Xcel Energy (NYSE: XEL) is a holding company with subsidiaries in the electric utility and natural gas businesses. The company provides electricity to 3.3 million electricity customers and natural gas to 1.8 million customers in eight Midwestern states. Xcel's revenue exceeds $9 billion annually, and the company owns more than 34,500 miles of natural gas pipelines. Xcel also manufactures wind turbines and invests heavily in wind energy. Of the 25,300 megawatts of wind energy capacity in the U.S., Xcel Energy produced 3000 megawatts by the end of 2009. The American Wind Energy Association named Xcel Energy the nation’s top wind power provider for 2004-2009. Wind energy comprises 8 percent of Xcel's portfolio and by 2020 it projects that wind will comprise 20 percent.
Global climate change, the limited reserves of fossil fuels in the world, and government support for alternative, renewable sources of energy make wind power an especially promising investment for Xcel; it plans to double wind capacity by 2020. Currently, about 8 percent of the power generated by Xcel in the Upper Midwest comes from wind farms. Xcel's investment in wind energy has the potential to be profitable, but the large investment costs--85% of the cost of wind power production is installation--will need to be mitigated by a hike in utility prices. While regulators might be willing to raise prices in order to switch to a renewable source of energy, it remains to be seen whether or not consumers will tolerate higher prices.
Though wind has proven to be a strong investment for Xcel, coal and natural gas are becoming more more profitable due to the falling price of coal. The average weekly coal commodity spot price fell from $145 per short ton in August 2008 to around $50 in December 2009. Since coal is a key input into the energy production process, falling coal prices have increased XEL's profit margin on its coal power plant operations. However, the price of coal is projected to increase in the long-term due to increased worldwide energy demand coupled with a shortage of rail cars needed to transport it.
As a regulated utility company, the government has some degree of control over Xcel's profitability. Regulated prices guarantee the company profits by setting prices high enough that margins are at a "fair" level but are still affordable to many consumers. Xcel must receive regulatory approval before it can raise electricity prices.
Xcel Energy is a government-regulated Midwestern gas and electric utilities company, and the largest provider of wind energy in the United States. As a vertically-integrated company, Xcel produces its own energy and distributes it through its local utilities, with its biggest markets in Minnesota and Colorado. The company owns four main utilities: two rooted in Northern States Power, one in Public Service Company of Colorado, and the Southwestern Public Service Company. Xcel operates in Minnesota, the Dakotas, Wisconsin, Michigan, Colorado, Texas, Oklahoma, and New Mexico, and has 3.3 million energy and 1.8 million natural gas customers.
First Quarter 2010 Summary
Xcel reported first quarter net income of $167 million, down 4% from the year-ago quarter. Revenue rose 4.2% to $2.8 billion for the quarter. The fall in net income was due to one-time tax expenses. However, Xcel's adjusted earnings rose on rate increases and higher electric and gas sales.
Xcel recorded a tax expense of $17 million related to healthcare legislation passed by the U.S. Congress. The company also had a tax bill of $10 million from its life insurance program. Xcel sales fell during the economic downturn in 2009, but sales are recovering at utilities across the U.S.
Fourth Quarter 2009 Summary
Xcel reported earnings for 2009 of $681 million, up 5.4% from earnings of $646 million in 2008. It reported sales of $2.62 billion, down 3 percent from 2008, and significantly below analyst estimates of $3.50 billion. Xcel reported a fourth-quarter profit of 37 cents a share, 1 cent above both Wall Street estimates and its year-ago profit of 36 cents a share.
The increase in earnings from 2008 to 2009 is primarily attributed to improved electric margins as a result of electricity rate hikes in Minnesota, Colorado, Texas, New Mexico and Wisconsin. The effect of higher margins was partially offset by mild weather, lower sales, and higher purchase capacity power costs.
Third Quarter 2009 Summary
Xcel Energy Inc. reported third quarter 2009 earnings of $221 million, down nearly 1% from earnings of $223 in the third quarter of 2008. The decrease in earnings was primarily due to lower sales resulting from cooler temperatures, higher operating and maintenance expense, and an increase in the effective tax rate. Xcel's sales volume and profitability fall when temperatures are cooler, especially during the summer months, because fewer people use air conditioning in cool weather. Partially offsetting these factors was an increase in electric margins as a result of rate increases in Minnesota, Colorado, Texas, New Mexico and Wisconsin.
Second Quarter 2009 Summary
Xcel reported second quarter earnings of $117 million, up 10.4% from second quarter 2008 earnings of $106 million. Higher second quarter 2009 earnings were primarily due to increases in electric margin as a result of constructive rate case outcomes (Minnesota interim, Texas, New Mexico and Wisconsin), partially offset by a decline in retail electric sales. Xcel has experienced a decline in megawatt hours (MwH) sales which is driven by the economic recession and increased conservation efforts. The company's most significant declines have occurred in commercial and industrial sales (down 4.2% for the quarter), but residential electric sales have also fallen 0.7%. The declines in MwH sales to the commercial and industrial customer class are partially offset by demand fees.
