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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
X Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 (fee required)
or
Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (no fee required)
For the fiscal year ended December 31, 1999 Commission file number: 10-3140
Northern States Power Company, a Wisconsin corporation, meets the
conditions set forth in general instruction I (1) (a) and (b) of Form 10-K and
is therefore filing this form with the reduced disclosure format. (In general
instruction I(2))
NORTHERN STATES POWER COMPANY
(Exact name of registrant as specified in its charter)
Wisconsin 39-0508315
(State or other jurisdiction of (I.R.S. employer identification number)
incorporation or organization)
1414 W. Hamilton Ave. 54701
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (715) 839-2621
Securities registered pursuant to Section 12(b) of the Act:
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None
Securities registered pursuant to Section 12(g) of the Act:
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None
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 registrant's
classes of common stock as of the latest practicable date.
Class Outstanding at March 14, 2000
- ----- ---------------------------------
Common Stock, $100 Par Value 862,000 Shares
All outstanding common stock is owned beneficially and of record by
Northern States Power Company, a Minnesota corporation.
Documents Incorporated by Reference
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None
INDEX
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PART I Page No.
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Item 1 Business 1
REGULATION AND RATES
Utility Industry Restructuring Status 1
Construction Authorization 3
Ratemaking Principles in Wisconsin and Michigan 4
Fuel and Purchased Gas Adjustment Clauses 4
Rate Matters by Jurisdiction 5
ELECTRIC OPERATIONS
Competition 7
NSP System 7
Capability and Demand 8
Demand Side Management 8
Intercompany Agreements 8
Fuel Supply 9
Electric Operating Statistics 9
GAS OPERATIONS 10
ENVIRONMENTAL MATTERS 11
CONSTRUCTION AND FINANCING 13
EMPLOYEES AND EMPLOYEE BENEFITS 14
Item 2 Properties 15
Item 3 Legal Proceedings 16
Item 4 Submission of Matters to a Vote of Security Holders 17
PART II
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Item 5 Market Price of and Dividends on the Registrant's Common
Equity and Related Stockholder Matters 18
Item 6 Selected Financial Data 18
Item 7 Management's Discussion and Analysis 19
Item 7a Quantitative and Qualitative Disclosures about Market Risk 22
Item 8 Financial Statements and Supplementary Data 23
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 40
PART III
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Item 10 Directors and Executive Officers of the Registrant 40
Item 11 Executive Compensation 40
Item 12 Security Ownership of Certain Beneficial
Owners and Management 40
Item 13 Certain Relationships and Related Transactions 40
PART IV
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Item 14 Exhibits, Financial Statement Schedules and Reports
on Form 8-K 41
SIGNATURES 43
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EXHIBITS (EXCERPT)
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Statement pursuant to Private Securities Litigation
Reform Act of 1995 44
PART I
ITEM 1 - BUSINESS
- --------------------
Northern States Power Company (NSP-Wisconsin), incorporated in 1901 under the
laws of Wisconsin as the La Crosse Gas and Electric Company, is an operating
public utility company with executive offices at 1414 West Hamilton Ave., Eau
Claire, Wis. 54701 (Phone: (715) 839-2621). NSP-Wisconsin is a wholly owned
subsidiary of Northern States Power Company, a Minnesota corporation
(NSP-Minnesota). The term NSP refers to NSP-Wisconsin combined with
NSP-Minnesota and its other subsidiaries.
NSP-Wisconsin is engaged in the generation, transmission, and distribution of
electricity to approximately 214,000 retail customers in an area of
approximately 18,900 square miles in northwestern Wisconsin, to approximately
9,000 electric retail customers in an area of approximately 300 square miles in
the western portion of the Upper Peninsula of Michigan, and to 10 wholesale
customers in the same general area. NSP-Wisconsin is also engaged in the
distribution and sale of natural gas in the same service territory to
approximately 81,000 customers in Wisconsin and 5,000 customers in Michigan.
In 1999, NSP-Wisconsin derived 83 percent of its total operating revenues from
electric utility operations and 17 percent from gas utility operations.
Except for the historical information contained herein, the matters discussed in
this Form 10-K are forward-looking statements that are subject to certain risks,
uncertainties and assumptions as discussed in Management's Discussion and
Analysis under Item 7 and Exhibit 99.01 to this report on Form 10-K
BUSINESS DEVELOPMENTS
---------------------
Proposed Merger
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NSP and New Century Energies, Inc. (NCE), a utility based in Denver, Colo.,
have agreed to merge. It is expected that NSP-Wisconsin will continue to
exist as an operating subsidiary of the merged company.
REGULATION AND RATES
--------------------
The Public Service Commission of Wisconsin (PSCW) and the Michigan Public
Service Commission (MPSC) regulate the rates and service of NSP-Wisconsin with
respect to retail sales within Wisconsin and Michigan, respectively, and various
other aspects of NSP-Wisconsin's operations. The Federal Energy Regulatory
Commission (FERC) regulates wholesale sales of electricity and gas and various
other aspects of operations.
Utility Industry Restructuring Status
- ----------------------------------------
Some states have begun to allow retail customers to choose their electricity
supplier, and many other states are considering retail access proposals. The
PSCW and Wisconsin Legislature have focused on improving electric system
reliability before they address retail access. The MPSC has approved voluntary
plans that began offering retail customers a choice of suppliers in selected
markets in 1998. The Michigan Legislature is considering legislation to allow
all customers to choose their electricity supplier by 2002.
WISCONSIN
Electric
Due to electrical reliability concerns in eastern Wisconsin during the summer of
1997, the PSCW turned its focus from restructuring the electric utility industry
to developing the utility infrastructure necessary to assure reliable electric
service. In 1998, reliability legislation introduced by Wisconsin Governor
Thompson passed and the 1997 Wisconsin Act 204, "the Reliability Act", became
law. The Reliability Act contains a number of steps necessary for industry
restructuring, including streamlining and updating the regulatory process. The
restructuring activities in Wisconsin in 1998 were mainly limited to compliance
with provisions of the Reliability Act. During the summer of 1999, an electric
reliability bill was passed as part of the Budget Bill. This "Reliability 2000"
bill, as it is known, included further steps necessary to move towards a
restructured industry. Major components included some relief from a restriction
on the amount of nonutility assets that a Wisconsin utility holding company can
own, a requirement that eastern Wisconsin utilities join an eastern Wisconsin
transmission company, mandated public benefits encompassing low income energy
assistance, conservation programs, and renewable and environmental research.
The bill also includes a mandate for the production of electricity from
renewable fuel sources, local impact fees for new transmission lines and
protection from some effects of implementing new Nitrogen Oxide emission rules
for utilities that are members of the Mid-Continent Area Power Pool (MAPP), a
regional electric generation and transmission reliability council and power
pool.
The effects of the provisions that impact NSP are:
- an increase in the amount of money that must be collected from
NSP-Wisconsin's customers to fund low-income assistance and conservation
programs, renewable and environmental research, and
- partial protection from potential costs related to the proposed Nitrogen
Oxide emission regulations (see "Environmental Matters" in this Item
and "Environmental Contingencies " in Footnote 8 to the Financial Statements
in Item 8).
NSP-Wisconsin is not affected by the mandate for the production of electricity
from renewable fuels since it already relies significantly on renewable sources
of energy. Although activity has taken place at the legislature that will
ultimately enable a competitive energy market, at this time a definitive
timeline has not yet been established for the implementation of retail
competition in Wisconsin.
Natural Gas
A number of years ago the PSCW reviewed four proposed models of restructuring
the natural gas industry. The chosen model deregulates the gas purchasing and
transportation functions by market segment as competition becomes effective and
sustainable. The PSCW then separated natural gas restructuring into three
phases. In Phase I, the PSCW ordered separation of gas purchasing activities
associated with providing regulated services from those associated with
providing unregulated services. Phase II developed standards of conduct
governing opportunity sales of pipeline capacity and gas supply and imposed
additional restrictions on transactions between a utility and its gas marketing
affiliate. The restrictions are intended to ensure fair treatment of all market
participants. Phase III focused on identifying regulatory or structural barriers
that may prohibit competition; identifying standards to determine the level of
competitiveness of the market and the level of necessary regulation, and
identifying conditions to impose on marketers serving formerly regulated
markets. In this phase it was also decided that consumer protection and customer
service policy issues must be addressed before any markets are deregulated. An
Essential Services workgroup submitted a report to the PSCW in the first quarter
of 1999 addressing customer protection and customer services issues. At this
time the PSCW has not taken action on that report. The PSCW is currently
addressing the issue of essential use customers. It is anticipated that natural
gas market restructuring activities will resume in the next year or two.
MICHIGAN
Electric
In 1998 the MPSC reaffirmed its order to open Michigan's retail electricity
market to competition. The initial order directed large Michigan utilities to
open 2.5 percent of their electric load to competition each year from 1997 to
2001, and to allow Michigan electric customers access to a competitive market in
2002. The larger Michigan utilities challenged that order. The lower courts
upheld the MPSC's authority to implement retail competition; however, the State
Supreme Court ruled that the MPSC did not have the authority to order retail
competition, but may allow it if utilities proceed voluntarily. The smaller
Michigan utilities, including NSP-Wisconsin, have not elected to offer customer
choice at this time. A coalition of businesses and a few utilities, working
through the Michigan Chamber of Commerce, have introduced a bill to mandate
customer choice by January 2002. The smaller utilities continue to work with
the Chamber and legislators to include provisions that take into consideration
the unique situation of the smaller utilities in terms of multi-state territory,
implementation costs to customers and the effective date.
Natural Gas
Legislation allowing natural gas customers to choose their own gas supplier was
introduced in late 1999 and it has the general support of the major natural gas
providers in Michigan. The bills contain specific provisions for the smaller
natural gas utilities in the state which allow an extended phase-in schedule.
Under the smaller utility phase-in schedule, 10 percent of the utilities' gas
customers would be allowed to choose their gas supplier in April 2004 and the
program would expand until all customers are allowed to choose their gas
supplier by April 2005. The MPSC would have the option of extending these dates
if, upon review of the utilities' customer choice plans, the MPSC determines it
to be in the public interest. The proposed bills call for MPSC approval of all
plans before implementation, licensing of marketers, codes of conduct for
affiliates and a safe haven for natural gas commodity service.
The timing of regulatory actions regarding electric and gas restructuring and
their impact on NSP-Wisconsin and the industry cannot be predicted at this time
and may be significant.
FEDERAL ENERGY REGULATORY COMMISSION (FERC)
In 1996, the FERC issued Orders No. 888 and 889 to foster competition in the
electric utility industry. These orders give competing wholesale suppliers the
ability to transmit electricity through a utility's transmission system. Order
No. 888 grants nondiscriminatory access to transmission service. Order No. 889
seeks to ensure a fair market by imposing standards of conduct on transmission
system owners, by requiring separation of the wholesale power supply -- or
merchant -- function from the transmission system operation function, and by
mandating the posting of transmission availability and pricing information on an
electronic bulletin board. NSP has made open access transmission tariff filings
and compliance filings with the FERC and believes it is taking the proper steps
to comply with these rules.
