SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
or
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For Quarter Ended September 30, 1994 Commission File Number 1-3034
Northern States Power Company
Exact name of registrant as specified in its charter)
Minnesota 41-0448030
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
414 Nicollet Mall, Minneapolis, Minnesota 55401
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 330-5500
None
Former name, former address and former fiscal year, if changed since
last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1994
Common Stock, $2.50 par value 66,905,587 shares
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Northern States Power Company (Minnesota) and Subsidiaries
Statements of Income (Unaudited)
Three Months Ended Nine Months Ended
September 30 September 30
1994 1993 1994 1993
(Thousands of dollars) (Thousands of dollars)
Utility operating revenues
Electric................................................. $570,522 $557,289 $1,577,904 $1,501,948
Gas...................................................... 41,806 44,635 299,850 286,045
Total.................................................. 612,328 601,924 1,877,754 1,787,993
Utility operating expenses
Fuel for electric generation............................. 88,163 82,212 248,887 238,000
Purchased and interchange power.......................... 70,028 70,517 194,071 153,962
Cost of gas purchased and transported.................... 24,987 33,955 188,617 192,823
Other operation.......................................... 76,746 70,913 227,620 227,576
Maintenance.............................................. 41,049 37,636 121,434 119,337
Administrative and general............................... 48,282 42,239 142,532 137,743
Conservation and energy management....................... 7,783 7,808 23,256 21,877
Depreciation and amortization............................ 68,628 67,139 204,340 198,232
Taxes: Property and general.............................. 59,939 57,890 178,315 169,912
Current income tax expense........................ 40,432 42,394 118,174 97,731
Deferred income tax expense....................... (436) 1,314 (2,028) 6,659
Deferred investment tax credits recognized ....... (2,205) (2,169) (7,717) (6,527)
Total.................................................. 523,396 511,848 1,637,501 1,557,325
Utility operating income.................................. 88,932 90,076 240,253 230,668
Other income and expense
Allowance for funds used during construction - equity.... 1,052 2,188 3,245 4,819
Equity in earnings of unconsolidated investees........... 8,143 2,185 20,899 2,949
Other income (expense) - net............................. 5,273 194 6,517 (536)
Total other income...................................... 14,468 4,567 30,661 7,232
Income before interest charges............................ 103,400 94,643 270,914 237,900
Interest charges
Interest on long-term debt............................... 23,863 25,985 69,154 77,898
Other interest and amortization.......................... 5,873 2,604 13,280 6,337
Allowance for funds used during construction - debt...... (2,401) (1,601) (6,188) (4,363)
Total.................................................. 27,335 26,988 76,246 79,872
Net Income ............................................... 76,065 67,655 194,668 158,028
Preferred stock dividends ................................ 3,097 3,743 9,210 11,287
Earnings available for common stock....................... $72,968 $63,912 $185,458 $146,741
Average number of common and equivalent
shares outstanding (000's).............................. 66,867 66,505 66,799 64,664
Earnings per average common share......................... $1.09 $0.96 $2.78 $2.27
Common dividends declared per share....................... $0.660 $0.645 $1.965 $1.920
Statements of Retained Earnings (Unaudited)
Balance at beginning of period............................ $1,152,787 $1,100,176 $1,127,372 $1,099,896
Net income for period..................................... 76,065 67,655 194,668 158,028
Dividends declared:
Cumulative preferred stock............................... (3,097) (3,743) (9,210) (11,287)
Common stock............................................. (44,158) (42,928) (131,233) (125,477)
Balance at end of period.................................. $1,181,597 $1,121,160 $1,181,597 $1,121,160
The Notes to Financial Statements are an integral part of the Statements of Income and Retained Earnings.
Northern States Power Company (Minnesota) and Subsidiaries
Balance Sheets (Unaudited)
September 30, December 31,
1994 1993
ASSETS (Thousands of dollars)
UTILITY PLANT
Electric.................................................. $6,305,554 $6,167,670
Gas....................................................... 658,909 621,871
Other..................................................... 257,381 237,293
Total................................................. 7,221,844 7,026,834
Accumulated provision for depreciation.................. (3,076,487) (2,888,144)
Nuclear fuel.............................................. 787,164 749,078
Accumulated provision for amortization.................. (707,875) (673,669)
Net utility plant..................................... 4,224,646 4,214,099
CURRENT ASSETS
Cash and cash equivalents................................. 39,759 57,812
Short-term investments.................................... 1,627 26
Accounts receivable - net................................. 254,861 266,531
Accrued utility revenues..................................... 78,803 111,296
Federal income tax and interest receivable........... 28,282 20,927
Materials and supplies - at average cost..................... 159,139 145,375
Prepayments and other..................................... 35,598 40,885
Total current assets.................................... 598,069 642,852
OTHER ASSETS
Regulatory assets.................................... 375,965 334,354
Non-regulated property - net......................... 160,696 157,615
Investments in non-regulated projects................ 143,192 45,772
External decommissioning fund and other investments.. 149,643 121,657
Federal income tax and interest receivable........... 57,360 0
Intangible assets and other.......................... 72,112 71,369
Total other assets................................ 958,968 730,767
TOTAL................................................. $5,781,683 $5,587,718
LIABILITIES
CAPITALIZATION
Common stock equity
Common stock and premium - authorized 160,000,000
shares of $2.50 par value, issued shares:
1994, 66,905,587; 1993, 66,879,577............... $712,592 $710,969
Retained earnings....................................... 1,181,597 1,127,372
Leveraged common stock held by ESOP ....................... (4,957) (10,887)
Currency translation adjustments - net............. 1,921 0
Total common stock equity............................. 1,891,153 1,827,454
Cumulative preferred stock and premium - authorized
7,000,000 shares of $100 par value; outstanding
shares: 1994 and 1993, 2,400,000
without mandatory redemption....................... 240,469 240,469
Long-term debt............................................ 1,311,938 1,291,867
Total capitalization.................................. 3,443,560 3,359,790
CURRENT LIABILITIES
Long-term debt due within one year........................ 14,251 90,618
Redeemable long-term debt............................ 141,600 141,600
Short-term debt - primarily commercial paper......... 252,405 106,200
Accounts payable.......................................... 181,716 210,654
Taxes accrued............................................. 218,288 177,853
Interest accrued.......................................... 22,843 24,110
Dividends payable on common and preferred stocks......... 47,255 46,195
Rate refunds to customers............................ 0 12,235
Accrued payroll, vacation and other........................ 68,638 61,557
Total current liabilities............................. 946,996 871,022
OTHER LIABILITIES
Accumulated deferred income taxes......................... 815,992 788,378
Accumulated deferred investment tax credits............... 177,291 187,466
Regulatory liabilities.................................... 243,359 243,880
Pension and other benefit obligations................ 83,936 64,224
Other long-term obligations and deferred income............ 70,549 72,958
Total other liabilities................................ 1,391,127 1,356,906
COMMITMENTS AND CONTINGENT LIABILITIES (See Notes 4, 5 and 6)
TOTAL............................................... $5,781,683 $5,587,718
The Notes to Financial Statements are an integral part of the Balance Sheets.
