埃克西爾能源 (XEL) 2018 Q3 法說會逐字稿

Good day, and welcome to the Xcel Energy Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. (Operator Instructions)

At this time, I would like to turn the conference over to Paul Johnson, Vice President of Investor Relations. Please go ahead, sir.

Good morning, and welcome to Xcel Energy's 2018 third quarter earnings release conference call. Joining me today are Ben Fowke, Chairman, President and Chief Executive Officer; and Bob Frenzel, 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 third quarter results, discuss earning guidance, update our final plans -- financial plans and objectives and update you on recent business developments and regulatory developments.

Slides that accompany today's call are available on our website.

As a reminder, some of the comments made during today's conference 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 filings with the SEC.

I'll now turn the call over to Ben.

Thank you, Paul, and good morning. We're having a great year, and I'm excited to discuss some of our accomplishments and an improved outlook.

So let's start with earnings. Today, we reported third quarter earnings of $0.96 per share, that's compared to $0.97 per share last year. Earnings for the third quarter were consistent with our plans. And with the first 3 quarters of the year behind us, we're on track to deliver earnings at the high end of our original earnings guidance range.

We have also updated our base capital forecast, which reflects rate base growth of 6.2% rolling forward and using 2018 as a base. We're also confident there are incremental investment opportunities beyond our base capital plan, as we continue our steel-for-fuel and customer-focused strategies. As a result, we are increasing our long-term EPS growth objective to 5% to 7%. We're very confident in our ability to deliver earnings at or above the midpoint of the EPS growth range over the forecasted time period.

Next, let me provide you with an update on some of our accomplishments with a focus on our Leading the Clean Energy Transition and steel-for-fuel investment strategies. In August, the Colorado Commission approved our Colorado Energy Plan, which will result in the addition of 1,100 megawatts of wind, 700 megawatts of solar and 275 megawatts of battery storage, along with the retirement of 660 megawatts of coal generation. PSCo will own 500 megawatts of new wind generation, acquire 380 megawatts of existing natural gas generation and invest in new transmission for a total investment of about $1 billion, which is reflected in our updated capital budget. Colorado Energy Plan is projected to provide over $200 million worth of savings for our customers, while reducing emissions by 60% from 2005 levels. Renewables at PSCo will represent 55% of our fuel mix by 2026. I'm extremely proud of our team for delivering this remarkable plan to our customers, the State of Colorado and our investors. We really think it's a model for how the clean energy transition can pragmatically occur in the United States.

As part of the Colorado Energy Plan, we also received commission approval for our EVRAZ contract proposal. This represents a creative economic development effort and allows us to retain our largest customer in Colorado through our unique contract underpinned by the addition of 240 megawatts of third-party solar behind-the-meter for this customer. EVRAZ was considering moving out of the state, but instead planned to stay in Pueblo and expand its operation. This is great news for all of our customers and the company, but especially Southern Colorado. This is yet another example of how we have worked to have a positive impact on our local communities.

We're seeing good progress as we move from the approval to execution stage with our steel-for-fuel program. We recently completed, on time and under budget, the construction of our Rush Creek 600 mega wind -- of megawatt wind farm in Colorado. We're well on our way to having approximately 11,500 megawatts of wind on our system by 2021, solidifying our position as the leading renewable generation utility in the United States, while providing significant customer benefit. By 2022, we expect to have 48% of our energy coming from renewables, and we'll have reduced carbon emissions by 50% across all of our systems.

Steel-for-fuel helps drive a very robust capital investment plan of $19.3 billion, and I'm confident we have upside potential to that capital forecast. We have a track record of consistently delivering more investment opportunities in the outer years of our forecast period, and I believe this forecast will be no different. I also believe we have plenty of attractive capital investment opportunities beyond the forecasted time frame. There will be multiple phases of steel-for-fuel and increased opportunities to invest in our electric and natural gas infrastructure.

