Xcel Energy Inc. (NASDAQ:XEL) Q3 2023 Earnings Call Transcript

Xcel Energy Inc. (NASDAQ:XEL) Q3 2023 Earnings Call Transcript October 27, 2023

Xcel Energy Inc. misses on earnings expectations. Reported EPS is $1.19 EPS, expectations were $1.31.

Operator: Hello, and welcome to the Xcel Energy Third Quarter 2023 Earnings Conference Call. My name is George, I’ll be a coordinator for today’s events. Please note this conference is being recorded and for the duration of the call, your lines will be listen-only. A question-and-answer session will follow the prepared remarks, and questions will only be taken from institutional investors and analysts. Reporters can contact Media Relations with inquiries and individual investors and others can reach out to Investor Relations. [Operator Instructions] I’d now like to hand the call over to your host today, Mr. Paul Johnson Vice President, Treasurer and Investor Relations to begin today’s conference. Please go ahead sir.

Paul Johnson: Thank you. Good morning and welcome to Xcel Energy’s third quarter earnings call. Joining me today are Bob Frenzel, Chairman, President and Chief Executive Officer; and Brian Van Abel, Executive Vice President and Chief Financial Officer. In addition, we have other members of the management team in the room to answer questions if needed. This morning we will review our third quarter results and highlights, share recent business and regulatory developments, update our capital and financing plans and provide 2024 guidance. 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’ll discuss certain measures that are non-GAAP measures. Information on comparable GAAP measures and reconciliations are included in our earnings release. Early this week a jury in Denver District Court found Xcel Energy liable and its dispute with core cooperative regarding prior years lost power damages at our Comanche power plant. We intend to appeal the decision. For the third quarter of 2023, we recorded GAAP earnings of $1.19 per share, which includes a onetime nonrecurring pre-tax charge of $34 million related to the ongoing legal dispute. As a result we have taken a nonrecurring charge of $0.05 per share, which we don’t consider part of ongoing earnings. All for the discussion in our earnings call will focus on ongoing earnings.

For more information on this matter, please see the disclosure in our earnings release. I’ll now turn the call over to Bob.

Bob Frenzel: Thanks Paul and good morning everybody. Let’s start with the quarter. We had solid results recording ongoing earnings of $1.23 per share for 2023 compared to $1.18 per share in 2022. As a result, we’re narrowing our 2023 ongoing earnings guidance to $3.32 to $3.37 per share. We’re also initiating 2024 ongoing earnings guidance of $3.50 to $3.60 per share, which is consistent with our 5% to 7% long-term EPS growth rate. Consistent with past practices, we’ve reviewed our customer and operational needs and have updated our infrastructure plan for 2024 to 2028. This revised forecast reflects $34 billion of needed capital investment, an increase of $4.5 billion from our previous plan. This base infrastructure investment plan includes substantial resiliency investments in both transmission and distribution, including additional upgrades required to support the Colorado Energy Plan.

However, it does not include clean energy generation investments that could result from the resource plans in Colorado, Texas, New Mexico or in the Upper Midwest. If approved by our commissions these cost-effective clean energy generation investments could result in an additional capital need totaling $10 billion from 2024 to 2028 and dramatically reduced carbon emissions in various states. Xcel Energy’s resource plans also demonstrate the benefits of the Inflation Reduction Act our state’s geographic advantages that enable high-capacity renewable generation and our operational expertise and commercial acumen, can bring to our customers. In September, we filed our recommended plan in Colorado. This plan seeks to double the amount of renewable energy in the state making it the largest clean energy transition effort in Colorado history, and demonstrates our strong element with the state’s environmental goals.

Our proposal contemplates the shutdown or conversion of our remaining coal units, replaces them with approximately 6,500 megawatts of renewable energy and battery storage and 600 megawatts of dispatchable gas resources to ensure system reliability in times of low wind or solar conditions. These amounts include 4,800 megawatts as proposed to be owned and operated by Xcel Energy for the benefit of our customers. Including the approximately $3 billion in required transmission investments to ensure deliverability and reliability, this Colorado energy plan represents nearly an $11 billion total investment by Xcel Energy. In addition this portfolio also, includes $10 billion in IRA savings to customers. It creates local jobs, promote economic development and provides over $2 billion in tax benefits to local communities in the coming decades.

