SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) JULY 15, 1999
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NORTHERN STATES POWER COMPANY
--------------------------------
(Exact name of registrant as specified in its charter)
MINNESOTA
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(State or other jurisdiction of incorporation)
1-3034 41-0448030
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(Commission File Number) (IRS Employer Identification No.)
414 NICOLLET MALL, MPLS, MN 55401
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 612-330-5500
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(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS
- -------- -------------
On July 15, 1999, Northern States Power Company (NSP) released earnings for
the second quarter of 1999.
Additional information is contained in the investor release attached as
Exhibit 99.01.
In addition, in connection with NSP's July 15, 1999, discussion with
security analysts, NRG indicated that earnings for the six month period ended
June 30, 1999 were $1.4 million or approximately 1 cent per NSP common share.
The first six months results have been adversely affected by a decline in the
relative value in the Czech currency, which reduced 1999 year to date earnings
by $4 million or 2.5 cents per NSP common share. In addition, NRG has
experienced higher costs related to new acquisitions and additional interest
costs for project and corporate debt issuances.
NRG's earnings for the twelve months ended June 30, 1999 were
approximately 20 cents per NSP common share. It was indicated that these
earnings from underlying operations could be used as a basis to approximate 1999
underlying earnings. NRG also indicated that the following acquisitions are
expected to provide additional earnings per NSP common share benefits in the
ranges shown below:
<TABLE>
<S> <C> <C> <C> <C> <C>
EPS Impact for 6 months
Assets Acquired Cost (Millions) MW Ownership Close ended 12/31/99
Huntley/Dunkirk $ 355 1,360 100% June 1999 $0.03 - $0.06
Astoria/Arthur Kill $ 505 1,456 100% June 1999 $0.08 - $0.10
Encina/CT's $ 356 1,218 50% May 1999 $0.02 - $0.05
Somerset $ 55 229 100% April 1999 $0.01 - $0.02
Oswego $ 91 1,700 100% 4th Quarter N/A
Middletown/Devon/Norwalk $ 460 2,235 100% 4th Quarter N/A
</TABLE>
NRG stated they remain confident that they will contribute about 40 cents
per share (or approximately 20% of NSP's 1999 earnings).
This document includes forward-looking statements that are subject to
certain risks, uncertainties and assumptions. Such forward-looking statements
are intended to be identified in this document by the words "anticipate,"
"estimate," "expect," "objective," "possible," "potential" and similar
expressions. Actual results may vary materially. Factors that could cause
actual results to differ materially include, but are not limited to: general
economic conditions, including their impact on capital expenditures; business
conditions in the energy industry; competitive factors; unusual weather; changes
in federal or state legislation; regulation; issues relating to Year 2000
remediation efforts; currency translation and transaction adjustments; the
higher degree of risk associated with NSP's nonregulated businesses as compared
to NSP's regulated business; regulatory delays or conditions imposed by
regulatory agencies in approving the proposed merger with New Century Energies,
Inc.; and the other risk factors listed from time to time by NSP in reports
filed with the Securities and Exchange Commission (SEC), including Exhibit 99.01
to NSP's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
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(c) EXHIBITS
Exhibit
No. Description
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99.01 Investor Release dated July 15, 1999
-2-
<PAGE>
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Northern States Power Company
(a Minnesota Corporation)
By /s/
-------------------
Edward J. McIntyre
Vice President and Chief
Financial Officer
Dated: July 15, 1999
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-3-
Exhibit 99.01
July 15, 1999
INVESTOR RELATIONS RELEASE
--------------------------
COMMISSION RULING REDUCES NSP'S SECOND QUARTER EARNINGS BY 14
CENTS TO 6 CENTS PER SHARE
MINNEAPOLIS -- Northern States Power Co.'s (NSP) earnings for the second
quarter ended June 30, 1999, were 6 cents per share, reflecting a $35 million
charge or 14 cents per share, due to an adverse Minnesota Public Utilities
Commission (MPUC) decision related to conservation program incentives. If not
for the conservation decision, earnings for the second quarter would have been
20 cents per share in 1999, compared with 23 cents per share in 1998.
