UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017March 31, 2018
or
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-03140
Northern States Power Company
(Exact name of registrant as specified in its charter)
Wisconsin 39-0508315
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
1414 West Hamilton Avenue  
Eau Claire, Wisconsin 54701
(Address of principal executive offices) (Zip Code)
(715) 737-2625
(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
 
Accelerated filer ¨
Non-accelerated filer x
 
Smaller reporting company ¨
(Do not check if smaller reporting company) 
Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class Outstanding at July 28, 2017April 27, 2018
Common Stock, $100 par value 933,000 shares
Northern States Power Company (a Wisconsin corporation) meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H (2) to such Form 10-Q.
     



TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION 
   
Item l    
Item 2   
Item 4   
   
PART II — OTHER INFORMATION 
   
Item 1    
Item 1A
Item 6    
   
Certifications Pursuant to Section 3021
Certifications Pursuant to Section 9061
Statement Pursuant to Private Litigation1

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




Table of Contents


PART I — FINANCIAL INFORMATION
Item 1 — FINANCIAL STATEMENTS

NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(amounts in thousands)
Three Months Ended June 30 Six Months Ended June 30Three Months Ended March 31
2017 2016 2017 20162018 2017
Operating revenues          
Electric$210,742
 $202,879
 $427,051
 $414,403
$216,366
 $216,309
Natural gas19,027
 16,005
 67,374
 59,025
56,500
 48,347
Other257
 289
 532
 595
278
 275
Total operating revenues230,026
 219,173
 494,957
 474,023
273,144
 264,931
          
Operating expenses 
  
  
  
 
  
Electric fuel and purchased power, non-affiliates3,583
 3,651
 6,456
 7,632
2,898
 2,873
Purchased power, affiliates101,793
 96,853
 208,251
 205,567
101,311
 106,458
Cost of natural gas sold and transported8,563
 6,465
 34,550
 29,883
28,723
 25,987
Operating and maintenance expenses49,210
 50,516
 99,072
 99,135
50,344
 49,184
Conservation expenses3,177
 3,094
 6,231
 6,160
2,978
 3,054
Depreciation and amortization27,628
 23,720
 54,677
 48,169
30,587
 27,049
Taxes (other than income taxes)7,005
 7,096
 13,878
 14,251
7,313
 6,873
Total operating expenses200,959
 191,395
 423,115
 410,797
224,154
 221,478
          
Operating income29,067
 27,778
 71,842
 63,226
48,990
 43,453
          
Other income, net83
 77
 329
 526
Other (expense), net(359) (432)
Allowance for funds used during construction — equity1,751
 918
 3,038
 1,728
1,855
 1,287
          
Interest charges and financing costs 
  
  
  
 
  
Interest charges — includes other financing costs of $461, $461, $917 and $923, respectively8,656
 8,583
 17,338
 17,187
Interest charges — includes other financing costs of $478 and $456, respectively9,595
 8,682
Allowance for funds used during construction — debt(749) (392) (1,299) (739)(836) (550)
Total interest charges and financing costs7,907
 8,191
 16,039
 16,448
8,759
 8,132
          
Income before income taxes22,994
 20,582
 59,170
 49,032
41,727
 36,176
Income taxes8,753
 7,957
 22,510
 18,776
10,310
 13,757
Net income$14,241
 $12,625
 $36,660
 $30,256
$31,417
 $22,419

See Notes to Consolidated Financial Statements


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NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(amounts in thousands)
Three Months Ended June 30 Six Months Ended June 30Three Months Ended March 31
2017 2016 2017 20162018 2017
Net income$14,241
 $12,625
 $36,660
 $30,256
$31,417
 $22,419
Other comprehensive income 
  
     
  
Derivative instruments: 
  
     
  
Reclassification of losses to net income, net of tax of $12, $12, $24 and $25, respectively19
 19
 38
 38
Reclassification of losses to net income, net of tax of $8 and $12, respectively23
 19
Other comprehensive income19
 19
 38
 38
23
 19
Comprehensive income$14,260
 $12,644
 $36,698
 $30,294
$31,440
 $22,438

See Notes to Consolidated Financial Statements


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NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
Six Months Ended June 30Three Months Ended March 31
2017 20162018 2017
Operating activities      
Net income$36,660
 $30,256
$31,417
 $22,419
Adjustments to reconcile net income to cash provided by operating activities: 
  
 
  
Depreciation and amortization55,434
 48,929
30,987
 27,425
Deferred income taxes22,588
 15,188
1,843
 11,348
Amortization of investment tax credits(262) (264)(131) (131)
Allowance for equity funds used during construction(3,038) (1,728)(1,855) (1,287)
Net derivative losses115
 138
154
 166
Other, net(1,505) 
Other511
 
Changes in operating assets and liabilities: 
  
 
  
Accounts receivable(295) 4,599
(9,504) (10,867)
Accrued unbilled revenues10,846
 6,072
12,026
 12,986
Inventories2,669
 5,429
6,103
 4,806
Other current assets(58) 329
5,854
 4,305
Accounts payable28,882
 12,907
(15,873) 19,809
Net regulatory assets and liabilities(3,112) 1,555
10,518
 656
Other current liabilities(9,191) 589
(1,837) (9,158)
Pension and other employee benefit obligations(8,735) (6,848)(9,200) (8,860)
Change in other noncurrent assets(359) (393)157
 (294)
Change in other noncurrent liabilities(2,696) 555
(474) (800)
Net cash provided by operating activities127,943
 117,313
60,696
 72,523
      
Investing activities 
  
 
  
Utility capital/construction expenditures(90,735) (87,791)(58,488) (47,999)
Allowance for equity funds used during construction3,038
 1,728
1,855
 1,287
Other, net(33) 687
(197) (159)
Net cash used in investing activities(87,730) (85,376)(56,830) (46,871)
      
Financing activities 
  
 
  
Repayments of short-term borrowings, net(14,000) (2,000)
Proceeds from (repayments of) short-term borrowings, net11,000
 (27,000)
Repayments of long-term debt(27) (29)(6) (13)
Capital contributions from (to) parent12,282
 (1,545)
Capital contributions from parent3,326
 12,282
Dividends paid to parent(38,800) (27,850)(15,481) (10,729)
Other, net(70) 
(331) (70)
Net cash used in financing activities(40,615) (31,424)(1,492) (25,530)
      
Net change in cash and cash equivalents(402) 513
2,374
 122
Cash and cash equivalents at beginning of period1,546
 1,079
1,403
 1,546
Cash and cash equivalents at end of period$1,144
 $1,592
$3,777
 $1,668
      
Supplemental disclosure of cash flow information: 
  
 
  
Cash paid for interest (net of amounts capitalized)$(15,062) $(15,718)$(5,751) $(6,020)
Cash paid for income taxes, net(9,699) (3,336)(7,038) (11,489)
Supplemental disclosure of non-cash investing transactions: 
  
 
  
Property, plant and equipment additions in accounts payable$21,867
 $10,220
$21,757
 $15,150

See Notes to Consolidated Financial Statements

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NSP-WISCONSIN AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands, except share and per share data)
June 30, 2017 Dec. 31, 2016March 31, 2018 Dec. 31, 2017
Assets      
Current assets      
Cash and cash equivalents$1,144
 $1,546
$3,777
 $1,403
Accounts receivable, net54,340
 54,031
69,378
 63,200
Accrued unbilled revenues42,792
 53,638
47,982
 60,008
Other receivables15,256
 15,144
Inventories15,640
 18,309
11,655
 17,758
Regulatory assets18,161
 18,162
22,922
 23,113
Prepaid taxes26,244
 25,915
17,768
 23,606
Prepayments and other3,434
 3,785
3,262
 3,450
Total current assets161,755
 175,386
192,000
 207,682
      
Property, plant and equipment, net2,000,347
 1,947,637
2,116,095
 2,088,728
      
Other assets 
  
 
  
Regulatory assets274,107
 286,188
281,875
 282,217
Other investments2,876
 2,844
3,089
 2,892
Other1,143
 785
147
 201
Total other assets278,126
 289,817
285,111
 285,310
Total assets$2,440,228
 $2,412,840
$2,593,206
 $2,581,720
      
