What does the proposed merger with New Century Energies mean for NSP shareholders?

Each NCE common share would convert into 1.55 NSP common shares, and NSP would survive as the combined company, with James Howard serving as Chairman for one year and Wayne Brunetti becoming President and CEO. The transaction is structured as tax-free and as a pooling of interests, and it requires approvals from both shareholder groups, several state commissions, the SEC under PUHCA, FERC, the NRC, the FCC and expiration of the HSR waiting period. The filing states the process is expected to take 12 to 18 months, so no change in NSP's share count or structure should be assumed until closing.

How much of NSP's earnings come from nonregulated businesses, and how risky are they?

Nonregulated operations contributed $0.26 per share in 1998, up from $0.11 in 1997, with NRG providing $0.28. Management states that these businesses carry higher risk than the utility, including foreign currency, political and development risk, and that earnings will be more variable. NRG's goal is to deliver 20% of NSP's earnings by 1999, and it had about $862 million in equity investments in unconsolidated projects at year-end 1998, much of it in Australia, Europe and Latin America.

Is NSP's dividend secure and how does it compare to the payout target?

The company has raised its dividend for 24 consecutive years, with the annualized rate reaching $1.43 per share in June 1998. Dividends declared in 1998 were $1.425 per share against EPS of $1.84, a 77.7% payout ratio that is above the company's long-term target range of 65% to 75%. Cash dividends are not restricted beyond the terms described in Note 4, and the company reports it could have paid over $1.4 billion in additional common dividends under its covenants.

What are the biggest legal and regulatory risks in this filing?

The most significant items include a Court of Federal Claims suit against the DOE seeking over $1 billion for failure to accept spent nuclear fuel, a FERC complaint from Wisconsin Electric over firm transmission curtailments, and a lawsuit seeking more than $15 million tied to a 1997 Grand Forks fire that insurers allege was electrical in origin. The company also faces an environmental cleanup at Ashland, Wisconsin, where options range from $4 million to $93 million, and a December 1998 gas explosion in St. Cloud that killed four people. Management says the ultimate costs of these matters are unknown, and no specific reserves beyond existing accruals are disclosed for most of them.

Why did earnings per share rise in 1998, and was the increase driven by operations?

Most of the increase reflects the absence of 1997's $0.12 merger-cost write-off and nonregulated gains, not stronger utility operations. Regulated utility EPS fell to $1.58 from $1.62, weighed down by weather that reduced earnings by about 11 cents and higher operating and maintenance costs, while the one-time $0.11 gain from the Enfield sale and growth at NRG helped nonregulated results. Share dilution from the 1997 equity offering also cut EPS by about 13 cents, so underlying utility profitability was roughly flat to slightly lower.

XEL/XELLL 10-K FY1998 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed March 29, 1999. Cited figures are marked; the original filing is the authoritative source.

Northern States Power Company (NSP, the Minnesota-incorporated utility holding company that owns NSP-Wisconsin, NRG Energy, Viking Gas Transmission, EMI and other subsidiaries) reported 1998 net income of $282.4 million^a, or $1.84 diluted EPS, up from $1.61 in 1997 (which included a $0.12 merger-cost write-off) and roughly flat with 1996's $1.91 excluding that charge.

Regulated utility earnings were $1.58^b per share, down from $1.62 in 1997 and $1.79 in 1996, while nonregulated operations contributed $0.26, driven largely by NRG (28 cents, or 15% of EPS) and including a one-time gain from selling half of its Enfield interest. Weather reduced 1998 earnings by an estimated 11 cents per share, and the company notes that its ROE of 11.4% over three years fell below the top-quartile benchmark of about 12.75%. The most consequential item for investors is the March 24, 1999 agreement to merge with New Century Energies (NCE), in which each NCE share converts into 1.55 NSP shares in a stock-for-stock, pooling-of-interests transaction expected to take 12 to 18 months and requiring shareholder, state, FERC, SEC (PUHCA), NRC and FCC approvals.

Management is also pursuing a 10-point strategy that includes growing NRG to supply 20% of earnings by 1999, divesting transmission and nuclear generation into independent companies, and pursuing a portfolio of roughly $1.3 billion^c in 1999 nonregulated capital commitments, mostly for acquisitions financed with nonrecourse project debt. Key risks include pending FERC and MPUC matters, a potential loss of conservation incentive recovery in Minnesota, unresolved spent nuclear fuel storage issues with DOE (NSP seeks over $1 billion in damages), and contingent liabilities such as the Grand Forks fire lawsuit and the Ashland, Wisconsin remediation, with the Ashland cleanup estimated between $4 million and $93 million depending on the remedy selected.

