ML20138A491

1996 Annual Rept for Northern States Power Co

ML20138A491
Person / Time
Site:	Prairie Island
Issue date:	12/31/1996
From:	Richard Anderson, Howard J NORTHERN STATES POWER CO.
To:	NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM)
References
NUDOCS 9704280088
Download: ML20138A491 (61)

Text

{{#Wiki_filter:N Northem States Power Company April 18,1997 10 CFR 50.71(b) U. S. Nuclear Regulatory Commission Attention: Document Control Desk Washington, DC 20555 MONTICELLO NUCLEAR Gi!NERATING PLANT Docket No. 50-263 Licease No. DPR-22 PRAIRIE ISLAND NUCLEAR GENERATING PLANT Docket No. 50-282 License No. DPR-40 50-306 DPR-60 Submittal of 1996 Annual Report includina the Certified Financial Statements in accordance with 10 CFR 50.71(b) and item No. 70 in Regulatory Guide 10.1, enclosed are ten (10) copies of our 1996 Annual Report, including the certified financial statements. if you have any questions with regard to this information, please call Scott L. Weatherby at 612-330-7643 or S6m Shirey at 612-295-1449. Sincerely, q' fe r-Roger O. Anderson

Director, Licensing & Management issues (jQY c: w/ enclosure Regional Administrator-Ill, NRC Monticello NRR Project Manager, NRC Monticello Residentinspector, NRC Prairie Island NRR Project Manager, NRC Prairie Island Resident inspector, NRC c: w/o enclosure State of Minnesota, Attn: Kris Sanda i

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4 r ~. 4 s Financial Summary $1 s a atYear End 1992 oI r o ars I n M lisons) Y a - nd Donars per Share i .0 - 1IIll 120 ~ ' ~ im _ 3 _ 80. 150 _ -~ ' ~ j so _ __. _ _ _ _ 1 _ 10 20. - 0 _ O _ 0_ O_ n estment o Dividends c uding 1 2 e ud ng 1 2 Ma et nce Accountmg Change Accounting Change W Total N Total i Finaneia1 HighIights l;;;;,,cy,;', ";;;;;?"-- l Percent i Year Ended Dec. 31 to io f M 1995 % Change ~ 569 I'5% On o ng o erat ~ $3.12~ 8 8 Thta_I.. _ _, [$3.82] [$3,91[ '(23%! Dividends declared per_s. hare. __ _ $2 745 . _S2 68_5._..2.2% _ Utrhty operating revenues (millions) $2.654.2 _ $2,568.6 _33% j Net income (milhons) $274.5 $2758 . j0.5%) 6. _ _ _ _ _ 6 _ __ E i Return on average c_ommon e_quity__._ _ _ Ongoing operations

• _1_2.6% _

_12.7% l Total _,. _ _ _ _12.6% . _13 4%_ _ _ _ . _. Assets (milhons), _ __. _ _ _$6,636{_ $6.228 6_, 6.6% 4 - - - - - - 4 ------ Book vstue pe_r common share.. _ $30.93_ $29 74 _ ._40% j Electnc & gas customersjthousands) 1,854.3 1,821.5 _ 1.8% i _. Peak electrie demand (megawatts)_ 7,481 l 7,519 _j0 4%) 2. _ 2._____ E t ic 11o s ikilowittio~rsi NB33~ " 34,500~ 70s u Gasibilhons of cubic feet) ' ~ ~ f ~ 103% ~ ~ iS" 10 93 Benef(ernployees _ __ __ 6370 ~ ~ 6,829~ 'i53%i 0 _ o r J f

• Excluding non-recurnng transactions in 1995, as discussed in l

Management's Discussion and Anahsis under Non-recurnng items l

e Company Description orthern States Power Company (NSP), Eloigne Company, a wholly owned subsidiary, headquartered in Alinneapolis, Alinnesota,is has ownership interests in affordable housing a major U.S. utility with growing domestic and projects, principally within NSP's service area. l international nonregulated operations. NSP and Generprise, Inc., a wholly owned subsidiary, its wholly owned utility subsidiary, Northern delivers natural gas and electric products and ser-States Power Company-Wisconsin, operate gener-vices to commercial and industrial customers, utili-ation, transmission and distribution facilities pro-ties, municipalities and energy marketers, and offers viding electricity to about 1.4 million customers performance contracting to customers nationwide. in hiinnesota, Wisconsin, North Dakota, South Dakota and Alichigan. The two companies also distribute natural gas to more than 400,000 cus-totiiers in Niinnesota, Wisconsin, North Dakota ContenCS j and Alichigan, and provide a variety of energy-1,etter to Shareholders 2 related services throughout their service areas. Operations Review 6 NRG Energy, Inc., a wholly owned subsidiary, Directors and Officers 16 operates and has ownership interests in indepen-Alanagement's Discussion and Analysis 18 dent, nonregulated power and energy businesses in Consolidated Financial Statements 28 Notes to Financial Statements 34 the United States and other countries, with major Reports of Alanagement projects in G,ermany and Austrah.a. and Independent Accountants 50 Viking Gas Transmission Company, a who!! Financial Statistics 51 owned subsidiary, owns and operates a 500-mile Operating Statistics 52 interstate natural gus pipeline providing gas trans-Shareholder Information 55 portation services to customers in the Upper hiidwest from connections with four major pipelines in the United States and Canada.

22 Years of Dividend Growth

Dear Slitireliolders:

DoMars per Share he strength of Northern States Power 3 00 Company is in its people, who take pride in " Creating Your Energy I?uture." Your company has been successful at anticipat-2.m ing changes in our industry and implementing strategies for continued success as we approach i so the 21st century. Overall,1996 was a good year for NSP. Our 85 earnings were on target, our electric and natural gas operations were strong and our subsidiaries "~ ~ - - - ~ continued to develop business opportunities. We continued to progress with our long-term ) 1 o. ~ . p_. efforts to reduce costs and improve service in our utility operations, supplement utility returns by selectively investing in and managing energy production projects in the United States and over-was,an op an energy dces suWary Dividend Payout Ratic Percent of Earnings I bodnig & M'y of m Imin M i 120 llowever, I am disappointed that the process to approve our request to merge with Wisconsin 110 Energy Corporation (WEC) to form Primergy Corporation has moved very slowly. Regulators in in. Niichigan and North Dakota approved our merger so ' recpiest, and it received conditional endorsement from the administrative law judge before the hD*., itederal Energy Regulatory Commission (l'EllC). 3 m. 'O f Approval is not required in South Dakota. I a #: ca 4 Although we had hoped for approvals from all u._ jurisdictions by the end of 1996, it now appears 50 - that the FERC and regulators in hiinnesota and Wisconsin could reach decisions within the first 1992 Payout Excluding Accounting Change h3][of ]997, We will keep you informed as the process continues to unfold. 2

1 L v. Net income was $274.5 million, compared with 1995 results of $275.8 million, which included j p non-recurring items totaling $14.7 million. These results re0cct our commitment to achieve r W annual earnings-per-share growth of 5 percent, on average. NitG Energy, Inc., our largest nonregu-lated subsidiary, increased its contribution to ongo-h. ing carnings by five cents per share in 1996. f NitG's goal is to contribute at least 20 percent of NSP's earnings by the year 2000. Since 1993, NSP's carnings per share from ongoing operations have increased by an average of 8 percent annually. James J. Howard I am pleased to report that for the 22nd consec-l Chairman of the Board, President and Chief Executive Officer l utive year, your dividend increased. The annual rate is now $2.76 per share, compared with $2.70 I appreciate the loyalty and dedication of all NSP in 1995. employees who are working to make this merger in addition to NitG, our subsidiaries Viking become a reality w hile ensuring that our day-to-day Gas Transmission Company, Generprise, Inc. and business continues to operate well and that we Eloigne Company were successful in expanding remain financially strong. Our employees are among their operations in 1996, as uas our natural gas the best in the industry. Throughout my profes-utility business. I sional career of more than 35 years, I have never NSP Gas continued its history of growth, adding I seen such a tremendous team effort. This is the more than 14,000 customers in 1996, w hile Viking j same loyalty, commitment and perseverance that completed a pipeline expansion to increase s olume contributed to our strong performance in 1996 and by 6 percent. w ill drive the success of your company in the future. NitG brought the former O'llrien Environmental Earnings from ongoing operations w ere $3.82 per Energy, Inc. out of bankruptcy as NitG Generating share in 1996, compared with $3.69 (excluding (U.S.) Inc., and it already is turning a profit. NitG non-recurring transactions) in 1995, a 4 percent closed on a power plant refurbishment project in increase. 'lbtal carnings per share were $3.82 in Australia, and is a partner in a new gas-fired power 19'm, compared with $3.91 in 1995, w hich included plant project to be built outside 1,ondon, England. net non-recurring income of 22 cents per share. NitG continues to work on several other projects, Earnings from ongoing operations increased for the and 1997 is shaping up as another good year for fourth consecutive year in 1096. the subsidiary. l 3 lL

1 i l d' i j NSP is fi>rtunate to serve economically strong and R diverse communities that require reliable, competi-1 i tively priced and environmentally sound energy. j j i Nuclear power, combined with coal, natural gas er . ;I and other fuel sources, has been key to meeting - I' the demand in the past, and we are working to f 4 ensure that those resources will remain competi-A tive in the future. a j 1 j,,w w -pg. We were encouraged by a U.S. Court of a Appeals ruling in 1996 dealing with nuclear waste l NSP worked with state, county and city partners to help Possis Medical,Inc. locate a new facility in Coon Rapids, Minnesota. storage. l'he court aflirmed the U.S. Department l' The highchnology medical device company's new f acility l includes this 3nvironmentally controlled space necessary in of EneT,y's (DOE) obligation to begin accepting i the manuf actu'ing process. ussa nuclear fuel by 1998. Ilowever, the DOE has 3 1 1 announced it is unable to meet the deadline and j Cencrprise continues to show potential as a conceded that a national repository will not be avail-1 national energy service company. The subsidiary able until at least 2010. Therefore, voor company l j announced in 1996 that it has an option to acqmre joined other utilities and state agencies in separate l l Energy Solutions International, a full-serv. ice energy lawsuits filed against the DOE in January 1997 to management firm based in St. Paul, Niinnesota. suspend payments to the Nuclear Waste Fund. ,I he partnersh.ip has the potential to enhance i Since 1983, customers of utilities with nuclear Cenerpn.se's ability to provide energy products and plants have paid more than $12 billion, including I services in the Southeast and on the West Coast. interest, into the fund to cover costs associated Elm.gne is our subsidiary that invests m afli>rdable with spent-fuel disposal. l hous.mg. I.he projects contribute to the vitah.ty of l We will continue to pursue other solutions for the communities we serve and benefit shareholders nuclear waste disposal as ucil, including federal through federal tax cred.its. Eloigne invests about j $12 million of equity in projects annually and has a.. an it terest in 33 developments throughout our sert"; area. l in preparation for the future, your company l created a new subsidiary, Seren innovations, Inc., 1 i to provide energy management, security control i l and business information services over a variety of Am communications netw orks. l NSP established Eloigne Company as a wholly owned subsidiary in 1993 The company provides affordable, multifamily. rental housing l primarily within the NSP service area. i 4

4 O. legislation to address the issue effectively and a campaigns ever. Employee and retirce United private interim storage facility. Way contributions provided more than $900,000 Our tradition of nuclear excellence will con-for people in need. In addition, nearly 7,500 tinue under the strong leadership of NSP veterans employees, retirees and their family members con-Ed Wats, our new president of NSP Generation, tributed 14,000 hours to NSP community volun-acd Slike Wadley, the new vice president of teer projects benefiting about 63,000 customers. Nuclear Generation. Ed was vice president of I am proud of our accomplishments. Nuclear Generation and replaces Doug Antony, As I reflect on the past year, I also am pleased who retired February 3,1997. Mike was plant with our economic development efforts, our manager at Prairie Island and moves into Ed's progress on developing alternative energy sources, former position We commend Doug's 28-year our initiatives to serve customers well with state-commitment to the highest level of nuclear per-of-the-art technology, and our highaluality electric formance, and we wish him well in retirement. and natural gas operations. As I reflect on the past nine decades of NSP's Corporate Contributions s4 75 Memon environmental stewardship and tenacity in resolving complex issues, I am confident that we are posi-10 % us tioned well for continued success in the future. 34 % On behalf of the NSP Iloard of Directors, officers l 31 % i and all employees, I thank you for your investment and commitment. We are grateful for your involve-E Education ment in our grassroots political advocacy group to E M Cdwe E RegionalGrants help us deal with legislative issues affecting our E Buildmg Human Capacity E Communny Development ' g .g again in 1997, along with your support as we move into the next decade. j in addition to NSP's day-to-day work providing We have exciting opportunities ahead of us, and energy and high-quality service for our customers, all of us h>ok forward to creating your energy future. u e continue to focus on helping our communities. Our corporate contributions totaled $4.75 million Sincerely, l in 1996. l Employees, including members of the l International llrotherhood of Electrical Workers, James J. Iloward also produced one of the best United Way Chainnan of the lloard, President and Chief Executive Officer February 24,1997 1 l 5 l

i '4 C REATING y0Hr Fi_ requires for the year 2000. llecause NSP opened J its transmission lines to other users several years before federal mandates, the company's transition .{ in 1996 to an open wholesale electric market J was smooth. We've learned from experience that the surest In creating your energy future, NSP is shaping way to prevail is to anticipate trends, understand an environment in w hich the company can prosper their consequences and meet them heal on. as the electric industry becomes increasingly I competitive. Our strategy for success includes \\Vinning \\Vitli Teclinology taking significant steps to prepare for competition n that same tradition, NSP is preparing for the ami change. future by investing more than $90 million in a It's an approach born of a long tradition. variety of new technologies to improve electric The company led the industry, for example, in system reliability and customer service. Crews in the commercial use of nuclear power. We wcre F196 completed installing measurement devices on among the first utilities to hurn low-sulfur coal and already are in compliance with sulfur dioxide emission regulations that the federal Clean Air Act + x More than 20 years ago, NSP l twan using low sulfur Western ~ -' + coal at its coal fired power plants >M i g in an effort to reduce sulfur >1 ~ dioxide ermssions --A .e~ ' \\ $)N 5 J. ;.\\ i Y,, .s q ~' N,: 0 k %,'N h g,-m,I[D, g g' gp < gV gg e ' 4',,w, y pg 4;. n , 4 .l,t [ \\, f, wv .,j. r y. I

+ , 3 Four major storms disrupted f c, S. electric service to NSP customers

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dunng1996. Asalways NSPline crews worked long hours to restore s 4 service. Despite the storms. NSP ,a [ made good progress in improving 1 ' electnc rehabikty ,2<- ., 4.N. 'bs e r h 4., %i ' g , * - ^ l .. s.. ;- [ .. x y ).' L g-f\\t, i ..= 633 Twin Cities electric distribution lines that New technology offered opportunities for provide "real-time," or as-it-happens, information growth that benefited not only NSP but its cus-about the amount of electricity flowing between comers. The company made substantial progress in switches on the line. The information allows opera-encouraging large customers to adopt electrotech-tors in our new system control center to make bet-nologies, which use electricity innovatively and ter and faster decisions about routing p<mcr during efficiently to make businesses more competitive. times of heavy electrie demand, u hich helps pre-Printing companies, fi>r example, can use ultra-s ent damaged equipment and customer outages. violet lights to cure ink faster, with no harm to Our new customer service system became the environment. F.lectrotechnologies increased operational in the spring of 1996. The system, NSP electric sales by $1.5 million in 1996. w hich employs the latest information technology, will be indispensable when all customers are able to choose their electricity supplier because it will enable us to deal with the billing intricacies that a competitive retail market will require. d / We also are working on a new geographic ,,^ 4 Infortnation system to standardt/c and compitterite e thousands of NSP maps and other pieces of information, w hich will significantly improve productivity and, as a result, etistomer service. With the help of NSP. Acme Foundry Company of Minneapolis took a giant technological step forward when it began using equipment powered by electncity to melt metal. The new fumaces save time and money because they are more etficient and do not require preheaters. 1 L

4 I Electric Sales by Customer Class Providing genuine customer value requires us to 24 ss be flexible and open to new ways of doing things. 15 3% A good example of that flexibility is a recent agree-18 8 % 27 8 % rnent with Koch Refinery in Rosemount, hiinn., our .8% largest electric customer. For several years, Koch ya had considered building its own 200-megawatt E Residential cogeneration plant, which would meet the refin-E SmallCommercialandindustrial E Medium Commercialandindustnal* ery's electrie needs with excess power to sell. E Largc Commercialandindustriel q. gp E Streetlighting and Other E Sales for nessie electricity to Koch through 2006 or until Koch

• Medium Commercial and Industrial Demands of Mt 999 Kilowatts g9.g gg.

g9 y gy gll 9 , (9gg .gg99 l l with excess power needs in the region, and gives NSP the option of buying all excess energy the 1996 Energy Sources cogeneration plant produces. 46 4 % As the Koch agreement illustrates, our customer 28 " focus is of primary importance, and its cornerstone 2.8% in continues to be our work to help electric customers conserve and manage energy use. Offering a range 73% of services from innovative pricing to comprehen-E Coal owned site construction design assistance, NSP in 1996 E Nuclear .jg g E Hydro E Other* ed

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E Manrtobo Hydro gh 11 E Purchase and Interchange h

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. p:r.s u n =L NSP has a vanety of energy sources to ensure an adequate supply of

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Mp electricity is avmiable to meet customers' needs In 1996. NSP-owned

,I # ~ \\. 4 2. Y sources supphed 18 9 percent ci the electncitv customers used y3 .. n gas 3 g. '~ A > ~ --, "r ' e, ?'* w . 6 :g ;. . ;) !r All nuclear generation employees play a role in achieving the excellent operating results that NSP consistent!y produces Kurt Markling is an instructor at Monticello's training center, where employees receive operator certification training e

4 NSP's Jeff Bernngton. an env'- reclassified two units ofits Illack Dog plant and Ihe - h ronmental analyst, checks a well g near the Sherco ccal-fired plant entire Minnesota Valley plant from intermediate to peaking units, which operate only during ci tt t pa y to s at all of rts power plants ~ times of high electric demand. The change should ~ ' net an estimated $3 million in operating cost ~t. '; k s - - savmgs annually. s Thanks to the reliability of NSP's Angus Anson gas-fired plant near Sioux Falls, S.D., the company saved approximately $800,000 in operating costs enabled customers to reduce growth in electric in 1996. llecause the Anson plant was available demand by 151 megawatts. Since this efTort to serve NSP's South Dakota electric load, the began about 10 years ago, electric demand is company was not required to pay for the use of 1,350 megawatts less than it would have been, transmission lines to bring in additional electricity during periods of peak electric demand. NSP Generation Improves con 1petiCive Position A pair of osprey. currently hsted as threatened wildhfe. Oompetitive forces prompted NSP Generation has nested near NSP's King coal-fired plant for the past three years. In addition to constructing the platforrn where the osprey i d to change the operating priority ofIWo of its built their nest, employees band the birds so the U S Fish and coal-fired power plants. llecause the company frequently can buy electricity for less than the cost of generating it with those units, NSP m, ? g s . -.,l ' = ,kL pg',,

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and Reliability was the watchword at NSP's Sherburne County (Sherco) coal-fired plant as Natural Gas Customer Growth Percent well. Sherco attained availability ratings of 93 percent, compared with the industry average of 87.7 percent for similar units. NSP's nuclear plants once again achieved 4 operations excellence. Iloth the Prairic Island and 3-Nfonticello plants received almost perfect ratings in the Nuclear Regulatory Commission's annual 2-assessments. In addition, Prairie Island received a No. I rating from the institute of Nuclear Power ~ ~ ~ ~ Operations (INPO), indicating the plant's opera-tions were superior. Alonticello also holds a No.1 0. INPO rating. l At the Alonticello plant, crews replaced three p e industry turbines to increase the plant's electrical output. I im industry crowtn citimated 51nar tuMne mpbcenmnts am pbnned WWin 6e next two years at the Prairie Island nuclear plant. Some of the new gas customers NSP Gas Reports Strong Sales were in the Brainerd lakes area. where NSP Gas in 1994 initiated its largest expansion ever ] xcellent sales results characterized NSP Gas, which ended the year with more than 14,000 new customers. Some of the new customers were in the Ilrainerd I,akes area, but the company also 1, concentrated on signing up homes and businesses located close to NSP gas mains in the company's existing service territory. .? q m i ?M N 3

1 y-A in North Dakota, yj}qjng (3as INands the company reached he Viking Gas Transmission Co., an NSP x an agreement with the interstate pipeline subsidiary, completed a ~ ' Y Grand Forks Air Force major, two-phase expansion in 1996 by installing '9, liase to convert the nearly 30 miles of new natural gas transmission base's 1,621 water line. The first phase of the project was a 13.5-mile heaters to natural gas. expansion to serve large customers in Niinnesota The project will and North Dakota as well as municipal gas utilities generate an estimated in Perham and Randall, N! inn. NSP Gas added more than 14.000 o rewnue new tustomers tn 1996 annually and require no additional NSI' capital investment to serve N.I

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4b er@w% sa. ;#4*.L,ie -{$..e. 1 ?. ft :q the new load. m: %..A.6 v ,st Promoting innovative uses of natural gas was

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I another NSP Gas focus in 1996. A new 200,000-s. 3 square-foot elementary and middle school under / i 3 ' s. w construction in Oakdale, Niinn., for example, will 1 3i* ~ i l i ~. feature natural gas cooling units as ucil as a gas .g } 3

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), ~ g#/., 9 s l dehumidificanon system. 1 u-r 't l Our gas employees also wmk with customers .f ; E, ~ '~ n ~ to help them consen e energy. With NSP's help, ~' %ng G s nsne n C 3 m# d the instaHabon of neaOO mdes gas customers in Niinnesota and Wisconsin saved of natural gas transmission kne in 1996 some 542,000 thousand cubic feet (Nicf) of natural gas in 1996, for a five-year total of more than 1 million Nicf. The second phase of the pmject involved con-Outstanding customer service uas one of the uruction of a 15-mile pipeline to improve reliability reasons NSP Gas ranked No. I overallin a suney and innease natural gas capacity to Grand Forks, of 18 similar gas utilities. The survey, which N.D., and East Grand Forks, N! inn. In total, the compares gas utilities in such categories as con-project increases Viking's transportation capacity by struction, maintenance, customer satisfaction nwre than 19.4 million cubic feet of gas per day, and employee safety, gave NSP Gas the highest and will provide more than 10 percent growth in score in the combined categories. Viking's annual revenues. 11

Good Progress for NRG O rowth was solid among other NSP companies, too. NRG Energy, Inc., a wholly owned, nonregulated NSP subsidiary, successfully An operator checks the stearn pressure at the 52-inegawatt this country and abroad. Newark cogeneration facihty NRG and its partner Nordic Power invest AB that NRG Generating (U S )lnc. owns in New Jersey purchased flolivian Power Company, the second largest electricity generator in llolivia. The com-pany generates and transmits electricity in La Paz and Oruro, llolivia, with an installed capacity of 162 megawatts and an additional 56 megawatts under construction. NRG also is developing a hydro facility in Chile and has ownership interests in projects in Colombia, Peru, llonduras and Jamaica. In Estonia, NRG signed a development and cooperation agreement with the Estonian government and the country's state-owned electric corapany. The agreement establishes the terms on which the partners would develop and refurhish Estonia's major power plants.

r W q qgg } NEO Corporation, an NRG subsidiary 3 gfl. 1 sa continued to expand in 1996 with the purchase ~~ E' of seven hydroelectric plants from Duke Power Co. s ,1 The plants' 15.5 megawatts are owned in l. h / partnership with Omega 1.1,C in Chicago and F are in addition to 12 other hydroelectric facilities f operated by the partnership. NEO also operates [ --h six landfill gas facilities. a, . ;$e k Cenerpr se Grows iii NRG Generatmg (U S )inc has a one-third interest in the ISO-megawatt Grays ferry togeneration project under construction in Phdadelphia l}TOD1iSing I)iTeCCiOnS Trigen Phdadelptua will use the plant's thermal energy to serve 400 steam customers Electncity will be sold under a long-term contract O cnerprise, Inc., an NSl* subsidiary offering lVenergy delivery and energy performance to PEC0 Energy On the Asian /l'acific Itim, NitG and pwacr$ products and services to customers nationwide, I plan to build, own and operate a 400-megawatt, launched several promising projects in 1996. coal-fired power plant in West Java, Indonesia. Among them was an $8.5 million, multiphased Construction of the plant, w hich NitG will oper-energy improvement contract with Alliant are,is due to begin in mid-1997 and should be Techsystems, headquartered in llopkins, Alinn. operational by 2000. The Utah-based project is one of six similar N RG's established international facilities ventures Cencrprise is pioring for other Alliant include a 200-megau att share of the 960-megawatt Techsystems locations. The company also signed Schkopau coal-fired generating plant, near a letter of intent to provide energy improvements 1.cip/.ig, Germany, and a 630-megawatt share of to buildings in the the 1,680-megawatt, coal-fired Gladstone Power j Itobbinsdale School Station in Queensland, Australia. Iloth plants District in N!innesota. n m. reported excellent years. The first phase of the in the Ii ited States, NRG reorganized O'llrien project will include five n Environmental Energy, Inc. as NRG Generating buildings with improve-(U.S.) Inc., a publicly held NRG affiliate. The ments ranging from company develops, builds, owns and operates lighting retrofits to heat-cogeneration and waste-heat recovery projects ing system upgrades. A Gladstone Power Station that produce electricity and thermal energy for employee exammes waste sale to commercial and industrial customers and water discharge from the plant Gladstone has received public utilities. accolades in the local press for its environmental stewardship 13

