Xcel Energy Inc. — Q2 2014 Form 10-Q
Business context and reporting period. Xcel Energy is a regulated electric and natural gas utility holding company operating through NSP-Minnesota, NSP-Wisconsin, PSCo and SPS. This unaudited filing covers the quarter and six months ended June 30, 2014, compared with the corresponding 2013 periods. Management cautions that seasonal interim results are not necessarily indicative of full-year results.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Operating revenue | $2.685 billion | $2.579 billion | $5.888 billion | $5.362 billion |
| Operating income | $397.2 million | $402.2 million | $891.2 million | $856.9 million |
| Net income | $195.2 million | $196.9 million | $456.4 million | $433.4 million |
| Diluted EPS | $0.39 | $0.40 | $0.91 | $0.88 |
| Electric margin | $1.257 billion | $1.209 billion | $2.490 billion | $2.376 billion |
| Natural gas margin | $158 million | $152 million | $414 million | $383 million |
- Q2 revenue rose about 4.1%, while net income declined about 0.9%. For the first half, revenue rose about 9.8% and net income about 5.3%.
- Operating margin, measured as operating income divided by revenue, was approximately 14.8% in Q2 2014 versus 15.6% in Q2 2013; first-half operating margin was approximately 15.1% versus 16.0%.
- Management attributed earnings pressure to higher O&M, property taxes, depreciation and conservation-program costs, and less favorable weather in Q2. Higher regulated margins and lower interest expense were favorable. Q2 diluted EPS was down one cent; first-half EPS rose three cents.
- Cash from operations for the first half was $1.040 billion, versus $1.074 billion. Investing used $1.531 billion, principally reflecting utility construction expenditures of $1.576 billion. Financing provided $484 million. Cash at June 30 was $99.5 million.
- At June 30, long-term debt was $11.753 billion, current maturities $7.5 million and short-term debt $777.8 million. Combined reported debt was approximately $12.538 billion, compared with approximately $11.951 billion at year-end 2013. Total equity was $9.921 billion.
- Current assets were $3.124 billion and current liabilities $3.060 billion. The company reported $1.601 billion of available committed credit capacity at June 30; the $2.450 billion facilities mature in July 2017. Commercial paper outstanding was $778 million.
- Cash dividends declared were $0.30 per share for Q2, up from $0.28. The company issued about 5.7 million shares through its at-the-market program in the first half; the program is now complete.
Outlook, regulatory matters and risks
- Guidance: 2014 ongoing EPS guidance is $1.90–$2.05. Assumptions include normal weather for the remainder of the year, weather-normalized retail electric sales growth of about 1% and firm natural gas sales growth of about 2%. Management projected O&M growth of 2%–3%, property tax growth of $40–$50 million, and an effective tax rate of 34%–36%.
- Long-term objectives: Annual EPS growth of 4%–6% from normalized 2013 EPS of $1.90, annual dividend increases of 4%–6%, and senior unsecured debt ratings in the BBB+ to A range.
- Guidance depends in part on constructive outcomes in rate cases and regulatory proceedings. NSP-Minnesota’s revised 2014 electric rate request was approximately $169.5 million, with an additional $95 million requested for 2015; interim rates are subject to refund. A $12.5 million estimated refund liability was recorded at June 30.
- The Minnesota prudence review of the Monticello life-cycle management/extended power uprate project presents potential disallowance exposure: the Department of Commerce recommended excluding about $71.5 million of Minnesota-jurisdictional costs, approximately $94 million on a system basis. A final decision was anticipated in Q1 2015.
- Other material regulatory issues include pending electric rate cases in Colorado, Texas, South Dakota and Wisconsin; transmission return-on-equity complaints that could reduce annual NSP-System transmission revenue by an estimated $5–$7 million; and SPS wholesale ROE complaints with potential refund exposure.
- Environmental and legal exposures include the Ashland manufactured-gas-plant site, for which NSP-Wisconsin recorded a $113.3 million liability; the cleanup estimate for the Phase I area was about $52 million, while the sediment remedy and cost remain uncertain. The company also faces evolving emissions and water rules, with costs and recoverability not fully determined.
- Additional risks include weather variability, fuel and commodity prices, interest rates, credit and counterparty exposure, nuclear regulation and fuel supply, and the outcome of regulatory, environmental and legal proceedings. Management stated that no other material off-balance-sheet arrangements were identified.
Important facts for investors to verify
- Progress and final outcomes of the Minnesota rate case and Monticello prudence review, including any refund or disallowance effects.
- Whether the company achieves its $1.90–$2.05 ongoing EPS guidance and its stated sales, expense, tax and weather assumptions.
- Debt growth, refinancing needs, available credit capacity and the impact of the completed ATM share issuance on per-share results.
- Updates to Ashland remediation costs, environmental-rule compliance spending and the recoverability of those costs in customer rates.
- Potential financial effects of pending FERC ROE complaints and other major rate and legal proceedings.