UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (fee required)
or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required)
For the fiscal year ended December 31, 1998 Commission file number: 10-3140
Northern States Power Company, a Wisconsin corporation, meets the
conditions set forth in general instruction I (1) (a) and (b) of Form 10-K and
is therefore filing this form with the reduced disclosure format. (In general
instruction I(2))
NORTHERN STATES POWER COMPANY
(Exact name of registrant as specified in its charter)
Wisconsin 39-0508315
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
100 North Barstow Street 54703
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (715) 839-1382
Securities registered pursuant to Section 12(b) of the Act:
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None
Securities registered pursuant to Section 12(g) of the Act:
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None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No.
---
Indicate the number of shares outstanding of each of the registrant's
classes of common stock as of the latest practicable date.
Class Outstanding at March 24, 1999
- ----- ---------------------------------
Common Stock, $100 Par Value 862,000 Shares
All outstanding common stock is owned beneficially and of record by
Northern States Power Company, a Minnesota corporation.
Documents Incorporated by Reference
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None
<PAGE>
INDEX
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PART I Page No.
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Item 1 Business 1
REGULATION AND RATES
Utility Industry Restructuring Status 1
Construction Authorization 3
Ratemaking Principles in Wisconsin and Michigan 4
Fuel and Purchased Gas Adjustment Clauses 5
Rate Matters by Jurisdiction 6
ELECTRIC OPERATIONS
Competition 7
NSP System 7
Capability and Demand 8
Demand Side Management 8
Intercompany Agreements 9
Electric Power Pooling Agreements 9
Fuel Supply 9
Electric Operating Statistics 10
GAS OPERATIONS 10
ENVIRONMENTAL MATTERS 11
CONSTRUCTION AND FINANCING 12
EMPLOYEES AND EMPLOYEE BENEFITS 13
Item 2 Properties 14
Item 3 Legal Proceedings 15
Item 4 Submission of Matters to a Vote of Security Holders 15
PART II
- - -------
Item 5 Market Price of and Dividends on the Registrant's Common Equity
and Related Stockholder Matters 15
Item 6 Selected Financial Data 15
Item 7 Management's Discussion and Analysis 16
Item 7a Quantitative and Qualitative Disclosures about Market Risk 18
Item 8 Financial Statements and Supplementary Data 18
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 34
PART III
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Item 10 Directors and Executive Officers of the Registrant 34
Item 11 Executive Compensation 34
Item 12 Security Ownership of Certain Beneficial Owners and Management 34
Item 13 Certain Relationships and Related Transactions 34
PART IV
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Item 14 Exhibits, Financial Statement Schedules and Reports on Form 8-K 35
SIGNATURES 37
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EXHIBITS (EXCERPT)
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Statement pursuant to Private Securities Litigation Reform Act of 1995 38
<PAGE>
PART I
ITEM 1 - BUSINESS
- --------------------
Northern States Power Company (NSP-Wisconsin), incorporated in 1901 under
the laws of Wisconsin as the La Crosse Gas and Electric Company, is an operating
public utility company with executive offices at 100 North Barstow Street, Eau
Claire, Wis. 54703 (Phone: (715) 839-1382). NSP-Wisconsin is a wholly-owned
subsidiary of Northern States Power Company, a Minnesota corporation
(NSP-Minnesota). NSP-Minnesota and its subsidiaries collectively are referred
to as NSP.
NSP-Wisconsin is engaged in the generation, transmission, and distribution
of electricity to approximately 210,000 retail customers in an area of
approximately 18,900 square miles in northwestern Wisconsin, to approximately
9,100 electric retail customers in an area of approximately 300 square miles in
the western portion of the Upper Peninsula of Michigan, and to ten wholesale
customers in the same general area. NSP-Wisconsin is also engaged in the
distribution and sale of natural gas in the same service territory to
approximately 78,000 customers in Wisconsin and 5,000 customers in Michigan.
In 1998, NSP-Wisconsin derived 83 percent of its total operating revenues
from electric utility operations and 17 percent from gas utility operations. As
of December 31, 1998, NSP-Wisconsin had 955 full-time equivalent employees
including 863 full-time employees.
Except for the historical information contained herein, the matters
discussed in this Form 10-K 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; and the other risk factors listed from time to
time by NSP-Wisconsin in reports filed with the Securities and Exchange
Commission (SEC), including Exhibit 99.01 to this report on Form 10-K.
Recent Events-Proposed Merger
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On March 24, 1999, Northern States Power Company (NSP) and New Century
Energies, Inc., a Delaware corporation (NCE), entered into an Agreement and Plan
of Merger (the Merger Agreement) providing for a strategic business combination
of NCE and NSP. Pursuant to the Merger Agreement, NCE will be merged with and
into NSP with NSP as the surviving corporation in the Merger (the Merger).
Subject to the terms of the Merger Agreement, at the time of the Merger, each
share of NCE common stock, par value $1.00 per share (NCE Common Stock), (other
than certain shares to be canceled) together with any associated purchase
rights, will be converted into the right to receive 1.55 shares of NSP common
stock, par value $2.50 per share (NSP Common Stock). Cash will be paid in lieu
of any fractional shares of NSP Common Stock which holders of NCE Common Stock
would otherwise receive. The Merger is expected to be a tax-free
stock-for-stock exchange for shareholders of both companies and to be accounted
for as a pooling of interests.
Consummation of the Merger is subject to certain closing conditions,
including, among others, approval by the shareholders of NSP and NCE, approval
or regulatory review by certain state utilities regulators, the Securities and
Exchange Commission under the Public Utility Holding Company Act of 1935, as
amended, the Federal Energy Regulatory Commission, the Nuclear Regulatory
Commission, the Federal Communications Commission and expiration or termination
of the waiting period applicable to the Merger under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended. Each of NCE and NSP have agreed
to certain undertakings and limitations regarding the conduct of their
businesses prior to the closing of the transaction. The Merger is expected to
take from 12 to 18 months to complete.
REGULATION AND RATES
--------------------
Utility Industry Restructuring Status
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Some states have begun to allow retail customers to choose their
electricity supplier, and many other states are considering retail access
proposals. NSP believes that retail competition will result in more innovative
services and lower prices to all customers if the transition is managed in a
thoughtful manner. NSP supports fair and equal treatment for all competitors,
the recovery of utilities' investments made under traditional regulation. NSP
supports a gradual implementation that would take two or three years to resolve
these issues and develop infrastructure, and another two or three years to phase
in customers' choice.
Wisconsin
In 1996, the Public Service Commission of Wisconsin (PSCW) issued its
report to the legislature on restructuring the electric industry. In 1997, after
receiving comments on this 32-step plan, the PSCW consolidated the plan to seven
steps and revised its restructuring plan delaying the start of competition to
2002. However, due to the summer of 1997's electrical reliability concerns in
eastern Wisconsin, the PSCW turned its focus to development of a utility
infrastructure necessary to assure reliable electric service. In April 1998,
reliability legislation introduced by Wisconsin Governor Thompson passed and the
1997 Wisconsin Act 204, "the Reliability Act", became law. The Reliability Act
contains a number of steps necessary for industry restructuring, including
streamlining and updating the regulatory process. The restructuring activities
in Wisconsin in 1998 were mainly limited to compliance with provisions of the
Reliability Act. At present, a definite timeline has not yet been established
for the implementation of retail competition in Wisconsin.
The Reliability Act includes provisions which require a public utility that
owns electric transmission facilities to transfer control of its transmission
facilities to an independent system operator or ISO (an independent nonprofit
organization which would operate, but not own, the electric transmission system)
or divest the public utility's interest in its transmission facilities to an
independent transmission owner or ITO (an independent entity that would own and
operate the electric transmission system) by June 30, 2000, as discussed later
in the Electric Transmission section of Item 1.
<PAGE>
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ITEM 1 - BUSINESS
- --------------------
In addition to the ISO / ITO provision in the Reliability Act, there are
provisions which require the PSCW to develop rules on a number of topics
including the owning, operating, and controlling of wholesale merchant plants in
Wisconsin by Wisconsin investor owned utility affiliates; the cost treatment of
electricity sales to customers that the utility does not have an obligation to
serve including in-state wholesale contracts and out-of-state retail sales; the
reporting requirements of utilities necessary for the commission to develop a
strategic energy assessment and the setting of service standards for electric
generation, transmission and distribution facilities. The PSCW has subsequently
developed dockets for these issues and anticipates recommendations and decision
on all topics by late 1999.
The PSCW has reviewed four proposed models of restructuring the natural gas
industry. The chosen model deregulates the gas purchasing and transportation
functions by market segment as competition becomes effective and sustainable.
The PSCW then separated natural gas restructuring into three phases. In Phase
I, the PSCW ordered separation of gas purchasing activities associated with
providing regulated services from those associated with providing unregulated
services. Phase II developed standards of conduct governing opportunity sales
of pipeline capacity and gas supply and imposed additional restrictions on
transactions between a utility and its gas marketing affiliate. The
restrictions are intended to ensure fair treatment of all market participants.
Phase III focused on identifying regulatory or structural barriers that may
prohibit competition; identifying standards to determine the level of
competitiveness of the market and the level of necessary regulation, and
identifying conditions to impose on marketers serving formerly regulated
markets. In this phase it was also decided that consumer protection and customer
service policy issues must be addressed before any markets are deregulated. An
Essential Services workgroup developed and will submit a report to the PSCW in
the first quarter of 1999 addressing customer protection and customer services
issues. Once the PSCW makes a determination on consumer protections, it is
anticipated that natural gas market restructuring efforts will resume.
Michigan
In January 1998 the Michigan Public Service Commission (MPSC) reaffirmed
its order to open Michigan's retail electricity market to competition. The
initial order directed large Michigan utilities to open 2.5 percent of their
electric load to competition each year from 1997 to 2001, and that all Michigan
electric customers would have access to a competitive market in 2002. The larger
Michigan utilities continue to challenge the order. The lower courts have
upheld the MPSC's authority to implement retail competition and a final decision
by the state supreme court is expected in 1999. The smaller Michigan utilities,
including NSP-Wisconsin, have continued their settlement discussions with the
MPSC to allow full retail customer choice on January 1, 2002.
Federal Energy Regulatory Commission (FERC)
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 granted 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.
Electric Transmission
In April 1998, NSP announced its intention to divest its electric
transmission business to an independent company (an Independent Transmission
Company or ITC) not affiliated with the rest of NSP's utility operations.
Several developments have occurred since this commitment was made:
- - On April 28, 1998, the Reliability Act became law. It includes provisions
which allow the PSCW to order a public utility that owns transmission facilities
in Wisconsin to transfer control of its transmission facilities to an ISO or
divest the public utility's interest in its transmission facilities to an 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 December 31, 1998, the
net book value of NSP-Wisconsin's transmission assets was approximately $148
million. NSP-Wisconsin may attempt to obtain a legislative amendment in 1999 of
the mandatory transfer or divestiture requirements of the new law.
<PAGE>
ITEM 1 - BUSINESS
- --------------------
- - In November 1998, NSP and Alliant Energy (Alliant), a neighboring utility,
announced plans to develop an ITC which will provide electric transmission
services to the upper midwest. The two companies are developing a relationship
in which NSP will create an ITC which will own NSP's transmission assets and
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.
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 this ITC, NSP would ultimately divest its electric transmission assets.
At December 31, 1998, the net book value of NSP's transmission assets was
approximately $647 million. If NSP is not successful in forming an ITC, the
Reliability Act currently would require the transfer of control of
NSP-Wisconsin's transmission assets to an ISO, unless a waiver is granted.
The timing of regulatory actions regarding electric and gas restructuring
and their impact on NSP-Wisconsin and the industry cannot be predicted at this
time and may be significant.
Construction Authorization
- ---------------------------
Before construction of a major electric project begins, NSP-Wisconsin must
obtain various licenses and permits, including either a Certificate of Authority
(CA) or a Certificate of Public Convenience and Necessity (CPCN), from the PSCW.
In 1998, the minimum project expenditure requiring a CA rose, generally, from
$3.3 million to $5.0 million. Transmission line projects involving equipment
with a capacity less than 100 Kilovolts (kV), costing less than $5 million, and
of a length greater than 10 miles on new right-of-way, are subject to a review
by PSCW staff. That review may lead to the full review process if the PSCW
deems it necessary.
Until the end of 1998 PSCW approval was required through the 'Advance Plan'
process before a major electric generation or transmission project could receive
a CPCN. NSP-Wisconsin filed an Advance Plan most recently in early 1998 and it
was approved in January 1999. Starting in 1999, Advance Plan approval is no
longer required for a CPCN to be issued for a major generation or transmission
project (this was revised in the Reliability Act).
NSP-Wisconsin is required to file a CPCN application for: 1) transmission
lines greater than 200 kV and greater than 1 mile in length; 2) and transmission
lines greater than 100 kV, greater than 1 mile in length and on new right-of-way
and 3) generation projects with a capacity greater than 100 MW. Before the
passage of the Reliability Act in May 1998, NSP-Wisconsin was required to file a
CPCN application for all transmission line projects greater than 100 kV and
greater than 1 mile in length and all generation projects with a capacity
greater than 12 MW.
