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Xcel Energy (XEL)Stock (Electric Utilities Industry, Energy Industry)
The regulated Midwestern gas and electric utilities company, Xcel, recently shifted its business strategy; in the past, the company generated its energy from a variety of sources, mostly coal and natural gas. Rising price for both inputs, however, have led Xcel to enter the wind energy market; after installing 1,296 MW of capacity in 2006, the company is going to triple its wind capacity by 2011, in an effort to cut costs and woo industry regulators to raise prices. The current political climate is highly conducive to Xcel's green shift. Increasing fears of pollution and climate change have lead to governments all over the world pushing emissions cuts and renewable energy substitutes; increasing media coverage of environmental damages has brought the worlds ills right to consumers doorsteps, fueling ever increasing social movements pushing for clean sources of energy. Xcel's shift comes at a time where regulators may be more willing to raise utilities prices for green energy sources, and with traditional energy prices rising, the shift could help the company stem decreasing profit margins. Local governments are the shamans of the utilities industry as price regulators. Xcel must be able to convince regulators to raise prices in order to adopt more expensive alternative energies and ultimately increase profit margins. On the flip side, increased profits come with the potential of consumer backlash. As long as Xcel's customers are willing to hand over greater sums of money for greener energy, Xcel's new strategy has the potential to push the company forward.
[edit] Company OverviewXcel 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.
Source: Company information and the Energy Information Administration 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. [edit] Xcel Provides Electricity from a Number of SourcesAs a vertically-integrated utilities company, Xcel generates its own electricity from a variety of sources and then delivers it to customers. 
Source: Company website The company has over half of its capacity invested in cheap coal-fired generation units, and over a quarter invested in natural gas. With coal and natural gas prices rising, however, renewable energy sources have become more attractive in terms of profit margins, explaining the 2006 wind capacity increase and the plan to triple its wind capacity. [edit] Wind Energy is Xcel's Expansion Strategy 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. [edit] Trends and ForcesA 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. [edit] Consumer Demand for Renewable, Clean EnergyThe 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. [edit] Xcel Benefits from Greener ConsumersOil 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. [edit] Rising Fossil Fuel Prices Are Cutting the Profitability of Traditional EnergyFossil fuels like oil, natural gas, and coal are not considered to be renewable energy because there is a limited quantity of both resources on the earth, and the replenishment of these resources takes hundreds of thousands of years. As fossil fuels become depleted, energy production through these methods 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 much less profitable in a regulated environment. The price of coal has risen over 10% since 2004, and continues to increase because of 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. [edit] Utility Rate Regulators Control ProfitabilityAs 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. [edit] Raised Prices Tolerated in ColoradoGas and electric utilities are commodity services and are often regulated monopolies within specified regions. Higher prices could hurt revenue growth for Xcel if customer backlash but Xcel is essentially betting that its consumers will be willing to pay higher prices for greener energy. Whether this is the case or not has yet to be determined, though revenue gains in Colorado in 2006 could be an indication. Colorado is where a fourth of Xcel's wind capacity was installed, and in 2006, Xcel's customers saw a hike in utility prices. Analysts predicted decreased revenues, and were surprised to see that reported financials were well beyond what was expected. Colorado, is more of a green-minded state than most, but if it is indicative of Xcel's other markets, the company should benefit tremendously from its new strategy. [edit] CompetitionAs 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
 Xcel Energy2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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