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EX-99.01 - EXHIBIT 99.01 - NORTHERN STATES POWER COnspmex9901q12017.htm
EX-32.01 - EXHIBIT 32.01 - NORTHERN STATES POWER COnspmex3201q12017.htm
EX-31.02 - EXHIBIT 31.02 - NORTHERN STATES POWER COnspmex3102q12017.htm
EX-31.01 - EXHIBIT 31.01 - NORTHERN STATES POWER COnspmex3101q12017.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-31387
Northern States Power Company
(Exact name of registrant as specified in its charter)
Minnesota
 
41-1967505
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
414 Nicollet Mall
 
 
Minneapolis, Minnesota
 
55401
(Address of principal executive offices)
 
(Zip Code)
(612) 330-5500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No

Indicate by check mark whether the registrant has submitted electronically 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). x Yes ¨ 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 ¨
Accelerated filer ¨
Non-accelerated filer x
Smaller reporting company ¨
(Do not check if smaller reporting company)
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at April 28, 2017
Common Stock, $0.01 par value
 
1,000,000 shares
Northern States Power Company (a Minnesota corporation) meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H (2) to such Form 10-Q.
 
 
 
 
 



TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
 
 
 
 
Item l —

Item 2 —

Item 4 —

 
 
 
PART II —
OTHER INFORMATION
 
 
 
 
Item 1 —

Item 1A —

Item 6 —

 
 
 

 
 
Certifications Pursuant to Section 302
1

Certifications Pursuant to Section 906
1

Statement Pursuant to Private Litigation
1


This Form 10-Q is filed by Northern States Power Company, a Minnesota corporation (NSP-Minnesota). NSP-Minnesota is a wholly owned subsidiary of Xcel Energy Inc. Xcel Energy Inc. wholly owns the following subsidiaries: NSP-Minnesota; Northern States Power Company, a Wisconsin corporation (NSP-Wisconsin); Public Service Company of Colorado (PSCo); and Southwestern Public Service Company (SPS). NSP-Minnesota, NSP-Wisconsin, PSCo and SPS are also referred to collectively as utility subsidiaries. The electric production and transmission system of NSP-Minnesota and NSP-Wisconsin, which is operated on an integrated basis and is managed by NSP-Minnesota, is referred to collectively as the NSP System. Additional information on Xcel Energy Inc. and its subsidiaries (collectively, Xcel Energy) is available on various filings with the Securities and Exchange Commission (SEC).




PART IFINANCIAL INFORMATION
Item 1FINANCIAL STATEMENTS

NSP-MINNESOTA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(amounts in thousands)
 
Three Months Ended March 31
 
2017
 
2016
Operating revenues
 
 
 
Electric, non-affiliates
$
955,341

 
$
908,747

Electric, affiliates
123,689

 
124,896

Natural gas
221,183

 
194,130

Other
6,927

 
6,860

Total operating revenues
1,307,140

 
1,234,633

 
 
 
 
Operating expenses
 
 
 
Electric fuel and purchased power
396,121

 
366,166

Cost of natural gas sold and transported
142,745

 
120,223

Cost of sales — other
4,178

 
4,432

Operating and maintenance expenses
312,024

 
320,496

Conservation program expenses
32,499

 
23,269

Depreciation and amortization
172,179

 
145,797

Taxes (other than income taxes)
68,324

 
70,352

Total operating expenses
1,128,070

 
1,050,735

 
 
 
 
Operating income
179,070

 
183,898

 
 
 
 
Other income, net
1,864

 
2,860

Allowance for funds used during construction — equity
6,283

 
5,648

 
 
 
 
Interest charges and financing costs
 
 
 
Interest charges — includes other financing costs of
 $1,786, and $1,742, respectively
57,264

 
54,015

Allowance for funds used during construction — debt
(3,228
)
 
(2,706
)
Total interest charges and financing costs
54,036

 
51,309

 
 
 
 
Income before income taxes
133,181

 
141,097

Income taxes
39,015

 
46,468

Net income
$
94,166

 
$
94,629


See Notes to Consolidated Financial Statements

3


NSP-MINNESOTA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(amounts in thousands)
 
Three Months Ended March 31
 
2017
 
2016
Net income
$
94,166

 
$
94,629

 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
Pension and retiree medical benefits:
 
 
 
Amortization of losses included in net periodic benefit cost,
net of tax of $25 and $15 respectively
35

 
19

 
 
 
 
Derivative instruments:
 
 
 
Net fair value decrease, net of tax of $0 and $(1), respectively

 
(1
)
Reclassification of losses to net income, net of tax of $139 and $154, respectively
203

 
223

 
203

 
222

 
 
 
 
Other comprehensive income
238

 
241

Comprehensive income
$
94,404

 
$
94,870


See Notes to Consolidated Financial Statements

4


NSP-MINNESOTA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
 
Three Months Ended March 31,
 
2017
 
2016
Operating activities
 
 
 
Net income
$
94,166

 
$
94,629

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
173,726

 
147,310

Nuclear fuel amortization
30,852

 
25,750

Deferred income taxes
52,411

 
47,018

Amortization of investment tax credits
(414
)
 
(420
)
Allowance for equity funds used during construction
(6,283
)
 
(5,648
)
Net realized and unrealized hedging and derivative transactions
1,744

 
1,890

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(25,483
)
 
(45,382
)
Accrued unbilled revenues
69,893

 
40,322

Inventories
32,678

 
35,378

Other current assets
(6,397
)
 
(14,146
)
Accounts payable
(22,007
)
 
(4,057
)
Net regulatory assets and liabilities
1,513

 
51,517

Other current liabilities
(16,016
)
 
(12,118
)
Pension and other employee benefit obligations
(58,004
)
 
(48,074
)
Change in other noncurrent assets
849

 
(43
)
Change in other noncurrent liabilities
(11,593
)
 
(1,112
)
Net cash provided by operating activities
311,635

 
312,814

 
 
 
 
Investing activities
 
 
 
Utility capital/construction expenditures
(277,125
)
 
(259,570
)
Allowance for equity funds used during construction
6,283

 
5,648

Purchases investment securities
(172,751
)
 
(109,373
)
Proceeds from the sale of investment securities
167,658

 
104,280

Investments in utility money pool arrangement
(87,000
)
 

Repayments from utility money pool arrangement
87,000

 

Other, net
(4,565
)
 
(2,084
)
Net cash used in investing activities
(280,500
)
 
(261,099
)
 
 
 
 
Financing activities
 
 
 
Repayments of short-term borrowings, net
(46,000
)
 
(150,000
)
Borrowings under utility money pool arrangement
25,000

 
310,000

Repayments under utility money pool arrangement
(25,000
)
 
(217,000
)
Repayments of long-term debt
(10
)
 

Capital contributions from parent
89,487

 
89,874

Dividends paid to parent
(89,428
)
 
(73,498
)
Net cash used in financing activities
(45,951
)
 
(40,624
)
 
 
 
 
Net change in cash and cash equivalents
(14,816
)
 
11,091

Cash and cash equivalents at beginning of period
47,595

 
42,605

Cash and cash equivalents at end of period
$
32,779

 
$
53,696

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest (net of amounts capitalized)
$
(68,511
)
 
$
(69,643
)
Cash received (paid) for income taxes, net
10,080

 
(7,558
)
Supplemental disclosure of non-cash investing transactions:
 
 
 
Property, plant and equipment additions in accounts payable
$
48,551

 
$
56,605


See Notes to Consolidated Financial Statements

5


NSP-MINNESOTA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands, except share and per share data)
 
 
March 31, 2017
 
Dec. 31, 2016
Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
32,779

 
$
47,595

Accounts receivable, net
 
328,368

 
329,481

Accounts receivable from affiliates
 
46,955

 
49,355

Accrued unbilled revenues
 
189,697

 
259,590

Inventories
 
312,554

 
345,192

Regulatory assets
 
190,644

 
186,266

Derivative instruments
 
11,117

 
22,028

Prepaid taxes
 
60,915

 
56,083

Prepayments and other
 
43,534

 
41,923

Total current assets
 
1,216,563

 
1,337,513

 
 
 
 
 
Property, plant and equipment, net
 
13,339,095

 
13,300,793

 
 
 
 
 
Other assets
 
 
 
 
Nuclear decommissioning fund and other investments
 
2,001,318

 
1,905,059

Regulatory assets
 
1,194,192

 
1,245,151

Derivative instruments
 
26,041

 
24,678

Other
 
8,237

 
9,086

Total other assets
 
3,229,788

 
3,183,974

Total assets
 
$
17,785,446

 
$
17,822,280

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Current liabilities
 
 
 
 
Current portion of long-term debt
 
$
500,004

 
$
10

Short-term debt
 
39,000

 
85,000

Accounts payable
 
297,098

 
371,589

Accounts payable to affiliates
 
60,706

 
59,216

Regulatory liabilities
 
34,460

 
60,779

Taxes accrued
 
296,092

 
241,100

Accrued interest
 
54,790

 
71,012

Dividends payable to parent
 
85,687

 
89,428

Derivative instruments
 
17,136

 
16,606

Customer deposits
 
100,267

 
110,244

Other
 
103,493

 
150,244

Total current liabilities
 
1,588,733

 
1,255,228

 
 
 
 
 
Deferred credits and other liabilities
 
 
 
 
Deferred income taxes
 
2,859,965

 
2,788,752

Deferred investment tax credits
 
23,762

 
24,175

Regulatory liabilities
 
496,905

 
489,825

Asset retirement obligations
 
2,482,507

 
2,452,567

Derivative instruments
 
114,524

 
116,804

Pension and employee benefit obligations
 
311,435

 
368,922

Other
 
139,106

 
127,283

Total deferred credits and other liabilities
 
6,428,204

 
6,368,328

 
 
 
 
 
Commitments and contingencies
 


 


Capitalization
 
 
 
