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EX-99.01 - EXHIBIT 99.01 - NORTHERN STATES POWER CO /WI/nspwex9901q32015.htm
EX-31.02 - EXHIBIT 31.02 - NORTHERN STATES POWER CO /WI/nspwex3102q32015.htm
EX-32.01 - EXHIBIT 32.01 - NORTHERN STATES POWER CO /WI/nspwex3201q32015.htm
EX-31.01 - EXHIBIT 31.01 - NORTHERN STATES POWER CO /WI/nspwex3101q32015.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 Sept. 30, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-03140
Northern States Power Company
(Exact name of registrant as specified in its charter)
Wisconsin
 
39-0508315
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1414 West Hamilton Avenue
 
 
Eau Claire, Wisconsin
 
54701
(Address of principal executive offices)
 
(Zip Code)
(715) 737-2625
(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
 
Accelerated filer ¨
 
 
 
Non-accelerated filer x
 
Smaller reporting company ¨
(Do not check if smaller reporting company)
 
 
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 Nov. 2, 2015
Common Stock, $100 par value
 
933,000 shares
Northern States Power Company (a Wisconsin corporation) meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H (2) to such Form 10-Q.
 
 
 
 
 



TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
 
 
 
 
Item l    
Item 2   
Item 4   
 
 
 
PART II — OTHER INFORMATION
 
 
 
 
Item 1    
Item 1A
Item 4    
Item 5    
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 Wisconsin corporation (NSP-Wisconsin).  NSP-Wisconsin is a wholly owned subsidiary of Xcel Energy Inc.  Xcel Energy Inc. wholly owns the following subsidiaries: Northern States Power Company, a Minnesota corporation (NSP-Minnesota); Southwestern Public Service Company, a New Mexico corporation (SPS); Public Service Company of Colorado, a Colorado corporation (PSCo); and NSP-Wisconsin.  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).



2


PART I — FINANCIAL INFORMATION
Item 1 — FINANCIAL STATEMENTS

NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(amounts in thousands)
 
Three Months Ended Sept. 30
 
Nine Months Ended Sept. 30
 
2015
 
2014
 
2015
 
2014
Operating revenues
 
 
 
 
 
 
 
Electric
$
224,666

 
$
216,289

 
$
634,571

 
$
625,663

Natural gas
11,088

 
14,484

 
91,273

 
117,814

Other
407

 
273

 
1,090

 
825

Total operating revenues
236,161

 
231,046

 
726,934

 
744,302

 
 
 
 
 
 
 
 
Operating expenses
 

 
 

 
 

 
 

Electric fuel and purchased power, non-affiliates
2,624

 
2,707

 
5,066

 
11,887

Purchased power, affiliates
102,297

 
105,092

 
318,542

 
321,550

Cost of natural gas sold and transported
4,375

 
7,854

 
54,933

 
78,190

Operating and maintenance expenses
46,292

 
47,899

 
134,126

 
140,563

Conservation program expenses
2,977

 
3,005

 
8,821

 
8,692

Depreciation and amortization
23,019

 
19,940

 
66,908

 
59,121

Taxes (other than income taxes)
7,045

 
7,009

 
21,151

 
20,458

Loss on Monticello life cycle management/extended power uprate project

 

 
5,237

 

Total operating expenses
188,629

 
193,506

 
614,784

 
640,461

 
 
 
 
 
 
 
 
Operating income
47,532

 
37,540

 
112,150

 
103,841

 
 
 
 
 
 
 
 
Other income (expense), net
100

 
(9
)
 
384

 
45

Allowance for funds used during construction — equity
1,929

 
1,576

 
5,926

 
4,915

 
 
 
 
 
 
 
 
Interest charges and financing costs
 

 
 

 
 

 
 

Interest charges — includes other financing costs of
$461, $408, $1,273 and $1,159, respectively
8,625

 
7,701

 
24,152

 
21,536

Allowance for funds used during construction — debt
(931
)
 
(733
)
 
(2,865
)
 
(2,341
)
Total interest charges and financing costs
7,694

 
6,968

 
21,287

 
19,195

 
 
 
 
 
 
 
 
Income before income taxes
41,867

 
32,139

 
97,173

 
89,606

Income taxes
15,635

 
12,109

 
36,162

 
33,319

Net income
$
26,232

 
$
20,030

 
$
61,011

 
$
56,287


See Notes to Consolidated Financial Statements


3


NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(amounts in thousands)
 
Three Months Ended Sept. 30
 
Nine Months Ended Sept. 30
 
2015
 
2014
 
2015
 
2014
Net income
$
26,232

 
$
20,030

 
$
61,011

 
$
56,287

Other comprehensive income
 

 
 

 
 
 
 
Derivative instruments:
 

 
 

 
 
 
 
Reclassification of losses to net income, net of tax of $13, $12, $37 and $38 for each of the three and nine months ended Sept. 30, 2015 and 2014, respectively
19

 
20

 
57

 
57

Other comprehensive income
19

 
20

 
57

 
57

Comprehensive income
$
26,251

 
$
20,050

 
$
61,068

 
$
56,344


See Notes to Consolidated Financial Statements


4


NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
 
Nine Months Ended Sept. 30
 
2015
 
2014
Operating activities
 
 
 
Net income
$
61,011

 
$
56,287

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

 
 

Depreciation and amortization
67,936

 
60,017

Deferred income taxes
38,595

 
28,691

Amortization of investment tax credits
(396
)
 
(504
)
Allowance for equity funds used during construction
(5,926
)
 
(4,915
)
Loss on Monticello life cycle management/extended power uprate project
5,237

 

Net derivative losses (gains)
338

 
(356
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
10,026

 
7,761

Accrued unbilled revenues
12,657

 
13,009

Inventories
2,847

 
(5,172
)
Other current assets
14,471

 
11,693

Accounts payable
(25,023
)
 
(9,910
)
Net regulatory assets and liabilities
(13,962
)
 
(35,546
)
Other current liabilities
5,948

 
955

Pension and other employee benefit obligations
(3,931
)
 
(6,882
)
Change in other noncurrent assets
11

 
(46
)
Change in other noncurrent liabilities
595

 
1,013

Net cash provided by operating activities
170,434

 
116,095

 
 
 
 
Investing activities
 

 
 

Utility capital/construction expenditures
(171,586
)
 
(194,886
)
Allowance for equity funds used during construction
5,926

 
4,915

Other, net
(90
)
 
(13
)
Net cash used in investing activities
(165,750
)
 
(189,984
)
 
 
 
 
Financing activities
 

 
 

Proceeds from short-term borrowings, net
(78,000
)
 
(60,000
)
Proceeds from notes payable to affiliate

 
30

Proceeds from issuance of long-term debt
98,038

 
98,625

Repayments of long-term debt

 
(54
)
Capital contributions from parent
25,060

 
68,011

Dividends paid to parent
(40,265
)
 
(32,331
)
Net cash provided by financing activities
4,833

 
74,281

 
 
 
 
Net change in cash and cash equivalents
9,517

 
392

Cash and cash equivalents at beginning of period
1,285

 
1,349

Cash and cash equivalents at end of period
$
10,802

 
$
1,741

 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

Cash paid for interest (net of amounts capitalized)
$
(18,647
)
 
$
(17,313
)
Cash received for income taxes, net
9,662

 
915

Supplemental disclosure of non-cash investing transactions:
 

 
 

Property, plant and equipment additions in accounts payable
$
13,520

 
$
28,693


See Notes to Consolidated Financial Statements

5


NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands, except share and per share data)
 
Sept. 30, 2015
 
Dec. 31, 2014
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
10,802

 
$
1,285

Accounts receivable, net
50,370

 
60,396

Accrued unbilled revenues
40,910

 
53,567

Inventories
21,838

 
24,685

Regulatory assets
14,626

 
20,036

Prepaid taxes
18,421

 
28,628

Deferred income taxes
7,724

 
8,201

Prepayments and other
2,872

 
6,918

Total current assets
167,563

 
203,716

 
 
 
 
Property, plant and equipment, net
1,789,334

 
1,674,281

 
 
 
 
Other assets
 

 
 

Regulatory assets
276,552

 
280,693

Other investments
3,908

 
3,818

Other
5,415

 
4,612

Total other assets
285,875

 
289,123

Total assets
$
2,242,772

 
$
2,167,120

 
 
 
 
Liabilities and Equity
 

 
 

Current liabilities
 

 
 

Current portion of long-term debt
$
1,196

 
$
1,235

Short-term debt

 
78,000

Notes payable to affiliates
500

 
500

Accounts payable
32,777

 
61,530

Accounts payable to affiliates
26,471

 
26,524

Dividends payable to parent
13,664

 
14,957

Regulatory liabilities
10,765

 
16,940

Environmental liabilities
16,689

 
29,116

Other
24,379

 
19,923

Total current liabilities
126,441

 
248,725

 
 
