10-Q 1 form10q.htm NORTHERN STATES POWER COMPANY MINNESOTA 10-Q 3-31-2013 form10q.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

(Mark One)

 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2013

or

 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-31387

Northern States Power Company
(Exact name of registrant as specified in its charter)

Minnesota
 
41-1967505
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
414 Nicollet Mall
   
Minneapolis, Minnesota
 
55401
(Address of principal executive offices)
 
(Zip Code)

(612) 330-5500
 (Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  xYes  oNo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 and Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  xYes  oNo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
   
Non-accelerated filer x
Smaller reporting company o
(Do not check if smaller reporting company)
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  oYes  xNo

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class
 
Outstanding at May 6, 2013
Common Stock, $0.01 par value
 
1,000,000 shares

Northern States Power Company (a Minnesota corporation) meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H (2) to such Form 10-Q.
 


 
 

 

TABLE OF CONTENTS

PART I 
FINANCIAL INFORMATION  
     
Item l —
3
Item 2 —
27
Item 4 —
32
     
PART II
OTHER INFORMATION  
     
Item 1 —
32
Item 1A —
32
Item 4 —
32
Item 5 —
32
Item 6 —
33
     
34
   
Certifications Pursuant to Section 302
1
Certifications Pursuant to Section 906
1
Statement Pursuant to Private Litigation
1
 
This Form 10-Q is filed by Northern States Power Company, a Minnesota corporation (NSP-Minnesota).  NSP-Minnesota is a wholly owned subsidiary of Xcel Energy Inc.  Xcel Energy Inc. wholly owns the following subsidiaries: NSP-Minnesota; Northern States Power Company, a Wisconsin corporation (NSP-Wisconsin); Public Service Company of Colorado (PSCo); and Southwestern Public Service Company (SPS).  NSP-Minnesota, NSP-Wisconsin, PSCo and SPS are also referred to collectively as utility subsidiaries.  Additional information on Xcel Energy Inc. and its subsidiaries (collectively, Xcel Energy) is available on various filings with the Securities and Exchange Commission (SEC).
 
 
PART I FINANCIAL INFORMATION
Item 1 FINANCIAL STATEMENTS

NSP-MINNESOTA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(amounts in thousands)

   
Three Months Ended March 31
 
   
2013
   
2012
 
Operating revenues
           
Electric, non-affiliates
  $ 841,176     $ 765,433  
Electric, affiliates
    110,138       108,951  
Natural gas
    235,286       196,514  
Other
    6,635       5,875  
Total operating revenues
    1,193,235       1,076,773  
                 
Operating expenses
               
Electric fuel and purchased power
    388,901       365,328  
Cost of natural gas sold and transported
    158,770       134,190  
Cost of sales — other
    3,575       3,117  
Operating and maintenance expenses
    273,280       261,030  
Conservation program expenses
    24,879       27,684  
Depreciation and amortization
    109,085       98,980  
Taxes (other than income taxes)
    59,455       53,768  
Total operating expenses
    1,017,945       944,097  
                 
Operating income
    175,290       132,676  
                 
Other income, net
    2,153       2,405  
Allowance for funds used during construction — equity
    10,262       8,035  
                 
Interest charges and financing costs
               
Interest charges — includes other financing costs of $1,486 and $1,477, respectively
    45,114       52,120  
Allowance for funds used during construction — debt
    (4,589 )     (4,278 )
Total interest charges and financing costs
    40,525       47,842  
                 
Income before income taxes
    147,180       95,274  
Income taxes
    45,215       18,288  
Net income
  $ 101,965     $ 76,986  

See Notes to Consolidated Financial Statements
 

NSP-MINNESOTA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(amounts in thousands)

   
Three Months Ended March 31
 
   
2013
   
2012
 
             
Net income
  $ 101,965     $ 76,986  
                 
Other comprehensive (loss) income
               
                 
Pension and retiree medical benefits:
               
Amortization of losses included in net periodic benefit cost,net of tax of $15 and $26, respectively
    24       37  
                 
Derivative instruments:
               
Net fair value increase, net of tax of $8 and $8,517, respectively
    5       12,373  
Reclassification of losses (gains) to net income, net of tax of $135 and $(22), respectively
    193       (33 )
      198       12,340  
Marketable securities:
               
Net fair value (decrease) increase, net of tax of $(22) and $36, respectively
    (32 )     52  
Other comprehensive income
    190       12,429  
Comprehensive income
  $ 102,155     $ 89,415  

See Notes to Consolidated Financial Statements
 

NSP-MINNESOTA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
 
   
Three Months Ended March 31
 
   
2013
   
2012
 
Operating activities
           
Net income
  $ 101,965     $ 76,986  
Adjustments to reconcile net income to cash provided by operating activities:
               
Depreciation and amortization
    110,327       100,173  
Nuclear fuel amortization
    27,522       26,000  
Deferred income taxes
    53,338       62,025  
Amortization of investment tax credits
    (670 )     (675 )
Allowance for equity funds used during construction
    (10,262 )     (8,035 )
Net realized and unrealized hedging and derivative transactions
    (607 )     (361 )
Changes in operating assets and liabilities:
               
Accounts receivable
    (25,251 )     (86,112 )
Accrued unbilled revenues
    25,672       63,486  
Inventories
    33,946       67,420  
Other current assets
    (23,131 )     (31,155 )
Accounts payable
    11,242       (63,414 )
Net regulatory assets and liabilities
    19,685       20,904  
Other current liabilities
    38,294       8,531  
Pension and other employee benefit obligations
    (69,407 )     (77,603 )
Change in other noncurrent assets
    17,652       (23,427 )
Change in other noncurrent liabilities
    (3,900 )     (2,053 )
Net cash provided by operating activities
    306,415       132,690  
                 
Investing activities
               
Utility capital/construction expenditures
    (376,588 )     (221,874 )
Proceeds from insurance recoveries
    23,500       -  
Allowance for equity funds used during construction
    10,262       8,035  
Purchases of investments in external decommissioning fund
    (586,239 )     (213,618 )
Proceeds from the sale of investments in external decommissioning fund
    584,948       213,618  
Investments in utility money pool arrangement
    (20,000 )     -  
Repayments from utility money pool arrangement
    20,000       -  
Change in restricted cash
    -       86,232  
Other, net.
    (2,284 )     (2,488 )
Net cash used in investing activities
    (346,401 )     (130,095 )
                 
Financing activities
               
(Repayments of) proceeds from short-term borrowings, net
    (176,000 )     2,000  
Borrowings under utility money pool arrangement
    238,000       229,000  
Repayments under utility money pool arrangement
    (58,000 )     (253,000 )
Proceeds from issuance of long-term debt
    52       -  
Capital contributions from parent
    120,000       100,000  
Dividends paid to parent
    (58,757 )     (58,054 )
Net cash provided by financing activities
    65,295       19,946  
                 
Net change in cash and cash equivalents
    25,309       22,541  
Cash and cash equivalents at beginning of period
    28,842       26,005  
Cash and cash equivalents at end of period
  $ 54,151     $ 48,546  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest (net of amounts capitalized)
  $ (61,296 )   $ (76,530 )
Cash received (paid) for income taxes, net
    31,362       (8,199 )
Supplemental disclosure of non-cash investing transactions:
               
Property, plant and equipment additions in accounts payable
  $ 120,689     $ 129,499  
 
See Notes to Consolidated Financial Statements
 

NSP-MINNESOTA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands, except share and per share data)

   
March 31, 2013
   
Dec. 31, 2012
 
Assets            
Current assets
           
Cash and cash equivalents
  $ 54,151     $ 28,842  
Accounts receivable, net
    352,269       325,143  
Accounts receivable from affiliates
    23,744       26,660  
Accrued unbilled revenues
    203,992       229,664  
Inventories
    226,812       260,758  
Regulatory assets
    164,380       156,223  
Derivative instruments
    47,424       56,232  
Prepayments and other
    153,482       94,019  
Total current assets
    1,226,254       1,177,541  
                 
Property, plant and equipment, net
    9,747,142       9,546,968  
                 
Other assets
               
Nuclear decommissioning fund and other investments
    1,560,902       1,514,156  
Regulatory assets
    1,021,942       1,039,675  
Derivative instruments
    55,284       66,480  
Other
    38,236       56,438  
Total other assets
    2,676,364       2,676,749  
Total assets
  $ 13,649,760     $ 13,401,258  
                 