02—Key points

Key Highlights

Pending merger with New Century Energies: NCE holders receive 1.55 NSP shares per share in a tax-free, pooling-of-interests deal announced March 24, 1999; closing expected in 12 to 18 months.
1998 diluted EPS of $1.84 versus $1.61 in 1997; 1997 included a $0.12 merger-cost write-off, and regulated utility EPS fell to $1.58 from $1.62.
Nonregulated earnings rose to $0.26 per share (from $0.11), led by NRG at $0.28, including an $0.11 gain on the Enfield sell-down and a $0.10 Indonesia write-down.
Utility operating revenues of $2.82 billion and net income of $282 million; total assets of $7.4 billion and book value of $16.25 per share.
Capital plan of $450 million in 1999 utility capex and about $1.3 billion in 1999 nonregulated commitments (NRG acquisitions including Arthur Kill, Astoria, Somerset and others), largely financed with nonrecourse project debt.
Dividend increased to an annualized $1.43 per share, marking 24 consecutive years of increases, though the 1998 payout ratio of 77.7% sits above the 65-75% target.
Litigation and regulatory exposure: DOE spent-fuel suit seeking over $1 billion, FERC curtailment dispute with WEPCO, Grand Forks fire suit over $15 million, and a St. Cloud gas explosion that killed four people.

03—Questions

Frequently Asked Questions

What does the proposed merger with New Century Energies mean for NSP shareholders?
Each NCE common share would convert into 1.55 NSP common shares, and NSP would survive as the combined company, with James Howard serving as Chairman for one year and Wayne Brunetti becoming President and CEO. The transaction is structured as tax-free and as a pooling of interests, and it requires approvals from both shareholder groups, several state commissions, the SEC under PUHCA, FERC, the NRC, the FCC and expiration of the HSR waiting period. The filing states the process is expected to take 12 to 18 months, so no change in NSP's share count or structure should be assumed until closing.
How much of NSP's earnings come from nonregulated businesses, and how risky are they?
Nonregulated operations contributed $0.26 per share in 1998, up from $0.11 in 1997, with NRG providing $0.28. Management states that these businesses carry higher risk than the utility, including foreign currency, political and development risk, and that earnings will be more variable. NRG's goal is to deliver 20% of NSP's earnings by 1999, and it had about $862 million in equity investments in unconsolidated projects at year-end 1998, much of it in Australia, Europe and Latin America.
Is NSP's dividend secure and how does it compare to the payout target?
The company has raised its dividend for 24 consecutive years, with the annualized rate reaching $1.43 per share in June 1998. Dividends declared in 1998 were $1.425 per share against EPS of $1.84, a 77.7% payout ratio that is above the company's long-term target range of 65% to 75%. Cash dividends are not restricted beyond the terms described in Note 4, and the company reports it could have paid over $1.4 billion in additional common dividends under its covenants.
What are the biggest legal and regulatory risks in this filing?
The most significant items include a Court of Federal Claims suit against the DOE seeking over $1 billion for failure to accept spent nuclear fuel, a FERC complaint from Wisconsin Electric over firm transmission curtailments, and a lawsuit seeking more than $15 million tied to a 1997 Grand Forks fire that insurers allege was electrical in origin. The company also faces an environmental cleanup at Ashland, Wisconsin, where options range from $4 million to $93 million, and a December 1998 gas explosion in St. Cloud that killed four people. Management says the ultimate costs of these matters are unknown, and no specific reserves beyond existing accruals are disclosed for most of them.
Why did earnings per share rise in 1998, and was the increase driven by operations?
Most of the increase reflects the absence of 1997's $0.12 merger-cost write-off and nonregulated gains, not stronger utility operations. Regulated utility EPS fell to $1.58 from $1.62, weighed down by weather that reduced earnings by about 11 cents and higher operating and maintenance costs, while the one-time $0.11 gain from the Enfield sale and growth at NRG helped nonregulated results. Share dilution from the 1997 equity offering also cut EPS by about 13 cents, so underlying utility profitability was roughly flat to slightly lower.

04—Continue

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