Q3 2022 Xcel Energy Inc Earnings Call
Benefits of the IR Rea extends the growth rate and improves the quality of rate base reduces financing risk improved credit metrics and deliver 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 credits 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 footprints 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.
Tax credit transferability will increase liquidity and improve credit metrics.
An excellent example of the Irish tax benefits as our 460 megawatt <unk> 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 a top five installation in the United States, which will go into service in 2024 and 2025.
Following the IRA passage the level is cost of Serco solar is projected to decline by over 30%.
Even after accounting for inflation and supply chain pressures due to the project qualifying for both solar Ptc's and community energy bonus as we are reinvesting in the community around our retiring coal facility. This is a substantial benefit to our customers.
Earlier this year the commissions in both Minnesota, and Colorado approved resource plan that will add nearly 10000 megawatts of utility scale renewables to our system.
And achieve an 85% carbon reduction by 2030.
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 level of 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 a mixture of self build build own transfer project as well as some power purchase agreements.
Our generation resource plans are consistent with our steel for fuel strategy, which provides a valuable hedge for our customers against rising commodity prices.
As an example, our owned wind farms are projected to generate nearly $1 billion of fuel related customer savings in 2022 alone and almost $3 billion 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 the clean energy transition.
We also continued to advance our broader ESG leadership as MSCI recently upgraded <unk> rating from double AA AAA and categorized our company as a leader in their normal glazer 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.
We were also named to Investor's business Daily 100, Best ESG companies, which is further recognition of our ESG leadership.
With that I'll turn it over to Brian .
Thanks, Bob and good morning, everyone.
We had a solid quarter recording earnings of $1 18 per share for the third quarter 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 <unk> 33 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.
Keep in mind production tax credits lower the ETR, However, PTC as our flow back to customers through lower electric margins are largely earnings neutral.
Offsetting these positive drivers were increased depreciation expense, which reduced earnings by <unk> 10 per share, reflecting our capital investment program.
Higher O&M expense, which decreased earnings by six cents per share.
Higher interest expense and other taxes, primarily property taxes decreased earnings by seven cents per share and other items combined to reduce earnings by seven cents per share.
Turning to our sales our year to date weather adjusted electric sales increased by two 2% largely due to higher C&I sales driven by strong economic activity in our service territories.
The year 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&M expenses increased $43 million for the third quarter, driven by investments in technology and customer programs storm cost vegetation management and inflation.
Like other businesses, we're facing inflationary pressures and now expect an annual O&M increase of approximately 4%. This.
This represents a step increase due to cost pressures. However, we anticipate flat O&M in 2023.
We've made progress on a number of regulatory proceedings.
During the quarter, Minnesota Commission approved our Euro storm settlement moving full recovery of all costs.
Exception of a $19 million of slots.
Now resolved urea cost recovery in all of our states with the exception of Texas.
We also have pending electric and natural gas rate cases in Minnesota.
And then the natural gas rate case, we reached a comprehensive settlement, which reflects a rate increase of $21 million and Roe.
ROE of $9 five 7%. Our 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.
And the Minnesota Electric rate case, we recently received intervenor testimony.
Department of Commerce recommended three year rate increase of $274 million based on an ROE of nine 5% and an equity ratio of 52, 5%.
In addition, the department of Commerce recommendation reflects customer credits for the MISO capacity auction revenues an extension of the depreciable lives of the Monticello nuclear plant and our wind farms.
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 million for our natural gas case, reflecting a historic test year with a year end rate base and $16 million of incremental depreciation and depreciation expense.
The Commission also approved a weighted average cost of capital of six 7%.
Which will reflect a an ROE of nine 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 are evaluating options of filing another rate case is the natural gas business remains a critical part of the energy infrastructure in Colorado that is valued by our customers.
As far as future filings, we plan to file a Colorado and new Mexico Electric rate cases later this year, the Texas rate case in the first quarter of 2023.
As Bob mentioned, we've issued a robust $29 5 billion five year base capital forecast with a rate base growth of six 5% using a <unk> using 2022 as a base.