In eastern Wisconsin, which is not served by NSP-Wisconsin, the compound
effect of simultaneous generating facility outages and a transmission system
already near capacity raised the possibility of rolling blackouts and system
instability in that area during 1997. The PSCW and the Governor's office are
studying proposals to amend the requirements for new electric generation and
transmission facilities to promote the production of more electricity and the
movement of more electricity to the state.
NSP-Wisconsin, NSP-Minnesota, and Dairyland Power Cooperative of LaCrosse,
Wis. propose to construct 230- and 115-Kv transmission lines and substations to
improve and maintain electric service to northwestern Wisconsin and eastern
Minnesota. There is a need for additional electrical service to eastern
Minnesota and a critical need to construct facilities to maintain adequate
reliability in northwestern Wisconsin. Some parties oppose the proposal. The
major issue is the location and aesthetics of crossing the St. Croix River,
which is a designated National Scenic Riverway. State agencies in Minnesota and
Wisconsin are expected to issue decisions on the proposal by mid-1999. If
approved, the companies expect the project to be in service by 2003.
<PAGE>
ITEM 1 - BUSINESS
- --------------------
Ratemaking Principles in Wisconsin and Michigan
- ----------------------------------------------------
The PSCW and MPSC regulate the rates and service of NSP-Wisconsin with
respect to retail sales within Wisconsin and Michigan, respectively, and various
other aspects of NSP-Wisconsin's operations. The PSCW also exercises
jurisdiction over the construction of certain electric and gas facilities and
the issuance of new securities. NSP-Wisconsin is also subject to the
jurisdiction of the FERC with respect to its sales to wholesale electric
customers and certain other aspects of its operations, including the licensing
and operation of hydro-electric projects and NSP-Wisconsin's Interchange
Agreement (see Electric Operations-Interchange Agreement). Approximately 93
percent of NSP-Wisconsin's 1998 revenues from sales were subject to PSCW
jurisdiction. Of the 93 percent, 75 percent was generated from retail electric
revenues and the remaining 18 percent from retail gas revenues. NSP-Wisconsin's
wholesale revenues from sales subject to FERC jurisdiction were approximately 4
percent of NSP-Wisconsin's 1998 revenues from sales with the remaining 3 percent
of revenues from sales subject to MPSC jurisdiction.
For the purpose of rate regulation, all three of the regulatory
jurisdictions allow a "forward looking" test year corresponding to the time that
rates are to be put into effect.
The PSCW has a biennial filing requirement for processing rate cases and
monitoring utilities' rates. By June 1 of each odd-numbered year, NSP-Wisconsin
must submit filings for calendar test years beginning the following January 1.
The filing procedure and subsequent review generally allow the PSCW sufficient
time to issue an order effective with the start of the test year.
The PSCW reviews each utility's cash position to determine if a current
return on Construction Work in Progress (CWIP) will be allowed. The PSCW will
allow either a current return on CWIP or capitalization of Allowance for Funds
Used During Construction (AFC) at the adjusted overall cost of capital.
NSP-Wisconsin currently capitalizes AFC on production and transmission CWIP at
the FERC formula rate and on all other CWIP at the adjusted overall cost of
capital.
Fuel and Purchased Gas Adjustment Clauses
- ----------------------------------------------
Wisconsin
The Wisconsin automatic retail electric fuel adjustment clause was
eliminated in the electric retail rate order issued by the PSCW in 1986. The
electric fuel adjustment clause was replaced by a procedure which compares
actual monthly and anticipated annual fuel costs with those costs which were
included in the latest retail electric rates approved by the PSCW. If the
comparison results in a difference outside a range of eight percent for the
first month, five percent for the second month, or two percent for the remainder
of the year, the PSCW may hold hearings limited to fuel costs and revise rates.
This is subject to two year approval under the biennial rate case process.
Effective January 1996, the fuel costs that are monitored include demand costs
for sales, purchased power costs, and transmission wheeling expenses, which had
been excluded prior to that date.
On June 9, 1997 NSP-Wisconsin filed for an interim fuel cost surcharge to
its retail electric rates under the fuel rules provisions of the Wisconsin
Statutes. The surcharge was requested because fuel and purchased power costs had
risen beyond the amount included in NSP-Wisconsin's rates due to unplanned and
extended outages at NSP-Minnesota's nuclear generating stations and higher than
projected costs to transmit electricity purchased from other utilities to
NSP-Wisconsin's service territory. Effective September 25, 1997 the PSCW
authorized NSP-Wisconsin to increase rates through a fuel cost surcharge of
$0.00043 per Kilowatt-hour (kWh) of electricity sold to all Wisconsin retail
electric customers, which produced approximately $574,000 of additional electric
revenue in 1997 and approximately $1.6 million of additional electric revenue in
1998. The surcharge represented less than one percent of then-current rates and
was the first rate increase implemented since January 1993. The surcharge ended
when new base electric rates were implemented in September 1998.
Gas rate schedules include a Purchased Gas Adjustment (PGA) clause that
provides for rate adjustments to compensate for any difference between the
current price of purchased gas and the price of purchased gas already included
in rates. The current month's factor is based on the estimated purchased gas
costs for that month.
In 1996 the PSCW required all major gas utilities in Wisconsin to file
proposed Gas Cost Recovery Mechanisms (GCRM) to replace the PGA.
NSP-Wisconsin's modified proposal was approved in February 1999 to be effective
March 1, 1999. The financial impact of the new GCRM will be substantially the
same as the former PGA. Approximately 70 percent of NSP-Wisconsin's gas revenues
represent recovery of gas costs through the GCRM.
<PAGE>
ITEM 1 - BUSINESS
- --------------------
NSP-Wisconsin's three year gas supply plan was approved by the PSCW in
October 1998. PSCW approval is needed before gas supply costs can be recovered
in the GCRM. The new plan allows NSP-Wisconsin to purchase additional pipeline
capacity from NSP's subsidiary Viking Gas Transmission Company (Viking).
Michigan
NSP-Wisconsin's Michigan retail gas and electric rate schedules include Gas
Cost Recovery Factors and Power Supply Cost Recovery Factors, respectively,
which are based on a twelve-month projection of costs. The MPSC requires formal
filing and subsequent approval of the factors. After each twelve-month period
is completed, a reconciliation is submitted whereby over-recoveries are refunded
and any under-recoveries are collected, including interest.
In September 1997, NSP-Wisconsin filed an application for a Power Supply
Cost Recovery Factor (PSCR) of $0.00172 per kWh of electricity sold to retail
customers in Michigan, or approximately $250,000, which was approved and
implemented in 1998. NSP-Wisconsin filed an application for its 1999 PSCR in
September 1998. In February 1999 the MPSC authorized a PSCR of $0.00107 per kWh
of electricity sold to retail customers in Michigan, which is projected to
produce about $160,000 of incremental revenue. The PSCR is a method of
recovering the difference between the actual cost of fuel for electric
generating plants and purchased electricity and the amount assumed in base
electric rates.
Wholesale
Eight wholesale customers are on a rate schedule which includes a fuel
adjustment factor based on variations between estimated electric fuel and
purchased power costs and actual fuel and purchased power costs. The remaining
2 wholesale customers have fixed rate contracts which do not include a fuel
adjustment factor.
Rate Matters by Jurisdiction
- -------------------------------
Wisconsin
During November 1997, NSP-Wisconsin filed retail electric and gas rate
cases with the PSCW requesting an annual increase of approximately $12.7
million, or 4.3 percent, in retail electric rates and an annual decrease of $1.7
million, or 1.9 percent, in retail gas rates. On September 15, 1998 the PSCW
issued a rate order which authorizes:
- - a $7.3 million, or 2.5 percent, increase in electric rates,
- - a $1.9 million, or 2.2. percent, decrease in gas rates,
- - an 11.9 percent return on common stockholder's equity,
- - recovery of the amount paid through December 31, 1997, for investigation
and environmental remediation at a site near a former manufactured gas plant
in Ashland, Wis.,
- - recovery of $4.3 million of deferred and ongoing NTS costs (discussed later),
and
- - the recovery of approximately $780,000 of decommissioning and
decontamination (D&D) assessments (discussed later) that had been deferred
from NSP-Wisconsin's last rate proceeding, plus ongoing costs.
In July 1997, NSP-Wisconsin received authorization from the PSCW to defer
its share of Network Transmission Service (NTS) costs incurred after May 23,
1997. (NTS costs relate to operating and maintaining the regional electric
transmission network that NSP shares with other qualifying regional utilities.)
Beginning in the third quarter of 1997, NSP-Wisconsin began deferring these
costs, including a retroactive adjustment to May 23, 1997. At December 31,
1998, $2.6 million of NTS costs were deferred. These deferred NTS costs are
being recovered in the new electric rates approved in 1998.
In its order regarding NSP-Wisconsin's 1997 rates, the PSCW denied current
rate recovery of the federal government's assessment for the D&D of federal
uranium enrichment facilities based on a court decision involving another
utility that these assessments were unlawful. However, the PSCW did state that
they would allow future rate recovery of these costs with interest if the courts
ultimately decided the assessments must be paid. While the case was under
appeal, NSP-Wisconsin continued to pay the assessments and defer the cost as a
regulatory asset. On May 6, 1997, the United States Court of Appeals reversed
the lower court's earlier decision that these assessments were unlawful.
Accordingly, NSP-Wisconsin is recovering D&D assessments in its 1998 Wisconsin
retail electric rates.
<PAGE>
ITEM 1 - BUSINESS
- --------------------
Michigan
On January 6, 1999, the MPSC approved a settlement agreement authorizing
NSP-Wisconsin to restructure its Michigan retail electric rates. The settlement
more closely aligns rates with the cost to provide service to various classes of
customers. It will decrease rates for some customers and increase rates for
others, but it will not change the total amount of revenue expected to be
collected from all Michigan retail electric sales. An 11.9% return on equity
was authorized.
FERC-Electric
In response to changes in the wholesale electric market, NSP-Wisconsin is
providing discounts and negotiated services to be competitive. All ten municipal
wholesale customers have current power supply arrangements under which they will
purchase the majority of their power supply requirements from NSP-Wisconsin.
In February and March of 1998, NSP filed wholesale 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
annually, and increase ancillary service revenues by $1 million. The NTS tariff
change would, if approved, reduce NTS costs from 1997 levels. During April
1998, the FERC votedto allow the proposed increases in point-to-point and
ancillary service rates effective October 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.
On November 24, 1998, Wisconsin Electric Power Company (WEPCO) filed a
complaint against NSP with the FERC relating to transmission service
curtailments. In March 1999 NSP and WEPCO reached a settlement in principle.
NSP and WEPCO will file the agreement with the FERC and anticipate their
decision before summer 1999.
ELECTRIC OPERATIONS
-------------------
Competition
-----------
NSP-Wisconsin's electric sales are subject to competition in some areas
from municipally owned systems, electric cooperatives, other utilities and
independent power producers. Electric service also increasingly competes with
other forms of energy. The degree of competition may vary from time to time.
Although NSP-Wisconsin cannot predict the extent to which its future business
may be affected by supply, relative cost, or promotion of other electricity or
energy suppliers, NSP-Wisconsin believes that it will be in a position to
compete effectively.
The Energy Policy Act of 1992 (Energy Act) amends the Public Utility
Holding Company Act of 1935 (PUHCA) and the Federal Power Act. Among many other
provisions, the Energy Act is designed to promote competition in the development
of wholesale power generation in the electric utility industry. It exempts a
new class of independent power producers from regulation under the PUHCA. The
Energy Act also allows the FERC to order wholesale "wheeling" by public
utilities to provide utility and non-utility generators access to public utility
transmission facilities. The provision allows the FERC to set prices for
wheeling, which will allow utilities to recover certain costs. The costs would
be recovered from the companies receiving the services, rather than the
utilities' retail customers. The market-based power agreement filings with FERC
and the open access orders issued by FERC (as discussed in "Regulation and
Rates," herein) reflect the trend toward increasing transmission access under
the Energy Act.
The Energy Act is a catalyst for comprehensive and significant changes in
the operation of electric utilities, including increased competition. The Act's
reform of the PUHCA promotes creation of wholesale non-utility power generators
and authorizes 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. Management believes this legislation will increase competition in
the electric energy markets. NSP plans to be a competitively priced supplier of
electricity and an active participant in the competitive market for electricity.
<PAGE>
ITEM 1 - BUSINESS
- --------------------
Many states are currently considering proposals to increase competition in
the supply of electricity As discussed previously, regulators in Wisconsin and
Michigan are currently considering what actions they should take regarding
electric industry competition, including restructuring. NSP-Wisconsin believes
that, under such restructuring plans, utilities should retain direct operational
responsibility of their transmission and distribution systems, and that
utilities should be permitted to recover the cost of their investments made
under traditional regulation, including any "stranded costs." The timing of
regulatory actions regarding restructuring and their impact on NSP-Wisconsin
cannot be predicted at this time and may be significant.
NSP System
-----------
NSP-Wisconsin's electric production and transmission systems are
interconnected with the production and transmission system of NSP-Minnesota (the
"NSP System").