I'm also excited about the opportunities we have to deliver customized products to our customers and to partner with them to achieve their energy goals. A great example of that is our Renewable Connect programs, which have been a very big success in Colorado and Minnesota. Renewables Connect offers our customers a flexible and affordable way to receive up to 100% of their electricity from renewable energy and also without the cost being subsidized by other customers. We filed for commission approval of Renewable Connect in Wisconsin. And we plan to continue to expand the program in Minnesota and Colorado, which is another customer-driven way for us to add cost-effective renewables to our system.

Xcel Energy is also leading the way towards an electric vehicle future that is cleaner, more affordable and more convenient for our customers. Our nation-leading clean energy initiatives, paired with the advances in automotive and battery technology, have created a pathway to reduce carbon in significant and exciting ways. We recently filed a plan in Minnesota that proposes initiatives and pilot programs, focusing on 3 main areas: home charging, public charging and fleet operations. Our goal is to test innovative ED services that can be expanded to our customers over time.

This truly is an exciting time for Xcel Energy. We are leading the clean energy transition and providing our customers with new innovative products that will ensure we remain their trusted energy provider in the future and provide future investment opportunities for our shareholders.

In wrapping up, I'd like to highlight a couple of awards we've received. Xcel Energy was recently recognized as the Gold Leader under the State of Colorado's Environmental Leadership Program for the company's environmental programs, emission reductions and stewardship initiatives. Xcel Energy was also recently named to Forbes' Best Employer listing. We're ranked number 74 globally, which, I think, is a pretty significant accomplishment. And I think it's always nice to be recognized for our environmental leadership and our workforce culture.

So with that, let me turn it over to Bob, who'll provide more detail on our financial results and outlook and a regulatory update. Bob?

Thanks, Ben, and good morning, everyone. We had a solid third quarter with earnings of $0.96 per share compared with $0.97 per share last year. And on a year-to-date basis, we're now $0.17 ahead of last year. The most significant earnings driver for the quarter, after netting the impact of tax reform, include higher electric margin, which increased earnings by $0.10 per share, largely due to favorable weather and sales growth as well as rate increases and riders to recover our capital investment.

Offsetting these positive drivers were higher O&M expenses, which decreased earnings by $0.07 per share; increased depreciation expense reflecting our capital investment program, which reduced earnings by $0.03 per share; and higher interest expense to fund our capital investment program, which reduced earnings by $0.01 per share.

Turning to sales, on a weather-adjusted basis, our year-to-date electric sales increased 1.3%, reflecting strong sales growth to our commercial and industrial classes and modest residential sales growth. Year-to-date, natural gas sales increased 1.9% on a weather-adjusted basis, reflecting continued customer growth and increasing use per customer. Weather has contributed approximately $0.06 per share this year as compared to normal. And as we indicated in the second quarter call, we've been investing O&M to improve and enhance customer service.

Accordingly, our third quarter O&M expenses increased by $57 million, which reflects increased vegetation management and maintenance due to the hot summer, initiatives to improve business processes, business systems costs and remediation costs for a former manufactured gas plant site.

Next, let me provide a regulatory update. We've had a busy regulatory schedule between rate cases and tax reform this year. I'm pleased to point out that most of the regulatory proceedings have either been settled or finalized. And we will enter 2019 with relative certainty around our rate revenue. In Texas, we have a rate case settlement with various interveners, in which there'll be no change in rates as we will use the benefits of tax reform to offset our projected revenue deficiency. The settlement is pending a commission decision, which we expect during the fourth quarter.

In October, we reached a settlement agreement with the staff and the OCC to extend our pipeline integrity rider through 2021 in Colorado. This will provide timely recovery of about half of our capital investment in the natural gas business. The settlement is pending commission approval.

Looking forward, next year, we anticipate filing rate cases in Colorado in the second quarter and Minnesota in the fourth quarter with new rates going into effect primarily in 2020. As we've discussed, we plan to file rate cases in Texas and New Mexico next year to incorporate the Hale Wind farm and other infrastructure investment for which we expect real-time recovery.

Next, I want to update you on the regulatory proceedings related to tax reform treatment. We've made significant progress on tax reform in all of our states. You could find additional discussion of each jurisdiction in the earnings release, so I'll just focus on a few recent developments.

