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 JUNE 30, 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 JULY 31, 1999 COMMON STOCK, $2.50 PAR VALUE 154,196,342 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> <C> <C> Three Months Ended Six Months Ended June 30 June 30 1999 1998 1999 1998 (Thousands of dollars) Utility operating revenues Electric: Retail $538,721 $518,745 $1,044,282 $998,571 Sales for resale and other 50,065 51,906 101,360 93,651 Gas 70,589 67,950 256,916 247,781 Total 659,375 638,601 1,402,558 1,340,003 Utility operating expenses Fuel for electric generation 81,343 75,466 151,307 151,106 Purchased and interchange power 107,214 96,901 205,279 169,424 Cost of gas purchased and transported 35,121 37,137 147,300 150,719 Other operation 101,782 96,481 202,909 191,947 Maintenance 53,057 54,444 98,047 94,304 Administrative and general 35,234 36,492 65,797 74,271 Conservation and energy management 16,691 16,667 33,928 33,551 Depreciation and amortization 88,095 83,111 175,580 167,211 Taxes: Property and general 57,361 56,343 114,993 112,304 Current income 24,268 20,351 66,814 58,738 Deferred income (4,482) 2,357 (8,517) (3,265) Investment tax credits recognized (2,215) (2,203) (4,438) (4,411) Total 593,469 573,547 1,248,999 1,195,899 Utility operating income 65,906 65,054 153,559 144,104 Other income (expense) Income (loss) from nonregulated businesses - before interest and taxes 140 7,682 (7,213) 11,967 Allowance for funds used during construction - equity (419) 1,812 2,757 3,557 Regulatory reserve-conservation program recovery (35,035) - (35,035) - Other utility income (deductions) - net (4,340) (6,486) (9,351) (5,686) Income tax benefit - nonregulated operations and nonoperating items 35,844 11,825 51,986 25,851 Total (3,810) 14,833 3,144 35,689 Income before financing costs 62,096 79,887 156,703 179,793 Financing costs Interest on utility long-term debt 23,288 26,204 47,253 51,470 Other utility interest and amortization 7,058 2,622 12,610 6,041 Nonregulated interest and amortization 17,188 13,859 29,329 26,138 Allowance for funds used during construction - debt (866) (1,770) (4,175) (3,882) Total interest charges 46,668 40,915 85,017 79,767 Distributions on redeemable preferred securities of subsidiary trust 3,938 3,938 7,875 7,875 Total financing costs 50,606 44,853 92,892 87,642 Net income 11,490 35,034 63,811 92,151 Preferred stock dividends 2,110 1,060 3,171 3,427 Earnings available for common stock $9,380 $33,974 $60,640 $88,724 Average number of common shares outstanding (000's) 153,012 149,877 152,704 149,547 Average number of common and potentially dilutive shares outstanding (000's) 153,118 150,143 152,834 149,807 Earnings per average common share - basic $0.06 $0.23 $0.40 $0.59 Earnings per average common share - assuming dilution $0.06 $0.23 $0.40 $0.59 Common dividends declared per share $0.3625 $0.3575 $0.7200 $0.7100 Consolidated Statements of Retained Earnings (Unaudited) Balance at beginning of period $1,429,410 $1,367,003 $1,432,696 $1,364,875 Net income for period 11,490 35,034 63,811 92,151 Dividends declared: Cumulative preferred stock (2,110) (1,060) (3,171) (3,427) Common stock (55,533) (54,000) (110,079) (106,622) Balance at end of period $1,383,257 $1,346,977 $1,383,257 $1,346,977 </TABLE> The Notes to Consolidated Financial Statements are an integral part of the Statements of Income and Retained Earnings. 1 <TABLE> <CAPTION> Northern States Power Company (Minnesota) and Subsidiaries Consolidated Statements of Cash Flows (Unaudited) <S> <C> <C> Six Months Ended June 30, 1999 1998 (Thousands of dollars) Cash Flows from Operating Activities: Net Income $63,811 $92,151 Adjustments to reconcile net income to cash from operating activities: Depreciation and amortization 199,190 187,522 Nuclear fuel amortization 24,867 21,148 Deferred income taxes (33,746) (2,709) Deferred investment tax credits recognized (4,465) (4,565) Allowance for funds used during construction - equity (2,757) (3,557) Distributions in excess of (less than) equity in earnings of unconsolidated affiliates 27,423 (13,520) Regulatory reserve - conservation recovery 35,035 - Cash used for changes in certain working capital items (65,329) (10,042) Cash provided by changes in other assets and liabilities 9,820 3,557 Net cash provided by operating activities 253,849 269,985 Cash Flows from Investing Activities: Capital expenditures (240,891) (180,459) Increase (decrease) in construction payables 2,558 (1,367) Allowance for funds used during construction - equity 2,757 3,557 Investment in external decommissioning fund (21,119) (21,020) Equity investments, loans and deposits for nonregulated projects (77,606) (126,627) Collection of loans made to nonregulated projects 39,956 63,739 Business acquisitions (930,185) - Other investments - net (15,502) (10,603) Net cash used for investing activities (1,240,032) (272,780) Cash Flows from Financing Activities: Change in short-term debt - net issuances (repayments) 1,025,992 (5,077) Proceeds from issuance of long-term debt - net 309,197 267,467 Repayment of long-term debt (208,667) (115,078) Proceeds from issuance of common stock - net 27,558 45,540 Redemption of preferred stock - (95,000) Dividends paid (112,088) (109,762) Net cash provided by (used for) financing activities 1,041,992 (11,910) Net increase (decrease) in cash and cash equivalents 55,809 (14,705) Cash and cash equivalents at beginning of period 42,364 54,765 Cash and cash equivalents at end of period $98,173 $40,060 </TABLE> The Notes to Consolidated Financial Statements are an integral part of the Statements of Cash Flows. 2 <TABLE> <CAPTION> Northern States Power Company (Minnesota) and Subsidiaries Consolidated Balance Sheets (Unaudited) <S> <C> <C> June 30, December 31, 1999 1998 ASSETS (Thousands of dollars) Utility Plant Electric $7,310,938 $7,199,843 Gas 907,171 884,182 Other 378,368 365,101 Total 8,596,477 8,449,126 Accumulated provision for depreciation (4,309,955) (4,155,641) Nuclear fuel 989,303 975,030 Accumulated provision for amortization (898,147) (873,281) Net utility plant 4,377,678 4,395,234 Current Assets Cash and cash equivalents 98,173 42,364 Customer accounts receivable - net 274,019 253,559 Unbilled utility revenues 112,990 139,098 Other receivables 72,282 105,116 Fossil fuel inventories - at average cost 46,502 58,806 Materials and supplies inventories - at average cost 157,869 110,267 Prepayments and other 124,546 44,855 Total current assets 886,381 754,065 Other Assets Nonregulated property - net of accumulated depreciation 1,213,803 282,524 Equity investments in nonregulated projects 893,946 862,596 External decommissioning