SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE
SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the registrant [X]
Filed by a party other than the registrant [ ]
Check the appropriate box:
[ ] Preliminary proxy statement
[X] Definitive proxy statement
[ ] Definitive additional materials
[ ] Soliciting material pursuant to Rule 14a-11(c) or Rule 14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
NORTHERN STATES POWER COMPANY
- - --------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
- - --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transactions applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11. (Set forth the amount on which the
filing fee is calculated and state how it was determined.)
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting
fee was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount previously paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing party:
(4) Date filed:
<PAGE>
NSP [LOGO]
March 20, 1998
Dear Shareholder:
This is your invitation to attend the Annual Meeting of Shareholders of
Northern States Power Company on Wednesday, April 22, 1998, at 10:00 a.m., at
Minneapolis Convention Center, 1301 Second Avenue South, Minneapolis, Minnesota.
The Notice of Annual Meeting of Shareholders and Proxy Statement on the
following pages describe matters to be acted upon at the meeting. We will also
report on current operations and on our future plans. At the conclusion of
voting, you will have an opportunity to ask questions.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE SIGN, DATE AND
RETURN THE ENCLOSED PROXY CARD PROMPTLY TO ASSURE THAT YOUR PROXY WILL BE VOTED.
YOUR VOICE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU HOLD.
IF YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE SIGN AND RETURN THE
ADMISSION CARD AND WE WILL SEND YOU DIRECTIONS AND PARKING INSTRUCTIONS.
Our annual meetings have been helpful in maintaining communications and
understanding between our Board of Directors and shareholders. We would like you
to join us.
Sincerely,
/s/ James J. Howard
James J. Howard
CHAIRMAN, PRESIDENT &
CHIEF EXECUTIVE OFFICER
<PAGE>
NORTHERN STATES POWER COMPANY
(A MINNESOTA CORPORATION)
NOTICE OF ANNUAL MEETING
OF SHAREHOLDERS
The Annual Meeting of Shareholders of NORTHERN STATES POWER COMPANY, a
Minnesota corporation, will be held on Wednesday, April 22, 1998, at 10:00 a.m.,
at Minneapolis Convention Center, 1301 Second Avenue South, Minneapolis,
Minnesota for the following purposes:
(1) To elect three directors to Class III until the Annual Meeting of
Shareholders in 2001;
(2) To vote on a proposal to amend the Company's Restated Articles of
Incorporation to increase the number of shares of authorized common
stock from 160 million shares to 350 million shares;
(3) To approve amendments to the Company's Executive Long-Term Incentive
Award Stock Plan;
(4) To approve the Company's Executive Annual Incentive Award Plan;
(5) To ratify the appointment of Price Waterhouse, Certified Public
Accountants, as independent auditors of the Company for 1998;
(6) To vote on a shareholder proposal entitled, "Shareholder Resolution on
Conversion of Prairie Island Nuclear Plant to Natural Gas Plant," if
properly presented at the meeting; and
(7) To transact such other business as may properly come before the
meeting or any adjournment thereof.
Shareholders of record at the close of business on March 2, 1998, will be
entitled to notice of, and to vote at, this Annual Meeting.
Minneapolis, Minnesota By order of the Board of Directors
March 20, 1998 John P. Moore, Jr.
SECRETARY
PLEASE REMEMBER TO SIGN AND RETURN YOUR PROXY
<PAGE>
NORTHERN STATES POWER COMPANY
414 NICOLLET MALL
MINNEAPOLIS, MINNESOTA 55401
PROXY STATEMENT
This proxy statement is furnished in connection with the solicitation of
the enclosed proxy by the Company's Board of Directors for use at the Annual
Meeting or any adjournment thereof. The proxy statement and the enclosed proxy
card were mailed on or about March 20, 1998.
When proxies are returned properly executed, the shares represented will be
voted according to shareholders' direction. A proxy may be revoked at any time
before it is exercised by giving written notice of the revocation to John P.
Moore, Jr., Secretary, Northern States Power Company, 414 Nicollet Mall,
Minneapolis, Minnesota 55401, by filing another proxy with him, or by attending
the meeting and voting in person.
Owners of record at the close of business on March 2, 1998 of each
outstanding share of NSP common stock are entitled to one vote and of each
outstanding share of NSP preferred stock are entitled to one vote (other than
NSP preferred stock of the series designated "Cumulative Preferred Stock, $3.60
Series" (the "$3.60 Series Preferred Stock"), which is entitled to three votes
per share) upon each matter presented at the Annual Meeting. On the Record Date,
there were 74,861,502 shares of common stock, 275,000 shares of $3.60 Series
Preferred Stock and 1,725,000 shares of other NSP preferred stock outstanding.
First Trust N.A., the Trustee for the Company's Employee Stock Ownership
Plan, holds approximately 7.48% of the Company's common stock for the benefit of
Plan participants, none of whom has a total beneficial interest of more than
.009% of the Company's outstanding voting securities. No other person holds of
record or, to the knowledge of management, owns beneficially more than 5% of any
class of the outstanding voting securities of the Company.
The cost of preparing, assembling and mailing proxies will be borne by the
Company. Officers and other employees of the Company may solicit proxies by
mail, personal interview, telephone and telegram. In addition, Georgeson &
Company, Inc. has been retained to assist in the solicitation of proxies for the
1998 Annual Meeting, at a fee of approximately $10,000 plus associated costs and
expenses. The Company will reimburse brokers and other custodians, nominees or
fiduciaries for their expenses in forwarding proxy material to principals and
obtaining their proxies.
The Company mailed its annual report for the year 1997 on or about March
13, 1998, to all shareholders of the Company of record on March 2, 1998. The
following portions of the Annual Report are incorporated herein and made a part
of this proxy statement: the information under the caption Management's
Discussion and Analysis of Results; and the consolidated financial statements
and notes thereto, including the Report of Management and the Report of
Independent Public Accountants.
1
<PAGE>
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
GENERAL INFORMATION
The Company's Bylaws currently provide that the Board of Directors shall
consist of at least seven, but no more than fifteen directors, as determined by
the Board. The Board of Directors is divided into three classes as nearly equal
in number as possible with staggered terms of office so that one class of
directors will be elected at each annual meeting for a term of three years.
At the Annual Meeting, the following three individuals are the nominees to
be elected to the Board of Directors to serve in Class III until the Annual
Meeting of Shareholders in the year 2001 and until their successors are elected
and have qualified: H. Lyman Bretting, David A. Christensen and Dr. Margaret R.
Preska. Each of these nominees is currently a director of the Company whose
term is scheduled to expire at this Annual Meeting.
All of the nominees have indicated a willingness to serve. Should any of
the nominees become unavailable prior to this Annual Meeting, your proxy will be
voted for such person or persons as shall be recommended by a proxy committee
appointed by the Board.
Shareholders are entitled to vote cumulatively for the election of
directors. Each shareholder is entitled to a number of votes for such election
equal to the number of votes entitled to be cast with respect to the shares held
by such shareholder multiplied by the number of directors of each class to be
elected, and may cast all votes for one nominee or distribute the votes among
the nominees. The election of each director shall be decided by plurality vote.
As a result, any shares not voted for a director (whether by withholding
authority, broker non-vote or otherwise) will have no impact on the election of
directors except to the extent that the failure to vote for an individual
results in another individual receiving a larger number of votes. With respect
to the election of the nominated directors, the persons named as proxies reserve
the right to cumulate votes represented by proxies which they receive and to
distribute such votes among one or more of the nominees at their discretion.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR ALL OF THE
NOMINEES NAMED BELOW.
2
<PAGE>
CLASS III -- NOMINEES FOR TERMS EXPIRING IN 2001
[PHOTO]
DIRECTOR SINCE 1990
H. LYMAN BRETTING, age 61, is President and Chief Executive Officer of C.G.
Bretting Manufacturing Co. in Ashland, Wisconsin. Mr. Bretting joined C.G.
Bretting Manufacturing Co., a family owned business, in 1958 and shifted the
scope of the business from repairing and manufacturing mining equipment to
manufacturing automated paper tissue, towel and napkin folding equipment.
In 1989, he was named "Wisconsin Small Business Person of the Year" and
also the nation's "Small Business Person of the Year" by President George Bush.
A graduate of the University of Notre Dame in South Bend, Indiana, Mr.
Bretting is involved in numerous community activities. He is also chairman of
the board and director of M&I National Bank of Ashland, and a director of
NSP-Wisconsin, a subsidiary of the Company, and president and director of the
Ashland Foundation.
[PHOTO]
DIRECTOR SINCE 1976
DAVID A. CHRISTENSEN, age 62, is President, Chief Executive Officer and a
director of Raven Industries, Inc. of Sioux Falls, South Dakota, a diversified
manufacturer that supplies plastics, electronics and special apparel products to
various markets. He has been associated with Raven Industries since 1962. Before
joining Raven Industries, he worked at John Morrell & Co. and served in the U.S.
Army Corps of Engineers.
He received his bachelors degree in industrial engineering from South
Dakota State University, which later honored him with its distinguished
engineer, distinguished service, and distinguished alumni awards. He also was
honored in 1993 as South Dakotan of the Year by the University of South Dakota
and South Dakota Sales and Marketing Executive of the Year.
Mr. Christensen also serves as a director of Norwest Corporation,
Minneapolis; Beta Raven, Inc., St. Louis, Missouri; Aerostar International,
Inc., Sioux Falls, South Dakota; and Glassite, Inc., Dunnell, Minnesota.
A strong advocate for his community and state, he has served in many
volunteer activities. He is a past director of the South Dakota Symphony and
Sioux Falls Downtown Development Corp., as well as a past chairman of the Sioux
Empire United Way.
[PHOTO]
DIRECTOR SINCE 1980
DR. MARGARET R. PRESKA, age 60, is the Distinguished Senior Fellow for Academic
Affairs of the Minnesota State Colleges and Universities and the Distinguished
Service Professor for the Minnesota State Universities. She was President of
Mankato State University from 1979 until 1992. She had served as its Vice
President for Academic Affairs and Equal Opportunity Officer from 1975 until
1979. She previously was academic dean, instructor, assistant and associate
professor of history and government at LaVerne College in LaVerne, California.
Dr. Preska earned a bachelor of science degree at SUNY Brockport, where she
graduated SUMMA CUM LAUDE. She earned a masters at The Pennsylvania State
University, a Ph.D. at Claremont Graduate University, and further studied at
Manchester College of Oxford University.
She is an advisory board member of Norwest Bank Minnesota South Central,
N.A. in Mankato and a member of Women Directors and Officers in Public
Utilities. She served as national president of Camp Fire Boys and Girls, Inc.,
from 1985-87. She is a charter member of the board of directors of Executive
Sports, Inc., a division of Golden Bear International. She is affiliated with
several organizations, including: the Retired Presidents Association of the
American Association of State Colleges and Universities, the St. Paul/
Minneapolis Committee on Foreign Relations, Rotary, Minnesota Women's Economic
Roundtable and the American Historical Association.
3
<PAGE>
CLASS II -- DIRECTORS WHOSE TERMS EXPIRE IN 2000
[PHOTO]
DIRECTOR SINCE 1997
GIANNANTONIO FERRARI, age 58, is a Director and President and Chief Operating
Officer of Honeywell, Inc. From January 1992 to April 1997, he was President of
Honeywell Europe. From 1988 to 1992, Mr. Ferrari was Vice President for Western
Europe, the Middle East and Africa. Prior thereto, he served as Controller and
Vice President of Finance and Director of Distribution of Honeywell Europe.
Mr. Ferrari holds a degree as a chartered accountant from the Catholic
University of Milan, Italy. He is on the Board of Governors of the National
Electrical Manufacturers Association and the European American Industrial
Council located in Belgium. He is also a member of the Board of Directors of the
National Association of Manufacturers.
[PHOTO]
DIRECTOR SINCE 1990
RICHARD M. KOVACEVICH, age 54, is the Chairman and Chief Executive Officer of
Norwest Corporation, in Minneapolis, a holding company for banking institutions.
Mr. Kovacevich joined Norwest Corporation as Vice Chairman of the Board and
Chief Operating Officer of the Banking Group in March 1986, became President and
Chief Operating Officer of the Norwest Corporation on January 1, 1989, became
President and Chief Executive Officer of Norwest Corporation on January 1, 1993
and assumed the additional position of Chairman on May 1, 1995.
Before joining Norwest Corporation, Mr. Kovacevich was group executive and
a member of the policy committee of Citicorp in New York. Previously, he was in
charge of Citibank USA, including its nationwide MasterCard and Visa division
and its New York City banking division.
Mr. Kovacevich holds a bachelors and a masters degree in industrial
engineering and a masters of business administration degree, all from Stanford
University.
He also serves as a director of Dayton Hudson Corporation, PETsMART, Inc.,
ReliaStar Financial Corp. and The Bankers Roundtable. He also is vice chairman
of the American Bankers Council, vice chairman of the board of the Greater
Minneapolis Metropolitan Housing Corporation, director and vice president of the
Walker Art Center, director and member of the executive committee of the
Minnesota Business Partnership, Inc., and 1998 vice chair of Leadership Giving
for the United Way of Minneapolis Area.
4
<PAGE>
[PHOTO]
DIRECTOR SINCE 1991
DOUGLAS W. LEATHERDALE, age 61, is Chairman, President and Chief Executive
Officer of The St. Paul Companies, Inc., a worldwide property and liability
insurance organization, having served in such capacity since 1990. Mr.
Leatherdale joined The St. Paul Companies in 1972 and has held numerous
executive positions with the Company, including President and Chief Executive
Officer, Executive Vice President and Senior Vice President of Finance. Before
joining The St. Paul Companies, Mr. Leatherdale was employed by the Lutheran
Church of America in Minneapolis where he served as Associate Executive
Secretary on the Board of Pensions. Prior to his four years at the Lutheran
Church of America, he served as Investment Analyst Officer at Great West Life
Assurance Company in Winnipeg.
A native of Canada, Mr. Leatherdale attended United College in Winnipeg and
later completed additional studies at Harvard Business School and the University
of California-Berkeley.
Mr. Leatherdale also serves as a director of The John Nuveen Company and
United HealthCare Corporation. He is also vice chairman of the board of
directors and a trustee of Carleton College. He is a member of the Twin City
Society of Security Analysts and the Financial Executive Institute.
[PHOTO]
DIRECTOR SINCE 1985
A. PATRICIA SAMPSON, age 49, currently operates The Sampson Group, Inc., a
management development and strategic planning consulting business. Prior to that
she served as a consultant with Dr. Sanders and Associates, a management and
diversity consulting company. Prior to her current endeavors, Ms. Sampson served
as Chief Executive Officer of the Greater Minneapolis Area Chapter of the
American Red Cross from July 1993 until January 1, 1995. She also previously
served successively as Executive Director from October 1986 until July 1993,
Assistant Executive Director-Services (April 1985), and Assistant Manager (July
1984) of the Greater Minneapolis Area Chapter. Prior to the above, she served as
the Director of Service to Military Families and Veterans and Director of
Disaster Services for the St. Paul Area Chapter of the American Red Cross.
Mrs. Sampson received a masters degree from the University of Pennsylvania
and a bachelors degree from Youngstown State University.
She is a director on the Minnesota Women's Economic Roundtable and the
Utility Women's Conference Board. She is active in Christian education. She
previously served on the boards of the Greater Minneapolis Area United Way,
Minneapolis Urban League and the Minnesota Orchestral Association.
5
<PAGE>
CLASS I -- DIRECTORS WHOSE TERMS EXPIRE IN 1999
[PHOTO]
DIRECTOR SINCE 1974
W. JOHN DRISCOLL, age 68, was associated with the Rock Island Co. in St. Paul, a
private investment company, from 1973 until his retirement as Chairman and Chief
Executive Officer in 1994. From 1978 to 1986, Mr. Driscoll was Chairman and a
director of First National Bank in Palm Beach, Florida. In 1967, he was a
co-founder of the Minnesota North Stars National Hockey League team and served
as its Chairman until 1978. Earlier, he was General Manager of the Rock Island
Corp., a retail lumber, wood millwork and particle board manufacturer and
distributor, and worked in sales and sales management for the Weyerhaeuser Co.,
a wood products firm.
He earned a bachelors degree at Yale University. He served in the Marine
Corps from 1951 to 1954, which included a tour of duty in Korea.
Mr. Driscoll also serves as a director of Comshare, Inc., The John Nuveen
Company, The St. Paul Companies, Inc., and Weyerhaeuser Co.
Also active in the community, he is a former chairman of the Northwest Area
Foundation; former chairman and a life trustee of the Minneapolis Society of
Fine Arts; a former chairman and honorary trustee of Macalester College, St.
Paul; and a trustee and former president of the Minnesota Landscape Arboretum
Foundation.
[PHOTO]
DIRECTOR SINCE 1978
DALE L. HAAKENSTAD, age 69, retired in 1989 as President and Chief Executive
Officer at Western States Life Insurance. He began his career there in 1949,
became Executive Vice President and Actuary in 1963, President in 1968, Chairman
and Chief Executive Officer in 1981 and, in 1986, President and Chief Executive
Officer.
Mr. Haakenstad attended North Dakota State University at Fargo and earned a
bachelors degree from the University of Michigan.
Mr. Haakenstad serves the Red River Valley community as trustee and
committee chairman of the North Dakota State University Development Foundation.
He is also a director of the Pelican Group of Lakes Improvement District. His
professional associations include the American Council of Life Insurance,
Society of Actuaries and American Academy of Actuaries.
6
<PAGE>
[PHOTO]
DIRECTOR SINCE 1987
JAMES J. HOWARD, age 62, is Chairman, President and Chief Executive Officer of
NSP and has served in such capacity since December 1, 1994. Mr. Howard graduated
from the University of Pittsburgh, receiving a bachelor's degree in 1957. He was
awarded a Sloan Fellowship to the Massachussetts Institute of Technology and
received a master of science degree in 1970.
Mr. Howard was president and chief operating officer of Ameritech, the
Chicago-based parent of the Bell companies serving Illinois, Indiana, Michigan,
Ohio and Wisconsin, prior to joining NSP as its president and chief executive
officer in 1987. Mr. Howard has served as NSP's chairman of the board and chief
executive officer since 1988, and in 1994, was also named president.
Mr. Howard is also a director of Walgreen Company, Ecolab, Inc., Honeywell,
Inc., ReliaStar Financial and the Federal Reserve Bank of Minneapolis. He also
serves on the board of overseers for the Carlson School of Management,
University of Minnesota, the Board of Trustees for the University of St. Thomas,
and the Board of Visitors for the University of Pittsburgh, Joseph M. Katz
School of Business.
Mr. Howard is former chairman and a board member of the Edison Electric
Institute and current chairman of the Nuclear Energy Institute, both located in
Washington, D.C.
Mr. Howard serves the community as a board member and past chairman
(1994-1995) of the United Way of Minneapolis Area; the Minnesota Business
Partnership; the Jeremiah Program; Capitol City Partnership; the Minneapolis
Center for Corporate Responsibility; and the Danny Thompson Memorial Leukemia
Foundation.
7
<PAGE>
INFORMATION CONCERNING THE BOARD OF DIRECTORS
COMMITTEES OF THE BOARD
There are four committees of the Board of Directors whose duties and
responsibilities are described below.
THE CORPORATE MANAGEMENT COMMITTEE has responsibility for Board
organization, director selection and compensation, senior management
organization, performance and compensation, corporate structure, mergers and
acquisitions, human resource policies, corporate ethics and long-range planning
and strategy for the Company. Current members of the Committee are W. John
Driscoll (Chairman), David A. Christensen, Douglas W. Leatherdale and Margaret
R. Preska. The Committee held three meetings during 1997.
Any shareholder may make recommendations to the Corporate Management
Committee for membership on the Board of Directors by sending a written
statement of the qualifications of the recommended individual to the Secretary,
Northern States Power Company, 414 Nicollet Mall, Minneapolis, Minnesota 55401.
THE AUDIT COMMITTEE has responsibility for overseeing internal and external
audit activities. In performing these functions, the Committee reviews auditing
activities by internal and external auditors; financial reporting, internal
controls and accounting policies and practices; matters affecting protection and
recovery of assets of the Company; and oversight of the management of assets of
dedicated funds, including ERISA plans and nuclear decommissioning funding.
Current members of the Committee are A. Patricia Sampson (Chairperson), H. Lyman
Bretting, Dale L. Haakenstad and Richard M. Kovacevich. The Committee held three
meetings during 1997.
THE POWER SUPPLY COMMITTEE has responsibility for oversight and
recommendations for all generation requirements for the Company, including
nuclear, hydro, coal and alternative sources of power supply; bulk power supply
planning; power supply permits and license compliance; major power supply
facility construction and construction budgets; nuclear plant safety,
reliability and operations. Current members of the Committee are David A.
Christensen (Chairman), W. John Driscoll, Giannantonio Ferrari, Douglas W.
Leatherdale and Margaret R. Preska. The Committee held three meetings during
1997.
THE FINANCE COMMITTEE has responsibility for oversight and recommendations
regarding the financial management of the Company. In performing these
functions, the Committee oversees corporate capital structure, capital budgets
and financial plans, dividend policy and dividend recommendations, insurance
coverages, banking relationships and investor relations. Current members of the
Committee are Richard M. Kovacevich (Chairman), H. Lyman Bretting, Giannantonio
Ferrari, Dale L. Haakenstad, and A. Patricia Sampson. The Committee held three
meetings during 1997.
DIRECTOR MEETINGS
There were 9 meetings of the Board of Directors in 1997. Each director
attended at least 80% of the total number of meetings of the Board and
Committees on which such director served during 1997.
DIRECTOR COMPENSATION
Employees of the Company receive no separate compensation for service as a
director. During 1997, directors not employed by the Company received a $20,000
annual retainer, or a pro rata portion thereof if service was less than 12
months, $1,200 for attendance at each Board meeting and $1,000 for each
Committee meeting attended, and a grant of stock equivalent units under the
Stock Equivalent Plan for Non-Employee Directors established in 1996 and
described below. A $2,500 annual retainer was paid to each elected Committee
Chairperson. Prior to January 1, 1998, directors also were eligible to
8
<PAGE>
participate in a retirement plan which continued payment of the director's
retainer at 1.2 times the rate in effect for the calendar quarter immediately
preceding the director's retirement. Effective January 1, 1998, certain changes
were made to the directors' compensation program, including an increase in the
amount of the annual retainer to $25,000 and an increase in the Committee
meeting fee to $1,200. The remaining changes in the directors' compensation
program are discussed below.
In 1996, a Stock Equivalent Plan for Non-Employee Directors (the "Stock
Equivalent Plan") was established to more closely align directors' interests
with those of NSP's shareholders. Under the Stock Equivalent Plan, directors may
receive an annual award of stock equivalent units with each unit having a value
equal to one share of common stock of the Company. Stock equivalent units do not
entitle a director to vote and are only payable as a distribution of whole
shares of the Company's common stock upon a director's termination of service.
The stock equivalent units fluctuate in value as the value of common stock of
the Company fluctuates. Additional stock equivalent units are accumulated upon
the payment of and at the same value as dividends declared on common stock of
the Company. On June 26, 1997, non-employee directors received an award of
97.859 stock equivalent units totaling approximately $5,000 in cash value.
Additional stock equivalent units were accumulated during 1997 as dividends were
paid on common stock of the Company. The number of stock equivalents for each
non-employee director is listed in the share ownership chart which is set forth
below. For 1998, each non-employee director will receive an award of stock
equivalent units totaling approximately $20,800 in cash value. This cash value
amount reflects the $5,000 award included in the Stock Equivalent Plan prior to
January 1, 1998, the amount of $9,700 which replaces the directors' retirement
plan compensation as discussed below, and an additional amount of $6,100 to
raise the overall compensation for directors to a competitive level.
As stated previously, prior to January 1, 1998, directors were eligible to
participate in a retirement plan which continued payment of the director's
retainer at 1.2 times the rate in effect for the calendar quarter immediately
preceding the director's retirement. Benefits under the retirement plan
continued for a period equal to the number of calendar quarters served on the
Board, up to 40 calendar quarters. As part of its continuing effort to align
directors' interests with those of NSP shareholders, effective January 1, 1998,
the Company suspended the retirement plan. Directors who retired prior to
January 1, 1998 will continue to receive their benefits under the retirement
plan. Active non-employee directors were given a one-time irrevocable option to
remain in the retirement plan and receive their accrued benefits under the
retirement plan or to cease participation in the retirement plan and instead
receive a one-time grant of stock equivalent units equal to the value of their
accrued benefits on December 31, 1997. Mr. Bretting, Mr. Christensen, Mr.
Driscoll, Mr. Kovacevich, Mr. Leatherdale, Dr. Preska and Mrs. Sampson elected
to convert the value of their accrued benefits under the retirement plan and
received 3101.774, 4652.662, 4652.662, 3101.774, 2688.204, 4135.699 and 4135.699
stock equivalents, respectively. Mr. Haakenstad elected to remain under the
retirement plan and will receive his retirement benefits in accordance with the
plan.
Finally, directors may participate in a deferred compensation plan which
provides for deferral of director retainers and meeting fees until after
retirement from the Board of Directors. Effective January 1, 1998, the Stock
Equivalent Plan has been amended to permit a director to defer director retainer
and meeting fees into the Stock Equivalent Plan.
9
<PAGE>
SHARE OWNERSHIP OF DIRECTORS, NOMINEES AND NAMED EXECUTIVE OFFICERS
The following table lists the beneficial ownership of NSP common stock
owned as of March 2, 1998, by (i) the Company's directors and nominees, (ii) the
executive officers named in the Summary Compensation Table that follows and
(iii) all the directors and executive officers of the Company as a group. None
of these individuals owns any shares of NSP Preferred Stock.
<TABLE>
<CAPTION>
ACQUIRABLE
STOCK WITHIN RESTRICTED
NAME OF BENEFICIAL OWNER COMMON STOCK EQUIVALENTS(1) 60 DAYS(2) STOCK TOTAL
- - --------------------------------- -------------- ---------------- ------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
H. Lyman Bretting ............... 1,416 3,361 -- -- 4,777
David A. Christensen ............ 500 4,932 -- -- 5,432
W. John Driscoll ................ 2,000 4,932 -- -- 6,932
Giannantonio Ferrari ............ -- 131 -- -- 131
Dale L. Haakenstad .............. 801 220 -- -- 1,021
James J. Howard ................. 31,000 -- 116,067 14,326 161,393
Richard M. Kovacevich ........... 1,000 3,361 -- -- 4,361
Douglas W. Leatherdale .......... 300 3,096 -- -- 3,396
Margaret R. Preska .............. 600 4,409 -- -- 5,009
A. Patricia Sampson ............. 433 4,409 -- -- 4,842
Paul E. Anders .................. -- -- -- -- --
Edward J. McIntyre .............. 10,758 -- 38,364 3,265 52,387
Loren L. Taylor ................. 7,016 -- 25,219 2,913 35,148
Edward L. Watzl ................. 6,162 -- 13,221 2,349 21,732
- - --------------------------------- -------------- ---------------- ------------ ----------- ----------
Directors and executive
officers as a group ............ 89,791 28,851 295,404 35,537 449,583
</TABLE>
(1) Represents stock units awarded under the Stock Equivalent Plan for
Non-employee Directors as of March 2, 1998.
(2) Represents exercisable options and performance units under the current
Executive Long-Term Incentive Award Stock Plan (LTIP) as of March 2, 1998.
Options to purchase common stock of the Company which are exercisable within
the next 60 days are 114,071 option shares for Mr. Howard, 13,167 option
shares for Mr. Watzl, 37,727 option shares for Mr. McIntyre, 24,969 option
shares for Mr. Taylor and -0- option shares for Mr. Anders. The number of
shares that would have been payable upon the exercise of performance units
on March 2, 1998 are: 1,996 for Mr. Howard, 54 for Mr. Watzl, 637 for Mr.
McIntyre, 250 for Mr. Taylor and -0- for Mr. Anders.
10
<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth cash and non-cash compensation for each of
the last three fiscal years ended December 31, 1997, for services in all
capacities to the Company and its subsidiaries, to the Chief Executive Officer
and the next four highest compensated executive officers of the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
----------------------------------------------- -------------------------------------
AWARDS PAYOUTS
--------------------------- ---------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
NUMBER OF
OTHER RESTRICTED SECURITIES
ANNUAL STOCK UNDERLYING LTIP ALL OTHER
COMPENSATION AWARDS OPTIONS PAYOUTS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($)(1) ($)(2) ($)(3) AND SARs (#) ($)(4) ($)(5)
- - ----------------------------- ------ ----------- ------------- -------------- ------------ -------------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JAMES J. HOWARD 1997 672,000 197,000 11,705 477,120 17,708 0 23,429
Chairman, President & 1996 622,000 401,000 7,610 478,940 15,264 0 20,056
Chief Executive Officer 1995 565,000 400,000 8,476 328,830 15,522 0 5,930
EDWARD J. MCINTYRE 1997 260,000 58,000 961 109,200 5,755 0 11,412
Vice President & Chief 1996 241,000 105,000 985 108,450 4,968 0 4,378
Financial Officer 1995 222,000 102,000 3,165 75,369 5,123 0 3,274
LOREN L. TAYLOR 1997 232,000 65,000 1,134 97,440 5,135 0 15,537
President, NSP Electric 1996 215,000 84,000 1,312 96,750 4,432 0 5,201
1995 200,000 93,000 2,008 67,900 4,615 0 10,763
EDWARD L. WATZL 1997 223,667 63,000 3,077 92,068 3,351 0 13,913
President, NSP 1996 175,000 85,000 1,986 56,000 2,920 0 4,584
Generation 1995 160,000 82,000 818 38,800 2,989 0 9,910
PAUL E ANDERS(6) 1997 183,334 236,000 12,651 0 0 0 5,671
Vice President and
Chief Information
Officer
</TABLE>
- - ------------------
(1) This column consists of awards made to each named executive under the
Company's current Annual Executive Incentive Compensation Plan and, with
respect to Mr. Anders, also includes an additional payment of $150,000 to
replace compensation opportunities that Mr. Anders forfeited when he left
his previous employer and a $50,000 payment in lieu of a restricted stock
grant.
(2) This column consists of reimbursements for taxes on certain personal
benefits received by the named executives.
(3) Amounts shown in this column reflect the market value of the shares of
restricted stock awarded under the LTIP, and are based on the closing price
of the Company's common stock on the date that the awards were made.
Restricted shares earned for 1997 under the Company's LTIP were granted on
January 28, 1998 based on the performance period ending September 30, 1997.
As of December 31, 1997, the named executives held the following as a result
of grants under the LTIP: Mr. Howard held 14,302 restricted shares at a
market value of $833,091; Mr. McIntyre held 3,248 restricted shares at a
market value of $189,196; Mr. Anders held -0- restricted shares at a market
value of $0; Mr. Taylor held 2,905 restricted shares at a market value of
$169,216 and Mr. Watzl held 1,676 restricted shares at a market value of
$97,627. The restricted stock awards vest one year after the date of grant
with respect to fifty (50%) of the shares and two years after such date with
respect to the remaining shares, conditioned upon the continued employment
of the recipient with the Company. Regular dividends are paid on the
restricted shares.
Mr. Watzl received an additional 1,600 shares of restricted stock during
1994, which as of December 31, 1997, had a market value of $55,337. These
additional shares vested with respect to 50% of the shares on October 26,
1996. The remainder of the shares will vest on October 26, 1998.
The total number of restricted shares awarded during the years 1995, 1996
and 1997 are as follows: 21,909 shares for Mr. Howard, 5,135 shares for
Mr. McIntyre, -0- shares for Mr. Anders, 4,290 shares for Mr. Taylor and
2,179 shares for Mr. Watzl.
(4) The Company had no LTIP payouts in 1997.
(5) This column consists of the following: $1,811.95 was contributed by the
Company for the Employee Stock Ownership Plan (ESOP) for each named
executive officer, excluding Mr. Anders (the Company contribution on behalf
of all ESOP participants, including the named executive officers, excluding
Mr. Anders, was equal to 1.13% of their covered compensation); the value to
each named executive of the remainder of insurance premiums paid under the
Officer Survivor Benefit Plan by the Company: $15,794 for Mr. Howard, $720
for
11
<PAGE>
Mr. McIntyre, $2,147 for Mr. Watzl, $-0- for Mr. Taylor and $4,298 for Mr.
Anders; imputed income as a result of life insurance paid by the Company on
behalf of each named executive: $3,417 for Mr. Howard, $519 for Mr.
McIntyre, $943 for Mr. Watzl, $623 for Mr. Taylor and $473 for Mr. Anders;
Company matching 401(k) plan contribution of $900 to each named executive;
and, earnings accrued under the Company Deferred Compensation Plan to the
extent such earnings exceeded the market rate of interest (as prescribed
pursuant to the SEC rules), which was $1,506 for Mr. Howard, $7,461 for Mr.
McIntyre, $8,111 for Mr. Watzl, $12,202 for Mr. Taylor and $-0- for Mr.
Anders.
(6) Mr. Anders joined the Company in May 1997.
OPTIONS AND STOCK APPRECIATION RIGHTS (SARs)
The following table indicates for each of the named executives (i) the
extent to which the Company used stock options and SARs for executive
compensation purposes in 1997 and (ii) the potential value of such options and
SARs as determined pursuant to the SEC rules.
OPTIONS AND SARs GRANTED IN 1997
<TABLE>
<CAPTION>
- - -----------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- - ------------------------------------------------------------------------------------ --------------------------------
(a) (b) (c) (d) (e) (f) (g)
% OF TOTAL
OPTIONS AND
OPTIONS/ SARs EXERCISE
SARs GRANTED TO OR BASE
GRANTED(1) EMPLOYEES PRICE EXPIRATION
NAME (#) IN 1997 ($/Sh) DATE 5%($)(2) 10%($)(2)
- - --------------------- ---------------- ------------ ------------ ----------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
J. Howard 17,708 options 6.18% 47.4375 01/22/07 528,286 1,338,781
E. McIntyre 5,755 options 2.01% 47.4375 01/22/07 171,690 435,096
E. Watzl 3,351 options 1.17% 47.4375 01/22/07 99,971 253,346
L. Taylor 5,135 options 1.79% 47.4375 01/22/07 153,193 388,222
P. Anders 0 options 0% N/A N/A N/A N/A
All Shareholders(3) N/A N/A N/A N/A 5,336,600,601 8,497,644,565
</TABLE>
- - ------------------
(1) Options were granted on January 22, 1997 and vested on January 22, 1998. No
SARs were awarded for 1997.
(2) The hypothetical potential appreciation shown in columns (f) and (g) for
the named executives is required by the SEC rules. The amounts in these
columns do not represent either the historical or anticipated future
performance of the Company's common stock level of appreciation.
(3) Potential realizable values during the ten year period commencing January
22, 1997, are based on the market price ($47.4375) and the outstanding
shares (69,063,712) of common stock of the Company on that date.
The following table indicates for each of the named executives the number
and value of exercisable and unexercisable options and SARs as of December 31,
1997.
