10-Q 1 nspm09301810-q.htm 10-Q Document
 
 
 
 
 
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 Sept. 30, 2018
or
¨
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. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). x Yes ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer x
Smaller reporting company ¨
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No

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 Oct. 26, 2018
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 —

Item 2 —

Item 4 —

 
 
 
PART II —
OTHER INFORMATION
 
 
 
 
Item 1 —

Item 1A —

Item 6 —

 
 
 

 
 
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. The electric production and transmission system of NSP-Minnesota and NSP-Wisconsin, which is operated on an integrated basis and is managed by NSP-Minnesota, is referred to collectively as the NSP System. 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 IFINANCIAL INFORMATION
Item 1FINANCIAL STATEMENTS

NSP-MINNESOTA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(amounts in thousands)
 
Three Months Ended Sept. 30
 
Nine Months Ended Sept. 30
 
2018
 
2017
 
2018
 
2017
Operating revenues
 
 
 
 
 
 
 
Electric, non-affiliates
$
1,166,862

 
$
1,167,447

 
$
3,091,144

 
$
3,083,182

Electric, affiliates
122,636

 
123,524

 
357,025

 
366,598

Natural gas
54,625

 
57,442

 
379,169

 
356,631

Other
7,631

 
7,366

 
22,902

 
21,448

Total operating revenues
1,351,754

 
1,355,779

 
3,850,240

 
3,827,859

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Electric fuel and purchased power
479,813

 
435,003

 
1,304,087

 
1,215,071

Cost of natural gas sold and transported
19,595

 
20,723

 
211,679

 
198,968

Cost of sales — other
5,703

 
4,313

 
14,539

 
13,085

Operating and maintenance expenses
310,536

 
285,372

 
912,027

 
899,187

Conservation program expenses
29,434

 
31,674

 
87,762

 
92,238

Depreciation and amortization
187,201

 
176,739

 
547,333

 
522,070

Taxes (other than income taxes)
59,990

 
62,220

 
191,820

 
191,989

Total operating expenses
1,092,272

 
1,016,044

 
3,269,247

 
3,132,608

 
 
 
 
 
 
 
 
Operating income
259,482

 
339,735

 
580,993

 
695,251

 
 
 
 
 
 
 
 
Other expense, net
(1,976
)
 
(1,278
)
 
(3,994
)
 
(6,444
)
Allowance for funds used during construction — equity
5,899

 
10,683

 
19,550

 
23,391

 
 
 
 
 
 
 
 
Interest charges and financing costs
 
 
 
 
 
 
 
Interest charges — includes other financing costs of
 $1,853, $1,845, $5,501 and $5,437, respectively
56,398

 
57,577

 
170,517

 
172,548

Allowance for funds used during construction — debt
(3,500
)
 
(5,383
)
 
(10,287
)
 
(11,909
)
Total interest charges and financing costs
52,898

 
52,194

 
160,230

 
160,639

 
 
 
 
 
 
 
 
Income before income taxes
210,507

 
296,946

 
436,319

 
551,559

Income taxes
9,331

 
67,943

 
31,016

 
140,728

Net income
$
201,176

 
$
229,003

 
$
405,303

 
$
410,831


See Notes to Consolidated Financial Statements

3


NSP-MINNESOTA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(amounts in thousands)
 
Three Months Ended Sept. 30
 
Nine Months Ended Sept. 30
 
2018
 
2017
 
2018
 
2017
Net income
$
201,176

 
$
229,003

 
$
405,303

 
$
410,831

 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension and retiree medical benefits:
 
 
 
 
 
 
 
Amortization of losses included in net periodic benefit cost,
net of tax of $20, $21, $65 and $70, respectively
56

 
39

 
163

 
110

 


 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
Net fair value decrease, net of tax of $2, $16, $13 and $33, respectively
5

 
22

 
32

 
48

Reclassification of losses to net income, net of tax of $56, $222, $185 and $502, respectively
172

 
379

 
504

 
786

 
177

 
401

 
536

 
834

Marketable securities:
 
 
 
 
 
 
 
Reclassification of gains to net income, net of tax of $0, $0, $(51) and $0,
respectively

 

 
(128
)
 

 
 
 
 
 
 
 
 
Other comprehensive income
233

 
440

 
571

 
944

Comprehensive income
$
201,409

 
$
229,443

 
$
405,874

 
$
411,775


See Notes to Consolidated Financial Statements

4


NSP-MINNESOTA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
 
Nine Months Ended Sept. 30,
 
2018
 
2017
Operating activities
 
 
 
Net income
$
405,303

 
$
410,831

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
552,141

 
526,784

Nuclear fuel amortization
92,393

 
87,654

Deferred income taxes
32,672

 
98,125

Amortization of investment tax credits
(1,226
)
 
(1,241
)
Allowance for equity funds used during construction
(19,550
)
 
(23,391
)
Net realized and unrealized hedging and derivative transactions
(2,278
)
 
(2,703
)
Other, net
(1,038
)
 
(1,072
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(29,320
)
 
(14,677
)
Accrued unbilled revenues
28,610

 
33,465

Inventories
17,168

 
(4,265
)
Other current assets
84,801

 
35,591

Accounts payable
(21,377
)
 
(34,275
)
Net regulatory assets and liabilities
115,043

 
(15,467
)
Other current liabilities
(78,895
)
 
(73,898
)
Pension and other employee benefit obligations
(57,593
)
 
(55,548
)
Change in other noncurrent assets
880

 
(3,585
)
Change in other noncurrent liabilities
(32,596
)
 
(30,704
)
Net cash provided by operating activities
1,085,138

 
931,624

 
 
 
 
Investing activities
 
 
 
Utility capital/construction expenditures
(697,705
)
 
(696,857
)
Allowance for equity funds used during construction
19,550

 
23,391

Purchases investment securities
(493,893
)
 
