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EX-31.01 - EXHIBIT 31.01 - NORTHERN STATES POWER CO /WI/nspwex3101q12016.htm
EX-99.01 - EXHIBIT 99.01 - NORTHERN STATES POWER CO /WI/nspwex9901q12016.htm
EX-32.01 - EXHIBIT 32.01 - NORTHERN STATES POWER CO /WI/nspwex3201q12016.htm
EX-31.02 - EXHIBIT 31.02 - NORTHERN STATES POWER CO /WI/nspwex3102q12016.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
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 May 13, 2016
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 March 31
 
2016
 
2015
Operating revenues
 
 
 
Electric
$
211,524

 
$
210,284

Natural gas
43,020

 
63,296

Other
306

 
380

Total operating revenues
254,850

 
273,960

 
 
 
 
Operating expenses
 

 
 

Electric fuel and purchased power, non-affiliates
3,981

 
1,283

Purchased power, affiliates
108,714

 
111,832

Cost of natural gas sold and transported
23,418

 
42,438

Operating and maintenance expenses
48,619

 
42,173

Conservation program expenses
3,066

 
2,855

Depreciation and amortization
24,449

 
21,361

Taxes (other than income taxes)
7,155

 
7,232

Loss on Monticello life cycle management/extended power uprate project

 
5,237

Total operating expenses
219,402

 
234,411

 
 
 
 
Operating income
35,448

 
39,549

 
 
 
 
Other income, net
449

 
249

Allowance for funds used during construction — equity
810

 
2,219

 
 
 
 
Interest charges and financing costs
 

 
 

Interest charges — includes other financing costs of
$462 and $402, respectively
8,604

 
7,756

Allowance for funds used during construction — debt
(347
)
 
(1,070
)
Total interest charges and financing costs
8,257

 
6,686

 
 
 
 
Income before income taxes
28,450

 
35,331

Income taxes
10,819

 
13,064

Net income
$
17,631

 
$
22,267


See Notes to Consolidated Financial Statements


3


NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(amounts in thousands)
 
Three Months Ended March 31
 
2016
 
2015
Net income
$
17,631

 
$
22,267

Other comprehensive income
 
 
 
Derivative instruments:
 
 
 
Reclassification of losses to net income, net of tax of $13 and $13, respectively
19

 
19

Other comprehensive income
19

 
19

Comprehensive income
$
17,650

 
$
22,286


See Notes to Consolidated Financial Statements


4


NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
 
Three Months Ended March 31
 
2016
 
2015
Operating activities
 
 
 
Net income
$
17,631

 
$
22,267

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

 
 

Depreciation and amortization
24,829

 
21,682

Deferred income taxes
5,284

 
8,241

Amortization of investment tax credits
(132
)
 
(132
)
Allowance for equity funds used during construction
(810
)
 
(2,219
)
Loss on Monticello life cycle management/extended power uprate project

 
5,237

Net derivative losses
200

 
554

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(2,797
)
 
(5,496
)
Accrued unbilled revenues
7,326

 
10,428

Inventories
6,717

 
9,830

Other current assets
6,348

 
11,335

Accounts payable
2,325

 
(11,851
)
Net regulatory assets and liabilities
1,856

 
(1,404
)
Other current liabilities
3,492

 
1,289

Pension and other employee benefit obligations
(7,264
)
 
(4,915
)
Change in other noncurrent assets
(319
)
 
(4
)
Change in other noncurrent liabilities
798

 
535

Net cash provided by operating activities
65,484

 
65,377

 
 
 
 
Investing activities
 

 
 

Utility capital/construction expenditures
(44,655
)
 
(79,926
)
Allowance for equity funds used during construction
810

 
2,219

Other, net
292

 
(90
)
Net cash used in investing activities
(43,553
)
 
(77,797
)
 
 
 
 
Financing activities
 

 
 

(Repayments of) proceeds from short-term borrowings, net
(5,000
)
 
2,000

Repayments of long-term debt
(14
)
 
(128
)
Capital contributions (to) from parent
(1,545
)
 
25,210

Dividends paid to parent
(15,322
)
 
(14,957
)
Net cash (used in) provided by financing activities
(21,881
)
 
12,125

 
 
 
 
Net change in cash and cash equivalents
50

 
(295
)
Cash and cash equivalents at beginning of period
1,079

 
1,285

Cash and cash equivalents at end of period
$
1,129

 
$
990

 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

Cash paid for interest (net of amounts capitalized)
$
(6,305
)
 
$
(5,791
)
Cash (paid) received for income taxes, net
(2,424
)
 
625

Supplemental disclosure of non-cash investing transactions:
 

 
 

