Company Quick10K Filing
Quick10K
Public Service Co of Colorado
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-08-27 Other Events
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-06-21 Other Events, Exhibits
8-K 2018-06-07 Other Events
8-K 2018-05-15 Other Events
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-02-07 Earnings, Exhibits
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DLOC Digital Locations
ENGT Energy & Technology
CNNA Cannamed Enterprises
AEI20 AEI Net Lease Income & Growth Fund XX
ZEST Ecoark Holdings
CRDA Crawford
HHEG Huahui Education Group
KTYB Kentucky Bancshares
PGOL Patriot Gold
PSCO 2018-09-30
Part I - Financial Information
Item 1 - Financial Statements
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 4 - Controls and Procedures
Part II - Other Information
Item 1 - Legal Proceedings
Item 1A - Risk Factors
Item 6 - Exhibits
EX-31.01 pscoex3101q32018.htm
EX-31.02 pscoex3102q32018.htm
EX-32.01 pscoex3201q32018.htm
EX-99.01 pscoex9901q32018.htm

Public Service Co of Colorado Earnings 2018-09-30

PSCO 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 psco9301810-q.htm 10-Q Document
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Sept. 30, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-3280
Public Service Company of Colorado
(Exact name of registrant as specified in its charter)
Colorado
 
84-0296600
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
1800 Larimer, Suite 1100
 
 
Denver, Colorado
 
80202
(Address of principal executive offices)
 
(Zip Code)
(303) 571-7511
(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 every Interactive Data File required to be submitted 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 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 ¨
 
 
 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
 
Oct. 26, 2018
Common Stock, $0.01 par value
 
100 shares

Public Service Company of Colorado meets the conditions set forth in General Instruction H (1) (a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H (2) to such Form 10-Q.
 
 
 
 
 




TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
 
 
 
 
Item l —

Item 2 —

Item 4 —

 
 
 
PART II — OTHER INFORMATION
 
 
 
 
Item 1 —

Item 1A —

Item 6 —

 
 
 

 
 
Certifications Pursuant to Section 302
1

Certifications Pursuant to Section 906
1

Statement Pursuant to Private Litigation
1


This Form 10-Q is filed by Public Service Company of Colorado, a Colorado corporation (PSCo). PSCo 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); Northern States Power Company, a Wisconsin corporation (NSP-Wisconsin); PSCo; and Southwestern Public Service Company, a New Mexico corporation (SPS). NSP-Minnesota, NSP-Wisconsin, PSCo and SPS are also referred to collectively as utility subsidiaries. Additional information on Xcel Energy Inc. and its subsidiaries (collectively, Xcel Energy) is available on various filings with the Securities and Exchange Commission (SEC).



PART I — FINANCIAL INFORMATION

Item 1FINANCIAL STATEMENTS

PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(amounts in thousands)
 
Three Months Ended Sept. 30
 
Nine Months Ended Sept. 30
 
2018
 
2017
 
2018
 
2017
Operating revenues
 
 
 
 
 
 
 
Electric
$
894,786

 
$
877,604

 
$
2,309,255

 
$
2,318,912

Natural gas
157,205

 
142,389

 
707,852

 
691,302

Steam and other
8,688

 
10,300

 
28,736

 
31,529

Total operating revenues
1,060,679

 
1,030,293

 
3,045,843

 
3,041,743

 
 
 
 
 
 
 
 
Operating expenses
 

 
 

 
 
 
 
Electric fuel and purchased power
288,589

 
288,997

 
841,650

 
857,346

Cost of natural gas sold and transported
32,310

 
37,243

 
282,134

 
303,903

Cost of sales — steam and other
3,327

 
4,098

 
10,867

 
11,991

Operating and maintenance expenses
201,390

 
173,392

 
573,456

 
545,874

Demand side management expenses
39,391

 
34,520

 
105,345

 
92,552

Depreciation and amortization
167,961

 
118,289

 
406,121

 
350,796

Taxes (other than income taxes)
50,820

 
47,213

 
153,220

 
146,481

Total operating expenses
783,788

 
703,752

 
2,372,793

 
2,308,943

 
 
 
 
 
 
 
 
Operating income
276,891

 
326,541

 
673,050

 
732,800

 
 
 
 
 
 
 
 
Other income, net
1,399

 
1,023

 
2,429

 
5,546

Allowance for funds used during construction — equity
16,353

 
8,642

 
40,851

 
19,591

 
 
 
 
 
 
 
 
Interest charges and financing costs
 

 
 

 
 
 
 
Interest charges — includes other financing costs of $1,682 and $1,605, $4,855, and $4,669 respectively
53,182

 
49,097

 
154,324

 
141,403

Allowance for funds used during construction — debt
(6,370
)
 
(3,266
)
 
(16,156
)
 
(7,610
)
Total interest charges and financing costs
46,812

 
45,831

 
138,168

 
133,793

 
 
 
 
 
 
 
 
Income before income taxes
247,831

 
290,375

 
578,162

 
624,144

Income taxes
40,719

 
104,298

 
115,033

 
225,934

  Net income
$
207,112

 
$
186,077

 
$
463,129

 
$
398,210

 
See Notes to Consolidated Financial Statements

3


PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(amounts in thousands)
 
 
Three Months Ended Sept. 30
 
Nine Months Ended Sept. 30
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
207,112

 
$
186,077

 
$
463,129

 
$
398,210

 
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 

 
 

