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>
[LOGO] NSP
March 8, 1999
Dear Shareholder:
You are cordially invited to attend the Annual Meeting of Shareholders of
Northern States Power Company on April 28, 1999, at 10:00 a.m., at Minneapolis
Convention Center, 1301 Second Avenue South, Minneapolis, Minnesota.
The matters to be voted on at the meeting are described in the Notice of
Annual Meeting of Shareholders and Proxy Statement on the following pages. In
addition to these matters, we will also report on our current operations and on
our future plans. After the voting, you will have an opportunity to ask
questions.
We are pleased to inform you that this year there are three methods
available for voting your proxy. You can mail your proxy form as you have in the
past, or you can vote by telephone or over the Internet. Instructions for voting
by telephone or the Internet are included on the proxy form.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE VOTE YOUR
PROXY PROMPTLY. YOUR VOICE IS IMPORTANT, REGARDLESS OF THE NUMBER OF SHARES YOU
HOLD.
IF YOU PLAN TO ATTEND THE ANNUAL MEETING, PLEASE BRING THE ADMISSION
TICKET ATTACHED TO THE ENCLOSED PROXY FORM. A COMPLIMENTARY PARKING PASS WITH
PARKING LOCATION INSTRUCTIONS IS ALSO ATTACHED TO THE PROXY FORM. REFRESHMENTS
WILL BE SERVED FROM 8:45-9:45 A.M. AND NSP'S REDDY KILOWATT AND REDDY FLAME
WILL BE AVAILABLE FOR PHOTOGRAPHS WITH SHAREHOLDERS.
Our annual meetings are helpful in maintaining communications and
understanding between our Board of Directors and shareholders. We hope you will
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 28, 1999, at 10:00 a.m.,
at Minneapolis Convention Center, 1301 Second Avenue South, Minneapolis,
Minnesota for the following purposes:
(1) To elect 3 directors to Class I until the Annual Meeting of
Shareholders in 2002;
(2) To ratify the appointment of PricewaterhouseCoopers LLP, Certified
Public Accountants, as independent auditors of the Company for 1999;
(3) To vote on a proposal to amend the Company's Restated Articles of
Incorporation to remove limitations on the Company's issuance of
unsecured indebtedness;
(4) To vote on a proposal to amend the Company's Restated Articles of
Incorporation to remove provisions relating to series of preferred
stock that have been redeemed; and
(5) To transact such other business as may properly come before the
meeting or any adjournment thereof.
If Item 3 is adopted at the Annual Meeting, each preferred shareholder of
the Company will be entitled to receive a special cash dividend of $1.00 for
each share held as of March 1, 1999, the record date fixed for the Annual
Meeting.
Under Section 302A.471 of the Minnesota Business Corporation Act, holders
of NSP preferred stock have the right to dissent from the proposal to amend the
Restated Articles of Incorporation to remove limitations on the issuance of
unsecured indebtedness and, if such amendment is approved, to obtain payment of
the fair value of their shares. Sections 302A.471 and 302A.473 of the Minnesota
Business Corporation Act are attached in full as Annex A to the accompanying
Proxy Statement, which also includes a description of the procedure to be
followed under those sections by a preferred stockholder wishing to dissent.
Shareholders who own stock at the close of business on March 1, 1999, will
be entitled to notice of, and to vote at, this Annual Meeting.
Minneapolis, Minnesota By order of the Board of Directors
March 8, 1999 John P. Moore, Jr.
SECRETARY
PLEASE REMEMBER TO VOTE YOUR PROXY
<PAGE>
NORTHERN STATES POWER COMPANY
414 NICOLLET MALL
MINNEAPOLIS, MINNESOTA 55401
PROXY STATEMENT
INTRODUCTION
Your Board of Directors is sending you this proxy statement in connection
with the solicitation of your proxy for use at the Annual Meeting. When you
vote by proxy, you appoint Edward J. McIntyre, Gary R. Johnson and John P.
Moore, Jr. as your representatives at the Annual Meeting. Edward J. McIntyre,
Gary R. Johnson and John P. Moore, Jr. will vote your shares, as you have
instructed them on the proxy form, at the Annual Meeting. This way, your shares
will be voted whether or not you attend the Annual Meeting. Even if you plan to
attend the meeting, it is a good idea to vote by proxy in advance of the
meeting just in case your plans change.
If an issue comes up for vote at the meeting that is not covered by your
proxy, Edward J. McIntyre, Gary R. Johnson and John P. Moore, Jr. will vote
your shares, under your proxy, in accordance with their best judgment.
VOTING PROCEDURES; REVOCATION OF PROXY
You may vote by mail, in person, by telephone or by the Internet. To vote
by mail, simply complete and sign the proxy form and mail it in the enclosed,
prepaid and preaddressed envelope. If you mark your voting instructions on the
proxy form, your shares will be voted as you instruct. If you return a signed
form but do not provide voting instructions, your shares will be voted FOR the
three named nominees and FOR each of the other items indicated on the prior
page.
If you wish to vote in person, we will pass out written ballots at the
meeting. If you hold your shares in street name (i.e., they are held by your
broker in an account for you), you must request a legal proxy from your broker
in order to vote at the meeting.
If you wish to vote by telephone or the Internet, please follow the
instructions included on the enclosed proxy form. If you vote by telephone or
the Internet, it is not necessary to mail in your proxy form. Telephone and
Internet voting is also available to shareholders who hold their shares in the
Employee Stock Ownership Plan (ESOP) and the Dividend Reinvestment and Stock
Purchase Plan (DRIP).
If you change your mind after voting your proxy, you can revoke your proxy
and change your vote at any time before the polls close at the meeting. You can
revoke your proxy by either signing another proxy with a later date, voting a
second time by telephone or by the Internet, or voting again at the meeting.
Alternatively, you may provide a written statement to the Company (attention,
John P. Moore, Jr., Secretary) of your intention to revoke your proxy.
RECORD DATE; NUMBER OF VOTES
If you owned shares of the Company's stock at the close of business on
March 1, 1999, you are entitled to vote at the meeting.
If you owned common stock, you are entitled to one vote per common share
upon each matter presented at the Annual Meeting. If you owned preferred stock
(other than the $3.60 Series), you also are entitled to one vote per share of
preferred stock upon each matter presented at the Annual Meeting. If you owned
shares of the $3.60 Series of preferred stock, you are entitled to three votes
per share of $3.60 series preferred upon each matter presented at the Annual
Meeting.
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On March 1, 1999, there were 153,135,578 shares of common stock, 275,000
shares of $3.60 Series preferred stock and 775,000 shares of other NSP preferred
stock outstanding. US Bank, the Trustee for our ESOP, holds approximately 7.57%
of the Company's common stock for the benefit of ESOP participants, none of whom
has a total beneficial interest of more than .009% of the Company's outstanding
voting securities. We also have been notified by J.P. Morgan & Co. Incorporated,
60 Wall Street New York, New York 10260, that it holds 11,929,647 shares,
approximately 7.8% of our common stock. No other person holds of record or, to
our knowledge, beneficially owns more than 5% of any class of our outstanding
voting securities.
EXPENSES OF PROXY SOLICITATION
We will pay all costs associated with preparing, assembling and mailing the
proxy materials and proxy statements. We also will reimburse brokers, nominees,
fiduciaries and other custodians for their expenses in forwarding proxy
materials to shareholders. Officers and other employees of the Company may
solicit proxies by mail, personal interview, telephone and/or telegraph. In
addition, we have retained Georgeson & Company, Inc. to assist in the
solicitation of proxies, at a fee of approximately $8,500 plus associated costs
and expenses. Our employees will not receive any additional compensation for
soliciting proxies.
MAILING OF PROXY STATEMENT AND ANNUAL REPORT
This proxy statement, the enclosed proxy materials and our Annual Report
for the year 1998 were mailed on or about March 8, 1999 to all of our
shareholders who owned stock on March 1, 1999. The following portions of the
Annual Report are incorporated in, and made a part of, this proxy statement just
as if they had been set forth in 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.
SPECIAL CASH DIVIDEND
If Item 3, the amendment to the Company's Restated Articles of
Incorporation to remove the limitation on the issuance of unsecured debt, is
adopted at the Annual Meeting, the Company will pay a Special Cash Dividend of
$1.00 per share to each holder of preferred stock as of March 1, 1999, the
record date for the Annual Meeting.
VOTING OF SHARES HELD UNDER ESOP OR DRIP
If you are a participant in our ESOP, you will receive an ESOP voting
directive for shares allocated to your account under the ESOP. The Trustee for
the ESOP will vote such shares as instructed by you in your ESOP voting
directive. If you do not return an ESOP voting directive, the Trustee will vote
your allocated ESOP shares, along with all unallocated shares held in the ESOP,
in the same proportion that all allocated shares in the ESOP are voted.
If you are a participant in our DRIP, your proxy form will include the
shares held on your behalf under the DRIP and such shares will be voted in
accordance with your proxy vote. If you do not vote your proxy, your shares in
the DRIP will not be voted.
VOTING OF SHARES HELD IN STREET NAME BY YOUR BROKER
Brokerage firms have authority under New York Stock Exchange Rules to vote
customers' unvoted shares on certain "routine" matters, including the election
of directors. If you do not vote your proxy, your brokerage firm may either vote
your shares on routine matters or leave your shares unvoted. We encourage you to
provide instructions to your brokerage firm by voting your proxy. This ensures
your shares will be voted at the meeting. When a brokerage firm votes its
customers' unvoted shares on
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<PAGE>
routine matters, these shares are counted for purposes of establishing a quorum
to conduct business at the meeting. A brokerage firm, however, cannot vote
customers' shares on non-routine matters. Accordingly, these shares (sometimes
referred to as broker non-votes) are considered not entitled to vote on
non-routine matters, rather than as a vote against the matter.
PROPOSAL NO. 1 -- ELECTION OF DIRECTORS
GENERAL INFORMATION
Our Bylaws provide that the Board of Directors must 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, with each class as nearly equal in
number as possible. Each class has a staggered term of office so that one class
of directors will be elected at each annual meeting for a term of three years.
In January 1999, the Board of Directors unanimously elected Allan L.
Schuman to complete the unexpired term of Dale L. Haakenstad, who retired in
April, 1998. Mr. Schuman's term will expire at this year's Annual Meeting, and
as indicated below, he has been nominated for election for a three-year term
expiring in 2002.
Richard M. Kovacevich has resigned his position as a member of the Board of
Directors effective April 1, 1999.
At the Annual Meeting, the following three individuals are the nominees to
be elected to the Board of Directors to serve in Class I until the Annual
Meeting of Shareholders in the year 2002 and until their successors are elected
and have qualified: W. John Driscoll, James J. Howard and Allan L. Schuman. Each
of these nominees is currently a director of the Company whose term is scheduled
to expire at this Annual Meeting. The remaining six directors will continue to
serve the terms described in their biographies.
Each of the nominees has 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.
You are entitled to vote cumulatively for the election of directors. This
means that you are entitled to a number of votes equal to the number of votes
entitled to be cast with respect to the shares held by you multiplied by the
number of directors of each class to be elected (I.E., 3). You may cast all your
votes for one nominee or distribute your votes among the nominees. The election
of each director shall be decided by plurality vote. This means that the three
individuals receiving the most votes will be elected. 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.
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CLASS I -- NOMINEES FOR TERMS EXPIRING IN 2002
[PHOTO] W. JOHN DRISCOLL, age 69, was associated with the Rock
DIRECTOR SINCE 1974 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 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] JAMES J. HOWARD, age 63, is Chairman, President and
DIRECTOR SINCE 1987 Chief Executive Officer of NSP and has served in such
capacity since December 1, 1994. He earned a bachelor's
degree from the University of Pittsburgh, and in 1969
was awarded a Sloan Fellowship to MIT where he received
his master of science degree in 1970. Before joining NSP
as president and CEO in 1987, 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 that, he served as Chairman and CEO of Wisconsin
Bell.
Mr. Howard is also a director of Ecolab Inc.,
Honeywell Inc., ReliaStar Financial Corp., Walgreen Co,
and the Federal Reserve Bank of Minneapolis. He also is
on the Board of Trustees for the University of St.
Thomas in St. Paul, Minnesota; and the Board of Visitors
for the University of Pittsburgh, Joseph M. Katz
Graduate School of Business in Pittsburgh, Pennsylvania.
In addition, Mr. Howard serves as a director of
the Minnesota Business Partnership, the MEDA Advisory
Board, Danny Thompson Memorial Leukemia Foundation,
Capital City Partnership, the Minnesota Center for
Corporate Responsibility, and is a senior member of The
Conference Board, Inc. He also is a member of the
International Energy Agency Coal Industry Advisory Board
in Paris, France; and is a director of the Nuclear
Energy Institute, the Edison Electric Institute, and
Association of Edison Illuminating Companies, Inc.
[PHOTO] ALLAN L. SCHUMAN, age 64, is President and Chief
DIRECTOR SINCE 1999 Executive Officer and a director of Ecolab Inc. in St.
Paul, Minnesota. Ecolab develops and manufactures
cleaning, sanitizing, and maintenance products for the
hospitality, institutional, and industrial markets.
Mr. Schuman joined Ecolab in 1957, and became Vice
President, Institutional, Marketing and National
Accounts in 1972. In 1985 he was named Executive Vice
President and in 1988, President, Ecolab Services Group.
He was promoted to President and Chief Operating Officer
of the Company in August 1992, and named President and
Chief Executive Officer in March 1995.
Mr. Schuman serves as a director of the Soap and
Detergent Association, American Marketing Association
Services Council, Hazelden Foundation, the Ordway Music
Theatre and the Guthrie Theatre. He is also a Trustee of
the Culinary Institute of America and of the National
Education Foundation of the National Restaurant
Association, and a member of the Board of Overseers of
Carlson School of Management at the University of
Minnesota.
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CLASS III -- DIRECTORS WHOSE TERMS EXPIRE IN 2001
[PHOTO] H. LYMAN BRETTING, age 62, is President and Chief
DIRECTOR SINCE 1990 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 past president and director of the Ashland
Foundation.
[PHOTO] DAVID A. CHRISTENSEN, age 62, is President, Chief
DIRECTOR SINCE 1976 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.
In 1998, Mr. Christensen was inducted into the South
Dakota Hall of Fame. In 1993, he was honored as South
Dakotan of the Year by the University of South Dakota
and as South Dakota Sales and Marketing Executive of the
Year by Sales and Marketing Executives, Inc. of Sioux
Falls, South Dakota.
Mr. Christensen also serves as a director of Wells
Fargo & Co, San Francisco, California; Beta Raven, Inc.,
St. Louis, Missouri; 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] DR. MARGARET R. PRESKA, age 61, is the Distinguished
DIRECTOR SINCE 1980 Senior Fellow for Academic Affairs of the Minnesota
State Colleges and Universities (MNSCU) and the
Distinguished Service Professor for the Minnesota State
Universities. She was President of Minnesota State
University, Mankato, 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 is on special assignment from MNSCU as
CEO and Provost to establish the Abu Dhabi campus of
Zayed National Women's University in the United Arab
Emirates.
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.
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CLASS II -- DIRECTORS WHOSE TERMS EXPIRE IN 2000
[PHOTO] GIANNANTONIO FERRARI, age 59, was named President and
DIRECTOR SINCE 1997 Chief Operating Officer and a director of Honeywell,
Inc., a supplier of control technology for homes,
businesses and avionics, effective April 15, 1997. Prior
to that he was president of Honeywell Europe, based in
Brussels, Belgium.
Ferrari joined Honeywell in 1960 through Gavazzi
SpA who were the official agents and distributors for
Honeywell in Italy at the time. When Honeywell Italia
was formed in 1965, Giannantonio Ferrari was one of its
first employees and went on to hold a variety of
managerial positions in Italy. In 1981, Ferrari was
appointed Controller for Honeywell Europe and was
promoted to vice president of finance and administration
for Honeywell Europe in 1985. In 1988, he returned to
Italy to the position of vice president, Western Europe,
Middle East and Africa.
Ferrari holds a degree as a chartered accountant
from the Catholic University of Milan, Italy. He is on
the Board of Governors, National Electrical
Manufacturers Association, and the Board of Directors,
National Association of Manufacturers.
[PHOTO] DOUGLAS W. LEATHERDALE, age 62, is Chairman and Chief
DIRECTOR SINCE 1991 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, 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 of
the Minnesota Orchestral, Association, Chairman of the
University of Minnesota Foundation and a trustee of
Carleton College. He is a member of the Twin City
Society of Security Analysts and the Financial
Executives Institute.
[PHOTO] A. PATRICIA SAMPSON, age 50, currently operates The
DIRECTOR SINCE 1985 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 member of the Minnesota Women's Economic
Roundtable and the Utility Women's Conference. She is
active in Christian education. She serves on the David
W. Preus Leadership Award Sponsoring Council. She
previously served on the boards of the Greater
Minneapolis Area United Way, Minneapolis Urban League
and the Minnesota Orchestral Association.
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INFORMATION CONCERNING THE BOARD OF DIRECTORS
DIRECTOR MEETINGS
There were 11 meetings of the Board of Directors in 1998. Each director
attended at least 88% of the total number of meetings of the Board and
Committees on which such director served during 1998.
COMMITTEES OF THE BOARD
There are four committees of the Board of Directors whose duties and
responsibilities are described below.
<TABLE>
<CAPTION>
NAME OF COMMITTEE NUMBER OF MEETINGS
AND MEMBERS FUNCTIONS OF THE COMMITTEE IN 1998
- ------------------------------- -------------------------------------- ------------------
<S> <C> <C>
CORPORATE MANAGEMENT * Determines Board organization, 3
David A. Christensen selects director nominees and sets
W. John Driscoll(1) director compensation
Douglas W. Leatherdale * determines senior management
Margaret R. Preska organization and compensation
* reviews corporate structure and
policies with respect to
* mergers and acquisitions
* human resource policies
* corporate ethics
* long range planning and strategy
AUDIT * reviews auditing activities by 3
H. Lyman Bretting internal and external auditors
Richard M. Kovacevich(2) * reviews financial reporting, internal
A. Patricia Sampson(1) controls and accounting policies and
practices
* reviews matters affecting protection
and recovery of assets of the Company
* oversees dedicated funds, including
ERISA plans and nuclear
decommissioning fund
POWER SUPPLY * oversees all generation requirements 3
David A. Christensen(1) (nuclear, hydro, coal, alternative)
W. John Driscoll * oversees bulk power supply planning
Giannantonio Ferrari * oversees major power supply facility
Douglas W. Leatherdale construction and budgets
Margaret R. Preska * monitors nuclear plant safety,
reliability and operation
FINANCE * oversees corporate capital structure 3
H. Lyman Bretting and budgets
Giannantonio Ferrari * oversees financial plans and dividend
Richard M. Kovacevich(1)(2) policies
A. Patricia Sampson * recommends dividends
* oversees insurance coverage and
banking relationships
* oversees investor relations
</TABLE>
- ---------------------
(1) Chairperson
(2) Resignation effective April 1, 1999
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DIRECTOR COMPENSATION
Employees of the Company receive no separate compensation for service as a
director. During 1998, directors not employed by the Company received a $25,000
annual retainer (or a pro rata portion if service was less than 12 months) and
$1,200 for each Board and Committee meeting attended. These directors also
received a grant of stock equivalent units under the Stock Equivalent Plan for
Non-Employee Directors, which was established in 1996 and is described below.
Additionally, a $2,500 annual retainer was paid to each elected Committee
Chairperson. Prior to January 1, 1998, directors also 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. Effective January 1, 1998, certain changes
were made to the directors' compensation program, including an increase from
$20,000 to $25,000 in the the annual retainer and an increase from $1,000 to
$1,200 in the Committee meeting fee. The remaining changes in the directors'
compensation program are discussed below.
In 1996, we established a Stock Equivalent Plan for Non-Employee Directors
(the "Stock Equivalent Plan") to more closely align directors' interests with
those of our 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 April 23, 1998, non-employee directors each received an award of
744.934 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. Additional stock equivalent units were accumulated during
1998 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.
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 our continuing effort to align
directors' interests with those of our shareholders, effective January 1, 1998,
we 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 6203.55, 9305.32,
9305.32, 6203.55, 5376.44, 8271.40 and 8271.40 stock equivalents, respectively.*
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 was amended to permit a director to defer director retainer and
meeting fees into the Stock Equivalent Plan.
- --------------------
* Stock equivalent units are expressed in amounts reflecting the June 1, 1998
two-for-one common stock split.
8
<PAGE>
SHARE OWNERSHIP OF DIRECTORS, NOMINEES AND NAMED EXECUTIVE OFFICERS
The following table lists the beneficial ownership of NSP common stock
owned as of February 23, 1999, 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.
On June 1, 1998, the Company effected a two-for-one split of its common
stock. Shares of common stock, stock options and stock equivalent units shown in
the following tables and footnotes and elsewhere in this proxy statement reflect
this split.
<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 ............... 2,832 7,851 -- -- 10,683
David A. Christensen ............ 1,000 11,157 -- -- 12,157
W. John Driscoll ................ 4,000 11,157 -- -- 15,157
Giannantonio Ferrari ............ -- 2,660 -- -- 2,660
James J. Howard ................. 73,908 -- 264,694 25,534 364,136
Richard M. Kovacevich ........... 2,000 7,851 -- -- 9,851
Douglas W. Leatherdale .......... 600 8,997 -- -- 9,597
Margaret R. Preska .............. 1,200 10,055 -- -- 11,255
A. Patricia Sampson ............. 911 10,055 -- -- 10,966
Paul E. Anders .................. 2,062 -- 11,134 3,874 17,070
Edward J. McIntyre .............. 25,041 -- 90,013 6,757 121,811
Loren L. Taylor ................. 17,520 -- 59,808 5,168 82,496
Edward L. Watzl ................. 19,939 -- 64,922 -- 84,861
------- ------ ------- ------ ---------
Directors and executive
officers as a group ............ 221,262 69,783 756,892 70,412 1,118,349
</TABLE>
(1) Represents stock units awarded under the Stock Equivalent Plan for
Non-employee Directors as of February 23, 1999.
(2) Represents exercisable options and performance units under the current
Long-Term Incentive Program (LTIP) as of February 23, 1999. Options to
purchase common stock of the Company which are exercisable within the next
60 days are 260,700 option shares for Mr. Howard, 64,922 option shares for
Mr. Watzl, 88,738 option shares for Mr. McIntyre, 59,314 option shares for
Mr. Taylor and 11,134 option shares for Mr. Anders. The number of shares
that would have been payable upon the exercise of performance units on
February 23, 1999 are: 3,994 for Mr. Howard, 0 for Mr. Watzl, 1,275 for Mr.
McIntyre, 494 for Mr. Taylor and 0 for Mr. Anders.
9
<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, 1998, 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 1998 700,000 286,300 9,578 441,000 32,558 0 19,545
Chairman, President & 1997 672,000 197,000 11,705 477,120 35,416 0 23,429
Chief Executive Officer 1996 622,000 401,000 7,610 478,940 30,528 0 20,056
EDWARD J. MCINTYRE 1998 340,000 96,300 2,444 125,800 13,284 0 15,283
Vice President & Chief 1997 260,000 58,000 961 109,200 11,510 0 11,412
Financial Officer 1996 241,000 105,000 985 108,450 9,936 0 4,378
PAUL E ANDERS, JR.(6) 1998 285,000 263,500 5,461 105,450 11,134 0 4,211
Vice President and 1997 183,334 236,000 12,651 0 0 0 5,671
Chief Information
Officer
EDWARD L. WATZL 1998 280,000 139,100 545 103,600 10,940 0 11,206
President, NSP 1997 223,667 63,000 3,077 92,068 6,702 0 13,913
Generation 1996 175,000 85,000 1,986 56,000 5,840 0 4,584
LOREN L. TAYLOR 1998 240,000 103,600 1,401 88,800 9,376 0 9,434
President, NSP Electric 1997 232,000 65,000 1,134 97,440 10,270 0 15,537
1996 215,000 84,000 1,312 96,750 8,864 0 5,201
</TABLE>
- ------------------
(1) This column consists of awards made to each named executive under the
Company's current Executive Annual Incentive Program and, with respect to
Mr. Anders, also includes an additional payment of $150,000 in each of 1997
and 1998 to replace compensation opportunities that Mr. Anders forfeited
when he left his previous employer.
(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 1998 under the Company's LTIP were granted on
January 27, 1999 based on the performance period ending September 30, 1998.
As of December 31, 1998, the named executives held the following as a
result of grants under the LTIP: Mr. Howard held 29,740 restricted shares
at a market value of $825,285; Mr. McIntyre held 6,779 restricted shares at
a market value of $188,117; Mr. Anders held 0 restricted shares at a market
value of $0; Mr. Taylor held 6,048 restricted shares at a market value of
$167,832 and Mr. Watzl held 4,877 restricted shares at a market value of
$135,337. 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.
The total number of restricted shares awarded for the years 1996, 1997 and
1998 are as follows: 54,599 shares for Mr. Howard, 13,358 shares for Mr.
McIntyre, 3,874 shares for Mr. Anders, 11,057 shares for Mr. Taylor and
9,644 shares for Mr. Watzl.
(4) The Company had no LTIP payouts in 1998.
(5) This column consists of the following: $1,749.73 was contributed by the
Company for the Employee Stock Ownership Plan (ESOP) for each named
executive officer (the Company contribution on behalf of all ESOP
participants, including the named executive officers was equal to 1.09% 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: $8,970 for Mr. Howard, $1,876 for Mr. McIntyre, $2,289
for Mr. Watzl, $2,691 for Mr. Taylor and $1,555 for Mr. Anders; imputed
income as a result of life insurance paid by the Company on behalf of each
named executive: $4,323 for Mr. Howard, $471 for Mr. McIntyre, $1,241 for
Mr. Watzl, $149 for Mr. Taylor and $0 for Mr. Anders; Company matching
401(k) plan contribution of $900 to each named
10
<PAGE>
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 $3,603 for Mr. Howard,
$10,286 for Mr. McIntyre, $5,026 for Mr. Watzl, $3,944 for Mr. Taylor and
$6 for Mr. Anders.
(6) Mr. Anders joined the Company in May 1997.
OPTIONS AND STOCK APPRECIATION RIGHTS (SARs)
The following table indicates for each of the named executives (i) the
extent to which the Company used stock options and SARs for executive
compensation purposes in 1998 and (ii) the potential value of such options and
SARs as determined pursuant to the SEC rules.
OPTIONS AND SARs GRANTED IN 1998
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM
- ------------------------------------------------------------------------------------ -----------------------------------
(a) (b) (c) (d) (e) (f) (g)
% OF TOTAL
OPTIONS AND
OPTIONS/ SARs EXERCISE
SARs GRANTED TO OR BASE
GRANTED(1) EMPLOYEES PRICE EXPIRATION
NAME (#) IN 1998 ($/Sh) DATE 5%($)(2) 10%($)(2)
- -------------------- -------------- ------------ ---------- ---------- -------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
J. Howard 32,558 options 5.69% 26.8750 01/28/08 $ 550,280 $ 1,394,519
E. McIntyre 13,284 options 2.32% 26.8750 01/28/08 $ 224,520 $ 568,978
E. Watzl 10,940 options 1.91% 26.8750 01/28/08 $ 184,903 $ 468,580
L. Taylor 9,376 options 1.64% 26.8750 01/28/08 $ 158,469 $ 401,591
P. Anders 11,134 options 1.95% 26.8750 01/28/08 $ 188,182 $ 476,890
All Shareholders(3) N/A N/A 26.8750 N/A $6,548,097,330 $10,426,750,631
</TABLE>
- ------------------
(1) Options were granted on January 28, 1998 and vested on January 28, 1999. No
SARs were awarded for 1998.
(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
28, 1998, are based on the market price ($26.8750) and the outstanding
shares (149,580,046) of common stock of the Company on that date.
The following table indicates for each of the named executives the number
and value of exercisable and unexercisable options and SARs as of December 31,
1998.