Property, plant and equipment additions in accounts payable
$
9,586

 
$
14,550


See Notes to Consolidated Financial Statements

5


NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands, except share and per share data)
 
March 31, 2016
 
Dec. 31, 2015
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,129

 
$
1,079

Accounts receivable, net
59,175

 
56,378

Accrued unbilled revenues
40,372

 
47,698

Inventories
14,842

 
21,559

Regulatory assets
13,824

 
16,146

Prepaid taxes
19,786

 
25,976

Deferred income taxes
8,900

 
3,138

Prepayments and other
2,226

 
2,387

Total current assets
160,254

 
174,361

 
 
 
 
Property, plant and equipment, net
1,845,767

 
1,828,079

 
 
 
 
Other assets
 

 
 

Regulatory assets
291,774

 
289,196

Other investments
3,751

 
4,042

Other
384

 
67

Total other assets
295,909

 
293,305

Total assets
$
2,301,930

 
$
2,295,745

 
 
 
 
Liabilities and Equity
 

 
 

Current liabilities
 

 
 

Current portion of long-term debt
$
1,168

 
$
1,131

Short-term debt
5,000

 
10,000

Notes payable to affiliates
500

 
500

Accounts payable
25,218

 
34,317

Accounts payable to affiliates
27,275

 
24,538

Dividends payable to parent
12,529

 
15,322

Regulatory liabilities
15,634

 
11,781

Environmental liabilities
17,453

 
17,155

Accrued interest
9,549

 
7,945

Other
16,379

 
15,778

Total current liabilities
130,705

 
138,467

 
 
 
 
Deferred credits and other liabilities
 

 
 

Deferred income taxes
406,150

 
393,569

Deferred investment tax credits
8,428

 
8,560

Regulatory liabilities
144,832

 
141,289

Environmental liabilities
77,026

 
77,441

Customer advances
19,162

 
18,480

Pension and employee benefit obligations
42,453

 
49,889

Other
16,220

 
16,347

Total deferred credits and other liabilities
714,271

 
705,575

 
 
 
 
Commitments and contingencies


 


Capitalization
 

 
 

Long-term debt
661,448

 
661,318

Common stock — 1,000,000 shares authorized of $100 par value; 933,000 shares
outstanding at March 31, 2016 and Dec. 31, 2015, respectively
93,300

 
93,300

Additional paid in capital
394,553

 
394,553

Retained earnings
307,843

 
302,741

Accumulated other comprehensive loss
(190
)
 
(209
)
Total common stockholder’s equity
795,506

 
790,385

Total liabilities and equity
$
2,301,930

 
$
2,295,745


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 March 31, 2016 and Dec. 31, 2015; the results of its operations, including the components of net income and comprehensive income, for the three months ended March 31, 2016 and 2015; and its cash flows for the three months ended March 31, 2016 and 2015. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Management has also evaluated the impact of events occurring after March 31, 2016 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, 2015 balance sheet information has been derived from the audited 2015 consolidated financial statements included in the NSP-Wisconsin Annual Report on Form 10-K for the year ended Dec. 31, 2015. 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, 2015, filed with the SEC on Feb. 22, 2016. 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, 2015, 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. 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.

Presentation of Deferred Taxes — In November 2015, the FASB issued Balance Sheet Classification of Deferred Taxes, Topic 740 (ASU No 2015-17), which eliminates the requirement to present deferred tax assets and liabilities as current and noncurrent on the balance sheet based on the classification of the related asset or liability, and instead requires classification of all deferred tax assets and liabilities as noncurrent. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2016, and early adoption is permitted. Other than the prescribed classification of all deferred tax assets and liabilities as noncurrent, NSP-Wisconsin does not expect the implementation of ASU 2015-17 to have a material impact on its 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 among other changes in accounting and disclosure requirements, replaces the cost method of accounting for non-marketable equity securities with a model for recognizing impairments and observable price changes, and also eliminates the available-for-sale classification for marketable equity securities. Under the new guidance, other than when the consolidation or equity method of accounting is utilized, changes in the fair value of equity securities are to be recognized in earnings. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2017. NSP-Wisconsin is currently evaluating the impact of adopting ASU 2016-01 on its consolidated financial statements.


7


Leases — In February 2016, the FASB issued Leases, Topic 842 (ASU No. 2016-02), which, for lessees, requires balance sheet recognition of right-of-use assets and lease liabilities for all leases. Additionally, for leases that qualify as finance leases, the guidance requires expense recognition consisting of amortization of the right-of-use asset as well as interest on the related lease liability using the effective interest method. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2018, and early adoption is permitted. NSP-Wisconsin is currently evaluating the impact of adopting ASU 2016-02 on its consolidated financial statements.