 
 
 
 
 
 
 
 
 
Pension and retiree medical benefits:
 
 
 
 
 
 
 
 
Net pension and retiree medical losses arising during the period, net of tax of $(50), $0, $(50) and $0, respectively
 
(153
)
 

 
(153
)
 

Amortization of losses included in net periodic benefit cost, net of tax of $51, $1, $51, and $3, respectively
 
155

 
1

 
159

 
3

 
 
2

 
1

 
6

 
3

 
 
 
 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 

 
 

Reclassification of losses to net income, net of tax of $97, $150, $294 and $455, respectively
 
310

 
257

 
913

 
753

 
 
 
 
 
 
 
 
 
Other comprehensive income
 
312

 
258

 
919

 
756

Comprehensive income
 
$
207,424

 
$
186,335

 
$
464,048

 
$
398,966


See Notes to Consolidated Financial Statements


4


PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
 
Nine Months Ended Sept. 30
 
2018
 
2017
Operating activities
 
 
 
Net income
$
463,129

 
$
398,210

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

 
 

Depreciation and amortization
409,836

 
353,653

Demand side management program amortization


 


Deferred income taxes
66,563

 
223,121

Amortization of investment tax credits
(2,099
)
 
(2,102
)
Allowance for equity funds used during construction
(40,851
)
 
(19,591
)
Net realized and unrealized hedging and derivative transactions
(9,852
)
 
907

Other
1

 
661

Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(737
)
 
4,431

Accrued unbilled revenues
60,079

 
74,918

Inventories
13,557

 
(250
)
Prepayments and other
12,633

 
11,717

Accounts payable
25,303

 
(53,706
)
Net regulatory assets and liabilities
(23,604
)
 
(28,594
)
Other current liabilities
(87,867
)
 
(40,789
)
Pension and other employee benefit obligations
(28,958
)
 
(16,691
)
Change in other noncurrent assets
6,551

 
(1,149
)
Change in other noncurrent liabilities
(26,296
)
 
(1,916
)
Net cash provided by operating activities
837,388

 
902,830

 
 
 
 
Investing activities
 

 
 

Utility capital/construction expenditures
(1,231,585
)
 
(995,680
)
Allowance for equity funds used during construction
40,851

 
19,591

Investments in utility money pool arrangement
(578,000
)
 
(659,000
)
Repayments from utility money pool arrangement
575,000

 
609,000

Other, net

 
(657
)
Net cash used in investing activities
(1,193,734
)
 
(1,026,746
)
 
 
 
 
Financing activities
 

 
 

Repayments of short-term borrowings, net

 
(129,000
)
Borrowings under utility money pool arrangement
526,000

 
40,000

Repayments under utility money pool arrangement
(526,000
)
 
(40,000
)
Proceeds from issuance of long-term debt
691,439

 
393,795

Repayments of long-term debt
(300,000
)
 

Capital contributions from parent
246,829

 
158,080

Dividends paid to parent
(271,884
)
 
(245,291
)
Other
(118
)
 
(110
)
Net cash provided by financing activities
366,266

 
177,474

 
 
 
 
Net change in cash and cash equivalents
9,920

 
53,558

Cash and cash equivalents at beginning of period
7,513

 
5,926

Cash and cash equivalents at end of period
$
17,433

 
$
59,484

 
 
 
 
Supplemental disclosure of cash flow information:
 

 
 

Cash paid for interest (net of amounts capitalized)
$
(145,251
)
 
$
(145,461
)
Cash paid for income taxes, net
(86,418
)
 
(7,752
)
Supplemental disclosure of non-cash investing transactions:
 

 
 

Property, plant and equipment additions in accounts payable
$
134,994

 
$
133,933


See Notes to Consolidated Financial Statements

5


PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands, except share and per share data)
 
Sept. 30, 2018
 
Dec. 31, 2017
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
17,433

 
$
7,513

Accounts receivable, net
299,980

 
294,403

Accounts receivable from affiliates
8,605

 
14,719

Investments in utility money pool arrangement
23,000

 
20,000

Accrued unbilled revenues
235,722

 
295,801

Inventories
187,412

 
214,489

Regulatory assets
111,996

 
77,337

Derivative instruments
16,562

 
3,197

Prepayments and other
28,207

 
35,720

Total current assets
928,917

 
963,179

 
 
 
 
Property, plant and equipment, net
14,839,033

 
14,025,751

 
 
 
 
Other assets
 

 
 

Regulatory assets
987,696

 
950,258

Derivative instruments
3,688

 
1,009

Other
20,542

 
27,429

Total other assets
1,011,926

 
978,696

Total assets
$
16,779,876

 
$
15,967,626

 
 
 
 
Liabilities and Equity
 

 
 

Current liabilities
 

 
 

Current portion of long-term debt
$
406,021

 
$
305,577

Accounts payable
467,173

 
492,829

Accounts payable to affiliates
48,220

 
58,749

Regulatory liabilities
55,587

 
66,126

Taxes accrued
155,131

 
222,517

Accrued interest
38,881

 
48,552

Dividends payable to parent
103,470

 
76,195

Derivative instruments
8,918

 
7,348

Other
88,500

 
92,333

Total current liabilities
1,371,901

 
1,370,226

 
 
 
 
Deferred credits and other liabilities
 

 
 