 
Long-term debt
 
4,344,223

 
4,843,155

Common stock — authorized 5,000,000 shares of $0.01 par value; 1,000,000 shares
outstanding at March 31, 2017 and Dec. 31, 2016, respectively
 
10

 
10

Additional paid in capital
 
3,495,096

 
3,435,096

Retained earnings
 
1,949,725

 
1,941,246

Accumulated other comprehensive loss
 
(20,545
)
 
(20,783
)
Total common stockholder’s equity
 
5,424,286

 
5,355,569

Total liabilities and equity
 
$
17,785,446

 
$
17,822,280

See Notes to Consolidated Financial Statements

6


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

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (GAAP), the financial position of NSP-Minnesota and its subsidiaries as of March 31, 2017 and Dec. 31, 2016; the results of its operations, including the components of net income and comprehensive income, for the three months ended March 31, 2017 and 2016; and its cash flows for the three months ended March 31, 2017 and 2016. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Management has also evaluated the impact of events occurring after March 31, 2017 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, 2016 balance sheet information has been derived from the audited 2016 consolidated financial statements included in the NSP-Minnesota Annual Report on Form 10-K for the year ended Dec. 31, 2016. These notes to the consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP on an annual basis have been condensed or omitted pursuant to such rules and regulations. For further information, refer to the consolidated financial statements and notes thereto, included in the NSP-Minnesota Annual Report on Form 10-K for the year ended Dec. 31, 2016, filed with the SEC on Feb. 24, 2017. Due to the seasonality of NSP-Minnesota’s electric and natural gas sales, interim results are not necessarily an appropriate base from which to project annual results.

1.
Summary of Significant Accounting Policies

The significant accounting policies set forth in Note 1 to the consolidated financial statements in the NSP-Minnesota Annual Report on Form 10-K for the year ended Dec. 31, 2016, appropriately represent, in all material respects, the current status of accounting policies and are incorporated herein by reference.

2.
Accounting Pronouncements

Recently Issued

Revenue Recognition In May 2014, the Financial Accounting Standards Board (FASB) issued Revenue from Contracts with Customers, Topic 606 (Accounting Standards Update (ASU) No. 2014-09), which provides a new framework for the recognition of revenue. NSP-Minnesota expects its adoption will result in increased disclosures regarding revenue, cash flows and obligations related to arrangements with customers, as well as separate presentation of alternative revenue programs. NSP-Minnesota has not yet fully determined the impacts of adoption for several aspects of the standard, including a determination whether and how much an evaluation of the collectability of regulated electric and gas revenues will impact the amounts of revenue recognized upon delivery. NSP-Minnesota currently expects to implement the standard on a modified retrospective basis, which requires application to contracts with customers effective Jan. 1, 2018, with the cumulative impact on contracts not yet completed as of Dec. 31, 2017 recognized as an adjustment to the opening balance of retained earnings.

Classification and Measurement of Financial Instruments — In January 2016, the FASB issued Recognition and Measurement of Financial Assets and Financial Liabilities, Subtopic 825-10 (ASU No. 2016-01), which eliminates the available-for-sale classification for marketable equity securities, and also replaces the cost method of accounting for non-marketable equity securities with a model for recognizing impairments and observable price changes. Under the new standard, other than when the consolidation or equity method of accounting is utilized, changes in the fair value of equity securities are to be recognized in earnings. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2017. NSP-Minnesota expects that as a result of application of accounting principles for rate regulated entities, changes in the fair value of the securities in the nuclear decommissioning fund, currently classified as available-for-sale, will continue to be deferred to a regulatory asset, and that the overall impacts of the Jan. 1, 2018 adoption will not be material.



7


Leases — In February 2016, the FASB issued Leases, Topic 842 (ASU No. 2016-02), which for lessees requires balance sheet recognition of right-of-use assets and lease liabilities for most leases. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2018. NSP-Minnesota has not yet fully determined the impacts of implementation. However, adoption is expected to occur on Jan. 1, 2019 utilizing the practical expedients provided by the standard. As such, agreements entered prior to Jan. 1, 2017 that are currently considered leases are expected to be recognized on the consolidated balance sheet, including contracts for use of office space, equipment and natural gas storage assets, as well as certain purchased power agreements (PPAs) for natural gas-fueled generating facilities. NSP-Minnesota expects that similar agreements entered after Dec. 31, 2016 will generally qualify as leases under the new standard, but has not yet completed its evaluation of certain other contracts, including arrangements for the secondary use of assets, such as land easements.

Presentation of Net Periodic Benefit Cost — In March 2017, the FASB issued Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, Topic 715 (ASU No. 2017-07), which establishes that only the service cost element of pension cost may be presented as a component of operating income in the income statement. Also under the guidance, only the service cost component of pension cost is eligible for capitalization. NSP-Minnesota has not yet fully determined the impacts of adoption of the standard, but expects that as a result of application of accounting principles for rate regulated entities, a similar amount of pension cost, including non-service components, will be recognized consistent with the current ratemaking treatment, and that the impacts of adoption will be limited to changes in classification of non-service costs in the consolidated statement of income. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2017.

3.
Selected Balance Sheet Data
(Thousands of Dollars)
 
March 31, 2017
 
Dec. 31, 2016
Accounts receivable, net
 
 
 
 
Accounts receivable
 
$
348,348

 
$
349,449

Less allowance for bad debts
 
(19,980
)
 
(19,968
)
 
 
$
328,368

 
$
329,481


(Thousands of Dollars)
 
March 31, 2017
 
Dec. 31, 2016
Inventories
 
 
 
 
Materials and supplies
 
$
217,287

 
$
214,234

Fuel
 
85,069

 
97,527

Natural gas
 
10,198

 
33,431

 
 
$
312,554

 
$
345,192

(Thousands of Dollars)
 
March 31, 2017
 
Dec. 31, 2016
Property, plant and equipment, net
 
 
 
 
Electric plant
 
$
17,085,453

 
$
17,059,993

Natural gas plant
 
1,316,661

 
1,311,235

Common and other property
 
702,387

 
710,958

Construction work in progress
 
565,146

 
509,891

Total property, plant and equipment
 
19,669,647

 
19,592,077

Less accumulated depreciation
 
(6,771,090
)
 
(6,682,418
)
Nuclear fuel
 
2,652,026

 
2,571,770

Less accumulated amortization
 
(2,211,488
)
 
(2,180,636
)
 
 
$
13,339,095

 
$
13,300,793


4.
Income Taxes

Except to the extent noted below, Note 6 to the consolidated financial statements included in NSP-Minnesota’s Annual Report on Form 10-K for the year ended Dec. 31, 2016 appropriately represents, in all material respects, the current status of other income tax matters, and are incorporated herein by reference.


8


Federal Tax Loss Carryback Claims — In 2012-2016, NSP-Minnesota identified certain expenses related to 2009, 2010, 2011, 2013, 2014 and 2015 that qualify for an extended carryback beyond the typical two-year carryback period. As a result of a higher tax rate in prior years, NSP-Minnesota recognized a tax benefit of approximately $5 million in 2015, $17 million in 2014, $12 million in 2013 and $15 million in 2012.

Federal Audit — NSP-Minnesota is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. In 2012, the Internal Revenue Service (IRS) commenced an examination of tax years 2010 and 2011, including the 2009 carryback claim. As of March 31, 2017, the IRS had proposed an adjustment to the federal tax loss carryback claims that would result in $14 million of income tax expense for the 2009 through 2011 claims, and the 2013 through 2015 claims. In the fourth quarter of 2015, the IRS forwarded the issue to the Office of Appeals (Appeals). In 2016 the IRS audit team and Xcel Energy presented their case to Appeals; however, the outcome and timing of a resolution is uncertain. The statute of limitations applicable to Xcel Energy’s 2009 through 2011 federal income tax returns, following extensions, expires in December 2017. Xcel Energy has recognized its best estimate of income tax expense that will result from a final resolution of the IRS’s proposed adjustment of the carryback claims.

In the third quarter of 2015, the IRS commenced an examination of tax years 2012 and 2013. In the first quarter of 2017, the IRS proposed an adjustment to tax years 2012 and 2013 that could have impacted Xcel Energy’s net operating loss (NOL) and tax credit carryforwards and effective tax rate (ETR). After additional review, the IRS withdrew their proposed adjustment. As of March 31, 2017, the IRS had not proposed any other material adjustments to tax years 2012 and 2013.

State Audits — NSP-Minnesota is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of March 31, 2017, NSP-Minnesota’s earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2009. In 2016, the state of Minnesota began an audit of years 2010 through 2014. As of March 31, 2017, Minnesota had not proposed any adjustments, and there were no other state income tax audits in progress.

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

A reconciliation of the amount of unrecognized tax benefit is as follows:
(Millions of Dollars)
 
March 31, 2017
 
Dec. 31, 2016
Unrecognized tax benefit — Permanent tax positions
 
$
21.8

 
$
21.5

Unrecognized tax benefit — Temporary tax positions
 
39.8

 
39.3

Total unrecognized tax benefit
 
$
61.6

 
$
60.8


The unrecognized tax benefit amounts were reduced by the tax benefits associated with NOL and tax credit carryforwards. The amounts of tax benefits associated with NOL and tax credit carryforwards are as follows:
(Millions of Dollars)
 
March 31, 2017
 
Dec. 31, 2016
NOL and tax credit carryforwards
 
$
(19.5
)
 
$
(19.3
)

It is reasonably possible that NSP-Minnesota’s amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS Appeals and audit progress, the Minnesota audit progresses, and other state audits resume. As the IRS Appeals and IRS and Minnesota audits progress, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $32 million.

