SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED MARCH 31, 1999 COMMISSION FILE NUMBER 1-3034 -------------------- ------- NORTHERN STATES POWER COMPANY ---------------------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) MINNESOTA 41-0448030 (STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 414 NICOLLET MALL, MINNEAPOLIS, MINNESOTA 55401 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (612) 330-5500 ----------------------------- NONE - -------------------------------------------------------------------------------- FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST REPORT INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO ----- INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE. CLASS OUTSTANDING AT APRIL 30, 1999 - ------------------------------- ----------------------------- COMMON STOCK, $2.50 PAR VALUE 153,608,767 SHARES
PART 1. FINANCIAL INFORMATION ------------------------------ ITEM 1. FINANCIAL STATEMENTS - --------------------------------- <TABLE> <CAPTION> NORTHERN STATES POWER COMPANY (MINNESOTA) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) --------------------------------------------- <S> <C> <C> Three Months Ended March 31 -------- 1999 1998 ---- ---- (Thousands of dollars) UTILITY OPERATING REVENUES Electric: Retail $505,561 $479,826 Sales for resale and other 51,295 41,745 Gas 186,327 179,831 Total 743,183 701,402 ------- ------- UTILITY OPERATING EXPENSES Fuel for electric generation 69,963 75,639 Purchased and interchange power 98,065 72,523 Cost of gas purchased and transported 112,178 113,582 Other operation 101,127 95,466 Maintenance 44,990 39,860 Administrative and general 30,563 37,779 Conservation and energy management 17,238 16,885 Depreciation and amortization 87,485 84,100 Taxes: Property and general 57,632 55,960 Current income 42,546 38,387 Deferred income (4,035) (5,623) Investment tax credits recognized (2,223) (2,206) Total 655,529 622,352 ------- ------- UTILITY OPERATING INCOME 87,654 79,050 OTHER INCOME (EXPENSE) Income (loss) from nonregulated businesses - before interest and taxes (7,353) 4,380 Allowance for funds used during construction - equity 3,175 1,745 Other utility income (deductions) - net (5,011) 705 Income tax benefits on nonregulated operations and nonoperating items 16,142 14,026 ------ ------ Total 6,953 20,856 ----- ------ INCOME BEFORE FINANCING COSTS 94,607 99,906 FINANCING COSTS Interest on utility long-term debt 23,965 25,266 Other utility interest and amortization 5,552 3,419 Nonregulated interest and amortization 12,141 12,278 Allowance for funds used during construction - debt (3,310) (2,112) ------- ------- Total interest charges 38,348 38,851 Distributions on redeemable preferred securities of subsidiary trust 3,938 3,938 ---- ----- TOTAL FINANCING COSTS 42,286 42,789 ------ ------ NET INCOME 52,321 57,117 PREFERRED STOCK DIVIDENDS 1,060 2,367 EARNINGS AVAILABLE FOR COMMON STOCK $51,261 $54,750 ======= ======= AVERAGE NUMBER OF COMMON SHARES OUTSTANDING (000'S) 152,392 149,214 AVERAGE NUMBER OF COMMON AND POTENTIALLY DILUTIVE SHARES OUTSTANDING (000'S) 152,553 149,467 EARNINGS PER AVERAGE COMMON SHARE - BASIC $0.34 $0.37 EARNINGS PER AVERAGE COMMON SHARE - DILUTED $0.34 $0.37 COMMON DIVIDENDS DECLARED PER SHARE $0.3575 $0.3525 </TABLE> CONSOLIDATED STATEMENTS OF RETAINED EARNINGS (UNAUDITED) -------------------------------------------------------- Balance at beginning of period $1,432,696 $1,364,875 Net income for period 52,321 57,117 Dividends declared: Cumulative preferred stock (1,060) (2,367) Common stock (54,547) (52,622) -------- -------- Balance at end of period $1,429,410 $1,367,003 ========== ========== The Notes to Consolidated Financial Statements are an integral part of the Statements of Income and Retained Earnings.
<TABLE> <CAPTION> CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ------------------------------------------------- <S> <C> <C> Three Months Ended March 31, 1999 1998 ---- ---- (Thousands of dollars) CASH FLOWS FROM OPERATING ACTIVITIES: Net Income $52,321 $57,117 Adjustments to reconcile net income to cash from operating activities: Depreciation and amortization 98,698 93,874 Nuclear fuel amortization 12,944 9,878 Deferred income taxes (5,529) (6,181) Deferred investment tax credits recognized (2,237) (2,284) Allowance for funds used during construction - equity (3,175) (1,745) Distributions in excess of (less than) equity in earnings of unconsolidated affiliates 2,975 (11,019) Cash provided by changes in certain working capital items 95,781 77,590 Cash provided by changes in other assets and liabilities 9,800 3,455 ----- ----- Net cash provided by operating activities. 261,578 220,685 ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (96,073) (74,814) Increase (decrease) in construction payables 5,547 (500) Allowance for funds used during construction - equity 3,175 1,745 Investment in external decommissioning fund (12,280) (10,497) Equity investments, loans and deposits for nonregulated projects (23,145) (77,230) Collection of loans made to nonregulated projects 6,030 55,079 Other investments - net (9,785) (7,469) ------- ------- Net cash used for investing activities (126,531) (113,686) --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Change in short-term debt - net issuances (repayments) 129,802 (134,971) Proceeds from issuance of long-term debt - net - 252,781 Repayment of long-term debt (206,710) (9,818) Proceeds from issuance of common stock - net 12,905 16,045 Redemption of preferred stock - (95,000) Dividends paid (55,128) (55,994) -------- -------- Net cash used for financing activities (119,131) (26,957) --------- -------- Net increase in cash and cash equivalents 15,916 80,042 Cash and cash equivalents at beginning of period 42,364 54,765 ------ ------ Cash and cash equivalents at end of period $58,280 $134,807 ======= ======== </TABLE> The Notes to Consolidated Financial Statements are an integral part of the Statements of Cash Flows.