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., y: +ww : I l l (:oi11illit111e11t Io (:o111111iiIlirv f"**""^'s NT Soum Deu Aswoe;>cenuNe Den H Doneun Di M shown here ch Rahm:1 Chosmnson. me CIllill11% b() ( USN I Thlfet! J'nbrulum in the ( omurn!y s NNI' incets the challenges of., changing j o,.u ke,pon c.,ne menpans continecs o, etemne pi.mn. u m< h n omm e,nph,s abemt 900 ret ogni/c that its strength is dependent on the l people in athlition to the 800 alre.uly working at l s itahn of the connnonicies it sen es. We o,ntribute llutchinson in Eau (:laire. In (:hippeu a Falls, 1 l to the cu >nomic.oni social u cIl-being of our Wis.. Johnson Niatthey. a manufacturer of circuit { sen ice tenin,n ihn,ngh economic des ch,pment boanis hought a ronner (:ra3 nesearch facility, i miii.o n es. e,y,o,.ue m,nuibmtions oni emr,s ce m,Ca iis uo e, mph,s ecs.ina is espamhng eper... n l s oinmeerism, ann,ng other.a tis ities. iions to emph,3 as mans as 1,100 peopic. l s s e s e m,n o m ic a es c h,p,n e nt e rro n s h.n e anothe, economic sumess sn,n is in Sious l helped make the (:hippeu a Valley, u hich Falls S.1)., w here John \\lorrell & (:o., one of the inchnics Eau (:laire, Wis.. and its surrounding cit 3 's major employ ers and NNI' South I)akota's af ea. t,ne t,[ t}le HU,st s Ital in t he sr.lte. ln l98Hi, lJrgest custinner, has res itali/ed <>peratitois. Jitst I for es.unple. Ilutchinson Technologs Inc. a man-i tu o s cars ago, it w as questionable w hether the uf.a turer of suspension assemblics for unnputer dnk dris es, announced plans to build a photo i f { 14 l l

o plant would remain in operation. 'Ibday, John Alorrell plans to build a new distribution facility that will add 4 to 5 megawatts to NSP's electric .p load. One reason for the turnaround was an g .( 1 cconomic package offered by NSP, tne city, the - "~ ? 7- " l county and the state. In Minnesota, the company supported 19 ~ cconomic development projects that will add 1 $5.2 million in annual revenues and create or retain 3,300 jobs. Notable projects include the reopening for the fifth year in a row. NSP employees such as Roshonda Royston (center) and Kevin Jernigan (nght) won the Judson Bemis Visionary of a Grede lloundries facility in St. Cloud that Award for raising the most money for the annual Twin Cities College Fund /UNCF Walk-a-thon added 10 megawatts to NSP's electric load. Our contributions to the social well-being of Whether it's 30 degrees below zero or 100 the conununities we serve focus on strengthem.ng degrees and humid, NSP gas and electric crews the capabih.. ties of chi;dren, fam.l.i ies and ne. hbor-ig are at work. During maintenance and refueling hoods, with more than 75 percent of.our corporate outages at NSP power plants, employees put in l grants going to programs that serve disadvantaged i people. Those contributions were one of the rea-l time. Across the company, employees are taking l sons NSP was among a group of 100 lI.S. corpora- "" 'P"" "I" i tions chosen by /lusinos A/ Airs maga /ine as the '""P' best corporate citizens Regardless of circumstances, NSP employees in the nation. stav focused on customers. The best example Our comnu.tment might be the employees of NSP-Wisconsin, u ho to the commum.. ties imprm ed operations by every measure during and people we serve l 19% despite the fact that the merger presented ?.* will remain the same i them with more uncertainty than almost any I f desp.ite the changes other employee group. j;g created by a comperi- '7 As NSP continues to embrace the future by j rive marketplace. In taking significant steps to ensure success, the in keeping with its capabilities part, that's becan:,e of budding strategy. NSP is a maior skills and dedication of NSP employees will l sponsor of the Green Chair Project the pcrsonal comm.it-in which teenagers construrt and provide the fotindation of otir effort. Perhaps that ment of employees. sdl Adirondack chairs, while legacy, more than any other, will enable us to leamey about carpentry. quatoy control and bus ness triumph in creating your energy future. l 15 L__.._

___ _.__ _ __-- - - - - ~ '~ 4 DIRECTOllS OF TIIE hilNNESOTA COMPANY 4 H. Lyman ITad) Bretting (60) 3,4 hesident andCEO James J. Howard (61)* C.G. lirecting Alanufacturing Qainnan, hrsisAnt andCEO John E.Pearsor. (70) 2, 3 RetiredGairman Company, Inc. Northern States Power Company The NWNL Companics, Inc., Alanufacturer of napkin and paper (elected January 1987) and Northwestern National Life ton el folding machines Insurance Co. (elected % larch 1990) Allen F.Jacobson (70) 2,4 RetirrdChainnan andCM) (elected December 1983) David A. Christensen (62) 2, 4 Alinnesota Niining G.M. Pieschel(69) I, 3 hnident andCEO and N1anufacturing Company Chainnan Rn en industries, Inc. (elected January 1983) Farmers and Alerchants State llank hianufacturers of reinforced plastics, seu n products and electronic Richard M.Kovacevich (53) 3,4 (elected February 1978) equipment Chainnan andCEO (elected December 1976) Noruest Corporation Dr. Margaret R. Preska (59) 2,4 liolding company for banking DistinguishedSatia Professor inst'tutions hiinnesota State !!nis ersities W. John Driscoll(6H) 1,2 RetiredChauman andbesident (elected April 19M)) (elected January 1980) lhk Island Company Prh are incestment firm Douglas W. Leatherdale (60) 1,2 A. Patricia Sampson (48) 1,3 Consultant (elet ted Nm ember 1974) Chainnan, hrsident andCEO The St. Paul Companies, Inc. The Sampson Group, Inc., Dale L. Haskenstad (69) 1,4 Property and liability insurance and Dr. Sanders and Associates organization Af anagemmt consultant companies Rrtired hrsidentandCEO (elected January 1985) (elected April 1991) Western States I,ife insurance Company (elected February 1978) Board Committees

1. Audit

2. Corporate N!anagement

3. Finance

4. PowerSupply

• James J. Iloward is an ex nyi,io member of all committees.

PRINCIPAL, OFFICERS OF Tile hilNNESOTA COMPANY Arland D. Brusven (64) Iia orsidrut-Finanie and Drasarrr Edward J. McIntyre (46) l'r nrsidentandCFO Michael D. Wadley (41) i Via hrsident-Nudrar Generation James J. Howard (61) Chainnan, hrsidentandCEO Thomas A.Micheletti(50) Vi<r nnidrut-Pa/dirand Edward L Watil(57) Gary R. Johnson (50) Guccrun rnt Affairs nrsident-NSP Gennation Vur hrsidrnt, GennalCounsd andCorporate Startary Roger D. Sandeen (5I) Keith H. Wietecki(47) besident-NSP Gas Vice hrsident, ContndlerandCIO Cynthia L Lesher (49) Vier Mrsident-Iluman Resonnes Loren L Taylor (50) besidnn-NSP Elanic is

DIRECTORS 01 Tile WISCONSIN COhll'ANY 11.Lyman(Tad)Bretting(60

• Wr yne E. Harrison (69)

Larry G. Schnack (59)* hrsident andCEO Dairy Farmer Chancd/or C.G, litetting hianufacturing (elected August 1990) l'niversity of Wisconsin-Eau Claire Company, Inc. (elected hlay 1988) N!anufacturer of napkin and Ray A. Larson (67)' paper towel folding machines President Loren L Taylor (50) (elected h1 arch 1990) Wissota Sand and Gravel Company hrsiden/JSP Electric (elected Nm ember 1979) NSP-Alinnesota Philip M. Gelatt (46)* (elected hlay 1992) h nident John A.Noer(50) Northern Engraving Corporation Chairman, hrsidentandCEO Nianufacturer of decorative Northern States Pow er Company components for the automobile, (\\Wconsin) appliance and electronic controls (elected I)cccmber 1992) industries (elected h1ay 1990)

• Audit Committee Alembers I'RINCIPAI, OI?FICERS OF Tile WISCONSIN CONIPANY Michael N. Gregerson (49)

Roger D. Sandeen (51) Neal A.Siikarla (50) 17,e nnident-Customer Serrisis Contnd/rr brasurer John P. Moore, Jr. (50) Anthony G. Schuster (52) Patrick D.Watkins (56) l Santary and GennalCounsd lia nnident Porar Dditrry 17a hrsidrut-Corporate Snrias andGennation John A.Noer(50) thairman, hrsidentandCEO DIRECTORS OF NRG ENERGY, INC. l Gary R. Johnson (50) Edward J. McIntyre (46) \\ia hrsident, GanalConusd lia hrsident andCFO and Corporate Saretary Northern States Pow er Company l Northern States Power Company (elected hlay 1992) l (elected February 1993) David H. Peterson (55) Cynthia L Lesher (48) Chainnan, hrsidenlandCEO tiir hrsidat-Human Resounts NRG Energy, Inc. Northern States Pow er Company (elected July 1989) (elected June 1996) PRINCIPAL OFFICERS OF NRG ENERGY, INC. Leonard A. Bluhm (51) Robert McClenachan (45) David E. Ripka (48) Euaritr lia nnident andCFO lia brsidat-Intanational Contndler Business iMriopment Julia A.Jorgensen(34) Ronald J.Will(56) lia hrsident and Genend Connsd David H. Peterson (55) lia hrsident Operations and Enginating Chairman, hrsident andCEO Valorie A. Knudsen (40) Michael J. Young (40) 11ar hrsidat-Finamr and.4aounting Louive T. Routhe (40) Corporate Senrtary \\*ia hrsident-Human Rnounts Craig A.Matacrynski(36) and 4dministration \\ he Prnident-l!.S. Business IMvlopment 17 l

Management's Discussion and Analysis Northern States l'ower Cornpany, Niinnesota and Subsidiaries Northern States Power Company, a Minnesota corporst>on (the Company), has two significant subsidiaries: Northern States Power

• To maintain long-term everage annual earnings per share growth of Company, a Wisconsin corporation (the Wisconsin Company), and5 percent from ongoing operations, as described below. Excluding NRG Energy, Inc., a Delaware corporation (NRG). The Company also the non-recurring items discussed later under Factors Affecting has several other subsidiaries, including Viking Gas Transmission Resutts of Operations, NSP achieved earnings-per-share growth of Company (Viking), Cenerprise, Inc. (Cenerprise) and Eloigne Company 3.5 percent in 19% over 1995 and an average annual growth rate of 8.1 percent since 1993.

(Eloigne). The Company and its subsidiaries collectively are referred to here n as NSP. mm 1995 1994 1993 Total earnings per share $3.82 $3.91 $3.46 $3.02 boIIIIMICI'll OhjeCliVCS und NCSulfS Less earmngs from NSP's fmancial objectives are: non-recurrinpems a22 act Earnings from ongoing operations $3.82 $3.69 $3.45 $3.02

• To provide investor returns in the top one-fourth of the utility indus-try as measured by a three-year average return on equity. NSP's IIS UCSS SIINICN CS i

average return on common equrty for the three years ending in 1996 was 12.8 percent. Based on a three-year average, this return places NSP's management is proactive in shaping the new business environ-ment in which it will be operating. In April 1995, the Company and NSP in the top one-fourth of the industry, which was approximately Wisconsin Energy Corporation (WEC) entered into a definitive agree-12.75 percent. The median three-year industry average was approx-imately 11.5 percent. Using total return to investors (measured by ment that provides for a strategic business combination in a merger-dividends plus stock price appreciation) the total return on NSP of-equals" transaction to operate as Primergy Corporation (Primergy), common stock for the most recent five-year period averaged 7 4 per-as discussed further under Factors Affecting Results of Operations. cent per year. For the same period, the total return for the electric Completion of the merger is subject to regulatory approvals and other industry averaged 7.0 percent. Utdity stock prices were adversely cunditions. In addition to this merger strategy, mans gement's business strategies include: aff ected by higher interest rates in 1996. The average stock price for the 20 utilities with a AA bond rating declined 4 8 percent. NSP's price decline was a comparable 6 6 percent. Nine of the AA rated

• Focusing on the core energy business. The electric and natural gas companies had stock price dechnes greater than NSP.

utihty industries are becoming more complex as customers, as well as utilities and federal and state regulators, promote competition. To

• To increase dividends on a regular basis and maintain a long-term remain successfulin this more complex environment, NSP will main-tain its focus on its core energy-related activities.

average payout ratio in the range of 65 to 75 percent. NSP has increased its dividend for 22 consecutive years. In June 1996, NSP's annuahied common dividend rate was increased by 6 cents per

• Providing reliable, low-cost, environmentally responsible energy.

share, or 2.2 percent, from $2.70 to $2,76. The objective payout ratio Whether energy is produced or purchased through NSP's regulated is based on long term earnings expectations. The dividend payout utility or its nonregulated businesses, three general concepts pro-ratio was 71.5 percent in 1996, within the objective range. vide a focus for its energy businesses: reliable energy, low-cost energy and environmentally responsible energy.

• To maintain continued financial strength with a AA bond rating The Company's first mortgage bonds continued to be rated AA-by* Responding to customer needs. Customers will have an increasing Standard & Poor's (S&P), AA by Duff & Phelps,Inc., and AA by Fitch number of options for meetmg their energy needs, and there will be Investors Service, Inc. Since 1994, Moody's investors Services competition among energy companies for the privilege of serving (Moody's) has rated NSP's first mortgage bonds Al based on its inter-those customers. NSP will work with its customers to develop innova-pretations of a Mmnesota law enacted in 1994 regarding the used fuel tive products and services that benefit customers and NSP.

storage proget for the Praine Island nuclear generstmg plant. First mortgage bonds issued by the Wisconsin Company carry comparable

• Increasing nonregulated investments and earnings. Nonregulated ratings. NSP's pretax interest coverage ratio, based on income exclud-businesses wdl be an important part of NSP's future. Deregulation of ing Allowance for Funds Used During Construction (AFC), was 3.7 in certain aspects of the utiltty industry is expected to provide new 1996 A caprtalstructure consisting of 46.5 percent common equity at investment opportunities in nonregulated busmesses. Participation year-end 1996 contnbutes to NSP's financial flexibihty and strength. in these opportunities is expected to improve NSP's total profitability.
• To provide at least 2D percent of NSP earnings from NRG businesses by the year 2000. NRG expects to meet this goalthrough the growing profitabihty of existing businesses and the addition of new businesses.The following discussion and analysis by management focuses on Busmesses owned by NRG provided 29 cents, or 7.1 percent of NSP's those factors that had a matenal effect on NSP's financial condition earnings per share from ongoing operations in 1996, and 24 cents, or 6.5 and results of operations dunng 1996 and 1995. It should be read in percent of NSP's earnings per share from ongoing operations in 1995.

conjunction with the accompanying Financial Statements and Notes thereto. Trends and contingencies of a materialnature are discussed to the extent known and considered relevant. Material changes in balance sheet items are discussed below and in the accompanying it

Management's Discussion and Analysis Northern Scarn fuer Cornpany, Niinnesota and Suinidiaries Notes to Financial Statements. The discussion and analysis and the On a weather-adjusted basis, sales to retail customers are estimated related financial statements do not reflect the impact of the Company's to have increased 1.5 percent in 1996 and 2.4 percent in 1995. Retail proposed merger with WEC, except for pro forma information included sales growth for 1997 is projected to be 1.8 percent over 1996, or 2.3 in Note 17 to the Financial Statements and except where specific ref-percent on a weather adjusted basis. erence is made to the proposed merger. Sales to other utilities decreased 21.6 percent in 1996 after increasing Except for the historicalinformation contained herein, the matters dis-1.0 percent in 1995. Market conditions and regional transmission sys-cussed in the following discussion and analysis, including the statements tem constraints contributed to the sales decrease in 1996. regarding the anticipated impact of the proposed merger, are forward-looking statements that are subject to certain risks, uncertainties and The table below summarizes the principal reasons for the electric rev-assumptions. Such forward-looking statements are intended to be iden-enue changes during the past two years: tified in this document by the words " anticipate "

• estimate,"
• expect,"

" objective," "possible." " potential" and similar expressions. Actual (Mdbons of dollars) mmMM 1995 vs.1994 results may vary materi4y Factors that could cause actual results to dif-Retail sales growth fer materially include, but are not limited to: general economic condi- _ Estimated impact of weather _ $ 29 $46 ( . excluding weatherimpacts) tions, including their impact on capital expenditures; business conditions in the energy industry; competitive f actors; unusual weather; changes in on reta_il sales volume _15) 42 ( federal or state legislation; regulatory decisions regarding the proposed Sales to other utilities (20) I combination of NSP and WEC; the stems set forth below under " Factors Wholesale sales . 15) jl3) ( Aftecting Results of Operations;" and the other risk factors listed from Conservation cost recovery 13 19 time to time by the Company in reports filed with the Secunties and Fuel ad;ustment clause recovery , (10) _(7) Exchange Commission (SECL including Exhibit 99 01 to the Company's Other rate changes Bi) ..(10) (2) 1996 report on Form 10 K. Other electric revenue 8 Total revenue increase Idecrease) $(15) $76 Restilts of Oper itioris ,,,,,,,,p,,,,,,,,,,,,,,,,,,,,,,,,,n,,,,,,,,c,,,,,,,,,,,,,nin 19tS COMPARED WITH 1995 AND 1994 1996 decreased $24.5 rr'lhon, or 7.5 percent, compared with an increase of $4.5 million, or 1.4 percent, in 1995. The 1996 decrease was NSP's 1996 earnings per share from ongoing operations were $3 82, up primarily due to lower average fuel costs resulting from a new coal 13 cents, or 3.5 percent, from the $3.69 earned in 1995 and up 37 cents, transportation contract in July 1995, and lower plant output caused by or 10.7 percent, from the $3.45 earned in 1994. Regulated utikty busi-decreased electric sales and planned outages for maintenance and nesses generated earnings of $3.58 per share from ongoing operations conversion of two plants to peaking status. The 1995 meresse primar-in 1996, $3.41 in 1995 and $3.00 in 1994. Earnings from regulated opera _ ily was attnbutable to an increase in output from NSP's generating plants, resulting from increased sales and fewer scheduled plant tions were higher in 1996 primanly due to growth in electric and gas sales and reduced administrative costs. Partially offsetting these earn-maintenance outages. ings increases were the impacts of less favorable weather, higher utikty operating and depreciation expenses, and dilutive effects of stock Purchased power costs decteased $4.5 million, or 1.9 percent, in 1996 issuances. Nonregulated businesses generated earnings of 24 cents after decreasing $5.2 milhon, or 2.1 percent,in 1995 The 19% decrease per share from ongoing operations in 1996,28 cents in 1995 and 45 cents pnmanly was due to lower demand expenses. The 1995 decrease pri-in 1994 Despite higher NRG earnings from new projects, nonregulated marily was due to lower average market prices and less energy pur-earnings declined because the price volatikty for natural gas supply had chased The level of purchates declined due to fewer scheduled plant an adverse impact on financial results of Cenerprise. NSP's total earn-maintenance outages in 1995. l ings per share, including non-recurring transactions in 1995 and 1994 (as discussed latert were $3.82 in 1996, $3 91 in 1995 and $3 46 in 1994. Gas Revenues The majonty of NSP's retail gas sales are categorized as firm (pnmarily space heatmg customers) and interruptible (com-UTILITY OPERATING RESULTS mercial/ industrial customers wrth an alternate energy supply). Firm sales in 1996 increased 13.2 percent compared with 1995 sales, while Electric Revenues Sales to retail customers, which account for more firm sales in 1995 increased 6.8 percent compared with 1994 sales. The than 90 percent of NSP's electric revenue, increased 1.0 percentin 1996 increases in 19% and 1995 primarily were due to strong sales growth and 4.2 percent n 1995. Sales in both 1996 and 1995 included net favor-and favorable impacts of weather. Increased sales of natural gas able weather impacts compared with normal average temperatures, but resulted in part from the addition of 14,381 new firm gas customers in the retail sales impact for 19% was less f avorable than it was in 1995. 1996, a 3.4 percent increase, and 16,680 new firm gas customers in Total sales of electricity decreased 3.0 percent in 1996 and increased 2.9 1995, a 4.1 percent increase. percent in 1995 Lower sales to other utikties in 1996 and the loss of sev-eral wholesale customers in 1995 and 1996, as discussed later, con-On a weather adjusted basis, firm gas sales are estimated to have I tributed to the 1996 decrease. Warmer-than-normal summer weather in increased 5.1 percent in 1996 and increased 4 6 percent in 1995 Firm l 1995 contnbuted to sales growth compared with results in 1994, when gas sales in 1997 are projected to be 6 5 percent lower compared with the summer was cooler than normal. 1996 sales, which reflect f avorable weather. Firm gas sales in 1997, compared with 1996 sales on a weather-adjusted basis, are projected to increase by 1.6 percent. 19

Management's Discussion and Analysis Erthern States 1%wer Cornpany, Niinnewta and Subsidiaries Interruptible sales of gas increased 36 percent in 1996 and 15 7 percent Conservation and Energy Management Expenses increased in both in 1995. The increases in both years are the result of favorable gas 1996 and 1995 mainly due to higher amortization levels of deferred market prices that caused large interruptible customers with alternate electric and gas conservation and energy management program fuel sources to use more natural gas. Other gas deliveries, including costs. Higher cost levels in 1996 also include the effects of expensing Viking sales, increased 5.3 percent in both 1996 and 1995. Viking whole-currently (rather than amortizing over a period of time)new conserva-sale gas transmission deliveries to parties other than NSP increased 7.7 tion expenditures beginning in 1996. Expense increases in 1995 also percent in 1996 and 1.1 percent in 1995. reflect higher deferred costs due to increased customer participation in NSP's conservation and energy management programs. These The table below summarites the principal reasons for the gas revenue higher amortization and cost levels are recovered concurrently changes during the past two years. through retail rate adjustment clauses in the Company's Minnesota jurisdiction, which are discussed later in the " Regulation" section. IMdhons of dollars) Wm =M 1995 ys.1994 Sales growth Depreciation and Amortization The increases in 1996 and 1995 reflect (excluding weather impacts) $ 25 $26 higher levels of depreciable plant, including new information systems Estimated impact of weather in 1996 wrth relatively short useful lives. on firm sales volume 13 7 Purchased gas adjustmerit Property and General Taxes Property and general taxes decreased in clause recovery 52 (26) 1996 primarily due to lower property tax rates, and increased in 1995 pri-Conservation cost recovery marily due to property additions and slightly higher property tax rates. and other rate changes 6 1 Other 5 (2) Utility income Taxes The variations in income taxes primarily are Total revenue increase $101 $6 attributable to fluctuations in taxable income. (See Note 10 to the Financial Statements for a detailed reconciliation of tN: statutory tax Cost of Gas Purchased and Transported The cost of gas purchased rate to NSP's effective tax rate ) and transported increased $78 7 million (30.6 percent)in 19%, primar-j ily due to a 20 5 percent increase in the per unit cost of purchased gas NONOPEF i IING ITEMS RELATED TO UTILITY BUSINESSES l and higher gas sendout. The increase in gas sendout reflects l increased gas sales, while the increase in cost per unit of purchased Allowance for Funds Used During Construction (AFC) The differences l gas reflects changes in market conditions. The cost of gas purchased in AFC for the reported periods are attributable to varying levels of and transported decreased $7.1 million (2.7 percent)in 1995, primanly construction work in progress and changing AFC rates associated due to a 12 6 percent dechne in the per unit cost of purchased gas, with various levels of short-term borrowings to fund construction. In partially offset by higher sendout volumes due to increased sales and addition, returns allowed on deferred costs for conservation and off system deliveries. The lower cost of purchased gas reflects favor-energy management programs increased AFC-equity by $1.0 million able market pricing, while the higher gas sendout reflects sales and $2.6 million in 1996 and 1995, respectively, and increased AFC-debt Drowth m 1995 and higher gas sales to off-system customers. by $0 4 mill,on and $1.5 million in 1996 and 1995, respectively. Other Operation, Maintenance and Administrative and GeneralThese Other Income (Expense) Note 8 to the Financial Statements lists the expenses, in total, decreased by $24.5 million (3.7 percent) in 1996, components of Other Income (Oeductions)-Net reported on the compared with a decrease of $9.1 million (1.4 percent)in 1995. The Consolidated Statements of income. Other than the operating rev. iower costs in 19% largely are due to lower administrative and general enues and expenses of nonregulated businesses, as discussed in the I costs, partly offset by higher scheduled plant maintenance outage next section, nonoperating income inet of expense items and associ-eapenses and provisions for uncollectible accounts. Administrative ated income taxes) related to utility businesses decreased $5.2 million and general expenses reflect fewer employees and decreases in in 19% and increased $5 6 million in 1995. The 1996 decrease is primar-insurante and c' aims, employee benefits and other corporate costs. ily due to lower interest income associated with settlement of tax dis-Planned maintenance outages occurred at three major plants in 1996 putes and with customer financing. The 1995 increase primarily was compared with only two major plants in 1995. Of the $13 million due to lower expense levels compared with 1994 costs for environ-increase in Other Operation and Mamtenance expenses for 1996, mental and regulatory contingencies, and public and governmental approximately $9 milhon is due to additional costs related to the timing aff airs costs related to the Prairie Island fuel storage issue. Lower of planned outages at generstmg plants. The 1995 decrease in total interest income associated with the Company's settlement of federal expenses largely is due to f ewer employees, f ewer scheduled plant income tax disputes partially offset the 1995 increase. maintenance outages, lower property insurance premiums and a one-time charge in 1994 for postemployment benefits. Partially offsettmg Interest Charges (Before AFC) Interest costs recognized for NSP's these decreases in 1995 were higher employee benefit costs and higher utikty businesses, including amounts capitalized to reflect the financing electric line maintenance costs, mostly for tree trimming and heat-costs of construction activities, were $123.1 milhon in 1996, $123 4 million l related repairs. (See Note 8 to the Financial Statements for a summary in 1995 and $107.1 million in 1994. The slight 1996 decrease is largely l of administrative and general expenses ) due to lower interest costs on variable rate long term debt, partially offset by higher average short-term borrowing levels. The 1995 increase was largely due to long-term debt issues in 1995 and 1994 20 1

Mtintigement's Disetission tind j ntilysis Northern States Power Cornpany Minnesota and Subsidiaries (net of retirements) and higher short-term interest rates, which affect utility company was terminated. NRG recognized a pretax gain of commercial paper borrowings and variable rate long-term debt. The approximately $30 million for its share of the termination settlement. average short-term debt balance was $265 4 million in 1996, $208.7 mil-In 1994, a Michigan cogeneration project,in which NRG was a 50 lion in 1995 and $204.5 million in 1994. percent nvestor, received a payment from an unaffiliated utility company as compensation for the termination of an energy purchase agreement. N00lREGULATED BUSINESS RESULTS NRG recognized a pretax gain of $9.7 milkon, net of project investment costs, for its share of the contract termination settlement. NSP's nonregulated operations include many diversified businesses, such as independent power production, energy sales and services, Other income (Expense) Other than the operating revenues and industnal heating and cooling, and energy-related refuse-derived fuel expenses of nonregulated businesses, as discussed previously, production. NSP also has investments in affordable housing projects nonoperating income (net of expense ite:ns) related to nonregulated and severalincome producing properties.The following discusses businesses increased $3.8 million iri 1996 cnd increased $4.7 million in NSP's diversified business results in the aggregate and include NRG 1995. The 1996 increase mainly is due to higher income from NRG and Cenerprise, which are owned and managed separately. temporary cash investments. The 1995 increase primarily is due to a pain on the sale of Cenerprise oil and gas properties, higher income Operating Revenues and Expenses The net results of nonregula*.ed from cash investments and an adjustment to the 1994 contract termi-businesses that are consohdated are reported in Other incon.e nation gain recorded by NRG. {0 eductions)-Net on the Consolidated Statements of income. (Note 8 to the Financial Statements lists the ir4vidual components of this line Interest Expense Interest charges on the Consolidated Statements of item ) Nonregulated operating revenues decreased $9.2 milhon, or 3 per-Income include interest and amortization expenses related to debt cent,in 1996 and increased $71.3 million, or 29 percent,in 1995 The 1996 issued by nonregulated businesses. The expenses were $18 8 million in decrease largely is due to curtailment of Cenerprise's gas trading activ-1996, $9 9 milhon in 1995 and $8.0 million in 1994. The increase in 1996 is stres in early 1996. The 1995 increase largely was due to increased gas mainly due to interest on $125 million of NRG long-term debt issued in marketing sales by Cenerprise. Nonregulated operating expenses January 1996. The increase in 1995 mainly is due to the issuance of decreased $1.6 milhon in 1996 pnmarily due to lower gas costs associ-long-term debt on new affordable housing projects by Eloigne. ated with Cenerprise's curtailment of gas trading in 1996, partially offset by losses incurred from Cenerprise's gas trading. NRG's expenses were income Taxes The Consohdated Statements of income include income higher in 19% compared with 1995 due to increased project develop-taxes related to nonregulated businesses. The results are a net benefit ment costs as NRG pursued severalinternational and domestic pro-of $16.6 million in 19%, expense of $6.1 million in 1995 and expense of jects. Until there is substantial assurance that a project under develop- $2.6 million in 1994. The decrease in 1996 mainly is due to lower ment will come to financial closure, such costs are expensed. income from Cenerprise, tax effects of higher nonregulated debt levels Nonregulated operating expenses increased $86.3 milkon, or 36 percent, and higher income tax credits from Eloigne's affordable housing pro-in 1995 primarily due to higher gas costs associated with Cenerprise gas jects. The increase in 1995 mainly is due to a gain from an NRG energy sales and higher project development expenses by NRG on pending contract termination, as discussed previously, somewhat offset by projects. Nonregulated operatmg expenses include charges of $1.5 mil-higher income tax credits from Eloigne's affordable housing projects. hon in 1996, $5.0 million in 1995 and $5 0 milhon in 1994 for previously The effective tax rate for nonregulated businesses is substantially less capitahzed development and investment costs to reflect a decrease in than the U.S. federal tax rate mainly due to the tax treatment of income the expected future cash flows of certain energy projects. from unconsolidated international affiliates, and energy and affordable housing tax credits, as shown in Note 10 to the Financial Statements. Equity in Operating Earnings NSP has a less-than majonty equity inter-est in many nonregulated projects, as discussed in Note 2 to the FACTORS AFFECTING RESULTS OF OPERATIONS Financial Statements. Consequently, a large portion of NSP's nonregu-lated earnings is reported as Equity in Earnings of Unconsohdated NSP's results of operations during 1996,1995 and 1994 primarily were Aff hates on the Cnnschdated Statements of Income. Equity m project dependent upon the operations of the Company's and Wisconsin operstmg earmngs increased by $1.8 milkon in 1996 primarily due to Company's util ty busmesses consisting of the generation, transmission, first-time earmngs from new NRG projects (Schkopau operations in distribution and sale of electricity, and the distribution, transportation Germany and NRG Generating in the U S.), partially offset by lower and sale of natural gas. NSP's utikty revenues depend on customer equity in earnings, mainly from NRG's MIBRAG mbh project in Germany. usage, which varies with weather condrtions, general business condi-Equrry in earnings from MIBRAG decreased in 1996 primarily due to an tions,the state of the ecoromy and the cost of energy services. Various expected dechne in heating bnquette and coal sales. Equity in project regulatory agencies approve the prices for electric and gas service operating earnings decreased by $2.8 million in 1995 primarily due to within their respective jurisdictions. In addition, NSP's nonregulated lower earnings from the NRG energy project contract that was termi-businesses are contributing to NSP's earnings. The historical and nated in 1995 (as discussed in the following section) and other domes-future trends of NSP's operating results have been and are expe:ted to tic projects, somewhat offset by higher oarnings from NRG interne-be affected by the following factors: tional energy projects. Proposed Merger On Apnl 28,1995, the Company and WEC entered into Equity in Gains From Contract Terminations In 1995, after receiving final an Agreement and Plan of Merger (Merger Agreement)that provides regulatory approvals, a power sales contract between a Cahfornia for a business combination of NSP and WEC in a " merger of-equals" energy project, in which NRG is a 45 percent investor, and an unaffiliated transaction. As a result of the mergers contemplated by the Merger 21