The base plan reflects significant grid resiliency investment, our Colorado power pathway proposal and other transmission system investments to maintain asset health and reliability and enable renewable generation.
The plan reflects a modest global renewables, including a circle 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 a potential incremental capital investment for renewables associated with the Minnesota, and Colorado resource plans.
Our proposed resource plans include approximately 3500 megawatts of additions from 'twenty to 'twenty four to 2027, which would result in capital investment of $1 $5 to $3 billion, assuming 50% ownership.
In addition, we anticipate the need for an incremental $500 million to $1 billion of related transmission for the Colorado IRB.
Combined we could see a potential incremental investment to support the clean energy transition of.
$2 billion to $4 billion.
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 $8 billion 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 five year plan transfer ability to reduce equity needs to $750 million, while we've increased capex by $3 5 billion.
In addition, we anticipate that any incremental capital would be finance at roughly our current capital structure.
It is important to recognize that we've always maintained a conservative financing strategy, which reflects our strong balance sheet and credit metrics are 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.
Bob discuss IRA customer benefits, but I wanted to add a few more details.
Tax credit transfer ability is projected to provide $1 8 billion of liquidity, which increases cash flow and reduces our equity needs.
Our <unk> to debt metrics improved by approximately 100 basis points during the forecast time period, even after adding $3 $5 billion of capital and reducing equity needs.
The solar PTC and tax credit transfer for ability to improve the competitiveness of our renewable bids.
We project the IRA will driver approximately $500 million of customer savings from our own renewable projects over the next five years and nuclear Ptc's could drive additional savings.
We anticipate that pricing will decline in 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 AMG as a result of makers depreciation and 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% key assumptions are detailed in our earnings release.
With that I'll wrap it up with a quick summary IRA.
<unk> was passed with significant benefits for our customers and the company.
The Minnesota Commission approved our <unk> solar project.
We reached a constructive settlement in our Minnesota natural gas rate case.
The Colorado Commission approved our natural gas rate case.
We are narrowing our 2022 earnings guidance range.
We announced a 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 bills low for our customers.
This concludes our prepared remarks, operator, we will now take questions.
Thank you if you would like to ask a question. Please press star one on your telephone keypad.
Well take our first question from Nicole I'll come from MELA can I just switch.
Hey, good morning, everyone can you hear me.
Sure Hey, good morning.
Hey, good morning, good morning, So I guess I'll just start it off I mean, youre raising capex.
Decreased equity need the CAGR. It's still the same can you just give 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 and the various tax impacts but.
Any more clarity there would be helpful.
Yeah, absolutely, Nick and ill handle that one yes, I mean, when we look at the IRI a huge win for our customers and also in really and when you think about our financing plan that's around transferability and there is an offset because a majority of those tax credits were on our balance sheet as a deferred tax asset, which would increase the cost of our renewable project.
So by by being able to monetize them, we reduce that tax asset on our balance sheet lower the overall <unk> for our wind projects and solar projects to our customers and improve our cash flow. So you do have lower rate base from that in.
In a vacuum, but it allows us to reduce our equity needs increased capex and have basically a higher quality rate base as we think about it I'd much rather have steel in the ground and in tax assets on our balance sheet.
And Nick just as a clarification those.
Tax credits are not currently on our balance sheet, but they would have been in our on our balance sheet without transfer tax credit transfer ability in the future.
Got it that's helpful. That's helpful.
And then in the electric rate case in Minnesota, If I heard you correctly I think you are engaging parties for a possible settlement can you just kind of give us a sense of.
Overall confidence level and just getting it across the finish line and then.
Is there a drop dead date that you need to get this done by if you were to like is there a hearing date, we should have in mind.
Yeah, Nick it's Bob Good morning, and thanks for the question.
Look I think on the Minnesota Electric case first and foremost we've got the gas case behind us.
That's a good framework for some of the items in the electric case, we're engaged with parties.
I think rebuttal testimony is due in the middle or the hearings are in the middle of December . So I think we should target that as a deadline for settlement opportunities.
Alright, thanks, so much you'll see in a few weeks.
Yeah.
We will now take the next question.
David Arcaro with Morgan Stanley .
