Xcel Energy Inc. (XEL) Earnings Call Transcript & Summary

Welcome to the 2020 Annual Meeting for Xcel Energy Inc. [Operator Instructions] I would now like to turn the call over to Xcel Energy's Chairman and CEO, Ben Folk. Ben, you may begin.

Thank you, and good morning, and welcome to the Xcel Energy 2020 Annual Shareholders meeting. I would have loved to see you all in person today in La Crosse, Wisconsin. But for the safety of everyone involved, we determined it was in the best interest to hold this meeting virtually. This will be our agenda today. First, Wendy Mahling, our Corporate Secretary, will lead the business meeting. Following that, I will share brief comments about our 2019 financial results and our response to the coronavirus outbreak. After my prepared remarks, I will answer the pre-submitted shareholder questions we've received. I expect the entire meeting will last no more than half an hour and conclude by 9:30 Central this morning. In addition to my leadership team, members of our Board of Directors are also attending virtually today. I want to thank our Board members for their engagement. We've been holding virtual meetings every 2 weeks throughout the coronavirus outbreak, and I appreciate their counsel. I'd also like to welcome 2 new Board members who joined us this year, Netha Johnson & George Kehl. And finally, I want to thank Richard Davis, who's rolling off our Board following this meeting. Richard has been a key Board member since 2006, serving as our Lead Independent Director for much of that time. Richard, thanks for your service and dedication to this organization. Now Wendy Mahling will lead us through the business meeting.

Thank you, Ben. Good morning, everyone. Let me start with a few procedural matters. As noted in the proxy statement, the record date for voting at this meeting was the close of business on March 25 of 2020. As of that date, there were 525,029,432 shares of common stock outstanding. Each share has 1 vote. More than 86% of the shares of our common stock are present by proxy at this meeting, so we do have a quorum. If you've already voted your proxy, your votes will be cast as you've instructed. Dan Costello from Broadridge Financial Solutions is our Inspector of Election. There are 4 proposals that will be voted on today, the details of which were provided in the proxy statement. Proposal #1 is the election of 14 directors to 1-year terms. The names of the nominees are listed in the proxy statement and on the screen. Proposal #2 seeks approval on an advisory basis of our executive compensation. Proposal #3 seeks the ratification of the appointment of Deloitte & Touche LLP as Xcel Energy's independent registered public accounting firm for 2020. Proposal #4, a shareholder proposal seeks approval for the company to create a report on the costs and benefits of its voluntary climate-related activities that exceed government regulatory requirements. This proposal, along with the company's response, was fully disclosed in the proxy statement. Steve Milloy, the shareholder who submitted the proposal has joined us by phone today and will have up to 3 minutes to explain his proposal and the rationale behind it. Welcome, Mr. Milloy. Operator, please open the line for Mr. Milloy to present his proposal.

Good morning. My name is Steve Milloy. Can you hear me, yes?

Yes, we can.

My name is Steve Milloy. Excel management is lying to its shareholders and the public. And this lying is going to cost everyone a lot of money unless it's stopped. First, management says that my report is not needed because it already does it. That is a lie. Denying management's request to exclude my proposal from this meeting, the government lawyers at the U.S. Securities and Exchange Commission, told Xcel, that it does not already do what I requested. Why did I filed my proposal? Management has been lying to shareholders in the public about climate change. What's the lie? The lie is that management is addressing climate change by switching out of fossil fuels and into pointlessly expensive wind and solar junk. The truth is that Xcel could stop admitting carbon dioxide today and forever, and it would make no difference to the climate. In fact, the entire United States could stop emitting carbon dioxide today and forever, and it would make no difference to climate. The math is simple. Claims and implications on the contrary are just lies. The climate doesn't care that Xcel is shutting its handful of coal plants. The rest of the world is building or planning to build 500-gigawatts worth of coal power, equivalent to about 230 Sherburne County coal plants, the largest coal plant in Minnesota, which is operated by Xcel. So management is not addressing climate change. It's lying so they can raise rates. There was a time when utilities like Xcel sought to make more money by selling more electricity. That was honest business. Now utilities like Xcel just want to sell expensive electricity and pointlessly more expensive electricity at that using climate as the excuse. The Center of the American Experiment estimates that Xcel's climate plan to be 50% renewable by 2034, could cost $46 billion through 2050. That works out to about $1,200 for every Xcel customer every year through 2050. That's a lot of money. If you're an Xcel shareholder and an Xcel customer, you'd have to own almost 700 shares of Xcel stock at current prices to have the dividend breakeven with the coming rate increases. And if Xcel plans to be 75% or 100% renewable this cost will skyrocket. This is bad business. It's dishonest business. Xcel management didn't even try to engage with me on this proposal. Management knows I'm right, but doesn't care. Management is arrogant. Management knows its Wall Street buddies and institutional investor cronies again on the climate scan will support management against my proposal. They plan to laugh all the way to the bank, it's shareholder, rate payer and taxpayer expense. But just remember Milloy's law, green equals fraud. If you voted from my proposal, asking for simple honestly for management. Thank you. If you voted against my proposal, it's not too late to change your vote. Thank you for listening.