(965,086
)
Proceeds from the sale of investment securities
478,614

 
948,558

Investments in utility money pool arrangement
(748,000
)
 
(122,000
)
Repayments from utility money pool arrangement
748,000

 
122,000

Other, net
(2,775
)
 
(3,463
)
Net cash used in investing activities
(696,209
)
 
(693,457
)
 
 
 
 
Financing activities
 
 
 
Repayments of short-term borrowings, net
4,000

 
(85,000
)
Borrowings under utility money pool arrangement
345,000

 
516,000

Repayments under utility money pool arrangement
(430,000
)
 
(466,000
)
Proceeds from issuance of long-term debt

 
586,264

Repayments of long-term debt
(1
)
 
(507,865
)
Capital contributions from parent
49,622

 
123,247

Dividends paid to parent
(371,960
)
 
(418,133
)
Other, net
(93
)
 

Net cash (used in) provided by financing activities
(403,432
)
 
(251,487
)
 
 
 
 
Net change in cash and cash equivalents
(14,503
)
 
(13,320
)
Cash and cash equivalents at beginning of period
43,781

 
47,595

Cash and cash equivalents at end of period
$
29,278

 
$
34,275

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest (net of amounts capitalized)
$
(167,301
)
 
$
(177,336
)
Cash received (paid) for income taxes, net
59,461

 
(60,911
)
Supplemental disclosure of non-cash investing transactions:
 
 
 
Property, plant and equipment additions in accounts payable
$
79,346

 
$
47,261


See Notes to Consolidated Financial Statements

5


NSP-MINNESOTA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands, except share and per share data)
 
 
Sept. 30, 2018
 
Dec. 31, 2017
Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
29,278

 
$
43,781

Accounts receivable, net
 
387,855

 
345,110

Accounts receivable from affiliates
 
17,758

 
48,494

Accrued unbilled revenues
 
249,106

 
277,716

Inventories
 
288,678

 
337,712

Regulatory assets
 
278,288

 
276,392

Derivative instruments
 
30,450

 
25,230

Prepaid taxes
 
20,789

 
79,145

Prepayments and other
 
32,591

 
43,682

Total current assets
 
1,334,793

 
1,477,262

 
 
 
 
 
Property, plant and equipment, net
 
13,215,718

 
13,033,612

 
 
 
 
 
Other assets
 
 
 
 
Nuclear decommissioning fund and other investments
 
2,262,751

 
2,192,344

Regulatory assets
 
1,326,785

 
1,190,429

Derivative instruments
 
22,083

 
28,102

Other
 
10,032

 
4,142

Total other assets
 
3,621,651

 
3,415,017

Total assets
 
$
18,172,162

 
$
17,925,891

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Current liabilities
 
 
 
 
Current portion of long-term debt
 
$
16

 
$
7

Short-term debt
 
24,000

 
20,000

Borrowings under utility money pool arrangement
 

 
85,000

Accounts payable
 
391,695

 
368,342

Accounts payable to affiliates
 
61,347

 
80,070

Regulatory liabilities
 
219,169

 
83,403

Taxes accrued
 
246,397

 
229,335

Accrued interest
 
52,530

 
65,896

Dividends payable to parent
 
84,177

 
98,687

Derivative instruments
 
18,664

 
17,697

Customer deposits
 
58,949

 
95,369

Other
 
146,862

 
152,965

Total current liabilities
 
1,303,806

 
1,296,771

 
 
 
 
 
Deferred credits and other liabilities
 
 
 
 
Deferred income taxes
 
1,700,494

 
1,612,341

Deferred investment tax credits
 
21,301

 
22,528

Regulatory liabilities
 
1,984,514

 
1,978,527

Asset retirement obligations
 
2,167,201

 
2,083,874

Derivative instruments
 
86,748

 
102,742

Pension and employee benefit obligations
 
278,614

 
331,087

Other
 
160,242

 
89,440

Total deferred credits and other liabilities
 
6,399,114

 
6,220,539

 
 
 
 
 
Commitments and contingencies
 


 


Capitalization
 
 
 
 
Long-term debt
 
4,936,119

 
4,933,011

Common stock — authorized 5,000,000 shares of $0.01 par value; 1,000,000 shares
outstanding at Sept. 30, 2018 and Dec. 31, 2017, respectively
 
10

 
10

Additional paid in capital
 
3,589,363

 
3,580,234

Retained earnings
 
1,967,716

 
1,919,863

Accumulated other comprehensive loss
 
(23,966
)
 
(24,537
)
Total common stockholder’s equity
 
5,533,123

 
5,475,570

Total liabilities and equity
 
$
18,172,162

 
$
17,925,891

See Notes to Consolidated Financial Statements

6


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 Sept. 30, 2018 and Dec. 31, 2017; the results of its operations, including the components of net income and comprehensive income, for the three and nine months ended Sept. 30, 2018 and 2017; and its cash flows for the nine months ended Sept. 30, 2018 and 2017. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Management has also evaluated the impact of events occurring after Sept. 30, 2018 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, 2017 balance sheet information has been derived from the audited 2017 consolidated financial statements included in the NSP-Minnesota Annual Report on Form 10-K for the year ended Dec. 31, 2017. 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, 2017, filed with the SEC on Feb. 26, 2018. 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, 2017, appropriately represent, in all material respects, the current status of accounting policies and are incorporated herein by reference.

2.
Accounting Pronouncements

Recently Issued

Leases — In February 2016, the Financial Accounting Standards Board (FASB) issued Leases, Topic 842 (Accounting Standards Update (ASU) No. 2016-02), which for lessees requires balance sheet recognition of right-of-use assets and lease liabilities for most leases. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2018. Adoption will occur on Jan. 1, 2019 utilizing the practical expedients provided by the standard and included in Targeted Improvements, Topic 842 (ASU No. 2018-11). On Jan. 1, 2019, agreements historically disclosed as operating leases for the use of real estate, equipment and certain fossil-fueled generating facilities operated under purchased power agreements (PPAs) are expected to be recognized on the consolidated balance sheet. Other than first-time recognition of these types of operating leases on the consolidated balance sheet, the implementation is not expected to have a significant impact on NSP-Minnesota’s consolidated financial statements.