fund and other investments 527,725 479,402 Regulatory assets 261,418 331,940 Notes receivable from nonregulated projects 108,582 106,427 Intangible assets - net of accumulated amortization 121,231 95,915 Long-term prepayments, deferred charges and long-term receivables 115,125 58,398 Other long-term receivables 32,736 29,796 Total other assets 3,274,566 2,246,998 TOTAL ASSETS $8,538,625 $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 153,796,567 and 1998 152,696,971 $1,183,682 $1,156,067 Retained earnings 1,383,257 1,432,696 Leveraged common stock held by ESOP (15,055) (18,503) Accumulated other comprehensive income (64,397) (89,014) Total common stock equity 2,487,487 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* 200,000 200,000 Long-term debt 2,152,611 1,851,146 Total capitalization 4,945,438 4,637,732 Current Liabilities Long-term debt due within one year 26,775 227,600 Other long-term debt potentially due within one year 141,600 141,600 Short-term debt - utility 504,196 114,273 Short-term debt - nonregulated (mainly temporary NRG project financing) 761,626 125,557 Accounts payable 262,943 271,799 Taxes accrued 124,791 170,274 Interest accrued 38,777 38,836 Dividends payable on common and preferred stocks 56,812 55,650 Other accrued liabilities 142,150 86,673 Total current liabilities 2,059,670 1,232,262 Other Liabilities Deferred income taxes 790,656 814,983 Deferred investment tax credits 123,549 128,444 Regulatory liabilities 407,098 372,239 Postretirement and other benefit obligations 126,829 129,514 Other long-term obligations and deferred income 85,385 81,123 Total other liabilities 1,533,517 1,526,303 Commitments and Contingent Liabilities (See Note 4) TOTAL LIABILITIES AND EQUITY $8,538,625 $7,396,297 </TABLE> The Notes to Consolidated Financial Statements are an integral part of the Balance Sheets. * 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. 3
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 June 30, 1999 and Dec. 31, 1998, the results of its operations for the three and six months ended June 30, 1999 and 1998, and its cash flows for the six months ended June 30, 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. 1. PROPOSED BUSINESS COMBINATION - -- ------------------------------- On March 24, 1999, NSP and New Century Energies, Inc. (NCE) agreed to merge and form a new entity, Xcel Energy Inc. (Xcel). For more discussion of this proposed business combination, see Part II, Item 5 - Other Information of this report. On June 28, 1999, shareholders of both NSP and NCE approved the merger. NCE shareholder approval of the merger totaled 93 percent of votes received, and 78 percent of overall shares. NSP shareholder approval of the merger totaled 83 percent and 62 percent, respectively. The merger requires approval or regulatory review by federal regulators, including the Federal Energy Regulatory Commission (FERC) and the Securities and Exchange Commission (SEC), as well as state regulators in eight of the 12 states served by the two companies. The approval process is expected to be completed within 12 to 18 months from the date of the merger announcement. The costs associated with the proposed merger are being deferred based on NSP's plan to request amortization and rate recovery over future periods. At June 30, 1999, NSP had deferred $15.6 million of merger costs. 2. BUSINESS DEVELOPMENTS - -- ---------------------- NRG ENERGY, INC. (NRG) - 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 Corporation and Rochester Gas and Electric Corporation. The facilities are located in Oswego, New York. The acquisition is expected to close in the fourth quarter of 1999, pending regulatory approvals. In April 1999, NRG completed its acquisition of the Somerset power station for approximately $55 million from Eastern Utilities Associates. The Somerset station, located in Somerset, Mass., includes two coal-fired generating facilities and two aeroderivative combustion turbine peaking units with a total capacity of 229 MW. A total of 69 MW of capacity is on deactivated reserve. NRG owns a 100 percent interest in the project. In May 1999, NRG and Dynegy completed their acquisition of the Encina generating station and 17 combustion turbines for $356 million from San Diego Gas & Electric Company. The facilities, which have a combined capacity of 1,218 MW, are located near Carlsbad and San Diego, Calif. NRG and Dynegy each own a 50 percent interest in the joint venture. In June 1999, NRG completed its acquisition of the Huntley and Dunkirk generating stations from Niagara Mohawk Power Corp. for $355 million. The two coal-fired plants are located near Buffalo, New York, and have a combined summer capacity of 1,360 MW. NRG owns a 100 percent interest in the project. In June 1999, NRG completed its acquisition of the Arthur Kill generating station and the Astoria gas turbine site for $505 million from the Consolidated Edison Company of New York, Inc. These facilities, which are located in New York City area, have a combined summer capacity rating of 1,456 MW. NRG owns a 100 percent interest in the project. In July 1999, NRG reached agreement to purchase electric generating stations with a combined capacity of 2,235 MW for $460 million from Connecticut Light & Power Company. The facilities, located throughout Connecticut, include the Middletown, Montville, Devon and Norwalk Harbor gas and oil fired steam generating stations. The acquisition is expected to close in the fourth quarter of 1999, pending regulatory approvals. INDEPENDENT TRANSMISSION COMPANY (ITC) - In April 1998, NSP announced its intention to form an ITC unaffiliated with the rest of its utility operations. As originally proposed, NSP anticipated divesting its transmission assets to an ITC. In light of the proposed merger with NCE, divestiture of transmission assets would appear to trigger adverse tax and accounting consequences. Therefore, NSP is evaluating alternatives to divestiture of its transmission assets. In its regulatory filing seeking approval of the proposed merger with NCE, NSP has proposed to transfer control, but not ownership, of its transmission assets to the Midwest independent system operator (ISO) upon completion of the merger. 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 ISO or divest it'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 June 30, 1999, the net book value of NSP-Wisconsin's transmission assets was approximately $152 million. INDEPENDENT NUCLEAR GENERATING COMPANY - In February 1999, NSP, Wisconsin Electric Power Co. and Wisconsin Public Service Corp. established a nuclear management company. 