NORTHERN STATES POWER CO /WI/ - FORM 10-K/A - July 27, 2018

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EX-23.01 - EXHIBIT 23.01 - NORTHERN STATES POWER CO /WI/nspwex2301q420171.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-K/A
(Amendment No. 1)
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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)

Registrant’s telephone number, including area code: 715-839-2625

Securities registered pursuant to Section 12(b) of the Act:  None
Securities registered pursuant to section 12(g) of the Act:  None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes x No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
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 if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
 
Accelerated filer ¨
Non-accelerated filer x
 
Smaller Reporting Company ¨
(Do not check if a smaller reporting company)
 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ¨ Yes x No
As of Feb. 23, 2018, 933,000 shares of common stock, par value $100 per share, were outstanding, all of which were held by Xcel Energy Inc., a Minnesota corporation.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Item 14 of Form 10-K is set forth under the heading “Independent Registered Public Accounting Firm – Audit and Non-Audit Fees” in Xcel Energy Inc.’s definitive Proxy Statement for the 2018 Annual Meeting of Stockholders which definitive Proxy Statement is expected to be filed with the SEC on or about April 3, 2018. Such information set forth under such heading is incorporated herein by this reference hereto.
Northern States Power Company meets the conditions set forth in General Instructions I(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format permitted by General Instruction I(2).
 
 
 
 
 



TABLE OF CONTENTS
Index

This Form 10-K/A (Amendment No. 1) is filed by NSP-Wisconsin.  NSP-Wisconsin is a wholly owned subsidiary of Xcel Energy Inc. Additional information on Xcel Energy is available in various filings with the SEC.  This report should be read in its entirety.

2

EXPLANATORY NOTE
We are filing this Amendment No. 1 to our Annual Report on Form 10-K/A (the "Amendment") for the fiscal year ended December 31, 2017, as filed with the Securities and Exchange Commission (the “SEC”) on February 26, 2018 (the “Original Form 10-K”), solely to correct an administrative error in the date of the Report of Independent Registered Public Accounting Firm of Deloitte & Touche LLP (the “Report”). The Report in the Original Form 10-K was incorrectly dated as “February 23, 2017.” The correct date is “February 23, 2018.” The Report of Independent Registered Public Accounting Firm with the correct date is filed herewith.
In accordance with Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), we have included the entire text of Part II, Item 8 of the Original Form 10-K in this Amendment. However, there have been no changes to the text of such Part II, Item 8 other than the change stated in the immediately preceding paragraph. Further, there have been no changes to the XBRL data filed in Exhibit 101 of the Original Form 10-K.
This Amendment includes new consent of Deloitte & Touche LLP as Exhibit 23.01 and new certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.01, 31.02, and 32.01 hereto.
Except as expressly set forth above, this Amendment does not, and does not purport to, amend, update or restate the information in any other Item of the Original Form 10-K or reflect any events that have occurred after the filing of the Original Form 10-K.

3


PART II

Item 8 — Financial Statements and Supplementary Data

See Item 15-1 in Part IV for an index of financial statements included herein.

See Note 16 to the consolidated financial statements for summarized quarterly financial data.


4

Management Report on Internal Controls Over Financial Reporting

The management of NSP-Wisconsin is responsible for establishing and maintaining adequate internal control over financial reporting. NSP-Wisconsin’s internal control system was designed to provide reasonable assurance to Xcel Energy Inc.’s and NSP-Wisconsin’s management and board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

In 2016, NSP-Wisconsin implemented the general ledger modules, as well as initiated deployment of work management systems modules, of a new enterprise resource planning system. NSP-Wisconsin implemented additional work management systems modules in2017. NSP-Wisconsin does not believe this implementation had an adverse effect on its internal control over financial reporting.

NSP-Wisconsin management assessed the effectiveness of NSP-Wisconsin’s internal control over financial reporting as of Dec. 31, 2017. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our assessment, we believe that, as of Dec. 31, 2017, NSP-Wisconsin’s internal control over financial reporting is effective at the reasonable assurance level based on those criteria.

/s/ BEN FOWKE
 
/s/ ROBERT C. FRENZEL
Ben Fowke
 
Robert C. Frenzel
Chairman and Chief Executive Officer
 
Executive Vice President, Chief Financial Officer
Feb. 23, 2018
 
Feb. 23, 2018


5

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of
Northern States Power Company, a Wisconsin corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Northern States Power Company, a Wisconsin corporation and subsidiaries (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, cash flows, and common stockholder’s equity for each of the three years in the period ended December 31, 2017, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ DELOITTE & TOUCHE LLP
 
Minneapolis, Minnesota
 
February 23, 2018
 

We have served as the Company’s auditor since 2002.

6

NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands)
 
Year Ended Dec. 31
 
2017
 
2016
 
2015
Operating revenues
 
 
 
 
 
Electric
$
881,891

 
$
849,946

 
$
834,998

Natural gas
122,353

 
106,157

 
120,147

Other
1,207

 
1,130

 
1,396

Total operating revenues
1,005,451

 
957,233

 
956,541

 
 
 
 
 
 
Operating expenses
 
 
 
 
 
Electric fuel and purchased power, non-affiliates
16,197

 
15,574

 
10,795

Purchased power, affiliates
421,609

 
413,615

 
419,028

Cost of natural gas sold and transported
62,259

 
54,436

 
70,988

Operating and maintenance expenses
205,539

 
194,927

 
179,413

Conservation program expenses
12,572

 
12,645

 
11,695

Depreciation and amortization
111,216

 
98,294

 
91,245

Taxes (other than income taxes)
27,831

 
27,814

 
28,181

Loss on Monticello life cycle management/extended power uprate project
—

 
—

 
5,237

Total operating expenses
857,223

 
817,305

 
816,582

 
 
 
 
 
 
Operating income
148,228

 
139,928

 
139,959

 
 
 
 
 
 
Other income, net
833

 
461

 
883

Allowance for funds used during construction — equity
6,707

 
4,277

 
7,253

 
 
 
 
 
 
Interest charges and financing costs
 
 
 
 
 
Interest charges — includes other financing costs of
$1,855, $1,854, and $1,738, respectively
35,040

 
34,452

 
32,731

Allowance for funds used during construction — debt
(2,860
)
 
(1,823
)
 
(3,510
)
Total interest charges and financing costs
32,180

 
32,629

 
29,221

 
 
 
 
 
 
Income before income taxes
123,588

 
112,037

 
118,874

Income taxes
44,172

 
42,902

 
44,238

Net income
$
79,416

 
$
69,135

 
$
74,636


See Notes to Consolidated Financial Statements


7

NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands)
 
Year Ended Dec. 31
 
2017
 
2016
 
2015
Net income
$
79,416

 
$
69,135

 
$
74,636

 
 
 
 
 
 
Other comprehensive income
 
 
 
 
 
 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
Reclassification of losses to net income, net of tax of $50 and $51, and $51, respectively.
76

 
76

 
76

Other comprehensive income
76

 
76

 
76

Comprehensive income
$
79,492

 
$
69,211

 
$
74,712


See Notes to Consolidated Financial Statements


8

NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
 
Year Ended Dec. 31
 
2017
 
2016
 
2015
Operating activities
 
 
 
 
 
Net income
$
79,416

 
$
69,135

 
$
74,636

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
112,750

 
99,824

 
92,656

Deferred income taxes
45,557

 
37,368

 
45,833

Amortization of investment tax credits
(523
)
 
(523
)
 
(528
)
Allowance for equity funds used during construction
(6,707
)
 
(4,277
)
 
(7,253
)
Loss on Monticello life cycle management/extended power uprate project
—

 
—

 
5,237

Provision for bad debts
4,105

 
3,730

 
3,947

Net derivative losses
128

 
160

 
482

Other
(1,823
)
 
(623
)
 
—

Changes in operating assets and liabilities:
 
 
 

 
 

Accounts receivable
(9,948
)
 
(1,383
)
 
71

Accrued unbilled revenues
(6,370
)
 
(5,940
)
 
5,869

Inventories
552

 
3,250

 
3,126

Other current assets
922

 
(1,191
)
 
7,135

Accounts payable
9,025

 
10,632

 
(7,626
)
Net regulatory assets and liabilities
(31,223
)
 
(18,601
)
 
(27,114
)
Other current liabilities
(2,215
)
 
14,036

 
5,147

Pension and other employee benefit obligations
(8,558
)
 
(6,197
)
 
(3,177
)
Change in other noncurrent assets
583

 
(718
)
 
209

Change in other noncurrent liabilities
(5,934
)
 
2,050

 
716

Net cash provided by operating activities
179,737

 
200,732

 
199,366

 
 
 
 
 
 
Investing activities
 
 
 
 
 
Utility capital/construction expenditures
(218,801
)
 
(204,427
)
 
(251,797
)
Allowance for equity funds used during construction
6,707

 
4,277

 
7,253

Other, net
(49
)
 
1,198

 
(224
)
Net cash used in investing activities
(212,143
)
 
(198,952
)
 
(244,768
)
 
 
 
 
 
 
Financing activities
 
 
 
 
 
(Repayments of) proceeds from short-term borrowings, net
(49,000
)
 
50,000

 
(68,000
)
Proceeds from issuance of long-term debt
97,455

 
—

 
97,969

Repayments of long-term debt
(77
)
 
(93
)
 
(87
)
Capital contributions from parent
47,992

 
1,935

 
69,243

Dividends paid to parent
(64,037
)
 
(53,100
)
 
(53,929
)
Other, net
(70
)
 
(55
)
 
—

Net cash provided by (used in) financing activities
32,263

 
(1,313
)
 
45,196

 
 
 
 
 
 
Net change in cash and cash equivalents
(143
)
 
467

 
(206
)
Cash and cash equivalents at beginning of period
1,546

 
1,079

 
1,285

Cash and cash equivalents at end of period
$
1,403

 
$
1,546

 
$
1,079

 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
Cash paid for interest (net of amounts capitalized)
$
(30,907
)
 
$
(30,878
)
 
$
(27,491
)
Cash (paid) received for income taxes, net
(5,046
)
 
5,873

 
5,762

Supplemental disclosure of non-cash investing transactions:
 
 
 
 
 
Property, plant and equipment additions in accounts payable
$
27,753

 
$
16,172

 
$
16,729

See Notes to Consolidated Financial Statements

9

NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data)
 
Dec. 31
 
2017
 
2016
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,403

 
$
1,546

Accounts receivable, net
63,200

 
54,031

Accrued unbilled revenues
60,008

 
53,638

Other receivables
15,144

 
657

Inventories
17,758

 
18,309

Regulatory assets
23,113

 
18,162

Prepaid taxes
23,606

 
25,915

Prepayments
3,450

 
3,128

Total current assets
207,682

 
175,386

 
 
 
 
Property, plant and equipment, net
2,088,728

 
1,947,637

 
 
 
 
Other assets
 
 
 
Regulatory assets
282,217

 
286,188

Other investments
2,892

 
2,844

Other
201

 
785

Total other assets
285,310

 
289,817

Total assets
$
2,581,720

 
$
2,412,840

 
 
 
 
Liabilities and Equity
 
 
 
Current liabilities
 
 
 
Current portion of long-term debt
$
151,080

 
$
1,123

Short-term debt
11,000

 
60,000

Notes payable to affiliates
500

 
500

Accounts payable
58,365

 
41,068

Accounts payable to affiliates
29,628

 
29,037

Dividends payable to parent
15,481

 
10,729

Regulatory liabilities
20,712

 
17,428

Environmental liabilities
10,469

 
41,438

Accrued interest
8,025

 
8,012

Other
34,474

 
26,484

Total current liabilities
339,734

 
235,819

 
 
 
 
Deferred credits and other liabilities
 
 
 
Deferred income taxes
256,687

 
430,593

Deferred investment tax credits
7,514

 
8,037

Regulatory liabilities
386,807

 
148,189

Environmental liabilities
19,190

 
23,003

Customer advances
16,325

 
19,425

Pension and employee benefit obligations
50,027

 
55,164

Other
18,747

 
18,814

Total deferred credits and other liabilities
755,297

 
703,225

 
 
 
 
Commitments and contingencies


 


Capitalization
 
 
 
Long-term debt
610,100

 
661,946

Common stock — 1,000,000 shares authorized of $100 par value; 933,000 shares
outstanding at Dec. 31, 2017 and 2016, respectively
93,300

 
93,300

Additional paid in capital
449,350

 
395,315

Retained earnings
334,008

 
323,368

Accumulated other comprehensive loss
(69
)
 
(133
)
Total common stockholder’s equity
876,589

 
811,850

Total liabilities and equity
$
2,581,720

 
$
2,412,840


See Notes to Consolidated Financial Statements

10

NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER’S EQUITY
(amounts in thousands, except share data)
 
Common Stock
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Common
Stockholder’s
Equity
 
Shares
 
Par Value
 
Additional
Paid In
Capital
 
Retained
Earnings
 
 
Balance at Dec. 31, 2014
933,000

 
$
93,300

 
$
322,276

 
$
282,398

 
$
(285
)
 
$
697,689

Net income
 
 
 
 
 
 
74,636

 
 
 
74,636

Other comprehensive income
 
 
 
 
 
 


 
76

 
76

Common dividends declared to parent
 
 
 
 
 
 
(54,293
)
 
 
 
(54,293
)
Contribution of capital by parent
 
 
 
 
72,277

 


 
 
 
72,277

Balance at Dec. 31, 2015
933,000

 
$
93,300

 
$
394,553

 
$
302,741

 
$
(209
)
 
$
790,385

Net income
 
 
 
 
 
 
69,135

 
 
 
69,135

Other comprehensive income
 
 
 
 
 
 
 
 
76

 
76

Common dividends declared to parent
 
 
 
 
 
 
(48,508
)
 
 
 
(48,508
)
Contribution of capital by parent
 
 
 
 
762

 
 
 
 
 
762

Balance at Dec. 31, 2016
933,000

 
$
93,300

 
$
395,315

 
$
323,368

 
$
(133
)
 
$
811,850

Net income
 
 
 
 
 
 
79,416

 
 
 
79,416

Other comprehensive income
 
 
 
 
 
 
 
 
76

 
76

Common dividends declared to parent
 
 
 
 
 
 
(68,788
)
 
 
 
(68,788
)
Contribution of capital by parent
 
 
 
 
54,035

 
 
 
 
 
54,035

Adoption of ASU No. 2018-02
 
 
 
 
 
 
12

 
(12
)
 
—

Balance at Dec. 31, 2017
933,000

 
$
93,300

 
$
449,350

 
$
334,008

 
$
(69
)
 
$
876,589


See Notes to Consolidated Financial Statements

11

NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(amounts in thousands, except share and per share data)
 
Dec. 31
 
2017
 
2016
Long-Term Debt
 
 
 
First Mortgage Bonds, Series due:
 
 
 
Oct. 1, 2018, 5.25%
$
150,000

 
$
150,000

June 15, 2024, 3.3%
200,000

 
200,000

Sept. 1, 2038, 6.375%
200,000

 
200,000

Oct. 1, 2042, 3.7%
100,000

 
100,000

Dec. 1, 2047, 3.75%
100,000

 
—

City of La Crosse Resource Recovery Bond, Series due Nov. 1, 2021, 6% (a)
18,600

 
18,600

Other
1,954

 
2,031

Unamortized discount
(2,869
)
 
(2,865
)
Unamortized debt expense
(6,505
)
 
(4,697
)
Total
761,180

 
663,069

Less current maturities
151,080

 
1,123

Total long-term debt
$
610,100

 
$
661,946

 
 
 
 
Common Stockholder’s Equity
 
 
 
Common stock  — 1,000,000 shares authorized of $100 par value;
 
 
 
933,000 shares outstanding at Dec. 31, 2017 and 2016, respectively
$
93,300

 
$
93,300

Additional paid in capital
449,350

 
395,315

Retained earnings
334,008

 
323,368

Accumulated other comprehensive loss
(69
)
 
(133
)
Total common stockholder’s equity
$
876,589

 
$
811,850


(a) 
Resource recovery financing

See Notes to Consolidated Financial Statements

12

Notes to Consolidated Financial Statements

1.
Summary of Significant Accounting Policies

Business and System of Accounts — NSP-Wisconsin is engaged in the regulated generation, transmission, distribution and sale of electricity and in the regulated purchase, transportation, distribution and sale of natural gas.  NSP-Wisconsin’s consolidated financial statements and disclosures are presented in accordance with GAAP.  All of NSP-Wisconsin’s underlying accounting records also conform to the FERC uniform system of accounts or to systems required by various state regulatory commissions, which are the same in all material respects.

