XEL

Business Context and Reporting Period

Company: Northern States Power Company (Minnesota) and Subsidiaries (NSP), a subsidiary of Xcel Energy Inc.

Filing Type: Form 10-Q (Quarterly Report)

Period Ended: March 31, 1995

Business Overview: NSP operates regulated electric and gas utilities. The quarter was significantly impacted by a proposed merger with Wisconsin Energy Corporation (WEC) announced on April 28, 1995, to form Primergy Corporation. The transaction is structured as a "pooling of interests" and is subject to regulatory and shareholder approval, with completion anticipated in late 1996.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 3.3% to $661.2 million. Gas revenues dropped 13.5% ($25.6 million) due to warmer weather reducing sales volume by 7.4% and lower purchased gas costs. Electric revenues increased slightly by 0.7% ($3.3 million), driven by higher sales to other utilities, offsetting a 0.5% decline in retail revenues caused by rate reductions in North Dakota.
• Expense Reductions: Cost of gas purchased and transported fell 18.5% ($22.5 million) due to lower market prices and reduced sendout. Combined operating, maintenance, and administrative expenses decreased 3.1% ($5.2 million) due to lower employee benefit costs and favorable timing of plant outages.
• Interest Costs: Interest charges increased 26.3% ($6.4 million) to $30.8 million, attributed to long-term debt issuances in 1994 and higher short-term interest rates and balances in 1995.
• Non-Regulated Growth: Non-regulated businesses contributed $0.13 per share in 1995 compared to $0.03 in 1994, driven by new energy projects in Australia and Germany and increased gas marketing sales.

Outlook, Risks, and Management Commentary

• Merger with WEC: The proposed merger with Wisconsin Energy Corporation is the primary strategic focus. The combined entity (Primergy) is projected to generate $2.0 billion in cost savings over 10 years. The transaction is expected to result in a pro forma dividend rate of $1.62 per share. Completion is contingent on regulatory approvals, estimated to take 12-18 months.
• Rate Matters: The North Dakota Public Service Commission approved retroactive refunds totaling approximately $5.1 million for electric customers and a prospective annualized rate reduction of $750,000 effective June 1, 1995.
• Non-Regulated Developments: NSP's subsidiary NRG reached an agreement with Pacific Gas & Electric (PG&E) to acquire Standard Offer 4 contracts for four power plants in California. This is expected to result in a one-time gain in the second quarter of 1995, though the final financial impact remains pending regulatory approval.
• Liquidity: The company maintains $299 million in commercial bank credit lines to support commercial paper borrowings. Short-term debt was reduced by $80.8 million during the quarter.
• Legal/Environmental: NSP agreed to pay a $105,436 civil penalty to the Minnesota Pollution Control Agency regarding halogen content in water discharge reports.

Investor Verification Checklist

• Verify the status of regulatory approvals for the NSP-WEC merger, as completion is not expected until late 1996.
• Monitor the final accounting treatment and timing of the one-time gain from the PG&E contract acquisition in Q2 1995.
• Assess the impact of the North Dakota rate reductions and refunds on future utility operating margins.
• Review the pro forma financial statements for Primergy to understand the combined earnings power and debt profile.
• Confirm the company's ability to maintain liquidity given the reduction in short-term debt and ongoing capital expenditure requirements.