Xcel Energy: Minnesota Regulators Surprise Investors With Disappointing Rate Decision

We are cutting our fair value estimate for Xcel Energy XEL to $59 from $60 after incorporating Minnesota regulators’ ruling that increases Xcel’s electric rates in 2022-24 by $306 million cumulatively, about 20% less than we expected. We are reaffirming our narrow moat and stable moat trend ratings.

The biggest surprise was regulators’ reversal of the $247 million interim rate increase that they approved for 2022. Regulators’ final ruling June 1 includes only a $92 million rate increase for 2022. Xcel will have to refund the difference. We estimate the refund will be a $0.20 per share annualized drag on 2023-24 earnings. Our new 2023 EPS estimate is below management’s previous $3.30-$3.40 guidance.

Regulators approved base rate increases in 2023 ($93 million) and 2024 ($121 million) that were higher than we forecast, supporting our long-term growth outlook and offsetting most of the valuation impact related to the lower 2022 rate increase. Regulators increased Xcel’s base allowed return on equity used to set customer rates to 9.25% from near 9.1%. However, the new allowed ROE remains well below the average awarded allowed ROE in other recent rate decisions for U.S. utilities and lower than the 9.57% that Minnesota regulators approved for Xcel’s gas rates last year.

We still forecast 6% long-term earnings growth, in line with management’s 5%-7% target. Our long-term growth rate is based on Xcel’s plan to invest $29.5 billion during the next five years. We think that will move higher as Xcel incorporates more renewable energy and transmission investments.

Xcel recently reached constructive settlements in South Dakota and New Mexico that will support earnings growth in 2024. Xcel also is awaiting a ruling on its $312 million electric rate increase request in Colorado. Some intervenors have proposed keeping customer rates flat and cutting Xcel’s allowed ROE to 9% or lower. We assume state regulators approve a $180 million rate increase.