Business Context and Reporting Period
Company: Northern States Power Company (Minnesota) and Subsidiaries (NSP), a subsidiary of Xcel Energy Inc.
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended September 30, 1998.
Business Overview: NSP operates regulated electric and gas utilities in Minnesota and Wisconsin. It also maintains significant nonregulated businesses, primarily through its 50% interest in NRG Energy, Inc., which engages in independent power production and energy services globally. The company completed mergers with Black Mountain Gas Company and Natural Gas Inc. in July 1998.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended 9/30/98 | 3 Months Ended 9/30/97 | 9 Months Ended 9/30/98 | 9 Months Ended 9/30/97 |
|---|---|---|---|---|
| Total Utility Operating Revenues | $766,448 | $697,443 | $2,106,451 | $2,034,263 |
| Utility Operating Income | $134,985 | $118,540 | $279,090 | $272,582 |
| Net Income | $101,694 | $87,912 | $193,845 | $171,938 |
| Earnings Available for Common Stock | $100,634 | $85,541 | $189,358 | $163,239 |
| Earnings Per Share (Diluted) | $0.67 | $0.61 | $1.26 | $1.18 |
| Net Cash Provided by Operating Activities | N/A | N/A | $550,940 | $508,864 |
| Capital Expenditures | N/A | N/A | ($312,212) | ($319,904) |
| Cash and Cash Equivalents (End of Period) | $88,931 | N/A | $88,931 | $112,521 |
| Total Long-Term Debt | $1,848,110 | N/A | $1,848,110 | $1,878,875 |
Material Changes vs. Prior Period
- Revenue Growth: Total utility operating revenues increased 9.9% in Q3 1998 and 3.6% for the nine-month period compared to 1997. Electric retail revenues rose 8.4% in Q3 due to a 6.9% increase in sales volume and favorable weather. Gas revenues surged 26.2% in Q3 driven by a 33.1% price increase, though nine-month gas revenues declined 10.9% due to lower sales volumes from less favorable weather.
- Expense Increases: Fuel and purchased power costs increased 22.5% in Q3 and 17.5% for the nine months, driven by higher market prices and increased generation to support sales growth. Operating expenses related to storms increased by approximately $11 million in the first nine months of 1998.
- Nonregulated Performance: Nonregulated operations reported a net loss of $5.6 million in Q3 1998 compared to a profit of $1.4 million in Q3 1997. This was primarily due to a $23.4 million nonrecurring write-down of investments in NRG projects in Indonesia and other international ventures.
- Stock Split: A two-for-one stock split effective June 1, 1998, has been reflected in all share and per-share data.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- NRG Write-downs: A $20 million pretax charge ($13.3 million after-tax) was recorded in Q3 1998 for the West Java, Indonesia project due to political and economic instability. An additional $3.3 million reserve was recorded for other international projects. These reduced earnings by $0.10 per share.
- Storm Costs: Severe hail and wind storms in May and June 1998 resulted in approximately $11 million in operating expenses and $10 million in capital expenditures, reducing earnings by approximately $0.03 per share for the nine-month period.
- Regulatory and Legal Risks:
- Transmission Divestiture: Wisconsin legislation (Act 204) may require NSP to divest transmission assets or transfer control to an Independent Transmission Company (ITC) by June 30, 2000. NSP is exploring forming an ITC with Alliant Energy.
- DOE Litigation: NSP filed a complaint against the Department of Energy (DOE) seeking over $1 billion in damages for breach of contract regarding spent nuclear fuel storage. A class action lawsuit by customers against the DOE also names NSP as a nominal defendant.
- Grand Forks Fire: NSP is defending a lawsuit alleging responsibility for a fire in Grand Forks, North Dakota, during 1997 floods, with damages claimed in excess of $15 million.
- Year 2000 (Y2K) Remediation: NSP has spent approximately $10.5 million on Y2K remediation through September 1998, with an estimated additional $14 million required. The company does not anticipate significant business disruptions from internal systems but notes risks regarding third-party compliance.
- Liquidity: The company maintains a $300 million revolving credit facility and approximately $58 million in unused credit lines for subsidiaries. Short-term debt levels were reduced in the period.
Investor Verification Checklist
- Verify the impact of the $23.4 million NRG investment write-down on future nonregulated earnings projections.
- Monitor the status of the Wisconsin transmission divestiture legislation and the proposed ITC formation with Alliant Energy.
- Review the progress of the DOE litigation regarding nuclear fuel storage and potential recovery of costs.
- Assess the sufficiency of the $14 million estimated remaining budget for Y2K remediation and potential third-party failure risks.
- Confirm the outcome of the Minnesota Public Utilities Commission (MPUC) deliberations on the Conservation Improvement Program (CIP) incentives, which could impact annual revenue by approximately $32 million if discontinued.