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XEL > SEC Filings for XEL > Form 10-K on 21-Feb-2014All Recent SEC Filings

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Form 10-K for XCEL ENERGY INC


21-Feb-2014

Annual Report


Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Business Segments and Organizational Overview

Xcel Energy Inc. is a public utility holding company. In 2013, Xcel Energy's operations included the activity of four utility subsidiaries that serve electric and natural gas customers in eight states. These utility subsidiaries are NSP-Minnesota, NSP-Wisconsin, PSCo and SPS. These utilities serve customers in portions of Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas and Wisconsin. Along with WYCO, a joint venture formed with CIG to develop and lease natural gas pipelines, storage and compression facilities, and WGI, an interstate natural gas pipeline company, these companies comprise the regulated utility operations.

Xcel Energy Inc.'s nonregulated subsidiary is Eloigne, which invests in rental housing projects that qualify for low-income housing tax credits.

Forward-Looking Statements

Except for the historical statements contained in this report, the matters discussed in the following discussion and analysis are forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements, including the 2014 EPS guidance and assumptions, are intended to be identified in this document by the words "anticipate," "believe," "estimate," "expect," "intend," "may," "objective," "outlook," "plan," "project," "possible," "potential," "should" and similar expressions. Actual results may vary materially. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them to reflect changes that occur after that date. Factors that could cause actual results to differ materially include, but are not limited to:
general economic conditions, including inflation rates, monetary fluctuations and their impact on capital expenditures and the ability of Xcel Energy Inc. and its subsidiaries to obtain financing on favorable terms; business conditions in the energy industry, including the risk of a slow down in the U.S. economy or delay in growth recovery; trade, fiscal, taxation and environmental policies in areas where Xcel Energy has a financial interest; customer business conditions; actions of credit rating agencies; competitive factors, including the extent and timing of the entry of additional competition in the markets served by Xcel Energy Inc. and its subsidiaries; unusual weather; effects of geopolitical events, including war and acts of terrorism; state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rates or have an impact on asset operation or ownership or impose environmental compliance conditions; structures that affect the speed and degree to which competition enters the electric and natural gas markets; costs and other effects of legal and administrative proceedings, settlements, investigations and claims; actions by regulatory bodies impacting our nuclear operations, including those affecting costs, operations or the approval of requests pending before the NRC; financial or regulatory accounting policies imposed by regulatory bodies; availability or cost of capital; employee work force factors; the items described under Factors Affecting Results of Operations; and the other risk factors listed from time to time by Xcel Energy Inc. in reports filed with the SEC, including "Risk Factors" in Item 1A of this Annual Report on Form 10-K and Exhibit 99.01 hereto.

Management's Strategic Plans

Xcel Energy's corporate strategy focuses on the following primary objectives:

Driving operational excellence;

Providing options and solutions to customers;

Investing for the future; and

Enhancing engagement with employees, customers, shareholders, communities and policy makers.

These objectives are designed to provide our investors an attractive total return and our customers with clean, safe, reliable energy at a competitive price. Below is a discussion of these objectives and how they support our overall strategy.


Table of Contents

Driving operational excellence

Managing our operational performance and satisfying our customers has and will continue to be a fundamental priority. However, operational excellence also includes managing costs. By building on past success, leveraging technology, managing risks and continuously striving to improve our processes, we can bend the cost curve downward. Over the next five years, Xcel Energy is planning to implement cost saving measures which are intended to align increases in O&M expense more closely to sales growth. Our financial objective is to slow our annual O&M expense growth to approximately zero percent to two percent. However, we will not sacrifice reliability or safety to meet this initiative.

Providing options and solutions to customers

Adapting to a changing environment is critical to our success. Our customers expect to be offered choices and we are committed to providing options and solutions that are fair and satisfy their needs. Environmental leadership is a core priority and is designed to meet customer and policy maker expectations for clean energy at a competitive price while creating shareholder value. We will continue to offer and expand our production of renewable energy, including wind and solar alternatives, and further develop DSM, conservation and renewable programs.

