Attached files

file filename
EX-99.01 - EXHIBIT 99.01 - NORTHERN STATES POWER COnspmex9901q22018.htm
EX-32.01 - EXHIBIT 32.01 - NORTHERN STATES POWER COnspmex3201q22018.htm
EX-31.02 - EXHIBIT 31.02 - NORTHERN STATES POWER COnspmex3102q22018.htm
EX-31.01 - EXHIBIT 31.01 - NORTHERN STATES POWER COnspmex3101q22018.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 June 30, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-31387
Northern States Power Company
(Exact name of registrant as specified in its charter)
Minnesota
 
41-1967505
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
414 Nicollet Mall
 
 
Minneapolis, Minnesota
 
55401
(Address of principal executive offices)
 
(Zip Code)
(612) 330-5500
(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically 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, smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Accelerated filer ¨
Non-accelerated filer x
Smaller reporting company ¨
(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 July 27, 2018
Common Stock, $0.01 par value
 
1,000,000 shares
Northern States Power Company (a Minnesota corporation) meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H (2) to such Form 10-Q.
 
 
 
 
 



TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
 
 
 
 
Item l —

Item 2 —

Item 4 —

 
 
 
PART II —
OTHER INFORMATION
 
 
 
 
Item 1 —

Item 1A —

Item 6 —

 
 
 

 
 
Certifications Pursuant to Section 302
1

Certifications Pursuant to Section 906
1

Statement Pursuant to Private Litigation
1


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




PART IFINANCIAL INFORMATION
Item 1FINANCIAL STATEMENTS

NSP-MINNESOTA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(amounts in thousands)
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
Operating revenues
 
 
 
 
 
 
 
Electric, non-affiliates
$
978,991

 
$
960,394

 
$
1,924,282

 
$
1,915,735

Electric, affiliates
117,417

 
119,385

 
234,389

 
243,074

Natural gas
83,112

 
78,006

 
324,544

 
299,189

Other
8,215

 
7,155

 
15,271

 
14,082

Total operating revenues
1,187,735

 
1,164,940

 
2,498,486

 
2,472,080

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Electric fuel and purchased power
416,502

 
383,947

 
824,274

 
780,068

Cost of natural gas sold and transported
36,818

 
35,500

 
192,084

 
178,245

Cost of sales — other
4,655

 
4,594

 
8,836

 
8,772

Operating and maintenance expenses
309,196

 
305,189

 
601,491

 
613,815

Conservation program expenses
27,518

 
28,065

 
58,328

 
60,564

Depreciation and amortization
178,654

 
173,152

 
360,132

 
345,331

Taxes (other than income taxes)
64,285

 
61,445

 
131,830

 
129,769

Total operating expenses
1,037,628

 
991,892

 
2,176,975

 
2,116,564

 
 
 
 
 
 
 
 
Operating income
150,107

 
173,048

 
321,511

 
355,516

 
 
 
 
 
 
 
 
Other expense, net
(2,234
)
 
(3,632
)
 
(2,018
)
 
(5,166
)
Allowance for funds used during construction — equity
6,903

 
6,425

 
13,651

 
12,708

 
 
 
 
 
 
 
 
Interest charges and financing costs
 
 
 
 
 
 
 
Interest charges — includes other financing costs of
 $1,833 $1,806, $3,648 and $3,592, respectively
56,767

 
57,707

 
114,119

 
114,971

Allowance for funds used during construction — debt
(3,352
)
 
(3,298
)
 
(6,787
)
 
(6,526
)
Total interest charges and financing costs
53,415

 
54,409

 
107,332

 
108,445

 
 
 
 
 
 
 
 
Income before income taxes
101,361

 
121,432

 
225,812

 
254,613

Income taxes
8,974

 
33,770

 
21,685

 
72,785

Net income
$
92,387

 
$
87,662

 
$
204,127

 
$
181,828


See Notes to Consolidated Financial Statements

3


NSP-MINNESOTA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(amounts in thousands)
 
Three Months Ended June 30
 
Six Months Ended June 30
 
2018
 
2017
 
2018
 
2017
Net income
$
92,387

 
$
87,662

 
$
204,127

 
$
181,828

 
 
 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension and retiree medical benefits:
 
 
 
 
 
 
 
Amortization of losses included in net periodic benefit cost,
net of tax of $22, $22, $45 and $47, respectively
54

 
36

 
107

 
71

 


 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 
 
Net fair value decrease, net of tax of $9, $17, $11 and $17, respectively
22

 
26

 
27

 
26

Reclassification of losses to net income, net of tax of $64, $141, $129 and $280, respectively
165

 
204

 
332

 
407

 
187

 
230

 
359

 
433

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

 

 
(128
)
 

 
 
 
 
 
 
 
 
Other comprehensive income
241

 
266

 
338

 
504

Comprehensive income
$
92,628

 
$
87,928

 
$
204,465

 
$
182,332


See Notes to Consolidated Financial Statements

4


NSP-MINNESOTA AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
 
Six Months Ended June 30,
 
2018
 
2017
Operating activities
 
 
 
Net income
$
204,127

 
$
181,828

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
Depreciation and amortization
363,310

 
348,442

Nuclear fuel amortization
62,294

 
57,003

Deferred income taxes
41,204

 
90,927

Amortization of investment tax credits
(817
)
 
(827
)
Allowance for equity funds used during construction
(13,651
)
 
(12,708
)
Net realized and unrealized hedging and derivative transactions
(1,497
)
 
(2,973
)
Other, net
(998
)
 
(946
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(16,025
)
 
(23,008
)
Accrued unbilled revenues
31,354

 
45,497

Inventories
44,093

 
18,901

Other current assets
59,683

 
(56,145
)
Accounts payable
(31,673
)
 
(17,828
)
Net regulatory assets and liabilities
43,782

 
2,613

Other current liabilities
(105,681
)
 
(94,500
)
Pension and other employee benefit obligations
(59,371
)
 
(57,698
)
Change in other noncurrent assets
1,224

 
(2,505
)
Change in other noncurrent liabilities
(17,885
)
 
(11,878
)
Net cash provided by operating activities
603,473

 
464,195

 
 
 
 
Investing activities
 
 
 
Utility capital/construction expenditures
(439,868
)
 
(484,172
)
Allowance for equity funds used during construction
13,651

 
12,708

Purchases investment securities
(367,159
)
 
(361,881
)
Proceeds from the sale of investment securities
356,973

 
350,446

Investments in utility money pool arrangement
(627,000
)
 
(192,000
)
Repayments from utility money pool arrangement
627,000

 
192,000

Other, net
(2,065
)
 
(4,097
)
Net cash used in investing activities
(438,468
)
 
(486,996
)
 
 
 
 
Financing activities
 
 
 
Repayments of short-term borrowings, net
(20,000
)
 
(2,000
)
Borrowings under utility money pool arrangement
131,000

 
465,000

Repayments under utility money pool arrangement
(154,000
)
 
(374,000
)
Repayments of long-term debt
(9
)
 

Capital contributions from parent
49,622

 
89,487

Dividends paid to parent
(183,245
)
 
(175,115
)
Other, net
(68
)
 

Net cash (used in) provided by financing activities
(176,700
)
 
3,372

 
 
 
 
Net change in cash and cash equivalents
(11,695
)
 
(19,429
)
Cash and cash equivalents at beginning of period
43,781

 
47,595

Cash and cash equivalents at end of period
$
32,086

 
$
28,166

 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
Cash paid for interest (net of amounts capitalized)
$
(101,005
)
 
$
(104,020
)
Cash received (paid) for income taxes, net
64,212

 
(33,014
)
Supplemental disclosure of non-cash investing transactions:
 
 
 
Property, plant and equipment additions in accounts payable
$
50,370

 
$
60,361


See Notes to Consolidated Financial Statements

5


NSP-MINNESOTA AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands, except share and per share data)
 
 
June 30, 2018
 
Dec. 31, 2017
Assets
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
32,086

 
$
43,781

Accounts receivable, net
 
361,144

 
345,110

Accounts receivable from affiliates
 
19,462

 
48,494

Accrued unbilled revenues
 
246,362

 
277,716

Inventories
 
294,602

 
337,712

Regulatory assets
 
300,150

 
276,392

Derivative instruments
 
31,268

 
25,230

Prepaid taxes
 
41,763

 
79,145

Prepayments and other
 
36,717

 
43,682

Total current assets
 
1,363,554

 
1,477,262

 
 
 
 
 
Property, plant and equipment, net
 
13,075,676

 
13,033,612

 
 
 
 
 
Other assets
 
 
 
 
Nuclear decommissioning fund and other investments
 
2,195,458

 
2,192,344

Regulatory assets
 
1,343,820

 
1,190,429

Derivative instruments
 
26,790

 
28,102

Other
 
11,936

 
4,142

Total other assets
 
3,578,004

 
3,415,017

Total assets
 
$
18,017,234

 
$
17,925,891

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Current liabilities
 
 
 
