Q1 2022 Xcel Energy Inc Earnings Call
With our steel for fuel strategy.
Which provides a significant hedge against rising commodity prices.
And is projected to generate over $1 billion of fuel related customer savings in 2022 alone.
In terms of next steps, we anticipate issuing rfps in the second half of this year.
With insight into the preferred portfolios early next year and commission decisions in the first half of 2023.
We expect a recommended portfolio of generation assets will include self build build own transfers as well as some power purchase agreements.
This timeline represents a modest delay in our original plans, but provides additional time for more clarity given the solar supply chain considerations.
Last quarter, the Colorado Commission approved our $1 7 billion pathway transmission project.
To enable access to 5500 megawatts of new renewables and some of the richest wind and solar resources in the region.
The Commission also conditionally approved a 90 mile May Valley to Longhorn line extension with an additional investment opportunity of approximately $250 million. These constructive regulatory outcomes reflect our alignment with our commissions on our clean energy transition is.
As critical as we work to deliver reliable affordable and sustainable energy to the states the communities and the customers that we serve.
We also remain excited about the transmission expansion opportunities in our Midwest region.
MISO is future one scenario, which reflects an estimated $30 billion of investment opportunity is expected to be awarded and four discrete tranches tranche. One includes roughly $10 billion of projects in our MISO decision on that tranche is anticipated. This July .
Our preliminary estimates suggest a $1 billion to $2 billion investment opportunity for XL energy within tranche one.
And we expect to have more clarity. This summer after MISO provides more detail on the recommended portfolio.
Longer term, we expect to be awarded approximately $5 to $6 billion in total future one investments.
And as we've previously discussed our capital investment plan is not dependent on changes in federal policy. However, the energy provisions that were included in the build back better legislation would provide substantial customer benefits and help enable our clean energy transition while.
Keeping our customer bills affordable.
While that legislation has stalled there is ongoing discussion or a more modest version potentially moving forward this year.
We would expect it to include new and extended tax credits for wind and solar.
Hydrogen.
Storage nuclear and even transmission along with a direct pay option for those tax credits.
We continue to work with our federal delegation as well as the EI to advocate for these provisions, which we believe will benefit our customers and accelerate the clean energy transition nationally.
Shifting to electric vehicles, we are executing well on our approved Colorado and New Mexico plant and we recently received approval of our transportation plan in Minnesota, which outlined future program focus areas and allows for implementation of new fast Chargers in our service territory in Minnesota.
We're also supporting comprehensive transportation legislation in Minnesota that includes the potential for customer rebates similar to what we're implementing in Colorado.
We're planning a more substantial update around these programs this summer to coincide with potential federal funding from the <unk> and.
And these are important steps in helping drive electric vehicle adoption as we support the goals of our states.
Given strong alignment with our states on EV goals and our progress to date, we continue to anticipate significant long term investment opportunities and load growth from electric vehicles.
We've made significant progress this quarter and I'm proud of the way our teams delivered those results are regulatory settlements and outcomes reflect our diligent efforts to listen engage and collaborate with our many stakeholders not just through regulatory processes, but also through our sustainability.
Priorities in our core values.
We have a history of strong storm restoration and earlier this month had another opportunity to showcase.
Our operational excellence when we experienced two feet of snow in North Dakota.
Our teams are prepared and restore power customers quickly despite battling frigid conditions.
Our system resilience and storm preparedness are great examples of our continued discipline and proactive planning.
Strong execution.
And our employees commitment to customer service.
We strive to live our company values every day and as a result, we were again named as one of the world's most ethical companies by Ethisphere.
And the world's most admired companies by fortune.
Also recognized by military times, and Gi jobs for our continued commitment to veteran hiring.
And finally.
To pause and remember that today April 28 as workers Memorial day.
Which for more than 50 years has been a day of remembrance for workers, who have been injured or killed in the line of work.
And I want to acknowledge that all the women and men of <unk> energy.
Our contractor partners.
All utility workers across the country and sacrifice to provide the critical energy needs of our customers and our communities.
And with that I'll turn it over to Brian .
Thanks, Bob and good morning, everyone.
We had another solid quarter recording earnings of <unk> 70 per share for the first quarter of 2022, compared with <unk> 67 per share in 2021.
