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, 1998 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, 1998
Common Stock, $2.50 par value 151,415,882 shares
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
Northern States Power Company (Minnesota) and Subsidiaries
Consolidated Statements of Income (Unaudited)
1998 1997 1998 1997
(Thousands of dollars)
Utility operating revenues
Electric: Retail................................................................ $518,745 $482,931 $998,571 $965,775
Sales for resale and other........................................ 51,906 35,111 93,651 71,402
Gas............................................................................. 67,950 76,281 247,781 299,643
Total ........................................................................ 638,601 594,323 1,340,003 1,336,820
Utility operating expenses
Fuel for electric generation.................................................... 75,466 68,147 151,106 149,441
Purchased and interchange power................................................. 96,901 72,024 169,424 130,312
Cost of gas purchased and transported........................................... 37,137 42,379 150,719 194,399
Other operation................................................................. 96,481 93,659 191,947 182,459
Maintenance..................................................................... 54,444 40,736 94,304 84,238
Administrative and general...................................................... 36,492 36,316 74,271 70,943
Conservation and energy management.............................................. 16,667 16,009 33,551 33,308
Depreciation and amortization................................................... 83,111 80,649 167,211 160,491
Taxes: Property and general.................................................... 56,343 56,244 112,304 117,597
Current income..................................................... 20,351 26,943 58,738 73,160
Deferred income.................................................... 2,357 (2,191) (3,265) (9,214)
Investment tax credits recognized.................................. (2,203) (2,178) (4,411) (4,356)
Total....................................................................... 573,547 528,737 1,195,899 1,182,778
Utility operating income.......................................................... 65,054 65,586 144,104 154,042
Other income (expense)
Income from nonregulated businesses - before interest and taxes................. 7,682 5,093 11,967 11,743
Allowance for funds used during construction - equity........................... 1,812 1,507 3,557 3,821
Merger costs.................................................................... - (29,005) - (29,005)
Other utility income (deductions) - net......................................... (6,486) (1,862) (5,686) (5,000)
Income tax benefit - nonregulated operations and nonoperating items............. 11,825 16,811 25,851 23,201
Total....................................................................... 14,833 (7,456) 35,689 4,760
Income before financing costs..................................................... 79,887 58,130 179,793 158,802
Financing costs
Interest on utility long-term debt.............................................. 26,204 25,698 51,470 51,248
Other utility interest and amortization......................................... 2,622 5,029 6,041 9,894
Nonregulated interest and amortization.......................................... 13,859 8,044 26,138 13,005
Allowance for funds used during construction - debt............................. (1,770) (2,832) (3,882) (5,934)
Total interest charges...................................................... 40,915 35,939 79,767 68,213
Distributions on redeemable preferred securities of subsidiary trust.............. 3,938 3,938 7,875 6,563
Total financing costs....................................................... 44,853 39,877 87,642 74,776
Net income ....................................................................... 35,034 18,253 92,151 84,026
Preferred stock dividends and redemption premiums................................. 1,060 2,371 3,427 6,328
Earnings available for common stock .............................................. $33,974 $15,882 $88,724 $77,698
Average number of common shares outstanding (000's)............................... 149,877 137,523 149,547 137,485
Average number of common and potentially dilutive shares outstanding (000's)...... 150,143 137,743 149,807 137,697
Earnings per average common share - basic <F1>.................................... $0.23 $0.12 $0.59 $0.57
Earnings per average common share - assuming dilution <F1>........................ $0.23 $0.12 $0.59 $0.56
Common dividends declared per share............................................... $0.3575 $0.3525 $0.7100 $0.6975
Consolidated Statements of Retained Earnings (Unaudited)
Balance at beginning of period.................................................... $1,367,003 $1,354,894 $1,364,875 $1,340,799
Net income for period........................................................ 35,034 18,253 92,151 84,026
Dividends declared:
Cumulative preferred stock............................................ (1,060) (2,371) (3,427) (5,180)
Common stock.......................................................... (54,000) (48,511) (106,622) (96,232)
Premium on redeemed preferred stock........................................... - - - (1,148)
Balance at end of period.......................................................... $1,346,977 $1,322,265 $1,346,977 $1,322,265
<FN>
<F1> As described in the Management's Discussion and Analysis, earnings for the three and six months ended June 30, 1997, were
reduced by $0.12 per share due to the write-off of $29 million in merger related costs.
</FN>
The Notes to Consolidated Financial Statements are an integral part of the
Statements of Income and Retained Earnings.
Northern States Power Company (Minnesota) and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended
June 30,
1998 1997
(Thousands of dollars)
Cash Flows from Operating Activities:
Net Income........................................................................................ $92,151 $84,026
Adjustments to reconcile net income to cash from operating activities:
Depreciation and amortization................................................................... 187,522 176,095
Nuclear fuel amortization....................................................................... 21,148 19,506
Deferred income taxes........................................................................... (2,709) (9,145)
Deferred investment tax credits recognized...................................................... (4,565) (4,837)
Allowance for funds used during construction - equity........................................... (3,557) (3,821)
Undistributed equity in earnings of unconsolidated affiliates .................................. (13,520) (4,605)
Write-off of prior year merger costs............................................................ - 25,289
Cash used for changes in certain working capital items.......................................... (10,042) (11,174)
Cash provided by changes in other assets and liabilities........................................ 3,557 17,067
Net cash provided by operating activities.......................................................... 269,985 288,401
Cash Flows from Investing Activities:
Capital expenditures ............................................................................. (180,459) (185,075)
Decrease in construction payables................................................................. (1,367) (710)
Allowance for funds used during construction - equity............................................. 3,557 3,821
Investment in external decommissioning fund....................................................... (21,020) (20,687)
Equity investments, loans and deposits for nonregulated projects.................................. (126,627) (310,617)
Collection of loans made to nonregulated projects................................................. 63,739 2,188
Other investments - net........................................................................... (10,603) (8,296)
Net cash used for investing activities............................................................. (272,780) (519,376)
Cash Flows from Financing Activities:
Change in short-term debt - net issuances (repayments)............................................ (5,077) (65,643)
Proceeds from issuance of long-term debt - net.................................................... 267,467 250,999
Repayment of long-term debt....................................................................... (115,078) (4,436)
Proceeds from issuance of common stock - net...................................................... 45,540 769
Proceeds from issuance of preferred securities - net.............................................. - 193,315
Redemption of preferred stock, including reacquisition premiums................................... (95,000) (41,278)
Dividends paid.................................................................................... (109,762) (100,736)
Net cash (used for) provided by financing activities............................................... (11,910) 232,990
Net increase (decrease) in cash and cash equivalents................................................. (14,705) 2,015
Cash and cash equivalents at beginning of period..................................................... 54,765 51,118
Cash and cash equivalents at end of period........................................................... $40,060 $53,133
The Notes to Consolidated Financial Statements are an integral part of the
Statements of Cash Flows.
