the $3.5 trillion budget reconciliation process. There are a lot of moving parts with that. The first part will be just getting the budget resolutions to the various committees, which will establish how much funding those committees have to pursue broad topics, which we believe will ultimately include the nuclear PTC. We expect to see that in August, and then the actual legislation would take place in the fall. Again, there are many moving parts. It's a 50-50 Senate and a very narrow margin in the House. So, it's a balancing act. We're advocating for that, as Brian mentioned, Senator Wyden's bill. We think direct pay, PTC for solar—these are things that will help the clean energy transition to be affordable for our customers and the industry in general. I look forward to seeing you perhaps at EEI.

Certainly. Thank you so much.

You got it.

Yes. Thanks all for participating in our earnings call this morning. Please contact our Investor Relations team with any follow-up questions. Thanks everyone.