At the same time, it will reduce carbon emissions by over 80% from 2005 levels in Colorado will have an expected annual rate impact of only 2.3%. This competitive portfolio provides our Colorado customers an industry-leading opportunity for a cleaner economy, at a fraction of the cost most other states would incur. Moving to Minnesota. In September, the commission approved 350 megawatts of new renewable generation including an additional 250 megawatts at our Sherco facility. This brings the total amount of company built solar at Sherco to over 700 MW, making it one of the largest solar facilities in the country. In October, we also issued an RFP seeking 1,200 megawatts of wind that will utilize our transmission interconnect at our retiring Sherco coal facility, and we’ll be issuing additional RFPs to fulfill the remainder of the approved Upper Midwest Resource Plan in 2024.

Finally, in October, we filed a resource plan in New Mexico. Based on our filing, SPS could require additional 5,000 to 10,000 megawatts of new generation by the end of the decade, to accommodate increasing demand, plant retirements and ensure resiliency and reliability of the grid. We’ve already proposed 418 megawatts of company-owned solar and battery projects, that are pending commission approval. We anticipate filing another RFP in 2024 and for the additional generation resources. Shifting to our clean energy innovation projects. The Department of Energy recently announced nearly $1.5 billion in awards to support multiple Xcel Energy affiliated projects. Starting with the Heartland Hydrogen Hub this estimated $5 billion initiative, which includes multiple projects from Xcel Energy and others received an award of up to $925 million by the DOE.

This game-changing funding will serve as a catalyst, for clean hydrogen ecosystem in the Upper Midwest and the foundation of our clean fuels efforts at Xcel Energy. Fortunately, the Western Interstate hydrogen hub in Colorado, New Mexico, Wyoming and Utah was not successful in this round of DOE funding. And that said, we remain committed to working with policymakers and federal offices with the hopes that our projects can progress to advance our shared clean energy goals. The deal we also awarded Xcel Energy up to $70 million to support two 10-megawatt 100-hour battery pilots with Form Energy. Combined with the grants from breakthrough Energy’s Catalyst Fund, we secured up to $90 million to support these long-duration energy storage pilots a critical asset class to ensure cost-effective reliability in a high renewable grid.

With respect to DOE grid resilience and innovation partnerships program Xcel Energy was selected as part of two different awards. First, the DOE we awarded Xcel Energy, a $100 million to support projects to mitigate the threat of wildfires and ensure resiliency of the grid through extreme weather. Projects include vegetation management selective undergrounding advanced infrastructure, technologies drones and several additional resiliency projects. Xcel Energy also grids $464 million grant to expand transmission as part of the MISO and SPP program to fund high-voltage transmission to improve interregional transfer capability reliability and resolve grid constraints. We’re appreciative of the DOE support as well as many of our partners in these projects including our state and regional transmission organizations.

Funding support helps us accelerate critical carbon-free technologies enhance safety and resiliency, while keeping costs low for customers. Turning to our natural gas utility. In August, we filed our Clean Heat program in Colorado. This first-of-a-kind plan provides a framework reduce greenhouse gas emissions consistent with state goals in our net zero emissions target. The Plant fast track solutions such as electrification, demand side management, clean fuels and certified natural gas. The proposed Clean Heat Plus portfolio reduces greenhouse and gas emissions by 28% by 2030, ensures customer reliability and choice, while optimizing customer bill impact. We plan to file a natural gas innovation plan a corresponding framework for our Minnesota gas utility in the fourth quarter.

In September, Meta announced construction of a $700 million data center in Minnesota, which eventually could be one of the largest customers in the state. We continue to evaluate a number of additional data center and commercial opportunities that will further support growth and economic development in our committees. Finally, there are not many new material developments with the Marshall Wildfire litigation. We currently have 14 complaints with 675 plaintiffs which have been consolidated into a single case. For the past four years, Xcel Energy has been operating under a commission-approved wildfire mitigation program in Colorado. We intend to file an updated wildfire mitigation plan next year which will include a wide range of options for stakeholder consideration, including the technologies, undergrounding additional vegetation management, composite poles, selective use of covered conductor and preventative power system shutoffs.

