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EX-99.01 - EXHIBIT 99.01 - PUBLIC SERVICE CO OF COLORADOpsco-ex9901q42016.htm
EX-32.01 - EXHIBIT 32.01 - PUBLIC SERVICE CO OF COLORADOpsco-ex3201q42016.htm
EX-31.02 - EXHIBIT 31.02 - PUBLIC SERVICE CO OF COLORADOpsco-ex3102q42016.htm
EX-31.01 - EXHIBIT 31.01 - PUBLIC SERVICE CO OF COLORADOpsco-ex3101q42016.htm
EX-23.01 - EXHIBIT 23.01 - PUBLIC SERVICE CO OF COLORADOpsco-ex2301q42016.htm
EX-12.01 - EXHIBIT 12.01 - PUBLIC SERVICE CO OF COLORADOpsco-ex1201q42016.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
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)
Registrant’s telephone number, including area code: (303) 571-7511
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. x Yes ¨ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 and Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
 
Accelerated filer ¨
Non-accelerated filer x
 
Smaller reporting company ¨
(Do not check if smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
As of Feb. 24, 2017, 100 shares of common stock, par value $0.01 per share, were outstanding, all of which were held by Xcel Energy Inc., a Minnesota corporation.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Item 14 of Form 10-K is set forth under the heading “Independent Registered Public Accounting Firm – Audit and Non-Audit Fees” in Xcel Energy Inc.’s definitive Proxy Statement for the 2017 Annual Meeting of Stockholders which definitive Proxy Statement is expected to be filed with the SEC on or about April 4, 2017. Such information set forth under such heading is incorporated herein by this reference hereto.

Public Service Company of Colorado meets the conditions set forth in General Instructions I(1)(a) and (b) of Form 10-K and is therefore filing this form with reduced disclosure format permitted by General Instruction I(2).
 



TABLE OF CONTENTS
Index
PART I
 
Item 1A — Risk Factors
Item 2 — Properties
 
 
PART II
 
 
 
PART III
 
 
 
PART IV
 
 
 

This Form 10-K is filed by PSCo. PSCo is a wholly owned subsidiary of Xcel Energy Inc. Additional information on Xcel Energy is available in various filings with the SEC. This report should be read in its entirety.


2


PART I

Item lBusiness

DEFINITION OF ABBREVIATIONS AND INDUSTRY TERMS
Xcel Energy Inc.’s Subsidiaries and Affiliates (current and former)
NCE
New Century Energies, Inc.
NSP-Minnesota
Northern States Power Company, a Minnesota corporation
NSP-Wisconsin
Northern States Power Company, a Wisconsin corporation
PSCo
Public Service Company of Colorado
PSRI
P.S.R. Investments, Inc.
SPS
Southwestern Public Service Company
Utility subsidiaries
NSP-Minnesota, NSP-Wisconsin, PSCo and SPS
WYCO
WYCO Development, LLC
Xcel Energy
Xcel Energy Inc. and subsidiaries
 
 
Federal and State Regulatory Agencies
CFTC
Commodity Futures Trading Commission
CPUC
Colorado Public Utilities Commission
D.C. Circuit
United States Court of Appeals for the District of Columbia Circuit
DOT
United States Department of Transportation
EPA
United States Environmental Protection Agency
FERC
Federal Energy Regulatory Commission
IRS
Internal Revenue Service
NERC
North American Electric Reliability Corporation
PHMSA
Pipeline and Hazardous Materials Safety Administration
SEC
Securities and Exchange Commission
 
 
Electric, Purchased Gas and Resource Adjustment Clauses
DSM
Demand side management
DSMCA
Demand side management cost adjustment
ECA
Retail electric commodity adjustment
ERP
Electric resource plan
GCA
Gas cost adjustment
PCCA
Purchased capacity cost adjustment
PSIA
Pipeline system integrity adjustment
QSP
Quality of service plan
RES
Renewable energy standard
RESA
Renewable energy standard adjustment
SCA
Steam cost adjustment
TCA
Transmission cost adjustment
 
 
Other Terms and Abbreviations
AFUDC
Allowance for funds used during construction
ALJ
Administrative law judge
APBO
Accumulated postretirement benefit obligation
ARO
Asset retirement obligation
ASU
FASB Accounting Standards Update
C&I
Commercial and Industrial
CAA
Clean Air Act
CACJA
Clean Air Clean Jobs Act
CO2
Carbon dioxide
CPCN
Certificate of public convenience and necessity

3


CPP
Clean Power Plan
CWIP
Construction work in progress
ERCOT
Electric Reliability Council of Texas
ETR
Effective tax rate
FASB
Financial Accounting Standards Board
GAAP
Generally accepted accounting principles
GHG
Greenhouse gas
ITC
Investment tax credit
JOA
Joint operating agreement
MGP
Manufactured gas plant
MISO
Midcontinent Independent Transmission System Operator, Inc.
Moody’s
Moody’s Investor Services
Native load
Customer demand of retail and wholesale customers whereby a utility has an obligation to serve under statute or long-term contract.
NAV
Net asset value
NOL
Net operating loss
NOx
Nitrogen oxide
O&M
Operating and maintenance
OCI
Other comprehensive income
PCB
Polychlorinated biphenyl
PJM
PJM Interconnection, LLC
PM
Particulate matter
PPA
Purchased power agreement
PRP
Potentially responsible party
PTC
Production tax credit
PV
Photovoltaic
R&E
Research and experimentation
REC
Renewable energy credit
ROE
Return on equity
RPS
Renewable portfolio standards
SIP
State implementation plan
SO2
Sulfur dioxide
SPP
Southwest Power Pool, Inc.
Standard & Poor’s
Standard & Poor’s Ratings Services
 
 
Measurements
KV
Kilovolts
KWh
Kilowatt hours
MMBtu
Million British thermal units
MW
Megawatts
MWh
Megawatt hours
GWh
Gigawatt hours

4


COMPANY OVERVIEW

PSCo was incorporated in 1924 under the laws of Colorado.  PSCo is a utility engaged primarily in the generation, purchase, transmission, distribution and sale of electricity in Colorado.  The wholesale customers served by PSCo comprised approximately 14 percent of its total KWh sold in 2016.  PSCo also purchases, transports, distributes and sells natural gas to retail customers and transports customer-owned natural gas.  PSCo provides electric utility service to approximately 1.4 million customers and natural gas utility service to approximately 1.4 million customers.  All of PSCo’s retail electric operating revenues were derived from operations in Colorado during 2016.  Although PSCo’s large C&I electric retail customers are comprised of many diversified industries, a significant portion of PSCo’s large C&I electric sales include the following industries:  fabricated metal products, communications and health services.  For small C&I customers, significant electric retail sales include the following industries:  real estate and dining establishments.  Generally, PSCo’s earnings contribute approximately 35 percent to 45 percent of Xcel Energy’s consolidated net income.

PSCo owns the following direct subsidiaries: 1480 Welton, Inc. and United Water Company, both of which own certain real estate interests; and Green and Clear Lakes Company, which owns water rights and certain real estate interests.  PSCo also holds a controlling interest in several other relatively small ditch and water companies.

PSCo conducts its utility business in the following reportable segments: regulated electric utility, regulated natural gas utility and all other. See Note 15 to the consolidated financial statements for further discussion relating to comparative segment revenues, net income and related financial information.

ELECTRIC UTILITY OPERATIONS

Public Utility Regulation

Summary of Regulatory Agencies and Areas of Jurisdiction PSCo is regulated by the CPUC with respect to its facilities, rates, accounts, services and issuance of securities.  PSCo is regulated by the FERC with respect to its wholesale electric operations, accounting practices, hydroelectric licensing, wholesale sales for resale, the transmission of electricity in interstate commerce, compliance with the NERC electric reliability standards, asset transactions and mergers and natural gas transactions in interstate commerce. PSCo is authorized to make wholesale electric sales at market-based prices to customers outside its balancing authority area.

Fuel, Purchased Energy and Conservation Cost-Recovery Mechanisms PSCo has several retail adjustment clauses that recover fuel, purchased energy and other resource costs:

ECA — Recovers fuel and purchased energy costs. Short-term sales margins are shared with retail customers through the ECA. The ECA is revised quarterly.
PCCA — Recovers purchased capacity payments.
SCA — Recovers the difference between PSCo’s actual cost of fuel and the amount of these costs recovered under its base steam service rates. The SCA rate is revised on a quarterly basis.
DSMCA — Recovers DSM, interruptible service option credit costs and performance initiatives for achieving various energy savings goals.
RESA — Recovers the incremental costs of compliance with the RES with a maximum of two percent of the customer’s total bill.
Wind Energy Service — Premium service for customers who choose to pay an additional charge for renewable resources.
TCA — Recovers costs associated with transmission investment outside of rate cases.
CACJA — Recovers costs associated with implementing its compliance plan under the CACJA.

PSCo recovers fuel and purchased energy costs from its wholesale electric customers through a fuel cost adjustment clause approved by the FERC. PSCo’s wholesale customers have agreed to pay the full cost of certain renewable energy purchase and generation costs through a fuel clause and in exchange receive RECs associated with those resources. The wholesale customers pay their jurisdictional allocation of production costs through a fully forecasted formula rate with true-up.

QSP Requirements The CPUC established an electric QSP that provides for bill credits to customers if PSCo does not achieve certain performance targets relating to electric reliability and customer service. PSCo monitors and records, as necessary, an estimated customer refund obligation under the QSP. The CPUC extended the terms of the current QSP through 2018.


5


Capacity and Demand

Uninterrupted system peak demand for PSCo’s electric utility for each of the last three years and the forecast for 2017, assuming normal weather conditions, is as follows:
 
System Peak Demand (in MW)
 
2014
 
2015
 
2016
 
2017 Forecast
PSCo
6,152

 
6,284

 
6,585

 
6,439


The peak demand for PSCo’s system typically occurs in the summer. The 2016 system peak demand for PSCo occurred on Aug. 3, 2016. The 2016 system peak demand was higher due to Comanche Unit 3 not running at full capacity, which increased PSCo’s system load for the backup power provided by PSCo to the joint owners. The forecast of system peak assumes normal weather conditions.

Energy Sources and Related Transmission Initiatives

PSCo expects to meet its system capacity requirements through existing electric generating stations, power purchases, new generation facilities, DSM options and phased expansion of existing generation at select power plants.

Purchased Power PSCo has contracts to purchase power from other utilities and independent power producers.  Long-term purchased power contracts typically require a periodic capacity charge and an energy charge for energy actually purchased. PSCo also makes short-term purchases to meet system load and energy requirements, to replace generation from company-owned units under maintenance or during outages, to meet operating reserve obligations, or to obtain energy at a lower cost.

Purchased Transmission Services In addition to using its own transmission system, PSCo has contracts with regional transmission service providers to deliver energy to PSCo’s customers.

Rush Creek Wind Ownership Proposal — In 2016, PSCo filed an application for a CPCN to build, own and operate a 600 MW wind generation facility at Rush Creek for a cost of approximately $1 billion, including transmission investment.

In 2016, the CPUC approved a settlement between PSCo and various parties and granted a CPCN, which allows PSCo to commence the project on a timely basis and capture the full PTC benefit for customers.

Key terms of the settlement are listed below:

The Rush Creek project satisfies the reasonable cost standard and is in the public interest;
The project should be placed in service by Oct. 31, 2018;
The useful life of the project should be set at 25 years;
A hard cost-cap on the $1.096 billion investment (which includes the capital investment and AFUDC); 
A capital cost sharing mechanism for every $10 million below the cost-cap, with 82.5 percent retained by customers and 17.5 percent retained by PSCo on a net present value basis over the life of the project;
Amounts retained by PSCo under the capital cost sharing mechanism as well as overall facility revenue requirements may each be reduced for lower than projected long term generating output (i.e., higher degradation);
The Pawnee-Daniels transmission line (estimated project cost of $178 million) should be accelerated and operations are expected to begin by October 2019; and
PSCo committed to develop a rate for third-party access to available capacity in the Rush Creek transmission line to be filed at the FERC.

Colorado 2016 ERP — In May 2016, PSCo filed its 2016 ERP which identified approximately 600 MW of additional resource needs by the summer of 2023; the level of resource need is driven by load growth, retiring generation facilities, expiring purchased power contracts and the impacts of customer-facing programs. In its initial filing, PSCo proposed a competitive acquisition process in which all generation resources, except coal-fired generation, could compete. PSCo has expressed an interest in owning incremental generation through self-build proposals, purchase of existing assets some of which are currently subject to PPAs or through build-own-transfer projects. In February 2017, the CPUC held hearings regarding PSCo’s proposal and an initial decision is anticipated by March 2017. The actual range of need to be filled in the competitive acquisition process will be determined once a final decision is received from the CPUC and prior to the beginning of the competitive acquisition phase of the ERP process.


6


Brush to Castle Pines 345 KV Transmission Line — In 2015, the CPUC granted a CPCN to construct a new 345 KV transmission line originating from Pawnee generating station, near Brush, CO to the Daniels Park substation, near Castle Pines, CO to be placed in service by May 2022. The estimated project cost is $178.3 million. The CPUC granted the parties’ requests for consolidation with the Rush Creek project and approved for construction to begin in the first half of 2017.

PSCo Global Settlement Agreement — In August 2016, PSCo and various intervenors entered into a global settlement agreement regarding three pending filings with the CPUC, including the Phase II electric rate case (which is related to the rate design portion of the 2015 Electric rate case), the Renewable*Connect® proposal and the 2017 Renewable Energy Plan. Key terms of the agreement include that participating customers in the proposed Renewable*Connect program would pay ordinary tariff electric rates in addition to a voluntary tariff solar charge, and receive bill credits related to avoided cost savings for a new 50 MW solar resource. It was also agreed that PSCo’s 2017 Renewable Energy Plan would include 2017 to 2019 acquisition of a total of 225 MW of renewable energy from sources including rooftop solar, solar gardens and recycled energy.

In December 2016, the CPUC approved the global settlement agreement. In January 2017, PSCo began implementing the terms of the settlement.
Joint Dispatch Agreement (JDA) — In February 2016, the FERC approved a JDA between PSCo, Black Hills/Colorado Electric Utility Company, LP and Platte River Power Authority. Through the JDA, energy is dispatched to economically serve the combined electric customer loads of the three systems. In circumstances where PSCo is the lowest cost producer, it will sell its excess generation to other JDA counterparties. The agreement results in a reduction in total energy costs for the parties, of which approximately $1.4 million would be allocated to PSCo’s customers. As part of the agreement, PSCo will earn a management fee to administer the JDA. In January 2017, the CPUC approved the JDA.

Advanced Grid Intelligence and Security In August 2016, PSCo filed a request with the CPUC to approve a CPCN for implementation of its advanced grid initiative. The project incorporates installing advanced meters, implementing a combination of hardware and software applications to allow the distribution system to operate at a lower voltage (integrated volt-var optimization) and installing necessary communications infrastructure to implement this hardware. These major projects are expected to improve customer experience, enhance grid reliability and enable the implementation of new and innovative programs and rate structures. The estimated capital investment for the project is approximately $500 million. PSCo anticipates a CPUC decision by mid-2017. If approval is received, the project is expected to be completed by 2021.

Decoupling Filing — In July 2016, PSCo filed a request with the CPUC to approve a partial decoupling mechanism for a five-year period, effective Jan. 1, 2017.  The proposed decoupling adjustment would allow PSCo to adjust annual revenues based on changes in weather normalized average use per customer for the residential and small C&I classes.  The proposed decoupling mechanism is symmetric and may result in potential refunds to customers if there were an increase in average use per customer. PSCo did not request that revenue be adjusted as a result of weather related sales fluctuations.

In January 2017, the CPUC Staff (Staff) and various intervenors, including the Office of Consumer Counsel (OCC), filed direct testimony. 

The Staff recommended a portion of PSCo’s request be approved and suggested the CPUC should lower PSCo’s ROE by 30 basis points to account for lower risk associated with annual revenues, if the full proposal were approved;
The OCC opposed PSCo’s decoupling request; and
Other intervening parties generally supported PSCo’s proposal, but recommended various modifications, such as the use of actual sales data instead of weather-normalized sales.

A CPUC decision is expected in April 2017.

Boulder, Colo. Municipalization In 2011, a ballot measure was passed which authorized the formation and operation of a municipal utility and the issuance of enterprise revenue bonds. In 2014, the City of Boulder (Boulder) City Council passed an ordinance to establish an electric utility. PSCo challenged the formation of this utility as premature because costs and system separation plans were not final, but the case was dismissed. PSCo appealed this decision and in September 2016, the Colorado Court of Appeals preserved PSCo’s ability to challenge the utility while vacating the lower court’s decision.


7


In 2013, the CPUC ruled that Boulder may not be the retail service provider to any PSCo customers located outside Boulder city limits unless Boulder can establish that PSCo is unwilling or unable to serve those customers. The CPUC also ruled that it has jurisdiction over the transfer of any facilities to Boulder that currently serve any customers located outside Boulder city limits and will determine separation matters. The CPUC has declared that Boulder must receive CPUC transfer approval prior to any eminent domain actions. Boulder appealed this ruling to the Boulder District Court. In January 2015, the Boulder District Court affirmed the CPUC decision. The Boulder District Court also dismissed a condemnation action that Boulder had filed. The CPUC must complete the separation plan proceeding before Boulder may refile a condemnation proceeding.

In July 2015, Boulder filed an application with the CPUC requesting approval of its proposed separation plan. In August 2015, PSCo filed a motion to dismiss Boulder’s separation proposal, arguing Boulder’s request was not permissible under Colorado law. In December 2015, the CPUC granted the motion to dismiss the application in part, holding that Boulder had no right to acquire PSCo facilities used exclusively to serve customers located outside Boulder city limits. Other portions of Boulder’s application were not dismissed, but were stayed until Boulder supplemented its application. Boulder filed its amended application in September 2016.

In February 2017, PSCo and other intervenors filed answer testimony which addressed several legal issues posed by the CPUC. Overall, PSCo believes that Boulder’s plan is not consistent with and cannot be effectively administered under Colorado law and that from a reliability perspective it is an inappropriate way to separate the two distribution systems and poses significant risks to PSCo and its remaining customers. The remaining key dates in the procedural schedule are as follows:

Rebuttal testimony — March 30, 2017;
Hearings — April 26 through May 5, 2017;
Statements of position — May 17, 2017; and
Final decision — June 15, 2017.

Depreciation and Amortization Proceeding — In April 2016, PSCo filed for approval of depreciation rates and amortization schedules for its electric and common plant. In January 2017, the CPUC approved a comprehensive settlement agreement. The new depreciation and amortization rates are expected to be implemented in conjunction with PSCo’s next rate case or through a separate proceeding in 2018, with an expected annual increase of approximately $33 million.

RES Compliance Plan — Colorado law mandates that at least 20 percent of PSCo’s energy sales are supplied by renewable energy through 2019, with the percentage increasing to 30 percent by 2020 and includes a distributed generation standard. PSCo was in compliance with the RES as of Dec. 31, 2016.


Fuel Supply and Costs

The following table shows the delivered cost per MMBtu of each significant category of fuel consumed for owned electric generation, the percentage of total fuel requirements represented by each category of fuel and the total weighted average cost of all fuels.
 
 
Coal
 
Natural Gas
 
Weighted
Average Owned Fuel Cost
PSCo Generating Plants
 
Cost
 
Percent
 
Cost
 
Percent
 
2016
 
$
1.75

 
72
%
 
$
3.79

 
28
%
 
$
2.33

2015
 
1.75

 
75

 
3.89

 
25

 
2.29

2014
 
1.82

 
75

 
5.32

 
25

 
2.68


See Items 1A and 7 for further discussion of fuel supply and costs.

Fuel Sources

Coal  PSCo normally maintains approximately 41 days of coal inventory. Coal supply inventories at Dec. 31, 2016 and 2015 were approximately 36 and 49 days of usage, respectively. At Dec. 31, 2016, stockpile reductions in preparation for unit retirements at the Cherokee and Valmont stations in 2017 resulted in coal inventories being slightly below optimal levels. PSCo’s generation stations use low-sulfur western coal purchased primarily under contracts with suppliers operating in Colorado and Wyoming. During 2016 and 2015, PSCo’s coal requirements for existing plants were approximately 9.9 million tons and 10.5 million tons, respectively. The estimated coal requirements for 2017 are approximately 10.0 million tons. The increase is primarily due to higher expected natural gas prices in 2017.


8


PSCo has contracted for coal supply to provide 84 percent of its estimated coal requirements in 2017, and a declining percentage of requirements in subsequent years. PSCo’s general coal purchasing objective is to contract for approximately 80 percent of requirements for the first year, 50 percent of requirements in year two, and 25 percent of requirements in year three. Remaining requirements will be filled through the procurement process or over-the-counter transactions.

PSCo has coal transportation contracts that provide for delivery of 100 percent its coal requirements in 2017 and 2018. Coal delivery may be subject to interruptions or reductions due to operation of the mines, transportation problems, weather and availability of equipment.

Natural gas  PSCo uses both firm and interruptible natural gas supply and standby oil in combustion turbines and certain boilers. Natural gas supplies for PSCo’s power plants are procured under contracts to provide an adequate supply of fuel. However, as natural gas primarily serves intermediate and peak demand, any remaining forecasted requirements are able to be procured through a liquid spot market. The majority of natural gas supply under contract is covered by a long-term agreement with Anadarko Energy Services Company, the balance of natural gas supply contracts have variable pricing features tied to changes in various natural gas indices. PSCo hedges a portion of that risk through financial instruments. See Note 10 to the consolidated financial statements for further discussion.