The most significant earnings drivers for the quarter included the following.
Higher electric and natural gas margins increased earnings by <unk> 12 per share.
Primarily driven by riders and regulatory outcomes to recover our capital investments.
In addition, our lower effective tax rate increased earnings by <unk> <unk> per share.
But keep in mind production tax credits lower the ETR ETR. However, ptc's are flowed back to customers through lower electric margins are largely earnings neutral.
Offsetting these positive drivers were increased depreciation expense, which reduced earnings by <unk> <unk> per share, reflecting our capital investment program.
Higher O&M expense, which decreased earnings by <unk> <unk> per share.
Higher interest expense and other taxes, primarily property taxes decreased earnings by <unk> <unk> per share and other items combined to reduce earnings by <unk> <unk> per share.
Turning into sales weather adjusted electric sales increased by three 9% for the first quarter of 2022.
Largely due to higher C&I sales driven by improved economic activity as COVID-19 impacts lessons.
Our unemployment rate is 60 basis points below the national average and their economies are growing faster than the average for the country.
As a result, we've increased our 2022 electric sales growth assumption of 1% to 2%.
Our O&M expenses increased $18 million for the first quarter, primarily driven by higher insurance costs and additional investments in technology and our customer programs.
Now projected annual O&M increase of approximately 1%.
While Bob touched on the resource plan in transmission regulatory approvals. This past quarter. We also made strong progress on various rate cases in.
In March the Colorado Commission approved our electric rate case settlement, which will provide a net rate increase of $177 million based on an ROE of nine 3% and an equity ratio of 55, 7%.
New rates were effective in April .
In February the New Mexico Commission approved our electric rate case settlement, which will provide a net rate increase of $62 million and includes an ROE of 935% and an equity ratio of 54, 7% for determining our revenue requirements for our wind projects.
Rates were effective at the end of February .
Now every settlement was based on compromises and we feel these are constructive outcomes for all parties.
We also have pending rate cases in other jurisdictions.
In Texas we.
We have a black box settlement in our electric rate case, which provides a rate increase of approximately $89 million. The agreement also accelerates the depreciation life of the <unk> coal plant to 2034.
A commission decision anticipated later this year.
We also have pending electric and natural gas rate cases in Minnesota and our early in the process. We're in.
In the discovery phase and expect intervenor testimony to this fall followed by commission decisions in 2023.
In addition, we'll look for opportunities to reach settlements on both these cases after intervenor testimony has been filed.
Earlier this year, we filed a natural gas case in Colorado.
The request is driven by significant capital investment to support continued customer growth safety reliability and resiliency.
We anticipate a commission decision later this year and final rates to be implemented in November 2022.
Details on these cases and schedules are included in our earnings release.
Shifting to earnings we've updated our 2020 guidance assumptions to reflect our latest information.
Details are included in our earnings release.
Please note our depreciation expense assumption has increased.
Regulatory recovery in Colorado, and New Mexico.
In addition, the decrease in capital of riders and the lower ETR, reflecting the IRS increasing the value of the PTC. These assumption changes are largely earnings neutral.
Finally, the combination of increased sales growth favorable weather and lower O&M costs are expected to mitigate the headwind associated with replacement power costs related to Comanche, three and increased interest expense due to rising rates.
As a result, we are reaffirming our 2022 earnings guidance range of $3 10 to $3 20 per share, which is consistent with our long term, 5% to 7% EPS growth objective.
With that I'll wrap up with a quick summary.
The Minnesota Commission approved our resource plan.
The Colorado Commission approved our electric rate case settlement and pathway transmission project.
We reach a revised settlement on the Colorado resource plan, which has the support of additional parties and accelerates retirement of Comanche three to no later than January one 2031.
We are reaffirming our 2022 earnings guidance 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 bills low for our customers.
This concludes our prepared remarks, and operator, we will now take questions.
Thank you as a reminder, if you wish to ask a question. Please press star one on your telephone keypad, ladies and drew the mute function on your telephone switched off to allow your signal to reach adequate bench. We will now take our first question is from Jeremy Tonet from Jpmorgan. Please go ahead.
Hi, good morning.
Hey, Jeremy how are you a busy day for you.
