Xcel Energy Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
October 27, 2022

Key Takeaways

  • Xcel narrowed its 2022 earnings guidance to $3.14–$3.19 per share and initiated 2023 guidance of $3.30–$3.40 per share, reflecting its 5–7% long-term EPS growth objective.
  • The company updated its 5-year capital plan to $29.5 billion and signaled an additional $2–$4 billion of potential renewables and transmission investment, driving roughly 7.6% rate base growth at the midpoint.
  • Passage of the Inflation Reduction Act provides substantial tax credits for wind, solar, hydrogen, storage, nuclear and enables credit transferability, lowering project costs and boosting liquidity.
  • In Q3, higher depreciation, O&M and interest expenses partly offset margin and tax benefits, reducing EPS by $0.23 per share relative to positive drivers.
  • Key regulatory wins include approval of the 460 MW Sherco Solar project, a constructive Minnesota natural gas rate case settlement and a Colorado gas increase, enhancing cost recovery.
AI Generated. May Contain Errors.
Earnings Conference Call
Xcel Energy Q3 2022
00:00 / 00:00

There are 13 speakers on the call.

Operator

Good day, and welcome to Xcel Energy's Third Quarter 2022 Earnings Conference Call. Today's conference is being recorded. After the presentation, we will open up for questions. Questions will only be taken from institutional investors. Reporters can contact media relations with inquiries and individual investors and others can reach out to Investor Relations.

Operator

I will now hand the call over to Paul Johnson, Vice President, Treasurer and Investor Relations. Please go ahead.

Speaker 1

Good morning, and welcome to Xcel Energy's 2,000 and 2 2011 President and Chief Executive Officer and Brian Van Ael, Executive Vice President and Chief Financial Officer. In addition, we have others in the room available to answer questions if needed. This morning, we will discuss our 2022 results, Share recent business and regulatory developments, update our capital and financing plans and provide 2023 guidance. Slides that accompany today's call are available on our website. As a reminder, some of the comments made during today's call may contain forward looking information.

Speaker 1

Significant factors that could cause results to differ from those anticipated are described in our earnings release and our SEC filings. Today, we will discuss certain measures that are non GAAP metrics. Information on the comparable GAAP measures and reconciliations are included in our earnings release. I'll now turn the call over to Bob.

Speaker 2

Thanks, Paul, and good morning, everyone. Welcome to our Q3 earnings call. Let's start with our financial We had another solid quarter recording earnings of $1.18 per share for 20.22 compared to $1.13 per share in 2021. Our earnings are on track and as a result, we are narrowing our 2022 earnings guidance range to $3.14 to $3.19 per share. We're also initiating 2023 earnings guidance of $3.30 to $3.40 per share, which reflects our 5% to 7% long term EPS growth objective.

Speaker 2

Consistent with past practices, we've updated our base investment plan, which reflects $29,500,000,000 of Capital expenditures over the next 5 years. This investment plan provides significant benefits to our customers, Support continued execution of our long term strategy and clean energy leadership. It enhances reliability and resiliency, Advances our generation fleet transition, allows for the electrification of transportation, keeps customers' bills low and delivers attractive returns for investors. And while our base plan is robust, it does not include any potential renewable generation assets That are approved in our Minnesota and Colorado resource plans or additional transmission capital that's needed to integrate new renewable generation in Colorado beyond The Power Pathway project. For these assets, we expect further regulatory clarification in the second half of twenty twenty three, which could result in incremental capital expenditures of $2,000,000,000 to $4,000,000,000 which would result in rate base growth of 7.6% at the midpoint.

Speaker 2

Our updated capital plan, which reflects the benefits of the IRA, extends the growth rate and improves the quality of rate base, Reduces financing risk, improves credit metrics and delivers substantial customer and environmental benefits. During the quarter, the Inflation Reduction Act was passed into law, which includes new and extended tax credits for wind, Solar, hydrogen, storage, carbon sequestration and nuclear. It also includes tax credit transferability. Some of the key takeaways for the IRA include substantial customer benefits and a continuation of our clean energy leadership while keeping customer bills affordable The inclusion of the new solar production tax credit makes our company owned projects more affordable for our customers Relative to the solar ITC, the hydrogen production tax credit should improve our competitive advantage in delivering low cost clean fuels For our combustion turbines for electric reliability and for blending into our local gas distribution systems that will help our customers lower their carbon footprint in the future. The nuclear production tax credit will provide additional customer credits depending on MISO marginal pricing, Thereby lowering the cost of electricity from our existing nuclear assets.

Speaker 2

The tax credit transferability will increase liquidity and improve credit metrics. An excellent example of the IRA tax benefits is our 460 Megawatt Sherco Solar proposal that was recently approved by the Minnesota Commission with strong stakeholder support. This will be the largest solar facility in the Midwest and the top 5 installation in the United States, which will go into service in 2024 2025. Following the IRA passage, The levelized cost of Sherco Solar is projected to decline by over 30%, even after accounting for inflation and supply chain pressures. Due to the project qualified for both solar PTCs and community energy bonus as we are reinvesting in the community around our retiring coal This is a substantial benefit to our customers.