In Colorado, our tax settlement for electric operations was approved and will result in a $42 million customer refund and a $59 million accelerated amortization of prepaid pension assets for 2018. In 2019, the customer refund will increase to $67 million and the amortization of the prepaid pension asset will be $34 million. Tax reform for 2020 and beyond will be addressed in our next electric case.

For our natural gas operations in Colorado, we have agreed to refund the benefits of tax reform to our customers. As expected, our tax reform true-up filing we requested to increase the authorized equity ratio to at least 56% to offset the impact of tax reform on our credit metrics. We anticipate a commission decision later this year.

In Minnesota, the commission approved a customer refund of approximately $136 million and low-income funding of $2 million.

And finally, in North Dakota, we reached an electric settlement with the staff, which includes a onetime customer refund of approximately $10 million, while NSP-Minnesota will retain the benefits of tax reform in 2019 and 2020 to offset revenue deficiencies that would have resulted in rate cases. Settlement is pending commission approval.

Turning to earnings guidance. Based on our year-to-date results and full year expectations, we are narrowing our 2018 earnings guidance to $2.45 to $2.49 per share, which represents the high end of our original guidance range of $2.37 to $2.47 per share. We're also initiating our 2019 earnings guidance range of $2.55 to $2.65 per share, which is consistent with our revised long-term EPS growth objective of 5% to 7% annually. Please note that our 2019 EPS guidance is based on several assumptions, which are listed in the earnings release. I wanted to highlight a couple of them here.

We assume constructive regulatory outcomes in all proceedings. We expect flat electric sales and modest natural gas sales growth of 0% to 1%. And we expect O&M expenses to be flat with 2017 levels.

In our earnings release, you'll find our updated 5-year capital forecast, which reflects investment of $19.3 billion in our base capital plan and drives compound annual rate base growth of approximately 6.2% over the period.

As Ben mentioned, we are confident that there are incremental investment opportunities beyond our base capital plan as we continue our steel-for-fuel and customer-focused strategies.

We've updated our financing plan. In addition to reinvesting our cash flow back into infrastructure on our operating companies, we expect to issue operating company and holding company debt in approximately $690 million of DRIP and common equity to fund our capital plan. This will allow us to maintain our solid credit -- excuse me, this will allow us to maintain our solid credit metrics with expanded capital investment program.

Let me wrap up by highlighting a few of our key accomplishments. We received approval of our Colorado Energy Plan. We received approval of the EVRAZ contract. We reached a settlement to extend our PSIA rider. And we've made significant progress on tax reform in all of our jurisdictions. We're on track to deliver 2018 earnings within a narrowed guidance range of $2.45 to $2.49 per share, and we've increased our long-term EPS growth rate to 5% to 7%.

Finally, we've initiated 2019 EPS guidance of $2.55 to $2.65 per share, which is consistent with our long-term objective.

This concludes our prepared remarks. And operator, we are prepared to take a few questions.

(Operator Instructions) We'll now take our first question from Julien Dumoulin-Smith from Bank of America.

Hey, congratulations. So just a couple things real quickly, just high level -- what's...

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on the 5% to 7%. And what I'm getting at more is your commentary in the prepared remarks around the future investments and being able to roll forward because, obviously, you provided $22 million and now $23 million, but how do you think about the investments as the wind -- and wind PTC scales down, whether it's sold or a distribution or what have you, how do you think about the future sources to keeping this higher sustained level of growth going?

And then separately, if I can come back just a little bit nitty gritty here. There's just been a slight reduction in the nominal level of rate base on '22 since your last update. Can you give us a little bit of a flavor of exactly what transpired there?

Okay. Well, I mean -- we just -- obviously, we update our capital forecast, which is what we did, rolling it forward 1 year. And I think, Julien, when you look at it, I mean, it's -- I think it's strong in its own merits and reflects significant rate base growth of 6.2%. We also have clarity with our steel-for-fuel programs now. They're behind us and approved. And as I said on my prepared remarks, if you look at our history, Julien, those outer years always get filled in. And I think, if you think go back, for example, like to 2014 and looked at what we were forecasting in that '17 to '19 period of time, we were looking about a $2.8 billion average annual on those 3 years periods. And in fact, we are spending more, like, $4 billion. So I'm quite confident we're going to find incremental opportunities in the forecast period.