Thank you. I now declare the polls closed. Official results, which include the ballots cast at this meeting will be disclosed in an 8-K filing and posted on Xcel Energy's website. Meanwhile, the inspector of election has provided us preliminary results showing that all director nominees were elected and all management proposals were approved. The shareholder proposal did not pass. The formal business portion of the meeting is now officially adjourned. Let me also remind you that we may make some forward-looking statements during this meeting. You should refer to our SEC filings for the risk factors related to our business. We may also refer to non-GAAP measures during the presentation. The nearest GAAP measure and reconciliation to the non-GAAP measure can be found in our 2019 year-end earnings release located on the Investor Relations page of our website. Ben will now discuss the company's 2019 performance and our response to the coronavirus pandemic. Following his remarks, Ben will answer questions that have been submitted through the virtual meeting site. If we are not able to answer all questions, we will provide a response on our Investor Relations page as noted in our proxy statement. We expect to adjourn this meeting no later than 9:30 Central Time. Thank you for attending our business meeting. And now I will turn it back to Ben.

Thanks, Wendy. I want to briefly discuss our 2019 accomplishments. Once again, we enjoyed a very strong financial year. We delivered earnings of $2.64 per share, which is at the top end of our original guidance range. This is the 15th consecutive year that we have met or exceeded earnings guidance. We've increased our dividend 6.6% or $0.10 annually in 2019. And this was our 16th consecutive year of raising your dividend. Our total shareholder return exceeded 32%. Once again, we outpaced our peer group on all measures: 1-, 3-, 5- and 10-year returns. Another financial measure is our stock price, which achieved an all-time high in September at $65.82 per share. We subsequently surpassed $71 per share earlier in 2020 before the coronavirus outbreak. Investors appreciate the value and consistency of our financial performance and of our story, leading the clean energy transition, while enhancing reliability and ensuring affordability. I'm proud to say that carbon emissions from electricity used to serve our customers are down 44% from 2005 levels, and that's a 10% improvement over 2018. We completed 3 wind farms in 2019 and advanced several others as we continue to make strong progress towards our goal of reducing carbon emissions by 80% by 2030 and producing carbon-free electricity by 2050. Overall, it was a very strong year financially and operationally for Xcel Energy. Turning to 2020. We are faced with operating under the challenging times caused by the coronavirus pandemic. That said, for more than a century, Xcel Energy has served our customers through all kinds of storms. Be it blizzards, floods, tornadoes or ice storms, we have and will always be there for our customers. The coronavirus pandemic will be no different. So despite the pandemic, we continue to execute on our capital plans and deliver our products, which are essential for a modern society. I'm proud of the work we're doing to keep electricity and natural gas flowing for all parts of our economy that are also essential for our communities in this difficult times. And that includes hospitals, grocery stores, fire stations, companies that are producing mask and ventilators and many, many others. We know that reliability has never been more important. The safety of our employees and customers is a top priority at Xcel Energy. Because many of our employees provided -- provide rather mission-critical services for our customers and our communities. We've taken many extra steps to keep our employees and contractors safe during the pandemic, including providing additional personal protective equipment, following social distancing guidelines, enhancing cleaning practices, conducting temperature checks at critical facilities, segregating crews and staggering work times. All employees who can work remotely have done so, which helps protect those employees conducting mission-critical work. And we never lose sight of the important role we play in the community. We continue to give back to communities we are privileged to serve through the donations of more than 300,000 masks and tripling the impact of employee gifts to nonprofits through our foundation. We also announced that more than $20 million of the proceeds from the recent sale of the Mankato Energy center a natural gas facility in Southern Minnesota will be used to expand corporate giving, including COVID-19 relief funding. Of course, we are not immune to the economic shutdown caused by the coronavirus. But we are positioned better than those companies with a strong balance sheet and excellent liquidity. On our May 7 earnings call, we described a sales scenario, we believe is the most likely to occur, which assumes a severe downturn will last through the second quarter with a slower recovery thereafter. We expect retail sales to decline approximately 4% for the year under this scenario, which is the one we've used for our earnings forecast. To offset lower sales revenue and other COVID-19 costs, we plan to lower O&M expenses between 4% to 5% this year. We are confident we can do so, which is why we reaffirm that we expect to deliver 2020 ongoing earnings within our original guidance range of $2.73 to $2.83 per share-based upon this scenario. However, it is important to point out that there is considerable uncertainty around what will actually particularly the duration of the downturn and the lingering effects, which could have a material impact on our financial results. I want to close by reiterating that Xcel Energy is built to weather storms and we will weather the coronavirus outbreak as well. In fact, I believe will come out of this pandemic as a stronger company, more nimble and even better positioned for sustained success. Thanks for your virtual participation in the Annual Shareholders Meeting today, and thanks for your ongoing support. Now let's get to your questions.