On June 24, 1999, the MPUC voted 3-2 to deny NSP recovery of 1998 lost
margins, load management discounts and incentives associated with state-mandated
programs for electric energy conservation. The MPUC's decision appears to
contradict previous orders and reduce NSP's 1998 rates retroactively. NSP plans
to challenge the MPUC's decision. Due to the uncertain outcome of the challenge,
NSP has established a regulatory reserve for recovery of 1998 conservation
program incentives. This reserve has reduced NSP's earnings by $35 million
(before tax) or 14 cents per share. The MPUC decision did not address 1999
conservation incentives.
"We are disappointed with the MPUC's decision regarding recovery of
conservation related items and we plan to ask for reconsideration," said Jim
McIntyre, vice president and chief financial officer. "Excluding the
conservation charge and assuming recovery of 1999 conservation program
incentives, we expect NSP's 1999 annual earnings to be in line with the
consensus of analysts' earnings estimates," said McIntyre.
Excluding the conservation charge, regulated utility earnings would have
been 19 cents per share for the second quarter of 1999, compared with 20 cents
per share in 1998. "NSP's utility operations remain fundamentally sound and we
view the conservation decision as an unfortunate anomaly," said McIntyre.
<PAGE>
NSP's nonregulated operations, including NRG, recorded earnings of 1 cent
per share for the second quarter of 1999, compared with earnings of 3 cents per
share in 1998. NRG second quarter earnings were 2 cents per share in 1999 and 5
cents per share in 1998. "NRG's results reflect increased costs to support new
acquisitions, timing of project earnings and additional interest expense. NRG's
year-to-date earnings are not indicative of our annual expectations. We remain
confident that NRG will contribute about 40 cents per share or 20 percent of
NSP's 1999 earnings," added McIntyre.
For the 12 months ended June 30, earnings per share were $1.63 in 1999,
compared with $1.62 in 1998. Excluding the conservation charge, earnings for
the 12 months ended June 30, 1999, would have been $1.77 per share. NRG's
earnings for the 12-month periods ended June 30, were 20 cents in 1999 and 16
cents in 1998.
This release includes forward-looking statements that are subject to
certain risks, uncertainties and assumptions. Such forward-looking statements
are intended to be identified in this document by the words "anticipate,"
"estimate," "expect," "objective," "possible," "potential" and similar
expressions. Actual results may vary materially. Factors that could cause
actual results to differ materially include, but are not limited to: general
economic conditions, including their impact on capital expenditures; business
conditions in the energy industry; competitive factors; unusual weather; changes
in federal or state legislation; regulation; issues relating to Year 2000
remediation efforts; currency translation and transaction adjustments; the
higher degree of risk associated with NSP's nonregulated businesses as compared
to NSP's regulated business; regulatory delays or conditions imposed by
regulatory agencies in approving the proposed merger with New Century Energies,
Inc.; and the other risk factors listed from time to time by NSP in reports
filed with the Securities and Exchange Commission (SEC), including Exhibit 99.01
to NSP's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999.
# # #
For more information, contact:
E J McIntyre Vice President & Chief Financial Officer 612/330-7712
P E Pender Vice President, Finance & Treasurer 612/330-7769
R J Kolkmann Director, Investor Relations 612/330-6622
NSP Internet Address: http://www.nspco.com
NSP Investor Relations Internet Address: http://www.nspco.com/ir.htm
This information is not given in connection with any
sale or offer for sale or offer to buy any security.