The NSP System includes coal, nuclear, natural gas, waste wood, and refuse
derived fuel (RDF) steam generating plants, gas and oil fired combustion
turbines, hydroelectric plants, an interconnection with the Manitoba
Hydro-Electric Board for the purpose of exchanging power, and extra-high voltage
transmission facilities for interconnection to Kansas City, Milwaukee and St.
Louis to provide the necessary back-up for large power plants in those regions.
NSP-Minnesota operates two nuclear generating plants: the single unit, 578
Mw Monticello Nuclear Generating Plant and the Prairie Island Nuclear Generating
Plant with two units having a total summer capacity of 1,052 Mw. The Monticello
Plant commenced operation in 1971 and is licensed to operate until 2010. Prairie
Island Units 1 and 2 commenced operation in 1973 and 1974 and are licensed to
operate until 2013 and 2014, respectively. The ability of these nuclear plants
to continue operating until the end of the license periods is dependent upon the
availability of storage facilities for used nuclear fuel. The Monticello plant
has sufficient temporary storage for used fuel to operate until 2010. With the
additional on-site dry cask fuel storage facilities approved by the Minnesota
Legislature in 1994, the Prairie Island plant is expected to have sufficient
temporary storage capacity to operate until 2007.
The Nuclear Waste Policy Act stipulated that the U.S. Department of Energy
(DOE) execute contracts with utilities that own nuclear generating facilities,
such as NSP-Minnesota, that require the DOE to begin accepting spent nuclear
fuel no later than January 31, 1998. In 1996, the DOE notified commercial spent
fuel owners of an anticipated delay in accepting spent nuclear fuel by the
required date of January 31, 1998, and conceded that a permanent storage or
disposal facility will not be available until at least 2010. 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.
NSP-Minnesota may have to rely on these on-site or contracted off-site
facilities for storage of used fuel to continue operations of its nuclear plants
until a DOE disposal or storage facility is ready. (See related legal
proceedings under Item 3 - Legal Proceedings, herein.)
In April 1998, NSP announced its intention to divest its nuclear generation
business to an independent company. During 1999, NSP and neighboring utilities
Wisconsin Energy Corp., and Wisconsin Public Service Corp. formed a nuclear
management company. Another neighboring utility, Alliant Energy, is seeking
Securities and Exchange Commission approval to join the nuclear management
company. At December 31, 1998 the net book value of NSP's nuclear assets
(excluding decommissioning investments and obligations) was approximately $737
million.
Capability and Demand
-----------------------
NSP-Wisconsin's record peak demand occurred on July 14, 1998, and was 1,172
Mw. As a member of MAPP, NSP's reserve requirement is determined jointly with
the other parties to the MAPP Agreement. Currently, the minimum reserve
requirement is 15 percent of the NSP System's maximum demand. The reserve
requirement reflects the benefit of MAPP members sharing their reserves to
protect against equipment failures on their systems (see Electric Power Pooling
Agreements).
NSP-Wisconsin primarily relies on plants operated by NSP-Minnesota for base
load generation. Historically, approximately 80 percent of the total kWh
requirements of NSP-Wisconsin were provided by NSP-Minnesota generating
facilities or purchases made by NSP-Minnesota for system use.
NSP-Wisconsin owns fourteen thermal electric generating units on four sites
and nineteen hydroelectric plants. These plants are used as "peaking plants" -
called into service during periods of high demand for electricity - or as
"intermediate load" plants to supplement the output of NSP-Minnesota's base load
plants. NSP-Wisconsin's electric generating units are described in Item 2 -
Properties.
<PAGE>
ITEM 1 - BUSINESS
- --------------------
Demand Side Management
- ------------------------
NSP-Wisconsin continues to implement various Demand Side Management (DSM)
programs designed to improve load factor and reduce NSP-Wisconsin's power
production cost and system peak demands, thus reducing or delaying the need for
additional investment in new generation and transmission facilities.
NSP-Wisconsin currently offers a broad range of DSM programs to all customer
sectors, including information programs, incentive programs, and rate incentive
programs. These programs are designed to respond to customer needs and focus on
increasing the value of service that will, over the long term, reduce
NSP-Wisconsin's capital requirements and help its customer base become more
stable, energy efficient and competitive.
In response to PSCW direction to move DSM to third party providers,
NSP-Wisconsin has increased its efforts to:
- - become a provider of energy efficiency information and training,
- - decrease reliance on utility sponsored programs,
- - increase the availability of energy efficiency services provided by third
parties in its service territory, and
- - link customers who can benefit from energy efficiency improvements with
third-party service providers.
Since 1986, NSP-Wisconsin's retail DSM programs have achieved 228 Mw of
summer peak demand reduction, exceeding NSP-Wisconsin's goal of reducing summer
peak demand by 216 Mw by the end of 1998 by 12 Mw. This is equivalent to 19
percent of NSP-Wisconsin's 1998 summer peak demand. These impacts were obtained
through appliance, lighting, motor, and cooling efficiency and process
improvements, peak curtailable and time-of-use rate applications and direct load
control of water heaters and air conditioners. NSP-Wisconsin continues to focus
on improving the cost-effectiveness of its DSM programs through market research
studies and program evaluations.
Since January 1, 1996, NSP-Wisconsin has been allowed to immediately
expense rather than defer and amortize certain DSM program expenditures.
Expenditures incurred prior to 1996 continue to be amortized.
As the electricity market becomes more competitive in the future, the
utilities' role in providing DSM programs may change dramatically. Whatever
utilities' future role, NSP-Wisconsin remains committed to helping customers
manage their energy costs. Therefore, NSP-Wisconsin will continue to encourage
the development of a competitive market for energy efficiency programs.
NSP-Wisconsin anticipates that, in the future, it will act mainly as the
facilitator between customers and providers of energy-efficiency services.
Intercompany Agreements
- ------------------------
The electric production and transmission costs of the NSP System are shared
by NSP-Wisconsin and NSP-Minnesota. The cost-sharing arrangement between the
companies is referred to as the Interchange Agreement. It is a FERC regulated
agreement and has been accepted by the PSCW and the MPSC for determination of
costs recoverable in rates by NSP-Wisconsin for charges from NSP-Minnesota in
rate cases.
NSP filed an updated Administrative Services Agreement (NSP-Wisconsin and
NSP-Minnesota share some administrative services and related costs) with the
PSCW and Minnesota Public Utilities Commission (MPUC) in October 1998. The
update does not fundamentally change the nature of the relationship between the
parties, but rather refines the services that may be exchanged and addresses the
cost allocation methods to be used. The updated Agreement requires a full cost
allocation in place of the incremental cost method used in the previous
agreement, and places an explicit restriction on sharing non-utility resources.
The new Agreement, estimated to increase the NSP-Wisconsin costs by
approximately $750,000 in 1999, was approved by the PSCW in January 1999, the
MPUC in March 1999, and became effective January 1, 1999.
Historically NSP-Wisconsin's share of the NSP System annual production and
transmission costs has been between 15 to 16 percent. Revenues received from
billings to NSP-Minnesota for its share of NSP-Wisconsin's production and
transmission costs are recorded as electric operating revenues on
NSP-Wisconsin's income statement. The portions of NSP-Minnesota's production
and transmission costs that were charged to NSP-Wisconsin were recorded as
purchased and interchange power expenses and other operation expenses,
respectively, on NSP-Wisconsin's income statement. (See Note 6 to Financial
Statements).
<PAGE>
ITEM 1 - BUSINESS
- --------------------
Under the Interchange Agreement, NSP-Wisconsin could be charged a portion
of the cost of an assessment made against NSP-Minnesota pursuant to the
Price-Anderson liability provisions of the Atomic Energy Act of 1954. (See Note
8 to the Financial Statements).
Electric Power Pooling Agreements
- ------------------------------------
Many of the NSP System's power purchases from other utilities are
coordinated through MAPP. The MAPP agreement provides for the members to
coordinate the installation and operation of generating plants and transmission
line facilities. The terms and conditions of the MAPP agreement and transactions
between MAPP members are subject to the jurisdiction of the FERC.
Fuel Supply
- ------------
In 1998 NSP-Wisconsin shared in the fuel supply costs incurred by
NSP-Minnesota in accordance with the Interchange Agreement. Coal and nuclear
fuel will continue to be the dominant fuels for NSP System generating plants
over the next several years and natural gas, oil, refuse derived fuel, waste
materials, renewable sources, and wood will also continue to be used. The
actual fuel mix for 1998, and the estimated fuel mix for 1999 and 2000, are as
follows:
Fuel Use on Btu Basis
-------------------------
(Est.) (Est.)
1998 1999 2000
---- ---- ----
Coal 60.3% 58.8% 59.5%
Nuclear 35.0% 37.6% 37.0%
Other 4.7% 3.6% 3.5%
Electric Operating Statistics
- -------------------------------
The following table summarizes the revenues, sales and customers from
NSP-Wisconsin's electric business, excluding sales to NSP-Minnesota and
miscellaneous revenues:
<TABLE>
<CAPTION>
OPERATING STATISTICS
- ---------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
ELECTRIC REVENUE (THOUSANDS)
Residential $ 121 178 $ 117 490 $ 118 557 $ 121 073 $115 949
Commercial and industrial 184 137 175 438 169 189 169 416 165 639
------- ------- -------- ------- --------
Total retail 305 315 292 928 287 746 290 489 281 588
Sales for resale 16 769 16 429 17 391 17 902 17 414
-------- ------- -------- ------- --------
Total $ 322 084 $ 309 357 $ 305 137 $ 308 391 $ 299 002
========= ========= ========= ========= =========
SALES (MILLIONS OF KILOWATT-HOURS)
Residential 1 706 1 681 1 706 1 718 1 642
Commercial and industrial 3 674 3 528 3 405 3 327 3 212
----- ----- ----- ----- -----
Total retail 5 380 5 209 5 111 5 045 4 854
Sales for resale 462 455 458 456 438
------ ------ ------ ------ ------
Total 5 842 5 664 5 569 5 501 5 292
====== ====== ====== ===== =====
CUSTOMER ACCOUNTS (DECEMBER 31)
Residential 187 977 184 921 183 036 181 151 178 473
Commercial and industrial 31 538 31 002 30 695 30 388 29 704
------ ------- ------- ------- -------
Total retail 219 515 215 923 213 731 211 539 208 177
Sales for resale 10 10 10 10 10
------- ------- ------- ------- -------
Total 219 525 215 933 213 741 211 549 208 187
======= ======= ======= ======= =======
</TABLE>
In early 1998, Fort James Corp. closed its Ashland, Wis. paper mill. It was
one of NSP-Wisconsin's ten largest electric and gas customers, purchasing in
excess of $2 million of utility services from NSP-Wisconsin annually. The
financial effect of losing this customer was reflected in NSP-Wisconsin's 1998
Wisconsin rate filing.
<PAGE>
ITEM 1 - BUSINESS
- --------------------
GAS OPERATIONS
--------------
NSP-Wisconsin has a strategy of holding a diversified portfolio of natural
gas supplies and transportation arrangements. It relies entirely on third party
suppliers for its natural gas supply needs, and uses pipelines only for
transportation and storage services.
The natural gas supply network throughout North America is an integrated
gas transportation grid enabling NSP-Wisconsin to purchase natural gas from
numerous suppliers, obtain contracts for transportation service on directly
connected and upstream pipelines, and to flexibly deliver the supplies to
NSP-Wisconsin's gas service territory. In addition, NSP-Wisconsin has directly
contracted for underground storage and owns and operates liquefied natural gas
and propane-air peak shaving facilities. NSP-Wisconsin's diversified supply and
transportation contracts, as well as underground storage and peak shaving
facilities, provide NSP-Wisconsin with the ability to meet customer needs with
reliable and economic natural gas supply.
The PSCW is continuing to investigate the need to change natural gas
regulation in Wisconsin as a result of changes in the structure of natural gas
utility pipeline services provided to all gas utilities. The PSCW is advocating
a market model in which gas costs will be deregulated by segment, where
competition is effective. Distribution service will remain regulated.
NSP-Wisconsin continues to hold annual and/or winter peaking transportation
contracts with Northern Natural Gas Company, Great Lakes Transmission Limited
Partnership, Northern Border Pipeline Company, Viking, and TransCanada Pipeline,
LTD. NSP-Wisconsin's ability to operate in a competitive gas market was expanded
through NSP-Minnesota's acquisitions of Viking in June 1993. Viking allows NSP
continued access to competitive interstate natural gas transportation.
On July 1, 1998, NSP-Wisconsin completed the acquisition of Natural Gas,
Inc. (NGI), a natural gas utility serving approximately 1,900 customers in the
New Richmond, Wis. area. The transaction was a tax-free reorganization for tax
purposes and was recorded as a 'pooling of interests' for accounting purposes.
Financial statements for prior periods were not restated because the combination
had only an immaterial effect on operating results and financial condition.