 
 
Deferred credits and other liabilities
 

 
 

Deferred income taxes
390,095

 
348,180

Deferred investment tax credits
8,692

 
9,089

Regulatory liabilities
141,659

 
132,674

Environmental liabilities
79,153

 
78,620

Customer advances
18,080

 
17,623

Pension and employee benefit obligations
47,336

 
51,313

Other
16,330

 
16,151

Total deferred credits and other liabilities
701,345

 
653,650

 
 
 
 
Commitments and contingencies


 


Capitalization
 

 
 

Long-term debt
666,379

 
567,056

Common stock — 1,000,000 shares authorized of $100 par value; 933,000 shares
outstanding at Sept. 30, 2015 and Dec. 31, 2014, respectively
93,300

 
93,300

Additional paid in capital
351,097

 
322,276

Retained earnings
304,438

 
282,398

Accumulated other comprehensive loss
(228
)
 
(285
)
Total common stockholder’s equity
748,607

 
697,689

Total liabilities and equity
$
2,242,772

 
$
2,167,120


See Notes to Consolidated Financial Statements

6


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

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (GAAP), the financial position of NSP-Wisconsin and its subsidiaries as of Sept. 30, 2015 and Dec. 31, 2014; the results of its operations, including the components of net income and comprehensive income, for the three months and nine months ended Sept. 30, 2015 and 2014; and its cash flows for the nine months ended Sept. 30, 2015 and 2014. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Management has also evaluated the impact of events occurring after Sept. 30, 2015 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, 2014 balance sheet information has been derived from the audited 2014 consolidated financial statements included in the NSP-Wisconsin Annual Report on Form 10-K for the year ended Dec. 31, 2014. 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-Wisconsin Annual Report on Form 10-K for the year ended Dec. 31, 2014, filed with the SEC on Feb. 23, 2014. Due to the seasonality of NSP-Wisconsin’s electric and natural gas sales, interim results are not necessarily an appropriate base from which to project annual results.

1.
Summary of Significant Accounting Policies

The significant accounting policies set forth in Note 1 to the consolidated financial statements in the NSP-Wisconsin Annual Report on Form 10-K for the year ended Dec. 31, 2014, appropriately represent, in all material respects, the current status of accounting policies and are incorporated herein by reference.

2.
Accounting Pronouncements

Recently Issued

Revenue Recognition In May 2014, the Financial Accounting Standards Board (FASB) issued Revenue from Contracts with Customers, Topic 606 (Accounting Standards Update (ASU) No. 2014-09), which provides a framework for the recognition of revenue, with the objective that recognized revenues properly reflect amounts an entity is entitled to receive in exchange for goods and services. The new guidance also includes additional disclosure requirements regarding revenue, cash flows and obligations related to contracts with customers. As a result of the FASB’s deferral of the standard’s required implementation date in July 2015, the guidance is effective for interim and annual reporting periods beginning after Dec. 15, 2017. NSP-Wisconsin is currently evaluating the impact of adopting ASU 2014-09 on its consolidated financial statements.

Consolidation In February 2015, the FASB issued Amendments to the Consolidation Analysis, Topic 810 (ASU No. 2015-02), which reduces the number of consolidation models and amends certain consolidation principles related to variable interest entities. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15. 2015, and early adoption is permitted. NSP-Wisconsin does not expect the implementation of ASU 2015-02 to have a material impact on its consolidated financial statements.

Presentation of Debt Issuance Costs In April 2015, the FASB issued Simplifying the Presentation of Debt Issuance Costs, Subtopic 835-30 (ASU No. 2015-03), which amends existing guidance to require the presentation of debt issuance costs on the balance sheet as a deduction from the carrying amount of the related debt, instead of an asset. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2015, and early adoption is permitted. Other than the prescribed reclassification of assets to an offset of debt on the consolidated balance sheets, NSP-Wisconsin does not expect the implementation of ASU 2015-03 to have a material impact on its consolidated financial statements.

Fair Value Measurement In May 2015, the FASB issued Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent), Topic 820 (ASU No. 2015-07), which removes the requirement to categorize within the fair value hierarchy the fair values for investments measured using a net asset value methodology. This guidance will be effective on a retrospective basis for interim and annual reporting periods beginning after Dec. 15, 2015, and early adoption is permitted. Other than the reduced disclosure requirements, NSP-Wisconsin does not expect the implementation of ASU 2015-07 to have a material impact on its consolidated financial statements.

7






8


3.
Selected Balance Sheet Data
(Thousands of Dollars)
 
Sept. 30, 2015
 
Dec. 31, 2014
Accounts receivable, net (a)
 
 
 
 
Accounts receivable
 
$
55,204

 
$
66,217

Less allowance for bad debts
 
(4,834
)
 
(5,821
)
 
 
$
50,370

 
$
60,396

(Thousands of Dollars)
 
Sept. 30, 2015
 
Dec. 31, 2014
Inventories
 
 
 
 
Materials and supplies
 
$
6,865

 
$
6,494

Fuel
 
6,376

 
6,654

Natural gas
 
8,597

 
11,537

 
 
$
21,838

 
$
24,685

(Thousands of Dollars)
 
Sept. 30, 2015
 
Dec. 31, 2014
Property, plant and equipment, net
 
 
 
 
Electric plant
 
$
2,332,155

 
$
2,061,669

Natural gas plant
 
264,390

 
255,465

Common and other property
 
124,584

 
125,938

Construction work in progress
 
112,108

 
231,413

Total property, plant and equipment
 
2,833,237

 
2,674,485

Less accumulated depreciation
 
(1,043,903
)
 
(1,000,204
)
 
 
$
1,789,334

 
$
1,674,281


(a) 
Accounts receivable, net includes an immaterial amount due from affiliates as of Sept. 30, 2015 and Dec. 31, 2014, respectively.


9


4.
Income Taxes

Except to the extent noted below, Note 6 to the consolidated financial statements included in NSP-Wisconsin’s Annual Report on Form 10-K for the year ended Dec. 31, 2014 appropriately represents, in all material respects, the current status of other income tax matters, and are incorporated herein by reference.

Federal Audit NSP-Wisconsin is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. In the third quarter of 2012, the Internal Revenue Service (IRS) commenced an examination of tax years 2010 and 2011, including the 2009 carryback claim. As of Sept. 30, 2015, the IRS had proposed an adjustment to the federal tax loss carryback claims that would result in $13 million of income tax expense for the 2009 through 2011 claims, the recently filed 2013 claim, and the anticipated claim for 2014. NSP-Wisconsin is not expected to accrue any income tax expense related to this adjustment. As of Sept. 30, 2015, the IRS had begun the appeals process; however, the outcome and timing of a resolution is uncertain. The statute of limitations applicable to Xcel Energy’s 2009-2011 federal income tax returns expires in December 2016 following an extension to allow additional time for the appeals process. In the third quarter of 2015, the IRS commenced an examination of tax years 2012 and 2013. As of Sept. 30, 2015, the IRS had not proposed any material adjustments to tax years 2012 and 2013.

State Audits NSP-Wisconsin is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Sept. 30, 2015, NSP-Wisconsin’s earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2011. As of Sept. 30, 2015, there were no state income tax audits in progress.

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

A reconciliation of the amount of unrecognized tax benefit is as follows:
(Millions of Dollars)
 
Sept. 30, 2015
 
Dec. 31, 2014
Unrecognized tax benefit — Permanent tax positions
 
$
0.2

 
$
0.1

Unrecognized tax benefit — Temporary tax positions
 
2.9

 
2.9

Total unrecognized tax benefit
 
$
3.1

 
$
3.0


The unrecognized tax benefit amounts were reduced by the tax benefits associated with net operating loss (NOL) and tax credit carryforwards. The amounts of tax benefits associated with NOL and tax credit carryforwards are as follows:
(Millions of Dollars)
 
Sept. 30, 2015
 
Dec. 31, 2014
NOL and tax credit carryforwards
 
$
(1.0
)
 
$
(0.9
)

It is reasonably possible that NSP-Wisconsin’s amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS appeals process and audit progress and state audits resume. As the IRS appeals process moves closer to completion, the change in the unrecognized tax benefit is not expected to be material.

The payable for interest related to unrecognized tax benefits is partially offset by the interest benefit associated with NOL and tax credit carryforwards. The payables for interest related to unrecognized tax benefits at Sept. 30, 2015 and Dec. 31, 2014 were not material. No amounts were accrued for penalties related to unrecognized tax benefits as of Sept. 30, 2015 or Dec. 31, 2014.

