ML003698700

Submittal of 1999 Annual Report Including the Certified Financial Statements

ML003698700
Person / Time
Site:	Monticello, Prairie Island
Issue date:	03/23/2000
From:	Voth M Northern States Power Co
To:	NRC/OCIO/IMD/RMB
References
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Download: ML003698700 (61)

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Northern States Power Company Monticello Nuclear Generating Plant 2807 West County Road 75 Monticello, MN 55362 March 23, 2000 10 CFR 50.71(b)

U. S. Nuclear Regulatory Commission Attention: Document Control Desk Washington, DC 20555 MONTICELLO NUCLEAR GENERATING PLANT Docket No. 50-263 License No. DPR-22 PRAIRIE ISLAND NUCLEAR GENERATING PLANT Docket No. 50-282 License No. DPR-40 50-306 DPR-60 Submittal of 1999 Annual Report Including the Certified Financial Statements In accordance with 10 CFR 50.71(b) and Item No. 70 in Regulatory Guide 10.1, enclosed are five (5) copies of our 1999 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 Marcus H. Voth at (763) 271-5116.

Sincerely, Marcus H. Voth Project Manager of Licensing Monticello Nuclear Generating Plant c: w/enclosure Regional Administrator-Ill, NRC Monticello NRR Project Manager, NRC Monticello Resident Inspector, NRC Prairie Island NRR Project Manager, NRC Prairie Island Resident Inspector, NRC c: w/o enclosure Minnesota Dept. of Commerce J E Silberg S L Weatherby 03/23/00 D311 J:\LICENSE\Periodic Reports\1999 Annual Report Lotter.doc

NSP AND ITS MAJOR SUBSIDIARIES Northern States Power Company (NSP) I NSP is a major U.S. electric and natural gas utility with headquarters in Minneapolis, Minnesota. NSP and its wholly owned subsidiary NSP Wisconsin operate generation, transmission and distribution facilities providing electricity to about 1.5 million customers in Minnesota, Wisconsin, North Dakota, South Dakota and Michigan. The two companies distribute natural gas to about 500,000 customers in Minnesota, Wisconsin, North Dakota, South Dakota, Michigan and Arizona.

FINANCIAL HIGHLIGHTS Year Ended Dere hber 31 1999 1998 CA Changn Earnings per common share - diluted $1.43 $1.84 (22.3)%

Dividends declared per share $1.445 $1.425 1.4%

Stock price (close) $19.50 $27.75 (29.7)%

Return on average common equity 8.7% 11.4%

Assets (millions) $9 768 $7 396 32.0%

Book value per common share $16.42 $16.25 1.1%

Electric and gas customers (thousands) 1 979 1 934 2.3%

Retail energy sales:

Electric (millions of kilowatt hours) 37 079 36 531 1.5%

Natural gas (billions of cubicfeet) 91.1 85.2 6.9%

NRG Energy, Inc. (NRG) I NRG is a global leader in independent power production. The company specializes in the development, construction, operation, maintenance and ownership of power production and cogeneration facilities, thermal energy production and transmission facilities and resource recovery facilities. NRG has a high-quality portfolio of projects in the United States, Europe, Asia-Pacific and Latin America.

Seren Innovations, Inc. I Seren Innovations focuses on broadband, wireless and other com munication technologies. Through its Astound"' brand services, the company offers cable TV, high-speed Internet access and local and long distance telephone services over a new hybrid fiber-optic network.

Viking Gas Transmission Company Viking Gas Transmission Company operates an inter state natural gas pipeline located in Minnesota, North Dakota and Wisconsin.

ALTHOUGH WE BEGAN 2000 WITH MANY FACTORS IN OUR FAVOR, we were tremendously disappointed in our 1999 financial results and in the performance of our stock. I'm sure you were too. Our 1999 earnings were $1.43 per share, compared with $1.84 per share in 1998. Our stock price declined 29.7 percent from the beginning of 1999 to year-end.

We describe the reasons for our poor earnings and stock performances in the Management's Discussion and Analysis section beginning on page 19. Several one-time events were responsible for the earnings decline, which in turn affected the stock performance. Also significant to the stock price, however, were higher interest rates, which contributed to a 23 percent overall decline among utility stocks in general.

Without going into more detail, I want to say that the reasons for those performances are for the most part behind us. We are in a strong position to get back on track in 2000.

Our merger with New Century Energies (NCE) to form Xcel Energy Inc., for example, is ahead of schedule and could close during the second quarter. The merger will produce

$1.1 billion in net cost savings synergies over 10 years, half of which we expect to retain for shareholders. We are eager to launch this new venture, to say the least. I will serve as Xcel Energy's chairman for a year and NCE's Wayne Brunetti will be Xcel Energy's presi dent and CEO. We also have selected Xcel Energy's senior officers, a top-notch group of

I experienced and talented individuals. Our business plans are in place and we are ready to hit the ground running once all the regulatory approvals are secure. 3 When the merger is complete, we anticipate that Xcel Energy will adopt a dividend payment level equivalent to the current NCE dividend payment lcvel adjusted for the exchange ratio. This would result in a dividend payment from Xcel Energy of $1.50 per share on an annual basis, a slight dividend increase for NSP shareholders.

From an operations perspective, NSP's utility system is strong, growing and enjoying the hard-earned support of our customers. Our electric and natural gas prices are low and will stay low in the coming competitive environment.

Our NRG Energy subsidiary has grow n into the big league of independent power producers worldwide, with 11,000 megawatts of generating assets. Of those assets, 81 percent are in the U.S. Substantial shareholder value has been created in NRG that is not reflected in our stock price. Publicly traded IPPs like NRG enjoy price-earnings ratios of 25 times or more.

We will explore ways to unlock that value for you this year. We expect NRG to continue its expansion and to provide a significant increase in earnings in 2000.

Seren Innovations, another NSP subsidiary, is a leader in the broadband communications industry with its proven strategy of selling significantly superior setvices, including cable

television, high-speed Internet access and local and long distance telephone services.

Video-on-demand will become a new service offering this year. While subject to some uncertainties, Seren's five-year plan is to obtain a customer base of approximately 500,000 customers, with an annual revenue stream of $400 million. The industry has valued com panies with similar but inferior services and technology at about $5,000 per customer.

In other news of 1999, we accepted the resignation of NSP board member H. Lyman (Tad) Bretting, president and CEO of C.G. Bretting Manufacturing Company, Inc.

Tad resigned in December after serving on the board since March 1990. He had a distinguished tenure on our board, and we thank him for his service.

4 I'm sorry to tell you that Ed Theisen, retired NSP president, died June 11 of cancer. In his 40 years at NSP, Ed made many lasting contributions to our company. We will remember his honesty, optimism and gentle nature. Along with his family and many friends, we will truly miss him.

As I look ahead, I'm encouraged by several facts. Our growth platforms, including utility operations, NRG and Seren, are strong and in many ways unique. We expect our merger with NCE and the creation of Xcel Energy to provide a strong boost to your value. In fact, the rest of this report provides more reasons why NSP is a good investment.

We are looking forward to an exciting new beginning, and appreciate your trust and continued support.

Sincerely, James J. Howard Chairman of the Board Presidentand ChiefExecutive Officer February 1, 2000

AN HONEST DEDICATION TO EXCELLENCE

' 1I;>Il[ /11 0 1[ 0 \ [,],E-[IL" f 1999, crews at NSP's coal-fired plants over financial setbacks in 1999, NSP continues to hauled the unit 3 turbine at the Sherco plant grow, thanks to excellent financial and operat and upgraded controls at the High Bridge, ing fundamentals. The company's service Black Dog and Riverside plants. Having ben territory is thriving, its cost structure is com efited from a number of improvements over petitive and its dividend increased for the the years, the High Bridge plant marked its 25th consecutive year. 75th anniversary in August.

NSP's core businesses are growing. In 1999, In other measures of operating excellence, for example, NSP Gas purchased Natrogas, Inc., NSP Gas achieved the lowest costs for new which includes 15,000 propane customers and gas service and new gas main in benchmark 5,000 natural gas customers. NSP Energy ing comparisons. By working closely with Marketing also grew at a healthy pace, achiev excavators, NSP Gas continues to reduce the ing wholesale sales of more than 6 million incidents of damage to NSP's underground megawatt-hours of electricity. gas lines by excavating crews. NSP Electric Operating excellence is an NSP hallmark met or exceeded all of its reliability perform that is evident across the company. In 1999, ance measures and kept the electric system NSP's combustion and hydroelectric plants running during the heat wave with relatively generated more than 21.6 million megawatt few heat-related outages.

hours of electricity and held up under trying NSP also achieved several notable safety conditions. During a heat wave in July, for milestones in 1999. In Grand Forks, N.D.,

example, those plants operated with a forced employees worked 12 years without a lost work outage rate of just 1.9 percent, better than the day accident. Viking Gas Transmission received company's five-year average. NSP's Monticello a safety award from the state of Wisconsin rec and Prairie Island nuclear plants safely gener ognizing Viking's Chippewa Falls and Osceola ated a record 13.3 million megawatt-hours of districts for working 39 and 32 years, respec electricity, surpassing the previous record set tively, without a lost work day accident.

in 1995.

The company continues to make careful investments in its generating plants to keep them reliable, efficient and competitive. In

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THE STRENGTH TO GROW BUSINESSES N>P HAS BLEEN AIM E 70 LElE\'Lk\GE NRG also has a high-quality portfolio of proj- [

its excellent operating skills to its nonregulated ects in Europe, Australia and Latin America.

businesses, which are thriving. The value of In 2000, NRG plans to purchase the 665 these businesses, which is not yet reflected in megawatt, gas-fired Killingholme A power the company's stock price, is an added benefit station in North Lincolnshire, England, for for NSP shareholders. approximately $664 million.

NRG Energy, Inc., an NSP subsidiary that Seren Innovations, Inc., a recognized E is now the seventh largest independent power telecommunications leader in the broadband producer (IPP) in the world, is the best exam market, provides high-speed Internet access, ple of the extra value shareholders receive by cable television and telephone services and soon 9 investing in NSP. In 1999, NRG purchased a will offer video-on-demand. The company's number of power plants, tripling its ownership use of superior technology and its ability to interests to approximately 11,000 megawatts of deliver all services with one connection put it generating capacity. in the enviable position of having customers In the Northeast region of the United knocking on its door. In 1999, the company States, NRG purchased 10 plants in New York, expanded operations from St. Cloud, Minn.,

Massachusetts and Connecticut as well as four to communities in the San Francisco East Bay gas turbine plants. In 2000, NRG plans to area and Colorado.

purchase four plants and interests in two addi Viking Gas Transmission Co., an NSP sub tional facilities from Conectiv of Wilmington, sidiary that owns and operates an interstate Del., for $800 million. These baseload facilities, natural gas pipeline, completed a 45-mile which total 1,875 megawatts, add to NRG's expansion that will increase capacity by existing Northeast holdings of more than 4,500 5 percent. Viking also initiated the Guardian megawatts of generating capacity in the New Pipeline project in which the company and York Power Pool and almost 2,500 megawatts two partners plan to construct a gas pipeline in the New England Power Pool. to serve growing markets in northern Illinois In Louisiana, NRG will purchase Cajun and southeastern Wisconsin. In 1999, Viking Electric Power Cooperative's 1,700 megawatts increased its assets by 20 percent and received of fossil-fueled generation for $1.026 billion a favorable ruling from the Federal Energy during 2000. In California, NRG is among the Regulatory Commission, which allowed a top four IPPs, with an interest in almost 2,800 6 percent increase in revenues.

megawatts. With solid footholds on both coasts, NRG is in a strong position to capture profits from emerging wholesale electric markets.

THE SATISFACTION OF OUR ta CUSTOMEERS CO Il\ ,P I-D CIT_ i - LR LA\RGL NSP continued several customer service utilities, NSP is a low-cost producer of elec enhancements in 1999, including expanding tricity, and its natural gas rates are among the its automated meter reading system and con nation's lowest. Those rates complement the solidating its customer call centers into two company's excellent customer service, which locations. The company's investment in new NSP recognizes as critical to its future success. technology to improve customer service and 10 If customers are satisfied today, they will be less reliability proved especially worthwhile during likely to switch electricity providers when they the July heat storm, when NSP's energy man are given a choice. By several measures, the agement system helped system operators make company ranked high in customer satisfaction critical decisions to keep the power flowing.

in 1999. After announcing in June that it was Y2K NSP was second in the nation for overall ready, NSP experienced a seamless transition satisfaction among residential customers in to the year 2000, reporting no Y2K outages.

a study by J.D. Power and Associates and NSP Gas implemented new rates that Navigant Consulting, Inc. The study found provide customers more choices in how they that the key determinant of satisfaction in the purchase natural gas from NSP. Advantage electric utility industry is a provider's image, Service, NSP's appliance repair service, began including such attributes as reputation, selling appliances in 1999 and offering com honesty, efforts to become more efficient and petitive financing. In quarterly surveys, 87 per the ability to communicate changes. Other cent of Advantage Service customers rated the determinants of overall satisfaction are price company's service as excellent or very good.

and value, power quality and reliability, billing Perhaps the most gratifying measure of and the call center. customer satisfaction comes directly from NSP's own customer satisfaction surveys customer letters, phone calls and e-mails. "I also yielded strong results in 1999, with can't compliment them enough," wrote one 94 percent of electric customers rating their St. Paul gas customer about the NSP crew overall satisfaction with NSP as excellent, very who worked through the night in sub-zero good or good. Employees working directly temperatures to install a new meter. "They with customers turned in an outstanding per got the problem resolved quickly and without formance in all categories, including meter hassle," said a Minnesota electric customer.

reading, billing, calls answered and credit. "They were friendly, courteous and caring."

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COMvtPETITION IN THE RETAIL operating procedures of both companies to

'4 electric market is increasing as states across the determine best practices, which Xcel Energy

'4 nation allow customers to choose their elec will implement. Xcel Energy will remain

'4 tricity providers. Although Michigan is the committed to environmental stewardship and

-4' only state in NSP's service territory to mandate to the social and economic well-being of the competition so far, NSP has taken significant communities it serves.

steps to prepare for a full-fledged competitive With headquarters and an operational 12 market. One of the most important efforts is center in Minneapolis, Minn., Xcel Energy the proposed merger with New Century also will maintain operational centers in Eau Energies (NCE), a gas and electric utility in Claire, Wis., Denver, Colo., and Amarillo, Denver, Colo., to form Xcel Energy Inc. Texas. The company's international presence Operating in 12 states and serving 3 million includes operations in the United Kingdom, electric customers and 1.5 million natural gas central Europe, Australia and South America.

customers, Xcel Energy will have the size and In other efforts to prepare for a competitive scope necessary to compete with large national energy market, NSP in 1999 agreed to join energy companies, and the financial strength the Midwest Independent System Operator and flexibility it needs to grow its regulated (ISO), a broad, regional transmission group and nonregulated businesses. Including its that will take operational responsibility for the subsidiaries, the new company will do business company's transmission assets. NSP believes in at least 40 states and 15 countries. As a the Midwest ISO is the most effective means result, Xcel Energy will be able to provide presently available to enhance the competitive shareholders with stronger returns on their market for wholesale electricity.

investment and long-lasting value.

Customers also will benefit. Today, NSP and NCE customers enjoy competitively priced electricity and natural gas. Xcel Energy will be in a strong position to keep prices com petitive through the purchasing efficiencies and other economies of scale it will achieve.

To ensure a smooth transition and to make Xcel Energy a world-class energy company, NSP and NCE employees have reviewed the

A LONG-TIME LEADER IN INNOVATION AS FAR BACK AS 1923. WHEN NSP Corp. Together, the utilities own seven nuclear was part of an experiment to bring electricity units at five sites, which are capable of produc to rural areas, the company has been blazing ing 3,650 megawatts of electricity.

trails in the energy industry. In the 1950s, NSP Formed in February 1999, the NMC is began exploring the commercial use of nuclear working to become a nuclear operating com power, which became a safe, efficient and eco pany responsible for operating all five plants.

nomical source of generating electricity. In the NSP's board of directors and the boards of the 1970s, NSP was one of the first utilities to other utilities approved agreements to transfer burn low-sulfur coal to reduce emissions. The the plants' operating licenses to the NMC.

company also installed pollution control Pending approval from the Nuclear Regulatory equipment on its generating plants early on, Commission and state regulators, the NMC putting it in compliance with the Clean Air could be operating the plants by mid-2000.

Act regulations on sulfur dioxide well ahead of Although the NMC will operate the facili schedule. In the 1980s, NSP was experiment ties, NSP and the other parent companies will ing with wind generation, long before the state continue to own the plants and will retain the of Minnesota required its use. financial obligation for their safe operation, Today, NSP is implementing an innovative maintenance and decommissioning.

new model for operating its nuclear generat As the operator of seven nuclear units, the ing plants. With increasing regulation and its NMC will be able to share and employ best related costs, nuclear plants find it challenging practices across the fleet of plants, achieve to remain competitive in a restructured energy purchasing economies and capture many market. In response, some utilities are selling other benefits of scale. Best of all, the NMC their nuclear plants. Others are shutting down concept ensures continued safe, reliable oper units prematurely. ations while enhancing the plants' value to NSP, which considers its nuclear plants shareholders.

to be extremely valuable assets, is taking a far different approach by forming the Nuclear Management Company (NMC) with three regional utilities: Alliant Energy, Wisconsin Electric Co. and Wisconsin Public Service

A SINCERE COMMITMENT TO THE COMMUNITY CONTRIBUTING TO THE FINANCIAL revenues. In Minot, N.D., ReliaStar opened a and social well-being of communities in its new service center, where 600 people now service territory is a long-standing NSP work, and Northwest Airlines announced commitment that will continue regardless plans to move its subsidiary MLT Vacations, of changes in the industry or the company. Inc., to the city.

NSP's contributions include corporate NSP's volunteerism was rewarded in 1999 funding, economic development and envi when the company received the Judson Bemis ronmental efforts, as well as employee and Award for raising the most money during the retiree volunteerism. Twin Cities UNCF walk-a-thon. The $28,000 In November, NSP celebrated its part in that NSP walkers collected was the largest the restoration of the peregrine falcon, a bird contribution by one company in the eight-year that was taken off the endangered species list history of the walk-a-thon. NSP employees in 1999. Ten years ago, NSP began building also raised more than $18,000 in Veterans' nest boxes on the stacks of its power plants, Day events that was given to veterans' homes.

where the peregrines could mate and raise Other volunteer efforts include tutoring and their young. Almost 100 peregrines have mentoring students, delivering Meals on hatched at NSP nest boxes. Wheels and serving as camp counselors at On the economic development front, Camp Sunrise, a camp for urban teenagers NSP encouraged Twin City Die Castings, a that NSP helped establish in 1974.

St. Paul-based foundry, to select Monticello, To ensure the availability of affordable Minn., as the site for an expansion that housing in the area, NSP's subsidiary Eloigne eventually will result in 80 new jobs and Company has an ownership interest in more an estimated $500,000 in annual electric than 50 housing developments, providing more revenues. In Wisconsin, the Nesd6 Corporation than 3,300 rental units to eligible tenants.

plans to build a new manufacturing plant in Eloigne is committed to investing in both Eau Claire that will employ 125-200 people family and senior housing that spans the social and will generate almost $1 million in gas spectrum. In return, Eloigne's investments and electric sales for NSP. An expansion at generate more than $9 million of tax credits Andersen Windows in Menomonie, Wis., annually, which are passed along to NSP will create 250 new jobs and generate approx imately $360,000 in new gas and electric

FINANCIAL STATISTICS SELECTED FINANCIAL DATA (Millions otollars.exeetv per share data) 1999 1998 1997 1996 1995 Utility operating revenues $2 869 $2819 $2734 $2654 $2569 Utility operating expenses $2 526 $2455 $2372 $2288 $2223 Net income $224 $282 $237 $275 $276 Earnings available for common stock $219 $277 $226 $262 $263 Average number of common shares outstanding (000s) 153 366 150502 140594 137121 134646 Average number of common and potentially dilutive shares outstanding (000s) 153443 150743 140870 137358 134832 Earnings per average common share:

Basic $1.43 $1.84 $1.61 $1.91 $1.96 Diluted $1.43 $1.84 $1.61 $1.91 $1.95 Dividends declared per share $1.445 $1.425 $1.403 $1.373 $1.343 Total assets $9 768 $7396 $7 144 $6637 $6229 Long-term debt $3 453 $1 851 $1 879 $1 593 $1 542 Ratio of earnings to fixed charges 2.1 3.0 2.9 3.8 3.9 FINANCIAL STATISTICS 1999 1998 1997 1996 1995 Return on average common equity (a) 8.7% 11.4% 10.2% 12.5% 13.4%

Dividends as percent of earnings 101.4% 77.7% 89.4% 71.5% 68.5%

Dividends as percent of book value 8.9% 9.0% 9.1% 9.3% 9.5%

Utility capital expenditures (millions) $462 $411 $397 $387 $386 Internally generated utility funds (W) 80% 114% 109% 81% 94%

Cash dividend coverage 3.0 3.2 3.3 2.8 3.1 AFC as percent of earnings per share 2.8% 5.7% 7.3% 7.2% 6.5%

Effective tax rate 22.8% 27.1% 29.0% 34.8% 35.6%

Capitalization:

Common equity 34.5% 47.3% 46.7% 46.5% 48.4%

Preferred equity and securities 4.1% 5.8% 7.9% 5.2% 5.7%

Debt (W) 61.4% 46.9% 45.4% 48.3% 45.9%

18 Total 100.0% 100.0% 100.0% 100.0% 100.0%

Accumulated depreciation as a percent of utility plant 50.3% 49.2% 47.6% 46.0% 44.2%

Depreciation expense as a percent of average depreciable utility plant 3.83% 3.77% 3.78% 3.68% 3.64%

(a) 13-month average (b) Percent of utility capitalexpenditures that could befinanced by internally generatedutilit, fiunds, excluding allowancefor fiinds used during construction (AFC)and after dividends (c) Includes sbort-term debt, currentportionoflong-term debt and AVRG project-secureddebt ofapproxinatel),$1 billion, as shown in the Statements of Capitalization

MANAGEMENT'S DISCUSSION AND ANALYSIS Northern States Power Company, a Minnesota corporation increasing its generation capability by more than 7,500 megawatts.

(NSP-Minnesota), has two significant subsidiaries: Northern States During 2000, NRG expects to spend approximately $2.7 billion to Power Company, a Wisconsin corporation (NSP-Wisconsin), and acquire or develop more than 6,000 megawatts of generating facilities.

NRG Energy, Inc., a Delaware corporation (NRG). NSP-Minnesota PositionNSPs Generation Businessfor Long-Term Value I NSP's also has several other subsidiaries, including Viking Gas Transmission conventional plants include coal-fired, hydro, refuse-derived fuel, Company (Viking), Energy Masters International, Inc. (EMI),

natural gas and oil-fired facilities. NSP will make strategic invest Eloigne Company (Eloigne), Seren Innovations, Inc. (Seren) and ments designed to enhance the value of these generating assets.

Ultra Power Technologies, Inc. (Ultra Power). NSP-Minnesota and its subsidiaries collectively are referred to as NSP. Create an Independent Nuclear Company I With increasing regula tion and associated costs in the nuclear industry, NSP believes the AN)in best way to enhance NSP's nuclear assets is to combine our opera P I.IANItIAA In PrCTTWr I HRJITR tions with other well-run nuclear plants and create a Nuclear Because of several significant charges and adverse weather condi Management Company. During 1999, NSP, Alliant Energy, tions (both are discussed later), 1999 earnings declined and NSP Wisconsin Electric and Wisconsin Public Service Corporation fell short of some of its financial objectives. This decline in earn formed a Nuclear Management Company (NMC) to provide ser ings is not representative of NSP's continuing operational and vices to member companies. 0 financial strength.