Liabilities and Equity 
  
 
  
Current liabilities 
  
 
  
Current portion of long-term debt$1,096
 $1,123
$151,074
 $151,080
Short-term debt46,000
 60,000
22,000
 11,000
Notes payable to affiliates500
 500
500
 500
Accounts payable48,670
 41,068
40,301
 58,365
Accounts payable to affiliates53,294
 29,037
25,823
 29,628
Dividends payable to parent13,840
 10,729
16,042
 15,481
Regulatory liabilities24,140
 17,428
25,032
 20,712
Environmental liabilities29,752
 41,438
12,386
 10,469
Accrued interest8,083
 8,012
10,682
 8,025
Other16,651
 26,484
29,239
 34,474
Total current liabilities242,026
 235,819
333,079
 339,734
      
Deferred credits and other liabilities 
  
 
  
Deferred income taxes454,839
 430,593
258,599
 256,687
Deferred investment tax credits7,775
 8,037
7,383
 7,514
Regulatory liabilities152,588
 148,189
396,304
 386,807
Environmental liabilities17,146
 23,003
20,378
 19,190
Customer advances16,759
 19,425
16,448
 16,325
Pension and employee benefit obligations46,281
 55,164
40,668
 50,027
Other18,857
 18,814
18,322
 18,747
Total deferred credits and other liabilities714,245
 703,225
758,102
 755,297
      
Commitments and contingencies

 



 

Capitalization 
  
 
  
Long-term debt662,306
 661,946
610,038
 610,100
Common stock — 1,000,000 shares authorized of $100 par value; 933,000 shares
outstanding at June 30, 2017 and Dec. 31, 2016, respectively
93,300
 93,300
Common stock — 1,000,000 shares authorized of $100 par value; 933,000 shares
outstanding at March 31, 2018 and Dec. 31, 2017, respectively
93,300
 93,300
Additional paid in capital410,329
 395,315
449,350
 449,350
Retained earnings318,117
 323,368
349,383
 334,008
Accumulated other comprehensive loss(95) (133)(46) (69)
Total common stockholder’s equity821,651
 811,850
891,987
 876,589
Total liabilities and equity$2,440,228
 $2,412,840
$2,593,206
 $2,581,720

See Notes to Consolidated Financial Statements

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

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (GAAP), the financial position of NSP-Wisconsin and its subsidiaries as of June 30, 2017March 31, 2018 and Dec. 31, 2016;2017; the results of its operations, including the components of net income and comprehensive income, for the three and six months ended June 30, 2017March 31, 2018 and 2016;2017; and its cash flows for the sixthree months ended June 30, 2017March 31, 2018 and 2016.2017. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Management has also evaluated the impact of events occurring after June 30, 2017March 31, 2018 up to the date of issuance of these consolidated financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation. The Dec. 31, 20162017 balance sheet information has been derived from the audited 20162017 consolidated financial statements included in the NSP-Wisconsin Annual Report on Form 10-K for the year ended Dec. 31, 2016.2017. These notes to the consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP on an annual basis have been condensed or omitted pursuant to such rules and regulations. For further information, refer to the consolidated financial statements and notes thereto, included in the NSP-Wisconsin Annual Report on Form 10-K for the year ended Dec. 31, 2016,2017, filed with the SEC on Feb. 24, 2017.26, 2018. Due to the seasonality of NSP-Wisconsin’s electric and natural gas sales, interim results are not necessarily an appropriate base from which to project annual results.

1.Summary of Significant Accounting Policies

The significant accounting policies set forth in Note 1 to the consolidated financial statements in the NSP-Wisconsin Annual Report on Form 10-K for the year ended Dec. 31, 2016,2017, appropriately represent, in all material respects, the current status of accounting policies and are incorporated herein by reference.

2.Accounting Pronouncements

Recently Issued

Revenue RecognitionLeases — I In May 2014,n February 2016, the Financial Accounting Standards Board (FASB) issued Revenue from Contracts with Customers,Leases, Topic 606842 (Accounting Standards Update (ASU) No. 2014-09), which provides a new framework for the recognition of revenue. NSP-Wisconsin expects its adoption will result in increased disclosures regarding revenue, cash flows and obligations related to arrangements with customers, as well as separate presentation of alternative revenue programs. NSP-Wisconsin has not yet fully determined the impacts of adoption for several aspects of the standard, including a determination whether and how much an evaluation of the collectability of regulated electric and gas revenues will impact the amounts of revenue recognized upon delivery. NSP-Wisconsin currently expects to implement the standard on a modified retrospective basis, which requires application to contracts with customers effective Jan. 1, 2018, with the cumulative impact on contracts not yet completed as of Dec. 31, 2017 recognized as an adjustment to the opening balance of retained earnings.

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



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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.standard and proposed in Targeted Improvements, Topic 842 (Proposed ASU 2018-200). As such, agreements entered into prior to Jan. 1, 20172019 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 into after Dec. 31, 20162018 will generally qualify as leases under the new standard, but has not yet completed its evaluation of certain other contracts, including arrangementsstandard.

Recently Adopted

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

Classification and Measurement of Financial Instruments — In January 2016, the FASB issued Recognition and Measurement of Financial Assets and Financial Liabilities, Subtopic 825-10 (ASU No. 2016-01), which eliminated the available-for-sale classification for marketable equity securities and also replaced the cost method of accounting for non-marketable equity securities with a model for recognizing impairments and observable price changes. Under the new standard, other than when the consolidation or equity method of accounting is utilized, changes in the fair value of equity securities are recognized in earnings. NSP-Wisconsin implemented the guidance on Jan. 1, 2018 and the implementation did not have a material impact on its consolidated financial statements.

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Presentation of Net Periodic Benefit Cost — In March 2017, the FASB issued Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, Topic 715 (ASU No. 2017-07), which establishes that only the service cost element of pension cost may be presented as a component of operating income in the income statement. Also under the guidance, only the service cost component of pension cost is eligible for capitalization. NSP-Wisconsin has not yet fully determined the impacts of adoption of the standard, but expects that asAs 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 currenthistorical ratemaking treatment, and that the impacts of adoption will be limited to changes in classification of non-service costs in the consolidated statement of income. ThisNSP-Wisconsin implemented the new guidance will be effectiveon Jan. 1, 2018, and as a result, $0.7 million of pension costs were retrospectively reclassified from operating and maintenance expenses to other income, net on the consolidated income statement for interim and annual reportingthe three months ended March 31, 2017. Under a practical expedient permitted by the standard, NSP-Wisconsin used benefit cost amounts disclosed for prior periods beginning after Dec. 15, 2017.as the basis for retrospective application.

3.Selected Balance Sheet Data
(Thousands of Dollars) June 30, 2017 Dec. 31, 2016 March 31, 2018 Dec. 31, 2017
Accounts receivable, net (a)
        
Accounts receivable $58,587
 $58,896
 $74,732
 $68,073
Less allowance for bad debts (4,247) (4,865) (5,354) (4,873)
 $54,340
 $54,031
 $69,378
 $63,200

(a) 
Accounts receivable, net includes an immaterial amount and $3.4 million due from affiliates as of June 30, 2017March 31, 2018 and Dec. 31, 2016,2017, respectively.

(Thousands of Dollars) June 30, 2017 Dec. 31, 2016 March 31, 2018 Dec. 31, 2017
Inventories        
Materials and supplies $7,117
 $6,582
 $7,015
 $6,916
Fuel 4,615
 4,743
 3,842
 3,866
Natural gas 3,908
 6,984
 798
 6,976
 $15,640
 $18,309
 $11,655
 $17,758
(Thousands of Dollars) June 30, 2017 Dec. 31, 2016 March 31, 2018 Dec. 31, 2017
Property, plant and equipment, net        
Electric plant $2,534,258
 $2,499,401
 $2,619,336
 $2,602,671
Natural gas plant 307,217
 294,986
 330,055
 326,723
Common and other property 170,486
 156,316
 182,685
 181,105
Construction work in progress 145,458
 118,822
 178,000
 148,770
Total property, plant and equipment 3,157,419
 3,069,525
 3,310,076
 3,259,269
Less accumulated depreciation (1,157,072) (1,121,888) (1,193,981) (1,170,541)
 $2,000,347
 $1,947,637
 $2,116,095
 $2,088,728

4.Income Taxes

Except to the extent noted below, Note 6 to the consolidated financial statements included in NSP-Wisconsin’s Annual Report on Form 10-K for the year ended Dec. 31, 20162017 appropriately represents, in all material respects, the current status of other income tax matters, and are incorporated herein by reference.