Speaker 2

Earlier this year, the commissions in both Minnesota and Colorado approved resource plans That will add nearly 10,000 megawatts of utility scale renewables to our systems and achieve an 85% carbon reduction by 2,030. These resource plans were approved prior to the passage of the IRA, but the final recommended portfolios are expected to Capture the benefits of the IRA, which will significantly reduce the levelized cost of these renewable projects for our customers. We've issued a request for proposal in Minnesota and plan to issue an RFP in Colorado later this year. After evaluation of proposals, we anticipate submitting our recommended portfolios to our respective commissions by the middle of next year and expect decisions in the second half of next year. We expect the recommended portfolios of generation assets will include self build, build own transfer projects as well as some power purchase agreements.

Speaker 2

Our generation resource plans are consistent with our seal for fuel strategy, which provides a valuable hedge for our customers against rising commodity prices. As example, our owned wind farms are Projected to generate nearly $1,000,000,000 of fuel related customer savings in 2022 alone and almost $3,000,000,000 since 2017. While these fuel savings were not included in our investment case, it shows the tremendous customer benefits of being an early leader in a clean energy transition. We also continue to advance our broader ESG leadership as MSCI recently upgraded Xcel Energy's rating from AA to AAA and categorized our company as leader in their nomenclature for managing the most significant ESG risks and opportunities. This is an outstanding accomplishment and reflects our continued progress, including adopting a water management goal, greater disclosure of human capital management practices and an improved governance score.

Speaker 2

We were also named to Investor Business Daily's 100 Best ESG Companies, which is further recognition of our ESG leadership. And with that, I'll turn it over to Brian.

Speaker 3

Thanks, Bob, and good morning, everyone. We had a solid quarter recording earnings of $1.18 per share for the Q3 of 2022 compared with $1.13 per share in 2021. The most significant earnings drivers for the quarter included the following. Higher electric and natural gas margins increased earnings by $0.33 per share, primarily driven by riders and regulatory outcomes to recover our capital investments. In addition, a lower effective tax rate increased earnings by $0.02 per share.

Speaker 3

Keep in mind, production tax credit has lowered the ETR. However, PTCs are flowed back to customers through lower electric margin are largely earnings neutral. Offsetting these positive drivers were increased depreciation expense, which reduced earnings by $0.10 per share, reflecting our capital investment program Higher O and M expense, which decreased earnings by $0.06 per share higher interest expense and other taxes, primarily property taxes, decreased earnings by $0.07 per share And other items combined to reduce earnings by $0.07 per share. Turning to our sales, Our year to date weather adjusted electric sales increased by 2.2%, largely due to higher C and I sales driven by strong economic activity in our service territories.

Speaker 1

The year

Speaker 3

to date results are relatively consistent with our expectations of 2% sales growth for 2022, while we anticipate more modest sales growth of 1% for next year. Shifting to expense. O and M expenses increased $43,000,000 for the 3rd quarter, Driven by investments in technology and customer programs, storm costs, vegetation management inflation. Like other businesses, we are facing inflationary pressures and now expect Annual O and M increase of approximately 4%. This represents a step increase due to cost pressures.

Speaker 3

However, we anticipate flat O and M in 2023. We made progress on a number of regulatory proceedings. During the quarter, Minnesota Commission approved our Erie storm settlement, Including full recovery of all costs with the exception of a $19,000,000 dislaunch, we have now resolved U. S. Recovery in all of our states with the exception of Texas.

Speaker 3

We also have pending electric and natural gas rate cases in Minnesota. In the natural gas rate case, we reached a comprehensive settlement, Which reflects a rate increase of $21,000,000 an ROE of 9.57 percent, a currently authorized equity ratio of 52.5%, Decoupling mechanism and property tax tracker. We think this is a constructive settlement and anticipate a commission decision next year. In the Minnesota Electric rate case, we recently received intervenor testimony. The Department of Commerce recommended a 3 year rate increase $274,000,000 based on an ROE of 9.25 percent and an equity ratio of 52.5 percent.

Speaker 3

In addition, the Department of Commerce recommendation reflects customer credits for the MISO capacity auction revenues and We are meeting with parties to see if we can reach a constructive settlement. In October, the Colorado Commission approved a rate increase of $64,000,000 for our natural gas case, reflecting a historic test year with the year end rate base and $16,000,000,000 of incremental depreciation expense. The commission also approved a weighted average cost of capital of 6.7%, Which will reflect as an ROE of 9.2% and an equity ratio of 53.8% based on the ranges they provided. As a result of the Colorado Commission denying the step increases, we're evaluating options of filing another rate case as the natural gas business remains a critical part of the energy infrastructure Colorado that is valued by our customers. As far as future filings, we plan to file Colorado and New Mexico electric rate cases later this year The Texas rate case in the Q1 of 2023.

Speaker 3

As Bob mentioned, We've issued a robust $29,500,000,000 5 year base capital forecast with a rate base growth of 6.5% using 2022 as a base. The base plan reflects significant grid and resiliency investment, our Colorado Power Pathway proposal and other transmission system investments The plan reflects a modest level of renewables, including our Sherkel solar facility. It also includes natural gas peaking plants to ensure reliability as we retire coal plants along with investments to improve the customer experience. We also anticipate potential incremental capital investment for renewables associated with the Minnesota and Colorado resource plans. Our proposed resource plans include approximately 3,500 megawatts of additions from 2024 to 2027, which would result in capital investment of 1.5 $3,000,000,000 assuming 50 percent ownership.