Most transportation contract pricing is based on FERC approved transportation tariff rates. Certain natural gas supply and transportation agreements include obligations for the purchase and/or delivery of specified volumes of natural gas or to make payments in lieu of delivery.

At Dec. 31, 2016, PSCo’s commitments related to gas supply contracts, which expire in various years from 2017 through 2023, were approximately $654 million and commitments related to gas transportation and storage contracts, which expire in various years from 2017 through 2060, were approximately $573 million.
At Dec. 31, 2015, PSCo’s commitments related to gas supply contracts were approximately $750 million and commitments related to gas transportation and storage contracts were approximately $684 million.

PSCo has limited on-site fuel oil storage facilities and primarily relies on the spot market for incremental supplies.

Renewable Energy Sources

PSCo’s renewable energy portfolio includes wind, hydroelectric, biomass and solar power from both owned generating facilities and PPAs. As of Dec. 31, 2016, PSCo was in compliance with mandated RPS, which requires generation from renewable resources of 20.0 percent of electric retail sales.

Renewable energy comprised 28.3 percent and 22.0 percent of PSCo’s total energy for 2016 and 2015, respectively;
Wind energy comprised 23.7 percent and 19.4 percent of the total energy for 2016 and 2015, respectively; and
Hydroelectric, biomass and solar power comprised approximately 4.6 percent and 2.6 percent of the total energy for 2016 and 2015.

PSCo also offers customer-focused renewable energy initiatives. Windsource® allows customers to purchase a portion or all of their electricity from renewable sources. In 2016, the number of customers utilizing Windsource increased to approximately 46,000 from 45,000 in 2015.

Additionally, to encourage the growth of solar energy on the system, customers are offered incentives to install solar panels on their homes and businesses under the Solar*Rewards® program. Over 32,500 PV systems with approximately 276 MW of aggregate capacity and over 29,500 PV systems with approximately 258 MW of aggregate capacity have been installed in Colorado under this program as of Dec. 31, 2016 and 2015, respectively. Additionally, 25 community solar gardens with 18.1 MW of capacity and 24 gardens with 16.6 MW of capacity have been completed in Colorado as of Dec. 31, 2016 and 2015, respectively.


9


Wind — PSCo acquires the majority of its wind energy from PPAs with wind farm owners, primarily located in Colorado. Currently, PSCo has 19 of these agreements in place, with facilities ranging in size from two MW to over 300 MW.

PSCo had approximately 2,560 MW of wind energy on its system at the end of 2016 and 2015. In addition to receiving purchased wind energy under these agreements, PSCo also typically receives wind RECs which are used to meet state renewable resource requirements.
The average cost per MWh of wind energy under these contracts was approximately $42 in 2016 and 2015. The cost per MWh of wind energy varies by contract and may be influenced by a number of factors including regulation, state-specific renewable resource requirements, and the year of contract execution. Generally, contracts executed in 2016 continued to benefit from improvements in wind technology, excess capacity among manufacturers, and motivation to commence new construction prior to the anticipated expiration of the federal PTCs. In December 2015, the federal PTCs were extended through 2019 with a phase down beginning in 2017.

Wholesale and Commodity Marketing Operations

PSCo conducts various wholesale marketing operations, including the purchase and sale of electric capacity, energy, ancillary services and energy related products. PSCo uses physical and financial instruments to minimize commodity price and credit risk and hedge sales and purchases. PSCo also engages in trading activity unrelated to hedging and sharing of any margins is determined through state regulatory proceedings as well as the operation of the FERC approved JOA. See Item 7 for further discussion.

Summary of Recent Federal Regulatory Developments

The FERC has jurisdiction over rates for electric transmission service in interstate commerce and electricity sold at wholesale, hydro facility licensing, natural gas transportation, asset transactions and mergers, accounting practices and certain other activities of PSCo, including enforcement of NERC mandatory electric reliability standards.  State and local agencies have jurisdiction over many of PSCo’s activities, including regulation of retail rates and environmental matters.  In addition to the matters discussed below, see Note 11 to the accompanying consolidated financial statements for a discussion of other regulatory matters.

Status of FERC Commissioners — The FERC is comprised of five commissioners appointed by the President and subject to confirmation by the Senate. There are today only two sitting commissioners.  It is uncertain when the President will appoint new commissioners to the open seats or when those appointments may be confirmed.  Without three sitting commissioners, the FERC will not have a quorum 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.

NERC Critical Infrastructure Protection Requirements — The FERC has approved Version 5 of NERC’s critical infrastructure protection standards, which added additional requirements to strengthen grid security controls. PSCo applied the requirements to high and medium impact assets by the July 1, 2016 deadline. Requirements must be applied to low impact assets through a staggered implementation beginning April 1, 2017 through September 2018. PSCo is currently in the process of implementing initiatives to meet the compliance deadline. The additional cost for compliance is anticipated to be recoverable through rates.

NERC Physical Security Requirements — In 2014, the FERC approved NERC’s proposed critical infrastructure protection standard related to physical security for bulk electric system facilities. The new standard became enforceable in October 2015 with staggered milestone deliverable dates through 2016. PSCo has developed physical security plans in accordance with the requirements of the standard. The additional cost for compliance is anticipated to be recoverable through rates.

Formula Rate Treatment of Accumulated Deferred Income Taxes (ADIT) — In 2015, PSCo filed changes to its transmission
formula rate and production formula rate to comply with IRS guidance regarding how ADIT must be reflected in formula rates using
future test years and a true-up. The filings were intended to ensure that PSCo is in compliance with IRS rules and may continue to use
accelerated tax depreciation. PSCo requested a Jan. 1, 2016 effective date.

In April 2016, the FERC accepted PSCo’s ADIT formula rate changes, effective Jan. 1, 2016, subject to a compliance filing. In August 2016, the FERC approved PSCo’s compliance filing. PSCo believes its wholesale formula rates are in compliance with the IRS ADIT rules.


10


Public Utility Regulatory Policies Act (PURPA) Enforcement Complaint against CPUC In December 2016, Sustainable Power Group, LLC (sPower) petitioned the FERC to initiate an enforcement action in federal court against the CPUC under PURPA. The petition asserts that a December 2016 CPUC ruling, which indicated that a QF must be a successful bidder in a PSCo resource acquisition bidding process, violated PURPA and FERC rules. In January 2017, PSCo filed a motion to intervene and protest, arguing that the FERC should decline the petition. The CPUC filed a similar pleading. sPower has proposed to construct 800 MW of solar generation and 700 MW of wind generation in Colorado and seeks to require PSCo to contract for these resources under PURPA. If sPower were to prevail, PSCo’s ability to select generation resources through competitive bidding would be negatively affected. FERC action is pending.

Electric Operating Statistics

Electric Sales Statistics
 
Year Ended Dec. 31
 
 
2016
 
2015
 
2014
 
Electric sales (Millions of KWh)
 
 
 
 
 
 
Residential
9,272

 
9,112

 
9,009

 
Large commercial and industrial
6,371

 
6,596

 
6,712

 
Small commercial and industrial
12,890

 
12,750

 
12,709

 
Public authorities and other
268

 
242

 
241

 
Total retail
28,801

 
28,700

 
28,671

 
Sales for resale
4,672

 
3,581

 
3,664

 
Total energy sold
33,473

 
32,281

 
32,335

 
 
 
 
 
 
 
 
Number of customers at end of period
 
 
 
 
 
 
Residential
1,235,378

 
1,218,662

 
1,202,621

 
Large commercial and industrial
337

 
337

 
334

 
Small commercial and industrial
159,299

 
158,086

 
156,809

 
Public authorities and other
54,048

 
53,944

 
53,824

 
Total retail
1,449,062

 
1,431,029

 
1,413,588

 
Wholesale
34

 
26

 
23

 
Total customers
1,449,096

 
1,431,055

 
1,413,611

 
 
 
 
 
 
 
 
Electric revenues (Thousands of Dollars)
 
 
 
 
 
 
Residential
$
1,063,526

 
$
1,060,626

 
$
1,081,092

 
Large commercial and industrial
414,797

 
433,061

 
462,449

 
Small commercial and industrial
1,204,881

 
1,220,064

 
1,267,023

 
Public authorities and other
54,070

 
52,783

 
54,555

 
Total retail
2,737,274

 
2,766,534

 
2,865,119

 
Wholesale
152,375

 
180,716

 
211,241

 
Other electric revenues
159,703

 
168,007

 
49,577

 
Total electric revenues
$
3,049,352

 
$
3,115,257

 
$
3,125,937

 
 
 
 
 
 
 
 
KWh sales per retail customer
19,876

 
20,055

 
20,282

 
Revenue per retail customer
$
1,889

 
$
1,933

 
$
2,027

 
Residential revenue per KWh
11.47

¢
11.64

¢
12.00

¢
Large commercial and industrial revenue per KWh
6.51

 
6.57

 
6.89

 
Small commercial and industrial revenue per KWh
9.35

 
9.57

 
9.97

 
Total retail revenue per KWh
9.50

 
9.64

 
9.99

 
Wholesale revenue per KWh
3.26

 
5.05

 
5.77

 

11



Energy Source Statistics
 
Year Ended Dec. 31
 
2016
 
2015
 
2014
 
Millions of
KWh
 
Percent of
Generation
 
Millions of
KWh
 
Percent of
Generation
 
Millions of
KWh
 
Percent of
Generation
Coal
15,895

 
47
%
 
18,601

 
54
%
 
18,274

 
53
%
Natural Gas
8,632

 
25

 
7,948

 
23

 
8,601

 
25

Wind (a)
8,106

 
24

 
6,699

 
19

 
6,472

 
19

Hydroelectric
1,179

 
3

 
662

 
2

 
617

 
2

Other (b)
393

 
1

 
705

 
2

 
294

 
1

Total
34,205

 
100
%
 
34,615

 
100
%
 
34,258

 
100
%
 


 


 
 
 
 
 
 
 
 
Owned generation
22,753

 
67
%
 
22,981

 
66
%
 
23,023

 
67
%
Purchased generation
11,452

 
33

 
11,634

 
34

 
11,235

 
33

Total
34,205

 
100
%
 
34,615

 
100
%
 
34,258

 
100
%

(a)
This category includes wind energy de-bundled from RECs and also includes Windsource RECs.  PSCo uses RECs to meet or exceed state resource requirements and may sell surplus RECs.
(b)
Distributed generation from the Solar*Rewards program is not included, and was approximately 396, 245 and 197 million net KWh for 2016, 2015, and 2014, respectively.

NATURAL GAS UTILITY OPERATIONS

Overview

The most significant developments in the natural gas operations of PSCo are uncertainty regarding political and regulatory developments that impact hydraulic fracturing, safety requirements for natural gas pipelines and the continued trend of declining use per residential and small C&I customer, as a result of improved building construction technologies, higher appliance efficiencies, and conservation. From 2000 to 2016, average annual sales to the typical PSCo residential customer declined 16 percent, while sales to the typical small C&I customer declined 12 percent, each on a weather‑normalized basis. Although wholesale price increases do not directly affect earnings because of natural gas cost recovery mechanisms, high prices can encourage further efficiency efforts by customers.

The Pipeline and Hazardous Materials Safety Administration

Protecting our Infrastructure of Pipelines and Enhancing Safety Act (PIPES) Act The PIPES Act, signed into law in June 2016, requires the DOT PHMSA to issue regulations on the construction and operation of the nation’s underground gas storage fields. The act also grants PHMSA emergency order authority for pipeline operators, which would require operators to make immediate changes to assets or operations. The act also directs PHMSA to continue work on a variety of mandates from the 2012 Pipeline Safety, Regulatory Certainty, and Job Creation Act (Pipeline Safety Act), many of which have not been completed.

PHMSA issued interim final rules for underground storage operators in December 2016. PSCo operates three underground storage fields in Colorado and is developing a plan to meet the storage rules. PSCo does not expect these changes to have a material impact on costs or operating reliability.

Pipeline Safety Act The Pipeline Safety Act requires additional verification of pipeline infrastructure records by pipeline owners and operators to confirm the maximum allowable operating pressure of lines located in high consequence areas or more-densely populated areas. The DOT PHMSA will require operators to re-confirm the maximum allowable operating pressure if records are inadequate. This process could cause temporary or permanent limitations on throughput for affected pipelines.


12


In addition, the Pipeline Safety Act requires PHMSA to issue reports and develop new regulations including: requiring use of automatic or remote-controlled shut-off valves; requiring testing of certain previously untested transmission lines; and expanding integrity management requirements. The Pipeline Safety Act also raises the maximum penalty for violating pipeline safety rules to $2 million per day for related violations. PSCo is taking actions that are intended to comply with the Pipeline Safety Act and any related PHMSA regulations as they become effective. PSCo cannot predict the ultimate impact the Pipeline Safety Act will have on its costs, operations or financial results. PSCo can generally recover costs to comply with the transmission and distribution integrity management programs through the PSIA rider.

Public Utility Regulation

Summary of Regulatory Agencies and Areas of Jurisdiction PSCo is regulated by the CPUC with respect to its facilities, rates, accounts, services and issuance of securities. PSCo holds a FERC certificate that allows it to transport natural gas in interstate commerce without PSCo becoming subject to full FERC jurisdiction under the Federal Natural Gas Act. PSCo is subject to the DOT and the CPUC with regards to pipeline safety compliance.

Purchased Natural Gas and Conservation Cost-Recovery Mechanisms PSCo has retail adjustment clauses that recover purchased natural gas and other resource costs:

GCA — Recovers the actual costs of purchased natural gas and transportation to meet the requirements of its customers and is revised quarterly to allow for changes in natural gas rates.
DSMCA — Recovers costs of DSM and performance initiatives to achieve various energy savings goals.
PSIA — Recovers costs associated with transmission and distribution pipeline integrity management programs and two projects to replace large transmission pipelines. The rider has been extended through 2018.

QSP Requirements — The CPUC established a natural gas QSP that provides for bill credits to customers if PSCo does not achieve certain performance targets relating to natural gas leak repair time and customer service. The CPUC has extended the terms of the QSP through 2018.

Capability and Demand

Natural gas supply requirements are categorized as firm or interruptible (customers with an alternate energy supply). The maximum daily send-out (firm and interruptible) for PSCo was 1,932,070 MMBtu, which occurred on Dec. 17, 2016 and 1,633,493 MMBtu, which occurred on March 4, 2015.

PSCo purchases natural gas from independent suppliers, generally based on market indices that reflect current prices. The natural gas is delivered under transportation agreements with interstate pipelines. These agreements provide for firm deliverable pipeline capacity of approximately 1,818,151 MMBtu per day, which includes 854,852 MMBtu of natural gas held under third-party underground storage agreements. In addition, PSCo operates three company-owned underground storage facilities, which provide approximately 43,500 MMBtu of natural gas supplies on a peak day. The balance of the quantities required to meet firm peak day sales obligations are primarily purchased at PSCo’s city gate meter stations.

PSCo is required by CPUC regulations to file a natural gas purchase plan each year projecting and describing the quantities of natural gas supplies, upstream services and the costs of those supplies and services for the 12-month period of the following year. PSCo is also required to file a natural gas purchase report by October of each year reporting actual quantities and costs incurred for natural gas supplies and upstream services for the previous 12-month period.

Natural Gas Supply and Costs

PSCo actively seeks natural gas supply, transportation and storage alternatives to yield a diversified portfolio that provides increased flexibility, decreased interruption and financial risk and economical rates.  In addition, PSCo conducts natural gas price hedging activities that have been approved by the CPUC.


13


The following table summarizes the average delivered cost per MMBtu of natural gas purchased for resale by PSCo’s regulated retail natural gas distribution business:
2016
$
3.27

2015
3.92

2014
4.91


The cost of natural gas in 2016 decreased due to lower wholesale commodity prices.

PSCo has natural gas supply, transportation and storage agreements that include obligations for the purchase and/or delivery of specified volumes of natural gas or to make payments in lieu of delivery. At Dec. 31, 2016, PSCo was committed to approximately $884 million in such obligations under these contracts, which expire in various years from 2017 through 2029.

PSCo purchases natural gas by optimizing a balance of long-term and short-term natural gas purchases, firm transportation and natural gas storage contracts. During 2016, PSCo purchased natural gas from approximately 32 suppliers.

See Items 1A and 7 for further discussion of natural gas supply and costs.

Natural Gas Operating Statistics
 
Year Ended Dec. 31
 
2016
 
2015
 
2014
Natural gas deliveries (Thousands of MMBtu)
 
 
 
 
 
Residential
90,941

 
92,001

 
99,127

Commercial and industrial
38,093

 
38,405

 
40,438

Total retail
129,034

 
130,406

 
139,565

Transportation and other
117,462

 
108,860

 
108,006

Total deliveries
246,496

 
239,266

 
247,571

 
 
 
 
 
 
Number of customers at end of period
 
 
 
 
 
Residential
1,269,338

 
1,254,056

 
1,240,674

Commercial and industrial
100,718

 
100,389

 
100,238

Total retail
1,370,056

 
1,354,445

 
1,340,912

Transportation and other
7,261

 
6,936

 
6,547

Total customers
1,377,317

 
1,361,381

 
1,347,459

 
 
 
 
 
 
Natural gas revenues (Thousands of Dollars)
 
 
 
 
 
Residential
$
611,804

 
$
678,909

 
$
824,633

Commercial and industrial
228,103

 
257,287

 
313,821

Total retail
839,907

 
936,196

 
1,138,454

Transportation and other
117,814

 
70,470

 
76,870

Total natural gas revenues
$
957,721

 
$
1,006,666

 
$
1,215,324

 
 
 
 
 
 
MMBtu sales per retail customer
94.18

 
96.28

 
104.08

Revenue per retail customer
$
613

 
$
691

 
$
849

Residential revenue per MMBtu
6.73

 
7.38

 
8.32

Commercial and industrial revenue per MMBtu
5.99

 
6.70

 
7.76

Transportation and other revenue per MMBtu
1.00

 
0.65

 
0.71



14


GENERAL

Seasonality

The demand for electric power and natural gas is affected by seasonal differences in the weather. In general, peak sales of electricity occur in the summer months, and peak sales of natural gas occur in the winter months. As a result, the overall operating results may fluctuate substantially on a seasonal basis. Additionally, PSCo’s operations have historically generated less revenues and income when weather conditions are milder in the winter and cooler in the summer. See Item 7 for further discussion.

Competition

PSCo is a vertically integrated utility, subject to traditional cost-of-service regulation. However, PSCo is subject to different public policies that promote competition and the development of energy markets. PSCo’s industrial and large commercial customers have the ability to own or operate facilities to generate their own electricity. In addition, customers may have the option of substituting other fuels, such as natural gas, steam or chilled water for heating, cooling and manufacturing purposes, or the option of relocating their facilities to a lower cost region. Customers also have the opportunity to supply their own power with solar generation (typically rooftop solar or solar gardens) and in most jurisdictions can currently avoid paying for most of the fixed production, transmission and distribution costs incurred to serve them. Several states, including Colorado, have policies designed to promote the development of solar and other distributed energy resources through significant incentive policies; with these incentives and federal tax subsidies, distributed generating resources are potential competitors to PSCo’s electric service business.

The FERC has continued to promote competitive wholesale markets through open access transmission and other means. As a result, PSCo and its wholesale customers can purchase generation resources from competing wholesale suppliers and use the transmission systems of Xcel Energy Inc.’s utility subsidiaries on a comparable basis to serve their native load. State public utilities commissions, including the CPUC, have created resource planning programs that promote competition in the acquisition of electricity generation resources used to provide service to retail customers. In addition, FERC Order 1000 seeks to establish competition for construction and operation of certain new electric transmission facilities. PSCo also has franchise agreements with certain cities subject to periodic renewal. If a city elected not to renew a franchise agreement, it could seek alternative means for its citizens to access electric power or gas, such as municipalization. While facing these challenges, PSCo believes its rates and services are competitive with currently available alternatives.

ENVIRONMENTAL MATTERS

PSCo’s facilities are regulated by federal and state environmental agencies. These agencies have jurisdiction over air emissions, water quality, wastewater discharges, solid wastes and hazardous substances. Various company activities require registrations, permits, licenses, inspections and approvals from these agencies. PSCo has received all necessary authorizations for the construction and continued operation of its generation, transmission and distribution systems. PSCo’s facilities have been designed and constructed to operate in compliance with applicable environmental standards. However, it is not possible to determine when or to what extent additional facilities or modifications of existing or planned facilities will be required as a result of changes to environmental regulations, interpretations or enforcement policies or what effect future laws or regulations may have upon PSCo’s operations. See Notes 11 and 12 to the consolidated financial statements for further discussion.

There are significant present and future environmental regulations to encourage the use of clean energy technologies and regulate emissions of GHGs to address climate change. PSCo has undertaken a number of initiatives to meet current requirements and prepare for potential future regulations, reduce GHG emissions and respond to state renewable and energy efficiency goals. If these future environmental regulations do not provide credit for the investments we have already made to reduce GHG emissions, or if they require additional initiatives or emission reductions, then their requirements would potentially impose additional substantial costs. PSCo believes, based on prior state commission practice, it would recover the cost of these initiatives through rates.

EMPLOYEES

As of Dec. 31, 2016, PSCo had 2,575 full-time employees, of which 1,984 were covered under collective-bargaining agreements. See Note 8 to the consolidated financial statements for further discussion.



15


Item 1A — Risk Factors

Xcel Energy, which includes PSCo, is subject to a variety of risks, many of which are beyond our control. Important risks that may adversely affect the business, financial condition and results of operations are further described below. These risks should be carefully considered together with the other information set forth in this report and in future reports that Xcel Energy files with the SEC.

Oversight of Risk and Related Processes

A key accountability of the Board of Directors is the oversight of material risk, and our Board of Directors employs an effective process for doing so. Management and each Board of Directors’ committee has responsibility for overseeing the identification and mitigation of key risks and reporting its assessments and activities to the full Board of Directors.