Principles of Consolidation — NSP-Wisconsin’s consolidated financial statements include its wholly-owned subsidiaries and variable interest entities for which it is the primary beneficiary.  In the consolidation process, all intercompany transactions and balances are eliminated. NSP-Wisconsin has investments in certain transmission facilities jointly owned with nonaffiliated utilities. NSP-Wisconsin’s proportionate share of jointly owned facilities is recorded as property, plant and equipment on the consolidated balance sheets and NSP-Wisconsin’s proportionate share of the operating costs associated with these facilities is included in its consolidated statements of income. See Note 5 for further discussion of jointly owned transmission facilities and related ownership percentages.

NSP-Wisconsin evaluates its arrangements and contracts with other entities to determine if the other party is a variable interest entity, if NSP-Wisconsin has a variable interest and if NSP-Wisconsin is the primary beneficiary.  NSP-Wisconsin follows accounting guidance for variable interest entities which requires consideration of the activities that most significantly impact an entity’s financial performance and power to direct those activities, when determining whether NSP-Wisconsin is a variable interest entity’s primary beneficiary. See Note 11 for further discussion of variable interest entities.

Use of Estimates — In recording transactions and balances resulting from business operations, NSP-Wisconsin uses estimates based on the best information available. Estimates are used for such items as plant depreciable lives or potential disallowances, AROs, certain regulatory assets and liabilities, tax provisions, uncollectible amounts, environmental costs, unbilled revenues, jurisdictional fuel and energy cost allocations and actuarially determined benefit costs. The recorded estimates are revised when better information becomes available or when actual amounts can be determined. Those revisions can affect operating results.

Regulatory Accounting — NSP-Wisconsin accounts for certain income and expense items in accordance with accounting guidance for regulated operations. Under this guidance:

•
Certain costs, which would otherwise be charged to expense or OCI, are deferred as regulatory assets based on the expected ability to recover the costs in future rates; and
•
Certain credits, which would otherwise be reflected as income or OCI, are deferred as regulatory liabilities based on the expectation the amounts will be returned to customers in future rates, or because the amounts were collected in rates prior to the costs being incurred.

Estimates of recovering deferred costs and returning deferred credits are based on specific ratemaking decisions or precedent for each item. Regulatory assets and liabilities are amortized consistent with the treatment in the rate setting process.

If restructuring or other changes in the regulatory environment occur, NSP-Wisconsin may no longer be eligible to apply this accounting treatment, and may be required to eliminate regulatory assets and liabilities from its balance sheets.  Such changes could have a material effect on NSP-Wisconsin’s financial condition, results of operations and cash flows.  See Note 12 for further discussion of regulatory assets and liabilities.

Revenue Recognition — Revenues related to the sale of energy are generally recorded when service is rendered or energy is delivered to customers. However, the determination of the energy sales to individual customers is based on the reading of their meter, which occurs on a systematic basis throughout the month.  At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is recognized.  NSP-Wisconsin presents its revenues net of any excise or other fiduciary-type taxes or fees.


13

NSP-Wisconsin has various rate-adjustment mechanisms in place that provide for the recovery of purchased natural gas, electric fuel and purchased energy costs.  These cost-adjustment tariffs may increase or decrease the level of revenue collected from customers and are revised periodically, for differences between the total amount collected under the clauses and the costs incurred.  When applicable, under governing regulatory commission rate orders, fuel cost over-recoveries (the excess of fuel revenue billed to customers over fuel costs incurred) are deferred as regulatory liabilities and under-recoveries (the excess of fuel costs incurred over fuel revenues billed to customers) are deferred as regulatory assets. Under Wisconsin rules, NSP-Wisconsin must submit a forward looking fuel cost plan annually for approval by the PSCW. The rules also allow for deferral of any under-recovery or over-recovery of fuel costs in excess of a two percent annual tolerance band, for future rate recovery or refund, subject to PSCW approval.

Conservation Programs — NSP-Wisconsin participates in and funds conservation programs in its retail jurisdictions to assist customers in conserving energy and reducing peak demand on the electric and natural gas systems.  NSP-Wisconsin recovers approved conservation program costs in base rate revenue.

For operations in the state of Wisconsin, NSP-Wisconsin is required to contribute 1.2 percent of its three-year average annual operating revenues to the statewide energy efficiency and renewable resource program Focus on Energy. Funding is collected through base rates, and there is no financial incentive provided to the utility. The PSCW has full oversight of Focus on Energy including auditing and verification of programs. The program portfolio is outsourced to a third-party administrator who subcontracts as necessary to implement programs.

Property, Plant and Equipment and Depreciation — Property, plant and equipment is stated at original cost. The cost of plant includes direct labor and materials, contracted work, overhead costs and AFUDC. The cost of plant retired is charged to accumulated depreciation and amortization. Amounts recovered in rates for future removal costs are recorded as regulatory liabilities. Significant additions or improvements extending asset lives are capitalized, while repairs and maintenance costs are charged to expense as incurred. Maintenance and replacement of items determined to be less than a unit of property are charged to operating expenses as incurred. Planned major maintenance activities are charged to operating expense unless the cost represents the acquisition of an additional unit of property or the replacement of an existing unit of property.  Property, plant and equipment also includes costs associated with property held for future use.  The depreciable lives of certain plant assets are reviewed annually and revised, if appropriate.

Property, plant and equipment is tested for impairment when it is determined that the carrying value of the assets may not be recoverable. A loss is recognized in the current period if it becomes probable that part of a cost of a plant under construction or recently completed plant will be disallowed for recovery from customers and a reasonable estimate of the disallowance can be made. For investments in property, plant and equipment that are abandoned and not expected to go into service, incurred costs and related deferred tax amounts are compared to the discounted estimated future rate recovery, and a loss is recognized, if necessary.

NSP-Wisconsin records depreciation expense related to its plant using the straight-line method over the plant’s useful life. Actuarial life studies are performed and submitted to the state and federal commissions for review.  Upon acceptance by the various commissions, the resulting lives and net salvage rates are used to calculate depreciation.  Depreciation expense, expressed as a percentage of average depreciable property, was approximately 3.4, 3.3 and 3.4 percent for the years ended Dec. 31, 2017, 2016 and 2015, respectively.

Leases — NSP-Wisconsin evaluates a variety of contracts for lease classification at inception, including rental arrangements for office space, vehicles and equipment.  Contracts determined to contain a lease because of per unit pricing that is other than fixed or market price, terms regarding the use of a particular asset, and other factors are evaluated further to determine if the arrangement is a capital lease. See Note 11 for further discussion of leases.

AFUDC — AFUDC represents the cost of capital used to finance utility construction activity. AFUDC is computed by applying a composite financing rate to qualified CWIP. The amount of AFUDC capitalized as a utility construction cost is credited to nonoperating income (for equity capital) and interest charges (for debt capital). AFUDC amounts capitalized are included in NSP-Wisconsin’s rate base for establishing utility service rates.

Generally, AFUDC costs are recovered from customers as the related property is depreciated.  However, in some cases, the PSCW has allowed an AFUDC calculation greater than the FERC-defined AFUDC rate, resulting in higher recognition of AFUDC. In some cases for certain transmission projects, the FERC has approved a more current recovery of the cost of capital associated with large capital projects, resulting in a lower recognition of AFUDC.


14

AROs — NSP-Wisconsin accounts for AROs under accounting guidance that requires a liability for the fair value of an ARO to be recognized in the period in which it is incurred if it can be reasonably estimated, with the offsetting associated asset retirement costs capitalized as a long-lived asset. The liability is generally increased over time by applying the effective interest method of accretion, and the capitalized costs are depreciated over the useful life of the long-lived asset. Changes resulting from revisions to the timing or amount of expected asset retirement cash flows are recognized as an increase or a decrease in the ARO. NSP-Wisconsin also recovers through rates certain future plant removal costs in addition to AROs. The accumulated removal costs for these obligations are reflected in the balance sheets as a regulatory liability. See Note 11 for further discussion of AROs.

Income Taxes — NSP-Wisconsin accounts for income taxes using the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. NSP-Wisconsin defers income taxes for all temporary differences between pretax financial and taxable income, and between the book and tax bases of assets and liabilities.  NSP-Wisconsin uses the tax rates that are scheduled to be in effect when the temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date.

The effects of NSP-Wisconsin’s tax rate changes are generally subject to a normalization method of accounting. Therefore, the revaluation of most its net deferred taxes upon a tax rate reduction results in the establishment of a net regulatory liability which will be refundable to utility customers over the remaining life of the related assets. A tax rate increase would result in the establishment of a similar regulatory asset. Due to the effects of past regulatory practices, when deferred taxes were not required to be recorded due to the use of flow through accounting for ratemaking purposes, the reversal of some temporary differences are accounted for as current income tax expense. Tax credits are recorded when earned unless there is a requirement to defer the benefit and amortize it over the book depreciable lives of the related property. The requirement to defer and amortize tax credits only applies to federal ITCs related to public utility property. Utility rate regulation also has resulted in the recognition of certain regulatory assets and liabilities related to income taxes, which are summarized in Note 12.

Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. In making such a determination, all available evidence is considered, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations.

NSP-Wisconsin follows the applicable accounting guidance to measure and disclose uncertain tax positions that it has taken or expects to take in its income tax returns.  NSP-Wisconsin recognizes a tax position in its consolidated financial statements when it is more likely than not that the position will be sustained upon examination based on the technical merits of the position.  Recognition of changes in uncertain tax positions are reflected as a component of income tax.

NSP-Wisconsin reports interest and penalties related to income taxes within the other income and interest charges sections in the consolidated statements of income.

Xcel Energy Inc. and its subsidiaries, including NSP-Wisconsin, file consolidated federal income tax returns as well as combined or separate state income tax returns.  Federal income taxes paid by Xcel Energy Inc. are allocated to Xcel Energy Inc.’s subsidiaries based on separate company computations of tax.  A similar allocation is made for state income taxes paid by Xcel Energy Inc. in connection with combined state filings. Xcel Energy Inc. also allocates its own income tax benefits to its direct subsidiaries which are recorded directly in equity by the subsidiaries based on the relative positive tax liabilities of the subsidiaries.

See Note 6 for further discussion of income taxes.

Types of and Accounting for Derivative Instruments — NSP-Wisconsin uses derivative instruments in connection with its utility commodity price and interest rate activities, including forward contracts, futures, swaps and options.  All derivative instruments not designated and qualifying for the normal purchases and normal sales exception, as defined by the accounting guidance for derivatives and hedging, are recorded on the consolidated balance sheets at fair value as derivative instruments.  This includes certain instruments used to mitigate market risk for the utility operations.  The classification of changes in fair value for those derivative instruments is dependent on the designation of a qualifying hedging relationship.  Changes in fair value of derivative instruments not designated in a qualifying hedging relationship are reflected in current earnings or as a regulatory asset or liability.  The classification as a regulatory asset or liability is based on commission approved regulatory recovery mechanisms.


15

Interest rate hedging transactions are recorded as a component of interest expense.  NSP-Wisconsin is allowed to recover in electric or natural gas rates the costs of certain financial instruments purchased to reduce commodity cost volatility.  For further information on derivatives entered to mitigate commodity price risk on behalf of electric and natural gas customers, see Note 9.

Cash Flow Hedges — Certain qualifying hedging relationships are designated as a hedge of a forecasted transaction or future cash flow (cash flow hedge). Changes in the fair value of a derivative designated as a cash flow hedge, to the extent effective, are included in OCI, or deferred as a regulatory asset or liability based on recovery mechanisms until earnings are affected by the hedged transaction.

Normal Purchases and Normal Sales — NSP-Wisconsin enters into contracts for the purchase and sale of commodities for use in its business operations. Derivatives and hedging accounting guidance requires a company to evaluate these contracts to determine whether the contracts are derivatives.  Certain contracts that meet the definition of a derivative may be exempted from derivative accounting if designated as normal purchases or normal sales.

NSP-Wisconsin evaluates all of its contracts at inception to determine if they are derivatives and if they meet the normal purchases and normal sales designation requirements.  See Note 9 for further discussion of NSP-Wisconsin’s risk management and derivative activities.

Fair Value Measurements — NSP-Wisconsin presents cash equivalents, interest rate derivatives and commodity derivatives at estimated fair values in its consolidated financial statements.  Cash equivalents are recorded at cost plus accrued interest; money market funds are measured using quoted NAVs.  For interest rate derivatives, quoted prices based primarily on observable market interest rate curves are used as a primary input to establish fair value.  For commodity derivatives, the most observable inputs available are generally used to determine the fair value of each contract.  In the absence of a quoted price for an identical contract in an active market, NSP-Wisconsin may use quoted prices for similar contracts, or internally prepared valuation models to determine fair value. For the pension and postretirement plan assets published trading data and pricing models, generally using the most observable inputs available, are utilized to estimate fair value for each security. See Notes 7 and 9 for further discussion.

Cash and Cash Equivalents — NSP-Wisconsin considers investments in certain instruments, including commercial paper and money market funds, with a remaining maturity of three months or less at the time of purchase, to be cash equivalents.

Accounts Receivable and Allowance for Bad Debts — Accounts receivable are stated at the actual billed amount net of an allowance for bad debts. NSP-Wisconsin establishes an allowance for uncollectible receivables based on a policy that reflects its expected exposure to the credit risk of customers.

Inventory — All inventory is recorded at average cost.

RECs — RECs are marketable environmental instruments that represent proof that energy was generated from eligible renewable energy sources. RECs are awarded upon delivery of the associated energy and can be bought and sold. RECs are typically used as a form of measurement of compliance to RPS enacted by those states that are encouraging construction and consumption from renewable energy sources, but can also be sold separately from the energy produced. NSP-Wisconsin acquires RECs from the generation or purchase of renewable power.  

When RECs are purchased or acquired in the course of generation they are recorded as inventory at cost. The cost of RECs that are utilized for compliance purposes is recorded as electric fuel and purchased power expense.

Sales of RECs that are purchased or acquired in the course of generation are recorded in electric utility operating revenues on a gross basis. The cost of these RECs and related transaction costs are recorded in electric fuel and purchased power expense.

Emission Allowances — Emission allowances, including the annual SO2 and NOx emission allowance entitlement received from the EPA, are recorded at cost plus associated broker commission fees. NSP-Wisconsin follows the inventory accounting model for all emission allowances. Sales of emission allowances are included in electric utility operating revenues and the operating activities section of the consolidated statements of cash flows.