Hi, Thanks, so much for taking my question.
Maybe sticking on the regulatory 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.
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.
Three year forward gas case.
We are expecting capital expenditures, continuing next year and the year. After 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 some time in 2023 for a new gas case.
Yep 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 and Repowering opportunities in the wake of the IRA has that become a bigger opportunity for you look at now.
Yeah, I'll take that one I think it absolutely does and the way I would think about it.
<unk> extends our PPA about opportunity for a long time right. What we've been successful and we bought out about $750 million of PPA has over the past number of years and we were successful because we brought forward a win for our customers a win for US right. We were able to buyout a PPA with steel in the ground and serve our customers.
Money and we did that by buying out a PPA and repowering it and qualifying for new new set new strip of tax credits on the wind side.
So.
Free IRA the buyout opportunities, we're stepping down as your tax credit step down now since we have a 10 year plus runway of Ptc's and also we're looking at evaluating solar buyout opportunities. It can repower on a solar PTC farm. So I think there's a much longer runway for buyout options and none of that into our capital forecast.
Our five year plan as upside and I think longer term as you think about Repowering as you mentioned repowering.
So we put.
Over 3000, Gigawatts or 3000 megawatts of wind in service between 18, and 21, and we'll look at potential Repowering. Those in 2028, 2029, 2030, and save our customers money like we're doing with our forward wind Repowering in Minnesota right. Now so I think there's really extends our opportunity on the PPA buyout add our own.
Repowering opportunities.
Thanks, that's helpful color it seems like a big opportunity any.
Any just visibility into timing of clarity as to when those could crystallize in terms of hitting the.
Hitting the Capex plan I.
I think what we could potentially see in the Colorado like we talked about potentially seeing bids in the RFP and the Minnesota RFP was focus on solar Colorado, one will be an all source RFP. So we could potentially see something in that RFP that will launch later this year that Bob mentioned, we'll.
Youll get visibility and call. It mid to later next year could be the first time.
Because when we were middle of kind of a resource plan in RFP processes processes that 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.
A developer that is willing to transact in a at a price that's beneficial for our customers.
Yes got it okay, great. Thanks, so much.
We will now take the next question is from Jay.
Aaron Mokoena J P. Morgan.
Hi, good morning.
Hey, Jeremy how are you nice headline.
Yes.
Yeah.
Thanks for that.
With like in the Vaseline I'm just wondering.
Thank you for all the detail today on Capex, but what could be incremental maybe on the horizon here if idea kind of asked what more could come in over time.
And specifically any thought.
Some additional MISO opportunities, whether that's competitive or upsizing future LR TP portfolios.
Yeah, Hey, I appreciate the question a couple of things that Brian highlighted.
What we would call incremental capital that 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 opportunities $2 billion to $4 billion.
At the midpoint of that we'd probably have rate base growth in the mid sevens.
Additional to that things early things are starting to think about I mean, you heard the.
Previous caller's comments around PPA buyouts, and Repowering Thats certainly in our sights, we havent 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 array, we see economics in solar and wind down there that could make an acceleration of renewables in.
The Sps territory also not in our plan would be towards the back end of the five 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 grids enabled 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 Brian Yes, I would just add a couple more to that one is in our five year plan, we have nothing on hydrogen whether if there is opportunity on the on the electric side or potential looking opportunities on the gas LDC side as we work through a clean. He plans then also storage.
We're working on some interesting long duration storage projects and also with the Standalone ITC on store for our 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 is as we think through the overall benefits of the IRA.
Got it that's that's.
Great to hear and just wanted to go into 'twenty three 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-19 normalization or some I guess.
Conservatism here and just thoughts I guess on achieving flat O&M in 2023.
<unk> I guess work that you've done this year to de risk the 'twenty three outlook if you could.
Kind of give us thoughts as to how that factors into the 'twenty three guidance, yes. The first part is to make sure youre talking about sales right yes.
Yes.
Yes, so I think the way you frame it up it's a little bit of both right. So post COVID-19 normalization, we expect to residential use per customer to come down kind of like we saw in Colorado. This year, where Reza use UPC has come down more towards pre pandemic levels and I think we expect to see that in other jurisdictions to why.
