Business Context and Reporting Period
This Form 10-Q covers the quarterly and six-month periods ended June 30, 1999, for Northern States Power Company (Minnesota) (NSP), a subsidiary of Xcel Energy Inc. The filing details NSP's operations as a regulated electric and gas utility alongside its nonregulated subsidiaries, primarily NRG Energy, Inc. (NRG). A material event during this period was the shareholder approval on June 28, 1999, of a merger between NSP and New Century Energies, Inc. (NCE) to form Xcel Energy Inc., pending regulatory review.
Key Financial Metrics
| Metric | Six Months Ended June 30, 1999 | Six Months Ended June 30, 1998 |
|---|---|---|
| Total Utility Operating Revenues | $1,402.6 million | $1,340.0 million |
| Utility Operating Income | $153.6 million | $144.1 million |
| Net Income | $63.8 million | $92.2 million |
| Earnings Per Share (Diluted) | $0.40 | $0.59 |
| Net Cash Provided by Operating Activities | $253.8 million | $270.0 million |
| Net Cash Used for Investing Activities | ($1,240.0 million) | ($272.8 million) |
| Net Cash Provided by Financing Activities | $1,042.0 million | ($11.9 million) |
| Total Assets | $8,538.6 million | $7,396.3 million |
| Long-Term Debt | $2,152.6 million | $1,851.1 million |
| Short-Term Debt | $1,265.8 million | $239.8 million |
Note: Short-term debt includes $761.6 million of nonregulated project financing.
Material Changes vs. Prior Period
- Earnings Decline: Net income decreased 31% to $63.8 million, and diluted EPS fell to $0.40 from $0.59. This decline was primarily driven by a $35 million pre-tax charge (14 cents per share) related to the disallowance of rate recovery for 1998 conservation program incentives by the Minnesota Public Utilities Commission (MPUC).
- Revenue Growth: Total utility operating revenues increased 4.7% year-over-year. Electric revenues rose 4.9% due to retail sales growth and fuel cost recovery, while gas revenues increased 3.7% driven by weather-normalized sales growth and the Black Mountain Gas merger.
- Investing Surge: Net cash used for investing activities jumped to $1.24 billion, largely due to $930.2 million in business acquisitions by the NRG subsidiary (including the Huntley, Dunkirk, and Arthur Kill generating stations) and capital expenditures of $240.9 million.
- Debt Structure: Short-term debt increased significantly to fund acquisitions and working capital, though NSP issued $250 million in long-term debt in July 1999 to reduce these levels.
Outlook, Risks, and Management Commentary
- Merger Status: The merger with NCE to form Xcel Energy Inc. was approved by shareholders (83% for NSP, 93% for NCE). Regulatory approval from the FERC, SEC, and state commissions is expected within 12 to 18 months. Pro forma diluted EPS for the combined entity for the six months ended June 30, 1999, is estimated at $0.64.
- Regulatory Risks:
- Conservation Charge: NSP plans to seek reconsideration of the MPUC's decision denying 1998 conservation incentives. A regulatory reserve of $35 million has been established.
- Rate Investigation: The MPUC ordered an investigation into the reasonableness of NSP's Minnesota retail electric rates. While this does not authorize immediate rate reductions, it could lead to a formal rate proceeding.
- Transmission Tariffs: The proposed Midcontinent Area Power Pool (MAPP) tariff is estimated to reduce 2000 pretax earnings by $5 million to $16 million.
- Legal Contingencies:
- St. Cloud Explosion: Five lawsuits remain pending regarding a December 1998 gas explosion that killed four people. NSP denies liability.
- Grand Forks Fire: Multiple lawsuits seek damages exceeding $15 million related to a 1997 fire during historic floods. NSP maintains it is not legally responsible.
- DOE Litigation: NSP is appealing a Court of Federal Claims dismissal of its $1 billion+ claim against the Department of Energy regarding spent nuclear fuel storage.
- Year 2000 (Y2K): NSP reported 99% of systems were Y2K ready as of June 30, 1999. Total costs incurred to date are approximately $19.1 million, with an additional $5.3 million estimated for completion.
Investor Verification Checklist
- Conservation Charge Impact: Verify the status of the MPUC appeal regarding the $35 million disallowed conservation incentive charge and potential future rate recovery.
- Merger Timeline: Monitor regulatory approvals from the FERC and state commissions required to close the Xcel Energy merger.
- NRG Acquisition Integration: Assess the financial performance and debt refinancing of NRG's recent $1.2 billion+ in power plant acquisitions.
- Rate Investigation Outcome: Track the MPUC's rate investigation to determine if a formal rate case is initiated, which could impact future revenue.
- Debt Maturity Profile: Review the refinancing plans for the $761.6 million in short-term nonregulated debt and the $540 million in 364-day NRG project financing.