 
Current portion of long-term debt
 
$
8

 
$
7

Short-term debt
 

 
20,000

Borrowings under utility money pool arrangement
 
62,000

 
85,000

Accounts payable
 
348,475

 
368,342

Accounts payable to affiliates
 
53,790

 
80,070

Regulatory liabilities
 
135,725

 
83,403

Taxes accrued
 
193,465

 
229,335

Accrued interest
 
67,765

 
65,896

Dividends payable to parent
 
88,714

 
98,687

Derivative instruments
 
18,029

 
17,697

Customer deposits
 
66,764

 
95,369

Other
 
153,256

 
152,965

Total current liabilities
 
1,187,991

 
1,296,771

 
 
 
 
 
Deferred credits and other liabilities
 
 
 
 
Deferred income taxes
 
1,655,863

 
1,612,341

Deferred investment tax credits
 
21,710

 
22,528

Regulatory liabilities
 
2,013,411

 
1,978,527

Asset retirement obligations
 
2,134,741

 
2,083,874

Derivative instruments
 
92,122

 
102,742

Pension and employee benefit obligations
 
271,228

 
331,087

Other
 
178,347

 
89,440

Total deferred credits and other liabilities
 
6,367,422

 
6,220,539

 
 
 
 
 
Commitments and contingencies
 


 


Capitalization
 
 
 
 
Long-term debt
 
4,935,060

 
4,933,011

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

 
10

Additional paid in capital
 
3,600,234

 
3,580,234

Retained earnings
 
1,950,716

 
1,919,863

Accumulated other comprehensive loss
 
(24,199
)
 
(24,537
)
Total common stockholder’s equity
 
5,526,761

 
5,475,570

Total liabilities and equity
 
$
18,017,234

 
$
17,925,891

See Notes to Consolidated Financial Statements

6


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

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (GAAP), the financial position of NSP-Minnesota and its subsidiaries as of June 30, 2018 and Dec. 31, 2017; the results of its operations, including the components of net income and comprehensive income, for the three and six months ended June 30, 2018 and 2017; and its cash flows for the six months ended June 30, 2018 and 2017. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Management has also evaluated the impact of events occurring after June 30, 2018 up to the date of issuance of these consolidated financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation. The Dec. 31, 2017 balance sheet information has been derived from the audited 2017 consolidated financial statements included in the NSP-Minnesota Annual Report on Form 10-K for the year ended Dec. 31, 2017. These notes to the consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP on an annual basis have been condensed or omitted pursuant to such rules and regulations. For further information, refer to the consolidated financial statements and notes thereto, included in the NSP-Minnesota Annual Report on Form 10-K for the year ended Dec. 31, 2017, filed with the SEC on Feb. 26, 2018. Due to the seasonality of NSP-Minnesota’s electric and natural gas sales, interim results are not necessarily an appropriate base from which to project annual results.

1.
Summary of Significant Accounting Policies

The significant accounting policies set forth in Note 1 to the consolidated financial statements in the NSP-Minnesota Annual Report on Form 10-K for the year ended Dec. 31, 2017, appropriately represent, in all material respects, the current status of accounting policies and are incorporated herein by reference.

2.
Accounting Pronouncements

Recently Issued

Leases — In February 2016, the Financial Accounting Standards Board (FASB) issued Leases, Topic 842 (Accounting Standards Update (ASU) No. 2016-02), which for lessees requires balance sheet recognition of right-of-use assets and lease liabilities for most leases. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2018. 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 and proposed in Targeted Improvements, Topic 842 (Proposed ASU 2018-200). On Jan. 1, 2019 agreements considered leases for the use of office space, equipment and natural gas storage assets, as well as certain purchased power agreements (PPAs) for fossil-fueled generating facilities are expected to be recognized on the consolidated balance sheet.

Recently Adopted

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

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


7


Presentation of Net Periodic Benefit Cost — In March 2017, the FASB issued Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, Topic 715 (ASU No. 2017-07), which establishes that only the service cost element of pension cost may be presented as a component of operating income in the income statement. Also under the guidance, only the service cost component of pension cost is eligible for capitalization. As a result of the application of accounting principles for rate regulated entities, a similar amount of pension cost, including non-service components, will be recognized consistent with the historical ratemaking treatment, and the impacts of adoption will be limited to changes in classification of non-service costs in the consolidated statement of income. NSP-Minnesota implemented the new guidance on Jan. 1, 2018, and as a result, $6.8 million of pension costs were retrospectively reclassified from operating and maintenance expenses to other income, net on the consolidated income statement for the six months ended June 30, 2017. Under a practical expedient permitted by the standard, NSP-Minnesota used benefit cost amounts disclosed for prior periods as the basis for retrospective application.

3.
Selected Balance Sheet Data
(Thousands of Dollars)
 
June 30, 2018
 
Dec. 31, 2017
Accounts receivable, net
 
 
 
 
Accounts receivable
 
$
380,606

 
$
366,388

Less allowance for bad debts
 
(19,462
)
 
(21,278
)
 
 
$
361,144

 
$
345,110


(Thousands of Dollars)
 
June 30, 2018
 
Dec. 31, 2017
Inventories
 
 
 
 
Materials and supplies
 
$
208,596

 
$
209,236

Fuel
 
73,737

 
94,483

Natural gas
 
12,269

 
33,993

 
 
$
294,602

 
$
337,712

(Thousands of Dollars)
 
June 30, 2018
 
Dec. 31, 2017
Property, plant and equipment, net
 
 
 
 
Electric plant
 
$
17,276,273

 
$
17,024,925

Natural gas plant
 
1,407,523

 
1,370,330

Common and other property
 
719,069

 
724,066

Construction work in progress
 
528,079

 
530,126

Total property, plant and equipment
 
19,930,944

 
19,649,447

Less accumulated depreciation
 
(7,210,566
)
 
(7,018,249
)
Nuclear fuel
 
2,712,590

 
2,697,412

Less accumulated amortization
 
(2,357,292
)
 
(2,294,998
)
 
 
$
13,075,676

 
$
13,033,612


4.
Income Taxes

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


8


Total income tax expense from operations differs from the amount computed by applying the statutory federal income tax rate to income before income tax expense. The following reconciles such differences:
 
 
Six Months Ended June 30
 
 
2018
 
2017
Federal statutory rate
 
21.0
 %
 
35.0
 %
State tax, net of federal tax effect
 
7.1

 
5.8

Increases (decreases) in tax from:
 

 

Wind production tax credits (PTCs)
 
(17.1
)
 
(11.4
)
Regulatory differences - ARAM (a)
 
(8.5
)
 
(0.2
)
Regulatory differences - ARAM deferral (b)
 
7.9

 

Other tax credits, net of federal income tax expense
 
(1.5
)
 
(1.0
)
Other, net
 
0.7

 
0.4

Effective income tax rate
 
9.6
 %
 
28.6
 %

(a)  
The average rate assumption method (ARAM); a method to flow back excess deferred taxes to customers.
(b)
As we receive direction from our regulatory commissions regarding the return of excess deferred taxes (to our customers resulting from the Tax Cuts and Jobs Act
(TCJA)), the ARAM deferral may decrease during the year, which would result in a reduction to tax expense with a corresponding reduction to revenue.

Federal Audits — NSP-Minnesota is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. The statute of limitations applicable to Xcel Energy’s federal income tax returns expire as follows:

Tax Year(s)
 
Expiration
2009 - 2011
 
December 2018
2012 - 2014
 
October 2019
2015
 
September 2019
2016
 
September 2020

In 2012, the Internal Revenue Service (IRS) commenced an examination of tax years 2010 and 2011, including the 2009 carryback claim. The IRS proposed an adjustment to the federal tax loss carryback claims and in 2015 the IRS forwarded the issue to the Office of Appeals (Appeals). In 2017 Xcel Energy and Appeals reached an agreement and the benefit related to the agreed upon portions was recognized. In the second quarter of 2018, the Joint Committee on Taxation completed its review and took no exception to the agreement. As a result, the remaining unrecognized tax benefit was released and recorded as a payable to the IRS.

