Good day, and welcome to Xcel Energy's Second Quarter 2022 Earnings Conference Call. 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. Today's conference is being recorded. At this time, I would like to turn the conference over to Paul Johnson, Vice President, Treasurer, Investor Relations. Please go ahead, sir.

Good morning, and welcome to Xcel Energy's 2022 Second Quarter Earnings Call. Joining me today are Bob Frenzel, Chairman, President and Chief Executive Officer; and Brian Van Abel, Executive Vice President and Chief Financial Officer. In addition, we have other members of the management team in the room to answer your questions if needed. This morning, we will review our 2022 results, share recent business and regulatory developments. Slides that accompany today's call are available on our website. As a reminder, some comments made during today's call may contain forward-looking information. Significant factors that could cause results to differ from those anticipated are described in our earnings release and our SEC filings. Today, we will discuss certain metrics that are non-GAAP measures. Information on the comparable GAAP measures and reconciliations are included in our earnings release. With that, I'll turn it over to Bob.

Thanks, Paul. Good morning, everybody. It was certainly an interesting 11th hour twist in legislative news last evening, but we'll get to that in just a minute. Let's start with our financial results. We had another solid quarter, recording earnings of $0.60 per share in 2022 compared with $0.58 per share in '21. Our earnings are on track with expectations, and as a result, we are reaffirming our 2022 earnings guidance of $3.10 to $3.20 per share. During the quarter, we made good progress on our clean energy plan, achieving constructive regulatory outcomes. In June, the Colorado Commission approved our resource plan settlement, which includes approximately 4,000 megawatts of utility scale renewable additions. The conversion of our Pawnee coal plant to natural gas by the end of 2025, and the early retirement of our Comanche 3 coal unit by the end of 2030, which will be the final coal plant retirement in Colorado. We now have the approval of both our Minnesota and our Colorado resource plans, which together will add 10,000 megawatts of utility-scale renewables to our system and achieve an 85% carbon reduction by 2030. We anticipate issuing RFPs later this year, submitting our recommended portfolios by mid-2023 and receiving commission decisions in the second half of 2023. We expect the recommended portfolio -- we expect the recommended portfolio of generation assets will include self-build, build-own transfers and power purchase agreements. Our plans are consistent with our steel for fuel strategy, which provides a valuable hedge for our customers against rising commodity prices. Our owned wind farms are projected to generate nearly $1 billion of fuel-related customer savings in 2022 alone and a total of $2.7 billion since 2017. We're excited about our transmission expansion opportunity. MISO's long-term planning approach identified projects in Futures 1 with an estimated…

Thanks, Bob, and good morning, everyone. We had another solid quarter, recording earnings of $0.60 per share for the second quarter of 2022, compared with $0.58 per share in 2021. The most significant earnings drivers for the quarter included the following: higher electric and natural gas margins increased earnings by $0.25 per share, primarily driven by rises and regulatory outcomes to recover our capital investments. In addition, a lower effective tax rate increased earnings by $0.06 per share. But keep in mind, production tax credits lowered the ETR. However, PTCs are flowed back to customers through lower electric margin and are largely earnings neutral. Offsetting these positive drivers were increased depreciation expense, which reduced earnings by $0.15 per share, reflecting our capital investment program and the recognition of previously deferred costs related to the Texas electric rate case, higher O&M expense, which decreased earnings by $0.02 per share, higher interest expense and other taxes, primarily property taxes decreased earnings by $0.08 per share. And other items combined to reduce earnings by $0.04 per share. Turning to sales. Weather-adjusted electric sales increased by 3.1% for the first 6 months of 2022, largely due to higher C&I sales driven by strong economic activity in our service territories. In addition, our unemployment rate is 80 basis points below the national average. As a result, we have revised our assumption for 2022 sales growth to 2%. O&M expenses increased $14 million for the second quarter, primarily driven by the recognition of previously deferred expenses related to the Texas electric rate case, additional investments in technology and customer programs and increased costs for storms and vegetation management. Like other businesses, we are facing inflationary pressures and now expect an annual O&M increase of approximately 2%. In addition to the Colorado resource plan approval, we also…

[Operator Instructions]. All right. And our first question will come from Nicholas Campanella with Credit Suisse.