AGGREGATED OPTION AND SAR EXERCISES IN 1998
AND FY-END OPTION/SAR VALUE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (e)
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
SHARES OPTIONS AND SARs AT 12/31/98 OPTIONS AND SARs AT
ACQUIRED ON REALIZED (#) -- EXERCISABLE (ex)/ 12/31/98 ($) -- EXERCISABLE (ex)/
NAME EXERCISE(#) VALUE($) UNEXERCISABLE (unex) UNEXERCISABLE (unex)*
- ---- ----------- -------- ---------------------------- ---------------------------------
<S> <C> <C> <C> <C>
J. Howard N/A N/A 232,136 (ex) 1,547,536 (ex)
32,558 (unex) 28,488 (unex)
E. McIntyre N/A N/A 76,729 (ex) 510,091 (ex)
13,284 (unex) 11,623 (unex)
E. Watzl N/A N/A 26,445 (ex) 125,286 (ex)
10,940 (unex) 9,572 (unex)
L. Taylor N/A N/A 50,441 (ex) 277,998 (ex)
9,376 (unex) 8,204 (unex)
P. Anders N/A N/A -- (ex) -- (ex)
11,134 (unex) 9,742 (unex)
</TABLE>
- ------------------
*Share price on December 31, 1998 was $27.7500. Unexercisable options were
granted on January 28, 1998 at a price of $26.8750. No SARs were granted in
1998.
11
<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 programs with full authority to establish and interpret the terms of
the programs and to make payment of the awards.
COMPENSATION STRATEGY. Our executive compensation goals for 1998 were: (i)
to provide a competitive compensation package enabling us to attract and retain
key executives and (ii) to align the executives' interests with those of our
stockholders and with our performance. The 1998 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 1998, 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 Index of
Investor-Owned Electrics ("EEI Electrics") 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 we compete 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 our
shareholders and with our performance. These portions of an executive's
compensation are placed at risk and are linked to the accomplishment of specific
results that are designed to benefit our shareholders and the Company, 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 their 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 1998 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, 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 amended, effective January 1, 1998, its long-term
incentive plan and adopted, effective January 1, 1998, a new annual incentive
plan. The shareholders approved both plans at last year's 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
12
<PAGE>
pay level for the executive's 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
1998 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 1997.
The 1998 base pay amounts for the named executives are reflected in the salary
column of the Summary Compensation Table.
ANNUAL INCENTIVE. For 1998, annual incentive awards for the executive
officers were made in accordance with the Company's Executive Annual Incentive
Program (the "Program"). Under the Program, 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 1998, target awards for executive officers
ranged from 30% to 55% of their base pay. Individuals could realize from 0% to
225% of their target awards dependent on the performance of the Company, and the
individual's group in certain predetermined areas. These areas were Company
financial performance (based on EPS), customer satisfaction, service
reliability, product price/cost and safety. The awards given to the CEO, the
Vice President and Chief Financial Officer, the President-NSP Nuclear Generation
and the Executive Vice President 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 40% to 50%
of an executive's target incentive award. All of the other areas accounted for
between 10% and 25% of the target awards. Based on NSP results, executives
received from 74% to 144% of their targeted incentive awards for 1998. The
annual awards paid for 1998 are reflected in the bonus column of the Summary
Compensation Table.
Mr. Howard's annual incentive award payout for 1998 was $286,300, 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 55% of his base pay and was based 50% on
financial performance, 15% on safety, 5% on nuclear safety, 10% on customer
satisfaction, 10% on price of product and 10% on reliability.
LONG-TERM INCENTIVE. For 1998, long-term incentive awards for executive
officers were determined in accordance with the Long-Term Incentive Program (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 our shareholders through the use of stock ownership and
long-term financial performance goals.
The Corporate Management Committee made one grant of stock options during
1998 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 our stock when our shareholders are similarly benefited.
Target awards for 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. For
13
<PAGE>
1998, actual awards ranged from 26% to 63% 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 ending as of September 30 prior
to the year in which the restricted stock is granted, in comparison to the three
year average ROE of the EEI Electrics index (the same index used for purposes of
comparing shareholder return.) No restricted stock awards are made unless our
three year average ROE is at least equal to the median of the EEI Electrics
index, thereby prohibiting restricted stock awards when our performance does not
surpass the median performance of utilities in the index. If our 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 1998 performance period, our ROE was .60% above the
median, resulting in a payout of 105% 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 1998, Mr. Howard received an option for 32,558 shares. For 1998, Mr.
Howard also received 16,760 shares of restricted stock (63% 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 1998 to its executives are contributions to the Employee Stock
Ownership Plan (ESOP) (at 1.09% of the individual's covered compensation - the
same rate applied to all other ESOP participants), Company paid life insurance
in an amount equal to five times base pay for Mr. Howard and three times base
pay for all other executives, 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 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
14
<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 1998, the Company
believes that all reports were filed on a timely basis except that the initial
ownership report filed on behalf of Mr. John A. Noer, President NSP Combustion
and Hydro Generation, was late.
15
<PAGE>
TOTAL SHAREHOLDER RETURN COMPARISON
The graph below compares the Company's cumulative total shareholder return
on common stock with the cumulative total return of the Standard & Poor's 500
Composite Stock Price Index, the Edison Electric Institute Index of
Investor-Owned Electrics (EEI Electrics Index), and the EEI Combination Gas and
Electric Investor-Owned Utility Index (EEI Combination Gas Electric Index) over
the last five fiscal years (assuming a $100 investment in each vehicle on
December 31, 1993 and the reinvestment of all dividends.)
The EEI Combination Gas and Electric Index includes 44 companies. All are
included in the EEI Electrics Index, which currently includes 89 companies and
constitutes a broader measure of industry performance.
COMPARATIVE TOTAL RETURN
[PLOT POINTS CHART]
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NSP ................................ $100 $109 $128 $127 $170 $170
EEI Electrics ...................... $100 $ 88 $116 $117 $149 $170
EEI Combination Gas & Electric...... $100 $ 87 $111 $110 $143 $166
S&P 500 ............................ $100 $101 $139 $171 $229 $294
</TABLE>
16
<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
--------------------------------------------------------------------------
YEARS OF SERVICE
AVERAGE --------------------------------------------------------------------------
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 $ 46,500 $ 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 $ 99,000 $119,000
$ 300,000 $24,000 $ 48,000 $ 72,000 $ 95,500 $119,500 $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 $144,500 $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 $221,500 $266,000
$ 600,000 $48,500 $ 97,000 $145,500 $193,500 $242,000 $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 $242,500 $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 $344,000 $413,000
$ 900,000 $73,000 $146,000 $219,000 $291,500 $364,500 $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
$1,050,000 $85,000 $170,500 $255,500 $340,500 $426,000 $511,000
$1,100,000 $89,500 $178,500 $268,000 $357,000 $446,500 $535,500
$1,150,000 $93,500 $186,500 $280,000 $373,500 $466,500 $560,000
$1,200,000 $97,500 $195,000 $292,500 $389,500 $487,000 $584,500
wage base: $68,400
</TABLE>
- --------------------
As of January 1, 1999, pension benefits were changed. Prior to January 1,
1999, each nonbargaining employee was given an opportunity to choose
between two retirement programs, the Traditional Program and the Pension
Equity Program. All of the executive officers named in the Summary
Compensation Table chose the Traditional Program for their pension
benefits.
Under the TRADITIONAL PROGRAM, the annual compensation used to calculate
the average compensation uses base salary for the year, and, for certain
individuals, including Messrs. Howard, McIntyre and Taylor, bonus
compensation paid in that same year. After an employee has reached 30 years
of service, no additional years of service are used in determining the
pension benefit under the Traditional Program. The basic pension benefit
under the Traditional Program payable at age 65 is the same as the benefit
payable under the pension plan as of December 31, 1998. The benefit amounts
under the Traditional Program are computed in the form of a straight-life
annuity.
Under the PENSION EQUITY PROGRAM, the annual compensation used to calculate
average compensation uses base salary for the year and bonus compensation
paid in that same year, with no maximum on the number of years used to
determine the pension benefit. The benefit amounts under the Pension Equity
Program are computed in the form of a lump sum. The formula for determining
the lump sum is average compensation times years of service times 10
percent.
Both programs feature a cash balance side account, which credits $1,400
annually, plus interest each year. The opening balance as of January 1,
1999 is $1,400 times years of service.
The benefit amounts shown above reflect the plan in effect as of December
31, 1998 and therefore do not reflect the cash balance benefits.
At the end of 1998, each of the executive officers named in the Summary
Compensation Table had the following credited service: Mr. Howard, 11.92
years, Mr. Anders, 1.67 years, Mr. Watzl, 31.58 years, Mr. McIntyre, 25.83
years and Mr. Taylor, 25.58 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
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Company payments as though he had completed 30 years of service, less the
pension benefits earned from a former employer. For purposes of the
employment agreement, the present value of the lump sum payment will be
calculated using a discount rate based on the interest rate for valuing
immediate annuities used by the Pension Benefit Guaranty Corporation, which
is now different from the GATT rate utilized for other employees.
An employment agreement with Mr. Anders provides that he will receive
payments equal to the combined benefits from the Pension Plan and
supplemental Company payments as though his service with a former employer
were included in determining benefits under the Company's pension plans,
less the pension benefits earned from a former employer. Benefits under the
employment agreement will include incentive payments in determining the
final average compensation.
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 -- RATIFICATION OF APPOINTMENT
OF INDEPENDENT AUDITORS
Subject to ratification by the shareholders, the Board of Directors has
appointed PricewaterhouseCoopers LLP as independent auditors of the Company for
the year 1998. PricewaterhouseCoopers 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. 3 -- PROPOSAL TO AMEND THE COMPANY'S
RESTATED ARTICLES TO REMOVE LIMITATIONS ON THE
COMPANY'S ISSUANCE OF UNSECURED INDEBTEDNESS
EXPLANATION OF THE PROPOSED AMENDMENT
Our Restated Articles of Incorporation (the "Articles") currently grant the
holders of our Preferred Stock special voting rights with respect to certain
matters, including, among others, the amendment of
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the Articles to authorize any prior ranking stock, the issuance of Preferred
Stock unless certain coverage tests are met, the issuance of unsecured
indebtedness unless certain coverage tests are met and the merger or
consolidation of the Company unless ordered, approved or permitted by the SEC.
Specifically Article V, Section 6(a)(i) provides that the approval of a
majority of the total number of shares of Preferred Stock, without regard to
series, present or represented by proxy is required for the Company to:
Issue any unsecured notes, debentures, or other securities
representing unsecured indebtedness, or assume any such unsecured
securities, for purposes other than the refunding of outstanding unsecured
securities theretofore issued or assumed by the Corporation or the
redemption or other retirement of outstanding shares of one or more series
of the Preferred Stock, if, immediately after such issue or assumption, the
total principal amount of all unsecured notes, debentures, or other
securities representing unsecured indebtedness issued or assumed by the
Corporation and then outstanding (including unsecured securities then to be
issued or assumed) would exceed twenty per cent (20%) of the aggregate of
(a) the total principal amount of all bonds or other securities
representing secured indebtedness issued or assumed by the Corporation and
then to be outstanding, and (b) the capital and surplus of the Corporation
(including all earned surplus, paid-in surplus, capital surplus, or other
surplus of the Corporation) as then to be stated on the books of account of
the Corporation.
The proposed amendment (the "Proposed Amendment") would delete Section
6(a)(1) and thereby enable us to incur unsecured indebtedness without a
shareholder vote.
SPECIAL CASH DIVIDEND
Subject to the terms and conditions described in this Proxy Statement, if
(but only if) the Proposed Amendment is adopted at the Annual Meeting, the
Company will declare and pay, to each holder of Preferred Stock of record as of
March 1, 1999, a special cash dividend in the amount of $1.00 per share. If the
Proposed Amendment is adopted at the Annual Meeting, the special cash dividend
will be paid promptly after the Proposed Amendment shall have become effective.
However, no accrued interest will be paid on the special cash dividend,
regardless of any delay in making such dividend payment. See "Certain Federal
Income Tax Consequences" below.
REASONS FOR THE PROPOSED AMENDMENT
GENERAL. We believe that legislative, regulatory, technological and market
developments will lead to a more competitive environment in the electric and gas
utility industries. As competition intensifies, our ability to retain
flexibility and reduce costs will be even more crucial to our success. Because
the electric and gas utility industries are extremely capital intensive, control
and minimization of financing costs are of particular importance to us. In
response to the competitive forces and regulatory changes that we face, we have
from time to time considered, and expect to continue to consider, various
strategies designed to enhance our competitive position and to increase our
ability to adapt to and anticipate changes in our utility business. An example
of one such strategy is our previously announced plan to develop an independent
transmission company, and, in connection with such ITC, to sell or spin-off our
transmission assets.
We believe that adoption of the Proposed Amendment is critical to
maintaining financial flexibility and facilitating capital cost reduction.
Historically, our debt financing generally has been accomplished through the
issuance of long-term mortgage bonds, unsecured indebtedness and pollution
control bonds. Our mortgage bonds contain certain restrictive covenants with
respect to, among other things, the disposition of assets and the ability to
issue additional mortgage bonds. While the use of these mortgages may have been
an acceptable and attractive financing vehicle in the non-competitive
environment of the
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<PAGE>
past, the restrictive covenants contained in our mortgage bonds limit our
ability to respond to changing circumstances in a competitive environment.
Unsecured indebtedness generally has fewer restrictions than mortgage bonds,
will provide us more flexibility, and is, therefore, more desirable to us as the
environment becomes more competitive. Short-term indebtedness, a lower cost form
of debt available to us, represents one type of unsecured indebtedness.
Pollution control bond financing, a more favorable type of financing due to its
tax-exempt status, is available only for very limited purposes.
Inasmuch as the limitation on the issuance of unsecured debt contained in
the Articles restricts our flexibility in planning and financing our business
activities, we believe we ultimately will be at a competitive disadvantage
unless this provision is eliminated. Our new competitors (for example, power
marketers, exempt wholesale generators, independent power producers and
cogeneration facilities) generally are not subject to the type of financing
restrictions this provision imposes on us. Recently, several other utilities
with the same or similar charter restrictions have successfully eliminated such
provisions by soliciting their shareholders for the same or similar amendments.
In addition, some of our potential utility competitors have no comparable
provision restricting the issuance of unsecured debt. Given the onset of
competition in the utility industry, we must continue to explore new ways of
reducing our costs and enhancing our flexibility. We believe that the adoption
of the Proposed Amendment will be in the best long-term competitive interests of
our shareholders.
FINANCIAL FLEXIBILITY. If the Proposed Amendment is adopted, we will have
increased flexibility (i) to choose among different types of debt financing and
(ii) to finance projects using the most cost effective means. We believe that
various types of unsecured debt alternatives may increase in importance as a
financing option. We believe that we will be able to tailor the terms of
unsecured debt to take full advantage of changing conditions in securities
markets.
In addition, although our earnings currently are sufficient to meet the
earnings coverage tests that must be satisfied before we can issue additional
mortgage bonds and preferred stock, there is no guarantee that this will be true
in the future. Other utilities have been unable to issue mortgage bonds during
certain periods because of restrictive covenants in their mortgages. Our
inability to issue mortgage bonds or preferred stock in the future, combined
with an inability to issue additional unsecured debt, could limit our financing
options to more costly options, including additional common equity. Moreover,
continued reliance on the issuance of mortgage bonds could limit our ability in
the future to strategically redeploy our assets.
Our use of unsecured short-term indebtedness is presently restricted by the
debt limitation provision. However, we believe that the prudent use of such
indebtedness in excess of the amount currently permitted is vital to effective
financial management of our business. Not only is unsecured short-term
indebtedness generally one of our least expensive forms of raising capital, it
also provides us flexibility in meeting seasonal and business cycle fluctuations
in cash requirements, acts as a bridge between issues of permanent capital and
can be used when unfavorable conditions prevail in the market for long-term
capital. However, because of the debt limitation provision in the Articles, as
of December 31, 1998, the maximum amount of unsecured indebtedness that we were
authorized under the Articles to issue or assume was approximately $804.7
million. As of December 31, 1998, we had approximately $393.6 million of
unsecured indebtedness outstanding, thus leaving an additional $411.1 million of
capacity available.
The Proposed Amendment will not only allow us to issue a greater amount of
our debt as unsecured indebtedness, it also will allow us to issue a greater
amount of total indebtedness. We presently have no intention, however, of
issuing a greater amount of total debt than we would have issued absent the
adoption of the Proposed Amendment. It is our present intention to retain
flexibility in the mix of our outstanding debt and therefore have the option to
use more short-term and other unsecured debt and fewer mortgage bonds, not to
increase our overall debt level. Moreover, as a regulated utility, our capital
structure will continue to be subject to the approval of the Minnesota Public
Utility Commission.
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<PAGE>
LOWER COSTS. As previously mentioned, our short-term debt issuances
generally represent one of our lowest-cost forms of financing. By increasing our
use of short-term debt, we may be able to lower our cost structure further,
thereby making our products more competitive and reducing our business risks.
However, with the debt limitation provision currently in place, the availability
and corresponding benefits of short-term debt diminish. In addition, although
short-term debt may expose us to more volatility in interest rates, it should be
noted that the cost of short-term debt seldom exceeds the cost of other forms of
capital available at the same time.
CERTAIN EFFECTS OF THE PROPOSED AMENDMENT
If the Proposed Amendment is adopted at the Annual Meeting, the holders of
Preferred Stock will no longer be entitled to the benefits of the debt
limitation provision, which will have been removed by the Proposed Amendment. As
discussed above, the debt limitation provision places restrictions on our
ability to issue or assume unsecured indebtedness. Although our debt instruments
may contain certain restrictions on our ability to issue or assume debt, any
such restrictions may be waived and the increased flexibility afforded by the
removal of the debt limitation provision may permit us to take certain actions
that may increase our credit risks, adversely affecting the market prices and
credit ratings of the Preferred Stock, or that may otherwise be materially
adverse to the interests of the holders of Preferred Stock. In addition, to the
extent that we elect to issue or assume additional unsecured indebtedness, the
relative position of Preferred Stock in our capital structure could be perceived
to decline, which in turn could adversely affect the market prices and credit
ratings of the remaining Preferred Stock. Since holders of any debt, including
unsecured indebtedness, would rank ahead of Preferred Stock in a bankruptcy or
other liquidation, the issuance of a greater amount of unsecured indebtedness
may pose additional risk to holders of Preferred Stock under certain
circumstances, including circumstances relating to a default by us in the
repayment of such indebtedness.
Approval of the Proposed Amendment also will constitute approval of the
Special Cash Dividend.
RATING AGENCIES
As of the date of this Proxy Statement, each series of Preferred Stock was
rated AA by Fitch IBCA, Inc., a1 by Moody's Investors Service, Inc. and A by
Standard & Poor's Rating Services, a division of McGraw-Hill Companies, Inc.
(collectively, the "Rating Agencies"). The Rating Agencies have advised us that
the adoption of the Proposed Amendment, in and of itself, will not result in a
reduction in their current ratings of NSP's preferred stock.
Ratings are not recommendations to purchase, hold or sell the Preferred
Stock inasmuch as the ratings do not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to the Rating Agencies by us and obtained from other sources. The
ratings may be changed, suspended or withdrawn as a result of changes in, or the
unavailability of, such information.
VOTE REQUIRED. The affirmative vote of the holders of a majority of (i) the
Preferred 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 Proposed 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 PROPOSED AMENDMENT TO THE RESTATED ARTICLES OF INCORPORATION,
AS AMENDED.
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<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
GENERAL. In the opinion of Gardner, Carton & Douglas, our special counsel,
the following summary describes the principal United States federal income tax
consequences of the receipt of the Special Cash Dividend and the adoption of the
Proposed Amendment. This summary is based on the Internal Revenue Code of 1986,
as amended to the date hereof (the "Code"), administrative pronouncements,
judicial decisions and existing and proposed Treasury Regulations, changes to
any of which subsequent to the date of this Proxy Statement may adversely affect
the tax consequences described herein, possibly on a retroactive basis. This
summary is addressed to Preferred Stockholders who hold such shares as capital
assets within the meaning of Section 1221 of the Code. This summary does not
discuss all of the tax consequences that may be relevant to a Preferred
Stockholder in light of such Preferred Stockholder's particular circumstances or
to Preferred Stockholders subject to special rules (including certain financial
institutions, tax-exempt organizations, insurance companies, dealers in
securities or currencies, and Preferred Stockholders who are not citizens or
residents of the United States). Preferred Stockholders should consult their tax
advisors with regard to the application of the United States federal income tax
laws to their particular situations as well as any tax consequences arising
under the laws of any state, local or foreign taxing jurisdiction.
As used herein, the term "United States Holder" means an owner of Preferred
Stock that is for United States federal income tax purposes (i) a citizen or
resident of the United States; (ii) a corporation, partnership or other entity
created or organized in or under the laws of the United States or of any
political subdivision thereof; (iii) an estate and certain electing trusts in
existence on August 20, 1996 if the income of such estate or trust is subject to
United States federal income taxation regardless of its source; or (iv) for non
electing trusts and trusts not in existence until after August 20, 1996, any
trust if a court within the United States is able to exercise primary
supervision over the administration of such trust and one or more United States
fiduciaries have the authority to control all substantial decisions of such
trust. A "Non-United States Holder" is a Preferred Stockholder that is not a
United States Holder.
SPECIAL CASH DIVIDENDS; MODIFICATION OF ARTICLES. UNITED STATES
HOLDERS. We will take the position that, for federal income tax purposes, the
Special Cash Dividends are ordinary dividend income to United States Holders
and report them as such.
NON-UNITED STATES HOLDERS. We will take the position that Special Cash
Dividends paid to a Non-United States Holder of Preferred Stock are subject to
withholding of United States federal income tax at a 30% rate unless appropriate
documentation has been provided to the Company that a lower treaty rate applies.
However, Special Cash Dividends that are effectively connected with the conduct
of a trade or business by the Non-United States Holder within the United States
are not subject to the withholding tax (provided such Non-United States Holder
provides two originals of Internal Revenue Service ("IRS") Form 4224 stating
that such Special Cash Dividends are so effectively connected), but instead are
subject to United States federal income tax on a net income basis at applicable
graduated individual or corporate rates. Any such effectively connected Special
Cash Dividends received by a foreign corporation may, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate
(or such lower rate as may be specified by an applicable income tax treaty). A
Non-United States Holder of Preferred Stock eligible for a reduced rate of
United States withholding tax pursuant to an income tax treaty may obtain a
refund of any excess amounts withheld by filing an appropriate claim for refund
with the IRS.
ALL HOLDERS Preferred Stockholders will not recognize any taxable gain or
loss with respect to their Preferred Stock as a result of the modification of
the Articles by the Proposed Amendment other than with respect to the receipt of
the Special Cash Dividend or if they exercise dissenters' rights.
BACKUP WITHHOLDING. The amount of the Special Cash Dividend paid to a
United States Holder will be reported to such holder and to the Internal
Revenue Service in the same way all cash dividends are
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<PAGE>
reported. Backup withholding at a rate of 31% will apply to any such payments
made to non-exempt United States Holders for whom backup withholding applies
with regards to the payment of regular cash dividends.
DISSENTERS' RIGHTS
Section 302A.471 of the Minnesota Business Corporation Act, as amended (the
"Business Corporation Act"), provides that if you are a shareholder of a
Minnesota corporation you are entitled to dissent from, and obtain payment for
your shares in the event of, among other things, an amendment of the
corporation's articles of incorporation that (i) materially and adversely
affects your rights in respect of your shares because it alters or abolishes a
preferential right of such shares or (ii) excludes or limits the right of a
shareholder to vote on a matter, or to cumulate votes, except as the right may
be excluded or limited through the authorization or issuance of securities of an
existing or new class or series with similar or different voting rights. As
described herein, the Proposed Amendment would amend the Articles to remove a
covenant which provides that the issuance or assumption of unsecured
indebtedness for certain purposes above a certain threshold requires the consent
of the holders of at least a majority of the total number of shares of Preferred
Stock present or represented by proxy at such meeting. To the extent that the
Proposed Amendment is deemed to alter or abolish a "preferential right" of the
Preferred Stock or to exclude or limit the right of a holder of Preferred Stock
to vote on a matter within the meaning of Section 302A.471 of the Business
Corporation Act, if you are a holder of Preferred Stock you would have the right
to dissent from the Proposed Amendment and obtain payment of the fair value of
your Preferred Stock. If you intend to demand payment for shares of Preferred
Stock if the Proposed Amendment is adopted, you must file a notice with us at
414 Nicollet Mall, Minneapolis, Minnesota 55401, Attn: Corporate Secretary. This
notice must be filed prior to the vote on the Proposed Amendment at the Annual
Meeting. You also must not vote in favor of the Proposed Amendment. A
shareholder who votes for the Proposed Amendment will have no dissenters'
rights. A shareholder who does not satisfy each of the requirements of Sections
302A.471 and 302A.473 of the Business Corporation Act is not entitled to payment
for such shares of Preferred Stock under the dissenters' rights provisions of
the Business Corporation Act and will be bound by the terms of the Proposed
Amendment.
After the Proposed Amendment has been approved at the Annual Meeting, we
must send written notice to all shareholders who have given written notice and
not voted in favor of the Proposed Amendment as described above. Our notice will
contain: (i) the address where the demand for payment and your Preferred Stock
certificates must be sent and the date by which they must be received (which
date will be the 30th day after the notice is given), (ii) any restrictions on
transfer of uncertificated shares that will apply after the demand for payment
is received, (iii) a form to be used to certify the date on which you, or the
beneficial owner on whose behalf you dissent, acquired the shares (or an
interest in them) and to demand payment, and (iv) a copy of the provisions of
the Business Corporation Act set forth in Annex A with a brief description of
the procedures to be followed under those provisions. If you wish to assert
dissenters' rights you must demand payment and deposit your Preferred Stock
certificates (at the address specified in our notice) within 30 days after such
notice is given. From and after the effective time of the Proposed Amendment,
dissenting shareholders will no longer be entitled to any rights of a
shareholder, including, but not limited to, the right to receive notice of
meetings, to vote at any meetings or to receive dividends, and will only be
entitled to any rights of appraisal as provided by the Business Corporation Act.
If you shall have failed to perfect or shall have effectively withdrawn or lost
such right, you will not be entitled to fair value for your shares from us and
your shares will remain outstanding.
After the effective time of the Proposed Amendment or upon receipt of a
valid demand for payment, whichever is later, we must remit to each dissenting
shareholder who complied with the requirements of the Business Corporation Act
the amount we estimate to be the fair value of such
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<PAGE>
shareholder's shares of Preferred Stock, plus interest accrued at a statutory
rate from the fifth day after the effective time to the date of payment. The
payment also must be accompanied by certain financial data, our estimate of the
fair value of the shares and a description of the method used to reach such
estimate, and a copy of the applicable provisions of the Business Corporation
Act with a brief description of the procedures to be followed in demanding
supplemental payment. You may decline to accept the amount remitted by us and
demand payment for an amount equal to your estimate of the fair value of the
Preferred Stock. Failure to make such demand within 30 days after the notice is
given by us, entitles you only to the amount initially remitted by us. If we
fail to remit payment within 60 days of the deposit of your Preferred Stock
certificates or the imposition of transfer restrictions on uncertificated
shares, we must return all deposited Preferred Stock certificates and cancel all
transfer restrictions; however, we may again give notice regarding the procedure
to exercise dissenters' rights and require deposit or restrict transfer at a
later time. If you believe that the amount remitted is less than the fair value
of your Preferred Stock (including statutory interest), you may give written
notice to us of your own estimate of the fair value of the shares, plus
interest, within 30 days after we mail our remittance, and demand payment of the
difference. Otherwise you are entitled only to the amount remitted by us.
If we receive a demand from you to pay such difference, we shall, within 60
days after receiving the demand, either pay to you the amount demanded or agreed
to by you after discussion with us or file in court a petition requesting that
the court determine the fair value of your shares of Preferred Stock, plus
interest.
