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Xcel Energy’s Growth Plan Is Backed by Huge Capital Spending Plan

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Market performance

Shares of Xcel Energy (XEL) gained 1.7% after the company reported quarterly earnings on January 28, 2016. 2015 was bad for utilities, as they lost nearly 8% during the year. Xcel Energy outperformed the industry with nearly flat returns over the year.

The chart below shows the stock price movement of Xcel Energy (XEL), PPL (PPL), and the Utilities Select Sector SPDR ETF (XLU).

Utilities mainly corrected last year due to the fear of interest rates heading higher. PPL (PPL) corrected by ~5% while XLU dropped 8% during the year. Xcel Energy accounts for 3.5% in XLU. Duke Energy (DUK) and NextEra Energy (NEE) are some of the top holdings in XLU, each accounting for 8% of the fund’s holdings.

Utilities (FXU) is one industry that benefitted because of the near-zero interest rates. It is an asset-heavy industry, so utilities carry a lot of debt on their books. It will be interesting to see how utilities perform in 2016 as interest rates are expected to increase very slowly.

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Capital spending plan

Xcel Energy intends to spend nearly $17.7 billion in the next five years as part of its capital expenditure plan. This spending particularly focuses on grid modernization through 2020.

The aggressive capital spending plan is expected to drive the rate base growth by 3.7% compounded annually through 2020. This spending may raise the current leverage of Xcel in the coming years. It has a total debt of $13 billion as of December 31, 2015. Higher interest rates can increase the interest expenses of Xcel Energy, ultimately hampering its profitability.

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