So I guess just -- thanks for the upfront color on the inflation Reduction Act, helpful. Just if there is an alternative minimum tax, can you just remind us how your business is positioned there?

Hey, Nick. Good morning. This is Brian. Yes, it's a good question. So we think about that book AMT is -- we look at it in a couple of different ways. First is we have credits available where you can offset 75% of that book AMT impact. And then also when we look at the transferability that's included in the legislation, that ultimately, when we put those 2 together, that we see this as cash flow accretive for us. Now I'll caveat that. This came out yesterday and the 700 pages of legislative text. So we're still working through it. But that's our view on the book AMT.

Okay. Great. That's helpful. And then I guess on sales, this is like the second time, I think, this year that your electric sales forecast for the near year has changed to the positive. So just maybe kind of talk about what type of trends you're seeing for this year, how that kind of compares to your long-term forecast? And are you kind of starting to see structurally higher demand going forward? And is that a long-term tailwind for you?

So that's a good question. And we've seen -- you're right, both in Q1 and Q2, we've increased our sales guidance for the year. And I would say there's probably some more opportunity there as we look into the balance of the year. Now certainly, the dependence on the macro impacts that could occur with what the Fed is doing, but we see strong C&I sales. And it's even better if you look at where Colorado is, the C&I sales in Colorado, that's -- this is an adjustment there when you normalize this large solar farm that we helped with a major customer behind the meter. C&I sales in Colorado are strong, too. So we're seeing that across our service territories with that C&I strength, good economic rebound. We're seeing it on the residential side, we expected that, call it, reduction. And when we look at our budget, we're actually higher on residential than we expected. So structurally, I think we've seen a strong economy in the first half of the year and is certainly in the energy sector, in the manufacturing sector across the board. So as I think about longer term, obviously, you could have some potential headwinds if there's a recession or what happens and how big of an impact interest rates have. But I think we're bullish longer term when we start to think about the electrification opportunities, when we start to see EV penetration, when you start to see electrification of industrial processes. So I think there's a longer-term tailwind as I look at our service territories. And just another example down in the Permian Basin. We've seen extremely strong growth. But longer term, we're talking to their customers about electrification. They have their own ESG goals and net zero goals in the Permian, and so we're in discussions of how you electrify pumps and rigs and compressors and ensuring that we have the capacity and the investments in our distribution and transmission system on there to serve them. So I think there are tailwinds longer term, and it's great to see the rebound that we have in the C&I sector.

All right. And our next question will come from Jeremy Tonet with JPMorgan.

Just want to dive into MISO a little bit here now that we have some more developments and touching on your $1.2 billion. Just wondering if you could characterize a bit more in terms of greenfield versus brownfield. And I guess this is just a preliminary estimate, but what's the scope, I guess, of what could possibly fall in incremental into this? Is this some competitive processes that still could make the way in? Just trying to feel our way through what this could mean.

Yes. Good morning. This is Bob. Look, first of all, let me just comment on transmission broadly. We feel very confident and excited about the transmission build-out opportunities we have. And as you think about where we've been this past quarter between the Colorado power pathway, the transmission needs from the Minnesota Resource Plan, and now the MISO MTEP tranche that's about $3.5 billion of large-scale transmission projects that we've identified and, in some cases, have approved. So the class is important to us. It's certainly going to enable our ability to add to 10,000 megawatts of renewables that we need from the Minnesota and the Colorado resource plans, and to continue to execute on our 20%, 30%, 80% carbon reduction vision. Particularly with regard to the MISO MTEP process, I think we put our best estimate out in terms of the investment opportunity around $1.5 billion for about 6 different -- portions of 6 different projects. We've got ROFR legislation in Minnesota, North Dakota, South Dakota and feel pretty confident about what we've put forward in terms of the opportunity in MTEP.