Northern States Power Company (Minnesota) and Subsidiaries
Consolidated Balance Sheets (Unaudited)
June 30, December 31,
1998 1997
ASSETS (Thousands of dollars)
Utility Plant
Electric.................................................................................... $7,073,809 $6,964,888
Gas......................................................................................... 835,692 821,119
Other....................................................................................... 355,614 343,950
Total................................................................................... 8,265,115 8,129,957
Accumulated provision for depreciation.................................................... (4,018,606) (3,868,810)
Nuclear fuel................................................................................ 948,625 932,335
Accumulated provision for amortization.................................................... (853,310) (832,162)
Net utility plant....................................................................... 4,341,824 4,361,320
Current Assets
Cash and cash equivalents................................................................... 40,060 54,765
Customer accounts receivable - net.......................................................... 241,355 269,455
Unbilled utility revenues................................................................... 98,345 121,619
Notes receivable from nonregulated projects................................................. 27,874 55,787
Other receivables........................................................................... 50,919 80,803
Fossil fuel inventories - at average cost................................................... 45,031 56,434
Materials and supplies inventories - at average cost........................................ 113,383 107,254
Prepayments and other....................................................................... 56,405 55,674
Total current assets...................................................................... 673,372 801,791
Other Assets
Equity investments in nonregulated projects ................................................ 844,001 740,734
External decommissioning fund and other investments......................................... 444,545 400,290
Regulatory assets........................................................................... 320,922 340,122
Nonregulated property - net of accumulated depreciation..................................... 257,809 256,726
Notes receivable from nonregulated projects................................................. 66,379 77,639
Other long-term receivables................................................................. 43,058 42,600
Intangible assets - net of amortization..................................................... 97,437 92,829
Long-term prepayments and deferred charges.................................................. 41,025 30,015
Total other assets....................................................................... 2,115,176 1,980,955
TOTAL ASSETS............................................................................ $7,130,372 $7,144,066
LIABILITIES AND EQUITY
Capitalization
Common stock equity:
Common stock and premium - authorized: 1998 350,000,000 and 1997 160,000,000
shares of $2.50 par value, issued shares:
1998 150,880,820 and 1997 149,236,764................................................... $1,126,502 $1,080,273
Retained earnings......................................................................... 1,346,977 1,364,875
Leveraged common stock held by ESOP....................................................... (21,924) (10,533)
Accumulated other comprehensive income.................................................... (85,958) (62,887)
Total common stock equity............................................................... 2,365,597 2,371,728
Cumulative preferred stock and premium - authorized
7,000,000 shares of $100 par value; outstanding
shares: 1998, 1,050,000 and 1997, 2,000,000
without mandatory redemption.............................................................. 105,340 200,340
Mandatorily redeemable preferred securities of subsidiary trust - guaranteed
by NSP<F1>.............................................................................. 200,000 200,000
Long-term debt.............................................................................. 2,049,221 1,878,875
Total capitalization.................................................................... 4,720,158 4,650,943
Current Liabilities
Long-term debt due within one year.......................................................... 25,129 22,820
Other long-term debt potentially due within one year........................................ 141,600 141,600
Short-term debt ............................................................................ 255,275 260,352
Accounts payable............................................................................ 201,013 249,813
Taxes accrued............................................................................... 144,720 186,369
Interest accrued............................................................................ 39,105 28,724
Dividends payable on common and preferred stocks............................................ 55,065 54,778
Accrued payroll, vacation and other......................................................... 79,580 89,562
Total current liabilities............................................................... 941,487 1,034,018
Other Liabilities
Deferred income taxes....................................................................... 781,192 792,569
Deferred investment tax credits............................................................. 133,565 138,509
Regulatory liabilities...................................................................... 349,703 305,765
Postretirement and other benefit obligations................................................ 129,414 135,612
Other long-term obligations and deferred income............................................. 74,853 86,650
Total other liabilities................................................................. 1,468,727 1,459,105
Commitments and Contingent Liabilities (See Note 3)
TOTAL LIABILITIES AND EQUITY.......................................................... $7,130,372 $7,144,066
<FN>
<F1> 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.
</FN>
The Notes to Consolidated Financial Statements are an integral part of the
Balance Sheets
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, 1998 and Dec. 31, 1997, the
results of its operations for the three and six months ended June 30, 1998 and
1997, and its cash flows for the six months ended June 30, 1998 and 1997. 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 Dec.
31, 1997 (1997 Form 10-K). The following notes should be read in conjunction
with such policies and other disclosures in the 1997 Form 10-K.
Certain reclassifications have been made to 1997 financial information to
conform with the 1998 presentation. These reclassifications had no effect on
net income or earnings per share as previously reported.
On April 22, 1998, the Company's Board of Directors authorized a
two-for-one stock split effective June 1, 1998 for shareholders of record on May
18, 1998. All financial information pertaining to earnings per share and
number of shares outstanding has been adjusted to reflect the stock split.
1. BUSINESS DEVELOPMENTS
- -- ----------------------
NRG ENERGY, INC. (NRG) - On March 31, 1998, NRG and its 50 percent partner,
Dynegy, concluded the acquisition of the Long Beach Generating Station for
approximately $15 million, one of two Southern California Edison plants awarded
to the NRG and Dynegy consortium. The Long Beach Station is a gas-fired plant
comprised of seven 60-megawatt gas turbine generators and two steam turbines
totaling 140-megawatts. During April 1998, NRG and Dynegy concluded the
acquisition of the second plant, the El Segundo Generating Station for
approximately $88 million. The El Segundo Generating Station is a gas-fired
plant with a capacity rating of 1,020-megawatts.
During April 1998, NRG exercised its option to acquire 16.8 million
convertible, non-voting preference shares of Energy Developments Limited (EDL)
for $24.8 million, bringing NRG's total investment in EDL to $48.8 million for
an ownership interest of approximately 35 percent. NRG had previously invested
in EDL in 1997. EDL is a listed Australian company that owns 189-megawatts and
operates 238-megawatts of generation throughout Australia and the United
Kingdom.
In 1996, NRG, Ansaldo Energia SpA, a major Italian industrial company
(Ansaldo), and P.T. Kiani Metra, an Indonesian industrial company (PTKM) formed
a joint venture to develop a 400-megawatt coal-fired power generation facility
in West Java, Indonesia, through P.T. Dayalistrik Pratama (PTDP), a limited
liability company created by the joint venturers. NRG and Ansaldo each have an
ownership interest of 45 percent in PTDP, and PTKM has an ownership interest of
10 percent. As a result of the political and economic instability in Indonesia,
all development efforts have been temporarily halted and the viability of the
project is uncertain. As of June 30, 1998, NRG had invested $9.9 million in the
project, including land acquisition and capitalized development costs. In
addition, NRG has an interest rate hedge in place for a portion of the equity
commitment to PTDP. If the hedge was marked-to-market as of June 30, 1998, NRG
would incur a settlement obligation of $5.2 million. If the West Java project
does not go forward, NRG would write down the majority of these costs. However,
at this time, management remains committed to the project. Consequently, no
impairment loss had been recognized as of June 30, 1998.