And then when you look beyond that, just as importantly, we're not done with the clean energy transition. We still have 4.4 gigawatts of coal on our system. I'm really excited, Julien, about customer-driven programs, like I mentioned Renewable Connect. We're just now starting to develop more customized programs to allow customers to have EVs and other customized products. I think it's going to open up a whole new world for us. And of course, we are behind probably some of our peers in some of our grid modernization efforts. And so I think we've got a great transparent opportunity to have investments going forward.

Julien, it's Bob. Just one more add there. On our base capital plan, we expect, as Ben indicated in his comments, that we expect that to drive earnings growth at or above the midpoint. And the incremental opportunities that Ben mentions would lead you to further growth rates in the range.

Got it. Can you come back just on the 2022 rate base? It's down about $300 million versus the last slide that you provided. You gave about $35 million CEP approval. So I want to know, is that a CEP change in terms of the final approval? Or is that something else that's just moving in and around in the forecast?

Julien, it's really just the nuances of developing the capital forecast. It's nothing -- no one project or one decision point. It's just really the fact that as we update the timing of when CapEx goes into service, deferred tax assets, things like that, it -- there's just going to be some natural movement.

It's just timing, Julien, basically. There isn't a project dropping out.

Got it. All right. Great confirmation there. And then one further follow-up there. With respect to further grid mod, can you elaborate just a little bit further on opportunities maybe in Texas? I know there's some talk of legislation in the '19 calendar year potentially around this.

Well, I mean, Texas is not one of our biggest jurisdictions, but we don't -- it's one of the few places where I understand we still have manual reading -- meter reading. So I think there's a tremendous opportunity to update the grid there. As you know, Julien, excuse me, the bigger opportunities in SPS are keeping up with the incredible expansion of the infrastructure required to drive oil and gas opportunities in the Permian Basin. And as you can see in the sales and some other commentaries we've made, that part of the country is really growing quickly.

We'll take our next question from Jonathan Arnold from Deutsche Bank.

On the equity, so you now -- you're saying you've done $200 million of the $300 million via ATM in 2018. And you had $300 million in the plan -- the prior 5-year plan. And now you've got $300 million in the new 5-year plan, but nothing in '19. Is that a sort of incremental $300 million that's sort of in the back end of the new plan? Am I thinking about that right?

Yes. Jonathan, I think that what we've said was when we got the Colorado Energy Plan approved, we would likely need approximately $300 million of equity associated with that. So as we've rolled the Colorado Energy Plan into the capital forecast, we've also rolled that $300 million into the equity forecast. That equity is going to be timed more commensurate with the spend on the CEP, which is sort of '20, '21 time frame.

Okay. Great. And then just to make -- just revisiting the last question. You also had a change, and the '18 rate base went down by $400 million, which -- and if that hadn't happened, you would have been showing a sub 6% CAGR. So I'm just curious, what drove that shift? It looks like a shift from '18 to '19. Can you shed some light on that?

Yes. Look, I think, as we think about $4 billion worth of capital spend that was planned in '18, some of that capital might just get shifted into '19, particularly as we do developments on our larger wind farm projects. Some of that stuff is shifting across year-end.

Some of it is timing of payments, the big turbine payments, et cetera, Jonathan.

Okay. But the general message is the back end, there's more to come there basically.

Well, I think if you look at our historic track record, we always -- I think, first of all, we'll put out a very conservative transparent forecast, so there's not a lot of, well, we're going to find something, so let's put it in the forecast. And if you look at our historic track record, the outer years always turn out to have a heavier capital spend than what we have originally forecasted going into those years.

We'll now take our next question from Ali Agha from SunTrust Bank.

Ben, I wanted to clarify one point, if I heard that correctly. With regards to looking at the EPS, CAGR and then looking at the rate base CAGR. So rate base CAGR off the '18 is just over 6%, EPS now 5% to 7%. Was I hearing it right that to get to the 7% high end of that EPS CAGR would imply some additional CapEx spend that you're confident you'll spend beyond what you've laid out for us? Or does that imply some improvement in earned ROE from where we are currently, so that EPS CAGR could actually be greater than rate base CAGR? Just wanted to clarify your message on how we get to a 7% EPS CAGR from here.