Liabilities and Equity
               
Current liabilities
               
Current portion of long-term debt
  $ 6     $ 2  
Short-term debt
    45,000       221,000  
Borrowings under utility money pool arrangement
    180,000       -  
Accounts payable
    387,921       367,021  
Accounts payable to affiliates
    56,237       69,739  
Regulatory liabilities
    49,866       53,159  
Taxes accrued
    230,329       175,929  
Accrued interest
    36,054       58,135  
Dividends payable to parent
    58,690       58,757  
Derivative instruments
    19,330       20,117  
Other
    93,839       102,915  
Total current liabilities
    1,157,272       1,126,774  
                 
Deferred credits and other liabilities
               
Deferred income taxes
    2,036,960       1,944,910  
Deferred investment tax credits
    29,829       30,304  
Regulatory liabilities
    436,892       432,471  
Asset retirement obligations
    1,676,487       1,655,402  
Derivative instruments
    165,428       174,471  
Pension and employee benefit obligations
    353,013       422,496  
Other
    105,178       89,423  
Total deferred credits and other liabilities
    4,803,787       4,749,477  
                 
Commitments and contingencies
               
Capitalization
               
Long-term debt
    3,488,867       3,488,638  
Common stock – authorized 5,000,000 shares of $0.01 par value; 1,000,000 shares
outstanding at March 31, 2013 and Dec. 31, 2012, respectively
    10       10  
Additional paid in capital
    2,701,501       2,581,501  
Retained earnings
    1,521,332       1,478,057  
Accumulated other comprehensive loss
    (23,009 )     (23,199 )
Total common stockholder's equity
    4,199,834       4,036,369  
Total liabilities and equity
  $ 13,649,760     $ 13,401,258  

See Notes to Consolidated Financial Statements
 
 
NSP-MINNESOTA AND SUBSIDIARIES
Notes to Consolidated Financial Statements (UNAUDITED)

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (GAAP), the financial position of NSP-Minnesota and its subsidiaries as of March 31, 2013 and Dec. 31, 2012; the results of its operations, including the components of net income and comprehensive income, for the three months ended March 31, 2013 and 2012; and its cash flows for the three months ended March 31, 2013 and 2012.  All adjustments are of a normal, recurring nature, except as otherwise disclosed.  Management has also evaluated the impact of events occurring after March 31, 2013 up to the date of issuance of these consolidated financial statements.  These statements contain all necessary adjustments and disclosures resulting from that evaluation.  The Dec. 31, 2012 balance sheet information has been derived from the audited 2012 consolidated financial statements included in the NSP-Minnesota Annual Report on Form 10-K for the year ended Dec. 31, 2012.  These notes to the consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q.  Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP on an annual basis have been condensed or omitted pursuant to such rules and regulations.  For further information, refer to the consolidated financial statements and notes thereto, included in the NSP-Minnesota Annual Report on Form 10-K for the year ended Dec. 31, 2012, filed with the SEC on Feb. 25, 2013.  Due to the seasonality of NSP-Minnesota’s electric and natural gas sales, interim results are not necessarily an appropriate base from which to project annual results.

1.
Summary of Significant Accounting Policies

The significant accounting policies set forth in Note 1 to the consolidated financial statements in the NSP-Minnesota Annual Report on Form 10-K for the year ended Dec. 31, 2012, appropriately represent, in all material respects, the current status of accounting policies and are incorporated herein by reference.

2.
Accounting Pronouncements

Recently Adopted

Balance Sheet Offsetting — In December 2011, the Financial Accounting Standards Board (FASB) issued Balance Sheet (Topic 210) — Disclosures about Offsetting Assets and Liabilities (Accounting Standards Update (ASU) No. 2011-11), which requires disclosures regarding netting arrangements in agreements underlying derivatives, certain financial instruments and related collateral amounts, and the extent to which an entity’s financial statement presentation policies related to netting arrangements impact amounts recorded to the financial statements.  In January 2013, the FASB issued Balance Sheet (Topic 210) – Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities (ASU No. 2013-01) to clarify the specific instruments that should be considered in these disclosures.  These disclosure requirements do not affect the presentation of amounts in the consolidated balance sheets, and were effective for annual reporting periods beginning on or after Jan. 1, 2013, and interim periods within those annual reporting periods.  NSP-Minnesota implemented the disclosure guidance effective Jan. 1, 2013, and the implementation did not have a material impact on its consolidated financial statements.  See Note 8 for the required disclosures.

Comprehensive Income Disclosures — In February 2013, the FASB issued Comprehensive Income (Topic 220) — Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU No. 2013-02), which requires detailed disclosures regarding changes in components of accumulated other comprehensive income and amounts reclassified out of accumulated other comprehensive income.  These disclosure requirements do not change how net income or comprehensive income are presented in the consolidated financial statements.  These disclosure requirements were effective for annual reporting periods beginning on or after Dec. 15, 2012, and interim periods within those annual reporting periods.  NSP-Minnesota implemented the disclosure guidance effective Jan. 1, 2013, and the implementation did not have a material impact on its consolidated financial statements.  See Note 12 for the required disclosures.
 

3. 
Selected Balance Sheet Data

(Thousands of Dollars)
 
March 31, 2013
   
Dec. 31, 2012
 
Accounts receivable, net
           
Accounts receivable
  $ 371,985     $ 345,563  
Less allowance for bad debts
    (19,716 )     (20,420 )
    $ 352,269     $ 325,143  

(Thousands of Dollars)
 
March 31, 2013
   
Dec. 31, 2012
 
Inventories
           
Materials and supplies
  $ 135,563     $ 134,952  
Fuel
    75,085       80,307  
Natural gas
    16,164       45,499  
    $ 226,812     $ 260,758  

(Thousands of Dollars)
 
March 31, 2013
   
Dec. 31, 2012
 
Property, plant and equipment, net
           
Electric plant
  $ 12,366,058     $ 12,322,677  
Natural gas plant
    1,031,918       1,027,632  
Common and other property
    489,695       493,322  
Construction work in progress
    1,172,173       951,199  
Total property, plant and equipment
    15,059,844       14,794,830  
Less accumulated depreciation
    (5,649,369 )     (5,594,064 )
Nuclear fuel
    2,108,788       2,090,801  
Less accumulated amortization
    (1,772,121 )     (1,744,599 )
    $ 9,747,142     $ 9,546,968  

4.
Income Taxes

Except to the extent noted below, the circumstances set forth in Note 6 to the consolidated financial statements included in the NSP-Minnesota Annual Report on Form 10-K for the year ended Dec. 31, 2012 appropriately represent, in all material respects, the current status of other income tax matters, and are incorporated herein by reference.

Federal AuditNSP-Minnesota is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return.  The statute of limitations applicable to Xcel Energy’s 2008 federal income tax return expired in September 2012.  The statute of limitations applicable to Xcel Energy’s 2009 federal income tax return expires in June 2015.  In the third quarter of 2012, the Internal Revenue Service (IRS) commenced an examination of tax years 2010 and 2011.  As of March 31, 2013, the IRS had not proposed any material adjustments to tax years 2010 and 2011.

State AuditsNSP-Minnesota is a member of the Xcel Energy affiliated group that files consolidated state income tax returns.  As of March 31, 2013, NSP-Minnesota’s earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2009.  There are currently no state income tax audits in progress.

Unrecognized Tax BenefitsThe unrecognized tax benefit balance includes permanent tax positions, which if recognized would affect the annual effective tax rate (ETR).  In addition, the unrecognized tax benefit balance includes temporary tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.  A change in the period of deductibility would not affect the ETR but would accelerate the payment of cash to the taxing authority to an earlier period.
 

A reconciliation of the amount of unrecognized tax benefit is as follows:

(Millions of Dollars)
 
March 31, 2013
   
Dec. 31, 2012
 
Unrecognized tax benefit — Permanent tax positions
  $ 5.1     $ 2.8  
Unrecognized tax benefit — Temporary tax positions
    17.3       16.7  
Total unrecognized tax benefit
  $ 22.4     $ 19.5  

The unrecognized tax benefit amounts were reduced by the tax benefits associated with net operating loss (NOL) and tax credit carryforwards.  The amounts of tax benefits associated with NOL and tax credit carryforwards are as follows:

(Millions of Dollars)
 
March 31, 2013
   
Dec. 31, 2012
 
NOL and tax credit carryforwards
  $ (18.0 )   $ (16.8 )

It is reasonably possible that NSP-Minnesota’s amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS audit progresses and state audits resume.  As the IRS examination moves closer to completion, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $21 million.

