埃克西爾能源 (XEL) 2002 Q2 法說會逐字稿

Ladies and gentlemen thank you for standing by and welcome to the Xcel Energy second quarter earnings conference call. At this time, all participant lines are in a listen-only mode. Later there will be a question-and-answer session and instructions will be given at that time. If you do need assistance during the conference today, please press the zero followed by the star. As a reminder, today's call is being recorded. At this time, I'd like to turn the conference over to Dick Copeman. Please go ahead, sir.

Thank you. And welcome to the Xcel Energy second quarter 2002, earnings conference call. I'm Mr. Dick Copeman, managing Director of Investor Relations. With me today are Wayne Brunetti, Chairman, CEO and President of Xcel Energy; Jim McIntyre, CFO of Xcel Energy; Dick Kelly, President and Chief Operating Officer of Energy and Paul Bonavia President of Xcel Energy Markets. In addition we have others here to help ensure that we have answers to your questions. After remarks from management we'll open the phone lines for questions from analysts. Before we get started, I want to remind you that some of the comments that we will make contain forward-looking information. Significant factors that could cause results to differ from those anticipated, are described in Xcel Energy and NRG Energy filings with the Securities and Exchange Commission. With that I will turn the call over to Wayne Brunetti.

Thank you, Dick. I'll begin our presentation with my perspective of Xcel Energy and particularly NRG. Jim McIntyre will then review our earnings for the second quarter. He will be followed by Dick Kelly, who has been appointed President of NRG, and he will talk about NRG and the action plans that are now being executed. Paul Bonavia heads up our trading and marketing business unit will discuss the integration and our operation of the trading and marketing activities. Then Jim will come back with our earnings guidance and I'll wrap it up and we'll open it up for questions at that time.

At our core, Xcel Energy is predominantly a conservative integrated utility. We have one of the best utility service territories in the country and since its formation, and with the exception of NRG, we have operated the company across all legal entities by business unit. This practice has given us the opportunity to standardize our business practice, which in turn has resulted in both cost reductions and service level improvements for our customers. With low rates, we provide good service and we have constructive regulation to each of the states that we serve.

The utility business segment, which is the dominant portion of our company, is solid and earnings from our utility operation this year are between $1.57 and $1.65 per share, are sufficient to pay our dividend. Over the past few weeks and months, major concerns in the energy sector have revolved around the viability of energy merchant business and have spilled over effect on our valuation. And I want to address those issues as they relate to NRG.

We bought NRG back in because we saw that like other IPP's's would likely have great difficult in today's environment unless they adopted a different business model. NRG is largely been a development company with our primary emphasis on asset acquisition. Our intent in reacquiring NRG is to change that business structure to that of an operating company, a skill set that we do well. As we work through the transition from what NRG was to what NRG is becoming, there are several legacy issues we have to resolve over the next few weeks. This is not an easy task, but we think the end result will be worth the effort.

From my perspective, NRG has a number of valuable assets in its portfolio. However, we face a number of challenges. NRG is a cyclical business. It's highly leveraged. It has an adverse effect on the credit ratings of Xcel Energy. And there are near-term liquidity concerns.

Our management team has a game plan that has three primary objectives. First and foremost is to assure that we continue to run an excellent utility and to achieve first quartile performance in everything we do. Next, to solve the NRG liquidity problem and lastly, to integrate NRG into Xcel.

In regard to the two issues facing NRG, we have the skill set management team necessary to change NRG's business model. We're selling assets and we will use the proceeds to reduce leverage. We're reducing costs by integrating both power plant operations and the trading and marketing within Xcel Energy, as well as a whole host of staff functions. We will provide measured additional financial support to NRG.

Of these issues, our most pressing today is to ensure NRG has adequate liquidity. We have been implementing actions to address NRG's liquidity needs under different scenarios. This week, we initiated discussions with FirstEnergy regarding the acquisition of the Lakes assets. We are working with the rating agencies regarding the implications and modifications and timing in terms of the FirstEnergy transaction and the implications for NRG's credit rating. We are in active discussions with lenders regarding modifications of collateral requirements in the event of a possible downgrade of NRG's debt.

When NRG was created one of our founding principles was that NRG be structured so that it would not have an adverse effect on the credit quality of the parent corporation. Or the operating utilities. For all but the last several months we have been able to maintain that. With the recent rating actions by Standard & Poor's, that's no longer the case. At the risk of oversimplification, S&P has averaged the credit characteristics of the Xcel Energy companies and applied the average rating to all under the presumption that funds would flow from the financially strong entity to a weaker as needed. Consequently, Xcel Energy and operating companies were lowered by S&P.

Our operational support to NRG will be sufficient. However, our financial commitment to NRG is and will be limited to our equity investment in the company. Thus far this year, we have invested $500 million of Xcel Energy equity into NRG. Under the limitations of the Public Utility Holding Company Act, Xcel Energy can invest approximately an additional $400 million into NRG. Nothing more. We have not and will not use the financial strength of our operating utilities to fund NRG. We believe that all the parties that have a stake in NRG will work together to create substantial progress over the the next few weeks.

I'm now going to turn over the call to Jim McIntyre, who will talk about the second quarter results.

Thanks, Wayne. Ongoing earnings for the second quarter of 2002 were 37 cents per share compared with 46 cents per share in 2001. Total earnings for the second quarter of 2002 were 23 cents per share due to 14 cents of special charges at NRG which we'll talk about later. In regard to utility results which I'll talk about first, in the second quarter of 2001, market conditions were very favorable and we had strong short term wholesale electric trading margins through our utility operations. This was a trend that we knew would not continue into 2002 and we communicated that to you when we discussed our original guidance. As you can see on the table on page 8 of our earnings release, second quarter of 2002 short-term wholesale of electric trading margins were 8 million compared with 57 million for the second quarter of 2001. The earnings per share impact, due to the decline in short-term wholesale in trading margins, is approximately 9 cents per share.

