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Table of Contents

 

 

 

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 June 30, 2010

 

or

 

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

 

Commission File Number: 001-03140

 

Northern States Power Company

(Exact name of registrant as specified in its charter)

 

Wisconsin

 

39-0508315

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

1414 West Hamilton Avenue

 

 

Eau Claire, Wisconsin

 

54701

(Address of principal executive offices)

 

(Zip Code)

 

(715) 839-2625

(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  o No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 and Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o Yes  o No

 

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

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o 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 July 30, 2010

Common Stock, $100 par value

 

933,000 shares

 

Northern States Power Company (a Wisconsin 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

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item l.

Financial Statements (Unaudited)

3

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

19

Item 4.

Controls and Procedures

23

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

Item 6.

Exhibits

25

 

 

 

SIGNATURES

26

 

 

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 Wisconsin corporation (NSP-Wisconsin).  NSP-Wisconsin is a wholly owned subsidiary of Xcel Energy Inc. (Xcel Energy). Additional information on Xcel Energy is available on various filings with the Securities and Exchange Commission (SEC).

 

2



Table of Contents

 

PART I. FINANCIAL INFORMATION

 

Item 1. FINANCIAL STATEMENTS

 

NSP-WISCONSIN AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(amounts in thousands of dollars)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

Operating revenues

 

 

 

 

 

 

 

 

 

Electric

 

$

164,082

 

$

153,059

 

$

337,144

 

$

337,387

 

Natural gas

 

15,281

 

17,907

 

66,762

 

82,217

 

Other

 

234

 

220

 

460

 

436

 

Total operating revenues

 

179,597

 

171,186

 

404,366

 

420,040

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

 

 

Electric fuel and purchased power

 

99,535

 

89,877

 

196,885

 

191,027

 

Cost of natural gas sold and transported

 

8,623

 

10,492

 

44,701

 

58,624

 

Other operating and maintenance expenses

 

37,934

 

36,567

 

75,820

 

70,707

 

Conservation program expenses

 

2,989

 

2,543

 

5,885

 

5,595

 

Depreciation and amortization

 

15,883

 

15,393

 

31,613

 

30,636

 

Taxes (other than income taxes)

 

5,639

 

5,658

 

11,601

 

11,679

 

Total operating expenses

 

170,603

 

160,530

 

366,505

 

368,268

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

8,994

 

10,656

 

37,861

 

51,772

 

 

 

 

 

 

 

 

 

 

 

Other income, net

 

86

 

90

 

749

 

339

 

Allowance for funds used during construction — equity

 

649

 

392

 

1,083

 

663

 

 

 

 

 

 

 

 

 

 

 

Interest charges and financing costs

 

 

 

 

 

 

 

 

 

Interest charges — includes other financing costs of $354, $352, $704 and $692 respectively

 

6,043

 

5,982

 

12,399

 

12,634

 

Allowance for funds used during construction — debt

 

(298

)

(192

)

(483

)

(347

)

Total interest charges and financing costs

 

5,745

 

5,790

 

11,916

 

12,287

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

3,984

 

5,348

 

27,777

 

40,487

 

Income taxes

 

1,305

 

1,872

 

11,554

 

15,290

 

Net income

 

$

2,679

 

$

3,476

 

$

16,223

 

$

25,197

 

 

See Notes to Consolidated Financial Statements

 

3



Table of Contents

 

NSP-WISCONSIN AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands of dollars)

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

Operating activities

 

 

 

 

 

Net income

 

$

16,223

 

$

25,197

 

Adjustments to reconcile net income to cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

32,271

 

31,281

 

Deferred income taxes

 

7,224

 

1,860

 

Amortization of investment tax credits

 

(312

)

(313

)

Allowance for equity funds used during construction

 

(1,083

)

(663

)

Net realized and unrealized hedging and derivative transactions

 

63

 

1,080

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

24,110

 

9,427

 

Accrued unbilled revenues

 

10,467

 

8,206

 

Inventories

 

6,116

 

17,639

 

Other current assets

 

8,213

 

602

 

Accounts payable

 

(17,803

)

(8,194

)

Net regulatory assets and liabilities

 

(5,879

)

9,971

 

Other current liabilities

 

624

 

1,145

 

Change in other noncurrent assets

 

(78

)

223

 

Change in other noncurrent liabilities

 

2,324

 

(640

)

Net cash provided by operating activities

 

82,480

 

96,821

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

Utility capital/construction expenditures

 

(56,028

)

(45,662

)

Allowance for equity funds used during construction

 

1,083

 

663

 

Other investments

 

2,281

 

4,635

 

Net cash used in investing activities

 

(52,664

)

(40,364

)

 

 

 

 

 

 

Financing activities

 

 

 

 

 

Proceeds from notes payable to affiliate

 

190,500

 

 

Repayment of notes payable to affiliate

 

(206,000

)

 

Repayment of long-term debt, including reacquisition premiums

 

(34

)

(66,832

)

Capital contributions from parent

 

44,032

 

1,321

 

Dividends paid to parent

 

(57,296

)

(17,137

)

Net cash used in financing activities

 

(28,798

)

(82,648

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

1,018

 

(26,191

)

Cash and cash equivalents at beginning of period

 

923

 

31,611

 

Cash and cash equivalents at end of period

 

$

1,941

 

$

5,420

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Cash paid for interest, net of amounts capitalized

 

$

(11,215

)

$

(11,596

)

Cash received (paid) for income taxes, net

 

1,558

 

(11,884

)

Supplemental disclosure of non-cash investing transactions:

 

 

 

 

 

Property, plant and equipment additions in accounts payable

 

$

1,615

 

$

2,698

 

 

See Notes to Consolidated Financial Statements

 

4



Table of Contents

 

NSP-WISCONSIN AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(amounts in thousands of dollars)

 

 

 

June 30, 2010

 

Dec. 31, 2009

 

Assets

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and cash equivalents

 

$

1,941

 

$

923

 

Accounts receivable, net

 

44,419

 

50,069

 

Accounts receivable from affiliates

 

1,988

 

20,448

 

Accrued unbilled revenues

 

34,440

 

44,907

 

Inventories

 

22,327

 

28,443

 

Prepaid taxes

 

20,297

 

26,646

 

Deferred income taxes

 

2,766

 

4,238

 

Prepayments and other

 

2,030

 

6,507

 

Total current assets

 

130,208

 

182,181

 

 

 

 

 

 

 

Property, plant and equipment, net

 

1,085,140

 

1,059,773

 

 

 

 

 

 

 

Other assets

 

 

 

 

 

Regulatory assets

 

218,797

 

220,702

 

Other investments

 

4,046

 

4,287

 

Other

 

4,738

 

4,768

 

Total other assets

 

227,581

 

229,757

 

Total assets

 

$

1,442,929

 

$

1,471,711

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current portion of long-term debt

 

$

1,341

 

$

1,365

 

Notes payable to affiliates

 

600

 

16,100

 

Accounts payable

 

27,301

 

36,560

 

Accounts payable to affiliates

 

29,992

 

38,722

 

Dividends payable to parent

 

8,119

 

8,522

 

Accrued interest

 

6,461

 

6,440

 

Derivative instruments valuation

 

1,264

 

20

 

Other

 

16,915

 

16,780

 

Total current liabilities

 

91,993

 

124,509

 

 

 

 

 

 

 

Deferred credits and other liabilities

 

 

 

 

 

Deferred income taxes

 

190,248

 

183,909

 

Deferred investment tax credits

 

9,420

 

9,732

 

Regulatory liabilities

 

123,715

 

131,621

 

Environmental liabilities

 

95,888

 

95,085

 

Pension and employee benefit obligations

 

45,806

 

45,247

 

Customer advances

 

17,359

 

16,672

 

Other

 

4,005

 

3,884

 

Total deferred credits and other liabilities

 

486,441

 

486,150

 

 

 

 

 

 

 

Commitments and contingent liabilities

 

 

 

 

 

Capitalization

 

 

 

 

 

Long-term debt

 

368,021

 

367,978

 

Common stock — authorized 1,000,000 shares of $100 par value; outstanding 933,000 shares

 

93,300

 

93,300

 

Additional paid in capital

 

190,537

 

146,505

 

Retained earnings

 

213,265

 

253,935

 

Accumulated other comprehensive loss

 

(628

)

(666

)

Total common stockholder’s equity

 

496,474

 

493,074

 

Total liabilities and equity

 

$

1,442,929

 

$

1,471,711

 

 

See Notes to Consolidated Financial Statements

 

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Table of Contents

 

NSP-WISCONSIN 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-Wisconsin and its subsidiaries as of June 30, 2010 and Dec. 31, 2009; the results of operations for the three and six months ended June 30, 2010 and 2009, and its cash flows for the six months ended June 30, 2010 and 2009.  All adjustments are of a normal, recurring nature, except as otherwise disclosed.  Management has also evaluated the impact of events occurring after June 30, 2010 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, 2009 balance sheet information has been derived from the audited 2009 financial statements.  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 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-Wisconsin Annual Report on Form 10-K for the year ended Dec. 31, 2009, filed with the SEC on March 1, 2010.  Due to the seasonality of NSP-Wisconsin’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 NSP-Wisconsin’s Annual Report on Form 10-K for the year ended Dec. 31, 2009, appropriately represent, in all material respects, the current status of accounting policies and are incorporated herein by reference.

 

2.        Accounting Pronouncements

 

Recently Adopted

 

Consolidation of Variable Interest Entities — In June 2009, the Financial Accounting Standards Board (FASB) issued new guidance on consolidation of variable interest entities. The guidance affects various elements of consolidation, including the determination of whether an entity is a variable interest entity and whether an enterprise is a variable interest entity’s primary beneficiary. These updates to the FASB Accounting Standards Codification (ASC or Codification) are effective for interim and annual periods beginning after Nov. 15, 2009.  NSP-Wisconsin implemented the guidance on Jan. 1, 2010, and the implementation did not have a material impact on its consolidated financial statements.  For further information and required disclosures regarding variable interest entities, see Note 6 to the consolidated financial statements.