The court may appoint one or more appraisers to receive evidence and make
recommendations to the court on the amount of the fair value of the shares. The
court shall determine whether the dissenting shareholder has complied with the
requirements of Section 302A.473 of the Business Corporation Act and shall
determine the fair value of the shares, taking into account any and all factors
the court finds relevant, computed by any method or combination of methods that
the court, in its discretion, sees fit to use. The fair value of the shares as
determined by the court is binding on all dissenting shareholders and may be
less than, equal to or greater than the current market price of the Preferred
Stock. If the court determines that the fair value of the shares is in excess of
the amount, if any, remitted by us, then the court will enter a judgment for
cash in favor of the dissenting shareholders in an amount by which the value
determined by the court, plus interest, exceeds such amount previously remitted.
A dissenting shareholder will not be liable to us if the amount, if any,
originally remitted to such shareholder by us exceeds the fair value of the
shares, as determined by the court, plus interest.
Costs of the court proceeding shall be determined by the court and assessed
against us, except that part or all of the costs may be assessed against any
dissenting shareholders whose actions in demanding supplemental payments are
found by the court to be arbitrary, vexatious or not in good faith.
If the court finds that we did not substantially comply with the relevant
dissenters' provisions of the Business Corporation Act, the court may assess the
fees and expenses, if any, of attorneys or experts as the court deems equitable.
Such fees and expenses may also be assessed against any party if the court finds
that such party in bringing the proceeding has acted arbitrarily, vexatiously or
not in good faith, and may be awarded to a party injured by those actions. The
court may award, in its discretion, fees and expenses of any attorney for the
dissenting shareholders out of the amount awarded to such shareholders, if any.
A shareholder of record may assert dissenters' rights as to fewer than all
of the shares registered in such shareholder's name only if he or she dissents
with respect to all shares beneficially owned by any one beneficial shareholder
and notifies us in writing of the name and address of each person on whose
behalf he or she asserts dissenters' rights. The rights of such a partial
dissenting shareholder are determined as if the shares as to which he or she
dissents and his or her other shares were registered in the names of different
shareholders.
Under Subdivision 4 of Section 302A.471 of the Business Corporation Act, a
holder of Preferred Stock has no right, at law or in equity, to set aside the
approval of the Proposed Amendment, except if such approval or consummation was
fraudulent with respect to such shareholder or the Company.
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A dissenter who receives payment for his or her shares upon exercise of the
right of dissent will, subject to the provisions of Section 302(b) of the
Internal Revenue Code, recognize gain or loss for Federal income tax purposes,
measured by the difference between the cost basis of his or her shares and the
amount of payment received.
PREFERRED STOCKHOLDERS WHO WISH TO RESERVE THE RIGHT TO EXERCISE
DISSENTERS' RIGHTS SHOULD REVIEW CAREFULLY THE FOREGOING DISCUSSION AND THE
PROVISIONS OF THE BUSINESS CORPORATION ACT SET FORTH IN ANNEX A. THE FAILURE TO
COMPLY STRICTLY WITH THE DESCRIBED PROCEDURES WILL RESULT IN THE LOSS OF ANY
SUCH DISSENTERS' RIGHTS. ANY PREFERRED STOCKHOLDER WHO CONTEMPLATES THE
ASSERTION OF DISSENTERS' RIGHTS IS URGED TO CONSULT HIS OR HER OWN COUNSEL.
PROPOSAL NO. 4 -- PROPOSAL TO AMEND THE COMPANY'S RESTATED
ARTICLES TO REMOVE PROVISIONS RELATING TO SERIES OF
PREFERRED STOCK THAT HAVE BEEN REDEEMED
EXPLANATION OF PROPOSED AMENDMENT
Subsections (g), (h), (i), (j) and (k) (attached hereto as Annex B) of
Section 14 of Article V of our Restated Articles of Incorporation (the
"Articles") currently set forth the specific terms of the $6.80 Series, $7.00
Series, $8.80 Series, $7.84 Series and $10.36 Series (collectively, the
"Series") of our Preferred Stock, all of which Series have been redeemed in
their entirety. Because such Series have been redeemed and there are no shares
of such Series outstanding, these subsections (g) through (k) are of no effect
and the Company desires to delete them from the Articles.
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 is required for approval of
the adoption of the proposal to amend the Articles to remove subsections (g),
(h), (i), (j), and (k) of Section 14 of Article V. 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 PROPOSAL TO AMEND THE ARTICLES TO REMOVE SUBSECTIONS (g), (h),
(i), (j), and (k) OF SECTION 14 OF ARTICLE V.
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
Proposed Amendment of the Articles of Incorporation to remove the limitation on
the issuance of unsecured debt requires the approval of a majority of the
Preferred Stock, voting separately as a class, and a majority of the total
voting power present in person or by proxy and entitled to vote. The proposal to
amend the Articles to remove the provisions relating to series of Preferred
Stock that have been redeemed requires the approval of a majority of the total
voting power present in person or by proxy and entitled to vote. Ratification of
the selection of outside auditors requires the affirmative vote of the
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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.
2000 SHAREHOLDER PROPOSALS
Any proposal by a shareholder intended to be included in the proxy
statement for the annual shareholder meeting in 2000 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 8, 1999. Proposals received by that
date will be included in the 2000 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.
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. Any such
proposal will be considered untimely for purposes of Rule 14c-4(c) of the SEC's
proxy rules and, accordingly, we will be entitled to exercise discretionary
voting authority with respect to such item.
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 8, 1999 John P. Moore, Jr.
SECRETARY
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ANNEX A
DISSENTERS' RIGHTS PROVISIONS
OF THE
MINNESOTA BUSINESS CORPORATION ACT
302A.471 RIGHTS OF DISSENTING SHAREHOLDERS.
SUBDIVISION 1. ACTIONS CREATING RIGHTS. A shareholder of a corporation may
dissent from, and obtain payment for the fair value of the shareholder's shares
in the event of, any of the following corporate actions:
(a) An amendment of the articles that materially and adversely affects the
rights or preferences of the shares of the dissenting shareholder in that it:
(1) alters or abolishes a preferential right of the shares;
(2) creates, alters, or abolishes a right in respect of the redemption
of the shares, including a provision respecting a sinking fund for the
redemption or repurchase of the shares;
(3) alters or abolishes a preemptive right of the holder of the shares
to acquire shares, securities other than shares, or rights to purchase
shares or securities other than shares;
(4) excludes or limits the right of a shareholder to vote on a matter,
or to cumulate votes, except as the right may be excluded or limited
through the authorization or issuance of securities of an existing or new
class or series with similar or different voting rights; except that an
amendment to the articles of an issuing public corporation that provides
that section 302A.671 does not apply to a control share acquisition does
not give rise to the right to obtain payment under this section;
(b) A sale, lease, transfer, or other disposition of all or substantially
all of the property and assets of the corporation, but not including a
transaction permitted without shareholder approval in section 302A.661,
subdivision 1, or a disposition in dissolution described in section 302A.725,
subdivision 2, or a disposition pursuant to an order of a court, or a
disposition for cash on terms requiring that all or substantially all of the net
proceeds of disposition be distributed to the shareholders in accordance with
their respective interests within one year after the date of disposition;
(c) A plan of merger, whether under this chapter or under chapter 322B, to
which the corporation is a party, except as provided in subdivision 3;
(d) A plan of exchange, whether under this chapter or under chapter 322B,
to which the corporation is a party as the corporation whose shares will be
acquired by the acquiring corporation, if the shares of the shareholder are
entitled to be voted on the plan; or
(e) Any other corporate action taken pursuant to a shareholder vote with
respect to which the articles, the bylaws, or a resolution approved by the board
directs that dissenting shareholders may obtain payment for their shares.
SUBDIVISION 2. BENEFICIAL OWNERS. (a) A shareholder shall not assert
dissenters' rights as to less than all of the shares registered in the name of
the shareholder, unless the shareholder dissents with respect to all the shares
that are beneficially owned by another person but registered in the name of the
shareholder and discloses the name and address of each beneficial owner on whose
behalf the shareholder dissents. In that event, the rights of the dissenter
shall be determined as if the shares as to which the shareholder has dissented
and the other shares were registered in the names of different shareholders.
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(b) A beneficial owner of shares who is not the shareholder may assert
dissenters' rights with respect to shares held on behalf of the beneficial
owner, and shall be treated as a dissenting shareholder under the terms of this
section and section 302A.473, if the beneficial owner submits to the corporation
at the time of or before the assertion of the rights a written consent of the
shareholder.
SUBDIVISION 3. RIGHTS NOT TO APPLY. (a) Unless the articles, the bylaws, or
a resolution approved by the board otherwise provide, the right to obtain
payment under this section does not apply to a shareholder of the surviving
corporation in a merger, if the shares of the shareholder are not entitled to be
voted on the merger.
(b) If a date is fixed according to section 302A.445, subdivision 1, for
the determination of shareholders entitled to receive notice of and to vote on
an action described in subdivision 1, only shareholders as of the date fixed,
and beneficial owners as of the date fixed who hold through shareholders, as
provided in subdivision 2, may exercise dissenters' rights.
SUBDIVISION 4. OTHER RIGHTS. The shareholders of a corporation who have a
right under this section to obtain payment for their shares do not have a right
at law or in equity to have a corporate action described in subdivision 1 set
aside or rescinded, except when the corporate action is fraudulent with regard
to the complaining shareholder or the corporation.
302A.473 PROCEDURES FOR ASSERTING DISSENTERS' RIGHTS.
SUBDIVISION 1. DEFINITIONS. (a) For purposes of this section, the terms
defined in this subdivision have the meanings given them.
(b) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action referred to in section 302A.471, subdivision 1 or the
successor by merger of that issuer.
(c) "Fair value of the shares" means the value of the shares of a
corporation immediately before the effective date of the corporate action
referred to in section 302A.471, subdivision 1.
(d) "Interest" means interest commencing five days after the effective date
of the corporate action referred to in section 302A.471, subdivision 1, up to
and including the date of payment, calculated at the rate provided in section
549.09 for interest on verdicts and judgments.
SUBDIVISION 2. NOTICE OF ACTION. If a corporation calls a shareholder
meeting at which any action described in section 302A.471, subdivision 1 is to
be voted upon, the notice of the meeting shall inform each shareholder of the
right to dissent and shall include a copy of section 302A.471 and this section
and a brief description of the procedure to be followed under these sections.
SUBDIVISION 3. NOTICE OF DISSENT. If the proposed action must be approved
by the shareholders, a shareholder who is entitled to dissent under section
302A.471 and who wishes to exercise dissenters' rights must file with the
corporation before the vote on the proposed action a written notice of intent to
demand the fair value of the shares owned by the shareholder and must not vote
the shares in favor of the proposed action.
SUBDIVISION 4. NOTICE OF PROCEDURE; DEPOSIT OF SHARES. (a) After the
proposed action has been approved by the board and, if necessary, the
shareholders, the corporation shall send to all shareholders who have complied
with subdivision 3 and to all shareholders entitled to dissent if no shareholder
vote was required, a notice that contains:
(1) The address to which a demand for payment and certificates of
certificated shares must be sent in order to obtain payment and the date by
which they must be received;
(2) Any restrictions on transfer of uncertificated shares that will
apply after the demand for payment is received;
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(3) A form to be used to certify the date on which the shareholder, or
the beneficial owner on whose behalf the shareholder dissents, acquired the
shares or an interest in them and to demand payment; and
(4) A copy of section 302A.471 and this section and a brief
description of the procedures to be followed under these sections.
(b) In order to receive the fair value of the shares, a dissenting
shareholder must demand payment and deposit certificated shares or comply with
any restrictions on transfer of uncertificated shares within 30 days after the
notice required by paragraph (a) was given, but the dissenter retains all other
rights of a shareholder until the proposed action takes effect.
SUBDIVISION 5. PAYMENT; RETURN OF SHARES. (a) After the corporate action
takes effect, or after the corporation receives a valid demand for payment,
whichever is later, the corporation shall remit to each dissenting shareholder
who has complied with subdivisions 3 and 4 the amount the corporation estimates
to be the fair value of the shares, plus interest, accompanied by:
(1) the corporation's closing balance sheet and statement of income
for a fiscal year ending not more than 16 months before the effective date
of the corporate action, together with the latest available interim
financial statements;
(2) an estimate by the corporation of the fair value of the shares and
a brief description of the method used to reach the estimate; and
(3) a copy of section 302A.471 and this section, and a brief
description of the procedure to be followed in demanding supplemental
payment.
(b) The corporation may withhold the remittance described in paragraph (a)
from a person who was not a shareholder on the date the action dissented from
was first announced to the public or who is dissenting on behalf of a person who
was not a beneficial owner on that date. If the dissenter has complied with
subdivisions 3 and 4, the corporation shall forward to the dissenter the
materials described in paragraph (a), a statement of the reason for withholding
the remittance, and an offer to pay to the dissenter the amount listed in the
materials if the dissenter agrees to accept that amount in full satisfaction.
The dissenter may decline the offer and demand payment under subdivision 6.
Failure to do so entitles the dissenter only to the amount offered. If the
dissenter makes demand, subdivisions 7 and 8 apply.
(c) If the corporation fails to remit payment within 60 days of the deposit
of certificates or the imposition of transfer restrictions on uncertificated
shares, it shall return all deposited certificates and cancel all transfer
restrictions. However, the corporation may again give notice under subdivision 4
and require deposit or restrict transfer at a later time.
SUBDIVISION 6. SUPPLEMENTAL PAYMENT; DEMAND. If a dissenter believes that
the amount remitted under subdivision 5 is less than the fair value of the
shares plus interest, the dissenter may give written notice to the corporation
of the dissenter's own estimate of the fair value of the shares, plus interest,
within 30 days after the corporation mails the remittance under subdivision 5,
and demand payment of the difference. Otherwise, a dissenter is entitled only to
the amount remitted by the corporation.
SUBDIVISION 7. PETITION; DETERMINATION. If the corporation receives a
demand under subdivision 6, it shall, within 60 days after receiving the demand,
either pay to the dissenter the amount demanded or agreed to by the dissenter
after discussion with the corporation or file in court a petition requesting
that the court determine the fair value of the shares, plus interest. The
petition shall be filed in the county in which the registered office of the
corporation is located, except that a surviving foreign corporation that
receives a demand relating to the shares of a constituent domestic corporation
shall file the petition in
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the county in this state in which the last registered office of the constituent
corporation was located. The petition shall name as parties all dissenters who
have demanded payment under subdivision 6 and who have not reached agreement
with the corporation. The corporation shall, after filing the petition, serve
all parties with a summons and copy of the petition under the rules of civil
procedure. Nonresidents of this state may be served by registered or certified
mail or by publication as provided by law. Except as otherwise provided, the
rules of civil procedure apply to this proceeding. The jurisdiction of the court
is plenary and exclusive. The court may appoint appraisers, with powers and
authorities the court deems proper, to receive evidence on and recommend the
amount of the fair value of the shares. The court shall determine whether the
shareholder or shareholders in question have fully complied with the
requirements of this section, and shall determine the fair value of the shares,
taking into account any and all factors the court finds relevant, computed by
any method or combination of methods that the court, in its discretion, sees fit
to use, whether or not used by the corporation or by a dissenter. The fair value
of the shares as determined by the court is binding on all shareholders,
wherever located. A dissenter is entitled to judgment in cash for the amount by
which the fair value of the shares as determined by the court, plus interest,
exceeds the amount, if any, remitted under subdivision 5, but shall not be
liable to the corporation for the amount, if any, by which the amount, if any,
remitted to the dissenter under subdivision 5 exceeds the fair value of the
shares as determined by the court, plus interest.
SUBDIVISION 8. COSTS; FEES; EXPENSES. (a) The court shall determine the
costs and expenses of a proceeding under subdivision 7, including the reasonable
expenses and compensation of any appraisers appointed by the court, and shall
assess those costs and expenses against the corporation, except that the court
may assess part or all of those costs and expenses against a dissenter whose
action in demanding payment under subdivision 6 is found to be arbitrary,
vexatious, or not in good faith.
(b) If the court finds that the corporation has failed to comply
substantially with this section, the court may assess all fees and expenses of
any experts or attorneys as the court deems equitable. These fees and expenses
may also be assessed against a person who has acted arbitrarily, vexatiously, or
not in good faith in bringing the proceeding, and may be awarded to a party
injured by those actions.
(c) The court may award, in its discretion, fees and expenses to an
attorney for the dissenters out of the amount awarded to the dissenters, if any.
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ANNEX B
SUBSECTIONS (g), (h), (i), (j) AND (k) OF
SECTION 14 OF ARTICLE V OF THE
RESTATED ARTICLES OF INCORPORATION
OF
NORTHERN STATES POWER COMPANY
(A MINNESOTA CORPORATION)
ARTICLE V. DESCRIPTION OF CAPITAL STOCK
The total authorized number of shares that may be issued by the Corporation and
that the Corporation will henceforth be authorized to have is three hundred
fifty-seven million (357,000,000) of the par value per share hereinafter set
forth.
A description of the classes of shares and a statement of the number of shares
in each class and the relative rights, voting power, and preferences granted to
and restrictions imposed upon the shares of each class are as follows:
* * *
14. SERIES OF PREFERRED STOCK
* * *
g. CUMULATIVE PREFERRED STOCK, $6.80 SERIES
(i) There be and there hereby is created from the authorized and
unallotted shares of Preferred Stock of the Company, a new series of
Preferred Stock of the Company which is hereby designated Cumulative
Preferred Stock, $6.80 Series, and the number of shares constituting
said new series is hereby fixed at 200,000 shares.
(ii) The dividend rate of the shares of said new series is hereby
fixed at $6.80 per share per annum; dividends on said shares shall be
payable on the 15th day of January, April, July and October for the
quarter-yearly period ending with the last day of the preceding month,
when and as declared by the Board of Directors.
(iii) The redemption prices of the shares of said new series are
hereby fixed at $108.29 per share in case of redemption on or prior to
December 31, 1973; $106.59 per share in case of redemption subsequent
to December 31, 1973 and on or prior to December 31, 1978; $104.89 per
share in case of redemption subsequent to December 31, 1978 and on or
prior to December 31, 1983; and the $103.19 per share in case of
redemption subsequent to December 31, 1983; plus in each case an
amount equal to the dividends at the rate of $6.80 per share per annum
from the date dividends on the shares to be redeemed begin to accrue
to the date fixed for redemption thereof, less the amount of dividends
theretofore paid thereon; provided, however, that the shares of said
new series shall not be redeemable prior to May 1, 1973 from the
proceeds of any refunding of shares of said new series through the
incurring of debt, or through the issuance of preferred stock ranking
equally with or prior to the shares of said new series as to dividends
or on liquidation, if such debt has an effective interest cost or such
preferred stock has an effective dividend cost to the Company of less
than the effective dividend cost to the Company of the said new
series.
(iv) The amount which the shares of said new series are entitled to
receive in preference to the Common Stock upon any distribution of
assets, other than by dividends from net earnings or surplus, upon
voluntary liquidation or dissolution of the corporation is hereby
fixed as the then redemption price, plus an amount equal to all
dividends accumulated and unpaid thereon.
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h. CUMULATIVE PREFERRED STOCK, $7.00 SERIES
(i) There be and there hereby is created from the authorized and
unallotted shares of Preferred Stock of the Company, a new series of
Preferred Stock of the Company which is hereby designated Cumulative
Preferred Stock, $7.00 Series, and the number of shares constituting
said new series is hereby fixed at 200,000 shares.
(ii) The dividend rate of the shares of said new series is hereby
fixed at $7.00 per share per annum; dividends on said shares shall be
payable on the 15th day of January, April, July and October for the
quarter-yearly period ending with the last day of the preceding month,
when and as declared by the Board of Directors.
(iii) The redemption prices of the shares of said new series are
hereby fixed at $108.45 per share in case of redemption on or prior to
December 31, 1974; $106.70 per share in case of redemption subsequent
to December 31, 1974 and on or prior to December 31, 1979; $104.95 per
share in case of redemption subsequent to December 31, 1979 and on or
prior to December 31, 1984; and $103.20 per share in case of
redemption subsequent to December 31, 1984; plus in each case an
amount equal to the dividends at the rate of $7.00 per share per annum
from the date dividends on the shares to be redeemed begin to accrue
to the date fixed for redemption thereof, less the amount of dividends
theretofore paid thereon; provided, however, that the shares of said
new series shall not be redeemed prior to January 1, 1974 from the
proceeds of any refunding of shares of said new series through the
incurring of debt, or through the issuance of preferred stock ranking
equally with or prior to the shares of said new series as to dividends
or on liquidation, if such debt has an effective interest cost or such
preferred stock has an effective dividend cost to the Company of less
than the effective dividend cost to the Company of the said new
series.
(iv) The amount which the shares of said new series are entitled to
receive in preference to the Common Stock upon any distribution of
assets, other than by dividends from net earnings or surplus, upon
voluntary liquidation or dissolution of the corporation is hereby
fixed as the then redemption price, plus an amount equal to all
dividends accumulated and unpaid thereon.
i. CUMULATIVE PREFERRED STOCK, $8.80 SERIES
(i) There be and there hereby is created from the authorized and
unallotted shares of Preferred Stock of the Company, a new series of
Preferred Stock of the Company which is hereby designated Cumulative
Preferred Stock, $8.80 Series, and the number of shares constituting
said new series is hereby fixed at 250,000 shares.
(ii) The dividend rate of the shares of said new series is hereby
fixed at $8.80 per share per annum; dividends on said shares, when and
as declared by the Board of Directors, shall be payable on the 15th
day of January, April, July and October for the quarter-yearly period
ending with the last day of the preceding month; except that the
dividend period for the first such dividend shall begin with the date
of original issue.
(iii) The redemption prices of the shares of said new series are
hereby fixed at $109.95 per share in case of redemption on or prior to
December 31, 1975; $107.75 per share in case of redemption subsequent
to December 31, 1975 and on or prior to December 31, 1980; $105.55 per
share in case of redemption subsequent to December 31, 1980 and on or
prior to December 31, 1985; and $103.35 per share in case of
redemption subsequent to December 31, 1985; plus in each case an
amount equal to the dividends at the rate of $8.80 per share per annum
from the date dividends on the shares to be redeemed begin to accrue
to the date fixed
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for redemption thereof, less the amount of dividends theretofore paid
thereon; provided, however, that the shares of said new series shall
not be redeemable prior to September 1, 1975 from the proceeds of any
refunding of shares of said new series through the incurring of debt,
or through the issuance of preferred stock ranking equally with or
prior to the shares of said new series as to dividends or on
liquidation, if such debt has an effective interest cost or such
preferred stock has an effective dividend cost to the Company of less
than the effective dividend cost to the Company of the said new
series.
(iv) The amount which the shares of said new series are entitled to
receive in preference to the Common Stock upon any distribution of
assets, other than by dividends from net earnings or surplus, upon
voluntary liquidation or dissolution of the corporation is hereby
fixed as the then redemption price, plus an amount equal to all
dividends accumulated and unpaid thereon.
j. CUMULATIVE PREFERRED STOCK, $7.84 SERIES
(i) There be and there hereby is created from the authorized and
unallotted shares of Preferred Stock of the Company, a new series of
Preferred Stock of the Company which is hereby designated Cumulative
Preferred Stock, $7.84 Series, and the number of shares constituting
said new series is hereby fixed at 350,000 shares.
(ii) The dividend rate of the shares of said new series is hereby
fixed at $7.84 per share per annum; dividends on said shares, when and
as declared by the Board of Directors, shall be payable on the 15th
day of January, April, July and October for the quarter-yearly period
ending with the last day of the preceding month; except that the
dividend period for the first such dividend shall begin with the date
of original issue.
(iii) The redemption prices of the shares of said new series are
hereby fixed at $109.00 per share in case of redemption on or prior to
December 31, 1976; $107.04 per share in case of redemption subsequent
to December 31, 1976, and on or prior to December 31, 1981; $105.08
per share in case of redemption subsequent to December 31, 1981, and
on or prior to December 31, 1986; and $103.12 per share in case of
redemption subsequent to December 31, 1986; plus in each case an
amount equal to the dividends at the rate of $7.84 per share per annum
from the date dividends on the shares to be redeemed begin to accrue
to the date fixed for redemption thereof, less the amount of dividends
theretofore paid thereon; provided, however, that the shares of said
new series shall not be redeemable prior to October 1, 1976, from the
proceeds of any refunding of shares of said new series through the
incurring of debt, or through the issuance of preferred stock ranking
equally with or prior to the shares of said new series as to dividends
or on liquidation, if such debt has an effective interest cost or such
preferred stock has an effective dividend cost to the Company of less
than the effective dividend cost to the Company of the said new
series.
(iv) The amount which the shares of said new series are entitled to
receive in preference to the Common Stock upon any distribution of
assets, other than by dividends from net earnings or surplus, upon
voluntary liquidation or dissolution of the corporation is hereby
fixed as the then redemption price, plus an amount equal to all
dividends accumulated and unpaid thereon.
k. CUMULATIVE PREFERRED STOCK, $10.36 SERIES
(i) There be and there hereby is created from the authorized and
unallotted shares of Preferred Stock of the Company, a new series of
Preferred Stock of the Company which is hereby designated Cumulative
Preferred Stock, $10.36 Series, and the number of shares constituting
said new series is hereby fixed at 250,000 shares.
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(ii) The dividend rate of the shares of said new series is hereby
fixed at $10.36 per share per annum; dividends on said shares, when
and as declared by the Board of Directors, shall be payable on the
15th day of January, April, July and October for the quarter-yearly
period ending with the last day of the preceding month; except that
the dividend period for the first such dividend shall begin with the
date of original issue.
(iii) The redemption prices of the shares of said new series are
hereby fixed at $115.00 per share in case of redemption on or prior to
June 30, 1984; $105.00 per share in case of redemption subsequent to
June 30, 1984, and on or prior to June 30, 1989; and $102.50 per share
in case of redemption subsequent to June 30, 1989; plus in each case
an amount equal to the dividends at the rate of $10.36 per share per
annum from the date dividends on the shares to be redeemed begin to
accrue to the date fixed for redemption thereof, less the amount of
dividends theretofore paid thereon; provided, however, that the shares
of said new series shall not be redeemable prior to July 1, 1979, from
the proceeds of any refunding of shares of said new series through the
incurring of debt, or through the issuance of preferred stock ranking
equally with or prior to the shares of said new series as to dividends
or on liquidation, if such debt has an effective interest cost or such
preferred stock has an effective dividend cost to the Company of less
than the effective dividend cost to the Company of the said new
series. The shares of said new series will also be redeemable at any
time on and after July 1, 1979, for the sinking fund at the sinking
fund redemption price, which shall be $101.10 per share plus accrued
and unpaid dividends.
(iv) Subject to the prohibitions and limitations contained in its
Articles of Incorporation, as amended, and in Orders of the Securities
and Exchange Commission in Files No. 70-3221 and 70-3279, the Company
shall apply as and for a sinking fund for said new series on July 1 in
each year commencing July 1, 1979, a minimum of 12,500 shares of said
new series, and may so apply on each of said July 1 dates up to a
maximum of an additional 12,500 shares of said new series. The shares
to be applied annually in satisfaction of the sinking fund may be
acquired either by redemption at the sinking fund redemption price in
accordance with the provisions of Article V of the Articles of
Incorporation and of this resolution, or by purchase from time to time
in such manner as the Board of Directors may determine. If the Company
shall be prevented by the restrictions referred to above or for any
other reason from redeeming the number of shares of said new series,
which in the absence of such restrictions it would be required to
apply for the sinking fund on any such July 1, the deficit shall be
made good on the first succeeding July 1 on which the Company shall
not be prevented by such restrictions from redeeming the number of
shares of said new series, which in the absence of such restrictions
it would be required to apply for the sinking fund on any such July 1,
the deficit shall be made good on the first succeeding July 1 on which
the Company shall not be prevented by such restrictions from redeeming
shares of said new series. Shares applied to the sinking fund on any
applicable July 1 date shall be deemed to be not outstanding on such
date. Shares of said new series acquired by redemption must be applied
in satisfaction of the current sinking fund payments; but shares of
said new series purchased by the Company may be applied in
satisfaction of any sinking fund payment. Shares applied in
satisfaction of the sinking fund shall become authorized but unissued
shares of Preferred Stock of the Company but may not be reissued as
shares of said new series, and the Company shall forthwith take all
necessary action to effectuate the foregoing.