Utility results excluding short-term wholesale and trading margins were 34 cents per share for the second quarter 2002, compared with 30 cents per share for second quarter 2001. As we have said several times, our utility operations are the core of Xcel and they continue to perform well. Ongoing earnings for utility operations, which includes our short-term wholesale and electric trading results, were 35 cents per share for the second quarter 2002 compared with 40 cents per share for the second quarter of 2001, and as I mentioned including the strong trading results in 2001.

Moving on to weather, in the second quarter, there's typically not a lot of heating or cooling, so percentage comparisons based on heating and cooling review days can be misleading. Across our entire system we had more cooling load in the quarter than normal and more than last year. The warmer temperatures increased our second quarter earnings by 3 cents in 2001 in comparison to both last year and normal temperatures.

Moving to the economy, as we have said many times, we across the Xcel service territory have a very robust area and we started to see some improvement in the economy in the second quarter. The second quarter unemployment rate in our region averaged 4.4 percent, down from 4.9 percent in the first quarter. The national average for the second quarter stood at 5.7 percent.

In regard to dilution, off setting the weather impact has been the impact of incremental shares issued in the February equity offering and in the completion of the NRG exchange offer in June which has resulted in dilution that reduced earnings by 3 cents per share for the quarter.

In regard to operating and maintenance expenses at the utility, we continue to manage our utility costs as evidenced by the decline of 27.6 million or about 7.4 percent, and our utility O&M expenses for the second quarter of 2002. The reduction in O&M expenses reflect lower employee benefit accruals, ongoing cost management including a reduction in our incentive compensation program. Based on our revised guidance for 2002, we took the step of eliminating the Company's incentive compensation plan for all employees in 2002.

Moving on to NRG in regard to their second quarter results, for the second quarter of 2002, NRG contributed ongoing earnings of 5 cents per share compared with 11 cents per Xcel Energy share for the second quarter of 2001. Earnings declined largely due to lower power pool prices which reduced margins. Earnings were further reduced to the higher fixed costs associated with interest expenses and depreciation as NRG acquired projects during 2001. You'll also note that accrual accounting under SFAS 133 resulted in a favorable benefit for the quarter. Keep in mind that the SFAS 133 accounting reflects the accrual adjustment but this only represents one side of the equation. As you move through time and perform under the contracts, your actual performance is recorded, which offsets the SFAS 133 accrual portion, therefore it's inappropriate to focus on just the accrual side of the equation.

I mentioned special charges during the second quarter. NRG's earnings were reduced by special charges of approximately 14 cents per share. These special charges were largely associated with our integration plan for NRG. During the second quarter, NRG incurred pre-tax charges of about 20 million, or 4 cents per share for severance costs related to management changes at NRG. This charge reflects only the employees severed during the second quarter and as we continue with the integration plan, we would expect to incur additional severance expense. Also recorded during the second quarter were special charges of approximately 36 million before tax or 6 cents per share related to an asset impairment charge at Neal. Neal is an NRG subsidiary that focuses on landfill methane gas extraction and it also includes a resolution through a legal settlement with Florida Star pertaining to Neal.

Finally NRG recorded a write-off of $14 million before tax or 4 cents per share to reflect an impairment related to two projects which we are now in the process of selling. Obviously, we never like to record a loss, but this write-off is a result of the pending sale of two smaller projects at NRG and reflect progress that we are making relative to asset sales. These particular projects are (indiscernible) and Collinsville in Australia. At this point, Dick Kelly will discuss Energy.

Thanks, Jim. Our business strategy is to build on Xcel's's strong utility operations by utilizing our core competencies in plant operations, fuel procurement, energy traded and risk management, all in an effort to maximize the value of NRG. NRG is now focused on producing and selling power, not business development and not acquisition. After the completion of asset sales, NRG will be primarily a domestic-based, non--regulated power producer with regionally based businesses. They will remain focused around high load centers with the continued emphasis on a diversity of fuel sources, dispatch mix, and power sales.

I think it's important for to you know how we are operating NRG today. NRG's plant operations have been moved into David Wilks's organization who is President for Xcel's Energy Supply organization. David's group is responsible for the performance of all of our power plants, no matter where they are located. His charge is to improve the availability of NRG's plants and to increase their output wherever possible. Today the availability of our utility plants is in the top quartile nationally. The availability of NRG's plants is near the average. NRG was focused primarily on development, not optimizing operations.

David's charge is to bring NRG's plants' availability up to match that of our utility plants. Let me give you a real-life example of what David and his group can do. Last year, NRG was experiencing a degradation of 25 megawatts at its El Segundo plant in California and they couldn't seem to find the problem. They called David and he dispatched one of his trouble shooting crews. Within three days they not only diagnosed the problem, they recaptured the 25 megawatts.

The other major operational change is in fuel procurement, plant dispatch and marketing the output. That's the responsibility of Paul Bonavia. Paul's organization with Xcel will be one of the largest purchases of coal in the United States, and will also have tremendous leverage in fuel transportation. Paul will tell you more about his responsibilities and operations shortly.

Let me talk to you a little bit about cost reduction. NRG was built with the optionality for a potential spin as a freestanding, independent company. As we integrate NRG into Xcel Energy, we will eliminate the duplicative functions. We have plans to reduce the cost structure by $75 million annually, and have a target which I feel comfortable we will achieve, of over $100 million. We will reduce costs by about $68 million this year alone. Cost savings will be achieved through integrating plant management across our system, by capturing infrastructure savings, by consolidating our trading and marketing organization, while honoring all the regulatory requirements in order to maximize available synergys. We have virtually eliminated all business development activities and we are reducing business development and administrative and general expenses through the elimination of duplicate corporate functions.

Let me spend a few minutes to talk to you about capital expenditures. We have taken a hard look at the construction program at NRG. In 2002, we are completing only those projects that is not economically feasible to cancel or delay. Virtually all plant additions beyond 2002 have been cancelled or deferred. Capital expenditures have been scaled back to a level appropriate for a power production company. As disclosed on page 14 of our earnings release, we are projecting capital expenditures of NRG of 1.4 billion in 2002, 548 million in 2003, and 257 million in 2004.