The payable for interest related to unrecognized tax benefits is partially offset by the interest benefit associated with NOL and tax credit carryforwards. A reconciliation of the amount of the payable for interest related to unrecognized tax benefits reported are as follows:

(Millions of Dollars)
 
March 31, 2017
 
Dec. 31, 2016
Payable for interest related to unrecognized tax benefits at beginning of period
 
$
(2.0
)
 
$
(0.2
)
Interest expense related to unrecognized tax benefits recorded during the period
 
(0.3
)
 
(1.8
)
Payable for interest related to unrecognized tax benefits at end of period
 
$
(2.3
)
 
$
(2.0
)

No amounts were accrued for penalties related to unrecognized tax benefits as of March 31, 2017 or Dec. 31, 2016.

9



5.
Rate Matters

Except to the extent noted below, the circumstances set forth in Note 10 to the consolidated financial statements included in NSP-Minnesota’s Annual Report on Form 10-K for the year ended Dec. 31, 2016, appropriately represent, in all material respects, the current status of other rate matters, and are incorporated herein by reference.

Pending Regulatory Proceeding — Minnesota Public Utilities Commission (MPUC)

Minnesota 2016 Multi-Year Electric Rate Case — In November 2015, NSP-Minnesota filed a three-year electric rate case with the MPUC. The rate case is based on a requested return on equity (ROE) of 10.0 percent and a 52.50 percent equity ratio. In December 2015, the MPUC approved interim rates for 2016. The request is detailed in the table below:
Request (Millions of Dollars)
 
2016
 
2017
 
2018
Rate request
 
$
194.6

 
$
52.1

 
$
50.4

Increase percentage
 
6.4
%
 
1.7
%
 
1.7
%
Interim request
 
$
163.7

 
$
44.9

 
N/A

Rate base
 
$
7,800

 
$
7,700

 
$
7,700


Settlement Agreement

In August 2016, NSP-Minnesota and various parties reached a settlement which resolves all revenue requirement issues in dispute. The settlement agreement requires the approval of the MPUC.

Key terms of the settlement are listed below:

Four-year period covering 2016-2019;
Annual sales true-up;
ROE of 9.2 percent and an equity ratio of 52.5 percent;
Nuclear related costs will not be considered provisional;
Continued use of all existing riders, however no new riders may be utilized during the four-year term;
Deferral of incremental 2016 property tax expense above a fixed threshold to 2018 and 2019;
Four-year stay out provision for rate cases;
Property tax true-up mechanism for 2017-2019; and
Capital expenditure true-up mechanism for 2016-2019.
(Millions of Dollars, incremental)
 
2016
 
2017
 
2018
 
2019
 
Total
Settlement revenues
 
$
74.99

 
$
59.86

 
$

 
$
50.12

 
$
184.97

NSP-Minnesota’s sales true-up
 
59.95

 

 

 
(0.20
)
 
59.75

   Total rate impact
 
$
134.94

 
$
59.86

 
$

 
$
49.92

 
$
244.72


In March 2017, the Administrative Law Judge (ALJ) recommended that the MPUC approve the settlement as it will contribute to just and reasonable rates and that no objections to the settlement are sufficient to merit rejection. The ALJ also provided recommendations for a majority of the revenue requirement issues in the event the MPUC decides to reject the settlement.

The MPUC is anticipated to hold deliberations on the rate case in May 2017 and issue an order in June 2017.

Pending Regulatory Proceeding — Federal Energy Regulatory Commission (FERC)

Midcontinent Independent System Operator, Inc. (MISO) ROE Complaints/ROE Adder — In November 2013, a group of customers filed a complaint at the FERC against MISO transmission owners (TOs), including NSP-Minnesota and NSP-Wisconsin. The complaint argued for a reduction in the ROE in transmission formula rates in the MISO region from 12.38 percent to 9.15 percent, a prohibition on capital structures in excess of 50 percent equity, and the removal of ROE adders (including those for Regional Transmission Organization (RTO) membership and for being an independent transmission company), effective Nov. 12, 2013.


10


In December 2015, an ALJ recommended the FERC approve a ROE of 10.32 percent using a FERC ROE methodology adopted in June 2014, which the FERC upheld in an order issued in September 2016. This ROE is applicable for the 15 month refund period from Nov. 12, 2013 to Feb. 11, 2015, and prospectively from the date of the FERC order. The total prospective ROE is 10.82 percent, which includes a 50 basis point adder for RTO membership.

In February 2015, a second complaint seeking to reduce the MISO ROE from 12.38 percent to 8.67 percent prior to any adder was filed with the FERC, resulting in a second period of potential refund from Feb. 12, 2015 to May 11, 2016. The MPUC, the North Dakota Public Service Commission (NDPSC), the South Dakota Public Utilities Commission and the Minnesota Department of Commerce joined a joint complainant/intervenor initial brief recommending an ROE of approximately 8.81 percent. FERC staff recommended a ROE of 8.78 percent. The MISO TOs recommended a ROE of 10.92 percent. In June 2016, the ALJ recommended a ROE of 9.7 percent, the midpoint of the upper half of the discounted cash flow (DCF) range, applying the June 2014 FERC ROE methodology. A decision was expected later in 2017, but could be delayed by the lack of a quorum at the FERC.

On April 14, 2017 the D.C. Circuit Court of Appeals vacated and remanded the June 2014 FERC decision, previously made in a New England ROE case. The court decision found that the FERC in that case had not established that the prior ROE was unjust and unreasonable, and that the FERC also failed to adequately support the newly approved ROE. The New England ROE ruling was then the basis for the ROE methodology used in the MISO complaint cases. The court found that the ROE methodology used in the New England ROE case was inadequate because it relied on approaches other than the DCF model. The impact of this court decision on the pending MISO complaint cases is uncertain.

As of March 2017, NSP-Minnesota has recognized a current liability for the Nov. 12, 2013 to Feb. 11, 2015 complaint period based on the 10.32 percent ROE provided in the FERC order. This liability is net of refunds processed during the first quarter of 2017. NSP-Minnesota has also recognized a current liability representing the best estimate of the final ROE for the Feb. 12, 2015 to May 11, 2016 complaint period.

6.
Commitments and Contingencies

Except to the extent noted below and in Note 5 above, the circumstances set forth in Notes 10, 11 and 12 to the consolidated financial statements included in the NSP-Minnesota Annual Report on Form 10-K for the year ended Dec. 31, 2016, appropriately represent, in all material respects, the current status of commitments and contingent liabilities, and are incorporated herein by reference. The following include commitments, contingencies and unresolved contingencies that are material to NSP-Minnesota’s financial position.

PPAs

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

NSP-Minnesota had approximately 1,069 megawatts (MW) of capacity under long-term PPAs as of March 31, 2017 and Dec. 31, 2016, with entities that have been determined to be variable interest entities. NSP-Minnesota has concluded that these entities are not required to be consolidated in its consolidated financial statements because it does not have the power to direct the activities that most significantly impact the entities’ economic performance. These agreements have expiration dates through 2028.

Guarantees

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

The following table presents the guarantee issued and outstanding for NSP-Minnesota:
(Millions of Dollars)
 
March 31, 2017
 
Dec. 31, 2016
Guarantee issued and outstanding
 
$
4.8

 
$
4.8



11


Environmental Contingencies

Fargo, N.D. Manufactured Gas Plant (MGP) Site — In May 2015, underground pipes, tars and impacted soils were discovered in a right-of-way in Fargo, N.D. that appeared to be associated with a former MGP operated by NSP-Minnesota or prior companies. NSP-Minnesota removed impacted soils and other materials from the right-of-way and commenced an investigation of the historic MGP and adjacent properties (the Fargo MGP Site). NSP-Minnesota has recommended that targeted source removal of impacted soils and historic MGP infrastructure should be performed. The North Dakota Department of Health approved NSP-Minnesota’s proposed cleanup plan in January 2017. The timing and final scope of remediation is dependent on whether current property owners will agree to provide reasonable access to NSP-Minnesota to perform and implement the approved cleanup plan.

NSP-Minnesota has initiated insurance recovery litigation in North Dakota. The U.S. District Court for the District of North Dakota agreed to the parties’ request for a stay of the litigation until May 2017.

As of March 31, 2017 and Dec. 31, 2016, NSP-Minnesota had recorded a liability of $11.1 million and $11.3 million, respectively, for the Fargo MGP Site. In December 2015, the NDPSC approved NSP-Minnesota’s request to defer costs associated with the Fargo MGP Site, resulting in deferral of all investigation and response costs with the exception of approximately 12 percent allocable to the Minnesota jurisdiction. Uncertainties related to the liability recognized include obtaining access to perform the approved remediation, final designs that will be developed to implement the approved cleanup plan and the potential for contributions from entities that may be identified as potentially responsible parties (PRPs).

Other MGP and Landfill Sites — NSP-Minnesota is currently involved in investigating and/or remediating several other MGP and landfill sites. NSP-Minnesota has identified six sites, in addition to the site in Fargo, N.D., where former MGP or landfill disposal activities have or may have resulted in site contamination and are under current investigation and/or remediation. At some or all of these sites, there are other parties that may have responsibility for some portion of any remediation. NSP-Minnesota anticipates that the majority of the investigation or remediation at these sites will continue through at least 2018. NSP-Minnesota had accrued $1.1 million and $0.2 million for these sites at March 31, 2017 and Dec. 31, 2016, respectively. There may be insurance recovery and/or recovery from other PRPs to offset any costs incurred. NSP-Minnesota anticipates that any significant amounts incurred will be recovered from customers.

Environmental Requirements

Water and Waste
Federal Clean Water Act (CWA) Waters of the United States Rule In 2015, the United States Environmental Protection Agency (EPA) and the U.S. Army Corps of Engineers (Corps) published a final rule that significantly expands the types of water bodies regulated under the CWA and broadens the scope of waters subject to federal jurisdiction. The final rule will subject more utility projects to federal CWA jurisdiction, thereby potentially delaying the siting of new generation projects, pipelines, transmission lines and distribution lines, as well as increasing project costs and expanding permitting and reporting requirements. In October 2015, the U.S. Court of Appeals for the Sixth Circuit issued a nationwide stay of the final rule and subsequently ruled that it, rather than the federal district courts, had jurisdiction over challenges to the rule.  In January 2017, the U.S. Supreme Court agreed to resolve the dispute as to which court should hear challenges to the rule. A ruling is expected by the end of 2017.