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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:
 Three Months ended March 31
  2018 2017
Federal statutory rate 21.0 % 35.0 %
State tax, net of federal tax effect 6.2
 5.1
Increases (decreases) in tax from:    
Regulatory differences - ARAM (a)
(4.7) (0.2)
Regulatory differences - ARAM deferral (b)
4.6
 
Regulatory differences - other utility plant items(1.7) (1.3)
Other tax credits, net of federal income tax expense(0.8) (0.7)
Other, net0.1
 0.1
Effective income tax rate 24.7 % 38.0 %

(a)
The average rate assumption method (ARAM); a method to flow back excess deferred taxes to customers.
(b)
As we receive further clarity or direction from our commissions regarding the flow back to customers of excess deferred taxes resulting from the TCJA, the ARAM deferral may decrease during the year, which would result in a reduction to tax expense with a correlating reduction to revenue.

Federal Audits NSP-Wisconsin is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. The statute of limitations applicable to Xcel Energy’s 2009 through 2013 federal income tax returns following extensions, expires in December 2017.expire as follows:

Tax Year(s)Expiration
2009 - 2011December 2018
2012 - 2013October 2018
2014September 2018
2015September 2019
2016September 2020


In 2012, the Internal Revenue Service (IRS) commenced an examination of tax years 2010 and 2011, including athe 2009 carryback claim. The IRS has proposed an adjustment to the federal tax loss carryback claims that would resultand in $14 million of income tax expense for the 2009 through 2011 claims, and the 2013 through 2015 claims. In 2016 the IRS audit team and Xcel Energy presented their casesforwarded the issue to the Office of Appeals; however,Appeals (“Appeals”). In 2017 Xcel Energy and Appeals reached an agreement and the outcome and timing of a resolution is uncertain.benefit related to the agreed upon portions was recognized. NSP-Wisconsin isdid not expected to accrue any income tax expensebenefit related to this adjustment. As of March 31, 2018, 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 secondthird quarter of 2017, the IRS concluded the audit of tax years 2012 and 2013 and proposed an adjustment to tax year 2012 that maywould impact Xcel Energy’s net operating loss (NOL) and effective tax rate (ETR). After evaluating the proposed adjustment Xcel Energy is evaluatingfiled a protest with the IRS’ proposal andIRS. Xcel Energy anticipates the issue will be forwarded to Appeals. As of March 31, 2018, 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 June 30, 2017,March 31, 2018, 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 June 30, 2017,March 31, 2018, Wisconsin had not proposed any material adjustments, and there were no other state income tax audits in progress.

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



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A reconciliation of the amount of unrecognized tax benefit is as follows:
(Millions of Dollars) June 30, 2017 Dec. 31, 2016 March 31, 2018 Dec. 31, 2017
Unrecognized tax benefit — Permanent tax positions $0.4
 $0.4
 $1.5
 $1.4
Unrecognized tax benefit — Temporary tax positions 5.1
 4.9
 1.0
 1.0
Total unrecognized tax benefit $5.5
 $5.3
 $2.5
 $2.4

The unrecognized tax benefit amounts were reduced by the tax benefits associated with NOL and tax credit carryforwards. The amounts of tax benefits associated with NOL and tax credit carryforwards are as follows:
(Millions of Dollars) June 30, 2017 Dec. 31, 2016 March 31, 2018 Dec. 31, 2017
NOL and tax credit carryforwards $(1.3) $(1.2) $(1.9) $(1.9)

It is reasonably possible that NSP-Wisconsin’s amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS Appeals progresses and audit progress,resumes, the Wisconsin audit progresses, and other state audits resume. As the IRS Appeals and IRS and Wisconsin audits progress, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $2$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 June 30, 2017March 31, 2018 and Dec. 31, 20162017 were not material. No amounts were accrued for penalties related to unrecognized tax benefits as of June 30, 2017March 31, 2018 or Dec. 31, 2016.2017.

5.Rate Matters

Except to the extent noted below, the circumstances set forth in Note 10 to the consolidated financial statements included in NSP-Wisconsin’s Annual Report on Form 10-K for the year ended Dec. 31, 2016 and in Note 5 to NSP-Wisconsin’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017, appropriately represent, in all material respects, the current status of other rate matters, and are incorporated herein by reference.

Tax Reform Regulatory Proceedings

The specific impacts of the Tax Cuts and Jobs Act (TCJA) on customer rates are subject to regulatory approval. Each of the states in NSP-Wisconsin’s service areas have opened dockets to address the impacts of the TCJA. NSP-Wisconsin has made filings and is working with various stakeholders in its jurisdictions to determine the appropriate treatment for the TCJA.

In January 2018, the Public Service Commission of Wisconsin (PSCW) issued an order requiring public utilities to apply deferred accounting for the impacts of the TCJA. In March 2018, NSP-Wisconsin filed recommended plans for Wisconsin, which for electric operations included an option for an immediate bill credit for a portion of the tax savings in 2018 and 2019, while deferring the remainder until NSP-Wisconsin’s 2020 electric rate case. For the natural gas operations, NSP-Wisconsin proposed using the TCJA to reduce the unamortized regulatory asset for the Ashland/Northern States Power Lakefront Superfund Site (the Site) clean-up. A PSCW decision on the regulatory treatment of the TCJA is anticipated later in 2018.

For Michigan, NSP-Wisconsin has reached settlement in its electric rate case, which reflects the impacts of the TCJA, and has proposed customer refunds for natural gas operations.

Federal Energy Regulatory Commission (FERC) Formula Rates — The FERC has not yet issued guidance on how or when electric utilities should reflect the impacts of the TCJA in FERC jurisdictional wholesale rates. The FERC issued a Notice of Inquiry (NOI) in March 2018 seeking comments on how to reflect TCJA impacts in wholesale rates, in particular changes to accumulated deferred income taxes and bonus depreciation. Comments for the NOI are due in May 2018. However, FERC-approved formula rates for wholesale customers are generally adjusted on an annual basis for certain changes in rate base and actual operating expenses, including income taxes. As a result, these revenues would be subject to an automatic reduction for the effect of the TCJA corporate tax rate change through the annual true-up process, absent specific FERC action.

NSP-Wisconsin was a party to a February 2018 FERC filing by certain transmission owner (TO) members of the Midcontinent Independent System Operator, Inc. (MISO) proposing to commence early reductions to transmission formula rates in 2018 for corporate tax rate impacts of the TCJA. In March 2018, the FERC issued orders granting MISO TO waiver requests so that 2018 rates will reflect the lower federal corporate tax rate.

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Pending
Recently Concluded Regulatory Proceeding — Michigan Public Service Commission of Wisconsin (PSCW)(MPSC)

WisconsinMichigan 2018 Electric and Natural Gas Rate Case In MayNovember 2017, NSP-Wisconsin filed a request with the PSCWMPSC to increase rates for electric ratesservice by $24.7$1 million, or 3.6 percent, and natural gas rates by $12.0 million, or 10.1 percent, effective January 2018.7.1 percent. The rate filing iswas based on a 2018 forecast test year, a 10.1 percent return on equity (ROE) of 10.0 percent,, an equity ratio of 52.5352.5 percent and a forecasted average net investment rate base of approximately $1.2 billion$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 electric utilityMPSC staff, intervenors in the case include the Michigan Attorney General and $138.4 million for the natural gas utility.Association of Businesses Advocating Tariff Equity, a voluntary association of large industrial businesses.

