Xcel Energy Inc. — Q2 2012 Form 10-Q
Business context and period. Xcel Energy is a regulated electric and natural gas utility holding company with operations across eight states. This unaudited report covers the quarter and six months ended June 30, 2012; comparisons are with the same periods in 2011. Management cautions that seasonal interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Operating revenue | $2.275 billion | $2.438 billion | $4.853 billion | $5.255 billion |
| Operating income | $406 million | $359 million | $786 million | $786 million |
| Net income | $183 million | $159 million | $367 million | $362 million |
| Diluted EPS | $0.38 | $0.33 | $0.75 | $0.74 |
| Electric margin | $1.183 billion | $1.139 billion | $2.256 billion | $2.237 billion |
| Natural gas margin | $131 million | $129 million | $334 million | $351 million |
- Quarterly revenue declined about 6.7%, while net income rose about 15.3%; six-month revenue declined about 7.7% and net income increased about 1.3%.
- Q2 operating margin (operating income divided by revenue) was about 17.8%, versus 14.7% a year earlier. This reflects lower fuel and purchased-power costs alongside stronger electric margin.
- Six-month operating cash flow was $865 million, down from $1.123 billion. Utility capital/construction expenditures were $1.104 billion; the resulting operating-cash-flow less capital-expenditure shortfall was approximately $238 million.
- Cash and cash equivalents were $64 million at June 30. Current assets were $2.560 billion and current liabilities $3.831 billion.
- Short-term debt was $481 million; long-term debt including current maturities was $10.018 billion. Total debt on that basis was about $10.499 billion, versus $10.127 billion at year-end 2011.
- Committed credit facilities totaled $2.450 billion, with $1.957 billion available at June 30. The company declared dividends of $0.27 per share for the quarter.
Material changes and management commentary
- Management attributed higher Q2 earnings chiefly to stronger electric margin from rate increases and warmer-than-normal summer weather. Electric margin increased $44 million year over year in the quarter; weather contributed an estimated $0.019 per share versus Q2 2011.
- Higher property taxes and interest expense partly offset electric-margin gains. Six-month earnings also benefited from a roughly $15 million discrete tax benefit from eligible loss carryback claims; without it, the six-month effective tax rate would have been about 35.3%, rather than 32.6%.
- Six-month operating cash flow fell by $258 million, primarily due to working-capital timing, higher pension contributions, and income-tax cash payments compared with a refund in 2011. Xcel contributed $190.5 million to pension plans in January and expected no further 2012 contributions.
- Revenue changes were substantially affected by lower fuel-cost recovery and natural-gas prices, which generally pass through to customers and have limited effect on margins. Natural-gas margin fell $17 million for the first six months, mainly due to weather.
Outlook, regulatory matters and risks
- 2012 guidance: earnings are expected in the lower half of the $1.75–$1.85 per-share range. Assumptions include normal weather for the remainder of the year, relatively flat weather-adjusted retail sales, O&M expense growth up to 1%, and an effective tax rate of approximately 34%–35%.
- Management projected 2012 increases over 2011 in depreciation and amortization of $40–$50 million, property taxes of $25–$30 million, and interest expense (net of debt AFUDC) of about $10 million. Guidance depends in part on constructive outcomes in remaining rate and regulatory proceedings.
- Rate actions include a Colorado electric rate increase effective May 2012 and further scheduled increases in 2013 and 2014 under a settlement; Wisconsin, South Dakota and other rate proceedings remained pending. Outcomes and timing may affect earnings and cost recovery.
- At the Ashland, Wisconsin manufactured-gas-plant site, NSP-Wisconsin had recorded a $104.3 million liability. A proposed settlement estimated Phase I cleanup at $40 million, while responsibility and costs for sediment remediation remained unresolved; estimated sediment costs were $63.3–$77.1 million, potentially varying substantially. The company expects customer recovery, but regulatory treatment and final costs remain uncertain.
- Environmental compliance, including emissions rules and potential controls, could require significant investment. SPS estimated approximately $470 million of capital expenditures over five years for possible CSAPR-related modifications; the rule was stayed pending court review. Xcel generally expected relevant costs to be recoverable from customers.
- Other material uncertainties include the enXco Merricourt wind-project litigation, with a claim exceeding $240 million and no accrual recorded; climate-related lawsuits for which management assessed loss likelihood as remote; nuclear regulatory requirements estimated to cost $20–$50 million; and the economics and regulatory approval of the Prairie Island nuclear uprate.
- In July 2012, the companies amended revolving credit agreements, extending maturity to July 2017 and reducing pricing. Management also anticipated possible 2012 bond issuances by NSP-Minnesota, PSCo and NSP-Wisconsin; plans were subject to change.
Most important facts for investors to verify
- Whether full-year EPS remains on track for the lower half of $1.75–$1.85 guidance, particularly given weather sensitivity and pending regulatory outcomes.
- How operating cash flow, capital spending, debt balances and available credit evolve, including planned bond issuance and the funding of utility investments.
- Whether the Ashland cleanup settlement becomes final, how sediment costs are allocated, and whether regulators permit recovery of costs and carrying charges.
- Final outcomes and timing of major rate cases, environmental rules and associated cost-recovery mechanisms.
- How much of six-month earnings growth reflects recurring operations versus the one-time $15 million tax benefit and unusually warm weather.