That's right that's right.
Just wanted to start off on the solar supply chain a noted in the release some timing changes there and just wondering if you could speak to your conversations with developers in the supply chain and any thoughts you could share or any consensus sharing hearing out there with regards to resolution of the Doe <unk> second.
Circumvention investigation or any thoughts on that topic in general at this point.
Hey, Jeremy good morning.
We are certainly.
Seeing.
The directions, the disruptions and given you saw the impacts in our earnings release and all the impacts. It has had on the panel supply now we're in regular contact with developers whether it's on now.
<unk> projects or Ppas that are in the works or even as we think about.
We're going into potential Rfps in Minnesota, and Colorado later this year.
I don't think there's necessarily a consensus I think theres a good arguments for it not to be affirmed in terms of tariff, but we'll wait and see where the department of Commerce rules on it certainly right there'll be the preliminary finding.
At the end of August will be the first real data point and then we'll see how things go from there for us.
Think we're in we're in a good spot solar capex is less than 3% over overall five year Capex plan and we have flexibility to delay our projects. The scirocco solar project in the Western Mustangs. So it really just pushed them later into our five year plan.
So I just wanted to note that we are very committed to those projects. Both the scirocco solar in Western Mustang, while circle solar is going to be the largest solar farm in Minnesota that we're pretty excited about it we can reuse a cold transmission interconnection.
It reinvests tax space into that community and also to create good local paying union construction jobs. So we're very committed to that and look forward to working with our intervenors and our stakeholders and the commission as we bring forward a new plan on that but really we just ask for some time as you said to work through kind of what the real supply chain impacts are here.
<unk>.
I think broader or on a broader note I think is really points to.
The importance of getting a domestic clean energy supply chain and hopefully with this event and some of the other global events that are happening as we can get some legislation passed in Washington as Bob noted.
There's a lot of incentives for clean energy manufacturing and we're very supportive of that and then also very supportive on the tax credit side for production of wind solar hydrogen I think that will be absolutely great for our customers long term.
All we know is certainly weighing in where we can on this issue.
Got it.
That's very helpful. And then maybe just pivoting towards Colorado and the IOP revised settlement filed in April .
With the implications for the 2031 Comanche unit three retirement.
Just wondering how you think about I guess potential generation replacement options going forward at this point or just any other details on that that you can provide.
Yes, Jeremy it's Bob we said that we've got about 4000 megawatts of new renewables.
As part of this resource plan.
As it pertains specifically to Comanche three replacement, we're going to need a separate regulatory proceeding to address the capacity replacement in the energy replacement.
Of that unit and we expect that to be maybe two to three years from now.
Got it. Thank you and then maybe just a quick last one on MISO that $1 billion to $2 billion.
Capex for tranche one.
That you identified today, just wondering how that I guess squares versus your expectations have they been kind of changing over time based on what youre seeing unfolding here.
Any other thoughts I guess for two and three sizing up what.
<unk> investment opportunities might look like for example.
Yes look we see great opportunity and great need for transmission expansion in the upper Midwest.
And as one of the largest transmission owners in the country our expectations for future one in tranche, one really havent changed that's still a bit of our same range one to two in tranche, one and 5% to six over future one.
And then if you think about longer term in the country nationally when you look at MISO future three that looks a little bit more like what would match something that has the de carbonization plans.
The United States embedded into it so we see great opportunity here.
Only thing that's changed in our view was a little bit of a delay in the timing of.
The MISO publishing the results and then getting board approval for the plans, but our investment opportunity looks very similar.
Got it Thats all very helpful. I'll leave it there thanks.
We will now take our next question from Julien Dumoulin Smith from Bank of America. Please go ahead.
Hey, good morning, and thanks for the time.
Hey, good morning Julien.
Hey, so perhaps just a nuance here on Comanche III, just if you can speak to just the debt, which the plant did out in kind of near term.
Purchase power impacts I imagine that that's that's fairly transparent I wanted to check on that and then also related on C. III I've just any efforts to improve the reliability of units through the 2031 timeframe.
Sure happy to chat about it look.
Unit three went down in January and our fourth quarter call, we indicated that.
It was likely going to be a two month repair after.
After inspection and discovery it looks more like a four month repair in our costs.
