Xcel Energy Inc. (NASDAQ:XEL) Q1 2024 Earnings Call Transcript

Xcel Energy Inc. (NASDAQ:XEL) Q1 2024 Earnings Call Transcript April 25, 2024

Xcel Energy Inc. beats earnings expectations. Reported EPS is $0.88, expectations were $0.78. Xcel Energy Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and welcome to Xcel Energy First Quarter 2024 Earnings Conference Call. My name is Melissa, and I will be your coordinator for today’s event. Please note this conference is being recorded. [Operator Instructions] Questions will only be taken from institutional investors, reporters can contact media relations with inquiries and individual investors and others can reach out to Investor Relations. [Operator Instructions] I’ll now turn the call over to Paul Johnson, Vice President, Treasurer and Investor Relations. Please go ahead.

Paul Johnson: Good morning, and welcome to Xcel Energy’s 2024 First Quarter Earnings Call. Joining me today are Bob Frenzel, Chairman, President and Chief Executive Officer; and Brian Van Abel, Executive Vice President, Chief Financial Officer. In addition, we have other members of the management team in the room to answer your questions if needed. This morning, we’ll review our 2024 first quarter results and highlights, discuss recent wildfires and our mitigation efforts and share recent business developments. Slides accompanying today’s call are available on our website. Please note, that we’ve changed our presentation, as a result, we no longer refer to electric and natural gas margin. Instead, we’ll discuss changes in revenue and cost of goods sold from the income statement.

Please note that these most fluctuations and cost of electric fuel and natural gas are recovered through regulatory mechanisms and are generally earnings neutral. 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 SEC filings. Today, we’ll discuss certain measures that are non-GAAP measures. Information on comparable GAAP measures and reconciliations are included in earnings release. With that, I’ll turn over to Bob.

Bob Frenzel: Thank you, Paul, and good morning and welcome everyone. It’s been two months since wildfires impacted our Texas neighbors, and before Brian walks through our financial results, I’d like to discuss the actions we’re taking to protect the public and to strengthen our system’s resiliency in the states that we serve. In February, multiple wildfires were ignited in Texas and from the outset of those fires, our focus has been on the people and the communities in the panhandle and on the safety and the wellbeing of our coworkers and their families there, I want to thank all the first responders, emergency personnel, state and local employees, and our own SPS employees who worked tirelessly in support of our customers and our communities during and after the event.

They provided wildfire response, community assistance, relief services, and worked tirelessly in the field to restore essential services. Been to the panhandle and I’ve witnessed the impacted areas, and I can speak for the entire Xcel Energy team, when I say that we are saddened by the losses and we will stand with the panhandle community as we recover, rebuild, and renew that area as we have for over 100 years. Xcel Energy has acknowledged that our distribution poles appear to have been involved in an ignition of the Smokehouse Creek fire and the smaller reefer fire, which quickly burned into the Smokehouse Creek fire footprint. We dispute claims that Xcel Energy acted negligently in maintaining and operating its infrastructure. In addition, we do not believe that our facilities caused the way to dose or the Grapevine Creek fires and believe that their additions were caused by distribution lines owned by other companies.

In an effort to expedite relief and recovery in the community, we’ve established a claims processes for those who have property or livestock loss in the Smokehouse Creek fires, and are actively settling a number of claims. So far, 46 claims have been submitted, and as of April 22, Xcel Energy and SPS have been named as defendants in 15 lawsuits. Based on the most current information, we believe it’s probable that we incur a loss due to the Smokehouse Creek wildfire and accrued a liability of $215 million, which is offset by an insurance receivable since it’s lower than our approximately $500 million insurance. Please note that the $215 million loss accrual of preliminary estimate, which reflects the low end of a range and is subject to change based on new information, more information on Smokehouse Creek.

Please see our disclosures and our earnings release and our Form 10-Q. By all utilities, we’re experiencing profound changes in weather and climate related impacts on our operations. As a result, we must continue to evolve our operations for these unparalleled dynamics. Risk mitigation and system resiliency has long been a priority for Xcel Energy continued into the future. Our strategy consists of three phases. First, immediate near term response. Second, regulatory activities needed to address comprehensive wildfire mitigation and resiliency plans. Third, additional state and federal legislation that could be valuable. Part of our first phase, we’ve accelerated risk reduction initiatives across our system, including accelerating full inspections and replacements, as well as operational actions such as proactive de-energized lines, and adjusting recloser settings, known as power safety, power shutoffs, and enhanced power line safety settings.