Management's Discussion and Analysis hthern States Pwcr Cornpans Minnemta and Nubsidiaries Agreement, Primergy will become the holding company for the regulated operations of both the Company and the utihty subsidiary of WEC. The The FERC administrative law judge (AU),in the merger proceeding, business combination is intended to be taofree for income tax pur-issued an initial decision on Aug 29,1996, recommending approval of the merger apphcation, subject to NSP and WEC meeting eight condi-poses, and accounted for as a "poohng of interests? On Sept. 13,1995, the merger plan was approved by more than 95 percent of the respec-tions. A significant part of the AU's initialdecision discusses the design tive shareholders of the Company and WEC voting at their respective of an 150. The AU's initial decision specifically rejected the need for shareholder meetings. Under the proposed business combination,divestiture of any generation or transmission facihties as a requirement shareholders of the Company would receive 1.626 shares of Primcrgy for ensuring open and equal access to the transmission system. In cornmon stock for each share of the Company's common stock owned October 19%, NSP and WEC filed a Unilateral 0ffer of Settlement (U0S) at the time of the merger. with the FERC. The U0S includes a transmission system control agree-ment and articles and bylaws for estabhshing an ISO, intended to meet After the merger is completed, a transition to a new organization would the requirements of the AU's decision and FERC guidelines. In mid-begin. At the time that the Merger Agreement was signed, anticipated December 1996, the FERC revised and streamlined its 30-year-old policy cost savings of the new organization (compared with the continued inde-for evaluating p blic utihty mergers, wrth the chances designed to expe-pendent operation of NSP and WEC) were estimated to be approximately dite tha processing of merger apphcations. Tb new pokey primarily $2 bilhon over a 14 year penod, net of transaction costs (about $30 milhon) focuses on three factors in reviewing mergers: the effect on competi-and costs to achieve the merger savings (about $122 million). The actual tion, rates, and state and federal regulation. For pending mergers, the reakzation of these savings will be dependent on numerous factors. It is policy will be applied on a case-by-case basis. NSP and WEC believe ant cipated that the proposed merger will allow the companies to the proposed merger is consistent with the FERC's revised merger policy i implernent a 1.5 percent reduction in electric retail rates in most of and are hopeful that the FERC will simultaneously rule on the U0S and the pending merger apphcation m the first quarter of 1997. Their junsdictions effective following the receipt of the necessary approvals and closing of the merger transaction, and a four year rate treeze thereafter for electnc retail customers. In addition, the compa-On April 10,1996, the Michigan Public Service Commission (MPSC) nies agreed to provide a four year freeze in wholesale electric rates approved the merger apphcation through a settlement agreement con-effective once the merger is completed taimng terms consistent with the merger application. On June 26,1996, the North Dakota Public Service Commission (NDPSC) approved the After the merger, the regulated businesses of NSP and WEC would merger application. These state commission approvals represent two continue to operate es utility subsidiaries of Primergy, which would be a of the four states where approval of the merger is required. registered holding c.ompany under the Pubhc Utikty Holding Company Act of 1935 (PUHCA), as amended, and some of the Company's sub-in June 1996, the Mmnesota Public Utahties Commission (MPUC) issued sedianes would be transferred to direct Pnmergy ownership. Except for an order that estabkshed the procedural framework for the MPUC's certain gas distribution properties transferred to the Company, the consideration of the merger Contested case hearings were ordered Wisconsin Company will become part of the regulated busmess of for the issues of merger-related savings, electric rate freeze character. WEC Although NSP and WEC are working to avoid divestitures, the istics, NSP's pre-merger revenue requirements, Primergy's abikty to PUHCA may require the merged entity to divest certam of its gas utihty control the transmission interf ace between the Mid-Contment Area and/or nonregulated operations. Also, regulatory authonties may Power Pool and the Wisconsin and Upper Michigan area, and the require the use of an independent transmission system operator (150) impact of control of this interface on other Mmnesota utikties. or divestiture of certain transmission and/or generation assets NSP Evidentiary hearings were held from Nov. 20 through Dec. 3,1996. The I currently cannot determine if such divestitures would be required by Mmnesota Department of Public Service has recommended a rate 1 regulators In addition Wisconsin state law hmits the total assets of reduction of 2.0 percent, compared with the 1.5 percent reduction the nonutikty aff, hates of Pnmergy, which, as presently interpreted, would Company proposed in January and February 1997, administrative law affect the growth of nonregulated operations. judges issued their findings and recommendations in the Minnesota merger apphcations. Among other items, they: found that the projected The agreement to merge is subject to a number of conditions, including merger-related cost savings were reasonable, recommended a four-year approval by apphcable regulatory authorities. During 1995 NSP and rate freeze, with very hmited exceptions for rate changes; concluded WEC received a ruhng from the internal Revenue Service indicatmg that the truger would not provide Pnmergy with the abihty or incentive that the proposed successive merger transactions would not prevent to negatively impact competition, and determined the Company's pre-treatment of the business combination as a tax-free reorganization merger electric rates for Minnesota retail customers may exceed under apphcable tax law if each transaction independently quahfied. revenue requirements by $3 5 milkon, or one-fifth of one percent. The During 1995 NSP and WEC submitted fihngs to the Federal Energy MPUC will consider the admimstrative law judges' recommendations Regulatory Commission (FERC), appkcable state regulatory commissions along with other information when it debberates and decides the case. and other governmental authooties seekmg approvalof the proposed merger to form Pomergy. The goal of NSP and WEC was to completeOn July 24,1996, the Pubhc Service Commission of Wisconsin (PSCW) the merger by year-end 1996 However, as discussed below, ali neces-held a preheanng conference on the merger proceeding At the pre-sary regulatory approvals were not obtained by the end of 1996 and, asheanng conference, the parties agreed upon an extensive issues hst a result, the merger was not completed in 1996. NSP and WEC contmue and a schedule for the heanng At its open meeting on Aug 8,1996, the to pursue regulatory approvals, without unacceptable conditions, to PSCW revised the schedule and set heanngs to begin Oct. 30,1996. In allow completion of the merger as soon as possible in 1997. October 1996, the PSCW staff filed testimony with the PSCW proposing vanous conditions, including potentialdivestiture of certain transmission, generation and gas assets and a larger reduction in electric rates than proposed by NSP and WEC. The staff recommendations differ materially 22

Management's Discussion and Analysis Northern Scaren Power Company, Minnewca and Subsidiaries from the merger terms and conditions included in the application NSP Under the Merger Agreement, completion of the merger is subject to end WEC originally filed with the PSCW, in late December 1996, two numerous conditions that, unless waived by the affected party, must be legislators from Wisconsin asked the PSCW to delay decisions on all met, including but not limited to: the prior receipt of all necessary regu. ptnding utikty mergers until the Wisconsin Legislature rewrites the fatory approvals without the imposition of materialty adverse terms; the strte's utshty merger law. In eat y January 1997, the PSCW voted accuracy of each party's representations and warranties in the l unanimously not to delay its decision. However,later in January, a Dane Merger Agreement, other than representations and warranties whose County Circuit Court judge ordered the PSCW to delay rts decision on inaccuracy does not result in a material adverse eff ect on the business, the rnerger, pending the results of an investigation regarding alleged assets, financial condition, results of operations or prospects of such prohibited conversations between one of the commissioners and WEC party and its subsidiaries taken as a whole; and no such material off cials. The judge further ordered the PSCW to investigate the allega-adverse effect having occurred, or being reasonably hkely to occur, with tions. NSP cannot predict when the PSCW will resolve the allegations respect to either party. In addition, both WEC and NSP have the right to and proceed with dehberations concerning the proposed merger. terminate the Merger Agreement under certain circumstances,includ-ing without limiting the foregoing, the inability to fulfill all conditions to in a related matter,the PSCWin September 1996 issued an order setting the closing of the merger at April 30,1997 (other than receipt of all reg-minimum standards for creating an 150 that differ from NSP's and ulatory approvals without any matenally adverse terms) or the failure WEC's ISO proposal. This order was issued as part of a generic electric to receive all regulatory approvals without any materially adverse utihty restructuring process the PSCW started in 1995. Although the terms by Oct. 31,1997 NSP continues to work with WEC to complete restructuring process is separate from the merger proceedings, the the merger. However, since numerous conditions are beyond its con-order is related because the PSCW staff,in its testimony filed in the trol, NSP cannot state whether all necessary conditions for comple-merger proceedmg. as discussed above, recommended establishing an tion of the merger will occur. ISO that meets the standards of the PSCW's order as a condition of approving the merger. In addition,in September 1996, the PSCW sub-Regulation NSP's utikty rates are approved by the FERC, the MPUC, the mitted sts ISO order to the FERC with a request that the FERC require NDPSC, the PSCW, the MPSC and the South Dakota Public Utikties an ISO satisfying the PSCW minimum standards as a condition of FERC Commission. Rates are designed to recover plant investment and approval of the NSP/WEC merger apphcation. In October 1996, NSP operating costs and an allowed return on investment, using an annual and WEC hied wrth the PSCW, as supplemental testimony and exhibits period upon which rate case filings are based. NSP requests changes in the merger proceedmg, the same ISO proposalincluded with the in rates for utihty services as needed through filings with the governing U0S filed with the FERC, as discussed previously. commissions. The rates charged to retail customers in Wisconsin are reviewed and adjusted biennially. Because comprehensive rate On April 5,1996, NSP and WEC submitted the initial fihng to the SEC to changes are not requested annually in Minnesota, NSP's primary faciktate registration of Primergy under the PUHCA, as amended. jurisdiction, changes in operating costs can affect NSP's earnings, Notification under the Hart-Scott-Rodino Antitrust improvements Act shareholders' equity and other financial results. Except for Wisconsin of 1976, as amended, was filed with the United States Department of electric operations, NSP's retail rate schedules provide for cost-of-Justice (00J)in December 1996. On Jan.15,1997, the DOJ served its energy and resource adjustments to billings and revenues for changes second request for information and documents. NSP and WEC antici-in the cost of fuel for electric generation, purchased energy, purchased pate responding to the second request in March 1997. In October 1995, gas, and in Mmnesota, conservation and energy management program a request for transfer of nuclear operating hcenses was filed with the costs. For Wisconsin electric operations, where cost-of energy adjust-Nuclear Regulatory Commission. Approvalis expected in early 1997. ment clauses are not used, the biennial retail rate review process and an interim fuel cost hearing process provide the opportunity for rate Each of the state filings included a request for deferred accounting recovery of changes in electric fuel and purchased energy costs in lieu treatment and rate recovery of amorttred costs incurred in connection of a cost-of-energy adjustment clause. In addition to changes in operat-with the proposed merger. At Dec. 31,1996, $25.3 milhon of costs asso-ing costs, other factors affecting rate filings are sales growth, conserva-ciated with the proposed merger had been deferred as a component tion and demand-side management efforts and the cost of capital. of Intangible and Other Assets. If the merger is not completed,these costs would be charged to expense. As discussed in Note I to the Financial Statements, regulated public util-itses are allowed to record as assets certain costs that would be in addition to the regulatory and other governmental approvals expensed by nonregulated enterprises, and to record as habilities certain required to complete the proposed merger, certain NSP financial and gains that would be recognized as income by nonregulated enterpnses. Other agreements may be construed to require that,in the case of a if deregulation or other changes in the regulatory environment occur, change in ownership (such as the proposed merger), the other party NSP may no longer be eligible to apply this accounting treatment and to the agreement must consent to the change or waive the require-may be required to eliminate such regulatory assets and habilities from ment. Agreements with such provisions at Dec. 31,1996, include its balance sheet. Such changes could have a matenal adverse effect on $106 million of long-term debt and a $10 milhon credit kne agreement, NSP's results of operations in the period the wnte-off is recorded. At under which short-term borrowings totalled $3.7 million at Dec.31, Dec. 31,1996, NSP reported on its balance sheet approximately $217 mil-1996. In January 1997, the PSCW adopted new rules establishing hon and $162 million of regulatory assets and liabilities, respectively, that standards of conduct for retail natural gas utihties in Wisconsin, would need to be recognized in the income statement in the absence of includmg the Wisconsin Company. The rules will necessitate PSCW regulation. Included in these regulatory assets are $96 milhon of conser-approval of Primergy's contemplated regulated gas operating arrange-vation expenditures that are anticipated to be substantially recovered by mints, on which a portion of the projected merger savings are based. the year 2000 based on accelerated recovery available through resource NSP wili timely seek all necessary approvals. adjustment clauses to customer rates, as discussed previously. 23

Management's Discussion and Analysis Northetn States Prmer Dirnpany, Nfinnewta and Subsidiaries e in addstion to potentialwrite-off of regulatory assets and liabilities, deregulation and competition (as discussed belowl may require recogni-cost of their investments rnade under traditional regulation, including tson of certain " stranded costs" not recoverable under market pricing. any " stranded costs." The PSCW has votad to adopt a restructuring NSP currently is recovering its costs in all regulated jurisdictions and plan that phases in retail wheeling by 2001. The MPUC has not yet does not expect to wrrte off to expense any " stranded costs" unless and approved a timetable or action plan for retail electric industry restruc-until market pnce levels change, or unless cost levels increase above turing. NSP supports industry restructuring in Minnesota, as long as market price levels. all energy supphers are trested equally. The timing of regulatory actions regarding restructuring and their impact on NSP cannot be Competition The Energy Policy Act of 1992 (the Act)is a catalyst for predicted at this time and may be significant. comprehensive and significant changes in the operation of electric utilities, including increased competition. The Act's reform of the Wholesale Customers The trend of increased electric supply competi-PUHCA promotes creation of wholesale nonut lity power generators tion, as previously discussed, has resulted in significant changes in and authontes the FERC to require utshties to provide wholesale trans-contract negotiations with wholesale customers. Because the market mission services to third parties. The legislation allows utihties and is becoming more competitive, rate discounts and negotiated rates are nonregulated companies to build, own and operate power plants being offered to satisfy existing wholesale customers and to attract nationally and internationally without being subject to restrictions that potential new wholesale customers. in the past several years, these previously applied to utshties under the PUHCA. Management believes customers have begun to evaluate a variety of energy sources to pro. this legislation will promote the continued trend of increased competi-vide their electric supply Revenues from sales of electricity to municipal tion in the electric energy markets. NSP plans to continue its efforts to customers totaled approximately $29 million in 1996, $44 inillion in 1995 be a competitively priced supplier of electricity and an active partici-and $57 millinn in 1994. In 1992, nine of the Company's municipal pant in the competitive market for electricity. wholesale electric customers notified the Company of theirintent to terminate their power supply agreements with the Company, effective in April 1996, the FERC issued two final rules, Order Nos 888 and 889, July 1995 or July 1996. NSP has been able to partially offset the effects which may have a significant impact on wholesale markets. Order of lost revenues from these municipal customers by providing trans-No. 888, which was preceded by a Notice of Proposed Rulemakingmission services to them. In addition, NSP has renewed or extended contracts with its remaining 19 municipal customers with terms expir-referred to as the Mega NOPR, concerns rules on nondiscriminatorying in the years 1999 through 2005. NSP has other new or extended open access transmission service to promote wholesale competition. Order No. 889 requires pubhc utilities to implement standards of con-contracts with various wholesale customers and is pursuing extensions duct and use an online information system. These new open access of existing wholesale contracts and submitting proposals to potential new wholesale customers to gain new contracts. rules are effective for 1996 and 1997. NSP has made transmission fdings with the FERC and believes it is taking the proper steps to comply with the new rules as they become effective NSP continues to be generally Used Nuclear Fuel Storage and Disposal in 1994, NSP received legisla-supportive of the FERC's efforts to increase competition. tive authorization from the state of Minnesota for the use of 17 casks for spent fuel storage at the Company's Prairie Island nuclear generating The FERC's Order No. 888 requires utilities to offer a transmission tanff f acility. Under the current authorization, NSP will have sufficient storage that includes network transmission service (NTS)to qualifying network capacity to operate the nuclear generating facility until2003. The first transmission customers. NTS a!Iows transmission service customers to five casks were authonzed in 1994. As a condition of this authorization, l fully integrate load and resources on an instantaneous basis,in a the Minnesota Legislature estabhshed several resource commitments manner similar to NSP's historicalintegration of its native load and for the Company, including wind and biomass generation sources, as resources Customers can elect to participate in the cost sharing well as other requirements. The Company has tak en steps to fulfill these network by requesting NTS service from NSP. Under NTS, NSP and requirements and has been authorized by the Minnesota Environmental participalmg customers share the total annual transmission cost for Quality Board (MEQB) to load casks six through nine. The MEQB autho-their combined joint use systems, net of related transmission rev-rized casks six through nine, but terminated an alternative siting enues, based upon each company's share of the total network load. process, which was one of the legislative requirements. In October The expected annual expense increase to NSP, net of cnst sharing 1996, the Praine Island Dakota Indian Tribe fded suit with the Minnesota revenues, as a result of offenng NTS is estimated to be approximately Court of Appeals challengmg the actions of the MEQB. The Company $27 mdhon for 1997. In 1996, NSP incurred $3 mdlion of NTS costs. loaded casks six and seven in January 1997. Many states are considering proposals to increase competition in the In addition,the Company and other utdities were successfulin a lawsuit supply of electricett NSP beheves the transition to a more competitive against the U.S. Department of Energy (DOE)to compelit to fulfillits electnc industry will be beneficial for all consumers it is likely that retail statutory and contractual obhgations to store and dispose of used nuclear fuel as required by the Nuclear Waste Policy Act of 1982. On competition will provide more innovative services and lower prices. Jan 31,1997,the Company, along with more than 30 other electric utili-NSP supports an orderfy transition to an open, fair and efhcient compet-rtive energy market for all customers and suppliers. Like many other ties and 45 state agencies, filed another lawsuit against the DOE request-states, regulators in Minnesota and Wisconsin (NSP's primary jurisdic. ing authonty to withhold payments to the DOE for the permanent disposal tions) are currently considering plans to restructure the electric utility program. However, it is still unknown when the DOE actually will begin industry to promote open and fair competition for retail customers in accepting used fuel. Consequently, the Company continues to rely on their states. NSP bekeves that, under such restructuring plans, utihtiesintenm on-site storage facilrties for the time being. Also, the Company is should retain direct operational responsibihty of their transmission and part of a consortium to estabbsh a private facihty for interim storage of distnbution systems, and that utikties should be permrtted to recover theused nuclear fuel, the availability of which is uncertain at this time. (See Notes 13 and 14 to the Financial Statements for more information.) 24

Management's Discussion and Analysis %rthern States Power Com;uny, Slinnewta and Suinidiaries Computer Software Changes for the Year 2000 Like many other com-and foreign government, pohtical, economic and currency risks. Future panies, NSP expects to incur significant software development costs to nonregulated projects will be subject to development risks, including modify existing computer programs for the year 2000 and beyond. uncertainties prior to finallegal closing,in addition to some or all of the Assuming NSP's proposed merger with WEC is completed, the prelimi-previously identified risks. Most of NRG's current project investments nary estimate of NSP's portion of the operating expenses to be spent consist of minonty interests, and a substantial portion of future invest-on this project, primarily in 1997 and 1998, is expected to range from ments may take the form of rninority interests, which limits NRG's ability $20 million to $25 million. The Company is seeking regulatory approval to control the development or operation of the projects. In addition, sig-to defer and amortize these costs over the four year rate freeze pro-nificant expenses may be incurred for projects pursued by NRG that do posed as part of the merger application in Minnesota. If the merger is not materialize. The aggregate effect of these factors creates the poten-not completed, the amount of additional development costs necessary tial for more volatility in the nonregulated component of NSP's earnings. to prepare for the year 2000 is estimated to be approximately $10 million. Accordingly, the historical operating results of NSP's nonregulated busi-nesses may not necessarily be indicative of future operating results. Environmental Matters NSP incurs several types of environmeatal costs, including nuclear plant decommissioning, storage and ultimate 'lisposal Accounting Changes The Financial Accounting Standards Board (FASB) of used nuclear fuel, disposal of hazardous materials and wastes, reme-has proposed new accounting standards that may go into effect as soon diation of contaminated sites and monitonng of discharges into the envi-as 1998. The standards would require the full accrual of nuclear plant ronment. Because of the continuing trend toward greater environmental decommissioning and certain other site exit obligations. Material adjust-awareness and increasingly stringent regulation, NSP has been ments to NSP's balance sieet could occur under the FASB's proposal. experiencing a trend toward increasing environmental costs. This trend However, the effects of regulation are expected to minimize or eliminate has caused, and may continue to cause, slightly higher operating any impact on operating expenses and earnings from this future expenses and capital expenditures for environmental compliance. In accounting change. (For further discussion of the expected impact of addition to nuclear decommissioning and used nuclear fuel disposal this change, see Note 13 to the Financial Statements.) expenses (as discussed in Note 13 to the Financial Statements), costs charged to NSP's operating expenses for environmental monitoring Use of Derivatives Through its nonregulated subsidiaries, NSP uses and disposal of hazardous materials and wastes were approximately derivative financialinstruments to hedge the risks of fluctuations in $31 million in 1996, $26 million in 1995 and $31 million in 1994, and are foreign currency exchange rates and natural gas prices. Also, to expected to increase to an average annual amount of approximately hedge the interest rate risk associated with fixed rate debt in a declin- $33 milhon for the five year period 1997-2001. However, the precise timing ing interest rate environment, NSP uses interest rate swap agreements and amount of environmental costs, including those for site remediation to convert fixed rate debt to variable rate debt. (See Notes I and 11 to and disposal of hazardous materials, are currently unknown. In each of tlw Financial Statements for further discussion of NSP's financial the years 1996,1995 and 1994, the Company spent about $10 million, instruments and derivatives ) $13 million and $17 milhon, respectuely, for capital expenditures on envi-ronmental improvements at its utikty facilities. In 1997, the Company Union Agreements Approximately 43 percent of NSP's benefit employees expects to incur approximately $14 inillion in capital expenditures for are represented by five locallabor unions under a collective-bargaining comphance with environmental regulations and approximately $123 mil-agreement, which expired Dec. 31,1996, but was extended to April 30, lion for the fwe-year period 1997 2001. These capital expenditure amounts 1997. Management and union representatives have reached a tentative l include the costs of constructing used nuclear fuel storage casks. (See agreement on the terms of a new three-year collective bargaining i Notes 13 and 14 to the Financial Statements for further discussion of agreement, subject to approval by the union membership. NSP is not j these and other environmental contingencies that could affect NSP.) able to predict the outcome at this time. Westher NSP's earnings can be significantly affected by unusual Non-Recurring items NSP's earnings for 1995 include two significant weather. In 1996, colder 4han-normal weather dunng the heating season unusual or infrequently occurring items. As discussed in the mcreased earnings over a normal year by an estimated 16 cents per Nonregulated Business Results section NRG recognized a pretax gain share. In 1995, unusual weather, mainly a hot summer, increased of approximately $30 million (26 cents per share) from a power sales earnings over a normal year by an estimated 21 cents per share. In contract termination settlement. Partially offsetting this gain was an 1994, mild weather, mainly a cool summer, reduced earnings from a asset impairment write-down of $5 million before taxes (4 cents per normal year by an estimated 13 cents per share. The effect of weather share) for a nonregulated domestic energy project. is considered part of NSP's ongoing business operations. NSP's 1994 earnings also included several significant unusual or infre-Impact of Nonregulated investments A significant portion of NSP's quently occurring items. Although their net effect was an earnings earnmgs comes from nonregulated operations, as shown on page 54. increase of only I cent per share, individually significant non-recurring NSP expects to continue investing significant amounts in nonregulated items included a $9.7 milhon gain on termination of a nonregulated projects, including domestic and international power production projects cogeneration contract, interest income from the settlement of a federal through NRG, as described under Future Financing Requirements. The income tax dispute, a $9 4 million charge for pre-1994 postemployment non'egulated projects in which NRG has invested carry a higher level of costs associated with adopting FASB Statement No.112 and $5 milhon in risk than NSP's traditional utshty businesses. Current investments in asset impairment wnte-downs for certain nonregulated energy projects. nonregulated projects are subject to competition, operating risks, dependence on certain supphers and customers, and domestic and Inflation inflation at its current levelis not expected to materially foreign environmental and energy regulations. Nonregulated project affect NSP's prices to customers or returns to shareholders. investments also may be subject to partnership and government actions n