Key datesIn March 2018, NSP-Wisconsin reached a settlement in principle with the procedural scheduleparties authorizing a 2018 rate increase of approximately $300 thousand, or approximately 2.0 percent, which reflects a portion of the TCJA benefits. The settlement was based on a 9.8 percent ROE and a 52.5 percent equity ratio. In April 2018, the MPSC issued an order approving the settlement agreement, and new rates are as follows:

Staff and intervenor testimony — Sept. 12, 2017;
Rebuttal testimony — Sept. 26, 2017;
Sur-rebuttal testimony — Oct. 3, 2017; and
Hearing — Oct. 5, 2017.

A PSCW decision is anticipated in the fourth quarter of 2017.expected to be implemented on May 1, 2018.

Pending Regulatory Proceeding — Federal Energy Regulatory Commission (FERC)FERC

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

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

In February 2015, a second complaint seeking to reduce the MISO ROE from 12.38 percent to 8.67 percent prior to any RTO adder was filed, with the FERC, resulting in a second period of potential refundrefunds from Feb. 12, 2015 to May 11, 2016. In June 2016, thean ALJ recommended a base ROE of 9.7 percent, applying the methodology adopted byFERC Opinion 531 methodology. Various parties filed exceptions to the ALJ recommendation, and FERC in Opinion 531. A final FERC decision on the second ROE complaint was expected later in 2017, but inaction is pending. In April 2017, the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) by opinion, 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. The MISO TOs are evaluating the impact of the D.C. Circuit ruling on the November 2013 and February 2015 ROE complaints.

As of June 30, 2017, NSP-Minnesota has processed refunds for the Nov. 12, 2013 to Feb. 11, 2015 complaint period based on the 10.32 percent ROE provided in the September 2016 FERC order. NSP-Minnesota has also recognized a current refund liability representingconsistent with the best estimate of the final ROE for the Feb. 12, 2015 to May 11, 2016 complaint period.

6.Commitments and Contingencies

Except to the extent noted below and in Note 5 above, the circumstances set forth in Notes 10 and 11 to the consolidated financial statements included in NSP-Wisconsin’s Annual Report on Form 10-K for the year ended Dec. 31, 2016 and in Notes 5 and 6 the consolidated financial statements included in NSP-Wisconsin’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016,2017, appropriately represent, in all material respects, the current status of commitments and contingent liabilities and are incorporated herein by reference. The following include commitments, contingencies and unresolved contingencies that are material to NSP-Wisconsin’s financial position.


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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 has a stated maximum amount. The guarantee contains no recourse provisions and requires no collateral. These agreements have expiration dates through 2020.


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The following table presents the guarantee issued and outstanding for NSP-Wisconsin:
(Millions of Dollars) June 30, 2017 Dec. 31, 2016 March 31, 2018 Dec. 31, 2017
Guarantee issued and outstanding $1.0
 $1.0
 $1.0
 $1.0
Current exposure under this guarantee 
 0.1
 
 

Environmental Contingencies

Ashland Manufactured Gas Plant (MGP) Site — NSP-Wisconsin was named a potentially responsible party (PRP) for contamination at a site in Ashland, Wis. The Ashland/Northern States Power Lakefront Superfund Site (the Site) includes 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,January 2017, NSP-Wisconsin agreed to remediate the Phase II Project Area (the Sediments), under a settlement agreement with the Environmental Protection Agency. 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. Under the current plan, NSP-Wisconsin anticipates completion of restoration activities of the Sediments in 2018 with finalization of Phase I Project Area (which includes the Upper Bluff and Kreher Park areas of the Site), under a settlement agreement with the United States Environmental Protection Agency (EPA).

NSP-Wisconsin performed a wet dredge pilot study in 2016 construction and demonstrated that a wet dredge remedy can meet the performance standards for remediation of the Phase II Project Area (the Sediments). As a result, the EPA authorized NSP-Wisconsin to extend the wet dredge pilot to additional areas of the Site. In January 2017, NSP-Wisconsin agreed to remediate the Sediments, under a settlement agreement with the EPA. The settlement was approved by the U.S. District Court for the Western District of Wisconsin NSP-Wisconsin has initiated field activities to perform a full scale wet dredge remedy of the Sediments in 2017, with performance of restoration activities in 2018.early 2019 although April weather may challenge that schedule. Groundwater treatment activities at the Site will continue.

The current cost estimate for the remediation of the entire site (both Phase I Project Area and the Sediments) is approximately $160.0$172 million, of which approximately $113.2$139 million has been spent. At June 30, 2017As of March 31, 2018 and Dec. 31, 2016,2017, NSP-Wisconsin had recorded a total liability of $46.8$33 million and $64.3$30 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 MayDecember 2017, the PSCW approved an NSP-Wisconsin filed a natural gas rate case, which included recovery of additional expenses associated with remediating the Site. If approved, theThe annual recovery of MGP clean-up costs would increaseincreased from $12.4$12 million in 2017 to $18.1$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 sites. NSP-Wisconsin has identified one site where former MGP disposalcontamination is present and where investigation and/or remediation activities may have resulted in site contamination and is under current investigation. There are othercurrently underway. Other parties that may have responsibility for some portion of any remediation.the investigation and/or remediation activities that are underway. NSP-Wisconsin anticipates that the majority of thethese investigation or remediation at this siteactivities will continue through at least 2018. NSP-Wisconsin had accrued $0.1 million for this site at June 30, 2017as of March 31, 2018 and Dec. 31, 2016. There may be insurance recovery and/or recovery from other PRPs to offset any costs incurred.2017. NSP-Wisconsin anticipates that any significant amounts incurredspent will be fully recovered from customers.

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Environmental Requirements

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

In February 2017, President Trump issued an executive order requiring the EPA and the Corps to review and revise the final rule. On June 27, 2017, the agencies issued a proposed rule that rescinds the 2015 final rule and reinstates the prior 1986 definition of “Water of the U.S.”

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

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

In March 2017, President Trump signed an executive order requiring the EPA Administrator to review the CPP rule and if appropriate, publish proposed rules suspending, revising or rescinding it. Accordingly, the EPA has requested that the D.C. Circuit Court hold the litigation in abeyance until the EPA completes its work under the executive order. The D.C. Circuit granted the EPA’s request to hold the litigation in abeyance until June 27, 2017, and is considering briefs by the parties on whether the court should remand the challenges to the EPA rather than holding them in abeyance, to determine whether and how the court continues or ends the stay that currently applies to the CPP. On June 9, 2017, the EPA submitted a proposed rule to the Office of Management and Budget entitled “Review of the Clean Power Plan.”

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.


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Employment, Tort and Commercial Litigation

Gas Trading Litigation — e prime, inc. (e prime) is a wholly owned subsidiary of Xcel Energy. e prime was in the business of natural gas trading and marketing but has not engaged in natural gas trading or marketing activities since 2003.  Thirteen lawsuits were commenced against e prime and Xcel Energy (and NSP-Wisconsin, in two instances) between 2003 and 2009 alleging fraud and anticompetitive activities in conspiring to restrain the trade of natural gas and manipulate natural gas prices.

Thee 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. FiveSix of the cases have since been settled and seven remain active, which includes onea multi-district litigation (MDL) matter consisting of a Colorado class (Breckenridge), a Wisconsin class (NSP-Wisconsin)(Arandell Corp.), a Missouri class, a Kansas class, and two other cases identified as “Sinclair Oil” and “Farmland.” In November 2016,March 2017, summary judgment was granted by the MDL judge dismissed e prime andin favor of Xcel Energy from the Farmland lawsuit, and Farmland has appealed the dismissal. Motions for summary judgment were filed by defendants, including e prime, in all of the remaining lawsuits. In March 2017, the U.S. District Court issued an order dismissing the claims against e prime in the Sinclair Oil lawsuit and deniedFarmland 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 other lawsuits. The U.S. District Court did not grant e prime’s summary judgment motions granted in the Wisconsin or Colorado cases. There are currently additional motions brought by e primeFarmland and Sinclair Oil cases and the denial of class certification and remand to the U.S. Court of Appeals for reconsiderationthe Ninth Circuit (Ninth Circuit). Oral arguments were heard before the Ninth Circuit in February 2018. In March 2018, the Ninth Circuit reversed and remanded the summary judgment pending in the U.S. District Court.Farmland case. The Farmland defendants subsequently filed a request for further review by the Ninth Circuit. In light of the decision in the Farmland case, the Sinclair plaintiffs have requested the Ninth Circuit to reverse the grant of summary judgment without hearing. Final rulings on all pending motions and appeals are expected by the end of 2018. Xcel Energy, NSP-Wisconsin and e prime have concluded that a loss is remote.