<PAGE>
Northern States Power Company
Diluted Earnings Per Share
Bar graph indicating second quarter diluted earnings per share:
1994 $0.37
1995 0.42
1996 0.29
1997 0.12
1998 0.23
1999 0.06 (Total)
1999 0.20 (Excluding CIP Reserve (1))
Bar graph indicating 12 months ended June 30 earnings per share:
1994 $1.70
1995 1.79
1996 1.80
1997 1.71
1998 1.62
1999 1.63 (Total)
1999 1.77 (Excluding CIP Reserve (1))
(1) Excluding conservation (CIP) reserve of $35 million or 14 cents per share.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Second Quarter 1994 1995 1996 1997 1998 1999
Weather Adjusted EPS $0.35 $0.37 $0.26 $0.23 $0.23 $0.21
Weather Impact $0.02 $0.05 $0.03 $0.01 $0.00 ($0.01)
EPS Excluding Merger/CIP $0.37 $0.42 $0.29 $0.24 $0.23 $0.20
Merger Write-off/CIP Reserve $0.00 $0.00 $0.00 ($0.12) $0.00 ($0.14)
Total EPS $0.37 $0.42 $0.29 $0.12 $0.23 $0.06
12 Months Ended June 30 1994 1995 1996 1997 1998 1999
Weather Adjusted EPS $1.69 $1.90 $1.64 $1.79 $1.78 $1.85
Weather Impact $0.01 ($0.11) $0.16 $0.04 ($0.16)($0.08)
EPS Excluding Merger/CIP $1.70 $1.79 $1.80 $1.83 $1.62 $1.77
Merger Write-off/CIP Reserve $0.00 $0.00 $0.00 ($0.12) $0.00 ($0.14)
Total EPS $1.70 $1.79 $1.80 $1.71 $1.62 $1.63
</TABLE>
See Notes to Financial Statements
<PAGE>
<TABLE>
<CAPTION>
NORTHERN STATES POWER COMPANY
Consolidated Statements of Income (Unaudited)
(Millions of dollars, except per share data)
<S> <C> <C> <C> <C> <C> <C>
3 Months Ended June 30 12 Months Ended June 30
1999 1998 Change 1999 1998 Change
Utility operating revenues
Electric:
Retail $538.7 $518.7 20.0 $2,191.3 $2,085.1 106.2
Sales for resale and other 50.1 51.9 (1.8) 224.5 188.5 36.0
Gas 70.6 68.0 2.6 465.9 463.3 2.6
Total 659.4 638.6 20.8 2,881.7 2,736.9 144.8
Utility operating expenses
Fuel for electric generation 81.3 75.5 5.8 311.6 311.7 (0.1)
Purchased and interchange power 107.2 96.9 10.3 413.8 325.4 88.4
Cost of gas purchased and transported 35.1 37.1 (2.0) 263.6 287.6 (24.0)
Other operation 101.8 96.5 5.3 403.0 378.0 25.0
Maintenance 53.1 54.4 (1.3) 184.8 174.6 10.2
Administrative and general 35.2 36.5 (1.3) 141.6 145.1 (3.5)
Conservation and energy management 16.7 16.7 0.0 71.5 71.2 0.3
Depreciation and amortization 88.1 83.1 5.0 346.6 332.6 14.0
Property and general taxes 57.4 56.3 1.1 223.3 222.6 0.7
Income taxes 17.6 20.5 (2.9) 148.2 136.3 11.9
Total 593.5 573.5 20.0 2,508.0 2,385.1 122.9
Utility operating income 65.9 65.1 0.8 373.7 351.8 21.9
Other income (expense)
Income from nonregulated businesses - before interest and taxes 0.2 7.7 (7.5) 32.0 12.3 19.7
Allowance for funds used during construction - equity (0.4) 1.8 (2.2) 7.7 6.1 1.6
Regulatory reserve - conservation program recovery (35.0) 0.0 (35.0) (35.0) 0.0 (35.0)
Other utility income (deductions) - net (4.4) (6.5) 2.1 (7.4) (3.5) (3.9)
Income taxes on nonregulated operations and nonoperating items. 35.8 11.8 24.0 66.7 50.8 15.9
Total (3.8) 14.8 (18.6) 64.0 65.7 (1.7)
Income before financing costs 62.1 79.9 (17.8) 437.7 417.5 20.2
Financing Costs
Interest on utility long-term debt 23.3 26.2 (2.9) 99.9 101.5 (1.6)
Other utility interest and amortization 7.1 2.6 4.5 18.2 15.2 3.0
Nonregulated interest and amortization 17.2 13.9 3.3 57.5 47.8 9.7
Allowance for funds used during construction - debt (0.9) (1.7) 0.8 (7.6) (8.2) 0.6
Total interest charges 46.7 41.0 5.7 168.0 156.3 11.7
Distributions on redeemable preferred securities of subsidiary trust 3.9 3.9 0.0 15.7 15.7 0.0
