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 SEPTEMBER 30, 1998 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 OCTOBER 31,1998
COMMON STOCK, $2.50 PAR VALUE 152,578,228 SHARES
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Northern States Power Company (Minnesota) and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
(Thousands of dollars)
<S> <C> <C> <C> <C>
Utility operating revenues
Electric: Retail $638,623 $588,941 $1,637,193 $1,554,716
Sales for resale and other 61,984 56,327 155,635 127,729
Gas 65,841 52,175 313,623 351,818
Total 766,448 697,443 2,106,451 2,034,263
Utility operating expenses
Fuel for electric generation 89,744 82,936 240,850 232,377
Purchased and interchange power 112,621 82,231 282,044 212,542
Cost of gas purchased and transported 32,226 27,974 182,945 222,372
Other operation 95,656 93,942 287,603 276,401
Maintenance 36,795 38,737 131,100 122,975
Administrative and general 36,946 37,549 111,217 108,493
Conservation and energy management 19,403 19,342 52,954 52,650
Depreciation and amortization 84,809 81,469 252,020 241,960
Taxes: Property and general 58,004 58,571 170,308 176,169
Current income 69,878 52,550 128,616 125,710
Deferred income (2,377) 5,822 (5,643) (3,392)
Investment tax credits recognized (2,242) (2,220) (6,653) (6,576)
Total 631,463 578,903 1,827,361 1,761,681
Utility operating income 134,985 118,540 279,090 272,582
Other income (expense)
Income from nonregulated businesses - before interest and taxes * (5,114) 2,223 6,854 13,959
Allowance for funds used during construction - equity 1,562 1,382 5,118 5,203
Merger costs * - - - (29,005)
Other utility income (deductions) - net (2,187) (2,383) (7,873) (7,376)
Income tax benefit - nonregulated operations and nonoperating items 18,021 9,274 43,872 32,475
Total 12,282 10,496 47,971 15,256
Income before financing costs 147,267 129,036 327,061 287,838
Financing costs
Interest on utility long-term debt 26,788 25,506 78,258 76,754
Other utility interest and amortization 2,627 4,965 8,668 15,102
Nonregulated interest and amortization 14,445 9,376 40,583 22,139
Allowance for funds used during construction - debt (2,225) (2,661) (6,106) (8,595)
Total interest charges 41,635 37,186 121,403 105,400
Distributions on redeemable preferred securities of subsidiary trust 3,938 3,938 11,813 10,500
Total financing costs 45,573 41,124 133,216 115,900
Net income 101,694 87,912 193,845 171,938
Preferred stock dividends and redemption premiums 1,060 2,371 4,487 8,699
Earnings available for common stock $100,634 $85,541 $189,358 $163,239
Average number of common shares outstanding (000's) 151,026 138,815 150,045 137,933
Average number of common and potentially dilutive shares outstanding (000's) 151,227 139,111 150,284 138,176
Earnings per average common share - basic * $0.67 $0.62 $1.26 $1.18
Earnings per average common share - assuming dilution * $0.67 $0.61 $1.26 $1.18
Common dividends declared per share $0.3575 $0.3525 $1.0675 $1.0500
Consolidated Statements of Retained Earnings (Unaudited)
Balance at beginning of period, as previously reported $1,346,977 $1,322,265 $1,364,875 $1,340,799
Net income for period 101,694 87,912 193,845 171,938
Dividends declared:
Cumulative preferred stock (1,060) (2,371) (4,487) (7,551)
Common stock (54,142) (52,165) (160,764) (148,397)
Premium on redeemed preferred stock - - - (1,148)
Pooling of interests with acquired companies (see Note 1) 6,066 6,066
Balance at end of period $1,399,535 $1,355,641 $1,399,535 $1,355,641
The Notes to Consolidated Financial Statements are an integral part of the Statements of Income and Retained Earnings.
* As described in the Management's Discussion and Analysis, nonregulated earnings for the three and nine months
ended September 30, 1998, were reduced by $0.10 per share due to NRG investment write-downs. The write-off of
Primergy merger costs reduced earnings for the nine months ended September 30, 1997 by $0.12 per share .
</TABLE>
<TABLE>
<CAPTION>
Northern States Power Company (Minnesota) and Subsidiaries
Consolidated Statement of Cash Flows (Unaudited)
Nine Months Ended
September 30,
1998 1997
(Thousands of dollars)
<S> <C> <C>
Cash Flows from Operating Activities:
Net Income $193,845 $171,938
Adjustments to reconcile net income to cash from operating activities:
Depreciation and amortization 283,173 265,994
Nuclear fuel amortization 34,066 30,242
Deferred income taxes (7,109) (9,396)
Deferred investment tax credits recognized (6,885) (6,343)
Allowance for funds used during construction - equity (5,118) (5,203)
Undistributed equity in earnings of unconsolidated affiliates (36,849) (7,086)
Write-down of investments in NRG projects 23,410 -
Write-off of prior year merger costs - 25,289
Cash used for changes in certain working capital items 51,551 51,669
Cash provided by changes in other assets and liabilities 20,856 (8,240)
Net cash provided by operating activities 550,940 508,864
Cash Flows from Investing Activities:
Capital expenditures (312,212) (319,904)
Decrease in construction payables (2,169) (1,051)
Allowance for funds used during construction - equity 5,118 5,203
Investment in external decommissioning fund (31,234) (30,750)
Equity investments, loans and deposits for nonregulated projects (154,194) (353,078)
Collection of loans made to nonregulated projects 77,565 3,840
Other investments - net (17,531) (6,625)
Net cash used for investing activities (434,657) (702,365)
Cash Flows from Financing Activities:
Change in short-term debt - net issuances (repayments) (33,923) (261,716)
Proceeds from issuance of long-term debt - net 280,485 266,348
Repayment of long-term debt (128,650) (6,650)
Proceeds from issuance of common stock - net 59,514 256,560
Proceeds from issuance of preferred securities - net - 193,307
Redemption of preferred stock, including reacquisition premiums (95,000) (41,278)
Dividends paid (164,543) (151,667)
Net cash (used for) provided by financing activities (82,117) 254,904
Net increase (decrease) in cash and cash equivalents 34,166 61,403
Cash and cash equivalents at beginning of period 54,765 51,118
Cash and cash equivalents at end of period $88,931 $112,521
The Notes to Consolidated Financial Statements are an integral part of the Statements of Cash Flows.