Northern States Power Company (Minnesota) and Subsidiaries
STATEMENTS OF CASH FLOWS (Unaudited)
Nine Months Ended
September 30
1994 1993
(Thousands of dollars)
Cash Flows from Operating Activities:
Net Income............................................................. $194,668 $158,028
Adjustments to reconcile net income to cash from operating activities:
Depreciation and amortization........................................ 226,867 211,931
Nuclear fuel amortization............................................ 34,737 32,828
Deferred income taxes................................................ (1,788) (9,091)
Deferred investment tax credits recognized........................... (7,950) (6,753)
Allowance for funds used during construction - equity................ (3,245) (4,819)
Equity in earnings of partnerships and unconsolidated subsidiaries... (20,899) (2,949)
Gain from non-regulated project termination settlement............... (9,685) 0
Cash provided by changes in certain working capital items............ 29,481 80,757
Conservation program expenditures - net of amortization.............. (18,905) (9,032)
Cash used for changes in other assets and liabilities................ (29,118) (5,907)
Net cash provided by operating activities 394,163 444,993
Cash Flows from Investing Activities:
Capital expenditures .................................................. (259,529) (242,984)
Decrease in construction payables...................................... (5,259) (3,467)
Allowance for funds used during construction - equity.................. 3,245 4,819
Temporary investment - pollution control bond refinancing proceeds.... 0 (100,000)
(Purchase) sale of short-term investments - net........................ (1,601) 61
Investment in external decommissioning fund............................ (22,230) (23,562)
Proceeds from non-regulated project termination settlement............. 14,000 0
Investments in non-regulated projects and other........................ (89,852) (7,731)
Business acquisitions.................................................. 0 (155,299)
Net cash used for investing activities (361,226) (528,163)
Cash Flows from Financing Activities:
Changes in short-term debt - net issuances (repayments)................ 146,205 (115,061)
Proceeds from issuance of long-term debt............................... 208,525 369,923
Repayment of long-term debt (including reacquisition premium).......... (267,159) (199,856)
Proceeds from issuance of common stock................................. 822 170,437
Dividends paid......................................................... (139,383) (133,303)
Net cash (used for) provided by financing activities (50,990) 92,140
Net (decrease) increase in cash and cash equivalents...................... (18,053) 8,970
Cash and cash equivalents at beginning of period.......................... 57,812 15,752
Cash and cash equivalents at end of period................................ $39,759 $24,722
The Notes to Financial Statements are an integral part of the Statements of Cash Flows.
Northern States Power Company (Minnesota) and Subsidiaries
NOTES TO FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited financial
statements contain all adjustments necessary to present fairly the
financial position of Northern States Power Company (Minnesota) (the
Company) and its subsidiaries (collectively, NSP) as of September 30,
1994 and December 31, 1993, the results of its operations for the three
and nine months ended September 30, 1994 and 1993, and its cash flows
for the nine months ended September 30, 1994 and 1993. Due to the
seasonality of NSP's electric and gas sales, operating results on a
quarterly basis are not necessarily an appropriate base from which to
project annual results.
The accounting policies followed by NSP are set forth in Note 1
to NSP's financial statements in the 1993 Form 10-K. The following
notes should be read in conjunction with such policies and other
disclosures in the Form 10-K.
Certain reclassifications have been made to 1993 financial
information to conform with the 1994 presentation. These
reclassifications had no effect on net income or earnings per share as
previously reported.
1. Accounting Changes
Postemployment Benefits
Effective January 1, 1994 NSP adopted the provisions of Statement
of Financial Accounting Standards (SFAS) No. 112 - Accounting for
Postemployment Benefits. This standard required the accrual of certain
postemployment costs (such as injury compensation and severance) that
are payable in future time periods. The annual expense for costs
accrued under SFAS No. 112 is not materially different than amounts
recognized under NSP's prior accounting method. NSP has recorded its
full liability related to such costs in 1994 but has deferred the pre-
1994 portion chargeable to operating expense (approximately $9 million)
based on the Company's preliminary decision to request amortization and
rate recovery over future periods, consistent with regulatory precedent
for similar costs. On October 26, 1994 the Minnesota Public Utilities
Commission (MPUC) approved another Minnesota utility's request to defer
pre-1994 SFAS No. 112 costs and amortize them over a three-year period.
