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 June 30, 1997 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 July 31, 1997
Common Stock, $2.50 par value 69,292,619 shares
Item 1. Financial Statements
Northern States Power Company (Minnesota) and Subsidiaries
Consolidated Statements of Income (Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
1997 1996 1997 1996
(Thousands of dollars)
Utility operating revenues
Electric................... $518,042 $506,763 $1,037,177 $1,019,706
Gas........................ 76,281 85,495 299,643 291,262
Total...................... 594,323 592,258 1,336,820 1,310,968
Utility operating expenses
Fuel for electric
generation.............. 68,147 70,128 149,441 146,220
Purchased and interchange
power................... 72,024 59,789 130,312 122,695
Cost of gas purchased and
transported............. 42,379 51,505 194,399 185,030
Other operation........... 93,659 81,795 182,459 165,058
Maintenance............... 40,736 40,326 84,238 87,394
Administrative and general 36,316 40,419 70,943 75,359
Conservation and energy
management.............. 16,009 13,788 33,308 29,979
Depreciation and
amortization............ 80,649 76,093 160,491 150,746
Taxes:Property and General 56,244 59,786 117,597 119,914
Current income...... 26,943 32,493 73,160 87,320
Deferred income..... (2,191) (2,467) (9,214) (14,421)
Investment tax
credits recognized (2,178) (2,198) (4,356) (4,405)
Total................... 528,737 521,457 1,182,778 1,150,889
Utility operating income... 65,586 70,801 154,042 160,079
Other income (expense)
Equity in earnings of un-
consolidated affiliates. 4,789 6,142 11,966 12,131
Allowance for funds used
during construction -
equity.................. 1,507 1,542 3,821 4,123
Merger costs.............. (29,005) 0 (29,005) 0
Other income (deductions)
- net................... (1,558) (4,969) (5,223) (8,396)
Income taxes on non-
regulated operations and
non-operating items..... 16,811 3,210 23,201 7,238
Total ................... (7,456) 5,925 4,760 15,096
Income before financing
costs.................... 58,130 76,726 158,802 175,175
Financing costs
Interest on utility long-
term debt............... 25,698 25,355 51,248 50,376
Other utility interest and
amortization............. 5,029 5,597 9,894 10,596
Nonregulated interest and
amortization............. 8,044 4,867 13,005 8,932
Allowance for funds used
during construction -
debt..................... (2,832) (2,475) (5,934) (5,321)
Total interest charges... 35,939 33,344 68,213 64,583
Distributions on redeemable
preferred securities of
subsidiary trust......... 3,938 - 6,563 -
Total financing costs....... 39,877 33,344 74,776 64,583
Net Income ................. 18,253 43,382 84,026 110,592
Preferred stock dividends and
redemption premiums ....... 2,371 3,061 6,328 6,123
Earnings available for common
stock...................... $15,882 $40,321 $77,698 $104,469
Average number of common and
equivalent shares
outstanding (000's)........ 68,871 68,661 68,849 68,486
Earnings per average common
share*..................... $0.23 $0.59 $1.13 $1.53
Common dividends declared per
share.... $0.705 $0.690 $1.395 $1.365
Consolidated Statements of Retained Earnings (Unaudited)
Balance at beginning of
period................... $1,354,894 $1,284,516 $1,340,799 $1,266,026
Net income for period...... 18,253 43,382 84,026 110,592
Dividends declared:
Preferred stock........... (2,371) (3,061) (5,180) (6,123)
Common stock.............. (48,511) (47,634) (96,232) (93,292)
Premium on redeemed
preferred stock.......... 0 0 (1,148) 0
Balance at end of period... $1,322,265 $1,277,203 $1,322,265 1,277,203
The Notes to Financial Statements are an integral part of the Statements of
Income and Retained Earnings.
* As described in the Management's Discussion and Analysis, earnings for the
three and six months ended June 30, 1997, were reduced by $0.25 per share due
to the write-off of $29 million in merger related costs.
Northern States Power Company (Minnesota) and Subsidiaries
Consolidated Balance Sheets (Unaudited)
June 30, December 31,
1997 1996
ASSETS (Thousands of dollars)
Utility Plant
Electric..................... $6,878,676 $6,766,896
Gas.......................... 768,751 750,449
Common....................... 331,319 331,441
Total.................... 7,978,746 7,848,786
Accumulated provision
for depreciation......... (3,757,070) (3,611,244)
Nuclear fuel................. 912,209 892,484
Accumulated provision for
amortization............. (811,125) (792,146)
Net utility plant........ 4,322,760 4,337,880
Current Assets
Cash and cash equivalents.... 53,133 51,118
Customer accounts receivable
- net...................... 252,767 288,330
Unbilled utility revenues.... 94,512 147,366
Notes receivable............. 36,147 9,435
Other receivables............ 51,967 73,889
Fossil fuel inventories -
at average cost............ 36,228 45,013
Materials and supplies in-
ventories - at average cost 110,044 109,425
Prepayments and other........ 54,827 72,647
Total current assets....... 689,625 797,223
Other Assets
Equity investments in non-
regulated projects......... 705,035 412,175
External decommissioning fund
and other investments...... 350,366 299,804
Regulatory assets............ 342,891 354,128
Nonregulated property - net.. 203,623 192,790
Notes receivable from non-
regulated projects......... 87,839 75,811
Other long-term receivables.. 55,722 63,684
Intangible assets - net...... 46,731 46,168
Long-term prepayments and
deferred charges........... 64,377 57,237
Total other assets........ 1,856,584 1,501,797
TOTAL ASSETS............. $6,868,969 $6,636,900
LIABILITIES AND EQUITY
Capitalization
Common stock equity:
Common stock and premium -
authorized 160,000,000
shares of $2.50 par
value, issued shares:
1997, 69,083,289;
1996, 69,063,712......... $811,475 $811,378
Retained earnings.......... 1,322,265 1,340,799
Leveraged common stock held
by ESOP.................. (15,613) (19,091)
Currency translation
adjustments - net........ (13,845) 2,794
Total common stock equity 2,104,282 2,135,880
Cumulative preferred stock
and premium - authorized
7,000,000 shares of $100 par
value; outstanding shares:
1997, 2,000,000; 1996,
2,400,000 without
mandatory redemption....... 200,340 240,469
Mandatorily redeemable
preferred securities of sub-
sidiary trust - guaranteed
by NSP*.................... 200,000 -
Long-term debt............... 1,839,698 1,592,568
Total capitalization..... 4,344,320 3,968,917
Current Liabilities
Long-term debt due within one
year....................... 118,662 119,618
Other long-term debt
potentially due within one
year....................... 141,600 141,600
Short-term debt - primarily
commercial paper........... 302,724 368,367
Accounts payable............. 185,659 236,341
Taxes accrued................ 136,017 204,348
Interest accrued............. 32,127 34,722
Dividends payable on common
and preferred stocks....... 51,084 50,409
Accrued payroll, vacation and
other...................... 73,636 80,995
Total current liabilities 1,041,509 1,236,400
Other Liabilities
Deferred income taxes........ 803,326 804,342
Deferred investment tax
credits.................... 144,200 149,606
Regulatory liabilities....... 345,351 302,647
Postretirement and other
benefit obligations........ 124,153 114,312
Other long-term obligations
and deferred income........ 66,110 60,676
Total other liabilities.. 1,483,140 1,431,583
Commitments and Contingent Liabilities (See Note 4)
TOTAL LIABILITIES AND
EQUITY............... $6,868,969 $6,636,900
The Notes to Financial Statements are an integral part of the Balance Sheets.
