Xcel Energy Q3 2021 Earnings Call Transcript

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Provided by Quartr
October 27, 2021

Key Takeaways

  • Q3 earnings and 2022 guidance: Xcel Energy reported $1.13 EPS in Q3 and narrowed its 2021 guidance to $2.94–$2.98, while initiating 2022 guidance of $3.10–$3.20 per share.
  • Robust 5-year $26 billion capital plan: The updated base investment plan targets 6.5% rate base growth over five years and includes potential $1.5–$2.5 billion incremental renewables and transmission additions from upcoming IRPs.
  • Colorado regulatory settlement: The company reached a comprehensive agreement with Colorado regulators to recover Winter Storm Yuri costs over 24–30 months and resolve multiple proceedings, reducing regulatory uncertainty.
  • Clean energy transition: Proposed resource plans in Minnesota and Colorado aim to add nearly 10,000 MW of renewables for an 85% carbon reduction by 2030 while keeping customer bills in line with inflation, with decisions expected in Q1 2022.
  • Potential federal tax incentives: Xcel Energy is optimistic that proposed extensions to investment and production tax credits, plus direct pay options, will lower resource plan costs, improve cash flow, and reduce equity financing needs.
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Earnings Conference Call
Xcel Energy Q3 2021
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Operator

Good day, and welcome to Xcel Energy's third quarter 2021 earnings conference call. Today's conference is being recorded. 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. At this time, I would like to turn the conference over to Paul Johnson, Vice President, Treasurer, and Investor Relations. Please go ahead, sir.

Paul Johnson
Paul Johnson
VP Treasury and Investor Relation at Xcel Energy

Good morning, and welcome to Xcel Energy's 2021 third quarter earnings conference call. Joining me today are Bob Frenzel, President and Chief Executive Officer, Brian Van Abel, Executive Vice President and Chief Financial Officer, Amanda Rome, Executive Vice President and General Counsel, and a few others. This morning, we will review our 2021 results, share recent business and regulatory developments, update our capital and financing plan, and provide 2022 guidance. Slides that accompany today's call are available on our website. As a reminder, some of the comments during today's call may contain forward-looking information. Significant factors that could cause results to differ from those anticipated are described in our earnings release and our SEC filings. Today, we'll discuss certain metrics that are non-GAAP measures, including ongoing earnings and electric and natural gas margins.

Paul Johnson
Paul Johnson
VP Treasury and Investor Relation at Xcel Energy

Information on the comparable GAAP measures and reconciliations are included in our earnings release. With that, I'll turn over to Bob.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

Thank you, Paul, and good morning, everybody. Today, we reported solid third quarter earnings of $1.13 per share compared with $1.14 per share last year. Given our strong year-to-date results, we're narrowing our 2021 guidance to $2.94-$2.98 per share. We're also initiating 2022 guidance of $3.10-$3.20 per share, which reflects our 5%-7% long-term EPS growth objective. Consistent with our past tradition, we've updated our base investment plan, reflecting $26 billion of capital expenditures over the next 5 years, which provides significant benefits to our customers and supports community vitality. This investment plan delivers rate base growth of 6.5% off of a projected 2021 year-end rate base.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

This plan is robust, but there are certain investment opportunities that are not included in our base plan, including potential renewable generation assets authorized in our Minnesota or Colorado resource plan proceedings and additional transmission capital that's needed to integrate new renewable generation additions in Colorado beyond the base Colorado's Power Pathway proposal. The base plan also does not include any capital for green hydrogen production for our LDC or generation needs, which we believe could be material over the balance of the decade. We have our hydrogen pilot at the Prairie Island Nuclear Plant, and we're exploring 5-8 additional greenfield and brownfield projects.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

With favorable state backdrops in Minnesota and in Colorado, which have passed clean fuel legislation, as well as a potential for a federal hydrogen production tax credit, we believe that our favorable renewable generation conditions will help us push beyond pilots and into green hydrogen production resources that can be valuable to a clean energy future. We're very excited about our investment plan, which supports continued execution of our long-term strategy and clean energy leadership. It provides for sustainability of our local communities, enhances reliability and resiliency, advances our fleet transition, keeps customer bills low, and delivers attractive returns for our investors. We're well-positioned for sustainable organic growth over the next decade, including renewable additions in our proposed Minnesota and Colorado resource plans and the transmission needed to enable those carbon-free resources.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

Together, our resource plans are going to add nearly 10,000 MW of renewables to our system and achieve an 85% carbon reduction by 2030 while keeping customer bills at or below the rate of inflation. We expect decisions on both the Minnesota and the Colorado resource plans in the first quarter of next year. The clean energy transition is also going to need substantial transmission investment. We continue to make good progress on the Colorado's Power Pathway transmission project, which is essential for us to deliver on our Colorado Energy Resource Plan. It will enable over 5,500 MW of new renewables in the state, and it's vital as we explore further Western market integration over time. To date, comments from most parties have been generally supportive, and we expect a commission decision in the first quarter of 2022.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