5.
Rate Matters

Except to the extent noted below, the circumstances set forth in Note 10 to the consolidated financial statements included in NSP-Wisconsin’s Annual Report on Form 10-K for the year ended Dec. 31, 2014 and in Note 5 to the consolidated financial statements included in NSP-Wisconsin’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2015 and June 30, 2015, appropriately represent, in all material respects, the current status of other rate matters, and are incorporated herein by reference.

10



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

Wisconsin 2016 Electric and Gas Rate Case — In May 2015, NSP-Wisconsin filed a request with the PSCW to increase rates for electric and natural gas service effective Jan. 1, 2016. NSP-Wisconsin requested an overall increase in annual electric rates of $27.4 million, or 3.9 percent, and an increase in natural gas rates of $5.9 million, or 5.0 percent.

The rate filing is based on a 2016 forecast test year, a return on equity (ROE) of 10.2 percent, an equity ratio of 52.5 percent and a forecasted average net investment rate base of approximately $1.2 billion for the electric utility and $111.2 million for the natural gas utility.

On Oct. 1, 2015, the PSCW Staff and other intervenors, including the Citizens Utility Board, filed their direct testimony in the case. The PSCW Staff recommended an electric rate increase of $10.4 million, or 1.5 percent, and a gas rate increase of $3.0 million, or 2.5 percent, based on a ROE of 10.0 percent and an equity ratio of 52.5 percent. The Citizens Utility Board recommended a ROE of 8.75 percent. None of the intervenors presented a complete revenue requirements analysis. The majority of the Staff adjustments relate to ROE, compensation issues and capital related forecast disputes.

Key dates in the procedural schedule are as follows:

Initial Brief — Nov. 12, 2015;
Reply Brief — Nov. 19, 2015;
A PSCW decision is anticipated in December 2015; and
New rates effective on or about Jan.1, 2016.

Recently Concluded Regulatory Proceedings — Minnesota Public Utilities Commission (MPUC)

Nuclear Project Prudence Investigation — In 2013, NSP-Minnesota completed the Monticello life cycle management (LCM)/extended power uprate (EPU) project. The multi-year project extended the life of the facility and increased the capacity from 600 to 671 megawatts (MW). Monticello LCM/EPU project expenditures were approximately $665 million. Total capitalized costs were approximately $748 million, which includes allowance for funds used during construction (AFUDC). In 2008, project expenditures were initially estimated at approximately $320 million, excluding AFUDC.

In 2013, the MPUC initiated an investigation to determine whether the final costs for the Monticello LCM/EPU project were prudent.

In March 2015, the MPUC voted to allow for full recovery, including a return, on approximately $415 million of the total plant costs (inclusive of AFUDC), but only allow recovery of the remaining $333 million of costs with no return on this portion of the investment over the remaining life of the plant. Further, the MPUC determined that only 50 percent of the investment was considered used and useful for 2014.  As a result of these determinations and assuming the other state commissions within the NSP System jurisdictions adopt the MPUC’s decisions, Xcel Energy recorded an estimated pre-tax loss of $129 million in the first quarter of 2015. The remaining book value of the Monticello project represents the present value of the estimated future cash flows allowed for by the MPUC. As NSP-Wisconsin shares in the costs of the Monticello plant through the Interchange Agreement with NSP-Minnesota, the MPUC decision also affects NSP-Wisconsin. NSP-Wisconsin’s portion of the $129 million pre-tax loss, recorded in the first quarter of 2015, was approximately $5 million.

Pending Regulatory Proceedings — Federal Energy Regulatory Commission (FERC)

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

Subsequently, the FERC issued and upheld an order adopting a new ROE methodology, which requires electric utilities to use a two-step discounted cash flow analysis that incorporates both short-term and long-term growth projections to estimate the cost of equity.


11


The ROE complaint was set for full hearing procedures. The complainants and intervenors filed testimony recommending a ROE between 8.67 percent and 9.54 percent. The FERC staff recommended a ROE of 8.68 percent. The MISO TOs recommended a ROE not less than 10.8 percent. An administrative law judge (ALJ) initial decision is anticipated to be issued by November 2015 and a FERC order is expected to be issued no earlier than 2016.

Certain MISO TOs requested FERC approval of a 50 basis point RTO membership ROE adder, which was approved effective Jan. 6, 2015, subject to the outcome of the ROE complaint. The total ROE, including the RTO membership adder, may not exceed the top of the discounted cash flow range under the new ROE methodology. Certain intervenors sought rehearing of the FERC order granting the ROE adder; FERC action is pending.

Certain intervenors filed a second complaint in February 2015 to reduce the MISO region ROE to 8.67 percent, prior to an adder.  A hearing has been set, and a refund effective date of Feb. 12, 2015 was established. The complainants and intervenors filed direct testimony in September 2015 recommending ROEs between 8.72 percent and 9.13 percent. The MISO TOs filed answering testimony on Oct. 20, 2015, recommending a ROE of not less than 10.75 percent. FERC staff is expected to file testimony in November 2015, and a hearing is scheduled for February 2016. An ALJ initial decision is expected in June 2016 with a FERC decision in late 2016 or in 2017. Currently, the ROE refund obligation initiated under the November 2013 complaint is effective through May 2016. The MISO TOs sought rehearing of the FERC decision to allow back-to-back complaints. NSP-Minnesota and NSP-Wisconsin sought rehearing of the FERC’s decision not to order changes to the ROE used by non-jurisdictional MISO transmission owners (more than 20 municipal, cooperative and other utilities who are not respondents to the ROE complaints), which equals the ROE presently used by the jurisdictional MISO TOs. FERC action is pending.

NSP-Minnesota recorded a current liability representing the current best estimate of a refund obligation associated with the new ROE as of Sept. 30, 2015. The new FERC ROE methodology is estimated to reduce transmission revenue, net of expense, between $7 million and $9 million annually for the NSP System.

6.
Commitments and Contingencies

Except to the extent noted below and in Note 5 above, the circumstances set forth in Notes 10 and 11 to the consolidated financial statements included in NSP-Wisconsin’s Annual Report on Form 10-K for the year ended Dec. 31, 2014 and in Notes 5 and 6 to the consolidated financial statements included in NSP-Wisconsin’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2015 and June 30, 2015, appropriately represent, in all material respects, the current status of commitments and contingent liabilities, and are incorporated herein by reference. The following include commitments, contingencies and unresolved contingencies that are material to NSP-Wisconsin’s financial position.

Guarantees

NSP-Wisconsin provides a guarantee for payment of customer loans related to NSP-Wisconsin’s farm rewiring program. NSP-Wisconsin’s exposure under the guarantee is based upon the net liability under the agreement. The guarantee issued by NSP-Wisconsin limits its exposure to a maximum amount stated in the guarantee. The guarantee contains no recourse provisions and requires no collateral.

The following table presents the guarantee issued and outstanding for NSP-Wisconsin:
(Millions of Dollars)
 
Sept. 30, 2015
 
Dec. 31, 2014
Guarantees issued and outstanding
 
$
1.0

 
$
1.0

Current exposure under these guarantees
 
0.1

 
0.2


Environmental Contingencies

Ashland Manufactured Gas Plant (MGP) Site — NSP-Wisconsin has been named a potentially responsible party (PRP) for contamination at a site in Ashland, Wis. The Ashland/Northern States Power Lakefront Superfund Site (the Ashland site) includes property owned by NSP-Wisconsin, which was a site previously operated by a predecessor company as a MGP facility (the Upper Bluff), and two other properties: an adjacent city lakeshore park area (Kreher Park), on which an unaffiliated third party previously operated a sawmill and where NSP-Wisconsin believes wood treating operations were conducted; and an area of Lake Superior’s Chequamegon Bay adjoining the park (the Sediments).


12


The U.S. Environmental Protection Agency (EPA) issued its Record of Decision (ROD) in 2010, which describes the preferred remedy the EPA has selected for the cleanup of the Ashland site. For the Sediments at the Ashland site, the ROD preferred remedy is a hybrid remedy involving both dry excavation and wet conventional dredging methodologies (the Hybrid Remedy). The ROD also identifies the possibility of a wet conventional dredging only remedy for the Sediments (the Wet Dredge), contingent upon the completion of a successful Wet Dredge pilot study.

In 2011, the EPA issued special notice letters identifying several entities, including NSP-Wisconsin, as PRPs, for future remediation at the Ashland site. As a result of settlement negotiations with NSP-Wisconsin, the EPA agreed to segment the Ashland site into separate areas. The first area (Phase I Project Area) includes soil and groundwater in Kreher Park and the Upper Bluff. The second area includes the Sediments.