Gas Operating Statistics
- --------------------------
The following table summarizes the revenues, sales and customers from
NSP-Wisconsin's gas business, excluding sales to NSP-Minnesota and miscellaneous
revenues (including purchased gas adjustments):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUES (THOUSANDS)
Residential $35 034 $39 989 $41 382 $37 251 $34 297
Commercial & Industrial 43 620 49 459 47 033 43 189 40 404
------ ------ ------ ------ ------
Total $78 654 $89 448 $88 415 $80 440 $74 701
======== ======== ======= ======= =======
SALES (THOUSANDS OF MCF)
Residential 5 168 5 848 6 457 5 873 5 316
Commercial & Industrial 12 784 13 132 13 557 13 078 11 750
------ ------ ------ ------ ------
Total 17 952 18 980 20 014 18 951 17 066
======= ======= ======= ====== ======
CUSTOMER ACCOUNTS (DECEMBER 31)
Residential 72 673 68 631 65 868 63 176 60 194
Commercial & Industrial 10 277 8 809 8 657 8 377 8 012
------ ------- ------- ------- ------
Total 82 950 77 440 74 525 71 553 68 206
======= ======= ======= ====== ======
</TABLE>
<PAGE>
- ------
ITEM 1 - BUSINESS
- --------------------
ENVIRONMENTAL MATTERS
---------------------
NSP-Wisconsin regularly monitors its operations to prevent adverse impacts
to the environment, and it takes timely corrective actions where past practices
have had a negative impact on the environment. Significant resources are
dedicated to environmental training, monitoring and compliance matters.
NSP-Wisconsin strives to maintain compliance with all applicable environmental
laws.
The WDNR has been authorized by the United States Environmental Protection
Agency (EPA) to administer the National Pollutant Discharge Elimination System
Permits under the Federal Water Pollution Control Act Amendments of 1977. Such
permits are required for the lawful discharge of any pollutant into navigable
waters from any point source (e.g. power plants). Permits have been issued for
all of NSP-Wisconsin's applicable plants and all plants are in compliance with
permit requirements.
NSP-Wisconsin presently operates hydro, coal, natural gas, tire-derived
fuel, railroad tie, oil-fired, wood and refuse-derived fuel/wood-fired
generation equipment. The WDNR has jurisdiction over emissions to the
atmosphere from the operation of NSP-Wisconsin's power plants. The operation of
NSP-Wisconsin's generating plants substantially conforms to federal and state
limitations pertaining to discharges into the air.
Regulatory approval is required for the construction of generating plants
and major transmission lines. Also, additional regulations have been instituted
governing the use, transport, disposal and inspection of hazardous material and
electrical equipment containing polychlorinated biphenyls (PCB's).
NSP-Wisconsin has procedures in place to comply with these regulations.
In September 1998 the EPA released nitrogen oxide emission regulations
affecting 22 states, including Wisconsin. The goal of the new regulations is to
reduce nitrogen oxide emissions by approximately 85 percent. Two of
NSP-Wisconsin's steam electric generators and eight of its combustion turbines
are subject to this action. If the WDNR implements the regulation as outlined
by the EPA, NSP-Wisconsin's initial estimates are that compliance will require
the payment of $25 to $45 million for capital improvements, plus $3 million each
year for additional operation and maintenance expense.
NSP-Wisconsin has joined with two other Wisconsin-based utilities as well
as the Wisconsin Paper Council and Wisconsin Manufacturers and Commerce
industrial organizations to request a judicial review of the EPA's final
nitrogen oxide rules. NSP-Wisconsin believes that the EPA improperly included
Wisconsin in the scope of the regulatory action, and it improperly calculated
potential emissions of nitrogen oxides reducing the allowable emission limits
for the state.
In 1996 NSP-Wisconsin received two Notices of Violation (NOV) from the WDNR
stating that dioxin emissions from unit 2 of the French Island generating plant
had exceeded allowable levels. Corrective action brought dioxin emissions
within acceptable limits by the end of 1997. The WDNR will close the NOV when
it issues a new operating permit.
NSP-Wisconsin may be involved in the cleanup and remediation of five sites
of former landfills or manufactured gas plants. NSP-Wisconsin's responsibility
for these sites is discussed in Note 8 to the Financial Statements.
In December 1997, nearly 160 nations adopted the "Kyoto Protocol to the
United Nations Framework Convention on Climate Change" (the Kyoto Protocol).
The Kyoto Protocol obligates developed nations to meet certain emissions
targets; specific limits vary from country to country. If the Kyoto Protocol is
approved internationally and if the U.S. is a party, the Kyoto Protocol would
impose, during the first commitment period of 2008 - 2012, a binding obligation
on the U.S. to reduce its emissions of carbon dioxide, methane and nitrous oxide
to a level 7 percent below 1990 levels and its emissions of hydrofluorocarbons,
perfluorocarbons and sulfur hexafluoride by 7 percent below 1990 or 1995 levels.
The Kyoto Protocol must be ratified by the U.S. Senate in order for the U.S. to
become a party to the protocol. Major provisions of the Kyoto Protocol, such as
an international emissions trading program, have yet to be developed. Until
they are developed the impact on NSP cannot be predicted.
<PAGE>
ITEM 1 - BUSINESS
- --------------------
CONSTRUCTION AND FINANCING
--------------------------
During the five years ended December 31, 1998, NSP-Wisconsin had gross
additions to utility plant in service of approximately $268 million. Included
in NSP-Wisconsin's gross additions is $29 million for electric production
facilities, $156 million for other electric properties, $33 million for gas
utility properties, and $50 million for other utility properties. Based on
studies made by NSP-Wisconsin, the weighted average age of depreciable property
was 14.64 years at December 31, 1998.
Expenditures for NSP-Wisconsin's construction programs for the five-year
period 1998-2002, are estimated to be as follows:
Year Estimated Construction Expenditures
---- -------------------------------------
(millions of dollars)
1999 $84
2000 88
2001 70
2002 82
2003 78
------
TOTAL $402
====
The largest projects included in these estimates are to construct a new 230
kV electric transmission line between Chisago County, Minn. and Amery, Wis. and
a new 161 kV line between Stone Lake, Wis. and the Bay Front Generating Plant in
Ashland, Wis., and to rebuild transmission lines between Baldwin and Abbotsford,
Wis. These projects' estimated total cost is $70.6 million, of which about $21.9
million will be spent in 1999. The 1999 construction expenditures are estimated
to include approximately $65.2 million for electric facilities, $6.6 million for
gas facilities and $12.5 million for general plant and equipment. It is
presently estimated that approximately 76 percent of the 1999-2003 construction
expenditures will be provided by internally generated funds, with the remainder
from the issue of short-term and long-term debt. At December 31, 1998,
NSP-Wisconsin's short-term borrowing payable to NSP-Minnesota were $55.9
million. The PSCW has authorized up to $80.0 million of short-term borrowing.
NSP-Wisconsin currently projects the need for $20 million of common stock equity
from NSP-Minnesota in 2000 and $50 million of long-term debt in 1999 to finance
the estimated construction expenditures for the 1999-2003 construction program.
The foregoing estimates of future construction expenditures, internally
generated funds and external financing requirements can be affected by many
factors, including load growth, competition, inflation, changes in the tax laws,
rate relief, earnings and regulatory actions. Major electric and gas utility
projects in Wisconsin are currently subject to the jurisdiction of the PSCW and
require its approval. Hence, the above estimated construction program and
financing program could change from time to time due to variations in these
other factors.
Bond Ratings
- -------------
NSP-Wisconsin's first mortgage bonds are currently rated AA by Standard and
Poor's Corporation, AA by Duff & Phelps, Inc., and AA by Fitch Investors
Service, Inc. On July 15, 1997, Moody's Investors Service upgraded the credit
ratings of NSP-Wisconsin's first mortgage bonds from A1 to Aa3, and the
unsecured resource recovery bonds guaranteed by NSP-Wisconsin from A2 to A1.
NSP-Wisconsin's financial and competitive position were among the factors cited
for the upgrade. These ratings are the opinions of the rating agency and an
explanation of the significance of these ratings may be obtained from them. 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.
EMPLOYEES AND EMPLOYEE BENEFITS
-------------------------------
At year end 1998, the total number of full- and part-time employees of
NSP-Wisconsin was 955. About 400 employees of NSP-Wisconsin are represented by
one local of the International Brotherhood of Electrical Workers under a three
year collective bargaining agreement which was ratified by NSP-Wisconsin's union
membership on April 10, 1997. All provisions of this new agreement were
effective retroactively to January 1, 1997 and extend to December 31, 1999.
ITEM 1 - BUSINESS
- --------------------
Recent changes to NSP-Wisconsin's employee and retiree benefits, which
support a broad NSP goal of providing market-based benefits, include:
WAGE INCREASES: NSP-Wisconsin uses data from surveys of other local and
regional companies to determine the rate of compensation for its nonbargaining
employees. In 1998 and 1999 nonbargaining employees received average wage
increases of 3.2 percent and 3.4 percent, respectively. Bargaining employees
received 2 percent per year wage increases in 1998 and 1999 under the new
collective bargaining agreement.
RETIREMENT PLAN CHANGES: Effective January 1999, NSP revised its retirement
plans for nonbargaining employees as follows:
- - The retiree medical plan was discontinued for employees retiring after
December 31, 1998.
- - The qualified pension plan was enhanced to provide a Retirement Spending
Account and enhanced Social Security supplement to use for medical coverage or
to supplement pension benefits.
- - The 401(k) plan was enhanced, increasing the amount of employee
contributions matched by NSP.
Bargaining employee benefit plans are unchanged for 1999.
<PAGE>
- ------
ITEM 2 - PROPERTIES
- ----------------------
Electric Utility
- -----------------
NSP-Wisconsin's electric generating facilities are:
Year Summer
Station and Units Fuel Installed Capability (Mw)
------------------- ---- --------- ---------------
Combustion Turbine:
Flambeau Station Gas/Oil 1969 12
Park Falls, WI
(1 unit)
Wheaton Gas/Oil 1973 342
Eau Claire, WI
(6 units)
French Island Oil 1974 142
La Crosse, WI
(2 units)
Steam:
Bay Front Coal/Wood/ 1945-1960 73
Ashland, WI Gas
(3 units)
French Island Wood/RDF 1940-1948 29
La Crosse, WI
(2 units)
Hydro Plants:
(19 plants) Various dates 251
---
TOTAL 849
===
At December 31, 1998, NSP-Wisconsin owned approximately 2,400 structure
miles of electric transmission lines and 9,600 structure miles of electric
distribution lines. Virtually all of the land and personal property owned by
NSP-Wisconsin is subject to the lien of its first mortgage bond indentures
pursuant to which NSP-Wisconsin has issued first mortgage bonds.
Gas Utility
------------
The gas properties of NSP-Wisconsin include approximately 1,700 miles of
natural gas distribution mains. NSP-Wisconsin owns two liquefied natural gas
(LNG) facilities with a combined storage capacity of 0.3 Billion Cubic Feet
(Bcf), and two propane-air plants with a storage capacity of 0.02 Bcf, to
supplement the supply of natural gas available during periods of high demand.
The two LNG facilities are located in Eau Claire and LaCrosse, Wis. The LaCrosse
LNG facility is currently not in service. In January 1993, NSP-Wisconsin
installed temporary propane-air facilities with a capacity of 144,000 gallons to
further supplement its gas supply in the LaCrosse, Wis. area during peak periods
and, in 1998, NSP-Wisconsin added a second propane-air plant in New Richmond,
Wis., with the acquisition of NGI.
<PAGE>
- ------
ITEM 3 - LEGAL PROCEEDINGS
- ------------------------------
In the normal course of business, NSP-Wisconsin is a party to routine
claims and litigation arising from prior and current operations. NSP-Wisconsin
is actively defending these matters and has recorded an estimate of the probable
cost of settlement or other disposition.
The DOE is required by statute and contract to accept spent nuclear fuel
from NSP System nuclear generating facilities no later than January 31, 1998.
In 1996 the DOE notified commercial spent nuclear fuel owners that it could not
accept their spent nuclear fuel by January 31, 1998 and that a permanent
storage or disposal facility would not be available until at least 2010. NSP
and other affected parties have commenced lawsuits against the DOE to require
them to meet their contractual obligations and to escrow payments that are being
made to them for the permanent disposal program. NSP has also commenced an
action to recover damages caused by the DOE's breach of its statutory and
contractual obligation to accept spent nuclear fuel. The DOE's failure to
fulfill its obligation has increased NSP's expenses for interim storage of spent
nuclear fuel and related issues, may impact the length of time NSP System
nuclear generating facilities can operate, and has led to concern over past
payments to the DOE by utility customers to fund the permanent disposal program.
NSP-Wisconsin was given a favorable ruling in a service dispute with Eau
Claire Electric Cooperative (EC Co-op). EC Co-op had installed electric service
to a new industrial park in Osseo, Wis., which is a NSP-Wisconsin franchise
area. NSP-Wisconsin filed a complaint with the PSCW and requested that it be
allowed to serve the park. On October 29, 1998, the PSCW ruled in favor of
NSP-Wisconsin. The ruling gave NSP-Wisconsin the exclusive right to serve the
park, and it directed the EC Co-op to sell their facilities to NSP-Wisconsin or
remove them within 30 days. The matter has been appealed by the EC Co-op and is
currently pending before the Dane County circuit court.
