XEL

Xcel Energy Inc. 10-Q Summary: Quarter Ended June 30, 2001

Business Context and Reporting Period

This Form 10-Q covers the quarterly and six-month periods ended June 30, 2001, for Xcel Energy Inc., a holding company formed in August 2000 by 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 energy businesses, primarily through its 74% ownership of NRG Energy, Inc. The financial statements are unaudited but reviewed by Arthur Andersen LLP.

Key Financial Metrics

Note: Revenue growth was driven by higher fuel costs passed through to customers, increased trading volumes, and acquisitions by NRG. Operating margins improved in utility segments despite higher fuel costs.

Material Changes vs. Prior Period

• Revenue Surge: Total operating revenues increased 66% year-over-year to $7.93 billion. Electric utility revenue rose 28% and gas utility revenue rose 88%, largely due to higher commodity costs passed through to customers and favorable weather conditions.
• Profitability: Net income increased 27% to $377 million. Earnings per share rose from $0.87 to $1.10. This growth was aided by a $35 million reversal of a liability related to Minnesota conservation incentives and strong performance from NRG's acquired assets.
• Special Charges: The company recorded a $23 million pre-tax charge related to the write-off of regulatory assets for deferred postemployment benefits at PSCo following a Colorado Supreme Court decision. This reduced earnings by approximately 4 cents per share.
• Capital Expenditures: Investing cash outflows increased significantly to $3.0 billion, primarily due to $2.8 billion in nonregulated capital expenditures and asset acquisitions by NRG.
• Debt Levels: Total debt increased substantially to fund NRG's expansion. Long-term debt rose by $2.5 billion, and short-term debt increased by $794 million.

Guidance, Outlook, and Risks

Management Commentary: Management notes that quarterly results are not necessarily indicative of annual results due to seasonality and variability in nonregulated operations. The company expects trading margins in the second half of 2001 to be weaker than the first half due to a decline in the forward price curve.

Regulatory and Legal Risks:

• California Power Market: NRG faces significant credit risk in California due to the bankruptcy of PG&E and the California Power Exchange. Approximately $218 million in receivables are owed to NRG's California affiliates. While NRG expects full collection, timing and amounts remain uncertain. FERC price caps may require refunds of up to $22.5 million.
• Restructuring Delays: Legislation in Texas and New Mexico has delayed electric utility restructuring until 2007. Consequently, Southwestern Public Service (SPS) has abandoned plans to divest generation assets and will continue under traditional cost-of-service regulation.
• Environmental Compliance: NSP-Wisconsin faces potential fines and litigation regarding dioxin emissions at the French Island plant and must install new control equipment to comply with EPA regulations.

Accounting Changes: The company adopted SFAS 133 (Derivatives) on Jan 1, 2001, resulting in a net transition loss of $29 million recorded in other comprehensive income. Future adoption of SFAS 142 (Goodwill) and SFAS 143 (Asset Retirement Obligations) is expected to have immaterial earnings impacts initially.

Investor Verification Checklist

• California Receivables: Verify the collectibility and timing of the $218 million owed to NRG affiliates in California given the ongoing bankruptcy proceedings of major utilities.
• NRG Acquisition Integration: Assess the financial performance and integration risks of NRG's recent acquisitions (Conectiv, PowerGen, Vattenfall) which drove significant revenue growth but also increased debt.
• Regulatory Asset Recovery: Monitor the status of SPS's request to recover $45 million in restructuring costs in Texas and New Mexico, and PSCo's ability to recover costs related to the Fort St. Vrain repowering.
• Derivative Exposure: Review the impact of SFAS 133 on earnings volatility, particularly regarding the mark-to-market valuation of energy and interest rate derivatives.
• Debt Servicing: Evaluate the company's ability to service increased debt levels ($12.3 billion total debt) given the high capital expenditure requirements of the nonregulated segment.