Effective in July 1998, NRG's affiliate NRG Generating (U.S.) Inc. changed
its name to Cogeneration Corporation of America (CogenAmerica). NRG holds
approximately 45 percent of the common stock of CogenAmerica.
ENERGY MASTERS INTERNATIONAL, INC. (EMI) - In June 1998, EMI sold its
interest in the joint venture, Enerval, to its joint venture partner. EMI's
investment in and advances to Enerval were written down to an estimate of their
net realizable value in 1997 and therefore the transaction had no material
impact on 1998 earnings.
VIKING GAS TRANSMISSION COMPANY (VIKING) - On April 21, 1998, Viking
withdrew from the proposed Voyageur pipeline project, which would have carried
natural gas from Emerson, Manitoba, to Joliet, Illinois. The pipeline had been
scheduled to begin service on Nov. 1, 1999.
Although Viking believes a pipeline project will go forward in the future
to meet growing midwest demand, the Voyageur proposal did not receive the
necessary producer support to make the project viable at this time under the
proposed schedule.
As of June 30, 1998, Viking had written off $1.4 million in costs related
to the Voyageur project. At this time, Viking has eliminated all liabilities
to the partnership from its balance sheet. Viking continues to negotiate the
final termination of its involvement in the partnership and cannot determine if
any additional costs will be incurred related to the Voyageur project.
BLACK MOUNTAIN GAS - On Dec. 31, 1997, the Company announced an agreement
and plan of merger with Black Mountain Gas Company of Cave Creek, Arizona (Black
Mountain). On July 24, 1998, the Company completed its merger with Black
Mountain. Black Mountain is a natural gas and propane distribution company with
natural gas operations in Cave Creek, Carefree, North Phoenix and North
Scottsdale, and propane operations in the city of Page, Arizona. Black Mountain
currently serves about 6,500 customers and had 1997 annual revenue of
approximately $6 million. The transaction was structured as a tax-free
reorganization for income tax purposes and was accounted for using the pooling
of interests method.
NATURAL GAS INC. - In late 1997, Northern States Power Company, a Wisconsin
Corporation (the Wisconsin Company), signed a purchase agreement to acquire
Natural Gas Inc. (NGI) of New Richmond, Wisconsin. On July 1, 1998, the
Wisconsin Company completed the acquisition. New Richmond is located in St.
Croix County - the fastest growing county in Wisconsin in 1996 with a 15 percent
growth rate. NGI, a privately owned natural gas utility founded in 1962, serves
1,900 natural gas customers in New Richmond and has annual revenue of
approximately $2.3 million. The transaction was structured as a tax-free
reorganization for income tax purposes and was accounted for using the pooling
of interests method.
UNION NEGOTIATIONS - Five local unions of the International Brotherhood of
Electrical Workers have accepted NSP's proposal to begin midterm contract
negotiations to modify or create new work rules, practices and operations to
improve workforce productivity. If these midterm negotiations are successfully
completed by Dec. 31, 1998, the Company will then propose a three-year contract
extension including negotiated changes to wages and benefits. If the contract
extension is ratified, new terms and conditions will become effective Jan. 1,
2000. The existing agreements will stay in effect through Dec. 31, 1999 unless
the contract is extended as discussed above.
INDUSTRY RESTRUCTURING - On April 28, 1998, the 1997 Wisconsin Act 204
became law (Act 204). Act 204 includes provisions which require the Public
Service Commission of Wisconsin (PSCW) to order a public utility that owns
transmission facilities to transfer control of its transmission facilities to an
independent system operator (ISO) or divest the public utility's interest in its
transmission facilities to an independent transmission owner (ITO) if the public
utility has not already transferred control to an ISO or divested to an ITO by
June 30, 2000. Under certain circumstances the PSCW has authority to waive
imposition of such an order on June 30, 2000. At Dec. 31, 1997, the Wisconsin
Company owned approximately 2,390 miles of transmission lines with a book value
of $87.9 million and transmission substations with a book value of $59.5
million. The Wisconsin Company may attempt to obtain a legislative amendment in
1999 of the mandatory transfer or divestiture requirements and is also
considering whether to judicially challenge the transmission transfer or
divestiture requirements of the new law. See Note 2 for a discussion of NSP's
possible divestiture of its transmission assets through the formation of an
Independent Transmission Company (ITC).
2. REGULATION AND RATE MATTERS
- -- ------------------------------
MINNESOTA PUBLIC UTILITIES COMMISSION (MPUC) - During December 1997, NSP
filed for a general increase in Minnesota retail gas rates of $18.5 million or
5.5 percent on an annualized basis. NSP requested an interim rate increase of
$15.6 million or 4.6 percent on an annualized basis, and received approval of an
interim rate increase totaling $13.9 million on an annualized basis, subject to
refund, effective February 1, 1998. During May 1998, NSP, the Department of
Public Service (DPS) and the Office of the Attorney General entered into
settlement agreements on essentially all revenue and rate design issues. On
July 29, 1998, the administrative law judge recommended approval of the
settlement and a final rate increase of $13.6 million, or 4.1 percent, on an
annualized basis. A final decision by the MPUC is expected in October 1998.
During April and May 1998, NSP submitted to the MPUC its annual electric
and gas Conservation Improvement Program (CIP) and Financial Incentive Reports.
On June 1, 1998, the DPS recommended the MPUC discontinue further recovery of
lost margins, load management discounts and performance bonuses for NSP and
other Minnesota public utilities. The DPS recommendation, if approved by the
MPUC, would not allow NSP to accrue lost margins, load management discounts and
performance bonuses after Dec. 31, 1997. NSP's annual electric and gas revenues
include approximately $34 million of recovery for lost margins, load management
discounts and performance bonuses associated with conservation programs. During
July 1998, NSP and other Minnesota public utilities filed comments opposing the
DPS position and arguing for continued recovery of CIP incentives. Although the
MPUC has not yet determined when they will deliberate the issue of continued
recovery of CIP incentives, the Company believes that the MPUC will address this
issue before the end of 1998.
PUBLIC SERVICE COMMISSION OF WISCONSIN (PSCW) - During November 1997, the
Wisconsin Company filed retail electric and gas rate cases with the PSCW
requesting an annual increase of approximately $12.7 million, or 4.3 percent in
retail electric rates and an annual decrease of $1.7 million, or 1.9 percent in
retail gas rates. In April 1998, the PSCW staff filed testimony recommending an
annual rate increase of $3.8 million in retail electric rates and an annual rate
decrease of $2.5 million in retail gas rates based on a much lower recommended
return on common equity of 11.25 percent. In a recent rate case decision by the
PSCW for a large Wisconsin utility, a 12.2 percent return on common equity was
found reasonable. Although the Wisconsin Company requested that the rates become
effective in the second quarter of 1998, a final decision by the PSCW has not
yet been received, which will delay the implementation of new rates. The
Wisconsin Company estimates a final order will be received during the third
quarter of 1998.