In the Midwest, MISO has experienced some minor delays, but we still expect MTEP 2021 to be announced in the first half of next year. We also had a strong operational quarter. Our industry-leading nuclear fleet set another record with 2 units having run over 700 consecutive days prior to their refueling outages. Another highlight this quarter was the dedication of the 300 MW Bighorn Solar facility at the EVRAZ steel mill in Pueblo, Colorado. In partnership with Lightsource bp and state and local leaders, we've enabled the largest on-site solar array in the country serving a single customer. This was a really creative solution between multiple parties to ensure the continued operation and expansion of the steel mill and its 1,100 employees. It reduces carbon emissions and creates valuable property tax base that helps sustain the local economy.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

We also continue to partner with our states and OEMs to electrify the transportation sector. This quarter, we implemented new programs for our Colorado customers that will help us to achieve our goal of enabling 1.5 million electric vehicles across our states by 2030. We appreciate the collaboration of so many stakeholders as we collectively work to reduce carbon emissions and enable sustainable communities. We remain well-positioned with a sound strategy, a robust five-year capital plan, and sustainable long-term growth trajectory that provides attractive returns to our investors while keeping bills low for our customers. These plans are not dependent on changes in federal policy.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

However, it's our understanding the Biden administration has reached an agreement on a framework for the reconciliation package, which would include extensions for investment tax credits and production tax credits, a solar and a hydrogen production tax credit, a storage and a transmission investment tax credit, and direct pay options for all tax credits. This proposed plan creates significant customer benefits by lowering the cost of our proposed resource plans and potentially accelerating our clean energy transition. Our Steel for Fuel program has demonstrated our geographic advantages in renewables. Proposed tax credit extensions for ITCs and PTCs, including a solar production tax credit, would make future projects even more competitive, providing additional benefit to our customers. Additionally, a direct pay option would provide greater financial flexibility, increased corporate cash flow and credit metrics, which would reduce our financing needs.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

A PTC for green hydrogen would also bring significant value in technology advancement and costs. It could help accelerate the timeframe in which we could begin incorporating hydrogen into power generation and into our natural gas distribution operations at a cost that's more economic for our customers. While discussions continue at the federal level on the final bill, we are optimistic that this plan will be passed and will have significant benefits for our customers. With that, I'll turn it over to Brian.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Thanks, Bob, and good morning, everyone. We had a solid third quarter, recording $1.13 per share compared with $1.14 per share last year. On a year-to-date basis, our earnings are $0.13 per share ahead of last year. The most significant earnings drivers for the quarter include the following. Higher electric and natural gas margins increased earnings by $0.04 per share, primarily driven by riders and regulatory outcomes to recover our capital investments. Lower O&M expenses increased earnings by $0.02 per share. In addition, a lower effective tax rate increased earnings by $0.01 per share. As a reminder, production tax credits lower the ETR. However, PTCs are flowed back to customers through lower electric margin and are largely earnings neutral.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Offsetting these positive drivers were increased depreciation expense, which reduced earnings by $0.03 per share, reflecting our capital investment program. Lower AFUDC decreased earnings by $0.02 per share, largely due to placing several large wind farms into service last year. Other items combined to reduce earnings by $0.03 per share. Turning to sales, weather-adjusted electric sales increased by 2.4% in the third quarter, while our year-to-date electric sales increased 1.9%. Given our year-to-date results and the continued economic rebound in our states, we're updating our full-year weather-adjusted electric sales growth to approximately 1.5%-2%. Shifting to expenses, O&M expenses declined 1.9% for the quarter and increased 2.6% on a year-to-date basis.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Quarterly O&M expense comparisons are noisy with the COVID impacts from last year, but overall, we expect our O&M expenses to increase approximately 1% for the year. Turning to regulatory, we reached a comprehensive settlement in Colorado and are making strong progress on potential Texas rate case settlement. As a reminder, last quarter, we reached constructive settlements in our Wisconsin, New Mexico, and North Dakota rate cases. In October, we reached a comprehensive settlement with the Colorado staff and the Colorado Energy Office that proposes to resolve several regulatory proceedings. Key terms include, we will fully recover all Winter Storm Uri deferred fuel costs over 24 months for electric and over 30 months for the natural gas LDC customers with no carrying charges through a rider. Please note the Uri storm cost estimate for Colorado was revised to $550 million.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

We'll refund to electric customers approximately $41 million of previously deferred revenue associated with the 2020 decoupling program. We'll forego recovery of approximately $14 million of replacement power costs incurred due to an extended Comanche III outage during 2020, and we will not seek recovery of approximately $11 million of deferred COVID-19 bad debt expense. We are pleased that we were able to reach this comprehensive settlement, which represents compromises from all the parties and takes steps to mitigate the customer impact of the Uri cost recovery. We expect a commission decision in the first half of 2022. In terms of pending rate cases, we are making progress in settlement discussions in our Texas case. As a result, the hearing schedule has been abated, and we are hopeful that we'll ultimately be able to reach a settlement agreement.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

We expect a decision on our Colorado electric case in March of next year, with new rates effective in April. As a reminder, we're seeking a net rate increase of approximately $343 million based on an ROE of 10%, an equity ratio of 55.6% in the 2022 forecast test year. The case is largely driven by capital investment. In October, we filed a Minnesota electric rate case seeking a net increase of $677 million over three years. The filing is based on a requested ROE of 10.2%, an equity ratio of 52.5% in forecast test years.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