Electric Transmission
To foster competition in the wholesale electricity market, the FERC requires the
transmission portion of a utility's business to be functionally separate from
the utility's generation facilities. The Reliability Act also calls for a
separate transmission operating structure. NSP has joined the Midwest
Independent System Operator or MISO (an independent entity that will control the
operation of the electric transmission systems of NSP and other utilities)
because it is the most effective means available to enhance the competitive
market for wholesale electricity. This election also supports accounting and
regulatory considerations associated with our proposed merger.
The MISO intends to commence operations in June 2001. The MISO will administer
transmission service for most of the area extending east from NSP's service area
to Pennsylvania and south through Illinois and Kentucky. NSP remains a member
of MAPP. MAPP recently signed an agreement with the MISO, which may further
broaden the scope of the MISO and regional markets for transmission service.
NSP-Wisconsin has filed for PSCW approval of its request to transfer operating
control of its transmission system to the MISO on March 1, 2000. It is expected
that, during 2000, the PSCW will approve NSP-Wisconsin's request to transfer
operating control to the MISO and certify that NSP-Wisconsin's joining of the
MISO will satisfy the statutory requirement for a separate transmission
operating structure.
Construction Authorization
- ---------------------------
Before construction of a major electric project begins, NSP-Wisconsin must
obtain various licenses and permits, including either a Certificate of Authority
(CA) or a Certificate of Public Convenience and Necessity (CPCN), from the PSCW.
The minimum project expenditure requiring a CA is $5 million. Transmission line
projects involving equipment with a capacity less than 100 Kilovolts (kv),
costing less than $5 million, and of a length greater than 10 miles on new
right-of-way, are subject to a review by PSCW staff. That review may lead to
the full review process if the PSCW deems it necessary.
NSP-Wisconsin is required to file a CPCN application for: 1) transmission lines
with a capacity greater than 200 kv and greater than 1 mile in length; 2) and
transmission lines with a capacity greater than 100 kv, greater than one mile in
length and on new right-of-way; and 3) generation projects with a capacity
greater than 100 Mw. Before the passage of the Reliability Act, NSP-Wisconsin
was required to file a CPCN application for all transmission line projects
greater than 100 kv and greater than 1 mile in length and all generation
projects with a capacity greater than 12 Mw.
In 1996, NSP and Dairyland Power Cooperative of LaCrosse, Wis. proposed building
an electric transmission system between NSP-Minnesota's Chisago substation in
eastern Minnesota and Dairyland's Apple River substation in northwestern
Wisconsin in response to a need for additional reliability and capacity in both
regions. During 1999 the PSCW granted permission to build the system. Approval
from Minnesota regulators is still needed. The Minnesota Department of Commerce
recommended not building the line as it is proposed, although they did
acknowledge the need for more transmission capacity. Its recommendation will be
considered by the Minnesota Environmental Quality Board (MEQB), which has the
authority to approve or deny the project. NSP and Dairyland have responded to
additional data requests from the Department of Commerce to be used in the
regulatory proceedings in Minnesota. At this time, the Administrative Law Judge
is reviewing the case and parties are making their cases before him. A decision
from the MEQB is expected in mid 2000.
In eastern Wisconsin, which is not served by NSP-Wisconsin, the compound effect
of simultaneous generating facility outages and a transmission system already
near capacity raised the possibility of rolling blackouts and system instability
in that area during 1997. The PSCW and the Governor's office have studied
proposals to amend the requirements for new electric generation and transmission
facilities to promote the production of more electricity and the movement of
more electricity to the state. Currently there are several proposals before the
PSCW to install additional generation in southeastern Wisconsin, and a proposal
by some utilities to construct a new 345 kv transmission line from Duluth, Minn.
to Wausau, Wis.
Ratemaking Principles in Wisconsin and Michigan
- ----------------------------------------------------
The PSCW and MPSC regulate the rates and service of NSP-Wisconsin with respect
to retail sales within Wisconsin and Michigan, respectively, and various other
aspects of NSP-Wisconsin's operations. The PSCW also exercises jurisdiction
over the construction of certain electric and gas facilities and the issuance of
new securities. NSP-Wisconsin is also subject to the jurisdiction of the FERC
with respect to its sales to wholesale electric customers and certain other
aspects of its operations, including the licensing and operation of
hydroelectric projects and NSP-Wisconsin's Interchange Agreement (see Electric
Operations-Interchange Agreement). Approximately 93 percent of NSP-Wisconsin's
1999 revenues from sales were subject to PSCW jurisdiction. Of the 93 percent,
75 percent was generated from retail electric revenues and the remaining 18
percent from retail gas revenues. NSP-Wisconsin's wholesale revenues from sales
subject to FERC jurisdiction were approximately four percent of NSP-Wisconsin's
1999 revenues from sales with the remaining three percent of revenues from sales
subject to MPSC jurisdiction.
All three of the regulatory jurisdictions allow a "forward looking" test year
corresponding to the time that rates are to be put into effect.
The PSCW has a biennial filing requirement. By June 1 of each odd-numbered year,
NSP-Wisconsin must submit filings for calendar test years beginning the
following January 1. The filing procedure and subsequent review generally allow
the PSCW sufficient time to issue an order effective with the start of the test
year.
The PSCW reviews each utility's cash position to determine if a current return
on Construction Work in Progress (CWIP) will be allowed. The PSCW will allow
either a current return on CWIP or capitalization of Allowance for Funds Used
During Construction (AFC) at the adjusted overall cost of capital.
NSP-Wisconsin currently capitalizes AFC on production and transmission CWIP at
the FERC formula rate and on all other CWIP at the adjusted overall cost of
capital.
Fuel and Purchased Gas Adjustment Clauses
- ----------------------------------------------
Wisconsin
Wisconsin does not have an automatic retail electric fuel adjustment clause.
Instead, it has a procedure which compares actual monthly and anticipated annual
fuel costs with those costs that were included in the latest retail electric
rates approved by the PSCW. If the comparison results in a difference outside a
range of eight percent for any month and two percent for the year; or five
percent for the first and second months and two percent for the year; or two
percent cumulative year to date after the second month and two percent for the
year, the PSCW may hold hearings limited to fuel costs and revise rates. The
revised rates remain in effect until the next biennial rate case. Fuel and
purchased power costs are monitored, including demand costs for sales and
transmission wheeling expenses.
Gas rate schedules include mechanisms to compensate for differences between the
actual cost of gas that NSP-Wisconsin purchased for its customers and the price
of purchased gas already included in base rates. The mechanism in use before
March 1, 1999 was the Purchased Gas Adjustment Clause (PGA) and the mechanism in
use since that time is the Gas Cost Recovery Mechanism (GCRM) The financial
impact of the two is substantially the same. Approximately 70 percent of
NSP-Wisconsin's gas revenues represent recovery of gas costs through the GCRM.
NSP-Wisconsin's latest three year gas supply plan was approved by the PSCW in
October 1999. PSCW approval is needed before gas supply costs can be recovered
in the GCRM.
The previous year's three year gas supply plan allowed NSP-Wisconsin to purchase
additional pipeline capacity from NSP's subsidiary Viking Gas Transmission
Company (Viking), but the PSCW's approval to purchase that capacity was
contingent on the excluding from the GCRM the cost of an equivalent amount
of capacity on the Northern Natural Gas (NNG) pipeline. NSP-Wisconsin had
planned to recover the cost of the NNG capacity, since it could no longer
recover the cost from NSP-Wisconsin gas customers, by selling the right to this
capacity in the secondary market. However, in the 1999-2000 heating season, the
value of NNG capacity in the secondary market declined and NSP-Wisconsin
estimates that $400,000 of its NNG pipeline capacity expenses will not be
recovered through either the GCRM or the secondary capacity release market.
NSP-Wisconsin recorded a liability of $400,000 for this estimated loss. Due to
the uncertainty of prices in the secondary market, it is possible that
NSP-Wisconsin's ultimate loss might be greater.
Michigan
NSP-Wisconsin's Michigan retail gas and electric rate schedules include Gas Cost
Recovery Factors and Power Supply Cost Recovery Factors, respectively, which are
based on a twelve-month projection of costs. The MPSC requires formal filing and
subsequent approval of the factors. After each twelve-month period is
completed, a reconciliation is submitted and over-recoveries are refunded and
any under-recoveries are collected, including interest.
Wholesale
Eight wholesale customers are on a FERC approved rate schedule which includes a
fuel adjustment factor based on variations between estimated electric fuel and
purchased power costs and actual fuel and purchased power costs. The remaining
two wholesale customers have fixed rate contracts that do not include a fuel
adjustment factor.
Rate Matters by Jurisdiction
- -------------------------------
Wisconsin
1998 Filing
- ------------
During November 1997, NSP-Wisconsin 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. On Sept. 15, 1998 the PSCW issued a rate
order which authorized:
- a $7.3 million, or 2.5 percent, increase in electric rates,
- a $1.9 million, or 2.2 percent, decrease in gas rates, and
- an 11.9 percent return on common stockholder's equity.
In July 1997 NSP-Wisconsin received authorization from the PSCW to defer, rather
than immediately expense, its share of Network Transmission Service (NTS) costs
incurred after May 23, 1997. (NTS costs are the result of FERC Order No. 888 and
relate to operating and maintaining the regional electric transmission network
that NSP shares with other transmission system-owning entities.) NSP was in
dispute with certain other parties over the amount to be paid for NTS, so it
deferred estimated NTS costs in some cases. In its 1998 rate order, the PSCW
authorized NSP-Wisconsin to recover these deferred NTS costs from its customers
and NSP-Wisconsin has simultaneously expensed the regulatory asset for these
deferred NTS costs. At Dec. 31, 1999 settlements had been reached with most
parties and only an immaterial balance of deferred NTS costs remained.
2000 Filing
- ------------
In May 1999 NSP-Wisconsin filed an application with the PSCW for recertification
of certain plant depreciation rates and for approval of a change to the
remaining life technique for the calculation of straight-line depreciation for
production facilities. The PSCW issued its order in the third quarter of 1999,
and revised depreciation rates were put into effect on Jan. 1, 2000. Annual
depreciation expense is expected to decrease slightly in 2000 as a result of
this change.
In October 1999 the PSCW approved NSP-Wisconsin's application for authority to
maintain base retail electric and natural gas service rates in Wisconsin at
current levels through 2001. Current rates were placed in effect in September
1998.
Fuel Cost Surcharges
- ----------------------
NSP-Wisconsin's base electric rates include an amount to reimburse it for the
cost of generating station fuel and purchases of electricity from others. When
fuel and purchased power costs exceed that amount (as discussed earlier),
NSP-Wisconsin can request that the PSCW authorize a temporary surcharge to
rates.