 

Fair Value Measurement Disclosures — In January 2010, the FASB issued Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements (Accounting Standards Update (ASU) No. 2010-06), which updates the Codification to require new disclosures for assets and liabilities measured at fair value. The requirements include expanded disclosure of valuation methodologies for fair value measurements, transfers between levels of the fair value hierarchy, and gross rather than net presentation of certain changes in Level 3 fair value measurements. The updates to the Codification contained in ASU No. 2010-06 were effective for interim and annual periods beginning after Dec. 15, 2009, except for requirements related to gross presentation of certain changes in Level 3 fair value measurements, which are effective for interim and annual periods beginning after Dec. 15, 2010.  NSP-Wisconsin implemented the portions of the guidance required on Jan. 1, 2010, and the implementation did not have a material impact on its consolidated financial statements.  For further information and required disclosures, see Note 8 to the consolidated financial statements.

 

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Table of Contents

 

3.        Selected Balance Sheet Data

 

(Thousands of Dollars)

 

June 30, 2010

 

Dec. 31, 2009

 

Accounts receivable, net

 

 

 

 

 

Accounts receivable

 

$

48,099

 

$

54,778

 

Less allowance for bad debts

 

(3,680

)

(4,709

)

 

 

$

44,419

 

$

50,069

 

Inventories

 

 

 

 

 

Materials and supplies

 

$

5,115

 

$

4,892

 

Fuel

 

12,562

 

13,377

 

Natural gas

 

4,650

 

10,174

 

 

 

$

22,327

 

$

28,443

 

Property, plant and equipment, net

 

 

 

 

 

Electric plant

 

$

1,514,491

 

$

1,486,696

 

Natural gas plant

 

192,192

 

187,459

 

Common and other property

 

111,012

 

109,226

 

Construction work in progress

 

69,973

 

52,144

 

Total property, plant and equipment

 

1,887,668

 

1,835,525

 

Less accumulated depreciation

 

(802,528

)

(775,752

)

 

 

$

1,085,140

 

$

1,059,773

 

 

4.        Income Taxes

 

Medicare Part D Subsidy Reimbursements In March 2010, the Patient Protection and Affordable Care Act was signed into law.  The law includes provisions to generate tax revenue to help offset the cost of the new legislation.  One of these provisions reduces the deductibility of retiree health care costs to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D coverage, beginning in 2013.  Based on this provision, NSP-Wisconsin is subject to additional taxes and is required to reverse previously recorded tax benefits in the period of enactment.

 

NSP-Wisconsin expensed approximately $0.7 million of previously recognized tax benefits relating to Medicare Part D subsidies during the first quarter of 2010.  NSP-Wisconsin does not expect the $0.7 million of additional tax expense to recur in future periods.  However, the 2010 effective tax rate (ETR) will increase due to additional tax expense of approximately $0.2 million associated with current year retiree health care accruals.

 

Federal AuditNSP-Wisconsin is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. During the first quarter of 2010, the Internal Revenue Service (IRS) completed an examination of Xcel Energy’s federal income tax returns of tax years 2006 and 2007. The IRS did not propose any material adjustments for those tax years. The statute of limitations applicable to Xcel Energy’s 2006 federal income tax return expires on Aug. 28, 2010. The IRS audit of tax years 2008 and 2009 is expected to begin during the fourth quarter of 2010.

 

State AuditsNSP-Wisconsin is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of June 30, 2010, NSP-Wisconsin’s earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2005. There currently are no state income tax audits in progress.

 

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

 

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

 

(Millions of Dollars)

 

June 30, 2010

 

Dec. 31, 2009

 

Unrecognized tax benefit - Permanent tax positions

 

$

0.2

 

$

0.2

 

Unrecognized tax benefit - Temporary tax positions

 

1.2

 

1.0

 

Unrecognized tax benefit balance

 

$

1.4

 

$

1.2

 

 

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Table of Contents

 

The increase in the unrecognized tax benefit balance of $0.1 million from March 31, 2010 to June 30, 2010 and $0.2 million from Dec. 31, 2009 to June 30, 2010 was due to the addition of similar uncertain tax positions related to ongoing activity. NSP-Wisconsin’s amount of unrecognized tax benefits could significantly change in the next 12 months when the IRS and state audits resume. At this time, due to the uncertain nature of the audit process, it is not reasonably possible to estimate an overall range of possible change.

 

5.        Rate Matters

 

Except to the extent noted below, the circumstances set forth in Note 12 to the consolidated financial statements included in NSP-Wisconsin’s Annual Report on Form 10-K for the year ended Dec. 31, 2009 appropriately represent, in all material respects, the current status of other rate matters, and are incorporated herein by reference.

 

Pending and Recently Concluded Regulatory Proceedings — Public Service Commission of Wisconsin (PSCW)

 

2009 Electric Fuel Cost Recovery — In April 2009, the PSCW initiated a fuel cost recovery proceeding under the Wisconsin fuel rules and set NSP-Wisconsin’s rates subject to refund with interest, pending a full review of 2009 fuel costs.  The PSCW completed its review of actual 2009 fuel costs in the second quarter of 2010 and determined that NSP-Wisconsin’s 2009 fuel refund obligation was $19.1 million.  In NSP-Wisconsin’s 2010 rate case decision, the PSCW authorized NSP-Wisconsin to apply $6.4 million of the 2009 fuel refund obligation to offset the 2010 Wisconsin retail electric rate increase.  NSP-Wisconsin implemented fuel cost credits in the first half of 2010 designed to refund the remaining $12.7 million to customers.

 

2010 Electric Fuel Cost Recovery — NSP-Wisconsin’s fuel and purchased power costs through March 2010 were approximately $1.7  million, or 4.1 percent lower than authorized in the 2010 electric rate case, which was outside the monthly and cumulative variance ranges for monitored fuel costs established by the PSCW.  Pursuant to the fuel rules, on May 11, 2010, the PSCW set NSP-Wisconsin’s electric rates subject to refund with interest at 10.40 percent, pending a full review of 2010 fuel costs.  The PSCW has not begun its review of 2010 fuel costs.  However, through June 2010, NSP-Wisconsin’s fuel costs were approximately $0.2 million, or 0.2 percent, lower than authorized in the 2010 electric rate case, which is within the cumulative variance range for monitored fuel costs established by the PSCW.

 

2010 Electric Rate Case Reopener — As part of the resolution of its 2010 electric rate case, the PSCW allowed NSP-Wisconsin to file for a reopener for production and transmission capital costs, as well as fuel and purchased power expense.  NSP-Wisconsin is expected to file its reopener petition in August 2010.

 

Pending and Recently Concluded Regulatory Proceedings — Federal Energy Regulatory Commission (FERC)

 

FERC Rate Case for Wholesale Municipal Customers On April 1, 2010, NSP-Wisconsin filed an application with the FERC seeking changes to the rates, terms and conditions of the firm power sale for resale service agreement provided to its ten wholesale municipal full-requirements customers.  The filing would allow NSP-Wisconsin:

 

·                     To set rates that will allow it to collect revenues sufficient to recover significant increases in its costs of services to the customers since rates were last set in 2006;

·                     To convert from existing cost-based production stated rates to cost-based production formula rates; and

·                     To establish a means to collect from the customers their proportionate share of presently unrecovered transmission costs incurred by the NSP System, whereby NSP-Minnesota and NSP-Wisconsin share all generation and transmission costs through the Interchange Agreement, which is a FERC-approved tariff.

 

NSP-Wisconsin requested the FERC to accept the formula rate template as the rate effective June 1, 2010, but permit NSP-Wisconsin to delay charging the customers the rates derived by the formula until July 1, 2010.  The municipal customers protested the proposed changes, arguing the use of Interchange Agreement costs does not provide the transparency required by FERC formula rates, that the return on equity of 11.1 percent requested by NSP-Wisconsin was unreasonable and the FERC should impose the maximum five-month suspension period.  NSP-Wisconsin filed an answer to the municipal customer protest and agreed that a FERC order issued after the April 1, 2010 filing would result in a return on equity of 10.4 percent.  On May 28, 2010, the FERC issued an order accepting NSP-Wisconsin’s proposed formula rate and related terms and conditions for filing, suspending the rates for one day, allowing the rate formula to become effective July 1, 2010, subject to refund, and establishing hearing and settlement judge procedures.  NSP-Wisconsin estimates the new rates will result in an increase in non-fuel revenues of $5.7 million, or 21 percent, for the formula rate year July 1, 2010 through June 30, 2011, as compared to prior stated rates, which are based on a 2006 test year.  This increase will be subject to refund pending the outcome of the settlement judge or hearing procedures.  The settlement judge procedures began on June 30, 2010, and a second settlement conference is scheduled for August 2010.

 

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Table of Contents

 

6.        Commitments and Contingent Liabilities

 

Except as noted below and in Note 5 to the consolidated financial statements in this Quarterly Report on Form 10-Q, the circumstances set forth in Notes 12 and 13 to the consolidated financial statements in NSP-Wisconsin’s Annual Report on Form 10-K for the year ended Dec. 31, 2009 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-Wisconsin’s financial position.

 

Commitments

 

Variable Interest Entities — Effective Jan. 1, 2010, NSP-Wisconsin adopted new guidance on consolidation of variable interest entities contained in ASC 810 Consolidation.  The guidance requires enterprises to consider the activities that most significantly impact an entity’s financial performance, and power to direct those activities, when determining whether an entity is a variable interest entity and whether an enterprise is a variable interest entity’s primary beneficiary.