Management's Discussion and Analysis Northern States Pow er Cornpany, Minnewta and Soinidiaries l,14tildMy and b,3pital NCSOUTCCS nonregulated businesses (mainly NRCL Project debt associated 1996 Financing Requireraents NSP's need for capital funds pnmarily is sth many of NSP's nonregulated investments is not reflected in NSP's related to the construction of plant and equipment to meet the needs balance sheet because the equity method of accounting is used for of electric and gas utility customers and to fund equity commitments such investments. (See Note 2 to the Financial Statements.) Long-term or other investments in nonregulated businesses. Total NSP utikty cap-loans made to nonregulated projects are reflected separately on the ital expenditures (including AFC) were $387 million in 1996. Of that balance sheet as Notes Receivable from Nonregulated Projects. amount, $324 milhon related to replacements and improvements of NSP's electric system and nuclear fuel, and $42 rnilhon involved con-Dunng 1996, the Company issued new shares of common stock under struction of natural gas distribution facilities. NSP companies invested vanous stock plans, including 587,055 new shares under the Dividend approximately $180 milliun in 1996 for equrty interests in nonregulated fleinvestment and Stock Purchase Plan (DRSPP),182,828 new shares projects and for additions to nonregulated property. NRG primarily under the Employee Stock Ownership Plan (ESOP) and 118,304 new invested in a new domestic project and a new international project, shares under the Executive Long-Term lncentive Award Stock Plan. both of which are hsted in Note 2 to the Financial Statements. Eloigne invested in affordable housing projects, including wholly owned prop-Future Financing Requirements Utikty fmancing requirements for 1997-2001 may be affected in varying degrees by numerous factors, erties and hmited partnership ventures. including load growth, changes in capital expenditure levels, rate 1996 Financing Activity Dunng 1996, NSP's primary sources of capital changes allowed by regulatory agencies, new legislation, market entry mcluded internally generated funds,long term debt, short term debtof competing electric power generators, changes in environmental and common stock issuances, as discussed below The allocation ofregulations and other regulatory requirements. NSP currently esti-l hnancing requirements between these capital resources is based on mates that its utility capital expenditures will be $420 million in 1997 l the relative cost of each resource, regulatory restnctions and the con-and $2.0 tullion for the five year period 1997-2001. Of the 1997 amount. stramts of NSP's long-range capital structure objectives. Dunng 1996, approximately $330 milhon is scheduled for electric utility facihties and NSP continued to meet its long range regulated capital structure approximately $70 million for natural gas facihties, including Viking. In objective of 45 50 percent common equrry and 42-50 percent debt. addition to utility capital expenditures, expected financing requirements for the hve-year period 1997 2001 include approximately $632 milhon to Funds generated internally from operating cash flows in 19% remained retire long term debt and fund principal matunties. sufhcient to meet worlung capital needs, debt service, dividend payout requirements and nonregulated investment commrtments, as well as to Through its subsidiaries, NSP expects to invest significant amounts in fund a significant portion of construction expenditures. The pretax nonregulated projects in the future. Financing requirements for nonreg-mterest coverage ratio, excluding AFC, was 3 7 in 1996,3 8 in 1995 andulated project investments will vary depending on the success, timing 3 9 m 1994. These ratios met NSP's objective range of 3 5-5 0 for interest and level of involvement in projects currently under consideration. I coverage. internally generated funds could have provided financing for NSP's potential capital requirements for nonregulated projects and 75 percent of NSP's total capital expenditures for 1996 and 75 percent property are estimated to be approximately $310 million in 1997 and of the $2.0 bilhon in capital expenditures incurred for the hve year approximately $940 million for the five-year period 1997-2001. These penod 1992-1996. amounts include commitments for NRG investments, as discussed in j Note 14 to the Financial Statements, and Eloigne investments of up to NSP had approximately $368 melhon in short-term borrowings out- $13 million annually in 1997 2001 for affordable housing projects. j I standmg as of Dec. 31,1996 Throughout 1996, NSP used short-term Eloigne expects toimance approximately 30 percent of these invest-borrowmgs to hnance temporanly a portion of utihty capital expenditures ments in afiordable housing projects with equity and approximately 70 and p. side for other NSP cash needs. percent with long-term debt. In addition to the estimated potential investments in nonregulated projects as disclosed above, NSP contin-in the utihty businesses, the Wisconsin Company issued $65 milhon of ves to evaluate opportunities to enhance shareholder returns and f rst mortgage bonds and $18 6 milhon of resource recovery revenue achieve long-term financial objectives through investments in projects bonds dunng 1996 to refmance higher-cost debt issues and reduce or acquisitions of existing businesses. These investments could cause short term debt levels. Vikmg also issued $5 4 milhon in long-term debt signAcant changes to the capital requirement estimates for nonregu-dunng 1996 to fmance a construction project. lated projects and property. Long-term nonregulated hnancing may be l required for such investments. NSP's 1996 equity investments in nonregulated p.ojects primarily were financed through internally generated funds and the issuance of The Company also will have future hnancing requirements for the portion debt by nonregulated subsidiaries. NRG issued $125 milhon of 7.625 of nuclear plant decommissioning costs not funded externally Based on percent unsecured Senior Notes in 1996 to support equity require-the most recent decornmissioning study approved by regulators, these ments for projects currently under way and in development. The amounts are anticipated to be approximately $363 milhon, and are J Semor Notes were assigned ratings of BBB by S&P and Baa3 by expected to be paid dunng the years 2010 to 2022. Moody's. In addition, Eloigne issued approximately $5 milhon of nonreg-i ulated long-term debt to finance affordable housing project investments. { Project fmancing requirements,in excess of equity contnbutions I l from mvestors, were satisfied with project debt and loans from NSP's t l l i

Managemem's Discussion and Analysis %rihern Sures 1%cr Company. Minnemra and Subsidiaries Future Sources of financing NSP expects to obtain external capital for The Company's Board of Directors has approved short-term borrowing future financing requirements by periodically issuing long term debt, levels up to 10 percent of capitalitation. The Company has received short term debt, common stock and preferred stock as needed to regulatory approval for up to S474 million in short-term borrowing levels mzintain desired capitalization ratios. 0ver the long-term, NSP's equity and plans to keep its credit lines at or above its average level of com-inytstments in nonregulated projects are expected to be financed mercial paper borrowings. Commercial banks presently provide credit ) through internally generated funds or the Company's issuance of lines of approximately $300 milhon to the Company and an additional common stock. Fiaancing requirements for the nonregulated projects,in $75 million to subsidiaries of the Company. NRG currently is in the excess of equity contributions from project investors, are expected to be process of negotiating a $100 rmthon unsecured revolving bank credit fulfilled through project or subsidiary debt. Decommissioning expenses f acility. NSP credit lines make short-term financing available in the not funded by an external trust are expected to be financed through a form of bank loans, letters of credit and support for commercial paper combination of internally generated funds, long-term debt and common for utikty operations. stock. The extent of external financing to be required for nuclear dicommissioning costs, as discussed above,is unknown at this time. The Company's Articles of incorporation authorize the maximum amount of preferred stock that may be issued. Under these provisions, NSP's sbihty te i rance its utikty construction program at a reasonable the Company could have issued all $460 million of its remaining autho-cost and to provide for other capital needs depends on its abihty to rized, but unissued, preferred stock at Dec. 31,19%, and remained in meet investors' return expectations. Financing flexibihty is enhanced compliance with allinterest and dividend coverage requirements. by providing working capital needs and a high percentage of total cap-rtal requirements from internal sources, and having the ability to issue The Company's Articles of Incorporation authorize an additional 90.9 long term secunties and obtain short-term credit. NSP expects to mdhon shares of common stock m excess of shares issued at Dec. 31, mamtain adequate access to securities markets in 1997. Access to 1996 in January 1996, the Company filed a registration statement with recurities markets at a reasonable cost is determined in large part by the SEC to provide for the sale of up to 1.6 million additional shares of credit quakty. The Company's first mortgage bonds are rated AA-by new common stock under the Company's DRSPP and Executive Long-Standard & Poor's Corporation, A1 by Moody's investors Service,Inc. Term incentive Award Stock Plan. The Company may issue new (Moody's), AA by Duff & Phelps, Inc., and AA by Fitch investors shares or purchase shares on the open market for its stock-based Service, Inc. Ratings for the Wisconsin Company's first rnortgage plans. (See Note 4 to the Financial Siatements for discussion of stock bonds are generally comparable. These ratings reflect the views of awards outstanding) The Company plans to issue market shares for such organizations, and an explanation of the significance of these its DRSPP, ESOP and Executive Long-Term incentive Award Stock ratings may be obtained from each agency. Moody's has rated the plans in 1997. Depending on the timing of approvals and outcome of Company's first mortgage bond ratings A1, based on its interpretation NSP's proposed merger with WEC, a general stock offering of up to of provisions of a Minnesota law enacted in 1994 for used nuclear fuel $200 milkon may occur in 1997. Also, other offenngs may be necessary storage at the Prairie Island generating plant, as discussed in Notes 13 over the next several years to fund significant equity investments in and 14 to the Financial Statements. No other rating agencies changed nonregulated projects should they occur, their ratings of NSP's bonds as a result of this legislation. Internally generated funds from utdity operations are expected to equal The Company's and the Wisconsin Company's first mortgage indentures approximately 95 percent of anticipated utility capital expenditures for hmit the amount of first mortoage bonds that may be issued. The 1997 and approximately 95 percent of the $2.0 billion in anticipated utihty MPUC and the PSCW have jurisdiction over securities issuance. At capital expenditures for the five-year penod 1997 2001. Internally gen-Dec. 31,1996, with an assumed interest rate of 7.5 percent, the erated funds from all operations are expected to equal epproximately Company could have issued about $2.4 bilkon of additional first mort-60 percent and 80 percent of the anticipated total capital requirements gage bonds under its indenture, and the Wisconsin Company could for 1997 and the five-year period 1997-2001, respectively. Because have issued about $333 milhon of additional first mortgage bonds NSP has generally been reinvesting foreign cash flows in operations under its indenture. Outside the United States, the equity income from foreign investments is not fully available to provide operating cash flows for domestic cash The Company filed a shelf registration for first mortgage bonds with requirements such as payment of NSP dividends, domestic capital the SEC in October 1995. Depending on caprtal market conditions, the expenditures and domestic debt service. Through NRG, NSP is estab-Company expects to issue the $300 mdhon of registered, but unissued, kshing a diverse portfoho of foreign energy projects with varying levels bonds over the next several years to raise additional capital or redeem of cash flows, income and foreign taxation to allow maximum flexibility outstanding secunties. NSP also ided a shelf registration for $200 mil-of foreign cash flows in the future. hon in grantor trust-onginated preferred secunties in Dece nber 1996. In January 1997, the Company issued $200 million of 7.P!5 percent The Merger Agreement, as previously discussed, provides for restric-grantor trust preferred secunties. The proceeds were used to redeem tions on certain transactions by both the Company and WEC, including $40 rmlhon of preferred stock and reduce short-term debt levels. the issuance of debt and equity securities prior to completion of the Finsncing costs paid to holders of the trust originated preferred merger. While the Company currently plans to comply with these szcurities will be included in expenses in arriving at net income. restrictions, circumstances may arise to make such transactions nec-essary. Under such circumstances.the Company and WEC would need to mutually agree to amend the Merger Agreement. 21

Consolidated Statements of Income Northern States 1%w er Cornpany, Minnewta and Subsidiaries Yeat Ended Dec. 31 (7housands of dollars, except per share datal van 1995 1994 Utility Operating flevenues _ _ Electric $2127 413 $2142 770_ s2 066 644 Gas 526 793 425 814 419 903. Total 2 654 206 2 568 584 2 486 547 Utility Operating Expense Fuelfor electric generation, _ _ _, 301 201 Purchased andinterchange power _ _ 240 066 _. _ 325 652 _ _ _ 321 12_6_ _ 244 593 _ _ _249 754.. ._. Cost of gas pu.rchased and transported __ _ _ _ ___335 453_ ._ _ 256 758 _ _ _ 26_3_905_ Other operation _ _ _ 336 506 _ _ Administrative and general _ _ _ _155,830_. 32_1 121 _ 31_6 479_ _. Maintenance __ 158_203 _ 170 145_ _ Co_nservation and energy manageme_nt_ _ _ _ _ _.. __ _._ _ _ _ _, 148 656____ 186 147_ _ _ _ _ 187 996_ Depreciation and amortiration _ _ 69 784_ _ _ 53 466 _ _ _ 31 231_ Property and generaltaxes _ _ _ _ 306 432 290 184 income taxes _ _ _ _. _ _ _ _232_824 _ ___ _239,433_ _ ___ __273 801 _ _ 234 564 _ 161 410 147 148 129 228 Total 2 288 162 2 222 705 2 178 229 Utility Operating incone 366 044 345 879 308 318 Other income (Expense) Equity in earnings of unconsolidated affiliates: Earnings from operations 31 025 29 217 32 024 Allow nce f funds u ed r onstridt' ion} equity [ [ [_ ['[7[ []7 _(([ ]4 ~ Other incorne (deductions)- net income taxes on nonregulated operations and nonoperating items ___ _ _ _ _ (14 026) ( _ 7 975) ( , 3 686) 14 600 (5 080)__ (199) Total 39194 52 806 42 372 income Before Interest Charges 405 238 398 685 350 690 Interest Charges interest on utilitylong-term debt 101 177 103 298 89 553 0.ther uti.lity interest and_ amortization _ _ _ _ _ 21,950 _ 20 151 _ _17 55_5_ Nonregulated interest a_nd arnortization _,__ Allowance for funds used during construction - debt ___ _ _ _ __,18_834_ _. _9 879. __7 975_ (11 262) (10 438) (7 868) Totaf 130 699 122 890 107 215 Not income 274 539 275 795 243 475 Preferred Stock Dividends 12 245 12 449 12 364 Earnings Available for Common Stock $ 262294 $ 263346 $ 231111 Average Number of Common and Equivalent Shares Outstanding (000ls). . _ _ _ _ _ _ 68 679 67_416 _ 66 845 Earnings Per Average Common Share _ Common Dividends Declared per Share 33.82_ __ $3;91 . _ $3 46_ $2.745 $2.685 $2.625 he hres to FinsmialStatrments onpages Mto M f 28

Consolidated Statements of Cash Flows Northern States Pow er Company Minnesota and Subsidiaries 4 Year Ended Dec. 31 IThousands of dollars) m 1995 1994 Cash Flows from Operating Activities: Adjustments to reconcile net income to cash from operating activities:__ _ _ _ _ _3274 539 _ $2_75_795_ _ $243 475_ Net income _. Dep[ecjatign_and amortization _ _ __, __ _ 335 005_ _ _ 322 296 _ _ _ _304 583 __ _ Nuclear fuel _ amortization _. _ _ 45 774_ _ _ 49 778 _ _._45_5_53 ~ t (cred_dsIeci$g~ nite ( .[ [ ~ [ r e .e 1 _. 7 595) ___ _ 6 794), , _ j4 54_8)_ ( ( Allowance for funds used during construction - equity _ _. _Undistnb_uted equity in_ earnings of unconsolidated offjliat_e operations (25 976) _ _ 24 305)___(23 58,8[ ( _..... Undistributed equity in gajn from_nonregulated contract termination (17 565) ( (791) (8 627) _ Cash used for changes in certain working capital _ stems (see below) __ _ _ _ 58 634)_. _ _ _j21668)_ _ _ (29_963). . _.. Conservation program expenditures - net of amortization _ _ _ _ _ __ __(2 054) Cash provided by (used for) changes in other assets and habilities 23 518 ' 17 234 (1 042) Not Cash Provided by Dperating Activities 544 464 573 787 510 241 Cash Flows from investing Activities: Capital expenditures: _ 386 02R (387 026) . Unlity plant additions (inclu_ ding n_ucle_ar fue_l)_ _ _ _ _ _ _ _. _(3e6 655).. ( _ Allowance for funds used during construction - equ'ty _ _ 3 716). . _ 14 984)_ _ _ (22 260). Additions to non_ regulated property._ _ _J25 807) ( Increase (d_ecreasej in construction payables _ _ ( _ _(12 588) _. _ _ 11_668_ r 7 595 6 794 4 548 ( ( Investment in external decomrnissioning fund _ _ _, _. . _J40_497) _ _ _ 33 196)_ _ _ 42 677) Equity investments, loans and d,eposits for nonregulated projects _.j299173). _J55 884) _ _ _ (133 348)_ Collection of loans _made to nonregulated projects ___ _ _ _116126_ 1 7_66 _ 459_ Other investments - net (15 B73) (998) (488) Cet Cash Used for investing Activities (648 000) (495 112) (569 124) Cash Flows from Financing Activities: Change in short-term debt - net issuances (repayments) __ _ __152173_ __.22 24_5)__ _ 367 1_ ( 13_2 239_ Proceeds from issuance of,long-term de_bt _ _ _ ____. _ _ _._ __ _ 197_B24 __ 277 174 o[g jerhjehnchhg}eac[uhthn ph[s_ _. ,_ jk628[ [_ (( (2h[ S ~ pa k _ Proceeds fromissuance of common _ stock _ _ _ _ _ 41 725_ _ _ _56 185 _ 1 368 - Dividends paid (190 234) (191 367) (186 568) Not Cash Provided by (Used for) Financing Activities 125 000 (90 936) 42 126 Net _ lac!sesejD.ecteaje)in Cash and Cash Equivalents _ 22 324 _ (12 261) (16 757)_ Cash and Cash Equivalents at Beginning of Period 28 794 41 055 57 812 Cash and Cash Equivalents at End of Period S 51 118 5 28 794 $ 41055 Cash Provided by (Used for) Changes in Certain Working Capital items: Customer _ accounts ruei_vable an_d_unbiIled util_ity revenues _ _ _ ____,, _. 8 41,495).. _ _$(66 311)___ $ 1_4 708 Materials and supplies inventories (9 091) 14 290 (13 462) _Payables and ecc!ued liabilities (exclud(ng construct!on_payables) _ __.1179 53 141 32 550_ Customer rate refunds (1825) (10 410) Other (B 427) (86) (32 013) Net 8(58 634 i S (791) $ (8 627) Supplemental Disclosures of Cash Flow Information: Cash paid duriag the year for Interest (net of amount capitalized) $121697 $113705 $106 867 income taxes (net of refunds received) $195146 $131452 $170 474 Sar Notts to financialStatemcats on juges 34 to 40 i l l I

Consolidated Balance Sheets Northern States Power Company, Minnewta and Subsidbrics __ lihousands ofdollarsi j Assets Dec. 31 ~ l Utility Plant 1995 Electric -including construction work in progress: 1996, $132,705; 1995, $137,662 Gas _ Other _ __ _ _ _. _$6 766896_ . $6 553 383 Total ,_ _ 750 449_ _ 710 035_ 331 441 [ Ac' cumulated provision for depreciation ~ _}} ~ 7 563 003~ 299 585 ~ 7848786 Nuclear fuel; includin0 amount _s in process: 1996, $6,916; 1995, $34 235. 33611244). j3343 760) Accumulated provision for amortization _ _ _ _ 892 484 Net utihty plant (792 146) _ _ _ _ _ 843 919 Current Assets (752 821) 4 337 880 4 310 341 Cashandcashequivalents. Customer accounts receivable-net of accumulated provision _ 51 118 28 794 for uncollectible accounts: 1996, $10,195; 1995, $4,338 Unb611ed utility revenues Other receivables _ 288 330_ . _. 281 584 Materials and supphes inventories - at average cost _ 147 366 83 324_ 112 650 Fuel 78 993 Other _ 45 013 109 425 . 43 941 Prepayments and other 100 607 Total current assets 72 647 Other Assets 57 894 797 223 704 463 Equity investments in nontegulated projects and other investments Regulatory assets 451 223 289 495 Externaidecommissioning fundinvestments, 374 212 354 128 Nonregulated property-net of accumulated depteciation: 1996, $93.320; 1995 $83 724 Notes receivable from nonregulated projects 260 756_ Otherlong term receivables ._ 192 790 203 625 intangible and other assets _ _ 75 811. _ _ 177 598 . 14 560 Totalother assets _,._ 63 684__ _ 68 505 103 405 Total 85 786 1 501 797 1 213 781 Liabilities and Equity $6 636 900 $ti 228 585 Capitalization fSee pages 32 33) Common stockholders' equity Preferred stockholders' equity Long term debt $2135 880 . $2 027 391 240 469 240 469 Total capitalization 1 552 568 Current Liabilities 1 542 286 3 968 917 Long-term debt due within one year 3 810 146 Other long term debt potentially due within one year 119 618 Short-term debt - primarily commercial paper 25 760 141 600 Accounts payable _ 141 600 368 367 Tames accruel 216 194 236 341 Interest accrud 2_46 051 204 348 Devidends payable on common and preferred stocks 202 777 34 722 Ar.crued payroll, vacation and other _ 50 409 31 806 Total current habilities 80 995 _48 875 Other Liabilities 78 310 1 236 400 Deferred income taxes 991 373 Deferred investment tax credits _ 804 342 _R_egulatory ljabihtys 841 153 _ __ _ 149 006 Pension and other benefit obhgations. _ 161 51_3 _ _ _ 302 647 Other long-term obhgations and deferred in:ome _ 114 312_ _ _ 242_787 . _ _115 797 Totalother habihtses 60 676 65 816 Commitments and Contingent Liabilities fSee Notes 13 and 14) 1 431 583 Total 1 427 066 Sa ben n han,udStateww onpagn Mn H $6 636900 S6 228 585] 30

Consolidated Statements of Common Stockholders' Equity Northern States Power Onnpany, %1innesota and Sutnidiaries + Cumulative Currency Number of Retained Shares Held Translation 7 (Dollar amounts in thousands / Shares issued Par Value Premium Earnings by ESOP Adjustments Balance at Dec.31,1993 66 879 577 $167199 $543 770 $1127 372 $(10 887) Net income 243 475 Dividends declared: Cumulative preferred stock (12 364) Common stock (175 292) Issuances of common stock-net 42 567 106 1 262 Ttx benefit from stock options exercised 843 7 897 Ripayment of ESOP loan' $3 586 Currency translation adjustments Belance at Dec.31,1994 66 922 144 $167 305 $545 875 $1183191 $ (2 990) $3 586 Net income 275 795 4 Dividends declared; Cumulative preferred stock (12 450) Common stock (180 510) issuances of common stockinet 1 253 790 3 '135 _ 53 050 [ __[ Tax benefit from stock options exercised 169 Loan to ESOP to purchase shares (15 000) _ __ Repayment of ESOP loan

• 7 333

~(1 098) Currency translation adjustments Balance at Dec.31,1995 68 175 934 $170440 $599094 $1266 026 $(10 657) $2 488 Net mcome 274 539 _ _ Dividends declared: (12 245) Cumulative preferred stock .(187 521)_. Common stock lssuances of common stock-net 887 778 2 219 39 256 Tax benefit from stock options exercised ..(15 000), _ _.. _ _. _ _ _ _ 369 Lozn to ESOP to purchase shares

• 6 566 Repayment of ESOP loan' 306 Currency translation ediustments n:.., m.

,mer-mi:m 69 063 712 $172 659 $638 719 31 340 799 $(19091) $2 794 l

• Did not afkrt NSPcash flows Sir Notts to 7 'inantia/ Staltmrnit un pages )) /o ]V i

k 1 4 31

i Consolidated Statements of Capitalization Northern Scaces Power Cornpany. Alinnesota and Subsidiaries Dec. 31 1995 _ ffhousands c! dollars] Common Stockholders' Equity Common stock - authorized 160,000,000 shares of $2.50 par value; issued shares: 1996,69,063,712;1995, 68,175,934 $ 172050 $ 170 440 _.. Premium on common stoc.k _.__ _ _ _538_719 _ _ _ _599_094 _ Retained earnings _ 1_J40 799_ _ 1 266 026_._. Leveraged common stock held by Employee Stock Ownership Plan (ESOP) _,. _ ; shares at cost 1996,381,313,1995,229,154_ __, _ _ _ _, _. _, _ _ _. _ __ 19001)_ (1_0 657) _ ( Currency translation adjustments - net 2 794 . 2 488 Total common stockholders' equity $2135 000 $2 027 391 Cumulative Preferred Stock - authorized 7,000,000 shares of $100 par value; ) outstandino shares: 1996 and 1995,2,400,000 Minnesota Company $3.60 series,275,000 shares S'~27 500 $ 27 500-i 08 series [,[150,000 shares [ ]_ [ [ [ ['[ ~ ~ (( 15 00 ]0 [ j5[000 . 410_ series 175,000 shares 17 500 _ _ 1_7 500_ j t .._ 4.11. series,2_00,000 shares, __ _ _ _ _ _ _ _ _. _ _ _ _ _ _ _ 20 000 _ _ 20_000 _ 416 series, 100.000 shares _ _ _ ___10 000,_ _, _ 10 000 _ 15 000_ _ 15 000 _ _ 4:56 series 150,000, shares _ 20_000 _ _ _. _ __20 000_ t __6.80 series,200,000 shares _ __ _ _ 20 000 _ _ _ 20 000 _ _ 7,00 sayies 200,000 sha_res. t __. Vajable Hate serie_s_A,300,000 shares _ _ _ _ _ _ 30 000 _ _ 30_000 _ Variable Rate series B,650,000 shares 65 000 65 000 Premium on preferred stock _ _ _ _ _ _ _ _ _, _ _ _. _, _ _ _ __240_000 _ _ _ 240 000 _ Total _,. _ _ 489 469 Total preferred stockholders' equity 8 240 400 $ 240 469 Long. Term Debt First Mortgage Bonds - Minnesota Company Series due: March 1,1996,6.2% $ 8 800* Oct.1,1997,5X% $ 100 000 100 000 . Fe_b.1,1999, 5_X.% _ _ _ _ _ __ _ 200 000 _ _ 200 000 _ 0 _ _ _ _1_ _0 000_ 0 ._._ Doc.1,2000,_5.X%_ . __ _ _ _ _100 _ 00, _ _ ]50 000 _._ 1500W _ .._..,. Oct.1,2001,7X%_ _ _ _ _ _ _. _ ~ _ _ _ _ _ _. _ _ 50 000 _ 50_000_. . March 1,2002,7M% __ _ _.._ F_eb._1, 2003, 7M%. _ _. _ _ _ _ _ _ _ __ _50 000 _ _50__000_ 00E _ _ 80 000 _ _ _ Apyi[1,2003,6R_ Dee: 1,2005,64%_ __ _ _ .__70_000 _ __70 000_ _ _ Dec.1,1.995-2006,6 63% _ _ 19_000**_. ,_ _,_ 21 100" . _ _..Ma[ch 1,2011_, Variablo Rate _ _ _ _ _. _ _ ___ _ _13_700* 13 7_00*._ July 1,2025,7X% 250 000 250 000 ..__ Total. . _ _3 003 500 _ _ 1,093 600 _ _.1,3 700) ( (13 700) ._Less_ redeemable bonds classif ed as current (see Note _6E _ _ (101 400) (10 100) _ Less current maturities Net S 960 400 $1069 800

• Pollution controlfinancing

" Resource recoveryhnancing Se hks to FinaarialStakneents ou pays M to 40 l i l 1 i 32

l Consolidated Statements of Capitalization Northern Statea Power Cornpany, Minnewta and Subsidiaries Dec.31 (Thousands of dollars) m 1995 Long-Term Debt-contissed First Mortgage Bonds - Wisconsin Company 1 (less reacquired bonds of $3,365 at Dec. 31,1995) l Genes due: ) Oct.1,2003,5X% $ 40 000 $ 40 000 _ _.._ April.1,2021,9%% _ _ _ _ _ 110 000 _ _ _ 110 000 _ 44 635 ,_ March t,2023,7W% _ __ 05 000 1 Dec,1,2026,7%%. i Total $ 215000 $ 194 635 Guaranty Agreements - Minnesota Company Series due: Feb.1,1995-2003,5.41% $ _5 700* -...-... May 1,1995. 2003,5. 69%_...._ _ _ $ _5 500*_ _.._. 24 250*, 23 750* Less current matunties _ _.. _ _ 32 750 _. _ 33 450 _. ... Total. (700) (700) Net $ 32 050 3 32 750 > Other Long-Term Debt City of Becker Pollution Control Revenue Bonds - Series due 5 p. _ March 1,2019, Variable Rate _ ,_ _._ __. 27 900*_ _ _ 27 900* __ Sept.1,2019, Variable Rate 100 000* 100 000* Anoka County Resource Recovery Bond - Series due Dec.1,1995-2008,7.07% 23 050** 24 150 " Crty of La Crosse, Resource Recovery Bond - Series due Nov.1,2011,7X% _ _ _ _ 18 600 i*. Viki g Ga nsm ssion Coinpan~y Senior Notes - Series ~due ' ~ ~ ~ ' ~ ~~ ^ ~ ~ Oct. 31,2008,6 4% _ ....Nov. 30,2011,7.1%_ _ _ 25 244 _ _ 27 378._ NRG Energy,Inc. Senior Notes - Series due ___ _ 5 370, ~MG Energ enter nc.'(Minrieapolis Energdentef ~ ~ ~ " ~~ ~ ~~ ~ ~ Senior Secured Notes - Se_ ries due June 15,2013,7.31% United Power & Land Notes due . _ 76 092 _ _ _ 79 326 . _ March 31,2000,7 62%. _ 7 700_ _ 8 542 Various Eloigne Company Affordable Housing Project Notes due _ 1995 2024,1;0 %-9 9 %. _ _. _ Employee Stock Ownership Plan Bank Loans dus. _ _ _ _ _, _._ _. _ _ _. _ _ _ _ _ 24 755 20 696 _ 1995:2002, Variable Rate Miscellaneous _ _ 17 571 _ _ _._ _9 87_4_ _ 7 533 8967 ..,. Total. _.___ _______ _. _ 520 723 _. . 394 433 _ less variable rate Becker bonds classified as current (See Note 6) less current maturities ~ ' ~ ~ ~ ~ ~ ~ ~ ~ ~ -(127 900) ' (127 900) (17 510) I14 960) Net S 303 305 3 251 573 Uremortued discount on long. term debt - net (6 107) (6 472) Total bng-term debt $1502 500 $1542 286 Total cepitaluation 53 900 917 $3 810146

• Pollution controlimancing

" Resource recovery financing 1 See Notes tu finanaalStatements on pages M to @ - 1 33 J

Notes to Financial Statements Mrthern States 1%er umiung Minnewra and Subsidiaries

1.

