By Pam Boschee, Managing Editor
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EL&P proudly names Xcel Energy Inc., Minneapolis, as its Utility of the Year award winner in 2000. Although a new name in the industry, Xcel is made up of companies familiar to EL&P’s readers, including Northern States Power Co. (NSP), Southwestern Public Service, Public Service Company of Colorado and NRG Energy.
Xcel shares a unique bit of history with EL&P and its past Utility of the Year awards. In 1972, NSP was the winner, and the 1978 award went to Southwestern Public Service.
Combination of solid performers
This prestigious history (and performance) is preserved in today’s hybrid company, Xcel, which was formed in August 2000 as a result of the merger of NSP and New Century Energies Inc. An earlier merger in August 1997 of Public Service Company of Colorado and Southwestern Public Service created New Century Energies.
The most recent merger created the fourth largest combination utility in the United States. Its regulated electric service area serves 3.1 million customers with 15,450 MW of generation. The regulated gas service area serves 1.5 million customers. Including its subsidiaries, Xcel does business in 50 states and 15 countries (including the U.K., central Europe, Australia and South America).
NSP brought its unregulated subsidiary, NRG, which is now the fifth largest independent power producer (IPP) in the world, to the new Xcel-a contribution that may prove to be quite a gold mine. Xcel and NRG together own 28,133 MW in North America and 31,801 MW worldwide.
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Xcel’s unregulated businesses, of which NRG is the largest, will contribute about 25 percent of Xcel’s earning going forward, according to Wayne H. Brunetti, president and CEO of Xcel.
Consider that in 1999, NRG’s earnings grew by 35 percent (37 cents per NSP share), contributing to an average earnings growth rate of 35 percent per year since 1996. Its net equity in MW grew by 233 percent.
NRG, with its partners, continues to extend its reach across the United States and around the globe. For example, it acquired more than 1,200 MW of generation in Southern California in 1999. Added to its 1998 purchases, NRG now owns a 50 percent interest in almost 3,000 MW of California capacity. Partnering with Dynegy Inc., it has become one of the top four IPPs in that region.
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Acquiring nearly 7,000 MW of generation in the Northeast in 1999, NRG is one of the top three IPPs in that region.
From Sept. 30, 1999 to Sept. 30, 2000, NRG increased its net MW ownership interest in generating facilities in operation by 112 percent, from 6,719 MW to 14,216 MW.
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NRG’s investment in generation (and the West’s summer demand for electricity) served it well, looking at reported financial results for the nine months ended Sept. 30, 2000. Net income was $141 million or 87 cents per share, vs. $29 million or 20 cents per share for the nine months ended Sept. 30, 1999. Revenue for the nine months ended Sept. 30, 2000 rose to $1,470 million from $284 million in the first nine months of 1999.
In an exclusive interview with EL&P in December, Brunetti discussed NRG:
“We want to try to find ways to increase the value to our shareholders. Looking at market valuations, we believe that Xcel is undervalued if you take out the market caps of the portion we own of NRG.
“We were the first utility to partial IPO an IPP company [May 2000], and that was to foster its growth. It was more economical to fund the growth in NRG with a 30 multiple [price/earnings] rather than a utility looking at a 12 multiple [price/earnings] going forward. The challenge we have as a company is how to reflect the 82 percent that we own of NRG now in the stock of Xcel.
They continue to run an excellent operation and continue to grow this company at a compounded rate in excess of 25 percent-closer to 35 percent this year-so we will continue to foster the growth. Our board last month [November] authorized us to have an additional $600 million of equity floated by NRG outside of the utility. We’re going to continue to grow that company and support its success.”
Leading the pack
NRG may be a powerhouse in the IPP genre, but Xcel’s utility subsidiaries remain reliable contributors to the bottom line (see table on page 20). However, in 1999 NSP saw a decline in earnings per share of 40 cents compared to 1998. A combination of four significant one-time items lead to this decrease (Conservation Incentive Recovery 1998; Conservation Incentive Recovery 1999; pretax write off of all goodwill recorded by its subsidiary EMI for acquisitions of Energy Masters and Energy Solutions; and loss on marketable securities).
The good news, according to Brunetti, is that compared to 1999, Xcel shareholders will see enhanced earnings. “We reported for the 12 months ending the third quarter 2.13 vs. 1.86 compared to 1999. Estimates for the year-end are 2.08 and 2.20 for 2001. We have publicly stated we expect growth rates between 7 and 9 percent.”
The August 2000 merger served to combine complementary strengths. Brunetti described the merger as an economic merger. “If we look at the companies separately, they’re quite different. NSP’s growth platform was through generation through its investment in NRG, and NCE’s growth platform was fundamentally Colorado, where there’s rapid customer growth. This merger diversified our sales and revenues. We have a dispersed geographic region; we’ve created the fourth largest combination electric and gas company; we have a good customer mix; and we have economies of scale.”
He added that Xcel expected initial synergy savings of $1.1 billion, but is now targeting $1.3 billion. “We have a very disciplined process in place to achieve that. We learned a lot through our last merger [Public Service Company of Colorado and Southwestern Public Service] about managing synergy savings.”
The increase in synergy savings is possible due to additional benefits gained from a more diverse investor base and more trading liquidity in the market. “We at least have the size and scale to withstand just about any kind of [market] structure that is ultimately adopted.”