 

Low-Income Housing Limited Partnerships — NSP-Wisconsin has entered into limited partnerships for the construction and operation of affordable rental housing developments which qualify for low-income housing tax credits.  NSP-Wisconsin has determined the low-income housing limited partnerships to be variable interest entities primarily due to contractual arrangements within each limited partnership that establish sharing of ongoing voting control and profits and losses that does not consistently align with the partners’ proportional equity ownership.  These limited partnerships are designed to qualify for low-income housing tax credits, and NSP-Wisconsin received a larger allocation of the tax credits than the general partners at inception of the arrangements.  It has been determined that NSP-Wisconsin has the power to direct the activities that most significantly impact these entities’ economic performance, and therefore NSP-Wisconsin consolidates these limited partnerships in its consolidated financial statements.

 

Equity financing for these entities has been provided by NSP-Wisconsin and the general partner of each limited partnership, and NSP-Wisconsin’s risk of loss is limited to its capital contributions, adjusted for any distributions and its share of undistributed profits and losses; no significant additional financial support has been, or is in the future, required to be provided to the limited partnerships by NSP-Wisconsin.  Mortgage-backed debt comprises the majority of the financing at inception of each limited partnership and is to be paid over the life of the limited partnership arrangement.  Obligations of the limited partnerships are secured by the low-income housing properties of each limited partnership, and the creditors of each limited partnership have no significant recourse to NSP-Wisconsin or its subsidiaries.  Likewise, the assets of the limited partnerships may only be used to settle obligations of the limited partnerships, and not those of NSP-Wisconsin or its subsidiaries.

 

Amounts reflected in NSP-Wisconsin’s consolidated balance sheets for low-income housing limited partnerships include the following:

 

(Thousands of Dollars)

 

June 30, 2010

 

Dec. 31, 2009

 

Current assets

 

$

175

 

$

208

 

Property, plant and equipment, net

 

2,959

 

3,030

 

Other noncurrent assets

 

86

 

82

 

Total assets

 

$

3,220

 

$

3,320

 

 

 

 

 

 

 

Current portion of mortgages and other current liabilities

 

$

1,425

 

$

1,476

 

Mortgages and other long-term debt payable

 

674

 

684

 

Other noncurrent liabilities

 

42

 

40

 

Total liabilities

 

$

2,141

 

$

2,200

 

 

Environmental Contingencies

 

NSP-Wisconsin has been, or is currently, involved with the cleanup of contamination from certain hazardous substances at several sites.  In many situations, NSP-Wisconsin believes it will recover some portion of these costs through insurance claims.  Additionally, where applicable, NSP-Wisconsin is pursuing, or intends to pursue, recovery from other potentially responsible parties (PRPs) and through the rate regulatory process.  New and changing federal and state environmental mandates can also create added financial liabilities for NSP-Wisconsin, which are normally recovered through the rate regulatory process.  To the extent any costs are not recovered through the options listed above, NSP-Wisconsin would be required to recognize an expense.

 

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Site RemediationNSP-Wisconsin must pay all or a portion of the cost to remediate sites where past activities of NSP-Wisconsin or other parties have caused environmental contamination.  Environmental contingencies could arise from various situations including sites of former manufactured gas plants (MGPs) operated by NSP-Wisconsin, its predecessors, or other entities; and third party sites, such as landfills, for which NSP-Wisconsin is alleged to be a PRP that sent hazardous materials and wastes.  At June 30, 2010, the liability for the cost of remediating these sites was estimated to be $100.8 million, of which $4.9 million was considered to be a current liability.

 

Manufactured Gas Plant Sites

 

Ashland MGP Site — NSP-Wisconsin has been named a PRP for creosote and coal tar contamination at a site in Ashland, Wis.  The Ashland/Northern States Power Lakefront Superfund Site (Ashland site) includes property owned by NSP-Wisconsin, which was previously an MGP facility and two other properties: an adjacent city lakeshore park area, on which an unaffiliated third party previously operated a sawmill; and an area of Lake Superior’s Chequamegon Bay adjoining the park.

 

In September 2002, the Ashland site was placed on the National Priorities List.  In 2009, the Environmental Protection Agency (EPA) issued its proposed remedial action plan (PRAP).  The estimated remediation costs for the cleanup proposed by the EPA in the PRAP range between $94.4 million and $112.8 million.  NSP-Wisconsin submitted comments to EPA in response to the PRAP, and indicated that it had serious concerns about the cleanup approach proposed by the EPA.  It is expected that the EPA will select a final remedial action plan sometime later in 2010.

 

NSP-Wisconsin’s potential liability, the actual cost of remediating the Ashland site and the time frame over which the amounts may be paid out are not determinable until the EPA selects a remediation strategy for the entire site and determines NSP-Wisconsin’s level of responsibility.  NSP-Wisconsin continues to work with the Wisconsin Department of Natural Resources to access state and federal funds to apply to the ultimate remediation cost of the entire site.  NSP-Wisconsin has recorded a liability of $97.5 million based upon the minimum of the range of remediation costs established by the PRAP, together with estimated outside legal, consultant and remedial design costs.

 

NSP-Wisconsin has deferred, as a regulatory asset, the costs accrued for the Ashland site based on an expectation that the PSCW will continue to allow NSP-Wisconsin to recover payments for environmental remediation from its customers.  The PSCW has consistently authorized recovery in NSP-Wisconsin rates of all remediation costs incurred at the Ashland site and has authorized recovery of similar remediation costs for other Wisconsin utilities.  External MGP remediation costs are subject to deferral in the Wisconsin retail jurisdiction and are reviewed for prudence as part of the Wisconsin biennial retail rate case process.  A final determination of the scope and cost of the remediation of the Ashland site is not currently expected until sometime later in 2010.

 

In addition, in 2003, the Wisconsin Supreme Court rendered a ruling that reopens the possibility that NSP-Wisconsin may be able to recover a portion of the remediation costs from its insurance carriers.  Any insurance proceeds received by NSP-Wisconsin will be credited to ratepayers.

 

In addition to potential liability for remediation, NSP-Wisconsin may also have potential liability for natural resource damages at the Ashland site.  NSP-Wisconsin has recorded an estimate of its potential liability based upon its best estimate of potential exposure.

 

Third Party and Other Environmental Site Remediation

 

Asbestos Removal — Some of NSP-Wisconsin’s facilities contain asbestos. Most asbestos will remain undisturbed until the facilities that contain it are demolished or renovated.  NSP-Wisconsin’s removal costs for asbestos are expected to be immaterial; therefore, no asset retirement obligation was recorded.  See additional discussion of asset retirement obligations in Note 13 of the NSP-Wisconsin Annual Report on Form 10-K for the year ended Dec. 31, 2009.  It may be necessary to remove some asbestos to perform maintenance or make improvements to other equipment.  The cost of removing asbestos as part of other work is immaterial and is recorded as incurred as operating expenses for maintenance projects, capital expenditures for construction projects or removal costs for demolition projects.

 

Other Environmental Requirements

 

EPA Greenhouse Gas (GHG) Rulemaking — On Dec. 7, 2009, in response to the U. S. Supreme Court’s decision in Massachusetts v. EPA, 549 U. S. 497 (2007), the EPA issued its “endangerment” finding that GHG emissions endanger public health and welfare and that emissions from motor vehicles contribute to the GHGs in the atmosphere.  This endangerment finding creates a mandatory duty for the EPA to regulate GHGs from light duty vehicles.  The EPA finalized GHG efficiency standards for light duty vehicles in spring of 2010 and has promulgated permitting requirements for GHGs for large new and modified stationary sources, such as power plants.  These regulations will become applicable in 2011.

 

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Clean Air Interstate Rule (CAIR) — In March 2005, the EPA issued the CAIR to further regulate sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions.  The objective of CAIR is to cap emissions of SO2 and NOx in the eastern United States, including Wisconsin.  In 2008, the U. S. Court of Appeals for the District of Columbia vacated and remanded CAIR.  On July 6, 2010, the EPA issued the proposed Clean Air Transport Rule (CATR), which would replace CAIR by requiring SO2 and NOx reductions in 31 states and the District of Columbia.  The EPA is proposing to reduce these emissions through federal implementation plans for each affected state.  The EPA’s preferred approach would set emission limits for each state and allow limited interstate emissions trading.  As proposed, CATR will impact Wisconsin for annual SO2 and NOx emissions.  NSP-Wisconsin is analyzing the proposed rule to determine whether emission reductions are needed from facilities.  Until CATR becomes final, NSP-Wisconsin will continue activities to support CAIR compliance.

 

For 2009, the NOx allowance costs for NSP-Wisconsin were $0.5 million.  The estimated NOx allowance cost for 2010 is $0.4 million.  Allowance cost estimates for NSP-Wisconsin are based on fuel quality and current market data.  NSP-Wisconsin believes the cost of any required capital investment or allowance purchases will be recoverable from customers in rates.

 

Clean Air Mercury Rule (CAMR) — In March 2005, the EPA issued the CAMR, which regulated mercury emissions from power plants.  In February 2008, the U. S. Court of Appeals for the District of Columbia vacated CAMR, which impacts federal CAMR requirements, but not necessarily state-only mercury legislation and rules.  The EPA has agreed to finalize Maximum Achievable Control Technology (MACT) emission standards for all hazardous air pollutants from electric utility steam generating units by November 2011 to replace CAMR.  NSP-Wisconsin anticipates that the EPA will require affected facilities to demonstrate compliance within 18 to 36 months thereafter.

 

Wisconsin Mercury Rule — In December 2008, the Wisconsin mercury reduction rule took effect, which impacts NSP-Wisconsin’s Bay Front plant.  The rule applies to coal-fired utility boilers and requires that small coal-fired utility boilers, which include all three boilers at the Bay Front plant, must perform a top-down best available control technology (BACT) analysis for mercury by June 30, 2011, and limit mercury emissions to a level that is determined by the Wisconsin Department of Natural Resources to be BACT by Jan. 1, 2015.

