Xcel Energy Inc.
Q2 2021 Earnings Call Transcript

Published: 29 Jul 2021

[Operator:]

Good day everyone. Welcome to Xcel Energy's Second Quarter 2021 Earnings Conference Call. Today's conference is being recorded. . At this time, I would like to introduce your host for today's call, Paul Johnson, Vice President, Treasurer and Investor Relations. Please go ahead sir.

[Paul Johnson:]

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.

[Robert Frenzel:]

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, and Chief Operating Officer, and then CEO and Chairman of the Board. And 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%. And under Ben's leadership, we delivered for the environment, became a national leader in wind energy and 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 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 TSR 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.

[Brian Van Abel:]

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

[Ben Fowke:]

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 really 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, 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.

[Operator:]

Thank you. And we'll take our first question from Jeremy Tonet from JPMorgan.

[Jeremy Tonet:]

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

[Ben Fowke:]

Thank you very much. I appreciate it.

[Jeremy Tonet:]

I just want to start off, I guess, with the renewables. And if you could expand, I guess, 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?

[Robert Frenzel:]

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. And 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. And we'll move forward with what we'll call resource acquisition plans where we propose projects, and we solicit input from others for projects that are coming. I think if your question is around where we are in the R&R recovery plan in Minnesota, in particular, 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 that we hope for approval by end of this year or maybe early next.

[Jeremy Tonet:]

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?

[Robert Frenzel:]

Sure. So, 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 the proceedings on as well as Texas. Our expectation is we acted in accordance with all of our regulatory regulations, prior policies and procedures. And so we do expect a full recovery of our incurred costs on Winter Storm Uri. Yes, 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 NOPR, so they're looking for inputs, and we've commented to the NOPR. And we expect some resolution and some hearings in that process in the third or fourth quarter of this year.

[Jeremy Tonet:]

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

[Robert Frenzel:]

Thank you.

[Operator:]

And we'll take our next question from Julien Dumoulin-Smith from Bank of America Securities.

[Robert Frenzel:]

Hey Julien, good morning.

[Julien Dumoulin-Smith:]

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

[Ben Fowke:]

Thanks.

[Julien Dumoulin-Smith:]

But if I can -- absolutely. I look forward to seeing you at EEI. If I can pivot to the transmission side in brief here, you all talked previously about this Colorado being potentially expanded over time. Obviously, you're looking for the first phase here to be approved, as you talked about in the prepared remarks. But can you talk about subsequent co-ownership partners and just ultimately, expansion of what you guys have underway here, if there's been any progress?

[Robert Frenzel:]

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

[Julien Dumoulin-Smith:]

Thank you so much. I sincerely appreciate that.

[Robert Frenzel:]

On transmission, in particular, in Colorado, we put forward what we think is a pretty progressive plan, Julien. Historically, we'd have generation be put forward first and then you'd follow-up with the transmission that's necessary. I think where we are and certainly in Colorado and where I think a lot of the country is actually is, is we need to build a substantial amount of transmission to relieve congestion to enable the renewables that we see are necessary to complete this clean energy transition. So, in Colorado, we've put forth what we call the power pathway. That's largely, I'll call it, a super highway of transmission lines through the Eastern Plains of Colorado to connect the good solar and wind resources of the Eastern half of Colorado with the load centers, predominantly in Denver and in the I-25 corridor. So, that path, along with the Colorado resource plan, are progressing in parallel, two separate dockets but in parallel. We expect resolution on both of them by late this year, probably early next year. And your comment on -- we've got a base plan, and I call that sort of we're going to build the freeway. But we also have to build the on and offramps and things like that. So, while the base plan for the freeway itself, I think, is about -- and Brian, correct me if I'm wrong, somewhere in the $1.7-ish billion range. But we need to build voltage and VAR stability. We need to build -- once we find out exactly where the generation resources are going to exist, then we need to build support along that freeway for how those transmissions will integrate with the broader bulk electric system. And that's sort of where that incremental and variation in sort of the base plan versus the other things that we'll need to do once we identify exactly where the resources are. So, like I just mentioned to Jeremy, we'll conclude the phase one of the resource plan in Q1 of next year. At that point, we'll go into resource acquisition. And that's where we picked the resource in exact locations, and then we can have a better, more granular answer to your question on what's the total pathway cost above and beyond sort of the base system. Does that make sense?

[Julien Dumoulin-Smith:]

Yes, totally. I get it. Excellent. And 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 just some of the timing on, for instance, Sherco here? Perhaps not necessarily related, but just as you think about some of those decision-making truths.

[Brian Van Abel:]

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. But really, we think it's transitory in nature. And I think really, it's -- I think we 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. So, 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. Now, 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. And so we don't really face any significant inflationary pressures on those. So, 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. But 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. So overall, something we're certainly focused on and watching but don't see any real impacts as we sit here today.

[Julien Dumoulin-Smith:]

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.

[Robert Frenzel:]

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. So, I wouldn't say it necessarily fully offsets it.

[Julien Dumoulin-Smith:]

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

[Robert Frenzel:]

Thank you.

[Operator:]

And we'll take our final question from Ryan Levine from Citi.

[Ryan Levine:]

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?

[Robert Frenzel:]

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.

[Ryan Levine:]

Okay. I mean, are there a lot of different pathways that you're -- no pun intended, around the way that, that project can get built out? Or is it fairly visible from your mind in terms of how the project will be contracted?

