Q2 2019 Earnings Call
Please standby.
Good day and welcome to the Excel Energy second quarter 2019 earnings Conference call.
Today's conference is being recorded.
Questions will only be taking from institutional investors reporters can contact media relations with inquiries and individual investors and others can reach out to Investor relations.
At this time I'd like to turn the conference over to Paul Johnson, Vice President of Investor Relations. Please go ahead.
Good morning, and welcome to XL Energy's 2019 second quarter earnings release Conference call.
Joining me today are Ben folk Chairman, President and Chief Executive Officer, and Bob Frenzel, Executive Vice President and Chief Financial officers. In addition, we have other members of the management team available to answer your questions. This morning will review, our 2018 second quarter results and update you on recent business and regulatory developments.
Slides that accompany today's call are available on our website.
As a reminder, some of the comments during todays conference 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 filings with the FCC.
On today's call, we will discuss certain metrics that are non-GAAP measures include the ongoing earnings electric margin in natural gas margin information on comparable GAAP measures and reconciliations are included in the earnings release with that I'll turn the call over to Ben.
Well, thank you Paul and good morning.
Today, we reported second quarter earnings of 46 cents per share compared to 52 cents per share last year.
Our year to date earnings are on track and we are well positioned to deliver earnings at or above the midpoint of our 2019 guidance range.
Bob will walk you through the favorable timing differences in the second half of the year in a few minutes.
Well, we are very confident that we will deliver on our financial objectives as we have in the past.
Well, let me start with some quick highlights from the quarter.
In July we filed our upper Midwest resource plan, which runs through 2034.
Our preferred plan, which is supported by a partial settlement with various environmental and labor groups includes the following key points.
The early retirement of coal plants, starting with King and 2028, followed by Sherco three in 2030.
By the end of 2030, we will have completely exited coal in the upper Midwest.
The plan also calls for an extension of the life of the Monticello nuclear plant from 2030 to 2040.
It includes the acquisition of the main Kato combined cycle natural gas facility and the construction of a combined cycle natural gas plant at the Sherco site.
The plant adds an additional 4000 megawatts of solar and 1200 megawatts of wind replacement.
Finally, we will also add 1700 megawatts affirmed peaking capacity post the 2030 timeframe.
Our preferred plan would result in an 80% carbon reduction by 2030.
And put an S.P. on a path to be 100% carbon free by 2050.
We are excited by the opportunity to create a cleaner sustainable energy future for our customers.
We also continue to make strong progress on our steel for fuel strategy.
In June our 478 megawatt hail wind farm went into service in Texas. The project was completed on time and under budget, our customers will see substantial savings over its life.
All of our other wind projects are in various stages of permitting and construction.
We expect they will be completed between 2019 2021.
These projects highlight the excellent planning construction and project management skills of our employees.
Well Legislative sessions are now completed in our states and there were some important laws that were passed.
In Texas three bills passed a bill that provides the right of first refusal new transmission projects.
Bill that provides rider recovery for new generation and a bill that provides rider recovery for am I investment. These bills point to a more constructive regulatory environment in Texas.
In Colorado legislation passed the codified our plans to achieve 100% carbon free electricity by 2050, and an 80% carbon reduction by 2030.
In addition, the bill provides for voluntary securitization as an option and targets utility ownership of 50% of all generation.
Also in Colorado, a bill passed that allows us to own EDI infrastructure.
Finally in new Mexico, The energy transition Act was passed.
This small targets, a 50% renewable portfolio standard by 2030, and a 100 and 100% carbon free electricity by 2045.
We are well positioned to meet the 2030 milestone.
We are proud to be leading the clean energy transition.
And the bills I discuss are consistent with our carbon reduction objectives and reflect our strong alignment with policymakers in our states.
Finally, I'm proud to announce that excel energy has been named to the 2019 military times best for Vets employers ranking.
This is the sixth straight year, we've received this honor.
In 2013, we set a goal to have 10% of new hires be veterans and the company's reached that goal every year.
So energy currently employs more than 1000 veterans nearly 10% of our workforce.
It's an honor to have these men and women in our workforce, our veterans brings strong leadership teamwork and experience to their job their dedication and passion for service deliver value for our customers every day.
So now I'll turn it over to Bob Frenzel, Who's a navy that to provide you more detail on the quarterly results have regulatory plans Bob.
Thanks, Pat and good morning, everyone. We recorded second quarter earnings of 46 cents per share compared with 52 cents per share in 2018.
Most significant earnings driver for the quarter include higher electric and natural gas margins, which increased earnings by nine cents per share.
Including various regulatory outcomes and riders to recover our capital investments.
Which is partially offset by five cents per share of unfavorable weather.
In addition, our lower effective tax rate increased earnings by three cents per share.