 

NSP-Wisconsin has proposed a gasifier project for boiler 5 at the Bay Front plant.  If the gasifier project is implemented prior to 2015, that boiler will no longer be subject to this rule as long as the modification does not increase mercury emissions, and the boiler no longer burns coal.  At that point, it will likely be subject to revised commercial and industrial boiler MACT (Boiler MACT) requirements.  In addition, if the Boiler MACT is revised prior to 2015, boilers 1 and 2 will no longer be subject to the Wisconsin mercury reduction rule, and will need to comply with the Boiler MACT.  As such, any cost estimates to comply with the Wisconsin mercury reduction rule are premature at this time.

 

Federal Clean Water Act — The federal Clean Water Act (CWA) requires the EPA to regulate cooling water intake structures to assure that these structures reflect the best technology available (BTA) for minimizing adverse environmental impacts.  In July 2004, the EPA published phase II of the rule, which applies to existing cooling water intakes at steam-electric power plants.  Several lawsuits were filed against the EPA challenging the phase II rulemaking.  In April 2009, the U. S. Supreme Court issued a decision in Entergy Corp. v. Riverkeeper, Inc., concluding that the EPA can consider a cost benefit analysis when establishing BTA.  The decision overturned only one aspect of the Court of Appeals’ earlier opinion, and gives the EPA the discretion to consider costs and benefits when it reconsiders its phase II rules.  Until the EPA fully responds, the rule’s compliance requirements and associated deadlines will remain unknown.  As such, it is not possible to provide an accurate estimate of the overall cost of this rulemaking at this time.

 

Proposed Coal Ash Regulation —  In June 2010, the EPA published a proposed rule seeking comment on whether to regulate coal combustion byproducts (often referred to as coal ash) as a special waste (subject to many of the requirements for hazardous waste) or as a solid (nonhazardous) waste.  Coal ash is currently exempt from hazardous waste regulation.  The EPA’s proposal would result in more comprehensive and expensive requirements related to management and disposal of coal ash.  There is a 90-day comment deadline to submit comments on the rule, but requests for extension of time to submit comments have been submitted to the EPA.  The EPA is also seeking comment on what regulations are appropriate for the beneficial reuse of coal ash.  The timing, scope and potential cost of any final rule that might be implemented are not determinable at this time.

 

Legal Contingencies

 

Lawsuits and claims arise in the normal course of business.  Management, after consultation with legal counsel, has recorded an estimate of the probable cost of settlement or other disposition of them.  The ultimate outcome of these matters cannot presently be determined.  Accordingly, the ultimate resolution of these matters could have a material adverse effect on NSP-Wisconsin’s financial position and results of operations.

 

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Gas Trading Litigation

 

Arandell vs. e prime, Xcel Energy, NSP-Wisconsin et al. e prime, inc. (e prime) is a subsidiary of Xcel Energy Markets Holdings Inc., which is a wholly owned subsidiary of Xcel Energy.  Among other things, e prime was in the business of natural gas trading and marketing.  e prime has not engaged in natural gas trading or marketing activities since 2003.  In February 2007, a complaint was filed alleging that NSP-Wisconsin, Xcel Energy and e prime, among others, engaged in fraud and anticompetitive activities in conspiring to restrain the trade of natural gas and manipulate natural gas prices.  The plaintiffs seek a declaration that contracts for natural gas entered into between Jan. 1, 2000 and Oct. 31, 2002 are void that they are entitled to repayment for amounts paid for natural gas during that time period, and that treble damages are appropriate.  The case was filed in the Wisconsin State Court (Dane County), and then removed to U. S. District Court for the Western District of Wisconsin.  In June 2007, the plaintiffs filed a motion to remand the matter to state court, which was denied, and the matter was transferred by the Multi-District Litigation panel to Federal District Court Judge Pro in Nevada, who is the judge assigned to the Western Area Wholesale Natural Gas Antitrust Litigation.  In July 2007, plaintiffs filed an amended complaint in Federal District Court in Nevada, which includes allegations against NRG, a former Xcel Energy subsidiary.  In February 2008, the court denied the defendants’ motions for summary judgment, granted plaintiffs’ motion to conduct limited discovery, and in December 2009 allowed defendants to renew their summary judgment motions.

 

In March 2009, Newpage Wisconsin System Inc. commenced a lawsuit in state court in Wood County, Wis.  The allegations are substantially similar to Arandell and name several of the same defendants, including Xcel Energy, e prime and NSP-Wisconsin.  In September 2009, Plaintiffs moved to consolidate the Newpage and Arandell matters.  In June 2010, the court denied defendants’ motions to dismiss the Newpage lawsuit on statute of limitations grounds and granted the motion to consolidate New Page and Arandell.

 

Environmental Litigation

 

Carbon Dioxide (CO2) Emissions Lawsuit — In 2004, the attorneys general of eight states and New York City, as well as several environmental groups, filed lawsuits in U. S. District Court in the Southern District of New York against five utilities, including Xcel Energy, the parent company of NSP-Wisconsin, to force reductions in CO2 emissions.  The other utilities include American Electric Power Co., Southern Co., Cinergy Corp. and Tennessee Valley Authority.  The lawsuits allege that CO2 emitted by each company is a public nuisance.  The lawsuits do not demand monetary damages.  Instead, the lawsuits ask the court to order each utility to cap and reduce its CO2 emissions.  On Sept. 19, 2005, the court granted a motion to dismiss on constitutional grounds.  On appeal in September 2009, the U. S. Court of Appeals for the Second Circuit reversed the lower court decision.  Defendants anticipate filing a petition for review with the U. S. Supreme Court.

 

Comer vs. Xcel Energy Inc. et al. — In 2006, Xcel Energy, the parent company of NSP-Wisconsin, received notice of a purported class action lawsuit filed in U. S. District Court in the Southern District of Mississippi.  The lawsuit names more than 45 oil, chemical and utility companies, including Xcel Energy, as defendants and alleges that defendants’ CO2 emissions “were a proximate and direct cause of the increase in the destructive capacity of Hurricane Katrina.”  Plaintiffs allege negligence and public and private nuisance and seek damages related to the loss resulting from the hurricane.  Xcel Energy believes this lawsuit is without merit and intends to vigorously defend itself against these claims.  In August 2007, the court dismissed the lawsuit in its entirety against all defendants on constitutional grounds.  Plaintiffs filed a notice of appeal to the U. S. Court of Appeals for the Fifth Circuit.  In October 2009, the U. S. Court of Appeals for the Fifth Circuit reversed the district court decision, in part, concluding that the plaintiffs pleaded sufficient facts to overcome the constitutional challenges that formed the basis for dismissal by the district court.  A subsequent petition by defendants, including Xcel Energy, for en banc review was granted.  On May 28, 2010, the U. S. Court of Appeals for the Fifth Circuit ruled that it lacked an en banc quorum of nine active members to hear the case.  It dismissed the appeal, which resulted in the reinstatement of the district court’s opinion dismissing the case.

 

Native Village of Kivalina vs. Xcel Energy Inc. et al. In 2008, the City and Native Village of Kivalina, Alaska, filed a lawsuit in U. S. District Court for the Northern District of California against Xcel Energy, the parent company of NSP-Wisconsin, and 23 other utilities, oil, gas and coal companies.  Plaintiffs claim that defendants’ emission of CO2 and other GHGs contribute to global warming, which is harming their village.  Xcel Energy believes the claims asserted in this lawsuit are without merit and joined with other utility defendants in filing a motion to dismiss on June 30, 2008.  In October 2009, the U. S. District Court dismissed the lawsuit on constitutional grounds.  In November 2009, plaintiffs filed a notice of appeal to the U. S. Court of Appeals for the Ninth Circuit.  It is unknown when the Ninth Circuit will render a final opinion.

 

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Table of Contents

 

Employment, Tort and Commercial Litigation

 

MGP Insurance Coverage Litigation — In October 2003, NSP-Wisconsin initiated discussions with its insurers regarding the availability of insurance coverage for costs associated with the remediation of four former MGP sites located in Ashland, Chippewa Falls, Eau Claire and La Crosse, Wis.  In lieu of participating in discussions, in October 2003, two of NSP-Wisconsin’s insurers, St. Paul Fire & Marine Insurance Co. and St. Paul Mercury Insurance Co., commenced litigation against NSP-Wisconsin in Minnesota state district court.  In November 2003, NSP-Wisconsin commenced suit in Wisconsin state court against St. Paul Fire & Marine Insurance Co. and its other insurers.  Subsequently, the Minnesota court enjoined NSP-Wisconsin from pursuing the Wisconsin litigation.  In July of 2007, the Minnesota trial court granted defendant’s motion for summary judgment, which was affirmed on appeal in August 2009.  Pursuant to defendants’ motion, the Wisconsin action was dismissed in March 2010.  In April 2010, NSP-Wisconsin appealed this decision to the Wisconsin Court of Appeals.  It is unknown when the Wisconsin Court of Appeals will render a decision.

 

NSP-Wisconsin has reached settlements with 22 insurers, and these insurers have been dismissed from both the Minnesota and Wisconsin actions.  NSP-Wisconsin has also reached settlements in principle with Ranger Insurance Company, TIG Insurance Company, Royal Indemnity Company and Globe Indemnity Company.

 

The PSCW has established a deferral process whereby clean-up costs associated with the remediation of former MGP sites are deferred and, if approved by the PSCW, recovered from ratepayers.  Carrying charges associated with these clean-up costs are not subject to the deferral process and are not recoverable from ratepayers.  Any insurance proceeds received by NSP-Wisconsin will be credited to ratepayers.  None of the aforementioned lawsuit settlements are expected to have a material effect on Xcel Energy’s consolidated financial statements.