This is obviously a significant reduction in the construction program compared with NRG's previous forecast which represented capital expenditure reductions of approximately $1 billion in 2003 and $1.3 billion reduction in 2004. In addition, for this forecast, we have assumed that we maintain 100 percent ownership of all projects. As we sell assets, we would expect to reduce the capital expenditures forecast further. These changes will reduce debt levels, lower reliance on external financing, and move NRG towards positive free cash flow.

Let me move to asset sales now. When we announced the tender offer, we set an objective of $1.1 billion of net proceeds from the sale of generating assets. Since then we have increased our target and expect to reach $1.4 billion. Initially we targeted all the international assets but have since broadened the mix. We are also marketing select North American assets including our south-central region for a potential sale. We completed the indicative bid stage in June and determined our short list bidders.

Our timetable is as follows. The bidder due diligence is expected to be completed in July. And we expect final bids in August. Negotiations of sale and per share agreements will be completed in August or early September. We then expect financial close in some situations to be done as early as September but the remainder to be done by December. We also expect to close on a few of the smaller projects in August and yesterday, in fact, we announced our sale of our interest in Energy Development Limited of Australia.

Frequently we've been asked whether our estimates of proceeds is reasonable given current market conditions. When we added up the preliminary indication of interest, we received in June, the total was quite close to what we expected. Some bids were higher than we expected and obviously some were lower, but the total was generally on the mark. We expect the asset sales to provide net proceeds after the reduction of non-recourse project level debt of over $1.4 billion. We will use these proceeds to pay down debt at NRG. While we are in negotiations it is too soon to provide specific information on individual projects. We will, however, provide more detailed information after we have signed sale and purchase agreements.

Moving on to liquidity, we are working on several fronts to improve liquidity at NRG. As of June 30, 2002, NRG had approximately 375 million of cash and cash equivalents. Of this amount, approximately 220 million would be available for collateral commitment. This reflects the NRG peaker financing that was completed in June. In addition to cash available at the end of June, the NRG Energy center issued 75 million of bonds in a private placement security in early July. The recently announced sale of EDL will add another $45 million.

In addition, Xcel Energy has the option to infuse an additional 400 million of equity into NRG. In the event of a downgrade, NRG expects to meet the liquidity requirements of available cash, operating cash flows, the remaining equity component from Xcel Energy, proceeds from asset sales, and the issuance of bonds in the capitol market, subject to market conditions or as a private placement.

There are obviously two key actions that we are taking to address liquidity concerns at NRG. The first one is NRG is working with its banks to renegotiate collateral requirements under its construction revolver. Secondly, we are working with FirstEnergy. NRG is completing its review of its obligations under the order issued by the Federal Energy Regulatory Commission on July 16, 2002. We are currently in discussions with FirstEnergy to review the conditions for closing. We will complete this transaction in a matter which will allow it to maintain liquidity. The successful completion of these actions will address the most significant liquidity concerns at NRG.

Let me talk to you a little bit about the NRG guidance for 2002. As a result of several factors, but primarily because of the lower power prices, we are revising our 2002 ongoing earnings guidance from NRG to 25 cents to 40 cents per share. We have taken all of the optimism out of the forecast and we intend to achieve it.

The key changes in assumptions from first quarter guidance are as follows. Lower power prices account for approximately 20 cents per share. The Connecticut Light and Power rate increase and delay of the FirstEnergy purchase, decreases earnings by 15 cents a share. And higher interest expense and other, an additional 15 cents a share. NRG 2002 earnings guidance does not include the impact of special charges related to our restructuring plant at NRG.

The first is severance. As I indicated earlier, we expect to reduce NRG's cost structure by consolidating and integrating NRG's corporate and operational functions into Xcel Energy. We anticipate completing this integration in the third quarter. The end result is that we expect a reduction in employees and a restructuring charge for the cost of severance. However at this point it is still too early to estimate the cost of the severance program. On the asset sales side, we have received indicative bids on our asset sale program.

Based on these indicative bids it's very possible that we will incur a material loss on the sale of the generating assets. As you are aware, indicative bids can go up or down and we have not started negotiations. Also, all material sales require approval by the Xcel Board of Directors. Therefore, it is difficult and premature to estimate the potential impact of the asset sales.

An integral part of improving NRG's performance is to improve the profitability of its substantial asset base and that responsibility is in the hands of Paul Bonavia, who heads the trading and marketing organization for Xcel. I'd now like to turn it over to Paul.

Thank you, Dick. As Wayne indicated earlier, our energy marketing group is called Xcel Energy Markets or XEM for short. We have 2 principal and very closely related tasks. First, we are responsible for the commercial management of Xcel's generating asset. We use our market knowledge to maximize wholesale earnings and to enhance the value of the plants. Second, we manage the commodity and credit risks that are inherent in owning power plants and serving customers.

We have been performing these roles for the utility operating companies since the completion of the Xcel merger in 2000, and we are well along in integrating NRG's marketing activities into XEM, and I'll talk a bit more about that later. To meet our accountabilities, we buy the fossil fuel for the plants, we buy energy to assure reliable low-cost supply for our customers. We also market the off take, that's plant output for NRG and it's the surplus energy and capacity for the utilities. We conduct both the short term and long-term wholesale transactions.

To assure that we are fully assessing our risks and capturing the value in our generating portfolio, our group models the system requirements and resources. We produce production budgets and to optimize results, we conduct the ISO bidding and we dispatch the power plants in realtime from our trading floor, 24 hours a day, seven days a week. We use our trading floor to execute our short-term hedging and commercial strategies and we benefit from the market information that it supplies which informs all of our decisions. Xcel Energy Markets is governed by comprehensive risk management policies. These are administered by an independent mid-office within the business unit. They are also reviewed by a corporate risk management oversight committee.