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 to the nuclear management company. VIKING GAS - During the second quarter of 1999, Viking Gas reached a settlement with TransCanada Pipelines, Ltd. and NICOR, Inc., Viking's former partners in the Viking Voyageur pipeline project, which was cancelled in 1998. The settlement provides for Viking Gas to receive all engineering and other studies related to the former Voyageur project in return for a cash payment. Since the studies obtained through the settlement have continuing value to Viking Gas for projects currently under construction and consideration, the payment has been capitalized as a plant cost. 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. The point-to-point and ancillary rates would be effective June 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. MIDCONTINENT AREA POWER POOL (MAPP) TRANSMISSION TARIFF - In May 1999, MAPP members voted to approve a MAPP regional transmission service tariff which will supercede MAPP members' individual electric transmission service tariffs for most wholesale transactions. The proposed MAPP tariff was filed with the FERC in July 1999. MAPP proposed the new tariff be effective 90 days after a FERC order accepting the tariff for filing. NSP estimates that the MAPP regional transmission service tariff will reduce NSP's year 2000 pretax earnings by between $5 million and $16 million. NSP and several other parties filed protests to the MAPP tariff, asking the FERC to modify and/or delay implementation of the new tariff. The tariff is pending FERC action, which is expected 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. FERC approved this settlement in May 1999. NSP-WISCONSIN - In May 1999, NSP-Wisconsin filed its biennial rate case, as required by the PSCW. NSP-Wisconsin is requesting to maintain current rates for electric and natural gas service through 2001. A rate order is expected later this year. 4. COMMITMENTS AND CONTINGENT LIABILITIES - -- ----------------------------------------- CONSERVATION IMPROVEMENT PROGRAM (CIP) - NSP recorded a charge to second quarter 1999 earnings of $35 million (before tax), or 14 cents per share, due to disallowance of rate recovery for accrued conservation program incentives based on a June 24, 1999 decision by the Minnesota Public Utilities Commission (MPUC). State law requires Minnesota utilities to fund and participate in various energy conservation programs and initiatives. After NSP's last electric rate case in 1993, NSP incurred higher levels of conservation program expenditures, and in 1994 requested MPUC approval of a rate recovery mechanism to avoid a significant delay between the incurring of CIP costs and their recovery in rates. Since 1995, the MPUC has approved the use of this special rate recovery mechanism to provide timely recovery (for NSP and other Minnesota public utilities) of CIP costs and also to provide conservation program incentives, including: reimbursement of a portion of electric margins lost due to energy conservation, reimbursement of certain load management discounts provided to customers under CIP programs, and performance incentives based on the success of NSP's conservation programs. MPUC procedures require an annual filing by each utility to consider approval of conservation items. For NSP, this annual filing has typically occurred in the second quarter of the year, and the rate recovery levels have been adjusted each July 1 and then continued until the following June 30. The requested recovery levels approved for NSP since 1995 have included recovery of budgeted levels of conservation related items recoverable in the current year. In late 1998, the MPUC considered a proposal to discontinue recovery of lost margins and load management discounts related to conservation programs for NSP and other Minnesota public utilities. The MPUC declined to take such action, but put Minnesota utilities on notice that there may be significant changes, including elimination of lost margin and load management discount recovery for programs beginning January 1999. The MPUC established a roundtable to study the issue. On June 24, 1999, the MPUC held a hearing to consider NSP's April 1999 conservation filing. The MPUC voted three to two to deny NSP the lost margins, load management discounts and incentives related to 1998 that were associated with state-mandated programs for electric energy conservation. On July 27, 1999, the MPUC issued an order formalizing its conservation decision. The MPUC decision did not appear to affect the recovery of CIP expenditures. Also, the MPUC did not address or change 1999 conservation incentive recovery levels. However, a review is under way. NSP plans to request reconsideration of the MPUC decision, and if necessary seek court review. The MPUC's decision appears to contradict previous orders and reduce NSP's 1998 rates retroactively. However, due to the uncertainty of the challenge, NSP has established a regulatory reserve as of June 30, 1999 for all income recorded for expected recovery of 1998 accruals of lost margins, load management discounts and performance incentives. This reserve has reduced NSP's earnings by $35 million (before tax) or 14 cents per share. Based on MPUC practice and approvals since 1995, NSP has continued to accrue income for 1999 conservation incentives, consistent with the levels requested in its filing earlier this year. Through June 30, 1999, NSP has recorded pretax income, primarily in other electric revenue, of approximately $14 million (representing 5 cents per share) for 1999 conservation program incentives. No reserve has been established for possible non-recovery of these amounts, pending MPUC action on 1999 conservation programs and recovery levels. RATE INVESTIGATION - On July 27, 1999, the MPUC issued an order requiring an investigation into the reasonableness of NSP's retail electric rates in Minnesota. The rate investigation order requires NSP to file, within 60 days, a written explanation and detailed schedules showing the individual adjustments to the 1998 and projected 1999 normalized rate base, revenue and expense statements, and the cost of capital that are necessary to reconcile 1998 normalized and 1999 projected returns on equity to the 11.47 percent authorized return on equity. NSP is also required to explain why it believes its current rates continue to be just and reasonable. Once NSP has filed the required information, interested parties will have 60 days to review and file comments and recommendations. The rate investigation does not authorize the MPUC to reduce base rates, but only to determine whether a rate proceeding should be initiated. If, after hearing, the MPUC finds that a rate proceeding should be initiated, it must then, under Minnesota law, allow the utility 120 days after the MPUC's Order to file its case. If a rate case is initiated, NSP's rates would first become subject to refund, as interim rates, 60 days after the filing of the rate proceeding. 