FEDERAL ENERGY REGULATORY COMMISSION (FERC) - During February and March
1998, NSP filed electric point-to-point and network integration transmission
service (NTS) rate cases with the FERC. NSP proposed that both rate changes
become effective May 1, 1998. The proposed point-to-point rates would, if
approved, provide an annual increase in third party transmission service revenue
of approximately $3 million, plus a $1 million annual increase in ancillary
service revenues. The NTS tariff change would, if approved, reduce NTS costs
from 1997 levels.
During April 1998, the FERC voted to accept the rates, consolidate the
cases, and defer the effective date of the rate changes to Oct. 1, 1998. The
proposed increases in point-to-point and ancillary service rates would be placed
into effect subject to refund. An administrative law judge and a settlement
judge were appointed to hear arguments and facilitate possible settlements in
the case. As of early August 1998, the cases were in the initial hearing
stage.
On June 29, 1998, the FERC issued an order requiring NSP to curtail service
to its own retail sales customers proportionally with curtailment of wholesale
transmission-only customers taking service under NSP's Order 888 transmission
tariff. The effect of FERC's order would require that in a situation where
NSP's transmission lines are constrained or about to become overloaded, NSP
would reduce or curtail service to retail customers on a comparable basis with
curtailment of wholesale transactions. On July 1, 1998, NSP filed an emergency
request for clarification and rehearing on FERC's June 29 order and a motion to
stay its effective date. On July 31, 1998, the FERC issued a second order,
denying NSP's request.
On Aug. 3, 1998, NSP filed an appeal of the FERC orders with the U.S. Court
of Appeals, Eighth Circuit (Court). NSP believes FERC exceeded its legal
authority because service to retail customers is subject to state regulation,
not FERC regulation. In addition, NSP believes FERC has issued inconsistent
orders which NSP cannot fully comply with and which places reliability of
service to NSP's retail customers at risk. In its petition, NSP requested a
court order delaying enforcement of the FERC orders and authorizing NSP to
comply with the regional transmission service interruption procedures developed
by the Mid-Continent Area Power Pool, pending a final Court decision. NSP also
requested an expedited Court review and ultimate reversal of the FERC orders.
On Aug. 6, 1998, the Court denied the Company's motion for stay and expedited
consideration. The underlying appeal will be considered by the Court using its
normal procedures. NSP believes a final decision will be issued later in 1998.
During June 1998, the FERC approved NSP's wholesale electric market-based
sales rate application with rates effective immediately. This allows NSP's
Energy Marketing organization to sell wholesale power at market-based rates,
which represent the true clearing price of energy. Previously, NSP's Energy
Marketing organization had been restricted by regulation to sell power only
under cost-based rates. The move to market-based rates reflects the
increasingly competitive nature of the electric industry.
In April 1998 testimony before FERC, the Company proposed to form an
Independent Transmission Company (ITC), as an alternative to an ISO. The ITC
would own and operate transmission facilities independent from vertically
integrated utilities and other market participants and satisfy the regulatory
requirements for control of transmission facilities. The ITC would operate
transmission facilities as a for-profit entity. NSP is currently in discussion
with other utilities to form an ITC and is seeking to reach an agreement to
proceed within the next several months. However there can be no assurance that
such an agreement will be reached. In the event NSP is successful in forming an
ITC, NSP anticipates at the present time that as part of such transaction, it
would divest its electric transmission assets through a sale, spin-off or other
means. At June 30, 1998, the net book value of NSP's transmission assets was
approximately $634 million.
During June 1998, Viking filed a rate case with the FERC, requesting a $3
million annual rate increase. On July 30, 1998, the FERC issued an order
allowing the rate increase to take effect January 1999, subject to refund. A
final order is expected in the second half of 1999.
3. 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 1997 Annual
Report on Form 10-K. During April 1998, a final agreement was signed with Lake
Benton Power Partners II LLC for 103.5-megawatts of wind energy. This brings
NSP's total contracted wind energy capacity to approximately 269-megawatts.
LEGAL CLAIMS - During April 1997, a fire damaged several buildings in
downtown Grand Forks. This fire occurred during the historic floods in that
city. On July 23, 1998, the St. Paul Mercury Insurance Company, which insured
the First National Corporation and its three buildings in downtown Grand Forks,
commenced a lawsuit against NSP for damages in excess of $15 million. The suit
was filed in the District Court in Grand Forks County in North Dakota. Mr.
Douglas W. Leatherdale, a director of the Company, is Chairman, President and
Chief Executive of St. Paul Companies, Inc., the parent of St. Paul Mercury
Insurance Company. Mr. W. John Driscoll, a director of the Company, is also a
director of St. Paul Companies, Inc.
The insurance company alleges that the fire was electrical in origin and
that NSP was legally responsible for the fire because it failed to shut off
electrical power to downtown Grand Forks during the flood and prior to the fire.
It is NSP's position that it is not legally responsible for this unforeseeable
event. At no time prior to the fire was NSP instructed to shut power off to
downtown Grand Forks by any government officials, including representatives from
the fire department. Moreover, people in downtown Grand Forks were relying on
electricity before and after the fire occurred. NSP has a self-insured
retention deductible of $2 million, with general liability insurance coverage
limits of $150 million. The ultimate costs to NSP, if any, are unknown at this
time.
4. ACCOUNTING AND REPORTING CHANGES
- -- -----------------------------------
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income". The Statement requires that an
enterprise (a) classify items of other comprehensive income by their nature in a
financial statement and (b) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. The
Statement is effective for NSP in 1998.
NSP's other comprehensive income consists of currency translation
adjustments related to NRG's investments in international projects. The
currency translation adjustments for the three month periods ended June 30, 1998
and 1997, reduced common stock equity and other comprehensive income by $19.9
million and $13.2 million, respectively. The currency translation adjustments
for the six month periods ended June 30, 1998 and 1997, reduced common stock
equity and other comprehensive income by $23.1 million and $16.6 million,
respectively.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires that all
derivatives be recognized at fair value in the balance sheet and all changes in
fair value be recognized currently in earnings or deferred as a component of
other comprehensive income, depending on the intended use of the derivative, its
resulting designation (for example, as a qualifying hedge) and its
effectiveness, if designated as a qualifying hedge. The Company will be
required to adopt this standard in the third quarter of 1999, but can elect to
adopt it in 1998. The Company has not determined the potential impact of the
implementing this statement or the expected adoption date at this time.
5. SHORT-TERM BORROWINGS
- -- ----------------------
As of June 30, 1998, the Company had a $300 million revolving credit
facility under a commitment fee arrangement. This facility provides short-term
financing in the form of bank loans, letters of credit and support for
commercial paper sales. The Company has regulatory approval for up to
approximately $575 million in short-term borrowing levels.