 

Robarge vs. NSP-Wisconsin — Plaintiffs in this purported class action, served in late 2009 and venued in County Circuit Court in Eau Claire, Wis., allege that NSP-Wisconsin has engaged in unfair and improper refund practices regarding the cost of service extensions and seek certification of a class of those similarly situated.  Plaintiff claims entitlement to actual damages in an amount, as yet undetermined, punitive damages, injunctive relief, and fees and costs.  NSP-Wisconsin filed a motion for dismissal, which was denied in March 2010, and the parties are now engaged in discovery.  NSP-Wisconsin filed a motion for summary judgment in April 2010 and filed its opposition to plaintiff’s motion for class certification in July 2010.  NSP-Wisconsin will vigorously defend this matter, which it believes is without merit.

 

7.        Short-Term Borrowings

 

NSP-Wisconsin has an intercompany borrowing arrangement with NSP-Minnesota, with interest charged at NSP-Minnesota’s short-term borrowing rate.  The following table presents the intercompany borrowing arrangement for NSP-Wisconsin:

 

(Millions of Dollars)

 

June 30, 2010

 

Dec. 31, 2009

 

Notes payable to affiliates

 

$

 

$

15.5

 

Weighted average interest rate

 

N/A

%

0.36

%

Total notes payable available for issuance

 

$

100

 

$

100

 

 

The following table presents the notes payable of Clearwater Investments Inc., a NSP-Wisconsin subsidiary, to Xcel Energy:

 

(Millions of Dollars)

 

June 30, 2010

 

Dec. 31, 2009

 

Notes payable to affiliates

 

$

0.6

 

$

0.6

 

Weighted average interest rate

 

0.42

%

0.37

%

 

8.        Derivative Instruments and Fair Value Measurements

 

NSP-Wisconsin enters into derivative instruments, including forward contracts, futures, swaps and options, to reduce risk in connection with changes in interest rates and utility commodity prices.

 

Interest Rate Derivatives — NSP-Wisconsin 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 a specific period.  These derivative instruments are designated as cash flow hedges for accounting purposes.

 

At June 30, 2010, accumulated other comprehensive income (OCI) related to interest rate derivatives included $0.1 million of net losses expected to be reclassified into earnings during the next 12 months as the related hedged interest rate transactions impact earnings.  There were immaterial losses related to interest rate derivatives reclassified from accumulated OCI into earnings during the three and six months ended June 30, 2010.

 

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Commodity Derivatives — NSP-Wisconsin enters into derivative instruments to manage variability of future cash flows from changes in commodity prices in its natural gas operations, including the sale of natural gas or the purchase of natural gas for resale.

 

At June 30, 2010, NSP-Wisconsin had no commodity derivative contracts designated as cash flow hedges.  However, as of June 30, 2010, NPS-Wisconsin has entered into derivative instruments that mitigate commodity price risk on behalf of natural gas customers but are not designated as qualifying hedging instruments.  Changes in the fair value of these commodity derivative instruments are deferred as a regulatory asset or liability based on the commission approved regulatory recovery mechanisms.

 

The following table details the gross notional amounts of commodity forwards at June 30, 2010 and Dec. 31, 2009:

 

(Amounts in Thousands) (a)

 

June 30, 2010

 

Dec. 31, 2009

 

MMBtu of natural gas

 

1,690

 

2,053

 

 


(a) Amounts are not reflective of net positions in the underlying commodities.

 

Financial Impact of Qualifying Cash Flow Hedges — The impact of qualifying cash flow hedges on NSP-Wisconsin’s accumulated other comprehensive income, included as a component of common stockholder’s equity, is detailed in the following table:

 

 

 

Three Months Ended June 30,

 

(Thousands of Dollars)

 

2010

 

2009

 

Accumulated other comprehensive loss related to cash flow hedges at April 1

 

$

(647

)

$

(723

)

After-tax net realized losses on derivative transactions reclassified into earnings

 

19

 

19

 

Accumulated other comprehensive loss related to cash flow hedges at June 30

 

$

(628

)

$

(704

)

 

 

 

Six Months Ended June 30,

 

(Thousands of Dollars)

 

2010

 

2009

 

Accumulated other comprehensive loss related to cash flow hedges at Jan. 1

 

$

(666

)

$

(742

)

After-tax net realized losses on derivative transactions reclassified into earnings

 

38

 

38

 

Accumulated other comprehensive loss related to cash flow hedges at June 30

 

$

(628

)

$

(704

)

 

NSP-Wisconsin had no derivative instruments designated as fair value hedges during the three and six months ended June 30, 2010 and June 30, 2009, and as such, had no gains or losses from fair value hedges or related hedged transactions for these periods.

 

During the three and six months ended June 30, 2010, changes in the fair value of natural gas commodity derivatives resulted in net losses of $0.1 million and $1.6 million, respectively, recognized as regulatory assets and liabilities.  During the six months ended June 30, 2009 changes in fair value of natural gas commodity derivatives resulted in losses of $0.4 million recognized in regulatory assets and liabilities.  There were no material changes in fair value on commodity derivatives for the three months ended June 30, 2009.

 

Natural gas commodity derivatives settlement gains of $0.3 million and settlement losses of $4.3 million were incurred during the six months ended June 30, 2010 and June 30, 2009, respectively, subject to purchased natural gas cost recovery mechanisms, which capture derivative settlement gains and losses out of income as a regulatory asset or liability, as appropriate.  There were no material settlement losses on commodity derivatives for the three months ended June 30, 2010 and June 30, 2009.

 

Credit Related Contingent Features Contract provisions of the derivative instruments that NSP-Wisconsin enters into may require the posting of collateral or settlement of the contracts for various reasons, including if NSP-Wisconsin is unable to maintain its credit ratings.  If the credit ratings of NSP-Wisconsin at June 30, 2010 and Dec. 31, 2009 were downgraded below investment grade, no contracts underlying NSP-Wisconsin’s derivative liabilities would require the posting of collateral or contract settlement upon the downgrade.

 

Certain of NSP-Wisconsin’s derivative instruments are 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-Wisconsin’s ability to fulfill its contractual obligations is reasonably expected to be impaired.  As of June 30, 2010 and Dec. 31, 2009, NSP-Wisconsin had no collateral posted related to adequate assurance clauses in derivative contracts.

 

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Fair Value Measurements

 

ASC 820 Fair Value Measurements and Disclosures provides a single definition of fair value and requires enhanced disclosures about assets and liabilities measured at fair value. A hierarchal 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 reported 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 reported 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 with inputs requiring significant management judgment or estimation.

 

Fair value for commodity derivatives is determined based on observable prices for identical or similar forward contracts, or internally prepared option valuation models using observable forward curves and volatilities.  NSP-Wisconsin continuously monitors the creditworthiness of the counterparties to its commodity derivative contracts 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-Wisconsin’s own credit risk when determining the fair value of commodity derivative liabilities, the impact of considering credit risk was immaterial to the fair value of commodity derivative assets and liabilities presented in the consolidated balance sheets.

 

The following tables present, for each of these hierarchy levels, NSP-Wisconsin’s assets and liabilities that are measured at fair value on a recurring basis:

 

 

 

June 30, 2010

 

 

 

Fair Value

 

Fair Value

 

Counterparty

 

 

 

(Thousands of Dollars)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Netting (b)

 

Total

 

Current derivative assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas commodity (a)

 

$

 

$

16

 

$

 

$

16

 

$

 

$

16

 

Current derivative liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas commodity

 

$

 

$

1,264

 

$

 

$

1,264

 

$

 

$

1,264

 

 

 

 

Dec. 31, 2009

 

 

 

Fair Value

 

Fair Value

 

Counterparty

 

 

 

(Thousands of Dollars)

 

Level 1

 

Level 2

 

Level 3

 

Total

 

Netting (b)

 

Total

 

Current derivative assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas commodity (a)

 

$

 

$

608

 

$

 

$

608

 

$

5

 

$

613

 

Current derivative liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Natural gas commodity

 

 

15

 

 

15

 

5

 

20

 

 


(a)

Amounts included in prepayments and other in the consolidated balance sheets.

(b)

ASC 815 Derivatives and Hedging permits the netting of receivables and payables for derivatives and related collateral amounts when a legally enforceable master netting agreement exists between NSP-Wisconsin and a counterparty.  A master netting agreement is an agreement between two parties who have multiple contracts with each other that provides for the net settlement of all contracts in the event of default on or termination of any one contract.

 

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9.        Financial Instruments

 

The estimated fair values of NSP-Wisconsin’s recorded financial instruments are as follows:

 

 

 

June 30, 2010

 

Dec. 31, 2009

 

 

 

Carrying

 

 

 

Carrying

 

 

 

(Thousands of Dollars)

 

Amount

 

Fair Value

 

Amount

 

Fair Value

 

Other investments

 

$

116

 

$

116

 

$

134

 

$

134

 

Long-term debt, including current portion

 

369,362

 

437,255

 

369,343

 

394,476

 

 

The fair value of cash and cash equivalents, notes and accounts receivable and notes and accounts payable are not materially different from their carrying amounts.  The fair value of NSP-Wisconsin’s long-term debt is estimated based on the quoted market prices for the same or similar issues or the current rates for debt of the same remaining maturities and credit quality.

 

The fair value estimates presented are based on information available to management as of June 30, 2010 and Dec. 31, 2009.  These fair value estimates have not been comprehensively revalued for purposes of these consolidated financial statements since that date and current estimates of fair values may differ significantly.