- In September 1997 the PSCW authorized a temporary surcharge of $0.00043 per
kilowatt-hour (kwh) which produced about $574,000 of revenue in 1997 and
$1.6 million of revenue in 1998. The surcharge was necessary because
of unplanned and extended outages at NSP-Minnesota's nuclear generating
stations and higher than projected costs to transmit electricity purchased
from other utilities to NSP-Wisconsin's service territory.
- In October 1999 the PSCW authorized a temporary surcharge of $0.00195 per
kwh to electricity billed between Oct. 26 and Dec. 31, 1999. It
generated approximately $1.8 million of revenue. Purchased power costs were
substantially higher during the summer of 1999 due to extreme weather.
- On Feb. 14, 2000, NSP-Wisconsin filed an application with the PSCW to
increase electric rates for fuel costs. In its application NSP-Wisconsin
noted that 2000 fuel costs are forecast to be $11.9 million above
authorized levels, primarily due to higher purchased power costs. The
application is currently pending before the PSCW, and a decision is expected
in the second quarter of the year. The amount of cost recovery and the
effective date of the potential surcharge will be determined upon
completion of the regulatory process. If NSP-Wisconsin's application is
approved, a surcharge would be added to customer bills for the remainder of
2000 and all of 2001.
Michigan
On Jan. 6, 1999 the MPSC approved a settlement agreement authorizing
NSP-Wisconsin to restructure its Michigan retail electric rates. The settlement
more closely aligns rates with the cost to provide service to various classes of
customers. It will decrease rates for some customers and increase rates for
others, but it will not change the total amount of revenue expected to be
collected from all Michigan retail electric sales. An 11.9 percent return on
equity was authorized. The new rates have been phased in over two years to
minimize the impact on customers. The second phase was implemented in January
2000.
FERC-Electric
In response to changes in the wholesale electric market, NSP-Wisconsin is
providing discounts and negotiated services to be competitive. All ten municipal
wholesale customers have current power supply arrangements under which they will
purchase most of their power supply requirements from NSP-Wisconsin.
NSP offers two types of electric transmission service under its Open Access
Transmission Tariff: point-to-point and network. In the first quarter of 1998,
NSP filed point-to-point and network service rate cases with the FERC. In March
1999, NSP filed an offer of settlement that would resolve virtually all issues
in the two cases. The offer of settlement provides an approximate two percent
reduction in point-to-point rates which, combined with anticipated reductions in
non-firm discounting, is expected to have little or no impact on annual revenue.
In addition, the settlement calls for an annual increase of approximately $1
million in ancillary service revenues. Finally, the settlement places a cap on
NSP's annual NTS payment liabilities to its five current NTS customers at $10
million per year, about 15 percent of which relates to NSP-Wisconsin. The
point-to-point and ancillary rates would be effective Oct. 1, 1998. The offer
also includes a three-year moratorium period on future transmission rate
changes. All parties filed written comments generally recommending FERC approval
of the offer. In December 1999 the FERC issued an order approving the
settlement. In January 2000, NSP and the Southern Minnesota Municipal Power
Agency reached a settlement resolving the remaining NTS liability for 1996
through 1998. The settlement does not materially affect 2000 NSP-Wisconsin
earnings. NSP-Wisconsin expects final FERC approval in 2000.
On Nov. 24, 1998, Wisconsin Electric Power Company (WE) filed a complaint
against NSP with the FERC relating to transmission service curtailments. In
March 1999 NSP and WE reached a settlement, and the settlement was approved by
the FERC on May 19, 1999. The settlement provides that NSP is not liable to WE
for transmission curtailments during 1998 and that NSP will bear certain
disputed transmission mitigation costs for 1998 and 1999. The financial impact
of the settlement is not material.
In May 1999 a majority of MAPP members voted to approve a MAPP regional
transmission service tariff. The MAPP tariff would prospectively supersede MAPP
members' individual electric transmission service tariffs for most wholesale
transactions. The proposed MAPP tariff was filed with the FERC in June 1999.
MAPP proposed the new tariff be effective 90 days after a FERC order accepting
the tariff for filing. When effective, MAPP's tariff could reduce NSP's
earnings due to lower revenues and/or higher costs. The tariff is pending FERC
action. While there is a small probability that the tariff could take effect as
early as July 1, 2000, which would result in a $6 million pretax impact in 2000
(about 15 percent of which would relate to NSP-Wisconsin), NSP anticipates
continued regulatory delay to tariff implementation resulting in minimal, if
any, impact on NSP's 2000 pretax earnings.
ELECTRIC OPERATIONS
-------------------
Competition
- -----------
NSP-Wisconsin's electric sales are subject to competition in some areas from
municipally owned systems, electric cooperatives, other utilities and
independent power producers. Electric service also increasingly competes with
other forms of energy. Although NSP-Wisconsin cannot predict the extent to which
its future business may be affected by supply, relative cost, or promotion of
other electricity or energy suppliers, NSP-Wisconsin believes that it will be in
a position to compete effectively.
The Energy Policy Act of 1992 has been a catalyst for comprehensive and
significant changes in the operation of electric utilities, including increased
competition. The Act's reform of the Public Utility Holding Company Act of 1935
(PUHCA) promoted creation of wholesale nonutility power generators and
authorized the FERC to require utilities to provide wholesale transmission
services to third parties. The legislation allows utilities and nonregulated
companies to build, own, and operate power plants nationally and internationally
without being subject to restrictions that previously applied to utilities under
the PUHCA.
Many states are currently considering proposals to increase competition in the
supply of electricity. As discussed previously, regulators and legislators in
Wisconsin and Michigan are currently considering what actions they should take
regarding electric industry competition, including restructuring. The timing of
regulatory actions regarding restructuring and their impact on NSP-Wisconsin
cannot be predicted at this time and may be significant.
NSP System
- -----------
NSP-Wisconsin's electric production and transmission systems are interconnected
with the production and transmission system of NSP-Minnesota (the "NSP System").
The NSP System includes coal, nuclear, natural gas, waste wood, and
refuse-derived fuel (RDF) steam generating plants, gas and oil fired combustion
turbines, hydroelectric plants, an interconnection with the Manitoba
Hydro-Electric Board for the purpose of exchanging power, and extra-high voltage
transmission facilities for interconnection to Kansas City, Milwaukee and St.
Louis to provide the necessary back-up for large power plants in those regions.
NSP-Minnesota operates two nuclear generating plants: the single unit, 578 Mw
Monticello Nuclear Generating Plant and the Prairie Island Nuclear Generating
Plant with two units having a total summer capacity of 1,049 Mw. The Monticello
Plant commenced operation in 1971 and is licensed to operate until 2010. Prairie
Island Units 1 and 2 commenced operation in 1973 and 1974 and are licensed to
operate until 2013 and 2014, respectively. The ability of these nuclear plants
to continue operating until the end of the license periods is dependent upon the
availability of storage facilities for used nuclear fuel. The Monticello plant
has sufficient temporary storage for used fuel to operate until 2010. With the
additional on-site dry cask fuel storage facilities approved by the Minnesota
Legislature in 1994, the Prairie Island plant is expected to have sufficient
temporary storage capacity to operate until 2007.
The Nuclear Waste Policy Act required the DOE to begin accepting spent nuclear
fuel no later than Jan. 31, 1998. In 1996, the DOE notified commercial spent
fuel owners of an anticipated delay in accepting spent nuclear fuel by the
required date, and conceded that a permanent storage or disposal facility will
not be available until at least 2010. Accordingly, NSP has been providing, with
regulatory and legislative approval, its own temporary on-site storage
facilities at its Monticello and Prairie Island nuclear plants. NSP-Minnesota
may have to rely on these on-site or contracted off-site facilities for storage
of used fuel to continue operations of its nuclear plants until a DOE disposal
or storage facility is ready. (See related legal proceedings under Item 3 -
Legal Proceedings, herein.)
During 1998 NSP announced its intention to form a nuclear management company
(NMC). Recent developments are:
- During 1999, NSP, WE, Wisconsin Public Service Corp. and Alliant Energy
established a NMC that it expects will improve plant performance and
reliability, strengthen operational efficiency, maintain high safety levels
and reduce costs. The four companies operate seven nuclear units at five
sites with a total generation capacity exceeding 3,650 Mw.
- In late 1999, NMC member utilities filed an application with the Nuclear
Regulatory Commission (NRC) to transfer plant operating licenses to the
NMC. The four partners, including NSP, will retain ownership of their
respective nuclear plant assets. License transfer would allow the NMC
to become an operating company in 2000. During 1999, NSP's board of
directors and the boards of the other utilities approved the transfer of the
nuclear operating licenses for their respective companies to the NMC. The
request to transfer operating licenses requires approval from state and
federal regulators, including the NRC.
Capability and Demand
- -----------------------
NSP-Wisconsin's record peak demand of 1,259 Mw occurred on July 30, 1999. As a
member of MAPP, NSP must own or contract for enough electric generating capacity
to serve its own customers plus an additional "reserve requirement" to protect
the system from failure in case of an unexpected generating station outage or
demand due to severe weather. NSP's reserve requirement is determined jointly
with the other parties to the MAPP Agreement. Currently, the minimum reserve
requirement is 15 percent of the NSP System's maximum demand. (Also see Electric
Power Pooling Agreements.)
NSP-Wisconsin primarily relies on plants operated by NSP-Minnesota for base load
generation. Historically, approximately 80 percent of the total kwh
requirements of NSP-Wisconsin were provided by NSP-Minnesota generating
facilities or purchases made by NSP-Minnesota for NSP system use.
NSP-Wisconsin owns fourteen thermal electric generating units on four sites and
nineteen hydroelectric plants. These plants are used as "peaking plants" -
called into service during periods of high demand for electricity - or as
"intermediate load" plants to supplement the output of NSP-Minnesota's base load
plants. NSP-Wisconsin's electric generating units are described in Item 2 -
Properties.
Demand Side Management
- ------------------------
NSP-Wisconsin continues to implement various Demand Side Management (DSM)
programs designed to improve load factor and reduce NSP-Wisconsin's power
production cost and system peak demands, thus reducing or delaying the need for
additional investment in new generation and transmission facilities.
NSP-Wisconsin currently offers a broad range of DSM programs to all customer
sectors, including information programs, incentive programs, and rate incentive
programs. These programs are designed to respond to customer needs and focus on
increasing the value of service that will, over the long term, reduce
NSP-Wisconsin's capital requirements and help its customer base become more
stable, energy efficient and competitive. Since 1986, NSP-Wisconsin's retail
DSM programs have achieved 245 Mw of summer peak demand reduction. This is
equivalent to 19 percent of NSP-Wisconsin's 1999 summer peak demand.
The passage of Act 9, the Reliability 2000 bill, developed a new Division of
Energy and Public Benefits within the State Department of Administration (DOA)
and authorized additional public benefit funding. This agency will be
responsible for the administration of energy conservation programs, energy
assistance programs for low income customers, and renewable and environmental
research. The current utility spending on these activities will be transferred
to the Division of Energy and Public Benefits over a three year period. The
increase in money beyond current utility spending will be collected by utilities
from their customers and sent to the DOA for disbursement.