In October 2012, a settlement among the EPA, the Wisconsin Department of Natural Resources, the Bad River and Red Cliff Bands of the Lake Superior Tribe of Chippewa Indians and NSP-Wisconsin was approved by the U.S. District Court for the Western District of Wisconsin. This settlement resolves claims against NSP-Wisconsin for its alleged responsibility for the remediation of the Phase I Project Area. Under the terms of the settlement, NSP-Wisconsin agreed to perform the remediation of the Phase I Project Area, but does not admit any liability with respect to the Ashland site. Fieldwork to address the Phase I Project Area at the Ashland site began at the end of 2012 and continues. Demolition activities occurred at the Ashland site in 2013. Soil, including excavation and treatment, as well as containment wall remedies were completed in early 2015. In fall 2015, the ground water remedy was initiated at the site with the installation of groundwater wells and the start of construction on the groundwater treatment plant. The final design for the Phase I remedy was approved by the EPA in September 2015. The current cost estimate for the cleanup of the Phase I Project Area is approximately $57 million, of which approximately $39 million has already been spent. The settlement also resolves claims by the federal, state and tribal trustees against NSP-Wisconsin for alleged natural resource damages at the Ashland site, including both the Phase I Project Area and the Sediments.

Negotiations are ongoing between the EPA and NSP-Wisconsin regarding who will pay for or perform the cleanup of the Sediments and what remedy will be implemented at the site to address the Sediments. It is NSP-Wisconsin’s view that the Hybrid Remedy is not safe or feasible to implement. The EPA’s ROD for the Ashland site includes estimates that the cost of the Hybrid Remedy is between $63 million and $77 million, with a potential deviation in such estimated costs of up to 50 percent higher to 30 percent lower. In November 2013, NSP-Wisconsin submitted a revised Wet Dredge pilot study work plan proposal to the EPA. In May 2014, NSP-Wisconsin entered into a final administrative order on consent (AOC) for the Wet Dredge pilot study with the EPA. In early 2015, NSP-Wisconsin entered into an AOC to construct a breakwater at the site to serve as wave attenuation and containment for a wet dredge pilot study and full scale sediment remedy at the site. Construction of the breakwater is underway with anticipated completion in early 2016. A wet dredge pilot study is anticipated to commence in summer 2016.

In August 2012, NSP-Wisconsin also filed litigation against other PRPs for their share of the cleanup costs for the Ashland site. A final settlement has been reached between NSP-Wisconsin, along with the EPA, and two of the PRPs, Wisconsin Central Ltd. and Soo Line Railroad Co. (collectively, the “Railroad PRPs”) resolving claims relating to the Railroad PRPs’ share of the costs of cleanup at the Ashland site. NSP-Wisconsin also entered into a second private party settlement agreement with LE Myers Co. Under the agreements, the Railroad PRPs contributed $10.5 million and LE Myers Co. contributed $5.4 million to the costs of the cleanup at the Ashland site. The agreements for the Railroad PRPs and LE Myers Co. were approved by the U.S. District Court for the Western District of Wisconsin in 2015 and payment has been received. As discussed below, existing PSCW policy requires that any payments received from PRPs be used to reduce the amount of the cleanup costs ultimately recovered from customers. Trial with the remaining PRPs for this matter, County of Ashland and City of Ashland, took place in May 2015. In September 2015, the Court ruled that the County of Ashland is not a liable party and the City of Ashland, although a liable party, is not required to contribute any funds to the cleanup of the site. NSP-Wisconsin filed a notice of appeal with the Seventh Circuit Court of Appeals in October 2015.

At Sept. 30, 2015 and Dec. 31, 2014, NSP-Wisconsin had recorded a liability of $95.7 million and $107.6 million, respectively, for the Ashland site based upon potential remediation and design costs together with estimated outside legal and consultant costs; of which $16.6 million and $28.9 million, respectively, was considered a current liability. NSP-Wisconsin’s potential liability, the actual cost of remediation and the time frame over which the amounts may be paid are subject to change. NSP-Wisconsin also continues to work to identify and access state and federal funds to apply to the ultimate remediation cost of the entire site. Unresolved issues or factors that could result in higher or lower NSP-Wisconsin remediation costs for the Ashland site include the cleanup approach implemented for the Sediments, which party implements the cleanup, the timing of when the cleanup is implemented and whether federal or state funding may be directed to help offset remediation costs at the Ashland site.


13


NSP-Wisconsin has deferred the estimated site remediation costs, as a regulatory asset, based on an expectation that the PSCW will continue to allow NSP-Wisconsin to recover payments for environmental remediation from its customers. The PSCW has consistently authorized NSP-Wisconsin rate recovery for all remediation costs incurred at the Ashland site, and has authorized recovery of MGP remediation costs by other Wisconsin utilities. Under the established PSCW policy, once deferred MGP remediation costs are determined by the PSCW to be prudent, utilities are allowed to recover those deferred costs in natural gas rates, typically over a four- to six-year amortization period. The PSCW historically has not allowed utilities to recover their carrying costs on unamortized regulatory assets for MGP remediation.

The PSCW reviewed the existing MGP cost recovery policy as it applied to the Ashland site in the context of NSP-Wisconsin’s 2013 general rate case. In December 2012, the PSCW recognized the potential magnitude of the future liability for the cleanup at the Ashland site and granted an exception to its existing policy at the request of NSP-Wisconsin. The elements of this exception include: (1) approval to begin recovery of estimated Phase 1 Project costs beginning on Jan. 1, 2013; (2) approval to amortize these estimated costs over a ten-year period; and (3) approval to apply a three percent carrying cost to the unamortized regulatory asset. In a 2014 rate case decision, the PSCW continued the cost recovery treatment with respect to the 2013 and 2014 cleanup costs for the Phase I Project Area and allowed NSP-Wisconsin to increase its 2014 amortization expense related to the cleanup by an additional $1.1 million to offset the need for a rate decrease for the natural gas utility. Cost recovery will continue at the level set in the 2014 rate case through 2015. In May 2015, NSP-Wisconsin filed its 2016 rate case, in which it requested an increase to the annual recovery for MGP clean-up costs from $4.7 million to $7.6 million. A decision is anticipated in December 2015.

Environmental Requirements

Water
Federal Clean Water Act (CWA) Effluent Limitations Guidelines (ELG) — In September 2015, the EPA issued a final ELG rule for power plants that use coal, natural gas, oil or nuclear materials as fuel and discharge treated effluent to surface waters as well as utility-owned landfills that receive coal combustion residuals. NSP-Wisconsin is currently reviewing the final rule and cannot predict, at this time, whether the costs of compliance with the final rule will have a material impact on the results of operations, financial position or cash flows. NSP-Wisconsin believes that compliance costs would be recoverable through regulatory mechanisms.

Federal CWA Waters of the United States Rule In June 2015, the EPA and the U.S. Army Corps of Engineers published a final rule that significantly expands the types of water bodies regulated under the CWA and broadens the scope of waters subject to federal jurisdiction. The expansion of the term “Waters of the U.S.” will subject more utility projects to federal CWA jurisdiction, thereby potentially delaying the siting of new generation projects, pipelines, transmission lines and distribution lines, as well as increasing project costs and expanding permitting and reporting requirements. The rule went into effect in August 2015. On Oct. 9, 2015, the U.S. Court of Appeals for the Sixth Circuit issued a nationwide stay of the final rule, pending further legal proceedings.

Air
Green House Gas (GHG) Emission Standard for Existing Sources — In June 2014, the EPA published its proposed rule on GHG emission standards for existing power plants. A final rule was published in October 2015. States must develop implementation plans by September 2016, with the possibility of an extension to September 2018. If a state decides not to submit a plan, the EPA will prepare a federal plan for the state. In addition, the EPA published a proposed model federal plan and will provide a 90-day public comment period on the federal plan once it has been published in the Federal Register. Among other things, the rule requires that state plans include enforceable measures to ensure emissions from existing power plants in the state achieve the EPA’s state-specific interim (2022-2029) and final (2030 and thereafter) emission performance targets. The plan will likely require additional emission reductions in states in which NSP-Wisconsin operates. Until NSP-Wisconsin has reviewed the final rule and has more information about state implementation plans, NSP-Wisconsin cannot predict whether the costs of compliance with the final rule will have a material impact on the results of operations, financial position or cash flows. NSP-Wisconsin believes that compliance costs will be recoverable through regulatory mechanisms.