Management identifies and analyzes risks to determine materiality and other attributes such as timing, probability and controllability. Management broadly considers our business, the utility industry, the domestic and global economies and the environment when identifying, assessing, managing and mitigating risk. Identification and analysis occurs formally through a key risk assessment process conducted by senior management, the financial disclosure process, the hazard risk management process and internal auditing and compliance with financial and operational controls. Management also identifies and analyzes risk through its business planning process and development of goals and key performance indicators, which include risk identification to determine barriers to implementing our strategy. The business planning process also identifies areas in which there is a potential for a business area to take inappropriate risk to meet goals, and determines how to prevent inappropriate risk-taking.

At a threshold level, PSCo has developed a robust compliance program and promotes a culture of compliance, including tone at the top, which mitigates risk. The process for risk mitigation includes adherence to our code of conduct and other compliance policies, operation of formal risk management structures and groups and overall business management to mitigate the risks inherent in the implementation strategy. Building on this culture of compliance, PSCo manages and further mitigates risks through operation of formal risk management structures and groups, including management councils, risk committees and the services of internal corporate areas such as internal audit, the corporate controller and legal services.

Management communicates regularly with the Board of Directors and key stakeholders regarding risk. Senior management presents a periodic assessment of key risks to the Board of Directors. The presentation and the discussion of the key risks provides the Board of Directors with information on the risks management believes are material, including the earnings impact, timing, likelihood and controllability. Management also provides information to the Board of Directors in presentations and communications over the course of the year.

The Board of Directors approaches oversight, management and mitigation of risk as an integral and continuous part of its governance of PSCo. First, the Board of Directors regularly reviews management’s key risk assessment and analyzes areas of existing and future risks and opportunities. In addition, the Board of Directors assigns oversight of certain critical risks to each of its four standing committees to ensure these risks are well understood and given focused oversight by the appropriate committee. The Audit Committee is responsible for reviewing the adequacy of risk oversight and affirming that appropriate oversight occurs. New risks are considered and assigned as appropriate during the annual Board of Directors’ and committee evaluation process, and committee charters and annual work plans are updated accordingly. Committees regularly report on their oversight activities and certain risk issues may be brought to the full Board of Directors for consideration where deemed appropriate to ensure broad Board of Directors’ understanding of the nature of the risk. Finally, the Board of Directors conducts an annual strategy session where PSCo’s future plans and initiatives are reviewed and confirmed.


16


Risks Associated with Our Business

Environmental Risks

We are subject to environmental laws and regulations, with which compliance could be difficult and costly.

We are subject to environmental laws and regulations that affect many aspects of our past, present and future operations, including air emissions, water quality, wastewater discharges and the generation, transport and disposal of solid wastes and hazardous substances. These laws and regulations require us to obtain and comply with a wide variety of environmental requirements including those for protected natural and cultural resources (such as wetlands, endangered species and other protected wildlife, and archaeological and historical resources), licenses, permits, inspections and other approvals. Environmental laws and regulations can also require us to restrict or limit the output of certain facilities or the use of certain fuels, shift generation to lower-emitting, but potentially more costly facilities, install pollution control equipment at our facilities, clean up spills and other contamination and correct environmental hazards. Environmental regulations may also lead to shutdown of existing facilities, either due to the difficulty in assuring compliance or that the costs of compliance makes operation of the units no longer economical. Both public officials and private individuals may seek to enforce the applicable environmental laws and regulations against us.  We may be required to pay all or a portion of the cost to remediate (i.e., clean-up) sites where our past activities, or the activities of certain other parties, caused environmental contamination. At Dec. 31, 2016, these sites included:

Sites of former MGPs operated by us, our predecessors or other entities; and
Third party sites, such as landfills, for which we are alleged to be a PRP that sent hazardous materials and wastes.

We are also subject to mandates to provide customers with clean energy, renewable energy and energy conservation offerings.  Failure to meet the requirements of these mandates may result in fines or penalties, which could have a material effect on our results of operations.  If our regulators do not allow us to recover all or a part of the cost of capital investment or the O&M costs incurred to comply with the mandates, it could have a material effect on our results of operations, financial position or cash flows.

In addition, existing environmental laws or regulations may be revised, and new laws or regulations may be adopted or become applicable to us, including but not limited to, regulation of mercury, NOx, SO2, CO2 and other GHGs, particulates, cooling water intakes, water discharges and ash management.  We may also incur additional unanticipated obligations or liabilities under existing environmental laws and regulations.

We are subject to physical and financial risks associated with climate change.

Climate change can create physical and financial risk. Physical risks from climate change can include changes in weather conditions, changes in precipitation and extreme weather events.

Our customers’ energy needs vary with weather conditions, primarily temperature and humidity.  For residential customers, heating and cooling represent their largest energy use.  To the extent weather conditions are affected by climate change, customers’ energy use could increase or decrease. Increased energy use due to weather changes may require us to invest in additional generating assets, transmission and other infrastructure to serve increased load.  Decreased energy use due to weather changes may result in decreased revenues. Extreme weather conditions in general require more system backup, adding to costs, and can contribute to increased system stress, including service interruptions.  Weather conditions outside of our service territory could also have an impact on our revenues. We buy and sell electricity depending upon system needs and market opportunities.  Extreme weather conditions creating high energy demand may raise electricity prices, which would increase the cost of energy we provide to our customers.

Severe weather impacts our service territories, primarily when thunderstorms, tornadoes and snow or ice storms occur.  To the extent the frequency of extreme weather events increases, this could increase our cost of providing service.  Changes in precipitation resulting in droughts or water shortages, whether caused by climate change or otherwise, could adversely affect our operations, principally our fossil generating units.  A negative impact to water supplies due to long-term drought conditions could adversely impact our ability to provide electricity to customers, as well as increase the price they pay for energy.  We may not recover all costs related to mitigating these physical and financial risks.


17


Climate change may impact a region’s economic health, which could impact our revenues.  Our financial performance is tied to the health of the regional economies we serve.  The price of energy has an impact on the economic health of our communities.  The cost of additional regulatory requirements, such as regulation of CO2 emissions under the CAA, or additional environmental regulation could impact the availability of goods and prices charged by our suppliers which would normally be borne by consumers through higher prices for energy and purchased goods.  To the extent financial markets view climate change and emissions of GHGs as a financial risk, this could negatively affect our ability to access capital markets or cause us to receive less than ideal terms and conditions.

Financial Risks

Our profitability depends in part on our ability to recover costs from our customers and there may be changes in circumstances or in the regulatory environment that impair our ability to recover costs from our customers.

We are subject to comprehensive regulation by federal and state utility regulatory agencies.  The CPUC regulates many aspects of our utility operations, including siting and construction of facilities, customer service and the rates that we can charge customers.  The FERC has jurisdiction, among other things, over wholesale rates for electric transmission service, the sale of electric energy in interstate commerce and certain natural gas transactions in interstate commerce.

The profitability of our operations is dependent on our ability to recover the costs of providing energy and utility services to our customers and earn a return on our capital investment.  We provide service at rates approved by one or more regulatory commissions. These rates are generally regulated and based on an analysis of our costs incurred in a test year. We are subject to both future and historical test years depending upon the regulatory mechanisms approved in each jurisdiction. Thus, the rates we are allowed to charge may or may not match our costs at any given time.  While rate regulation is premised on providing an opportunity to earn a reasonable rate of return on invested capital, in a continued low interest rate environment there has been pressure pushing down ROE. There can also be no assurance that the applicable regulatory commission will judge all of our costs to have been prudent, which could result in cost disallowances, or that the regulatory process in which rates are determined will always result in rates that will produce full recovery of such costs. Changes in the long-term cost-effectiveness or changes to the operating conditions of our assets may result in early retirements and while regulation typically provides relief for these types of changes, there is no assurance that regulators would allow full recovery of all remaining costs leaving all or a portion of these asset costs stranded. Rising fuel costs could increase the risk that we will not be able to fully recover our fuel costs from our customers.  Furthermore, there could be changes in the regulatory environment that would impair our ability to recover costs historically collected from our customers.

Management currently believes these prudently incurred costs are recoverable given the existing regulatory mechanisms in place. However, adverse regulatory rulings or the imposition of additional regulations could have an adverse impact on our results of operations and hence could materially and adversely affect our ability to meet our financial obligations, including debt payments.

Any reductions in our credit ratings could increase our financing costs and the cost of maintaining certain contractual relationships.

We cannot be assured that any of our current ratings will remain in effect for any given period of time, or that a rating will not be lowered or withdrawn entirely by a rating agency.  In addition, our credit ratings may change as a result of the differing methodologies or change in the methodologies used by the various rating agencies.  Any downgrade could lead to higher borrowing costs.  Also, we may enter into certain procurement and derivative contracts that require the posting of collateral or settlement of applicable contracts if credit ratings fall below investment grade.


18


We are subject to capital market and interest rate risks.

Utility operations require significant capital investment. As a result, we frequently need to access capital markets.  Any disruption in capital markets could have a material impact on our ability to fund our operations.  Capital markets are global in nature and are impacted by numerous issues and events throughout the world economy.  Capital market disruption events and resulting broad financial market distress could prevent us from issuing new securities or cause us to issue securities with less than ideal terms and conditions, such as higher interest rates.

Higher interest rates on short-term borrowings with variable interest rates could also have an adverse effect on our operating results.  Changes in interest rates may also impact the fair value of the debt securities in the master pension trust, as well as our ability to earn a return on short-term investments of excess cash.

We are subject to credit risks.

Credit risk includes the risk that our customers will not pay their bills, which may lead to a reduction in liquidity and an increase in bad debt expense.  Credit risk is comprised of numerous factors including the price of products and services provided, the overall economy and local economies in the geographic areas we serve, including local unemployment rates.

Credit risk also includes the risk that various counterparties that owe us money or product will breach their obligations.  Should the counterparties to these arrangements fail to perform, we may be forced to enter into alternative arrangements.  In that event, our financial results could be adversely affected and we could incur losses.

One alternative available to address counterparty credit risk is to transact on liquid commodity exchanges.  The credit risk is then socialized through the exchange central clearinghouse function.  While exchanges do remove counterparty credit risk, all participants are subject to margin requirements, which create an additional need for liquidity to post margin as exchange positions change value daily. The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) requires broad clearing of financial swap transactions through a central counterparty, which could lead to additional margin requirements that would impact our liquidity. However, we have taken advantage of an exception to mandatory clearing afforded to commercial end-users who are not classified as a major swap participant.  The Board of Directors has authorized Xcel Energy and its subsidiaries to take advantage of this end-user exception.

We may at times have direct credit exposure in our short-term wholesale and commodity trading activity to various financial institutions trading for their own accounts or issuing collateral support on behalf of other counterparties.  We may also have some indirect credit exposure due to participation in organized markets, such as SPP, PJM, MISO and ERCOT, in which any credit losses are socialized to all market participants.

We do have additional indirect credit exposures to various domestic and foreign financial institutions in the form of letters of credit provided as security by power suppliers under various long-term physical purchased power contracts.  If any of the credit ratings of the letter of credit issuers were to drop below the designated investment grade rating stipulated in the underlying long-term purchased power contracts, the supplier would need to replace that security with an acceptable substitute.  If the security were not replaced, the party could be in technical default under the contract, which would enable us to exercise our contractual rights.


19


Increasing costs associated with our defined benefit retirement plans and other employee benefits may adversely affect our results of operations, financial position or liquidity.

We have defined benefit pension and postretirement plans that cover most of our employees.  Assumptions related to future costs, return on investments, interest rates and other actuarial assumptions, including mortality tables, have a significant impact on our funding requirements related to these plans.  These estimates and assumptions may change based on economic conditions, actual stock and bond market performance, changes in interest rates and changes in governmental regulations.  In addition, the Pension Protection Act changed the minimum funding requirements for defined benefit pension plans with modifications that allowed additional flexibility in the timing of contributions.  Therefore, our funding requirements and related contributions may change in the future.  Also, the payout of a significant percentage of pension plan liabilities in a single year due to high retirements or employees leaving PSCo could trigger settlement accounting and could require PSCo to recognize material incremental pension expense related to unrecognized plan losses in the year these liabilities are paid.

Increasing costs associated with health care plans may adversely affect our results of operations.

Our self-insured costs of health care benefits for eligible employees have increased in recent years.  Increasing levels of large individual health care claims and overall health care claims could have an adverse impact on our operating results, financial position, and liquidity.  We believe that our employee benefit costs, including costs related to health care plans for our employees and former employees, will continue to rise.  Changes in industry standards utilized by management in key assumptions (e.g., mortality tables) could have a significant impact on future liabilities and benefit costs. Legislation related to health care could also significantly change our benefit programs and costs.

Changes in federal tax law may significantly impact our business.

There are a number of provisions in federal tax law designed to incentivize capital investments which have benefited our customers by keeping rates lower than without such provisions. Examples of these include the use of accelerated and bonus depreciation for most of our capital investments, PTCs for wind energy, investment tax credits for solar energy and research and development tax credits and deductions. Changes to current federal tax law have the ability to benefit or adversely affect our earnings and our customer costs. Significant changes in corporate tax rates could result in the impairment of deferred tax assets that are established based on existing law. Changes to the value of various tax credits could change the economics of resources and our resource selections. While regulation allows us to incorporate changes in tax law into the rate-setting process, there could be timing delays before realization of the changes.

Operational Risks

We are subject to commodity risks and other risks associated with energy markets and energy production.

We engage in wholesale sales and purchases of electric capacity, energy and energy-related products as well as natural gas. As a result we are subject to market supply and commodity price risk.  Commodity price changes can affect the value of our commodity trading derivatives. We mark certain derivatives to estimated fair market value on a daily basis (mark-to-market accounting).  Actual settlements can vary significantly from estimated fair values recorded, and significant changes from the assumptions underlying our fair value estimates could cause significant earnings variability.

If we encounter market supply shortages or our suppliers are otherwise unable to meet their contractual obligations, we may be unable to fulfill our contractual obligations to our customers at previously anticipated costs.  Therefore, a significant disruption could cause us to seek alternative supply services at potentially higher costs or suffer increased liability for unfulfilled contractual obligations. Any significantly higher energy or fuel costs relative to corresponding sales commitments could have a negative impact on our cash flows and potentially result in economic losses.  Potential market supply shortages may not be fully resolved through alternative supply sources and may cause short-term disruptions in our ability to provide electric and/or natural gas services to our customers.  The impact of these cost and reliability issues depends on our operating conditions such as generation fuels mix, availability of water for cooling, availability of fuel transportation including rail shipments of coal, electric generation capacity, transmission, natural gas pipeline capacity, etc.


20


Our utility operations are subject to long-term planning risks.

Most electric utility investments are long-lived and are planned to be used for decades. Transmission and generation investments typically have long lead times, and therefore are planned well in advance of when they are brought in-service subject to long-term resource plans. These plans are based on numerous assumptions over the planning horizon such as: sales growth, customer usage, economic activity, costs, regulatory mechanisms, customer behavior, available technology and public policy. The electric utility sector is undergoing a period of significant change. For example, public policy has driven increases in appliance and lighting efficiency and energy efficient buildings, wider adoption and lower cost of renewable generation and distributed generation, including community solar gardens and customer-sited solar, shifts away from coal generation to decrease CO2 emissions and increasing use of natural gas in electric generation driven by lower natural gas prices. Over time, customer adoption of these technologies and increased energy efficiency could result in excess transmission and generation resources as well as stranded costs if PSCo is not able to fully recover the costs and investments. These changes also introduce additional uncertainty into long-term planning which gives rise to a risk that the magnitude and timing of resource additions and growth in customer demand may not coincide, and that the preference for the types of additions may change from planning to execution. In addition, we are also subject to longer-term availability of the natural resource inputs such as coal, natural gas, uranium and water to cool our facilities. Lack of availability of these resources during the planning period could jeopardize long-term operations of our facilities or make them uneconomic to operate.

The resource plans reviewed and approved by our state regulators assume continuation of the traditional utility cost of service model under which utility costs are recovered from customers as they receive the benefit of service. PSCo is engaged in significant and ongoing infrastructure investment programs to accommodate distributed generation and maintain high system reliability. PSCo is also investing in renewable and natural gas-fired generation to reduce our CO2 emissions profile. The inability of coal mining companies to attract capital could disrupt longer-term supplies. Early plant retirements that may result from these changes could expose us to premature financial obligations, which could result in less than full recovery of all remaining costs. Both decreasing use per customer driven by appliance and lighting efficiency and the availability of cost-effective distributed generation puts downward pressure on load growth. This could lead to under recovery of costs, excess resources to meet customer demand and increases in electric rates.

Our natural gas and electric transmission and distribution operations involve numerous risks that may result in accidents and other operating risks and costs.

Our natural gas transmission and distribution activities include a variety of inherent hazards and operating risks, such as leaks, explosions and mechanical problems, which could cause substantial financial losses. Our electric transmission and distribution activities also include inherent hazards and operating risks such as contact, fire and widespread outages which could cause substantial financial losses. In addition, these natural gas and electric risks could result in loss of human life, significant damage to property, environmental pollution, impairment of our operations and substantial losses to us. We maintain insurance against some, but not all, of these risks and losses.

The occurrence of any of these events not fully covered by insurance could have a material effect on our financial position and results of operations. For our natural gas transmission or distribution lines located near populated areas, the level of potential damages resulting from these risks is greater.

Additionally, for natural gas the operating or other costs that may be required in order to comply with potential new regulations, including the Pipeline Safety Act, could be significant. The Pipeline Safety Act requires verification of pipeline infrastructure records by pipeline owners and operators to confirm the maximum allowable operating pressure of lines located in high consequence areas or more-densely populated areas. We have programs in place to comply with the Pipeline Safety Act and for systematic infrastructure monitoring and renewal over time. A significant incident could increase regulatory scrutiny and result in penalties and higher costs of operations.


21


As we are a subsidiary of Xcel Energy Inc., we may be negatively affected by events impacting the credit or liquidity of Xcel Energy Inc. and its affiliates.

If Xcel Energy Inc. were to become obligated to make payments under various guarantees and bond indemnities or to fund its other contingent liabilities, or if either Standard & Poor’s or Moody’s were to downgrade Xcel Energy Inc.’s credit rating below investment grade, Xcel Energy Inc. may be required to provide credit enhancements in the form of cash collateral, letters of credit or other security to satisfy part or potentially all of these exposures.  If either Standard & Poor’s or Moody’s were to downgrade Xcel Energy Inc.’s debt securities below investment grade, it would increase Xcel Energy Inc.’s cost of capital and restrict its access to the capital markets. This could limit Xcel Energy Inc.’s ability to contribute equity or make loans to us, or may cause Xcel Energy Inc. to seek additional or accelerated funding from us in the form of dividends.  If such event were to occur, we may need to seek alternative sources of funds to meet our cash needs.

As of Dec. 31, 2016, Xcel Energy Inc. and its utility subsidiaries had approximately $14.2 billion of long-term debt and $0.6 billion of short-term debt and current maturities.  Xcel Energy Inc. provides various guarantees and bond indemnities supporting some of its subsidiaries by guaranteeing the payment or performance by these subsidiaries for specified agreements or transactions.

Xcel Energy also has other contingent liabilities resulting from various tax disputes and other matters.  Xcel Energy Inc.’s exposure under the guarantees is based upon the net liability of the relevant subsidiary under the specified agreements or transactions.  The majority of Xcel Energy Inc.’s guarantees limit its exposure to a maximum amount that is stated in the guarantees.  As of Dec. 31, 2016, Xcel Energy had guarantees outstanding with a maximum stated amount of approximately $18.8 million and exposure of $0.1 million. Xcel Energy also had additional guarantees of $43.0 million at Dec. 31, 2016 for performance and payment of surety bonds for the benefit of itself and its subsidiaries, with total exposure that cannot be estimated at this time.  If Xcel Energy Inc. were to become obligated to make payments under these guarantees and bond indemnities or become obligated to fund other contingent liabilities, it could limit Xcel Energy Inc.’s ability to contribute equity or make loans to us, or may cause Xcel Energy Inc. to seek additional or accelerated funding from us in the form of dividends.  If such event were to occur, we may need to seek alternative sources of funds to meet our cash needs.

We are a wholly owned subsidiary of Xcel Energy Inc.  Xcel Energy Inc. can exercise substantial control over our dividend policy and business and operations and may exercise that control in a manner that may be perceived to be adverse to our interests.

All of the members of our Board of Directors, as well as many of our executive officers, are officers of Xcel Energy Inc.  Our Board makes determinations with respect to a number of significant corporate events, including the payment of our dividends.

We have historically paid quarterly dividends to Xcel Energy Inc.  In 2016, 2015 and 2014 we paid $336.6 million, $330.8 million and $433.8 million of dividends to Xcel Energy Inc., respectively.  If Xcel Energy Inc.’s cash requirements increase, our Board of Directors could decide to increase the dividends we pay to Xcel Energy Inc. to help support Xcel Energy Inc.’s cash needs.  This could adversely affect our liquidity. The most restrictive dividend limitation for PSCo is imposed by its credit facility, which limits the debt-to-total capitalization ratio. See Item 5 for further discussion on dividend limitations.

Public Policy Risks

We may be subject to legislative and regulatory responses to climate change and emissions, with which compliance could be difficult and costly.

Increased public awareness and concern regarding climate change may result in more state, regional and/or federal requirements to reduce or mitigate the effects of GHGs. Legislative and regulatory responses related to climate change and new interpretations of existing laws through climate change litigation create financial risk as our electric generating facilities may be subject to additional regulation at either the state or federal level in the future. Such regulations could impose substantial costs on our system. International agreements could have an impact to the extent they lead to future federal or state regulations.