Deferred income taxes
1,732,686

 
1,644,476

Deferred investment tax credits
25,759

 
27,858

Regulatory liabilities
1,982,649

 
1,933,488

Asset retirement obligations
358,715

 
347,769

Derivative instruments
3,156

 
3,468

Customer advances
166,325

 
162,614

Pension and employee benefit obligations
258,509

 
287,783

Other
49,028

 
58,923

Total deferred credits and other liabilities
4,576,827

 
4,466,379

 
 
 
 
Commitments and contingencies


 


Capitalization
 

 
 

Long-term debt
4,592,382

 
4,302,698

Common stock — 100 shares authorized at $0.01 par value; 100 shares
outstanding at Sept. 30, 2018 and Dec. 31, 2017, respectively

 

Additional paid in capital
4,278,380

 
4,032,826

Retained earnings
1,986,199

 
1,822,229

Accumulated other comprehensive loss
(25,813
)
 
(26,732
)
Total common stockholder’s equity
6,238,766

 
5,828,323

Total liabilities and equity
$
16,779,876

 
$
15,967,626


See Notes to Consolidated Financial Statements

6


PUBLIC SERVICE CO. OF COLORADO 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 PSCo and its subsidiaries as of Sept. 30, 2018 and Dec. 31, 2017; the results of its operations, including the components of net income and comprehensive income, for the three and nine months ended Sept. 30, 2018 and 2017; and its cash flows for the nine months ended Sept. 30, 2018 and 2017. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Management has also evaluated the impact of events occurring after Sept. 30, 2018 up to the date of issuance of these consolidated financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation. The Dec. 31, 2017 balance sheet information has been derived from the audited 2017 consolidated financial statements included in the PSCo Annual Report on Form 10-K for the year ended Dec. 31, 2017. These notes to the consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP on an annual basis have been condensed or omitted pursuant to such rules and regulations. For further information, refer to the consolidated financial statements and notes thereto, included in the PSCo Annual Report on Form 10-K for the year ended Dec. 31, 2017, filed with the SEC on Feb. 23, 2018. Due to the seasonality of PSCo’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 PSCo Annual Report on Form 10-K for the year ended Dec. 31, 2017, appropriately represent, in all material respects, the current status of accounting policies and are incorporated herein by reference.

2.
Accounting Pronouncements

Recently Issued

Leases — In February 2016, the Financial Accounting Standards Board (FASB) issued Leases, Topic 842 (Accounting Standards Update (ASU) No. 2016-02), which for lessees requires balance sheet recognition of right-of-use assets and lease liabilities for most leases. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2018. Adoption will occur on Jan. 1, 2019 utilizing the practical expedients provided by the standard and included in Targeted Improvements, Topic 842 (ASU No. 2018-11). On Jan. 1, 2019, agreements historically disclosed as operating leases for the use of real estate, equipment and certain fossil-fueled generating facilities operated under purchased power agreements (PPAs) are expected to be recognized on the consolidated balance sheet. Other than first-time recognition of these types of operating leases on the consolidated balance sheet, the implementation is not expected to have a significant impact on PSCo’s consolidated financial statements.

Recently Adopted

Revenue Recognition In May 2014, the FASB issued Revenue from Contracts with Customers, Topic 606 (ASU No. 2014-09), which provides a new framework for the recognition of revenue. PSCo 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 material impact on PSCo’s consolidated financial statements. For related disclosures, see Note 13 to the consolidated financial statements.

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

7



Presentation of Net Periodic Benefit Cost — In March 2017, the FASB issued Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, Topic 715 (ASU No. 2017-07), which establishes that only the service cost element of pension cost may be presented as a component of operating income in the income statement. Also under the guidance, only the service cost component of pension cost is eligible for capitalization. As a result of the application of accounting principles for rate regulated entities, a similar amount of pension cost, including non-service components, will be recognized consistent with the historical ratemaking treatment, and the impacts of adoption will be limited to changes in classification of non-service costs in the consolidated statement of income. PSCo implemented the new guidance on Jan. 1, 2018, and as a result, $0.5 million and $1.5 million of pension costs were retrospectively reclassified from operating and maintenance expenses to other income, net on the consolidated income statement for the three and nine months ended Sept. 30, 2017, respectively. Under a practical expedient permitted by the standard, PSCo used benefit cost amounts disclosed for prior periods as the basis for retrospective application.

3.
Selected Balance Sheet Data
(Thousands of Dollars)
 
Sept. 30, 2018
 
Dec. 31, 2017
Accounts receivable, net
 
 
 
 
Accounts receivable
 
$
320,572

 
$
314,009

Less allowance for bad debts
 
(20,592
)
 
(19,606
)
 
 
$
299,980

 
$
294,403

(Thousands of Dollars)
 
Sept. 30, 2018
 
Dec. 31, 2017
Inventories
 
 
 
 
Materials and supplies
 
$
58,198

 
$
68,940

Fuel
 
62,409

 
73,893

Natural gas
 
66,805

 
71,656

 
 
$
187,412

 
$
214,489

(Thousands of Dollars)
 
Sept. 30, 2018
 
Dec. 31, 2017
Property, plant and equipment, net
 
 
 
 
Electric plant
 
$
12,401,598

 
$
12,627,592

Natural gas plant
 
4,269,700

 
4,102,075

Common and other property
 
1,046,991

 
1,022,333

Plant to be retired (a)
 
337,087

 
10,949

Construction work in progress
 
1,575,102

 
1,014,338

Total property, plant and equipment
 
19,630,478

 
18,777,287

Less accumulated depreciation
 
(4,791,445
)
 
(4,751,536
)
 
 
$
14,839,033

 
$
14,025,751


(a) 
In the third quarter of 2018, the Colorado Public Utilities Commission (CPUC) approved early retirement of PSCo’s Comanche Units 1, 2 and shared Common plant in approximately 2022, 2025 and 2025, respectively. PSCo also expects Craig Unit 1 to be early retired in approximately 2025. In the third quarter of 2017, PSCo early retired Valmont Unit 5 and converted Cherokee Unit 4 from a coal-fueled generating facility to natural gas. Amounts are presented net of accumulated depreciation.