16

Environmental Costs — Environmental costs are recorded when it is probable NSP-Wisconsin is liable for remediation costs and the liability can be reasonably estimated. Costs are deferred as a regulatory asset if it is probable that the costs will be recovered from customers in future rates. Otherwise, the costs are expensed. If an environmental expense is related to facilities currently in use, such as emission-control equipment, the cost is capitalized and depreciated over the life of the plant.

Estimated remediation costs, excluding inflationary increases, are recorded based on experience, an assessment of the current situation and the technology currently available for use in the remediation.  The recorded costs are regularly adjusted as estimates are revised and remediation proceeds.  If other participating PRPs exist and acknowledge their potential involvement with a site, costs are estimated and recorded only for NSP-Wisconsin’s expected share of the cost.  

Any future costs of restoring sites where operation may be extended are treated as a capitalized cost of plant retirement.  The depreciation expense levels recoverable in rates include a provision for removal expenses, which may include final remediation costs.  Removal costs recovered in rates before the related costs are incurred are classified as a regulatory liability.

See Note 11 for further discussion of environmental costs.

Benefit Plans and Other Postretirement Benefits — NSP-Wisconsin maintains pension and postretirement benefit plans for eligible employees.  Recognizing the cost of providing benefits and measuring the projected benefit obligation of these plans under applicable accounting guidance requires management to make various assumptions and estimates.

Based on regulatory recovery mechanisms, certain unrecognized actuarial gains and losses and unrecognized prior service costs or credits are recorded as regulatory assets and liabilities, rather than OCI.

See Note 7 for further discussion of benefit plans and other postretirement benefits.

Guarantees — NSP-Wisconsin recognizes, upon issuance or modification of a guarantee, a liability for the fair market value of the obligation that has been assumed in issuing the guarantee.  This liability includes consideration of specific triggering events and other conditions which may modify the ongoing obligation to perform under the guarantee.

The obligation recognized is reduced over the term of the guarantee as NSP-Wisconsin is released from risk under the guarantee.  See Note 11 for specific details of issued guarantees.

Subsequent Events — Management has evaluated the impact of events occurring after Dec. 31, 2017 up to the date of issuance of these consolidated financial statements.  These statements contain all necessary adjustments and disclosures resulting from that evaluation.

2.
Accounting Pronouncements

Recently Issued

Revenue Recognition — In May 2014, the FASB issued Revenue from Contracts with Customers, Topic 606 (ASU No. 2014-09), which provides a new framework for the recognition of revenue. As the appropriate timing of recognition of revenue from contracts with customers in our regulated operations continues to generally be based on the delivery of electricity and natural gas, NSP-Wisconsin’s adoption will primarily result in increased disclosures regarding sources of revenues, including alternative revenue programs. The guidance is effective for interim and annual periods beginning after Dec. 15, 2017. NSP-Wisconsin is implementing the standard on a modified retrospective basis, which requires application to contracts with customers effective Jan. 1, 2018.

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


17

Leases — In February 2016, the FASB issued Leases, Topic 842 (ASU No. 2016-02), which, for lessees, requires balance sheet recognition of right-of-use assets and lease liabilities for most leases. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2018. NSP-Wisconsin has not yet fully determined the impacts of implementation. However, adoption is expected to occur on Jan. 1, 2019 utilizing the practical expedients provided by the standard and proposed in Targeted Improvements, Topic 842 (Proposed ASU 2018-200). As such, agreements entered prior to Jan. 1, 2019 that are currently considered leases are expected to be recognized on the consolidated balance sheet, including contracts for use of office space, equipment and natural gas storage assets, as well as certain purchased power agreements (PPAs) for natural gas-fueled generating facilities. NSP-Wisconsin expects that similar agreements entered after Dec. 31, 2018 will generally qualify as leases under the new standard.

Presentation of Net Periodic Benefit Cost — In March 2017, the FASB issued Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, Topic 715 (ASU No. 2017-07), which establishes that only the service cost element of pension cost may be presented as a component of operating income in the income statement. Also under the guidance, only the service cost component of pension cost is eligible for capitalization. As a result of application of accounting principles for rate regulated entities, a similar amount of pension cost, including non-service components, will be recognized consistent with the historical ratemaking treatment and the impacts of adoption will be limited to changes in classification of non-service costs in the consolidated statement of income. This guidance is effective for interim and annual reporting periods beginning after Dec. 15, 2017.
  
Recently Adopted

Accounting for the TCJA — In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118), to supplement the accounting requirements of ASC Topic 740 Income Taxes (ASC Topic 740) as it relates to assessing and recognizing the impacts of the TCJA in the period of enactment. SAB 118 allows an entity to recognize provisional amounts in its financial statements in circumstances in which the entity’s assessment is incomplete, but for which a reasonable estimate can be made. Provisional amounts recognized are subject to adjustment for up to one year from the enactment date. For further details, see Note 6 to the consolidated financial statements.

Reporting Comprehensive Income — In February 2018, the FASB issued Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, Topic 220 (ASU No. 2018-02), which addresses the stranded amounts of accumulated OCI which may result from enactment of a new tax law. Though accumulated OCI is presented on a net-of-tax basis, ASC Topic 740 requires that the effects of new tax laws on items in accumulated OCI be recognized without a corresponding adjustment to accumulated OCI, and instead recorded to income tax expense. ASU No. 2018-02 permits stranded amounts of accumulated OCI specifically resulting from the TCJA to be removed from accumulated OCI and reclassified to retained earnings, if elected. NSP-Wisconsin adopted the guidance in the fourth quarter of 2017, and elected to recognize an immaterial increase to accumulated other comprehensive loss and retained earnings in the consolidated financial statements for the year ended Dec. 31, 2017, related to a revaluation of deferred income tax assets and liabilities for items in accumulated other comprehensive loss, at the TCJA federal tax rate.

3.
Selected Balance Sheet Data
(Thousands of Dollars)
 
Dec. 31, 2017
 
Dec. 31, 2016
Accounts receivable, net (a)
 
 
 
 
Accounts receivable
 
$
68,073

 
$
58,896

Less allowance for bad debts
 
(4,873
)
 
(4,865
)
 
 
$
63,200

 
$
54,031


(a) 
Accounts receivable, net includes $3.4 million and an immaterial amount due from affiliates for 2017 and 2016, respectively.
(Thousands of Dollars)
 
Dec. 31, 2017
 
Dec. 31, 2016
Inventories
 
 
 
 
Materials and supplies
 
$
6,916

 
$
6,582

Fuel
 
3,866

 
4,743

Natural gas
 
6,976

 
6,984

 
 
$
17,758

 
$
18,309


18

(Thousands of Dollars)
 
Dec. 31, 2017
 
Dec. 31, 2016
Property, plant and equipment, net
 
 
 
 
Electric plant
 
$
2,602,671

 
$
2,499,401

Natural gas plant
 
326,723

 
294,986

Common and other property
 
181,105

 
156,316

CWIP
 
148,770

 
118,822

Total property, plant and equipment
 
3,259,269

 
3,069,525

Less accumulated depreciation
 
(1,170,541
)
 
(1,121,888
)
 
 
$
2,088,728

 
$
1,947,637


4.
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 Dec. 31, 2017
Borrowing limit
 
$
150

Amount outstanding at period end
 
11

Average amount outstanding
 
70

Maximum amount outstanding
 
129

Weighted average interest rate, computed on a daily basis
 
1.38
%
Weighted average interest rate at period end
 
1.73

(Amounts in Millions, Except Interest Rates)
 
Twelve Months Ended Dec. 31, 2017
 
Twelve Months Ended Dec. 31, 2016
 
Twelve Months Ended Dec. 31, 2015
Borrowing limit
 
$
150

 
$
150

 
$
150

Amount outstanding at period end
 
11

 
60

 
10

Average amount outstanding
 
52

 
15

 
39

Maximum amount outstanding
 
129

 
64

 
122

Weighted average interest rate, computed on a daily basis
 
1.23
%
 
0.69
%
 
0.44
%
Weighted average interest rate at period end
 
1.73

 
0.95

 
0.70


Letters of Credit — NSP-Wisconsin may use letters of credit, generally with terms of one-year, to provide financial guarantees for certain operating obligations.  At Dec. 31, 2017 and 2016, 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.

NSP-Wisconsin has the right to request an extension of the June 2021 termination date for an additional one-year period. The extension requests are subject to majority bank group approval.

Other features of NSP-Wisconsin’s credit facility include:

•
The credit facility has a financial covenant requiring that the debt-to-total capitalization ratio be less than or equal to 65 percent. NSP-Wisconsin was in compliance as its debt-to-total capitalization ratio was 47 percent at both Dec. 31, 2017 and 2016. If NSP-Wisconsin does not comply with the covenant, an event of default may be declared, and if not remedied, any outstanding amounts due under the facility can be declared due by the lender.
•
The credit facility has a cross-default provision that provides NSP-Wisconsin will be in default on its borrowings under the facility if NSP-Wisconsin or any of its subsidiaries whose total assets exceed 15 percent of NSP-Wisconsin’s consolidated total assets, default on certain indebtedness in an aggregate principal amount exceeding $75 million.
•
NSP-Wisconsin was in compliance with all financial covenants on its debt agreements as of Dec. 31, 2017 and 2016.


19

At Dec. 31, 2017, NSP-Wisconsin had the following committed credit facility available (in millions):
Credit Facility (a)
 
Drawn (b)
 
Available
$
150

 
$
11

 
$
139


(a) 
This credit facility matures in June 2021.
(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 Dec. 31, 2017 and 2016.

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)
 
Dec. 31, 2017
 
Dec. 31, 2016
Notes payable to affiliates
 
$
0.5

 
$
0.5

Weighted average interest rate
 
1.73
%
 
0.95
%

Long-Term Borrowings and Other Financing Instruments

Generally, all real and personal property of NSP-Wisconsin is subject to the liens of its first mortgage indentures. Debt premiums, discounts and expenses are amortized over the life of the related debt. The premiums, discounts and expenses associated with refinanced debt are deferred and amortized over the life of the related new issuance, in accordance with regulatory guidelines.

In 2017, NSP-Wisconsin issued $100 million of 3.75 percent first mortgage bonds due Dec. 1, 2047.

During the next five years, NSP-Wisconsin has long-term debt maturities of approximately $151 million, $19 million and $1 million due in 2018, 2021 and 2022, respectively.

Deferred Financing Costs — Deferred financing costs of approximately $7 million and $5 million, net of amortization, are presented as a deduction from the carrying amount of long-term debt at Dec. 31, 2017 and 2016, respectively.  NSP-Wisconsin is amortizing these financing costs over the remaining maturity periods of the related debt.

Dividend Restrictions — NSP-Wisconsin’s dividends are subject to the FERC’s jurisdiction, which prohibits the payment of dividends out of capital accounts; payment of dividends is allowed out of retained earnings only.

The most restrictive dividend limitation for NSP-Wisconsin is imposed by its state regulatory commission.  NSP-Wisconsin cannot pay annual dividends in excess of approximately $53 million if its calendar year average equity-to-total capitalization ratio is or falls below the state commission authorized level as calculated consistent with PSCW requirements. NSP-Wisconsin’s calendar year average equity-to-total capitalization ratio calculated on this basis was 53.1 percent at Dec. 31, 2017 and $19 million in retained earnings was not restricted. NSP-Wisconsin’s authorized equity ratio was 52.5 percent for 2016 and 2017, but will be 51.5 percent for 2018.

5.
Joint Ownership of Transmission Facilities

Following are the investments by NSP-Wisconsin in jointly owned transmission facilities and the related ownership percentages as of Dec. 31, 2017:
(Thousands of Dollars)
 
Plant in
Service
 
Accumulated Depreciation
 
CWIP
 
Ownership %
Electric Transmission:
 
 
 
 
 
 
 
 
CapX2020 Transmission
 
$
162,108

 
$
12,205

 
$
103,144

 
81
%
La Crosse, Wis. to Madison, Wis.
 
—

 
—

 
101,546

 
37

Total
 
$
162,108

 
$
12,205

 
$
204,690

 
 


20

NSP-Wisconsin’s share of operating expenses and construction expenditures are included in the applicable utility accounts. Each of the respective owners is responsible for providing its own financing.

6.
Income Taxes

Federal Tax Reform — In December 2017, the TCJA was signed into law. While the legislation will require interpretations and regulations to be issued by the IRS, the key provisions impacting Xcel Energy (which includes NSP-Wisconsin) generally beginning in 2018, include:

•
Corporate federal tax rate reduction from 35 percent to 21 percent;
•
Normalization of resulting plant-related excess deferred taxes;
•
Elimination of the corporate alternative minimum tax;
•
Continued interest expense deductibility and discontinued bonus depreciation for regulated public utilities;
•
Limitations on certain executive compensation deductions;
•
Limitations on certain deductions for NOLs arising after Dec. 31, 2017 (limited to 80 percent of taxable income);
•
Repeal of the section 199 manufacturing deduction; and
•
Reduced deductions for meals and entertainment as well as state and local lobbying.

Entities are required under ASC Topic 740 to recognize the accounting impacts of a tax law change, including the impacts of a change in tax rates on deferred tax assets and liabilities, in the period including the date of the tax law enactment. The SEC staff issued guidance in SAB 118 that supplements the accounting requirements of ASC Topic 740 if elements of the TCJA assessment are not complete, and provides for up to a one year period to finalize the required accounting. Xcel Energy has estimated the effects of the TCJA, which have been reflected in the Dec. 31, 2017 consolidated financial statements. Issuance of U.S. Treasury regulations interpreting the TCJA, other U.S. Treasury and IRS guidance or interpretations of the application of ASC Topic 740 may result in changes to these estimates.

Overall for Xcel Energy, reductions in deferred tax assets and liabilities due to the reduction in corporate federal tax rates result in a net tax benefit. However, as a result of IRS requirements and past regulatory treatment of deferred taxes in the determination of regulated rates of the utility subsidiaries, including deferred taxes related to regulated plant and certain other deferred tax assets and liabilities, the impact was primarily recognized as a regulatory liability refundable to utility customers.

The fourth quarter 2017 estimated accounting impacts of the December 2017 enactment of the new tax law at NSP-Wisconsin included:

•
$149 million ($210 million grossed-up for tax) of reclassifications of plant-related excess deferred taxes to regulatory liabilities upon valuation at the new 21 percent federal rate. The regulatory liabilities will be amortized consistent with IRS normalization requirements, resulting in customer refunds over the average remaining life of the related property;
•
$23 million and $41 million of reclassifications (grossed-up for tax) of excess deferred taxes for non-plant related deferred tax assets and liabilities, respectively, to regulatory assets and liabilities;
•
An immaterial income tax benefit related to the federal tax reform implementation, and a $1 million reduction to net income related to the allocation of Xcel Energy Services Inc.’s tax rate change on its deferred taxes.

Xcel Energy has accounted for the state tax impacts of federal tax reform based on currently enacted state tax laws. Any future state tax law changes related to the TCJA will be accounted for in the periods state laws are enacted.

Consolidated Appropriations Act, 2016 — In December 2015, the Consolidated Appropriations Act, 2016 (Act) was signed into law. The Act provided for the following:

•
Immediate expensing, or “bonus depreciation,” of 50 percent for property placed in service in 2015, 2016, and 2017;
•
PTCs at 100 percent of the applicable rate for wind energy projects that begin construction by the end of 2016; 80 percent of the credit rate for projects that begin construction in 2017; 60 percent of the credit rate for projects that begin construction in 2018; and 40 percent of the credit rate for projects that begin construction in 2019. The wind energy PTC was not extended for projects that begin construction after 2019;
•
ITCs at 30 percent for commercial solar projects that begin construction by the end of 2019; 26 percent for projects that begin construction in 2020; 22 percent for projects that begin construction in 2021; and 10 percent for projects thereafter;
•
R&E credit was permanently extended; and
•
Delay of two years (until 2020) of the excise tax on certain employer-provided health insurance plans.