Speaker 3

In addition, we anticipate the need for an incremental $500,000,000 to $1,000,000,000 of related Combined, we could see a potential incremental investment to support the clean energy transition of $2,000,000,000 to $4,000,000,000 We've updated our financing plan, which reflects a combination of cash generation, Debt and equity to fund the majority of our capital expenditures. The financing plan assumes $1,800,000,000 of tax credit transfers, Which improves our credit metrics, maintains a strong balance sheet and lowers the cost of renewable projects for our customers. Compared to our previous 5 year plan, Transferability to reduce equity needs to $750,000,000 while we've increased CapEx by 3,500,000,000 In addition, we anticipate that any incremental capital would be financed at roughly our current capital structure. It is important to recognize that we've always maintained a conservative financing strategy, which reflects a strong balance sheet and credit metrics, a balanced financing plan and minimal levels of variable debt and longer maturities. This approach is critical in the current market of rising rates and will benefit our customers while maintaining our solid credit ratings and favorable access to the capital markets.

Speaker 3

Bob discussed IRA customer benefits, but I wanted to add a few more details. Tax credit transferability is projected to provide $1,800,000,000 of liquidity, which increases cash flow and reduces our equity needs. Our FFO to debt metrics improved by approximately 100 basis points during the forecast time period, even after adding $3,500,000,000 of capital and reducing equity needs. The solar PTC and tax credit transferability improve the competitiveness of our renewable bids. We project the IRA will drive approximately $500,000,000 of customer savings from our own renewable projects over the next 5 years Nuclear PTCs could drive additional savings.

Speaker 3

We anticipate that pricing will decline on solar projects by 25% to 40% And wind projects by 50% to 60% later in this decade due to new and extended tax credits along with potential adders in the IRA. Finally, we don't anticipate any material impact from AMT as a result of makers' depreciation in existing tax credits on our balance sheet. Shifting to earnings, we've updated our 2022 guidance assumptions to reflect the latest information. We're also narrowing our 2022 earnings guidance range to $3.14 to $3.19 per share. We're also initiating our 2023 earnings guidance range of $3.30 to $3.40 per share, which is consistent with our long term EPS growth objective of 5% to 7%.

Speaker 3

Key assumptions are detailed in our earnings release. With that, I'll wrap it up with a quick summary. IRA was passed with significant benefits for our customers in the company. The Minnesota Commission approved our Sherco Solar project. We reached a constructive settlement in our Minnesota natural gas rate case.

Speaker 3

The Colorado Commission approved our natural gas rate case. We're narrowing our 2022 earnings guidance range. We announced our robust updated capital investment program that provides Strong transparent rate base growth and customer value. We initiated 2023 guidance consistent with our long term earnings growth rate, And we remain confident we can continue to deliver long term earnings and dividend growth within the upper half of our 5% to 7% objective range as we lead the clean energy transition and keep those low for our customers. This concludes our prepared remarks.

Speaker 3

Operator, we will now take questions.

Speaker 4

Thank

Operator

you. We will take our first question from Nicola Campanella with Credit Suisse.

Speaker 5

Hey, good morning, everyone. Can you hear me? Sure.

Speaker 3

Hey, good morning, Nick.

Speaker 2

Hey, good morning. Good morning. So I guess I'll just start it off. I mean, you're raising CapEx, Your decreased equity need, the CAGR is still the same. Can you just give

Speaker 5

us a sense of kind of what the offsets are In that plan, I believe that there is some offset to rate base with transferability in the various tax impacts, but any more clarity would be helpful.

Speaker 3

Yes, absolutely Nick, and I'll handle that one. Yes, I mean, when we look at the IRA, huge win for our customers and us. And really, and when you think about our financing plan, it's around transferability. And there was an offset because a majority of Tax credits were on our balance sheet as a deferred tax asset, which would increase the cost of our renewable projects. So By being able to monetize them, we reduced that tax asset on our balance sheet, lower the overall LCOE For our wind projects and solar projects to our customers and improve our cash flow.

Speaker 3

So you do have lower rate base from that In a vacuum, but it allows us to reduce our equity needs, increase CapEx and have basically a higher quality rate base as we think about it. Much of that steel in the ground and then tax asset on our balance sheet.

Speaker 1

And Nick, just as a clarification, those tax credits are not currently on our balance sheet, but they would have been On our balance sheet without tax credit transferability in the future.

Speaker 5

Got it. That's helpful. That's helpful.

Speaker 2

And then in the electric rate case in Minnesota, if I heard you correctly, I think you're engaging

Speaker 5

parties for a possible settlement. Can you just kind of give us a sense of Overall confidence level and just getting across the finish line and then is there a drop dead kind of date that you need to get this done by if You were to like is there a hearing date we should have in mind? Thanks.

Speaker 2

Yes, Nick. Hey, it's Bob. Good morning and thanks for the question. Look, I think on the Minnesota Electric case, 1st and foremost, we've got the gas case behind us and that sets a good framework for some of the items in the electric We're engaged with parties. I think rebuttal testimony is due in the middle of or the hearings are in the middle of December.

Speaker 2

So I think we should Target that as a deadline for settlement opportunities. All right. Thanks so much. We'll see you in a few weeks.

Operator

We will now take the next question from David Alcaro with Morgan Stanley.

Speaker 6

Hi. Thanks so much for taking my question. Maybe sticking Tore, Arena, wondering on the Colorado Gas rate case, when might be the next time you go in just in the wake of This recent decision.

Speaker 2

Hey, David, it's Bob. Good morning. Thanks for the question. We filed the case Back in January with the commission and we're looking for a 3 year forward gas case. We have expected capital expenditures continuing next year and the year after.

Speaker 2

We had real visibility into The case grant sorry, the commission granted us a historic test year case means we likely need to go back in sometime in 2023 For a new gas case.

