Xcel Energy Inc. (XEL-NYSE)

Transcription

1 January 30, 2015 Xcel Energy Inc. (XEL-NYSE) Current Recommendation Prior Recommendation SUMMARY DATA NEUTRAL Underperform Date of Last Change 04/23/2003 Current Price (01/29/15) $38.11 Target Price $ Week High $ Week Low $28.16 One-Year Return (%) Beta 0.29 Average Daily Volume (sh) 2,430,494 Shares Outstanding (mil) 506 Market Capitalization ($mil) $19,284 Short Interest Ratio (days) 3.92 Institutional Ownership (%) 69 Insider Ownership (%) 1 Annual Cash Dividend $1.20 Dividend Yield (%) Yr. Historical Growth Rates Sales (%) 2.7 Earnings Per Share (%) 5.9 Dividend (%) 4.4 using TTM EPS 18.8 using 2015 Estimate 18.2 using 2016 Estimate 17.3 Zacks Rank *: Short Term 1 3 months outlook 2 - Buy * Definition / Disclosure on last page SUMMARY Xcel Energy Inc. s earnings and revenues in the fourth quarter and 2014 surpassed the Zacks Consensus Estimate and increased year over year primarily due to increased electric rates at its service territories. The company s stable financial position and disciplined investments in infrastructure projects are expected to boost future performance. Focus on adding renewables will help the company achieve its target of curbing carbon emissions. A large portion of the company s capital expenditure from will be directed towards transmission and natural gas. In addition, positive economic fundamentals and constructive regulatory outcome will likely support the company s revenue stream. However, an increase in projected operating expenses and tighter environmental legislations might limit the company s profitability. Thus, we are maintaining our Neutral recommendation on the stock. Risk Level * Type of Stock Low, Large-Blend Industry Util-Elec Pwr Zacks Industry Rank * 113 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) ,783 A 2,579 A 2,822 A 2,731 A 10,915 A ,203 A 2,685 A 2,870 A 2,929 A 11,686 A ,243 E 2,574 E 3,924 E 2,252 E 11,993 E ,324 E Earnings Per Share Estimates (EPS is operating earnings before non-recurring items, but including employee stock options expenses) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2013 $0.48 A $0.40 A $0.77 A $0.30 A $1.95 A 2014 $0.52 A $0.39 A $0.73 A $0.39 A $2.03 A 2015 $0.54 E $0.43 E $0.82 E $0.30 E $2.09 E 2016 $2.20 E Projected EPS Growth - Next 5 Years % Zacks Investment Research, All Rights reserved North Canal Street, Chicago IL 60606

2 RECENT NEWS Xcel Energy Tops Q4 Earnings, Revenues on Rate Hike Jan 29, 2015 Xcel Energy Inc. (XEL) recorded operating earnings of $0.39 per share in the fourth quarter of 2014, outpacing the Zacks Consensus Estimate of $0.34 by 14.7%. Quarterly earnings also increased 30% from the year-ago figure on the heels of increased electric rates. Earnings for 2014 were reported at $2.03 per share, ahead of the Zacks Consensus Estimate of $1.99. On a year-over-year basis, earnings escalated 4.1%. Total Revenue Xcel Energy s fourth-quarter revenues of $2,928.6 million surpassed the Zacks Consensus Estimate of $2,876 million and increased 7.2% year over year. In 2014, revenues of $11.69 billion were ahead of the Zacks Consensus Estimate of $10.91 billion and were up 7.1% over the prior year. Segment Revenue Electric: Revenues from this segment in the quarter increased 6% year over year to $2,250.2 million. Natural Gas: Quarterly revenues from the Natural Gas business escalated 11.7% to $657.3 million. Other: Segment revenues of $21.2 million in the reported quarter increased 3.9% from $20.4 million in the year-ago period. Quarterly Highlights Total operating expenses climbed 5.5% year over year to $2,537.4 million. Increasing costs can primarily be attributed to a rise in electric fuel and purchased power, cost of natural gas sold and operation and maintenance expenses. These costs spiraled due to volatility in the price of natural gas, coal and uranium used in power generation. Operating income surged 20.2% year over year to $391.3 million. Total interest charges and financing costs, after Allowance for funds used during construction ("AFUDC"), decreased 14.7% year over year at the end of the fourth quarter 2014 to $20.9 million. Financial Update Total debt as of Dec 31, 2014, was $12.8 billion out of which long-term debt was $11.5 billion. In Mar 2014, Xcel Energy issued $300 million of 4.30% first mortgage bonds due Mar 15, Again in May 2014, the company issued $300 million, 4.125% first mortgage bonds due May 15, In Jun 2014, Xcel Energy issued $150 million, 3.30% first mortgage bonds due Jun 15, In the same month, Xcel Energy sold $100 million, 3.30% first mortgage bonds due Jun 15, In 2015, Xcel Energy plans to issue $500 million of senior unsecured bond. The company s four subsidiaries collectively expect to issue first mortgage bonds worth $1200 million. Equity Research XEL Page 2

