Xcel Energy Inc. — Q2 2019 Form 10-Q
Business context and reporting period. Xcel Energy is a regulated electric and natural gas utility serving customers across several U.S. states. This unaudited filing covers the quarter and six months ended June 30, 2019; interim results are seasonal and are not necessarily indicative of full-year performance.
Financial results and position
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Operating revenue | $2.577bn | $2.658bn | $5.718bn | $5.609bn |
| Operating income | $410m | $450m | $896m | $930m |
| Net income | $238m | $265m | $553m | $556m |
| Diluted EPS | $0.46 | $0.52 | $1.07 | $1.09 |
| Electric margin | $1.436bn | $1.413bn | $2.847bn | $2.750bn |
| Natural gas margin | $196m | $188m | $511m | $475m |
Cash flow and liquidity. First-half operating cash flow was $1.334bn, down from $1.437bn. Investing cash outflow was $1.708bn, mainly reflecting utility construction expenditures of $1.689bn. Financing provided $580m; dividends paid were $387m. Cash was $353m at June 30, versus $147m at year-end 2018. Total debt was approximately $18.1bn, including $16.0bn long-term debt, $553m current maturities and $1.597bn short-term debt. Committed credit facilities totaled $3.1bn, with $1.972bn available at June 30. The company also had a fully drawn $500m term loan. Stockholders’ equity was $12.366bn.
Material changes and management commentary
- Q2 revenue fell about 3% year over year, while first-half revenue rose about 2%. Q2 net income declined about 10% and diluted EPS fell from $0.52 to $0.46; first-half net income and EPS were also slightly lower year over year.
- Electric and natural gas margins increased, but higher depreciation and amortization, O&M, and interest costs weighed on earnings. Management attributed roughly $0.05 per share of year-over-year pressure to unfavorable weather; higher depreciation reduced EPS by $0.09 in Q2 and $0.16 for the first half.
- First-half O&M rose $49m, or 4.3%; depreciation and amortization increased $112m, or 14.7%; and interest charges rose $33m, or 9.5%. More wind production tax credits and plant-related regulatory differences lowered the effective tax rate to 8.1% for the first half, from 17.0%; management said wind credits are flowed back to customers and do not materially affect net income.
- Adoption of lease accounting in January added approximately $1.7bn of operating lease assets and liabilities to the balance sheet. Management said the adoption had no significant overall financial-statement impact beyond balance-sheet recognition.
Guidance, outlook, risks and contingencies
- 2019 guidance: GAAP and ongoing EPS of $2.55–$2.65. Assumptions include constructive regulatory outcomes, normal weather for the remainder of the year, weather-normalized retail electric sales roughly flat with 2018, natural gas sales growth of 2%–3%, O&M down about 2%, and an effective tax rate of 8%–10%.
- Long-term objectives: Annual EPS and dividend growth of 5%–7%, a 60%–70% dividend payout ratio, and senior secured debt ratings in the A range.
- Major capital and regulatory developments include pending rate requests in Colorado and New Mexico, the proposed acquisition of the 760-MW Mankato Energy Center for approximately $650m, and planned wind investment. Regulatory decisions could alter expected returns, customer rates and cost recovery.
- Contingencies include ongoing regulatory matters and environmental remediation. Ashland site remediation and restoration is estimated at about $190m for the entire site; NSP-Wisconsin recorded a $26m liability, with authorized rate recovery. The filing says potential effects of coal-ash groundwater assessments remain uncertain. Other matters include an unresolved Sherco Unit 3 prudence review, MISO transmission ROE proceedings, and fuel-cost reconciliation claims of up to approximately $4m against SPS.
- Risks identified include weather, cost recovery and regulation, financing costs and credit ratings, commodity and fuel exposure, environmental requirements, nuclear operations and fuel supply, counterparty credit, cybersecurity, and operational safety. The company stated there were no material changes to the risk factors disclosed in its 2018 Form 10-K.
Important facts for investors to verify
- Whether 2019 EPS guidance remains achievable given weather sensitivity, cost increases and pending regulatory outcomes.
- Rate-case decisions and customer-rate treatment for the Colorado and New Mexico filings, Mankato acquisition, and other pending proceedings.
- Funding needs and the pace of capital spending, debt issuance and short-term borrowing; short-term debt increased to $1.597bn from $1.038bn at year-end.
- Potential liabilities, recovery mechanisms and timing for environmental remediation and regulatory or legal contingencies.
- The effects of lease obligations, including PPA-related operating lease liabilities, and the timing and form of settlement of the $459m forward equity offering agreements, which were due to mature by February 7, 2020.