Our business unit risk management group marks our books every business day, they produce daily reports, to detail our positions, our value at risk and our profit and loss with extensive supporting data. We do all of these things and have done them since the merger completion for compel. But we were also asked to begin immediately integrating NRG power marketing into our activities. We prepared a detailed plan and on the day the exchange offer closed, we began to execute it.

As of today, here is where we are. We assume management of NRG power marketing immediately upon completion of the exchange offer. It all reports to Xcel Energy Markets. Secondly, we brought personnel from our Denver headquarters to the NRG trade floor in Minneapolis, both management, traders, mid-office and back office personnel. They're in residence working with their colleagues, learning the system, exchanging best practices 24 hours a day. We made an announcement this week that NRG power marketing as well as the remaining realtime trading operations of Northern States Power Company here in Minneapolis, will be consolidated and move to our Denver headquarters, beginning at the end of the summer. We want to keep personnel in place during the busy season in the summer. We'll start that move in September and we'll complete it by the end of the year.

We also are working hard to produce integrated risk reports, using a single risk system and single deal capture system. We actually have begun to produce reports on a test basis. We'll have that concluded very soon. The effect of all of this integration is that we will have one non-utility trading floor, located in Denver, that will combine NRG power marketing with the activities of our e prime natural gas marketing affiliate. We will also have one utility trading floor in Denver. We are required by regulation to keep that separate from the non-utility. We'll have a single mid-office and back office focused on energy marketing, we'll produce unified risk reports using the same language and systems.

The benefit of all of this is obvious. We'll have combined market information that will allow us to make better and more efficient decisions about optimizing the system. We'll more efficiently use corporate credit support. We'll reduce credit exposure through a broader spectrum of netting. And we'll use the benefits of our size. An example that Wayne alluded to is that currently, NRG procures a good deal of its fuel regionally. We'll centralize that and combine it with our other operations. That added together adds up to about 50 million tons of coal that we buy and transport every year.

Using that combined purchasing power and the leverage it gives us will produce substantial cost savings. Likewise, we can produce similar savings in natural gas by combining the e prime skills with NRG's volumes. We will also use our Xcel Energy Market's origination group, who are busy even today, finding and executing opportunities to better hedge NRG's position, to rationalize assets and to improve our margins. And finally, and also importantly, we'll do all of this with cost reductions. Looking at the number of people employed at NRG power marketing as well as our Northern States Power facility here in Minneapolis, when we've completed the consolidation there will be about a third fewer people performing the same tasks, more efficiently.

Finally, I've been asked to outline some of the characteristics of our trading books within XEM for our utility operations which we call the system books. 90 percent of the transactions have a delivery period of less than 1 year as of June 30, '02. Our average shareholder value at risk, over the last 12 months in the utility books, was $3.73 million for Public Service Company of Colorado and about $750,000 for Northern States Power Company. These are based on a 95 percent confidence level and a two-day holding period or liquidation period for natural gas, five days for power. These are shareholder VAR numbers for the utility value at risk for shareholders is different from total VAR due to differences in the regulated rate base treatments and fuel clause treatments in some of our jurisdictions.

For our proprietary books related to utility operations, the average value at risk over the last 12 months was $1.13 million, based on the same methodology; 99.8 percent, or virtually all of the transactions in the utility proprietary books had a tenor of less than one year. e prime, I mentioned before, is our non-utility gas marketing subsidiary. 95 percent of e prime's transactions had a settlement period less than one year from June 30, 2002. The average VAR over the last 12 months was $271,000, based on 95 percent confidence interval and two-day liquidation period for gas.

NRG uses today a somewhat different methodology as I mentioned. We are going to get that on a uniform basis. The NRG asset book VAR employs a methodology which is undiversified in its calculation. Undiversified VAR is extremely conservative. It's calculated so that it does not reflect the correlations across time or commodities within the portfolio. For NRG, the asset book, 86 percent of the contracts had a tenor less than one year, and there was an average VAR of $83.5 million on that undiversified basis. For NRG's proprietary book, 100 percent of the contracts had a tenor less than a year. The average VAR was $2.7 million.

In summary, our trading and marketing business at XEM is very much asset based. We consider our business to be inseparable from the assets and the utility obligations. Our mission is to minimize and manage the risk inherent in those operations and maximize the value. With that, I will turn it back over to Jim McIntyre.

Thank you Paul. We discussed some of the significant actions that we are taking at NRG. Not only have we reduced the NRG capital forecast; we have also reduced the utility capital expenditures. We expect to spend about 1 billion on utility Cap-X in 2002, declining to about 900 million annually in 2003 and 2004, about a 200 million decline in each year. Based on our current projections, the cash from operations from the utility operations should cover the majority of the utility capital expenditure program and our dividend.

In regard to the financing plans on page 15 of the earnings release, we indicate our intent to issue long-term debt at NSP Minnesota, PSCo and the Xcel Energy holding company level in the third and fourth quarter of 2002, to term out to commercial paper that we rolled into our credit facilities. We have also arranged bridge loan financing to provide additional liquidity and flexibility if the market conditions are not conducive for debt financing. In addition, as we successfully implement our action plan for NRG, we expect that the market will stabilize and we will consider issuing long-term debt at NRG to provide additional liquidity.

As most of you are aware, we have limits on how much equity we can infuse into NRG. The Public Utility Holding Company Act limits not only the equity but also guarantees the loans to NRG. So far in 2002, we have infused 500 million of equity into NRG. Based on our average retained earnings as of June 30, 2002, we can infuse an additional 400 million of equity into NRG.

As we continue to work to strengthen our balance sheet, we expect to issue additional equity later this year. Our current plan is to issue 500 million of equity in the third or fourth quarter. We'll use these proceeds to infuse potential additional equity at NRG and to reduce debt at the holding company level. In the current marketplace, there is significant concerns regarding liquidity, to provide you with additional information, we have included a listing on page 15 of our earnings release of all significant credit facilities at Xcel Energy and our major subsidiaries. Obviously, these balances change on a daily basis.