 

Guarantees — NSP-Wisconsin provides a guarantee for payment or performance under a specified agreement.  As a result, NSP-Wisconsin’s exposure under the guarantee is based upon the net liability under the specified agreement.  The guarantee issued by NSP-Wisconsin limits the exposure of NSP-Wisconsin to a maximum amount stated in the guarantee.  The guarantee requires no liability to be recorded, contains no recourse provisions and requires no collateral.

 

The following table presents guarantees issued and outstanding for NSP-Wisconsin:

 

(Millions of Dollars)

 

June 30, 2010

 

Dec. 31, 2009

 

Guarantees issued and outstanding

 

$

1.0

 

$

1.0

 

Known exposure under these guarantees

 

0.4

 

0.5

 

 

Letters of Credit — NSP-Wisconsin may use letters of credit, generally with terms of one year, to provide financial guarantees for certain operating obligations.  At June 30, 2010 and Dec. 31, 2009, there were no letters of credit outstanding.

 

10.      Other Income, Net

 

Other income (expense), net, consisted of the following:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(Thousands of Dollars)

 

2010

 

2009

 

2010

 

2009

 

Interest income

 

$

49

 

$

257

 

$

781

 

$

531

 

Other nonoperating income

 

62

 

13

 

76

 

45

 

Insurance policy expenses

 

(25

)

(180

)

(108

)

(237

)

Other income, net

 

$

86

 

$

90

 

$

749

 

$

339

 

 

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11.      Segment Information

 

NSP-Wisconsin has two reportable segments, regulated electric utility and regulated natural gas utility.  All other revenues primarily include investments in rental housing projects that qualify for low-income housing tax credits.

 

 

 

Regulated

 

Regulated

 

All

 

Reconciling

 

Consolidated

 

(Thousands of Dollars)

 

Electric

 

Natural Gas

 

Other

 

Eliminations

 

Total

 

Three Months Ended June 30, 2010

 

 

 

 

 

 

 

 

 

 

 

Operating revenues from external customers

 

$

164,082

 

$

15,281

 

$

234

 

$

 

$

179,597

 

Intersegment revenues

 

94

 

418

 

 

(512

)

 

Total revenues

 

$

164,176

 

$

15,699

 

$

234

 

$

(512

)

$

179,597

 

Net income (loss)

 

$

3,300

 

$

(759

)

$

138

 

$

 

$

2,679

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2009

 

 

 

 

 

 

 

 

 

 

 

Operating revenues from external customers

 

$

153,059

 

$

17,907

 

$

220

 

$

 

$

171,186

 

Intersegment revenues

 

46

 

206

 

 

(252

)

 

Total revenues

 

$

153,105

 

$

18,113

 

$

220

 

$

(252

)

$

171,186

 

Net income (loss)

 

$

3,804

 

$

(495

)

$

167

 

$

 

$

3,476

 

 

 

 

Regulated

 

Regulated

 

All

 

Reconciling

 

Consolidated

 

(Thousands of Dollars)

 

Electric

 

Natural Gas

 

Other

 

Eliminations

 

Total

 

Six Months Ended June 30, 2010

 

 

 

 

 

 

 

 

 

 

 

Operating revenues from external customers

 

$

337,144

 

$

66,762

 

$

460

 

$

 

$

404,366

 

Intersegment revenues

 

181

 

688

 

 

(869

)

 

Total revenues

 

$

337,325

 

$

67,450

 

$

460

 

$

(869

)

$

404,366

 

Net income

 

$

12,986

 

$

3,224

 

$

13

 

$

 

$

16,223

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2009

 

 

 

 

 

 

 

 

 

 

 

Operating revenues from external customers

 

$

337,387

 

$

82,217

 

$

436

 

$

 

$

420,040

 

Intersegment revenues

 

80

 

759

 

 

(839

)

 

Total revenues

 

$

337,467

 

$

82,976

 

$

436

 

$

(839

)

$

420,040

 

Net income

 

$

20,871

 

$

4,036

 

$

290

 

$

 

$

25,197

 

 

12.      Comprehensive Income

 

The components of total comprehensive income are shown below:

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

(Thousands of Dollars)

 

2010

 

2009

 

2010

 

2009

 

Net income

 

$

2,679

 

$

3,476

 

$

16,223

 

$

25,197

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

After-tax net realized losses on derivative transactions reclassified into earnings

 

19

 

19

 

38

 

38

 

Comprehensive income

 

$

2,698

 

$

3,495

 

$

16,261

 

$

25,235

 

 

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13.      Benefit Plans and Other Postretirement Benefits

 

Pension and other postretirement benefit disclosures below generally represent Xcel Energy consolidated information unless specifically identified as being attributable to NSP-Wisconsin.

 

Components of Net Periodic Benefit Cost

 

 

 

Three Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

Postretirement Health

 

(Thousands of Dollars)

 

Pension Benefits

 

Care Benefits

 

Xcel Energy Inc.

 

 

 

 

 

 

 

 

 

Service cost

 

$

18,956

 

$

16,744

 

$

965

 

$

1,057

 

Interest cost

 

41,853

 

43,046

 

10,861

 

13,050

 

Expected return on plan assets

 

(58,035

)

(64,909

)

(7,131

)

(5,993

)

Amortization of transition obligation

 

 

 

3,611

 

3,726

 

Amortization of prior service cost (credit)

 

5,164

 

6,154

 

(1,233

)

(711

)

Amortization of net loss

 

13,134

 

3,299

 

3,113

 

4,779

 

Net periodic benefit cost

 

21,072

 

4,334

 

10,186

 

15,908

 

Costs not recognized and additional cost recognized due to the effects of regulation

 

(6,314

)

(959

)

973

 

973

 

Net benefit cost recognized for financial reporting

 

$

14,758

 

$

3,375

 

$

11,159

 

$

16,881

 

 

 

 

 

 

 

 

 

 

 

NSP-Wisconsin

 

 

 

 

 

 

 

 

 

Net benefit cost recognized for financial reporting

 

$

1,358

 

$

150

 

$

421

 

$

483

 

 

 

 

Six Months Ended June 30,

 

 

 

2010

 

2009

 

2010

 

2009

 

 

 

 

 

 

 

Postretirement Health

 

(Thousands of Dollars)

 

Pension Benefits

 

Care Benefits

 

Xcel Energy Inc.

 

 

 

 

 

 

 

 

 

Service cost

 

$

36,574

 

$

32,730

 

$

2,003

 

$

2,333

 

Interest cost

 

82,505

 

84,895

 

21,390

 

25,206

 

Expected return on plan assets

 

(116,159

)

(128,269

)

(14,265

)

(11,388

)

Amortization of transition obligation

 

 

 

7,222

 

7,222

 

Amortization of prior service cost (credit)

 

10,328

 

12,309

 

(2,466

)

(1,363

)

Amortization of net loss

 

24,158

 

6,228

 

5,822

 

9,665

 

Net periodic benefit cost

 

37,406

 

7,893

 

19,706

 

31,675

 

Costs not recognized and additional cost recognized due to the effects of regulation

 

(13,640

)

(1,446

)

1,946

 

1,946

 

Net benefit cost recognized for financial reporting

 

$

23,766

 

$

6,447

 

$

21,652

 

$

33,621

 

 

 

 

 

 

 

 

 

 

 

NSP-Wisconsin

 

 

 

 

 

 

 

 

 

Net benefit cost recognized for financial reporting

 

$

2,432

 

$

280

 

$

823

 

$

1,063

 

 

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Item 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Discussion of financial condition and liquidity for NSP-Wisconsin is omitted per conditions set forth in general instructions H (1) (a) and (b) of Form 10-Q for wholly owned subsidiaries. It is replaced with management’s narrative analysis of the results of operations set forth in general instructions H (2) (a) of Form 10-Q for wholly owned subsidiaries (reduced disclosure format).

 

Forward-Looking Statements

 

The following discussion and analysis by management focuses on those factors that had a material effect on NSP-Wisconsin’s financial condition, results of operations, and cash flows during the periods presented, or are expected to have a material impact in the future. It should be read in conjunction with the accompanying unaudited consolidated financial statements and the related notes to the consolidated financial statements.  Due to the seasonality of NSP-Wisconsin’s electric and natural gas sales, such interim results are not necessarily an appropriate base from which to project annual results. Except for the historical statements contained in this report, the matters discussed in the following discussion and analysis are forward-looking statements that are subject to certain risks, uncertainties and assumptions.  Such forward-looking statements are intended to be identified in this document by the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should” and similar expressions. Actual results may vary materially. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them to reflect changes that occur after that date.  Factors that could cause actual results to differ materially include, but are not limited to: general economic conditions, including the availability of credit and its impact on capital expenditures and the ability of Xcel Energy and its subsidiaries to obtain financing on favorable terms; business conditions in the energy industry; actions of credit rating agencies; competitive factors, including the extent and timing of the entry of additional competition in the markets served by NSP-Wisconsin; unusual weather; effects of geopolitical events, including war and acts of terrorism; state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rates or have an impact on asset operation or ownership or impose environmental compliance conditions; structures that affect the speed and degree to which competition enters the electric and natural gas markets; costs and other effects of legal and administrative proceedings, settlements, investigations and claims; environmental laws and regulations; actions of accounting regulatory bodies; the items described under Factors Affecting Results of Continuing Operations; and the other risk factors listed from time to time by NSP-Wisconsin in reports filed with the SEC, including “Risk Factors” in Item 1A of NSP-Wisconsin’s Form 10-K for the year ended Dec. 31, 2009, and Item 1A and Exhibit 99.01 to this Quarterly Report on Form 10-Q for the quarter ended June 30, 2010.

 

Market Risks

 

NSP-Wisconsin is exposed to market risks, including changes in commodity prices and interest rates, as disclosed in Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in its Annual Report on Form 10-K for the year ended Dec. 31, 2009.  Commodity price and interest rate risks for NSP-Wisconsin are mitigated in most jurisdictions due to cost-based rate regulation.