In addition to Company lines, as of June 30, 1998, commercial banks
provided credit lines of approximately $317 million to wholly owned subsidiaries
of the Company. At June 30, 1998, approximately $175 million in borrowings were
outstanding under these credit lines. In addition, approximately $42 million in
letters of credit were outstanding, which reduced the credit lines available to
subsidiaries at June 30, 1998, and therefore left approximately $100 million of
unused lines available at that date. At June 30, 1998, the Company had $80
million in short-term commercial paper borrowings outstanding. The weighted
average interest rate on all short-term borrowings was 6.1 percent as of June
30, 1998.
------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- --------------------------------------------------------------------------------
OF OPERATIONS
-------------
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; regulation; issues
relating to year 2000 remediation efforts; 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, 1998.
RESULTS OF OPERATIONS
Northern States Power Company's earnings per share (assuming dilution) for
the periods ending June 30, 1998 and 1997 were as follows:
3 Mos. Ended 6 Mos. Ended
6/30/98 6/30/97 6/30/98 6/30/97
------------- --------- -------- ---------
Earnings per share:
Ongoing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.23 $ 0.24 $ 0.59 $ 0.68
Merger costs <F1>. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.00 (0.12) 0.00 (0.12)
------------- --------- -------- ---------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.23 $ 0.12 $ 0.59 $ 0.56
- ------------------------------------------------------------------------------ ============= ========= ======== =========
<FN>
<F1>Net of applicable income tax. See discussion under Nonrecurring transaction.
</FN>
FACTORS AFFECTING RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------
In addition to items noted in the 1997 Form 10-K, t he historical and
future trends of NSP's operating results have been and are expected to be
affected by the following factors:
NONREGULATED BUSINESS RESULTS - The following summarizes the earnings
contributions of NSP's nonregulated businesses:
3 Mos. Ended 6 Mos. Ended
6/30/98 6/30/97 6/30/98 6/30/97
--------------------------------------------
NRG Energy, Inc. . . . . . . . . . . $ 0.05 $ 0.04 $ 0.09 $ 0.09
Eloigne Company. . . . . . . . . . . 0.01 0.01 0.02 0.02
Energy Masters International, Inc. (0.01) (0.01) (0.03) (0.03)
Other. . . . . . . . . . . . . . . . (0.02) (0.01) (0.01) 0.00
--------------------------------------------
Total. . . . . . . . . . . . . . . $ 0.03 $ 0.03 $ 0.07 $ 0.08
- ------------------------------------ ============================================
Due to the nature of these nonregulated businesses, NSP anticipates that
the earnings from nonregulated operations could experience more variability than
regulated utility businesses.
ESTIMATED IMPACT OF WEATHER ON REGULATED EARNINGS - NSP estimates electric
and gas 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
1998 vs Normal 1997 vs Normal 1998 vs 1997
- ------------------------------------- -------------------- -------------- --------------
Earnings per Share for:
Quarter Ended June 30 $ 0.00 $ 0.01 ($0.01)
Six Months Ended June 30. . . ($0.08) $ 0.02 ($0.10)
- ------------------------------------- -------------------- -------------- ---------------
IMPACT OF STORMS - NSP's results for three and six month periods ending
June 30, 1998, were reduced by approximately 4 cents per share due to a series
of severe hail and wind storms in May and June. Results for 1998 included
approximately $8 million in operating and maintenance expenses related to the
cost of customer restoration and storm repair. In addition, electric margin was
reduced by an estimated $1 million due to customer outages from the storms. NSP
also incurred approximately $8 million of capital expenditures related to the
storms during the 1998 second quarter. It is expected that NSP will incur
approximately $4 million of additional storm related costs in the third quarter
as repairs are completed.
NONRECURRING TRANSACTION - In May 1997, NSP and Wisconsin Energy
Corporation terminated their merger agreement. The operating results for the
three and six month periods ending June 30, 1997, include a charge to
nonoperating expense of approximately $29 million, or 12 cents per share, for
the write-off of costs incurred related to the merger. This charge is being
reported as a nonrecurring item outside of earnings from ongoing operations.
INDUSTRY RESTRUCTURING - Efforts are continuing to bring more competition
to the electric and gas industry. Wisconsin has enacted legislation requiring
utilities to form an ISO or to divest its transmission assets to a ITO. NSP is
separately considering the formation of an ITC. See Notes 1 and 2 of the
Financial Statements for a further discussion of these matters.
TECHNOLOGY CHANGES FOR THE YEAR 2000 - NSP expects to incur significant
costs to modify or replace existing technology, including computer software, for
uninterrupted operation in the year 2000 and beyond. In 1996, NSP's Board of
Directors approved funding to address development and remediation efforts
related to the year 2000. A committee made up of senior management is leading
NSP's initiatives to identify year 2000 related issues and remediate business
processes as necessary in 1998.
NSP's year 2000 program covers not only NSP's 2,000 computer applications
consisting of about 75,000 programs totaling more than 30 million lines of code,
but also the thousands of hardware and embedded system components in use
throughout NSP. Embedded systems perform mission-critical functions in all
parts of operations including power generation, distribution, communications and
business operations. NSP is on track to remediate critical applications and
critical embedded components by the end of 1998 or during scheduled 1999 plant
outages and to devote 1999 to remediating lower priority items, fine tuning and
re-testing, and contingency planning.
NSP is working with major suppliers to minimize business interruptions due
to year 2000 issues in the suppliers' business processes. NSP is also working
closely with the Electric Power Research Institute, the Mid-Continent Area Power
Pool, the Nuclear Energy Institute, the North American Electric Reliability
Council and other utilities to enhance coordination, system reliability and
compliance with industry and regulatory requirements.
Despite these efforts there can be no assurances that every year 2000
related issue will be identified and addressed before 2000. An unexpected
failure regarding a year 2000 issue could result in an interruption in certain
normal business activities or operations. However, NSP believes that with the
completion of its year 2000 project, significant interruptions will not be
encountered.
Through June 30, 1998, NSP had spent approximately $7.5 million for year
2000 remediation. The amount of additional development and remediation costs
necessary for NSP to prepare for the year 2000 is estimated to be approximately
$17 million.
SECOND QUARTER 1998 COMPARED WITH SECOND QUARTER 1997
- ------------------------------------------------------------
Utility Operating Results
- ---------------------------
ELECTRIC REVENUES for the second quarter of 1998 compared with the second
quarter of 1997 increased $52.6 million or 10.2 percent. Retail revenues
increased approximately $35.8 million largely due to a 5.1 percent increase in
retail sales volume and a 2.2 percent increase in average prices due to fuel
cost recovery. The increase in retail electric sales reflects sales growth and
more favorable weather. The average temperature for the second quarter of 1998
was 4.3 degrees warmer than the second quarter of 1997. Sales for resale and
other electric revenues increased $16.8 million primarily due to higher prices
in the resale market reflecting market conditions and higher sales volumes as a
result of more aggressive marketing efforts, and increased transmission of
electricity for others.
