Legalectric

Xcel Energy’s 2Q report came out almost two weeks ago (where DOES the time go?!?!), and one part stuck out:

I think the strongest sales that we are seeing are at SPS, based upon the energy related businesses they had down there. We are also seeing on the C&I sides, some pretty good pick up in Wisconsin.  Again, that’s energy-related, but in this case, it’s more sand mining, which has really become quite the business in that part of Wisconsin.

This came from their transcript, on Seeking Alpha, linked above.  So who is looking at the impacts of frac sand mining on energy use, sales and peak demand?

The earnings call and other info is available on Xcel’s Investor site at www.xcelenergy.com.  CLICK HERE FOR THEIR INVESTOR RELATIONS PAGE (may need to agree to their “Safe Harbor Statement” to get here) Xcel’s demand isn’t anything to write home about, this from their 8/2/2012 Xcel Energy Second Quarter 2012 Earnings Report:

And from the SEC:

Xcel’s 10-Q filed with SEC

And in this filing, an amazing tidbit that I’d not noticed before — Firm Transmission Rights are regarded as COMMODITY DERIVATIVES:

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

Electric commodity derivatives held by NSP-Minnesota include financial transmission rights (FTRs) purchased from Midwest Independent Transmission System Operator, Inc. (MISO).  FTRs purchased from MISO are financial instruments that entitle the holder to one year of monthly revenues or charges based on transmission congestion across a given transmission path.  The value of an FTR is derived from, and designed to offset, the cost of that energy congestion, which is caused by overall transmission load and other transmission constraints.  Congestion is also influenced by the operating schedules of power plants and the consumption of electricity pertinent to a given transmission path.  Unplanned plant outages, scheduled plant maintenance, changes in the relative costs of fuels used in generation, weather and overall changes in demand for electricity can each impact the operating schedules of the power plants on the transmission grid and the value of an FTR.  NSP-Minnesota’s valuation process for FTRs utilizes complex iterative modeling to predict the impacts of forecasted changes in these drivers of transmission system congestion on the historical pricing of FTR purchases.

If forecasted costs of electric transmission congestion increase or decrease for a given FTR path, the value of that particular FTR instrument will likewise increase or decrease.  Given the limited observability of management’s forecasts for several of the inputs to this complex valuation model – including expected plant operating schedules and retail and wholesale demand, fair value measurements for FTRs have been assigned a Level 3.  Monthly FTR settlements are included in the fuel clause adjustment, and therefore changes in the fair value of the yet to be settled portions of FTRs are deferred as a regulatory asset or liability.  Given this regulatory treatment and the limited magnitude of NSP-Minnesota’s FTRs relative to its electric utility operations, the numerous unobservable quantitative inputs to the complex model used for valuation of FTRs are insignificant to the consolidated financial statements of Xcel Energy.

“Financial Transmission Rights” which “entitle the holder to one year of monthly revenues or charges based on transmission congestion across a given transmission path.” SAY WHAT?!?!?!

Now please, correct me if I’m wrong, but wasn’t “derivatives” in a tanking market what got Xcel’s NRG into bankruptcy?