Xcel Energy Inc. executives in an Oct. 24 earnings call defended the company's bid to acquire the 760-MW Mankato Power Plant as an unregulated asset after Minnesota utility commissioners rejected a request to fold the purchase cost of the natural gas facility into its regulated rate base.
Company Chairman, President and CEO Benjamin Fowke told investors that "we believe the Mankato asset brings tremendous value and reliability to the system, especially as we retire coal plants."
"We anticipate the acquisition will generate utility-like returns over the life of the asset," Fowke said. "However, we expect the non-regulated returns will be lower in the near-term as the benefits are back-end loaded."
Fowke characterized the utility's modeling on the back-end returns as conservative and said the trend toward anti-gas sentiment among regulators conversely makes existing gas assets more valuable.
As Xcel Energy retires coal plants as a part of its vision to transition to 100% carbon-free power by 2050, the company is "keenly focused on reliability," Fowke said.
Indeed, Xcel Energy's transition to carbon-free power leans on natural gas, according to an Oct. 10 analysis by S&P Global Market Intelligence. The company, which serves 3.6 million electric customers in parts of Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas and Wisconsin, said it has plans to add roughly 9,800 MW of wind, solar and battery storage in the coming years. But it also plans to significantly expand its natural gas fleet, adding 2,500 MW of new natural gas generation capacity and acquiring the Mankato plant.
Xcel proposed to purchase for $650 million the Mankato plant, which came online in 2006 in Blue Earth County, Minn., from Southern Co. subsidiary Southern Power Co. The Minnesota Public Utilities Commission in September scuttled the utility's plan to acquire the plant as a rate base asset, saying the company did not show the purchase would be in the public interest. So the company is instead attempting to acquire it as a nonregulated asset and assume its existing power purchase agreements with its regulated subsidiary, Northern States Power Co. - Minnesota. Northern States Power has two power purchase agreements for the full output of the facility, one that ends in 2026 and another that ends in 2039.
Following the rejection by Minnesota regulators, Xcel Energy subsequently asked the Federal Energy Regulatory Commission to act by December on its application to acquire the facility through a new, unregulated subsidiary, MEC Holdings LLC.
Xcel Energy recorded third-quarter earnings of $1.01 per share compared with 96 cents per share in the third quarter of 2018. The company is initiating its 2020 earnings guidance range of $2.73 to $2.83 per share, consistent with its long-term EPS growth objective of 5% to 7%, CFO Robert Frenzel said. The company's $22 billion capital forecast results in annual rate base growth of roughly 6.7% using 2019 as a base year.
Some 13% of that $22 billion will be invested in natural gas, while 9% will be invested in renewables. About half, meanwhile, will be invested in electric transmission and distribution. In addition to the potential Mankato purchase, the company also plans to spend $135 million in repowering and PPA buyouts for 50 MW of the Jeffers Wind plant, as well as for 99 MW from the Mower County Wind (High Prairie I) for an undisclosed price. Both plants are in Minnesota.
Of Xcel Energy's nearly 29,000 MW of available capacity, a significant portion, 9,058 MW, comes from power purchase agreements, according to S&P Global Market Intelligence data.
Fowke said the PPA buyout approach is not a strategic change. The difference between the Mankato acquisition and the two wind purchases, he said, is when the bulk of the benefits can be shared with customers.