The payable for interest related to unrecognized tax benefits is partially offset by the interest benefit associated with NOL and tax credit carryforwards.  The payables for interest related to unrecognized tax benefits at March 31, 2013 and Dec. 31, 2012 were not material.  No amounts were accrued for penalties related to unrecognized tax benefits as of March 31, 2013 or Dec. 31, 2012.

5. 
Rate Matters

Except to the extent noted below, the circumstances set forth in Note 10 to the consolidated financial statements included in NSP-Minnesota’s Annual Report on Form 10-K for the year ended Dec. 31, 2012 appropriately represent, in all material respects, the current status of other rate matters, and are incorporated herein by reference.

Pending Regulatory Proceedings — Minnesota Public Utilities Commission (MPUC)

Base Rate

Minnesota 2012 Electric Rate Case  In November 2012, NSP-Minnesota filed a request with the MPUC to increase electric rates approximately $285 million, or 10.7 percent.  The rate filing was based on a 2013 forecast test year, a requested return on equity (ROE) of 10.6 percent, an average electric rate base of approximately $6.3 billion and an equity ratio of 52.56 percent.  In January 2013, interim rates of approximately $251 million became effective, subject to refund.

On Feb. 28, 2013, intervening parties filed direct testimony proposing modifications to NSP-Minnesota’s rate request.  The Minnesota Department of Commerce (DOC) recommended an increase of approximately $93.6 million, based on a recommended ROE of 10.24 percent and an equity ratio of 52.56 percent.  Seven other intervenors filed testimony recommending various adjustments, some similar to the DOC, but no other party made a comprehensive analysis of all rate case elements.  See the summary of DOC recommendations below.

On March 25, 2013, NSP-Minnesota filed rebuttal testimony and revised the requested annual revenue increase to approximately $219.7 million, or 8.23 percent, based on an ROE of 10.6 percent, a rate base of approximately $6.3 billion and an equity ratio of 52.56 percent.  The updated request reflects alternate proposals in several key areas including deferral and removal of certain costs related to Sherco 3 and to Monticello, as well as removal of costs for cancellation of the Prairie Island Extended Power Uprate (EPU) project.  Additional adjustments were made for compensation and benefits, amortization of pension market losses and Black Dog remediation costs.  NSP-Minnesota’s updated request also reflects more recent information on property taxes and sales forecast, as well as data corrections to the original filing.
 

On April 12, 2013, intervenors including the DOC, Office of Attorney General (OAG), Minnesota Chamber (MCC), Xcel Large Industrials (XLI), Commercial Group, Industrial, Commercial and Institutional Customers, and Energy Cents Coalition filed surrebuttal testimony.  The DOC recommended a revenue increase of $89.6 million, based on a 9.83 percent ROE, an average electric rate base of approximately $6.1 billion and an equity ratio of 52.56 percent.  The following table summarizes the effect of the DOC’s recommendations on NSP-Minnesota’s original request:

(Millions of Dollars)
 
DOC Direct
Testimony
February 2013
   
DOC Surrebuttal
Testimony
April 2013
 
NSP-Minnesota's original request
  $ 285     $ 285  
ROE
    (20 )     (44 )
Sherco Unit 3
    (39 )     (44 )
Reduced recovery for the nuclear plants
    (9 )     (5 )
Elimination of certain incentive compensation
    (25 )     (20 )
Increase to the sales forecast
    (24 )     (26 )
Reduced recovery of pension
    (25 )     (25 )
Employee benefits
    (11 )     (6 )
Other, net
    (38 )     (25 )
DOC recommendation
  $ 94     $ 90  

In its surrebuttal testimony, the OAG recommends, among other things, no recovery for the Prairie Island EPU project, stating it should have been written off in 2012 when cancellation was approved by the MPUC on Dec. 20, 2012.  The DOC is also not supportive of recovery of the Prairie Island EPU cancelled plant costs, but identifies requirements for the next case if deferral is allowed.  The OAG suggests pension recovery in rates exceeds benefit payout because of changes made to benefit plans and recommends correction for an alleged over-collection of funds to pay for future benefits which may never be paid out.  The OAG supports the DOC in adjustments to recovery of annual incentive compensation and does not find NSP-Minnesota’s Sherco 3 proposal warranted.  Other intervenors maintained their primary positions with various adjustments and recommendations for class responsibility and rate design. XLI and MCC opposed recovery of Sherco 3 costs and Monticello EPU costs.

Hearings were held in April and NSP-Minnesota revised its rate request to approximately $215.4 million to reflect updated property tax information and other adjustments.  Also at the hearings, the DOC’s recommendation was revised to approximately $98.6 million, largely to reflect updated information.  NSP-Minnesota has recognized a liability representing its best estimate of any refund obligation.

Next steps in the procedural schedule are expected to be as follows:

 
·
Initial Brief – May 15, 2013
 
·
Reply Brief and Findings of Fact – May 30, 2013
 
·
Administrative Law Judge (ALJ) Report – July 3, 2013
 
·
MPUC Order – Anticipated by September 2013

Pending Regulatory Proceedings — North Dakota Public Service Commission (NDPSC)

Base Rate

North Dakota 2012 Electric Rate Case — In December 2012, NSP-Minnesota filed a request with the NDPSC to increase annual retail electric rates approximately $16.9 million, or 9.25 percent.  The rate filing is based on a 2013 forecast test year, a requested ROE of 10.6 percent, an electric rate base of approximately $377.6 million and an equity ratio of 52.56 percent.  In January 2013, the NDPSC approved an interim electric increase of $14.7 million, effective Feb. 16, 2013, subject to refund.

Next steps in the procedural schedule are expected to be as follows:

 
·
Staff/Intervenor Direct Testimony – July 12, 2013
 
·
Rebuttal Testimony – Aug. 12, 2013
 
·
Technical Hearings – Aug. 27-28, 2013
 
·
Initial Briefs – Sept. 20, 2013
 
·
Reply Briefs/Proposed Findings – October 2013

A final NDPSC decision on the case is expected in the fourth quarter of 2013.
 
 
10

 
Recently Concluded Regulatory Proceedings — South Dakota Public Utilities Commission (SDPUC)

Base Rate

South Dakota 2012 Electric Rate Case  In June 2012, NSP-Minnesota filed a request with the SDPUC to increase electric rates by $19.4 million annually.  The request was based on a 2011 historic test year adjusted for known and measurable changes, a requested ROE of 10.65 percent, an average rate base of $367.5 million and an equity ratio of 52.89 percent.  Interim rates of $19.4 million went into effect on Jan. 1, 2013, subject to refund.

In March 2013, NSP-Minnesota and the SDPUC Staff reached a settlement agreement that provides for a base rate increase of approximately $11.6 million and the implementation of a new rider to recover an additional $3.7 million for certain capital projects and incremental property taxes.  Combined, the overall revenue increase for 2013 is approximately $15.3 million, or 9.1 percent.  The rider is subject to true-up for actual costs and is projected to provide incremental revenue of $2.6 million in 2014.  The settlement agreement also includes a moratorium on base rate increases, effective until Jan. 1, 2015.  The settlement was approved by the SDPUC on April 9, 2013.  Implementation of new rates and the rider began on May 1, 2013.

6.
Commitments and Contingencies

Except to the extent noted below and in Note 5 to the consolidated financial statements in this Quarterly Report on Form 10-Q, the circumstances set forth in Notes 10, 11 and 12 to the consolidated financial statements included in the NSP-Minnesota Annual Report on Form 10-K for the year ended Dec. 31, 2012 appropriately represent, in all material respects, the current status of commitments and contingent liabilities, including those regarding public liability for claims resulting from any nuclear incident and are incorporated herein by reference. The following include commitments, contingencies and unresolved contingencies that are material to NSP-Minnesota’s financial position.

Purchased Power Agreements

Under certain purchased power agreements, NSP-Minnesota purchases power from independent power producing entities for which NSP-Minnesota is required to reimburse natural gas or biomass fuel costs, or to participate in tolling arrangements under which NSP-Minnesota procures the natural gas required to produce the energy that it purchases.  These specific purchased power agreements create a variable interest in the associated independent power producing entity.

NSP-Minnesota had approximately 1,064 megawatts (MW) of capacity under long-term purchased power agreements as of March 31, 2013 and Dec. 31, 2012 with entities that have been determined to be variable interest entities.  NSP-Minnesota has concluded that these entities are not required to be consolidated in its consolidated financial statements because it does not have the power to direct the activities that most significantly impact the entities’ economic performance.  These agreements have expiration dates through the year 2028.