</TABLE>
<TABLE>
<CAPTION>
Northern States Power Company (Minnesota) and Subsidiaries
Consolidated Balance Sheets (Unaudited)
September 30, December 31,
1998 1997
<S> <C> <C>
ASSETS (Thousands of dollars)
Utility Plant
Electric $7,137,418 $6,964,888
Gas 870,136 821,119
Other 365,353 343,950
Total 8,372,907 8,129,957
Accumulated provision for depreciation (4,095,578)(3,868,810)
Nuclear fuel 961,898 932,335
Accumulated provision for amortization (866,228) (832,162)
Net utility plant 4,372,999 4,361,320
Current Assets
Cash and cash equivalents 88,931 54,765
Customer accounts receivable - net 253,454 269,455
Unbilled utility revenues 99,804 121,619
Notes receivable from nonregulated projects 19,359 55,787
Other receivables 64,352 80,803
Fossil fuel inventories - at average cost 59,386 56,434
Materials and supplies inventories - at average cost 114,486 107,254
Prepayments and other 49,626 55,674
Total current assets 749,398 801,791
Other Assets
Equity investments in nonregulated projects 855,001 740,734
External decommissioning fund and other investments 448,809 400,290
Regulatory assets 329,769 340,122
Nonregulated property - net of accumulated depreciation 265,872 256,726
Notes receivable from nonregulated projects 74,792 77,639
Other long-term receivables 22,590 42,600
Intangible assets - net of amortization 96,119 92,829
Long-term prepayments and deferred charges 50,897 30,015
Total other assets 2,143,849 1,980,955
TOTAL ASSETS $7,266,246 $7,144,066
LIABILITIES AND EQUITY
Capitalization
Common stock equity:
Common stock and premium - authorized: 1998 350,000,000 and 1997 160,000,000
shares of $2.50 par value, issued shares:
1998 152,240,646 and 1997 149,236,764 $1,143,143 $1,080,273
Retained earnings 1,399,535 1,364,875
Leveraged common stock held by ESOP (20,220) (10,533)
Accumulated other comprehensive income (92,650) (62,887)
Total common stock equity 2,429,808 2,371,728
Cumulative preferred stock and premium - authorized
7,000,000 shares of $100 par value; outstanding
shares: 1998, 1,050,000 and 1997, 2,000,000
without mandatory redemption 105,340 200,340
Mandatorily redeemable preferred securities of subsidiary trust - guaranteed by NSP * 200,000 200,000
Long-term debt 1,848,110 1,878,875
Total capitalization 4,583,258 4,650,943
Current Liabilities
Long-term debt due within one year 227,320 22,820
Other long-term debt potentially due within one year 141,600 141,600
Short-term debt 226,429 260,352
Accounts payable 214,952 249,813
Taxes accrued 233,255 186,369
Interest accrued 40,086 28,724
Dividends payable on common and preferred stocks 55,486 54,778
Accrued payroll, vacation and other 76,853 89,562
Total current liabilities 1,215,981 1,034,018
Other Liabilities
Deferred income taxes 775,357 792,569
Deferred investment tax credits 131,179 138,509
Regulatory liabilities 352,522 305,765
Postretirement and other benefit obligations 129,297 135,612
Other long-term obligations and deferred income 78,652 86,650
Total other liabilities 1,467,007 1,459,105
Commitments and Contingent Liabilities (See Note 3)
TOTAL LIABILITIES AND EQUITY $7,266,246 $7,144,066
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.
</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) (the Company) and its
subsidiaries (collectively, NSP) as of September 30, 1998 and Dec. 31, 1997, the
results of its operations for the three and nine months ended September 30, 1998
and 1997, and its cash flows for the nine months ended September 30, 1998 and
1997. 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, 1997 (1997 Form 10-K). The following notes should be read in conjunction
with such policies and other disclosures in the 1997 Form 10-K.
Certain reclassifications have been made to 1997 financial information to
conform with the 1998 presentation. These reclassifications had no effect on
net income or earnings per share as previously reported.
On April 22, 1998, the Company's Board of Directors authorized a
two-for-one stock split effective June 1, 1998 for shareholders of record on May
18, 1998. All financial information pertaining to earnings per share and
number of shares outstanding has been adjusted to reflect the stock split.
1. BUSINESS DEVELOPMENTS
- - -- ----------------------
NRG ENERGY, INC. (NRG) - On March 31, 1998, NRG and its 50 percent partner,
Dynegy, concluded the acquisition of the Long Beach Generating Station for
approximately $15 million, one of two Southern California Edison plants awarded
to the NRG and Dynegy consortium. The Long Beach Station is a gas-fired plant
comprised of seven 60-megawatt gas turbine generators and two steam turbines
totaling 140- megawatts. During April 1998, NRG and Dynegy concluded the
acquisition of the second plant, the El Segundo Generating Station, for
approximately $88 million. The El Segundo Generating Station is a gas-fired
plant with a capacity rating of 1,020-megawatts.
During April 1998, NRG exercised its option to acquire 16.8 million
convertible, non-voting preference shares of Energy Developments Limited (EDL)
for $24.8 million, bringing NRG's total investment in EDL to $48.8 million for
an ownership interest of approximately 35 percent. NRG had previously invested
in EDL in 1997. EDL is a listed Australian company that owns 189-megawatts and
operates 238- megawatts of generation throughout Australia and the United
Kingdom.
In August 1998, the Collinsville power station began commercial operation.
The Collinsville power station, located in Queensland, Australia, had been idle
since 1988. In 1996, NRG and Transfield Collinsville Pty. Ltd., acquired the
plant from the Queensland State government and began to refurbish it. NRG owns
a 50 percent interest in the plant.
NRG and two partners (collectively known as Louisiana Generating LLC) are
attempting to acquire 1,706 megawatts of coal-fired generation in the
bankruptcy proceeding of Cajun Electric Power Cooperative (Cajun). In September
1998, Enron Capital & Trade Corp. (Enron) withdrew from the proceedings.
Enron's withdrawal leaves the bankruptcy court with two competing plans offered
by Louisiana Generating LLC and Southwestern Electric Power Co. In March
1998, Louisiana Generating LLC filed its final bid of $1.2 billion while keeping
proposed electricity prices 10 percent below Cajun's current prices. Under the
plan, NRG would hold a 30 percent equity interest in the partnership.
In September 1998, the government of Estonia started direct negotiations
with NRG to form a joint venture between NRG and Eesti Energia for ownership of
two of Estonia's largest fossil fueled power plants (Narva Power). Eesti
Energia is Estonia's national electricity generator and distributor.
On Jan. 30, 1998, NRG's 45 percent owned affiliate, Cogeneration
Corporation of America (CogenAmerica), gave notice that it intended to seek
arbitration of its claim that NRG sold the Mid-Continent Power Company (MCPC)
facility to OGE Energy Corp. (OGE) in violation of NRG's obligation to offer
certain project investments to CogenAmerica under the Co-Investment Agreement
between NRG and CogenAmerica. On July 31, 1998, an arbitration panel ordered
NRG to offer its interest in MCPC to CogenAmerica and enjoined NRG's pending
sale of the MCPC facility to OGE. In October 1998, NRG sold the MCPC facility
to CogenAmerica. NRG also agreed to loan CogenAmerica approximately $24 million
to finance the acquisition. The MCPC facility is a 110 megawatt gas-fired
power generation station located near Pryor, Oklahoma.
In September 1998, NRG filed preliminary proxy materials and a revised
schedule 13D with the Security and Exchange Commission (SEC) to seek a special
meeting of the shareholders of CogenAmerica for the purpose of removing Robert
T. Sherman, Jr., president and chief executive officer of CogenAmerica, from
his position as a director of CogenAmerica. In October 1998, NRG delivered to
CogenAmerica written consents from a majority of CogenAmerica's shareholders in
favor of such action. At a regularly scheduled board meeting, following the
delivery of the consents, the board of directors of CogenAmerica placed Sherman
on administrative leave and appointed Julie A. Jorgenson, senior counsel and
corporate secretary of NRG and a director of CogenAmerica, interim president and
chief executive officer of CogenAmerica. NRG is continuing to actively solicit
proxies for the special meeting of CogenAmerica's shareholders, which is
expected to occur in November 1998. NRG expects that it will be necessary to
proceed with the special meeting, since Sherman and three directors of
CogenAmerica have challenged the ability of a majority of shareholders to act
via written consent.
In 1996, NRG, Ansaldo Energia SpA, a major Italian industrial company
(Ansaldo), and P.T. Kiani Metra, an Indonesian industrial company (PTKM) formed
a joint venture to develop a 400-megawatt coal-fired power generation facility
in West Java, Indonesia, through P.T. Dayalistrik Pratama (PTDP), a limited
liability company created by the joint venturers. NRG and Ansaldo each have an
ownership interest of 45 percent in PTDP, and PTKM has an ownership interest of
10 percent. During the third quarter of 1998, NRG recorded a nonrecurring
pretax charge of approximately $20 million to write-down its investment in the
West Java project as a result of the political and economic instability in
Indonesia.
