Xcel Energy Inc. — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012. Xcel Energy is a regulated electric and natural gas utility holding company whose principal subsidiaries serve customers across the Upper Midwest, Colorado, Texas and New Mexico. Financial statements are unaudited; management notes that seasonal interim results are not a reliable basis for projecting full-year results.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Operating revenue | $2.724 billion | $2.832 billion | $7.577 billion | $8.086 billion |
| Operating income | $720 million | $651 million | $1.506 billion | $1.438 billion |
| Net income | $398 million | $338 million | $765 million | $701 million |
| Diluted EPS | $0.81 | $0.69 | $1.57 | $1.43 |
| Electric margin | $1.526 billion | $1.469 billion | $3.781 billion | $3.707 billion |
| Natural gas margin | $125 million | $108 million | $460 million | $458 million |
Revenue declined year over year, mainly reflecting lower fuel and purchased-power cost recovery and lower natural gas revenue; these pass-through items generally have limited effect on margin. Electric margin increased by $57 million in Q3 and $74 million year to date, principally from rate increases, partly offset by reduced wholesale sales after a long-term Black Hills power agreement expired. Net income and EPS rose, with a material contribution from tax benefits described below. Management’s non-GAAP ongoing diluted EPS was $0.78 for Q3 and $1.54 year to date, excluding a prescription-drug tax benefit.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $1.572 billion, down from $1.924 billion. Investing cash outflow was $1.610 billion, including $1.806 billion of utility construction expenditures. Operating cash flow less utility construction expenditures was approximately negative $234 million.
- Financing provided $724 million, versus $177 million used in the prior-year period. Cash increased to $747 million at September 30 from $61 million at year-end 2011.
- Total debt, including current maturities and short-term debt, was approximately $11.269 billion at September 30, compared with $10.127 billion at December 31, 2011. Long-term debt including current maturities had a reported fair value of $12.925 billion versus carrying value of $10.965 billion.
- Committed credit facilities totaled $2.45 billion; $2.133 billion was available at September 30. Current assets were $3.371 billion and current liabilities $3.161 billion.
- Stockholders’ equity was $8.850 billion. Common dividends declared were $0.27 per share for Q3 and $0.80 year to date.
Material changes and notable items
- Q3 ongoing EPS increased $0.09 year over year; year-to-date ongoing EPS increased $0.11. Rate increases and higher electric margins were key contributors; higher property taxes and interest expense offset some gains.
- A tax strategy restored approximately $17 million of previously written-off retiree prescription-drug subsidy tax benefits in Q3. A separate federal tax-loss carryback generated approximately $15 million of benefit in Q1. The filing reports an effective tax rate of 33.2% for the first nine months; without these discrete benefits it would have been approximately 36.0%.
- Debt issuance included $800 million of new bonds each at NSP-Minnesota and PSCo, largely used to refinance higher-coupon debt; SPS issued an additional $100 million of bonds. Credit agreements were extended to July 2017 on improved pricing terms.
- Operating cash flow fell partly because of working-capital timing, higher pension contributions, interest-rate-swap settlements and income taxes paid versus a prior-year refund. Pension contributions were $190.5 million in January; no further 2012 contributions were expected.
Outlook, risks and contingencies
- Guidance: 2012 ongoing EPS guidance is $1.75–$1.85; management expects GAAP EPS in the upper half of that range. 2013 ongoing EPS guidance is $1.85–$1.95. Assumptions include constructive regulatory outcomes and normal weather. 2012 sales assumptions are relatively flat weather-adjusted retail electric sales and a roughly 1% decline in firm natural gas sales; 2013 assumptions are about 0.5% electric growth and a roughly 1% gas decline.
- Management’s 2013 assumptions include O&M expense growth of 4%–5%, depreciation expense growth of $70–$80 million, property-tax growth of about $35 million, and interest expense reduction of $30–$35 million versus projected 2012 levels. Guidance is exposed to weather, regulation, cost recovery, financing and economic conditions.
- Environmental exposure: NSP-Wisconsin’s recorded Ashland site liability was $104.3 million, including $26.6 million current. An October 2012 settlement set a $40 million cost estimate for the Phase I cleanup; negotiations continue over sediment remediation, estimated by EPA at $63.3–$77.1 million before a potential deviation of up to 50% higher or 30% lower. Cost recovery, other responsible parties and funding remain uncertain.
- Regulatory and capital program: Xcel expects substantial investment, including approximately $1.0 billion for PSCo’s Colorado emissions-reduction plan through 2017; planned controls are expected to be recoverable through regulatory mechanisms. Estimated consolidated capital expenditures are $3.2 billion in 2013. Environmental rules, rate cases, transmission cost allocation and nuclear requirements could affect timing, costs or recovery.
- Litigation: A Pacific Northwest FERC refund proceeding presents a reasonably possible loss; PSCo could not estimate a loss range. Other disclosed matters include climate-related suits and the Merricourt wind project dispute, for which management assessed loss likelihood as remote and recorded no accrual. The Ashland sediment cleanup and tax audits also remain unresolved.
- Moody’s downgraded SPS by one notch in October 2012, citing expected moderation in credit metrics amid high capital spending and regulatory lag; outlook was stable. A 100-basis-point rate change on variable-rate debt would affect annual pretax interest expense by about $4.2 million.
Most important facts for investors to verify
- Whether 2012 and 2013 EPS guidance assumptions—especially constructive rate-case outcomes and normal weather—remain achievable.
- The recurring earnings contribution from approved rate increases versus the approximately $32 million of discrete tax benefits recognized in 2012.
- Cash generation relative to capital spending, planned financing needs, leverage and dividend commitments.
- Final Ashland remediation scope, cost allocation, regulatory recovery and potential funding from other parties or governments.
- Outcomes of major rate, transmission, environmental and legal proceedings, and the credit implications of SPS’s downgrade.