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 - -- ---------------------- At June 30, 1999, NSP and its subsidiaries had approximately $1.3 billion of short-term debt outstanding at a weighted average interest rate of 5.71 percent. NSP-Minnesota had $504 million in short-term commercial paper borrowings outstanding at a composite rate of 5.07 percent. Included in NSP's subsidiary debt is approximately $540 million of 364 day NRG project financing, which is expected to be refinanced later this year with long-term project debt. NSP has regulatory approval for up to $1.2 billion in short-term borrowing levels. The regulatory approval permits NSP to be out of compliance with its limits for up to 60 days without notifying the MPUC. During July 1999, NSP-Minnesota issued $250 million of long-term debt, which was primarily used to reduce short-term debt levels. With this issue, NSP is currently in compliance with its regulatory short-term borrowing limits. As of June 30, 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. In addition to NSP-Minnesota lines, at June 30, 1999, commercial banks provided credit lines of approximately $361 million to wholly owned subsidiaries of NSP with approximately $222 million in borrowings outstanding, mainly NRG. 6. 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. Other comprehensive income items for the three and six month ended periods of 1999 and 1998 are listed below. <TABLE> <CAPTION> <S> <C> <C> Millions of Dollars 3 Mos. Ended Increase / (decrease) in Equity 6/30/99 6/30/98 - ---------------------------------------- ------------- -------- Currency translation adjustments $19.0 ($19.9) Marketable securities: Holding gain during period - net of tax 1.6 0.0 Loss realized during period - net of tax 0.5 0.0 --- --- Total $21.1 ($19.9) </TABLE> <TABLE> <CAPTION> <S> <C> <C> Millions of Dollars 6 Mos. Ended Increase / (decrease) in Equity 6/30/99 6/30/98 - ---------------------------------------- ------------- -------- Currency translation adjustments $20.6 ($23.1) Marketable securities: Holding gain during period - net of tax 2.0 0.0 Loss realized during period - net of tax 2.0 0.0 --- --- Total $24.6 ($23.1) </TABLE> 7. 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 second quarter and six month ended periods of 1999 and 1998 are as follows: BUSINESS SEGMENTS Business Segments <TABLE> <S> <C> <C> <C> Operating Revenues from Inter- Segment 3 Mos. Ended 6/30/99 External Segment Net Income (Thousands of dollars) Customers Revenues (Loss) Electric Utility $588,587 $199 $14,129 Gas Utility 70,564 522 (3,590) NRG 59,610 425 2,341 EMI 10,504 0 (921) All Other 7,176 0 (469) Reconciling Eliminations 0 (922) 0 Consolidated Total<F1> $736,441 $224 $11,490 <FN> <F1> The consolidated total revenue amounts represent the sum of utility and nonregulated amounts. </FN> </TABLE> <TABLE> <S> <C> <C> <C> Operating Revenues from Inter- Segment 3 Mos. Ended 6/30/98 External Segment Net Income (Thousands of dollars) Customers Revenues (Loss) Electric Utility $570,470 $181 $36,306 Gas Utility 67,933 2,306 (5,646) NRG 24,931 329 6,969 EMI 11,434 0 (1,976) All Other 7,219 221 (619) Reconciling Eliminations 0 (2,839) 0 Consolidated Total <F1> $681,987 $198 $35,034 <FN> <F1> The consolidated total revenue amounts represent the sum of utility and nonregulated amounts. </FN> </TABLE> <TABLE> <S> <C> <C> <C> Operating Revenues from Inter- Segment 6 Mos. Ended 6/30/99 External Segment Net Income (Thousands of dollars) Customers Revenues (Loss) Electric Utility $1,145,240 $402 $49,995 Gas Utility 256,819 1,655 15,276 NRG 97,133 748 1,401 EMI 28,082 0 (2,434) All Other 14,511 0 (427) Reconciling Eliminations 0 (2,306) 0 Consolidated Total <F1> $1,541,785 $499 $63,811 <FN> <F1> The consolidated total revenue amounts represent the sum of utility and nonregulated amounts. </FN> </TABLE> <TABLE> <S> <C> <C> <C> Operating Revenues from Inter- Segment 6 Mos. Ended 6/30/98 External Segment Net Income (Thousands of dollars) Customers Revenues (Loss) Electric Utility $1,091,775 $446 $72,190 Gas Utility 247,703 3,368 9,310 NRG 49,101 682 13,058 EMI 22,720 0 (4,502) All Other 14,291 316 2,095 Reconciling Eliminations 0 (4,287) 0 Consolidated Total <F1> $1,425,590 $525 $92,151 <FN> <F1> The consolidated total revenue amounts represent the sum of utility and nonregulated amounts. </FN> </TABLE>
- ------ 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 June 30, 1999. RESULTS OF OPERATIONS On March 24, 1999, NSP and NCE agreed to merge and form a new entity, Xcel. For more discussion of this proposed business combination, see Part II, Item 5 - Other Information and Note 1 to the Financial Statements 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 (EPS) for the three and six month periods ending June 30, 1999 and 1998 were as follows: <TABLE> <CAPTION> <S> <C> <C> <C> <C> Earnings per share: 3 mos. Ended 6 Mos. Ended 6/30/99 6/30/98 6/30/99 6/30/98 Regulated $0.05 $0.20 $0.41 $0.52 Nonregulated 0.01 0.03 (0.01) 0.07 Total $0.06 $0.23 $0.40 $0.59 </TABLE> 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: CONSERVATION PROGRAM RECOVERY - NSP recorded a charge of $35 million (before tax) or approximately 14 cents per share in the second quarter of 1999 as a result of a MPUC disallowance of rate recovery of accrued 1998 conservation program incentives. See Note 4 to the Financial Statements for more information. 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): <TABLE> <CAPTION> Increase (Decrease) Earnings per Share Actual Actual Actual <S> <C> <C> <C> For Periods Ending June 30: 1999 vs Normal 1998 vs Normal 1999 vs 1998 - --------------------------- ------------------- ----------------- --------------- Quarter Ended . . . . . . . ($0.01) $0.00 ($0.01) Six Months Ended. . . . . . ($0.05) ($0.08) $0.03 </TABLE> 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 and the 6-month periods ended June 30, 1999, as compared with the same periods in 1998. NSP's weather normalization process removes the estimated impact on sales of temperature variations from historical averages. <TABLE> <CAPTION> 3 Mos. Ended 6 Mos. Ended Actual W/N Actual W/N ------- ----- ------- ---- <S> <C> <C> <C> <C> Electric Residential . . . . . . . 3.1% 4.5% 3.9% 3.2% Electric Industrial and Commercial (0.8%) (0.3%) 0.6% 0.5% Total Electric Retail. . . . . . . 