AGGREGATED OPTION AND SAR EXERCISES IN 1997
AND FY-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
- - ----------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AND SARs AT 12/31/97 OPTIONS AND SARs AT
ACQUIRED ON REALIZED (#) -- EXERCISABLE (EX)/ 12/31/97 ($) -- EXERCISABLE (EX)/
NAME EXERCISE(#) VALUE($) UNEXERCISABLE (UNEX) UNEXERCISABLE (UNEX)*
- - ------------- ------------- ---------- ------------------------------ ----------------------------------
<S> <C> <C> <C> <C>
J. Howard N/A N/A 98,359 (ex) 1,675,260 (ex)
17,708 (unex) 191,468 (unex)
E. McIntyre N/A N/A 32,611 (ex) 553,368 (ex)
5,755 (unex) 62,226 (unex)
E. Watzl N/A N/A 9,874 (ex) 125,610 (ex)
3,351 (unex) 36,233 (unex)
L. Taylor N/A N/A 20,089 (ex) 292,081 (ex)
5,135 (unex) 55,522 (unex)
P. Anders N/A N/A -- (ex) -- (ex)
-- (unex) -- (unex)
</TABLE>
- - ------------------
*Share price on December 31, 1997 was $58.25. Unexercisable options were granted
on January 22, 1997 at a price of $47.4375. No SARs were granted in 1997.
12
<PAGE>
CORPORATE MANAGEMENT COMMITTEE REPORT
ON EXECUTIVE COMPENSATION
CORPORATE MANAGEMENT COMMITTEE. The Committee is composed entirely of
outside directors of the Company and makes recommendations to the Board
concerning total compensation for executive officers of the Company. The
Committee is the sole administrator of the executive annual and long-term
incentive plans with full authority to establish and interpret the terms of the
plans and to make payment of the awards.
COMPENSATION STRATEGY. NSP's executive compensation goals for 1997 were:
(i) to provide a competitive compensation package that enables NSP to attract
and retain key executives and (ii) to align the executive's interests with those
of NSP's stockholders and with NSP's performance. The 1997 compensation of NSP's
executives was comprised primarily of base salary, annual incentive awards and
long-term incentive awards.
To achieve the compensation goal of providing a competitive compensation
package, the Committee seeks to set base salary and the target amounts of the
annual and long-term awards at the median of a combined group of major utilities
and industrial companies (the "Peer Group"). For 1997, the Peer Group consisted
of twelve industrial companies, with regional representation and average
revenues of $2.6 billion, and twelve utilities, all of which operate nuclear
facilities, with average revenues of $3.9 billion. The utilities included in
this group are also part of the Edison Electric Institute 100 utilities ("EEI
100") index used in the Total Shareholder Return Comparison in this proxy
statement, but all of the companies in such index are not included in the Peer
Group for purposes of compensation review. The twenty-four companies in the Peer
Group were selected primarily because they are viewed as representative of the
types of companies with which NSP competes in attracting and retaining executive
officers.
The annual and long-term incentive portions of an executive's compensation
are intended to achieve NSP's goal of aligning an executive's interests with
NSP's shareholders and with NSP performance. These portions of an executive's
compensation are placed at risk and are limited to the accomplishment of
specific results that are designed to benefit NSP's shareholders and NSP, both
in the long and short term. As a result, during years of excellent performance,
executives are provided the opportunity to earn a highly-competitive level of
compensation and, conversely, in years of below-average performance, their
compensation may be below competitive levels. Generally, higher level executive
officers have a greater level of compensation placed at risk.
In 1993, a Federal tax law was passed which limits the deductibility of
executive compensation in excess of $1,000,000 unless certain exceptions are
met. Compensation increases that reflected market levels of compensation and the
regular operation of the Company's incentive plans, fully described below,
caused Mr. Howard's 1997 compensation to become partially non-deductible under
this law. It is the Committee's intent to maintain the deductibility of
executive compensation to the extent reasonably practicable and to the extent
consistent with its other compensation objectives. For this reason and the
reasons discussed in Proposal No. 3 and Proposal No. 4 herein, the Committee
determined that the Company should modify its long-term and annual incentive
plans beginning in 1998, so that certain compensation payable thereunder would
qualify for the "performance based compensation" exception to the $1,000,000
deduction limit, thereby ensuring that, beginning in 1998 for the annual plan
and beginning in 2001 for the long-term plan, such compensation will be
deductible under the Code.
Accordingly, the Board has amended, effective January 1, 1998, its current
long-term incentive plan and adopted, effective January 1, 1998, a new annual
incentive plan, in each case subject to shareholder approval at this Annual
Meeting.
BASE PAY. The level of base pay is not directly related to the Company's
financial performance. Instead, target levels for base pay are established for
each executive officer based on the median base
13
<PAGE>
pay level for that position within the Peer Group. The target level of base pay
is subject to some adjustment (15% either way) to reflect individual and
corporate performance. In deciding whether to make base pay adjustments, the
Corporate Management Committee considers the base pay target level established
for each officer, the general contribution of each officer to overall corporate
performance and the achievement level of specific annual goals established for
each officer. While individual, business area and corporate goals are considered
regarding base pay adjustments, achievement of these goals is primarily rewarded
through the Company's annual and long-term incentive programs. Generally, in
1997 base pay levels for executive officers, including Mr. Howard, were
increased in accordance with comparable market movement as reflected within the
Peer Group and solid individual and corporate performance results during 1996.
The 1997 base pay amounts for the named executives are reflected in the salary
column of the Summary Compensation Table.
ANNUAL INCENTIVE. For 1997, annual incentive awards for the executive
officers were made in accordance with the Company's Executive Incentive
Compensation Plan (the "Plan"). Under the Plan, annual incentive awards were
established with target awards (expressed as a percentage of base pay)
commensurate with annual incentive awards for comparable positions at the median
level within the Peer Group. In 1997, target awards for executive officers
ranged from 30% to 50% of their base pay. Individuals could realize from 0% to
188% of their target awards dependent on the performance of the Company, the
individual and the individual's group in certain predetermined areas. These
areas were Company financial performance (based on EPS), customer satisfaction,
service reliability, price of product, safety and individual performance. The
awards given to the CEO, the President-NSP Generation and the
Vice-President-Nuclear Generation also were dependent on performance
specifically with respect to nuclear safety. The weight accorded particular
performance areas varied by executive. Generally, financial performance
accounted for 20% to 25% of an executive's target incentive award. All of the
other areas accounted for between 10% and 30% of the target awards. Based on NSP
and individual performance results, executives received from 35% to 85% of their
targeted incentive awards in 1997. The annual awards paid for 1997 are reflected
in the bonus column of the Summary Compensation Table.
Mr. Howard's annual incentive award payout for 1997 was $197,000, as shown
in the Summary Compensation Table. The determination of this amount was based on
the criteria set forth above for the other executive officers. In particular,
Mr. Howard's target incentive award was 50% of his base pay and was based 25% on
financial performance, 10% on safety, 10% on nuclear safety, 15% on customer
satisfaction, 15% on price of product, 15% on reliability and 10% on individual
performance.
LONG-TERM INCENTIVE. For 1997, long-term incentive awards for executive
officers were determined in accordance with the current Executive Long-Term
Incentive Award Stock Plan (the "LTIP") and were generally set at target levels
commensurate with the median level for comparable positions within the Peer
Group. The LTIP permits the granting of non-qualified stock options and
restricted common stock to key employees. One of the goals of the LTIP is to
align key employees' long-term interests with those of NSP's shareholders
through the use of stock ownership and long-term financial performance goals.
The Corporate Management Committee made one grant of stock options during
1997 to each of the named executive officers. Option grants were positioned at a
level which generally equated to the average grant levels awarded to executives
in comparable positions in the Peer Group. The number of shares subject to
option was not affected by the number of shares previously awarded to such
executives. These options were not exercisable until one year after their grant,
and will remain exercisable for nine years. Stock options were granted with an
exercise price of 100% of the fair market value of the stock on the date of
grant to ensure that executives can only be rewarded for appreciation in the
price of the Company's stock when the Company's shareholders are similarly
benefited.
14
<PAGE>
Target awards of restricted stock (measured as a percentage of base pay)
were established for each executive at levels consistent with median levels for
comparable positions within the Peer Group. In 1997, actual awards ranged from
30% to 71% of the executive's base pay. Restricted stock is actually granted,
however, only if the Company achieves a certain level of financial performance,
as measured by the Company's return on common equity ("ROE") for the three year
period then ending, as compared to the three year average ROE of the EEI 100
index (the same index used for purposes of comparing shareholder return.) No
restricted stock awards are made unless the Company's three year average ROE is
at least equal to the median of the EEI 100 index, thereby prohibiting
restricted stock awards when NSP performance does not surpass the median
performance of utilities in the index. If NSP's ROE is 0.5% or more above the
index median, 100% of the target will be granted. Partial payout of restricted
stock will be made for ROE levels between the median and 0.5% above the median.
For the 1997 performance period, NSP's ROE was .87% above the median, resulting
in a payout of 119% of the target award. The stock awards are restricted so that
50% of the shares awarded become available one year following the grant and the
remaining 50% becomes available after two years. The restricted stock awards
reinforce the tie to shareholder returns, and the restrictions encourage the
retention of qualified executives.
In 1997, Mr. Howard received an option for 17,708 shares. For 1997, Mr.
Howard also received 8,871 shares of restricted stock (71% of his base pay).
These amounts were determined as described above for other executive officers.
The terms of the options and restricted stock are the same as for other
executive officers.
OTHER BENEFITS. Other benefits provided to executives generally are not
tied to the Company's financial performance. Rather, these benefits are
primarily designed to attract and retain executives. Among the benefits provided
by the Company in 1997 to its executives are contributions to the Employee Stock
Ownership Plan (at 1.13% of the individual's covered compensation - the same
rate applied to all other ESOP participants), Company paid life insurance in an
amount equal to 2 times base pay and benefits provided under the NSP Deferred
Compensation Plan and the NSP Excess Benefit Plan that make up for pension
benefits that can not be paid under the Company's qualified defined benefit
pension plan due to Internal Revenue Code limitations and the exclusion of
certain elements of pay from pension-covered earnings. The level of retirement
benefits provided by these plans in the aggregate is reflected in the Pension
Plan Table.
Certain executive officers, including three of the named executive
officers, may receive severance benefits in accordance with the NSP Senior
Executive Severance Policy, which is described in more detail under the section
below entitled "Severance Arrangements."
CONCLUSION. The Committee believes that the Company's executive
compensation package, with the amendments to the LTIP and the adoption of the
new annual plan described in Proposal No. 3 and Proposal No. 4, effectively
serves the interests of the Company and its shareholders. The balance of base
pay, and annual and long-term incentives provides increased motivation to
executives to contribute to and participate in the Company's long-term success.
The Committee is dedicated to ensuring that the Company's total compensation
package continues to meet the needs of the Company and shall monitor and revise
compensation policies as necessary.
W. JOHN DRISCOLL, CHAIRMAN DOUGLAS W. LEATHERDALE
DAVID A. CHRISTENSEN MARGARET R. PRESKA
15
<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
James J. Howard, Chairman and Chief Executive Officer of the Company is a
member of the Board of Directors of Honeywell, Inc. and serves on Honeywell's
Personnel Committee. Giannantonio Ferrari became a member of the Company's
Board of Directors in October 1997. Mr. Ferrari is the President and Chief
Operating Officer of Honeywell. Since Mr. Ferrari joined the Company's Board of
Directors, Mr. Howard has abstained from voting on all matters considered by
Honeywell's Personnel Committee dealing with Mr. Ferrari's compensation. Mr.
Ferrari is not a member of the Corporate Management Committee of the Company.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Under the federal securities laws, the Company's directors and executive
officers are required to report, within specified monthly and annual due dates,
their initial ownership in the Company's common and preferred stocks and certain
subsequent acquisitions, dispositions or other transfers of interest in such
securities. The Company is required to disclose whether it has knowledge that
any person required to file such a report may have failed to do so in a timely
manner. Based solely upon a review of these reports and written representations
that no additional reports were required to be filed in 1997, the Company
believes that all reports were filed on a timely basis except that Mr. Paul E.
Anders, Vice President and Chief Information Officer, filed his initial
ownership report late.
16
<PAGE>
TOTAL SHAREHOLDER RETURN COMPARISON
The graph below compares the cumulative total shareholder return on the
Company's common stock for the last five fiscal years with the cumulative total
return of the Standard & Poor's 500 Stock Index, the Edison Electric Institute
100 utilities index (EEI 100), and the Edison Electric Institute Combination Gas
and Electric index (EEI G&E) over the same period (assuming the investment of
$100 in each vehicle on December 31, 1992 and reinvestment of all dividends).
CUMULATIVE 5 YEAR VALUE
[PLOT POINTS GRAPH]
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C>
NSP ................................ $100 $105 $114 $135 $134 $179
EEI 100 ............................ $100 $111 $ 98 $129 $130 $166
EEI Combination Gas & Electric...... $100 $112 $ 97 $124 $123 $159
S&P 500 ............................ $100 $110 $112 $153 $188 $251
</TABLE>
The Company has elected to add the EEI G&E index to this return comparison
so that the Company's performance can be analyzed against other companies which
provide both electric and gas service, as does the Company. The EEI G&E index
consists of 40 companies, which are all included in the EEI 100 index of
companies. The remainder of the companies in the EEI 100 index provide electric
service only, but provide a broader measure of industry performance.
17
<PAGE>
PENSION PLAN TABLE
The following table illustrates the approximate retirement benefits payable
to employees retiring at the normal retirement age of 65 years:
<TABLE>
<CAPTION>
ESTIMATED ANNUAL BENEFITS FOR YEARS OF SERVICE INDICATED
---------------------------------------------------------------------------------
AVERAGE YEARS OF SERVICE
COMPENSATION ---------------------------------------------------------------------------------
(4 YEARS) 5 10 15 20 25 30
- - ------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$ 50,000 $ 3,500 $ 7,000 $ 10,500 $ 14,000 $ 17,500 $ 21,000
100,000 7,500 15,000 23,000 30,500 38,000 45,500
150,000 11,500 23,500 35,000 47,000 58,500 70,000
200,000 16,000 31,500 47,500 63,000 79,000 94,500
250,000 20,000 39,500 59,500 79,500 99,500 119,000
300,000 24,000 48,000 72,000 96,000 120,000 143,500
350,000 28,000 56,000 84,000 112,000 140,000 168,000
400,000 32,000 64,000 96,500 128,500 160,500 192,500
450,000 36,000 72,500 108,500 145,000 181,000 217,000
500,000 40,500 80,500 121,000 161,000 201,500 241,500
550,000 44,500 88,500 133,000 177,500 222,000 266,000
600,000 48,500 97,000 145,500 194,000 242,500 290,500
650,000 52,500 105,000 157,500 210,000 262,500 315,000
700,000 56,500 113,000 170,000 226,500 283,000 339,500
750,000 60,500 121,500 182,000 243,000 303,500 364,000
800,000 65,000 129,500 194,500 259,000 324,000 388,500
850,000 69,000 137,500 206,500 275,500 344,500 413,000
900,000 73,000 146,000 219,000 292,000 365,000 437,500
950,000 77,000 154,000 231,000 308,000 385,000 462,000
1,000,000 81,000 162,000 243,500 324,500 405,500 486,500
wage base: $ 65,400
</TABLE>
- - ------------------
After an employee has reached 30 years of service, no additional years are
used in determining pension benefits. The annual compensation used to
calculate the average compensation shown in this table is based on the
participant's base salary for the year (as shown on the Summary
Compensation Table at column (c)) and bonus compensation paid in that same
year (as shown on the Summary Compensation Table at column (d); see figure
for prior year). The benefit amounts shown are amounts computed in the form
of a straight-life annuity. The amounts are not subject to offset for
social security or otherwise, except as provided in the employment
agreement with Mr. Howard, as described below.
At the end of 1997, each of the executive officers named in the Summary
Compensation Table had the following credited service: Mr. Howard, 10.92
years, Mr. Anders, 0 years, Mr. Watzl, 30.58 years, Mr. McIntyre, 24.83
years and Mr. Taylor, 24.58 years.
An employment agreement with Mr. Howard provides that he and his spouse, if
she survives him, will receive a lump-sum payment equal to the present
value of combined benefits from the Pension Plan and supplemental Company
payments as though he had completed 30 years of service, less the pension
benefits earned from a former employer.
18
<PAGE>
SEVERANCE ARRANGEMENTS
Certain executive officers of the Company, including the named executives
other than Mr. Howard and Mr. Anders, are participants under the NSP Senior
Executive Severance Policy which provides for payment of severance benefits to
any participant whose employment is terminated after April 28, 1995, the
effective date of the Policy, and prior to April 28, 2000, if the participant's
employment is terminated: (i) by the employer, other than for cause, disability
or retirement; (ii) as a result of the sale of a business by the employer if the
purchaser of the business does not agree to employ the participant on the same
terms and conditions as were in effect before the sale, including comparable
severance protection; (iii) or by the participant within 90 days after a
reduction in his or her salary, a material and adverse diminishment of his or
her duties and responsibilities or of the program of incentive compensation and
employee benefits covering the participant, or a relocation of the participant
by more than 50 miles.
The severance benefits under the Policy consist of: (i) a cash lump sum
payment of three years' salary and annual incentive compensation; (ii) a cash
lump sum payment of the actuarial equivalent of the additional retirement
benefits the participant would have earned if he or she had remained employed
for three more years; (iii) continued medical, dental and life insurance
coverage for three years; (iv) outplacement services at a cost of not more than
$30,000 or the use of office space and support for up to one year; (v) financial
planning counseling for two years; and (vi) transfer of title of the
participant's company car, if any, at no cost to the participant. If the
foregoing benefits, when taken together with any other payments to the
participant, result in the imposition of the excise tax on excess payments under
Section 4999 of the Code, then the severance benefits will be reduced only if
the reduction results in a greater after-tax payment to the participant.
PROPOSAL NO. 2 -- PROPOSAL TO AMEND THE COMPANY'S
RESTATED ARTICLES OF INCORPORATION TO INCREASE
THE NUMBER OF SHARES OF AUTHORIZED COMMON STOCK
FROM 160 MILLION SHARES TO 350 MILLION SHARES
On January 28, 1998, the Board of Directors adopted, subject to shareholder
approval, an amendment to the Company's Restated Articles of Incorporation, as
amended, which provides for an increase in the number of shares of authorized
Company common stock, par value $2.50 per share ("Common Stock"), from 160
million shares to 350 million shares. As of March 2, 1998, 74,861,502 shares of
Common Stock were issued and outstanding. Of the 85,138,498 shares of Common
Stock available for issuance, approximately 1,946,510 shares are reserved for
issuance under the Company's dividend reinvestment plan, long-term incentive
plan and other employee benefit plans and shares having a market value of
approximately $19 million (approximately 345,062 shares based on the market
value on March 2, 1998) have been authorized for issuance in connection with the
previously announced acquisition of Black Mountain Gas Company, leaving
approximately 82,846,926 shares authorized, unissued and unreserved.
The additional shares of Common Stock for which authorization is sought
would be part of the existing class of Common Stock and, if and when issued,
would have the same rights and privileges as the shares of Common Stock
presently outstanding. Adoption of the proposed amendment would not affect the
rights of the holders of currently outstanding Common Stock of the Company.
However, any issuance of additional authorized shares could result in the
dilution of each existing shareholder's voting power, and could have the effect
of diluting the earnings per share or book value per share of outstanding shares
of Common Stock. Holders of Common Stock do not have the preemptive right to
subscribe for the purchase of any part of any new or additional issue of stock
or securities convertible into stock.
The Board of Directors believes that it is in the best interest of the
Company to increase the authorized shares of Common Stock to provide the Company
with flexibility in structuring future
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financings and achieving other proper corporate purposes, including without
limitation, stock splits, stock dividends, financings, acquisitions, providing
additional equity incentives to employees, officers or directors, and/or
establishing strategic relationships with other companies. Other than the
dividend reinvestment plan and the employee benefit plans discussed above, the
Company has no current plans to issue shares of Common Stock relating to these
or other matters, although the Company from time to time evaluates such matters
and acknowledges that one or more could occur in the near term. In particular,
it should be noted that the Company evaluates potential stock splits from time
to time. If market conditions so warrant and the proposed amendment is approved,
the Board of Directors may authorize a stock split at or shortly after the 1998
Annual Meeting.
If the proposed amendment is approved, the Board of Directors could
generally issue such additional shares without further shareholder action,
unless such action is then required by applicable law or the rules of any stock
exchange on which the Company's securities may be listed. The proposed
amendment, if adopted, would cause the Company's authorized capital stock to
consist of: (i) 350,000,000 shares of Common Stock and (ii) 7,000,000 shares of
preferred stock, $100 par value (the "Preferred Stock"). Preferred Stock,
2,000,000 shares of which are currently outstanding, may be issued in the future
in such series as may be designated by the Board of Directors. In creating any
such series, the Board of Directors has the authority to fix the rights and
preferences of each such series with respect to, among other things, the
designation, dividend rates and times of payment, redemption price and
liquidation price or preference as to assets in voluntary liquidation. The
increase in the amount of authorized Common Stock was not proposed with the
intention of discouraging tender offers or takeover attempts of the Company.
However, the availability of additional authorized shares of Common Stock for
issuance, along with the power of the Board over the terms of the Preferred
Stock and certain other provisions, could render more difficult or discourage a
merger, tender offer, proxy contest or other attempt to obtain control of the
Company. These other provisions include certain provisions of its Restated
Articles of Incorporation and the Minnesota Business Corporation Act, which
provide for, among other things, cumulative voting for directors, a classified
board of directors, control share acquisition and fair price provisions.
The Company has no knowledge, however, of any effort to accumulate the
Company's Common Stock or to obtain control of the Company by means of a merger,
tender offer, solicitation in opposition to management or otherwise.
VOTE REQUIRED. The affirmative vote of the holders of a majority of (i) the
Common Stock, voting separately as a class and (ii) the total voting power
present in person or by proxy and entitled to vote is required for the approval
of the adoption of the amendment to the Restated Articles of Incorporation, as
amended. Abstentions from voting on this matter are treated as votes against,
while broker nonvotes are treated as shares not present and entitled to vote.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE
APPROVAL OF THE AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION, AS
AMENDED.
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PROPOSAL NO. 3 -- PROPOSAL TO APPROVE AMENDMENTS
TO THE COMPANY'S EXECUTIVE LONG-TERM
INCENTIVE AWARD STOCK PLAN
On January 28, 1998, the Board approved amendments to the Long-Term
Incentive Award Stock Plan (the "Original Long-Term Plan"), which was initially
approved by the Board in January 1988 and by the shareholders at the 1989 Annual
Meeting. The amendments to the Original Long-Term Plan became effective January
1, 1998, subject to shareholder approval. Such Original Long-Term Plan as so
amended is hereinafter referred to as the "Amended Long-Term Plan". The
amendments, which are embodied in the Amended Long-Term Plan, include (i)
revisions to maintain the Company's tax deduction for certain performance-based
compensation, (ii) an increase in the number of shares available for issuance
per year from 0.5% of the outstanding Common Stock at the end of the prior year
to 1% of the outstanding Common Stock at the end of the prior year and (iii)
revisions to provide for accelerated vesting of options and stock appreciation
rights and the lapse of restrictions for restricted stock in the event of a
change in control of the Company. As with the Original Long-Term Plan, the
Amended Long-Term Plan permits a committee of the Board to grant non-qualified
stock options, incentive stock options, restricted stock ("Restricted Stock"),
stock appreciation rights ("SARs"), and performance awards to key employees.
The Amended Long-Term Plan has been designed to comply with Section 162(m)
of the Internal Revenue Code of 1986 (the "Code"), which generally denies a
corporate tax deduction for annual compensation exceeding $1,000,000 paid to the
chief executive officer and the four other most highly compensated officers of a
public company ("Covered Employees"). Certain types of compensation, including
performance-based compensation, are generally excluded from this deduction
limit. In an effort to ensure that stock awards under the plan will qualify as
performance-based compensation, the Amended Long-Term Plan is being submitted to
shareholders for approval at the Annual Meeting. While the Company believes that
compensation payable pursuant to the Amended Long-Term Plan generally will be
deductible for federal income tax purposes, under certain circumstances such as
death, disability and change in control, compensation not qualified under
Section 162(m) of the Code may be payable pursuant to the provisions of the
Amended Long-Term Plan. By approving the Amended Long-Term Plan, the
shareholders will be approving, among other things, the performance measures,
eligibility requirements and limits on various stock awards contained therein.
Set forth below is a summary of certain important features of the Amended
Long-Term Plan, which summary is qualified in its entirety by reference to the
actual plan attached as Exhibit A to this proxy statement. All capitalized terms
which are not defined herein are defined in the Amended Long-Term Plan.
DESCRIPTION OF THE AMENDED LONG-TERM PLAN
PURPOSE. The purpose of the Amended Long-Term Plan is to provide a portion
of compensation for executives in Common Stock of the Company to emphasize the
common interest between them and the shareholders and the need to balance
short-term and long-term goals in managing the Company. The total compensation
program is designed to be competitive with leading utilities and industry in
general to attract and retain key individuals with outstanding abilities.
ADMINISTRATION. The Amended Long-Term Plan will be administered by the
Corporate Management Committee of the Board of Directors of the Company (the
"Committee") which has the authority and discretion to select participants,
establish the criteria for making awards, determine the time at which awards
shall be granted, set the period, terms and conditions for each award, establish
the terms and conditions of any loans to participants for stock options and make
any other determinations which it believes necessary or advisable for the
administration of the Amended Long-Term Plan. The Committee always must have at
least three members and its members must be persons who are not eligible to
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participate in the Amended Long-Term Plan or any similar plan at the time
discretion under the Amended Long-Term Plan is exercised, and have not been
eligible to participate for at least one year prior thereto.
NUMBER OF SHARES. The maximum number of shares which may be awarded under
the Amended Long-Term Plan in any year is 1.0% of the outstanding Common Stock
at the end of the previous calendar year; provided that the number of shares
awarded to any participant in any calendar year may not exceed 100,000 shares.
Any shares forfeited by a participant after an award will not be counted as
shares awarded under the Amended Long-Term Plan until used in a subsequent
award. Any options and other awards under the Amended Long-Term Plan that either
expire or are settled in cash will not be counted in applying the aggregate
share limitation described above. If there is any change in the outstanding
Common Stock by reason of a stock dividend or distribution, stock split-up, or
by reason of merger, consolidation or other corporate reorganization in which
the Company is the surviving corporation, the number of shares of Common Stock
available for awards under the Plan shall be adjusted by the Committee to give
proper effect to such change.
ELIGIBILITY. All officers and key employees of the Company and its
subsidiaries are eligible for selection to participate in the Amended Long-Term
Plan. While the persons to whom awards will be made in future years and the
amounts and nature of such awards cannot be determined at this time, it is
anticipated that approximately 190 officers and key employees will be eligible
for participation in the Amended Long-Term Plan in any year. Participants may
receive successive awards under the Amended Long-Term Plan, while restrictions
on prior awards are still outstanding.
STOCK OPTIONS AND SARs. The exercise price for any stock options and SARs
will be determined by the Committee and may be granted at such price, including
cash, common stock, Restricted Stock, or any other consideration in kind, as may
be determined by the Committee. Options granted under the Amended Long-Term Plan
will be nontransferable, other than by will or the laws of descent and
distribution, and will be exercisable during the life of the optionee only by
such optionee. Options granted under the Amended Long-Term Plan will not be
exercisable more than 121 months after the date of grant.
The Plan provides for the issuance of SARs, which entitle the recipient to
receive, upon exercise, the excess of the fair market value of one share of
Common Stock over the exercise price of any option granted in conjunction
therewith, or the fair market value of such share at the time of grant. SARs
granted in conjunction with an option will have the same term as the underlying
option and the option to which the SAR relates will cease to be exercisable upon
the exercise of the related SAR.
An SAR may be granted under the Amended Long-Term Plan either in
conjunction with an option grant or separately. An SAR granted in conjunction
with an option enables the option holder to realize the value of the option
without having to provide what may be a substantial cash payment which would be
necessary to exercise the option. The exercise of SARs granted in conjunction
with options would require the surrender of the related options. Any amount
payable upon exercise of SARs may be paid in cash, in shares of Common Stock, or
a combination of cash and shares, as determined by the Committee. For the
purpose of the aggregate limitation on the number of shares that may be awarded
under the Amended Long-Term Plan, an exercise of an SAR will be treated as an
exercise of the related option.
RESTRICTED STOCK. The Amended Long-Term Plan also provides for the award of
Restricted Stock with such terms and conditions as may be established by the
Committee in its award; provided that Restricted Stock is not awarded unless
applicable performance goals established by the Committee within the time period
prescribed by Section 162(m) of the Code are satisfied. These performance goals
must be based on the attainment of specified levels of earnings per share,
market share, stock price, sales, costs, net operating income, cash flow,
retained earnings, return on equity, total shareholder return,
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shareholder value analysis, results of customer satisfaction surveys, aggregate
product price and other product price measures, safety record, service
reliability, demand-side management (including conservation and load
management), operating and maintenance cost management, energy production
availability, and individual performance measures. Such performance goals also
may be based on the attainment of specified levels of the Company's performance
under one or more of the measures described above relative to the performance of
other corporations. Performance goals based on the foregoing factors are
hereinafter referred to as "Performance Goals." All Performance Goals must be
objective performance goals satisfying the requirements for "performance-based
compensation" within the meaning of Section 162(m)(4) of the Code. The Committee
also may condition the vesting of Restricted Stock awards to participants who
are not Covered Employees upon the satisfaction of these or other applicable
performance goals. The provisions of Restricted Stock awards (including any
applicable Performance Goals) need not be the same with respect to each
participant. Unless, otherwise limited by the Committee, the holders of
Restricted Stock have voting power for stock currently under restriction. If the
recipient of Restricted Stock shall cease to be continuously employed by the
Company during any restricted period, the recipient's rights to Restricted Stock
not yet vested will be forfeited except upon retirement or death.
PERFORMANCE AWARDS. Performance awards made pursuant to the Amended
Long-Term Plan entitle the recipient to receive future payments of cash or
distributions of shares of Common Stock upon the achievement of pre-established
performance goals, which may or may not be from among the objective performance
measures described above relating to Restricted Stock. Performance goals will be
established by the Committee. Performance awards may be granted in conjunction
with or separate from stock options granted under the Amended Long-Term Plan.
CHANGE IN CONTROL. The Plan provides that in the event of a change in
control (as defined in the Amended Long-Term Plan) of the Company (i) any SARs
and stock options outstanding as of the date of the change in control which are
not then exercisable and vested will become fully exercisable and vested, (ii)
the restrictions applicable to Restricted Stock will lapse and such Restricted
Stock shall become free of all restrictions and fully vested and (iii) all
performance awards will be considered to be earned and payable in full and any
restrictions will lapse and such performance awards will be settled in cash as
promptly as practicable.
AMENDMENT, SUSPENSION OR TERMINATION. The Board of Directors generally may
amend, suspend or terminate the Amended Long-Term Plan or any portion thereof at
any time. No amendment, suspension or termination of the Amended Long-Term Plan
by the Board may have the effect of impairing any awards previously granted to a
participant unless the participant consents to such impairment.
RIGHTS OF PARTICIPANTS. A participant in the Amended Long-Term Plan will
have no rights under the Amended Long-Term Plan greater than those of a general
creditor of the Company. The Committee may authorize the creation of trusts and
other arrangements to facilitate or ensure payment of the Company's obligations
under the Amended Long-Term Plan, provided that such trusts and arrangements are
consistent with the unfunded status of the Plan.
FEDERAL INCOME TAX CONSEQUENCES. The following discussion is intended only
as a brief discussion of the federal income tax rules relevant to stock options,
SARs, Restricted Stock and performance awards. The laws governing the tax
aspects of awards are highly technical and such laws are subject to change.
1. The award of a nonqualified stock option or SAR will not result in
income for federal tax purposes when the award is made. When nonqualified
stock options are exercised, the recipient will be deemed to have received
ordinary income in the amount equal to the difference between the option
price and the market price of the stock on the exercise date. When an SAR
is exercised, the
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recipient will be deemed to receive ordinary income in an amount equal to
any cash and/or the market price of any unrestricted shares received.
When any stock acquired by exercise of an option or SAR is sold, the
difference between the amount which was earlier deemed to be income and the
sale price of the stock will be treated as a capital gain or capital loss.
2. When cash or shares of stock are received by a recipient as a
performance award, the recipient will be deemed to have received ordinary
income equal to any cash and the market value of any stock received at the
time of receipt.
3. A recipient of Restricted Stock normally will not recognize taxable
income at the time the stock is granted, unless his rights to part or all
of the Restricted Stock are immediately vested. Thereafter, the recipient
will recognize ordinary income as the restrictions lapse. The amount of
such ordinary income will be equal to the market value of the Restricted
Stock (in excess of any amount paid by the recipient) at the time of the
lapse. However, the recipient may elect pursuant to Section 83(b) of the
Code to recognize ordinary income in an amount equal to the market value of
the Restricted Stock (in excess of any amount paid by the recipient) at the
time the stock is granted. Any subsequent change in the value of the
Restricted Stock would then be treated as capital gain or loss when the
stock is sold.
4. In each of the foregoing cases, the Company will be entitled to a
deduction for federal income tax purposes at the same time and in the same
amount as the receipt of cash and stock is initially treated as ordinary
income to the recipient.
Under generally accepted accounting principles, there will be no charge to
the income of the Company in connection with the grant or exercise of a stock
option that is granted at market value. In the case of below-market options and
any SARs, compensation expense would be recorded ratably over the vesting
period, with further charges or credits to income based on increases or
decreases in the market value of the stock while the option or SAR is
outstanding. Compensation expense for Restricted Stock would be recorded ratably
over the restricted period.
NEW PLAN BENEFITS. It cannot be determined at this time what benefits or
amounts, if any, will be received by or allocated to any persons or group of
persons under the Amended Long-Term Plan if such plan is approved. Such
determinations are subject to the discretion of the Committee. However, the
benefits and amounts that were paid or allocated under the Original Long-Term
Plan with respect to 1998 are described below and for 1997 and prior years are
described in the Summary Compensation Table, Option and SAR Grants Table and
Aggregated Option and SAR Exercises and FY-End Option/SAR Value Table on pages
11 and 12 of this proxy statement.
1998 AWARDS. The Committee in January 1998 awarded nonqualified stock
options under the Original Long-Term Plan to the following individuals and
groups described on page 10 that are presently employees of the Company: Mr.
Howard, 16,279 shares; Mr. McIntyre, 6,642 shares; Mr. Taylor, 4,688 shares; Mr.
Watzl, 5,470 shares, Mr. Anders, 5,567 shares; all executive officers as a
group, 63,309 shares; and all employees (excluding executive officers) 189,801
shares. The nonqualified stock options will become exercisable one year from the
date of grant at a purchase price of $53.75 per share. The Committee also
decided to make Restricted Stock awards to the following individuals and groups
described on page 10 who are currently employees of the Company: Mr. Howard,
8,871 shares, $477,120; Mr. McIntyre, 2,030 shares, $109,200; Mr. Taylor, 1,812
shares, $97,440; Mr. Watzl, 1,712 shares, $92,068; Mr. Anders, 0 shares, $0; all
executive officers as a group, 21,733 shares, $1,168,828; and all employees
(excluding executive officers), 0 shares, $0. The dollar value of the awards is
based on the fair market value of the Common Stock on the date of grant
($53.7813 per share).
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VOTE REQUIRED. The affirmative vote of the holders of a majority of the
total voting power present in person or by proxy and entitled to vote at the
Annual Meeting will be required for approval of the Amended Long-Term Plan.
Abstentions from voting on this matter are treated as votes against, while
broker non-votes are treated as shares not present and entitled to vote. Proxies
solicited by the Board of Directors will be voted in favor of the proposal
unless a different vote is specified.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR THE
APPROVAL OF AMENDMENTS TO THE COMPANY'S EXECUTIVE LONG-TERM INCENTIVE AWARD
STOCK PLAN.
