Fair Value of Financial Assets and Liabilities

6 Months Ended

Jun. 30, 2020

Fair Value of Financial Assets and Liabilities

Fair Value Measurements

Accounting guidance for fair value measurements and disclosures provides a single definition of fair value and requires 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.

•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; and

•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:

Cash equivalents — The fair values of cash equivalents are generally based on cost plus accrued interest; money market funds are measured using quoted 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. The investments in commingled funds may be redeemed for NAV with proper notice. Private equity commingled fund 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 commingled funds investments may be redeemed with proper notice, however, 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 relate to inactive delivery locations or extend to periods beyond those readily observable on active exchanges or quoted by brokers, the significance of the use of less observable forecasts of forward prices and volatilities on a valuation is evaluated, and may result in Level 3 classification.

Electric commodity derivatives held by NSP-Minnesota include transmission congestion instruments, generally referred to as FTRs. 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.

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 certain inputs to the value of FTRs between auction processes, including expected plant operating schedules and retail and wholesale demand, 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 relative to its electric utility operations, the numerous unobservable quantitative inputs pertinent to the value of FTRs are immaterial to the consolidated financial statements of NSP-Minnesota.

Non-Derivative Fair Value Measurements

The Nuclear Regulatory Commission requires NSP-Minnesota to maintain a portfolio of investments to fund the costs of decommissioning its nuclear generating plants. Assets of the nuclear decommissioning fund are legally restricted for the purpose of decommissioning these facilities. The fund contains cash equivalents, debt securities, equity securities and other investments. NSP-Minnesota uses the MPUC approved 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 over the lives of the nuclear plants, assuming rate recovery of all costs. 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 are deferred as a component of the regulatory asset.

Unrealized gains for the nuclear decommissioning fund were $637.4 million and $705.5 million as of June 30, 2020 and Dec. 31, 2019, respectively, and unrealized losses were $16.8 million and $5.9 million as of June 30, 2020 and Dec. 31, 2019, respectively.

Non-derivative instruments with recurring fair value measurements in the nuclear decommissioning fund:


	June 30, 2020
			Fair Value
(Millions of Dollars)	Cost		Level 1		Level 2		Level 3		NAV		Total
Nuclear decommissioning fund ^(a)
Cash equivalents	$	21.6	$	21.6	$	—	$	—	$	—	$	21.6
Commingled funds	766.0		—		—		—		897.2		897.2
Debt securities	512.9		—		531.0		10.0		—		541.0
Equity securities	473.5		933.5		1.3		—		—		934.8
Total	$	1,774.0	$	955.1	$	532.3	$	10.0	$	897.2	$	2,394.6

^(a)Reported in nuclear decommissioning fund and other investments on the consolidated balance sheet, which also includes $55.4 million of rabbi trust assets and miscellaneous investments.


	Dec. 31, 2019
			Fair Value
(Millions of Dollars)	Cost		Level 1		Level 2		Level 3		NAV		Total
Nuclear decommissioning fund ^(a)
Cash equivalents	$	33.4	$	33.4	$	—	$	—	$	—	$	33.4
Commingled funds	732.8		—		—		—		934.9		934.9
Debt securities	489.2		—		495.2		12.7		—		507.9
Equity securities	484.6		962.0		1.4		—		—		963.4
Total	$	1,740.0	$	995.4	$	496.6	$	12.7	$	934.9	$	2,439.6

^(a)Reported in nuclear decommissioning fund and other investments on the consolidated balance sheet, which also includes $55.6 million of rabbi trust assets and miscellaneous investments.

For the three and six months ended June 30, 2020 and 2019 there were immaterial Level 3 nuclear decommissioning fund investments or transfer of amounts between levels.

Contractual maturity dates of debt securities in the nuclear decommissioning fund as of June 30, 2020:


	Final Contractual Maturity
(Millions 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
Debt securities	$	(3.8)	$	97.6	$	212.1	$	235.1	$	541.0

Rabbi Trusts

NSP-Minnesota has established a rabbi trust to provide partial funding for future deferred compensation plan distributions.