We requested interim rates of $288 million to be implemented in January 2022. Finally, we plan to file a Minnesota gas rate case in early November, with interim rates going into effect in January 2022. We also plan to file a stay out option as we look to help mitigate bill impacts of Uri cost recovery for our customers. As Bob mentioned, we have issued a robust $26 billion five-year capital forecast, which is detailed in our earnings release. Our base capital plan results in rate base growth of approximately 6.5% using 2021 as a base. The base forecast reflects significant grid investment, our Colorado's Power Pathway proposal and other transmission system investments to maintain asset health and reliability and enable renewable generation. The plan reflects a modest level of renewables, including our proposed Sherco Solar facility.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

It also includes 2 natural gas peaking plants to ensure reliability as we retire coal plants, along with investments to improve the customer experience. Beyond our base capital forecast, we anticipate potential incremental capital investment for renewables associated with the Minnesota and Colorado resource plans. Our proposed resource plans include approximately 2,000 MW of renewable additions from 2024 to 2026, which would result in incremental capital investment of $1.0 billion-$1.5 billion, assuming 50% ownership. In addition, we anticipate the need for incremental $500 million-$1 billion of related transmission for the Colorado IRP. Combined, we could see a potential incremental investment to support the clean energy transition of $1.5 billion-$2.5 billion in the latter part of this 5-year forecast.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

We've also updated our financing plan, which reflects a combination of internal cash generation and debt issuances to fund the majority of our capital expenditures. We expect to issue $800 million of equity and $450 million of DRIP and benefits equity over the next 5 years. The financing plan maintains our current credit metrics and strong balance sheet, which is important for maintaining a low cost of capital for our customers. We expect the equity would likely be issued through an ATM over the 5 years. We anticipate that any incremental capital would be financed with approximately 50% equity and 50% debt. This incremental equity will allow us to fund accretive capital investments, which will benefit our customers while maintaining our solid credit ratings and favorable access to the capital markets.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

However, our equity needs could be significantly reduced if the reconciliation package is passed with the current framework. Shifting to earnings, we are initiating our 2022 earnings guidance range of $3.10-$3.20 per share, which is consistent with our long-term EPS growth objective of 5%-7%. Key assumptions are detailed in our earnings release. In addition, we've updated the base of our growth rate to $2.96 per share, which represents the midpoint of our revised 2021 guidance range. This represents 6.5% growth in the base between 2020 and 2021. With that, I'll wrap up with a quick summary. We reached a comprehensive settlement in Colorado that resolves several regulatory proceedings. We are making progress towards the settlement of our Texas rate case.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

We narrowed our 2021 guidance range to $2.94-$2.98 per share. We announced a robust updated capital investment program that provides strong, transparent rate-based growth and customer value. We initiated 2022 earnings guidance consistent with our long-term growth objective. Finally, we remain confident we can deliver long-term earnings and dividend growth within the upper half of our 5%-7% objective range as we continue leading the clean energy transition and keeping bills low for our customers. This concludes our prepared remarks. Operator, we will now take questions.

Operator

Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll take our first question from Jeremy Tonet with J.P. Morgan. Please go ahead.

Jeremy Tonet
Jeremy Tonet
Executive Director and Senior Equity Research Analyst at J.P. Morgan

Hi. Good morning.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Hey, Jeremy. How are you? Morning, Jeremy.

Jeremy Tonet
Jeremy Tonet
Executive Director and Senior Equity Research Analyst at J.P. Morgan

Good, thanks. Just wanted to start off on the load side, if I could. What types of customers drove the C&I growth there, and how did residential perform relative to your expectations heading into the quarter? Just trying to see how you think these respective classes would be trending into 2022, you know, particularly with retained residential load.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Yeah. I think residential has been stickier than, you know, call it forecasted going into this year. You know, we expected to give back some of the, call it, the residential gains that we saw last year, but it's been sticky. If you look at a year-to-date basis, residential is up 1.8%. I think that's, that was one of the big drivers of our updated guidance for the year. A lot of that is in Colorado, if you look at where Colorado has been. We also see strong customer growth on the residential side across all of our service territories. Residential permits or building permits are significantly up. On the C&I side, I think we're really seeing good rebound across all C&I sectors in our opcos, but really the Permian Basin is coming back.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

You know, we focus a lot on what's happening with our oil and gas customers in SPS. You know, we look at some substations that directly serve those loads, and that load is up 25% even relative to pre-pandemic levels. We're hearing those customers are disciplined, but continue to drill, and also they're looking at electrification. They're feeling ESG pressure, and there's a big focus on electrifying drill rigs, pumps, compressors. Certainly good load growth for us. I think we're pleasantly surprised with the strength of our sales and confident that it will continue into next year.

Jeremy Tonet
Jeremy Tonet
Executive Director and Senior Equity Research Analyst at J.P. Morgan

Got it. Just on residential for next year, do you expect more kinda giveback or have we kinda hit a new normal of as far as kind of, you know, partial work from home, what have you?

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

You know, I think we expect a slow giveback. I think there'll be a amount of stickiness long term that will be there as you think about return to work. I'll give you our example. You know, we have a telecommuting policy for our employees when they come back to work, so they'll be able to work from home on a part-time basis. I think we'll see that stickiness for a long time. I do think it'll start to come down from last year and this year a little bit.

