Xcel Energy: Lines Drawn in Colorado Rate Negotiations; More Solar Possible in Minnesota

We are reaffirming our $60 fair value estimate for Xcel Energy XEL after reviewing new filings related to Xcel’s pending Colorado electric rate request and a new 250-megawatt solar project in Minnesota. We are reaffirming our narrow moat and stable moat trend ratings as well.

Both developments are consistent with our near- and long-term outlook for Xcel. We continue to forecast 6% average annual earnings growth for the next three years, in line with management’s 5%-7% target and $3.30-$3.40 EPS guidance for 2023.

On May 3, several influential intervenors in Colorado filed testimony recommending that regulators keep electric rates mostly flat, a huge difference from Xcel’s $312 million proposed rate increase. The outcome will have a material impact on 2024 earnings. We assume regulators approve a $180 million rate increase.

Most concerning we think for investors are recommendations from three intervenors that regulators cut Xcel’s allowed return on equity from 9.3% approved last year to 9% or lower despite a sharp rise in interest rates since then. Xcel was allowed to earn a 9.83% ROE as recently as 2019. Our rate increase estimate is based on Xcel’s 9.3% allowed ROE.

Regulatory rulings that limit rate adjustments could slow Xcel’s near-term earnings growth. Electric rate adjustments in Colorado and Minnesota are the only significant rate adjustments we anticipate for 2024. We expect a constructive outcome in Minnesota in line with our estimate and a recent administrative law judge recommendation.

Xcel’s Minnesota solar proposal filed May 8 supports our view that the company might increase its capital investment plan, pushing annual earnings growth toward 7%. However, Xcel’s filing says solar costs are rising, offsetting benefits from tax subsidies and likely leading to pushback from regulators. We assume only a slight increase in Xcel’s five-year $29.5 billion capital investment plan pending evidence that regulators will support incremental investments.