When the MPUC's order becomes available in the fourth quarter of 1994,
the Company plans to evaluate its cost recovery options for SFAS No. 112
costs, including the possible use of the three-year amortization
procedure approved by the MPUC.
Fair Value Accounting for Certain Investments
Effective January 1, 1994 NSP adopted the provisions of SFAS No.
115 - Accounting for Certain Investments in Debt and Equity Securities.
This new standard resulted in an increase of approximately $4.1 million
to decommissioning investments to present such investments at their
market value at September 30, 1994. This increase represents an
unrealized gain on investments which has been deferred as a regulatory
liability. The Company anticipates the offsetting of such gains against
decommissioning costs in future ratemaking.
Accounting for Employee Stock Ownership Plans (ESOP)
Effective January 1, 1994 NSP adopted the American Institute of
Certified Public Accountants' Statement of Position (SOP) 93-6. This
SOP required the accrual of compensation expense for any market value
increase in uncommitted leveraged ESOP shares. It also required the
reduction of average common shares used to compute earnings per share
by such uncommitted ESOP shares. No compensation expense was required
to be recorded by NSP upon adoption of the SOP. The impact of the
reduction in average common shares had an immaterial impact on 1994
earnings per share (less than 1 cent). Of the 5.4 million shares of the
Company's stock that NSP's ESOP currently holds, an average of
approximately 134,000 uncommitted leveraged ESOP shares were excluded
from earnings per share calculations for the first nine months of 1994.
The fair value of NSP's leveraged ESOP shares approximated cost at
September 30, 1994.
Stock Compensation Expense
The Financial Accounting Standards Board (FASB) had previously
issued an Exposure Draft requiring the accrual of compensation expense
related to certain stock awards beginning in 1997, with disclosure
required beginning in 1994. On June 8, 1994, the FASB postponed issuing
the final version of the proposed new accounting rule, and eliminated
disclosure requirements for 1994.
2. Non-Regulated Earnings and International Investments
NSP's net income for the first nine months of 1994 includes
earnings from all non-regulated businesses of $20.9 million, or $0.31
per share. Through its subsidiaries, NRG Energy, Inc. (NRG), a wholly
owned subsidiary of the Company, has purchased equity interests in
three significant non-regulated international energy projects. Earnings
from equity interests in these international projects for the first nine
months of 1994 were $15.8 million before income taxes and $12.9 million
net of foreign income taxes, or approximately $0.20 per share.
German Projects
In December 1993, a subsidiary of NRG agreed to acquire an
ownership interest in the German corporation Mitteldeutsche
Braunkohlengesellschaft mbh (MIBRAG). MIBRAG was formed by the German
government to operate coal mines, electric power plants, and other
energy related facilities. NRG's subsidiary and its two investor
partners each agreed to acquire 33% interests in MIBRAG, while the
German government retained a 1% interest. The investor partners began
operating MIBRAG effective January 1, 1994, subject to several
contingencies. NSP's earnings for the first quarter of 1994 did not
include NRG's equity in the earnings of MIBRAG due to the unresolved
contingencies. During the second quarter 1994, essentially all of the
contingencies were favorably resolved. Accordingly, in June 1994 NRG
recorded its equity in earnings of the MIBRAG project for the first six
months of 1994. The legal closing occurred on August 11, 1994. Through
September 30, 1994, NRG had invested approximately $15 million,
including capitalized development costs, for its interest in MIBRAG.
Through September 30, 1994, another subsidiary of NRG had invested
$10 million, including capitalized development costs, in its 50% interest
in a German corporation, Saale Energie GmbH (Saale). Saale owns a 400-
megawatt share of a 900-megawatt power plant (Schkopau power station)
currently under construction near Schkopau, Germany. See Note 4 to the
Financial Statements for further discussion of commitments related to
this project.
Australian Projects
Through March 1994, another subsidiary of NRG had invested
approximately $70 million, including capitalized development costs, in
a joint venture which acquired a 1680-megawatt coal-fired power plant
in Gladstone, Queensland, Australia. NRG's investment represents a
37.5% ownership in the Australian plant.
Foreign Currency Transactions
Local currencies are generally the functional currency of NSP's
foreign operations. Assets and liabilities of international
subsidiaries are translated at end-of-period rates of exchange. Income,
expense and cash flows are translated at weighted-average rates of
exchange for the period. The resulting currency translation adjustments
are accumulated and reported as a separate component of shareholder's
equity.
Gains and losses that result from translation of foreign currency
transactions (i.e. converting cash into a different currency at a
translation rate different from that which applied when the receivable
or payable was accrued) will be included in the results of operations.
Through September 30, 1994, NRG had not experienced any material
translation gains or losses from foreign currency transactions which
have occurred since the respective investment dates.
NRG does not speculate in foreign currencies. NRG's policy
is to hedge foreign currency denominated investments as they are made
to preserve the U.S. dollar value of its equity position in foreign
currency denominated investment assets. NRG has entered into hedging
transactions through the use of forward foreign currency exchange
agreements. Gains and losses on these contracts offset the effect of
foreign currency exchange rate fluctuations on the valuation of the
investments underlying the hedges. The net effect of these gains and
losses is reported with other currency translation adjustments as a
separate component of stockholders' equity. NRG is not hedging currency
translation adjustments related to operating results.