Moving to our 2002 annual guidance, we have reduced our 2002 guidance to $1.70 to $1.95. Largely to reflect the lower expectations for NRG. We don't like to change our guide, however, with delays in the Lakes acquisition, issues related to the CL&P rate increase, the continued low power prices that we have experienced and expect to experience, we believe it's appropriate to change our outlook to reflect these current market conditions. Our forecast for earnings from our utility operations remains strong. The forecast also incorporates an equity offering in the latter part of 2002. Our forecast does not include any restructuring charges from additional severance or asset sales. It's really an ongoing earnings forecast.

In regard to 2003, I know that many of you would like us to provide guidance for 2003. But it would not be appropriate to provide the guidance at this point in time, because there are too many moving pieces including asset sales, amount and timing of equity issuance, status of FirstEnergy, the Colorado rate case, the potential Moody's decision, and our related financing plan. During the third quarter, we expect to make final decisions on which assets are sold and we would expect to have additional clarity on the other key factors in our plan. At that point in time, we'll be in a better position to provide 2003 guidance.

Finally, I want to touch on our dividend. As you are aware, there was speculation last month regarding the level of the dividend payment. The management team at Xcel and our board, committed to providing our shareholders both competitive total return and understand the importance of the dividend to both the institutional and retail shareholders. The Xcel Energy Board of Directors approved the quarterly dividend. The board declared the second quarter dividend late June after a very thorough review. They take this responsibility very seriously, and we'll continue to monitor the situation. We understand the importance of the dividend to our investors. We do have strong earnings and cash flows from the utility operations to support the dividend. Now back to Wayne.

With that, I'd like to wrap things up. We are clearly not satisfied with our second quarter earnings. And the fact that we have reduced our earnings outlook. Our results have been more adversely affected than we expected by power prices. However, we are responding to that challenge. And we have reflected those lower prices in our revised guidance.

NRG is a good set of core assets and operations and we have changed their focus from business development and acquisition to asset management. We have developed an aggressive plan to sell noncore assets and reduce Cap-X to reduce NRG's reliance on leverage, and improve their balance sheet. With the successful completion of the integration with Xcel Energy, it will benefit from a lower cost structure. Finally, we are working with appropriate parties to improve NRG's liquidity and address the concerns of the market. Our regulated operations continue to have very strong performance and we operate in a growing and diverse service territory. We'll continue to focus on both cost management and customer service, to ensure that we deliver the results our stake holders expect.

I want to thank you for the participation in our conference call. And your support. And now we'll turn it over -- open it up for questions and answers.

Great. Thank you. And ladies and gentlemen, if you do wish to ask a question, please press the 1 on your touch-tone phone. You'll hear a tone indicating you have been placed in queue and you may remove yourself from queue by press the pound key. Also, if you are on a speaker phone, we please ask that you pick up your handset before pressing any of the numbers. And in consideration of time, we do ask that you please limit yourself to one question per turn. Our first question comes from Peggy Jones with ABM Amro. Please go ahead. And Miss Jones, if you do have a question, please go ahead.

Yes. I just wanted to ask if you would actually transfer the NRG trading positions to Xcel yet. And if you, , haven't, when will you be doing that? And are there any logistical issues involved in doing it?

Paul?

We are in the process of transferring those things that can be transferred, particularly where there are guarantee or liquidity issues behind them. NRG has a financing structure that in some cases requires us to keep the margins at project or regional levels and we will certainly comply with all of that. But as rapidly as we can, within the context of the financing covenants and regulatory rules, we'll get the non-utility positions transferred into single books. Jim, if you would like to elaborate on the credit, that would be helpful.

Yes. The bulk of the credit responsibilities have been transferred from NRG to XEM.

So does that mean that there is not much of a collateral posting issue anymore?

That's correct.

Okay. Thank you.

Thank you. And we do have a question then from Jim Von Riesemann's line with J.P. Morgan. Please go ahead.

Yes. Actually, Jamie Warners. I guess, with regard to the six projects where you mentioned being in technical default, how much debt or what's the amount of debt that could be accelerated based on the technical default? And also, what's the cash flow associated with those projects?

What are you referring to specifically?

You mentioned in the press release being in technical default on six projects based on your covenants.

This is Adam Cartan. I don't believe we're in technical default, in some cases we have projects where the cash flows are below debt service coverage ratio minimums which means we can't distribute cash to NRG. It does not mean that they are in default.

So you are basically depending on lender cooperation there?

No. It's simply a part of the provisions of the covenant structure, that if the cash flows fall to a certain level, we can't take equity dividends to NRG Energy.

Well how much cash flow is associated with those projects?

Well, because the cash flows are low, to trigger this event, the cash flows aren't terribly meaningful in the overall context of NRG.

Okay.

Thank you. We are going onto a question, then, from Neal Stein with Credit Suisse First Boston. Please go ahead.

Good morning. Just a couple of questions. First, could you describe the thought process you guys went through in terms of the cost and benefits of continuing to support NRG versus what might be the benefit of simply maybe allowing it to go bankrupt?

Well, let me start. And then I'll have others participate in it. NRG has, we believe, as I said, a good set of assets. We were at the time of the tender offer, 74 percent owner of that and we believe that we could best preserve the value of NRG by completing that exchange offer. This would allow us an action plan to reduce us as I have said in my comments, reduce their cost structure, reduce their Cap-X of both Op-X and Cap-X. And to preserve the equity value that we already had invested in this company.

Well, I want to add to that. [INAUDIBLE] the assets that NRG has, we think we have a plan. We are executing that plan. So we'll retain and increase the value to the Xcel shareholders of the assets and the value that we had in NRG

Could you give an updated forecast for operating cash flow, with both NRG and Xcel?

Operating cash flow for NRG is in the 250 to 300 range and at the Xcel level from the operating utilities is between 1.4 and 1.5 billion.

And how much of the billion four of Cap-X for NRG for '02 has been spent so far?

It's in the press release.

