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Why Is Xcel Energy’s Rising Debt So Concerning?

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Apr. 5 2016, Updated 8:07 a.m. ET

Debt profile

Utilities were one of the prime beneficiaries of near-zero interest rates after the financial crisis. Xcel Energy’s (XEL) leverage also increased in this period. At the end of the fourth quarter of 2015, its total debt stood at $13 billion. Its debt-to-equity ratio was 1.3x, while its debt-to-capitalization ratio was 0.6x.

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Assessing Xcel Energy’s leverage

The graph above shows Xcel’s total debt against its debt-to-EBITDA (earnings before interest, tax, depreciation, and amortization) ratio. We can see a steady rise in total debt and debt-to-EBITDA.

As of December 31, 2015, Xcel Energy’s debt-to-EBITDA was 4.3x. Its three-year historical debt-to-EBITDA multiple was near 4x. A debt-to-EBITDA ratio shows how many years it will take a company to repay its debt using EBITDA. Utilities are asset-rich businesses that have heavy debt. So leverage is an important metric for analyzing utilities.

The debt-to-asset ratio represents the portion of a company’s assets that are financed by debt. It assesses a company’s financial risk. Xcel Energy has a debt-to-asset ratio of 0.3x. DTE Energy (DTE) has a debt-to-asset ratio of 0.3x, and CMS Energy’s (CMS) is 0.4x.

Credit rating

Xcel Energy has a “stable” outlook and a credit rating of A- from Standard & Poor’s. Utilities (FXU) overall had a BBB+ credit rating at the end of the fourth quarter of 2015. Xcel’s exclusive regulated operations could be the reason behind its better credit rating compared to utilities (JXI).

Next, let’s look at Xcel Energy’s forward yield and stock, which reached new highs.

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