PROPOSAL NO. 4 -- PROPOSAL TO APPROVE THE COMPANY'S
EXECUTIVE ANNUAL INCENTIVE AWARD PLAN
In January 1998, the Board adopted, effective January 1, 1998, the Northern
States Power Company Executive Annual Incentive Award Plan (the "Annual Plan").
The Annual Plan is intended to replace the Company's existing Executive
Incentive Compensation Plan. The Annual Plan will not become effective with
respect to individuals who are subject to Section 162(m) of the Code unless the
shareholder approval described below is obtained.
The purpose of the Annual Plan is to provide a significant and flexible
economic opportunity to selected officers and salaried employees of the Company
and its subsidiaries and other Affiliates (as defined in the Annual Plan) in an
effort to reward their individual and group contributions to the Company and
more closely link the financial interests of management, shareholders and
customers.
The Annual Plan is designed to take into account Section 162(m) of the
Code, which generally denies a corporate tax deduction for annual compensation
exceeding $1,000,000 paid to the chief executive officer and the four other most
highly compensated officers of a public company. Certain types of compensation,
including performance-based compensation, are excluded from this deduction
limit. In an effort to ensure that compensation payable under the Annual Plan to
certain executives will qualify as performance-based compensation that is
generally tax-deductible, the Annual Plan is being submitted to shareholders of
the Company for approval at the Annual Meeting. While the Company believes
compensation payable pursuant to the Annual Plan will be deductible for federal
income tax purposes, under certain circumstances such as death, disability and
change in control (all as defined in the Annual Plan), compensation not
qualified under Section 162(m) of the Code may be payable. By approving the
Annual Plan, the shareholders will be approving, among other things, the
performance measures, eligibility requirements and annual incentive award limits
contained therein.
Set forth below is a summary of certain important features of the Annual
Plan, which summary is qualified in its entirety by reference to the actual plan
attached as Exhibit B to this Proxy Statement:
ADMINISTRATION. The Annual Plan will be administered by the Corporate
Management Committee, or such other committee of the Company's Board as the
Company's Board may from time to time designate (the "Committee"), which, unless
the Company's Board determines otherwise, will be composed solely of not less
than two "disinterested persons" who qualify as "outside directors" for purposes
of Section 162(m) of the Code. The Committee will have sole authority to make
rules and regulations relating to the administration of the Annual Plan, and any
interpretations and decisions of the Committee with respect to the Annual Plan
will be final and binding.
ELIGIBILITY. The Committee will, in its sole discretion, determine those
officers and salaried employees of the Company who shall be eligible to
participate in the Annual Plan for a given period of 12 months or less (an
"Incentive Period"). These participants will be selected based upon their
opportunity to have a substantial impact on the Company's results. Participation
in the Annual Plan by
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a participant during a given Incentive Period does not require continued
participation by such participant in any subsequent Incentive Period.
PLAN FEATURES. The Annual Plan provides for the payment of cash incentive
awards to participants designated by the Committee, which payments may be
conditioned upon the attainment of pre-established performance goals or upon
such other factors or criteria as the Committee shall determine. Such
performance goals may be different for each participant. Bonus amounts are
determined by multiplying a participant's "Target Incentive Award" by a
percentage which varies depending on the extent to which the performance goals
or other factors or criteria are satisfied. A participant's Target Incentive
Award, in turn, is determined by multiplying such participant's base salary as
of the last day of the applicable Incentive Period by a percentage designated by
the Committee, in its sole discretion, which percentage need not be the same for
each participant (and which may exceed 100%). The Committee may, in its sole
discretion, increase or decrease the amount of any incentive awards payable to a
participant and may, in recognition of special circumstances, pay incentive
awards even if not earned, provided that the Committee cannot increase the
amount of any incentive awards payable to certain designated "Covered
Employees." Incentive awards payable under the Annual Plan to certain designated
"Covered Employees" are subject to special restrictions described in the
following section.
DESIGNATED COVERED EMPLOYEES. The Committee will have the authority, in its
sole discretion, to designate certain participants as "Covered Employees" for a
specified Incentive Period upon determining that such participants are or are
expected to be "covered employees" within the meaning of Section 162(m) of the
Code for such Incentive Period. Not more than 90 days after the beginning of the
Incentive Period, and, in any event, before 25% or more of the Incentive Period
has elapsed, the Committee will establish the performance goals for the bonus
award opportunities of these Covered Employees. Such performance goals are to be
comprised of one or more of the following measures: earnings per share, market
share, stock price, sales, costs, net operating income, cash flow, retained
earnings, return on equity, total shareholder return, shareholder value
analysis, results of customer satisfaction surveys, aggregate product price and
other product price measures, safety record, service reliability, demand-side
management (including conservation and load management), operating and
maintenance cost management, energy production availability, and individual
performance measures. Such performance goals also may be based on the attainment
of specified levels of performance by the Company under one or more of the
measures described above relative to the performance of other corporations. With
respect to Covered Employees, all Performance Goals must be objective
performance goals satisfying the requirements for "performance-based
compensation" within the meaning of Section 162(m) of the Code. Incentive awards
payable to Covered Employees are to be calculated in the same manner described
in the "PLAN FEATURES" section above, except that subjective individual
performance ratings cannot be used to increase the amount of incentive awards
payable to Covered Employees. No incentive awards will be paid to Covered
Employees if the minimum applicable pre-established Performance Goals are not
satisfied, unless the Covered Employee's employment is terminated because of
death, disability or change in control. Furthermore, the Committee will have the
authority to decrease, but not to increase, the amount of incentive awards
otherwise payable to Covered Employees pursuant to pre-established performance
goals and payment formulas. The maximum amount payable to any Covered Employee
of the Company for any calendar year will be $1,000,000.
AMENDMENT AND DISCONTINUANCE. The Board will have the right to amend,
alter, discontinue or otherwise modify the Annual Plan from time to time, but no
amendment will, without the consent of the participant affected, impair any
award made prior to the effective date of the modification.
NEW PLAN BENEFITS. It cannot be determined at this time what benefits or
amounts, if any, will be received by or allocated to any persons or group of
persons under the Annual Plan if such Plan is approved. Such determinations as
to allocations are at the discretion of the Committee and as to receipt of
payouts is dependent on future performance. However, the target incentive award
levels under the
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Annual Plan for 1998 are described below and amounts payable under the existing
Executive Annual Incentive Compensation Plan for 1995, 1996 and 1997 are set
forth in the bonus column of the Summary Compensation Table on page 11.
1998 AWARDS. The Committee in January 1998 established target incentive
award levels (expressed as a percentage of base salary) under the Annual Plan
for the following individuals and groups described on page 10 that are presently
employees of the Company: Mr. Howard in an aggregate amount equal to 55% of base
salary; for Messrs. McIntyre, Taylor, Watzl and Anders each in an amount equal
to 35% of their respective base salaries; and all executive officers as a group
in an aggregate amount ranging from 30% to 55% of base salary. These awards were
established for the incentive period commencing January 1, 1998 and ending
December 31, 1998, and their payout is dependent upon Company performance.
Individuals can realize from 0% to 188% of their target awards dependent on the
performance of the Company, the individual and the individual's group in certain
predetermined areas. These areas are company financial performance (based on
EPS), customer satisfaction, price of product, safety, service reliability, and
(except for the CEO) individual performance. The awards for the CEO, the
President-NSP Generation and the Vice President-Nuclear Generation also are
dependent on performance specifically with respect to nuclear safety. The weight
accorded particular performance areas varies by executive. Generally, financial
performance accounts for up to 50% of an executive's target incentive award. All
of the other areas account for between 5-30% of the target awards.
VOTE REQUIRED. The affirmative vote of a majority of the total voting power
present in person or by proxy and entitled to vote at the Annual Meeting is
required to approve the Annual Plan. Abstentions from voting on this matter are
treated as votes against, while broker non-votes are treated as shares not
present and entitled to vote. Proxies solicited by the Board of Directors will
be voted in favor of the proposal unless a different vote is specified.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF
THE COMPANY'S EXECUTIVE ANNUAL INCENTIVE AWARD PLAN.
PROPOSAL NO. 5 -- RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
Subject to ratification by the shareholders, the Board of Directors has
appointed Price Waterhouse LLP as independent auditors of the Company for the
year 1998. Price Waterhouse has performed this function for the Company
commencing with the fiscal year 1995. Members of the firm will be available at
the Annual Meeting of Shareholders to answer questions and to make a statement
if they desire to do so.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR
RATIFICATION OF THE APPOINTMENT OF AUDITORS.
PROPOSAL NO. 6 -- SHAREHOLDER PROPOSAL
Marlys Weber, 4657 Colfax Avenue South, Minneapolis, MN 55409, beneficial
owner of 89.881 shares of NSP common stock, and Bruce Drew, 4425 Abbott Avenue
South, Minneapolis, MN 55410, beneficial owner of 1.378 shares of NSP common
stock, have given notice that they intend to present for action at the Annual
Meeting the following resolution:
Shareholder Resolution on Conversion of Prairie Island
Nuclear Plant to Natural Gas Plant
Whereas: The Prairie Island plant occupies a vital location in the power grid
of NSP, and is important to the local and state economy as well as to NSP's
shareholders;
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Whereas: The continued operation and repair of steam generators at the Prairie
Island Nuclear plant has resulted in high maintenance and facility costs to
NSP;
Whereas: The inventory of spent nuclear fuel continues to increase through
nuclear power operation, and as a result, continues to cause storage issues
with the local community as well as the state of Minnesota;
Whereas: NSP has successfully converted the Pathfinder plant in South Dakota
from a nuclear power facility to a natural gas power facility;
Whereas: Electricity produced from natural gas can be more cost effective with
lower maintenance and waste costs than electricity produced with nuclear
reactors;
Therefore be it resolved that the shareholders recommend that the Board of
Directors commission a study of the economic feasibility of converting the
Prairie Island Nuclear Power Plant to a natural gas power plant, and make
available to shareholders such a study with recommendations of Board actions
before the next annual meeting.
THE NSP BOARD OF DIRECTORS AND MANAGEMENT RECOMMEND A VOTE AGAINST THIS
PROPOSAL.
No formal study is needed to conclude that the conversion of the Prairie
Island Nuclear Generating Plant to a natural gas plant would not be economically
feasible for your Company.
The Company estimates that it would incur in excess of $500 million in
capital costs to convert the Prairie Island plant facilities to a natural gas
facility. During the conversion process, the cost of replacement power could be
as high as $200 million per year. Following the conversion, the Company
estimates that it would incur more than $100 million annually to supply fuel to
a converted facility -- that's more than 3 times the current annual cost of fuel
to Prairie Island. Other costs likely would be incurred due to the advancement
of decommissioning of the nuclear portions of the plant, the acceleration of
depreciation expenses and ongoing spent fuel management expenses.
The Company has successfully converted its Pathfinder Plant to a fossil
fuel plant. The Pathfinder Plant had previously operated as a nuclear plant from
1964 until 1967, after which it was converted to an oil and gas-fired plant.
However, there are great differences between the Pathfinder facility and Prairie
Island. First of all, Pathfinder was converted at the end of its useful life;
therefore, the economic feasibility was much more favorable for conversion of
that plant than for a premature Prairie Island conversion. Second, Pathfinder
was a small facility with a maximum capacity output of 90 megawatts; thus, it
was much more cost effective to replace that plant's small capacity output with
natural gas.
Since conversion, Pathfinder has been used as a "peaking" facility to
supply extra capacity when needed. Pathfinder operates annually at less than 1
percent of the total available hours to produce this peak capacity. Prairie
Island, on the other hand, is a "baseload" facility, fundamental to NSP's total
energy output. Prairie Island operates in excess of 90% of available hours on an
annual basis, with a total output of 1100 megawatts. The replacement of Prairie
Island's baseload capacity would require approximately 67 MILLION mcf of natural
gas per year -- that's more than 15-20% of the total annual gas usage in the
state of Minnesota, as compared to an annual 50 THOUSAND mcf of natural gas used
at the Pathfinder plant per year.
The Prairie Island Nuclear Generating facility is indeed vital to the total
energy output at your Company. In 1997, Prairie Island supplied 21.8% of the
Company's total energy. And, while storage of nuclear spent fuel from our
nuclear operations remains an issue, your Company continues to lead the way to
finding a permanent solution and to look for interim alternatives until a
permanent solution is found. The costs of maintaining Prairie Island, including
its steam generators, have been diligently managed to avoid large expenses over
the plant's life. Further, even with those maintenance costs,
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Prairie Island has proven to be one of the lowest cost producers in the U.S., as
confirmed by the September 1997 Utility Data Institute's report on the 1996
Production Costs Operating Steam-Electric Plants.
While it is technically feasible to convert a nuclear facility into a
natural gas facility and while it generally may be more cost effective to
construct a NEW gas facility than it is to construct a NEW nuclear plant, your
Company's management believes that it is not more cost effective to change an
existing, well-managed nuclear facility, like Prairie Island, to a natural gas
plant. Information compiled by the Utility Data Institute supports this
position, showing that based on 1996 data, combined fuel, maintenance and
operational expenses for a U.S. nuclear plant were only $19.25 per megawatt hour
(MWhr), as compared to $34.21 per MWhr for a gas plant. (September 1997 Utility
Data Institute's report on the 1996 Production Costs Operating Steam-Electric
Plants). What's more, Prairie Island's production costs are well below that
national average, with production expenses during 1996 totaling only $13.84 per
MWhr.
The bottom line is if we burden the Prairie Island plant with the
additional costs of a conversion to natural gas, the plant will no longer be
cost competitive. As described above, the premature conversion of Prairie Island
would unnecessarily increase costs by hundreds of millions of dollars annually.
A premature conversion of Prairie Island would likely cause NSP to lose its
position as a low-cost supplier of electricity and could seriously impair the
Company's ability to compete against other electric suppliers in the years
ahead, substantially lessening shareholder value. Therefore, based on what is
presently known about the costs to the Company to convert Prairie Island, a
commissioned study is not necessary to conclude that such a conversion would not
be economically feasible for this Company.
AGAIN, THE NSP BOARD AND MANAGEMENT URGE YOU TO VOTE "NO" ON THIS PROPOSAL.
QUORUM AND VOTE REQUIRED
The presence in person or by proxy, of the holders of a majority of the
voting power of the shares of common stock and cumulative preferred stock
issued, outstanding and entitled to vote at a meeting for the transaction of
business is required to constitute a quorum. The election of each director shall
be decided by plurality vote. As a result, any shares not voted for a director
(whether by withholding authority, broker non-vote or otherwise) have no impact
on the election of directors except to the extent the failure to vote for an
individual results in another individual receiving a larger number of votes. The
proposal for amendments of the Articles of Incorporation to increase the
authorized Common Stock requires the approval of a majority of the Common Stock,
voting separately as a class, and a majority of the total voting power present
in person or by proxy and entitled to vote. Each of the proposals for approval
of amendments to the Executive Long-Term Incentive Award Stock Plan, adoption of
the Executive Annual Incentive Award Plan, the shareholder proposal and
ratification of the selection of outside auditors requires the affirmative vote
of the holders of a majority of the total voting power present in person or by
proxy and entitled to vote. Abstentions from voting on these matters are treated
as votes against, while broker non-votes are treated as shares not present and
entitled to vote.
1999 SHAREHOLDER PROPOSALS
Any proposal by a shareholder for the annual shareholder meeting in 1999
must be received by the Secretary of the Company at 414 Nicollet Mall,
Minneapolis, Minnesota 55401, not later than the close of business on November
20, 1998. Proposals received by that date will be included in the 1999 Proxy
Statement if the proposals are proper for consideration at an annual meeting and
are required for inclusion in the proxy statement by, and conform to, the rules
of the SEC.
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For a proposal not included in the proxy statement to be properly brought
before an annual meeting by a shareholder, the Company's Bylaws provide that the
Secretary of the Company must have received written notice thereof not less than
20 or more than 90 days prior to the meeting. The notice must contain (i) a
description of the proposed business and the reasons for conducting such
business at the annual meeting, (ii) the shareholder's name and record address,
(iii) the class and number of shares beneficially owned by the shareholder, and
(iv) any material interest of the shareholder in such business.
OTHER BUSINESS
Management does not know of any business, other than that described herein,
that may be presented for action at the Annual Meeting of Shareholders. If any
other matters are properly presented at the meeting for action, the persons
named in the accompanying proxy will vote upon them in accordance with their
best judgment.
Minneapolis, Minnesota By order of the Board of Directors
March 20, 1998 John P. Moore, Jr.
SECRETARY
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EXHIBIT A
AMENDED AND RESTATED
EFFECTIVE AS OF JANUARY 1, 1998
NORTHERN STATES POWER COMPANY
EXECUTIVE LONG-TERM INCENTIVE AWARD STOCK PLAN
SECTION 1. PURPOSE. The general purpose of the Northern States Power
Company Executive Long-Term Incentive Award Plan (the "Plan") is to create a
compensation environment which will attract and retain talented officers and key
employees of Northern States Power Company, a Minnesota corporation (the
"Company") and its subsidiaries, by providing to employees determined to be
eligible ("Participants") with common stock of the Company ("Common Stock")
pursuant to awards ("Awards") described herein.
The specific purposes of the Plan are to:
(a) Provide a total compensation program which is competitive with general
industry programs and also those emerging in the leading utility
companies.
(b) Use a stock based long-term incentive plan to more closely align the
interest of NSP's executives with those of the shareholders and to
maintain NSP's long-term financial strength so that NSP can take
advantage of opportunities that will allow it to provide quality
service at the lowest cost possible.
(c) Provide another element of compensation beyond base salary and annual
incentive pay to focus attention on long-term business goals and to
reward superior company performance.
(d) Encourage teamwork and the spirit of cooperation along the executive
group.
SECTION 2. COMMITTEE. The Plan shall be administered by the Corporate
Management Committee of the Company's Board of Directors ( the "Committee" ) or
any committee designated as its successor for purposes of this Plan. The
Committee shall consist of not less than three members of the Board of Directors
who are not employees of the Company and all members of the Committee shall be
"disinterested persons" as defined in Rule 16b-3 of the General Rules and
Regulations under the Security Exchange Act of 1934. To the extent required to
comply with the performance-based compensation exemption under Internal Revenue
Code ("Code") Section 162(m) and the related regulations, each member of the
Committee shall qualify as an "outside director" as defined therein.
SECTION 3. COMMITTEE POWERS AND DUTIES. The Committee shall have the
authority to make rules and regulations governing the administration of the
Plan; to select the eligible employees to whom Awards shall be granted; to
determine the type, amount, size and terms of Awards; to determine the time when
Awards shall be granted; to determine whether any restrictions shall be placed
on shares of Common Stock granted pursuant to any Awards; to authorize the
Company to make available loans, on specified terms, to Participants for the
purpose of providing funds for the use of Participants in exercising options
granted under the Plan; and to make all other determinations necessary or
advisable for the administration of the Plan. The Committee's determination need
not be uniform, and may be made selectively among persons who are eligible to
receive Awards under the Plan, whether such persons are similarly situated. All
interpretations, decisions, or determinations made by the Committee pursuant to
the Plan shall be final and conclusive.
SECTION 4. PARTICIPANTS. Participants will consist of such key employees
(including officers) of the Company or any of its present or future
subsidiaries as the Committee, in its sole discretion, determines
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to be mainly responsible for the success and future growth and profitability of
the Company and whom the Committee may designate from time to time to receive
Awards under the Plan. Awards may be granted under this Plan to persons who have
previously received Awards or other benefits under this or other plans of the
Company.
SECTION 5. AWARDS. Awards may consist of Common Stock transferred to
Participants, subject to restrictions as described in Section 6, as additional
compensation for service rendered to the Company without any other payment
therefor provided that the value of the Common Stock awarded by the Committee to
any Participant in a calendar year shall not exceed $1,000,000. The Committee
also may make Awards in the form of stock options, stock appreciation rights,
performance awards, or any combination of the foregoing provided that the
Committee shall not award rights or options to purchase more than 100,000 shares
to any Participant in a calendar year. Awards granted under the Plan in any
calendar year cannot exceed one percent (1%) of the number of outstanding shares
of Common Stock at the end of the previous calendar year. Solely for the purpose
of computing the number of shares of Common Stock granted under this Plan, there
shall not be counted any shares that have been forfeited. The stock awarded may
be previously unissued or stock repurchased by the Company for purposes of this
Plan as designated by the Board of Directors. If there is any change in the
outstanding Common Stock by reason of a stock dividend or distribution, stock
split-up, recapitalization, combination or exchange of shares, or by reason of
merger, consolidation or other corporate reorganization in which the Company is
the surviving corporation, the number of shares of Common Stock available for
Awards under the Plan shall be adjusted by the Committee to give proper effect
to such change.
SECTION 6. RESTRICTED STOCK.
(a) AWARDS. All Awards shall consist of restricted shares of Common Stock
granted pursuant to the Plan and shall entitle the Participant to
receive the shares of Common Stock, subject to forfeiture if specified
conditions are not satisfied, at the end of a specified period. The
shares of Common Stock awarded shall be subject to such terms and
conditions as the Committee shall from time to time approve; provided,
that each Award shall be subject to the requirements of this Section
6. Awards of restricted stock shall be determined by the Committee
utilizing performance goals based on one or more of the following:
earnings per share, market share, stock price, sales, costs, net
operating income, cash flow, retained earnings, return on equity,
total shareholder return, shareholder value analysis, results of
customer satisfaction surveys, aggregate product price and other
product price measures, safety record, service reliability,
demand-side management (including conservation and load management),
operating and maintenance cost management, energy production
availability, and individual performance measures; provided, that all
Performance Goals shall be objective performance goals satisfying the
requirements for "performance-based compensation" within the meaning
of Section 162(m)(4) of the Code. Such Performance Goals also may be
based on the attainment of specified levels of performance of the
Company and/or any Affiliates under one or more of the measures
described above relative to the performance of other corporations.
(b) RESTRICTED PERIOD. The Committee shall establish a period (the
"Restricted Period") of not less than one year nor more than five
years, commencing on the date of award, during which the Participant
will not be permitted to sell, transfer, pledge, encumber, or assign
the Common Stock subject to the Award. Within these limits, the
Committee may provide for the lapse of restrictions in installments or
upon the occurrence of certain events where deemed appropriate. Any
attempt by a Participant to dispose of restricted shares of Common
Stock in a manner contrary to the applicable restrictions shall be
void, and of no force and effect.
(c) RIGHTS DURING RESTRICTED PERIOD. Except to the extent otherwise
provided in this Section 6 or under the terms of any restricted stock
agreement during the Restricted Period, the Participant
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shall have all of the rights of a stockholder in the Company with
respect to the restricted shares of Common Stock, including the right
to vote the shares and to receive dividends and other distributions
with respect to the shares unless the Committee shall otherwise
determine; provided, that all stock dividends, stock rights, and stock
issued upon split-ups or reclassification of shares shall be subject
to the same restrictions as the rights, or additional stock are
issued, and may be held in custody as provided hereafter in this
Section 6 until the restrictions thereon shall have lapsed.
(d) FORFEITURES. Except to the extent otherwise provided in the restricted
stock agreement, if the Participant shall cease to be an employee of
the Company or any subsidiary, or if any condition established by the
Committee for the release of any restrictions shall not have occurred,
prior to the expiration of the Restricted Period, all shares of Common
Stock then subject to any restrictions shall be forfeited to the
Company without any further obligations of the Company to the
Participant, and all rights of the Participant with respect to such
shares shall terminate.
(e) CUSTODY. Restricted shares may be held in custody by the Company in an
account allocated to the Participant until restrictions applicable to
thereto have expired. The Committee may require that any certificates
evidencing restricted shares of Common Stock be held in custody by a
bank or other institution, or by the Company or any subsidiary, until
the restrictions thereon have lapsed. If any certificates are issued
for shares still subject to restrictions, the Participant awarded such
shares shall deliver to the Company a stock power, endorsed in blank,
relating to the restricted shares as a condition of receiving the
Award.
(f) CERTIFICATES. Subject to paragraph (e) above, if a recipient of
restricted shares pursuant to an Award shall be issued a certificate
or certificates evidencing the shares of Common Stock subject to the
restrictions provided as to the applicable Award, such certificates
shall bear an appropriate legend referring to the terms, conditions,
and restrictions applicable to the Award, which legend shall be
substantially in the following form:
"The transferability of this certificate and the
shares represented hereby are subject to the terms
and conditions (including forfeiture) of the
Northern States Power Company Executive Long-Term
Incentive Award Stock Plan and an Agreement
entered into between the registered owner and
Northern States Power Company, a Minnesota
corporation. Copies of such Plan and Agreement are
on file in the office of the Secretary, Northern
States Power Company, 414 Nicollet Mall,
Minneapolis, Minnesota."
(g) GIFT TO DEPENDENT. Notwithstanding any provision of this Section 6,
the Committee may permit a gift of restricted shares to the
Participant's spouse, child, stepchild, grandchild, or legal
dependent, or to a trust whose sole beneficiary or beneficiaries shall
be the Participant and/or any one or more of such persons; provided,
that the donee shall have entered into an agreement with the Company
pursuant to which the donee agrees that the restricted shares of
Common Stock shall be subject to the same restrictions as they were
prior to the donation by the Participant.
SECTION 7. STOCK OPTIONS. A stock option granted pursuant to the Plan shall
entitle the optionee, upon exercise, to purchase shares of Common Stock at a
specified price during a specified period. Such options will be "nonqualified"
for the purposes of Section 422A of the Internal Revenue Code. Options shall be
subject to such terms and conditions as the Committee shall from time to time
approve; provided, that each option shall be subject to the following
requirements:
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(a) TYPE OF OPTION. Each option shall be identified in the agreement
pursuant to which it is granted as a nonqualified option.
(b) TERM. No option shall be exercisable more than 121 months after the
date on which it is granted.
(c) PAYMENT. The purchase price of shares of Common Stock subject to an
option shall be payable in full at the time the option is exercised.
Payment may be made in cash, in shares of Common Stock having a fair
market value which is not less than the option price on the date of
exercise, or by a combination of cash and such shares, or any other
consideration in kind, including shares of restricted stock, as the
Committee may determine, and subject to such terms and conditions as
the Committee deems appropriate.
(d) OPTIONS NOT TRANSFERABLE. Options shall not be transferable except to
the extent permitted by the agreement evidencing such option;
provided, that in no event shall any option be transferable by the
optionee, other than by will or the laws of descent and distribution,
and shall be exercisable during an optionee's lifetime only by such
optionee. If, pursuant to the agreement evidencing any option, such
option remains exercisable after the optionee's death, to the extent
permitted by such agreement, it may be exercised by the personal
representative of the optionee's estate or by any person who acquired
the right to exercise such option by bequest, inheritance, or
otherwise by reason of the optionee's death. Subject to the foregoing,
options may be made exercisable in one or more installments, upon the
happening of certain events, upon the fulfillment of certain
conditions, or upon such other terms and conditions as the Committee
shall determine.
SECTION 8. STOCK APPRECIATION RIGHTS. A stock appreciation right granted
pursuant to the Plan shall entitle the holder, upon exercise, to receive a
payment equal to the amount by which the fair market value of one share of
Common Stock (as determined by the Committee) on the date the right is exercised
exceeds the "base amount" established by the Committee for such right on the
date it was granted. Stock appreciation rights shall be subject to such terms
and conditions as the Committee shall from time to time approve; provided, that
each right shall be subject to the following requirements:
(a) TYPE OF RIGHT. A stock appreciation right may be granted in tandem
with an option granted pursuant to the Plan, or as a "freestanding"
right not in tandem with an option.
(b) TANDEM RIGHTS. Any option granted in tandem with a stock appreciation
right shall become nonexercisable upon the exercise of the related
right, and any right granted in tandem with an option shall become
nonexercisable upon exercise of the related option. Shares of Common
Stock subject to an option which becomes nonexercisable by virtue of
the exercise of a tandem right shall not be available for subsequent
awards under the Plan.
(c) TERM. No stock appreciation right shall be exercisable more than 121
months after the date on which it is granted.
(d) PAYMENT. Any amount payable upon the exercise of a stock appreciation
right may be paid in cash, in shares of Common Stock having a fair
market value which is not more than the amount payable on the date of
exercise, or in a combination of cash and such shares, or any other
consideration in kind, including shares of restricted stock, as the
Committee, in its sole discretion, shall determine.
(e) RIGHTS NOT TRANSFERABLE. A stock appreciation right shall not be
transferable by the holder except to the extent permitted by the
agreement evidencing such right; provided, that in no event shall any
right be transferable by the holder, other than by will or the laws of
descent and distribution, and such right shall be exercisable during
the holder's lifetime only by the
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holder. If, pursuant to the agreement evidencing a stock appreciation
right, the right remains exercisable after the holder's death, to the
extent permitted by such agreement, it may be exercised by the
personal representative of the holder's estate or by any person who
acquired the right to exercise such right by bequest, inheritance, or
otherwise by reason of the holder's death.
Subject to the foregoing, stock appreciation rights may be made exercisable in
one or more installments, upon the happening of certain events, upon the
fulfillment of certain conditions, or upon such other terms and conditions as
the Committee shall determine.
SECTION 9. PERFORMANCE AWARDS. Performance Awards made pursuant to the Plan
shall entitle the recipient to receive future payments of cash or distributions
of shares of Common Stock upon the achievement of pre-established, long-term
performance goals. All performance Awards shall be evidenced by agreements in
such form as the Committee shall from time to time approve; provided, that each
Award shall be subject to the following requirements:
(a) PERFORMANCE PERIOD. The Committee shall establish with respect to each
performance Award a performance period of not fewer than one year, nor
more than five years.
(b) AMOUNT OF AWARDS. The Committee shall establish a value for each
performance Award, which value may be expressed in terms of specified
dollar amounts or a specified number of shares of Common Stock. Any
such value may be fixed or variable in accordance with criteria
specified by the Committee at the time of the Award provided that the
value of the performance Award awarded by the Committee to any
Participant in a calendar year shall not exceed $1,000,000.
(c) PERFORMANCE OBJECTIVES. The Committee shall establish performance
objectives to be achieved with respect to each performance Award
during the applicable performance period, determining the extent to
which an employee shall be entitled to distributions with respect to
such performance Award.
(d) PERFORMANCE MEASURES. Performance objectives established by the
Committee may relate to corporate, subsidiary, unit, or individual
performance or any combination thereof, and may be established in
terms of growth in gross or net earnings, earnings per share, ratio of
earnings to equity or assets, share value, or such other measures or
standards as the Committee shall determine. Multiple objectives may be
used which have the same or different weighting, and such objectives
may relate to absolute performance or to relative performance measured
against other companies or businesses, or against other subsidiaries,
units, or individuals.
(e) ADJUSTMENTS. At any time prior to the end of a performance period, the
Committee may adjust previously established performance objectives to
reflect major unforeseen events such as changes in applicable laws,
regulations, or accounting practices; mergers, acquisitions, or
divestitures; or other unusual or nonrecurring items of events.
(f) DISTRIBUTIONS WITH RESPECT TO AWARDS. Following the end of each
performance period, the Committee shall determine the extent to which
the performance objectives established for such period have been
achieved and the amounts of cash or number of shares of Common Stock,
if any, that are payable or distributable with respect to performance
Awards made with respect to each period. Payments with respect to
performance Awards may be made in cash or in shares (based on fair
market value at the time of the distribution), or in any combination
thereof, as the Committee shall determine. Such payments or
distributions may be made in a lump sum or in installments, and shall
be subject to such vesting, deferral or other terms and conditions as
the Committee may determine.
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(g) NONTRANSFERABILITY. Performance Awards granted under this Plan shall
not be assignable or otherwise transferable by the recipient,
otherwise than by will or the laws of descent and distribution, and
shall be payable during the recipient's lifetime, only to the
recipient.
SECTION 10. AGREEMENTS. Each Award granted pursuant to the Plan shall be
evidenced by an agreement setting forth the terms and conditions upon which it
is granted. Multiple Awards may be evidenced by a single agreement. Subject to
the limitations set forth in the Plan, the Committee may, with the consent of
the Participant to whom an Award has been granted, amend any such agreement to
modify the terms or conditions governing the Award evidenced thereby.
SECTION 11. ADJUSTMENTS. In the event of any change in the outstanding
shares of Common Stock by reason of any stock dividend or split,
recapitalization, reclassification, combination, or exchange of shares or other
similar corporate change, then if the Committee shall determine, in its sole
discretion, that such change necessarily or equitably requires an adjustment in
the number of shares of Common Stock subject to an Award, in the option price or
value of an Award, or in the maximum number of shares subject to this Plan, such
adjustments shall be made by the Committee and shall be conclusive and binding
for all purposes of this Plan. No adjustment shall be made in connection with
the issuance by the Company of any warrants, rights, or options to acquire
additional shares of Common Stock or of securities convertible into shares of
Common Stock.
SECTION 12. TENURE. A Participant's right, if any, to continue to serve the
Company or its subsidiaries as an officer, employee or otherwise, shall not be
enlarged or otherwise affected by the Participant's designation as a Participant
under the Plan.
SECTION 13. MERGER, CONSOLIDATION, REORGANIZATION, LIQUIDATION, ETC.
Subject to the provisions of the agreement evidencing any Award, if the Company
shall become a party to any corporate merger, consolidation, major acquisition
of property for stock, reorganization, or liquidation, the Board of Directors of
the Company shall have the power to make any arrangement it deems advisable with
respect to outstanding Awards and in the number of shares of Common Stock
subject to this Plan, which shall be binding for all purposes of this Plan,
including, but not limited to, the substitution of new Awards for any Awards
then outstanding, the assumption of any such Awards, and the termination of such
Awards. Notwithstanding any other provision of the Plan to the contrary, in the
event of a Change in Control:
(i) Any Stock Options and Stock Appreciation Rights outstanding as of
the date such Change in Control is determined to have occurred and not
then exercisable and vested shall become fully exercisable and vested
to the full extent of the original grant.
(ii) The restrictions applicable to any Restricted Stock shall lapse,
and such Restricted Stock shall become free of all restrictions and
become fully vested and transferable to the full extent of the
original grant.
(iii) All Performance Awards shall be considered to be earned and
payable in full and any other deferral or other restriction shall
lapse and such Performance Awards shall be settled in cash as promptly
as practicable.
"Change in Control" shall mean the happening of any of the following
events:
(a) An acquisition by an individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a
"Person") of beneficial ownership (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of either (1) the
then outstanding shares of common stock of the Company (the
"Outstanding Company Common Stock") or (2) the combined voting power
of the then outstanding voting securities of the
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Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); excluding, however, the
following: (i) any acquisition directly from the Company, other than
an acquisition by virtue of the exercise of a conversion privilege
unless the security being so converted was itself acquired directly
from the Company, (ii) any acquisition by the Company, (iii) any
acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any corporation controlled by the
Company or (iv) any acquisition by any corporation pursuant to a
transaction which complies with clauses (i), (ii) and (iii) of
subsection (b) of this definition; or
(b) The approval by the shareholders of the Company of a
reorganization, merger, consolidation, share exchange or sale or other
disposition of all or substantially all of the assets of the Company
("Corporate Transaction") or, if consummation of such Corporate
Transaction is subject, at the time of such approval by shareholders,
to the consent of any government or governmental agency, the obtaining
of such consent (either explicitly or implicitly by consummation);
excluding, however, such a Corporate Transaction pursuant to which (i)
all or substantially all of the individuals and entities who are the
beneficial owners, respectively, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to
such Corporate Transaction will beneficially own, directly or
indirectly, more than 60% of, respectively, the outstanding shares of
common stock, and the combined voting power of the then outstanding
voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such
Corporate Transaction (including, without limitation, a corporation
which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through
one or more subsidiaries) in substantially the same proportions as
their ownership, immediately prior to such Corporate Transaction, of
the Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be, (ii) no Person (other than the
Company, any employee benefit plan (or related trust) of the Company
or such corporation resulting from such Corporate Transaction) will
beneficially own, directly or indirectly, 20% or more of,
respectively, the outstanding shares of common stock of the
corporation resulting from such Corporate Transaction or the combined
voting power of the outstanding voting securities of such corporation
entitled to vote generally in the election of directors except to the
extent that such ownership existed prior to the Corporate Transaction
and (iii) individuals who were members of the board of directors of
the corporation resulting from such Corporate Transaction; or
(c) The approval by the shareholders of the Company of a complete
liquidation or dissolution of the company.