Cost and fair value of assets held in rabbi trusts:


	June 30, 2020
			Fair Value
(Millions of Dollars)	Cost		Level 1		Level 2		Level 3		Total
Rabbi Trusts ^(a)
Cash equivalents	$	1.2	$	1.2	$	—	$	—	$	1.2
Mutual funds	12.9		13.9		—		—		13.9
Total	$	14.1	$	15.1	$	—	$	—	$	15.1


	Dec. 31, 2019
			Fair Value
(Millions of Dollars)	Cost		Level 1		Level 2		Level 3		Total
Rabbi Trusts ^(a)
Cash equivalents	$	1.2	$	1.2	$	—	$	—	$	1.2
Mutual funds	11.4		13.1		—		—		13.1
Total	$	12.6	$	14.3	$	—	$	—	$	14.3

^(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 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, with changes in fair value prior to settlement recorded as other comprehensive income.

At June 30, 2020, accumulated other comprehensive loss 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.

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 is allowed to conduct these activities within guidelines and limitations as approved by its risk management committee, comprised of management personnel not directly involved in 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, FTRs, vehicle fuel, and weather derivatives.

At June 30, 2020, NSP-Minnesota had no commodity contracts designated as cash flow hedges. NSP-Minnesota may enter 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 approved regulatory recovery mechanisms.

NSP-Minnesota also 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.

Gross notional amounts of commodity forwards, options and FTRs:


(Amounts in Millions) ^(a)(b)	June 30, 2020	Dec. 31, 2019
Megawatt hours of electricity	95.3	79.1
Million British thermal units of natural gas	82.9	77.8

^(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 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. Impact of credit risk was immaterial to the fair value of unsettled commodity derivatives presented in the consolidated balance sheets. 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.

As of June 30, 2020, six of NSP-Minnesota’s 10 most significant counterparties for these activities, comprising $40.5 million, or 51%, of this credit exposure, had investment grade credit ratings from S&P Global Ratings, Moody’s Investor Services or Fitch Ratings. Three of the 10 most significant counterparties, comprising $16.0 million, or 20%, 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. One of these significant counterparties, comprising $13.2 million or 17% of this credit exposure, had credit quality less than investment grade, based on internal analysis. Seven of these significant counterparties are municipal or cooperative electric entities, RTOs or other utilities.

The impact of derivative activity:


	Pre-Tax Fair Value Gains (Losses) Recognized During the Period in:
(Millions of Dollars)	Accumulated Other Comprehensive Loss		Regulatory (Assets) and Liabilities
Three Months Ended June 30, 2020
Other derivative instruments
Electric commodity	$	—	$	2.3
Natural gas commodity	—		(0.3)
Total	$	—	$	2.0

Six Months Ended June 30, 2020
Other derivative instruments
Electric commodity	$	—	$	2.4
Natural gas commodity	—		0.2
Total	$	—	$	2.6


	Pre-Tax Fair Value Gains (Losses) Recognized During the Period in:
(Millions of Dollars)	Accumulated Other Comprehensive Loss		Regulatory (Assets) and Liabilities
Three Months Ended June 30, 2019
Other derivative instruments
Electric commodity	$	—	$	15.6
Natural gas commodity	—		(0.2)
Total	$	—	$	15.4

Six Months Ended June 30, 2019
Other derivative instruments
Electric commodity	$	—	$	(0.5)
Natural gas commodity	—		(0.3)
Total	$	—	$	(0.8)


	Pre-Tax (Gains) Losses Reclassified into Income During the Period from:									Pre-Tax Gains (Losses) Recognized During the Period in Income
(Millions of Dollars)	Accumulated Other Comprehensive Loss			Regulatory Assets and (Liabilities)
Three Months Ended June 30, 2020
Derivatives designated as cash flow hedges
Interest rate	$	0.2	^(a)	$	—		$	—
Total	$	0.2		$	—		$	—
Other derivative instruments
Commodity trading	$	—		$	—		$	(1.3)	^(b)
Electric commodity	—			(0.7)		^(c)	—
Total	$	—		$	(0.7)		$	(1.3)

