Xcel Energy Inc. — Q2 2020 Form 10-Q
Business context and reporting period. Xcel Energy is a regulated electric and natural gas utility. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with the same 2019 periods unless stated otherwise. Interim results are seasonal and are not necessarily indicative of full-year performance.
Financial results and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Operating revenue | $2.586 billion, versus $2.577 billion | $5.397 billion, versus $5.718 billion |
| Operating income | $422 million, versus $410 million | $877 million, versus $896 million |
| Net income | $287 million, versus $238 million | $582 million, versus $553 million |
| Diluted EPS | $0.54, versus $0.46 | $1.10, versus $1.07 |
| Electric margin | $1.453 billion, versus $1.436 billion | $2.859 billion, versus $2.847 billion |
| Natural gas margin | $194 million, versus $196 million | $492 million, versus $511 million |
| Cash provided by operating activities | $1.148 billion for the six months, versus $1.334 billion |
Second-quarter earnings benefited from lower O&M costs, favorable weather and lower income taxes; higher depreciation and interest costs partly offset these factors. Year-to-date revenue fell mainly on lower natural gas revenue, while net income and EPS increased. The effective tax rate was negative 4.7% for Q2 and negative 3.4% year to date, primarily reflecting wind production tax credits and plant-related regulatory differences; wind credits are generally flowed back to customers and did not materially affect net income.
Cash, investment and debt. Cash and cash equivalents were $1.625 billion at June 30, 2020, compared with $248 million at December 31, 2019. Cash used in investing was $2.580 billion, including $2.569 billion of capital and construction expenditures. Financing provided $2.818 billion, including $2.447 billion of long-term debt issuance. At June 30, short-term debt was $1.410 billion, current long-term debt was $1.101 billion and long-term debt was $19.463 billion. Xcel issued $2.5 billion of long-term debt during the first half.
As of July 27, Xcel reported $4.512 billion of total available liquidity, including $3.004 billion of available credit facilities and $1.508 billion of cash liquidity. Its outstanding forward equity agreements related to a 2019 share offering were expected to provide approximately $720 million to $730 million upon settlement by December 31, 2020.
Material changes and notable items
- Weather-normalized retail electric sales declined 3.5% year to date; commercial and industrial sales were especially affected by COVID-19 shutdowns, partly offset by increased residential use. Management attributed lower collections to the pandemic.
- O&M expense declined 6.1% in Q2 and 4.6% year to date, reflecting cost controls. Depreciation and amortization increased 7.7% in Q2 and 7.3% year to date, while interest charges rose 10.1% and 7.4%, respectively.
- Xcel purchased the 760 MW Mankato Energy Center (MEC) in January 2020 for approximately $650 million. In July, after quarter-end, it sold MEC for $680 million, subject to working-capital adjustments; the facility was classified as held for sale at June 30. Proceeds were expected to reduce financing needs.
- The quarterly dividend declared was $0.43 per share, up from $0.41 in Q2 2019. The filing reports no material changes to market-risk disclosures from the 2019 Form 10-K.
Outlook, risks and contingencies
- 2020 guidance: Xcel reaffirmed ongoing EPS guidance of $2.73 to $2.83. This assumes a base-case COVID-19 impact, normal weather for the rest of the year, constructive regulatory outcomes, weather-normalized retail electric sales down approximately 4%, natural gas sales down approximately 1%, and O&M expense down approximately 4% to 5% from 2019. Management said its plans would not offset the impact under a severe pandemic scenario, which could result in earnings below guidance.
- Management’s modeled COVID-19 scenarios estimated a sales-related EPS reduction of approximately $0.11 under a mild scenario, $0.17 under the base case and $0.37 under a severe scenario. Potential impacts from other items could reduce EPS by a further $0.02 to $0.05, assuming constructive regulatory treatment. These are estimates, not reported results.
- Long-term objectives are annual EPS growth of 5% to 7% from a 2019 base of $2.60, annual dividend increases of 5% to 7%, a dividend payout ratio of 60% to 70%, and senior secured debt ratings in the A range.
- Several jurisdictions allowed or were considering deferral of incremental COVID-19 costs, including bad debt, as regulatory assets; recovery and timing remain subject to regulatory decisions. The filing warns that service protections, customer payment difficulties and prolonged economic disruption could materially affect results, cash flow or liquidity.
- Potential contingencies include a pending prudence review of the Sherco Unit 3 outage and insurance recoveries; a Westmoreland insurers’ arbitration claim of approximately $36 million, for which a loss range could not be estimated; and environmental monitoring and possible corrective action at certain Colorado coal-ash locations. The filing states that the potential impact of the latter is uncertain.
- Other significant uncertainties include rate proceedings, transmission return-on-equity disputes, fuel-cost recovery and environmental requirements. Xcel said the expected cost of environmental compliance or replacement generation was believed recoverable through rates, but outcomes remain subject to regulatory action.
Important facts for investors to verify
- Whether COVID-19 sales, bad debt and customer-payment trends remain within the base-case assumptions supporting the reaffirmed EPS range.
- Whether deferred pandemic-related costs are approved for recovery, and the timing and amount of any recovery.
- Completion and final proceeds of the MEC sale, including working-capital adjustments, and settlement terms for the forward equity agreements.
- Debt, capital spending and operating cash flow trends, given first-half operating cash flow below the prior-year level and substantial investment spending.
- Outcomes and possible customer refunds or cost recovery from key regulatory and legal matters, including Sherco, Westmoreland arbitration, rate cases and coal-ash compliance.