Xcel Energy Earnings: New Outlook Supports Accelerating Growth, as We Expected

We are reaffirming our $59 per share fair value estimate for Xcel Energy XEL after the company reported $1.23 per share of operating earnings in the third quarter, up from $1.18 in the same quarter in 2022. The company remains on track to meet our full-year 2023 earnings estimate in line with management’s $3.32-$3.37 EPS guidance range. We are reaffirming our narrow moat rating.

Earnings growth has slowed in 2023 due to less-favorable weather and an unfavorable regulatory outcome in Minnesota. We expect those headwinds to fade in 2024, supporting our 6% annual average long-term earnings growth forecast and management’s 5%-7% target on a weather-normalized basis. Our 2024 earnings estimate is in line with management’s $3.50-$3.60 EPS guidance range.

As we expected, management raised its five-year investment plan to $34 billion in 2024-28 from $29.5 billion in 2023-27. Nearly two thirds of the plan involves electric distribution and transmission investments, which we expect will receive regulatory support. Management suggested as much as $10 billion of additional investment opportunities in the outer years mostly related to clean energy. This could push annual earnings growth toward 7% beyond 2025.

Xcel’s large investment plan increases regulatory risk. However, higher electricity demand trends should ease customer bill pressure. Management now expects 2%-3% annual electricity demand growth for at least the next few years, up from 1%-2% in recent years.

Higher usage and rate increases, particularly in Colorado, should help offset higher interest costs, depreciation, and operating costs in 2024. Xcel might get a slight earnings boost if it receives a favorable outcome in its appeal of this year’s Minnesota rate review decision.

Cost savings and customer rate increases during the second half of the year have helped offset the year-over-year earnings drag from a return to normal weather-related usage after several years of favorable weather conditions.