During October 1998, NRG agreed to purchase the Somerset power station for
approximately $55 million from Eastern Utilities Association (EUA). The
Somerset station, located in Somerset, Massachusetts, includes two coal-fired
generating facilities supplying a total of 181 megawatts and two aeroderivative
combustion turbine peaking units supplying a total of 48 megawatts. A total of
69 megawatts is on deactivated reserve. NRG will hold a 100 percent interest in
the project and will own, operate and maintain the units. The project's
financial close is expected to occur in the first quarter of 1999.
ENERGY MASTERS INTERNATIONAL, INC. (EMI) - In June 1998, EMI sold its
interest in the joint venture, Enerval, to its joint venture partner. EMI's
investment in and advances to Enerval were written down to an estimate of their
net realizable value in 1997 and therefore the transaction had no material
impact on 1998 earnings.
VIKING GAS TRANSMISSION COMPANY (VIKING) - On April 21, 1998, Viking, an
NSP subsidiary, withdrew from the proposed Voyageur pipeline project, which
would have carried natural gas from Emerson, Manitoba, to Joliet, Illinois.
During the second quarter of 1998, Viking wrote off $1.4 million in costs
related to the Voyageur project. Viking has eliminated all liabilities to the
partnership from its balance sheet and does not expect additional costs to be
incurred related to the Voyageur project.
During September 1998, Viking, filed an application with the Federal Energy
Regulatory Commission (FERC) to expand its transmission system in northwestern
and central Minnesota by adding 45 miles of 24-inch pipeline during 1999.
Viking Gas is also requesting approval to establish a new meter station at its
existing compressor station near Frazee, Minnesota. The proposed $21 million
expansion is a result of customers' requests and would create an additional
28,200 dekatherms per day of winter capacity. If approved, construction could
begin in the summer of 1999, with the pipeline placed in service during the
fourth quarter of 1999.
BUSINESS COMBINATIONS - In July 1998, NSP completed its merger with Black
Mountain Gas Company (Black Mountain) located in Cave Creek, Arizona. Black
Mountain is a natural gas and propane distribution company with natural gas
operations in Cave Creek, Carefree, North Phoenix and North Scottsdale, and
propane operations in Page, Arizona. Black Mountain currently serves about
6,500 customers and had 1997 annual revenue of approximately $6 million. Also
in July 1998, Northern States Power Company, a Wisconsin Corporation (the
Wisconsin Company), completed its merger with Natural Gas Inc. (NGI) of New
Richmond, Wisconsin. NGI, a privately owned natural gas utility, serves 1,900
natural gas customers in New Richmond and has annual revenue of approximately
$2.3 million. Both of these mergers were structured as tax-free reorganizations
for income tax purposes and were accounted for using the pooling of interests
method. Prior period financial statements have not been restated due to
immateriality.
UNION NEGOTIATIONS - Five local unions of the International Brotherhood of
Electrical Workers have accepted NSP's proposal to begin midterm contract
negotiations to modify or create new work rules, practices and operations to
improve workforce productivity. If these midterm negotiations are successfully
completed by Dec. 31, 1998, the Company will then propose a three-year contract
extension including negotiated changes to wages and benefits. If the contract
extension is ratified, new terms and conditions will become effective Jan. 1,
2000. If not extended, the existing contracts will stay in effect through Dec.
31, 1999.
NUCLEAR COOPERATIVE ALLIANCE - During the third quarter of 1998, NSP,
Alliant Utilities, Wisconsin Electric Power Co., and Wisconsin Public Service
Corp. agreed to form a cooperative nuclear alliance to take advantage of the
combined skills of their employees to improve plant performance and reliability,
strengthen operational efficiency, maintain high safety levels and reduce
costs. Working teams are being organized to implement cooperative alliances in
several areas, including fuel management, Year 2000 initiatives, inventory
management, information exchange and self-assessment programs. The four
companies operate seven nuclear plants at five sites with a total generation
capacity exceeding 3,650 megawatts.
INDEPENDENT TRANSMISSION COMPANY (ITC) - On April 28, 1998, the 1997
Wisconsin Act 204 became law (Act 204). Act 204 includes provisions which
require the Public Service Commission of Wisconsin (PSCW) to order a public
utility that owns transmission facilities 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 Sept. 30, 1998, the net book value of the Wisconsin Company's
transmission assets was approximately $147 million. The Wisconsin Company may
attempt to obtain a legislative amendment in 1999 of the mandatory transfer or
divestiture requirements and is also considering whether to judicially challenge
the transmission transfer or divestiture requirements of the new law.
In April 1998 testimony before the FERC, NSP proposed to form an ITC as an
alternative to an ISO. The ITC would own and operate transmission facilities
independent from vertically integrated utilities and other market participants
and satisfy the regulatory requirements for control of transmission facilities.
The ITC would be a for-profit entity.
During the third quarter of 1998, the Mid-Continent Area Power Pool (MAPP)
submitted its ISO proposal and a companion regional transmission tariff to all
MAPP members for approval. On Nov. 4, 1998, MAPP announced that its members
rejected the ISO proposal. The ISO proposal would have transferred control of an
owner's transmission assets to the MAPP center.
In November 1998, NSP and Alliant Energy (Alliant) announced plans to
develop an ITC to provide transmission services to the Upper Midwest. The two
companies are developing a relationship by which NSP will create an ITC, which
will lease the transmission assets of Alliant. Lease terms have not yet been
finalized. The ITC is intended to be a publicly traded entity and not an
affiliate of NSP or Alliant. NSP and Alliant plan to seek the necessary
approvals from state and federal regulators in 1999, with the ITC proposed to be
operational in 2000. In the event that NSP is successful in forming this ITC,
NSP would divest its electric transmission assets through a sale or spin-off.
At Sept. 30, 1998, the net book value of NSP's transmission assets was
approximately $641 million.
2. REGULATION AND RATE MATTERS
- - -- ------------------------------
MINNESOTA PUBLIC UTILITIES COMMISSION (MPUC)
MINNESOTA GAS RATE CASE - During December 1997, NSP filed for a general
increase in Minnesota retail gas rates of $18.5 million or 5.5 percent on an
annualized basis. NSP received approval of an interim rate increase totaling
$13.9 million on an annualized basis, subject to refund, effective February 1,
1998. On Sept. 30, 1998 the MPUC issued an order granting NSP a gas rate
increase of $13.4 million, or 4.0 percent, on an annualized basis. On Oct. 19,
1998, NSP filed a request for reconsideration of portions of the MPUC order.
The request would not have a material impact on the final rate increase.
PUBLIC SERVICE COMMISSION OF WISCONSIN (PSCW)
WISCONSIN GAS AND ELECTRIC RATE CASES - During November 1997, the Wisconsin
Company filed retail electric and gas rate cases with the PSCW requesting an
annual increase of approximately $12.7 million, or 4.3 percent in retail
electric rates and an annual decrease of $1.7 million, or 1.9 percent in retail
gas rates. On Sep. 16, 1998, the PSCW issued an order granting the Wisconsin
Company an electric rate increase of $7.3 million or 2.5% and gas rate decrease
of $1.9 million or 2.2%, on an annual basis.
FEDERAL ENERGY REGULATORY COMMISSION (FERC)
TRANSMISSION RATE CASE - During the first quarter of 1998, NSP filed
electric point-to-point and network integration transmission service (NTS) rate
cases with the FERC. The proposed point-to-point rates would, if approved,
provide an annual increase in third party transmission service revenue of
approximately $3 million, plus a $1 million annual increase in ancillary service
revenues. The NTS tariff change would, if approved, reduce NTS costs from 1997
levels. During April 1998, the FERC voted to accept the rates and consolidate
the cases. The proposed increases in point-to-point and ancillary service rates
were placed into effect on Oct. 1, 1998, subject to refund. An administrative
law judge and a settlement judge were appointed to hear arguments and facilitate
possible settlements in the case. NSP is currently in settlement discussions.