Recently Adopted

Revenue Recognition In May 2014, the FASB issued Revenue from Contracts with Customers, Topic 606 (ASU No. 2014-09), which provides a new framework for the recognition of revenue. NSP-Minnesota implemented the guidance on a modified retrospective basis on Jan. 1, 2018. Results for reporting periods beginning after Dec. 31, 2017 are presented in accordance with Topic 606, while prior period results have not been adjusted and continue to be reported in accordance with prior accounting guidance. Other than increased disclosures regarding revenues related to contracts with customers, the implementation did not have a material impact on NSP-Minnesota’s consolidated financial statements. For related disclosures, see Note 13 to the consolidated financial statements.

Classification and Measurement of Financial Instruments — In January 2016, the FASB issued Recognition and Measurement of Financial Assets and Financial Liabilities, Subtopic 825-10 (ASU No. 2016-01), which eliminated the available-for-sale classification for marketable equity securities and also replaced the cost method of accounting for non-marketable equity securities with a model for recognizing impairments and observable price changes. Under the new standard, other than when the consolidation or equity method of accounting is utilized, changes in the fair value of equity securities are recognized in earnings. NSP-Minnesota implemented the guidance on Jan. 1, 2018. As a result of application of accounting principles for rate regulated entities, changes in the fair value of the securities in the nuclear decommissioning fund, historically classified as available-for-sale, continue to be deferred to a regulatory asset, and the overall adoption impacts were not material.


7


Presentation of Net Periodic Benefit Cost — In March 2017, the FASB issued Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, Topic 715 (ASU No. 2017-07), which establishes that only the service cost element of pension cost may be presented as a component of operating income in the income statement. Also under the guidance, only the service cost component of pension cost is eligible for capitalization. As a result of the application of accounting principles for rate regulated entities, a similar amount of pension cost, including non-service components, will be recognized consistent with the historical ratemaking treatment, and the impacts of adoption will be limited to changes in classification of non-service costs in the consolidated statement of income. NSP-Minnesota implemented the new guidance on Jan. 1, 2018, and as a result, $3.4 million and $10.2 million of pension costs were retrospectively reclassified from operating and maintenance expenses to other income, net on the consolidated income statement for the three and nine months ended Sept. 30, 2017, respectively. Under a practical expedient permitted by the standard, NSP-Minnesota used benefit cost amounts disclosed for prior periods as the basis for retrospective application.

3.
Selected Balance Sheet Data
(Thousands of Dollars)
 
Sept. 30, 2018
 
Dec. 31, 2017
Accounts receivable, net
 
 
 
 
Accounts receivable
 
$
409,740

 
$
366,388

Less allowance for bad debts
 
(21,885
)
 
(21,278
)
 
 
$
387,855

 
$
345,110


(Thousands of Dollars)
 
Sept. 30, 2018
 
Dec. 31, 2017
Inventories
 
 
 
 
Materials and supplies
 
$
176,183

 
$
209,236

Fuel
 
76,962

 
94,483

Natural gas
 
35,533

 
33,993

 
 
$
288,678

 
$
337,712

(Thousands of Dollars)
 
Sept. 30, 2018
 
Dec. 31, 2017
Property, plant and equipment, net
 
 
 
 
Electric plant
 
$
17,363,519

 
$
17,024,925

Natural gas plant
 
1,426,646

 
1,370,330

Common and other property
 
726,127

 
724,066

Construction work in progress
 
685,047

 
530,126

Total property, plant and equipment
 
20,201,339

 
19,649,447

Less accumulated depreciation
 
(7,314,826
)
 
(7,018,249
)
Nuclear fuel
 
2,716,595

 
2,697,412

Less accumulated amortization
 
(2,387,390
)
 
(2,294,998
)
 
 
$
13,215,718

 
$
13,033,612


4.
Income Taxes

Except to the extent noted below, Note 6 to the consolidated financial statements included in NSP-Minnesota’s Annual Report on Form 10-K for the year ended Dec. 31, 2017 appropriately represents, in all material respects, the current status of other income tax matters, and are incorporated herein by reference.


8


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 following reconciles such differences:
 
 
Nine Months Ended Sept. 30
 
 
2018
 
2017
Federal statutory rate
 
21.0
 %
 
35.0
 %
State tax (net of federal tax effect)
 
7.1

 
5.8

Increases (decreases) in tax from:
 

 

Wind production tax credits (PTCs) (a)
 
(12.1
)
 
(11.3
)
Regulatory differences - ARAM (b)
 
(9.5
)
 
(0.1
)
Regulatory differences - ARAM deferral (c)
 
7.7

 

Regulatory differences - reversal of prior quarters’ ARAM deferral (c)
 
(7.1
)
 

Regulatory differences - other utility plant items
 
0.2

 
(0.3
)
Other tax credits (net of federal income tax expense)
 
(1.4
)
 
(1.1
)
Other (net)
 
1.2

 
(2.5
)
Effective income tax rate
 
7.1
 %
 
25.5
 %

(a)  
Quarterly PTCs may vary due to production and timing differences. Annual 2018 PTCs are forecasted to exceed 2017.
(b)
The average rate assumption method (ARAM); a method to flow back excess deferred taxes to customers.
(c) 
ARAM has been deferred when regulatory treatment has not been established. As NSP-Minnesota received direction from its regulatory commissions regarding the return of excess deferred taxes to customers, the ARAM deferral was reversed. This resulted in a reduction to tax expense with a corresponding reduction to revenue.

