XEL

Xcel Energy Inc. 10-Q Summary: Quarter Ended March 31, 2003

Business Context and Reporting Period

This Form 10-Q covers the three-month period ended March 31, 2003. Xcel Energy Inc. operates regulated electric and natural gas utilities and nonregulated energy businesses, most notably NRG Energy, Inc. (NRG). The reporting period is dominated by the severe financial distress of NRG, which filed for voluntary Chapter 11 bankruptcy protection on May 14, 2003, shortly after the quarter-end. The filing includes a tentative settlement agreement between Xcel Energy and NRG creditors.

Key Financial Metrics

Note: Net income includes a significant gain from discontinued operations ($212.2 million). Income from continuing operations was a loss of $72.2 million.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 14.8% year-over-year, driven by higher electric utility sales, increased natural gas costs passed through to customers, and growth in nonregulated operations.
• Discontinued Operations: Net income was significantly boosted by a $191.2 million gain on the disposal of NRG's Killingholme project and a $21.2 million gain on the sale of Viking Gas Transmission Co., reported as discontinued operations.
• Continuing Operations Loss: Excluding discontinued operations, the company reported a loss from continuing operations of $72.2 million, compared to income of $93.9 million in Q1 2002. This deterioration was caused by NRG's restructuring costs, asset impairments, and increased interest expenses.
• Special Charges: Special charges increased to $47.2 million in Q1 2003 from $14.1 million in Q1 2002, primarily due to NRG restructuring costs ($22 million) and asset impairments ($24 million).
• Interest Expense: Interest charges increased 51.2% to $285.3 million, largely due to higher debt levels at NRG.

Guidance, Outlook, and Risks

NRG Bankruptcy and Settlement: The most critical development is NRG's Chapter 11 filing. Xcel Energy has reached a tentative settlement with NRG creditors to pay up to $752 million to settle claims and restructure NRG's debt. This payment is contingent on court approval and creditor releases. Xcel Energy expects to fund this via cash on hand and tax benefits from writing off its NRG investment.

Accounting Changes: Xcel Energy adopted SFAS No. 143 (Asset Retirement Obligations) effective Jan 1, 2003, recording an $866 million increase in long-term liabilities and a $684 million increase in plant assets. Future accounting for NRG will shift from consolidation to the equity method once the bankruptcy plan is effective.

Risks and Contingencies:

• Substantive Consolidation: There is a risk that a bankruptcy court could consolidate Xcel Energy and NRG, which would have a material adverse effect on Xcel Energy, though management believes this is unlikely.
• Regulatory Matters: Pending rate cases in Colorado (PSCo) and Texas (SPS) involve fuel cost recovery mechanisms. Disallowances of costs could impact future earnings.
• Legal Investigations: The CFTC is investigating Xcel Energy's affiliates regarding the reporting of natural gas transactions ("round-trip trades").

Investor Verification Checklist

• Settlement Finality: Verify the status of the $752 million NRG settlement agreement and whether the requisite creditor signatures and court approvals have been obtained.
• Deconsolidation Timing: Confirm the exact date NRG will be deconsolidated from Xcel Energy's financial statements and the impact on leverage ratios.
• Tax Benefit Realization: Monitor the realization of the estimated $706 million tax benefit from the NRG investment write-off and the timing of the expected $355 million tax refund.
• Regulatory Outcomes: Track the resolution of the PSCo general rate case and the FERC complaints regarding fuel cost recovery, as these affect future revenue streams.
• CFTC Investigation: Review updates on the CFTC investigation into trading practices to assess potential fines or penalties.