Jeremy Tonet
Jeremy Tonet
Executive Director and Senior Equity Research Analyst at J.P. Morgan

Got it. That's helpful. Certainly the northern Delaware there, New Mexico, really a lot of activity. Good to see it coming through for you there. Just wanted to pivot, I guess. You know, it's a bit early for MISO's MTEP process, but just wondering what your current thoughts are, what you might be able to say as far as the first wave of projects that could come out there. Could you frame your expectations of the timing of the release, the volume of the investments expected, potential start, completion of project announcement?

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

Hey, Jeremy, it's Bob. Agreed that the analysis and the output of MTEP 2021 has been probably slower than we expected. We do expect a series of MTEPs over the next a number of years that will continue to highlight the need for transmission expansion in the Upper Midwest. My expectations for 2021 are, you know, reasonable, maybe modest. I think we'll see more in 2022 and 2023. I think the timeline for construction is probably at the very tail of this five-year plan, but probably more in the back half of the decade for these projects. It's gonna take a while to get through. Once you file the proceeding, it's gonna take a while to get through permitting and things like that, and then actual construction.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

Probably outside of our five-year forecast, but really in the 5-10 years after that.

Jeremy Tonet
Jeremy Tonet
Executive Director and Senior Equity Research Analyst at J.P. Morgan

Got it. Just one last one, if I could. For the incremental CapEx, how do you expect line of sight to develop here as the IRP process continues? Could the opportunity be fully defined in 2022, or do you expect it to take more time?

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

Yeah. I expect 2022 for it to really shape up. You know, call it a year from now, we should have real good clarity. Q1 of next year, we expect the phase ones of those resource plans in both Minnesota and in Colorado to be approved by their commissions and, you know, with a substantial amount of renewable opportunity and growth in each of our jurisdictions, as I highlighted in my prepared remarks. We'll go through phase two processes through Q2 and Q3 of next year, and we expect to be back here next year having some pretty good clarity on the outcomes.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

For clarification, the phase two is the request for proposal to determine how much is PPA versus BOTs and ownership.

Jeremy Tonet
Jeremy Tonet
Executive Director and Senior Equity Research Analyst at J.P. Morgan

That's very helpful. That's it for me. Thanks.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

Thank you.

Operator

We'll take our next question from Insoo Kim with Goldman Sachs. Please go ahead.

Insoo Kim
Insoo Kim
Senior Research Analyst at Goldman Sachs

Thank you. My first question, and apologies if I missed it, is on the Minnesota side of things for Uri cost recovery process, where are we in that process? You know, similar to what you got on the Colorado side, do you think that there's a potential for a constructive settlement there?

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Yeah. Hey, Insoo, this is Brian. In terms of Uri in Minnesota, the commission has approved recovery of the cost over 27 months, subject to a prudence review. There is some disputed amounts. If you remember, the Department of Commerce disputed about $20 million of our costs, and the OAG disputed about $34 million of our costs. We'll work through that proceeding. We'd expect to see intervener testimony late December, and then a commission decision mid next year. You know, we feel like we've acted prudently, and followed commission-approved hedging policies, and we feel good about working through the process with the commission and expect to reach a constructive outcome.

Insoo Kim
Insoo Kim
Senior Research Analyst at Goldman Sachs

Got it. Second question, just a little bit longer term, maybe for Bob. You know, you're seeing a lot of other, you know, utilities in their generation transformation plan, you know, putting out timelines for coal retirement from, you know, the 2030s and even 2040 period to the late 2020s and whatnot. You know, I know in your Colorado and Minnesota jurisdictions, you have the IRPs that have been filed that are, you know, that call for acceleration and, you know, have robust plans in place. Just how much further acceleration opportunity do you think is possible given the current regulatory frameworks that are in place and, you know, maybe from a financial and reliability perspective as well?

Insoo Kim
Insoo Kim
Senior Research Analyst at Goldman Sachs

You know, what other help or items do you think are needed that could further support acceleration?

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

Yeah, that's a great question. Look, we've been a leader in coal plant transitions over the last decade, and we expect over the next decade to close the majority of the coal plants on our systems across the country. We'll be out of coal in the Upper Midwest by the end of this decade. We have plans and approved plans to close a coal plant almost every single year this decade, which, you know, we've done a great job of transitioning the communities and the employees as part of that program. Our philosophy has been long runways, Insoo, making sure that we take care of the communities, the property tax base. We get a chance to do economic development and bring businesses back to those communities that have supported us and those assets for decades.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

You know, with the proposal on the table for production tax credits that are part of the reconciliation bill, you know, I think you're gonna see with a 10-year window, we've got a long runway to manage this transition. I think for the company, we are going to potentially accelerate areas that might have been a bit behind as best we can. These resource plans are very much in the works. We expect to work through these resource plans, and we file about every three years. You know, come 2024, we'd have another bite at the apple to think about the remaining assets on our fleets in those transitions. I think at the core, though, we need to identify that next generation of generation.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

We were the first company to announce we'd be carbon free by 2050. I think what we need is another type of emissions-free generation. I think the infrastructure bill triples DOE funding for research and development. I think that's critical for the industry to progress past, you know, where we expect to be, which is about an 80%-85% carbon reduction by the end of the decade.