<TABLE> <CAPTION> NORTHERN STATES POWER COMPANY (MINNESOTA) AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) --------------------------------------- <S> <C> <C> March 31, December 31, 1999 1998 ---- ---- ASSETS (Thousands of dollars) UTILITY PLANT Electric $7,258,627 $7,199,843 Gas 885,730 884,182 Other 370,401 365,101 ------- ------- Total 8,514,758 8,449,126 Accumulated provision for depreciation (4,236,127) (4,155,641) Nuclear fuel 989,734 975,030 Accumulated provision for amortization (886,224) (873,281) --------- --------- Net utility plant 4,382,141 4,395,234 CURRENT ASSETS Cash and cash equivalents 58,280 42,364 Customer accounts receivable - net 270,194 253,559 Unbilled utility revenues 102,585 139,098 Other receivables 55,980 105,116 Fossil fuel inventories - at average cost 45,306 58,806 Materials and supplies inventories - at average cost 112,455 110,267 Prepayments and other 49,219 44,855 ------ ------ Total current assets 694,019 754,065 OTHER ASSETS Equity investments in nonregulated projects 874,414 862,596 External decommissioning fund and other investments 503,400 479,402 Regulatory assets 311,694 331,940 Nonregulated property - net of accumulated depreciation 285,247 282,524 Notes receivable from nonregulated projects 113,048 106,427 Other long-term receivables 34,057 29,796 Intangible assets - net of accumulated amortization 96,108 95,915 Long-term prepayments and deferred charges 85,249 58,398 ------ ------ Total other assets 2,303,217 2,246,998 --------- --------- TOTAL ASSETS $7,379,377 $7,396,297 ========== ========== LIABILITIES AND EQUITY CAPITALIZATION Common stock equity: Common stock and premium - authorized: 1999 350,000,000 and 1998 350,000,000 shares of $2.50 par value, issued shares: 1999 153,194,008 and 1998 152,696,971 $1,168,973 $1,156,067 Retained earnings 1,429,410 1,432,696 Leveraged common stock held by ESOP (16,749) (18,503) Accumulated other comprehensive income (85,478) (89,014) -------- -------- Total common stock equity 2,496,156 2,481,246 Cumulative preferred stock and premium - authorized 7,000,000 shares of $100 par value; outstanding shares: 1999 1,050,000 and 1998 1,050,000 without mandatory redemption 105,340 105,340 Mandatorily redeemable preferred securities of subsidiary trust - guaranteed by NSP<F1> 200,000 200,000 Long-term debt 1,844,071 1,851,146 --------- --------- Total capitalization 4,645,567 4,637,732 CURRENT LIABILITIES Long-term debt due within one year 27,131 227,600 Other long-term debt potentially due within one year 141,600 141,600 Short-term debt 369,632 239,830 Accounts payable 256,839 271,799 Taxes accrued 226,497 170,274 Interest accrued 34,156 38,836 Dividends payable on common and preferred stocks 56,128 55,650 Accrued payroll, vacation and other 76,080 86,673 ------ ------ Total current liabilities 1,188,063 1,232,262 OTHER LIABILITIES Deferred income taxes 814,355 814,983 Deferred investment tax credits 125,993 128,444 Regulatory liabilities 392,285 372,239 Postretirement and other benefit obligations 127,754 129,514 Other long-term obligations and deferred income 85,360 81,123 ------ ------ Total other liabilities 1,545,747 1,526,303 COMMITMENTS AND CONTINGENT LIABILITIES (SEE NOTE 4) TOTAL LIABILITIES AND EQUITY $7,379,377 $7,396,297 ========== ========== The Notes to Consolidated Financial Statements are an integral part of the Balance Sheets. <FN> <F1> The primary asset of NSP Financing I, a subsidiary trust of NSP, is $200 million principal amount of the Company's 7.875% Junior Subordinated Debentures due 2037. </FN> </TABLE>
NORTHERN STATES POWER COMPANY (MINNESOTA) AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ---------------------------------------------- In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly the financial position of Northern States Power Company (Minnesota) (NSP-Minnesota) and its subsidiaries (collectively, NSP) as of March 31, 1999 and Dec. 31, 1998, the results of its operations for the three months ended March 31, 1999 and 1998, and its cash flows for the three months ended March 31, 1999 and 1998. Due to the seasonality of NSP's electric and gas sales and variability of nonregulated operations, operating results on a quarterly basis are not necessarily an appropriate base from which to project annual results. The accounting policies followed by NSP are set forth in Note 1 to the financial statements in NSP's Annual Report on Form 10-K for the year ended Dec. 31, 1998 (1998 Form 10-K). The following notes should be read in conjunction with such policies and other disclosures in the 1998 Form 10-K. On April 22, 1998, NSP's Board of Directors authorized a two-for-one stock split effective June 1, 1998. All financial information pertaining to earnings per share and number of shares outstanding has been adjusted to reflect the stock split. 1. PROPOSED BUSINESS COMBINATION - -- ------------------------------- On March 24, 1999, NSP and New Century Energies, Inc. (NCE) entered into an Agreement and Plan of Merger, providing for a strategic business combination of NSP and NCE. For more discussion of this proposed business combination, see Part II, Item 5 - Other Information of this report. Preliminary joint proxy materials requesting shareholder approval were filed with the Securities and Exchange Commission (SEC) on April 26, 1999. It is expected that definitive proxy materials will be mailed in May 1999, to the shareholders of NSP and NCE for their consideration at meetings scheduled for June 28, 1999. During the summer of 1999, NSP and NCE anticipate filing merger applications with the Federal Energy Regulatory Commission (FERC) and various regulatory agencies in the states that NSP and NCE provide utility service. The costs associated with the proposed merger are being deferred as a component of Regulatory Assets based on NSP's plan to request amortization and rate recovery over future periods. At March 31, 1999, NSP had deferred $5.4 million of merger costs. 