Indemnifications

In connection with the acquisition of the 201 MW Nobles wind project in 2011, NSP-Minnesota agreed to indemnify the seller for losses arising out of a breach of certain representations and warranties.  NSP-Minnesota’s indemnification obligation was capped at $20 million under the agreement.  The indemnification obligation expired in March 2013.

Environmental Contingencies

Environmental Requirements

Cross-State Air Pollution Rule (CSAPR) — In 2011, the U.S. Environmental Protection Agency (EPA) issued the CSAPR to address long range transport of particulate matter (PM) and ozone by requiring reductions in sulfur dioxide (SO2) and nitrogen oxide (NOx) from utilities in the eastern half of the United States, including Minnesota.  The CSAPR would have set more stringent requirements than the proposed Clean Air Transport Rule.  The rule also would have created an emissions trading program.

In August 2012, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) vacated the CSAPR and remanded it back to the EPA.  The D.C. Circuit also stated that the EPA must continue administering the Clean Air Interstate Rule (CAIR) pending adoption of a valid replacement.  In October 2012, the EPA, as well as state and local governments and environmental advocates, petitioned the D.C. Circuit to rehear the CSAPR appeal.  In January 2013, the D.C. Circuit denied all requests for rehearing.  In March 2013, the EPA and a coalition of environmental advocacy groups separately petitioned for U.S. Supreme Court review of the CSAPR decision.  It is not known whether the Supreme Court will decide to review the D.C. Circuit’s decision.
 
 
CAIR — In 2005, the EPA issued the CAIR to further regulate SO2 and NOx emissions.  The CAIR does not currently apply to Minnesota.

Regional Haze Rules — In 2005, the EPA finalized amendments to its regional haze rules, known as best available retrofit technology (BART), which require the installation and operation of emission controls for industrial facilities emitting air pollutants that reduce visibility in certain national parks and wilderness areas.  NSP-Minnesota generating facilities are subject to BART requirements.  Individual states were required to identify the facilities located in their states that will have to reduce SO2, NOx and PM emissions under BART and then set emissions limits for those facilities.

In 2009, the Minnesota Pollution Control Agency (MPCA) approved the state implementation plan (SIP) and submitted it to the EPA for approval.  The MPCA selected the BART controls for Sherco Units 1 and 2 to improve visibility in the national parks.  The MPCA concluded Selective Catalytic Reduction (SCR) should not be required because the minor visibility benefits derived from SCRs do not outweigh the substantial costs.  The MPCA’s source-specific BART controls for Sherco Units 1 and 2 consist of combustion controls for NOx and scrubber upgrades for SO2.  The combustion controls have been installed on Sherco Units 1 and 2.  The scrubber upgrades are underway and scheduled to be completed by January 2015.

The EPA’s preliminary review of the SIP in 2011 indicated that SCR controls should be added to Sherco Units 1 and 2.  Subsequently, the EPA and MPCA both determined that CSAPR meets BART requirements for purposes of the SIP.  In addition, the MPCA retained its source-specific BART determination for Sherco Units 1 and 2 from the 2009 SIP. The EPA approved the SIP for electric generating units, and also approved the source-specific emission limits for Sherco Units 1 and 2 as strengthening the SIP, but avoided characterizing them as BART limits.

In August 2012, the National Parks Conservation Association, Sierra Club, Voyageurs National Park Association, Friends of the Boundary Waters Wilderness, Minnesota Center for Environmental Advocacy and Fresh Energy appealed the EPA’s approval of the SIP to the U.S. Court of Appeals for the Eighth Circuit.  The Court denied intervention in the case to NSP-Minnesota and other regulated parties who petitioned to intervene.  It is not yet known how the D.C. Circuit’s reversal of the CSAPR may impact the EPA’s approval of the SIP.

The estimated cost for meeting the BART, regional haze and other Clean Air Act requirements is approximately $50 million, of which $32 million has already been spent on projects to reduce NOx emissions on Sherco Units 1 and 2.  NSP-Minnesota anticipates that all costs associated with BART compliance will be fully recoverable through regulatory recovery mechanisms.  If the above litigation results in further EPA proceedings concerning the SIP, such proceedings may consider whether SCRs should be required for Sherco Units 1 and 2.

In addition to the regional haze rules, there are other visibility rules related to a program called the Reasonably Attributable Visibility Impairment (RAVI) program.  In 2009, the U.S. Department of the Interior certified that a portion of the visibility impairment in Voyageurs and Isle Royale National Parks is reasonably attributable to emissions from NSP-Minnesota’s Sherco Units 1 and 2.  The EPA is required to make its own determination as to whether Sherco Units 1 and 2 cause or contribute to RAVI and, if so, whether the level of controls required by the MPCA is appropriate.  The EPA plans to issue a separate notice on the issue of BART for Sherco Units 1 and 2 under the RAVI program.  It is not yet known when the EPA will publish a proposal under RAVI or what that proposal will entail.  In December 2012, a lawsuit against the EPA was filed in the U.S. District Court for the District of Minnesota by the following organizations: National Parks Conservation Association, Minnesota Center for Environmental Advocacy, Friends of the Boundary Waters Wilderness, Voyageurs National Park Association, Fresh Energy and Sierra Club.  The lawsuit alleges that the EPA has failed to perform a nondiscretionary duty to determine BART for the Sherco Units 1 and 2 under the RAVI program.  The EPA filed an answer denying the allegations and asserting that it did not have a nondiscretionary duty under the RAVI program.  NSP-Minnesota has requested the Court to allow it to intervene in this litigation.  The Court has not yet ruled on NSP-Minnesota’s motion.

Legal Contingencies

NSP-Minnesota is involved in various litigation matters that are being defended and handled in the ordinary course of business.  The assessment of whether a loss is probable or is a reasonable possibility, and whether the loss or a range of loss is estimable, often involves a series of complex judgments about future events.  Management maintains accruals for such losses that are probable of being incurred and subject to reasonable estimation.  Management is sometimes unable to estimate an amount or range of a reasonably possible loss in certain situations, including but not limited to when (1) the damages sought are indeterminate, (2) the proceedings are in the early stages, or (3) the matters involve novel or unsettled legal theories.  In such cases, there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss.  For current proceedings not specifically reported herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on NSP-Minnesota’s financial statements.  Unless otherwise required by GAAP, legal fees are expensed as incurred.
 
 
Environmental Litigation

Native Village of Kivalina vs. Xcel Energy Inc. et al. — In February 2008, the City and Native Village of Kivalina, Alaska, filed a lawsuit in the U.S. District Court for the Northern District of California against Xcel Energy and 23 other utility, oil, gas and coal companies.  Plaintiffs claim that defendants’ emission of carbon dioxide (CO2) and other greenhouse gases contribute to global warming, which is harming their village.  Xcel Energy believes the claims asserted in this lawsuit are without merit and joined with other utility defendants in filing a motion to dismiss in June 2008.  In October 2009, the U.S. District Court dismissed the lawsuit on constitutional grounds.  In November 2009, plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit (Ninth Circuit).  In October 2012, the Ninth Circuit affirmed the U.S. District Court’s dismissal and subsequently rejected plaintiffs’ request for rehearing.  Plaintiffs subsequently filed a petition for review with the United States Supreme Court. It is unknown whether the United States Supreme Court will grant this petition.  The amount of damages claimed by plaintiffs is unknown, but likely includes the cost of relocating the Village of Kivalina.  Plaintiffs’ alleged relocation is estimated to cost between $95 million to $400 million.  Although Xcel Energy believes the likelihood of loss is remote based primarily on existing case law, it is not possible to estimate the amount or range of reasonably possible loss in the event of an adverse outcome of this matter.  No accrual has been recorded for this matter.

Comer vs. Xcel Energy Inc. et al. — In May 2011, less than a year after their initial lawsuit was dismissed, plaintiffs in this purported class action lawsuit filed a second lawsuit against more than 85 utility, oil, chemical and coal companies in the U.S. District Court in Mississippi.  The complaint alleges defendants’ CO2 emissions intensified the strength of Hurricane Katrina and increased the damage plaintiffs purportedly sustained to their property.  Plaintiffs base their claims on public and private nuisance, trespass and negligence.  Among the defendants named in the complaint are Xcel Energy Inc., SPS, PSCo, NSP-Wisconsin and NSP-Minnesota.  The amount of damages claimed by plaintiffs is unknown.  The defendants believe this lawsuit is without merit and filed a motion to dismiss the lawsuit.  In March 2012, the U.S. District Court granted this motion for dismissal.  In April 2012, plaintiffs appealed this decision to the U.S. Court of Appeals for the Fifth Circuit.  Oral arguments occurred in May 2013.  It is uncertain when the Fifth Circuit will issue its decision.  Although Xcel Energy believes the likelihood of loss is remote based primarily on existing case law, it is not possible to estimate the amount or range of reasonably possible loss in the event of an adverse outcome of this matter.  No accrual has been recorded for this matter.