21


The accounting related to the Act was recorded beginning in the fourth quarter of 2015 because a change in tax law is accounted for beginning in the period of enactment.

Federal Audit — NSP-Wisconsin is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. The statutes of limitations applicable to Xcel Energy’s federal income tax returns expire as follows:
Tax Year(s)
 
Expiration
2009 - 2011
 
June 2018
2012 - 2013
 
October 2018
2014
 
September 2018
2015
 
September 2019
2016
 
September 2020

In 2012, the IRS commenced an examination of tax years 2010 and 2011, including the 2009 carryback claim. The IRS proposed an adjustment to the federal tax loss carryback claims that would have resulted in $14 million of income tax expense for the 2009 through 2011 claims, and the 2013 through 2015 claims. In the fourth quarter of 2015, the IRS forwarded the issue to the Office of Appeals (“Appeals”). In the third quarter of 2017, Xcel Energy and Appeals reached an agreement and the benefit related to the agreed upon portions was recognized. NSP-Wisconsin did not accrue any income tax benefit related to this adjustment. As of Dec. 31, 2017, the case has been forwarded to the Joint Committee on Taxation.

In the third quarter of 2015, the IRS commenced an examination of tax years 2012 and 2013. In the third quarter of 2017, the IRS concluded the audit of tax years 2012 and 2013 and proposed an adjustment that would impact Xcel Energy’s NOL and ETR. After evaluating the proposed adjustment, Xcel Energy filed a protest with the IRS. Xcel Energy anticipates the issue will be forwarded to Appeals. As of Dec, 31, 2017, Xcel Energy has recognized its best estimate of income tax expense that will result from a final resolution of this issue; however, the outcome and timing of a resolution is uncertain.

State Audits — NSP-Wisconsin is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Dec. 31, 2017, NSP-Wisconsin’s earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2012. In 2016, the state of Wisconsin began an audit of years 2012 and 2013. As of Dec. 31, 2017, Wisconsin had not proposed any material adjustments, and there were no other state income tax audits in progress.

Unrecognized Tax Benefits — The unrecognized tax benefit balance includes permanent tax positions, which if recognized would affect the annual ETR. In addition, the unrecognized tax benefit balance includes temporary tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. A change in the period of deductibility would not affect the ETR but would 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)
 
Dec. 31, 2017
 
Dec. 31, 2016
Unrecognized tax benefit — Permanent tax positions
 
$
1.4

 
$
0.4

Unrecognized tax benefit — Temporary tax positions
 
1.0

 
4.9

Total unrecognized tax benefit
 
$
2.4

 
$
5.3


A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
(Millions of Dollars)
 
2017
 
2016
 
2015
Balance at Jan. 1
 
$
5.3

 
$
4.5

 
$
3.0

Additions based on tax positions related to the current year
 
0.4

 
0.5

 
1.9

Reductions based on tax positions related to the current year
 
(0.3
)
 
—

 
(0.3
)
Additions for tax positions of prior years
 
1.3

 
0.5

 
0.8

Reductions for tax positions of prior years
 
(4.3
)
 
(0.2
)
 
(0.9
)
Balance at Dec. 31
 
$
2.4

 
$
5.3

 
$
4.5



22

The unrecognized tax benefit amounts were reduced by the tax benefits associated with NOL and tax credit carryforwards.  The amounts of tax benefits associated with NOL and tax credit carryforwards are as follows:
(Millions of Dollars)
 
Dec. 31, 2017
 
Dec. 31, 2016
NOL and tax credit carryforwards
 
$
(1.9
)
 
$
(1.2
)

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 progresses and audit resumes, the Wisconsin audit progresses, and other state audits resume. As the IRS Appeals and Wisconsin audit progress, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $1 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 Dec. 31, 2017, 2016 and 2015 were not material. No amounts were accrued for penalties related to unrecognized tax benefits as of Dec. 31, 2017, 2016 or 2015.

Other Income Tax Matters — NOL amounts represent the amount of the tax loss that is carried forward and tax credits represent the deferred tax asset. NOL and tax credit carryforwards as of Dec. 31 were as follows:
(Millions of Dollars)
 
2017
 
2016
Federal NOL carryforward
 
$
58

 
$
97

Federal tax credit carryforwards
 
4

 
4

State NOL carryforward
 
5

 
3


The federal carryforward periods expire between 2021 and 2037.  The state carryforward periods expire between 2021 and 2032.

Total income tax expense from operations differs from the amount computed by applying the statutory federal income tax rate to income before income tax expense. The following reconciles such differences for the years ending Dec. 31:
 
 
2017
 
2016 (b)
 
2015 (b)
Federal statutory rate
 
35.0
 %
 
35.0
 %
 
35.0
 %
State income tax on pretax income, net of federal tax effect
 
5.1
 %
 
5.1
 %
 
5.1
 %
Increases (decreases) in tax from:
 


 


 


Adjustments attributable to tax returns
 
(2.3
)
 
(0.3
)
 
(0.4
)
Regulatory differences - effects of rate changes (a)
 
(0.1
)
 
(0.2
)
 
(0.2
)
Regulatory differences - other utility plant items
 
(1.7
)
 
(0.6
)
 
(1.8
)
Tax credits recognized, net of federal income tax expense
 
(1.0
)
 
(0.7
)
 
(0.7
)
Change in unrecognized tax benefits
 
0.8

 
0.1

 
0.1

Other, net
 
(0.1
)
 
(0.1
)
 
0.1

Effective income tax rate
 
35.7
 %
 
38.3
 %
 
37.2
 %

(a) 
The amortization of excess deferred taxes.
(b) 
The prior periods included in this footnote have been reclassified to conform to current year presentation.

The components of income tax expense for the years ending Dec. 31 were:
(Thousands of Dollars)
 
2017
 
2016
 
2015
Current federal tax expense (benefit)
 
$
2,765

 
$
5,367

 
$
(4,715
)
Current state tax (benefit) expense
 
(1
)
 
131

 
2,150

Current change in unrecognized tax (benefit) expense
 
(3,626
)
 
559

 
1,498

Deferred federal tax expense
 
32,919

 
29,588

 
40,580

Deferred state tax expense
 
7,972

 
8,212

 
6,675

Deferred change in unrecognized tax expense (benefit)
 
4,666

 
(432
)
 
(1,422
)
Deferred investment tax credits
 
(523
)
 
(523
)
 
(528
)
Total income tax expense
 
$
44,172

 
$
42,902

 
$
44,238



23

The components of deferred income tax expense for the years ending Dec. 31 were:
(Thousands of Dollars)
 
2017
 
2016
 
2015
Deferred tax (benefit) expense excluding items below
 
$
(173,906
)
 
$
39,530

 
$
51,084

Amortization and adjustments to deferred income taxes on income tax regulatory assets and liabilities
 
219,514

 
(2,112
)
 
(5,200
)
Tax expense allocated to other comprehensive income, net of adoption of ASU No. 2018-02, and other
 
(51
)
 
(50
)
 
(51
)
Deferred tax expense
 
$
45,557

 
$
37,368

 
$
45,833


The components of the net deferred tax liability at Dec. 31 were as follows:
(Thousands of Dollars)
 
2017
 
2016 (a)
Deferred tax liabilities:
 
 
 
 
Difference between book and tax bases of property
 
$
270,425

 
$
412,071

Regulatory assets
 
58,436

 
63,825

Pension expense
 
14,245

 
21,575

Other
 
6,855

 
9,666

Total deferred tax liabilities
 
$
349,961

 
$
507,137

Deferred tax assets:
 


 


Regulatory liabilities
 
$
55,768

 
$
(5,788
)
NOL carryforward
 
12,606

 
35,216

Environmental remediation
 
8,068

 
25,842

Tax credit carryforward
 
4,644

 
3,704

Other employee benefits
 
3,868

 
6,132

Deferred investment tax credits
 
3,175

 
4,996

Other
 
5,145

 
6,442

Total deferred tax assets
 
$
93,274

 
$
76,544

Net deferred tax liability
 
$
256,687

 
$
430,593


(a) 
The prior period included in this footnote has been reclassified to conform to current year presentation.

7.
Benefit Plans and Other Postretirement Benefits

Consistent with the process for rate recovery of pension and postretirement benefits for its employees, NSP-Wisconsin accounts for its participation in, and related costs of, pension and other postretirement benefit plans sponsored by Xcel Energy Inc. as multiple employer plans. NSP-Wisconsin is responsible for its share of cash contributions, plan costs and obligations and is entitled to its share of plan assets; accordingly, NSP-Wisconsin accounts for its pro rata share of these plans, including pension expense and contributions, resulting in accounting consistent with that of a single employer plan exclusively for NSP-Wisconsin employees.

Xcel Energy, which includes NSP-Wisconsin, offers various benefit plans to its employees. Approximately 71 percent of employees that receive benefits are represented by several local labor unions under several collective-bargaining agreements. At Dec. 31, 2017, NSP-Wisconsin had 383 bargaining employees covered under a collective-bargaining agreement, which expires in December 2019.

24


The plans invest in various instruments which are disclosed under the accounting guidance for fair value measurements which establishes a hierarchical framework for disclosing the observability of the inputs utilized in measuring fair value. The three levels in the hierarchy and examples of each level are as follows:

Level 1 — Quoted prices are available in active markets for identical assets as of the reporting date. The types of assets 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 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 included in Level 3 are those with inputs 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 NAVs.

Insurance contracts — Insurance contract fair values take into consideration the value of the investments in separate accounts of the insurer, which are priced based on observable inputs.

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

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

Derivative Instruments — Fair values for foreign currency derivatives are determined using pricing models based on the prevailing forward exchange rate of the underlying currencies. The fair values of interest rate derivatives are based on broker quotes that utilize current market interest rate forecasts.

Pension Benefits

Xcel Energy, which includes NSP-Wisconsin, has several noncontributory, defined benefit pension plans that cover almost all employees. Generally, benefits are based on a combination of years of service, the employee’s average pay and, in some cases, social security benefits. Xcel Energy Inc.’s and NSP-Wisconsin’s policy is to fully fund into an external trust the actuarially determined pension costs recognized for ratemaking and financial reporting purposes, subject to the limitations of applicable employee benefit and tax laws.


25

In addition to the qualified pension plans, Xcel Energy maintains a supplemental executive retirement plan (SERP) and a nonqualified pension plan. The SERP is maintained for certain executives that were participants in the plan in 2008, when the SERP was closed to new participants. The nonqualified pension plan provides unfunded, nonqualified benefits for compensation that is in excess of the limits applicable to the qualified pension plans, with distributions attributable to NSP-Wisconsin funded by NSP-Wisconsin’s consolidated operating cash flows. The total obligations of the SERP and nonqualified plan as of Dec. 31, 2017 and 2016 were $37 million and $44 million, respectively, of which $1 million was attributable to NSP-Wisconsin in both 2017 and 2016. In 2017 and 2016, Xcel Energy recognized net benefit cost for financial reporting for the SERP and nonqualified plans of $5 million and $8 million, respectively, of which amounts attributable to NSP-Wisconsin were immaterial.

In 2016, Xcel Energy established rabbi trusts to provide partial funding for future distributions of the SERP and its deferred compensation plan. Rabbi trust funding of deferred compensation plan distributions attributable to NSP-Wisconsin will be supplemented by NSP-Wisconsin’s consolidated operating cash flows as determined necessary. The amount of rabbi trust funding attributable to NSP-Wisconsin is immaterial. Also in 2016, Xcel Energy amended the deferred compensation plan to provide eligible participants the ability to diversify deferred settlements of equity awards, other than time-based equity awards, into various fund options.

Xcel Energy Inc. and NSP-Wisconsin base the investment-return assumption on expected long-term performance for each of the investment types included in the pension asset portfolio and consider the historical returns achieved by the asset portfolio over the past 20-year or longer period, as well as the long-term return levels projected and recommended by investment experts. Xcel Energy Inc. and NSP-Wisconsin continually review pension assumptions. The pension cost determination assumes a forecasted mix of investment types over the long term.

•
Investment returns in 2017 were above the assumed level of 7.10 percent;
•
Investment returns in 2016 were below the assumed level of 7.10 percent;
•
Investment returns in 2015 were below the assumed level of 7.25 percent; and
•
In 2018, NSP-Wisconsin’s expected investment-return assumption is 7.10 percent.

The assets are invested in a portfolio according to Xcel Energy Inc.’s and NSP-Wisconsin’s return, liquidity and diversification objectives to provide funding for plan obligations and minimize contributions to the plan, within appropriate levels of risk. The principal mechanism for achieving these objectives is the projected asset allocation given the long-term risk, return, and liquidity characteristics of each particular asset class. There were no significant concentrations of risk in any particular industry, index, or entity. Market volatility can impact even well-diversified portfolios and significantly affect the return levels achieved by pension assets in any year.

The following table presents the target pension asset allocations for NSP-Wisconsin at Dec. 31 for the upcoming year:
 
 
2017
 
2016
Domestic and international equity securities
 
38
%
 
40
%
Long-duration fixed income and interest rate swap securities
 
23

 
23

Short-to-intermediate fixed income securities
 
21

 
16

Alternative investments
 
16

 
19

Cash
 
2

 
2

Total
 
100
%
 
100
%

The ongoing investment strategy is based on plan-specific investment recommendations that seek to minimize potential investment and interest rate risk as a plan’s funded status increases over time. The investment recommendations result in a greater percentage of long-duration fixed income securities being allocated to specific plans having relatively higher funded status ratios and a greater percentage of growth assets being allocated to plans having relatively lower funded status ratios. The aggregate projected asset allocation presented in the table above for the master pension trust results from the plan-specific strategies.

