01—Abstract
Summary
Summary of the 10-K filed March 15, 2004. Cited figures are marked; the original filing is the authoritative source.
Xcel Energy's FY2003 10-K shows a company in transition after the NRG bankruptcy and divestiture.
Reported 2003 GAAP net income was $622.4 milliona, or $1.50 diluted EPS, versus a $2.2 billion loss ($5.77 per share) in 2002, which was driven by NRG impairments. Income from continuing operations was $510.0 million ($1.23 diluted), down from $527.7 million in 2002, and the decline reflects higher operating costs, weather, and share dilution. Much of the 2003 swing comes from discontinued operations, including a $251 million NRG equity loss offset by $339.5 million of other nonregulated gains and $404 million of NRG-related tax benefits, so investors should focus on continuing-operations EPS of $1.23 and the 2004 guidance range of $1.15 to $1.25.
The regulated utility base is the core of the franchise, with five utility subsidiaries serving customers in 11 states. Continuing-operations revenue was $7.94 billionb, and the electric segment's contribution fell to $462.5 million. The company is also exiting nonregulated businesses, having agreed to sell Cheyenne Light, Fuel and Power and planning exits from Xcel Energy International and e prime.
Total assets fell to $20.2 billionc from $29.4 billion, and the balance sheet still carries sizable regulatory and litigation exposure. Key items include a $752 million settlement payment to NRG (of which $400 million was paid in February 2004), a pending CFTC settlement of $16 million, pending FERC market-power matters, the Minnesota Emissions Reduction Project (about $1 billion), and the IRS challenge to COLI interest deductions (potential $254 million after-tax earnings impact). The company expects to use roughly $1.1 billion of tax benefits from the NRG divestiture to fund settlement payments and reduce taxes.
Dividends were $0.75d per share in 2003, versus $1.13 in 2002, after a cut to $0.1875 per quarter. The dividend reduction was driven by PUHCA restrictions and by the goal of funding growth internally. Management projects 2004 capital requirements of $1.4 billion, rising to $2.1 billion in 2006, and plans to deleverage through internally generated cash flow.
02—Key points
Key Highlights
- Reported 2003 GAAP net income of $622.4M ($1.50 diluted EPS) vs. a $2.2B loss in 2002 (-$5.77), largely due to the NRG-related swing in discontinued operations
- Continuing-operations diluted EPS fell to $1.23 from $1.37, pressured by higher utility O&M, weather, and 2003 share dilution of about 12 cents per share
- NRG divestiture completed Dec. 2003; Xcel owes $752M in settlement payments ($400M paid Feb. 2004, $352M due April 2004) funded partly by about $1.1B of expected tax-benefit cash savings
- 2004 EPS guidance for continuing operations of $1.15–$1.25, assuming NRG has no impact and normal weather
- Total assets declined to $20.2B from $29.4B following the deconsolidation of NRG and other discontinued operations
- Dividend reduced to $0.1875/quarter in 2003 (from $0.375 in early 2002); PUHCA limits dividends to retained earnings, which were $369M at year-end 2003
- Significant legal and regulatory overhangs: CFTC e prime settlement ($16M), FERC market-power and refund proceedings, IRS COLI interest disallowance (potential $254M after-tax), and securities/ERISA class actions
03—Questions
Frequently Asked Questions
Is Xcel Energy's underlying business profitable after the NRG fallout?
Yes, on a continuing basis. Income from continuing operations was $510M in 2003, and the regulated electric and natural gas utility segments contributed $564M of segment income. The holding company and nonregulated subsidiaries (Seren broadband losses, financing costs) reduced results by $54M. The company is now focused on its regulated utility operations.
Why did reported net income swing so dramatically between 2002 and 2003?
The 2002 loss of $2.2B was driven by NRG's more than $3B of asset impairments and restructuring charges, reported within discontinued operations. In 2003, NRG's loss was reduced to $251M after PUHCA-related equity-method limits, and Xcel booked $404M of NRG-related tax benefits, so the 2003 result is not representative of ongoing earnings.
What are the biggest risks to future earnings and cash flow?
Key risks include the $752M NRG settlement timing and its funding through tax refunds; the outcome of the IRS COLI disallowance (about $254M after-tax if the IRS prevails); FERC decisions on market-based rate authority and the SMA screen; Minnesota and Colorado regulatory proceedings (including the MERP recovery and the PSCo electric earnings tests); and the possibility of an economic slowdown affecting sales growth. The company also faces the regulatory uncertainty around RTO formation and the MISO and SPP market designs.
How is Xcel managing its capital needs and balance sheet?
Capital requirements total about $1.4B in 2004 and $2.1B in 2006, including the $1B MERP and new generation projects. The company plans to fund them mainly with internally generated cash, periodic debt and equity issuance, and about $1.1B of NRG-related tax savings. In 2003 it refinanced about $1.7B of higher-coupon debt, and it reports a common equity ratio of about 43%, above the 30% PUHCA financing condition. Its senior unsecured debt is rated investment grade (Baa3/BBB-).
Will the dividend be restored to its prior level?
Not in the near term based on this filing. The dividend was cut to $0.1875 per quarter in 2002, and 2003 dividends were $0.75 per share versus $1.13 in 2002. Dividends are paid from retained earnings under PUHCA, which had a $369M balance at year-end 2003. Management says dividend policy will balance cash generation, capital investment, returns to shareholders, and credit ratings, and the board will evaluate it going forward.
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