Power Outage

A $300 million investment by Xcel Energy in a subsidiary that buys and sells power plants all over the world has led to Xcel's being placed on a negative credit watch by a national credit agency.

The subsidiary, NRG Energy Inc., was spun off from one of Xcel's predecessor companies twelve years ago, but Xcel is its largest stockholder by far, with 74 percent of the shares. NRG plans to spend $1.5 billion to buy four coal-fired power plants in Ohio, and it needed the money from Xcel to complete that purchase.

But the deal comes in the midst of chaos in the utility industry. California's disastrous experiment with deregulation has led to electricity bills that have doubled or tripled for many ratepayers there, and the collapse of Enron Corp. -- a company once valued at $70 billion -- has led to closer scrutiny of the power business, especially the big-bucks trading of power in deregulated markets, which has become part of the industry's brave new world.

Thus far, the Colorado Legislature has refused to deregulate the power industry here, but that hasn't stopped Xcel from making a major commitment to energy trading elsewhere. NRG has bought power plants from California to the East Coast and sells the power produced on energy markets. The company was founded with the idea that the days of local power plants serving only locally owned utilities are over.

The credit agency, Fitch Inc., warned investors in December that Xcel's involvement in NRG was cause for concern, and it lumped Xcel in with four other energy companies that buy and sell power on the open market. "Each of these companies derives a significant portion of its earnings and cash flow from the merchant energy business and has an aggressive capital expenditure program or pending acquisition," Fitch stated. "The companies also have debt leverage that is relatively high. While Fitch does not see any of the companies listed as analogous in circumstances to Enron, the change that is underway in asset valuations and access to capital will place a burden on them."

The downgrade could mean that Xcel will have to pay higher interest rates in the future when it borrows money, and whether Colorado consumers will pay higher energy bills as a result will depend on the vigilance of Colorado officials. Under state law, the Colorado Public Utilities Commission is charged with setting rates for power. In theory, ratepayers are only supposed to subsidize Xcel's expenses in providing that power here and shouldn't have to help the company pay the higher interest rates it may have to carry because of its investment in NRG.

"We evaluate all aspects of the expenses assigned to Colorado," says PUC spokesman Terry Bote. "We look at all the power costs. It's a very complicated thing, but that's what we do."

Xcel was created in August 2000 through a merger of Denver-based New Century Energies and the Northern States Power Company. Colorado's longtime power provider, Public Service Company of Colorado, is now a wholly owned subsidiary of Xcel. In May, hearings will begin before the PUC on new utility rates.

"When the PUC sets rates, it determines the cost of capital for Public Service Company of Colorado, not for Xcel," says Ken Reif, director of the Colorado Office of Consumer Counsel. "Whatever investments Xcel makes in non-regulated businesses shouldn't be reflected in Colorado rates, but that's easier said than done. If Xcel's investments fail, it affects Xcel's costs for borrowing. If we properly allocate the risk, it shouldn't make a difference to ratepayers."

And with the growing evidence of monumental fraud at Enron, all power companies are now operating under a cloud. In addition to Fitch, Moody's Investors Service has also said it will review NRG for a possible downgrade on its unsecured debt. If the $1.5 billion Ohio deal is completed, NRG would have an estimated debt of $4.3 billion. Last March NRG's stock hit a high of $37 per share, but since then, the stock has plummeted to $14.

"There's been a heightened concern by the rating agencies as a result of the Enron debacle," says Dick Kolkmann, managing director of investor relations for Xcel. He blames the turmoil, as well as a recent drop in energy costs, for his company's falling stock price.

Like Xcel, NRG is based in Minneapolis, but the company has been scouting for business as far away as Taiwan; it owns several power plants in Australia and the former East Germany, and it purchased facilities in California after that state's market was opened through deregulation. (NRG and other free-trading energy firms were attacked by California politicians as lawless cowboy companies preying on consumers after the state's power grid started to collapse last year.) Today NRG owns more than seventy plants on four continents, including 48 in the United States.


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