In 2015, the 21st Conference of the Parties to the United Nations Framework Convention on Climate Change reached consensus among 190 nations on an agreement (the Paris Agreement) that establishes a framework for GHG mitigation actions by all countries (“nationally determined contributions”), with a goal of holding the increase in global average temperature to below 2o Celsius above pre-industrial levels and an aspiration to limit the increase to 1.5o Celsius. If implemented, the Paris Agreement could result in future additional GHG reductions in the United States.


22


We have been, and in the future may be, subject to climate change lawsuits. An adverse outcome in any of these cases could require substantial capital expenditures and could possibly require payment of substantial penalties or damages. Defense costs associated with such litigation can also be significant. Such payments or expenditures could affect results of operations, cash flows and financial condition if such costs are not recovered through regulated rates.

The EPA has proposed the CPP, which would regulate GHGs from power plants by mandating state plans to achieve state-specific emission reduction goals. The legality of the CPP has been challenged in the courts, and the Supreme Court stayed the rule while those challenges proceed. If the rule is ultimately implemented, uncertainties remain regarding implementation plans, including available opportunities to reduce costs, availability of emission trading, how states will allocate the reduction burden among utilities, what actions are creditable and the indirect impact of carbon regulation on natural gas and coal prices.

Some states have indicated a desire to continue to pursue climate policies even in the absence of federal mandates. All of the steps that PSCo has taken to date to reduce GHG emissions, including energy efficiency measures, adding renewable generation or retiring or converting coal plants to natural gas, occurred under state-endorsed resource plans, renewable energy standards and other state policies. While those actions likely would have put PSCo in a good position to meet federal standards under the CPP or the Paris Agreement, repeal of these policies would not impact those state-endorsed actions and plans.

Whether under state or federal programs, an important factor is our ability to recover the costs incurred to comply with any regulatory requirements in a timely manner. If our regulators do not allow us to recover all or a part of the cost of capital investment or the O&M costs incurred to comply with the mandates, it could have a material effect on our results of operations.

We are also subject to a significant number of proposed and potential rules that will impact our coal-fired and other generation facilities. These include rules associated with emissions of SO2 and NOx, mercury, regional haze, ozone and PM, water intakes, water discharges and ash management. The costs of investment to comply with these rules could be substantial and in some cases would lead to early retirement of coal units. We may not be able to timely recover all costs related to complying with regulatory requirements imposed on us.

Increased risks of regulatory penalties could negatively impact our business.

The Energy Act increased civil penalty authority for violation of FERC statutes, rules and orders.  The FERC can now impose penalties of up to $1.2 million per violation per day, particularly as it relates to energy trading activities for both electricity and natural gas.  Under statute, the FERC can adjust penalties for inflation. In addition, NERC electric reliability standards and critical infrastructure protection requirements are mandatory and subject to potential financial penalties by regional entities, the NERC or the FERC for violations. Additionally, the PHMSA, the Occupational Safety and Health Administration and other federal agencies also have penalty authority. In the event of serious incidents, these agencies have become more active in pursuing penalties. Some states have the authority to impose substantial penalties in the event of non-compliance.  If a serious reliability or safety incident did occur, it could have a material effect on our operations or financial results.

We attempt to mitigate the risk of regulatory penalties through formal training on such prohibited practices and a compliance function that reviews our interaction with the markets under FERC and CFTC jurisdictions. We are also managing natural gas risk on our system by removing types of pipe (e.g. cast iron) with known problem tendencies and by testing transmission pipelines in high consequence areas. However, there is no guarantee our compliance programs will be sufficient to ensure against violations.


23


Macroeconomic Risks

Economic conditions impact our business.

Our operations are affected by local, national and worldwide economic conditions. Growth in our customer base is correlated with economic conditions. While the number of customers is growing, sales growth is relatively modest due to an increased focus on energy efficiency including federal standards for appliance and lighting efficiency and distributed generation, primarily solar PV. Instability in the financial markets also may affect the cost of capital and our ability to raise capital, which is discussed in the capital market risk section above.

Economic conditions may be impacted by insufficient financial sector liquidity leading to potential increased unemployment, which may impact customers’ ability to pay timely, increase customer bankruptcies, and may lead to increased bad debt.

Further, worldwide economic activity has an impact on the demand for basic commodities needed for utility infrastructure, such as steel, copper, aluminum, etc., which may impact our ability to acquire sufficient supplies.  Additionally, the cost of those commodities may be higher than expected.

Our operations could be impacted by war, acts of terrorism, threats of terrorism or disruptions in normal operating conditions due to localized or regional events.

Our generation plants, fuel storage facilities, transmission and distribution facilities and information systems may be targets of terrorist activities.  Any such disruption could result in a decrease in revenues and additional costs to repair and insure our assets. These disruptions could have a material impact on our financial condition and results of operations.  The potential for terrorism has subjected our operations to increased risks and could have a material effect on our business.  We have already incurred increased costs for security and capital expenditures in response to these risks. In addition, we may experience additional capital and operating costs to implement security for our plants, such as additional physical plant security and additional security personnel.  We have also already incurred increased costs for compliance with NERC reliability standards associated with critical infrastructure protection. In addition, we may experience additional capital and operating costs to comply with the NERC critical infrastructure protection standards as they are implemented and clarified.

The insurance industry has also been affected by these events and the availability of insurance may decrease.  In addition, the insurance we are able to obtain may have higher deductibles, higher premiums and more restrictive policy terms.

A disruption of the regional electric transmission grid, interstate natural gas pipeline infrastructure or other fuel sources, could negatively impact our business. Because our generation, the transmission systems and local natural gas distribution companies are part of an interconnected system, we face the risk of possible loss of business due to a disruption caused by the actions of a neighboring utility or an event (severe storm, severe temperature extremes, wildfires, solar storms, generator or transmission facility outage, breakdown or failure of equipment, pipeline rupture, railroad disruption, sudden and significant increase or decrease in wind generation or any disruption of work force such as may be caused by flu or other epidemic) within our operating systems or on a neighboring system. Any such disruption could result in a significant decrease in revenues and significant additional costs to repair assets, which could have a material impact on our financial condition and results.

The degree to which we are able to maintain day-to-day operations in response to unforeseen events will in part determine the financial impact of certain events on our financial condition and results. It is difficult to predict the magnitude of such events and associated impacts.

A cyber incident or cyber security breach could have a material effect on our business.

We operate in an industry that requires the continued operation of sophisticated information technology systems and network infrastructure.  In addition, we use our systems and infrastructure to create, collect, use, disclose, store, dispose of and otherwise process sensitive information, including company data, customer energy usage data, and personal information regarding customers, employees and their dependents, contractors and other individuals.


24


Our generation, transmission, distribution and fuel storage facilities, information technology systems and other infrastructure or physical assets, as well as the information processed in our systems (e.g., information about our customers, employees, operations, infrastructure and assets) could be affected by cyber security incidents, including those caused by human error. Our industry has begun to see an increased volume and sophistication of cyber security incidents from international activist organizations, Nation States and individuals. Cyber security incidents could harm our businesses by limiting our generating, transmitting and distributing capabilities, delaying our development and construction of new facilities or capital improvement projects to existing facilities, disrupting our customer operations or exposing us to liability. Our generation, transmission systems and natural gas pipelines are part of an interconnected system. Therefore, a disruption caused by the impact of a cyber security incident of the regional electric transmission grid, natural gas pipeline infrastructure or other fuel sources of our third party service providers’ operations, could also negatively impact our business.  In addition, such an event would likely receive regulatory scrutiny at both the federal and state level.  We are unable to quantify the potential impact of cyber security threats or subsequent related actions.  These potential cyber security incidents and corresponding regulatory action could result in a material decrease in revenues and may cause significant additional costs (e.g., penalties, third party claims, repairs, insurance or compliance) and potentially disrupt our supply and markets for natural gas, oil and other fuels.

We maintain security measures designed to protect our information technology systems, network infrastructure and other assets. However, these assets and the information they process may be vulnerable to cyber security incidents, including the resulting disability, or failures of assets or unauthorized access to assets or information.   If our technology systems were to fail or be breached, or those of our third-party service providers, we may be unable to fulfill critical business functions, including effectively maintaining certain internal controls over financial reporting. We are unable to quantify the potential impact of cyber security incidents on our business.

Rising energy prices could negatively impact our business.

Although commodity prices are currently relatively low, if fuel costs increase, customer demand could decline and bad debt expense may rise, which could have a material impact on our results of operations. While we have fuel clause recovery mechanisms, higher fuel costs could significantly impact our results of operations if costs are not recovered.  Delays in the timing of the collection of fuel cost recoveries as compared with expenditures for fuel purchases could have an impact on our cash flows.  We are unable to predict future prices or the ultimate impact of such prices on our results of operations or cash flows.

Our operating results may fluctuate on a seasonal and quarterly basis and can be adversely affected by milder weather.

Our electric and natural gas utility businesses are seasonal, and weather patterns can have a material impact on our operating performance. Demand for electricity is often greater in the summer and winter months associated with cooling and heating.  Because natural gas is heavily used for residential and commercial heating, the demand depends heavily upon weather patterns throughout our service territory, and a significant amount of natural gas revenues are recognized in the first and fourth quarters related to the heating season. Accordingly, our operations have historically generated less revenues and income when weather conditions are milder in the winter and cooler in the summer.  Unusually mild winters and summers could have an adverse effect on our financial condition, results of operations, or cash flows.

Our operations use third party contractors in addition to employees to perform periodic and on-going work.
We rely on third party contractors with specific qualifications to perform work both for ongoing operations and maintenance and for capital construction. We have contractual arrangements with these contractors which typically include performance standards, progress payments, insurance requirements and security for performance. Poor vendor performance could impact on going operations, restoration operations, our reputation and could introduce financial risk or risks of fines for PSCo.

Item 1B — Unresolved Staff Comments

None.


25


Item 2 — Properties

Virtually all of the utility plant property of PSCo is subject to the lien of its first mortgage bond indenture.
Electric Utility Generating Stations:
 
 
 
 
 
 
 

Station, Location and Unit
 
Fuel
 
Installed
 
Summer 2016
Net Dependable
Capability (MW)
 
Steam:
 
 
 
 
 
 
 
Cherokee-Denver, Colo., 1 Unit
 
Coal
 
1968
 
352

 (a)
Comanche-Pueblo, Colo.
 
 
 
 
 
 
 
Unit 1
 
Coal
 
1973
 
325

 
Unit 2
 
Coal
 
1975
 
335

 
Unit 3
 
Coal
 
2010
 
500

 (b)
Craig-Craig, Colo., 2 Units
 
Coal
 
1979-1980
 
83

 (c)
Hayden-Hayden, Colo., 2 Units
 
Coal
 
1965-1976
 
233

 (d)
Pawnee-Brush, Colo., 1 Unit
 
Coal
 
1981
 
505

 
Valmont-Boulder, Colo., 1 Unit
 
Coal
 
1964
 
184

 (e)
Combustion Turbine:
 
 
 
 
 
 
 
Blue Spruce-Aurora, Colo., 2 Units
 
Natural Gas
 
2003
 
264

 
Cherokee-Denver, Colo., 3 Units
 
Natural Gas
 
2015
 
576

 
Fort St. Vrain-Platteville, Colo., 6 Units
 
Natural Gas
 
1972-2009
 
968

 
Rocky Mountain-Keenesburg, Colo., 3 Units
 
Natural Gas
 
2004
 
580

 
Various locations, 6 Units
 
Natural Gas
 
Various
 
171

 
Hydro:
 
 
 
 
 
 
 
Cabin Creek-Georgetown, Colo.
 
 
 
 
 
 
 
Pumped Storage, 2 Units
 
Hydro
 
1967
 
210

 
Various locations, 9 Units
 
Hydro
 
Various
 
26

 
 
 
 
 
Total
 
5,312

 
(a) 
Cherokee Unit 4 will be fuel switched from coal to natural gas by Dec. 31, 2017.
(b) 
Based on PSCo’s ownership interest of 67 percent of Unit 3.
(c) 
Based on PSCo’s ownership interest of 10 percent. Craig Unit 1 is expected to be early retired in approximately 2025.
(d) 
Based on PSCo’s ownership interest of 76 percent of Unit 1 and 37 percent of Unit 2.
(e) 
Valmont Unit 5 will be retired by Dec. 31, 2017.

Electric utility overhead and underground transmission and distribution lines (measured in conductor miles) at Dec. 31, 2016:
Conductor Miles
 
345 KV
2,630

230 KV
12,890

138 KV
92

115 KV
4,929

Less than 115 KV
76,355


PSCo had 230 electric utility transmission and distribution substations at Dec. 31, 2016.

Natural gas utility mains at Dec. 31, 2016:
Miles
 
Transmission
2,281

Distribution
22,262



26


Item 3 — Legal Proceedings

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.

Additional Information

See Note 12 to the consolidated financial statements for further discussion of legal claims and environmental proceedings.  See Item 1 and Note 11 to the consolidated financial statements for a discussion of proceedings involving utility rates and other regulatory matters.

Item 4 — Mine Safety Disclosures

None.

PART II

Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

PSCo is a wholly owned subsidiary of Xcel Energy Inc. and there is no market for its common equity securities. PSCo’s dividends are subject to the FERC’s jurisdiction under the Federal Power Act, which prohibits the payment of dividends out of capital accounts; payment of dividends is allowed out of retained earnings only.

See Note 4 to the financial statements for further discussion of PSCo’s dividend policy.

The dividends declared during 2016 and 2015 were as follows:
(Thousands of Dollars)
 
2016
 
2015
First quarter
 
$
83,914

 
$
80,650

Second quarter
 
86,509

 
82,872

Third quarter
 
82,785

 
83,672

Fourth quarter
 
74,208

 
83,373


Item 6 — Selected Financial Data

This is omitted per conditions set forth in general instructions I (1) (a) and (b) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).



27


Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

Discussion of financial condition and liquidity for PSCo is omitted per conditions set forth in general instructions I (1) (a) and (b) of Form 10-K for wholly owned subsidiaries.  It is replaced with management’s narrative analysis of the results of operations set forth in general instructions I (2) (a) of Form 10-K 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 PSCo’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 consolidated financial statements and related notes to the consolidated financial statements.

Forward-Looking Statements

Except for the historical statements contained in this report, the matters discussed herein are forward-looking statements that are subject to certain risks, uncertainties and assumptions.  Such forward-looking statements are intended to be identified in this document by the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should” and similar expressions.  Actual results may vary materially.  Forward-looking statements speak only as of the date they are made, and we expressly disclaim any obligation to update any forward-looking information. The following factors, in addition to those discussed elsewhere in this Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2016 (including risk factors listed from time to time by PSCo in reports filed with the SEC, including “Risk Factors” in Item 1A of this Annual Report on Form 10-K and Exhibit 99.01 hereto), 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 PSCo 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 PSCo 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 PSCo and its subsidiaries; unusual weather; effects of geopolitical events, including war and acts of terrorism; cyber security threats and data security breaches; state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rates, or have an impact on asset operation or ownership or impose environmental compliance conditions; structures that affect the speed and degree to which competition enters the electric and natural gas markets; costs and other effects of legal and administrative proceedings, settlements, investigations and claims; financial or regulatory accounting policies imposed by regulatory bodies; outcomes of regulatory proceedings; availability of cost of capital; and employee work force factors.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

PSCo’s net income was approximately $463.5 million for 2016, compared with approximately $466.8 million for 2015.  The positive impact of higher natural gas margins (primarily due to a rate increase), sales growth and a lower estimated electric earnings test refund, were more than offset by increased depreciation and interest charges.

Electric Revenues and Margin

Electric revenues and fuel and purchased power expenses are largely impacted by the fluctuation in the price of natural gas and coal used in the generation of electricity, but as a result of the design of fuel recovery mechanisms to recover current expenses, these price fluctuations have little impact on electric margin.  The following table details the electric revenues and margin:
(Millions of Dollars)
 
2016
 
2015
Electric revenues
 
$
3,049

 
$
3,115

Electric fuel and purchased power
 
(1,196
)
 
(1,247
)
Electric margin
 
$
1,853

 
$
1,868



28


The following tables summarize the components of the changes in electric revenues and electric margin for the year ended Dec. 31:

Electric Revenues
(Millions of Dollars)
 
2016 vs. 2015
Fuel and purchased power cost recovery
 
$
(40
)
DSM program revenues, offset by expenses
 
(14
)
Firm wholesale
 
(12
)
Trading, including REC sales
 
(9
)
Non-fuel riders
 
(5
)
Retail sales growth, excluding weather impact
 
15

Earnings test refunds
 
6

Other, net
 
(7
)
Total decrease in electric revenues
 
$
(66
)

Electric Margin
(Millions of Dollars)
 
2016 vs. 2015
DSM program revenues, offset by expenses
 
$
(14
)
Firm wholesale
 
(12
)
Non-fuel riders
 
(5
)
Retail sales growth, excluding weather impact
 
15

Earnings test refunds
 
6

Other, net
 
(5
)
Total decrease in electric margin
 
$
(15
)

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 natural gas revenues and margin:
(Millions of Dollars)
 
2016
 
2015
Natural gas revenues
 
$
958

 
$
1,007

Cost of natural gas sold and transported
 
(425
)
 
(502
)
Natural gas margin
 
$
533

 
$
505


The following tables summarize the components of the changes in natural gas revenues and natural gas margin for the year ended Dec. 31:

Natural Gas Revenues
(Millions of Dollars)
 
2016 vs. 2015
Purchased natural gas adjustment clause recovery
 
$
(78
)
Infrastructure and integrity riders, partially offset in O&M expenses
 
(9
)
Retail rate increase
 
32

DSM program revenues, offset by expenses
 
2

Other, net
 
4

Total decrease in natural gas revenues
 
$
(49
)


29


Natural Gas Margin
(Millions of Dollars)
 
2016 vs. 2015
Retail rate increase
 
$
32

DSM program revenues, offset by expenses
 
2

Infrastructure and integrity riders, partially offset in O&M expenses
 
(9
)
Other, net
 
3

Total increase in natural gas margin
 
$
28


Non-Fuel Operating Expenses and Other Items

DSM Program Expenses DSM program expenses decreased $10.5 million, or 8.2 percent, for 2016 compared with 2015.  The decrease was primarily attributable to lower electric recovery rates. Lower DSM program expenses are generally offset by lower revenues.

Depreciation and Amortization Depreciation and amortization expense increased by approximately $31.9 million, or 7.7 percent, for 2016 compared with 2015.  The increase is primarily attributable to capital investments.

AFUDC — AFUDC increased by $5.6 million for 2016 compared with 2015.  The increase was primarily due to the expansion of transmission facilities and other capital expenditures.

Interest Charges Interest charges increased by $4.2 million, or 2.4 percent, for 2016 compared with 2015.  The increase is primarily due to higher long-term debt levels to fund capital investments.

Income Taxes — Income tax expense decreased $4.5 million for 2016 compared with 2015.  The decrease in income tax expense was primarily due to lower pretax earnings in 2016 and increased plant-related adjustments (e.g., AFUDC-equity) in 2016.  The ETR was 37.1 percent for 2016 compared with 37.4 percent for 2015. The lower ETR in 2016 was primarily due to the adjustments referenced above.

Item 7A — Quantitative and Qualitative Disclosures About Market Risk

Derivatives, Risk Management and Market Risk

PSCo is exposed to a variety of market risks in the normal course of business.  Market risk is the potential loss that may occur as a result of adverse changes in the market or fair value of a particular instrument or commodity.  All financial and commodity-related instruments, including derivatives, are subject to market risk.  See Note 10 to the consolidated financial statements for further discussion of market risks associated with derivatives.

PSCo is exposed to the impact of adverse changes in price for energy and energy-related products, which is partially mitigated by the use of commodity derivatives.  In addition to ongoing monitoring and maintaining credit policies intended to minimize overall credit risk, when necessary, management takes steps to mitigate changes in credit and concentration risks associated with its derivatives and other contracts, including parental guarantees and requests of collateral.  While PSCo expects that the counterparties will perform under the contracts underlying its derivatives, the contracts expose PSCo to some credit and nonperformance risk.

Though no material non-performance risk currently exists with the counterparties to PSCo’s commodity derivative contracts, distress in the financial markets may in the future impact that risk to the extent it impacts those counterparties.  Distress in the financial markets may also impact the fair value of the securities in the master pension trust, as well as PSCo’s ability to earn a return on short-term investments of excess cash.

Commodity Price Risk — PSCo is exposed to commodity price risk in its electric and natural gas operations.  Commodity price risk is managed by entering into long- and short-term physical purchase and sales contracts for electric capacity, energy and energy-related products and for various fuels used in generation and distribution activities.  Commodity price risk is also managed through the use of financial derivative instruments.  PSCo’s risk management policy allows it to manage commodity price risk within each rate-regulated operation to the extent such exposure exists.


30


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 the policy.

At Dec. 31, 2016, the fair values by source for net commodity trading contract assets were as follows:
 
 
Futures / Forwards
(Thousands of Dollars)
 
Source of
Fair Value
 
Maturity
Less Than
1 Year
 
Maturity
1 to 3
Years
 
Maturity
4 to 5
Years
 
Maturity
Greater Than
5 Years
 
Total Futures/
Forwards
Fair Value
PSCo
 
1

 
$
(188
)
 
$

 
$

 
$

 
$
(188
)
1 — Prices actively quoted or based on actively quoted prices.