On February 20, 1999, a person who was not an NSP employee was killed while
working with a hydraulic press at NSP-Wisconsin's Western Avenue Service Center.
This person was on the premises with an NSP employee. No legal action
has been taken to date.
As discussed in Note 8 to the Financial Statements in Item 8, NSP and
Wisconsin Electric Power Company have reached a settlement in principle in a
dispute relating to transmission service curtailments.
For a discussion of environmental proceedings, see "Environmental Matters"
under Item 1, incorporated by reference. For a discussion of proceedings
involving NSP-Wisconsin's utility rates, see "Regulation and Rates" under Item
1, incorporated by reference.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------------------
None
PART II
ITEM 5 - MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------
This is not applicable as NSP-Wisconsin is a wholly owned subsidiary.
ITEM 6 - SELECTED FINANCIAL DATA
- -------------------------------------
This is omitted per conditions set forth in general instructions I (1) (a)
and (b) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).
<PAGE>
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
---------------------------------------
Management's Discussion and Analysis of Financial Condition and Results of
Operations is omitted per conditions as set forth in general instructions I (1)
(a) and (b) of Form 10-K for wholly owned subsidiaries. It is replaced with
management's narrative analysis of the results of operations as set forth in
general instructions I (2) (a) of Form 10-K for wholly owned subsidiaries
(reduced disclosure format). This analysis will primarily compare its revenue
and expense items for the year ended December 31, 1998 with the year ended
December 31, 1997.
RESULTS OF OPERATIONS
NSP-Wisconsin's net income for the year ended December 31, 1998 was $32.2
million, down from the $37.4 million earned in the same period of 1997.
Operating income decreased $4 million from 1997.
Electric Sales and Revenues
- ------------------------------
ELECTRIC REVENUES in total increased $15.6 million in 1998. Revenue from
customers increased $12.4 million or 4.2 percent in 1998 as compared to 1997
primarily due to higher sales levels and a rate increase. Total electric sales
volumes increased 3.1 percent in 1998 as compared to 1997 due to customer and
sales growth, partially offset by less favorable weather in 1998 than 1997.
NSP-Wisconsin was allowed an electric rate increase of 2.5 percent on September
15, 1998 as discussed in the Rate Matters section of Item 1. The remaining $3.2
million increase in electric revenues relates to higher Interchange Agreement
billings to NSP-Minnesota for energy delivered and cost allocations.
Gas Sales and Revenues
- -------------------------
GAS REVENUES in 1998 decreased $10.9 million or 12.2 percent as compared
with 1997 primarily due to lower sales volume and lower natural gas costs in
1998, which flow through customer rates via the GCRM. Total gas sales volume
decreased 5.9 percent in 1998 compared with 1997 primarily due to unfavorable
winter weather.
Operating Expenses and Other Factors
- ----------------------------------------
PURCHASED AND INTERCHANGE POWER and FUEL FOR ELECTRIC GENERATION together
increased $11.6 million or 6.1 percent in 1998 from 1997 mainly due to
additional power purchases from NSP-Minnesota and the usage of higher cost
peaking plants to support increased sales levels. Power purchases from
NSP-Minnesota were more expensive in 1998 due to unplanned and extended outages
at NSP-Minnesota's nuclear generating stations in 1998.
GAS PURCHASED FOR RESALE decreased $8.1 million, or 13.3 percent, in 1998
primarily due to reduced purchase requirements due to the effect of warm winter
weather on gas sales, and also to lower costs per unit of gas.
OTHER OPERATION, and MAINTENANCE EXPENSES together increased $4.2 million,
or 6.4 percent, in 1998 as compared to 1997 primarily due to increased
transmission interchange costs billed from NSP-Minnesota, the amortization of
NTS costs approved in the September PSCW rate order as discussed in the Rate
Matters section of Item 1, and higher post employment benefit costs in 1998.
ADMINISTRATIVE AND GENERAL, and CONSERVATION AND DEMAND SIDE MANAGEMENT
EXPENSES together increased $2.6 million or 9.7 percent in 1998 as compared to
1997 due to increased benefit expenses discussed in Note 5 to the Financial
Statements, partly offset by lower conservation and DSM expenses allowed in the
September PSCW rate order discussed in the Rate Matters section of Item 1.
DEPRECIATION AND AMORTIZATION increased $1.3 million, or 3.5 percent, in
1998 from 1997 due to increases in the Company's plant in service.
INCOME TAX decreased $3.3 million in 1998 from 1997 reflecting lower pretax
operating income in 1998.
OTHER INCOME (EXPENSE) - NET decreased $0.3 million (net of income tax
effects) in 1998 from 1997 primarily due to gains recorded in 1997 for the sales
of property. Offsetting this increase was the pretax write-off of approximately
$900,000 of deferred merger-related costs resulting from the termination of the
proposed merger between NSPM and WEC in May 1997.
INTEREST charges increased $1.0 million in 1998 from 1997. In 1997,
previously recorded accrued interest was reversed following a favorable ruling
on a tax issue dispute with the State of Wisconsin.
Technology Changes for the Year 2000 (Y2K)
- ------------------------------------------------
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 December 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 December 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.
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-Wisconsin had spent approximately $850,000 for Y2K
efforts to date. The additional development and remediation costs necessary for
NSP-Wisconsin to prepare for Y2K is estimated to be approximately $300,000.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
NSP-Wisconsin did not have any derivative financial instruments outstanding
at the end of the latest fiscal year. Accordingly, the disclosures about market
risk are not applicable.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
See Item 14(a)-1 in Part IV for financial statements included herein.
See Note 10 to the financial statements for summarized quarterly financial
data.
<PAGE>
======
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
====================================
To The Shareholder of Northern States Power Company (Wisconsin):
In our opinion, the accompanying balance sheets and the related statements of
income and retained earnings and of cash flows present fairly, in all material
respects, the financial position of Northern States Power Company, a Wisconsin
corporation, at December 31, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of NSP-Wisconsin'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
Minneapolis, Minnesota
February 1, 1999
<PAGE>
- ------
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF INCOME AND RETAINED EARNINGS Year Ended December 31
-----------------------
<S> <C> <C> <C>
(Thousands of dollars) 1998 1997 1996
- ------------------------ ---- ---- ----
Operating Revenues
Electric $ 398 497 $ 382 859 $ 377 073
Gas 78 845 89 790 88 756
--- ------- ------- -------
Total 477 342 472 649 465 829
----- -------- -------- --------
Operating Expenses
Purchased and interchange power 190 019 179 708 173 492
Fuel for electric generation 11 355 10 023 5 165
Gas purchased for resale 53 067 61 195 58 347
Other operation 48 009 45 534 46 920
Maintenance 21 437 19 734 19 617
Administrative and general 21 521 17 845 21 814
Conservation and demand side management 7 853 8 935 9 117
Depreciation and amortization 39 135 37 815 35 731
Property and general taxes 14 507 14 140 14 332
Income taxes 20 809 24 120 24 688
------------- ------- ------- -------
Total operating expenses 427 712 419 049 409 223
-------------------------- -------- -------- -------
Operating Income 49 630 53 600 56 606
Other Income (Expense)
Allowance for funds used during
construction-equity 393 246 339
Other income and deductions-net of
applicable income taxes 851 1 253 677
--- ----- ---
Total Other Income (Expense)-Net 1 244 1 499 1 016
----------------------------------- ------ ----- -----
Income Before Interest Charges 50 874 55 099 57 622
- --------------------------------- ------- ------- ------
Interest Charges
Interest on long-term debt 16 204 16 322 15 918
Other interest and amortization 2 985 1 688 3 406
Allowance for funds used during
construction-debt (510) (328) (399)
------------------------------------ ----- ----- -----
Total interest charges 18 679 17 682 18 925
------------------------ ------- ------- -------
Net Income 32 195 37 417 38 697
Retained Earnings, January 1 244 171 234 751 221 638
Retained Earnings of acquired business 729
Dividends on common stock paid to parent (26 205) (27 997) (25 584)
Retained Earnings, December 31 $ 250 890 $ 244 171 $ 234 751
================================= ========== ========== ==========
See Notes to Financial Statements.
</TABLE>
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS Year Ended December 31
-------------------------
<S> <C> <C> <C>
(Thousands of dollars) 1998 1997 1996
- ------------------------ ---- ---- ----
Cash Flows from Operating Activities:
Net Income $ 32 195 $ 37 417 $ 38 697
Adjustments to reconcile net income
to cash from operating activities:
Depreciation and amortization 40 059 38 991 36 665
Deferred income taxes 5 405 4 372 1 736
Deferred investment tax credits recognized (859) (880) (910)
Allowance for funds used during
construction - equity (393) (246) (339)
Cash provided by (used for) changes
in certain working capital items (1 768) (1 491) (2 633)
Cash provided by (used for) changes
in other assets and liabilities 6 721 (3 293) (2 691)
------ ------ ------
Net Cash Provided by Operating Activities 81 360 74 870 70 525
- ---------------------------------------------- ------ ------ ------
Cash Flows from Investing Activities:
Capital expenditures (66 646) (53 580) (49 403)
Increase (decrease) in construction
payables 538 899 (118)
Allowance for funds used during
construction - equity 393 246 339
Other 347 (615) (897)
----- --- ----- -----
Net Cash Used for Investing Activities (65 368) (53 050) (50 079)
- ----------------------------------------- -------- -------- --------
Cash Flows from Financing Activities:
Issuances (repayment) of short-term
debt due to parent - net 10 400 6 000 (11 600)
Proceeds from issuance of long-term debt 82 691
Redemption of long-term debt, including
reacquisition premiums (167) (65 992)
Dividends paid to parent (26 205) (27 997) (25 584)
--------------------------- --------- -------- --------
Net Cash Used for Financing Activities (15 972) (21 997) (20 485)
- ----------------------------------------- -------- -------- --------
Net increase (decrease) in cash and cash
equivalents 20 (177) (39)
Cash and cash equivalents beginning of period 31 208 247
- --------------------------------------------- -- --- ---
Cash and cash equivalents end of period $ 51 $ 31 $ 208
========================================== ========= ======= =======
Cash provided by (used for) changes in
certain working capital items:
Accounts receivable and unbilled revenues $ (1 188) $ 6 847 $ 474
Materials and supplies inventories (1 243) (3 980) (1 447)
Payables and accrued liabilities 268 (4 060) 2 756
Income and other taxes accrued 1 643 134 (4 007)
Other (1 248) (432) (409)
----- -------- ----- -----
Net $ (1 768) $ (1 491) $ (2 633)
=== ======== ===== =====
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $ 17 345 $ 16 581 $ 18 556
Income taxes (net of refunds received) $ 10 824 $ 20 673 $ 26 977
See Notes to Financial Statements.
</TABLE>
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
<TABLE>
<CAPTION>
BALANCE SHEETS December 31
------------
<S> <C> <C>
(Thousands of dollars) 1998 1997
- ------------------------ ---- ----
ASSETS
Utility Plant
Electric-including construction work in progress:
1998, $22,770; 1997, $14,904 $ 972 442 $ 931 752
Gas-including construction work in progress:
1998, $1,606; 1997, $1,561 113 574 105 362
Other-including construction work in progress:
1998, $4,481; 1997, $6,769 81 040 70 892
----------------------------- ------- -------
Total 1 167 056 1 108 006
Accumulated provision for depreciation (457 272) (426 723)
----------------------------------------- ---------- ---------
Net utility plant 709 784 681 283
------------------- -------- --------
Current Assets
Cash 51 31
Accounts receivable-net of accumulated provision
for uncollectible accounts: 1998, $825; 1997, $656 34 748 38 102
Unbilled utility revenues 21 011 16 376
Materials and supplies inventories - at average cost
Fuel 12 406 12 073
Other 6 609 5 604
Prepayments and other 13 472 12 135
----------------------- ------- -------
Total current assets 88 297 84 321
---------------------- ------- -------
Other Assets
Regulatory assets 42 467 35 634
Other investments 7 823 8 166
Nonutility property - net of accumulated depreciation:
1998, $75; 1997, $328 2 803 2 752
Unamortized debt expense 1 668 1 761
Federal income tax receivable 3 307
Long-term prepayments and deferred charges 10 869 7 411
---------------------------------------------- ------ -----
Total other assets 65 630 59 031
-------------------- ------- -----
Total Assets $ 863 711 $ 824 635
============= ======= =======
LIABILITIES AND EQUITY
Capitalization
Common stock-authorized 870,000 shares of $100 par value;
issued shares: 1998 and 1997, 862,000 $ 86 200 $ 86 200
Premium on common stock 10 541 10 461
Retained earnings 250 890 244 171
------------------ -------- --------
Total common stock equity 347 631 340 832
------------------------------ -------- --------
Long-term debt-net of unamortized discount:
1998, $1,737; 1997, $1,825 231 863 231 775
--------------------------------- -------- --------
Total capitalization 579 494 572 607
--------------------- -------- --------
Current Liabilities
Notes payable - parent company 55 900 45 300
Accounts payable 14 301 13 844
Payables to affiliated companies (principally parent) 16 596 15 682
Salaries, wages, and vacation pay accrued 5 910 6 089
Taxes accrued 3 418 1 775
Interest accrued 4 184 4 187
Other 4 310 4 897
----- ------ ------
Total current liabilities 104 619 91 774
--------------------------- -------- -------
Other Liabilities
Accumulated deferred income taxes 110 831 105 850
Accumulated deferred investment tax credits 18 122 18 970
Regulatory liabilities 21 947 19 306
Customer advances 9 458 8 192
Benefit obligations and other 19 240 7 936
-------------------------------- ------- ------
Total other liabilities 179 598 160 254
------------------------- -------- --------
Commitments and Contingent Liabilities (see Note 8)
- ---------------------------------------------------------
Total Liabilities and Equity $ 863 711 $ 824 635
=============================== ======= =======
See Notes to Financial Statements.