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

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

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


9


A reconciliation of the amount of unrecognized tax benefit is as follows:
(Millions of Dollars)
 
June 30, 2018
 
Dec. 31, 2017
Unrecognized tax benefit — Permanent tax positions
 
$
10.2

 
$
10.2

Unrecognized tax benefit — Temporary tax positions
 
5.5

 
7.9

Total unrecognized tax benefit
 
$
15.7

 
$
18.1


The unrecognized tax benefit amounts were reduced by the tax benefits associated with NOL and tax credit carryforwards. The amounts of tax benefits associated with NOL and tax credit carryforwards are as follows:
(Millions of Dollars)
 
June 30, 2018
 
Dec. 31, 2017
NOL and tax credit carryforwards
 
$
(15.0
)
 
$
(12.8
)

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

The payable for interest related to unrecognized tax benefits is partially offset by the interest benefit associated with NOL and tax credit carryforwards. A reconciliation of the beginning and ending amount of the payable for interest related to unrecognized tax benefits are as follows:
(Millions of Dollars)
 
June 30, 2018
 
Dec. 31, 2017
Payable for interest related to unrecognized tax benefits at beginning of period
 
$
(0.9
)
 
$
(2.0
)
Interest (expense) income related to unrecognized tax benefits recorded during the period
 
(1.0
)
 
1.1

Payable for interest related to unrecognized tax benefits at end of period
 
$
(1.9
)
 
$
(0.9
)

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

5.
Rate Matters

Except to the extent noted below, the circumstances set forth in Note 10 to the consolidated financial statements included in NSP-Minnesota’s Annual Report on Form 10-K for the year ended Dec. 31, 2017 and in Note 5 to the consolidated financial statements to NSP-Minnesota’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, appropriately represent, in all material respects, the current status of other rate matters, and are incorporated herein by reference.

Tax Reform Regulatory Proceedings

The specific impacts of the TCJA on customer rates are subject to regulatory approval. Each of the states in NSP-Minnesota’s service areas have opened dockets to address the impacts of the TCJA.

In April 2018, NSP-Minnesota updated the estimated impact of the TCJA, which reflected an overall reduction in 2018 revenue requirements of approximately $136 million for electric and $7 million for natural gas, and made recommendations regarding the sharing of those benefits with ratepayers. The proposed electric options included: customer refunds and rider impacts of $68 million, deferral of $44 million to allow for a rate case stay-out for 2020, acceleration of depreciation for the King coal plant of $22 million and low income program funding of $2 million. The proposed natural gas options included customer refunds and rider impacts of $3 million, with the remaining TCJA benefits deferred to mitigate increased costs in the next natural gas rate case.

In June 2018, the Minnesota Department of Commerce (DOC) recommended to implement refunds for the current tax impacts (approximately $90 million), and incorporate the deferred tax impacts (approximately $53 million) in NSP-Minnesota’s next electric and gas rate cases. A decision from the Minnesota Public Utilities Commission (MPUC) is expected in 2018.

North and South Dakota — In February 2018, NSP-Minnesota proposed using the reduced revenue requirements from the TCJA to defer planned future rate filings in North Dakota and South Dakota. In July 2018, the South Dakota Public Utilities Commission (SDPUC) approved a settlement which proposed a one-time customer refund of $11 million for the 2018 impact of the TCJA and a 2-year rate case moratorium.


10


Dockets have also been opened in North Dakota and South Dakota. In February 2018, NSP-Minnesota proposed using the reduced revenue requirements from the TCJA to defer planned future rate filings in both jurisdictions.

Recently Concluded Regulatory Proceedings — MPUC and the North Dakota Public Service Commission (NDPSC)

PPA Terminations and Amendments — In June 2018, NSP-Minnesota executed the terminations of the Benson and Laurentian PPAs, and purchased the Benson biomass facility. As a result, a $103 million regulatory asset was recognized for the costs of the Benson transaction, including payments to Benson of $93 million, as well as other transaction costs and future estimated facility removal costs. For Laurentian, a regulatory asset of $109 million was recognized for annual termination payments over 6 years. The regulatory approvals provide for recovery of the Benson regulatory asset over approximately 10 years, and for recovery of the Laurentian termination payments as they occur, through fuel and purchased energy recovery mechanisms.

Pending Regulatory Proceeding — Federal Energy Regulatory Commission (FERC)

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

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

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

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

6.
Commitments and Contingencies

Except to the extent noted below and in Note 5 to the consolidated financial statements, the circumstances set forth in Notes 10, 11 and 12 to the consolidated financial statements included in the NSP-Minnesota Annual Report on Form 10-K for the year ended Dec. 31, 2017 and in Notes 5 and 6 to NSP-Minnesota’s Quarterly Report of Form 10-Q for the quarterly period ended March 31, 2018, appropriately represent, in all material respects, the current status of commitments and contingent liabilities and are incorporated herein by reference. The following include commitments, contingencies and unresolved contingencies that are material to NSP-Minnesota’s financial position.

PPAs

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

NSP-Minnesota had approximately 1,002 Megawatts (MW) of capacity under long-term PPAs as of June 30, 2018 and 1,069 MW as of Dec. 31, 2017, with entities that have been determined to be variable interest entities. NSP-Minnesota has concluded that these entities are not required to be consolidated in its consolidated financial statements because it does not have the power to direct the activities that most significantly impact the entities’ economic performance. These agreements have various expiration dates through 2027.


11


Guarantees

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

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

 
$
4.8


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 and commenced an investigation of the historic MGP and adjacent properties (the Fargo MGP Site). The North Dakota Department of Health approved NSP-Minnesota’s proposed cleanup plan in January 2017, which involves targeted source removal of impacted soils and historic MGP infrastructure. Remediation activities commenced in June 2018. NSP-Minnesota has also initiated insurance recovery litigation in North Dakota. The U.S. District Court for the District of North Dakota has set a trial date for Spring of 2020.

NSP-Minnesota recorded an estimated liability of $10 million as of June 30, 2018 and $16 million as of Dec. 31, 2017, for the Fargo MGP Site. The current cost estimate for the remediation of the site is approximately $22 million, of which approximately $12 million has been spent. NSP-Minnesota has deferred Fargo MGP Site costs allocable to the North Dakota jurisdiction, or approximately 88 percent of all remediation costs, as approved by the NDPSC. In December 2017, NSP-Minnesota filed a request with the MPUC to defer post-2017 MGP remediation expenditures allocable to the Minnesota jurisdiction, including the Fargo MGP Site. In March 2018, the DOC recommended that the MPUC deny NSP-Minnesota’s deferral request. A MPUC decision is expected in the third quarter of 2018.

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

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.


12


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

 
$
250

Amount outstanding at period end
 
62

 
85

Average amount outstanding
 
1

 
25

Maximum amount outstanding
 
62

 
142

Weighted average interest rate, computed on a daily basis
 
1.85
%
 
1.14
%
Weighted average interest rate at period end
 
1.85

 
1.18


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

 
$
500

Amount outstanding at period end
 

 
20

Average amount outstanding
 

 
62

Maximum amount outstanding
 

 
237

Weighted average interest rate, computed on a daily basis
 
N/A

 
1.10
%
Weighted average interest rate at period end
 
N/A

 
1.93


Letters of Credit — NSP-Minnesota uses letters of credit, generally with terms of one year, to provide financial guarantees for certain operating obligations. At June 30, 2018 and Dec. 31, 2017, there were $36 million and $24 million, respectively, of letters of credit outstanding under the credit facility. The contract amounts of these letters of credit approximate their fair value and are subject to fees.

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

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

 
$
36

 
$
464

(a) 
This credit facility expires in June 2021.
(b) 
Includes outstanding letters of credit.

All credit facility bank borrowings, outstanding letters of credit and outstanding commercial paper reduce the available capacity under the credit facility. NSP-Minnesota had no direct advances on the credit facility outstanding at June 30, 2018 and Dec. 31, 2017.


13


8.
Fair Value of Financial Assets and Liabilities

Fair Value Measurements

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

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

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

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

Specific valuation methods include the following:

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

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

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

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

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

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

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


14


Non-Derivative Instruments Fair Value Measurements

Nuclear Decommissioning Fund

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

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

Unrealized gains for the nuclear decommissioning fund were $547 million and $560 million as of June 30, 2018 and Dec. 31, 2017, respectively, and unrealized losses and amounts recorded as other-than-temporary impairments were $23 million and $7 million as of June 30, 2018 and Dec. 31, 2017, 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 as of June 30, 2018 and Dec. 31, 2017:
 
 
June 30, 2018
 
 
 
 
Fair Value
(Thousands of Dollars)
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Investments Measured at NAV (b)
 
Total
Nuclear decommissioning fund (a)
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
30,868

 
$
30,868

 
$

 
$

 
$

 
$
30,868

Commingled funds:
 
 
 
 
 
 
 
 
 
 
 
 
Non U.S. equities
 
262,468

 
197,545

 

 

 
90,402

 
287,947

Emerging market debt funds
 
158,296

 

 

 

 
158,075

 
158,075

Private equity investments
 
150,565

 

 

 

 
220,460

 
220,460

Real estate
 
128,115

 

 

 

 
197,032

 
197,032

Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
Government securities
 
75,806

 

 
75,477

 

 

 
75,477

U.S. corporate bonds
 
330,170

 

 
322,689

 

 

 
322,689

Non U.S. corporate bonds
 
57,902

 

 
56,422

 

 

 
56,422

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. equities
 
269,483

 
568,134

 

 

 

 
568,134

Non U.S. equities
 
156,756

 
227,226

 

 

 

 
227,226

Total
 
$
1,620,429

 
$
1,023,773

 
$
454,588

 
$

 
$
665,969

 
$
2,144,330


(a) 
Reported in nuclear decommissioning fund and other investments on the consolidated balance sheet, which also includes $51 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.

