Xcel Energy: Regulatory Developments Support Earnings Growth Outlook

We are reaffirming our $59 per share fair value estimate for Xcel Energy XEL after two key regulatory developments this week. We are reaffirming our narrow moat rating.

In Colorado, which is Xcel’s second-largest service territory, regulators approved a settlement that includes a $95 million increase in base electric rates along with other smaller rate increases starting in the fourth quarter, as we expected.

The final rate increase is well below Xcel’s $303 million adjusted request, but it still supports our 6% annual average earnings growth outlook. Colorado regulators maintained Xcel’s 9.3% allowed return on equity and granted a 55.69% equity allocation in Xcel’s allowed cost of capital for ratemaking, a constructive but not overly generous outcome.

Also, this week, Xcel received counterproposals to its revised request for a $158 million electric rate increase in Texas, likely taking effect in early 2024. Although the counterproposals are below Xcel’s request, they are mostly in line with our assumption that regulators will approve a rate increase around $90 million. A key debate is whether regulators will support Xcel’s plan to close the large Tolk coal plant by 2028 or other proposals to keep it open as long as 2045. The outcome could impact how long it takes for Xcel to reach its net-zero emissions target.

We continue to forecast 2023 earnings slightly below the midpoint of management’s $3.30-$3.40 EPS guidance range. Cost savings and favorable summer weather could erase some of the earnings drag from a warmer-than-normal winter and an unfavorable regulatory outcome in Minnesota earlier this year.

Our 6% average annual earnings growth rate estimate is in line with management’s 5%-7% target. We estimate annual earnings growth could hit 7% beyond 2025 if Xcel increases its five-year $29.5 billion capital investment plan by adding new clean energy investments such as new solar, energy storage, and hydrogen.