In February 2017, President Trump issued an executive order requiring the EPA and the Corps to review and revise the final rule. The executive order directs the agencies to consider interpreting the term “Waters of the U.S.” in a manner that is more narrow than the final rule. In March 2017, the EPA and the Corps published formal notice of the agencies’ intent to review the final rule and engage in further rulemaking.


12


Federal CWA Effluent Limitations Guidelines (ELG) In 2015, the EPA issued a final ELG rule for power plants that use coal, natural gas, oil or nuclear materials as fuel and discharge treated effluent to surface waters as well as utility-owned landfills that receive coal combustion residuals.
 
The estimated compliance cost for NSP-Minnesota’s Allen S. King Plant is approximately $10 million; and
NSP-Minnesota continues to evaluate the cost of compliance at its other facilities potentially affected by this rule.

NSP-Minnesota believes that compliance costs would be recoverable through regulatory mechanisms. Consolidated challenges to the rule are being heard by the Fifth Circuit Court of Appeals.  On April 12, 2017, the EPA issued an administrative stay to delay the ELG rule’s compliance deadlines during the pendency of the ongoing litigation in order to give the agency the opportunity to reconsider and review the rule.

Air
Greenhouse Gas (GHG) Emission Standard for Existing Sources (Clean Power Plan or CPP) — In 2015, the EPA issued its final rule for existing power plants.  Among other things, the rule requires that state plans include enforceable measures to ensure emissions from existing power plants achieve the EPA’s state-specific interim (2022-2029) and final (2030 and thereafter) emission performance targets. 

The CPP was challenged by multiple parties in the D.C. Circuit Court.  In February 2016, the U.S. Supreme Court issued an order staying the final CPP rule. In September 2016, the D.C. Circuit Court heard oral arguments in the consolidated challenges to the CPP. The stay will remain in effect until the D.C. Circuit Court reaches its decision and the U.S. Supreme Court either declines to review the lower court’s decision or reaches a decision of its own.

In March 2017, President Trump signed an executive order requiring the EPA Administrator to review the CPP rule and if appropriate, publish proposed rules suspending, revising or rescinding it. Accordingly, the EPA has requested that the D.C. Circuit Court hold the litigation in abeyance until the EPA completes its work under the executive order. Parties in the litigation, who support the CPP have filed briefs opposing the EPA’s motion. A court ruling on the EPA’s motion is expected in the second quarter of 2017.

NSP-Minnesota has undertaken a number of initiatives that reduce GHG emissions and respond to state renewable and energy efficiency goals.  The CPP could require additional emission reductions in states in which NSP-Minnesota operates.  If state plans do not provide credit for the investments NSP-Minnesota has already made to reduce GHG emissions, or if they require additional initiatives or emission reductions, then their requirements would potentially impose additional substantial costs.  NSP-Minnesota cannot predict the costs of compliance with the final rule once it takes effect due to the uncertainty about what, if anything, the final rules may require.  NSP-Minnesota believes compliance costs will be recoverable through regulatory mechanisms.  If NSP-Minnesota’s regulators do not allow recovery of all or a part of the cost of capital investment or the operating and maintenance (O&M) costs incurred to comply with the CPP or cost recovery is not provided in a timely manner, it could have a material impact on results of operations, financial position or cash flows.

Legal Contingencies

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


13


7.
Borrowings and Other Financing Instruments

Short-Term Borrowings

Money Pool — Xcel Energy Inc. and its utility subsidiaries have established a money pool arrangement that allows for short-term investments in and borrowings between the utility subsidiaries. Xcel Energy Inc. may make investments in the utility subsidiaries at market-based interest rates; however, the money pool arrangement does not allow the utility subsidiaries to make investments in Xcel Energy Inc. Money pool borrowings for NSP-Minnesota were as follows:
(Amounts in Millions, Except Interest Rates)
 
Three Months Ended March 31, 2017
 
Year Ended Dec. 31, 2016
Borrowing limit
 
$
250

 
$
250

Amount outstanding at period end
 

 

Average amount outstanding
 

 
16

Maximum amount outstanding
 
21

 
225

Weighted average interest rate, computed on a daily basis
 
0.93
%
 
0.69
%
Weighted average interest rate at period end
 
N/A

 
N/A


Commercial Paper — NSP-Minnesota meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under its credit facility and the money pool. Commercial paper outstanding for NSP-Minnesota was as follows:
(Amounts in Millions, Except Interest Rates)
 
Three Months Ended March 31, 2017
 
Year Ended Dec. 31, 2016
Borrowing limit
 
$
500

 
$
500

Amount outstanding at period end
 
39

 
85

Average amount outstanding
 
95

 
73

Maximum amount outstanding
 
237

 
353

Weighted average interest rate, computed on a daily basis
 
0.91
%
 
0.65
%
Weighted average interest rate at period end
 
1.10

 
0.94


Letters of Credit — NSP-Minnesota uses letters of credit, generally with terms of one year, to provide financial guarantees for certain operating obligations. At March 31, 2017 and Dec. 31, 2016, there were $8 million and $11 million, respectively, of letters of credit outstanding under the credit facility. The contract amounts of these letters of credit approximate their fair value and are subject to fees.

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

At March 31, 2017, NSP-Minnesota had the following committed credit facility available (in millions of dollars):
Credit Facility (a)
 
Drawn (b)
 
Available
$
500

 
$
47

 
$
453


(a) 
This credit facility matures in June 2021.
(b) 
Includes outstanding commercial paper and letters of credit.

All credit facility bank borrowings, outstanding letters of credit and outstanding commercial paper reduce the available capacity under the credit facility. NSP-Minnesota had no direct advances on the credit facility outstanding at March 31, 2017 and Dec. 31, 2016.


14


8.
Fair Value of Financial Assets and Liabilities

Fair Value Measurements

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

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

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

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

Specific valuation methods include the following:

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

Investments in equity securities and other funds Equity securities are valued using quoted prices in active markets. The fair values for commingled funds are measured using NAVs, which take into consideration the value of underlying fund investments, as well as the other accrued assets and liabilities of a fund, in order to determine a per-share market value. The investments in commingled funds may be redeemed for NAV with proper notice. Proper notice varies by fund and can range from daily with one or two days notice to annually with 90 days notice. Private equity investments require approval of the fund for any unscheduled redemption, and such redemptions may be approved or denied by the fund at its sole discretion. Unscheduled distributions from real estate investments may be redeemed with proper notice, which is typically quarterly with 45-90 days notice; however, withdrawals from real estate investments may be delayed or discounted as a result of fund illiquidity.

Investments in debt securities Fair values for debt securities are determined by a third party pricing service using recent trades and observable spreads from benchmark interest rates for similar securities.

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

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

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


15


If forecasted costs of electric transmission congestion increase or decrease for a given FTR path, the value of that particular FTR instrument will likewise increase or decrease. Fair value measurements for FTRs have been assigned a Level 3 given the limited observability of management’s forecasts for several of the inputs to this complex valuation model. Non-trading monthly FTR settlements are included in fuel and purchased energy cost recovery mechanisms, and therefore changes in the fair value of the yet to be settled portions of most FTRs are deferred as a regulatory asset or liability. Given this regulatory treatment and the limited magnitude of NSP-Minnesota’s FTRs, the numerous unobservable quantitative inputs to the complex model used for valuation of FTRs are insignificant to the consolidated financial statements of NSP-Minnesota.

Non-Derivative Instruments Fair Value Measurements

Nuclear Decommissioning Fund

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

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

Unrealized gains for the nuclear decommissioning fund were $428.2 million and $378.6 million at March 31, 2017 and Dec. 31, 2016, respectively, and unrealized losses and amounts recorded as other-than-temporary impairments were $31.7 million and $46.9 million at March 31, 2017 and Dec. 31, 2016, respectively.

The following tables present the cost and fair value of NSP-Minnesota’s non-derivative instruments with recurring fair value measurements in the nuclear decommissioning fund at March 31, 2017 and Dec. 31, 2016:
 
 
March 31, 2017
 
 
 
 
Fair Value
(Thousands of Dollars)
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Investments Measured at NAV (b)
 
Total
Nuclear decommissioning fund (a)
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
24,161

 
$
24,161

 
$

 
$

 
$

 
$
24,161

Commingled funds:
 
 
 
 
 
 
 
 
 
 
 
 
Non U.S. equities
 
272,437

 
178,990

 

 

 
98,876

 
277,866

Emerging market debt funds
 
94,772

 

 

 

 
101,269

 
101,269

Commodity funds
 
106,571

 

 

 

 
88,749

 
88,749

Private equity investments
 
137,176

 

 

 

 
194,912

 
194,912

Real estate
 
125,410

 

 

 

 
187,609

 
187,609

Other commingled funds
 
151,048

 

 

 

 
161,936

 
161,936

Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
Government securities
 
27,369

 

 
27,199

 

 

 
27,199

U.S. corporate bonds
 
127,841

 

 
128,799

 

 

 
128,799

Non U.S. corporate bonds
 
25,345

 

 
25,556

 

 

 
25,556

Municipal bonds
 
5

 

 
5

 

 

 
5

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. equities
 
275,101

 
501,543

 

 

 

 
501,543

Non U.S. equities
 
188,763

 
232,851

 

 

 

 
232,851

Total
 
$
1,555,999

 
$
937,545

 
$
181,559

 
$

 
$
833,351

 
$
1,952,455


(a) 
Reported in nuclear decommissioning fund and other investments on the consolidated balance sheet, which also includes $48.9 million of rabbi trust assets and miscellaneous investments.
(b) 
Due to limited availability of published pricing and a lack of immediate redeemability, certain fund investments measured at NAV are not required to be categorized within the fair value hierarchy.

