XEL

Xcel Energy Inc. 10-Q Summary: Period Ended September 30, 2005

Business Context and Reporting Period

This is a quarterly report (Form 10-Q) for Xcel Energy Inc., a regulated utility holding company operating electric and natural gas utilities in multiple states (Minnesota, Wisconsin, Colorado, Texas, New Mexico). The report covers the three and nine months ended September 30, 2005. The company is currently divesting non-regulated subsidiaries, including Utility Engineering Corp. (sold in April 2005) and Seren Innovations (held for sale), which are reported as discontinued operations.

Key Financial Metrics

Note: 2004 figures include significant losses from discontinued operations ($117.1 million net loss) which were largely absent in 2005, driving the year-over-year net income increase.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 12.6% year-over-year. Electric utility revenues rose 13.0% and natural gas revenues rose 12.1%, driven primarily by higher fuel and purchased power costs passed through to customers and favorable weather conditions in the third quarter.
• Profitability: Net income from continuing operations remained relatively flat ($400.1 million in 2005 vs. $400.0 million in 2004). However, total net income increased significantly due to the absence of the $119 million impairment charge related to Seren Innovations recorded in 2004.
• Operating Expenses: Operating and maintenance expenses increased by $76 million (6.5%) for the nine-month period, attributed to nuclear plant refueling outages, higher employee benefit costs (pension and performance-based compensation), and litigation adjustments.
• Depreciation: Depreciation and amortization increased by $56 million (10.8%) due to new steam generators at the Prairie Island nuclear plant and software system additions.
• Discontinued Operations: The 2004 period included a $112 million after-tax impairment charge for Seren. In 2005, discontinued operations resulted in a minimal net loss of $1.8 million for the quarter and a small net income of $0.8 million for the nine months.

Guidance, Outlook, and Risks

Earnings Guidance:

• 2005: Diluted EPS from continuing operations is guided at $1.18 - $1.28. Management currently expects results to be in the lower half of this range. This assumes normal weather in Q4 and continued recognition of Corporate-Owned Life Insurance (COLI) tax benefits ($0.09 per share).
• 2006: Diluted EPS from continuing operations is guided at $1.25 - $1.35. Assumptions include reasonable rate recovery in pending cases (Minnesota, Wisconsin, Colorado) and a 3-4% increase in operating expenses.

Key Risks and Contingencies:

• Tax Litigation (COLI): Xcel Energy is litigating with the IRS regarding the deductibility of interest on corporate-owned life insurance policies. If the IRS prevails, earnings could be reduced by an estimated $350 million (pre-tax) through 2005, or approximately $40 million after-tax ($0.09 per share). The company currently records the tax benefit.
• Fuel Supply Disruptions: Coal deliveries from the Powder River Basin have been disrupted due to rail issues, forcing a shift to more expensive natural gas and purchased power. While cost recovery mechanisms exist, there is uncertainty regarding the timing and full recovery of these costs in Texas and Colorado.
• Regulatory Matters: Pending rate cases in Wisconsin, Colorado, and Minnesota are critical for cost recovery. Additionally, the FERC is investigating market-based rate authority for certain subsidiaries, and new EPA rules (CAIR and Mercury) will require significant capital investments ($30M-$300M) starting in 2010.
• Environmental Liabilities: Significant remediation costs are associated with the Ashland Manufactured Gas Plant site in Wisconsin, with estimates ranging from $4 million to $93 million. A liability of $18 million has been recorded.

Investor Verification Checklist

• COLI Tax Position: Verify the status of the IRS litigation and the likelihood of the $350 million exposure materializing, as this is a major contingent liability.
• Fuel Cost Recovery: Monitor regulatory decisions in Texas (SPS) and Colorado (PSCo) regarding the recovery of increased fuel costs due to coal supply disruptions.
• Rate Case Outcomes: Track the final rulings on the 2006 rate cases in Wisconsin and Minnesota, which are key assumptions for 2006 earnings guidance.
• Discontinued Operations: Confirm the closing dates and final proceeds for the sales of Seren Innovations and Quixx Corp.
• Capital Expenditures: Review the execution of the $1.255 billion 2005 capital plan, specifically the Comanche 3 coal plant construction and emissions reduction projects.