26


Pension Plan Assets

The following tables present, for each of the fair value hierarchy levels, NSP-Wisconsin’s pension plan assets that are measured at fair value as of Dec. 31, 2017 and 2016:
 
 
Dec. 31, 2017
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
Investments Measured at NAV
 
Total
Cash equivalents
 
$
8,091

 
$
—

 
$
—

 
$
—

 
$
8,091

Commingled funds:
 
 
 
 
 
 
 
 
 
 
U.S. equity funds
 
21,850

 
—

 
—

 
—

 
21,850

Non U.S. equity funds
 
3,900

 
—

 
—

 
8,479

 
12,379

U.S. corporate bond funds
 
14,035

 
—

 
—

 
—

 
14,035

Emerging market equity funds
 
—

 
—

 
—

 
13,381

 
13,381

Emerging market debt funds
 
3,198

 
—

 
—

 
7,079

 
10,277

Private equity investments
 
—

 
—

 
—

 
3,583

 
3,583

Real estate
 
—

 
—

 
—

 
8,309

 
8,309

Other commingled funds
 
206

 
—

 
—

 
4,965

 
5,171

Debt securities:
 
 
 
 
 
 
 
 
 
 
Government securities
 
—

 
12,167

 
—

 
—

 
12,167

U.S. corporate bonds
 
—

 
10,178

 
—

 
—

 
10,178

Non U.S. corporate bonds
 
—

 
1,730

 
—

 
—

 
1,730

Equity securities:
 
 
 
 
 
 
 
 
 
 
U.S. equities
 
4,863

 
—

 
—

 
—

 
4,863

Other
 
(1,334
)
 
149

 
—

 
23

 
(1,162
)
Total
 
$
54,809

 
$
24,224

 
$
—

 
$
45,819

 
$
124,852

 
 
Dec. 31, 2016
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
Investments Measured at NAV
 
Total
Cash equivalents
 
$
3,939

 
$
—

 
$
—

 
$
—

 
$
3,939

Commingled funds:
 
 
 
 
 
 
 
 
 
 
U.S. equity funds
 
21,415

 
—

 
—

 
—

 
21,415

Non U.S. equity funds
 
7,406

 
—

 
—

 
8,942

 
16,348

U.S. corporate bond funds
 
10,581

 
—

 
—

 
—

 
10,581

Emerging market equity funds
 
—

 
—

 
—

 
8,577

 
8,577

Emerging market debt funds
 
3,519

 
—

 
—

 
3,787

 
7,306

Commodity funds
 
—

 
—

 
—

 
889

 
889

Private equity investments
 
—

 
—

 
—

 
4,652

 
4,652

Real estate
 
—

 
—

 
—

 
8,108

 
8,108

Other commingled funds
 
—

 
—

 
—

 
8,752

 
8,752

Debt securities:
 
 
 
 
 
 
 
 
 
 
Government securities
 
—

 
12,773

 
—

 
—

 
12,773

U.S. corporate bonds
 
—

 
9,432

 
—

 
—

 
9,432

Non U.S. corporate bonds
 
—

 
1,514

 
—

 
—

 
1,514

Mortgage-backed securities
 
—

 
254

 
—

 
—

 
254

Asset-backed securities
 
—

 
120

 
—

 
—

 
120

Equity securities:
 
 
 
 
 
 
 
 
 
 
U.S. equities
 
4,219

 
—

 
—

 
—

 
4,219

Other
 
—

 
97

 
—

 
—

 
97

Total
 
$
51,079

 
$
24,190

 
$
—

 
$
43,707

 
$
118,976


There were no assets transferred in or out of Level 3 for the years ended Dec. 31, 2017, 2016 or 2015.

27


Benefit Obligations — A comparison of the actuarially computed pension benefit obligation and plan assets for NSP-Wisconsin is presented in the following table:
(Thousands of Dollars)
 
2017
 
2016
Accumulated Benefit Obligation at Dec. 31
 
$
145,387

 
$
146,448

 
 
 
 
 
Change in Projected Benefit Obligation:
 
 
 
 
Obligation at Jan. 1
 
$
157,457

 
$
152,545

Service cost
 
4,618

 
4,417

Interest cost
 
6,218

 
6,816

Plan amendments
 
(713
)
 
305

Actuarial loss
 
6,499

 
7,315

Benefit payments (a)
 
(17,331
)
 
(13,941
)
Obligation at Dec. 31
 
$
156,748

 
$
157,457

(Thousands of Dollars)
 
2017
 
2016
Change in Fair Value of Plan Assets:
 
 
 
 
Fair value of plan assets at Jan. 1
 
$
118,976

 
$
119,314

Actual return on plan assets
 
13,923

 
6,163

Employer contributions
 
9,284

 
7,440

Benefit payments (a)
 
(17,331
)
 
(13,941
)
Fair value of plan assets at Dec. 31
 
$
124,852

 
$
118,976

(Thousands of Dollars)
 
2017
 
2016
Funded Status of Plans at Dec. 31:
 
 
 
 
Funded status (b)
 
$
(31,896
)
 
$
(38,481
)
(a) 
2017 amount includes approximately $13 million of lump-sum benefit payments used in the determination of a settlement charge.
(b) 
Amounts are recognized in noncurrent liabilities on NSP-Wisconsin’s consolidated balance sheets.
(Thousands of Dollars)
 
2017
 
2016
Amounts Not Yet Recognized as Components of Net Periodic Benefit Cost:
 
 
 
 
Net loss
 
$
80,429

 
$
91,531

Prior service (credit) cost
 
(346
)
 
750

Total
 
$
80,083

 
$
92,281

(Thousands of Dollars)
 
2017
 
2016
Amounts Not Yet Recognized as Components of Net Periodic Benefit Cost Have Been Recorded as Follows Based Upon Expected Recovery in Rates:
 
 
 
 
Current regulatory assets
 
$
5,548

 
$
5,972

Noncurrent regulatory assets
 
74,535

 
86,309

Total
 
$
80,083

 
$
92,281

Measurement date
 
Dec. 31, 2017
 
Dec. 31, 2016
 
 
2017
 
2016
Significant Assumptions Used to Measure Benefit Obligations:
 
 
 
 
Discount rate for year-end valuation
 
3.63
%
 
4.13
%
Expected average long-term increase in compensation level
 
3.75

 
3.75

Mortality table
 
RP 2014

 
RP 2014



28

Mortality — In 2014, the Society of Actuaries published a new mortality table (RP-2014) that increased the overall life expectancy of males and females. In 2014, NSP-Wisconsin adopted this mortality table, with modifications, based on its population and specific experience. During 2017, a new projection table was released (MP-2017). NSP-Wisconsin evaluated the updated projection table and concluded that the methodology currently in use and adopted in 2016 is consistent with the recently updated 2017 table and continues to be representative of NSP-Wisconsin’s population.

Cash Flows — Cash funding requirements can be impacted by changes to actuarial assumptions, actual asset levels and other calculations prescribed by the funding requirements of income tax and other pension-related regulations. Required contributions were made in 2015 through 2018 to meet minimum funding requirements.

Total voluntary and required pension funding contributions across all four of Xcel Energy’s pension plans were as follows:

•
$150 million in January 2018, of which $10 million was attributable to NSP-Wisconsin;
•
$162 million in 2017, of which $9 million was attributable to NSP-Wisconsin;
•
$125 million in 2016, of which $7 million was attributable to NSP-Wisconsin; and
•
$90 million in 2015, of which $5 million was attributable to NSP-Wisconsin.

For future years, Xcel Energy and NSP-Wisconsin anticipate contributions will be made as necessary.

Plan Amendments — Xcel Energy, which includes NSP-Wisconsin, amended the Xcel Energy Pension Plan in 2017 to reduce supplemental benefits for non-bargaining participants as well as to allow the transfer of a portion of non-qualified pension obligations into the qualified plans.  In 2016, the Xcel Energy Pension Plan was amended to change the discount rate basis for lump-sum conversion to annuity participants and annuity conversion to lump-sum participants.

Benefit Costs — The components of NSP-Wisconsin’s net periodic pension cost were:
(Thousands of Dollars)
 
2017
 
2016
 
2015
Service cost
 
$
4,618

 
$
4,417

 
$
4,759

Interest cost
 
6,218

 
6,816

 
6,520

Expected return on plan assets
 
(9,180
)
 
(9,157
)
 
(9,483
)
Amortization of prior service cost
 
138

 
111

 
111

Amortization of net loss
 
5,846

 
5,392

 
6,804

Settlement charge (a)
 
7,107

 
—

 
—

Net periodic pension cost
 
14,747

 
7,579

 
8,711

Costs not recognized due to effects of regulation
 
(4,176
)
 
—

 
—

Net benefit cost recognized for financial reporting
 
$
10,571

 
$
7,579

 
$
8,711

(a) 
A settlement charge is required when the amount of lump-sum distributions during the year is greater than the sum of the service and interest cost components of the annual net periodic pension cost. In the fourth quarter of 2017 as a result of lump-sum distributions during the 2017 plan year, NSP-Wisconsin recorded a total pension settlement charge of $7 million, the majority of which was not recognized due to the effects of regulation. A total of $2 million of that amount was recorded in O&M expenses in the fourth quarter of 2017.
 
 
2017
 
2016
 
2015
Significant Assumptions Used to Measure Costs:
 
 
 
 
 
 
Discount rate
 
4.13
%
 
4.66
%
 
4.11
%
Expected average long-term increase in compensation level
 
3.75

 
4.00

 
3.75

Expected average long-term rate of return on assets
 
7.10

 
7.10

 
7.25



29

In addition to the benefit costs in the table above, for the pension plans sponsored by Xcel Energy Inc., costs are allocated to NSP-Wisconsin based on Xcel Energy Services Inc. employees’ labor costs. The amount allocated to NSP-Wisconsin was $3 million, $2 million and $2 million in 2017, 2016 and 2015, respectively. Pension costs include an expected return impact for the current year that may differ from actual investment performance in the plan. The return assumption used for 2018 pension cost calculations is 7.10 percent. The cost calculation uses a market-related valuation of pension assets. Xcel Energy, including NSP-Wisconsin, uses a calculated value method to determine the market-related value of the plan assets. The market-related value begins with the fair market value of assets as of the beginning of the year. The market-related value is determined by adjusting the fair market value of assets to reflect the investment gains and losses (the difference between the actual investment return and the expected investment return on the market-related value) during each of the previous five years at the rate of 20 percent per year. As these differences between actual investment returns and the expected investment returns are incorporated into the market-related value, the differences are recognized over the expected average remaining years of service for active employees.

Defined Contribution Plans

Xcel Energy, which includes NSP-Wisconsin, maintains 401(k) and other defined contribution plans that cover substantially all employees. The expense to these plans for NSP-Wisconsin was approximately $1 million in 2017, 2016 and 2015.

Postretirement Health Care Benefits

Xcel Energy, which includes NSP-Wisconsin, has a contributory health and welfare benefit plan that provides health care and death benefits to certain Xcel Energy retirees. NSP-Wisconsin discontinued contributing toward health care benefits for nonbargaining employees retiring after 1998 and for bargaining employees who retired after 1999.

Regulatory agencies for nearly all retail utility customers have allowed rate recovery of accrued postretirement benefit costs.

Plan Assets — Certain state agencies that regulate Xcel Energy Inc.’s utility subsidiaries also have issued guidelines related to the funding of postretirement benefit costs. These assets are invested in a manner consistent with the investment strategy for the pension plan.

The following table presents the target postretirement asset allocations for Xcel Energy Inc. and NSP-Wisconsin at Dec. 31 for the upcoming year:
 
 
2017
 
2016
Domestic and international equity securities
 
24
%
 
25
%
Short-to-intermediate fixed income securities
 
60

 
57

Alternative investments
 
9

 
13

Cash
 
7

 
5

Total
 
100
%
 
100
%

Xcel Energy Inc. and NSP-Wisconsin base investment-return assumptions for the postretirement health care fund assets on expected long-term performance for each of the investment types included in the asset portfolio. Assumptions and target allocations are determined at the master trust level. The investment mix at each of Xcel Energy Inc.’s utility subsidiaries may vary from the investment mix of the total asset portfolio. The assets are invested in a portfolio according to Xcel Energy Inc.’s and NSP-Wisconsin’s return, liquidity and diversification objectives to provide a source of funding for plan obligations and minimize contributions to the plan, within appropriate levels of risk. The principal mechanism for achieving these objectives is the projected asset allocation given the long-term risk, return, correlation and liquidity characteristics of each particular asset class. There were no significant concentrations of risk in any particular industry, index, or entity. Market volatility is not considered to be a material factor in postretirement health care costs.


30

The following tables present, for each of the fair value hierarchy levels, NSP-Wisconsin’s proportionate allocation of the total postretirement benefit plan assets that are measured at fair value as of Dec. 31, 2017 and 2016:
 
 
Dec. 31, 2017
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
Investments Measured at NAV

 
Total
Cash equivalents
 
$
68

 
$
—

 
$
—

 
$
—

 
$
68

Insurance contracts
 
—

 
115

 
—

 
—

 
115

Commingled funds:
 
 
 
 
 
 
 
 
 
 
U.S. equity funds
 
172

 
—

 
—

 
—

 
172

U.S fixed income funds
 
79

 
—

 
—

 
—

 
79

Emerging market debt funds
 
94

 
—

 
—

 
—

 
94

Debt securities:
 
 
 
 
 
 
 
 
 
 
Government securities
 
—

 
134

 
—

 
—

 
134

U.S. corporate bonds
 
—

 
147

 
—

 
—

 
147

Non U.S. corporate bonds
 
—

 
50

 
—

 
—

 
50

Asset-backed securities
 
—

 
54

 
—

 
—

 
54

Mortgage-backed securities
 
—

 
80

 
—

 
—

 
80

Equity securities:
 
 
 
 
 
 
 
 
 
 
Non U.S. equities
 
82

 
—

 
—

 
—

 
82

Other
 
—

 
3

 
—

 
—

 
3

Total
 
$
495

 
$
583

 
$
—

 
$
—

 
$
1,078


 
 
Dec. 31, 2016
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
Investments Measured at NAV

 
Total
Cash equivalents
 
$
25

 
$
—

 
$
—

 
$
—

 
$
25

Insurance contracts
 
—

 
58

 
—

 
—

 
58

Commingled funds:
 
 
 
 
 
 
 
 
 
 
U.S. equity funds
 
67

 
—

 
—

 
—

 
67

U.S fixed income funds
 
33

 
—

 
—

 
—

 
33

Emerging market debt funds
 
38

 
—

 
—

 
—

 
38

Other commingled funds
 
—

 
—

 
—

 
67

 
67

Debt securities:
 
 
 
 
 
 
 
 
 
 
Government securities
 
—

 
46

 
—

 
—

 
46

U.S. corporate bonds
 
—

 
77

 
—

 
—

 
77

Non U.S. corporate bonds
 
—

 
21

 
—

 
—

 
21

Asset-backed securities
 
—

 
23

 
—

 
—

 
23

Mortgage-backed securities
 
—

 
36

 
—

 
—

 
36

Equity securities:
 
 
 
 
 
 
 
 
 
 
Non U.S. equities
 
50

 
—

 
—

 
—

 
50

Other
 
—

 
2

 
—

 
—

 
2

Total
 
$
213

 
$
263

 
$
—

 
$
67

 
$
543


There were no assets transferred in or out of Level 3 for the years ended Dec. 31, 2017, 2016 and 2015.