Do you want to take it?

Yes. It's Bob. Look, I think that to achieve the high end of the earnings guidance range, you could see either driving the midpoint to a higher end, it would either be higher-earned ROEs or incremental investment opportunities in our operating companies. And I think either are possible.

Okay. But if I start to the base plan as you've laid out today, there is room for ROEs to go up because, in the past, as we've talked, it seemed to me that the -- in terms of finishing off any theoretical lag, there wasn't much left. But are you indicating that there's still room to increase the earned ROEs from here?

Yes. I think that's probably true. When we initiated or closed the ROE gap, we had about 90 basis points of lag. We've narrowed that to closer to 50 basis points of lag. And we think there's still upside opportunity to close that further.

And Ali, I think if you look at a rising interest rate as we file rate cases, I'd be the first one to tell you that ROEs were sticky going down as interest rates fell. I think they will be sticky going up. But the fact of the matter is -- and this is an issue, we use every opportunity we can to talk to our commissions. We have below national average ROEs. So I think we're going to be a little less sticky going up than perhaps others that have enjoyed better ROEs today. So I think ROEs will improve. I think our base capital expenditures give us -- it solidly puts us, as I said in my remarks, at the middle of that range, little improvement in ROE, any additional CapEx, and we are going to be even better than that. So we're really excited about this plan.

Got you. And my other question was when I look at the $19.3 billion plan, are there any constraints you think about whether customer rate impact, how much equity you want to put in the system? When you factor all of those issues in, how much, I guess, capacity do you have to increase that plan and stay within whatever parameters that you like to track?

Ali, I think that's a great question. It's something that we're always looking at. And what I'm pleased to tell you is that, while rate base is growing at 6-plus percent in this time frame, and I think it will continue to grow at those kinds of rates going forward, the key is not to have that translate for the need for corresponding rate increases to our customers.

So if you look at our cost at where we've been since 2013 on a total bill base, our bills have actually fallen. That's lower commodity prices, that's the beginning days of steel-for-fuel, that's energy efficiency and our own cost initiatives to keep rates low. If we look at the forecast time period, we don't think rates will go up any more than 1% to 2% on that time frame. So that creates that headroom potentially for additional investments that, I think, are closely aligned with customer wants and expectations.

So it's a really important thing. You've got to keep your eye on the ball. I don't think you can ask for more than CPI-type rate increases with -- and have success. And that's the beauty of steel-for-fuel and turning fuel into investment opportunities and -- et cetera. I mean, it allows us to grow, give you something to get excited about and give our customers what they want without a price increase.

And would you, I mean, just from a rough perspective, give us some quantification of how much headroom you think there is?

I really think it depends on what you're investing in. I mean, I think we have tremendous opportunities to continue to invest in our distribution, create our gas infrastructure. And those are just conversations we're going to have with regulators because this -- it goes -- as many opportunities as they want us to do.

I can't really quantify it for you, Ali. But I mean, to the extent you can hold O&M flat, to the extent you can help customers to be more energy efficient, to the extent you can do things like steel-for-fuel that save customers money, I think that creates the headroom to give us more runway than I would venture to say most of my peer companies have.

We'll now take our next question from Greg Gordon from Evercore ISI.

I think you guys have really answered most of my questions. The only one I have and maybe...

Should we talk about the Jets then?

Yes. Well, that's a short conversation and not a great one given the way you guys handled us on Sunday. But when we get out -- I just don't recall these numbers, but when we get out to the end of your current capital plan, what percentage of your generation fleet remains coal, if any?

It's 4.4 gigs. So let's see. Does anybody have the energy mix what that would be in?

It'd be less than 30%.

Less than 30%, Greg.