* As described in Note 2 to Financial Statements, the primary asset of NSP
Financing I, a subsidiary trust of NSP, is $200 million principal amount of
the Company's 7.875% Junior Subordinated Debentures due 2037.
Northern States Power Company (Minnesota) and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended
June 30,
1997 1996
(Thousands of dollars)
Cash Flows from Operating Activities:
Net Income............................ $84,026 $110,592
Adjustments to reconcile net income to cash from operating activities:
Depreciation and amortization....... 176,095 165,297
Nuclear fuel amortization........... 19,506 19,886
Deferred income taxes............... (9,145) (16,461)
Deferred investment tax credits
recognized........................ (4,837) (4,558)
Allowance for funds used during
construction - equity............. (3,821) (4,123)
Undistributed equity in earnings of
unconsolidated affiliate
operations........................ (4,605) (9,989)
Write-off of prior year merger costs 25,289 -
Cash used for changes in certain
working capital items............. (11,174) (112,470)
Cash provided by changes in other
assets and liabilities............ 17,067 7,046
Net cash provided by operating
activities........................... 288,401 155,220
Cash Flows from Investing Activities:
Capital expenditures ................. (185,075) (192,294)
Decrease in construction payables..... (710) (5,243)
Allowance for funds used during
construction - equity............... 3,821 4,123
Investment in external decommissioning
fund................................ (20,687) (19,698)
Equity investments, loans and deposits
for nonregulated projects........... (308,429) (138,823)
Other investments - net............... (8,296) 359
Net cash used for investing activities. (519,376) (351,576)
Cash Flows from Financing Activities:
Change in short-term debt - net
issuances (repayments).............. (65,643) 161,558
Proceeds from issuance of long-term
debt - net.......................... 250,999 126,472
Repayment of long-term debt, including
reacquisition premiums.............. (4,436) (14,107)
Proceeds from issuance of common stock
- net............................... 769 30,674
Proceeds from issuance of redeemable
preferred securities - net.......... 193,315 -
Redemption of preferred stock,
including reacquisition premiums.... (41,278)
Dividends paid........................ (100,736) (97,965)
Net cash provided by financing
activities........................... 232,990 206,632
Net increase in cash and cash equivalents 2,015 10,276
Cash and cash equivalents at beginning of
period................................ 51,118 28,794
Cash and cash equivalents at end of
period................................ $53,133 $39,070
The Notes to Financial Statements are an integral part of the Statements of
Cash Flows.
Northern States Power Company (Minnesota) and Subsidiaries
NOTES TO CONSOLIDATED 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 June 30, 1997 and December 31, 1996,
the results of its operations for the three and six months ended June 30,
1997 and 1996, and its cash flows for the six months ended June 30, 1997 and
1996. Due to the seasonality of NSP's electric and gas sales and variability
of nonregulated operations, 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 the
financial statements in NSP's Annual Report on Form 10-K for the year ended
December 31, 1996 (1996 Form 10-K). The following notes should be read in
conjunction with such policies and other disclosures in the 1996 Form 10-K.
Certain reclassifications have been made to 1996 financial information to
conform with the 1997 presentation. These reclassifications had no effect on
net income or earnings per share as previously reported.
1. Change in Reporting of Earnings Per Share
Effective for year-end 1997 financial statements, NSP will be required to
present its results of operations on a per share basis in accordance with
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share (EPS). This new reporting standard requires a dual presentation of EPS
on the face of the income statement, with one calculation assuming no
dilution and another assuming full dilution from potential issuance of
unexercised stock awards. The SFAS No. 128 method differs from the current
approach, under which some dilution from common stock equivalents is assumed
in the "primary" EPS calculation. Applying the new standard to the results
for the three and six month periods ended June 30, 1996 and 1997 would not
change reported EPS. The impact of applying SFAS No. 128 to other
historical periods is expected to be immaterial.
2. Business Developments
Termination of Proposed Merger - As discussed in the Company's Form 8-K
filed on May 19, 1997, NSP and Wisconsin Energy Corporation (WEC) announced
on May 16, 1997 that they mutually agreed to terminate their plans to merge
the two companies. As a result of the merger termination, NSP charged to
expense in the second quarter of 1997 its share of deferred merger-related
costs. On July 31, 1997, the Minnesota Public Utilities Commission (MPUC)
approved the Company's request to terminate the merger proceeding. The
Company continues to work with state regulatory agencies in Minnesota
regarding the final resolution of a regulatory accounting proposal filed
concurrently with the merger proceedings. See Management's Discussion and
Analysis for discussion of the financial effects of the merger termination.
Business Interruptions - The Company experienced several events in the
second and early third quarters that resulted in interruptions to normal
business operations, including flooding, unscheduled plant outages and
unusual storm damage. See Management's Discussion and Analysis for discussion
of the financial effects of these items.
Union Agreements - A new three-year collective-bargaining agreement was
ratified by the Company's union membership on April 10, 1997. All provisions
of this new agreement are effective retroactively to Jan. 1, 1997. The prior
agreement had expired Dec. 31, 1996, but was extended to April 30, 1997.
Issuance of Trust Originated Preferred Securities (TOPrS) - As previously
reported, on Jan. 31, 1997, 8,000,000 shares of 7.875 percent TOPrS were
issued and sold through NSP Financing I, a statutory business trust formed
under Delaware law. The Company owns all of the common equity securities of
the trust and, accordingly, the trust is treated as a subsidiary of NSP, with
its accounts included in NSP's consolidated financial statements. The
business trust was formed for the sole purpose of issuing the TOPrS, and the
primary asset of the trust is $200 million of 7.875 percent unsecured Junior
Subordinated Debentures issued by the Company and maturing in 2037. NSP
Financing I used the proceeds from the sale of $200 million of TOPrS to
purchase such Debentures, which are eliminated in NSP's consolidation. The
Company used the proceeds from the issuance of such Debentures to redeem $40
million of preferred stock and to repay a portion of outstanding short-term
borrowings.
The quarterly interest and other payment dates for the Debentures coincide
with the distribution and other payment dates for the TOPrS. NSP has the
right to defer payments of interest on the Debentures by extending the
interest payment period, at any time, for up to 20 consecutive quarters. If
interest payments on the Debentures are so deferred, distributions on the
TOPrS will also be deferred. During any deferral, distributions will
continue to accrue with interest thereon. In addition, during any such
deferral, NSP may not, except in certain limited circumstances, declare or
pay any dividend or other distribution on, or redeem or purchase, any of its
capital stock.
The TOPrS are redeemable by NSP (in whole or in part) from time to time,
beginning in 2002, or at any time in the event of certain income tax
circumstances. If the debentures are redeemed, the trust must redeem TOPrS
having an aggregate liquidation amount equal to the aggregate principal
amount of the debentures so redeemed. Upon redemption, holders of the TOPrS
are generally entitled to receive a liquidation amount of $25 per share plus
accrued and unpaid distributions. The TOPrS must be fully redeemed when the
Debentures mature in 2037.
The payment of distributions related to the TOPrS by NSP Financing I and
payments on liquidation of NSP Financing I or the redemption of the TOPrS are
guaranteed by NSP (the "Guarantee"), to the extent set forth therein. The
Guarantee covers payments of distributions and other payments on the TOPrS
only to the extent NSP makes a payment of interest or principal on the
Debentures. NSP's obligations under the Debentures and the Guarantee are
subordinate and junior in right of payment to certain indebtedness of NSP.