Total financing costs 50.6 44.9 5.7 183.7 172.0 11.7
Net income 11.5 35.0 (23.5) 254.0 245.5 8.5
Preferred stock dividends and redemption premiums 2.1 1.1 1.0 5.3 8.2 (2.9)
Earnings available for common stock $9.4 $33.9 ($24.5) $248.7 $237.3 $11.4
Average number of common shares outstanding (000's) 153,012 149,877 152,067 146,575
Average number of common and potentially dilutive
shares outstanding (000's) 153,118 150,143 152,242 146,805
Earnings per average common share - basic $0.06 $0.23 ($0.17) $1.64 $1.62 $0.02
Earnings per average common share - diluted $0.06 $0.23 ($0.17) $1.63 $1.62 $0.01
Common dividends declared per share $0.3625 $0.3575 $0.0050 $1.4350 $1.4150 $0.020
Return on average common equity 10.1% 10.2%
Return on average common equity excluding conservation reserve 10.9% 10.2%
</TABLE>
See Notes to Financial Statements on Page 2.
This information is not given in connection with any sale or offer for sale or
offer to buy any security.
-1-
<PAGE>
NORTHERN STATES POWER COMPANY (MINNESOTA) AND SUBSIDIARIES (NSP)
Notes to Financial Statements
Due to the seasonality of NSP's electric and gas sales, operating results on a
quarterly basis are not necessarily an appropriate base from which to project
annual results.
Except for the historical statements contained in this document, the matters
discussed in this investor relations release, including the statements regarding
revenue and earnings expectations, are forward-looking statements that are
subject to certain risks, uncertainties and assumptions. Such forward-looking
statements are intended to be identified in this document by the words
"anticipate," "estimate," "expect," "objective," "possible," "potential" and
similar expressions. Actual results may vary materially. Factors that could
cause actual results to differ materially include, but are not limited to:
general economic conditions, including their impact on capital expenditures;
business conditions in the energy industry; competitive factors; unusual
weather; changes in federal or state legislation; regulation; issues relating to
Year 2000 remediation efforts; the higher risk associated with NSP's
nonregulated businesses compared with NSP's regulated business; currency
translation and transaction adjustments; regulatory delays or conditions imposed
by regulatory agencies in approving the proposed merger with New Century
Energies, Inc.; and the other risk factors listed from time to time in NSP's
Securities and Exchange Commission (SEC) reports, including Exhibit 99.01 to
NSP's report on Form 10-Q for the quarter ended March 31, 1999.
1. SIGNIFICANT FACTORS AFFECTING OPERATING RESULTS
REGULATED OPERATIONS
- ---------------------
CONSERVATION IMPROVEMENT PROGRAM (CIP) RECOVERY
NSP recorded a charge to second quarter 1999 earnings of $35 million (before
tax), or 14 cents per share, due to a Minnesota Public Utilities Commission
(MPUC) disallowance of rate recovery for accrued 1998 conservation program
incentives. For more information, see Note 3 on Conservation Recovery.
ESTIMATED IMPACT OF TEMPERATURE ON EARNINGS
NSP estimates sales levels under normal weather conditions and analyzes the
approximate effect of variations from historical average temperatures on actual
sales levels. The following summarizes the estimated impact of temperature
variations on actual utility operating results (in relation to sales under
normal weather conditions).
