Xcel Energy Earnings: Despite Minnesota Setback, Earnings Remain on Steady Growth Trajectory

We are reaffirming our $59 per share fair value estimate for Xcel Energy XEL after reviewing second-quarter earnings and several updates in recent weeks. We are reaffirming our narrow moat rating.

Xcel reported $0.52 per share of earnings in the second quarter, down from $0.60 in the same quarter in 2022 primarily due to an unfavorable outcome of its Minnesota rate review during the quarter. This decision, along with mild weather, resulted in a $0.23 per share year-over-year drop in earnings for the quarter, in line with our expectations.

Despite Minnesota’s June decision to approve a cumulative rate increase in 2022-24 that was 20% lower than our estimate, management maintained their $3.30-$3.40 EPS guidance range for the full year. We forecast earnings slightly below that range after incorporating the Minnesota decision. However, cost savings and more-favorable weather in the second half could offset some of those lost earnings. Xcel will benefit from rate increases in South Dakota, Colorado, and New Mexico during the second half of the year.

We also think Xcel has a chance to recoup some of those lost earnings in Minnesota when it files for reconsideration. We were surprised by the large difference between rates regulators approved and developments throughout the year-long rate case process.

We continue to forecast 6% average annual earnings growth on a weather-normalized basis for the next three years, in line with management’s 5%-7% target. Management reaffirmed its plan to invest $29.5 billion during 2023-27, in line with our forecast.

We think annual earnings growth could hit 7% beyond 2025 if Xcel executes some of the potential clean energy investment opportunities. These include an iron-air energy storage pilot project that Minnesota regulators recently approved, and regulatory proposals for what could be $1 billion of new solar investments across its service territories. We also think Xcel will receive approval for other energy storage and hydrogen projects.