NRG Investments - In May 1997, the Company's wholly owned subsidiary NRG
Energy, Inc. (NRG), as part of a consortium with CMS Energy Corporation (CMS)
and Horizon Energy Australia Investments, closed on its acquisition of the
Australian State of Victoria's Loy Yang A power plant (Loy Yang), Victoria's
largest and Australia's lowest-cost electric generating facility. Loy Yang is
a 2,000 megawatt, brown coal-fired power station. The acquisition included
an adjacent coal mine. The total purchase price was approximately 4.7
billion Australian dollars (or US$3.7 billion as of May 12, 1997). NRG holds
a 25.37 percent ownership interest in the consortium. While most of the
purchase price was raised through project-financed loans and leveraged leases
that are non-recourse to the three partners, NRG paid $257 million for its
equity interest in Loy Yang.
Loy Yang is one of the newest and most modern of Victoria's brown coal-
fired generating plants, with a high proportion of its electric output
committed under power supply contracts through the year 2000. The coal mine
has two billion tons of proven coal reserves, enough to serve the coal supply
needs for 50 years of the Loy Yang plant acquired by the consortium and the
Loy Yang B plant not included in the acquisition. The mine has a supply
contract with the 1,000 megawatt Loy Yang B electric generating plant and the
exclusive rights to provide coal supplies for a third Loy Yang generating
plant, should it be built. Loy Yang will be jointly managed and operated by
CMS and NRG.
In June 1997, loan financing was obtained for the refurbishment and
expansion of the Energy Center Kladno (Kladno) plant in Kladno, the Czech
Republic. NRG owns a 34 percent interest in the existing coal-fired electric
and thermal energy generating facility that can supply 28 megawatts of
electricity and 150 megawatts-thermal of steam and heated water. This project
financing will fund the refurbishment of the existing facility as well as the
expansion project to add 354 megawatts of new capacity, of which 282 megawatts
will be coal-fired and 72 megawatts will be gas-fired. NRG currently holds
a 57.85 percent interest in the expansion project and El Paso Energy
International and Stredoceska Energeticka (STE), the regional Czech electric
distribution company, own the remaining percentage of the expansion. Kladno
has executed a 20-year agreement to supply electricity to STE and thermal
energy to the district heating company in the city of Kladno. Long-term fuel
supply agreements have been made with local Kladno mining companies.
In June 1997, P.T. Dayalistrik Pratama (PTDP), a limited liability company
of which NRG owns 45 percent, signed a coal supply agreement and purchased
land for a 400 megawatt coal-fired power generation facility to be built in
West Java, Indonesia. NRG's expected equity investment in PTDP is $65
million, with the total project cost of $560 million to be financed by a
combination of equity investments, commercial bank debt and capital markets
funding. The project is expected to reach financial closing in the third
quarter of 1997.
In July 1997, an NRG affiliate signed an agreement with Millennium
Petrochemicals Inc. (Millennium) to develop, finance, construct and operate a
117 megawatt cogeneration plant at Millennium's Morris, Illinois polyethylene
manufacturing facility. The plant will provide the facility's steam and
electrical needs pursuant to a 25-year contract and would market the excess
electric capacity. The natural and process methane gas plant construction is
expected to begin in October 1997 with anticipated operations beginning the
end of 1998. Millennium will have the right to buy out the contract at fair
market values at certain defined points in the contract term. Millennium, a
subsidiary of Millennium Chemicals Inc., is the largest domestic producer of
polyethylene and a major supplier of performance polymers and select
chemicals.
Since late 1996, NRG has had a right to acquire a 27.75 percent interest in
the 390 megawatt Alto Cachapoal hydroelectric complex that is under
development in central Chile. Alto Cachapoal is a two-stage "greenfield"
project. In the first 195 megawatt stage, Alto Cachapoal plans to sell all
of its firm energy to Codelco-El Teniente, the world's largest underground
copper mine, pursuant to a 20-year power sales contract. Financial closing
for the first stage is expected later in 1997. Along with NRG, Nordic Power
Invest AB also has a right to acquire a 27.75 percent interest in the Alto
Cachapoal facility from Construction Andrade Gutierrez, the current owner of
the project.
As discussed in the 1996 Form 10-K, an NRG subsidiary has a 50 percent
interest in the Sunnyside cogeneration joint venture in Utah, which sells
energy and capacity to PacifiCorp under a power purchase agreement with an
initial term expiring in 2023. Under the agreement, PacifiCorp is obligated
to pay for: energy at prices based on PacifiCorp's avoided cost, base
capacity at a levelized fixed price, and additional capacity at escalating
fixed prices. The Sunnyside facility has experienced a shortfall in project
cash flow attributable primarily to decreased revenues due to avoided energy
rates being significantly lower than originally forecasted. In addition,
higher fuel costs than originally forecasted may be incurred in the future.
These changes in the economic performance of the Sunnyside project have
caused NRG to explore its options. In particular, the joint venture has
negotiated with PacifiCorp to restructure payments under the power purchase
agreement, and the joint venture has discussed a restructuring of the project
debt with its bondholders. In the absence of a restructuring of the
project's debt, a debt service reserve fund, which has been used to make up
cash shortfalls, is expected to be depleted within the next 12 months. There
can be no assurance that either PacifiCorp or the bondholders will agree to
any restructuring, nor can there be any assurances as to the actions the
joint venture may take when and if the debt service reserve fund is depleted.
As of Dec. 31, 1996, NRG's investment in Sunnyside was $12.5 million.
Change in NRG Hedging Policy - In July 1997, NRG changed its policy of
hedging foreign currency denominated investments as they were made, to a
policy of hedging foreign currency cash flows over a projected 12-month
period. As a result of this change in hedging policy, NRG terminated its
seven existing foreign currency swap agreements on July 29, 1997. Such
terminations resulted in cash payments to NRG without any earnings impact.
Consistent with prior policies, NRG is not hedging future earnings and does
not speculate in foreign currencies.
Cenerprise Investments - In July 1997, Cenerprise, Inc. (Cenerprise)
exercised its option to acquire a 100 percent interest of Energy Solutions
International, Inc. (ESI) headquartered in Mendota Heights, Minnesota. ESI is
a full service energy management company that provides turnkey solutions to
help customers throughout the United States reduce their energy costs. For
the fiscal year ended December 31, 1996, ESI had operating revenues of $17
million and approximately 200 employees.
Also in July 1997, Cenerprise exercised its option to acquire the remaining
20 percent of Energy Masters Corporation (EMC). The original acquisition of
Cenerprise's 80 percent interest in EMC occurred in the third quarter of
1995. EMC specializes in energy efficiency improvement services for
commercial, industrial, and institutional customers throughout the United
States.
Viking Voyageur - In June 1997, the Viking Voyageur Gas Transmission
Company, LLC (Viking Voyageur), 50 percent owned by the Company's wholly
owned subsidiary, Viking Gas Transmission Company (Viking Gas), and 50
percent owned by the Canadian corporation TransCanada PipeLines Limited
(TransCanada), completed the "open season" for firm gas transportation
service requests on its proposed $1 billion gas pipeline project. During the
open season, prospective natural gas shippers submitted requests for firm gas
transportation capacity. At the conclusion of the open season, the project
received requests for firm capacity of more than 1.8 billion cubic feet per
day. The pipeline's initial design capacity was planned at approximately 1.2
billion cubic feet per day. Viking Voyaguer is evaluating an increase of its
design capacity to 2.0 billion cubic feet per day.