Federal Audits — NSP-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 federal income tax returns expire as follows:

Tax Year(s)
 
Expiration
2009 - 2014
 
October 2019
2015
 
September 2019
2016
 
September 2020

In 2012, the Internal Revenue Service (IRS) commenced an examination of tax years 2010 and 2011, including the 2009 carryback claim. In 2017 Xcel Energy and the Office of Appeals (Appeals) reached an agreement and the benefit related to the agreed upon portions was recognized. In the second quarter of 2018, the Joint Committee on Taxation completed its review and took no exception to the agreement. As a result, the remaining unrecognized tax benefit was released and recorded as a payable to the IRS.

In the third quarter of 2015, the IRS commenced an examination of tax years 2012 and 2013. In the third quarter of 2017, the IRS concluded the audit of tax years 2012 and 2013 and proposed an adjustment that would impact Xcel Energy’s net operating loss (NOL) and effective tax rate (ETR). Xcel Energy filed a protest with the IRS. As of Sept. 30, 2018 the case has been forwarded to Appeals and Xcel Energy has recognized its best estimate of income tax expense that will result from a final resolution of this issue; however, the outcome and timing of a resolution is unknown.

State Audits — NSP-Minnesota is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Sept. 30, 2018, NSP-Minnesota’s earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2009. In 2016, the state of Minnesota began an audit of years 2010 through 2014. As of Sept. 30, 2018, Minnesota had not proposed any material adjustments.

Unrecognized Benefits — The unrecognized tax benefit balance includes permanent tax positions, which if recognized would affect the annual 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.


9


A reconciliation of the amount of unrecognized tax benefit is as follows:
(Millions of Dollars)
 
Sept. 30, 2018
 
Dec. 31, 2017
Unrecognized tax benefit — Permanent tax positions
 
$
11.4

 
$
10.2

Unrecognized tax benefit — Temporary tax positions
 
5.4

 
7.9

Total unrecognized tax benefit
 
$
16.8

 
$
18.1


The unrecognized tax benefit amounts were reduced by the tax benefits associated with NOL and tax credit carryforwards. The amounts of tax benefits associated with NOL and tax credit carryforwards are as follows:
(Millions of Dollars)
 
Sept. 30, 2018
 
Dec. 31, 2017
NOL and tax credit carryforwards
 
$
(14.0
)
 
$
(12.8
)

It is reasonably possible that NSP-Minnesota’s amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS Appeals progresses and audit resumes, the Minnesota audit progresses, and other state audits resume. As the IRS Appeals and Minnesota audit progress and the IRS audit resumes, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $13 million.

The payable for interest related to unrecognized tax benefits is partially offset by the interest benefit associated with NOL and tax credit carryforwards. A reconciliation of the beginning and ending amount of the payable for interest related to unrecognized tax benefits are as follows:
(Millions of Dollars)
 
Sept. 30, 2018
 
Dec. 31, 2017
Payable for interest related to unrecognized tax benefits at beginning of period
 
$
(0.9
)
 
$
(2.0
)
Interest (expense) income related to unrecognized tax benefits recorded during the period
 
(1.1
)
 
1.1

Payable for interest related to unrecognized tax benefits at end of period
 
$
(2.0
)
 
$
(0.9
)

No amounts were accrued for penalties related to unrecognized tax benefits as of Sept. 30, 2018 or Dec. 31, 2017.

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, 2017 and in Note 5 to the consolidated financial statements to NSP-Minnesota’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018, appropriately represent, in all material respects, the current status of other rate matters, and are incorporated herein by reference.

Tax Reform Regulatory Proceedings

The specific impacts of the TCJA on customer rates are subject to regulatory approval. The following details the status of regulatory decisions in each state where NSP-Minnesota operates.

Minnesota — In August 2018, the Minnesota Public Utilities Commission (MPUC) ordered NSP-Minnesota to refund the 2018 impacts of TCJA, including $5 million to natural gas customers and $131 million to electric customers, including low income program funding of $2 million.

South Dakota — In July 2018, the South Dakota Public Utilities Commission approved a settlement providing a one-time customer refund of $11 million for the 2018 impact of the TCJA, while NSP-Minnesota would retain the benefits of the TCJA in 2019 and 2020 in exchange for a two-year rate case moratorium.

North Dakota Natural Gas — In August 2018, NSP-Minnesota and the North Dakota Public Service Commission (NDPSC) Staff reached a TCJA settlement, in which NSP-Minnesota would amortize $1 million annually of the regulatory asset for the remediation of the manufactured gas plant (MGP) site in Fargo, N.D. beginning in 2018, and retain the TCJA savings to approximately offset the MGP amortization expense. The TCJA benefits would be incorporated into a future rate case and the MGP amortization would then be recoverable through the cost of gas rider until fully amortized. A NDPSC decision related to the settlement is expected to be received by the end of 2018. See Note 6 for further discussion of the Fargo, N.D. MGP Site.


10


North Dakota Electric — In October 2018, NSP-Minnesota and the NDPSC Staff reached a settlement which included a one-time customer refund of $10 million for 2018, while NSP-Minnesota would retain the benefits of the TCJA in 2019 and 2020 in exchange for a two-year rate case moratorium. The settlement also includes an earnings sharing provision in which annual weather normalized earnings exceeding an ROE of 9.85 percent are returned to customers.
A NDPSC decision related to the settlement is expected to be received by the end of 2018 or during the first quarter of 2019.

Recently Concluded Regulatory Proceedings — MPUC and the NDPSC

PPA Terminations and Amendments — In June 2018, NSP-Minnesota terminated the Benson and Laurentian PPAs, and purchased the Benson biomass facility. As a result, a $103 million regulatory asset was recognized for the costs of the Benson transaction, including payments to Benson of $93 million, as well as other transaction costs and future estimated facility removal costs. For Laurentian, a regulatory asset of $109 million was recognized for annual termination payments over six years. The regulatory approvals provide for recovery of the Benson regulatory asset over approximately 10 years, and for recovery of the Laurentian termination payments as they occur, through fuel and purchased energy recovery mechanisms. The termination of the PPAs is expected to save customers over $600 million over the next 10 years.