Stock Compensation — In March 2016, the FASB issued Improvements to Employee Share-Based Payment Accounting, Topic 718 (ASU 2016-09), which amends existing guidance to simplify several aspects of accounting and presentation for share-based payment transactions, including the accounting for income taxes and forfeitures, as well as presentation in the statement of cash flows. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2016, and early adoption is permitted. NSP-Wisconsin is currently evaluating the impact of adopting ASU 2016-09 on its consolidated financial statements.

Recently Adopted

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. NSP-Wisconsin implemented the guidance on Jan. 1, 2016, and the implementation did not have a significant 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 requires the presentation of debt issuance costs on the balance sheet as a deduction from the carrying amount of the related debt, instead of presentation as an asset. NSP-Wisconsin implemented the new guidance as required on Jan. 1, 2016, and as a result, $5.0 million of deferred debt issuance costs are presented as a deduction from the carrying amount of long-term debt on the consolidated balance sheet as of March 31, 2016, and $5.1 million of such deferred costs were retrospectively reclassified from other non-current assets to long-term debt on the consolidated balance sheet as of Dec. 31, 2015.

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 eliminates the requirement to categorize fair value measurements using a net asset value (NAV) methodology in the fair value hierarchy. NSP-Wisconsin implemented the guidance on Jan. 1, 2016, and the implementation did not have a material impact on its consolidated financial statements.

3.
Selected Balance Sheet Data
(Thousands of Dollars)
 
March 31, 2016
 
Dec. 31, 2015
Accounts receivable, net (a)
 
 
 
 
Accounts receivable
 
$
64,138

 
$
61,506

Less allowance for bad debts
 
(4,963
)
 
(5,128
)
 
 
$
59,175

 
$
56,378

(Thousands of Dollars)
 
March 31, 2016
 
Dec. 31, 2015
Inventories
 
 
 
 
Materials and supplies
 
$
6,676

 
$
6,785

Fuel
 
5,881

 
6,528

Natural gas
 
2,285

 
8,246

 
 
$
14,842

 
$
21,559

(Thousands of Dollars)
 
March 31, 2016
 
Dec. 31, 2015
Property, plant and equipment, net
 
 
 
 
Electric plant
 
$
2,431,503

 
$
2,411,562

Natural gas plant
 
276,568

 
275,376

Common and other property
 
134,327

 
132,329

Construction work in progress
 
77,148

 
65,755

Total property, plant and equipment
 
2,919,546

 
2,885,022

Less accumulated depreciation
 
(1,073,779
)
 
(1,056,943
)
 
 
$
1,845,767

 
$
1,828,079


(a) 
Accounts receivable, net includes an immaterial amount due from affiliates as of March 31, 2016 and Dec. 31, 2015, respectively.

8



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, 2015 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 March 31, 2016, the IRS had proposed an adjustment to the federal tax loss carryback claims that would result in $14 million of income tax expense for the 2009 through 2011 and 2013 claims, the recently filed 2014 claim, and the anticipated claim for 2015. NSP-Wisconsin is not expected to accrue any income tax expense related to this adjustment. In the fourth quarter of 2015, the IRS forwarded the issue to the Office of Appeals (Appeals); however, the outcome and timing of a resolution is uncertain. The statute of limitations applicable to Xcel Energy’s 2009 through 2011 federal income tax returns 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 March 31, 2016, 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 March 31, 2016, 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 March 31, 2016, 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)
 
March 31, 2016
 
Dec. 31, 2015
Unrecognized tax benefit — Permanent tax positions
 
$
0.3

 
$
0.2

Unrecognized tax benefit — Temporary tax positions
 
4.3

 
4.3

Total unrecognized tax benefit
 
$
4.6

 
$
4.5


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)
 
March 31, 2016
 
Dec. 31, 2015
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 and audit progress and state audits resume. As the IRS Appeals and audit progress, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $2 million.

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 March 31, 2016 and Dec. 31, 2015 were not material. No amounts were accrued for penalties related to unrecognized tax benefits as of March 31, 2016 or Dec. 31, 2015.

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, 2015, appropriately represent, in all material respects, the current status of other rate matters, and are incorporated herein by reference.

9



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

Wisconsin 2017 Electric and Gas Rate Case — On April 1, 2016, NSP-Wisconsin filed a request with the PSCW for an increase in annual electric rates of $17.4 million, or 2.4 percent, and an increase in natural gas rates by $4.8 million, or 3.9 percent, effective January 2017.

The electric rate request is for the limited purpose of recovering increases in (i) generation and transmission fixed charges and fuel and purchased power expenses related to the interchange agreement with NSP-Minnesota, and (ii) costs associated with forecasted average rate base of $1.188 billion in 2017.