0.1% 0.9% 1.5% 1.2% Electric Resale. . . . . . . . . . 13.7% NA 25.6% NA Firm Gas Sales . . . . . . . . . . 34.5% 9.5% 15.8% 4.6% </TABLE> Year 2000 (Y2K) Readiness - This information 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. o On June 30, 1999, 99 percent of both NSP's mission-critical and non-critical systems and processes were Y2K ready. o On June 30, 1999, NSP filed its contingency plans as required by the North American Electric Reliability Council. NSP's contingency plans are comprehensive and include the following actions: the establishment of back-up or alternative data and voice communications, increasing generation reserves, coordination with government agencies, increased staffing levels during Y2K critical time periods and conducting readiness drills. o By Dec. 31, 1999, NSP expects to have completed implementation and testing of all applications. Since the start of the Y2K project in 1996 through June 30, 1999, NSP has spent approximately $19.1 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 $5.3 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 2001, as required. NSP has not yet determined the potential impact of implementing this statement. Second Quarter 1999 vs. Second Quarter 1998 Utility Operating Results Electric revenues for the second quarter of 1999 increased $18.1 million, or 3.2 percent, compared with the second quarter of 1998. The following table summarizes the change in electric revenues for the second quarter. <TABLE> <S> <C> Millions of dollars 1999 vs. 1998 Retail sales growth (excluding weather impact) $5.8 Weather impact (3.7) Sales for resale (0.6) Conservation program recovery (0.8) Fuel cost recovery 13.3 Rate changes 1.8 Transmission and other 2.3 Total electric revenue increase $18.1 </TABLE> 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 second quarter. <TABLE> <CAPTION> <S> <C> Millions of dollars. . . . . . . . . . . . . . 1999 vs. 1998 - ---------------------------------------------- --------------- Retail sales growth (excluding weather impact) $ 5.2 Weather impact . . . . . . . . . . . . . . . . (3.1) Sales for resale . . . . . . . . . . . . . . . (1.8) Conservation program recovery. . . . . . . . . (0.8) Rate changes . . . . . . . . . . . . . . . . . 1.8 Transmission and other . . . . . . . . . . . . 0.6 --------------- Total electric margin increase . . . . . . . $ 1.9 =============== </TABLE> GAS REVENUES for the second quarter of 1999 increased $2.6 million, or 3.9 percent, compared with 1998. The following table summarizes the change in gas revenues for the second quarter. <TABLE> <CAPTION> <S> <C> Millions of dollars . . . . . . . . . . 1999 vs. 1998 - --------------------------------------- --------------- Sales growth (excluding weather impact) $ 3.5 Weather impact. . . . . . . . . . . . . 6.7 Rate changes. . . . . . . . . . . . . . (0.4) Black Mountain Gas merger . . . . . . . 1.4 Cost of gas recovery. . . . . . . . . . (4.4) Other . . . . . . . . . . . . . . . . . (4.2) --------------- Total gas revenue increase. . . . . . $ 2.6 =============== <FN> GAS MARGIN equals gas revenue minus the cost of purchased gas. The table below summarizes the change in gas margin for the second quarter. </TABLE> <TABLE> <CAPTION> <S> <C> Millions of dollars . . . . . . . . . . 1999 vs. 1998 - --------------------------------------- --------------- Sales growth (excluding weather impact) $ 1.7 Weather impact. . . . . . . . . . . . . 2.1 Rate changes. . . . . . . . . . . . . . (0.4) Black Mountain Gas merger . . . . . . . 1.0 Other . . . . . . . . . . . . . . . . . 0.3 --------------- Total gas margin increase . . . . . . $ 4.7 =============== </TABLE> OTHER OPERATION, MAINTENANCE AND ADMINISTRATIVE AND GENERAL expenses together increased $2.7 million, or 1.4 percent, compared with the second quarter of 1998. The increases are primarily due to customer service and reliability initiatives and plant outages, partially offset by lower storm costs. DEPRECIATION AND AMORTIZATION expense increased $5.0 million, or 6.0 percent, compared with the second quarter of 1998. The increase is mainly due to increased plant in service. Nonregulated Business Results - ------------------------------- The following table summarizes NSP's nonregulated business results in the aggregate, including consolidated subsidiaries and unconsolidated affiliates. <TABLE> <CAPTION> 3 Mos. Ended (Thousands of dollars, except EPS) 6/30/99 6/30/98 ---------------------------------------------------------------------- <S> <C> <C> Operating revenues $ 77,290 $43,584 Equity in project earnings 6,282 12,751 Operating and development expenses (85,946) (50,645) Other income (expense) 2,514 1,992 Income before interest & taxes 140 7,682 Interest expense (17,188) (13,859) Income tax benefit and credits 17,999 10,551 Net income $ 951 $ 4,374 Nonregulated earnings per share $ 0.01 $ 0.03 </TABLE> NSP's nonregulated operations include diversified businesses, as described below. - - NRG's primary business is independent power production, commercial and industrial heating and c ooling, 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: <TABLE> 3 Mos. Ended 6/30/99 6/30/98 --------- --------- <S> <C> <C> NRG . . . . . . . $ 0.02 $ 0.05 Eloigne Company . 0.01 0.01 EMI, Inc. . . . . (0.01) (0.01) Seren Innovations (0.01) (0.01) Other . . . . . . 0.00 (0.01) --------- --------- Total . . . . . $ 0.01 $ 0.03 ========= ========= </TABLE> NRG - NRG's 1999 second quarter earnings decreased compared with 1998, primarily due to the timing of project earnings, increased costs related to new project acquisitions and business development, and additional interest expense.
FIRST SIX MONTHS 1999 VS. FIRST SIX MONTHS 1998 - ------------------------------------------------------- Utility Operating Results - --------------------------- ELECTRIC REVENUES for the first six months of 1999 increased $53.4 million, or 4.9 percent, compared with the first six months of 1998. The following table summarizes the change in electric revenues. <TABLE> <CAPTION> <S> <C> Millions of dollars. . . . . . . . . . . . . . 1999 vs. 1998 - ---------------------------------------------- Retail sales growth (excluding weather impact) $ 14.4 Weather impact . . . . . . . . . . . . . . . . 2.1 Sales for resale . . . . . . . . . . . . . . . 13.7 Conservation program recovery. . . . . . . . . (1.5) Fuel cost recovery . . . . . . . . . . . . . . 20.3 Rate changes . . . . . . . . . . . . . . . . . 3.7 Transmission and other . . . . . . . . . . . . 