Thanks, Ben. The first question this morning relates to how we choose board members, and the shareholder is wondering whether Xcel Energy Board members are required to be resident of Xcel Energy service territory. And if not, the shareholder thinks they should be?

Well, first, I want to thank the shareholder for the question. We look at a number of factors when we add Board members to the Board, diversity of experience, diversity of background, diversity and things like gender and race. These are all important factors, and we also do look at where the Board member resides. And I'm proud to say that 10 out of the 14 Board members serving on our Board, reside in the states that we serve. So I think we do a good job getting geographic representation as well.

The next question is about wind towers and solar panels. And the shareholder has read the annual report. And in looking at the pictures of a wind farm in the report is wondering if it would be a viable option to add solar panels on the towers and use the same infrastructure to transmit the energy generated.

Well, thanks for the question and always appreciate hearing new ideas and approaches. Of course, not every idea can work. And this is one that does fall into a category where it wouldn't be technically or economically feasible. And just let me explain a few things. I mean, you can imagine that the towers and the blades are built with very strict tolerances in mind. And if we added solar panels to those towers, it could degradate those towers and the integrity of those towers. And we'd have to add the solar panels in a way that would be angled properly to catch all the sunlight that they need to absorb. Our blades typically throw off ice particles in the winter, they would damage the solar panels. And it's important to recognize that scale really matters in our business. And so it would be difficult to scale that. So there's a lot of reasons that wouldn't make this technically or economically feasible. That said, I do appreciate the idea. I appreciate the support, and we'll keep looking at new ways to deliver clean energy.

Great. The next question is asking about the impact of coronavirus on the business and the shareholder asks, in light of COVID-19 and current decline in energy use, including electricity, they'd like to know what are your projections for returning to a more normal earnings stream? And in the meantime, what is the company doing to help preserve earnings and shareholder value?

Well, again, thank you for the question. And as I mentioned in my prepared remarks, I think we have put together a very realistic scenario of what COVID-19, the financial impact it will have on our business. We think there will be a severe downturn in sales through the second quarter than a kind of a U-shaped recovery through the balance of the year, all in. Again, we think overall sales will be down 4%. And we have plans in place to reduce our O&M by 4% to 5%, which will keep us in our earnings guidance range. I think it's important to note that every forecast can be wrong. The impact of the virus might be less than we are forecasting or, quite frankly, it could be worse. And we're prepared to do more, but we will make sure that we don't do anything in the short-term that hurts our long-term ability to deliver for our stakeholders, and that includes our shareholders, our communities, customers and, of course, our employees.