The natural gas rate request is for the limited purpose of recovering expenses related to the ongoing environmental remediation of a former manufactured gas plant site and adjacent area in Ashland, Wis.

No changes are being requested to the capital structure or the 10.0 percent return on equity (ROE) authorized by the PSCW in the 2016 rate case. As part of an agreement with stakeholders to limit the size and scope of the case, NSP-Wisconsin also agreed to an earnings cap, solely for 2017, in which 100 percent of the earnings in excess of the authorized ROE would be refunded to customers.

The major components of the requested rate increases are summarized below:

Electric Rate Request (Millions of Dollars)
 
Request
Rate base investments
 
$
11.0

Generation and transmission expenses (excluding fuel and purchased power) (a)
 
6.8

Fuel and purchased power expenses
 
11.0

Subtotal
 
28.8

2015 fuel refund
 
(9.5
)
Department of Energy settlement refund
 
(1.9
)
Total electric rate increase
 
$
17.4


(a) Includes Interchange Agreement billings. The Interchange Agreement is a Federal Energy Regulatory Commission (FERC) tariff under which NSP-Wisconsin and its affiliate, NSP-Minnesota, own and operate a single integrated electric generation and transmission system and both companies pay a pro-rata share of system capital and operating costs. For financial reporting purposes, these expenses are included in operating and maintenance (O&M) expenses.

Natural Gas Rate Request (Millions of Dollars)
 
Request
Environmental remediation expenses
 
$
4.8

Total natural gas rate increase
 
$
4.8


A PSCW decision is anticipated in the fourth quarter of 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 and increased the capacity from 600 to 671 megawatts (MW) in 2015. The 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.


10


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, Xcel Energy recorded an estimated pre-tax loss of $129 million in the first quarter of 2015, after which the remaining book value of the Monticello project represented the present value of the estimated future cash flows. 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 — FERC

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

In June 2014 the FERC adopted 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.

In December 2015, an administrative law judge (ALJ) initial decision recommended the FERC approve a ROE of 10.32 percent. A FERC order is expected to be issued no earlier than late 2016 or 2017.

Certain MISO TOs separately requested FERC approval of a 50 basis point ROE adder for RTO membership, which was approved effective Jan. 6, 2015, subject to the outcome of the ROE complaint. Certain intervenors sought rehearing of this order, which the FERC denied in 2015.

In February 2015, a second complaint was filed seeking to reduce the MISO region ROE from 12.38 percent to 8.67 percent, prior to any adder.  The FERC set the second complaint for hearings, and established a refund effective date of Feb. 12, 2015. The MPUC, the North Dakota Public Service Commission, the South Dakota Public Utilities Commission and the Minnesota Department of Commerce (DOC) joined a joint complainant/intervenor initial brief recommending an ROE of either 8.82 percent or 8.81 percent. FERC staff recommended a ROE of 8.78 percent. The MISO TOs recommended a ROE of 10.92 percent. An ALJ initial decision is expected in June 2016 with a FERC decision expected no earlier than late 2016 or 2017.

NSP-Minnesota has recorded a current liability representing the current best estimate of a refund obligation associated with the new ROE, including the RTO membership adder, as of March 31, 2016. The new FERC ROE methodology is estimated to reduce transmission revenue, net of expense, between $8 million and $10 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, 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.


11


The following table presents the guarantee issued and outstanding for NSP-Wisconsin:
(Millions of Dollars)
 
March 31, 2016
 
Dec. 31, 2015
Guarantee issued and outstanding
 
$
1.0

 
$
1.0

Current exposure under this guarantee
 
0.1

 
0.1


Environmental Contingency

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 Site) includes property owned by NSP-Wisconsin, previously operated as a MGP facility (the Upper Bluff), and two other properties: an adjacent city lakeshore park area (Kreher Park); and an area of Lake Superior’s Chequamegon Bay adjoining the park (the Sediments).

In 2010, the United States Environmental Protection Agency (EPA) issued its Record of Decision (ROD), including their preferred remedy for the Sediments which is a hybrid remedy involving both dry excavation and wet conventional dredging methodologies (the Hybrid Remedy). A wet conventional dredging only remedy (the Wet Dredge), contingent upon the completion of a successful Wet Dredge pilot study, is another potential remedy.

In 2012, under a settlement agreement, NSP-Wisconsin agreed to perform the remediation of the Phase I Project Area (which includes the Upper Bluff and Kreher Park areas of the Site). The excavation and containment remedies are complete, and a long-term groundwater pump and treatment program is now underway. The final design was approved by the EPA in 2015. The current cost estimate for the cleanup of the Phase I Project Area is approximately $68.1 million, of which approximately $50.5 million has already been spent.