If this case is not settled, NSP expects a FERC decision in 1999 or 2000.
SERVICE CURTAILMENT RULES - On June 29, 1998, the FERC issued an order in
the transmission rate case requiring NSP to curtail service to its own retail
sales customers proportionally with curtailment of wholesale transmission-only
customers taking service under NSP's Order 888 transmission tariff. In a
situation where NSP's transmission lines are constrained or about to become
overloaded, the FERC order would require NSP to reduce or curtail service to
retail customers on a comparable basis with curtailment of wholesale
transactions. On Aug. 3, 1998, NSP filed an appeal of the FERC orders with the
U.S. Court of Appeals, Eighth Circuit (Court). NSP believes the FERC exceeded
its legal authority because service to retail customers is subject to state
regulation, not FERC regulation. In addition, NSP believes the FERC has issued
inconsistent orders with which NSP cannot fully comply and which places
reliability of service to NSP's retail customers at risk. The appeal will be
considered by the Court using its normal procedures. NSP believes a final
decision will be issued in 1999.
MARKET-BASED RATES - During June 1998, the FERC approved NSP's wholesale
electric market-based sales rate application with rates effective immediately.
This allows NSP's Energy Marketing organization to sell wholesale power at
market-based rates, which represent the true clearing price of energy.
Previously, NSP's Energy Marketing organization had been restricted by
regulation to sell power only under cost-based rates. The move to market-based
rates reflects the increasingly competitive nature of the electric industry.
VIKING RATE CASE - During June 1998, Viking filed a rate case with the
FERC, requesting a $3 million annual rate increase. On July 30, 1998, the FERC
issued an order allowing the rate increase to take effect January 1999, subject
to refund. A final order is expected in the second half of 1999.
3. COMMITMENTS AND CONTINGENT LIABILITIES
- - -- -----------------------------------------
CONSERVATION IMPROVEMENT PROGRAM (CIP) - During the second quarter of
1998, NSP submitted to the MPUC its annual electric and gas CIP and Financial
Incentive Reports. On June 1, 1998, the Minnesota Department of Public Service
(DPS) recommended the MPUC discontinue recovery of lost margins, load management
discounts and performance bonuses for NSP and other Minnesota public utilities,
retroactive to Jan.1, 1998. The DPS recommendation, if approved by the MPUC,
would reduce NSP's annual revenue by approximately $32 million. During July
1998, NSP and other Minnesota public utilities filed comments opposing the DPS
position and arguing for continued recovery of CIP incentives. The MPUC has
scheduled deliberations on this issue for Nov. 19, 1998.
LEGISLATIVE RESOURCE COMMITMENTS - In 1994, the Minnesota Legislature
established several energy resource and other commitments for NSP to fulfill as
part of its approval of NSP's Prairie Island nuclear generating plant's
temporary nuclear fuel storage facility, as discussed in NSP's 1997 Form 10-K.
During April 1998, a final agreement was signed with Lake Benton Power Partners
II LLC for 103.5-megawatts of wind energy. This brings NSP's total contracted
wind energy capacity to approximately 269-megawatts.
LEGAL CLAIMS - In April 1997, a fire damaged several buildings in downtown
Grand Forks, North Dakota during the historic floods in that city. On July 23,
1998, the St. Paul Mercury Insurance Company, which insured the First National
Corporation 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. Mr. Douglas W.
Leatherdale, a member of NSP's Board of Directors, is chairman, president and
chief executive of St. Paul Companies, Inc., the parent of St. Paul Mercury
Insurance Company. Mr. W. John Driscoll, a member of NSP's Board of Directors,
is also a director of St. Paul Companies, Inc. 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. 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 power off 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 costs
to NSP, if any, are unknown at this time.
ENVIRONMENTAL CONTINGENCIES - As discussed in Note 14 to the Financial
Statements in the 1997 Form 10-K, the Wisconsin Company has been named as one
of three potentially responsible parties in connection with environmental
remediation at a site in Ashland, Wisconsin. The Wisconsin Company has
continued its investigations during 1998. Based on the results of the Wisconsin
Company's investigation to date, and information received from consultants, the
Wisconsin Company has recorded in accrued liabilities an estimate of its share
of future remediation costs at the Ashland site. In addition, the Wisconsin
Company has simultaneously recorded a regulatory asset for these accrued
remediation costs because management expects that prior regulatory recovery of
remediation costs will continue. In its 1998 rate case orders, the PSCW has
authorized recovery in Wisconsin customer rates of amounts paid for remediation
of the Ashland site through December 31, 1997. Also, the PSCW has authorized
recovery of similar remediation costs for other utilities.
4. ACCOUNTING AND REPORTING CHANGES
- - -- -----------------------------------
SFAS NO. 130 - In June 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standard (SFAS) No. 130,
"Reporting Comprehensive Income". The statement requires that an enterprise (a)
report items of other comprehensive income and (b) display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of financial
position. The statement is effective for NSP in 1998.
NSP's other comprehensive income consists of currency translation
adjustments (CTA) related to NRG's investments in international projects. The
CTA for the three and nine month periods ended September 30, 1998 and 1997 are
listed below.
3 Mos. Ended 9 Mos. Ended
Millions of Dollars 9/30/98 9/30/97 9/30/98 9/30/97
- - --------------------- ------- ------- ------- -------
CTA impact on Equity - ($6.7) ($17.0) ($29.8) ($33.6)
increase/(decrease)
SFAS NO. 133 - In June 1998, the FASB issued 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 (for example, as a qualifying hedge) and its
effectiveness, if designated as a qualifying hedge. The Company will be
required to adopt this standard in 2000, but can elect to adopt it in 1998 or
1999. The Company has not determined the potential impact of implementing this
statement or the expected adoption date at this time.
5. SHORT-TERM BORROWINGS
- - -- ----------------------
As of Sept. 30, 1998, the Company 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. The Company has regulatory approval for up to
approximately $575 million in short-term borrowing levels.
In addition to Company lines, at Sept. 30, 1998 commercial banks provided
credit lines of approximately $319 million to wholly owned subsidiaries of the
Company with approximately $226 million in borrowings outstanding. In addition,
approximately $35 million in letters of credit were outstanding, which reduced
the credit lines available to subsidiaries at Sept. 30, 1998 resulting in
approximately $58 million of unused lines available.
At Sept. 30, 1998, the Company had no short-term commercial paper
borrowings outstanding. The weighted average interest rate on all short-term
borrowings was 6 percent as of Sept. 30, 1998.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- - --------------------------------------------------------------------------------
OF OPERATIONS
-------------
Except for the historical statements contained herein, 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"; 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
Sept. 30, 1998.
RESULTS OF OPERATIONS
NSP's earnings per share (assuming dilution) for the periods ending Sept.
30, 1998 and 1997 were as follows:
Earnings per share: 3 Mos. Ended 9 Mos. Ended
9/30/98 9/30/97 9/30/98 9/30/97
------- ------- ------- ------
Ongoing operations $0.77 $0.61 $1.36 $1.30
Nonrecurring Items * (0.10) 0.00 (0.10) (0.12)
------ ----- ------ ------
Total $0.67 $0.61 $1.26 $1.18
===== ===== ===== =====
* See discussion under Nonrecurring transactions.