SUMMARY

OF SIGNIFICANT ACCOUNTING POLICIES System of Accounts Northern States Power Company, a Minnesota Allowance for Funds Used During Construction {AFC) AFC, a no corporation (the Company), is predominantly a regulated pubhc utihty item, is computed by applying a composite pretax rate, repr serving customers in Minnesota, North Dakota and South Dakota. the cost of capital used to finance utshty construction activities to Northern St.ates Pnwer Company, a Wisconsin corporation (the quahfied Construction Work in Progress (CWIP). The AFC rate wa Wisconsm Company), a wholly owned subsidiary of the Company, is a 1996,6.0 percent in 19Z and 5 0 percent in 1994. The percent in regulated pubhc utikty serving customers in Wisconsm and Michigan, amount of AFC capitahzed as a construction cost in CWIP is credited Another wholly owned subsidiary, Viking Gas Transmission Company to other income (for equity c apital) and interest charges (for debt (Viking),is a regulated natural gas transmission company that oper ital). AFC amounts capitahted in CWIP are included in rate base for ates a 500 mde interstate natural gas pipeline. Consequently, the-establishing utility service rates. In addition to construction-related Company, the Wisconsin Company and Viking mamtam accountmg amounts, AFC is also recorded to reflect returns on capital used to fmance con /ervation programs. records in accordance with either the umform system of accounts prescobed by the Federal Energy Regulatory Commission (FERC) or those prescribed by state regulatory commissions, whose systems are Depreciation Dr hnancial reporting purposes, depreciation is com-the same in all material respects puted by applying the straight Sne method over the estimated useful hves of various property classes. The Companv files with the Principles of Consolidation The consohdated fmancial statements Mmnesota Pubhc Utikties Commission (MPUC) an a include all rnaterial companies in which the Cumpany holds a controlkng remainmg hves for electric and gas production properties. The most fmancialinterest, including t% Wisconsm Company; NRG Energy Inc recent studies, as approved by the MPUC, recommended immaterial (NRG), %kmg; Cenerpose, Inc. (Cenerpise), and Eloigne Company. decreases in annual depreciation accruals for 1996 and 1995. Eloigne) The Company and its subsidianes collectively are referred to herein a;, NSP As discussed m Note 2, NSP has investments in partner. Every five years, the Company also must fde an average service kfe ships, jomt ventures and projects for which the equity method of ing for transmission, distnbution and general properties The most accounting is apphed. Earnmgs from equsty in internationalinvestments recent fshngs approved by the MPUC were in 19% fo.r computer soft-are recorded not of foreign income taxes All significant intercompany ware, in 1994 for general plant and in 1993 for all other facihties. transactions and balances have been ehmmated m consohdation Depreciation provisions, as a percentage of the average balance of except for intercompany and intersegment profits for sales among the depreciable utihty property in service, were 3 68 percent in 19%,3 64 electric and gas utility busmesses of the Congany, the Wisconsm percent in 1995 and 3 55 percent in 1994. Company and % king, which are allowed in utihty rates Decommissioning As discussed - Note 13 NSP currently is rec Revenues Revenues are recogmzed based on products and services the future costs of decommissionmg the Company's nuclear generat-provided to customers each month. Because utthty customer meters ing plants through annual depreciation accruals. The provision for th are read and bdied on a cycle basis, unbdled revenues (and related estimated decommissionmg costs has been calculated using an annu-energy costs) are estimated and recorded for services provided from sty approach designed to provide for full expense accrual (with fult rate the monthly meter reading dates to month-end. recovery) of the future decommissioning costs,includmg decontami-nation and removal, over the estimated operating hves cf the The Company's rate schedules, appbcable to substantially allof its utd-Company's nuclear plants. The hnancial Accounting Standards boa sty customers, mclude cost-of energy and resource adjustment (FASB) has proposed new accounting standards that would requi clauses, under which rates are adgusted to reflect changes m everage the full accrual of nuclear plant decommissioning and certain other costs of fuels, purchased energy, purchased gas, and m M nnesota, site exit obhgations beginning as soon as 1998. (See Note 13 for more conservation and energy management program costs. As ordered by discussion of this proposed standardl ets pomary regulator, Wisconsin Company retad rate schedules include a cost-of energy ad ustment clause for purchased gas but not Nuclear FuelExpense The onginal cost of nuclear fuelis amortized l for electoc fuel and purchased energy for Wisconsin electric opera-fuel expense based on energy expended Nuclear fuel expense also tions where cost-of-energy adjustment clauses are not used the bien includes assessments from the U.S Department of Energy (00E) for nial retad rate review process and on mtenm luel cost heanng process-costs of future fuel disposal and 00E facihty decommissioning, as dis-provide the opportunity for rate recovery of changes in electnc fuel cussed in Note 13. and purchased energy costs in heu of a cost of energy adjustment. Environmental Costs Accruals fnr environmental costs are recogn Utikty Plant and Retirements Utihty plant is stated at onginal cost The when it is probable that a liabihty has been incurred and the amount of cost of additions to utikty plant includes direct labor and matenals, con-the habihty can be reasonably estimated Costs are charged to tracted work, al!ocable overhead costs and allowance for funds used expense or deferred as a regulatory asset based on expected recov-dunna construction The cost of umts of property retired, plus net ery m future rates,if they relate to the remedsation of conditions removal cost, is charged to the accumulated provision for depreciatson caused by past operations, or if they are not expected to mitigate or and amortization Mamtenance and replacement ofitems determined to prevent contamination from future operations. Where environmental be less than units of property are charged to operatmg expenses expenditures relate to facihties currently m use, such as pollution con-trol equipment, the costs may be capitahzed and depreciated over the future service penods Estimated remediation costs are recorded at undiscounted amounts, independent of any insurance or rate recov-ery, based on prior experience, assessments and current technology 34

Notes to Financial Statements Northern States Power Gunpany, Minnemta and Sulnidiaries Accrued obligations are regularly adjusted as environmental assess-as a component of interest expense. None of these three derivative ments and estimates are revised, and rem 6diation efforts proceed. For financialinstruments is reflected on NSP's balance sheet. sites where NSP has been desigr:ated as one of several potentially responsible parties, the amount accrued represents NSP's estimated Use of Estimates In recording transactions and balances resulting share of the cost. NSP intends to treat any future costs incurred related from business operations, NSP uses estimates based on the best to decommissioning and restoration of its nonnuclear power plants and information available. Estimates are used for such items as plant substation sites, where operation may extend indefinitely, as a capital-depreciable lives, tax provisions, uncollectible accounts, environmen-ited removal cost of retirement in utihty plant. Depreciation expense tal costs, unbilled revenues and actuarially determined benefit costs. levels currently recovered in rates include a provision for an estimate As better information becomes availablo (or actual amounts are deter-of removal costs (based on historical experiencel minablel the recorded estimates are revised. Consequently, operating results can be affected by revisions to prior accounting estimates. Income Taxes Under the liability method used by NSP, income taxes are Recent changes in interest rates have resulted in changes to actuarial def erred for all temporary differences between pretax financial and assumptions used in the benefit cost calculations for postretirement taxable income and between the book and tax bases of assets and ha-benefits, as discussed in Note 7. Also, the depreciable lives of certain hiltties, using the tax rates scheduled by law to be in effect when the plant assets are reviewed and,if appropriate, revised each year, as temporary differences reverse. Due to the effects of regulation, current discussed previously. income tax expense is provided for the reversal of some temporary dif-ferences previously accounted for by the flow-through method. Also, Cash Equivalents NSP considers investments in certain debt instruments regulation has created certam regulatory assets and habiltties related (primarily commercial paper and money market funds) with an original to incomw taxes, as summarized in Note 9. NSP's policy for income maturity to NSP of three months or less at the time of purchase to be taxes related to international operations is discussed in Note 10. cash equivalents. Investment tax credits were deferred and are being amortized over the Regulatoiy Deferrals As regulated utilities, the Company, the Wisconsin estimated hves of the related property. Company and Viking account for certain income and expense items under the provisions of Statement of Financial Accounting Standards Fersign Currency Translation The local currencies are generally the (SFAS) No. 71 - Accounting for the Effects of Regulation. In doing so, functional currency of NSP's foreign operations. Foreign currency certain costs that would otherwise be charged to expense are deferred denominated assets and habihties are translated at end of. period as regulatory assets ijased on expected recovery from customers in rates of exchange. Income, expense and cash flows are translated at future rates. Likewise, certain credits that otherwise would be reflected weighted-average rates of exchange for the penod. The resulting cur-as income are deferred as regulatory liabilrties based on expected flow-rency translation adjustments are accumulated and reported as a sep-back to customers in future rates. Management's expected recovery of atato component of stockholders' equity. deferred costs and expected flowback of deferred credits are generally based on specific ratemaking decisions or precedent for each item. Exchange ga6s and losse that result from foreign currency transactions Regulatory assets and habikties are amortized consistent w:th ratemak-(e g. converting cash distributiens made 6 one currency to another) are ing treatment estabhshed by regulators. Note 9 describes the nature included in the resutts of operations as a component of equity in earnings and amounts of these regulatory deferrals. of unconsolidated att hates. Through Dec. 31,1996 NSP's translation gains or losses from foreign currency transactions that have occurred Stock-Based Employee Compensation NSP has several stock-based since the respective foreign investment dates have been immatenal. compensation plans, as desenbed in Note 4 Under the intrinsic-value-based method of accountmg followed by NSP, no compensation j Dxrivative Financiat instruments NSP's pohcy is to hedge foreign cur-expense is recorded for stock options because there is no difference rency denominated investments as they are made, where appropriate between the market price and purchase price at the grant date, which hedging instruments are available, to preserve their U.S. dollar value. is the measurement date for determining compensation expense. NSP NRG has entered mto currency hedging transactions through the use of does, however, record compensation expense for stock that is forward foreign currency exchange agreements. Gains and losses on awarded to certain employees, but held by NSP until the restrictions these agreements offset the effect of foreign currency exchange rate lapse or the stock is forfeited. Effective for 1996, the FASB issued a fluctuations on the valuation of the investments underlying the hedges. new accounting standard, SFAS No.123 - Accounting for Stock-Hedging gains and losses, net of income tax effects are reported with Based Compensation, which provides an optional accounting method other currency translation adjustments as a separate component of for compensation from stock option and other stock award programs. stockholders' equity. NRG is not hedgmg currency translation ad ust-NSP diri not elect the new optional accounting method. If the provi-i ments related to future operating results. NSP does not speculate in for-sions of the optional method had been adopted as of the beginning of eign currencies. A second derivative arrangement is the use of natural 1995, the effect on tiet income and earnings per share for 1996 and gas futures contracts by Cenerprise to manage the nsk of gas price fluc-1995 would have been immaterial. tuat>ons. The cost or benefit of natural gas futures contracts is recorded when related sales commitments are fulfilled as a :omponent of Other Assets The purchase of vanous nonregulated entities at a price Cenerprise's nonregulated operatog expenses. NSP does not speculate exceeding the underlying fair value of net assets acquired has resulted in natural gas futures. A third denvative instrument used by NSP is in recorded goodwill of $20 milhon (SI8 million net of accumulated amor-interest rate swaps that convert fixed. rate debt to variable-rate debt. tization) at Dec. 31,1996. This goodwill and other intangible assets The cost or benefit of the interest rate swap agreements is recorded acquired are being amortized using the straight Ane method over periods 35

. Notes to Financial Statements rthern States 1%er Company..\\linnesota and Subsidiaries of five to 30 years. NSP periodically evaluates the recovery of goodwill Financial Position based on an analysis of estimated undiscounted future cash flows. (M&ons of dollars) US Intangible and other assets also include deferred financing costs (net Current Assets _ _ _$ _681 __ 1995 _$_762 Other Assets of amortization) of approximately $12 million and deferred merger 3 525 2 632 Total Assets costs of $25.3 rnillion at Dec. 31,1996. The financing costs are being $4206 $3394 Current Liabilities $ 397 $ 296 amortized over the remaining maturity period of the related debt. 0ther liabilities Equity _ 2 798 2 290 _. _ _ _

2. INVESTMENTS ACCOUNTED FOR BY THE EQUITY METHOD 1 011 808 Through its nonregulated subsidiaries, NSP has investments in various Total Liabikties and Equity

$4206 53 394 NSP's Equity Investment international and domestic energy projects and domestic affordable in Unconsolidated Affiliates $ 410 $ 266 housing and real estate projects. The equity method of accounting is apphed to such investments in affiliates, which include joint ventures

3. PREFERRED SECURITIES and partnerships, because the ownership structure prevents NSP from exercising a controlhng influence over operating and hnancial policies The Company has two series of adjustable rate preferred stock. The div-of the projects. Under this rnethod equity in the pretax income or losses idend rates are calculated quarterly and are based on prevailing rates of domestic partrierships and in the net income or losses of international of certain taxable government debt securities indices. At Dec. 31,1996, projects is reflected as Equityin Earnings of Unconsolidated Affiliates. A the annualized dividend rates were $5.50 for both series A and series B.

summary of NSP's significant equity-method investments is as follows: At Dec. 31,1996, various preferred stock series were callable at prices per share ranging from $100.00 to $103.75, plus accrued dividends. Purchased or Geographic Economic Placed in Dn Jan. 31,1997, NSP issued $200 million in 7,875 percent grantor Name Area Interest Service Various Indepndent trust-originated preferred securities that mature in 2037. A portion of Power Production the proceeds were used to redeem the Company's $6.80 and $7 00 July 1991-series of preferred stock in February 1997. Facihties U.S. A. 45W50% December 1994 Various Attordable Housing Limited

4. COMMON STOCK AND INCENTIVE STOCK PLANS April 1993-The Company's Articles of incorporation and First Mortgage Partnerships U.S. A.

20 % 99 % December 1996 NRG Genesating Indenture provide for certain restrictions on the payment of cash dividends on common stock. At Dec. 31,1996, the Company could (U S.)Inc. (NRCG) U.S. A. 42 % April 1996 MIBRAG Mining and have paid, without restrictions, additional cash dividends of more than $1 billion on common stock. Power Generation Europe 33 % January 1994 Gladstone Power NSP has an Executive Long-Term lncentive Award Stock Plan that per. Station Australia 37.5 % March 1994 Scudder Latm mits granting nonquahfied stock options and restricted stock. The American Trust for awards granted in any calendar year cannot exceed one half of one independent Power Latin percent of the number of outstanding shares of NSP common stock at the end of the previous calendar year. When options are exercised, or Energy Projects America 25 % June 1993 Schkopau Power restricted stock granted, the Company may either issue new shares or January 1996-purchase market shares. Using the treast,ry stock rnethod of account-Station Europe 20.6 % July 1996 ing for outstanding stock options, the weighted average number of COBEE Electric South shares of common stock outstanding for the calculation of primary Power America 62%' December 1996 earnings per share includes any dilutive effects of stock options and

• Not consohdated as NRG intends to divest a portion ofits interest.other stock awards as common stock equivalents.

Summarized Financiallnfonnation of Unconsolidated Affiliates Stock options cunently granted may be exercised one year from the Summarized hnancialinformation for these projects, includmg interests date of grant and are exercisable thereafter for up to nine years. The owned by NSP and other partiet was as follows (for the years endedoptions are forfeited if employment ceases before the one year vest-and as of Dec.31): ing tern if employment ceases after the one yeal vesting term, options will either be forfeited, or would need to be exercised within Results of Operations three or 36 months, dependmg on the circumstances. The exercise (Mdhons of dollars) M price of an option is the market price of NSP common stock on the _1995 1994 Operating Revanues date of grant.The plan,in previous years, granted other types of per- $958 _ $790 _ $UB_ formance awards, some of which are still outstanding. Most of these Operating income $105 $154 $129 Net income performance awards were valued in dollars, but paid in shares based $ 89 $160 $117 NSP's Equity in Earnings of on the market price at the time of payment. Transactions under the various incentive stock programs, with the corresponding weighted Unconsokdated Affshates $ 31 $ 59 $ 42 average exercise price, were ss follows: 36

Notes to Financial Statements Northern States Power Company, Minnemra and Sulnidiaries Stock Option and Performance Awards o-1995 1994 Average Average Average (Thousands o/ shares) Shares Price Shares Price Sharus Price Outstand (ng Jan.1. _ _ _ 990_,, $41.97_. 782_ $40.58 . b37_, _$39 38 Options granted in January.. 263 _ _ $50.94 278, $45.50 304 . $42.19 Other stock awards Options and awards e_xercised___ _ _. (1W _ _ __ $41.98. __$b26 _ ___.. ____ $36.67 ( Options and awards forfeited (64). 43) a $47.70 .(6) $44.58 (14).. $42.28 Options and awards expired (4) $40.00 (2) $39.87 Outstanding at Dec. 31 1 117 . $43.97 _990 . $41_.97 _ 782_ _$40.58 Exercisable at Dec. 31 870 $41.96 716 $40.60 491 $39.59 The following table summarizes information about stock options

6. LONG-TERM DEBT outstanding at Dec. 31,1996.

Except for minor exclusions, all real and personal property of the Company and the Wisconsin Company is subject to the liens of the Range of Exercise Pnces First Mortgage Indentures. 0ther debt securities are secured by a lien $33.25 40.94 $42.19 50.94 on the related real or personal property, as indicated on the Options Outstanding: Consolidated Statements of Capitalization. Number outstanding at Dec. 31,1996 244 501 861 759 Weighted-average remaining The annual sinking-fund requirements of the Company's and the contractuallife (years) 4.2 _ 7.7 Wisconsin Company's First Mortgage Indentures are the amounts nec-Weighted average exercise _ price ..$37.22 _ $45.88 essary to redeem 1 percent of the highest principal amount of each Options Exercisable: series of first mortgage bonds at any time outstanding, excluding l Number exercisable at Dec. 31,1996 244 501_ 614 214 those series issued for pollution control and resource recovery financ-Weighted-average exercise price $37.22 $43.85 ings, and excluding certain other series totaling $990 million. The Company may, and has, applied property additions in lieu of cash pay-in addrtion to stock options and performance awards, restricted stock ments on all series, as permitted by its First Mortgage Indenture. The is granted based on a dollar value of the award. The market price on Wisconsin Company also may apply property additions in lieu of cash the date of grantis used to determine the number of restricted shares on all series as permitted by its First Mortgage Indenture. awarded. The stock is held by NSP until the restnctions lapse: 50 per-cent of the stock will vest one year from the date of the award and the The Company's 2011 series First Mortgage Bonds and the 2019 series remaimng 50 percent vests two years from the date of the award. City of Becker Pollution Control Revenue Bonds have variable interest Dividends on the shares heV while the restrictions are in place are rates, which currently change at various periods up to 270 days, based reinvested to obtain additional shares, and the restrictions apply to on prevailing rates for certain commercial paper securities or similar these additional shares. In each of the years 1994 through 1996, NSP issues. The interest rates applicable to these issues averaged 4.2 per-granted restricted stock awards of about 20,000 shares per year at cent and 3.6 percent, respectively, at Dec. 31,1996. The 2011 series then-current market prices of NSP stock. Compensation expense bonds are redeemable upon seven days notice at the option of the related to these awards was immaterial, bondholder. The Company also is potentially liable for repayment of the 2019 Series Becker Bonds when the bonds are tendered, which

5. SHORT-TERM BORROWINGS occurs each time the variable interest rates change. The principal As of Dec. 31,1996 and 1995, the Company had approximately $300 mil-amount of all of these variable rate bonds outstanding represents lion and $265 milhon, respectively, of commercial bank credit lines under potential short term obligations and,therefore,is reported under cur-commitment fee arrangements. These credit lines make short-term tant liabilities on the balance sheet.

financing available in the form of bank loans, letters of credit and scpport for commercial paper sales. There were no borrowings against these Maturities and sinking-fund requirements on long-term debt are: 1997, credit knes at Dec. 31,1996 and 1995. At Dec. 31,1996 and 1995, credit $119,618,000,1998, $18,971,000,1999, $212,369.000, 2000, $117,416,000, lines of $75 milhon and $17 million, respectively, primarily were provided and 2001, $163,209,000. by commerical banks to wholly owr'ed subsidiaries of the Company. At Dec. 31,1996, approximately $4 milhon in loans against these credit lines 7, BENEFIT PLANS AND OTHER POSTRETIREMENT BENEFITS were outstanding in addition, at Dec. 31,1996 and 1995, $21 rnillion and NSP offers the following benefit plans to its benefit employees, of whom $10 million, respectively,in letters of credit were outstanding, which approximately 43 percent are represented by five locallabor unions reduced the available credit knes. under a collective-bargaimng agreement, which expired Dec.31,1996, but was extended to April 30,1997. Management and union representa-At Dec. 31,1996 and 1995, NSP had $362 milhon and $216 million, tives have reached a tentative agreement on the terms of a new three-respect)vely, in short-term commercial paper borrowings outstanding, year collective-bargaining agreement, subject to approval by the union and $7 million and $0 6 milhon, respectively,in short term bank loans membership. NSP is not able to predict the outcome at this time. outstanding The weighted average interest rates on all short-term bor-remngs were 5.7 percent as of both Dec. 31,1936 and Dec. 31,1995. 31

Notes to Financial Statements Lrthern States 1% cr Company. Minnewta and Sulnidiaries Pension Benefits NSP has a noncontnbutory, defined beneht pension plan that covers substantially all employees. Benefits are based on a financial reporting purposes, the effects of regulation prevent the combination of years of service, the employee's highest average pay majonty of these assumption changes from affecting earnings. for 48 consecutive rnonths and Social Security benehts. l 401(k) NSP has a contributory, defined contribution Retirement NSP's policy is to fully fund into an external trust the actuarially deter-Savings Plan, which complies with section 401(k) of the Internal rnined pension costs recognized for ratemaking and financial reporting Revenue Code and covers substantially all employees. Since 1994 purposes, subject to the limitations under applicable employee benefit NSP has been matching specified amounts of employee contribut and tax laws. Plan assets principally consist of common stock of public to this plan. NSP's matching contributions were $4.3 million in 1996 companies, corporate bonds and U.S. government securities. The $3.7 million in 1995 and $2.6 million in 1994. funded status of NSP's pension plan as of Dec. 31 is as follows: Postretirement Health Care NSP has a contributory health and wel _ fThousands o/do//ars/ 1995 benefit plan that provides health care and death benefits to sub Actuanalpresent value of benefit obligation: all employees after their retirement. The plan is intended to provide fo Vested shanng the costs of retiree health care between NSP and retirees. For Nonvested $ 660 920 $ 686 403 employees retiring after Jan.1,1994, a six year cost-sharing strate 147 278 155 177 _ Accumulated beneftt obhgation was implemented with retwees paymg 15 percent of the total cost of S 808 198 ~$ 841580 Proiected beneht obhgation health care in 1994, increasing to a totalof 40 percent in 1999 In con- $ 993 821~ $103998F Plan assets at fair value junction with the 1993 adoption of SFAS No.106 - Employers' 1 634 696 1 456 530 Plan assets in excess of Accounting for Postretirement Benefits Other Than Pensions NSP elected to amortize on a straight-kne basis over 20 years the unrec-projected benefit obligatson 640 875 416 549 Unrecognized poor service cost ognized accumulated postretirement benefit obligation (APBO) of 19 734 20 805 Unrecognized net actuarialgain $215 6 milhon for current and future retirees. (651 368) (452 699) Unr ecoDnited net transitional asset (539) (615) Net pension asset (habihty) recorded Before 1993, NSP funded payments for retiree benefits internally W 8 8702 $ (15 960) NSP generally prefers to continue using internal funding of bene j For ratemaking purposes, the Company's pension costs are deter-and accrued, signihcant levels of external fundmg, including the use of mined and recorded under the aggregate-cost actuarial method As tax-advantaged trusts, have been required by NSP's regulators as dis requned by SFAS No. 87 - Employers' Accounting for Pensions the cussed below. Plan assets held in such trusts principally consist of-difference between the pension costs recorded for ratemaking pur-investments in equity mutual funds and cash equivalents. The funded poses and the amounts determined under SFAS No. 87 is recorded as status of NSP's retiree health care plan as of Dec. 31 is as follows: a regulatory hability on the balance sheet. Net annual periodic pension cost includes the following components: fThousands of do#ars/ ' ' AP80 __ 1995 (Thousands of dollars / mM 1995 1994~ Retirees ~5ervice cost-benehts earned $144180 $145 763 during the period ~ Fully eligible plan participants 1 l 23 438 24 406 Other active plan participants $29971 $24 499 $27 536 101 065 116 810 Interest cost on prolected TotalAPB0 268 683 286 979 benefit obhgation Plan assets at fair value 70 863 69 742 65 107 15 514 11 583 Actuai return on assets APB0 n excess of plan as. sets (265 370) (344 837) (12 668) 253 169 275 3 % ~ Net amortization and deferral Unrecognized net actuarialloss 139 874 240 458 (82 114) (12 467) (40 411) Net penodic pension c5t determined under SFAS No. 87 ~ Unrecognized transttion obhgation (172 480) (183 260) _ Neibenehthabiktyrecorded (24 662_) (10 138) 12 139) $ 68222 - 3 51 725] Addttional costs recognized due to actions of regulators The assumed health care cost trend rates used in measuring the AP 23 572 10 454 3 922 Net penodic pension cost at Dec. 31,1996 and 1995, were 9 8 percent and 10.4 percent for those recognized for fmancial reporting $(1990) $ 316 $ 1783 under age 65, and 7.1 percent and 7.3 percent for those age 65 and over respectively The assumed cost trend rates are expected to decrease The weighted average discount rate used in determining the actuarial each year untd they reach 5.5 percent for both age groups in the year present value of the projected obhgation was 7.5 percent in 1996 and 7 2004, after which they are assumed to remain constant. A 1 percent percent in 1995. The rate of increase in furure compensation levels increase in the assumed health care cost trend rate for each year wou used in determining the actuanal present value of the projected obhga-increase the APB0 by approximately 14 percent as of Dec.31 1996. tion was 5 percent in 1996 and 1995 The assumed long-term rate of Service and interest cost components of the net periodic postretireme return on assets used for cost determinations under SFAS No. 87 was 9 cost would increase by approximately 17 percent with a similar 1 per-percent for 1996 and 1995, and 8 percent for 1994. Assumption changes centincrease in the assumed health care cost trend rate Th increased 1996 pension costs (determined under SFAS No 87) by discount rate used in determining the APB0 was 7.5 percent for Dec 3 approximately $126 melhor and decreased 1995 costs by approximately 1996, and 7 percent for Dec. 31,1995, compounded annueUy The $215 mahon. Because the Company's pension expense is determined assumed long-term rate of return on assets used for cost determina-under the aggregate cost method (not SFAS No. 87) for ratemaking and tions under SFAS No.106 was 8 percent for1996,1995 and 1994 Assumption changes decreased 1995 costs by approximately $20 md and increased 1996 costs by approximately $13 milhon. 38