But we’ve been operating under an approved wildfire planning Colorado since 2020. As part of our second phase strategy, we will file updated wildfire mitigation plans in our respective states, beginning with an updated Colorado WMP later this quarter. The plans incorporate industry learnings that are tailored to our unique geographies and risk profiles. New and expanded actions include increased vegetation management, accelerated pole inspections, hardening and replacements, distribution undergrounding segmentation and covered conductor programs, transition line hardening and or rebuilds, enhanced recloser settings and proactive de-energize of lines, and situational awareness programs, including weather stations, cameras, and other monitoring software.

Later this year, we intend to file a system resiliency plan that will include wildfire mitigation at SPS contemplated under recent Texas law. And the third component of our strategy is to continue to step up our efforts to innovate and plan for evolving climate and wildfire risk. We know that our ability to enable a clean energy transition and to deliver an affordable product to our customers is predicated on maintaining a reasonable cost of capital. And we believe that proactive legislation at a state and federal level is a potential vehicle to ensure that our customers continue to receive affordable, reliable, sustainable, and safe power service. We aren’t doing this alone. We’re working across the industry with peer utilities, industry groups such as EEI and EPRI, partner of energy, federal, state, local agencies, first responders, our labor partners, and countless others.

While we need to reduce wildfire risk, our core operations remain strong and our investment opportunities robust. During the first quarter, we made significant progress on our clean energy transition and resource plans. In February, we filed our resource plan for the NSP system, which proposes to add 6,400 megawatts of new resources and extend the lives of our Prairie Island and Monticello nuclear facilities past 2050. The proposed plan reduces carbon emissions by more than 80%, while increasing customer bills by approximately 1% annually. We anticipate the decision on our proposal by the Minnesota Commission in 2025. In New Mexico, the commission accepted our resource plan. We proposed approximately 5,000 to 10,000 megawatts, new generation by 2030.

We anticipate issuing an RFP for these resource needs this summer. And finally, the Minnesota Commission recently approved our updated transportation electrification plan, and we filed an updated transportation electrification plan in New Mexico in April. We’ve also made continued progress with several economic and commercial development projects in February, we announced the working with Microsoft to bring a new data center to our retiring Sherco coal facility. The proposed data center is positioned to be 1 of our largest customers in Minnesota and is projected to bring jobs and investments to the community. In March, Meta broke ground on its previously announced data center that will be powered by NSP Minnesota. Meta will provide funding for new infrastructure upgrades, including transmission lines to support the project, and the facility is slated to open in late summer 2025.

Accelerating proactively worked with data center developers, communities and stakeholders across our states to ensure that we can reliably and affordably serve this new demand while providing benefits to our other customers. With several additional opportunities in the pipeline, we expect data centers to drive further growth for the foreseeable future. Our employees are at the heart of these many accomplishments. Our team is composed of dedicated and hard-working and courageous employees are committed to serving our communities with same clean, reliable and affordable energy. For the 11th year in a row, Xcel Energy was honored as one of the world’s most admired companies by Fortune Magazine, placing 2nd overall among the most admired gas electric company in the country.

For the fifth in row, Xcel Energy has been one of the world’s most ethical companies by Ethisphere. Xcel is 1 of only 5 energy companies in the United States recognized this year. Xcel Energy also joined the Economic Opportunity Coalition, a public-private partnership with the U.S. government, where we committed to allocating 15% of our U.S.-based contract spending in the areas of energy supply, distribution, transition and clean energy small and underserved businesses by 2025. With that, I’ll turn it over to Brian.

Brian Van Abel: Thanks, Bob, and good morning, everyone. Turning to our financial results. Excel Energy had earnings of $0.88 per share for the first quarter of 2024 compared to $0.76 per share in 2023. The increase in earnings reflects our investment of approximately $8 billion over the last 5 quarters to improve resiliency and enable clean energy for our customers while delivering economic growth and vitality for our communities. The most significant earnings drivers for the quarter included the following: the impact of electric and natural gas rate reviews to recover our capital investments increased earnings by $0.12 per share. Lower O&M expenses increased earnings by $0.06 per share, reflecting lower labor and benefit costs, lower bad debt expenses and gains from a land sale for a data center.

Non-fuel riders recover capital investment increased earnings by $0.05. Offsetting these positive drivers were higher depreciation and amortization decreased earnings by $0.05 per share, reflecting our capital investment programs. Higher interest charges decreased earnings by $0.05 per share. In addition, other items combined to decrease earnings by $0.01 per share. W/A sales, year-to-date weather and leap year adjusted electric sales decreased by 0.3% and natural gas sales increased by 1.7% as compared to 2023. Please note that we have revised our projected electric sales growth to 1% to 2% for the year, largely due to declining use per customer and timing delays for expansions for some of our large C&I customers. However, we can certainly expect long-term electric sales to grow 3% annually.

