Xcel Energy’s stock is struggling in the face of flashier, market-driven power companies whose returns have soared along with rising prices for electricity.
While Xcel has built a reputation as a steady performer with a solid dividend, utilities with a more aggressive approach of selling excess power in unregulated markets are outpacing Xcel in stock performance.
Colorado’s largest electric and gas utility also has been hurt more than some of its peers by rising interest rates that have pushed Xcel shares down 16 percent since April.
Xcel’s total return – a measure of stock-price gains plus dividends – over the past year is 13.4 percent. The average gain for all U.S. utilities is 26.5 percent.
Within Xcel’s smaller peer group of largely regulated utilities, Xcel’s total return so far this year is negative 7.2 percent compared with an average decline of 0.3 percent.
Xcel is based in Minneapolis but is Colorado’s largest utility with 1.3 million electric customers and 1.2 million natural gas customers.
Denver investment manager Bruce Allen said he recently sold all his Xcel shares – not because he disliked the company, but because he sought the higher returns of utilities with unregulated wholesale power sales such as Dallas-based TXU Corp.
Paul Johnson, Xcel’s managing director of investor relations, acknowledges the current return-on-investment gap between Xcel and more- aggressive utilities.
“Right now investor sentiment favors companies with nonregulated affiliates,” he said. “When power prices go up they can make a significant amount of net income.
“But we like the regulated model. There has been no change in our long-term strategy. We think it benefits shareholders and customers.”
Nonregulated utilities cash in
Xcel and many other utilities are valued by investors for their steady dividend payments that make them an attractive alternative to bonds and U.S. Treasury securities. Utility stocks also have provided a relatively safe haven from market volatility in recent years.
Some power companies such as TXU and American Electric Power of Columbus, Ohio, have used their nonregulated divisions to sell excess power at premium prices to other utilities. That has given those firms a boost from investors looking for big profits and stock-price appreciation.
Yet ironically, Xcel in 2003 unloaded its bankrupt merchant-power unit, NRG Energy, in order to focus on the less-risky regulated utility business. Its investment in NRG was so disastrous that Xcel agreed to pay NRG’s creditors $752 million to take the albatross off its hands.
Analysts and investors at the time saluted Xcel for its decision to become an exemplar of a nonflashy, steady utility firm with predictable revenues and dividends.
The strategy worked, with Xcel shares more than doubling from $11 in early 2003 to the recent peak of $24.99 in April.
Xcel has received national acclaim for its move toward renewable energy and carbon reductions. Plus, it has benefited from $384 million in electric and natural gas rate increases over the past two years, mostly in Colorado and Minnesota.
But since Xcel dumped NRG, the nation’s power glut has subsided and rising prices for natural gas – the fuel utilities use when they need a quick power fix for peak demand times – has made wholesale power merchants highly profitable.
Angie Storozynski, a utilities analyst with New York-based HSBC Securities, recently downgraded her investment rating for Xcel and other utilities because of rising interest rates.
The yield on 10-year Treasury notes has risen from 4.5 percent in March to 5.1 percent, making Xcel’s dividend yield of 4.5 percent less attractive by comparison.
“We see mostly regulated utility stocks (including Xcel) as dividend-driven investments, and therefore strongly dependent on the level of Treasury yields,” Storozynski said. “With no or limited upside from improving wholesale power markets in the U.S., we believe higher T-yields are sharply reducing valuations of regulated utilities.”
But utility analyst Charles Fishman of St. Louis-based A.G. Edwards recently upgraded his Xcel rating to “buy” because he viewed a tax settlement with the Internal Revenue Service as a positive. In that lawsuit settlement, Xcel agreed to pay $64.4 million in back taxes to the IRS.
IRS issue actually helps stock
The dispute stemmed from Xcel taking tax deductions on the interest it paid for corporate-owned life insurance policies on some of its employees.
“We have really liked the entire Xcel story, but we had been concerned that if the company had lost the (tax) trial, the back taxes and potential penalty of $500 million would have required Xcel to issue common equity,” Fishman said. “We believe the elimination of the (tax problem) makes Xcel one of the simplest stories in the utility industry for investors.”
Resolving the IRS issue prompted Fitch Ratings to upgrade Xcel’s credit rating, making it cheaper for the utility to borrow money.
Staff writer Steve Raabe can be reached at 303-954-1948 or sraabe@denverpost.com.