(v) The amount which the shares of said new series are entitled to
receive in preference to the Common Stock upon any distribution of
assets, other than by dividends from net earnings or surplus, upon
voluntary liquidation or dissolution of the corporation is hereby
fixed as the then redemption price, including an amount equal to all
dividends accumulated and unpaid thereon.
B-4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Northern States Power Company, a Minnesota corporation (NSP-Minnesota), has two
significant subsidiaries: Northern States Power Company, a Wisconsin corporation
(NSP-Wisconsin), and NRG Energy, Inc., a Delaware corporation (NRG).
NSP-Minnesota also has several other subsidiaries, including Viking Gas
Transmission Company (Viking), Energy Masters International, Inc. (EMI), Eloigne
Company (Eloigne), Seren Innovations, Inc. (Seren) and Ultra Power Technologies,
Inc. (Ultra Power). NSP-Minnesota and its subsidiaries collectively are referred
to as NSP.
All financial information pertaining to per share amounts and number of common
shares outstanding has been adjusted to reflect a two-for-one stock split that
occurred on June 1, 1998.
FINANCIAL OBJECTIVES AND RESULTS
NSP'S FINANCIAL OBJECTIVES ARE:
TO ACHIEVE A RETURN ON EQUITY IN THE TOP ONE-FOURTH OF THE UTILITY INDUSTRY
BASED ON A THREE-YEAR AVERAGE.
- NSP's average return on common equity for the three years ending in 1998
was 11.4 percent, which places NSP below the top quarter of the industry,
which was approximately 12.75 percent, and above the median industry
average of approximately 11.0 percent.
- The total return to investors (measured by dividends plus stock price
appreciation) on NSP common stock for the last five years averaged 11.2
percent per year, matching the total average return for the electric
industry.
- NSP's stock price fell 4.7 percent in 1998, while the Standard & Poor's
(S&P) electric utilities group increased in price by 10.2 percent.
TO INCREASE DIVIDENDS ON A REGULAR BASIS AND MAINTAIN A LONG-TERM AVERAGE PAYOUT
RATIO OF 65 TO 75 PERCENT. NSP has increased its dividend for 24 consecutive
years. In June 1998, NSP's annualized common dividend rate was increased by 2
cents per share, or 1.4 percent, from $1.41 to $1.43. The dividend payout ratio
was 77.7 percent in 1998, slightly outside the long-term objective range.
TO MAINTAIN LONG-TERM AVERAGE ANNUAL EARNINGS PER SHARE GROWTH OF 5 PERCENT.
NSP's earnings per share have grown by an average annual rate of 4.0 percent
since 1993.
TO PROVIDE AT LEAST 20 PERCENT OF NSP EARNINGS FROM NRG BY THE YEAR 2000. NRG
provided:
- 28 cents, or 15 percent, of NSP's earnings per share in 1998
- 16 cents, or 10 percent, of NSP's earnings per share in 1997
TO MAINTAIN CONTINUED FINANCIAL STRENGTH WITH A AA RATING FOR UTILITY BONDS.
NSP-Minnesota's first mortgage bonds were rated:
- AA by Fitch Investors Service, Inc.
- AA by S&P
- Aa3 by Moody's Investors Services (Moody's)
- AA by Duff & Phelps, Inc.
These ratings reflect the views of rating agencies, which can provide an
explanation of the significance of the ratings. A security rating is not a
recommendation to buy, sell or hold securities and is subject to revision or
withdrawal at any time by the rating agency. First mortgage bonds issued by
NSP-Wisconsin carry comparable ratings.
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. During
1998, NSP developed the following 10-Point Game Plan to achieve this mission:
GROW NRG NSP expects NRG to provide 20 percent of NSP earnings in 1999, one year
ahead of schedule. In addition, NRG's goal is to become a top independent power
producer in each of its core markets: North America, Europe and Asia-Pacific.
NRG expects to achieve these goals by profitably growing existing businesses and
adding new businesses.
POSITION NSP'S GENERATION BUSINESS FOR LONG-TERM VALUE NSP's conventional plants
include coal-fired, hydro, refuse-derived fuel, natural gas and oil-fired
facilities. To ensure these assets remain valuable, NSP will make careful
investments in these facilities to keep them reliable, efficient and
competitive. NSP is preparing to operate its generation facilities as a
stand-alone business in a competitive market.
CREATE AN INDEPENDENT NUCLEAR GENERATING COMPANY NSP's Monticello and Prairie
Island nuclear plants are extremely valuable assets. With increasing regulation
and associated costs in the nuclear industry, NSP believes the best way to
enhance NSP's nuclear assets is to combine our plants with other well-run
nuclear plants and create a free-standing nuclear generating company.
EXPAND ENERGY MARKETING To enhance NSP's position in the increasingly
competitive electric market, NSP expanded its wholesale energy marketing efforts
by establishing Energy Marketing within its Generation business unit. Energy
Marketing is responsible for meeting the requirements of NSP's retail and
wholesale electric customers for low-cost energy, while optimizing margins from
NSP's generation resources.
CREATE AN INDEPENDENT TRANSMISSION COMPANY To foster competition in the
wholesale electricity market, the Federal Energy Regulatory Commission (FERC)
requires the transmission portion of a utility's business to be functionally
separate from the utility's generation facilities. The state of Wisconsin also
calls for a separate transmission operating structure. NSP believes the best way
to ensure a reliable, efficient, customer-focused and investor-responsive
electric transmission network is to create a for-profit, independent
transmission company.
EXPAND NSP'S CORE ELECTRIC AND GAS DISTRIBUTION BUSINESS To expand our core
business, NSP will actively seek to acquire and merge with other energy
companies.
DEVELOP SEREN Seren has moved into the telecommunications business, with plans
to deliver high-speed Internet access, video-on-demand, telephone service and
cable TV. Seren is currently constructing a broadband network in St. Cloud,
Minn. Further expansion and development is anticipated.
GROW VIKING NSP's goal is to continue the growth of Viking through pipeline
expansion.
20
<PAGE>
DRIVE EMI TO PROFITABILITY EMI is moving toward profitability by reducing costs
and narrowing its focus to concentrate on retrofitting and upgrading customer
facilities for greater energy efficiency. As part of its effort to concentrate
on federal facilities, EMI has been selected as a qualified vendor by the U.S.
Department of Energy and Department of Defense.
MANAGE NSP'S ENTIRE BUSINESS AS A PORTFOLIO NSP will manage its collective
businesses as a portfolio of assets with a focus on growth. NSP will acquire or
divest businesses and assets if it will increase shareholder value.
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 1998 and 1997, or are expected to have a material impact in
the future. It should be read in conjunction with the accompanying Financial
Statements and Notes.
Except for the historical statements contained in this report, the matters
discussed in the following discussion and analysis are forward-looking
statements that are subject to certain risks, uncertainties and assumptions.
Such forward-looking statements are intended to be identified in this document
by the words "anticipate," "estimate," "expect," "objective," "possible,"
"potential" and similar expressions. Actual results may vary materially. Factors
that could cause actual results to differ materially include, but are not
limited to:
- general economic conditions, including their impact on capital
expenditures
- business conditions in the energy industry
- competitive factors
- unusual weather
- changes in federal or state legislation
- regulation
- issues relating to Year 2000 remediation efforts
- the higher risk associated with NSP's nonregulated businesses as
compared with NSP's regulated business
- the items described under "Factors Affecting Results of Operations"
- 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 1998 report on Form 10-K
RESULTS OF OPERATIONS
1998 COMPARED WITH 1997 AND 1996
NSP's earnings per share for the past three years were as follows:
<TABLE>
<CAPTION>
EARNINGS PER SHARE - DILUTED 1998 1997 1996
- ---------------------------------------------------------------
<S> <C> <C> <C>
Regulated utility operations
(excluding merger costs) $ 1.58 $ 1.62 $ 1.79
Nonregulated operations 0.26 0.11 0.12
- ---------------------------------------------------------------
Subtotal excluding merger costs $ 1.84 $ 1.73 $ 1.91
Write-off of merger costs (0.12)
- ---------------------------------------------------------------
TOTAL $ 1.84 $ 1.61 $ 1.91
===============================================================
</TABLE>
Revenue and expense items affecting earnings in these periods are discussed
later. In addition, average common shares outstanding increased due to stock
issuances, mainly a public offering in September 1997. In comparison with
average share levels in the prior year, dilution from increased average shares
decreased earnings per share by approximately 13 cents in 1998.
REGULATED UTILITY OPERATING RESULTS
ELECTRIC REVENUES The table below summarizes the principal reasons for the
electric revenue changes during the past two years:
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS) 1998 VS.1997 1997 VS.1996
- ---------------------------------------------------------------
<S> <C> <C>
Retail sales growth
(excluding weather impact) $ 63 $ 47
Estimated impact of weather
on retail sales volume 3 (23)
Sales for resale 42 8
Conservation cost recovery 11 10
Fuel cost recovery 19 31
Transmission and other 6 18
- ---------------------------------------------------------------
TOTAL REVENUE INCREASE $144 $ 91
===============================================================
</TABLE>
Electric sales growth for 1998 and 1997 is listed in the table below on both
an actual and weather-normalized basis. NSP's weather-normalization process
removes the estimated impact on sales of temperature variations from
historical averages.
<TABLE>
<CAPTION>
(SALES GROWTH) 1998 VS. 1997 1997 VS. 1996
- ------------------------------------------------------------------------
Weather- Weather-
Actual Normalized Actual Normalized
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Residential 3.4% 3.7% (0.6)% 1.7%
Commercial and industrial 3.3% 3.1% 2.3% 2.9%
Total retail 3.3% 3.3% 1.5% 2.6%
Sales for resale 35.3% na (5.5)% na
TOTAL ELECTRIC SALES 7.1% 7.0% 0.6% 1.6%
========================================================================
</TABLE>
na = not applicable
Retail electric sales accounted for 91 percent of NSP's electric revenue in 1998
and 93 percent in 1997. Retail electric sales growth for 1999 is estimated to be
2.4 percent over 1998, or 1.9 percent on a weather-adjusted basis.
Electric retail sales growth increased in 1998 due to strong economic conditions
in NSP's service territory. Electric retail sales growth increased in 1997 due
to economic conditions, partially offset by unfavorable average temperatures
compared with favorable average temperatures in 1996.
Sales for resale volumes and revenues increased in 1998 due to the expansion of
NSP's energy marketing operations. Sales for resale volumes decreased in 1997
due to constraints on NSP's system from unscheduled plant outages and storms.
Revenues from sales to other utilities increased in 1997 due to higher market
prices.
ELECTRIC MARGIN As shown in the table below, electric margin equals electric
revenue minus related production expenses, which includes electric fuel and
power purchase costs.
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS) 1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Electric revenue $2 362 $2 218 $2 127
Fuel for electric generation (311) (310) (301)
Purchased and interchange power (378) (286) (244)
- ------------------------------------------------------------
ELECTRIC MARGIN $1 673 $1 622 $1 582
=============================================================
</TABLE>
<PAGE>
Electric production expenses tend to vary with changing retail and wholesale
sales requirements and unit cost changes in fuel and purchased power. However,
due to fuel clause cost recovery mechanisms for retail customers and the ability
to vary wholesale prices with changing market conditions, most fluctuations in
production expenses do not affect electric margin, as shown below. The table
below summarizes the principal reasons for electric margin changes during the
past two years:
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS) 1998 VS. 1997 1997 VS. 1996
- ----------------------------------------------------------------------
<S> <C> <C>
Retail sales growth
(excluding weather impact) $51 $34
Estimated impact of weather
on retail sales volume 3 (19)
Sales for resale 11 (5)
Conservation cost recovery 11 10
Transmission and other (8) 24
Demand expenses (17) (4)
- ----------------------------------------------------------------------
TOTAL ELECTRIC MARGIN INCREASE $51 $40
======================================================================
</TABLE>
GAS REVENUES The table below summarizes the principal reasons for the gas
revenue changes during the past two years:
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS) 1998 VS. 1997 1997 VS. 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Sales growth
(excluding weather impact) $ 7 $ 13
Estimated impact of weather
on firm sales volume (46) (41)
Purchased gas adjustment
clause recovery (40) 28
Rate changes
and conservation cost recovery 9 (1)
Black Mountain Gas Company
acquisition 6
Transportation and other 6 (11)
- ----------------------------------------------------------------------
TOTAL REVENUE DECREASE $(58) $(12)
======================================================================
</TABLE>
Gas sales growth for 1998 and 1997 is listed in the tables below on both an
actual and weather-normalized basis. 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).
<TABLE>
<CAPTION>
(SALES GROWTH) 1998 VS. 1997 1997 VS. 1996
- --------------------------------------------------------------------------------
WEATHER- WEATHER-
ACTUAL NORMALIZED ACTUAL NORMALIZED
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total firm (13.1)% 2.9% (10.8)% 2.2%
Interruptible (10.4)% na 11.6% na
Total retail (12.4)% (0.6)% (6.1)% 4.1%
Transportation
and other 33.4% na (33.3)% na
Viking (external sales) 2.8% na 4.8% na
TOTAL GAS SALES
AND DELIVERY (1.5)% 2.4% (2.0)% 1.9%
================================================================================
</TABLE>
na = not applicable
Firm gas sales in 1999 are estimated to be 23.1 percent higher than 1998 sales,
or 2.1 percent higher on a weather-adjusted basis.
The 1998 firm sales decrease was due to more unfavorable weather in 1998,
compared with 1997, partially offset by sales growth. Also, interruptible sales
declined in 1998 because favorable alternate fuel prices, as compared with
natural gas, caused interruptible customers to purchase less natural gas. The
1998 interruptible sales decrease also was due to the ability of customers to
switch to transportation-only service.
The decrease in firm sales in 1997 was primarily due to the impacts of favorable
weather in 1996 and unfavorable weather in 1997, partially offset by sales
growth. The weather-adjusted sales growth was partially offset by lost gas sales
as a result of flooding in the Grand Forks area. Interruptible sales increased
in 1997 because favorable gas prices, compared with alternate fuels, caused
interruptible customers to purchase more natural gas.
GAS MARGIN As shown in the table below, gas margin equals gas revenue less the
cost of gas sold.
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS) 1998 1997 1996
- -------------------------------------------------------------
<C> <S> <S> <S>
Gas revenue $457 $515 $527
Cost of gas purchased
and transported (267) (331) (336)
- -------------------------------------------------------------
GAS MARGIN $190 $184 $191
=============================================================
</TABLE>
The cost of gas tends to vary with changing sales requirements and unit cost of
gas purchases. However, due to purchased gas cost recovery mechanisms for retail
customers, nearly all fluctuations in the cost of gas have no effect on gas
margin, as shown below. The table below summarizes the principal reasons for gas
margin changes during the past two years:
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS) 1998 VS. 1997 1997 VS. 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Retail and transportation sales growth
(excluding weather impact) $ 7 $ 6
Estimated impact of weather
on firm sales volume (16) (12)
Rate changes 9 (1)
Black Mountain Gas Company
acquisition 4
Other 2
- --------------------------------------------------------------------------------
TOTAL GAS MARGIN INCREASE (DECREASE) $ 6 $(7)
================================================================================
</TABLE>
UTILITY OPERATING EXPENSES Total utility operating expenses, including fuel,
energy purchases and the cost of gas, increased by $82.9 million in 1998
compared with 1997, and by $83.8 million in 1997 compared with 1996. Increases
in electric production costs, partially offset by decreases in cost of gas
purchased, together account for $28.8 million of the 1998 increase and $47.3
million of the 1997 increase. In addition, variations in income taxes are
primarily attributable to fluctuations in pretax income.
OTHER OPERATION, MAINTENANCE AND ADMINISTRATIVE AND GENERAL Expenses increased
in 1998 by $48.3 million, or 7.2 percent, compared with 1997. The higher costs
in 1998 are primarily due to increased expenses associated with plant outages,
nuclear regulatory costs, system reconstruction due to extensive storm damage,
Year 2000 remediation, energy marketing activities, customer growth, an
insurance refund in 1997 and Black Mountain Gas Company, which was acquired in
1998.
22
<PAGE>
In 1997, the total of these expenses increased by $37.4 million, or 5.9 percent,
compared with 1996. The higher 1997 costs were primarily due to increased
expenses associated with business interruptions, customer service, network
integration transmission service (NTS), scheduled plant maintenance outages and
technology improvements. Business interruptions in 1997 included flooding in
NSP's service area, an unscheduled baseload nuclear plant outage and storm
damage to transmission lines. Technology improvements included development of
customer information, automated meter reading and other systems, including Year
2000 remediation. Cost increases were partially offset by a $6.9 million
decrease in administrative and general expenses, reflecting decreases in
insurance and employee benefit costs.
DEPRECIATION AND AMORTIZATION Costs increased $12.3 million in 1998 and $19.4
million in 1997 primarily due to higher levels of depreciable plant, including
new information systems and equipment with relatively short useful lives.
NONOPERATING ITEMS RELATED TO UTILITY BUSINESSES
UTILITY FINANCING COSTS Interest costs recognized for NSP's utility businesses,
including amounts capitalized to reflect the financing costs of construction
activities, were $115.8 million in 1998, $120.3 million in 1997 and $123.1
million in 1996. In addition to interest expense, beginning in 1997, financing
costs of NSP's utility businesses include distributions on redeemable preferred
securities, which were $15.8 million in 1998 and $14.4 million in 1997.
The 1998 decrease is largely due to lower average short-term debt levels,
partially offset by increased long-term debt levels. (For more information see
the Statement of Capitalization.) 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 average short-term debt balance for utility
operations was $58.9 million in 1998, $208.3 million in 1997 and $265.4 million
in 1996.
MERGER COSTS In May 1997, NSP and Wisconsin Energy Corporation (WEC) mutually
terminated their plans to merge. NSP's earnings for 1997 include a pretax charge
to nonoperating expense of $29 million, or 12 cents per share, to write off its
cumulative merger-related costs incurred.
PREFERRED DIVIDENDS Dividends paid to preferred shareholders declined by
$5.5 million in 1998 and $1.2 million in 1997 due to the redemption of several
series of preferred stock during those years.
NONREGULATED BUSINESS RESULTS
NSP anticipates that the earnings from nonregulated operations will experience
more variability than regulated utility businesses, due to the nature of these
nonregulated businesses. A description of NSP's primary nonregulated businesses
and their earnings contribution is summarized below.
- NRG is primarily involved in independent power production, commercial and
industrial heating and cooling, and energy-related refuse-derived fuel
production. NRG's business strategy includes holding a portfolio of
nonregulated energy projects on both a wholly owned and joint venture
basis. The divestitures of partial or entire interests in projects when
the economics maximize shareholder value is a continuing part of NRG's
strategy.
- EMI is primarily an energy services company.
- Eloigne invests in affordable housing.
- Seren provides broadband communication services.
<TABLE>
<CAPTION>
CONTRIBUTION TO NSP'S EARNINGS PER SHARE 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
NRG $0.28 $0.16 $0.15
EMI (0.05) (0.08) (0.06)
Eloigne 0.04 0.03 0.02
Seren (0.02) (0.01) 0.00
Other 0.01 0.01 0.01
- --------------------------------------------------------------------------------
TOTAL $0.26 $0.11 $0.12
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
NRG NRG's earnings increased in 1998, compared with 1997, primarily due to
income from new projects, including: El Segundo, Long Beach, certain Pacific
Generation Company (PGC) operations, an increase in NRG's holdings in Energy
Developments Limited and higher earnings from Loy Yang. In addition, NRG's
landfill gas subsidiary, NEO, entered into projects in 1997 and 1998 that are
generating higher levels of energy tax credits. Increased earnings were
partially offset by higher interest costs due to the $250 million senior notes
issued in mid-1997, interest on NRG's revolving line of credit and new debt
obtained for certain NEO projects and the purchase of PGC. Also, NRG's earnings
in 1998 were adversely affected by declines in the value of the Australian
dollar and German deutsche mark in relation to the U.S. dollar. If exchange
rates throughout 1998 had stayed the same as the beginning of the year, NRG's
1998 earnings would have been approximately 1 cent per share higher.
In December 1998, NRG sold one-half of its 50 percent interest in Enfield Energy
Centre Ltd. (EECL) to an affiliate of El Paso International for approximately
$26.2 million, resulting in an after-tax gain to NRG of approximately $16.6
million. This gain increased 1998 earnings by approximately 11 cents per share.
NRG continues to hold a 25 percent interest in EECL. Also in 1998, NRG recorded
a charge of approximately $22 million ($15.2 million after tax) to write down
its investment in a 400-megawatt, coal-fired power station in Cilegon, West
Java, due to the political and economic instability in Indonesia. This
write-down reduced 1998 earnings by approximately 10 cents per share.
NRG's 1997 earnings increased compared with 1996 largely due to income from new
projects, including tax credits from NEO. New projects contributing to NRG's
earnings include: Bolivian Power Company Ltd. (COBEE), PGC, Schkopau and Loy
Yang. NRG's earnings also included gains on the sale of equity interests in two
projects late in 1997, offset by a write-down of NRG's Sunnyside project. NRG's
increased earnings in 1997 were partially offset by increased interest costs and
declines in the value of the Australian dollar and German deutsche mark in
relation to the U.S. dollar. If exchange rates throughout 1997 stayed the same
as the beginning of the year, NRG's 1997 earnings would have been approximately
2 cents per share higher.
In the past, NSP has reported gains from divestitures of NRG projects and losses
from write-downs of NRG projects as nonrecurring items. Since its inception,
NRG's investment in nonregulated energy projects has grown substantially. NRG
manages these projects as a portfolio and evaluates earnings enhancement
opportunities and risks from unsuccessful ventures on an ongoing basis. As such,
NSP expects gains and losses to occur periodically. Therefore, while NSP will
continue to disclose significant NRG gains and losses, we will no longer report
these transactions as nonrecurring events.
Further information on NRG's financial results may be obtained from NRG's annual
report on Form 10-K filed with the SEC.
23
<PAGE>
EMI EMI's losses for 1998 were lower than 1997, due to increased margins and
1997 losses incurred by Enerval, a joint venture previously held by EMI. In June
1998, EMI sold its interest in Enerval. EMI's investment in Enerval was written
down in the fourth quarter of 1997 and, as a result, the transaction had no
material impact on 1998 earnings.
EMI's losses for 1997 were higher than 1996 losses, 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. and Energy Masters
Corporation, 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
negatively affected operating margins during the first half of 1996.
OTHER Eloigne's earnings grew in 1997 and 1998, due to new investments in
affordable housing projects. Seren is experiencing losses as it develops its
broadband communication services network in St. Cloud, Minn.
FACTORS AFFECTING RESULTS OF OPERATIONS
NSP's results of operations during 1998, 1997 and 1996 primarily were dependent
on its electric and gas utility businesses. NSP's utility revenues depend on
customer usage, which varies with weather conditions, general business
conditions 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, Arizona and Michigan. Rates are designed to recover
plant investment, 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 requested
infrequently 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.
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
restructuring 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, 1998, NSP reported on its
balance sheet regulatory assets of approximately $210 million and regulatory
liabilities of approximately $149 million that would need to be recognized in
the income statement in the absence of regulation. Included in these regulatory
assets are $73 million of conservation expenditures that are expected to be
recovered by the year 2000. In addition to a potential write-off of regulatory
assets and liabilities, deregulation and competition may require recognition of
certain "stranded costs" not recoverable under market pricing. NSP currently
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. (See Notes 1 and 9 to the Financial Statements for further discussion.)
In June 1998, the Minnesota Department of Public Service recommended the
Minnesota Public Utilities Commission (MPUC) discontinue recovery of lost
margins, load management discounts and performance incentives from conservation
programs for NSP-Minnesota and other Minnesota public utilities. In November
1998, the MPUC approved continued recovery of lost margins, discounts and
performance bonuses for 1998. However, the MPUC put Minnesota utilities on
notice that there may be significant changes, including elimination of rate
recovery, pending the outcome of a 1999 study. A commission round table will
study the issue and report its findings by May 1, 1999. In 1998, NSP-Minnesota
recorded approximately $33 million, primarily in electric revenue, from the
conservation incentives under review by the MPUC.
RATE FILINGS The status of NSP's recent rate and cost-of-service filings with
regulators is summarized below:
- In December 1997, NSP-Minnesota filed an annual natural gas rate increase
request of approximately $18.5 million in Minnesota. An interim rate
increase totaling $13.9 million on an annualized basis was approved
effective Feb. 1, 1998, subject to refund. On Dec. 11, 1998, the MPUC
issued its final order granting NSP-Minnesota a gas rate increase of $13.4
million, or 4.0 percent, on an annualized basis.
- In November 1997, NSP-Wisconsin filed a retail electric and gas rate case
with the Public Service Commission of Wisconsin (PSCW), requesting an
annual increase of approximately $12.7 million, or 4.3 percent, in retail
electric rates and an annual decrease of $1.7 million, or 1.9 percent, in
retail gas rates. On Sept. 15, 1998, the PSCW issued an order granting an
electric rate increase of $7.3 million, or 2.5 percent, and a gas rate
decrease of $1.9 million, or 2.2 percent, on an annual basis.
- In February and March of 1998, NSP filed wholesale electric point-to-point
and NTS rate cases with the FERC. The proposed point-to-point rates would,
if approved, increase third party transmission service revenue by
approximately $3 million and ancillary service revenues by $1 million,
annually. The NTS tariff change would, if approved, reduce NTS costs from
1997 levels. During April 1998, the FERC voted to allow the proposed
increases in point-to-point and ancillary service rates effective Oct. 1,
1998, subject to refund, and to consolidate the cases. In late 1998, NSP
reached a settlement in principle with the parties to the case. The
settlement is expected to be filed in the first quarter of 1999 and is
subject to FERC approval.
24
<PAGE>
- In June 1998, Viking filed a rate case with the FERC, requesting a $3
million annual rate increase. In December 1998, Viking arrived at a
settlement in principle with parties to the case. The final settlement
will be filed in the first quarter of 1999 and is subject to FERC
approval.
- In December 1998, NSP-Minnesota submitted a voluntary cost separation
filing with the MPUC, which outlines the method NSP proposes to use to
assign costs of its electric operations to business segments and state
jurisdictions. Because of changes and increased competition in the
electric industry, NSP wants to separate or "unbundle" its generation,
transmission and distribution costs. This filing does not propose to
change electric rates for any of NSP's customers in Minnesota. An
administrative law judge has been assigned to convene a technical
conference of interested parties to discuss the merits of NSP's cost
separation proposal. A report is expected to be issued in the second
quarter of 1999.
COMPETITION The Energy Policy Act of 1992 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.
In 1996, the FERC issued Orders No. 888 and 889 to foster competition in the
electric utility industry. These orders give competing wholesale suppliers the
ability to transmit electricity through a utility's transmission system. Order
No. 888 grants nondiscriminatory access to transmission service. Order No. 889
seeks to ensure a fair market by imposing standards of conduct on transmission
system owners, by requiring separation of the wholesale power supply - or
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 open access transmission tariff filings and compliance
filings with the FERC and believes it is taking the proper steps to comply with
the new rules as they become effective.
Some states have begun to allow retail customers to choose their electricity
supplier, and many other states are considering retail access proposals. The
Minnesota Legislature continues to study the issues, but has determined that
further study is necessary before any action can be taken. The PSCW revised its
restructuring plan, delaying the start of retail competition to 2002. The
Michigan Public Service Commission approved a plan to begin offering a choice of
suppliers to retail customers in selected markets in 1998. The timing of
regulatory actions regarding restructuring and their impact on NSP cannot be
predicted at this time and may be significant.
INDEPENDENT TRANSMISSION COMPANY (ITC) In April 1998, NSP announced its
intention to divest its electric transmission business to form an independent
company unaffiliated with the rest of its utility operations.
Several developments have occurred since this commitment was made.