SECTION 14. EXPENSES OF PLAN. The expenses of administering this Plan
shall be borne by the Company and its subsidiaries.
SECTION 15. RIGHTS AS STOCKHOLDER. Except to the extent otherwise
specifically provided herein or in the agreement evidencing the Award, no
recipient of any Award shall have any rights as a stockholder with respect to
shares of Common Stock sold or issued pursuant to the Plan until certificates
for such shares have been issued to such person.
SECTION 16. GENERAL RESTRICTIONS. Each Award granted pursuant to the
Plan shall be subject to the requirement that if, in the opinion of the
Committee:
(a) the listing, registration, or qualification of any Common Stock
related thereto upon any securities exchange or any state or federal
law;
(b) the consent or approval of any regulatory body; or
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(c) an agreement by the recipient with respect to the disposition of any
such shares of Common Stock;
is necessary or desirable as a condition of the issuance or sale of such shares
of Common Stock, such Award shall not be consummated unless and until such
listing, registration, qualification, consent, approval, or agreement is
affected or obtained in form satisfactory to the Committee.
SECTION 17. WITHHOLDING. If the Company proposes or is required to
distribute shares of Common Stock pursuant to the Plan, it may require the
Participant to remit to it, or withhold from such Award or from the
participant's other compensation, an amount sufficient to satisfy any applicable
federal, state, or local tax withholding requirements prior to the delivery of
any certificates for such shares of Common Stock.
SECTION 18. AMENDMENTS. The Board of Directors of the Company may at any
time, and from time to time, amend or terminate the Plan provided, that no
amendment: (a) increasing the number of shares of Common Stock available for
Awards pursuant to the Plan previously established pursuant to shareholder
approval; (b) changing the classification of employees eligible to participate
in the Plan; or (c) materially increasing the benefits accruing to Participants
under the Plan; shall be made without approval by an affirmative vote of
shareholders representing at least the majority of the voting power at a duly
authorized meeting of shareholders if such affirmative vote is required as a
condition of continued exemption of the Plan under Securities and Exchange
Commission Rule 16b-3.
SECTION 19. SHAREHOLDER APPROVAL. This Agreement shall be submitted to the
shareholders of the Company for its approval by an affirmative vote of the
majority of the voting power at a meeting of the shareholders before
restrictions for any Award lapse. After initial approval, the Board of Directors
shall determine whether further submission is appropriate or necessary whenever
the Plan is amended, to satisfy Code Section 162(m), the Rules of the New York
Stock Exchange, regulatory or other legal requirements.
SECTION 20. EFFECTIVE DATE OF THE PLAN. This Plan shall be effective as
of January 1, 1998.
38
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EXHIBIT B
NORTHERN STATES POWER COMPANY
EXECUTIVE ANNUAL INCENTIVE AWARD PLAN
I
PURPOSE AND EFFECTIVE TIME
This Northern States Power Company ("Company") Executive Annual Incentive
Award Plan (the "Plan") is designed to provide a significant and flexible
economic opportunity to selected officers and employees of the Company and its
Affiliates as a reflection of their individual and group contributions to the
success of the Company and its Affiliates. Payments pursuant to Section IX of
the Plan are intended to qualify under Section 162(m)(4)(C) of the Internal
Revenue Code of 1986, as amended, as excluded from the term "applicable employee
remuneration" (such payments are hereinafter referred to as "Excluded Income").
The Plan shall be effective as of January 1, 1998, subject to the shareholder
approvals required by Section XII of the Plan for Covered Employees.
II
DEFINITIONS
"Affiliate" means (i) a corporation at least 50% of the common stock or
voting power of which is owned, directly or indirectly, by the Company and (ii)
any other corporation or other entity controlled by the Company and designated
by the Committee from time to time as such.
"Board" shall mean the Board of Directors of the Company.
"Change in Control" shall mean the happening of any of the following
events:
(a) An acquisition by an individual, entity or group (within the meaning of
Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act) of 20% or more of either (1) the then outstanding shares
of common stock of the Company (the "Outstanding Company Common Stock") or
(2) the combined voting power of the then outstanding voting securities of
the Company entitled to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); excluding, however, the
following: (i) any acquisition directly from the Company, other than an
acquisition by virtue of the exercise of a conversion privilege unless the
security being so converted was itself acquired directly from the Company,
(ii) any acquisition by the Company, (iii) any acquisition by any employee
benefit plan (or related trust) sponsored or maintained by the Company or
any corporation controlled by the Company or (iv) any acquisition by any
corporation pursuant to a transaction which complies with clauses (i), (ii)
and (iii) of subsection (b) of this definition; or
(b) The approval by the shareholders of the Company of a reorganization,
merger, consolidation, share exchange or sale or other disposition of all
or substantially all of the assets of the Company ("Corporate Transaction")
or, if consummation of such Corporate Transaction is subject, at the time
of such approval by shareholders, to the consent of any government or
governmental agency, the obtaining of such consent (either explicitly or
implicitly by consummation); excluding, however, such a Corporate
Transaction pursuant to which (i) all or substantially all of the
individuals and entities who are the beneficial owners, respectively, of
the Outstanding Company Common Stock
39
<PAGE>
and Outstanding Company Voting Securities immediately prior to such
Corporate Transaction will beneficially own, directly or indirectly, more
than 60% of, respectively, the outstanding shares of common stock, and the
combined voting power of the then outstanding voting securities entitled to
vote generally in the election of directors, as the case may be, of the
corporation resulting from such Corporate Transaction (including, without
limitation, a corporation which as a result of such transaction owns the
Company or all or substantially all of the Company's assets either directly
or through one or more subsidiaries) in substantially the same proportions
as their ownership, immediately prior to such Corporate Transaction, of the
Outstanding Company Common Stock and Outstanding Company Voting Securities,
as the case may be, (ii) no Person (other than the Company, any employee
benefit plan (or related trust) of the Company or such corporation
resulting from such Corporate Transaction) will beneficially own, directly
or indirectly, 20% or more of, respectively, the outstanding shares of
common stock of the corporation resulting from such Corporate Transaction
or the combined voting power of the outstanding voting securities of such
corporation entitled to vote generally in the election of directors except
to the extent that such ownership existed prior to the Corporate
Transaction and (iii) individuals who were members of the board of
directors of the corporation resulting from such Corporate Transaction; or
(c) The approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Committee" shall mean the Corporate Management Committee of the Board, or
such other committee of the Board as the Board may from time to time determine,
which, except as specifically decided otherwise by the Board, is composed solely
of not less than two Disinterested Persons, each of whom shall be appointed by
and serve at the pleasure of the Board.
"Company" shall mean Northern States Power Company, a Minnesota
corporation.
"Covered Employees" shall mean the Participants designated by the Committee
prior to the award of an Incentive Award opportunity hereunder who are or are
expected to be "covered employees" within the meaning of Section 162(m)(3) of
the Code for the Incentive Period as to which an Incentive Award hereunder is
payable and for whom the Committee intends that amounts payable hereunder
constitute Excluded Income.
"Disinterested Person" shall mean a member of the Board who qualifies as an
"outside director" for purposes of Section 162(m) of the Code.
"Incentive Award" shall mean a cash award payable to a Participant pursuant
to the terms of the Plan, including a Special Incentive Award.
"Incentive Period" shall mean the period with respect to which a
Participant is eligible to earn an Incentive Award.
"Participant" shall have the meaning set forth in Article IV hereof.
"Payment Date" shall mean the date following the conclusion of a particular
Incentive Period on which the Committee certifies that applicable Performance
Goals have been satisfied and authorizes payment of corresponding Incentive
Awards.
"Performance Goals" shall have the meaning set forth in Article IX hereof.
"Special Incentive Award" shall have the meaning set forth in Article IX
hereof.
40
<PAGE>
"Target Incentive Award" shall mean the amount determined by multiplying a
Participant's base salary as of the last day of the applicable Incentive Period
by a percentage designated by the Committee in its sole discretion at the time
the award is granted, which percentage need not be the same for each
Participant.
III
ADMINISTRATION
The Plan shall be administered by the Committee. In administering the Plan,
the Committee may at its option employ compensation consultants, accountants and
counsel (who may be the compensation consultants, independent auditors and
outside counsel of the Company or an Affiliate) and other persons to assist or
render advice to the Committee, all at the expense of the Company. The Committee
shall have the sole authority to make rules and regulations relating to the
administration of the Plan, and any interpretations and decisions of the
Committee with respect to the Plan shall be final and binding.
IV
ELIGIBILITY
The Committee shall, in its sole discretion, determine for each Incentive
Period those officers and salaried employees of the Company and its Affiliates
who shall be eligible to participate in the Plan (the "Participants") for such
Incentive Period based upon such Participants' opportunity to have a substantial
impact on the operating results of the Company or an Affiliate. Nothing
contained in the Plan shall be construed as or be evidence of any contract of
employment with any Participant for a term of any length nor shall participation
in the Plan in any Incentive Period by any Participant require continued
participation by such Participant in any subsequent Incentive Period.
V
DETERMINATION OF INCENTIVE AWARDS
Subject to Article IX hereof, the amount and terms of each Incentive Award
to a Participant shall be determined by and in the discretion of the Committee.
The Committee may condition the earning of an Incentive Award upon the
attainment of specified Performance Goals, measured over a period ending no
later than the end of the applicable Incentive Period. Such performance goals
may relate to the Participant or the Company, or any Affiliate, division or
department of the Company for or within which the Participant is primarily
employed, or upon such other factors or criteria as the Committee shall
determine, and may be different for each Participant. Incentive Awards payable
under the Plan will consist of a cash award from the Company, based upon a
percentage (which may exceed 100%) of the Target Incentive Award and, if
applicable, the degree of achievement of such performance goals. Incentive
Awards under this Plan for Covered Employees shall be subject to preestablished
Performance Goals in accordance with Article IX hereof. Except with respect to
Covered Employees, the Committee may, in its sole discretion, increase or
decrease the amount of any Incentive Award payable to a Participant and, in
recognition of changed or special circumstances, may award Incentive Awards to
Participants even though the Incentive Awards are not earned. Incentive Awards
earned or otherwise awarded will be paid as soon as administratively feasible on
or after the Payment Date.
VI
TERMINATION OF EMPLOYMENT
In the event that a Participant's employment with the Company and its
Affiliates terminates for any reason during the Incentive Period with respect to
any Incentive Awards, the balance of any Incentive
41
<PAGE>
Award which remains unpaid at the time of such termination shall be payable to
the Participant, or forfeited by the Participant, in accordance with the terms
of the award granted by the Committee; provided, however, that in the case of a
Covered Employee, no amount shall be payable pursuant to the Plan unless the
Performance Goals are satisfied or the termination of employment of the Covered
Employee is due to death or disability. A Participant who remains employed
through the Incentive Period, but is terminated prior to the Payment Date, shall
be entitled to receive any Incentive Award payable to such Participant with
respect to such Incentive Period.
VII
AMENDMENT AND DISCONTINUANCE
The Board shall have the right to amend, alter, discontinue or otherwise
modify the Plan from time to time but no such modification shall, without the
consent of the Participant affected, impair any award made prior to the
effective date of the modification.
VIII
MISCELLANEOUS
It is presently intended that the Plan constitute an "unfunded" plan for
incentive and deferred compensation. The Committee may authorize the creation of
trusts or other arrangements to meet the payment obligations created under the
Plan; provided, however, that, unless the Committee otherwise determines, the
existence of such trusts or other arrangements is consistent with the "unfunded"
status of the Plan. The Plan shall be governed by and construed in accordance
with the laws of the State of Minnesota.
IX
PROCEDURES FOR CERTAIN DESIGNATED PARTICIPANTS
Incentive Awards under the Plan to Participants who are Covered Employees
shall be subject to preestablished Performance Goals as set forth herein.
Notwithstanding Article V hereof, the Committee shall not have the discretion to
modify the terms of awards to such Participants except as specifically set forth
in this Article IX.
(a) TARGET BONUS. On or before the 90th day of each Incentive Period, and
in any event before 25% or more of the Incentive Period has elapsed, the
Committee shall establish in writing specific Performance Goals for the
Incentive Period, upon the attainment of which will be conditioned the payment
of Incentive Awards ("Special Incentive Awards") to such of the Participants who
may be Covered Employees. A Special Incentive Award shall consist of a cash
award from the Company to be based upon a percentage (which may exceed 100%) of
a Target Incentive Award. The extent, if any, to which a Special Incentive Award
will be payable will be based upon the degree of achievement of preestablished
Performance Goals over a specified Incentive Period; provided, however, that the
Committee may, in its sole discretion, reduce the amount which would otherwise
be payable with respect to an Incentive Period.
(b) INCENTIVE PERIOD. The Incentive Period will be a period of up to twelve
months, unless a shorter period is otherwise selected and established in writing
by the Committee at the time the Performance Goals are established with respect
to such Incentive Period.
42
<PAGE>
(c) PERFORMANCE GOALS. The Performance Goals established by the Committee
at the time a Special Incentive Award is granted will be based on one or more of
the following: earnings per share, market share, stock price, sales, costs, net
operating income, cash flow, retained earnings, return on equity, total
shareholder return, shareholder value analysis, results of customer satisfaction
surveys, aggregate product price and other product price measures, safety
record, service reliability, demand-side management (including conservation and
load management), operating and maintenance cost management, energy production
availability, and individual performance measures; provided, that all
Performance Goals shall be objective performance goals satisfying the
requirements for "performance-based compensation" within the meaning of Section
162(m)(4) of the Code. Such Performance Goals also may be based on the
attainment of specified levels of performance of the Company and/or any
Affiliates under one or more of the measures described above relative to the
performance of other corporations.
(d) PAYMENT OF AN INCENTIVE AWARD. At the time the Special Incentive Award
is granted, the Committee shall prescribe a formula to determine the percentage
of the Target Incentive Award which may be payable based upon the degree of
attainment of the Performance Goals during the Incentive Period. If the minimum
Performance Goals established by the Committee are not met, no payment will be
made to a Participant who is a Covered Employee. To the extent that the minimum
Performance Goals are satisfied or surpassed, and upon written certification by
the Committee that the Performance Goals have been satisfied to a particular
extent and any other material terms and conditions of the Special Incentive
Awards have been satisfied, payment shall be made on the Payment Date in
accordance with the prescribed formula based upon a percentage of the Target
Incentive Award unless the Committee determines, in its sole discretion, to
reduce the payment to be made.
(e) MAXIMUM PAYABLE. The maximum amount payable to a Covered Employee under
this Plan for any calendar year of the Company pursuant to this Plan shall be
$1,000,000.
X
CHANGE IN CONTROL
Notwithstanding any other provision of this Plan, (i) upon a Change in
Control, each Participant who is employed by the Company or an Affiliate
immediately before the Change in Control shall be entitled to receive a payment
equal to his or her Target Incentive Award for the Incentive Period that
includes the date of the Change in Control, and (ii) any additional Incentive
Award that becomes payable to such a Participant for that Incentive Period shall
be reduced (but not below zero) by the amount of the payment made to such
Participant pursuant to clause (i) of this Article X.
XI
DEFERRAL ELECTIONS
The Committee may at its option establish procedures pursuant to which
Participants are permitted to defer the receipt of Incentive Awards payable
hereunder.
XII
SHAREHOLDER APPROVAL
This Plan shall not become effective with respect to individuals who are
Covered Employees unless it shall have been approved by the affirmative vote of
a majority of the total voting power of the shares of common stock and preferred
stock of Northern States Power Company present in person or by proxy and
entitled to vote thereon.
43
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Northern States Power Company, a Minnesota corporation (the Company), has two
significant subsidiaries: Northern States Power Company, a Wisconsin corporation
(the Wisconsin Company), and NRG Energy, Inc., a Delaware corporation (NRG). The
Company also has several other subsidiaries, including Viking Gas Transmission
Company (Viking), Energy Masters International, Inc. (EMI), which changed its
name from Cenerprise, Inc., effective Sept. 1, 1997, and Eloigne Company
(Eloigne). The Company and its subsidiaries collectively are referred to herein
as NSP.
FINANCIAL OBJECTIVES AND RESULTS
NSP's financial objectives are:
* TO PROVIDE INVESTOR RETURNS IN THE TOP ONE-FOURTH OF THE UTILITY
INDUSTRY AS MEASURED BY A THREE-YEAR AVERAGE RETURN ON EQUITY. NSP's
average return on common equity for the three years ending in 1997 was
12.0 percent. Based on a three-year average, this return places NSP
below the top one-fourth of the industry, which was approximately 12.7
percent, and above the median three-year industry average of
approximately 11.3 percent. The total return to investors (measured by
dividends plus stock price appreciation) on NSP common stock for the
most recent five-year period averaged 12.4 percent per year. For the
same period, the total return for the electric industry averaged 10.7
percent. NSP's stock price rose 27.0 percent over the year, well above
the 22.1 percent average increase of other utilities rated AA by
Standard & Poor's (S&P).
* TO INCREASE DIVIDENDS ON A REGULAR BASIS AND MAINTAIN A LONG-TERM
AVERAGE PAYOUT RATIO IN THE RANGE OF 65 TO 75 PERCENT. NSP has
increased its dividend for 23 consecutive years. In June 1997, NSP's
annualized common dividend rate was increased by 6 cents per share, or
2.2 percent, from $2.76 to $2.82. The dividend payout ratio was 89.4
percent in 1997, above the objective range due to the unusual events
that adversely affected NSP's earnings in 1997. (See discussion under
Results of Operations.) The objective payout ratio is based on
long-term earnings expectations.
* TO MAINTAIN LONG-TERM AVERAGE ANNUAL EARNINGS PER SHARE GROWTH OF 5
PERCENT FROM ONGOING OPERATIONS, AS DESCRIBED BELOW. Excluding the
nonrecurring items discussed later under Factors Affecting Results of
Operations, NSP's earnings per share have grown by an average annual
rate of 4.1 percent since 1993.
1997 1996 1995
---------------------------------------------------------------------------
EARNINGS PER SHARE FROM ONGOING OPERATIONS $3.54 $3.82 $3.69
Earnings (losses) from nonrecurring items (.33) 0.22
---------------------------------------------------------------------------
Total earnings per share $3.21 $3.82 $3.91
===========================================================================
* TO PROVIDE AT LEAST 20 PERCENT OF NSP EARNINGS FROM NRG BUSINESSES BY
THE YEAR 2000. NRG expects to meet this goal through the growing
profitability of existing businesses and the addition of new
businesses. Businesses owned by NRG provided 39 cents, or 11 percent,
of NSP's earnings per share from ongoing operations in 1997, and 29
cents, or 7.6 percent, of NSP's earnings per share from ongoing
operations in 1996.
* TO MAINTAIN CONTINUED FINANCIAL STRENGTH WITH A AA RATING FOR UTILITY
BONDS. The Company's first mortgage bonds continued to be rated AA by
Fitch Investors Service, Inc. In October 1997, S&P's raised NSP's bond
rating to AA, as a part of an industry re-evaluation. In July 1997,
Moody's Investors Services (Moody's) upgraded its rating on NSP's first
mortgage bonds to Aa3. Moody's rating action reflects NSP's progress in
satisfying legislative requirements associated with spent-fuel storage
at Prairie Island and various other factors. Moody's also cited NSP's
healthy competitive position and strong financial condition. Duff &
Phelps, Inc. raised the Company's bond rating to AA in February 1998.
First mortgage bonds issued by the Wisconsin Company carry comparable
ratings. NSP's pretax interest coverage ratio for utility operations,
based on income excluding Allowance for Funds Used During Construction
(AFC), was 3.5 in 1997. A capital structure consisting of 46.7 percent
common equity at year-end 1997 contributes to NSP's financial
flexibility and strength.
<PAGE>
BUSINESS STRATEGIES
NSP's mission is to be a recognized leader in the energy industry by increasing
the value provided to our customers with energy-related products and services.
We will utilize the skills and talents of our people to thrive in a dynamic and
competitive energy environment that provides increased value for our customers
and shareholders and significant growth opportunities for our company.
Strategies to achieve this mission include:
* EXCEEDING CUSTOMER REQUIREMENTS. Anticipate and exceed customer
requirements by balancing costs, benefits and expectations to maximize
value for each customer.
* IMPROVE COMPETITIVENESS. Achieve and maintain best quartile status in
the service and price of providing our electric and gas products.
* SUPPORT EMPLOYEES. Gain competitive advantage by fully utilizing the
diversity, skills and talents of our people.
* SUPPORT THE COMMUNITY AND THE ENVIRONMENT. Preserve and enhance NSP's
name and reputation by protecting the environment and helping to meet
the social and economic needs of the community, thereby contributing to
the growth of the community and creating support for our business
requirements.
* GROW THE BUSINESS PROFITABLY. Build on our core businesses,
subsidiaries and strategic acquisitions to profitably grow our company,
enhance shareholder value and excel in a dynamic industry environment.
FINANCIAL REVIEW
The following discussion and analysis by management focuses on those factors
that had a material effect on NSP's financial condition and results of
operations during 1997 and 1996. It should be read in conjunction with the
accompanying Financial Statements and Notes thereto. Trends and contingencies of
a material nature are discussed to the extent known and considered relevant.
Material changes in balance sheet items are discussed below and in the
accompanying Notes to Financial Statements.
Except for the historical information 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; the items
discussed under "Factors Affecting Results of Operations"; and the other risk
factors listed from time to time by the Company in reports filed with the
Securities and Exchange Commission (SEC), including Exhibit 99.01 to the
Company's 1997 report on Form 10-K.
<PAGE>
RESULTS OF OPERATIONS
1997 COMPARED WITH 1996 AND 1995
NSP's 1997 earnings per share from ongoing operations (assuming dilution) were
$3.54, down 28 cents, or 7.3 percent, from the $3.82 earned in 1996 and down 15
cents, or 4.1 percent, from the $3.69 earned in 1995. NSP's total earnings per
share (assuming dilution), including nonrecurring transactions in 1997 and 1995
(as discussed later), were $3.21 in 1997, $3.82 in 1996 and $3.91 in 1995.
Nonrecurring transactions in 1997 include the write-off of costs incurred prior
to the termination of NSP's proposed merger with Wisconsin Energy Corporation
(WEC) and NRG's write-down of a cogeneration project.
Regulated utility businesses generated earnings of $3.24 per share from ongoing
operations in 1997, $3.58 in 1996 and $3.41 in 1995. Earnings from ongoing
regulated operations were lower in 1997, primarily due to higher utility
operations, maintenance and depreciation expenses, the impacts of less favorable
weather, and dilutive effects of stock issuances. Partially offsetting these
earnings decreases were growth in electric sales and reduced administrative
costs.
Nonregulated businesses generated earnings from ongoing operations of 30 cents
per share in 1997, 24 cents in 1996 and 28 cents in 1995. Nonregulated earnings
increased in 1997 primarily due to higher NRG earnings from new projects,
including tax credits. Increased financing costs at NRG and losses incurred by
EMI partially offset these increases.
UTILITY OPERATING RESULTS
ELECTRIC REVENUES Sales to retail customers, which account for more than 90
percent of NSP's electric revenue, increased 1.5 percent in 1997 and 1.0 percent
in 1996. Sales in 1997 included unfavorable weather impacts compared with normal
average temperatures, and sales in 1996 and 1995 included favorable weather
impacts compared with normal average temperatures, with the retail sales impact
for 1996 being less favorable than it was in 1995. Total electric sales volumes
increased 0.6 percent in 1997 and decreased 3.0 percent in 1996. Lower sales
volumes to other utilities in 1997 and 1996 and the loss of several municipal
power customers in 1995 and 1996 partially offset the retail sales growth in
1997 and contributed to the 1996 decrease.
On a weather-adjusted basis, retail electric sales volumes are estimated to have
increased 2.6 percent in 1997 and 1.5 percent in 1996. Retail electric sales
growth for 1998 is estimated to be 2.0 percent over 1997, or 1.5 percent, on a
weather-adjusted basis.
Sales volumes to other utilities decreased 5.2 percent in 1997, while revenues
increased in 1997 (as shown in the following table). Constraints on NSP's system
due to unscheduled plant outages and storms (as discussed later) contributed to
the decrease in volumes in 1997, while higher market prices due to market
conditions contributed to the revenue increase in 1997. Market conditions and
regional transmission system constraints contributed to the sales decrease in
1996.
The table below summarizes the principal reasons for the electric revenue
changes during the past two years:
(Millions of dollars) 1997 VS. 1996 1996 vs. 1995
- - --------------------------------------------------------------------------------
Retail sales growth (excluding weather impacts) $47 $ 29
Estimated impact of weather on retail sales volume (23) (15)
Sales to other utilities 14 (20)
Municipal power sales (6) (15)
Conservation cost recovery 10 13
Fuel cost recovery 31 (10)
Other rate changes (1) (5)
Transmission and other electric revenues 19 8
- - --------------------------------------------------------------------------------
Total revenue increase (decrease) $91 $(15)
================================================================================
<PAGE>
ELECTRIC PRODUCTION EXPENSES Fuel expense for electric generation in 1997
increased $8.8 million, or 2.9 percent, compared with a decrease of $24.5
million, or 7.5 percent, in 1996. The 1997 increase is primarily due to higher
average fossil fuel prices, mainly reflecting the increased use of higher-cost
plants due to plant outages and transmission line and plant limitations, as
discussed later. In 1997, management decided to take the Company's Monticello
nuclear generating plant, a baseload plant, out of service to accelerate
implementation of a design change originally planned for 1998. In addition,
during the summer of 1997, portions of transmission lines connecting two of
NSP's baseload generating plants, the Monticello nuclear and Sherco fossil
plants, to the Minneapolis-St. Paul metro area were damaged by storms. Until
repairs were completed later in 1997, the Company's generating and transmission
capabilities were temporarily reduced. As a result, NSP increased generation at
its more expensive peaking plants and purchased more power to meet 1997 sales
requirements. The 1996 decrease was primarily due to lower average fuel costs
resulting from a new coal transportation contract in July 1995, and lower plant
output caused by decreased electric sales, planned maintenance outages and
conversion of two plants to peaking status.
Purchased power costs increased $42.7 million, or 17.5 percent, in 1997 after
decreasing $4.1 million, or 1.7 percent, in 1996. The 1997 increase was
primarily due to higher purchases, higher average market prices and higher
demand expenses. The higher purchases were a result of lower plant availability
due to the unplanned nuclear plant outage and storms, as discussed previously,
and higher 1997 sales requirements. The 1996 decrease primarily was due to lower
demand expenses.
GAS REVENUES The majority of NSP's retail gas sales are categorized as firm
(primarily heating customers) and interruptible (commercial/industrial customers
with an alternate energy supply). Firm sales in 1997 decreased 10.8 percent
compared with 1996 sales, while firm sales in 1996 increased 13.2 percent
compared with 1995 sales. The decrease in 1997 was primarily due to the impacts
of favorable weather in 1996 and unfavorable weather in 1997, partially offset
by sales growth. The increase in 1996 primarily was due to strong sales growth
and favorable impacts of weather.
On a weather-adjusted basis, firm gas sales are estimated to have increased 2.2
percent in 1997 and increased 5.1 percent in 1996. The firm sales increase in
1997 was partially offset by lost gas sales as a result of flooding in the Grand
Forks area. Firm gas sales in 1998 are estimated to be 7.0 percent higher
compared with 1997 sales, or 3.3 percent higher on a weather-adjusted basis.
Interruptible sales of gas increased 11.6 percent in 1997 and 3.6 percent in
1996. The increases in both years are the result of favorable gas market prices
compared with alternate fuels that caused large interruptible customers with
alternate fuel sources to use more natural gas. Other gas deliveries, including
Viking sales, increased 0.6 percent in 1997 and 5.3 percent in 1996. Viking gas
transmission deliveries to parties other than NSP increased 4.8 percent in 1997
and 7.7 percent in 1996.
The table below summarizes the principal reasons for the gas revenue changes
during the past two years:
(Millions of dollars) 1997 VS. 1996 1996 vs. 1995
- - --------------------------------------------------------------------------------
Sales growth (excluding weather impacts) $13 $ 25
Estimated impact of weather on firm sales volume (41) 13
Purchased gas adjustment clause recovery 28 52
Conservation cost recovery and other rate changes (1) 6
Transportation and other (11) 5
- - --------------------------------------------------------------------------------
Total revenue increase (decrease) $(12) $101
================================================================================
COST OF GAS PURCHASED AND TRANSPORTED The cost of gas purchased and transported
decreased $4.2 million, or 1.2 percent, in 1997, primarily due to lower gas
sendout partially offset by a 6.7 percent increase in the per unit cost of
purchased gas. The lower sendout reflects decreased gas sales, as discussed
previously, while the increase in cost per unit of purchased gas, occurring
mainly in the first quarter of 1997, reflects changes in market conditions. The
cost of gas purchased and transported increased $78.7 million, or 30.6 percent,
in 1996, primarily due to a 20.5 percent increase in the per unit cost of
purchased gas and higher gas sendout. The increase in gas sendout reflects
increased gas sales, while the increase in cost per unit of purchased gas
reflects changes in market conditions.
<PAGE>
OTHER OPERATION, MAINTENANCE AND ADMINISTRATIVE AND GENERAL These expenses, in
total, increased by $37.4 million, or 5.9 percent, in 1997, compared with a
decrease of $24.9 million, or 3.8 percent, in 1996. The higher costs in 1997 are
primarily due to increased operating expenses associated with 1997 business
interruptions, higher customer service expenses, increased network transmission
service (NTS) costs, as discussed under Factors Affecting Results of Operations,
higher scheduled plant maintenance outage expenses and higher technology
improvement expenses. Business interruptions in 1997 included flooding in the
Company's service area, the unscheduled Monticello plant outage and storm damage
to transmission lines. Technology improvements included development of customer
information, automated meter reading and other systems, including preparation
for the year 2000. These cost increases were partially offset by a $6.9 million
decrease in administrative and general expenses, reflecting decreases in
insurance and employee benefit costs.
The lower costs in 1996 largely are due to lower administrative and general
costs, partly offset by higher scheduled plant maintenance outage expenses and
provisions for uncollectible accounts. Administrative and general expenses in
1996 reflect fewer employees and decreases in insurance and claims, employee
benefit and other corporate costs. (See Note 8 to the Financial Statements for a
summary of administrative and general expenses.)
CONSERVATION AND ENERGY MANAGEMENT Expenses increased in both 1997 and 1996
mainly due to higher amortization levels of deferred electric and gas
conservation and energy management program costs. Higher cost levels in 1996
also include the effects of expensing currently (rather than amortizing over a
period of time) new conservation expenditures beginning in 1996. These higher
amortization and cost levels are recovered concurrently through retail rate
adjustment clauses in the Company's Minnesota jurisdiction, which are discussed
later under Factors Affecting Results of Operations.
DEPRECIATION AND AMORTIZATION The increases in 1997 and 1996 reflect higher
levels of depreciable plant, including new information systems and equipment in
1997 and 1996 with relatively short useful lives. Information technology
improvements are expected to continue in 1998.
PROPERTY AND GENERAL TAXES Property and general taxes decreased in 1997 and
1996, primarily due to lower property tax rates partially offset by increases
due to property additions.
UTILITY INCOME TAXES The variations in income taxes primarily are attributable
to fluctuations in taxable income and changes to effective tax rates. (See Note
7 to the Financial Statements for a detailed reconciliation of the statutory tax
rate to NSP's effective tax rate.)
NONOPERATING ITEMS RELATED TO UTILITY BUSINESSES
MERGER COSTS In May 1997, NSP and WEC mutually terminated their plans to merge.
NSP's earnings for 1997 include a pretax charge to nonoperating expense of $29
million, or 25 cents per share, to write off its cumulative merger-related costs
incurred. This charge is being reported as a nonrecurring item outside of
earnings from ongoing operations.
UTILITY FINANCING COSTS Interest costs recognized for NSP's utility businesses,
including amounts capitalized to reflect the financing costs of construction
activities, were $120.3 million in 1997, $123.1 million in 1996 and $123.4
million in 1995. The 1997 decrease is due primarily to lower average short-term
borrowing levels, and the retirement of $100 million of first mortgage bonds in
October 1997. The slight 1996 decrease is largely due to lower interest costs on
variable rate long-term debt, partially offset by higher average short-term
borrowing levels. The average short-term debt balance was $208.3 million in
1997, $265.4 million in 1996 and $208.7 million in 1995. In addition to interest
expense, beginning in 1997, financing costs of NSP's utility businesses include
distributions on redeemable preferred securities.
<PAGE>
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 energy sales and service. NSP
also has investments in affordable housing projects through Eloigne and several
income-producing properties through other subsidiaries. Due to the nature of
these nonregulated businesses, NSP anticipates that the earnings from
nonregulated operations will experience more variability than regulated utility
businesses. As discussed below and shown in Note 8 to the Financial Statements,
NSP's nonregulated earnings for these periods are experiencing such variability.
The following summarizes the earnings contributions of NSP's nonregulated
businesses:
CONTRIBUTION TO NSP'S EARNINGS PER SHARE
1997 1996 1995
- - --------------------------------------------------------------------------------
NRG:
Ongoing operations $0.39 $0.29 $0.24
Nonrecurring items (0.08) 0.00 0.22
Eloigne 0.06 0.05 0.02
EMI (0.15) (0.12) (0.02)
Seren Innovations (0.02) .00 .00
Other (1) 0.02 0.02 0.04
- - -------------------------------------------------------------------------------
Total $0.22 $0.24 $0.50
===============================================================================
(1) Includes NSP-owned refuse-derived fuel operations managed by NRG
NRG
NRG's earnings from ongoing operations (excluding the nonrecurring transaction
discussed later) increased in 1997, compared with 1996, primarily due to income
from new projects, including tax credits. New projects contributing to NRG's
earnings increase include: Bolivian Power Company Ltd. (COBEE); Pacific
Generation Company (PGC); the Schkopau power generating facility in Germany,
which began operation in July 1996; and the Australian State of Victoria's Loy
Yang A power plant in which NRG, through affiliates, purchased a 25.37 percent
interest in May 1997. NRG's landfill gas subsidiary, NEO, has entered into
projects in 1996 and 1997 that are generating higher levels of energy tax
credits. Also contributing to NRG's increased earnings were the gains on the
sale of equity interests in two projects late in 1997. Higher interest costs due
to the $250 million senior notes issued in mid-1997 partially offset the
increased earnings. NRG's earnings in 1997 were adversely affected by declines
in the value of the Australian dollar and German deutsche mark in relation to
the U.S. dollar. Had exchange rates throughout 1997 stayed the same as the
beginning of the year, NRG's 1997 earnings would have been higher by
approximately 4 cents per share.