Insoo Kim
Insoo Kim
Senior Research Analyst at Goldman Sachs

That makes sense. Thank you so much.

Operator

We'll take our next question from Julien Dumoulin-Smith with Bank of America. Please go ahead.

Julien Dumoulin-Smith
Julien Dumoulin-Smith
Senior Research Analyst at Bank of America Merrill Lynch

Hey, good morning, team. Thanks for the time. Perhaps just to pick up-

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

Hey, Julian.

Julien Dumoulin-Smith
Julien Dumoulin-Smith
Senior Research Analyst at Bank of America Merrill Lynch

On the reconciliation. Hey, good morning. Maybe just pick up on the reconciliation point. I wanted to follow up on this. Just how are you thinking about the potential for expanding repowering here, depending on the various combinations on PTCs here? I mean, it seems like your overall position might be particularly enviable when it comes to leveraging an expanded PTC. Could you elaborate a little bit more specifically on some of the opportunities that could emerge there? I mean, I know we've been talking about repowering in various forms here for a bit.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

Yeah. Look, repowering is a great opportunity for us. We've been leaders in wind for 15 years, so we've got some assets that have moved past their PTC dates. We've got a lot of wind on our system already. We have four repowerings underway already that were approved as part of the R&R plan here in Minnesota. I think that this bill, again, which lacks a lot of definition and clarity, but would provide people who've owned wind for a long time to repower those assets. We haven't delved into the details on our side on our legacy assets and what this would open up for repowering. I think the opportunity could be pretty substantial.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Yeah. I think if you, Julian, this is Brian. If you heard me talk before, if you look at our PPA buyout strategy, particularly the ones we've been successful at have been on the wind side, where we bought them out and repowered them. I think a long-term extension of wind PTCs and even solar PTCs, new solar PTCs longer term, open up that PPA buyout opportunity or kinda just extend the runway for that longer term, right? Where obviously opportunity is second, and you got to make it work for the customers and show customer benefit and make it work from a financial perspective. I think that's a longer-term opportunity that this reconciliation package and a 10-year extension of credits brings.

Julien Dumoulin-Smith
Julien Dumoulin-Smith
Senior Research Analyst at Bank of America Merrill Lynch

Got it. Excellent. Then, I mean, at risk of staying on the subject of reconciliation here, can you elaborate? Is there anything else that you all are looking at particularly closely and scrutinizing in terms of potential angles for you all specifically here? I mean, I know we talked about transmission a little bit ago. Perhaps maybe elsewhere. What else are you seeing in that reconciliation bill that could really move the needle beyond obviously the PTC in front of us?

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

Look, I think the bill lacks a lot of clarity in our understanding. Even towards the goal line, we were putting in $100 billion or so of government infrastructure proposals that lack a lot of clarity from our side. I see real opportunity in hydrogen, as I mentioned in the prepared remarks, storage and transmission, with potential development. Obviously with the potential for a nuclear production tax credit, you're talking about significant opportunities on the customer bill side, as our plants run through the next decade, as we've applied for in the Minnesota resource plan. Opportunities are out there.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

We really honestly without a lot of clarity on the bills, you know, lack some definition, but that's the stuff we're gonna be working on through the course of the next couple of months, and then we'll have more clarity as we get more insight into the bill text.

Julien Dumoulin-Smith
Julien Dumoulin-Smith
Senior Research Analyst at Bank of America Merrill Lynch

Yeah. No, I appreciate your prepared remarks. It sounds like just to clarify that, on the nuclear front, it sounds like you could potentially tap into that, depending exactly on how it's framed here for your regulated asset.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

That's correct. Yeah.

Julien Dumoulin-Smith
Julien Dumoulin-Smith
Senior Research Analyst at Bank of America Merrill Lynch

Excellent. Good to hear. All right. Well, I'll pass it on. Thank you guys very much.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

Thanks, Julien.

Operator

We'll take our next question from Steve Fleishman with Wolfe Research. Please go ahead.

Steve Fleishman
Steve Fleishman
Managing Director and Senior Analyst at Wolfe Research

Hey, good morning. I think, Brian, you said in your remarks that your equity needs could be lower if reconciliation passes. Could you explain that more?

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Yeah. Absolutely, Steve. I said, you know, significantly be reduced if the current framework passes. Now, still a little light on details in terms of what gets passed. You see, you know, we have $1.2 billion of equity in our plan, and you could see that cut significantly down, right? The direct pay opportunity reduces, call it, the tax inefficiency, and provides, probably, you know, call it 75-100 basis points of improved cash flow. We look at that and what we can do from a financing perspective. It gives us a lot of opportunity to reduce those equity needs. We're pretty excited about the overall plan. Really good for customers when we look at that long-term tax credit extension and what that can do for our customers.

