Morningstar | Xcel's Large Capital Investment Plan Supports Long-Term Earnings Growth
We are reaffirming our $40 fair value estimate and narrow moat rating for Xcel Energy after the company announced $0.96 EPS in the third quarter, down from $0.97 in third-quarter 2017. We think year-to-date earnings totaling $2.05 per share, up 9% from the first nine months of 2017, are more indicative of Xcel's growth prospects.Management tightened its 2018 EPS guidance to $2.45-$2.49, in line with its previous guidance and our estimate. Management also initiated 2019 earnings guidance at $2.55-$2.65 per share, in line with our $2.58 estimate and implying 5% growth. Adjusting for Xcel's $0.06 per share weather benefit thus far in 2018 implies 7% core earnings growth next year.
Xcel's typically conservative management team also made a bold statement by raising the upper end of its long-term earnings growth target to 7% from 6%. The lower end remains 5%. We already expected Xcel to hit the high end of its previous 5%-6% growth target after Colorado regulators approved its plan to invest about $1 billion in the Colorado Energy Plan. We are reaffirming our 6% weather-normalized annual earnings growth for the next three to five years.
Management also raised its five-year capital investment plan to $19.3 billion from $18.5 billion, likely giving them conviction to raise the earnings-growth rate target. We already anticipated Xcel's five-year investment would top $19 billion, so management's additional spending plans do not change our outlook or fair value estimate materially.
Regulatory proceedings starting next year in Xcel's largest service territories, Minnesota and Colorado, will be key to its ability to hit the 6% earnings growth beyond 2019. We expect there will be considerable debate about allowed returns on equity since Xcel's Minnesota electric and Colorado gas allowed ROE are among the lowest in the U.S.
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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