If we think about the forecast period being 2023, we really haven't gotten into the meat of the shutdown of the Sherco Units 1 and 2 and Comanche Units 1 and 2. We will -- by the time we shut those units down by the mid-2020s, we'll be -- we'll have about 4,400 megawatts of coal left on our system. And yes, so I think that our declining coal percentage will continue both as -- in terms of generation as well as capacity. And as we think about it as a percentage of rate base, our coal investment will be less than 5% of our rate base by that point, too.

Yes.

Right. So less than 5% of rate base. And in terms of capacity and/or energy, and I'm not looking for a precise number, it will be substantially lower than 30%, substantially lower than 20%. Just what's your guess?

It will be lower than 30%, Greg.

Perfect. We can have a conversation offline. I was just trying to get a sense of it because, I mean, you guys have come an incredibly long way with the steel-for-fuel plan. I mean, where were you 5 years ago to 6 years ago? It was significantly...

Well, I mean, when we look back at where we started this journey, I mean, we were dominated by coal, as you know. And again, we'll get -- we should have the energy mix, Greg. But when we get all the steel-for-fuel and wind that we're talking about here by 2022, renewables is 50% of our energy mix, so coal has got to be -- and gas, I think, is somewhere around in the mid-20s, so it's falling. Then you look out to 2030, that's when we have still 4.4 gigs left after the coal retirements Bob mentioned. And I think you get -- I think the percentage then is somewhere in the 20s, isn't it? And more to come after that. It is from the earnings, Greg. You know, the key is to do it in a way that doesn't sacrifice reliability and affordability, and that's what I'm very proud of.

We'll now take our next question from Christopher Turnure from JPMorgan.

I wanted to ask one of the prior questions in a little bit of a different way just on the constraints, if any, to your rate base growth plan. It sounds to me like there's a lot of opportunity to invest. It sounds like the customer bill is something that you're clearly focused on and thinking about. But the inflation rate there does not sound particularly high under your base plan. And today, you introduced a bit of incremental equity through the 5-year plan. Do you view the balance sheet as a constraint on that growth given, I guess, the current capital market conditions?

No. Hey, Chris, it's Bob. We find that the capital markets have been very receptive to our offerings and our larger strategic story. And to the extent that they remain open, we certainly think we can access the markets, both the fixed income and the equity markets, at rates that are appropriate to finance this plan. And if this plan were, as Ben indicated, to have additional investment opportunities, my belief is that capital finds good projects. And if we've got good projects, we'll be able to raise the money.

Okay. Great. Good to hear. And then given the unfortunately low ROE and kind of unfavorable rate case outcome in New Mexico, can you give us your latest thoughts on that jurisdiction and strategy near term, at least?

Yes. I mean, it was a disappointment, there's no doubt about it. We did petition the New Mexico Supreme Court to stay that decision, and that petition was successful. So we'll have a shot at getting in the field. And particularly, as it relates to the refunding of the amounts under the tax reform, I've got David Eves sitting across from me, and he has worked with David Hudson, who runs SPS, getting out there and outreaching to our customers and our regulators. It's important. ROE matters. Credit quality matters as -- or rather Moody's downgraded SPS, I think, as a result of some of the New Mexico actions.

We also recognize that we've got to get out there and talk to our constituents more, and this is a growing area. Rate base is going to grow significantly, I think, by almost 50% with the wind we're adding. We've got to get the right regulatory construct now. I think you also probably know that there's an election that's going to take place. And these -- there's 5 commissioners in New Mexico, they're all elected. And we'll have 3 new commissioners as of January 1. So perhaps, there's a chance to restart the dialogue, if you will. David, do you have anything to add to that?

No. I think you covered it. An increased presence in New Mexico, we've already started working with our customers, that intervene or are involved in the regulatory process. And we'll embrace and work with those new commissioners. And we got 2 important cases coming up with Hale and Sagamore in the middle of 2019 and then in '20. So we -- we'll position to get a very different outcome then.

We'll take our next question from Travis Miller from Morningstar.

Question again about that 5% to 7% range. Interested in the opposite side of it, that 5%. What takes you down to that? Would it be more unexpected operating costs are higher? Or is it more the projects and the CapEx toward the outer years don't come through? Or something else?

