What happens to NSP shareholders if the merger with Wisconsin Energy is completed?

Each NSP common share would be converted into 1.626 shares of Primergy common stock, and NSP's preferred shares would be exchanged for identical New NSP preferred. Management estimated pro forma Primergy dividends of about $1.70 per share (on an exchange-adjusted basis), but the Primergy board would set future dividends based on its own results. The companies projected roughly $2 billion of net savings over ten years, although management called these 'aggressive goals' and acknowledged that a rate freeze shifts some risk to shareholders.

Why is the merger not yet completed, and when might it close?

The original goal was year-end 1996, but several approvals were still outstanding at filing. The Minnesota PUC was expected to decide in the second quarter of 1997 if no further procedures were required, while the Wisconsin PSCW had been ordered by a Dane County judge to delay its decision pending an investigation of alleged improper contacts. FERC rulings, the DOJ second request (responses due March 1997) and the NRC license transfer also remain. The merger agreement terminates on April 30, 1997 unless extended to October 31, 1997 for regulatory approvals.

How much of NSP's earnings come from nonregulated businesses, and what are the risks?

Nonregulated businesses contributed $0.24 per share of 1996 ongoing EPS, down from $0.28 in 1995 and $0.45 in 1994, due to Cenerprise gas trading losses that offset higher NRG earnings. NRG's investments are largely minority stakes in international and domestic projects (Gladstone, Schkopau, MIBRAG, Bolivian Power) that carry currency, political and development risk; management acknowledged that these projects are riskier than the utility business and that results may be volatile.

What are the main regulatory and operational risks to the utility business?

Key risks include the pending merger's rate-freeze conditions, possible Wisconsin divestiture or independent transmission operator requirements, retail competition and restructuring timelines in Minnesota, Wisconsin and Michigan, and the costs of environmental compliance (about $32 million of 1997 operating expenses and $14 million of capital). Nuclear risks include the DOE's failure to accept used fuel by January 1998 (repository now expected around 2010), reliance on interim on-site storage at Prairie Island and Monticello, and a $50,000 NRC penalty plus an apparent Monticello violation under review.

XEL/XELLL 10-K FY1996 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 27, 1997. Cited figures are marked; the original filing is the authoritative source.

Northern States Power Company (NSP, parent of the Minnesota and Wisconsin utilities, NRG Energy, Viking Gas Transmission and Cenerprise) reported 1996 earnings of $3.82^a per share from ongoing operations, up 3.5% from $3.69 in 1995 (reported EPS $3.82 vs. $3.91 in 1995, which included a one-time NRG contract-termination gain).

Net income was $274.5 million^b on utility operating revenues of $2.65 billion. Regulated utility earnings were $3.58 per share, while nonregulated businesses contributed $0.24 per share, with NRG's growing international and domestic power portfolio offset by losses at Cenerprise's gas trading. The company paid a $2.76 annualized dividend (71.5% payout ratio), has increased its dividend for 22 consecutive years, and reports a 46.5% common equity capital structure.

The dominant investor issue is the pending merger with Wisconsin Energy Corporation (WEC) into Primergy Corporation, a 'merger-of-equals' in which NSP shareholders would receive 1.626 Primergy shares per NSP share. Shareholders approved the deal in September 1995, but completion as of March 1997 depends on approvals from the Minnesota PUC, the Wisconsin PSCW, FERC, the SEC and the NRC, plus a Department of Justice antitrust review. The Minnesota ALJs recommended approval with a four-year rate freeze, but the Wisconsin PSCW is in a contested, delayed posture (including a Dane County court order and a Wisconsin staff push for divestitures), and the Michigan Attorney General has newly opposed the merger.

The merger agreement's outside dates are April 30, 1997, extendable to October 31, 1997, so timing risk is material. Beyond the merger, investors should weigh rising nonregulated exposure (NRG's equity investments grew to roughly $408 million^c in unconsolidated projects, with significant new commitments in Indonesia, the UK, Estonia and Cajun), a 1997 utility capital program of $420 million, and ongoing nuclear waste disposal uncertainty as the DOE has signaled that a permanent repository will not be available until about 2010. Management itself notes that the nonregulated projects carry higher risk than the utility business.