Thanks. So the next question is about executive compensation and the shareholder is asking who sets the compensation objectives for executives, and would like to know a little bit more about the process for determining goals and the payment of compensation?

Well, again, I appreciate the question. And the shareholder, I think, should take comfort in the fact that our Board sets executive compensation and works with an independent comp consultant to do so. The goals are set to be very much aligned with what's important to our stakeholders. So if you look at what we're rewarded on, we're rewarded on reliability and safety, customer satisfaction. Longer term, we're rewarded on how well we perform against our peers in terms of total shareholder return. And the good news there is we've really outperformed our peer group significantly. We're also rewarded for our ability to reduce carbon emissions. And I'm quite proud of what we've done while keeping our product affordable and reliable. And that's measured against our peers, and we've outperformed our peers in those measures. And I'm proud of the fact, too, that if you look at what we promised our stakeholders. And if you go back in time and look at what we've actually delivered. We've delivered on that promise and then many times exceeded the goals that were set for us, which is why there are times where we are paying out more than the 100% target, it's because we're producing at the top of our range. So it's a good question, and I hope I gave you some comfort with my answer.

Thanks, Ben. The next question is about our energy supply mix and decisions related to that. And the shareholder states in Jacksonville, Florida, our local city owned electric utility tore down their coal facility. Since gas is cheaper at the present time, the plant should have been mothballed for backup. And as a negotiating tool in the event the gas supplier chose to raise prices and basically asked does Xcel have similar plans of -- basically states does that want Xcel to have such and hopes Xcel does not have any such bad policies?

Well, I will tell you -- well, thank you for the question. First of all, there's a big geographic difference between Jacksonville, Florida and the upper Midwest down to Texas and that we have some of the best renewable resources right in our backyard, particularly wind. And wind today, we can build wind farms at a price that is less -- even after we recover our cost of that wind, is less than the variable cost of running fossil plants. And I can show you that on a spreadsheet. So we're able to lock in wind prices today that are lower than natural gas prices, lower than we could hedge natural gas prices on a 10-, 20-year type strip. That means that we're lowering our carbon emissions and saving our customers' money at the same time. And that's despite low natural gas prices that we're seeing today. So we call that program steel for fuel, and it's been a really popular program with customers, communities, regulators and shareholders alike, it's working. And it is the hedge that the shareholder mentioned against natural gas. Now that said, we also recognize that the sun doesn't always shine and the wind doesn't always blow. And we have a good idea of how often that will happen in the course of 365 days in a year. And that's why I'm comfortable again that these prices do offset the variable cost of fossil fuels. That said, I also recognize that we need to have backup generation so that we can ensure a reliable grid for our customers, and we have that.

And the next question is about Board tenure, Ben. And the shareholder has asked how we can justify the tenure of some of our longer-term board members?

Well, first of all, I think we've got a great Board with a lot of different experiences and diversity. And again, as I mentioned, they give me great counsel. And I think our guidelines are very strong. We limit directors serving no more than 15 years and require retirement at age 72. Now that said, certain board members have been grandfathered regarding the 10-year limits, and that dates back to the merger of Xcel Energy in the year 2000. We evaluate nominees each year. As I mentioned, we strive for a good mix of directors who bring significant experience and company knowledge. We are refreshing our Board. They are retiring. People are coming off the board for tenure. I just -- I mentioned that we added 2 new directors and that trend will continue. And of course, we do have annual elections of directors, which allows shareholders to vote their concerns. And our governance around how we elect our Board of Directors is very well received.

Great. The next question is about also related to the coronavirus pandemic and wondering about its impacts to employees potentially. And the shareholder asked, what actions are you taking to offset the impacts of COVID-19? And also, specifically thinking about what employee impacts might be?