16


 
 
Dec. 31, 2016
 
 
 
 
Fair Value
(Thousands of Dollars)
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Investments Measured at NAV (b)
 
Total
Nuclear decommissioning fund (a)
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
20,379

 
$
20,379

 
$

 
$

 
$

 
$
20,379

Commingled funds:
 
 
 
 
 
 
 
 
 
 
 
 
Non U.S. equities
 
260,877

 
133,126

 

 

 
112,233

 
245,359

Emerging market debt funds
 
93,597

 

 

 

 
97,543

 
97,543

Commodity funds
 
106,571

 

 

 

 
92,091

 
92,091

Private equity investments
 
132,190

 

 

 

 
190,462

 
190,462

Real estate
 
128,630

 

 

 

 
187,647

 
187,647

Other commingled funds
 
151,048

 

 

 

 
159,489

 
159,489

Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
Government securities
 
32,764

 

 
31,965

 

 

 
31,965

U.S. corporate bonds
 
104,913

 

 
105,772

 

 

 
105,772

Non U.S. corporate bonds
 
21,751

 

 
21,672

 

 

 
21,672

Municipal bonds
 
13,609

 

 
13,786

 

 

 
13,786

Mortgage-backed securities
 
2,785

 

 
2,816

 

 

 
2,816

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. equities
 
270,779

 
473,400

 

 

 

 
473,400

Non U.S. equities
 
189,100

 
218,381

 

 

 

 
218,381

Total
 
$
1,528,993

 
$
845,286

 
$
176,011

 
$

 
$
839,465

 
$
1,860,762


(a) 
Reported in nuclear decommissioning fund and other investments on the consolidated balance sheet, which also includes $44.3 million of rabbi trust assets and miscellaneous investments.
(b) 
Due to limited availability of published pricing and a lack of immediate redeemability, certain fund investments measured at NAV are not required to be categorized within the fair value hierarchy.

For the three months ended March 31, 2017 and 2016 there were no Level 3 nuclear decommissioning fund investments and no transfers of amounts between levels.

The following table summarizes the final contractual maturity dates of the debt securities in the nuclear decommissioning fund, by asset class, at March 31, 2017:
 
 
Final Contractual Maturity
(Thousands of Dollars)
 
Due in 1 Year
or Less
 
Due in 1 to 5
Years
 
Due in 5 to 10
Years
 
Due after 10
Years
 
Total
Government securities
 
$

 
$
1,100

 
$
3,017

 
$
23,082

 
$
27,199

U.S. corporate bonds
 
354

 
38,741

 
74,617

 
15,087

 
128,799

International corporate bonds
 

 
8,085

 
13,443

 
4,028

 
25,556

Municipal bonds
 

 

 
5

 

 
5

Debt securities
 
$
354

 
$
47,926

 
$
91,082

 
$
42,197

 
$
181,559


Rabbi Trusts

In June 2016, NSP-Minnesota established a rabbi trust to provide partial funding for future deferred compensation plan distributions. The following tables present the cost and fair value of the assets held in rabbi trust at March 31, 2017 and Dec. 31, 2016:
 
 
March 31, 2017
 
 
 
 
Fair Value
(Thousands of Dollars)
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Total
Rabbi Trust (a)
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
392

 
$
392

 
$

 
$

 
$
392

Mutual funds
 
8,745

 
9,089

 

 

 
9,089

Total
 
$
9,137

 
$
9,481

 
$

 
$

 
$
9,481


17


 
 
Dec. 31, 2016
 
 
 
 
Fair Value
(Thousands of Dollars)
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Total
Rabbi Trusts (a)
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
7,459

 
$
7,459

 
$

 
$

 
$
7,459

Mutual funds
 
1,663

 
1,901

 

 

 
1,901

Total
 
$
9,122

 
$
9,360

 
$

 
$

 
$
9,360

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

Derivative Instruments Fair Value Measurements

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

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

At March 31, 2017, accumulated other comprehensive losses related to interest rate derivatives included $0.9 million of net losses expected to be reclassified into earnings during the next 12 months as the related hedged interest rate transactions impact earnings, including forecasted amounts for unsettled hedges, as applicable.

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

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

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

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

The following table details the gross notional amounts of commodity forwards, options and FTRs at March 31, 2017 and Dec. 31, 2016:
(Amounts in Thousands) (a)(b)
 
March 31, 2017
 
Dec. 31, 2016
Megawatt hours of electricity
 
21,044

 
37,805

Million British thermal units of natural gas
 
77,728

 
79,520


(a) 
Amounts are not reflective of net positions in the underlying commodities.
(b) 
Notional amounts for options are included on a gross basis, but are weighted for the probability of exercise.


18


The following tables detail the impact of derivative activity during the three months ended March 31, 2017 and 2016 on accumulated other comprehensive loss, regulatory assets and liabilities and income:
 
 
Three Months Ended March 31, 2017
 
 
 
Pre-Tax Fair Value
Losses Recognized
During the Period in:
 
Pre-Tax (Gains) Losses
Reclassified into Income
During the Period from:
 
Pre-Tax Gains (Losses) Recognized
During the Period in Income
 
(Thousands of Dollars)
 
Accumulated
Other
Comprehensive Loss
 
Regulatory
(Assets) and Liabilities
 
Accumulated
Other
Comprehensive Loss
 
Regulatory
Assets and (Liabilities)
 
 
Derivatives designated as cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest rate
 
$

 
$

 
$
342

(a) 
$

 
$

 
Total
 
$

 
$

 
$
342

 
$

 
$

 
Other derivative instruments
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$

 
$

 
$

 
$
622

(c) 
Electric commodity
 

 
(1,247
)
 

 
(2,788
)
(d) 

 
Natural gas commodity
 

 
(665
)
 

 
698

(e) 
(945
)
(e) 
Total
 
$

 
$
(1,912
)
 
$

 
$
(2,090
)
 
$
(323
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2016
 
 
 
Pre-Tax Fair Value
Losses Recognized
During the Period in:
 
Pre-Tax Losses
Reclassified into Income
During the Period from:
 
Pre-Tax Gains (Losses)
Recognized
During the Period in Income
 
(Thousands of Dollars)
 
Accumulated
Other
Comprehensive Loss
 
Regulatory
(Assets) and Liabilities
 
Accumulated
Other
Comprehensive Loss
 
Regulatory
Assets and(Liabilities)
 
 
Derivatives designated as cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest rate
 
$

 
$

 
$
346

(a) 
$

 
$

 
Vehicle fuel and other commodity
 
(2
)
 

 
31

(b) 

 

 
Total
 
$
(2
)
 
$

 
$
377

 
$

 
$

 
Other derivative instruments
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$

 
$

 
$

 
$
992

(c) 
Electric commodity
 

 
(1,558
)
 

 
10,712

(d) 

 
Natural gas commodity
 

 
(631
)
 

 
3,460

(e) 
(1,595
)
(e) 
Total
 
$

 
$
(2,189
)
 
$

 
$
14,172

 
$
(603
)
 

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

NSP-Minnesota had no derivative instruments designated as fair value hedges during the three months ended March 31, 2017 and 2016. Therefore, no gains or losses from fair value hedges or related hedged transactions were recognized for these periods.

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


19


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

NSP-Minnesota’s most significant concentrations of credit risk with particular entities or industries are contracts with counterparties to its wholesale, trading and non-trading commodity activities. At March 31, 2017, five of NSP-Minnesota’s 10 most significant counterparties for these activities, comprising $30.1 million or 38 percent of this credit exposure, had investment grade credit ratings from Standard & Poor’s, Moody’s or Fitch Ratings. Four of the 10 most significant counterparties, comprising $17.1 million or 22 percent of this credit exposure, were not rated by these external agencies, but based on NSP-Minnesota’s internal analysis, had credit quality consistent with investment grade. Another of these significant counterparties, comprising $0.9 million or 1 percent of this credit exposure, had credit quality less than investment grade, based on ratings from internal analysis. All ten of these significant counterparties are municipal or cooperative electric entities, or other utilities.

Credit Related Contingent Features — Contract provisions for derivative instruments that NSP-Minnesota enters into, including those recorded to the consolidated balance sheet at fair value, as well as those accounted for as normal purchase-normal sale contracts and therefore not reflected on the balance sheet, may require the posting of collateral or settlement of the contracts for various reasons, including if NSP-Minnesota is unable to maintain its credit ratings. At March 31, 2017 and Dec. 31, 2016, there were no derivative instruments in a liability position with underlying contract provisions that required the posting of collateral or settlement of outstanding contracts if the credit ratings of NSP-Minnesota were downgraded below investment grade.

Certain derivative instruments are also subject to contract provisions that contain adequate assurance clauses. These provisions allow counterparties to seek performance assurance, including cash collateral, in the event that NSP-Minnesota’s ability to fulfill its contractual obligations is reasonably expected to be impaired. NSP-Minnesota had no collateral posted related to adequate assurance clauses in derivative contracts as of March 31, 2017 and Dec. 31, 2016.