During the quarter, we also made progress on a relatively light rate this calendar. In April, the Texas Commission approved our electric rate case settlement without modification. The settlement reflects a rate increase of $65 million based on the black box settlement which includes an ROE of 9.55% and an equity ratio of 54.5% for AFUDC purposes. In our Minnesota Natural Gas Rate Case, we received interviewer customary last week. — were scheduled for dry and expect the commission decision by year-end or in the first quarter of next year. And in our Colorado natural gas rate case, procedural schedule has been established that reflects interviewer testimony in July, hearings in September and a commission decision in the fourth quarter. Please see our earnings release for more details on our regulatory proceedings.

We are reaffirming our 2024 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%. In addition, we’ve updated our key assumptions to reflect the latest information, which are detailed in our earnings release. With that, I’ll wrap up with a [indiscernible] summary. We are proactively enhancing our operational and wildfire mitigation actions, commanded the risk to our systems to protect our customers from extreme weather. We continue to expect to deliver 2024 earnings within our guidance range as of half of the past 19 years. We are executing on our capital investment plan, including clean generation, transmission and distribution to support reliability and resiliency and economic development to support our communities.

And we remain confident we can deliver long-term earnings growth at or above the top end of our 5% to 7% range starting in 2025 and dividend growth at the low end of our 7% objective range. This concludes our prepared remarks. Operator, we will now take questions.

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Q&A Session

Operator: [Operator Instructions] Our first question is from Nick Campanella with Barclays.

Nick Campanella : Thanks for all the information today. I guess a couple of questions to kick it off. You have a lot of resource plan activity going on across SPS and the RFPs seeming like they’re coming out this summer. Just how are you kind of thinking about competition for capital within the current CapEx plan now that you’re seemingly accelerating some resiliency plans at SPS and PSCL, maybe you can kind of remind us what’s incremental versus not? And then also just touch on your financing plan and it needs.

Bob Frenzel: Yes, certainly, if I touch on all the multiple parts of that question, just please be feel free to follow up. We’re pretty excited about the upcoming RFP and SPS. We talked about it before seeking a range of generation between 5,000 and 10,000 megawatts combination of renewables and dispatchable firm capacity. And we’ll look to launch that RFP in July. It’s a little bit of a longer time line. So I’ll help you understand in terms of how we launch in July. We do expect to file CPCNs in the summer of 2025. So summer of next year with decisions in Q1 of 2026. So that capital really will be kind of in the ’27 to 2030 type of spend time frames. I think it was the long meeting, adding to the sum of the back end over 5 years but elongating our growth opportunities beyond what we’re seeing there.

So that’s how I think about that capital, but really great opportunity and excited to get started on that. You touched a little bit on — absolutely, we’re looking to continue to invest in resiliency and risk mitigation spend. Just rewind to note, we have about $10 billion in our current CapEx spend around distribution and transition resiliency. But as we look to file our Colorado WMP here later in Q2, there will certainly be incremental investment needs related to reducing wildfire risk. So we’ll evaluate all of that within our kind of current normal cadence when we come back in October of this year to provide a kind of roll forward for a ’25 to ’29 plan, and think about competition for capital. I think as you sit here today, we’re very comparable with — I reiterated we’ll be at or above the top end of the 5% to 7% range.

I think those look at all the opportunities we have in front of us with a base so fast is above 9%. And we’ll let the finance that as we always have been. I think it’s important to maintain a strong balance sheet and important to keep that going forward. And so we’ll look at it financing incremental growth with accretive equity at that kind of 60%, 40% range. [Indiscernible] touching everything you’re asking about.

Brian Van Abel: And I’ll just add 1 thing on the broad comment. I think you asked about sort of relative competitiveness of the company. We would expect to offer our own development projects into the SPS proposal, and we’ve proven that we — with our scale and utility-owned wind and our growing expertise in solar and storage, we think we’ll be very competitive for some of the generation in Southwestern Public service RFP process.

Nick Campanella : That’s really helpful. And then I guess just — and you did hit all the points. To put a finer point on the equity needs, I guess, do you just see really kind of no change to current plans, even with the multiple a little bit lower here?