Expand Ene?g, Marketing ITo enhance NSP's position in the Our earnings objective for 2000 is $1.95 per share, including increasingly competitive electric market, NSP has expanded its whole build-out costs at Seren, which have reduced the projection by sale energy marketing efforts by establishing an Energy Marketing 15 cents per share. NRG is expected to contribute 80 cents per function. Energy Marketing is responsible for meeting the require share, or about 40 percent of NSP's earnings. These projections ments of NSP's retail and wholesale electric customers for low-cost assume NSP continues to own 100 percent of NRG and Seren.

energy, while optimizing margins from NSP's generation resources.

In June 1999, NSP increased its dividend for the 25th consecutive Providefor Independent Transmission Operations I To foster year. The increase of 2 cents per share raised the dividend per share competition in the wholesale electricity market, the Federal Energy from $1.43 to $1.45 on an annual basis. At the time of the proposed Regulatory Commission (FERC) requires the transmission portion merger to form Xcel Energy, the annual dividend is expected to of a utility's business to be functionally separate from the utility's be increased to $1.50 per share, equivalent to the current dividend generation facilities. The state of Wisconsin also calls for a separate of New Century Energies (NCE) adjusted for the 1.55 exchange ratio.

transmission operating structure. During 1999, NSP joined the NSP's objective is to maintain continued financial strength with Midwest Independent System Operator (Midwest ISO) because it 19 an AA rating for utility bonds. NSP-Minnesota's first mortgage is the most effective means available to enhance the competitive bonds were rated: market for wholesale electricity.

• AA- by Fitch IBCA ExpandNSPs Core Electric and Gas DistributionBusiness 0 AA by Standard & Poors To expand our core business, NSP will actively seek to acquire o Aa3 by Moody's Investors Service and merge with other energy companies. During 1999, NSP announced its plans to merge with NCE and form Xcel Energy.

The three rating agencies placed NSP's bond ratings under review While NSP cannot guarantee the timing or receipt of the necessary upon announcement of its merger with NCE. These ratings and regulatory approvals, NSP currently expects the merger to be com the review reflect the views of rating agencies, which can provide an pleted by the middle of 2000.

explanation of the significance. A security rating is not a recommen dation to buy, sell or hold securities and is subject to revision or Develop Seren I Seren provides broadband telecommunications withdrawal at any time by the rating agency. First mortgage bonds services, including high-speed Internet access, telephone service and issued by NSP-Wisconsin carry comparable ratings. cable TV and soon will provide video-on-demand. Seren is expanding its broadband network in Minnesota, California and Colorado.

BIJINFSS STRATEGIES Grow Viking I NSP's goal is to continue the growth of Viking NSP's mission is to be a recognized leader in the energy industry by through pipeline expansion. During 1999, Viking completed a increasing the value provided to our customers with energy-related 5 percent capacity expansion. In addition, Viking, WICOR and products and services. We will utilize the skills and talents of our CMS Energy announced plans to build a 147-mile natural gas people to thrive in a dynamic and competitive energy environment pipeline to serve northern Illinois and southeastern Wisconsin.

that provides increased value for our customers and shareholders and Drive EMI to Profitability I EMI is narrowing its focus to concen significant growth opportunities for our company. NSP continues to trate on retrofitting and upgrading customer facilities for greater move forward with its 10-Point Game Plan to achieve this mission.

energy efficiency.

Grow NRG I NRG's goal is to become a top independent power Manage NSP' Entire Business as a Portfolio I NSP will manage its producer in each of its core markets: North America, Europe and collective businesses as a portfolio of assets with a focus on growth.

Asia-Pacific. NRG expects to achieve this goal by profitably growing NSP will acquire or divest businesses and assets if it will increase existing businesses and adding new businesses. NRG's asset acquisi shareholder value. Pooling restrictions, associated with NSP's pro tions have enabled its earnings to grow from 16 cents per share in posed merger with NCE, limit NSP's ability to divest assets for a 1997 to 37 cents per share in 1999. NRG's long-term goal is to period of time.

increase its earnings by an average of 25 percent per year. During 1999, NRG completed more than $1.6 billion of asset acquisitions,

MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAl RFVI*W RFSUITS OF OPFRATIONS The following discussion and analysis by management focuses on 1999 Compared with 1998 and 1997 1NSP's earnings per share those factors that had a material effect on NSP's financial condition for the past three years were as follows:

and results of operations during the periods presented, or are (Earninsper S're - Dilutred) 1909 IGOR 1007 expected to have a material impact in the future. It should be read in Regulated utility operations conjunction with the accompanying Financial Statements and Notes.

(excluding Primergy costs) $1.26 $1.58 $1.62 Except for the historical statements contained in this report, the Nonregulated operations (see page 22) 0.22 0.26 0.11 matters discussed in the following discussion and analysis are forward CellNet investment write-down (0.05) looking statements that are subject to certain risks, uncertainties and Subtotal excluding Primergy costs $1.43 $1.84 $1.73 a assumptions. Such forward-looking statements are intended to be Write-off of Primergy merger costs (0.12) 8 identified in this document by the words "anticipate,"" estimate," TOTAL $1.43 $1.84 $1.61

-u "expect," "objective," "outlook," "possible," "potential" and similar a

-a expressions. Actual results may vary materially. Factors that could C

a cause actual results to differ materially include, but are not limited to: The combination of four significant one-time items accounted for a a decline in 1999 earnings per share of 40 cents compared with 1998.

"*general economic conditions, including their impact on C

a Conservation Incentive Recovery 1998 1In 1999, the Minnesota capital expenditures Public Utilities Commission (MPUC) denied NSP recovery of

"*business conditions in the energy industry 1998 lost margins, load management discounts and incentives C

a "*competitive factors

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"*unusual weather associated with state-mandated programs for electric energy con 8

"*changes in federal or state legislation servation. NSP recorded a $35 million charge based on this action,

"* regulation which reduced 1999 earnings by 14 cents per share. This charge

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"* the higher risk associated with NSP's nonregulated represented a $32 million reduction in accrued revenue and a businesses as compared with NSP's regulated business reduction of carrying charges. NSP may appeal the decision on a 1998 conservation incentives.

c-fl "* currency translation and transaction adjustments C

° issues relating to Year 2000 remediation efforts Conservation Incentive Recovery 1999 1At the end of 1999, the

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• regulatory delays or conditions imposed by regulatory agencies MPUC had not approved a conservation plan for 1999 or subse a

in approving the proposed merger with NCE quent years. Based on the change in MPUC policy on conservation

° the items described under "Factors Affecting Results incentives and regulatory uncertainty, management decided not to of Operations" accrue any conservation incentives for 1999. On Jan. 27, 2000, the 20

• the other risk factors listed from time to time by NSP in reports MPUC approved a conservation incentive plan under which utilities filed with the Securities and Exchange Commission (SEC), could earn incentives up to 30 percent of their annual conservation including Exhibit 99.01 to NSP's 1999 report on Form 10-K spending. For NSP, the maximum amount of conservation incen ProposedBusiness Combination I On March 24, 1999, NSP and tives that could be earned is approximately $10 million, with the NCE agreed to merge and form a new entity, Xcel Energy. The actual incentive dependent on performance compared with conser merger requires approval or regulatory review by certain state and vation goals. The MPUC also decided that the conservation incentive federal regulators. The merger is expected to be a tax-free, stock program is not linked to earnings levels. NSP estimates it could for-stock exchange for shareholders of both companies and to be potentially earn $2 million-$3 million in 2000 for 1999 performance.

accounted for as a pooling of interests. At the time of the merger, NSP will file its performance report with the MPUC in the spring Xcel Energy will register as a holding company. of 2000 and request approval of the appropriate amount based on final conservation program results for 1999. In addition, the MPUC The Xcel Energy board of directors will determine the dividend denied NSP's request to allow rate recovery of load management payment level of Xcel Energy. However, NSP anticipates that Xcel discounts provided to certain customers.

Energy will adopt an initial dividend equivalent to the current divi dend of NCE. Based on the conversion ratio of 1.55 shares of Xcel NSP's 1998 earnings included approximately 13 cents per share from common stock for each share of NCE stock, the pro forma dividend accrued conservation incentives. Including carrying charges, the for Xcel Energy would currently be $1.50 per share annually.

reversal of 1998 conservation incentives reduced 1999 earnings by 14 cents per share, a decrease of 27 cents per share compared with For more discussion of this merger, see Note 15 to the Financial incentive recovery levels in 1998. The earnings impacts in 1999 are Statements. The following discussion and analysis is based on the non-cash accrual adjustments. NSP will make a filing with the MPUC financial condition and operations of NSP and does not reflect the in 2000 to address the cash impacts of conservation incentives potential effects of the proposed merger between NSP and NCE. collected in rates, including any overcollections for 1998 and 1999.

EMI Goodwill I NSP recorded a pretax charge of approximately

$17 million, or about 8 cents per share, to write off all goodwill that was recorded by its subsidiary EMI for its acquisitions of Energy Masters Corporation in 1995 and Energy Solutions International in 1997. This charge reflects a revised business outlook based on recent levels of contract signings by EMI.

MANAGEMENT'S DISCUSSION AND ANALYSIS Loss on Marketable Securities I During 1999, NSP recorded pretax Electric production expenses tend to vary with changing retail and charges of approximately $14 million, or 5 cents per share, for a valu wholesale sales requirements and unit cost changes in fuel and pur ation write-down on its investment in the publicly traded common chased power. Due to fuel clause cost recovery mechanisms for retail stock of CelINet Data Systems, Inc. In October 1999, CellNet customers and the ability to vary wholesale prices with changing announced it was experiencing financial difficulties and was contem market conditions, most fluctuations in energy costs do not affect plating restructuring its capital financing. In February 2000, CellNet electric margin. However, during July 1999, NSP's service territory filed for Chapter 11 bankruptcy protection. At Dec. 31,1999, the experienced extremely high temperatures, which drove customer remaining value of NSP's investment in CellNet stock was approxi usage to record levels. With NSPs power plants operating at maxi mately $1 million and Seren had approximately $5 million of mum available capacity, market conditions forced NSP to purchase intangible assets related to CellNet. Recovery of these assets is the power necessary to serve customer demand at very high costs.

uncertain, pending the resolution of CellNet's financial difficulties. NSP's fuel clause billing adjustment process in Minnesota does not a allow for the recovery of capacity charges above the levels reflected in

-n base rates. In addition, NSP-Wisconsin does not have an automatic a REGIJI ATF) IJTII ITY OPERATING RFSU1,TS fuel clause to recover increased energy and capacity charges from -na Electric Revenues IThe following table summarizes the principal a customers. Without the ability to obtain fill recovery, these unusu a reasons for the electric revenue changes during the past two years: a ally high energy and capacity costs reduced electric margin as (Millions oIdollarO 1999 vs. 199 1998 v. 1997 a shown below. a Retail sales growth The following table summarizes the principal reasons for electric (excluding weather impact) $35 $ 63 a margin changes during the past two years: a a,

Estimated impact of weather 1 1 8

on retail sales volume (2) 3 (Millionc ofdalla ) 999 ia. 1998 998 vm1997 Ua Sales for resale 25 47 Retail sales growth Conservation incentive (excluding weather impact) $ 29 $51 a, accrual adjustments (78) 4 Estimated impact of weather Fuel cost recovery a 47 19 on retail sales volume (2) 3 Rate changes 5 2 Sales for resale 7 11 a Transmission and other 3 6 Conservation incentive -a a

TOTAL REVENUE INCREASE $35 $144 accrual adjustments (78) 4 Unrecovered demand, fuel and purchased power costs (19) (14)

Electric sales growth for 1999 and 1998 is listed in the following Rate changes 5 2 21 table on both an actual and weather-normalized basis. NSP's Transmission and other 9 (6) weather-normalization process removes the estimated impact on TOTAL ELECTRIC MARGIN sales of temperature variations from historical averages.

INCREASE (DECREASE) $(49) $51

/C-I-.. ... ÷i, ico*,., tone ,ooo..,. to7

ý vww 4 ZZZ 719 L ZZ12 L ZZa IN L ZZý_

Weather Weather Gas Revenues IThe following table summarizes the principal Actual Normalized Actual iVormalizrd reasons for the gas revenue changes during the past two years:

Residential 2.4% 2.5% 3.4% 3.7%

Commercial and industrial 1.1% 1.2% 3.3% 3.1% (Millions of do/larn) 1999Y . 199IR 1990R ,, 1997 Total retail 1.5% 1.6% 3.3% 3.3% Sales growth Sales for resale 6.7% na 35.3% na (excluding weather impact) $7 $7 TOTAL ELECTRIC SALES 2.3% na 7.1% na Estimated impact of weather na = not applicable on firm sales volume 20 (46)

Purchased gas adjustment Retail electric sales accounted for 93 percent of NSP's electric rev clause recovery (11) (40) enue in 1999 and 91 percent in 1998. Retail electric sales growth Rate changes 9 for 2000 is estimated to be 2.7 percent over 1999, or 2.1 percent Black Mountain Gas Company on a weather-adjusted basis. Sales for resale volumes and revenues acquisition 6 increased in 1999 and 1998 due to the expansion of NSPs whole Transportation and other (2) 6 sale energy marketing operations. TOTAL REVENUE Electric Margin IAs shown in the following table, electric margin INCREASE (DECREASE) $15 $(58) equals electric revenue minus production expenses.

c at tIn/la rcI 1999 1998 1997 Electric revenue $2397 $2362 $2218 Fuel for electric generation (319) (311) (310)

Purchased and interchange power (454) (378) (286)

ELECTRIC MARGIN $1 624 $1 673 $1 622

MANAGEMENT'S DISCUSSION AND ANALYSIS Gas sales growth for 1999 and 1998 is listed in the following Expenses increased in 1998 by $48.3 million, or 7.2 percent, com tables on both an actual and weather-normalized basis. The major pared with 1997. The higher costs in 1998 are primarily due to ity of NSP's retail gas sales are categorized as firm (primarily heating increased expenses associated with plant outages, nuclear regulatory customers) and interruptible (commercial/industrial customers with costs, storm damage, Year 2000 remediation, energy marketing an alternate energy supply). activities, customer growth and an insurance refund in 1997.

K(ales o*,ointh 1999 v 1992 199R vft 1997 DepreciationandAmortization I Costs increased $17.5 million in Weather- Weather 1999 and $12.3 million in 1998, primarily due to higher levels of Actual Normg/lized Actual iormalizged depreciable plant, including new information systems and equip Total firm 8.6% 1.4% (13.1)% 2.9% ment with relatively short depreciable lives.

a Interruptible 2.3% na (10.4)% na 2 Total retail 6.9% na (12.4)% na NONJGPFRATING IJTII ITY ITFMS

-a Transportation Utility Financing Costs I Interest costs for NSPs utility businesses and other (11.8)% na 33.4% na were $128.5 million in 1999, $115.8 million in 1998 and a Viking (wholesale a $120.3 million in 1997. The 1999 increase is largely due to a transportation) (0.9)% na 2.8% na higher average short-term debt levels to support financing needs.

a TOTAL GAS SALES The 1998 decrease is largely due to lower average short-term debt AND DELIVERY 1.1% na (1.5)% na levels, partially offset by increased long-term debt levels. For more A

a na = not applicable a information, see the Statements of Capitalization.

8a Allowancefor Funds Used During Construction (AFQ I AFC The 1999 firm sales increase was primarily due to slightly more

'-I favorable weather in 1999, compared with 1998, and sales growth. declined primarily due to reductions in carrying charges and 9 The 1998 firm sales decrease was due to more unfavorable weather other adjustments related to conservation incentive adjustments, in 1998, compared with 1997, partially offset by sales growth. as discussed previously, and less construction activity presumed a Interruptible sales declined in 1998 because lower alternate fuel to be financed with equity capital.

a prices caused interruptible customers to purchase less natural gas PrimergyMerger Costs I In May 1997, NSP and Wisconsin Energy

-a and customers were able to switch to transportation-only service.

Corp. mutually terminated their plans to merge. NSP's earnings Firm gas sales in 2000 are estimated to be 15.1 percent higher than for 1997 include a pretax charge to nonoperating expense of 1999 sales, or 2.2 percent higher on a weather-adjusted basis.

$29 million, or 12 cents per share, to write off its cumulative Gas MIargin I As shown in the following table, gas margin equals merger-related costs incurred.

22 gas revenue less the cost of gas sold.

(Actihlios ni dal/or, 1999 1992 1997 NONRFGUIATFD BUSINFSS RFSJITS Gas revenue $472 $457 $515 A description of NSPs primary nonregulated businesses and their Cost of gas purchased earnings contribution is summarized below.

and transported (278) (267) (331) o NRG isinvolved in independent power production, commercial GAS MARGIN $194 $190 $184 and industrial heating and cooling, and energy-related refuse-derived fuel production.

The cost of gas tends to vary with changing sales requirements and 0 EMI is an energy services company.

unit cost of gas purchases. However, due to purchased gas cost recov " Eloigne invests in affordable housing.

ery mechanisms for retail customers, fluctuations in the cost of gas ° Seren provides broadband communication services.

have little effect on gas margin. The following table summarizes the CONTRIBUTION TO NSPS EARNINGS PER SHARE principal reasons for gas margin changes during the past two years: 1999 1998 1997 (AilLoni ot dol/ar) 199 9 7).1998 1998 Vý.1997 NRG $0.37 $0.28 $0.16 Retail and transportation sales growth EMI (0.13) (0.05) (0.08)

(excluding weather impact) $4 $7 Eloigne 0.05 0.04 0.03 Estimated impact of weather Seren (0.06) (0.02) (0.01) on firm sales volume 6 (16) Other (0.01) 0.01 0.01 Rate changes 1 9 Subtotal - nonregulated subsidiaries $0.22 $0.26 $0.11 Black Mountain Gas Company Write-down of investment acquisition 4 in CellNet stock (0.05)

Other (7) 2 TOTAL $0.17 $0.26 $0.11 TOTAL GAS MARGIN INCREASE $4 $6 NRG I NRCs earnings increased for 1999, compared with 1998, Other Operation, Maintenanceand Administrativeand General primarily due to acquisitions of generating facilities in the Northeast Expenses decreased in 1999 by $15.2 million, or 2.1 percent, region of the United States. During 1999, NRG recognized a gain of compared with 1998. 1999 expenses decreased primarily due to approximately 3 cents per share due to the partial sale of its interest in cost control, including lower employee benefit costs, higher levels Cogeneration Corporation of America. Results for 1999 also reflected of insurance refunds and lower Year 2000 remediation costs. increased earnings from MIBRAG. These increased earnings were partially offset by the effects of cooler-than-normal weather in

MANAGEMENT'S DISCUSSION AND ANALYSIS California, which reduced equity earnings at the El Segundo, Long are reviewed and adjusted biennially. Because comprehensive rate Beach and Encina generating stations. In addition, earnings were changes are requested infrequently in Minnesota, NSP's primary decreased by costs related to project acquisitions and business devel jurisdiction, changes in operating costs can affect NSP's financial opment, and increased interest expenses. Also, equity earnings were results. Except for Wisconsin electric operations, NSP's retail rate affected by several other factors, including a currency transaction schedules provide for cost-of-energy and resource adjustments to adjustment relating to the Kladno project and a decrease in earnings billings and revenues for changes in the cost of fuel for electric from NEO, NRG's landfill gas affiliate. generation, purchased energy, purchased gas and, in Minnesota, conservation and energy management program costs. In Minnesota, NRG's earnings increased in 1998, compared with 1997, primarily changes in electric capacity costs are not recovered through the fuel due to income from new projects. In addition, NEO generated clause. For Wisconsin electric operations, where cost-of-energy higher levels of energy tax credits. Increased earnings were partially adjustment clauses are not used, the biennial retail rate review process offset by higher interest costs. Also, NRG's earnings in 1998 were and an interim fuel cost hearing process provide the opportunity for adversely affected by declines in the value of the Australian dollar rate recovery of changes in electric fuel and purchased energy costs in and German deutsche mark in relation to the U.S. dollar. In 1997, lieu of a cost-of-energy adjustment clause. In addition to changes in NRG's investment in the Sunnyside project was written down by operating costs, other factors affecting rate filings are sales growth,

$9 million, or 4 cents per share.

conservation and demand-side management efforts and the cost In 1998, NRG sold one-half of its 50 percent interest in Enfield of capital.

Energy Centre Ltd. for approximately $26 million, resulting in an Regulated public utilities are allowed to record as assets certain costs after-tax gain of approximately $17 million. This gain increased that would be expensed by nonregulated enterprises and to record as 1998 earnings by approximately 11 cents per share. Also in 1998, liabilities certain gains that would be recognized as income by non NRG recorded a charge of approximately $22 million ($15 million regulated enterprises. If restructuring or other changes in the regulatory after tax) to write down its investment in a 400-megawatt coal environment occur, NSP may no longer be eligible to apply this fired power station in West Java, due to the political and economic accounting treatment and may be required to eliminate such regula instability in Indonesia. This write-down reduced 1998 earnings by tory assets and liabilities from its balance sheet. Such changes could approximately 10 cents per share.

have a material adverse effect on NSP's results of operations in the Further information on NRG's financial results may be obtained period the write-off is recorded. At Dec. 31, 1999, NSP reported on from NRG's annual report on Form 10-K filed with the SEC. its balance sheet regulatory assets of approximately $136 million and regulatory liabilities of approximately $206 million that would need EMI I EMI's losses for 1999 were greater than 1998, due to the to be recognized in the income statement in the absence of regula write-off of goodwill associated with two acquisitions, as previ ously discussed. The write-off of goodwill reduced 1999 results by tion. In addition to a potential write-off of regulatory assets and 23 liabilities, deregulation and competition may require recognition of approximately 8 cents per share. EMI's losses for 1998 were lower certain "stranded costs" not recoverable under market pricing. NSP than 1997, due to increased margins in 1998 and losses incurred currently does not expect to write off any "stranded costs" unless by Enerval in 1997, a joint venture previously held by EMI. In market price levels change, or cost levels increase above market 1998, EMI sold its interest in Enerval. EMI's investment in price levels. See Notes I and 9 to the Financial Statements for fur Enerval was written down in 1997.

ther discussion of regulatory deferrals.

Eloigne I Eloigne's earnings grew in 1999 and 1998 due to new Meiger SettlementAg©eements I In December 1999, NSP signed investments in affordable housing projects.

separate agreements with the Minnesota Office of Attorney General Seren I Seren's build-out of its broadband communications and the Minnesota Energy Consumers related to stipulated terms network in St. Cloud, Minn., and initial construction in northern under which those parties would support NSP's proposed merger California resulted in losses for 1999 and 1998, consistent with with NCE. Under the agreements, which contained substantially the Seren's business plan. same financial terms, NSP agreed to reduce its Minnesota electric rates by $10 million per year, or approximately 0.6 percent less than current levels, for 2001-2005. The agreements are subject to the FACTORS AFFECTING RESULTS OF OPFRATIONS approval of the MPUC and can be terminated in the event the NSP's utility revenues depend on customer usage, which varies merger does not proceed. Under the agreements, NSP's electric with weather conditions, general business conditions and the cost rates may not otherwise be increased through 2005, except under of energy services. Various regulatory agencies approve the prices limited circumstances.

for electric and gas service within their respective jurisdictions. In addition, NSP's nonregulated businesses are becoming a more sig In January 2000, NSP also signed a separate agreement with the nificant factor in NSP's earnings. The historical and future trends Minnesota Dept. of Commerce (MDC), in which the MDC would of NSP's operating results have been and are expected to be support NSP's proposed merger with NCE. Under the agreement affected by the following factors: NSP agreed not to seek recovery of certain merger costs from cus tomers, to meet various quality standards and to certain provisions Regulation I NSP's utility rates are approved by the Federal Energy affecting the regulatory oversight of Xcel Energy.