We do see continued economic growth so.
You could call Conservative we are certainly conservative with our sales forecast for this 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&M side, Yes, I think.
As we went through this year right, where certainly subject to the inflationary pressures and we had been flat since 2014 on O&M. So that was eight years of being flat and we had some inflationary pressures had storms this year.
Increased investments in our customer platforms.
And also we are running our coal plants much more given the change between gas prices and coal so higher chemical costs higher higher plant costs. So as we think about next year and we had a good year. This year. If you look at kind of a change in the guidance from Q2 to Q3, we invested this year right and when we have when we have good times. So that's why we.
We think about next year in maintaining flat almost a rebase lining to this year doubling down on continuous improvement programs and setting yourselves up for next year.
Got it Thats all very helpful. One last one if I could if you might be able to speak on the Colorado gas steppe increased denials.
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.
I wouldn't 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 Uri on the gas case so.
So no I don't think I'd I'd sort of read through too much to the electric side.
We are continuing to invest in that system for safety and reliability and continued customer growth. There. So we need to make sure that we're having the right balance of healthy financial metrics for the company.
So we are going to file a rate case next year.
Yeah, and I, just think about longer term.
On the gas LDC side like our net zero plans for 2030 in 2015 on the LDC side are aligned with the climate science. They are aligned with the state goals and we're looking forward to working through the clean he plan in Colorado really.
Think about resource planning on the gas side, and I think that will help us align with the commission and our stakeholders. How we achieved these 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 and just to put a timeline on that you should see clean heap plan filing from the company sometime in the second half of next year.
Sure.
Got it that that all makes a lot of sense just checking thank you.
Alright. Thanks.
And we will now take the next question from George West Chelsea.
So I'll start with clients.
Hey, good morning, guys solid quarter here. Thanks. Thank you.
Just I actually had two questions Brian for you just one thank you.
I think you mentioned this in the remarks, but the jump in CFO between the two plans.
The one eight or 2 billion is included in that CFO number right from the from the correct.
Okay, then maybe just because it's a newer concept how does that actually work.
At a market for it and how should we think about you are monetizing.
Those taxes I heard quality, that's for newer assets, if I'm not wrong. So maybe just any color that you could give us there, which will help us profile to the cash flows through the five years.
Yes.
Absolutely and the year.
It's a great question because the market for PTC is in.
Transferability doesn't exist because it's being stood up and its effect of one so any credit generated starting January one of 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 LC OEM projects and for US we spent a lot of time.
We're not waiting for a market to get setup right longer term I think a liquid exchange ultimately get 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.
<unk>, we've had very good reception in the discussions we've had.
And so we feel very confident in being able to execute on this transferability, but even just being conservative we've only assume we transfer half of half of those credits in 2023, just being conservative nature.
So it takes a little bit of wireless 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 in the interest there from the other corporates.
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 use.
To offset your taxes currently am I thinking about that correctly, Brian yes.
Okay. Thanks, so much Brian ever so helpful. Thank you so much yes. Thank you.
We will now take the next question from.
You bet.
Good morning, Bonnie.
Gives me how are you.
Hey, great. Thanks.
So I'm just want to wind back a little bit to Nick's question on growth you lowered the 'twenty two base year to about $38 nine which is lower than you previously forecasted growth when you're growing rate base out a little bit faster.
Look at your old forecasted sort of six four to six 5% through 25 and now it's kind of 71 to 74, depending on the year through.
<unk> 25.
You mentioned transferability sort of brings that back a little bit, but now if I look at sort of your three year rate base growth out to 'twenty five its about seven 3% and before it was sort of six 5% or just under that so it would seem to me that youre really pushing the high.
And to your EPS growth guidance here or am I, not thinking about that correctly and then I guess the second part of that question is the growth tails off a little bit in 'twenty six 'twenty seven is that where you see most of that 2% to $4 billion in capex upside potential coming in.
Yes, so so I think.
Ross the way, we think about it is really now five to seven but we publicly targeted 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 yes.