- In April 1998, the 1997 Wisconsin Act 204 became law. Act 204 includes
provisions that require the PSCW to order a public utility that owns
transmission facilities in Wisconsin to transfer control of its
transmission acilities to an independent system operator (ISO) or
divest the public utility's interest in its transmission facilities to
an independent transmission owner (ITO) if the public utility has not
already transferred control to an ISO or divested to an ITO by June 30,
2000. Under certain circumstances, the PSCW has authority to waive
imposition of such an order on June 30, 2000. At Dec. 31, 1998, the net
book value of NSP-Wisconsin's transmission assets was approximately
$148 million.
- In November 1998, NSP and Alliant Energy (Alliant) announced plans to
develop an ITC to provide transmission services to the Upper Midwest. The
two companies are developing a relationship by which NSP will create an
ITC, which will lease the transmission assets of Alliant. Lease terms have
not been finalized. The ITC is intended to be a publicly traded entity and
not an affiliate of NSP or Alliant. NSP and Alliant plan to seek the
necessary approvals from state and federal regulators in 1999, with the
ITC proposed to be operational in 2000.
- In November 1998, the members of Mid-Continent Area Power Pool (MAPP)
rejected a proposal to establish a MAPP ISO. In December 1998, Minnesota
Power Company (MP) filed a complaint with the FERC, alleging that NSP
violated its duty in a settlement agreement to work cooperatively to form
an ISO by voting against the MAPP ISO. MP also wants NSP's transmission
rate structure to be declared unreasonably discriminatory. MP is
requesting the FERC to order NSP to join the newly formed Midwest ISO, or
to order NSP to charge the Midwest ISO regional rate and to revoke NSP's
market rate authority.
- Due to the need for regulatory approval and other factors outside NSP's
control, there is no guarantee that NSP will be successful in forming an
ITC, or that if an ITC is formed it will include Alliant. In the event
that NSP is successful in forming an ITC, NSP would ultimately divest its
electric transmission assets. At Dec. 31, 1998, the net book value of
NSP's transmission assets was approximately $647 million. If NSP is not
successful in forming an ITC, Act 204 currently would require the transfer
of control of NSP-Wisconsin's transmission assets to an ISO, unless a
waiver is granted.
INDEPENDENT NUCLEAR GENERATING COMPANY In April 1998, NSP announced its
intention to divest its nuclear generation business to form an independent
company unaffiliated with the rest of its utility operations.
- During 1998, in the first step toward this commitment, NSP, Alliant, WEC
and Wisconsin Public Service Corp. agreed to form a cooperative nuclear
alliance to improve plant performance and reliability, strengthen
operational efficiency, maintain high safety levels and reduce costs.
Working teams are being organized to implement cooperative alliances in
several areas, including: fuel management, Year 2000 initiatives,
inventory management, information exchange and self-assessment programs.
The four companies operate seven nuclear units at five sites with a total
generation capacity exceeding 3,650 megawatts.
25
<PAGE>
- NSP continues to work with regulators and potential business partners
toward the divestiture of its nuclear generation business. At Dec. 31,
1998, the net book value of NSP's nuclear assets (excluding
decommissioning investments and obligations) was approximately $737
million.
ENERGY MARKETING In April 1998, NSP announced an initiative to expand its
wholesale energy marketing efforts by formally establishing an Energy Marketing
division within NSP's Generation business unit. During 1998, Energy Marketing:
- Established a comprehensive risk management program. Since electricity
cannot be stored, there is potential for extreme price volatility. Strict
risk management is an integral element of Energy Marketing's business
activity.
- Led the development of the Minneapolis Grain Exchange (MGE) electricity
futures and option contracts. The MGE contracts provide NSP and the region
an opportunity to hedge against the price volatility inherent in the
electric market.
- Obtained market-based rate approval from the FERC in June 1998. This
enables Energy Marketing to sell energy at market prices in addition to
selling under traditional cost-based rates.
- Expanded the scale of NSP's electric sales for resale, increasing sales
volume by approximately 35 percent.
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 NSP's Prairie Island nuclear generating facility. Through
the use of longer fuel cycles and utilization of temporary storage racks in the
spent fuel pools, NSP 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). NSP had loaded seven of the casks as of Dec.
31, 1998. As a condition of the authorization, the Minnesota Legislature
established several resource commitments for NSP, including wind and biomass
generation sources as well as other requirements. NSP is complying with these
requirements. The MEQB has terminated an alternative siting process, which had
been one of the original legislative requirements.
NSP and other utilities have an ongoing dispute with the U.S. Department of
Energy (DOE) regarding the DOE's statutory and contractual obligations to
provide permanent storage and disposal facilities for nuclear fuel by Jan. 31,
1998, as required by the Nuclear Waste Policy Act of 1982. (See Notes 13 and 14
to the Financial Statements for more information.)
YEAR 2000 (Y2K) READINESS To the extent allowed, the information in the
following section is designated as a "Year 2000 Readiness Disclosure." NSP is
incurring significant costs to modify or replace existing technology, including
computer software, for uninterrupted operation in the year 2000 and beyond. In
1996, NSP's Board of Directors approved funding to address development and
remediation efforts related to Y2K. A committee made up of senior management is
leading NSP's initiatives to identify Y2K related issues and remediate business
processes as necessary.
NSP's Y2K program covers not only NSP's 2,000 computer applications, consisting
of about 75,000 programs and totaling more than 30 million lines of code, but
also the thousands of hardware and embedded system components in use throughout
NSP. Embedded systems perform mission-critical functions in all parts of
operations, including power generation, transmission, distribution,
communications and business operations. NSP has implemented a Y2K methodology
consistent with state-of-the-art best practices and standards within the utility
industry. This seven-step process includes:
- Discovery of possible date-related logic in components, systems
and processes
- Assessment of potential problems
- Development of a plan to address the problem
- Remediation to resolve the problem
- Testing to verify that the solutions are workable
- Implementation of the solution into production
- Closure through retesting and documentation and review by a separate
internal due diligence committee
NSP's timetable for Y2K completion is:
- As of Dec. 31, 1998, 70 percent of NSP's mission-critical systems and
processes were Y2K ready.
- By March 31, 1999, completion of all Y2K efforts on 90 percent of
mission-critical systems and processes.
- By June 30, 1999, completion of all Y2K efforts on mission-critical
systems and processes, completion of all nuclear plant remediation in
accordance with Nuclear Regulatory Commission guidelines and finalization
of all contingency planning.
- By Dec. 31, 1999, complete remediation of low-priority applications,
complete all testing and implementation, and final closure.
NSP is communicating with its key suppliers and business partners regarding
their Y2K progress, particularly in software and embedded component areas, to
determine the areas in which NSP's operations may be vulnerable to those
parties' failure to complete their remediation efforts. NSP is currently
evaluating and initiating follow-up actions regarding the responses from these
parties as appropriate. NSP is also working closely with the Electric Power
Research Institute, MAPP, the Nuclear Energy Institute, the North American
Electric Reliability Council (NERC) and other utilities to enhance coordination,
system reliability and compliance with industry and regulatory requirements. In
its fourth quarter 1998 report, NERC stated, "findings continue to indicate that
transition through critical Y2K dates is expected to have minimal impact on
electric operations in North America."
NSP has made significant progress implementing its Y2K plan. Based upon the
information currently known regarding its internal operations and assuming
successful and timely completion of its remediation plan, NSP does not
anticipate significant business disruptions from its internal systems due to the
Y2K issue. However, NSP may possibly experience limited interruptions to some
aspects of its activities, relating to information technology, operations and
administrative functions. NSP is considering such potential occurrences in
planning for its most reasonably likely worst case scenarios.
In addition, risk exists regarding the noncompliance of third parties with
key business or operational importance to NSP. Y2K problems affecting key
customers, interconnected utilities, fuel suppliers and transporters,
telecommunications providers or financial institutions could result in lost
power or gas sales, reductions in power production or transmission, or
internal functional and administrative difficulties on the part of NSP. NSP
is not presently aware of any such situations; however, occurrences of this
type, if severe, could have material adverse impacts upon the business,
operating results or financial condition of NSP. Consequently, there can be
no assurance that NSP will be able to identify and correct all aspects of the
Y2K problem that affect it in sufficient time, or that the costs of achieving
Y2K readiness will not be material.
26
<PAGE>
NSP is currently updating contingency plans for all material Y2K risk and is
on track to meet the contingency planning schedule set forth by NERC. Among
the areas contingency planning will address are delays in completion of NSP's
remediation plans, failure or incomplete remediation results and failure of
key third party contacts to be Y2K compliant.
Through 1998, NSP had spent approximately $13.1 million for Y2K efforts, which
primarily is expensed as incurred. The additional development and remediation
costs necessary for NSP to prepare for Y2K is estimated to be approximately
$11.3 million.
ENVIRONMENTAL MATTERS NSP incurs several types of environmental costs, including
nuclear plant decommissioning, storage and ultimate disposal of spent nuclear
fuel, disposal of hazardous materials and wastes, remediation of contaminated
sites and monitoring of discharges into the environment. Because of greater
environmental awareness and increasingly stringent regulation, NSP has
experienced 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 spent nuclear fuel disposal expenses,
costs charged to NSP's operating expenses for environmental monitoring and
disposal of hazardous materials and wastes were approximately:
- $32 million in 1998
- $31 million in 1997
- $31 million in 1996
NSP expects to average approximately $34 million per year for the five-year
period 1999-2003. However, the precise timing and amount of environmental costs,
including those for site remediation and disposal of hazardous materials, are
currently unknown.
Capital expenditures on environmental improvements at its utility facilities,
which include the costs of constructing spent nuclear fuel storage casks, were
approximately:
- $21 million in 1998
- $19 million in 1997
- $10 million in 1996
NSP expects to incur approximately $32 million in capital expenditures for
compliance with environmental regulations in 1999 and approximately $100 million
for the five-year period 1999-2003.
(See Notes 13 and 14 to the Financial Statements for further discussion of these
and other environmental contingencies.)
WEATHER NSP's earnings can be significantly affected by unusual weather.
Very hot summers and very cold winters increase electric and gas sales.
Unseasonably mild weather reduces electric and gas sales. The following
summarizes the estimated impact on NSP's earnings due to temperature variations
from historical averages.
- Weather in 1998 decreased earnings by an estimated 11 cents per share
- Weather in 1997 decreased earnings by an estimated 6 cents per share
- Weather in 1996 increased earnings by an estimated 8 cents per share
IMPACT OF NONREGULATED INVESTMENTS A significant portion of NSP's earnings comes
from nonregulated operations. NSP expects to continue investing in nonregulated
projects, including domestic and international power production projects through
NRG. The nonregulated projects in which NSP or its subsidiaries have invested
and may invest in the future carry a higher level of risk than NSP's traditional
utility businesses due to a number of factors, including:
- competition, operating risks, dependence on certain suppliers and
customers and domestic and foreign environmental and energy regulations;
- partnership and government actions and foreign government, political,
economic and currency risks; and
- development risks, including uncertainties prior to final legal closing.
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.
USE OF DERIVATIVES AND MARKET RISK NSP uses derivative financial instruments to
mitigate the impact of changes in: foreign currency exchange rates on NRG's
international project cash flows, natural gas prices on EMI's margins,
electricity prices on Energy Marketing's margins and interest rates on the cost
of borrowing.
The fair value of NRG's foreign currency contracts is sensitive to market risk
as a result of changes in foreign currency exchange rates. As of Dec. 31, 1998,
a 10 percent appreciation in foreign exchange rates from prevailing market rates
would decrease the market value of NRG's foreign currency contracts by
approximately $0.3 million. Conversely, a 10 percent depreciation in these
currencies from the prevailing market rates would increase the market value by
approximately $0.3 million.
EMI is exposed to market risk through changes in market prices of natural gas
forward and futures contracts. As of Dec. 31, 1998, a 10 percent increase in
natural gas forward and futures prices would result in a gain on these contracts
of approximately $0.5 million. Conversely, a 10 percent decrease in natural gas
forward and futures prices would result in a loss on these contracts of
approximately $0.5 million. These hypothetical gains and losses on natural gas
forward and futures contracts would be offset by the gains and losses on the
underlying commodities being hedged.
NSP's Energy Marketing division is exposed to market risk of changes in market
prices of electricity. The market risk of these energy futures contracts is
immaterial.
Market risk associated with NSP's interest rate swap agreement results from
short-term interest rate fluctuations. This market risk is not material since
this swap expired on Feb. 1, 1999. (See Notes 1 and 11 to the Financial
Statements for further discussion of NSP's financial instruments and
derivatives.)
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.)
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In June 1998, the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 133 - Accounting for Derivative Instruments and Hedging Activities. This
statement requires that all derivatives be recognized at fair value in the
balance sheet and all changes in fair value be recognized currently in earnings
or deferred as a component of other comprehensive income, depending on the
intended use of the derivative, its resulting designation and its effectiveness.
NSP is required to adopt this standard in 2000, but can elect to adopt it
earlier. NSP has not determined the potential impact of implementing this
statement or its expected adoption date.
INFLATION Inflation at its current level is not expected to materially affect
NSP's prices or returns to shareholders.
LIQUIDITY AND CAPITAL RESOURCES
1998 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. In 1998:
- Total utility capital expenditures (including AFC) were $411 million.
- Of that amount, $332 million related to replacements and improvements of
NSP's electric system and nuclear fuel, and $49 million involved
construction of natural gas facilities, including Viking.
- NSP companies (mainly NRG and Eloigne) invested approximately $279 million
for equity interests in and loans to nonregulated projects, for the
acquisition of existing businesses and for additions to nonregulated
property.
1998 FINANCING ACTIVITY During 1998, NSP's sources of capital included
internally generated funds and external financings. The allocation of financing
requirements between these capital resources is based on the relative cost of
each resource, regulatory restrictions and NSP's long-range capital structure
objectives. A capital structure consisting of 47.3 percent common equity at
year-end 1998 contributes to NSP's financial flexibility and strength. The
following summarizes the financing sources used in 1998.
- Internal funds - Funds generated internally from operating cash flows in
1998 remained sufficient to meet working capital needs, debt service,
dividend payout requirements and construction expenditures, as well as to
fund a significant portion of nonregulated investment commitments. NSP's
stated goal for its pretax interest coverage ratio for utility operations
is 3.5-5.0. The utility pretax interest coverage ratio, excluding AFC, was
3.8 in 1998, 3.6 in 1997 and 4.4 in 1996, which falls within the range.
Internally generated funds from utility operations could have provided
financing for more than 100 percent of NSP's utility capital expenditures
for 1998 and approximately 93 percent of the $2.0 billion in utility
capital expenditures incurred for the five-year period 1994-1998. The
pretax interest coverage ratio, excluding AFC, for all NSP operations was
2.9 in 1998, 2.8 in 1997 and 3.7 in 1996.
- External financing - NSP's short-term debt availability and usage is
described in Note 2 to the Financial Statements. In general, short-term
borrowings are used to provide temporary financing, mainly for
NSP-Minnesota and NRG, for utility capital expenditures, nonregulated
projects and other short-term cash needs. NSP's long-term debt and capital
stock activity are shown on the Statements of Capitalization and
Stockholders' Equity. These sources are used to provide permanent
financing for both regulated and nonregulated business activities. In
addition to funding current year capital needs, external financing
activities also reflect NSP's management of its capital structure to
maintain desired capitalization ratios.
NSP's 1998 nonregulated construction expenditures and equity investments
in nonregulated projects were primarily financed through internally generated
funds and the issuance of debt by nonregulated subsidiaries. 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.
FUTURE FINANCING REQUIREMENTS NSP currently estimates that its utility capital
expenditures will be $450 million in 1999 and $2.1 billion for the five-year
period 1999-2003. Of the 1999 amount, approximately $369 million is scheduled
for electric utility facilities and approximately $69 million for natural gas
facilities, including Viking. In addition to utility capital expenditures,
expected financing requirements for the five-year period 1999-2003 include
approximately $825 million to retire long-term debt and fund principal
maturities.
If NSP carries out its game plan to divest transmission and nuclear generation
assets, capital expenditures would be significantly lower. Another game plan
item, expansion of NSP's utility distribution, includes possible business
combinations that may require substantial issuance of capital.
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. Potential capital
requirements for nonregulated projects and property, which include acquisitions
and project investments, are estimated to be approximately $1.3 billion in 1999
and approximately $1.7 billion for the five-year period 1999-2003. The 1999
nonregulated capital requirements reflect NRG's expected acquisitions of
existing generation facilities, including: Arthur Kill, Astoria, Somerset,
Dunkirk, Huntley and Encina. A significant portion of these capital requirements
is expected to be financed by nonrecourse project debt.
28
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NSP and its subsidiaries continue 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 financing may be
required for such investments.
NSP 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 meet future financing requirements by
periodically issuing long-term debt, short-term debt, common stock and preferred
securities to maintain desired capitalization ratios. Over the long term, NSP's
equity investments in and acquisitions of 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 partners, are expected to be
fulfilled through project or subsidiary 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 is unknown
at this time.
The following summarizes the financing sources expected to be available to NSP
in the near future:
- Internal funds - Internally generated funds from utility operations are
expected to equal approximately 80 percent of anticipated utility capital
expenditures for 1999 and approximately 85 percent of the $2.1 billion in
anticipated utility capital expenditures for the five-year period
1999-2003. Because NRG 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.
- Short-term debt - NSP's board of directors has approved short-term
borrowing levels up to 10 percent of capitalization. NSP has received
regulatory approval for up to $604 million in short-term borrowing levels
and plans to keep its credit lines at or above its average level of
commercial paper borrowings. NSP credit lines (as discussed in Note 2 to
the Financial Statements) make short-term financing available in the form
of bank loans, letters of credit and support for commercial paper for
utility operations.
- Long-term debt - NSP-Minnesota's and NSP-Wisconsin'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, 1998, with an assumed interest rate of 6.25 percent, NSP-Minnesota
could have issued about $2.4 billion of additional first mortgage bonds
under its indenture and NSP-Wisconsin could have issued about $326 million
of additional first mortgage bonds under its indenture. In November 1998,
NSP filed with the SEC a $400 million universal debt shelf registration.
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. Depending on market conditions, NSP expects to
issue the bonds to raise additional capital for general corporate purposes
or to redeem or retire outstanding securities. In 1999, NRG anticipates
issuing approximately $300 million of corporate debt to finance several
acquisitions that are expected to close during the year.
- Common stock - NSP's Articles of Incorporation authorize an additional
197.3 million shares of common stock in excess of shares issued at Dec.
31, 1998. In 1996, NSP 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 NSP's Dividend Reinvestment and Stock Purchase Program (DRSPP)
and Executive Long-term Incentive Award Stock Plan. NSP may issue new
shares or purchase shares on the open market for its stock-based plans.
(See Note 4 to the Financial Statements for discussion of stock awards
outstanding.) NSP plans to issue new shares for its DRSPP, Employee Stock
Ownership Plan (ESOP) and Executive Long-term Incentive Award Stock Plans
in 1999. Also, NSP may consider a general common stock offering in 1999,
depending on corporate needs and opportunities.
- Preferred stock - NSP's Articles of Incorporation authorize the maximum
amount of preferred stock that may be issued. Under these provisions, NSP
could have issued all $595 million of its remaining authorized, but
unissued, preferred stock at Dec. 31, 1998, and remained in compliance
with all interest and dividend coverage requirements.
29
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE DATA) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
UTILITY OPERATING REVENUES
Electric: Retail $2 145 548 $2 052 288 $1 985 923
Sales for resale and other 216 803 166 262 141 490
Gas 456 823 515 196 526 793
- -----------------------------------------------------------------------------------------------------------------------------
Total 2 819 174 2 733 746 2 654 206
- -----------------------------------------------------------------------------------------------------------------------------
UTILITY OPERATING EXPENSES
Fuel for electric generation 311 368 309 999 301 201
Purchased and interchange power 377 907 286 239 243 562
Cost of gas purchased and transported 267 050 331 296 335 453
Other operation 392 054 368 545 333 010
Maintenance 181 066 164 542 155 830
Administrative and general 150 078 141 802 148 656
Conservation and energy management 71 134 70 939 69 784
Depreciation and amortization 338 225 325 880 306 432
Property and general taxes 220 620 227 893 232 824
Income taxes 145 383 144 855 161 410
- -----------------------------------------------------------------------------------------------------------------------------
Total 2 454 885 2 371 990 2 288 162
- -----------------------------------------------------------------------------------------------------------------------------
Utility operating income 364 289 361 756 366 044
- -----------------------------------------------------------------------------------------------------------------------------
OTHER INCOME (EXPENSE)
Income from nonregulated businesses - before interest and taxes 51 171 12 078 18 543
Allowance for funds used during construction - equity 8 509 6 401 7 595
Merger costs (29 005)
Other utility income (deductions) - net (3 697) (2 886) (1 544)
Income taxes on nonregulated operations and nonoperating items - benefit 40 588 48 145 14 600
- -----------------------------------------------------------------------------------------------------------------------------
Total 96 571 34 733 39 194
- -----------------------------------------------------------------------------------------------------------------------------
Income before financing costs 460 860 396 489 405 238
- -----------------------------------------------------------------------------------------------------------------------------
FINANCING COSTS
Interest on utility long-term debt 104 171 101 250 101 177
Other utility interest and amortization 11 612 19 063 21 950
Nonregulated interest and amortization 54 261 34 627 18 834
Allowance for funds used during construction - debt (7 307) (10 208) (11 262)
- -----------------------------------------------------------------------------------------------------------------------------
Total interest charges 162 737 144 732 130 699
Distributions on redeemable preferred securities of subsidiary trust 15 750 14 437
- -----------------------------------------------------------------------------------------------------------------------------
Total financing costs 178 487 159 169 130 699
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME 282 373 237 320 274 539
Preferred stock dividends and redemption premiums 5 548 11 071 12 245
- -----------------------------------------------------------------------------------------------------------------------------
EARNINGS AVAILABLE FOR COMMON STOCK $ 276 825 $ 226 249 $ 262 294
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Average number of common shares outstanding (000's) 150 502 140 594 137 121
Average number of common and potentially dilutive shares outstanding (000's) 150 743 140 870 137 358
EARNINGS PER AVERAGE COMMON SHARE - BASIC $ 1.84 $ 1.61 $ 1.91
EARNINGS PER AVERAGE COMMON SHARE - DILUTED $ 1.84 $ 1.61 $ 1.91
Common dividends declared per share $ 1.4250 $ 1.4025 $ 1.3725
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES 36 TO 50
30
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
(THOUSANDS OF DOLLARS) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $282 373 $237 320 $274 539
Adjustments to reconcile net income to cash from operating activities:
Depreciation and amortization 379 397 358 928 335 605
Nuclear fuel amortization 43 816 40 015 45 774
Deferred income taxes (1 017) (5 902) (30 561)
Deferred investment tax credits recognized (9 432) (10 061) (9 352)
Allowance for funds used during construction - equity (8 509) (6 401) (7 595)
Undistributed equity in earnings of unconsolidated affiliates (22 753) (5 364) (25 976)
Write-off of prior year merger costs 25 289
Cash provided by (used for) changes in certain working capital
items (see below) (13 673) 36 117 (58 634)
Cash provided by changes in other assets and liabilities 51 863 19 844 20 664
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 702 065 689 785 544 464
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures:
Utility plant additions (including nuclear fuel) (411 113) (396 605) (386 655)
Additions to nonregulated property (44 918) (35 928) (25 807)
Increase (decrease) in construction payables 5 270 2 563 (3 716)
Allowance for funds used during construction - equity 8 509 6 401 7 595
Investment in external decommissioning fund (41 360) (41 261) (40 497)
Equity investments, loans and deposits for nonregulated projects (234 214) (395 495) (299 173)
Collection of loans made to nonregulated projects 109 530 87 128 116 126
Business acquisitions (159 600)
Other investments - net 1 307 (15 692) (15 873)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (606 989) (948 489) (648 000)
- -----------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Change in short-term debt - net issuances (repayments) (20 522) (108 023) 152 173
Proceeds from issuance of long-term debt - net 290 626 299 779 197 824
Repayment of long-term debt, including reacquisition premiums (135 183) (141 681) (67 628)
Proceeds from issuance of preferred securities - net 193 315
Proceeds from issuance of common stock - net 72 348 267 965 41 725
Redemption of preferred stock, including reacquisition premiums (95 000) (41 278)
Dividends paid (219 746) (207 726) (198 234)
- -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (107 477) 262 351 125 860
- -----------------------------------------------------------------------------------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (12 401) 3 647 22 324
Cash and cash equivalents at beginning of period 54 765 51 118 28 794
- -----------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 42 364 $ 54 765 $ 51 118
- -----------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) CHANGES IN CERTAIN WORKING CAPITAL ITEMS
Customer accounts receivable and unbilled utility revenues $ (1 583) $ 47 745 $ (31 925)
Federal income tax and other receivables (19 853) 133 (9 570)
Materials and supplies inventories (5 385) (8 547) (9 891)
Payables and accrued liabilities (excluding construction payables) 7 845 (7 342) 1 179
Other 5 303 4 128 (8 427)
- -----------------------------------------------------------------------------------------------------------------------------
NET $ (13 673) $ 36 117 $ (58 634)
=============================================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the year for:
Interest (net of amount capitalized) $220 424 $144 062 $121 697
Income taxes (net of refunds received) $ 74 005 $113 009 $165 146
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES 36 TO 50
31
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
(THOUSANDS OF DOLLARS) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
UTILITY PLANT
Electric - including construction work in progress: 1998, $120,095; 1997, $92,302 $7 199 843 $6 964 888
Gas 884 182 821 119
Other 365 101 343 950
- -----------------------------------------------------------------------------------------------------------------------------
Total 8 449 126 8 129 957
Accumulated provision for depreciation (4 155 641) (3 868 810)
Nuclear fuel - including amounts in process: 1998, $16,744; 1997, $23,381 975 030 932 335
Accumulated provision for amortization (873 281) (832 162)
- -----------------------------------------------------------------------------------------------------------------------------
Net utility plant 4 395 234 4 361 320
- -----------------------------------------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and cash equivalents 42 364 54 765
Customer accounts receivable - net of accumulated provisions
for uncollectible accounts: 1998, $5,176; 1997, $10,406 253 559 269 455
Unbilled utility revenues 139 098 121 619
Notes receivable from nonregulated projects 4 460 55 787
Other receivables 100 656 80 803
Materials and supplies inventories - at average cost:
Fuel 58 806 56 434
Other 110 267 107 254
Prepayments and other 44 855 55 674
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 754 065 801 791
- -----------------------------------------------------------------------------------------------------------------------------
OTHER ASSETS
Equity investments in nonregulated projects 862 596 740 734
External decommissioning fund and other investments 479 402 400 290
Regulatory assets 331 940 340 122
Nonregulated property - net of accumulated depreciation: 1998, $122,445; 1997, $105,526 282 524 256 726
Notes receivable from nonregulated projects 106 427 77 639
Other long-term receivables 29 796 42 600
Long-term prepayments and deferred charges 58 398 30 015
Intangible assets - net of accumulated amortization 95 915 92 829
- -----------------------------------------------------------------------------------------------------------------------------
Total other assets 2 246 998 1 980 955
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL $7 396 297 $7 144 066
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND EQUITY
CAPITALIZATION (SEE PAGES 34-35)
Common stockholders' equity $2 481 246 $2 371 728
Preferred stockholders' equity 105 340 200 340
Mandatorily redeemable preferred securities of subsidiary trust 200 000 200 000
Long-term debt 1 851 146 1 878 875
- -----------------------------------------------------------------------------------------------------------------------------
Total capitalization 4 637 732 4 650 943
- -----------------------------------------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Long-term debt due within one year 227 600 22 820
Other long-term debt potentially due within one year 141 600 141 600
Short-term debt 239 830 260 352
Accounts payable 271 799 249 813
Taxes accrued 170 274 186 369
Interest accrued 38 836 28 724
Dividends payable on common and preferred stocks 55 650 54 778
Accrued payroll, vacation and other 86 673 89 562
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 1 232 262 1 034 018
- -----------------------------------------------------------------------------------------------------------------------------
OTHER LIABILITIES
Deferred income taxes 814 983 792 569
Deferred investment tax credits 128 444 138 509
Regulatory liabilities 372 239 305 765
Postretirement and other benefit obligations 129 514 135 612
Other long-term obligations and deferred income 81 123 86 650
- -----------------------------------------------------------------------------------------------------------------------------
Total other liabilities 1 526 303 1 459 105
- -----------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES (SEE NOTES 13 AND 14)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL $7 396 297 $7 144 066
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES 36 TO 50
32
<PAGE>
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER TOTAL
RETAINED SHARES HELD COMPREHENSIVE STOCKHOLDERS'
(THOUSANDS OF DOLLARS) PAR VALUE PREMIUM EARNINGS BY ESOP INCOME EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at Dec. 31, 1995
(as previously reported) $170 440 $599 094 $1 266 026 $(10 657) $ 2 488 $2 027 391
Restatement for June 1, 1998
two-for-one stock split 170 440 (170 440)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1995 (AS RESTATED) $340 880 $428 654 $1 266 026 $(10 657) $ 2 488 $2 027 391
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 274 539 274 539
Currency translation adjustments 306 306
--------
--------
Comprehensive income for 1996 274 845
Dividends declared:
Cumulative preferred stock (12 245) (12 245)
Common stock (187 521) (187 521)
Issuances of common stock - net 4 438 37 037 41 475
Tax benefit from stock options exercised 369 369
Loan to ESOP to purchase shares* (15 000) (15 000)
Repayment of ESOP loan* 6 566 6 566
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1996 $345 318 $466 060 $1 340 799 $(19 091) $ 2 794 $2 135 880
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 237 320 237 320
Currency translation adjustments (65 681) (65 681)
--------
--------
Comprehensive income for 1997 171 639
Dividends declared:
Cumulative preferred stock (9 923) (9 923)
Common stock (202 173) (202 173)
Premium on redeemed preferred stock (1 148) (1 148)
Issuances of common stock - net 27 774 240 112 267 886
Tax benefit from stock options exercised 1 009 1 009
Repayment of ESOP loan* 8 558 8 558
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1997 $373 092 $707 181 $1 364 875 $(10 533) $(62 887) $2 371 728
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Net income 282 373 282 373
Unrealized loss from marketable
securities, net of income tax of $4,417 (6 416) (6 416)
Currency translation adjustments (19 711) (19 711)
--------
--------
Comprehensive income for 1998 256 246
Dividends declared:
Cumulative preferred stock (5 548) (5 548)
Common stock (215 069) (215 069)
Issuances of common stock - net 8 650 66 294 74 944
Retained earnings of acquired businesses 6 065 6 065
Tax benefit from stock options exercised 850 850
Loan to ESOP to purchase shares* (15 000) (15 000)
Repayment of ESOP loan* 7 030 7 030
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DEC. 31, 1998 $381 742 $774 325 $1 432 696 $(18 503) $(89 014) $2 481 246
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Did not affect NSP cash flows
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES 36 TO 50
33
<PAGE>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
DECEMBER 31
(THOUSANDS OF DOLLARS) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKHOLDERS' EQUITY
Common stock - authorized 350,000,000 shares of $2.50 par value;
issued shares: 1998, 152,696,971; 1997, 149,236,764 $ 381 742 $ 373 092
Premium on common stock 774 325 707 181
Retained earnings 1 432 696 1 364 875
Leveraged common stock held by Employee Stock Ownership Plan (ESOP) -
shares at cost: 1998, 641,884; 1997, 460,506 (18 503) (10 533)
Accumulated other comprehensive income (89 014) (62 887)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY $2 481 246 $2 371 728
- -----------------------------------------------------------------------------------------------------------------------------
CUMULATIVE PREFERRED STOCK - authorized 7,000,000 shares of $100 par value;
outstanding shares: 1998, 1,050,000; 1997, 2,000,000
NSP-Minnesota
$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
Variable Rate series A, 300,000 shares 30 000
Variable Rate series B, 650,000 shares 65 000
- -----------------------------------------------------------------------------------------------------------------------------
Total 105 000 200 000
Premium on preferred stock 340 340
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCKHOLDERS' EQUITY $ 105 340 $ 200 340
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST - holding as its sole asset
junior sub-ordinated deferrable debentures of NSP-Minnesota 7 7/8% series, 8,000,000 shares,
due Jan. 31, 2037 (See Note 8) $ 200 000 $ 200 000
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT
First Mortgage Bonds - NSP-Minnesota
Series due:
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
Feb. 1, 2003, 7 1/2% 50 000
April 1, 2003, 6 3/8% 80 000 80 000
Dec. 1, 2005, 6 1/8% 70 000 70 000
Dec. 1, 1998-2006, 6.68% 16 900** 18 400**
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* 60 000*
March 1, 2019, Variable Rate 27 900* 27 900*
Sept. 1, 2019, Variable Rate 100 000* 100 000*
March 1, 2003, 5 7/8% 100 000
March 1, 2028, 6 1/2% 150 000
- -----------------------------------------------------------------------------------------------------------------------------
Total 1 318 500 1 170 000
- -----------------------------------------------------------------------------------------------------------------------------
Less redeemable bonds classified as current (See Note 3) (141 600) (141 600)
Less current maturities (201 600) (1 500)
- -----------------------------------------------------------------------------------------------------------------------------
Net $ 975 300 $1 026 900
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Pollution control financing
** Resource recovery financing
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES 36 TO 50
Northern States Power Company, Minnesota and Subsidiaries
34
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31
(THOUSANDS OF DOLLARS) 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
LONG-TERM DEBT - CONTINUED
First Mortgage Bonds - NSP-Wisconsin
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 - NSP-Minnesota
Series due:
Feb. 1, 1998-2003, 5.41% $ 5 100* $ 5 300*
May 1, 1998-2003, 5.70% 22 750* 23 250*
Feb. 1, 2003, 7.40% 3 500* 3 500*
- -----------------------------------------------------------------------------------------------------------------------------
Total 31 350 32 050
Less current maturities (700) (700)
- -----------------------------------------------------------------------------------------------------------------------------
Net $ 30 650 $ 31 350
- -----------------------------------------------------------------------------------------------------------------------------
OTHER LONG-TERM DEBT
City of Becker Pollution Control Revenue Bonds - Series due
Dec. 1, 2005, 7.25% $ 9 000* $ 9 000*
Anoka County Resource Recovery Bond - Series due
Dec. 1, 1998-2008, 7.10% 20 600** 21 850**
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% 20 978 23 111
Nov. 30, 2011, 7.1% 4 650 5 010
Sept. 30, 2012, 7.31% 12 833 13 767
NRG Energy, Inc. Senior Notes - Series due
Feb. 1, 2006, 7.625% 125 000 125 000
June 15, 2007, 7.5% 250 000 250 000
NRG Energy Center, Inc. (Minneapolis Energy Center)
Senior Secured Notes - Series due June 15, 2013, 7.31% 71 783 74 481
Pacific Generation Company debt due 2000-2007, 4.7%-9.9% 28 586 33 424
Various NEO Corporation debt due Oct. 30, 2000, 6.9%-9.4% 17 792 5 618
United Power & Land Notes due
March 31, 2000, 7.62% 6 041 6 875
Black Mountain Gas Industrial Development Bond due
June 1, 2004, May 1, 2005, 6% 3 000
Various Eloigne Company Affordable Housing Project Notes due
1998-2024, 1.0%-9.9% 46 024 27 223
Employee Stock Ownership Plan Bank Loans due
1998-2005, Variable Rate 18 504 10 535
Miscellaneous 9 122 7 385
- -----------------------------------------------------------------------------------------------------------------------------
Total 662 513 631 879
Less current maturities (25 300) (20 620)
- -----------------------------------------------------------------------------------------------------------------------------
Net $ 637 213 $ 611 259
- -----------------------------------------------------------------------------------------------------------------------------
Unamortized discount on long-term debt - net (7 017) (5 634)
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $1 851 146 $1 878 875
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION $4 637 732 $4 650 943
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Pollution control financing
** Resource recovery financing
SEE NOTES TO FINANCIAL STATEMENTS ON PAGES 36 TO 50
35
<PAGE>
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
SYSTEM OF ACCOUNTS NSP-Minnesota is primarily a public utility serving
customers in Minnesota, North Dakota, South Dakota and, since the merger with
Black Mountain Gas, Arizona. NSP-Wisconsin serves utility customers in
Wisconsin and Michigan. Viking operates a 500-mile interstate natural gas
pipeline. All of the utility companies' accounting records conform to the
Federal Energy Regulatory Commission (FERC) uniform system of accounts or to
systems required by various state regulatory commissions, which are the same
in all material aspects.