FACTORS AFFECTING RESULTS OF OPERATIONS
- - -------------------------------------------
In addition to items noted in the 1997 Form 10-K and the Notes to the
Financial Statements, the historical and future trends of NSP's operating
results have been and are expected to be affected by the following factors:
NONREGULATED BUSINESS RESULTS - The following summarizes the earnings
contributions of NSP's nonregulated businesses:
3 Mos. Ended 9 Mos. Ended
9/30/98 9/30/97 9/30/98 9/30/97
------- ------- ------- ------
NRG Ongoing $0.07 $0.02 $0.16 $0.11
NRG Nonrecurring (0.10) 0.00 (0.10) 0.00
Eloigne Company 0.01 0.01 0.03 0.02
EMI, Inc. (0.01) (0.02) (0.04) (0.04)
Seren Innovations 0.00 0.00 (0.01) (0.01)
Other 0.00 0.00 (0.01) 0.01
---- ---- ------ ----
Total ($0.03) $0.01 $0.03 $0.09
======= ===== ===== =====
Due to the nature of these nonregulated businesses, NSP anticipates that
the earnings from nonregulated operations could experience more variability than
regulated utility businesses.
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 Sept. 30: 1998 vs Normal 1997 vs Normal 1998 vs 1997
Quarter Ended $0.04 ($0.03) $0.07
Nine Months Ended ($0.04) ($0.01) ($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 and the 9-month periods ended Sept. 30, 1998, as compared with the same
periods in 1997. NSP's weather normalization process removes the estimated
impact on sales of temperature variations from historical averages.
3 Mos. Ended 9 Mos. Ended
Actual W/N Actual W/N
Electric Residential 12.2% 6.1% 4.3% 4.2%
Electric Industrial and Commercial 4.9% 2.9% 3.8% 3.4%
Total Electric Retail 6.9% 3.8% 3.9% 3.6%
Total Gas Sales & Delivery 3.8% 3.5% 0.5% 5.4%
IMPACT OF STORMS - NSP's results for the first nine months of 1998 were
reduced by approximately 3 cents per share due to storm damage. NSP's 1998
results include approximately $11 million in operating and maintenance expenses
related to the cost of customer restoration and storm repair from a series of
hail and wind storms in May and June. In comparison, during the first nine
months of 1997, NSP incurred approximately $4 million of operation and
maintenance expense as a result of several storms. During 1998, NSP also
incurred approximately $10 million of capital expenditures and electric margin
was reduced by an estimated $1 million due to the storms. Both 1997 and 1998
were unusual in the frequency and extent of violent storms.
NONRECURRING TRANSACTIONS - During the third quarter of 1998, NRG recorded
a nonrecurring charge of approximately $20 million ($13.3 million after tax) to
write down its investment in a proposed 400-megawatt coal-fired power station in
Cilegon, West Java, due to the political and economic instability in Indonesia.
NRG also reviewed all international projects in development and recorded a $3.3
million reserve ($2 million after tax) for other potential project write-downs.
These charges together reduced earnings by 10 cents per share.
In May 1997, NSP and Wisconsin Energy Corporation terminated their merger
agreement. The operating results for the nine month period ending Sept. 30,
1997, include a nonrecurring pre-tax charge to nonoperating expense of
approximately $29 million, or 12 cents per share, for the write-off of costs
incurred related to the merger.
INDUSTRY RESTRUCTURING - Efforts are continuing to bring more competition
to the electric and gas industry. Wisconsin has enacted legislation requiring
utilities to form an ISO or to divest its transmission assets to a ITC. NSP
has proposed forming an ITC as an alternative to an ISO. See Note 1 to the
Financial Statements for a further discussion of these matters.
TECHNOLOGY CHANGES FOR THE YEAR 2000 (Y2K) - NSP expects to incur
significant costs to modify or replace existing technology, including computer
software, for uninterrupted operation in the Year 2000 and beyond. In 1996,
NSP's Board of Directors approved funding to address development and remediation
efforts related to Y2K. A committee made up of senior management is leading
NSP's initiatives to identify Y2K related issues and remediate business
processes as necessary.
NSP's Y2K program covers not only NSP's 2,000 computer applications,
consisting of about 75,000 programs and totaling more than 30 million lines of
code, but also the thousands of hardware and embedded system components in use
throughout NSP. Embedded systems perform mission-critical functions in all
parts of operations including power generation, distribution, communications and
business operations.
NSP has implemented a Y2K methodology consistent with state-of-the-art best
practices and standards within the utility industry. This seven-step process
includes:
- - - Discovery of possible date-related logic in components, systems, and
processes.
- - - Assessment of potential problems.
- - - Plan design to address the problem.
- - - Remediation to resolve the problem.
- - - Testing to verify that the solutions are workable.
- - - Implementation of the solution into production.
- - - Closure through re-testing and documentation.
As NSP has developed more detailed plans for completion of the Y2K project,
several of the completion targets have been revised to align them more logically
with release of Y2K compliant package software and to coordinate logically with
scheduled plant outages. NSP time table for Y2K completion is as follows:
- - - By Dec. 31, 1998 - Completion of all Y2K efforts on 70 percent of
mission-critical systems and processes.
- - - By Mar. 31, 1999 - Completion of all Y2K efforts on 90 percent of
mission-critical systems and processes.
- - - By June 30, 1999 - Completion of all Y2K efforts on mission-critical
systems and processes, completion of all nuclear plant remediation in
accordance with Nuclear Regulatory Commission guidelines, and
finalization of all contingency planning.
- - - By Dec. 31, 1999 - Remediate low-priority applications, complete all
testing and implementation, and final closure.
In conjunction with this logical change in timing, NSP has accelerated
completion of primary and secondary systems consistent with NSP's overall plan
for system remediation prior to the Year 2000.
NSP is communicating with its key suppliers, customers and business
partners regarding their Y2K progress, particularly in software and embedded
component areas, to determine the areas in which NSP's operations are vulnerable
to those parties' failure to complete their remediation efforts. NSP is
currently evaluating and initiating follow-up actions regarding the responses
from these parties as appropriate. NSP is also working closely with the
Electric Power Research Institute, MAPP, the Nuclear Energy Institute, the North
American Electric Reliability Council (NERC), and other utilities to enhance
coordination, system reliability and compliance with industry and regulatory
requirements.
NSP has made significant progress in the implementation of its Y2K plan.
Based upon the information currently known regarding its internal operations and
assuming successful and timely completion of its remediation plan, NSP does not
anticipate significant business disruptions from its internal systems due to the
Y2K issue. However, NSP may possibly experience limited interruptions to some
aspects of its activities, relating to information technology, operations,
administrative or otherwise. NSP is considering such potential occurrences in
planning for its most reasonably likely worst case scenarios.
Additionally, risk exists regarding the non-compliance of third parties
with key business or operational importance to NSP. Y2K problems affecting key
customers, interconnected utilities, fuel suppliers and transporters,
telecommunications providers or financial institutions could result in lost
power or gas sales, reductions in power production or transmission or internal
functional and administrative difficulties on the part of NSP. NSP is not
presently aware of any such situations; however, occurrences of this type, if
severe, could have material adverse impacts upon the business, operating results
or financial condition of NSP. Consequently, there can be no assurance that NSP
will be able to identify and correct all aspects of the Y2K problem that affect
it in sufficient time, or that the costs of achieving Y2K readiness will not be
material.
NSP is currently updating contingency plans for all material areas of Y2K
risk and is on track to meet the contingency planning schedule set forth by
NERC. Among the areas contingency planning will address include delays in
completion in NSP's remediation plans, failure or incomplete remediation results
and failure of key third party contacts to be Y2K compliant.
Through September 1998, NSP had spent approximately $10.5 million for Y2K
remediation. The amount of additional development and remediation costs
necessary for NSP to prepare for the Year 2000 is estimated to be approximately
$14 million.
