Xcel Energy Inc. 10-Q Summary: Quarter Ended September 30, 2001
Business Context and Reporting Period
This Form 10-Q covers the three and nine months ended September 30, 2001, for Xcel Energy Inc., a registered holding company formed by the 2000 merger of New Century Energies and Northern States Power. The company operates regulated electric and gas utilities in 12 states and maintains significant nonregulated energy businesses, primarily through its subsidiary NRG Energy, Inc. (in which Xcel held approximately 74% ownership as of September 30, 2001).
Key Financial Metrics
| Metric (Nine Months Ended Sept 30) | 2001 (in millions) | 2000 (in millions) |
|---|---|---|
| Total Operating Revenues | $11,693 | $7,898 |
| Net Income | $650 | $389 |
| Earnings Per Share (Diluted) | $1.88 | $1.14 |
| Operating Cash Flow | $1,338 | $975 |
| Investing Cash Flow | ($4,623) | ($2,807) |
| Financing Cash Flow | $3,364 | $1,956 |
| Total Assets | $27,746 | $21,769 |
| Long-Term Debt | $10,960 | $7,583 |
| Short-Term Debt | $2,211 | $1,475 |
Material Changes vs. Prior Period
- Revenue Growth: Total operating revenues increased 48% year-over-year (nine months), driven by a 20% increase in electric utility revenue and a 76% increase in gas utility revenue. Gas revenue growth was primarily due to higher natural gas costs passed through to customers.
- Profitability: Net income increased 67% to $650 million. Diluted EPS rose to $1.88 from $1.14. The 2000 period was negatively impacted by $201 million in merger-related special charges and restructuring costs, which were absent in 2001.
- Segment Performance:
- NRG Energy: Nonregulated earnings improved significantly due to a larger generation portfolio from acquisitions (Conectiv, Indeck, McClain, etc.) and strong operating performance.
- Regulated Utilities: Electric margins increased slightly due to sales growth and favorable weather, partially offset by higher fuel costs. Gas margins decreased in the third quarter due to accrual revisions in Minnesota but increased year-to-date.
- Capital Structure: Total debt increased substantially to fund NRG's aggressive acquisition strategy. Long-term debt rose by approximately $3.4 billion.
Guidance, Outlook, Risks, and Unusual Items
- Accounting Changes: The company adopted SFAS 133 (Derivatives) on January 1, 2001. This resulted in a net transition loss of $29 million recorded in other comprehensive income and reduced net income by approximately $14 million for the nine months ended September 30, 2001, primarily due to mark-to-market impacts on NRG's derivative instruments.
- Regulatory Developments:
- SPS Restructuring: Texas and New Mexico legislation delayed electric utility restructuring until 2007. SPS reapplied regulatory accounting (SFAS 71) and abandoned plans to divest generation assets.
- Conservation Incentives: A Minnesota Supreme Court decision allowed the recovery of 1998 conservation incentives, increasing earnings by 7 cents per share.
- Postemployment Benefits: A Colorado Supreme Court decision denied recovery of deferred postemployment benefit costs, resulting in a $23 million write-off (4 cents per share reduction).
- California Power Market Risk: NRG faces significant credit risk in California due to the bankruptcy of PG&E and SCE and the California Power Exchange. Approximately $230 million in receivables are owed to NRG affiliates. While NRG expects full collection, timing and amount remain uncertain. FERC orders regarding price caps could require refunds of up to $22.5 million.
- Legal Proceedings: Ongoing litigation includes a lawsuit against the U.S. Department of Energy regarding spent nuclear fuel storage (seeking over $1 billion) and environmental compliance issues at the French Island plant in Wisconsin.
- Outlook: Management notes that short-term wholesale and trading margins are expected to decline in the remainder of 2001 and 2002 due to falling forward energy prices. NRG continues to pursue asset acquisitions to expand its portfolio.
Investor Verification Checklist
- California Receivables: Verify the collectibility status of the $230 million owed to NRG affiliates by California utilities and the potential impact of FERC price cap refunds.
- NRG Debt Levels: Assess the sustainability of NRG's increased leverage ($1.6 billion in interest rate swaps and significant term loans) given the volatility of merchant power markets.
- Regulatory Recovery: Monitor the outcome of SPS's application to recover restructuring costs in Texas and New Mexico, and the status of PSCo's postemployment benefit cost recovery.
- Derivative Exposure: Review the impact of SFAS 133 on future earnings volatility, particularly regarding NRG's energy trading and hedging activities.
- Environmental Liabilities: Track the costs and compliance status of the French Island plant retrofit and the Craig Station emission control equipment.