Xcel Energy

Xcel Energy reported adjusted earnings per share of $0.93 during the second quarter, up from $0.75 in the same period in 2025. Earnings are on track to meet our full-year estimate and management's guidance.

Why it matters: Higher customer rates and growth investments boosted Xcel's earnings during the quarter, partially offset by higher financing costs. Electricity demand growth remains historically high, particularly in Xcel's New Mexico and Texas service territories where electricity demand is up nearly 5% from the first half of 2025. Management reaffirmed its 2026 EPS guidance of $4.04-$4.16, in line with our estimate.

The bottom line: We are reaffirming our $74 fair value estimate and Morningstar Economic Moat Rating of narrow for Xcel. Xcel's stock trades at a 6% premium to our fair value estimate as of July 30, in line with our valuation for the US utilities sector. We forecast 7% annual earnings growth through 2028, in line with management's 6%-8% target.

Big picture: Management reaffirmed its $60 billion base investment plan for 2026-30 and expressed increasing confidence in an additional $10 billion as regulators approve new generation and transmission projects. This supports our outlook for annual earnings growth that could reach 9% beyond 2028. Xcel's near-term data center growth outlook has remained the same since last year with 2 gigawatts contracted or under construction and 4 GW set to be contracted by the end of 2027. In June, Minnesota regulators approved a $211 million rate increase based on a 9.6% allowed return on equity, in line with interim rates regulators approved in 2025. We consider this a constructive outcome.

Coming up: Xcel has six pending rate reviews set to conclude by year-end. It already settled several of those, providing transparency for 2027 earnings. In June, Xcel agreed to a $225 million electric rate increase and 9.3% allowed return on equity in Colorado, well below its request but resolving a key uncertainty.

Our fair value estimate is $74 per share after incorporating the most recent financial and regulatory updates.

We forecast average annual earnings growth will trend toward the high end of management's 6%-8% target range based on upside to management's $60 billion capital investment plan during the next five years. Regulatory activity across Xcel's service territories set a clear path to achieve that growth target through 2027.

We think annual earnings growth could top 8% beyond 2027 if Xcel receives constructive regulatory outcomes and finds incremental capital investment, potentially from data center growth.

Realizing this growth will require support from regulators and the financial markets to execute its ambitious investment plan, which could produce 11% annual rate-base growth through 2030. We expect earnings and dividends to grow more slowly than the rate base due to higher financing costs. Higher operating costs could also slow earnings growth.

We assume that constructive regulatory outcomes and cost controls will allow Xcel's subsidiary utilities to earn returns on equity in line with their allowed ROE by 2028. Our long-term forecast incorporates a systemwide 9.8% average allowed ROE and 1% average annual long-term gas and electricity demand growth.

Our probability-adjusted estimate for liabilities from the 2024 Smokehouse Creek Fire in Texas represents less than $1 per share of shareholder value impact.

We use a 7% cost of equity in our discounted cash flow valuation. This is lower than the 9% rate of return we expect investors will demand of a diversified equity portfolio.

We think Xcel Energy’s rate regulation and investments in critical energy infrastructure support a narrow moat.

State and federal regulators grant Xcel exclusive rights to charge customers rates that allow it to earn a fair return on and return of the capital it invests to build, operate, and maintain its infrastructure. In exchange for Xcel’s service territory monopolies, state and federal regulators set returns at levels that aim to minimize customer costs while offering fair returns for capital providers.

Xcel has significantly improved the regulatory structures and asset mix in its primary jurisdictions during the last decade. We now have good confidence that Xcel can consistently earn above its cost of capital.

Allowed returns on equity for Xcel’s 14 state-level rate jurisdictions range from 9.2% to 9.8% with a 9.5% systemwide weighted average allowed ROE. This is slightly lower than the average for all US utilities but sufficient to allow Xcel to create value with its growth investments.

Rate structures in Xcel's two largest service territories—Colorado and Minnesota—allow near real-time investment cost recovery and minimize regulatory lag, helping Xcel close the gap between earned ROE and allowed ROE.

Minnesota legislation passed in 2015 has helped stabilize long-term earned returns. The legislation supports constructive ratemaking, such as the option for multiyear forward-looking rate plans, formula rate reviews for capital investment, indexed operation and maintenance cost recovery, riders for distribution investment, stranded cost recovery, and interim rates.

However, the outcome of Xcel's 2022-24 rate review suggests Minnesota rate regulation remains challenging. Minnesota regulators are set to decide in late 2026 on another round of proposed rate increases.

Texas legislation also passed in 2015 virtually eliminates regulatory lag by allowing rate adjustments for capital investments 30 days prospectively and 155 days retroactively. Colorado has ambitious clean energy goals, but the state will need to offer utilities more regulatory support if it is going to accomplish them.

Xcel benefits from strong political and regulatory support for upgrading its electric and gas systems to improve safety and reliability. Its service territories have among the best wind and solar resources in the country, keeping costs low for renewable energy.

The states it serves support shifting from a heavy reliance on coal generation to renewable energy, offering Xcel opportunities to invest billions of dollars in new infrastructure that grow earnings and create shareholder value.

Xcel has raised its dividend every year since 2003, including a 4% increase in 2026 to $2.37 per share. We expect similar dividend growth in the future.

Renewable energy portfolio standards in Minnesota and Colorado give Xcel policy support to add wind and solar projects.

Xcel's service territories are in areas with low-cost wind and solar resources, providing a foundation for growth while keeping customer bills low.

Like all utilities, rising interest rates will raise Xcel's borrowing costs and make its dividend less attractive to income investors.

Xcel's large investment plan could lead to higher customer rates even with the offsetting drop in customers' energy costs due to more low-cost renewable energy.

Energy-efficiency improvements are limiting energy demand growth, putting more pressure on Xcel to seek customer rate increases.