Business Context and Reporting Period
Company: Northern States Power Company (NSP), a Minnesota corporation, and its subsidiaries (collectively NSP), including Northern States Power Company (Wisconsin), Viking Gas Transmission Company, and NRG Energy, Inc.
Reporting Period: Fiscal year ended December 31, 1993.
Operations: NSP is a regulated public utility generating, transmitting, and distributing electricity across a 49,000-square-mile service area in Minnesota, North Dakota, South Dakota, Wisconsin, and Michigan. It also transports and distributes natural gas. The company operates two nuclear plants (Monticello and Prairie Island) and several coal-fired plants. In 1993, NSP completed a functional restructuring into three core businesses: electric power generation, electric transmission/distribution, and gas distribution.
Key Financial Metrics
| Metric | 1993 | 1992 | 1991 |
|---|---|---|---|
| Utility Operating Revenues | $2,404.0 million | $2,159.5 million | $2,201.1 million |
| Net Income | $211.7 million | $206.4 million | $224.1 million |
| Earnings Per Share (Total) | $3.02 | $3.04 | $3.29 |
| Capital Expenditures | $362 million | $428 million | $350 million |
| Long-Term Debt | $1,291.9 million | $1,299.9 million | $1,233.9 million |
| Total Assets | $5,587.7 million | $5,142.5 million | $4,918.8 million |
| Common Stockholders' Equity | $1,827.5 million | $1,622.1 million | $1,622.1 million |
| Dividends Declared Per Share | $2.565 | $2.495 | $2.395 |
Liquidity: Cash and cash equivalents totaled $57.8 million at year-end. Net cash provided by operating activities was $561.8 million. The company maintained a capital structure of approximately 45-50% common equity and 40-45% debt.
Material Changes vs. Prior Period
- Revenue Growth: Utility operating revenues increased 11.3% to $2,404.0 million, driven by rate increases approved in Minnesota, Wisconsin, North Dakota, and South Dakota, and the acquisition of Viking Gas Transmission Company.
- Earnings: Net income increased 2.6% to $211.7 million. Earnings per share were $3.02, compared to $3.04 in 1992 (which included a one-time accounting change benefit of $45.5 million). On a continuing operations basis, earnings improved significantly from 1992 due to better weather conditions and rate relief.
- Acquisitions: NSP invested $159 million in 1993 to acquire three businesses: Viking Gas Transmission Company ($45 million), the Minneapolis Energy Center ($110 million), and assets of Centran Corporation ($4 million, reorganized as Cenergy, Inc.).
- Capital Spending: Total capital expenditures decreased 15.4% to $362 million, primarily due to lower spending on electric system replacements and improvements compared to 1992.
- Accounting Changes: NSP adopted SFAS No. 106 (Postretirement Benefits) and SFAS No. 109 (Income Taxes) in 1993. The impact of SFAS No. 106 was largely offset by rate recovery.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Capital Requirements: NSP estimates utility capital expenditures of $396 million for 1994 and $1.8 billion for 1994-1998. Non-regulated project investments are estimated at $130 million in 1994 and $540 million for 1994-1998.
- Rate Outlook: Rate increases approved in 1993 are expected to fully impact revenues in 1994. No general rate filings are anticipated in Minnesota or South Dakota for 1994.
- Competition: The Energy Policy Act of 1992 and FERC Order 636 are increasing competition in electric and gas markets. NSP is pursuing competitive bidding for new generation and expanding non-regulated energy services.
Material Risks and Contingencies
- Prairie Island Nuclear Fuel Storage (Critical): The company faces a potential shutdown of the Prairie Island nuclear facility (supplying ~20% of output) by early 1996 if the Minnesota Legislature does not approve an onsite dry cask storage facility. The estimated present value cost of replacement power and stranded investment is at least $1.8 billion. Legislative approval was pending as of March 1994.
- Regulatory Appeals: An appeal was filed regarding the method of calculating the rate of return on common equity in Minnesota, involving approximately $7 million in annual revenues.
- Environmental Liabilities: NSP is a potentially responsible party (PRP) for eight waste disposal sites with estimated total costs of $85 million. NSP's estimated share is approximately $2.5 million. Additional costs for former gas plant sites are estimated at $7 million.
- Wholesale Customer Loss: Nine municipal wholesale customers representing $24 million in annual revenue plan to terminate power supply agreements in 1995-1996.
- Legal Proceedings: A natural gas explosion in St. Paul in July 1993 resulted in damages estimated to exceed $1 million, with four personal injury lawsuits filed.
Investor Verification Checklist
- Legislative Action on Prairie Island: Verify the status of the Minnesota Legislature's decision on the dry cask storage facility, as a denial could trigger a $1.8 billion cost recovery request and plant shutdown.
- Rate Case Appeals: Monitor the outcome of the Minnesota Court of Appeals case regarding the return on equity calculation ($7 million annual revenue impact).
- Wholesale Contract Renewals: Track the status of negotiations with the Minnesota Municipal Power Agency (MMPA) regarding transmission access for the nine terminating customers.
- Environmental Cost Recovery: Confirm regulatory approval for the recovery of environmental remediation costs in future rate filings.
- Non-Regulated Project Progress: Review the status and equity funding requirements for international projects in Germany (Schkopau/MIBRAG) and Australia (Gladstone).