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Morningstar | Management Meeting: Xcel Plotting Path Toward Carbon-Free Goal

We are reaffirming our $42 fair value estimate for Xcel Energy after meeting with management at the American Gas Association Financial Forum. We also are reaffirming our narrow moat and stable moat trend ratings.

Xcel continues to methodically plot its path toward having a carbon-free generation fleet by 2050. Pending and recently approved legislation and policymaking in its two largest jurisdictions, Colorado and Minnesota, could get Xcel most of the way by 2030. Its Colorado resource plan filing later this year will set out a path to greater than 80% carbon emissions reductions by 2030. A resource plan in Minnesota should set a similar glide path toward near-elimination of carbon emissions within the next decade.

Achieving regulatory approval for these plans in 2020 and 2021 will be key for Xcel to sustain its 5%-7% earnings and dividend growth beyond the next few years. The company’s five-year, $20 billion investment plan supports our 6% earnings and dividend growth rate forecast during the next few years. Management suggests the next leg of investment could top $20 billion just for power generation plus some $2.5 billion of annual gas and electric distribution and transmission spending.

Investors have rewarded Xcel for its regulatory and political success, driving its stock to trade at 22 times our 2019 earnings estimate and a 2.8% dividend yield based on its 2019 annualized dividend as of late May. Both valuation metrics are premiums to peers and well above what we consider a long-run fair value.

Although we think investors should benefit in the near term from Xcel’s investment plans and policymaking success, we think the market valuation fails to reflect the fact that Xcel continues to operate in historically tough regulatory and political jurisdictions.