THIRD QUARTER 1998 VS. THIRD QUARTER 1997
- - -----------------------------------------------
Utility Operating Results
- - ---------------------------
ELECTRIC REVENUES for the third quarter of 1998 compared with the third
quarter of 1997 increased $55.3 million or 8.6 percent. Retail revenues
increased approximately $49.7 million or 8.4 percent largely due to a 6.9
percent increase in retail sales volume and a 1.4 percent increase in average
prices primarily due to fuel cost recovery. The increase in retail electric
sales reflects sales growth and favorable weather. Sales for resale and other
electric revenues increased $5.7 million primarily due to higher sales volumes
in the resale market as a result of more aggressive marketing efforts, the sale
of options to purchase NSP's electricity and somewhat higher prices reflecting
market conditions. These increases were partially offset by decreases in other
revenue due to a 1997 recognition of a transmission settlement.
GAS REVENUES for the third quarter of 1998 increased $13.7 million or 26.2
percent compared with the third quarter of 1997. Gas revenues increased
primarily due to a 33.1 percent average price increase and the merger with
Black Mountain, as discussed in Note 1 to the Financial Statements, partially
offset by a 5.3 percent decrease in gas sales volumes (excluding transportation
deliveries). Depending on prices, interruptible gas customers often switch back
and forth between transportation service and interruptible service. The impact
of this switching on NSP's gas margins is immaterial. The price increase is
mainly due to rate adjustments for increased purchased gas costs, resulting from
market changes in natural gas supply prices, and interim retail rate increases
as discussed in Note 2 to the Financial Statements.
FUEL FOR ELECTRIC GENERATION AND PURCHASED AND INTERCHANGE POWER expense
together increased $37.2 million or 22.5 percent for the third quarter of 1998
compared with the third quarter of 1997. Purchased and interchange power costs
increased $30.4 million primarily due to more purchases to support sales growth,
higher average cost of purchases as a result of market conditions and higher
demand expenses related to a contract which began in October 1997, and higher
seasonal purchases. Fuel expenses increased $6.8 million primarily due to
higher output from NSP's generating plants. The higher output reflects higher
sales levels and greater plant availability.
COST OF GAS PURCHASED AND TRANSPORTED for the third quarter of 1998
compared with the third quarter of 1997 increased $4.3 million or 15.2 percent
primarily due to the higher cost of gas, partially offset by lower gas sendout
due to lower sales. The higher cost of purchased gas reflects changes in market
conditions and purchased gas cost adjustments to match expense with rate
recovery.
OTHER OPERATION, MAINTENANCE AND ADMINISTRATIVE AND GENERAL expenses
together decreased $0.8 million or 0.5 percent compared with the third quarter
of 1997. The decreases are primarily due to lower costs for NTS, which is
discussed in Note 2 to the Financial Statements, decreased line maintenance
costs and lower employee benefit costs. These decreases were partially offset by
higher costs for information technology improvements, including costs related to
the Year 2000 project, and higher generating plant costs.
DEPRECIATION AND AMORTIZATION expense increased $3.3 million or 4.1 percent
compared with the third quarter of 1997. The increase is mainly due to
increased plant in service between the two periods partially offset by lower
depreciation rates.
UTILITY INCOME TAXES for third quarter 1998 compared with the third quarter
1997 were $9.1 million more primarily due to a higher operating income.
UTILITY INTEREST AND AMORTIZATION decreased $1.1 million or 3.5 percent
primarily due to lower levels of commercial paper, retirement of bonds in
October 1997 and April 1998, partially offset by new bonds issued in March 1998
and Senior Notes issued by Viking in October 1997.
PREFERRED STOCK DIVIDENDS AND REDEMPTION PREMIUMS decreased $1.3
million in the third quarter of 1998 compared with 1997 primarily due to the
redemption of two issues of preferred stock in late March 1998.
AVERAGE COMMON SHARES OUTSTANDING increased due to stock issuances, mainly
a public offering in September 1997. Share dilution has decreased third quarter
earnings by approximately six cents per share in 1998 in comparison to 1997.
Nonregulated Business Results
- - -------------------------------
NSP's nonregulated operations include diversified businesses, such as NRG's
businesses, which are primarily independent power production, commercial and
industrial heating and cooling, and energy-related refuse-derived fuel
production. In addition, EMI's primary business is custom energy services and
sales. NSP also has investments in affordable housing projects through Eloigne
Company and several income-producing properties through other subsidiaries.
Seren Innovations is a communications and data services subsidiary. The
following summarizes NSP's nonregulated business results in the aggregate,
including consolidated subsidiaries and unconsolidated affiliates.
3 Mos. Ended
(Thousands of dollars, except EPS) 9/30/98 9/30/97
------- ---------
Operating revenues $44,980 $48,918
Equity in project earnings 28,322 2,807
Operating and development expenses (57,021) (53,618)
Nonrecurring project write-downs (23,410) 0
Other income (expense) 2,015 4,116
----- -----
Income before interest and tax (5,114) 2,223
Interest expense (14,445) (9,376)
Income tax benefit and credits 13,974 8,580
------ -----
Net income ($5,585) $1,427
Nonregulated earnings per share ($0.03) $0.01
NRG - NRG's third quarter earnings from ongoing operations (excluding
nonrecurring items) increased in 1998 from the same period one year ago
primarily due to earnings, including tax credits, from interests in Pacific
Generation Company, Energy Developments Limited, El Segundo, Long Beach and
other new projects purchased after the third quarter of 1997. Earnings for 1998
were partially offset by increased interest costs primarily associated with
NRG's debt outstanding under line of credit arrangements. NRG also recorded a
nonrecurring charge in the third quarter of 1998, as previously discussed.
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 Sept. 30, 1998.
EMI - EMI's 1998 third quarter losses were less than third quarter 1997
losses, due to increased margins and 1997 losses incurred by Enerval, a joint
venture previously held by EMI.
FIRST NINE MONTHS 1998 VS. FIRST NINE MONTHS 1997
- - ---------------------------------------------------------
Utility Operating Results
- - ---------------------------
ELECTRIC REVENUES for the first nine months of 1998 increased $110.4
million or 6.6 percent compared with the first nine months of 1997. Retail
revenues increased approximately $82.5 million or 5.3 percent largely due to a
3.9 percent increase in retail sales volume and a 1.4 percent increase in
average prices due to fuel cost recovery. The increase in retail electric sales
reflects sales growth and more favorable weather, particularly in the third
quarter. Sales for resale and other electric revenues increased $27.9 million
primarily due to higher sales volumes in the resale market as a result of more
aggressive marketing efforts, higher prices due to market conditions and the
sale of options to purchase NSP's electricity. In addition, revenue from
conservation program recovery and transmission of electricity for others also
increased. These increases were partially offset by decreases in other revenue
due to a 1997 recognition of a transmission settlement.
GAS REVENUES for the first nine months of 1998 decreased $38.2 million or
10.9 percent compared with the first nine months of 1997. Gas revenues
decreased primarily due to a 15.1 percent decrease in gas sales volume,
partially offset by a 1.0 percent average price increase, increased revenue due
to the merger with Black Mountain (as discussed in Note 1 to the Financial
Statements), higher Viking Gas revenues, and higher off-system sales. The sales
volume decrease is due primarily to less favorable weather in 1998 in comparison
to 1997. The price increase is mainly due to interim retail rate increases as
discussed in Note 2 to the Financial Statements, partially offset by rate
adjustments for decreased purchased gas costs resulting from market changes in
natural gas supply prices.