However, the majority of the lower east yards due to an increase in production tax credits was flow back to customers through electric margin and tax reform impacts both of which are largely earnings neutral.
Offsetting these positive drivers were increased depreciation interest and other taxes, reflecting our capital investment program, which reduced earnings by 12 cents per share.
In higher onetime expenses decreased earnings by one cents per share.
Year to date weather adjusted natural gas sales increased 3% as a result of strong customer growth and higher use per customer.
For 2019, we anticipate slightly favorable consolidated electric sales, which reflect some of the favorable year to date sales.
And some discrete known declines in large customer usage and expectations of lower use per customer in the residential sector.
For natural gas, we've increased our 2019 sales guidance to 2% to 3% growth reflects strong year to date performance.
Turning to own them, our quarterly expenses increased by $8 million, reflecting storm costs natural gas pipeline maintenance and increased it spend to modernize our business systems that support our strategy to enhance the customer experience.
Our year to date, and then expenses are above last year, largely due to expense timing, but also due to higher than expected storm cost in 2019.
We expect lower plant outage and nuclear operation costs in the second half of 2019.
And as a reminder, we increased our own im spending in the second half of 2018 due to the impact of hot weather as well as incurring cost for environmental remediation and business efficiency improvements.
Accordingly, we reiterate our guidance that full year, 2019, Oh, and I'm expenses will be approximately 2% lower than 2000 eighteens level.
Next let me provide a quick regulatory update.
In May of 2019, P. ESCO filed an unopposed settlement agreement and its Colorado steam rate case settlement reflects a rate increase of $6.6 million and equity ratio of 56%.
And are we have 9.67% free AFUDC purposes.
And utilization of T.C.J. benefits.
New tax rates would occur in two steps in 2019 in October of 2020.
The administrative law judge has recommended approval of the settlement, which is pending at Colorado Commission decision.
In May of 2019 Fiasco also filed an electric rate case in Colorado, seeking an increase of $158 million or 5.7%.
Based on historic test year with a capital reached forward for 2019 capital expenditures and equity ratio of 56.46%.
And then are we have 10.35%.
The request for flex capital investment far advanced grid initiative and changes in depreciation rates, both of which were previously approved by the commission.
Yes goes requested rates effective in January of 2020.
We also reached a settlement in Wisconsin, which will maintain current electric rates through 2021 and result in a modest natural gas rate decrease the settlement is pending a commission decision.
In July 2019, Sps filed an electric rate case in new Mexico, seeking an increase of $51 million based on historic test year, where the capital reached for an ROI, we have 10.35% and an equity ratio at 54.8%.
The requests were largely reflects capital investment for the hail wind project as well as other capital invested to support strong growth in the region.
We anticipate rates going into effect in the second half of 2020.
In addition, we are planning to file an electric rate case in Texas in August to recover our investment in the hail wind project as well as other Sps capital projects, both the Texas and New Mexico commissions previously granted a certificate of need and recovery mechanisms for the hail wind farm.
Next I want to give a quick update on our PPA buyout efforts.
During the quarter, we reached a partial settlement with various environmental and labor groups that support the main Kato combined cycle acquisition.
Last week, the department of Commerce, and the office of the Attorney General filed comments recommending against the acquisition. However, their recommendations included alternate customer protection mechanisms. If the commission approves the acquisition.
We believe we've demonstrated the economics of ownership are still compelling despite the disagreements on modeling highlighted by the comments.
We anticipate hearings and a commission decision in September .
We are cautiously optimistic the commission will prove the acquisition based on the anticipated customer savings and the long term value to the state that our ownership of the facility would create.
Additionally, we are actively working across our four operating companies to identify other customer beneficial asset acquisition opportunities and we'll work proactively with our stakeholders to identify the cost the environmental and the labor benefits of these transactions.
And we will share these developments as they progress.
With that I'll wrap up we had a solid second quarter and are right on our budget for first half earnings.
Whether and when were slightly unfavorable to our budget, but sales and margin were slight slightly favorable to offset.
In the second half of the year, we expect year over year favorability in own EM margin and sales.
In addition, depreciation and amortization expense will moderate due to the timing of lower levels of prepaid pension amortization in Colorado.
As a result, we're very confident in our ability to deliver earnings at or above the midpoint of our guidance range.
In summary, we filed our preferred plan and the Minnesota resource planning proceeding, which we'll continue our clean energy transition and if approved would allow us to reduce carbon emissions by more than 80% by 2030.
We completed the hail wind farm on time and under budget.
We reached constructive rate settlements in Wisconsin, and our steam case in Colorado.
Constructive legislation was passed in Colorado, Texas, and New Mexico, and we are well positioned to deliver on our 2019 earnings guidance and our long term objectives of 5% to 7% earnings and dividend growth.