Regulatory Commission (FERC) and state regulatory commissions in Minnesota, North Dakota, South Dakota, Wisconsin, Arizona and Competition IThe Energy Policy Act of 1992 has been a catalyst Michigan. Rates are designed to recover plant investment, operating for comprehensive and significant changes in the operation of elec costs and an allowed return on investment. NSP requests changes tric utilities, including increased competition. The Act's reform of in rates for utility services through filings with the governing the Public Utility Holding Company Act of 1935 (PUHCA) commissions. The rates charged to retail customers in Wisconsin promoted creation of wholesale nonutility power generators and

MANAGEMENT'S DISCUSSION AND ANALYSIS authorized the FERC to require utilities to provide wholesale NuclearManagement Company (NMC) As part of its game plan, transmission services to third parties. The legislation allows utilities NSP announced its intention to form an independent nuclear and nonregulated companies to build, own and operate power management company. Recent developments include:

plants nationally and internationally without being subject to restrictions that previously applied to utilities under the PUHCA.

" During 1999, NSP, Wisconsin Electric Power Co., Wisconsin Public Service Corp. and Alliant Energy established an NMC In 1996, the FERC issued Orders No. 888 and 889 to foster to improve plant performance and reliability, strengthen oper competition in the electric utility industry. These orders give ational efficiency, maintain high safety levels and reduce costs.

competing wholesale suppliers the ability to transmit electricity The four companies operate seven nuclear units at five sites, through a utility's transmission system. Order No. 888 grants with a total generation capacity exceeding 3,650 megawatts.

0 nondiscriminatory access to transmission service. Order No. 889 "oIn late 1999, NMC member utilities filed with the Nuclear 70 seeks to ensure a fair market by imposing standards of conduct on

-t Regulatory Commission (NRC) to transfer plant operating a transmission system owners, by requiring separation of the wholesale licenses to the NMC. The four partners, including NSP will

-u power supply function from the transmission system operation a retain ownership of their respective nuclear plant assets. License 0 function, and by mandating the posting of transmission avail a transfer would allow the NMC to become an operating com 1/2 ability and pricing information on an electronic bulletin board.

pany in 2000. During 1999, NSP's board of directors and the a NSP has made open access transmission tariff filings and com a boards of the other utilities approved the transfer of the nuclear pliance filings with the FERC and believes it is taking the proper operating licenses for their respective companies to the NMC.

A a

steps to comply with these rules.

0 The request to transfer operating licenses requires approval 4,

8 Some states have begun to allow retail customers to choose their from federal regulators, including the NRC.

U electricity supplier, and many other states are considering retail Used Nuclear Fuel Storageand Disposal I In 1994, NSP received access proposals. The Minnesota Legislature continues to study the legislative authorization from the state of Minnesota to use 17 casks a' issues, but has determined that further study is necessary before any for temporary spent-fuel storage at NSP's Prairie Island nuclear gen action can be taken. The Public Service Commission of Wisconsin 0 erating facility. NSP has determined that 17 casks will allow operation Cs (PSCW) and Wisconsin Legislature have been focusing their efforts a of the facility until 2007. NSP had loaded nine of the casks as of on improving electric reliability by requiring utility infrastructure

-a Dec. 31, 1999. As a condition of the authorization, the Minnesota improvements prior to addressing customer choice. The Michigan 1/2 Legislature established several resource commitments for NSP, Public Service Commission has approved voluntary plans that began including wind and biomass generation sources as well as other offering retail customers a choice of suppliers in selected markets in requirements. NSP is complying with these requirements, as dis 1998. The Michigan Legislature is considering legislation to allow 24 customer choice for all customers by 2002. The timing of regulatory cussed in Note 14 to the Financial Statements.

and legislative actions regarding restructuring and their impact on NSP and other utilities have an ongoing dispute with the U.S.

NSP cannot be predicted at this time and may be significant. Department of Energy (DOE) regarding the DOE's statutory and contractual obligations to provide permanent storage and disposal Transmission OperationsI During 1999, NSP joined the Midwest facilities for nuclear fuel by Jan. 31, 1998, as required by the ISO, a FERC-approved Regional Transmission Organization (RTO).

Nuclear Waste Policy Act of 1982. See Note 13 to the Financial This action commits the NSP transmission system to control by the Statements for more information.

Midwest ISO and ensures transmission operations in compliance with FERC Order No. 888. Recent developments include: Year 2000 (Y2K) 1NSP's Y2K program covered not only NSP's 2,000 computer applications, consisting of about 75,000 programs "TheMidwest ISO intends to commence operations in 2001.

and totaling more than 30 million lines of code, but also the thousands The Midwest ISO will administer transmission service for of hardware and embedded system components in use throughout most of the area extending east from NSP's service area to NSP Although it appears that NSP successfully transitioned into the Pennsylvania and south through Illinois and Kentucky. NSP year 2000 with no Y2K disruptions to customers or to internal oper remains a member of the Mid-Continent Area Power Pool ations, there are no guarantees that a Y2K-related problem will not (MAPP). MAPP recently signed an agreement with the surface at a later date. NSP is not presently aware of any such Midwest ISO, which may further broaden the scope of the situations; however, occurrences of this type could adversely affect Midwest ISO and regional markets for transmission service.

NSP's business, operating results or financial condition.

"Wisconsin state law requires the PSCW to order a public NSP has spent approximately $22 million for Y2K efforts, from utility that owns transmission facilities in Wisconsin to transfer 1996-1999. This includes $9 million in 1999. These costs have control of its transmission facilities to an ISO or divest been expensed as incurred, except for a small portion deferred for its interest in its transmission facilities to an Independent approved rate recovery.

Transmission Company (ITC) by June 30, 2000. It is expected that during 2000 the PSCW will approve NSP Wisconsin's request to join the Midwest ISO and certify that NSP-Wisconsin's joining of the Midwest ISO will satisfy the requirements of this Wisconsin law.

MANAGEMENT'S DISCUJSSION AND ANALYSIS En viromnnentalMatters INSP incurs several types of environmental "* competition, operating risks, dependence on certain suppliers costs, including nuclear plant decommissioning, storage and ultimate and customers, and domestic and foreign environmental and disposal of spent nuclear fuel, disposal of hazardous materials and energy regulations; wastes, remediation of contaminated sites and monitoring of dis "*partnership and government actions and foreign government, charges into the environment. Because of greater environmental political, economic and currency risks; and awareness and increasingly stringent regulation, NSP has experienced "*development risks, including uncertainties prior to final increasing environmental costs. This trend has caused, and may legal closing.

continue to cause, slightly higher operating expenses and capital Some of NRG's project investments (as listed in Note 10 to the expenditures for environmental compliance. In addition, NRCs Financial Statements) consist of minority interests, which may recent acquisition of generation facilities will tend to increase limit NRG's financial risk, but also limit NRG's ability to control nonutility costs for environmental compliance.

the development or operation of the projects. In addition, signifi In addition to nuclear decommissioning and spent nuclear fuel cant expenses may be incurred for projects pursued by NRG that disposal expenses, costs charged to NSP's operating expenses for do not materialize. The aggregate effect of these factors creates the environmental monitoring and disposal of hazardous materials and potential for volatility in the nonregulated component of NSP's wastes were approximately: earnings. Accordingly, the historical operating results of NSP's nonregulated businesses may not necessarily be indicative of future

• $32 million in 1999 operating results.

• $32 million in 1998

• $31 million in 1997 Use of Derivatives and Mlarket Risk I NSP uses derivative financial instruments to mitigate the impact of changes in foreign currency NSP's utility operations expect to spend approximately $35 million exchange rates on NRG's international project cash flows, natural per year for 2000-2004. However, the precise timing and amount gas, electricity and fuel prices on margins and interest rates on the of environmental costs, including those for site remediation and cost of borrowing. See Notes I and 11 to the Financial Statements disposal of hazardous materials, are currently unknown.

for further discussion of NSP's financial instruments and derivatives.

Capital expenditures on environmental improvements at its utility The fair value of NRG's interest rate hedging contracts is sensitive to facilities, which include the costs of constructing spent nuclear fuel changes in interest rates. As of Dec. 31, 1999, a 10 percent decrease storage casks, were approximately:

in interest rates from prevailing market rates would decrease the o $39 million in 1999 market value of NRG's interest rate hedging contracts by approxi

• $21 million in 1998 mately $28 million. Conversely, a 10 percent increase in interest

, $19 million in 1997 rates from the prevailing market rates would increase the market 25 value by approximately $26 million.

NSP expects to incur approximately $24 million in capital expendi tures for compliance with environmental regulations in 2000 and NRG has an investment in the Kladno project in the Czech Republic.

approximately $74 million for 2000-2004. In addition, NRG Statement of Financial Accounting Standard (SFAS) No. 52 expects to incur approximately $44 million in capital expenditures requires foreign currency gains and losses to flow through the for environmental compliance for 2000-2004. See Notes 13 and income statement if settlement of an obligation is in a currency 14 to the Financial Statements for further discussion of NSP's envi other than the local currency of the entity. A portion of the Kladno ronmental contingencies. project debt is in non-local currency (U.S. dollars and German deutsche marks). As of Dec. 31, 1999, if the value of the Czech WeatherI NSP's earnings can be significantly affected by weather.

koruna decreased by 10 percent in relation to the U.S. dollar and Very hot summers and very cold winters increase electric and gas the German deutsche mark, NRG would have recorded a $5 million sales, but can also increase expenses, which may not be fully recov loss (after tax) on the currency transaction adjustment. If the erable. Unseasonably mild weather reduces electric and gas sales.

value of the Czech koruna increased by 10 percent, NRG would The following summarizes the estimated impact on NSP's earnings have recorded a $5 million gain (after tax) on the currency due to temperature variations from historical averages.

transaction adjustment.

"*Weather in 1999 decreased earnings by an estimated In February 1999, EMI transferred its natural gas supply and market 8 cents per share.

ing function to NSP's Energy Marketing division. Sales commitments

"*Weather in 1998 decreased earnings by an estimated and natural gas futures and forward contracts that EMI entered into 11 cents per share.

prior to the transfer remain the contractual responsibility of EMI. As

"*Weather in 1997 decreased earnings by an estimated of Dec. 31, 1999, EMI had natural gas forward and futures contracts 6 cents per share.

in the notional amount of less than $1 million. These contracts will Impact ofionregularedhvestments I A significant portion of NSP's expire during 2000 and EMI will have no further derivative activity.

earnings comes from nonregulated operations. NSP expects to con EMI's market risk due to changes in market prices of natural gas tinue investing in nonregulated projects, including domestic and forward and futures contracts is immaterial.

international power production projects through NRG and broad band communications systems through Seren. NSP's nonregulated businesses may carry a higher level of risk than NSP's traditional utility businesses due to a number of factors, including:

MANAGEMENT'S DISCUSSION AND ANALYSIS NSP's Energy Marketing division has exposure to the risk of changes and NSP's long-range capital structure objectives. The following in market prices of electricity and natural gas. As of Dec. 31, 1999, summarizes the financing sources used in 1999.

a 10 percent increase or decrease in electricity futures and forward Internal funds - Funds generated internally from operating prices would have an immaterial impact on NSP's financial results.

cash flows in 1999 remained generally sufficient to meet work Any changes in the values of these futures contracts would be offset ing capital needs, debt service, dividend payout requirements by a change in the underlying commodities being hedged.

and a significant portion of utility construction expenditures.

NRG's power marketing subsidiary is exposed to the risk of changes NSP's goal for its pretax interest coverage ratio for utility in market prices of fuel oil, natural gas and electricity. To manage operations is 3.5-5.0. The utility pretax interest coverage ratio, exposure to this volatility, NRG uses a variety of energy contracts, excluding AFC, was 3.2 in 1999, 3.8 in 1998 and 3.6 in 1997.

including options, swaps and forward contracts. As of Dec. 31, 1999, Internally generated funds from utility operations could have

-e a 10 percent increase in fuel oil, natural gas and electricity forward provided financing for approximately 80 percent of NSP's utility prices would result in a gain on these contracts of approximately capital expenditures for 1999 and approximately 95 percent of

$12 million. Conversely, a 10 percent decrease in fuel oil, natural the $2.0 billion in utility capital expenditures incurred from C gas and electricity forward prices would result in a loss on these 1995-1999. The pretax interest coverage ratio, excluding contracts of approximately $12 million. These hypothetical gains AFC, for all NSP operations was 2.1 in 1999, 2.9 in 1998 and losses on energy forward contracts would be offset by the and 2.8 in 1997.

gains and losses on the underlying commodities being hedged.

o External financing - NSP's short-term debt availability and A

Accounting Changes IThe Financial Accounting Standards Board usage is described in Note 2 to the Financial Statements. In (FASB) has proposed new accounting standards that would require general, short-term borrowings are used to provide temporary U the full accrual of nuclear plant decommissioning and certain financing, mainly for NSP-Minnesota and NRG, utility capital other site exit obligations. Material adjustments to NSP's balance expenditures, nonregulated projects and other short-term sheet would occur upon implementation of the FASB's proposal, cash needs. NSP's long-term debt and capital stock activity which would be no earlier than 2002. However, the effects of regu are shown on the Statements of Capitalization and Stockholders' lation are expected to minimize or eliminate any impact on operating Equity. These sources are used to provide permanent financ expenses and earnings from this future accounting change. For fur ing for both regulated and nonregulated business activities.

ther discussion of the expected impact of this change, see Note 13 The 1999 nonregulated asset acquisitions, property additions to the Financial Statements.

and equity investments by NSP's subsidiaries were primarily In June 1998, the FASB issued SIAS No. 133 -Accounting for financed by the issuance of subsidiary debt and equity contribu 26 Derivative Instruments and Hedging Activities. This statement tions from NSF. Project debt associated with some nonregulated requires that all derivatives be recognized at fair value in the balance investments is not reflected in NSP's balance sheet because the sheet and all changes in fair value be recognized currently in earn equity method of accounting is used for such investments as ings or deferred as a component of other comprehensive income, discussed in Note 10 to the Financial Statements.

depending on the intended use of the derivative, its resulting desig Future FinancingRequirements I NSP currently estimates that nation and its effectiveness. NSP plans to adopt this standard in its utility capital expenditures will be $490 million in 2000 and 2001, as required. NSP has not yet determined the potential impact

$2.3 billion for 2000-2004. Of the 2000 amount, approximately of implementing this statement.

$410 million is scheduled for electric utility facilities and approxi Inflation , Inflation at its current level is not expected to materially mately $50 million for natural gas facilities. In addition to utility affect NSP's prices or returns to shareholders. capital expenditures, expected financing requirements for 2000-2004 include approximately $1 billion to retire long-term debt and fund principal maturities.

LtOi LQITYN_C APITA REMULQRCES 1999 FinancingRequirements [ NSP's need for capital funds primar NSP subsidiaries expect to invest significant amounts in nonregu ily is related to the construction of plant and equipment to meet the lated projects in the future. Financing requirements for nonregulated needs of electric and gas utility customers and to fund equity com project investments will vary depending on the success, timing and mitments or other investments in nonregulated businesses. In 1999: level of involvement in projects currently under consideration.

Total utility capital expenditures were $462 million. Of NRG expects to invest approximately $2.7 billion in 2000 and that amount, $367 million related to replacements and approximately $4.7 billion for 2000-2004 for nonregulated improvements of NSP's electric system and nuclear fuel, and projects and property, which include acquisitions and project

$67 million involved construction of natural gas facilities. investments. NRG's capital requirements may vary signifi cantly. NRG's capital requirements for 2000 reflect expected NSP companies (mainly NRG) invested approximately acquisitions of existing generation facilities, including Cajun,

$1.9 billion for equity interests in and loans to nonregulated Killingholme A and the Conectiv fossil assets. A significant projects for the acquisition of generating assets and for addi portion of NRG's capital requirements is expected to be tions to nonregulated property.

financed by project-secured debt. In addition, NRG may issue 1999 FinancingActiviiy I During 1999, NSP's sources of capital a limited amount of equity financing to third parties for included internally generated funds and external financings. The funding a portion of the capital requirements.

allocation of financing requirements between these capital resources is based on the relative cost of each resource, regulatory restrictions

MANAGEMENT'S DISCUSSION AND ANALYSIS o Seren expects to spend approximately $180 million during remaining from its $400 million universal shelf registration 2000, which reflects the build-out of its broadband communi filed with the SEC in November 1998 and $50 million of cations network in Northern California. Seren is evaluating its unissued first mortgage bonds remaining from its shelf regis financing options, including equity financing to third parties tration filed in October 1995. In addition, NSP-Minnesota is and project-secured debt. Seren's capital requirements for planning on filing a $400 million universal debt shelf registration 2001-2004 may vary significantly depending on the success during the first half of 2000. During 1999, NSP-Wisconsin of development efforts under way. filed a shelf registration with the SEC to issue up to $80 million of long-term debt. NSP-Wisconsin currently expects to issue NSP and its subsidiaries continue to evaluate opportunities to between $50 million and $80 million of unsecured long-term enhance shareholder returns and achieve long-term financial objec debt during 2000, primarily to reduce short-term debt levels.

tives through investments in projects or acquisitions of existing businesses. These investments could cause significant changes to the NRG debt - In December 1999, NRG filed a shelf registration capital requirement estimates for nonregulated projects and prop with the SEC to issue up to $500 million of unsecured debt.

erty. Long-term financing may be required for such investments. NRG expects to issue debt under this shelf during 2000 for general corporate purposes, which may include financing NSP also will have future financing requirements for the portion of development and construction of new facilities, additions to nuclear plant decommissioning costs not funded externally. Based working capital and financing capital expenditures and pending on the most recent decommissioning study approved by regulators, or potential acquisitions. In addition to NRG corporate debt, these amounts are anticipated to be approximately $363 million NRG Northeast Generating LLC (N.E. Generating), a and are expected to be paid during the years 2010-2022.

wholly owned subsidiary of NRG, issued $750 million of FutureSources of Financing INSP expects to meet future financing bonds in February 2000 to pay down short-term borrowings requirements by periodically issuing long-term debt, short-term debt, and reduce NRG's corporate debt issued to fund N.E.

common stock and preferred securities to maintain desired capitaliza Generating (see Note 2).

tion ratios. Over the long term, NSPs equity investments in and Common stock - NSP's Articles of Incorporation authorize acquisitions of nonregulated projects are expected to be financed at an additional 194.3 million shares of common stock in the nonregulated subsidiary level from internally generated finds or excess of shares issued at Dec. 31, 1999. In 1999, NSP filed the issuance of subsidiary debt. Financing requirements for the non registration statements with the SEC to allow for the sale regulated projects, in excess of equity contributions from partners, of up to 1.9 million shares of newly issued common stock are expected to be fulfilled through project or subsidiary debt.

under NSP's Dividend Reinvestment and Stock Purchase Decommissioning expenses not funded by an external trust will Program (DRSPP) and Executive Long-Term Incentive be financed through a combination of internally generated funds, Award Stock Plan. NSP plans to issue new shares for its 27 long-term debt and common stock.

DRSPP, Employee Stock Ownership Plan (ESOP) and The following summarizes the financing sources expected to be Executive Long-Term Incentive Award Stock Plan in 2000.

available to NSP in the near future: NSP filed its proposed 2000 Capital Structure and Financing Plan with the MPUC in November 1999. In its filing, NSP Internal funds - Internally generated funds from utility proposed that if the completion of its merger with NCE is operations are expected to equal approximately 85 percent of timed as currently anticipated, NSP will be recapitalized as a anticipated utility capital expenditures for 2000 and approxi subsidiary of Xcel Energy. If completion of the merger mately 95 percent of the anticipated utility capital expenditures appears to be delayed, NSP may issue equity or an equity for 2000-2004. Because NRG has been reinvesting foreign related security in the first half of 2000.

cash flows in operations outside the United States, the equity income from foreign investments is not fully available Preferred stock - NSP's Articles of Incorporation authorize to provide operating cash flows for domestic cash require the maximum amount of preferred stock that may be issued.

ments such as payment of NSP dividends, domestic capital Under these provisions, NSP could have issued all $595 million expenditures and domestic debt service. of its remaining authorized, but unissued, preferred stock at Dec. 31, 1999, and remained in compliance with all interest Short-term debt - NSP has received regulatory approval for up and dividend coverage requirements.

to approximately $1.5 billion in short-term borrowing levels.

NSP credit lines (as discussed in Note 2 to the Financial Statements) make short-term financing available in the form of bank loans, letters of credit and support for commercial paper.

Utility long-term debt - NSP-Minnesota's and NSP-Wisconsinds first mortgage indentures limit the amount of first mortgage bonds that may be issued. The MPUC and the PSCW have jurisdiction over securities issuance. At Dec. 31, 1999, with an assumed interest rate of 7.75 percent, NSP-Minnesota could have issued about $1.9 billion of additional first mortgage bonds under its indenture and NSP-Wisconsin could have issued about $320 million of additional first mortgage bonds under its indenture. NSP has $150 million of unissued bonds

CONSOLIDATED STATEMENTS OF INCOME Yar Ended Deceniber 31 rNNN f-15o1saild ({fdoi/ar's,cxcepýt p/eC; sbare data) ,LYZZ LZ 199 UTHl1Y O!PFRAI ING RI VFNU[FS Electric: Retail $2 169 296 $2 152221 $2 054 473 Sales for resale and other 227 800 210 130 164 077 Gas 471 915 456 823 515 196 Total 2869011 2819 174 2 733 746 UTILI IY OI LRAING I XI NSES Fuel for electric generation 319 193 311 368 309 999 Purchased and interchange power 454487 377 907 286 239 Cost of gas purchased and transported 278 240 267 050 331 296 Other operation 401 968 392 054 368 545 Maintenance 178 594 181 066 164 542 Administrative and general 127 427 150 078 141 802 Conservation and energy management 60 180 71 134 70 939 Depreciation and amortization 355 704 338 225 325 880 Property and general taxes 222 446 220 620 227 893 Income taxes 127 293 145 383 144 855 Total 2525 532 2454 885 2371 990 Utility operating income 343 479 364 289 361 756 01II I[1 INCO\ME (I \XI'lN'. )

Income from nonregulated businesses - before interest and taxes 79439 51 171 12078 Allowance for funds used during construction - equity 162 8 509 6401 2 Write-down of investment in CellNet stock (14 063)

Primergy merger costs (29 005)

Other utility income (deductions) - net (9 483) (3 697) (2 886)

Income taxes on nonregulated operations and nonoperating items - benefit 61 011 40588 48 145 Total 117066 96571 34 733 28 Income before financing costs 460 545 460 860 396 489 FINANCING CO\1S Interest on utility long-term debt 102843 104 171 101250 Other utility interest and amortization 25677 11 612 19063 Nonregulated interest and amortization 97854 54261 34627 Allowance for funds used during construction - debt (5915) (7307) (10208)

Total interest charges 220459 162737 144732 Distributions on redeemable preferred securities of subsidiary trust 15750 15750 14437 Total financing costs 236209 178487 159 169 NIT INCOMI 224 336 282 373 237 320 Preferred stock dividends and redemption premiums 5292 5548 11 071 ARNIN GS A\AI IA B1I[ FO[R COMONI0N S MOCK $ 219044 $ 276825 $ 226249 Average number of common shares outstanding (000s) 153366 150 502 140594 Average number of common and potentially dilutive shares outstanding (000s) 153443 150743 140870 I .ARNI NGCSP RIAVEAG F COMM NI\ON SI ARIR BAS I C $ 1.43 $ 1.84 $ 1.61 I AININGS PlL A\':IS,\GF COMIMON S1ARIU DI LUILD $ 1.43 $ 1.84 $ 1.61 Common dividends declared per share $ 1.445 $ 1.425 $ 1.403 Se .Votes to iNnanial Sratmnents

CONSOLIDATED STATEMENTS OF CASH FLOWS V11-1.