NSP-Wisconsin is currently working with the Division of Energy and Public
Benefits, the PSCW and other stakeholders on the implementation and compliance
with the legislation. At this time there are many unknowns surrounding the
future implementation of energy efficiency services including NSP's future role
in providing those services. Although a significant portion of the costs will
be passed through from the customer to the DOA and thus will not affect
NSP-Wisconsin, certain utility labor costs associated with providing those
services are currently in question.
Since 1996 NSP-Wisconsin has been allowed to immediately expense rather than
defer and amortize certain DSM program expenditures. The remaining balance of
deferred pre-1996 DSM program costs will be amortized in full by the end of
2002.
Intercompany Agreements
- ------------------------
NSP-Wisconsin and NSP-Minnesota share the electric production and transmission
costs of the NSP System. The cost-sharing arrangement between the companies is
referred to as the Interchange Agreement. It is a FERC-regulated agreement and
has been accepted by the PSCW and the MPSC for determination of costs
recoverable in rates by NSP-Wisconsin for charges from NSP-Minnesota in rate
cases.
Historically NSP-Wisconsin's share of the NSP System annual production and
transmission costs has been between 15 to 16 percent. Revenues received from
billings to NSP-Minnesota for its share of NSP-Wisconsin's production and
transmission costs are recorded as electric operating revenues on
NSP-Wisconsin's income statement. The portions of NSP-Minnesota's production
and transmission costs that were charged to NSP-Wisconsin were recorded as
purchased and interchange power expenses and other operation expenses,
respectively, on NSP-Wisconsin's income statement. (See Note 6 to Financial
Statements).
Under the Interchange Agreement, NSP-Wisconsin could be charged a portion of the
cost of an assessment made against NSP-Minnesota pursuant to the Price-Anderson
liability provisions of the Atomic Energy Act of 1954. (See Note 8 to the
Financial Statements).
NSP filed an updated Administrative Services Agreement (NSP-Wisconsin and
NSP-Minnesota share some administrative services and related costs) with the
PSCW and Minnesota Public Utilities Commission (MPUC) in October 1998. The
update does not fundamentally change the nature of the relationship between the
parties, but rather refines the services that may be exchanged and addresses the
cost allocation methods to be used. The updated Agreement requires a full cost
allocation in place of the incremental cost method used in the previous
agreement, and places an explicit restriction on sharing non-utility resources.
The new Agreement was approved by the PSCW in January 1999, the MPUC in March
1999, and became effective Jan. 1, 1999.
Fuel Supply
- ------------
Coal and nuclear fuel will continue to be the dominant fuels for NSP System
generating plants over the next several years and natural gas, oil, refuse
derived fuel, waste materials, renewable sources, and wood will also continue to
be used. The actual fuel mix for 1999, and the estimated fuel mix for 2000 and
2001, are as follows:
Fuel Use on Btu Basis
-------------------------
(Est.) (Est.)
1999 2000 2001
---- ---- ----
Coal 57.5% 58.5% 58.7%
Nuclear 38.4% 36.4% 36.7%
Other 4.1% 5.1% 4.6%
Electric Operating Statistics
- -------------------------------
The following table summarizes the revenues, sales and customers from
NSP-Wisconsin's electric business, excluding sales to NSP-Minnesota and
miscellaneous revenues:
OPERATING STATISTICS
- ---------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
ELECTRIC REVENUE (THOUSANDS)
Residential $ 126 744 $ 121 178 $ 117 490 $ 118 557 $ 121 073
Commercial and industrial 190 904 184 137 175 438 169 189 169 416
------- ------- ------- ------- -------
Total retail 317 648 305 315 292 928 287 746 290 489
Sales for resale 17 292 16 769 16 429 17 391 17 902
------- -------- -------- -------- --------
Total $ 334 940 $ 322 084 $ 309 357 $ 305 137 $ 308 391
========= ========= ========= ========= =========
SALES (MILLIONS OF KILOWATT-HOURS)
Residential 1 731 1 706 1 681 1 706 1 718
Commercial and industrial 3 703 3 674 3 528 3 405 3 327
----- ----- ----- ----- -----
Total retail 5 434 5 380 5 209 5 111 5 045
Sales for resale 471 462 455 458 456
----- ----- ----- ----- -----
Total 5 905 5 842 5 664 5 569 5 501
===== ===== ===== ===== =====
CUSTOMER ACCOUNTS (DECEMBER 31)
Residential 190 926 187 977 184 921 183 036 181 151
Commercial and industrial 32 265 31 538 31 002 30 695 30 388
------ ------ ------ ------ ------
Total retail 223 191 219 515 215 923 213 731 211 539
Sales for resale 10 10 10 10 10
------- ------- ------- ------- -------
Total 223 201 219 525 215 933 213 741 211 549
======= ======= ======= ======= =======
In early 1998, Fort James Corp. closed its Ashland, Wis. paper mill. It was one
of NSP-Wisconsin's ten largest electric and gas customers, purchasing in excess
of $2 million of utility services from NSP-Wisconsin annually. The financial
effect of losing this customer was reflected in NSP-Wisconsin's 1998 Wisconsin
rate filing.
One of NSP-Wisconsin's five largest combined retail electric and gas customers,
Heileman Brewing of La Crosse, was sold. Stroh's Brewery had sold the beer
labels and decided to close its breweries, including the La Crosse brewery.
Heileman purchased approximately $2.8 million of utility services annually.
Platinum Holdings, a New York based investment company, purchased the brewery
and began making beer in November 1999 as the City Brewery. The estimated
annual revenue for gas and electric service for the first year of operation is
$1 million and is expected to grow as they increase production and possibly
convert some of the plant to produce ethanol.
GAS OPERATIONS
--------------
NSP-Wisconsin has a strategy of holding a diversified portfolio of natural gas
supplies and transportation arrangements. It relies entirely on third party
suppliers for its natural gas supply needs, and uses pipelines only for
transportation and storage services.
NSP-Wisconsin purchases natural gas from numerous suppliers, obtains contracts
for transportation service on directly connected and upstream pipelines, and
delivers the supplies to NSP-Wisconsin's gas service territory. In addition,
NSP-Wisconsin has directly contracted for underground storage and owns and
operates liquefied natural gas and propane-air peak shaving facilities.
NSP-Wisconsin's diversified supply and transportation contracts, as well as
underground storage and peak shaving facilities, provide NSP-Wisconsin with the
ability to meet customer needs with reliable and economic natural gas supply.
The PSCW is continuing to investigate the need to change natural gas regulation
in Wisconsin as a result of changes in the structure of natural gas utility
pipeline services provided to all gas utilities. The PSCW is advocating a
market model in which gas costs will be deregulated by segment, where
competition is effective. Distribution service will remain regulated.
NSP-Wisconsin continues to hold annual and/or winter peaking transportation
contracts with Northern Natural Gas Company, Great Lakes Transmission Limited
Partnership, Northern Border Pipeline Company, Viking, and TransCanada Pipeline,
LTD.
In July 1998 NSP-Wisconsin completed the acquisition of Natural Gas, Inc. (NGI),
a natural gas utility serving approximately 1,900 customers in the New Richmond,
Wis. area. The transaction was a tax-free reorganization for tax purposes and
was recorded as a 'pooling of interests' for accounting purposes. Financial
statements for prior periods were not restated because the combination had only
an immaterial effect on operating results and financial condition.
Gas Operating Statistics
- --------------------------
The following table summarizes the revenues, sales and customers from
NSP-Wisconsin's gas business, excluding sales to NSP-Minnesota and miscellaneous
revenues (including the PGA and GCRM):
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
REVENUES (THOUSANDS)
Residential $37 732 $35 034 $39 989 $41 382 $37 251
Commercial & Industrial 44 453 43 620 49 459 47 033 43 189
------ ------ ------ ------ ------
Total $82 185 $78 654 $89 448 $88 415 $80 440
======= ======= ======= ======= =======
SALES (THOUSANDS OF MCF)
Residential 5 744 5 168 5 848 6 457 5 873
Commercial & Industrial 13 251 12 784 13 132 13 557 13 078
------ ------ ------ ------ ------
Total 18 995 17 952 18 980 20 014 18 951
====== ====== ====== ====== ======
CUSTOMER ACCOUNTS (DECEMBER 31)
Residential 75 224 72 673 68 631 65 868 63 176
Commercial & Industrial 10 503 10 277 8 809 8 657 8 377
------ ------ ------ ------ ------
Total 85 727 82 950 77 440 74 525 71 553
====== ====== ====== ====== ======
------
ENVIRONMENTAL MATTERS
---------------------
NSP-Wisconsin monitors its operations to ensure the environment is not adversely
affected and takes timely corrective actions if past practices have had a
negative impact on the environment. Significant resources are dedicated to
environmental training, monitoring and compliance. NSP-Wisconsin strives to
maintain compliance with all applicable environmental laws.
Air and Water Emissions
- --------------------------
NSP-Wisconsin presently operates hydro, coal, natural gas, tire-derived fuel,
railroad tie, oil-fired, wood and refuse-derived fuel/wood-fired generation
equipment.
- The Wisconsin Department of Natural Resources (WDNR) has been authorized by
the United States Environmental Protection Agency (EPA) to administer the
National Pollutant Discharge Elimination System Permits under the Federal
Water Pollution Control Act Amendments of 1977. Such permits are required
for the lawful discharge of any pollutant into navigable waters from any
point source (e.g. power plants). Permits have been issued for all of
NSP-Wisconsin's applicable plants and all plants are in compliance with
permit requirements.
- The WDNR has jurisdiction over emissions to the atmosphere from the
operation of NSP-Wisconsin's power plants. The operation of NSP-Wisconsin's
generating plants substantially conforms to federal and state limitations
pertaining to discharges into the air.
In 1994 the EPA proposed air emission guidelines for municipal waste combustors.
NSP-Wisconsin's French Island electric generating plant, which uses
refuse-derived fuel, will be subject to the EPA's small municipal waste
combustor regulations. They have not yet been finalized but NSP-Wisconsin could
have to install additional pollution control and monitoring equipment to comply.
The Clean Air Act calls for reductions in emissions of sulfur dioxide and
nitrogen oxides from electric generating plants. NSP has already invested
significantly to reduce sulfur dioxide emissions at its plants.
In 1997, the EPA revised the National Ambient Air Quality Standards for ozone
and fine particulate matter. In 1999, these standards were remanded to the EPA
for reconsideration. It is unknown if the EPA will simply try to re-adopt the
1997 standards or propose additional changes. It is anticipated, based on
historical monitoring, that NSP will be in compliance with the 1997 standards.
However, if the standards change or if an area is determined to not comply with
the standards, reductions in emissions of sulfur dioxide and oxides of nitrogen
could be required.