15


 
 
Dec. 31, 2017
 
 
 
 
Fair Value
(Thousands of Dollars)
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Investments Measured at NAV (b)
 
Total
Nuclear decommissioning fund (a)
 
 
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
28,741

 
$
28,741

 
$

 
$

 
$

 
$
28,741

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

 
216,551

 

 

 
89,857

 
306,408

Emerging market debt funds
 
156,057

 

 

 

 
166,375

 
166,375

Private equity investments
 
141,413

 

 

 

 
198,037

 
198,037

Real estate
 
130,787

 

 

 

 
201,842

 
201,842

Other commingled funds
 
9,340

 
6,286

 

 

 
2,975

 
9,261

Debt securities:
 
 
 
 
 
 
 
 
 
 
 
 
Government securities
 
67,760

 

 
69,413

 

 

 
69,413

U.S. corporate bonds
 
319,809

 

 
322,129

 

 

 
322,129

Non U.S. corporate bonds
 
50,121

 

 
50,102

 

 

 
50,102

Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
U.S. equities
 
271,166

 
556,974

 

 

 

 
556,974

Non U.S. equities
 
151,961

 
233,999

 

 

 

 
233,999

Total
 
$
1,590,849

 
$
1,042,551

 
$
441,644

 
$

 
$
659,086

 
$
2,143,281


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

For the three and six months ended June 30, 2018 and 2017 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, as of June 30, 2018:
 
 
Final Contractual Maturity
(Thousands of Dollars)
 
Due in 1 Year
or Less
 
Due in 1 to 5
Years
 
Due in 5 to 10
Years
 
Due after 10
Years
 
Total
Government securities
 
$

 
$
3,930

 
$
2,300

 
$
69,247

 
$
75,477

U.S. corporate bonds
 
4,919

 
89,594

 
172,423

 
55,753

 
322,689

Non U.S. corporate bonds
 
2,007

 
19,925

 
30,316

 
4,174

 
56,422

Debt securities
 
$
6,926

 
$
113,449

 
$
205,039

 
$
129,174

 
$
454,588


Rabbi Trusts

In 2016, NSP-Minnesota established a rabbi trust to provide partial funding for future deferred compensation plan distributions. The following tables present the cost and fair value of the assets held in rabbi trust at June 30, 2018 and Dec. 31, 2017:
 
 
June 30, 2018
 
 
 
 
Fair Value
(Thousands of Dollars)
 
Cost
 
Level 1
 
Level 2
 
Level 3
 
Total
Rabbi Trust (a)
 
 
 
 
 
 
 
 
 
 
Cash equivalents
 
$
394

 
$
394

 
$

 
$

 
$
394

Mutual funds
 
10,423

 
11,374

 

 

 
11,374

Total
 
$
10,817

 
$
11,768

 
$

 
$

 
$
11,768


16


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

 
$
783

 
$

 
$

 
$
783

Mutual funds
 
10,332

 
11,283

 

 

 
11,283

Total
 
$
11,115

 
$
12,066

 
$

 
$

 
$
12,066

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

Derivative Instruments Fair Value Measurements

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

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

At June 30, 2018, accumulated other comprehensive losses related to interest rate derivatives included $0.8 million of net losses expected to be reclassified into earnings during the next 12 months as the related hedged interest rate transactions impact earnings, including forecasted amounts for unsettled hedges, as applicable.

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

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

At June 30, 2018, NSP-Minnesota had various vehicle fuel contracts designated as cash flow hedges extending through December 2018. NSP-Minnesota enters into derivative instruments that mitigate commodity price risk on behalf of electric and natural gas customers, but may not be designated as qualifying hedging transactions. Changes in the fair value of non-trading commodity derivative instruments are recorded in other comprehensive income or deferred as a regulatory asset or liability. The classification as a regulatory asset or liability is based on commission approved regulatory recovery mechanisms. NSP-Minnesota recorded immaterial amounts to income related to the ineffectiveness of cash flow hedges for the three and six months ended June 30, 2018 and 2017.

At June 30, 2018, net gains related to commodity derivative cash flow hedges recorded as a component of accumulated other comprehensive losses included $0.1 million of net gains expected to be reclassified into earnings during the next 12 months as the hedged transactions occur.

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

17



The following table details the gross notional amounts of commodity forwards, options and FTRs at June 30, 2018 and Dec. 31, 2017:
(Amounts in Thousands) (a)(b)
 
June 30, 2018
 
Dec. 31, 2017
Megawatt hours of electricity
 
73,771

 
41,711

Million British thermal units of natural gas
 
7,403

 
23,829

Gallons of vehicle fuel
 
120

 
240


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

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

 
$

 
$
264

(a) 
$

 
$

 
Vehicle fuel and other commodity
 
31

 

 
(35
)
(b) 

 

 
Total
 
$
31

 
$

 
$
229

 
$

 
$

 
Other derivative instruments
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$

 
$

 
$

 
$
2,263

(c) 
Electric commodity
 

 
24,262

 

 
1,142

(d) 

 
Natural gas commodity
 

 
(18
)
 

 

 

 
Total
 
$

 
$
24,244

 
$

 
$
1,142

 
$
2,263

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

 
$

 
$
525

(a) 
$

 
$

 
Vehicle fuel and other commodity
 
38

 

 
(64
)
(b) 

 

 
Total
 
$
38

 
$

 
$
461

 
$

 
$

 
Other derivative instruments
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$

 
$

 
$

 
$
8,981

(c) 
Electric commodity
 

 
(5,615
)
 

 
3,311

(d) 

 
Natural gas commodity
 

 
830

 

 
(521
)
(e) 
(404
)
(e) 
Total
 
$

 
$
(4,785
)
 
$

 
$
2,790

 
$
8,577

 

18


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

 
$

 
$
350

(a) 
$

 
$

 
Vehicle fuel and other commodity
 
43

 

 
(5
)
(b) 

 

 
Total
 
$
43

 
$

 
$
345

 
$

 
$

 
Other derivative instruments
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$

 
$

 
$

 
$
5,977

(c) 
Electric commodity
 

 
(1,526
)
 

 
(1,149
)
(d) 

 
Natural gas commodity
 

 
(51
)
 

 

 

 
Total
 
$

 
$
(1,577
)
 
$

 
$
(1,149
)
 
$
5,977

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

 
$

 
$
692

(a) 
$

 
$

 
Vehicle fuel and other commodity
 
43

 

 
(5
)
(b) 

 

 
Total
 
$
43

 
$

 
$
687

 
$

 
$

 
Other derivative instruments
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$

 
$

 
$

 
$
6,599

(c) 
Electric commodity
 

 
(2,772
)
 

 
(3,937
)
(d) 

 
Natural gas commodity
 

 
(717
)
 

 
698

(e) 
(945
)
(e) 
Total
 
$

 
$
(3,489
)
 
$

 
$
(3,239
)
 
$
5,654

 

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

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

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

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


19


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 June 30, 2018, five of NSP-Minnesota’s 10 most significant counterparties for these activities, comprising $39.7 million or 48 percent of this credit exposure, had investment grade credit ratings from Standard & Poor’s, Moody’s or Fitch Ratings. Five of the 10 most significant counterparties, comprising $20.1 million or 24 percent of this credit exposure, were not rated by these external agencies, but based on NSP-Minnesota’s internal analysis, had credit quality consistent with investment grade. All ten of these significant counterparties are municipal or cooperative electric entities, or other utilities.

Credit Related Contingent Features — Contract provisions for derivative instruments that NSP-Minnesota enters into, including those accounted for as normal purchase-normal sale contracts and therefore not reflected on the balance sheet, may require the posting of collateral or settlement of the contracts for various reasons, including if NSP-Minnesota’s credit ratings are downgraded below its investment grade credit rating by any of the major credit rating agencies or for cross-default contractual provisions that could result in the settlement of such contracts if there was a failure under other financing arrangements related to payment terms or other covenants. At June 30, 2018 and Dec. 31, 2017, there were no derivative instruments in a material liability position with such underlying contract provisions.

Certain derivative instruments are also subject to contract provisions that contain adequate assurance clauses. These provisions allow counterparties to seek performance assurance, including cash collateral, in the event that NSP-Minnesota’s ability to fulfill its contractual obligations is reasonably expected to be impaired. NSP-Minnesota had no collateral posted related to adequate assurance clauses in derivative contracts as of June 30, 2018 and Dec. 31, 2017.

