Credit analyst advises considering Xcel only on sure settlement with NRG creditors

By Ronda Fears

Nashville, Jan. 30 - Carol Levenson, director of research at Gimme Credit, said she would recommend Xcel Energy Inc. only if it reaches an airtight and reasonable settlement with NRG Energy's creditors.

"There is a strong and relatively stable utility company being obscured by Xcel's deregulated problem children and a successful outcome of Xcel's negotiations with NRG's creditors could set this utility free," Levenson said in a report Thursday.

"Meanwhile something is consuming Xcel's liquidity, despite the company's seemingly limitless supply of interim financing moves.

"The worst outcome for Xcel bondholders would be the breakdown of NRG negotiations, an involuntary bankruptcy filing and a lengthy period of litigation uncertainty for Xcel.

"We would only consider recommending this name if an airtight settlement is reached for a reasonable sum."

Xcel Energy (Baa3/BBB-) on Wednesday announced preliminary earnings for fourth quarter and 2002 without providing an income statement, cash flow statement, balance sheet or 2003 earnings guidance.

With the future of its insolvent merchant energy subsidiary NRG still very much up in the air, Xcel is unable to finalize its results until NRG's audit is completed, as additional restructuring costs and charges are possible.

"Even if we exclude NRG's results, as management has understandably been encouraging investors to do, we note Xcel's adjusted earnings fell by 11% for the year and 6% for the quarter, dragged down by weaker margins in its wholesale power and trading operations as well as losses in the company's grab bag of other non-regulated subsidiaries," Levenson said.

"Although management boasted of $310 million in liquidity at the holding company level as of January 27, this is only $70 million more than holding company liquidity at the end of the third quarter."

Beyond that, the utility subsidiaries have $700 million in debt maturing this year, including bank debt, and all their bank lines also mature this year. Xcel estimates a downgrade below investment grade would require it to post just over $200 million in cash collateral.

"Moreover, any settlement negotiated with NRG's creditors would likely require a cash outlay," Levenson said.

"But if the company were to announce a preliminary settlement agreement with NRG creditors that would absolve it of all future liability, we don't anticipate it would have any difficulty financing the payout."

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