Negotiations are ongoing between the EPA and NSP-Wisconsin regarding who will pay for or perform the cleanup of the Sediments and which remedy will be implemented. The EPA’s ROD 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 or 30 percent lower. NSP-Wisconsin believes the Hybrid Remedy is not safe or feasible to implement. In 2015, NSP-Wisconsin constructed 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. Equipment mobilization for the wet dredge pilot study commenced in April 2016.

Three other PRPs have contributed $15.9 million to the remediation of the site, as a result of litigation and settlements approved by the U.S. District Court for the Western District of Wisconsin in 2015. NSP-Wisconsin’s litigation effort against other PRPs is now complete.

At March 31, 2016 and Dec. 31, 2015, NSP-Wisconsin had recorded a liability of $94.2 million and $94.4 million, respectively, for the Site based upon potential remediation and design costs together with estimated outside legal and consultant costs; of which $17.2 million and $17.0 million, respectively, were considered a current liability. NSP-Wisconsin’s potential liability, the actual cost of remediation and the timing of expenditures are subject to change. NSP-Wisconsin also continues to work to identify and access state and federal funds to apply to the remediation cost of the entire site.

NSP-Wisconsin has deferred the estimated site remediation costs as a regulatory asset. The PSCW has consistently authorized NSP-Wisconsin rate recovery for all remediation costs incurred at the Site. In a December 2012 decision, the PSCW agreed to allow NSP-Wisconsin to pre-collect certain costs, to amortize costs over a ten-year period, and to apply a three percent carrying cost to the unamortized regulatory asset. In December 2015, the PSCW approved NSP-Wisconsin’s 2016 rate case request for an increase to the annual recovery for MGP clean-up costs from $4.7 million to $7.6 million. In April 2016, NSP-Wisconsin filed a limited natural gas rate case for recovering additional expenses associated with remediating the Site. If approved, the annual recovery of MGP clean-up costs would increase from $7.6 million in 2016 to $12.4 million in 2017.


12


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 (Ninth Circuit), which reversed the U.S. 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. Trial dates have not yet been set, but are not expected to occur prior to early 2017. Xcel Energy, NSP-Wisconsin 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 March 31, 2016
 
Twelve Months Ended Dec. 31, 2015
Borrowing limit
 
$
150

 
$
150

Amount outstanding at period end
 
5

 
10

Average amount outstanding
 
14

 
39

Maximum amount outstanding
 
38

 
122

Weighted average interest rate, computed on a daily basis
 
0.66
%
 
0.44
%
Weighted average interest rate at period end
 
0.65

 
0.70


Letters of Credit — NSP-Wisconsin uses letters of credit, generally with terms of one year, to provide financial guarantees for certain operating obligations. At March 31, 2016 and Dec. 31, 2015, 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 March 31, 2016, NSP-Wisconsin had the following committed credit facility available (in millions of dollars):
Credit Facility (a)
 
Drawn (b)
 
Available
$
150

 
$
5

 
$
145


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


13


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 March 31, 2016 and Dec. 31, 2015.

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)
 
March 31, 2016
 
Dec. 31, 2015
Notes payable to affiliates
 
$
0.5

 
$
0.5

Weighted average interest rate at period end
 
0.60
%
 
0.87
%

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 prices.

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.


14


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.

At March 31, 2016, 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 March 31, 2016 and Dec. 31, 2015:
(Amounts in Thousands) (a)(b)
 
March 31, 2016
 
Dec. 31, 2015
Million British thermal units of natural gas
 

 
388


(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 March 31, 2016 and 2015.

During the three months ended March 31, 2016, changes in the fair value of natural gas commodity derivatives resulted in $0.1 million of net losses recognized as regulatory assets and liabilities, respectively. For the three months ended March 31, 2015, changes in the fair value of natural gas commodity derivatives resulted in immaterial net losses 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 $0.6 million and gains of $1.0 million were recognized for the three months ended March 31, 2016 and 2015, 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.

NSP-Wisconsin had no derivative instruments designated as fair value hedges during the three months ended March 31, 2016 and 2015. 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.


15


Recurring Fair Value Measurements — There were no recognized recurring fair value measurements at March 31, 2016. The following table presents for each of the fair value hierarchy levels, NSP-Wisconsin’s derivative assets and liabilities measured at fair value on a recurring basis at Dec. 31, 2015:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Dec. 31, 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
 
$

 
$
15

 
$

 
$
15

 
$
(11
)
 
$
4

Total current derivative assets
 
$

 
$
15

 
$

 
$
15

 
$
(11
)
 
$
4

Current derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas commodity
 
$

 
$
194

 
$

 
$
194

 
$
(11
)
 
$
183

Total current derivative liabilities
 
$

 
$
194

 
$

 
$
194

 
$
(11
)
 
$
183


(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 Dec. 31, 2015.  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 other current assets balance of $2.4 million and other current liabilities balance of $15.8 million at Dec. 31, 2015, in the consolidated balance sheets.

