Business Context and Reporting Period
Company: Northern States Power Company (NSP), a Minnesota corporation.
Reporting Period: Fiscal year ended December 31, 1995.
Operations: NSP is a regulated public utility providing electricity and natural gas in Minnesota, North Dakota, South Dakota, Wisconsin, and Michigan. It also operates non-regulated energy businesses through subsidiaries NRG Energy, Inc. (NRG), Cenergy, Inc., and Viking Gas Transmission Company.
Strategic Development: On April 28, 1995, NSP entered into a "merger-of-equals" agreement with Wisconsin Energy Corporation (WEC) to form Primergy Corporation. The transaction is subject to regulatory approvals and shareholder ratification, with a goal of closing by the end of 1996.
Key Financial Metrics (1995)
| Metric | 1995 Value | 1994 Value |
|---|---|---|
| Utility Operating Revenues | $2,568.6 million | $2,486.5 million |
| Net Income | $275.8 million | $243.5 million |
| Earnings Per Share (EPS) | $3.91 | $3.46 |
| Dividends Declared Per Share | $2.685 | $2.625 |
| Total Assets | $6,228.6 million | $5,949.7 million |
| Long-Term Debt | $1,542.3 million | $1,463.4 million |
| Operating Cash Flow | $573.8 million | $510.2 million |
| Capital Expenditures (Utility) | $386.0 million | $387.0 million |
Profitability: Regulated utility earnings increased 14.8% year-over-year, driven by sales growth, favorable weather, and reduced operating costs. Non-regulated businesses contributed $0.50 per share to earnings.
Liquidity: Internally generated funds covered approximately 85% of total capital expenditures. Short-term borrowings totaled approximately $216 million at year-end.
Material Changes vs. Prior Period
- Revenue Growth: Total utility operating revenues increased $82.1 million (3.3%) compared to 1994. Electric revenues rose $76.1 million, while gas revenues increased $5.9 million.
- Earnings Growth: Net income increased $32.3 million (13.3%). EPS grew 13.0% to $3.91.
- Non-Regulated Performance: Non-regulated operating revenues increased 29% to $313.1 million, largely due to increased gas marketing sales by Cenergy. A $30 million pretax gain was recognized from the termination of a power sales contract in California.
- Costs: Fuel expenses for electric generation increased slightly ($4.5 million) due to higher output. Purchased power costs decreased $5.2 million due to lower market prices and fewer plant outages.
- Debt: Long-term debt increased by $78.9 million, primarily due to the issuance of $250 million in first mortgage bonds to refinance higher-cost debt.
Guidance, Outlook, and Risks
Merger Outlook
NSP and WEC anticipate $2.0 billion in net cost savings over 10 years from the merger. The companies have proposed a 1.5% reduction in electric retail rates and a four-year rate freeze, pending regulatory approval. The merger is expected to close shortly after all regulatory conditions are met, with a target of end-1996.
Capital Requirements
Utility capital expenditures are estimated at $410 million for 1996 and $1.9 billion for the five-year period ending 2000. Non-regulated project investments are estimated at $140 million for 1996 and $550 million for the 1996-2000 period.
Risks and Contingencies
- Regulatory: The merger is subject to approvals from FERC, state commissions, and the SEC. Divestiture of gas or non-regulated operations may be required under the Public Utility Holding Company Act.
- Nuclear Fuel Storage: The Department of Energy (DOE) has indicated a permanent storage facility will not be ready until approximately 2010, contrary to the 1998 statutory deadline. NSP is pursuing on-site dry cask storage and a private interim storage facility in New Mexico.
- Competition: The Energy Policy Act of 1992 and FERC Order 636 have increased competition in wholesale power and gas markets. NSP lost seven municipal wholesale customers in 1995, resulting in a $12 million revenue decrease.
- Environmental: NSP faces potential liabilities for 12 waste disposal sites (estimated total cost $123-$126 million). NSP's share is estimated at $2.5 million, with $1.0 million accrued for four unsettled sites. Additional costs may arise from Clean Air Act compliance and site remediation.
Investor Verification Checklist
- Merger Status: Verify the timeline for FERC and state regulatory approvals for the WEC merger and any potential divestiture requirements.
- Nuclear Storage: Confirm the progress of the DOE's permanent storage facility and the status of NSP's alternative storage solutions (dry casks and New Mexico consortium).
- Environmental Liabilities: Review the status of the 12 waste disposal sites and the potential for cost increases beyond the current $2.5 million estimate.
- Non-Regulated Investments: Assess the performance and risk profile of NRG's international projects (Germany, Australia, Latin America) and the O'Brien Environmental Energy acquisition.
- Rate Cases: Monitor the outcome of the proposed rate reduction and freeze filings in Minnesota, Wisconsin, and North Dakota.