Steve Fleishman
Steve Fleishman
Managing Director and Senior Analyst at Wolfe Research

Okay. Then I know this is also—sorry, same topic. I know this is early, but the, you know, it looks like they've added a, you know, the provision of a minimum corporate tax of 15% on larger companies like yours. I think renewables credits are excluded from that, which is good. I don't know if there might be other issues related to that for you. Could you talk a little bit about how to think about that provision? You know, I think bonus went away with the Trump changes, but just thoughts on that issue and whether that could be a pressure.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Yeah. You know, it's a new regime, and we spent yesterday looking through the legislative text and assessing that, and we think it's, for us, very manageable, in terms of really it's the way it's qualified as a book alternative minimum tax, so different than the old AMT that existed. Overall, we feel comfortable with how it would work, and we can manage through it. When we look at the overall package, we view it as very positive for us. But again, like I said, it's a new regime and details will continue to come out, but that's our initial read on it.

Steve Fleishman
Steve Fleishman
Managing Director and Senior Analyst at Wolfe Research

Great. That's very helpful. Last question, just high level. You obviously have the two big rate cases, Minnesota, Colorado. You've had a lot of success in regulatory, you know, for a while now. I guess the one thing that might be different today is just there's a lot of upward rate pressures. You know, those are decent-sized rate filings. Fuel costs are rising and Uri and things like that. Just could you talk about does this make that, you know, different this time?

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

You know, Steve, it's Bob, and thanks for the question. You know, one of the key tenets of our strategy is affordability for our customers. You hear how resource planning will drive over the long term, you know, continued transitions in renewables that'll drive customer bills relatively lower. We always work for ways to mitigate the customer impacts. These cases are largely capital cases under approved capital investment plans, and we have deferred, at least in the Minnesota side, for over six years, we haven't had a case, and we've offered ways to mitigate some of the impacts of this case in particular.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

If you remember, we deferred cases throughout the pandemic, and feel like, you know, we've been very judicious in watching our O&M expenses and trying to continue the investment plans that drive a clean energy transition, but ultimately end up investing in capital that will ultimately need to get recovered. Our plans, we've offered mitigation on interim rates. We think that the bill increases are manageable. I think, under the proposal, we'd be down at about $1.25 a month for residential customers. You know, I think very manageable in total bill impacts.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

Other areas we improve, we work hard on, if you think about our Steel for Fuel program, and the success of adding wind in the upper Midwest. We talked about this at the outset, but that addition of those megawatts has provided a natural gas hedge. We think we've saved our customers over $300 million per year by having wind blowing instead of procuring natural gas on the margin. A very successful Steel for Fuel program, which doesn't necessarily show up, but it has mitigated bills over the last years and certainly with this uptick in natural gas pricing.

Steve Fleishman
Steve Fleishman
Managing Director and Senior Analyst at Wolfe Research

Great. Thank you so much.

Operator

I'll take our next question from Durgesh Chopra with Evercore ISI. Please go ahead.

Durgesh Chopra
Durgesh Chopra
Managing Director and Equity Research Analyst at Evercore ISI

Hey, good morning.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Morning.

Durgesh Chopra
Durgesh Chopra
Managing Director and Equity Research Analyst at Evercore ISI

Thank you for taking my question. You've answered, I guess, all the questions I had. Maybe just elaborate a little bit on the last point you made about natural gas prices. Obviously, we've had a ton of discussions with investors on that front. So perhaps your hedges, your gas assets, how are they placed, you know, impact on customer bills, anything that you can share with us?

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Yeah. Really, Bob's point was really around our, you know, our own wind investments providing significant, you know, fuel reductions, and we look at what the cost would have been had we not had those wind farms. It would have been a $300 million higher impact to our customers on a year-to-date basis this year. That's really what Bob's point is. I think the broader question is around how these higher commodity costs potentially impact our customers? We think about on the electric side, I think we're really well positioned, right? Bob already made the point about our wind strategy, our Steel for Fuel strategy. Also look, right, natural gas is a relatively small portion of the overall customer bill on the electric side. We also have length.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

I mean, look at NSP and SPS. This is something that doesn't quite come through clear, but we've had leverage this year, and we can sell into the market. We've provided over $300 million in market sales that we credit back to our customers and help offset some of those higher commodity costs. I think we're really well-positioned on the electric side and don't see a significant impact on our customers. On the LDC side, certainly there's less you can do there given that commodity costs are a higher portion of our customer's bill. On the going into the winter, we have physical storage, we have financial products.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

I think we're, you know, when we look at it for, take Colorado, for example, you know, I think our forecast for an impact, the average impact on a residential customer bill is about $15 per month for this winter. We think it manageable, but we obviously look for every opportunity we can to help mitigate these customer bill impacts.

Durgesh Chopra
Durgesh Chopra
Managing Director and Equity Research Analyst at Evercore ISI

Thanks, Brian. The $15, did you say $15, $15 per month, right?

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

15. Yes, not 50.

Durgesh Chopra
Durgesh Chopra
Managing Director and Equity Research Analyst at Evercore ISI

Yeah. What would that be percentage-wise?

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

It's about 20% over the wind in the winter months.

Durgesh Chopra
Durgesh Chopra
Managing Director and Equity Research Analyst at Evercore ISI

Got it. Thank you so much.

Operator

We'll take our next question from Sophie Karp with KeyBanc. Please go ahead.