Let me wrap-up with just a few summary comments before I turn it over to Brian. As we look forward across the next five years and beyond, we see a future that is bright for our communities, our customers and our investors. Xcel Energy is committed to providing a clean energy economy in our regions and it will require meaningful investment to accomplish. For our customers we have the potential to deploy 15,000 to 20,000 megawatts of new clean generation on our systems by 2030, dramatically lowering our emissions profile, affordably powering our customers’ homes and businesses, while ensuring 99.99% reliability that they come to expect from Xcel Energy. And through leveraging the benefits of the IRA and the IIJA, we are able to accelerate deployment of renewable resources in pairing them with affordable energy storage assets and other firm dispatchable clean fuel resources to provide reliability.

We continue to invest in and innovate our transmission and distribution systems to ensure reliability and resilience and provide for regional and interregional deliverability. We’re laying the framework to achieve net zero greenhouse gas emissions on our natural gas system. All the while our residential customer electric and natural gas builds are amongst the lowest in the country 28% and 14% below the national average. And given that the regions where we serve customers are the most resource rich in wind and solar, we believe that we can lead this clean energy transition for our customers more cost-effectively than almost any other company. With that I’ll turn it over to Brian.

Brian Van Abel: Thanks, Bob and good morning everyone. We had ongoing earnings of $1.23 per share for the third quarter of 2023 compared to $1.18 per share in 2022. The most significant earnings drivers for the quarter included the following. Lower O&M expenses increased earnings by $0.03 share which reflects the impact of cost containment actions, lower effective tax rate and conservation and demand side management expenses which increased earnings $0.03 per share. Note that these items are apparently offset in lower margins are earnings neutral. In addition other items combined to increase earnings by $0.04 per share. Offsetting these positive drivers, higher interest charges which decreased earnings by $0.03 per share, driven by rising interest rates and increased debt levels to fund capital investment and higher depreciation and amortization expense which decreased earnings by $0.02 per share reflecting our capital investment program.

Turning to sales. Year-to-date weather-adjusted electric sales increased by 1.1%, largely driven by strong C&I sales. As a result, we now expect annual electric sales growth of 1% to 2% in 2023. Shifting to expenses. O&M decreased $25 million for the third quarter, reflecting management actions to lower costs. We now expect our annual O&M expenses to decline by 1% to 2%. During the third quarter, we also made progress in several regulatory proceedings and we are getting close to wrapping up a busy regulatory year. 2024 will be much lighter from a rate case perspective. In our Colorado electric rate case, the commission approved our settlement that reflects a $95 million rate increase, based on an ROE of 9.3% and an equity ratio of 55.7%. Rates were effective in September.

In October, the New Mexico Commission approved our electric rate case settlement. That reflects a rate increase of $33 million, based on an ROE of 9.5%, an equity ratio of 54.7%, a forward test year an acceleration of total depreciation to 2028. Rates were effective in October. In our pending Texas electric rate case, we reached a settlement in principle on revenue requirements. We’re hopeful the parties will reach agreement on class cost allocation and rate design, so that we can file the settlement this year. We expect a decision in the implementation rates in the first quarter of 2024. And as a reminder we have a relate back date to July 13th. In New Wisconsin, we continue to work through the regulatory process for our electric and natural gas rate cases and expect the commission decision by year-end.

With regards to future rate cases we plan to file a natural gas rate case for Minnesota in the order and the potential Colorado natural gas rate case in the first quarter of next year. Updating our progress on production tax credit transferability we recently executed two contracts totaling $250 million. We anticipate further PTC sales in the fourth quarter consistent with our plan totaling $300 million to $400 million for the year. Transferability lowers the cost of our renewable energy projects for our customers and reduces near-term funding needs. Moving to our updated capital forecast. We’ve issued a robust $34 billion five-year base capital plan with annual rate base growth of 7.6%. The base plan reflects commission approved renewable projects including over 700 megawatts of new solar at Sherco.