Speaker 6

Yes, got it. Makes sense. And then the other thing I wanted to check on was, What's your latest thinking about the prospects for PPA buyouts in repowering opportunities in the wake of the IRA? Does that become a bigger opportunity for you to look at now?

Speaker 3

Yes, I'll take that one. I think it absolutely does. And the way I think about it, it extends our PPA bout opportunity for a long time, Right. What we've been successful at, we bought out about $750,000,000 of PPAs over the past number of years. And we were successful because we brought forward a win for our customers a win for us, right?

Speaker 3

We were able to buy out a PPA, put steel in the ground And we did that by buying out the PPA and repowering it and qualifying for a new set, new strip of tax credits on the wind side. So Free IRA, the buyout opportunities were stepping down as your tax credits step down. Now since we have a 10 year plus runway of PTCs and also we'll look at evaluating solar buyout opportunities, again, repower on a solar PTC farm. So I think there's a much longer runway for buyout opportunities and none of that is our capital forecast in our 5 year plan as upside. And I think the longer term as You think about repowerings, you mentioned repowerings is that we put over 3000 gigawatts or 3000 megawatts of wind in service between 2018 2021 and we'll look at potentially repowering those in 2028, 2029, 2030 Save our customers money like we're doing with our 4 wind repowerings in Minnesota right now.

Speaker 3

So I think this really extends our opportunity on the PPA buyout and our own repowering opportunities.

Speaker 1

Thanks. Yes, that's helpful color.

Speaker 6

It seems like a big opportunity. Any just visibility into timing or clarity as to when those could crystallize In terms of hitting the CapEx plan?

Speaker 3

I think what we could potentially see in the Colorado, like we talked about potentially seeing bids in the RFP and The Minnesota RFP is focused on solar. The Colorado 1 will be an all source RFP, so we could potentially see something in that RFP that will launch later this year that Bob mentioned. You'll get visibility and call it mid to later of next year, could be the first time, because when we're middle of kind of the resource plan and RFP Processes, we want to follow those and make sure we align with the other acquisitions. So that's probably the first time I'd look at it. Longer term, it's much more opportunistic, right?

Speaker 3

You got to find a developer that is willing to transact at a price that's beneficial for our customers.

Speaker 6

Yes, got it. Okay, great. Thanks so much.

Operator

We will now take the next question from Jeremy Tonet with JPMorgan.

Speaker 7

Hi, good morning.

Speaker 2

Hey, Jeremy, how are you? Nice headline.

Speaker 7

Thanks for that. Just with Life in the Fastlane, Just wondering, thank you for all the detail today on CapEx, but what could be incremental maybe on the horizon here if I dare kind of ask what More could come in over time. And specifically, any thoughts on additional MISO opportunities, whether that's competitive For upsizing future LRTP

Speaker 2

portfolios. Yes. Hey, appreciate the question. A couple of things. Brian highlighted what we would call incremental capital we've been talking about for the better part of the year and this is the competitively bid generation In both Minnesota and Colorado, as well as the incremental transmission that we would need on the power pathway in Colorado to Integrate those renewables, that opportunity is $2,000,000,000 to $4,000,000,000 At the midpoint of that, we probably have rate base growth in the mid-7s.

Speaker 2

Additional to that, things early things we're starting to think about, I mean, you heard the previous caller's comments around TPA buyouts and repowerings that certainly in our sites, we haven't put bookends around those for the community, but we certainly will. Secondly, as we think about generation in our Southwestern service territory, I think with the IRA, we see economics in solar and wind down there that can make an acceleration of renewables In the SPS territory, also not in our plan, it would be towards the back end of the 5 year plan, maybe in the middle of the 10 year plan. We're still evaluating our resiliency expenditures. We feel very solid about what we're doing to harden our grids For climate change, but some of that will happen with the intelligence we need on a distribution grid to enable electrification of transportation And the potential beneficial electrification of gas, those are the big buckets that I think we need to be continuing to think about.

Speaker 3

Brian, do you have anything to add? Yes, I would just add a couple more to that. One is, in our 5 year plan, we have nothing around hydrogen, whether if there's an opportunity on the electric side or potential looking on the gas LDC side as we work through our clean heat plans. Then also storage, we're working on some interesting long duration storage projects and also with the Standalone ITC on 4 Hour Storage, and we're looking at opportunities there. So I think there's a good number of, call it, incremental opportunities that aren't Captured in our plan as we think through the overall benefits of the IRA.

Speaker 7

Got it. That's great to hear. And just I just wanted to go into 2023 guide a little bit more there. I think there's 1% growth next year instead of 2% this year. Just wondering, Is this primarily post COVID normalization or some, I guess, conservatism here?

Speaker 7

And just thoughts, I guess, on achieving Flat O and M in 2023, including, I guess, work that you've done this year to de risk the 2023 outlook, if you could Kind of give us thoughts as how that factors into the 2023 guide?

Speaker 3

Yes. And the first part, just make sure you're talking about sales, right? Yes. So I think the way you framed up it, it's a little bit of both, right? It's a little post COVID normalization.

Speaker 3

We expect residential use for customer to come down, Kind of like we saw in Colorado this year where resi UPC has come down more towards pre pandemic levels. And I think we expect to see that in other jurisdictions too, While we do see continued economic growth. So, you could call conservative, we are certainly conservative with our sales forecast year going into the year, we thought we were going to be flat and we've been up 2% and have seen strong economic activity. On the O and M side, yes, I think As we went through this year, right, we're certainly subject to the inflationary pressures and we have been flat since 2014 on O and M. So that was 8 years of being flat and we had some inflationary pressures, had storms this year, increased investments in our customer platforms And also we're running our coal plants much more given the change between gas prices and coal, so higher chemical costs, higher Plant costs.