PRINCIPLES OF CONSOLIDATION The following wholly owned subsidiaries of
NSP-Minnesota are included in the consolidated financial statements. In this
report, we refer to these companies collectively as NSP.
- NSP-Wisconsin
- NRG Energy, Inc. (NRG)
- Viking Gas Transmission Co. (Viking)
- Energy Masters International, Inc. (EMI)
- Eloigne Co. (Eloigne)
- Seren Innovations, Inc. (Seren)
- Ultra Power Technologies, Inc. (Ultra Power)
NSP uses the equity method of accounting for its investments in partnerships,
joint ventures and certain projects, mainly at NRG and Eloigne. We record our
portion of earnings from international investments after subtracting foreign
income taxes. In the consolidation process, we eliminate all significant
intercompany transactions and balances except for intercompany and
intersegment profits for sales among the electric and gas utility businesses
of NSP-Minnesota, NSP-Wisconsin and Viking, which are allowed in utility
rates.
REVENUES NSP records utility revenues based on a calendar month, but reads
meters and bills customers according to a cycle that doesn't necessarily
correspond with the calendar month's end. To compensate, we estimate and
record unbilled revenues from the monthly meter-reading dates to the month's
end. NSP-Minnesota's rates include monthly adjustments for:
- changes in the average cost of fuel, including electricity and gas that
NSP purchases, from base levels approved in the most recent rate case
- conservation and energy management program costs in Minnesota
Because of a Public Service Commission of Wisconsin (PSCW) rule,
NSP-Wisconsin's rates include a cost-of-energy adjustment clause for
purchased gas, but not for purchased electricity or electric fuel. We can
recover those electric costs through the rate review process, which normally
occurs every two years in Wisconsin, and an interim fuel cost hearing process.
UTILITY PLANT AND RETIREMENTS Utility plant is stated at original cost. The
cost of utility plant includes direct labor and materials, contracted work,
overhead costs and applicable interest expense. The cost of utility plant
retired, plus net removal cost, is charged to accumulated 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,
represents the cost of capital used to finance utility construction activity.
AFC is computed by applying a composite pretax rate to qualified construction
work in progress. The AFC rate was 8.0 percent in 1998, 5.75 percent in 1997
and 5.5 percent in 1996. The amount of AFC capitalized as a construction cost
is credited to other income (for equity capital) and interest charges (for
debt capital). AFC amounts capitalized are included in NSP's 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 NSP determines the depreciation of its plant by spreading the
original cost equally over the plant's useful life. Every five years, NSP
submits an average service life filing to the Minnesota Public Utilities
Commission (MPUC) for electric and gas property. The most recent filing
occurred in 1997. Depreciation expense as a percentage of the average utility
plant in service was 3.77 percent in 1998, 3.78 percent in 1997 and 3.68
percent in 1996.
DECOMMISSIONING NSP accounts for the future cost of decommissioning - or
permanently retiring - its nuclear generating plants through annual
depreciation accruals using an annuity approach designed to provide for full
rate recovery of the future decommissioning costs. Our decommissioning
calculation covers all expenses, including decontamination and removal of
radioactive material, and extends over the estimated lives of the plants. The
calculation assumes that NSP will recover those costs through rates. (See
Note 13 for more information on decommissioning.)
NUCLEAR FUEL EXPENSE Nuclear fuel expense, which is expensed as the plant
uses fuel, includes the cost of:
- nuclear fuel used
- future nuclear fuel disposal, based on fees established by the U.S.
Department of Energy (DOE)
- NSP's portion of the cost of decommissioning or shutting down the
DOE's fuel enrichment facility
ENVIRONMENTAL COSTS We record environmental costs when it is probable that
NSP is liable for the costs and we can reasonably estimate the liability. We
may defer costs as a regulatory asset based on our expectation that we will
recover these costs from customers in future rates. Otherwise, we expense the
costs.
If an environmental expense is related to facilities we currently use, such
as pollution control equipment, we capitalize and depreciate the costs over
the life of the plant. We record estimated remediation costs, excluding
inflationary increases and possible reductions for insurance coverage and
rate recovery. The estimates are based on our experience, our assessment of
the current situation and the technology currently available to assist in the
remediation.
We regularly adjust the recorded costs as we revise estimates and as
remediation proceeds. If we are one of several designated responsible
parties, we estimate and record only our share of the cost. We treat any
future costs of restoring sites, where operation may extend indefinitely, as
a capitalized cost of plant retirement. The depreciation expense levels we
can recover in rates include a provision for these estimated removal costs.
INCOME TAXES Based on the liability method, NSP defers income taxes for all
temporary differences between pretax financial and taxable income and between
the book and tax bases of assets and liabilities.
We use the tax rates that are scheduled to be in effect when the temporary
differences are expected to turn around, or reverse.
Due to the effects of past regulatory practices, when deferred taxes were not
required to be recorded, we account for the reversal of some temporary
differences as current income tax expense. We defer investment tax credits
and spread their benefits over the estimated lives of the related property.
Utility rate regulation also has created certain regulatory assets and
liabilities related to income taxes, which we summarize in Note 9. We discuss
our income tax policy for international operations in Note 7.
36
<PAGE>
FOREIGN CURRENCY TRANSLATION NSP's foreign operations generally use the local
currency as their functional currency in translating international operating
results and balances to U.S. currency. Foreign currency denominated assets
and liabilities are translated at the exchange rates in effect at the end of
a reporting period. Income, expense and cash flows are translated at weighted
average exchange rates for the period. We accumulate the resulting currency
translation adjustments and report them as a separate component of
stockholders' equity.
When we convert cash distributions made in one currency to another currency,
we include those gains and losses in the results of operations as a component
of income from nonregulated businesses before interest and taxes. We do the
same for foreign currency derivative arrangements that do not qualify for
hedge accounting.
DERIVATIVE FINANCIAL INSTRUMENTS To preserve the U.S. dollar value of
projected foreign currency cash flows, NRG hedges - or protects - those cash
flows if appropriate foreign hedging instruments are available. NRG hedges
foreign currency transactions by using forward foreign currency exchange
agreements with terms of less than one to three years. The gains and losses
on those agreements offset the effect of exchange rate fluctuations on NRG's
known and anticipated cash flows. NRG defers gains on agreements that hedge
firm commitments of cash flows, and accounts for them as part of the relevant
foreign currency transaction when the transaction occurs. NRG defers losses
on these agreements the same way, unless it appears that the deferral would
result in recognizing a loss later.
While NRG is not hedging investments involving foreign currency currently,
NRG will hedge such investments when it 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. Before July 1997, NRG hedged investments
involving foreign currency as they were made to preserve their U.S. dollar
value. Gains and losses on those agreements offset the effects of exchange
rate fluctuations on the value of the investments underlying the hedges. We
reported hedging gains and losses on those agreements, net of income tax
effects, with other currency translation adjustments as a separate component
of stockholders' equity.
From time to time NRG also uses interest rate hedging instruments to protect
against increases in the cost of borrowing at both the corporate and project
level. NRG defers gains and losses on interest rate hedging instruments,
which are included and reported as part of the underlying equity investments.
EMI uses natural gas future and forward contracts 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
operating expenses. In February 1999, EMI transferred its gas supply and
marketing function to NSP's Energy Marketing Division.
NSP's Energy Marketing Division uses future and forward contracts to manage
the risk of electric price fluctuations. The cost or benefit of futures or
forward contracts is recorded when related sales commitments are fulfilled as
a component of Energy Marketing's operating expenses. NSP does not speculate
in electric or natural gas futures.
A final derivative instrument used by NSP is interest rate swaps. 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. (For information on derivatives see Note 11.)
USE OF ESTIMATES In recording transactions and balances resulting from
business operations, NSP uses estimates based on the best information
available. We use estimates for such items as plant depreciable lives, tax
provisions, uncollectible amounts, environmental costs, unbilled revenues and
actuarially determined benefit costs.
We revise the recorded estimates when we get better information or when we
can determine actual amounts. Those revisions can affect operating results.
Each year, we also review the depreciable lives of certain plant assets and
revise them if appropriate.
CASH EQUIVALENTS NSP considers investments in certain debt instruments - with
a remaining maturity of three months or less at the time of purchase - to be
cash equivalents. Those debt instruments are primarily commercial paper and
money market funds.
REGULATORY DEFERRALS As regulated entities, NSP-Minnesota, NSP-Wisconsin and
Viking account for certain income and expense items using Statement of
Financial Accounting Standards (SFAS) No. 71 - Accounting for the Effects of
Regulation. Under SFAS No. 71:
- we defer certain costs, which would otherwise be charged to expense, as
regulatory assets based on our expected ability to recover them in
future rates
- we defer certain credits, which would otherwise be reflected as income,
as regulatory liabilities based on our expectation that they will be
returned to customers in future rates
We base our estimates of recovering deferred costs and returning deferred
credits on specific ratemaking decisions or precedent for each item. We
amortize regulatory assets and liabilities consistent with the period of
expected regulatory treatment.
STOCK-BASED EMPLOYEE COMPENSATION NSP has several stock-based compensation
plans, which are described in Note 4. NSP accounts for those plans using the
intrinsic value method. We do not record compensation expense for stock
options because there is no difference between the market price and the
purchase price at grant date. We do, however, record compensation expense for
restricted stock that NSP awards to certain employees, but holds until the
restrictions lapse or the stock is forfeited. We do not use the optional
accounting under SFAS No. 123 - Accounting for Stock-Based Compensation. If
we had used the SFAS No. 123 method of accounting, the reduction of earnings
for 1998, 1997 and 1996 would have been immaterial.
DEVELOPMENT COSTS As NRG develops projects, it expenses the development costs
it incurs until a sales agreement or letter of intent is signed and the
project has received NRG board approval. NRG capitalizes additional costs
incurred at that point as part of equity investments in projects. When a
project begins to operate, NRG amortizes the capitalized costs over either
the life of the project's related assets or the revenue contract period,
whichever is less.
INTANGIBLE ASSETS Goodwill results when NSP purchases an entity at a price
higher than the underlying fair value of the net assets. We amortize the
goodwill and other intangible assets over periods of up to 40 years. We
periodically evaluate the recovery of goodwill based on an analysis of
estimated undiscounted future cash flows. At Dec. 31, 1998, NSP's intangible
assets included $44 million of goodwill, net of accumulated amortization.
Intangible and other assets also included deferred financing costs, net of
amortization, of approximately $23 million at Dec. 31, 1998. We are
amortizing these financing costs over the remaining maturity period of the
related debt.
37
<PAGE>
RECLASSIFICATIONS AND STOCK SPLIT We reclassified certain items in the 1996
and 1997 income statements to conform to the 1998 presentation. These
reclassifications had no effect on net income or earnings per share. In
addition, all financial information pertaining to per share amounts and
number of common shares outstanding has been adjusted to reflect a
two-for-one stock split effective June 1, 1998, for shareholders of record on
May 18, 1998.
2. SHORT-TERM BORROWINGS
Short-term debt outstanding at Dec. 31 consisted of:
<TABLE>
<CAPTION>
(MILLIONS OF DOLLARS) 1998 1997
- ---------------------------------------------------------------------------
<S> <C> <C>
Commercial paper borrowings $114 $138
Bank loans 126 122
- ---------------------------------------------------------------------------
TOTAL SHORT-TERM DEBT $240 $260
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Weighted average interest rate - Dec. 31 5.6% 6.2%
</TABLE>
At the end of 1997 and 1998, NSP-Minnesota had a $300 million revolving
credit facility under a commitment fee arrangement. This facility provides
short-term financing in the form of bank loans, letters of credit and support
for commercial paper sales. NSP did not borrow or issue any letters of credit
against this facility in 1997 or 1998.
In addition, banks provided lines of credit to NSP wholly owned subsidiaries,
of $318 million at Dec. 31, 1998. The short-term bank loans listed previously
reduced the amounts available under these subsidiary credit lines. Also, $34
million of letters of subsidiary credit were outstanding at Dec. 31, 1998 (as
discussed in Note 11), which further reduced amounts available under the
lines.
3. LONG-TERM DEBT
Except for minor exclusions, all real and personal property of NSP-Minnesota
and NSP-Wisconsin is subject to the liens of the first mortgage indentures,
which are contracts between the companies and their bond holders. A lien on
the related real or personal property secures other debt securities, as we
indicate on the Consolidated Statements of Capitalization.
The annual sinking-fund requirements of NSP-Minnesota and NSP-Wisconsin'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:
- series issued for pollution control and resource recovery financings
- certain other series totaling $1 billion
NSP-Minnesota and NSP-Wisconsin may apply property additions in lieu of cash
for sinking fund requirements on all series, as permitted by their first
mortgage indenture.
NSP-Minnesota'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 4.3 percent
and 3.1 percent, respectively, at Dec. 31, 1998. The 2011 series bonds are
redeemable upon seven days notice at the option of the bondholder.
NSP-Minnesota 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 are:
1999 $227.8 million 2002 $ 24.0 million
2000 $127.9 million 2003 $273.5 million
2001 $172.0 million
4. COMMON STOCK AND INCENTIVE STOCK PLANS
NSP's Articles of Incorporation and first mortgage indenture include certain
restrictions on paying cash dividends on common stock. Even with these
restrictions, NSP could have paid more than $1.4 billion in additional cash
dividends on common stock at Dec. 31, 1998.
NSP grants nonqualified stock options and restricted stock under our
Executive Long-term Incentive Award Stock Plan. The awards granted in any
year cannot exceed 1 percent of the number of outstanding shares of NSP
common stock at the end of the previous year. When options are exercised or
when we grant restricted stock, we may either issue new shares or purchase
market shares.
The weighted average number of common and potentially dilutive shares
outstanding includes the dilutive effect of stock options and other stock
awards based on the treasury stock method. Stock options may be exercised
after one year from the option's grant date and no later than 10 years after
the grant date. Effective in January 1999, stock options granted to NSP
officers vest at a rate of one-third each year for three years.
Employees forfeit stock options if their employment ends before the one-year
vesting term. If employment ends after the one-year vesting term, employees
either forfeit their options or must redeem them within three to 36 months,
depending on their circumstances. If an employee retires, all options granted
in 1999 will vest immediately and can be exercised over their 10-year life.
The exercise price of an option is the market price of NSP stock on the date
of grant. The plan previously granted other types of performance awards, some
of which remain outstanding. Most of these performance awards were valued in
dollars, but paid in shares based on the market price at the time of payment.
The following table includes transactions that have occurred under the
various incentive stock programs, with the corresponding weighted average
exercise price:
<TABLE>
<CAPTION>
STOCK OPTION AND PERFORMANCE AWARDS 1998 1997 1996
(THOUSANDS OF SHARES) SHARES AVERAGE PRICE SHARES AVERAGE PRICE SHARES AVERAGE PRICE
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding Jan. 1 2 206 $22.57 2 235 $21.99 1 980 $20.99
Options granted in January 572 $26.88 573 $23.72 526 $25.47
Options and awards exercised (346) $22.39 (520) $21.12 (210) $20.99
Options and awards forfeited (34) $26.48 (60) $23.60 (54) $23.85
Options and awards expired (9) $23.24 (22) $25.47 (7) $20.00
- ------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING AT DEC. 31 2 389 $23.57 2 206 $22.57 2 235 $21.99
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
EXERCISABLE AT DEC. 31 1 847 $23.34 1 685 $22.21 1 740 $20.98
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
38
<PAGE>
The following table summarizes information about stock options outstanding at
Dec. 31, 1998:
<TABLE>
<CAPTION>
RANGE OF EXERCISE PRICES
$16.63-20.47 $21.10-22.75 $23.72-26.88
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Options Outstanding:*
Number Outstanding
at Dec. 31, 1998 290 396 721 942 1 361 838
Weighted average remaining
contractual life (years) 2.2 5.2 8.1
Weighted average exercise price $18.66 $21.96 $25.47
Options Exercisable:*
Number Exercisable
at Dec. 31, 1998 290 396 721 942 819 904
Weighted average exercise price $18.66 $21.96 $24.54
- -------------------------------------------------------------------------------
</TABLE>
* THERE WERE ALSO 14,621 OTHER AWARDS OUTSTANDING AT DEC. 31, 1998.
In addition to granting stock options, NSP grants restricted stock based on a
Dollar value of the award. We use the market price of the stock on the date
it Was granted to determine the number of restricted shares to grant. NSP
holds the stock until restrictions lapse; 50 percent of the stock vests one
year from the date of the award and the other 50 percent vests two years from
the date of the award. To obtain additional shares, we reinvest dividends on
the shares we hold while restrictions are in place. Restrictions also apply
to the additional shares.
Over the last three years, NSP has granted the following restricted stock
awards:
- 1996: 37,168 shares
- 1997: 52,688 shares
- 1998: 49,651 shares
Compensation expense related to these awards was immaterial.
5. BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS
NSP offers the following benefit plans to its benefit employees.
Approximately 38 percent of benefit employees 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 almost 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 of applicable employee benefit and tax
laws. Plan assets principally consist of the common stock of public
companies, corporate bonds and U.S. government securities.
POSTRETIREMENT HEALTH CARE NSP has a contributory health and welfare benefit
plan that provides health care and death benefits to almost all NSP Retirees.
The plan, which will terminate for nonbargaining employees retiring after
1998, enables NSP and retirees to share the costs of retiree health care for
those employees retiring prior to 1999. In 1994, NSP implemented a
cost-sharing strategy, with 1997 and 1998 nonbargaining retirees paying 40
percent of total health care costs. Cost-sharing for bargaining employees is
governed by the terms of NSP'S collective bargaining agreement.
In conjunction with the 1993 adoption of SFAS No. 106 - Employers' Accounting
for Postretirement Benefits Other Than Pensions, NSP elected to amortize the
unrecognized accumulated postretirement benefit obligation (APBO) on a
straight-line basis over 20 years.
NSP's regulators require significant levels of external funding for retiree
benefits, including the use of tax-advantaged trusts. Plan assets held in
such trusts principally consist of investments in equity mutual funds and
cash equivalents.
Regulators for almost all of NSP's retail and wholesale customers have
allowed full recovery of increased benefit costs under SFAS No. 106.
Minnesota and Wisconsin retail regulators require external funding to the
extent it is tax advantaged. Such funding began for Wisconsin in 1993 and for
Minnesota in 1998. For wholesale ratemaking, FERC requires external funding
for all benefits paid and accrued under SFAS No. 106.