4.
Income Taxes

Except to the extent noted below, Note 7 to the consolidated financial statements included in PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 2017 appropriately represents, in all material respects, the current status of other income tax matters, and are incorporated herein by reference.


8


Total income tax expense from operations differs from the amount computed by applying the statutory federal income tax rate to income before income tax expense. The following reconciles such differences:
 
 
Nine Months Ended Sept. 30
 
 
2018
 
2017
Federal statutory rate
 
21.0
 %
 
35.0
 %
State tax (net of federal tax effect)
 
3.7

 
3.0

Increases (decreases) in tax from:
 

 

Regulatory differences - ARAM (a)
 
(2.5
)
 

Regulatory differences - ARAM deferral (b)
 
2.2

 

Regulatory differences - reversal of prior quarters' ARAM deferral (b)
 
(1.5
)
 

Regulatory differences - other utility plant items
 
(1.3
)
 
(1.0
)
Tax credits (net of federal income tax expense)
 
(0.9
)
 
(0.8
)
Other (net)
 
(0.8
)
 

Effective income tax rate
 
19.9
 %
 
36.2
 %
(a)  
The average rate assumption method (ARAM); a method to flow back excess deferred taxes to customers.
(b)
ARAM has been deferred when regulatory treatment has not been established. As PSCO received direction from its regulatory commission regarding the return of excess deferred taxes to customers, the ARAM deferral was reversed. This resulted in a reduction to tax expense with a corresponding reduction to revenue.

Federal Audits  PSCO is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. The statute of limitations applicable to Xcel Energy’s federal income tax returns expire as follows:
Tax Year(s)
 
Expiration
2009 - 2014
 
October 2019
2015
 
September 2019
2016
 
September 2020

In 2012, the Internal Revenue Service (IRS) commenced an examination of tax years 2010 and 2011, including the 2009 carryback claim. In 2017 Xcel Energy and the Office of Appeals (Appeals) reached an agreement and the benefit related to the agreed upon portions was recognized. PSCo did not accrue any income tax benefit related to this adjustment. In the second quarter of 2018, the Joint Committee on Taxation completed its review and took no exception to the agreement. As a result, the remaining unrecognized tax benefit was released and recorded as a payable to the IRS.

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

State Audits — PSCo is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Sept. 30, 2018, PSCo’s earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2009. There are currently no 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.

A reconciliation of the amount of unrecognized tax benefit is as follows:
(Millions of Dollars)
 
Sept. 30, 2018
 
Dec. 31, 2017
Unrecognized tax benefit — Permanent tax positions
 
$
5.1

 
$
4.0

Unrecognized tax benefit — Temporary tax positions
 
4.9

 
6.1

Total unrecognized tax benefit
 
$
10.0

 
$
10.1



9


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)
 
Sept. 30, 2018
 
Dec. 31, 2017
NOL and tax credit carryforwards
 
$
(5.5
)
 
$
(4.0
)

It is reasonably possible that PSCo’s amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS Appeals progresses and the IRS and state audits resume. As the IRS Appeals progresses and the IRS audit resumes, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $8 million.

Payables for interest related to unrecognized tax benefits were not material and no amounts were accrued for penalties related to unrecognized tax benefits as of Sept. 30, 2018 or Dec. 31, 2017.

5.
Rate Matters

Except to the extent noted below, the circumstances set forth in Note 11 to the consolidated financial statements included in PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 2017 and in Note 5 to the consolidated financial statements to PSCo’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018, appropriately represent, in all material respects, the current status of other rate matters, and are incorporated herein by reference.

Tax Reform Regulatory Proceedings

The specific impacts of the TCJA on customer rates are subject to regulatory approval. The following details the status of regulatory decisions.

Natural Gas — In February 2018, the administrative law judge (ALJ) recommended approval of PSCo and the CPUC Staff’s TCJA settlement agreement which included a $20 million reduction to provisional rates effective March 1, 2018. In September 2018, PSCo submitted a TCJA true-up filing and revised its TCJA benefit estimate to $24 million and requested an equity ratio of 56 percent to offset the negative impact of the TCJA on credit metrics. A decision is expected in the fourth quarter of 2018. The true-up of the estimated TCJA benefit is expected to be retroactive to January 2018.

Electric — In April 2018, PSCo, the CPUC Staff, and the Office of Consumer Counsel (OCC) filed a TCJA settlement agreement for 2018 that included a customer refund of $42 million in 2018, with the remainder of the $59 million of TCJA benefits to be used to accelerate the amortization of an existing prepaid pension asset.  In June 2018, the CPUC approved the customer refund of $42 million. In October 2018, the accelerated amortization of the prepaid pension asset was effective by operation of law. For 2019, the expected customer refund is estimated to be $67 million, and amortization of the prepaid pension asset is estimated to be $34 million. Impacts of the TCJA for 2020 and beyond are expected to be addressed in a future electric rate case.