31

Benefit Obligations — A comparison of the actuarially computed benefit obligation and plan assets for NSP-Wisconsin is presented in the following table:
(Thousands of Dollars)
 
2017
 
2016
Change in Projected Benefit Obligation:
 
 
 
 
Obligation at Jan. 1
 
$
14,973

 
$
14,718

Service cost
 
29

 
24

Interest cost
 
590

 
651

Medicare subsidy reimbursements
 
—

 
7

Plan participants’ contributions
 
71

 
87

Actuarial loss
 
2,069

 
775

Benefit payments
 
(1,368
)
 
(1,289
)
Obligation at Dec. 31
 
$
16,364

 
$
14,973

(Thousands of Dollars)
 
2017
 
2016
Change in Fair Value of Plan Assets:
 
 
 
 
Fair value of plan assets at Jan. 1
 
$
543

 
$
418

Actual loss on plan assets
 
(6
)
 
(12
)
Plan participants’ contributions
 
71

 
87

Employer contributions
 
1,838

 
1,339

Benefit payments
 
(1,368
)
 
(1,289
)
Fair value of plan assets at Dec. 31
 
$
1,078

 
$
543

(Thousands of Dollars)
 
2017
 
2016
Funded Status of Plans at Dec. 31:
 
 
 
 
Funded status
 
$
(15,286
)
 
$
(14,430
)
Current liabilities
 
(269
)
 
(822
)
Noncurrent liabilities
 
(15,017
)
 
(13,608
)
Net postretirement amounts recognized on consolidated balance sheets
 
$
(15,286
)
 
$
(14,430
)
(Thousands of Dollars)
 
2017
 
2016
Amounts Not Yet Recognized as Components of Net Periodic Benefit Cost:
 
 
 
 
Net loss
 
$
10,553

 
$
8,883

Prior service credit
 
(1,783
)
 
(2,134
)
Total
 
$
8,770

 
$
6,749

(Thousands of Dollars)
 
2017
 
2016
Amounts Not Yet Recognized as Components of Net Periodic Benefit Cost Have Been Recorded as Follows Based Upon Expected Recovery in Rates:
 
 
 
 
Current regulatory assets
 
$
110

 
$
—

Noncurrent regulatory assets
 
8,660

 
6,749

Total
 
$
8,770

 
$
6,749

Measurement date
 
Dec. 31, 2017
 
Dec. 31, 2016
 
 
2017
 
2016
Significant Assumptions Used to Measure Benefit Obligations:
 
 
 
 
Discount rate for year-end valuation
 
3.62
%
 
4.13
%
Mortality table
 
RP 2014

 
RP 2014

Health care costs trend rate — initial Pre-65
 
7.00
%
 
5.50
%
Health care costs trend rate — initial Post-65
 
5.50
%
 
5.50
%


32

Beginning with the Dec. 31, 2017 measurement, Xcel Energy Inc. and NSP-Wisconsin separated its initial medical trend assumption for pre-Medicare (Pre-65) and post-Medicare (Post-65) claims costs of 7.0 percent and 5.5 percent, respectively, in order to reflect different short-term expectations based on recent experience differences. The ultimate trend assumption remained at 4.5 percent for both Pre-65 and Post-65 claims costs as similar long-term trend rates are expected for both populations. The period until the ultimate rate is reached is five years. Xcel Energy Inc. and NSP-Wisconsin base the medical trend assumption on the long-term cost inflation expected in the health care market, considering the levels projected and recommended by industry experts, as well as recent actual medical cost increases experienced by the retiree medical plan.

A one-percent change in the assumed health care cost trend rate would have the following effects on NSP-Wisconsin:
 
 
One-Percentage Point
(Thousands of Dollars)
 
Increase
 
Decrease
APBO
 
$
1,588

 
$
(1,344
)
Service and interest components
 
65

 
(55
)

Cash Flows — The postretirement health care plans have no funding requirements under income tax and other retirement-related regulations other than fulfilling benefit payment obligations, when claims are presented and approved under the plans. Additional cash funding requirements are prescribed by certain state and federal rate regulatory authorities. Xcel Energy, which includes NSP-Wisconsin, contributed $20 million, $18 million and $18 million during 2017, 2016 and 2015, respectively, of which $2 million, $1 million and $1 million were attributable to NSP-Wisconsin. Xcel Energy expects to contribute approximately $12 million during 2018, of which $1 million is attributable to NSP-Wisconsin.

Plan Amendments — In 2017 and 2016, there were no plan amendments made which affected the benefit obligation.

Benefit Costs — The components of NSP-Wisconsin’s net periodic postretirement benefit costs were:
(Thousands of Dollars)
 
2017
 
2016
 
2015
Service cost
 
$
29

 
$
24

 
$
29

Interest cost
 
590

 
651

 
653

Expected return on plan assets
 
(31
)
 
(24
)
 
(30
)
Amortization of prior service credit
 
(351
)
 
(351
)
 
(351
)
Amortization of net loss
 
436

 
330

 
456

Net periodic postretirement benefit cost
 
$
673

 
$
630

 
$
757

 
 
2017
 
2016
 
2015
Significant Assumptions Used to Measure Costs:
 
 
 
 
 
 
Discount rate
 
4.13
%
 
4.65
%
 
4.08
%
Expected average long-term rate of return on assets
 
5.80

 
5.80

 
5.80


In addition to the benefit costs in the table above, for the postretirement health care plans sponsored by Xcel Energy Inc., costs are allocated to NSP-Wisconsin based on Xcel Energy Services Inc. employees’ labor costs.

Projected Benefit Payments

The following table lists NSP-Wisconsin’s projected benefit payments for the pension and postretirement benefit plans:
(Thousands of Dollars)
 
Projected Pension
Benefit Payments
 
Gross Projected
Postretirement
Health Care
Benefit Payments
 
Expected Medicare
Part D Subsidies
 
Net Projected
Postretirement
Health Care
Benefit Payments
2018
 
$
11,189

 
$
1,352

 
$
5

 
$
1,347

2019
 
11,812

 
1,329

 
4

 
1,325

2020
 
12,361

 
1,298

 
3

 
1,295

2021
 
11,842

 
1,254

 
3

 
1,251

2022
 
11,640

 
1,215

 
3

 
1,212

2023-2027
 
58,627

 
5,111

 
14

 
5,097



33

Multiemployer Plans

NSP-Wisconsin contributes to several union multiemployer pension plans, none of which are individually significant. These plans provide pension benefits to certain union employees who may perform services for multiple employers and do not participate in the NSP-Wisconsin sponsored pension plans. Contributing to these types of plans creates risk that differs from providing benefits under NSP-Wisconsin sponsored plans, in that if another participating employer ceases to contribute to a multiemployer plan, additional unfunded obligations may need to be funded over time by remaining participating employers.

Contributions to multiemployer plans were as follows for the years ended Dec. 31, 2017, 2016 and 2015. There were no significant changes to the nature or magnitude of the participation of NSP-Wisconsin in multiemployer plans for the years presented:
(Thousands of Dollars)
 
2017
 
2016
 
2015
Multiemployer plan contributions:
 
 
 
 
 
 
Pension
 
$
248

 
$
707

 
$
944


8.
Other Income, Net

Other income, net for the years ended Dec. 31 consisted of the following:
(Thousands of Dollars)
 
2017
 
2016
 
2015
Interest income
 
$
716

 
$
244

 
$
332

Other nonoperating income
 
325

 
208

 
789

Insurance policy (expense) income
 
(195
)
 
22

 
(228
)
Other nonoperating expense
 
(13
)
 
(13
)
 
(10
)
Other income, net
 
$
833

 
$
461

 
$
883


9.
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 NAVs.

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


34

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

At Dec. 31, 2017, 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 Dec. 31:
(Amounts in Thousands) (a)(b)
 
2017
 
2016
MMBtu of natural gas
 
42

 
255


(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.

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 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.

Financial Impact of Qualifying Cash Flow Hedges — The impact of qualifying interest rate cash flow hedges on NSP-Wisconsin’s accumulated other comprehensive loss, included in the consolidated statements of common stockholder’s equity and in the consolidated statements of comprehensive income, is detailed in the following table:
(Thousands of Dollars)
 
2017
 
2016
 
2015
Accumulated other comprehensive loss related to cash flow hedges at Jan. 1
 
$
(133
)
 
$
(209
)
 
$
(285
)
After-tax net realized losses on derivative transactions reclassified into earnings
 
76

 
76

 
76

Accumulated other comprehensive loss related to cash flow hedges at Dec. 31
 
$
(57
)
 
$
(133
)
 
$
(209
)

Pre-tax losses related to interest rate derivatives reclassified from accumulated other comprehensive loss into earnings were $0.1 million for each of the years ended Dec. 31, 2017, 2016 and 2015.

During the years ended Dec. 31, 2017, 2016 and 2015 changes in the fair value of natural gas commodity derivatives resulted in net losses of $0.3 million, $0.2 million and $0.7 million, recognized as regulatory assets and liabilities. The classification as a regulatory asset or liability is based on commission approved regulatory recovery mechanisms.


35

During the years ended Dec. 31, 2017, 2016 and 2015, $0.2 million, $0.8 million and $1.4 million of natural gas commodity derivatives settlement losses were recognized 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 years ended Dec. 31, 2017, 2016 and 2015. Therefore, no gains or losses from fair value hedges or related hedged transactions were recognized for these periods.

Recurring Fair Value Measurements — 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:

 
 
Dec. 31, 2017
 
 
Fair Value
 
Fair Value
Total
 
Counterparty
Netting (a)
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Total (b)
Current derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas commodity
 
$
—

 
$
14

 
$
—

 
$
14

 
$
—

 
$
14

 
 
Dec. 31, 2016
 
 
Fair Value
 
Fair Value
Total
 
Counterparty
Netting (a)
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Total (b)
Current derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas commodity
 
$
—

 
$
149

 
$
—

 
$
149

 
$
—

 
$
149


(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, 2017 and 2016.  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 the prepayments balance of $3.5 million and $3.1 million at Dec. 31, 2017 and 2016, respectively, in the consolidated balance sheets.

Fair Value of Long-Term Debt

As of Dec. 31, 2017 and 2016, other financial instruments for which the carrying amount did not equal fair value were as follows:
 
 
2017
 
2016
(Thousands of Dollars)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Long-term debt, including current portion
 
$
761,180

 
$
856,106

 
$
663,069

 
$
730,284


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 Dec. 31, 2017 and 2016, and given the observability of the inputs to these estimates, the fair values presented for long-term debt have been assigned a Level 2.

10.
Rate Matters

Tax Reform - Regulatory Proceedings

The specific impacts of the TCJA on retail customer rates are subject to regulatory approval. NSP-Wisconsin is in the process of quantifying the rate impacts of the TCJA and addressing these impacts in its open and recently concluded proceedings focused on retail base rate impacts for its utility subsidiaries.

In January 2018, the PSCW issued an order requiring public utilities to apply deferred accounting for the impacts of the TCJA. The PSCW has also requested that utilities provide responses to questions on tax reform and its impact on electric and natural gas revenue requirements. In February 2018, NSP-Wisconsin proposed levelizing upcoming rate cases, advancing infrastructure investments and buying down assets such as the regulatory asset for Ashland clean-up.


36

The MPSC has issued an order for utilities to use deferred accounting for the impacts of the TCJA. In February 2018, the MPSC issued an order directing each utility in Michigan to file an application for determination of the benefits related to the reduction in the corporate federal tax rate by March 30, 2018. The MPSC will address the remaining benefits related to the TCJA in the second quarter of 2018. NSP-Wisconsin plans to include the TCJA tax benefits as part of the electric rate case pending before the MPSC.

Recently Concluded Regulatory Proceedings — PSCW

Wisconsin 2018 Electric and Gas Rate Case — In May 2017, NSP-Wisconsin filed a request with the PSCW to increase electric rates by $25 million, or 3.6 percent, and natural gas rates by $12 million, or 10.1 percent, effective Jan. 1, 2018. The rate filing was based on a 2018 forecast test year, a ROE of 10 percent, an equity ratio of 52.53 percent and a forecasted rate base of approximately $1.2 billion for the electric utility and $138 million for the natural gas utility.

In December 2017, the PSCW approved electric and natural gas rate increases of approximately $9 million, or 1.4 percent, and $10 million, or 8.3 percent, respectively, based on a 9.8 percent ROE and an equity ratio of 51.45 percent. New rates went into effect on Jan. 1, 2018.

Pending Regulatory Proceedings - MPSC

Michigan 2018 Electric Rate Case — In November 2017, NSP-Wisconsin filed a request with the MPSC to increase rates for electric service by $1 million, or 7.1 percent. The filing was based on a 2018 forecast test year, a 10.1 percent ROE, an equity ratio of 52.5 percent and a forecasted average rate base of approximately $43 million. The primary driver of the requested increase is continuing investment in transmission and distribution infrastructure. The filing also included a request for step increases in 2019 and 2020 related to electric distribution system investments in those years. In addition to the MPSC staff, intervenors in the case include the Michigan Attorney General and the Association of Businesses Advocating Tariff Equity, a voluntary association of large industrial businesses. Hearings are scheduled for April 2018. The parties have agreed to meet in March 2018 to discuss potential settlement of the case.

Recently Concluded Regulatory Proceedings — MPUC

Monticello Prudence Investigation — In 2013, NSP-Minnesota completed the Monticello LCM/EPU project. The multi-year project extended the life of the facility and increased the capacity from 600 to 671 MW in 2015. The Monticello LCM/EPU project expenditures were approximately $665 million. Total capitalized costs were approximately $748 million, which includes AFUDC. In 2008, project expenditures were initially estimated at approximately $320 million, excluding AFUDC.

In 2015, the MPUC voted to allow for full recovery, including a return, on $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. As a result, Xcel Energy recorded a 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

MISO ROE Complaints/ROE Adder — In November 2013, a group of customers filed a complaint at the FERC against MISO TOs, including NSP-Minnesota and NSP-Wisconsin. The complaint argued for a reduction in the ROE in transmission formula rates in the MISO region from 12.38 percent to 9.15 percent, and the removal of ROE adders (including those for RTO membership), effective Nov. 12, 2013.

In December 2015, an ALJ recommended the FERC approve a base ROE of 10.32 percent for the MISO TOs. The ALJ found the existing 12.38 percent ROE to be unjust and unreasonable. The recommended 10.32 percent ROE applied a FERC ROE policy adopted in a June 2014 order (Opinion 531). The FERC approved the ALJ recommended 10.32 percent base ROE in an order issued in September 2016. This ROE would be applicable for Nov. 12, 2013 to Feb. 11, 2015, and prospectively from the date of the FERC order. The total prospective ROE would be 10.82 percent, including a 50 basis point adder for RTO membership. Various parties requested rehearing of the September 2016 order. The requests are pending FERC action.


37

In February 2015, a second complaint seeking to reduce the MISO ROE from 12.38 percent to 8.67 percent prior to any adder was filed with the FERC, resulting in a second period of potential refund from Feb. 12, 2015 to May 11, 2016. In June 2016, the ALJ recommended a ROE of 9.7 percent, applying the methodology adopted by the FERC in Opinion 531. In April 2017, the D.C. Circuit vacated and remanded Opinion 531. It is unclear how the D.C. Circuit’s opinion to vacate and remand Opinion 531 will affect the September 2016 FERC order or the timing and outcome of the second ROE complaint. In September 2017, certain MISO TOs (not including NSP-Minnesota and NSP-Wisconsin) filed a motion to dismiss the second ROE complaint. The motion to dismiss is pending FERC action.

As of Dec. 31, 2017, NSP-Minnesota has processed the refunds for the Nov. 12, 2013 to Feb. 11, 2015 complaint period based on the 10.32 percent ROE. NSP-Minnesota has also recognized a current refund liability consistent with the best estimate of the final ROE for the Feb. 12, 2015 to May 11, 2016 complaint period.

11.
Commitments and Contingencies

Commitments

Fuel Contracts — NSP-Wisconsin has entered into various long-term commitments for the purchase and delivery of a significant portion of its current coal and natural gas requirements. These contracts expire in various years between 2018 and 2029. In addition, NSP-Wisconsin is required to pay additional amounts depending on actual quantities shipped under these agreements. As NSP-Wisconsin does not have an automatic electric fuel adjustment clause for Wisconsin retail customers, NSP-Wisconsin utilizes deferred accounting treatment for future rate recovery or refund when fuel costs differ from the amount included in rates by more than two percent on an annual basis, as determined by the PSCW after an opportunity for a hearing and an earnings test based on NSP-Wisconsin’s authorized ROE.

The estimated minimum purchases for NSP-Wisconsin under these contracts as of Dec. 31, 2017 are as follows:
(Millions of Dollars)
 
Coal
 
Natural gas
supply
 
Natural gas
storage and
transportation
2018
 
$
6.4

 
$
9.4

 
$
13.3

2019
 
0.6

 
0.4

 
12.3

2020
 
0.6

 
0.3

 
10.1

2021
 
0.7

 
0.3

 
9.5

2022
 
0.7

 
0.2

 
8.2

Thereafter
 
0.7

 
—

 
30.5

Total (a)
 
$
9.7

 
$
10.6

 
$
83.9


(a) 
Excludes additional amounts allocated to NSP-Wisconsin through intercompany charges.

