Xcel Energy Inc. — Q1 2017 Form 10-Q
Business context and reporting period. Xcel Energy is a regulated electric and natural gas utility holding company with operations across portions of the Midwest, Colorado, Texas and New Mexico. This unaudited filing covers the three months ended March 31, 2017, compared with Q1 2016. The company cautions that seasonal interim results are not an appropriate basis for projecting the full year.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 / prior balance |
|---|---|---|
| Operating revenue | $2.946 billion | $2.772 billion; up 6.3% |
| Operating income | $486.2 million | $489.9 million |
| Net income | $239.3 million | $241.3 million |
| Diluted EPS | $0.47 | $0.47 |
| Electric margin | $1.374 billion | $1.323 billion; up $51 million |
| Natural gas margin | $261 million | $254 million; up $7 million |
| Operating cash flow | $718 million | $803 million |
| Utility capital/construction expenditures | $749 million | $700 million |
| Cash and cash equivalents | $74.0 million at March 31 | $84.5 million at Dec. 31, 2016 |
| Long-term debt, including current portion | $14.452 billion carrying value | $14.450 billion at Dec. 31, 2016 |
| Short-term debt | $605 million | $392 million at Dec. 31, 2016 |
Available committed credit facilities were $2.129 billion at March 31. Reported current liabilities were $3.708 billion versus current assets of $2.633 billion. Cash dividends declared were $0.36 per share, compared with $0.34 a year earlier.
Material changes and management commentary
- Revenue and margins increased, mainly from electric rate increases, non-fuel riders and infrastructure recovery. Management attributed flat EPS to stronger electric and natural gas margins and a lower effective tax rate, offset by higher depreciation and interest expense.
- Depreciation and amortization rose $45.2 million, or 14.1%, primarily due to capital investments and a reduction in Minnesota’s excess depreciation reserve. Interest charges increased $9.5 million, or 6.1%, reflecting higher debt levels, partly offset by lower-rate refinancing.
- The effective tax rate fell to 32.8% from 34.8%, primarily due to higher wind production tax credits; those credits flow back to customers through Minnesota fuel clauses and riders.
- Operating cash flow declined $85 million, attributed primarily to payment timing, lower tax refunds and higher pension contributions. Investing cash use increased $54 million, mainly due to Rush Creek wind construction.
- Actual retail electric sales fell 1.3%; weather-normalized sales fell 0.8%, or rose 0.3% after adjustment for the 2016 leap day. Weather reduced Q1 2017 EPS by an estimated $0.035 after Minnesota decoupling recovery.
Guidance, plans and key risks
- 2017 GAAP and ongoing EPS guidance is $2.25–$2.35. Assumptions include normal weather for the rest of the year, 0%–0.5% weather-normalized growth in retail electric and firm natural gas sales, flat O&M, and a 32%–34% effective tax rate. Ongoing EPS is non-GAAP; the company says it cannot provide a quantitative reconciliation to GAAP guidance for unknown or unplanned adjustments.
- Long-term objectives are annual EPS growth of 4%–6%, dividend increases of 5%–7%, a 60%–70% dividend payout ratio, and senior unsecured debt ratings in the BBB+ to A range.
- Xcel proposed 3,380 MW of additional wind capacity by 2020, including $4.2 billion of planned company-owned project investment for 2017–2021. Most projects remained subject to regulatory approval; Rush Creek’s 600 MW Colorado project was approved.
- Regulatory outcomes remain important to guidance. A Minnesota multi-year electric rate settlement was awaiting commission action. SPS’s New Mexico rate case seeking a $41.4 million base-rate increase was dismissed in April 2017; reconsideration was pending. Texas approved a settlement with an estimated $51.8 million rate impact, and SPS filed for a separate $16.1 million annual transmission-cost recovery.
- Environmental requirements could entail substantial uncertain costs. Potential dry scrubbers at SPS’s Harrington units were estimated at about $400 million; Tolk scrubbers at about $600 million, with the related rule under reconsideration and litigation. The company expects compliance costs to be recoverable through regulation, but recovery and timing are not assured.
- Tax authorities had proposed a $14 million adjustment related to federal tax-loss carryback claims; the matter was in IRS Appeals, and Xcel had recorded its best estimate of the eventual expense. Unrecognized tax benefits totaled $135.4 million; the company said that amount could decrease by up to approximately $60 million as audits and appeals progress.
- Other items to monitor include MISO transmission return-on-equity complaints, the uncertain effect of an appellate ruling on the applicable FERC methodology, and the potential effect of Lubbock Power & Light transferring load away from SPS. Westinghouse filed for bankruptcy, but management did not expect a material near-term operational or financial impact.
Most important facts for investors to verify
- Whether rate-case and regulatory decisions support the assumptions embedded in the $2.25–$2.35 EPS guidance, especially Minnesota and SPS proceedings.
- Whether planned wind investment receives approval, is completed on schedule and achieves the projected customer savings and tax-credit benefits.
- Whether capital spending, higher depreciation and borrowing needs affect cash generation, leverage and dividend coverage.
- How environmental-rule reconsideration and litigation change the potential Harrington and Tolk compliance costs and their recoverability from customers.
- Developments in federal and state tax audits, including resolution of the carryback issue and changes in unrecognized tax benefits.