Investing for the future

Sound investments today are necessary for tomorrow's success. From 2014 through 2018, we anticipate investing approximately $14.1 billion in our utility businesses, which will grow rate base at a compounded average annual rate of approximately 5.4 percent. Our capital investment plan is primarily intended to take advantage of opportunities to grow the business, refresh our infrastructure, reduce emissions and improve reliability. Xcel Energy has a proven record for making sound investments, including proactive and forward-looking decisions to balance its generation portfolio and expand alternative energy production. Our customers, stakeholders and the environment are currently benefiting from these decisions and will continue to do so in the future. Organic growth will remain a priority, but ventures such as transmission related projects outside our established footprint are also being considered.

Enhancing engagement with employees, customers, shareholders, communities and policy makers

Engagement starts with our employees and creating a productive place to work. Providing the right tools and opportunities to our employees is important not only for their future development, but the future of Xcel Energy. Communicating with customers, shareholders, communities and policymakers is also crucial to enhancing our business relationships and overall engagement. Maintaining a constructive regulatory environment is a key part of our overall strategy. We plan to further improve the regulatory compact by proposing additional rate mitigation methodologies, rider mechanisms and continuing to negotiate multi-year rate agreements.

Provide an attractive total return

Successful execution of our strategic plan should allow Xcel Energy to deliver an attractive total return to our shareholders. Through a combination of earnings growth and dividend yield, we plan to:

Deliver long-term annual EPS growth of four percent to six percent, based on a normalized 2013 EPS of $1.90 per share;

Deliver annual dividend increases of four percent to six percent; and

Maintain senior unsecured debt credit ratings in the BBB+ to A range.

We have successfully achieved our prior financial objectives and believe we are positioned to continue to achieve our value proposition. Our ongoing earnings have grown approximately 6.8 percent and our dividend has grown approximately 3.4 percent annually since 2005. In addition, our current senior unsecured debt credit ratings for Xcel Energy and it utility subsidiaries are in the BBB+ to A range.

Financial Review

The following discussion and analysis by management focuses on those factors that had a material effect on Xcel Energy's financial condition, results of operations and cash flows during the periods presented, or are expected to have a material impact in the future. It should be read in conjunction with the accompanying consolidated financial statements and the related notes to consolidated financial statements.


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The only common equity securities that are publicly traded are common shares of Xcel Energy Inc. The earnings and EPS as well as the ROE of each subsidiary discussed below do not represent a direct legal interest in the assets and liabilities allocated to such subsidiary but rather represent a direct interest in our assets and liabilities as a whole. Ongoing diluted EPS and ongoing ROE for Xcel Energy and by subsidiary are financial measures not recognized under GAAP. Ongoing diluted EPS is calculated by dividing the net income or loss attributable to the controlling interest of each subsidiary, adjusted for certain nonrecurring items, by the weighted average fully diluted Xcel Energy Inc. common shares outstanding for the period. Ongoing ROE is calculated by dividing the net income or loss attributable to the controlling interest of Xcel Energy or each subsidiary, adjusted for certain nonrecurring items, by each entity's average common stockholders' or stockholder's equity. We use these non-GAAP financial measures to evaluate and provide details of earnings results. We believe that these measurements are useful to investors to evaluate the actual and projected financial performance and contribution of our subsidiaries. These non-GAAP financial measures should not be considered as alternatives to measures calculated and reported in accordance with GAAP.

Results of Operations

The following table summarizes the diluted EPS for Xcel Energy and subsidiaries:

Diluted Earnings (Loss) Per Share                  2013       2012       2011
PSCo                                             $ 0.91     $ 0.90     $ 0.82
NSP-Minnesota                                      0.79       0.70       0.73
SPS                                                0.23       0.22       0.18
NSP-Wisconsin                                      0.12       0.10       0.10
Equity earnings of unconsolidated subsidiaries     0.04       0.04       0.04
Regulated utility                                  2.09       1.96       1.87
Xcel Energy Inc. and other costs                  (0.14 )    (0.14 )    (0.15 )
Ongoing diluted earnings per share                 1.95       1.82       1.72
SPS 2004 FERC complaint case orders               (0.04 )        -          -
Prescription drug tax benefit                         -       0.03          -
GAAP diluted earnings per share                  $ 1.91     $ 1.85     $ 1.72

Ongoing earnings exclude adjustments for certain items. For 2013, the adjustment is related to the SPS 2004 FERC complaint case orders. For 2012, the adjustment is related to the Patient Protection and Affordable Care Act. See below under Adjustments to GAAP Earnings and Note 12 and Note 6 to the consolidated financial statements for further discussion, respectively, for the 2013 and 2012 adjustments.