Employment, Tort and Commercial Litigation

Merricourt Wind Project Litigation — In April 2011, NSP-Minnesota terminated its agreements with enXco Development Corporation (enXco) for the development of a 150 MW wind project in southeastern North Dakota.  NSP-Minnesota’s decision to terminate the agreements was based in large part on the adverse impact this project could have on endangered or threatened species protected by federal law and the uncertainty in cost and timing in mitigating this impact.  NSP-Minnesota also terminated the agreements due to enXco’s nonperformance of certain other conditions, including failure to obtain a Certificate of Site Compatibility and the failure to close on the contracts by an agreed upon date of March 31, 2011.  NSP-Minnesota recorded a $101 million deposit in the first quarter of 2011, which was collected in April 2011.  In May 2011, NSP-Minnesota filed a declaratory judgment action in the U.S. District Court in Minnesota to obtain a determination that it acted properly in terminating the agreements.  enXco also filed a separate lawsuit in the same court seeking approximately $240 million for an alleged breach of contract.  NSP-Minnesota believes enXco’s lawsuit is without merit.  On Oct. 22, 2012, NSP-Minnesota filed a motion for summary judgment.  In April 2013, the U.S. District Court granted NSP-Minnesota’s motion and entered judgment in its favor.  On April 23, 2013 enXco filed a notice of appeal to the Eighth Circuit.  It is uncertain when the Eighth Circuit will decide this appeal.  Although Xcel Energy believes the likelihood of loss is remote based on existing case law and the U.S. District Court’s April 2013 decision, it is not possible to estimate the amount or range of reasonably possible loss in the event of an adverse outcome of this matter.  No accrual has been recorded for this matter.

Nuclear Power Operations and Waste Disposal

Nuclear Waste Disposal Litigation — In 1998, NSP-Minnesota filed a complaint in the U.S. Court of Federal Claims against the United States requesting breach of contract damages for the U.S. Department of Energy’s (DOE) failure to begin accepting spent nuclear fuel by Jan. 31, 1998, as required by the contract between the United States and NSP-Minnesota.  NSP-Minnesota sought contract damages in this lawsuit through Dec. 31, 2004.  In September 2007, the court awarded NSP-Minnesota $116.5 million in damages.  In August 2007, NSP-Minnesota filed a second complaint; this lawsuit claimed damages for the period Jan. 1, 2005 through Dec. 31, 2008.
 

In July 2011, the United States and NSP-Minnesota executed a settlement agreement resolving both lawsuits, providing an initial $100 million payment from the United States to NSP-Minnesota, and providing a method by which NSP-Minnesota can recover its spent fuel storage costs through 2013, estimated to be an additional $100 million.  The settlement does not address costs for used fuel storage after 2013; such costs could be the subject of future litigation.  NSP-Minnesota received the initial $100 million payment in August 2011, the second installment of $18.6 million in March 2012, and the third installment of $20.7 million in October 2012.  Amounts were subsequently credited to customers, except for approved reductions such as legal costs, customer credit amounts still in process at March 31, 2013, and amounts set aside to be credited through another regulatory mechanism.

In NSP-Wisconsin’s 2012 Electric and Gas Rate Case, the Public Service Commission of Wisconsin (PSCW) authorized NSP-Wisconsin to utilize the proceeds from the second and third installments to be included as a reduction of the 2013 electric rate increase.  In December 2012, the MPUC approved NSP-Minnesota’s triennial nuclear decommissioning filing which required NSP-Minnesota to place the Minnesota retail portion of the DOE settlement payments for the third installment of $15.3 million and the anticipated fourth installment in 2013 into the nuclear decommissioning fund when received.  NSP-Minnesota proposed to contribute the second, third and fourth installments to the nuclear decommissioning fund to offset the increase in the decommissioning accrual that was included in the 2012 North Dakota electric rate case.  That filing is pending NDPSC action.

7. 
Borrowings and Other Financing Instruments

Money Pool Xcel Energy Inc. and its utility subsidiaries have established a money pool arrangement that allows for short-term investments in and borrowings between the utility subsidiaries.  Xcel Energy Inc. may make investments in the utility subsidiaries at market-based interest rates; however, the money pool arrangement does not allow the utility subsidiaries to make investments in Xcel Energy Inc.  Money pool borrowings for NSP-Minnesota were as follows:

(Amounts in Millions, Except Interest Rates)
 
Three Months Ended
March 31, 2013
   
Twelve Months Ended
Dec. 31, 2012
 
Borrowing limit
 
$
250
   
$
250
 
Amount outstanding at period end
   
180
     
-
 
Average amount outstanding
   
13
     
56
 
Maximum amount outstanding
   
196
     
236
 
Weighted average interest rate, computed on a daily basis
   
0.34
 %
   
0.33
 %
Weighted average interest rate at period end
   
                       0.34
     
 N/A
 

Commercial Paper — NSP-Minnesota meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under its credit facility.  Commercial paper outstanding for NSP-Minnesota was as follows:

(Amounts in Millions, Except Interest Rates)
 
Three Months Ended
March 31, 2013
   
Twelve Months Ended
Dec. 31, 2012
 
Borrowing limit
 
$
500
   
$
500
 
Amount outstanding at period end
   
45
     
221
 
Average amount outstanding
   
257
     
59
 
Maximum amount outstanding
   
347
     
302
 
Weighted average interest rate, computed on a daily basis
   
0.36
 %
   
0.39
 %
Weighted average interest rate at period end
   
0.34
     
0.39
 

Letters of Credit NSP-Minnesota uses letters of credit, generally with terms of one-year, to provide financial guarantees for certain operating obligations.  At March 31, 2013 and Dec. 31, 2012, there were $11.2 million and $10.2 million of letters of credit outstanding, respectively, under the credit facility.  All letters of credit outstanding were issued under the credit facilities at March 31, 2013 and Dec. 31, 2012.  The contract amounts of these letters of credit approximate their fair value and are subject to fees determined in the marketplace.
 

Credit Facility — In order to use its commercial paper program to fulfill short-term funding needs, NSP-Minnesota must have a revolving credit facility in place at least equal to the amount of its commercial paper borrowing limit and cannot issue commercial paper in an amount exceeding available capacity under this credit facility.  The line of credit provides short-term financing in the form of notes payable to banks, letters of credit and back-up support for commercial paper borrowings.

At March 31, 2013, NSP-Minnesota had the following committed credit facility available (in millions):

Credit Facility (a)
   
Drawn (b)
   
Available
 
$ 500.0     $ 56.2     $ 443.8  

(a)
Credit facility expires in July 2017.
(b)
Includes outstanding commercial paper and letters of credit.

All credit facility bank borrowings, outstanding letters of credit and outstanding commercial paper reduce the available capacity under the credit facility.  NSP-Minnesota had no direct advances on the credit facility outstanding at March 31, 2013 and Dec. 31, 2012.

8. 
Fair Value of Financial Assets and Liabilities

Fair Value Measurements

The accounting guidance for fair value measurements and disclosures provides a single definition of fair value and requires certain disclosures about assets and liabilities measured at fair value. A hierarchical framework for disclosing the observability of the inputs utilized in measuring assets and liabilities at fair value is established by this guidance.  The three levels in the hierarchy are as follows:

Level 1 — Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.  The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices.

Level 2 — Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reporting date.  The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, or priced with discounted cash flow or option pricing models using highly observable inputs.

Level 3 — Significant inputs to pricing have little or no observability as of the reporting date.  The types of assets and liabilities included in Level 3 are those valued with models requiring significant management judgment or estimation.

Specific valuation methods include the following:

Cash equivalents  The fair values of cash equivalents are generally based on cost plus accrued interest; money market funds are measured using quoted net asset values.

