Good day, and welcome to the Xcel Energy Second Quarter 2020 Earnings Conference Call. 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] At this time, I turn the conference over to Paul Johnson, Vice President of Investor Relations. Please go ahead, sir.

Good morning, and welcome to Xcel Energy's 2020 second quarter earnings conference call. Joining me today are Ben Fowke, Chairman and 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'll review our second quarter results, share recent business and regulatory developments and discuss how we're managing through uncertainty around COVID. The slides that accompany today's call are available on our website. As a reminder, some of the comments we make during today's call may contain forward-looking information. Significant factors that could cause results to different from those anticipated are described in our earnings release and our SEC filings. Today, we will discuss certain metrics that are non-GAAP measures, including items, ongoing earnings, electric and natural gas margins. Information on comparable GAAP measures and reconciliations are included in our earnings release. Now, I'll turn the call over to Ben Fowke.

Well, thanks, Paul and good morning everyone. We had a strong quarter, booking earnings of $0.54 per share for the second quarter of 2020, compared with $0.46 per share last year. Our year-to-date earnings are on track with our financial plan, and we are mitigating the impact of COVID-19. As a result, we are reaffirming our 2020 guidance. We continue to help our customers and protect our employees during the pandemic. We're stepping up our charitable giving to help our communities. Our business continuity plans have been executed extremely well. We're keeping employees safe, while providing reliable service to our customers. And we're helping to restart the economy through our capital investment programs that create jobs in our communities. Earlier this year, the Minnesota Commission opened a relief and recovery docket and invited utilities in the state to submit potential projects that would create jobs and help jump-start the economy. In June, we filed a plan that proposes $3 billion of capital investment. This includes approximately $1.8 billion of incremental capex for wind repowering, a 460-megawatt solar facility, expanded EV infrastructure and about $1.2 billion of accelerated transmission, distribution and natural gas investments. We recently announced a solicitation for repowering of wind projects that are either owned by Xcel Energy or under PPAs. We estimate 800 megawatts to 1,000 megawatts of potential repowering projects and expect to make a commission recommendation by year-end. We are also proposing options to mitigate customer bills. Overall, feedback has been very positive, and we look forward to working through the process with the commission. Now, as you might have heard, the US Treasury recently announced a one-year extension of the Safe Harbor for renewable projects. Wind projects that began construction in 2016 now have until the end of 2021 to complete construction and received…

Thanks, Ben, and good morning everyone. We had a strong quarter, booking $0.54 per share for the second quarter of 2020, compared with $0.46 per share last year. The most significant earnings drivers for the quarter include the following: lower O&M expenses primarily driven by our cost management efforts increased earnings by $0.05 per share; higher electric margins increased earnings by $0.02 per share, which reflects riders and rate increases that offset the negative $0.07 per share impact from declining sales largely due to COVID-19; higher AFUDC equity increased earnings by $0.03 per share; and finally, our lower effective tax rate increased earnings by $0.07 per share. However, the majority of the lower ETR is due to an increase in production tax credits, which flow back to customers through electric margin and is largely earnings neutral. Offsetting these positive drivers were increased depreciation and interest expense, reflecting our capital investment program and other items, which combined reduced earnings by $0.09 per share. Next, I want to discuss the status of COVID-19 impacts and mitigation efforts. As expected, COVID-19 had a major impact on second quarter sales. Our second quarter weather-adjusted electric sales declined by 7.1%. However, these impacts are better than projected in our base case scenario, which is embedded in our guidance assumptions. On a weather-adjusted basis, April retail electric sales declined 9.6%. May showed improvement as retail electric sales declined 6.7%, and June showed further improvement as retail electric sales declined 4.7%. This monthly trend reflects the economic shutdown that started in mid-March and the gradual opening up of the economy in May and June. As a reminder, we have a sales true-up mechanism for all electric classes in Minnesota and decoupling for the electric residential and non-demand small C&I classes in Colorado. This covers about 45% of…

Thank you. [Operator Instructions] And we'll take our first question from Jeremy Tonet with JPMorgan.

Just wanted to touch base, I guess, on your retail sales expectations at this point. Didn't know if you had any data from July, if you could provide us any more color. It seems so far in the second quarter, you guys are trended somewhere between the base case and the mild case. I'm just wondering if you could give us any feeling, I guess, from what you can see so far how the third quarter might be shaping up initially between those two scenarios?

