Xcel Energy Inc. — Q2 2017 Form 10-Q
Business context and period: Unaudited consolidated results for the quarter and six months ended June 30, 2017, compared with the same 2016 periods. Xcel Energy is a regulated electric and natural gas utility operating through four utility subsidiaries. Management cautions that seasonal interim results are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Operating revenues | $2,644.9 million | $2,499.8 million | $5,591.4 million | $5,272.1 million |
| Operating income | $459.7 million | $431.6 million | $945.9 million | $921.5 million |
| Net income | $227.3 million | $196.8 million | $466.5 million | $438.1 million |
| Diluted EPS | $0.45 | $0.39 | $0.92 | $0.86 |
| Electric margin | $1,419 million | $1,368 million | $2,793 million | $2,691 million |
| Natural gas margin | $176 million | $169 million | $437 million | $423 million |
| Operating cash flow | Not presented quarterly | $1,291.8 million | $1,425.0 million |
Cash, debt and liquidity at June 30: Cash and cash equivalents were $61.4 million. Short-term debt was $784 million; long-term debt, including current maturities, totaled $14,597.2 million. Committed credit facilities totaled $2.75 billion, with $1.952 billion available. Utility capital expenditures were $1,473.8 million for the first half, exceeding operating cash flow by approximately $182 million. Dividends declared were $0.36 per share for Q2 and $0.72 per share for the first half.
Material changes versus comparable periods
- Q2 revenue rose about 5.8%, net income about 15.5%, and diluted EPS by $0.06; first-half revenue rose about 6.1%, net income about 6.5%, and diluted EPS by $0.06.
- Management attributed earnings growth mainly to higher electric and natural gas margins, lower effective tax rates, and lower O&M expenses. Rate increases and infrastructure-related riders supported margins.
- Depreciation and amortization increased $43.2 million in Q2 and $88.4 million year to date, primarily reflecting capital investment and prior-year Minnesota reserve amortization. Interest expense rose $10.7 million year to date as debt levels increased.
- First-half operating cash flow fell $133 million, mainly due to lower tax refunds and timing of payments, receipts, refunds and rider recoveries. Investing cash use increased $31 million, largely due to Rush Creek wind project expenditures.
Outlook, management commentary and risks
- 2017 guidance: GAAP and ongoing EPS guidance is $2.25–$2.35. Assumptions include constructive regulatory outcomes, normal weather, weather-normalized retail electric and natural gas sales growth of 0%–0.5%, flat O&M expense, and an effective tax rate of approximately 31%–33%. Management’s long-term objectives are annual EPS growth of 4%–6%, dividend growth of 5%–7%, a 60%–70% payout ratio, and BBB+ to A senior unsecured debt ratings.
- Investment plans: Xcel proposed 3,380 MW of wind additions by 2020, including approximately $4.2 billion of planned ownership investment. Minnesota approved 1,550 MW after quarter-end; Texas and New Mexico approvals for SPS projects remained pending. Capital recovery, cost caps and project approvals remain important execution factors.
- Regulatory and environmental exposure: Minnesota regulators disallowed approximately $4.4 million of 2015 Prairie Island replacement-energy costs, recognized in Q2. Potential Texas regional-haze controls could require about $400 million for Harrington units and about $600 million for Tolk units; the rules and related challenges remained unresolved. Xcel also reported $46.8 million of Ashland site remediation liability and $16.4 million for the Fargo MGP site at June 30; recovery, remediation scope and timing remain relevant uncertainties.
- Other contingencies: The IRS proposed an adjustment that could result in $14 million of tax expense relating to federal carryback claims; resolution is uncertain. Unrecognized tax benefits totaled $137.4 million, with a possible decrease of up to approximately $61 million as audits and appeals progress. The filing also describes unresolved rate cases, transmission ROE complaints, litigation and other regulatory proceedings.
- Other risks and items: Unusual weather, rate-case outcomes, financing costs, commodity and counterparty risks, and environmental policy changes could affect results. Management cited possible exposure to nuclear-fuel supply disruptions linked to Russia and Ukraine, but said alternate sources provided near-term flexibility. Xcel did not expect Westinghouse’s bankruptcy to materially affect operations or financial performance.
Important facts for investors to verify
- Whether earnings remain within the $2.25–$2.35 2017 guidance range and whether its weather and regulatory assumptions hold.
- Timing, cost control and regulatory recovery for the planned wind buildout and other substantial capital projects.
- Developments in Texas environmental-control requirements, Minnesota and Wisconsin rate matters, and MISO transmission ROE proceedings.
- Cash-flow and financing needs as capital expenditures exceed operating cash flow; monitor short-term borrowings and available credit capacity.
- Changes in tax audit exposure and environmental remediation estimates, including customer recovery and potential third-party or insurance contributions.