0.7 --------------- Total electric revenue increase. . . . . . . $ 53.4 =============== </TABLE> ELECTRIC MARGIN equals electric revenue minus production expenses which includes electric fuel and purchased power costs. The following table summarizes the change in electric margin for the first six months. <TABLE> <CAPTION> <S> <C> Millions of dollars. . . . . . . . . . . . . . 1999 vs. 1998 - ---------------------------------------------- Retail sales growth (excluding weather impact) $ 12.2 Weather impact . . . . . . . . . . . . . . . . 1.8 Sales for resale . . . . . . . . . . . . . . . (0.3) Conservation program recovery. . . . . . . . . (1.5) Rate changes . . . . . . . . . . . . . . . . . 3.7 Transmission and other . . . . . . . . . . . . 1.5 --------------- Total electric margin increase . . . . . . . $ 17.4 - ---------------------------------------------- =============== </TABLE> GAS REVENUES for the first six months of 1999 increased $9.1 million, or 3.7 percent, compared with the first six months of 1998. The table below summarizes the change in gas revenues. <TABLE> <CAPTION> <S> <C> Millions of dollars . . . . . . . . . . 1999 vs. 1998 - --------------------------------------- Sales growth (excluding weather impact) $ 6.3 Weather impact. . . . . . . . . . . . . 17.2 Rate changes. . . . . . . . . . . . . . 1.3 Black Mountain Gas merger . . . . . . . 3.7 Cost of gas recovery. . . . . . . . . . (12.8) Other . . . . . . . . . . . . . . . . . (6.6) --------------- Total gas revenue increase. . . . . . $ 9.1 - --------------------------------------- =============== <FN> GAS MARGIN equals gas revenue minus the cost of purchased gas. The table below summarizes the change in gas margin for the first six months. </TABLE> <TABLE> <CAPTION> <S> <C> Millions of dollars . . . . . . . . . . 1999 vs. 1998 - --------------------------------------- Sales growth (excluding weather impact) $ 3.8 Weather impact. . . . . . . . . . . . . 5.4 Rate changes. . . . . . . . . . . . . . 1.3 Black Mountain Gas merger . . . . . . . 2.6 Other . . . . . . . . . . . . . . . . . (0.5) --------------- Total gas margin increase . . . . . . $ 12.6 - --------------------------------------- =============== </TABLE> OTHER OPERATION, MAINTENANCE AND ADMINISTRATIVE AND GENERAL expenses together increased $6.2 million, or 1.7 percent, compared with the first six months of 1998. The increases are primarily due to customer service and reliability initiatives, increase in uncollectibles and Y2K remediation efforts, partially offset by lower administrative and general expenses (primarily lower employee benefit costs) and lower storm costs. DEPRECIATION AND AMORTIZATION expense increased $8.4 million, or 5.0 percent, compared with the first six months of 1998. The increase is mainly due to increased plant in service. Nonregulated Business Results - ------------------------------- The following table summarizes NSP's nonregulated business results in the aggregate, including consolidated subsidiaries and unconsolidated affiliates. <TABLE> <CAPTION> 6 Mos. Ended (Thousands of dollars, except EPS) 6/30/99 6/30/98 ------------ ---------- <S> <C> <C> Operating revenues $ 139,726 $ 86,112 Equity in project earnings 14,312 28,079 Operating and development expenses (164,572) (103,431) Other income (expense) 3,321 1,207 ---------- ---------- Income (loss) before interest & taxes (7,213) 11,967 Interest expense (29,329) (26,138) Income tax benefit and credits 35,082 24,822 ---------- ---------- Net income (loss) $ (1,460) $ 10,651 Nonregulated earnings (loss) per share $ (0.01) $ 0.07 </TABLE> The following table summarizes the earnings contributions of NSP's nonregulated businesses. <TABLE> <S> <C> <C> 6 Mos. Ended 6/30/99 6/30/98 NRG $0.01 $0.09 Eloigne Company 0.02 0.02 EMI, Inc. (0.02) (0.03) Seren Innovations (0.02) (0.01) Other 0.00 0.00 Total ($0.01) $0.07 </TABLE> NRG - NRG's earnings for the first six months of 1999 decreased compared with 1998, primarily due to increased costs related to new project acquisitions and business development, additional interest expense and lower equity earnings. The decrease in equity earnings was due to several factors, including lower earnings from the Mt. Poso project primarily due to curtailment revenues that were recorded in 1998; decreased earnings due to cool weather conditions at the El Segundo, Long Beach and Encina facilities; and a decrease in earnings from NEO affiliates. In addition, there was a decrease in equity earnings due to the transaction adjustment related to the Kladno Project. A portion of the Kladno project's debt is denominated in U.S. dollars and German deutsche marks, which strengthened against the Czech koruna in the first six months of 1999. Under SFAS No. 52, the Kladno project records foreign currency gains and losses through the income statement. LIQUIDITY AND CAPITAL RESOURCES For a discussion of short-term borrowings, see Note 5 to the Financial Statements. In February 1999, stock options for 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 June 30, 1999, a total of 3,332,215 options were outstanding, which were considered potentially dilutive common shares for calculating earnings per share. During the first six months of 1999, NSP issued 1,099,596 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. NSP may consider a general common stock offering later 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. In July 1999, NSP-Minnesota issued $250 million of unsecured long-term debt under the universal registration. These bonds have an annual coupon of 6.875% and mature Aug. 1, 2009. The net proceeds were 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. In May 1999, NRG issued $300 million of 7.5 percent senior notes due in 2009 under this shelf registration. The net proceeds were used for general corporate purposes, including development and construction of new facilities, working capital, debt reduction and acquisitions. 