GHG New Source Performance Standard (NSPS) Proposal — In January 2014, the EPA re-proposed a GHG NSPS for newly constructed power plants which would set performance standards (maximum carbon dioxide emission rates) for coal- and natural gas-fired power plants. For coal power plants, the NSPS requires an emissions level equivalent to partial carbon capture and storage (CCS) technology; for natural gas-fired power plants, the NSPS reflects emissions levels from combined cycle technology with no CCS. The NSPS does not apply to modified or reconstructed existing power plants. In addition, installation of control equipment on existing plants would not constitute a “modification” to those plants under the NSPS program. The final rule was published in October 2015. NSP-Wisconsin does not anticipate the costs of compliance with the final rule will have a material impact on the results of operations, financial position or cash flows.


14


GHG NSPS for Modified and Reconstructed Power Plants — In June 2014, the EPA published a proposed NSPS that would apply to GHG emissions from power plants that are modified or reconstructed. A final rule was published in October 2015. A modification is a change to an existing source that increases the maximum achievable hourly rate of emissions. A reconstruction involves the replacement of components at a unit to the extent that the capital cost of the new components exceeds 50 percent of the capital cost of an entirely new comparable unit. The standards do not require installation of CCS technology. Instead, the standard for coal-fired power plants requires a combination of best operating practices and equipment upgrades. The standards for natural gas-fired power plants require emissions standards based on efficient combined cycle technology. These requirements would only apply if NSP-Wisconsin were to modify or reconstruct an existing power plant in the future in a way that triggers applicability of this rule.

Cross-State Air Pollution Rule (CSAPR) — CSAPR addresses long range transport of particulate matter and ozone by requiring reductions in sulfur dioxide (SO2) and nitrous oxide (NOx) from utilities in the eastern half of the United States, including Wisconsin, using an emissions trading program.

In August 2012, the United States District Court of Appeals for the District of Columbia Circuit (D.C. Circuit) vacated the CSAPR and remanded it back to the EPA. The D.C. Circuit stated the EPA must continue administering the Clean Air Interstate Rule pending adoption of a valid replacement. In April 2014, the U.S. Supreme Court reversed and remanded the case to the D.C. Circuit. The Supreme Court held that the EPA’s rule design did not violate the Clean Air Act and that states had received adequate opportunity to develop their own plans. Because the D.C. Circuit overturned the CSAPR on two over-arching issues, there are many other issues the D.C. Circuit did not rule on that were considered on remand. In July 2015, the D.C. Circuit issued an opinion which found the reduction budgets exceed what is necessary for Texas to reduce its impact on downwind states that do not meet ambient air quality standards. The D.C. Circuit remanded the matter to the EPA to reconsider the emission budgets. While the EPA reconsiders emission budgets, the D.C. Circuit left CSAPR in effect.

In October 2014, the D.C. Circuit granted the EPA’s request to begin to implement CSAPR by imposing its 2012 compliance obligations starting in January 2015. While the litigation continues, the EPA is administering the CSAPR in 2015.

NSP-Wisconsin can operate within its CSAPR emission allowance allocation for SO2. NSP-Wisconsin is complying with the CSAPR for NOx in 2015 through operational changes or allowance purchases. CSAPR compliance in 2015 is not having a material impact on the results of operations, financial position or cash flows.

Electric Generating Unit (EGU) Mercury and Air Toxics Standards (MATS) Rule — The final EGU MATS rule became effective in April 2012. The EGU MATS rule sets emission limits for acid gases, mercury and other hazardous air pollutants and requires coal-fired utility facilities greater than 25 MW to demonstrate compliance within three to four years of the effective date. In 2014, the U.S. Supreme Court decided to review the D.C. Circuit’s decision that upheld the MATS standard. By April 2015, the MATS compliance deadline, NSP-Wisconsin had met the EGU MATS rule by ending use of coal at Bay Front Unit 5. In June 2015, the U.S. Supreme Court found that the EPA acted unreasonably by not considering the cost to regulate mercury and other hazardous air pollutants. The D.C. Circuit, on remand, will decide whether to leave MATS in effect while the EPA considers such costs in making a new determination. NSP-Wisconsin believes EGU MATS costs will be recoverable through regulatory mechanisms and does not anticipate a material impact on the results of operations, financial position or cash flows.

Industrial Boiler (IB) Maximum Achievable Control Technology (MACT) Rules — In 2011, the EPA finalized IB MACT rules to regulate boilers and process heaters fueled with coal, biomass and liquid fuels, which would apply to NSP-Wisconsin’s Bay Front Units 1 and 2. The project to meet the requirements was completed in September 2015 with an estimated cost of approximately $20 million.

Revisions to the NAAQS for Ozone — In October 2015, the EPA revised the NAAQS for ozone by lowering the eight-hour standard from 75 parts per billion (ppb) to 70 ppb. Current monitored air quality concentrations in areas of Wisconsin, where NSP-Wisconsin operates, are below the new standard. Therefore, NSP-Wisconsin does not expect a material impact on results of operations, financial position or cash flows.


15


Legal Contingencies

NSP-Wisconsin 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-Wisconsin’s financial statements. Unless otherwise required by GAAP, legal fees are expensed as incurred.

Employment, Tort and Commercial Litigation

Gas Trading Litigation — e prime, inc. (e prime) is a wholly owned subsidiary of Xcel Energy.  e prime was in the business of natural gas trading and marketing, but has not engaged in natural gas trading or marketing activities since 2003.  Thirteen lawsuits were commenced against e prime and Xcel Energy (and NSP-Wisconsin, in two instances) between 2003 and 2009 alleging fraud and anticompetitive activities in conspiring to restrain the trade of natural gas and manipulate natural gas prices. The cases were consolidated in U.S. District Court in Nevada.  In 2009, five of the cases were settled and one was dismissed.  The U.S. District Court in 2011 issued an order dismissing entirely six of the remaining seven lawsuits, and partially dismissing the seventh. Plaintiffs appealed the dismissals to the U.S. Court of Appeals for the Ninth Circuit, which reversed the District Court. The matter was ultimately heard by the U.S. Supreme Court in early 2015, which agreed with the Ninth Circuit and remanded the matter to the U.S. District Court. In September 2015, the District Court held a status conference and set deadlines for certain litigation related activities in 2016. A trial date has not yet been set, but is not expected to occur prior to late 2016 or early 2017. Xcel Energy and e prime have concluded that a loss is remote with respect to this matter.

7.
Borrowings and Other Financing Instruments

Commercial Paper — NSP-Wisconsin meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under its credit facility. Commercial paper outstanding for NSP-Wisconsin was as follows:
(Amounts in Millions, Except Interest Rates)
 
Three Months Ended Sept. 30, 2015
 
Twelve Months Ended Dec. 31, 2014
Borrowing limit
 
$
150

 
$
150

Amount outstanding at period end
 

 
78

Average amount outstanding
 

 
46

Maximum amount outstanding
 

 
101

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

 
0.27
%
Weighted average interest rate at period end
 
N/A

 
0.55


Letters of Credit — NSP-Wisconsin uses letters of credit, generally with terms of one year, to provide financial guarantees for certain operating obligations. At Sept. 30, 2015 and Dec. 31, 2014, there were no letters of credit outstanding.

Credit Facility — In order to use its commercial paper program to fulfill short-term funding needs, NSP-Wisconsin 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 aggregate amount exceeding available capacity under this credit facility. The line of credit provides short-term financing in the form of notes payable to banks, letters of credit and back-up support for commercial paper borrowings.

At Sept. 30, 2015, NSP-Wisconsin had the following committed credit facility available (in millions of dollars):
Credit Facility (a)
 
Drawn (b)
 
Available
$
150

 
$

 
$
150


(a) 
This credit facility expires in October 2019.
(b) 
Includes outstanding commercial paper.

All credit facility bank borrowings, outstanding letters of credit and outstanding commercial paper reduce the available capacity under the credit facility. NSP-Wisconsin had no direct advances on the credit facility outstanding at Sept. 30, 2015 and Dec. 31, 2014.

Other Short-Term Borrowings The following table presents the notes payable of Clearwater Investments, Inc., a NSP-Wisconsin subsidiary, to Xcel Energy Inc.:
(Amounts in Millions, Except Interest Rates)
 
Sept. 30, 2015
 
Dec. 31, 2014
Notes payable to affiliates
 
$
0.5

 
$
0.5

Weighted average interest rate at period end
 
0.38
%
 
0.51
%

Long-Term Borrowings

In June 2015, NSP-Wisconsin issued $100 million of 3.3 percent first mortgage bonds due June 15, 2024.

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 values.

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

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

Derivative Instruments Fair Value Measurements

NSP-Wisconsin 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 and utility commodity prices.

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


16


At Sept. 30, 2015, accumulated other comprehensive loss related to interest rate derivatives included $0.1 million of net losses expected to be reclassified into earnings during the next 12 months as the related hedged interest rate transactions impact earnings, including forecasted amounts for unsettled hedges, as applicable.