Investments in equity securities and other funds Equity securities are valued using quoted prices in active markets.  The fair values for commingled funds, international equity funds, private equity investments and real estate investments are measured using net asset values, which take into consideration the value of underlying fund investments, as well as the other accrued assets and liabilities of a fund, in order to determine a per-share market value.  The investments in commingled funds and international equity funds may be redeemed for net asset value with proper notice.  Private equity investments require approval of the fund for any unscheduled redemption, and such redemptions may be approved or denied by the fund at its sole discretion.  Unscheduled distributions from real estate investments may be redeemed with proper notice; however, withdrawals from real estate investments may be delayed or discounted as a result of fund illiquidity.  Based on NSP-Minnesota’s evaluation of its ability to redeem private equity and real estate investments, fair value measurements for private equity and real estate investments have been assigned a Level 3.

Investments in debt securities Fair values for debt securities are determined by a third party pricing service using recent trades and observable spreads from benchmark interest rates for similar securities, except for asset-backed and mortgage-backed securities, for which the third party service also utilizes additional inputs in a discounted cash flow model, including forecasted prepayments and risk adjusted discounting.

Interest rate derivatives — The fair values of interest rate derivatives are based on broker quotes that utilize current market interest rate forecasts.
 

Commodity derivatives The methods used to measure the fair value of commodity derivative forwards and options utilize forward prices and volatilities, as well as pricing adjustments for specific delivery locations, and are generally assigned a Level 2.  When contractual settlements extend to periods beyond those readily observable on active exchanges or quoted by brokers, the significance of the use of less observable forecasts of long-term forward prices and volatilities on a valuation is evaluated, and may result in Level 3 classification.

Electric commodity derivatives held by NSP-Minnesota include financial transmission rights (FTRs) purchased from Midwest Independent Transmission System Operator, Inc. (MISO).  FTRs purchased from MISO are financial instruments that entitle or obligate the holder to one year of monthly revenues or charges based on transmission congestion across a given transmission path.  The value of an FTR is derived from, and designed to offset, the cost of energy congestion, which is caused by overall transmission load and other transmission constraints. In addition to overall transmission load, congestion is also influenced by the operating schedules of power plants and the consumption of electricity pertinent to a given transmission path.  Unplanned plant outages, scheduled plant maintenance, changes in the relative costs of fuels used in generation, weather and overall changes in demand for electricity can each impact the operating schedules of the power plants on the transmission grid and the value of an FTR.  NSP-Minnesota’s valuation process for FTRs utilizes complex iterative modeling to predict the impacts of forecasted changes in these drivers of transmission system congestion on the historical pricing of FTR purchases.

If forecasted costs of electric transmission congestion increase or decrease for a given FTR path, the value of that particular FTR instrument will likewise increase or decrease.  Given the limited observability of management’s forecasts for several of the inputs to this complex valuation model – including expected plant operating schedules and retail and wholesale demand, fair value measurements for FTRs have been assigned a Level 3.  Monthly FTR settlements are included in the fuel clause adjustment, and therefore changes in the fair value of the yet to be settled portions of FTRs are deferred as a regulatory asset or liability.  Given this regulatory treatment and the limited magnitude of NSP-Minnesota’s FTRs relative to its electric utility operations, the numerous unobservable quantitative inputs to the complex model used for valuation of FTRs are insignificant to the consolidated financial statements of NSP-Minnesota.

Non-Derivative Instruments Fair Value Measurements

The Nuclear Regulatory Commission (NRC) requires NSP-Minnesota to maintain a portfolio of investments to fund the costs of decommissioning its nuclear generating plants.  Together with all accumulated earnings or losses, the assets of the nuclear decommissioning fund are legally restricted for the purpose of decommissioning the Monticello and Prairie Island nuclear generating plants.  The fund contains cash equivalents, debt securities, equity securities and other investments all classified as available-for-sale.  NSP-Minnesota plans to reinvest matured securities until decommissioning begins.  The MPUC approved NSP-Minnesota’s proposed change in escrow fund investment strategy in September 2012.  The MPUC approved an asset allocation for the escrow and investment targets by asset class for both the escrow and qualified trust.

NSP-Minnesota recognizes the costs of funding the decommissioning of its nuclear generating plants over the lives of the plants, assuming rate recovery of all costs.  Given the purpose and legal restrictions on the use of nuclear decommissioning fund assets, realized and unrealized gains on fund investments over the life of the fund are deferred as an offset of NSP-Minnesota’s regulatory asset for nuclear decommissioning costs.  Consequently, any realized and unrealized gains and losses on securities in the nuclear decommissioning fund, including any other-than-temporary impairments, are deferred as a component of the regulatory asset for nuclear decommissioning.

Unrealized gains for the nuclear decommissioning fund were $171.3 million and $135.8 million at March 31, 2013 and Dec. 31, 2012, respectively, and unrealized losses and amounts recorded as other-than-temporary impairments were $49.6 million and $46.4 million at March 31, 2013 and Dec. 31, 2012, respectively.
 

The following tables present the cost and fair value of NSP-Minnesota’s non-derivative instruments with recurring fair value measurements, in the nuclear decommissioning fund, at March 31, 2013 and Dec. 31, 2012:

   
March 31, 2013
 
         
Fair Value
 
(Thousands of Dollars)
 
Cost
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Nuclear decommissioning fund (a)
                             
Cash equivalents
  $ 94,131     $ 88,759     $ 5,372     $ -     $ 94,131  
Commingled funds
    422,333       -       442,976       -       442,976  
International equity funds
    67,032       -       70,587       -       70,587  
Private equity investments
    29,199       -       -       34,506       34,506  
Real estate
    33,048       -       -       40,406       40,406  
Debt securities:
                                       
Government securities
    16,375       -       16,464       -       16,464  
U.S. corporate bonds
    210,505       -       216,318       -       216,318  
International corporate bonds
    18,562       -       19,226       -       19,226  
Municipal bonds
    103,090       -       103,837       -       103,837  
Asset-backed securities
    1,636       -       1,636       -       1,636  
Mortgage-backed securities
    4,627       -       5,106       -       5,106  
Equity securities:
                                       
Common stock
    411,751       488,811       -       -       488,811  
Total
  $ 1,412,289     $ 577,570     $ 881,522     $ 74,912     $ 1,534,004  

(a)
Reported in nuclear decommissioning fund and other investments on the consolidated balance sheet, which also includes $26.9 million of miscellaneous investments.

   
Dec. 31, 2012
 
         
Fair Value
 
(Thousands of Dollars)
 
Cost
   
Level 1
   
Level 2
   
Level 3
   
Total
 
Nuclear decommissioning fund (a)
                             
Cash equivalents
  $ 246,904     $ 237,938     $ 8,966     $ -     $ 246,904  
Commingled funds
    396,681       -       417,583       -       417,583  
International equity funds
    66,452       -       69,481       -       69,481  
Private equity investments
    27,943       -       -       33,250       33,250  
Real estate
    32,561       -       -       39,074       39,074  
Debt securities:
                                       
Government securities
    21,092       -       21,521       -       21,521  
U.S. corporate bonds
    162,053       -       169,488       -       169,488  
International corporate bonds
    15,165       -       16,052       -       16,052  
Municipal bonds
    21,392       -       23,650       -       23,650  
Asset-backed securities
    2,066       -       -       2,067       2,067  
Mortgage-backed securities
    28,743       -       -       30,209       30,209  
Equity securities:
                                       
Common stock
    379,093       420,263       -       -       420,263  
Total
  $ 1,400,145     $ 658,201     $ 726,741     $ 104,600     $ 1,489,542  

(a)
Reported in nuclear decommissioning fund and other investments on the consolidated balance sheet, which also includes $24.6 million of miscellaneous investments.
 

The following tables present the changes in Level 3 nuclear decommissioning fund investments for the three months ended March 31, 2013 and 2012:

(Thousands of Dollars)
 
Jan. 1, 2013
   
Purchases
   
Settlements
   
Gains
Recognized as
Regulatory
Liabilities
   
Transfers Out
of Level 3 (a)
   
March 31, 2013
 
Private equity investments
  $ 33,250     $ 1,256     $ -     $ -     $ -     $ 34,506  
Real estate
    39,074       4,786       (4,299 )     845       -       40,406  
Asset-backed securities
    2,067       -       -       -       (2,067 )     -  
Mortgage-backed securities
    30,209       -       -       -       (30,209 )     -  
Total
  $ 104,600     $ 6,042     $ (4,299 )   $ 845     $ (32,276 )   $ 74,912  

(a)
Transfers out of Level 3 into Level 2 were principally due to diminished use of unobservable inputs that were previously significant to these fair value measurements.