2. BUSINESS DEVELOPMENTS - -- ---------------------- NRG ENERGY, INC. (NRG) - In January 1999, NRG reached agreement to purchase the Arthur Kill generating station and the Astoria gas turbine site for $505 million from Consolidated Edison Co. These facilities, which are located in New York, have a combined summer capacity rating of 1,456 MW. The acquisition is expected to close in the second quarter of 1999, pending regulatory approvals. In April 1999, NRG reached agreement to purchase the 1,700 MW oil and gas-fired Oswego generating station for $91 million from Niagara Mohawk Power and Rochester Gas and Electric. The facilities are located in New York. The acquisition is expected to close in the fourth quarter of 1999, pending regulatory approvals. NRG, together with two other parties and the Chapter 11 trustees, filed a plan with the United States Bankruptcy Court for the Middle District of Louisiana to acquire 1,706 MW of fossil generating assets from Cajun electric Power Cooperative of Baton Rouge, La., for approximately $1.2 billion. In addition to the NRG plan, the bankruptcy court was considering one other plan submitted by Southwestern Electric Power Co. In February 1999, the bankruptcy court refused to confirm either of the proposed plans. NRG, its partner and the Trustee, have submitted a revised plan and a confirmation hearing has been scheduled for June of 1999. INDEPENDENT TRANSMISSION COMPANY (ITC) - In April 1998, NSP announced its intention to form an independent company unaffiliated with the rest of its utility operations. As originally proposed, NSP anticipated divesting its transmission assets as part of the formation of the ITC. In light of the proposed merger with NCE, divestiture of transmission assets does not seem feasible as it would appear to trigger adverse tax and accounting consequences. Therefore, NSP is evaluating the feasibility of alternatives to divestiture of its transmission assets, which may or may not include an ITC at this time. In April 1998, Wisconsin Act 204 became law. Act 204 includes provisions that require the Public Service Commission of Wisconsin (PSCW) to order a public utility that owns transmission facilities in Wisconsin to transfer control of its transmission facilities to an independent system operator (ISO) or divest the public utility's interest in its transmission facilities to an independent transmission owner (ITO) if the public utility has not already transferred control to an ISO or divested to an ITO by June 30, 2000. Under certain circumstances, the PSCW has authority to waive imposition of such an order on June 30, 2000. At March 31, 1999, the net book value of NSP-Wisconsin's transmission assets was approximately $150 million. INDEPENDENT NUCLEAR GENERATING COMPANY - In February 1999, NSP, Wisconsin Electric Power Co. and Wisconsin Public Service Corp. formalized their cooperative nuclear alliance by establishing a nuclear management company. The fourth member of the alliance, Alliant Energy, is seeking approval from the SEC to join the management company at a later date. NSP does not intend to divest its nuclear assets as part of establishing the nuclear management company. UNION CONTRACT EXTENSION - In March 1999, NSP management and union business managers reached agreement on a five year extension of the collective bargaining agreement, subject to ratification by the union membership. On April 12, 1999, the five International Brotherhood of Electric Workers local unions representing NSP employees notified NSP that the membership had ratified the contract extension, which will begin on Jan. 1, 2000. VIKING EXPANSION PROJECT - In April 1999, Viking received approval from the FERC to expand its transmission system in northwestern and central Minnesota by installing 45 miles of 24-inch pipeline. The $21 million expansion is a result of customers' requests and would increase the capacity of Viking's pipeline by 5 percent. Construction is expected to begin in the summer of 1999, with the pipeline placed in service during the fourth quarter of 1999. 3. REGULATION AND RATE MATTERS - -- ------------------------------ FERC TRANSMISSION RATE CASE - As discussed in NSP's 1998 Form 10-K, in the first quarter of 1998, NSP filed wholesale electric point-to-point and network integration transmission service (NTS) rate cases with the FERC. In March 1999, NSP filed an offer of settlement which would resolve virtually all issues in the two cases. The offer of settlement provides an approximate two percent reduction in point-to-point rates, which combined with anticipated reductions in non-firm discounting, is expected to have little or no impact on annual revenue. In addition, the settlement calls for an annual increase of approximately $1 million in ancillary service revenues. Finally, the settlement places a cap on NSP's annual NTS payment liabilities to its five current NTS customers at $10 million per year. All rates are effective Oct. 1, 1998. The offer also includes a two or three year moratorium period on future transmission rate changes. The length of the moratorium is based on whether NSP forms an ITC or is ordered to join an ISO (two years), or voluntarily joins an ISO (three years). All parties filed written comments generally recommending FERC approval of the offer. NSP expects FERC approval later in 1999. VIKING RATE CASE - In June 1998, Viking filed a rate case with the FERC, requesting a $3 million annual rate increase. In March 1999, Viking filed an agreement of settlement which would resolve all issues in the case. The settlement would provide Viking an annual rate increase of approximately $1.3 million, or 6 percent, effective Jan. 1, 1999, and a four year phased rate roll-in for the cost of Viking's 1996 and 1997 expansion projects. Viking expects FERC approval later in 1999. 4. COMMITMENTS AND CONTINGENT LIABILITIES - -- ----------------------------------------- CONSERVATION IMPROVEMENT PROGRAM (CIP) - In June 1998, the Minnesota Department of Public Service (DPS) recommended the Minnesota Public Utility Commission (MPUC) discontinue recovery of lost margins and load management discounts from conservation programs for NSP and other Minnesota public utilities. In November 1998, the MPUC approved continued recovery of lost margins and load management discounts for 1998. However, the MPUC put Minnesota utilities on notice that there may be significant changes, including elimination of lost margin and load management discount recovery, pending the outcome of a 1999 study. In 1998, NSP recorded approximately $33 million, primarily in electric revenue, from the conservation incentives under review by the MPUC. In April 1999, NSP filed a revised conservation incentive plan which, if approved, will result in recovery of approximately $27 million in 1999. The April filing is in lieu of a previously planned work group report to the MPUC scheduled for May 1999. In 1999, NSP is recording CIP revenues at its expected recovery levels. NSP expects MPUC action by early fall of 1999. NUCLEAR INSURANCE - The circumstances set forth in Note 14 to NSP's financial statements in NSP's 1998 Form 10-K appropriately represent, in all material respects, the current status of commitments and contingent liabilities regarding public liability for claims resulting from any nuclear incident. 