The Clean Air Act requires the EPA to investigate the impact of air toxic
emissions from utilities and, if appropriate, recommend regulations to control
those emissions. The EPA delivered a report to Congress in early 1998 that
recommended additional investigation of air toxics emissions. The report did not
recommend any controls on utility boilers at that time. In 1999, the EPA issued
an Information Collection Request which required utilities to analyze coal
shipments for mercury and share the results with the EPA and a number of
coal-fired generating units were randomly selected, including one of
NSP-Wisconsin's Bay Front generating units, for mercury emissions stack tests.
The EPA intends to use the data to make a regulatory determination on the need
for mercury controls on coal-fired utility boilers by the end of 2000.
In October 1998 the EPA published nitrogen oxide (NOx) emission regulations
affecting 22 states, including Wisconsin. The goal of the new regulations is to
reduce NOx emissions by 85 percent by May 1, 2003. Two of NSP-Wisconsin's
boilers and eight of its combustion turbines could have been affected by this
action. If the existing boilers and combustion turbines were made compliant
using retrofit technology to control NOx emissions, it could have cost
NSP-Wisconsin up to $62.3 million for capital improvements and add $13.6 million
each year to operation and maintenance expenses. This was the estimated cost of
the most expensive alternative to achieve compliance, which was not necessarily
the compliance alternative of choice. If the rules had been finalized in their
most stringent form, other alternatives for these older units may have been
deemed more cost effective than retrofitting.
NSP-Wisconsin joined with two other Wisconsin-based utilities as well as the
Wisconsin Paper Council and Wisconsin Manufacturers and Commerce industrial
organizations to request a judicial review of the EPA's final NOx rules.
NSP-Wisconsin believed that the EPA improperly included Wisconsin in the scope
of the regulatory action and it improperly calculated potential emissions of
NOx, reducing the allowable emission limits for the state.
In 1999 the EPA was ordered by a federal appeals panel (7th Circuit) to suspend
implementation of the NOx rules pending further action on a lawsuit brought by
another trade group. Subsequently, the 7th Circuit action commenced by
NSP-Wisconsin and other parties was transferred to the DC Circuit and
consolidated with a similar action pending in the DC Circuit. In March 2000 the
Court ruled that the EPA unlawfully included Wisconsin in the scope of the NOx
rules. That decision releases NSP-Wisconsin from the new NOx rules.
Legislation has been introduced in Wisconsin that would require a reduction of
the amount of mercury emitted by electric generating plants and other sources.
As currently proposed, the legislation would require significant and costly
reductions of mercury emissions, without the assurance of commensurate
environmental benefits. NSP-Wisconsin is working with the Wisconsin Utilities
Association and other organizations, seeking amendments to the proposed
legislation.
To comply with federal and state laws and state regulatory permit requirements,
NSP has installed environmental monitoring systems at all coal and RDF ash
landfills and coal stockpiles to assess and monitor the impact of these
facilities on the quality of ground and surface waters.
In 1994, the United Nations Framework Convention on Climate Change was
established. In 1997 the Kyoto Protocol was drafted and adopted at the third
Conference. This Protocol will become effective following ratification by 55
countries, provided those 55 countries account for at least 55 percent of the
total carbon dioxide emissions for 1990. Since the Conference at Kyoto there
have been several conferences in which significant progress has been made to
turn the broad concepts of Kyoto into working realities, including the
development of an action plan. The sixth Conference will meet in November 2000
to continue development of the plan. Although the U.S. has signed the Kyoto
Protocol, it must be ratified by the U.S. Senate for the U.S. to become a party
to the protocol. If the U.S. becomes a party, the Kyoto Protocol would impose,
during the first commitment period of 2008-2012, a binding obligation on the
U.S. to reduce Greenhouse Gas emissions by seven percent below 1990 levels.
Until the details regarding the action plan are completed, the impact on NSP
cannot be determined.
Waste Disposal
- ---------------
NSP-Wisconsin is potentially liable for remediating waste disposal sites owned
by others and for decommissioning and restoration of present and former plant
sites. (See "Environmental Contingencies" in Footnote 8 to the Financial
Statements in Item 8.)
NSP has met or exceeded the state and federal removal and disposal requirements
for polychlorinated biphenyl (PCB) equipment. NSP has removed nearly all known
PCB capacitors from its distribution system, network transformers and equipment
in power plants. NSP continues to dispose of PCB-contaminated mineral oil and
equipment in accordance with regulations. PCB-contaminated mineral oil is
detoxified and reused or burned for energy recovery at permitted facilities. The
amount of any future cleanup or remediation costs associated with past PCB
disposal practices is unknown at this time.
NSP-Wisconsin had been named as one of three potentially responsible parties in
connection with environmental contamination at a site in Ashland, Wis. (See
"Environmental Contingencies" in Footnote 8 to the Financial Statements in Item
8.)
NSP-Wisconsin was also investigating its responsibility to remediate
contamination found at a former landfill site in Amery, Wis. NSP-Wisconsin
reached a settlement with the owner of the landfill during the second quarter of
1999 that released NSP-Wisconsin from liability.
Electromagnetic Fields (EMF)
- ------------------------------
EMF surround electric wires and conductors of electricity such as electrical
tools, household wiring, appliances, electric distribution lines, electric
substations and high-voltage electric transmission lines. Extensive research has
been conducted in the last three decades concerning the possibility that adverse
health effects may result from exposure to power-frequency fields surrounding
transmission and distribution lines and the electrical appliances and devices
which are common in residences and workplaces. By 1995, it was generally
concluded in the scientific community that there was no consistent evidence that
exposure to EMF produced by power lines and electric devices causes cancer or
produces other adverse effects on human health. Extensive research studies
published since 1995 have reinforced this view. The nation's electric utilities,
including NSP, continue to support research in an effort to determine whether or
not exposure to EMF causes health effects. The interaction of humans with EMF is
complicated and will continue to be an area of public concern.
Contingencies
- -------------
Both regulatory requirements and environmental technology change rapidly. NSP
cannot estimate the extent to which it may be required by law, in the future, to
make additional capital expenditures or incur additional operating expenses for
environmental purposes. NSP also cannot predict whether future environmental
regulations might result in significant reductions in generating capacity or
efficiency or otherwise affect NSP's income, operations or facilities.
CONSTRUCTION AND FINANCING
--------------------------
During the five years ended Dec. 31, 1999, NSP-Wisconsin had gross additions to
utility plant in service of approximately $277 million. Included in
NSP-Wisconsin's gross additions is $30 million for electric production
facilities, $171 million for other electric properties, $32 million for gas
utility properties, and $44 million for other utility properties. Based on
studies made by NSP-Wisconsin, the weighted average age of depreciable property
was approximately 15 years at Dec. 31, 1999.
Expenditures for NSP-Wisconsin's construction programs for the next five years
are estimated to be as follows:
Year Estimated Construction Expenditures
---- -------------------------------------
(millions of dollars)
2000 $89
2001 71
2002 90
2003 76
2004 63
----
TOTAL $389
====
The largest projects included in these estimates are to construct a new
230-kilovolt (kv) electric transmission line between Chisago County, Minn. and
Amery, Wis. and a new 161 kv line between Stone Lake, Wis. and the Bay Front
Generating Plant in Ashland, Wis., and to rebuild transmission lines between
Baldwin and Abbotsford, Wis. These projects' estimated total cost is $77
million, of which about $29 million will be spent in 2000. The 2000 construction
expenditures are estimated to include approximately $75 million for electric
facilities, $8 million for gas facilities and $6 million for general plant and
equipment. It is presently estimated that approximately 79 percent of the
2000-2004 construction expenditures will be provided by internally generated
funds, with the remainder from the issue of common equity and short-term and
long-term debt. At Dec. 31, 1999, NSP-Wisconsin's short-term borrowings payable
to NSP-Minnesota were $80.8 million. The PSCW has authorized up to $100 million
of short-term borrowing. In addition to short-term borrowings, NSP-Wisconsin
currently projects the need to issue $30 million of common stock equity and $50
million in long-term debt in 2000, and $70 million of long-term debt in 2003 to
finance the estimated construction expenditures for the 2000-2004 construction
program.
The foregoing estimates of future construction expenditures, internally
generated funds and external financing requirements can be affected by many
factors, including load growth, competition, inflation, changes in the tax laws,
rate relief, earnings and regulatory actions. Major electric and gas utility
projects in Wisconsin are currently subject to the jurisdiction of the PSCW and
require its approval. Hence, the above estimated construction program and
financing program could change from time to time due to variations in these
other factors.
Bond Ratings
- -------------
Standard and Poor's and Fitch IBCA currently rate NSP-Wisconsin's first mortgage
bonds AA. Moody's Investors Service rates NSP-Wisconsin's first mortgage bonds
Aa3, and the unsecured resource recovery bonds guaranteed by NSP-Wisconsin A1.
On Nov. 15, 1999, Standard and Poor's assigned a preliminary rating of AA- to
NSP-Wisconsin's new $80 million shelf registration of unsecured debt securities.
A final rating will be assigned after their review is complete. On Dec. 2, 1999,
Fitch IBCA rated the same shelf registration AA- and affirmed its AA rating for
NSP-Wisconsin's first mortgage bonds.
These ratings are the opinions of the rating agency and an explanation of the
significance of these ratings may be obtained from them. A security rating is
not a recommendation to buy, sell or hold securities and is subject to revision
or withdrawal at any time by the rating agency.
Long Term Debt
- ----------------
During 1999 NSP-Wisconsin filed a shelf registration with the SEC to issue up to
$80 million of unsecured long-term debt. The board of directors of NSP-Wisconsin
had authorized the issuance of up to $80 million of long-term debt and, in
October 1999, NSP-Wisconsin received approval from the PSCW to issue up to $80
million of long-term debt and to increase its short-term borrowing limit to $100
million. NSP-Wisconsin plans to issue unsecured long-term debt during the fourth
quarter of 2000. The funds will be used primarily to reduce short-term debt
levels. (See Notes 2 and 3 to the Financial Statements.)
Common Stock Equity
- ---------------------
On March 3, 2000, NSP-Wisconsin filed an application with the PSCW for approval
to issue up to $30 million of common stock to its parent, NSP-Minnesota.
EMPLOYEES AND EMPLOYEE BENEFITS
-------------------------------
At year-end 1999, NSP-Wisconsin had 997 full- and part-time employees.
Approximately 410 of them are represented by one local union of the
International Brotherhood of Electrical Workers. In 1999, NSP and the five IBEW
local unions representing NSP employees reached agreement on a five-year
extension of the collective bargaining agreement. The contract expires at
the end of 2004.
Recent changes to NSP-Wisconsin's employee and retiree benefits, which support a
broad NSP goal of providing market-based benefits, include:
WAGE INCREASES: In 1999 and 2000 nonbargaining employees received average wage
increases of 3.4 percent and 4.4 percent, respectively. Bargaining employees
received 2 percent per year wage increases in 1999 and 3.5 percent increases in
2000 under the new collective bargaining agreement.
RETIREMENT PLAN CHANGES: NSP revised its retirement plans for nonbargaining
employees (effective January 1999) and bargaining employees (effective January
2000) as follows:
- The retiree medical plan was discontinued for nonbargaining employees
retiring after Dec. 31, 1998 and for bargaining employees retiring after
Dec. 31, 1999.
