Fitch Ratings downgrades Xcel & subsidiaries

NEW YORK, NY, July 30, 2002 — Fitch Ratings has lowered the outstanding ratings of Xcel Energy, Inc. (XEL) and its subsidiaries Northern States Power MN (NSP-MN), Northern States Power WI (NSP-WI), Southwestern Public Service Co (SPS) and Public Service Co. of Colorado (PSC).

XEL’s senior unsecured rating was lowered to ‘BB+’ from ‘BBB+’. XEL’s commercial paper rating is lowered to ‘B’ from ‘F2’ and withdrawn. The ratings of the subsidiaries NSP-MN, NSP-WI, SPS and PSC remain investment grade but are constrained by the rating of the parent group.; The full rating changes are listed below.

The ratings have been removed from Rating Watch Negative. The Rating Outlook for all five entities is Negative.

Xcel Energy officials responded to the rating with disappointment that they are now below below investment grade. Fitch’s rating stands in contrast to ratings from the two largest rating agencies, Moody’s and Standard & Poor’s, which kept Xcel Energy at investment grade.

Ratings were lowered on June 24, 2002 in consideration of high leverage and liquidity concerns at XEL’s subsidiary, NRG Energy, Inc. (NRG) and the likely need for parental infusions of capital or credit support. At the time, Fitch stated that it would monitor the group’s plans for NRG.

The current rating action reflects the material deterioration of liquidity at NRG, pressure upon XEL liquidity as outlined below, including but not exclusively related to pressure at the XEL level from potential further, albeit limited, committed support by XEL for NRG.

Although a cross-default clause exists which would link a future default by NRG to an event of default within XEL’s $800 million in parent-level committed facilities, the ratings incorporate an expectation by Fitch that a waiver will ultimately be negotiated with the bank group, thus limiting the linkage between the rating of XEL and the implicit rating of NRG.

Failure to achieve receipt of a waiver from the bank group for the $800 million committed facilities would see XEL’s ratings lowered further into speculative grade. XEL retains drawing capacity under the $800 million facilities (two facilities of $400 million, expiring in November 2002 and November 2005) – available drawing capacity stood at $530 million as of June 30 2002, though the company has also used a portion of the facilities to refinance maturing commercial paper thus far during third-quarter 2002.

The current ratings also acknowledge the strength of dividend cash-flow received by XEL from its four regulated subsidiaries, but also the limitations upon increasing this source of cash for the XEL holding company. The utilities have very strong individual financial profiles and provide stable dividend income that is the primary support for the credit of the XEL parent company.

XEL itself has low headline leverage, though this is to some extent offset by the proximate pressures on cash-flow. These include: potential support of NRG as outlined below, low levels of remaining undrawn committed facilities at the XEL level; the decreased likelihood of progress with a $500 million equity offering previously planned for the balance of 2002; the possibility that counterparties of XEL’s trading operation may require collateral from XEL (including a portion of the NRG trading book guaranteed by XEL as part of the integration process); and the obstacles that further deterioration at NRG may create in closing on additional committed funding at the XEL level.

Fitch notes that XEL has historically had a relatively high dividend payout ratio, and that this area of cash expenditure is open to review going forward, but that a material reduction in dividend alone would not offset the current liquidity concerns.

Unregulated subsidiaries – NRG

Management’s plan for NRG continues to focus on cutting back on capital expenditure, deferring projects and selling assets to reduce debt. An asset sales process already underway, targeting $1.5 billion by the end of 2002, will reduce XEL consolidated leverage, particularly at NRG, but both amounts and timing are subject to material uncertainty in the current market.

The sharp deterioration of liquidity at the NRG level has been driven both by the likely need to provide a significant volume (potentially in excess of $1 billion) of collateral, following the downgrade of the ratings of NRG by other rating agencies, and by the prospect of the $1.5 billion acquisition of 2,535MW of generation capacity from FirstEnergy Corp. NRG is currently attempting to negotiate the terms of collateral provision, which would otherwise typically be required within 15 business days of the downgrade of NRG.

Again, execution risk on these negotiations, which may involve linkage with the timing of proceeds from the asset sale programme, remains high. The combined cost of meeting all potential collateral requirements and the NRG-supplied equity component of the FE asset acquisition would exceed currently available liquidity at NRG. In addition, completion of the additional funding elements for the acquisition of the FE assets – including non-recourse debt at the project level, a lease structure, and a portion of third-party equity – is subject to high levels of execution risk at this time.

XEL could inject up to $400 million into NRG in the balance of 2002. This figure reflects a cap on tangible support from XEL to NRG, fixed in reference to XEL’s retained earnings, under Section 53 of the PUHCA Act. The cap mitigates, but does not fully offset, the material drain on XEL level liquidity which a further capital injection by XEL into NRG would represent, relative to XEL committed facilities and cash-flow receipts over the remainder of the year.

The downgrades affecting ratings of NSP-MN, NSP-WI, SPS and PSC are driven by Fitch’s policy regarding the linkage of ratings of subsidiaries with those of a lower-rated parent. On a stand-alone basis, the companies’ financial profiles remain consistent with those of companies with higher ratings. The current ratings reflect linkage to the reduced financial flexibility of their parent. The continued Negative Outlook reflects the Outlook of parent XEL.

Ratings affected by the rating action are:

Xcel Energy Inc.
–Senior unsecured debt lowered to ‘BB+’ from ‘BBB+’;
–Commercial paper lowered to ‘B’ and withdrawn;

Northern States Power Company-MN
–First mortgage bonds and secured pollution control revenue bonds lowered to ‘BBB+’ from ‘A+’;
–Senior unsecured debt and unsecured pollution control revenue bonds lowered to ‘BBB’ from ‘A’;
–Trust preferred stock lowered to ‘BBB-‘ from ‘A-‘;
–Commercial paper lowered to ‘F2’ from ‘F1’;

Northern States Power Company-WI

–First mortgage bonds lowered to ‘BBB+’ from ‘A+’;
–Senior unsecured debt and unsecured shelf ratings lowered to ‘BBB’ from ‘A’;

Southwestern Public Service Company
–First mortgage bonds lowered to ‘BBB+’ from ‘A+’;
–Senior unsecured debt lowered to ‘BBB’ from ‘A’;
–Commercial paper lowered to ‘F2’ from ‘F1’;

Southwestern Public Service Capital I
–Trust preferred stock lowered to ‘BBB-‘ from ‘A-‘;

Public Service Company of Colorado
–First mortgage bonds lowered to ‘BBB+’ from ‘A’;
–Senior unsecured notes lowered to ‘BBB’ from ‘A-‘;
–Preferred stock lowered to ‘BBB-‘ from ‘BBB+’;
–Commercial paper rating lowered to ‘F2’ from ‘F1’;
–Rating Outlook Negative for all entities.

Xcel Energy Inc. is the holding company for six electric utility companies that serve electric and natural gas customers in 12 states, together with two transmission companies and two natural gas pipelines. XEL also owns a number of non-regulated businesses, the largest of which is NRG Energy, Inc.

A very small portion of business is done by subsidiaries in utility engineering, broadband telecommunications, natural gas marketing and trading and investments in affordable housing.


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