Sophie Karp
Sophie Karp
Managing Director and Equity Research Analyst at KeyBanc Capital Markets

Hi. Good morning, and thank you for taking my question. Maybe a couple of housekeeping items, if I may. You guys are showing some equity needs in your financial plans of 2026. Can you give us some color on what shape and form those might, you know, come in as and what should we expect in terms of timing?

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

I think yeah, we show, you know, we get about $450 million of the equity through our dividend reinvestment benefits program. That's. The other piece, we say $800 million. That's likely we do it through an at the market program, just through an ATM, and we have flexibility over that 5-year timeframe as we look at our capital needs.

Paul Johnson
Paul Johnson
VP Treasury and Investor Relation at Xcel Energy

Sophie, if you want for modeling purpose, you could kind of assume something ratable, assuming that could be significantly reduced through a direct pay program that could potentially be approved by the government by year-end.

Sophie Karp
Sophie Karp
Managing Director and Equity Research Analyst at KeyBanc Capital Markets

Got it. Just overall, the CapEx is going higher, right? How should we think about the rate-based growth in this scenario? I can appreciate there's lots of puts and takes here with the, you know, uncertainties with what Washington is gonna do. In general, how should we think about that and the corresponding kind of regulatory lag and earnings growth with this new forecast? If you guys are not prepared to talk about this now, like when do you think you will roll out those numbers?

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Yeah, no, I think, you know, we're pretty excited about our new capital plan. I think we, as Bob mentioned, drives a lot of benefit for our customers. It's, you know, based off of our kind of 2021 rate base. This roll forward is 6.5% rate base growth for our five-year plan. Then if you look at that all potential incremental capital that we need on the transmission system and some renewables that could come out of the resource plans, that could push north of 7% to about 7.3% if we executed on that. A lot of this, right, depending on the type of capital, it could be recovered through riders if it's transmission or renewables or, you know, built into our multi-year plan in Colorado.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

We're comfortable with the overall capital plan and have kind of plans in place to address the regulatory recovery of it.

Paul Johnson
Paul Johnson
VP Treasury and Investor Relation at Xcel Energy

Sophie, if you look at the slides, we do detail the rate-based growth by year. If you wanna see that, you can check that out.

Sophie Karp
Sophie Karp
Managing Director and Equity Research Analyst at KeyBanc Capital Markets

Got it. Thank you. Lastly, if I may, on Colorado. Pretty good outcome, I guess, with the settlement there on the fuel cost recovery. Should we think about potentially that opening the door on the settlement in the rate case you have there, or is it too early to say?

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Well, I think you're hitting on one of the key points of the settlement. I mean, we put, you know, four proceedings behind us as part of the settlement, so that we could get to the more strategic conversation, Sophie. The Power Pathway and the resource plan are certainly right in front of us and ripe for fourth quarter conversations. Then as you mentioned, longer term, you know, the electric rate case in Colorado, you know, could also be in there. Yeah, I think what it says is we've got pathways to settlement in Colorado. We can reach constructive outcomes. We wanted to clear the underbrush a bit, and get to the bigger and more strategic issues.

Sophie Karp
Sophie Karp
Managing Director and Equity Research Analyst at KeyBanc Capital Markets

Thank you. I appreciate the comments. I'll jump back into the queue.

Operator

We'll take our next question from Travis Miller with Morningstar. Please go ahead.

Travis Miller
Travis Miller
Senior Equity Analyst at Morningstar

Good morning. Thank you.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Hey, Travis.

Paul Johnson
Paul Johnson
VP Treasury and Investor Relation at Xcel Energy

Hey, Travis.

Travis Miller
Travis Miller
Senior Equity Analyst at Morningstar

Wanted to kind of build on this customer affordability and rate making a little bit. If you look holistically across all the regulatory rate making proposals and such that you have out there, and if we put kind of buckets around those components, so the allowed ROE or cost of capital, another bucket being operating costs recovery, another bucket being CapEx. Where are you seeing the most pushback in terms of keeping customer bills affordable on that?

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

You know, I think ROE has always been called an area of dispute in a rate case. You know, I don't think that's unique to us. I think that's pretty common across other utilities. That's one of the big levers that they look at in determining what the appropriate ROE is. Now, we feel pretty good that, you know, from where we stand, you know, our ROEs that have been authorized over the past few years have been below the national average. When we think about ROE risk there, we think of more of potential upside and getting closer to national average, right? As we know, we're leading the clean energy transition, helping our states lead with their policy goals. I think there's an opportunity there for us on the ROE side.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

You know, for us, I think we're pretty proud about our O&M story. You know, if you go all the way back to 2014 and look at where we are today, we're basically flat from an O&M perspective. We've saved. You know, if you just apply the 2% inflation growth on that number, that'd be $ several hundred million that we've avoided and save our customers annually. I think, you know, overall, I think we have a really clean story. Our cases are primarily capital-driven, you know, investing in the needs of the system. I think overall, you know, obviously, you know, sometimes it's lumpy if you hadn't filed a case in 6 years, it becomes a big headline number.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

You know, we look forward to working with our parties and the commissions on working through these rate cases and really delivering a great product in the end.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

Hey, Travis, it's Bob.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Hey, sure.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

Just one more thing to add on to what Brian said, which I completely agree with. We've got, you know, and I mentioned this earlier, we've got such a favorable renewables regime where we sit that we've been able to both mitigate commodity increases, whether that's coal or natural gas over time, deliver on our steel-for-fuel premise and drive the fuel component of customer bills down and, you know, provide sort of a mitigant in terms of volatility. That provides real value, both on the residential side. When you talk to our industrial customers, you know, stability and predictability is what they really want as they're making investments in their own business. By being able to have a favorable regime for that, we can deliver renewables at significantly more beneficial costs than a lot of the country.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

That's helped mitigate our total bills for all of our customer classes.