As of year-end 1997, NRG and its partner's effort to restructure the debt of the
58-megawatt Sunnyside cogeneration project in Utah was not successful. Due to a
lack of progress in restructuring the project's debt, NRG recorded a
nonrecurring expense of 8 cents per share to write down its investment in the
Sunnyside project late in 1997. This write-down reduced income from nonregulated
businesses before interest and taxes by $9 million for 1997 and is considered a
nonrecurring item.
Excluding the nonrecurring items discussed later, NRG's earnings from ongoing
operations increased in 1996, compared with 1995, due primarily to higher equity
in earnings of projects. Equity in earnings of projects increased in 1996,
primarily due to first-time earnings from Schkopau and NRG Generating (U.S.)
Inc. and higher income from Scudder Latin American Power Projects. These
earnings were partially offset by lower equity earnings from the MIBRAG project.
Equity in earnings from MIBRAG decreased, primarily due to an expected decline
in heating briquette and coal sales. NRG's earnings from ongoing operations were
higher in 1996, as compared with 1995, despite experiencing an increased level
of business development costs in 1996 as it pursued several international and
domestic projects. Until there is substantial assurance that a project in
development will come to financial closure, such costs are expensed.
NRG's earnings for 1995 included two nonrecurring items that added 22 cents to
1995 earnings. A gain of approximately 26 cents per share was recorded for a
power sales contract termination settlement, which was partially offset by a
domestic energy project write-down of 4 cents per share.
Further information on NRG's financial results may be obtained from NRG's annual
report on Form 10-K filed with the SEC.
<PAGE>
EMI
EMI's losses for 1997 were higher than 1996, primarily due to losses incurred by
EMI's gas marketing joint venture, Enerval, the partial write-down of EMI's
investment in Enerval, and increased expenses related to combining operations
with Energy Solutions International, Inc. (ESI) and Energy Masters Corporation
(EMC), both purchased by EMI in July 1997. These increased losses were partially
offset by increased operating margins, primarily due to the curtailment of gas
trading activity in the second quarter of 1996, which had negatively impacted
operating margins during the first half of 1996. EMI is currently in the process
of evaluating proposals for the sale of its interest in Enerval and expects to
finalize the sale during the first quarter of 1998. EMI's investment in and
advances to Enerval have been written down to an estimate of their net
realizable value.
EMI's earnings for 1996 decreased, compared with 1995, largely due to price
volatility in the gas market, which adversely affected earnings from Enerval,
and losses incurred from the gas trading business.
OTHER
Eloigne's earnings have continued to grow in 1997 and 1996 due to investments in
new affordable housing projects. NSP's new communications and data services
subsidiary, Seren Innovations, experienced a loss in its first year, 1997, as it
focused on development of its products and services.
FACTORS AFFECTING RESULTS OF OPERATIONS
NSP's results of operations during 1997, 1996 and 1995 primarily were dependent
upon the operations of the Company's and Wisconsin Company's utility businesses,
consisting of the generation, transmission, distribution and sale of
electricity, and the distribution, transportation and sale of natural gas. NSP's
utility revenues depend on customer usage, which varies with weather conditions,
general business conditions, the state of the economy and the cost of energy
services. Various regulatory agencies approve the prices for electric and gas
service within their respective jurisdictions. In addition, NSP's nonregulated
businesses are contributing to NSP's earnings. The historical and future trends
of NSP's operating results have been and are expected to be affected by the
following factors:
REGULATION NSP's utility rates are approved by the Federal Energy Regulatory
Commission (FERC) and state regulatory commissions in Minnesota, North Dakota,
South Dakota, Wisconsin and Michigan. Rates are designed to recover plant
investment and operating costs and an allowed return on investment, using an
annual period upon which rate case filings are based. NSP requests changes in
rates for utility services as needed through filings with the governing
commissions. The rates charged to retail customers in Wisconsin are reviewed and
adjusted biennially. Because comprehensive rate changes are not requested
annually in Minnesota, NSP's primary jurisdiction, changes in operating costs
can affect NSP's earnings, shareholders' equity and other financial results.
Except for Wisconsin electric operations, NSP's retail rate schedules provide
for cost-of-energy and resource adjustments to billings and revenues for changes
in the cost of fuel for electric generation, purchased energy, purchased gas,
and, in Minnesota, conservation and energy management program costs. For
Wisconsin electric operations, where cost-of-energy adjustment clauses are not
used, the biennial retail rate review process and an interim fuel cost hearing
process provide the opportunity for rate recovery of changes in electric fuel
and purchased energy costs in lieu of a cost-of-energy adjustment clause. In
addition to changes in operating costs, other factors affecting rate filings are
sales growth, conservation and demand-side management efforts and the cost of
capital.
As discussed in Note 1 to the Financial Statements, regulated public utilities
are allowed to record as assets certain costs that would be expensed by
nonregulated enterprises, and to record as liabilities certain gains that would
be recognized as income by nonregulated enterprises. If deregulation or other
changes in the regulatory environment occur, NSP may no longer be eligible to
apply this accounting treatment and may be required to eliminate such regulatory
assets and liabilities from its balance sheet. Such changes could have a
material adverse effect on NSP's results of operations in the period the
write-off is recorded. At Dec. 31, 1997, NSP reported on its balance sheet
approximately $212 million and $129 million of regulatory assets and
liabilities, respectively, that would need to be recognized in the income
statement in the absence of regulation. Included in these regulatory assets are
$87 million of conservation expenditures that are anticipated to be
substantially recovered by the year 2000 based on accelerated recovery available
through resource adjustment clauses to customer rates, as discussed previously.
In addition to a potential write-off of regulatory assets and liabilities,
deregulation and competition (as discussed later) may require recognition of
certain "stranded costs" not recoverable under market pricing. NSP currently is
<PAGE>
recovering its costs in all regulated jurisdictions and does not expect to write
off to expense any "stranded costs" unless and until market price levels change,
or unless cost levels increase above market price levels.
RATE FILINGS On Dec. 2, 1997, the Company filed a natural gas rate case seeking
an annual rate increase of approximately $18.5 million for retail customers in
Minnesota. An interim rate increase totaling $13.9 million on an annual basis
has been approved, subject to refund, effective Feb. 1, 1998.
On Nov. 14, 1997, the Wisconsin Company filed retail electric and natural gas
rate cases for Wisconsin customers requesting that the rate changes become
effective during the second quarter of 1998. The Wisconsin Company is seeking an
annual increase in retail electric rates of approximately $12.7 million and an
annual decrease in retail natural gas rates of approximately $1.7 million.
On February 17, 1998, NSP filed a rate application with the FERC to update its
rates for point to point transmission service. As filed, the proposed rates
increase annual transmission revenues by approximately $4 million. In addition,
the filing is expected to support reductions in NSP's NTS costs, as discussed
later.
COMPETITION The Energy Policy Act of 1992 (the Act) has been a catalyst for
comprehensive and significant changes in the operation of electric utilities,
including increased competition. The Act's reform of the Public Utility Holding
Company Act of 1935 (PUHCA) promoted creation of wholesale nonutility power
generators and authorized the FERC to require utilities to provide wholesale
transmission services to third parties. The legislation allows utilities and
nonregulated companies to build, own and operate power plants nationally and
internationally without being subject to restrictions that previously applied to
utilities under the PUHCA. NSP plans to continue its efforts to be a
competitively priced supplier of electricity and an active participant in the
competitive market for electricity.
In 1996, the FERC issued Orders No. 888 and 889, which have had a significant
impact on wholesale electric markets by giving competitors the ability to
transmit electricity through utilities' transmission systems. Order No. 888
granted nondiscriminatory access to transmission service. Order No. 889 ensures
a fair market by imposing standards of conduct on transmission system owners, by
requiring separation of the wholesale power supply ("merchant") function from
the transmission system operation function and by mandating the posting of
transmission availability and pricing information on an electronic bulletin
board. These new open access rules became effective in 1996 and 1997. In 1997,
the FERC issued clarifying final orders in response to rehearing requests by
numerous market participants regarding Orders No. 888 and 889. These FERC
clarifying final orders are currently being appealed in federal court. NSP has
made transmission filings with the FERC and believes it is taking the proper
steps to comply with the new rules as they become effective. NSP continues to be
generally supportive of the FERC's efforts to increase competition.
In compliance with FERC Orders No. 888 and 889, NSP has separated personnel who
perform the merchant function, which includes power and energy marketing and
trading, from personnel who perform the transmission system operation function.
In 1997, NSP's merchant function, NSP Energy Marketing, expanded its power
trading to focus on new market opportunities created by open transmission
access. NSP is also developing risk management practices to respond to the
rapidly growing electric commodity market. In addition, a significant effort was
put forth in 1997 to enter current and all new requests for transmission service
into the electronic bulletin board, as directed by FERC Order No. 889 and
supported by NSP.
The FERC Order No. 888 requires utilities to offer, among other services,
Network Transmission Service (NTS) to qualifying customers. Under NTS, NSP and
other qualifying regional utilities share the total annual costs of operating
and maintaining the regional transmission network that NSP uses, net of related
network revenues, based on each company's share of the total network load. The
transmission tariff filed with the FERC is used as the cost basis for
FERC-regulated utilities in determining NTS rates. In 1997, NSP conducted a
review of information received from other participating utilities and commenced
settlement negotiations with these utilities regarding the final amount of NTS
costs to be paid by NSP for 1997. Based on this review and discussion, NSP
concluded that its net NTS costs for 1997 were less than the $27 million
previously estimated. NSP recorded a liability for what management believes is a
reasonable estimate of the net NTS costs for 1997. NSP expects that its
transmission tariff filing and settlement negotiations will result in lower NTS
costs in 1998.
Some states have begun to allow retail customers to choose their electricity
supplier, and many other states are considering retail access proposals. NSP
believes that retail competition will result in more innovative services and
<PAGE>
lower prices for all consumers if the transition is managed in a thoughtful
manner. NSP supports fair and equal treatment for all competitors, recovery of
utilities' investments made under traditional regulation and a resolution of
property tax issues. NSP supports a plan that would take two or three years to
resolve these issues and develop infrastructure, and another two to three years
to phase in customers' choice. In 1997, the Minnesota Public Utilities
Commission (MPUC) approved a report by its staff that identifies issues that
must be resolved before retail competition can begin, but did not approve an
action plan or schedule for its implementation. The Minnesota Legislature began
studying the issues in 1997 and concluded that another year of study was
necessary before any action could be taken. The Public Service Commission of
Wisconsin (PSCW) revised its restructuring plan, delaying the start of retail
competition another year to 2002. The Michigan Public Service Commission (MPSC)
approved a plan to begin offering a choice of suppliers to retail customers in
selected markets in 1998. That plan was unsuccessfully challenged by the
affected Michigan utilities, and the courts upheld the MPSC's authority to
implement retail competition. The timing of regulatory actions regarding
restructuring and their impact on NSP cannot be predicted at this time and may
be significant.
USED NUCLEAR FUEL STORAGE AND DISPOSAL In 1994, NSP received legislative
authorization from the state of Minnesota for the use of 17 casks for temporary
spent-fuel storage at the Company's Prairie Island nuclear generating facility.
Based on assumptions in the original Certificate of Need granted by the MPUC,
the Company previously estimated that 17 casks would allow operation of the
Prairie Island facility to continue to 2003. After review of the 1994
legislative authorization which amends the Certificate of Need, and through the
use of longer fuel cycles, the Company has determined 17 casks will allow
operation of the facility until 2007. The first nine casks have been authorized
by the Minnesota Environmental Quality Board (MEQB). The Company had loaded
seven of the casks as of Dec. 31, 1997. As a condition of the authorization, the
Minnesota Legislature established several resource commitments for the Company,
including wind and biomass generation sources, as well as other requirements.
The Company has taken steps to fulfill these requirements. The MEQB has
terminated an alternative siting process, which had been one of the original
legislative requirements.
Regarding permanent fuel storage, in 1996 the Company and other utilities were
successful in a lawsuit against the U.S. Department of Energy (DOE) to compel it
to fulfill its statutory and contractual obligations to store and dispose of
used nuclear fuel as required by the Nuclear Waste Policy Act of 1982. In
January 1997, the Company, other utility parties and state parties filed another
lawsuit against the DOE, requesting authority to withhold payments to the DOE
for the permanent disposal program. In April 1997, the parties filed for
additional relief, asking the U.S. Court of Appeals for the District of Columbia
(the Court) to order the DOE to take spent nuclear fuel by Jan. 31, 1998. In
November, 1997, the Court, in a unanimous ruling, reiterated the unconditional
obligation for the DOE to begin acceptance of spent nuclear fuel by Jan. 31,
1998. The Court confirmed this obligation exists under both the statute and the
standard contract; however, the Court denied the Company's request for an order
directing the DOE to accept spent nuclear fuel by the Jan. 31, 1998 date in the
standard contract, finding that the contractual remedies under the standard
contract, i.e., damages, may be adequate. The Court also held that the DOE
cannot use its own delays or the unavailability of a permanent disposal or
temporary storage facility as defense to utilities' actions for damages.
In its November 1997 decision, the Court did not discuss the request to escrow
payments to the Nuclear Waste Fund. In December 1997, the DOE petitioned the
Court for rehearing. Based on the Court's ruling, NSP and other utilities are
currently analyzing claims against the DOE for the costs incurred as a result of
the DOE's failure to meet its statutory and contractual obligations. However, it
is still unknown when the DOE actually will begin accepting used fuel.
Consequently, the Company continues to rely on interim on-site storage
facilities. Also, the Company is part of a consortium to establish a private
facility for interim storage of used nuclear fuel, the availability of which is
uncertain at this time. (See Notes 13 and 14 to the Financial Statements for
more information.)
TECHNOLOGY CHANGES FOR THE YEAR 2000 Like many other companies, 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 the year 2000. A committee made up of senior
management is leading NSP's initiatives to identify year 2000 related issues and
remediate business processes as necessary in 1998. Testing of computer software
modifications and other remediated processes is scheduled for 1999. NSP is also
working with major suppliers so that NSP does not experience business
interruptions due to year 2000 issues in the suppliers' business processes. The
amount of additional development and remediation costs necessary after 1997 for
NSP to prepare for the year
<PAGE>
2000 is estimated to be approximately $20 million, expected mainly in 1998. In
1997 and 1996, NSP expensed approximately $2.3 million and $0.6 million,
respectively, for this modification effort.
ENVIRONMENTAL MATTERS NSP incurs several types of environmental costs, including
nuclear plant decommissioning, storage and ultimate disposal of used nuclear
fuel, disposal of hazardous materials and wastes, remediation of contaminated
sites and monitoring of discharges into the environment. Because of the
continuing trend toward greater environmental awareness and increasingly
stringent regulation, NSP has been experiencing a trend toward increasing
environmental costs. This trend has caused, and may continue to cause, slightly
higher operating expenses and capital expenditures for environmental compliance.
In addition to nuclear decommissioning and used nuclear fuel disposal expenses
(as discussed in Note 13 to the Financial Statements), costs charged to NSP's
operating expenses for environmental monitoring and disposal of hazardous
materials and wastes were approximately $31 million in 1997, $31 million in 1996
and $26 million in 1995, and are expected to average approximately $35 million
per year for the five-year period 1998-2002. However, the precise timing and
amount of environmental costs, including those for site remediation and disposal
of hazardous materials, are currently unknown. In each of the years 1997, 1996
and 1995, the Company spent about $19 million, $10 million and $13 million,
respectively, for capital expenditures on environmental improvements at its
utility facilities. In 1998, the Company expects to incur approximately $18
million in capital expenditures for compliance with environmental regulations
and approximately $142 million for the five-year period 1998-2002. These capital
expenditure amounts include the costs of constructing used nuclear fuel storage
casks. (See Notes 13 and 14 to the Financial Statements for further discussion
of these and other environmental contingencies that could affect NSP.)
WEATHER NSP's earnings can be significantly affected by unusual weather. In
1997, warmer-than-normal weather late in the year decreased earnings over a
normal year by an estimated 11 cents per share. In 1996, colder-than-normal
weather during the heating season increased earnings over a normal year by an
estimated 16 cents per share. In 1995, unusual weather, mainly a hot summer,
increased earnings over a normal year by an estimated 21 cents per share. The
effect of weather is considered part of NSP's ongoing business operations.
IMPACT OF NONREGULATED INVESTMENTS A significant portion of NSP's earnings comes
from nonregulated operations, as discussed in the Results of Operations section.
NSP expects to continue investing in nonregulated projects, including domestic
and international power production projects through NRG, as described under
Future Financing Requirements. The nonregulated projects in which NRG has
invested carry a higher level of risk than NSP's traditional utility businesses.
Current investments in nonregulated projects are subject to competition,
operating risks, dependence on certain suppliers and customers, and domestic and
foreign environmental and energy regulations. Nonregulated project investments
also may be subject to partnership and government actions and foreign
government, political, economic and currency risks. Future nonregulated projects
will be subject to development risks, including uncertainties prior to final
legal closing, in addition to some or all of the previously identified risks.
Most of NRG's current project investments (as listed in Note 10 to the Financial
Statements) consist of minority interests, and a substantial portion of future
investments may take the form of minority interests, which may limit NRG's
financial risk and ability to control the development or operation of the
projects. In addition, significant expenses may be incurred for projects pursued
by NRG that do not materialize. The aggregate effect of these factors creates
the potential for volatility in the nonregulated component of NSP's earnings.
Accordingly, the historical operating results of NSP's nonregulated businesses
may not necessarily be indicative of future operating results.
ACCOUNTING CHANGES The Financial Accounting Standards Board (FASB) has proposed
new accounting standards that would require the full accrual of nuclear plant
decommissioning and certain other site exit obligations. Material adjustments to
NSP's balance sheet would occur upon implementation of the FASB's proposal,
which does not currently have a scheduled effective date. However, the effects
of regulation are expected to minimize or eliminate any impact on operating
expenses and earnings from this future accounting change. (For further
discussion of the expected impact of this change, see Note 13 to the Financial
Statements.)
USE OF DERIVATIVES Through its nonregulated subsidiaries, NSP uses derivative
financial instruments to mitigate the impact of changes in foreign currency
exchange rates and natural gas prices, and changes in interest rates on the cost
of borrowing. Also, to mitigate the interest rate risk associated with fixed
rate debt in a declining interest rate environment, NSP uses interest rate swap
agreements to convert fixed rate debt to variable rate debt. (See Notes 1 and 11
to the Financial Statements for further discussion of NSP's financial
instruments and derivatives.)
<PAGE>
NONRECURRING ITEMS NSP's earnings for 1997 include two significant unusual or
infrequently occurring items. As discussed previously, NSP recorded a
nonrecurring charge of $29 million, or 25 cents per share, to write off costs
previously deferred as a result of the proposed merger with WEC. Also, as
discussed in the Nonregulated Business Results section, NRG wrote down a
cogeneration project, reducing income from nonregulated businesses before
interest and taxes by $9 million, or 8 cents per share.
NSP's earnings for 1995 include two significant unusual or infrequently
occurring items. As discussed in the Nonregulated Business Results section, NRG
recognized a pretax gain of approximately $30 million, or 26 cents per share,
from a power sales contract termination settlement. Partially offsetting this
gain was an asset impairment write-down of $5 million before taxes, or 4 cents
per share, for a nonregulated domestic energy project.
INFLATION Inflation at its current level is not expected to materially affect
NSP's prices to customers or returns to shareholders.
LIQUIDITY AND CAPITAL RESOURCES
1997 FINANCING REQUIREMENTS NSP's need for capital funds primarily is related to
the construction of plant and equipment to meet the needs of electric and gas
utility customers and to fund equity commitments or other investments in
nonregulated businesses. Total NSP utility capital expenditures (including AFC)
were $397 million in 1997. Of that amount, $305 million related to replacements
and improvements of NSP's electric system and nuclear fuel, and $72 million
involved construction of natural gas distribution and transmission facilities.
NSP companies invested approximately $591 million in 1997 for equity interests
in and loans to nonregulated projects, for the acquisition of existing
businesses and for additions to nonregulated property. NRG invested in many
energy projects in 1997, including the $149 million purchase of PGC, and several
equity investments, the largest of which are listed in Note 10 to the Financial
Statements. Eloigne invested in affordable housing projects, including wholly
owned properties and limited partnership ventures.
1997 FINANCING ACTIVITY During 1997, NSP's sources of capital included
internally generated funds and external financings, as discussed later. The
allocation of financing requirements between these capital resources is based on
the relative cost of each resource, regulatory restrictions and the constraints
of NSP's long-range capital structure objectives.
Funds generated internally from operating cash flows in 1997 remained sufficient
to meet working capital needs, debt service, dividend payout requirements and
nonregulated investment commitments, as well as to fund a significant portion of
construction expenditures. NSP's objective pretax interest coverage ratio for
utility operations is 3.5 - 5.0. The utility pretax interest coverage ratio,
excluding AFC, was 3.6 in 1997, 4.4 in 1996, and 4.1 in 1995, which falls within
the objective range. Internally generated funds from utility operations could
have provided financing for more than 100 percent of NSP's utility capital
expenditures for 1997 and approximately 90 percent of the $1.9 billion in
utility capital expenditures incurred for the five-year period 1993-1997. The
pretax interest coverage ratio, excluding AFC, for all NSP operations was 2.8 in
1997, 3.7 in 1996 and 3.8 in 1995. The 1997 decline in the coverage ratio is due
to the unusual events that adversely affected NSP's earnings in 1997, as
discussed previously in the Results of Operations section, and issuance of new
debt by NRG, as discussed later.
NSP had approximately $260 million in short-term borrowings, including $122
million related to NRG, outstanding as of Dec. 31, 1997. Throughout 1997, the
Company used short-term borrowings to temporarily finance a portion of utility
capital expenditures and provide for other cash needs. NRG's line of credit
borrowings were used for the acquisition of PGC and other corporate purposes.
In the utility businesses, during 1997 NSP issued $200 million of 7.875 percent
preferred securities through a wholly owned special purpose subsidiary trust and
used the proceeds to redeem two preferred stock issues and reduce short-term
debt levels. The Company also collateralized $188 million of outstanding
pollution control bonds under its first mortgage indenture, and Viking issued
$14 million of long-term debt to finance an expansion project.
NSP's 1997 business acquisition, equity investments in nonregulated projects,
and construction expenditures were primarily financed through internally
generated funds and the issuance of debt by nonregulated subsidiaries. NRG
issued $250 million of 7.5 percent unsecured publicly traded Senior Notes in
1997 to support equity requirements for projects currently under way and in
development. The Senior Notes were assigned ratings of BBB- by S&P and
<PAGE>
Baa3 by Moody's. Project financing requirements, in excess of equity
contributions from investors, were satisfied with project debt and loans from
NSP's nonregulated businesses (mainly NRG). Project debt associated with many of
NSP's nonregulated investments is not reflected in NSP's balance sheet because
the equity method of accounting is used for such investments. (See Note 10 to
the Financial Statements.) Loans made by NSP to nonregulated projects are
reflected separately on the balance sheet as Notes Receivable from Nonregulated
Projects.
During 1997, the Company issued 5.6 million shares of common stock. Of these
shares, 4.9 million were sold to a group of underwriters in September 1997 at an
offering price to the public of $49.5625 per share. The net proceeds to the
Company of $237 million were used for general corporate purposes, including the
retirement of $100 million of first mortgage bonds that matured Oct. 1, 1997,
expenditures for the Company's construction program and the repayment of
short-term borrowings. Of the remaining new shares, 0.3 million were issued
under the Dividend Reinvestment and Stock Purchase Plan (DRSPP), 0.2 million
were issued under the Employee Stock Ownership Plan (ESOP) and 0.2 million were
issued under the Executive Long-Term Incentive Award Stock Plan.
FUTURE FINANCING REQUIREMENTS Utility financing requirements for 1998-2002 may
be affected in varying degrees by numerous factors, including load growth,
changes in capital expenditure levels, rate changes allowed by regulatory
agencies, new legislation, market entry of competing electric power generators,
changes in environmental regulations and other regulatory requirements. NSP
currently estimates that its utility capital expenditures will be $441 million
in 1998 and $2.1 billion for the five-year period 1998-2002. Of the 1998 amount,
approximately $371 million is scheduled for electric utility facilities and
approximately $49 million for natural gas facilities, including Viking. Approval
of the $1.25 billion Viking Voyageur Project, a proposed natural gas
transmission pipeline, would increase the total gas expenditures approximately
$500 million for the five-year period 1998-2002, with yearly expenditures
dependent on FERC approval. In addition to utility capital expenditures,
expected financing requirements for the five-year period 1998-2002 include
approximately $606 million to retire long-term debt and fund principal
maturities.
Through its subsidiaries, NSP expects to invest significant amounts in
nonregulated projects in the future. Financing requirements for nonregulated
project investments will vary depending on the success, timing and level of
involvement in projects currently under consideration. NSP's potential capital
requirements for nonregulated projects and property are estimated to be
approximately $310 million in 1998 and approximately $940 million for the
five-year period 1998-2002. These amounts include commitments for NRG
investments, as discussed in Note 14 to the Financial Statements, and Eloigne
investments of up to $11 million annually in 1998-2002 for affordable housing
projects. In addition to the estimated potential investments in nonregulated
projects as disclosed above, NSP continues to evaluate opportunities to enhance
shareholder returns and achieve long-term financial objectives through
investments in projects or acquisitions of existing businesses. These
investments could cause significant changes to the capital requirement estimates
for nonregulated projects and property. Long-term nonregulated financing may be
required for such investments.
The Company also will have future financing requirements for the portion of
nuclear plant decommissioning costs not funded externally. Based on the most
recent decommissioning study approved by regulators, these amounts are
anticipated to be approximately $363 million, and are expected to be paid during
the years 2010 to 2022.
FUTURE SOURCES OF FINANCING NSP expects to obtain external capital for future
financing requirements by periodically issuing long-term debt, short-term debt,
common stock and preferred securities as needed to maintain desired
capitalization ratios. Over the long term, NSP's equity investments in
nonregulated projects are expected to be financed at the nonregulated subsidiary
level, from internally generated funds or the issuance of subsidiary debt.
Financing requirements for the nonregulated projects, in excess of equity
contributions from project investors, are expected to be fulfilled through
project or subsidiary debt. In addition, to provide additional capital to NRG,
NSP is considering the public offering of up to 20 percent equity ownership of
NRG in late 1998 or 1999. Eloigne expects to finance approximately 60 percent of
its estimated five-year investments in affordable housing projects with equity
and approximately 40 percent with long-term debt. Decommissioning expenses not
funded by an external trust are expected to be financed through a combination of
internally generated funds, long-term debt and common stock. The extent of
external financing to be required for nuclear decommissioning costs, as
discussed above, is unknown at this time.
NSP's ability to finance its utility construction program at a reasonable cost
and to provide for other capital needs depends on its ability to meet investors'
return expectations. Financing flexibility is enhanced by providing working
capital needs and a high percentage of total capital requirements from internal
sources, and having the ability to
<PAGE>
issue long-term securities and obtain short-term credit. NSP expects to maintain
adequate access to securities markets in 1998. Access to securities markets at a
reasonable cost is determined in large part by credit quality. The Company's
first mortgage bonds are currently rated AA by Standard & Poor's Corporation,
Aa3 by Moody's Investors Service, Inc., AA by Duff & Phelps, Inc., and AA by
Fitch Investors Service, Inc. Ratings for the Wisconsin Company's first mortgage
bonds are generally comparable. These ratings reflect the views of such
organizations, and an explanation of the significance of these ratings may be
obtained from each agency.
The Company's and the Wisconsin Company's first mortgage indentures limit the
amount of first mortgage bonds that may be issued. The MPUC and the PSCW have
jurisdiction over securities issuance. At Dec. 31, 1997, with an assumed
interest rate of 6.75 percent, the Company could have issued about $2.1 billion
of additional first mortgage bonds under its indenture, and the Wisconsin
Company could have issued about $351 million of additional first mortgage bonds
under its indenture.
The Company filed a shelf registration for first mortgage bonds with the SEC in
October 1995. Depending on capital market conditions, the Company expects to
issue the remaining $300 million of registered, but unissued, bonds over the
next several years to raise additional capital or redeem outstanding securities.
The Company's Board of Directors has approved short-term borrowing levels up to
10 percent of capitalization. The Company has received regulatory approval for
up to $575 million in short-term borrowing levels and plans to keep its credit
lines at or above its average level of commercial paper borrowings. Commercial
banks presently provide credit lines of $300 million to the Company and an
additional $245 million to subsidiaries of the Company, including a $175 million
unsecured revolving bank credit facility available to NRG. NSP credit lines make
short-term financing available in the form of bank loans, letters of credit and
support for commercial paper for utility operations.
The Company's Articles of Incorporation authorize the maximum amount of
preferred stock that may be issued. Under these provisions, the Company could
have issued all $500 million of its remaining authorized, but unissued,
preferred stock at Dec. 31, 1997, and remained in compliance with all interest
and dividend coverage requirements.
The Company's Articles of Incorporation authorize an additional 85.4 million
shares of common stock in excess of shares issued at Dec. 31, 1997. In 1996, the
Company filed a registration statement with the SEC to provide for the sale of
up to 1.6 million additional shares of new common stock under the Company's
DRSPP and Executive Long-Term Incentive Award Stock Plan. The Company may issue
new shares or purchase shares on the open market for its stock-based plans. (See
Note 3 to the Financial Statements for discussion of stock awards outstanding.)
The Company plans to issue new shares for its DRSPP, ESOP and Executive
Long-Term Incentive Award Stock plans in 1998. NSP currently has no plans for
any general offerings of common stock in 1998 or 1999.