We are approximately 1/2.

Would you be able to meet the remaining Cap-X requirements with no additional funding at NRG?

Yes, we believe so. Obviously we are working -- we have some committed financings in place and we are working with our lenders to resolve that but we have cash on hand and we expect to be able to meet remaining capital commitments.

Because I think the cash on hand is only about 369 million? And then your -- you have 700 million going out the door at Cap-X.

We also have committed financing facilities and there is the potential for an equity infusion from Xcel.

Thank you. And we do have a question from Taren Miller with UBS Warburg. Please go ahead.

Yeah. I was wondering if you could start and tell us what the remaining availability is on the construction finance loan, number one. Number two, can you please walk us through -- I mean, in terms of the NRG future it seems to be largely predicated on the discussions with your banks. Could you give us some indication how long you've been talking to them and where you're at, number one? And also, it seems to be predicated on FirstEnergy being willing to probably delay the closing of the Lake assets and I was wondering if you could discuss where you are on that. And third -- and lastly, have you retained bankruptcy counsel?

Start with the cash. NRG's two primarily liquidity facilities which is the 2 billion construction revolver and the 1 billion corporate revolver. The 1 billion corporate revolver is fully drawn at this time and the 2 billion construction revolver we have drawn about 1.2 billion to date. In terms of how long we have been talking to our banks, we have been working actively with our banks throughout this whole year. In the last, you know, four to six weeks, as there became -- as the capital markets became more and more uncertain, we have stepped up our discussions in the event that it looks that we cannot issue bonds into the capital markets. So we have been working actively with our banks the last four to six weeks. And had a meeting with all of our agent banks earlier this week.

As far as the FirstEnergy acquisition, we have been working with FirstEnergy to modified both the terms and the conditions of the Lakes acquisitions. We're too early in that process to give you any -- much more detail than that. But we're trying to assure that does not impact the liquidity of NRG.

And the last part of that question dealt with we retain bankruptcy counsel. The answer is no. But we have retained financial counsel.

Thank you. And once again, as a reminder we do ask for time consideration purposes that you please limit yourself to one question per turn. And we do have a question from Kurt Burns with Metropolitan West. Please go ahead.

Yes. I guess my question is,, , a little bit along the lines of what Karen just asked. How far along in the discussions are you with the various banks? Could you give us more color than just to say that you have met with them? And if there is a downgrade, what are the timing of the downgrade calls that you have?

Well, the primary -- the primary collateral call relates to the $2 billion construction revolver and which we would be required to repay a portion of the debt or else post a letter of credit to support it. That would happen 15 business days after a downgrade. In terms of how far we are, and what we have -- we have a proposal. We are working with the banks. I think it's in everybody's interest to -- to see us through this period of liquidity. We are actively involved in asset sales. And I'm not sure that we can comment much more to date.

Thank you. And we do have a question then from Nancy Doyle's line from Time Square Capital. Please go ahead.

Thank you. Have you at Xcel considered petitioning the SEC or whoever else you have to petition to expand your capacity to infuse equity into NRG?

We have considered that. We will continue to consider it. Obviously, the situation relative to the markets are different than they were. We'll be very thoughtful in terms of the infusion of the remaining balance of equity that we have into NRG. And we'll consider a change or soliciting a change to our authorization by the SEC.

Thank you. And we do have a question from Andrew Levy with Bear Wagner. Please go ahead.

Hi, guys. I just want to understand keeping the dividend, kind of the business sense on that and your reasoning beyond just trying to, I guess support the stock price and support, you know, obviously the shareholders, as well. But it just doesn't make business sense to me that based on everything that you described today that you can keep this dividend longer term at this level.

Well, you know, the Board of Directors considers and approves the dividend quarterly. And we did on the second quarter in late June after a very thorough review, they take -- the board takes this very seriously. But after a thorough review of it in June, we did declare that dividend. And as each quarter comes up, I can't presume what the Board of Directors do. But we will, you know, the board will consider that very, very carefully.

Thanks. And we do have a question, then, from Elizabeth Perella's line with Merrill Lynch. Please go ahead.

Thank you. Could you just walk us through how the cross default provision at the Xcel credit facilities came about? And also, if you could talk about who the lead banks are in your credit facilities and the NRG construction revolver, and is there -- what kind of degree of overlap is there within the two bank groups?

This is Paul Tender, the treasurer of Xcel Energy. The cross default provision has been in the Xcel credit facility since the facility was put together right after the time of the merger of NSP and NCE. The lead agent on the Xcel credit facility is Bank of New York. There is some overlap between the credit facilities of a -- at Xcel and NRG. I would characterize it as a moderate overlap.

Thank you. And we do have a question, then, from Marie Unger's line with Unger Corp.. Please go ahead.

Yes. Thank you. This question is for Wayne Brunetti, the Chairman. In reference to what another analyst has previously mentioned about discontinuing the dividend, I represent some individual investors, many of whom are elderly retired people who count on their dividend income from Xcel to help them survive. So since the price of Xcel's stock has recently dropped like a rock, these people are worried about the safety of the dividend and the financial health and strength of your company. What could you tell them perhaps to reassure them about the dividend and also the financial health and strength of Xcel Energy?

Start off with the latter part of your question about the financial health. As I stated in my opening, at the core of our business is the utility operation. It represents more than 75 percent of our company. It is strong. It is performing well. It's delivering results. And as I also said, that, it produces sufficient earnings to cover the dividend.

Having said that, I want to go back to the comment I made previously which is, we understand the importance of the dividend to a number of our shareholders. And our board takes that consideration very, very seriously. But I will not predict what that -- what the board might do in the future. They take that responsibility very seriously. We did declare the dividend this last quarter. After thorough review by them.

Thank you. And we do have a question then from Paul Devas' line with Value Line. Please go ahead. Hi this is Paul Devas.

Are there any regulatory matters pending at NRG similar to what you had at Connecticut that we ought to know about?