Xcel Energy's management believes that ongoing earnings reflects management's performance in operating the company and provides a meaningful representation of the performance of Xcel Energy's core business. In addition, Xcel Energy's management uses ongoing earnings internally for financial planning and analysis, for reporting of results to the Board of Directors and when communicating its earnings outlook to analysts and investors.

2013 Adjustment to GAAP Earnings

SPS FERC Orders - As a result of the two orders issued in August 2013 by the FERC for a potential SPS customer refund, a pre-tax charge of $36 million was recorded in 2013. Of this amount, approximately $30 million ($26 million revenue reduction and $4 million of interest) was attributable to periods prior to 2013 and not representative of ongoing earnings. As such, GAAP earnings include the total after tax amount of $24.4 million and ongoing earnings exclude $20.2 million. See Note 12 to the consolidated financial statements for further discussion.

2012 Adjustment to GAAP Earnings

Prescription drug tax benefit - In the third quarter of 2012, Xcel Energy implemented a tax strategy related to the allocation of funding of Xcel Energy's retiree prescription drug plan. This strategy restored a portion of the tax benefit associated with federal subsidies for prescription drug plans that had been accrued since 2004 and was expensed in 2010. As a result, Xcel Energy recognized approximately $17 million, or $0.03 per share, of income tax benefit. See Note 6 to the consolidated financial statements for further discussion.


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Earnings Adjusted for Certain Items (Ongoing EPS)

2013 Comparison with 2012

Xcel Energy - Overall, ongoing earnings increased $0.13 per share for 2013. Ongoing earnings increased as a result of higher electric and gas margins due to rate increases in various states, the impact of favorable colder weather on the natural gas business and reduced interest charges. These positive factors were partially offset by planned increases in O&M expenses and depreciation.

PSCo - PSCo's ongoing earnings increased $0.01 per share for 2013. Ongoing earnings increased as a result of higher gas and electric margins primarily due to rate increases, the impact of cooler weather on natural gas margins and lower interest charges, partially offset by higher depreciation, O&M expenses and customer refunds related to the 2013 electric earnings test refund obligation.

NSP-Minnesota - NSP-Minnesota's ongoing earnings increased $0.09 per share for 2013. Ongoing earnings were positively impacted by electric rate increases in Minnesota and South Dakota, interim rates subject to refund in North Dakota, the impact of cooler winter weather and lower interest charges. These items were partially offset by higher O&M expenses.

SPS - SPS' ongoing earnings increased $0.01 per share for 2013. Electric rate increases in Texas and the gain associated with the sale of certain transmission assets to Sharyland were partially offset by higher depreciation.

NSP-Wisconsin - NSP-Wisconsin's ongoing earnings increased $0.02 per share for 2013. Higher ongoing earnings from electric and natural gas rates and cooler winter weather were partially offset by higher O&M expenses and depreciation.

2012 Comparison with 2011

Xcel Energy - Overall, ongoing earnings increased $0.10 per share for 2012. Ongoing earnings increased largely due to increases in electric margins driven by the conclusion of various rate cases, which reflect our continued investment in our utility business and a lower ETR. Partially offsetting these positive factors were warmer than normal winter weather, increases in depreciation expense, O&M expenses and property taxes.

PSCo - PSCo's ongoing earnings increased $0.08 per share for 2012. The increase is primarily due to an electric rate increase, effective May 2012, and the impact of warmer summer weather. The increase was partially offset by decreased wholesale revenue due to the expiration of a long-term power sales agreement with Black Hills Corp, higher depreciation expense and O&M expenses.

NSP-Minnesota - NSP-Minnesota's 2012 ongoing earnings decreased $0.03 per share. The decrease is primarily due to the unfavorable impact of warmer than normal winter weather during the first quarter, electric sales decline and higher property taxes, O&M expenses and depreciation expense. These decreases were partially offset by the 2012 rate increase and a lower ETR.

SPS - SPS' ongoing earnings increased $0.04 per share for 2012. The increase is the result of rate increases in New Mexico and Texas, effective January 2012, partially offset by the impact of milder weather during the second half of the year, higher depreciation expense and property taxes.