Recurring Fair Value Measurements — The following table presents for each of the fair value hierarchy levels, NSP-Minnesota’s derivative assets and liabilities measured at fair value on a recurring basis at June 30, 2018:
 
 
June 30, 2018
 
 
Fair Value
 
Fair Value Total
 
Counterparty Netting (b)
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Total
Current derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Vehicle fuel and other commodity
 
$

 
$
81

 
$

 
$
81

 
$

 
$
81

Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
480

 
14,737

 
1,661

 
16,878

 
(8,601
)
 
8,277

Electric commodity
 

 

 
22,896

 
22,896

 
(177
)
 
22,719

Natural gas commodity
 

 
167

 

 
167

 

 
167

Total current derivative assets
 
$
480

 
$
14,985

 
$
24,557

 
$
40,022

 
$
(8,778
)
 
31,244

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
24

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
31,268

Noncurrent derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$
33,171

 
$
5,596

 
$
38,767

 
$
(12,085
)
 
$
26,682

Total noncurrent derivative assets
 
$

 
$
33,171

 
$
5,596

 
$
38,767

 
$
(12,085
)
 
26,682

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
108

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
26,790



20


 
 
June 30, 2018
 
 
Fair Value
 
Fair Value Total
 
Counterparty Netting (b)
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Total
Current derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
286

 
$
12,147

 
$
1,550

 
$
13,983

 
$
(9,805
)
 
$
4,178

Electric commodity
 

 

 
177

 
177

 
(177
)
 

Total current derivative liabilities
 
$
286

 
$
12,147

 
$
1,727

 
$
14,160

 
$
(9,982
)
 
4,178

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
13,851

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
18,029

Noncurrent derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$
24,476

 
$
397

 
$
24,873

 
$
(15,738
)
 
$
9,135

Total noncurrent derivative liabilities
 
$

 
$
24,476

 
$
397

 
$
24,873

 
$
(15,738
)
 
9,135

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
82,987

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
92,122



(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 is being 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 June 30, 2018. At June 30, 2018, derivative assets and liabilities include no obligations to return cash collateral and rights to reclaim cash collateral of $4.9 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, 2017:
 
 
Dec. 31, 2017
 
 
Fair Value
 
Fair Value Total
 
Counterparty Netting (b)
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Total
Current derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Vehicle fuel and other commodity
 
$

 
$
107

 
$

 
$
107

 
$

 
$
107

Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
1,691

 
17,144

 
142

 
18,977

 
(11,744
)
 
7,233

Electric commodity
 

 

 
17,581

 
17,581

 
(425
)
 
17,156

Natural gas commodity
 

 
77

 

 
77

 

 
77

Total current derivative assets
 
$
1,691

 
$
17,328

 
$
17,723

 
$
36,742

 
$
(12,169
)
 
24,573

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
657

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
25,230

Noncurrent derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$
29,121

 
$
5,363

 
$
34,484

 
$
(6,502
)
 
$
27,982

Total noncurrent derivative assets
 
$

 
$
29,121

 
$
5,363

 
$
34,484

 
$
(6,502
)
 
27,982

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
120

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
28,102



21


 
 
Dec. 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
 
$
1,713

 
$
13,853

 
$

 
$
15,566

 
$
(11,974
)
 
$
3,592

Electric commodity
 

 

 
425

 
425

 
(425
)
 

Total current derivative liabilities
 
$
1,713

 
$
13,853

 
$
425

 
$
15,991

 
$
(12,399
)
 
3,592

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
14,105

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
17,697

Noncurrent derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$
22,163

 
$

 
$
22,163

 
$
(9,334
)
 
$
12,829

Total noncurrent derivative liabilities
 
$

 
$
22,163

 
$

 
$
22,163

 
$
(9,334
)
 
12,829

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
89,913

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
102,742



(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 is being 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, 2017. At Dec. 31, 2017, derivative assets and liabilities include no obligations to return cash collateral and rights to reclaim cash collateral of $3.1 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 and six months ended June 30, 2018 and 2017:
 
 
Three Months Ended June 30
(Thousands of Dollars)
 
2018
 
2017
Balance at April 1
 
$
13,516

 
$
4,643

Purchases
 
26,395

 
40,460

Settlements
 
(5,170
)
 
(8,166
)
Net transactions recorded during the period:
 
 
 
 
(Losses) gains recognized in earnings (a)
 
(2,654
)
 
6,007

Net losses recognized as regulatory assets and liabilities
 
(4,058
)
 
(2,372
)
Balance at June 30
 
$
28,029

 
$
40,572

 
 
 
 
 
 
 
Six Months Ended June 30
(Thousands of Dollars)
 
2018
 
2017
Balance at Jan. 1
 
$
22,662

 
$
15,320

Purchases
 
26,397

 
40,740

Settlements
 
(7,104
)
 
(11,592
)
Net transactions recorded during the period:
 
 
 
 
(Losses) gains recognized in earnings (a)
 
(374
)
 
5,215

Net gains recognized as regulatory assets and liabilities
 
(13,552
)
 
(9,111
)
Balance at June 30
 
$
28,029

 
$
40,572


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

NSP-Minnesota recognizes transfers between levels as of the beginning of each period. There were no transfers of amounts between levels for derivative instruments for the three and six months ended June 30, 2018 and 2017.


22


Fair Value of Long-Term Debt

As of June 30, 2018 and Dec. 31, 2017, other financial instruments for which the carrying amount did not equal fair value were as follows:
 
 
June 30, 2018
 
Dec. 31, 2017
(Thousands of Dollars)
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Long-term debt, including current portion
 
$
4,935,068

 
$
5,192,385

 
$
4,933,018

 
$
5,601,919


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 June 30, 2018 and Dec. 31, 2017, and given the observability of the inputs to these estimates, the fair values presented for long-term debt have been assigned a Level 2.

9.
Other Expense, Net

Other expense, net consisted of the following:
 
 
Three Months Ended June 30
 
Six Months Ended June 30
(Thousands of Dollars)
 
2018
 
2017
 
2018
 
2017
Interest income
 
$
522

 
$
605

 
$
3,457

 
$
3,314

Other nonoperating income
 
697

 
17

 
698

 
27

Insurance policy expense
 
(1,537
)
 
(856
)
 
(1,195
)
 
(1,711
)
Benefits non-service cost
 
(1,916
)
 
(3,398
)
 
(4,978
)
 
(6,796
)
Other expense, net
 
$
(2,234
)
 
$
(3,632
)
 
$
(2,018
)
 
$
(5,166
)

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 operating and maintenance (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.

23


(Thousands of Dollars)
 
Regulated Electric
 
Regulated Natural Gas
 
All Other
 
Reconciling Eliminations
 
Consolidated Total
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)(b)
 
$
1,096,408

 
$
83,112

 
$
8,215

 
$

 
$
1,187,735

Intersegment revenues
 
128

 
116

 

 
(244
)
 

Total revenues
 
$
1,096,536

 
$
83,228

 
$
8,215

 
$
(244
)
 
$
1,187,735

Net income
 
$
88,875

 
$
399

 
$
3,113

 
$

 
$
92,387

(Thousands of Dollars)
 
Regulated Electric
 
Regulated Natural Gas
 
All Other
 
Reconciling Eliminations
 
Consolidated Total
Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)(b)
 
$
1,079,779

 
$
78,006

 
$
7,155

 
$

 
$
1,164,940

Intersegment revenues
 
243

 
177

 

 
(420
)
 

Total revenues
 
$
1,080,022

 
$
78,183

 
$
7,155

 
$
(420
)
 
$
1,164,940

Net income (loss)
 
$
89,477

 
$
(3,360
)
 
$
1,545

 
$

 
$
87,662

(a) 
Operating revenues include 117 million and 119 million of affiliate electric revenue for the three months ended June 30, 2018 and 2017.
(b) 
Operating revenues include an immaterial amount of affiliate gas revenue for the three months ended June 30, 2018 and 2017.

(Thousands of Dollars)
 
Regulated Electric
 
Regulated Natural Gas
 
All Other
 
Reconciling Eliminations
 
Consolidated Total
Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)(b)
 
$
2,158,671

 
$
324,544

 
$
15,271

 
$

 
$
2,498,486

Intersegment revenues
 
293

 
260

 

 
(553
)
 

Total revenues
 
$
2,158,964

 
$
324,804

 
$
15,271

 
$
(553
)
 
$
2,498,486

Net income
 
$
174,597

 
$
25,844

 
$
3,686

 
$

 
$
204,127

(Thousands of Dollars)
 
Regulated Electric
 
Regulated Natural Gas
 
All Other
 
Reconciling Eliminations
 
Consolidated Total
Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)(b)
 
$
2,158,809

 
$
299,189

 
$
14,082

 
$

 
$
2,472,080

Intersegment revenues
 
352

 
271

 

 
(623
)
 

Total revenues
 
$
2,159,161

 
$
299,460

 
$
14,082

 
$
(623
)
 
$
2,472,080

Net income
 
$
167,559

 
$
14,145

 
$
124

 
$

 
181,828

(a) 
Operating revenues include $234 million and $243 million of affiliate electric revenue for the six months ended June 30, 2018 and 2017.
(b) 
Operating revenues include an immaterial amount of affiliate gas revenue for the six months ended June 30, 2018 and 2017.

