XEL

Business Context and Reporting Period

This Form 10-Q covers the quarterly and six-month periods ended June 30, 2000, for Northern States Power Company (Minnesota) and its subsidiaries (NSP). The registrant is in the process of merging with New Century Energies, Inc. (NCE) to form Xcel Energy Inc., a transaction approved by state regulators, FERC, the DOJ, and the NRC, pending final SEC and FCC approval. NSP operates regulated electric and gas utilities alongside significant nonregulated businesses, primarily through its subsidiary NRG Energy, Inc.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total utility operating revenues increased 8.3% for the quarter and 7.4% for the six-month period compared to 1999. Electric revenues rose 5.3% (quarter) and 5.0% (six months), while gas revenues surged 31.6% (quarter) and 17.9% (six months) due to higher cost recovery and sales growth.
• Profitability Surge: Net income for the quarter jumped from $11.5 million in 1999 to $62.2 million in 2000. This was driven by a massive increase in nonregulated business income (from $140k to $133.1 million pre-tax) and a favorable comparison to a 1999 quarter that included a $35 million conservation incentive write-off.
• Nonregulated Performance: NRG Energy's earnings contribution was the primary driver of growth, increasing from $0.02 to $0.24 per share for the quarter, fueled by acquisitions in the Northeast, South (Cajun), and UK (Killingholme).
• Capital Expenditures: Net cash used for investing activities increased significantly to $2.13 billion for the six months ended June 30, 2000, compared to $1.24 billion in 1999, largely due to $1.79 billion in nonregulated property additions and asset acquisitions.

Guidance, Outlook, and Risks

• Merger Outlook: The merger with NCE to form Xcel Energy is expected to close in the third quarter of 2000. Pro forma information indicates combined diluted EPS of $0.87 for the six months ended June 30, 2000.
• NRG IPO: NRG Energy completed an IPO in June 2000, raising approximately $454 million. NSP retained an 82% ownership stake. Proceeds were used to repay bridge loans and fund future acquisitions.
• Regulatory Matters:
  • Minnesota Fuel Clause: MPUC approved a change to reflect fuel costs more timely, effective July 2000.
  • Conservation Surcharge: MPUC ordered a reduction in the conservation surcharge and a refund of approximately $24 million in overcollections, though NSP expects no earnings impact due to prior accruals.
  • Guardian Pipeline: FERC issued a preliminary determination supporting the construction of a new 149-mile pipeline; a final decision is expected by March 2001.
• Risks and Contingencies:
  • Legal Proceedings: NSP is a defendant in lawsuits related to a gas explosion in St. Cloud, MN (1998) and a fire in Grand Forks, ND (1997). Ultimate costs are unknown, though insurance coverage exists.
  • CellNet Bankruptcy: NSP holds approximately $5 million in intangible assets related to CellNet Data Systems, which filed for Chapter 11 bankruptcy in February 2000. Recovery is not assured.
  • Market Caps: NYISO petitioned FERC to cap ancillary service revenues; FERC rejected retroactive application, allowing NRG to retain approximately $16.2 million in revenues.

Investor Verification Checklist

• Verify the final closing date and regulatory approvals for the NSP/NCE merger to form Xcel Energy.
• Monitor the resolution of the Minnesota Public Utilities Commission (MPUC) investigation into fuel cost recoveries and the impact of the $24 million conservation refund on cash flow.
• Assess the integration and performance of NRG Energy's recent acquisitions (Cajun, Killingholme, Conectiv) and the impact of the NRG IPO on NSP's consolidated earnings.
• Review the status of the Guardian Pipeline project and potential capital requirements for the Black Dog plant repowering project.
• Track the outcome of pending litigation regarding the St. Cloud gas explosion and Grand Forks fire to determine potential liability exposure beyond insurance limits.