We have generally be known to put a conservative plan in place and we have a lot of incremental upside and I think you hit 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 two years of our plan. So I think.
That's the way to think about it as we kind of have that continued year over year strong rate based growth.
Okay. Thanks, Brian .
Maybe if we just look forward into winter how are you thinking about natural gas fuel expenses in there.
Is any of that been sort of defer through the regulatory process or how you're just thinking about doing pressure generally how do you keep that with customers because natural gas prices are up a lot year over year.
Yeah, Ross, it's Bob we heard.
Certainly sensitive to the commodity impact on our natural gas customers in their bills. This winter we've been very active.
And energy efficiency programs, we've been very active on the federal and the state levels on identifying and trying to secure significant portions of light heat funding and then working with our customers directly to find and enable those customers that may not even know their light heap eligible to benefit from some of the.
That we have in the state and at the 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 are feeling in rent and they're feeling it at the grocery store.
So we're epithetic were doing everything we can to mitigate the impacts we have extended the cost of the winter storm Yuri costs in various jurisdictions anywhere from two to five years. So we have.
Mitigated regulatory outcomes on that gas piece, but very active with our customers and communications as we go into the winter time.
And I would just add Bob you talked on the LDC side.
I'll touch on the on the electric side, right, where 85% roughly electric and we 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 thats exactly what we see now we're going to provide our customers over $1 billion in fuel related benefits or avoidance. This year alone with our owned wind farms and we got those approved back when their gas was two to $3 and the two.
The $3 range, so think about how economic those wind investments are for our customers now so on the electric side feel we feel good about where we are and also on the electric side, we have the third lowest bills of any investor owned utility in the country. So we're in a really good starting point to.
And so obviously, we're Bob said, we're very conscientious of customer bill impacts and spent a lot of time focusing on how we can mitigate and manage those for our customers.
We have very very good work on the liquid side, Brian I appreciate the answer thank you.
We will now take the next question from Steve Fleishman with Wolfe Research.
Yes, hi, good morning.
So the C.
The 18% <unk> to debt that you now see.
I mean, that's obviously great great number very strong.
Is that kind of your target now for <unk> to debt going forward or how should we think about that.
No Steve.
I think novartis has a little bit of a balance between naphtha voted that 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 certainly we can have a conversation about what that rate threshold is great to see our <unk> to debt was strong improvement.
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 maintaining that strong credit quality and not only at the holding company, but also to work with our commissions ensure we have strong credit quality at all the operating companies to because it really isn't the best interest of the customer.
Okay.
Just to clarify the comment that you made about the $2 billion to $4 billion incremental capital I think you said you.
Be able to finance it.
With the current capital structure.
You just better clarify what that means is 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.
Consistent with the consolidated capital structure, yes.
So there would be more equity needed to fund that.
Yes.
Caveat that with all depending on the timing of the capital right.
With more backdated, maybe have more flexibility. So that's just sitting here today, but it really depends on the timing and we will evaluate it once we get more visibility on on magnitude and timing of that capital.
Okay.
Okay, yes, because it just.
<unk> strong balance sheet, just 18% is kind of off the charts. These days so it's.
It's but it's also obviously better.
Probably not yeah, we said the IRA was good for us and 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 digest attack so happy to spend more time on it now.
Okay and then another question just on all the data that you gave on the IRR.
Savings for the cost of solar and wind so shortly at 30% lower than some of the data just.
I wanted to just make sure I understand the starting point there because we.
There have been a lot of inflationary pressures for like the last 18 months.
And so when Youre, saying these savings are you going back to before that are you going to kind of where you'd be now.
As the baseline, including those inflationary cost pressures that had already occurred.
Just want to make sure I understand the baseline for that.
Absolutely so sugarcoat I'll start with <unk> solar that includes from our initial very initial filing too.
The revised filing with a higher capital costs to address the supply chain pressures. So that is from includes all those pressures and then pre IRA pulsar right. So that's that kind of actual capital costs, including and pressures on the overall call it panel pricing.
So the 30%.
So the 30% goes back to the initial filing or to.
The revised.
The revised filing so.