Additional expenditures for fuel and natural gas storage and transportation will be required to meet expected future electric generation and natural gas needs.

Leases — NSP-Wisconsin leases a variety of equipment and facilities. These leases, primarily for office space, vehicles, aircraft and power-operated equipment, are accounted for as operating leases. Total expenses under operating lease obligations were approximately $1.2 million, $1.2 million and $1.1 million for 2017, 2016 and 2015, respectively.

Future commitments under operating leases are:
(Millions of Dollars)
 
 
2018
 
$
0.9

2019
 
0.9

2020
 
0.9

2021
 
0.8

2022
 
0.8

Thereafter
 
4.6

Total
 
$
8.9



38

Variable Interest Entities — The accounting guidance for consolidation of variable interest entities requires enterprises to consider the activities that most significantly impact an entity’s financial performance, and power to direct those activities, when determining whether an enterprise is a variable interest entity’s primary beneficiary.

NSP-Wisconsin has entered into limited partnerships for the construction and operation of affordable rental housing developments which qualify for low-income housing tax credits. NSP-Wisconsin has determined the low-income housing limited partnerships to be variable interest entities primarily due to contractual arrangements within each limited partnership that establish sharing of ongoing voting control and profits and losses that does not consistently align with the partners’ proportional equity ownership. NSP-Wisconsin has determined that it has the power to direct the activities that most significantly impact these entities’ economic performance, and therefore NSP-Wisconsin consolidates these limited partnerships in its consolidated financial statements.

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

Amounts reflected in NSP-Wisconsin’s consolidated balance sheets for low-income housing limited partnerships include the following:
(Thousands of Dollars)
 
Dec. 31, 2017
 
Dec. 31, 2016
Current assets
 
$
426

 
$
375

Property, plant and equipment, net
 
1,882

 
2,025

Other noncurrent assets
 
137

 
125

Total assets
 
$
2,445

 
$
2,525

 
 
 
 
 
Current liabilities
 
$
1,214

 
$
1,269

Mortgages and other long-term debt payable
 
486

 
486

Other noncurrent liabilities
 
56

 
54

Total liabilities
 
$
1,756

 
$
1,809


Joint Operating System — The electric production and transmission system of NSP-Wisconsin is managed as an integrated system with that of NSP-Minnesota, jointly referred to as the NSP System. The electric production and transmission costs of the entire NSP System are shared by NSP-Minnesota and NSP-Wisconsin. A FERC approved agreement between the two companies, called the Interchange Agreement, provides for the sharing of all costs of generation and transmission facilities of the system, including capital costs. Such costs include current and potential obligations of NSP-Minnesota related to its nuclear generating facilities.

NSP-Minnesota’s public liability for claims resulting from any nuclear incident is limited to $13.4 billion under the Price-Anderson amendment to the Atomic Energy Act. NSP-Minnesota has secured $450 million of coverage for its public liability exposure with a pool of insurance companies. The remaining $13.0 billion of exposure is funded by the Secondary Financial Protection Program, available from assessments by the federal government in case of a nuclear incident. NSP-Minnesota is subject to assessments of up to $127 million per reactor-incident for each of its three licensed reactors, to be applied for public liability arising from a nuclear incident at any licensed nuclear facility in the United States. The maximum funding requirement is $19 million per reactor per incident during any one year. These maximum assessment amounts are both subject to inflation adjustment by the NRC and state premium taxes. The NRC’s last adjustment was effective September 2013.


39

NSP-Minnesota purchases insurance for property damage and site decontamination cleanup costs from Nuclear Electric Insurance Ltd. (NEIL) and European Mutual Association for Nuclear Insurance (EMANI). The coverage limits are $2.3 billion for each of NSP-Minnesota’s two nuclear plant sites. NEIL also provides business interruption insurance coverage, including the cost of replacement power obtained during certain prolonged accidental outages of nuclear generating units. Premiums are expensed over the policy term. All companies insured with NEIL are subject to retroactive premium adjustments if losses exceed accumulated reserve funds. Capital has been accumulated in the reserve funds of NEIL and EMANI to the extent that NSP-Minnesota would have no exposure for retroactive premium assessments in case of a single incident under the business interruption and the property damage insurance coverage. However, in each calendar year, NSP-Minnesota could be subject to maximum assessments of approximately $19 million for business interruption insurance and $41 million for property damage insurance if losses exceed accumulated reserve funds.

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 the exposure of NSP-Wisconsin 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)
 
Guarantee
Amount
 
Current
Exposure
 
Term or
Expiration Date
 
Triggering
Event
Guarantee of customer loans for the Farm Rewiring Program(a)
 
$
1.0

 
$
—

 
2020
 
(b) 
(a) 
The term of this guarantee expires in 2020, which is the final scheduled repayment date for the loans. As of Dec. 31, 2017, no claims had been made by the lender.
(b) 
The debtor becomes the subject of bankruptcy or other insolvency proceedings.

Environmental Contingencies

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

Site Remediation — Various federal and state environmental laws impose liability, without regard to the legality of the original conduct, where hazardous substances or other regulated materials have been released to the environment. NSP-Wisconsin may sometimes pay all or a portion of the cost to remediate sites where past activities of NSP-Wisconsin or other parties have caused environmental contamination. Environmental contingencies could arise from various situations, including sites of former MGPs operated by NSP-Wisconsin, its predecessors, or other entities; and third-party sites, such as landfills, for which NSP-Wisconsin is alleged to be a PRP that sent wastes to that site.

MGP Sites

Ashland MGP Site — NSP-Wisconsin was named a PRP for contamination at a site in Ashland, Wis. The Ashland/Northern States Power Lakefront Superfund Site (the Site) includes NSP-Wisconsin property, 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.

In 2012, NSP-Wisconsin agreed to remediate the Phase I Project Area (which includes the Upper Bluff and Kreher Park areas of the Site), under a settlement agreement with the EPA. In January 2017, NSP-Wisconsin agreed to remediate the Phase II Project Area (the Sediments), under a settlement agreement with the EPA. The settlement agreements were approved by the U.S. District Court for the Western District of Wisconsin. NSP-Wisconsin initiated a full scale wet dredge remedy of the Sediments in 2017. Going forward, NSP-Wisconsin anticipates completion of restoration activities of the Sediments in 2018 with finalization of Phase I Project Area construction and restoration activities in 2019. Groundwater treatment activities at the Site will continue.


40

The current cost estimate for the entire site (both Phase I Project Area and the Sediments) is approximately $168 million, of which approximately $138 million has been spent. As of Dec. 31, 2017 and 2016, NSP-Wisconsin had recorded a total liability of $30 million and $64 million, respectively, for the entire site.

NSP-Wisconsin has deferred the unrecovered portion of the estimated Site remediation costs as a regulatory asset. The PSCW has authorized NSP-Wisconsin rate recovery for all remediation costs incurred at the Site. In 2012, 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 2017, the PSCW approved an NSP-Wisconsin natural gas rate case which included recovery of additional expenses associated with remediating the Site. The annual recovery of MGP clean-up costs will increase from $12 million in 2017 to $18 million in 2018.

Other MGP, Landfill or Disposal Sites — In addition to the site in Ashland, Wis., NSP-Wisconsin is currently involved in investigating and/or remediating an MGP, landfill or other disposal site. NSP-Wisconsin has identified one site where contamination is present and where investigation and/or remediation activities are currently underway. Other parties may have responsibility for some portion of the investigation and/or remediation activities that are underway. NSP-Wisconsin anticipates that these investigation or remediation activities will continue through at least 2018. NSP-Wisconsin had accrued $0.1 million for this site at Dec. 31, 2017 and 2016, respectively. NSP-Wisconsin anticipates that any amounts spent will be fully recovered from customers.

Environmental Requirements

Water and Waste
Asbestos Removal — Some of NSP-Wisconsin’s facilities contain asbestos. Most asbestos will remain undisturbed until the facilities that contain it are demolished or removed. NSP-Wisconsin has recorded an estimate for final removal of the asbestos as an ARO. It may be necessary to remove some asbestos to perform maintenance or make improvements to other equipment. The cost of removing asbestos as part of other work is not expected to be material and is recorded as incurred as operating expenses for maintenance projects, capital expenditures for construction projects or removal costs for demolition projects.

Federal CWA Waters of the United States Rule — In 2015, the EPA and the U.S. Army Corps of Engineers (Corps) published a final rule that significantly expanded the types of water bodies regulated under the CWA and broadened the scope of waters subject to federal jurisdiction. In October 2015, the U.S. Court of Appeals for the Sixth Circuit issued a nationwide stay of the final rule and subsequently ruled that it, rather than the federal district courts, had jurisdiction over challenges to the rule.  In January 2017, the U.S. Supreme Court agreed to resolve the dispute as to which court should hear challenges to the rule. A ruling is expected in 2018.

In February 2017, President Trump issued an executive order requiring the EPA and the Corps to review and revise the final rule. On June 27, 2017, the agencies issued a proposed rule that rescinds the final rule and reinstates the prior definition of “Water of the U.S.” The agencies are also undertaking a rulemaking to develop a new definition of “Waters of the U.S.”

Federal CWA Effluent Limitations Guidelines (ELG) — In 2015, the EPA issued a final ELG rule for power plants that use coal, natural gas, oil or nuclear materials as fuel and discharge treated effluent to surface waters as well as utility-owned landfills that receive coal combustion residuals.  In 2017, the EPA delayed the compliance date for flue gas desulfurization wastewater and bottom ash transport until November 2020 while the agency conducts a rulemaking process to potentially revise the effluent limitations and pretreatment standards for these waste streams.


41

Federal CWA Section 316(b) — The federal CWA requires the EPA to regulate cooling water intake structures to assure that these structures reflect the best technology available for minimizing adverse environmental impacts to aquatic species. The EPA published the final 316(b) rule in 2014. The rule prescribes technology for protecting fish that get stuck on plant intake screens (known as impingement) and describes a process for site-specific determinations by each state for sites that must protect the small aquatic organisms that pass through the intake screens into the plant cooling systems (known as entrainment). NSP-Wisconsin believes at least two plants could be required by state regulators to make improvements to reduce entrainment. NSP-Wisconsin estimates the likely cost for complying with impingement requirements may be incurred between 2018 and 2027 and is approximately $4 million, while the total cost of entrainment improvements are anticipated to be immaterial. NSP-Wisconsin anticipates these costs will be fully recoverable in rates.

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

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

In March 2017, President Trump signed an executive order requiring the EPA Administrator to review the CPP rule and if appropriate publish proposed rules suspending, revising or rescinding it. Accordingly, the EPA requested that the D.C. Circuit Court hold the litigation in abeyance until the EPA completes its work under the executive order. The D.C. Circuit granted the EPA’s request and is holding the litigation in abeyance, while considering briefs by the parties on whether the court should remand the challenges to the EPA rather than holding them in abeyance, determining whether and how the court continues or ends the stay that currently applies to the CPP.

In October 2017, the EPA published a proposed rule to repeal the CPP, based on an analysis that the CPP exceeds the EPA’s statutory authority under the CAA. In the proposal, the EPA stated it has not yet determined whether it will promulgate a new rule to regulate GHG emissions from existing EGUs. In December 2017, the EPA issued an Advanced Notice of Proposed Rulemaking to take and consider comments on whether to issue a future rule and what such a rule should include.

Revisions to the NAAQS for Ozone — In 2015, the EPA revised the NAAQS for ozone by lowering the eight-hour standard from 75 parts per billion (ppb) to 70 ppb. In November 2017, the EPA published final designations of areas that meet the 2015 ozone standard. NSP-Wisconsin meets the 2015 ozone standard in all areas where its generating units operate.

Asset Retirement Obligations

Recorded AROs — AROs have been recorded for property related to the following: electric production (steam, other and hydro), electric distribution and transmission, natural gas distribution, and general property. The electric production obligations include asbestos, processed water and ash-containment facilities, storage tanks and control panels. The asbestos recognition associated with electric production includes certain specific plants. AROs also have been recorded for NSP-Wisconsin steam production related to processed water and ash-containment facilities such as solid waste landfills.

NSP-Wisconsin has recognized AROs for the retirement costs of natural gas mains and lines and for the removal of electric transmission and distribution equipment, which consists of obligations associated with polychlorinated biphenyl, lithium batteries, mercury and street lighting lamps. The common general ARO includes obligations related to storage tanks.


42

A reconciliation of NSP-Wisconsin’s AROs for the years ended Dec. 31, 2017 and 2016 is as follows:
(Thousands of Dollars)
 
Beginning Balance
Jan. 1, 2017
 
Liabilities Recognized
 
Accretion
 
Cash Flow Revisions
 
Ending Balance
   Dec. 31, 2017 (a)
Electric plant
 
 
 
 
 
 
 
 
 
 
Steam production asbestos
 
$
2,194

 
$
949

(b) 
$
50

 
$
—

 
$
3,193

Steam production ash containment
 
452

 
—

 
15

 
—

 
467

Electric distribution
 
32

 
—

 
3

 
—

 
35

Other
 
376

 
—

 
12

 
—

 
388

Natural gas plant
 
 
 
 
 
 
 
 
 
 
Gas distribution
 
8,293

 
—

 
339

 
1,661

(c) 
10,293

Common and other property
 
 
 
 
 
 
 
 
 
 
Common miscellaneous
 
45

 
—

 
2

 
—

 
47

Total liability (d)
 
$
11,392

 
$
949

 
$
421

 
$
1,661

 
$
14,423


(a) 
There were no ARO liabilities settled during the year ended Dec. 31, 2017.
(b) 
The liability recognized relates to asbestos at the French Island plant.
(c) 
Changes in the gas distribution ARO are mainly related to increased labor costs.
(d) 
Included in other long-term liabilities balance in the consolidated balance sheet.

(Thousands of Dollars)
 
Beginning Balance
Jan. 1, 2016
 
Liabilities Settled
 
Accretion
 
Cash Flow
Revisions
 
Ending Balance
    Dec. 31, 2016 (a)
Electric plant
 
 
 
 
 
 
 
 
 
 
Steam production asbestos
 
$
2,145

 
$
—

 
$
49

 
$
—

 
$
2,194

Steam production ash containment
 
617

 
—

 
18

 
(183
)
 
452

Electric distribution
 
72

 
—

 
3

 
(43
)
 
32

Other
 
391

 
(29
)
 
14

 
—

 
376

Natural gas plant
 
 
 
 
 
 
 
 
 
 
Gas distribution
 
6,367

 
—

 
256

 
1,670

 
8,293

Common and other property
 
 
 
 
 
 
 
 
 
 
Common miscellaneous
 
95

 
—

 
2

 
(52
)
 
45

Total liability (b)
 
$
9,687

 
$
(29
)
 
$
342

 
$
1,392

 
$
11,392

 
(a) 
There were no ARO liabilities recognized during the year ended Dec. 31, 2016.
(b) 
Included in other long-term liabilities balance in the consolidated balance sheet.

Indeterminate AROs — Outside of the known and recorded asbestos AROs, other plants or buildings may contain asbestos due to the age of many of NSP-Wisconsin’s facilities, but no confirmation or measurement of the amount of asbestos or cost of removal could be determined as of Dec. 31, 2017. Therefore, an ARO has not been recorded for these facilities.