First Quarter 2009 Summary
Xcel's net income in the first quarter totaled $174 million, up from $153 million at the end of the 2008 first quarter. Higher first quarter 2009 earnings were primarily due to improved financial performance at Southwestern Public Service Company, higher interim electric rates in Minnesota, and improved fuel cost recovery in Wisconsin. These factors were partially offset by a decline in earnings at Public Service Company of Colorado.
Total operating revenue was down 4.4% to $1.887 billion for the electric business segment and down 23.7% to $788.7 million for the natural gas business segment. However, operating expenses also declined in the first quarter, with electric fuel costs declining 15% to $924.7 million and natural gas costs declining 28% to $591.8 million. Xcel saw lower sales volumes in the first quarter, with residential electricity demand down 2.4%, commercial and industrial electricity demand down 1.8%, total retail electric sales down 2%, and natural gas sales down 9.9%.
|Revenue ($ Millions)||9,840||10,034||11,203||9,760|
|Net income ($ Millions)||567.51||573.11||641.31||676.65|
As a vertically-integrated utilities company, Xcel generates its own electricity from a variety of sources and then delivers it to customers.
|Retailer||Number of Facilities||Generating Capacity in Megawatts|
Xcel uses GE- and Vestas-manufactured wind turbines that produce at high outputs (over 500 kW each). Wind turbines have increasing economies of scale with larger turbine sizes. The cost of wind energy also depends on wind speed. In fact, the energy that can be tapped from the wind is proportional to the cube of the wind speed, so a slight increase in wind speed results in a large increase in electricity generation.
Furthermore, the cost of producing electricity from a turbine actually decreases the more power a turbine puts out, making bulk production much cheaper than with inputs like coal where production costs stay constant. In a utilities market where traditional energy input prices are generally rising, Xcel Energy is looking to generate electricity more efficiently in order to increase profit margins.
Wind power plants can generate electricity for less than 5 cents/kWh with the Production Tax Credit in many parts of the U.S., a price that is competitive with new coal- or gas-fired power plants. The 1.5-cent per kilowatt-hour Production Tax Credit for wind energy was included in the Energy Policy Act of 1992. It is a business credit that applies to electricity produced during the first 10 years of a wind plant's operation.
A company that is increasingly dependent on alternative energy, Xcel could be set to benefit from the rapidly changing energy paradigms; with energy utility prices in the hands of government regulators, however, just how much the company will benefit has yet to be seen.
In June 2010, Xcel Energy announced that it would halve its solar installations in San Luis Valley, Colorado. The Colorado Public Utilities Commission must approve transmission line installation, and without new transmission lines it is impossible to move electricity from power plants to households and businesses. Xcel originally planned to install 355 megawatts of solar power in San Luis Valley, but has revised the range to 60 MW to 185 MW, depending on the transmission development scheme selected by the Colorado Public Utilities Commission.
Xcel and the Tri-State Generation & Transmission Association had proposed the transmission line as a means of exporting solar power out of the valley and as a way to improve the grid's reliability in the area. But the $180 million proposal has met stiff resistance in utilities commission hearings from Trinchera Ranch, which sits in the path of the line. This case is not unique; Xcel must comply with government regulators, and often its ambitious plans for power installation meet resistance from local and state governments.
The primary benefit of wind power is that it is fully renewable--it cannot be used up unlike petroleum. Furthermore, current energy production methods release pollutants such as smog and carbon dioxide gas, which arguably contribute to the greenhouse effect and global warming. Wind energy production produces little pollution or emissions, making it one of the cleanest sources of power. Increasingly, new global trends have been molding a new energy market where pricing and consumer pressure will push a transition to renewable energy production.
Another growing trend is the transition from coal power to natural gas power. For example, in Colorado, Xcel has reached an agreement with the state governmnet to retire coal power plants powering 900 megawatts by 2017 and replace them with natural gas-fired power. This initiative would reduce Xcel's Colorado coal operations by 30% and cut 5 million tons of carbon emissions. Natural gas is an attractive alternative to coal because it produces lower carbon emissions, and advances are being made in developing shale gas fields, which mean that the domestic supplies of the natural gas that can power electric plants with half the CO2 emissions of coal are 39 percent larger than previously thought.
Oil and coal combustion release carbon dioxide and monoxide, as well as nitrogen oxides, sulfur oxides, ozone, and other pollutants that contribute to acid rain, smog pollution, as well as asthma and respiratory problems in the general populace. Increasing awareness of these issues has led to movements to push for government regulation of pollution. Adding to this push is ever higher energy prices and greater consumer demand for cleaner energy sources. While cleaner technology advents such as clean coal are on the horizon, coal and oil can only be burned cleanly up to a certain point and, as a result, there is growing support for government and corporate investment in very clean energy sources such as wind power. Xcel, which plans to triple wind capacity in the near future, is poised to benefit from this trend.