5. SHORT-TERM BORROWINGS - -- ---------------------- As of March 31, 1999, NSP-Minnesota had a $300 million revolving credit facility under a commitment fee arrangement. This facility provides short-term financing in the form of bank loans, letters of credit and support for commercial paper sales. NSP has regulatory approval for up to approximately $604 million in short-term borrowing levels. In addition to NSP-Minnesota lines, at March 31, 1999, commercial banks provided credit lines of approximately $339 million to wholly owned subsidiaries of NSP with approximately $33 million in borrowings outstanding. At March 31, 1999, approximately $71 million in letters of credit were outstanding, reducing the credit lines available to subsidiaries to approximately $235 million. At March 31, 1999, NSP-Minnesota had $337 million in short-term commercial paper borrowings outstanding at a composite rate of 4.85 percent. NSP and its subsidiaries had $370 million of short-term debt outstanding at a weighted average interest rate of 4.91 percent on March 31, 1999. 6. SEGMENT INFORMATION - -- -------------------- NSP has four reportable segments: Electric Utility, Gas Utility and two of its wholly owned, nonregulated subsidiaries, NRG and EMI. Segment information for the first quarter of 1999 and 1998 is as follows: <TABLE> <CAPTION> BUSINESS SEGMENTS <S> <C> <C> <C> Operating Revenues from Inter- Segment 3 MOS. ENDED 3/31/99 External Segment Net Income (Thousands of dollars) Customers Revenues (Loss) - ------------------------------------------------- -------- ------ Electric Utility $556,654 $ 202 $35,951 Gas Utility 186,257 1,132 18,781 NRG 37,522 324 (940) EMI 17,578 0 (1,512) All Other 7,335 0 41 Reconciling Eliminations 0 (1,386) 0 - ------------------------- Consolidated Total <F1> $805,346 $272 $52,321 ======================== <FN> <F1>The consolidated total revenue amounts represent the sum of utility and nonregulated amounts. </FN> </TABLE> <TABLE> <CAPTION> <S> <C> <C> <C> Operating Revenues from Inter- Segment 3 MOS. ENDED 3/31/98 External Segment Net Income (Thousands of dollars) Customers Revenues (Loss) - ------------------------------------------------- -------- ------ Electric Utility $521,306 $ 266 $36,985 Gas Utility 179,771 1,061 15,222 NRG 24,169 353 6,089 EMI 11,286 0 (2,526) All Other 7,168 0 1,347 Reconciling Eliminations 0 (1,355) 0 - ------------------------- Consolidated Total <F1> $743,700 $325 $57,117 ======================== <FN> <F1> The consolidated total revenue amounts represent the sum of utility and nonregulated amounts. </FN> </TABLE> 7. OTHER COMPREHENSIVE INCOME - -- ---------------------------- NSP's other comprehensive income consists of foreign currency translation adjustments related to NRG's investments in international projects and changes in the fair value of certain marketable securities. The other comprehensive income for the first quarter of 1999 and 1998 are listed below. Millions of Dollars 3 Mos. Ended Increase / (decrease) in Equity 3/31/99 3/31/98 - ----------------------------------- ------- ------- Currency translation adjustments $1.6 $(3.2) Unrealized loss - marketable securities: Holding gain during period - net of tax 0.4 0.0 Loss realized during period - net of tax 1.5 0.0 --- --- Total $3.5 ($3.2) ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - -------------------------------------------------------------------------------- OF OPERATIONS ------------- Except for the historical statements contained in this report, the matters discussed in the following discussion and analysis are forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements are intended to be identified in this document by the words "anticipate", "estimate", "expect", "objective", "possible", "potential" and similar expressions. Actual results may vary materially. Factors that could cause actual results to differ materially include, but are not limited to: - - general economic conditions, including their impact on capital expenditures; - - business conditions in the energy industry; - - competitive factors; - - unusual weather; - - changes in federal or state legislation; - - regulation; - - issues relating to Year 2000 remediation efforts; - - the higher degree of risk associated with NSP's nonregulated businesses as compared to NSP's regulated business; - - the items set forth below under "Factors Affecting Results of Operations"; - - currency translation and transaction adjustments; - - regulatory delays or conditions imposed by regulatory agencies in approving the proposed merger with NCE; - - and the other risk factors listed from time to time by NSP in reports filed with the SEC, including Exhibit 99.01 to this report on Form 10-Q for the quarter ended March 31, 1999. RESULTS OF OPERATIONS On March 24,1999, NSP and NCE entered into an Agreement and Plan of Merger, providing for a strategic business combination of NSP and NCE. For more discussion of this proposed business combination, see Part II, Item 5 - Other Information of this report. The following discussion and analysis is based on the financial condition and operations of NSP and does not reflect the potential effects of the combination between NSP and NCE. NSP's earnings per share (diluted) for the periods ending March 31, 1999 and 1998 were as follows: Earnings per share: 3 Mos. Ended 3/31/99 3/31/98 ------- ------- Regulated $0.35 $0.33 Nonregulated (0.01) 0.04 ------ ---- Total $0.34 $0.37 ===== ===== FACTORS AFFECTING RESULTS OF OPERATIONS - ------------------------------------------- In addition to items noted in the 1998 Form 10-K and the Notes to the Financial Statements, the historical and future trends of NSP's operating results are affected by the following factors: ESTIMATED IMPACT OF WEATHER ON REGULATED EARNINGS - NSP estimates electric and gas utility sales levels under normal weather conditions and analyzes the approximate effect of variations from historical average temperatures on actual sales levels. The following summarizes the estimated impact of weather on actual utility operating results (in relation to sales under normal weather conditions): Increase (Decrease) Earnings per Share Actual Actual Actual For Periods Ending March 31: 1999 vs Normal 1998 vs Normal 1999 vs 1998 Quarter Ended ($0.04) ($0.07) $0.03 SALES GROWTH - The following table summarizes NSP's growth in actual electric and gas sales and growth on a weather normalized (W/N) basis for the 3-month period ended March 31, 1999, as compared with the same period in 1998. NSP's weather normalization process removes the estimated impact on sales of temperature variations from historical averages. 