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 between $50 million and $80 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 discussed in NSP's 1998 Form 10-K, Wisconsin Electric Power Co. (WEPCO) filed a complaint against NSP with the FERC, relating to transmission service curtailments. In March 1999, NSP and WEPCO reached a settlement agreement, which was approved by the FERC on May 19, 1999. The settlement provides that NSP would not be liable to WEPCO for transmission curtailments during 1998 and NSP would bear certain disputed transmission mitigation costs for 1998 and 1999. As discussed in NSP's 1998 Form 10-K, on Dec. 11, 1998, a gas explosion in downtown St. Cloud, Minn., killed four people, including two NSP employees, injured approximately 14 people and damaged several buildings. The accident occurred as a crew from Cable Constructors Inc. (CCI) was installing fiber optic cable. CCI was performing this work for Seren as part of its broad band communications project in St. Cloud and surrounding communities. The accident is under investigation by the National Transportation Safety Board (NTSB). Although this investigation has yet to be completed, the NTSB investigator in charge has stated publicly that "the location of the gas line and a gas main that runs parallel had been properly marked by NSP before the drilling." Presently, there are five lawsuits related to the explosion. One lawsuit involves multiple plaintiffs seeking damages for personal injuries and property losses. Seren, CCI and Sirti (an architecture/engineering firm retained by Seren for the St. Cloud project) are named as defendants in all of the lawsuits. NSP is a defendant in four of the lawsuits. NSP is not a defendant in a wrongful death action brought by a trustee on behalf of the family of an NSP employee who was killed during the explosion. NSP and Seren deny any liability for this accident. NSP has a self-insured retention deductible of $2 million with general liability coverage limits of $185 million. Seren's primary insurance coverage is $1 million and its secondary insurance coverage is $185 million. The ultimate cost to NSP and Seren, if any, is presently unknown. As discussed in NSP's 1998 Form 10-K, in April 1997, a fire damaged several buildings in downtown Grand Forks, N. D., during the historic floods in that city. On July 23, 1998, the St. Paul Mercury Insurance Co., which insured the First National Corp. and its three buildings in downtown Grand Forks, commenced a lawsuit against NSP for damages in excess of $15 million. The suit was filed in the District Court in Grand Forks County in North Dakota. The insurance company alleges that the fire was electrical in origin and that NSP was legally responsible for the fire because it failed to shut off electrical power to downtown Grand Forks during the flood and prior to the fire. In December 1998, a second lawsuit related to the fire was commenced by two partnerships that owned property damaged by the fire and Protection Mutual Insurance Co., which insured the Grand Forks Herald building damaged by the fire. During 1999, four additional law suits have been filed against NSP by insurance companies, which insured businesses damaged by the fire. It is NSP's position that it is not legally responsible for this unforeseeable event. At no time prior to the fire was NSP instructed to shut off power to downtown Grand Forks by any government officials, including representatives from the fire department. Moreover, people in downtown Grand Forks were relying on electricity before and after the fire occurred. NSP has a self-insured retention deductible of $2 million, with general liability insurance coverage limits of $150 million. The ultimate cost to NSP, if any, is unknown at this time. As previously discussed in NSP's 1998 Form 10-K and Report on Form 8-K dated April 6, 1999, NSP filed a complaint, on June 8, 1998, in the Court of Federal Claims against the Department of Energy (DOE) requesting damages in excess of $1 billion for the DOE's partial breach of the Standard Contract. NSP requested damages consist of the costs of storage of spent nuclear fuel at the Prairie Island nuclear generating plant, anticipated costs related to the Private Fuel Storage, LLC and costs relating to 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. On May 20, 1999, NSP filed a notice of appeals with the Federal Circuit and on July 20, 1999, NSP filed its initial brief on appeal. On or about July 12, 1999, Fortistar Capital, Inc. (Fortistar) commenced an action against NRG in Hennepin County District Court in Minnesota, seeking damages in excess of $100 million and an order restraining NRG from closing on the acquisition of Niagara Mohawk Power Corporation's Oswego generating station. Fortistar's motion for a temporary restraining order was denied and a temporary injunction hearing has been scheduled for September 27, 1999. NRG intends to vigorously defend the suit and believes Fortistar's claims to be without merit. NRG has asserted numerous counterclaims against Fortistar. NRG intends to close the Oswego acquisition in the fourth quarter of 1999, pending regulatory approvals. 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 On June 28, 1999, a Special Meeting of Shareholders was held to vote on the merger between NSP and NCE. The voting results are listed below. There were no broker non-votes. <TABLE> <CAPTION> <S> <C> Common & Preferred Class: ------------------------- Shares Voted For 96,625,254 Voted Against 17,727,719 Vote Abstained 1,478,929 Common Class Only: ------------------------- Shares Voted For 95,822,237 Voted Against 17,684,944 Vote Abstained 1,456,516 </TABLE>
ITEM 5. OTHER INFORMATION PROPOSED BUSINESS COMBINATION - ----------------------------- As previously reported in NSP's Report on Form 8-K, dated March 24, 1999, which was filed on March 25, 1999, NSP and NCE agreed to merge and form Xcel. At the time of the merger, each share of NCE common stock will be exchanged for 1.55 shares of Xcel common stock. NSP shares need not be exchanged and will become Xcel shares on a one-for-one basis. Cash will be paid in lieu of any fractional shares of Xcel common stock which holders of NCE common stock would otherwise receive. The merger requires approval or regulatory review by certain state utilities regulators, the SEC, the FERC, the Nuclear Regulatory Commission, the Federal Communications Commission, and expiration or termination of the waiting period applicable to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act. In July 1999, NSP and NCE filed merger applications in Minnesota, North Dakota, Colorado, Wyoming, Texas, New Mexico, Kansas and at the FERC. 