Speaker 3

So as we think about it next year and we had a good year this year, if you look at kind of their change in our guidance from Q2 to Q3, we invested Right. And when we have good times. So that's why we think about next year in maintaining flat, almost a rebaselining into this year, Doubling down our continuous improvement programs and setting ourselves up for next year.

Speaker 7

Got it. That's all very helpful. One Last one, if I could, if you might be able to speak on the Colorado gas step increase denial there. Do you see this as a signal from the commission to continue Regularly filing rate cases and are there any takeaways on the electric side?

Speaker 2

I wouldn't have contagion, Jeremy, between the electric and the gas case, I think this year was particularly sensitive given the commodity increase and the impacts of winter storm Yuri On the gas case, so no, I don't think I'd sort of read through too much to the electric side. We are continuing to invest in that For safety and reliability and continued customer growth there. So we need to make sure that we're having a right balance of healthy financial metrics For the company, so we are going to file a rate case next year.

Speaker 3

Yes. And I just think about longer term, on the gas LDC side, like our Net 0 plans for 2,030 and 2,050 on the LDC side are aligned with the climate science, they're aligned with the state goals, And we're looking forward to working through the clean heat plan in Colorado. Really, I think about resource planning on the gas side and I think that will help us align With the commission and our stakeholders, how we achieve these carbon reduction targets on the LDC side, because it is a critical Asset for us and our customers really see demand and interest in it.

Speaker 2

And just to put a timeline on that, you should see Clean heat plant filing from the company sometime in the second half of next year.

Speaker 7

Got it. That all makes a lot of sense. Just checking. Thank you.

Speaker 2

Hey, thanks.

Operator

And we will now take the next question from Durgesh Chopra with Evercore.

Speaker 8

Hey, good morning, guys. Solid quarter here. Thanks for your time. Just I actually had 2 questions, Brian, for you. Just one, I think you mentioned this in your remarks, but the jump in CFO between the two plans, the $1,800,000,000 or $2,000,000,000 is included in that CFO number, right, From the tax expense period?

Speaker 8

Correct. Okay. Okay. Then maybe just because it's a newer concept, how does that actually work? Is there a market for it?

Speaker 8

And how should we think about you monetizing those taxes? I heard Paul say that that's For newer assets, if I'm not wrong. So maybe just any color that you could give us there, which will sort of help us profile the cash flows through the 5 years?

Speaker 3

Yes, absolutely. And it's a great question because the market for PTCs and Transferability doesn't exist because it's being stood up and it's effective one so any credit generated starting January 1, 2023, so starting next year, Is eligible to be transferred. And we were instrumental in the language that was included. We worked very closely on that. So we've been very focused on this because it's so important for our customers to driving down the overall cost for renewables and the LCOE of projects.

Speaker 3

And for us, we've spent a lot of time. We're not waiting for a market to get set up, right? Longer term, I think a liquid exchange ultimately gets set up, But we don't expect that in 2023. We've been going out ourselves talking to local companies that have a significant cash tax appetite To look at bilateral transactions, and I think there's a really good local angle here, where we can save our customers money. We've had very good reception in the discussions we've had.

Speaker 3

And so we feel very confident in being able to execute on this transferability. But even just being conservative, we've only assumed we transfer half of those credits in 2023, Just in conservative nature, in that, so it takes a little bit of a while to set up in our financing plan. But From all the discussions we've had over the past month, we feel very bullish about being able to do this and the interest there from the other corporates.

Speaker 8

Got it. Sounds like the process is already underway. And just to be clear, these are tax credits in excess of what you wouldn't be able To offset your taxes currently, am I thinking about that correctly, Brian?

Speaker 3

Yes, you are. Yes.

Speaker 8

Okay. Thanks so much, Brian. Ever so helpful. Thank you so much.

Speaker 3

Yes. Thank you.

Operator

We will now take the next question from Ross Powell with UBS.

Speaker 9

Good morning, Bob.

Speaker 4

Good morning, Bob. Good morning. Good morning, Bob. Good morning. So I just want to wind back a little bit to Nick's question on growth, right?

Speaker 4

You lowered the 'twenty two base year to about 38.9, which is Lower than your previously forecasted growth and then your growing rate base out a little bit faster. If I look at your old forecast, it's sort of 6.4% to 6.5% through 2025 and now it's kind of 7.1% to 7.4% depending on the year through 2025. And I know you mentioned transferability sort of brings that back a little bit. But now if I look at sort of your 3 year rate base growth out to 2025, it's about 7.3%, Sort of 6.5 percent or just under that. So it would seem to me that you're really pushing the high end of your EPS growth guidance here or Am I not thinking about that correctly?

Speaker 4

And then I guess the second part of that question is the growth tails off a little bit in 'twenty six and 'twenty seven. Is that where you see most of that $2,000,000,000 to $4,000,000,000 in CapEx upside potential coming in?

Speaker 3

Yes. So I think, Ross, the way we think about it is really 5 to 7, but we publicly target the upper half of that guidance range for EPS growth. And when we look at it, we feel very confident in delivering there. We've delivered in the upper half of our guidance For the past 12 years, when you look at our annual earnings guidance and delivering on our guidance for 17 straight years. So we feel good about the plan we put in place.