Demonstrating its willingness to try a new approach, NSP along with three regional utilities, Alliant Energy, Wisconsin Electric Co. and Wisconsin Public Service Corp., formed the Nuclear Management Co. (NMC) in February 1999 to keep their nuclear plants competitive in a deregulating market. The boards of directors of the utilities transferred the plants’ operating licenses to the NMC in order to employ best practices across the fleet of plants and harness benefits of scale.
Although NMC will operate the facilities, the companies will continue to own the plants and will retain the financial obligation for their safe operation.
Consumers Energy has recently signed an agreement to become a partner in NMC, increasing the number of units to eight with 4,500 MW of total generating capacity.
Another area in which Xcel’s utility subsidiaries lead is customer satisfaction. For the second consecutive year, NSP ranked high in a study by J.D. Power and Associates and Navigant Consulting (see EL&P’s October issue) rating residential customer satisfaction. The ratings included these five components: price and value, power quality and reliability, billing and payment, customer service and company image. NSP ranked second among Midwestern utilities and NCE ranked sixth among Western utilities.
In the following excerpts from EL&P’s interview, Brunetti shared more of Xcel’s strategy and plans.
EL&P: The Midwest has been in the spotlight over the last few years in terms of transmission constraints. What is Xcel’s plan to assure its subsidiaries meet their transmission needs (particularly for the Minnesota and Wisconsin utilities)? What changes do you anticipate in transmission planning and operation?
Brunetti: As part of the merger, we agreed to join MISO. Building transmission is probably more difficult today than building new generation. The siting and getting approval for it is a very difficult process. We have a board meeting tomorrow [December 13], and on the agenda is approval of a capital budget going forward into 2001. We bring not only a total budget to them, but any projects specifically over $10 million. We have 12 transmission projects identified in that budget for a build out of about $315 million to strengthen the systems both in the Midwest and West. There are two principal projects, which are brand new lines and large expenditures; two lines that I’m referring to are the ones that were part of our first merger with Southwestern Public Service and Public Service Company of Colorado. Part of our merger agreement was that we build a tie in from Texas to Colorado. The others [projects] are significant upgrades of the systems in Colorado, Minnesota and Wisconsin.
Editors note: NCE announced plans (prior to its merger with NSP) to build a 345 kV intertie between Amarillo, Texas and southeastern Colorado (about 300 miles) to connect the Southwestern Public Service and Public Service Company of Colorado systems.
EL&P: What does unregulated business mean for Xcel moving forward?
Brunetti: Our principal unregulated business is NRG. This year our nonregulated businesses will contribute about 25 percent of our earnings. The principal earnings come from NRG and Yorkshire Electricity, which is a restructured utility in the U.K. We have tried to keep all of our nonregulated businesses close to our existing skill sets. Another business is Seren Innovations, which is building off of our fundamental skill set in building an operating distribution system. Instead of handling electricity or gas, it’s handling telephone and Internet services. Another business unit we’ve created is called Enterprise Business Unit, which is the portfolio manager for our nonregulated businesses. We have recently combined two of our energy services businesses, Energy Masters, which was NSP and Planergy, which NCE owned, to create a stronger energy services company. We just did that a couple weeks ago. It’s now called Planergy International.
EL&P: Telecom is a growth industry for many utilities. What are Xcel’s plans for Seren Innovations over the next five years?
Brunetti: I would describe Seren right now as a proof of our business model. We’re looking for the next growth platform. We do know that the products Seren delivers are in high demand; we know we can sell it, but we have to prove the business model. A business like Seren requires an intense amount of capital going forward, and utilities use an earnings per share evaluation. For companies like Seren, earnings come significantly after the investment. You have to build out the system, sell to customers, provide multiple products and then the revenue stream comes.
EL&P: What is your projected capital investment plan over the next five years?
Brunetti: Our capital forecast for the next five years is about $1 billion a year . A good deal of that, besides transmission, is in the build out of the distribution system. We’re adding about 70,000 new meters in the old NCE territory and about 30,000 new meters in the NSP territory to meet natural growth in those territories.
EL&P: How long has NSP Energy Marketing operated?
Brunetti: In 1996, NSP Energy Marketing got into trading and risk management and developed capabilities. We’ve always been involved in the wholesale market in one way or another, but it has become more sophisticated in the past few years. Trading volumes for NSP have increased about 7.25 percent from 1999 to 2000. We’re very conservative in the trading area. We trade off our assets and do no speculative trading.
EL&P: Please describe your personal management style. What factors are most important for you?
Brunetti: I have had for many years a fundamental philosophy that’s based upon core values or principles. I haven’t changed these although I examine them every year and ask, ‘Are these still the right things to do?’
You have to focus the business on the customer. Drive the business from a customer perspective.
It takes people to run an organization and you have to respect people. Organizations have a great deal of talent, but often have a difficult time tapping the great minds. Every employee can contribute to improving the business-improving how we serve customers and improving the profitability of the business.
I like to manage with facts. I was trained as an accountant; I can’t seem to get it out of my blood. I’d rather deal with facts than opinions or ‘gut feelings.’
[Strive for] continuous improvement. No business should ever be satisfied with how they do things. Problems are opportunities to improve the business.
Xcel appears to be well positioned, able to play both the investor-owned utility role and the more aggressive IPP role. Its utilities enjoy the insulation (for now) of being in states not eager to embrace restructuring (Minnesota, Wisconsin), and NRG has clearly demonstrated its ability to contribute to the continued growth of Xcel.
This hybrid has demonstrated financial integrity, sound management, innovation, diversification-and perhaps most important in remaining competitive-has remained financially conservative while still taking advantage of opportunity.