Internally generated funds from utility operations are expected to equal
approximately 85 percent of anticipated utility capital expenditures for 1998
and approximately 95 percent of the $2.1 billion in anticipated utility capital
expenditures for the five-year period 1998-2002. Internally generated funds from
all operations are expected to equal approximately 60 percent and 85 percent of
the anticipated total capital requirements for 1998 and the five-year period
1998-2002, respectively. Because NSP has generally been reinvesting foreign cash
flows in operations outside the United States, the equity income from foreign
investments is not fully available to provide operating cash flows for domestic
cash requirements such as payment of NSP dividends, domestic capital
expenditures and domestic debt service. Through NRG, NSP is establishing a
diverse portfolio of foreign energy projects with varying levels of cash flows,
income and foreign taxation to allow maximum flexibility of foreign cash flows
in the future.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended Dec. 31
------------------------------------
(Thousands of dollars, except per share data) 1997 1996 1995
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UTILITY OPERATING REVENUES
Electric $2 218 550 $2 127 413 $2 142 770
Gas 515 196 526 793 425 814
- - ------------------------------------------------------------------------------------------------------------------
Total 2 733 746 2 654 206 2 568 584
- - ------------------------------------------------------------------------------------------------------------------
UTILITY OPERATING EXPENSES
Fuel for electric generation 309 999 301 201 325 652
Purchased and interchange power 286 239 243 562 247 699
Cost of gas purchased and transported 331 296 335 453 256 758
Other operation 368 545 333 010 318 015
Maintenance 164 542 155 830 158 203
Administrative and general 141 802 148 656 186 147
Conservation and energy management 70 939 69 784 53 466
Depreciation and amortization 325 880 306 432 290 184
Property and general taxes 227 893 232 824 239 433
Income taxes 144 855 161 410 147 148
- - ------------------------------------------------------------------------------------------------------------------
Total 2 371 990 2 288 162 2 222 705
- - ------------------------------------------------------------------------------------------------------------------
UTILITY OPERATING INCOME 361 756 366 044 345 879
- - ------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Income from nonregulated businesses - before interest and taxes 12 078 18 543 49 611
Allowance for funds used during construction---equity 6 401 7 595 6 794
Merger costs (29 005)
Other utility income (deductions)---net (2 886) (1 544) 1 481
Income taxes on nonregulated operations and nonoperating items 48 145 14 600 (5 080)
- - ------------------------------------------------------------------------------------------------------------------
Total 34 733 39 194 52 806
- - ------------------------------------------------------------------------------------------------------------------
INCOME BEFORE FINANCING COSTS 396 489 405 238 398 685
- - ------------------------------------------------------------------------------------------------------------------
FINANCING COSTS
Interest on utility long-term debt 101 250 101 177 103 298
Other utility interest and amortization 19 063 21 950 20 151
Nonregulated interest and amortization 34 627 18 834 9 879
Allowance for funds used during construction---debt (10 208) (11 262) (10 438)
- - ------------------------------------------------------------------------------------------------------------------
Total interest charges 144 732 130 699 122 890
Distributions on redeemable preferred securities of subsidiary trust 14 437
- - ------------------------------------------------------------------------------------------------------------------
Total Financing Costs 159 169 130 699 122 890
- - ------------------------------------------------------------------------------------------------------------------
NET INCOME 237 320 274 539 275 795
Preferred Stock Dividends 11 071 12 245 12 449
- - ------------------------------------------------------------------------------------------------------------------
Earnings Available for Common Stock $226 249 $262 294 $263 346
==================================================================================================================
Average Number of Common Shares Outstanding (000's) 70 297 68 561 67 323
Average Number of Common and Potentially Dilutive Shares Outstanding (000's)70 435 68 679 67 416
EARNINGS PER AVERAGE COMMON SHARE - BASIC $3.22 $3.83 $3.91
EARNINGS PER AVERAGE COMMON SHARE - ASSUMING DILUTION $3.21 $3.82 $3.91
Common Dividends Declared per Share $2.805 $2.745 $2.685
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended Dec. 31
------------------------------------
(Thousands of dollars) 1997 1996 1995
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $237 320 $274 539 $275 795
Adjustments to reconcile net income to cash from operating activities:
Depreciation and amortization 358 928 335 605 322 296
Nuclear fuel amortization 40 015 45 774 49 778
Deferred income taxes (5 902) (30 561) (11 076)
Deferred investment tax credits recognized (10 061) (9 352) (9 117)
Allowance for funds used during construction --- equity (6 401) (7 595) (6 794)
Undistributed equity in earnings of unconsolidated affiliates (5 364) (25 976) (24 305)
Undistributed equity in gain from nonregulated contract termination (17 565)
Write-off of prior year merger costs 25 289
Cash provided by (used for) changes in certain working capital items
(see below) 36 117 (58 634) (791)
Conservation program expenditures --- net of amortization (9 207) (2 854) (21 668)
Cash provided by changes in other assets and liabilities 29 051 23 518 17 234
- - -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 689 785 544 464 573 787
- - -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures:
Utility plant additions (including nuclear fuel) (396 605) (386 655) (386 022)
Additions to nonregulated property (35 928) (25 807) (14 984)
Increase (decrease) in construction payables 2 563 (3 716) (12 588)
Allowance for funds used during construction --- equity 6 401 7 595 6 794
Investment in external decommissioning fund (41 261) (40 497) (33 196)
Equity investments, loans and deposits for nonregulated projects (395 495) (299 173) (55 884)
Collection of loans made to nonregulated projects 87 128 116 126 1 766
Business acquisitions (159 600)
Other investments --- net (15 692) (15 873) (998)
- - -------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (948 489) (648 000) (495 112)
- - -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Change in short-term debt --- net issuances (repayments) (108 023) 152 173 (22 245)
Proceeds from issuance of long-term debt - net 299 779 197 824 277 174
Loan to ESOP (15 000)
Repayment of long-term debt, including reacquisition premiums (141 681) (67 628) (195 683)
Proceeds from issuance of preferred securities - net 193 315
Proceeds from issuance of common stock - net 267 965 41 725 56 185
Redemption of preferred stock, including reacquisition premiums (41 278)
Dividends paid (207 726) (198 234) (191 367)
- - -------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 262 351 125 860 (90 936)
- - -------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3 647 22 324 (12 261)
Cash and Cash Equivalents at Beginning of Period 51 118 28 794 41 055
- - -------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $54 765 $51 118 $28 794
===================================================================================================================
CASH PROVIDED BY (USED FOR) CHANGES IN CERTAIN WORKING CAPITAL ITEMS:
Customer accounts receivable and unbilled utility revenues $47 878 $(41 495) $(66 311)
Materials and supplies inventories (8 547) (9 891) 14 290
Payables and accrued liabilities (excluding construction payables) (7 342) 1 179 51 316
Other 4 128 (8 427) (86)
- - -------------------------------------------------------------------------------------------------------------------
Net $36 117 $(58 634) $(791)
===================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of amount capitalized) $144 062 $121 697 $113 705
Income taxes (net of refunds received) $113 009 $165 146 $131 452
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS Dec. 31
----------------------
(Thousands of dollars) 1997 1996
- - ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
UTILITY PLANT
Electric---including construction work in progress:
1997, $92,302; 1996, $132,705 $6 964 888 $6 766 896
Gas 821 119 750 449
Other 343 950 331 441
- - ---------------------------------------------------------------------------------------------------------------
Total 8 129 957 7 848 786
Accumulated provision for depreciation (3 868 810) (3 611 244)
Nuclear fuel---including amounts in process:
1997, $23,381; 1996, $6,916 932 335 892 484
Accumulated provision for amortization (832 162) (792 146)
- - ---------------------------------------------------------------------------------------------------------------
Net utility plant 4 361 320 4 337 880
- - ---------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 54 765 51 118
Customer accounts receivable --- net of accumulated provisions
for uncollectible accounts: 1997, $10,406; 1996, $10,195 269 455 288 330
Unbilled utility revenues 121 619 147 366
Notes receivable from nonregulated projects 55 787 5 753
Other receivables 80 803 77 571
Materials and supplies inventories---at average cost:
Fuel 56 434 45 013
Other 107 254 109 425
Prepayments and other 55 674 72 647
- - ---------------------------------------------------------------------------------------------------------------
Total current assets 801 791 797 223
- - ---------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Equity investments in nonregulated projects 740 734 409 729
External decommissioning fund and other investments 400 290 302 250
Regulatory assets 340 122 354 128
Nonregulated property---net of accumulated depreciation:
1997, $105,526; 1996, $93,320 256 726 192 790
Notes receivable from nonregulated projects 77 639 75 811
Other long-term receivables 42 600 63 684
Long-term prepayments and deferred charges 30 015 57 237
Intangible assets - net of accumulated amortization 92 829 46 168
- - ---------------------------------------------------------------------------------------------------------------
Total other assets 1 980 955 1 501 797
- - ---------------------------------------------------------------------------------------------------------------
TOTAL $7 144 066 $6 636 900
===============================================================================================================
LIABILITIES AND EQUITY
CAPITALIZATION
Common stockholders' equity $2 371 728 $2 135 880
Preferred stockholders' equity 200 340 240 469
Company obligated mandatorily redeemable preferred securities of subsidiary trust
holding as its sole asset junior subordinated deferrable debentures of the Company 200 000
Long-term debt 1 878 875 1 592 568
- - ---------------------------------------------------------------------------------------------------------------
Total capitalization 4 650 943 3 968 917
- - ---------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Long-term debt due within one year 22 820 119 618
Other long-term debt potentially due within one year 141 600 141 600
Short-term debt 260 352 368 367
Accounts payable 249 813 236 341
Taxes accrued 186 369 204 348
Interest accrued 28 724 34 722
Dividends payable on common and preferred stocks 54 778 50 409
Accrued payroll, vacation and other 89 562 80 995
- - ---------------------------------------------------------------------------------------------------------------
Total current liabilities 1 034 018 1 236 400
- - ---------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES
Deferred income taxes 792 569 804 342
Deferred investment tax credits 138 509 149 606
Regulatory liabilities 305 765 302 647
Postretirement and other benefit obligations 135 612 114 312
Other long-term obligations and deferred income 86 650 60 676
- - ---------------------------------------------------------------------------------------------------------------
Total other liabilities 1 459 105 1 431 583
- - ---------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (SEE NOTES 13 AND 14)
- - ---------------------------------------------------------------------------------------------------------------
TOTAL $7 144 066 $6 636 900
===============================================================================================================
</TABLE>
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
CUMULATIVE
CURRENCY
NUMBER OF RETAINED SHARES HELD TRANSLATION
(Dollar amounts in thousands) SHARES ISSUED PAR VALUE PREMIUM EARNINGS BY ESOP ADJUSTMENTS
- - -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DEC. 31, 1994 66 922 144 $167 305 $545 875 $1 183 191 $(2 990) $3 586
- - -------------------------------------------------------------------------------------------------------------------------
Net income 275 795
Dividends declared:
Cumulative preferred stock (12 450)
Common stock (180 510)
Issuances of common stock - net 1 253 790 3 135 53 050
Tax benefit from stock options exercised 169
Loan to ESOP to purchase shares (15 000)
Repayment of ESOP loan * 7 333
Currency translation adjustments (1 098)
- - -------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1995 68 175 934 $170 440 $599 094 $1 266 026 $(10 657) $2 488
- - -------------------------------------------------------------------------------------------------------------------------
Net income 274 539
Dividends declared:
Cumulative preferred stock (12 245)
Common stock (187 521)
Issuances of common stock - net 887 778 2 219 39 256
Tax benefit from stock options exercised 369
Loan to ESOP to purchase shares * (15 000)
Repayment of ESOP loan * 6 566
Currency translation adjustments 306
- - -------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1996 69 063 712 $172 659 $638 719 $1 340 799 $(19 091) $2 794
- - -------------------------------------------------------------------------------------------------------------------------
Net income 237 320
Dividends declared:
Cumulative preferred stock (9 923)
Common stock (202 173)
Premium on redeemed preferred stock (1,148)
Issuances of common stock - net 5 554 670 13 887 253 999
Tax benefit from stock options exercised 1 009
Repayment of ESOP loan * 8 558
Currency translation adjustments (65 681)
- - -------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1997 74 618 382 $186 546 $893 727 $1 364 875 $(10 533) $(62 887)
=========================================================================================================================
</TABLE>
* Did not affect NSP cash flows
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
Dec. 31
---------------------------
(Thousands of dollars) 1997 1996
- - -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKHOLDERS' EQUITY
Common stock---authorized 160,000,000 shares of $2.50 par value;
issued shares: 1997, 74,618,382; 1996, 69,063,712 $186 546 $172 659
Premium on common stock 893 727 638 719
Retained earnings 1 364 875 1 340 799
Leveraged common stock held by Employee Stock Ownership Plan (ESOP)
---shares at cost: 1997, 230,253; 1996, 381,313 (10 533) (19 091)
Currency translation adjustments---net (62 887) 2 794
- - -------------------------------------------------------------------------------------------------------------------
Total common stockholders' equity $2 371 728 $2 135 880
===================================================================================================================
CUMULATIVE PREFERRED STOCK---authorized 7,000,000 shares of $100 par value;
outstanding shares: 1997, 2,000,000; 1996, 2,400,000
Minnesota Company
$3.60 series, 275,000 shares $27 500 $27 500
4.08 series, 150,000 shares 15 000 15 000
4.10 series, 175,000 shares 17 500 17 500
4.11 series, 200,000 shares 20 000 20 000
4.16 series, 100,000 shares 10 000 10 000
4.56 series, 150,000 shares 15 000 15 000
6.80 series, 200,000 shares 20 000
7.00 series, 200,000 shares 20 000
Variable Rate series A, 300,000 shares 30 000 30 000
Variable Rate series B, 650,000 shares 65 000 65 000
- - -------------------------------------------------------------------------------------------------------------------
Total 200 000 240 000
Premium on preferred stock 340 469
- - -------------------------------------------------------------------------------------------------------------------
Total preferred stockholders' equity $200 340 $240 469
===================================================================================================================
MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST (See Note 2)
7 7/8% series, 8,000,000 shares, due Jan. 31, 2037 $200 000
===================================================================================================================
LONG-TERM DEBT
First Mortgage Bonds - Minnesota Company
Series due:
Oct. 1, 1997, 5 7/8% $100 000
Feb. 1, 1999, 5 1/2% $200 000 200 000
Dec. 1, 2000, 5 3/4% 100 000 100 000
Oct. 1, 2001, 7 7/8% 150 000 150 000
March 1, 2002, 7 3/8% 50 000 50 000
Feb. 1, 2003, 7 1/2% 50 000 50 000
April 1, 2003, 6 3/8% 80 000 80 000
Dec. 1, 2005, 6 1/8% 70 000 70 000
Dec. 1, 1996-2006, 6.65% 18 400** 19 800**
March 1, 2011, Variable Rate 13 700* 13 700*
July 1, 2025, 7 1/8% 250 000 250 000
April 1, 2007, 6.80% 60 000*
March 1, 2019, Variable Rate 27 900*
Sept. 1, 2019, Variable Rate 100 000*
- - -------------------------------------------------------------------------------------------------------------------
Total 1 170 000 1 083 500
Less redeemable bonds classified as current (See Note 5) (141 600) (13 700)
Less current maturities (1 500) (101 400)
- - -------------------------------------------------------------------------------------------------------------------
Net $1 026 900 $968 400
- - -------------------------------------------------------------------------------------------------------------------
</TABLE>
* POLLUTION CONTROL FINANCING
** RESOURCE RECOVERY FINANCING
See Notes to Financial Statements.
<PAGE>
<TABLE>
<CAPTION>
Dec. 31
-------------------------------
(Thousands of dollars) 1997 1996
- - --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM DEBT---CONTINUED
First Mortgage Bonds - Wisconsin Company
Series due:
Oct. 1, 2003, 5 3/4% $40 000 $40 000
March 1, 2023, 7 1/4% 110 000 110 000
Dec. 1, 2026, 7 3/8% 65 000 65 000
- - -------------------------------------------------------------------------------------------------------------------
Total 215 000 $215 000
- - -------------------------------------------------------------------------------------------------------------------
Guaranty Agreements---Minnesota Company
Series due:
Feb. 1, 1997 - 2003, 5.41% $5 300* $ 5 500*
May 1, 1997 - 2003, 5.70% 23 250* 23 750*
Feb. 1, 2003, 7.40% 3 500* 3 500*
- - -------------------------------------------------------------------------------------------------------------------
Total 32 050 32 750
Less current maturities (700) (700)
- - -------------------------------------------------------------------------------------------------------------------
Net $31 350 $32 050
- - -------------------------------------------------------------------------------------------------------------------
Other Long-Term Debt
City of Becker Pollution Control Revenue Bonds---Series due
Dec. 1, 2005, 7.25% $9 000* $ 9 000*
April 1, 2007, 6.80% 60 000*
March 1, 2019, Variable Rate 27 900*
Sept. 1, 2019, Variable Rate 100 000*
Anoka County Resource Recovery Bond---Series due
Dec. 1, 1997 - 2008, 7.09% 21 850** 23 050**
City of La Crosse Resource Recovery Bond---Series due
Nov. 1, 2021, 6% 18 600** 18 600**
Viking Gas Transmission Company Senior Notes---Series due
Oct. 31, 2008, 6.65% 23 111 25 244
Nov. 30, 2011, 7.1% 5 010 5 370
Sept. 30, 2012, 7.31% 13 767
NRG Energy, Inc. Senior Notes---Series due
Feb. 1, 2006, 7.625% 125 000 125 000
June 15, 2007, 7.5% 250 000
NRG Energy Center, Inc. (Minneapolis Energy Center) Senior Secured Notes---Series due
June 15, 2013, 7.31% 74 481 76 992
Pacific Generation Company debt due 2000-2007, 4.7% - 9.9% 33 424
Various NEO Corporation debt due Oct. 30, 2000, 6.9% - 9.4% 5 618
United Power & Land Notes due
March 31, 2000, 7.62% 6 875 7 708
Various Eloigne Company Affordable Housing Project Notes due
1997 - 2024, 1.0% - 9.9% 27 223 24 755
Employee Stock Ownership Plan Bank Loans due
1997 - 2003, Variable Rate 10 535 17 571
Miscellaneous 7 385 7 533
- - -------------------------------------------------------------------------------------------------------------------
Total 631 879 528 723
Less redeemable bonds classified as current (see Note 5) (127 900)
Less current maturities (20 620) (17 518)
- - -------------------------------------------------------------------------------------------------------------------
Net $611 259 $383 305
- - -------------------------------------------------------------------------------------------------------------------
Unamortized discount on long-term debt-net (5 634) (6 187)
- - -------------------------------------------------------------------------------------------------------------------
Total long-term debt $1 878 875 $1 592 568
===================================================================================================================
Total capitalization $4 650 943 $3 968 917
===================================================================================================================
</TABLE>
* POLLUTION CONTROL FINANCING
** RESOURCE RECOVERY FINANCING
See Notes to Financial Statements.
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
SYSTEM OF ACCOUNTS Northern States Power Company, a Minnesota corporation (the
Company), is predominantly a regulated public utility serving customers in
Minnesota, North Dakota and South Dakota. Northern States Power Company, a
Wisconsin corporation (the Wisconsin Company), a wholly owned subsidiary of the
Company, is a regulated public utility serving customers in Wisconsin and
Michigan. Another wholly owned subsidiary, Viking Gas Transmission Company
(Viking), is a regulated natural gas transmission company that operates a
500-mile interstate natural gas pipeline. Consequently, the Company, the
Wisconsin Company and Viking maintain accounting records in accordance with
either the uniform system of accounts prescribed by the Federal Energy
Regulatory Commission (FERC) or those prescribed by state regulatory
commissions, whose systems are the same in all material respects.
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include all
material companies in which the Company holds a controlling financial interest,
including: the Wisconsin Company; NRG Energy, Inc. (NRG); Viking; Energy Masters
International, Inc. (EMI), formerly Cenerprise, Inc.; and Eloigne Company
(Eloigne). The Company and its subsidiaries collectively are referred to herein
as NSP. As discussed in Note 10, NSP has investments in partnerships, joint
ventures and projects for which the equity method of accounting is applied.
Earnings from equity in international investments are recorded net of foreign
income taxes. All significant intercompany transactions and balances have been
eliminated in consolidation except for intercompany and intersegment profits for
sales among the electric and gas utility businesses of the Company, the
Wisconsin Company and Viking, which are allowed in utility rates.
REVENUES Revenues are recognized based on products and services provided to
customers each month. Because utility customer meters are read and billed on a
cycle basis, unbilled revenues (and related energy costs) are estimated and
recorded for services provided from the monthly meter-reading dates to
month-end.
The Company's rate schedules, applicable to substantially all of its utility
customers, include cost-of-energy and resource adjustment clauses, under which
rates are adjusted to reflect changes in average costs of fuels, purchased
energy, purchased gas and, in Minnesota, conservation and energy management
program costs. As ordered by its primary regulator, Wisconsin Company retail
rate schedules include a cost-of-energy adjustment clause for purchased gas but
not for electric fuel and purchased energy. For Wisconsin electric operations
where cost-of-energy adjustment clauses are not used, the biennial retail rate
review process and an interim fuel cost hearing process provide the opportunity
for rate recovery of changes in electric fuel and purchased energy costs in lieu
of a cost-of-energy adjustment.
UTILITY PLANT AND RETIREMENTS Utility plant is stated at original cost. The cost
of additions to utility plant includes direct labor and materials, contracted
work, allocable overhead costs and allowance for funds used during construction.
The cost of units of property retired, plus net removal cost, is charged to the
accumulated provision for depreciation and amortization. Maintenance and
replacement of items determined to be less than units of property are charged to
operating expenses.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFC) AFC, a noncash item, is
computed by applying a composite pretax rate, representing the cost of capital
used to finance utility construction activities, to qualified Construction Work
in Progress (CWIP). The AFC rate was 5.75 percent in 1997, 5.5 percent in 1996
and 6.0 percent in 1995. The amount of AFC capitalized as a construction cost in
CWIP is credited to other income (for equity capital) and interest charges (for
debt capital). AFC amounts capitalized in CWIP are included in rate base for
establishing utility service rates. In addition to construction-related amounts,
AFC is also recorded to reflect returns on capital used to finance conservation
programs.
DEPRECIATION For financial reporting purposes, depreciation is computed by
applying the straight-line method over the estimated useful lives of various
property classes. The Company files with the Minnesota Public Utilities
Commission (MPUC) an annual review of remaining lives for electric and gas
production properties. The most recent studies, as approved by the MPUC,
recommended immaterial changes in annual depreciation accruals for 1997 and
1996.
<PAGE>
The Company also submitted in 1997, as required every five years, an average
service life filing for transmission, distribution and general properties. The
filing, as approved by the MPUC, decreased depreciation approximately $1 million
from 1996 levels. Depreciation provisions, as a percentage of the average
balance of depreciable utility property in service, were 3.78 percent in 1997,
3.68 percent in 1996 and 3.64 percent in 1995.
DECOMMISSIONING As discussed in Note 13, NSP currently is recording the future
costs of decommissioning the Company's nuclear generating plants through annual
depreciation accruals. The provision for the estimated decommissioning costs has
been calculated using an annuity approach designed to provide for full expense
accrual (with full rate recovery) of the future decommissioning costs, including
decontamination and removal, over the estimated operating lives of the Company's
nuclear plants. The Financial Accounting Standards Board (FASB) has proposed new
accounting standards that would require the full accrual of nuclear plant
decommissioning and certain other site exit obligations beginning no sooner than
1999. (See Note 13 for more discussion of this proposed standard.)
NUCLEAR FUEL EXPENSE The original cost of nuclear fuel is amortized to fuel
expense based on energy expended. Nuclear fuel expense also includes assessments
from the U.S. Department of Energy (DOE) for costs of future fuel disposal and
DOE facility decommissioning, as discussed in Note 13.
ENVIRONMENTAL COSTS Accruals for environmental costs are recognized when it is
probable that a liability has been incurred and the amount of the liability can
be reasonably estimated. Costs are charged to expense if they relate to the
remediation of conditions caused by past operations, or if they are not expected
to mitigate or prevent contamination from future operations. Costs may be
deferred as a regulatory asset based on expected recovery in future rates. Where
environmental expenditures relate to facilities currently in use, such as
pollution control equipment, the costs may be capitalized and depreciated over
the future service periods. Estimated remediation costs are recorded at
undiscounted amounts, independent of any insurance or rate recovery, based on
prior experience, assessments and current technology. Accrued obligations are
regularly adjusted as environmental assessments and estimates are revised, and
remediation efforts proceed. For sites where NSP has been designated as one of
several potentially responsible parties, the amount accrued represents NSP's
estimated share of the cost. NSP intends to treat any future costs incurred
related to decommissioning and restoration of its nonnuclear power plants and
substation sites, where operation may extend indefinitely, as a capitalized
removal cost of retirement in utility plant. Depreciation expense levels
currently recovered in rates include a provision for an estimate of removal
costs, based on historical experience.
INCOME TAXES Under the liability method used by NSP, income taxes are deferred
for all temporary differences between pretax financial and taxable income and
between the book and tax bases of assets and liabilities, using the tax rates
scheduled by law to be in effect when the temporary differences reverse. Due to
the effects of regulation, current income tax expense is provided for the
reversal of some temporary differences previously accounted for by the
flow-through method. Also, regulation has created certain regulatory assets and
liabilities related to income taxes, as summarized in Note 9. NSP's policy for
income taxes related to international operations is discussed in Note 7.
Investment tax credits were deferred and are being amortized over the estimated
lives of the related property.
FOREIGN CURRENCY TRANSLATION The local currencies are generally the functional
currency of NSP's foreign operations. Foreign currency denominated assets and
liabilities are translated at end-of-period rates of exchange. Income, expense
and cash flows are translated at weighted-average rates of exchange for the
period. The resulting currency translation adjustments are accumulated and
reported as a separate component of stockholders' equity. During 1997, the
effects of changes in currency exchange rates on NRG's international project
investments, mainly in Australia, reduced equity by $66 million.
Exchange gains and losses that result from foreign currency transactions (e.g.,
converting cash distributions made in one currency to another) and derivative
arrangements that do not qualify for hedge accounting (see Note 11) are included
in the results of operations as a component of income from nonregulated
businesses before interest and taxes. The earnings impact of these items was not
material to NSP's results for the periods presented.
DERIVATIVE FINANCIAL INSTRUMENTS NSP's policy is to hedge projected foreign
currency denominated cash flows, where appropriate hedging instruments are
available, to preserve their U.S. dollar value. NRG has entered into currency
hedging transactions through the use of forward foreign currency exchange
agreements with terms of less than one to three years. Gains and losses on these
agreements offset the effect of foreign currency exchange rate fluctuations on
NRG's known and anticipated cash flows. Gains on agreements that hedge firm
commitments of
<PAGE>
cash flows are deferred and included in the measurement of the related foreign
currency transaction in the period the transaction occurs, and losses on these
agreements are deferred in the same manner unless it is estimated that deferral
would lead to recognizing losses in later periods. Gains and losses on
agreements that hedge cash flows not meeting the criteria of a firm commitment
are recorded in the current period as a component of NSP's nonregulated income
before interest and taxes. Prior to July 1997, NSP's policy was to hedge foreign
currency denominated investments as they were made, where appropriate hedging
instruments were available, to preserve their U.S. dollar value. Gains and
losses on these agreements offset the effects of foreign currency exchange rate
fluctuations on the valuation of the investments underlying the hedges. Hedging
gains and losses, net of income tax effects, on these agreements were reported
with other currency translation adjustments as a separate component of
stockholders' equity. While NRG is not currently hedging foreign currency
denominated investments, NRG will hedge such investments when management
believes that preserving the U.S. dollar value of the investment is appropriate.
NRG is not hedging currency translation adjustments related to future operating
results. NRG does not speculate in foreign currencies.
Where appropriate, NRG also uses interest rate hedging instruments to protect
against increases in the cost of borrowing at both the corporate and project
level. Gains and losses on interest rate hedging instruments are deferred and
included in the measurement of the underlying equity investment when made.
Another derivative arrangement is the use of natural gas futures contracts by
EMI to manage the risk of gas price fluctuations. The cost or benefit of natural
gas futures contracts is recorded when related sales commitments are fulfilled
as a component of EMI's nonregulated operating expenses. NSP does not speculate
in natural gas futures. A final derivative instrument used by NSP is interest
rate swaps that convert fixed-rate debt to variable-rate debt. The cost or
benefit of the interest rate swap agreements is recorded as a component of
interest expense. None of these derivative financial instruments are reflected
on NSP's balance sheet.
USE OF ESTIMATES In recording transactions and balances resulting from business
operations, NSP uses estimates based on the best information available.
Estimates are used for such items as plant depreciable lives, tax provisions,
uncollectible accounts, environmental costs, unbilled revenues and actuarially
determined benefit costs. As better information becomes available, or actual
amounts are determinable, the recorded estimates are revised. Consequently,
operating results can be affected by revisions to prior accounting estimates.
The depreciable lives of certain plant assets are reviewed and, if appropriate,
revised each year, as discussed previously.
CASH EQUIVALENTS NSP considers investments in certain debt instruments,
primarily commercial paper and money market funds, with an original maturity to
NSP of three months or less at the time of purchase to be cash equivalents.
REGULATORY DEFERRALS As regulated utilities, the Company, the Wisconsin Company
and Viking account for certain income and expense items under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 71---Accounting for the
Effects of Regulation. In doing so, certain costs that would otherwise be
charged to expense are deferred as regulatory assets based on expected recovery
from customers in future rates. Likewise, certain credits that otherwise would
be reflected as income are deferred as regulatory liabilities based on expected
flowback to customers in future rates. Management's expected recovery of
deferred costs and expected flowback of deferred credits are generally based on
specific ratemaking decisions or precedent for each item. Regulatory assets and
liabilities are amortized consistent with ratemaking treatment established by
regulators. Note 9 describes the nature and amounts of these regulatory
deferrals.
STOCK-BASED EMPLOYEE COMPENSATION NSP has several stock-based compensation
plans, as described in Note 3. Under the intrinsic-value-based method of
accounting followed by NSP, no compensation expense is recorded for stock
options because there is no difference between the market price and purchase
price at the grant date, which is the measurement date for determining
compensation expense. NSP does, however, record compensation expense for stock
that is awarded to certain employees, but held by NSP until the restrictions
lapse or the stock is forfeited. Effective for 1996, the FASB issued a new
accounting standard, SFAS No. 123---Accounting for Stock-Based Compensation,
which provides an optional accounting method for compensation from stock option
and other stock award programs. NSP did not elect the new optional accounting
method. If the provisions of the optional method had been adopted as of the
beginning of 1995, the effect on net income and earnings per share for 1997,
1996 and 1995 would have been immaterial.
<PAGE>
DEVELOPMENT COSTS As it pursues projects under development, NRG expenses
development costs incurred until a sales agreement or letter of intent is signed
and the project has received capital authorization. Additional costs incurred
after this point are capitalized as part of equity investments in projects. When
project operations begin, such capitalized costs are amortized on a
straight-line basis over the lesser of the life of the project's related assets
or revenue contract period.
OTHER ASSETS The purchase of various nonregulated entities at a price exceeding
the underlying fair value of net assets acquired has resulted in recorded
goodwill of $43 million ($38 million net of accumulated amortization) at Dec.
31, 1997. This goodwill and other intangible assets acquired are being amortized
using the straight-line method over periods of three to 30 years. NSP
periodically evaluates the recovery of goodwill based on an analysis of
estimated undiscounted future cash flows.
Intangible and other assets also include deferred financing costs (net of
amortization) of approximately $22 million at Dec. 31, 1997. These financing
costs are being amortized over the remaining maturity period of the related
debt.
RECLASSIFICATIONS Certain reclassifications have been made to the 1996 and 1995
income statements to conform to 1997 presentation. These classifications had no
effect on net income or earnings per share.
2. Preferred Securities
The Company has two series of adjustable rate preferred stock. The dividend
rates are calculated quarterly and are based on prevailing rates of certain
taxable government debt securities indices. At Dec. 31, 1997, the annualized
dividend rates were $5.50 for both series A and series B.
At Dec. 31, 1997, various preferred stock series were callable at prices per
share ranging from $100.00 to $103.75, plus accrued dividends.
In January 1997, a wholly owned special purpose subsidiary trust of NSP issued
$200 million in 7.875 percent preferred securities that mature in 2037. A
portion of the proceeds was used to redeem the Company's $6.80 and $7.00 series
of preferred stock in February 1997. Distributions paid to preferred security
holders are reflected as a financing cost in the Consolidated Statement of
Income along with interest expense. Distributions paid by the subsidiary trust
on the preferred securities are financed through interest payments from the
Company on debentures issued by the Company and held by the subsidiary trust,
which are eliminated in NSP's consolidation. The preferred securities are
redeemable at $25 per share beginning in 2002. Distributions and redemption
payments are guaranteed by NSP.
3. Common Stock and Incentive Stock Plans
The Company's Articles of Incorporation and First Mortgage Indenture provide for
certain restrictions on the payment of cash dividends on common stock. At Dec.
31, 1997, the Company could have paid, without restrictions, additional cash
dividends of more than $1 billion on common stock.
Nonqualified stock options and restricted stock may be granted under NSP's
Executive Long-Term Incentive Award Stock Plan. The awards granted in any
calendar year cannot exceed 1 percent of the number of outstanding shares of NSP
common stock at the end of the previous calendar year. When options are
exercised, or restricted stock granted, the Company may either issue new shares
or purchase market shares. Using the treasury stock method of accounting for
stock options unexercised, the weighted average number of shares of common stock
outstanding for the calculation of Earnings Per Share - Assuming Dilution
includes any dilutive effects of stock options and other stock awards as
potential common shares.
Stock options currently granted may be exercised one year from the date of grant
and are exercisable thereafter for up to nine years. The options are forfeited
if employment ceases before the one-year vesting term. If employment ceases
after the one-year vesting term, options will either be forfeited, or would need
to be exercised within three or 36 months, depending on the circumstances. The
exercise price of an option is the market price of NSP common stock on the date
of grant. The plan, in previous years, granted other types of performance
awards, some of which are still outstanding. Most of these performance awards
were valued in dollars, but paid in shares based on the market price at the time
of payment. Transactions under the various incentive stock programs, with the
corresponding weighted average exercise price, were as follows:
<PAGE>
Stock Option and Performance Awards
<TABLE>
<CAPTION>
1997 1996 1995
----------------- ------------------ ------------------
AVERAGE Average Average
(Thousands of shares) SHARES PRICE Shares Price Shares Price
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding Jan. 1 1 117 43.97 990 $41.97 782 $40.58
Options granted in January 287 47.44 263 $50.94 278 $45.50
Options and awards exercised (260) 42.23 (105) $41.98 (64) $40.26
Options and awards forfeited (30) 47.19 (27) $47.70 (6) $44.58
Options and awards expired (11) 50.94 (4) $40.00
- - ----------------------------------------------------------------------------------------------
Outstanding at Dec. 31 1 103 45.13 1 117 $43.97 990 $41.97
Exercisable at Dec. 31 843 44.41 870 $41.96 716 $40.60
==============================================================================================
</TABLE>
The following table summarizes information about stock options outstanding at
Dec. 31, 1997:
Range of Exercise Prices
-----------------------------
$33.25-40.94 $42.19-50.94
- - --------------------------------------------------------------------------------
Options Outstanding:
Number outstanding at Dec. 31, 1997 170 346 923 517
Weighted-average remaining contractual life (years) 3.1 7.4
Weighted-average exercise price $37.15 $46.60
Options Exercisable:
Number exercisable at Dec. 31, 1997 170 346 663 156
Weighted-average exercise price $37.15 $46.27
In addition to stock options, restricted stock is granted based on a dollar
value of the award. The market price on the date of grant is used to determine
the number of restricted shares awarded. The stock is held by NSP until the
restrictions lapse: 50 percent of the stock will vest one year from the date of
the award and the remaining 50 percent vests two years from the date of the
award. Dividends on the shares held while the restrictions are in place are
reinvested to obtain additional shares, and the restrictions apply to these
additional shares. In each of the years 1995 through 1997, NSP granted
restricted stock awards of 15,898, 18,584 and 26,344 shares, respectively, at
then-current market prices of NSP stock. Compensation expense related to these
awards was immaterial.
4. Short-Term Borrowings
As of Dec. 31, 1997 and 1996, 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. There were no borrowings against this facility at Dec.
31, 1997 and 1996. At Dec. 31, 1997 and 1996, credit lines of $245 million and
$75 million, respectively, were provided primarily by commercial banks to wholly
owned subsidiaries of the Company. There were $122 million and approximately $4
million in outstanding loans against these subsidiary credit lines at Dec. 31,
1997 and 1996, respectively. In addition, at Dec. 31, 1997 and 1996, $49 million
and $21 million, respectively, in letters of credit were outstanding (as
discussed in Note 11), which reduced the available credit lines.
At Dec. 31, 1997 and 1996, the Company had $138 million and $362 million,
respectively, in short-term commercial paper borrowings outstanding, and another
$122 million and $7 million, respectively, in short-term bank loans outstanding,
mainly for nonregulated subsidiaries. The weighted average interest rates on all
short-term borrowings were 6.2 percent as of Dec. 31, 1997, and 5.7 percent as
of Dec. 31, 1996.
5. Long-Term Debt
Except for minor exclusions, all real and personal property of the Company and
the Wisconsin Company is subject to the liens of the First Mortgage Indentures.
Other debt securities are secured by a lien on the related property, as
indicated on the Consolidated Statements of Capitalization.
The annual sinking-fund requirements of the Company's and the Wisconsin
Company's First Mortgage Indentures are the amounts necessary to redeem 1
percent of the highest principal amount of each series of first mortgage bonds
at any time outstanding, excluding those series issued for pollution control and
resource recovery financings, and excluding certain other series totaling $1
billion. The Company may, and has, applied property additions in lieu of cash
payments on all series, as permitted by its First Mortgage Indenture. The
Wisconsin Company also may apply property additions in lieu of cash on all
series as permitted by its First Mortgage Indenture.
<PAGE>
The Company's 2011 and 2019 series First Mortgage Bonds have variable interest
rates, which currently change at various periods up to 270 days, based on
prevailing rates for certain commercial paper securities or similar issues. The
interest rates applicable to these issues averaged 4.0 percent and 3.8 percent,
respectively, at Dec. 31, 1997. The 2011 series bonds are redeemable upon seven
days notice at the option of the bondholder. The Company also is potentially
liable for repayment of the 2019 series when the bonds are tendered, which
occurs each time the variable interest rates change. The principal amount of all
of these variable rate bonds outstanding represents potential short-term
obligations and, therefore, is reported under current liabilities on the balance
sheet.
Maturities and sinking-fund requirements on long-term debt (in millions) are:
1998, $22.8; 1999, $217.3; 2000, $122.4; 2001, $167.8; and 2002, $76.6.
6. Benefit Plans and Other Postretirement Benefits
NSP offers the following benefit plans to its benefit employees, of whom
approximately 40 percent are represented by five local labor unions under a
collective-bargaining agreement, which expires Dec. 31, 1999.
PENSION BENEFITS NSP has a noncontributory, defined benefit pension plan that
covers substantially all employees. Benefits are based on a combination of years
of service, the employee's highest average pay for 48 consecutive months and
Social Security benefits.
NSP's policy is to fully fund into an external trust the actuarially determined
pension costs recognized for ratemaking and financial reporting purposes,
subject to the limitations under applicable employee benefit and tax laws. Plan
assets principally consist of common stock of public companies, corporate bonds
and U.S. government securities. The funded status of NSP's pension plan as of
Dec. 31 is as follows:
(Thousands of dollars) 1997 1996
- - -------------------------------------------------------------------------------
Actuarial present value of benefit obligation:
Vested $701 219 $660 920
Nonvested 165 004 147 278
- - -------------------------------------------------------------------------------
Accumulated benefit obligation $866 223 $808 198
===============================================================================
Projected benefit obligation $1 048 251 $993 821
Plan assets at fair value 1 978 538 1 634 696
- - -------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 930 287 640 875
Unrecognized prior service cost 18 663 19 734
Unrecognized net actuarial gain (953 825) (651 368)
Unrecognized net transitional asset (463) (539)
- - -------------------------------------------------------------------------------
Net pension asset (liability) recorded $(5 338) $8 702
===============================================================================
For ratemaking purposes, the Company's pension costs are determined and recorded
under the aggregate-cost actuarial method. As required by SFAS No.
87---Employers' Accounting for Pensions, the difference between the pension
costs recorded for ratemaking purposes and the amounts determined under SFAS No.
