XEL

Xcel Energy Inc. 10-Q Summary: Quarter Ended September 30, 2004

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2004, for Xcel Energy Inc., a holding company for regulated electric and natural gas utilities and nonregulated subsidiaries. The company operates primarily in Minnesota, Wisconsin, Colorado, and Texas. The reporting period is significantly impacted by the classification of several businesses as discontinued operations, including the broadband subsidiary Seren Innovations, the regulated utility CLF&P (held for sale), and the divestiture of NRG Energy and international assets.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased slightly in the quarter ($2,008.6M vs. $2,001.6M in 2003) and rose 5.4% year-to-date ($6,085.9M vs. $5,772.8M in 2003). Growth was driven by higher electric utility revenues and natural gas utility revenues, partially offset by a decline in nonregulated revenues.
• Profitability Decline: Net income dropped significantly to $46.7 million in Q3 2004 from $287.5 million in Q3 2003. This decline is primarily due to a $119.5 million loss from discontinued operations in 2004, compared to a $102.8 million gain in 2003. The 2004 loss includes a $112 million impairment charge for Seren Innovations.
• Continuing Operations: Income from continuing operations decreased to $166.2 million in Q3 2004 from $184.6 million in Q3 2003, largely due to adverse weather impacts reducing utility earnings by approximately $0.07 per share.
• Expense Management: Depreciation and amortization decreased by $10 million in the quarter and $52 million year-to-date, attributed to regulatory extensions of asset lives (nuclear plants) and changes in decommissioning accruals.

Guidance, Outlook, and Risks

• Discontinued Operations: The company is actively divesting non-core assets. Seren Innovations is expected to be sold in Q1 2005. The sale of CLF&P is pending SEC approval. International assets (Argentina) are being liquidated.
• Regulatory Risks:
  • IRS COLI Litigation: The IRS has challenged the deductibility of interest on Corporate-Owned Life Insurance (COLI) policy loans. If the IRS prevails, the exposure could reach approximately $380 million (including penalties) through Dec 31, 2004, potentially reducing 2004 annual earnings by $35 million ($0.08 per share).
  • FERC & Rate Cases: Ongoing proceedings include Midwest ISO market implementation, FERC market-based rate reviews, and various state rate cases (Minnesota, Colorado, Texas) regarding fuel cost recovery and transmission rates.
• Environmental Liabilities: Significant contingent liabilities exist regarding Manufactured Gas Plant (MGP) site remediation (e.g., Fort Collins, Levee Station) and compliance with the Federal Clean Water Act, with estimated capital costs ranging up to $55 million.
• Capital Expenditures: Utility capital expenditures increased to $856.5 million for the first nine months of 2004, reflecting continued investment in infrastructure.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the final sale price and timing for Seren Innovations and CLF&P to assess the permanence of the $119.5 million Q3 loss.
• COLI Tax Litigation: Monitor the status of the lawsuit against the IRS regarding COLI interest deductibility, as a loss could materially impact future earnings.
• Weather Normalization: Review weather-normalized earnings to understand the underlying performance of the regulated utility segments, as Q3 2004 was negatively impacted by mild weather.
• Regulatory Approvals: Track the approval status of the CLF&P sale and the outcomes of pending rate cases in Minnesota, Colorado, and Texas.
• Environmental Costs: Assess the final remediation costs for MGP sites and Clean Water Act compliance, as current estimates may change.