Six Months Ended June 30, 2020
Derivatives designated as cash flow hedges
Interest rate	$	0.5	^(a)	$	—		$	—
Total	$	0.5		$	—		$	—
Other derivative instruments
Commodity trading	$	—		$	—		$	0.7	^(b)
Electric commodity	—			(1.9)		^(c)	—
Natural gas commodity	—			1.2		^(d)	(2.0)		^(d)
Total	$	—		$	(0.7)		$	(1.3)


	Pre-Tax (Gains) Losses Reclassified into Income During the Period from:									Pre-Tax Gains (Losses) Recognized During the Period in Income
(Millions of Dollars)	Accumulated Other Comprehensive Loss			Regulatory Assets and (Liabilities)
Three Months Ended June 30, 2019
Derivatives designated as cash flow hedges
Interest rate	$	0.3	^(a)	$	—		$	—
Total	$	0.3		$	—		$	—
Other derivative instruments
Commodity trading	$	—		$	—		$	1.6	^(b)

Total	$	—		$	—		$	1.6

Six Months Ended June 30, 2019
Derivatives designated as cash flow hedges
Interest rate	$	0.5	^(a)	$	—		$	—
Total	$	0.5		$	—		$	—
Other derivative instruments
Commodity trading	$	—		$	—		$	(1.2)	^(b)
Electric commodity	—			0.8		^(c)	—
Natural gas commodity	—			0.2		^(d)	(1.3)		^(d)
Total	$	—		$	1.0		$	(2.5)

^(a)Amounts 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.

NSP-Minnesota had no derivative instruments designated as fair value hedges during the three and six months ended June 30, 2020 and 2019.

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 consolidated balance sheets, 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 if there was a failure under other financing arrangements related to payment terms or other covenants. At June 30, 2020 and Dec. 31, 2019, there were $8.4 million and $7.1 million derivative instruments in a liability position with such underlying contract provisions, respectively.

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 June 30, 2020 and Dec. 31, 2019.

Recurring Fair Value Measurements — NSP-Minnesota’s derivative assets and liabilities measured at fair value on a recurring basis:


	June 30, 2020																							Dec. 31, 2019
	Fair Value										Fair Value Total			Netting ^(a)				Fair Value									Fair Value Total	Netting ^(a)
(Millions of Dollars)	Level 1		Level 2		Level 3								Total			Level 1		Level 2		Level 3						Total
Current derivative assets
Other derivative instruments:
Commodity trading	$	2.5	$	35.3	$	9.8	$	47.6	$	(31.7)	$	15.9		$	1.6	$	39.5	$	23.6	$	64.7	$	(42.1)	$	22.6
Electric commodity	—		—		29.7		29.7		(1.4)		28.3			—		—		8.7		8.7		(0.9)		7.8
Natural gas commodity	—		1.1		—		1.1		—		1.1			—		2.1		—		2.1		—		2.1
Total current derivative assets	$	2.5	$	36.4	$	39.5	$	78.4	$	(33.1)	$	45.3		$	1.6	$	41.6	$	32.3	$	75.5	$	(43.0)	$	32.5


Noncurrent derivative assets
Other derivative instruments:
Commodity trading	$	9.7	$	30.7	$	23.7	$	64.1	$	(37.2)	$	26.9		$	8.5	$	29.4	$	6.0	$	43.9	$	(34.8)	$	9.1
Total noncurrent derivative assets	$	9.7	$	30.7	$	23.7	$	64.1	$	(37.2)	26.9			$	8.5	$	29.4	$	6.0	$	43.9	$	(34.8)	9.1
PPAs ^(b)											0.1													0.1
Noncurrent derivative instruments											$	27.0												$	9.2