And Jeremy, I'd just add to that, like Bob said, we feel good about our point estimate and the Wisconsin projects were deemed upgrades, so they're not expected to be competitively bid. So what you see as we put in our earnings presentation, are what we expect to be ours and owned, and that's our good estimate right now.

And the estimate does not include any competitive bid. So if we choose to be competitively bid and we're successful, that would be incremental to the $1.2 billion.

Got it. So this $1.2 billion replaces the 1 to 2 range, but there's still potentially competitive processes that could add to this is a fair way to think about it?

Yes.

Got it. And thanks for all the comments on the climate policy so far and noting that this is hot off the press. But just wondering if there's any particular items in there, if we peel back the onion more, what do you see as the largest potential impact and points of opportunity to your plan near and long term? I mean, could CCS be something that's thought about more now?

It's great question. Again, as Brian said, you kind of have to absorb about a page a minute since it came out last night to get through all the text. But we've been talking about a lot of these broad strokes since the third quarter call and EEI Financial Conference last fall. Some really interesting things in here is we've seen production increases in solar, the PTC for solar is really interesting relative to an ITC. You might see some regional differentiations on people using PTCs versus ITCs. I think the transferability piece is really interesting as we think about not just for our account, but for everybody who builds renewable assets and the friction costs that are embedded. We're financing some of those things, particularly with tax equity. This could overall bring the cost of both owned and PPA assets down, again, real benefits for our customers as we continue to make this transition. Stand-alone storage credit is interesting. There's some really challenges with the pairing of solar and storage. We've made them work, but this makes stand-alone storage pretty interesting. And then Obviously, our North Dakota company is -- the governor there has put a very aggressive carbon neutral goal on the table and CCS is really important to North Dakota. So I think as we look across the country and across our portfolio, you're going to find bits and pieces of all of this to be interesting. And notwithstanding all of that, there's great stuff around energy security, electric vehicles and resiliency all built into this that we really haven't even dug into. But I think it's a terrific piece of legislation for us as a company, and we're excited to dig in and hopefully see this pass the House and the Senate before the end of the fiscal year.

Yes. And I'll just add to that, Bob. I mean, as we're in the middle of developing our clean heat plans for our gas LDCs in Colorado and Minnesota and have a hydrogen PTC. So you couple that with a long-term PTC for wind or solar, it really gives -- should give green hydrogen a jump start. And so we're excited about that. And so I think there's a number of great things in this bill. And ultimately, we look at it, it's really in the looks and feel similar to what I talked about on Q3 of last year in terms of the impacts to us. But ultimately, we look as cash flow accretive and slightly, there's some slight rate base reductions from we become more tax efficient, but slightly EPS beneficial. Now again, that's with a caveat, we're digging into it and make sure we understand everything, particularly around transferability but when we look at this whole package, as we talked about, our current plan is not built on this, right? Our current 5-year plan and long-term plan, our research plans were approved with current tax law. This just makes our plans even better for our customers. And that's the important point long run. Great for our customers as we make this clean energy transition even more affordable. So we're excited about this and optimistic that it gets passed.

Got it. That's super helpful. If I could just circle back to MISO. Real quick, real quick last 1 here. Of the $10.3 billion of capital there, do you -- would you be willing to share any thoughts on how much of that you think could go through a competitive process?

I think the estimates I've seen are about $1 billion.

Got it. I'll leave it there.

Our next question will come from Julien Dumoulin-Smith with Bank of America.

Hey, good morning. Thanks for the time and the opportunity to connect here. Really appreciate it. So I'm going to keep going on this on the same front. Let's talk a little bit more on the legislative, how does your prior [indiscernible] debt improvement target under BBB with direct [indiscernible] compare to your first take of the provisions under the IRA factoring in the transferability elements, right? You specifically called that out a moment ago in your prepared remarks.