Changes in the fair value of commodity trading contracts before the impacts of margin-sharing mechanisms for the years ended Dec. 31 were as follows:
(Thousands of Dollars)
 
2016
 
2015
Fair value of commodity trading net contract assets outstanding at Jan. 1
 
$
112

 
$

Contracts realized or settled during the period
 
(654
)
 
14

Commodity trading contract additions and changes during the period
 
354

 
98

Fair value of commodity trading net contract assets outstanding at Dec. 31
 
$
(188
)
 
$
112


At Dec. 31, 2016, a 10 percent increase in market prices for commodity trading contracts would decrease pretax income by approximately $0.9 million, whereas a 10 percent decrease would increase pretax income by approximately $0.9 million. At Dec. 31, 2015, a 10 percent increase in market prices for commodity trading contracts would decrease pretax income by approximately $0.1 million, whereas a 10 percent decrease would increase pretax income by approximately $0.1 million.

PSCo’s wholesale and commodity trading operations measure the outstanding risk exposure to price changes on transactions, contracts and obligations that have been entered into, but not closed, including transactions that are not recorded at fair value, using an industry standard methodology known as Value at Risk (VaR).  VaR expresses the potential change in fair value on the outstanding transactions, contracts and obligations over a particular period of time under normal market conditions.  The VaRs for the NSP-Minnesota and PSCo commodity trading operations, calculated on a consolidated basis using a Monte Carlo simulation with a 95 percent confidence level and a one-day holding period, were as follows:
(Millions of Dollars)
 
Year Ended
Dec. 31
 
VaR Limit
 
Average
 
High
 
Low
2016
 
$
0.09

 
$
3.00

 
$
0.16

 
$
0.38

 
$
0.05

2015
 
0.10

 
3.00

 
0.28

 
1.34

 
 
0.06


Interest Rate Risk — PSCo is subject to the risk of fluctuating interest rates in the normal course of business.  PSCo’s risk management policy allows interest rate risk to be managed through the use of fixed rate debt, floating rate debt and interest rate derivatives such as swaps, caps, collars and put or call options.

At Dec. 31, 2016, a 100-basis-point change in the benchmark rate on PSCo’s variable rate debt would impact annual pretax interest expense by approximately $1.3 million, and at Dec. 31, 2015 a 100-basis-point change in the benchmark rate on PSCo’s variable rate debt would impact annual pretax interest expense by approximately $0.1 million. See Note 10 to the consolidated financial statements for a discussion of PSCo’s interest rate derivatives.


31


Credit Risk — PSCo is also exposed to credit risk.  Credit risk relates to the risk of loss resulting from counterparties’ nonperformance on their contractual obligations.  PSCo maintains credit policies intended to minimize overall credit risk and actively monitors these policies to reflect changes and scope of operations.

At Dec. 31, 2016, a 10 percent increase in commodity prices would have resulted in an increase in credit exposure of $14.3 million, while a decrease in prices of 10 percent would have resulted in a decrease in credit exposure of $2.2 million.  At Dec. 31, 2015, a 10 percent increase in commodity prices would have resulted in an increase in credit exposure of $3.2 million, while a decrease in prices of 10 percent would have resulted in an increase in credit exposure of $0.2 million.

PSCo conducts standard credit reviews for all counterparties.  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.  Distress in the financial markets could increase PSCo’s credit risk.

Fair Value Measurements

PSCo follows accounting and disclosure guidance on fair value measurements that contains a hierarchy for inputs used in measuring fair value and requires disclosure of the observability of the inputs used in these measurements.  See Note 10 to the consolidated financial statements for further discussion of the fair value hierarchy and the amounts of assets and liabilities measured at fair value that have been assigned to Level 3.

Commodity Derivatives — PSCo continuously monitors the creditworthiness of the counterparties to its commodity derivative contracts and assesses each counterparty’s ability to perform on the transactions set forth in the contracts.  Given this assessment and the typically short duration of these contracts, the impact of discounting commodity derivative assets for counterparty credit risk was not material to the fair value of commodity derivative assets at Dec. 31, 2016.  PSCo also assesses the impact of its own credit risk when determining the fair value of commodity derivative liabilities.  The impact of discounting commodity derivative liabilities for credit risk was immaterial to the fair value of commodity derivative liabilities at Dec. 31, 2016.

Commodity derivative assets and liabilities assigned to Level 3 typically consist of forwards and options that are long-term in nature. Determining the fair value of certain commodity forwards and options can require management to make use of subjective price and volatility forecasts which extend to periods beyond those readily observable on active exchanges or quoted by brokers.  When less observable forward price and volatility forecasts are significant to determining the value of commodity forwards and options, these instruments are assigned to Level 3.  There were immaterial Level 3 commodity derivative assets or liabilities at Dec. 31, 2016.

Item 8 — Financial Statements and Supplementary Data

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

See Note 17 to the consolidated financial statements for summarized quarterly financial data.


32


Management Report on Internal Controls Over Financial Reporting

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

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

In 2016, PSCo implemented the general ledger modules of a new enterprise resource planning system. PSCo will initiate deployment of work management systems modules, including the conversion of existing work management systems, during 2017. PSCo does not believe this implementation has or will have an adverse effect on its internal control over financial reporting.

PSCo management assessed the effectiveness of PSCo’s internal control over financial reporting as of Dec. 31, 2016. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our assessment, we believe that, as of Dec. 31, 2016, PSCo’s internal control over financial reporting is effective at the reasonable assurance level based on those criteria.

/s/ BEN FOWKE
 
/s/ ROBERT C. FRENZEL
Ben Fowke
 
Robert C. Frenzel
Chairman and Chief Executive Officer
 
Executive Vice President, Chief Financial Officer
Feb. 24, 2017
 
Feb. 24, 2017


33


REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of
Public Service Company of Colorado
We have audited the accompanying consolidated balance sheets and statements of capitalization of Public Service Company of Colorado and subsidiaries (the “Company”) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, cash flows, and common stockholder’s equity for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Public Service Company of Colorado and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

/s/ DELOITTE & TOUCHE LLP
 
Minneapolis, Minnesota
 
February 24, 2017
 


34


PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands)
 
Year Ended Dec. 31
 
2016
 
2015
 
2014
Operating revenues
 
 
 
 
 
Electric
$
3,049,352

 
$
3,115,257

 
$
3,125,937

Natural gas
957,721

 
1,006,666

 
1,215,324

Steam and other
40,723

 
41,590

 
41,888

Total operating revenues
4,047,796

 
4,163,513

 
4,383,149

 
 
 
 
 
 
Operating expenses
 
 
 
 
 
Electric fuel and purchased power
1,196,417

 
1,246,666

 
1,405,498

Cost of natural gas sold and transported
425,410

 
501,824

 
725,754

Cost of sales — steam and other
15,872

 
17,788

 
16,831

Operating and maintenance expenses
762,416

 
761,901

 
751,786

Demand side management program expenses
118,175

 
128,681

 
139,780

Depreciation and amortization
443,555

 
411,667

 
379,202

Taxes (other than income taxes)
196,330

 
195,285

 
161,928

Total operating expenses
3,158,175

 
3,263,812

 
3,580,779

 
 
 
 
 
 
Operating income
889,621

 
899,701

 
802,370

 
 
 
 
 
 
Other income, net
3,817

 
2,964

 
4,265

Allowance for funds used during construction —  equity
18,557

 
14,485

 
46,784

 
 
 
 
 
 
Interest charges and financing costs
 
 
 
 
 
Interest charges — includes other financing costs of
$6,289, $6,285 and $6,340, respectively
181,631

 
177,430

 
171,881

Allowance for funds used during construction — debt
(7,045
)
 
(5,522
)
 
(17,241
)
Total interest charges and financing costs
174,586

 
171,908

 
154,640

 
 
 
 
 
 
Income before income taxes
737,409

 
745,242

 
698,779

Income taxes
273,918

 
278,440

 
243,591

Net income
$
463,491

 
$
466,802

 
$
455,188


See Notes to Consolidated Financial Statements

35


PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands)
 
 
Year Ended Dec. 31
 
 
2016
 
2015
 
2014
Net income
 
$
463,491

 
$
466,802

 
$
455,188

 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension and retiree medical benefits:
 
 
 
 
 
 
Net pension and retiree medical losses arising during the period, net of tax of $(138), $0, and $0
 
(223
)
 

 

Amortization of losses included in net periodic benefit cost, net of tax of $2, $0, and $0, respectively
 
3

 

 

 
 
(220
)
 

 

 
 
 
 
 
 
 
Derivative instruments:
 
 
 
 
 
 
Net fair value decrease, net of tax of $0, $(20), and $(43), respectively
 

 
(30
)
 
(72
)
Reclassification of losses (gains) to net income, net of tax of $648, $39, and $(287), respectively
 
1,056

 
72

 
(468
)
 
 
1,056

 
42

 
(540
)
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
836

 
42

 
(540
)
Comprehensive income
 
$
464,327

 
$
466,844

 
$
454,648


See Notes to Consolidated Financial Statements


36


PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
 
Year Ended Dec. 31
 
2016
 
2015
 
2014
Operating activities
 
 
 
 
 
Net income
$
463,491

 
$
466,802

 
$
455,188

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
 
Depreciation and amortization
446,179

 
416,427

 
383,992

Demand side management program amortization
2,138

 
3,509

 
4,331

Deferred income taxes
222,002

 
277,896

 
227,823

Amortization of investment tax credits
(2,805
)
 
(2,807
)
 
(2,941
)
Allowance for equity funds used during construction
(18,557
)
 
(14,485
)
 
(46,784
)
Provision for bad debts
14,121

 
13,052

 
17,005

Net realized and unrealized hedging and derivative transactions
1,325

 
2,414

 
(2,578
)
Other
(388
)
 
2,500

 

Changes in operating assets and liabilities:
 
 
 
 
 
Accounts receivable
(14,227
)
 
8,872

 
(42,921
)
Accrued unbilled revenues
(20,866
)
 
17,837

 
(23,132
)
Inventories
172

 
33,417

 
(972
)
Prepayments and other
68,693

 
10,483

 
(81,715
)
Accounts payable
38,439

 
(40,982
)
 
(22,789
)
Net regulatory assets and liabilities
4,143

 
78,055

 
130,499

Other current liabilities
1,892

 
19,654

 
5,284

Pension and other employee benefit obligations
(10,627
)
 
(23,449
)
 
(38,905
)
Change in other noncurrent assets
(6,750
)
 
4,086

 
5,537

Change in other noncurrent liabilities
(22,120
)
 
(35,334
)
 
(19,130
)
Net cash provided by operating activities
1,166,255

 
1,237,947

 
947,792

 
 
 
 
 
 
Investing activities
 
 
 
 
 
Utility capital/construction expenditures
(1,113,800
)
 
(995,597
)
 
(1,114,338
)
Proceeds from insurance recoveries
608

 

 

Allowance for equity funds used during construction
18,557

 
14,485

 
46,784

Investments in utility money pool arrangement
(444,000
)
 
(196,300
)
 
(603,000
)
Repayments from utility money pool arrangement
444,000

 
212,300

 
659,000

Other
(1,460
)
 

 

Net cash used in investing activities
(1,096,095
)
 
(965,112
)
 
(1,011,554
)
 
 
 
 
 
 
Financing activities
 
 
 
 
 
Proceeds from (repayments of) short-term borrowings, net
115,000

 
(368,000
)
 
382,000

Borrowings under utility money pool arrangement
524,500

 
165,000

 
333,000

Repayments under utility money pool arrangement
(524,500
)
 
(165,000
)
 
(333,000
)
Proceeds from issuance of long-term debt
244,507

 
246,751

 
295,598

Repayments of long-term debt
(129,500
)
 

 
(275,000
)
Capital contributions from parent
38,755

 
175,210

 
81,498

Dividends paid to parent
(336,581
)
 
(330,846
)
 
(433,788
)
Net cash (used in) provided by financing activities
(67,819
)
 
(276,885
)
 
50,308

 
 
 
 
 
 
Net change in cash and cash equivalents
2,341

 
(4,050
)
 
(13,454
)
Cash and cash equivalents at beginning of period
3,585

 
7,635

 
21,089

Cash and cash equivalents at end of period
$
5,926

 
$
3,585

 
$
7,635

 
 
 
 
 
 
Supplemental disclosure of cash flow information:
 
 
 
 
 
Cash paid for interest (net of amounts capitalized)
$
(171,714
)
 
$
(165,546
)
 
$
(150,011
)
Cash received (paid) for income taxes, net
22,827

 
13,822

 
(91,810
)
Supplemental disclosure of non-cash investing transactions:
 
 
 
 
 
Property, plant and equipment additions in accounts payable
$
68,870

 
$
106,912

 
$
139,616


See Notes to Consolidated Financial Statements

37


PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data)
 
Dec. 31
 
2016
 
2015
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
5,926

 
$
3,585

Accounts receivable, net
304,900

 
300,882

Accounts receivable from affiliates
9,421

 
4,909

Accrued unbilled revenues
297,078

 
276,212

Inventories
202,220

 
205,562

Regulatory assets
103,783

 
92,072

Derivative instruments
10,934

 
1,945

Prepaid taxes
9,124

 
81,162

Prepayments and other
25,435

 
22,698

Total current assets
968,821

 
989,027

 
 
 
 
Property, plant and equipment, net
12,849,799

 
12,172,211

 
 
 
 
Other assets
 

 
 

Regulatory assets
958,429

 
906,275

Derivative instruments
3,398

 
3,478

Other
25,637

 
18,224

Total other assets
987,464

 
927,977

Total assets
$
14,806,084

 
$
14,089,215

 
 
 
 
Liabilities and Equity
 

 
 

Current liabilities
 

 
 

Current portion of long-term debt
$
5,270

 
$
8,103

Short-term debt
129,000

 
14,000

Accounts payable
376,186

 
352,701

Accounts payable to affiliates
98,797

 
76,643

Regulatory liabilities
101,110

 
152,823

Taxes accrued
171,862

 
166,660

Accrued interest
48,619

 
49,698

Dividends payable to parent
74,208

 
83,374

Derivative instruments
6,788

 
8,881

Other
73,022

 
78,910

Total current liabilities
1,084,862

 
991,793

 
 
 
 
Deferred credits and other liabilities
 

 
 

Deferred income taxes
2,889,129

 
2,658,198

Deferred investment tax credits
30,661

 
33,466

Regulatory liabilities
512,933

 
471,421

Asset retirement obligations
289,563

 
240,508

Derivative instruments
7,828

 
13,020

Customer advances
162,742

 
198,526

Pension and employee benefit obligations
285,774

 
200,774

Other
62,201

 
63,864

Total deferred credits and other liabilities
4,240,831

 
3,879,777

 
 
 
 
Commitments and contingencies


 


Capitalization
 

 
 

Long-term debt
4,210,936

 
4,097,493

Common stock — 100 shares authorized of $0.01 par value; 100 shares
outstanding at Dec. 31, 2016 and 2015, respectively

 

Additional paid in capital
3,633,216

 
3,620,824

Retained earnings
1,659,239

 
1,523,164

Accumulated other comprehensive loss
(23,000
)
 
(23,836
)
Total common stockholder’s equity
5,269,455

 
5,120,152

Total liabilities and equity
$
14,806,084

 
$
14,089,215


See Notes to Consolidated Financial Statements

38


PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER’S EQUITY
(amounts in thousands, except share and per share data)
 
Common Stock Issued
 
 
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Common
Stockholder’s
Equity
 
Shares
 
Par Value
 
Additional
Paid In
Capital
 
Retained
Earnings
 
 
Balance at Dec. 31, 2013
100

 
$

 
$
3,441,290

 
$
1,384,047

 
$
(23,338
)
 
$
4,801,999

Net income
 
 
 
 
 
 
455,188

 
 
 
455,188

Other comprehensive loss
 
 
 
 
 
 
 
 
(540
)
 
(540
)
Common dividends declared to parent
 
 
 
 
 
 
(452,306
)
 
 
 
(452,306
)
Contribution of capital by parent
 
 
 
 
81,498

 
 
 
 
 
81,498

Balance at Dec. 31, 2014
100

 
$

 
$
3,522,788

 
$
1,386,929

 
$
(23,878
)
 
$
4,885,839

Net income
 
 
 
 
 
 
466,802

 
 
 
466,802

Other comprehensive income
 
 
 
 
 
 
 
 
42

 
42

Common dividends declared to parent
 
 
 
 
 
 
(330,567
)
 
 
 
(330,567
)
Contribution of capital by parent
 
 
 
 
98,036

 
 
 
 
 
98,036

Balance at Dec. 31, 2015
100

 
$

 
$
3,620,824

 
$
1,523,164

 
$
(23,836
)
 
$
5,120,152

Net income
 
 
 
 
 
 
463,491

 
 
 
463,491

Other comprehensive income
 
 
 
 
 
 
 
 
836

 
836

Common dividends declared to parent
 
 
 
 
 
 
(327,416
)
 
 
 
(327,416
)
Contribution of capital by parent
 
 
 
 
12,392

 
 
 
 
 
12,392

Balance at Dec. 31, 2016
100

 
$

 
$
3,633,216

 
$
1,659,239

 
$
(23,000
)
 
$
5,269,455


See Notes to Consolidated Financial Statements

39


PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPITALIZATION
(amounts in thousands, except share and per share data)
 
Dec. 31
 
2016
 
2015
Long-Term Debt
 
 
 
First Mortgage Bonds, Series due:
 
 
 
Sept. 1, 2017, 4.375% (a)
$

 
$
129,500

Aug. 1, 2018, 5.8%
300,000

 
300,000

June 1, 2019, 5.125%
400,000

 
400,000

Nov. 15, 2020, 3.2%
400,000

 
400,000

Sept. 15, 2022, 2.25%
300,000

 
300,000

March 15, 2023, 2.5%
250,000

 
250,000

May 15, 2025, 2.9%
250,000

 
250,000

Sept. 1, 2037, 6.25%
350,000

 
350,000

Aug. 1, 2038, 6.5%
300,000

 
300,000

Aug. 15, 2041, 4.75%
250,000

 
250,000

Sept. 15, 2042, 3.6%
500,000

 
500,000

March 15, 2043, 3.95%
250,000

 
250,000

March 15, 2044, 4.3%
300,000

 
300,000

June 15, 2046, 3.55%
250,000

 

Capital lease obligations, through 2060, 11.2% — 14.3%
155,927

 
164,031

Unamortized discount
(12,922
)
 
(11,340
)
Unamortized debt expense
(26,799
)
 
(26,595
)
Total
4,216,206

 
4,105,596

Less current maturities
5,270

 
8,103

Total long-term debt
$
4,210,936

 
$
4,097,493

Common Stockholder’s Equity
 

 
 

Common Stock — 100 shares authorized of $0.01 par value; 100 shares
outstanding at Dec. 31, 2016 and 2015, respectively.
$

 
$

Additional paid-in capital
3,633,216

 
3,620,824

Retained earnings
1,659,239

 
1,523,164

Accumulated other comprehensive loss
(23,000
)
 
(23,836
)
Total common stockholder’s equity
$
5,269,455

 
$
5,120,152


(a) 
Pollution control financing.

See Notes to Consolidated Financial Statements

40


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.
Summary of Significant Accounting Policies

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

Principles of Consolidation — PSCo’s consolidated financial statements include its wholly-owned subsidiaries.  In the consolidation process, all intercompany transactions and balances are eliminated.  PSCo has investments in several plants and transmission facilities jointly owned with nonaffiliated utilities.  PSCo’s proportionate share of jointly owned facilities is recorded as property, plant and equipment on the consolidated balance sheets, and PSCo’s proportionate share of the operating costs associated with these facilities is included in its consolidated statements of income.  See Note 6 for further discussion of jointly owned generation, transmission, and gas facilities and related ownership percentages.

PSCo evaluates its arrangements and contracts with other entities, including but not limited to, investments, PPAs and fuel contracts to determine if the other party is a variable interest entity, if PSCo has a variable interest and if PSCo is the primary beneficiary.  PSCo follows accounting guidance for variable interest entities which requires consideration of the activities that most significantly impact an entity’s financial performance and power to direct those activities, when determining whether PSCo is a variable interest entity’s primary beneficiary.  See Note 12 for further discussion of variable interest entities.

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

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

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

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

If restructuring or other changes in the regulatory environment occur, PSCo may no longer be eligible to apply this accounting treatment and may be required to eliminate regulatory assets and liabilities from its balance sheet.  Such changes could have a material effect on PSCo’s financial condition, results of operations and cash flows.  See Note 13 for further discussion of regulatory assets and liabilities.

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


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PSCo 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.

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, revenue is recognized equal to the revenue requirement, including return on rate base items, for the qualified mechanisms. The mechanisms are revised periodically for differences between the total amount collected under the riders and the revenue recognized, which may increase or decrease the level of revenue collected from customers.

Conservation Programs — PSCo has implemented programs to assist its retail customers in conserving energy and reducing peak demand on the electric and natural gas systems.  These programs include approximately 20 unique DSM products, pilots and services for C&I customers, as well as approximately 23 DSM products, pilots and services for residential and low-income customers. Overall, the DSM portfolio provides rebates and/or incentives for nearly 1,000 unique measures.

The costs incurred for DSM programs are deferred if it is probable future revenue will be provided to permit recovery of the incurred cost. Recorded revenues for incentive programs designed for recovery of DSM program costs and/or conservation performance incentives are limited to amounts expected to be collected within 24 months from the annual period in which they are earned.

PSCo’s DSM program costs are recovered through a combination of base rate revenue and rider mechanisms.  The revenue billed to customers recovers incurred costs for conservation programs and also incentive amounts that are designed to encourage PSCo’s achievement of energy conservation goals.  PSCo recognizes regulatory assets to reflect the amount of costs or earned incentives that have not yet been collected from customers.