Notes to Financial Statements Mrthern States 1%er Cmnpany Niinnewta and Sulnidiaries The net annual penodic postretirement benefrt cost recorded consists Other income (deductions)- net consist of the folicwing: of the following components: (Thousands of dollars) Li1 1995 1994 (Thousands of dollars) EM W1 1995 1994 Nonregulated operations: Service cost benefits Operating revenues and sales $303 903 5313 082 $241827 earned dunng the year $ 6 380 $ 5 206 $ 5039 Operating expenses

• 326 332 327 894 241 480 Interest cost (on service Pretax operating income (loss)** (22 429)

(14 812) 347 cost and APBO) 19 283 19 201 16 092 Interest and investment income 15 417 11 953 10 839 Actuai return on assets . 947) (1 046) (147[ .Chantable contributions _ j5 410] (5 314) ( _ 5 037) ( Amortization of transition obligation 10 780 10 780 10 780 Environmental and Net amortization and deferral 140 406 (340) regulatory contingencies 1 219 1 027 (4 568) Net penodic postretirement Other -net (excluding income taxes) (2 823) (829) (5 267) health care cost under SFAS No.106 35 636 34 547 31 424 Total-net expense before Additional costs recognized due to income taxes 3(14026h $ (7975) $ (3686) actions of regulators 4 033 4 033 4 033 Net postretirement cost

• Includes nonregulated energy project write downs of $1.5 million recognized for fanancial reportmg

$39 669 $38 580 $35 457 in I996, $5 0 million m I995 and $5 0 million in I994. " See ' Operating Results"on page M for a summary of the total Regulatorp 'or NSP's retail and wholesale customers in Minnesota, operatmg results oinonregulated businesses. Wisconsin o d North Dakota have allowed full recovery of increased beneftt costs under SFAS No.106, effective in 1993. Increased 1993

9. REGULATORY ASSETS AND LIABILITIES secrual costs of approximately $12 million for Minnesota retail cus-The following summarizes the individual components of unamortized tomers were amortized over the years 1994 through 1996, consistent wrth regulatory assets and liabilities shown on the Consolidated Balance approved rate recovery. External funding was required by Minnesota Sheets at Dec. 31:

and Wisconsin retail regulators to the extent it is tax advantaged, funding began for Wisconsin in 1993 and must begin by the next general rate fil-Remaining ing for Minnesota. For wholesale ratemaking, the FERC has required Amortization I external funding for all benefits paid and accrued under SFAS No.106. (Thousands of dollars) Period LK1 1995 AFC recorded in plant ESOP NSP has a leveraged Employee Stock Ownership Plan (ESOP)that on a net-of-tax basis

• Plant Lives $137412

$146 662 covers substantially all employees Employer contnbutions to this non. Conservation and energy Primarily centnbutory, defined contnbution plan are generally made to the extent management programs

• 4 Years 95 716 98 570 l

NSP realizes a tax savings on its income statement from dividunds paid Losses on on certain shares held by the ESOP. Contnbutions to the ESOP in 1996, reacquired debt Term of New Debt 63 481 63 209 1995 and 1994, which represent compensation expense,were $4.647,000, Environmental costs Primanly 11 Years 42 322 45 018 $5.059,000 and $5.695,000, respectively. ESOP contributions have no State commission material effect on NSP earnings because the contributions (net of tax) accounting ad ustments* Plant Lives 7 296 7 221 l are essentially offset by the tax savings provided by the dividends paid Unrecovered purchased on ESOP shares. Leveraged shares held by the ESOP are allocated to gas costs 1-2 Years 3 885 5 932 participants when dividends on stock held by the plan are used to repay Deferred postretirement ESOP loans NSP's ESOP held 5 9 m3on and 5 7 milhon shares of the benefit costs 11 Years 1 413 5 568 Company's common stock as of Dec 31,1996 and 1995. respectively. An Other Various 2 603 2 032 average of 208,288,221,066 and 111,845 uncommitted leveraged ESOP Total regulatory assets $354128 $374 212 shares were excluded from earnings-per-share calculations in 1996,1995 Deferred income tax adjustments $ 92 390 $ 83066 and 1994, respectively The fair value of NSP's leveraged ESOP shares investment tax credit deferrals 97 636 104 371 was approximately the same as cost at Dec. 31,1996 and 1995. Unrealized gains from decommissioning investments 43 008 26 374

8. DETAll 0F CERTAIN INCOME AND EXPENSE ITEMS Pension costs - regulatory differences 45 000 21 508 Administrative and general (A&G) expense for utihty operations Fuel costs, refunds and other 24 533 7 468 consists of the following.

Totai regulatory liebikties $302 647l $242 787 (Thousands of dollars} nin 1995 1994

• Earns a return on investment in the ratemaking process.

A&G salanes and wages $ 47 546 $ 48 437 $ 49 726 Pension, medical and other benefits - all utikty employees 64 733 81 279 80 693 Information technology,Iacihties and administrative support 21 281 31863 29 751 insurance and claims 5 503 13 969 16 771 Other 9 593 10 599 11 055 Total $148 656 $186147 $tB7996 39

I Notes to Financial Statements Northern stares l'ow er O>mpany, Niinnesora and Sub&liaries

10. INCOME TAXES Totalincome tax expense from operations differs from the amount computed by applying the stat t income tax expense. The reasons for the difference are as follows:

u ory federalincome tax rate to income before ~ Federal statutory rate. 1995 1994 US increases (decreases)in tax from: _ 35.0 % 35 0 % 35 0 % State income taxes, net of federat income tax benefit Tax credits recognized 5.2% 5.1% 5.9% Equity income from unconsolidated affilia'es (3,7)% _ (3.4)%, _ _ (3.5)% Regulatory differences - utility plant items _ _._ 2.6)%. _ _ {2:5)%_ _ _ _, (2.5)%_ ( Other - net 0.9% 1.0% 0.5% Effective income tax rata 34.8 %~ 0.4% (0.7)% 35.6 % 34.7 % _ IThousandsofdonars) Income taxes are composed of the following expense (benefit) rtems: Included in utikty operating expenses: Current federal tax expense Current state tax expense $_154 421_ U37 Ol' _ _ $108 652 Deferred federal tax expense _ 39 923 33 359 _ _ . 34 823 Deferred state tax expense. _ (19 933) (12 019) (3 450) Deterred investment tax credits (3 958) (2 396) (1 606) Total (9 043) (8 807) (9 191) included in income taxes on nonregulated operations and nonoperating items: 161 410 147 148 129 228 Current federal tax expense Current state tax expense _ _ 906) ( 4 j 81 3 959 Current foreign tax expense _ 712_ 1629_ 923 Current federaltax credi s 616 t 233 219 Deferred federal tax expense ( _ 8 044) (5 2921 (3 548) Deferred state tax expense (835) Deferred investment tax credits .. (5 150). 2 646 (1 520) 693 (209) Total (308) (310) (310) Totalincome tax expense (14 600) 5 080 199 $146 810] $152 228 3129 427 income before income taxes includes net foreign equity income of $28 mdlion, $32 million and $26 rnithon in 1996,1995 and 1994, respec-The components of NSP's net deferred tax liability (current and tively Except to the extent NSP's earnings from foreign operations noncurrent portions) at Dec. 31 were: are subject to current U S. income taxes, NSP's management intends to reinvest indelsnitely such earnings in its foreign operations. (Thousands of donars/ Accordingly, U S. income taxes and foreign withholdmg taxes have not Deferred Tax Liabihties: EQ 1995 been provided on a cumulative amount of unremitted earnings of for-Difference between book and eign subsidiaries of approximately $87 million at Dec. 31,1996. The tax bases of property $ SiO139 $ 856 507 additional U S. income tax and foreign withholdmg tax on the unremit. Regulatory assets. 121 232 ted foreign earnings,if repatriatM, would be offset in whole or in part Tax benefit transfer leases 124 910 Other _ 43 481_ 59 579 by foreign tax credits. Thus,it is imptacticable to estimate the amount 23 182 13 338 of tax that might be payable. Totaldeferred tax habihties $1038 034' $1054 334 Dektred Tax Assets: Regula. tory 1.iabilities _ _ _. Deterred investment tax credits _ __$ 90_485. $ _81427 57 239 61 911 Deferred compensation, vacation and other accruedliabikties not currently deductible Other _ 65 690 62 440 34 509. 22 658 Total deferred tax assets 8 247 923 $ 228 436 Net deferred tax habihty 8 790 111 3 825 898~ 40

Notes to Financial Statements Lrthctn States 1%w er Coinpand.\\finnewta and Sulnidiaries

11. IINANCIAL INSTRUMENTS Cenerprise has entered into natural gas futures contracts in the Fair Values The estimated Dec. 31 fair values of NSP's recorded notional amount of $22 million at Dec. 31,1996. The original contract financial mstruments are as follows:

terms range from one month to three yers. The contracts we intended to mrtigate risk from fluctuations in the price of natural gas that will be 1995 required to satisfy sales commitments for future deliveries to cus-Carrying Fair Carrying Fair tomers in excess of Cenerprise's natural gas +.erves. Cenerprise's Amount Value Amount Value futures contracts hedge $22 million L. anticipt ted natural gas sales in Cash, cash equiva!ents 19971998. Margin balances of $1 million m Dec. 31,1996, were main-and short-term tained on deposit with brokers and recorded as cash and cash investments $ $1 E8 $ 51 118 $ 28943 $ 28 943 equivalents on NSP's balance sheet. The counterparties to the Long -term futures contracts are the New York Mercantile Exchange and major decommissioning gas pipeline operators. Management believes that the risk of nonper-investments $ 260 756 $ 260756 $ 203625 $ 203625 formance by these counterparties is not sign.ficant. If the contracts Long term debt, had been terminated at Dec. 31,1996, $0.5 million would have been including payable to Cenerprise for natural gas price fluctuations to date. current porton $1853 786 $1838 40B $1709646 $1781066 g NSP has three interest rate swap agreements with notional amounts For cash, cash equivents and short-term investments, the carrying totalling $320 million. These swaps were entered into in conjunction amount approximates f air olue berw of the short matunty of those with first mortgage bonds. As summarized below, these agreements mstmments. The fair values of the Company's long-term investments, effectively convert the interest costs of these debt issues from fixed to mamry debt securities in an external nuclear decommissioning fund, variable rates based on six-month London Interbank Offered Rates are estimated based on quoted market p' ices for those or similar (LIBOR), with the rates changing semiannually. investments. The fair value of NSP's long term debtis estimated based on the quoted market prices for the same or similar issues, or the cur-Notional Amount Term of Net Effective rent rates for debt of the same remainiql maturities and credit quality. (Mdlions Swap Interest Cost at Series o/ dollars / Agreement Dec. 31,1996 i l Derivatives NRG has entered i,to seven forward foreign currency S A% Senes due I exchange contracts with econterparties to hedge exposure to cur-Oct.1,1997 $100 Maturity 5.73 % l rency fluctuations to the Jxtent permissible by hedge accounting 5M% Series due s eqwrements. Pursuant h these contracts, transactions have been exe-Feb.1,1999 $200 Maturity 5.34 % cuted that are designeJ to protect the economic value in U S. dollars of 7x% Series due NRG's quity invest nents and retained estnings, denominated in March 1,2023 $ 20 March 1,1998 7.89 % l Australian dollars and German deutsche marks (DM). As of Dec. 31, 1996, NRG had $132 milliJn of foreign currency denommated assets Market risks associated with these agreements result from short-term that Wern hedged by forward foreign currency exchange contracts interest rate fluctuations. Credit risk related to nonpe-formance of the with a notional value of $123 milhon in addition, NRG had approxi-counterparties is not deemed significant, but would result in NSP ter-matelv %2 million of foreign currency denominated retamed earnings minating the swap transaction and recognizing a gain or loss, depend-froci foreign projects that were hedged by forward foreign currency ing on the f air market value of the swap. The interest rate swaps serve exchange contracts with a n(tional value of $59 million. Because the to hedge the market risk associated with fixed rate debt in a declining eff ects of both currency trarstation adjustments to foreign invest. interest rate environment. This hedge is produced by the tendency for ments and currency hdp instrument gains and losses are recorded changes in the fair market value of the swap to be offset by changes in on a net basis in sto#,olders' equity (not earnings), the impact of sig-the present value of the liability attributable to the fixed rate debt nificant changes b currency exchange rates on these items would issued in conjunction with the interest rate swaps. If the interest rate have an immatr.ial effect on NSP's financial condition and results of swaps had been discontinued on Dec. 31,1996, $2.0 million would have j operations in connection with the forward foreign currency exchange been payable by the Company, while the present value of the related contracta, cash collateral of $16 million was required at Dec. 31,1996, fixed rate debt was $3.5 million below carrying value. l which is reflected as other current assets on NSP's balance sheet. The j forward foreign currency exchange contracts terminate in 1998 through Letters of Credit NSP uses letters of credit to provide financial guaran-l 2006 and require foreign currency interest payments by either party dur-tees for certain operatmg obligations (including NSP workers' com-l mg each year of the contract if the cmtracts had been terminated at pensation benefits and ash disposal site costs, and Cenerprise natural j Dec 31,1996, $13.3 mil. ion would have been payable by NRG for cur. gas purchases) and for nonregulated equity investment commitments. rency exchange rate changes to date. Management believes NRG's At Dec. 31,1996, letters of credit of $70 million were outstanding. exposure to cred,t risk due to nonperfor nar ce by the counterparties to Generally, the letters of credit have terms of one year and are auto-its forward exchange contracts is not signi icant, based on the invest-matically renewed, unless prior written notice of cancellation is pro-ment grade rating of the counterparties. vided to NSP and the beneficiary by the issuing bank. The contract amounts of these letters of credit approximate their f air value and are subject to fees competitively determined in the marketplace. 41

Notes to Financial Statements Northern States 1%wer Company, Minnewra and Subsidiaries 12.JOINTPLANT DWNERSHIP The Company is a participant in a jointly owned 855 megawatt coal DOE facility is available, including pursuing the establishme hred electric generating umt Sherburne County generating station-facihty for interim storage of used nuclear fuel as part of a con unit No. 3 (Sherco 3), which began commercial operation Nov.1,1981 electric utihties. lf on-site 'emporary storage at NSP's nuclear Undivided interests in Sherco 3 have been financed and are owned by scaches approved capacity, the Company could seek interim s the Company (59 percent) and Southern Minnesota Municipal Po this or another contracted private acihty, if available. Agency (41 percent). The Company is the operating agent under the wer joint ownership agreement. The Company's share of related expe in 1994, the Company received Minnesota legislative approval for $herco 3 since commercial operations began are included in Util t additionalon-site temporary storage facilities at NSP's Prairie Is nses Operating Expenses. The Company's share of the gross cost recorded plant, provided the Company satisfies certain requirements. iy in Utility Plant at Dec. 31,1996 and 1995, was $5B8 076 000 andSeventeen dry cask containers, each of which can store appro $585.625,000, respectively. The corresponding accumulated provisions mately one half year's used fuel, were approved to become available for depreciation were $168,641,000 and $150,022,000. as follows: five immediately in 1994; four more in 1996 if an applic

13. NUCLEAR OBLIGATIONS for en alternative storage site is filed, an effort to locate such a s made and 100 meganatts of wind generation is available or con-Fuel Disposal NSP is responsible for the temporary storage of used tracted for construction; and the final eight in 1999, unless the spe nuclear fuel from the Company's nuclear generating plants. Under a con-fied alternative site is not operational or under construction or ce tract with the Company, the DOE is obligated to assume the responsibil resource commitments are not met, and the Minnesota Legislature sty for permanent storage or disposal of NSP's used nuclear fuel Tho-revokes its approval. (See additional discussion of legislative commi Company has been fundmg its portion of the DOE's perrr.anent disposo ments in Note 14J NSP has loaded used nuclear fuelint program since 1981. Funding took place through an internd siriing fund dry cask containers as of Dec. 31,1996, and in January 1997 loade until 1983, when the DOE began assessing fuel disposal fees under the casks six and seven. With the dry cask storage facihties approved in Nuclear Waste Pohey Act of 1982 based on a charge of 0.1 cent per kilo 1994 for the Prairie Island nuclear generating plant, the Com watt. hour sold to customers from nuclear generation. Fuel expense-beheves it has adequate storage capacity to continue operation o includes DOE fuel dispusal assessments of $11.3 million, $123 million nuclear plants until at least 2003 and 2004 for Prairie Island Unrts and $10 6 milhon for 1996,1995 and 1994, respectively. The cumulative 2, respectively. The Monticello nuclear plant has storage capac amount of such assessments paid by NSP to the DOE through Dec. 31 continue operations until 2010. Storage availabikty to permit operatio 1996, was approximately $240 milhon. Currently, it is not determmable if, beyond these dates is not assured at this time.

the amount and method of the DOE's assessments to all utilit e sufficient to fully fund the DOE's permanent storage or disposal facihty. i s will be Nuclear fuel expenses in 1996,1995 and 1994 include about $4 m $5 milhon and $5 rnithon, respectively, for payments to the 00E fo The Nuclear Waste Pohey Act stipulated that the 00E execute contracts decommissioning and decontamination of the DOE's uranium enric with utilstres that require DOE to begin accepting spent nuclear fuel no ment facihties. The DOE's initial assessment of $46 milli later than Jan. 31,1998 Accordingly, NSP has been providing with reg Company was recorded in 1993. This assessment will be payabl latory and legislative approval,its own temporary on-site storage facsh-u- annualinstallments from 1993-2008 and each installment is being tres at its Monticello and Prairie Island nuclear plants with a capacit amortized to expense on a monthly basis in the 12 months follo suff.cient ior used fuel from the plants until at least that date. In 1996 the y each payment. The most recent installment paid in 1996 was $3.8 milli Company and 13 other major utihties were successful in a lawsuit future installments are subject to inflation adjustments under DOE against the DOE to clanfy the DOE's obligation to accept spent nuclear The Company is obtaining rate recovery of these DOE assessmen fuel beginning in 1998, in July 1996, the U S. Court of Appeals for the through the cost-of-energy adjustment clause as the assessments a District of Columbia Circuit unanimously ruled that the Nuclear Waste amortized. Accordingly, the unamortized assessment of $41 million at re Pohey Act creates an unconditional obhgation for the DOE to begin Dec. 31,19%, has been deferred as a regulatory asset and is rep acceptance of spent nuclear fuel by Jan. 31,1998. The DOE did not seek under the caption Environmental Costs in Note 9. U S. Supreme Court review. The ruhng is a very positive development for the industry regarding concerns about the storage and dispos l f Plant Decommissioning Decommissioning of all Company nucleat nuclear fuel. In December 1996, the DOE notified commercial spent fuel facihties is planned for the years 2010-2022, using the prompt disman a o used owners of an anticipated delay in acceptmg used nuclear fuel by the tlement method. The Company currently is following industry practi required date of Jm 31,1998, and conceded that a permanent storage or by ratably accruing the costs for decommissioning over the approve ce disposal facihty will not be available until at least 2010. Because of the cost recovery period and includmg the accruals in Utahty Plant - DOE's madequate progress to provide a permanent repository the MPUC Accumulated Depreciation, as discussed in Note 1. Consequentl is investigating whether continued payments to fund the DOE's perma total decommissioning cost obhgation and correspondmg asset cur-nent disposal program is prudent use of ratepayer money. The outcome-rently are not recorded in NSP's fmancial statementt The FASB has of this investigation is unknown at this time. On Jan. proposed new accounting standards which,if approved as expectedin Company, along with more than 30 other electric utibties and 45 state 31,1997 the 1997, would require the full accrual of nuclear plant decommiss agencies, including the Minnesota Department of Pubhc Service filed and certain other site exit obligations beginning as soon as 1998 another lawsuit against the DOE requestmg authority to withhold pay Dec. 31,1996, estimates, NSP's adoption of the proposed acco ments to the DOE for the permanent disposal program, in the meantime-would result in the recording of the total discounted decommission NSP is investigating all of its alternatives for used fuel storage until a, obbgation of $592 million as a liabihty, with the correspondmg costs capitahzed as plant and other assets and depreciated over the ope at

Notes to Financial Statements Northern States l'ower 0,mpany, Niinnewca and subsidiaries life of the plant. The obligation calculation rnethodology proposed by the Decommissioning expenses recognized include the following FASB is slightly different from the ratemaking methodology that derives components: the decommissioning accruals currently being recovered in rates, as dis-cussed below. The Company has not yet determined the potential!mpact (Thousands of dollars) -M 1995 1994 of the FASB's proposed changes in the accounting for site exit obliga-Annual decommissiomng cost accrual tions other than nuclear decommissioning (such as costs of removal). reported as depreciation expense: However, the ultimato decommissioning and site exit costs to be accrued Externally funded $33178 $33178 $33188 are the same under both methods and, accordingly, the effects of regu. Internally funded lation are expected to minimize or eliminate any impact on operating (including interest costs) 1 268 1 174 1 109 expenses and resutts of operations from this future accounting change. Interest cost on externally funded decommissioning obligation 5 246 5 966 3 540 Consistent with cost recovery in utility customer rates, the Company Earnings from external trust funds (6 294) (5 620) ~ (3 539) records annual decommissioning accruals based on periodic site-spe-Net decommissioning cific cost studies and a presumed level of dedicated fundmg. Cost accruals recorded $33 398 $34 698 $34 298 studies quantify decommissioning costs in current dollars. Since the costs are expected to be paid in 2010-2022, funding presumes that cur-Decommissioning and interest accruals are included wtth the accumu-rent costs will escalate in the future at a rate of 4.5 percent per year. lated provision for depreciation on the balance sheet interest costs and The tutal estirnated decommissioning costs that will ultimately be paid, trust earnings associated with externally funded obligations are reported net of incomo earned by external trust funds, is currently being in 0ther income and Expense on the income statement. accrued using an annuity approach over the approved plant recovery period This annuity approach uses an assumed rate of return on fund. The MPUC last approved a nuclear decommissioning study and related ing, which is currently 6 percent (net of tax) for external funding and nuclear plant depreciation capital recovery request in 1994 based on a approximately 8 percent (net of tax) for internal funding. 1993 study. Although management expects to operate the Prairie Island units through the end of their licensed lives, the approved capital recov-The total obligation for decommissioning currently is expected to be cry would allow for the plant to be fully depreciated (including the funded apptoximately 82 percent by external funds and 18 percent by accrual and recovery of decommissioning costs)in 2008, about six years internal funds, as approved by the MPUC. Rate recovery of internal earlier than the end of its licensed life. The approved recovery period for funding began in 1971 through depreciation rates for removal expense, Prairie Island has been reduced because of the uncertainty regarding and was changed to a sinking fund recovery in 1981. Contributions to used fuel storage, as discussed previously. In October 1996, the the external fund started in 1990 and are expected to continue until Company submitted to the MPUC a revised nuclear decommissioning plant decommissioning begins. Costs not funded by external trust study The filing recommends no change to current accruals and fund-assets (mcluding accumulated earnings) will be funded through inter-ing. Approval was received from the MPUC in February 1997. The nally generated funds and issuance of Company debt or stock. The Company believes future decommissioning cost accruals will continue assets held in trusts as of Dec. 31,1996, pomanly consisted of invest-to be recovered in customer rates. I ments m fixed income secunties, such as tax-exempt municipal bonds and U.S. government secunties, which mature in three to 27 years, and

14. COMMITMENTS AND CONTINGENT LIABILITIES common stock of public companies. The Company plans to reinvest Legislative Resource Commitments in 1994, the Minnesota Legislature matured secunties until decommissioning commences.

established several energy resource and other commitments for NSP l to fulfill to obtain the Prairie Island temporary nuclear fuel storage At Dec. 31,1996, the Company has recorded and recovered in rates facility approval, as discussed in Note 13. The additional commitments, l cumulative decommissioning accruals of $422 million. The following which can be rnet by building, purchasing or (in the case of biomass) l table summarites the funded status of the Company's decommission-converting generation resources, are: ing obligation at Dec. 31,1996: Power Type Megawatts Required Contract Deadline (Thousands of dollarsJ wa Wind 100 0) (Additiona') _ 12/31/96(2) Estimated decommissionmg cost obligatmn Wind 100 (Additional) 12/31/98(3) from most recent approved study (1993 dollars) $ 750 824 Biomass ] (Additional) 12C1/98 (4) Effect of escalating costs to 1996 dollars . Wmd 200 (Additional) 12/31/02 (at 4 5% per year) bl5 991 Biomass 75 (Additional) 12/31/98(5) Estimated decommissionmg cost obligation in current dollats 856 815 (I)In addition to 25 megawatts of wind generation currently installed Ettect of escalatmg costs to payment (2)Contractpending MPUC approval date (at 4 5% per year) 987 970 (3) Proposals under review by independent evaluator Estimated future decommissioning costs (undiscounted) $1_844 785 (4) Developer selected for 75 megawatts; negotiating contract l Effect of discounting obligation (using risk-free (5} Solicited bids for remaining 50 megawatts of the l25-megawatt interest rate) (1 253 038) totalbiomass requirement Discounted decommissionmg cost obligation 591 747 External trust fund assets at fair value 260 756 _ Discounted decommissioning obligation m excuss of assets currently held in external trust $ 330991 43 l l