11.
Benefit Plans and Other Postretirement Benefits

Components of Net Periodic Benefit Cost
 
 
Three Months Ended June 30
 
 
2018
 
2017
 
2018
 
2017
(Thousands of Dollars)
 
Pension Benefits
 
Postretirement Health
Care Benefits
Service cost
 
$
6,982

 
$
6,958

 
$
43

 
$
36

Interest cost (a)
 
8,804

 
10,177

 
769

 
854

Expected return on plan assets (a)
 
(14,542
)
 
(15,017
)
 
(96
)
 
(54
)
Amortization of prior service (credit) cost (a)
 
(28
)
 
265

 
(759
)
 
(759
)
Amortization of net loss (a)
 
9,614

 
9,902

 
595

 
507

Net periodic benefit cost
 
10,830

 
12,285

 
552

 
584

Costs not recognized due to the effects of regulation
 
(3,069
)
 
(4,899
)
 

 

Net benefit cost recognized for financial reporting
 
$
7,761

 
$
7,386

 
$
552

 
$
584


24


 
 
Six Months Ended June 30
 
 
2018
 
2017
 
2018
 
2017
(Thousands of Dollars)
 
Pension Benefits
 
Postretirement Health Care Benefits
Service cost
 
$
13,964

 
$
13,916

 
$
86

 
$
72

Interest cost (a)
 
17,608

 
20,354

 
1,538

 
1,708

Expected return on plan assets (a)
 
(29,083
)
 
(30,034
)
 
(192
)
 
(108
)
Amortization of prior service (credit) cost (a)
 
(57
)
 
530

 
(1,518
)
 
(1,518
)
Amortization of net loss (a)
 
19,229

 
19,804

 
1,190

 
1,014

Net periodic benefit cost
 
21,661

 
24,570

 
1,104

 
1,168

Costs not recognized due to the effects of regulation
 
(5,832
)
 
(9,798
)
 

 

Net benefit cost recognized for financial reporting
 
$
15,829

 
$
14,772

 
$
1,104

 
$
1,168


(a)
The components of net periodic cost other than the service cost component are included in the line item “other expense, net” in the income statement or capitalized on the balance sheet as a regulatory asset.

In January 2018, contributions of $150 million were made across four of Xcel Energy’s pension plans, of which $63.0 million was attributable to NSP-Minnesota. Xcel Energy does not expect additional pension contributions during 2018.

12.
Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive loss, net of tax, for the three and six months ended June 30, 2018 and 2017 were as follows:
 
 
Three Months Ended June 30, 2018
(Thousands of Dollars)
 
Gains and
Losses on Cash Flow
Hedges
 
Unrealized
Gains on Marketable
Securities
 
Defined Benefit
Pension and
Postretirement Items
 
Total
Accumulated other comprehensive loss at April 1
 
$
(20,723
)
 
$

 
$
(3,717
)
 
$
(24,440
)
Other comprehensive income before reclassifications
 
22

 

 

 
22

Losses reclassified from net accumulated other comprehensive loss
 
165

 

 
54

 
219

Net current period other comprehensive income
 
187

 

 
54

 
241

Accumulated other comprehensive loss at June 30
 
$
(20,536
)
 
$

 
$
(3,663
)
 
$
(24,199
)
 
 
Three Months Ended June 30, 2017
(Thousands of Dollars)
 
Gains and
Losses on Cash Flow
Hedges
 
Unrealized
Gains on
Marketable
Securities
 
Defined Benefit
Pension and
Postretirement Items
 
Total
Accumulated other comprehensive loss at April 1
 
$
(18,005
)
 
$
105

 
$
(2,645
)
 
$
(20,545
)
Other comprehensive income before reclassifications
 
26

 

 

 
26

Losses reclassified from net accumulated other comprehensive loss
 
204

 

 
36

 
240

Net current period other comprehensive income
 
230

 

 
36

 
266

Accumulated other comprehensive loss at June 30
 
$
(17,775
)
 
$
105

 
$
(2,609
)
 
$
(20,279
)
 
 
Six Months Ended June 30, 2018
(Thousands of Dollars)
 
Gains and
Losses on Cash Flow Hedges
 
Unrealized
Gains on Marketable
Securities
 
Defined Benefit
Pension and
Postretirement Items
 
Total
Accumulated other comprehensive loss at Jan. 1
 
$
(20,895
)
 
$
128

 
$
(3,770
)
 
$
(24,537
)
Other comprehensive income before reclassifications
 
27

 

 

 
27

Losses (gains) reclassified from net accumulated other comprehensive loss
 
332

 
(128
)
 
107

 
311

Net current period other comprehensive income
 
359

 
(128
)
 
107

 
338

Accumulated other comprehensive loss at June 30
 
$
(20,536
)
 
$

 
$
(3,663
)
 
$
(24,199
)

25


 
 
Six Months Ended June 30, 2017
(Thousands of Dollars)
 
Gains and
Losses on Cash Flow Hedges
 
Unrealized
Gains on Marketable
Securities
 
Defined Benefit
Pension and
Postretirement Items
 
Total
Accumulated other comprehensive loss at Jan. 1
 
$
(18,208
)
 
$
105

 
$
(2,680
)
 
$
(20,783
)
Other comprehensive income before reclassifications
 
26

 

 

 
26

Losses reclassified from net accumulated other comprehensive loss
 
407

 

 
71

 
478

Net current period other comprehensive income
 
433

 

 
71

 
504

Accumulated other comprehensive loss at June 30
 
$
(17,775
)
 
$
105

 
$
(2,609
)
 
$
(20,279
)

Reclassifications from accumulated other comprehensive loss for the three and six months ended June 30, 2018 and 2017 were as follows:
 
 
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
 
(Thousands of Dollars)
 
Three Months Ended June 30, 2018
 
Three Months Ended June 30, 2017
 
Losses (gains) on cash flow hedges:
 
 
 
 
 
Interest rate derivatives
 
$
264

(a) 
$
350

(a) 
Vehicle fuel derivatives
 
(35
)
(b) 
(5
)
(b) 
Total, pre-tax
 
229

 
345

 
Tax benefit
 
(64
)
 
(141
)
 
Total, net of tax
 
165

 
204

 
Defined benefit pension and postretirement losses:
 
 
 
 
 
Amortization of net loss
 
125

(c) 
109

(c) 
Prior service credit
 
(49
)
(c) 
(51
)
(c) 
Total, pre-tax
 
76

 
58

 
Tax benefit
 
(22
)
 
(22
)
 
Total, net of tax
 
54

 
36

 
Marketable securities:
 
 
 
 
 
Realization of gains
 

 

 
Total, pre-tax
 

 

 
Tax expense
 

 

 
Total, net of tax
 

 

 
Total amounts reclassified, net of tax
 
$
219

 
$
240

 

26


 
 
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
 
(Thousands of Dollars)
 
Six Months Ended June 30, 2018
 
Six Months Ended June 30, 2017
 
Losses (gains) on cash flow hedges:
 
 
 
 
 
Interest rate derivatives
 
$
525

(a) 
$
692

(a) 
Vehicle fuel derivatives
 
(64
)
(b) 
(5
)
(b) 
Total, pre-tax
 
461

 
687

 
Tax benefit
 
(129
)
 
(280
)
 
Total, net of tax
 
332

 
407

 
Defined benefit pension and postretirement losses:
 
 
 
 
 
Amortization of net loss
 
250

(c) 
218

(c) 
Prior service credit
 
(98
)
(c) 
(100
)
(c) 
Total, pre-tax
 
152

 
118

 
Tax benefit
 
(45
)
 
(47
)
 
Total, net of tax
 
107

 
71

 
Marketable securities:
 
 
 
 
 
Realization of gains
 
(179
)
 

 
Total, pre-tax
 
(179
)
 

 
Tax expense
 
51

 

 
Total, net of tax
 
(128
)
 

 
Total amounts reclassified, net of tax
 
$
311

 
$
478

 

(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 to the consolidated financial statements for details regarding these benefit plans.

13. Revenues

NSP-Minnesota principally generates revenue from the generation, transmission, distribution and sale of electricity and the transportation, distribution and sale of natural gas to wholesale and retail customers. Performance obligations related to the sale of energy are satisfied as energy is delivered to customers. NSP-Minnesota recognizes revenue in an amount that corresponds directly to the price of the energy delivered to the customer. The measurement of energy sales to customers is generally based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated, and the corresponding unbilled revenue is recognized. Contract terms are generally short-term in nature, and as such NSP-Minnesota does not recognize a separate financing component of its collections from customers. NSP-Minnesota presents its revenues net of any excise or other fiduciary-type taxes or fees.

