XEL

Xcel Energy Inc. 10-Q Summary: Quarter Ended March 31, 2001

Business Context and Reporting Period

This Form 10-Q covers the three-month period ended March 31, 2001, for Xcel Energy Inc., a Minnesota-based holding company formed in August 2000 via the merger of New Century Energies, Inc. (NCE) and Northern States Power Co. (NSP). The company operates regulated electric and gas utilities in 12 states and maintains significant nonregulated interests, primarily through its competitive power producer, NRG Energy, Inc. (NRG).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 81% year-over-year, driven by a 27.6% rise in electric utility revenue, a 97.5% surge in gas utility revenue (due to higher commodity costs passed to customers), and a 323% increase in electric and gas trading revenues.
• Profitability: Net income rose 36% to $209.3 million. Earnings per share increased from $0.45 to $0.61. Regulated EPS contributed $0.56, while nonregulated EPS contributed $0.05.
• Margin Expansion: Electric utility margin increased by $51 million, and gas utility margin increased by $19 million, largely due to cooler winter temperatures increasing demand and favorable market conditions in trading operations.
• Accounting Changes: The adoption of SFAS 133 (Accounting for Derivative Instruments) on January 1, 2001, resulted in a net transition loss of $29 million in other comprehensive income but increased Q1 2001 earnings by approximately $10 million (3 cents per share) due to mark-to-market gains on derivatives.
• Capital Structure: Interest expense increased 25.8% to $175.8 million, primarily due to higher debt levels funding NRG acquisitions. Short-term debt increased significantly to $2.2 billion.

Guidance, Outlook, Risks, and Unusual Items

• NRG Acquisitions: NRG Energy aggressively expanded its portfolio, acquiring a 5,633-megawatt portfolio from LS Power for ~$777 million and increasing ownership in several other facilities. NRG also completed a secondary stock offering in March 2001, reducing Xcel's ownership from 82% to 74% and generating a $242 million gain recorded in equity (not earnings).
• California Power Market Risk: NRG has approximately $217 million in receivables from California utilities (PG&E, SCE) and the California ISO/PX. PG&E filed for Chapter 11 bankruptcy in April 2001. While NRG believes receivables will be collected, timing and amounts remain uncertain. FERC orders may require refunds of up to $22.5 million of NRG's share of revenues from Jan/Feb 2001.
• Regulatory Contingencies:
  • Cheyenne (Wyoming): Facing significant increases in purchased power costs. A rate increase application is pending, with $9 million in costs deferred pending regulatory approval.
  • French Island (Wisconsin): EPA found the plant in violation of large combustor regulations. The company faces potential penalties and operational changes.
  • Minnesota Conservation Incentives: A $41 million liability remains recorded for potential customer refunds pending final implementation of a court decision.
• Yorkshire Power Sale: Xcel sold the majority of its investment in Yorkshire Power in April 2001 for ~$366 million, retaining a 5% interest. Proceeds were used to pay down short-term debt.
• Outlook: Management notes that quarterly results are not necessarily indicative of annual results due to seasonality and variability in nonregulated operations. Xcel expects to have over 600 megawatts of wind power capacity online by the end of 2001.

Investor Verification Checklist

• California Receivables Collectibility: Verify the status of the $217 million in receivables owed by PG&E, SCE, and the California ISO/PX following PG&E's bankruptcy filing.
• NRG Debt Covenants: Confirm that NRG has secured lender forbearance regarding covenant defaults triggered by delayed collections in California.
• Regulatory Rate Approvals: Monitor the Wyoming Public Service Commission's decision on Cheyenne's rate increase application and the recoverability of the $9 million in deferred costs.
• French Island Compliance: Track the resolution of EPA violations and potential costs associated with emission control upgrades or penalties.
• NRG Ownership Dilution: Assess the long-term impact of the reduced ownership stake in NRG (74%) on Xcel's consolidated earnings and future capital allocation.