Xcel Energy Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012. Xcel Energy is a regulated electric and natural gas utility holding company with operations across several U.S. states. Comparisons below are against Q1 2011 unless noted. Interim results are seasonal and management cautions they are not necessarily indicative of full-year results.
Financial performance
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Operating revenue | $2.578 billion | $2.817 billion | Down 8.5% |
| Operating income | $380.2 million | $426.7 million | Down 10.9% |
| Income from continuing operations | $183.8 million | $203.5 million | Down 9.7% |
| Net income | $183.9 million | $203.6 million | Down 9.7% |
| Diluted EPS | $0.38 | $0.42 | Down $0.04 |
| Cash dividends declared per share | $0.26 | $0.25 | Up $0.01 |
Electric margin was $1.073 billion, down $25 million; natural gas margin was $203 million, down $19 million. Lower margins primarily reflected unusually warm weather and the expiration of a long-term wholesale power agreement with Black Hills. The effective tax rate fell to 29.1% from 35.5%, including a discrete tax benefit of approximately $15 million from an extended tax-loss carryback; excluding that benefit, the 2012 rate would have been 34.9%.
Cash flow, debt and liquidity
- Operating cash flow was $477.5 million, compared with $659.4 million. Management attributed the decrease principally to lower earnings, higher pension contributions and income-tax cash flows (a payment in 2012 versus a refund in 2011).
- Investing cash outflow was $399.0 million, including $497.2 million of utility construction expenditures. Financing cash outflow was $39.4 million. Cash and cash equivalents ended the quarter at $99.7 million.
- At March 31, total debt was approximately $10.25 billion, comprising $8.60 billion of long-term debt, $1.31 billion current portion and $339 million of short-term debt. Stockholders’ equity was $8.54 billion.
- Committed credit facilities totaled $2.45 billion, of which $2.10 billion was available at quarter-end. Commercial paper outstanding was $339 million; the weighted-average rate was 0.36%.
- In January, Xcel made $190.5 million of pension contributions and said it did not expect further contributions in 2012. The company expects to fund future requirements through operating cash flow and periodic debt, equity and other issuances.
Material changes and management commentary
- Warm winter weather reduced first-quarter EPS by an estimated $0.044 versus normal and $0.058 versus Q1 2011. Weather-normalized retail electric and firm natural gas sales were relatively flat year over year.
- Electric revenues declined $93 million and natural gas revenues declined $144 million, substantially reflecting lower fuel and gas-cost recovery, which generally moves with corresponding expenses. Electric and gas margins nevertheless declined because of weather, lower wholesale revenue and other factors.
- Interest expense increased $7.5 million, principally because of higher long-term debt used to fund utility investment, partly offset by lower rates. Taxes other than income taxes rose $9.1 million, primarily due to higher Minnesota property taxes.
- Cash capital spending was lower year over year, partly because of prior-year Merricourt wind-project payments and other project timing. Utility capital/construction expenditures were $497.2 million.
Outlook, regulation and notable risks
- 2012 earnings outlook: Management expected earnings in the lower half of its $1.75–$1.85 per-share guidance range. Assumptions included normal weather for the remainder of the year, relatively flat weather-adjusted retail sales, O&M expense growth of up to 1%, depreciation expense growth of $50–$60 million, and an effective tax rate of 34%–35%. The outlook assumed constructive regulatory outcomes, including approval of Minnesota property-tax deferral.
- Rates: The Minnesota electric-rate settlement was approved March 29, providing an approximately $58 million 2011 increase and a further $14.8 million increase in 2012; a written order was pending. NSP-Minnesota sought deferral of approximately $24 million in incremental 2012 property taxes, opposed by the state Department of Commerce; a decision was expected in Q2. After quarter-end, on April 26, Colorado regulators approved a PSCo settlement providing annual electric rate increases of $73 million in 2012, $16 million in 2013 and $25 million in 2014, subject to the settlement terms.
- Environmental compliance: If the Cross-State Air Pollution Rule is upheld without modification, SPS estimated approximately $470 million of capital expenditures over four years; management expected costs to be recoverable through regulatory mechanisms. The rule was stayed pending judicial review. Nuclear regulatory requirements were estimated to cost $20–$50 million at Monticello and Prairie Island, with compliance expected by December 2016; the company expected recovery through regulation.
- Environmental and legal contingencies: NSP-Wisconsin had recorded a $104.3 million Ashland manufactured-gas-plant remediation liability, including $26.6 million current; ultimate cost and recovery remain uncertain. The Merricourt wind-project counterparty sought more than $240 million in damages; Xcel considered loss remote and recorded no accrual. Climate-related lawsuits were also described as remote, with no accrual. Management cautioned that unresolved legal matters could have material effects.
- Other risks: Results remain exposed to weather, fuel and commodity prices, interest rates, financing access, regulatory cost recovery, environmental requirements, nuclear operations and counterparty credit risk. A 100-basis-point change in benchmark rates on variable-rate debt was estimated to affect annual pretax interest expense by about $4.1 million.
Most important facts for investors to verify
- Whether Minnesota regulators approved the requested property-tax deferral and how any denial affects earnings and the full-year guidance assumptions.
- Whether the lower-half EPS outlook remains achievable as weather normalizes, and the recurring earnings impact of the approximately $15 million tax benefit.
- Progress on rate settlements and recovery of environmental and infrastructure costs, including CSAPR compliance and the Ashland site remediation liability.
- Operating cash generation relative to capital spending, pension funding needs, debt maturities and planned 2012 bond issuances.
- Developments and potential exposure in the Merricourt litigation and other legal or environmental proceedings.