3 2015 Guidance Xcel Energy reiterated its 2015 earnings guidance in the range of $2.00 $2.15 per share. On a weathernormalized basis, the company expects retail electric utility sales to increase 1% while natural gas sales to decline 2%. Various operating expenses such as depreciation expense, property taxes and interest expense are expected to rise over 2014 levels. VALUATION Xcel Energy s current trailing 12-month earnings multiple is 18.8, compared with 21.6 average for the peer group and 18.4 for the S&P 500. For the last five years, the company s shares have traded in the multiple range of 13.1x to 18.8x trailing 12-month earnings. The company s Return on Equity (ROE) of 9.9% in the trailing twelve months is much higher than its industry peers. This indicates that the company is investing its funds more efficiently than its peers. Our target price of $40.00 reflects 19.1x based on 2015 EPS. Key Indicators F1 F2 Est. 5-Yr EPS Gr% P/CF 5-Yr High 5-Yr Low Xcel Energy Inc. (XEL) Industry Average S&P DTE Energy Company (DTE) Datang International Power Generation Co., Ltd. (DIPGY) N/A N/A N/A Centrais Eletricas Brasileiras SA (ADR) (EBR.B) N/A N/A N/A N/A N/A Centrais Elétricas Brasileiras S.A. Eletrobrás (EBR) N/A N/A N/A N/A N/A N/A 6.4 TTM is trailing 12 months; F1 is 2015 and F2 is 2016, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Xcel Energy Inc. (XEL) Industry Average S&P N/A 2.0 N/A Equity Research XEL Page 3

4 Earnings Surprise and Estimate Revision History NOTE THIS IS A NEWS-ONLY UPDATE; THE REST OF THIS REPORT HAS NOT BEEN UPDATED YET. Equity Research XEL Page 4

5 OVERVIEW Minneapolis, MN-based Xcel Energy Inc. is a holding company, with subsidiaries engaged primarily in the utility business. Xcel is a major U.S. electricity and natural gas company, with operations in eight states Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas and Wisconsin. Through its four regulated utility subsidiaries Northern States Power Company (NSP)-Minnesota, NSP- Wisconsin, Public Service Company of Colorado (PSCo) and Southwestern Public Service Co. (SPS) the company serves roughly 3.5 million electricity customers and almost 1.9 million natural gas customers. Along with WYCO Development LLC (WYCO) and West Gas Inter State Inc. (WGI), these companies comprise the regulated utility operations. Xcel s operating utilities are engaged in the generation, purchase, transmission, distribution and sale of electricity in the U.S. The utilities generate electricity using coal, nuclear, hydro, wind and solar energy. Except SPS, the company s remaining utilities also purchase, transport, distribute and sell natural gas to retail customers, as well as transport customer-owned natural gas. Xcel s operating company, NSP-Minnesota, conducts business in Minnesota, North Dakota and South Dakota. At the end of 2013, NSP-Minnesota provided electric utility services to around 1.4 million customers and natural gas utility services to roughly 0.5 million customers. NSP-Minnesota s direct subsidiaries are real estate-based Utility Power & Land Company and NSP Nuclear Corporation. NSP-Minnesota s earnings contribution ranges from 35% to 45% of Xcel Energy s consolidated net income. Through its subsidiary, NSP-Wisconsin, Xcel Energy provides services in Wisconsin and Michigan. In 2013, the subsidiary served roughly 0.3 million electric customers and more than 0.1 million natural gas customers. NSP-Wisconsin s earnings range between 5% and 10% of Xcel Energy s consolidated net income. Public Service Company (PSCo) is an operating company that does business in Colorado. It provides services to roughly 1.4 million and 1.3 million electricity and natural gas customers, respectively. PSCo s earnings range is consistently between 45% and 55% of Xcel Energy s consolidated net income. Southwestern Public Service Co. (SPS) is an operating company that does business in Texas and Colorado. In 2013, it provided electricity utility services to a widened consumer base of 383,000 in Texas and New Mexico. SPS earnings range between 5% and 15% of Xcel Energy s consolidated net income. WYCO Development is a joint venture with a subsidiary of El Paso Corporation to develop and lease natural gas pipeline, storage and compression facilities. Xcel has a 50% ownership interest in WYCO. West Gas Inter State Inc. (WGI) is an interstate natural gas pipeline company engaged in transporting natural gas from the PSCo system to the Cheyenne system. Over the years, the company has successfully divested nearly all of its non-regulated businesses. Xcel Energy's only non-regulated subsidiary in continuing operations is Eloigne, which invests in rental housing projects that qualify for low-income housing tax credits. Equity Research XEL Page 5

