XEL

Xcel Energy Inc. 10-Q Summary: Period Ended June 30, 2006

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, including Minnesota, Wisconsin, Colorado, New Mexico, and Texas. The report covers the three and six months ended June 30, 2006. The company is classified as a Large Accelerated Filer. As of July 28, 2006, there were 405,967,399 shares of common stock outstanding.

Key Financial Metrics

Note: Operating margins for the electric utility segment were approximately 43.7% for the quarter and 42.6% for the six-month period.

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased by 0.5% for the quarter and 11.4% for the six months compared to the same periods in 2005. Electric utility revenues rose due to rate increases in Minnesota and Wisconsin, the Metro Emissions Reduction Project (MERP) rider, and fuel cost recovery. Natural gas revenues decreased in the quarter due to lower gas costs but increased year-to-date due to higher costs passed through to customers.
• Profitability: Net income increased 17.8% for the quarter and 21.8% for the six months. Earnings per share (diluted) rose from $0.20 to $0.24 for the quarter and from $0.49 to $0.60 for the six months.
• Margin Drivers: Base electric utility margins increased significantly ($71 million for the quarter, $138 million for six months) driven by interim rate increases in Minnesota and weather impacts. Conversely, short-term wholesale and commodity trading margins declined due to retail sales growth reducing surplus generation and the impact of MISO centralized dispatch markets.
• Expenses: Operating and maintenance expenses increased slightly, while depreciation and amortization rose by approximately 5% due to plant additions and changes in decommissioning accruals.
• Tax Rate: The effective tax rate for continuing operations decreased to 17.3% for the quarter (from 24.1% in 2005) and 23.0% for the six months (from 25.6% in 2005), primarily due to the recognition of tax benefits from capital loss carryforwards.

Guidance, Outlook, and Risks

2006 Earnings Guidance: Management projects diluted earnings per share from continuing operations for the full year 2006 to be in the range of $1.25 to $1.35. This guidance assumes normal weather, reasonable rate recovery in Minnesota, and the continued recognition of corporate-owned life insurance (COLI) tax benefits.

Key Risks and Contingencies:

• Tax Litigation (COLI): Xcel Energy is litigating with the IRS regarding the deductibility of interest expense on corporate-owned life insurance policies. If the IRS prevails, the company estimates a potential reduction in retained earnings of approximately $419 million (excluding penalties) or $497 million (including penalties) through year-end 2006. Annual earnings could be reduced by approximately $44 million (10 cents per share).
• Regulatory Proceedings: Significant rate cases are pending in Minnesota (NSP-Minnesota), Colorado (PSCo), and Texas (SPS). Outcomes regarding rate increases, wholesale margin sharing, and fuel cost recovery will materially impact future results.
• Environmental Compliance: The company faces capital expenditures for compliance with the Clean Air Interstate Rule (CAIR), Regional Haze Rules (BART), and mercury emission regulations. Estimated costs include approximately $165 million for BART alternatives in Colorado and $30 million for NOx controls in Texas.
• Legal Proceedings: Various lawsuits are pending, including claims related to natural gas price manipulation (e prime), carbon dioxide emissions (global warming), and pension plan fiduciary duties. Management believes most claims are without merit or have been settled without material impact.

Investor Verification Checklist

• COLI Tax Outcome: Verify the status of the litigation with the IRS regarding COLI interest deductions, as a loss could materially reduce earnings and retained earnings.
• Minnesota Rate Case: Monitor the final order from the Minnesota Public Utilities Commission (MPUC) regarding the NSP-Minnesota electric rate case, specifically the approved revenue increase and treatment of wholesale margins.
• Wholesale Margin Sharing: Confirm the final approval of the settlement agreement regarding the sharing of short-term wholesale and commodity trading margins with retail customers in Minnesota.
• Environmental Capital Expenditures: Track actual capital spending against estimates for BART, CAIR, and mercury compliance projects to assess impact on future cash flows and rate cases.
• Discontinued Operations: Review the final disposition of assets held for sale related to discontinued operations (Quixx, Seren, etc.) to ensure no unexpected losses or liabilities arise.