It looks more like $25 million as opposed to the nine or 10, we talked about in the first quarter.
I feel comfortable with that in that.
The.
Collect our rings and the generator, which is what we needed to repair or source have been procured and have been delivered to the United States and we're starting reassembly as early as this week. So our June timeframe I feel pretty comfortable about.
<unk> did have higher purchase power cost to replace that unit and Thats reflective of the 2000 $25 million estimate that we put out there.
Look longer term.
The reliability of that unit I think early in its life and add some asset challenges and they are largely behind us.
And I think we've spent a lot of time on operational excellence at.
And our generation fleet broadly and in Colorado in particular, and I think we should have sustained reliability in that unit for the balance of the decade.
Okay.
Got it excellent and then just if I can pivot here into the buy ins.
You previously talked about obviously some of your peers are as well I mean, how is that going the process negotiations.
And cost increases is that an issue here to for the relative economics or is pressure on that vertical keeping the economics close to attack here just to kind of revisit the wind subject, especially in light of everything going on.
Yeah.
Hey, Julian just clarify when you say buying you mean PPA buyout.
Buyout opportunities.
Sorry.
Yes.
Nomenclature of different companies.
The way we've talked about it recently.
We still see a good opportunity, but I think for us.
Next opportunity comes through the Rfps that we're issuing.
After we resolve the Minnesota resolve the ERP and we're awaiting on the Colorado Commission to.
Approve our revised ERP settlement. So I think that's the process for us in the near term in terms of seeing some potential PPA buyout opportunities as it will get better into an RFP and we have a nice process setup. So we'll have to work outside of that I think so as I think about the longer term.
With where gas prices are today and call the upward.
Step change in long term gas forecast as I think it provides us more opportunity on wind, even if you see higher capital cost per win pushed up by inflation or on the solar side right that comparison against gas being kind of the marginal fuel the offset fuel is we'll make the renewable strategy and <unk>.
Buyout opportunities more valuable for our customers in right, we have to demonstrate customer benefit so and then the other data point to Washington.
We've spoken about it before as an extension of the long term extension of Ptc's just provides a longer runway for us to look at buying something else repowering them, because we've been very successful at a recent buyouts that have been a buyout and repower. So that's a little bit of commentary for it but I think when you think about inflationary costs on renewables.
Relative to how we look at it for customer benefit and white feels youre offset as I think they'll still hot.
Alright, so certainly I am just curious on the timing it sounds like that's not necessarily as relatively pricing with some of the rfps that you Bosphorus.
Yes, no I think it's more about the commission when there's a process upcoming like an RFP The commission.
It makes sense for us to follow that RFP and have it that process already laid out versus doing a separate.
One off regulatory approval.
Got it okay excellent I'll leave it there. Thank you guys.
We will now take our next question is from Doug Dash Chopra from Evercore. Please go ahead.
Hey, good morning team. Thank you for taking my question.
Brian just one quick one for me.
Looking at the 2020.
Earnings guidance reaffirmation that changes the depreciation expense increase that is is that I know.
Regulatory recovery here is that our depreciation expense change that.
To whatever studies that you were able to get or what does that actually represent.
It's really the implementation of new rates with the rate cases in Colorado, and new Mexico, and so that will be offset by the revenue with it. So it's really earnings neutral and just the implementation of new rates that comes out of it.
Got it is that cash flow accretive.
Are you.
Is it a higher rates or are.
Yes, okay.
So this would be cash flow positive modestly I guess.
Yes.
Okay. Thank you.
We will now take our next question from Travis Miller from Morningstar. Please go ahead.
Good morning, Thank you.
Hey, Travis.
There's been a lot of talk obviously about solar and supply chain I'm wondering you touched on this a little bit but I wanted some more comments on could you see a shift toward wins in the near term, especially these rfps would you anticipate maybe seeing a little solar pullback at least again in the near term.
More wins and other supply chain issues that might prevent that on the wind side.
You know Travis.
It's a good question.
One of the reasons why at least in Minnesota, we have slowed down.
RFP is to see if we can get some visibility into that preliminary finding.
For the the tariff investigation and so I think that will help but these are longer term right. We're looking to source renewable projects 25 and beyond so I think it's.