V1111111 ý' I I QQ) I 99R !997 (Thnua.... ,I¢o, ,Ih .

CASH FLOWS FR OM OPERATING ACTIVI I ES Net income $ 224336 $282373 $237320 Adjustments to reconcile net income to cash from operating activities:

Depreciation and amortization 423 807 379 397 358 928 Nuclear fuel amortization 50 056 43 816 40 015 Deferred income taxes (18 907) (1 017) (5 902)

Deferred investment tax credits recognized (9417) (9 432) (10 061)

(162) (8 509) (6401)

Allowance for funds used during construction - equity Undistributed equity in earnings of unconsolidated affiliates (27 956) (22 753) (5 364)

Conservation incentive adjustments - noncash 71 348 Write-downs of EMI goodwill and CellNet investment 31 346 Write-off of prior year Primergy merger costs 25 289 Cash provided by (used for) changes in certain working capital items (see below) (80 649) (13 673) 36 117 17 348 51 863 19 844 Cash provided by changes in other assets and liabilities NEI CASH PRO OVIDED BY OPERATING ACIIVI 1ES 681 150 702065 689785 CASH I LOWS FROM [NVEST I NG ACT I VITI LS Capital expenditures:

Nonregulated property additions and asset acquisitions (1698414) (44918) (195 528)

Utility plant additions (including nuclear fuel) (462054) (411 113) (396605)

Increase (decrease) in construction payables (2 604) 5 270 2 563 Allowance for funds used during construction - equity 162 8509 6401 Investment in external decommissioning fund (39 183) (41 360) (41 261)

Equity investments, loans and deposits for nonregulated projects (176 207) (234 214) (395 495)

Collection of loans made to nonregulated projects 81 440 109 530 87 128 Other investments - net (16 545) 1 307 (15 692)

NET CASH USED FOR INVEST ING ACIVII IES (2 313 405) (606 989) (948 489) 29 CASH FLOWS FROMl FINANCING ACTIVI I IES Change in short-term debt - net issuances (repayments) 1 205 894 (20 522) (108 023)

Proceeds from issuance of long-term debt - net 859718 290626 299779 Repayment of long-term debt, including reacquisition premiums (249 371) (135 183) (141 681)

Proceeds from issuance of preferred securities- net 193 315 Proceeds from issuance of common stock - net 55 127 72348 267 965 Redemption of preferred stock, including reacquisition premiums (95 000) (41 278)

Dividends paid (225 509) (219 746) (207 726)

NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 1 645 859 (107 477) 262 351 NELi INCREASE (DECREASE) IN CASH AND CASH EOJUIVALENTS 13604 (12401) 3647 Cash and cash equivalents at beginning of period 42364 54765 51 118 CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 55968 $ 42364 $ 54765 CASH PROVIDED BY [USED FOR CHANGES IN CERTAIN WORKING CAPITAL II EMS Customer accounts receivable and unbilled utility revenues $ (106692) $ (1 583) $ 47745 Materials and supplies inventories (22 228) (5 385) (8 547)

Payables and accrued liabilities (excluding construction payables) 73 136 7 845 (7342)

Other (24865) (14 550) 4261 N ET $ (80649) $(13673) $ 36 117 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORM4AT ION Cash paid during the year for:

Interest (net of amount capitalized) $ 201276 $148275 $144062 Income taxes (net of refunds received) $ 65 121 $ 74005 $113009 See Nlotes to FinancialStatements

CONSOLIDATED BALANCE SHEETS e3 Drrpm.r 1 aiozasanefdosard 199*9 1992_

ASSETS UTILITY PLANT Electric - including construction work in progress: 1999, $119,944; 1998, $120,095 $7430686 $7 199843 Gas 952 131 884 182 Other 375 058 365 101 Total 8757875 8449 126 Accumulated provision for depreciation (4409 151) (4 155 641)

Nuclear fuel - including amounts in process: 1999, $13,708; 1998, $16,744 1 026 063 975 030 Accumulated provision for amortization (923336) (873281)

Net utility plant 4451451 4395234 CURRENT ASSETS Cash and cash equivalents 55 968 42 364 Customer accounts receivable - net of accumulated provisions for uncollectible accounts: 1999, $8,442; 1998, $5,176 370 270 253 559 Unbilled utility revenues 144 261 139 098 Other receivables 58 680 105 116 Materials and supplies inventories - at average cost:

Fuel 59 600 58 806 Other 231 503 110267 Prepayments and other 113 524 44855 Total current assets 1 033 806 754 065 OTH ER ASSETS Nonregulated property- net of accumulated depreciation: 1999, $203,767; 1998, $122,445 2 086 476 282 524 Equity investments in nonregulated projects 1 047 248 862 596 External decommissioning fund and other investments 561 682 479 402 Regulatory assets 248 127 331 940 Notes receivable from nonregulated projects 66876 106427 Long-term prepayments, deferred charges and receivables 158 096 88 194 Intangible assets - net of accumulated amortization 113969 95915 Total other assets 4 282 474 2 246 998 30 TOTAL $9767731 $7396297 LIABILITIES AND EQUITY CAPITALIZATION (SEE CONSOLIDATED STATEMENTS OF CAPITALIZATION)

Common stockholders' equity $2557530 $2481 246 Preferred stockholders' equity 105 340 105 340 Mandatorily redeemable preferred securities of subsidiary trust 200 000 200 000 Long-term debt 3453 364 1 851 146 Total capitalization 6316234 4637732 CURRENT LIABILITIES Long-term debt due within one year 153231 227600 Other long-term debt potentially due within one year 141 600 141 600 Short-term debt - utility 420443 114273 Short-term debt - nonregulated 378716 125557 Accounts payable 321 382 271 799 Taxes accrued 172059 170274 Interest accrued 49 327 38 836 Dividends payable on common and preferred stocks 57 523 55 650 Accrued payroll, vacation and other 131 855 86673 Total current liabilities 1826136 1232262 OTHER LIABILITIES Deferred income taxes 811 638 814983 Deferred investment tax credits 118582 128444 Regulatory liabilities 461 569 372239 Postretirement and other benefit obligations 143905 129514 Other long-term obligations and deferred income 89667 81 123 Total other liabilities 1 625 361 1 526303 COMNMITMENTS AND CONTINGENT LIABILITIES (SEE NOTES 13 AND 141 TOTAL $9767731 $7396297 See Notes to FinancialStatemenwts

CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY Acc. enmulated Other 7btal Retained Shares Held Comatrehensive Stockholders' gd_.oa*lazs.J CLDW-atLadml'a1,14r P'IaYLdeings m BALANCE AT DEC. 31. 1996 $345318 $466060 $1 340799 $(19 091) $ 2794 $2 135 880 Net income 237 320 237 320 Currency translation adjustments (65 681) (65 681)

Comprehensive income for 1997 171 639 Dividends declared:

Cumulative preferred stock (9 923) (9 923)

Common stock (202 173) (202 173)

Premium on redeemed preferred stock (1 148) (1 148)

Issuances of common stock - net 27774 240 112 267 886 1 009 1 009 Tax benefit from stock options exercised Repayment of ESOP loan (a) 8 558 8 558 BALANCE AT DEC. 31, 1997 $373 092 $707 181 $1 364 875 $(10 533) $(62 887) $2 371 728 Net income 282 373 282 373 Unrealized loss from marketable securities, net of tax of $4,417 (6416) (6416)

Currency translation adjustments (19711) (19711)

Comprehensive income for 1998 256 246 Dividends declared:

Cumulative preferred stock (5 548) (5 548)

Common stock (215069) (215069)

Issuances of common stock - net 8 650 66 294 74 944 Pooling of interests business combinations 6065 6065 Tax benefit from stock options exercised 850 850 Loan to ESOP to purchase shares (a) (15000) (15000)

Repayment of ESOP loan (a) 7030 7030 BALANCE AT DEC. 31, 1998 $381742 $774 325 $1432696 $(18503) $(89 014) $2 481 246 224 336 31 Net income 224 336 Recognition of unrealized loss from marketable securities, net of tax of $4,417 6416 6416 Currency translation adjustments 7 128 7 128 Comprehensive income for 1999 237 880 Dividends declared:

Cumulative preferred stock (5 292) (5 292)

Common stock (222 092) (222 092)

Issuances of common stock - net 7 582 46 652 54 234 Pooling of interests business combination 4 599 4 599 Tax benefit from stock options exercised 58 58 Repayment of ESOP loan (a) 6897 6897 BALANCE AT DEC. 31, 1999 $389 324 $821 035 $1434247 $(11606) $(75 470) $2 557 530 (a) Did not affect NSP cash flows See Notes to FinancialStatements

CONSOLIDATE[D STATEMENTS OE CAPIT ALIZAT ION 1999 1998 I hn ,,,,n,,I, ,nck,//,n CONIM()N 'IOCKIIOI. DLRIIAI).UI Y Common stock - authorized 350,000,000 shares of $2.50 par value; issued shares: 1999, 155,729,663; 1998, 152,696,971 $ 389 324 $ 381 742 Premium on common stock 821 035 774 325 Retained earnings 1 434 247 1 432 696 Leveraged common stock held by Employee Stock Ownership Plan (ESOP) shares at cost: 1999, 392,325; 1998, 641,884 (11 606) (18 503)

Accumulated other comprehensive income (75470) (89014) 101AL CO(tMMON SIOCKHI()1)IIR LQ.UIIY $2557 530 $2481 246 CU \1 LAVII 0 \. PRlI L RI D 0 IC K - authorized 7,000,000 shares of $100 par value; outstanding shares: 1999 and 1998, 1,050,000 NSP-Minnesota

$3.60 series, 275,000 shares $ 27500 $ 27500 4.08 series, 150,000 shares 15000 15000 4.10 series, 175,000 shares 17500 17500 4.11 series, 200,000 shares 20 000 20 000 4.16 series, 100,000 shares 10000 10000 4.56 series, 150,000 shares 15 000 15000 Total 105000 105000 Premium on preferred stock 340 340 101 AL IM I1I 1:RL1 SIOCKIIOLDI.RS' PL[UI IY $ 105340 $ 105340 M\AN DAI\IORILY RI DLLMI\AIP[ PIRLI: LIRRI S)CL-R.IIII[FS Of UBSIDIR) 1Y RIUSI holding as its sole asset junior subordinated deferrable debentures of NSP-Minnesota 7 7s% series, 8,000,000 shares due Jan. 31, 2037 (See Note 8) $ 200000 $ 200 000 LONG- I LM DHBI First Mortgage Bonds - NSP-Minnesota 32 Series due:

Feb. 1, 1999, 5Y2% $ 200 000 Dec. 1, 2000, 5X% $ 100000 100 000 Oct. 1, 2001, 77% 150 000 150 000 April 1, 2003, 67% 80 000 80 000 Dec. 1, 2005, 67*% 70 000 70 000 Dec. 1, 1999-2006, 6.00%-6.75% 16 900-Dec. 1, 1999-2006, 3.50%-4.10% 15 170" March 1, 2011, Variable Rate 13 700** 13 700" July 1, 2025, 7Ys% 250 000 250 000 April 1, 2007, 6.80% 60 000" 60 000"*

March 1, 2019, Variable Rate 27 900"* 27 900**

Sept. 1, 2019, Variable Rate 100000"" 100 000'*

March 1, 2003, 57s% 100000 100000 March 1, 2028, 6Y% 150000 150000 Total 1 116770 1 318 500 Less redeemable bonds classified as current (See Note 3) (141 600) (141 600)

Less current maturities (101 940) (201 600)

Net $ 873 230 975 300

• ResIuc e i-eco'er,,fin/a;cing

"^Pollution cfiona l fina u;cing

.See Notes to Fm)*ancial StatoeJw;*s

CONSOLIDATED STATEMENTS OF CAPITALIZATION Derember 3 1 1000 100f3

/*T*l I I* r II

( I20 ,lqnC4lgt 4042/rc.

LONG-TERM DEBT- CONTINUED First Mortgage Bonds - NSP-Wisconsin Series due:

Oct. 1, 2003, 5Y% $ 40000 $ 40000 110000 110000 March 1, 2023, 7X°/o 65 000 65 000 Dec. 1, 2026, 7Y%

$ 215000 $ 215000 Total Guaranty Agreements - NSP-Minnesota Series due:

Feb. 1, 1999-2003, 5.41%

$ 4900** $ 5 100" "-n 22 250" 22 750" May 1, 1999-2003, 5.70%

Feb. 1, 2003, 7.40% 3 500" 3 500" Total 30650 31350 Less current maturities (700) (700)

Net $ 29 950 $ 30650 0THI-ER LONG-TERM DEBT 4

NSP-Minnesota Senior Notes due Aug. 1, 2009, 6;/% $ 250000 9 0001, $ 9 000"*

City of Becker Pollution Control Revenue Bonds - Series due Dec. 1, 2005, 7.25%

20 600' Anoka County Resource Recovery Bond - Series due Dec. 1, 1999-2008, 6.70%-7.15% C,.

19 615' Anoka County Resource Recovery Bond - Series due Dec. 1, 2000-2008, 3.95%-4.60%

18 600' 18 600' City of La Crosse Resource Recovery Bond - Series due Nov. 1, 2021, 6%

Viking Gas Transmission Company Senior Notes - Series due:

18 845 20 978 Oct. 31, 2008, 6.65%

4 290 4 650 Nov. 30, 2011, 7.1 %

11900 12 833 Sept. 30, 2012, 7.31%

19667 Sept. 30, 2014, 8.04%

NRG Energy, Inc. Senior Notes - Series due:

125 000 125 000 Feb. 1, 2006, 7.625%

250 000 250 000 33 June 15, 2007, 7.5%

300 000 June 1, 2009, 7.5%

240 000 Nov. 1, 2013, 8%

NRG debt secured solely by project assets:

NRG Northeast Generating debt reclassified from short-term (see Note 2) 646 564 255 000 Crockett Corp. LLP debt due Dec. 31, 2014, 8.13%

NRG Energy Center, Inc. (Minneapolis Energy Center) Senior Secured Notes Series due June 15, 2013, 7.31% 68881 71783 26216 28586 Pacific Generation Company debt due 2000-2007, 4.7%-9.9%

17390 17792 Various NEO Corporation debt due Jan. 31, 2008, 9.35%

6 800 Pittsburgh Thermal LP Notes due 2002-2004, 10.61%-10.729%

5 905 San Francisco Thermal LP Notes due Nov. 5, 2004, 10.6%

5 761 COBEE debt due April 21, 2000, 0.0%

5208 6041 United Power & Land Notes due March 31, 2000, 7.62%

3000 3000 Black Mountain Gas Industrial Development Bonds due June 1, 2004, May 1, 2005, 6%

47116 46024 Various Eloigne Company Affordable Housing Project Notes due 1999-2027, 1.0%-9.9%

11606 18504 Employee Stock Ownership Plan Bank Loans due 1999-2005, Variable Rate 27665 9 122 Miscellaneous 2394029 662513 Total (50 591) (25 300)

Less current maturities Net $2343438 $ 637213 (8254) (7017)

Unamortized discount on long-term debt - net

$3 453 364 $1 851 146 TOTAL LONG-TERM DEBT TOTAL CAPITALI ZA'IION

$6316234 $4637732 SResource recoveryfinancing SP1oeueton controi/ tnancing See Aotes to FinancialStatements

NOTES TO FINANCIAL STATEMENTS 1 SiimmaTr nfSianificnnr AcciunringTolicies Allowance for Funds Used during Construction (AFQ ' AFC, a Business and System f/Accounts NSP-Minnesota is primarily a noncash item, represents the cost of capital used to finance utility public utility serving customers in Minnesota, North Dakota, South construction activity. AFC is computed by applying a composite Dakota and Arizona. NSP-Wisconsin serves utility customers in pretax rate to qualified construction work in progress. The AFC Wisconsin and Michigan. Viking operates an interstate natural gas rate was 5.25 percent in 1999, 8.0 percent in 1998 and 5.75 percent pipeline. All of the utility companies' accounting records conform to in 1997. The amount of AFC capitalized as a construction cost is the Federal Energy Regulatory Commission (FERC) uniform system credited to other income (for equity capital) and interest charges of accounts or to systems required by various state regulatory com (for debt capital). AFC amounts capitalized are included in NSP's missions, which are the same in all material aspects. rate base for establishing utility service rates. In addition to Principlesof Consolidation IThe following wholly owned sub construction-related amounts, AFC is also recorded to reflect sidiaries of NSP-Minnesota are included in the consolidated returns on capital used to finance conservation programs.

financial statements. In this report, we refer to these companies Depreciation I NSP determines the depreciation of its plant by collectively as NSP. spreading the original cost equally over the plant's useful life. Every

"°NSP-Wisconsin five years, NSP submits an average service life filing to the Minnesota

" NRG Energy, Inc. Public Utilities Commission (MPUC) for electric and gas property.

34

• Viking Gas Transmission Co. The most recent filing occurred in 1997. Depreciation expense as a Energy Masters International, Inc. percentage of the average utility plant in service was 3.83 percent in

, Eloigne Co. 1999, 3.77 percent in 1998 and 3.78 percent in 1997.

"Seren Innovations, Inc. Decommissioning NSP accounts for the future cost of decommis o Ultra Power Technologies, Inc.

sioning - or permanently retiring - its nuclear generating plants NSP uses the equity method of accounting for its investments in through annual depreciation accruals using an annuity approach partnerships, joint ventures and certain projects, mainly at NRG designed to provide for full rate recovery of the future decommis and Eloigne. We record our portion of earnings from international sioning costs. Our decommissioning calculation covers all expenses, investments after subtracting foreign income taxes. In the consoli including decontamination and removal of radioactive material, dation process, we eliminate all significant intercompany transactions and extends over the estimated lives of the plants. The calculation and balances except for intercompany and intersegment profits for assumes that NSP will recover those costs through rates. (See Note sales among the electric and gas utility businesses of NSP-Minnesota, 13 for more information on decommissioning.)

NSP-Wisconsin and Viking, which are allowed in utility rates. Nuclear FuelExpense I Nuclear fuel expense, which is recorded as 34 the plant uses fuel, includes the cost of:

Revenues I NSP records utility revenues based on a calendar month, but reads meters and bills customers according to a cycle that doesn't nuclear fuel used necessarily correspond with the calendar month's end. To compen o future spent nuclear fuel disposal, based on fees established sate, we estimate and record unbilled revenues from the monthly by the U.S. Department of Energy (DOE) meter-reading dates to the month's end. NSP-Minnesota's rates NSP's portion of the cost of decommissioning or shutting include monthly adjustments for: down the DOE's fuel enrichment facility

" changes in the average cost of fuel, including electricity and EnvironmentalCosts I We record environmental costs when it is natural gas that NSP purchases, from base levels approved in probable that NSP is liable for the costs and we can reasonably the most recent rate case; and estimate the liability. We may defer costs as a regulatory asset based

" recovery of conservation and energy management program on our expectation that we will recover these costs from customers costs and incentives in Minnesota, which is reviewed annually. in future rates. Otherwise, we expense the costs. If an environmen NSP-Wisconsin's rates include a cost-of-energy adjustment clause tal expense is related to facilities we currently use, such as pollution for purchased gas, but not for purchased electricity or electric fuel. control equipment, we capitalize and depreciate the costs over the We can request recovery of those electric costs prospectively life of the plant.

through the rate review process, which normally occurs every two We record estimated remediation costs, excluding inflationary years in Wisconsin, and an interim fuel cost hearing process. increases and possible reductions for insurance coverage and rate Utiliýy Plant and Retirements I Utility plant is stated at original recovery. The estimates are based on our experience, our assessment cost. The cost of utility plant includes direct labor and materials, of the current situation and the technology currently available for contracted work, overhead costs and applicable interest expense. use in the remediation.

The cost of utility plant retired, plus net removal cost, is charged We regularly adjust the recorded costs as we revise estimates and as to accumulated depreciation and amortization. Maintenance and remediation proceeds. If we are one of several designated responsi replacement of items determined to be less than units of property ble parties, we estimate and record only our share of the cost. We are charged to operating expenses. treat any future costs of restoring sites where operation may extend indefinitely as a capitalized cost of plant retirement. The deprecia tion expense levels we can recover in rates include a provision for these estimated removal costs.

NOTES TO FINANCIAL STATEMENTS Income Taxes I Based on the liability method, NSP defers income futures or forward contracts is recorded when related sales com taxes for all temporary differences between pretax financial and taxable mitments are fulfilled as a component of operating expenses. NSP income, and between the book and tax bases of assets and liabilities. and NRG do not speculate in electricity or natural gas futures.

We use the tax rates that are scheduled to be in effect when the A final derivative instrument used by NSP and NRG is the interest temporary differences are expected to turn around, or reverse.

rate swap. The cost or benefit of the interest rate swap agreements is Due to the effects of past regulatory practices, when deferred taxes recorded as a component of interest expense. None of these deriva were not required to be recorded, we account for the reversal of tive financial instruments are reflected on NSP's balance sheet. For some temporary differences as current income tax expense. We defer information on derivatives, see Note 11.

investment tax credits and spread their benefits over the estimated Use of Estimates In recording transactions and balances resulting "a lives of the related property. Utility rate regulation also has created from business operations, NSP uses estimates based on the best infor certain regulatory assets and liabilities related to income taxes, which mation available. We use estimates for such items as plant depreciable we summarize in Note 9. We discuss our income tax policy for lives, tax provisions, uncollectible amounts, environmental costs, international operations in Note 7.

unbilled revenues and actuarially determined benefit costs.

Foreign Currency Translation I NSP's foreign operations generally use We revise the recorded estimates when we get better information the local currency as their functional currency in translating interna -t or when we can determine actual amounts. Those revisions can tional operating results and balances to U.S. currency. Foreign currency affect operating results. Each year, we also review the depreciable denominated assets and liabilities are translated at the exchange rates in lives of certain plant assets and revise them if appropriate.

effect at the end of a reporting period. Income, expense and cash flows a are translated at weighted-average exchange rates for the period. We Cash Equivalents I NSP considers investments in certain debt accumulate the resulting currency translation adjustments and report instruments - with a remaining maturity of three months or less them as a component of Accumulated Other Comprehensive Income. at the time of purchase - to be cash equivalents. Those debt instru 35 ments are primarily commercial paper and money market funds.

When we convert cash distributions made in one currency to another currency, we include those gains and losses in the results Regulatory Deferrals I As regulated entities, NSP-Minnesota, NSP of operations as a component of income from nonregulated busi Wisconsin and Viking account for certain income and expense items nesses before interest and taxes. We do the same for foreign currency using Statement of Financial Accounting Standards (SFAS) No. 71 derivative arrangements that do not qualify for hedge accounting. Accounting for the Effects of Regulation. Under SIAS No. 7 1:

Derivative FinancialInstruments I To preserve the U.S. dollar value

• we defer certain costs, which would otherwise be charged to of projected foreign currency cash flows, NRG hedges - or protects expense, as regulatory assets based on our expected ability to those cash flows if appropriate foreign hedging instruments are recover them in future rates; and available. The gains and losses on those agreements offset the effect o we defer certain credits, which would otherwise be reflected of exchange rate fluctuations on NRG's known and anticipated as income, as regulatory liabilities based on our expectation cash flows. NRG defers gains on agreements that hedge firm com they will be returned to customers in future rates.

mitments of cash flows, and accounts for them as part of the relevant We base our estimates of recovering deferred costs and returning foreign currency transaction when the transaction occurs. NRG deferred credits on specific ratemaking decisions or precedent for defers losses on these agreements the same way, unless it appears each item. We amortize regulatory assets and liabilities consistent that the deferral would result in recognizing a loss later.

with the period of expected regulatory treatment.