NSP-Minnesota participates in MISO. NSP-Minnesota recognizes sales to both native load and other end use customers on a gross basis in electric revenues and cost of sales. Revenues and charges for short term wholesale sales of excess energy transacted through RTOs are also recorded on a gross basis. Other revenues and charges related to participating and transacting in RTOs are recorded on a net basis in cost of sales.

NSP-Minnesota has various rate-adjustment mechanisms in place that provide for the recovery of natural gas, electric fuel and purchased energy costs. These cost-adjustment tariffs may increase or decrease the level of revenue collected from customers and are revised periodically for differences between the total amount collected under the clauses and the costs incurred.

When applicable, under governing regulatory commission rate orders, fuel cost over-recoveries (the excess of fuel revenue billed to customers over fuel costs incurred) are deferred as regulatory liabilities and under-recoveries (the excess of fuel costs incurred over fuel revenues billed to customers) are deferred as regulatory assets.


27


Certain rate rider mechanisms qualify as alternative revenue programs under GAAP. These mechanisms arise from costs imposed upon the utility by action of a regulator or legislative body related to an environmental, public safety or other mandate. When certain criteria are met (including collection within 24 months), revenue is recognized equal to the revenue requirement, which may include return on rate base items and incentives. The mechanisms are revised periodically for differences between the total amount collected and the revenue recognized, which may increase or decrease the level of revenue collected from customers. Alternative revenue is recorded on a gross basis and is disclosed separate from revenue from contracts with customers in the period earned.

In the following tables, revenue is classified by the type of goods/services rendered and market/customer type. The tables also reconcile revenue to the reportable segments.
 
 
Three Months Ended June 30, 2018
(Thousands of Dollars)
 
Electric
 
Natural Gas
 
All Other
 
Total
Major revenue types
 
 
 
 
 
 
 
 
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
Residential
 
$
311,086

 
$
42,398

 
$
6,710

 
$
360,194

Commercial and industrial (C&I)
 
514,710

 
33,417

 
42

 
548,169

Other
 
8,639

 

 
1,463

 
10,102

Total retail
 
834,435

 
75,815

 
8,215

 
918,465

Wholesale
 
42,033

 

 

 
42,033

Transmission
 
59,951

 

 

 
59,951

Interchange
 
117,417

 

 

 
117,417

Other
 
6,033

 
3,317

 

 
9,350

Total revenue from contracts with customers
 
1,059,869

 
79,132

 
8,215

 
1,147,216

Alternative revenue and other
 
36,539

 
3,980

 

 
40,519

Total revenues
 
$
1,096,408

 
$
83,112

 
$
8,215

 
$
1,187,735


 
 
Three Months Ended June 30, 2017
(Thousands of Dollars)
 
Electric
 
Natural Gas
 
All Other
 
Total
Major revenue types
 
 
 
 
 
 
 
 
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
Residential
 
$
288,733

 
$
36,860

 
$
6,416

 
$
332,009

C&I
 
526,867

 
31,382

 
92

 
558,341

Other
 
7,854

 

 
647

 
8,501

Total retail
 
823,454

 
68,242

 
7,155

 
898,851

Wholesale
 
28,841

 

 

 
28,841

Transmission
 
56,177

 

 

 
56,177

Interchange
 
119,384

 

 

 
119,384

Other
 
7,445

 
1,452

 

 
8,897

Total revenue from contracts with customers
 
1,035,301

 
69,694

 
7,155

 
1,112,150

Alternative revenue and other
 
44,478

 
8,312

 

 
52,790

Total revenues
 
$
1,079,779

 
$
78,006

 
$
7,155

 
$
1,164,940



28


 
 
Six Months Ended June 30, 2018
(Thousands of Dollars)
 
Electric
 
Natural Gas
 
All Other
 
Total
Major revenue types
 
 
 
 
 
 
 
 
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
Residential
 
$
622,215

 
$
174,057

 
$
13,033

 
$
809,305

Commercial and industrial (C&I)
 
982,733

 
130,325

 
85

 
1,113,143

Other
 
18,358

 

 
2,153

 
20,511

Total retail
 
1,623,306

 
304,382

 
15,271

 
1,942,959

Wholesale
 
88,398

 

 

 
88,398

Transmission
 
114,749

 

 

 
114,749

Interchange
 
234,389

 

 

 
234,389

Other
 
17,578

 
5,528

 

 
23,106

Total revenue from contracts with customers
 
2,078,420

 
309,910

 
15,271

 
2,403,601

Alternative revenue and other
 
80,251

 
14,634

 

 
94,885

Total revenues
 
$
2,158,671

 
$
324,544

 
$
15,271

 
$
2,498,486


 
 
Six Months Ended June 30, 2017
(Thousands of Dollars)
 
Electric
 
Natural Gas
 
All Other
 
Total
Major revenue types
 
 
 
 
 
 
 
 
Revenue from contracts with customers:
 
 
 
 
 
 
 
 
Residential
 
$
593,146

 
$
158,273

 
$
12,626

 
$
764,045

C&I
 
1,011,970

 
119,873

 
130

 
1,131,973

Other
 
16,057

 

 
1,326

 
17,383

Total retail
 
1,621,173

 
278,146

 
14,082

 
1,913,401

Wholesale
 
74,760

 

 

 
74,760

Transmission
 
110,136

 

 

 
110,136

Interchange
 
243,073

 

 

 
243,073

Other
 
13,408

 
2,697

 

 
16,105

Total revenue from contracts with customers
 
2,062,550

 
280,843

 
14,082

 
2,357,475

Alternative revenue and other
 
96,259

 
18,346

 

 
114,605

Total revenues
 
$
2,158,809

 
$
299,189

 
$
14,082

 
$
2,472,080


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.


29


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 including the TCJA’s impact to NSP-Minnesota and its customers, as well as assumptions and other statements are intended to be identified in this document by the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should,” “will,” “would” 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, 2017 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.

Non-GAAP Financial Measures

The following discussion includes financial information prepared in accordance with GAAP, as well as certain non-GAAP financial measures such as electric margin and natural gas margin.  Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position or cash flows that excludes (or includes) amounts that are adjusted from the most directly comparable measure calculated and presented in accordance with GAAP. Xcel Energy’s management uses non-GAAP measures internally for financial planning and analysis, for reporting of results to the Board of Directors and when communicating its earnings outlook to analysts and investors. Non-GAAP financial measures are intended to supplement investors’ understanding of our operating performance and should not be considered alternatives for financial measures presented in accordance with GAAP. These measures are discussed in more detail below and may not be comparable to other companies’ similarly titled non-GAAP financial measures.

Electric margin is presented as electric revenues less electric fuel and purchased power expenses and natural gas margin is presented as natural gas revenues less the cost of natural gas sold and transported. Expenses incurred for electric fuel and purchased power and the cost of natural gas sold and transported are generally recovered through various recovery mechanisms, and as a result, changes in these expenses are offset in operating revenues. Management believes electric and natural gas margins provide the most meaningful basis for evaluating our operations because they exclude the revenue impact of fluctuations in these expenses. These margins can be reconciled to operating income, a GAAP measure, by including other operating revenues, cost of sales other, O&M expenses, conservation program expenses, depreciation and amortization and taxes (other than income taxes).

Results of Operations

NSP-Minnesota’s net income was approximately $204 million for 2018 year-to-date, compared with approximately $182 million for the same period of 2017. The increase in earnings, driven by lower O&M expenses and higher electric and natural gas margins due to favorable weather, was partially offset by higher depreciation expense due to invested capital.


30


Electric Revenues and Margin

Electric revenues and fuel and purchased power expenses are impacted by fluctuations in the price of natural gas, coal and uranium used in the generation of electricity. However, these price fluctuations have minimal impact on electric margin due to fuel recovery mechanisms that recover fuel expenses. The following table details the electric revenues and margin:
 
 
Six Months Ended June 30
(Millions of Dollars)
 
2018
 
2017
Electric revenues before impact of the TCJA
 
$
2,218

 
$
2,159

Electric fuel and purchased power
 
(826
)
 
(780
)
Electric margin before impact of the TCJA
 
$
1,392

 
$
1,379

Impact of the TCJA (offset as a reduction in income tax expense)
 
(57
)
 

Electric margin
 
$
1,335

 
$
1,379


The following tables summarize the components of the changes in electric revenues and electric margin for the six months ended June 30:

Electric Revenues
(Millions of Dollars)
 
2018 vs. 2017
Interchange agreement billings with NSP-Wisconsin
 
$
(9
)
Conservation program revenue (offset by expenses)
 
(5
)
Conservation incentive
 
(5
)
Fuel and purchased power cost recovery
 
39

Estimated impact of weather (net of Minnesota decoupling)
 
11

Wholesale transmission revenue
 
10

Retail sales growth (including Minnesota decoupling and sales true-up)
 
9

Trading
 
7

Other, net
 
2

Total increase in electric revenues before impact of the TCJA
 
$
59

Impact of the TCJA (offset as a reduction in income tax expense)
 