3 Mos. Ended Actual W/N ------ --- Electric Residential 4.6% 2.1% Electric Industrial and Commercial 2.1% 1.4% Total Electric Retail 2.7% 1.6% Electric Resale 37.5% NA Total Gas Sales & Delivery 2.6% -0.1% YEAR 2000 (Y2K) READINESS - To the extent allowed, the information in the following section is designated as a "Year 2000 Readiness Disclosure." NSP is incurring significant costs to modify or replace existing technology, including computer software, for uninterrupted operation in the year 2000 and beyond as discussed in NSP's 1998 Form 10-K. NSP is on schedule for completion of its Y2K project. - - On March 31, 1999, 91 percent of NSP's mission-critical systems and processes were Y2K ready. - - By June 30, 1999, NSP expects to complete essentially all Y2K efforts on mission-critica systems and processes and to finalize contingency planning. - - By Dec. 31, 1999, NSP expects to complete remediation of low-priority applications and complete all Y2K testing and implementation. Since the Y2K project started in 1996 and through March 31, 1999, NSP has spent approximately $16.3 million for Y2K efforts, which (except for a portion deferred for approved rate recovery) has been expensed as incurred. The additional development and remediation costs necessary for NSP to prepare for Y2K is estimated to be approximately $8 million. ACCOUNTING CHANGE - In June 1998, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement requires that all derivatives be recognized at fair value in the balance sheet and all changes in fair value be recognized currently in earnings or deferred as a component of other comprehensive income, depending on the intended use of the derivative, its resulting designation and its effectiveness. NSP plans to adopt this standard in 2000, as required. NSP has not yet determined the potential impact of implementing this statement. FIRST QUARTER 1999 VS. FIRST QUARTER 1998 - ----------------------------------------------- Utility Operating Results - --------------------------- ELECTRIC REVENUES for the first quarter of 1999 increased $35.3 million, or 6.8 percent, compared with 1998. The following table summarizes the change in electric revenues for the first quarter. Millions of dollars 1999 vs. 1998 ------------------- Retail sales growth (excluding weather impact) $8.6 Weather impact 5.8 Sales for resale 13.1 Conservation cost recovery (0.7) Fuel cost recovery 6.9 Rate changes 2.0 Transmission and other (0.4) ----- Total electric revenue increase $35.3 - ------------------------------------ ===== ELECTRIC MARGIN equals electric revenue minus production expenses which includes electric fuel and purchased power costs. The table below summarizes the change in electric margin for the first quarter. Millions of dollars 1999 vs. 1998 ------------------- Retail sales growth (excluding weather impact) $7.0 Weather impact 4.8 Sales for resale 2.4 Conservation cost recovery (0.7) Rate changes 2.0 Transmission and other (0.1) ----- Total electric margin increase $15.4 - ----------------------------------- ===== GAS REVENUES for the first quarter of 1999 increased $6.5 million, or 3.6 percent, compared with 1998. The table below summarizes the change in gas revenues for the first quarter. Millions of dollars 1999 vs. 1998 ------------------- Sales growth (excluding weather impact) $8.1 Weather impact 3.3 Rate changes and conservation cost recovery 3.2 Black Mountain Gas acquisition 2.4 Purchased gas adjustment clause recovery (7.2) Other (3.3) ----- Total gas revenue increase $6.5 - ------------------------------- ==== GAS MARGIN equals gas revenue minus the cost of purchased gas. The table below summarizes the change in gas margin for the first quarter. Millions of dollars 1999 vs. 1998 ------------------- Sales growth (excluding weather impact) $0.6 Weather impact 3.3 Rate changes 2.6 Black Mountain Gas acquisition 1.6 Other (0.2) ----- Total gas margin increase $7.9 - ------------------------------ ==== OTHER OPERATION, MAINTENANCE AND ADMINISTRATIVE AND GENERAL expenses together increased $3.5 million, or 2.1 percent, compared with the first quarter of 1998. The increases are primarily due to plant maintenance outages, an increase in uncollectible accounts receivable and Y2K remediation efforts, which were partially offset by lower administrative and general expenses. DEPRECIATION AND AMORTIZATION expense increased $3.4 million, or 4.0 percent, compared with the first quarter of 1998. The increase is mainly due to increased plant in service between the two periods. OTHER UTILITY INCOME (EXPENSES) INCLUDING ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFC) decreased $4.3 million mainly due to losses from marketable securities and lower investment and other income. Nonregulated Business Results - ------------------------------- The following table summarizes NSP's nonregulated business results in the aggregate, including consolidated subsidiaries and unconsolidated affiliates. 