Pending Regulatory Proceedings — CPUC

Colorado 2017 Multi-Year Natural Gas Rate Case — In June 2017, PSCo filed a multi-year request with the CPUC seeking to increase retail natural gas rates approximately $139 million over three years. The request was based on forward test years, a 10.0 percent ROE and an equity ratio of 55.25 percent.
In August 2018, the CPUC issued an interim decision that included application of a 2016 historic test year (HTY), with a 13-month average rate base, an ROE of 9.35 percent, an equity ratio of 54.6 percent and provided no return on the prepaid pension and retiree medical asset.  With these adjustments, the total rate increase, prior to TCJA impacts, would be $47 million. PSCo filed an interim rehearing request to preserve its rights and the CPUC decided that any reconsideration can be brought after a final order incorporating TCJA impacts. The CPUC is expected to issue its order on the natural gas rate case and the final decision related to the impacts of the TCJA in the fourth quarter of 2018.

PSIA Rider
In October 2018, PSCo, CPUC Staff, and the OCC filed a settlement agreement to extend the PSIA rider through 2021. The CPUC is expected to rule on the settlement in the fourth quarter of 2018.


10


6.
Commitments and Contingencies

Except to the extent noted below and in Note 5 to the consolidated financial statements, the circumstances set forth in Notes 11 and 12 to the consolidated financial statements included in PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 2017 and in Notes 5 and 6 to PSCo’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018, appropriately represent, in all material respects, the current status of commitments and contingent liabilities and are incorporated herein by reference. The following include commitments, contingencies and unresolved contingencies that are material to PSCo’s financial position.

PPAs

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

PSCo had approximately 1,571 Megawatts (MW) of capacity under long-term PPAs as of Sept. 30, 2018 and Dec. 31, 2017, with entities that have been determined to be variable interest entities. PSCo has concluded that these entities are not required to be consolidated in its consolidated financial statements because it does not have the power to direct the activities that most significantly impact the entities’ economic performance. These agreements have various expiration dates through 2032.

Environmental Contingencies

Manufactured Gas Plant (MGP), Landfill or Disposal Sites — PSCo is currently involved in investigating and/or remediating several MGP, landfill or other disposal sites. PSCo has identified four sites where investigation and/or remediation activities are currently underway. Other parties may have responsibility for some portion of the investigation and/or remediation activities. PSCo anticipates that these investigation or remediation activities will continue through at least 2019. PSCo accrued $1 million as of Sept. 30, 2018 and an immaterial amount as of Dec. 31, 2017, for these sites. There may be insurance recovery and/or recovery from other responsible parties that will offset any costs incurred.

Environmental Requirements

Water and Waste
Coal Ash Regulation — PSCo’s operations are subject to federal and state laws that impose requirements for handling, storage, treatment and disposal of solid waste. In 2015, the United States Environmental Protection Agency published a final rule regulating the management, storage, and disposal of coal combustion residuals (CCRs) as a nonhazardous waste (CCR Rule).

Under the CCR Rule, utilities are required to complete certain groundwater sampling around their CCR landfills and surface impoundments. PSCo has identified at least one site where there are impoundments and/or landfills present and where a statistically significant increase of certain constituents exist in the groundwater. However, at that location, closure activities are already underway. PSCo is currently conducting additional groundwater sampling and will evaluate whether corrective action is required at any CCR landfills or surface impoundments. Until PSCo completes additional groundwater sampling, it is uncertain what impact, if any, there will be on the operations, financial position or cash flows. PSCo believes that any associated costs would be recoverable through regulatory mechanisms.

Legal Contingencies

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


11


Employment, Tort and Commercial Litigation

Line Extension Disputes — In December 2015, Development Recovery Company (DRC) filed a lawsuit in the Denver District Court, stating PSCo failed to award proper allowances and refunds for line extensions to new developments pursuant to the terms of electric and gas service agreements entered into by PSCo and various developers. The dispute involved claims by over fifty developers. In February 2018, the Colorado Supreme Court denied DRC’s petition to appeal the Denver District Court’s dismissal of the lawsuit, effectively terminating this litigation. However, in January 2018, DRC filed a new lawsuit in Boulder County District Court, asserting a single claim that PSCo was required to file its line extension agreements with the CPUC but failed to do so. This claim is substantially similar to the arguments previously raised by DRC. PSCo filed a motion to dismiss this claim, which was granted in May 2018. DRC subsequently filed an appeal to the Colorado Court of Appeals. It is uncertain when a decision will be rendered regarding this appeal.
 
PSCo has concluded that a loss is remote with respect to this matter as the service agreements were developed to implement CPUC approved tariffs and PSCo has complied with the tariff provisions. Also, if a loss were sustained, PSCo believes it would be allowed to recover these costs through traditional regulatory mechanisms. The amount or range in dispute is presently unknown and no accrual has been recorded for this matter.