(Thousands of Dollars)
 
Jan. 1, 2012
   
Purchases
   
Settlements
   
Gains (Losses)
Recognized as
Regulatory Assets
and Liabilities
   
Transfers Out
of Level 3
   
March 31, 2012
 
Private equity investments
  $ 9,203     $ 10,155     $ -     $ 710     $ -     $ 20,068  
Real estate
    26,395       1,636       (1,766 )     1,640       -       27,905  
Asset-backed securities
    16,501       -       (1 )     47       -       16,547  
Mortgage-backed securities
    78,664       6,904       (16,728 )     (169 )     -       68,671  
Total
  $ 130,763     $ 18,695     $ (18,495 )   $ 2,228     $ -     $ 133,191  

The following table summarizes the final contractual maturity dates of the debt securities in the nuclear decommissioning fund, by asset class, at March 31, 2013:

 
 
Final Contractual Maturity
 
(Thousands of Dollars)
 
Due in 1 Year
or Less
   
Due in 1 to 5
Years
   
Due in 5 to 10
Years
   
Due after 10
Years
   
Total
 
Government securities
  $ -     $ 2,498     $ 10,165     $ 3,801     $ 16,464  
U.S. corporate bonds
    1,441       40,952       92,076       81,849       216,318  
International corporate bonds
    -       4,300       13,746       1,180       19,226  
Municipal bonds
    829       16,628       21,917       64,463       103,837  
Asset-backed securities
    -       1,636       -       -       1,636  
Mortgage-backed securities
    -       -       -       5,106       5,106  
Debt securities
  $ 2,270     $ 66,014     $ 137,904     $ 156,399     $ 362,587  

Derivative Instruments Fair Value Measurements

NSP-Minnesota enters into derivative instruments, including forward contracts, futures, swaps and options, for trading purposes and to manage risk in connection with changes in interest rates, utility commodity prices and vehicle fuel prices.

Interest Rate Derivatives — NSP-Minnesota enters into various instruments that effectively fix the interest payments on certain floating rate debt obligations or effectively fix the yield or price on a specified benchmark interest rate for an anticipated debt issuance for a specific period.  These derivative instruments are generally designated as cash flow hedges for accounting purposes.

At March 31, 2013, accumulated other comprehensive losses related to interest rate derivatives included $0.8 million of net losses expected to be reclassified into earnings during the next 12 months as the related hedged interest rate transactions impact earnings, including forecasted amounts for any unsettled hedges.

Wholesale and Commodity Trading Risk — NSP-Minnesota conducts various wholesale and commodity trading activities, including the purchase and sale of electric capacity, energy and energy-related instruments.  NSP-Minnesota’s risk management policy allows management to conduct these activities within guidelines and limitations as approved by its risk management committee, which is made up of management personnel not directly involved in the activities governed by this policy.
 

Commodity Derivatives — NSP-Minnesota enters into derivative instruments to manage variability of future cash flows from changes in commodity prices in its electric and natural gas operations, as well as for trading purposes.  This could include the purchase or sale of energy or energy-related products, natural gas to generate electric energy, natural gas for resale, and vehicle fuel.

At March 31, 2013, NSP-Minnesota had various vehicle fuel contracts designated as cash flow hedges extending through December 2016.  NSP-Minnesota also enters into derivative instruments that mitigate commodity price risk on behalf of electric and natural gas customers but are not designated as qualifying hedging transactions.  Changes in the fair value of non-trading commodity derivative instruments are recorded in other comprehensive income or deferred as a regulatory asset or liability.  The classification as a regulatory asset or liability is based on commission approved regulatory recovery mechanisms.  NSP-Minnesota recorded immaterial amounts to income related to the ineffectiveness of cash flow hedges for the three months ended March 31, 2013 and 2012.

At March 31, 2013, net gains related to commodity derivative cash flow hedges recorded as a component of accumulated other comprehensive losses included $0.1 million of net gains expected to be reclassified into earnings during the next 12 months as the hedged transactions occur.

Additionally, NSP-Minnesota enters into commodity derivative instruments for trading purposes not directly related to commodity price risks associated with serving its electric and natural gas customers.  Changes in the fair value of these commodity derivatives are recorded in electric operating revenue, net of amounts credited to customers under margin-sharing mechanisms.

The following table details the gross notional amounts of commodity forwards, options and FTRs at March 31, 2013 and Dec. 31, 2012:

(Amounts in Thousands) (a)(b)
 
March 31, 2013
   
Dec. 31, 2012
 
Megawatt hours (MWh) of electricity
    30,966       55,163  
Million British thermal units (MMBtu) of natural gas
    -       26  
Gallons of vehicle fuel
    347       375  
 
(a)
Amounts are not reflective of net positions in the underlying commodities.
(b)
Notional amounts for options are included on a gross basis, but are weighted for the probability of exercise.

Consideration of Credit Risk and Concentrations — NSP-Minnesota continuously monitors the creditworthiness of the counterparties to its interest rate derivatives and commodity derivative contracts prior to settlement, and assesses each counterparty’s ability to perform on the transactions set forth in the contracts.  Given this assessment, as well as an assessment of the impact of NSP-Minnesota’s own credit risk when determining the fair value of derivative liabilities, the impact of considering credit risk was immaterial to the fair value of unsettled commodity derivatives presented in the consolidated balance sheets.

NSP-Minnesota employs additional credit risk control mechanisms when appropriate, such as letters of credit, parental guarantees, standardized master netting agreements and termination provisions that allow for offsetting of positive and negative exposures.  Credit exposure is monitored and, when necessary, the activity with a specific counterparty is limited until credit enhancement is provided.

NSP-Minnesota’s most significant concentrations of credit risk with particular entities or industries are contracts with counterparties to its wholesale, trading and non-trading commodity activities.  At March 31, 2013, eight of NSP-Minnesota’s 10 most significant counterparties for these activities, comprising $39.9 million or 36 percent of this credit exposure at March 31, 2013, had investment grade credit ratings from Standard & Poor’s, Moody’s or Fitch Ratings.  The remaining two significant counterparties, comprising $9.0 million or 8 percent of this credit exposure at March 31, 2013, were not rated by these agencies, but based on NSP-Minnesota’s internal analysis, had credit quality consistent with investment grade.  All 10 of these significant counterparties are municipal or cooperative electric entities, or other utilities.
 
 
Financial Impact of Qualifying Cash Flow Hedges — The impact of qualifying interest rate and vehicle fuel cash flow hedges on NSP-Minnesota’s accumulated other comprehensive loss, included as a component of common stockholder’s equity and in the consolidated statements of comprehensive income, is detailed in the following table:

   
Three Months Ended March 31
 
(Thousands of Dollars)
 
2013
   
2012
 
Accumulated other comprehensive loss related to cash flow hedges at Jan. 1
  $ (21,393 )   $ (11,729 )
After-tax net unrealized gains related to derivatives accounted for as hedges
    5       12,373  
After-tax net realized losses (gains) on derivative transactions reclassified into earnings
    193       (33 )
Accumulated other comprehensive (loss) income related to cash flow hedges at March 31
  $ (21,195 )   $ 611  
 
The following tables detail the impact of derivative activity during the three months ended March 31, 2013 and 2012, on accumulated other comprehensive loss, regulatory assets and liabilities and income:

   
Three Months Ended March 31, 2013
 
   
Pre-Tax Fair Value
   
Pre-Tax (Gains) Losses
       
   
Gains (Losses) Recognized
   
Reclassified into Income
       
   
During the Period in:
   
During the Period from:
       
   
Accumulated
         
Accumulated
         
Pre-Tax Gains
 
   
Other
   
Regulatory
   
Other
   
Regulatory
   
Recognized
 
   
Comprehensive
   
(Assets) and
   
Comprehensive
   
Assets and
   
During the Period
 
(Thousands of Dollars)
 
Loss
   
Liabilities
   
Loss
   
(Liabilities)
   
in Income
 
Derivatives designated as cash flow hedges
                             
Interest rate
  $ -     $ -     $ 342    (a)   $ -     $ -  
Vehicle fuel and other commodity
    13       -       (14 (e)     -       -  
Total
  $ 13     $ -     $ 328     $ -     $ -  
                                         
Other derivative instruments
                                       
Commodity trading
  $ -     $ -     $ -     $ -     $ 2,776   (b)
Electric commodity
    -       6,419       -       (15,229 ) (c)     -  
Natural gas commodity
    -       2       -       -       -  
Total
  $ -     $ 6,421     $ -     $ (15,229 )   $ 2,776  
 