The base plan also reflects significant rate and resiliency investments including our Colorado Power Pathway, transition to support our Colorado preferred plan MISO transformer investments, as well as other system investments to maintain asset health and reliability. In addition we have additional capital investment opportunities for our renewables and firm capacity associated with the Colorado preferred plan, 418 megawatts of proposed self-built solar and Solar SPS and further RFPs in NSP and SPS. We’ll update our base capital plan after our various commissions complete their review and finalize their decisions regarding our proposals. These opportunities, if approved, could to translate to $10 billion of additional investment through 2028 resulting in annual rate base growth of 10.7%.

We’ve updated our base financing plan which reflects $15 billion of debt and $2.5 billion of equity. We anticipate that any incremental capital investment would be funded by approximately 40% equity and 60% debt. It is important to recognize that we’ve always maintained a balanced financing strategy which includes a mix of debt and equity to fund accretive growth, while maintaining a strong balance sheet and credit metrics. Maintaining solid credit ratings and favorable access to capital markets are critical to fund our clean energy transition deliver strong shareholder returns and keep customer bills low, especially with rising interest rates. Shifting to our earnings. We’ve updated our 2023 guidance assumptions to reflect the latest information.

We’re also narrowing our 2023 ongoing earnings guide range to $3.32 to $3.37 per share. We have a long history of delivering on our financial objectives and expect to continue that trend in 2023. As a result, we anticipate strong earnings in the fourth quarter that will result in achieving our earnings guidance. Key drivers include incremental revenue from the Colorado and New Mexico electric rate cases, deferral of certain O&M depreciation and interest expenses as part of the Texas electric rate case, strong O&M cost management, and better-than-expected sales growth. Finally, we are initiating our 2024 ongoing earnings guidance range of $3.50 to $3.60 per share, which is consistent with our long-term EPS growth objective of 5% to 7%. Key assumptions are detailed in our earnings release.

With that, I’ll wrap-up with a quick summary. We continue to execute on our clean energy plans, leveraging the benefits of the IRA to reduce cost for our customers. We proposed a game-changing preferred plan in Colorado, which results in one of the most aggressive renewable bill loads in the country. We secured DOE grants for our Heartland hydrogen hub, wildfire mitigation plants, four-man injury pilots, and transmission expansion, which will accelerate breakthrough technology and reduce risk at a lower cost for our customers. We resolved great cases in Colorado and New Mexico while reaching a settlement in Princeville and Texas. We’re nearing our 2023 ongoing earnings guidance and continue to expect to deliver within our guidance range as we have for the past 18 years.

We announced a robust, updated capital investment program and initiated 2024 guidance that provides strong, transparent, rate-based growth and customer value. And finally, we remain confident we can continue to deliver long-term earnings and dividend growth within the upper half of our 5% to 7% objective range as we lead the clean energy transition and continue to keep bills low for our customers. This concludes our prepared remarks. Operator, you will now take questions.

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Q&A Session

Operator: Thank you very much, sir. [Operator Instructions] Our first question today is coming from Julien Dumoulin-Smith of Bank of America. Please go ahead. Your line is open.

Julien Dumoulin-Smith: Hey, good morning team. Nicely done. Got to say, what a set of updates quarter-to-quarter here.

Bob Frenzel: Hey Julian, good morning.

Julien Dumoulin-Smith: Hey, good morning. Thank you. Quite well. Really appreciate it. It’s still warm here, still warm in Houston. I’ll leave it at that. So maybe just to pick things up here real quickly, on the credit side, I mean, I appreciate the commentary about 60-40. Can you comment a little bit about the latest monetization policies for the credit rating agencies and thoughts about monetizing in terms of flowing tax credits through FFO? To what extent does that change or impact your financing plan at all? Just to come back to that a bit.

Brian Van Abel: Hey, Julian. Good morning. Yeah. So we’ve met with the credit rate agencies in September And as we sitting right now that we’ve included tax credit transfer ability in our financing plan and we expect it that they will include it in the way they look at our credit metrics and for us we use income tax election methods so it’ll flow through our cash from operations in our financial statement so all of that is included in our in our base plan as we think about it.