Speaker 3

Yes, it's We have generally been known to put a conservative plan in place and we have a lot of incremental upside and I think you hit it The nail on the head, if you look at one of our slides, we show where we think that incremental capital is going to be in the back half of the plan or the back 2 years of the plan. So I think That's the way to think about it as we kind of have that continued year over year strong rate base growth.

Speaker 4

Okay. Thanks, Brian. And then maybe as we just look forward into winter, how are you thinking about Natural gas fuel expenses there, has any of that been sort of deferred through the regulatory process? Or how are you just thinking about bill Generally, how do we keep that with customers because natural gas prices are up a lot year over year?

Speaker 2

Yes, Ross, it's Bob. We are certainly sensitive to the commodity impact on our natural gas customers And their bills this winter, we've been very active in energy efficiency programs. We've been very active on the federal and the state levels on Identifying and trying to secure significant portions of LIHEAP funding and then working with our customers directly to find And enable those customers that may not even know they're LIHEAP eligible to benefit from some of the mechanisms that we have at the state and Federal level to mitigate impacts on our customers. We start with some of the lowest rates in the country in our Colorado Gas Company, But we recognize and are empathetic to everything is up from a starting point for customers who are feeling it at the pump, they're feeling it in rent, And they're feeling it at the grocery store. So we're empathetic.

Speaker 2

We're doing everything we can to mitigate the impacts. We have extended the cost of the Winter From Yuri costs in various jurisdictions anywhere from 2 to 5 years. So we have mitigated regulatory outcomes on that gas But very active with our customers and communications as we go into the wintertime. And I'll just add,

Speaker 3

Bob, you talked on the LDC side. We didn't touch on the electric side, right. We're 85% roughly electric. And we've really set ourselves up well with our steel for fuel Investments, right, we've always viewed those as being a hedge against rising gas commodity costs, and that's exactly what we see. Now we're going to provide our customers over $1,000,000,000 in fuel related benefits or avoidance this year, alone with our owned wind farms.

Speaker 3

And we got those approved back when their gas was $2 to $3 in the $2 to $3 range. So think about how economic those wind investments are for our customers now. So on the electric side, we feel good about where we are. And also on the electric side, we have the 3rd lowest bills of any investor owned utility in the country. At a really good starting point too.

Speaker 3

And so obviously what Bob said, we're very conscientious of customer bill impacts and spend a lot of time focusing on how we can mitigate and manage those for our customers. Yes, very good work on

Speaker 4

the electric side, Brian. I appreciate the answer. Thank you.

Operator

We will now take the next question from Steve Fleishman with Wolfe Research.

Speaker 10

Yes. Hi, good morning. So the 18% FFO to debt that you now see, I mean, that's obviously great number, very strong. Is that kind of your target now for FFO to debt going forward or how should we think about that?

Speaker 3

Steve, another way I think about it is a little bit of balance between FFO to debt and then the holding company debt to total debt And that metric right now for Moody's has us at about a 25% threshold on that. And so we're going to have conversations about what that right threshold is, but Great to see our FFO to debt with strong improvement of 100 plus basis points relative to pre IRA. So, but we will look at both of those in combination because it really is Important to have maintained that strong credit quality, not only as a holding company, but also to work with our commissions, ensure we have strong credit quality at all the operating Because that really is in the best interest of the customer.

Speaker 10

Okay. And just to clarify the comment that you made about the $2,000,000,000 to $4,000,000,000 incremental capital. I think you said you'd be able to finance it with the current capital structure. Could you just better clarify what that means? Does that mean you would finance it kind of consistent With the way your current capital structure is in terms of new debt and new equity?

Speaker 3

Yes. Or is it Yes. Consistent with the consolidated capital structure.

Speaker 10

So there would be more equity needed then to fund that if you have the capital?

Speaker 3

Yes. All but Caveat that was all depending on the timing of the capital, right? And if it's more backdated, you maybe have more flexibility. So that's just sitting here today, but it really depends On the timing, we will evaluate it once we get more visibility on magnitude and timing of that capital.

Speaker 10

Okay. Okay. Yes, because it just I mean, I love strong balance sheet, just 18% is kind of off the charts these days. So It's but it's also obviously better to be strong than not.

Speaker 3

Yes. We said the IRA was good for us Good for our customers. So we're glad to be able to speak about it in more depth on this earnings call. We only had about 12 hours last Q2 earnings call to talk about it And DigestiveTech, so happy to spend more time on it now. Okay.

Speaker 10

And then another question, just on all the data that you gave On the IRA savings for the cost of solar and wind, so like SureCo 30% lower and Some of the data. Just I want to just make sure I understand the starting point there because there have been a lot of inflationary pressures for like the last 18 months. And so when you're saying these savings, are you going back to before that? Are you going to kind of where you'd be now Is the baseline including those inflationary cost pressures that had already occurred?

Speaker 9

I just want to make

Speaker 10

sure I understand the baseline for that, for these?

Speaker 3

Absolutely. So Sherco, I'll start with Sherco Solar. That includes from our initial very initial filing to The revised filing was higher capital costs to address the supply chain pressures. So that is from includes all those pressures and then pre IRA to post IRA. So that's that kind of actual capital costs, including pressures on the overall, call it, panel pricing with everything at half of twenty nineteen.

Speaker 10

So the 30% goes back to the initial filing or to the revised?