7.
Borrowings and Other Financing Instruments

Short-Term Borrowings

Money Pool — Xcel Energy Inc. and its utility subsidiaries have established a money pool arrangement that allows for short-term investments in and borrowings between the utility subsidiaries. Xcel Energy Inc. may make investments in the utility subsidiaries at market-based interest rates; however, the money pool arrangement does not allow the utility subsidiaries to make investments in Xcel Energy Inc. Money pool borrowings for PSCo were as follows:
(Amounts in Millions, Except Interest Rates)
 
Three Months Ended Sept. 30, 2018
 
Year Ended Dec. 31, 2017
Borrowing limit
 
$
250

 
$
250

Amount outstanding at period end
 

 

Average amount outstanding
 

 

Maximum amount outstanding
 

 
20

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

 
0.92
%
Weighted average interest rate at period end
 
N/A

 
N/A


Commercial Paper — PSCo meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under its credit facility and the money pool. Commercial paper outstanding for PSCo was as follows:
(Amounts in Millions, Except Interest Rates)
 
Three Months Ended Sept. 30, 2018
 
Year Ended Dec. 31, 2017
Borrowing limit
 
$
700

 
$
700

Amount outstanding at period end
 

 

Average amount outstanding
 

 
54

Maximum amount outstanding
 

 
268

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

 
1.08
%
Weighted average interest rate at period end
 
N/A

 
N/A


Letters of Credit PSCo uses letters of credit, generally with terms of one year, to provide financial guarantees for certain operating obligations. At Sept. 30, 2018 and Dec. 31, 2017, there were $10 million and $3 million, respectively, of letters of credit outstanding under the credit facility. The contract amounts of these letters of credit approximate their fair value and are subject to fees.

Credit Facility — In order to use its commercial paper program to fulfill short-term funding needs, PSCo 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 credit facility provides short-term financing in the form of notes payable to banks, letters of credit and back-up support for commercial paper borrowings.


12


At Sept. 30, 2018, PSCo had the following committed credit facility available (in millions of dollars):
Credit Facility (a)
 
Drawn (b)
 
Available
$
700

 
$
10

 
$
690


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

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

8.
Fair Value of Financial Assets and Liabilities

Fair Value Measurements

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

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

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

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

Specific valuation methods include the following:

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

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

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

Interest Rate Derivatives — PSCo 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 Sept. 30, 2018, accumulated other comprehensive losses related to interest rate derivatives included $1.2 million of net losses expected to be reclassified into earnings during the next 12 months as the related hedged interest rate transactions impact earnings, including forecasted amounts for unsettled hedges, as applicable.


13


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

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

PSCo enters into derivative instruments that mitigate commodity price risk on behalf of electric and natural gas customers but may not be designated as qualifying hedging transactions. Changes in the fair value of non-trading commodity derivative instruments are recorded in other comprehensive income or deferred as a regulatory asset or liability. The classification as a regulatory asset or liability is based on commission approved regulatory recovery mechanisms. PSCo had no income related to the ineffectiveness of cash flow hedges for the three and nine months ended Sept. 30, 2018 and 2017.

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

The following table details the gross notional amounts of commodity forwards and options at Sept. 30, 2018 and Dec. 31, 2017:
(Amounts in Thousands) (a)(b)
 
Sept. 30, 2018
 
Dec. 31, 2017
Megawatt hours of electricity
 
21,474

 
22,260

Million British thermal units of natural gas
 
30,763

 
13,410


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

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

 
$

 
$
407

(a) 
$

 
$

 
Total
 
$

 
$

 
$
407

 
$

 
$

 
Other derivative instruments
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$

 
$

 
$

 
$
2,004

(b) 
Natural gas commodity
 

 
(1,187
)
 

 

(c) 

(c) 
Total
 
$

 
$
(1,187
)
 
$

 
$

 
$
2,004

 

14


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

 
$

 
$
1,207

(a) 
$

 
$

 
Total
 
$

 
$

 
$
1,207

 
$

 
$

 
Other derivative instruments
 
 

 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$

 
$

 
$

 
$
2,728

(b) 
Natural gas commodity
 

 
(1,607
)
 

 
2,749

(c) 
(1,581
)
(c) 
Total
 
$

 
$
(1,607
)
 
$

 
$
2,749

 
$
1,147

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

 
$

 
$
407

(a) 
$

 
$

 
Total
 
$

 
$

 
$
407

 
$

 
$

 
Other derivative instruments
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$

 
$

 
$

 
$
(211
)
(b) 
Natural gas commodity
 

 
(1,635
)
 

 

 

(c) 
Total
 
$

 
$
(1,635
)
 
$

 
$

 
$
(211
)
 

15


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

 
$

 
$
1,208

(a) 
$

 
$

 
Total
 
$

 
$

 
$
1,208

 
$

 
$

 
Other derivative instruments
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$

 
$

 
$

 
$
(23
)
(b) 
Natural gas commodity
 

 
(8,643
)
 

 
282

(c) 
(2,990
)
(c) 
Total
 
$

 
$
(8,643
)
 
$

 
$
282

 
$
(3,013
)
 

(a) 
Amounts are recorded to interest charges.
(b) 
Amounts are recorded to interest charges. Amounts are recorded to electric operating revenues. Portions of these gains and losses are subject to sharing with electric customers through margin-sharing mechanisms and deducted from gross revenue as appropriate.
(c) 
Certain derivatives are utilized to mitigate natural gas price risk for electric generation and are recorded to electric fuel and purchased power, subject to cost-recovery mechanisms and reclassified to a regulatory asset, as appropriate. Amounts for the three and nine months ended Sept. 30, 2018 included no settlement gains or losses and $1.2 million of settlement losses, respectively. Amounts for the three and nine months ended Sept. 30, 2017 included no settlement gains or losses and $0.9 million of settlement gains, respectively. The remaining derivative settlement gains and losses for the three and nine months ended Sept. 30, 2018 and 2017 relate to natural gas operations and are recorded to cost of natural gas sold and transported. These gains and losses are subject to cost-recovery mechanisms and reclassified out of income to a regulatory asset or liability, as appropriate.