FUEL FOR ELECTRIC GENERATION AND PURCHASED AND INTERCHANGE POWER expense
together increased $78.0 million or 17.5 percent for the first nine months of
1998 compared with the first nine months of 1997. Purchased and interchange
power costs increased $69.5 million primarily due to higher average cost of
purchases reflecting market conditions and more purchases in 1998 to support
higher sales. In addition, demand expenses were higher mainly due to a
contract which began in October 1997 and higher seasonal purchases. Fuel
expenses increased $8.5 million primarily due to higher output at both
nuclear and fossil plants to support higher sales.
COST OF GAS PURCHASED AND TRANSPORTED for the first nine months of 1998
compared with the first nine months of 1997 decreased $39.4 million or 17.7
percent primarily due to lower gas sendout and the lower cost of gas. The lower
sendout primarily is a result of decreased gas sales, reflecting less favorable
weather conditions. The lower cost of purchased gas, primarily in the first
quarter, reflects changes in natural gas market conditions and purchased gas
cost adjustments to match expense with rate recovery.
OTHER OPERATION, MAINTENANCE AND ADMINISTRATIVE AND GENERAL expenses
together increased $22.1 million or 4.3 percent compared with the first nine
months of 1997. The increases are primarily due to higher costs related to
plant outages, information technology improvements, including costs related to
the Year 2000 project, storm related costs, and higher insurance costs mainly as
a result of an insurance refund recorded in 1997. These increases were
partially offset by decreases in employee benefit costs.
DEPRECIATION AND AMORTIZATION expense increased $10.1 million or 4.2
percent compared with the first nine months of 1997. The increase is mainly due
to increased plant in service between the two periods partially offset by
revised depreciation lives resulting in lower depreciation rates.
PROPERTY AND GENERAL TAXES for the first nine months of 1998 compared with
the first nine months of 1997 decreased $5.9 million or 3.3 percent primarily
due to lower property tax rates reflecting recent legislation, and lower
payroll taxes.
OTHER INCOME (EXPENSE) RELATED TO UTILITY OPERATIONS - other expenses
decreased mainly due to the write off of $29 million of merger costs (before
tax) in the second quarter of 1997.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFC) decreased $2.6 million
in 1998 largely due to lower returns as a result of less capital used to finance
conservation and energy management programs and fewer construction projects
eligible for AFC.
UTILITY INTEREST AND AMORTIZATION decreased $4.9 million primarily due to
lower levels of commercial paper and retirement of bonds in October 1997 and
April 1998, partially offset by new bonds issued in March 1998 and Senior Notes
issued by Viking in October 1997.
DISTRIBUTIONS ON REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST
increased $1.3 million due to the issuance of new securities in late January
1997.
PREFERRED STOCK DIVIDENDS AND REDEMPTION PREMIUMS decreased $4.2 million in
the first nine months of 1998 compared with 1997 primarily due to the redemption
of two issues of preferred stock in February 1997 and two other issues in late
March 1998.
AVERAGE COMMON SHARES OUTSTANDING increased due to stock issuances, mainly
a public offering in September 1997. Share dilution has decreased 1998 earnings
by approximately eleven cents per share in comparison to 1997.
Nonregulated Business Results
- - -------------------------------
The following summarizes NSP's nonregulated business results in the
aggregate, including consolidated subsidiaries and unconsolidated affiliates.
9 Mos. Ended
(Thousands of dollars, except EPS) 9/30/98 9/30/97
------- -------
Operating revenues $129,267 $159,800
Equity earnings 56,507 14,433
Operating and development expenses (160,453) (171,521)
Nonrecurring project write-downs (23,410) 0
Other income (expense) 4,942 11,247
----- ------
Income before interest and taxes 6,854 13,959
Interest expense (40,583) (22,139)
Income tax benefit and credits 38,796 20,671
------ ------
Net income $5,067 $12,491
Nonregulated earnings per share $0.03 $0.09
NRG - NRG's earnings from ongoing operations (excluding nonrecurring items)
for the first nine months of 1998 increased from the same period on year ago
primarily due to project earnings, including tax credits, from interests in
Pacific Generation Company, Energy Developments Limited, El Segundo, Long Beach
and other new projects, all purchased after the third quarter of 1997, along
with increased earnings from existing projects were offset by increases in
interest costs, business development expenses, and costs of expanded operations.
Higher interest costs primarily reflect the issuance of $250 million senior
notes in mid-1997 and higher borrowings on its line of credit. NRG also
recorded a nonrecurring charge in the third quarter of 1998, as previously
discussed.
LIQUIDITY AND CAPITAL RESOURCES
For a discussion of available credit lines and short-term borrowings, see
Note 5 to the Financial Statements.
On April 22, 1998, NSP's shareholders approved an amendment to the
Company's Restated Articles of Incorporation to increase the number of
authorized common shares from 160 million to 350 million. Also on April 22,
1998, NSP's Board of Directors authorized a two-for-one stock split effective
June 1, 1998, for shareholders of record on May 18, 1998. All share amounts in
this report have been restated to reflect this stock split.
In January 1998, stock options for the purchase of 571,756 shares were
awarded under the Company's Executive Long-Term Incentive Award Stock Plan (the
Plan). These options are not exercisable for approximately twelve months after
the award date. As of Sept. 30, 1998, a total of 2,417,378 options were
outstanding, which were considered potentially dilutive common shares for
calculating earnings per share - assuming dilution. During the first nine
months of 1998, the Company has issued 361,942 new shares of common stock under
the Plan pursuant to the exercise of options and awards granted in prior years.
Under NSP's Dividend Reinvestment and Stock Purchase Plan, the Company has
issued 938,710 shares of common stock during the first nine months of 1998.
During 1998 the Company has issued a total of 850,581 shares of common
stock to the Employee Stock Ownership Plan (ESOP), including 511,726 leveraged
shares, which were financed by a $15 million bank loan in April 1998.
In third quarter of 1998, NSP issued 852,650 shares of common stock in
connection with various business combinations.
On March 11, 1998, the Company issued $100 million of 5.875 percent First
Mortgage Bonds due March 1, 2003 and $150 million of 6.5 percent First Mortgage
Bonds due March 1, 2028. A portion of the proceeds was used to redeem preferred
stock and certain First Mortgage Bonds, as discussed below, and to reduce
short-term debt balances.
On March 31, 1998, the Company redeemed 300,000 shares of its cumulative
preferred stock adjustable rate series A and 650,000 shares of its cumulative
preferred stock adjustable rate series B both at $100 per share plus dividends.
On April 27, 1998, the Company redeemed $50 million of 7.375 percent and
$50 million of 7.5 percent First Mortgage Bonds.
The Company currently anticipates filing with the SEC a $400 million
universal debt shelf registration during the fourth quarter of 1998. The
Company 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. Depending on market conditions, the Company expects to issue the
long term debt to raise additional capital for general corporate purposes or to
redeem or retire outstanding securities.
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.
On June 8, 1998, the Company filed a complaint in the Court of Federal
Claims against the DOE requesting damages for the DOE's partial breach of the
Standard Contract. The Company requests damages in excess of $1 billion, which
consists of the costs of storage of spent nuclear fuel at the Prairie Island
nuclear generating plant (Prairie Island), as well as anticipated costs related
to the Private Fuel Storage, LLC and the 1994 state legislation limiting the
number of casks which can be used to store spent nuclear fuel at Prairie Island.
On June 8, 1998, Indiana Michigan Power Company (a subsidiary of American
Electric Power), Duke Energy and Florida Power and Light filed similar
complaints in the Court of Federal Claims against the DOE requesting damages for
the DOE's partial breach of the Standard Contract. On June 17, 1998, the four
utilities filed a motion to consolidate the complaints. On June 26, 1998, the
Court of Federal Claims determined that briefing on jurisdictional issues in the
Company's case would proceed, while the other cases are stayed. Essentially,
the Company's case requesting damages of $1.4 billion will proceed as the lead
case on jurisdictional issues. (See detailed discussion in the Company's 1997
Form 10-K, Item 3 - Legal Proceedings).