Fair Value of Long-Term Debt

As of March 31, 2016 and Dec. 31, 2015, other financial instruments for which the carrying amount did not equal fair value were as follows:
 
 
March 31, 2016
 
Dec. 31, 2015
(Thousands of Dollars)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Long-term debt, including current portion (a)
 
$
662,616

 
$
760,820

 
$
662,449

 
$
742,565

(a) 
Amounts reflect the classification of debt issuance costs as a deduction from the carrying amount of the related debt. See Note 2, Accounting Pronouncements for more information on the adoption of ASU 2015-03.

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 March 31, 2016 and Dec. 31, 2015, 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, Net

Other income, net consisted of the following:
 
 
Three Months Ended March 31
(Thousands of Dollars)
 
2016
 
2015
Interest income
 
$
124

 
$
297

Other nonoperating income
 
158

 
61

Insurance policy income (expense)
 
170

 
(106
)
Other nonoperating expense
 
(3
)
 
(3
)
Other income, net
 
$
449

 
$
249


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.


16


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 O&M expenses and interest expense are allocated based on cost causation allocators.  A general allocator is used for certain general and administrative expenses, including office supplies, rent, property insurance and general advertising.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(Thousands of Dollars)
 
Regulated
Electric
 
Regulated
Natural Gas
 
All Other
 
Reconciling
Eliminations
 
Consolidated
Total
Three Months Ended March 31, 2016
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)(b)
 
$
211,524

 
$
43,020

 
$
306

 
$

 
$
254,850

Intersegment revenues
 
109

 
80

 

 
(189
)
 

Total revenues
 
$
211,633

 
$
43,100

 
$
306

 
$
(189
)
 
$
254,850

Net income
 
$
11,501

 
$
6,092

 
$
38

 
$

 
$
17,631

 
 
 
 
 
 
 
 
 
 
 
(Thousands of Dollars)
 
Regulated
Electric
 
Regulated
Natural Gas
 
All Other
 
Reconciling
Eliminations
 
Consolidated
Total
Three Months Ended March 31, 2015
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)
 
$
210,284

 
$
63,296

 
$
380

 
$

 
$
273,960

Intersegment revenues
 
109

 
225

 

 
(334
)
 

Total revenues
 
$
210,393

 
$
63,521

 
$
380

 
$
(334
)
 
$
273,960

Net income (loss)
 
$
15,514

(b) 
$
6,781

 
$
(28
)
 
$

 
$
22,267

(a) 
Operating revenues include $41 million and $38 million of affiliate electric revenue for the three months ended March 31, 2016 and 2015, 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 March 31
 
 
2016
 
2015
 
2016
 
2015
(Thousands of Dollars)
 
Pension Benefits
 
Postretirement Health
Care Benefits
Service cost
 
$
1,104

 
$
1,190

 
$
6

 
$
7

Interest cost
 
1,704

 
1,630

 
163

 
163

Expected return on plan assets
 
(2,289
)
 
(2,371
)
 
(6
)
 
(8
)
Amortization of prior service cost (credit)
 
28

 
28

 
(88
)
 
(88
)
Amortization of net loss
 
1,348

 
1,701

 
83

 
114

Net benefit cost recognized for financial reporting
 
$
1,895

 
$
2,178

 
$
158

 
$
188


17


 
 
 
 
 
 
 
 
 
In January 2016, contributions of $125.0 million were made across four of Xcel Energy’s pension plans, of which $7.4 million was attributable to NSP-Wisconsin. Xcel Energy does not expect additional pension contributions during 2016.

12.
Other Comprehensive Income

Changes in accumulated other comprehensive loss, net of tax, for the three months ended March 31, 2016 and 2015 were as follows:
 
 
 
 
 
 
 
Gains and Losses on
Cash Flow Hedges
(Thousands of Dollars)
 
Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2015
Accumulated other comprehensive loss at Jan. 1
 
$
(209
)
 
$
(285
)
Losses reclassified from net accumulated other comprehensive loss
 
19

 
19

Net current period other comprehensive income
 
19

 
19

Accumulated other comprehensive loss at March 31
 
$
(190
)
 
$
(266
)

Reclassifications from accumulated other comprehensive loss for the three months ended March 31, 2016 and 2015 were as follows:
 
 
 
 
 
 
 
 
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
 
(Thousands of Dollars)
 
Three Months Ended March 31, 2016
 
Three Months Ended March 31, 2015
 
Losses on cash flow hedges:
 
 
 
 
 
Interest rate derivatives
 
$
32

(a) 
$
32

(a) 
Total, pre-tax
 
32

 
32

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

 
$
19

 

(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.