Speaker 3

The revised filing. So A revised filing in pre IRA, post IRA. And then on the generics, Assume capital cost is the same, assume today's capital costs are an inflated capital costs, right? So assume CapEx is the same and A solar farm that would qualify for a 10% ITC versus now you get a PTC For us, which is as a regulated utility, we'll choose the PPC and then the range is based on NCFs and if you qualify for any call it adders or bonuses, So it's just community energy?

Speaker 10

Wind. So those are saving, yes.

Speaker 9

Got it.

Speaker 3

And then wind, right, wind that assumes, Say a 2027 wind farm that would have qualified for 0 tax credits, 0 PTCs versus now 100% PTCs At the escalated value as you assume over time. So that's really what our customers are going to see when we add those several 1000 megawatts or 5,000,000 plus megawatts in that back half of the decade.

Speaker 10

Okay. That's great. Thanks. Thanks for that.

Operator

Our next question

Speaker 11

I was curious if you could talk a little bit about this, the collaboration with Bloom Energy on the 0 emission electrolyzer, I guess, to produce hydrogen in front of your nuclear plants. Just curious if you could give any color on the milestones And also, can you describe why it makes sense to have this type of process at the nuclear plant, which is a baseload plant And presumably, we could dispatch into the grid at all times as opposed to a wind facility that may have more variability? Thank you.

Speaker 2

Hey, Sophie, it's Bob. Thanks for the question. Look, we were a recipient of a High temperature gas electric or high temperature electrification Pilot from the Department of Energy related to our Prairie Island Nuclear Plant. And the concept is And I think you hit on really the big point is, as we increase wind or renewable or 0 cost energy on our system. We see our nuclear plants, particularly in the shoulder months, starting to cycle up and down.

Speaker 2

We have processes and procedures and approvals to do that. But your point is, wouldn't you rather keep the plant at 100 Powered not cyclic. And that's exactly what the concept of an electrolyzer off the back of a nuclear plant does. As you take the steam, You let the reactor run at 100% power, but you don't run the generator at 100%, use that excess steam to do Steam reformation on the electrolyzer raise the temperature and create hydrogen that way. So you do it when the plant Would otherwise be cycling, it allows you reactor stability by keeping the plant the nuclear plant at 100% power while keeping the generation plant Load following on the electric side.

Speaker 2

And your comment on the manufacturers, we chose Manufacture for the electrolyzer, and I think that was your comment.

Speaker 11

Okay.

Speaker 3

Yes. And Sophie, I'll just add to it. We're working through The development of it should be online probably later in 2023. And as we think, we're this is a really interesting Aspect of potentially how we could use our nuclear plants and create pink hydrogen, we're working with a consortium in our states around the hydrogen hub announcement And applying for a DOE grant. And so this is part of a broader opportunity as we think we work with our states, both in Minnesota in the upper Midwest and also in Colorado and the surrounding states on another hydrogen hub.

Speaker 11

I guess, does it make a difference if it's the nuclear plants that you avoid cycling versus just hooking it up to Wind Farm, I guess, from an operational standpoint, maybe it makes sense, but the marginal cost of the wind Generation is 0, right? Marginal cost of a nuclear plant is not 0. So economically, does that make a difference? Or since they're on the same grade, it doesn't? Like how should we think about this?

Speaker 12

And so this is one of

Speaker 3

the unique aspects of this is high temperature steam electrolysis. So we're taking waste steam off the nuclear plant To heat the water, which makes it 30% the electrolysis process 30% more efficient.

Speaker 11

Okay, got it. Thank you. That's all for me. Yes.

Speaker 9

Thanks, Sophie. We

Operator

will now take the next question from Julien Dumoulin Smith with Bank of America.

Speaker 9

Hey, good morning, team. Thanks for the time. Appreciate it. Listen, I

Speaker 10

want to just pick up real quickly around the

Speaker 9

$2,000,000,000 to $4,000,000,000 real quickly with respect to the upside CapEx. How do you think about that materializing from the tiered perspective? I know you flagged the back half of the year, but can you talk about some of the dynamics In the near term that would result in that upside in the back half, I. E. Is a lot of that predicated on the Colorado RFP processes here.

Speaker 9

How do you think about that? You're manifesting itself here in just in terms of procurement processes. And related to that, what about upside to the 50% renewable assumption that we've used in the past? You alluded to it in your script remarks on that front, Seems like there could be some latitude whether tender repowerings or greenfield opportunities.

Speaker 3

Yes. Hey, Julian. Let me start on the first one. Yes, really two processes. One is the Minnesota RFP is already in flight.

Speaker 3

We launched it Later in Q3. And so that one's a little bit of ahead of Colorado. So likely see a decision out of Minnesota in middle of 2023 On the Minnesota, but that's a smaller RFP than Colorado. Colorado is the bigger RFP in terms of megawatts of renewables. And we'll look to launch that here later this year, and then likely file the application with the Colorado Commission in, call it, Mid to late Q3 is probably when you get some visibility into that and the decision hopefully by the end of next year on the Colorado Commission.

Speaker 3

So a little bit Phase between Minnesota and Colorado. On your question about the 50% assumption, We take a conservative assumption and I think given the opportunity and the benefit that ZEIRA has around the Solar PTC and Transferability, we expect to be extremely cost competitive and potentially have an opportunity to own more than 50 And that's certainly our goal because we think it is long term beneficial for our customers of ownership, right? I mean the PPAs that We're struck a few years ago on passing this benefit of transferability back to our customers as we are with our own wind farms and we think about repowering our own wind farms longer And we're going to strive to own it as much as we possibly can.

