XCEL ENERGY INC quarterly report, Q2 FY2018

Xcel Energy Inc. — Form 10-Q Summary

Business context and reporting period

Xcel Energy is a regulated electric and natural gas utility holding company operating through subsidiaries in Minnesota, Wisconsin, Colorado, Texas, New Mexico, North Dakota, South Dakota and Michigan. This unaudited filing covers the quarter and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Management cautions that seasonal interim results are not necessarily indicative of full-year results.

Financial performance and position

Metric	Three months ended June 30	Six months ended June 30
Operating revenue	$2.658 billion, versus $2.645 billion in 2017	$5.609 billion, versus $5.591 billion
Operating income	$450 million, versus $466 million	$930 million, versus $959 million
Net income	$265 million, versus $227 million	$556 million, versus $467 million
Diluted EPS	$0.52, versus $0.45	$1.09, versus $0.92
Cash dividends declared per share	$0.38, versus $0.36	$0.76, versus $0.72

• Second-quarter revenue increased about 0.5% and net income about 17%; first-half revenue increased about 0.3% and net income about 19%. Operating income declined about 3% in both comparisons.
• Reported electric margin was $1.413 billion in Q2 and $2.750 billion year to date, versus $1.419 billion and $2.793 billion in 2017. The TCJA-related reductions to electric margin were $70 million and $132 million, respectively, and were offset in income tax expense. Natural gas margin was $188 million in Q2 and $475 million year to date, up from $176 million and $436 million.
• Effective tax rate fell to 16.9% for Q2 from 31.0%, and to 17.0% for the first half from 31.9%, principally reflecting the lower federal tax rate, regulatory treatment of excess deferred taxes and wind production tax credits.
• First-half operating cash flow was $1.437 billion, versus $1.292 billion. Investing cash outflow was $1.865 billion, including $1.903 billion of utility capital/construction expenditures; financing provided $677 million. Cash and cash equivalents were $332 million at June 30, versus $83 million at year-end 2017.
• At June 30, long-term debt was $15.311 billion, current maturities of long-term debt $856 million and short-term debt $682 million. The filing reports $2.276 billion of available credit facilities at quarter-end. Xcel issued $1.2 billion of long-term debt during the first half, including green bonds and senior notes in Q2.
• Total assets were $44.240 billion and stockholders’ equity $11.650 billion at June 30. Property, plant and equipment, net, was $35.289 billion.

Material changes versus the prior comparable period

• Earnings growth reflected favorable weather and sales growth, higher electric and natural gas margins before TCJA customer-rate effects, and increased allowance for funds used during construction (AFUDC). These were partly offset by higher depreciation and interest expense.
• Unusually strong cooling conditions contributed to results: Q2 cooling degree days were 59.1% above normal. Weather’s estimated EPS benefit versus 2017, after Minnesota decoupling, was $0.034 for Q2 and $0.070 for the first half.
• First-half operating cash flow rose $145 million, while investing outflow increased $391 million, primarily due to higher capital spending on the Rush Creek and Hale wind projects. Financing cash flow increased, mainly due to higher net debt proceeds.
• O&M expense decreased $17 million year to date, largely from timing, while depreciation and amortization rose $29 million and interest charges increased $16 million.

Outlook, commentary and risks

• Xcel raised its 2018 ongoing EPS guidance to $2.41–$2.51 from $2.37–$2.47. Assumptions include constructive regulatory outcomes, normal weather for the remainder of the year, weather-normalized retail electric sales growth of 0%–1%, and natural gas sales growth of 1%–1.5%.
• Other guidance assumptions include O&M growth of 1%–2%; depreciation growth of approximately $100–$110 million; interest expense growth of $30–$40 million; and an effective tax rate of approximately 15%–17%, potentially falling to 8%–10% as regulators clarify excess deferred-tax treatment. Revenue reductions would correspondingly offset such a tax-rate decrease.
• Long-term objectives are annual EPS growth of 5%–6% from a 2017 base of $2.30, annual dividend increases of 5%–7%, a 60%–70% payout ratio and senior unsecured debt ratings in the BBB+ to A range.
• TCJA customer-rate proceedings remain consequential. Outcomes include approved or proposed customer refunds and rate reductions in several jurisdictions; other proceedings, including Minnesota’s, were pending. Rate-case outcomes, refund obligations and regulatory decisions could affect revenue and earnings.
• Major investment plans include approved SPS wind projects, with approximately $1.6 billion proposed for 1,000 MW of owned wind generation and a 230 MW wind power purchase agreement. PSCo’s proposed Colorado Energy Plan includes coal-unit retirements and substantial renewable, storage and gas resources; a regulatory decision was anticipated in September 2018.
• Environmental and legal matters include remediation liabilities of $29 million for the Ashland site and $10 million for the Fargo site, plus $5 million for other sites. Xcel expects recovery of certain remediation costs through rates, but timing and regulatory treatment remain relevant. Other proceedings include transmission cost disputes, rate-case appeals and gas-trading litigation; management describes the loss in the latter as remote.
• Market and operating risks include weather variability, regulatory and environmental changes, interest rates, commodity prices, counterparty credit risk, cybersecurity and legal proceedings. The filing reports no material change in previously disclosed risk factors. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.

Important facts for investors to verify

• Whether 2018 EPS guidance assumptions—especially regulatory outcomes, weather, sales growth and tax treatment—remain achievable.
• Final customer-rate and refund decisions under the TCJA, including the treatment of excess deferred taxes and provisional rates.
• Funding and execution of the elevated capital program, and its effect on debt, interest expense, credit metrics and planned equity issuance.
• Progress and cost recovery for wind projects, the Colorado Energy Plan, and environmental remediation.
• Resolution and potential financial effects of pending rate, transmission and litigation matters; the filing does not quantify all possible losses.