<TABLE>
<CAPTION>
RECONCILIATION OF FUNDED STATUS PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
(THOUSANDS OF DOLLARS) 1998 1997 1998 1997
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION AT JAN. 1 $ 1 048 251 $ 993 821 $ 279 230 $ 268 683
Service cost 31 643 27 680 3 247 5 095
Interest cost 78 839 72 651 15 896 18 872
Plan amendments 102 315 (51 456)
Actuarial (gain) loss (41 635) 30 431 (9 732) 2 164
Benefit payments (75 949) (76 332) (17 423) (15 584)
- -------------------------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION AT DEC. 31 $ 1 143 464 $ 1 048 251 $ 219 762 $ 279 230
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at Jan. 1 $ 1 978 538 $ 1 634 696 $ 19 783 $ 15 514
Actual return on plan assets 319 230 420 174 2 471 1 461
Employer contributions 29 683 18 392
Benefit payments (75 949) (76 332) (17 423) (15 584)
- -------------------------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS AT DEC. 31 $ 2 221 819 $ 1 978 538 $ 34 514 $ 19 783
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Funded status at Dec. 31 - net asset (obligation) $ 1 078 355 $ 930 287 $(185 248) $(259 447)
Unrecognized transition (asset) obligation (387) (463) 104 482 161 700
Unrecognized prior service cost 114 305 18 663 (2 399)
Unrecognized net (gain) loss (1 167 340) (953 825) 3 790 14 406
- -------------------------------------------------------------------------------------------------------------------
NET AMOUNT RECOGNIZED - ASSET (LIABILITY) $ 24 933 $ (5 338) $ (79 375) $ (83 341)
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
AMOUNT RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
(THOUSANDS OF DOLLARS) 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Prepaid benefit cost $24 933
Accrued benefit liability $(5 338) $(79 375) $(83 841)
- --------------------------------------------------------------------------------------------------------------------------
Net amount recognized - asset (liability) $24 933 $(5 338) $(79 375) $(83 341)
- --------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE ASSUMPTIONS USED IN BENEFIT CALCULATIONS
Discount rate at end of year 6.5% 7.0% 6.5% 7.0%
Expected return on plan assets for year 8.5% 9.0% 8.0% 8.0%
Rate of future compensation increase per year 4.5% 5.0% 4.5% 5.0%
Rate of future health care cost increase per year:
Next succeeding year - age 65 and older 6.1% 6.8%
Next succeeding year - under age 65 8.1% 9.2%
Final rate of increase in 2004 5.0% 5.5%
Effect of changes in the assumed health care cost trend rate
for each year:
1% increase in APBO components at Dec. 31, 1998 $ 27 199 $ 40 487
1% decrease in APBO components at Dec. 31, 1998 (22 551) (35 359)
1% increase in service and interest costs components of the
net periodic cost 2 652 3 692
1% decrease in service and interest costs components of the
net periodic cost (2 158) (3 199)
</TABLE>
<TABLE>
<CAPTION>
COMPONENTS OF NET PERIODIC BENEFIT COST PENSION BENEFITS OTHER POSTRETIREMENT BENEFITS
(THOUSANDS OF DOLLARS) 1998 1997 1996 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 31 643 $ 27 680 $ 29 971 $ 3 247 $ 5 095 $ 6 380
Interest cost 78 839 72 651 70 863 15 896 18 872 19 283
Expected return on plan assets (129 263) (115 359) (102 473) (1 582) (1 242) (927)
Amortization of transition (asset) obligation (76) (76) (76) 8 335 10 780 10 780
Amortization of prior service cost 6 673 1 071 1 071 (175)
Recognized actuarial (gain) (27 727) (20 762) (24 018) (4) 3 120
- ------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost under SFAS 87 or 106 (39 911) (34 795) (24 662) 25 717 33 508 35 636
Costs recognized due to effects of ratemaking 35 545 30 862 23 572 4 033
- ------------------------------------------------------------------------------------------------------------------------------
NET PERIODIC BENEFIT COST RECOGNIZED FOR
FINANCIAL REPORTING $ (4 366) $ (3 933) $ (1 090) $25 717 $33 508 $39 669
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 matched specified amounts of
employee contributions to the plan. NSP's matching contributions were: $4.8
million in 1998, $4.4 million in 1997 and $4.3 million in 1996.
ESOP NSP has a leveraged Employee Stock Ownership Plan (ESOP) that covers
substantially all employees. NSP makes contributions to this noncontributory,
defined contribution plan to the extent we realize a tax savings on our
income statement from dividends paid on certain ESOP shares. Contributions to
the ESOP, which represent compensation expense, were: $4.3 million in 1998,
$4.4 million in 1997 and $4.6 million in 1996.
ESOP contributions have no material effect on NSP earnings because the
contributions are essentially offset by the tax savings provided by the
dividends paid on ESOP shares. NSP allocates leveraged ESOP shares to
participants when it repays ESOP loans with dividends on stock held by the
ESOP.
NSP's ESOP held: 11.3 million shares of NSP common stock at the end of 1998,
11.2 million shares of NSP common stock at the end of 1997 and 11.8 million
shares of NSP common stock at the end of 1996.
NSP excluded the following uncommitted leveraged ESOP shares from
earnings-per-share calculations: 0.6 million in 1998, 0.6 million in 1997 and
0.4 million in 1996.
6. NONREGULATED EARNINGS CONTRIBUTION
Income from nonregulated businesses consists of the following:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS,
EXCEPT PER SHARE AMOUNTS) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues $182 230 $223 571 $303 903
Equity in operating earnings of
unconsolidated affiliates 79 884 18 600 30 668
Operating and development expenses,
including project write-downs (248 420) (251 087) (326 332)
Interest and other income,
including gains from project sales 37 477 20 994 10 304
- -------------------------------------------------------------------------------
Income from nonregulated businesses
before interest and taxes 51 171 12 078 18 543
Interest expense (54 261) (34 627) (18 834)
Income tax benefit 41 791 38 032 16 576
- -------------------------------------------------------------------------------
NET INCOME $ 38 701 $ 15 483 $ 16 285
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
EARNINGS PER SHARE $ 0.26 $ 0.11 $ 0.12
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
40
<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:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------------------------
<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 4.7% 4.3% 5.2%
Tax credits recognized (8.9)% (7.9)% (4.1)%
Equity income from unconsolidated affiliates (3.8)% (2.5)% (2.6)%
Regulatory differences - utility plant items 0.7% 1.1% 0.9%
Other - net (0.6)% (1.0)% 0.4%
- -------------------------------------------------------------------------------------------------
EFFECTIVE INCOME TAX RATE 27.1% 29.0% 34.8%
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
(THOUSANDS OF DOLLARS)
Income taxes are comprised of the following
expense (benefit) items:
Included in utility operating expenses:
Current federal tax expense $127 734 $125 202 $154 421
Current state tax expense 32 750 28 812 39 923
Deferred federal tax expense (6 625) (88) (19 933)
Deferred state tax expense 646 (23) (3 958)
Deferred investment tax credits (9 122) (9 048) (9 043)
- -------------------------------------------------------------------------------------------------
Total 145 383 144 855 161 410
- -------------------------------------------------------------------------------------------------
Included in income taxes on nonregulated
operations and nonoperating items:
Current federal tax expense (15 732) (19 470) (906)
Current state tax expense (6 744) (5 804) 712
Current foreign tax expense 2 358 236 616
Current federal tax credits (25 122) (17 006) (8 044)
Deferred federal tax expense 11 132 (2 237) (5 150)
Deferred state tax expense 1 566 (662) (1 520)
Deferred foreign tax expense (7 736) (2 892)
Deferred investment tax credits (310) (310) (308)
- -------------------------------------------------------------------------------------------------
Total (40 588) (48 145) (14 600)
- -------------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $104 795 $ 96 710 $146 810
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</TABLE>
NRG intends to reinvest earnings from foreign operations in those operations
except to the extent the earnings are subject to current U.S. income taxes.
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 $158 million and $112 million at Dec. 31, 1998
and 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 not practicable to estimate the
amount of tax that might be payable.
The components of NSP's net deferred tax liability (current and noncurrent
portions) at Dec. 31 were:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred tax liabilities:
Differences between book and
tax bases of property $ 886 099 $ 867 155 $ 850 139
Regulatory assets 103 640 100 564 121 232
Tax benefit transfer leases 27 170 31 614 43 481
Other 22 961 21 715 23 182
- -------------------------------------------------------------------------------
Total deferred tax liabilities $1 039 870 $1 021 048 $1 038 034
- -------------------------------------------------------------------------------
Deferred tax assets:
Regulatory liabilities $ 75 774 $ 83 765 $ 90 485
Deferred compensation, vacation
and other accrued liabilities
not currently deductible 67 539 70 765 65 690
Deferred investment tax credits 51 003 54 741 57 239
Other 29 565 26 557 34 509
- -------------------------------------------------------------------------------
Total deferred tax assets $ 223 881 $ 235 828 $ 247 923
- -------------------------------------------------------------------------------
NET DEFERRED TAX LIABILITY $ 815 989 $ 785 220 $ 790 111
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
8. PREFERRED SECURITIES
At Dec. 31, 1998, various preferred stock series were callable at prices per
share ranging from $102.00 to $103.75, plus accrued dividends.
In 1997, a wholly owned special purpose subsidiary trust of NSP issued
$200 million of 7.875 percent preferred securities that mature in 2037.
Distributions paid by the subsidiary trust on the preferred securities are
financed through interest payments on debentures issued by NSP-Minnesota 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. A portion of the
proceeds was used to redeem NSP'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.
41
<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 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AFC recorded in plant
on a net-of-tax basis* Plant Lives $121 551 $128 364
Conservation programs* Primarily 2 Years 72 995 86 508
Losses on
reacquired debt Term of Related Debt 56 242 59 353
Environmental costs Primarily 10 Years 50 158 45 849
Unrecovered gas costs 1-2 Years 16 259 8 020
State commission
accounting adjustments* Plant Lives 7 370 7 286
Other Various 7 365 4 742
- -----------------------------------------------------------------------------------------------
TOTAL REGULATORY ASSETS $331 940 $340 122
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
Deferred income tax adjustments $ 75 066 $ 88 035
Investment tax credit deferrals 84 865 91 146
Unrealized gains from
decommissioning investments 138 613 85 482
Pension costs - regulatory differences 53 012 27 107
Fuel costs, refunds and other 20 683 13 995
- -----------------------------------------------------------------------------------------------
TOTAL REGULATORY LIABILITIES $372 239 $305 765
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
</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. We use the equity method of accounting for such
investments in affiliates, which include joint ventures and partnerships. That's
because the ownership structure prevents NSP from exercising a controlling
influence over the projects' operating and financial policies. Under this
method, NSP records its portion of the earnings or losses of unconsolidated
affiliates as equity earnings. A summary of NSP's significant equity method
investments is listed below.
<TABLE>
<CAPTION>
NAME GEOGRAPHIC AREA ECONOMIC INTEREST
- -----------------------------------------------------------------------------
<S> <C> <C>
Loy Yang Power Australia 25.37%
Pacific Generation Company USA/Canada 3.70%-100%
Gladstone Power Station Australia 37.50%
COBEE South America 48.30%
MIBRAG mbH Europe 33.33%
Cogeneration Corp. of America USA 45.21%
Schkopau Power Station Europe 20.95%
Long Beach Generating USA 50.00%
El Segundo Generating USA 50.00%
Energy Development Limited Australia 33.97%
Scudder Latin American Trust
for Independent Power
Energy Projects Latin America 25.00%
Various independent power
production facilities USA 45%-50%
Various affordable housing
limited partnerships USA 20%-99%
- -----------------------------------------------------------------------------
</TABLE>
SUMMARIZED FINANCIAL INFORMATION OF UNCONSOLIDATED AFFILIATES Summarized
financial information for these projects, including interests owned by NSP
and other parties, is as follows for the years ended Dec. 31:
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
(MILLIONS OF DOLLARS) 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Operating revenues $1 509 $1 698 $ 958
Operating income $ 205 $ 93 $ 105
Net income $ 143 $ 84 $ 89
NSP's equity in earnings of
unconsolidated affiliates $ 80 $ 19 $ 31
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL POSITION
(MILLIONS OF DOLLARS) 1998 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets $ 714 $ 742 $ 681
Other assets 8 071 7 853 3 525
- -----------------------------------------------------------------------------
TOTAL ASSETS $8 785 $8 595 $4 206
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Current liabilities $ 537 $ 514 $ 397
Other liabilities 5 931 6 109 2 798
Equity 2 317 1 972 1 011
- -----------------------------------------------------------------------------
TOTAL LIABILITIES AND EQUITY $8 785 $8 595 $4 206
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
NSP's equity investment
in unconsolidated affiliates $ 863 $ 741 $ 410
</TABLE>
11. FINANCIAL INSTRUMENTS
FAIR VALUES The estimated Dec. 31 fair values of NSP's recorded financial
instruments are as follows:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS) 1998 1997
- --------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash, cash equivalents
and short-term
investments $ 42 364 $ 42 364 $ 54 765 $ 54 765
Long-term
investments $ 438 981 $ 438 981 $ 344 491 $ 344 491
Long-term debt,
including
current portion $2 220 346 $2 313 468 $2 043 295 $2 079 123
- --------------------------------------------------------------------------------------
</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 NSP'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 executed certain transactions designed to protect the
Economic value in U.S. dollars of selected known and anticipated NRG cash
flows denominated in Australian dollars.
As of Dec. 31, 1998, NRG had one contract with a notional value of $2.8
million to hedge - or protect - foreign currency denominated future cash
flows. The effect of this contract on 1998 earnings was immaterial. This
foreign currency exchange contract expires in 1999. Management believes that
NRG'S exposure to credit risk due to nonperformance by the counterparties to
its forward exchange contracts is insignificant, based on the investment
grade rating of the counterparties.
42
<PAGE>
EMI had natural gas forward and futures contracts in the notional amount of
$6 million at Dec. 31, 1998. The original contract terms range from one month to
two years. The contracts are intended to hedge risk from fluctuations in the
price of natural gas that will be required to satisfy sales commitments for
future deliveries to customers. EMI's futures contracts hedge $6.1 million in
anticipated natural gas sales in 1999-2000. At Dec. 31, 1998, EMI maintained
margin balances of $1.3 million on deposit with brokers for these contracts,
which are reported 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, 1998, $0.8 million would have been
payable by EMI for natural gas price fluctuations to date.
Energy Marketing uses energy futures contracts, along with physical supply, to
hedge market risk. At Dec. 31, 1998, the notional amount of electricity futures
contracts was less than $1 million. In February 1999, EMI transferred its gas
supply and marketing function to NSP's Energy Marketing Division. Existing sales
commitments and natural gas futures and forward contracts, currently in place,
will remain the contractual responsibility of EMI.
NSP had one interest rate swap agreement with a notional amount of $200 million.
NSP entered into this swap in conjunction with first mortgage bonds (5 1/2%
Series due Feb. 1, 1999). This agreement effectively converted the interest cost
of the debt from fixed to variable rates based on the six-month London Interbank
Offered Rate, with the rates changing semiannually. The net effective interest
cost at Dec. 31, 1998, was 4.91 percent. This swap expired on Feb. 1, 1999.
NRG has one interest rate swap agreement with a notional amount of $17.5
million. This swap was entered into with an existing variable rate debt issue.
The swap effectively converts the variable rate debt into fixed rate debt at
7.65 percent. If the swap had been discontinued on Dec. 31, 1998, NRG would have
had to pay the counterparty approximately $0.9 million. The swap expires on
Sept. 30, 2002.
LETTERS OF CREDIT NSP and its subsidiaries use letters of credit, generally with
terms of one year, to provide financial guarantees for certain operating
obligations, such as NSP-Minnesota workers' compensation benefits, ash disposal
site costs and EMI natural gas purchases.
In addition, NRG uses letters of credit for: nonregulated equity commitments,
collateral for credit agreements, fuel purchase and operating commitments and
bids on development projects.
At Dec. 31, 1998, there were $84 million in letters of credit outstanding,
including $33 million related to NRG commitments. The contract amounts of these
letters of credit approximate their fair value and are subject to fees
determined in the marketplace.
12. JOINT PLANT OWNERSHIP
NSP is part owner of an 860-megawatt, coal-fired electric generating unit called
Sherco 3. NSP owns, and has financed, 59 percent and Southern Minnesota
Municipal Power Agency (SMMPA) owns, and has financed, 41 percent of Sherco 3.
NSP is the operating agent under the joint ownership agreement. NSP's share of
related expenses for Sherco 3 is included in Utility Operating Expenses. NSP's
share of the gross cost recorded in Utility Plant was approximately $604 million
at year-end for both 1998 and 1997. The accumulated provisions for depreciation
were $214.8 million in 1998 and $196.2 million in 1997.
13. NUCLEAR OBLIGATIONS
FUEL DISPOSAL NSP is responsible for temporarily storing used - or spent
- -nuclear fuel from its nuclear plants. Under a contract with NSP, the U.S.
Department of Energy (DOE) is responsible for permanently storing spent fuel
from NSP's nuclear plants as well as from other U.S. nuclear plants. NSP has
been funding its portion of the DOE's permanent disposal program since 1981.
NSP funded its obligation through an internal sinking fund until 1983, when
the DOE began assessing fuel disposal fees 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: $10.8 million in 1998, $10.1
million in 1997 and $11.3 million in 1996.
In total, NSP had paid approximately $262 million to the DOE through Dec. 31,
1998. However, we cannot determine whether 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 the 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 1996, the DOE notified
commercial spent fuel owners of an anticipated delay in accepting spent
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.
NSP and other utilities have commenced lawsuits against the DOE to recover
damages caused by 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, NSP 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 spent fuel storage until a DOE facility is available,
including pursuing the establishment of a private facility for interim
storage of spent nuclear fuel as part of a consortium of electric utilities.
If on-site temporary storage at NSP's nuclear plants reaches approved
capacity, NSP could seek interim storage at this or another contracted
private facility, if available.
Nuclear fuel expenses include payments to the DOE for the decommissioning - or
permanent retirement - and decontamination of the DOE's uranium enrichment
facilities. In 1993, NSP recorded the DOE's initial assessment of $46 million,
which is payable in annual installments from 1993-2008. NSP is amortizing each
installment to expense on a monthly basis in the 12 months following each
payment. The most recent installment paid in 1998 was $3.9 million; future
installments are subject to inflation adjustments under DOE rules. NSP is
obtaining rate recovery of these DOE assessments through the cost-of-energy
adjustment clause as the assessments are amortized. Accordingly, we deferred the
unamortized assessment of $35 million at Dec. 31, 1998, as a regulatory asset.
PLANT DECOMMISSIONING Decommissioning of NSP's nuclear facilities is planned for
the years 2010-2022, using the prompt dismantlement method. NSP 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. Consequently, the total decommissioning cost
obligation and corresponding assets currently are not recorded in NSP's
financial statements.
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The Financial Accounting Standards Board (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
2000. Using Dec. 31, 1998, estimates, NSP's adoption of the proposed
accounting would result in the recording of the total discounted
decommissioning obligation of $811 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 than the ratemaking methodology
that derives the decommissioning accruals currently being recovered in rates.
NSP has not yet determined the potential impact of the FASB's proposed
changes in the accounting for site exit obligations, such as costs of
removal, other than nuclear decommissioning. However, the ultimate
decommissioning and site exit costs to be accrued are the same under both
methods. The effects of regulation are expected to minimize or eliminate any
impact on operating expenses and results of operations from this future
accounting change.
Consistent with cost recovery in utility customer rates, NSP 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 MPUC last approved NSP's nuclear decommissioning study and related nuclear
plant depreciation capital recovery request in April 1997, using 1993 cost data.
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. NSP believes
future decommissioning cost accruals will continue to be recovered in customer
rates.
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 NSP debt or stock. The assets held in
trusts as of Dec. 31, 1998, primarily consisted of investments in fixed income
securities, such as tax-exempt municipal bonds and U.S. government securities
that mature in one to 16 years, and common stock of public companies. NSP plans
to reinvest matured securities until decommissioning begins.
At Dec. 31, 1998, NSP had recorded and recovered in rates cumulative
decommissioning accruals of $508 million. The following table summarizes
the funded status of NSP's decommissioning obligation at Dec. 31, 1998:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS) 1998
- -------------------------------------------------------------------------------
<S> <C>
Estimated decommissioning cost obligation
from most recent approved study (1993 dollars) $ 750 824
Effect of escalating costs to 1998 dollars
(at 4.5% per year) 184 840
- -------------------------------------------------------------------------------
Estimated decommissioning cost obligation
in current dollars 935 664
Effect of escalating costs to payment
date (at 4.5% per year) 909 121
- -------------------------------------------------------------------------------
Estimated future decommissioning costs (undiscounted) 1 844 785
Effect of discounting obligation (using risk-free
interest rate) (1 033 906)
- -------------------------------------------------------------------------------
Discounted decommissioning cost obligation 810 879
External trust fund assets at fair value 438 981
- -------------------------------------------------------------------------------
DISCOUNTED DECOMMISSIONING OBLIGATION IN EXCESS
OF ASSETS CURRENTLY HELD IN EXTERNAL TRUST $ 371 898
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
Decommissioning expenses recognized include the following components:
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS) 1998 1997 1996
- -------------------------------------------------------------------------------
<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) 1 477 1 368 1 268
Interest cost on externally funded
decommissioning obligation 6 960 7 690 5 246
Earnings from external trust funds (6 960) (7 690) (6 294)
- -------------------------------------------------------------------------------
NET DECOMMISSIONING
ACCRUALS RECORDED $34 655 $34 546 $33 398
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</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.
14. COMMITMENTS AND CONTINGENT LIABILITIES
CAPITAL COMMITMENTS NSP estimates utility capital expenditures, including
purchases of nuclear fuel, will be $450 million in 1999 and $2.1 billion for
1999-2003. There also are contractual commitments for the disposal of spent
nuclear fuel. (See Note 13.)
As of Dec. 31, 1998, NRG is contractually committed to additional equity
investments of approximately $1.3 billion in 1999 and approximately $1.3
billion for 1999-2003 for various power generation projects. The 1999 capital
commitments reflect NRG's expected acquisitions of existing generation
facilities, including: Arthur Kill, Astoria, Somerset, Dunkirk, Huntley and
Encina. A significant portion of these capital requirements is expected to be
financed by nonrecourse project debt.
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<PAGE>
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
current status of these commitments can be met by building, purchasing or, in
the case of biomass, converting generation resources.
In 1994, NSP received Minnesota legislative approval for additional on-site
temporary storage facilities at NSP's Prairie Island plant, provided NSP
satisfies certain requirements. Seventeen dry cask containers were approved. In
1996, the Minnesota Environmental Quality Board (MEQB) certified that NSP had
met the requirements necessary to use the sixth through ninth casks at the
Prairie Island nuclear generating facility. The final eight casks become
available unless the resource commitments discussed below are not met and the
Minnesota Legislature revokes its approval before June 1, 1999. As of Dec. 31,
1998, NSP had loaded seven casks.
The 1994 legislation requires NSP to have 425 megawatts of wind resources
contracted by Dec. 31, 2002. Of this commitment, approximately 130 megawatts
remain to be contracted. The MPUC recently ordered an additional 400 megawatts
to be contracted by 2012; however, this order is subject to further MPUC
consideration.
During 1997 and 1998, NSP executed three separate power purchase agreements
(PPA) for a total of 125 megawatts of biomass-fueled generation resources. These
contracts meet the statutory requirements to contract for 125 megawatts of
biomass energy by Dec. 31, 1998. However, all three contracts are currently
being reviewed by the MPUC. The MPUC has tabled further consideration until at
least March of 1999 to allow future consideration of the PPAs. Delayed MPUC
action on any of these contracts puts at risk having 50 megawatts of biomass
resources operational by Dec. 31, 2001, and 75 megawatts of biomass resources
operational by Dec. 31, 2002.
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 NSP's low-income discount programs in
accordance with the statute. NSP's capital commitments 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, NSP 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 NSP. Under the sale agreements, NSP is required to guarantee repayment to the
third party of the remaining loan balances. At Dec. 31, 1998, the outstanding
balance of the loans was approximately $22 million. Based on prior collection
experience of these loans, NSP 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 $33 million, $32
million and $29 million for 1998, 1997 and 1996, 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 1999 and
2013, require minimum purchases and deliveries of fuel, lease payments for
railcars and additional payments for the right to purchase coal in the future.
In total, NSP is committed to the minimum purchase of approximately $254 million
of coal, $34 million of nuclear fuel and $266 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.
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 all fuel 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 NSP has several agreements to purchase electricity from the
Manitoba Hydro-Electric Board (MH). A summary of the agreements is as follows:
<TABLE>
<CAPTION>
POWER AGREEMENTS YEARS MEGAWATTS
- ---------------------------------------------------------------
<S> <C> <C>
Participation power purchase 1999-2005 500
Seasonal diversity exchanges:
Summer exchanges from MH 1999-2014 150
1999-2016 200
Winter exchanges to MH 1999-2014 150
1999-2015 200
2015-2017 400
2018 200
- ---------------------------------------------------------------
</TABLE>
The cost of the 500-megawatt participation power purchase commitment is based
on 80 percent of the costs of owning and operating NSP's Sherco 3 generating
plant, adjusted to 1993 dollars. The future annual capacity costs for the
500-megawatt MH agreement are 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 1999 and
account for approximately 10 percent of NSP's 1999 electric system
capability. The 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.
NSP has an agreement with Minnkota Power Cooperative for the purchase of summer
season capacity and energy. From 1999 through 2001, NSP will buy 150 megawatts
of summer season capacity for approximately $12 million annually. From 2002
through 2015, NSP 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. NSP
also has a seasonal (summer) purchase power agreement with Minnesota Power for
the purchase of 173 megawatts, including reserves, from 1999-2000. The annual
cost of this capacity will be approximately $2 million.
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<PAGE>
NSP has agreements with several nonregulated power producers to purchase
electric capacity and associated energy. The 1999 cost of these commitments
is approximately $45 million for 363 megawatts of summer capacity. This
commitment is expected to range between $44 million and $55 million annually for
the years 2000 through 2021. These commitments are expected to decline to
approximately $27 million annually for the years 2022 through 2027, due to the
expiration of existing agreements.
NUCLEAR INSURANCE NSP's public liability for claims resulting from any nuclear
incident is limited to $9.8 billion under the 1988 Price-Anderson amendment to
the Atomic Energy Act of 1954. NSP has secured $200 million of coverage for its
public liability exposure with a pool of insurance companies. The remaining
$9.6 billion of exposure is funded by the Secondary Financial Protection
Program, available from assessments by the federal government in case of a
nuclear accident. NSP is subject to assessments of up to $88 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.
NSP purchases insurance for property damage and site decontamination cleanup
costs with coverage limits of $1.5 billion for each of NSP's two nuclear plant
sites 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 NEIL are expensed over the
policy term. All companies insured with NEIL are subject to retrospective
premium adjustments if losses exceed accumulated reserve funds. Capital has been
accumulated in the reserve funds of NEIL to the extent that NSP would have no
exposure for retrospective premium assessments in case of a single incident
under the business interruption and the property damage insurance coverage.
However, in each calendar year, NSP could be subject to maximum assessments of
approximately $3.6 million for business interruption insurance (generally five
times the amount of its annual premium) and $14.7 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
$40 million, and other current liabilities include an accrual of $5 million, at
Dec. 31, 1998, for estimated costs associated with environmental remediation.
Approximately $28 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 NSP, 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 NSP's nuclear generating plants. (See Note 13
for further discussion.)
The Environmental Protection Agency (EPA) or state environmental agencies have
designated NSP-Minnesota as a potentially responsible party (PRP) for 17 waste
disposal sites to which NSP-Minnesota allegedly sent hazardous materials.
- Twelve of these 17 sites have been remediated and, consistent with
settlements reached with the EPA and other PRPs, NSP-Minnesota has paid
$2.2 million for its share of the remediation costs. While these
remediated sites will continue to be monitored, NSP-Minnesota expects
that future remediation costs, if any, will be immaterial. Under
applicable law, NSP-Minnesota, along with each PRP, could be held jointly
and severally liable for the total remediation costs of PRP sites.
- The total remediation costs of the five unremediated sites is currently
estimated to be approximately $18 million. If additional remediation is
necessary or unexpected costs are incurred, the amount could be higher.
NSP-Minnesota 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, NSP-Minnesota has recorded an estimate of approximately $550,000
for its share of future costs for these five sites, including $500,000
that is expected to be paid in 1999.
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 NSP-Minnesota's future liability. It is NSP-Minnesota's practice to
vigorously pursue and, if necessary, litigate with insurers to recover incurred
remediation costs whenever possible. Through litigation, NSP-Minnesota 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 NSP-Minnesota 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 previously.
NSP-Wisconsin may be involved in the cleanup and remediation at five
additional sites. One site is a solid and hazardous waste landfill site in
Amery, Wis. NSP-Wisconsin contends that it did not dispose of hazardous
wastes in this landfill during the time period in question. The four other
sites are at locations of former manufactured gas plants at Ashland,
LaCrosse, Eau Claire and Chippewa Falls, Wis. The ultimate cleanup and
remediation costs at the LaCrosse, Eau Claire, Amery and Chippewa Falls sites
and the extent of NSP-Wisconsin's responsibility, if any, for sharing such
costs are not known at this time, but are expected to be immaterial.