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

Consideration of Credit Risk and Concentrations — PSCo 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 PSCo’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.

PSCo 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.

PSCo’s most significant concentrations of credit risk with particular entities or industries are contracts with counterparties to its wholesale, trading and non-trading commodity activities. At Sept. 30, 2018, four of PSCo’s 10 most significant counterparties for these activities, comprising $24.1 million or 42 percent of this credit exposure, had investment grade credit ratings from Standard & Poor’s, Moody’s or Fitch Ratings. Five of the 10 most significant counterparties, comprising $16.6 million or 29 percent of this credit exposure, were not rated by these external agencies, but based on PSCo’s internal analysis, had credit quality consistent with investment grade. The one remaining significant counterparty, comprising $1.1 million or 2 percent of this credit exposure, had credit quality less than investment grade, based on ratings from external analysis. Eight of these significant counterparties are municipal or cooperative electric entities, or other utilities.

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


16


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

Recurring Fair Value Measurements  The following table presents, for each of the fair value hierarchy levels, PSCo’s assets and liabilities measured at fair value on a recurring basis at Sept. 30, 2018:

 
 
Sept. 30, 2018
 
 
Fair Value
 
Fair Value
Total
 
Counterparty
Netting (b)
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Total
Current derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
695

 
$
21,035

 
$

 
$
21,730

 
$
(6,861
)
 
$
14,869

Natural gas commodity
 

 
1,233

 

 
1,233

 

 
1,233

Total current derivative assets
 
$
695

 
$
22,268

 
$

 
$
22,963

 
$
(6,861
)
 
16,102

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
460

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
16,562

Noncurrent derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
6

 
$
3,682

 
$

 
$
3,688

 
$

 
$
3,688

Total noncurrent derivative assets
 
$
6

 
$
3,682

 
$

 
$
3,688

 
$

 
3,688

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
3,688


 
 
Sept. 30, 2018
 
 
Fair Value
 
Fair Value
Total
 
Counterparty
Netting (b)
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Total
Current derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
580

 
$
20,219

 
$
13

 
$
20,812

 
$
(15,853
)
 
$
4,959

Total current derivative liabilities
 
$
580

 
$
20,219

 
$
13

 
$
20,812

 
$
(15,853
)
 
4,959

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
3,959

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
8,918

Noncurrent derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$
3,156

 
$

 
$
3,156

 
$

 
$
3,156

Total noncurrent derivative liabilities
 
$

 
$
3,156

 
$

 
$
3,156

 
$

 
3,156

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
3,156


(a) 
During 2006, PSCo qualified these contracts under the normal purchase exception. Based on this qualification, the contracts are no longer adjusted to fair value and the previous carrying value of these contracts is being amortized over the remaining contract lives along with the offsetting regulatory assets and liabilities.
(b) 
PSCo nets derivative instruments and related collateral in its consolidated balance sheet when supported by a legally enforceable master netting agreement, and all derivative instruments and related collateral amounts were subject to master netting agreements at Sept. 30, 2018. At Sept. 30, 2018, derivative assets and liabilities include no obligations to return cash collateral and rights to reclaim cash collateral of $9.0 million. The counterparty netting amounts presented exclude settlement receivables and payables and non-derivative amounts that may be subject to the same master netting agreements.


17


The following table presents, for each of the fair value hierarchy levels, PSCo’s assets and liabilities measured at fair value on a recurring basis at Dec. 31, 2017:
 
 
Dec. 31, 2017
 
 
Fair Value
 
Fair Value
Total
 
Counterparty
Netting (b)
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Total
Current derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
528

 
$
4,488

 
$
12

 
$
5,028

 
$
(3,554
)
 
$
1,474

Natural gas commodity
 

 
18

 

 
18

 
(10
)
 
8

Total current derivative assets
 
$
528

 
$
4,506

 
$
12

 
$
5,046

 
$
(3,564
)
 
1,482

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
1,715

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
3,197

Noncurrent derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 

 
 
 
 

 
 

 
 

Commodity trading
 
$

 
$
1,541

 
$

 
$
1,541

 
$
(563
)
 
$
978

Total noncurrent derivative assets
 
$

 
$
1,541

 
$

 
$
1,541

 
$
(563
)
 
978

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
31

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
1,009



 
 
Dec. 31, 2017
 
 
Fair Value
 
Fair Value
Total
 
Counterparty
Netting (b)
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
 
 
Total
Current derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
446

 
$
4,285

 
$
6

 
$
4,737

 
$
(3,431
)
 
$
1,306

Natural gas commodity
 

 
1,016

 

 
1,016

 
(10
)
 
1,006

Total current derivative liabilities
 
$
446

 
$
5,301

 
$
6

 
$
5,753

 
$
(3,441
)
 
2,312

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
5,036

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
7,348

Noncurrent derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$
1,362

 
$

 
$
1,362

 
$
(563
)
 
$
799

Total noncurrent derivative liabilities
 
$

 
$
1,362

 
$

 
$
1,362

 
$
(563
)
 
799

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
$
2,669

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
3,468


(a) 
During 2006, PSCo qualified these contracts under the normal purchase exception. Based on this qualification, the contracts are no longer adjusted to fair value and the previous carrying value of these contracts is being amortized over the remaining contract lives along with the offsetting regulatory assets and liabilities.
(b) 
PSCo nets derivative instruments and related collateral in its consolidated balance sheet when supported by a legally enforceable master netting agreement, and all derivative instruments and related collateral amounts were subject to master netting agreements at Dec. 31, 2017. At Dec. 31, 2017, derivative assets and liabilities include no obligations to return cash collateral or rights to reclaim cash collateral. The counterparty netting amounts presented exclude settlement receivables and payables and non-derivative amounts that may be subject to the same master netting agreements.