Recurring Fair Value Measurements — The following table presents for each of the fair value hierarchy levels, NSP-Minnesota’s derivative assets and liabilities measured at fair value on a recurring basis at March 31, 2017:
 
 
March 31, 2017
 
 
Fair Value
 
Fair Value Total
 
Counterparty Netting (b)
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Total
Current derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
4,015

 
$
7,307

 
$

 
$
11,322

 
$
(6,258
)
 
$
5,064

Electric commodity
 

 

 
5,659

 
5,659

 
(223
)
 
5,436

Total current derivative assets
 
$
4,015

 
$
7,307

 
$
5,659

 
$
16,981

 
$
(6,481
)
 
10,500

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
617

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
11,117

Noncurrent derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
198

 
$
32,272

 
$

 
$
32,470

 
$
(7,295
)
 
$
25,175

Total noncurrent derivative assets
 
$
198

 
$
32,272

 
$

 
$
32,470

 
$
(7,295
)
 
25,175

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
866

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
26,041



20


 
 
March 31, 2017
 
 
Fair Value
 
Fair Value Total
 
Counterparty Netting (b)
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Total
Current derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
4,777

 
$
5,026

 
$

 
$
9,803

 
$
(6,777
)
 
$
3,026

Electric commodity
 

 

 
223

 
223

 
(223
)
 

Total current derivative liabilities
 
$
4,777

 
$
5,026

 
$
223

 
$
10,026

 
$
(7,000
)
 
3,026

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
14,110

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
17,136

Noncurrent derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
204

 
$
23,434

 
$
793

 
$
24,431

 
$
(10,463
)
 
$
13,968

Total noncurrent derivative liabilities
 
$
204

 
$
23,434

 
$
793

 
$
24,431

 
$
(10,463
)
 
13,968

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
100,556

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
114,524



(a) 
During 2006, NSP-Minnesota qualified these contracts under the normal purchase exception. Based on this qualification, the contracts are no longer adjusted to fair value and the previous carrying value of these contracts will be amortized over the remaining contract lives along with the offsetting regulatory assets and liabilities.
(b) 
NSP-Minnesota nets derivative instruments and related collateral in its consolidated balance sheet when supported by a legally enforceable master netting agreement, and all derivative instruments and related collateral amounts were subject to master netting agreements at March 31, 2017. At March 31, 2017, derivative assets and liabilities include no obligations to return cash collateral and rights to reclaim cash collateral of $3.7 million. The counterparty netting amounts presented exclude settlement receivables and payables and non-derivative amounts that may be subject to the same master netting agreements.

The following table presents for each of the fair value hierarchy levels, NSP-Minnesota’s derivative assets and liabilities measured at fair value on a recurring basis at Dec. 31, 2016:
 
 
Dec. 31, 2016
 
 
Fair Value
 
Fair Value Total
 
Counterparty Netting (b)
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Total
Current derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
12,053

 
$
8,651

 
$

 
$
20,704

 
$
(15,500
)
 
$
5,204

Electric commodity
 

 

 
15,997

 
15,997

 
(677
)
 
15,320

Natural gas commodity
 

 
912

 

 
912

 

 
912

Total current derivative assets
 
$
12,053

 
$
9,563

 
$
15,997

 
$
37,613

 
$
(16,177
)
 
21,436

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
592

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
22,028

Noncurrent derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
100

 
$
31,029

 
$

 
$
31,129

 
$
(7,323
)
 
$
23,806

Total noncurrent derivative assets
 
$
100

 
$
31,029

 
$

 
$
31,129

 
$
(7,323
)
 
23,806

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
872

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
24,678



21


 
 
Dec. 31, 2016
 
 
Fair Value
 
Fair Value Total
 
Counterparty Netting (b)
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Total
Current derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
12,397

 
$
5,964

 
$

 
$
18,361

 
$
(15,837
)
 
$
2,524

Electric commodity
 

 

 
677

 
677

 
(677
)
 

Total current derivative liabilities
 
$
12,397

 
$
5,964

 
$
677

 
$
19,038

 
$
(16,514
)
 
2,524

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
14,082

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
16,606

Noncurrent derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
89

 
$
23,424

 
$

 
$
23,513

 
$
(10,727
)
 
$
12,786

Total noncurrent derivative liabilities
 
$
89

 
$
23,424

 
$

 
$
23,513

 
$
(10,727
)
 
12,786

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
104,018

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
116,804



(a) 
During 2006, NSP-Minnesota qualified these contracts under the normal purchase exception. Based on this qualification, the contracts are no longer adjusted to fair value and the previous carrying value of these contracts will be amortized over the remaining contract lives along with the offsetting regulatory assets and liabilities.
(b) 
NSP-Minnesota nets derivative instruments and related collateral in its consolidated balance sheet when supported by a legally enforceable master netting agreement, and all derivative instruments and related collateral amounts were subject to master netting agreements at Dec. 31, 2016. At Dec. 31, 2016, derivative assets and liabilities include no obligations to return cash collateral and rights to reclaim cash collateral of $3.7 million. The counterparty netting amounts presented exclude settlement receivables and payables and non-derivative amounts that may be subject to the same master netting agreements.

The following table presents the changes in Level 3 commodity derivatives for the three months ended March 31, 2017 and 2016:
 
 
Three Months Ended March 31
(Thousands of Dollars)
 
2017
 
2016
Balance at Jan. 1
 
$
15,320

 
$
12,970

Purchases
 
280

 

Settlements
 
(3,426
)
 
(5,038
)
Net transactions recorded during the period:
 
 
 
 
Losses recognized in earnings (a)
 
(792
)
 
(24
)
Net losses recognized as regulatory assets and liabilities
 
(6,739
)
 
(2,784
)
Balance at March 31
 
$
4,643

 
$
5,124


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

NSP-Minnesota recognizes transfers between levels as of the beginning of each period. There were no transfers of amounts between levels for derivative instruments for the three months ended March 31, 2017 and 2016.

Fair Value of Long-Term Debt

As of March 31, 2017 and Dec. 31, 2016, other financial instruments for which the carrying amount did not equal fair value were as follows:
 
 
March 31, 2017
 
Dec. 31, 2016
(Thousands of Dollars)
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Long-term debt, including current portion
 
$
4,844,227

 
$
5,304,592

 
$
4,843,165

 
$
5,310,925


The fair value of NSP-Minnesota’s long-term debt is estimated based on recent trades and observable spreads from benchmark interest rates for similar securities. The fair value estimates are based on information available to management as of March 31, 2017 and Dec. 31, 2016, and given the observability of the inputs to these estimates, the fair values presented for long-term debt have been assigned a Level 2.


22


9.
Other Income, Net

Other income, net consisted of the following:
 
 
Three Months Ended March 31
(Thousands of Dollars)
 
2017
 
2016
Interest income
 
$
2,709

 
$
3,336

Other nonoperating income
 
10

 
164

Insurance policy expense
 
(855
)
 
(640
)
Other income, net
 
$
1,864

 
$
2,860


10.
Segment Information

Operating results from the regulated electric utility and regulated natural gas utility are each separately and regularly reviewed by NSP-Minnesota’s chief operating decision maker. NSP-Minnesota evaluates performance based on profit or loss generated from the product or service provided. These segments are managed separately because the revenue streams are dependent upon regulated rate recovery, which is separately determined for each segment.

NSP-Minnesota has the following reportable segments: regulated electric utility, regulated natural gas utility and all other.

NSP-Minnesota’s regulated electric utility segment generates, transmits and distributes electricity primarily in portions of Minnesota, North Dakota and South Dakota. In addition, this segment includes sales for resale and provides wholesale transmission service to various entities in the United States. Regulated electric utility also includes NSP-Minnesota’s commodity trading operations.
NSP-Minnesota’s regulated natural gas utility segment transports, stores and distributes natural gas primarily in portions of Minnesota and North Dakota.
Revenues from operating segments not included above are below the necessary quantitative thresholds and are therefore included in the all other category. Those primarily include appliance repair services, nonutility real estate activities and revenues associated with processing solid waste into refuse-derived fuel.

Asset and capital expenditure information is not provided for NSP-Minnesota’s reportable segments because as an integrated electric and natural gas utility, NSP-Minnesota operates significant assets that are not dedicated to a specific business segment, and reporting assets and capital expenditures by business segment would require arbitrary and potentially misleading allocations which may not necessarily reflect the assets that would be required for the operation of the business segments on a stand-alone basis.

To report income from operations for regulated electric and regulated natural gas utility segments, the majority of costs are directly assigned to each segment. However, some costs, such as common depreciation, common O&M expenses and interest expense are allocated based on cost causation allocators. A general allocator is used for certain general and administrative expenses, including office supplies, rent, property insurance and general advertising.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Thousands of Dollars)
 
Regulated Electric
 
Regulated Natural Gas
 
All Other
 
Reconciling Eliminations
 
Consolidated Total
Three Months Ended March 31, 2017
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)(b)
 
$
1,079,030

 
$
221,183

 
$
6,927

 
$

 
$
1,307,140

Intersegment revenues
 
109

 
94

 

 
(203
)
 

Total revenues
 
$
1,079,139

 
$
221,277

 
$
6,927

 
$
(203
)
 
$
1,307,140

Net income (loss)
 
$
78,082

 
$
17,505

 
$
(1,421
)
 
$

 
$
94,166


23


(Thousands of Dollars)
 
Regulated Electric
 
Regulated Natural Gas
 
All Other
 
Reconciling Eliminations
 
Consolidated Total
Three Months Ended March 31, 2016
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)(b)
 
$
1,033,643

 
$
194,130

 
$
6,860

 
$

 
$
1,234,633

Intersegment revenues
 
145

 
162

 

 
(307
)
 

Total revenues
 
$
1,033,788

 
$
194,292

 
$
6,860

 
$
(307
)
 
$
1,234,633

Net income
 
$
71,321

 
$
23,142

 
$
166

 
$

 
$
94,629

(a) 
Operating revenues include $124 million and $125 million of affiliate electric revenue for the three months ended March 31, 2017 and 2016.
(b) 
Operating revenues include an immaterial amount of affiliate gas revenue for the three months ended March 31, 2017 and 2016.