Hey Julien. Good morning. And like I said, it was -- and Bob said it is hot off the press and 700 pages of legislative text, so making sure we understand it in our nuances. So there's absolutely caveats as we think about it. But I think the best way to think about it, if you remember what we talked about in Q3 is maybe 75 to 100 basis points or higher improvement in FFO to that CFO to debt as we look at it, which gives us financing flexibility down the road potential capital headroom. But again, there's a lot to unpack around transferability and how that would ultimately work. But ultimately, our initial take is a little bit in line with what we talked about in Q3. So really good for us, but ultimately great for our customers as we think about how we can make this clean energy transition even more affordable for our customers.

It also be noted that Brian didn't go to bed last night. So he's doing all the math on this. So take that with a grain of salt.

Yes, totally. In his delirium though, nonetheless, you're broadly affirming your expectation that the math is not too different from the -- what you described in the third quarter? Correct?

With the caveat that we're still understanding. understanding.

Totally, completely. With that asteric, but also, what does that do for your equity needs, right? Let's just take that a step further if we can start to unpack that.

Look, so we talked about it gives us more flexibility. I think how we're going to unpack all this is we're rolling forward our capital plans and we'll release those in Q3 in our October earnings release. We'll know whether or not this passes by then. We should know a lot sooner whether this passes or not, and we can provide you a full update because that will include updated capital plans and how we're going to finance that so. But it certainly does give us more financing flexibility.

Got it. Excellent. All right. And then a super quick last 1 here. I know on transmission, we talked a bit already. What about the ROFR challenges at FERC? Again, I know that's more recent here, but -- any thoughts perspective on the FERC angle here? Again, I guess this is states versus FERC and then also time frame?

Julien, it's Bob. I think these have been challenged in both state and federal court and the ROFRs have held up, and we expect them to.

Our next question comes from Insoo Kim with Goldman Sachs.

My first one, just regarding the inflation impact in the O&M and the higher financing costs there. Like as we look I guess, beyond '22 into '23 and you just try to get ahead of it, what are some options you have that you could do now on any levers, I guess, to get ahead and position for '23?

Certainly, we're continually looking to offset inflationary pressures, and this is no different than any other year. But we've had O&M flat since 2014, and we're very proud of that because it has a direct impact on customer bills. Now like everyone else, we're feeling the inflationary pressures this year and adjusted our O&M up by 5% but as we go through the year and see how the year unfolds, you certainly take actions to see if you can set up next year in terms of how it's looking. And we have a continuous improvement team that is regularly working with our business areas. We're investing in technology this year, what we have something called the digital operations factory that helps drive technology into the business areas to reduce O&M costs and make us more efficient. So that's just part of our DNA and part of our culture that we've stood up, and you can see in how we've managed on over the long term. So that's really our focus in terms of what we see now. We do expect some inflationary pressures to continue through the balance of the year, and that's a bit why we increased our guidance. But I think you should expect more of the same as, right? We're going to deliver for our customers. We're going to deliver operationally, and we'll deliver financially this year and in the future.

Got it. My second one, and I think I know the answer to this one, but just given what could be on the table here on the legislative front for nuclear, does that change your thoughts on, I guess, over the next 5- to 10-year plan on building more, maybe it's a small module in nuclear or others?

Hey Insoo, it's Bob. Look, I think the legislation as it starts is really beneficial for the existing nuclear owners and in our case, the customers who would receive any benefits from production tax credits associated with the existing nuclear embedded within the new legislation. I think longer term, we've been pretty stalwart in saying that we, as a country, need to identify new clean energy resources that can be dispatchable and carbon-free to enable the transition to a carbon-light economy or a carbon-neutral economy. And I think new nuclear has to play a role in that. I don't think it's a this decade role, certainly not for Xcel Energy but we are active at any eye. We are active in the development process. We've been working diligently with new scale as they've been trying to stand up there and get permission to build their first new nuclear reactor. So we're -- we watch very closely. We're engaged in the dialogue. I think it's next decade or beyond issue and opportunity for us as a company.