NSP-Wisconsin - NSP-Wisconsin's ongoing earnings were flat for 2012. Ongoing earnings were positively impacted by rate increases, effective January 2012, offset by higher O&M expenses.


Table of Contents

Changes in Diluted EPS

The following table summarizes significant components contributing to the
changes in 2013 EPS compared with the same period in 2012. See further
discussion below.
Diluted Earnings (Loss) Per Share                                           Dec. 31
2012 GAAP diluted earnings per share                                       $   1.85
Prescription drug tax benefit                                                 (0.03 )
2012 ongoing diluted earnings per share                                        1.82

Components of change - 2013 vs. 2012
Higher electric margins (excludes impact of SPS 2004 FERC complaint case
orders)                                                                        0.18
Higher natural gas margins                                                     0.08
Higher AFUDC - equity                                                          0.05
Lower interest charges (excludes impact of SPS 2004 FERC complaint case
orders)                                                                        0.04
Gain on sale of transmission assets (included in O&M expenses)                 0.02
Higher O&M expenses (excludes gain on sale of transmission assets)            (0.14 )
Higher depreciation and amortization                                          (0.06 )
Dilution from at-the-market program, direct stock purchase plan and
benefit plans                                                                 (0.03 )
Higher taxes (other than income taxes)                                        (0.01 )
2013 ongoing diluted earnings per share                                        1.95
SPS 2004 FERC complaint case orders                                           (0.04 )
2013 GAAP diluted earnings per share                                       $   1.91


Diluted Earnings (Loss) Per Share                                               Dec. 31
2011 GAAP and ongoing diluted earnings per share                               $   1.72

Components of change - 2012 vs. 2011
Higher electric margins                                                            0.15
Lower ETR                                                                          0.04
Lower conservation and DSM expenses (generally offset in revenues)                 0.03
Higher AFUDC - equity                                                              0.02
Higher natural gas margins                                                         0.01
Higher O&M expenses                                                               (0.05 )
Higher depreciation and amortization                                              (0.04 )
Higher taxes (other than income taxes)                                            (0.04 )
Higher interest charges                                                           (0.01 )
Other, net (including interest and premium on redemption of preferred stock)      (0.01 )
2012 ongoing diluted earnings per share                                            1.82
Prescription drug tax benefit                                                      0.03
2012 GAAP diluted earnings per share                                           $   1.85

The following table summarizes the ROE for Xcel Energy and subsidiaries:

ROE - 2013                        PSCo       NSP-Minnesota        SPS        NSP-Wisconsin     Xcel Energy
2013 ongoing ROE                   9.66 %          9.24 %         9.03  %         10.61 %        10.50  %
SPS 2004 FERC complaint case
orders                                -               -          (1.54 )              -          (0.22 )
2013 GAAP ROE                      9.66 %          9.24 %         7.49  %         10.61 %        10.28  %


ROE - 2012                         PSCo       NSP-Minnesota       SPS        NSP-Wisconsin    Xcel Energy
2012 ongoing ROE                    9.92 %          8.77 %         9.44 %          9.62 %          10.24 %
Prescription drug tax benefit       0.38               -              -               -             0.19
2012 GAAP ROE                      10.30 %          8.77 %         9.44 %          9.62 %          10.43 %


Table of Contents

The following tables provide reconciliations of ongoing to GAAP earnings (net income) and ongoing to GAAP diluted earnings per share for the years ended Dec. 31:

(Millions of Dollars)                                      2013         2012         2011
Ongoing earnings                                        $  968.4     $  888.3     $  840.7
SPS 2004 FERC complaint case orders (2013),
prescription drug tax benefit (2012) and COLI
settlement (2011)                                          (20.2 )       16.9          0.5
GAAP earnings                                           $  948.2     $  905.2     $  841.2


Diluted Earnings (Loss) Per Share                          2013         2012         2011
Ongoing diluted earnings per share (a)                  $   1.95     $   1.82     $   1.72
SPS 2004 FERC complaint case orders (2013),
prescription drug tax benefit (2012) and COLI
settlement (2011)                                          (0.04 )       0.03            -
GAAP diluted earnings per share (a)                     $   1.91     $   1.85     $   1.72

(a) Includes the dividend requirements on preferred stock in 2011.

The following tables summarize the earnings contributions of Xcel Energy's business segments.