In July 1997, Viking Voyageur and NICOR Inc. announced agreement on a
letter of intent whereby NICOR would become a 20 percent owner of Viking
Voyageur and the terminus of the proposed Viking Voyageur pipeline would be
extended approximately 60 miles to Joliet, Ill. NICOR Inc. is a holding
company based in Naperville, Ill. One of its principal businesses is
Northern Illinois Gas, one of the nation's largest gas distribution
companies. In addition to NICOR's interest, Viking Gas and TransCanada would
each own 40 percent of the Viking Voyageur project. The route extension is
expected to provide access to NICOR's storage and transmission facilities and
may result in new storage field development. In anticipation of additional
interest as a result of this extension, Viking Voyageur extended to shippers
an offer to submit signed requests for firm gas transportation capacity by
Aug. 8, 1997.
Viking Voyageur will determine the final capacity and terminus of the
project based on shipper requests. An application for project approval is
expected to be filed with the Federal Energy Regulatory Commission (FERC) in
the fall of 1997. If the necessary regulatory approvals are promptly
obtained, the project is expected to be in-service in late 1999.
3. Regulation and Rate Matters
As a result of the termination of the proposed merger with WEC as discussed
in Note 2, the Company has revised its regulatory plan and is considering
rate filings in several jurisdictions. The Company is planning to file an
application for a retail gas rate increase in its Minnesota jurisdiction in
the fourth quarter of 1997. In addition, the Company is planning to file
later in 1997 a rate application with the FERC to update its rates for
transmission service.
In July 1997, Northern States Power Company, a Wisconsin corporation, (the
Wisconsin Company), received authorization from the Public Service Commission
of Wisconsin to defer its share of network transmission service (NTS) costs
incurred after May 23, 1997. Beginning in the third quarter 1997, the
Wisconsin Company will begin deferring these costs, including a retroactive
adjustment to May 23, 1997. The Wisconsin Company estimates that about $2.4
million of its annual NTS costs of approximately $3.8 million will be
deferred in 1997 as a result of this action.
Under NTS, the Company and participating utilities share the total annual
transmission cost for their combined joint-use systems, net of related
transmission revenues, based upon each company's share of the total network
load. The Company has offered NTS service to qualifying transmission
customers as a result of the FERC Order No. 888. The Wisconsin Company's
share of this expense is billed through the Interchange Agreement with the
Company.
4. Commitments and Contingent Liabilities
Legislative Resource Commitments - In 1994, the Minnesota Legislature
established several energy resource and other commitments for NSP to fulfill
as part of its approval of NSP's Prairie Island nuclear generating plant's
temporary nuclear fuel storage facility, as discussed in NSP's 1996 Annual
Report on Form 10-K. Steps have been taken to fulfill certain of these
commitments during 1997 as described below.
The 1994 Prairie Island legislation requires NSP to have under contract, or
in operation, 225 megawatts of wind generation by Dec. 31, 1998 and a total
of 425 megawatts by Dec. 31, 2002. NSP is currently purchasing generation
from a 25 megawatt wind farm. The Company has a contract with Zond Minnesota
Development Corporation II (Zond), a wind developer, to purchase 107
megawatts which is expected to be operating by June 1998. In March 1997, the
Company signed two power purchase agreements with Northern Alternative
Energy, Inc. for the development of 22.65 megawatts of wind-generated
electricity and in June 1997, the Company signed a tentative agreement with
Woodstock Windfarm, LLC for the development of 10.2 megawatts of wind-
generated electricity. In July, 1997, after a competitive bid process to
supply 100 megawatts of wind energy by mid-1999, the Company selected Zond to
supply this wind energy. These agreements are subject to approval by the
MPUC. When these three increments are completed, the Company's total wind
production will be approximately 265 megawatts.
On May 13, 1997, the Minnesota Court of Appeals (the Court) affirmed an
Order of the Minnesota Environmental Quality Board (MEQB) which authorized
the Company to use four additional casks for the storage of spent nuclear
fuel at the Prairie Island nuclear generating plant. The Court also affirmed
the MEQB's Order which denied a certificate of site comparability for an
alternative site for the storage of spent nuclear fuel in Goodhue County.
The Prairie Island Indian Tribe (the Tribe) had filed suit with the Court
challenging the MEQB actions in October 1996. In June 1997, the Tribe
petitioned the Minnesota Supreme Court for review. In July 1997, the
Minnesota Supreme Court denied further review and the Company subsequently
withdrew its application to the Nuclear Regulatory Commission to construct
and operate an alternative site for the storage of spent nuclear fuel.
Nuclear Insurance - The circumstances set forth in Note 14 to NSP's
financial statements contained in the 1996 Form 10-K appropriately represent
the current status of commitments and contingent liabilities regarding public
liability for claims resulting from any nuclear incident.
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION
Except for the historical statements contained herein, the matters
discussed in the following discussion and analysis are forward looking
statements that are subject to certain risks, uncertainties and assumptions.
Such forward-looking statements are intended to be identified in this
document by the words "anticipate", "estimate", "expect", "objective",
"possible", "potential" and similar expressions. Actual results may vary
materially. Factors that could cause actual results to differ materially
include, but are not limited to: general economic conditions, including
their impact on capital expenditures; business conditions in the energy
industry; competitive factors; unusual weather; changes in federal or state
legislation; the higher degree of risk associated with the Company's
nonregulated businesses as compared to the Company's regulated business; the
items set forth below under "Factors Affecting Results of Operations"; and
the other risk factors listed from time to time by the Company in reports
filed with the Securities and Exchange Commission (SEC), including Exhibit
99.01 to this report on Form 10-Q for the quarter ended June 30, 1997.
RESULTS OF OPERATIONS
NSP's earnings for the periods ending June 30, 1997 and 1996 were as
follows:
3 Mos. Ended 6 Mos. Ended
6/30/97 6/30/96 6/30/97 6/30/96
Earnings per average common share:
Ongoing operations $0.48 $0.59 $1.38 $1.53
Merger costs (net of
applicable income tax) (0.25) 0.00 (0.25) 0.00
Total $0.23 $0.59 $1.13 $1.53
The changes in revenues and expenses of the regulated utility businesses
and nonregulated businesses underlying the variances in financial results are
discussed in more detail later. In addition to the revenue and expense
changes, earnings per share have been affected by an increasing average
number of common and equivalent shares outstanding due mainly to stock
issuances for the Company's dividend reinvestment and stock ownership plans.
Factors Affecting Results of Operations
In addition to items noted in the 1996 Form 10-K, the historical and future
trends of NSP's operating results have been and are expected to be affected
by the following factors:
Termination of Proposed Merger - As discussed in Note 2, during May 1997
NSP and WEC terminated their plans to merge. NSP's second quarter and year-
to-date operating results for 1997 include a charge to non-operating expense
of approximately $29 million, or 25 cents per share to write off its
cumulative merger-related costs incurred. This charge, which is being
reported as a non-recurring item outside of earnings from ongoing operations,
includes estimates for certain regulatory and other costs which NSP will be
required to pay but which have not yet been finalized.
