Xcel Energy Inc. — Q3 2011 Form 10-Q
Business context and reporting period. Xcel Energy is a regulated electric and natural gas utility holding company. This unaudited filing covers the quarter and nine months ended September 30, 2011, compared with the same periods in 2010. Management cautions that seasonal interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Operating revenue | $2.832 billion | $2.629 billion | $8.086 billion | $7.744 billion |
| Operating income | $651.5 million | $568.6 million | $1.438 billion | $1.298 billion |
| Income from continuing operations | $338.3 million | $312.5 million | $700.4 million | $615.5 million |
| Net income | $338.3 million | $312.3 million | $700.7 million | $619.2 million |
| Diluted GAAP EPS | $0.69 | $0.67 | $1.43 | $1.34 |
| Cash provided by operating activities | Not separately provided | Not separately provided | $1.924 billion | $1.526 billion |
Q3 revenue rose about 7.7%, operating income 14.6%, and continuing income 8.3%. For the first nine months, revenue rose about 4.4% and continuing income about 13.8%. Calculated operating margin was approximately 23.0% for Q3 2011 versus 21.6% in Q3 2010, and 17.8% versus 16.8% for the nine-month periods.
- Margins and drivers: Electric margin increased $139 million in Q3 and $315 million year to date, primarily from rate increases, PSCo gas-generation revenue requirements, weather, conservation incentives and other items. Natural gas margin increased $4 million in Q3 and $23 million year to date. Fuel-cost recovery mechanisms generally limit the effect of fuel-price changes on utility margins.
- Costs: Year-to-date O&M increased 4.5% to $1.575 billion; depreciation and amortization rose 8.9% to $696.3 million; and non-income taxes rose 13.9% to $278.1 million. Higher costs reflected generation and maintenance activity, new assets, employee costs and property taxes.
- Cash flow and investment: Nine-month capital/construction expenditures were $1.604 billion. Cash used in investing was $1.661 billion, and financing activities used $177 million. Operating cash flow improved by $398 million year over year, with working-capital and regulatory-balance movements contributing; the company also received a $100 million nuclear-waste settlement payment recorded as restricted cash and a regulatory liability.
- Debt and liquidity: At September 30, long-term debt was $9.450 billion, current long-term debt $462.4 million and short-term debt $50 million. Cash and cash equivalents were $194.2 million, plus $100.0 million restricted cash. Committed credit facilities totaled $2.45 billion, with $2.388 billion available; all entities were within the 65% debt-to-capitalization covenant, with Xcel Energy at 54%.
- Equity and dividends: Common shareholders’ equity was $8.431 billion, up from $8.084 billion at year-end 2010. Q3 declared common dividends were $0.26 per share, versus $0.25 a year earlier. Weighted-average diluted shares increased to 485.9 million from 462.0 million in Q3 2010.
Material changes and notable items
- Management-reported ongoing diluted EPS was $0.69 for Q3 versus $0.62 in 2010, and $1.43 for the first nine months versus $1.34. The 2010 comparison included a $25 million COLI settlement benefit in Q3 and Medicare Part D/COLI-related items.
- Weather contributed an estimated $0.07 per share to Q3 2011 earnings versus normal conditions; weather-adjusted Q3 retail electric sales were essentially flat year over year. Management cited warmer July and August weather as a contributor to electric margins.
- Xcel issued $250 million of 4.80% senior notes due 2041; PSCo issued $250 million of 4.75% first mortgage bonds due 2041; and SPS issued $200 million of 4.50% first mortgage bonds due 2041. The company announced redemption of all preferred stock on October 31, 2011 for about $108 million plus accrued dividends; a $3.3 million redemption premium reduced earnings available to common shareholders in the reported periods.
- The DOE nuclear-waste settlement provided an initial $100 million payment, received in August, and a process for recovering eligible spent-fuel storage costs through 2013, currently estimated at a further $100 million. Amounts received are to be addressed through regulatory filings for ratepayers.
Outlook, regulation and risks
- Guidance: 2011 ongoing EPS guidance is $1.65–$1.75, with management expecting the upper half. 2012 ongoing EPS guidance is $1.75–$1.85. Assumptions include normal weather, constructive regulatory outcomes, and projected sales, expense, tax and share-count levels; these are forward-looking estimates, not guarantees.
- Rate matters: Several proceedings remained pending. The Minnesota electric rate case had interim rates subject to refund and a final decision expected in Q1 2012; proposed or settled increases in North Dakota and New Mexico awaited regulatory action. PSCo’s Colorado gas settlement produced a $12.8 million base-rate increase, with additional pipeline-cost rider recovery expected in 2012.
- Environmental compliance: The Cross State Air Pollution Rule required compliance beginning in 2012. SPS estimated potential 2012 operating costs of up to $250 million under one compliance scenario, largely from fuel costs, with possible reliability impacts; it expected recovery through regulatory mechanisms and challenged the rule. Outcomes of petitions, litigation and proposed revisions remained uncertain. Other material regulatory topics include greenhouse gases, mercury, regional haze, coal ash and cooling-water rules.
- Capital program and nuclear: The Colorado Clean Air Clean Jobs plan was estimated at about $1.0 billion over seven years, with average customer bills expected to rise about 2% annually. Monticello uprate timing was delayed, in part amid NRC review and post-Fukushima considerations. NSP-Minnesota suspended review of the proposed Black Dog repowering project to reassess timing.
- Contingencies: Environmental remediation liabilities totaled $107.3 million, including a $97.5 million Ashland site accrual; final liability and timing there remain uncertain. The Merricourt project developer sought more than $240 million in litigation, for which no accrual was recorded. Other unresolved matters include climate litigation, environmental notices and regulatory investigations; the filing states outcomes and potential costs are uncertain in several cases.
- Other risks: Utility earnings depend on rate recovery, weather, fuel and power markets, financing access, and regulatory and legal outcomes. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether pending rate cases and riders deliver the constructive outcomes assumed in 2011 and 2012 EPS guidance, including final treatment of interim rates subject to refund.
- How SPS and other utilities comply with the Cross State Air Pollution Rule, the final cost and reliability effects, and whether costs are recoverable from customers.
- Progress, cost and timing of major capital projects, nuclear uprates and environmental controls, alongside the projected $150–$200 million in 2012 pension contributions.
- Developments in the Merricourt, Ashland, climate-related and other legal or environmental matters, including any change in recorded liabilities or expected rate recovery.
- Whether operating cash flow, available credit and planned debt refinancing remain sufficient to fund capital spending, dividends and debt maturities; also monitor higher debt and share dilution.