7.Borrowings and Other Financing Instruments

Commercial Paper — NSP-Wisconsin meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under its credit facility. Commercial paper outstanding for NSP-Wisconsin was as follows:
(Amounts in Millions, Except Interest Rates) Three Months Ended June 30, 2017 Year Ended Dec. 31, 2016 Three Months Ended March 31, 2018 Year Ended Dec. 31, 2017
Borrowing limit $150
 $150
 $150
 $150
Amount outstanding at period end 46
 60
 22
 11
Average amount outstanding 26
 15
 18
 52
Maximum amount outstanding 49
 64
 46
 129
Weighted average interest rate, computed on a daily basis 1.15% 0.69% 1.80% 1.23%
Weighted average interest rate at period end 1.36
 0.95
 2.24
 1.73

Letters of Credit — NSP-Wisconsin uses letters of credit, generally with terms of one year, to provide financial guarantees for certain operating obligations. At June 30, 2017March 31, 2018 and Dec. 31, 2016,2017, there were no letters of credit outstanding.

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

At June 30, 2017,March 31, 2018, NSP-Wisconsin had the following committed credit facility available (in millions of dollars):
Credit Facility (a)
Credit Facility (a)
 
Drawn (b)
 Available
Credit Facility (a)
 
Drawn (b)
 Available
$150
 $46
 $104
150
 $22
 $128

(a) 
This credit facility expires 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 June 30, 2017March 31, 2018 and Dec. 31, 2016.2017.

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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) June 30, 2017 Dec. 31, 2016 March 31, 2018 Dec. 31, 2017
Notes payable to affiliates $0.5
 $0.5
 $0.5
 $0.5
Weighted average interest rate at period end 1.55% 0.95% 2.34% 1.73%


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8.Fair Value of Financial Assets and Liabilities

Fair Value Measurements

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

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

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

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

Specific valuation methods include the following:

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

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

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

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 June 30, 2017,March 31, 2018, accumulated other comprehensive loss related to interest rate derivatives included $0.1 million ofimmaterial 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.


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The following table details the gross notional amounts of commodity options at June 30, 2017March 31, 2018 and Dec. 31, 2016:2017:
(Amounts in Thousands) (a)(b)
 June 30, 2017 Dec. 31, 2016
Million British thermal units of natural gas 123
 255
(Amounts in Thousands)(a)(b)
March 31, 2018Dec. 31, 2017
Million British thermal units of natural gas
42

(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.


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Impact of Derivative Activities on Income and Accumulated Other Comprehensive Loss — There were immaterial pre-tax losses related to interest rate derivatives reclassified from accumulated other comprehensive loss into earnings during the three months ended June 30, 2017March 31, 2018 and 2016, and $0.1 million of net losses reclassified from accumulated other comprehensive loss into earnings during the six months ended June 30, 2017 and 2016.2017.

During the three and six months ended June 30,March 31, 2018 and 2017, changes in the fair value of natural gas commodity derivatives resulted in immaterial and $0.1 million of net losses, recognized as regulatory assets and liabilities, respectively. For the three and six months ended June 30, 2016, changes in the fair value of natural gas commodity derivatives resulted in $0.1 million of net gains and $0.1 million of net lossesrespectively, recognized as regulatory assets and liabilities. The classification as a regulatory asset or liability is based on commission approved regulatory recovery mechanisms.

NaturalThere were no natural gas commodity derivativesderivative settlement gains or losses ofrecognized and $0.2 million and $0.6 million wereof losses recognized for the sixthree months ended June 30,March 31, 2018 and 2017, and 2016, respectively, and were subject to purchased natural gas cost recovery mechanisms, which result in reclassifications of derivative settlement gains and losses out of income to a regulatory asset or liability, as appropriate. There were no losses or gains and immaterial natural gas commodity derivatives settlement losses recognized during the three months ended June 30, 2017 and 2016, respectively.

NSP-Wisconsin had no derivative instruments designated as fair value hedges during the three and six months ended June 30, 2017March 31, 2018 and 2016.2017. Therefore, no gains or losses from fair value hedges or related hedged transactions were recognized for these periods.

Consideration of Credit Risk and Concentrations  NSP-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.

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:
                        
 June 30, 2017 March 31, 2018
 Fair Value 
Fair Value
Total
 
Counterparty
Netting (a)
 
Total (b)
 Fair Value 
Fair Value
Total
 
Counterparty
Netting (a)
 
Total (b)
(Thousands of Dollars) Level 1 Level 2 Level 3  Level 1 Level 2 Level 3 
Current derivative assets                        
Natural gas commodity $
 $71
 $
 $71
 $
 $71
 $11
 $
 $
 $11
 $
 $11
 Dec. 31, 2016 Dec. 31, 2017
 Fair Value 
Fair Value
Total
 
Counterparty
Netting (a)
 
Total (b)
 Fair Value 
Fair Value
Total
 
Counterparty
Netting (a)
 
Total (b)
(Thousands of Dollars) Level 1 Level 2 Level 3  Level 1 Level 2 Level 3 
Current derivative assets                        
Natural gas commodity $
 $149
 $
 $149
 $
 $149
 $
 $14
 $
 $14
 $
 $14

(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 June 30, 2017March 31, 2018 and Dec. 31, 2016.2017.  The counterparty netting amounts presented exclude settlement receivables and payables and non-derivative amounts that may be subject to the same master netting agreements.
(b) 
Included in prepayments and other current assets balance of $3.4$3.3 million and $3.8$3.5 million at June 30, 2017March 31, 2018 and Dec. 31, 2016,2017, respectively, in the consolidated balance sheets.


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Fair Value of Long-Term Debt

As of June 30, 2017March 31, 2018 and Dec. 31, 2016,2017, other financial instruments for which the carrying amount did not equal fair value were as follows:
 June 30, 2017 Dec. 31, 2016 March 31, 2018 Dec. 31, 2017
(Thousands of Dollars) Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value Carrying Amount Fair Value
Long-term debt, including current portion $663,402
 $747,072
 $663,069
 $730,284
 $761,112
 $827,506
 $761,180
 $856,106

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 June 30, 2017March 31, 2018 and Dec. 31, 2016,2017, and given the observability of the inputs to these estimates, the fair values presented for long-term debt have been assigned a Level 2.

9.Other Income,(Expense), Net

Other income,(expense), net consisted of the following:
 Three Months Ended June 30 Six Months Ended June 30 Three Months Ended March 31
(Thousands of Dollars) 2017 2016 2017 2016 2018 2017
Interest income $61
 $14
 $204
 $138
 $156
 $143
Other nonoperating income 75
 108
 230
 266
 6
 155
Insurance policy (expense) income (49) (42) (98) 128
Benefits non-service cost (471) (678)
Insurance policy expense (47) (49)
Other nonoperating expense (4) (3) (7) (6) (3) (3)
Other income, net $83
 $77
 $329
 $526
Other (expense), net $(359) $(432)

10.
Segment Information

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

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

NSP-Wisconsin’s regulated electric utility segment generates, transmits and distributes electricity primarily in portions of Wisconsin and Michigan. 
NSP-Wisconsin’s regulated natural gas utility segment purchases, transports, stores and distributes natural gas primarily in portions of Wisconsin and Michigan.
Revenues from operating segments not included above are below the necessary quantitative thresholds and are therefore included in the all other category.  Those primarily include investments in rental housing projects that qualify for low-income housing tax credits.

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

To report income from operations for regulated electric and regulated natural gas utility segments, the majority of costs are directly assigned to each segment.  However, some costs, such as common depreciation, common operating and maintenance 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.