<unk> filing an <unk> pulse Ira.
And then on the generics.
Assume capital cost is the same assumed today as capital costs are an inflated capital costs right. So assume capex is the same.
And.
Solar farm that would qualify for a 10% ITC versus now you get a PTC for us which is in regulated utility would choose the PTC and then the range is based on NCS and if you qualify for any called adders or bonuses. So it was just community energy.
So those are saving yeah, yeah got.
Got it and then wind right when that assumes.
Say, a 2027 wind farm that were qualified for zero tax credit zero Ptc's versus now a 100% ptc's at the escalated value as you assume overtime.
So that's really what our customers are going to see when we add those several thousand megawatts or five plus thousand megawatts in that back half of the decade.
Okay.
That's great. Thanks.
Thanks for that.
Our next question comes from the smelter.
Keybanc.
Hi.
Good morning, Thank you for taking my question.
I was curious if you could talk a little bit about that.
The collaboration with Bloom energy on that.
Zero emission electrolyze, there I guess, but produce hydrogen antwacky nuclear plants.
Just curious if you could give any color on the milestones there and also can.
Can you describe why it makes sense to have this type of a process at the nuclear plants, which is basically with plans and presumably could dispatch into the greatest all time as opposed to a wind facility and that may have more variability. Thank you yeah.
Yeah, Hey, Sophie it's Bob Thanks for the question.
Look we were a recipient of a.
Our high temperature.
Gas electric our high temperature elect 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 zero cost energy on our system, we see our nuclear plants, particularly in the shoulder months.
Starting to cycle up and down and we have 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 thats exactly what the concept of an electrolyzed or off the back of a.
Nuclear play does is you take the steam you, let the react to run at a 100% power, but did you don't run the generator at a 100% use that excess team.
Do seem that steam Reformation on the electrolyze or raise the temperature.
And.
And create hydrogen that way so you do it when the plant would otherwise be cycling that 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.
And your comment on the manufacturers as we chose.
Manufacturer for the Electrolyze her and I think that was your comment.
Okay, Yes.
Ill just add to it we're working through the development of it should be online in probably later in 2023 and.
And as we think 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 grant in and so this is part of a broader opportunity is we think we work with it with our states boats in Minnesota.
In the upper Midwest and also in Colorado and the surrounding states on a another hydrogen hub.
I guess does it make a difference.
Got it.
Nuclear plants that you avoid cycling versus just keeping it up to it.
Wind farm.
I guess, so my operational standpoint, maybe it makes sense, but.
The margin of course, if we can.
Generation is zero marginal cost of the nuclear plant is not zero. So economically does that make a difference and stay on the same great. It doesn't like how should we think about this.
So this is one of the unique aspects of this as high temperature steam electrolysis. So we're taking waste steam off the nuclear plant.
The water, which makes up 30% the electrolysis process, 30% more efficient.
Yes.
Okay got it.
That's all for me thanks.
We will now take the next question.
Similar.
With bank of America.
Hey, good morning team. Thanks for the time appreciate it.
Listen I wanted to just pick up a real quickly around the two to 4 billion real quickly with respect to the.
The upside Capex.
How do you think about that materializing.
With respective I know you've flagged the back half of the year, but can you talk about some of the dynamics here in the near term that would result from that upside in the back half.
Lot of are predicated on the Colorado RFP processes here, how do you how are you.
Think about that.
You are manifesting in software.
Government procurement processes unrelated to that what about upside to the 50% renewable assumption that we've used in the past you allude to it in your script remarks on that front. It seems like there could be some latitude weather probably reportings green.
Greenfield opportunity.
Yeah, Hey, Julien.
The first on yeah really too.
Processes, one is the Minnesota RFP is already in flight, we launched it in in 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 'twenty, three on the Minnesota, but thats, a smaller RFP than Colorado, Colorado 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 a decision hopefully by the end of next year out of the Colorado Commission, so a little bit phased between collar, Minnesota and Colorado.
On your question about the 50% assumption, we take a conservative assumption and I think given the opportunity and the benefit desire 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 were struck a few years ago aren't passing this benefit of transferability back to our customers as we are with our own wind farms, and we think about Repowering your own wind farms longs.