Speaker 9

Yes. And maybe let me just clarify a little bit. On the repowering side, are you thinking that that's pretty strictly going to be done through the RFP process And the timeline and opportunity set for the Dictator drill or is there more of an opportunistic ability to approach customers on a one off basis? I think you're implying

Speaker 3

Yes. When you say repowerings, so I think about our own repowerings in the Kind of the latter part of this decade and that would not be in this RFP. That's a couple of years out type of opportunity to bring forth With our commissions in terms of we can do something that can save our customers money. So I would say that's outside of the RFP process.

Speaker 2

But I'll come back to the PPA buyout And we think that RFPs and preferred plans as part of our resource plans are an opportunity to bring Some of the PPA buyout forward, we have talked about that. So we have a history of doing it outside of an RRP process As well as that being an emphasis and a driver for it. So I would expect that some of this stuff to come to fruition over the next 9 months to 12 months as we work through the process with our commissioners and with the RFP results.

Speaker 3

Got it. More of a

Speaker 10

holistic update, say, late next maybe by 4Q across

Speaker 9

all of the above.

Speaker 12

Sounds good.

Speaker 3

Take care. Good luck. Thanks, Julien. Couple of weeks.

Operator

And we will now take the next question from Ryan Levine with Citigroup.

Speaker 3

Good morning. Just wanted to follow-up on the Hydrogen Hub comments. To the extent that Hydrogen Hub is developed in your neighborhood or in your backyard, can you talk to the materiality for your business Atlas In light of the IRA and your opportunities both on the gas and electric side?

Speaker 2

Sure. Hey, this is Bob. Look, we're working on 2 applications for Hydrogen Hub. These proposals came out of the Infrastructure and Jobs Act That was passed around this time last year. The DOE is now in receptivity mode to receiving proposals.

Speaker 2

We've got one In the upper Midwest, largely targeted around North Dakota, South Dakota, Minnesota and Wisconsin. We've got both the states in MOUs, partnerships as well as a lot of the energy providers in those states working collaboratively To identify all the facets of what a hydrogen hub could look like, and I'll just give you the example in the upper Midwest. We're looking at Fertilizer production, we're looking at LDC gas, we're looking at gas for electric CTs, we're looking at hydrogen production off the back of our nuclear facilities all encapsulated into a system that allows for transportation and storage and consumption of hydrogen that's produced from clean energy. Similarly, in the Western states, so in Colorado, we're working with a consortium of states, So Wyoming, Utah and New Mexico and Colorado on a similar concept out west. And again, A significant we in our Colorado companies at the center of those conversations again on electricity, Hydrogen for electricity, hydrogen for our LDC system, hydrogen for agriculture, hydrogen for transportation.

Speaker 2

So we talk about investment opportunities. I don't think we've characterized them fully in terms of The hub concept, the DOE has talked about the hubs being sort of $8,000,000,000 $4,000,000,000 to 5 of them. So you could think about them being $1,000,000,000 to $2,000,000,000 each, and each of those are requested to have sort of matching investments from private industry to match the public funds. And we've also characterized what a hydrogen production that would match Just 5% of our LDC is somewhere between $2,000,000,000 to $4,000,000,000 of investments between the renewables it takes to generate it, well as the electrolyzer, the balance of plant and the storage and transportation. So significant investments to create hydrogen for the benefit of our customers and to enable our clean energy transition.

Speaker 2

So I'd say it's a multibillion dollar opportunity, largely centered in the back half of the decade.

Speaker 3

Thanks. And just to be clear, you have some disclosure in Minnesota around hydrogen ready combined or CTS, is there any of that spending that's already in your plan or is this all incremental?

Speaker 2

As part of the Minnesota Resource Plan, we have reliability assets, combustion turbines that we've committed to making Hydrogen capable, that would be included in our plan, but that's just the CT side, but none of the production of hydrogen is included in our plan.

Speaker 6

Appreciate the color. Thank you.

Operator

And we will now take the next Question from Travis Miller with Morningstar.

Speaker 12

Good morning. Thank you. You just answered my exact question on the hydrogen pump, so I don't want to repeat it. But I appreciate all the detail There, I'll just throw in one more in terms of the election. Any key issues that you're looking at or key changes potentially in any of the state Level policies or legislatures?

Speaker 2

Hey, Travis, it's Bob. Good morning. Thanks for the inquiry on hydrogen. Glad we could answer your question. On the election, I think we're about 10 days away, lots of activity on the televisions, lots Signed lots of mailers, lots of e mails and texts.

Speaker 2

We're obviously interested in outcomes, but I think as a company, we've been very successful working with All administrations, our policies of energy transition, protecting our customers, enabling a good experience, And having clean energy for all is really important. And I think we can work with any of our elected officials. We've got great relationships with those sitting officers today, and we look forward to continuing those into the future. But I don't see anything that's going to Dramatically change our plans, our investment philosophy and our 10 year trajectory that we laid out today.

Speaker 12

Okay, great. I appreciate all the rest of the details on the call.

Speaker 2

Great. Thanks, Travis.

Operator

And there are no further questions. So I will turn the call back to Brian Van Ael, CFO, for closing remarks.

Speaker 3

Yes. Thank you all for participating in our earnings call this morning. We look forward to seeing everyone in a few weeks. And please contact our Investor Relations team with any follow-up questions.

Operator

Thank you for joining today's call. You may now disconnect.

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