As a part of its hedging program, NRG has entered into three
forward foreign currency exchange contracts with a counterparty.
Pursuant to these contracts, transactions have been executed which are
designed to protect the economic value of NRG's equity investments that
are denominated in Australian dollars and German deutsche marks (DM).
Management believes NRG's exposure to credit risk due to nonperformance
by the counterparty to its forward exchange contracts is not significant
based on the Investment Grade credit rating of the counterparty.
NRG's forward foreign currency exchange contracts hedge
approximately $83 million of foreign currency denominated investments
and $10 million of foreign currency denominated investment commitments
at September 30, 1994. These forward foreign currency exchange
contracts are not reflected in NSP's balance sheet. The contracts
terminate in 2004 and require foreign currency interest payments by
either party during each year of the contract. If the contracts had
been terminated at September 30, 1994, $1.7 million would have been
payable to NRG for currency exchange rate changes to date.
Income Taxes for International Operations
It is the intention of NSP's management to indefinitely reinvest
the earnings of foreign operations. Accordingly, U.S. deferred income
taxes and foreign withholding taxes have not been provided on the
earnings of foreign subsidiary companies. The cumulative amount of
undistributed pretax earnings of foreign subsidiaries upon which no U.S.
deferred income taxes or foreign withholding taxes have been provided
is approximately $15.8 million at September 30, 1994. The additional
U.S. income tax and foreign withholding tax on the unremitted foreign
earnings, if repatriated, would be offset in whole or in part by foreign
tax credits, and thus it is impracticable to estimate the amount of tax
that might be payable.
U.S. Cogeneration Project
In July 1994, Michigan Cogeneration Partners Limited Partnership
(MCP), a joint venture between subsidiaries of NRG and Cogentrix Energy,
Inc., reached an agreement with Consumers Power Company (Consumers), an
electric utility headquartered in Jackson, Michigan, to terminate the
power sales contract related to a 65 megawatt cogeneration facility being
developed by MCP in Parchment, Michigan. The agreement to terminate the
contract required Consumers to make a payment to MCP of $29.8 million. As
a result, NRG has recorded a net gain from the termination of this contract
which has increased NSP's earnings by approximately nine cents per share in
the third quarter of 1994. NRG's net gain from the termination in the
third quarter has been partially offset by a write-down of investments in
other domestic energy projects which decreased NSP's earnings by approximately
four cents per share.
3. Investments Accounted for by the Equity Method
Project Investments - NSP has investments in various projects
accounted for by the equity method of accounting. Current investments
include both international and domestic energy projects and domestic
affordable housing and real estate projects. Prior to 1994 such
investments had been limited to immaterial domestic projects. The
equity method is applied to investments in which NSP does not have a
majority interest or is not able to exercise a controlling influence
over operating and financial policies. A summary of the significant
investments is as follows:
Economic Placed in
Name Geographic Area Interest Service
Various Independent Power
Production Facilities United States 45%-50% July 1991-June 1993
Affordable Housing-Ltd.
Partnerships United States 50%-99% April 1993-May 1994
Western Syncoal
Partnership United States 50% August 1993
MIBRAG Europe 33.0% January 1994
Gladstone Power Station Australia 37.5% March 1994
Schkopau Power Station Europe 20.6% Under Construction
Summarized Financial Information of Unconsolidated Investees -
Summarized financial information for these projects, including interests
owned by NSP and other parties, was as follows as of September 30, 1994
and for the nine-month period then ended:
Financial Position Results of Operations
(Millions of dollars) (Millions of dollars)
Current Assets $489.2 Operating Revenues $513.5
Other Assets 1,311.3
Operating Income $68.9
Total Assets $1,800.5
Net Income $69.1
Current Liabilities $126.9
Other Liabilities 1,224.5
Equity 449.1
Total Liabilities and Equity $1,800.5
4. Commitments and Contingent Liabilities
The Company's public liability for claims resulting from any
nuclear incident, and insurance coverage thereon, have not changed
significantly from the circumstances set forth in Note 15 to the
Company's financial statements contained in the Company's 1993 report
on Form 10-K.
NRG is contractually committed to additional equity investments
in Saale. Such commitments are for approximately DM 16.5 million in
1994, DM 36 million in 1995, and DM 35 million in 1996. The 1994
commitment has been hedged through a forward foreign currency exchange
contract for $10 million. The 1995 and 1996 commitments would be
approximately $23 million each year, based on exchange rates in effect
at September 30, 1994.
5. Resolution of Operating Contingency
The onsite storage pool for spent nuclear fuel at the Company's
Prairie Island Nuclear Generating Plant (Prairie Island) was filled
during refueling in June 1994, so adequate space for a subsequent
refueling is no longer available. In anticipation of this, the Company
proposed construction of a temporary onsite dry cask storage facility
for spent nuclear fuel at Prairie Island. The Minnesota Legislature
(Legislature) considered the dry cask storage issue during its 1994
legislative session as required by a Minnesota Court of Appeals ruling
in June 1993.
On May 10, 1994, the Governor of the State of Minnesota (Governor)
signed into law a bill passed by the Legislature on May 6, 1994. The
law authorizes the Company to install 17 dry casks at Prairie Island if
the Company satisfies certain responsibilities. The Company executed
an agreement with the Governor concerning the renewable energy and
alternative siting commitments contained in the new law and is now
authorized the first increment of five casks. The second increment of
four casks would be available if the Minnesota Environmental Quality
Board finds that by December 31, 1996, the Company has applied to the
Nuclear Regulatory Commission for an alternative site license for the
temporary spent nuclear fuel storage facility, used good faith in
locating an alternative site and has committed to build or purchase 100
megawatts of wind generation. The final increment of eight casks would
be available unless prior to June 1, 1999, the Legislature specifically
revokes the authorization for the final eight casks. The Legislature
can revoke the authorization if an alternative storage site is not
operational or under construction, or the Company fails to meet certain
renewable energy commitments, including the increased use of wind power
and biomass generation facilities by December 31, 1998.