Nonregulated Business Results - The following summarizes the earnings
contributions of NSP's nonregulated businesses:
3 Mos. Ended 6 Mos. Ended
6/30/97 6/30/96 6/30/97 6/30/96
NRG Energy, Inc. (NRG) $0.08 $0.06 $0.18 $0.10
Eloigne Company 0.02 0.01 0.03 0.03
Cenerprise, Inc. (Cenerprise) (0.03) (0.04) (0.05) (0.07)
Other (0.02) 0.00 0.00 0.01
Total $0.05 $0.03 $0.16 $0.07
Due to the nature of these nonregulated businesses, NSP anticipates that
the earnings from nonregulated operations will experience more variability
than regulated utility businesses. As discussed below, NSP's nonregulated
earnings in the six-month period ended June 30, 1997 are experiencing such
variability.
NRG - NRG's second quarter earnings increased in 1997 from the same period
one year ago due primarily to higher equity income and tax credits from new
projects. NRG acquired its interest in Loy Yang in Australia in May 1997
(see Note 2 to the Financial Statements - Business Developments). Also, one
unit of the Schkopau power generation facility in Germany began operation in
January 1996, and the second unit began operation in late July of 1996.
NRG's landfill gas subsidiary, NEO, has entered into projects since the first
quarter of 1996 which are generating higher levels of energy tax credits.
Partially offsetting these increases were higher interest costs on new debt
financing in 1997.
NRG's earnings for the six months ended June 30 increased in 1997 compared
with the same period in 1996 due primarily to higher equity income and tax
credits from new projects (as discussed previously) and lower business
development costs, partially offset by higher interest costs on new debt
financing issued in January 1996 and May-June 1997. In addition to the
Schkopau and NEO projects discussed previously, several new NRG projects
contributed to higher earnings in 1997. NRG acquired its interest in NRG
Generating (U.S.) Inc. in late April 1996. NRG acquired its interest in Loy
Yang in Australia in May 1997, as discussed previously. Regarding business
development costs, NRG experienced an increased level of such costs in early
1996 as it pursued several significant international and domestic projects.
Until there is substantial assurance that a project under development will
come to financial closure, such costs are expensed.
Cenerprise - Cenerprise's results for the second quarter and first six
months improved in 1997 compared to 1996 due to losses incurred from gas
trading activities in the second quarter of 1996. (Cenerprise curtailed its
gas trading activity in the second quarter of 1996.) The losses incurred in
both the second quarter and first six months of 1997 are due in part to the
write-off of a $1.2 million 1996 receivable from a gas trading customer who
entered bankruptcy in May 1997.
Estimated Impact of Weather on Regulated Earnings - NSP estimates utility
sales levels under normal weather conditions and analyzes the approximate
effect of variations from historical average temperatures on actual sales
levels. The following summarizes the estimated impact of weather on actual
utility operating results (in relation to sales under normal weather
conditions):
Increase (Decrease)
Actual Actual Actual
1997 vs Normal 1996 vs Normal 1997 vs 1996
Earnings per Share for:
Quarter Ended June 30 $0.02 $0.05 ($0.03)
Six Months Ended June 30 $0.04 $0.15 ($0.11)
Business Interruptions
Service Area Flooding - In the flood-devastated Grand Forks area (North
Dakota and Minnesota), the Company serves approximately 21,000 electric
customers, representing about 1.5 percent of NSP's electric customers and
approximately 13,000 gas customers, representing about 3.1 percent of NSP's
gas customers. Flood damage and precautionary shut-downs cut off service to
many of these customers on or about April 21, 1997, and the Company has been
actively participating in the effort to restore service as quickly as
possible. As of June 30, 1997 approximately 1,000 of the electric customers
and 1,900 of the gas customers remained without service. However, due to
property damage sustained, reconnected customers are not currently using
energy at pre-flood levels. The Company anticipates that gas service may not
be fully restored until late 1997. In addition, a portion of the remaining
disconnected customers are expected to relocate and not reconnect to NSP
service.
NSP estimates that its second quarter and year-to-date operating results
for 1997 have been reduced by approximately 5 cents per share due to
flooding, mainly in the Grand Forks area, as discussed previously. This
estimate includes approximately $3 million of lost electric and gas margins
compared to expected customer usage in the second quarter under normal
weather conditions, and approximately $3 million in additional operating and
maintenance expenses related to the costs of restoring service to customers,
preparing NSP generating plants to handle flooding, and repairing system
damage. In addition, the Company expects to incur approximately $4 million
of capital expenditures to rebuild the area's delivery systems, of which
approximately $1 million had been spent through June 30, 1997. The Company
does not expect that additional flood-related operating expenses incurred and
revenues lost after June 30, 1997 will be significant to operating results.
The amounts of any insurance recovery or disaster relief available to NSP for
potential reimbursement of expenses incurred and revenues lost as a result of
flooding are not fully determinable at this time. Approximately $500,000 of
estimated insurance recovery has been reflected in the accompanying financial
statements. Depreciation and return on investment related to capital
expenditures incurred would be subject to recovery in future rate
proceedings.
Unscheduled Plant Outage - The Company's 555-megawatt Monticello nuclear
generating plant was taken out of service effective May 9, 1997 and returned
to service at full-power on Aug. 1, 1997. The unscheduled outage represents
an acceleration of a design change originally planned to be made in January
1998 during the unit's scheduled refueling outage. It was determined that
for a certain postulated accident event, the operating margin for the
emergency core cooling pumps would be reduced below acceptable levels. While
design calculations indicated that there was an extremely low probability of
this situation occurring, the Company took this precautionary step to remove
the plant from service and make the necessary plant design changes. Much of
the design change project is expected to be capitalized as a plant addition.
In order to fully utilize the current fuel loaded, the 1998 refueling outage
has been postponed by a few months. During the plant outage, NSP continued
to serve its customers with electricity generated at other NSP facilities and
through power purchases from other sources. The majority of the incremental
costs incurred by the Company from replacing the plant's generation is being
recovered via fuel adjustment clause rate mechanisms in place. The costs of
replacement power not recovered through the fuel clause, including the
operation of higher-cost peaking plants, and incremental maintenance costs
related to the outage are estimated to result in an adverse impact to NSP's
1997 earnings of approximately 4 cents per share, about one-half of which
has been recognized through June 30. See the Utility Operating Results
sections herein for further discussion of the financial effects of the
unscheduled plant outage.
Storms - The Company experienced several storms in April, June and July
1997, with the most extensive damage to Company property occurring July 1,
1997 from high winds and thunderstorms. During that storm, portions of three
of the five high voltage transmission lines connecting NSP's Monticello and
Sherco plants to the Minneapolis-St. Paul metro area were damaged. Two of
the lines are owned by the Company. The Company avoided transmission-related
outages but had to temporarily reduce production at its Sherco plant. The
Monticello nuclear generating plant had been out of service, as previously
discussed. The first Company-owned line was repaired and back in service by
July 29, 1997 and the second Company-owned line is expected to be repaired by
mid-September 1997. Both plants were back at full generating capacity after
the first line was repaired. However, reduced transmission capability until
repairs are completed, in addition to reduced generating capability as a
result of the unscheduled Monticello outage, have limited NSP's opportunity
to sell power to other utilities. The majority of the incremental costs for
replacement generation (purchased power and running NSP peaking facilities)
is being recovered through fuel adjustment clause rate mechanisms in place.