Yeah, happy to. But as you know, we don't have AMI. So we have some visibility into July information, particularly we have some sample customers. And what we're seeing on the C&I side is we're seeing a slight improvement, as we look at some of the specific data that we have. We've seen some improvement in the oil and gas slowed down in SPS, something we're watching closely. If you look at the results down there, the kind of bottomed out in May, and we've seen improvement relative still below about 5% from where it was pre-COVID levels, but good to see the C&I improvement there. We're also watching our Colorado C&I. If you look at our earnings release and our presentation, you can see that the C&I sales from May to June didn't improve as much as they did from April to May, so that some are focusing on in Q3, but we are seeing positive trends there. In the residential, I think we're still continuing to see that strength that we saw in 2Q. So overall, positive trends going into Q3, but if you look at our base scenario, we did have significant improvement in the depths in Q2 to Q3. So some, we are watching closely.

Got it. That's very helpful. Thanks. And just with regards to the Minnesota relief and recovery proposal, I'm just wondering if you might be able to share any more as far as any early feedback that you might have received so far or just kind of expectations going forward at this point.

Hey, Jeremy, it's Bob. Thanks for the question. Coincidentally, we actually had a Minnesota planning meeting yesterday with the department and the commission to talk through the Relief and Recovery Act. We think this is a really interesting example of coordination between investor-owned utilities and the political community to try and solve some of the problems that are affecting our communities from the pandemic. I think the commentary yesterday was kicked off by Lieutenant Governor with a positive tone. I feel like we had some positive tone from some of the commissioners with a special interest to an expeditious resolution and timeline. So we'll know more as we work through the rest of the summer in terms of timeline, but I think yesterday's planning meeting felt fairly positive.

Yeah. It's encouraging. That's great. Thanks. And if I could just sneak in a last one here, it seems like your guide, D&A interest and AFUDC equity, all kind of changed a little bit there. I was wondering if you could help us with some of the drivers.

Yeah, certainly. When you put them altogether bottom line, it impacts pretty immaterial for the year. Puts and takes, depreciation changes are coming out of our rate cases. We had some depreciation rate changes that were implemented. Obviously, interest expense, we set a record low coupons in Minnesota. We issued a 30-year bond at 2.6%, which is the lowest 30-year first mortgage bond for utilities, so really good results there out of the team. And then, on the other pieces of rider revenue, right, just a little bit of delays in implementation of wind farms, but net-net, pretty immaterial impact when you take them all together.

Great. Thanks so much.

Next, we will go to Julien Dumoulin-Smith with Bank of America.

Hey, team. Good morning. Hey, thanks for the time guys. So let me take the other side of what Jeremy was just talking about. Let's talk about cost reductions, and let's talk about that in the context of your progress year-to-date and what this means going forward in the future years, right? I hear you guys talking about staying out in Colorado, for instance, leveraging riders a little bit more, but give us a little bit of context and where you are against the plan given the 4% to 5% articulated and then, what that means for sustainability and prospects to stay out in these states?

Let me -- I'm going to let Brian give you the details on that drilling, but let me just say, I really proud of how the entire team -- entire Xcel workforce has really stepped up to mitigate the impacts of COVID-19, while still providing us important, obviously, product that we deliver. And we've done in a number of different ways, but what most impressed me is the innovation and creativity to use of technology and to improve our business. So I'm optimistic that a lot of that -- we've got to work through, but a lot of this will give us a lot of momentum as we go into 2021. With that, I'll ask Brian to give some more details.

Yeah. Thanks, Brian. And good morning, Julien. Yeah, so from a run rate, right? We've put in the contingency plans in the sense of the end of March, as we saw the fit. And so, we had nine months from a year-to-date perspective. We're about a little over $50 million ahead of 2019, so executing out just slightly ahead of plan when we look at what our plans are for Q2. So that puts us in a good position for the balance of the year. Now, obviously, if sales come in a little bit better, we can adjust those contingency plans for the year. And Ben said it well. The team has done a great job of developing and executing those plans for this year, and we've really turned our attention to what is sustainable in 2021 and beyond. But I think we've got -- when you talk about regulatory flexibility and rate case sales, we're also -- the other side of the equation is everything we've learned over the past few months from the impact of COVID-19 is we're incorporating into our sales forecast for 2021 and incorporating that in our sales forecast for 2021. And so, we're looking at both sides of the equation. And so, a big focus for the team in Q3 from an O&M sustainability perspective, which will deliver further guidance and clarity in Q3 on that.