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, Xcel will register as a holding company under the Public Utility Holding Company Act of 1935. The merger is expected to be completed within 12 to 18 months from the date of the merger announcement. The dividend payment level of Xcel will be determined by its board of directors. However, NSP anticipates that Xcel will adopt an initial dividend policy which will maintain a dividend equivalent to the current dividend of NCE. Based on the conversion ratio of 1.55, the pro forma dividend for the combined company would be $1.50 per share annually. James J. Howard, chairman, president and chief executive officer of NSP, will serve as chairman of Xcel 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. The Merger Agreement was filed as Exhibit 2.1 to NSP's March 24, 1999 Form 8-K, and is incorporated by reference. Xcel will be created by first transferring NSP-Minnesota'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-Minnesota's liabilities associated with the assets transferred. Then NCE will merge into NSP, with Xcel as the surviving corporate entity in the merger. Xcel 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-Minnesota's utility assets to New NSP Utility Sub, NSP and NCE may negotiate a mutually acceptable alternative. XCEL SUMMARIZED PRO FORMA INFORMATION - ----------------------------------------- The following summary of unaudited pro forma financial information for Xcel gives 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. This unaudited pro forma summarized financial information 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 balance sheet information at June 30, 1999, assumes the merger had been completed on June 30, 1999. The unaudited pro forma income statement information assumes the merger had been completed on Jan.1, 1999, the beginning of the earliest period presented. The unaudited summarized pro forma financial information does 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 does not necessarily indicate future operating results of the combined company. <TABLE> <CAPTION> XCEL ENERGY $Millions <S> <C> <C> <C> <C> As of June 30, 1999: . . NSP NCE Adjustments Pro Forma --------- ------ ------------- ---------- Utility Plant - Net. . . $ 4,378 $6,034 $ 1,214 $ 11,626 Current Assets . . . . . 886 714 1,600 Other Assets . . . . . . 3,274 1,007 (1,214) 3,067 --------- ------ ------------- ---------- Total Assets . . . . . . $ 8,538 $7,755 $ 16,293 ========= ====== ========== Common Equity. . . . . . $ 2,487 $2,645 $ 5,132 Pref. Securities . . . . 305 294 599 Long-Term Debt . . . . . 2,152 2,127 4,279 --------- ------ ---------- Total Capitalization . . 4,944 5,066 10,010 Current Liabilities. . . 2,060 1,440 3,500 Other Liabilities. . . . 1,534 1,249 2,783 --------- ------ ---------- Tot Equity & Liabilities $ 8,538 $7,755 $ 16,293 - ------------------------ ========= ====== ========== </TABLE> <TABLE> <CAPTION> XCEL ENERGY Millions except for earnings per share For the Six Months Ended June 30, 1999: NSP NCE Adjustments Pro Forma ------ ------ ------------ ---------- <S> <C> <C> <C> <C> Revenue. . . . . . . . . . . . . . . . . . . . . . . $1,403 $1,716 $ 166 $ 3,285 Operating Income . . . . . . . . . . . . . . . . . . 154 307 56 517 Net Income . . . . . . . . . . . . . . . . . . . . . 64 150 214 Available for Common . . . . . . . . . . . . . . . . $ 61 $ 150 $ 211 Earnings per Share - diluted . . . . . . . . . . . . $ 0.40 $ 1.31 $ 0.64 - ---------------------------------------------------- ====== ====== ========== </TABLE> NEW NSP UTILITY SUB SUMMARIZED PRO FORMA INFORMATION - ---------------------------------------------------- The following summary of unaudited pro forma financial information for New NSP Utility Sub adjusts the historical financial statements of NSP after the transfer of ownership of all NSP-Minnesota 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-Minnesota's liabilities associated with the assets transferred. The unaudited pro forma balance sheet information at June 30, 1999, assumes the merger had been completed on June 30, 1999. The unaudited pro forma income statement information assumes the merger had been completed on Jan.1, 1999, the beginning of the earliest period presented. The unaudited summarized pro forma financial information does 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 does not necessarily indicate future operating results of New NSP Utility Sub. <TABLE> <CAPTION> NEW NSP UTILITY SUB $Millions - --------------------------------------- --------- As of June 30, 1999: NSP Adjustments Pro Forma --------- ------------ ---------- <S> <C> <C> <C> Utility Plant - Net . . . . . . . . . . $ 4,378 ($810) $ 3,568 Current Assets. . . . . . . . . . . . . 886 (288) 598 Other Assets. . . . . . . . . . . . . . 3,274 (2,407) 867 --------- ------------ ---------- Total Assets. . . . . . . . . . . . . . $ 8,538 ($3,505) $ 5,033 Common Equity . . . . . . . . . . . . . $ 2,487 ($1,104) $ 1,383 Pref. Securities. . . . . . . . . . . . 305 (305) Long-Term Debt. . . . . . . . . . . . . 2,152 (924) 1,228 --------- ------------ ---------- Total Capitalization. . . . . . . . . . 4,944 (2,333) 2,611 Current Liabilities . . . . . . . . . . 2,060 (933) 1,127 Other Liabilities . . . . . . . . . . . 1,534 (239) 1,295 --------- ------------ ---------- Tot Equity & Liabilities. . . . . . . . $ 8,538 ($3,505) $ 5,033 - --------------------------------------- ========= ============ ========== </TABLE> <TABLE> <CAPTION> NEW NSP UTILITY SUB . . . . . . . . . . $Millions <S> <C> <C> <C> For the Six Months Ended June 30, 1999: NSP Adjustments Pro Forma --------- ------------ ---------- Revenue . . . . . . . . . . . . . . . . $ 1,403 ($120) $ 1,283 Operating Income. . . . . . . . . . . . 154 (32) 122 Net Income. . . . . . . . . . . . . . . 64 (18) 46 Available for Common. . . . . . . . . . $ 61 ($15) $ 46 - --------------------------------------- ========= ============ ========== </TABLE>
------ 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 Amended and Restated Corporate By-laws. 27.01 Financial Data Schedule for the six months ended June 30, 1999. 99.01 Statement pursuant to Private Securities Litigation Reform Act of 1995. (B) REPORTS ON FORM 8-K The following reports on Form 8-K were filed either during the three months ended June 30, 1999, or between June 30, 1999 and the date of this report: 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. June 24, 1999 (Filed June 25, 1999) - Item 5. Other Events. Re: Disclosure of the MPUC vote to deny rate recovery of certain electric conservation program incentives, retroactive to January 1, 1998. June 28, 1999 (Filed June 29, 1999) - Item 5 and 7. Other Events and Financial Statements and Exhibits. Re: Disclosure that the shareholders of NSP and NCE voted, in their respective shareholder meetings, to approve the proposed merger between the two companies. July 15, 1999 (Filed July 15, 1999) - Item 5 and 7. Other Events and Financial Statements and Exhibits. Re: Disclosure of NSP's second quarter earnings. July 21, 1999 (Filed July 23, 1999) - Item 5 and 7. Other Events and Financial Statements and Exhibits. Re: Disclosure of NSP's issuance of $250 million of long-term unsecured debt. July 27, 1999 (Filed July 30, 1999) - Item 5. Other Events. Re: Disclosure of MPUC's order requiring an investigation into the reasonableness of NSP's Minnesota electric rates. .
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: August 13, 1999 - ----------------------