6 Revenue Mix (2013) Natural Gas 15% Other 1% Electric 84% Source: Company REASONS TO BUY Xcel Energy continues to invest substantially in its utility assets to provide reliable services to its customers and effectively meet the rising electricity demand. The company s capital outlay from 2015 through 2019 is set at roughly $14.5 billion, including $3.4 billion for The company s capital allocation is primarily directed at transmission, generation and distribution projects. Xcel Energy, the largest partner in the CapX2020 transmission expansion initiative in the Upper Midwest, a collaboration of 11 utilities, is progressing well with 345 Kilovolt (Kv) of transmission line projects. The company has permit for more than 1,000 miles 345-kilovolt projects in seven states. The company schedules to start its fourth 345-Kv transmission line venture, spanning from Big Stone South to Brookings County, SD, in Sizeable investments in infrastructure development projects will enhance Xcel Energy s service capability, besides providing better returns in the coming years. Recently, the company has filed federal application for its TransCos Xcel Energy Transmission Development Company, LLC and Xcel Energy Southwest Transmission Company, LLC. This initiative will allow both the newly formed entities to participate in the Midcontinent Independent System Operator, Inc. (MISO) and Southwest Power Pool, Inc. (SPP) transmission competitive bidding processes and focus more on transmission investments. Xcel Energy expects to spend $4.5 billion over the next five years under this program. Xcel Energy is currently diversifying its generation portfolio with emphasis on renewable sources. The company has already reduced carbon dioxide emissions during power generation by around 20% since To further reduce emissions, the company plans to add 600 MW of wind energy to its portfolio by On the solar front, 187 MW of large-scale solar energy is planned by the end of With the current pulse in the U.S. market favoring green energy, Xcel Energy s large-scale clean energy projects will prove beneficial in the long run. Besides wind assets, the company is working on boosting its solar generation capacity. In Aug 2014, the company launched a new Minnesota Solar Rewards program giving customers the option to install photovoltaic systems on their rooftops. These initiatives will collectively help the company to meet the targeted renewable energy standards. Equity Research XEL Page 6

7 Generation Mix (2013) Generation Mix (2020) Wind 14% Nuclear 11% Hydro 4% Other 2% Coal 46% Nuclear 12% Hydro 2% Other 3% Coal 43% Natural gas 23% Wind 22% Natural gas 18% Source: Company The sign of economic improvement is prominent across Xcel Energy s service territories, especially in Minnesota, in comparison to the nation on the whole. The consolidated unemployment rate at the company s service territory is lower than the national average. The optimism in the market continues to drive the company s sales. Xcel Energy witnessed growth of 1.7% in commercial and industrial revenues in the first nine months of The company s future performance will likely improve with the gradual economic recovery. Apart from a recovering economy, positive outcomes from rate cases also play a vital role in the utility s performance. The company reaps benefit from rate increases at regular intervals and will keep doing so unless the sales volume drops substantially. We believe the upbeat market dynamics and constructive regulatory outcomes will keep Xcel Energy well-positioned for the future. Xcel Energy continues to maintain a strong financial position. As of Sep 30, 2014, the company had available liquidity of around $1.85 billion. As of Sep 30, 2014, the company had cash and cash equivalents of around $1.38 billion, compared with $1.07 billion as of Dec 31, The improvement in the cash position was primarily driven by a stable cash generation capacity through operating activities. During the first nine months of 2014, the company s cash flow from operating activities increased $1.4 million or 0.1% year over year. A stable financial position will enable the company to effectively meet its financial obligations and pay regular dividends. During the first nine months of 2014, the company distributed $0.42 billion as dividends, up 10.5% year over year. Regular dividend payments will enable Xcel Energy to retain investors interest in the stock. REASONS TO SELL Coal is the primary fuel for Xcel Energy s mode of power generation. On Jun 2, 2014, the U.S. Environmental Protection Agency (EPA) proposed the Clean Power Plan. The EPA has held the power generating plants responsible for being the largest source of carbon pollution in the U.S. Per the proposal, carbon emissions from the power sector have to be reduced by 30% by 2030 from 2005 levels. The company generated 46% of electricity from coal-fired plants in The law will probably come into effect from mid If the proposal is approved without any downward revision in emission rates, Xcel Energy will have to invest more to execute pollution control measures at its power generation facilities. These initiatives will likely increase the company s operating expenses, thereby impacting future margins. Electric and natural gas utility businesses are heavily impacted by changes in weather patterns. The demand for electricity is generally higher during the summer and winter months, mainly due to cooling and heating requirements. Milder weather conditions during these periods significantly weaken utility demand and Xcel Energy is not immune to it. Equity Research XEL Page 7

8 Xcel Energy s natural gas transmission and distribution operations are exposed to several risks, including explosions, leaks and mechanical setbacks. These incidents can affect the company s operations, thereby impacting its financial performance. DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of XEL. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1052 companies covered: Outperform %, Neutral %, Underperform 5.5%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Research Analyst Copy Editor Content Ed. Lead Analyst QCA Vinita Agarwal Jewel Saha Jewel Saha Jewel Saha Equity Research XEL Page 8