	June 30, 2020																							Dec. 31, 2019
	Fair Value										Fair Value Total			Netting ^(a)				Fair Value									Fair Value Total	Netting ^(a)
(Millions of Dollars)	Level 1		Level 2		Level 3								Total			Level 1		Level 2		Level 3						Total
Current derivative liabilities
Other derivative instruments:
Commodity trading	$	3.2	$	28.9	$	8.1	$	40.2	$	(31.6)	$	8.6		$	2.2	$	42.1	$	15.0	$	59.3	$	(49.8)	$	9.5
Electric commodity	—		—		1.4		1.4		(1.4)		—			—		—		1.0		1.0		(1.0)		—
Natural gas commodity	—		0.5		—		0.5		—		0.5			—		1.7		—		1.7		—		1.7
Total current derivative liabilities	$	3.2	$	29.4	$	9.5	$	42.1	$	(33.0)	9.1			$	2.2	$	43.8	$	16.0	$	62.0	$	(50.8)	11.2
PPAs ^(b)											13.9													13.8
Current derivative instruments											$	23.0												$	25.0
Noncurrent derivative liabilities
Other derivative instruments:
Commodity trading	$	3.0	$	51.8	$	18.3	$	73.1	$	(5.7)	$	67.4		$	2.0	$	32.3	$	17.0	$	51.3	$	(3.3)	$	48.0
Total noncurrent derivative liabilities	$	3.0	$	51.8	$	18.3	$	73.1	$	(5.7)	67.4			$	2.0	$	32.3	$	17.0	$	51.3	$	(3.3)	48.0
PPAs ^(b)											55.3													62.2
Noncurrent derivative instruments											$	122.7												$	110.2

^(a)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 June 30, 2020 and Dec. 31, 2019. At both June 30, 2020 and Dec. 31, 2019, derivative assets and liabilities include $31.5 million of obligations to return cash collateral. At June 30, 2020, no derivative assets and liabilities include the rights to reclaim cash collateral and $7.9 million at Dec. 31, 2019. The counterparty netting excludes settlement receivables and payables and non-derivative amounts that may be subject to the same master netting agreements.

^(b)During 2006, Xcel Energy 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.

Changes in Level 3 commodity derivatives for the three and six months ended June 30, 2020 and 2019:


	Three Months Ended June 30
(Millions of Dollars)	2020		2019
Balance at April 1	$	2.8	$	(10.0)
Purchases	28.0		16.7
Settlements	(12.6)		(3.1)
Net transactions recorded during the period:
Gains recognized in earnings ^(a)	10.9		7.0
Net gains (losses) recognized as regulatory assets and liabilities	6.3		(4.6)
Balance at June 30	$	35.4	$	6.0
	Six Months Ended June 30
(Millions of Dollars)	2020		2019
Balance at Jan. 1	$	5.3	$	14.3
Purchases	28.0		16.7
Settlements	(24.3)		(6.4)
Net transactions recorded during the period:
Gains (losses) recognized in earnings ^(a)	17.1		(11.6)
Net gains (losses) recognized as regulatory assets and liabilities	9.3		(7.0)
Balance at June 30	$	35.4	$	6.0

^(a)These amounts relate to commodity derivatives held at the end of the period.

NSP-Minnesota recognizes transfers between levels as of the beginning of each period. There were no transfers of amounts between levels for derivative instruments for the three and six months ended June 30, 2020 and 2019.

Fair Value of Long-Term Debt

Other financial instruments for which the carrying amount did not equal fair value:


	June 30, 2020						Dec. 31, 2019
(Millions of Dollars)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt, including current portion	$	6,202.3	$	7,517.5	$	5,521.3	$	6,296.5

Fair value of NSP-Minnesota’s long-term debt is estimated based on recent trades and observable spreads from benchmark interest rates for similar securities. Fair value estimates are based on information available to management as of June 30, 2020 and Dec. 31, 2019, and given the observability of the inputs, fair values presented for long-term debt were assigned as Level 2.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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