Pending Regulatory Proceeding — Federal Energy Regulatory Commission (FERC)

Midcontinent Independent System Operator, Inc. (MISO) Return on Equity (ROE) Complaints — In November 2013, a group of customers filed a complaint at the FERC against MISO transmission owners (TOs), including NSP-Minnesota and NSP-Wisconsin. The complaint argued for a reduction in the ROE in transmission formula rates in the MISO region from 12.38 percent to 9.15 percent, and the removal of ROE adders (including those for Regional Transmission Organization (RTO) membership), effective Nov. 12, 2013.

In September 2016, the FERC approved an Administrative Law Judge (ALJ) recommendation that MISO TOs be granted a 10.32 percent base ROE using the methodology adopted by FERC in June 2014 (Opinion 531). This ROE would be applicable for the 15-month refund period from Nov. 12, 2013 to Feb. 11, 2015, and prospectively from the date of the FERC order. The total prospective ROE would be 10.82 percent, including a 50 basis point adder for RTO membership. The requests are pending FERC action.

In February 2015, a second complaint seeking to reduce the MISO ROE from 12.38 percent to 8.67 percent prior to any RTO adder was filed, resulting in a second period of potential refunds from Feb. 12, 2015 to May 11, 2016. In June 2016, an ALJ recommended a base ROE of 9.7 percent, applying the FERC Opinion 531 methodology. FERC action is pending. In April 2017, the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) vacated and remanded Opinion 531. It is unclear how the D.C. Circuit’s opinion to vacate and remand Opinion 531 will affect the September 2016 FERC order or the timing and outcome of the second ROE complaint.

NSP-Minnesota has recognized a current refund liability consistent with the best estimate of the final ROE.

6.
Commitments and Contingencies

Except to the extent noted below and in Note 5 to the consolidated financial statements, 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, 2017 and in Notes 5 and 6 to NSP-Minnesota’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018, appropriately represent, in all material respects, the current status of commitments and contingent liabilities and are incorporated herein by reference. The following include commitments, contingencies and unresolved contingencies that are material to NSP-Minnesota’s financial position.

PPAs

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 PPAs create a variable interest in the associated independent power producing entity.


11


NSP-Minnesota had approximately 1,002 Megawatts (MW) of capacity under long-term PPAs as of Sept. 30, 2018 and 1,069 MW as of Dec. 31, 2017, 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 various expiration dates through 2027.

Guarantees

Under NSP-Minnesota’s railcar lease agreement, accounted for as an operating lease, NSP-Minnesota guarantees the lessor proceeds from sale of the leased assets at the end of the lease term will at least equal the guaranteed residual value. The guarantee issued by NSP-Minnesota has a stated maximum amount; however, NSP-Minnesota expects sale proceeds to exceed the guaranteed amount. This agreement expires in 2019.

The following table presents the guarantee issued and outstanding for NSP-Minnesota:
(Millions of Dollars)
 
Sept. 30, 2018
 
Dec. 31, 2017
Guarantee issued and outstanding
 
$
4.8

 
$
4.8


Environmental Contingencies

Fargo, N.D. Manufactured Gas Plant (MGP) Site — NSP-Minnesota is remediating a former MGP site in Fargo, N.D. Remediation is expected to be completed in early November 2018, and several years of groundwater monitoring is expected to follow. NSP-Minnesota has also initiated insurance recovery litigation in North Dakota. The U.S. District Court for the District of North Dakota has set a trial date for Spring of 2020.

NSP-Minnesota recorded an estimated liability of $6 million as of Sept. 30, 2018 and $16 million as of Dec. 31, 2017, for the Fargo MGP Site. The current cost estimate for the remediation of the site is approximately $25 million, of which approximately $19 million has been spent. NSP-Minnesota has deferred Fargo MGP Site costs allocable to the North Dakota jurisdiction, or approximately 88 percent of all remediation costs, as approved by the NDPSC. In October 2018, the MPUC denied NSP-Minnesota’s request to defer post-2017 MGP remediation expenditures allocable to the Minnesota jurisdiction, including the Fargo MGP Site.

Other MGP, Landfill or Disposal Sites — NSP-Minnesota is currently involved in investigating and/or remediating several MGP, landfill or other disposal sites. NSP-Minnesota has identified five sites, in addition to the Fargo MGP Site, where investigation and/or remediation activities are currently underway. Other parties may have responsibility for some portion of the investigation and/or remediation activities. NSP-Minnesota anticipates that these investigation or remediation activities will continue through at least 2019. NSP-Minnesota accrued $3 million as of Sept. 30, 2018 and Dec. 31, 2017 for all of these sites. There may be insurance recovery and/or recovery from other responsible parties that will offset any costs incurred.

Environmental Requirements

Water and Waste
Coal Ash Regulation — NSP-Minnesota’s operations are subject to federal and state laws that impose requirements for handling, storage, treatment and disposal of solid waste. In 2015, the United States Environmental Protection Agency published a final rule regulating the management, storage, and disposal of coal combustion residuals (CCRs) as a nonhazardous waste (CCR Rule).

Under the CCR Rule, utilities are required to complete certain groundwater sampling around their CCR landfills and surface impoundments. NSP-Minnesota is currently conducting additional groundwater sampling and will evaluate whether corrective action is required at any CCR landfills or surface impoundments. Until NSP-Minnesota completes additional groundwater sampling, it is uncertain what impact, if any, there will be on the operations, financial position or cash flows. NSP-Minnesota believes that any associated costs would be recoverable through regulatory mechanisms.


12


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.

