Why did earnings from continuing operations decline in 2005 despite higher revenues?

Continuing-operations income fell to $499.1 million from $522.3 million. Higher operating and maintenance costs (including scheduled Monticello and Prairie Island nuclear outages), higher employee benefit and uncollectible receivable expenses, and higher depreciation offset improved operating margins. Tax expense also rose, because 2004 included roughly $22 million of one-time tax benefits from audit resolutions.

What is the main contingent liability investors should watch?

The IRS has disallowed interest deductions on PSCo's corporate-owned life insurance (COLI) loans for 1993–1999. If the IRS prevails, tax and interest through 2005 would reduce retained earnings by about $361 million, or about $428 million with penalties. Management believes its position is correct, but the litigation could take two or more years. Losing would reduce 2006 earnings by about $44 million, or about $0.10 per share.

What drives the capital spending plan, and how is it recovered?

Capital expenditures are forecast at about $1.6 billion per year for 2006–2007, mainly in electric utility operations. Major projects are the MERP emissions upgrade in Minnesota (about $1 billion, with a rider recovering costs from January 2006) and the Comanche 3 coal unit in Colorado (about $1.35 billion total, with PSCo's share about $1 billion). Management relies on rate riders and general rate cases to earn returns on these investments.

What are the near-term regulatory catalysts?

The biggest is NSP-Minnesota's $168 million electric rate request, with interim rates of $147 million in effect since January 2006 and an MPUC order expected around September 2006. Other items include the FERC's review of SPS and PSCo market-based rate authority, the MISO Day 2 market cost recovery, and the PUCT and NMPRC fuel reviews for SPS.

Does the 2006 guidance reflect growth?

Guidance is $1.25–$1.35 in utility-driven diluted EPS from continuing operations, including a $0.10 COLI tax benefit and a $0.10 drag from other nonregulated subsidiaries. The assumptions include normal weather, reasonable recovery in the Minnesota electric case, and 1.3–1.7% weather-adjusted electric sales growth. Investors should note that the COLI benefit is itself subject to the IRS dispute.

XEL/XELLL 10-K FY2005 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed February 27, 2006. Cited figures are marked; the original filing is the authoritative source.

Xcel Energy's 2005 Form 10-K describes a holding company whose four regulated utilities (NSP-Minnesota, NSP-Wisconsin, PSCo, SPS) serve electric and natural gas customers across 10 states.

Reported 2005 GAAP net income was $513.0 million^a ($1.23 diluted EPS), up from $356.0 million ($0.87) in 2004, but continuing-operations earnings fell to $499.1 million ($1.20 diluted) from $522.3 million ($1.26). Management attributes the decline to higher O&M, depreciation, employee benefit and uncollectible-account costs, partly offset by higher margins and a $17 million NRG tax benefit within discontinued operations. Total revenue rose about 17% to $9.6 billion, driven largely by pass-through fuel and natural gas cost recovery.

The company's strategy, "Building the Core," centers on roughly $7 billion^b of utility investment over five years, including about $1 billion for the MERP emissions project in Minnesota and about $1.35 billion for the Comanche 3 coal unit in Colorado. Management targets 5–7% annual EPS growth for 2005–2009, dividend growth of 2–4%, and senior unsecured debt ratings in the BBB+ to A range. Current senior unsecured ratings are BBB- (S&P) and Baa1 (Moody's), so the company sits at the low end of its target range.

Key risks include a Powder River Basin coal delivery disruption, pending rate cases (Minnesota electric interim rates of $147 million^c), a potential IRS challenge to COLI interest deductions (up to $428 million including penalties, about $0.10 per share annually), and nuclear waste litigation against the DOE. 2006 guidance calls for utility EPS from continuing operations of $1.25–$1.35, with the COLI tax benefit contributing $0.10 and other nonregulated subsidiaries a $0.10 drag. Investors should weigh the company's large capital program and regulatory outcomes against the earnings pressure and the contingent COLI tax exposure.

02—Key points

Key Highlights

Net income rose to $513.0 million ($1.23 diluted EPS) in 2005 from $356.0 million ($0.87) in 2004, but continuing-operations EPS fell to $1.20 from $1.26.
Total operating revenues grew to $9.63 billion from $8.22 billion, mainly from higher fuel, purchased power and natural gas cost recovery.
The 'Building the Core' plan targets about $7 billion of utility investment over five years, with rate base growth of slightly more than 4% annually.
Long-term EPS growth target of 5–7% (2005–2009) and dividend growth of 2–4% per year; the 2005 dividend was $0.85 per share.
Powder River Basin coal delivery disruptions (about 70% of coal supply) forced dispatch changes and higher purchased power and gas generation costs.
Potential IRS disallowance of COLI interest deductions could reduce retained earnings by $361 million, or about $428 million including penalties, with about $0.10 per share annual earnings impact.
2006 guidance of $1.25–$1.35 diluted EPS from continuing operations; senior unsecured ratings sit at the low end of the BBB+ to A target range (S&P BBB-, Moody's Baa1, Fitch BBB+).

03—Questions

Frequently Asked Questions

Why did earnings from continuing operations decline in 2005 despite higher revenues?
Continuing-operations income fell to $499.1 million from $522.3 million. Higher operating and maintenance costs (including scheduled Monticello and Prairie Island nuclear outages), higher employee benefit and uncollectible receivable expenses, and higher depreciation offset improved operating margins. Tax expense also rose, because 2004 included roughly $22 million of one-time tax benefits from audit resolutions.
What is the main contingent liability investors should watch?
The IRS has disallowed interest deductions on PSCo's corporate-owned life insurance (COLI) loans for 1993–1999. If the IRS prevails, tax and interest through 2005 would reduce retained earnings by about $361 million, or about $428 million with penalties. Management believes its position is correct, but the litigation could take two or more years. Losing would reduce 2006 earnings by about $44 million, or about $0.10 per share.
What drives the capital spending plan, and how is it recovered?
Capital expenditures are forecast at about $1.6 billion per year for 2006–2007, mainly in electric utility operations. Major projects are the MERP emissions upgrade in Minnesota (about $1 billion, with a rider recovering costs from January 2006) and the Comanche 3 coal unit in Colorado (about $1.35 billion total, with PSCo's share about $1 billion). Management relies on rate riders and general rate cases to earn returns on these investments.
What are the near-term regulatory catalysts?
The biggest is NSP-Minnesota's $168 million electric rate request, with interim rates of $147 million in effect since January 2006 and an MPUC order expected around September 2006. Other items include the FERC's review of SPS and PSCo market-based rate authority, the MISO Day 2 market cost recovery, and the PUCT and NMPRC fuel reviews for SPS.
Does the 2006 guidance reflect growth?
Guidance is $1.25–$1.35 in utility-driven diluted EPS from continuing operations, including a $0.10 COLI tax benefit and a $0.10 drag from other nonregulated subsidiaries. The assumptions include normal weather, reasonable recovery in the Minnesota electric case, and 1.3–1.7% weather-adjusted electric sales growth. Investors should note that the COLI benefit is itself subject to the IRS dispute.

04—Continue

← View all 10-K filings