There were immaterial gains and losses recognized in earnings for Level 3 commodity trading derivatives in the three and nine months ended Sept. 30, 2018 and 2017.

PSCo recognizes transfers between levels as of the beginning of each period. There were no transfers of amounts between levels for derivative instruments for the three and nine months ended Sept. 30, 2018 and 2017.


18


Fair Value of Long-Term Debt

As of Sept. 30, 2018 and Dec. 31, 2017, other financial instruments for which the carrying amount did not equal fair value were as follows:
 
 
Sept. 30, 2018
 
Dec. 31, 2017
(Thousands of Dollars)
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Long-term debt, including current portion
 
$
4,998,403

 
$
5,090,696

 
$
4,608,275

 
$
5,024,840


The fair value of PSCo’s long-term debt is estimated based on recent trades and observable spreads from benchmark interest rates for similar securities. The fair value estimates are based on information available to management as of Sept. 30, 2018 and Dec. 31, 2017, and given the observability of the inputs to these estimates, the fair values presented for long-term debt have been assigned a Level 2.

9.
Other Income, Net

Other income, net consisted of the following:
 
 
Three Months Ended Sept. 30
 
Nine Months Ended Sept. 30
(Thousands of Dollars)
 
2018
 
2017
 
2018
 
2017
Interest income
 
$
1,366

 
$
1,422

 
$
1,738

 
$
2,406

Other nonoperating income
 
1,098

 
193

 
2,051

 
4,940

Other nonoperating expense
 
(3
)
 

 

 

Insurance policy expense
 
(74
)
 
(79
)
 
(224
)
 
(261
)
Benefits non-service cost
 
(988
)
 
(513
)
 
(1,136
)
 
(1,539
)
Other income, net
 
$
1,399

 
$
1,023

 
$
2,429

 
$
5,546


10.
Segment Information

Operating results from the regulated electric utility and regulated natural gas utility are each separately and regularly reviewed by PSCo’s chief operating decision maker. PSCo 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.

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

PSCo’s regulated electric utility segment generates, transmits and distributes electricity primarily in portions of Colorado. In addition, this segment includes sales for resale and provides wholesale transmission service to various entities in the United States. Regulated electric utility also includes PSCo’s commodity trading operations.
PSCo’s regulated natural gas utility segment transports, stores and distributes natural gas primarily in portions of Colorado.
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 steam revenue, appliance repair services and nonutility real estate activities.

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

To report income from operations for regulated electric and regulated natural gas utility segments, the majority of costs are directly assigned to each segment. However, some costs, such as common depreciation, common operating and maintenance (O&M) expenses and interest expense are allocated based on cost causation allocators. A general allocator is used for certain general and administrative expenses, including office supplies, rent, property insurance and general advertising.

19


(Thousands of Dollars)
 
Regulated Electric
 
Regulated Natural Gas
 
All Other
 
Reconciling Eliminations
 
Consolidated Total
Three Months Ended Sept. 30, 2018
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)(b)
 
$
894,786

 
$
157,205

 
$
8,688

 
$

 
$
1,060,679

Intersegment revenues
 
32

 
292

 

 
(324
)
 

Total revenues
 
$
894,818

 
$
157,497

 
$
8,688

 
$
(324
)
 
$
1,060,679

Net income
 
$
191,742

 
$
15,070

 
$
300

 
$

 
$
207,112

(Thousands of Dollars)
 
Regulated Electric
 
Regulated Natural Gas
 
All Other
 
Reconciling Eliminations
 
Consolidated Total
Three Months Ended Sept. 30, 2017
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)(b)
 
$
877,604

 
$
142,389

 
$
10,300

 
$

 
$
1,030,293

Intersegment revenues
 
47

 
222

 

 
(269
)
 

Total revenues
 
$
877,651

 
$
142,611

 
$
10,300

 
$
(269
)
 
$
1,030,293

Net income
 
$
178,648

 
$
5,815

 
$
1,614

 
$

 
$
186,077

(a)    Operating revenues include an immaterial amount of affiliate electric revenue for the three months ended Sept. 30, 2018 and 2017.
(b)    Operating revenues include $1 million of other affiliate revenue for the three months ended Sept. 30, 2018 and 2017.
(Thousands of Dollars)
 
Regulated
Electric
 
Regulated
Natural Gas
 
All
Other
 
Reconciling
Eliminations
 
Consolidated
Total
Nine Months Ended Sept. 30, 2018
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)(b)
 
$
2,309,255

 
$
707,852

 
$
28,736

 
$

 
$
3,045,843

Intersegment revenues
 
220

 
435

 

 
(655
)
 

Total revenues
 
$
2,309,475

 
$
708,287

 
$
28,736

 
$
(655
)
 
$
3,045,843