7.
Borrowings and Other Financing Instruments

Short-Term Borrowings

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 Sept. 30, 2018
 
Year Ended Dec. 31, 2017
Borrowing limit
 
$
250

 
$
250

Amount outstanding at period end
 

 
85

Average amount outstanding
 
34

 
25

Maximum amount outstanding
 
143

 
142

Weighted average interest rate, computed on a daily basis
 
1.97
%
 
1.14
%
Weighted average interest rate at period end
 
N/A

 
1.18


Commercial Paper — NSP-Minnesota meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under its credit facility and the money pool. Commercial paper outstanding for NSP-Minnesota was as follows:
(Amounts in Millions, Except Interest Rates)
 
Three Months Ended Sept. 30, 2018
 
Year Ended Dec. 31, 2017
Borrowing limit
 
$
500

 
$
500

Amount outstanding at period end
 
24

 
20

Average amount outstanding
 
6

 
62

Maximum amount outstanding
 
73

 
237

Weighted average interest rate, computed on a daily basis
 
2.12
%
 
1.10
%
Weighted average interest rate at period end
 
2.30

 
1.93



13


Letters of Credit — NSP-Minnesota uses letters of credit, generally with terms of one year, to provide financial guarantees for certain operating obligations. At Sept. 30, 2018 and Dec. 31, 2017, there were $37 million and $24 million, respectively, of letters of credit outstanding under the credit facility. The contract amounts of these letters of credit approximate their fair value and are subject to fees.

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 Sept. 30, 2018, NSP-Minnesota had the following committed credit facility available (in millions of dollars):
Credit Facility (a)
 
Drawn (b)
 
Available
$
500

 
$
61

 
$
439

(a) 
This credit facility expires in June 2021.
(b) 
Includes outstanding 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 Sept. 30, 2018 and Dec. 31, 2017.

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 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 value (NAV).

Investments in equity securities and other funds Equity securities are valued using quoted prices in active markets. The fair values for commingled funds are measured using NAVs, 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 may be redeemed for NAV with proper notice. Proper notice varies by fund and can range from daily with one or two days notice to annually with 90 days 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, which is typically quarterly with 45-90 days notice; however, withdrawals from real estate investments may be delayed or discounted as a result of fund illiquidity.

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.

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 classification. 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.

14



Electric commodity derivatives held by NSP-Minnesota include transmission congestion instruments, generally referred to as financial transmission rights (FTRs), purchased from MISO. FTRs purchased from a RTO are financial instruments that entitle or obligate the holder to 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 transmission congestion. 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 the cleared prices for each FTR for the most recent auction.

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 transparency in the auction process, fair value measurements for FTRs have been assigned a Level 3. Non-trading monthly FTR settlements are included in fuel and purchased energy cost recovery mechanisms, and therefore changes in the fair value of the yet to be settled portions of most FTRs are deferred as a regulatory asset or liability. Given this regulatory treatment and the limited magnitude of NSP-Minnesota’s FTRs, the limited transparency associated with the valuation of FTRs are insignificant to the consolidated financial statements of NSP-Minnesota.

Non-Derivative Instruments Fair Value Measurements

Nuclear Decommissioning Fund

The Nuclear Regulatory Commission 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 decommissioning the Monticello and Prairie Island (PI) nuclear generating plants. The fund contains cash equivalents, debt securities, equity securities and other investments. NSP-Minnesota plans to reinvest matured securities until decommissioning begins. NSP-Minnesota uses the asset class target allocations approved by the MPUC for the 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 impairments, are deferred as a component of the regulatory asset for nuclear decommissioning.

Unrealized gains for the nuclear decommissioning fund were $600 million and $560 million as of Sept. 30, 2018 and Dec. 31, 2017, respectively, and unrealized losses and amounts recorded as other-than-temporary impairments were $22 million and $7 million as of Sept. 30, 2018 and Dec. 31, 2017, respectively.


15


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 as of Sept. 30, 2018 and Dec. 31, 2017:
 
 
Sept. 30, 2018
 
 
 
 
Fair Value
(Thousands of Dollars)
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Investments Measured at NAV (b)
 
Total
Nuclear decommissioning fund (a)
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
33,040

 
$
33,040

 
$

 
$

 
$

 
$
33,040

Commingled funds:
 
 
 
 
 
 
 
 
 
 
 
 
Non U.S. equities
 
262,345

 
195,959

 

 

 
91,426

 
287,385

Emerging market debt funds
 
162,835

 

 

 

 
164,772

 
164,772

Private equity investments
 
169,676

 

 

 

 
249,881

 
249,881

Real estate
 
125,422

 

 

 

 
198,422

 
198,422

Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
Government securities
 
75,799

 

 
73,317

 

 

 
73,317

U.S. corporate bonds
 
334,219

 

 
329,727

 

 

 
329,727

Non U.S. corporate bonds
 
55,856

 

 
54,813

 

 

 
54,813

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. equities
 
257,932

 
590,310

 

 

 

 
590,310

Non U.S. equities
 
156,225

 
229,245

 

 

 

 
229,245

Total
 
$
1,633,349

 
$
1,048,554

 
$
457,857

 
$

 
$
704,501

 
$
2,210,912


(a) 
Reported in nuclear decommissioning fund and other investments on the consolidated balance sheet, which also includes $52 million of rabbi trust assets and miscellaneous investments.
(b) 
Due to limited availability of published pricing and a lack of immediate redeemability, certain fund investments measured at NAV are not required to be categorized within the fair value hierarchy.
 