Notes to Financial Statements %rthern Scares IW er Company, hiinnewra and Subsidiaries The Company is complying with the requirements of these resource commitments Twenty-five megawatts of third-party wind generation has statute. The Company has implemented programs to begin meeting the been fully operational since May 1994. With respect to the additional 100 other legislative commitments. The Company's capital commitments, megawatts of wind energy to be under contract by the end of 1996, the disclosed below, include the known effects of the 1994 Prairie Island Company has obtained a site designation from the Minnesota legislation. The impact of the legislation on power purchase commit-Environmental Quahty Board (MEGB), and selected Zond Minnesotaments and other operating expenses is not yet determinable. Development Corporation il (Zona to supply the wind energy. The Company resolved a confhet over wind rights and other issues with an Capital Commitments NSP estimates utility capital expenditures, unsuccessful bidder and signed an agreement with Zond allowing con-including acquisitions of nuclear fuel, will be $420 million in 1997 and struction of the 100 megawatts of wind power. In October 1996 NSP $2.0 billion for 1997-2001. There also are contractual commitments for issued a request for proposal for another 100-megawatt increment ofthe disposal of used nuclear fuel. (See Note 13.) wind power to fulfill the cumulative 225-megawatt requirement by Dec. 31,1998. Bids were received on Feb. 7,1997, and are being evaluated by As of Dec. 31,1996, NRG is contractually committed to additional equity an independent evaluator. A decision is expected by the summer of 1997. investments of approximately $37 rnillion in 1997 and approximately $200 million for 1997-2001 for various international power generation In July 1996, Minnesota Agri-Power Project was selected to supply 75 projects, in addition, in 1996 NRG has provided a $10 million loan com-megawatts of farm grown, closod-loop biomass generation resources mitment to a wholly owned subsidiary of NRG Generating (U.S.) inc. to be operational to the NSP system by Dec. 31,2001. The 75 megawatts (NRCG), an unconsolidated affiliate of NRG,in order for the NRCG of biomass generation resources represents Phase I of NSP's legislative subsidiary to fund its capital contribution to a cogeneration project cur-commitment to have 125 megawatts of such generation operational byrently under construction. No funds have been disbursed to date on the commitment. However, NRG expects to fund this loan sometime in 1997. Dec 31,2002. Also in 1996, NRG executed an agreement whereby NRG is obligated Since 1994, NSP has spent nearly $3 rnillion in a good faith offort to locate to provide to NRCG power generation investment opportunities in an alternate spent fuel storage site in Goodhue County, as required by the United States over a three-year period. These projects must have the 1994 Mmnesota Legislature. In 1995, the Company filed documents in aggregate, over the three-year term, an equity value of at least $60 wrth the MEGB outlining two alternative Goodhue County sites to be con-mihion or a minimum of 150 net rnegawatts. In addition, NRG has com-sidered for the development of an interim used nuclear fuel storage facil-mitted to finance NRCG's investment in the projects to the extent funds sty, as the Legislature required. In August 1996, NSP submitted a license are not available to NRCG on comparable terms from other sources apphcation to the Nuclear Regulatory Commission (NRC) for an alterna-tive site in Goodhue County to provide temporary storage for spent Leases Rentals under operating leases were approximately $29 million, nuclear fuel. The application to the NRC was required before casks six $27 milhon end $24 million for 1996,1995 and 1994, respectively. Future through nine could be used at the existing facihty for temporary spentcommitments under these leases generally decline from current levels. I nuclear fuel storage. in 0;tober 1996, the MEQB terminated the alternate spent fuel storage facil9 siting process in Goodhue County and certified fuel Contracts NSP has contracts providing for the purchase and that NSP has met tha requirements necessary to use the cads at tha delivery of a significant portion of its current coal, nuclear fuel and Prairie Island sclear generating facihty. In October 1996, the Prairie natural gas requirements. These contracts, which expire in various island Dakota indian Tnbe filed suit wrth the Minnesota Court of Appeals years between 1997 and 2013, require minimum contractual purchases challenging the MEQB actions. NSP is defending the legahty of the and deliveries of fuel, and additional payments for the rights to pur-MEQB's actions. The Tribe also asked that the Court stay the MEGB chase coalin the future. In total, NSP is committed to the minimum actions while the lawsuit is pending, which would prevent NSP from purchase of approximately $415 million of coal, $20 million of nuclear usrng casks six through nine. In November 19%, the Court denied the fuel and $385 milhon of natural gas and related transportation, or to Tobe's motion for a stay and referred the Tribe to the MEQB. In make payments in lieu thereof, under these contracts. In addition, NSP December 1996, the Tribe then asked that the MEQB stay its actionsis required to pay additional amounts depending on actual quantities while the lawsuit is pending. In December 19%, the MEQB denied theshipped under these agreements. As a result of FERC Order 636, NSP Tnbe's request for a stay of further loading of casks six through nine. In has been very active in developing a mix of gas supply, transportation January 1997, the Tribe again requested the Court stay the MEQB actions and storage contracts designed to meet its needs for retail gas sales. dunng the pendency of the suit. The Company loaded casks six and The contracts are with several suppliers and for various periods of seven in January 1997. In January 1997, the Court denied the Tribe'stime. Because NSP has other sources of fuel available and suppliers motson for a stay A decision by the Court on the ments is expected in late are expected to continue to prov;de reliable fuel supplies, risk of loss spring 1997. In November 1996, the Company requested that the NRC put from nonperformance under these contracts is not considered the bcense apphcation on hold while the Court reviews the lawsuit by the significant. In addition, NSP's risk of loss (in the form of increased l Tobe. In December 1996, the NRC granted the Company's request to sus-costs) from market price changes in fuelis mitigated through the cost-pend review of the application. of-energy adjustment provision of the ratemaking process, which pro-vides for recovery of nearly all fuel costs. Other commitmwnts established by the Legislature include a low-income discount for electric customers, required conservation improvement expenditures and various study and reporting requirements to a legisla-trve electric energy task force in 1995, the MPUC approved the Company's low-income discount programs in accordance with the 44

Notes to Financial Statements ' Northern states Power Onnpany, Minnesora and sulnidiaries Power Agreements The Company has executed several agreements The Company purchases insurance for property damage and site wrth the Manitoba Hydro Electric Board (MH)for hydroelectricity. A decontamination cleanup costs with coverage hmrts of $2.0 bilhon for summary of the agreements is as folluws: each of the Company's two nuclear plant sites. The coverage consists Years Megawatts of $500 milhon from Nuclear Mutual Limited (NML) and $1.5 bilhon from Participation Power Purchase 1997-2005 500 Nuclear Electric Insurance Limited (NEIL). Seasonal Diversity Exchanges: Summer exchanges from MH 1997-2014 150 NEIL also provides business interruption insurance coverage,incluw..y 1997-2016 200 the cost of replacement power obtained during certain prolonged Winter exchanges to MH 1997-2014 150 accidental outages of nuclear generating units. Premiums billed to NSP 1997-2015 200 from NML and NEIL are expensed over the policy term. All companies 2015-2017 400 insured with NML and NEIL are subject to retrospective premium adjust-2018 200 ments if losses exceed accume'Jed reserve funds. Capital has been accumulated in the reserve f ods of NML and NEll to the extent that the The cost of the 500-megawatt participation power purchase commit-Company would have no exposure for retrospective premium assess-ment is based on 80 percent of the costs of owning and operating the ments in case of o single incident under the business interruption and Company's Sherco 3 generating plant (adjusted to 1993 dollars). The the property damage insurance coverages. However,in each calendar future annual capacity costs for all MH agreements is estimated to be year,the Company could be subject to maximum assessments of approx-approximately $58 milhon. These commitments to MH represent about imately $5 million (five times the amount of its annual premium) and 18 percent of MH's system capabikty in 1997 and account for approxi- $26 million (generally five times the amount of its annual premium)if mately 10 percent of NSP's 1997 electnc system capabikty. The risk of losses exceed accumulated reserve funds under the business interrup-loss from nonperformance by MH is not considered significant, and tion and property damage coverages, respectively. the risk of loss from market price changes is mitigated through cost-of-energy rate adjustments. Environmental Contingencies Other long term liabilities include an accrual of $40 million, and other current liabilities include an accrual of The Company has an agreement with Minnkota Power Cooperative for $6 million at Dec. 31,1996, for estimated costs associated with environ-the purchase of summer season capacity and energy. From 1997 mentai remediation. Approximately $34 million of the long-term liability through 2001, the Company will buy 150 megawatts of summer season and $4 million of the current habihty relate to a DOE assessment for capacity for $12 milhon annually. From 2002 through 2015, the Company decommissioning a federal uranium enrichment facihty, as discussed in l will purchase 100 megawatts of capacity for $10 million annually. Note 13. 0ther estimates have been recorded for expected environmen-Under the agreement, energy will be priced at the cost of fuel con-tal costs associated with manufactured gas plant sites formerly used by sumed per megawatt hour at the Coyote Generatn.J Station in North the Company, and other waste disposal sites, as discussed below. Dakota. The Company also has a seasonal (summer) purchase power agreement with Minnesota Power for the purchase of 173 megawatts, These environmentalliabikties do not include accruals recorded (and includmg reserves, from 1997 2000. The annuel cost of this capacity collected from customers in rates) for future nuclear fuel disposal will be approximately $2 million. costs or decommissioning costs related to the Company's nuclear generating plants. (See Note 13 for further discussion.) The Company has agreements with several nonregulated power producers to purchase electric capacity and associated energy. The The Environmental Protection Agency (EPA) or state environmental 1997 cost of these commitments for nonregulated installed capacity is agencies have designated the Company as a "potentially responsible approximately $36 million for 379 megawatts of summer capacity. This party" (PRP) for 13 waste disposal sites to which the Company annual cost will mcrease to approximately $37 million-$44 million for allegedly sent hazardous materials. Nine of these 13 sites have been l 1998-2018 and then decrease to approximately $25 million-$29 million for remediated and, consistent with settlements reached with the EPA l 2019 2027 due to the expiration of existing agreements and an additional and other PRPs, the Company has paid $1.7 million for its shars of the l agreement for the purchase of 245 to 262 megawatts effective May 1997. remediation costs. While these remediated sites will continue to be j monitored,the Company expects that future remediation costs,if any, l Nuclear Insurance The Company's public liabihty for claims resulting will be immaterial. Under applicable law, the Company, along with from any nuclear incident is hmited to $8 9 billion under the 1988 Price-each PRP, could be held jointly and severally liable for the total remedi-Anderson amendment to the Atomic Energy Act of 1954. The Company ation costs of PRP sites. Of the four unremediated sites,the total reme-has secured $200 rnithon of coverage for its pubhc liabikty exposure diation costs are currently estimated to be approximately $18 million. If with a pool of insurance companies. The remaining $8.7 billion of expo-additional remediation is necessary or unexpected costs are incurred, ( sure is funded by the Secondary Financial Protection Program, avail-the amount could be higher. The Company is not aware of the other l able from assessments by the federal government in case of a nuclear parties'inabikty to pay, nor does it know if responsibihty for any of the I accident. The Company is subject to assessments of up to $79 million sites is in dispute. For these four sites, neither the amount of remedia-for each of its three heensed reactors to be apphed for public liability tion costs nor the final method of their allocation among all designated arising from a nuclear incident at any licensed nuclear f acihty in the PRPs has been determined. However, the Company has recorded an Umted States. The maximum funding rquirement is $10 milhon per estimate of approximately $1.4 million for its share of future costs for reactor during any one year. these four sites, including $0.6 milhon, which is expected to be paid in 1997. While it is not feasible to determine the ultimate impact of PRP site remediation at this time, the amounts accrued represent the best 45 i l

Notes to Financial Statements Lrthern St.srcs hmer Com;uny, Minnewta an<f Subsidiaries current estimate of the Company's future habihty It is the Company's practice to vigorously pursue and, if necessary, htigate with insurers a study was initiated in 1996 to determme the cost and method of to recover incurred remediation costs whenever possible Through lit cleanup, which is expected to begin in 1997. As of Dec. 31,1996 the igation, the Company has recovered from other PRPs a portion of the-Company has paid $5.4 mdhon on these six active srtes and has re remediation costs paid to date. Management believes remediation en estimated habihty of approximately $4 8 rn than for future costs, with costs incurred, but not recovered from insurante Carriers or other payment expected over the next 10 years. This estimate is based on pri parties, should be allowed recovery in future ratemaking. Until the expenence and includes investigation, remediation and litigation costs. Company is identified as a PRP, it is not possible to predict the timing As for the eight inactive sites, no liability has been recorded for remed or amount of any costs associated with sites, other than those dis-tion or investigation because the present land use at each of these site cussed above. does not warrant a response acbon. While it is not feasible to determine at this time the ultimate costs of gas site remediation, the amounts The W4consin Company potentiauy may be involved in the cleanup and accrued represent the best current estimate of the Company's future lia-remediation at four sites. Two sites are sohd and hazardous waste landhli bility for any required cleanup or remedial actions at these former sites in Eau Claire and Amery, Wis. The Wisconsin Company contends operating sites. Management also believes that incurred costs, which that it did not dispose of hazardous wastes in these landfills during the are not recovered from insurance carriers or other parties, should be time penod in question. Because neither the amount of cleanup costs allowed recovery in future ratemaking. During 1994, the Company's nor the final method of their allocation among all designated PRPs has utility received approval for deferred accounting for certain gas remedi-been determined,it is not feasible to predict the outcome of these mat-ation costs incurred at four active sites, with final rate treatment of such ters at this time. The third site is a landfillin Hudson, Wis, which is one costs to be determined in future general gas rate cases. of the PRP waste disposal sites discussed previously as part of the Company's sites. The fourth site, in Ashland, Wis., contains The Clean Air Act, including the Amendments of 1990(the Clean Air creosote / coal tar contamination. In 1995, the Wisconsin Department of Act), calls for reductions in emissions of sulfur dioxide and nitrogen Natural Resources (WDNR) notified the Wisconsin Company that it is a oxides from electric generating plants. These reductions, which will be PRP at this site. At this time, the WDNR has determined that the phased in, began in 1995. The majority of the rules implementing this Wisconsin Company is the only PRP at this site. WDNR's consultant is complex legislation has been finalized. NSP has invested significantl prepanng a remedial option study for the entire Ashland site, which over the years to reduce sulfur dioxide emissions at its plants. No addi-includes the Wisconsin Company's portion and two other adjacent por-tional capital expenditures are anticipated to comply with the sulfur tions. Until this study is completed and more information is known con-dioxide emission limits of the Clean Air Act. NSP is stdl evaluating ho cerning the extent of the final remediation required by the WDNR, the best to implement the nitrogen oxides standards. The Company's c remediation method rmlected, the related costs, the various parties tal expenditures include some costs for ensuring comp! ance with the involved, and the extent of the Wisconsin Company's responsibihty if Clean Air Act's other emission requirements; other expenditures m any, for sharing the costs, the ultimate cost to the Wisconsin Company be necessary upon EPA's finahration of remaining rules. Because NSP and timing of any payments related to the Ashland site are not deter-is stillin the process ofimplementing some provisions of the Clean Air minable. At Dec 31,1996, the Company had recorded an estimated liabd-Act, its total financial impact is unknown at this time. Capital expende sty of $900,000 for future remediation costs associated with the tures for opacity compliance are considered in the capital expenditure WisconsinCompany-ownedportionof the Ashlandsite ThroughDec 31 commitments disclosed previously The depreciation of these capital 1996, the Wisconsin Company has incurred approximately $525 000in costs will be subject to regulatory recovery in future rate proceedings. actual expenditures, excluding future remediation costs for this site. Based on a recent Pubhc Service Commission of Wisconsin decision to Severalof NSP's operating facihties have asbestos containing mater. allow recovery of incremental costs incurred for this site in 1997 rates, ial, which represents a potential health hazard to people who come in the Wisconsin Company has recorded a regulatory asset for the accrued contact with it. Governmental regulations specify the timing and and actualexpenoitures related to the Ashland site The ultimate cleanup nature of disposal of asbestos containing materials. Under such and remediation costs at the Eau Claire, Amery and Ashland sites and requirements, asbestos not readily accessible to the environment the extent of the Wisconsin Company's responsibihty,if any for sharing need not be removed until the f acilities containing the material are such costs are mt known at this time, but may be significant.demobshed. Although the ultimate cost and timing of asbestos removal is not yet known,it is estimated that removal under current regulations The Company also is continuing to investigate various properties which would cost $47 mdhon in 1996 dollars. Depending on the timing of rt presently or previously owned, The properties were formerly sites of asbestos removal, such costs would be recorded as incurred as oper-gas manufactunng. gas storage plants or gas pipehnes. The purpose of ating expenses for maintenance projects, capital expenditures for this nvestigation is to determine d waste materials are present if they construction prolects or removal costs for demohtson projects. are an environmental or health risk,if the Company has any responsibility for remedial action and if recovery under the Company's insurance poh-Environraental habihties are subject to considerable uncertainties that cres can contribute to any remediation costs. The Company has already affect NSP's abihty to estimate its share of the ultimate costs of remedia-remediated one srte, which continues to be monitored The Company has tion and pollution control efforts. Such uncertainties involve the nature paid $2 5 milhun to remediate this site and expects to incur in the future and extent of site contamination, the extent of required cleanup efforts, onlyimmaterialmorutonng costs related to this remediated site. Another varying costs of alternative cleanup methods and pollution control tech-14 gas srtes remain under investigation, and the Company is actively tak-nologies, changes in environmental remediation and pollution control ing remedial action at four of the sites. In addction, the Company has requirements, the potential effect of technologicalimprovements, the been notified that two other sites eventuaHy will require remediation, and number and financial strength of other potentially responsible parties at multiparty sites and the identification of new environmental cleanup sites. 46

F Notes to Financial Statements Northern Mates 1%cr Coinguny, Minnewra and Subsidiaries NSP has recorded and/or disclosed its best estimate of expected future one suit with multiple plaintiffs. In February 1997, NSP settled six of the environmental costs and obligations, as discussed previously. lawsuits, including all of the death and serious burn cases. Most,if not all, of the settlement will be paid by NSP's insurer. Additional mediation is Legal Claims in the normal course of bus: ness, NSP is a party to routine scheduled for earfy 1997. A trial to decide any additional civil liability and claims and htigation arising from prior and current operations. NSP is the parties responsible for the explosion has been scheduled for May actively defending these matters and has recorded an estimate of the 1997, with the damages portion of the trial scheduled for six months probable cost of settlernent or other disposition. thereafter. The ultimate costs to the Company are unknown at this time. In 1993, a natural gas explosion occurred on the Company's distnbution in late 1996, the Company was named in a class action lawsuit com-system in St. Paul, Minn. In 1995, the National Transportation Safety menced by two NSP commercial customers who claim that the Board found Irttle,if any, fauft with the Company's actions or conduct. expected energy savings from NSP's lighting efficiency program were Total damages related to the explosion are estimated to exceed $1 mil-misrepresented. The Company denies allliabihty with respect to the hon. The Company has a self insured retention deductible of $1 million, customers' claims. However, the ultimate costs to the Company,if any, with generalliabihty coverage of $150 million, which includes coverage are unknown at this time. for allinjuries and damages. Eighteen lawsuits have been filed, including

15. SEGMENT INFORMATION Year Ended Dec. 31 (Thousands of dollars)

~ M 1995 1994 Utikty operating income beforS income taxes Electric $ 469321 $ 444 687 $ 399185 Gas 58133 48 340 1 61 Total operating income before income taxes S 527 454 $ 493 027 $ 437 546 Utshty depreciation and amortization Electoc i yo n28 $ 266 231 $ 252 322 Gas ?6 604 23 953 21 479 Total depreciation and amortization $ 30647 $ 290184 $ 273 801 Utikty capital expenditures Electric utihty $ 323 532 $ 317 750 $ 303 8% Ges utihty _ 42 225 37 215 60 183 l Common utikty 20 898 31 057 22 947 Total utikty caprtal expenditures $ 386 655 $ 386 022 $ 387 026 Identifiable assets Electnc utshty $4 735330 $4 751650 $4 634 511 Gas utikty 649 218 600 738 556 975 Totalidentifiable assets $5 384 548 $5 352 388 $5191486 Other corporate assets

• 1 252 352 876 197 758 246 Total assets

$6 636 900 $6 228 585 $5 949 732

• Includes equity investments for nonregulated energy projects outside of the Umted States of $295 million in 1996, $185 million in 1995 and $134 millron in 1994.

l 1 l 47 l L_

I hotes to Financial Statements Northern Scares ther Company, Minnewca and Subsfiaries

16. SUMMAREZD QUARTERLY FINANCIAL D ATA (UNAUDITED)

Quarter Ended Utahty operating ievenues Utahty operating income 3718 709_ _ _ _ $$$2258_ _ _ _ $633 258_ _$709981 Net income _ _ 89 2_77_ _ ~ Earnings available for common stock ~ 67210 _ 70 301_ _ __ 105,456 _ _ 100 510 ~ ~ 43 382 ~ ~~~ 84 239 79 708 Earnings per. average common share 64149 ] [40321))~]81]78[][76646[ k Dividends declared per common share . $.94 . $.59_ _ _ $1.18_ _ _.$_1.11 Stock prices 7 gh $.675 $.690 $.690 $.690 hi -low $53 % _ _ _ _ $49 %_ ._ _ $49 % ._$49 % $47 % _ _ _$45 % _ _ _ _ $44 %.. _. _ $45 % __ Thousandsofdo//srs) Quarter Ended ( Utikty operatmg revenues March 31,1995 June 30,1995 Sept. 30,1995 Dec. 31,1995 Utihty operating income $661167 $5_89 673_ _ Net income 87 698.. _ _ _68 162 _. $664 976 _ _ $652 768 ~ Earnings.available for common stof 68 190 59 811 _, 111_ 592 _ _ _ 78 42 _7 _ ' 64 989 88 803 58 991 Earnings per_ average common share _ 85_742. 55 929 56 686 Dividends declared per common share . $ 97 $.84 $1. 27_ Stock prices - high $.660 $.675 $.675 $.82_ S.675 -low . $46 % . $47 %. $46,%. $49M $42 M $42 % $42% $45%

17. MERGER AGREEMENT WITH WISCONSIN ENERGY CORPORATION (WEC)

SUMMARIZED PRO FORMA FINANCIAL. As previously reported in the Company's Current Report on Form 9-K, INFORMATION (UNAUDITED) dated April 28,1995, and filed on May 3,1995, and Quarterfy Reports on The fotowing summary of unaudited pro forma financialinformation Form 10-0, the Company and WEC have entered into an Agreement reflects the adjustment of the historical consolidated balance sheets and Plan of Merger (Merger Agreement), which provides for a busi-and statements of income of NSP and WEC to give effect to the ness combination involving the Company and WEC in a

• merger-of Transaction to form Primergy and a new subsidiary structure. The equals
• transaction (the TransactionL See further discussioe.4 tne unaudited pro forma balance sheet information gives effect to the Transaction in the Management's Discussion and Analysis, factors Transaction as if it had occurred on Dec. 31,1996. The unaudited pro Affecting Results of Operations-Proposed Merger section.

forma income statement information gives effect to the Transaction as if it had occurred on Jan.1,1996. This pro forma information was Primergy Corporation (Primergy), which will be registered under the prepared from the historical consolidated financial statements of Pubhc Utihty Holding Company Act of 1935, as amended, will be the NSP and WEC on the basis of at. counting for the Transaction as a parent company of both the Company (which, for regulatory reasons, pooling of interests and should be read in conjunction with such his-ritt reincr.rporate in Wisconsin) and WEC's current principal utility torical consolidated financial statements and related notes there subsidbry. Wisconsin Electric Power Company, which will be NSP and WEC. The following informatico is not necessarily indicative renamed

• Wisconsin Energy Company
• lt is anticipated that, follow-of the financial position or operating results that would have I

ing the Transaction, except for certain gas distribution properties occurred had the Transaction been consummated on the dates for transferred to the Company, the Wisconsin Company will be merged which the Transaction is being given effect, nor is it necessarily into Wisconsin Energy Company and that some of the Company's indicative of future Primergy operating results or financial position. other subsidiaries will become direct Primergy subsidiaries. Completion of the Transaction is subject to numerous conditions, many of which are beyond NSP's control As noted above, pursuant to the Transaction, NSP will reincorporate in Wisconsin. This resocorporation will be accomplished by the merger of Primergy information The summarized Primergy pro forma financial the Company into a new compariy. Northern Power Wisconsin information on page 49 reflects the combination of the historical Corporation (New NSP), with New NSP being the surviving corporation financial statements of NSP and WEC after giving effect to the and succeeding to the business of the Company as an operating publis Transaction to form Primergy. A $154 million pro forma adjustment utihty. Following such merger, a new WEC subsidiary WEC Sub has been m,de to conform the presentations of noncurrent deferred Corporation (WEC Sub), will be merged with and into New NSP, w:th income taxes in the summarized pro forma combined balance sheet New NSP being the surviving corporation and becoming a subsidiary of information as a net liability. The pro forma combined earnings per Pnmergy. Both New NSP and WEC Sub were created to effect the common share reflect pro forma adjustments to average common Transaction and will not have any significant operations, assets or lia-shares outstanding in accordance with the stock conversion provi-bihties prior to such mergers. After the Transaction is completed, cur-sions of the Merger Agreement. rert common stockholders of the Company will own shares of Primergy common stock, and current bondholders and preferred stockholders of the Company wdl become investors in New NSP. as

Notes to Financial Statements Northern States Power Company, Niinnemta and Subsidiaries a 2 Primorgy Pro Forma Financial Infor nation NSP WEC Pro Forma Combined IMahons of dollars, except per share amounts) As of Dec.31,1996: - Utihty Plant - Net $4 338 $3 058 $7 396 ~ ^~ ~ Curre.nt Assets - 797_ 566' _. _' _ _ _ _ _ _. _1363 Total Assets $6 637 $4 811 $11294 Common Stockholders' Equrty._ $2136, . _ _ _ _30 _ . _ _. _ $4_082, $1946,_ Preferred Stockholders' E.quity_. ._ 240 __270 Long Term Debt 1 593 1 416 3 009 . Total Capitahzation Current Liabshties _ _ 3 969 _ 3 392__ _ _ _ _ _ 7 361 1 236_. 527_ _ Other Liabihties 1 432 892 ___ _ 1 763 2 170 Total Equrty and Liabihttes $6 637 $4 811 $11294 For the Yeat Ended Dec.31,1996: Utikty Opo_ rating Revenues _ $2_654. $1_774. $672 $4 428 Ut! ty Operatmg Inco_me. _ __. _. __. $262 $306_ $480 h $366 Net income, after Preferred Dividend Requirements $218 Earnings per Common Share: Asyeported. _ $3.82_ $1.97 Using NSP Equivalent _ Shares * $3.51 Using Primergy Shares $2.16

• Represents the pro forma equivalent of one share of NSP common stock calculated by multiplying the pro forma information by the conversion ratio of 1.626 shares of Primergy common stock for each share of NSP common stock.

l Gdew NSP Information The following summarized New NSP pro forma financialinformation reflects the adjustment of NSP's historical financial statements to give effect to the Transaction, including the merger of the Wisconsin Company into Wisconsin Energy Company and the transfer of l ownership of all of the other current NSP subsidiaries to Primergy. Due to immateriakty, the transfer of certain Wisconsin Company gas distribution properties to New NSP, which is anticipated as part of the merger, has not been reflected in the pro forma amounts. New NSP Pro Forma Financiallnformation NSP Merger Divestitures - Net Pro Forma New NSP IMdhons of dottars) As of Dec.31,1996: Utikty Plant - Net $4 338 $j711) $3 627 Current Assets 797 (178) 619 Other Assets 1 502 (756) 746 Total Assets $6 637 $11645) $4 992 Common Stockholders' Equrty $2136 $ (812) $1324 j Preferred Stockholders' Equity. 240 _____240 Long-Term Debt 1 593 (514) 1 079 Total Capitahzation 3 969 (1 326) 2 643 Current Liabihties _ 1_236 ( _ 139) 1 432 (180)_ __ _ 1097 Other Liabihties 1252 Total Equity and Liabihties $6 637 $(1645) $4 992 For the Year Ended Dec. 31,1996: Utikty Operatog Revenues $2 654 $(221) $2 433 Utikty Operating income _$366 $(63) $303 Net income, after Preferred Dividend Requirements $262 $(57) $205 49 L