Got it. That's what I expected.

All right. Moving on, we'll take our next question from David Arcaro with Morgan Stanley.

I had a quick question on the color pathway and the potential upside opportunity there. Is that something that could crystallize basically after you get the RSPs done and you get a sense of where the projects are coming into place there that we get a sense of whether that could be added to the plan at some point in 2023?

Yes. David, yes, you're exactly right. Once we kind of see where these projects are located and call it the mix of projects, we'll be able to come out at the same time with what we expect to call the network upgrades voltage support that we need. And also the commission did conditionally approve that, call it, that lag that $250 million lag basically a radial and we fully expect projects to show up there, too. So we'll be able to give color both on the, call it, our renewable opportunity at that point in time, plus the incremental transmission investments we expect to make which will be probably -- if we play this out probably middle of next year once we see that final portfolio.

Yes. That makes sense. Okay. And on the Minnesota rate case, I was wondering, when does the window kind of open for a potential settlement? And any thoughts on prospects of settlement given the focus areas and what you've proposed here?

Yes. Thanks, David. It's Bob. Look, the cases are progressing through the regulatory process. I think when I look at the cases, they reflect a lot of the investment categories and alignment with our policy and stakeholders. So we don't expect any contentious issues there. Typically, we don't start talking settlement with counterparties until after their testimony has been received. So on the gas case that's expected at the end of August and in the electric case, that's early October. So probably more ripe for discussions in late Q3 or into Q4.

Okay. Great. Sounds good. Thanks so much.

Our next question will come from Sophie Karp with KeyBanc.

If I may follow up on the MISO tranche 1, how much of the 1.2 is sort of low-hanging foot here where you have right of ways and basically shovel-ready, if you will? And then the same question for your competitive opportunities in that could potentially come behind it.

Yes. So look, I think we're in early innings in terms of the development of those lines. I think that some of them are concluded into existing substations, but most of the lines themselves are going to be greenfield and require local siting and permitting processes. I think that this is an area of strength and execution for the company as we do this. We did the CapEx 2020 plans up in the upper Midwest, we did the MVP plans. And so we've got a really strong team and a good partnership with the Grid North Partners Group that we think that from an execution perspective, this is something that's right in our wheelhouse.

And I'll just add, Sophie, is we'll go through the regulatory processes, certificate of need processes with our commissions. And so that will take 1 year, 1.5 years to get through those processes where we'll determine final work on final routing and permitting, everything.

Right, right. And so is that -- how much of that is already baked into your long-term capital plan, if anything, can you remind us?

So we had some -- a little bit in our 5-year plan. But when we look at it, right, these in service states are expected to be called by 2030. So we'll start -- you'll start to see as we roll forward our 5-year plan is that spend will kind of be baked in that new 5-year plan that we roll forward is how you'll see it in October. And we'll include it in our 10-year plan as we bring -- roll forward our 10-year plan to.

We did have some of it captured in the second 5 years of our...

Another question I had is on the ROEs, right? So kind of in the 9s and low 9s across the board in your territories. Interest rates keep going up, ROEs are kind of sticky at this level. And I can appreciate the fact that they were sticking on the way down, too, right? But with the rates being higher and arguments being made that the structure would be higher in the next decade. Do you see this trend kind of reverse a little bit and maybe they are a picking up? Or is that pretty much not something that we should look forward to?

Sophie, that's a good question. I think the way we look at it, we kind of look at some recent data points, and there's a couple of data points in Minnesota. One was an ROE decision late last year for Otter Tail at 9.48%. And then there's a -- and we have a 906 Minnesota electric business right now. And then in the gas side, CenterPoint has a settlement pending in Minnesota with a 939 and Armin's gas, ROE is a 904. So no, I think as we see inflationary pressures, interest rates go up that they were sticky to go down, but I think we do have below the national average authorized ROEs across most of our jurisdictions, and we'd like to work to get those closer to the national average. We do think we are a very good operator. We are a policy aligned with our commissions, policy aligns with our states in terms of helping them achieve their decarbonization goals. And hopefully, it can be reflective in some of the outcomes we see in the future.