Brian Van Abel: Yes. So the way we think about it, obviously, like I said and reiterated where we expect to be within the growth range. And that takes into our lower multiple impacts over the past quarter, certainly. As I mentioned, we think about the significant investment opportunities going forward. And it’s important to have a strong balance sheet. We try to maintain that strong balance sheet. But obviously, you will look at what is that, that’s balance sheet gives us some timing flexibility from an equity issuance perspective. And obviously, we’ll evaluate that and obviously, we’ll evaluate whether there’s incidental timing flexibility our own capital in the near term. But I think overall, as we think fundamentally, everything is intact from a long-term perspective in terms of maintaining a strong balance sheet and funding the investment needs for the cleanest transition with equity as we need to maintain that balance sheet.

Operator: Our next question is from Steve Fleishman with Wolfe Research.

Steve Fleishman: So just on the Texas fire. You mentioned the legislative report coming out in May. Just what should we expect to be coming out in that? Is that — who caused it? Or how should we think about what’s going to come out in that report?

Bob Frenzel: Look, at a macro level, I was pretty encouraged by the process we went through with the Texas House and the committee. I think one of the tenets of good risk mitigation is involving all the stakeholders who have a hand in doing that. And I think the committee here were a pretty good example of getting all — mostly all of the interested parties and participants in our [indiscernible] proactively talking about the issues. And on balance, I think the sessions were productive, [indiscernible] committee was looking to be prospective and gathering information for future solutions. And I think that’s how I expect to report in May to come out. I think we’ll see stuff on recommendations for utilities, emergency responders, proactive things that we’re doing in the counties to mitigate fire risk.

I think there’s already attempt to [indiscernible] for a service report on causation. I’m not certain we see something else from the committee on that. But, I think the report is going to be in line with the sessions themselves with constructive recommendations for how to proceed going forward.

Steve Fleishman: And then just on the damage estimate that you took as you’ve noted, I think, in your release a lot of kind of what’s in there, what’s not in there. One clarification just is how about not punitive damages, but noneconomic damages. Is that in your estimate or not in your estimate?

Brian Van Abel: Yes, Steve. I’ll handle this one, and I’ll give you [indiscernible], obviously, we’ll point to our disclosures. But I’ll give you a little bit more color in terms of that $215 million in the lower end of.

Steven Isaac Fleishman: Yes, that was great.

Brian Van Abel: And here’s very large some of our package it includes residential properties and related losses, cattle and feed, agricultural structures and fencing, noneconomic damages and then a number of other items. So obviously, this is subject to changes in additional information since we’re still early in the process.

Steve Fleishman: And then just on a follow-up on the question about equity. Just given some of the overhang that’s been caused by this, how are you — are you kind of revisiting like other options of getting equity than just issuing it? Are there asset sales or other things that you might consider? Or is that just not as attractive as just funding with equity?

Brian Van Abel: Obviously, itself, you’d expect, Bob and I to evaluate in the normal course, what other options are there. I think we’ve been — what you’ve seen from us is that we were a pretty straightforward conservative financing plan from a company perspective. So I don’t — I think right now, that’s our current plan of action. I think I’ve been on record about not interested in minority interest sale in the line of sale. So that’s our fair plan of action as we sit here today.

Steve Fleishman: And then last thing on the data center growth. So just on the facility at the old Sherco site, how was that being served? And then just, Bob, you mentioned talking to a lot of others. Could you just talk to kind of how they’re viewing your territory and just making sure you’re able to kind of do this in a way that is kind of good for the broader customer base?

Bob Frenzel: That’s a great question and conversation and Steve, and it’s very topical, both inside the walls of the building as well as around the industry. On your specific questions with regard to the Sherco site, does the site get powered with grid energy? And as you know, we’re the first company to commit to being a 100% carbon-free electricity. So we are a significant importance in the renewables [Indiscernible] the system, and they will benefit from all our system actions. More broadly, as we look across our footprint in the company, we think, depending on the operating company, we have really attractive dynamics for super scalers and other data center and high energy use customers. And whether it’s very low-cost C&I energy in the Southwest or the [Indiscernible] weather and high renewables in Colorado or a similar footprint here in the Upper Midwest.

I think that we’re having conversations across our footprints. And I think we’ve got both access to water transition infrastructure, land and energy and clean energy that they find attractiveness. So we’ve got a significant amount of interest from super scalers and others and look forward to sharing more of that as we develop our forecast.

Brian Van Abel: Just add a little bit of color to that. I think you kind of hinted that, how do we think about it from a current customer perspective build. I think as we bring on new data centers and is something we did with Meta and the approval of Meta in Minnesota. We make sure it’s a win-win for our existing customers. That’s really important as we continue to move forward with this significant opportunity. And I think there’s an opportunity there to work with our policymakers and regulators, to help drive economic development within the right context and also ensuring that we can move quickly because you will need to build out infrastructure both on the generation side and the wire side that can serve some of these significant opportunities that we’re seeing over the next 5 to 10 years.