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

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

PSCo records depreciation expense related to its plant using the straight-line method over the plant’s useful life.  Actuarial life studies are performed and submitted to the state and federal commissions for review.  Upon acceptance by the various commissions, the resulting lives and net salvage rates are used to calculate depreciation.  Depreciation expense, expressed as a percentage of average depreciable property, was approximately 2.6, 2.7 and 2.7 percent for the years ended Dec. 31, 2016, 2015 and 2014, respectively.

Leases — PSCo evaluates a variety of contracts for lease classification at inception, including PPAs and rental arrangements for office space, vehicles, and equipment.  Contracts determined to contain a lease because of per unit pricing that is other than fixed or market price, terms regarding the use of a particular asset, and other factors are evaluated further to determine if the arrangement is a capital lease. See Note 12 for further discussion of leases.


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

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

AROs — PSCo accounts for AROs under accounting guidance that requires a liability for the fair value of an ARO to be recognized in the period in which it is incurred if it can be reasonably estimated, with the offsetting associated asset retirement costs capitalized as a long-lived asset. The liability is generally increased over time by applying the effective interest method of accretion, and the capitalized costs are depreciated over the useful life of the long-lived asset. Changes resulting from revisions to the timing or amount of expected asset retirement cash flows are recognized as an increase or a decrease in the ARO. PSCo also recovers through rates certain future plant removal costs in addition to AROs. The accumulated removal costs for these obligations are reflected in the balance sheets as a regulatory liability. See Note 12 for further discussion of AROs.

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

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

Tax credits are recorded when earned unless there is a requirement to defer the benefit and amortize it over the book depreciable lives of the related property. The requirement to defer and amortize tax credits only applies to federal ITCs related to public utility property. Utility rate regulation also has resulted in the recognition of certain regulatory assets and liabilities related to income taxes, which are summarized in Note 13.

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

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

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

See Note 7 for further discussion of income taxes.


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

Gains or losses on commodity trading transactions are recorded as a component of electric operating revenues; hedging transactions for vehicle fuel costs are recorded as a component of capital projects and O&M costs; and interest rate hedging transactions are recorded as a component of interest expense.  PSCo is allowed to recover in electric or natural gas rates the costs of certain financial instruments purchased to reduce commodity cost volatility.  For further information on derivatives entered to mitigate commodity price risk on behalf of electric and natural gas customer, see Note 10.

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

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

PSCo evaluates all of its contracts at inception to determine if they are derivatives and if they meet the normal purchases and normal sales designation requirements.  None of the contracts entered into within the commodity trading operations qualify for a normal purchases and normal sales designation.

See Note 10 for further discussion of PSCo’s risk management and derivative activities.

Commodity Trading Operations — All applicable gains and losses related to commodity trading activities, whether or not settled physically, are shown on a net basis in electric operating revenues in the consolidated statements of income.

Pursuant to the JOA approved by the FERC, some of the commodity trading margins from PSCo are apportioned to NSP-Minnesota and SPS. Commodity trading activities are not associated with energy produced from PSCo’s generation assets or energy and capacity purchased to serve native load.  Commodity trading contracts are recorded at fair market value and commodity trading results include the impact of all margin-sharing mechanisms.  See Note 10 for further discussion.

Fair Value Measurements PSCo presents cash equivalents, interest rate derivatives and commodity derivatives at estimated fair values in its consolidated financial statements.  Cash equivalents are recorded at cost plus accrued interest; money market funds are measured using quoted NAVs.  For interest rate derivatives, quoted prices based primarily on observable market interest rate curves are used as a primary input to establish fair value.  For commodity derivatives, the most observable inputs available are generally used to determine the fair value of each contract.  In the absence of a quoted price for an identical contract in an active market, PSCo may use quoted prices for similar contracts, or internally prepared valuation models to determine fair value.  See Note 10 for further discussion.

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

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

Inventory — All inventory is recorded at average cost.


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

When RECs are purchased or acquired in the course of generation they are recorded as inventory at cost.  The cost of RECs that are utilized for compliance purposes is recorded as electric fuel and purchased power expense.  As a result of state regulatory orders, PSCo records that cost as a regulatory asset when the amount is recoverable in future rates.

Sales of RECs that are purchased or acquired in the course of generation are recorded in electric utility operating revenues on a gross basis. The cost of these RECs, related transaction costs, and amounts credited to customers under margin-sharing mechanisms are recorded in electric fuel and purchased power expense.

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

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

Estimated remediation costs, excluding inflationary increases, are recorded based on experience, an assessment of the current situation and the technology currently available for use in the remediation.  The recorded costs are regularly adjusted as estimates are revised and remediation proceeds.  If other participating PRPs exist and acknowledge their potential involvement with a site, costs are estimated and recorded only for PSCo’s expected share of the cost.  Any future costs of restoring sites where operation may extend indefinitely are treated as a capitalized cost of plant retirement.  The depreciation expense levels recoverable in rates include a provision for removal expenses, which may include final remediation costs.  Removal costs recovered in rates before the related costs are incurred are classified as a regulatory liability.

See Note 12 for further discussion of environmental costs.

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

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

See Note 8 for further discussion of benefit plans and other postretirement benefits.

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

The obligation recognized is reduced over the term of the guarantee as PSCo is released from risk under the guarantee.

Reclassifications Due to adoption of new accounting pronouncements, certain previously reported amounts have been reclassified to conform to the current year presentation. See Note 2 for further discussion of recently adopted accounting pronouncements.

Subsequent Events — Management has evaluated the impact of events occurring after Dec. 31, 2016 up to the date of issuance of these consolidated financial statements.  These statements contain all necessary adjustments and disclosures resulting from that evaluation.


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2.
Accounting Pronouncements

Recently Issued

Revenue Recognition In May 2014, the FASB issued Revenue from Contracts with Customers, Topic 606 (ASU No. 2014-09), which provides a new framework for the recognition of revenue. PSCo 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 in the consolidated statements of income. PSCo has not yet fully determined the impacts of adoption for several aspects of the standard, including a determination of whether receipts of non-refundable contributions in aid of construction should be recognized as revenues or may continue to be recorded as reductions to property, plant and equipment. Also, it is yet to be determined whether and how much an evaluation of the collectability of regulated electric and gas revenues will impact the amounts of revenue recognized upon delivery. PSCo 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 among other changes in accounting and disclosure requirements, replaces the cost method of accounting for non-marketable equity securities with a model for recognizing impairments and observable price changes, and also eliminates the available-for-sale classification for marketable equity securities. Under the new guidance, other than when the consolidation or equity method of accounting is utilized, changes in the fair value of equity securities are to be recognized in earnings. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2017. PSCo is currently evaluating the impact of adopting ASU No. 2016-01 on its consolidated financial statements.

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

Recently Adopted

Consolidation In February 2015, the FASB issued Amendments to the Consolidation Analysis, Topic 810 (ASU No. 2015-02), which reduces the number of consolidation models and amends certain consolidation principles related to variable interest entities. PSCo implemented the guidance on Jan. 1, 2016, and the implementation did not have a significant impact on its consolidated financial statements.

Presentation of Debt Issuance Costs In April 2015, the FASB issued Simplifying the Presentation of Debt Issuance Costs, Subtopic 835-30 (ASU No. 2015-03), which requires the presentation of debt issuance costs on the balance sheet as a deduction from the carrying amount of the related debt, instead of presentation as an asset. PSCo implemented the new guidance as required on Jan. 1, 2016, and as a result, $26.6 million of such deferred costs were retrospectively reclassified from other non-current assets to long-term debt on the consolidated balance sheet as of Dec. 31, 2015.

Fair Value Measurement In May 2015, the FASB issued Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent), Topic 820 (ASU No. 2015-07), which eliminates the requirement to categorize fair value measurements using a NAV methodology in the fair value hierarchy. PSCo implemented the guidance on Jan. 1, 2016, and the implementation did not have a material impact on its consolidated financial statements. For related disclosures, see Note 8 to the consolidated financial statements.

Presentation of Deferred Taxes — In November 2015, the FASB issued Balance Sheet Classification of Deferred Taxes, Topic 740 (ASU No. 2015-17), which eliminates the requirement to present deferred tax assets and liabilities as current and noncurrent on the consolidated balance sheet based on the classification of the related asset or liability, and instead requires classification of all deferred tax assets and liabilities as noncurrent. PSCo early adopted the new guidance in the fourth quarter of 2016 and as a result $62.7 million of current deferred income taxes were retrospectively reclassified to long-term deferred income tax liabilities on the consolidated balance sheet as of Dec. 31, 2015.

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Stock Compensation — In March 2016, the FASB issued Improvements to Employee Share-Based Payment Accounting, Topic 718 (ASU No. 2016-09), which simplifies accounting and financial statement presentation for share-based payment transactions. The guidance requires that the difference between the tax deduction available upon settlement of share-based equity awards and the tax benefit accumulated over the vesting period be recognized as an adjustment to income tax expense. PSCo adopted the guidance in 2016, and the implementation did not have a material impact on its consolidated financial statements.

3.
Selected Balance Sheet Data
(Thousands of Dollars)
 
Dec. 31, 2016
 
Dec. 31, 2015
Accounts receivable, net
 
 
 
 
Accounts receivable
 
$
324,512

 
$
321,004

Less allowance for bad debts
 
(19,612
)
 
(20,122
)
 
 
$
304,900

 
$
300,882

(Thousands of Dollars)
 
Dec. 31, 2016
 
Dec. 31, 2015
Inventories
 
 
 
 
Materials and supplies
 
$
66,161

 
$
58,128

Fuel
 
66,429

 
78,586

Natural gas
 
69,630

 
68,848

 
 
$
202,220

 
$
205,562

(Thousands of Dollars)
 
Dec. 31, 2016
 
Dec. 31, 2015
Property, plant and equipment, net
 
 
 
 
Electric plant
 
$
12,304,436

 
$
11,856,126

Natural gas plant
 
3,710,772

 
3,420,249

Common and other property
 
919,955

 
862,840

Plant to be retired (a)
 
31,839

 
38,249

Construction work in progress
 
484,340

 
408,963

Total property, plant and equipment
 
17,451,342

 
16,586,427

Less accumulated depreciation
 
(4,601,543
)
 
(4,414,216
)
 
 
$
12,849,799

 
$
12,172,211


(a) 
In 2017, PSCo expects to early retire Valmont Unit 5 and convert Cherokee Unit 4 from a coal-fueled generating facility to natural gas. PSCo also expects Craig Unit 1 to be early retired by approximately 2025.  Amounts are presented net of accumulated depreciation.

4.
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 Dec. 31, 2016
Borrowing limit
 
$
250

Amount outstanding at period end
 

Average amount outstanding
 
56

Maximum amount outstanding
 
141

Weighted average interest rate, computed on a daily basis
 
0.78
%
Weighted average interest rate at period end
 
N/A


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(Amounts in Millions, Except Interest Rates)
 
Twelve Months Ended Dec. 31, 2016
 
Twelve Months Ended Dec. 31, 2015
 
Twelve Months Ended Dec. 31, 2014
Borrowing limit
 
$
250

 
$
250

 
$
250

Amount outstanding at period end
 

 

 

Average amount outstanding
 
21

 
1

 
4

Maximum amount outstanding
 
141

 
34

 
97

Weighted average interest rate, computed on a daily basis
 
0.73
%
 
0.41
%
 
0.25
%
Weighted average interest rate at period end
 
N/A

 
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. Commercial paper borrowings for PSCo were as follows:
(Amounts in Millions, Except Interest Rates)
 
Three Months Ended Dec. 31, 2016
Borrowing limit
 
$
700

Amount outstanding at period end
 
129

Average amount outstanding
 
33

Maximum amount outstanding
 
151

Weighted average interest rate, computed on a daily basis
 
0.78
%
Weighted average interest rate at period end
 
0.95

(Amounts in Millions, Except Interest Rates)
 
Twelve Months Ended Dec. 31, 2016
 
Twelve Months Ended Dec. 31, 2015
 
Twelve Months Ended Dec. 31, 2014
Borrowing limit
 
$
700

 
$
700

 
$
700

Amount outstanding at period end
 
129

 
14

 
382

Average amount outstanding
 
24

 
95

 
167

Maximum amount outstanding
 
154

 
449

 
393

Weighted average interest rate, computed on a daily basis
 
0.70
%
 
0.51
%
 
0.31
%
Weighted average interest rate at period end
 
0.95

 
0.60

 
0.65


Letters of Credit PSCo uses letters of credit, generally with terms of one-year, to provide financial guarantees for certain operating obligations. At Dec. 31, 2016 and 2015, there were $3 million and $4 million of letters of credit outstanding, respectively, 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.

Amended Credit Agreement  In June 2016, PSCo entered into an amended five-year credit agreement with a syndicate of banks. The total borrowing limit under the amended credit agreement remained at $700 million. The amended credit agreement has substantially the same terms and conditions as the prior credit agreement with the following exceptions:
The maturity extended from October 2019 to June 2021.
The Eurodollar borrowing margin on this line of credit was reduced to a range of 75 to 150 basis points per year, from a range of 87.5 to 175 basis points per year, based upon applicable long-term credit ratings.
The commitment fees, calculated on the unused portion of the line of credit, were reduced to a range of 6 to 22.5 basis points per year, from a range of 7.5 to 27.5 basis points per year, also based on applicable long-term credit ratings.


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PSCo has the right to request an extension of the termination date for two additional one-year periods. The extension requests are subject to majority bank group approval.

Other features of PSCo’s credit facility include:

PSCo may increase its credit facility by up to $100 million.
The credit facility has a financial covenant requiring that the debt-to-total capitalization ratio be less than or equal to 65 percent. PSCo was in compliance as its debt-to-total capitalization ratio was 45 percent at both Dec. 31, 2016 and 2015. If PSCo does not comply with the covenant, an event of default may be declared, and if not remedied, any outstanding amounts due under the facility can be declared due by the lender.
The credit facility has a cross-default provision that provides PSCo will be in default on its borrowings under the facility if PSCo or any of its subsidiaries whose total assets exceed 15 percent of PSCo’s consolidated total assets, default on certain indebtedness in an aggregate principal amount exceeding $75 million.
PSCo was in compliance with all financial covenants on its debt agreements as of Dec. 31, 2016 and 2015.

At Dec. 31, 2016, PSCo had the following committed credit facility available (in millions):
Credit Facility (a)
 
Drawn (b)
 
Available
$
700

 
$
132

 
$
568


(a) 
This credit facility matures 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 Dec. 31, 2016 and 2015.

Long-Term Borrowings

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

In 2016, PSCo issued $250 million of 3.55 percent first mortgage bonds due June 15, 2046. In 2015, PSCo issued $250 million of 2.9 percent first mortgage bonds due May 15, 2025.

During the next five years, PSCo has long-term debt maturities of $300 million, $400 million and $400 million due in 2018, 2019 and 2020, respectively.

Deferred Financing Costs — Deferred financing costs of approximately $26.8 million and $26.6 million, net of amortization, are presented as a deduction from the carrying amount of long-term debt at Dec. 31, 2016 and 2015, respectively.  PSCo is amortizing these financing costs over the remaining maturity periods of the related debt.

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

5.
Preferred Stock

PSCo has authorized the issuance of preferred stock.
Preferred
Shares
Authorized
 
Par Value
 
Preferred
Shares
Outstanding
10,000,000

 
$
0.01

 
None



49


6.
Joint Ownership of Generation, Transmission and Gas Facilities

Following are the investments by PSCo in jointly owned generation, transmission and gas facilities and the related ownership percentages as of Dec. 31, 2016:
(Thousands of Dollars)
 
Plant in
Service
 
Accumulated
Depreciation
 
CWIP
 
Ownership %
Electric Generation:
 
 
 
 
 
 
 
 
Hayden Unit 1
 
$
149,221

 
$
67,415

 
$
97

 
76
%
Hayden Unit 2
 
148,795

 
64,024

 
64

 
37

Hayden Common Facilities
 
38,230

 
18,951

 
282

 
53

Craig Units 1 and 2
 
60,318

 
37,570

 
15,730

 
10

Craig Common Facilities 1, 2 and 3
 
37,925

 
19,312

 
183

 
7

Comanche Unit 3
 
892,978

 
112,254

 
6

 
67

Comanche Common Facilities
 
24,694

 
1,821

 
636

 
82

Electric Transmission:
 
 
 
 
 
 
 
 
Transmission and other facilities, including substations
 
166,840

 
65,619

 
4,313

 
Various

Gas Transportation:
 
 
 
 
 
 
 
 
Rifle, Colo. to Avon, Colo.
 
23,406

 
7,679

 

 
60

Gas Transportation Compressor
 
8,397

 
368

 

 
50

Total
 
$
1,550,804

 
$
395,013

 
$
21,311

 
 

PSCo has approximately 816 MW of jointly owned generating capacity.  PSCo’s share of operating expenses and construction expenditures are included in the applicable utility accounts.  Each of the respective owners is responsible for providing its own financing.

7.
Income Taxes

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

Immediate expensing, or “bonus depreciation,” of 50 percent for property placed in service in 2015, 2016, and 2017; 40 percent for property placed in service in 2018; and 30 percent for property placed in service in 2019. Additionally, some longer production period property placed in service in 2020 will be eligible for bonus depreciation;
PTCs at 100 percent of the credit rate ($0.023 per KWh) for wind energy projects that begin construction by the end of 2016; 80 percent of the credit rate for projects that begin construction in 2017; 60 percent of the credit rate for projects that begin construction in 2018; and 40 percent of the credit rate for projects that begin construction in 2019. The wind energy PTC was not extended for projects that begin construction after 2019;
ITCs at 30 percent for commercial solar projects that begin construction by the end of 2019; 26 percent for projects that begin construction in 2020; 22 percent for projects that begin construction in 2021; and 10 percent for projects thereafter;
R&E credit was permanently extended; and
Delay of two years (until 2020) of the excise tax on certain employer-provided health insurance plans.

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

Tax Increase Prevention Act of 2014 In 2014, the Tax Increase Prevention Act (TIPA) was signed into law. The TIPA provides for the following:

The R&E credit was extended for 2014;
PTCs were extended for projects that began construction before the end of 2014 with certain projects qualifying into future years; and
50 percent bonus depreciation was extended one year through 2014. Additionally, some longer production period property placed in service in 2015 is also eligible for 50 percent bonus depreciation.


50


The accounting related to the TIPA was recorded beginning in the fourth quarter of 2014 because a change in tax law is accounted for in the period of enactment.

Federal Audit  PSCo is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. In 2012, the IRS commenced an examination of tax years 2010 and 2011, including a 2009 carryback claim. As of Dec. 31, 2016, the IRS had proposed an adjustment to the federal tax loss carryback claims that would result in $14 million of income tax expense for the 2009 through 2011 claims, and the 2013 through 2015 claims. In the fourth quarter of 2015, the IRS forwarded the issue to the Office of Appeals (Appeals). In 2016 the IRS audit team and Xcel Energy presented their cases to Appeals; however, the outcome and timing of a resolution is uncertain. The statute of limitations applicable to Xcel Energy’s 2009 through 2011 federal income tax returns, following extensions, expires in December 2017. Xcel Energy has recognized its best estimate of income tax expense that will result from a final resolution of the IRS’ proposed adjustment of the carryback claims. PSCo is not expected to accrue any income tax expense related to this adjustment.

In the third quarter of 2015, the IRS commenced an examination of tax years 2012 and 2013. As of Dec. 31, 2016, the IRS had not proposed any material adjustments to tax years 2012 and 2013. Subsequent to year-end, the IRS proposed an adjustment to tax years 2012 through 2013 that may impact Xcel Energy’s NOL and tax credit carryforwards and ETR. However, Xcel Energy is continuing to evaluate the IRS’ proposal and the outcome and timing of a resolution is uncertain.

State Audits — PSCo is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Dec. 31, 2016, 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 Tax Benefits The unrecognized tax benefit balance includes permanent tax positions, which if recognized would affect the annual ETR. In addition, the unrecognized tax benefit balance includes temporary tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. A change in the period of deductibility would not affect the ETR but would accelerate the payment of cash to the taxing authority to an earlier period.

A reconciliation of the amount of unrecognized tax benefit is as follows:
(Millions of Dollars)
 
Dec. 31, 2016
 
Dec. 31, 2015
Unrecognized tax benefit — Permanent tax positions
 
$
2.9

 
$
2.4

Unrecognized tax benefit — Temporary tax positions
 
16.8

 
15.0

Total unrecognized tax benefit
 
$
19.7

 
$
17.4


A reconciliation of the beginning and ending amount of unrecognized tax benefit is as follows:
(Millions of Dollars)
 
2016
 
2015
 
2014
Balance at Jan. 1
 
$
17.4

 
$
11.9

 
$
8.4

Additions based on tax positions related to the current year
 
2.7

 
4.5

 
3.7

Reductions based on tax positions related to the current year
 

 
(1.5
)
 
(0.7
)
Additions for tax positions of prior years
 
0.5

 
2.5

 
2.8

Reductions for tax positions of prior years
 
(0.9
)
 

 
(1.2
)
Settlements with taxing authorities
 

 

 
(1.1
)
Balance at Dec. 31
 
$
19.7

 
$
17.4

 
$
11.9



51


The unrecognized tax benefit amounts were reduced by the tax benefits associated with NOL and tax credit carryforwards.  The amounts of tax benefits associated with NOL and tax credit carryforwards are as follows:
(Millions of Dollars)
 
Dec. 31, 2016
 
Dec. 31, 2015
NOL and tax credit carryforwards
 
$
(5.8
)
 
$
(4.3
)

It is reasonably possible that PSCo’s amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS Appeals and audit progress and state audits resume. As the IRS Appeals and audit progress, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $11 million.