 

Distress in the financial markets may also impact the fair value of the debt and equity securities in pension and postretirement health care plan trusts, as well as NSP-Wisconsin’s ability to earn a return on short-term investments of excess cash.  As of June 30, 2010, there have been no material changes to market risks from that set forth in NSP-Wisconsin’s Annual Report on Form 10-K for the year ended Dec. 31, 2009.

 

Results of Operations

 

NSP-Wisconsin’s net income was $16.2 million for the first six months of 2010, compared with $25.2 million for the first six months of 2009.  The year-to-date decrease is due to decreased fuel recovery and higher operating and maintenance (O&M), partially offset by new electric rates, which were effective in January 2010.

 

Electric Revenues and Margin

 

Electric production expenses tend to vary with the quantity of electricity sold and changes in the unit costs of fuel and purchased power.  The electric fuel and purchased power cost recovery mechanism of the Wisconsin jurisdiction may not allow for complete recovery of all expenses and, therefore, changes in fuel or purchased power costs can impact earnings.

 

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Electric — The following tables detail the change in electric revenues and margin:

 

 

 

Six Months Ended June 30,

 

(Millions of Dollars)

 

2010

 

2009

 

Electric revenues

 

$

337

 

$

337

 

Electric fuel and purchased power

 

(197

)

(191

)

Electric margin

 

$

140

 

$

146

 

 

The following summarizes the components of the changes in electric revenues and electric margin for the six months ended June 30, 2010:

 

Electric Revenues

 

(Millions of Dollars)

 

2010 vs. 2009

 

Base rate changes, net of provision for refund

 

$

12

 

Interchange agreement billing with NSP-Minnesota

 

1

 

Fuel and purchased power cost recovery

 

(3

)

Retail sales decline (excluding weather impact)

 

(1

)

Estimated impact of weather

 

(1

)

Other, net

 

(8

)

Total change in electric revenue

 

$

 

 

Electric Margin

 

(Millions of Dollars)

 

2010 vs. 2009

 

Base rate changes, net of provision for refund

 

$

12

 

Fuel and purchased power cost recovery

 

(7

)

Interchange agreement billing with NSP-Minnesota

 

(2

)

Estimated impact of weather

 

(1

)

Retail sales decline (excluding weather impact)

 

(1

)

Other, net

 

(7

)

Total decrease in electric margin

 

$

(6

)

 

Natural Gas Revenues and Margin

 

The cost of natural gas tends to vary with changing sales requirements and unit cost of natural gas purchases.  However, due to purchased natural gas cost recovery mechanisms for retail customers, fluctuations in the cost of natural gas have little effect on natural gas margin.

 

Natural Gas — The following table details the change in natural gas revenues and margin:

 

 

 

Six Months Ended June 30,

 

(Millions of Dollars)

 

2010

 

2009

 

Natural gas revenues

 

$

67

 

$

82

 

Cost of natural gas sold and transported

 

(45

)

(59

)

Natural gas margin

 

$

22

 

$

23

 

 

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Table of Contents

 

The following summarizes the components of the changes in natural gas revenues and margin for the six months ended June 30, 2010:

 

Natural Gas Revenues

 

(Millions of Dollars)

 

2010 vs. 2009

 

Purchased natural gas adjustment clause recovery

 

$

(15

)

Estimated impact of weather

 

(2

)

Other, net

 

2

 

Total decrease in natural gas revenues

 

$

(15

)

 

Natural Gas Margin

 

(Millions of Dollars)

 

2010 vs. 2009

 

Estimated impact of weather

 

$

(2

)

Other, net

 

1

 

Total decrease in natural gas margin

 

$

(1

)

 

Non-Fuel Operating Expense and Other Items

 

Other Operating and Maintenance Expenses — Other operating and maintenance expenses for the first six months of 2010 increased $5.1 million, or 7.2 percent, compared with 2009.  The higher insurance costs in 2010 are the result of a one-time cost reimbursement in 2009 related to a legal settlement and higher premiums.  The following summarizes the components of the changes in other operating and maintenance expense for the six months ended June 30, 2009:

 

(Millions of Dollars)

 

2010 vs. 2009

 

Higher Interchange Agreement billing costs with NSP-Minnesota

 

$

5

 

Higher insurance costs

 

2

 

Other, net

 

(2

)

Total increase in other operating and maintenance expenses

 

$

5

 

 

Income Taxes — Income tax expense decreased by $3.7 million for the first six months of 2010, compared with the first six months of 2009.  The decrease in income tax expense was primarily due to a decrease in pretax income, partially offset by a write-off of tax benefits previously recorded for Medicare Part D subsidies.  The effective tax rate was 41.6 percent for the first six months of 2010, compared with 37.8 percent for the same period in 2009.  The higher effective tax rate for the first six months of 2010 was primarily due to the write-off of tax benefit for Medicare Part D subsidies in 2010.  Without this write-off, the effective tax rate for the first six months of 2010 would have been 39.1 percent.

 

Factors Affecting Results of Continuing Operations

 

Public Utility Regulation

 

Bay Front Biomass Gasification — In December 2009, the PSCW granted NSP-Wisconsin a certificate of authority to install biomass gasification technology at the Bay Front Power Plant in Ashland, Wis.  The project will convert a third boiler to biomass gasification technology allowing the plant to use up to 100 percent biomass in all three boilers.  The initial estimate required for the additional biomass receiving and handling facilities at the plant, an external gasifier, minor modifications to the plant’s remaining coal-fired boiler and an enhanced air quality control system was approximately $58 million.  The project is expected to improve the environmental performance of the plant and contribute towards state renewable energy standard in the region.

 

NSP-Minnesota also made filings in North Dakota and Minnesota requesting future rate recovery of the portion of the project costs that will be billed to NSP-Minnesota through the Interchange Agreement, which is a FERC-approved tariff that allows NSP-Minnesota and NSP-Wisconsin to share all NSP System costs for the electric production and transmission systems of NSP-Minnesota and NSP-Wisconsin, which are managed as an integrated system and are jointly referred to as the NSP System.

 

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Table of Contents

 

In the second quarter of 2010, NSP-Wisconsin completed more detailed analyses of the project to determine a preferred gasification technology, refine the construction schedule and more precisely estimate the project cost.  As a result of these analyses, the estimated project cost increased to nearly $79.5 million, well above the 10 percent cost tolerance band allowed by the PSCW in the certificate of authority final order.  NSP-Wisconsin has notified the PSCW of the increase in estimated costs and requested a three-to-six month time period to review other options that may be viable for the third boiler at Bay Front.  The PSCW granted NSP-Wisconsin’s request.  NSP-Minnesota has withdrawn the rate recovery filings previously submitted to the MPUC and the NDPSC, but may submit revised filings once the regulatory process in Wisconsin is completed.

 

Wisconsin Fuel Cost Recovery Legislation — In May 2010, Wisconsin adopted a law to modify the existing statutes and rules governing electric fuel cost recovery in utility rates.  The prohibition on an automatic adjustment clause remains, but the provision requiring an emergency or extraordinary increase in the cost of fuel before the PSCW can approve a fuel-related rate increase was repealed.  Under the revised statutes, an electric utility will submit a forward-looking annual fuel cost plan for approval by the PSCW.  Once a utility has an approved fuel cost plan, it can then defer any under-collection or over-collection of fuel costs for future rate recovery or refund, providing that the under/over-collection exceeds a symmetrical annual tolerance band established by the PSCW.  Approval of a fuel cost plan and any rate adjustment for recovery or refund of deferred costs would be determined by the PSCW after opportunity for a hearing.  The legislation requires the PSCW to promulgate rules to implement the new statutes.  The PSCW has indicated its intention to complete the rulemaking in time to allow the new rules to go into effect for calendar year 2011.

 

Summary of Recent Federal Regulatory Developments

 

The FERC has jurisdiction over rates for electric transmission service in interstate commerce and electricity sold at wholesale, hydro facility licensing, natural gas transportation, accounting practices and certain other activities of NSP-Wisconsin, including enforcement of North American Electric Reliability Corporation (NERC) mandatory electric reliability standards. State and local agencies have jurisdiction over many of NSP-Wisconsin’s activities, including regulation of retail rates and environmental matters. See additional discussion in the summary of recent federal regulatory developments and public utility regulation sections of the NSP-Wisconsin Annual Report on Form 10-K for the year ended Dec. 31, 2009.  In addition to the matters discussed below, see Note 5 to the consolidated financial statements for a discussion of other regulatory matters.

 

Midwest Independent Transmission System Operator, Inc. (MISO) Generation Interconnection Cost Allocation Tariff — In October 2009, the FERC approved a proposal by MISO and its transmission owners, including NSP-Minnesota and NSP-Wisconsin, to change the cost allocation procedures in the MISO tariff associated with interconnection of new generation.  The approved tariff required the interconnecting generator to fund 90 or 100 percent of the costs of network upgrades required for interconnection (depending on voltage) on an interim basis until MISO and its stakeholders develop a replacement tariff to be filed with FERC in July 2010.  On July 15, 2010, MISO and certain transmission owners, including NSP-Minnesota and NSP-Wisconsin, filed the required replacement tariff.  The cost allocation provisions of the tariff provide for (1) regional allocation of costs associated with projects identified through the MISO transmission planning process as Multi-Value Projects (MVPs), which are projects that meet certain key planning objectives and (2) the allocation to generators of most costs for other network upgrades required to interconnect the generator to the MVPs or the existing transmission system.  MISO proposed the tariff changes be effective July 16, 2010.  Comments on the July 2010 MISO tariff filing are due at FERC by Sept. 10, 2010, and the filing is pending FERC action.

