Xcel Energy Inc. — Q2 2010 Form 10-Q
Business context and reporting period. Xcel Energy is a holding company for regulated electric and natural gas utilities, including NSP-Minnesota, NSP-Wisconsin, PSCo and SPS. This unaudited quarterly report covers the three and six months ended June 30, 2010. Management cautions that seasonal interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Operating revenue | $2.308 billion | $2.016 billion | $5.115 billion | $4.712 billion |
| Operating income | $325.3 million | $279.4 million | $729.0 million | $650.2 million |
| Net income | $139.8 million | $117.1 million | $306.9 million | $291.2 million |
| Diluted EPS | $0.30 | $0.25 | $0.66 | $0.63 |
| Electric margin | $1.055 billion | $937 million | $2.061 billion | $1.898 billion |
| Natural gas margin | $122 million | $120 million | $332 million | $317 million |
- Revenue rose 14% in Q2 and 9% for the half year; electric revenue growth reflected higher fuel and purchased-power cost recovery as well as rate increases. Fuel-cost recovery generally offsets corresponding expense and does not materially increase electric margin.
- Q2 net income increased about 19% and diluted EPS rose from $0.25 to $0.30. Management attributed stronger ongoing earnings chiefly to higher electric margins, including Colorado rate outcomes, SPS fuel-allocation reserve reversals, favorable weather and higher electric sales.
- Six-month operating cash flow was $911.5 million, down from $1.126 billion, primarily due to working-capital changes. Investing cash outflow was $934.4 million, including $967.3 million in utility capital expenditures. Financing cash outflow was $19.7 million; cash ended the period at $66.0 million.
- At June 30, total long-term debt, including current maturities, was $8.955 billion; short-term debt was $129 million. Cash plus available committed facilities totaled approximately $1.984 billion as of July 20, including $1.966 billion of undrawn facilities.
- Other balance-sheet measures: total assets were $25.563 billion and common stockholders’ equity was $7.392 billion. The declared common dividend was $0.25 per share for Q2.
Material changes and unusual items
- Reported six-month continuing-operations EPS was $0.65, compared with ongoing EPS of $0.71. The difference includes approximately $17 million ($0.04 per share) of Medicare Part D tax-benefit reversal and approximately $10 million ($0.02 per share) of tax and interest expense related to the PSRI COLI matter.
- Other O&M expense increased 9% in Q2 and 6% for the half year, reflecting employee benefits, labor, generation maintenance and nuclear outage costs. Conservation and demand-side management expense also increased, generally with recovery through rates or riders.
- Operating cash flow declined despite higher net income; the filing attributes the decrease primarily to lower cash-flow contributions from inventories, receivables and unbilled revenues.
- In May, Xcel Energy issued $550 million of 4.70% senior notes due 2020. Short-term debt fell from $459 million at year-end 2009 to $129 million at June 30.
Outlook, risks and contingencies
- Management reaffirmed 2010 ongoing diluted EPS guidance of $1.55–$1.65. Assumptions include normal weather, weather-adjusted retail electric sales growth of about 1%, natural gas sales growth of 0%–1%, and constructive outcomes in the Minnesota gas and PSCo wholesale electric rate cases. Projected cost pressures include $115–$135 million of higher O&M, $35–$45 million of higher depreciation and $20–$30 million of higher interest expense.
- Regulatory outcomes are important to the outlook. SPS sought a Texas base-rate increase of about $62 million (approximately $53.4 million net of related adjustments); a decision and new rates were expected in 2011. A Minnesota gas rate case and PSCo wholesale rate case were also pending.
- PSCo agreed to acquire two gas-fired generating facilities for $739 million, subject to remaining regulatory approvals; closing was expected in December 2010. Separately, SPS expected to sell Lubbock distribution assets for approximately $87 million, subject to approvals, with closing anticipated late in 2010.
- Environmental exposure includes estimated site-remediation liabilities of $102 million, including a $97.5 million recorded liability for the Ashland site. Recovery of remediation costs through rates is expected by the company but remains subject to regulatory treatment. SPS also disputed a draft New Mexico compliance order proposing a $16.1 million penalty.
- Other material matters include climate and air-quality regulation, nuclear-waste disposal litigation, gas-trading litigation, the Comanche Unit 3 contractor dispute and the Cabin Creek criminal proceeding. Outcomes and potential financial effects vary; the filing does not provide clear estimates for several matters.
- Management projected pension expense of $48 million in 2010 and $71 million in 2011, and estimated 2011 pension contributions of $125–$175 million. A voluntary 2010 contribution of about $35 million was under consideration.
- A subsequent-event settlement paid Xcel $25 million in July 2010 in the COLI insurance litigation; the company expected to record it in Q3 as nonrecurring earnings, approximately $0.05 per share.
Important facts for investors to verify
- Whether ongoing EPS guidance and its rate-case assumptions remain achievable, and how reported GAAP earnings reconcile to ongoing earnings.
- Cash generation, capital spending, planned financing and the ability to maintain liquidity while funding utility investment and dividends.
- Final decisions and customer-rate recovery in the pending state and wholesale rate proceedings.
- Approval, financing and expected returns for the $739 million generation acquisition and the proposed Lubbock asset sale.
- Potential costs, regulatory recovery and timing associated with environmental requirements, remediation and the listed legal proceedings.