Julien Dumoulin-Smith: Excellent. All right thank you and then separately just as you think about the upside plan here, I mean, just incredible numbers here. I mean, and I know there’s a lot of fixation here in Colorado. Can you walk through a little bit of just the timing here in some of the other jurisdictions in terms of coming to fruition, especially through 2020, it’s practically around the corner. Do you want to talk a little bit about the specific timelines to getting some of that full 10 reflected in the plan here just as it goes to aligning against the full update with 4Q or beyond?

Bob Frenzel: Yeah. Hey, Julian, it’s Bob. We’re really excited about the Colorado Energy Plan. It’s great to see it sort of nearing conclusion and approval milestones. We’ve been working on this for two years. We’ve actually been working with the counterparties on the bids for over six months. I recognize that it might be quick timing for the external world, but we’ve been working with these people for a while and we’re really excited about what we’ve done here. We’ve been working with stakeholders very collaboratively and the PUC over the past two years to bring this plan to life for our Colorado customers. Obviously a great wrinkle, right in the middle of it with the IRA, right? And so we’ve basically been able to double the renewable portfolio, have the fossil portfolio, increase our storage component dramatically.

So we think the plan meets the policy guidelines. The process from here is relatively quick in the grand scheme of things. So we received the independent engineer’s report that validated our proposal last week – actually Monday of this week I think. We get comments – external comments to early November. We applied to those comments late November and then we turn it over to the commission for deliberations. We think that happens in December and early next year and probably early Q1 of next year we’d expect a decision from the commission. So pretty quick given the long time frame of the process in total.

Brian Van Abel: And Julien, a couple of the other pieces in that steel for fuel 2.0 plan is the SPS Solar+Storage, we should get the decision in Q2 of next year. And then we just launched in a sort of 1200 megawatt wind RFP. Bids are due in December, should get a short list in Q2 of next year on that. And then not in any in our steel for fuel 2.0, but really looking forward to working with our stakeholders in SPS. Bob mentioned this in his opening remarks of our New Mexico resource plan. We’ll launch an RFP in mid next year and that’s 5,000 to 10,000 megawatts of potential generation resources and should get a project selection in call it early to mid-2025 for that. So nowhere in the $10 billion is a great opportunity as we look forward to transitioning to SPS’s generation outage

Julien Dumoulin-Smith: Yes. It’s incredible again update. With that said though, and then given the timing early 1Q for at least a good chunk of that. I mean, 4Q could we see an update to your earnings CAGR outlook and/or any other related metrics as you get that clarity affirmed here at least on the preponderance of it?

Brian Van Abel: Yes Julien, I mean certainly we’ll wait until we get through the commission approvals. So – but if that timing aligns, then yes, it would be fair to think through that.

Julien Dumoulin-Smith: All right, guys. I’ll leave it there. Good luck.

Brian Van Abel: Thank you.

Operator: Thank you very much, sir. We’ll now move to Nicholas Campanella coming from Barclays. Please go ahead.

Nicholas Campanella: Hey, good morning. Happy Friday. Thanks for taking the questions.

Brian Van Abel: Good morning.

Nicholas Campanella: So a couple for me. I guess on Colorado as you kind of layer in that to the next financing plan and obviously, you had the 40% rule. Is equity continuing to be programmatic across the five years, or does that drive more – a larger need in the near years of the plan?

Brian Van Abel: Hey, Nick. Good morning. The way we look at it the base capital plan pretty programmatic as we think about it most likely in ATM with the base capital plan. When you look at the – not just in Colorado but the $10 billion of the steel for fuel 2.0 opportunities this is really kind of the 2025, 2026, 2027 time frame or the heavy spend. So I would look at it as that’s in the time frame that would align with the spend for that incremental and additional opportunities.

Nicholas Campanella: Got it. And then one more on the Colorado plan. I just – I know the commission is exploring some type of risk-sharing mechanism for the renewable assets. But can you just help us understand if that type of proposal is something that would tweak the plan in any way? Is it something that you’re working with the commission actively on? And how could that kind of transpire through the remaining course of the year here?