 
Dec. 31, 2017
 
 
 
 
Fair Value
(Thousands of Dollars)
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Investments Measured at NAV (b)
 
Total
Nuclear decommissioning fund (a)
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
28,741

 
$
28,741

 
$

 
$

 
$

 
$
28,741

Commingled funds:
 
 
 
 
 
 
 
 
 
 
 
 
Non U.S. equities
 
263,694

 
216,551

 

 

 
89,857

 
306,408

Emerging market debt funds
 
156,057

 

 

 

 
166,375

 
166,375

Private equity investments
 
141,413

 

 

 

 
198,037

 
198,037

Real estate
 
130,787

 

 

 

 
201,842

 
201,842

Other commingled funds
 
9,340

 
6,286

 

 

 
2,975

 
9,261

Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
Government securities
 
67,760

 

 
69,413

 

 

 
69,413

U.S. corporate bonds
 
319,809

 

 
322,129

 

 

 
322,129

Non U.S. corporate bonds
 
50,121

 

 
50,102

 

 

 
50,102

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. equities
 
271,166

 
556,974

 

 

 

 
556,974

Non U.S. equities
 
151,961

 
233,999

 

 

 

 
233,999

Total
 
$
1,590,849

 
$
1,042,551

 
$
441,644

 
$

 
$
659,086

 
$
2,143,281


(a) 
Reported in nuclear decommissioning fund and other investments on the consolidated balance sheet, which also includes $49 million of rabbi trust assets and miscellaneous investments.
(b) 
Due to limited availability of published pricing and a lack of immediate redeemability, certain fund investments measured at NAV are not required to be categorized within the fair value hierarchy.

For the three and nine months ended Sept. 30, 2018 and 2017 there were no Level 3 nuclear decommissioning fund investments and no transfers of amounts between levels.

16



The following table summarizes the final contractual maturity dates of the debt securities in the nuclear decommissioning fund, by asset class, as of Sept. 30, 2018:
 
 
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
 
$

 
$

 
$
1,750

 
$
71,567

 
$
73,317

U.S. corporate bonds
 
12,759

 
90,982

 
175,662

 
50,324

 
329,727

Non U.S. corporate bonds
 
1,998

 
20,498

 
28,151

 
4,166

 
54,813

Debt securities
 
$
14,757

 
$
111,480

 
$
205,563

 
$
126,057

 
$
457,857


Rabbi Trusts

In 2016, NSP-Minnesota established a rabbi trust to provide partial funding for future deferred compensation plan distributions. The following tables present the cost and fair value of the assets held in rabbi trust at Sept. 30, 2018 and Dec. 31, 2017:
 
 
Sept. 30, 2018
 
 
 
 
Fair Value
(Thousands of Dollars)
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Total
Rabbi Trust (a)
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
2,321

 
$
2,321

 
$

 
$

 
$
2,321

Mutual funds
 
10,474

 
11,748

 

 

 
11,748

Total
 
$
12,795

 
$
14,069

 
$

 
$

 
$
14,069

 
 
Dec. 31, 2017
 
 
 
 
Fair Value
(Thousands of Dollars)
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Total
Rabbi Trusts (a)
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
783

 
$
783

 
$

 
$

 
$
783

Mutual funds
 
10,332

 
11,283

 

 

 
11,283

Total
 
$
11,115

 
$
12,066

 
$

 
$

 
$
12,066

(a) 
Reported in nuclear decommissioning fund and other investments on the consolidated balance sheet.

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 Sept. 30, 2018, 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 unsettled hedges, as applicable.

Wholesale and Commodity Trading Risk — NSP-Minnesota conducts various wholesale and commodity trading activities, including the purchase and sale of electric capacity, energy, energy-related instruments and natural gas related instruments, including derivatives. 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.


17


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, FTRs, vehicle fuel, and weather derivatives.

At Sept. 30, 2018, NSP-Minnesota had various vehicle fuel contracts designated as cash flow hedges extending through December 2018. NSP-Minnesota enters into derivative instruments that mitigate commodity price risk on behalf of electric and natural gas customers, but may not be 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 and nine months ended Sept. 30, 2018 and 2017.

At Sept. 30, 2018, net gains related to commodity derivative cash flow hedges recorded as a component of accumulated other comprehensive losses included immaterial 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 revenues, 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 Sept. 30, 2018 and Dec. 31, 2017:
(Amounts in Thousands) (a)(b)
 
Sept. 30, 2018
 
Dec. 31, 2017
Megawatt hours of electricity
 
61,746

 
41,711

Million British thermal units of natural gas
 
11,131

 
23,829

Gallons of vehicle fuel
 
60

 
240


(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.

The following tables detail the impact of derivative activity during the three and nine months ended Sept. 30, 2018 and 2017 on accumulated other comprehensive loss, regulatory assets and liabilities and income:
 
 
Three Months Ended Sept. 30, 2018
 
 
 
Pre-Tax Fair Value
Gains (Losses) Recognized
During the Period in:
 
Pre-Tax (Gains) Losses
Reclassified into Income
During the Period from:
 
Pre-Tax Gains Recognized
During the Period in Income
 
(Thousands of Dollars)
 
Accumulated
Other
Comprehensive Loss
 
Regulatory
(Assets) and Liabilities
 
Accumulated
Other
Comprehensive Loss
 
Regulatory
Assets and (Liabilities)
 
 
Derivatives designated as cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest rate
 
$

 
$

 
$
267

(a) 
$

 
$

 
Vehicle fuel and other commodity
 
7

 

 
(39
)
(b) 

 

 
Total
 
$
7

 
$

 
$
228

 
$

 
$

 
Other derivative instruments
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$

 
$

 
$

 
$
3,447

(c) 
Electric commodity
 

 
1,127

 

 
447

(d) 

 
Natural gas commodity
 

 
(370
)
 

 

(e) 

(e) 
Total
 
$

 
$
757

 
$

 
$
447

 
$
3,447

 

18


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended Sept. 30, 2018
 
 
 
Pre-Tax Fair Value Gains (Losses) Recognized
During the Period in:
 
Pre-Tax (Gains) Losses
Reclassified into Income
During the Period from:
 
Pre-Tax Gains (Losses)
Recognized
During the Period in Income
 
(Thousands of Dollars)
 
