Business Context and Reporting Period
Company: Northern States Power Company (NSP), a Minnesota corporation.
Reporting Period: Fiscal year ended December 31, 1998.
Operations: NSP is a regulated public utility generating, transmitting, and distributing electricity and natural gas in Minnesota, Wisconsin, North Dakota, South Dakota, Michigan, and Arizona. It also operates significant nonregulated energy businesses through its subsidiary, NRG Energy, Inc. (NRG), and other affiliates.
Recent Event: On March 24, 1999, NSP entered into a merger agreement with New Century Energies, Inc. (NCE), expected to close in 12 to 18 months.
Key Financial Metrics
| Metric | 1998 | 1997 |
|---|---|---|
| Utility Operating Revenues | $2,819 million | $2,734 million |
| Net Income | $282 million | $237 million |
| Earnings Per Share (Diluted) | $1.84 | $1.61 |
| Dividends Declared Per Share | $1.425 | $1.403 |
| Total Assets | $7,396 million | $7,144 million |
| Long-Term Debt | $1,851 million | $1,879 million |
| Net Cash Provided by Operating Activities | $702 million | $690 million |
| Capital Expenditures (Utility) | $411 million | $397 million |
Material Changes vs. Prior Period
- Revenue Growth: Utility operating revenues increased by $85 million (3.1%) compared to 1997. Electric revenues rose $144 million, driven by retail sales growth and expanded energy marketing. Gas revenues decreased $58 million, primarily due to warmer weather reducing firm sales volume.
- Earnings Increase: Net income increased $45 million (19%). Earnings per share rose to $1.84 from $1.61. This growth was supported by a $29 million pretax merger cost write-off in 1997 that did not recur in 1998.
- Nonregulated Performance: NRG contributed $0.26 per share to earnings in 1998, up from $0.11 in 1997. This increase included an $11 per share gain from the sale of an interest in the Enfield Energy Centre, partially offset by a $10 per share write-down of an Indonesian project.
- Weather Impact: Unfavorable weather in 1998 reduced earnings by an estimated 11 cents per share compared to historical averages.
Guidance, Outlook, and Risks
- Merger Outlook: The proposed merger with NCE is subject to shareholder and regulatory approvals. NSP expects the transaction to be a tax-free stock-for-stock exchange.
- Regulatory Environment: NSP faces ongoing regulatory reviews regarding rate recovery for conservation programs in Minnesota and potential restructuring of the electric industry. The company anticipates no general rate filings in Minnesota for 1999 pending the outcome of a study on conservation incentives.
- Strategic Divestitures: NSP plans to divest its electric transmission business to form an Independent Transmission Company (ITC) and its nuclear generation business to form an Independent Nuclear Generating Company.
- Capital Requirements: NSP estimates utility capital expenditures of $450 million for 1999 and $2.1 billion for 1999-2003. Nonregulated capital requirements are estimated at $1.3 billion for 1999.
- Key Risks:
- Nuclear Waste: Ongoing dispute with the U.S. Department of Energy (DOE) regarding the failure to accept spent nuclear fuel by the statutory deadline. NSP has sued the DOE for damages exceeding $1 billion.
- Environmental: Potential liabilities for site remediation, including the Ashland, Wisconsin site, with estimated costs ranging from $10 million to $20 million.
- Year 2000 (Y2K): Significant costs incurred for remediation; management does not anticipate significant business disruptions but notes risks related to third-party non-compliance.
Investor Verification Checklist
- Merger Approval: Verify the status of shareholder votes and regulatory approvals for the New Century Energies merger.
- NRG Volatility: Assess the sustainability of NRG earnings given the mix of one-time gains (Enfield sale) and project write-downs (Indonesia).
- Regulatory Assets: Review the $331 million in regulatory assets, specifically the $73 million in conservation expenditures, for potential write-offs if rate recovery is denied.
- Nuclear Litigation: Monitor the outcome of the lawsuit against the DOE regarding spent fuel storage damages.
- Environmental Accruals: Track the final determination of remediation costs for the Ashland, Wisconsin site and other potential responsible party (PRP) sites.