01—Abstract
Summary
Summary of the 10-K filed February 23, 2007. Cited figures are marked; the original filing is the authoritative source.
Xcel Energy's FY2006 10-K shows a regulated utility holding company that earned $571.8 milliona in GAAP net income ($1.36 diluted EPS), up from $513.0 million ($1.23) in 2005.
Continuing-operations earnings rose to $568.7 millionb, driven mainly by stronger base electric margin from Minnesota and Wisconsin rate increases, weather-normalized retail sales growth of about 1.8%, and MERP rider revenue. A $30 million tax benefit from reversing a regulatory reserve and capital loss carryforwards also helped, and the effective tax rate fell to 24.2% from 25.8%. Operating revenue rose 2.2% to $9.84 billion, while natural gas margin improved modestly.
Management's "Building the Core" strategy calls for roughly $9 billionc of investment over five years, with rate base growth above 5% annually and targets of 5–7% EPS growth and 2–4% dividend growth. The main investor concern is the IRS dispute over COLI interest deductions at PSCo. If the IRS prevails, tax and interest through 2006 would reduce earnings by an estimated $421 million, or about $499 million including penalties, and 2007 earnings would fall by about $49 million (11 cents per share).
The company has not reserved for this exposure and continues to take the deductions. Other key risks include about $1 billiond of nuclear and coal-plant capital projects, the uncertain outcome of the Excelsior IGCC proceeding, the pending Sherco upgrade, and the NSP-Minnesota base load resource decision. Liquidity appears adequate, with $1.67 billion of available committed liquidity as of February 20, 2007 and senior unsecured ratings in the Baa1/BBB-/BBB+ range, which sit at or near the low end of investment grade.
2007 guidance calls for continuing-operations diluted EPS of $1.35 to $1.455, including an assumed $0.11 COLI tax benefit. Management assumes normal weather, 1.7–2.2% retail electric sales growth, and an effective tax rate of 28–31%. Capital expenditures are planned at about $1.9 billion in 2007, and the company has $1.1 billion of remaining deferred tax benefits from NRG to realize as cash savings.
02—Key points
Key Highlights
- Net income rose to $571.8M ($1.36 diluted EPS) in 2006 from $513.0M ($1.23) in 2005, with continuing-operations EPS up to $1.35 from $1.20.
- Base electric utility margin increased $226M, led by NSP-Minnesota rate changes ($129M), the MERP rider ($38M), and weather-normalized retail sales growth of 1.8%.
- The IRS COLI interest-deduction dispute at PSCo could reduce earnings by an estimated $421M ($499M with penalties) through 2006, with no reserve recorded, and by about $49M (11 cents per share) in 2007 if the deductions are lost.
- The 2006 effective tax rate fell to 24.2% (28.2% excluding $30M of benefits), and the company expects to use about $123M of NRG-related tax benefits in 2007.
- Strategy calls for roughly $9B of capital investment over five years with rate base growth above 5% per year, alongside 5–7% EPS growth and 2–4% dividend growth targets.
- Liquidity totals about $1.67B of available committed facilities (as of Feb 20, 2007), and senior unsecured ratings are Baa1/BBB-/BBB+ (Moody's/S&P/Fitch), near the low end of investment grade.
- 2007 EPS guidance is $1.35–$1.455 from continuing operations, assuming normal weather and 1.7–2.2% weather-adjusted electric sales growth.
03—Questions
Frequently Asked Questions
How much could the COLI tax dispute affect Xcel Energy's earnings?
If the IRS prevails, tax and interest payable through Dec. 31, 2006 would reduce earnings by about $421 million. Including the IRS's stated intent to seek penalties, total exposure is about $499 million. Annual 2007 earnings would drop by about $49 million, or 11 cents per share, if the COLI interest deductions are disallowed. The company has recorded no provision and believes its position is strongly supported, but a trial is set for July 2007 if summary judgment motions are denied.
What drove the increase in 2006 earnings?
The primary driver was stronger base electric utility margin, which rose $226 million. That gain came from NSP-Minnesota and NSP-Wisconsin rate increases, weather-normalized retail sales growth, the MERP rider, and higher firm wholesale margins. The effective tax rate also fell, to 24.2% from 25.8%, partly because of $30 million in tax benefits. Offsetting factors included higher operations, maintenance and depreciation costs and a $26 million transmission fee reclassification.
What is management's capital investment plan and growth outlook?
Under its Building the Core strategy, Xcel plans about $9 billion of investment over five years, roughly $1.9 billion per year in 2007–2008. Major projects include MERP (about $1 billion), Comanche 3 (about $1 billion for PSCo's share), the proposed Sherco upgrade ($905 million), nuclear uprates and life extension (about $1 billion), and CapX 2020 transmission (about $700 million for Xcel's share). Management expects rate base to grow more than 5% annually and targets 5–7% EPS growth and 2–4% annual dividend increases.
Is Xcel Energy's balance sheet and liquidity adequate?
As of Feb. 20, 2007, Xcel had about $1.67 billion of available liquidity across committed credit facilities expiring in December 2011. Common equity was $5.8 billion, and the holding company capitalization ratio was 81%, so the company faces no effective dividend restriction. Senior unsecured debt is rated Baa1/BBB-/BBB+ (Moody's/S&P/Fitch), at the low end of investment grade. The company has $1.1 billion of NRG-related tax benefits to realize as cash savings, and total debt maturities total about $336 million in 2007 and $632 million in 2008.
04—Continue