The Company has taken steps to comply with the new legislative
requirements. Currently, 25 megawatts (Mw) of wind generation are in
place and all significant permit applications have been filed for
another 100 Mw. The Company anticipates filing with the MPUC a proposal
for the first 50 Mw of biomass generation later this fall. In addition,
the Company announced its plan to seek significant public input in its
exploration for an alternative interim spent nuclear fuel storage site
in Goodhue County. The Company's construction commitments are not
expected to be materially different than levels previously disclosed in
the 1993 Form 10-K as a result of the 1994 Prairie Island legislation.
The impact of the legislation on power purchase commitments is not yet
determinable.
An updated nuclear decommissioning study and nuclear plant
depreciation capital recovery request was filed with the MPUC in July
1994 for the Company's nuclear power plants. Although management
expects to operate the Prairie Island plant units through the end of
their useful lives, the requested capital recovery would allow for the
plant to be fully depreciated, including the accrual and recovery of
decommissioning costs, about six years earlier than the end of its
useful life. The proposed recovery period has been reduced because of
the uncertainty regarding the spent fuel storage situation. The study
supports a decrease in cost estimates for decommissioning. The combined
impact of the request if approved as filed, including the shorter
depreciation period and lower decommissioning costs, would be a decrease
of about $500,000 in annual depreciation and decommissioning expenses.
Although there is no time deadline for MPUC action, the Company is
hopeful of a decision by the end of the year.
6. Rate Matters
NSP's 1993 Annual Report on Form 10-K discussed an appeal filed
by intervenors in the Company's 1993 Minnesota electric and gas rate
cases. On August 2, 1994, the Minnesota Court of Appeals affirmed the
final rate orders issued in January 1994 for these rate cases. This
appeal process is now completed. As a result of this decision, no
adjustments or changes are required to rates charged to customers or to
revenues recorded by the Company.
On August 9, 1994 the Company applied to the North Dakota Public
Service Commission (NDPSC) for a rate reduction of $3.6 million in
annual electric revenues. The reduction reflects a correction in cost
allocations to the North Dakota jurisdiction. The Company also
requested authority to make refunds to customers to effectively
implement the reduction as of June 1, 1994. On November 9, 1994, the
NDPSC approved the proposed rate reduction, the liability for which has
been accrued as of September 30, 1994. In early 1995 the NDPSC will
address the possibility of retroactive refunds for the period January 1,
1989 through June 1, 1994. Due to the uncertainty surrounding this issue,
no accrued liability has been recorded for retroactive refunds.
In 1991, the Minnesota legislature passed a law which granted the
MPUC authority to approve a rate adjustment clause for changes in
certain costs (including property taxes, fees and permits) incurred by
Minnesota public utilities. The MPUC may approve a utility's use of the
rate adjustment clause for billing customers if certain conservation
expenditure levels are met. On September 30, 1994 and October 4, 1994,
the Company filed for approval of the use of the rate adjustment clause
for billing its electric and gas customers, respectively, beginning in
January 1995. The potential annual revenue increase from these filings
is approximately $18.4 million.
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Results of Operations
Northern States Power Company's earnings per share for the third
quarter ended September 30, 1994, were $1.09, up $.13 from the $.96
earned for the same period a year ago. For the first nine months of
1994, earnings per share were $2.78, up $.51 from the $2.27 earned in
the comparable period a year ago. The number of average common and
equivalent shares outstanding (considering stock options and awards)
during the third quarter and first nine months of 1994 increased in
comparison to 1993 by approximately 362,000 shares due to the exercise
and granting of stock options and awards, and 2,135,000 shares due
mainly to a general stock offering made in May 1993, respectively.
In addition to items noted in the 1993 Form 10-K, the historical
and future trends of NSP's operating results have been and are expected
to be impacted by the following factors:
Non-regulated Businesses - Through September 1994, NSP's non-
regulated businesses have provided a $.25 increase in earnings per share
due mainly to income contributions from various energy projects. See
Notes 2 and 3 to the Financial Statements for more information on these
projects.
Prairie Island Nuclear Fuel Storage - In May 1994 the Minnesota
Legislature approved a plan for the temporary onsite storage of spent
nuclear fuel at the Company's Prairie Island Nuclear Generating Plant,
if the Company satisfies certain responsibilities. See Note 5 to the
Financial Statements for more information on this matter.
Accounting Changes - Effective January 1, 1994, NSP adopted three
new accounting standards for postemployment benefits, fair value
accounting for certain investments and employee stock ownership plan
transactions. These accounting changes had an immaterial impact on
earnings in the third quarter of 1994, and are not expected to have a
material impact on the full year 1994. See Note 1 to the Financial
Statements for more information on these accounting changes.
Rate Changes - The Company has proposed a $3.6 million annual
reduction in rates charged to electric customers in North Dakota
effective June 1, 1994. See Note 6 to the Financial Statements for
discussion of this and other potential rate changes.