It's a fair question and you certainly could see some shift from slower when maybe in the near term but.
The way we look at it long term, we are adding a lot we do need a lot of solar and we need that resource diversity from wind and solar and so it's not just purely a cost perspective, it's what what is called the capacity accreditation for solar so there's a little bit more nuance going into it even if you do see some changes in overall capital cost.
So Travis it's Bob just to add on to what Brian said, when you think about our renewable mix right. Now we're about 11 gigs of wind and two gigs of solar if you count community and rooftop in that number.
As we look forward to the 10000 megawatts that we're likely to add over the next decade.
<unk> 60, 40 wind solar, but that's for US, it's indicative of our needs and where we what our starting point is you asked a good question about nationally could you see a shift towards wind in lieu of solar I think it's going to be company dependent but you do raise a nice thoughtful point around.
The wind supply chain looks a little bit more certain right now than the solar supply chain, but again, we expect the DLC outcome sometime in August .
And we're hopeful to not have a significant tariff there.
For the benefit of our customers and in the meantime, just the fact that we've got.
Still still working hard on federal legislation for tax credits recognizing that with inflationary pressures on both all of these will be mitigates for our clean energy transition across the country.
Oh, great. Thanks, so much I appreciate all that detail and then just one other quick thing when might we see some of these transmission projects and proposals start flowing through your Capex plan. So it's a year away two years away.
Months away.
So Travis.
We expect.
Approval in call it the summer timeframe MISO July timeframe, and then certainly we would need to go through a certificate of need process with our commissions.
But right now we don't have any of that MISO capital that and call. It tranche one in our five year plan.
So could you start to see it in the 'twenty five 'twenty six timeframe certainly potentially.
And we will give you more visibility into that as we get some ourselves with the approval of MISO and then we start the regulatory proceedings at the state level.
Okay, great. Thanks.
We will now take our next question from Nicolas Kim Hello from Credit Suisse. Please go ahead.
Hey, everyone. Thanks for squeezing me in here and taking my question.
A pleasure that I heard you on the yes. Thank you.
I heard your prepared remarks on just the MISO capacity print can you just kind of.
Date us on how <unk> is exposed to these higher capacity prices on the supply side here just kind of saw some of your MISO tiers.
<unk> put out some releases on some.
Seemingly high.
Bill impacts.
And I know, it's very specific to how your own vertically integrated portfolio is positioned so just how should we kind of think about the impact of supply costs for XL customers. Thank you.
Yeah, Nick good morning, and good question.
That's clear.
Clearly it's hit some headlines here in April as a result of that planning auction and I would say it was unexpected by parties right you had the.
Capacity payment last year, it was $5 per megawatt per day and it hit the cost of new entry here in <unk>.
Italy MISO was short when you look at the numbers.
<unk>.
No.
I think it really highlights the importance of dispatch of coal generation in making this <unk>.
Transition.
Reliably and methodically and I think you saw that in our commission decision with our resource plan as they saw the need for us to add dispatch will generation as we shut down a coal units.
And so but for us in this auction specifically were long and.
So it's a benefit to us and ultimately will be a benefit to our customers and the way. We look at it is it will flow through in our Minnesota rate case and to help us mitigate our electric rate case, and hopefully facilitate a settlement. So overall, it's a we're in a good position with the capacity auction.
It's important and just credit to how we think about this transition to ensure that we have the capacity to serve our customers.
Yeah.
That's real helpful. And then just just one cleanup question on the on the MISO transmission Capex upside is it still for any kind of capital upside that's not in the plan today should we still be thinking 50% equity funding there.
Yeah, that's fair I mean, the one caveat that we've spoken about before is we get federal legislation passed that does help us from a financing perspective improves our credit metrics so but.
If we don't get that then that's a good way to think about how we finance incremental capital.
Thank you see in New York here in a little bit having been one absolutely looking forward to.
We will now take our next question from Ryan Levine from Citi. Please go ahead.
Good morning.
If the Colorado Research plan tilts away from solar how could this impact incremental capex connected to the Colorado pathway.
And that there was some language in your presentation I was hoping to clarify.
So Ryan I think you were talking about the potential incremental capital that we need for the Colorado power pathway that we have now we haven't called upside, but we havent identified yet around voltage support system stability.