</TABLE>
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
NORTHERN STATES POWER COMPANY (WISCONSIN)
NOTES TO FINANCIAL STATEMENTS
1. Summary of Accounting Policies
System of Accounts Northern States Power Company (Wisconsin),
(NSP-Wisconsin), a wholly-owned subsidiary of Northern States Power Company, a
Minnesota corporation (NSP-Minnesota), is primarily a public utility serving
customers in Wisconsin and Michigan. Its accounting records conform with either
the uniform system of accounts of the Federal Energy Regulatory Commission
(FERC) or those of the Public Service Commission of Wisconsin (PSCW) and the
Michigan Public Service Commission (MPSC), which systems are the same in all
material respects.
Investment in Subsidiaries NSP-Wisconsin carries its investment in its
subsidiaries (Chippewa and Flambeau Improvement Company, 75.86 percent owned;
NSP Lands, Incorporated, 100 percent owned; and Clearwater Investments,
Incorporated, 100 percent owned) at cost plus equity in earnings since
acquisition. The impact of consolidating these subsidiaries would be
immaterial.
Related Party Transactions NSP-Wisconsin's financial statements include
intracompany transactions and balances related to sales among the electric and
gas utility businesses of NSP-Wisconsin as well as intercompany transactions
with NSP-Minnesota and Viking, including intercompany profits which are allowed
in utility rates. See Note 6 for further discussion of intercompany
transactions with NSP-Minnesota.
Utility Plant and Retirements Utility plant is stated at original cost.
The cost of additions to utility plant includes contracted work, direct labor
and materials, allocable overheads and allowance for funds used during
construction (AFC). The cost of units of property retired, plus net removal
cost, is charged to the accumulated provision for depreciation and amortization.
Maintenance and replacement of items determined to be less than units of
property are charged to operating expenses.
Depreciation For financial reporting purposes, depreciation is computed on
the straight-line method based on the annual rates certified by the PSCW and
MPSC for the various classes of property. Depreciation provisions, as a
percentage of the average balance of depreciable property in service, were 3.57
percent in 1998, 3.61 percent in 1997,and 3.57 percent in 1996.
Allowance for Funds Used during Construction (AFC) AFC, a non-cash item,
is computed by applying a composite pretax rate, representing the cost of
capital used to fund utility construction, to qualified construction work in
progress (CWIP). NSP-Wisconsin used the FERC calculation for production and
transmission property and the PSCW calculation for other qualified CWIP. The
rates used for the FERC calculation were 5.80 percent in 1998, 5.68 percent in
1997, and 5.70 percent in 1996. The rates used for the PSCW calculation were
10.17 percent in 1998, 10.00 percent in 1997, and 10.03 percent in 1996. The
amount of AFC capitalized as a construction cost in CWIP is credited to other
income and interest charges. AFC amounts capitalized in CWIP are included in
utility rate base for establishing utility service rates.
Revenues Revenues are recognized based on products and services provided
to customers each month. Because utility customer meters are read and billed on
a cycle basis, unbilled revenues are estimated and recorded for services
provided from the monthly meter-reading dates to month-end.
Regulatory Deferrals As a regulated utility, NSP-Wisconsin accounts for
certain income and expense items under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 71 - Accounting for the Effects of Certain Types
of Regulation. In doing so, certain costs which would otherwise be charged to
expense are deferred as regulatory assets based on expected recovery from
customers in future rates. Likewise, certain credits which would otherwise be
reflected as income are deferred as regulatory liabilities based on the
expectation that they will be returned to customers in the future. Management's
expected recovery of deferred costs and expected flowback of deferred credits is
generally based on specific ratemaking decisions or precedent for each item.
Regulatory assets and liabilities are being amortized consistent with ratemaking
treatment as established by regulators. Note 7 describes the components of
regulatory assets and liabilities.
Income Taxes Under the liability method used by NSP-Wisconsin, income
taxes are deferred for all temporary differences between pretax financial and
taxable income, and between the book and tax bases of assets and liabilities.
Deferred taxes are recorded using the tax rates scheduled by tax law to be in
effect when the temporary differences reverse. Due to the effects of
regulation, current income tax expense is provided for the reversal of some
temporary differences previously accounted for by the flow-through method.
Also, regulation has created certain regulatory assets and liabilities related
to income taxes, as summarized in Note 7.
<PAGE>
- ------
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
NSP-Wisconsin is included in the consolidated federal income tax return
filed by NSP-Minnesota and files separate state returns for Wisconsin and
Michigan. NSP-Wisconsin records current and deferred income taxes at the
statutory rates as if it filed a separate return for federal income tax
purposes. State income tax payments are made directly to the taxing
authorities. Federal income tax payments are made to the Internal Revenue
Service by NSP-Minnesota and charged back to NSP-Wisconsin.
Investment tax credits were deferred and are being amortized over the
estimated lives of the related property.
Purchased Tax Benefits NSP-Wisconsin purchased tax-benefit transfer
leases under the Safe Harbor Lease provisions of the Economic Recovery Tax Act
of 1981. For both financial reporting and regulatory purposes, NSP-Wisconsin is
amortizing the difference between the cost of the purchased tax benefits and the
amounts to be realized through reduced current income tax liabilities over the
remaining terms of the leases after the initial investments have been recovered.
Environmental Costs Accruals for environmental costs are recognized when
it is probable that a liability has been incurred and the amount of the
liability can be reasonably estimated. Costs are charged to expense (or
deferred as a regulatory asset based on expected recovery from customers in
future rates) if they relate to the remediation of conditions caused by past
operations or if they are not expected to mitigate or prevent contamination from
future operations. Where environmental expenditures relate to facilities
currently in use (such as pollution control equipment), the costs may be
capitalized and depreciated over the future service periods. Estimated
remediation costs are recorded at undiscounted amounts, independent of any
insurance or rate recovery, based on prior experience, assessments and current
technology. Accrued obligations are regularly adjusted as environmental
assessments and estimates are revised, and remediation efforts proceed. For
sites where NSP-Wisconsin has been designated as one of several potentially
responsible parties, the amount accrued represents NSP-Wisconsin's estimated
share of the cost. NSP-Wisconsin intends to treat any future costs related to
decommissioning and restoration of its power plants and substation sites, where
operation may extend indefinitely, as a capitalized removal cost of retirement
in utility plant. Depreciation expense levels currently recovered in rates
include a provision for an estimate of removal costs.
Use of Estimates In recording transactions and balances resulting from
business operations, NSP-Wisconsin uses estimates based on the best information
available. Estimates are used for such items as plant depreciable lives, tax
provisions, uncollectible accounts, environmental loss contingencies, unbilled
revenues and actuarially determined benefit costs. As better information
becomes available (or actual amounts are determinable), the recorded estimates
are revised. Consequently, operating results can be affected by revisions to
prior accounting estimates.
Reclassifications Certain reclassifications have been made to the 1997 and
1996 financial statements to conform with the 1998 presentation. These
reclassifications had no effect on net income or earnings per share.
2. Long-term Debt
December 31 December 31
1998 1997
------ ------
Long-term debt includes the following issues:
(Thousands of dollars)
First Mortgage Bonds - Series due:
October 1, 2003, 5 3/4% $ 40 000 $ 40 000
March 1, 2023, 7 1/4% 110 000 110 000
December 1, 2026, 7 3/8% 65 000 65 000
--------- -----------
Total First Mortgage Bonds 215 000 215 000
City of La Crosse Resource Recovery Revenue Bonds -
Series due November 1, 2021, 6% 18 600 18 600
------- -------
Total long-term debt $ 233 600 $ 233 600
=========== ===========
<PAGE>
- ------
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
Except for minor exclusions, all real and personal property is subject to
the lien of NSP-Wisconsin's first mortgage bonds. The Supplemental and Restated
Trust Indenture dated March 1, 1991, and effective October 1, 1993 permits an
amount of established permanent additions to be deemed equivalent to the payment
of cash necessary to redeem one percent of the highest principal amount of each
series of first mortgage bonds (other than resource recovery financing) at any
time outstanding.
Fair Value of Debt The estimated fair value of NSP-Wisconsin's long term
debt at December 31, 1998 and 1997 is $247.2 million and $234.9 million,
respectively. This fair value is estimated based on the quoted market prices
for the same or similar issues, or on the current rates offered to NSP-Wisconsin
for debt of the same remaining maturities.
Capital Lease Obligations Amounts due under capital lease obligations are
approximately $128,000 and $14,000, respectively, for 1999 and 2000.
3. Short-Term Borrowings
NSP-Wisconsin had bank lines of credit aggregating $1 million at December
31, 1998. Compensating balance arrangements in support of such lines of credit
were not required. These credit lines make short-term financing available by
providing bank loans. During 1998 and 1997 there were no bank loans outstanding
as NSP-Wisconsin obtained short-term borrowings from NSP-Minnesota at
NSP-Minnesota's average daily interest rate, including the cost of their
compensating balance requirements.
The PSCW has authorized NSP-Wisconsin to make short-term borrowings up to
$80.0 million. At December 31, 1998 and 1997, NSP-Wisconsin had $55.9 and $45.3
million, respectively, in short-term borrowings from NSP-Minnesota outstanding.
The weighted average interest rates on all short-term borrowings as of December
31, 1998 and 1997, were 5.80 percent and 5.68 percent, respectively.
4. Income Tax Expense
The total income tax expense differs from the amount computed by applying
the federal income tax statutory rate of 35 percent to net income before income
tax expense. The reasons for the difference are as follows:
<TABLE>
<S> <C> <C> <C>
1998 1997 1996
---- ---- ----
Tax computed at statutory rate 35.0% 35.0% 35.0%
Increases (decreases) in tax from:
State income taxes, net of federal income tax benefit 4.9 3.7 4.6
Investment tax credits recognized (1.6) (1.5) (1.4)
Other - net 0.6 1.2 0.7
----- ----- -----
Effective income tax rate 38.9% 38.4% 38.9%
===== ===== =====
Income tax expense is comprised of the following:
(Thousands of Dollars)
Included in Utility operating expenses:
Current federal tax expense $ 13 249 $ 15 549 $ 18 293
Current state tax expense 3 002 3 671 3 838
Deferred federal tax expense 4 381 4 688 2 790
Deferred state tax expense 1 036 1 092 677
Deferred investment tax credit adjustments (859) (880) (910)
------- ------- ------
Total 20 809 24 120 24 688
Included in other income and deductions - net:
Current federal tax expense (233) 1 942 1 299
Current state tax expense (96) (1 345) 326
Deferred federal tax expense (12) (1 408) (1 385)
Deferred state tax expense 0 0 (346)
------- ------ -------
Total income tax expense $ 20 468 $ 23 309 $ 24 582
======= ====== =======
</TABLE>
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
The components of NSP-Wisconsin's net deferred tax liability at December 31
(including current and noncurrent amounts) were as follows:
<TABLE>
<S> <C> <C>
(Thousands of dollars) 1998 1997
- ------------------------ ---- ----
Deferred tax liabilities:
- ---------------------------
Differences between book and tax bases of property $ 110 612 $ 106 242
Tax benefit transfer leases 96 108
Regulatory assets 11 180 12 227
Other 6 002 4 857
----- ------ ------
Total deferred tax liabilities 127 890 123 434
Deferred tax assets:
- ----------------------
Deferred investment tax credits 7 262 7 597
Regulatory liabilities 7 942 7 725
Deferred compensation, accrued vacation and
other reserves not currently deductible 494 618
Other (31) 585
----- ---- ---
Total deferred tax assets 15 667 16 525
---------------------------- ------- -------
Net deferred tax liability $ 112 223 $ 106 909
============================= ========= =========
</TABLE>
5. Benefit Plans and Other Postretirement Benefits
NSP offers the following benefit plans to participating employees,
including those of the NSP-Wisconsin. Approximately 46 percent of
NSP-Wisconsin's benefit employees are represented by five local labor unions
under a collective-bargaining agreement, which expires December 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-Wisconsin's pension costs for the past three years
were as follows:
<TABLE>
<S> <C> <C> <C>
(THOUSANDS OF DOLLARS) 1998 1997 1996
- ------------------------ ---- ---- ----
Service cost $ 3 444 $ 3 062 $ 3 390
Interest cost 9 400 8 926 8 618
Expected return on plan assets (15 477) (13 725) (12 353)
Amortization of transition asset (10) (10) (10)
Amortization of prior service cost 660 133 133
Recognized actuarial gain (1 371) (4 156) (2 850)
- --------------------------- -------- ------- -------
Net periodic benefit cost under SFAS 87 $ (3 354) $ (5 770) $ (3 072)
======================================= ========= ========= ========
</TABLE>
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
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. The funded status of the NSP
pension plan for the past two years was as follows:
<TABLE>
<CAPTION>
TOTAL NSP PLAN NSP-WISCONSIN PORTION
<S> <C> <C> <C> <C>
(THOUSANDS OF DOLLARS) 1998 1997 1998 1997
- ------------------------ ---- ---- ---- ----
Benefit obligation at January 1 $ 1 048 251 $ 993 821 $ 128 222 $ 120 886
Service cost 31 643 27 680 3 444 3 062
Interest cost 78 839 72 651 9 400 8 926
Plan amendments 102 315 9 625
Actuarial (gain) loss (41 635) 30 431 (3 846) 6 284
Benefit payments (75 949) (76 332) (10 581) (10 936)
- ----------------- --------- -------- -------- --------
Benefit obligation at December 31 $ 1 143 464 $1 048 251 $ 136 264 $ 128 222
Fair value of plan assets at January 1 1 978 538 1 634 696 234 304 196 089
Actual return on plan assets 319 230 420 174 41 046 49 151
Benefit payments (75 949) (76 332) (10 581) (10 936)
- ----------------- --------- -------- -------- --------
Fair value of plan assets at December 31 $ 2 221 819 $1 978 538 $ 264 769 $ 234 304
Funded status at December 31 -
excess of assets over obligations 1 078 355 930 287 128 505 106 082
Unrecognized transition asset (387) (463) (47) (57)
Unrecognized prior service cost 114 305 18 663 11 301 2 336
Unrecognized net gain (1 167 340) (953 825) (130 204) (102 160)
- ---------------------- --------- --------- -------- ---------
Net amount recognized - asset (liability) $ 24 933 $ (5 338) $ 9 555 $ 6 201
========================================= ========== ======== ======== ========
</TABLE>
Weighted average assumptions used in pension benefit calculations were:
1998 1997
--------------------------
Discount rate at end of year 6.5% 7.0%
Expected return on plan assets for year 8.5% 9.0%
Rate of future compensation increase per year 4.5% 5.0%
Effective January 1, 1998, NSP made two changes to its method of accounting
for pension costs under SFAS No. 87. First, actuarial gains and losses are now
amortized over the longest period allowed to reduce the volatility of accrued
pension costs and second, pension assets are now allocated based on
subsidiaries' benefit obligations, to better match earnings on total plan
assets with the corresponding subsidiary benefit obligations. The net effect of
these changes was an increase in periodic pension costs (represented by a
decrease in pension accrual credits) of $1.4 million in 1998, all related to
periods prior to the change. The cumulative and pro forma effects of these
changes are not presented on the face of the statements of income because the
impact is immaterial.