43


Removal Costs — NSP-Wisconsin records a regulatory liability for the plant removal costs of generation, transmission and distribution facilities that are recovered currently in rates. Generally, the accrual of future non-ARO removal obligations is not required. However, long-standing ratemaking practices approved by applicable state and federal regulatory commissions have allowed provisions for such costs in historical depreciation rates. These removal costs have accumulated over a number of years based on varying rates as authorized by the appropriate regulatory entities. Given the long time periods over which the amounts were accrued and the changing of rates over time, NSP-Wisconsin has estimated the amount of removal costs accumulated through historic depreciation expense based on current factors used in the existing depreciation rates. Accordingly, the recorded amounts of estimated future removal costs are considered regulatory liabilities. Removal costs as of Dec. 31, 2017 and 2016 were $146 million and $140 million, respectively.

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 Inc.  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.

e prime, Xcel Energy Inc. and its other affiliates were sued along with several other gas marketing companies. These cases were all consolidated in the U.S. District Court in Nevada. Six of the cases remain active, which includes a multi-district litigation (MDL) matter consisting of a Colorado class (Breckenridge), a Wisconsin class (Arandell Corp.), a Missouri class, a Kansas class, and two other cases identified as “Sinclair Oil” and “Farmland.” In March 2017, summary judgment was granted by the MDL judge in favor of Xcel Energy and e prime in the Sinclair Oil and Farmland cases. In November 2017, the U.S District Court in Nevada granted summary judgment against two plaintiffs in the Arandell Corp. case in favor of Xcel Energy and NSP-Wisconsin, leaving only three individual plaintiffs remaining in the litigation. In addition, the plaintiffs’ motions for class certification and remand back to originating courts in these cases were denied in March 2017. Plaintiffs have appealed the summary judgment motions granted in the Farmland and Sinclair Oil cases and the denial of class certification and remand to the U.S. Court of Appeals for the Ninth Circuit (Ninth Circuit). Oral arguments were heard before the Ninth Circuit in February 2018. A final decision is expected by the end of the first quarter of 2019. Xcel Energy, NSP-Wisconsin and e prime have concluded that a loss is remote.

Other Contingencies

See Note 10 for further discussion.

12.
Regulatory Assets and Liabilities

NSP-Wisconsin’s consolidated financial statements are prepared in accordance with the applicable accounting guidance, as discussed in Note 1.  Under this guidance, regulatory assets and liabilities are created for amounts that regulators may allow to be collected, or may require to be paid back to customers in future electric and natural gas rates.  Any portion of the business that is not rate regulated cannot establish regulatory assets and liabilities.  If changes in the utility industry or the business of NSP-Wisconsin no longer allow for the application of regulatory accounting guidance under GAAP, NSP-Wisconsin would be required to recognize the write-off of regulatory assets and liabilities in net income or OCI.


44

The components of regulatory assets shown on the consolidated balance sheets of NSP-Wisconsin at Dec. 31, 2017 and 2016 are:
(Thousands of Dollars)
 
See Note(s)
 
Remaining
Amortization Period
 
Dec. 31, 2017
 
Dec. 31, 2016
Regulatory Assets
 
 
 
 
 
Current
 
Noncurrent
 
Current
 
Noncurrent
Environmental remediation costs
 
1, 11
 
Various
 
$
16,006

 
$
136,146

 
$
10,669

 
$
148,880

Pension and retiree medical obligations (a)
 
7
 
Various
 
5,674

 
87,505

 
5,989

 
93,160

Excess deferred taxes - TCJA
 
6
 
Various
 
—

 
22,605

 
—

 
—

State commission adjustments
 
1
 
Plant lives
 
716

 
15,932

 
703

 
14,008

Recoverable deferred taxes on AFUDC recorded in plant (b)
 
1
 
Plant lives
 
—

 
14,286

 
—

 
22,345

Losses on reacquired debt
 
4
 
Term of related debt
 
655

 
2,678

 
801

 
3,333

Other
 
 
 
Various
 
62

 
3,065

 
—

 
4,462

Total regulatory assets
 
 
 
 
 
$
23,113

 
$
282,217

 
$
18,162

 
$
286,188


(a) 
Includes the non-qualified pension plan.
(b) 
Includes a write-down of $11.3 million as a result of the revaluation of deferred tax gross up at the new federal tax rate at Dec. 31, 2017.

The components of regulatory liabilities shown on the consolidated balance sheets of NSP-Wisconsin at Dec. 31, 2017 and 2016 are:
(Thousands of Dollars)
 
See Note(s)
 
Remaining
Amortization Period
 
Dec. 31, 2017
 
Dec. 31, 2016
Regulatory Liabilities
 
 
 
 
 
Current
 
Noncurrent
 
Current
 
Noncurrent
Excess deferred taxes - TCJA (a)
 
6
 
Various
 
$
—

 
$
236,589

 
$
—

 
$
—

Plant removal costs
 
11
 
Plant lives
 
—

 
146,370

 
—

 
139,735

Deferred electric production and natural gas costs
 
1
 
Less than one year
 
13,950

 
—

 
11,377

 
—

DOE settlement
 
11
 
Less than one year
 
5,261

 
—

 
4,822

 
—

Other
 
 
 
Various
 
1,501

 
3,848

 
1,229

 
8,454

Total regulatory liabilities
 
 
 
 
 
$
20,712

 
$
386,807

 
$
17,428

 
$
148,189

(a) 
Primarily relates to the revaluation of recoverable/regulated plant ADIT and $41.0 million revaluation impact of non-plant ADIT at Dec. 31, 2017.

13.
Other Comprehensive Income

Changes in accumulated other comprehensive loss, net of tax, for the years ended Dec. 31, 2017 and 2016 were as follows:
 
 
Gains and Losses on Cash Flow Hedges
(Thousands of Dollars)
 
Year Ended Dec. 31, 2017
 
Year Ended Dec. 31, 2016
Accumulated other comprehensive loss at Jan. 1
 
$
(133
)
 
$
(209
)
Losses reclassified from net accumulated other comprehensive loss
 
76

 
76

Net current period other comprehensive income
 
76

 
76

 
 
 
 
 
Adoption of ASU No. 2018-02 (a)
 
(12
)
 
—

Accumulated other comprehensive loss at Dec. 31
 
$
(69
)
 
$
(133
)
(a) 
In 2017, NSP-Wisconsin implemented ASU No. 2018-02 related to the TCJA, which resulted in reclassification of certain credit balances within net accumulated other comprehensive loss to retained earnings. For further information, see Note 2.


45

Reclassifications from accumulated other comprehensive loss for the years ended Dec. 31, 2017 and 2016 were as follows:
 
 
Amounts Reclassified from Accumulated
Other Comprehensive Loss
 
(Thousands of Dollars)
 
Year Ended Dec. 31, 2017
 
Year Ended Dec. 31, 2016
 
Losses on cash flow hedges:
 
 
 
 
 
Interest rate derivatives
 
$
126

(a) 
$
127

(a) 
Total, pre-tax
 
126

 
127

 
Tax benefit
 
(50
)
 
(51
)
 
Total amounts reclassified, net of tax
 
$
76

 
$
76

 

(a) 
Included in interest charges.

14.
Segments and Related 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 electricity which is transmitted and distributed in Wisconsin and Michigan.
•
NSP-Wisconsin’s regulated natural gas utility segment purchases, transports, stores and distributes natural gas 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.

The accounting policies of the segments are the same as those described in Note 1.

(Thousands of Dollars)
 
Regulated
Electric
 
Regulated
Natural Gas
 
All Other
 
Reconciling
Eliminations
 
Consolidated
Total
2017
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)
 
$
881,891

 
$
122,353

 
$
1,207

 
$
—

 
$
1,005,451

Intersegment revenues
 
497

 
287

 
—

 
(784
)
 
—

Total revenues
 
$
882,388

 
$
122,640

 
$
1,207

 
$
(784
)
 
$
1,005,451

 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
88,946

 
$
22,070

 
$
200

 
$
—

 
$
111,216

Interest charges and financing costs
 
29,396

 
2,761

 
23

 
—

 
32,180

Income tax expense
 
38,866

 
4,040

 
1,266

 
—

 
44,172

Net income
 
70,876

 
7,832

 
708

 
—

 
79,416


46

(Thousands of Dollars)
 
Regulated
Electric
 
Regulated
Natural Gas
 
All Other
 
Reconciling
Eliminations
 
Consolidated
Total
2016
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)
 
$
849,946

 
$
106,157

 
$
1,130

 
$
—

 
$
957,233

Intersegment revenues
 
397

 
487

 
—

 
(884
)
 
—

Total revenues
 
$
850,343

 
$
106,644

 
$
1,130

 
$
(884
)
 
$
957,233

 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
81,299

 
$
16,794

 
$
201

 
$
—

 
$
98,294

Interest charges and financing costs
 
29,749

 
2,855

 
25

 
—

 
32,629

Income tax expense (benefit)
 
40,547

 
2,445

 
(90
)
 
—

 
42,902

Net income (loss)
 
65,002

 
4,503

 
(370
)
 
—

 
69,135

(Thousands of Dollars)
 
Regulated
Electric
 
Regulated
Natural Gas
 
All Other
 
Reconciling
Eliminations
 
Consolidated
Total
2015
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)
 
$
834,998

 
$
120,147

 
$
1,396

 
$
—

 
$
956,541

Intersegment revenues
 
419

 
498

 
—

 
(917
)
 
—

Total revenues
 
$
835,417

 
$
120,645

 
$
1,396

 
$
(917
)
 
$
956,541

 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
77,036

 
$
14,034

 
$
175

 
$
—

 
$
91,245

Interest charges and financing costs
 
26,494

 
2,637

 
90

 
—

 
29,221

Income tax expense
 
40,654

 
2,501

 
1,083

 
—

 
44,238

Net income
 
69,398

 
4,862

 
376

 
—

 
74,636


(a) 
Operating revenues include $177 million, $170 million and $163 million of intercompany revenue for the years ended Dec. 31, 2017, 2016 and 2015 respectively. See Note 15 for further discussion of related party transactions by operating segment.

15.
Related Party Transactions

Xcel Energy Services Inc. provides management, administrative and other services for the subsidiaries of Xcel Energy Inc., including NSP-Wisconsin. The services are provided and billed to each subsidiary in accordance with service agreements executed by each subsidiary. NSP-Wisconsin uses services provided by Xcel Energy Services Inc. whenever possible. Costs are charged directly to the subsidiary and are allocated if they cannot be directly assigned.

The electric production and transmission costs of the entire NSP System are shared by NSP-Minnesota and NSP-Wisconsin. The Interchange Agreement provides for the sharing of all costs of generation and transmission facilities of the system, including capital costs.

The table below contains significant affiliate transactions among the companies and related parties including billings under the Interchange Agreement for the years ended Dec. 31:
(Thousands of Dollars)
 
2017
 
2016
 
2015
Operating revenues:
 
 
 
 
 
 
Electric
 
$
177,234

 
$
170,483

 
$
163,255

Operating expenses:
 
 
 
 
 
 
Purchased power
 
421,609

 
413,615

 
419,028

Transmission expense
 
68,613

 
61,920

 
54,070

Natural gas purchased for resale
 
47

 
41

 
45

Other operating expenses — paid to Xcel Energy Services Inc.
 
92,715

 
106,454

 
93,890

Interest expense
 
7

 
4

 
2




47

Accounts receivable and payable with affiliates at Dec. 31 were:
 
 
2017
 
2016
(Thousands of Dollars)
 
Accounts
Receivable
 
Accounts
Payable
 
Accounts
Receivable
 
Accounts
Payable
NSP-Minnesota
 
$
—

 
$
17,825

 
$
—

 
$
18,567

PSCo
 
—

 
61

 
—

 
974

SPS
 
—

 
7

 
333

 
—

Other subsidiaries of Xcel Energy Inc.
 
3,391

 
11,735

 
—

 
9,496

 
 
$
3,391

 
$
29,628

 
$
333

 
$
29,037


16.
Summarized Quarterly Financial Data (Unaudited)
 
 
Quarter Ended
(Thousands of Dollars)
 
March 31, 2017
 
June 30, 2017
 
Sept. 30, 2017
 
Dec. 31, 2017
Operating revenues
 
$
264,931

 
$
230,026

 
$
247,511

 
$
262,983

Operating income
 
42,775

 
29,067

 
38,392

 
37,994

Net income
 
22,419

 
14,241

 
22,325

 
20,431

 
 
Quarter Ended
(Thousands of Dollars)
 
March 31, 2016
 
June 30, 2016
 
Sept. 30, 2016
 
Dec. 31, 2016
Operating revenues
 
$
254,850

 
$
219,173

 
$
246,144

 
$
237,066

Operating income
 
35,448

 
27,778

 
46,342

 
30,360

Net income
 
17,631

 
12,625

 
24,221

 
14,658


PART IV

Item 15 — Exhibits, Financial Statement Schedules
1.
Consolidated Financial Statements
 
Management Report on Internal Controls Over Financial Reporting — For the year ended Dec. 31, 2017
 
Report of Independent Registered Public Accounting Firm — Financial Statements
 
Consolidated Statements of Income — For the three years ended Dec. 31, 2017, 2016 and 2015.
 
Consolidated Statements of Comprehensive Income — For the three years ended Dec. 31, 2017, 2016 and 2015.
 
Consolidated Statements of Cash Flows — For the three years ended Dec. 31, 2017, 2016 and 2015.
 
Consolidated Balance Sheets — As of Dec. 31, 2017 and 2016.
 
Consolidated Statements of Common Stockholder’s Equity — For the three years ended Dec. 31, 2017, 2016 and 2015.
 
Consolidated Statements of Capitalization — As of Dec. 31, 2017 and 2016.
 
 
 
2.
Schedule II — Valuation and Qualifying Accounts and Reserves for the years ended Dec. 31, 2017, 2016 and 2015.
 
 
 
3.
Exhibits
 
 
 
*  
Indicates incorporation by reference
+
Executive Compensation Arrangements and Benefit Plans Covering Executive Officers and Directors
#
Previously Filed
 
 
 
 

48


49

101
The following materials from NSP-Wisconsin’s Annual Report on Form 10-K for the year ended Dec. 31, 2017 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Balance Sheets, (v) the Consolidated Statements of Stockholder’s Equity, (vi) the Consolidated Statements of Capitalization, (vii) Notes to Consolidated Financial Statements, (viii) document and entity information, and (ix) Schedule II.

50

SCHEDULE II

NSP-WISCONSIN AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DEC. 31, 2017, 2016 AND 2015
(amounts in thousands)
 
 
 
Additions
 
 
 
 
 
Balance at
Jan. 1
 
Charged to Costs and Expenses
 
Charged to Other
Accounts(a)
 
Deductions from 
Reserves(b)
 
Balance at
Dec. 31
Allowance for bad debts:
 
 
 
 
 
 
 
 
 
2017
$
4,865

 
$
4,105

 
$
952

 
$
5,049

 
$
4,873

2016
5,128

 
3,730

 
1,008

 
5,001

 
4,865

2015
5,821

 
3,947

 
1,161

 
5,801

 
5,128


(a) 
Recovery of amounts previously written off.
(b) 
Deductions relate primarily to bad debt write-offs.


51


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized.

 
 
NORTHERN STATES POWER COMPANY
(A WISCONSIN CORPORATION)
 
 
 
July 27, 2018

/s/ ROBERT C. FRENZEL
 
 
Robert C. Frenzel
 
 
Executive Vice President, Chief Financial Officer and Director
 
 
(Principal Financial Officer)

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT

NSP-Wisconsin has not sent, and does not expect to send, an annual report or proxy statement to its security holder.


52

NORTHERN STATES POWER CO /WI/ Reports