And next, we'll take a question from Paul Patterson with Glenrock Associates.

So just -- I know like I can completely relate to the 700 pages late-night experience. But you mentioned how affordability could be potentially beneficial from the bill. Do you have any sense as to what the potential rate impact might be from the bill?

So this is a longer term when we look at it, and this is some of the analysis, we haven't done a very long-term model. We modeled it a while ago when we were looking at the earlier provisions. We saw about a 1% benefit to our customers over the long term on a CAGR basis as we thought about. Now there's a lot of caveats there in terms of what type of renewable deployment we have. But we are looking at inflationary right? Our target is long-term customer bill impacts at inflation, and this helped us drive below that. So I think that's kind of the magnitude. Now certainly will depend on the nuclear PTC and some of the nuances in terms of hydrogen. But I think longer term, we see a significant benefit to that. And I would just add that we're really well positioned for this type of long-term credit extension because I don't believe there's an IOU that has a better combination of wind and solar in our backyard than we do. And so our commissions approved our plans without any extension of tax credits. Now to have this on top of it just puts us in a really good position to deliver on this community transition for our customers even more affordably. And no, our view is long term customer bills matter. And for us to make this transition more affordably for our customers is great, and we look forward to working through with our commissions.

Yes, I'll just add on to what Brian said, and I agree with him completely. I think the opportunity here is really interesting because if we can make the energy transition more cost effective, that becomes an economic driver engine. Businesses are attracted to places that have clean energy and low-cost clean energy and reliable clean energy. When I think about a transition to clean fuels and green hydrogen with the production capability that we have and the wind and the solar resources we've got in and adjacent to our footprint should make the production of clean fuels more cost effective in the middle of the country, in the Midwest and in the Southwest than other parts. And you've seen that as we've located wind and solar across the country, they've been concentrated in those areas. And we'd expect those continued economic development drivers to drive our business long term.

Yes. And then just to clarify, going to talk about 1%. That's on a CAGR basis. So as you accumulate that over time, it becomes very significant for our customers. So like I said, optimistic this gets passed, but our plans are not built on it. But if it does, we look forward to driving forward our plans even faster.

Awesome. And then there was a local article about curtailments of wind production in Southern Minnesota. And I know you guys are pretty well positioned and what have you. But you guys are at a very large footprint, and you guys are very familiar with the situation around you. Do you see any -- well, are there any issues potentially that you're seeing? But also more significantly, perhaps, are there any situations that you're seeing with specific wind farms and curtailment occurring with other parties in your jurisdiction. I mean, the story sounds pretty significant in terms of how some counties were being impacted from a tax revenue perspective in the southern part of Minnesota. So I just was wondering if you had any insight on that?

Yes. Look, I think that we have seen curtailment in Southwestern Minnesota. It was a source of a significant amount of wind build-out over the last decade for us and for the region. And so 1 of the great things about the MTAP program is that it's identifying the need and locating transmission resources to move that 0 cost resource to the load. In the short term, it's led to curtailment and congestion. In the longer term, we think that frees up and is able to get to the load and deliver. I don't think that it's concentrated in any 1 entity in terms of the owners of the farms, but I think it's out there. And as we think about the impact for our customers, some of that's just is driven by the desire and the need for clean energy curtailments built into a lot of our plans, and we recognize that sometimes that has implications for local communities on property taxes or wind production payments. But I think it's certainly manageable and something we're in conversations with our stakeholders as well.

We have no additional questions. I'll turn the call back to CFO, Brian Van Abel for closing remarks.

Thank you all for participating in our earnings call this morning. Please contact our Investor Relations team with any follow-up questions.

And this does conclude today's call. We thank you again for your participation. You may now disconnect.