Term, it's more opportunity and benefit for our customers. So we think long term ownership of these renewable assets is really good for our customers and we're going to strive to learn as much as we possibly can.
Yeah, maybe let me just clarify little bit on the recall.
The Doc pretty strictly going to be done through the RFP process.
And the timeline and opportunity for the <unk> or is there more of an opportunistic ability to approach customers on a one off.
Thank you are implying the former.
Yes, when you say Repowering is so I think about our own repowering is 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 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.
But I'll come back to the PPA buyout concept, and we think that Rfps and preferred plans as part of our resource plans are an opportunity to bring some of the PPA buyout or do we have talked about that.
So we have a history of doing it outside of an RFP process as well as that being an emphasis and a driver for it. So I would expect that some of the stuff to come to fruition over the next nine months 12 months as we work through the process with our commissioners and with the RFP results.
Got it more of a holistic update say late next year, maybe by <unk>.
Across all of the above.
It sounds good.
Hey, Karen good luck.
Thanks, Sheila and couple of weeks.
The next question.
Ryan Levine.
Got it.
And good morning, just wanted to follow up on the hydrogen hub.
Comment.
To the extent that that how youre going to have is developed in your neighborhood are in your backyard can you just talk to the materiality for your business that was in light of CRA and your opportunities both on the gasoline metrics.
Sure Hey, this is Bob.
Look we're working on two applications for hydrogen hub. These proposals came out of the infrastructure and jobs Act that was passed around this time last year.
The <unk> now in receptivity mode to receiving proposals we've got one in the upper Midwest largely targeted.
Around North Dakota, South Dakota, Minnesota, and Wisconsin.
Got both the states and <unk> 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 were looking at <unk>.
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 of hydrogen that's produced from clean energy.
Similarly in the Western States. So in Colorado, we're working with a consortium of States, Wyoming, Utah, and New Mexico, and Colorado on a similar concept.
West and again a significant.
We in our Colorado companies at the center of those conversations again on electricity.
Hydrogen for electricity hydrogen for LDC system hydrogen for agriculture hydrogen for transportation.
So we talk about investment opportunities I don't think we've characterized them.
Fully in terms of the hub concept.
The deal we talked about the hubs being sort of $8 billion four to five of them. So you can think about them being $1 billion to $2 billion. Each in each of those are requested to have sort of matching investments from private industry to match the public funds.
And we've also characterize what a.
Hydrogen production that would match just 5% of our LDC is somewhere between.
$2 billion to $4 billion of investment between the renewables it takes to generated as well as the electrolyzed through 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. So I'd say, it's a multibillion dollar opportunity largely centered in the.
The back half of the decade.
Thanks, Jim.
Just to be clear you have some disclosure in Minnesota around how did you gain any combining.
<unk> is there any of that spending that's already in your plan or is this all incremental.
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 <unk> side, but none of the production of hydrogen is included in our plan.
I appreciate the color. Thank you.
Uh huh.
And we will now take the next question.
Ian Let's please Martin.
Yeah.
Yes.
Good morning, Thank you.
You just answered my exact question on the hydrogen home, so I won't repeat it but I appreciate all the detail there.
I'll just throw in one more in terms of the election or any issues that could be.
Looking at her T changes potentially in any of the statements Marvel policies our legislature.
Hey, Travis it's Bob good morning. Thanks.
Thanks for the inquiry on hydrogen glad we can answer your question on the election and I think we're about 10 days away lots of activity on the TV lots of signs lots of mailers lots emails and texts.
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.
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 thats going to dramatic.
Dramatically change our plans our investment philosophy, and our 10 year trajectory that we laid out today.
Okay, Great I appreciate the all the rest of the details on the call.
Thanks Travis.
And there are no further questions I will turn the call back to Bryan Adams CFO for closing remarks.
Yes. Thank you all for participating in our earnings call. This morning, and we look forward to seeing everyone. In a few weeks and please contact our investor relations teams with any follow up questions.
Thank you for joining today's call you may now disconnect.
Okay.