 

MISO vs. PJM Interconnection, L.L.C. (PJM) Complaint Proceedings — In March 2010, MISO filed two complaints against PJM at the FERC alleging that PJM violated generation redispatch requirements under the Joint Operating Agreement between the two RTOs, and alleging that incorrect modeling of certain generators by PJM resulted in underpayments by PJM of up to $135 million to generators in MISO (including the NSP System) for redispatch provided from 2002 to 2009.  MISO asked the FERC to direct PJM to pay the underpaid amount, plus interest.  In April 2010, PJM filed a complaint against MISO, alleging that MISO dispatched generation in the MISO region improperly under the RTO Joint Operating Agreement, and requested that the FERC order MISO to pay PJM up to $25 million.  Xcel Energy intervened in the complaint proceedings in support of MISO.  Informal settlement discussions have failed to resolve the issues, and the FERC issued an order setting the disputes for hearing and formal settlement discussions.  The first settlement conference is scheduled for August 2010.  The outcome of the complaint proceedings is uncertain.  If MISO were to prevail, NSP-Wisconsin could receive a portion of the payments to MISO from PJM.  If PJM were to prevail, NSP-Wisconsin could be required to reimburse MISO for a portion of the payments to PJM.

 

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Table of Contents

 

Electric Reliability Standards Compliance

 

Compliance Audits

The electric production and transmission system of NSP-Minnesota is managed as an integrated system with that of NSP-Wisconsin, jointly referred to as the NSP System.  The NSP System was subject to an electric reliability standards compliance audit in the first quarter of 2008.  The Midwest Reliability Organization (MRO) found the NSP System in compliance with all NERC standards audited.  In 2008, the NSP System filed self-reports with the MRO relating to failure to complete certain generation station battery tests, relay maintenance intervals and certain critical infrastructure protection (CIP) standards.  In 2009, the NSP System reached agreement with the MRO that would resolve all open audit findings and self-reports by payment of a non-material penalty.  In April 2010, the NSP System executed a definitive settlement agreement.  The settlement agreement is pending approval at the NERC and will also need to be approved by the FERC.

 

In March 2010, the MRO conducted a compliance spot check to evaluate compliance with the NERC CIP standards, which were effective July 1, 2008.  The draft non-public report issued by the MRO found that the Xcel Energy utility subsidiaries may not be in compliance with several of the CIP standards.  Xcel Energy provided comments disagreeing with many of the conclusions of the draft report and is awaiting issuance of the final spot check audit report.  The CIP spot check report findings related to the NSP System will then proceed to the MRO enforcement process.  The extent the MRO or NERC may seek to impose penalties for violations of CIP standards is unknown at this time.

 

NERC Compliance Investigations

As a result of a series of transmission line outages, on Sept. 18, 2007, portions of the NSP System and transmission systems west and north of the NSP System briefly islanded from the rest of the Eastern Interconnection.  In addition, service to approximately 790 MW of load was temporarily interrupted, primarily in Saskatchewan, Canada.  The initial transmission line outages occurred on the NSP System.  In March 2008, NSP-Minnesota received notice that the MRO was commencing a compliance investigation of the September 2007 event.  Because the event affected more than one region, the NERC took over the investigation.  In January 2010, the NERC issued a preliminary report alleging the NSP System violated certain NERC reliability standards.  The report represents the preliminary conclusions of the NERC and is subject to additional procedures at NERC, and ultimately FERC review.  Xcel Energy disagrees with the many aspects of the preliminary report and filed its response with NERC in February 2010.  The final outcome of the NERC compliance investigation, and whether and to what extent penalties for violations may be assessed, is unknown at this time.

 

Item 4. CONTROLS AND PROCEDURES

 

Disclosure Controls and Procedures

 

NSP-Wisconsin maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. In addition, the disclosure controls and procedures ensure that information required to be disclosed is accumulated and communicated to management, including the chief executive officer (CEO) and chief financial officer (CFO), allowing timely decisions regarding required disclosure. As of June 30, 2010, based on an evaluation carried out under the supervision and with the participation of NSP-Wisconsin’s management, including the CEO and CFO, of the effectiveness of its disclosure controls and the procedures, the CEO and CFO have concluded that NSP-Wisconsin’s disclosure controls and procedures were effective.

 

Internal Control Over Financial Reporting

 

No change in NSP-Wisconsin’s internal control over financial reporting has occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, NSP-Wisconsin’s internal control over financial reporting.

 

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Table of Contents

 

Part II. OTHER INFORMATION

 

Item 1. LEGAL PROCEEDINGS

 

In the normal course of business, various lawsuits and claims have arisen against NSP-Wisconsin.  After consultation with legal counsel, NSP-Wisconsin has recorded an estimate of the probable cost of settlement or other disposition for such matters.

 

Additional Information

 

See Notes 5 and 6 of the consolidated financial statements in this Quarterly Report on Form 10-Q for further discussion of legal proceedings, including Regulatory Matters and Commitments and Contingent Liabilities, which are hereby incorporated by reference. Reference also is made to Item 3 and Notes 12 and 13 of NSP-Wisconsin’s consolidated financial statements in its Annual Report on Form 10-K for the year ended Dec. 31, 2009 for a description of certain legal proceedings presently pending.

 

Item 1A — RISK FACTORS

 

Except to the extent updated or described below, NSP-Wisconsin’s risk factors are documented in Item 1A of Part I of its Annual Report on Form 10-K for the year ended Dec. 31, 2009, which is incorporated herein by reference.

 

We may be subject to legislative and regulatory responses to climate change, with which compliance could be difficult and costly.

 

Legislative and regulatory responses related to climate change and new interpretations of existing laws through climate change litigation create financial risk. Increased public awareness and concern may result in more regional and/or federal requirements to reduce or mitigate the effects of GHGs. Numerous states have announced or adopted programs to stabilize and reduce GHG, and federal legislation has been introduced in both houses of Congress. Our electric generating facilities are likely to be subject to regulation under climate change laws introduced at either the state or federal level within the next few years.

 

The EPA has taken steps to regulate GHGs under the CAA. On Dec. 7, 2009, the EPA issued a finding that GHG emissions endanger public health and welfare, and that motor vehicle emissions contribute to the GHGs in the atmosphere. This endangerment finding creates a mandatory duty for the EPA to regulate GHGs from light duty motor vehicles. The EPA finalized GHG efficiency standards for light duty vehicles in spring 2010 and has promulgated  permitting requirements for GHGs for large new and modified stationary sources, such as power plants.  These regulations will become applicable in 2011.  We are also currently a party to climate change lawsuits and may be subject to additional climate change lawsuits, including lawsuits similar to those described in Note 6, Commitments and Contingent Liabilities, in the notes to the consolidated financial statements. While we believe such lawsuits are without merit, an adverse outcome in any of these cases could require substantial capital expenditures that cannot be determined at this time and could possibly require payment of substantial penalties or damages. Defense costs associated with such litigation can also be significant. Such payments or expenditures could affect results of operations, cash flows, and financial condition if such costs are not recovered through regulated rates.

 

Many of the federal and state climate change legislative proposals, such as the American Clean Energy and Security Act and the proposed Kerry-Lieberman legislation, use a cap and trade policy structure, in which GHG emissions from a broad cross-section of the economy would be subject to an overall cap. Under the proposals, the cap becomes more stringent with the passage of time. The proposals establish mechanisms for GHG sources, such as power plants, to obtain “allowances” or permits to emit GHGs during the course of a year. The sources may use the allowances to cover their own emissions or sell them to other sources that do not hold enough emission allowances for their own operations. Proponents of the cap and trade policy believe it will result in the most cost effective, flexible emission reductions. There are many uncertainties, however, regarding when and in what form climate change legislation will be enacted. The impact of legislation and regulations, including a cap and trade structure, on us and our customers will depend on a number of factors, including whether GHG sources in multiple sectors of the economy are regulated, the overall GHG emissions cap level, the degree to which GHG offsets are allowed, the allocation of emission allowances to specific sources and the indirect impact of carbon regulation on natural gas and coal prices. While we do not have operations outside of the United States, any international treaties or accords could have an impact to the extent they lead to future federal or state regulations. Another important factor is our ability to recover the costs incurred to comply with any regulatory requirements that are ultimately imposed. We may not recover all costs related to complying with regulatory requirements imposed on us. If our regulators do not allow us to recover all or a part of the cost of capital investment or the O&M costs incurred to comply with the mandates, it could have a material adverse effect on our results of operations.

 

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Item 6. EXHIBITS

 


*Indicates incorporation by reference

 

3.01*

Amended and Restated Articles of Incorporation (Exhibit 3.01 to Form S-4 (file no. 333-112033) Jan. 21, 2004).

3.02*

By-Laws as amended and June 3, 2008 (Exhibit 3.02 to Form 10-Q for the quarter ended June 30, 2008 (file no. 001-03140) Aug. 4, 2008).

10.01*

Xcel Energy Executive Annual Incentive Award Plan (as amended and restated effective Feb. 17, 2010) (incorporated by reference to Appendix A to Schedule 14A, Definitive Proxy Statement to Xcel Energy Inc. (file no. 001-03034) dated April 6, 2010).

10.02*

Xcel Energy 2005 Long-Term Incentive Plan (as amended and restated effective Feb. 17, 2010) (incorporated by reference to Appendix B to Schedule 14A, Definitive Proxy Statement to Xcel Energy Inc. (file no. 001-03034) dated April 6, 2010).

31.01

Principal Executive Officer’s and Principal Financial Officer’s certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.01

Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.01

Statement pursuant to Private Securities Litigation Reform Act of 1995.

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on July 30, 2010.

 

Northern States Power Company (a Wisconsin corporation)

(Registrant)

 

 

 

/s/ TERESA S. MADDEN

 

Teresa S. Madden

 

Vice President and Controller

 

 

 

/s/ DAVID M. SPARBY

 

David M. Sparby

 

Vice President and Chief Financial Officer

 

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