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XEL AT A GLANCE

P/E ► 12.6 AVG EV/EBITDA ► 7.43 AVG ROA ► 4.9% AVG ROE ► 9.5% AVG Debt to Equity ► 2.44 AVG Current Ratio ► 1.00 AVG Interest Coverage Ratio ► 1.47 AVG

 

 

 

 

 

 

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.^[1] Xcel's revenue exceeds $9 billion annually, and the company owns more than 34,500 miles of natural gas pipelines.^[1] Xcel also manufactures wind turbines, and it had 3000 megawatts of wind energy capacity installed in the United States by the end of 2008.^[1]

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.^[1] 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.

Though wind has proven to be a good 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 in August 2008 to $58 in March 2009.^[2] 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 accessible to many consumers. Xcel must receive regulatory approval before it can raise electricity prices.

Company Overview

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 manufactures 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.

Second Quarter 2009 Summary Xcel reported second quarter earnings of $117 million, up 10.4% from second quarter 2008 earnings of $106 million.^[3] 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.^[3] Xcel has experienced a decline in megawatt hours (MwH) sales which is driven by the economic recession and increased conservation efforts.^[3] 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%.^[3] 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.^[4] 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.^[4] These factors were partially offset by a decline in earnings at Public Service Company of Colorado.^[4]

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.^[4] 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.^[4] 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%.^[4]

XEL Net Income and Revenue from 2005 to 2008 in millions of USD^[5]

The three-year downward profit margin trend can be attributed to the increasing price of coal and natural gas, on which Xcel was dependent to produce 75% of its energy.

Xcel Provides Electricity from a Number of Sources

As a vertically-integrated utilities company, Xcel generates its own electricity from a variety of sources and then delivers it to customers.

Overview of the electricity value chain, from the Energy Storage Council

Wind Energy is Xcel's Expansion Strategy

Wind economics and costs, NREL

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 bigger turbine sizes; moving from a 150kW turbine to a 600kW turbine (4x increase) makes the price triple, rather than quadruple. 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 more constant. In a utilities market where traditional energy input prices are rising, the company is looking to generate electricity more efficiently in order to increase profit margins. Currently, coal costs about 3 cents per kilowatt hour (and rising) compared to 4 cent per kilowatt hour for commercial wind power, which is decreasing.

Xcel is already the largest wind energy providing utility company in the U.S., and its expansion strategy calls for its increasing capacity by 20%, effectively tripling its 2006 wind capacity of 1,323 MW. The company believes that a transition to renewable energy will win over rate regulators, who could view green power more favorably because of emissions cuts passed in a number of state legislatures. If Xcel succeeds in appealing to regulators, they could raise utility rates, thus increasing the company's profit margins.

Trends and Forces

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 is up in the air.

Consumer Demand for Renewable, Clean Energy

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.

Xcel Benefits from Greener Consumers

Estimated CO2 emissions per Terrawatt of various electricity sources

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.

Falling Fossil Fuel Prices Have Increased the Profitability of Coal-Generated Energy

Historical Average Weekly Coal Commodity Spot Prices (Dollars per Short Ton)^[2]

As fossil fuels become depleted, energy production becomes more expensive. For instance, oil exploration companies have to look for petroleum in deeper, harder-to-reach places.

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.^[2] 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.

Utility Rate Regulators Control Profitability

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.

Raised Prices Tolerated in Colorado

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.^[7] 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.

Competition

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.

Source: American Wind Energy Association

References

1. ↑ ^{1.0 1.1 1.2 1.3} About Xcel Energy
2. ↑ ^{2.0 2.1 2.2} Energy Information Administration: Coal News and Markets
3. ↑ ^{3.0 3.1 3.2 3.3} XCEL ENERGY INC. SECOND QUARTER 2009 EARNINGS
4. ↑ ^{4.0 4.1 4.2 4.3 4.4 4.5} XEL First Quarter 2009 Earnings Release
5. ↑ ^{5.0 5.1} Google Finance: XEL Income Statement
6. ↑ About Xcel Energy
7. ↑ Xcel seeks Q4 rate boost to cover higher energy costs