Business Context and Reporting Period
This Form 10-Q covers Northern States Power Company (NSP) for the quarter and nine months ended September 30, 1999. NSP is a regulated utility operating in Minnesota and Wisconsin, with significant nonregulated subsidiaries including NRG Energy, Inc. (NRG). On March 24, 1999, NSP agreed to merge with New Century Energies, Inc. (NCE) to form Xcel Energy Inc., a transaction approved by shareholders in June 1999 and pending regulatory approval.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended 9/30/99 | 3 Months Ended 9/30/98 | 9 Months Ended 9/30/99 | 9 Months Ended 9/30/98 |
|---|---|---|---|---|
| Utility Operating Revenues | $813,482 | $766,448 | $2,216,040 | $2,106,451 |
| Net Income | $111,337 | $101,694 | $175,149 | $193,845 |
| Earnings Available for Common Stock | $110,277 | $100,634 | $170,918 | $189,358 |
| Earnings Per Share (Diluted) | $0.72 | $0.67 | $1.12 | $1.26 |
| Operating Cash Flow (9 Months) | $524,746 (1999) vs $550,940 (1998) | |||
| Capital Expenditures (9 Months) | $401,771 (1999) vs $312,212 (1998) | |||
| Total Assets | $8,685,147 (9/30/99) vs $7,396,297 (12/31/98) | |||
| Long-Term Debt | $2,393,364 (9/30/99) vs $1,851,146 (12/31/98) | |||
| Short-Term Debt | ~$1.0 billion (9/30/99) |
Material Changes vs. Prior Period
- Revenue Growth: Utility operating revenues increased 6.1% for the nine months ended September 30, 1999, driven by retail sales growth and fuel cost recovery. Electric revenues rose 6.1%, while gas revenues remained flat.
- Earnings Decline: Net income for the nine months decreased 9.6% to $175.1 million. This decline was primarily due to a $35 million pre-tax charge recorded in the second quarter related to the potential disallowance of 1998 conservation program incentives by the Minnesota Public Utilities Commission (MPUC).
- Nonregulated Performance: NRG Energy's earnings improved significantly compared to 1998, which included a $20 million write-down of an Indonesian project. NRG contributed $0.19 per share to earnings in the first nine months of 1999 versus $0.06 in 1998.
- Cost Pressures: High temperatures in July 1999 drove record customer usage, forcing NSP to purchase power at high market costs. Approximately $16.8 million of these capacity and energy costs were unrecoverable in the third quarter, reducing earnings by 7 cents per share.
- Balance Sheet Expansion: Total assets increased by approximately $1.3 billion year-over-year, largely due to business acquisitions by NRG (including Somerset, Encina, Huntley, Dunkirk, and Arthur Kill stations) and increased utility plant investments.
Guidance, Outlook, and Risks
- Merger Outlook: The merger with NCE to form Xcel Energy is expected to close by mid-2000. Pro forma diluted EPS for the combined entity for the nine months ended September 30, 1999, is estimated at $1.27.
- Regulatory Risks:
- Conservation Incentives: The MPUC denied recovery of 1998 conservation incentives. A final decision on 1999 incentives is pending. Management estimates a potential earnings reduction of 5 to 9 cents per share in the fourth quarter if the proposed recovery levels are not approved.
- Rate Investigation: The MPUC ordered an investigation into the reasonableness of NSP's retail electric rates in Minnesota. While this does not authorize immediate rate reductions, it could lead to a formal rate case.
- MAPP Tariff: A new regional transmission tariff proposed by the Midcontinent Area Power Pool could reduce 2000 pretax earnings by $5 million to $16 million.
- Legal Contingencies:
- St. Cloud Gas Explosion: Nine lawsuits remain pending following a December 1998 explosion that killed four people. NSP denies liability, but ultimate costs are unknown.
- Grand Forks Fire: Multiple lawsuits seek damages exceeding $15 million related to a 1997 fire during historic floods. NSP maintains it is not legally responsible.
- DOE Litigation: NSP is appealing a Court of Federal Claims dismissal of a $1 billion claim against the Department of Energy regarding spent nuclear fuel storage.
- Year 2000 (Y2K): NSP reports 99% of systems are Y2K ready. Total spending to date is approximately $20.3 million, with an estimated $4.1 million remaining.
Investor Verification Checklist
- Conservation Incentive Recovery: Verify the final MPUC decision on 1999 conservation program incentives and the resulting impact on Q4 1999 earnings (estimated 5-9 cents per share reduction).
- Merger Timeline: Monitor regulatory approvals for the NSP-NCE merger, specifically in Arizona, Colorado, Minnesota, New Mexico, North Dakota, Wyoming, and Texas, as delays could impact capital structure plans.
- NRG Acquisition Integration: Assess the financial performance and integration of NRG's recent Northeast acquisitions (Somerset, Encina, Huntley, Dunkirk, Arthur Kill) and the pending Connecticut Light & Power deal.
- Unrecoverable Energy Costs: Review the extent of unrecoverable purchased power costs in future quarters, particularly during peak demand periods, given the limitations of the fuel clause billing adjustment process.
- Legal Exposure: Track the status of the St. Cloud gas explosion lawsuits and the Grand Forks fire litigation to assess potential liability beyond current insurance deductibles.