The payable for interest related to unrecognized tax benefits is partially offset by the interest benefit associated with NOL and tax credit carryforwards. A reconciliation of the beginning and ending amount of the payable for interest related to unrecognized tax benefits are as follows:
(Millions of Dollars)
 
2016
 
2015
 
2014
Payable for interest related to unrecognized tax benefits at Jan. 1
 
$
(0.4
)
 
$
(0.2
)
 
$
(0.1
)
Interest expense related to unrecognized tax benefits
 
(0.7
)
 
(0.2
)
 
(0.1
)
Payable for interest related to unrecognized tax benefits at Dec. 31
 
$
(1.1
)
 
$
(0.4
)
 
$
(0.2
)

No amounts were accrued for penalties related to unrecognized tax benefits as of Dec. 31, 2016, 2015 or 2014.

Other Income Tax Matters — NOL amounts represent the amount of the tax loss that is carried forward and tax credits represent the deferred tax asset. NOL and tax credit carryforwards as of Dec. 31 were as follows:
(Millions of Dollars)
 
2016
 
2015
Federal NOL carryforward
 
$
260

 
$
328

Federal tax credit carryforwards
 
25

 
24

State NOL carryforwards
 
684

 
684

State tax credit carryforwards, net of federal detriment (a)
 
13

 
13

Valuation allowances for state credit carryforwards, net of federal detriment (b)
 
(3
)
 
(1
)

(a) 
State tax credit carryforwards are net of federal detriment of $7 million and $7 million as of Dec. 31, 2016 and 2015, respectively.
(b) 
Valuation allowances for state tax credit carryforwards were net of federal benefit of $2 million and $1 million as of Dec. 31, 2016 and 2015, respectively.

The federal carryforward periods expire between 2021 and 2036.  The state carryforward periods expire between 2017 and 2033.

Total income tax expense from operations differs from the amount computed by applying the statutory federal income tax rate to income before income tax expense.  The following reconciles such differences for the years ending Dec. 31:
 
 
2016
 
2015
 
2014
Federal statutory rate
 
35.0
 %
 
35.0
 %
 
35.0
 %
Increases (decreases) in tax from:
 
 
 
 
 
 
State income taxes, net of federal income tax benefit
 
3.2

 
3.2

 
2.8

Tax credits recognized, net of federal income tax expense
 
(0.7
)
 
(0.7
)
 
(0.8
)
Regulatory differences — utility plant items
 
(0.5
)
 
(0.3
)
 
(2.1
)
Change in unrecognized tax benefits (expense)
 

 
0.1

 
(0.1
)
Other, net
 
0.1

 
0.1

 
0.1

Effective income tax rate
 
37.1
 %
 
37.4
 %
 
34.9
 %


52


The components of income tax expense for the years ending Dec. 31 were:
(Thousands of Dollars)
 
2016
 
2015
 
2014
Current federal tax expense (benefit)
 
$
45,287

 
$
(1,166
)
 
$
9,550

Current state tax expense (benefit)
 
8,754

 
(727
)
 
2,611

Current change in unrecognized tax expense
 
680

 
5,244

 
6,548

Deferred federal tax expense
 
195,064

 
246,096

 
208,781

Deferred state tax expense
 
27,216

 
36,450

 
26,196

Deferred change in unrecognized tax benefit
 
(278
)
 
(4,650
)
 
(7,154
)
Deferred investment tax credits
 
(2,805
)
 
(2,807
)
 
(2,941
)
Total income tax expense
 
$
273,918

 
$
278,440

 
$
243,591


The components of deferred income tax expense for the years ending Dec. 31 were:
(Thousands of Dollars)
 
2016
 
2015
 
2014
Deferred tax expense excluding items below
 
$
230,931

 
$
285,144

 
$
254,142

Amortization and adjustments to deferred income taxes on income tax regulatory assets and liabilities
 
(8,418
)
 
(7,229
)
 
(26,649
)
Tax (expense) benefit allocated to other comprehensive income and other
 
(511
)
 
(19
)
 
330

Deferred tax expense
 
$
222,002

 
$
277,896

 
$
227,823


The components of the net deferred tax liability at Dec. 31 were as follows:
(Thousands of Dollars)
 
2016
 
2015
Deferred tax liabilities:
 
 
 
 
Differences between book and tax bases of property
 
$
2,967,162

 
$
2,772,043

Employee benefits
 
87,693

 
105,049

Other
 
69,931

 
82,732

Total deferred tax liabilities
 
$
3,124,786

 
$
2,959,824

Deferred tax assets:
 
 
 
 
NOL carryforward
 
$
115,328

 
$
147,763

Tax credit carryforward
 
34,658

 
35,240

Regulatory liabilities
 
19,635

 
17,201

Deferred investment tax credits
 
11,653

 
12,718

Deferred fuel costs
 
10,070

 
29,694

Rate refund
 
7,221

 
23,352

Other
 
37,092

 
35,658

Total deferred tax assets
 
$
235,657

 
$
301,626

Net deferred tax liability
 
$
2,889,129

 
$
2,658,198


8.
Benefit Plans and Other Postretirement Benefits

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

Xcel Energy, which includes PSCo, offers various benefit plans to its employees. Approximately 77 percent of employees that receive benefits are represented by several local labor unions under several collective-bargaining agreements. At Dec. 31, 2016, PSCo had 1,984 bargaining employees covered under a collective-bargaining agreement, which expires in May 2017.


53


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

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

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

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

Specific valuation methods include the following:

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

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

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

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

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

Pension Benefits

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

54



In addition to the qualified pension plans, Xcel Energy maintains a supplemental executive retirement plan (SERP) and a nonqualified pension plan. The SERP is maintained for certain executives that were participants in the plan in 2008, when the SERP was closed to new participants. The nonqualified pension plan provides unfunded, nonqualified benefits for compensation that is in excess of the limits applicable to the qualified pension plans, with distributions attributable to PSCo funded by PSCo’s consolidated operating cash flows. The total obligations of the SERP and nonqualified plan as of Dec. 31, 2016 and 2015 were $43.5 million and $41.8 million, respectively, of which $3.8 million and $3.6 million were attributable to PSCo. In 2016 and 2015, Xcel Energy recognized net benefit cost for financial reporting for the SERP and nonqualified plans of $7.9 million and $9.5 million, respectively, of which $0.6 million in each year was attributable to PSCo.

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

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

Investment returns in 2016 were below the assumed level of 6.84 percent;
Investment returns in 2015 were below the assumed level of 6.81 percent;
Investment returns in 2014 were above the assumed level of 6.81 percent; and
In 2017, PSCo’s expected investment-return assumption is 6.62 percent.

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

The following table presents the target pension asset allocations for PSCo at Dec. 31 for the upcoming year:
 
 
2016
 
2015
Domestic and international equity securities
 
36
%
 
36
%
Long-duration fixed income and interest rate swap securities
 
31

 
32

Short-to-intermediate fixed income securities
 
15

 
12

Alternative investments
 
16

 
18

Cash
 
2

 
2

Total
 
100
%
 
100
%

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


55


Pension Plan Assets

The following tables present, for each of the fair value hierarchy levels, PSCo’s pension plan assets that are measured at fair value as of Dec. 31, 2016 and 2015:
 
 
Dec. 31, 2016
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
Investments Measured at NAV (a)
 
Total
Cash equivalents
 
$
34,957

 
$

 
$

 
$

 
$
34,957

Commingled funds:
 
 
 
 
 
 
 
 
 
 
U.S. equity funds
 

 

 

 
165,621

 
165,621

Non U.S. equity funds
 

 

 

 
122,197

 
122,197

U.S. corporate bond funds
 

 

 

 
96,995

 
96,995

Emerging market equity funds
 

 

 

 
64,784

 
64,784

Emerging market debt funds
 

 

 

 
53,703

 
53,703

Commodity funds
 

 

 

 
7,497

 
7,497

Private equity investments
 

 

 

 
31,828

 
31,828

Real estate
 

 

 

 
61,048

 
61,048

Other commingled funds
 

 

 

 
74,696

 
74,696

Debt securities:
 
 
 
 
 
 
 
 
 
 
Government securities
 

 
168,014

 

 

 
168,014

U.S. corporate bonds
 

 
86,081

 

 

 
86,081

Non U.S. corporate bonds
 

 
13,828

 

 

 
13,828

Mortgage-backed securities
 

 
2,179

 

 

 
2,179

Asset-backed securities
 

 
1,032

 

 

 
1,032

Equity securities:
 
 
 
 
 
 
 
 
 
 
U.S. equities
 
27,348

 

 

 

 
27,348

Other
 

 
(7,595
)
 

 

 
(7,595
)
Total
 
$
62,305

 
$
263,539

 
$

 
$
678,369

 
$
1,004,213

 
(a) 
Based on the requirements of ASU No. 2015-07, investments measured at fair value using a NAV methodology have not been classified in the fair value hierarchy. See Note 2 for further information on the adoption of ASU No. 2015-07.

 
 
Dec. 31, 2015
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
Investments Measured at NAV (a)
 
Total
Cash equivalents
 
$
81,954

 
$

 
$

 
$

 
$
81,954

Derivatives
 

 
1,204

 

 

 
1,204

Commingled funds:
 
 
 
 
 
 
 
 
 
 
U.S. equity funds
 

 

 

 
125,011

 
125,011

Non U.S. equity funds
 

 

 

 
119,394

 
119,394

U.S. corporate bond funds
 

 

 

 
82,827

 
82,827

Emerging market equity funds
 

 

 

 
56,525

 
56,525

Emerging market debt funds
 

 

 

 
54,362

 
54,362

Commodity funds
 

 

 

 
14,169

 
14,169

Private equity investments
 

 

 

 
34,353

 
34,353

Real estate
 

 

 

 
67,075

 
67,075

Other commingled funds
 

 

 

 
72,327

 
72,327

Debt securities:
 
 
 
 
 
 
 
 
 
 
Government securities
 

 
214,341

 

 

 
214,341

U.S. corporate bonds
 

 
74,787

 

 

 
74,787

Non U.S. corporate bonds
 

 
12,127

 

 

 
12,127

Asset-backed securities
 

 
881

 

 

 
881

Equity securities:
 
 
 
 
 
 
 
 
 
 
U.S. equities
 
28,797

 

 

 

 
28,797

Other
 

 
(3,453
)
 

 

 
(3,453
)
Total
 
$
110,751

 
$
299,887

 
$

 
$
626,043

 
$
1,036,681


(a) 
Based on the requirements of ASU No. 2015-07, investments measured at fair value using a NAV methodology have not been classified in the fair value hierarchy. See Note 2 for further information on the adoption of ASU No. 2015-07.

There were no assets transferred in or out of Level 3 for the years ended Dec. 31, 2016, 2015 or 2014.

56



Benefit Obligations — A comparison of the actuarially computed pension benefit obligation and plan assets for PSCo is presented in the following table:
(Thousands of Dollars)
 
2016
 
2015
Accumulated Benefit Obligation at Dec. 31
 
$
1,213,890

 
$
1,192,798

 
 
 
 
 
Change in Projected Benefit Obligation:
 
 
 
 
Obligation at Jan. 1
 
$
1,224,650

 
$
1,277,957

Service cost
 
25,926

 
28,260

Interest cost
 
55,405

 
50,857

Transfer to other plan
 
(9,149
)
 
(2,938
)
Plan amendments
 
206

 

Actuarial loss (gain)
 
51,779

 
(54,737
)
Benefit payments
 
(96,995
)
 
(74,749
)
Obligation at Dec. 31
 
$
1,251,822

 
$
1,224,650

(Thousands of Dollars)
 
2016
 
2015
Change in Fair Value of Plan Assets:
 
 
 
 
Fair value of plan assets at Jan. 1
 
$
1,036,681

 
$
1,103,865

Actual return (loss) on plan assets
 
56,762

 
(9,122
)
Employer contributions
 
16,829

 
20,056

Transfer to other plan
 
(9,064
)
 
(3,369
)
Benefit payments
 
(96,995
)
 
(74,749
)
Fair value of plan assets at Dec. 31
 
$
1,004,213

 
$
1,036,681


(Thousands of Dollars)
 
2016
 
2015
Funded Status of Plans at Dec. 31:
 
 
 
 
Funded status (a)
 
$
(247,609
)
 
$
(187,969
)

(a) 
Amounts are recognized in noncurrent liabilities on PSCo’s consolidated balance sheets.
(Thousands of Dollars)
 
2016
 
2015
Amounts Not Yet Recognized as Components of Net Periodic Benefit Cost:
 
 
 
 
Net loss
 
$
554,999

 
$
521,703

Prior service credit
 
(12,155
)
 
(15,572
)
Total
 
$
542,844

 
$
506,131

(Thousands of Dollars)
 
2016
 
2015
Amounts Not Yet Recognized as Components of Net Periodic Benefit Cost Have Been Recorded as Follows Based Upon Expected Recovery in Rates:
 
 
 
 
Current regulatory assets
 
$
515,708

 
$
28,852

Noncurrent regulatory assets
 
26,853

 
477,279

Deferred income taxes
 
108

 

Net-of-tax accumulated OCI
 
175

 

Total
 
$
542,844

 
$
506,131

Measurement date
 
Dec. 31, 2016
 
Dec. 31, 2015

57


 
 
2016
 
2015
Significant Assumptions Used to Measure Benefit Obligations:
 
 
 
 
Discount rate for year-end valuation
 
4.13
%
 
4.66
%
Expected average long-term increase in compensation level
 
3.75

 
4.00

Mortality table
 
RP-2014

 
RP-2014


Mortality — In 2014, the Society of Actuaries published a new mortality table (RP-2014) and projection scale (MP-2014) that increased the overall life expectancy of males and females. On Dec. 31, 2014 PSCo adopted the RP-2014 table, with modifications, based on its population and specific experience and a modified MP-2014 projection scale. During 2016, a new projection table was released (MP-2016).  In 2016, PSCo adopted a modified version of the MP-2016 table and will continue to utilize the RP-2014 base table, modified for company experience.

Cash Flows — Cash funding requirements can be impacted by changes to actuarial assumptions, actual asset levels and other calculations prescribed by the funding requirements of income tax and other pension-related regulations. Required contributions were made in 2014 through 2017 to meet minimum funding requirements.

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

$150.0 million in January 2017, of which $16.8 million was attributable to PSCo;
$125.2 million in 2016, of which $16.8 million was attributable to PSCo;
$90.1 million in 2015, of which $20.1 million was attributable to PSCo; and
$130.6 million in 2014, of which $35.2 million was attributable to PSCo.

For future years, Xcel Energy and PSCo anticipate contributions will be made as necessary.

Plan Amendments — The 2016 increase in the projected benefit obligation resulted from an increase in the annual credits contributed to the PSCo Bargaining Plan retirement spending account. In 2015, there were no plan amendments made which affected the projected benefit obligation.

Benefit Costs The components of PSCo’s net periodic pension cost were:
(Thousands of Dollars)
 
2016
 
2015
 
2014
Service cost
 
$
25,926

 
$
28,260

 
$
23,939

Interest cost
 
55,405

 
50,857

 
53,277

Expected return on plan assets
 
(70,769
)
 
(72,590
)
 
(70,709
)
Amortization of prior service credit
 
(3,211
)
 
(3,136
)
 
(3,092
)
Amortization of net loss
 
26,771

 
36,377

 
33,892

Net periodic pension cost
 
34,122

 
39,768

 
37,307

Credits (costs) not recognized due to effects of regulation
 
3,364

 
(1,464
)
 

Net benefit cost recognized for financial reporting
 
$
37,486

 
$
38,304

 
$
37,307


 
 
2016
 
2015
 
2014
Significant Assumptions Used to Measure Costs:
 
 
 
 
 
 
Discount rate
 
4.66
%
 
4.11
%
 
4.75
%
Expected average long-term increase in compensation level
 
4.00

 
3.75

 
3.75

Expected average long-term rate of return on assets
 
6.84

 
6.81

 
6.81

 

58


In addition to the benefit costs in the table above, for the pension plans sponsored by Xcel Energy Inc., costs are allocated to PSCo based on Xcel Energy Services Inc. employees’ labor costs. Amounts allocated to PSCo were $9.4 million, $9.9 million and $9.4 million in 2016, 2015 and 2014, respectively. Pension costs include an expected return impact for the current year that may differ from actual investment performance in the plan. The return assumption used for 2017 pension cost calculations is 6.62 percent. The cost calculation uses a market-related valuation of pension assets. Xcel Energy, including PSCo, uses a calculated value method to determine the market-related value of the plan assets. The market-related value begins with the fair market value of assets as of the beginning of the year. The market-related value is determined by adjusting the fair market value of assets to reflect the investment gains and losses (the difference between the actual investment return and the expected investment return on the market-related value) during each of the previous five years at the rate of 20 percent per year. As these differences between actual investment returns and the expected investment returns are incorporated into the market-related value, the differences are recognized over the expected average remaining years of service for active employees.

Defined Contribution Plans

Xcel Energy, which includes PSCo, maintains 401(k) and other defined contribution plans that cover substantially all employees. The expense to these plans for PSCo was approximately $9.9 million in 2016, $9.5 million in 2015 and $9.1 million in 2014.

Postretirement Health Care Benefits

Xcel Energy, which includes PSCo, has a contributory health and welfare benefit plan that provides health care and death benefits to certain retirees. Xcel Energy discontinued contributing toward health care benefits for PSCo nonbargaining employees retiring after June 30, 2003. Employees of NCE who retired in 2002 continue to receive employer-subsidized health care benefits. Nonbargaining employees of the former NCE who retired after 1998, bargaining employees of the former NCE who retired after 1999 and nonbargaining employees of NCE who retired after June 30, 2003, are eligible to participate in the Xcel Energy health care program with no employer subsidy.

Plan Assets — Certain state agencies that regulate Xcel Energy Inc.’s utility subsidiaries also have issued guidelines related to the funding of postretirement benefit costs. PSCo is required to fund postretirement benefit costs in irrevocable external trusts that are dedicated to the payment of these postretirement benefits. These assets are invested in a manner consistent with the investment strategy for the pension plan.

The following table presents the target postretirement asset allocations for Xcel Energy Inc. and PSCo at Dec. 31 for the upcoming year:
 
 
2016
 
2015
Domestic and international equity securities
 
25
%
 
25
%
Short-to-intermediate fixed income securities
 
57

 
57

Alternative investments
 
13

 
13

Cash
 
5

 
5

Total
 
100
%
 
100
%

Xcel Energy Inc. and PSCo base the investment-return assumptions for the postretirement health care fund assets on expected long-term performance for each of the investment types included in the asset portfolio. Assumptions and target allocations are determined at the master trust level. The investment mix at each of Xcel Energy Inc.’s utility subsidiaries may vary from the investment mix of the total asset portfolio. The assets are invested in a portfolio according to Xcel Energy Inc.’s and PSCo’s return, liquidity and diversification objectives to provide a source of funding for plan obligations and minimize the necessity of contributions to the plan, within appropriate levels of risk. The principal mechanism for achieving these objectives is the projected allocation of assets to selected asset classes, given the long-term risk, return, correlation and liquidity characteristics of each particular asset class. There were no significant concentrations of risk in any particular industry, index, or entity. Market volatility can impact even well-diversified portfolios and significantly affect the return levels achieved by postretirement health care assets in any year.


59


The following tables present, for each of the fair value hierarchy levels, PSCo’s proportionate allocation of the total postretirement benefit plan assets that are measured at fair value as of Dec. 31, 2016 and 2015:
 
 
Dec. 31, 2016
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
Investments Measured at NAV (a)
 
Total
Cash equivalents
 
$
18,288

 
$

 
$

 
$

 
$
18,288

Insurance contracts
 

 
42,046

 

 

 
42,046

Commingled funds:
 
 
 
 
 
 
 
 
 
 
U.S. equity funds
 

 

 

 
48,462

 
48,462

U.S fixed income funds
 

 

 

 
24,132

 
24,132

Emerging market debt funds
 

 

 

 
27,089

 
27,089

Other commingled funds
 

 

 

 
48,922

 
48,922

Debt securities:
 
 
 
 
 
 
 
 
 
 
Government securities
 

 
33,600

 

 

 
33,600

U.S. corporate bonds
 

 
55,473

 

 

 
55,473

Non U.S. corporate bonds
 

 
15,384

 

 

 
15,384

Asset-backed securities
 

 
16,845

 

 

 
16,845

Mortgage-backed securities
 

 
25,563

 

 

 
25,563

Equity securities:
 
 
 
 
 
 
 
 
 
 
Non U.S. equities
 
36,462

 

 

 

 
36,462

Other
 

 
1,289

 

 

 
1,289

Total
 
$
54,750

 
$
190,200

 
$

 
$
148,605

 
$
393,555

(a) 
Based on the requirements of ASU No. 2015-07, investments measured at fair value using a NAV methodology have not been classified in the fair value hierarchy. See Note 2 for further information on the adoption of ASU No. 2015-07.

 
 
Dec. 31, 2015
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
Investments Measured at NAV (a)

 
Total
Cash equivalents
 
$
17,524

 
$

 
$

 
$

 
$
17,524

Insurance contracts
 

 
42,123

 

 

 
42,123

Commingled funds:
 
 
 
 
 
 
 
 
 
 
U.S. equity funds
 

 

 

 
34,089

 
34,089

Non U.S. equity funds
 

 

 

 
29,979

 
29,979

U.S fixed income funds
 

 

 

 
21,638

 
21,638

Emerging market equity funds
 

 

 

 
9,901

 
9,901

Emerging market debt funds
 

 

 

 
31,827

 
31,827

Other commingled funds
 

 

 

 
55,302

 
55,302

Debt securities:
 
 
 
 
 
 
 
 
 
 
Government securities
 

 
35,016

 

 

 
35,016

U.S. corporate bonds
 

 
53,433

 

 

 
53,433

Non U.S. corporate bonds
 

 
11,598

 

 

 
11,598

Asset-backed securities
 

 
25,602

 

 

 
25,602

Mortgage-backed securities
 

 
31,778

 

 

 
31,778

Other
 

 
(368
)
 

 

 
(368
)
Total
 
$
17,524

 
$
199,182

 
$

 
$
182,736

 
$
399,442

(a) 
Based on the requirements of ASU No. 2015-07, investments measured at fair value using a NAV methodology have not been classified in the fair value hierarchy. See Note 2 for further information on the adoption of ASU No. 2015-07.

