01—Abstract
Summary
Summary of the 10-K filed March 28, 1995. Cited figures are marked; the original filing is the authoritative source.
Northern States Power Company (NSP, ticker XEL) reported strong 1994 results, with earnings per share of $3.46a, up 14.6% from $3.02 in 1993.
Growth came from both the regulated utility, which delivered modest gains from core electric and gas sales growth despite mild weather, and from non-regulated businesses, which contributed 14.2% of EPS for the first time, mainly through NRG's international power investments in Germany and Australia. Utility operating revenues were $2.49 billionb, and the company maintained a 47.5% common equity capital structure, though the fact that the dividend payout ratio reached 76%, above the 65-75% target range, is a point investors should weigh. The key risk overhang is the 1994 Minnesota Prairie Island legislation, which tied nuclear dry-cask storage approval to resource commitments for wind and biomass generation.
Moody's downgraded NSP's first mortgage bonds from Aa2 to A1 on this basis, while the other three agencies affirmed AA-range ratings, and Moody's expects electric production costs to rise materially. Other exposures include a 1995 transmission and wholesale competition environment shaped by the Energy Policy Act, environmental remediation estimated at $122 millionc across 10 PRP sites, and a pending lawsuit against Westinghouse over steam generator defects.
For investors, the filing shows a utility with solid cash generation, a growing non-regulated earnings stream aimed at 20% of earnings by 2000, and a capital program of $1.9 billiond for 1995-1999. Execution risk on international projects and the cost impact of Prairie Island renewable commitments will be the main variables to monitor.
02—Key points
Key Highlights
- 1994 EPS of $3.46, up 14.6% from $3.02 in 1993; net income of $243.5 million
- Non-regulated businesses contributed 14.2% of EPS (49 cents) for the first time, driven by NRG's MIBRAG (Germany), Schkopau/Saale (Germany), and Gladstone (Australia) investments
- Quarterly dividend raised to $0.66 in 1994 (annualized $2.64, up 2.3%); payout ratio of 76% sits above the 65-75% objective range
- Moody's downgraded first mortgage bonds to A1 from Aa2 over Prairie Island legislation; S&P, Duff & Phelps and Fitch maintained AA-range ratings
- Capital expenditures of $383 million planned for 1995 and $1.9 billion for 1995-1999, with about 85% of utility capex expected to be funded internally
- Environmental remediation exposure of about $122 million across 10 PRP sites, plus $14-18 million for 15 former gas manufacturing sites
- Minnesota Prairie Island legislation requires 225 MW cumulative wind and additional biomass generation by 1998-2002, with cost implications not yet determinable
03—Questions
Frequently Asked Questions
How did NSP's earnings perform in 1994, and what drove the growth?
EPS rose to $3.46 from $3.02 (up 14.6%). Regulated utility EPS was $2.97 versus $2.93 in 1993, a modest gain held back by unfavorable weather. Non-regulated businesses added 49 cents per share, up from 9 cents in 1993, primarily from international energy project equity income and a $9.7 million pretax gain on a cogeneration contract termination. Note that about 38 cents of 1994 EPS came from the three NRG international projects.
Is the dividend sustainable given the payout ratio?
The dividend was increased 2.3% to an annualized $2.64 per share in June 1994, and the company has a stated policy of regular increases. However, the 1994 payout ratio of 76% exceeds the company's 65-75% long-term objective, and management says the goal is to return to range through earnings growth. Investors should watch whether earnings growth can close that gap without further dividend increases.
What is the significance of the Moody's downgrade and the Prairie Island legislation?
A 1994 Minnesota law approved dry-cask storage at Prairie Island in exchange for NSP committing to wind and biomass generation (225 MW cumulative wind by 1998, additional biomass and wind by 2002). Moody's cut NSP's first mortgage bond rating to A1, arguing these renewable sources cost considerably more than current generation and will materially raise production costs. Management acknowledges costs may rise but says the impact on power purchase commitments is not yet determinable.
What are the main environmental and legal liabilities?
NSP is a potentially responsible party at 10 waste disposal sites with estimated total remediation of $122 million, of which NSP's share is about $2.5 million, with roughly $1 million accrued for the remaining four sites. Separately, the company estimates $14-18 million for 15 former manufactured gas sites, with $5.3 million paid to date. Legal matters include a lawsuit against Westinghouse over Prairie Island steam generator defects and litigation from a July 1993 St. Paul gas explosion, where damages are estimated to exceed $1 million against $150 million in general liability coverage.
How is NSP positioning for competition and its non-regulated growth?
NSP targets 20% of earnings from non-regulated businesses by 2000, up from 14.2% in 1994, and expects to invest about $153 million in non-regulated projects in 1995 and $623 million over 1995-1999. Its strategy includes competitive bidding for new generation, FERC authority for Cenergy to sell electricity, and open-access transmission tariffs. Management notes that non-regulated projects carry higher risk, that foreign cash flows are reinvested abroad rather than used for U.S. dividends, and that 1994 non-regulated results may not be indicative of future performance.
04—Continue