Operator: Our next question is from Jeremy Tonet of JPMorgan.

Jeremy Tonet: Just want to continue with the data center question with one more finer point here, I guess, as it relates to SPS, just given the need for power and given the very cheap natural gas in that area, I don’t — wouldn’t necessarily think of SPS as a place that would data centers would target, but just wondering if what you’re seeing there if cheap Power is a draw? Just any thoughts in general?

Brian Van Abel: Yes, I think — I mean, as Bob mentioned, we’re seeing data center interest across all our service territories. And so service are preferred to have maybe a little different attractiveness. And then you hit SPS as on the lowest C&I rates in the country. So interest there. But I would say the other significant growth that we continue to see in SPS, and this is really what you’re seeing come through our numbers now when you look at the year-over-year growth from the C&I perspective is the oil and gas expansion in the Permian Basin are and everything they’re doing from an electrification perspective. So right now, that’s the near-term group growth in SPS with longer-term data center — some data centers down there.

We also have a fantastic renewable resources down there from a wind and solar perspective, what leads to that. When we talk about that RFP coming out in SPS in our resource plan, those are the reason why we have a range of 5,000 to 10,000 megawatts in the range is ensure that we enable some of the growth that we’re seeing.

Jeremy Tonet: Certainly, New Mexico, at the low end of the cost curve for production in North America there. So maybe continuing with Texas a little bit more and following up on the wildfires. Just wondering if Texas caps noneconomic damages or just any other details you could provide there?

Brian Van Abel: Yes. Right now, there is no cap on noneconomic damages in Texas. There is a cap on punitive advantages this 2x economic damages falls up to 750 cap for noneconomic.

Jeremy Tonet: And then looking forward to the Colorado Wildfire Mitigation Plan filing, there’s been some press in the state around recent deenergization in Colorado. Can you speak to the opportunity for sexualization or other efforts to reduce customer impact? Any other nuances to the filing you could share with us?

Bob Frenzel: First, I’m really proud of what the team did in Colorado and executing on behalf of public safety during a volatile weather event. As you can imagine, the second file on our wildfire mitigation plan, is going to have a lot of continuation of the existing plan and probably incremental areas that we’d be looking for. But as I think about the big buckets of opportunity there, really early warning capabilities. We’ve already sold 21 panel cameras, but I think there’s a real opportunity for increased early warning capabilities with AI-powered cameras as well as weather stations in and around our territories and our equipment. Obviously, we have opportunities to improve our operating capabilities in public safety power sets, as well as even the power line enhanced power ride safety settings.

But we’re executing those today, and we’re doing a pretty good job. We have more work to do there. I think about the third bucket where your question leads to is asset resilience capabilities and we can continue to expect our poles and wires, replace stuff and maybe accelerating some of that. But I think we’ve also system resiliency, and this gets back to what your comment on sectionalizing. We’ve done some of that. We have a real opportunity to do that more, both our intelligence at a granular level of weather and what’s happening in weather as well as our ability to control our system at a more micro level to mitigate customer impact is a real priority for us in this plan. And lastly, given as part of the plan is the public policy opportunity that we might have to protect our customers.

So big buckets there, but hopefully, I got to your sectionalization question as well as asset parting like undergrounding, covered conductors and other pieces of both transmission and distribution systems as we think about protecting public safety is a priority for us.

Jeremy Tonet: And just a last one, if I could, as it relates to gas cases and Minnesota and Colorado, any updates there that we should be thinking about or conversations with stakeholders and regulators on those cases and how you feel about those cases.

Brian Van Abel: Yes. And just I’ll get on first, the Minnesota natural gas case because that’s probably the one that spurred us along, given that we just received intervenor testimony and the Department of Commerce recommended a $44 million increase of a 9.4% ROE. We have hearings in mid-July, but we’ll certainly look at an opportunity to engage with our stakeholders to see if we’ve reached settlement, which we did in the last Minnesota gas rate case. So we’ll look to engage, like I said, here is our July. So from now until July, we’ll look to engage there. On the Colorado side, we’re still pretty early in the process. We haven’t received interviewer testimony yet. The procedural schedule just came out. So for us, it will be the settlement — we get intervenor testimony in mid-July. We get opportunity, there’s settlement deadline at the end of August, and then we don’t reach a settlement, we’ll be hearing in mid-September for the decision in Q4.