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.
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
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-Wisconsin's postretirement health care
costs for the past three years were as follows:
(THOUSANDS OF DOLLARS) 1998 1997 1996
- ------------------------ ---- ---- ----
Service cost $ 431 $ 644 $ 804
Interest cost 2 509 2 694 2 700
Expected return on plan assets (844) (663) (482)
Amortization of transition (asset) obligation 1 239 1 474 1 474
Recognized actuarial (gain) 71
- ----------------------------- ----- ----- -----
Net periodic benefit cost under SFAS 106 $3 335 $4 149 $4 567
NSP-Wisconsin'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. The funded status of the NSP postretirement health care
plan for the past two years is as follows:
<TABLE>
<CAPTION>
TOTAL NSP PLAN NSP-WISCONSIN PORTION
<S> <C> <C> <C> <C>
(THOUSANDS OF DOLLARS) 1998 1997 1998 1997
- ------------------------ ---- ---- ---- ----
Benefit obligation at January 1 $ 279 230 $ 268 683 $ 40 062 $ 37 678
Service cost 3 247 5 095 431 644
Interest cost 15 896 18 872 2 509 2 694
Plan amendments (51 456) (4 697)
Actuarial (gain) loss (9 732) 2 164 336 1 227
Benefit payments (17 423) (15 584) (2 549) (2 181)
- ----------------- --------- --------- ------- -------
Benefit obligation at December 31 219 762 279 230 36 092 40 062
- ---------------------------------- ------- ------- ------ ------
Fair value of plan assets at January 1 19 783 15 514 10 553 8 285
Actual return on plan assets 2 471 1 461 1 386 874
Employer contributions 29 683 18 392 2 737 3 575
Benefit payments (17 423) (15 584) (2 549) (2 181)
- ----------------- ------ ------ ----- -----
Fair value of plan assets at December 31 34 514 19 783 12 127 10 553
- ---------------------------------------- ------ ------ ------ -----
Funded status at December 31 -
unfunded obligation 185 248 259 447 23 965 29 509
Unrecognized transition obligation (104 482) (161 700) (16 176) (22 112)
Unrecognized prior service cost 2 399
Unrecognized net loss (3 790) (14 406) (2 865) (3 071)
- ----------------------- -------- -------- ------- -------
Net amount recognized - accrued liability $ 79 375 $ 83 341 $ 4 924 $ 4 326
========================================== ======== ======== ======= =======
</TABLE>
Weighted average assumptions used in postretirement benefit calculations were:
1998 1997
Discount rate at end of year 6.5% 7.0%
Expected return on plan assets for year 8.0% 8.0%
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 on
NSP-Wisconsin's portion:
1% increase in APBO components at December 31, 1998 $ 4 239 $ 5 809
1% decrease in APBO components at December 31, 1998 (3 535) (5 073)
1% increase in service and interest costs
components of the net periodic cost 384 514
1% decrease in service and interest costs components
of the net periodic cost (315) (445)
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
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-Wisconsin's matching contributions were:
$0.6 million in 1998 and $0.5 million in 1997 and 1996.
6. Parent Company and Intercompany Agreements
The electric production and transmission costs of the NSP System are shared
by NSP-Wisconsin and NSP-Minnesota. A FERC approved agreement (the Interchange
Agreement) between NSP-Wisconsin and NSP-Minnesota provides for the sharing of
all costs of electric generation and transmission facilities of the NSP System,
including capital costs. Billings under the Interchange Agreement and an
intercompany gas agreement which are included in the statement of income are as
follows:
Year Ended December 31
-------------------------
1998 1997 1996
--------- --------- ----------
(Thousands of dollars)
Operating revenues:
Electric $73 674 $71 262 $69 337
Gas $45 $45 $39
Operating expenses:
Purchased and interchange power $190 019 $179 708 $173 492
Gas purchased for resale $213 $231 $216
Other operation $15 066 $11 972 $13 685
7. Regulatory Assets and Liabilities
The following summarizes the individual components of unamortized
regulatory assets and liabilities shown on the Balance Sheet at December 31:
<TABLE>
<S> <C> <C> <C>
(Thousands of dollars) Amortization Period 1998 1997
- ------------------------ -------------------- ---- ----
AFC recorded in plant on a net-of-tax basis Plant Lives<F1> $ 9 795 $ 9 768
Losses on reacquired debt Term of Related Debt 11 887 12 533
Conservation and energy management programs Up to 8 years<F1> 7 032 8 842
Environmental costs As allowed in rates 10 369 1 913
Pensions and other Mainly 10 years 3 384 2 578
- -------------------- ----------------- ----- -----
Total Regulatory Assets $ 42 467 $ 35 634
========================= ======== =======
Excess deferred income taxes collected from customers $ 4 334 $ 3 898
Investment tax credit deferrals 12 132 12 694
Other 5 481 2 714
- ----- ------ ------
Total Regulatory Liabilities $ 21 947 $ 19 306
============================== ======== =======
<FN>
<F1> Earns a return on investment in the ratemaking process.
</FN>
</TABLE>
8. Commitments and Contingent Liabilities
COMMITMENTS NSP-Wisconsin presently estimates capital expenditures will
be $84 million in 1999 and $402 million for 1999-2003.
Rentals under operating leases were approximately $3,385,000, $3,339,000,
and $3,623,000 for 1998, 1997, and 1996, respectively. Future commitments under
these leases generally decline from current levels.
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
PURCHASED GAS CONTRACTS NSP-Wisconsin has contracts for the purchase and
delivery of a significant portion of its natural gas requirements. These
contracts, which expire in various years between 1999 and 2012, require minimum
contractual purchases and deliveries of natural gas. In total, NSP-Wisconsin is
committed to the minimum purchase of approximately $105.4 million of natural gas
and related transportation, or to make payments in lieu thereof, under these
contracts. In addition, NSP-Wisconsin is required to pay additional amounts
depending on actual quantities shipped under these agreements. NSP-Wisconsin
has been very active in developing 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-Wisconsin has other sources of natural gas available and suppliers are
expected to continue to provide reliable natural gas supplies, risk of loss from
non-performance under these contracts is not considered significant. In
addition, NSP-Wisconsin's risk of loss (in the form of increased costs) from
market price changes in natural gas is mitigated through the cost-of-gas
adjustment provision of the ratemaking process, which provides for recovery of
prudently incurred natural gas costs.
NUCLEAR CONTINGENCIES Although NSP-Wisconsin does not own a nuclear
facility, any assessment made against NSP-Minnesota and under the Price-Anderson
liability provisions of the Atomic Energy Act of 1954, would be a cost included
under the Interchange Agreement (see Note 6) and NSP-Wisconsin would be charged
its proportion of the assessment. Such provisions set a limit of $9.8 billion
for public liability claims that could arise from a nuclear incident.
NSP-Minnesota has secured insurance of $200 million to satisfy such claims. 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-Minnesota is subject to an assessment 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 with a maximum funding requirement of $10 million per reactor
during any one year.
ENVIRONMENTAL CONTINGENCIES NSP-Wisconsin may be involved in the cleanup
and remediation at five former landfill or manufactured gas plant 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. NSP-Wisconsin is conducting supplemental investigations of the LaCrosse,
Eau Claire, and Chippewa Falls sites as a result of ongoing monitoring and
revisions to Wisconsin's groundwater standards. These sites were previously
remediated in the 1980's based on the regulatory standards in place at that
time. The Ashland site is described below. 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 WDNR named NSP-Wisconsin as one of three potentially responsible
parties for creosote and coal tar contamination at the Ashland site. The Ashland
site includes property owned by NSP-Wisconsin and two other properties, 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
clean up 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 had until March
1, 1999 to develop its own FS which would then be considered by WDNR in its
decision-making process. This FS was submitted by NSP's consultant. The FS
indicates 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 $10 million to $20 million. NSP officials continue to discuss
remediation options available for the Ashland site, and NSP-Wisconsin's level of
responsibility, with the WDNR.
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
Until the WDNR selects a remediation method and determines the level of
responsibility of each potentially responsible party, NSP is not able to
accurately 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.
LEGAL CLAIMS In the normal course of business, various lawsuits and claims
have arisen against NSP-Wisconsin. Management, after consultation with legal
counsel, has recorded an estimate of the probable cost of settlement or other
disposition for such matters.
On November 24, 1998, Wisconsin Electric Power Company (WEPCO) filed a
complaint against NSP with the FERC. WEPCO alleged that it suffered 21 firm
transmission service curtailments from May 1998 to August 1998 and that these
curtailments violated NSP's obligation under its FERC Order No. 888 electric
transmission service tariff. WEPCO sought 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 December 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. In March 1999, NSP and WEPCO reached a settlement in
principle. NSP and WEPCO will file the agreement with the FERC and anticipate a
FERC decision before summer 1999.
9. Segment Information
Effective December 31, 1998, NSP-Wisconsin adopted SFAS No. 131 -
Disclosures About Segments of an Enterprise and Related Information.
NSP-Wisconsin has two reportable segments; its electric utility and gas utility.
- - NSP-Wisconsin's electric utility generates, transmits, and distributes
electricity primarily in Wisconsin and Michigan. As part of the interconnected
NSP System, it makes sales of electricity for resale and sells wholesale
electricity transmission service.
- - NSP-Wisconsin's gas utility transports, stores, and distributes natural
gas primarily in Wisconsin and Michigan.
Financial information for the electric and gas segments is reported in
various management reports, including reports to NSP-Wisconsin's board of
directors. Assets by segment are not reported to management and are not
included in the disclosures that follow.
To report net income for the electric and gas utility segments,
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, or
- - assigned to electric utility in the case of other income and expense
items.
Intersegment sales are priced at approved tariff rates and are immaterial.