11.
Benefit Plans and Other Postretirement Benefits

Components of Net Periodic Benefit Cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31
 
 
2017
 
2016
 
2017
 
2016
(Thousands of Dollars)
 
Pension Benefits
 
Postretirement Health
Care Benefits
Service cost
 
$
6,958

 
$
7,077

 
$
36

 
$
31

Interest cost
 
10,177

 
11,358

 
854

 
981

Expected return on plan assets
 
(15,017
)
 
(15,236
)
 
(54
)
 
(43
)
Amortization of prior service cost (credit)
 
265

 
234

 
(759
)
 
(759
)
Amortization of net loss
 
9,902

 
9,194

 
507

 
401

Net periodic benefit cost
 
12,285

 
12,627

 
584

 
611

Costs not recognized due to the effects of regulation
 
(4,899
)
 
(5,296
)
 

 

Net benefit cost recognized for financial reporting
 
$
7,386

 
$
7,331

 
$
584

 
$
611


In January 2017, contributions of $150.0 million were made across four of Xcel Energy’s pension plans, of which $59.4 million was attributable to NSP-Minnesota. Xcel Energy does not expect additional pension contributions during 2017.

12.
Other Comprehensive Income

Changes in accumulated other comprehensive (loss) income, net of tax, for the three months ended March 31, 2017 and 2016 were as follows:

 
 
Three Months Ended March 31, 2017
(Thousands of Dollars)
 
Gains and
Losses on Cash Flow Hedges
 
Unrealized
Gains and Losses on Marketable
Securities
 
Defined Benefit
Pension and
Postretirement Items
 
Total
Accumulated other comprehensive (loss) income at Jan. 1
 
$
(18,208
)
 
$
105

 
$
(2,680
)
 
$
(20,783
)
Losses reclassified from net accumulated other comprehensive loss
 
203

 

 
35

 
238

Net current period other comprehensive income
 
203

 

 
35

 
238

Accumulated other comprehensive (loss) income at March 31
 
$
(18,005
)
 
$
105

 
$
(2,645
)
 
$
(20,545
)

24


 
 
Three Months Ended March 31, 2016
(Thousands of Dollars)
 
Gains and
Losses on Cash Flow Hedges
 
Unrealized
Gains and Losses on Marketable
Securities
 
Defined Benefit
Pension and
Postretirement Items
 
Total
Accumulated other comprehensive (loss) income at Jan. 1
 
$
(19,090
)
 
$
105

 
$
(2,096
)
 
$
(21,081
)
Other comprehensive loss before reclassifications
 
(1
)
 

 

 
(1
)
Losses reclassified from net accumulated other comprehensive loss
 
223

 

 
19

 
242

Net current period other comprehensive income
 
222

 

 
19

 
241

Accumulated other comprehensive (loss) income at March 31
 
$
(18,868
)
 
$
105

 
$
(2,077
)
 
$
(20,840
)

Reclassifications from accumulated other comprehensive loss for the three months ended March 31, 2017 and 2016 were as follows:

 
 
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
 
(Thousands of Dollars)
 
Three Months Ended March 31, 2017
 
Three Months Ended March 31, 2016
 
Losses on cash flow hedges:
 
 
 
 
 
Interest rate derivatives
 
$
342

(a) 
$
346

(a) 
Vehicle fuel derivatives
 

(b) 
31

(b) 
Total, pre-tax
 
342

 
377

 
Tax benefit
 
(139
)
 
(154
)
 
Total, net of tax
 
203

 
223

 
Defined benefit pension and postretirement losses:
 
 
 
 
 
Amortization of net loss
 
109

(c) 
83

(c) 
Prior service credit
 
(49
)
(c) 
(49
)
(c) 
Total, pre-tax
 
60

 
34

 
Tax benefit
 
(25
)
 
(15
)
 
Total, net of tax
 
35

 
19

 
Total amounts reclassified, net of tax
 
$
238

 
$
242

 

(a) 
Included in interest charges.
(b) 
Included in O&M expenses.
(c) 
Included in the computation of net periodic pension and postretirement benefit costs. See Note 11 for details regarding these benefit plans.

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

Discussion of financial condition and liquidity for NSP-Minnesota 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).

Financial Review

The following discussion and analysis by management focuses on those factors that had a material effect on NSP-Minnesota’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 consolidated financial statements. Due to the seasonality of NSP-Minnesota’s operating results, quarterly financial results are not an appropriate base from which to project annual results.


25


Forward-Looking Statements

Except for the historical statements contained in this report, the matters discussed herein, 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 expressly disclaim any obligation to update any forward-looking information. The following factors, in addition to those discussed elsewhere in this Quarterly Report on Form 10-Q and in other securities filings (including NSP-Minnesota’s Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2016 and subsequent securities filings), could cause actual results to differ materially from management expectations as suggested by such forward-looking information: general economic conditions, including inflation rates, monetary fluctuations and their impact on capital expenditures and the ability of NSP-Minnesota and its subsidiaries to obtain financing on favorable terms; business conditions in the energy industry; including the risk of a slow down in the U.S. economy or delay in growth, recovery, trade, fiscal, taxation and environmental policies in areas where NSP-Minnesota has a financial interest; customer business conditions; actions of credit rating agencies; competitive factors including the extent and timing of the entry of additional competition in the markets served by NSP-Minnesota and its subsidiaries; unusual weather; effects of geopolitical events, including war and acts of terrorism; cyber security threats and data security breaches; 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; financial or regulatory accounting policies imposed by regulatory bodies; outcomes of regulatory proceedings; availability or cost of capital; and employee work force factors.

Results of Operations

NSP-Minnesota’s net income was approximately $94.2 million for the first quarter of 2017, compared with approximately $94.6 million for 2016. Higher electric margins driven by interim electric rates in Minnesota (subject to refund), non-fuel riders and lower O&M expenses were offset by an increase in depreciation.

Electric Revenues and Margin

Electric revenues and fuel and purchased power expenses are largely impacted by the fluctuation in the price of natural gas, coal and uranium used in the generation of electricity, but as a result of the design of fuel recovery mechanisms to recover current expenses, these price fluctuations have minimal impact on electric margin. The following table details the electric revenues and margin:
 
 
Three Months Ended March 31
(Millions of Dollars)
 
2017
 
2016
Electric revenues
 
$
1,079

 
$
1,034

Electric fuel and purchased power
 
(396
)
 
(366
)
Electric margin
 
$
683

 
$
668


The following tables summarize the components of the changes in electric revenues and electric margin for the three months ended March 31:

Electric Revenues
(Millions of Dollars)
 
2017 vs. 2016
Trading
 
$
25

Retail rate increases (a)
 
10

Non-fuel riders
 
8

Conservation program revenue, offset by expenses
 
7

Decoupling (weather portion) - Minnesota
 
2

Estimated impact of weather
 
(2
)
Other, net
 
(5
)
Total increase in electric revenues
 
$
45



26


Electric Margin
(Millions of Dollars)
 
2017 vs. 2016
Retail rate increases (a)
 
$
10

Non-fuel riders
 
8

Conservation program revenue, offset by expenses
 
7

Decoupling (weather portion) - Minnesota
 
2

Wholesale transmission revenue, net of costs
 
(8
)
Interchange revenues from NSP-Wisconsin
 
(3
)
Estimated impact of weather
 
(2
)
Other, net
 
1

Total increase in electric margin
 
$
15


(a) 
Increase is primarily due to interim rates in Minnesota (subject to and net of estimated provision for refund). See Note 5 to the consolidated financial statements.


Natural Gas Revenues and Margin

Total natural gas expense tends to vary with changing sales requirements and the cost of natural gas purchases. However, due to the design of purchased natural gas cost recovery mechanisms to recover current expenses for sales to retail customers, fluctuations in the cost of natural gas have little effect on natural gas margin. The following table details natural gas revenues and margin:
 
 
Three Months Ended March 31
(Millions of Dollars)
 
2017
 
2016
Natural gas revenues
 
$
221

 
$
194

Cost of natural gas sold and transported
 
(143
)
 
(120
)
Natural gas margin
 
$
78

 
$
74


The following tables summarize the components of the changes in natural gas revenues and natural gas margin for the three months ended March 31:

Natural Gas Revenues
(Millions of Dollars)
 
2017 vs. 2016
Purchased natural gas adjustment clause recovery
 
$
22

Conservation program revenue, offset by expenses
 
2

Retail sales growth, excluding weather impact
 
1

Other, net
 
2

Total increase in natural gas revenues
 
$
27


Natural Gas Margin
(Millions of Dollars)
 
2017 vs. 2016
Conservation program revenue, offset by expenses
 
$
2

Retail sales growth, excluding weather impact
 
1

Other, net
 
1

Total increase in natural gas margin
 
$
4



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Non-Fuel Operating Expenses and Other Items

O&M Expenses O&M expenses decreased $8.5 million, or 2.6 percent, for the first quarter of 2017, compared with 2016. The decrease was primarily due to the timing of planned maintenance and overhauls, decreases in nuclear expenses and savings from cost management programs.

Conservation Program Expenses — Conservation program expenses increased $9.2 million for the first quarter of 2017, compared with 2016. The increase was primarily attributable to both higher recovery rates, as well as additional customer participation in electric conservation programs. Conservation expenses are generally recovered in major jurisdictions concurrently through riders and base rates. Timing of recovery may not correspond to the period in which costs were incurred.

Depreciation and Amortization Depreciation and amortization expense increased $26.4 million, or 18.1 percent, for the first quarter of 2017, compared with 2016. The increase was primarily attributable to capital investments, including the Courtenay Wind Farm, and a reduction of the excess depreciation reserve in Minnesota.

Interest Charges Interest charges increased $3.2 million, or 6.0 percent, for the first quarter of 2017, compared with 2016. The increase was related to higher long-term debt levels to fund capital investments, partially offset by refinancings at lower interest rates.

Income TaxesIncome tax expense decreased $7.5 million for the first quarter of 2017, compared with 2016. The decrease was primarily due to lower pre-tax earnings in 2017 and an increase in wind production tax credits in 2017. The ETR was 29.3 percent for the first quarter of 2017, compared with 32.9 percent in 2016. The lower ETR in 2017 is primarily due to the wind production tax credits referenced above.