No, not that we know about. I think -- like I said, every day we are getting more up to speed what's going on in NRG but I don't think there is anything left out there to surprise us.

Okay, thank you.

Thanks and we do have a question then from Jay Dobson with Deutsche Banc. Please go ahead.

Hey, thank you. It's Jay Dobson with Deutsche Banc. Two quick questions if I can. Going back to Teran's question. When do you expect to complete these discussions with FirstEnergy on potentially restructuring the Lake asset acquisition? And then, Jim, I was wondering if you could go into a little more detail on just the SFAS 133 adjustment, just sort of how that swung so big and sort of what the portions of that are? I know Dick characterized it as a swing in accruals. But if you would just give us a little more detail there that would be great.

This is Dick. Let me start with the first, and again as I said we are in negotiations with them now. I would like to think that we would be done in a week to 10 days. But it could be a little bit longer now. But we are pushing that as fast as we can, Jay. Jim?

In regard to the SFAS 133 recognition, it's really just the recognition of the various contracts that are in place across the Xcel -- excuse me, the NRG regional and international businesses. We saw a net pickup as we mark-to-market on those contracts as you do each quarter and each month.

Thank you. And we do have a question then from Eric Harper with Patersaw Advisory. Please go ahead.

Yes. Other than the $800 million credit facility which does have the cross default trigger in it, and the subsequent writedown of NRG on book value, what other consequences would hit in Xcel should NRG be forced into bankruptcy?

Well, one, first off, we don't expect that to occur. But using your hypothetical example, the equity that's embedded in NRG obviously would be at risk. In regard to the Xcel credit lines, while a cross default would be in place as we discussed, we are taking steps to remove that part of the existing facility. In any case, the Xcel holding company would not be obligated to any of the NRG debt. It really if the default were not waived or not amended, it would mean that we would not be able to access that line until it was cleared.

Thank you. And we do have a question, then, from Chris Poter with Hartford Investment. Please go ahead.

Yes. Is there any thought of buying back any of the -- or the debt, given that your holding company debt's trading at like plus 700? And could you explain -- I'm sorry could you explain that again, I didn't quite understand it. If Xcel would not be able to tap their credit facility, if NRG was chapter 11? Is that right?

Well, if -- if there was a default that would be triggered at NRG, and, of course, as we have discussed they are in the process of working with the various lenders in order to put in place waivers or other modifications so that a default would not be triggered, and as we have talked about, there's been several meetings to date and we believe it's in everyone's best interest to address those situations without a default occurring. But if a default were to occur, currently there is a cross default that exists relative to the Xcel holding company debt, the 800 million of credit lines that we have at the Xcel holding company. We are in the process of working to provide an amendment or a waiver to that provision of the facility which, if removed, would not have an adverse effect relative to access to those 800 million of credit lines. But to clarify, there is not an obligation from the Xcel holding company to the NRG debt in any case.

Thank you. And we do have a question then from Charles Fishman with AG Edwards. Please go ahead.

Good morning. I just want to make sure I understood one thing from Wayne's comments at the very beginning of the conference call. You are prepared to put in 400 million into NRG and then you are making the commitment you are going to stop at that level regardless of PUHCA. Is that correct?

Yeah that's -- We can't put in any more under rule 53 of PUHCA.

But you are taking the position you are not going to even attempt to get that waived or modified, uh, that at this point in time, 400 million is all we are going to -- all we -- we'll see that will flow into NRG and beyond that, you would just walk away at that point?

Well, this is Jim McIntyre, earlier I tried to address the question on requesting a modification to rule 53 of the Public Utility Holding Company Act. One, that would be a fairly timely process to do. And, two, given where we're at, although it is our present intent to put the 400 million into NRG, in light of all of the changes in the business, we are carefully reviewing our options as it pertains to that, in order to gain approval to increase the percentage of retained earnings that we could invest in NRG. We would have to seek approval from all of the states in which Xcel Energy operates in. So then after gaining that, go to the SEC. So it's a very, very timely process. And in light of current market conditions, there would be -- expect some pressure from the states to not do that.

Thank you. And we do have a question from Carol Armstrong with Ohio Teachers. Please go ahead.

Can you guys detail the expected financing of the FirstEnergy transaction? Could you kind of give us some color on the loan lease and the equity -- loan or lease and the equity that NRG or another private equity investor would commit? It seems like at this point a private equity investor has other attractive opportunities than a specific asset. And second question for Jim, specifically, what would you recommend to the board regarding the dividend? It seems like Xcel's ability to improve its financial health is much better without the dividend.

Let me -- this is Dick Kelly. Let me start with the financing of FirstEnergy. Prior to any negotiations with FirstEnergy and how we had it originally set up, we intended to fund the acquisition with the $800 million lease with limited recourse to NRG. There is assumption of 145 million in municipal debt secured by the Bay Shore facility. As you said, we had talked up to 250 million from perspective equity investor, uh, and then the remainder would be from NRG. As I said we are in negotiations so those pieces will change, could change, might change, depending on how the negotiations go. In regard to the dividend, you know, Wayne. I think fairly stated our position. Obviously, with the markets the way they are and the financial condition of NRG and Xcel such as it is, we'll be very thoughtful as we look at what we would recommend to the board for the next review of the dividend. But we'll have to do and will do a lot of review and sense of where we're at before we move on that. So it's premature to take that position. But as we have said earlier, we do have strong utility earnings and the capacity within the utility earnings to support the dividend. Have having said that, we'll look very carefully and not prejudge either what we'll recommend or what the board will act on.

Thank you. And we do have a question, then, from Nancy Doyle with Time Square Capital. Please go ahead.

Yes. Could you elaborate on the cash flow that would be represented by the assets you are planning on selling, how that would impact the cash flow up to NRG? And have you ever given a parent level NRG cash flow to parent level debt analysis?