3 Mos. Ended (Thousands of dollars, except EPS) 3/31/99 3/31/98 ------- ------- Operating revenues $62,435 $42,623 Equity in project earnings 8,031 15,328 Operating and development expenses (78,626) (52,786) Other income (expense) 807 (785) --- ----- Income (loss) before interest & taxes (7,353) 4,380 Interest expense (12,141) (12,278) Income tax benefit and credits 17,083 14,271 ------ ------ Net income (loss) $(2,411) $6,373 - ------------------- ---------- -------- Nonregulated earnings (loss) per share $(0.01) $0.04 - ------------------------------------------ --------- ------- NSP's nonregulated operations include diversified businesses, as described below. - - NRG's primary business is independent power production, commercial and industrial heating and cooling, and energy-related refuse-derived fuel production. - - EMI's primary business is custom energy services and sales. - - Eloigne invests in affordable housing projects. - - Seren Innovations is a communications and data services subsidiary. The following table summarizes the earnings contributions of NSP's nonregulated businesses: 3 Mos. Ended 3/31/99 3/31/98 ------- ------- NRG ($0.01) $0.04 Eloigne Company 0.01 0.01 EMI, Inc. (0.01) (0.02) Seren Innovations (0.01) 0.00 Other 0.01 0.01 ---- ---- Total ($0.01) $0.04 ======= ===== NRG - NRG's 1999 first quarter earnings decreased compared with 1998, primarily due to a $4.5 million (net of tax) foreign currency transaction adjustment (approximately 3 cents per share), relating to the Kladno project. NRG owns 44.5 percent of Kladno, which is a 345 MW generating plant in the Czech Republic scheduled to be fully operational in the third quarter of 1999. SFAS No. 52 requires foreign currency gains and losses to flow through the income statement if settlement of an obligation is in a currency other than the local currency of the entity. A portion of the Kladno project debt is in non-local currency (60 million in U.S. dollars and 92 million in German deutsche marks as of March 31, 1999). The transaction adjustment is the result of a 20 percent decline in the Czech koruna against the U.S. dollar and a 10 percent decline against the German deutsche mark since Dec. 31, 1998. This adjustment is a current-period, non-operating, non-cash event. If the value of the Czech koruna increases, NRG will record a corresponding gain on the currency transaction adjustment. Subsequent transaction adjustments will be reflected in NRG and NSP's ongoing quarterly results as a component of equity in project earnings. Until project level debt is converted to local currency or other hedges are implemented, Kladno may periodically experience both positive and negative earnings variations due to fluctuations in currency rates. These currency fluctuations are inherent to the debt structure of the project and not indicative of the long-term earnings potential of the investment. Kladno is the only project NRG has at this time with this type of debt structure. In addition to the currency transaction loss, NRG's earnings declined in the first quarter of 1999 compared with the first quarter of 1998, largely due to lower earnings from the MIBRAG project and increased NRG operating expenses in preparation for completion of several acquisitions later in 1999. NRG is a public company and is subject to the informational reporting requirements of the Securities Exchange Act of 1934. Further information about NRG may be obtained from its Form 10-Q for the quarter ended March 31, 1999. EMI - EMI's 1999 first quarter losses were less than first quarter 1998 losses, due to increased energy services margins. SEREN - Seren is experiencing losses as it develops its broadband communication services network in St. Cloud, Minn. LIQUIDITY AND CAPITAL RESOURCES For a discussion of available credit lines and short-term borrowings, see Note 5 to the Financial Statements. In February 1999, stock options for the purchase of 993,305 shares were awarded under NSP's Executive Long-Term Incentive Award Stock Plan (the Long-Term Plan). These options are not exercisable for approximately twelve months after the award date. Effective in January 1999, stock options granted to NSP officers vest at a rate of one-third each year for three years. As of March 31, 1999, a total of 3,367,481 options were outstanding, which were considered potentially dilutive common shares for calculating earnings per share. During the first quarter of 1999, NSP issued 497,037 new shares of common stock under the Long-Term Plan (pursuant to the exercise of options and awards granted in prior years), the Dividend Reinvestment and Stock Purchase Plan and the Employee Stock Ownership Plan. Also, NSP may consider a general common stock offering in 1999, depending on corporate needs, capital structure objectives and business opportunities. In November 1998, NSP-Minnesota filed with the SEC a $400 million universal debt shelf registration. NSP-Minnesota currently has $50 million of registered, but unissued, bonds remaining from its $300 million first mortgage bond shelf registration, which was filed in October 1995. NSP-Minnesota will likely issue long-term debt under these registrations during the second quarter of 1999. The net proceeds are expected to be used for general corporate purposes, including reduction of short-term debt levels. In March 1999, NRG filed a shelf registration with the SEC for up to $500 million in debt securities. The net proceeds will be used to finance NRG's equity investment in connection with pending acquisitions and for general corporate purposes which may include financing the development and construction of new facilities, working capital, debt reduction, capital expenditures and potential acquisitions. NRG plans to issue approximately $300 million in debt securities during the second quarter of 1999. In anticipation of this transaction, NRG executed $100 million in 10-year treasury locks at 5.10 percent interest with an effective yield of 5.19 percent. In addition, the board of directors of NSP-Wisconsin authorized the issuance of up to $80 million of long-term debt in 1999 or 2000. NSP-Wisconsin currently expects to issue approximately $50 million of unsecured long-term debt in the second half of 1999, primarily to reduce short-term debt levels.