While NRG is not currently hedging investments involving foreign Stock-Based Employee Compensation I NSP has several stock-based currency, NRG will hedge such investments when it believes that compensation plans, which are described in Note 4. NSP accounts preserving the U.S. dollar value of the investment is appropriate. NRG for those plans using the intrinsic value method. We do not record is not hedging currency translation adjustments related to future compensation expense for stock options because there is no differ operating results. NRG does not speculate in foreign currencies.

ence between the market price and the purchase price at grant date.

From time to time, NRG also uses interest rate hedging instru We do, however, record compensation expense for restricted stock ments to protect it from an increase in the cost of borrowing. Gains that NSP awards to certain employees, but holds until the restrictions and losses on interest rate hedging instruments are reported as part lapse or the stock is forfeited. We do not use the optional accounting of the asset for Equity Investments in Nonregulated Projects when under SFAS No. 123 - Accounting for Stock-Based Compensation.

the hedging instrument relates to a project that has financial state If we had used the SFAS No. 123 method of accounting, the reduc ments that are not consolidated into NRG's financial statements. tion in earnings for 1999, 1998 and 1997 would have been less than Otherwise, they are reported as a part of debt. 1 cent per share per year.

In the past, EMI used natural gas futures and forward contracts to Development Costs i As NRG develops projects, it expenses the manage the risk of gas price fluctuations. In February 1999, EMI development costs it incurs until a sales agreement or letter of transferred its gas supply and marketing function to NSP's Energy intent is signed and the project has received NRG board approval.

Marketing division. EMI's remaining gas future and forward con NRG capitalizes additional costs incurred at that point. When a tracts will expire during 2000 and EMI will have no further project begins to operate, NRG amortizes the capitalized costs over derivative activity. either the life of the project's related assets or the revenue contract period, whichever is less. If a project is terminated without becom NSP's Energy Marketing division and NRG's Power Marketing ing operational, NRG expenses the capitalized costs in the year of subsidiary use future and forward contracts to manage the risk of the termination.

natural gas and electricity price fluctuations. The cost or benefit of

NOTES TO FINANCIAL STATEMENTS IntangibleAssets I Goodwill results when NSP purchases an entity at "* series issued for pollution control and resource recovery financings a price higher than the underlying fair value of the net assets. We "* certain other series totaling $1 billion amortize the goodwill and other intangible assets over periods consis tent with the economic useful life of the assets. Our intangible assets NSP-Minnesota and NSP-Wisconsin may apply property additions in lieu of cash on all series, as permitted by their first mortgage indenture.

are currently amortized over a range of 15 to 40 years. We periodi cally evaluate the recovery of goodwill based on an analysis of NSP-Minnesota's 2011 and 2019 series First Mortgage Bonds have estimated undiscounted future cash flows. At Dec. 31, 1999, variable interest rates, which currently change at various periods up NSP's intangible assets included $41 million of goodwill, net of to 270 days, based on prevailing rates for certain commercial paper accumulated amortization. securities or similar issues. The interest rates applicable to these Intangible and other assets also included deferred financing costs, issues averaged 5.75 percent and 3.7 percent, respectively, at net of amortization, of approximately $37 million at Dec. 31, 1999. Dec. 31, 1999. The 2011 series bonds are redeemable upon seven

-t We are amortizing these financing costs over the remaining maturity days notice at the option of the bondholder. NSP-Minnesota also a

C,; is potentially liable for repayment of the 2019 series when the bonds period of the related debt.

n are tendered, which occurs each time the variable interest rates Reclassifications I We reclassified certain items in the 1997 and 1998 change. The principal amount of all of these variable rate bonds a

income statements to conform to the 1999 presentation. These outstanding represents potential short-term obligations and, there reclassifications had no effect on net income or earnings per share. fore, is reported under current liabilities on the Balance Sheets.

"2S*hrr-Term Bnrrnvwrinu( Maturities and sinking-fund requirements on long-term debt are:

Short-term debt outstanding at Dec. 31 consiste d of: ' $153 million in 2000

• $190 million in 2001 Utility short-term debt $ 420 $ 114 $ $42 million in 2002 Weighted average interest rate - Dec. 31 "* $290 million in 2003 5 $373 million in 2004 Nonregulated short-term debt $1 026 $ 126 Less amounts reclassified to long-term (647) 4 Connmnn Srick grid Incenrive Stock Plans Net nonregulated short-term debt 379 126 Weighted average interest rate - Dec. 31 NSP's Articles of Incorporation and first mortgage indenture 7.4% 5.9%

include certain restrictions on paying cash dividends on common stock. Even with these restrictions, NSP could have paid more 36 At the end of 1998 and 1999, NSP-Minnesota had a $300 million than $1.4 billion in additional cash dividends on common stock revolving credit facility under a commitment fee arrangement. at Dec. 31, 1999.

This facility provides short-term financing in the form of bank loans, letters of credit and support for commercial paper sales. NSP grants nonqualified stock options and restricted stock under NSP did not borrow or issue any letters of credit against this our Executive Long-Term Incentive Award Stock Plan. The awards facility in 1998 or 1999.

granted in any year cannot exceed 1 percent of the number of out standing shares of NSP common stock at the end of the previous In addition, banks provided credit lines of $556 million to wholly year. When options are exercised or when we grant restricted owned subsidiaries of NSP at Dec. 31, 1999. At that time, a total stock, we may either issue new shares or purchase market shares.

of $343 million was borrowed against these lines, mainly by NRG.

The weighted average number of common and potentially dilutive On Feb. 22, 2000, NRG Northeast Generating issued $750 million shares outstanding includes the dilutive effect of stock options and of senior secured bonds to refinance short-term project borrowings. other stock awards based on the treasury stock method. Effective The bond offering included three tranches: $320 million with an in January 1999, stock options granted to NSP officers vest at a interest rate of 8.065 percent due in 2004, $109 million with rate of one-third each year for three years. Stock options for other an interest rate of 8.842 percent due in 2010 and $321 million employees vest one year from the date of grant. Once they have with an interest rate of 9.292 percent due in 2024. NRG used vested, options can be exercised up to 10 years after the date they

$647 million of the proceeds to repay short-term borrowings were granted.

outstanding at Dec. 31, 1999. Accordingly, $647 million of short-term debt has been classified as long-term debt, based on this refinancing. Employees forfeit stock options if their employment ends (for reasons other than retirement) before the vesting term. If employment ends 3 1nng-Term DebL after the vesting term, employees either forfeit their options or must Except for minor exclusions, all property of NSP-Minnesota and exercise them within three to 36 months, depending on their circum NSP-Wisconsin is subject to the liens of the first mortgage indentures, stances. If an employee retires, all options granted in 1999 will vest which are contracts between the companies and their bond holders. immediately and can be exercised over their 10-year life. The exercise A lien on the related property secures other debt securities, as we price of an option is the market price of NSP stock on the date of indicate in the Consolidated Statements of Capitalization. grant. The plan previously granted other types of performance awards, some of which remain outstanding. Most of these perfor The annual sinking-fund requirements of NSP-Minnesota and mance awards were valued in dollars, but paid in shares based on the NSP-Wisconsin's first mortgage indentures are the amounts neces market price at the time of payment. The following table includes sary to redeem 1 percent of the highest principal amount of each transactions that have occurred under the various incentive stock pro series of first mortgage bonds at any time outstanding, excluding: grams, with the corresponding weighted average exercise price:

NOTES TO FINANCIAL STATEMENTS STOCK OPTION AND 'ERFORMANCE AWARDS 1000 i 005 1997 cc - res AveragePrice Sha/res Avergage Price ,Shares Average Price L LnoiwnaS*no or saresj 'Ma Outstanding Jan. 1 23 89 $23.57 2 206 $22.57 2 235 $21.99 Options granted in January or February 993 $26.31 572 $26.88 573 $23.72 Options and awards exercised 28) $18.89 (346) $22.39 (520) $21.12 Options and awards forfeited (8) $26.45 (34) $26.48 (60) $23.60 Options and awards expired 10) $25.64 (9) $23.24 (22) $25.47 OUTSTANDING AT DEC. 31 33 36 $24.41 2 389 $23.57 2 206 $22.57 IXERCISABI E AT DEC. 31 23 49 $24.06 1 847 $23.34 1 685 $22.21 0g The following table summarizes information about stock options 5. Benefit Plans and Other Postretirement Benefits outstanding at Dec. 31, 1999: NSP offers the following benefit plans to its benefit employees. -n Approximately 37 percent of benefit employees are represented Pan"e oFExercse Prices *0 by five local labor unions under a collective-bargaining agreement,

$I**3-2A1d7 021 ff-22 7i 3ý23 72-262RA which expires in 2004.

Options Outstanding: (a) Ca Number outstanding at Pension Benefits I NSP has two noncontributory, defined benefit Dec. 31, 1999 271 624 715 216 2 336 859 pension plans that cover almost all utility employees. Benefits are 37 Weighted average remaining based on a combination of years of service, the employee's average contractual life (years) 1.2 4.2 7.9 pay and Social Security benefits.

Weighted average NSP's policy is to fully fund into an external trust the actuarially exercise price $18.72 $21.96 $25.82 determined pension costs recognized for ratemaking and financial Options Exercisable: (a) reporting purposes, subject to the limitations of applicable Number exercisable at Dec. 31, 1999 271624 715216 1 349786 employee benefit and tax laws. Plan assets principally consist of the common stock of public companies, corporate bonds and U.S.

Weighted average

$18.72 $21.96 $25.47 government securities.

exercise price PostretirementHealth Care I NSP has a contributory health and (a) There were also 12,197 other awards outstanding at Dec. 31, 1999. welfare benefit plan that provides health care and death benefits to almost all NSP retirees. The plan was terminated for nonbargaining In addition to granting stock options, NSP grants certain employees employees retiring after 1998 and for bargaining employees after restricted stock based on a dollar value of the award. We use the 1999. For covered retirees, the plan enables NSP and such retirees market price of the stock on the date it was granted to determine to share the costs of retiree health care. NSP nonbargaining retirees the number of restricted shares to grant. NSP holds the stock until pay 40 percent of total health care costs. Cost-sharing for bargaining restrictions lapse; 50 percent of the stock vests one year from the employees is governed by the terms of NSP's collective bargaining date of the award and the other 50 percent vests two years from agreement.

the date of the award. We reinvest dividends on the shares we hold while restrictions are in place. Restrictions also apply to the addi In conjunction with the 1993 adoption of SFAS No. 106 tional shares acquired through dividend reinvestment. Employers' Accounting for Postretirement Benefits Other Than Pensions, NSP elected to amortize the unrecognized accumulated Over the last three years, NSP has granted the following restricted postretirement benefit obligation (APBO) on a straight-line basis stock awards:

over 20 years.

• 52,688 shares in 1997 Regulators for almost all of NSP's retail and wholesale customers

• 49,651 shares in 1998 have allowed full rate recovery of increased benefit costs under

• 51,790 shares in 1999 SEAS No. 106. Minnesota and Wisconsin retail regulators require Compensation expense related to these awards was immaterial. external funding to the extent it is tax advantaged. Such funding began for Wisconsin in 1993 and for Minnesota in 1998. For wholesale ratemaking, FERC requires external funding for all bene fits paid and accrued under SFAS No. 106. Plan assets held in external funding trusts principally consist of investments in equity mutual funds and cash equivalents.

NOTES TO FINANCIAL STATEMENTS RECONCILIATION OF FUNDED STATUS Pension Benefits Other PostretirementBenefits (Thousaznds ofdollarf) 1999 1998 1999 199R BENEFIT OBLIGATION AT JAN. 1 $1 143 464 $1 048 251 $219762 $279230 Service cost 36421 31 643 196 3247 Interest cost 86 429 78 839 9 184 15896 Plan amendments 184255 102315 (80 840) (51 456)

Actuarial (gain) loss (105 634) (41 635) 8 269 (9 732)

Benefit payments (97 086) (75 949) (16 637) (17 4231 BENEFIT OBLIGATION AT DEC. 31 $1 247 849 $1 143 464 $139934 $219762 Fair value of plan assets at Jan. 1 $2221819 $1978538 $ 34514 $ 19783 Actual return on plan assets 293904 319230 3982 2471 Employer contributions 13339 29683 Benefit payments (97 086) (75 949) (16 637) (17 423)

FAIR VALUE OF PLAN ASSETS AT DEC. 31 $2418637 $2221 819 $ 35 198 $ 34514

'5 Funded status at Dec. 31 net asset (obligation) $1 170788 $1 078355 $(104736) $(185 248)

Unrecognized transition (asset) obligation (311) (387) 22073 104482 T-o Unrecognized prior service cost 277350 114305 (2926) (2399)

Unrecognized net (gain) loss (1 381 889) (1 167340) 10 580 3790 38 AMOUNT RECOGNIZED IN THE BALANCE SHEETS Prepaid benefit asset $ 65938 $ 24933 Accrued benefit liability $ (75 009) $ (79 375)

WEIGHTED AVERAGE ASSUMPTIONS USED IN BENEFIT CALCULATIONS Discount rate at end of year 7.5% 6.5% 7.5% 6.5%

Expected return on plan assets for year - before tax 8.5% 8.5% 8.0% 8.0%

Rate of future compensation increase per year 4.5% 4.5%

Rate of future health care cost increase per year:

Next succeeding year - age 65 and older 6.1% 6.1%

Next succeeding year - under age 65 8.1% 8.1%

Final rate of increase in 2004 5.5% 5.0%

Effect of changes in the assumed health care cost trend rate for each year:

1% increase in APBO components at Dec. 31, 1999 $12 188 1% decrease in APBO components at Dec. 31, 1999 (10 565) 1% increase in service and interest cost components of the net periodic cost 749 1% decrease in service and interest cost components of the net periodic cost (646)

COMPONENTS OF NET PERIODIC BENEFIT COST Pension Benefits Other PostretirementBenefits u4 ofLr*)r (Thnugands 1999 1928 1997 19_99 1998 1997 Service cost $ 36421 $ 31643 $ 27 680 $ 196 $3247 $ 5095 Interest cost 86 429 78 839 72651 9 184 15896 18872 Expected return on plan assets (1[47 592) (129263) (1.15 359) (2499) (1 582) (1 242)

Amortization of transition (asset) obligation (76) (76) (76) 2384 8335 10780 Amortization of prior service cost 21 210 6 673 1 071 (288) (175)

Recognized actuarial (gain) or loss (37 397) (27 727) (20 762) (5) (4) 3 Net periodic benefit cost (credit) under SFAS 87 or 106 (41 005) (39 911) (34 795) 8 972 25 717 33 508 Credits not recognized due to effects of ratemaking 36469 35 545 30 862 NET PERIODIC BENEFIT COST (CREDIT) RECOGNIZED FOR FINANCIAL REPORTING $ (4 536) $ (4 366) $ (3 933) $ 8 972 $25 717 $33 508 401(k) I NSP has a contributory, defined contribution Retirement ESOP i NSP has a leveraged Employee Stock Ownership Plan Savings Plan, which complies with section 401 (k) of the Internal (ESOP) that covers substantially all utility employees. NSP makes Revenue Code and covers substantially all utility employees. NSP contributions to this noncontributory, defined contribution plan matches specified amounts of employee contributions to the plan. to the extent we realize a tax savings from dividends paid on certain NSP's matching contributions were approximately $6.5 million in ESOP shares. Contributions to the ESOP, which represent com 1999, $4.8 million in 1998 and $4.4 million in 1997. pensation expense, were $4.2 million in 1999, $4.3 million in 1998 and $4.4 million in 1997.

NOTES TO FINANCIAL STATEMENTS ESOP contributions have no material effect on NSP earnings NSP's ESOP held 11.3 million shares of NSP common stock because the contributions are essentially offset by the tax savings at the end of 1999 and 1998, and 11.2 million shares of NSP provided by the dividends paid on ESOP shares. NSP allocates common stock at the end of 1997.

leveraged ESOP shares to participants when it repays ESOP NSP excluded the following uncommitted leveraged ESOP shares loans with dividends on stock held by the ESOP. from earnings per share calculations: 0.5 million in 1999, 0.6 million in 1998 and 0.6 million in 1997.

62No-negulaatechEarnings Conatribution Income from nonregulated subsidiaries consists of the following:

. . .J

. . rT' - I.. . . . . .. r .. .. . . .

LLLL(LLf 12999 1998 1997 Operating revenues $512 839 $182 230 $223 571 Equity in operating earnings of unconsolidated affiliates 67 859 79 884 18 600 Operating and development expenses, including project write-downs (500 803) (248 420) (251 087)

Interest and other income (loss), including gains from project sales (456) 37 477 2O 994 Income from nonregulated businesses before interest and taxes 79439 51 171 12078 Interest expense (97 854) (54 261) (34 627)

Income tax benefit 52761 41 791 38 032 NET INCOME FROM NONREGULATED SUBSIDIARIES $ 34 346 $ 38701 $ 15483 Earnings per share from nonregulated subsidiaries $ 0.22 $ 0.26 $ 0.11 Loss per share from write-down of investment in CellNet stock (0.05)

TOTAL NONREGULATED EARNINGS PER SHARE CONTRIBUTION $ 0.17 $ 0.26 $ 0.11 7_Jnco-me-Taxes Total income tax expense from operations differs from the amount computed by applying the statutory federal income tax rate to income before income tax expense. The reasons for the difference are:

1999 I99,8 1997 39 Federal statutory rate 35.0% 35.0% 35.0%

Increases (decreases) in tax from:

State income taxes, net of federal income tax benefit 4.7% 4.7% 4.3%

Tax credits recognized (13.6)% (8.9)% (7.9)%

Equity income from unconsolidated affiliates (4.2)% (3.8)% (2.5)%

Regulatory differences - utility plant items 2.3% 0.7% 1.1%

Other - net (1.4)% (0.6)% (1.0)%

EFFECTIVE INCOME TAX RATE 22.8% 27.1% 29.0%

£Tho2~sazds~Eakrs)

Income taxes are comprised of the following expense (benefit) items:

Included in utility operating expenses:

Current federal tax expense $111 280 $127 734 $125 202 Current state tax expense 29 113 32 750 28812 Deferred federal tax expense (3 878) (6 625) (88)

Deferred state tax expense (115) 646 (23)

Deferred investment tax credits (9 107) (9 122) (9 048)

Total 127293 145 383 144 855 Included in income taxes on nonregulared operations and nonoperating items:

Current federal tax expense (15 740) (15 732) (19 470)

Current state tax expense (3 949) (6 744) (5 804)

Current foreign tax expense 4 040 2358 236 Current federal tax credits (30 137) (25 122) (17 006)

Deferred federal tax expense (4 066) 11 132 (2 237)

Deferred state tax expense (4 097) 1 566 (662)

Deferred foreign tax expense (6 868) (7736) (2 892)

Deferred investment tax credits (194) (310) (310)

Total (61 011) (40 588) (48 145)

TOTAL INCOME TAX EXPENSE $ 66 282 $104 795 $ 96710

NOTES TO FINANCIAL STATEMENTS NRG intends to indefinitely reinvest earnings from foreign opera 9. Regulatory Assets and Liabilities tions except to the extent the earnings are subject to current U.S. The following summarizes the individual components of unamortized income taxes. Accordingly, U.S. income taxes and foreign with regulatory assets and liabilities shown on the Balance Sheets at Dec. 31:

holding taxes have not been provided on a cumulative amount of unremitted earnings of foreign subsidiaries of approximately Remaining

$195 million and $158 million at Dec. 31, 1999 and 1998. The (Thousands ofadollars) Amiortzation Period 1999 1998 additional U.S. income tax and foreign withholding tax on the AFC recorded in plant (a) Plant Lives $112291 $121 551 unremitted foreign earnings, if repatriated, would be offset in whole Conservation programs (a) 3 Years 5 254 72 995 or in part by foreign tax credits. Thus, it is not practicable to estimate Losses on reacquired debt Term of Related Debt 52 698 56242 the amount of tax that might be payable. Environmental costs Primarily 10 Years 48 708 50 158

-o Unrecovered gas costs 1-2 Years 15 266 16259 The components of NSP's net deferred tax liability (current and State commission

-o3 noncurrent portions) at Dec. 31 were:

accounting adjustments (a) Plant Lives 7641 7370

-u (Tl~o,,,,',J(*RIdllr *0 Various Other 6 269 7 365

( ousandý,ýW,11,?,)

Deferred tax liabilities: "FOTAL RECULATORY ASSETS $248 127 $331 940 Differences between book Deferred income tax adjustments $ 77433 $ 75066 and tax bases of property $ 908 320 $ 886 099 Investment tax credit deferrals 78281 84865 Regulatory assets 70 546 103 640 Unrealized gains from Tax benefit transfer leases 23431 27170 decommissioning investments 177 578 138 613 Other 20370 22961 Pension costs - regulatory differences 84 198 53012 Total deferred tax liabilities $1 022667 $1039870 Conservation incentives 25 284 Fuel costs, refunds and other 18795 20683 Deferred tax assets:

TOTAl REGULATORY [IABIIITIES $461 569 $372 239 Regulatory liabilities $ 49412 $ 75774 Deferred compensation, vacation (a) Earns a return on investment in the ratemakingaprocess and other accrued liabilities not currently deductible 63 073 67 539 Deferred investment tax credits 46969 51 003 10, Investments Accontied for by the Equiry Method Other 47 000 29 565 NSP's nonregulated subsidiaries have investments in various inter Total deferred tax assets $ 206454 $ 223881 national and domestic energy projects, and domestic affordable 40 NET DEFERRED TAX LIABILITY $ 816213 $ 815 989 housing and real estate projects. We use the equity method of accounting for such investments in affiliates, which include joint ventures and partnerships. That's because the ownership structure

8. PreferrTed S_eh*j prevents NSP from exercising a controlling influence over the pro At Dec. 31, 1999, various preferred stock series were callable at jects' operating and financial policies. Under this method, NSP prices per share ranging from $102.00 to $103.75, plus accrued records its portion of the earnings or losses of unconsolidated dividends. affiliates as equity earnings. A summary of NSP's significant equity method investments follows.

In 1997, a wholly owned special purpose subsidiary trust of NSP issued $200 million of 7.875 percent preferred securities that \ame GearaophicA tea Econzomic interest mature in 2037. Distributions paid by the subsidiary trust on the Loy Yang Power A Australia 25.37%

preferred securities are financed through interest payments on Enfield Energy Centre Europe 25.00%

debentures issued by NSP-Minnesota and held by the subsidiary Gladstone Power Station Australia 37.50%

trust, which are eliminated in NSP's consolidation. The preferred COBEE (Bolivian Power Co. Ltd.) South America 49.10%

securities are redeemable at $25 per share beginning in 2002. MIBRAG mbH Europe 33.33%

Distributions and redemption payments are guaranteed by NSP. Cogeneration Corp. of America USA 20.00%

Distributions paid to preferred security holders are reflected as a Schkopau Power Station Europe 20.95%

financing cost in the Income Statement along with interest expense. Long Beach Generating USA 50.00%

El Segundo Generating USA 50.00%

Encina USA 50.00%

San Diego Combustion Turbines USA 50.00%

Energy Developments Limited Australia 29.14%

Scudder Latin American Power Latin America 6.63%

Various independent power production facilities USA 450/6-50%

Various affordable housing limited partnerships USA 200/6-99.9%

NOTES TO FINANCIAL STATEMENTS Summarized FinancialInformation of UnconsolidatedAffiliatesI At Dec. 31, 1999, NRG had three interest rate swap agreements with Summarized financial information for these projects, including notional amounts totaling approximately $393 million. The contracts interests owned by NSP and other parties, is as follows for the are used to manage NRG's exposure to changes in interest rates. If the years ended Dec. 31: swaps had been discontinued on Dec. 31, 1999, NRG would have owed the counterparties approximately $3 million. Management RESULTS OF OPERATIONS believes that NRG's exposure to credit risk due to nonperformance (Mil/ion, of dollar) 1999 1998 1997 by the counterparties to its hedging contracts is insignificant, based Operating revenues $1 752 $1 509 $1 698 on the investment grade rating of the counterparties.