Third Quarter 1994 Compared with Third Quarter 1993
Electric revenues for third quarter 1994 compared with third
quarter 1993 increased $13.2 million or 2.4%. Retail revenues increased
approximately $17.8 million or 3.5% largely due to a 3.0% increase in
electric retail sales and a 0.5% average retail price increase. The
increase in sales levels is due mainly to sales growth. The retail
price increase is due to fuel expense recovery. Revenues from sales to
other utilities decreased by $7.5 million mainly due to a 22.8% sales
decrease. The sales volume decrease is due to the unusually high sales
in 1993 to utilities affected by flooding.
Gas revenues for the third quarter 1994 decreased $2.8 million or
6.3% compared with the third quarter of 1993. Firm gas revenues
decreased $4.9 million or 16.0% due to a 8.9% decrease in gas sales
volume and a 7.7% average retail price decrease. The sales volume
decrease is due primarily to weather impacts in September. The price
decrease is due to rate adjustments for decreased purchased gas costs
resulting from changed natural gas supply and demand market conditions.
Other gas revenues increased $1.7 million due mainly to a new revenue
source, supplying gas to industrial customers not on NSP's system.
Fuel for electric generation and Purchased and interchange power
combined for a net increase of $5.5 million or 3.6% for the third
quarter of 1994 compared with the third quarter of 1993. Fuel expense in
the third quarter increased mainly due to higher 1994 generation levels
of fossil fuel plants as a result of a scheduled nuclear plant
maintenance and refueling outage and higher customer energy
requirements in 1994 compared to the same time period in 1993. These
factors also contributed to an increase in the amount of power purchased
over the same period. Fuel expenses also increased due to a higher
average cost of nuclear fuel in 1994 compared with 1993 due to full
utilization of nuclear plants in 1993. These increased fuel and
purchased power expenses were partially offset by lower market pricing of
purchased power in 1994 due to more favorable conditions existing in
third quarter 1994 compared with third quarter 1993.
Cost of gas purchased and transported for the third quarter 1994
compared with the third quarter 1993 decreased $9.0 million or 26.4% due
to lower cost per thousand cubic feet (Mcf) of purchased gas, and gas
cost adjustments due to purchased gas adjustment clauses. The impact
of the cost decrease of lower firm sales volumes was offset by the
impact of supplying gas to industrial customers not on NSP's system.
Other operation, Maintenance and Administrative and general
expenses together increased $15.3 million or 10.1% compared with the
third quarter 1993. The higher costs are due mainly to the timing of
expenses rather than a long-term increase in costs. First, costs
increased by $4.3 million due to a scheduled nuclear plant refueling and
maintenance outage in third quarter 1994 compared with no similar costs
in third quarter 1993. Also, $3.6 million of tree trimming costs,
delayed from earlier in the year, increased expenses in the third
quarter 1994 compared to the same period a year ago. Finally,
approximately $4 million of the 1994 expense increase relates to
postretirement health care cost accruals, including amounts deferred
from 1993.
Depreciation and amortization increased $1.5 million or 2.2%
compared with the third quarter 1993. The increase is mainly due to
increased plant in service between the two periods.
Property and general taxes for the third quarter 1994 compared
with the third quarter of 1993 increased $2.0 million or 3.5% due
primarily to higher property tax rates in the State of Minnesota.
General taxes increased due to higher gross earnings taxes from higher
sales levels in 1994.
Income taxes for the third quarter 1994 compared with the third
quarter 1993 decreased $3.7 million or 9.0% primarily due to lower
pretax operating income between the two periods. In addition, income
taxes were higher in third quarter 1993 due to a 1% statutory federal
tax rate increase enacted in August 1993, retroactive to January 1,
1993.
Equity in earnings of unconsolidated investees increased $6.0
million in the third quarter 1994 compared with the same period a year
ago, due primarily to earnings contributions from NRG's equity in
earnings of international energy projects.
Other income (expense) - net increased $5.1 million in the third
quarter 1994 compared with the same period a year ago primarily due to
interest income associated with the settlement of an NSP federal income
tax dispute. This increase was offset in part by foreign income taxes
related to NRG's equity in earnings of international energy projects.
First Nine Months of 1994 Compared with First Nine Months of 1993
Electric revenues for the nine months of 1994 compared with the
first nine months of 1993 increased $76.0 million or 5.1%. Retail
revenues increased approximately $78.9 million or 5.8% due to both
higher sales levels and rate increases. Retail electric sales increased
3.8% in 1994 due to sales growth and more favorable weather in 1994,
while price per unit increased 1.9% due to fuel expense recovery and
recognition of the full impact of Minnesota electric retail rate
increases in 1994.
Gas revenues increased $13.8 million or 4.8% compared to the first
nine months of 1993. Firm gas revenues decreased approximately $3.8
million or 1.6% due to a 0.8% decrease in gas sales volumes and an
average price decrease of 0.8%. Interruptible gas revenues decreased
$0.8 million or 2.2% compared to the first nine months of 1993 due
mainly to lower sales volumes. Revenues from Viking Gas Transmission
Company, which was acquired in June 1993, increased revenues by $7.3
million. Other gas revenues increased $10.5 million, mainly due to a
new revenue source, supplying gas to industrial customers not on NSP's
system.
Fuel for electric generation and Purchased and interchange power
together increased $51.0 million or 13.0% over the nine months ended
September 1993. The increase was due mainly to higher cost of purchased
power, primarily resulting from increased demand expenses associated
with the new Manitoba Hydro contract effective in May 1993 and increased
market pricing of purchases in 1994 compared to more favorable market
pricing conditions in the first half of 1993. Also, power purchases
were higher in 1994 than 1993 due to increased customer energy
requirements. Fuel costs for electric generation increased due to higher
1994 fossil fuel generation levels to meet increased customer energy
requirements and due to scheduled outages of lower cost plants.
