There's a heavy dose of irony contained within the third-quarter 2019 earnings report from Xcel Energy (NASDAQ:XEL). The company is one of the largest investors in wind energy in the United States and last year committed its four regional electric utilities to deliver 100% zero-carbon energy by 2050. It's on pace to reduce its carbon emissions 80% from 2005 levels by 2030. It expects to rely on renewables for 48% of its electricity mix by 2027.
Yet through the first nine months of 2019, it appears all of the company's year-over-year earnings growth came from oil and gas customers operating in the Permian Basin. In fact, it was the only customer group in any territories served by Xcel Energy to see electricity sales growth in that span compared to the year-ago period.
Investors shouldn't get used to it. Xcel Energy expects to earn several rate increases in 2020 on its way to delivering at least 5% to 7% annual growth in earnings per share (EPS). Here's what investors need to know about the latest operating results and some important updates for the road ahead.
By the numbers
Xcel Energy owns four electric and gas utilities from the Upper Midwest to Texas. There's Public Service Company of Colorado (PSCo), NSP-Minnesota, NSP-Wisconsin, and Southwestern Public Service (SPS). The last one serves parts of Texas and New Mexico that include the Permian Basin, perhaps the world's most important source of crude oil growth at the moment. Good thing, too, because oil and gas customers in the region have been the only one of eight customer groups served by the company's utilities to grow electricity sales through the first nine months of 2019 compared to the same period of 2018.
It certainly shows. SPS contributed diluted earnings of $0.42 per share through the first nine months of 2019, compared to just $0.34 in the year-ago period. Xcel Energy delivered diluted EPS of $2.08 across its operations in the first three quarters of this year, compared to $2.05 in the same period of last year. In other words, SPS has been responsible for keeping the company on track to meet its full-year 2019 guidance.
To be fair, electric utilities are at the whim of the weather and whether or not industrial customers generate their own energy from co-generation activities. Xcel Energy CEO Ben Fowke reminded investors of that on the third-quarter 2019 earnings conference call, saying not to interpret quarterly electricity sales increases or declines as trends.
The important thing is that the business remains on track. Management narrowed full-year 2019 earnings guidance to the top half of its previous range, expecting $2.60 to $2.65 per share. Xcel Energy also initiated full-year 2020 EPS guidance of $2.73 to $2.83, which would be in line with expectations to grow earnings 5% to 7% per year.
The near-term growth will be supported primarily by regulatory approvals for rate increases in Colorado, New Mexico, and Texas -- all of which have passed ambitious state mandates for zero-carbon renewable energy that will support Xcel Energy's growth plans. The company should also receive a boost from the addition of 1,918 megawatts of owned wind power capacity through 2021, which will cement its position as a leading renewable energy stock.
Several additional highlights that investors may only have learned by listening to or reading the transcript of the third-quarter 2019 earnings conference call:
- Going unregulated?: Xcel Energy submitted a plan to acquire the Mankato natural gas-fired power plant in Minnesota and include the asset in its rate base (read: as a regulated asset), but the state commission denied the request. The company resubmitted its acquisition proposal with a subtle change: to acquire Mankato as an unregulated asset. The returns should be the same over the long haul, but there's slightly more risk involved. Analysts were caught off guard by the move, although management noted that the asset is strategically important to ensure reliability because of coal retirements and that acquiring unregulated assets is never Plan A.
- Frack sand impact: Electricity sales in Wisconsin fell 3.1%, in large part because of continued shifts away from Northern White Sand, which used to be the dominant frack sand and is mined primarily in the state. Of course, oil and gas customers in the Permian Basin more than made up the difference.
- Transmission admission: Congested electricity distribution systems in the Upper Midwest are beginning to impact renewable energy growth plans in the region. While Xcel Energy is large enough to dodge the worst effects in the near term, management noted that it may "get the band back together" and reassemble an industry consortium to tackle the problem. The investments wouldn't be made within the next five years, but they may be necessary to clear the way for the company's long-term solar energy growth strategy in the region.
- Wind is here to stay: Pointing out that Xcel Energy's wind energy investments drop off in 2022 -- coinciding with reductions in the production tax credit (PTC) -- analysts asked if wind power still had a place in the company's long-term growth. Management admitted that its next big renewable-energy push will be heavy in solar energy but reminded analysts that the company's geography will always make wind power a favorable investment.
A solid quarter with steady growth to come
Xcel Energy turned in another strong quarter and continues to reap the benefits of its favorable geography. While that's generally been noted when discussing siting for solar and wind energy projects, this year the company has taken advantage of serving customers in the Permian Basin. Of course, the most important characteristic of the business in the minds of investors is that it generates substantially all of its earnings from regulated assets, which guarantees growth and removes risk. That should set the stage for continued growth in 2020.