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(Thousands of Dollars) Regulated Electric Regulated Natural Gas All Other Reconciling Eliminations Consolidated Total Regulated Electric Regulated Natural Gas All Other Reconciling Eliminations Consolidated Total
Three Months Ended June 30, 2017          
Three Months Ended March 31, 2018          
Operating revenues (a)
 $210,742
 $19,027
 $257
 $
 $230,026
 $216,366
 $56,500
 $278
 $
 $273,144
Intersegment revenues 123
 68
 
 (191) 
 109
 148
 
 (257) 
Total revenues $210,865
 $19,095
 $257
 $(191) $230,026
 $216,475
 $56,648
 $278
 $(257) $273,144
Net income (loss) $14,516
 $(973) $698
 $
 $14,241
Net income $20,444
 $10,399
 $574
 $
 $31,417
          
(Thousands of Dollars) Regulated Electric Regulated Natural Gas All Other Reconciling Eliminations Consolidated Total Regulated Electric Regulated Natural Gas All Other Reconciling Eliminations Consolidated Total
Three Months Ended June 30, 2016          
Three Months Ended March 31, 2017          
Operating revenues (a)
 $202,879
 $16,005
 $289
 $
 $219,173
 $216,309
 $48,347
 $275
 $
 $264,931
Intersegment revenues 98
 122
 
 (220) 
 96
 114
 
 (210) 
Total revenues $202,977
 $16,127
 $289
 $(220) $219,173
 $216,405
 $48,461
 $275
 $(210) $264,931
Net income (loss) $15,098
 $(2,465) $(8) $
 $12,625
Net income $15,470
 $6,545
 $404
 $
 $22,419
(a) 
Operating revenues include $43$38 million and $42 million of affiliate electric revenue for the three months ended June 30,March 31, 2018 and 2017, and 2016.
           
(Thousands of Dollars) 
Regulated
Electric
 
Regulated
Natural Gas
 All Other 
Reconciling
Eliminations
 
Consolidated
Total
Six Months Ended June 30, 2017          
Operating revenues (a)
 $427,051
 $67,374
 $532
 $
 $494,957
Intersegment revenues 219
 182
 
 (401) 
Total revenues $427,270
 $67,556
 $532
 $(401) $494,957
Net income $29,986
 $5,572
 $1,102
 $
 $36,660
           
(Thousands of Dollars) 
Regulated
Electric
 
Regulated
Natural Gas
 All Other 
Reconciling
Eliminations
 
Consolidated
Total
Six Months Ended June 30, 2016          
Operating revenues (a)
 $414,403
 $59,025
 $595
 $
 $474,023
Intersegment revenues 207
 202
 
 (409) 
Total revenues $414,610
 $59,227
 $595
 $(409) $474,023
Net income $26,599
 $3,627
 $30
 $
 $30,256
(a)
Operating revenues include $85 million and $84 million of affiliate electric revenue for the six months ended June 30, 2017 and 2016, respectively.

11.Benefit Plans and Other Postretirement Benefits

Components of Net Periodic Benefit Cost
                
 Three Months Ended June 30 Three Months Ended March 31
 2017 2016 2017 2016 2018 2017 2018 2017
(Thousands of Dollars) Pension Benefits 
Postretirement Health
Care Benefits
 Pension Benefits 
Postretirement Health
Care Benefits
Service cost $1,155
 $1,104
 $7
 $6
 $1,195
 $1,154
 $9
 $7
Interest cost(a) 1,555
 1,704
 148
 163
 1,360
 1,554
 142
 148
Expected return on plan assets(a) (2,295) (2,289) (8) (6) (2,256) (2,295) (16) (8)
Amortization of prior service cost (credit)(a) 34
 28
 (88) (88) (8) 35
 (88) (88)
Amortization of net loss(a) 1,461
 1,348
 109
 83
 1,418
 1,462
 139
 109
Net periodic benefit cost $1,709
 $1,910
 $186
 $168
Credits not recognized due to the effects of regulation

 $221
 $
 $
 $
Net benefit cost recognized for financial reporting $1,910
 $1,895
 $168
 $158
 $1,930
 $1,910
 $186
 $168

17

Tablea) The components of Contentsnet periodic cost other than the service cost component are included in the line item “other income, net” in the


         
         
  Six Months Ended June 30
  2017 2016 2017 2016
(Thousands of Dollars) Pension Benefits 
Postretirement Health
Care Benefits
Service cost $2,309
 $2,208
 $14
 $12
Interest cost 3,109
 3,408
 296
 326
Expected return on plan assets (4,590) (4,578) (16) (12)
Amortization of prior service cost (credit) 69
 56
 (176) (176)
Amortization of net loss 2,923
 2,696
 218
 166
Net benefit cost recognized for financial reporting $3,820
 $3,790
 $336
 $316
income statement or capitalized on the balance sheet as a regulatory asset.

In January 2017,2018, contributions of $150.0$150 million were made across four of Xcel Energy’s pension plans, of which $9.0$10.0 million was attributable to NSP-Wisconsin. Xcel Energy does not expect additional pension contributions during 2017.2018.


12.Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive loss, net of tax, for the three and six months ended June 30,March 31, 2018 and 2017 and 2016 were as follows:
        
 
Gains and Losses on
Cash Flow Hedges
 
Gains and Losses on
Cash Flow Hedges
(Thousands of Dollars) Three Months Ended June 30, 2017 Three Months Ended June 30, 2016 Three Months Ended March 31, 2018 Three Months Ended March 31, 2017
Accumulated other comprehensive loss at April 1 $(114) $(190)
Accumulated other comprehensive loss at Jan. 1 $(69) $(133)
Losses reclassified from net accumulated other comprehensive loss 19
 19
 23
 19
Net current period other comprehensive income 19
 19
 23
 19
Accumulated other comprehensive loss at June 30 $(95) $(171)
Accumulated other comprehensive loss at March 31 $(46) $(114)
  
Gains and Losses on
Cash Flow Hedges
(Thousands of Dollars) Six Months Ended June 30, 2017 Six Months Ended June 30, 2016
Accumulated other comprehensive loss at Jan. 1 $(133) $(209)
Losses reclassified from net accumulated other comprehensive loss 38
 38
Net current period other comprehensive income 38
 38
Accumulated other comprehensive loss at June 30 $(95) $(171)

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Reclassifications from accumulated other comprehensive loss for the three and six months ended June 30,March 31, 2018 and 2017 and 2016 were as follows:
      
  
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
 
(Thousands of Dollars) Three Months Ended June 30, 2017 Three Months Ended June 30, 2016 
Losses on cash flow hedges:     
Interest rate derivatives $31
(a) 
$31
(a) 
Total, pre-tax 31
 31
 
Tax benefit (12) (12) 
Total amounts reclassified, net of tax $19
 $19
 

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Amounts Reclassified from
Accumulated Other
Comprehensive Loss
 
(Thousands of Dollars) Three Months Ended March 31, 2018 Three Months Ended March 31, 2017 
Losses on cash flow hedges:     
Interest rate derivatives $31
(a) 
$31
(a) 
Total, pre-tax 31
 31
 
Tax benefit (8) (12) 
Total amounts reclassified, net of tax $23
 $19
 
  
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
 
(Thousands of Dollars) Six Months Ended June 30, 2017 Six Months Ended June 30, 2016 
Losses on cash flow hedges:     
Interest rate derivatives $62
(a) 
$63
(a) 
Total, pre-tax 62
 63
 
Tax benefit (24) (25) 
Total amounts reclassified, net of tax $38
 $38
 

(a) 
Included in interest charges.

13. Revenues

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

NSP-Wisconsin has various rate-adjustment mechanisms in place that provide for the recovery of natural gas, electric fuel and purchased energy costs. These cost-adjustment tariffs may increase or decrease the level of revenue collected from customers and are revised periodically for differences between the total amount collected under the clauses and the costs incurred. When applicable,
under governing regulatory commission rate orders, fuel cost over-recoveries (the excess of fuel revenue billed to customers over fuel
costs incurred) are deferred as regulatory liabilities and under-recoveries (the excess of fuel costs incurred over fuel revenues billed to
customers) are deferred as regulatory assets. 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.