87 is recorded as a regulatory liability on the balance sheet. Net annual
periodic pension cost includes the following components:
<TABLE>
<CAPTION>
(Thousands of dollars) 1997 1996 1995
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period $27 680 $29 971 $24 499
Interest cost on projected benefit obligation 72 651 70 863 69 742
Actual return on assets (420 174) (265 370) (344 837)
Net amortization and deferral 285 048 139 874 240 458
- - ----------------------------------------------------------------------------------------------
Net periodic pension cost determined under SFAS No. 87 (34 795) (24 662) (10 138)
Additional costs recognized due to actions of regulators 30 862 23 572 10 454
- - ----------------------------------------------------------------------------------------------
Net periodic pension cost recognized for financial reporting $(3 933) $(1 090) $316
==============================================================================================
</TABLE>
The weighted average discount rate used in determining the actuarial present
value of the projected obligation was 7 percent for Dec. 31, 1997 and 7.5
percent for Dec. 31, 1996. The rate of increase in future compensation levels
used in determining the actuarial present value of the projected obligation was
5 percent in 1997 and 1996. The assumed long-term rate of return on assets used
for cost determinations under SFAS No. 87 was 9 percent for
<PAGE>
1997, 1996 and 1995. Assumption changes decreased 1997 pension costs (determined
under SFAS No. 87) by approximately $6.9 million and increased 1996 costs by
approximately $12.6 million. However, because the Company's pension expense is
determined under the aggregate-cost method (not SFAS No. 87) for ratemaking and
financial reporting purposes, the effects of regulation prevented the majority
of assumption changes from affecting earnings.
401(k) NSP has a contributory, defined contribution Retirement Savings Plan,
which complies with section 401(k) of the Internal Revenue Code and covers
substantially all employees. Since 1994, NSP has been matching specified amounts
of employee contributions to this plan. NSP's matching contributions were $4.4
million in 1997, $4.3 million in 1996 and $3.7 million in 1995.
POSTRETIREMENT HEALTH CARE NSP has a contributory health and welfare benefit
plan that provides health care and death benefits to substantially all employees
after their retirement. The plan is intended to provide for sharing the costs of
retiree health care between NSP and retirees. For employees retiring after Jan.
1, 1994, a six-year cost-sharing strategy was implemented with retirees paying
15 percent of the total cost of health care in 1994, increasing to a total of 40
percent in 1999. In conjunction with the 1993 adoption of SFAS No.
106-Employers' Accounting for Postretirement Benefits Other Than Pensions, NSP
elected to amortize on a straight-line basis over 20 years the unrecognized
accumulated postretirement benefit obligation (APBO) of $215.6 million for
current and future retirees.
Before 1993, NSP funded payments for retiree benefits internally. While NSP
generally prefers to continue using internal funding of benefits paid and
accrued, significant levels of external funding, including the use of
tax-advantaged trusts, have been required by NSP's regulators, as discussed
later. Plan assets held in such trusts principally consist of investments in
equity mutual funds and cash equivalents. The funded status of NSP's retiree
health care plan as of Dec. 31 is as follows:
(Thousands of dollars) 1997 1996
- - ----------------------------------------------------------------------------
APBO:
Retirees $149 081 $144 180
Fully eligible plan participants 21 245 23 438
Other active plan participants 108 904 101 065
- - -----------------------------------------------------------------------------
Total APBO 279 230 268 683
Plan assets at fair value 19 784 15 514
- - -----------------------------------------------------------------------------
APBO in excess of plan assets 259 446 253 169
Unrecognized net actuarial loss (14 408) (12 467)
Unrecognized transition obligation (161 700) (172 480)
- - ------------------------------------------------------------------------------
Net benefit liability recorded $83 338 $ 68 222
=============================================================================
The assumed health care cost trend rates used in measuring the APBO at Dec. 31,
1997 and 1996, were 9.2 percent and 9.8 percent for those under age 65, and 6.8
percent and 7.1 percent for those age 65 and over, respectively. The assumed
cost trend rates are expected to decrease each year until they reach 5.5 percent
for both age groups in the year 2004, after which they are assumed to remain
constant. A 1 percent increase in the assumed health care cost trend rate for
each year would increase the APBO by approximately 14.5 percent as of Dec. 31,
1997. Service and interest cost components of the net periodic postretirement
cost would increase by approximately 15.4 percent with a similar 1 percent
increase in the assumed health care cost trend rate. The assumed discount rate
used in determining the APBO was 7 percent for Dec. 31, 1997, and 7.5 percent
for Dec. 31, 1996, compounded annually. The assumed long-term rate of return on
assets used for cost determinations under SFAS No. 106 was 8 percent for 1997,
1996 and 1995. Assumption changes decreased costs by approximately $4.0 million
in 1997 and approximately $2.0 million in 1996.
<PAGE>
The net annual periodic postretirement benefit cost recorded consists of the
following components:
<TABLE>
<CAPTION>
(Thousands of dollars) 1997 1996 1995
- - -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the year $5 095 $ 6 380 $ 5 206
Interest cost (on service cost and APBO) 18 872 19 283 19 201
Actual return on assets (1 461) (947) (1 046)
Amortization of transition obligation 10 780 10 780 10 780
Net amortization and deferral 222 140 406
- - -------------------------------------------------------------------------------------------------
Net periodic postretirement health care cost under SFAS No. 106 33 508 35 636 34 547
Additional costs recognized due to actions of regulators 4 033 4 033
- - -------------------------------------------------------------------------------------------------
Net postretirement cost recognized for financial reporting $33 508 $39 669 $38 580
=================================================================================================
</TABLE>
Regulators for nearly all of NSP's retail and wholesale customers have allowed
full recovery of increased benefit costs under SFAS No. 106, effective in 1993.
Increased 1993 accrual costs of approximately $12 million for Minnesota retail
customers were amortized over the years 1994 through 1996, consistent with
approved rate recovery. External funding was required by Minnesota and Wisconsin
retail regulators to the extent it is tax advantaged; funding began for
Wisconsin in 1993 and will begin in 1998 for Minnesota. For wholesale
ratemaking, the FERC has required external funding for all benefits paid and
accrued under SFAS No. 106 since 1993.
ESOP NSP has a leveraged Employee Stock Ownership Plan (ESOP) that covers
substantially all employees. Employer contributions to this non-contributory,
defined contribution plan are generally made to the extent NSP realizes a tax
savings on its income statement from dividends paid on certain shares held by
the ESOP. Contributions to the ESOP in 1997, 1996 and 1995, which represent
compensation expense, were $4.4 million, $4.6 million and $5.0 million,
respectively. ESOP contributions have no material effect on NSP earnings because
the contributions (net of tax) are essentially offset by the tax savings
provided by the dividends paid on ESOP shares. Leveraged shares held by the ESOP
are allocated to participants when dividends on stock held by the plan are used
to repay ESOP loans. NSP's ESOP held 5.6 million and 5.9 million shares of the
Company's common stock as of Dec. 31, 1997 and 1996, respectively. An average of
0.3 million, 0.2 million and 0.2 million uncommitted leveraged ESOP shares were
excluded from earnings-per-share calculations in 1997, 1996 and 1995,
respectively. The fair value of NSP's leveraged ESOP shares was approximately
the same as cost at Dec. 31, 1997 and 1996.
<PAGE>
7. Income Taxes
Total income tax expense from operations differs from the amount computed by
applying the statutory federal income tax rate to income before income tax
expense. The reasons for the difference are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
Increases (decreases) in tax from:
State income taxes, net of federal income tax benefit 4.3% 5.2% 5.1%
Tax credits recognized (7.9)% (4.1)% (3.4)%
Equity income from unconsolidated affiliates (2.5)% (2.6)% (2.5)%
Regulatory differences---utility plant items 1.1% 0.9% 1.0%
Other---net (1.0)% 0.4% 0.4%
- - ------------------------------------------------------------------------------------------------------------------
Effective income tax rate 29.0% 34.8% 35.6%
==================================================================================================================
(Thousands of dollars)
Income taxes are comprised of the following expense (benefit) items:
Included in utility operating expenses:
Current federal tax expense $125 202 $154 421 $137 011
Current state tax expense 28 812 39 923 33 359
Deferred federal tax expense (88) (19 933) (12 019)
Deferred state tax expense (23) (3 958) (2 396)
Deferred investment tax credits (9 048) (9 043) (8 807)
- - ------------------------------------------------------------------------------------------------------------------
Total 144 855 161 410 147 148
- - ------------------------------------------------------------------------------------------------------------------
Included in income taxes on nonregulated operations
and nonoperating items:
Current federal tax expense (19 470) (906) 5 481
Current state tax expense (5 804) 712 1 629
Current foreign tax expense 236 616 233
Current federal tax credits (17 006) (8 044) (5 292)
Deferred federal tax expense (2 237) (5 150) 2 646
Deferred state tax expense (662) (1 520) 693
Deferred foreign tax expense (2 892) 0 0
Deferred investment tax credits (310) (308) (310)
- - ------------------------------------------------------------------------------------------------------------------
Total (48 145) (14 600) 5 080
- - ------------------------------------------------------------------------------------------------------------------
Total income tax expense $96 710 $146 810 $152 228
==================================================================================================================
</TABLE>
Income before income taxes includes net foreign equity income of $27 million,
$28 million and $32 million in 1997, 1996 and 1995, respectively. Except to the
extent NSP's earnings from foreign operations are subject to current U.S. income
taxes, NSP's management intends to reinvest indefinitely such earnings in its
foreign operations. Accordingly, U.S. income taxes and foreign withholding taxes
have not been provided on a cumulative amount of unremitted earnings of foreign
subsidiaries of approximately $112 million at Dec. 31, 1997. The additional U.S.
income tax and foreign withholding tax on the unremitted foreign earnings, if
repatriated, would be offset in whole or in part by foreign tax credits. Thus,
it is impracticable to estimate the amount of tax that might be payable.
<PAGE>
The components of NSP's net deferred tax liability (current and noncurrent
portions) at Dec. 31 were:
(Thousands of dollars) 1997 1996
- - --------------------------------------------------------------------------------
Deferred tax liabilities:
Differences between book and tax bases of property $867 155 $850 139
Regulatory assets 100 564 121 232
Tax benefit transfer leases 31 614 43 481
Other 21 715 23 182
- - --------------------------------------------------------------------------------
Total deferred tax liabilities $1 021 048 $1 038 034
- - --------------------------------------------------------------------------------
Deferred tax assets:
Regulatory liabilities $83 765 $90 485
Deferred compensation, vacation and other
accrued liabilities not currently deductible 70 765 65 690
Deferred investment tax credits 54 741 57 239
Other 26 557 34 509
- - --------------------------------------------------------------------------------
Total deferred tax assets $235 828 $247 923
- - --------------------------------------------------------------------------------
Net deferred tax liability $785 220 $790 111
================================================================================
8. Detail of Certain Income and Expense Items
Administrative and general (A&G) expense for utility operations consists of the
following:
<TABLE>
<CAPTION>
(Thousands of dollars) 1997 1996 1995
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
A&G salaries and wages $44 514 $47 546 $48 437
Pension, medical and other benefits---all utility employees 57 529 64 733 81 279
Information technology, facilities and administrative support 28 653 21 281 31 863
Insurance and claims 1 087 5 503 13 969
Other 10 019 9 593 10 599
- - ----------------------------------------------------------------------------------------------
Total $141 802 $148 656 $186 147
==============================================================================================
</TABLE>
Income from nonregulated businesses consists of the following:
<TABLE>
<CAPTION>
(Thousands of dollars, except per share amounts) 1997 1996 1995
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues $217 844 $303 903 $313 082
Equity in earnings of unconsolidated affiliates:
Earnings from operations 18 600 30 668 28 055
Gains from contract terminations 29 850
Operating and development expenses * (251 087) (326 332) (327 894)
Interest and other income 26 721 10 304 6 518
- - ----------------------------------------------------------------------------------------------------
Income from nonregulated businesses before interest and taxes 12 078 18 543 49 611
Interest expense (34 627) (18 834) (9 879)
Income tax benefit (expense) 38 032 16 576 (6 119)
- - -----------------------------------------------------------------------------------------------------
Net Income $15 483 $16 285 $33 613
====================================================================================================
Contribution of nonregulated businesses to NSP's earnings per share* $0.22 $0.24 $0.50
====================================================================================================
</TABLE>
* Includes nonrecurring project write-downs of $9 million in 1997 and $5 million
in 1995
<PAGE>
9. Regulatory Assets and Liabilities
The following summarizes the individual components of unamortized regulatory
assets and liabilities shown on the Consolidated Balance Sheets at Dec. 31:
<TABLE>
<CAPTION>
Remaining
(Thousands of dollars) Amortization Period 1997 1996
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AFC recorded in plant on a net-of-tax basis * Plant Lives $128 364 $137 412
Conservation and energy management programs * Primarily 3 Years 86 508 95 716
Losses on reacquired debt Term of Related Debt 59 353 63 481
Environmental costs Primarily 10 Years 45 849 42 322
State commission accounting adjustments * Plant Lives 7 286 7 296
Unrecovered purchased gas costs 1-2 Years 8 020 3 885
Other Various 4 742 4 016
- - -----------------------------------------------------------------------------------------------------------
Total regulatory assets $340 122 $354 128
===========================================================================================================
Deferred income tax adjustments 88 035 $92 390
Investment tax credit deferrals 91 146 97 636
Unrealized gains from decommissioning investments 85 482 43 008
Pension costs-regulatory differences 27 107 45 080
Fuel costs, refunds and other 13 995 24 533
- - -----------------------------------------------------------------------------------------------------------
Total regulatory liabilities $305 765 $302 647
===========================================================================================================
</TABLE>
* Earns a return on investment in the ratemaking process
10. Investments Accounted for by the Equity Method
Through its nonregulated subsidiaries, NSP has investments in various
international and domestic energy projects and domestic affordable housing and
real estate projects. The equity method of accounting is applied to such
investments in affiliates, which include joint ventures and partnerships,
because the ownership structure prevents NSP from exercising a controlling
influence over operating and financial policies of the projects. Under this
method, equity in the pretax income or losses of domestic partnerships and in
the net income or losses of international projects is reflected as Equity in
Earnings of Unconsolidated Affiliates. A summary of NSP's significant
equity-method investments is as follows:
<TABLE>
<CAPTION>
Name Geographic Area Economic Interest
- - ------------------------------------------------------------------------------------
<S> <C> <C>
Loy Yang Power * Australia 25.37%
Pacific Generation Company * USA/Canada 8.50%-28.70%
Gladstone Power Station Australia 37.50%
COBEE South America 48.30%
MIBRAG mbH Europe 33.33%
NRG Generating (U.S.) Inc. USA 45.21%
Schkopau Power Station Europe 20.55%
Energy Development, Limited * Australia 19.97%
Scudder Latin American Trust
for Independent Power Energy Projects Latin America 25%
Various independent power production facilities * USA 45%-50%
Various affordable housing limited partnerships * USA 20%-99%
</TABLE>
*Acquired in 1997
<PAGE>
SUMMARIZED FINANCIAL INFORMATION OF UNCONSOLIDATED AFFILIATES Summarized
financial information for these projects, including interests owned by NSP and
other parties, was as follows for the years ended and as of Dec. 31:
RESULTS OF OPERATIONS
(Millions of dollars)
1997 1996 1995
---- ---- ----
Operating Revenues $1 698 $958 $790
Operating Income $ 93 $105 $154
Net Income $ 84 $89 $160
NSP's Equity in Earnings of
Unconsolidated Affiliates $19 $31 $59
FINANCIAL POSITION
(Millions of dollars)
1997 1996
---- ----
Current Assets $ 742 $ 681
Other Assets 7 853 3 525
----- ------
Total Assets $8 595 $4 206
====== ======
Current Liabilities $ 514 $ 397
Other Liabilities 6 109 2 798
Equity 1 972 1 011
----- ------
Total Liabilities and Equity $8 595 $4 206
====== ======
NSP's Equity Investment in
Unconsolidated Affiliates $ 741 $410
11. Financial Instruments
FAIR VALUES The estimated Dec. 31 fair values of NSP's recorded financial
instruments are as follows:
<TABLE>
<CAPTION>
1997 1996
- - ------------------------------------------------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
(Thousands of dollars) AMOUNT VALUE Amount Value
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash, cash equivalents and short-term investments $54 765 $54 765 $51 118 $51 118
Long-term decommissioning investments $344 491 $344 491 $260 756 $260 756
Long-term debt, including current portion $2 043 295 $2 079 123 $1 853 786 $1 838 408
- - ------------------------------------------------------------------------------------------------------------------
</TABLE>
For cash, cash equivalents and short-term investments, the carrying amount
approximates fair value because of the short maturity of those instruments. The
fair values of the Company's long-term investments, mainly debt securities in an
external nuclear decommissioning fund, are estimated based on quoted market
prices for those or similar investments. The fair value of NSP's long-term debt
is estimated based on the quoted market prices for the same or similar issues,
or the current rates for debt of the same remaining maturities and credit
quality.
DERIVATIVES NRG has entered into forward foreign currency exchange contracts
with counterparties to hedge certain exposures to currency fluctuations.
Pursuant to these contracts, transactions have been executed that are designed
to protect the economic value in U.S. dollars of selected known and anticipated
NRG cash flows denominated in Australian dollars and German deutsche marks. As
of Dec. 31, 1997, NRG had in place contracts with a notional value of $10
million to hedge foreign currency denominated known future cash flows. In
addition, NRG has in place forward foreign currency exchange contracts with a
net notional value of $8.6 million to hedge projected construction expenditures,
which do not qualify for hedge accounting and consequently result in currency
fluctuations that can affect earnings. The effect on 1997 earnings from these
contracts was immaterial. The forward foreign currency exchange contracts
terminate in 1998. If all of the contracts had been terminated at Dec. 31, 1997,
$1.0 million would have been payable by NRG for currency exchange rate changes
to date. Management believes NRG's exposure to credit risk due to nonperformance
by the counterparties to its forward exchange contracts is not significant,
based on the investment grade rating of the counterparties.
<PAGE>
NRG also has two agreements in place, with a notional amount of $80 million, to
fix the interest rate at a rate based on U.S. Treasury obligations for known
future borrowings related to project investment commitments. If the agreements
had been terminated at Dec. 31, 1997, $4.2 million would have been payable by
NRG based on the underlying U.S. Treasury interest rate on that date.
EMI has entered into natural gas futures contracts in the notional amount of $23
million at Dec. 31, 1997. The original contract terms range from one month to
two years. The contracts are intended to mitigate risk from fluctuations in the
price of natural gas that will be required to satisfy sales commitments for
future deliveries to customers in excess of EMI's natural gas reserves. EMI's
futures contracts hedge $24 million in anticipated natural gas sales in
1998-1999. Margin balances of $3 million at Dec. 31, 1997, were maintained on
deposit with brokers and recorded as cash and cash equivalents on NSP's balance
sheet. The counterparties to the futures contracts are the New York Mercantile
Exchange, investment banks and major gas pipeline operators. Management believes
that the risk of nonperformance by these counterparties is not significant. If
the contracts had been terminated at Dec. 31, 1997, $0.7 million would have been
payable by EMI for natural gas price fluctuations to date.
NSP has two interest rate swap agreements with notional amounts totaling $220
million. These swaps were entered into in conjunction with first mortgage bonds.
As summarized below, these agreements effectively convert the interest costs of
these debt issues from fixed to variable rates based on the six-month London
Interbank Offered Rate (LIBOR), with the rates changing semiannually.
Term of Net Effective
Notional Amount Swap Interest Cost at
Series (millions of dollars) Agreement at Dec. 31, 1997
- - --------------------------------------------------------------------------------
5 1/2% Series due Feb. 1, 1999 $200 Maturity 5.49%
7 1/4% Series due March 1, 2023 $ 20 March 1, 1998 7.96%
Market risks associated with these agreements result from short-term interest
rate fluctuations. Credit risk related to nonperformance of the counterparties
is not deemed significant, but would result in NSP terminating the swap
transaction and recognizing a gain or loss, depending on the fair market value
of the swap. The interest rate swaps serve to hedge the market risk associated
with fixed rate debt in a declining interest rate environment. This hedge is
produced by the tendency for changes in the fair market value of the swap to be
offset by changes in the present value of the liability attributable to the
fixed rate debt issued in conjunction with the interest rate swaps. If the
interest rate swaps had been discontinued on Dec. 31, 1997, $0.6 million would
have been payable by the Company, while the present value of the related fixed
rate debt was $0.6 million below carrying value.
LETTERS OF CREDIT NSP uses letters of credit to provide financial guarantees for
certain operating obligations, including NSP workers' compensation benefits and
ash disposal site costs, and EMI natural gas purchases, generally with terms of
one year which are automatically renewed, unless prior written notice of
cancellation is provided to NSP and the beneficiary by the issuing bank. In
addition, NRG uses letters of credit for nonregulated equity commitments, as
collateral for credit agreements, for fuel purchase and operating commitments
and bids on development projects. At Dec. 31, 1997, letters of credit of $101
million were outstanding, of which $48 million related to NRG commitments. The
contract amounts of these letters of credit approximate their fair value and are
subject to fees competitively determined in the marketplace.
12. Joint Plant Ownership
The Company is a part owner of an 855-megawatt coal-fired electric generating
unit, Sherburne County generating station unit No. 3 (Sherco 3), which began
commercial operation Nov. 1, 1987. Undivided interests in Sherco 3 have been
financed and are owned by the Company (59 percent) and Southern Minnesota
Municipal Power Agency (41 percent). The Company is the operating agent under
the joint ownership agreement. The Company's share of related expenses for
Sherco 3 since commercial operations began are included in Utility Operating
Expenses. The Company's share of the gross cost recorded in Utility Plant at
Dec. 31, 1997 and 1996, was $603.9 million and $588.0 million, respectively. The
corresponding accumulated provisions for depreciation were $196.2 million and
$168.6 million.
<PAGE>
13. Nuclear Obligations
FUEL DISPOSAL NSP is responsible for the temporary storage of used nuclear fuel
from the Company's nuclear generating plants. Under a contract with the Company,
the DOE is obligated to assume the responsibility for permanent storage or
disposal of NSP's used nuclear fuel. The Company has been funding its portion of
the DOE's permanent disposal program since 1981. Funding took place through an
internal sinking fund until 1983, when the DOE began assessing fuel disposal
fees under the Nuclear Waste Policy Act of 1982 based on a charge of 0.1 cent
per kilowatt-hour sold to customers from nuclear generation. Fuel expense
includes DOE fuel disposal assessments of $10.1 million, $11.3 million and $12.3
million in 1997, 1996 and 1995, respectively. The cumulative amount of such
assessments paid by NSP to the DOE through Dec. 31, 1997, was approximately $250
million. Currently, it is not determinable if the amount and method of the DOE's
assessments to all utilities will be sufficient to fully fund the DOE's
permanent storage or disposal facility.
The Nuclear Waste Policy Act stipulated that the DOE execute contracts with
utilities that require DOE to begin accepting spent nuclear fuel no later than
Jan. 31, 1998. Accordingly, NSP has been providing, with regulatory and
legislative approval, its own temporary on-site storage facilities at its
Monticello and Prairie Island nuclear plants. In December 1996, the DOE notified
commercial spent fuel owners of an anticipated delay in accepting used nuclear
fuel by the required date of Jan. 31, 1998, and conceded that a permanent
storage or disposal facility will not be available until at least 2010.
The Company and other affected parties have commenced lawsuits against the DOE
to require the DOE to meet its statutory and contractual obligations, which can
include damages for nonperformance. NSP and other utilities are currently
analyzing claims against the DOE for the costs incurred as a result of the DOE's
failure to meet its statutory and contractual obligations. With the dry cask
storage facilities approved in 1994 for the Prairie Island nuclear generating
plant, the Company believes it has adequate storage capacity to continue
operation of its Prairie Island nuclear plant until at least 2007. The
Monticello nuclear plant has storage capacity to continue operations until 2010.
Storage availability to permit operation beyond these dates is not assured at
this time. In the meantime, NSP is investigating all of its alternatives for
used fuel storage until a DOE facility is available, including pursuing the
establishment of a private facility for interim storage of used nuclear fuel as
part of a consortium of electric utilities. If on-site temporary storage at
NSP's nuclear plants reaches approved capacity, the Company could seek interim
storage at this or another contracted private facility, if available.
Nuclear fuel expenses in 1997, 1996 and 1995 include about $4 million, $4
million and $5 million, respectively, for payments to the DOE for the
decommissioning and decontamination of the DOE's uranium enrichment facilities.
The DOE's initial assessment of $46 million to the Company was recorded in 1993.
This assessment will be payable in annual installments from 1993-2008 and each
installment is being amortized to expense on a monthly basis in the 12 months
following each payment. The most recent installment paid in 1997 was $3.9
million; future installments are subject to inflation adjustments under DOE
rules. The Company is obtaining rate recovery of these DOE assessments through
the cost-of-energy adjustment clause as the assessments are amortized.
Accordingly, the unamortized assessment of $38 million at Dec. 31, 1997, has
been deferred as a regulatory asset and is reported under the caption
Environmental Costs in Note 9.
PLANT DECOMMISSIONING Decommissioning of all Company nuclear facilities is
planned for the years 2010-2022, using the prompt dismantlement method. The
Company currently is following industry practice by ratably accruing the costs
for decommissioning over the approved cost recovery period and including the
accruals in Utility Plant---Accumulated Depreciation, as discussed in Note 1.
Consequently, the total decommissioning cost obligation and corresponding asset
currently are not recorded in NSP's financial statements. The FASB has proposed
new accounting standards, which, if approved, would require the full accrual of
nuclear plant decommissioning and certain other site exit obligations no sooner
than 1999. Using Dec. 31, 1997, estimates, NSP's adoption of the proposed
accounting would result in the recording of the total discounted decommissioning
obligation of $698 million as a liability, with the corresponding costs
capitalized as plant and other assets and depreciated over the operating life of
the plant. The obligation calculation methodology proposed by the FASB is
slightly different from the ratemaking methodology that derives the
decommissioning accruals currently being recovered in rates, as discussed later.
The Company has not yet determined the potential impact of the FASB's proposed
changes in the accounting for site exit obligations other than nuclear
decommissioning (such as costs of removal). However, the ultimate
decommissioning and site exit costs to be accrued are the same under both
methods and, accordingly, the effects of regulation are expected to minimize or
eliminate any impact on operating expenses and results of operations from this
future accounting change.
<PAGE>
Consistent with cost recovery in utility customer rates, the Company records
annual decommissioning accruals based on periodic site-specific cost studies and
a presumed level of dedicated funding. Cost studies quantify decommissioning
costs in current dollars. Since the costs are expected to be paid in 2010-2022,
funding presumes that current costs will escalate in the future at a rate of 4.5
percent per year. The total estimated decommissioning costs that will ultimately
be paid, net of income earned by external trust funds, is currently being
accrued using an annuity approach over the approved plant recovery period. This
annuity approach uses an assumed rate of return on funding, which is currently 6
percent (net of tax) for external funding and approximately 8 percent (net of
tax) for internal funding.
The total obligation for decommissioning currently is expected to be funded
approximately 82 percent by external funds and 18 percent by internal funds, as
approved by the MPUC. Rate recovery of internal funding began in 1971 through
depreciation rates for removal expense, and was changed to a sinking fund
recovery in 1981. Contributions to the external fund started in 1990 and are
expected to continue until plant decommissioning begins. Costs not funded by
external trust assets, including accumulated earnings, will be funded through
internally generated funds and issuance of Company debt or stock. The assets
held in trusts as of Dec. 31, 1997, primarily consisted of investments in fixed
income securities, such as tax-exempt municipal bonds and U.S. government
securities, which mature in two to 26 years, and common stock of public
companies. The Company plans to reinvest matured securities until
decommissioning commences.
At Dec. 31, 1997, the Company has recorded and recovered in rates cumulative
decommissioning accruals of $465 million. The following table summarizes the
funded status of the Company's decommissioning obligation at Dec. 31, 1997:
<TABLE>
<CAPTION>
(Thousands of dollars) 1997
- - ---------------------------------------------------------------------------------------------------------
<S> <C>
Estimated decommissioning cost obligation from most recent approved study (1993 dollars) $750 824
Effect of escalating costs to 1997 dollars (at 4.5% per year) 144 548
- - ---------------------------------------------------------------------------------------------------------
Estimated decommissioning cost obligation in current dollars 895 372
Effect of escalating costs to payment date (at 4.5% per year) 949 413
- - ---------------------------------------------------------------------------------------------------------
Estimated future decommissioning costs (undiscounted) 1 844 785
Effect of discounting obligation (using risk-free interest rate) (1 147 177)
- - ---------------------------------------------------------------------------------------------------------
Discounted decommissioning cost obligation 697 608
External trust fund assets at fair value 344 491
- - ---------------------------------------------------------------------------------------------------------
Discounted decommissioning obligation in excess of assets currently held in external trust $353 117
=========================================================================================================
</TABLE>
Decommissioning expenses recognized include the following components:
<TABLE>
<CAPTION>
(Thousands of dollars) 1997 1996 1995
- - ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Annual decommissioning cost accrual reported as depreciation expense:
Externally funded $33 178 $33 178 $33 178
Internally funded (including interest costs) 1 368 1 268 1 174
Interest cost on externally funded decommissioning obligation 7 690 5 246 5 966
Earnings from external trust funds (7 690) (6 294) (5 620)
- - -----------------------------------------------------------------------------------------------------
Net decommissioning accruals recorded $34 546 $33 398 $34 698
====================================================================================================
</TABLE>
Decommissioning and interest accruals are included with the accumulated
provision for depreciation on the balance sheet. Interest costs and trust
earnings associated with externally funded obligations are reported in Other
Utility Income and Deductions on the income statement.
The MPUC last approved a nuclear decommissioning study and related nuclear plant
depreciation capital recovery request in April 1997, using cost data from the
1993 study. Although management expects to operate the Prairie Island units
through the end of each unit's licensed life, the approved capital recovery
would allow for the plant to be fully depreciated, including the accrual and
recovery of decommissioning costs, in 2008, about six years earlier than the end
of each unit's licensed life. The approved recovery period for Prairie Island
has been reduced because of the uncertainty regarding used fuel storage, as
discussed previously. The Company believes future decommissioning cost accruals
will continue to be recovered in customer rates.
<PAGE>
14. Commitments and Contingent Liabilities
CAPITAL COMMITMENTS NSP estimates utility capital expenditures, including
acquisitions of nuclear fuel, will be $441 million in 1998 and $2.1 billion for
1998-2002. There also are contractual commitments for the disposal of used
nuclear fuel. (See Note 13.)
As of Dec. 31, 1997, NRG is contractually committed to additional equity
investments of approximately $35 million in 1998 and approximately $172 million
for 1998-2002 for various international power generation projects. In addition,
in 1996, NRG executed an agreement whereby NRG is obligated to provide to NRG
Generating (U.S.) Inc. (NRGG), an unconsolidated affiliate of NRG, power
generation investment opportunities in the United States over a three-year
period. These projects must have in aggregate, over the three-year term, an
equity value of at least $60 million or a minimum of 150 net megawatts. In
addition, NRG has committed to finance NRGG's investment in the projects to the
extent funds are not available to NRGG on comparable terms from other sources.
As required by the agreement, NRG provided several investment opportunities to
NRGG in 1997, and, as a result, NRGG purchased the Millennium project from NRG.
NRGG financed the Millennium purchase from sources other than NRG.
LEGISLATIVE RESOURCE COMMITMENTS In 1994, the Minnesota Legislature established
several energy resource and other commitments for NSP to obtain the Prairie
Island temporary nuclear fuel storage facility approval. The commitments, which
can be met by building, purchasing or, in the case of biomass, converting
generation resources, are:
Power Type Megawatts Required Contract Deadline
- - ----------------------------------------------------------------------------
Wind 100 (Additional) 12/31/96
Wind 100 (Additional) 12/31/98
Wind 200 (Additional) 12/31/02
Total Wind 400
Biomass 50 (Additional) 12/31/98
Biomass 75 (Additional) 12/31/98
--
Total Biomass 125
The Company is complying with the requirements of these resource commitments as
follows:
Power Type Developer Megawatts Operation Date
- - --------------------------------------------------------------------------------
Wind Lake Benton Power Partners LLC (1) 107.25 June 1998 (2)
Wind Northern Alternative Energy, Inc. 22.65 Oct. 1998 (2)
Wind Lake Benton Power Partners II LLC 100.50 Mid-1999 (3)
Wind Woodstock Wind Farm, LLC 10.20 Oct. 1998 (2)
-------
Total Wind 240.60
Biomass Minnesota Valley Alfalfa Producers (4) 75.00 Dec. 2001 (5)
Biomass District Energy St. Paul Inc. 25.00 Summer 2002 (6)
Biomass Lindroc Energy 25.00 Summer 2002 (6)
-------
Total Biomass 125.00
(1) Formerly Zond Minnesota Development Corporation II
(2) Approved by MPUC
(3) Selected after a competitive negotiation process
(4) Formerly Minnesota Agri-Power Project
(5) Agreement signed
(6) Selected after a competitive bid process
<PAGE>
In 1994, the Company received Minnesota legislative approval for additional
on-site temporary storage facilities at NSP's Prairie Island plant, provided the
Company satisfies certain requirements. Seventeen dry cask containers, each of
which can store approximately one-half year's used fuel, were approved to become
available. The first four casks were available in 1994. In late 1996, the MEQB
certified that NSP has met the requirements necessary to use the sixth through
ninth casks at the Prairie Island nuclear generating facility. The final eight
casks become available in 1999 unless the above resource commitments are not met
and the Minnesota Legislature revokes its approval. As of Dec. 31, 1997, the
Company had loaded seven casks.
Other commitments established by the Legislature include a discount for
low-income electric customers, required conservation improvement expenditures
and various study and reporting requirements to a legislative electric energy
task force. In 1995, the MPUC approved the Company's low-income discount
programs in accordance with the statute. The Company has implemented programs to
begin meeting the other legislative commitments. The Company's capital
commitments, disclosed below, include the known effects of the 1994 Prairie
Island legislation. The impact of the legislation on power purchase commitments
and other operating expenses is not yet determinable.
GUARANTEES In 1997 and 1996, the Company sold a portion of its other
receivables, consisting of energy loans made to customers, to a third party. The
portion of the receivables sold consisted of customer loans to local government
entities for energy efficiency improvements under various conservation programs
offered by the Company. Under the sale agreements, the Company is required to
guarantee repayment to the third party of the remaining loan balances. At Dec.
31, 1997, the outstanding balance of the loans was approximately $28 million.
Based on prior collection experience of these loans, the Company believes that
losses under the loan guarantees, if any, would have an immaterial impact on the
results of operations.
LEASES Rentals under operating leases were approximately $32 million, $29
million and $27 million for 1997, 1996 and 1995, respectively. Future
commitments under these leases generally decline from current levels.
FUEL CONTRACTS NSP has contracts providing for the purchase and delivery of a
significant portion of its current coal, nuclear fuel and natural gas
requirements. These contracts, which expire in various years between 1998 and
2013, require minimum purchases and deliveries of fuel, and additional payments
for the right to purchase coal in the future. In total, NSP is committed to the
minimum purchase of approximately $341 million of coal, $29 million of nuclear
fuel and $291 million of natural gas and related transportation, or to make
payments in lieu thereof, under these contracts. In addition, NSP is required to
pay additional amounts depending on actual quantities shipped under these
agreements. As a result of FERC Order 636, NSP has developed a mix of gas
supply, transportation and storage contracts designed to meet its needs for
retail gas sales. The contracts are with several suppliers and for various
periods of time. Because NSP has other sources of fuel available and suppliers
are expected to continue to provide reliable fuel supplies, risk of loss from
nonperformance under these contracts is not considered significant. In addition,
NSP's risk of loss, in the form of increased costs, from market price changes in
fuel is mitigated through the cost-of-energy adjustment provision of the
ratemaking process, which provides for recovery of nearly all fuel costs.