L Reports of Management and Independent Accountants Northern States 1%er Cornpany, Minnewta and Sulwidiaries lleport of Management s a lleport ofIndependent Accountants Management is responsible for the preparation and integrity of NSP's hnancial state.nents. The hnancial statements have been prepared in To the Shareholders of Northern States Power Company-accordance with generally accepted accounting principles and nec-essanly include some amounts that are based on management's este In our opinion, the accompanying consolidated balance sheets mates and judgment. statements of capitalization and the related consohdated statements of income, of common stockholders' equity and of cash flows pr To fulhliits responsibihty, management maintains a strong internal fairly, in all material respects, the financial position of Northern S control structure, supported by format pohcies and procedures that Power Company, a Minnesota corporation, and its subsidiaries ar are communicated throughout NSP. Management also maintains a Dec. 31,1996 and 1995, and the results of their operations and the staff ofinternalauditors who evaluate the adequacy of and investigate cash flows for the years then ended in conformity with generally the adherence to these controls, pohcies and proceduresaccepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to Our independent pubhc accountants have audited the financial state express an opinion on these financial statements based on our audits. ments and have rendered an opinion as to the statements' faimess of-We conducted our audits of thetie statements in accordance presentation,in all material respects,in conformity with generally erally accepted auditing standards which require that we plan and accepted account ng principles. During the audit, they obtained an perform the audit to obtain reasonable assurance about whether th understanding of NSP's internal control structure, and performed tests financial statements are free of material misstateman and other procedures to the extent required by generally accepted includes examining, on a test basis, evidence supporting the amo audit ng standards. and disclosures in the financial statements, assessing the acco principles used and significant estimates made by management, an The Board of Directors pursues its oversight role with respect to NSP's evaluating the overall financial statement presentation. We beheve hnancial statements through the Audit Committee, which is comprised that our audits provide a reasonable basis for the opinion expresse solely of nonmanagement directors. The Committee meets periodically above. The consolidated financial statements of the Company and with the independent public accountants, internal auditors and man-subsidiaries for the year ended Dec. 31,1994 were audited by other agement to assure that all are properly discharging their responsibili-independent accountants whose report dated Feb. 8 1995 expres ties. The Committee approves the scope of the annual audit and an unquahfied opinion on those statements. reviews the recommendations the independent public accountants have for improving the internal control structure The Board of M Directors, on the recommendation of the Audit Committee engages the independent public accountants, subject to shareholder approval. PRICE WATERHOUSE LLP Both the independent pubhc accountants and the internal auditors Minneapolis, M nnesota heve unrestricted access to the Audit Committee. Feb.3,1997 b JamesJ Howard Chairman of the Board, President and Chief Executive Othcer -Y Edward J. McIntyre Vice President and Chief FinancialOff cer NORTHERN STATES POWER COMPANY Minneapoks, Minnesota Feb 3,IS97 50

Financial Statistics a J Northern States Power Company, Niinnesota and Sub idiaries Selected Financial Data (Mdhons of dollars, except per share data) m 1995 1994 1993 1992 1986 . WdY operat!ng revenues _ _ _ _ _ _.._ _32 054_ . $2 569 , $2 487 _$2 404_ _ _ $2160_ $1772_ Utprty operating expenses _ ,$2 208 _ $2 223_. _ $2178_. _$2100_ _ $1904__$1521 income from continuing operations _ _ before accounting change (1) __ _ __ . _ _ $275.. $276 $243 $212 $161 $204 Net income _, _ __$275_ .$216 __ _ $243_ _____$212 _ _ _ 3206 _ _ _$207_ Earnings available for common stock Average number of common and _ $282 , $2_63_ _ $231 _ _ _ $197 _ _ $190_ _ _ $193_ equivalent shares outstanding (000's) Earnings per average common share: _ __ _ 00_579_ 67 41_6 _ 66 845 _ _ 65 211 62 641. _ 62 541 _ Contmuing operations before accounting change (1) _ $3.82_ _ $3.91_ _ $3.46 _, $3.02 ._.$2.31__ _ _ $3.04_ Total ~ ~ $3.82 $3.91 $3.46 $3.02 $3.04 $3.09 ~ Dividends' declared per share ~ ~ ' ~ ' ' }$2.745' _ [$2I685(([$2.6((($2.565 $2.495[,' 51.8_65 [ ~ Total assets.. _ _ _ _ $1593_ $1542, _$1_463_ $1292__$_1300_ __$129_2_ $6_229 _ _$5_950_ _$5 588 _ _ 35143 _$4 247 _ 36 637 Long-term debt _, _ Ratio of earnings (from continuing operations before accounting changes, including AFC)to fixed charges 3.8 3.9 4.0 40 3.2 4.3 Financial Statistics - wn 1995 1994 1993 1992 14_6 Return on average common equity: - Cont nuing operations before accounting change (1). ._ 12.8%. 13_4%_ _ _ _12.4% _ _11.4%_. 9.1_ %, _ 15.0 % . Total earni,ngs available for common stock __ __ _ 12.6%_ __134%_ 12.4% _11.4%. _ _11.9% _ _153% Dividends as percent of earnings (2)

71.5%

68.5 % 75 8 % 85.5 % 107.8 % 60.3 % Davidends as percent of book value Five-year growth rate in earnings per share (3): _, 9.3% 9.5% 9.7% 10.0 % _10.0% _ _ 96%_ Contirjuing operations _ before accounting change (1). _ .._ 4.8% 5.2% 2.6% 0.1% 0.2%.. _8.9% _ 2.9%) (4_.1%) I.6% 7.0%, _ _ _1.0% ( Total earnings available for common stock 90% Capital expenditures, excluding business acquisitions (millions) ~ Percent o' capit'al expenddures that could ~ ~ $412 $401 $409 $362 $428 ~~ $556 ( f be financed by internally generated funds (exclud ng AFC and after dividends) l Cash dividend coverage (2) _ 74.6%_ 85.0%_ 69 3 % 98_.5% 49.4%. 77.5 % f 3.0 3.1 3.0 3.1 2.8 4.1 l AFC as percent of earnings pe_r share (2) ].2% 6.5%. _ 5.4%[ ~ 65%~ ~ 10i5%[ ~ 56T7% Effective tax rate, 34.8% 35 6 % 34.7 % 38 2 % _ 34.9% _ 40.1% Capitalization (4): l Common equay _ 4.5%. 48.4%_ 47.5%_ 49 4 % 47.5%. 44 8 % 4 l Preferred equity ~48.3% 45 9 % 46 5 % ' 44.1 % ~ 44.5 % ~ 47.1 % 5.2% 5.7% 6.0% $5% 8.0% 8.1% Debt Total _ _100.0 % 100.0 % 100.0 % 100.0 %. 100.0 % E.0%. Ave [ age costpf longyenn debt __ 6.90%. ._ 6.92%. _ 7.34% Average uthty plant investment per dollar of revenue _ ,_.. _ $323 $3.22 _ _ _ __S3 19 _ 6 96 % _ 7.87%_ _ _ 8.03%._ $3.15 Accumulated depreciation as a percent of . $3 32 _$3.00 depreciable plant ~~ ~ ~ ~~ ~~ j Depreciation expense as a peice~nt ^ ~ ~ ~~~ 46.7 % 45.2 %~~ 43.3 % 42.1 % 40.4 % 34.7 % ~ ~~ of average depreciable ut&typlant ~6 829 7 032 ~'~7 362' ~7 522 ~ ' 7 515' ~ Binefit ' mpioyees (at Dec'.31) ~~ ~ ~~ 3.60 % 3.64 % ~ ~~ 3.55 % 3.47 % 3.36 % 3.48 % ~ e $ 470 AFC-Allowance for Funds Used During Construction (I) locome and earnings from continuing operations exclude discontinued telephone operations in 1986 and an accounting change in 1992. They irrclude non recurring nems in 1994 and 1995, as discussed on page 25. &cluding these non-recurring items, the average annualgrowth rate in earnings per share since 1993 was 8.1 percent (2) hcludes the cumulative effect of unbilled revenue accounting change in 1992 earnings (31 leastsquares method (4) includes short-term notes payable, current portion oflong-term debt andpreferred stocks wrth mandatory redemption 51

Operating Statistics Northern States 1%wer Cornpany,.\\finnemta and Sulnidiaries 4 a a Regulated Electric Operations M1 1995 1994 1993 1992 1986 Revenues (thousands) Resjoential With space heating Without space. heating __ _ $_67_260 S 67 332, _ _$ _66 962_ $_ 68 222_ _ $_63_376__ _ $_58_839_ . 659 885 _668 41_1 616 821 _ 583 37_1. Small commercial and indu_strial. _ 376 797 362 511. 351 287 327 888_ 534 676 . _ 445 304 _ _ M_edium commercia.I and industrial _401 1_37 312 581 ___. _ 246 693 Large commercialand industrial 399 259 _ _. j. _ _ _ _ i _ _ _.

• Streethght ng and other 450 811

_.448 226, _ _ 824 195. 780 444_ _ 718 712_ _ _.548 986_ 30 033 29 162 28 936 29 214 29 764 31 203 Total retail Sales for resale ~ 1 985 923 1 974 911 1 888 201 1 785 139~ " ' ~1 659 109 1 331 025~ ~~' . -. 98 961 133 961 ' 146 239 ' 159 498 137 962 ~ Total -- 77 606 $2127413 $2142 770 $2 066644 $1974 916 $1823316 $1427 734 Sales (mdhons of kilowatt-hours / Residential With space heating._ Without space fyeating_. ._ 1 112 SmaJl commercial and_ industrial _. _8735_ _1_111 _ ,1 076. _ _.1 094 _ _ 1_041 __ 1 063_ 8_845 _ 8_227 7 998, Medium commercial and industrial _ _6 091 _ 5 763 5 585 5 307 7 640_ _. _ _ _ 7 095 _ 5 224_. _ 4 487 7 470 7 511 Layge commercial and industrial Streethghtmg and other _ 11069 10 941 17_874 17 117 16 365 13 327 336 329 334 344 372 489 Total retail Sales for resale ~ ^ 34 833 34 500~~ 33 096 31 860 30 642 26 461 4 929 6 500 6 733 ' 8 044' ~ Total 6 530 3 166 39 762 41 000 39 829 39 904 37 172 29 627 Customer accounts (at Dec. JI/** Residential l . With space _h_ eating _ 77 201_. _ _ _76 344. _ _76 050_ , _75 644 . _ 74 939 _ _ 69 3_76 Without space heat!ng. Small commercial and industrial. 1 175 275 1_162 232 _ _1 146 578 1 13_1 928_ 1 119 354 _ 1_022 872 149 134 144 774 142 858 141 446 140 768 _ Medium commercialimd industrial 127 780 _ _7 962 7 906 l Large commercial and industrial 669 I ' Streethghting and other ~ 652 8 172 8 114 7 904 6 364 5 030 4 883 ~ ~ 4 813 ' '4 627~ ' ~ '291 4 836 Totairetail 5 1 415 271 1 396 791 1 378 494 1 361 945 1347592 1 231 683 Sales for resale 54 67 70 71 74 77 Total 1 415 325 1 396 858 1 378 564 1 362 016 1 347 666 1 231 760 Average revenue per kilowatt. hour Residential Small commercial and industrial. 7.38e 7.39e 7.35c 7.17e 6.89e _ 6.18e 6.19 6.29 6.29 6.18 5.98 5.50 l . Medium commercial and industrial _ 5.37 5.32 _ _ L _f. Large commercial and industrial 4.07 4.10 4.61 4.56 4.39 4.12 l Totai retail 5.70e 5 72e 5.71e 5 62c 5.41e 5 03c Kalowatt-hour output (milhons/ Thermal Hydro. 32 657 33 802_ Purchased and interchange _ 1_194 1 049 _ 32 710 33 130 ,30_467,, _._ 22 243 __922 1 001 ._1024, _1112 9 065 9 189_ 9 054 8 541 8 187 8 188 Total 42 916 44 040 42 686 42672 39 678 31 543 Capability at time of maximum demand (megawatts / Company owned, _ __ Purchased end sales - net (with reserve), _ _ _ _ _ _ _ 7 109 _ 7 100 _ 6_859_ _ _6 81_6 _ . 6 _798 _ 6 121_ 1 638 Total _ 1 910 1 860 1 787 1 614 807 8 807 _ 30 8 719 l . Mzzimum demand (megawatts / _ _ 7487 . J 5i9_ _. . 7 101 _ 8 603 8 412 6 928 Dste of maximum deman;f 6 990 _ _6 128 _ __ 6 012 Aug. 6 July 13 June 14 Aug. 25 June 12 July 18

• Beginning in 1995, the commercial and industrial customer class was segmentedinto small(less than 100 kw

" Customer accounts for 19% msy not be fully comparable to prior years d per yearl, o implementedin I996. a newbilhng system 52 l

Qperating Statistics e 8 Northern States Power Company Minnewta and Subsidiaries Rsgulated Gas Operations Ma 1995 1994 1993 1992 1980 ._ Revenues (thousands) Residential With space heating $263 391 $212 853_ $204 668. _ $220 828 $178164. $173 921 Without space heating _ l 739 2 690 3 383 Commercial and industrial _ 2 838 _ _ 2 715 _ _ 2 523 _. Rrm _ _1_46 145 119_B63 _ _ 20 912 _ 131 431 _ 10_5 829 103_275 1 , interruptible . Otner _ _ 63 585 _ 48 646 _ _ 49384_ _ _ 52 216 _ _ 41 612 _ 60 990 153 1 686 3 688 630 386 654 Total retast Interstate transmission (Viking)_. _ _ 477 013 385 738 381 490 _ 407 820__ 328 514 _ _ 342 223 17_553_ _16 323 _ _. _16_307 Agency, transportation and off-system sales _ 34 662 _26_122 _ _, _ 24 338.. ____1_0_247 __ _ _. _ _.._1_6_46 Elimination of Viking sales to NSP (2 435) (2 374) (2 232) _ 12,237 _ 7 692 (1 228) Total $526 793 $425 814 $419 903 $429 076 $336 206 $343 869, Ssles (thousands of mct) Residential With space heating. __ __ 47 698. 41 993 _ _ 38_427 40 946 Commercial and industrial __451 301 323 331 35 136 _ _ 31 518_ Without space heating 323 431 firm _31_748 28 275__ _ 27 342 _ ._ _28 622 _ _ _ 24_273_. _ 17 891 21 199 interruptible _; 23 210._ 22 408 _. 19 373 18 559 15 823 Other 394 772 212 186 108 195 Total retail 103 501 93 749 85 677 88 644 75 663 71 234 Other gas delivered (thousands of mct} Interstate transmission _(Viking [ _161 972_ 152 952 147 919 _ 83 613._ Agency, transportation and off system sales 17 535 19 679 13 466 8 128 7 332_ _ _. 1 081 Elimination of Viking sales to NSP (19 311) (20 440) (16 845) (8 425) Total other ges dehvered 160 196 152 191 144 540 83 316 7 332 1 081 Custo:ner accounts (at Dec. JI)" Residential l With space heating _ 379_834 367 811 _ 351 773 337 868 326 439 262 223 l . Commercial and industrial 40 244 38 575 37 140 36 185 35 458 29 230 Without space heating _ 18 889 _18 1 % 18 961 19 408 19 841. _ _23 737 l Total retail 438 967 424 582 407 874 393 461 381 738 315 190 Other gas delivered 30 62 18 40 30 not svadable Total 438 997 424 644 407 892 393 501 381 768 315 190 Avorage revenue per mcf Residential _$_S.55 S5 10__ _ $5.35_ __ $5.42 $5.10 _ $5.55 Firm commercial and industri,al, _ _ _4_.60 _4.24. _ _ _4.42. 2.81 2.63 3.41 4.59_ Interruptible commercial and industrial 2.74 2.17 2.55 _4_.36_ __ 4.87_ _ Total tetail $4.61 $4.11 $4 45 $4 60 $4.34 $4.80 Gas purchased for resale to utility customers Total cost (thousands)" _ __ _. $312 943 $236 71_4 _ _ $2_45 939. $275 313 $2_16_743.. $236 013 Cost recognited per mel sold ** $3.00 $2.49 $2.85 $3.11 $2.86 $3.31 Maximum sendout (mcf). _ 737 258 _ 659 800 686 130, 642 684_ 611 380 547 701 Date of maximum sendout Feb.1 Jan. 3 Jan.17 Dec. 27 Dec. 23 Jan.6

• Customer accounts for 1996 may not be fully comparable to prior years due to differences in meter accumulation in a new billing system implementedin 1996.
  • Excludes cost and volumes for other gas delivered 53

l Nonregulated Business Information i Northern St.ites Power Company, afinnesota and Subsidi.iries l __ l7housands of dollars, exceptper share data) a l Operating Results Lim 1995 1994 1993 Operating Revenues Operatmg Expenses (1)_ _ $303 903 Equity in earnings of unconsolidated affiliates: (326 332). $313 082 _ $241827 _ $90 531 J327894) (241 480). (81 480) _ Earnings from operations I Gains frorn contract terminations _ _, _ 30 668 28 055 31 595 2_695 investment and other income - net _ 29 850_ 9 685 10 304 . 6 518. - 1 843 ...1 040 Income tax (expense) benefit ~ ~ _ Net income ~~ ^16 576 ~ (6 119) "(2 591) ~(3 548) 3 16 285 _$ 33 613 $ 32 904 $ 6 092 Contribution of Nonregulated Businesses to NSP Earnings per Share NRG Energy,Inc.: Ongoing operations Non-recurring items 80.29 $0.24 $0.40 S0.04 Eloigne Company 0.00 Cenerprise, Inc. ~ 0.22 0.04 _ 0.00 . 0.05 Other (2) 0.02 0.02 0.00 ( _. 0.12) 10 02). 0.00 0.00 Total 0.02 0.04 0.03 0.05 30.24j _ S0.50 $0.49 S0.09 tIhousands of dollars) Equity investment by Nonregulated Businesses in Unconsolidated Projects at Dec 31 LKS' l995 lincluding undistnbuted earnings and capitalized development costs) 1994 Austrahan projects German projects S 91 350 $ 81885 $ 75108 South American and Latin American projects ._94 806 87699 55 337 Other internationalprojects 92 257 8 140 4 013 Attordable housing projects (U S ) 16 601 6 780 Other U S. projects 32 034 25 211 7 148 Total Equity investment in Unconschdated Nonregulated Protects 80 536 __ 54 276 36 152 $407584 5263 991 . $177 758 Additional Equity invested in Consolidated Nonregulated Businesses 79 522 _115 276 104 011 TotalNet Assets of Nonregulated Businesses $487106 $379267 $281769 SIGNIFICANT UNCONSOLIDATED NONREGULATED PROJECTS AT DEC 31 1996 Generation Projects Operating Total NRG Mw-Gladstone Power Station Location Mw Ownership Equity Operator Schkopau Power Station Austraha 1680 37.5 % 630 NRG CODEE Germany 960 20 6 % 200 Veba Kraftwerke Ruhr A G. NRG Generating (U.S )Inc. Bohvia 162 62.0 % 100 COBEE MrBRAG mbh New Jersey, USA 196 42.0 % 82 NRG Sunnyside Cogeneration Associates Germany 200 33.0 % 66 MIBRAG Utah, USA Scudder Latm American Power Proje:ts 58 50.0 % 29 Latin America Joint Venture NRG/ Babcock & Wilcox Energy Center Kladno 254 6.4%-8.8% 19 Czech Republic Stewart & Stevenson/Wartsila 28 26.5 % 7 Energy Center K!adno Generation Projects Under Development (3) Total NRG Mw-location Mw Ownership Equity Operator Estonia Privatization Cajun Estonia 3300 50 % 1650 Joint Venture NRG/Other West Java Louisiana, USA 1700 33 % $67 NRG Enfield Indonesia 400 45% 180 NRG Colhnsville United Kingdom 350 50 % 175 Joint Venture-NRG/Other Australia 180 50 % 90 NRG (2) locludes NSP. owned refuse-derrved fueloperations managed by NRG m ionin 1994 (31 Projects under development may or may not be completed 54 ~ ~ ~ '

y Shareholder Information d 8 Mrthern Nures 1%cr Com;uny, \\linnewta and Sulnidi.iries La 1995 1994 1993 1992 1986 Common stock shareholders at year-end _ _ _ _ _ 86 337 _ 83 902 _ 85 263_ _ _ 86 404 _ _72 525_ _ 79 921 Book value at year-end _$30.93 $29.74 $28.35 $27.32 $25.91 $20.80 Market prices High _ _ $53 %_ .$49 M_ __ $47___$47 % _ _ _ $45 % __S40_% Low $44 M $42% $38 % $40 X $38 X $25 Year-end closing _ $45 % . $49 %. ._ $44 $43 % . _ $43 X_ _ $34.M Dividends declared per share . $2.745 $2.685 $2.625 $2.565 _ $2.495_ _ _ $1.865 Earnings per share $3.82 $3 91 _ $3.46 $3.02 $3 04_ $3 09 HEADQUARTERS:414 Nicollet Mall, Minneapolis, MN 55401 SCHEDULE OF ANTICIPATED DIVIDEND RECORD DATES AND PAYMENT DATES FOR 1997: STDCK INFORMATION: Contact the Shareholders Departrnent at NSP headquarters Monday through Friday,8 A.u. to 5 P.M. CST. Call toll-free Preferred Stock Common Stock (800) 527-4677. From the Minneapolis-St. Paul area, call (612) 330-5560. Record Dates Payment Dates Record Dates Payment Dates Dec.31,1996 Jan.15,1997 .Ja n. 3,1997, _Jan;20,1997 INVESTOR RELATIONS INFORMATION. Contact Richard J. Kolkmann, March 31,1997 _ April 15,1997_. April 9,1997_ _A_pril_20,1997_ investor Relations, at NSP headquarters. Call (612) 330-6622. June 30,1997 July 15,1997 July 9,1997 July 20,1997 Sept. 30,1997 0ct.15,1997 Oct.1,1997 Oct. 20,1997 DIRECT DIVIDEND DEPOSIT: NSP offers direct deposit of dividends to Dec. 31,1997 Jan.15,1998 shareholders' checking or savings accounts. To sign up for this free service, contact the Shareholders Department for information ar.d FORM 10-K(THE ANNUAL REPORT TO THE SECURITIES AND authoruation forms. EXCHANGE COMMISSION): Contact the Financial Accounting, Budgets and Reports Department at NSP headquarters. A statistical DIVIDEND REINVLSTMFNT AND STOCK PURCHASE PLAN: suppleme it to the annual report is also available. Call (612) 330 7772. The Company's Dividend Reinvestment and Stock Purchase Plan offered by Pruspectus is a convenient way to purchase shares of the STREET-NAME SHAREHOLDERS AND BENEFICIAL OWNERS: Company's common stock without payment of any brokerage commis-If you would like to receive NSP's quarterly report, contact the sion or service charge. Those eligible to participate in the plan are: Financial Accounting, Budgets and Reports Department at NSP

• Shareholders of record of NSP headquarters. Call (612) 330-7772.
• Shareholders who hold stock in " street name" through investment firms, provided the firm has DUPLICATE MAILINGS:If there are two or more shareholders estabhshed procedures permitting participation at your address, you may have received duplicate shareholder

+ Employees of NSP and its subsidiaries mailings. To eliminate duplicate mailings, write or call the a Non shareholders of legal age who live in Minnesota, Shareholders Department at NSP headquarters. Call toll-free North Dakota, South Dakota, Wisconsin and Michigan. (800) 527-4677 Monday through Friday,8 A.M. to 5 P.M. CST. (Non shareholders must make an initialinvestment of at least $100.) From the Minneapolis St. Paul area, call (612) 330-5560. Once enrolled in the plan, participants may-

• Automatically reinvest all or a portion of their quarterly dividends a Make additional cash investments. The minimum single payment is

$25 and the maximum quarterly payment is $10,000. Contact the Shareholders Department for a Prospectus and authoruatian form STOCK EXCHANGE LISTINGS AND TICKER SYMDOL: Common stock is traded on Now York, Chicago, and Pacific Exchanges. VfSE hsts t.ome preferred stock. Ticker symbol. NSP Newspaper stock tables hst NSP as NoStPw, NoStPwr or NSPw. The stock of NRG Generating (U S )inc., an affikate of NRG Energy,Inc.,is listed on the NASDAQ SmallCap Market under the ticker symbol NRCG. ANNUAL MEETING: Wednesday, June 25,1997,10 A u. at the Historic State Theatre, Minneapohs, MN. INTERNET ADDRESS.httpBwww.nspco com 55

Fiscal Agents Northern States Power Company, Minnesota and Subsidiaries NORTHERN STATES POWER COMPANY (MINNESOTA) NDRTHERN STATES POWER COMPANY (WISCONSIN Transfer Agent, Common and Preferred Stocks Trustee-Bonds Northern States Power Company First Trust Company,Inc. 180 East 5th St Registrar. Common and Preferred Stocks St. Paul, MN 55101 Norwest Bank Minnesota, NA Sixth St and Marquette Ave. Firstar Trust Company Minneapolis, MN 55479-0059 777 E. W;sconsin Ave. Milwaukee, WI 53202 Dividend Distribution Northern States Power Company Forwarding Agent Norwest Bank international NRG ENERGY,INC. 3 New York Plaza,15th Floor New York, NY 10004 Trustee-Senior Notes Norwest Bank Minnesota, N.A. Trustee Bonds Sixth St and Marquette Ave. Harris Trust and Savings Bank Minneapolis, MN 55479-0059 til West Monroe St. Chicago, il 60690 Fitst Trust Company,Inc. 180 East 5th St St. Paul, MN 55101 Norwest Bank Minnesota, N.A. Minneapolis Coupon-Paying Agents. Bonds Harris Trust and Savings Bank Chicago Chase Manhattan Bank 277 Park Ave. New York, NY 10172 First Trust Company,Inc. St Paul 56

Cover Information: a> As the electric industry continues to become The second order, Order No. 889, requires utili-more competitive, state-of-the-art equipment, ties to establish a real-time information system such as NSP's Aldrich substation in Niinneapolis,is open to all transmission users as the means of com-vital to providing reliable, high-quality electric ser-munications between a utility's transmission oper-vice for customers. The substation is being com-ations and its marketing, and to establish standards pletely rebuilt, modemized and expanded. of conduct that transmission opeistcrs in the After more than 60 years of intensive federal control room must follow. The rule ensures that and state regulation, the pace of change in the utilities and their affiliates do not have an unfair electric utility industry is accelerating as the competitive advantage in using the utilities' trans-Federal Energy llegulatory Commission (FEllC) mission system to sell power. NSP has imple-and many states hasten the move toward competi-mented new procedures and is in full compliance tion in the generation market. We anticipate that with the rules, which are establishing new ways to by the beginning of the next decade retail cus-do business throughout the electric industry. tomers will have the option to choose their energy suppliers, just as wholesale customers do today. In 1996, the FEllC issued two rules to stimulate 1 vigorous wholesale competition and to mitigate gen-eration market power of utilities that own transmis-j sion facilities. These utilities must ofter comparable open-access transmission service to all users, and functionally separate their marketing and transmis-sion operations. The first order, Order No. 888, requires all utilities under the FEllC's jurisdiction j to open their transmission systems to competitors 1 for wholesale transactions, ofter the same terms and I conditions to competitors as they provide them-NSP GRASSROOTS selves, and charge their companies for transmission I For inforrnation about NSP's voluntary, grassroots political advocacy l service for their own wholesale transactions. NSp group, casi toli-free. (soo) s27 4s77 and press 2. The group includes shareholders, employees and retirees interested in the political process has had its transmission system open for wholesale and legislative issues affecting tho utility industry. sales since 1990 and was one of 21 utilities (out of 137) that already had an open access tarifTon file at the FEllC in 1996. Printed on paper containing 10 percent recycled fibers and a minimum of 10 percent post-consumer waste. Please recycle. J +

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