Operating income $ 215 $ 205 $ 93 Net income $ 200 $ 143 $ 84

"*In September 1999, NRG entered into a $200 million swap agreement effectively converting the 7.5 percent fixed rate on 'a NSP's equity in earnings of its senior notes to a variable rate. It expires on June 1,2009.

unconsolidated affiliates $ 68 $ 80 $ 19

"*A second swap effectively converts a $16 million issue of -n a

Sn variable rate debt into fixed rate debt. The swap expires on FINANCIAL POSITION a Sept. 30, 2002. a a

(Million ofdollan) 1999 199, "*A third swap converts $177 million of floating rate debt Current assets $ 748 $ 714 into fixed rate debt. The swap expires on Dec. 17, 2014.

Other assets 7461 8071 As of Dec. 31, 1999, EMI had natural gas forward and futures TOTAL ASSETS $8 209 $8 785 'S a

contracts in the notional amount of less than $1 million. These a Current liabilities $ 716 $ 537 aN contracts will expire during 2000 and EMI will have no further 8 Other liabilities 5246 5931 a derivative activity.

Equity 2247 2317 TOTAL LIABILITIES AND EQUITY $8 209 $8 785 NSP's Energy Marketing division uses energy futures contracts, 8 a,a NSP's equity investmen along with physical supply, to hedge market risk in the energy in unconsolidated afffiliates $1 047 $ 863 market. At Dec. 31, 1999, the notional amount of energy futures a contracts was approximately $2 million. Management believes that a F__inancia I nstrui the risk of counterparty nonperformance with regard to any of -a Fair Values IThe estim ared Dec. 31 fair values of NSP's recorded Energy Marketing's hedge transactions is not significant.

financial instruments aire as follows: NRG's Power Marketing subsidiary uses energy forward contracts, 1999 1998 along with physical supply, to hedge market risk in the energy

( T h5ozsandl of dollars) 41 market. At Dec. 31, 1999, the notional amount of energy forward Carrying Fair Canying Fair contracts was approximately $207 million. If the contracts had Amount Value Amount Va/ue been terminated at Dec. 31, 1999, NRG would have received Cash, cash equivalents approximately $12 million based on price fluctuations to date.

and short-term

$ 55968 $ 55 968 $ 42 364 $ 42 364 with investments regards to any believes Management thehedging of NRG's transactions nonperformance risk ofcounterparty is not significant.

Long-term investments $ 517129 $ 517129 $ 438981 $ 438981 Letters of Credit ýNSP and its subsidiaries use letters of credit, Long-term debt, generally with terms of one year, to provide financial guarantees including for certain operating obligations. In addition, NRG uses letters of current portion $3 748 195 $3 626 638 $2 220 346 $2 313 468 credit for nonregulated equity commitments, collateral for credit agreements, fuel purchase and operating commitments, and bids For cash, cash equivalents and short-term investments, the carrying on development projects.

amount approximates fair value because of the short maturity of those At Dec. 31, 1999, there were $140 million in letters of credit out instruments. The fair values of NSP's long-term investments, mainly standing, including $116 million related to NRG commitments.

debt securities in an external nuclear decommissioning fund, are The contract amounts of these letters of credit approximate their estimated based on quoted market prices for those or similar invest fair value and are subject to fees determined in the marketplace.

ments. The fair value of NSP's long-term debt is estimated based on the quoted market prices for the same or similar issues, or the cur 12- Joinr Plant Ownership rent rates for debt of the same remaining maturities and credit quality.

NSP is part owner of an 860-megawatt coal-fired electric generat Derivatives I As of Dec. 31, 1999, NRG had no contracts to hedge ing unit called Sherco 3. NSP owns and has financed 59 percent or protect - foreign currency denominated future cash flows. One and Southern Minnesota Municipal Power Agency owns and has contract that was outstanding during 1999 had no material effect financed 41 percent of Sherco 3. NSP is the operating agent under on earnings. the joint ownership agreement. NSP's share of related expenses for Sherco 3 is included in Utility Operating Expenses. NSP's share During the third quarter of 1999, NRG Northeast Generating of the gross cost recorded in Utility Plant was approximately LLC (N.E. Generating), a wholly owned subsidiary of NRG,

$607 million at year-end 1999 and $604 million at year-end 1998.

entered into $600 million of "treasury locks," at various interest The accumulated provisions for depreciation were $233 million in rates, which expired in February 2000. These treasury locks were 1999 and $215 million in 1998.

an interest rate hedge for an N.E. Generating bond offering issued in February 2000 (see Note 2).

NOTES TO FINANCIAL STATEMENTS 1 3. Nuclear Obligarinn The Financial Accounting Standards Board (FASB) has proposed Fuel Disposal INSP is responsible for temporarily storing used - or new accounting standards, which, if approved, would require the full spent - nuclear fuel from its nuclear plants. The U.S. Department accrual of nuclear plant decommissioning and other site exit obliga of Energy (DOE) is responsible for permanently storing spent fuel tions no sooner than 2002. Using Dec. 31, 1999, estimates, NSP's from NSP's nuclear plants as well as from other U.S. nuclear plants. adoption of the proposed accounting would result in the recording of NSP has been funding its portion of the DOE's permanent disposal the total discounted decommissioning obligation of $705 million as a program since 1981. The fuel disposal fees are based on a charge of liability, with the corresponding costs capitalized as plant and other 0.1 cent per kilowatt-hour sold to customers from nuclear genera assets and depreciated over the operating life of the plant. NSP has tion. Fuel expense includes DOE fuel disposal assessments of not yet determined the potential impact of the FASB's proposed approximately $12 million in 1999, $11 million in 1998 and changes in the accounting for site exit obligations, such as costs of

$10 million in 1997. removal, other than nuclear decommissioning. However, the ultimate decommissioning and site exit costs to be accrued are expected to be In total, NSP had paid approximately $272 million to the DOE similar to the current methodology. The effects of regulation are through Dec. 31, 1999. However, we cannot determine whether expected to minimize or eliminate any impact on operating expenses the amount and method of the DOE's assessments to all utilities and results of operations from this future accounting change.

will be sufficient to fully fund the DOE's permanent storage or

-n disposal facility. Consistent with cost recovery in utility customer rates, NSP records annual decommissioning accruals based on periodic site-specific cost The Nuclear Waste Policy Act requires the DOE to begin accepting studies and a presumed level of dedicated funding. Cost studies

• a spent nuclear fuel no later than Jan. 31, 1998. In 1996, the DOE quantify decommissioning costs in current dollars. Since the costs notified commercial spent fuel owners of an anticipated delay in are expected to be paid in 2010-2022, funding presumes that cur accepting spent nuclear fuel by the required date and conceded that 42S rent costs will escalate in the future at a rate of 4.5 percent per year.

a permanent storage or disposal facility will not be available until The total estimated decommissioning costs that will ultimately be at least 2010. NSP and other utilities have commenced lawsuits paid, net of income earned by external trust funds, is currently being against the DOE to recover damages caused by the DOE's failure accrued using an annuity approach over the approved plant recovery to meet its statutory and contractual obligations.

period. This annuity approach uses an assumed rate of return on Without a DOE facility, NSP has been providing, with regulatory funding, which is currently 6 percent, net of tax, for external fund and legislative approval, its own temporary on-site storage facilities ing and approximately 8 percent, net of tax, for internal funding.

at its Monticello and Prairie Island nuclear plants. With the dry cask The MPUC last approved NSP's nuclear decommissioning study storage facilities approved in 1994, NSP believes it has adequate and related nuclear plant depreciation capital recovery request in storage capacity to continue operation of its Prairie Island nuclear April 1997, using 1993 cost data. Although NSP expects to oper plant until at least 2007. The Monticello nuclear plant has storage ate Prairie Island through the end of each unit's licensed life, the capacity to continue operations until 2010. Storage availability to approved capital recovery would allow for the plant to be fully permit operation beyond these dates is not assured at this time.

depreciated, including the accrual and recovery of decommission NSP is investigating all of its alternatives for spent fuel storage until ing costs, in 2008. This is about six years earlier than each unit's "aDOE facility is available, including pursuing the establishment of licensed life. The approved recovery period for Prairie Island has "aprivate facility for interim storage of spent nuclear fuel as part of a been reduced because of the uncertainty regarding used fuel storage.

consortium of electric utilities. If on-site temporary storage at Prairie NSP believes future decommissioning cost accruals will continue Island reaches approved capacity, NSP could seek interim storage at to be recovered in customer rates.

this or another contracted private facility, if available.

The total obligation for decommissioning currently is expected to Nuclear fuel expense includes payments to the DOE for the decom be funded approximately 82 percent by external funds and 18 per missioning and decontamination of the DOE's uranium enrichment cent by internal funds, as approved by the MPUC. Contributions facilities. In 1993, NSP recorded the DOE's initial assessment of to the external fund started in 1990 and are expected to continue

$46 million, which is payable in annual installments from 1993-2008.

until plant decommissioning begins. Costs not funded by external NSP is amortizing each installment to expense on a monthly basis.

trust assets, including accumulated earnings, will be funded The most recent installment paid in 1999 was $4 million; future through internally generated funds and issuance of NSP debt or installments are subject to inflation adjustments under DOE rules.

stock. The assets held in trusts as of Dec. 31, 1999, primarily con NSP is obtaining rate recovery of these DOE assessments through sisted of investments in fixed income securities, such as tax-exempt the cost-of-energy adjustment clause as the assessments are amor municipal bonds and U.S. government securities that mature in tized. Accordingly, we deferred the unamortized assessment of two to 30 years, and common stock of public companies. NSP

$32 million at Dec. 31, 1999, as a regulatory asset.

plans to reinvest matured securities until decommissioning begins.

PlantDecommissioning I Decommissioning of NSP's nuclear facilities At Dec. 31, 1999, NSP had recorded and recovered in rates cumu is planned for the years 2010-2022, using the prompt dismantle lative decommissioning accruals of $549 million. The following ment method. NSP currently is following industry practice by ratably table summarizes the funded status of NSP's decommissioning accruing the costs for decommissioning over the approved cost obligation at Dec. 31, 1999:

recovery period and including the accruals in Utility Plant Accumulated Depreciation. Consequently, the total decommissioning cost obligation and corresponding assets currently are not recorded in NSP's financial statements.

NOTES TO FINANCIAL STATEMENTS (Thou*ands pfdollarf) 1999 Seren expects to spend approximately $180 million during 2000, Estimated decommissioning cost obligation which reflects the build-out of its broadband communications net from most recent approved study (1993 dollars) $ 750 8 work in Northern California. Seren is evaluating its financing options, Effect of escalating costs to 1999 dollars including equity financing to third parties and project-secured debt.

(at 4.5% per year) 226 9 Seren's capital requirements for 2001-2004 may vary significantly Estimated decommissioning cost obligation depending on the success of development efforts under way.

in current dollars 977 7 Legislative Resource Commitments ] In 1994, NSP received Effect of escalating costs to payment Minnesota legislative approval for additional on-site temporary date (at 4.5% per year) 867 0 spent fuel storage facilities at NSP's Prairie Island plant, provided Estimated future decommissioning NSP satisfies certain requirements. Seventeen dry cask containers costs (undiscounted) 1 844 7 were approved. As of Dec. 31, 1999, NSP had loaded nine casks.

Effect of discounting obligation The Minnesota Legislature established several energy resource and a (using risk-free interest rate) (1 140 0 other commitments for NSP to obtain the Prairie Island tempo Discounted decommissioning cost obligation 704 7 C rary nuclear fuel storage facility approval. These commitments C Assets held in external decommissioning trust 517 1 C can be met by building, purchasing, or in the case of biomass, C DISCOUNTED DECOMMISSIONING converting generation resources.

OBLIGATION IN EXCESS OF ASSETS CURRENTLY HELD IN EXTERNAL TRUST $ 1876 53 The 1994 legislation requires NSP to have 425 megawatts of wind C

resources contracted by Dec. 31, 2002. Of this commitment, C approximately 130 megawatts remain to be contracted. During 8 Decommissioning expenses recognized include the following 1999, the MPUC ordered an additional 400 megawatts to be con components:

tracted by 2012, subject to least-cost determinations. 8 1Tt, - lA 1999 199R 19 C Annual decommissioning cost accrual During 1997 and 1998, NSP executed three separate power purchase reported as depreciation expense: agreements (PPA) for a total of 125 megawatts of biomass-fueled C Externally funded $33 178 $33 178 $33 178 generation resources. These contracts would meet the statutory C Internally funded requirements to contract for 125 megawatts of biomass energy by -C (including interest costs) 1595 1477 1 368 Dec. 31, 1998. However, in December 1999, NSP terminated one Interest cost on externally funded of the contracts due to the nonperformance of the vendor. NSP is decommissioning obligation 4 191 6960 7690 currently working to replace this contract. At a hearing in December Earnings from external trust funds (4 191) (6960) (7690) 1999, the MPUC approved two 25-megawatt PPAs and required 43 NET DECOMMISSIONING further reporting by NSP in relation to its efforts to meet the ACCRUALS RECORDED $34 773 $34 655 $34 546 mandate, including whether NSP intends to exercise an option to increase the megawatt size of one of the contracts. Although the agreements met the requirements for biomass scheduled to be opera Decommissioning and interest accruals are included with the accu tional by Dec. 31, 2001, and Dec. 31, 2002, due to various delays mulated provision for depreciation on the balance sheet. Interest the actual operational dates of the biomass facilities may be later costs and trust earnings associated with externally funded obliga than scheduled.

tions are reported in Other Utility Income and Deductions on the income statement. Other commitments established by the Legislature include a discount for low-income electric customers, required conservation improve A triennial nuclear plant decommissioning filing was made with ment expenditures and various study and reporting requirements to a the MPUC in October 1999. Approval by the MPUC is expected legislative electric energy task force. NSP has implemented programs in the first quarter of 2000 and will be effective for cost accruals to meet the legislative commitments. NSP's capital commitments Jan. 1, 2000.

include the known effects of the Prairie Island legislation. The impact of the legislation on future power purchase commitments 14._Commitments and Cnng ingenr Iiabilitie and other operating expenses is not yet determinable.

Capital Commitments I NSP estimates utility capital expenditures, including purchases of nuclear fuel, will be $490 million in 2000 and Guarantees I NSP has sold a portion of its other receivables to a

$2.3 billion for 2000-2004. There also are contractual commitments third party. The portion of the receivables sold consisted of cus for the disposal of spent nuclear fuel. (See Note 13.) tomer loans to local and state government entities for energy efficiency improvements under various conservation programs NRG expects to invest approximately $2.7 billion in 2000 and offered by NSP. Under the sales agreements, NSP is required to approximately $4.7 billion for 2000-2004 for nonregulared projects guarantee repayment to the third party of the remaining loan bal and property, which include acquisitions and project investments.

ances. At Dec. 31, 1999, the outstanding balance of the loans was NRG's capital requirements may vary significantly. NRG's capital approximately $25 million. Based on prior collection experience of requirements for 2000 reflect expected acquisitions of existing gener these loans, NSP believes that losses under the loan guarantees, if ation facilities, including Cajun, Killingholme A and the Conectiv any, would have an immaterial impact on the results of operations.

fossil assets. A significant portion of NRG's capital requirements is expected to be financed by project-secured debt. In addition, NRG Leases I Rentals under operating leases were approximately may issue a limited amount of equity financing to third parties for $43 million, $33 million and $32 million for 1999, 1998 and funding a portion of the capital requirements. 1997, respectively. Future commitments under these leases generally decline from current levels.

NOTES TO FINANCIAL STATEMENTS Fuel Contracts I NSP has contracts providing for the purchase and expected to range between $52 million and $84 million annually for delivery of a significant portion of its current coal, nuclear fuel and 2004-2024. These commitments are expected to decline to approx natural gas requirements. These contracts expire in various years imately $27 million annually for 2025-2027, due to the expiration between 2000 and 2013. In total, NSP is committed to the mini of existing agreements.

mum purchase of approximately $399 million of coal, $21 million of nuclear fuel and $235 million of natural gas and related trans Wholesale Sales Agreement In 1999, NRG entered into a Standard Offer Service Wholesale Sales Agreement with Connecticut Light portation, or to make payments in lieu thereof, under these contracts.

In addition, NSP is required to pay additional amounts depending & Power Co. (CL&P). NRG will supply CL&P with 35 percent of its standard offer service load during 2000, 40 percent during on actual quantities shipped under these agreements.

2001 and 2002 and 45 percent during 2003. The four-year contract NSP has developed a mix of natural gas supply, transportation and is valued at $1.7 billion. NRG will serve the load with a combina

-8 storage contracts designed to meet its needs for retail gas sales. The tion of existing generation and power purchases. Also in 1999,

-a contracts are with several suppliers and for various periods of time. NRG acquired generating stations with a combined capacity of Zr a

-n Because NSP has other sources of fuel available and suppliers are 2,235 megawatts from CL&P.

C aa expected to continue to provide reliable fuel supplies, risk of loss from nonperformance under all fuel contracts is not considered Nuclear Insurance I NSP's public liability for claims resulting from significant. In addition, NSP's risk of loss, in the form of increased any nuclear incident is limited to $9.5 billion under the 1988 Price costs, from market price changes in fuel is mitigated through the Anderson amendment to the Atomic Energy Act of 1954. NSP has C cost-of-energy adjustment provision of the ratemaking process, secured $200 million of coverage for its public liability exposure a which provides for recovery of nearly all fuel costs. with a pool of insurance companies. The remaining $9.3 billion of 8 exposure is funded by the Secondary Financial Protection Program,

'2 Power Agreeinents ýNSP has several agreements to purchase elec available from assessments by the federal government in case of a a tricity from the Manitoba Hydro-Electric Board (MH). A summary nuclear accident. NSP issubject to assessments of up to $88 million of the agreements is as follows: for each of its three licensed reactors to be applied for public liability a arising from a nuclear incident at any licensed nuclear facility in the POWER AGRLEME[NTS United States. The maximum funding requirement is $10 million C Year; A[trnu1att per reactor during any one year.

-n Participation power purchase 2000-2005 500 Seasonal diversity exchanges: NSP purchases insurance for property damage and site decontami Summer exchanges from MH 2000-2014 150 nation cleanup costs from Nuclear Electric Insurance Limited 2000-2016 200 (NEIL). The coverage limits are $1.5 billion for each of NSP's 44 Winter exchanges to MH 2000-2014 150 two nuclear plant sites.

2000-2015 200 NEIL also provides business interruption insurance coverage, 2015-2017 400 including the cost of replacement power obtained during certain 2018 200 prolonged accidental outages of nuclear generating units. Premiums are expensed over the policy term. All companies insured with The cost of the 500-megawatt participation power purchase commit NEIL are subject to retroactive premium adjustments if losses ment is based on 80 percent of the costs of owning and operating exceed accumulated reserve funds. Capital has been accumulated in NSP's Sherco 3 generating plant, adjusted to 1993 dollars. The the reserve funds of NEIL to the extent that NSP would have no future annual capacity costs for the 500-megawatt MH agreement exposure for retroactive premium assessments in case of a single are estimated to be approximately $58 million. There are no capacity incident under the business interruption and the property damage payments for the diversity exchanges. These commitments repre insurance coverage. However, in each calendar year, NSP could be sent about 17 percent of MH's system capacity and account for subject to maximum assessments of approximately $4 million for approximately 10 percent of NSP's 2000 electric system capability. business interruption insurance and $15 million for property The risk of loss from nonperformance by MH is not considered damage insurance if losses exceed accumulated reserve funds.

significant, and the risk of loss from market price changes is miti gated through cost-of-energy rate adjustments. EnvironmentalContingencies I Other long-term liabilities include an accrual of $35 million, and other current liabilities include an NSP has an agreement with Minnkota Power Cooperative for the accrual of $6 million, at Dec. 31, 1999, for estimated costs associ purchase of summer season capacity and energy. NSP will buy ated with environmental remediation. Approximately $24 million 150 megawatts of summer season capacity for approximately of the long-term liability and $4 million of the current liability

$12 million annually in 2000 and 2001. From 2002-2015, NSP relate to a DOE assessment for decommissioning a federal uranium will purchase 100 megawatts of capacity for $10 million annually. enrichment facility, as discussed in Note 13. Other estimates have NSP also has a summer purchase power agreement with Minnesota been recorded for expected environmental costs associated with Power for the purchase of 173 megawatts, including reserves, for manufactured gas plant sites formerly used by NSP, and other waste 2000. The annual cost of this capacity will be approximately disposal sites, as discussed later. These environmental liabilities do

$2 million. not include accruals recorded and collected from customers in NSP has agreements with several nonregulated power producers to rates for future nuclear fuel disposal costs or decommissioning purchase electric capacity and associated energy. The cost of these com costs related to NSP's nuclear generating plants. See Note 13 for mitments is approximately $45 million annually for 379 megawatts further discussion of nuclear items.

of summer capacity for 2000-2003. These commitments are

NOTES TO FINANCIAL STATEMENTS The Environmental Protection Agency (EPA) or state environmental with payment expected over the next five years. This estimate agencies have designated NSP-Minnesota as a potentially responsible is based on prior experience and includes investigation, reme party (PRP) for 14 waste disposal sites to which NSP-Minnesota diation and litigation costs.

allegedly sent hazardous materials.

No liability has been recorded for remediation or investigation Eleven of these 14 sites have been remediated and, consistent of the remaining seven sites under investigation because the with settlements reached with the EPA and other PRPs, NSP present land use at each of these sites does not warrant a Minnesota has paid $2.4 million for its share of the remediation response action.

costs. One site that was previously remediated was reactivated While it is not feasible to determine at this time the ultimate cost of due to a change in the use of the land. While these remedi gas site remediation, the amounts accrued represent the best current ated sites will continue to be monitored, NSP-Minnesota estimate of NSP-Minnesota's future liability for any required expects that future remediation costs, if any, will be immate cleanup or remedial actions at these former gas operating sites.

rial. Under applicable law, NSP-Minnesota, along with each Environmental remediation costs may be recovered from insurance PRP, could be held jointly and severally liable for the total carriers, third parties or in future rates. The MPUC allowed NSP C C

remediation costs of PRP sites. C Minnesota to defer certain remediation costs of four active sites in Neither the total remediation cost nor the final method of cost 1994. In September 1998, the MPUC allowed the recovery of these C allocation among all PRPs of the three unremediated sites has gas site remediation costs in gas rates, with a portion assigned to been determined. However, NSP-Minnesota has recorded an NSP's electric operations for two sites formerly used by NSP gener estimate of approximately $0.1 million for its share of future ating facilities. Accordingly, NSP-Minnesota has recorded an C costs for these sites. NSP-Minnesota is not aware of the other environmental regulatory asset for these costs. NSP-Minnesota 8

'C parties' inability to pay, nor does it know if responsibility for may request recovery of costs to remediate other activated sites any of the sites is in dispute. following the completion of preliminary investigations.

