Xcel took an early lead in renewable energy development primarily due to the favorable wind conditions in its central U.S. service territories

Business Strategy & Outlook

Xcel Energy’s regulated gas and electric utilities serve customers across eight states and own infrastructure that ranges from nuclear plants to wind farms, making the company a barometer for the entire utilities sector. That barometer is signaling a clean energy future ahead. Xcel took an early lead in renewable energy development primarily due to the favorable wind conditions in its central U.S. service territories. The company now plans to invest $26 billion in 2022-26, much of it going to renewable energy projects and electric grid infrastructure to support clean energy. That could make investment climb above $30 billion in 2027-31 based on state and federal clean energy policies.

Transmission projects to support renewable energy represents about one third of Xcel’s investment plan, but that could go higher based on recent studies that show transmission is a constraint to meeting clean energy targets. Politicians and regulators in Colorado, Minnesota, and New Mexico are pushing aggressive environmental targets, which could extend Xcel’s growth potential. One example is the 460-megawatt Sherco solar project that Minnesota regulators approved in September on the site of a soon-to-close coal plant. Xcel aims to eliminate coal generation by 2034 and deliver 100% carbon-free electricity by 2050. Xcel’s investment plan gives investors a transparent runway of 6% to 7% annual earnings and dividend growth potential. However, realizing this growth requires political, regulatory, and customer support for clean energy investments, particularly in Xcel’s largest jurisdictions, Colorado and Minnesota, where it plans to invest $20 billion in 2022-26. Xcel’s substantial growth investment plan results in more regulatory risk than its peers. Xcel has made substantial progress in recent years bringing earned returns closer to allowed returns through constructive regulatory negotiations across its system. Lower energy costs have helped keep customer bills mostly flat despite higher infrastructure charges. Regulatory support for Xcel’s growth investments could wane with rising energy prices.

Financial Strengths

Xcel Energy has a strong financial profile. Its biggest financial challenge is raising enough capital at reasonable prices to fund its $26 billion investment plan during the next five years with minimal equity dilution. Most of Xcel’s planned investments benefit from favorable rate regulation, but regulatory lag could weigh on cash flow. Xcel’s strong balance sheet has helped it raise capital at attractive rates. The company is to maintain EBITDA/interest coverage near 5 times as long as regulators grant timely rate increases. Xcel’s consolidated debt/ capital leverage ratio could creep toward 60% during its heavy spending in 2023-25, but there are normal levels around 55%, which includes $1.7 billion of long-term parent debt. Parent debt boosts shareholder returns on equity about 100 basis points, offsetting some of the regulatory lag. Xcel has $3.9 billion of refinancing needs in 2022-26 and it will need more than $7 billion of new debt. Xcel has been issuing large amounts of new debt since 2019 at coupon rates around 100 basis points above U.S. Treasury yields. Xcel took care of its equity needs for at least the next two years with a forward sale in late 2020 to raise $720.9 million at $61 per share. This followed a $459 million forward sale initiated in late 2018 at $49 per share. These were good moves with the stock trading above the fair value estimate when the deals priced. The board has accelerated its dividend increases the past few years. The $0.11 per share annualized raises for 2021 and 2022 bring the dividend to $1.94. This is still at the low end of management’s 60%-70% payout target for 2022, so annualized increases will have to start climbing near 7% to keep up with earnings growth and management’s payout target.

Bulls Say

Xcel has raised its dividend every year since 2003, including a 6% increase for 2022 to $1.94 per share & similar dividend growth going forward is expected.
Renewable energy portfolio standards in Minnesota and Colorado are a key source of support for wind and solar projects.
The geography of Xcel’s service territories gives it among the best wind and solar resources in the U.S. and a foundation for growth.

Company Description

Xcel Energy manages utilities serving 3.7 million electric customers and 2.1 million natural gas customers in eight states. Its utilities are Northern States Power, which serves customers in Minnesota, North Dakota, South Dakota, Wisconsin, and Michigan; Public Service Company of Colorado; and Southwestern Public Service Company, which serves customers in Texas and New Mexico. It is one of the largest renewable energy providers in the U.S. with nearly half of its electricity sales coming from carbon-free energy.

(Source: Morningstar)

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