On Aug. 7, 1998, a group of residential and commercial customers brought a
class action lawsuit against the DOE in the Federal District Court in
Minneapolis, Minnesota. The suit demands the return of monies paid by customers
into the nuclear waste fund and other damages, based on the failure of the DOE
to meets its unconditional obligation to accept spent nuclear fuel by Jan. 31,
1998. The Company is named as nominal defendant, as the Company has the
contract with the DOE under which payments are made into the Fund.
See Notes 2 and 3 of the Financial Statements for further discussion of
legal proceedings, including Regulatory Matters and Commitments and Contingent
Liabilities, incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(A) EXHIBITS
The following Exhibits are filed with this report:
27.01 Financial Data Schedule for the nine months ended Sept. 30,
1998.
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 Sept. 30, 1998, or between Sept. 30, 1998 and the date of this report:
Oct. 6, 1998 (Filed Oct. 6, 1998) - Item 5 Other Events. Re: Disclosure of NRG's
$23 million pretax write-down of investments in Indonesia and other projects
against third quarter 1998 earnings.
.
<PAGE>
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.
Corporate Secretary
Date: Nov. 13, 1998
---------------
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
EXHIBIT 27.01
This schedule contains summary financial information extracted from the
Statements of Income, Balance Sheets, Statements of Capitalization, Statements
of Changes in Common Stockholder's Equity and Statements of Cash Flows and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,372,999
<OTHER-PROPERTY-AND-INVEST> 1,569,682
<TOTAL-CURRENT-ASSETS> 749,398
<TOTAL-DEFERRED-CHARGES> 329,769
<OTHER-ASSETS> 244,398
<TOTAL-ASSETS> 7,266,246
<COMMON> 380,594
<CAPITAL-SURPLUS-PAID-IN> 762,549
<RETAINED-EARNINGS> 1,399,535
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,429,808
200,000
105,340
<LONG-TERM-DEBT-NET> 1,848,110
<SHORT-TERM-NOTES> 226,429
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 368,920
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,974,769
<TOT-CAPITALIZATION-AND-LIAB> 7,266,246
<GROSS-OPERATING-REVENUE> 2,106,451
<INCOME-TAX-EXPENSE> 72,448
<OTHER-OPERATING-EXPENSES> 1,711,041
<TOTAL-OPERATING-EXPENSES> 1,827,361
<OPERATING-INCOME-LOSS> 279,090
<OTHER-INCOME-NET> (7,714)
<INCOME-BEFORE-INTEREST-EXPEN> 327,061
<TOTAL-INTEREST-EXPENSE> 121,403
<NET-INCOME> 193,845
4,487
<EARNINGS-AVAILABLE-FOR-COMM> 189,358
<COMMON-STOCK-DIVIDENDS> 160,764
<TOTAL-INTEREST-ON-BONDS> 107,819
<CASH-FLOW-OPERATIONS> 550,940
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.26
<FN>
<F1> ($112,870) thousand of Common Stockholder's Equity is classified as
Other Items-Capitalization and Liabilities. This represents the net
of leveraged common stock held by the Employee Stock Ownership Plan and
the currency translation adjustments.
<F2>($43,872) thousand of nonregulated and nonoperating income tax benefit
is classifed as Income Tax Expense. The financial statement presentation
includes them as a component of Other Income (Expense).
<F3> Includes Income from Nonregulated Businesses - Before Interest and Taxes,
Allowance for Funds Used During Construction-Equity, Other Utility Income
(Deductions)-Net and Distributions on redeemable preferred securities of
subsidiary trust.
</FN>
</TABLE>
EXHIBIT 99.01
- - --------------
Northern States Power Company Cautionary Factors
The Private Securities Litigation Reform Act of 1995 (the Act) provides a
new "safe harbor" for forward-looking statements to encourage such disclosures
without the threat of litigation providing those statements are identified as
forward-looking and are accompanied by meaningful, cautionary statements
identifying important factors that could cause the actual results to differ
materially from those projected in the statement. Forward-looking statements
have been and will be made in written documents and oral presentations of
Northern States Power Company (the Company). Such statements are based on
management's beliefs as well as assumptions made by and information currently
available to management. When used in the Company's documents or oral
presentations, the words "anticipate", "estimate", "expect", "objective",
"possible", "potential" and similar expressions are intended to identify
forward-looking statements. In addition to any assumptions and other factors
referred to specifically in connection with such forward-looking statements,
factors that could cause the Company's actual results to differ materially from
those contemplated in any forward-looking statements include, among others, the
following:
- - - Economic conditions including inflation rates and monetary fluctuations;
- - - Trade, monetary, fiscal, taxation, and environmental policies of
governments, agencies and similar organizations in geographic areas
where the Company has a financial interest;
- - - Customer business conditions including demand for their products or
services and supply of labor and materials used in creating their
products and services;
- - - Financial or regulatory accounting principles or policies imposed by the
Financial Accounting Standards Board, the Securities and Exchange
Commission,the Federal Energy Regulatory Commission and similar entities
with regulatory oversight;
- - - Availability or cost of capital such as changes in:interest rates;market
perceptions of the utility industry, the Company or any of its
subsidiaries; or security ratings;
- - - Factors affecting utility and nonutility operations such as unusual
weather conditions; catastrophic weather-related damage; unscheduled
generation outages, maintenance or repairs; unanticipated changes to
fossil fuel, nuclear fuel or gas supply costs or availability due to
higher demand, shortages, transportation problems or other
developments; nuclear or environmental incidents; or electric
transmission or gas pipeline system constraints;
- - - Employee workforce factors including loss or retirement of key
executives, collective bargaining agreements with union employees,
or work stoppages;
- - - Increased competition in the utility industry, including: industry
restructuring initiatives; transmission system operation and/or
administration initiatives; recovery of investments made under
traditional regulation; nature of competitors entering the industry;
retail wheeling; a new pricing structure; and former customers
entering the generation market;
- - - Rate-setting policies or procedures of regulatory entities, including
environmental externalities, which are values established by
regulators assigning environmental costs to each method of electricity
generation when evaluating generation resource options;
- - - Nuclear regulatory policies and procedures including operating
regulations and used nuclear fuel storage;
- - - Social attitudes regarding the utility and power industries;
- - - Cost and other effects of legal and administrative proceedings,
settlements, investigations and claims;
- - - Technological developments that result in competitive disadvantages and
create the potential for impairment of existing assets;
- - - Factors associated with nonregulated investments including conditions of
final legal closing, foreign government actions, foreign economic and
currency risks, political instability in foreign countries,
partnership actions, competition, operating risks, dependence on
certain suppliers and customers, domestic and foreign environmental
and energy regulations;
- - - Most of the current project investments made by the Company's
subsidiary, NRG Energy, Inc. (NRG) consist of minority interests, and a
substantial portion of future investments may take the form of
minority interests, which limits NRG's ability to control the
development or operation of the project;
- - - Other business or investment considerations that may be disclosed from
time to time in the Company's Securities and Exchange Commission
filings or in other publicly disseminated written documents.
- - - Factors associated with Y2K compliance that might cause material
differences from the expectations disclosed include, but are not limited
to, the availability of key Y2K personnel, NSP's ability to locate
and correct all relevant computer codes,the readiness of third parties,
and NSP's ability to respond to unforeseen Y2K complications. Such
material differences could result in, among other things, business
disruption, operational problems, financial loss, legal liability and
similar risks.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The foregoing review of factors pursuant to the Act should
not be construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of the Act.