Travis Miller
Travis Miller
Senior Equity Analyst at Morningstar

Yeah. Okay, great. I really appreciate it, and you had answered all my other questions.

Operator

We'll take our next question from Paul Patterson with Glenrock Associates. Please go ahead.

Paul Patterson
Equity Analyst at Glenrock Associates

Hey, good morning.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Hey, Paul.

Bob Frenzel
Bob Frenzel
President and CEO at Xcel Energy

Good morning.

Paul Patterson
Equity Analyst at Glenrock Associates

Just really quick clarification question on I guess it's Jeremy. Just on a high level, that 1% sales growth and I realize that it's been shifting around and what have you. Of course, we've had COVID, but just going forward, at 2022, just from my understanding, would you say that 1% is kind of what you see as being now a new normal number? Not so much between the classes of customers, just a general projection in 2023, et cetera. Do you think that that's sort of your new run rate in terms of sales growth?

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

I think it might be looking beyond 2022. I think 2022, we're still starting to see still a little bit of a rebound from the depths of COVID. I don't know if that, you know, full 1%, probably between 0% and 1% on a longer five-year forecast. I think that's. There's upside opportunities as I'll hedge when I give that number. There's upside opportunities, right, from electric vehicles and, you know, we're just getting into the discussion of beneficial electrification. I think longer term, there's a lot of opportunities on the electric sales side. I think for this front five, you're probably talking in the 0%-1%, after 2022.

Paul Patterson
Equity Analyst at Glenrock Associates

Okay, that's great. In terms of inflation, no change in that since we talked about last quarter, so I don't wanna go over it again. Unless there has been a change in your outlook, has there been any change or any new thoughts about it?

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

No, but I'm sure you read the same headlines as we all do with the near-term inflationary pressures, but no real changes from our commentary on Q2.

Paul Patterson
Equity Analyst at Glenrock Associates

Awesome.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

As we think about it longer term.

Paul Patterson
Equity Analyst at Glenrock Associates

Gotcha. Thank you.

Operator

We'll take our next question from Ashar Khan with Verition. Please go ahead.

Ashar Khan
Portfolio Manager at Verition Fund Management

Hi, good morning. If I heard correctly in response to Steve's question, you said that if this reconciliation bill passes and the direct payout provision, that you can eliminate most of your equity needs of $1.1 billion that you have in the plan. Is that accurate? I just want to reconfirm that.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

No, I said we could significantly reduce our equity needs.

Ashar Khan
Portfolio Manager at Verition Fund Management

Significantly. Okay, significantly is more than 50%?

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

I think significantly. We really have to see the details of this plan, right? It's a framework and the details are light. Once we get through all the nuts and bolts of it, we'll come back with. Assuming it get passed, you know, if we are optimistic that it gets passed, we'll come back with the full details on it.

Ashar Khan
Portfolio Manager at Verition Fund Management

If that significantly happens, hopefully, then that should imply a higher growth rate, because we have less dilution. Would that be a reasonable assumption, one leading to the other?

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Well, there are some puts and takes. You could see a little bit, a lower rate base growth depending on the details of it. There's puts and takes, but I think overall, we're positive about where the reconciliation package stands, both for our customers and for us as a company.

Ashar Khan
Portfolio Manager at Verition Fund Management

Okay, as shareholders. Okay. Thank you.

Operator

It appears there are no further questions at this time. I'd like to turn the call to CFO Brian Van Abel for any additional or closing remarks.

Brian Van Abel
Brian Van Abel
EVP and CFO at Xcel Energy

Yeah. Thank you all for participating in our earnings call this morning. With any questions, please contact our investor relations team.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

Executives
    • Bob Frenzel
      Bob Frenzel
      President and CEO
    • Brian Van Abel
      Brian Van Abel
      EVP and CFO
    • Paul Johnson
      Paul Johnson
      VP Treasury and Investor Relation
Analysts
    • Ashar Khan
      Portfolio Manager at Verition Fund Management
    • Durgesh Chopra
      Managing Director and Equity Research Analyst at Evercore ISI
    • Insoo Kim
      Senior Research Analyst at Goldman Sachs
    • Jeremy Tonet
      Executive Director and Senior Equity Research Analyst at J.P. Morgan
    • Julien Dumoulin-Smith
      Senior Research Analyst at Bank of America Merrill Lynch
    • Paul Patterson
      Equity Analyst at Glenrock Associates
    • Sophie Karp
      Managing Director and Equity Research Analyst at KeyBanc Capital Markets
    • Steve Fleishman
      Managing Director and Senior Analyst at Wolfe Research
    • Travis Miller
      Senior Equity Analyst at Morningstar
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