- The qualified pension plan was enhanced to provide a Retirement Spending
Account and an enhanced Social Security supplement which retirees can use
for medical coverage or to supplement pension benefits.
- The 401(k) plan was enhanced, increasing the amount of employee
contributions matched by NSP.
- ------
ITEM 2 - PROPERTIES
- ----------------------
Electric Utility
- -----------------
NSP-Wisconsin's electric generating facilities are:
Year Summer
Station and Units Fuel Installed Capability (Mw)
------------------- ---- --------- ---------------
Combustion Turbine:
Flambeau Station Gas/Oil 1969 12
Park Falls, WI
(1 unit)
Wheaton Gas/Oil 1973 346
Eau Claire, WI
(6 units)
French Island Oil 1974 154
La Crosse, WI
(2 units)
Steam:
Bay Front Coal/Wood/ 1945-1960 73
Ashland, WI Gas
(3 units)
French Island Wood/RDF 1940-1948 29
La Crosse, WI
(2 units)
Hydro Plants:
(19 plants) Various dates 251
---
TOTAL 865
===
At Dec. 31, 1999, NSP-Wisconsin owned approximately 2,400 structure miles of
electric transmission lines and 9,600 structure miles of electric distribution
lines. Virtually all of the land and personal property owned by NSP-Wisconsin is
pledged as collateral for its first mortgage bonds.
Gas Utility
- ------------
The gas properties of NSP-Wisconsin include approximately 1,811 miles of natural
gas distribution mains. NSP-Wisconsin owns two liquefied natural gas (LNG)
facilities with a combined storage capacity of 0.3 Billion Cubic Feet (bcf), and
three propane-air plants with a storage capacity of 0.02 bcf, to supplement the
supply of natural gas available during periods of high demand. The two LNG
facilities are located in Eau Claire and LaCrosse, Wis. The LaCrosse LNG
facility is currently not in service. NSP-Wisconsin has propane-air facilities
with a capacity of 153,000 gallons to further supplement its gas supply in the
LaCrosse, Wis. area during peak periods. NSP-Wisconsin added a second
propane-air plant with a capacity of 25,500 gallons in New Richmond, Wis., with
the acquisition of NGI in 1998 and its third propane-air plant with the
acquisition of the Fort McCoy gas properties near Sparta, Wis., in 1999.
- ------
ITEM 3 - LEGAL PROCEEDINGS
- ------------------------------
In the normal course of business, NSP-Wisconsin is a party to routine claims and
litigation arising from prior and current operations. NSP-Wisconsin is actively
defending these matters and has recorded an estimate of the probable cost of
settlement or other disposition.
In 1997, NSP was served with a summons and complaint on behalf of the owners of
Schachtner Farms located in Deer Park, Wis. The complaint alleged that stray
voltage from NSP's system harmed their dairy herd resulting in lost milk
production, injury to the dairy herd, lost profits and increased veterinary
expenses. On Nov. 23, 1999, the jury returned a verdict finding NSP negligent
and awarding Schachtner Farms $850,000 for economic damages and $200,000 for
inconvenience, annoyance and loss of use and enjoyment of their property plus
costs and interest. The Court trebled the damages because the jury found that
NSP was willful, wanton or reckless in its failure to provide adequate service
to the farm. NSP has appealed the decision to the Court of Appeals, Third
District, of the State of Wisconsin. NSP-Wisconsin anticipates that insurance
will indemnify it for all damages and costs subject to applicable insurance
policy deductibles.
On Feb. 20, 1999 a person who was not an NSP employee was killed while working
with a hydraulic press at NSP-Wisconsin's Western Avenue Service Center. The
claim by the decedent's family was recently settled on a confidential basis.
Because a portion of the settlement proceeds satisfies the claims of the
decedent's minor children, the settlement is subject to court approval.
Resolution of this claim should conclude all potential legal claims arising from
this incident.
On July 2, 1999, various insurers for Cenex Supply filed a complaint in the
Circuit Court for Clark County, Wisconsin, alleging that fire damage to Cenex's
property in October 1995 was caused by NSP's negligence. Damages of $600,000
are claimed. The lawsuit is in the early stages, however, NSP believes the claim
is defensible.
The City of St. Croix Falls, Wis., has filed suit in the U.S. District Court for
the Western District of Wisconsin against NSP-Wisconsin alleging that, during
the pendency of PSCW proceedings on NSP-Wisconsin's proposed Chisago to Apple
River transmission line project, NSP-Wisconsin engaged in ex parte
communications with PSCW Commissioners when it met with PSCW Commissioners for
the purpose of discussing general transmission issues. The City alleges that
the alleged ex parte communications deprived it of procedural due process. The
City asks for recovery of the costs and attorneys' fees it incurred during its
participation in the PSCW proceeding, punitive damages, and costs and attorneys'
fees associated with the present action. NSP-Wisconsin denies that any improper
subjects were discussed during its meetings with the PSCW Commissioners and
denies that the City is entitled to the relief and damages requested.
The DOE was required by statute and contract to accept spent nuclear fuel from
NSP System nuclear generating facilities no later than Jan. 31, 1998. In 1996
the DOE notified commercial spent nuclear fuel owners that it could not accept
their spent nuclear fuel by Jan. 31, 1998 and that a permanent storage or
disposal facility would not be available until at least 2010. NSP and other
affected parties have commenced lawsuits against the DOE to require it to meet
its contractual obligations and to escrow payments that are being made to them
for the permanent disposal program. NSP has also commenced an action to recover
damages caused by the DOE's breach of its statutory and contractual obligation
to accept spent nuclear fuel. The DOE's failure to fulfill its obligation has
increased NSP's expenses for interim storage of spent nuclear fuel and related
issues, may impact the length of time NSP System nuclear generating facilities
can operate, and has led to concern over past payments to the DOE by utility
customers to fund the permanent disposal program.
NSP-Wisconsin was given a favorable ruling in a service dispute with Eau Claire
Electric Cooperative (EC Co-op). EC Co-op had installed electric service to a
new industrial park in Osseo, Wis., which is a NSP-Wisconsin franchise area.
NSP-Wisconsin filed a complaint with the PSCW and requested that it be allowed
to serve the park. On Oct. 29, 1998, the PSCW ruled in favor of
NSP-Wisconsin. The ruling gave NSP-Wisconsin the exclusive right to serve the
park, and it directed the EC Co-op to sell their facilities to NSP-Wisconsin or
remove them within 30 days. The decision was sustained in an appeal to the Dane
County circuit court and NSP-Wisconsin is now delivering electricity in the
industrial park.
On Nov. 24, 1998, Wisconsin Electric Power Co. (WE) filed a complaint against
NSP with the FERC, relating to transmission service curtailments. In March 1999,
NSP and WE reached a settlement agreement, which was approved by the FERC on May
19, 1999. The settlement provides that NSP would not be liable to WE for
transmission curtailments during 1998 and NSP would bear certain disputed
transmission mitigation costs for 1998 and 1999. The financial impact of the
settlement is not material.
For a discussion of environmental proceedings, see "Environmental Matters" under
Item 1, incorporated by reference. For a discussion of proceedings involving
NSP-Wisconsin's utility rates, see "Regulation and Rates" under Item 1,
incorporated by reference.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------------------
None
PART II
ITEM 5 - MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------
This is not applicable as NSP-Wisconsin is a wholly owned subsidiary.
ITEM 6 - SELECTED FINANCIAL DATA
- -------------------------------------
This is omitted per conditions set forth in general instructions I (1) (a) and
(b) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
---------------------------------------
Discussion of financial condition and liquidity is omitted per conditions set
forth in general instructions I (1) (a) and (b) of Form 10-K for wholly owned
subsidiaries. It is replaced with management's narrative analysis and the
results of operations as set forth in general instructions I (2) (a) of Form 10
K for wholly owned subsidiaries (reduced disclosure format).
The following discussion and analysis by management focuses on those factors
that had a material effect on NSP-Wisconsin's financial condition and results of
operations during 1999 and 1998, or are expected to have a material impact in
the future. It should be read in conjunction with the accompanying Financial
Statements and Notes.
Except for the historical statements contained in this report, 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", "outlook",
"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 items set forth below under "Factors Affecting Results of Operations";
- and the other risk factors listed from time to time by NSP in reports filed
with the Securities and Exchange Commission (SEC), including Exhibit 99.01
to NSP-Wisconsin's report on Form 10-K.
RESULTS OF OPERATIONS
On March 24, 1999, NSP and NCE agreed to merge. It is expected that
NSP-Wisconsin will continue to exist as an operating subsidiary of the merged
company. The following discussion and analysis is based on the financial
condition and operations of NSP-Wisconsin and does not reflect the potential
effects of the combination between NSP and NCE.
FACTORS AFFECTING RESULTS OF OPERATIONS
- -------------------------------------------
In addition to items noted in the Notes to the Financial Statements of this
report, the historical and future trends of NSP's operating results are affected
by the following factors:
VARIATIONS IN WEATHER CONDITIONS - Both electric and gas sales levels are
significantly affected by variations in weather conditions. NSP estimates sales
levels under normal weather conditions and analyzes the approximate effect of
variations from historical average temperatures on actual sales levels. The
estimated impact of weather on operating revenues in relation to sales under
normal weather conditions is shown in the discussion of electric revenues and
gas revenues.
SALES GROWTH - The following table summarizes NSP-Wisconsin's growth in actual
electric and gas sales and growth on a weather normalized (W/N) basis for
1999 as compared with 1998. NSP-Wisconsin's weather normalization process
removes the estimated impact on sales of temperature variations from historical
averages.
PERCENTAGE SALES GROWTH 1999 VS. 1998
-----------------------
ACTUAL W/N
------ ---
Electric Residential 1.4 % -0.2 %
Electric Industrial and Commercial 0.8 % 0.7 %
---------------------------------- -------- ---------
Total Electric Retail 1.0 % 0.4 %
Electric Resale 2.0 % 1.4 %
--------------- -------- ---------
TOTAL ELECTRIC SALES 1.1% 0.5 %
------------------------------ ------- ---------
Gas Firm 11.5% 4.1%
Gas Interruptible 4.4% NA
Gas for generation -25.9% NA
------------------ ------ --
TOTAL GAS SALES 5.8% 1.6 %
------------------------- -------- ---------
NA = not applicable
1999 COMPARED WITH 1998
- --------------------------
ELECTRIC REVENUES for 1999 increased $13.0 million, or 3.3 percent, compared
with 1998. The following table summarizes the change in electric revenues.
Power supply and transmission revenue relates to interchange agreement revenues
received from NSP-Minnesota and reflect a net decrease in NSP-Wisconsin's fuel
and transmission expenses.