Commodity Derivatives — NSP-Wisconsin may enter 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 natural gas to generate electric energy and natural gas for resale.

The following table details the gross notional amounts of commodity options at Sept. 30, 2015 and Dec. 31, 2014:
(Amounts in Thousands) (a)(b)
 
Sept. 30, 2015
 
Dec. 31, 2014
Million British thermal units of natural gas
 
642

 
18


(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.

Impact of Derivative Activities on Income and Accumulated Other Comprehensive Loss — There were immaterial pre-tax losses related to interest rate derivatives reclassified from accumulated other comprehensive loss into earnings during the three months ended Sept. 30, 2015 and 2014, and $0.1 million of net losses reclassified from accumulated other comprehensive loss into earnings during the nine months ended Sept. 30, 2015 and 2014.

During the three months and nine months ended Sept. 30, 2015, changes in the fair value of natural gas commodity derivatives resulted in immaterial and $0.1 million of net losses recognized as regulatory assets and liabilities, respectively. For the three and nine months ended Sept. 30, 2014, changes in the fair value of natural gas commodity derivatives resulted in immaterial net losses and net gains of $0.7 million, respectively, recognized as regulatory assets and liabilities. The classification as a regulatory asset or liability is based on commission approved regulatory recovery mechanisms.

Natural gas commodity derivatives settlement losses of $1.0 million and gains of $0.5 million were recognized for the nine months ended Sept. 30, 2015 and 2014, respectively, and were subject to purchased natural gas cost recovery mechanisms, which result in reclassifications of derivative settlement gains and losses out of income to a regulatory asset or liability, as appropriate. There were immaterial natural gas commodity derivatives settlement losses recognized during the three months ended Sept. 30, 2015 and 2014, respectively.

NSP-Wisconsin had no derivative instruments designated as fair value hedges during the three and nine months ended Sept. 30, 2015 and 2014. 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-Wisconsin 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-Wisconsin’s own credit risk when determining the fair value of derivative liabilities, the impact of considering credit risk was immaterial to the fair value of unsettled commodity derivatives presented in the consolidated balance sheets.

NSP-Wisconsin 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.


17


Recurring Fair Value Measurements — The following tables present for each of the fair value hierarchy levels, NSP-Wisconsin’s derivative assets and liabilities measured at fair value on a recurring basis:

 
 
Sept. 30, 2015
 
 
Fair Value
 
Fair Value
Total
 
Counterparty
Netting (a)
 
Total (b)
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Current derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas commodity
 
$

 
$
292

 
$

 
$
292

 
$
(22
)
 
$
270

Total current derivative assets
 
$

 
$
292

 
$

 
$
292

 
$
(22
)
 
$
270

Current derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas commodity
 
$

 
$
94

 
$

 
$
94

 
$
(22
)
 
$
72

Total current derivative liabilities
 
$

 
$
94

 
$

 
$
94

 
$
(22
)
 
$
72


 
 
Dec. 31, 2014
 
 
Fair Value
 
Fair Value
Total
 
Counterparty
Netting (a)
 
Total (b)
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Current derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas commodity
 
$

 
$
52

 
$

 
$
52

 
$

 
$
52


(a) 
NSP-Wisconsin 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 Sept. 30, 2015 and Dec. 31, 2014.  The counterparty netting amounts presented exclude settlement receivables and payables and non-derivative amounts that may be subject to the same master netting agreements.
(b) 
Included in prepayments and other assets balance of $2.9 million and $6.9 million at Sept. 30, 2015 and Dec. 31, 2014, respectively, and other current liabilities balance of $24.4 million at Sept. 30, 2015, in the consolidated balance sheets.

Fair Value of Long-Term Debt

As of Sept. 30, 2015 and Dec. 31, 2014, other financial instruments for which the carrying amount did not equal fair value were as follows:
 
 
Sept. 30, 2015
 
Dec. 31, 2014
(Thousands of Dollars)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Long-term debt, including current portion
 
$
667,575

 
$
749,183

 
$
568,291

 
$
670,665


The fair value of NSP-Wisconsin’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 Sept. 30, 2015 and Dec. 31, 2014, 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 Income (Expense), Net

Other income (expense), net consisted of the following:
 
 
Three Months Ended Sept. 30
 
Nine Months Ended Sept. 30
(Thousands of Dollars)
 
2015
 
2014
 
2015
 
2014
Interest income
 
$
11

 
$
21

 
$
299

 
$
237

Other nonoperating income
 
72

 
29

 
202

 
108

Insurance policy income (expense)
 
20

 
(56
)
 
(109
)
 
(292
)
Other nonoperating expense
 
(3
)
 
(3
)
 
(8
)
 
(8
)
Other income (expense), net
 
$
100

 
$
(9
)
 
$
384

 
$
45



18


10.
Segment Information

Operating results from the regulated electric utility and regulated natural gas utility are each separately and regularly reviewed by NSP-Wisconsin’s chief operating decision maker.  NSP-Wisconsin 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-Wisconsin has the following reportable segments: regulated electric utility, regulated natural gas utility and all other.

NSP-Wisconsin’s regulated electric utility segment generates, transmits and distributes electricity primarily in portions of Wisconsin and Michigan. 
NSP-Wisconsin’s regulated natural gas utility segment purchases, transports, stores and distributes natural gas primarily in portions of Wisconsin and Michigan.
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 investments in rental housing projects that qualify for low-income housing tax credits.

Asset and capital expenditure information is not provided for NSP-Wisconsin’s reportable segments because as an integrated electric and natural gas utility, NSP-Wisconsin 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.
(Thousands of Dollars)
 
Regulated Electric
 
Regulated Natural Gas
 
All Other
 
Reconciling Eliminations
 
Consolidated Total
Three Months Ended Sept. 30, 2015
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)
 
$
224,666

 
$
11,088

 
$
407

 
$

 
$
236,161

Intersegment revenues
 
101

 
177

 


 
(278
)
 

Total revenues
 
$
224,767

 
$
11,265

 
$
407

 
$
(278
)
 
$
236,161

Net income (loss)
 
$
28,285

 
$
(1,993
)
 
$
(60
)
 
$

 
$
26,232

(Thousands of Dollars)
 
Regulated Electric
 
Regulated Natural Gas
 
All Other
 
Reconciling Eliminations
 
Consolidated Total
Three Months Ended Sept. 30, 2014
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)
 
$
216,289

 
$
14,484

 
$
273

 
$

 
$
231,046

Intersegment revenues
 
93

 
425

 

 
(518
)
 

Total revenues
 
$
216,382

 
$
14,909

 
$
273

 
$
(518
)
 
$
231,046

Net income (loss)
 
$
21,227

 
$
(2,003
)
 
$
806

 
$

 
$
20,030

(a) 
Operating revenues include $42 million and $33 million of affiliate electric revenue for the three months ended Sept. 30, 2015 and 2014, respectively.
 
 
 
 
 
 
 
 
 
 
 
(Thousands of Dollars)
 
Regulated
Electric
 
Regulated
Natural Gas
 
All Other
 
Reconciling
Eliminations
 
Consolidated
Total
Nine Months Ended Sept. 30, 2015
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)(b)
 
$
634,571

 
$
91,273

 
$
1,090

 
$

 
$
726,934

Intersegment revenues
 
308

 
475

 

 
(783
)
 

Total revenues
 
$
634,879

 
$
91,748

 
$
1,090

 
$
(783
)
 
$
726,934

Net income (loss)
 
$
57,586

(b) 
$
3,714

 
$
(289
)
 
$

 
$
61,011


19


 
 
 
 
 
 
 
 
 
 
 
(Thousands of Dollars)
 
Regulated
Electric
 
Regulated
Natural Gas
 
All Other
 
Reconciling
Eliminations
 
Consolidated
Total
Nine Months Ended Sept. 30, 2014
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)
 
$
625,663

 
$
117,814

 
$
825

 
$

 
$
744,302

Intersegment revenues
 
308

 
4,191

 

 
(4,499
)
 

Total revenues
 
$
625,971

 
$
122,005

 
$
825

 
$
(4,499
)
 
$
744,302

Net income
 
$
48,092

 
$
5,565

 
$
2,630

 
$

 
$
56,287

(a) 
Operating revenues include $121 million and $97 million of affiliate electric revenue for the nine months ended Sept. 30, 2015 and 2014, respectively.
(b) 
Includes a net of tax charge related to the Monticello LCM/EPU project.  See Note 5.