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
BUSINESS SEGMENTS
- ------------------
<TABLE>
<S> <C> <C> <C>
1998 Electric Gas Consolidated
(Thousands of dollars) Utility Utility Total
- ------------------------ ------- ------- -----
Operating revenues from external
customers $398 330 $74 274 $472 604
Intersegment revenues 167 4 571 4 738
- ---------------------- ----- ------ ------
TOTAL REVENUES $398 497 $78 845 $477 342
--------------- ------- ------ -------
Depreciation and amortization $ 33 463 $ 5 672 $ 39 135
Interest income 233 233
Interest expense 17 089 1 590 18 679
Income tax expense 18 868 1 600 20 468
Equity in earnings of
unconsolidated affiliates 969 969
SEGMENT NET INCOME 30 094 2 101 32 195
- -------------------- ------- ------ -------
1997 Electric Gas Consolidated
(Thousands of dollars) Utility Utility Total
- ------------------------ ------- ------- -----
Operating revenues from external
customers $ 382 682 $87 572 $470 254
Intersegment revenues 177 2 218 2 395
- ---------------------- --- ------ ------
TOTAL REVENUES $ 382 859 $89 790 $472 649
--------------- --------- -------- ---------
Depreciation and amortization $ 32 510 $ 5 305 $ 37 815
Interest income 422 422
Interest expense 16 190 1 492 17 682
Income tax expense 19 958 3 352 23 310
Equity in earnings of
unconsolidated affiliates 605 605
SEGMENT NET INCOME 33 076 4 341 37 417
- -------------------- ------- ------ -------
1996 Electric Gas Consolidated
(Thousands of dollars) Utility Utility Total
- ------------------------ ------- ------- -----
Operating revenues from external
customers $ 376 836 $86 401 $463 237
Intersegment revenues 237 2 355 2 592
- ---------------------- ----- ------ ------
TOTAL REVENUES $ 377 073 $88 756 $465 829
--------------- -------- ------ -------
Depreciation and amortization $ 30 857 $ 4 874 $ 35 731
Interest income 98 98
Interest expense 17 324 1 601 18 925
Income tax expense 20 504 4 078 24 582
Equity in earnings of
unconsolidated affiliates 358 358
SEGMENT NET INCOME 32 812 5 885 38 697
- -------------------- ------- ------ -------
The Consolidated Total amounts for income and expense items represent the sum of
utility operating and nonoperating amounts. The depreciation and amortization
amounts in the Statements of Cash Flows are different than reported in the
Consolidated Total column due to the classification of certain depreciation and
amortization amounts as other expense items in the Statements of Income.
<PAGE>
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
10. Summarized Quarterly Financial Data (Unaudited)
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
--------------
<S> <C> <C> <C> <C>
March 31, June 30, September 30, December 31,
1998 1998 1998 1998
------- ------- ------- -------
(Thousands of dollars)
Operating revenues $130 068 $107 083 $113 795 $126 396
Operating income $ 15 582 $ 7 100 $ 11 931 $ 15 017
Net income $ 10 936 $ 2 730 $ 7 885 $ 10 644
Quarter Ended
--------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
------- ------- ------- -------
(Thousands of dollars)
Operating revenues $138 249 $103 796 $104 341 $126 263
Operating income $ 17 259 $ 9 353 $ 11 225 $ 15 763
Net income $ 12 608 $ 4 645 $ 8 242 $ 11 922
</TABLE>
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
--------------------------------------
During 1998 there were no disagreements with NSP-Wisconsin's independent
certified public accountants on accounting procedures
or accounting and financial disclosures.
PART III
Part III of Form 10-K has been omitted from this report in accordance with
conditions set forth in general instructions I (1) (a) and (b) of Form 10-K for
wholly-owned subsidiaries.
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -----------------------------------------------------------------------
ITEM 11 - EXECUTIVE COMPENSATION
- ------------------------------------
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
---------------
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ---------------------------------------------------------------
<PAGE>
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
---------------------------
(a) 1. Financial Statements Page
--------------------- ----
Included in Part II of this report:
Report of Independent Accountants for the years ended
December 31, 1998, 1997, and 1996. 19
Statements of Income and Retained Earnings for
the three years ended December 31, 1998. 20
Statements of Cash Flows for the three
years ended December 31, 1998. 21
Balance Sheets, December 31, 1998 and 1997. 22
Notes to Financial Statements. 24
2. Financial Statement Schedules
-------------------------------
Schedules are omitted because of the absence of the conditions under
which they are required or because the information required is included in the
financial statements or the notes.
3. Exhibits
--------
* indicates incorporation by reference
3.01* Restated Articles of Incorporation as of December 23, 1987.
(Filed as Exhibit 30.01 to Form 10-K Report 10-3140 for the year 1987)
3.02* Copy of the By-Laws of NSP-Wisconsin as amended August 19, 1992.
(Filed as Exhibit 3.02 to Form 10-K Report 10-3140 for the year 1992)
4.01* Copy of Trust Indenture, dated April 1, 1947, From NSP-Wisconsin
to Firstar Trust Company (formerly First Wisconsin Trust Company).
(Filed as Exhibit 7.01 to Registration Statement 2-6982)
4.02* Copy of Supplemental Trust Indenture, dated March 1, 1949.
(Filed as Exhibit 7.02 to Registration Statement 2-7825)
4.03* Copy of Supplemental Trust Indenture, dated June 1, 1957.
(Filed as Exhibit 2.13 to Registration Statement 2-13463)
4.04* Copy of Supplemental Trust Indenture, dated August 1, 1964.
(Filed as Exhibit 4.20 to Registration Statement 2-23726)
4.05* Copy of Supplemental Trust Indenture, dated December 1, 1969.
(Filed as Exhibit 2.03E to Registration Statement 2-36693)
4.06* Copy of Supplemental Trust Indenture, dated September 1, 1973.
(Filed as Exhibit 2.03F to Registration Statement 2-49757)
<PAGE>
- ------
ITEM 14 - EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------------
4.07* Copy of Supplemental Trust Indenture, dated February 1, 1982.
(Filed as Exhibit 4.01G to Registration Statement 2-76146)
4.08* Copy of Supplemental Trust Indenture, dated March 1, 1982.
(Filed as Exhibit 4.08 to form 10-K Report 10-3140 for the year 1982)
4.09* Copy of Supplemental Trust Indenture, dated June 1, 1986.
(Filed as Exhibit 4.09 to Form 10-K Report 10-3140 for the year 1986)
4.10* Copy of Supplemental Trust Indenture, dated March 1, 1988.
(Filed as Exhibit 4.10 to Form 10-K Report 10-3140 for the year 1988)
4.11* Copy of Supplemental and Restated Trust Indenture, dated
March 1, 1991. (Filed as Exhibit 4.01K to Registration Statement
33-39831)
4.12* Copy of Supplemental Trust Indenture, dated April 1, 1991.
(Filed as Exhibit 4.01 to Form 10-Q Report 10-3140 for the
quarter ended March 31, 1991)
4.13* Copy of Supplemental Trust Indenture, dated March 1, 1993.
(Filed as Exhibit to Form 8-K Report dated March 3, 1993)
4.14* Copy of Supplemental Trust Indenture, dated October 1, 1993.
(Filed as Exhibit 4.01 to Form 8-K Report dated September 21, 1993)
4.15* Copy of Supplemental Trust Indenture, dated December 1, 1996.
(Filed as Exhibit 4.01 to Form 8-K Report dated December 12, 1996)
10.01* Copy of Interchange Agreement dated September 17, 1984, and
Settlement Agreement dated May 31, 1985, between NSP-Wisconsin, the
Minnesota Company and LSDP. (Filed as Exhibit 10.10 to Form 10-K
Report 10-3140 for the year 1985)
27.01 Financial Data Schedule
99.01 Statement pursuant to Private Securities Litigation Reform
Act of 1995.
(b) Reports on Form 8-K - The following report on Form 8-K was filed either
-------------------
during the three months ended December 31, 1998, or between December 31, 1998
and the date of this report.
None
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this annual report to be
signed on its behalf by the undersigned, thereunto authorized.
NORTHERN STATES POWER COMPANY
--------------------------------
March 25, 1999 /s/
---
Jerome L. Larsen
President and Chief Executive
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report signed below by the following persons on behalf of the registrant and in
the capacities and on the date indicated.
/s/ /s/
- --- ---
Jerome L. Larsen H. Lyman Bretting
President and Chief Executive Director
(Principal Executive Officer)
/s/ /s/
- --- ---
Roger D. Sandeen P. M. Gelatt
Treasurer and Controller Director
(Principal Financial and Accounting Officer)
/s/ /s/
- --- ---
Ray A. Larson, Jr. Larry G. Schnack
Director Director
/s/
- ---
Loren L. Taylor
Director
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
EXHIBIT
27.01
<ARTICLE> UT
<LEGEND>
This schedule contains summary financial information
extracted from the Statements of Income and Retained
Earnings, Balance Sheets and Statements
of Cash Flows and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 709,784
<OTHER-PROPERTY-AND-INVEST> 10,626
<TOTAL-CURRENT-ASSETS> 88,297
<TOTAL-DEFERRED-CHARGES> 55,004
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 863,711
<COMMON> 86,200
<CAPITAL-SURPLUS-PAID-IN> 10,541
<RETAINED-EARNINGS> 250,890
<TOTAL-COMMON-STOCKHOLDERS-EQ> 347,631
0
0
<LONG-TERM-DEBT-NET> 231,863
<SHORT-TERM-NOTES> 55,900
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 228,317
<TOT-CAPITALIZATION-AND-LIAB> 863,711
<GROSS-OPERATING-REVENUE> 477,342
<INCOME-TAX-EXPENSE> 20,809
<OTHER-OPERATING-EXPENSES> 406,903
<TOTAL-OPERATING-EXPENSES> 427,712
<OPERATING-INCOME-LOSS> 49,630
<OTHER-INCOME-NET> 1,244
<INCOME-BEFORE-INTEREST-EXPEN> 50,874
<TOTAL-INTEREST-EXPENSE> 18,679
<NET-INCOME> 32,195
0
<EARNINGS-AVAILABLE-FOR-COMM> 32,195
<COMMON-STOCK-DIVIDENDS> 26,205
<TOTAL-INTEREST-ON-BONDS> 16,204
<CASH-FLOW-OPERATIONS> 81,360
<EPS-DILUTED> 37.35
</TABLE>
<PAGE>
EXHIBIT 99.01
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Northern States Power Company Cautionary Factors
The Private Securities Litigation Reform Act of 1995 (the Act) provides a
new "safe harbor" for forward-looking statements to encourage such disclosures
without the threat of litigation providing those statements are identified as
forward-looking and are accompanied by meaningful, cautionary statements
identifying important factors that could cause the actual results to differ
materially from those projected in the statement. Forward-looking statements
have been and will be made in written documents and oral presentations of
Northern States Power Company, a Wisconsin Corporation (NSP-Wisconsin). Such
statements are based on management's beliefs as well as assumptions made by and
information currently available to management. When used in NSP-Wisconsin's
documents or oral presentations, the words "anticipate", "estimate", "expect",
"objective", "possible", "potential" and similar expressions are intended to
identify forward-looking statements. In addition to any assumptions and other
factors referred to specifically in connection with such forward-looking
statements, factors that could cause NSP-Wisconsin's actual results to differ
materially from those contemplated in any forward-looking statements include,
among others, the following:
- - Economic conditions including inflation rates and monetary fluctuations;
- - Trade, monetary, fiscal, taxation, and environmental policies of govern-
ments, agencies and similar organizations in geographic areas where
NSP-Wisconsin has a financial interest;
- - Customer business conditions including demand for their products or services
and supply of labor and materials used in creating their products and
services;
- - Financial or regulatory accounting principles or policies imposed by the
Financial Accounting Standards Board, the Securities and Exchange
Commission, the Federal Energy Regulatory Commission and similar entities
with regulatory oversight;
- - Availability or cost of capital such as changes in: interest rates; market
perceptions of the utility industry, or NSP-Wisconsin; or security
ratings;
- - Factors affecting operations such as unusual weather conditions;
catastrophic weather-related damage; unscheduled generation outages,
maintenance or repairs; unanticipated changes to fossil fuel or gas
supply costs or availability due to higher demand, shortages,
transportation problems or other developments; environmental incidents; or
electric transmission or gas pipeline system constraints;
- - Employee workforce factors including loss or retirement of key
executives, collective bargaining agreements with union employees, or work
stoppages;
- - Increased competition in the utility industry, including: industry
restructuring initiatives; transmission system operation and/or
administration initiatives; recovery of investments made under traditional
regulation; nature of competitors entering the industry; retail wheeling;
a new pricing structure; and former customers entering the generation
market;
- - Rate-setting policies or procedures of regulatory entities, including
environmental externalities, which are values established by regulators
assigning environmental costs to each method of electricity generation
when evaluating generation resource options;
- - Social attitudes regarding the utility and power industries;
- - Cost and other effects of legal and administrative proceedings,
settlements, investigations and claims;
- - Technological developments that result in competitive disadvantages and
create the potential for impairment of existing assets;
- - Other business or investment considerations that may be disclosed from time
to time in NSP-Wisconsin's Securities and Exchange Commission filings or in
other publicly disseminated written documents.
- - Factors associated with Y2K compliance that might cause material differences
from the expectations disclosed include, but are not limited to, the
availability of key Y2K personnel, NSP's ability to locate and correct all
relevant computer codes, the readiness of third parties, and NSP's ability
to respond to unforeseen Y2K complications. Such material differences
could result in, among other things, business disruptions, operational
problems, financial loss, legal liability, and similar risks.
NSP-Wisconsin undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. The foregoing review of factors pursuant to the Act should
not be construed as exhaustive or as any admission regarding the adequacy of
disclosures made by NSP-Wisconsin prior to the effective date of the Act.