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS -------------------------- In the normal course of business, various lawsuits and claims have arisen against NSP. Management, after consultation with legal counsel, has recorded an estimate of the probable cost of settlement or other disposition for such matters. As previously reported in Item 3 of Part I of NSP's 1998 10-K, on June 8, 1998, NSP filed a complaint in the Court of Federal Claims against the Department of Energy (DOE) requesting damages for the DOE's partial breach of the Standard Contract. NSP requested damages in excess of $1 billion, which consists of the costs of storage of spent nuclear fuel at the Prairie Island nuclear generating plant, as well as anticipated costs related to the Private Fuel Storage, LLC and the 1994 state legislation limiting the number of casks that can be used to store spent nuclear fuel at Prairie Island. On April 6, 1999, the Court of Federal Claims dismissed NSP's complaint finding that the Company is obligated to pursue its demand for monetary relief at the agency level, i.e. through a claim for equitable adjustment under the Standard Contract. NSP is analyzing its options, including an appeal of the Court's decision. See Notes 3 and 4 of the Financial Statements for further discussion of legal proceedings, including Regulatory Matters and Commitments and Contingent Liabilities, incorporated by reference. ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS - --------------------------------------------------------------- NSP's Annual Meeting of Shareholders was held on April 28, 1999, for the purpose of voting on the matters listed below. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management's solicitations. All of management's nominees for directors as listed in the proxy statement were elected. The voting results were as follows: 1. A proposal to elect three directors to Class I to serve until the 2002 Annual Meeting of Shareholders; Election of Director Shares Voted For Withheld Authority -------------------- ---------------- ------------------ W. John Driscoll 124,638,353 2,426,063 James J. Howard 124,098,712 2,965,704 Allan L. Schuman 124,660,541 2,403,875 2. A proposal to ratify the appointment of PricewaterhouseCoopers LLP as independent accountants for NSP for 1999; Shares Voted For 125,440,111 Voted Against 700,149 Voted Abstain 924,156 3. A proposal to amend NSP's Restated Articles of Incorporation to remove limitations of NSP's issuance of unsecured debt; Common Class Only: ------------------- Shares Voted For 100,324,281 Voted Against 8,558,358 Voted Abstain 2,913,507 Preferred Class Only: ---------------------- Shares Voted For 774,306 Voted Against 156,654 Voted Abstain 27,644 4. A proposal to amend NSP's Restated Articles of Incorporation to remove provisions relating to series of preferred stock that have been redeemed; Shares Voted For 106,140,754 Voted Against 3,157,806 Voted Abstain 2,497,590 ITEM 5. OTHER INFORMATION -------------------------- PROPOSED BUSINESS COMBINATION - ------------------------------- As previously reported in NSP's Current Report on Form 8-K, dated March 24, 1999, which was filed on March 25, 1999, NSP and New Century Energies, Inc. (NCE), entered into an Agreement and Plan of Merger (the Merger Agreement), providing for a strategic business combination of NSP and NCE. Pursuant to the Merger Agreement, NCE will be merged with and into NSP, with NSP as the surviving corporation in the merger (the Merger). Subject to the terms of the Merger Agreement, at the time of the Merger, each share of NCE common stock (par value $1.00 per share) (other than certain shares to be cancelled), together with any associated preferred share purchase rights, will be converted into the right to receive 1.55 shares of NSP common stock (par value $2.50 per share). Cash will be paid in lieu of any fractional shares of NSP common stock which holders of NCE common stock would otherwise receive. Consummation of the Merger is subject to the satisfaction or waiver of certain closing conditions, including, among others, approval by the shareholders of NSP and NCE, approval or regulatory review by certain state utilities regulators, the SEC, the FERC, the Nuclear Regulatory Commission and the Federal Communications Commission, and expiration or termination of the waiting period applicable to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act. The merger is expected to be a tax-free, stock-for-stock exchange for shareholders of both companies (except with respect to any cash received by NCE shareholders in lieu of fractional shares), and to be accounted for as a pooling of interests. NSP and NCE have agreed to certain undertakings and limitations regarding the conduct of their respective businesses prior to the closing of the transaction. At the time of the Merger, NSP will register as a holding company under the public utility holding company act of 1935. The Merger is expected to take from 12 to 18 months to complete. The dividend payment level of the combined company after the Merger will be determined by the board of directors of the combined company. However, NSP anticipates that the combined company will adopt an initial dividend policy which will maintain a dividend level equivalent to the current dividend for NCE shareholders. Based on the conversion ratio of 1.55, the pro forma dividend for the combined company would be $1.50 per share on an annual basis. Pursuant to employment agreements, James J. Howard, chairman, president and chief executive officer of NSP, will serve as chairman of the combined company for one year following the Merger. Wayne H. Brunetti, vice chairman, president and chief operating officer of NCE, will be president and chief executive officer following the Merger and will assume the responsibilities of chairman when James Howard retires. Based on the number of common shares currently outstanding, NCE shareholders will own approximately 54 percent of the common stock of the combined company and NSP shareholders will own 46 percent. NSP is expected to hold a special shareholders' meeting on June 28, 1999, to vote on the Merger. All shareholders will receive a detailed proxy statement prior to the meeting, which will explain in detail the terms of the Merger, membership on the board of directors, employment arrangements and other matters related to the Merger. The Merger Agreement was filed as Exhibit 2.1 to NSP's March 24, 1999 Form 8-K, and is incorporated by reference. The combined company will be created by first transferring NSP's utility assets (other than investments in and assets of subsidiaries) into a newly formed, wholly owned subsidiary (which is referred to in this report as New NSP Utility Sub). At the same time, New