POWER AGREEMENTS The Company has executed several agreements with the Manitoba
Hydro-Electric Board (MH) for hydroelectricity. A summary of the agreements is
as follows:
Years Megawatts
Participation Power Purchase 1998-2005 500
Seasonal Diversity Exchanges:
Summer exchanges from MH 1998-2014 150
1998-2016 200
Winter exchanges to MH 1998-2014 150
1998-2015 200
2015-2017 400
2018 200
The cost of the 500-megawatt participation power purchase commitment is based on
80 percent of the costs of owning and operating the Company's Sherco 3
generating plant, adjusted to 1993 dollars. The future annual capacity costs for
the 500-megawatt MH agreement is estimated to be approximately $55 million.
There are no capacity payments for the diversity exchanges. These commitments to
MH represent about 17 percent of MH's system capability in 1998 and account for
approximately 10 percent of NSP's 1998 electric system capability. The
<PAGE>
risk of loss from nonperformance by MH is not considered significant, and the
risk of loss from market price changes is mitigated through cost-of-energy rate
adjustments.
The Company has an agreement with Minnkota Power Cooperative for the purchase of
summer season capacity and energy. From 1998 through 2001, the Company will buy
150 megawatts of summer season capacity for $12 million annually. From 2002
through 2015, the Company will purchase 100 megawatts of capacity for $10
million annually. Under the agreement, energy will be priced at the cost of fuel
consumed per megawatt-hour at the Coyote Generating Station in North Dakota. The
Company also has a seasonal (summer) purchase power agreement with Minnesota
Power for the purchase of 173 megawatts, including reserves, from 1998-2000.
The annual cost of this capacity will be approximately $2 million.
The Company has agreements with several nonregulated power producers to purchase
electric capacity and associated energy. The 1998 cost of these commitments for
nonregulated capacity is approximately $46 million for 360 megawatts of summer
capacity. This commitment is expected to remain at this level until 2012, at
which time it will decrease to approximately $39 million annually and then
gradually decrease to approximately $26 million in the year 2027 due to the
expiration of existing agreements.
NUCLEAR INSURANCE The Company's public liability for claims resulting from any
nuclear incident is limited to $8.9 billion under the 1988 Price-Anderson
amendment to the Atomic Energy Act of 1954. The Company has secured $200 million
of coverage for its public liability exposure with a pool of insurance
companies. The remaining $8.7 billion of exposure is funded by the Secondary
Financial Protection Program, available from assessments by the federal
government in case of a nuclear accident. The Company is subject to assessments
of up to $79 million for each of its three licensed reactors to be applied for
public liability arising from a nuclear incident at any licensed nuclear
facility in the United States. The maximum funding requirement is $10 million
per reactor during any one year.
The Company purchases insurance for property damage and site decontamination
cleanup costs with coverage limits of $1.5 billion for each of the Company's two
nuclear plant sites. The coverage consists of $500 million from Nuclear Mutual
Limited (NML) and $1.0 billion from Nuclear Electric Insurance Limited (NEIL).
NEIL also provides business interruption insurance coverage, including the cost
of replacement power obtained during certain prolonged accidental outages of
nuclear generating units. Premiums billed to NSP from NML and NEIL are expensed
over the policy term. All companies insured with NML and NEIL are subject to
retrospective premium adjustments if losses exceed accumulated reserve funds.
Capital has been accumulated in the reserve funds of NML and NEIL to the extent
that the Company would have no exposure for retrospective premium assessments in
case of a single incident under the business interruption and the property
damage insurance coverages. However, in each calendar year, the Company could be
subject to maximum assessments of approximately $4.6 million for business
interruption insurance (five times the amount of its annual premium) and $19.0
million for property damage insurance (generally five times the amount of its
annual premium) if losses exceed accumulated reserve funds.
ENVIRONMENTAL CONTINGENCIES Other long-term liabilities include an accrual of
$34 million, and other current liabilities include an accrual of $6 million at
Dec. 31, 1997, for estimated costs associated with environmental remediation.
Approximately $31 million of the long-term liability and $4 million of the
current liability relate to a DOE assessment for decommissioning a federal
uranium enrichment facility, as discussed in Note 13. Other estimates have been
recorded for expected environmental costs associated with manufactured gas plant
sites formerly used by the Company, and other waste disposal sites, as discussed
below.
These environmental liabilities do not include accruals recorded, and collected
from customers in rates, for future nuclear fuel disposal costs or
decommissioning costs related to the Company's nuclear generating plants. (See
Note 13 for further discussion.)
The Environmental Protection Agency (EPA) or state environmental agencies have
designated the Company as a "potentially responsible party" (PRP) for 15 waste
disposal sites to which the Company allegedly sent hazardous materials. Ten of
these 15 sites have been remediated and, consistent with settlements reached
with the EPA and other PRPs, the Company has paid $1.7 million for its share of
the remediation costs. While these remediated sites will continue to be
monitored, the Company expects that future remediation costs, if any, will be
immaterial. Under applicable law, the Company, along with each PRP, could be
held jointly and severally liable for the total remediation costs of PRP sites.
Of the five unremediated sites, the total remediation costs are currently
estimated to be approximately $11 million. If additional remediation is
necessary or unexpected costs are incurred, the amount
<PAGE>
could be higher. The Company is not aware of the other parties' inability to
pay, nor does it know if responsibility for any of the sites is in dispute. For
these five sites, neither the amount of remediation costs nor the final method
of their allocation among all designated PRPs has been determined. However, the
Company has recorded an estimate of approximately $750,000 for its share of
future costs for these five sites, including $700,000 that is expected to be
paid in 1998. While it is not feasible to determine the ultimate impact of PRP
site remediation at this time, the amounts accrued represent the best current
estimate of the Company's future liability. It is the Company's practice to
vigorously pursue and, if necessary, litigate with insurers to recover incurred
remediation costs whenever possible. Through litigation, the Company has
recovered a portion of the remediation costs paid to date. Management believes
remediation costs incurred, but not recovered, from insurance carriers or other
parties should be allowed recovery in future ratemaking. Until the Company is
identified as a PRP, it is not possible to predict the timing or amount of any
costs associated with sites, other than those discussed above.
The Wisconsin Company potentially may be involved in the cleanup and remediation
at four sites. Three sites are solid and hazardous waste landfill sites in Eau
Claire, Rice Lake and Amery, Wis. The Wisconsin Company contends that it did not
dispose of hazardous wastes in these landfills during the time period in
question. Because neither the amount of cleanup costs nor the final method of
their allocation among all designated PRPs has been determined, it is not
feasible to predict the outcome of these matters at this time. The Wisconsin
Department of Natural Resources (WDNR) named the Wisconsin Company as one of
three Responsible Parties for creosote and coal tar contamination at a fourth
site in Ashland, Wis. WDNR's consultant is preparing a remedial option study for
the entire Ashland site, which includes the Wisconsin Company's portion and two
other adjacent portions. Until this study is completed and more information is
known concerning the extent of the final remediation required by the WDNR, the
remediation method selected, the related costs, the various parties involved,
and the extent of the Wisconsin Company's responsibility, if any, for sharing
the costs, the ultimate cost to the Wisconsin Company and timing of any payments
related to the Ashland site are not determinable. At Dec. 31, 1997, the Company
had recorded an estimated liability of $880,000 for future remediation costs
associated with the Wisconsin Company-owned portion of the Ashland site. Through
Dec. 31, 1997, the Wisconsin Company has incurred approximately $646,000 in
actual expenditures to date. Based on a recent Public Service Commission of
Wisconsin decision to allow recovery of incremental costs incurred for this site
beginning in 1997, the Wisconsin Company has recorded a regulatory asset for the
accrued and actual expenditures related to the Ashland site. The ultimate
cleanup and remediation costs at the Eau Claire, Amery, Rice Lake and Ashland
sites and the extent of the Wisconsin Company's responsibility, if any, for
sharing such costs are not known at this time, but may be significant.
The Company also is continuing to investigate various properties, which it
presently or previously owned. The properties were formerly sites of gas
manufacturing, gas storage plants or gas pipelines. The purpose of this
investigation is to determine if waste materials are present, if they are an
environmental or health risk, if the Company has any responsibility for remedial
action and if recovery under the Company's insurance policies can contribute to
any remediation costs. The Company has already remediated one site, which
continues to be monitored. The Company has paid $2.5 million to remediate this
site and expects to incur in the future only immaterial monitoring costs related
to this remediated site. Another 14 gas sites remain under investigation, and
the Company is actively taking remedial action at four of the sites. In
addition, the Company has been notified that two other sites eventually will
require remediation, and a study was initiated in 1996 to determine the cost and
method of cleanup at these two sites, which began in 1997. As of Dec. 31, 1997,
the Company has paid $8.1 million for the six active sites and has recorded an
estimated liability of approximately $3.0 million for future costs, with payment
expected over the next 10 years. This estimate is based on prior experience and
includes investigation, remediation and litigation costs. As for the eight
inactive sites, no liability has been recorded for remediation or investigation
because the present land use at each of these sites does not warrant a response
action. While it is not feasible to determine at this time the ultimate costs of
gas site remediation, the amounts accrued represent the best current estimate of
the Company's future liability for any required cleanup or remedial actions at
these former gas operating sites. Environmental remediation costs may be
recovered from insurance carriers, third parties, or in future rates. The MPUC
allowed the Company to defer certain remediation costs of four active sites in
1994 and the Company requested, in its December 1997 gas rate case, recovery of
these accumulated costs. In January 1998, the MPUC allowed the recovery of these
gas site remediation costs in the interim gas rates that went into effect in
February 1998. Accordingly, the Company has recorded an environmental regulatory
asset for these costs (see Note 9). The Company may request recovery of costs to
remedy the other two active sites following the completion of preliminary
investigations.
The Clean Air Act, including the Amendments of 1990 (the Clean Air Act), calls
for reductions in emissions of sulfur dioxide and nitrogen oxides from electric
generating plants. These reductions, which will be phased in, began in 1995. The
majority of the rules implementing this complex legislation have been finalized.
NSP has invested significantly over the years to reduce sulfur dioxide emissions
at its plants. No additional capital
<PAGE>
expenditures are anticipated to comply with the sulfur dioxide emission limits
of the Clean Air Act. NSP is still evaluating how best to implement the nitrogen
oxides standards. The Company's capital expenditures include some costs for
ensuring compliance with the Clean Air Act's other emission requirements; other
expenditures may be necessary upon EPA's finalization of remaining rules.
Because NSP is still in the process of implementing some provisions of the Clean
Air Act, its total financial impact is unknown at this time. Capital
expenditures for opacity compliance are considered in the capital expenditure
commitments disclosed previously. The depreciation of these capital costs will
be subject to regulatory recovery in future rate proceedings.
Several of NSP's facilities have asbestos-containing material, which represents
a potential health hazard to people who come in contact with it. Governmental
regulations specify the timing and nature of disposal of asbestos-containing
materials. Under such requirements, asbestos not readily accessible to the
environment need not be removed until the facilities containing the material are
demolished. Although the ultimate cost and timing of asbestos removal is not yet
known, it is estimated that removal under current regulations would cost $45
million in 1997 dollars. Depending on the timing of asbestos removal, such costs
would be recorded as incurred as operating expenses for maintenance projects,
capital expenditures for construction projects, or removal costs for demolition
projects.
Environmental liabilities are subject to considerable uncertainties that affect
NSP's ability to estimate its share of the ultimate costs of remediation and
pollution control efforts. Such uncertainties involve the nature and extent of
site contamination, the extent of required cleanup efforts, varying costs of
alternative cleanup methods and pollution control technologies, changes in
environmental remediation and pollution control requirements, the potential
effect of technological improvements, the number and financial strength of other
potentially responsible parties at multi-party sites and the identification of
new environmental cleanup sites. NSP has recorded and/or disclosed its best
estimate of expected future environmental costs and obligations, as discussed
previously.
LEGAL CLAIMS In the normal course of business, NSP is a party to routine claims
and litigation arising from prior and current operations. NSP is actively
defending these matters and has recorded an estimate of the probable cost of
settlement or other disposition.
15. Segment Information
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------------------
(Thousands of dollars) 1997 1996 1995
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Utility operating income before income taxes
Electric $456 489 $469 321 $444 687
Gas 50 122 58 133 48 340
- - -----------------------------------------------------------------------------------------------
Total utility operating income before income taxes $506 611 $527 454 $493 027
===============================================================================================
Utility depreciation and amortization
Electric $299 226 $279 828 $266 231
Gas 26 654 26 604 23 953
- - -----------------------------------------------------------------------------------------------
Total utility depreciation and amortization $325 880 $306 432 $290 184
===============================================================================================
Utility capital expenditures
Electric $305 292 $323 532 $317 750
Gas 71 386 42 225 37 215
Common 19 927 20 898 31 057
- - -----------------------------------------------------------------------------------------------
Total utility capital expenditures $396 605 $386 655 $386 022
===============================================================================================
Identifiable utility assets
Electric $4 845 306 $4 735 330 $4 751 650
Gas 675 030 649 218 600 738
- - -----------------------------------------------------------------------------------------------
Total identifiable utility assets $5 520 336 $5 384 548 $5 352 388
Other corporate assets * 1 623 730 1 252 352 876 197
- - -----------------------------------------------------------------------------------------------
Total assets $7 144 066 $6 636 900 $6 228 585
===============================================================================================
</TABLE>
* Includes equity investments for nonregulated energy projects outside of the
United States of $517 million in 1997, $295 million in 1996 and $185 million
in 1995.
Note: The gas utility segment includes Viking.
<PAGE>
16. Summarized Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Quarter Ended
- - ------------------------------------------------------------------------------------------------------------------
(Thousands of dollars) March 31, 1997 June 30, 1997* Sept. 30,1997 Dec. 31, 1997*
- - ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Utility operating revenues $742 496 $594 323 $697 443 699 484
Utility operating income 88 456 65 586 118 540 89 174
Net income 65 773 18 253 87 912 65 382
Earnings available for common stock 61 816 15 882 85 541 63 010
Earnings per average common share:
Basic $0.90 $0.23 $1.23 $0.85
Assuming dilution $0.90 $0.23 $1.23 $0.85
Dividends declared per common share $0.690 $0.705 $0.705 $0.705
Stock prices---high $49 1/8 $52 $52 15/16 $58 7/8
---low $45 1/2 $44 1/2 $48 $48 7/16
Quarter Ended
- - ------------------------------------------------------------------------------------------------------------------
(Thousands of dollars) March 31, 1996 June 30, 1996 Sept. 30, 1996 Dec. 31, 1996
- - ------------------------------------------------------------------------------------------------------------------
Utility operating revenues $718 709 $592 258 $633 258 $709 981
Utility operating income 89 277 70 801 105 456 100 510
Net income 67 210 43 382 84 239 79 708
Earnings available for common stock 64 149 40 321 81 178 76 646
Earnings per average common share:
Basic $0.94 $0.59 $1.18 $1.12
Assuming dilution $0.94 $0.59 $1.18 $1.11
Dividends declared per common share $0.675 $0.690 $0.690 $0.690
Stock prices---high $53 3/8 $49 5/8 $49 3/4 $49 1/8
---low $47 5/8 $45 1/2 $44 1/2 $45 1/2
</TABLE>
* 1997 results include two nonrecurring items: a $29 million pretax charge,
which reduced second quarter earnings by 25 cents per share, for the
write-off of merger costs; and a $9 million pretax charge, which reduced
fourth quarter earnings by 8 cents per share, for the write-down of an NRG
cogeneration project.
<PAGE>
REPORTS OF MANAGEMENT AND INDEPENDENT ACCOUNTANTS
REPORT OF MANAGEMENT
Management is responsible for the preparation and integrity of NSP's financial
statements. The financial statements have been prepared in accordance with
generally accepted accounting principles and necessarily include some amounts
that are based on management's estimates and judgment.
To fulfill its responsibility, management maintains a strong internal control
structure, supported by formal policies and procedures that are communicated
throughout NSP. Management also maintains a staff of internal auditors who
evaluate the adequacy of and investigate the adherence to these controls,
policies and procedures.
Our independent public accountants have audited the financial statements and
have rendered an opinion as to the statements' fairness of presentation, in all
material respects, in conformity with generally accepted accounting principles.
During the audit, they obtained an understanding of NSP's internal control
structure, and performed tests and other procedures to the extent required by
generally accepted auditing standards.
The Board of Directors pursues its oversight role with respect to NSP's
financial statements through the Audit Committee, which is comprised solely of
nonmanagement directors. The Committee meets periodically with the independent
public accountants, internal auditors and management to assure that all are
properly discharging their responsibilities. The Committee approves the scope of
the annual audit and reviews the recommendations the independent public
accountants have for improving the internal control structure. The Board of
Directors, on the recommendation of the Audit Committee, engages the independent
public accountants, subject to shareholder approval.
Both the independent public accountants and the internal auditors have
unrestricted access to the Audit Committee.
/s/
James J. Howard
Chairman of the Board, President
and Chief Executive Officer
/s/
Edward J. McIntyre
Vice President and Chief
Financial Officer
NORTHERN STATES POWER COMPANY
MINNEAPOLIS, MINNESOTA
FEB. 2, 1998
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE SHAREHOLDERS OF NORTHERN STATES POWER COMPANY:
In our opinion, the accompanying consolidated balance sheets and statements of
capitalization and the related consolidated statements of income, of common
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Northern States Power Company, a Minnesota
corporation, and its subsidiaries at Dec. 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended Dec. 31, 1997, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/
PRICE WATERHOUSE LLP
MINNEAPOLIS, MINNESOTA
FEB. 2, 1998
<PAGE>
[LOGO] NSP NORTHERN STATES POWER COMPANY PROXY FORM
414 NICOLLET MALL, MINNEAPOLIS, MINNESOTA 55401
Please sign EXACTLY as your name(s) appear(s) on this form. Attorneys,
executors, administrators, trustees, or guardians should so indicate when
signing. For joint accounts, one joint owner may sign.
Signature______________________________________ Date_____________________, 1998
Signature______________________________________ Date_____________________, 1998
[GRAPHIC OMITTED]
Ovals to be filled in
IMPORTANT: THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS. WHETHER OR NOT YOU
PLAN TO ATTEND THE ANNUAL MEETING, PLEASE REVIEW THE ENCLOSED PROXY STATEMENT,
COMPLETE THIS PROXY FORM AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU
PLAN TO ATTEND THE MEETING, PLEASE REVIEW THE MEETING GUIDELINES, SIGN THE
TICKET REQUEST FORM BELOW AND RETURN IT WITH YOUR PROXY FORM.
(CONTINUE AND TO BE VOTED ON OTHER SIDE)
================================================================================
[LOGO] NSP 1998 ANNUAL MEETING GUIDELINES
In the interest of an orderly and constructive meeting, the following guidelines
will apply for NSP's Annual Meeting of Shareholders on Wednesday, April 22, 1998
at 10:00 a.m. at the Minneapolis Convention Center, 1301 Second Avenue South,
Minneapolis, Minnesota.
1. To gain entrance to the meeting, you must present an admission ticket or
evidence of ownership of NSP stock. To obtain an admission ticket, complete
the request form below and return it to NSP by April 10, 1998.
2. You will be required to pass through a metal detector similar to those at
airports. Briefcases, purses and parcels will be examined. The use of
cameras or sound recording equipment is prohibited, except those employed
by the Company to provide a record of the proceedings.
3. The business of the meeting is set forth in the Proxy Statement and will be
published on an Agenda that you will receive at the meeting. Whether or not
you plan to attend the meeting, please sign, date and return the Proxy Form
in the envelope provided. If you wish to change your vote or have not voted
by proxy, a ballot will be distributed to you at the meeting.
4. Time has been reserved at the end of the meeting for shareholder questions
that relate to the business of the Company. If you want to speak, please go
to the nearest microphone, state your name and confirm that you are a
shareholder before asking your question. Please direct all questions to the
Chairman. Questions from the floor are limited to three minutes to provide
an opportunity for as many shareholders as possible.
5. Although personal grievances and claims are not appropriate subjects for
the meeting, you may submit any grievance or claim in writing to any usher
or Company Representative, and the Company will respond as soon as possible
after the meeting.
6. The Chairman in his sole discretion shall have authority to conduct the
meeting and rule on any questions or procedures that may arise.
================================================================================
[LOGO] NSP NORTHERN STATES POWER COMPANY
414 NICOLLET MALL, MINNEAPOLIS, MINNESOTA 55401
ANNUAL MEETING ADMISSION AND
PARKING TICKET REQUEST FORM
IMPORTANT: If you plan to attend the Annual Meeting, you must sign this form and
return it to NSP by April 10, 1998. Your Tickets will be mailed to you
approximately one week prior to the meeting along with parking instructions.
- - --------------------------------------------------------------------------------
THIS IS
NOT
A PROXY
- - --------------------------------------------------------------------------------
I (We) will attend NSP's Annual Meeting, and I (we) have read and understand the
Meeting Guidelines and security procedures. NOTE: Sign and return ONLY if you
plan to attend the meeting.
Signature______________________________________ Date_____________________, 1998
Signature______________________________________ Date_____________________, 1998
- - --------------------------------------------------------------------------------
<PAGE>
[LOGO] NSP NORTHERN STATES POWER COMPANY PROXY FORM
414 NICOLLET MALL, MINNEAPOLIS, MINNESOTA 55401
The undersigned appoints Edward J. McIntyre, John P. Moore, Jr. and Gary R.
Johnson, or any of them, each with full power of substitution, to represent and
vote the shares of stock held by the undersigned at the Annual Meeting of
Shareholders on Wednesday, April 22, 1998 at 10 a.m., and any adjournments
thereof, as follows. If you want, you can indicate your vote and your Proxy will
be voted as indicated. Be sure to follow the instructions below for marking your
Proxy to assure that your vote is counted. If no markings are made, your proxy
will be voted "FOR" Proposals 1,2,3,4 and 5 and "AGAINST" Proposal 6.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2, 3, 4 AND 5.
1. Election of three Directors in Class III. (If you wish to withhold
authority to vote for any of the Directors, strike out the appropriate
name(s)):
H. Lyman Bretting David A. Christensen Margaret R. Preska
|_| FOR |_| WITHHOLD
2. Approval to amend the Company's Restated Articles of Incorporation to
increase the number of authorized Common Stock shares from 160
million shares to 350 million shares.
|_| FOR |_| AGAINST |_| ABSTAIN
3. Approval of Amendments to the Company's Executive Long-Term Incentive
Award Stock Plan.
|_| FOR |_| AGAINST |_| ABSTAIN
4. Approval of the Company's Executive Annual Incentive Award Plan.
|_| FOR |_| AGAINST |_| ABSTAIN
5. Approval of appointment of Price Waterhouse as Independent Auditors.
|_| FOR |_| AGAINST |_| ABSTAIN
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" PROPOSAL 6.
6. Shareholder resolution on conversion of Prairie Island Nuclear Plant
to Natural Gas Plant.
|_| FOR |_| AGAINST |_| ABSTAIN
7. In their discretion to transact such other business as may properly
come before the meeting.
(TO BE SIGNED ON OTHER SIDE)
================================================================================
INSTRUCTIONS FOR MARKING YOUR VOTING DIRECTIVE
Your vote is important! Please follow the instructions below for marking your
choices:
CORRECT MARK INCORRECT MARKS
|_| |_| |_| |_| |_|
* Use a No. 2 pencil or blue or black ink pen only.
* Do not use pens with ink that soaks through the paper.
* Make solid marks that fill the oval completely.
* Make no stray marks on the directive.
* Do not fold, tear or mutilate the directive.
THANK YOU FOR VOTING.
<PAGE>
[LOGO] NSP NORTHERN STATES POWER COMPANY PROXY FORM
414 NICOLLET MALL, MINNEAPOLIS, MINNESOTA 55401
Please sign EXACTLY as your name(s) appear(s) on this form. Attorneys,
executors, administrators, trustees, or guardians should so indicate when
signing. For joint accounts, one joint owner may sign.
Signature______________________________________ Date_____________________, 1998
Signature______________________________________ Date_____________________, 1998
IMPORTANT: THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS. WHETHER OR NOT YOU
PLAN TO ATTEND THE ANNUAL MEETING, PLEASE REVIEW THE ENCLOSED PROXY STATEMENT,
COMPLETE THIS PROXY FORM AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED. IF YOU
PLAN TO ATTEND THE MEETING, PLEASE REVIEW THE MEETING GUIDELINES, SIGN THE
TICKET REQUEST FORM BELOW AND RETURN IT WITH YOUR PROXY FORM.
(CONTINUE AND TO BE VOTED ON OTHER SIDE)
================================================================================
[LOGO] NSP 1998 ANNUAL MEETING GUIDELINES
In the interest of an orderly and constructive meeting, the following guidelines
will apply for NSP's Annual Meeting of Shareholders on Wednesday, April 22, 1998
at 10:00 a.m. at the Minneapolis Convention Center, 1301 Second Avenue South,
Minneapolis, Minnesota.
1. To gain entrance to the meeting, you must present an admission ticket or
evidence of ownership of NSP stock. To obtain an admission ticket, complete
the request form below and return it to NSP by April 10, 1998.
2. You will be required to pass through a metal detector similar to those at
airports. Briefcases, purses and parcels will be examined. The use of
cameras or sound recording equipment is prohibited, except those employed
by the Company to provide a record of the proceedings.
3. The business of the meeting is set forth in the Proxy Statement and will be
published on an Agenda that you will receive at the meeting. Whether or not
you plan to attend the meeting, please sign, date and return the Proxy Form
in the envelope provided. If you wish to change your vote or have not voted
by proxy, a ballot will be distributed to you at the meeting.
4. Time has been reserved at the end of the meeting for shareholder questions
that relate to the business of the Company. If you want to speak, please go
to the nearest microphone, state your name and confirm that you are a
shareholder before asking your question. Please direct all questions to the
Chairman. Questions from the floor are limited to three minutes to provide
an opportunity for as many shareholders as possible.
5. Although personal grievances and claims are not appropriate subjects for
the meeting, you may submit any grievance or claim in writing to any usher
or Company representative, and the Company will respond as soon as possible
after the meeting.
6. The Chairman in his sole discretion shall have authority to conduct the
meeting and rule on any questions or procedures that may arise.
================================================================================
[LOGO] NSP NORTHERN STATES POWER COMPANY
414 NICOLLET MALL, MINNEAPOLIS, MINNESOTA 55401
ANNUAL MEETING ADMISSION AND
PARKING TICKET REQUEST FORM
IMPORTANT: If you plan to attend the Annual Meeting, you must sign this form and
return it to NSP by April 10, 1998. Your Tickets will be mailed to you
approximately one week prior to the meeting along with directions and parking
instructions.
- - --------------------------------------------------------------------------------
THIS IS
NOT
A PROXY
- - --------------------------------------------------------------------------------
I (We) will attend NSP's Annual Meeting, and I (we) have read and understand the
Meeting Guidelines and security procedures. NOTE: Sign and return ONLY if you
plan to attend the meeting.
Signature______________________________________ Date_____________________, 1998
Signature______________________________________ Date_____________________, 1998
- - --------------------------------------------------------------------------------
<PAGE>
[LOGO] NSP NORTHERN STATES POWER COMPANY PROXY FORM
414 NICOLLET MALL, MINNEAPOLIS, MINNESOTA 55401
The undersigned appoints Edward J. McIntyre, John P. Moore, Jr. and Gary R.
Johnson, or any of them, each with full power of substitution, to represent and
vote the shares of stock held by the undersigned at the Annual Meeting of
Shareholders on Wednesday, April 22, 1998, at 10 a.m., and any adjournments
thereof, as follows. If you want, you can indicate your vote and this Proxy will
be voted as indicated. If no markings are made, the proxy will be voted "FOR"
Proposals 1,2,3,4 and 5 and "AGAINST" Proposal 6.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2, 3, 4 AND 5.
1. ELECTION OF THREE DIRECTORS IN CLASS III. (If you wish to withhold
authority to vote for any of the Directors, strike out the appropriate
name(s)):
H. Lyman Bretting David A. Christensen Margaret R. Preska
|_| FOR |_| WITHHOLD
2. APPROVAL TO AMEND THE COMPANY'S RESTATED ARTICLES OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK FROM 160
MILLION SHARES TO 350 MILLION SHARES.
|_| FOR |_| AGAINST |_| ABSTAIN
3. APPROVAL OF AMENDMENTS TO THE COMPANY'S EXECUTIVE LONG-TERM INCENTIVE
AWARD STOCK PLAN.
|_| FOR |_| AGAINST |_| ABSTAIN
4. APPROVAL OF THE COMPANY'S EXECUTIVE ANNUAL INCENTIVE AWARD PLAN.
|_| FOR |_| AGAINST |_| ABSTAIN
5. APPROVAL OF APPOINTMENT OF PRICE WATERHOUSE AS INDEPENDENT AUDITORS.
|_| FOR |_| AGAINST |_| ABSTAIN
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" PROPOSAL 6.
6. SHAREHOLDER RESOLUTION ON CONVERSION OF PRAIRIE ISLAND NUCLEAR PLANT
TO NATURAL GAS PLANT.
|_| FOR |_| AGAINST |_| ABSTAIN
7. IN THEIR DISCRETION TO TRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY
COME BEFORE THE MEETING.
(TO BE SIGNED ON OTHER SIDE)
================================================================================
<PAGE>
[LOGO] NSP NORTHERN STATES POWER COMPANY ESOP VOTING
414 NICOLLET MALL, MINNEAPOLIS, MINNESOTA 55401 DIRECTIVE
Please sign EXACTLY as your name appears on this form.
Signature______________________________________ Date_____________________, 1998
[GRAPHIC OMITTED]
Ovals to be filled in
IMPORTANT: This Voting Directive is solicited by the Board of Directors. Please
review the enclosed Proxy Statement, complete this Voting Directive and return
it promptly in the enclosed envelope. If you plan to attend the meeting, please
review the meeting guidelines, complete the Ticket Request Form below and return
it with your Voting Directive.
(CONTINUED AND TO BE VOTED ON OTHER SIDE)
================================================================================
[LOGO] NSP 1998 ANNUAL MEETING GUIDELINES
In the interest of an orderly and constructive meeting, the following guidelines
will apply for NSP's Annual Meeting of Shareholders on Wednesday, April 22, 1998
at 10:00 a.m. at the Minneapolis Convention Center, 1301 Second Avenue South,
Minneapolis, Minnesota.
1. To gain entrance to the meeting, you must present an admission ticket or
evidence of ownership of NSP stock. To obtain an admission ticket, complete
the request form below and return it to NSP by April 10, 1998.
2. You will be required to pass through a metal detector similar to those at
airports. Briefcases, purses and parcels will be examined. The use of
cameras or sound recording equipment is prohibited, except those employed
by the Company to provide a record of the proceedings.
3. The business of the meeting is set forth in the Proxy Statement and will be
published on an Agenda that you will receive at the meeting. Whether or not
you plan to attend the meeting, please sign, date and return the ESOP
Voting Directive in the envelope provided. If you wish to change your vote
or have not voted, a ballot will be distributed to you at the meeting.
4. Time has been reserved at the end of the meeting for shareholder questions
that relate to the business of the Company. If you want to speak, please go
to the nearest microphone, state your name and confirm that you are a
shareholder before asking your question. Please direct all questions to the
Chairman. Questions from the floor are limited to three minutes to provide
an opportunity for as many shareholders as possible.
5. Although personal grievances and claims are not appropriate subjects for
the meeting, you may submit any grievance or claim in writing to any usher
or Company Representative, and the Company will respond as soon as possible
after the meeting.
6. The Chairman in his sole discretion shall have authority to conduct the
meeting and rule on any questions or procedures that may arise.
================================================================================
[LOGO] NSP NORTHERN STATES POWER COMPANY
414 NICOLLET MALL, MINNEAPOLIS, MINNESOTA 55401
ANNUAL MEETING ADMISSION AND
PARKING TICKET REQUEST FORM
IMPORTANT: Because of limited seating capacity at the Annual Meeting, employees
are urged to forego attending so that other shareholder groups may attend.
However, if you want to attend, the time away from your work would be personal
time. In keeping with Company Policy you must obtain your Supervisor's
permission to take a Vacation or MAT day. To request an Admission Ticket and
Parking Ticket, you and your Supervisor must sign below. Return the completed
form to NSP by April 10, 1998. Your Tickets will be mailed to you approximately
one week prior to the meeting along with directions and parking instructions.
- - --------------------------------------------------------------------------------
THIS IS
NOT
A VOTING
DIRECTIVE
I will attend NSP's Annual Meeting, and have read and understand the Meeting
Guidelines and security procedures. NOTE: Sign and return ONLY if you plan to
attend the meeting.
Signature of ESOP Participant_______________________ Date________________, 1998
Signature of Supervisor_____________________________ Date________________, 1998
- - --------------------------------------------------------------------------------
<PAGE>
[LOGO] NSP NORTHERN STATES POWER COMPANY ESOP VOTING
414 NICOLLET MALL, MINNEAPOLIS, MINNESOTA 55401 DIRECTIVE
The undersigned hereby instructs First Trust N.A. St. Paul, Minnesota, Trustee
of the Northern States Power Company Employee Stock Ownership Trust to vote the
common stock shares allocated to the Account of the undersigned in said Trust,
either directly or by designation of proxies, at the Annual Meeting of
Shareholders on Wednesday, April 22, 1998, at 10 a.m., and any adjournments
thereof, as follows. If you want, you can indicate your vote and your Directive
will be voted as indicated. Be sure to follow the instructions below for marking
your Directive to assure that your vote is counted. If no markings are made,
your Directive will be voted "FOR" Proposals 1,2,3,4 and 5 and "AGAINST"
Proposal 6.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2, 3, 4 AND 5.
1. ELECTION OF THREE DIRECTORS IN CLASS III. (If you wish to withhold
authority to vote for any of the Directors, strike out the appropriate
name(s)):
H. Lyman Bretting David A. Christensen Margaret R. Preska
|_| FOR |_| WITHHOLD
2. APPROVAL TO AMEND THE COMPANY'S RESTATED ARTICLES OF INCORPORATION TO
INCREASE THE NUMBER OF AUTHORIZED COMMON STOCK SHARES FROM 160
MILLION SHARES TO 350 MILLION SHARES.
|_| FOR |_| AGAINST |_| ABSTAIN
3. APPROVAL OF AMENDMENTS TO THE COMPANY'S EXECUTIVE LONG-TERM INCENTIVE
AWARD STOCK PLAN.
|_| FOR |_| AGAINST |_| ABSTAIN
4. APPROVAL OF THE COMPANY'S EXECUTIVE ANNUAL INCENTIVE AWARD PLAN.
|_| FOR |_| AGAINST |_| ABSTAIN
5. APPROVAL OF APPOINTMENT OF PRICE WATERHOUSE AS INDEPENDENT AUDITORS.
|_| FOR |_| AGAINST |_| ABSTAIN
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "AGAINST" PROPOSAL 6.
6. SHAREHOLDER RESOLUTION ON CONVERSION OF PRAIRIE ISLAND NUCLEAR PLANT
TO NATURAL GAS PLANT.
|_| FOR |_| AGAINST |_| ABSTAIN
7. IN THEIR DISCRETION TO TRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY
COME BEFORE THE MEETING.
(TO BE SIGNED ON OTHER SIDE)
================================================================================
INSTRUCTIONS FOR MARKING YOUR VOTING DIRECTIVE
Your vote is important! Please follow the instructions below for marking your
choices:
CORRECT MARK INCORRECT MARKS
|_| |_| |_| |_| |_|
* Use a No. 2 pencil or blue or black ink pen only.
* Do not use pens with ink that soaks through the paper.
* Make solid marks that fill the oval completely.
* Make no stray marks on the directive.
* Do not fold, tear or mutilate the directive.
THANK YOU FOR VOTING.