Cost of gas purchased and transported for the first nine months
of 1994 compared with the first nine months of 1993 decreased $4.2
million or 2.2%. This is mainly the result of a lower cost of purchased
gas due to market conditions and lower purchased gas cost adjustments,
offset by higher sendout volumes primarily due to supplying gas to
industrial customers not on NSP's system.
Other operation, Maintenance and Administrative and general
expenses together increased $8.6 million or 1.8%. The increase is due
entirely to higher postretirement health care costs in 1994, including
amounts which were deferred from 1993.
Depreciation and amortization increased $6.1 million or 3.1%
compared to the nine months ended September 1993. The increase is due
primarily to increased plant in service between the two periods.
Property and general taxes increased $8.4 million or 4.9% compared
with the first nine months of 1993. The increase is due mainly to
higher property tax rates in the State of Minnesota and also due to
higher gross earnings taxes due to higher sales levels in 1994.
Income taxes for the first nine months of 1994 compared with the
first nine months of 1993 increased $10.6 million or 10.8%. The
increase is due primarily to higher pretax operating income between the
two periods.
Equity in earnings of unconsolidated investees increased
approximately $18.0 million in the first nine months of 1994 compared
with the same period a year ago, due primarily to earnings contributions
from NRG's international projects.
Other income (expense) - net increased $7.1 million compared with
the first nine months of 1993 due primarily to interest income
associated with the settlement of an NSP federal income tax dispute.
In addition, higher income from non-regulated operations was offset by
foreign income taxes related to NRG's equity in earnings of
international energy projects.
Interest charges before allowance for funds used during
construction have decreased $1.8 million or 2.1% compared with the first
nine months of 1993 due to refinancings, retirements of long-term debt,
and increased use of lower-cost short-term commercial paper borrowings,
partially offset by new debt incurred in connection with businesses
acquired in 1993.
Liquidity and Capital Resources
The Company had $250.3 million in commercial paper debt
outstanding as of September 30, 1994. The Company plans to keep credit
lines of at least 85% of the maximum level of commercial paper
borrowings. Commercial banks currently provide credit lines of
approximately $299 million. These credit lines make short-term
financing available in the form of bank loans and support for commercial
paper sales. The Company has regulatory approval for up to $350 million
in short-term borrowing levels.
Commercial banks currently provide credit lines of $11 million to
wholly owned subsidiaries of the Company. Approximately $9 million of
those credit lines remained available at September 30, 1994.
In January 1994, stock options for the purchase of 290,138 shares
were awarded. As of September 30, 1994, a total of 784,489 stock
options were outstanding, which were considered as potential common
stock equivalents for earnings per share purposes.
As of September 30, the Company has issued 26,010 new shares of
common stock in 1994. All of these new shares were issued under the
Executive Long-Term Incentive Award Stock Plan.
On February 10, 1994 the Company issued $200,000,000 of first
mortgage bonds due February 1, 1999 with an interest rate of 5 1/2%.
The proceeds from these bonds were used to redeem $30,000,000 in
principal amount of its 6 1/8% First Mortgage Bonds, due June 1, 1995
at a redemption price of 100.29%, to redeem $45,000,000 in principal
amount of its 5 7/8% First Mortgage Bonds due August 1, 1996 at a
redemption price of 100.51%, to redeem $30,000,000 in principal amount
of its 6 1/2% First Mortgage Bonds due October 1, 1997 at a redemption
price of 100.75%, and to redeem $45,000,000 in principal amount of its
6 3/4% First Mortgage Bonds due May 1, 1998 at a redemption price of
100.93%. The remaining proceeds were added to the general funds of the
Company and used to repay short-term borrowings.
NSP has three interest rate swap agreements covering first
mortgage bonds of approximately $320 million. These agreements
effectively convert the interest costs of these debt issues from fixed
to variable rates based on short-term interest rates. Thus, market
risks associated with these agreements result from short-term interest
rate fluctuations. Credit risk related to nonperformance of the
counterparties is not deemed significant, but would result in NSP
recording interest expense at the stated rate of each bond issue. While
such agreements are not reflected on NSP's balance sheets, interest rate
swap transactions are recognized as an adjustment of interest expense
over the terms of the agreements.
The Company entered into one such interest rate swap agreement
during 1994 with Kidder, Peabody Global Capital Corporation, which
effectively converted the interest cost of the 5 1/2% first mortgage
bonds issued on February 10, 1994 from fixed rate to variable rate. The
variable rate is set six months in arrears based on a short-term interest
rate indicator with the rate changing on February 1 and August 1 of
each year until final maturity. Accrued interest expense is recorded
at estimated net interest rates until the actual rate is set. The net
interest rate charged for the six months ended August 1, 1994 was
approximately 4.6%. The estimated net interest rate accrued for the
two months ended September 30, 1994 was approximately 5.4%.
On February 25, 1994 the Company repurchased $10,000,000 of 9 3/8%
First Mortgage Bonds due June 1, 2020 at a price of 112.75%. On April
12, 1994 the Company repurchased another $20,000,000 of these 9 3/8%
bonds at a price of 110.24%.
On May 17, 1994 NSP's wholly owned subsidiary, United Power and
Land (UP&L) issued long-term debt of $10,000,000. The debt carries an
interest rate of 7.62%, matures in 2000 and is secured by UP&L property.
Proceeds were used to recapitalize NSP's equity investment in UP&L.
On October 5, 1994 the Company issued $150,000,000 of first
mortgage bonds due October 1, 2001 with an interest rate of 7 7/8%. The
proceeds from these bonds were used to repay short-term commercial paper
borrowings which had been increased while the Company was evaluating the
issuance of the bonds during the first nine months of 1994. The Company
continues to evaluate the early redemption of higher rate securities
and, depending on capital market conditions, may refinance them with
lower rate long-term debt.