18


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, 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 $17.6 million for the first quarter of 2016 compared with $22.3 million for the same period in 2015. The impact of the 2015 Monticello LCM/EPU project loss along with electric and natural gas rate increases were more than offset by higher O&M expenses and depreciation. 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:
 
 
Three Months Ended March 31
(Millions of Dollars)
 
2016
 
2015
Electric revenues
 
$
212

 
$
210

Electric fuel and purchased power
 
(113
)
 
(113
)
Electric margin
 
$
99

 
$
97


The following tables summarize the components of the changes in electric revenues and electric margin for the three months ended
March 31:
 
Electric Revenues
(Millions of Dollars)
 
2016 vs. 2015
Retail rate increases (Wisconsin and Michigan)
 
$
8

Interchange agreement billings with NSP-Minnesota
 
3

Fuel and purchased power cost recovery
 
(8
)
Estimated impact of weather
 
(3
)
Other, net
 
2

Total increase in electric revenues
 
$
2

 

19


Electric Margin
(Millions of Dollars)
 
2016 vs. 2015
Retail rate increases (Wisconsin and Michigan)
 
$
8

Estimated impact of weather
 
(3
)
Fuel cost recovery
 
(2
)
Other, net
 
(1
)
Total increase in electric margin
 
$
2


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:
 
 
Three Months Ended March 31
(Millions of Dollars)
 
2016
 
2015
Natural gas revenues
 
$
43

 
$
63

Cost of natural gas sold and transported
 
(23
)
 
(42
)
Natural gas margin
 
$
20

 
$
21


The following tables summarize the components of the changes in natural gas revenues and natural gas margin for the three months ended March 31:
 
Natural Gas Revenues
(Millions of Dollars)
 
2016 vs. 2015
Purchased natural gas adjustment clause recovery
 
$
(19
)
Estimated impact of weather
 
(2
)
Retail rate increase (Wisconsin)
 
1

Total decrease in natural gas revenues
 
$
(20
)

Natural Gas Margin
(Millions of Dollars)
 
2016 vs. 2015
Estimated impact of weather
 
$
(2
)
Retail rate increase (Wisconsin)
 
1

Total decrease in natural gas margin
 
$
(1
)

Non-Fuel Operating Expenses and Other Items

O&M Expenses — O&M expenses increased $6.4 million, or 15.3 percent, for the first quarter of 2016. The increase was primarily due to interchange agreement billings with NSP-Minnesota related to timing of transmission projects and higher gas survey costs.

Depreciation and Amortization — Depreciation and amortization increased $3.1 million, or 14.5 percent, for the first quarter ended 2016. The increase was primarily attributable to capital investments.

Income Taxes Income tax expense decreased $2.2 million for the first quarter ended 2016 compared with the same period in 2015. The decrease in income tax expense was primarily due to lower pretax earnings in 2016. The ETR was 38.0 percent for the first quarter of 2016 compared with 37.0 percent for the same period in 2015. The higher ETR in 2016 is primarily due to decreased permanent plant-related adjustments (e.g., AFUDC-equity) in 2016.

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, 2015, appropriately represents, in all material respects, the current status of public utility regulation, and are incorporated herein by reference.


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

In October 2015, NSP-Minnesota proposed revisions to the Plan. The revised proposal addressed stakeholder recommendations as well as the then final Clean Power Plan (CPP) 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 is expected to result in 63 percent of NSP System energy being carbon-free by 2030. Specific terms of the proposal include:

The addition of 800 MW of wind and 400 MW of utility scale solar to the pre-2020 time-frame;
The addition of 1000 MW of wind and 1000 MW of 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 natural gas combustion turbine in North Dakota by 2025;
Replacement of Sherco coal generation with a 786 MW natural gas combined cycle unit at the Sherco site no later than 2026; and
Operation of the Monticello and PI nuclear plants through their current license periods in the early 2030’s.

NSP-Minnesota believes this will provide substantial opportunities for the ownership of renewable generation and replacement thermal generation. In January 2016, NSP-Minnesota filed supplemental economic and technical information in support of its revised Plan. While the CPP was subsequently stayed, the filing demonstrated anticipated compliance with the CPP while maintaining reasonable costs for customers. Additionally, NSP-Minnesota responded to MPUC inquiries regarding forecasted cost increases at PI (through end of licensed life) and committed to provide additional information if the MPUC wishes to further explore alternatives to operating PI through its current license periods. The MPUC has authorized the DOC to engage an expert to aid in its analysis of PI information provided, the results of which are expected to influence NSP-Minnesota’s proposed resource portfolio in its next resource plan. Comments and reply comments on the Plan are due July 8, 2016 and Aug. 12, 2016, respectively. The MPUC is expected to make a decision on the resource plan in late 2016.

