XEL

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 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 shareholders and several regulators, with completion expected by mid-2000. The company operates regulated electric and gas utilities alongside nonregulated businesses, primarily through its subsidiary NRG Energy, Inc.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total operating revenues increased 42% to $1.146 billion, driven largely by the consolidation of NRG Energy's acquisitions (Cajun and Killingholme facilities) and growth in utility sales.
• Net Income Decline: Net income decreased 8.3% to $48.0 million. This decline was primarily due to a significant increase in financing costs ($92.4 million vs. $42.3 million) associated with funding nonregulated acquisitions.
• Utility Performance: Utility operating income decreased slightly to $83.8 million from $87.7 million. Electric revenues rose 4.7% due to sales growth and fuel cost recovery, partially offset by weather impacts. Gas revenues increased 12.7% due to cost recovery mechanisms, despite a weather-related sales decline.
• Nonregulated Segment: NRG's income before interest and taxes surged to $52.4 million from a loss of $7.4 million in the prior year, reflecting new asset acquisitions. However, high interest expenses ($54.0 million) significantly reduced the net contribution to consolidated earnings.
• Capital Structure: Long-term debt increased by approximately $1.5 billion compared to the prior year-end, reflecting $2.2 billion in new issuances to fund acquisitions and operations.

Outlook, Risks, and Management Commentary

• Merger Status: The merger with NCE to form Xcel Energy is pending final approvals from the SEC, Nuclear Regulatory Commission, and the states of New Mexico and Texas. Management expects completion by mid-2000.
• Regulatory Risks:
  • Minnesota Investigation: The Minnesota Office of Attorney General has petitioned the Public Utilities Commission to investigate NSP's fuel cost recovery practices, alleging improper diversion of low-cost generation. NSP contests this and does not expect a decision until later in 2000.
  • NYISO Market Cap: The New York Independent System Operator has petitioned FERC to impose a retroactive market cap on ancillary service revenues. If granted, this could result in an $8.2 million pretax earnings reduction for NRG.
• Contingencies: 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.
• Capital Resources: NRG plans a public offering of up to 18% of its common stock (up to $600 million) to repay bridge loans and fund future growth. NSP maintains approximately $1.0 billion in short-term debt and has access to significant credit facilities.

Investor Verification Checklist

• Verify the status of regulatory approvals for the NSP/NCE merger, specifically from the SEC, NRC, New Mexico, and Texas.
• Monitor the outcome of the Minnesota Attorney General's investigation into fuel cost recovery practices.
• Assess the potential financial impact of the NYISO ancillary service market cap petition on NRG's future earnings.
• Review the progress of NRG's planned 18% equity offering and its effect on NSP's ownership stake and consolidation accounting.
• Track the resolution of the CellNet Data Systems bankruptcy and the recoverability of the $5 million asset exposure.