XCEL ENERGY INC quarterly report, Q3 FY2017

Xcel Energy Inc. — Q3 2017 Form 10-Q

Reporting period: Three and nine months ended Sept. 30, 2017. Xcel Energy is a regulated electric and natural gas utility holding company with operations across several states. Management cautions that results are seasonal and interim results are not necessarily indicative of full-year performance.

Financial performance

Metric	Q3 2017	Q3 2016	Nine months 2017	Nine months 2016
Operating revenue	$3.017 billion	$3.040 billion	$8.608 billion	$8.312 billion
Operating income	$818 million	$827 million	$1.764 billion	$1.749 billion
Net income	$492 million	$458 million	$959 million	$896 million
Diluted EPS	$0.97	$0.90	$1.88	$1.76
Cash provided by operating activities	Not presented by quarter	$2.367 billion	$2.425 billion

Q3 revenue declined about 0.8%, while net income rose about 7.5%; nine-month revenue increased about 3.6% and net income about 7.0%.
Electric margin was $1.778 billion in Q3, up $15 million, and $4.571 billion year to date, up $117 million. Natural gas margin was $150 million in Q3, down $4 million, and $587 million year to date, up $10 million.
Approximate operating margin was 27.1% in Q3 versus 27.2% a year earlier, and 20.5% year to date versus 21.0%. Approximate net margin improved to 16.3% from 15.1% in Q3 and to 11.1% from 10.8% year to date.
Nine-month capital/construction expenditures were $2.256 billion. Investing cash use was $2.239 billion; financing cash use was $45 million. Cash at Sept. 30 was $168 million.
At Sept. 30, total assets were $42.469 billion and common equity $11.439 billion. Long-term debt was $14.573 billion, current maturities $305 million, and short-term debt $514 million. Committed credit facilities totaled $2.750 billion, with $2.208 billion available at Sept. 30.
Quarterly dividends declared were $0.36 per share, versus $0.34; nine-month dividends were $1.08, versus $1.02.

Material changes and management’s explanation

EPS increased by $0.07 in Q3 and $0.12 year to date. Management attributed gains principally to lower effective tax rates, lower operating and maintenance costs, and higher electric margins from rate increases and infrastructure-related recovery.
Lower Q3 revenue reflected lower electric and natural gas revenues and weather effects. Retail electric sales declined 2.2% in Q3 and 1.0% year to date; weather-normalized year-to-date retail electric sales declined 0.2% excluding leap-day effects.
O&M expense fell $48.5 million in Q3 and $58.3 million year to date, partly due to maintenance timing, lower nuclear outage costs, and reduced storm-related expense compared with 2016. Depreciation and amortization rose $42.6 million in Q3 and $131 million year to date, primarily from new investment.
Income tax expense fell $33.6 million in Q3 and $47.6 million year to date. The effective tax rate was 29.4% in Q3 and 30.7% year to date, versus 34.2% and 34.5%, respectively, in 2016; factors included wind production tax credits, tax audit resolutions, and research credits.
Operating cash flow decreased $58 million year to date, reflecting higher interest payments and pension contributions, lower tax refunds, and timing of payments and collections. Capital spending increased, notably for Rush Creek wind.

Outlook, regulation, risks, and unusual items

Guidance: 2017 GAAP and ongoing diluted EPS guidance was narrowed to $2.27–$2.32 per share. 2018 GAAP and ongoing guidance was $2.37–$2.47. Key assumptions include constructive regulatory outcomes, normal weather, modest weather-normalized sales growth, flat O&M, and higher depreciation, property taxes, and interest expense.
Long-term objectives: Annual EPS growth of 5%–6% from a 2017 base of $2.30; annual dividend growth of 5%–7%; dividend payout ratio of 60%–70%; and senior unsecured debt ratings in the BBB+ to A range.
Capital program: Base capital expenditures for 2018–2022 were forecast at $19.0 billion, funded primarily by operating cash flow and debt. The forecast excludes the proposed Colorado Energy Plan, which could add up to $1.5 billion of capital investment.
Rate cases and recovery: Significant pending proceedings included Colorado electric and natural gas rate requests, a Texas electric rate case, and a Wisconsin rate case. Outcomes and timing may affect earnings and recovery of investment and costs. Minnesota’s multi-year electric rate order provided an estimated adjusted total increase of about $240 million over 2016–2019.
Generation and environmental matters: PSCo early retired Valmont Unit 5 and converted Cherokee Unit 4 from coal to natural gas in Q3. EPA actions and litigation affecting emissions rules remained unsettled; possible future controls at Tolk were a risk, with potential investment previously estimated at about $600 million. A Texas regional haze rule reduced the stated risk of dry-scrubber investment at Harrington and Tolk.
Other contingencies: Recorded remediation liabilities included $31.1 million for the Ashland manufactured-gas site and $16.2 million for the Fargo site. The filing also describes rate-related proceedings, tax audits, litigation, and potential refunds. The MISO transmission return-on-equity complaints remained unresolved.
Financing and operations: Xcel issued $1.45 billion of long-term bonds in 2017 and redeemed $750 million of higher-coupon debt, paying $29.5 million in early-redemption premiums that were deferred as regulatory assets. Management reported no material change in previously disclosed risk factors and said disclosure controls were effective.

Important facts for investors to verify

Whether 2017 and 2018 EPS guidance assumptions—especially regulatory outcomes, weather, sales, and cost forecasts—remain achievable.
Final decisions and timing for pending state rate cases, and the recoverability of capital investment and deferred costs.
Actual spending, financing requirements, and returns on the $19.0 billion 2018–2022 base capital plan, including projects not yet approved.
How tax audit and appeal resolutions affect the effective tax rate and cash taxes in future periods.
Potential environmental, legal, fuel-supply, and transmission-related liabilities or costs, including outcomes not presently estimable.
Whether operating cash flow and available credit remain sufficient alongside rising capital expenditures, debt maturities, and dividends.