Got it. But net-net, fairly confident that consistently earn at authorized levels to the extent to which that you're successful staying out in these cases inclusive of, for instance, the Colorado?

Yeah. I think that's a fair assumption. You broke up a little bit. I think you said you would expect another authorized levels with the regulatory proceedings, just to make sure I heard you correctly.

Yeah.

Where exactly are you, Julien?

We will talk about that later.

We have enjoyed your notes from the road, Julien.

There you go. So in Colorado and speaking of Colorado, what are your prospects for stimulus here as you think about the -- potentially mirroring your efforts in Minnesota?

Hey, Julien; it's Bob. So if you're in Colorado, we're having good weather out there. We've had a nice warm summer. I think you saw some of our weather-adjusted sales were pretty strong in Colorado. As far as relief and recovery goes, what we've done in Minnesota we believe has been relatively unique for the country, but we're certainly open to the ideas and trying to partner in other jurisdictions. I'll give a lot of credit to the administration and the commission and the department in Minnesota for their leadership and their partnership with us on the R&R plan and getting the utilities in the state to step up and try and help our communities and our customers. And if we can find that kind of partnership, we are absolutely looking and willing to do that. As -- if the pandemic continues or if we see some resurgence, there may be more opportunities down the road for us on something similar in other jurisdictions. We wouldn't rule it out.

Great. Best of luck. Thanks guys. Nice travel.

Stay safe wherever you are.

And next, we'll go to Travis Miller with Morningstar.

I wonder if you could talk a little bit more when you said in Minnesota, the alternative path, what that might look like in one of the full three year rate cycle filings?

Yeah, Travis. And as we kind of put it in our relief and recovery plan, the alternative path is really looking at a potential stay out for 2021. Going into 2020, we were able to reach a constructive stay out with the parties, which the commission approved and that was really focused in a couple of key components around sales true-up and deferral of the annuity amortization, a couple of key components. And now, we're just starting to -- we put that in the relief and recovery plan. I think there is another path there, and we've just started the initial discussions around that. And certainly, we will look to see if we can find a good constructive settlement that works for our customers and us.

Okay. What do you include potentially something like a rate base true-up, something like that as well or are there other mechanisms that we keep you that allowed or slightly below the allowed ROE?

Well, for Minnesota, the two big components, if you look out similar to -- at least sitting here today, similar to the settlement that we reach for this year as the big component of sales true-up and then, the deferral of some amortizations. We do have riders recover a lot of our investments with our renewable investments -- long-term renewable rider. And we have our transmission cost rider, which covers some investments. So we have rider mechanisms that help recover the investments we're making for our customers.

Okay. Got it. And then, just confirming that you guys are still on track for that five-year 7% rate base growth and the $22 billion capex. Any changes for those numbers?

I would say -- Travis, this is Ben. Yeah, we are on track, and we're targeting the upper half. We'll update all of that in the third quarter when we update you on our five-year capital forecast, but I think you will be pleased with what we're projecting.

Okay. And then just real quick, does that include the $3 billion in Minnesota or would that be incremental?

That would be -- well, first of all, $1.8 billion is incremental; the other is an acceleration, but yeah, I mean, that's not necessary to -- for us. So that would be incremental.

Okay. Great. Thanks so much.

Next, we will go to Steve Fleishman with Wolfe Research.

Hi, good morning. So just good to hear your voice Ben and have fun being the Chair of EEI. So on the Minnesota kind of recovery investment, has the commission give some indication on the basis of the decisions they are going to make in terms of like, is it based on the amount of jobs created versus the rate impact or just how are they going to make that decision?

Well, I think they will take a number of factors into consideration. But I think as you know our steel for fuel strategy accomplishes capital investment, job growth and helps with rate. So. to the extent we can emphasize that, I think the better will be. There will be a solicitation and we'll bring those projects in. We are anticipating that we will have a very good price point for the solar that we're planning. And Brian and Bob, I don't know if you want to add anything else.

Yes, Steve, I think it's still a little bit early innings. But I think the comfort level with the investment, the economic development, the job creation, that portfolio coupled with the relief opportunities as Brian mentioned on rates and stay out mechanisms, I think is a big package. We haven't got a full time line out of them. We had a big planning meeting yesterday, which was favorable with some positive comments from the commission and even the administration. And so we're comfortable and confident where we sit. We don't have a lot of details other than that to share with you right now.