GAS REVENUES for the second quarter of 1998 decreased $8.3 million or 10.9
percent compared with the second quarter of 1997. Gas revenues decreased
primarily due to a 28.4 percent decrease in gas sales volume, partially offset
by a 18.2 percent average price increase. The sales volume decrease is due
primarily to less favorable weather in 1998 in comparison to 1997. The average
temperature for the second quarter of 1998 was 4.3 degrees warmer than the
second quarter of 1997. The price increase is mainly due to rate adjustments for
increased purchased gas costs resulting from market changes in natural gas
supply prices and interim rate increases as discussed in Note 2 to the
Financial Statements
FUEL FOR ELECTRIC GENERATION AND PURCHASED AND INTERCHANGE POWER expense
together increased $32.2 million or 23.0 percent for the second quarter of 1998
compared with the second quarter of 1997. Purchased and interchange power costs
increased $24.9 million primarily due to the higher average cost of purchases as
a result of market conditions and higher demand expenses related to a contract
which began in October 1997. In addition, more purchases were required in 1998
to support sales growth. Fuel expenses increased $7.3 million primarily due to
higher output from NSP's generating plants and higher average fossil fuel
prices. The higher output reflects higher sales levels. The higher fuel
prices are primarily due to increased use of less efficient fossil plants to
support higher sales.
COST OF GAS PURCHASED AND TRANSPORTED for the second quarter of 1998
compared with the second quarter of 1997 decreased $5.2 million or 12.4 percent
primarily due to the lower gas sendout, partially offset by higher cost of gas.
The lower sendout primarily is a result of decreased gas sales due to less
favorable weather. The higher cost of purchased gas reflects changes in market
conditions and purchased gas cost adjustments to match expense with rate
recovery.
OTHER OPERATION, MAINTENANCE AND ADMINISTRATIVE AND GENERAL expenses
together increased $16.7 million or 9.8 percent compared with the second quarter
of 1997. The increases are primarily due to storm costs, increased outage
related expenses and higher costs for information technology improvements,
including costs related to the Year 2000 project.
DEPRECIATION AND AMORTIZATION expense increased $2.5 million or 3.1 percent
compared with the second quarter of 1997. The increase is mainly due to
increased plant in service between the two periods partially offset by lower
depreciation rates.
PROPERTY AND GENERAL TAXES for the second quarter of 1998 compared with the
second quarter of 1997 increased $0.1 million or 0.2 percent primarily due to
higher property taxes partially offset by lower payroll taxes. The higher
property taxes reflect timing of accruals as a result of a second quarter 1997
reduction to adjust 1997 year to date accruals. Without this timing issue,
property taxes would have decreased.
UTILITY INCOME TAXES for second quarter 1998 compared with first quarter
1997 were $2.1 million less primarily due to a lower effective tax rate and
lower operating income.
OTHER UTILITY INCOME (DEDUCTIONS) - NET after applicable income taxes
increased $15.1 million mainly due to the write off of merger costs in the
second quarter of 1997.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFC) decreased $0.8 million
in 1998 largely due to lower returns as a result of less capital used to finance
conservation and energy management programs and fewer construction projects
eligible for AFC.
UTILITY INTEREST AND AMORTIZATION decreased $1.9 million or 6.2 percent
primarily due to lower levels of commercial paper, retirement of bonds in
October 1997 and April 1998, partially offset by new bonds issued in March 1998
and Senior Notes issued by Viking in October 1997.
PREFERRED STOCK DIVIDENDS AND REDEMPTION PREMIUMS decreased $1.3
million in the second quarter of 1998 compared with 1997 primarily due to
reductions in dividends resulting from the redemption of two issues of preferred
stock in late March 1998.
AVERAGE COMMON SHARES OUTSTANDING increased due to stock issuances, mainly
a public offering in September 1997. Share dilution has decreased second
quarter earnings by approximately two cents per share in 1998 in comparison to
1997.
Nonregulated Business Results
- -------------------------------
NSP's nonregulated operations include diversified businesses, such as NRG's
businesses, which are primarily independent power production, commercial and
industrial heating and cooling, and energy-related refuse-derived fuel
production. In addition, EMI's primary business is energy sales and service.
NSP also has investments in affordable housing projects through Eloigne Company
and several income-producing properties through other subsidiaries. The
following summarizes NSP's diversified business results in the aggregate,
including consolidated subsidiaries and unconsolidated affiliates.
3 Mos. Ended
- -------------------------------------
(Thousands of dollars, except EPS). . 6/30/98 6/30/97
--------- ---------
Operating revenues. . . . . . . . . . $ 42,373 $ 46,915
Equity in earnings of unconsolidated
affiliates . . . . . . . . . . . . 12,578 4,532
Operating and development expenses. . (50,645) (50,959)
Other income (expense). . . . . . . . 3,376 4,605
--------- ---------
Income from nonregulated businesses
before interest and taxes . . . . 7,682 5,093
Interest expense. . . . . . . . . . . (13,859) (8,044)
Income tax benefit. . . . . . . . . . 10,551 6,259
--------- ---------
Net income. . . . . . . . . . . . . . $ 4,374 $ 3,308
- ------------------------------------- --------- ---------
Contribution of nonregulated
businesses to NSP earnings per
share. . . . . . . . . . . . . . . $ 0.03 $ 0.03
- ------------------------------------- --------- ---------
NRG - NRG's second quarter earnings increased in 1998 from the same
period one year ago primarily due to earnings, including tax credits, from
interests in Pacific Generation Company, Energy Developments Limited, and other
new projects purchased after the second quarter of 1997. Earnings for 1998 were
partially offset by increased interest costs primarily associated with NRG's
$250 million of senior notes issued in mid-1997 and balances outstanding under
line of credit arrangements. NRG is a public company and is subject to the
informational reporting requirements of the Securities Exchange Act of 1934.
Further information about NRG may be obtained from its Form 10-Q for the quarter
ended June 30, 1998.
EMI - EMI's 1998 second quarter losses were equivalent to those of the
second quarter of 1997.
FIRST SIX MONTHS OF 1998 COMPARED WITH FIRST SIX MONTHS 1997
- ----------------------------------------------------------------------
Utility Operating Results
- ---------------------------
ELECTRIC REVENUES for the first six months of 1998 increased $55.0 million
or 5.3 percent compared with the six months of 1997. Retail revenues increased
approximately $32.8 million largely due to a 2.2 percent increase in retail
sales volume and a 1.2 percent increase in average prices due to fuel cost
recovery. The increase in retail electric sales reflects sales growth,
partially offset by less favorable weather, particularly in the first quarter.
Sales for resale and other electric revenues increased $22.2 million primarily
due to higher sales volumes in the resale market as a result of more aggressive
marketing efforts and higher prices due to market conditions, increased
transmission of electricity for others, and conservation program revenues.