(59
)
Total change in electric revenues
 
$


Electric Margin
(Millions of Dollars)
 
2018 vs. 2017
Interchange agreement billings with NSP-Wisconsin
 
$
(11
)
Conservation program revenue (offset by expenses)
 
(5
)
Conservation incentive
 
(5
)
Purchased capacity costs
 
20

Estimated impact of weather (net of Minnesota decoupling)
 
11

Retail sales growth (including Minnesota decoupling and sales true-up)
 
9

Other, net
 
(6
)
Total increase in electric margin before impact of the TCJA
 
$
13

Impact of the TCJA (offset as a reduction in income tax expense)
 
(57
)
Total decrease in electric margin
 
$
(44
)


31


Natural Gas Revenues and Margin

Total natural gas expense varies with changing sales and the cost of natural gas. However, fluctuations in the cost of natural gas have minimal impact on natural gas margin due to natural gas cost recovery mechanisms. The following table details natural gas revenues and margin:
 
 
Six Months Ended June 30
(Millions of Dollars)
 
2018
 
2017
Natural gas revenues before impact of the TCJA
 
$
329

 
$
299

Cost of natural gas sold and transported
 
(192
)
 
(178
)
Natural gas margin before impact of the TCJA
 
$
137

 
$
121

Impact of the TCJA (offset as a reduction in income tax expense)
 
(4
)
 

Natural gas margin
 
$
133

 
$
121


The following tables summarize the components of the changes in natural gas revenues and natural gas margin for the six months ended June 30:

Natural Gas Revenues
(Millions of Dollars)
 
2018 vs. 2017
Purchased natural gas adjustment clause recovery
 
$
13

Estimated impact of weather
 
10

Conservation program revenue (offset by expenses)
 
2

Other, net
 
5

Total increase in natural gas revenues before impact of the TCJA
 
$
30

Impact of TCJA (offset as a reduction in income tax expense)
 
(4
)
Total increase in natural gas revenues
 
$
26


Natural Gas Margin
(Millions of Dollars)
 
2018 vs. 2017
Estimated impact of weather
 
$
10

Conservation program revenue (offset by expenses)
 
2

Other, net
 
4

Total increase in natural gas margin before impact of TCJA
 
$
16

Impact of the TCJA (offset as a reduction in income tax expense)
 
(4
)
Total increase in natural gas margin
 
$
12


Non-Fuel Operating Expenses and Other Items

O&M Expenses O&M expenses decreased $12 million, or 2.0 percent, for 2018 year-to-date, largely reflecting expense timing. The significant changes are summarized in the table below:
(Millions of Dollars)
 
2018 vs. 2017
Nuclear plant operations and amortization
 
$
(16
)
Plant generation costs
 
7

Other, net
 
(3
)
  Total decrease in O&M expenses
 
$
(12
)

Nuclear plant operations and amortization expenses are lower largely reflecting expense timing, savings initiatives and reduced refueling outage costs; and
Plant generation costs increased primarily due to the timing of planned maintenance and overhauls at a number of generation facilities.

32



Conservation Program Expenses — Conservation program expenses decreased $2 million, or 3.7 percent, for 2018 year-to-date. The decrease was due to lower recovery rates, partially offset by additional customer participation in electric conservation programs. Conservation expenses are generally recovered 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 $15 million, or 4.3 percent, for 2018 year-to-date. The increase was primarily driven by capital expenditures due to planned system investments and amortization of certain regulatory assets, partially offset by lower depreciation rates in Minnesota.

Income TaxesIncome tax expense decreased $51 million for the first six months of 2018 compared with the same period in 2017. The decrease was primarily driven by a lower federal tax rate due to the TCJA, an increase in plant-related regulatory differences related to ARAM (net of deferrals), and an increase in wind PTCs. The ETR was 9.6 percent for the first six months of 2018 compared with 28.6 percent for the same period in 2017. The lower ETR in 2018 is primarily due to the items referenced above. See Note 4 to the consolidated financial statements.

Public Utility Regulation

Except to the extent noted below and in Note 5 to the consolidated financial statements 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, 2017 and in Item 2 of NSP-Minnesota’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, appropriately represent, in all material respects, the current status of public utility regulation and are incorporated herein by reference.

Wind Development — In 2017, the MPUC approved NSP-Minnesota’s proposal to add 1,550 megawatts (MW) of new wind generation including ownership of 1,150 MW of wind generation. An order from the NDPSC is expected later in 2018.

Dakota Range — In April 2018, the MPUC approved NSP-Minnesota’s petition to build and own the Dakota Range, a 300 MW wind project in South Dakota. The project is expected to be placed into service by the end of 2021 and qualify for 80 percent of the PTC. NSP-Minnesota’s total capital investment for the Dakota Range is expected to be approximately $350 million. A NDPSC decision is expected later in 2018.

Minnesota State Right-Of-First Refusal (ROFR) Statute Complaint — In September 2017, LSP Transmission Holdings, LLC (LSP Transmission) filed a complaint in the U.S. District Court for the District of Minnesota (Minnesota District Court) against the Minnesota Attorney General, the MPUC and the DOC. The complaint was in response to MISO assigning NSP-Minnesota and ITC Midwest, LLC to jointly own a new 345 KV transmission line from near Mankato, Minn. to Winnebago, Minn. The project was estimated by MISO to cost $108 million, with the transmission line portion of the project estimated by MISO to cost $103 million. The project was assigned to NSP-Minnesota and ITC Midwest as the incumbent utilities, consistent with a Minnesota state ROFR statute. The complaint challenged the constitutionality of the state ROFR statute and is seeking declaratory judgment that the statute violates the Commerce Clause of the U.S. Constitution and should not be enforced. The Minnesota state agencies and NSP-Minnesota filed motions to dismiss. In June 2018, the Minnesota District Court granted the defendants’ motions to dismiss with prejudice. LSP Transmission filed an appeal to the 8th Circuit Court of Appeals in July 2018. It is uncertain when a decision will be rendered regarding this appeal.


33


Nuclear Power Operations

NSP-Minnesota owns two nuclear generating plants: the Monticello plant and the PI plant. See Note 12 to the financial statements of NSP-Minnesota’s Annual Report on Form 10-K for the year ended Dec. 31, 2017 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, 2017 and Nuclear Power Operations included in Item 2 of NSP-Minnesota’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018, 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 58 percent of its 2018 and approximately 24 percent of its 2019 enriched nuclear material requirements from sources that could be impacted by current political/world events, including those related to Ukraine/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 34 percent of its average enriched nuclear material requirements from these sources. 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 will provide nuclear fuel assemblies for the upcoming PI outage under the current nuclear fuel fabrication contract. Westinghouse has indicated its intention to continue 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. Westinghouse announced on Jan. 4, 2018 it has agreed to be acquired by Brookfield Business Partners LP and other institutional partners. Brookfield’s acquisition of Westinghouse is expected to close in the third quarter of 2018, subject to bankruptcy court and regulatory approvals. NSP-Minnesota will continue to monitor the Westinghouse acquisition process.

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, 2017 and NSP-Minnesota’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2018. In addition to the matters discussed below, see Note 5 to the financial statements for a discussion of other regulatory matters.

Xcel Energy, which includes NSP-Minnesota, attempts to mitigate the risk of regulatory penalties through formal training on
prohibited practices and a compliance function that reviews interaction with the markets under FERC and Commodity Futures Trading Commission jurisdictions. Public campaigns are conducted to raise awareness of the public safety issues of interacting with our electric systems. While programs to comply with regulatory requirements are in place, there is no guarantee the compliance programs or other measures will be sufficient to ensure against violations.

FERC Order, ROE Policy — In June 2014, the FERC adopted a two-step ROE methodology for electric utilities in an order (Opinion 531) issued in a complaint proceeding involving New England Transmission Owners (NETOs). The issue of how to apply the FERC ROE methodology has been contested in various complaint proceedings, including two ROE complaints involving the MISO TOs, which include NSP-Minnesota and NSP-Wisconsin. In April 2017, the D.C. Circuit vacated and remanded the June 2014 ROE order. The D.C. Circuit found that the FERC had not properly determined that the ROE authorized for the NETOs prior to June 2014 was unjust and unreasonable. The D.C. Circuit also found that the FERC failed to justify the new ROE methodology. The FERC has yet to act on the D.C. Circuit’s decision. See Note 5 to the consolidated financial statements for discussion of the D.C. Circuit’s decision and the impact on the MISO ROE Complaints.


34


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 June 30, 2018, 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

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, 2017, which is incorporated herein by reference. There have been no material changes from the risk factors previously disclosed in the Form 10-K.


35


Item 6EXHIBITS

* Indicates incorporation by reference

101
The following materials from NSP-Minnesota’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 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.

36


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)
 
 
 
July 27, 2018
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)

37