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Coloraska ,

You asked:

Just because the lenders believe that Xcel will be able to pay their bills doesn't really say anything for the long term growth potential. Any thoughts?

Growth zfor Xcel is going to come from a rebound in the power demand. In my mind the key driver in Xcel's growth is going to be NRG unit - the current load stone around it's neck. But let me digress from NRG for a moment.

When the economy recovers and demand picks up, more power will be used and Xcel the regulated entityu will generate more power and will sell more power - real basic stuff there so no surprise. This in itself won't really juice Xcel's bottom line but it will provide a decent amount of upside to current earnings - maybe as much as 5-10% more EPS in good quarters. [just a guess on the number by the way based on peak usage a few years ago vs today.]

This minimal growth will happen regardless of NRG but won't be sustainable - i.e. the growth RATE won't be sustainable, the growth will probably stick around as long as the recovery lasts. So when the recovery in demand sets in, Xcel will have a year of nice big year over year returns before it settles back into a slow growth mentality.

The big growth will come from NRG - if they can keep these assets. Right now regulated utes have more capacity then demand - not a good trend for those whose specialty is providing power to those in need. Also a good bit of NRG's power is pre-sold. Pre-selling give some stabilty to the balance sheet while limiting upside [and downside too]. The key issues are 1) how much is pre-sold and how long those contracts last and 2) what can they get for new pre-sold contracts and for what length of time? I don't know the answers to the first and no one can give more then a guestimate for the second. Both will depend on when you are trying to negotiate the contract.

As California demonstrated if the power is hard to get, the cost can be quite high. But either way, NRG is not going to presell all it capacity not even in the best of markets. Too much could go wrong, like a plant could be out of commission and spot market prices are so high that you would lose a ton etc. More over, as good as prices are today they can always be better and finally, pre-sold contracts NEVER max out at the level that the spot market maxes out at. So in effect, if you with hold 20% of your capacity you probably only need to see a small bit at peak times on the spot market to make up for a long term contract for all of it.

But we digress again. The keys for big returns/growth of Xcel will hinge on if it can keep NRG from bankruptcy. Keep the assets and own them when demand recovers and Xcel can earn a nice return. Lose NRG and growth will be modest to minimal.

As an aside, since you asked where the growth will come from, losing NRG would not be terrible for Xcel but it would change the character of it. By that I mean, without NRG, Xcel is stodigy slow growing predictable utility with a decent dividend and limited growth prospects.
Its risk would be in line with say Southern which could provide some pop to the share price short term. [were Xcel to commnad even 25% of Southern's P/E of about 16 the share would be around 14.75 based on '04 est of 1.23 a share. At 16X earnings it would get 19.68 a share.] But it would probably be limited to a max of 5-7% long term growth without taking on more risk.

With NRG there is the potential for much higher EPS maybe even double what it earns today [remember that if NRG could be just break even it would add to Xcel's EPS as the unit is losing money right now.] Assume NRG adds .75 a share in EPS and a P/E of 10 we are at $20.00. make it 12 and we see $24.00. Provide it on a consistent basis and you might even see $30 in 3-4 years.

But like so much owning NRG has its downsides, the biggest being it will make Xcel more risky and volitile. NRG is a commodity seller. This is very cyclical and will provide far bigger swings in Xcel's share price as it will rise and fall with the spot market and the supply/demand curve.

Anyway, those are my thoughts here.


[Disclosure: As I mentioned on the Energy and Utilities board, I sold my Xcel on or about March 14 of this year to purchase GXP which has a higher dividend and less risk.]
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