The Wisconsin Department of Natural Resources (WDNR) named NSP-Wisconsin as one
of three PRPs for creosote and coal tar contamination at the Ashland site. The
Ashland site includes property owned by NSP-Wisconsin and two other properties,
which include an adjacent city lakeshore park area and a small area of Lake
Superior's Chequemegon Bay adjoining the park. The ultimate cost to NSP
associated with the Ashland site is expected to be determined by the WDNR after
appropriate study and review.
In December 1998, the WDNR released the results of its consultant's feasibility
study (FS) for remediating the Ashland site. The options considered by the
WDNR's consultant ranged from no action to completely removing and treating the
contaminated soils, groundwater and lake sediments. The report describes eight
potential corrective strategies and associated costs, and it scores the
effectiveness of each option in terms of meeting state and federal cleanup
standards and guidelines. The options described in the FS are estimated to cost
between $4 million and $93 million, with four of the eight options within a
range of $24 million to $51 million. The two options that were scored the most
effective by the consultant are in the middle to high end of the cost range.
However, the FS recommendations do not bind or require the WDNR to take any
specific remedial action, nor do they limit the options available to remediate
the Ashland site.
Under a spill response order that NSP signed in 1998, NSP has until March 1,
1999, to develop its own FS, which would then be considered by the WDNR in its
decision-making process. This FS is now being prepared by NSP's consultant. NSP
believes that reasonably effective remedial options exist for the Ashland site,
which were not evaluated by the WDNR's consultant, that are estimated to cost
between $6 million and $13 million. These other remedial options and their
46
<PAGE>
associated costs will be updated and refined in NSP's FS. NSP officials
continue to discuss remediation options available for the Ashland site, and
NSP-Wisconsin's level of responsibility, with the WDNR.
Until the WDNR selects a remediation method and determines the level of
responsibility of each potentially responsible party, NSP is not able to
estimate its share of the ultimate cost of remediating the Ashland site. NSP
anticipates a decision from the WDNR in the first half of 1999. In the
interim, NSP-Wisconsin has recorded a liability for an estimate of its share
of the cost of remediating the Ashland site based on information available to
date. NSP-Wisconsin has deferred as a regulatory asset the remediation costs
accrued for the Ashland site because management expects that the PSCW will
continue to allow NSP-Wisconsin to recover payments for environmental
remediation from its customers. The PSCW has consistently authorized recovery
in NSP-Wisconsin rates of all remediation costs incurred at the Ashland site,
and has authorized recovery of similar remediation costs for other utilities.
NSP-Minnesota also is continuing to investigate other properties that 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 NSP-Minnesota has any
responsibility for remedial action and if recovery under NSP-Minnesota's
insurance policies can contribute to any remediation costs.
- NSP-Minnesota has remediated three sites, which continue to be
monitored. NSP-Minnesota has paid $6.7 million to remediate these
sites and expects to incur in the future only immaterial monitoring
costs related to these remediated sites.
- Another 12 gas sites remain under investigation, and NSP-Minnesota is
taking remedial action at four of the sites.
- As of Dec. 31, 1998, NSP-Minnesota had paid $4.2 million for the four
active sites and had recorded an estimated liability of approximately
$1.5 million for future costs at these sites, 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 cost of gas site
remediation, the amounts accrued represent the best current estimate of
NSP-Minnesota'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 NSP-Minnesota to defer certain remediation costs of four active sites in
1994. In September 1998, the MPUC allowed the recovery of these gas site
remediation costs in gas rates, with a portion assigned to NSP's electric
operations for two sites formerly used by NSP generating facilities.
Accordingly, NSP-Minnesota has recorded an environmental regulatory asset for
these costs. NSP-Minnesota may request recovery of costs to remedy other
activated sites following the completion of preliminary investigations.
The Clean Air Act, including the Amendments of 1990, 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. NSP has invested
significantly over the years to reduce sulfur dioxide emissions at its plants.
No additional capital expenditures are anticipated to comply with the sulfur
dioxide emission limits of the Clean Air Act. NSP is evaluating how best to
implement the nitrogen oxides standards. NSP-Minnesota's capital expenditures
include some costs for ensuring compliance with the Clean Air Act's other
emission requirements; other expenditures may be necessary upon Environmental
Protection Agency (EPA) 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 included in the capital expenditure commitments disclosed
previously. The depreciation of these capital costs will be subject to
regulatory recovery in future rate proceedings.
In September 1998, the EPA issued nitrogen oxide regulation affecting 22 states,
including Wisconsin. NSP-Wisconsin may be required to retrofit some of its
electric generating plants by 2003 to comply with this regulation. NSP-Wisconsin
and other parties have petitioned for a judicial review of the regulation. The
new regulation has not been finalized by the WDNR, so NSP-Wisconsin cannot
determine the additional cost to comply.
Several of NSP's facilities have asbestos material, which can be a health hazard
to people who come in contact with it. Governmental regulations specify the
timing and nature of disposal of asbestos 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 1998 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.
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.
In April 1997, a fire damaged several buildings in downtown Grand Forks, N.D.,
during the historic floods in that city. On July 23, 1998, the St. Paul Mercury
Insurance Co., which insured the First National Corp. and its three buildings in
downtown Grand Forks, commenced a lawsuit against NSP for damages in excess of
$15 million. The suit was filed in the District Court in Grand Forks County in
North Dakota. Douglas W. Leatherdale, a member of NSP's board of directors, is
chairman and chief executive officer of St. Paul Companies Inc., the parent of
St. Paul Mercury Insurance Co. W. John Driscoll, a member of NSP's board of
directors, is also a director of St. Paul Companies Inc. The insurance company
alleges that the fire was electrical in origin and that NSP was legally
responsible for the fire because it failed to shut off electrical power to
downtown Grand Forks during the flood and prior to the fire. In December 1998, a
second lawsuit related to the fire was commenced by two partnerships that owned
47
<PAGE>
property damaged by the fire and Protection Mutual Insurance Co., which insured
the Grand Forks Herald building damaged by the fire. It is NSP's position that
it is not legally responsible for this unforeseeable event. At no time prior to
the fire was NSP instructed to shut off power to downtown Grand Forks by any
government officials, including representatives from the fire department.
Moreover, people in downtown Grand Forks were relying on electricity before and
after the fire occurred. NSP has a self-insured retention deductible of $2
million, with general liability insurance coverage limits of $150 million. The
ultimate cost to NSP, if any, is unknown at this time.
On Nov. 24, 1998, Wisconsin Electric Power Company (WEPCO) filed a complaint
against NSP with the FERC. WEPCO alleges that it suffered 21 firm transmission
service curtailments from May 1998 to August 1998 and that these curtailments
violated NSP's obligation under FERC Order No. 888 electric transmission service
tariff. WEPCO is seeking: a refund of an unspecified amount, a ruling that
certain mitigation charges WEPCO agreed to pay violate Order No. 888 and other
miscellaneous relief. On Dec. 24, 1998, NSP filed an answer demonstrating the 21
curtailments were implemented lawfully under NSP's contracts with WEPCO, FERC
Order No. 888 and the NSP transmission tariff, as clarified by the FERC. NSP
asked the FERC to promptly dismiss the complaint. There is no deadline for FERC
action on the complaint.
On Dec. 11, 1998, a gas explosion in downtown St. Cloud, Minn., killed four
people, including two NSP employees, injured approximately 14 people and damaged
several buildings. The accident occurred as a crew of four employees from Cable
Constructors Inc. (CCI) was installing fiber optic cable. CCI was performing
this work for Seren as part of its broadband communications project in St. Cloud
and surrounding communities. The accident is under investigation by the National
Transportation Safety Board (NTSB). Although this investigation is expected to
take several months, the NTSB investigator in charge has stated publicly that
"the location of the gas line and a gas main that runs parallel had been
properly marked by NSP before the drilling." NSP and Seren have been notified of
potential property and personal injury claims related to this explosion. Both
companies deny any liability for this accident. NSP has a self-insured retention
deductible of $2 million with general liability coverage limits of $185 million.
Seren's primary insurance coverage is $1 million and its secondary insurance
coverage is $185 million. The ultimate cost to NSP and Seren, if any, is
presently unknown.
15. SEGMENT AND RELATED INFORMATION
Effective Dec. 31, 1998, NSP adopted SFAS No. 131 - Disclosures About Segments
of an Enterprise and Related Information. NSP has four reported segments:
Electric Utility, Gas Utility and two of its nonregulated energy businesses, its
wholly owned subsidiaries, NRG and EMI.
- NSP's electric utility generates, transmits and distributes electricity
primarily in Minnesota, Wisconsin, Michigan, North Dakota and South
Dakota. It also makes sales for resale and provides wholesale
transmission service to various entities in the United States.
- NSP's gas utility transmits, transports, stores and distributes natural
gas and propane primarily in Minnesota, Wisconsin, North Dakota, Michigan
and, beginning in 1998, Arizona.
- NRG develops, builds, acquires, owns and operates several nonregulated
energy-related businesses, including independent power production,
commercial and industrial heating and cooling, and energy-related refuse-
derived fuel production, both domestically and outside the United States.
- EMI is an energy service company, primarily retrofitting and upgrading
facilities for greater energy efficiency, largely in the United States.
In general, NSP has segmented its operations as either regulated or
nonregulated businesses. Further, the regulated businesses are separated
between electric and gas; and nonregulated businesses are separated by
company (primarily based on product and services). The electric and gas
businesses are part of NSP-Minnesota, NSP-Wisconsin and Viking companies and
are reviewed at various jurisdiction and/or company levels. They have been
aggregated as reportable segments as they are aggregated for reporting to
NSP's Board of Directors. Assets by segment are not reported to management
and are not included in the disclosures that follow.
The measure of profit or loss for electric and gas reported in the various
management reports varies, but the largest component, NSP-Minnesota, reports net
income and earnings per share on a basis consistent with consolidated net income
and earnings per share, except that allocations are needed for some items, as
described later. Intercompany and intersegment sales are priced at approved
tariff rates and are immaterial. In addition, since NRG and EMI are separate
companies, their net income and earnings per share are the measure of profit or
loss for both internal management reporting and consolidated external NSP
reporting.
To report net income for electric and gas utility segments, NSP-Minnesota and
NSP-Wisconsin must assign or allocate all costs and certain other income.
In general, costs are:
- directly assigned wherever applicable
- allocated based on cost causation allocators wherever applicable
- allocated based on a general allocator for all other costs not assigned
by the above two methods
The "all other" category includes segments that measure below the quantitative
threshold for separate disclosure and consists primarily of nonregulated
companies, including Eloigne, an affordable housing investment company; Seren, a
communications and data services company; Ultra Power, a power-cable testing
company; and several other small companies and businesses.
48
<PAGE>
<TABLE>
<CAPTION>
BUSINESS SEGMENTS
1998 ELECTRIC GAS ALL RECONCILING CONSOLIDATED
(THOUSANDS OF DOLLARS) UTILITY UTILITY NRG EMI OTHER ELIMINATIONS TOTAL (a)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues from external
customers (b) $2 361 536 $456 710 $ 98 688 $ 54 254 $ 29 288 $3 000 476
Intersegment revenues 815 9 292 1 737 $(10 916) 928
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $2 362 351 $466 002 $100 425 $ 54 254 $ 29 288 $(10 916) $3 001 404
- -----------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 308 415 31 864 16 320 2 129 3 779 362 507
Interest income 9 103 1 403 8 052 184 776 (608) 18 910
Financing costs, mainly interest
expense 109 192 15 485 50 313 108 3 997 (608) 178 487
Income tax expense (credit) 135 914 10 672 (25 654) (4 214) (11 923) 104 795
Equity in earnings (losses) of
unconsolidated affiliates 969 81 706 300 (2 122) 80 853
SEGMENT NET INCOME (LOSS) $ 226 351 $ 17 321 $ 41 732 $ (7 659) $ 4 628 $ 282 373
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1997 ELECTRIC GAS ALL RECONCILING CONSOLIDATED
(THOUSANDS OF DOLLARS) UTILITY UTILITY NRG EMI OTHER ELIMINATIONS TOTAL (a)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues from external
customers (b) $2 217 542 $515 162 $102 791 $ 94 375 $ 26 405 $2 956 275
Intersegment revenues 1 008 6 113 926 $ (7 005) 1 042
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $2 218 550 $521 275 $103 717 $ 94 375 $ 26 405 $ (7 005) $2 957 317
- -----------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 299 325 28 609 10 310 1 768 3 069 343 081
Interest income 1 696 331 10 806 604 774 (482) 13 729
Financing costs, mainly interest
expense 111 595 13 429 30 729 272 3 626 (482) 159 169
Merger cost write-off 29 005 29 005
Income tax expense (credit) 122 655 12 087 (23 680) (5 921) (8 431) 96 710
Equity in earnings (losses) of
unconsolidated affiliates 605 26 003 (5 144) (2 259) 19 205
SEGMENT NET INCOME (LOSS) $ 199 553 $ 22 284 $ 21 982 $(10 841) $ 4 342 $ 237 320
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
1996 ELECTRIC GAS ALL RECONCILING CONSOLIDATED
(THOUSANDS OF DOLLARS) UTILITY UTILITY NRG EMI OTHER ELIMINATIONS TOTAL (a)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating revenues from external
customers (b) $2 126 364 $526 640 $ 70 104 $207 939 $ 25 860 $2 956 907
Intersegment revenues 1 049 3 363 1 545 $ (4 755) 1 202
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $2 127 413 $530 003 $ 71 649 $207 939 $ 25 860 $ (4 755) $2 958 109
- -----------------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 279 459 29 027 8 666 1 192 2 842 321 186
Interest income 4 593 696 9 443 295 680 (326) 15 381
Financing costs, mainly interest
expense 100 406 11 785 15 354 301 3 179 (326) 130 699
Income tax expense (credit) 145 514 17 872 (5 655) (4 591) (6 330) 146 810
Equity in earnings (losses) of
unconsolidated affiliates 358 34 674 (1 461) (2 545) 31 026
SEGMENT NET INCOME (LOSS) $ 230 602 $ 27 652 $ 19 978 $ (8 526) $ 4 833 $ 274 539
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) The Consolidated Total amounts for income and expense items represent the
sum of utility amounts (including some nonoperating items) from the
Statement of Income and the nonregulated amounts from Note 6. The
depreciation and amortization amounts in the Statement of Cash Flows are
different than reported in the Consolidated Total column due to
classification of certain depreciation and amortization amounts as other
expense items in the Statement of Income.
(b) All operating revenues are from external customers located in the United
States. However, NRG has significant equity investments for nonregulated
projects outside of the United States. Equity in earnings of unconsolidated
affiliates, primarily independent power projects, includes $29.3 million in
1998, $27.1 million in 1997 and $29.5 million in 1996 from nonregulated
projects located outside of the United States. NRG's equity investments in
projects outside of the United States were $591 million in 1998, $517
million in 1997 and $295 million in 1996.
49
<PAGE>
16. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
(THOUSANDS OF DOLLARS, QUARTER ENDED
EXCEPT PER SHARE AMOUNTS) MARCH 31, 1998 JUNE 30, 1998 SEPT. 30,1998(a) DEC. 31, 1998(b)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Utility operating revenues $701 402 $638 601 $766 448 $712 723
Utility operating income 79 050 65 054 134 985 85 200
Net income 57 117 35 034 101 694 88 528
Earnings available for common stock 54 750 33 974 100 634 87 467
Earnings per average common share:
Basic $0.37 $0.23 $0.67 $0.58
Diluted $0.37 $0.23 $0.67 $0.58
Dividends declared per common share $0.3525 $0.3575 $0.3575 $0.3575
Stock prices - high $29 25/32 $30 7/32 $29 3/16 $30 13/16
- low $26 1/2 $27 11/32 $25 11/16 $26 3/16
<CAPTION>
(THOUSANDS OF DOLLARS, QUARTER ENDED
EXCEPT PER SHARE AMOUNTS) MARCH 31, 1997 JUNE 30, 1997(c) 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 $0.45 $0.12 $0.62 $0.42
Diluted $0.45 $0.12 $0.61 $0.42
Dividends declared per common share $0.3450 $0.3525 $0.3525 $0.3525
Stock prices - high $24 9/16 $26 $26 15/32 $29 7/16
- low $22 3/4 $22 1/4 $24 $24 7/32
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(a) 1998 results include a $22 million pretax charge, which reduced third
quarter earnings by 10 cents per share, for the write-down of NRG projects.
(b) 1998 results include a $26 million pretax gain, which increased fourth
quarter earnings by 11 cents per share, for an NRG project sell down.
(c) 1997 results include a $29 million pretax charge, which reduced second
quarter earnings by 12 cents per share, for the write-off of merger costs.
50
<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
James J. Howard
Chairman of the Board, President
and Chief Executive Officer
/s/ Edward J. McIntyre
Edward J. McIntyre
Vice President and Chief
Financial Officer
NORTHERN STATES POWER COMPANY
Minneapolis, Minnesota
Feb. 1, 1999
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 (NSP), a Minnesota
corporation, and its subsidiaries at Dec. 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended Dec. 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of NSP'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/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
Feb. 1, 1999
51
<PAGE>
ANNUAL MEETING ADMISSION TICKET
[LOGO] NSP NORTHERN STATES POWER COMPANY
414 NICOLLET MALL, MINNEAPOLIS, MINNESOTA 55401
Admission ticket for Northern States Power Company Annual Meeting of
Shareholders; Wednesday, April 28, 1999, at 10:00 a.m. at the MINNEAPOLIS
CONVENTION CENTER, Ballroom, 1301 South Second Avenue. Refreshments will be
served from 8:45 a.m. - 9:45 a.m.
ADMISSION
TICKET
Please present this ticket for admittance of shareholder(s) named above.
Admittance will be based upon availability of seating.
CONTROL NUMBER [LOGO] NSP VOTE BY TELEPHONE OR INTERNET
For Telephone/Internet Voting QUICK * * * EASY * * * IMMEDIATE
Your telephone or internet vote authorizes the named proxies to vote your shares
in the same manner as if you marked, signed and returned your proxy card. For
TELEPHONE OR INTERNET VOTING you will be asked to enter the "CONTROL NUMBER"
located in the box in the upper left of this form.
VOTE BY PHONE: CALL TOLL-FREE ON A TOUCH-TONE TELEPHONE 1-800-678-8548
ANYTIME. NO CHARGE FOR THIS CALL.
OPTION A: To vote as the Board of Directors recommends on ALL proposals:
Press 1
OPTION B: If you choose to vote on each item separately, press 0. You will
hear these instructions:
PROPOSAL 1: To vote FOR ALL nominees, press 1; to WITHHOLD FOR ALL
nominees, press 9 To WITHHOLD FOR AN INDIVIDUAL nominee,
press 0 and listen to all the instructions
PROPOSAL 2: To vote FOR, press 1; AGAINST, press 9; ABSTAIN, press
0. The instructions are the same for all remaining items
to be voted.
WHEN ASKED, YOU MUST CONFIRM YOUR VOTE BY PRESSING 1.
VOTE BY INTERNET: THE WEB ADDRESS IS www.proxyvoting.com/nsp
---------------------------
IF YOU VOTE BY PHONE OR INTERNET - DO NOT MAIL THE PROXY FORM
THANK YOU FOR VOTING
VOTE BY MAIL: FOLD, DETACH HERE, SIGN (BELOW), MARK (OTHER SIDE) AND RETURN
PROXY FORM.
[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_______________, 1999
Signature______________________________________________Date_______________, 1999
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.
(CONTINUED AND TO BE VOTED ON OTHER SIDE)
<PAGE>
[LOGO] NSP
1999 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 28, 1999
at 10:00 a.m. at the Minneapolis Convention Center, Ballroom, 1301 Second Avenue
South, Minneapolis, Minnesota.
1. To gain entrance to the meeting, you must present this admission ticket or
evidence of ownership of NSP stock.
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.
- --------------------------------------------------------------------------------
NSP COMPLIMENTARY PARKING TICKET
PARKING
- -------
NSP will provide parking at the following ramps:
PLAZA PARKING RAMP
- ------------------
Enter on 2nd Avenue or 12th Street
ORCHESTRA HALL PARKING RAMP
- ---------------------------
Enter on 11 Street, 12th Street or Marquette [MAP]
HILTON PARKING RAMP
- -------------------
Enter on 2nd Avenue or 11th Street
LEAMINGTON PARKING RAMP
- -----------------------
Enter on 10th Street or 11th Street
PRESENT THIS CARD TO PARKING ATTENDANT...WHEN ENTERING PLAZA PARKING
RAMP...WHEN EXITING OTHER RAMPS.
INSTRUCTIONS FOR MARKING YOUR PROXY FORM
Your vote is important! Please follow the instructions below for marking your
choices:
CORRECT MARK INCORRECT MARKS TO VOTE BY MAIL
RETURN
PROXY FORM
BELOW
o Use a No. 2 pencil or blue or black ink pen only. THANK YOU FOR VOTING.
o Do not use pens with ink that soaks through the paper.
o Make solid marks that fill the oval completely.
o Make no stray marks on the directive.
o Do not fold, tear or mutilate the directive.
- --------------------------------------------------------------------------------
[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 28, 1999, 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 and 4.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2, 3 AND 4.
1. ELECTION OF THREE DIRECTORS IN CLASS I. (If you wish to withhold authority
to vote for any of the Directors, strike out the appropriate name(s)):
(01) W. John Driscoll (02) James J. Howard (3) Allan L. Schuman
|_| FOR |_| WITHHOLD
2. APPROVAL OF APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT
AUDITORS.
|_| FOR |_| AGAINST |_| ABSTAIN
3. TO VOTE ON A PROPOSAL TO AMEND THE COMPANY'S RESTATED ARTICLES OF
INCORPORATION TO REMOVE LIMITS ON THE COMPANY'S ISSUANCE OF UNSECURED
INDEBTEDNESS.
|_| FOR |_| AGAINST |_| ABSTAIN
4. TO VOTE ON A PROPOSAL TO AMEND THE COMPANY'S RESTATED ARTICLES OF
INCORPORATION TO REMOVE PROVISIONS RELATING TO SERIES OF PREFERRED STOCK
THAT HAVE BEEN REDEEMED.
|_| FOR |_| AGAINST |_| ABSTAIN
(TO BE SIGNED ON OTHER SIDE)
<PAGE>
ANNUAL MEETING ADMISSION TICKET
[LOGO] NSP NORTHERN STATES POWER COMPANY
414 NICOLLET MALL, MINNEAPOLIS, MINNESOTA 55401
Admission ticket for Northern States Power Company Annual Meeting of
Shareholders; Wednesday, April 28, 1999, at 10:00 a.m. at the MINNEAPOLIS
CONVENTION CENTER, Ballroom, 1301 South Second Avenue. Refreshments will be
served from 8:45 a.m. - 9:45 a.m.
ADMISSION
TICKET
Please present this ticket for admittance of shareholder(s) named above.
Admittance will be based upon availability of seating. 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 PTO or MAT
day.
CONTROL NUMBER [LOGO] NSP VOTE BY TELEPHONE OR INTERNET
For Telephone/Internet Voting QUICK * * * EASY * * * IMMEDIATE
Your telephone or internet vote authorizes the Trustee of NSP ESOP to vote your
shares in the same manner as if you marked, signed and returned your voting
directive. For TELEPHONE OR INTERNET VOTING you will be asked to enter the
"CONTROL NUMBER" located in the box in the upper left of this form.
VOTE BY PHONE: CALL TOLL-FREE ON A TOUCH-TONE TELEPHONE
1-800-678-8548 - ANYTIME. NO CHARGE FOR THIS CALL.
OPTION A: To vote as the Board of Directors recommends on ALL proposals:
Press 1
OPTION B: If you choose to vote on each proposal separately, press 0. You will
hear these instructions:
PROPOSAL 1: To vote FOR ALL nominees, press 1; to WITHHOLD FOR ALL
nominees, press 9 To WITHHOLD FOR AN INDIVIDUAL nominee,
press 0 and listen to all the instructions
PROPOSAL 2: To vote FOR, press 1; AGAINST, press 9; ABSTAIN, press
0. The instructions are the same for all remaining
items to be voted.
WHEN ASKED, YOU MUST CONFIRM YOUR VOTE BY PRESSING 1.
VOTE BY INTERNET: THE WEB ADDRESS IS www.proxyvoting.com/nsp
---------------------------
IF YOU VOTE BY PHONE OR INTERNET - DO NOT MAIL THE VOTING DIRECTIVE
THANK YOU FOR VOTING
VOTE BY MAIL: fold, detach here, sign (below), mark (other side) and return
voting directive.
- --------------------------------------------------------------------------------
[LOGO] NSP NORTHERN STATES POWER COMPANY ESOP VOTING
414 NICOLLET MALL, MINNEAPOLIS, MINNESOTA 55401 DIRECTIVE
Please sign EXACTLY as your name(s) appear(s) on this form.
Signature______________________________________________Date_______________, 1999
Signature______________________________________________Date_______________, 1999
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 VOTING DIRECTIVE AND RETURN IT PROMPTLY IN THE ENVELOPE PROVIDED.
(CONTINUED AND TO BE VOTED ON OTHER SIDE)
<PAGE>
[LOGO] NSP 1999 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 28, 1999
at 10:00 a.m. at the Minneapolis Convention Center, Ballroom, 1301 Second Avenue
South, Minneapolis, Minnesota.
1. To gain entrance to the meeting, you must present this admission ticket or
evidence of ownership of NSP stock.
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 Voting
Directive 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.
- --------------------------------------------------------------------------------
NSP COMPLIMENTARY PARKING TICKET
PARKING
- -------
NSP will provide parking at the following ramps:
PLAZA PARKING RAMP
- ------------------
Enter on 2nd Avenue or 12th Street
ORCHESTRA HALL PARKING RAMP
- --------------------------- [MAP]
Enter on 11 Street, 12th Street or Marquette
HILTON PARKING RAMP
- -------------------
Enter on 2nd Avenue or 11th Street
LEAMINGTON PARKING RAMP
- -----------------------
Enter on 10th Street or 11th Street
PRESENT THIS CARD TO PARKING ATTENDANT...WHEN ENTERING PLAZA PARKING
RAMP...WHEN EXITING OTHER RAMPS.
INSTRUCTIONS FOR MARKING YOUR VOTING DIRECTIVE
Your vote is important! Please follow the instructions below for marking your
choices:
TO VOTE BY MAIL
CORRECT MARK INCORRECT MARKS
RETURN
VOTING DIRECTIVE
BELOW
o Use a No. 2 pencil or blue or black ink pen only.
o Do not use pens with ink that soaks through the paper. THANK YOU FOR VOTING.
o Make solid marks that fill the oval completely.
o Make no stray marks on the directive.
o Do not fold, tear or mutilate the directive.
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[LOGO] NSP NORTHERN STATES POWER COMPANY ESOP VOTING
414 NICOLLET MALL, MINNEAPOLIS, MINNESOTA 55401 DIRECTIVE
The undersigned hereby instructs U.S. Bank 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 28, 1999, at 10:00 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 and 4.
YOUR BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" PROPOSALS 1, 2, 3 AND 4.
1. ELECTION OF THREE DIRECTORS IN CLASS I. (If you wish to withhold authority
to vote for any of the Directors, strike out the appropriate name(s)):
(01) W. John Driscoll (02) James J. Howard (3) Allan L. Schuman
|_| FOR |_| WITHHOLD
2. APPROVAL OF APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT
AUDITORS.
|_| FOR |_| AGAINST |_| ABSTAIN
3. TO VOTE ON A PROPOSAL TO AMEND THE COMPANY'S RESTATED ARTICLES OF
INCORPORATION TO REMOVE LIMITS ON THE COMPANY'S ISSUANCE OF UNSECURED
INDEBTEDNESS.
|_| FOR |_| AGAINST |_| ABSTAIN
4. TO VOTE ON A PROPOSAL TO AMEND THE COMPANY'S RESTATED ARTICLES OF
INCORPORATION TO REMOVE PROVISIONS RELATING TO SERIES OF PREFERRED STOCK
THAT HAVE BEEN REDEEMED.
|_| FOR |_| AGAINST |_| ABSTAIN
(TO BE SIGNED ON OTHER SIDE)