The estimated costs for repairs attributable to all of the storms is
estimated to be approximately $3 million of operating and maintenance
expenses and approximately $10 million in capital expenditures, with most of
the costs incurred after June 30, 1997. Depreciation and return on
investment related to capital expenditures incurred would be subject to
recovery in future rate proceedings.
1997 Financial Outlook - Management believes that, primarily as a result of
the business interruptions described above, there is an increased likelihood
that NSP's 1997 earnings from ongoing operations (excluding merger costs)
could be below 1996 results.
Second Quarter 1997 Compared with Second Quarter 1996
Utility Operating Results
Electric revenues for the second quarter of 1997 compared with the second
quarter of 1996 increased $11.3 million or 2.2 percent. Retail revenue
increased approximately $12.1 million or 2.6 percent largely due to higher
average prices and a 1.1 percent increase in retail electric sales. The
increase in retail electric sales reflects sales growth compared to 1996,
partially offset by less favorable weather in 1997. Average retail prices
increased as a result of rate adjustments for higher fuel and purchased power
costs and increased recovery of deferred conservation and energy management
costs. Wholesale revenue decreased $2.6 million compared to the prior year,
reflecting the expected contract terminations of two municipal customers in
July 1996. Revenue from sales to other utilities decreased $1.2 million in
1997 due to a decrease in sales volume, partly offset by price increases. The
decrease in sales volume reflects lower availability of plants due to
business interruptions, as discussed previously, and limitations on
transmission lines due in part to open access rules which began in November
1996. The increase in price resulted from more favorable market conditions.
Other electric revenues increased by $3.0 million largely due to increases in
the transmission of electricity for others.
Gas revenues for the second quarter of 1997 decreased $9.2 million or 10.8
percent compared with the second quarter of 1996 due to decreased sales
volumes, lower average prices and decreased transportation and off-system
sales. The sales volume decrease is due primarily to lower sales growth and
less favorable weather in 1997 in comparison to 1996. The price decrease is
mainly due to rate adjustments for decreased purchased gas costs resulting
from market changes in natural gas prices charged by suppliers.
Fuel for electric generation and Purchased and interchange power costs
combined increased $10.2 million or 7.9 percent for the second quarter of
1997 compared with the second quarter of 1996. Fuel expense decreased $2.0
million primarily due to reduced output from NSP's generating plants as a
result of plant outages, partly offset by higher average fossil fuel prices
reflecting the increased use of NSP's peaking plants. Purchased and
interchange power costs increased $12.2 million due primarily to higher
purchases as a result of lower plant availability, as discussed previously,
and higher market prices for purchased power.
Cost of gas purchased and transported for the second quarter of 1997
compared with the second quarter of 1996 decreased $9.1 million or 17.7
percent due to lower gas sendout and lower cost of gas. The lower cost of
purchased gas reflects changes in market conditions and purchased gas cost
adjustments to match expense with rate recovery. The lower sendout primarily
is a result of decreased gas sales and lower off-system sales.
Other operation and Maintenance expenses increased and Administrative and
general expenses decreased combining for a net increase of $8.2 million or
5.0 percent compared with the second quarter of 1996. The costs associated
with providing network transmission service (NTS) to qualifying transmission
customers, as a result of FERC Order No. 888 (see Note 3 to the Financial
Statements - Regulation and Rate Matters), added $6.1 million to other
operation expenses. In addition, costs associated with the flood damage in
the Company's service area increased operation and maintenance costs, as
discussed previously. Partially offsetting these increases were lower costs
for employee benefits and insurance costs.
Conservation and energy management costs increased $2.2 million or 16.1
percent in the second quarter of 1997 compared to the same period in the
prior year due to higher amortization levels and concurrent rate recovery of
deferred electric and gas conservation and energy management program costs.
These higher amortization levels are consistent with retail electric and gas
rate recovery levels in the Company's Minnesota jurisdiction which increased
in August 1996 for electric and September 1996 for gas.
Depreciation and amortization expense increased $4.6 million or 6.0 percent
compared with the second quarter of 1996. The increase is mainly due to
increased plant in service between the two periods.
Property and general taxes for the second quarter of 1997 compared with the
second quarter of 1996 decreased $3.5 million or 5.9 percent due primarily to
lower property taxes in Minnesota as a result of legislation enacted in May
1997. This decrease, which includes an adjustment to property taxes accrued
for the first quarter, was partly offset by higher payroll and gross earnings
taxes.
Utility income taxes for the second quarter of 1997 compared with the
second quarter of 1996 were $5.3 million less primarily due to lower
operating income in the second quarter of 1997.
Other income (expense) - net related to utility operations decreased $18.1
million mainly due to the write-off of $29.0 million in merger costs as
discussed previously, less income tax effects.
Interest and amortization on utility debt decreased $0.2 million or 0.7
percent primarily due to lower levels of short-term debt outstanding
resulting in lower interest costs partly offset by higher interest rates on
NSP's variable rate long-term debt.
Distributions on redeemable preferred securities of subsidiary trust
increased $3.9 million due to the issuance of new securities in 1997 as
discussed in Note 2 to the Financial Statements.
Preferred stock dividends and redemption premiums decreased $0.7 million in
the second quarter of 1997 compared with 1996 primarily due to reductions in
dividends resulting from the redemption of two issues of preferred stock in
February 1997.
Nonregulated Business Results
NSP's nonregulated operations include many diversified businesses, such as
independent power production, gas marketing, industrial heating and cooling,
and energy-related refuse-derived fuel production. NSP also has investments
in affordable housing projects and several income-producing properties. The
following discusses NSP's diversified business results in the aggregate.
Operating revenues and expenses - The operating results before interest,
taxes and equity income of nonregulated businesses that are consolidated are
reported in Other Income (Deductions) - Net on the Consolidated Statements of
Income. Nonregulated operating revenues decreased $17.0 million in the
second quarter of 1997 compared to the second quarter of 1996, to $46.9
million, largely due to Cenerprise's exit from the gas trading business.
Nonregulated operating expenses decreased $17.8 million in the second quarter
of 1997, to $51.0 million, due primarily to lower gas costs corresponding
with Cenerprise's exit from gas trading.
Equity income - NSP has a less-than-majority equity interest in many
nonregulated projects. Consequently, a large portion of NSP's nonregulated
earnings is reported as Equity in Earnings of Unconsolidated Affiliates on
the Consolidated Statements of Income. Equity income decreased in the second
quarter of 1997 compared to the second quarter of 1996 by $1.4 million
primarily due to lower equity income from NRG's domestic projects and from
Eloigne and Cenerprise projects.
Nonregulated interest and amortization increased $3.2 million due primarily
to interest costs on new NRG debt financing issued in May-June 1997.
Income Taxes - Other Income (Expense) reported on the Consolidated
Statements of Income includes income tax benefits related to nonregulated
businesses and nonoperating items. The amount of such tax benefits increased
in 1997 mainly due to higher levels of tax credits from new NRG projects, as
discussed previously, and from new Eloigne projects.
First Six Months of 1997 Compared with First Six Months of 1996
Utility Operating Results
Electric revenues for the first six months of 1997 compared with the first
six months of 1996 increased $17.5 million or 1.7 percent. Retail revenues
increased approximately $9.8 million or 1.0 percent due to an increase in
average retail prices and a 0.3 percent increase in electric sales. The
increase in retail electric sales reflects sales growth compared to 1996
partially offset by less favorable weather in 1997. Average retail prices
increased as a result of rate adjustments for higher fuel and purchased power
costs and increased recovery of deferred conservation and energy management
costs. Wholesale revenue decreased $4.0 million primarily due to the
expected contract terminations of two municipal customers in July 1996.