[Robert Frenzel:]

Well, look, I think we haven't gone through local permitting. We've got a lot of just local land processes we'll have to go through. So, -- and we're early stages in engineering of that project. I think we felt it was really important to make sure that the transmission and the generation proceeded in parallel. And so I think that as we go through time, as we get better engineering, as we get better insight into the land processes, those routes will be very specific. There's still a pretty big range of capital expenditures for that. A lot of it's based on final routing and final land approval costs. So, I guess then, I wouldn't read too much into that particular leg extension.

[Ryan Levine:]

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?

[Robert Frenzel:]

Can you repeat those again, Ryan? That's quite a litany of bill numbers. Let me just -- I'll talk a little bit about the clean heat plan in Colorado and maybe even to a parallel path, the innovative gas act that was also approved here in Minnesota. Look, I think both of those bills recognize that we're in early innings of lowering our customers' emissions from the gas LDC businesses and not dissimilar to what we went through in the mid-90s with renewables. I mean, the technology is nascent and the solutions are relatively expensive. But we also recognize we need to start somewhere. And so I think that the legislation in both places recognize those facts. And look, we are -- we'll do pilots. We'll introduce technology. We'll look at beneficial electrification and energy efficiency programs, all tools that maybe aren't readily available under the current regulation schemes today. But these pieces of legislation allow for some of that innovation to happen on the gas LDC side. I think the legislation also recognizes it's really important to respect the reliability and affordability. And I think each state addressed it slightly differently. But there's a cap in Colorado and regulatory approval for plans. And in Minnesota, similarly, their regulatory approval for the pilots, that makes sure that they're cost-justified and beneficial for our customers as well as we think about lowering their emissions profile from the gas LDC business. So, we're -- we were very active in both of those pieces of legislation, and we are working with the regulatory agencies to look at how we write the regulations for those pieces of legislation. And then we'll be active as we put proposals forward to help our customers reduce their footprint emissions profile in each state. So, yes, I think there's opportunity here, and we're going to continue to work with our commissions and our stakeholders.

[Ryan Levine:]

I appreciate it.

[Robert Frenzel:]

You bet.

[Operator:]

And it looks like we have a question from David Peters from Wolfe Research.

[David Peters:]

Hey good morning. I echo the congrats to Ben. Just one question for me. As you guys make progress working through your 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?

[Robert Frenzel:]

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 yourself. So, we have two of those on the call today.

[David Peters:]

Thank you.

[Robert Frenzel:]

In terms of incremental capital, yes, I think there's 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, and those are generally outside of our five-year forecast but definitely in sort of a 10-year vision forecast. And then we expect our base -- rate base growth plan to be right around 7%. And so any incremental -- and I think there's a couple of incremental projects that could take us above that. I think we'd expect to keep our 5% to 7% earnings growth rate, and we can reevaluate that regularly, and we do. But I think right now, we're just comfortable with being at the high end of our guidance range.

[Brian Van Abel:]

Yes. And Dave, I'd just add to that. I think what you hear from us, what we're really focused on doing is 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 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 through this five but through -- and talk about it through the decade, so something we're focused on.

[David Peters:]

Great. Thank you for the color.

[Operator:]

And we have a question from Paul Patterson from Glenrock Associates.

[Robert Frenzel:]

Hey good morning Paul.

[Paul Patterson:]

Hey good morning. Congratulations Ben.

[Ben Fowke:]

Thanks so much.

[Paul Patterson:]

Absolutely. So, just -- there have been some comments out of Colorado from some of the commissioners regarding rates and sort of the cumulative impact, et cetera. And you mentioned on the call, I think, that you don't see any significant -- you think that the inflation issues that we have currently are sort of transitory. But I'm wondering, in terms of your goals, and I think there's pretty much to be -- somewhat below the rate of inflation. Are we still on track with that with respect to your outlook in the various jurisdictions? Has there been any change in that because of the transitory impact or anything else that we should think about?

[Robert Frenzel:]

Paul, it's Bob, and I'll let Brian chime in if I miss anything. But in particular, with respect to Colorado, I think that 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. And 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.

[Brian Van Abel:]

If we got everything we asked for.

[Robert Frenzel:]

Yes, if we got everything in the case that we asked for, they'll still be 25% below the national average. But your longer-term question is, do we think we continue this transition to a cleaner energy economy cost affordably. And the answer to that is yes. And the impacts that we're seeing for inflation, we would say, are still relatively transitory. I think some of the macro economists would sort of agree with that comment. We think that 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 be 85% carbon reduction, less than the cost of inflation. So, I think our strategic thesis holds, and we don't see this current spat of restarting the economy as derailing our longer term plans.

[Brian Van Abel:]

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. And we do -- we run those resource plans in the cases we put forward to the commission with current tax policy. And there's a lot of discussion in D.C. about a long-term extension of federal tax credits around clean energy, and we certainly support -- fully support Senator Wyden's Clean Energy for America Act. And when we run that analysis, that's really good for our customers in terms of those extension of credits. It only brings down the cost as we make this transition.

[Paul Patterson:]

Okay. And just your long-term -- just for -- obviously, it could change, but your long-term inflation expectations are around 2% still. Is that about right?

[Brian Van Abel:]

Yes, longer term.

[Paul Patterson:]

Okay. Awesome. Thanks so much guys.

[Robert Frenzel:]

You bet.

[Operator:]

And we have a question from Ashar Khan with Verition.

[Ashar Khan:]

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. And 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?

[Ben Fowke:]

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

[Ashar Khan:]

Certainly. Thank you so much.

[Ben Fowke:]

You got it.

[Operator:]

And it appears we have no further questions at this time. I will turn the conference back over to Brian Van Abel, CFO.

[Brian Van Abel:]

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

[Operator:]

And once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation today.