XEL

Business Context and Reporting Period

Company: Xcel Energy Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2003
Business Overview: Xcel Energy operates regulated electric and natural gas utilities and nonregulated energy businesses. The reporting period is significantly impacted by the May 14, 2003, voluntary Chapter 11 bankruptcy filing of its major nonregulated subsidiary, NRG Energy, Inc. (NRG). Consequently, Xcel Energy changed its accounting for NRG from consolidation to the equity method effective as of the bankruptcy filing date, retroactively applied to January 1, 2003.

Key Financial Metrics

Note: Figures are in millions of dollars unless otherwise noted. Net loss is driven primarily by equity in losses of NRG.

Material Changes vs. Prior Period

• NRG Accounting Change: The most significant change is the deconsolidation of NRG. In 2002, NRG was consolidated; in 2003, it is reported under the equity method. This resulted in a single line item "Equity in losses of NRG" of $(351) million for the quarter and $(364) million for the six months, compared to consolidated revenues and expenses in 2002.
• Revenue Decline: Total operating revenues decreased by approximately 20% for the quarter and 15% for the six months compared to the prior year, primarily due to the removal of NRG's consolidated revenues and a decrease in nonregulated revenues.
• Net Loss vs. Net Income: The company reported a net loss of $(283) million for the quarter and $(143) million for the six months, a sharp reversal from net income of $87 million and $191 million in the comparable 2002 periods. This is attributable to NRG losses and asset impairments.
• Special Charges: Special charges decreased significantly to $7 million for the quarter and $9 million for the six months in 2003, compared to $60 million and $74 million in 2002. The 2002 charges included significant NRG restructuring and asset impairment costs.
• Discontinued Operations: In 2003, the company recognized a gain of $21 million (after tax) from the sale of Viking Gas Transmission Co., reported in discontinued operations. This contrasts with 2002, which included income from discontinued NRG projects.

Guidance, Outlook, and Risks

Management Commentary and Outlook

• NRG Settlement: Xcel Energy has reached a tentative settlement with NRG creditors. Xcel Energy may pay up to $752 million to NRG to settle claims, contingent on bankruptcy court approval and creditor releases. This payment is expected to be funded by cash on hand and tax benefits from the write-off of the NRG investment.
• Tax Benefits: Xcel Energy expects to claim a worthless stock deduction on its NRG investment, generating estimated tax benefits of $706 million recognized in 2002 and potentially up to $100 million more in 2003. Additional benefits of over $260 million may be recorded upon settlement approval.
• Dividend Policy: Due to a retained earnings deficit of approximately $245 million, Xcel Energy may lack sufficient retained earnings to pay the third-quarter dividend without a waiver from the SEC under the Public Utility Holding Company Act (PUHCA). The company intends to request authorization to pay the dividend out of capital and unearned surplus.
• Utility Operations: Regulated utility earnings were impacted by cooler-than-normal weather in the second quarter, higher purchased capacity costs, and increased employee benefit costs. However, retail sales growth provided a partial offset.

Risks and Contingencies

• NRG Bankruptcy Resolution: There is uncertainty regarding the final terms of the NRG reorganization plan and the timing of its emergence from bankruptcy. Failure to consummate the settlement could alter financial commitments.
• Substantive Consolidation: While Xcel Energy believes it is unlikely, there is a risk that a bankruptcy court could order the substantive consolidation of Xcel Energy and NRG, which would have a material adverse effect.
• Regulatory Investigations:
  • NSP-Minnesota: An investigation by the Minnesota Public Utilities Commission (MPUC) found inconsistencies and potential manipulation in service quality records. A hearing is expected within two to four months.
  • FERC/California: Ongoing investigations into potential market manipulation in California electricity markets. PSCo was named in a show cause order regarding circular scheduling, though data did not list PSCo as engaging in the practice.
  • CFTC: An investigation into the reporting of natural gas transactions by e prime (a subsidiary) to industry publications. Xcel Energy has suspended/terminated employees and is cooperating.
• Legal Proceedings: Various lawsuits remain, including the St. Cloud gas explosion litigation and disputes with Connecticut Light & Power regarding contract termination.

Investor Verification Checklist

• NRG Settlement Status: Verify the progress of the NRG bankruptcy plan of reorganization and the likelihood of the $752 million settlement payment being approved by the bankruptcy court and creditors.
• Dividend Authorization: Monitor SEC filings for the status of the request to pay the third-quarter dividend out of capital and unearned surplus due to the retained earnings deficit.
• Tax Benefit Realization: Confirm the timing and amount of tax refunds expected from the NRG investment write-off and the impact on future cash flows.
• Regulatory Outcomes: Track the results of the MPUC investigation into NSP-Minnesota's service quality records and the FERC/CFTC investigations regarding market conduct and reporting.
• Utility Weather Impact: Assess the sensitivity of future utility earnings to weather variations, given the adverse impact of cool weather in Q2 2003.
• Debt Maturities: Review the company's financing plans for upcoming debt maturities, particularly for PSCo and NSP-Minnesota, to ensure liquidity remains adequate.