Xcel Energy Inc. — Q3 2018 Form 10-Q
Business context and reporting period
Quarter ended Sept. 30, 2018; unaudited consolidated results include four regulated utility subsidiaries serving customers across parts of the Midwest, Mountain West and Texas. The business generates, transmits and distributes electricity and transports and sells natural gas. Results are seasonal, and interim performance is not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Operating revenue | $3.048B | $3.017B | $8.657B | $8.609B |
| Operating income | $696M | $824M | $1.626B | $1.784B |
| Net income | $491M | $492M | $1.047B | $959M |
| Diluted EPS | $0.96 | $0.97 | $2.05 | $1.88 |
Non-GAAP electric margin was $1.762B in Q3, versus $1.778B; excluding the Tax Cuts and Jobs Act (TCJA) impact, it increased to $1.865B from $1.778B. Natural gas margin was $169M, up from $150M. For the first nine months, electric margin was $4.512B versus $4.571B, while natural gas margin rose to $644M from $587M. Management reported no adjustments between GAAP and ongoing earnings for these periods.
Operating cash flow for the first nine months was $2.493B, compared with $2.367B. Investing used $2.706B, primarily reflecting higher utility construction spending; financing provided $343M. Cash and cash equivalents were $213M at Sept. 30, 2018, versus $83M at year-end 2017.
At Sept. 30, long-term debt was $15.508B, with $556M current portion and $437M short-term debt. Committed credit facilities totaled $3.0B, of which $2.514B was available. Total assets were $44.835B and stockholders’ equity was $12.165B. Cash dividends declared were $0.38 per share in Q3 and $1.14 year to date.
Material changes versus prior periods
- Q3 operating income fell $128M, while net income was nearly unchanged. Operating and maintenance expense rose $57M and depreciation and amortization rose $69M; lower income tax expense partly offset these pressures.
- For the first nine months, net income increased $88M and diluted EPS increased $0.17. Higher electric and natural gas margins and lower taxes supported results, partly offset by higher depreciation, operating costs and interest.
- The effective tax rate declined to 12.9% in Q3 from 29.4%, and to 15.2% year to date from 30.7%, principally reflecting the lower federal tax rate under the TCJA and regulatory tax adjustments.
- Utility capital/construction expenditures were $2.760B in the first nine months, versus $2.256B. Long-term debt issuances were $1.381B; the company also raised approximately $199M net through its at-the-market equity program by Sept. 30.
Outlook, management commentary and risks
- 2018 GAAP and ongoing EPS guidance was narrowed to $2.45–$2.49. Assumptions include constructive regulatory outcomes, normal weather, retail electric sales growth of about 1%, and a 12%–14% effective tax rate; management said the rate could fall to 8%–10% as regulators clarify excess deferred-tax treatment, with related revenue offsets.
- 2019 GAAP and ongoing EPS guidance is $2.55–$2.65. Long-term objectives are annual EPS and dividend growth of 5%–7%, a 60%–70% dividend payout ratio and senior secured debt ratings in the A range.
- Planned 2019–2023 capital expenditures total $19.325B. Management expects funding from operating cash flow, debt and equity; actual spending and financing plans may change with regulatory decisions, load growth, markets and other factors.
- Regulatory matters include customer refunds and rate proceedings tied to the TCJA. The Colorado Energy Plan approved retirement of Comanche Units 1 and 2 and new generation resources; PSCo’s anticipated investment, including transmission, is approximately $1B. Early retirement of Comanche Units 1 and 2 was expected around 2022 and 2025.
- Environmental contingencies include remediation liabilities of $28M for the Ashland manufactured-gas-plant site and $6M for the Fargo site. The company states that recovery of Ashland remediation costs is authorized; the MPUC denied a request to defer certain Minnesota-jurisdiction Fargo remediation expenditures. Coal-ash groundwater assessment and several legal and regulatory proceedings remain ongoing.
- Key risk exposures include weather and climate, cost recovery and regulatory outcomes, capital and financing costs, fuel and commodity prices, operational and nuclear safety, cybersecurity, environmental rules, credit quality and employee benefit funding. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Whether 2018 EPS guidance and 2019 guidance remain achievable, particularly given weather, regulatory outcomes and the stated expense and tax assumptions.
- How regulators implement TCJA-related customer refunds and deferred-tax flowbacks, and the resulting net effect on margins, revenue and earnings.
- Execution, timing and financing of the $19.325B 2019–2023 capital program, planned debt issuance and ongoing equity issuance.
- Progress and ultimate costs or recoveries for environmental remediation, coal-ash assessments and material rate or litigation proceedings.
- Whether higher depreciation, O&M and interest costs continue to offset margin growth and capital investment returns.