C While it is not feasible to determine the ultimate impact of PRP NSP-Wisconsin will be involved in the cleanup and remediation at locations of former manufactured gas plants at Ashland, La Crosse, C site remediation at this time, the amounts accrued represent the best current estimate of NSP-Minnesotas future liability. It is NSP Eau Claire and Chippewa Falls, Wis. The ultimate cleanup and Minnesotas practice to vigorously pursue and, if necessary, litigate remediation costs of sites other than Ashland (discussed below) and with insurers to recover incurred remediation costs whenever possi the extent of NSP-Wisconsin's responsibility, if any, for sharing such ble. Through litigation, NSP-Minnesota has recovered a portion of costs are not known at this time, but are expected to be immaterial.

the remediation costs paid to date. Management believes remedia The Wisconsin Department of Natural Resources (WDNR) tion costs incurred, but not recovered, from insurance carriers or named NSP-Wisconsin as one of three PRPs for creosote and coal 45 other parties should be allowed recovery in future ratemaking.

tar contamination at the Ashland site. The Ashland site includes Until NSP-Minnesota is identified as a PRP, it is not possible to property owned by NSP-Wisconsin and two other properties, predict the timing or amount of any costs associated with sites, which include an adjacent city lakeshore park area and a small other than those discussed previously.

area of Lake Superiors Chequemegon Bay adjoining the park.

NSP-Wisconsin may be involved in the cleanup and remediation The EPA has accepted a petition from a local environmental group at three sites, including one that NSP-Minnesota is also investi to conduct a preliminary assessment of the Ashland site under the gating. One site is a former transformer disposal facility in New Comprehensive Environmental Response, Compensation and Lisbon, Wis., and the remaining two are locations where fuel Liability Act (CERCLA). A preliminary assessment (PA) is a limited tanks were installed. The ultimate cleanup and remediation costs scope investigation to evaluate the potential for hazardous substance of these sites and the extent of NSP-Wisconsin's responsibility, if releases from a site and also to determine if the site is likely to score at any, for sharing such costs are not known at this time, but are a high enough level to be considered for inclusion on the National expected to be immaterial.

Priorities List (NPL). The PA was performed in the second half of NSP-Minnesota is also investigating other properties that were for 1999 and the results indicated a score sufficiently high to proceed to merly sites of gas manufacturing, gas storage plants or gas pipelines to the next formal step of the EPA scoring under the Hazardous determine if waste materials are present and if they are an environ Ranking System (HRS) under CERCLA. The HRS scoring process mental or health risk. NSP-Minnesota also determines if it has being performed by the EPA is now under way. NSP-Wisconsin any responsibility for remedial action and if recovery under NSP anticipates the VWDNR will still act as lead agency on the site. The Minnesotas insurance policies can contribute to remediation costs. PA and HRS scoring process will result in a delay in selection of a remedial strategy for the site until later in 2000. NSP-Wisconsin

"*NSP-Minnesota has remediated four sites, which continue to has proposed and WDNR has conceptually approved an interim be monitored. NSP-Minnesota has paid $7.3 million to action (groundwater treatment system) for one operable unit at the remediate these sites and expects to incur only immaterial site for which NSP-Wisconsin has accepted responsibility. This monitoring costs related to these sites.

interim action is expected to be operational by the spring of 2000 and

"*Another 11 gas sites remain under investigation. NSP is designed to be a first step in remediating one portion of the site.

Minnesota is taking remedial action at four of these sites.

The WDNR and NSP-Wisconsin have each developed several esti

"*As of Dec. 31, 1999, NSP-Minnesota had paid $4.3 million mates of the ultimate cost to remediate the Ashland site. The estimates for the four active sites and had recorded an estimated liability vary significantly, between $4 million and $93 million, based on of approximately $2.6 million for future costs at these sites, different assumptions for methods of remediation and expected results.

NOTES TO FINANCIAL STATEMENTS However, NSP-Wisconsin believes that the estimated costs of the In addition to NSP's utility plants, NRG has several plants most reasonable and effective solutions are between $24 million throughout the United States, some of which were acquired and $51 million. During 2000, the WDNR is expected to select during 1999. These plants are subject to federal and state emis the method of remediation for use at the site, after which a more sion standards and other environmental regulations. Although accurate estimate of the cost can be developed. NSP-Wisconsin NRG continues to study and investigate the methods and costs has already recorded a liability for remediation costs for its portion of complying with these standards and regulations, the future of the Ashland site, estimated using reasonably effective remedial financial effect is not known at this time and may be material.

methods. NSP-Wisconsin has deferred as a regulatory asset the Several of NSP's facilities contain asbestos, which can be a health remediation costs accrued for the Ashland site because management hazard to people who come in contact with it. Under governmental expects that the PSCW will continue to allow NSP-Wisconsin requirements, asbestos not readily accessible to the environment to recover payments for environmental remediation from its cus

-E need not be removed until the facilities containing the material are

-0 tomers. The PSCW has consistently authorized recovery in a

53 NSP-Wisconsin rates of all remediation costs incurred at the demolished. Although the ultimate cost and timing of asbestos 0

Ashland site, and has authorized recovery of similar remediation removal is not yet known, it is estimated that removal under cur C

C rent regulations would cost $45 million in 1999 dollars. Asbestos C costs for other utilities.

removal costs would be recorded as incurred as operating expenses I'5 A

a a

In 1998, the EPA published nitrogen oxide (NO5 ) emission regula tions affecting 22 states, including Wisconsin. The goal of the new regulations is to reduce NO5 emissions by 85 percent by May 1, 2003.

for maintenance projects, capital expenditures for construction projects or removal costs for demolition projects.

Environmental liabilities are subject to considerable uncertainties a5 , Two of NSP-Wisconsin's boilers and eight of its combustion tur 8 that affect NSP's ability to estimate its share of the ultimate costs bines may be affected by this action. If the existing boilers and U of remediation and pollution control efforts. Uncertainties include combustion turbines are made compliant using retrofit technology 8 to control NOx emissions, it could cost NSP-Wisconsin up to the nature and extent of site contamination, the extent of required C cleanup efforts, varying costs of alternative cleanup methods and

$62 million for capital improvements and add $14 million each a year for operation and maintenance expenses. This is the estimated pollution control technologies, changes in environmental remedia tion and pollution control requirements, the potential effect of C cost of the most expensive alternative to achieve compliance, which technological improvements, the number and financial strength

-C is not necessarily the compliance alternative of choice. If the rules are finalized in their most stringent form, other alternatives for these of other potentially responsible parties at multi-party sites and the older units may be deemed more cost effective than retrofitting. identification of new environmental cleanup sites. NSP has recorded and/or disclosed its best estimate of expected future How the WDNR will implement the new EPA NO. regulations environmental costs and obligations.

46 and their applicability to NSP-Wisconsin are still uncertain.

NSP-Wisconsin has joined with two other Wisconsin-based utilities Legal Claims ý In the normal course of business, NSP is a party to as well as the Wisconsin Paper Council and Wisconsin Manufacturers routine claims and litigation arising from prior and current opera and Commerce industrial organizations to request a judicial review of tions. NSP is actively defending these matters and has recorded an estimate of the probable cost of settlement or other disposition.

the EPAs final NOx rules. NSP-Wisconsin believes that the EPA improperly included Wisconsin in the scope of the regulatory action On Dec. 11, 1998, a gas explosion in St. Cloud, Minn., killed four and it improperly calculated potential emissions of NO,, reducing people, including two NSP employees, injured approximately the allowable emission limits for the state. 14 people and damaged several buildings. The accident occurred as In 1999, the EPA was ordered by a federal appeals panel to suspend a crew from Cable Constructors Inc. (CCI) was installing fiber optic cable for Seren. Seren, CCI and Sirti, an architecture/engineering implementation of the NO, rules pending further action on a firm retained by Seren, are named as defendants in 10 lawsuits relat lawsuit brought by another trade group. It is possible that the state of Wisconsin will either not be required to meet the more ing to the explosion. NSP is a defendant in eight of the lawsuits.

NSP and Seren deny any liability for this accident. NSP has a self stringent NO, requirements or that their implementation will be insured retention deductible of $2 million with general liability delayed substantially.

coverage limits of $185 million. Seren's primary insurance coverage The Clean Air Act calls for phased-in reductions in emissions is $1 million and its secondary insurance coverage is $185 million.

of sulfur dioxide and nitrogen oxides from electric generating The ultimate cost to NSP and Seren, if any, is presently unknown.

plants. NSP has invested significantly over the years to reduce sulfur dioxide emissions at its plants. No additional capital In April 1997, a fire damaged several buildings in downtown Grand Forks, N.D., during a flood in the city. On July 23, 1998, the St. Paul expenditures are anticipated to comply with the sulfur dioxide emission limits of the Clean Air Act. NSP-Minnesota is completing Mercury Insurance Co. commenced a lawsuit against NSP for dam installation of over-fire air at the King plant to meet the NO, ages in excess of $15 million. The suit was filed in the District Court emission limitations. NSP-Minnesota's capital expenditures in Grand Forks County in North Dakota. The insurance company include some costs for ensuring compliance with the Clean Air Act; alleges the fire was electrical in origin and that NSP was legally other expenditures may be necessary upon EPA finalization of responsible for the fire because it failed to shut off electrical power to remaining rules. Because NSP is still in the process of imple downtown Grand Forks during the flood and prior to the fire. Seven menting some provisions of the Clean Air Act, its total financial additional lawsuits have been filed against NSP by insurance com impact is unknown at this time. Capital expenditures for opacity panies that insured businesses damaged by the fire. It is NSP's compliance are included in the capital expenditure commit position that it is not legally responsible for this unforeseeable event.

ments disclosed previously. The depreciation of these capital costs NSP has a self-insured retention deductible of $2 million, with will be subject to regulatory recovery in future rate proceedings. general liability insurance coverage limits of $150 million. The ulti mate cost to NSP, if any, is unknown at this time.

NOTES TO FINANC[AL STATEMENTS On or about July 12, 1999, Fortistar Capital, Inc. commenced an The unaudited pro forma balance sheet information at Dec. 31, action against NRG in Hennepin County (Minnesota) District 1999, assumes the merger had been completed on Dec. 31, 1999.

Court, seeking damages in excess of $100 million and an order The unaudited pro forma income statement information assumes restraining NRG from consummating the acquisition of Niagara the merger had been completed on Jan. 1, 1999, the beginning of Mohawk Power Corp.'s Oswego generating station. Fortistar's the earliest period presented.

motion for a temporary restraining order was denied and a tempo These summarized pro forma amounts do not include any of the rary injunction hearing was held on Sept. 27, 1999. The acquisition estimated cost savings expected to result from the merger of NCE of the Oswego generating station was closed on Oct. 22, 1999, and NSP Such cost savings, net of the costs incurred to achieve such following notification to the court of the closing date. NRG savings and to complete the merger transaction, are subject to regu intends to continue to vigorously defend the suit and believes latory review and approval. However, the pro forma amounts for Fortistar's claims to be without merit. NRG has asserted numerous a NSP and NCE include approximately $25 million and $20 million, counterclaims against Fortistar. respectively, of deferred nonrecurring merger costs as of Dec. 31, 1999, mainly those directly attributable to the merger transaction.

15. ProposedBiisness Combination Assuming the business combination is accounted for as a pooling of As previously reported in NSP's Report on Form 8-K, dated interests, these costs will be expensed upon the consummation of the la March 24, 1999, which was filed on March 25, 1999, NSP and NCE/NSP merger. The pro forma income statement information NCE agreed to merge and form Xcel Energy. At the time of the a3 amounts do not reflect any of these costs. The pro forma balance merger, each share of NCE common stock will be exchanged for sheet information has been adjusted to reflect a write-off of the 1.55 shares ofXcel Energy common stock. NSP shares need not be deferred costs and a related reduction of retained earnings.

exchanged and will become Xcel Energy shares on a one-for-one basis. Cash will be paid in lieu of any fractional shares of Xcel In addition to the pro forma balance sheet adjustment discussed Energy common stock. above, adjustments have also been made to the historical amounts a7 for NCE and NSP to conform their presentation for pro forma The merger requires approval or regulatory review by certain state combined reporting, mainly to group nonregulated property with utilities regulators, the SEC, the FERC, the Nuclear Regulatory utility plant, and to report nonregulated revenue and operating Commission and the Federal Communications Commission, and income with utility amounts.

expiration or termination of the waiting period under the Hart Scott-Rodino Antitrust Improvements Act. During June 1999, The unaudited summarized pro forma financial information does shareholders of both NSP and NCE approved the merger. The not necessarily indicate what the combined company's financial FERC approved the merger in January 2000. The states of Kansas position or operating results would have been if the merger had been and Colorado have approved the merger. Merger approval is not completed on the assumed completion dates and does not necessarily required in Michigan, Oklahoma, South Dakota or Wisconsin. indicate future operating results of the combined company.

NSP and NCE have filed merger applications with regulators in As of Dec. 31, 1999:

Arizona, Minnesota, New Mexico, North Dakota, Wyoming and Texas, and at the SEC. While NSP cannot guarantee the XCEL ENERGY timing or receipt of the necessary regulatory approvals, NSP cur (Mi/lions ofcdoll/rd NJSP NCE Aumatnenti Pro Forma rently expects the merger to be completed by the middle of 2000. $4451 $6261 $2087 $12799 Plant - Net The merger is expected to be a tax-free, stock-for-stock exchange for Current Assets 1 034 1 027 2061 shareholders of both companies (except for fractional shares), and to Other Assets 4283 1 034 (2 132) 3 185 be accounted for as a pooling of interests. NSP and NCE have agreed TOTAL ASSETS $9768 $8322 $ (45) $18045 to certain undertakings and limitations regarding the conduct of their Common Equity $2558 $2733 $ (45) $ 5246 businesses prior to the closing of the transaction. At the time of the Preferred Securities 305 294 599 merger, Xcel Energy will register as a holding company under the Long-Term Debt 3454 2374 5828 Public Utility Holding Company Act of 1935. Total Capitalization 6317 5401 (45) 11 673 Current Liabilities 1 826 1 657 3483 At Dec. 31, 1999, NSP had deferred approximately $25 million Other Liabilities 1 625 1264 2889 of merger costs, pending the consummation of the business combi TOTAL EQUITY nation and consistent with NSP's filed request for regulatory $9768 $8322 $ (45) $18045 AND LIABILITIES amortization over future periods.

Xcel Energy Summarized Pro Forma Information I The following For the year ended Dec. 31, 1999:

summary of unaudited pro forma financial information for Xcel Energy gives effect to the merger using the pooling of interests XCEL ENERGY method of accounting. Under this accounting method, NSP's and NCE's balance sheets and income statements are treated as if they (Millions ofdollars, except mr e , .hotnr noe NSP MCE Adj al'imenms Pro Forma have always been combined for financial reporting purposes. This foar earmnig pers=42(

Revenue $2 869 $3 375 $625 $6 869 unaudited pro forma summarized financial information should be 343 642 237 1 222 Operating Income read in conjunction with the historical financial statements and 224 347 571 Net Income related notes of NSP and NCE, which are included in the 1999 $ 219 $ 347 $ 566 Available for Common Annual'Reports on Form 10-K of the respective companies. EARNINGS PER SHARE -DILUTED $ 1.43 $ 3.01 $ 1.70

NOTES TO FINANCIAL STATEMENTS New NSP Utility Sub SummarizedPro Forma Information IThe 16 Segment and Related Information following summary of unaudited pro forma financial information NSP has four reportable segments: Electric Utility, Gas Utility for New NSP Utility Sub adjusts the historical financial statements and two of its nonregulated energy businesses, its wholly owned of NSP after the transfer of ownership. Upon completion of the subsidiaries NRG and EMI.

merger, all NSP-Minnesota utility assets (other than investments in and assets of subsidiaries) and liabilities associated with the

" NSP's Electric Utility generates, transmits and distributes electricity primarily in Minnesota, Wisconsin, Michigan, assets will be transferred to New NSP Utility Sub.

North Dakota and South Dakota. It also makes sales for The unaudited pro forma balance sheet information at Dec. 31, resale and provides wholesale transmission service to various 1999, assumes the merger had been completed on Dec. 31, 1999. entities in the United States.

The unaudited pro forma income statement information assumes the merger had been completed on Jan.1, 1999, the beginning of

" NSP's Gas Utility transmits, transports, stores and distributes natural gas and propane primarily in Minnesota, Wisconsin, the earliest period presented.

North Dakota, Michigan and Arizona.

The unaudited summarized pro forma financial information does not "NRCdevelops, builds, acquires, owns and operates several necessarily indicate what New NSP Utility Sub's financial position or nonregulated energy-related businesses, including indepen operating results would have been if the merger had been completed on the assumed completion dates and does not necessarily indicate dent power production, commercial and industrial heating and cooling, and energy-related refuse-derived fuel produc future operating results of New NSP Utility Sub.

tion, both domestically and outside the United States.

As of Dec. 31, 1999:

" EMI is an energy service company, primarily retrofitting NEW NSP UTILITY SUB and upgrading facilities for greater energy efficiency, in (Mi//in,, ,nfo//prI the United States.

ISP Adicuftmpntr Pro Forma Utility Plant - Net $4451 $ (856) $3595 In general, NSP has segmented its operations as either regulated or Current Assets 1 034 (434) 600 nonregulated businesses. Further, the regulated businesses are sepa Other Assets 4283 (3416) 867 rated between electric and gas; and nonregulated businesses are TOTAL ASSETS $9768 $(4 706) $5062 separated by company (primarily based on product and services).

The electric and gas businesses are part of NSP-Minnesota, NSP Common Equity $2 558 $(1 374) $1 184 Wisconsin and Viking companies and are reviewed at various Preferred Securities 305 (305) jurisdiction and/or company levels. They have been aggregated as Long-Term Debt 3 454 (2 077) 1 377 48 Total Capitalization 6317 (3756) 2561 reportable segments as they are aggregated for reporting to NSP's board of directors. Assets by segment are not reported to manage Current Liabilities 1 826 (686) 1 140 ment and are not included in the disclosures that follow.

Other Liabilities 1 625 (264) 1 361 TOTAL EQUITY The measure of profit or loss for electric and gas segments reported AND LIABILITIES $9768 $(4 706) $5062 in the various management reports varies, but the largest compo nent, NSP-Minnesota, reports net income and earnings per share For the year ended Dec. 31, 1999:

on a basis consistent with consolidated net income and earnings NEW NSP UTILITY SUB per share, except that allocations are needed for some items, as described later. Intercompany and intersegment sales are priced at (Millionm ofdoll/n*, N.2 Adzuatienty Pro Forma approved tariff rates and are immaterial. In addition, since NRG Revenue $2 869 $ (236) $2 633 and EMI are separate companies, their net income and earnings Operating Income 343 (64) 279 per share are the measure of profit or loss for both internal man Net Income 224 (74) 150 agement reporting and consolidated external NSP reporting.

AVAI LABLE FOR COMMON $ 219 $ (69) $ 150 To report net income for electric and gas utility segments, NSP Minnesota and NSP-Wisconsin must assign or allocate all costs and certain other income. In general, costs are:

"* directly assigned wherever applicable

" allocated based on cost causation allocators wherever applicable

" allocated based on a general allocator for all other costs not assigned by the above two methods The "all other" category includes segments that measure below the quantitative threshold for separate disclosure and consists primarily of nonregulated companies, including Eloigne, an affordable hous ing investment company; Seren, a broadband telecommunications company; Ultra Power, a power-cable testing company; and several other small companies and businesses.

NOTES TO FINANCIAL STATEMENTS BUSINESS SEGMENTS 1999 Electric Gas All Reconciling Consolidated

{ I ~ll~?*7(*, f~l ]llg'lj2) r T+.:i.,

{ *ZI IL./ I I~zILIAtDv ATJOC I-EMI Other Eliminationy Total (a)

Operating revenues from external customers (b) $2 396 263 $471 780 $427 567 $ 48017 $ 37255 $3 380 882 Intersegment revenues 833 4369 963 $ (5 197) 968 TOTAL REVENUES $2 397 096 $476 149 $428 530 $ 48 017 $ 37255 $ (5 197) $3 381 850 Depreciation and amortization 322858 34857 37026 2223 6098 403062 Interest income 2 189 658 10038 52 885 (165) 13657 Financing costs 121465 17055 92570 318 4966 (165) 236209 Income tax expense (credit) 116601 8177 (26416) (8061) (24019) 66282 Equity in earnings (losses) of unconsolidated affiliates 68 947 (1 088) 67 859 Segment net income (loss) $ 178908 $19458 $ 57 195 $(19221) $(12004) $ 224336 1998 Electric Gas All Reconciling Consolidated T h÷;i,..

[

ATD0/2 V7D/-1*

I L:'lAC ElT'A

¢JV Other Eliminations Total (a)

ý'Thnuýands in"4oltard IA Operating revenues from external customers (b) $2 361 536 $456 710 $ 98 688 $ 54254 $ 29288 $3 000 476 Intersegment revenues 815 9292 1737 $(10916) 928 TOTAL REVENUES $2362351 $466002 $100425 $ 54254 $ 29288 $(10916) $3001404 Depreciation and amortization 308415 31 864 16320 2 129 3779 362507 Interest income 9 103 1403 8052 184 776 (608) 18910 Financing costs 109 192 15485 50313 108 3997 (608) 178 487 Income tax expense (credit) 135914 10672 (25654) (4214) (11 923) 104795 Equity in earnings (losses) of unconsolidated affiliates 81706 300 (2122) 79884 Segment net income (loss) $ 226351 $ 17321 $ 41732 $ (7659) $ 4628 $ 282373 1997 Electric Gas All Reconciling Consolidated 49 (Tlh,,,,,nn,1,d odllnn*) T r-, 1-1. T T+ý .1: ATDf"* csA/rT 7ll] ..r] Other Fliminatios Totalla)

LA L**] I

• 7I*I DI ..

.... ... 7.. . ...

( h u a d  ? .....

.ofd....... s.

....

Operating revenues from external customers (b) $2 217 542 $515 162 $102 791 $ 94375 $ 26405 $2 956 275 Intersegment revenues 1 008 6113 926 $ (7005) 1042 TOTAL REVENUES $2218 550 $521 275 $103717 $ 94375 $ 26405 $ (7005) $2957317 Depreciation and amortization 299325 28609 10310 1 768 3069 343081 Interest income 1 696 331 10 806 604 774 (482) 13729 Financing costs 111 595 13429 30729 272 3626 (482) 159 169 Primergy cost write-off 29 005 29 005 Income tax expense (credit) 122655 12087 (23680) (5921) (8431) 96710 Equity in earnings (losses) of unconsolidated affiliates 26003 (5 144) (2259) 18600 Segment net income (loss) $ 199553 $ 22284 $ 21 982 $(10841) $ 4342 $ 237320 (a) The Consolidated Total amountsfor income and expense items represent the sum ofutility amounts (includingsome nonoperatingitems)firom the Statements of Income and the nonregulatedamounts from Note 6. The depreciationand amortizationamounts in the Statements of Cash Flows are different than reported in the Consolidated Total column due to classification of certain depreciationand amortizationamounts as other expense items in the Income Statement.

(b) All operating revenues arefrom externalcustomers located in the UnitedStates. Howevei; NRG has significantequity investments for nonregulated projects outside of the UnitedStates. Equiiy in earnings of unconsolidatedaffiliates,primarily independentpowerprojects, includes $38.6million in 1999, $29.3 million in 1998 and $27.1 million in 1997from nonregulatedprojects located outside of the United States. NRCs equity invest ments in projects outside of the UnitedStates were $606 million in 1999, $557 million in 1998 and $517 million in 1997.