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

In the following tables, revenue is classified by the type of goods/services rendered and market/customer type. The tables also reconcile revenue to the reportable segments.


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  Three Months Ended March 31, 2018
(Thousands of Dollars) Regulated Electric Regulated Natural Gas All Other Total
Major revenue types        
Revenue from contracts with customers:        
Residential $67,803
 $30,326
 $16
 $98,145
Commercial and industrial (C&I) 104,817
 24,550
 25
 129,392
Other 1,606
 
 237
 1,843
Total retail 174,226
 54,876
 278
 229,380
Interchange 37,674
 
 
 37,674
Other 1,504
 1,007
 
 2,511
Total revenue from contracts with customers 213,404
 55,883
 278
 269,565
Alternative revenue and other 2,962
 617
 
 3,579
Total revenues $216,366
 $56,500
 $278
 $273,144
  Three Months Ended March 31, 2017
(Thousands of Dollars) Regulated Electric Regulated Natural Gas All Other Total
Major revenue types        
Revenue from contracts with customers:        
Residential $66,043
 $26,628
 $20
 $92,691
C&I 102,380
 20,258
 24
 122,662
Other 1,520
 
 231
 1,751
Total retail 169,943
 46,886
 275
 217,104
Interchange 42,378
 
 
 42,378
Other 969
 908
 
 1,877
Total revenue from contracts with customers 213,290
 47,794
 275
 261,359
Alternative revenue and other 3,019
 553
 
 3,572
Total revenues $216,309
 $48,347
 $275
 $264,931



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

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

Financial Review

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


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Forward-Looking Statements

Except for the historical statements contained in this report, the matters discussed herein, are forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements including the TCJA’s impact to NSP-Wisconsin and its customers, as well as assumptions and other statements are intended to be identified in this document by the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should”“should,” “will,” “would” and similar expressions. Actual results may vary materially. Forward-looking statements speak only as of the date they are made, and we expressly disclaim any obligation to update any forward-looking information. The following factors, in addition to those discussed elsewhere in this Quarterly Report on Form 10-Q and in other securities filings (including NSP-Wisconsin’s Annual Report on Form 10-K for the fiscal year ended Dec. 31, 20162017 and subsequent securities filings), could cause actual results to differ materially from management expectations as suggested by such forward-looking information: general economic conditions, including inflation rates, monetary fluctuations and their impact on capital expenditures and the ability of NSP-Wisconsin and its subsidiaries to obtain financing on favorable terms; business conditions in the energy industry; including the risk of a slow down in the U.S. economy or delay in growth, recovery, trade, fiscal, taxation and environmental policies in areas where NSP-Wisconsin has a financial interest; customer business conditions; actions of credit rating agencies; competitive factors including the extent and timing of the entry of additional competition in the markets served by NSP-Wisconsin and its subsidiaries; unusual weather; effects of geopolitical events, including war and acts of terrorism; cyber security threats and data security breaches; state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rates or have an impact on asset operation or ownership or impose environmental compliance conditions; structures that affect the speed and degree to which competition enters the electric and natural gas markets; costs and other effects of legal and administrative proceedings, settlements, investigations and claims; financial or regulatory accounting policies imposed by regulatory bodies; outcomes of regulatory proceedings; availability or cost of capital; and employee work force factors.

Non-GAAP Financial Measures

19

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

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

Results of Operations

NSP-Wisconsin’s net income was approximately $36.7$31 million for 2017 year-to-datethe three months ended March 31, 2018 compared with approximately $30.3$22 million for the same period of 2016.in 2017. The increase is due to higher electric margins primarilywas driven by rate increaseshigher natural gas and electric rates and the impact of favorable weather, partially offset by additional depreciation.depreciation and amortization expense related to higher invested capital.


20



Electric Revenues and Margin

Electric production expenses tend to vary with the quantity of electricity sold and changes in the unit costs of fuel and purchased power. The electric fuel and purchased power cost recovery mechanism of the Wisconsin jurisdiction may not allow for complete recovery of all expenses and, therefore, changes in fuel or purchased power costs can impact earnings. The following table details the electric revenues and margin:
 Six Months Ended June 30 Three Months Ended March 31
(Millions of Dollars) 2017 2016 2018 2017
Electric revenues $427
 $414
 $221
 $216
Electric fuel and purchased power (215) (213) (104) (109)
Electric Margin before impact of the TCJA $117
 $107
Impact of the TCJA (5) 
Electric margin $212
 $201
 $112
 $107

The following tables summarize the components of the changes in electric revenues and electric margin for the sixthree months ended
June 30, 2017:March 31, 2018:
 
Electric Revenues
(Millions of Dollars) 2017 vs. 2016 2018 vs. 2017
Retail rate increase $7
Fuel and purchased power cost recovery 5
Retail rate increase (Wisconsin) $5
Estimated impact of weather 3
Interchange agreement billings with NSP-Minnesota (5)
Other, net 1
 2
Total increase in electric revenues before impact of the TCJA

 $5
Impact of TCJA (offset as a reduction in income tax expense)

 (5)
Total increase in electric revenues $13
 $
 
Electric Margin
(Millions of Dollars) 2017 vs. 2016 2018 vs. 2017
Retail rate increase $7
Retail rate increase (Wisconsin) $5
Estimated impact of weather 3
Purchased capacity costs 2
Interchange agreement billings with NSP-Minnesota 6
 1
Other, net (2) (1)
Total increase in electric margin before impact of the TCJA


 $10
Impact of TCJA (offset as a reduction in income tax expense)

 (5)
Total increase in electric margin $11
 $5

Natural Gas Revenues and Margin
 
Total natural gas expense tends to vary with changing sales requirements and the cost of natural gas purchases. However, due to the design of purchased natural gas cost recovery mechanisms to recover current expenses for sales to retail customers, fluctuations in the cost of natural gas have little effect on natural gas margin. The following table details the natural gas revenues and margin:
 Six Months Ended June 30 Three Months Ended March 31
(Millions of Dollars) 2017 2016 2018 2017
Natural gas revenues $67
 $59
 $57
 $48
Cost of natural gas sold and transported (35) (30) (29) (26)
Natural gas margin before impact of the TCJA $28
 $22
Impact of the TCJA (offset as a reduction in income tax expense) (1) 
Natural gas margin $32
 $29
 $27
 $22


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The following tables summarize the components of the changes in natural gas revenues and natural gas margin for the sixthree months ended June 30, 2017:March 31, 2018:

Natural Gas Revenues
(Millions of Dollars) 2017 vs. 2016 2018 vs. 2017
Retail rate increase (Wisconsin and Michigan) $3
Estimated impact of weather 3
Purchased natural gas adjustment clause recovery $5
 2
Retail rate increase 2
Estimated impact of weather 1
Other, net 1
Total increase in natural gas revenues before impact of the TCJA $9
Impact of TCJA (offset as a reduction in income tax expense)

 (1)
Total increase in natural gas revenues $8
 $8

Natural Gas Margin
(Millions of Dollars) 2017 vs. 2016 2018 vs. 2017
Retail rate increase $2
Retail rate increase (Wisconsin and Michigan) $3
Estimated impact of weather 1
 3
Total increase in natural gas margin before impact of the TCJA

 $6
Impact of TCJA (offset as a reduction in income tax expense) (1)
Total increase in natural gas margin $3
 $5

Non-Fuel Operating Expenses and Other Items

Depreciation and Amortization — Depreciation and amortization expense increased $6.5$4 million, or 13.513.1 percent for 2017 year-to-date.the first quarter of 2018. The increase was primarily attributable to capital investments.investments due to planned system investments and increased amortization at the Ashland/Northern States Power Lakefront Superfund Site.