This concludes our prepared remarks, operator, we'll now take questions.
Thank you I would like to ask a question. Please signal by pressing star one on your telephone keypad.
We are using a speaker phone. Please make sure your mute function is turned off to like your signal to reach our equipment.
Again that is star one to ask a question. Our first question will come from Julien Dumoulin Smith with Bank of America.
Good morning. This is Alex Morgan, calling in for Julian. Thanks, So much for taking my call.
Good morning, Alex.
Good morning, and congratulations on the results from being able to.
Maintain their year end guidance, maybe on the upper end of the range.
I had a few quick questions and the first one I was wondering if you could provide any more regulatory environment color, specifically around new Mexico in Colorado.
In New Mexico, I know that PNM for example is.
Potentially struggling around weather securitization will apply to its future plans I was wondering if.
You know if we should interpret that if the commission looking at different rate cases.
With with a fine tooth comb on and then in Colorado as well I wish I was just hoping for a little more color there. Thank you.
Color in Colorado around securitization.
Yes, just in terms of the regulatory environment.
The pending rate cases.
Both.
Well, let's start with Colorado, I mean I think.
We continue to think we have a constructive environment, we're very much aligned with the policymakers ins in the state.
If you look at what we're filing in that rate case.
It's really capital oriented and as Bob mentioned most of the capital that we're talking about has already been approved.
So I think I think it continues to be very constructive and it helps when you're you're keeping your bills total bill's very flat in fact and in Colorado, the less today than they were.
Four or five years ago. So I think we're in very good position in Colorado moving to the Mexico, you know first of all that.
He asked with the overall growth in both Texas and New Mexico is just really starting in and it's creating a lot of opportunities for us and as I mentioned really pleased with some of the the bills that were passed in Texas that support a better regulatory environment. We are aligned in new Mexico up now securitization for us in new Mexico is not a very big deal. So I can't give you much more color on that but I do like the I actually think the.
The new administration and some of the changes in the commission are very positive for new Mexico and positive for Sps overall.
One of the thing to point out Alex.
Alex we did reach a a very constructive settlement with the New Mexico Commission, which allowed for an hour. We have just over 9.5 and an equity ratio of 54%.
Earlier in the first quarter and that was I think a good set of data points for the commission.
Thank you so much that's very helpful.
One quick question on.
The updates around PPS rolling off is there a date by which these need to be announced to take advantage of tax benefits or is this something that we'll we'll see just rolling into the 2020 is whether or not the PTC can be triggered.
If there is any wind PPS rolling off that you might take in house.
You know Alex I don't think Theres any deadlines on any of the PPA buyout strategies that we've we've discussed and while some of them may be triggered by repowering of various wind farms I wouldn't say that's the only.
Only trigger for an opportunity for us to to potentially buy in one of these assets that we already contract for the benefit of our customers.
Great. Thank you so much and last quick question on Mankato.
In terms of the timeline of the commission decision when when are you thinking about that.
Well I think the commission is scheduled.
Wolves will most likely take it up in September and probably in the middle of September . So we will have our answer then.
You too thank you.
And next we will hear from Travis Miller with Morningstar.
Hey, Travis good morning, good morning, Thank you.
Just on Texas, you made some comments about the positive regulatory environment developments, there, especially on the transmission side.
Would you anticipate potentially putting more capital.
To work in that state.
No.
Well I mean, it's it's growing pretty significantly and and there is a lot of capital that needs to be put into keep up with that growth.
And Travis World, It's Bob we're working through our long term financial planning process and capital planning process, and we expect to be back with guidance in the third quarter.
Okay. So if I recall correctly, it rolls off pretty quickly in Texas at least after the wind farms.
All right so that could possibly.
Come up in the 2021.
Yeah, I would say that the wind farms are certainly a large and discrete investment, but our run rate capital in Sps is positive driven by increased load and increased customer growth there.
Got it okay. Thanks, and then.
Very high level, if we look back over the last 10 years you guys have been right at the forefront of this whole idea of.
Gas plus renewables offsetting coal are leading to coal retirements.
As you look forward and kind of the next 10 years once coal sundry comes out of the picture for you guys.
Are we in an environment where.
Its gas versus renewables, whether that solar or wind, but it is that the also does that the competition assuming very very.
Flatter or little growth.
On the demand side.
Well I think thank you Travis for that I mean first of all let's get to that 80% milestone, which is a big milestone by 2030, I mentioned, we will be completely out of coal in the mid west to still have some coal I after that on our system. So there will be more transitioning I think gas and renewables and the extension of newly make all the sense on how we continue on that path to 100% carbon free electricity by 2050, I don't think they really compete with each other they're gonna they'll support each other at that point.
Of course, we'll also be looking at how the role batteries can play on grid. The role batteries can play with storage I think it will be even more important to have demand response type programs.
