XEL

Xcel Energy Inc. 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2000, for Xcel Energy Inc. The reporting period is significant as it reflects the first full quarter following the merger of New Century Energies, Inc. (NCE) and Northern States Power Company (NSP) on August 18, 2000, which formed Xcel Energy. The company operates regulated electric and gas utilities and nonregulated energy businesses, including NRG Energy, Inc. (82% owned).

Key Financial Metrics

Material Changes vs. Prior Period

• Earnings Decline: Earnings per share dropped from $0.63 in Q3 1999 to $0.27 in Q3 2000. This decrease was primarily driven by $201 million in pretax special charges related to the NSP/NCE merger (reducing EPS by $0.43) and an extraordinary item related to Southwestern Public Service Company (SPS) restructuring (reducing EPS by $0.02).
• Revenue Growth: Total revenue increased 41% year-over-year for the quarter ($1.82 billion to $2.56 billion) and 34% for the nine-month period ($5.07 billion to $6.77 billion). This growth was fueled by the consolidation of NCE's nonregulated businesses and increased sales volumes.
• Nonregulated Expansion: Nonregulated revenue surged from $186 million in Q3 1999 to $611 million in Q3 2000, largely due to NRG Energy's acquisitions and favorable market conditions.
• Debt Levels: Interest charges increased 49% in the quarter and 66% year-to-date, reflecting higher debt levels used to fund NRG's asset acquisitions.

Guidance, Outlook, and Risks

• Merger Integration: Management anticipates incurring an additional $30 million in merger-related transition and severance costs in Q4 2000. Most integration activities are expected to be completed by early 2001.
• Regulatory Restructuring: SPS is subject to restructuring legislation in Texas (SB-7) and New Mexico, requiring the unbundling of generation, transmission, and distribution. SPS must divest a minimum of 1,750 MW of generation assets by Jan 1, 2002, and potentially up to 3,184 MW by Jan 1, 2006, to comply with market share limits.
• Accounting Changes: The company plans to adopt SFAS No. 133 (Accounting for Derivative Instruments) in 2001. This is expected to result in a one-time cumulative effect adjustment and increased earnings volatility due to fair value accounting for derivatives.
• Legal Contingencies: Significant litigation includes lawsuits related to a gas explosion in St. Cloud, MN (10 lawsuits filed), and a fire in Grand Forks, ND (defense verdict reached in Sept 2000, but appeals possible). FERC investigations into California wholesale markets may impact NRG revenues.
• Capital Markets: Xcel Energy filed a $1 billion universal debt registration and plans to issue approximately $600 million of debt in Q4 2000. NRG is authorized to raise up to $600 million in equity via a follow-on offering.

Investor Verification Checklist

• Merger Synergies: Verify the timeline and cost realization of the $201 million special charges and the projected $30 million Q4 accruals.
• SPS Divestitures: Monitor the progress of SPS's required asset sales in Texas and New Mexico to ensure compliance with SB-7 and avoid regulatory penalties.
• NRG Performance: Assess the integration and profitability of NRG's recent acquisitions (Cajun, Killingholme, Flinders) and the impact of FERC price caps on ancillary services.
• Regulatory Rate Cases: Track the outcomes of pending rate cases in Colorado (PSCo gas rates) and Texas/New Mexico (SPS restructuring costs) which could impact future revenue recovery.
• Debt Servicing: Review the company's ability to service increased debt levels ($1.87B short-term, $7.13B long-term) amidst rising interest rates and potential earnings volatility from SFAS 133 adoption.