I mean, I think what takes you down is probably poor regulatory outcomes and declining sales and things like that, that would create essentially more regulatory lag as you would have to file rate cases sooner. We don't anticipate that. In fact, I mean, I think we have pretty conservative sales assumptions for 2019. But you asked, so those are the things that we'd have to look at.

Okay. Good. And then second question. On some of these customer plans that you've talked about and closer touch with the customer, are there earnings opportunities there? Or is there just more of a reputation building and perhaps even down to the regulatory relations improvement, stuff like that?

Well, I think there's earnings opportunities. And I -- obviously, I think it enhances our reputation with our customers, which is always important. But yes -- no, I think there's -- I think there are definitively and definitely earning opportunities in the things we're talking about.

Through capital investments?

Yes, yes. Through making investments that help our customers be successful.

We'll now take our next question from Paul Patterson from Glenrock Associates.

So just one sort of quick follow-up. Moody's took rating action on you guys with a variety of your subsidiaries. And it seems that they're basically predicating the affirmation that in Colorado on, you guys getting the regulatory treatment, the equity ratio bump that you're asking for. And just to sort of clarify here, if you don't get the regulatory treatment that you expect, would there be any change in the plan in and of itself? I mean -- or would you just let the credit rating do what it does, if you know what I'm saying?

Paul, I mean, it's a great question, but I think that -- you're talking about the Moody's recent credit action?

Yes, that's right.

I -- my understanding -- I'll turn this call, or question over to Bob pretty quickly is that the action there was to downgrade SPS. And I think that's the result of some of the regulatory actions that they took. And then the other one was to put the holding company on negative watch. I don't think they made any action in Colorado.

Let me clarify. I didn't mean that they took action. What they said I guess, in their affirmation of the rating in Colorado was that it was -- I mean, they seem to spell out very specifically that they were predicating it, on you getting the regulatory treatment that you were seeking with the bump in the equity ratio. And I guess, my question is, and I apologize if it wasn't clear is, what would happen if you don't get the regulatory treatment? Do you guys have some rating objective? Or would you just simply let the rating do whatever -- let the rating agencies do whatever they're going to do? Do you follow what I'm saying? Or would you guys, which is also discussed by Moody's, potentially change your CapEx or something else? Do you follow me?

Yes. Paul. This is Bob. In all of our jurisdictions, we interacted with the staff and the commissions around the importance of their decisions and preserving the credit ratings in our operating companies. And in Colorado, in particular, we filed for what we thought was the appropriate capital structure for public service to Colorado, which was a 56% equity ratio in both the gas and the electric companies. And we stand by that recommendation as appropriate for preserving the credit quality in those companies.

We've had a lot of conversations across the year about the importance of their decisions in preserving credit quality. I mean, at the end of the day, the commissions decide capital structure. They decide ROEs. They decide regulatory mechanisms for capital recovery. And so it's very important that they recognize that, as we do, that credit quality is important. And we felt like the equity structure in Colorado that we recommended is still appropriate based on our tax reform these -- or post tax reform outcomes.

So Paul, I think you're also asking, if the -- we're making those recommendations, as Bob mentioned. I think you're asking, would we change our equity plans? The answer is the equity plans are what we shared with the rating agencies. And we don't anticipate changing those. What we hope is that our commissions follow our guidance, so that the credit ratings would be preserved.

Okay. So for the most part, the -- your plan would be pretty much intact, one way or the other, if I understand you guys correctly.

Correct.

We'll now take our next question from Paul Fremont from Mizuho.

First of all, congratulations. Second of all, following up on Paul Patterson's question. I think Moody's was seeing consolidated 16% to 17% FFO-to-debt metric on a going forward basis. Is that consistent with what you're seeing as well?

Yes. Paul, it's Bob. We share our forecast with Moody's and S&P and Fitch. And I think that their forecasts are consistent with ours on an adjusted basis. And they make certain credit adjustments for pensions or for other fixed capacity payments we make for power plants and PPAs, and things like that, to our underlying FFO-to-debt metrics. I think they also recognize that we have a very diversified holding company that spans 8 states in multiple regulatory jurisdictions. And they cited the benefit of that diversity in the ratings outcomes. And so we're -- we work with Moody's very closely on all of their calculations and their outcomes.