Well, I think that's a really good question. I'm happy to answer it. I mean, again, I think we can stay in the earnings guidance range, and we can take actions that don't hurt us in the long term. And that's under the sales scenario, I mentioned, with a 4% decline, that would be reducing our O&M expenses by 4% to 5%. And I've been pretty, I think, straightforward to external stakeholders and importantly, internal stakeholders, our employees on how we want to do that. And Wendy, I think the first thing we need to do is focus on continue -- our continuous improvement efforts, which have really been successful over the last few years, figuring out new ways to do our processes more efficiently and save money. We've shown we can do that. I've asked the employees to really double down on those efforts because that will make us a stronger company, not only in 2020, but in '21 and beyond. So that's the first priority. I have been quite clear that there are some things we can do in terms of maintenance, et cetera, when you -- when that we have some room that we can do some things for the short run that won't hurt the long run. And then, of course, back to the question on compensation, we do have elements of our pay, particularly at the more senior levels of management that are variable. And variable incentives that we can -- that certainly won't pay out if we're not meeting our financial performance criteria. The thing I don't want to do and the thing I won't do to stay within an earnings guidance range is lay off people. So I've been pretty clear about that. We've also been pretty clear that we won't take things -- we won't do things that get us through the short run, but at the expense of our long-term goals because I am confident that we will come out of this pandemic a stronger company, a more nimble company, a more cost-efficient company. And we'll stay on track to deliver what we want to deliver for our shareholders, growing the company 5% to 7% earnings, growing the dividend at the same rate, leading the clean energy transition, enhancing the customer experience, all the while keeping our bills low and reliable. That's the plan. So great question.

And there is -- the next question relates to our auditors. And it's from the Carpenter Union Pension Funds. And they are, number one, they commend our actions to prioritize employee and customer safety and our generosity in the local nonprofits, providing COVID-19 relief efforts. But they're asking about audit from independents and noting the critical importance to protecting the integrity of the financial reporting system, and would like to know more about the periodic lead partner rotation process undertaken to protect auditor independence and indicate the decision-making authority within the process.

Well, thanks for the question. First of all, I appreciate your support. I mean, we recognize that we've been serving our communities for over 100 years, and we literally -- our success is dependent upon our community. So we're happy to step up during this challenging time and help. And of course, safety has always been the top priority at Xcel Energy. And this is another hazard that we have to overcome, and we are. In terms of the actual question, well, we comply with Sarbanes Oxley requirements, and that does require rotating your lead audit partner every 5 years. We do that. It's a very carefully monitored process. Of course, our auditors report to the Board, and they report on their independence every year as well. We also very closely monitor any fees that we might be paying Deloitte outside of the audit fees, consulting fees, et cetera. Again, this is consistent with Sarbanes Oxley, and we very much meet all those guidelines. So the shareholder can rest assure that our auditors are independent, and we're following the Sarbanes Oxley guidelines.

The next question relates to ownership and asks about the dramatic growth in the size of passive mutual funds, corporate ownership interest in the U.S. corporation and the policy and governance issues rates. They note that BlackRock, Vanguard and State Street have combined 24% of our outstanding shares. And so their question is, does the Board see this growing ownership concentration as a positive or negative development with respect to long-term corporate planning and performance? And are there potential conflicts of interest when you have a 5% holder also managing company's retirement plan assets?

Well, I don't think there's a conflict of interest because they do a very good job of walling that off. But to the -- I mean, this is just a trend. I mean, people invest in index funds and index funds do what they do. So I don't think this trend is going to go away. We certainly appreciate our independent retail investors. But the fact is there's not as many of them that hold our shares as they used to. Now people are holding shares through index funds and other things. And I think that is a trend that is probably here to stay. We engage with those index funds. You know Wendy because you do it. They have -- they're very active in terms of governance and interest in what we're doing in things like ESG, et cetera. So they're engaged shareholders too and we appreciate all shareholders. So thank you.

I think that kind of brings us to our time today. There were some additional questions. And as I noted, we'll be posting responses to those on our Investor Relations web page.

Okay. Well, great. Well, again, I wish we could have been in La Crosse and meet with you in person. We always enjoy going to the cities that we serve and meeting the communities, the employees, the nonprofits. But we couldn't do that this time for everybody's safety. Hopefully, next year, we will be. So stay safe, and thank you for attending our meeting today and take care. Thank you.

This now concludes the meeting. Thank you for joining, and have a pleasant day.