ELECTRIC REVENUES 1999 VS. 1998
-----------------
(MILLIONS OF DOLLARS)
---------------------
$ CHANGE % CHANGE
-------- --------
Sales growth (excluding weather impact) $ 1.5 0.5 %
Weather impact 1.8 0.6 %
Rate changes 9.4 2.9 %
----- -----
Total electric sales revenue $12.7 4.0 %
Power supply revenue 0.0 0.1 %
Transmission and other revenue 0.3 0.9 %
------- -----
Total Electric Revenue Increase $13.0 3.3 %
===== =====
ELECTRIC MARGIN equals electric revenues minus production expenses, consisting
of purchased and interchange power and fuel for electric generation. The table
below calculated electric margin for the years ended Dec. 31, 1999 and 1998.
ELECTRIC MARGIN 1999 1998
---------------
(MILLIONS OF DOLLARS)
---------------------
Electric revenues $ 411.5 $ 398.5
Fuel for electric generation (9.9) (11.4)
Purchased and interchange power (192.5) (190.0)
---------- --------
Electric Margin $ 209.1 $ 197.1
======= ========
Electric production expenses tend to vary with changing retail and wholesale
sales requirements and unit cost changes in fuel and purchased power. The table
below summarizes the principal reasons for electric margin changes from 1998 to
1999.
CHANGE IN ELECTRIC MARGIN 1999 VS. 1998
-------------------------
(MILLIONS OF DOLLARS)
---------------------
$ CHANGE
--------
Sales growth (excluding weather impact) $ 1.0
Weather impact 1.3
Rate changes 9.4
Interchange and other revenues 0.3
-------
Total Electric Margin Increase $12.0
=====
GAS REVENUES for 1999 increased $3.5 million, or 4.5 percent, compared with
1998. The following table summarizes the change in gas revenues. Changes in
per unit gas costs are reflected in customer rates through the gas cost recovery
mechanism.
GAS REVENUES 1999 VS. 1998
------------
(MILLIONS OF DOLLARS)
---------------------
$ CHANGE % CHANGE
-------- --------
Sales growth (excluding weather impact) $ 1.2 1.6 %
Weather impact 3.3 4.2 %
Rate changes (1.0) (1.3 %)
-------- ------
Total Gas Revenue Increase $ 3.5 4.5 %
======== =======
GAS MARGIN equals gas revenues minus the cost of gas sold. The table below
calculated gas margin for the years ended Dec. 31, 1999 and 1998.
GAS MARGIN 1999 1998
----------
(MILLIONS OF DOLLARS)
---------------------
Gas revenues $ 82.3 $ 78.8
Cost of gas purchased and transported (55.5) (53.0)
--------- -------
Gas Margin $ 26.8 $ 25.8
====== ======
The cost of gas tends to vary with changing sales requirements and unit cost of
gas purchased. However, due to the gas cost recovery mechanism, nearly all
fluctuations in the cost of gas have no effect on gas margin. The table below
summarizes the principal reasons for gas margin changes from 1998 to 1999.
CHANGE IN GAS MARGIN 1999 VS. 1998
--------------------
(MILLIONS OF DOLLARS)
---------------------
$ CHANGE
--------
Sales growth (excluding weather impact) $ 0.7
Weather impact 1.3
Rate changes ( 1.0)
-------
Total Gas Margin Increase $ 1.0
=======
OTHER OPERATING, MAINTENANCE, CONSERVATION DEMAND SIDE MANAGEMENT (DSM), AND
ADMINISTRATIVE AND GENERAL (A&G) expenses together increased $0.3 million, or
0.3 percent, in 1999 compared to 1998. The increase is due primarily to
increased maintenance, customer service initiatives, and amortization of
regulatory deferred network transmission service (NTS) fees offset by lower
authorized DSM and employee benefits in 1999.
DEPRECIATION AND AMORTIZATION expense increased $2.9 million, or 7.6 percent,
in 1999 compared to 1998. The increase is due mainly to increases in plant in
service and additional depreciation authorized by the PSCW in September 1998.
TECHNOLOGY CHANGES FOR THE YEAR 2000 (Y2K)
NSP's Y2K program covered not only NSP's 2,000 computer applications, consisting
of about 75,000 programs and totaling more than 30 million lines of code, but
also the thousands of hardware and embedded system components in use throughout
NSP. Although it appears that NSP successfully transitioned into the year 2000
with no Y2K disruptions to customers or to internal operations, there are no
guarantees that a Y2K-related problem will not surface at a later date. NSP is
not presently aware of any such situations; however, occurrences of this type
could adversely affect NSP's business, operating results, and financial
condition.
NSP has spent approximately $22 million for Y2K efforts from 1996 through 1999.
This includes $9 million in 1999. These costs have been expensed as incurred,
except for a portion deferred for approved rate recovery. NSP-Wisconsin's
portion of NSP's Y2K project costs was $1.2 million, $375,000 of which was spent
in 1999.
ACCOUNTING CHANGE - In June 1998, the FASB issued Statement of Financial
Accounting Standard (SFAS) Number 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, and its effectiveness. NSP plans to adopt this standard
in 2001, as required. NSP has not yet determined that potential impact of
implementing this statement.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------------------
NSP-Wisconsin did not have any derivative financial instruments outstanding at
the end of the latest fiscal year. Accordingly, the disclosures about market
risk are not applicable.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
See Item 14(a)-1 in Part IV for financial statements included herein.
See Note 10 to the financial statements for summarized quarterly financial data.
======
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- -----------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
====================================
To The Shareholder of Northern States Power Company (Wisconsin):
In our opinion, the accompanying balance sheets and the related statements of
income and retained earnings and of cash flows present fairly, in all material
respects, the financial position of Northern States Power Company
(NSP-Wisconsin), a Wisconsin corporation, at Dec. 31, 1999 and 1998, and the
results of its operations and its cash flows for each of the three years in the
period ended Dec. 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the
responsibility of NSP-Wisconsin's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/
PRICEWATERHOUSECOOPERS LLP
Minneapolis, Minnesota
Jan. 31, 2000
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAL
- ------------------------------------------------------------
- ------
STATEMENTS OF INCOME AND RETAINED EARNINGS Year Ended December 31
-----------------------
(Thousands of dollars) 1999 1998 1997
Operating Revenues
Electric $ 411 532 $ 398 497 $ 382 859
Gas 82 375 78 845 89 790
Total 493 907 477 342 472 649
Operating Expenses
Purchased and interchange power 192 541 190 019 179 708
Fuel for electric generation 9 941 11 355 10 023
Gas purchased for resale 55 534 53 067 61 195
Other operation 54 437 48 009 45 534
Maintenance 22 599 21 437 19 734
Administrative and general 16 998 21 521 17 845
Conservation and demand side management 5 122 7 853 8 935
Depreciation and amortization 42 117 39 135 37 815
Property and general taxes 14 725 14 507 14 140
Income taxes 25 546 20 809 24 120
Total operating expenses 439 560 427 712 419 049
Operating Income 54 347 49 630 53 600
Other Income (Expense)
Allowance for funds used during construction-equity 271 393 246
Other income and deductions-net of applicable income taxes 278 851 1 253
Total Other Income (Expense)-Net 549 1 244 1 499
Income Before Interest Charges 54 896 50 874 55 099
Interest Charges
Interest on long-term debt 16 185 16 204 16 322
Other interest and amortization 3 442 2 985 1 688
Allowance for funds used during construction-debt (1 097) (510) (328)
Total interest charges 18 530 18 679 17 682
Net Income 36 366 32 195 37 417
Retained Earnings, January 1 250 890 244 171 234 751
Retained Earnings of acquired business 729
Dividends on common stock paid to parent (26 997) (26 205) (27 997)
Retained Earnings, December 31 $ 260 259 $ 250 890 $ 244 171
See Notes to Financial Statements.
STATEMENTS OF CASH FLOWS Year Ended December 31
-------------------------
(Thousands of dollars) 1999 1998 1997
- ------------------------ ---- ---- ----
Cash Flows from Operating Activities:
Net Income $36 366 $32 195 $37 417
Adjustments to reconcile net income to
cash from operating activities:
Depreciation and amortization 43 044 40 059 38 991
Deferred income taxes 3 695 5 405 4 372
Deferred investment tax credits recognized (838) (859) (880)
Allowance for funds used during
construction - equity (271) (393) (246)
Undistributed equity in subsidiary
company earnings (409) (3) (300)
Cash provided by (used for) changes in certain
working capital items 5 591 (1 768) (1 491)
Cash provided by (used for) changes in other
assets and liabilities (2 230) 6 724 (2 993)
Net Cash Provided by Operating Activities 84 948 81 360 74 870
Cash Flows from Investing Activities:
Capital expenditures (85 471) (66 646) (53 580)
Increase in construction payables 2 963 538 899
Allowance for funds used during
construction - equity 271 393 246
Other (614) 347 (615)
Net Cash Used for Investing Activities (82 851) (65 368) (53 050)
Cash Flows from Financing Activities:
Issuances of short-term debt due to
parent - net of repayments 24 900 10 400 6 000
Redemption of long-term debt (167)
Dividends paid to parent (26 997) (26 205) (27 997)
Net Cash Used for Financing Activities (2 097) (15 972) (21 997)
Net increase (decrease) in cash and
cash equivalents 0 20 (177)
Cash and cash equivalents beginning of period 51 31 208
Cash and cash equivalents end of period $ 51 $ 51 $ 31
Cash provided by (used for) changes in certain working capital items:
Accounts receivable and unbilled revenues $(3 329) $(1 188) $ 6 847
Materials and supplies inventories 4 482 (1 243) (3 980)
Payables and accrued liabilities 6 631 268 (4 060)
Income and other taxes accrued (2 589) 1 643 134
Other 396 (1 248) (432)
Net $5 591 $(1 768) $(1 491)
Supplemental Disclosures of Cash Flow Information:
Cash paid during the year for:
Interest (net of amount capitalized) $17 565 $ 17 345 $ 16 581
Income taxes (net of refunds received) $24 838 $ 10 824 $ 20 673
See Notes to Financial Statements.
BALANCE SHEETS December 31
(Thousands of dollars) 1999 1998
ASSETS
Utility Plant
Electric-including construction work in progress:
1999, $43,788; 1998, $22,770 $1 034 315 $ 972 442
Gas-including construction work in progress:
1999, $1,077; 1998, $1,606 118 279 113 574
Other-including construction work in progress:
1999, $5,310; 1998, $4,481 87 726 81 040
Total 1 240 320 1 167 056
Accumulated provision for depreciation (487 549) (457 272)
Net utility plant 752 771 709 784
Current Assets
Cash 51 51
Accounts receivable-net of accumulated provision for
uncollectible accounts: 1999, $943, 1998, $825 37 320 34 748
Unbilled utility revenues 21 768 21 011
Materials and supplies inventories - at average cost
Fuel 7 465 12 406
Other 7 068 6 609
Prepayments and other 13 076 13 472
Total current assets 86 748 88 297
Other Assets
Regulatory assets 39 252 42 467
Other investments 9 295 7 823
Nonutility property - net of accumulated depreciation:
1999, $76; 1998, $75 2 768 2 803
Unamortized debt expense 1 575 1 668
Long-term prepayments and deferred charges 14 694 10 869
Total other assets 67 584 65 630
Total Assets $ 907 103 $ 863 711
See Notes to Financial Statements.