Correct.
Okay.
I think it really depends it's a tough one to answer because it depends on exactly where these projects are our end up.
Being located and so I think it's a little bit too early to say, if we shift some more to wind and solar.
Because it is so location dependent asset dependent and.
And how we think about it so we certainly no broader point is we absolutely believe we need that capital.
It's just more of.
Where it's going to be located right, we've talked about it a lot of it.
The think of the $3 45 that we're building is a free way and these are they on ramps and off ramps and sold needed, but it's a fair question that we just don't.
Needs to be a little bit more visibility into what the actual portfolio could look like.
A marginal shift between wind and solar probably doesn't change that number much.
And to be clear Ryan we've not made any change in our view of solar versus wind, it's really going to come through the RFP process to determine.
How many megawatts of solar how many megawatts of wind are ultimately chosen.
Okay, and then one just broader question given some of them moving timelines with given supply chain challenges and some of the solar policies from the government.
Broadly are you feeling about reliability within your service territory.
And needs for incremental capacity to help serve your customers.
It's a great question appreciate it Ryan this is Bob if.
If you saw in both of our resource plans.
We have continuing need for firm dispatch will resources in the upper Midwest.
We got a separate certificate process to build back firm capacity in the upper Midwest.
Early in the Colorado Resource plan proposal. So we recognize the need for reliability now youll see that we moved in the upper Midwest for example from a combined cycle to combustion turbines, we do think that with the geographic advantage and the place that we sit in the country. We do have.
Hi, Hi, Hi.
High capacity factors for wind and coincident peak solar so we do think that the assets that need to come back are largely combustion turbines. We're prepared and have offered in all of our jurisdictions to be able to co fire those with green hydrogen when and if that becomes available.
And so we're looking at the very low capacity factors, but a real need for system reliability.
I think about Cts broadly, it's a bit of an insurance policy.
We need them for the very rare times, when the Sun doesn't shine and the wind doesn't blow in the batteries aren't available.
But it is a great insurance policy to have.
And Ryan just to add onto that absolutely agree with everything Bob said in terms of longer term in the short term certainly we expected some solar plus storage projects come online in Colorado and were negotiating with the developers there about the impacts we're seeing yourself will evaluate alternative opportunities to ensure we have reliability in the system.
I appreciate the color. Thank you.
We will now take our next question from David Peters from Wolfe Research. Please go ahead.
Hey, good morning, everyone.
Just curious to maybe get an update on some of the regulatory items in Minnesota in near term I think you have.
Yuri gas recovery case, where an ALJ report is due soon I know initially you were pretty far off with some of the intervenor positions, but wasn't sure if.
Conversations have developed since then to where he can maybe resolve that and then.
Just related any commentary on the rate case, if any I know it's still early there.
Yeah, Hey, Dave in Europe .
<unk>.
<unk>.
We are awaiting that ALJ decision, we should get it at the end of May about the 25th.
And we are still fairly far apart with the office of Attorney General and Department of Commerce, I mean, if you read our testimony in her comments, we strongly disagree with the assertions.
And we believe we acted prudently and according to the commission approved hedging procedures really for the best interests of our customers. So we will await that ALJ recommendation and then once you get the ALJ recommendation it should likely be in August with the commission.
Decision on that.
On the rate cases.
It's still early.
In the preceding right. There was a couple of other rate cases in front of us that they call it or had been serially working through so we haven't received a lot of discovery yet in the electric or gas case, so not a whole lot to update you on.
But certainly as we get through through the year.
Like I said, we talked about.
So the MISO capacity capacity auction being help mitigating the impacts we've seen really good sales growth in Minnesota.
And our economy strong here in Minnesota, So it's good things to see that hopefully as we get later in the year and can start to talk about settlement opportunities within regions. We can reach a pretty constructive outcome for all of our parties.
Great. Thank you.
I would now like to turn the call back to Brian Van Abel CFO for any additional or closing remarks.
So thank you all for participating in our earnings call. This morning, please contact our Investor relations team with any follow up questions.
Okay.
Thank you that will conclude today's conference call. Thank you for your participation ladies and gentlemen, you may now disconnect.