Xcel Energy 2003 Annual Report Download - page 10

26 XCEL ENERGY 2003 ANNUAL REPORT
MANAGEMENT’S DISCUSSION AND ANALYSIS
of its interest in NRG, the NRG losses recorded in excess of Xcel Energy’s investment in and financial commitment to NRG were reversed in the fourth
quarter of 2003. This resulted in a noncash gain of $111 million, or 26 cents per share, for the quarter and an adjustment of the total NRG losses
recorded for the year 2003 to $251 million, or 60 cents per share.
NRG’s results included in Xcel Energy’s earnings for 2003 were as follows:
(Millions of dollars) Six months ended June 30, 2003
Total NRG loss $(621)
Losses not recorded by Xcel Energy under the equity method*370
Equity in losses of NRG included in Xcel Energy results for 2003 $(251)
* These represent NRG losses incurred in the first and second quarters of 2003 that were in excess of the amounts recordable by Xcel Energy under the equity method of accounting
limitations discussed previously.
Following its credit downgrade in July 2002, NRG experienced credit and liquidity constraints and commenced a financial and business restructuring,
including a voluntary petition for bankruptcy protection. This restructuring created significant incremental costs and resulted in numerous asset
impairments as the strategic and economic value of assets under development and in operation changed.
NRG’s asset impairments and related charges in 2003 include approximately $40 million in first-quarter charges related to NRG’s NEO landfill gas
projects and equity investments, and approximately $500 million was recorded in the second quarter. The impairment and related charges in the second
quarter of 2003 resulted from planned disposals of the Loy Yang project in Australia and the McClain and Brazos Valley projects in the United States,
and regulatory developments and changing circumstances throughout the second quarter that adversely affected NRG’s ability to recover the carrying
value of certain Connecticut merchant generation units. As of the bankruptcy filing date (May 14, 2003), Xcel Energy had recognized $263 million of
NRG’s impairments and related charges for the Connecticut facilities and Brazos Valley as these charges were recorded by NRG prior to May 14, 2003.
Consequently, Xcel Energy recorded its equity in NRG results for the second quarter (including these impairments) in excess of its financial commitment
to NRG under the settlement agreement reached in March 2003 among Xcel Energy, NRG and NRG’s creditors. These excess losses were reversed upon
NRG’s emergence from bankruptcy in December 2003, as discussed previously.
In 2003, NRG’s operating results (excluding the unusual items discussed above) were affected by higher market prices due to higher natural gas prices and
an increase in capacity revenues due to additional projects becoming operational in the later part of 2002. In addition, the sale of an NRG investment in
2002 resulted in a favorable impact in 2003 as the investment generated substantial equity losses in the prior years. The increase was offset by losses incurred
on contracts in Connecticut due to increased market prices, increased operating expenses, contract terminations and liquidated damages triggered by NRG’s
financial condition and additional restructuring charges.
During 2002, the tax filing status of NRG for 2002 and future years changed from being included as part of Xcel Energy’s consolidated federal income
tax group to filing on a stand-alone basis. On a stand-alone basis, NRG did not have the ability to recognize all tax benefits that may ultimately accrue
from its 2003 operating losses and is currently in a net operating loss carry forward position for tax purposes. Accordingly, NRG’s results for 2003
include no material tax effects.
2002 NRG Results Compared with 2001 NRG losses in 2002 were $3.4 billion, or $8.95 per share, due primarily to asset impairment charges
and estimated disposal losses of more than $3 billion and other charges recorded in the third and fourth quarters of 2002 related to NRG’s financial
restructuring. Also, NRG recorded other incremental costs related to its financial restructuring and business realignment.
During 2002, NRG’s operations, excluding impacts of asset impairments and disposals and restructuring costs, experienced significant losses compared
with 2001. The 2002 losses are primarily attributable to NRG’s North American operations, which experienced significant reductions in domestic energy
and capacity sales and an overall decrease in power pool prices and related spark spreads. In addition, increased administrative costs, depreciation and
interest expense from completed construction contributed to the less-than-favorable results for NRG in 2002.
As discussed previously, on a stand-alone basis, NRG did not have the ability to recognize all tax benefits that may ultimately accrue from its losses
incurred in 2002, thus increasing the overall loss from continuing operations. In addition to losing the ability to recognize all tax benefits for operating
losses, NRG in 2002 also lost the ability to utilize tax credits generated by its energy projects. These lower tax credits account for a portion of the
decreased earnings contribution of NRG compared with results in 2001, which included income related to recognition of tax credits.
See Notes 3 and 4 to the Consolidated Financial Statements for further discussion of the 2003 change in accounting for NRG, Xcel Energy’s limitation
for recognizing NRG’s losses due to its bankruptcy filing and further discussion of NRG’s results included in discontinued operations, including asset
impairment charges.
Other Nonregulated Results – Discontinued Operations
During 2003, the board of directors of Xcel Energy approved management’s plan to exit the businesses conducted by its nonregulated subsidiaries, Xcel
Energy International and e prime. Xcel Energy is in the process of marketing the assets and operations of these businesses to prospective buyers and
expects to exit the businesses during 2004.