02—Key points

Key Highlights

1996 EPS from ongoing operations of $3.82, up 3.5% from $3.69 in 1995; reported EPS of $3.82 compared with $3.91 in 1995, which included a roughly $0.22 non-recurring NRG gain.
Pending merger with Wisconsin Energy Corp. into Primergy Corp. (1.626 Primergy shares per NSP share); shareholder approval obtained Sept. 1995, but regulatory approvals remain outstanding and completion is uncertain as of March 1997.
Minnesota ALJs recommended merger approval with a four-year rate freeze and a finding that pre-merger electric rates may exceed revenue requirements by $3.5 million; the Wisconsin PSCW process is delayed by court order and staff recommended divestitures.
Nonregulated NRG Energy contributed $0.24 per share in 1996 (7.6% of ongoing EPS, versus a 20% goal by 2000), with new international projects in Indonesia, the UK, Estonia and Australia and the proposed Cajun Electric asset bid.
Dividend increased to an annualized $2.76 per share in June 1996 (22 consecutive annual increases); payout ratio 71.5%, within the 65-75% target range.
Financial strength: common equity of 46.5% of capitalization, pretax interest coverage of 3.7x, and first mortgage bond ratings of AA-/A1/AA-/AA; 1997 utility capex estimated at $420 million.
Weather and regulatory risk: 1996 colder weather added an estimated $0.16 per share, while the Prairie Island nuclear storage challenge and the DOE's delayed repository (about 2010) keep nuclear waste costs and storage capacity uncertain.

03—Questions

Frequently Asked Questions

What happens to NSP shareholders if the merger with Wisconsin Energy is completed?
Each NSP common share would be converted into 1.626 shares of Primergy common stock, and NSP's preferred shares would be exchanged for identical New NSP preferred. Management estimated pro forma Primergy dividends of about $1.70 per share (on an exchange-adjusted basis), but the Primergy board would set future dividends based on its own results. The companies projected roughly $2 billion of net savings over ten years, although management called these 'aggressive goals' and acknowledged that a rate freeze shifts some risk to shareholders.
Why is the merger not yet completed, and when might it close?
The original goal was year-end 1996, but several approvals were still outstanding at filing. The Minnesota PUC was expected to decide in the second quarter of 1997 if no further procedures were required, while the Wisconsin PSCW had been ordered by a Dane County judge to delay its decision pending an investigation of alleged improper contacts. FERC rulings, the DOJ second request (responses due March 1997) and the NRC license transfer also remain. The merger agreement terminates on April 30, 1997 unless extended to October 31, 1997 for regulatory approvals.
How much of NSP's earnings come from nonregulated businesses, and what are the risks?
Nonregulated businesses contributed $0.24 per share of 1996 ongoing EPS, down from $0.28 in 1995 and $0.45 in 1994, due to Cenerprise gas trading losses that offset higher NRG earnings. NRG's investments are largely minority stakes in international and domestic projects (Gladstone, Schkopau, MIBRAG, Bolivian Power) that carry currency, political and development risk; management acknowledged that these projects are riskier than the utility business and that results may be volatile.
What are the main regulatory and operational risks to the utility business?
Key risks include the pending merger's rate-freeze conditions, possible Wisconsin divestiture or independent transmission operator requirements, retail competition and restructuring timelines in Minnesota, Wisconsin and Michigan, and the costs of environmental compliance (about $32 million of 1997 operating expenses and $14 million of capital). Nuclear risks include the DOE's failure to accept used fuel by January 1998 (repository now expected around 2010), reliance on interim on-site storage at Prairie Island and Monticello, and a $50,000 NRC penalty plus an apparent Monticello violation under review.

04—Continue

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