Xcel Energy 2004 Annual Report Download - page 55

NOTES to CONSOLIDATED FINANCIAL STATEMENTS
Xcel Energy Annual Report 2004
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3. DISCONTINUED OPERATIONS
Pursuant to the requirements of SFAS No. 144, Xcel Energy classified and accounted for certain assets as held for sale at Dec. 31, 2004 and 2003. SFAS
No. 144 requires that assets held for sale are valued on an asset-by-asset basis at the lower of carrying amount or fair value less costs to sell. In applying
those provisions, management considered cash flow analyses, bids and offers related to those assets and businesses. In accordance with the provisions of
SFAS No. 144, assets held for sale are not depreciated.
Results of operations for divested businesses and the results of businesses held for sale are reported for all periods presented on a net basis as discontinued
operations. In addition, the assets and liabilities of the businesses divested and held for sale in 2004 and 2003 have been reclassified to assets and liabilities
held for sale accounts in the accompanying Balance Sheet.
Regulated Utility Segment
During 2003, Xcel Energy completed the sale of two subsidiaries in its regulated natural gas utility segment: Viking, including its interest in Guardian
Pipeline, LLC, and BMG. After-tax disposal gains of $23.3 million, or 6 cents per share, were recorded for the natural gas utility segment, primarily related
to the sale of Viking.
During January 2004, Xcel Energy reached an agreement to sell its regulated electric and natural gas subsidiary Cheyenne. Black Hills Corp. purchased
all the common stock of Cheyenne, including the assumption of outstanding debt of approximately $25 million, for approximately $90 million, plus a
working capital adjustment to be finalized in the second quarter of 2005. The sale was completed on Jan. 21, 2005, and resulted in an after-tax loss of
approximately $13 million, or 3 cents per share, which was accrued at Dec. 31, 2004.
NRG Segment
Change in Accounting for NRG in 2003 Prior to NRG’s bankruptcy filing in May 2003, Xcel Energy accounted for NRG as a consolidated subsidiary.
However, as a result of NRG’s bankruptcy filing, Xcel Energy no longer had the ability to control the operations of NRG. Accordingly, effective as
of the bankruptcy filing date, Xcel Energy ceased the consolidation of NRG and began accounting for its investment in NRG using the equity method
in accordance with Accounting Principles Board Opinion No. 18 – “The Equity Method of Accounting for Investments in Common Stock.” After
changing to the equity method, Xcel Energy was limited in the amount of NRG’s losses subsequent to the bankruptcy date that it was required to record.
In accordance with these limitations under the equity method, Xcel Energy stopped recognizing equity in the losses of NRG subsequent to the quarter
ended June 30, 2003. These limitations provide for loss recognition by Xcel Energy until its investment in NRG is written off to zero, with further loss
recognition to continue if its financial commitments to NRG exist beyond amounts already invested.
Prior to NRG entering bankruptcy, Xcel Energy recorded more losses than the limitations provide for as of June 30, 2003. Upon Xcel Energy’s divestiture
of its interest in NRG in December 2003, the NRG losses recorded in excess of Xcel Energy’s investment in and financial commitment to NRG were
reversed. This resulted in an adjustment of the total NRG losses recorded for the year 2003 to $251 million. Xcel Energy’s share of NRG’s results for all
2003 periods is reported in a single line item, Equity in Losses of NRG, as a component of discontinued operations. NRG’s 2003 results do reflect some
effects of asset impairments and restructuring costs, as discussed below. Xcel Energy’s share of NRG results for 2002 was a loss of $3.4 billion, due primarily
to asset impairments and other charges recorded in the third and fourth quarters of 2002 related to NRG’s financial restructuring.
NRG Asset Impairments In 2002, NRG experienced credit-rating downgrades, defaults under numerous credit agreements, increased collateral requirements
and reduced liquidity. These events resulted in impairment reviews of a number of NRG assets in 2002. NRG completed an analysis of the recoverability
of the asset-carrying values of its projects each period, factoring in the probability weighting of different courses of action available to NRG, given its financial
position and liquidity constraints at the time of each analysis. This approach was applied consistently to asset groups with similar uncertainties and cash flow
streams. As a result, NRG determined that many of its construction projects and its operational projects became impaired during 2002 and 2003 and should
be written down to fair market value. In applying those provisions, NRG management considered cash flow analyses, bids and offers related to those projects.
NRG incurred $3.5 billion of asset impairments and estimated disposal losses related to projects and equity investments, respectively, with lower
expected cash flows or fair values. These charges recorded by NRG in the third and fourth quarters of 2002 included write-downs of $2.3 billion
and $983 million for projects in development and operating projects, respectively, and $196 million for impairment charges and disposal losses
related to equity investments.
Approximately $2.5 billion of these NRG impairment charges in 2002 related to NRG assets considered held for use under SFAS No. 144 as of
Dec. 31, 2002. For fair values determined by similar asset prices, the fair value represented NRG’s estimate of recoverability at that time, if the
project assets were to be sold. For fair values determined by estimated market price, the fair value represented a market bid or appraisal received by
NRG that NRG believed was best reflective of fair value at that time. For fair values determined by projected cash flows, the fair value represents a
discounted cash flow amount over the remaining life of each project that reflected project-specific assumptions for long-term power pool prices,
escalated future project operating costs and expected plant operation given assumed market conditions at that time.
NRG continued to incur asset impairments and related charges in 2003. Prior to its bankruptcy filing in May 2003, NRG recorded more than $500 million
in impairment and related charges resulting from planned disposals of an international project and several projects in the United States, and to regulatory
developments and changing circumstances throughout the second quarter that adversely affected NRG’s ability to recover the carrying value of certain
merchant generation units in the northeastern United States.