The wind production tax credits flow back to customers through NSP-Minnesota’s fuel clause and riders.

Public Utility Regulation

Except to the extent noted below, the circumstances set forth in Public Utility Regulation included in Item 1 of NSP-Minnesota’s Annual Report on Form 10-K for the year ended Dec. 31, 2016, appropriately represent, in all material respects, the current status of public utility regulation, and are incorporated herein by reference.

Wind Development — During the first quarter of 2017, Xcel Energy announced plans to significantly expand its wind capacity by adding 1,550 MW of new wind generation at NSP-Minnesota by the end of 2020. NSP-Minnesota has filed to own and place in rate base 1,150 MW of these wind projects, while 400 MW would be through PPAs. If approved by the MPUC, these wind projects would qualify for 100 percent of the production tax credit (PTC) and are intended to provide billions of dollars of savings to our customers and substantial environmental benefits. Projected savings/benefits assume fuel costs and generation mix consistent with those included in various commission approved resource plans and generation need filings.

The following table details these wind projects:
Project Name
 
Capacity (MW)
 
State
 
Estimated Year of Completion
 
Ownership/PPA
 
Regulatory Status
Freeborn
 
200

 
MN
 
2020
 
NSP-Minnesota
 
Pending MPUC Approval
Blazing Star 1
 
200

 
MN
 
2019
 
NSP-Minnesota
 
Pending MPUC Approval
Blazing Star 2
 
200

 
MN
 
2020
 
NSP-Minnesota
 
Pending MPUC Approval
Lake Benton
 
100

 
MN
 
2019
 
NSP-Minnesota
 
Pending MPUC Approval
Foxtail
 
150

 
ND
 
2019
 
NSP-Minnesota
 
Pending MPUC Approval
Crowned Ridge
 
300

 
SD
 
2019
 
NSP-Minnesota
 
Pending MPUC Approval
Total Ownership
 
1,150

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Crowned Ridge
 
300

 
SD
 
2019
 
PPA
 
Pending MPUC Approval
Clean Energy 1
 
100

 
ND
 
2019
 
PPA
 
Pending MPUC Approval
Total PPA
 
400

 
 
 
 
 
 
 
 

NSP-Minnesota has requested that the MPUC approve the proposed wind projects by July 2017. NSP-Minnesota’s total capital investment for the proposed wind ownership projects is approximately $1.9 billion for 2017-2021.

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Minnesota Legislation — In February 2017, the Minnesota governor signed a bill into law allowing NSP-Minnesota to build a natural gas combined-cycle power plant at NSP-Minnesota’s Sherco site. The plant was originally proposed as part of NSP-Minnesota’s resource plan, which enables the retirement of two coal units at the Sherco site. The plant’s in-service date is anticipated for 2026. Cost recovery of the plant will be subject to MPUC approval.

Nuclear Power Operations

NSP-Minnesota owns two nuclear generating plants: the Monticello plant and the PI plant. See Note 12 of NSP-Minnesota’s Annual Report on Form 10-K for the year ended Dec. 31, 2016 for further discussion regarding the nuclear generating plants. The circumstances set forth in Nuclear Power Operations and Waste Disposal included in Item 1 of NSP-Minnesota’s Annual Report on Form 10-K for the year ended Dec. 31, 2016, appropriately represent, in all material respects, the current status of nuclear power operations, and are incorporated herein by reference.

Nuclear Fuel Supply — NSP-Minnesota is scheduled to take delivery of approximately 13 percent of its 2017 and approximately 56 percent of its 2018 enriched nuclear material requirements from sources that could be impacted by events in Ukraine and sanctions against Russia. Alternate potential sources are expected to provide the flexibility to manage NSP-Minnesota’s nuclear fuel supply to ensure that plant availability and reliability will not be negatively impacted in the near-term. Long-term, through 2024, NSP-Minnesota is scheduled to take delivery of approximately 31 percent of its average enriched nuclear material requirements from sources that could be impacted by events in Ukraine and extended sanctions against Russia. NSP-Minnesota is closely following the progression of these events and will periodically assess if further actions are required to assure a secure supply of enriched nuclear material.

Separately, NSP-Minnesota has enriched nuclear fuel materials in process with Westinghouse Electric Corporation (Westinghouse). Westinghouse filed for Chapter 11 bankruptcy protection in March 2017. NSP-Minnesota owns materials in Westinghouse’s inventory and has contracts in place under which Westinghouse will provide certain services during an upcoming outage at PI. Westinghouse has indicated its intention to perform under the arrangements. Based on Westinghouse’s stated intent and the interim financing secured to fund its on-going operations, NSP-Minnesota does not expect the bankruptcy to materially impact NSP-Minnesota’s operational or financial performance.

Summary of Recent Federal Regulatory Developments

FERC

The FERC has jurisdiction over rates for electric transmission service in interstate commerce and electricity sold at wholesale, hydro facility licensing, natural gas transportation, asset transactions and mergers, accounting practices and certain other activities of NSP-Minnesota, including enforcement of North American Electric Reliability Corporation mandatory electric reliability standards. State and local agencies have jurisdiction over many of NSP-Minnesota’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-Minnesota Annual Report on Form 10-K for the year ended Dec. 31, 2016. In addition to the matters discussed below, see Note 5 to the consolidated financial statements for a discussion of other regulatory matters.

Status of FERC Commissioners — The FERC is comprised of five commissioners appointed by the President and confirmed by the Senate. There are currently only two sitting commissioners.  It is uncertain when the President will appoint new commissioners or when those appointments may be confirmed.  Without three commissioners, the FERC does not have a quorum to act on contested matters. The lack of a quorum could affect the timing of FERC decisions on proposed rules or pending, newly submitted and future filings involving, among other things, contested electric rate matters and certificates of public convenience and necessity for construction of interstate natural gas pipeline facilities.  

FERC Order, ROE Policy — The FERC has adopted a two-step ROE methodology for electric utilities. The issue of how to apply the FERC ROE methodology is being contested in various complaint proceedings. There are two ROE complaints against the MISO TOs, which includes NSP-Minnesota. In September 2016, the FERC issued an order in the first MISO ROE complaint establishing an ROE of 10.32 percent for the period Nov. 12, 2013 to Feb. 11, 2015, and prospectively. The second complaint is pending FERC action after issuance of an initial decision by the ALJ in June 2016, recommending an ROE of 9.7 percent for the period Feb. 12, 2015 to May 11, 2016. The FERC had been expected to issue an order in the second litigated MISO ROE complaint proceeding during 2017, but the lack of a quorum may delay a final order. See Note 5 to the consolidated financial statements for discussion of the MISO ROE Complaints.


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Item 4CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

NSP-Minnesota maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in 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 March 31, 2017, based on an evaluation carried out under the supervision and with the participation of NSP-Minnesota’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-Minnesota’s disclosure controls and procedures were effective.

Internal Control Over Financial Reporting

In 2016, NSP-Minnesota implemented the general ledger modules, as well as initiated deployment of work management systems modules, of a new enterprise resource planning system to improve certain financial and related transaction processes. NSP-Minnesota is continuing to implement additional modules including the conversion of existing work management systems to this same system during 2017. In connection with this ongoing implementation, NSP-Minnesota is updating its internal control over financial reporting, as necessary, to accommodate modifications to its business processes and accounting systems. NSP-Minnesota does not believe that this implementation will have an adverse effect on its internal control over financial reporting.

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

Part IIOTHER INFORMATION

Item 1LEGAL PROCEEDINGS

NSP-Minnesota is involved in various litigation matters that are being defended and handled in the ordinary course of business. The assessment of whether a loss is probable or is a reasonable possibility, and whether the loss or a range of loss is estimable, often involves a series of complex judgments about future events. Management maintains accruals for such losses that are probable of being incurred and subject to reasonable estimation. Management is sometimes unable to estimate an amount or range of a reasonably possible loss in certain situations, including but not limited to when (1) the damages sought are indeterminate, (2) the proceedings are in the early stages, or (3) the matters involve novel or unsettled legal theories. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss.

Additional Information

See Note 6 to the consolidated financial statements for further discussion of legal claims and environmental proceedings. See Part I Item 2 and Note 5 to the consolidated financial statements for a discussion of proceedings involving utility rates and other regulatory matters.

Item 1A RISK FACTORS

NSP-Minnesota’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, 2016, which is incorporated herein by reference. There have been no material changes from the risk factors previously disclosed in the Form 10-K.


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Item 6EXHIBITS

* Indicates incorporation by reference
+ Executive Compensation Arrangements and Benefit Plans Covering Executive Officers and Directors
3.01*
Articles of Incorporation and Amendments of Northern Power Corp. (renamed Northern States Power Co. (a Minnesota corporation) on Aug. 21, 2000) (Exhibit 3.01 to Form 10-12G (file no. 000-31709) dated Oct. 5, 2000).
3.02*
By-Laws of Northern States Power Co. (a Minnesota corporation) as Amended and Restated on Sept. 26, 2013. (Exhibit 3.02 to Form 10-Q/A for the quarter ended Sept. 30, 2013 (file no. 000-31387)).
Principal Executive Officer’s certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Statement pursuant to Private Securities Litigation Reform Act of 1995.
101
The following materials from NSP-Minnesota’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2017 are formatted in XBRL (eXtensible Business Reporting Language):  (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Balance Sheets, (v) Notes to Consolidated Financial Statements, and (vi) document and entity information.

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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.

 
 
Northern States Power Company (a Minnesota corporation)
 
 
 
April 28, 2017
By:
/s/ JEFFREY S. SAVAGE
 
 
Jeffrey S. Savage
 
 
Senior Vice President, Controller
 
 
(Principal Accounting Officer)
 
 
 
 
 
/s/ ROBERT C. FRENZEL
 
 
Robert C. Frenzel
 
 
Executive Vice President, Chief Financial Officer and Director
 
 
(Principal Financial Officer)

32