Revenue from sales to other utilities increased $4.8 million primarily due to
price increases and an increase in sales volume during the first quarter,
both resulting from more favorable market conditions. This increase in sales
volume during the first quarter was partially offset by lower sales volume in
the second quarter, as discussed previously. Other electric revenues
increased $6.9 million largely due to increases in the transmission of
electricity for others.
Gas revenues for the first six months of 1997 compared with the first six
months of 1996 increased $8.4 million or 2.9 percent. Gas revenues
increased, despite a 2.7 percent decrease in gas sales volume and decreased
transportation and off-system sales, due to a significant increase in average
gas prices. The sales volume decrease is due primarily to less favorable
weather in 1997 in comparison to 1996. The price increase is mainly due to
rate adjustments for increased purchased gas costs in the first quarter of
1997, resulting from market changes in natural gas prices charged by
suppliers.
Fuel for electric generation and Purchased and interchange power costs
combined for a net increase of $10.8 million or 4.0 percent for the first six
months of 1997 compared with the first six months of 1996. Fuel expense
increased $3.2 million primarily due to higher average fossil fuel prices,
reflecting the increased use of NSP's peaking plants. Purchased and
interchange power costs increased $7.6 million due primarily to higher
purchases as a result of lower plant availability during the second quarter,
as discussed previously.
Cost of gas purchased and transported for the first six months of 1997
compared with the first six months of 1996 increased $9.4 million or 5.1
percent due to higher cost of gas, partly offset by lower gas sendout. The
higher cost of purchased gas, occurring in the first quarter of 1997,
reflects changes in market conditions and purchased gas cost adjustments to
match expense with rate recovery. The lower sendout is primarily a result of
decreased gas sales and lower off-system sales.
Other operation expenses increased and Maintenance and Administrative and
general expenses decreased, combining for a net increase of $9.8 million or
3.0 percent compared with the first six months of 1996. The cost associated
with offering NTS to qualifying transmission customers, as a result of FERC
Order No. 888, added approximately $11.8 million to other operation expenses.
Also, flooding in NSP's service area increased operating costs, as discussed
previously. Partially offsetting these increases were lower costs for
employee benefits, insurance and line maintenance costs.
Conservation and energy management expenses increased $3.3 million in the
first six months of 1997 compared to the same period in the prior year due
mainly to higher amortization levels and concurrent rate recovery of deferred
electric and gas conservation and energy management program costs. These
higher amortization levels are consistent with retail electric and gas rate
recovery levels in the Company's Minnesota jurisdiction which increased in
August 1996 for electric and September 1996 for gas.
Depreciation and amortization increased $9.7 million or 6.5 percent
compared with the first six months of 1996. The increase is mainly due to
increased plant in service between the two periods.
Property and general taxes for the first six months of 1997 compared with
the first six months of 1996 decreased $2.3 million or 1.9 percent due
primarily to lower property taxes in Minnesota due to legislation enacted in
May 1997. This decrease is partly offset by higher payroll and gross
earnings taxes.
Utility income taxes for the first six months of 1997 compared with the
first six months of 1996 decreased $8.9 million primarily due to lower
operating income.
Other income (expenses) - net (related to utility operations) for the first
six months of 1997 compared with the first six months of 1996 decreased $20.6
million due primarily to the write-off of $29.0 million in merger costs, less
income tax effects, as discussed previously, lower interest income from
financing programs and non-recurring 1996 refund adjustments.
Interest and amortization on utility debt for the first six months of 1997
compared with the first six months of 1996 increased by $0.2 million
primarily due to higher interest rates on NSP's variable rate long-term debt,
partly offset by lower interest costs on short-term debt due to lower
borrowing levels.
Distributions on redeemable preferred securities of subsidiary trust
increased $6.6 million due to the issuance of new securities in 1997 as
discussed in Note 2 to the Financial Statements.
Preferred stock dividends and redemption premiums increased $0.2 million
for the first six months of 1997 compared with the first six months of 1996
due to a $1.1 million premium recorded in February 1997 in connection with
the redemption of two issues of preferred stock, offset by reductions in
dividends resulting from the redemption.
Nonregulated Business Results
The following discusses NSP's diversified business results in the
aggregate.
Operating Revenues and Expenses - The operating results before interest,
taxes and equity income of nonregulated businesses that are consolidated are
reported in Other Income (Deductions) - Net on the Consolidated Statements of
Income. Nonregulated operating revenues decreased $74.3 million in 1997, to
$110.9 million, largely due to Cenerprise's exit from the gas trading
business. Nonregulated operating expenses decreased $78.5 million, to $117.9
million, due primarily to lower gas costs corresponding with Cenerprise's
exit from gas trading.
Nonregulated interest and amortization increased $4.1 million to $13.0
million due primarily to interest costs on new debt financing issued in late
January 1996 and May-June 1997 by NRG.
Income Taxes - Other Income (Expense) reported on the Consolidated
Statements of Income includes income tax benefits related to nonregulated
businesses and nonoperating items. The amount of such tax benefits increased
in 1997 mainly due to higher levels of tax credits from new NRG projects, as
discussed previously, and from Eloigne projects.
LIQUIDITY AND CAPITAL RESOURCES
The Company had approximately $299.5 million in commercial paper debt
outstanding as of June 30, 1997. Commercial banks currently provide credit
lines of approximately $300 million to the Company. These credit lines make
short-term financing available in the form of bank loans, letters of credit
and support for commercial paper sales. The Company has regulatory approval
for up to $474 million in short-term borrowing levels.
Commercial banks currently provide credit lines of approximately $247.1
million to wholly owned subsidiaries of the Company. At June 30, 1997,
approximately $2.9 million in loans against these credit lines were
outstanding. In addition, approximately $39.1 million in letters of credit
were outstanding, which reduced the available credit lines at June 30, 1997
and therefore approximately $205.1 million of those credit lines remained
available at June 30, 1997.
In January 1997, stock options for the purchase of 286,700 shares were
awarded under the Company's Executive Long-Term Incentive Award Stock Plan
(the Plan). These options are not exercisable for approximately twelve
months after the award date. As of June 30, 1997, a total of 1,303,006 stock
options were outstanding, which were considered as potential common stock
equivalents for earnings per share purposes. During the first six months of
1997, the Company has issued 12,698 new shares of common stock under the Plan
pursuant to the exercise of options and awards granted in prior years. Under
NSP's Employee Stock Ownership Plan, the Company has issued 6,879 shares of
common stock during the first six months of 1997.
As discussed in Note 2 to the Financial Statements, in January 1997 NSP
issued $200 million in 7.875 percent trust-originated preferred securities
that mature in 2037. Approximately $41 million of the proceeds were used in
February 1997 to redeem the Company's $6.80 and $7.00 series of preferred
stock. The balance of the proceeds were used to repay a portion of
outstanding short-term borrowings.
In May 1997, NRG finalized terms with a syndication of banks regarding a
three-year $175 million revolving credit facility. No amounts were
outstanding under this agreement at June 30, 1997. Proceeds from the
facility will be used for general corporate purposes, including letters of
credit and interim funding of NRG project investments. Under the terms of
the credit facility, NRG must maintain compliance with certain financial
requirements, including maintenance of a minimum level of tangible net worth
and a minimum ratio of tangible net worth to capitalization.
