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Xcel Energy’s Earnings May Rise If Regulatory Lag Is Addressed

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Earnings growth

Xcel Energy’s (XEL) earnings on average increased by 5.5% in the last five years. It’s targeting nearly the same earnings growth in the next couple of years. In 2015, Xcel’s earnings were mainly triggered by increased capital spending. Spending on capital projects can be recovered by utilities (FXU) through investment recovery mechanisms.

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Regulatory lag

As we saw in the first part of the series, Xcel Energy is looking to improve earnings by reducing the regulatory lag. Regulatory lag for a utility (IDU) is the difference of time between capital spending and rate recovery. According to Xcel Energy’s estimates, Minnesota has historically accounted for nearly 80% of its total regulatory lag. Minnesota is one of Xcel’s main territories.

Xcel Energy is looking to minimize the regulatory lag by presenting multiyear rate plans to regulators. Xcel settled one multiyear plan in 2015 and has a similar plan for Minnesota for 2016–2018. The multiyear plan not only reduces the regulatory lag but also minimizes the regulatory uncertainty. Xcel expects its returns to improve by 50 basis points by 2018 if the issue of regulatory lag gets addressed. These multiyear plans are expected to generate 75% of Xcel’s total revenue.

Xcel Energy not diversified into midstream

Xcel Energy is one of the largest utilities in the Midwest by market capitalization that’s not diversified into midstream operations. Apart from Xcel, CMS Energy (CMS) and Wisconsin Energy (WEC) also operate in the Midwest and aren’t diversified into the midstream. However, Xcel’s Colorado utility is looking for investments in gas reserves. It’s planning to invest $500 million in its gas utility.

In the next part, we’ll take a look at Xcel Energy’s rising debt.

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