Income Taxes Income tax expense increased $3.7decreased $3 million for 2017 year-to-date.the first quarter of 2018 compared with the same period in 2017. The increase in income tax expensedecrease was primarily due to higher pretax earningsthe decrease in 2017.the federal tax rate due to the Tax Cuts and Jobs Act and an increase in plant-related regulatory differences related to ARAM. These were partially offset by the deferral of the effects of ARAM. The ETR was 38.024.7 percent for 2017 year-to-date,the first quarter of 2018 compared with 38.338.0 percent for the same period in 2016.2017. The lower ETR in 2018 is primarily due to the items referenced above.

Public Utility Regulation

Except to the extent noted below, the circumstances set forth in Public Utility Regulation included in Item 1 of NSP-Wisconsin’s Annual Report on Form 10-K for the year ended Dec. 31, 2016 and Public Utility Regulation included in Item 2 of NSP-Wisconsin’s
Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017 appropriately represent, in all material respects, the current status of public utility regulation and are incorporated herein by reference.

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

In 2015, the PSCW issued its order approving a CPCN and route for the project. Two groups have appealed the CPCN order to the La Crosse County Circuit Court (Circuit Court). In May 2017, the Circuit Court determined that the project was necessary, allowing construction to continue on a seven mile segment near La Crosse, Wis. The parties have appealed various aspects of the case to the Wisconsin Court of Appeals, which is currently pending. The CPCN remains in full effect unless one of the parties seeks and receives a stay from the court and posts a bond to cover damages the utilities may incur due to delay. The 180-mile project is expected to cost approximately $541 million. NSP-Wisconsin’s portion of the investment, which includes allowance for funds used during construction, is estimated to be approximately $200 million. Construction on the line began in January 2016, with completion anticipated by late 2018.

2016 Electric Fuel Cost Recovery — NSP-Wisconsin’s electric fuel costs for the year ended Dec. 31, 2016 were lower than authorized in rates and outside the two percent annual tolerance band established in the Wisconsin fuel cost recovery rules, primarily due to lower sales volume and lower purchased power costs coupled with moderate weather. Under the fuel cost recovery rules, NSP-Wisconsin may retain the amount of over-recovery up to two percent of authorized annual fuel costs, or approximately $3.4 million. However, NSP-Wisconsin must defer the amount of over-recovery in excess of the two percent annual tolerance band for future refund to customers. In July 2017, the PSCW required NSP-Wisconsin to provide a refund of $9.5 million to customers, which is expected to start in September 2017.


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2017 Electric Fuel Cost Recovery NSP-Wisconsin’s electric fuel costs for the six months ended June 30, 2017 were lower than authorized in rates and outside the two percent annual tolerance band, established in the Wisconsin fuel cost recovery rules, primarily due to lower sales volume and lower purchased power costs coupled with moderate weather and generation sales into the MISO market. Under the fuel cost recovery rules, NSP-Wisconsin may retain the amountapproximately $4 million of over-recovery up to two percent of authorized annual fuel costs or approximately $3.7 million.  However, NSP-Wisconsin mustand defer the amount of over-recovery in excess of the two percent annual tolerance band for future refund to customers. Accordingly, NSP-Wisconsin recorded a deferral of approximately $3.0 million through June 30, 2017.  The amount of the deferral could increase or decrease based on actual fuel costs incurred for the remainder of the year.  In the first quarter ofMarch 2018, NSP-Wisconsin will filefiled a reconciliation of 2017 fuel costs with the PSCW.PSCW indicating a refund liability of approximately $10 million. The final amount of any potentialthe refund is subject to review and approval by the PSCW, which is not expected until mid-2018.in mid- 2018.


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Summary of Recent Federal Regulatory Developments

FERC

The FERC has jurisdiction over rates for electric transmission service in interstate commerce and electricity sold at wholesale, hydro facility licensing, natural gas transportation, asset transactions and mergers, accounting practices and certain other activities of NSP-Wisconsin, including enforcement of North American Electric Reliability Corporation mandatory electric reliability standards. State and local agencies have jurisdiction over many of NSP-Wisconsin’s activities, including regulation of retail rates and environmental matters. See additional discussion in the summary of recent federal regulatory developments and public utility regulation sections of the NSP-Wisconsin Annual Report on Form 10-K for the year ended Dec. 31, 2016 and Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2017. In addition to the matters discussed below, see Note 5 to the consolidated financial statements for a discussion of other regulatory matters.

StatusXcel Energy, which includes NSP-Wisconsin, attempts to mitigate the risk of regulatory penalties through formal training on
prohibited practices and a compliance function that reviews interaction with the markets under FERC Commissioners — The FERC is normally comprised of five commissioners appointed by the President and confirmed by the Senate. There is currently only one sitting commissioner.  Without three commissioners, the FERC does not have a quorumCommodity Futures Trading Commission jurisdictions. Public campaigns are conducted to act on contested matters. The lack of a quorum could affect the timing of FERC decisions on proposed rules or pending, newly submitted and future filings involving, among other things, contested electric rate matters and CPCNs for construction of interstate natural gas pipeline facilities to serve the utility subsidiaries.  NSP-Wisconsin does not expect any disruption in operations or material delay in decisions on contested matters pending before the FERC. President Trump has submitted nominations to fill threeraise awareness of the vacant seats and has indicated his intentpublic safety issues of interacting with our electric systems. While programs to submit one additional nomination. The three submitted nominationscomply with regulatory requirements are pending confirmation byin place, there is no guarantee the full Senate.compliance programs or other measures will be sufficient to ensure against violations.

FERC Order, ROE Policy — In June 2014, the FERC adopted a two-step ROE methodology for electric utilities in an order (Opinion 531) issued in a complaint proceeding involving New England Transmission Owners (NETOs). The issue of how to apply the FERC ROE methodology has been contested in various complaint proceedings, including two ROE complaints involving the MISO TOs, which includesinclude NSP-Minnesota and NSP-Wisconsin. In April 2017, the D.C. Circuit vacated and remanded the June 2014 ROE order. The D.C. Circuit found that the FERC had not properly determined that the ROE authorized for the NETOs prior to June 2014 was unjust and unreasonable. The D.C. Circuit also found that the FERC failed to justify the new ROE methodology. The FERC has yet to act on the D.C. Circuit’s decision and cannot act without a quorum.decision. See Note 5 to the consolidated financial statements for discussion of the D.C. Circuit’s decision and the impact on the MISO ROE Complaints.

Item 4 — CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

NSP-Wisconsin maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. In addition, the disclosure controls and procedures ensure that information required to be disclosed is accumulated and communicated to management, including the chief executive officer (CEO) and chief financial officer (CFO), allowing timely decisions regarding required disclosure. As of June 30, 2017,March 31, 2018, based on an evaluation carried out under the supervision and with the participation of NSP-Wisconsin’s management, including the CEO and CFO, of the effectiveness of its disclosure controls and the procedures, the CEO and CFO have concluded that NSP-Wisconsin’s disclosure controls and procedures were effective.


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Internal Control Over Financial Reporting

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

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

Part II — OTHER INFORMATION

Item 1 — LEGAL PROCEEDINGS

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


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Additional Information

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

Item 1A — RISK FACTORS

NSP-Wisconsin’s risk factors are documented in Item 1A of Part I of its Annual Report on Form 10-K for the year ended Dec. 31, 2016,2017, which is incorporated herein by reference. There have been no material changes from the risk factors previously disclosed in the Form 10-K.

Item 6 — EXHIBITS
*Indicates incorporation by reference
+Executive Compensation Arrangements and Benefit Plans Covering Executive Officers and Directors
3.01*
3.02*
101The following materials from NSP-Wisconsin’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017March 31, 2018 are formatted in XBRL (eXtensible Business Reporting Language):  (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Balance Sheets, (v) Notes to Consolidated Financial Statements, and (vi) document and entity information.

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SIGNATURES

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

  Northern States Power Company (a Wisconsin corporation)
   
July 28, 2017April 27, 2018By:/s/ JEFFREY S. SAVAGE
  Jeffrey S. Savage
  Senior Vice President, Controller
  (Principal Accounting Officer)
   
  /s/ ROBERT C. FRENZEL
  Robert C. Frenzel
  Executive Vice President, Chief Financial Officer and Director
  (Principal Financial Officer)

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