XEL

Business Context and Reporting Period

Xcel Energy Inc. filed its Annual Report on Form 10-K for the fiscal year ended December 31, 2003. Xcel Energy is a registered holding company under the Public Utility Holding Company Act of 1935, operating five regulated utility subsidiaries serving electric and natural gas customers in 11 states. The reporting period was defined by significant portfolio restructuring, including the divestiture of its nonregulated subsidiary NRG Energy, Inc. (NRG) following NRG's Chapter 11 bankruptcy reorganization, and the sale of regulated natural gas assets Viking Gas Transmission Co. and Black Mountain Gas Co. (BMG).

Key Financial Metrics

Note: The 2002 net loss was primarily driven by discontinued operations related to NRG. Income from continuing operations remained relatively stable year-over-year.

Material Changes vs. Prior Period

• Discontinued Operations: The most significant change was the reclassification of NRG Energy, Inc. to discontinued operations. In 2002, NRG contributed a loss of $3.4 billion. In 2003, NRG contributed a loss of $251 million, significantly improved by a $111 million reversal of previously recorded losses and $288 million in tax benefits upon divestiture.
• Asset Base Reduction: Total assets decreased by approximately $9.2 billion from 2002 to 2003, primarily due to the deconsolidation of NRG's assets following its bankruptcy reorganization and the sale of Viking and BMG.
• Regulated Utility Performance: Regulated electric utility income from continuing operations decreased slightly to $462.5 million (from $486.8 million in 2002) due to higher operating costs, weather impacts, and share dilution. Regulated natural gas utility income increased to $94.9 million (from $89.0 million).
• Debt Refinancing: Xcel Energy issued approximately $1.7 billion of long-term debt in 2003 to refinance higher-coupon debt, aiming to reduce interest costs in 2004.

Guidance, Outlook, and Risks

2004 Earnings Guidance

Xcel Energy provided the following diluted earnings per share (EPS) guidance for 2004 from continuing operations:

• Utility Operations: $1.25 - $1.33
• Holding Company Financing Costs: $(0.08)
• Seren Innovations: $(0.03)
• Other Nonregulated: $0.00 - $0.02
• Total Continuing Operations EPS: $1.15 - $1.25

Key Assumptions and Outlook

• NRG Impact: NRG is expected to have no impact on 2004 financial results.
• Sales Growth: Weather-adjusted retail electric sales growth of 2.2% and firm gas sales growth of 2.4% are projected.
• Capital Expenditures: Estimated at $1.22 billion for 2004, including new steam generators at Prairie Island and combustion turbines in Minnesota/South Dakota.
• NRG Settlement: Xcel Energy is obligated to pay up to $752 million to NRG in 2004 to settle claims. This is expected to be funded by cash on hand, credit facilities, and tax refunds associated with the NRG write-off.

Risks and Contingencies

• Regulatory Investigations: Ongoing investigations by the CFTC (settled for $16 million regarding e prime reporting), SEC (regarding "round trip" trades), and FERC (regarding market behavior and transmission inquiries).
• Environmental Liabilities: Significant exposure related to nuclear decommissioning (estimated obligation of $1.52 billion discounted) and site remediation (estimated liability of $43.2 million).
• Tax Matters: The IRS has disallowed interest expense deductions related to corporate-owned life insurance (COLI) policy loans for 1993-1997. If the IRS prevails, earnings could be reduced by an estimated $254 million after tax.
• Legal Proceedings: Pending litigation includes a class action regarding securities disclosures, shareholder derivative actions, and disputes over service quality and reliability.

Investor Verification Checklist

• NRG Settlement Funding: Verify the timing and sufficiency of tax refunds and credit facility availability to fund the $752 million NRG settlement payment due in 2004.
• Regulatory Rate Cases: Monitor the outcome of the PSCo 2002 general rate case settlement and the SPS fuel surcharge application, which impact future revenue recovery.
• Tax Dispute Resolution: Track the status of the IRS challenge regarding COLI interest deductions, which poses a potential $254 million earnings risk.
• Capital Project Costs: Review progress and cost estimates for the Minnesota Emissions Reduction Project (MERP) and the proposed Colorado coal plant, as cost overruns could impact rate recovery.
• Dividend Sustainability: Confirm that retained earnings remain sufficient to support the declared dividend policy under PUHCA restrictions, given the recent history of deficit earnings.