INCREASE (DECREASE)
--------------------
1999 1998 1999
EARNINGS PER SHARE FOR THE VS VS VS
PERIOD ENDED JUNE 30: NORMAL NORMAL 1998
- ------------------------- ------ ------ ----
Quarter Ended ($0.01) $0.00 ($0.01)
Twelve Months Ended ($0.08) ($0.16) $0.08
SALES GROWTH
The following table summarizes NSP's growth in actual electric and gas
sales and growth on a weather-normalized basis for the three-month and the
12-month periods ended June 30, 1999, as compared with the same periods in 1998.
NSP's weather-normalization process removes the estimated impact on sales of
temperature variations from historical averages.
Second Quarter 12 Months Ended
-------------- ----------------
Actual Normalized Actual Normalized
------ ---------- ------ ----------
Electric Residential 3.1% 4.5% 5.4% 3.7%
Electric Commercial & Industrial (0.8%) (0.3%) 2.0% 1.6%
Total Retail Electric Sales 0.1% 0.9% 2.9% 2.2%
Electric Sales for Resale 13.7% NA 29.7% NA
Total Firm Gas Sales 34.5% 9.5% 7.9% 3.3%
OTHER OPERATION, MAINTENANCE AND ADMINISTRATIVE AND GENERAL EXPENSES
Other operation, maintenance and administrative and general expenses combined
for the second quarter of 1999, increased by $2.7 million compared with 1998.
Cost increases for plant outages and customer service and reliability
initiatives during the second quarter of 1999 offset lower storm costs.
Other operation, maintenance and administrative and general expenses combined
for the 12-month period ended June 30, 1999, increased by $31.7 million,
compared with 1998. Expenses increased due to plant outages and Nuclear
Regulatory Commission costs, Year 2000 remediation, customer service and
reliability initiatives, customer growth and the acquisition of Black Mountain
Gas. NSP's current outlook is that 1999 year-end other operation, maintenance
and administrative expenses will be lower than 1998 levels.
NONREGULATED OPERATIONS
- ------------------------
Due to the nature of its nonregulated businesses, NSP anticipates that the
earnings from these operations may vary more than earnings from regulated
utility businesses. The following table summarizes the earnings per share
contributions of NSP's nonregulated businesses.
3 Mos. Ended 12 Mos. Ended
----------------- -----------------
6/30/99 6/30/98 6/30/99 6/30/98
------- ------- ------- -------
NRG Energy Inc. (NRG) $0.02 $0.05 $0.20 $0.16
Eloigne Co. 0.01 0.01 0.04 0.04
Energy Masters International Inc. (EMI) (0.01) (0.01) (0.04) (0.08)
Seren Innovations Inc. (0.01) (0.01) (0.03) 0.01)
Other 0.00 (0.01) 0.00 0.00
---- ---- ---- ----
Total Nonregulated $0.01 $0.03 $0.17 $0.11
===== ===== ===== =====
<PAGE>
NRG
NRG's earnings for the second quarter of 1999 decreased compared with 1998
results due to increased costs related to new project acquisitions and business
development, additional interest expense, adjustments to estimated tax credits
and timing of project earnings. NRG's year-to-date earnings are not indicative
of NRG's annual expectations. NRG expects to contribute about 40 cents per
share, or 20 percent of NSP's 1999 earnings.
NRG's earnings for the 12-months ended June 30, 1999, increased compared with
1998, primarily due to the performance of the El Segundo and Long Beach
projects, partially offset by increased expenses for corporate support, new
business development and interest costs.
EMI
EMI's losses for the 12-months ended June 30, 1999, were less than 1998 losses,
largely due to increased energy services margin. In addition, results for the
12-months ended June 30, 1998, included losses associated with Enerval, a joint
venture previously held by EMI.
2. BUSINESS DEVELOPMENTS
PROPOSED BUSINESS COMBINATION
- -------------------------------
On March 24, 1999, NSP and New Century Energies, Inc. (NCE), entered into a
merger agreement, providing for a strategic business combination of NCE and NSP
to form a new entity named Xcel Energy Inc. (Xcel). At the time of the merger,
each share of NCE common stock, par value $1.00 per share, will be exchanged for
1.55 shares of Xcel common stock, par value $2.50 per share. Cash will be paid
in lieu of any fractional shares of Xcel common stock that holders of NCE common
stock would otherwise receive. NSP shares need not be exchanged and will become
Xcel shares on a one-for-one basis. The merger is expected to be a tax-free,
stock-for-stock exchange for shareholders of both companies and to be accounted
for as a pooling of interests.