2015 Electric Fuel Cost Recovery — NSP-Wisconsin’s electric fuel costs for the year ended Dec. 31, 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. NSP-Wisconsin recorded a deferral of approximately $9.2 million through Dec. 31, 2015. In March 2016, NSP-Wisconsin filed a final reconciliation of 2015 actual fuel costs with the PSCW, indicating the total amount to be refunded to customers, including interest, is $9.5 million, and increased the deferral accordingly. NSP-Wisconsin has proposed that the refund liability be used to offset the proposed increase in the 2017 test year rate case. 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, 2015. In addition to the matters discussed below, see Note 5 to the consolidated financial statements for a discussion of other regulatory matters.


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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. Two complaints against the MISO Transmission Owners, including NSP-Minnesota and NSP-Wisconsin, are pending FERC action. FERC is not expected to issue orders in any of the litigated ROE complaint proceedings until 2016 or 2017. See Note 5 to the consolidated financial statements for discussion of the MISO ROE Complaints.

Formula Rate Treatment of Accumulated Deferred Income Taxes (ADIT) - In 2015, the MISO Transmission Owners, including NSP-Minnesota and NSP-Wisconsin filed separate changes to their transmission formula rates to modify the treatment of ADIT to comply with 2015 IRS guidance regarding how ADIT must be reflected in formula rates using future test years and a true-up. The filings are intended to ensure that NSP-Minnesota and NSP-Wisconsin are in compliance with IRS rules and may continue to use accelerated tax depreciation. In December 2015, the FERC partially accepted the proposed NSP-Minnesota and NSP-Wisconsin transmission formula rate changes, but rejected the changes regarding the treatment of ADIT in the formula rate true-up. NSP-Minnesota and NSP-Wisconsin sought clarification or rehearing of the FERC order partially rejecting the NSP System filing. FERC action on the NSP-Minnesota and NSP-Wisconsin request for clarification remains pending.

SPP and MISO Complaints Regarding RTO Joint Operating Agreement (JOA) - SPP and MISO were involved in a long-running dispute regarding the interpretation of their JOA, which is intended to coordinate RTO operations along the MISO/SPP system boundary. SPP and MISO disagreed over MISO’s authority to transmit power between the traditional MISO region in the Midwest and the Entergy system. Several cases were filed with the FERC by MISO and SPP between 2011 and 2014. In June 2014, the FERC set the issues for settlement judge and hearing procedures.

In January 2016, the FERC approved a settlement between SPP, MISO and other parties that resolves various disputed matters and provide a defined settlement compensation plan by MISO to SPP. MISO will pay SPP $16 million for the two-year retroactive period (February 2014 to January 2016) and $16 million annually prospectively starting Feb. 1, 2016, subject to a true-up. In January 2016, SPP filed a proposal regarding distribution of the MISO revenues to SPP members. In March 2016, the FERC issued an order rejecting one component of the SPP filing, accepting the remainder of the SPP tariff proposal subject to refund, and setting the filing for settlement judge or hearing procedures. Separate settlement discussions are ongoing regarding the April 2014 MISO tariff change filing to recover SPP JOA charges in MISO rates. NSP-Minnesota and NSP-Wisconsin expect to be able to recover any resulting MISO charges in retail rates.

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 March 31, 2016, 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

Effective January 2016, NSP-Wisconsin implemented the general ledger modules of a new enterprise resource planning (ERP) system to improve certain financial and related transaction processes. During 2016 and 2017, NSP-Wisconsin will continue implementing additional modules and expects to begin conversion of existing work management systems to this new ERP system. In connection with this ongoing implementation, NSP-Wisconsin has updated and will continue updating its internal control over financial reporting, as necessary, to accommodate modifications to its business processes and accounting procedures. NSP-Wisconsin does not believe the implementation of the general ledger modules, which occurred during the period ended March 31, 2016, materially affected its internal control over financial reporting.  NSP-Wisconsin also does not expect the implementation of the additional modules to materially affect its internal control over financial reporting.

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


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Part II — OTHER INFORMATION

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 a 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, 2015, 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 March 31, 2016 are formatted in XBRL (eXtensible Business Reporting Language):  (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Balance Sheets, (v) Notes to Consolidated Financial Statements, and (vi) document and entity information.

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SIGNATURES

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

 
 
Northern States Power Company (a Wisconsin corporation)
 
 
 
May 13, 2016
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)

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