NOTES TO FINANCIAL STATEMENTS

17. Summarized Quarterly Financial Data (Wnaudired)

QuarterEnded (Thousands ofdollars, except per share amo*unri;) March 31 1999 rune 30. 1999 (a) ,.5es. 30. 1999 Dec. 31. 1999 (a)

Utility operating revenues $743 183 $627 157 $813482 $685 189 Utility operating income 87 654 47944 122566 85 315 Net income 52 321 11490 111 337 49 188 Earnings available for common stock 51 261 9380 110277 48 126 Earnings per average common share:

Basic $0.34 $0.06 $0.72 $0.31 Diluted $0.34 $0.06 $0.72 $0.31 Dividends declared per common share $0.3575 $0.3625 $0.3625 $0.3625 Stock prices - high $27%6 $263/A $24'06 $221X 6

- low $23X6 $22*'/6 $20'X $19Y6 QuarterEnded (Thousands of dollars, exceppaershare amounts March 31. 1998 June30 1998 Sept 30. 1998(4) Dec. 31- 1998 (g)

Utility operating revenues $701 402 $638 601 $766448 $712 723 Utility operating income 79 050 65054 134985 85 200 Net income 57117 35 034 101 694 88 528 Earnings available for common stock 54 750 33 974 100 634 87 467 Earnings per average common share:

Basic $0.37 $0.23 $0.67 $0.58 Diluted $0.37 $0.23 $0.67 $0.58 Dividends declared per common share $0.3525 $0.3575 $0.3575 $0.3575 Stock prices - high $292Y32 $30Y32 $29Yi $302Y6

- low $260/ $27'Y32 $25 '/ $26Y16 (a) 1999 results include two adjustments relatedto regulatory recovery of conservationprogram incentives. Second quarterresults were reduced by 50 $35 million before taxes, or 14 centsper share, due to the disallowanceof 1998 incentives. Fourth quarter results were reduced by $22 million before taxes, or 8 cents per share, due to the reversalof all income recorded through the thirdquarterfor 1999 electric conservationprogramincentives.

In addition, 1999fourth quarterresults include a pretaxcharge of $17 million, or 8 cents per share,to write offgoodwill relatedto EMI acquisitions.

Also, a pretax charge of$l1 million, or 4 cents per share, was recordedin the fourth quarterof 1999 to write down an investment in CellNet common stock. In addition, NRG recordeda gain of approximately3 cents pershare on the partialsale of its interest in Cogeneration Corp. of America during the fourth quarter of1999.

(b) 1998 results includea $22 million pretax charge, which reduced thirdquarterearnings by 10 centsper share,for the write-down ofNRG projects.

(c) 1998 results include a $26million pretaxgain, which increasedfourth quarterearningsby 11 cents per share,for a partialsale ofan NRG project.

REPORTS OF MANAGEMENT AND INDEPENDENT ACCOUNTANTS RLPPZLF _DE MANAGEMENT RFPORT OF INDEPENDFNT ACCOUNTANTS Management is responsible for the preparation and integrity of To the Shareholders of Northern States Power Company:

NSP's financial statements. The financial statements have been In our opinion, the accompanying consolidated balance sheets prepared in accordance with generally accepted accounting prin and statements of capitalization and the related consolidated state ciples and necessarily include some amounts that are based on ments of income, of common stockholders' equity and of cash management's estimates and judgment.

flows present fairly, in all material respects, the financial position of To fulfill its responsibility, management maintains a strong internal Northern States Power Company (NSP), a Minnesota corporation, control structure, supported by formal policies and procedures that and its subsidiaries at Dec. 31, 1999 and 1998, and the results of are communicated throughout NSP Management also maintains a their operations and their cash flows for each of the three years in staff of internal auditors who evaluate the adequacy of and investigate the period ended Dec. 31, 1999, in conformity with accounting the adherence to these controls, policies and procedures. principles generally accepted in the United States. These financial statements are the responsibility of NSP's management; our Our independent public accountants have audited the financial responsibility is to express an opinion on these financial statements statements and have rendered an opinion as to the statements' fair based on our audits. We conducted our audits of these statements ness of presentation, in all material respects, in conformity with in accordance with auditing standards generally accepted in the generally accepted accounting principles. During the audit, they United States, which require that we plan and perform the audit to obtained an understanding of NSP's internal control structure, and obtain reasonable assurance about whether the financial statements performed tests and other procedures to the extent required by are free of material misstatement. An audit includes examining, on generally accepted auditing standards.

a test basis, evidence supporting the amounts and disclosures in The board of directors pursues its oversight role with respect to the financial statements, assessing the accounting principles used NSP's financial statements through the Audit Committee, which and significant estimates made by management, and evaluating the is comprised solely of nonmanagement directors. The Committee overall financial statement presentation. We believe that our audits meets periodically with the independent public accountants, internal provide a reasonable basis for the opinion expressed above.

auditors and management to ensure that all are properly discharging their responsibilities. The Committee approves the scope of the annual audit and reviews the recommendations the independent public accountants have for improving the internal control struc ture. The board of directors, on the recommendation of the Audit Committee, engages the independent public accountants, subject PRICLEWATERHOUSECOOPERS LLP to shareholder approval. Minneapolis, Minnesota 51 January 31, 2000, except as to Note 2, Both the independent public accountants and the internal auditors which is as of February 22, 2000 have unrestricted access to the Audit Committee.

James J. Howard Chairman of the Board, President and Chief Executive Officer Edward J. McIntyre Vice President and Chief Financial Officer NORTHERN STATES POWER COMPANY Minneapolis, Minnesota January 31, 2000

OPERATING STATISTICS REGULATED 0 [LECIIRIC OPE0RATIONS RF 1\ I1 ,f KI FS (Thotofand,/ nb-/la//ar) 1999 1998 1997 1996 1995 Residential $ 809 528 $ 774 803 $ 739684 $ 727 145 $ 735 743 Small commercial and industrial 405 620 389 744 379 848 376 797 362 521 Medium commercial and industrial 489 633 466 352 433 526 401 137 399 259 Large commercial and industrial 504 195 483 595 468 404 450 811 448226 Streetlighting and other 31 668 31 054 30 826 30 033 29 162 Conservation accrual adjustments (a) (71 348) 6 673 2 185 4 577 (666)

Total retail 2169296 2152221 2054473 1990500 1974245 Sales for resale 168581 149707 107464 98961 133961 Transmission and other 59219 60423 56613 37952 34564 ITOTAl, $2397096 $2362351 $2218550 $2127413 $2142770 L ES (Million* ofkilowatt-hours)

RLETA I L SA Residential 10373 10127 9791 9847 9956 Small commercial and industrial 6117 5999 5907 6091 5763 Medium commercial and industrial 8981 8801 8263 7470 7511 Large commercial and industrial 11 283 11277 11 059 11089 10941 Streetlighting and other 325 327 335 336 329 Total retail 37079 36531 35355 34833 34500 Sales for resale 6724 6304 4658 4929 6500 101 AL 43 803 42835 40 013 39762 41 000 CUSTOMER ACCOUNTS (at Dec. 31) (b)

Residential 1306900 1287080 1273 161 1252476 1 238576 Small commercial and industrial 160 880 155 536 150 103 149 134 144 774 Medium commercial and industrial 9731 9510 9142 7962 7906 Large commercial and industrial 762 727 695 669 652 Streetlighting and other 6365 6243 6276 5030 4883 Total retail 1484638 1459096 1439377 1415271 1396791 Sales for resale 82 78 59 54 67 52 TOTAL 1484720 1459 174 1439436 1415325 1396858 AVERAGE P,I-\FNUL PEP KILOWAT ITIOUR Residential 7.80t 7.65t 7.55t 7.38t 7.39¢ Small commercial and industrial 6.63 6.50 6.43 6.19 6.29 Medium commercial and industrial 5.45 5.30 5.25 5.37 5.32 Large commercial and industrial 4.47 4.29 4.24 4.07 4.10 TOTAL RLETA\I 1 5.85t 5.89q 5.81q 5.71t 5.72t KI !.OWATT- HOUR OUT PUT (till/otas)

Thermal 34091 32902 31 896 32657 33 802 Hydro 845 696 1 015 1 194 1 049 Purchased and interchange 12397 12529 10661 9065 9 189 TOTA 47333 46127 43572 42916 44040 CAPABILITY AT TIMNE OF MAXItMU M DOEMA\ND (megaivatts)

Company owned 7176 7149 7117 7109 7100 Purchased and sales - net (with reserve) 2024 1 871 1706 1698 1 910 TOTAL 9200 9020 8823 8807 9010 Maximum demand (),egawatts) 7990 7660 7353 7487 7519 Date of maximum demand July 29 July 14 July 16 Aug. 6 July 13 (a) Represents excess (defjicieng,) ofconseration incentives 'ecoganizedas -evenauebt contpa-isoit to tevels billed to ,etail cmstoants znader *?tes i effect.

(b) Custotoe" accontsfor 1996-2000 ina.' not befidly coatparabl/c to prioc.-,earsdit to difcfernces ini meter accautnlano, i t a aeltn bi//nigs)ysteni intplemented in 1996.

OPERATING STATISTICS RI GULATIL U GAS OIPIRiPTIONS IT?. JI ^ J.//I II.... f*OO f*7 7O00, 1000 111 1 ,a\I l ,RI'\' I N II", SI 17L'IO;*fl'ltI O 6f2Ld7('IUqW L'","

ZZZL-,Z12 i z/-/ L71{

ZZ/ L.Z./

Residential $237 976 $226 936 $253 065 $267 130 $215 543 Commercial and industrial Firm 130 066 124 099 144 539 146 145 119 863 Interruptible 63 376 61 050 79 135 63 585 48 646 Other 151 114 34 153 1 686 Total retail 431 569 412 199 476 773 477 013 385 738 Interstate transmission (Viking) 25 172 23 375 19 809 17 553 16328 Agency, transportation and off-system sales 18 372 23 792 21 287 34 662 26 122 Elimination of Viking sales to NSP (3 198) (2 543) (2 673) (2435) (2 374)

$471 915 $456 823 $515 196 $526 793 $425 814 1,1AI L SA LES (thousands of wnBtu)

Residential 40658 37522 42428 48 149 42294 Commercial and industrial Firm 26584 24410 28880 31748 28275 Interruptible 23732 23201 25898 23210 22408

'0 Other 97 48 33 394 772 TOTAlI RETAI I. 91 071 85 181 97239 103501 93749 0 T Il R G AS D I ILI\' I.R ED (thousands of/nmiBtn)

'0 Interstate transmission (Viking) 167360 168 187 166588 161 972 152952 Agency, transportation and off-system sales 13773 15609 11701 17535 19679 Elimination of Viking sales to NSP (15 114) (14563) (17145) (19311) (20440) 53 TOTAl. OTIII I1 GAS D1II.ISRI D 166 019 169 233 161 144 160 196 152 191 CUSTOMER ACCOUNTS (atDec.31) (a)

Residential 443692 430240 410773 398723 386007 Commercial and industrial 50 886 44 523 41 905 40 244 38 575 Total retail 494578 474763 452678 438967 424582 Other gas delivered 63 58 36 30 62 I-0 FA L 494641 474821 452714 438997 424644 AVLRAGE RIVEINUL PERLMNIBTU Residential $5.85 $6.05 $5.96 $5.55 $5.10 Firm commercial and industrial 4.89 5.08 5.00 4.60 4.24 Interruptible commercial and industrial 2.67 2.63 3.06 2.74 2.17 TOIAL RL1AI L $4.74 $4.84 $4.90 $4.61 $4.11 GAS PUR.CHASED FOR ,ISAI. I!

10 UTILITY CUSTOMERS Total cost (tho/ands)(b) $267859 $250661 $317646 $312943 $236714 Cost recognized per mmBtu sold (b) $2.85 $2.78 $3.20 $3.00 $2.49 Maximum sendout (/mnBtu) 782702 710831 662025 737258 659800 Date of maximum sendout Jan. 4 Jan. 10 Jan. 27 Feb. 1 Jan. 3 (a) Custowncr accountsfoi 1996-1999 ;nay not be fidly conparableto prioryears due to difenr/ens in meter acci/nulation in a new billingsysten inpleimuterd in 1996.

(b) Excludes cost and volunnr for other gas deti/jered.

NONREGULATED BUSINESS INFORMATION December 31 (Thanuands of do/larf) 1999 1998 EQUITY INVESTMtENT BY NONREGULATED BUSINISSES IN UNCONSOLIDATED PROJECTS (Including undistributed earnings and capitalized development costs)

Australian projects $ 349893 $ 327841 European projects 138760 134 197 South American and Latin American projects 117 106 95 173 Affordable housing projects (U.S.) 53338 45411 U.S. power and energy projects 386951 259974 Other 1 200 Total equity investment in unconsolidated nonregulated projects $1 047 248 $ 862 596 Nonregulated property of consolidated subsidiaries (net of accumulated depreciation) - primarily U.S. projects 2 086 476 282 524 Notes receivable from unconsolidated projects, including current portion 67 163 110 886

-1/4 Current assets 375 275 107 541 Other assets 207306 126 110

-s TOTAL ASSETS OF NONREGULATED BUSINESSES $3783468 $1489657 Long-term debt, including current maturities $2 048 842 $ 578 233 Short-term debt (including intercompany) 379438 126236 Other current liabilities 159 679 39 183 Other liabilities 137150 69072

'a 1/4,, Total liabilities of nonregulated businesses 2725 109 812724 1/4 1/4 NSP's equity investment in nonregulated businesses 1 133 829 759 530 C;

Cumulative currency translation adjustments (75 470) (82 597) 3 Total equity of nonregulated businesses 1 058 359 676 933 1/4 TOTAL LIABILITIES AND EQUITY OF NONREGULATED BUSINESSES $3783468 $1 489657

'a SIGNIFICANT NONREGULATED GENERATION PROJECTS OPERATING AT DEC. 31. 1999

-n Total NRG Mw Generation Proijert 2)oerarino_ forationi Ouzneuhip 0!ewtfor Gladstone Power Station Australia 1 680 37.50% 630 NRG 54 Loy Yang Power A Australia 2000 25.37% 507 NRG/CMS Generation Crockett Cogeneration USA 240 57.67% 138 NRG Schkopau Power Station (a) Germany 960 20.95% 200 PreussenElektra Kraftwerke A.G.

Cogeneration Corp. of America (b) USA 575 20.00% 99 Calpine COBEE (Bolivian Power Co. Ltd.) Bolivia 219 49.10% 108 COBEE MIBRAG mbH Germany 233 33.33% 78 MIBRAG Energy Developments Limited Australia 274 29.14% 79 Energy Developments Limited Scudder Latin American Power Projects (c) Latin America 772 6.63% 51 Stewart & Stevenson/Wartsila Long Beach Generating USA 530 50.00% 265 Southern California Edison El Segundo Generating USA 1 020 50.00% 510 Southern California Edison Enfield Energy Centre UK 396 25.00% 99 NRG/Indeck Encina USA 965 50.00% 483 San Diego Gas & Electric San Diego Combustion Turbines USA 253 50.00% 127 NRG NRG Northeast Generatina LLC USA 6 980 100.00% 6 980 NRG (a) Through a lease agreement, ANRG has ownership of200 megawatts.

(b) Cogeneration Coip. ofAmerica owns various percentages of'rojects, making NVRG; share ofownership 99 megawatts.

(c) Scudder owns variouspercentages ofprojects, making s\RGs share of ownership 5I megawatts.

SHAREHOLDER INFORMATION 1999 1998 1997 1996 1995 Common stock shareholders at year-end 81569 81 990 83232 86337 83902 Book value at year-end $16.42 $16.25 $15.89 $15.47 $14.87 Market prices High $27'%6 $30'`6 $29/6 $26'%6 $24Y Low $19Y $25'4/6 $22Y1/4 $221/4 $21X Year-end closing $19'Y $27% $29% $22'X6 $24Y6 Dividends declared per share $1.445 $1.425 $1.403 $1.373 $1.343

SHAREHOLDER INFORMATION Headquarters1414 Nicollet Mall, Minneapolis, MN 55401

• Non-shareholders of legal age who live in Minnesota, North Dakota, South Dakota, Wisconsin and Michigan. (Non InternetAddress I http://www.nspco.com shareholders must make an initial investment of at least $100.)

ShareholdersInformation I Contact the NSP Shareholders Department Once enrolled in the plan, participants may:

at NSP headquarters toll-free at (800) 527-4677, or e-mail at shareholders@nspco.com; from the Minneapolis-St. Paul area,

• Automatically reinvest all or a portion of their quarterly call (612) 330-5560. dividends

• Make additional cash investments. The minimum single pay Street-Name Shareholdersand Beneficial Owners ITo receive NSP's ment is $25 and the maximum quarterly payment is $10,000.

quarterly report, contact the Shareholders Department at the number listed previously. Stock Exchange Listings and Ticker Symbol I Common stock is traded on the New York, Chicago and Pacific Exchanges. Ticker Duplicate Mailings I If there are two or more shareholders at your symbol: NSP. Newspaper stock tables list NSP as NoStPw, address, you may have received duplicate shareholder mailings. To NoStPwr or NSPw. NYSE lists some of NSP's preferred stock eliminate duplicate mailings, write or call the Shareholders and its preferred securities.

Department at the number listed previously.

Form I 0-K (The Annual Report to the Securities and Exchange DirectDividend Deposit I NSP offers direct deposit of dividends to Commission) I Available online at: http://www.nspco.com/ir.htm or shareholders' checking or savings accounts. To sign up for this free contact the Shareholders Department at the number listed previ service, contact the Shareholders Department for information and ously. A statistical supplement to the annual report is also available.

an authorization form.

Investor Relations I Internet address: http://www.nspco.com/ir.htm; Dividend Reinvestment and Stock Purchase Plan I NSP's Dividend Richard J. Kolkmann, Investor Relations, at NSP headquarters Reinvestment and Stock Purchase Plan offered by Prospectus is a (612) 330-6622.

convenient way to purchase shares of NSP's common stock without payment of any brokerage commission or service charge. Contact Schedule ofAnticipatedDividendRecord Dates and Payment Datesfor 2000:

the Shareholders Department for a Prospectus and authorization PreferredStock Common Stock form. Those eligible to participate in the plan are: Record Dates Paoment Dates Record Dates (a) Payoent DLate (a) '55 Dec. 31, 1999 Jan. 15, 2000 Jan. 4, 2000 Jan. 20, 2000

• Shareholders of record of NSP March 31, 2000 April 15, 2000 April 13,2000 April 20,2000

• Shareholders who hold stock in "street name" through June 30, 2000 July 15, 2000 July 13, 2000 July 20, 2000 investment firms, provided the firm has established proce Sept. 29, 2000 Oct. 15, 2000 Oct. 2, 2000 Oct. 20, 2000 dures permitting participation Dec. 29, 2000 Jan. 15, 2001

° Employees of NSP and its subsidiaries (a)Datesfor common dividends may changepending the Xcel Energy merger.

FISCAL AGENTS NSP-MINNESOTA NSP-WI SCONS1 N TransferAgent, Common andPreferredStocks Coupon PayingAgents-Bonds Trustee-Bonds Northern States Power Company Harris Trust and Savings Bank, Chicago (a) U.S. Bank Trust, N.A., St. Paul Registrar,Common and PreferredStocks Firstar Trust Company, Milwaukee Firstar Trust Company, Milwaukee Norwest Bank Minnesota, N.A.

U.S. Bank Trust, N.A., St. Paul Sixth St. and Marquette Ave. NRG FNFRGY. INC Minneapolis, MN 55479-0059 Norwest Bank Minnesota, N.A., Trustee-Senior Notes Minneapolis Norwest Bank Minnesota, N.A.,

Dividend Distribution Minneapolis Northern States Power Company Tender, Registrarand PayingAgent Chase Manhattan Bank ForwardingAgent VIKING GAS 450 West 33rd St., New York, NY 10001 Norwest Bank International Trustee-Bonds 3 New York Plaza, New York, NY 10004 Trustee- Trust OrginatedPreferredSecurities (b) Norwest Bank Minnesota, N.A.,

Wilmington Trust Company Minneapolis Trustee-Bonds 1100 North Market St.

Harris Trust and Savings Bank (a)

Wilmington, DE 19807 S11West Monroe St., Chicago, IL 60690 (a) Harris CorporateTrust Services is being sold U.S. Bank Trust, N.A. to Bank of New York in March 2000 180 East 5th St., St. Paul, MN 55101 (b) Securities of NSP FinancingI, a wholly Norwest Bank Minnesota, N.A., owned specialpurpose subsidiary trust of Minneapolis Northern States Power Company (Minnesota)

Firstar Trust Company 1555 North River Center Drive, Suite 301 Milwaukee, WI 53212

DIRECTORS AND OFFICERS DIRECTORS OF THF MINNESOTA COM PANY DavidA. Christensen (64) 2, 4 Jamesj Howard(64) (a) A. PatriciaSampson (51) 1, 4 President and CEO Chairman, President and CEO President and CEO Raven Industries, Inc. Northern States Power Company The Sampson Group, Inc.

(elected December 1976) (elected January 1987) (elected January 1985)

WJohn Driscoll(70) 2, 4 Douglas W Leatherdale (63) 2, 3 Allan L. Schuman (65) 1, 3 Retired Chairman and President Chairman and CEO Chairman, President and CEO Rock Island Company The St. Paul Companies Inc. Ecolab Inc.

(elected November 1974) (elected April 1991) (elected January 1999)

GiannantonioFerrari(60) 1, 3 Dr.MargaretR. Preska (62) 2, 4 Board Committees Chief Operating Officer and Executive Distinguished Service Professor 1. Audit Vice President Minnesota State Universities 2. Corporate Management Honeywell International, Inc. (elected January 1980) 3. Finance (elected October 1997) 4. Power Supply (a) JamesJ. Howardis an ex officio menmber ofall committees.

C C JRINCIPAI OFFICERS OF THF MINNESOTA COMPANY

• 2 Paul E. Anders Jr.(56) Cynthia L. Lesher (51) Roger D. Sandeen (54)

Vice President and CIO President - NSP Gas Vice President and Controller Grady P Butts (53) Edwardj.McIntyre (49) DavidM. Sparby (45)

Vice President - Human Resources Vice President and CFO Vice President Regulatory Services Jamesj.Howard (64) John P MooreJr.(53)

Chairman, President and CEO Vice President and Loren L. Taylor (53)

Corporate Secretary President - NSP Electric Gary R. Johnson (53)

Vice President and Paul E. Pender (45) MichaelD. Wadley (43) 56 General Counsel Vice President - Finance President - Nuclear Generation and Treasurer DIRECTORS OF THE WISCONSIN COMPANY Philip M. Gelatt (49) (b) Ray A. LarsonJr.(70) (b) Loren L. Taylor (53)

President President President - NSP Electric Northern Engraving Corporation Wissota Sand and Gravel Company (elected May 1992)

(elected May 1990) (elected November 1979)

(b) Audit committee members JeromeL. Larsen (51) Larry G. Schnack (62) (b)

President and CEO Chancellor NSP-Wisconsin University of Wisconsin (elected June 1998) Eau Claire (elected May 1988)

PRINCIPAl OFFICFRS OF THE WI SCQNSIN COMPANY MichaelN. Gregerson (52) John P MooreJr.(53) Anthony G. Schuster (55)

Vice President - Marketing Vice President and Vice President and Business Development Corporate Secretary Transmission Systems Jerome L. Larsen (51) Roger D. Sandeen (54) John D. Wilson (40)

President and CEO Vice President, Treasurer Vice President - Regulatory Affairs and Controller and General Counsel

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BUL RAT MINAPLS, MN