Published January 26, 2024
On January 25, Xcel Energy, Inc. (the parent company of Northern States Power Company, Minnesota’s largest electric utility) held its 2023 year-end earnings call. The purpose of this call was to inform Xcel shareholders and investors of its recent financial performance and how Xcel’s corporate officers expect that performance to look in the months and years ahead. In stark contrast to arguments Xcel has raised before the Minnesota Public Utilities Commission (PUC) in a recent rate case, the year-end call reflects Xcel’s optimism about its strong financial performance, its ability to attract capital and maintain credit worthiness, and its ongoing delivery of strong returns for shareholders.
This blog post summarizes some updates we learned from the call and how it reinforces the PUC’s decision last year to approve a lower rate increase than Xcel had requested.
Xcel’s Electric Rate Case
In late 2021, Xcel filed a rate case proposing to significantly increase electric rates for its Minnesota customers. One of the biggest drivers of that proposed rate increase was Xcel’s request to increase its authorized return on equity (ROE) from 9.06% to 10.2%. If approved, this ROE increase would have added around $80 million per year to Minnesota ratepayers’ collective tab in order to deliver higher profits to Xcel shareholders. Xcel claimed this increase was necessary for the company to retain its financial integrity and credit worthiness, attract capital, and earn a return comparable to other companies facing similar risks.
Pushing back on this, CUB, the Minnesota Department of Commerce, and other parties submitted witness testimony and other evidence showing Xcel had no trouble meeting these financial objectives at its existing authorized ROE of 9.06%. We — along with hundreds of public commenters — also offered evidence highlighting the challenges everyday Minnesotans would face if Xcel were permitted to significantly increase rates to support additional profits.
Ultimately, the PUC found that Xcel did not meet its burden to prove that significantly increasing its authorized ROE was necessary, or that the outcome of that action would be consistent with the utility’s legal obligation to charge rates that are just and reasonable. Instead, the PUC authorized a modest increase to Xcel’s ROE, setting it at 9.25%.
Xcel reacted with frustration to this outcome. In a request that the PUC reconsider its decision, Xcel claimed the PUC’s ruling led to a “dramatic drop” in its stock price and threatened its ability to attract capital. Xcel later blamed the PUC’s ruling as contributing to lowered profitability in the second quarter of 2023. Xcel has since appealed the PUC’s decision to the Minnesota Court of Appeals, in part to challenge the PUC’s ROE decision.
CUB has consistently pushed back on the arguments Xcel has raised to request a higher ROE. For example, though Xcel’s stock price did drop (rather non-dramatically) by 2.7% on the day the Commission issued its rate case decision, CUB counted over 40 other times in the 5 years immediately prior to that date when Xcel’s stock price fluctuated by an equal or higher percentage during a single trading day.
We also noted that factors other than the PUC’s Minnesota rate case decision – particularly Xcel Energy Inc.’s significant exposure to Marshall fire litigation in Colorado – were as or more likely than the Minnesota rate case decision to impact Xcel’s stock price. Finally, we pointed to Xcel’s own securities filing, which informed shareholders and investors that its 2023 Q2 decrease in profitability “was primarily driven by unfavorable weather experienced in Colorado and [New Mexico] territories as well as higher O&M and interest charges, without expected increases in regulatory recovery to offset these drivers including the outcome of the Minnesota Electric Rate Case.” This same filing showed that, though Xcel Energy, Inc.’s overall profitability was down that quarter (as was profitability for Xcel’s Colorado and New Mexico utilities), earnings for Xcel’s Minnesota utility (Northern States Power Company) were up from the previous year.
Xcel’s 2023 Year-End Earnings Call
In its latest earnings call and presentation, Xcel’s corporate officers shared the following (among other) highlights with Xcel shareholders and institutional investors:
- 2023 marked the 19th consecutive year that Xcel met its earnings guidance, which Xcel’s CEO noted “is critical to maintaining a competitive cost of capital;”
- 2023 marked the 20th consecutive year that Xcel has increased its quarterly dividend amount;
- Xcel leadership remains optimistic about the company’s ability to achieve a 5-7% long-term earnings per share growth rate;
- Xcel Energy Inc.’s overall 2023 revenues were lower than in 2022; however, its net earnings increased relative to last year, due in part to lowered operating expenses;
- Northern States Power Company’s 4th quarter diluted earnings per share ($0.33) and year-end diluted earnings per share ($1.28) increased as compared to 4th quarter and year-end results for 2022; and
- Northern States Power Company continues to maintain very strong credit metrics from all three major credit rating agencies.
Notably, none of the institutional investors participating in the call asked about Xcel’s pending appeal of the 2021 Minnesota rate case decision, though several asked about Xcel’s ongoing exposure to the Marshall fire litigation in Colorado.
Meanwhile, it appears Xcel Energy, Inc. has had no trouble attracting investments from large institutional investors. According to this January 20, 2024 MarketBeat report, each of Principal Financial Group, Vanguard Group, Inc., BlackRock Inc., State Street Corp, Geode Capital Management LLC, and T. Rowe Price Investment Management Inc. increased their stake in Xcel in 2023, and the company saw more inflow than outflow of institutional investment capital in the last two quarters of 2023. Further, according to CNN Business, the majority of recently polled investment analysts recommend investors either hold or buy Xcel stock based on its recent performance. Xcel stock was the second most upgraded utility stock in recent months, further suggesting general optimism about Xcel stock among investment analysts.
We are glad to see Xcel remains a financially healthy utility. Strong financial integrity helps Xcel provide safe and reliable service. However, Xcel’s strong financial performance further illustrates why it is disappointing to see the company continue to fight to raise its electric rates to support a significantly higher authorized return. Evidence introduced as part of the 2021 rate case, and the company’s actual performance in the months since, continue to demonstrate that the PUC acted reasonably and appropriately in limiting Xcel’s ROE increase. By doing so, the PUC honored its responsibility to protect ratepayers from paying higher rates than necessary to support Xcel’s right to a reasonable return.
Xcel’s Minnesota gas utility has recently filed another rate case. In this case, the company seeks to raise rates for its Minnesota gas customers, again in part to support an increase to Xcel’s authorized ROE. CUB is a party to this case and intends to introduce testimony and arguments pushing back on Xcel’s ROE proposal. We are optimistic the PUC will again apply careful scrutiny to Xcel’s ROE request to appropriately protect ratepayers from unreasonable rate increases.