And you know of course, we're very excited about ease and what that might mean to our system in the <unk> and and the interactions new interactions that can create with our customers.
Okay, and do you still see a role for gas in 100% type carbon free environment can how how would that how do you see that <unk> vision. Yeah. Very good question. I mean, you know by 2050, unless those plants are burning renewable gas, which is certainly a possibility.
You wouldn't one of them on the grid, but that is a number of decades away and you know I think it's incredibly important that you take early action.
And so I think gas is how we move away from coal how we maintain reliability, how we maintain affordability, we get to that 80% Mark and as I've said before we're going to need to work on those technologies to get that last bit of carbon off of our system. You know, there's a lot of different things it could be but for now we need to take early action and gas is the avenue to get us there.
No you've got it okay. Thanks, so much for all of us.
You got it.
And our next question will come from Paul Patterson with Glenrock Associates.
Hey, good morning.
So in Colorado, there's been some discussion about.
Wind contractors, who have.
Having basically not signing onto the two contracts that have been basically backing out of the.
Out of the.
Their deal with you guys because the price has been too low.
And I just wondering if you could elaborate a little bit on that and what you're seeing in terms of Ah.
Of having to re contract and that's sort of what were what you're sort of seeing in the economics out there.
Paul are you talking about wind or you're talking about solar.
I thought it was wind I I thought it was a renewable contracts.
Oh, well, we think we've had <unk>.
Well, what I'm familiar with an I. I asked David eaves to help out if I'm missing something but we have some solar contracts one of which was going to support our deal with the ever as steel.
No that particular vendor pulled out due to economics. They had a change of ownership. The good news is we've gone out with bids and have received very attractive replacement bid. So I think things remain on track in Colorado, both for the C. P plan as well as our unique deal to keep ever as a REIT right there in Colorado and expanding David did I Miss anything.
Okay.
Okay. So there okay. So so what I'm reading here about some when contractors backing out that does this to the articles inaccurate I guess is that correct.
You're going to have some bids that you know can't cut the mustard in the end and you just keep moving to the next bid are you step in and take it over yourself, but I don't see this as anything but business as usual okay.
You don't see any change at all except for what it sounds like is yeah, there might be some people dropping out but for the most part you haven't seen any change in the economics or anything significant in terms of Oh for renewable development and and the outlook for <unk>.
The p. or anything or is that a good way to summarize it.
That's absolutely right Paul Okay, Great and then also just picking up on the storage a discussion that you mentioned.
I know that you have 235 megawatts I believe you do under the CP. Yeah. This is wondering in general we're seeing a lot of discussion you know different developers talking about you know.
Combined renewables with with a battery you know coming in quite cheap in different RF piece I'm. Just wondering since you guys are or is there a big on this stuff or what you're seeing you know and and how you see the economics of that developing you know through the this argument O cheaper than a peaker that kind of thing.
What are you guys seeing practically on the ground and what's your outlook there.
Yeah. So great question and we are seeing some very attractive bids and you mentioned that 275 megawatt battery project, that's associated with a solar asset and its associated with a solar asset Paul because you want because that allows for the 30% ITC to be recognized.
And I did put it on parity with Peakers I think batteries will continue to fall in price just like I think renewables will continue to fall in price and over time overcome the well the roll off of the tax benefits.
And yes storage can be the new peakers, but only to a certain degree of penetration and saturation I mean, because as you know we need to plan for much more than a four hour or even an eight hour event. So I think the initial tranche is a batteries are very valuable and you are planning bases, you give them equal weight as you would with a traditional C. T peaker, but the more penetration you haven't batteries. The more you shave off that very peak load you start you start to.
Lose some of the planning value of batteries and not to get too technical on you, but we're aware of that of course batteries will have other roles on the grid, including you know UBS supporting the grid reliability and we're looking at those alternatives.
And all of that will be baked into our plans as we move forward, but you cannot we place all peaking needs with batteries, that's that's very clear.
Okay, you know Paul I'd agree I'd add on Ben's comments is we did do abroad solicitation for the Colorado Energy plan, we publish the results of that solicitation.
Okay, great. Thanks, so much good.
Thank you.
And with no further questions in the queue I'd like to turn the call back over to Bob Frenzel for any additional or closing remarks.
Thanks for participating in our second quarter earnings call. This morning, we look forward to seeing people on the road in the third quarter, we have quite a few conferences and road shows that we highlight in our investor materials.
Lastly in before we depart I'd like to introduce our new director of Investor Relations Emilie a hostage.
She joins us from our internal corporate strategy group should we working with Paul and daring going forward Sophie Please feel free to reach out to anybody Investor Relations. If you have any questions or calls.
Thank you. Thank you.
Once again that does conclude our call for today. Thank you for your participation.
You may now disconnect.