I'll answer the first one on that the cash flow impact of the sales. Since this is fairly preliminary and we're at the point now we are just in the first stage of the sale and the short list, we have not decide what assets we will sell or which assets we will not sell. It obviously is going to depend on some of the things you mentioned. The price that compares to the contribution made by each asset. So it's too early in the process to have any kind of legitimate forecast of what we will or will not sell and what the impact will have. In regard to the second part of your question, we have not done that. Not publicly.

Thank you. And we do have a question then from Teresa Ho with Bank of America. Please go ahead.

Yes. Actually, most of my questions have been answered but if you could just go and discuss the 800 million cross-default again one more time? I'm sorry. , is that -- I believe that's the first time we are actually hearing of that, and I just wanted to you clarify that's something that you are just not going to be able to get a credit line on, or is that something that you would have to pay down in additional collateral or (indiscernible)?

This is Paul Tender, the Treasurer of the Company. The cross default provision provides that the, you know, there is a, technically a default on the Xcel credit line if NRG is in default. If we -- we are talking to the banks in the Xcel credit facility about a amendment that would clear that provision. As Jim Mcintyre said earlier, if we did not get that provision taken out of the Xcel credit facility, then we would be unable to do further draws on the Xcel facility. And the existing borrowings could be demanded, as I understand it, by the banks.

Thank you. And we do have a question, then, from Paul Ridzon with McDonald Investments. Please go ahead.

In your earnings forecast you included the Lake plants. I'm just wondering what timing you had. When did they start making an earnings contribution when you gave that forecast?

I think we put in there in September that they start contributing in September.

Okay, thank you.

Thank you. And we do a question then from Jessica Rutledge with Lazard. Please go ahead.

Yes, hello. Sorry my questions got all mixed up. I think probably the biggest question out there is would you consider bankrupting NRG?

That's not in our game plan. I think I made that -- that -- that very clear. Our objective in buying it back is we think we have a great set of assets that's got good, good people all in great regions of the country. Our job is to fix the liquidity of that company. It's highly leveraged and we have a game plan to do that. I mean, we have been very clear about that. About our asset sales, about reducing the infrastructure cost of NRG. We think it's got, you know, a great future. We have just got to fix the problems that we have particularly with the liquidity issues. We believe we can do that.

And then, what factors are going to influence how big your equity issuance is in the second half of this year? Is that 500 firm or could it go smaller or larger?

500 is a general place holder. Some of the factors that could influence will be what the book write-offs might be as we complete the asset sales, which will make our decisions there. That would influence what we might do relative to the level of equity. Obviously, the markets right now are very difficult. So the receptivity by the market will also influence that. As it will also influence the timing. So we'll look at all those and other factors as we size the equity.

Thank you. And we do have a question, then, from Tim Bond with Conseco. Please go ahead.

Yes, hello. I was just curious. You have obviously discussed this plan with the rating agencies. Just wondered if you could talk about your discussions with both agencies and maybe give some kind of indication upon, you know, how much time basically you have to get some of these things done. Thank you.

We have had discussions with the rating agencies. We continue to have ongoing dialogue with them in regard to all facets of the NRG and the Xcel plans. Obviously, they believe that the actions that we have taken in regard to NRG are very helpful and supportive of them. -- of that company. We'll continue to have dialogue with them as we continue to execute the plan. As you would expect, there is concern relative to the execution of the asset sales. Dick has talked about how we believe that we'll have the capability to continue and achieve the asset sales as we had expected. And we'll continue to monitor that and to brief the rating agencies and inform them of our plans as they move along. In terms of timing by any action by Moody's, I think they are in the process of completing their review and other than that, I can't be more specific in terms of what timing their action might be.

Thank you very much. And we do have time for two more questions. Our next question comes from Marc Fin with T. Rowe Price. Please go ahead.

Hi, guys. In the event that NRG were to default on any of its obligations and there was an involuntary filing made, that would cause that cross default on the Xcel $800 million bank line. As a precaution against having a capital call, having to fund up that the -- drawings on that $800 million line, are you guys bringing cash up from your operating company subsidiaries to stave off whatever capital call you might need in the event that that happened? And in addition, are you very carefully mapping the integration that you are doing of any trading book or operations so that you would be able to effectively unwind that in the event that NRG filed either voluntarily or involuntarily?

The only cash that comes from the operating utilities up to the holding company is that for dividends and there is some restrictions there that we will continue to abide by. In regard to your second question, in terms of being able to dissolve, if you will, the credit support from Xcel to NRG, that would be a possibility. But clearly, we're focused on integrating the companies and making the business work.

Thank you. And our final question comes from Phillip Adams with Bank One Capital Management. Please go ahead.

Thank you. Back to NRG and the FirstEnergy Lake plants. You have indicated that your discussions with them that I think you said that you intend to go forward but that you are seeking some modification to the plan. Would I be on the right track if I assumed that the nature of the discussion is getting them to either take back a note or retain an equity interest or somehow alter the amount of cash that NRG has to come up for the purchase? Is that the nature of the discussion?

This is Dick Kelly. We are in very early preliminary discussions with them and we are looking at all the terms and conditions of the acquisition and that's all I can say now. Thanks.

But it is your intention to move forward with the acquisition?

Yes, it is.

Thank you. And speakers, I'd like to turn the conference back over to you for any closing comments.

Yes. This is Dick Copeman and I would like to thank all of you for listening in and participating on the call. If you have any follow-up questions that we have not had time to answer, you can give us a call at Investor Relations, myself or Paul Johnson. We'll be available. Thank you.

Thank you. And ladies and gentlemen, this conference will be available for replay starting today, Friday, July 26, at 1:15 p.m. central time. And it will be available through next Friday, August 2, at midnight central time. You may access the AT&T executive play back service by dialing 1-800-475-6701. From within the United States or Canada. Or from outside the United States or Canada, please dial 320-365-3844. And then enter the access code of 645436. That number once again, 1-800-475-6701 from within the United States or Canada, or from outside the United States or Canada, please dial 320-365-3844. And again, enter the access code of 645436. That does conclude our conference for today. Thank you for your participation. And for using AT&T's executive teleconference. You may now disconnect.