Xcel Energy Resolves Regulatory Issues

We are reaffirming our $40 fair value estimate and narrow moat rating for

The Southwest is becoming a key growth area for Xcel after recent approval of new renewable energy projects and likely constructive outcomes in the pending base rate cases. We expect these regulatory outcomes will support Xcel's plan for $3.3 billion of investment in the region in 2018-21. This would be 21% of Xcel's consolidated $15.9 billion investment plan in a region that contributed only 12% of Xcel's 2017 operating earnings.

The Texas settlement comes with a 9.5% allowed return on equity, which is below industry average, but a higher-than-average 57% equity share, which offsets the lower ROE. The net earnings impact is in line with our estimate due to earnings-neutral offsets such as lower tax rates and accelerated depreciation. We expect Xcel can achieve a similar outcome in New Mexico based on regulatory filings to date.

Colorado, Xcel's second-largest service territory, is a key place for investors to watch next. We expect a ruling this fall on Xcel's $1 billion Colorado Energy Plan, with investments in renewable energy and natural gas power generation. A constructive outcome in Xcel's CEP filing will in part determine the company's growth beyond 2020. We assume a constructive outcome based on state regulators' past support for similar initiatives to reduce reliance on coal.

We also expect constructive outcomes in Xcel's Colorado gas and electric base rate cases. However, a less constructive outcome could lead Xcel to pull back on some of its planned $4.8 billion of investment in the state apart from the CEP. A cut in investment could reduce our fair value estimate by $2 per share.

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