GAS REVENUES for the first six months of 1998 decreased $51.9 million or
17.3 percent compared with the first six months of 1997. Gas revenues decreased
primarily due to a 16.8 percent decrease in gas sales volume and a 4.6 percent
average price decrease. The sales volume decrease is due primarily to less
favorable weather in 1998 in comparison to 1997. The average temperature for
the first six months of 1998 was 5.7 degrees warmer than the first six months
of 1997. The price decrease is mainly due to rate adjustments for decreased
purchased gas costs resulting from market changes in natural gas supply prices,
partially offset by interim rate increases as discussed in Note 2 to the
Financial Statements.
FUEL FOR ELECTRIC GENERATION AND PURCHASED AND INTERCHANGE POWER expense
together increased $40.8 million or 14.6 percent for the first six months of
1998 compared with the first six months of 1997. Purchased and interchange
power costs increased $39.1 million primarily due to higher average cost of
purchases as a result of market conditions and higher demand expenses related to
a contract which began in October 1997. In addition, more purchases were
required in 1998 to support higher sales.
COST OF GAS PURCHASED AND TRANSPORTED for the first six months of 1998
compared with the first six months of 1997 decreased $43.7 million or 22.5
percent due to lower gas sendout and the lower cost of gas. The lower sendout
primarily is a result of decreased gas sales, reflecting less favorable weather
conditions. The lower cost of purchased gas reflects changes in market
conditions and purchased gas cost adjustments to match expense with rate
recovery.
OTHER OPERATION, MAINTENANCE AND ADMINISTRATIVE AND GENERAL expenses
together increased $22.9 million or 6.8 percent compared with the first six
months of 1997. The increases are primarily due to storms costs incurred in the
second quarter of 1998, increased plant outage related expenses, higher costs
for information technology improvements, including costs related to the Year
2000 project, and higher insurance costs mainly as a result of an insurance
refund recorded in 1997.
DEPRECIATION AND AMORTIZATION expense increased $6.7 million or 4.2 percent
compared with the first six months of 1997. The increase is mainly due to
increased plant in service between the two periods partially offset by revised
depreciation lives.
PROPERTY AND GENERAL TAXES for the first six months of 1998 compared with
the first six months of 1997 decreased $5.3 million or 4.5 percent primarily due
to lower property tax rates reflecting recent legislation, and lower franchise
taxes.
UTILITY INCOME TAXES for first six months of 1998 compared with first six
months of 1997 were $8.5 million less primarily due to lower operating income in
the first six months of 1998 and a lower effective tax rate.
OTHER UTILITY INCOME (DEDUCTIONS) - NET after applicable income taxes
increased $18.2 million mainly due to the write off of $29 million of merger
costs (before tax) in the first six months of 1997.
ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION (AFC) decreased $2.3 million
in 1998 largely due to lower returns as a result of less capital used to finance
conservation and energy management programs and fewer construction projects
eligible for AFC.
UTILITY INTEREST AND AMORTIZATION decreased $3.6 million or 5.9 percent
primarily due to lower levels of commercial paper and retirement of bonds in
October 1997 and April 1998, partially offset by new bonds issued in March 1998
and Senior Notes issued by Viking in October 1997.
DISTRIBUTIONS ON REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST
increased $1.3 million due to the issuance of new securities in late January
1997.
PREFERRED STOCK DIVIDENDS AND REDEMPTION PREMIUMS decreased $2.9 million in
the first six months of 1998 compared with 1997 primarily due to reductions in
dividends resulting from the redemption of two issues of preferred stock in
February 1997 and two other issues in late March 1998.
AVERAGE COMMON SHARES OUTSTANDING increased due to stock issuances, mainly
a public offering in September 1997. Share dilution has decreased 1998 earnings
by approximately five cents per share in comparison to 1997.
Nonregulated Business Results
- -------------------------------
The following summarizes NSP's diversified business results in the
aggregate, including consolidated subsidiaries and unconsolidated affiliates.
6 Mos. Ended
-------------------------------------
(Thousands of dollars, except EPS). . 6/30/98 6/30/97
---------- ----------
Operating revenues. . . . . . . . . . $ 84,286 $ 110,883
Equity in earnings of unconsolidated
affiliates . . . . . . . . . . . . 28,185 11,626
Operating and development expenses. . (103,431) (117,898)
Other income (expense). . . . . . . . 2,927 7,132
---------- ----------
Income from nonregulated businesses
before interest and taxes . . . . 11,967 11,743
Interest expense. . . . . . . . . . . (26,138) (13,005)
Income tax benefit. . . . . . . . . . 24,822 12,090
---------- ----------
Net income. . . . . . . . . . . . . . $ 10,651 $ 10,828
- ------------------------------------- ---------- ----------
Contribution of nonregulated
businesses to NSP earnings per
share. . . . . . . . . . . . . . . $ 0.07 $ 0.08
- ------------------------------------- ---------- ----------
In the aggregate, approximately one cent per share of the decrease in
nonregulated earnings contribution is due to share dilution resulting primarily
from NSP's stock offering in September 1997.
NRG - NRG's earnings for the first six months of 1998 were approximately
equal to the first six months of 1997 on a per share basis. Project earnings,
including tax credits, from interests in Pacific Generation Company, Energy
Developments Limited and other new projects, all purchased after the second
quarter of 1997, along with increased earnings from existing projects were
offset by increases in interest costs, business development expenses, and costs
of expanded operations. Higher interest costs primarily reflect the issuance of
$250 million senior notes in mid-1997 and higher borrowings on its line of
credit.
EMI - EMI's losses for the first six months of 1998 were equivalent to the
first six months of 1997 on a per share basis.
LIQUIDITY AND CAPITAL RESOURCES
For a discussion of available credit lines and short-term borrowings, see
Note 5 to the Financial Statements.
On April 22, 1998, the Company's shareholders approved an amendment to the
Company's Restated Articles of Incorporation to increase the number of
authorized common shares from 160 million to 350 million. Also on April 22,
1998, the Company's Board of Directors authorized a two-for-one stock split
effective June 1, 1998, for shareholders of record on May 18, 1998. All share
amounts in this report have been restated to reflect this stock split.
In January 1998, stock options for the purchase of 571,756 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, 1998, a total of 2,470,008 options were
outstanding, which were considered potentially dilutive common shares for
calculating earnings per share - assuming dilution. During the first six months
of 1998, the Company has issued 317,161 new shares of common stock under the
Plan pursuant to the exercise of options and awards granted in prior years.
Under NSP's Dividend Reinvestment and Stock Purchase Plan, the Company has
issued 589,630 shares of common stock during the first six months of 1998.
During 1998 the Company has issued a total of 737,265 shares of common
stock to the Employee Stock Ownership Plan (ESOP), including 511,726 leveraged
shares, which was financed by a $15 million bank loan in April 1998.
In third quarter of 1998, NSP issued 852,650 shares of common stock in
connection with various business acquisitions.
On March 11, 1998, the Company issued $100 million of 5.875 percent First
Mortgage Bonds due March 1, 2003 and $150 million of 6.5 percent First Mortgage
Bonds due March 1, 2028. A portion of the proceeds was used to redeem preferred
stock and certain First Mortgage Bonds, as discussed below, and to reduce
short-term debt balances.