BALANCE SHEETS December 31
(Thousands of dollars) 1999 1998
LIABILITIES AND EQUITY
Capitalization
Common stock-authorized 1,000,000 shares of $100 par
value; issued shares: 1999 and 1998, 862,000 $ 86 200 $ 86 200
Premium on common stock 10 541 10 541
Retained earnings 260 259 250 890
Total common stock equity 357 000 347 631
Long-term debt-net of unamortized discount:
1999, $1,650; 1998, $1,737 231 950 231 863
Total capitalization 588 950 579 494
Current Liabilities
Notes payable - parent company 80 800 55 900
Accounts payable 18 570 14 301
Payables to affiliated companies (principally parent) 21 404 16 596
Salaries, wages, and vacation pay accrued 5 656 5 910
Taxes accrued 829 3 418
Interest accrued 4 330 4 184
Other 5 950 4 310
Total current liabilities 137 539 104 619
Other Liabilities
Accumulated deferred income taxes 111 772 110 831
Accumulated deferred investment tax credits 17 281 18 122
Regulatory liabilities 21 726 21 947
Customer advances 11 398 9 458
Benefit obligations and other 18 437 19 240
Total other liabilities 180 614 179 598
Commitments and Contingent Liabilities (see Note 8)
Total Liabilities and Equity $ 907 103 $ 863 711
See Notes to Financial Statements.
NORTHERN STATES POWER COMPANY (WISCONSIN)
NOTES TO FINANCIAL STATEMENTS
1. Summary of Accounting Policies
System of Accounts Northern States Power Company (Wisconsin), (NSP-Wisconsin),
a wholly owned subsidiary of Northern States Power Company, a Minnesota
corporation (NSP-Minnesota), is primarily a public utility serving customers in
Wisconsin and Michigan. Its accounting records conform to either the uniform
system of accounts of the Federal Energy Regulatory Commission (FERC) or those
of the Public Service Commission of Wisconsin (PSCW) and the Michigan Public
Service Commission (MPSC), which systems are the same in all material respects.
Investment in Subsidiaries NSP-Wisconsin carries its investment in its
subsidiaries (Chippewa and Flambeau Improvement Company, 75.86 percent owned;
NSP Lands, Incorporated, 100 percent owned; and Clearwater Investments,
Incorporated, 100 percent owned) at cost plus equity in earnings since
acquisition. The impact of consolidating these subsidiaries would be
immaterial.
Related Party Transactions NSP-Wisconsin's financial statements include
intracompany transactions and balances related to sales among the electric and
gas utility businesses of NSP-Wisconsin as well as intercompany transactions
with NSP-Minnesota and Viking, including intercompany profits which are allowed
in utility rates. See Note 6 for further discussion of intercompany
transactions with NSP-Minnesota.
Utility Plant and Retirements Utility plant is stated at original cost. The
cost of additions to utility plant includes contracted work, direct labor and
materials, allocable overheads and allowance for funds used during construction
(AFC). The cost of units of property retired, plus net removal cost, is charged
to the accumulated provision for depreciation and amortization. Maintenance and
replacement of items determined to be less than units of property are charged to
operating expenses.
Depreciation For financial reporting purposes, depreciation is computed on the
straight-line method based on the annual rates certified by the PSCW and MPSC
for the various classes of property. Depreciation provisions, as a percentage
of the average balance of depreciable property in service, were 3.66 percent in
1999, 3.57 percent in 1998, and 3.61 percent in 1997.
Allowance for Funds Used during Construction (AFC) AFC, a non-cash item, is
computed by applying a composite pretax rate, representing the cost of capital
used to fund utility construction, to qualified construction work in progress
(CWIP). NSP-Wisconsin uses the FERC calculation for production and transmission
property and the PSCW calculation for other qualified CWIP. The rates used for
the FERC calculation were 5.29 percent in 1999, 5.80 percent in 1998, and 5.68
percent in 1997. The rates used for the PSCW calculation were 10.17 percent in
1999 and 1998, and 10.00 percent in 1997. The amount of AFC capitalized as a
construction cost in CWIP is credited to other income and interest charges. AFC
amounts capitalized in CWIP are included in utility rate base for establishing
utility service rates.
Revenues Revenues are recognized based on sales to customers each month.
Because utility customer meters are read and billed on a cycle basis, unbilled
revenues are estimated and recorded for services provided from the monthly
meter-reading dates to month-end.
Regulatory Deferrals As a regulated utility, NSP-Wisconsin accounts for certain
income and expense items under the provisions of Statement of Financial
Accounting Standards (SFAS) No. 71 - Accounting for the Effects of Certain Types
of Regulation. In doing so, certain costs which would otherwise be charged to
expense are deferred as regulatory assets based on expected recovery from
customers in future rates. Likewise, certain credits which would otherwise be
reflected as income are deferred as regulatory liabilities based on the
expectation that they will be returned to customers in the future. Management's
expected recovery of deferred costs and expected flowback of deferred credits is
generally based on specific ratemaking decisions or precedent for each item.
Regulatory assets and liabilities are being amortized consistent with ratemaking
treatment as established by regulators. Note 7 describes the components of
regulatory assets and liabilities.
Income Taxes Under the liability method used by NSP-Wisconsin, income taxes are
deferred for all temporary differences between pretax financial and taxable
income, and between the book and tax bases of assets and liabilities. Deferred
taxes are recorded using the tax rates scheduled by tax law to be in effect when
the temporary differences reverse. Due to the effects of regulation, current
income tax expense is provided for the reversal of some temporary differences
previously accounted for by the flow-through method. Also, regulation has
created certain regulatory assets and liabilities related to income taxes, as
summarized in Note 7.
NSP-Wisconsin is included in the consolidated federal income tax return filed by
NSP-Minnesota and files separate state returns for Wisconsin and Michigan.
NSP-Wisconsin records current and deferred income taxes at the statutory rates
as if it filed a separate return for federal income tax purposes. State income
tax payments are made directly to the taxing authorities. Federal income tax
payments are made to the Internal Revenue Service by NSP-Minnesota and charged
back to NSP-Wisconsin.
Investment tax credits were deferred and are being amortized over the estimated
lives of the related property.
Environmental Costs Accruals for environmental costs are recognized when it is
probable that a liability has been incurred and the amount of the liability can
be reasonably estimated. Costs are charged to expense (or deferred as a
regulatory asset based on expected recovery from customers in future rates) if
they relate to the remediation of conditions caused by past operations or if
they are not expected to mitigate or prevent contamination from future
operations. Where environmental expenditures relate to facilities currently in
use (such as pollution control equipment), the costs may be capitalized and
depreciated over the future service periods. Estimated remediation costs are
recorded at undiscounted amounts, independent of any insurance or rate recovery,
based on prior experience, assessments and current technology. Accrued
obligations are regularly adjusted as environmental assessments and estimates
are revised, and remediation efforts proceed. For sites where NSP-Wisconsin has
been designated as one of several potentially responsible parties, the amount
accrued represents NSP-Wisconsin's estimated share of the cost. NSP-Wisconsin
intends to treat any future costs related to decommissioning and restoration of
its power plants and substation sites, where operation may extend indefinitely,
as a capitalized removal cost of retirement in utility plant. Depreciation
expense levels currently recovered in rates include a provision for an estimate
of removal costs.
Use of Estimates In recording transactions and balances resulting from business
operations, NSP-Wisconsin uses estimates based on the best information
available. Estimates are used for such items as plant depreciable lives, tax
provisions, uncollectible accounts, environmental loss contingencies, unbilled
revenues and actuarially determined benefit costs. As better information becomes
available (or actual amounts are determinable), the recorded estimates are
revised. Consequently, operating results can be affected by revisions to prior
accounting estimates.
Reclassifications Certain reclassifications have been made to the 1998 and 1997
financial statements to conform with the 1999 presentation. These
reclassifications had no effect on net income.
2. Long-term Debt
December 31 December 31
1999 1998
Long-term debt includes the following issues: (Thousands of dollars)
First Mortgage Bonds - Series due:
Oct. 1, 2003, 5 3/4% $ 40 000 $ 40 000
March 1, 2023, 7 1/4% 110 000 110 000
Dec. 1, 2026, 7 3/8% 65 000 65 000
Total First Mortgage Bonds 215 000 215 000
City of La Crosse Resource Recovery
Revenue Bonds - Series due Nov. 1, 2021, 6% 18 600 18 600
Total long-term debt $ 233 600 $ 233 600
Except for minor exclusions, all real and personal property is subject to the
lien of NSP-Wisconsin's first mortgage bonds. The Supplemental and Restated
Trust Indenture dated March 1, 1991, and effective Oct. 1, 1993 permits an
amount of established permanent additions to be deemed equivalent to the payment
of cash necessary to redeem one percent of the highest principal amount of each
series of first mortgage bonds (other than resource recovery financing) at any
time outstanding.
Fair Value of Debt The estimated fair value of NSP-Wisconsin's long term debt
at December 31, 1999 and 1998 is $218.1 million and $247.2 million,
respectively. This fair value is estimated based on the quoted market prices
for the same or similar issues, or on the current rates offered to NSP-Wisconsin
for debt of the same remaining maturities.
Capital Lease Obligations Amounts due under capital lease obligations are
$14,000 in 2000 and $0 thereafter.
3. Short-Term Borrowings
NSP-Wisconsin had bank lines of credit aggregating $1 million at Dec. 31, 1999.
Compensating balance arrangements in support of such lines of credit were not
required. These credit lines make short-term financing available by providing
bank loans. During 1999 and 1998 there were no bank loans outstanding as
NSP-Wisconsin obtained short-term borrowings from NSP-Minnesota at
NSP-Minnesota's average daily interest rate, including the cost of their
compensating balance requirements.
The PSCW has authorized NSP-Wisconsin to make short-term borrowings up to $100
million. At Dec. 31, 1999 and 1998, NSP-Wisconsin had $80.8 and $55.9 million,
respectively, in short-term borrowings from NSP-Minnesota outstanding. The
weighted average interest rates on all short-term borrowings as of Dec. 31, 1999
and 1998, were 5.99 percent and 5.80 percent, respectively.
4. Income Tax Expense
The total income tax expense differs from the amount computed by applying the
federal income tax statutory rate of 35 percent to net income before income tax
expense. The reasons for the difference are as follows:
1999 1998 1997
Tax computed at statutory rate 35.0% 35.0% 35.0%
Increases (decreases) in tax from:
State income taxes, net of federal income tax benefit 5.3 4.9 3.7
Investment tax credits recognized (1.4) (1.6) (1.5)
Other - net 2.1 0.6 1.2
Effective income tax rate 41.0% 38.9% 38.4%
Income tax expense is comprised of the following:
(Thousands of Dollars)
Included in Utility operating expenses:
Current federal tax expense $ 18 163 $ 13 249 $ 15 549
Current state tax expense