11.
Benefit Plans and Other Postretirement Benefits

Components of Net Periodic Benefit Cost
 
 
Three Months Ended Sept. 30
 
 
2015
 
2014
 
2015
 
2014
(Thousands of Dollars)
 
Pension Benefits
 
Postretirement Health
Care Benefits
Service cost
 
$
1,190

 
$
1,132

 
$
7

 
$
9

Interest cost
 
1,630

 
1,814

 
164

 
198

Expected return on plan assets
 
(2,371
)
 
(2,411
)
 
(8
)
 
(13
)
Amortization of prior service cost (credit)
 
27

 
28

 
(87
)
 
(88
)
Amortization of net loss
 
1,701

 
1,654

 
114

 
167

Net benefit cost recognized for financial reporting
 
$
2,177

 
$
2,217

 
$
190

 
$
273

 
 
Nine Months Ended Sept. 30
 
 
2015
 
2014
 
2015
 
2014
(Thousands of Dollars)
 
Pension Benefits
 
Postretirement Health
Care Benefits
Service cost
 
$
3,570

 
$
3,396

 
$
21

 
$
26

Interest cost
 
4,890

 
5,442

 
490

 
593

Expected return on plan assets
 
(7,113
)
 
(7,232
)
 
(23
)
 
(39
)
Amortization of prior service cost (credit)
 
83

 
84

 
(263
)
 
(263
)
Amortization of net loss
 
5,103

 
4,962

 
342

 
500

Net benefit cost recognized for financial reporting
 
$
6,533

 
$
6,652

 
$
567

 
$
817


In January 2015, contributions of $90.0 million were made across four of Xcel Energy’s pension plans, of which $4.9 million was attributable to NSP-Wisconsin. Xcel Energy does not expect additional pension contributions during 2015.

12.
Other Comprehensive Income

Changes in accumulated other comprehensive loss, net of tax, for the three and nine months ended Sept. 30, 2015 and 2014 were as follows:
 
 
Gains and Losses on
Cash Flow Hedges
(Thousands of Dollars)
 
Three Months Ended Sept. 30, 2015
 
Three Months Ended Sept. 30, 2014
Accumulated other comprehensive loss at July 1
 
$
(247
)
 
$
(324
)
Losses reclassified from net accumulated other comprehensive loss
 
19

 
20

Net current period other comprehensive income
 
19

 
20

Accumulated other comprehensive loss at Sept. 30
 
$
(228
)
 
$
(304
)

20


 
 
Gains and Losses on
Cash Flow Hedges
(Thousands of Dollars)
 
Nine Months Ended Sept. 30, 2015
 
Nine Months Ended Sept. 30, 2014
Accumulated other comprehensive loss at Jan. 1
 
$
(285
)
 
$
(361
)
Losses reclassified from net accumulated other comprehensive loss
 
57

 
57

Net current period other comprehensive income
 
57

 
57

Accumulated other comprehensive loss at Sept. 30
 
$
(228
)
 
$
(304
)

Reclassifications from accumulated other comprehensive loss for the three and nine months ended Sept. 30, 2015 and 2014 were as follows:
 
 
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
 
(Thousands of Dollars)
 
Three Months Ended Sept. 30, 2015
 
Three Months Ended Sept. 30, 2014
 
Losses on cash flow hedges:
 
 
 
 
 
Interest rate derivatives
 
$
32

(a) 
$
32

(a) 
Total, pre-tax
 
32

 
32

 
Tax benefit
 
(13
)
 
(12
)
 
Total amounts reclassified, net of tax
 
$
19

 
$
20

 
 
 
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
 
(Thousands of Dollars)
 
Nine Months Ended Sept. 30, 2015
 
Nine Months Ended Sept. 30, 2014
 
Losses on cash flow hedges:
 
 
 
 
 
Interest rate derivatives
 
$
94

(a) 
$
95

(a) 
Total, pre-tax
 
94

 
95

 
Tax benefit
 
(37
)
 
(38
)
 
Total amounts reclassified, net of tax
 
$
57

 
$
57

 

(a) 
Included in interest charges.

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

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

Financial Review

The following discussion and analysis by management focuses on those factors that had a material effect on NSP-Wisconsin’s financial condition, results of operations and cash flows during the periods presented, or are expected to have a material impact in the future. It should be read in conjunction with the accompanying unaudited consolidated financial statements and related notes to the consolidated financial statements. Due to the seasonality of NSP-Wisconsin’s electric and natural gas sales, such interim results are not necessarily an appropriate base from which to project annual results.


21


Forward-Looking Statements

Except for the historical statements contained in this report, the matters discussed herein are forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements are intended to be identified in this document by the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should” and similar expressions. Actual results may vary materially. Forward-looking statements speak only as of the date they are made, and we expressly disclaim any obligation to update any forward-looking information. The following factors, in addition to those discussed elsewhere in this Quarterly Report on Form 10-Q and in other securities filings (including NSP-Wisconsin’s Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2014 and Quarterly Reports on Form 10-Q for the quarters ended March 31. 2015 and June 30, 2015), 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-Wisconsin 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-Wisconsin 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-Wisconsin 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 of cost of capital; and employee work force factors.

Results of Operations

NSP-Wisconsin’s net income was $61.0 million for the nine months ended Sept. 30, 2015 compared with $56.3 million for the same period in 2014. Higher electric margins, primarily due to an electric rate increase and weather-normalized sales growth, along with lower O&M expenses were partially offset by higher depreciation, unfavorable weather, and the impact of the Monticello LCM/EPU project loss. See Note 5 to the consolidated financial statements for further discussion of the Monticello LCM/EPU project loss.

Electric Revenues and Margin

Electric production expenses tend to vary with the quantity of electricity sold and changes in the unit costs of fuel and purchased power. The electric fuel and purchased power cost recovery mechanism of the Wisconsin jurisdiction may not allow for complete recovery of all expenses and, therefore, changes in fuel or purchased power costs can impact earnings. The following table details the electric revenues and margin:
 
 
Nine Months Ended Sept. 30
(Millions of Dollars)
 
2015
 
2014
Electric revenues
 
$
635

 
$
626

Electric fuel and purchased power
 
(324
)
 
(333
)
Electric margin
 
$
311

 
$
293


The following tables summarize the components of the changes in electric revenues and electric margin for the nine months ended
Sept. 30:
 
Electric Revenues
(Millions of Dollars)
 
2015 vs. 2014
Interchange agreement billings with NSP-Minnesota
 
$
8

Retail rate increases (Wisconsin and Michigan)
 
3

Fuel and purchased power cost recovery
 
2

Estimated impact of weather
 
(3
)
Retail sales decline, excluding weather impact
 
(2
)
Other, net
 
1

Total increase in electric revenues
 
$
9

 

22


Electric Margin
(Millions of Dollars)
 
2015 vs. 2014
Interchange agreement billings with NSP-Minnesota
 
$
11

Fuel cost recovery
 
8

Retail rate increases (Wisconsin and Michigan)
 
3

Estimated impact of weather
 
(3
)
Retail sales decline, excluding weather impact
 
(2
)
Other, net
 
1

Total increase in electric margin
 
$
18


Natural Gas Revenues and Margin
 
Total natural gas expense tends to vary with changing sales requirements and the cost of natural gas purchases. However, due to the design of purchased natural gas cost recovery mechanisms to recover current expenses for sales to retail customers, fluctuations in the cost of natural gas have little effect on natural gas margin. The following table details the natural gas revenues and margin:
 
 
Nine Months Ended Sept. 30
(Millions of Dollars)
 
2015
 
2014
Natural gas revenues
 
$
91

 
$
118

Cost of natural gas sold and transported
 
(55
)
 
(78
)
Natural gas margin
 
$
36

 
$
40


The following tables summarize the components of the changes in natural gas revenues and natural gas margin for the nine months ended Sept. 30:
 
Natural Gas Revenues
(Millions of Dollars)
 
2015 vs. 2014
Purchased natural gas adjustment clause recovery
 
$
(24
)
Estimated impact of weather
 
(3
)
Total decrease in natural gas revenues
 
$
(27
)

Natural Gas Margin
(Millions of Dollars)
 
2015 vs. 2014
Estimated impact of weather
 
$
(3
)
Other, net
 
(1
)
Total decrease in natural gas margin
 
$
(4
)

Non-Fuel Operating Expenses and Other Items

O&M Expenses — O&M expenses decreased $6.4 million, or 4.6 percent, for the nine months ended Sept. 30, 2015. The decrease was primarily due to Interchange Agreement billings with NSP-Minnesota related to timing of transmission projects.
 
 
 
(Millions of Dollars)
 
2015 vs. 2014
Interchange agreement billings with NSP-Minnesota
 
$
(9
)
Other, net
 
3

Total decrease in O&M expenses
 
$
(6
)

Depreciation and Amortization — Depreciation and amortization increased $7.8 million or 13.2 percent for the nine months ended Sept. 30, 2015. The increase was primarily attributed to normal system expansion.