On June 28, 1999, shareholders of both NSP and NCE approved the merger. NCE
shareholder approval of the merger totaled 93 percent of votes received, and 78
percent of overall shares. NSP shareholder approval of the merger totaled 83
percent and 62 percent, respectively.
The merger requires approval or regulatory review by federal regulators,
including the Federal Energy Regulatory Commission (FERC) and the SEC, as well
as state regulators in eight of the 12 states currently served by the two
companies. The approval process is expected to be completed within 12 to 18
months from the date of the merger announcement.
<PAGE>
NRG
- ---
In April 1999, NRG reached agreement to purchase the 1,700 MW oil/gas-fired
Oswego generating station for $91 million from Niagara Mohawk Power and
Rochester Gas and Electric. The facilities are located in New York. The
acquisition is expected to close in the fourth quarter of 1999, pending
regulatory approvals.
In April 1999, NRG completed its acquisition of the Somerset power station for
approximately $55 million from Eastern Utilities Associates. The Somerset
station, located in Somerset, Mass., includes two coal-fired generating
facilities with a total capacity of 181 MW and two aeroderivative combustion
turbine peaking units with a total capacity of 48 MW. A total of 69 MW of
capacity is on deactivated reserve. NRG owns a 100 percent interest in the
project.
In May 1999, NRG and Dynegy completed their acquisition of the Encina generating
station and 17 combustion turbines for $356 million from San Diego Gas &
Electric Company. The facilities, which have a combined 1,218 MW of power
generation, are located near Carlsbad and San Diego, Calif. NRG and Dynegy will
each own a 50 percent interest in the joint venture.
In June 1999, NRG completed its acquisition of the Huntley and Dunkirk
generating stations from Niagara Mohawk Power Corp. for $355 million. The two
coal-fired plants are located near Buffalo, New York, and have a combined summer
capacity of 1,360 MW. NRG owns a 100 percent interest in the project.
In June 1999, NRG completed its acquisition of the Arthur Kill generating
station and the Astoria gas turbine site for $505 million from Consolidated
Edison Company. These facilities, which are located in New York, have a combined
summer capacity rating of 1,456 MW. NRG owns a 100 percent interest in the
project.
In July 1999, NRG reached agreement to purchase electric generating stations
with a combined capacity of 2,235 MW for $460 million from Connecticut Light &
Power Company. The facilities, located in Connecticut, include the Middletown,
Montiville, Devon and Norwalk Harbor gas- and oil-fired steam generating
stations totaling 2,108 MW and 127 MW of remote gas turbines. The acquisition
is expected to close in the fourth quarter of 1999, pending regulatory
approvals.
1999 NRG Acquisitions Cost in Millions MW Ownership Close
- ----------------------- ---------------- -- --------- -----
Somerset $55 229 100% April 1999
Encina $356 1,218 50% May 1999
Huntley/Dunkirk $355 1,360 100% June 1999
Arthur Kill/Astoria $505 1,456 100% June 1999
Oswego $91 1,700 100% 4th Quarter
Middletown/Devon/Norwalk $460 2,235 100% 4th Quarter
<PAGE>
VIKING GAS
- -----------
During the second quarter of 1999, Viking Gas reached a settlement with
TransCanada Pipelines, Ltd. and NICOR, Inc., Viking's former partners in the
Viking Voyageur pipeline project, which was cancelled in 1998. The settlement
provides for Viking Gas to receive all engineering and other studies and
investigations related to the former Voyageur project in return for a cash
payment. Since the studies obtained through the settlement have continuing
value to Viking Gas for projects currently under construction and consideration,
the payment has been capitalized as a plant cost as of June 30, 1999.