On March 31, 1998, the Company redeemed 300,000 shares of its cumulative
preferred stock adjustable rate series A and 650,000 shares of its cumulative
preferred stock adjustable rate series B both at $100 per share plus dividends.
On April 27, 1998, the Company redeemed $50 million of 7.375 percent and
$50 million of 7.5 percent First Mortgage Bonds.
The Company currently anticipates filing with the SEC a $400 million
universal debt shelf registration during the second half of 1998. The Company
currently has $50 million of registered, but unissued, bonds remaining from its
$300 million First Mortgage Bond shelf registration, which was filed in October
1995. Depending on market conditions, the Company expects to issue the long
term debt to raise additional capital for general corporate purposes or to
redeem or retire outstanding securities.
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.
In 1994, the Company along with other major utilities filed a lawsuit
against the Department of Energy (DOE) in an attempt to clarify the DOE's
obligation to dispose of spent nuclear fuel beginning not later than Jan. 31,
1998. The suit was filed in the U.S. Court of Appeals for the District of
Columbia Circuit (Court). Since then, the Company and other utilities have
filed additional lawsuits with the Court related to this issue. The Court has
confirmed the unconditional obligation of the DOE to begin acceptance of spent
nuclear fuel by the 1998 deadline and that the obligation exists under statute
and contract. (See detailed discussion in the Company's 1997 Form 10-K, Item 3
- - Legal Proceedings).
On Feb. 19, 1998, the Company and other utilities brought motions asking
the Court to order the DOE to develop a disposal program to dispose of nuclear
fuel beginning immediately; relief from an obligation to pay fees to the Nuclear
Waste Fund (Fund) and allowing escrow of the funds until the DOE is in
compliance; prohibition of any suspension or termination of the DOE's disposal
contract; and prevention of the DOE from paying damages related to the breach of
obligation from the Fund. On May 5, 1998, the Court dismissed the motion
brought by the Company and other utilities. The Court reiterated its earlier
finding that the proper remedy for the utilities is under the Standard Contract
between utilities and the DOE.
On June 8, 1998, the Company filed a complaint in the Court of Federal
Claims against the DOE requesting damages for the DOE's partial breach of the
Standard Contract. The Company requests damages in excess of $1 billion, which
consists of the costs of storage of spent nuclear fuel at the Prairie Island
nuclear generating plant (Prairie Island), as well as anticipated costs related
to the Private Fuel Storage, LLC and the 1994 state legislation limiting the
number of casks which can be used to store spent nuclear fuel at Prairie Island.
On June 8, 1998, Indiana Michigan Power Company (a subsidiary of American
Electric Power), Duke Energy and Florida Power and Light filed similar
complaints in the Court of Federal Claims against the DOE requesting damages for
the DOE's partial breach of the Standard Contract. On June 17, 1998, the four
utilities filed a motion to consolidate the complaints. On June 26, 1998, the
Court of Federal Claims determined that briefing on jurisdictional issues in the
Company's case would proceed, while the other cases are stayed. Essentially,
the Company's case requesting damages of $1.4 billion will proceed as the lead
case on jurisdictional issues.
On Aug. 7, 1998, a group of residential and commercial customers brought a
class action lawsuit against the DOE in the Federal District Court in
Minneapolis, Minnesota. The suit demands the return of monies paid by customers
into the nuclear waste fund and other damages, based on the failure of the DOE
to meets its unconditional obligation to accept spent nuclear fuel by January
31, 1998. The Company is named as nominal defendant, as the Company has the
contract with the DOE under which payments are made into the Fund.
On Jan. 30, 1998, NRG's 45 percent owned affiliate, CogenAmerica, gave
notice that it intended to seek arbitration of its claim that NRG sold the
Mid-Continent Power Company (MCPC) facility to OGE Energy Corp. (OGE) in
violation of NRG's obligation to offer certain project investments to
CogenAmerica under the Co-Investment Agreement between NRG and CogenAmerica.
On July 31, 1998, an arbitration panel ordered NRG to offer its interest in MCPC
to CogenAmerica and enjoined NRG's pending sale of the MCPC facility to OGE. On
Aug. 4, 1998, NRG, in accordance with the arbitration panel's order, offered its
interest in the MCPC facility to CogenAmerica on the same terms as it had agreed
to sell to OGE. Under the order, CogenAmerica has 30 days to accept NRG's
offer, and if the offer is not accepted in that time period, NRG has the right
to request that the arbitration panel lift the injunction. Finally, if
CogenAmerica accepts the offer, NRG will be required to finance the purchase
price of approximately $25 million in the event that other financing is not
commercially available to CogenAmerica.
On Aug. 12, 1998, the U.S. Court of Appeals for the Eighth Circuit ruled in
the Company's favor on two federal income tax issues. The first issue involved
the in-service dates for nuclear fuel assemblies received at the Prairie Island
plant in 1985 and 1986. The second issue involved the timing of losses on
uranium enrichment contracts sold to third parties in 1985 and 1986. The
Company previously capitalized and depreciated these costs for income tax
purposes, but filed refund claims in 1994 claiming current tax deductions. The
three judge panel voted unanimously in favor of the Company's positions. The
Internal Revenue Service can apply for rehearing and or appeal to the U.S.
Supreme Court. Based on the Court's reasoning and the unanimous vote, outside
legal counsel believes the Company's positions will be sustained.
See Notes 2 and 3 of the Financial Statements for further discussion of
legal proceedings, including Regulatory Matters and Commitments and Contingent
Liabilities, incorporated herein by reference.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
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(A) EXHIBITS
The following Exhibits are filed with this report:
3.01 Restated Articles of Incorporation of Northern States Power Company
27.01 Financial Data Schedule for the six months ended June 30, 1998.
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, 1998, or between June 30, 1998 and the date of this report:
April 21, 1998 (Filed April 22, 1998) - Item 5 Other Events. Re: Withdrawal
of NSP's subsidiary, Viking Gas Transmission Company, from participation in the
proposed Viking Voyageur pipeline project.
April 22, 1998 (Filed April 23, 1998) - Item 5. Other Events. Item 7.
Financial Statements and Exhibits. Re: Disclosure of the Company's Board of
Directors authorization of a two-for-one stock split effective June 1, 1998 for
shareholders of record on May 18, 1998.
May 20, 1998 (Filed May 20, 1998) - Item 5 Other Events. Re: Disclosure of
the Company's two-for-one stock split increase of the number of shares
registered under Statement No. 333-00415 from 3,500,000 to 4,624,674 shares.
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/
--------------------------------------
John P. Moore, Jr.
Corporate Secretary
Date: August 14, 1998
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EXHIBIT INDEX
Method of Exhibit
Filing No. Description
DT 3.01 Restated Articles of Incorporation of Northern States
Power Company
DT 27.01 Financial Data Schedule for the six months ended June
30, 1998
DT 99.01 Statement pursuant to Private Securities Litigation
Reform Act of 1995.
DT = Filed electronically with this direct transmission