During the first quarter of 1994, the Company was placed on
"credit watch" by Moody's Investors Service and Duff & Phelps Credit
Rating Co. (D&P) due to the prior uncertainty regarding Prairie Island.
D&P removed the Company from credit watch on May 9, 1994, following
passage of the law regarding Prairie Island, and reaffirmed the previous
bond ratings. On May 20, 1994, Moody's Investors Service downgraded the
credit ratings of the Company and Northern States Power Company
(Wisconsin), a wholly owned subsidiary of the Company. The new ratings
are as follows: first mortgage bonds and secured pollution control
bonds to A1 from Aa2; shelf registration of senior secured debt to (P)
A1 from (P) Aa2; unsecured pollution control bonds to A2 from Aa3;
preferred stock to "a2" from "aa3"; and shelf registration for preferred
stock to (P) "a2" from (P) "aa3". The commercial paper rating of the
Company remains unchanged at P-1.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
On May 27, 1994, the Company was notified by the United States
Environmental Protection Agency (USEPA) that it is a potentially
responsible party (PRP) at the Union Scrap Iron & Metal III Superfund
site in Minneapolis, Minnesota, which is in addition to the sites
identified in NSP's 1993 Annual Report on Form 10-K. The USEPA states
that total costs incurred to investigate and remediate the site were
approximately $1,000,000. Over 25 parties have received similar
notifications. On October 17, 1994, the Company was notified of a
potential settlement between the United States and PRPs. Under the
proposed settlement the Company would be required to pay $30,000. If
settlement is not reached, it is likely the USEPA would sue the Company
and other PRPs for recovery of the remediation costs.
In October 1992, the Company disclosed to the Minnesota Pollution
Control Agency (MPCA), the USEPA and the Nuclear Regulatory Commission
that reports on halogen content of water discharged at Prairie Island
were based on estimates of halogen content rather than actual physical
samples of water discharged as required by the plant's National
Pollution Discharge Elimination System permits. Even though the water
discharges at the plant did not exceed the halogen levels allowed under
the permits, the applicable state and federal statutes would permit the
imposition of fines, the institution of criminal sanctions and/or
injunctive relief for the reporting violations. Corrective actions were
taken by the Company. The Company and the MPCA are currently
negotiating a Stipulation Agreement to address monitoring procedures
used at Prairie Island between January and September 1992 that allegedly
did not comply with the permits. The MPCA is alleging noncompliance
with permit terms and conditions and is proposing a civil penalty of
$105,436.
For a discussion of proceedings involving NSP's utility rates, see
Note 6 to the Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.01 Ownership and Operating Agreement, dated March 11, 1982,
between the Company, Southern Minnesota Municipal Power
Agency and United Minnesota Municipal Power Agency
concerning Sherburne County Generating Unit No. 3.
10.02 Transmission agreement, dated April 27, 1982, and
Supplement No. 1, dated July 20, 1982, between the Company
and Southern Minnesota Municipal Power Agency.
10.03 Power agreement, dated June 14, 1984, between the Company
and the Manitoba Hydro-Electric Board, extending the
agreement scheduled to terminate on April 30, 1993, to
April 30, 2005.
27.01 Financial Data Schedule - September 30, 1994
(b) Reports on Form 8-K. The following reports on Form 8-K were
filed either during the three months ended September 30, 1994,
or between September 30, 1994 and the date of this report:
July 18, 1994 (Filed August 3, 1994) - Item 5. Other Events.
Re: Disclosure of termination of a cogeneration project by
Michigan Cogeneration Partners (an investee of the Company's
wholly owned subsidiary, NRG Energy, Inc.) and Consumers Power
Company.
September 7, 1994 (Filed September 8, 1994) - Item 5. Other
Events. Re: Disclosure of election of NSP Generation
officers. Douglas D. Antony was elected President, NSP
Generation and Edward L. Watzl was elected Vice President,
Nuclear Generation.
October 4, 1994 - Other 5. Other Events. Re: Disclosure of a
net gain of approximately nine cents per share associated with
the Michigan Cogeneration Partners contract termination to be
recorded in the third quarter of 1994. Also, disclosure of
negotiation of a Stipulation Agreement to address monitoring
procedures used at the Company's Prairie Island Nuclear
Generating Plant.
October 5, 1994 (Filed October 7, 1994) - Item 5. Other Events.
Re: Disclosure of Underwriting Agreement and filing of a
prospectus supplement relating to $150,000,000 in aggregate
principal amount of the Company's First Mortgage Bonds, Series
due October 1, 2001. Item 7. Financial Statements and
Exhibits. Re: Filing of Underwriting Agreement between the
Company and Kidder, Peabody & Co. Incorporated, Citicorp
Securities, Inc., Lehman Brothers, J. P. Morgan Securities
Inc., NatWest Capital Markets Limited, and Salomon Brothers Inc
relating to $150,000,000 First Mortgage Bonds, Series due
October 1, 2001; Filing of Supplemental Trust Indenture
relating to First Mortgage Bonds, due October 1, 2001; Filings
of computation of ratio of earnings to fixed charges.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
NORTHERN STATES POWER COMPANY
(Registrant)
(Roger D. Sandeen)
Roger D. Sandeen
Vice President, Controller and
Chief Information Officer
(Edward J. McIntyre)
Edward J. McIntyre
Vice President and Chief Financial
Officer
Date: November 14, 1994