(Millions of Dollars)                    2013        2012        2011
GAAP income (loss) by segment
Regulated electric income              $ 850.7     $ 851.9     $ 789.0
Regulated natural gas income             123.7        98.1       101.8
Other income (a)                          44.6        22.1        17.9
Xcel Energy Inc. and other costs (a)     (70.8 )     (66.9 )     (67.5 )
Total net income                       $ 948.2     $ 905.2     $ 841.2


Contributions to Diluted Earnings (Loss) Per Share     2013       2012       2011
GAAP earnings (loss) by segment
Regulated electric                                   $ 1.71     $ 1.74     $ 1.62
Regulated natural gas                                  0.25       0.20       0.21
Other (a)                                              0.09       0.05       0.04
Xcel Energy Inc. and other costs (a) (b)              (0.14 )    (0.14 )    (0.15 )
Total diluted earnings per share (b)                 $ 1.91     $ 1.85     $ 1.72

(a) Not a reportable segment. Included in all other segment results in Note 17 to the consolidated financial statements.

(b) Includes the dividend requirements on preferred stock (2011).

Statement of Income Analysis

The following discussion summarizes the items that affected the individual revenue and expense items reported in the consolidated statements of income.

Estimated Impact of Temperature Changes on Regulated Earnings - Unusually hot summers or cold winters increase electric and natural gas sales while, conversely, mild weather reduces electric and natural gas sales. The estimated impact of weather on earnings is based on the number of customers, temperature variances and the amount of natural gas or electricity the average customer historically uses per degree of temperature. Accordingly, deviations in weather from normal levels can affect Xcel Energy's financial performance, from both an energy and demand perspective.


Table of Contents

Degree-day or Temperature-Humidity Index (THI) data is used to estimate amounts of energy required to maintain comfortable indoor temperature levels based on each day's average temperature and humidity. Heating degree-days (HDD) is the measure of the variation in the weather based on the extent to which the average daily temperature falls below 65 Fahrenheit, and cooling degree-days (CDD) is the measure of the variation in the weather based on the extent to which the average daily temperature rises above 65 Fahrenheit. Each degree of temperature above 65 Fahrenheit is counted as one cooling degree-day, and each degree of temperature below 65 Fahrenheit is counted as one heating degree-day. In Xcel Energy's more humid service territories, a THI is used in place of CDD, which adds a humidity factor to CDD. HDD, CDD and THI are most likely to impact the usage of Xcel Energy's residential and commercial customers. Industrial customers are less sensitive to weather.

Normal weather conditions are defined as either the 20-year or 30-year average of actual historical weather conditions. The historical period of time used in the calculation of normal weather differs by jurisdiction based on the time period used by the regulator in establishing estimated volumes in the rate setting process. To calculate the impact of weather on demand, a demand factor is applied to the weather impact on sales as defined above to derive the amount of demand associated with the weather impact.

The percentage increase (decrease) in normal and actual HDD, CDD and THI are provided in the following table:

    2013 vs.    2012 vs.    2013 vs.    2011 vs.    2012 vs.
     Normal      Normal       2012       Normal       2011
HDD     6.5 %    (15.9 )%     25.8  %     (1.0 )%    (14.8 )%
CDD    24.7       46.1       (13.6 )      38.1         5.7
THI    21.8       36.1        (9.7 )      37.9        (0.2 )

Weather - The following table summarizes the estimated impact of temperature variations on EPS compared with sales under normal weather conditions:

                  2013 vs.      2012 vs.     2013 vs.      2011 vs.      2012 vs.
                   Normal        Normal        2012         Normal         2011
Retail electric  $    0.088    $  0.081     $    0.007    $    0.080    $  0.001
Firm natural gas      0.021      (0.033 )        0.054         0.002      (0.035 )
Total            $    0.109    $  0.048     $    0.061    $    0.082    $ (0.034 )

Sales Growth (Decline) - The following tables summarize Xcel Energy's sales growth (decline) for actual and weather-normalized sales for the years ended Dec. 31, compared with the previous year:

                                                                                    Dec. 31, 2013
                                                     Dec. 31, 2013             (Without 2012 Leap Day)
                                                              Weather                            Weather
                                                 Actual      Normalized        Actual          Normalized
Electric residential                               1.1 %         0.2 %            1.4 %             0.5 %
Electric commercial and industrial                   -           0.1              0.3               0.4
. . .
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