FINANCING ACTIVITIES
- ---------------------
In November 1998, NSP filed a $400 million universal debt shelf registration
with the SEC. NSP currently has $50 million of registered, but unissued bonds
remaining from its $300 million first mortgage bond shelf registration, which
was filed in October 1995. NSP expects to issue $250 million of unsecured debt
during the third quarter of 1999.
In March 1999, NRG filed a shelf registration with the SEC for up to $500
million in debt securities. In May 1999, NRG issued $300 million of 7.5 percent
senior notes due in 2009 under this shelf registration. The net proceeds were
used for general corporate purposes, which included financing the development
and construction of new facilities, working capital, debt reduction and
acquisitions.
3. CONTINGENCIES
CONSERVATION RECOVERY
- ----------------------
NSP recorded a charge to second quarter 1999 earnings of $35 million, or 14
cents per share, due to disallowance of rate recovery for accrued conservation
program incentives based on a June 24, 1999 MPUC decision.
BACKGROUND - State law requires Minnesota utilities to fund and participate in
various energy conservation programs and initiatives. The MPUC allows NSP to
recover costs incurred to provide conservation programs, and has in the past
also allowed NSP to recover a portion of the profit margins lost from
conservation efforts and an incentive to reward successful conservation
programs.
After NSP's last electric rate case in 1993, NSP incurred higher levels of
conservation program expenditures, and in 1994 requested MPUC approval of a rate
recovery mechanism to avoid a significant delay between the incurring of CIP
costs and their recovery in rates. Since 1995, the MPUC has approved the use of
this special rate recovery mechanism to provide timely recovery (for NSP and
other Minnesota public utilities) of CIP costs and also to provide conservation
program incentives, including: reimbursement of a portion of electric margins
lost due to energy conservation, reimbursement of certain load management
discounts provided to customers under CIP programs, and performance incentives
based on the success of NSP's conservation programs.
MPUC procedures require an annual filing by each utility to consider approval of
conservation items. For NSP, this annual filing has typically occurred in the
second quarter of the year, and the rate recovery levels have been adjusted each
July 1 and then continued until the following June 30. The requested recovery
levels approved for NSP since 1995 have included recovery of budgeted levels of
conservation related items recoverable in the current year.
In late 1998, the MPUC considered a proposal to discontinue recovery of lost
margins and load management discounts related to conservation programs for NSP
and other Minnesota public utilities. The MPUC declined to take such action,
but put Minnesota utilities on notice that there may be significant changes,
including elimination of lost margin and load management discount recovery for
programs beginning January 2, 1999. The MPUC established a roundtable to study
the issue.
1999 DECISION - On June 24, 1999, the MPUC held a hearing to consider NSP's
April 1999 conservation filing. The MPUC voted 3-2 to deny NSP the lost margins,
load management discounts and incentives recoverable in 1998 that were
associated with state-mandated programs for electric energy conservation. NSP
plans to request reconsideration of the MPUC decision, and if necessary seek
court review. The MPUC's decision appears to contradict previous orders and
reduce NSP's 1998 rates retroactively.
Although NSP has not yet received the MPUC's order, the MPUC decision did not
appear to affect the recovery of CIP expenditures. Also, the MPUC did not
address or change 1999 conservation incentive recovery levels. However, a
review is under way.
1999 EARNINGS IMPACT - NSP plans to challenge the MPUC's decision. However, due
to the uncertainty, NSP has established a regulatory reserve as of June 30, 1999
for all income recorded for expected recovery of 1998 accruals of lost margins,
load management discounts and performance incentives. This reserve has reduced
NSP's earnings by $35 million (before tax) or 14 cents per share.
Based on MPUC practice and approvals since 1995, NSP has continued to accrue
income for 1999 conservation incentives, consistent with the levels requested in
its filing earlier this year. Through June 30, 1999 NSP has recorded pretax
income, primarily in other electric revenue, of approximately $11 million
(representing 4 cents per share) for 1999 conservation program incentives. No
reserve has been established for possible non-recovery of these amounts, pending
MPUC action on 1999 conservation programs and recovery levels.