One of the most pressing issues associated with energy production is the advent of global climate change, caused by the warming of the earth's atmosphere. Climate change is predicted to have dramatic effects on human civilization, especially in developing countries, due to, among other things, its disruption of agriculture and fresh water distribution. The vast majority of climate scientists agree that global warming is a product of humans and may be stopped by reducing the amount of greenhouse gas emissions such as carbon dioxide, ozone, and water vapor.
Increased government regulation of greenhouse emissions in the U.S. (and worldwide) puts Xcel in a good position as an early and well-established entrant into the American clean energy market. Furthermore, the increased coverage that climate change has gained in contemporary media is essentially free advertising for clean energy companies, as it provides greater incentive for energy consumers to consent to higher utility prices. Xcel, though regulated, is in a great position to retain customers while getting regulators to raise prices.
Examples of government regulations that could benefit Xcel include a bill that is being considered by the Colorado state government. The bill would require Xcel to produce 30 percent of its power from renewable sources by 2020, creating 23,000 jobs. The bill would raise the standard for using renewable energy from the current 20 percent minimum by 2020 to 30 percent by 2020. If passed, this regulation will force Xcel to make large capital investments in renewable energy, but will ultimately help Xcel expand its operations over the next decade.
Xcel has found that coal and natural gas are becoming more more profitable due to the falling price of coal. The average weekly coal commodity spot price fell from $145 in August 2008 to $58 in March 2009. Since coal is a key input into the energy production process, falling coal prices have increased XEL's profit margin. However, the price of coal is projected to increase in the long-term due to increased worldwide energy demand coupled with a shortage of rail cars needed to transport it. Rising demand and drying reserves both have contributed to the increase in natural gas prices.
Xcel's investment in wind energy has the potential to be profitable, but the large investment costs--85% of the cost of wind power production is installation--will need to be facilitated by a hike in utility prices. While regulators might be willing to raise prices in order to switch to a renewable source of energy, it remains to be seen whether or not consumers will tolerate higher prices.
As a regulated utility company, the government is a double-edged sword for Xcel. Regulated prices guarantee the company profits by setting prices high enough that margins are at a "fair" level but are still accessible to many consumers. The company hurts, however, when consumers are willing to pay more but Xcel cannot raise prices due to a ceiling.
The company's belief that increased wind capacity will convince regulators to raise utility rates has been met with skepticism because it was only able to get 71% of its requested rate changes in 2006, on par with the rest of the industry but not as high as Xcel predicts for the future. In an increasingly green political climate, however, it’s possible that the company will see regulators lighten their hold on the prices of energy that stems from renewable sources. Strong indicators of this include recent legislation in Colorado and Minnesota, Xcel's two main regulated environments, mandating 20% and 30% emissions cuts, respectively, by 2020.
Gas and electric utilities are commodity services and are often regulated monopolies within specified regions. For example, Xcel Energy must have electricity rate increases approved by state and local governments. In September 2009, Xcel asked Colorado regulators for a rate adjustment that could mean a 2 percent increase for its small-business customers. The quarterly “Electric Commodity Adjustment” request is to cover an anticipated $12.8 million increase in fuel and purchased-energy prices in the fourth quarter, and to recover past price increases. Under state regulations, Xcel can seek increases in its authorized rate structure to recover higher energy costs dollar for dollar.
Xcel plans to install new transmission lines in several counties throughout Colorado, pending regulatory approval in 2010. These transmission lines would increase access to Southern Colorado's wind and solar resources. Southern Colorado hosts 42% of Colorado's potential wind power and is the only region in the state that could support utility-scale solar power plants. Higher transmission capacity could speed the development of wind power and solar power throughout Colorado.
As a regulated energy company, Xcel is essentially granted monopoly powers in the areas that it serves, meaning it has no real competition. Other electric utilities for comparative purposes include PG&E, FirstEnergy, Cinergy, and DTE Energy Company. In addition, major wind energy distributors include PG&E, Southern California Edison, MidAmerican Energy Holdings, and TXU.
The company's two main regulated environments are Minnesota and Colorado. In Minnesota, other utilities include Basin Electric Power Cooperative, Minnkota Power, Interstate Power and Light, Great River Energy, plus fifteen smaller ones; in Colorado, Xcel is the only significant utilities company.
In an increasingly green energy climate, well-established distributors of renewable energy have more potential to expand. Xcel, as the largest wind utility in the U.S., is at the head of the pack.
|Retailer||Installed Capacity (MW)|
|Southern California Edison||1,026|
|MidAmerica Energy Holdings||861|
Source: American Wind Energy Association