So, I mean, if that plays out, is it reasonable to assume that there likely would be a potential change in the rating, come, a year from now?

Look, we've shared with them their forecast. They put us on negative watch, and they're going to continue to have conversations with us. I don't think there's a triggering action at this point for them. And so we're going to sit and watch and work with them and talk about our -- what we think is a very solid financial profile of our holding company.

Okay. And then my other question is when we think about sort of rebasing the growth as we get to the end of the year, would it more likely be -- would it be like year-end numbers? Or how should we think about that?

Paul, in the earnings release, we gave a base for the growth rate at $2.43, which represents the midpoint of our original guidance range of $2.37 to $2.47. We can always revisit that once actuals of '18 are known, but that's the basis today.

We will now take our next question from Andrew Levi from ExodusPoint.

Ben, you finally increased the growth rate. Just to back up. I discussed this with Paul the other day, so I think I understand it, but as -- since there were some questions with the 2 other Pauls, Paul P. and Paul F., just as you look at the cash flows, I didn't really see it in the handout. But I guess, as the wind comes on, you get into a negative tax rate situation, I think, in like '21 or something like that. And so that also will affect the cash flows as well. I don't know if that's what Moody's is focused on as well. But don't you -- isn't there like a $200 million or $300 million change in operating cash flow because -- getting to that negative tax rate, but you still have to pay the PTCs? Am I correct on that? And can you just kind of talk about that? And I guess, Bob, one of the conversation I had last week was your parent rating is so high, it's -- if it gets knocked down a notch, it doesn't really matter.

Andy, it's Bob. And obviously, thanks for the continued support. We give Moody's our forecasts. And I think their ratings and their calculations are based on that. And it includes the impacts of the negative ETR that you mentioned. So I think they'll continue to watch the holding company as they put us on watch. And we'll keep working with them, espousing what we think it's a solid credit there.

Andy, this is Ben. And just stepping back, the -- that's not going to be -- that's not a determinant factor in the ratings. I mean, they're looking at some of the actions that the utilities have taken, and we mentioned New Mexico. We're keeping an eye on Colorado. In fact, I think Moody's is impressed with how we run our holding company. And they like the fact that unlike a holding company on top of a single operating company, we had 4 distinct operating companies operating in 8 different states, I think, with 21 different jurisdictions. They like the fact that we're purely regulated. They like the fact that we had economic customer regulatory diversity. So the holding company is a strength, not a weakness. And I think that's just important for our investors to understand.

Okay. I definitely do understand that. But just to make sure that I got it right last week. There is a reduction in the operating cash flow because of the way your tax rate becomes negative because of the PTC.

Well, Andy, the way to look at this is we run -- when we generate PTCs, they flow back through the customer and the reduction in tax expense. To the extent that we don't fully utilize all those PTCs, there would be a cash flow impact and they would result on being added to the balance sheet, and we earn a return on that.

And that's -- Andy, that's baked into our financing plans as we've laid out here.

Right. And it was also baked into kind of what you showed the rating agencies, so there really shouldn't be...

No. Exactly, Andy, you're exactly right.

The real issue with the rating agencies is the fact that tax reform when implemented caused our FFO to debt to go down by about 300 basis points. That's really what drove the change in the outlook.

Which is why we went to our commissions and generally said the best way to mitigate that is through higher equity ratios. And we've had some success and some things that we're still working on, and that's where we are.

And if you don't get the higher equity ratios, because obviously with everything else we just discussed, that wouldn't change your equity plans, would it?

The equity plans have been established with the rating agencies. And what we're hoping -- and...

So based on the equity ratios you have right now, right? Is that correct? Or with...

Short answer, it's not going to change our equity plans.

That concludes today's question-and-answer session. At this time, I would like to turn the call back to Bob Frenzel for any additional or closing remarks.

Thanks, everyone, for participating in our earnings call this morning and continued support of the company. Please contact the Investor Relations team with any follow-up questions.

Thanks, all.

Ladies and gentlemen, this concludes today's call. Thank you for your participation. You may now disconnect.