Accumulated
Other
Comprehensive Loss
 
Regulatory
(Assets) and Liabilities
 
Accumulated
Other
Comprehensive Loss
 
Regulatory
Assets and (Liabilities)
 
 
Derivatives designated as cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest rate
 
$

 
$

 
$
792

(a) 
$

 
$

 
Vehicle fuel and other commodity
 
45

 

 
(103
)
(b) 

 

 
Total
 
$
45

 
$

 
$
689

 
$

 
$

 
Other derivative instruments
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$

 
$

 
$

 
$
11,114

(c) 
Electric commodity
 

 
(4,487
)
 

 
3,758

(d) 

 
Natural gas commodity
 

 
460

 

 
(521
)
(e) 
(404
)
(e) 
Total
 
$

 
$
(4,027
)
 
$

 
$
3,237

 
$
10,710

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended Sept. 30, 2017
 
 
 
Pre-Tax Fair Value
Gains (Losses) Recognized
During the Period in:
 
Pre-Tax (Gains) Losses
Reclassified into Income
During the Period from:
 
Pre-Tax Gains
Recognized
During the Period in Income
 
(Thousands of Dollars)
 
Accumulated
Other
Comprehensive Loss
 
Regulatory
(Assets) and Liabilities
 
Accumulated
Other
Comprehensive Loss
 
Regulatory
Assets and (Liabilities)
 
 
Derivatives designated as cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest rate
 
$

 
$

 
$
612

(a) 
$

 
$

 
Vehicle fuel and other commodity
 
38

 

 
(11
)
(b) 

 

 
Total
 
$
38

 
$

 
$
601

 
$

 
$

 
Other derivative instruments
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$

 
$

 
$

 
$
1,493

(c) 
Electric commodity
 

 
20,216

 

 
(5,356
)
(d) 

 
Natural gas commodity
 

 
(383
)
 

 

(e) 

(e) 
Total
 
$

 
$
19,833

 
$

 
$
(5,356
)
 
$
1,493

 

19


 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended Sept. 30, 2017
 
 
 
Pre-Tax Fair Value
Gains (Losses) Recognized
During the Period in:
 
Pre-Tax (Gains) Losses
Reclassified into Income
During the Period from:
 
Pre-Tax Gains (Losses)
Recognized
During the Period in Income
 
(Thousands of Dollars)
 
Accumulated
Other
Comprehensive Loss
 
Regulatory
(Assets) and Liabilities
 
Accumulated
Other
Comprehensive Loss
 
Regulatory
Assets and (Liabilities)
 
 
Derivatives designated as cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest rate
 
$

 
$

 
$
1,304

(a) 
$

 
$

 
Vehicle fuel and other commodity
 
81

 

 
(16
)
(b) 

 

 
Total
 
$
81

 
$

 
$
1,288

 
$

 
$

 
Other derivative instruments
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$

 
$

 
$

 
$
8,092

(c) 
Electric commodity
 

 
17,444

 

 
(9,293
)
(d) 

 
Natural gas commodity
 

 
(1,010
)
 

 
698

(e) 
(945
)
(e) 
Total
 
$

 
$
16,434

 
$

 
$
(8,595
)
 
$
7,147

 

(a) 
Amounts are recorded to interest charges.
(b) 
Amounts are recorded to operating and maintenance (O&M) expenses.
(c) 
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.
(d) 
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.
(e)
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.

NSP-Minnesota had no derivative instruments designated as fair value hedges during the three and nine months ended Sept. 30, 2018 and 2017. Therefore, no gains or losses from fair value hedges or related hedged transactions were recognized for these periods.

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 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 Sept. 30, 2018, eight of NSP-Minnesota’s 10 most significant counterparties for these activities, comprising $41.8 million or 51 percent of this credit exposure, had investment grade credit ratings from Standard & Poor’s, Moody’s or Fitch Ratings. Two of the 10 most significant counterparties, comprising $14.0 million or 17 percent of this credit exposure, were not rated by these external agencies, but based on NSP-Minnesota’s internal analysis, had credit quality consistent with investment grade. All ten of these significant counterparties are municipal or cooperative electric entities, or other utilities.

Credit Related Contingent Features — Contract provisions for derivative instruments that NSP-Minnesota enters into, including those accounted for as normal purchase-normal sale 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’s credit ratings are downgraded below its investment grade credit rating by any of the major credit rating agencies or for cross-default contractual provisions that could result in the settlement of such contracts if there was a failure under other financing arrangements related to payment terms or other covenants. At Sept. 30, 2018 and Dec. 31, 2017, there were no derivative instruments in a material liability position with such underlying contract provisions.


20


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 Sept. 30, 2018 and Dec. 31, 2017.

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 Sept. 30, 2018:
 
 
Sept. 30, 2018
 
 
Fair Value
 
Fair Value Total
 
Counterparty Netting (b)
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Total
Current derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Vehicle fuel and other commodity
 
$

 
$
48

 
$

 
$
48

 
$

 
$
48

Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
422

 
17,565

 
1,951

 
19,938

 
(8,162
)
 
11,776

Electric commodity
 

 

 
18,002

 
18,002

 
(172
)
 
17,830

Natural gas commodity
 

 
771

 

 
771

 

 
771

Total current derivative assets
 
$
422

 
$
18,384

 
$
19,953

 
$
38,759

 
$
(8,334
)
 
30,425

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
25

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
30,450

Noncurrent derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
19

 
$
28,125

 
$
5,399

 
$
33,543

 
$
(11,561
)
 
$
21,982

Total noncurrent derivative assets
 
$
19

 
$
28,125

 
$
5,399

 
$
33,543

 
$
(11,561
)
 
21,982

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
101

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
22,083


 
 
Sept. 30, 2018
 
 
Fair Value
 
Fair Value Total
 
Counterparty Netting (b)
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Total
Current derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
135

 
$
14,792

 
$
1,754

 
$
16,681

 
$
(11,868
)
 
$
4,813

Electric commodity