 
   
Three Months Ended March 31, 2012
 
   
Pre-Tax Fair Value
   
Pre-Tax (Gains) Losses
       
   
Gains (Losses) Recognized
   
Reclassified into Income
       
   
During the Period in:
   
During the Period from:
       
   
Accumulated
         
Accumulated
         
Pre-Tax Gains
 
   
Other
   
Regulatory
   
Other
   
Regulatory
   
Recognized
 
   
Comprehensive
   
(Assets) and
   
Comprehensive
   
Assets and
   
During the Period
 
(Thousands of Dollars)
 
Loss
   
Liabilities
   
Loss
   
(Liabilities)
   
in Income
 
Derivatives designated as cash flow hedges
                             
Interest rate
  $ 20,787     $ -     $ (27 ) (a)   $ -     $ -  
Vehicle fuel and other commodity
    103       -       (28 ) (e)     -       -  
Total
  $ 20,890     $ -     $ (55 )   $ -     $ -  
                                         
Other derivative instruments
                                       
Commodity trading
  $ -     $ -     $ -     $ -     $ 1,723   (b)
Electric commodity
    -       1,582       -       (7,972 ) (c)     -  
Natural gas commodity
    -       (2,660 )     -       16,158   (d)     -  
Total
  $ -     $ (1,078 )   $ -     $ 8,186     $ 1,723  

(a)
Amounts are recorded to interest charges.
(b)
Amounts are recorded to electric operating revenues.  Portions of these gains and losses are subject to sharing with electric customers through margin-sharing mechanisms and deducted from gross revenue, as appropriate.
(c)
Amounts are recorded to electric fuel and purchased power.  These derivative settlement gains and losses are shared with electric customers through fuel and purchased energy cost-recovery mechanisms, and reclassified out of income as regulatory assets or liabilities, as appropriate.
(d)
Amounts are recorded to cost of natural gas sold and transported.  These derivative settlement gains and losses are shared with natural gas customers through purchased natural gas cost-recovery mechanisms, and reclassified out of income as regulatory assets or liabilities, as appropriate.
(e)
Amounts are recorded to operating and maintenance (O&M) expenses.

NSP-Minnesota had no derivative instruments designated as fair value hedges during the three months ended March 31, 2013 and 2012.  Therefore, no gains or losses from fair value hedges or related hedged transactions were recognized for these periods.
 
Credit Related Contingent Features Contract provisions for derivative instruments that NSP-Minnesota enters into, including those recorded to the consolidated balance sheet at fair value, as well as those accounted for as normal purchase-normal sale (NPNS) contracts and therefore not reflected on the balance sheet, may require the posting of collateral or settlement of the contracts for various reasons, including if NSP-Minnesota is unable to maintain its credit ratings.  If the credit ratings of NSP-Minnesota were downgraded below investment grade, derivative instruments reflected in a $19.3 million gross liability position on the consolidated balance sheet at March 31, 2013 would have required NSP-Minnesota to post collateral or settle outstanding contracts, including other contracts subject to master netting agreements; due to offsetting asset positions, no payments would be required at March 31, 2013.  At March 31, 2013 there was no collateral posted on these specific contracts.  At Dec. 31, 2012, no derivative instruments in a liability position would have required the posting of collateral or settlement of outstanding contracts if the credit ratings of NSP-Minnesota were downgraded below investment grade.

Certain derivative instruments are also subject to contract provisions that contain adequate assurance clauses.  These provisions allow counterparties to seek performance assurance, including cash collateral, in the event that NSP-Minnesota’s ability to fulfill its contractual obligations is reasonably expected to be impaired.  NSP-Minnesota had no collateral posted related to adequate assurance clauses in derivative contracts as of March 31, 2013 and Dec. 31, 2012.
 

Recurring Fair Value Measurements  The following table presents for each of the fair value hierarchy levels, NSP-Minnesota’s derivative assets and liabilities measured at fair value on a recurring basis at March 31, 2013:

   
March 31, 2013
 
   
Fair Value
                   
                     
Fair Value
   
Counterparty
       
(Thousands of Dollars)
 
Level 1
   
Level 2
   
Level 3
   
Total
   
Netting (b)
   
Total
 
Current derivative assets
                                   
Derivatives designated as cash flow hedges:
                                   
Vehicle fuel and other commodity
  $ -     $ 51     $ -     $ 51     $ -     $ 51  
Other derivative instruments:
                                               
Commodity trading
    -       18,986       509       19,495       (2,303 )     17,192  
Electric commodity
    -       -       7,449       7,449       (377 )     7,072  
Total current derivative assets
  $ -     $ 19,037     $ 7,958     $ 26,995     $ (2,680 )     24,315  
Purchased power agreements (a)
                                            23,109  
Current derivative instruments
                                          $ 47,424  
Noncurrent derivative assets
                                               
Derivatives designated as cash flow hedges:
                                               
Vehicle fuel and other commodity
  $ -     $ 48     $ -     $ 48     $ (48 )   $ -  
Other derivative instruments:
                                               
Commodity trading
    -       31,726       74       31,800       (2,246 )     29,554  
Total noncurrent derivative assets
  $ -     $ 31,774     $ 74     $ 31,848     $ (2,294 )     29,554  
Purchased power agreements (a)
                                            25,730  
Noncurrent derivative instruments
                                          $ 55,284  
Current derivative liabilities
                                               
Derivatives designated as cash flow hedges:
                                               
Other derivative instruments:
                                               
Commodity trading
  $ -     $ 10,803     $ 13     $ 10,816     $ (5,337 )   $ 5,479  
Electric commodity
    -       -       377       377       (377 )     -  
Total current derivative liabilities
  $ -     $ 10,803     $ 390     $ 11,193     $ (5,714 )     5,479  
Purchased power agreements (a)
                                            13,851  
Current derivative instruments
                                          $ 19,330  
Noncurrent derivative liabilities
                                               
Other derivative instruments:
                                               
Commodity trading
  $ -     $ 12,017     $ -     $ 12,017     $ (2,294 )   $ 9,723  
Total noncurrent derivative liabilities
  $ -     $ 12,017     $ -     $ 12,017     $ (2,294 )     9,723  
Purchased power agreements (a)
                                            155,705  
Noncurrent derivative instruments
                                          $ 165,428  

(a)
In 2003, as a result of implementing new guidance on the normal purchase exception for derivative accounting, NSP-Minnesota began recording several long-term purchased power agreements at fair value due to accounting requirements related to underlying price adjustments.  As these purchases are recovered through normal regulatory recovery mechanisms in the respective jurisdictions, the changes in fair value for these contracts were offset by regulatory assets and liabilities.  During 2006, NSP-Minnesota qualified these contracts under the normal purchase exception.  Based on this qualification, the contracts are no longer adjusted to fair value and the previous carrying value of these contracts will be amortized over the remaining contract lives along with the offsetting regulatory assets and liabilities.
(b)
NSP-Minnesota nets derivative instruments and related collateral in its consolidated balance sheet when supported by a legally enforceable master netting agreement, and all derivative instruments and related collateral amounts were subject to master netting agreements at March 31, 2013 and Dec. 31, 2012.  The counterparty netting amounts presented exclude settlement receivables and payables and non-derivative amounts that may be subject to the same master netting agreements.
 

The following table presents for each of the fair value hierarchy levels, NSP-Minnesota’s derivative assets and liabilities measured at fair value on a recurring basis at Dec. 31, 2012:

   
Dec. 31, 2012
 
   
Fair Value
                   
                     
Fair Value
   
Counterparty
       
(Thousands of Dollars)
 
Level 1
   
Level 2
   
Level 3
   
Total
   
Netting (b)
   
Total
 
Current derivative assets
                                   
Derivatives designated as cash flow hedges:
                                   
Vehicle fuel and other commodity
  $ -     $ 52     $ -     $ 52     $ -     $ 52  
Other derivative instruments:
                                               
Commodity trading
    -       19,871       692       20,563       (3,374 )     17,189  
Electric commodity
    -       -       16,724       16,724       (843 )     15,881  
Total current derivative assets
  $ -     $ 19,923     $ 17,416     $ 37,339     $ (4,217 )     33,122  
Purchased power agreements (a)
                                            23,110  
Current derivative instruments
                                          $ 56,232  
Noncurrent derivative assets
                                               
Derivatives designated as cash flow hedges:
                                               
Vehicle fuel and other commodity
  $ -     $ 47     $ -