01—Abstract
Summary
Summary of the 10-K filed March 29, 1996. Cited figures are marked; the original filing is the authoritative source.
Northern States Power Company (NSP, ticker XEL) reported 1995 earnings per share of $3.91a, up 13.0% from $3.46 in 1994, on utility operating revenues of $2.57 billion and net income of $275.8 million.
Regulated utility earnings were $3.41b per share, while non-regulated businesses (led by NRG Energy) contributed $0.50 per share. The 1995 results included two non-recurring items: a roughly $30 million pretax gain from a California power contract termination (about 26 cents per share) and a $5 million impairment (about 4 cents per share). Excluding these, EPS from ongoing operations was $3.69, up about 7%.
The dividend rate rose to an annualized $2.70c per share, with a 69% payout ratio. Book value per share reached $29.74. The central investor issue is the proposed "merger-of-equals" with Wisconsin Energy Corporation (WEC) to form Primergy Corporation.
NSP shareholders would receive 1.626 Primergy shares for each NSP share, giving legacy NSP holders 50% of the combined common equity. Management estimates net savings of about $2.0 billiond over 10 years and has proposed a 1.5% electric rate reduction followed by a four-year rate freeze. The deal faces multiple approvals (FERC, state commissions, SEC, NRC, and HSR antitrust review), and the filing states that timing may extend beyond 1996.
The 1995 financial statements exclude the merger's effects except for pro forma information. Key risks include nuclear used-fuel storage uncertainty (the DOE is not expected to accept fuel until about 2010), rising environmental and renewable-energy mandates tied to Minnesota's Prairie Island legislation, Moody's A1 rating on NSP first mortgage bonds (versus AA- from other agencies), increasing retail competition, and the early-stage, higher-risk international non-regulated portfolio. Net income of $275.8 million reflects continued utility growth, though the company's own filing notes that some of the 1995 earnings gains were weather-driven, with a hot summer adding an estimated 21 cents per share.
02—Key points
Key Highlights
- 1995 EPS of $3.91, up 13.0% from $3.46; excluding non-recurring items, EPS from ongoing operations was $3.69, up about 7%
- Proposed merger with Wisconsin Energy Corp. into Primergy Corp.: 1.626 Primergy shares per NSP share; 50/50 equity split; estimated $2.0 billion in net savings over 10 years
- Proposed rate plan: 1.5% electric rate cut plus four-year rate freeze, and a two-year gas freeze in Minnesota; FERC decision expected Q4 1996, though approvals could extend beyond 1996
- Dividend increased to an annualized $2.70 per share (2.3% increase), 69% payout ratio, within the 65–75% objective range
- Non-regulated businesses (NRG Energy and others) contributed $0.50 per share; NRG's share of the 1995 gain from a California contract termination was about $30 million pretax
- Credit rating concern: Moody's rates NSP first mortgage bonds A1 (since May 1994, tied to Prairie Island legislation) while S&P and others rate them AA-/AA; Moody's has placed ratings on review for possible upgrade tied to the merger
- Nuclear fuel storage remains unresolved: DOE not expected to accept used fuel until about 2010, and NSP is litigating against the DOE and pursuing a private interim storage facility in New Mexico
03—Questions
Frequently Asked Questions
How much will NSP shareholders own of the combined company after the Primergy merger?
Each NSP common share converts into 1.626 Primergy common shares. Based on the share counts at the April 1995 agreement date (67.3 million NSP shares and 109.4 million WEC shares), NSP shareholders would own about 50% of Primergy's common equity. The merger is structured as a tax-free, pooling-of-interests transaction.
Will the merger lead to lower electric rates for customers?
The companies have proposed a 1.5% average retail electric rate reduction, implemented after regulatory approval and closing, followed by a four-year electric rate freeze. Gas proposals include a two-year freeze in Minnesota and a 1.25% reduction plus a four-year freeze in North Dakota. Recovery of merger-related deferred costs is proposed over the same period. The filing acknowledges that if the projected cost savings are not realized, shareholders bear the risk during the freeze.
What is the dividend outlook for Primergy after the merger?
The companies anticipate that Primergy will adopt NSP's dividend level adjusted for the exchange ratio, implying a pro forma rate of about $1.66 per Primergy share as of Dec. 31, 1995. However, the Primergy board would set future dividends based on results and business considerations, so the amount is not guaranteed.
What are the main risks to NSP's earnings and growth?
Key risks include regulatory outcomes for the merger (including possible divestiture of gas and non-regulated businesses under PUHCA and a state limit on non-utility affiliate assets), rising renewable energy and environmental costs, unresolved used nuclear fuel storage, growing retail and wholesale competition (including loss of municipal customers), and the higher-risk international non-regulated investments in Australia, Germany and elsewhere. Weather also affects results; a hot 1995 summer added an estimated 21 cents per share.
Does NSP expect non-regulated businesses to contribute more to earnings?
NSP's goal is for NRG-owned businesses to provide at least 20% of NSP earnings by 2000. They provided 12.4% in 1995 and 13.5% in 1994. NRG's contribution was $0.46 per share in 1995, while total non-regulated earnings were $0.50 per share. NSP expects significant additional investment in non-regulated projects, with potential capital needs of about $140 million in 1996 and $550 million over 1996–2000, and may need equity issuance to fund them.
04—Continue