Business Context and Reporting Period
Company: Xcel Energy Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Business Overview: Xcel Energy is a public utility holding company with continuing operations comprising four wholly-owned utility subsidiaries: NSP-Minnesota, NSP-Wisconsin, Public Service Company of Colorado (PSCo), and Southwestern Public Service Co. (SPS). These subsidiaries serve electric and natural gas customers in eight states: Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas, and Wisconsin. The company also operates an interstate natural gas pipeline (WGI) and a nonregulated subsidiary (Eloigne) focused on low-income housing tax credits.
Key Financial Metrics
| Metric | 2006 | 2005 | 2004 |
|---|---|---|---|
| Operating Revenues | $9,840 million | $9,625 million | $8,216 million |
| Operating Expenses | $8,663 million | $8,533 million | $7,140 million |
| Net Income | $572 million | $513 million | $356 million |
| Earnings Per Share (Diluted) | $1.36 | $1.23 | $0.87 |
| Dividends Declared Per Share | $0.88 | $0.85 | $0.81 |
| Total Assets | $21,958 million | $21,505 million | $20,305 million |
| Long-Term Debt | $6,450 million | $5,898 million | $6,493 million |
| Cash Flow from Operating Activities (Continuing) | $1,729 million | $1,131 million | $1,128 million |
| Return on Average Common Equity | 10.1% | 9.6% | 6.8% |
Material Changes vs. Prior Period
- Revenue Growth: Operating revenues increased by $215 million (2.2%) in 2006 compared to 2005. This was driven by rate increases in Minnesota and Wisconsin, higher fuel and purchased power costs (largely recoverable), and weather-normalized retail electric sales growth of approximately 1.8%.
- Profitability: Net income increased by $59 million (11.5%). Earnings from continuing operations rose primarily due to stronger base electric utility margins, revenue from the Metropolitan Emissions Reduction Project (MERP) rider, and income tax benefits. These gains were partially offset by higher operating and maintenance expenses and lower short-term wholesale margins.
- Discontinued Operations: In 2006, the company recognized a gain of $6.1 million from the sale of SPS delivery system operations in Oklahoma, Kansas, and Texas to Tri-County Electric Cooperative. Discontinued operations contributed $3.1 million to net income in 2006, compared to $13.9 million in 2005.
- Capital Expenditures: Utility capital expenditures increased significantly, with total capital requirements projected at $1.9 billion for 2007. Major projects include the MERP ($1 billion), Comanche 3 coal plant ($1 billion), and nuclear life extensions ($1 billion).
Guidance, Outlook, and Risks
Management Commentary and Outlook
Management's strategy, "Building the Core," focuses on investing approximately $9 billion over five years in core utility operations to meet growing demand and environmental initiatives. The company targets annual earnings-per-share growth of 5% to 7% and annual dividend increases of 2% to 4%.
2007 Earnings Guidance: Xcel Energy projects diluted earnings per share from continuing operations in the range of $1.35 to $1.455. Key assumptions include normal weather, reasonable rate recovery in Texas, Minnesota, and Colorado, and the continued recognition of Corporate-Owned Life Insurance (COLI) tax benefits.
Material Risks and Contingencies
- COLI Tax Litigation: The IRS has challenged the deductibility of interest expense on COLI policy loans. If the IRS prevails, the total exposure through Dec. 31, 2006, is approximately $499 million (including penalties and interest), which would reduce 2007 earnings by approximately $49 million (11 cents per share). A trial is set for July 2007.
- Regulatory Risk: Profitability depends on the ability to recover costs through regulated rates. Changes in regulatory environments or disallowance of costs could impair earnings.
- Environmental Compliance: Significant capital expenditures are required for compliance with the Clean Air Interstate Rule (CAIR), Clean Air Mercury Rule (CAMR), and state-specific mercury legislation. Estimated capital costs for CAIR compliance in Minnesota and Wisconsin range from $30 million to $40 million.
- Nuclear Waste Disposal: The Department of Energy (DOE) has failed to meet statutory deadlines for accepting spent nuclear fuel. NSP-Minnesota is litigating against the DOE for damages, currently claiming over $100 million through 2004.
- Commodity Price Risk: The company is exposed to fluctuations in natural gas and coal prices, though cost-recovery mechanisms mitigate much of this risk for retail customers.
Investor Verification Checklist
- COLI Litigation Status: Monitor the outcome of the trial scheduled for July 24, 2007, regarding the deductibility of COLI interest expenses, as a loss could materially impact earnings.
- Rate Case Outcomes: Verify the final decisions on pending rate cases in Texas (SPS), Minnesota (NSP-Minnesota natural gas), and Colorado (PSCo natural gas), which are critical to the 2007 earnings guidance.
- Capital Project Progress: Track the construction progress and cost recovery status of major projects: MERP (Minnesota), Comanche 3 (Colorado), and nuclear plant life extensions.
- Environmental Compliance Costs: Review updates on CAIR and CAMR implementation plans and associated capital cost estimates, particularly for the Texas and Minnesota facilities.
- Wholesale Margin Volatility: Assess the impact of the MISO Day 2 market and regulatory settlements on short-term wholesale and commodity trading margins, which declined in 2006.