Xcel Energy: Focus On Renewal With A Renewable Energy Move (NASDAQ:XEL)


For 10 years, citizens in Boulder have been considering whether to create a public power utility that would replace electric service provided in the city by Public Service Company of Colorado, a subsidiary of Xcel Energy (NASDAQ:XEL).

On August 20, 2020, the Boulder, Colorado City Council voted to place a tentative agreement between the City of Boulder and Xcel Energy on the November city election ballot.

If approved by the voters in November, the agreement would stop a decade-long effort to create a municipal electric utility in the city and residents and businesses in the city would remain Xcel Energy customers.

Current Xcel Energy plans in Colorado

Xcel Energy stresses that it is a vertically integrated utility with generation, transmission, and distribution assets over eight states.

Source: Xcel Energy: Goldman Sachs Conference, August 2020

Moving towards increasing its renewable energy portfolio, the company produced a Colorado Energy Plan, which was approved in 2018 by the Colorado Public Utilities Commission. That plan includes:

  • Xcel Energy will retire 660 MW of coal-fired generation early and reduce carbon emissions 60% by late 2025 (from 2005 levels).
  • We will add 1,100 MW of wind, up to 700 MW of solar and up to 275 MW of storage, and 383 MW of existing natural gas generation to our Colorado fleet.

As a result, coal becomes a smaller portion of the company’s asset base.

Xcel Energy asset baseSource: Xcel Energy: Goldman Sachs Conference, August 2020

Tentative agreement

In 2019, the City of Boulder chose to pursue its clean energy policy by offering to buy Xcel Energy’s assets located inside the city for $93.96 million, which the city stated was double the original cost of the assets, less depreciation.

This effort stumbled as the coronavirus caused a downturn in the local economy, caused the city to reconsider whether starting a municipal utility was the best use of its financial assets, and led to the current settlement with the company.

On July 28, 2020, the city and Xcel came to a tentative agreement, which they are calling a new partnership that includes:

  • Right for Boulder to resume municipalization efforts at the five-, 10- or 15-year anniversaries for any reason, and in 2023, 2025, and 2028, if Xcel Energy fails to meet specified emission targets.
  • Preserves Boulder’s ability to create a local electric utility in the future by reducing future potential litigation.
  • Creates a pathway for Boulder to achieve 100% renewable electricity in Boulder by updating Boulder’s electric grid, sharing data and developing innovative demonstration projects under the guidance of a community board.
  • Committed both parties to work collaboratively to change current regulations that limit innovation and local renewable development.
  • Allow the city to use Xcel Energy’s distribution poles to implement a municipal broadband system, should the city choose to do so at a later date. (supplement agreement).
  • Xcel Energy will allow the election process to proceed without its intervention directly in a campaign, including this fall’s election to approve the franchise or any election to terminate the franchise based on emissions targets in 2022.

Source: City of Boulder, Colorado

Impact on Xcel shareholders

Many utilities, like Xcel Energy, are moving towards renewable energy, but the challenge for Xcel is its current debt load, which totals $23 billion or, to put it another way, it carries a debt/equity ratio of 173%. The company posted negative changes to net working capital for 2017, 2018, and 2019.

Annual cash from operations continues to hover around $3.1 to $3.2 billion per year, and current plans are contingent upon a continued low interest rate environment.

Xcel Energy Financing PlanSource: Xcel Energy: Goldman Sachs Conference, August 2020

The company’s capitalization stands at approximately 51% long-term debt and 40% equity. It offers a current dividend of $1.72 that translates into a current yield of less than 2.5%.

Xcel Energy capital forecastSource: Xcel Energy: Goldman Sachs Conference, August 2020

Boulder’s efforts may already be having an impact on the company, which announced that it would seek a rider rather than ask for a full electric rate case in Colorado.

Xcel Energy Colorado RiderSource: Xcel Energy: 2020 Q2 Presentation

Xcel argues that its balance sheet is satisfactory.

Xcel Energy balance sheetSource: Xcel Energy: Goldman Sachs Conference, August 2020

And its credit metrics remain positive.

Xcel Energy credit metrics Source: Xcel Energy: Goldman Sachs Conference, August 2020

The company remains committed to a steady increase in dividends.

Xcel Energy CAGR Source: Xcel Energy: Goldman Sachs Conference, August 2020

And shows how it has performed compared to peer organizations.

Xcel Energy peer performance Source: Xcel Energy: Goldman Sachs Conference, August 2020

Beyond Boulder

Boulder is not the only city in Colorado which has considered a switch to a municipal electric utility. In May, citizens of Pueblo, Colorado, voted to continue to receive electricity from Black Hills Energy, although citizens’ Electric Utility Commission (EUC) made up of residents continues to consider the viability of a municipal electric utility.

Citizens of Pueblo are watching how the Boulder-Xcel agreement unfolds, as it will influence the future direction of Pueblo’s EUC.

Black Hills has proposed building a 200-megawatt solar project in Pueblo County, Colorado, which may dampen some of the opposition to the utility.

Black Hills Energy Pueblo CO renewables planSource: Black Hills Energy 2020 Q2 Presentation

Conclusion

Even though electric utilities are making progress in adopting renewable energy, they will continue to feel pressure from customers who feel that their progress is too slow.

There are several positive effects in moving towards renewable energy, including a cleaner environment and gaining support from customers who can influence decisions by state regulators concerning the utility’s future rate requests.

For Xcel Energy shareholders, acceptance of this new “partnership” between the City of Boulder and Xcel Energy will accelerate efforts to move Xcel Energy towards renewable energy and lower emissions and increase customer satisfaction with the company.

For a regulated utility, support from customers is a valuable consideration for state regulators when considering changes in rate structures.

These opportunities can lead to a faster transformation of the company and an improved long-range outlook for the company, which benefits all stakeholders, including shareholders.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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