Morningstar | Xcel's Colorado Energy Plan Moves Forward, Supporting Growth Outlook
We are reaffirming our $40 fair value estimate and narrow moat rating for Xcel Energy after reports that Colorado regulators voted to move forward with Xcel's $2.5 billion preferred Colorado Energy Plan. We had already assumed regulators would approve the plan, which includes $1 billion of investment from Xcel that we include in our forecasts.We consider this a positive development during an important stretch of regulatory activity for Xcel in Colorado. The CEP and an electric base-rate review likely early next year will affect Xcel's ability to hit our 6% average annual earnings growth rate, at the high end of management's 5%-6% earnings growth target. We expect dividend increases to track earnings growth.
The CEP also enhances Xcel's clean energy profile, which is one reason we think the market is giving Xcel a premium valuation to its peers as of late August. As part of the CEP, Xcel would close two large coal plants in Colorado and add 1,800 megawatts of wind and solar generation. This should keep Xcel one of the top wind energy providers in the U.S. Part of its CEP investment will include owning 500 MW of wind energy.
We think CEP approval bodes well for a constructive electric base-rate review in early 2019. Xcel received a less constructive decision in its recent gas base-rate review, including a 9.35% allowed return on equity, one of the lowest in the U.S. The electric business could get a boost from regulators to support investment that will complement the CEP.
We assume Xcel invests $18.5 billion across its system between 2018-22, in line with management's budget.
Xcel Energy is a regulated electric and natural gas delivery company which serves customers in mid-western and western states, including portions of Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas and Wisconsin. The company's reportable segments include: regulated electric utility, which generates, transmits and distributes electricity in Minnesota, Wisconsin, Michigan, North Dakota, South Dakota, Colorado, Texas and New Mexico; regulated natural gas utility, which transports, stores and distributes natural gas primarily in portions of Minnesota, Wisconsin, North Dakota, Michigan and Colorado; and other, which includes steam revenue and appliance repair services.
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