Income Taxes Income tax expense increased $2.8 million for the nine months ended Sept. 30, 2015 compared with the same period in 2014. The increase in income tax expense was primarily due to higher pretax earnings in 2015. The ETR was 37.2 percent for the nine months ended Sept. 30, 2015 and Sept. 30, 2014.


23


Public Utility Regulation

Except to the extent noted below, the circumstances set forth in Public Utility Regulation included in Item 1. of NSP-Wisconsin’s Annual Report on Form 10-K for the year ended Dec. 31, 2014, and Public Utility Regulation included in Item 2. of NSP-Wisconsin’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2015 and June 30, 2015, appropriately represent, in all material respects, the current status of public utility regulation, and are incorporated herein by reference.

NSP System Resource Plans — In January 2015, NSP-Minnesota filed its 2016-2030 Integrated Resource Plan (the Plan) with the MPUC.

On Oct. 2, 2015, NSP-Minnesota filed revisions to the Plan. The revised proposal addressed stakeholder recommendations as well as the final Clean Power Plan (CPP) recently issued by the EPA. The revised Plan is based on four primary elements: (1) accelerate the transition from coal energy to renewables, (2) preserve regional system reliability, (3) pursue energy efficiency gains and grid modernization, and (4) ensure customer benefits. The provisions included in the Plan would allow for a 60 percent reduction in carbon emissions from 2005 levels by 2030 and will result in 63 percent of NSP System energy being carbon-free by 2030. Specific terms of the proposal include:

The addition of 800 megawatts (MW) of wind and 400 MW of utility scale solar to the pre-2020 time-frame;
The addition of 1000 MW wind and 1000 MW utility scale solar between 2020-2030;
The retirement of Sherco Unit 2 in 2023 and Sherco Unit 1 in 2026;
The addition of a 230 MW (approximate capacity, actual size to be determined) natural gas combustion turbine in North Dakota by 2025;
Replacement of Sherco coal generation with a 780 MW (approximate capacity, actual size to be determined) natural gas combined cycle unit at the Sherco site no later than 2026; and
Operation of the Monticello and Prairie Island nuclear plants through their current license periods in the early 2030’s.

NSP-Minnesota believes this will provide substantial opportunities for the ownership of replacement and renewable generation. The Plan is currently being reviewed by the MPUC.

CapX2020 — The estimated cost of the five major CapX2020 transmission projects is $2 billion.  NSP-Minnesota and NSP-Wisconsin are responsible for approximately $1.1 billion of the total investment.  As of Sept. 30, 2015, Xcel Energy has invested $975.5 million of its $1.1 billion share of the five CapX2020 transmission projects.

In September 2015, the first 345 Kilovolt (KV) segment of the Hampton, Minn. to La Crosse, Wis. 161/345 KV transmission line was energized. The segment stretches from the North Rochester Substation in Minn. to the Briggs Road Substation in Wis. The final segment of the project is expected to go into service in the fall of 2016, although segments are being placed in service as they are completed.

NSP-Wisconsin / American Transmission Company, LLC (ATC) - La Crosse, Wis. to Madison, Wis. Transmission Line — In October 2013, NSP-Wisconsin and ATC jointly filed an application with the PSCW for a Certificate of Public Convenience and Necessity (CPCN) for a new 345 Kilovolt transmission line that would extend from La Crosse, Wis. to Madison, Wis.  NSP-Wisconsin’s half of the line will be shared with three co-owners, Dairyland Power Cooperative, WPPI Energy and Southern Minnesota Municipal Power Agency-Wisconsin. 

In April 2015, the PSCW issued its order approving a CPCN and route for the project. In June 2015, the PSCW denied two requests for rehearing. Two groups have appealed the CPCN Order to county circuit court. Court action is pending and the CPCN remains in full effect unless one of the parties seeks and receives a stay from the court and posts a bond to cover damages the utilities may incur due to delay. The 180-mile project is expected to cost approximately $580 million. NSP-Wisconsin’s portion of the investment is estimated to be approximately $207 million. NSP-Wisconsin and ATC anticipate beginning construction on the line in mid-2016, with completion by late 2018.


24


2015 Electric Fuel Cost Recovery — NSP-Wisconsin’s electric fuel costs for the nine months ended Sept. 30, 2015 were lower than authorized in rates and outside the two percent annual tolerance band established in the Wisconsin fuel cost recovery rules, primarily due to lower load as a result of mild weather, lower natural gas prices and lower purchased power prices in the MISO market. Under the fuel cost recovery rules, NSP-Wisconsin may retain the amount of over-recovery up to two percent of authorized annual fuel costs, or approximately $3.5 million. However, NSP-Wisconsin must defer the amount of over-recovery in excess of the two percent annual tolerance band for future refund to customers. Accordingly, NSP-Wisconsin recorded a deferral of approximately $5.9 million through Sept. 30, 2015. The amount of the deferral could increase or decrease based on actual fuel costs incurred for the remainder of the year. In the first quarter of 2016, NSP-Wisconsin will file a reconciliation of 2015 fuel costs with the PSCW. The amount of any potential refund is subject to review and approval by the PSCW, which is not expected until mid-2016.

Summary of Recent Federal Regulatory Developments

The FERC has jurisdiction over rates for electric transmission service in interstate commerce and electricity sold at wholesale, hydro facility licensing, natural gas transportation, asset transactions and mergers, accounting practices and certain other activities of NSP-Wisconsin, including enforcement of North American Electric Reliability Corporation mandatory electric reliability standards. State and local agencies have jurisdiction over many of NSP-Wisconsin’s activities, including regulation of retail rates and environmental matters. See additional discussion in the summary of recent federal regulatory developments and public utility regulation sections of the NSP-Wisconsin Annual Report on Form 10-K for the year ended Dec. 31, 2014. In addition to the matters discussed below, see Note 5 to the consolidated financial statements for a discussion of other regulatory matters.

FERC Order, New ROE Policy — In June 2014, the FERC adopted a new two-step ROE methodology for electric utilities. In March, 2015, FERC upheld the new ROE methodology and denied rehearing. The issue of how to apply the new FERC ROE methodology is being contested in various complaint proceedings. FERC is not expected to issue orders in any of the litigated ROE complaint proceedings until 2016. See Note 5 to the consolidated financial statements for discussion of the MISO ROE complaints.

Item 4 — CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

NSP-Wisconsin maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. In addition, the disclosure controls and procedures ensure that information required to be disclosed is accumulated and communicated to management, including the chief executive officer (CEO) and chief financial officer (CFO), allowing timely decisions regarding required disclosure. As of Sept. 30, 2015, based on an evaluation carried out under the supervision and with the participation of NSP-Wisconsin’s management, including the CEO and CFO, of the effectiveness of its disclosure controls and the procedures, the CEO and CFO have concluded that NSP-Wisconsin’s disclosure controls and procedures were effective.

Internal Control Over Financial Reporting

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

Part II — OTHER INFORMATION


25


Item 1 — LEGAL PROCEEDINGS

NSP-Wisconsin 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 Note 5 to the consolidated financial statements for discussion of proceedings involving utility rates and other regulatory matters.

Item 1A — RISK FACTORS

NSP-Wisconsin’s risk factors are documented in Item 1A of Part I of its Annual Report on Form 10-K for the year ended Dec. 31, 2014, which is incorporated herein by reference. There have been no material changes from the risk factors previously disclosed in the Form 10-K.

Item 4MINE SAFETY DISCLOSURES

None.

Item 5OTHER INFORMATION

None.

Item 6 — EXHIBITS
*
Indicates incorporation by reference
3.01*
Amended and Restated Articles of Incorporation of NSP-Wisconsin (Exhibit 3.01 to Form S-4 (file no. 333-112033) dated Jan. 21, 2004).
3.02*
By-Laws of Northern States Power Co. (a Wisconsin corporation) as Amended and Restated on Sept. 26, 2013. (Exhibit 3.02 to Form 10-Q/A for the quarter ended Sept. 30, 2013 (file no. 001-03140)).
Principal Executive Officer’s certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Principal Financial Officer’s certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Statement pursuant to Private Securities Litigation Reform Act of 1995.
101
The following materials from NSP-Wisconsin’s Quarterly Report on Form 10-Q for the quarter ended Sept. 30, 2015 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.

26


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 Wisconsin corporation)
 
 
 
Nov. 2, 2015
By:
/s/ JEFFREY S. SAVAGE
 
 
Jeffrey S. Savage
 
 
Senior Vice President, Controller
 
 
(Principal Accounting Officer)
 
 
 
 
 
/s/ TERESA S. MADDEN
 
 
Teresa S. Madden
 
 
Executive Vice President, Chief Financial Officer and Director
 
 
(Principal Financial Officer)

27