NSP Utility Sub will assume all of NSP's liabilities associated with the assets transferred. Then NCE will merge into NSP, with NSP as the surviving corporate entity in the merger. The surviving corporation, which is referred to herein as New Co., will be a holding company for the combined assets and operations of NSP and NCE. If difficulties arise in obtaining the approvals and consents required to transfer NSP's utility assets to New NSP Utility Sub, NSP and NCE may negotiate a mutually acceptable alternative. NEW CO. PRO FORMA COMBINED CONDENSED INFORMATION - ------------------------------------------------------ The unaudited pro forma condensed financial statements included in Exhibit 99.02 give effect to the merger using the pooling of interests method of accounting. Under this accounting method, NSP's and NCE's balance sheets and income statements are treated as if they have always been combined for accounting and financial reporting purposes. These unaudited pro forma combined condensed financial statements are based on the assumptions set forth in the accompanying notes and should be read in conjunction with the historical financial statements and related notes of NSP and NCE, which are included in the Annual Reports on Form 10-K of the respective companies for the year ended Dec. 31, 1998. The unaudited pro forma combined condensed balance sheets at March 31, 1999, assumes the merger had been completed on March 31, 1999. The unaudited pro forma combined condensed statements of income for the three month periods ended March 31, 1999 and March 31, 1998, assume the merger had been completed on Jan. 1, 1998, the beginning of the earliest period presented. The unaudited pro forma combined condensed financial statements do not necessarily indicate what the combined company's financial position or operating results would have been if the merger had been completed on the assumed completion dates and they do not necessarily indicate future operating results of the combined company. NEW NSP UTILITY SUB PRO FORMA CONDENSED INFORMATION - ---------------------------------------------------------- The unaudited pro forma financial information included in Exhibit 99.03 adjusts the historical financial statements of NSP after giving effect to the transfer of ownership of all NSP utility assets (other than investments in and assets of subsidiaries) to New NSP Utility Sub and the assumption by New NSP Utility Sub of all of NSP's liabilities associated with the assets transferred. This unaudited pro forma financial information is based on the assumptions set forth in the accompanying notes. The unaudited pro forma condensed balance sheets at March 31, 1999, assumes the merger had been completed on March 31, 1999. The unaudited pro forma condensed statements of income for the three month periods ended March 31, 1999 and March 31, 1998, assume the merger had been completed on January 1, 1998, the beginning of the earliest period presented. The unaudited pro forma condensed financial statements do not necessarily indicate what New NSP Utility Sub's financial position or operating results would have been if the merger had been completed on the assumed completion dates and they do not necessarily indicate future operating results of New NSP Utility Sub. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ----------------------------------------- (A) EXHIBITS The following Exhibits are filed with this report: 2.01 Agreement and Plan of Merger, dated as of March 24, 1999, by and between Northern States Power Company and New Century Energies, Inc. (Incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K (File No. 1-12907) of New Century Energies, Inc. dated March 24, 1999.) 3.01 Restated Articles of Incorporation, as amended. 10.01 Employment Agreement, dated as of March 24, 1999, among Northern States Power Company, New Century Energies, Inc. and Wayne H. Brunetti (Incorporated by reference to Exhibit 10.02 to Registration Statement No. 333-76989). 10.02 NSP 1999 Senior Executive Severance Policy. 23.01 Consent of Independent Public Accountants. 23.02 Consent of Independent Public Accountants. 27.01 Financial Data Schedule for the three months ended March 31, 1999. 99.01 Statement pursuant to Private Securities Litigation Reform Act of 1995. 99.02 New Co. Pro Forma Financial Information. 99.03 New NSP Utility Sub Pro Forma Financial Information. 99.04 Audited Financial Statements of New Century Energies, Inc. (Item 8 of Part II of New Century Energies, Inc.'s Annual Report on Form 10-K for the fiscal year ended December 31, 1998, File No. 1-12907, and incorporated by reference herein). 99.05 Unaudited Interim Financial Statements of New Century Energies, Inc. (Item 1 of Part 1 of New Century Energies, Inc.'s Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, File No. 1-12907, and incorporated by reference herein). (B) REPORTS ON FORM 8-K The following reports on Form 8-K were filed either during the three months ended March 31, 1999, or between March 31, 1999 and the date of this report: March 24, 1999 (Filed March 25, 1999) - Item 5 and 7. Other Events and Financial Statements and Exhibits. Re: Disclosure of an agreement and plan of merger between NSP and New Century Energies, Inc., subject to shareholder and regulatory approval. March 26, 1999 (Filed March 30, 1999) - Item 5 and 7. Other Events and Financial Statements and Exhibits. Re: Disclosure of presentation materials used in analysts' meeting in connection with the proposed merger of NSP and New Century Energies, Inc. April 6, 1999 (Filed April 8, 1999) - Item 5. Other Events. Re: Disclosure of Court of Federal Claims' dismissal of NSP's complaint against the DOE for damages relating to spent nuclear fuel storage. April 23, 1999 (Filed April 23, 1999) - Item 5 and 7. Other Events and Financial Statements and Exhibits. Re: Disclosure of pro forma condensed financial statements reflecting the effect of the proposed merger between NSP and New Century Energies, Inc. .
SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NORTHERN STATES POWER COMPANY -------------------------------- (Registrant) /s/ --- Roger D. Sandeen Vice President and Controller /s/ --- John P. Moore, Jr. Vice President and Corporate Secretary Date: May 13, 1999 --------------