All right. Do you have any sense of the rate impact of the $3 billion. Or you're kind of waiting to see your bidding and all that?

I think we still need to run through the solicitation process on the renewable portions, for sure, which will run through August and into September before we make some decisions. But we're pretty confident that we know the impacts of the things we would put forward. And we know a little bit of what other people would do as well. So we're pretty comfortable with the cost side of that.

Steve, we wouldn't put forward our wind repowering if it wasn't NPV positive to the consumer. So I think the real -- will that offset the acceleration of some of the distribution and transmission spend that we're talking about, and I think likely it will, but to Bob's point, we will run through those numbers.

Yes, Steve, just some further color on the repowering. We had the long road repowering approved and we have now or should be upfront the commission hopefully in Q3 and those show the front end customer savings and you got the repowering which is now really good in this environment. And so we're working through similar analysis on our currently owned wind farms that we think would be good candidates for that.

Okay. And since most of these things are related to things that you own or like you're pre-assuming it gets approved pretty highly likely it would be you who actually would make some investment?

Yes. That's correct. Third parties.

I think that's...

And just last question. Yes, okay. And last question is related to -- so if that is all true, yes...

One thing to be clear on those -- there are parties that could submit PPAs for either a PPA extension or a BOT. So some combination of our investment plus others.

Great. And I apologize. Last question on this which is just how should we think about financing plan for as much as the incremental, you know, more time...

Yes. Steve as we talked about before and really in the filing, we think about $1.8 billion is the incremental part, the other $1.2 billion roughly is accelerated. But as we go through this process, we expect the commission indicated yesterday that they look to find a way to move through this pretty quickly. And at the same time we're developing our five-year capital plans for '21 through '25. And so, we'll put that all together and roll out our five-year financing plan if we have enough clarity to include this in our five-year capital plan by October. But generally, what we spoke about before, timing and size matters for incremental capital, and if it's significant enough and lines up, we will generally fund that with our consolidated capital structure. Now, as we've spoken about before, it's important to maintain that financial strength and the credit quality of the company.

Next we'll go to Sophie Karp with KeyBanc.

Hi, good morning. Congrats on the quarter and thank you for taking my question.

Thank you, Sophie.

So just to build on this -- on the rate strategy this year and the questions around that, I'm wondering if we think about more, I guess stay out rates since obviously your right decision given the COVID situation. But if this continues to be the case and the COVID is kind of here to stay and is effective economic consequences will be ongoing for a while, could we see a pivot in the overall strategy where you move away from periodically cases and kind of switch on a more permanent basis to alternative mechanisms and just kind of move away from the strategy of being a -- say a rate case filer to more of a paying outflow for the period for longer? That's my question. Thank you.

Sophie, it's, Bob. Good to hear your voice. You were a little broke up there, but let me try and address the question, which I think is, how do you think strategically about rate cases in the context of the pandemic in longer term is sort of my takeaway. And you know, we have a lot of rider mechanisms in our various states and we're making billions of dollars of investments on behalf of our customers and infrastructure around clean energy transition and grid modernization and we also have to keep the utility financially healthy. So that's the backdrop that we work with. We are obviously working with our regulators right now on mechanisms by which we would need to file rate cases and we're actively engaged in conversations with stakeholders in Minnesota and Colorado. I think you saw us settle our gas case and then file a couple of riders, which we think would allow us to stay out of our electric case in Colorado and that's a bit of the strategy. If we continue to invest in areas that have real time in rider recovery, you've seen us execute on decoupling in sales true-up mechanisms in our businesses and that's helpful as well. And so strategically, I think we're in the right places. We're always going to look for mechanisms by which we can mitigate our cost structure, keep our bills low for our customers, while we keep to invest in the infrastructure that we need to. So we'll continue to be creative, probably with our commitment and the goal would be to not go into rate cases, if we could avoid them, but we have to keep the utility financially healthy and so we balance all of that.

Yes. And Sophie, just building on what Bob said, I mean, whether it's traditional rate cases or expansion of riders or some combination, the bottom line is we are going to achieve our clean energy objectives, our levels of reliability and our customer improvements in customer experience all while keeping total bills below the pace of CPI. That's our objective. And that's what we're on track for and that's what I think we still remain on forecast to do. So -- because that's the key thing, is to make these investments, while not -- while keeping our product affordable.