In June 1997, NRG issued $250 million of 7.5 percent Senior Notes due 2007
in a private placement under securities laws. NRG used the net proceeds to
repay outstanding debt incurred primarily to fund its equity investment in
the Loy Yang project, and for other general corporate purposes. NRG
anticipates filing with the SEC in the third quarter of 1997 a tender offer
to exchange the existing notes for publicly-traded notes with the same
interest rate and maturity.
On July 15, 1997, Moody's Investors Service (Moody's) upgraded the credit
ratings of the Company and its Wisconsin subsidiary. First mortgage and
secured pollution control bonds are now rated `Aa3', unsecured pollution
control bonds and counterparty ratings are now rated `A1', and the Company's
preferred stock is now rated `a1'. These ratings reflect the views of
Moody's, and an explanation of the significance of these ratings may be
obtained from that agency. 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.
NRG's wholly owned subsidiary, NRG Energy Center expects to enter into a
financing agreement during August 1997 regarding a potential $30 million
issuance of term notes with maturities no later than June 2017. The
revolving credit facility could also provide for up to $5 million of short-
term borrowings and is intended to provide financing for the Minneapolis
Energy Center. The facility is expected to be secured by the assets of NRG
Energy Center.
In the third quarter of 1997, the Company anticipates filing with the SEC a
registration statement related to the issuance of $200 million to $250
million of common stock in a public offering. The proceeds will be used to
redeem $100 million in Company debt securities maturing October 1, 1997, to
repay a portion of Company short-term borrowings, and for other general
corporate purposes.
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
In the normal course of business, various lawsuits and claims have arisen
against NSP. Management, after consultation with legal counsel, has recorded
an estimate of the probable cost of settlement or other disposition for such
matters.
On July 23, 1996, the U.S. Court of Appeals for the District of Columbia
Circuit (the Court), in a lawsuit filed by the Company along with other major
utilities, unanimously ruled that the Nuclear Waste Policy Act creates an
unconditional obligation for the United States Department of Energy (DOE) to
begin acceptance of spent nuclear fuel by Jan. 31, 1998. The DOE did not
seek U.S. Supreme Court review. On Jan. 31, 1997, the Company along with 30
other electric utilities and 45 state agencies, filed another lawsuit with
the Court against the DOE requesting authority to withhold payments to the
DOE for the permanent nuclear fuel disposal program. On April 30, 1997, the
Court ordered the Company and other parties to file a petition seeking an
order to compel the DOE to begin accepting spent nuclear fuel by Jan. 31,
1998. In its petition, filed May 7, 1997, the Company and the other parties
asked for an order (a) compelling the DOE to begin accepting spent nuclear
fuel, as required by the Nuclear Waste Policy Act and the DOE's contracts
with the utilities, and to develop an enforceable plan for accepting spent
nuclear fuel by a date certain; and (b) allowing utilities to escrow payments
into the Nuclear Waste Fund until the DOE begins accepting spent nuclear
fuel. The petition if granted, will be significant to NSP and the industry
because the DOE will be mandated to take the above-stated actions concerning
spent nuclear fuel. Oral arguments have been scheduled for Sept. 25, 1997. In
June 1997, the State of Minnesota passed legislation that would allow the
State to begin placing in escrow the payments currently being made to fund
the DOE's permanent disposal program. This escrow could be implemented if
allowed by the Court in the pending case. Related to this matter, in June
1997 the DOE notified utilities that it likely will not meet its Jan. 31,
1998 deadline to accept spent nuclear fuel.
For discussion of legal proceedings concerning temporary storage of spent
nuclear fuel at the Prairie Island Nuclear Generating Plant, see Note 4 to
the Financial Statements, incorporated herein by reference.
Item 4. Submission of Matters to a Vote of Security Holders
The Annual Meeting of Shareholders of the Company was held on June 25,
1997, for the purpose of voting on the matters listed below. Proxies for the
meeting were solicited pursuant to Section 14(a) of the Securities Exchange
Act of 1934, as amended, and there was no solicitation in opposition to
management's solicitations. All of management's nominees for directors as
listed in the proxy statement were elected. The matters before the meeting
and the voting results were as follows:
1. A proposal to amend the Bylaws to decrease the minimum number of
directors from 12 to 7;
Shares
Voted For Voted Against Voted Abstain
53,275,446 1,314,569 575,653
The number of broker non-votes on this proposal was 4,532,179.
2. A proposal to elect three directors to Class II to serve until the 2000
Annual Meeting of Shareholders;
Shares
Election of Directors Voted For Withheld Authority
Richard M Kovacevich 58,139,261 1,558,586
Douglas W Leatherdale 58,074,589 1,623,258
A Patricia Sampson 57,892,057 1,805,790
3. A proposal to ratify the appointment of Price Waterhouse LLP as
independent accountants for NSP for 1997;
Shares
Voted For Voted Against Voted Abstain
58,718,796 421,063 557,987
4. A "Shareholder Resolution on Public Image";
Shares
Voted For Voted Against Voted Abstain
2,016,900 48,114,488 2,716,390
The number of broker non-votes on this proposal was 6,850,069.
5.A "Shareholder Resolution on Conversion of Prairie Island Nuclear Plant to
a Natural Gas Plant";
Shares
Voted For Voted Against Voted Abstain
2,544,003 47,315,741 2,948,905
The number of broker non-votes on this proposal was 6,889,198.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
The following Exhibits are filed with this report:
27.01 Financial Data Schedule for the six months ended June 30, 1997.
99.01 Statement pursuant to Private Securities Litigation Reform Act of
1995.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed either during the three months
ended June 30, 1997, or between June 30, 1997 and the date of this report:
April 22, 1997 (Filed April 22, 1997) - Item 5. Other Events. Disclosure
of a consortium, including NRG, as the successful bidder in the purchase
of the Australian State of Victoria's Loy Yang A power plant for $3.67
billion. Item 7. Exhibit containing the news release from NRG concerning
the Loy Yang A power plant purchase.
May 16, 1997 (Filed May 19, 1997) - Item 5. Other Events. Disclosure of
the announcement of the mutually agreed merger termination between NSP and
Wisconsin Energy Corporation. NSP will charge to expense in the second
quarter of 1997 all merger-related costs.
May 30, 1997 (Filed May 30, 1997) - Item 5. Other Events. Release of the
audited consolidated financial statements of NRG and its subsidiaries for
the year ended 1996 and the related management's discussion and analysis.
Item 7. Financial Statements and Exhibits. NRG's 1996 audited
consolidated financial statements.
July 28, 1997 (Filed July 30, 1997) Item 5. Other Events. Viking
Voyageur Gas Transmission Company, 50 percent owned by Viking Gas
Transmission Company, a wholly owned subsidiary of the Company, and NICOR
Inc. announced agreement on a letter of intent to make NICOR a 20 percent
owner of Viking Voyageur and to change the terminus of the Viking Voyageur
natural gas transmission project from Volo, Illinois to Joliet, Illinois.
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)
/s/
Roger D. Sandeen
Vice President and Controller
/s/
Edward J. McIntyre
Vice President and Chief Financial Officer
Date: August 13, 1997
EXHIBIT INDEX
Method of Exhibit
Filing No. Description
DT 27.01 Financial Data Schedule
DT 99.01 Statement pursuant to
Private Securities
Litigation Reform
Act of 1995
DT = Filed electronically with this direct transmission.