Thank you. And then a follow-up if I may, on the O&M. So you entered this year guiding for O&M growth year-over-year and then the COVID situation you had to flip that and basically find cost cuts right to offset the impact and it seems like it's going well. Could you give us some sense of the shape of that throughout the year. Are you kind of even into it now and plan to ramp up in the second half or are you pretty much trying a run rate at this point and we should expect a steady kind of O&M trajectory throughout the year? How should we think about this?

Hey, Sophie, this is Brian. I think the way you said it, you assume a steady run rate pretty ratably over the quarter. So I think you're thinking about it right, we continue to see that run rate.

Next we'll go to Paul Patterson with Glenrock Associates.

Just a few quick follow-ups. So back in Minnesota -- and I'm sorry if I didn't completely understand it. How much did you guys -- were you guys saying that this capex might be going to third parties or contracts, how much of the total is subject to that?

The $1.8 billion incremental is -- that's our spend. But what Paul was saying is when we do a solicitation, we'll have our own wind projects that we own that we bid into that and -- but we will also encourage independence to bid in as well and they can bid in either as a build, own, transfer, which would result in our ownership or they could bid in with an expansion of a power purchase agreement and we'll take a look at all of those. But at the end of the day, our incremental CapEx will come from ownership in wind projects, perhaps our own and perhaps BOT's, the solar facility that we're talking about at our coal plant and Becker, Minnesota, advances in EV infrastructure. And I think that covers the incremental and then we look at the acceleration of that $1.2 billion of grid spend.

Paul we're not going to -- we're not going to know what other parties are going to build until we get through the process, which would be more towards the end of August.

Okay. And then when we think incremental, just to be clear. That doesn't mean bringing something in from the future. This is just incremental, in other words it wouldn't happen anyway, it doesn't change the trajectory of your capex outlook from -- in other words, you are not moving something from the future to now. It's as an accelerated would suggest. When you say incremental, it would -- it wouldn't have occurred otherwise. Is that the way to think about it?

Yes, that's the way to think about it, Paul.

Okay. I think I understand. And then with respect to the...

Paul, just on the -- I mean, look, I think the way to think about it is, the $1.2 billion that we're not calling incremental, that's an acceleration of something that's already in our forecast. The $1.8 billion would not be in our existing forecast. Now over the course of 15 years, might it have happen. Yes, that's how we're defining that.

That's really helpful. I appreciate it. And then with respect to the CPI goal, is that still 2%?

Yes, I mean I think it extends a little bit by jurisdiction. Is that...

Yes. That's roughly at Xcel level, a good way to think about it.

Okay. And then, just in general, I mean, this has been touched on by other people, but I'm just wondering if this -- if things continues down the road, is there any potential maybe to upsize this, if we have a weaker economy. If -- do you follow what I'm saying, is there any sort of discussion of a potential like, hey, maybe this is a good jobs idea or economic stimulus idea and we could see something maybe a bigger than this?

I think I'll let the team weigh in on this Paul, but I think it's probably would come from other jurisdictions.

Okay. And you already sort of addressed that. Okay. I really appreciate it. Thank you so much.

Thank you. Have a good day.

We'll go to Insoo Kim with Goldman Sachs.

Thank you. I just have one quick question. In your guidance for the year end base case assumption, what type of assumption are you making on deferral treatment of COVID-related costs?

Around -- yes, bad debt deferrals. Hey Insoo, this is Brian. As we talked about in Q1, we assume that we get constructive treatment around the regulatory deferrals. When we think about our bad debt expense, we have roughly about $25 million increase and we look at what happened in 2008 and 2009 and that's everything we've seen for the three months of impacts that remains pretty consistent as our thinking going into this. And if we think about it right, we have about 95% of our businesses covered with our six deferral orders, two are waiting for the Dakotas. So we feel like we've reached a constructive place with those deferral orders and we'll continue to evaluate the deferrals as you go through the balance of the year.

Got it. So the bulk of -- at least the bulk of what's happened in terms of the approvals were somewhat embedded in making that guidance then.

Yes. That's correct.

Got it. That's all. Thank you.

That concludes today's question-and-answer session. I will now turn the call back over to Brian Van Abel for any additional or closing remarks.

Yes. Thank you all for participating in our earnings call this morning. Please contact our Investor Relations team with any follow-up questions. Have a good day.

And that does conclude today's conference. We thank you for your participation. You may now disconnect.