There were no assets transferred in or out of Level 3 for the years ended Dec. 31, 2016, 2015 or 2014.


60


Benefit Obligations — A comparison of the actuarially computed benefit obligation and plan assets for PSCo is presented in the following table:
(Thousands of Dollars)
 
2016
 
2015
Change in Projected Benefit Obligation:
 
 
 
 
Obligation at Jan. 1
 
$
403,574

 
$
443,753

Service cost
 
768

 
928

Interest cost
 
18,070

 
17,498

Medicare subsidy reimbursements
 
1,901

 
1,712

Plan participants’ contributions
 
5,376

 
4,961

Actuarial loss (gain)
 
27,355

 
(32,001
)
Benefit payments
 
(35,221
)
 
(33,277
)
Obligation at Dec. 31
 
$
421,823

 
$
403,574

(Thousands of Dollars)
 
2016
 
2015
Change in Fair Value of Plan Assets:
 
 
 
 
Fair value of plan assets at Jan. 1
 
$
399,442

 
$
425,282

Actual return (loss) on plan assets
 
18,590

 
(3,076
)
Plan participants’ contributions
 
5,376

 
4,961

Employer contributions
 
5,368

 
5,552

Benefit payments
 
(35,221
)
 
(33,277
)
Fair value of plan assets at Dec. 31
 
$
393,555

 
$
399,442

(Thousands of Dollars)
 
2016
 
2015
Funded Status at Dec. 31:
 
 
 
 
Funded status (a)
 
$
(28,268
)
 
$
(4,132
)

(a) 
Amounts are recognized in noncurrent liabilities on PSCo’s consolidated balance sheets.
(Thousands of Dollars)
 
2016
 
2015
Amounts Not Yet Recognized as Components of Net Periodic Benefit Cost:
 
 
 
 
Net loss
 
$
78,359

 
$
49,226

Prior service credit
 
(27,695
)
 
(33,942
)
Total
 
$
50,664

 
$
15,284

(Thousands of Dollars)
 
2016
 
2015
Amounts Not Yet Recognized as Components of Net Periodic Benefit Cost Have Been Recorded as Follows Based Upon Expected Recovery in Rates:
 
 
 
 
Noncurrent regulatory assets
 
$
50,664

 
$
15,284

Measurement date
 
Dec. 31, 2016
 
Dec. 31, 2015
 
 
2016
 
2015
Significant Assumptions Used to Measure Benefit Obligations:
 
 
 
 
Discount rate for year-end valuation
 
4.13
%
 
4.65
%
Mortality table
 
RP 2014

 
RP 2014

Health care costs trend rate — initial
 
5.50
%
 
6.00
%

Effective Jan. 1, 2017, the initial medical trend rate was decreased from 6.0 percent to 5.5 percent. The ultimate trend assumption remained at 4.5 percent. The period until the ultimate rate is reached is two years. Xcel Energy Inc. and PSCo base the medical trend assumption on the long-term cost inflation expected in the health care market, considering the levels projected and recommended by industry experts, as well as recent actual medical cost increases experienced by the retiree medical plan.


61


A one-percent change in the assumed health care cost trend rate would have the following effects on PSCo:
 
 
One-Percentage Point
(Thousands of Dollars)
 
Increase
 
Decrease
APBO
 
$
40,100

 
$
(34,155
)
Service and interest components
 
1,980

 
(1,677
)

Cash Flows — The postretirement health care plans have no funding requirements under income tax and other retirement-related regulations other than fulfilling benefit payment obligations, when claims are presented and approved under the plans. Additional cash funding requirements are prescribed by certain state and federal rate regulatory authorities. Xcel Energy, which includes PSCo, contributed $17.9 million, $18.3 million and $17.1 million during 2016, 2015 and 2014, respectively, of which $5.4 million, $5.6 million and $5.5 million were attributable to PSCo. Xcel Energy expects to contribute approximately $11.8 million during 2017, of which amounts attributable to PSCo will be zero.

Plan Amendments — In 2016 and 2015 there were no plan amendments made which affected the projected benefit obligation.

Benefit Costs — The components of PSCo’s net periodic postretirement benefit costs were:
(Thousands of Dollars)
 
2016
 
2015
 
2014
Service cost
 
$
768

 
$
928

 
$
1,915

Interest cost
 
18,070

 
17,498

 
23,704

Expected return on plan assets
 
(22,299
)
 
(23,803
)
 
(30,214
)
Amortization of prior service credit
 
(6,247
)
 
(6,247
)
 
(6,247
)
Amortization of net loss
 
1,931

 
2,475

 
6,434

Net periodic postretirement benefit credit
 
$
(7,777
)
 
$
(9,149
)
 
$
(4,408
)
 
 
2016
 
2015
 
2014
Significant Assumptions Used to Measure Costs:
 
 
 
 
 
 
Discount rate
 
4.65
%
 
4.08
%
 
4.82
%
Expected average long-term rate of return on assets
 
5.80

 
5.80

 
7.18


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

Projected Benefit Payments

The following table lists PSCo’s projected benefit payments for the pension and postretirement benefit plans:
(Thousands of Dollars)
 
Projected Pension
Benefit Payments
 
Gross Projected
Postretirement
Health Care
Benefit Payments
 
Expected Medicare
Part D Subsidies
 
Net Projected
Postretirement
Health Care
Benefit Payments
2017
 
$
79,506

 
$
33,912

 
$
2,140

 
$
31,772

2018
 
78,738

 
33,652

 
2,266

 
31,386

2019
 
80,914

 
33,467

 
2,383

 
31,084

2020
 
81,095

 
33,991

 
2,475

 
31,516

2021
 
82,084

 
33,588

 
2,574

 
31,014

2022-2026
 
417,876

 
156,773

 
14,246

 
142,527



62


9.
Other Income, Net

Other income, net for the years ended Dec. 31 consisted of the following:
(Thousands of Dollars)
 
2016
 
2015
 
2014
Interest income
 
$
1,860

 
$
753

 
$
1,470

Other nonoperating income
 
2,241

 
2,408

 
3,601

Insurance policy expense
 
(281
)
 
(197
)
 
(806
)
Other nonoperating expense
 
(3
)
 

 

Other income, net
 
$
3,817

 
$
2,964

 
$
4,265


10.
Fair Value of Financial Assets and Liabilities

Fair Value Measurements

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

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

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

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

Specific valuation methods include the following:

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

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

Derivative Instruments Fair Value Measurements

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 Dec. 31, 2016, accumulated other comprehensive losses related to interest rate derivatives included $1.0 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.


63


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 are not designated as qualifying hedging transactions.  Changes in the fair value of non-trading commodity derivative instruments are recorded in OCI 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 recorded immaterial amounts to income related to the ineffectiveness of cash flow hedges for the years ended Dec. 31, 2016 and 2015.

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 Dec. 31:
(Amounts in Thousands) (a)(b)
 
2016
 
2015
MWh of electricity
 
6,283

 
684

MMBtu of natural gas
 
42,203

 
12,515

Gallons of vehicle fuel
 

 
63


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

Consideration of Credit Risk and Concentrations — 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 considering 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.


64


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 Dec. 31, 2016, six of PSCo’s 10 most significant counterparties for these activities, comprising $8.8 million or 15 percent of this credit exposure, had investment grade credit ratings from Standard & Poor’s, Moody’s or Fitch Ratings.  Four of the 10 most significant counterparties, comprising $21.1 million or 35 percent of this credit exposure at Dec. 31, 2016, were not rated by these external agencies, but based on PSCo’s internal analysis, had credit quality consistent with investment grade.  Seven of these significant counterparties are municipal or cooperative electric entities, or other utilities.

Financial Impact of Qualifying Cash Flow Hedges — The impact of qualifying interest rate and vehicle fuel cash flow hedges on PSCo’s accumulated other comprehensive loss, included in the consolidated statements of common stockholder’s equity and in the consolidated statements of comprehensive income, is detailed in the following table:
(Thousands of Dollars)
 
2016
 
2015
 
2014
Accumulated other comprehensive loss related to cash flow hedges at Jan. 1
 
$
(23,836
)
 
$
(23,878
)
 
$
(23,338
)
After-tax net unrealized (losses) related to derivatives accounted for as hedges
 

 
(30
)
 
(72
)
After-tax net realized losses (gains) on derivative transactions reclassified into earnings
 
1,056

 
72

 
(468
)
Accumulated other comprehensive loss related to cash flow hedges at Dec. 31
 
$
(22,780
)
 
$
(23,836
)
 
$
(23,878
)

The following tables detail the impact of derivative activity during the years ended Dec. 31, 2016, 2015 and 2014, on accumulated other comprehensive loss, regulatory assets and liabilities, and income:
 
 
Year Ended Dec. 31, 2016
 
 
 
Pre-Tax Fair Value
Gains 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
 
$

 
$

 
$
1,618

(a) 
$

 
$

 
Vehicle fuel and other commodity
 

 

 
86

(b) 

 

 
Total
 
$

 
$

 
$
1,704

 
$

 
$

 
Other derivative instruments
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$

 
$

 
$

 
$
(257
)
(c) 
Natural gas commodity
 

 
2,051

 

 
10,292

(d) 
(5,832
)
(d) 
Total
 
$

 
$
2,051

 
$

 
$
10,292

 
$
(6,089
)
 
 
 
Year Ended Dec. 31, 2015
 
 
 
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 (Losses)
Recognized
During the Period
in Income
 
Derivatives designated as cash flow hedges
 
 
 
 
 
 
 
 
 
 
 
Interest rate
 
$

 
$

 
$
54

(a) 
$

 
$

 
Vehicle fuel and other commodity
 
(50
)
 

 
57

(b) 

 

 
Total
 
$
(50
)
 
$

 
$
111

 
$

 
$

 
Other derivative instruments
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$

 
$

 
$

 
$
364

(c) 
Natural gas commodity
 

 
(10,635
)
 

 
10,158

(d) 
(7,620
)
(d) 
Total
 
$

 
$
(10,635
)
 
$

 
$
10,158

 
$
(7,256
)
 

65


 
 
Year Ended Dec. 31, 2014
 
 
 
Pre-Tax Fair Value
Gains (Losses) Recognized
During the Period in:
 
Pre-Tax Gains
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
 
$

 
$

 
$
(730
)
(a) 
$

 
$

 
Vehicle fuel and other commodity
 
(115
)
 

 
(25
)
(b) 

 

 
Total
 
$
(115
)
 
$

 
$
(755
)
 
$

 
$

 
Other derivative instruments
 
 
 
 
 
 
 
 
 
 
 
Natural gas commodity
 
$

 
$
451

 
$

 
$
(4,631
)
(d) 
$
(9,850
)
(d) 
Total
 
$

 
$
451

 
$

 
$
(4,631
)
 
$
(9,850
)
 

(a) 
Amounts are recorded to interest charges.
(b) 
Amounts are recorded to O&M expenses.
(c) 
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.
(d) 
Amounts for the year ended Dec. 31, 2016 and Dec. 31, 2015 included $0.2 million and $1.1 million of settlement losses on derivatives entered to mitigate natural gas price risk for electric generation, recorded to electric fuel and purchased power, subject to cost-recovery mechanisms and reclassified to a regulatory asset, as appropriate.  Such losses for the years ended Dec. 31, 2014 were immaterial.  The remaining settlement losses for the years ended Dec. 31, 2016, 2015 and 2014 relate to natural gas operations and are recorded to cost of natural gas sold and transported.  These losses are subject to cost-recovery mechanisms and reclassified out of income to a regulatory asset, as appropriate.

PSCo had no derivative instruments designated as fair value hedges during the years ended Dec. 31, 2016, 2015 and 2014.  Therefore, no gains or losses from fair value hedges or related hedged transactions were recognized for these periods.

Credit Related Contingent Features  Contract provisions for derivative instruments that PSCo enters into, including those recorded to the consolidated balance sheet at fair value, as well as 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 is unable to maintain its credit ratings.  At Dec. 31, 2016 and 2015, there were no derivative instruments in a liability position with underlying contract provisions that required the posting of collateral or settlement of outstanding contracts if the credit ratings of PSCo were downgraded below investment grade.

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 Dec. 31, 2016 and 2015.


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Recurring Fair Value Measurements  The following table presents, for each of the fair value hierarchy levels, PSCo’s derivative assets and liabilities measured at fair value on a recurring basis at Dec. 31, 2016:
 
 
Dec. 31, 2016
 
 
Fair Value
 
 
 
 
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Total
 
Counterparty
Netting (b)
 
Total
Current derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
1,124

 
$
5,453

 
$

 
$
6,577

 
$
(5,137
)
 
$
1,440

Natural gas commodity
 

 
7,778

 

 
7,778

 

 
7,778

Total current derivative assets
 
$
1,124

 
$
13,231

 
$

 
$
14,355

 
$
(5,137
)
 
9,218

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
1,716

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
10,934

Noncurrent derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Natural gas commodity
 
$

 
$
1,652

 
$

 
$
1,652

 
$

 
$
1,652

Total noncurrent derivative assets
 
$

 
$
1,652

 
$

 
$
1,652

 
$

 
1,652

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
1,746

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
3,398

Current derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
1,386

 
$
5,357

 
$
22

 
$
6,765

 
$
(5,137
)
 
$
1,628

Total current derivative liabilities
 
$
1,386

 
$
5,357

 
$
22

 
$
6,765

 
$
(5,137
)
 
1,628

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
5,160

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
6,788

Noncurrent derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
$
7,828

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
7,828


(a) 
In 2003, as a result of implementing new guidance on the normal purchase exception for derivative accounting, PSCo began recording several long-term PPAs at fair value due to accounting requirements related to underlying price adjustments.  As these purchases are recovered through normal regulatory recovery mechanisms, the changes in fair value for these contracts were offset by regulatory assets and liabilities.  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 will be 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, 2016. At Dec. 31, 2016, 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.


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The following table presents, for each of the fair value hierarchy levels, PSCo’s derivative assets and liabilities measured at fair value on a recurring basis at Dec. 31, 2015:
 
 
Dec. 31, 2015
 
 
Fair Value
 
 
 
 
 
 
(Thousands of Dollars)
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Total
 
Counterparty
Netting (b)
 
Total
Current derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$
137

 
$
351

 
$

 
$
488

 
$
(324
)
 
$
164

Natural gas commodity
 

 
352

 

 
352

 
(286
)
 
66

Total current derivative assets
 
$
137

 
$
703

 
$

 
$
840

 
$
(610
)
 
230

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
1,715

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
1,945

Noncurrent derivative assets
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$
16

 
$

 
$
16

 
$

 
$
16

Total noncurrent derivative assets
 
$

 
$
16

 
$

 
$
16

 
$

 
16

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
3,462

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
3,478

Current derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
 
 
 
 
 
 
 
Vehicle fuel and other commodity
 
$

 
$
92

 
$

 
$
92

 
$

 
$
92

Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
34

 
325

 

 
359

 
(324
)
 
35

Natural gas commodity
 

 
3,850

 

 
3,850

 
(286
)
 
3,564

Total current derivative liabilities
 
$
34

 
$
4,267

 
$

 
$
4,301

 
$
(610
)
 
3,691

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
5,190

Current derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
8,881

Noncurrent derivative liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Other derivative instruments:
 
 
 
 
 
 
 
 
 
 
 
 
Commodity trading
 
$

 
$
33

 
$

 
$
33

 
$

 
$
33

Total noncurrent derivative liabilities
 
$

 
$
33

 
$

 
$
33

 
$

 
33

PPAs (a)
 
 
 
 
 
 
 
 
 
 
 
12,987

Noncurrent derivative instruments
 
 
 
 
 
 
 
 
 
 
 
$
13,020


(a) 
In 2003, as a result of implementing new guidance on the normal purchase exception for derivative accounting, PSCo began recording several long-term PPAs at fair value due to accounting requirements related to underlying price adjustments. As these purchases are recovered through normal regulatory recovery mechanisms, the changes in fair value for these contracts were offset by regulatory assets and liabilities. 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 will be 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, 2015.  At Dec. 31, 2015, derivative assets and liabilities include no obligations to return cash collateral of 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 losses recognized in earnings for level 3 commodity trading derivatives for the year ended Dec. 31, 2016. There were no changes in Level 3 recurring fair value measurements for the years ended Dec. 31, 2015 and 2014.

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 years ended Dec. 31, 2016, 2015 and 2014.


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Fair Value of Long-Term Debt

As of Dec. 31, 2016 and 2015, other financial instruments for which the carrying amount did not equal fair value were as follows:
 
 
2016
 
2015
(Thousands of Dollars)
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Long-term debt, including current portion (a)
 
$
4,216,206

 
$
4,491,570

 
$
4,105,596

 
$
4,376,875


(a) 
Amounts reflect the classification of debt issuance costs as a deduction from the carrying amount of the related debt. See Note 2, Accounting Pronouncements for more information on the adoption of ASU No. 2015-03.

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 Dec. 31, 2016 and 2015, and given the observability of the inputs to these estimates, the fair values presented for long-term debt have been assigned a Level 2.

11.
Rate Matters

Pending Regulatory Proceedings — CPUC

Annual Electric Earnings Test — As part of an annual earnings test, PSCo must share with customers earnings that exceed the authorized ROE threshold of 9.83 percent for 2015 through 2017. The 2016 earnings test did not result in a material customer refund obligation as of Dec. 31, 2016. PSCo will file its 2016 earnings test with the CPUC in April 2017. The final sharing obligation will be based on the CPUC approved tariff and could vary from the current estimate.

Electric, Purchased Gas and Resource Adjustment Clauses

DSM and the DSMCA — Energy efficiency and DSM costs are recovered through a combination of the DSMCA riders and base rates. DSMCA riders are adjusted biannually to capture program costs, performance incentives, and any over- or under-recoveries are trued-up in the following year. Savings goals were 400 GWh in 2015 and 2016 with incentives awarded in the year following plan achievements. PSCo is able to earn $5 million upon reaching its annual savings goal along with an incentive on five percent of net economic benefits up to a maximum annual incentive of $30 million. For the years 2017 through 2020, the annual electric energy savings goal is 400 GWh per year with an annual spending limit of $84.3 million.

In February 2017, the CPUC approved PSCo’s 2017-2018 DSM plan:

A 2017 DSM electric budget of $80.4 million and a natural gas budget of $13.1 million; and
A 2018 DSM electric budget of $77.7 million and a natural gas budget of $12.8 million.

REC Sharing — In 2011, the CPUC approved margin sharing on stand-alone REC transactions at 10 percent to PSCo and 90 percent to customers for 2014. In 2012, the CPUC approved an annual margin sharing on the first $20 million of margins on hybrid REC trades of 80 percent to the customers and 20 percent to PSCo. Margins in excess of the $20 million are to be shared 90 percent to the customers and 10 percent to PSCo. The CPUC authorized PSCo to return to customers unspent carbon offset funds by crediting the RESA regulatory asset balance. PSCo credited to the RESA regulatory liability balance approximately $5.8 million and $5.5 million in 2016 and 2015, respectively. The cumulative credit to the RESA regulatory liability balance was $116.3 million and $110.6 million at Dec. 31, 2016 and Dec. 31, 2015, respectively. The credits include the customers’ share of REC trading margins and the unspent share of carbon offset funds. The current sharing mechanism, without modification, extends through Dec. 31, 2017.


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12.
Commitments and Contingencies

Commitments

Capital Commitments — PSCo has made commitments in connection with a portion of its projected capital expenditures. PSCo’s capital commitments primarily relate to the following major projects:

Advanced Grid Intelligence and Security Initiative PSCo is pursuing projects to update and advance its electric distribution grid to increase reliability and security standards, meet customer expectations, offer additional customer choice and control over energy usage and implement new rate structures.

Rush Creek Wind Farm PSCo has gained approval to build, own and operate a 600 MW wind generation facility and proposed transmission line in Colorado.
Gas Transmission Integrity Management Programs PSCo is proactively identifying and addressing the safety and reliability of natural gas transmission pipelines. The pipeline integrity efforts include primarily pipeline assessment and maintenance projects.

Electric Distribution Integrity Management Programs PSCo is assessing aging infrastructure for distribution assets and replacing worn components to increase system performance.

Fuel Contracts — PSCo has entered into various long-term commitments for the purchase and delivery of a significant portion of its current coal and natural gas requirements. These contracts expire in various years between 2017 and 2060. PSCo is required to pay additional amounts depending on actual quantities shipped under these agreements.

The estimated minimum purchases for PSCo under these contracts as of Dec. 31, 2016, are as follows:
(Millions of Dollars)
 
Coal
 
Natural gas supply
 
Natural gas
storage and
transportation
2017
 
$
241.2

 
$
293.6

 
$
117.8

2018
 
143.1

 
185.7

 
69.0

2019
 
68.6

 
179.7

 
37.1

2020
 
48.5

 
184.3

 
36.6

2021
 
49.6

 
191.5

 
34.4

Thereafter
 
293.4

 
171.2

 
609.9

Total
 
$
844.4

 
$
1,206.0

 
$
904.8


Additional expenditures for fuel and natural gas storage and transportation will be required to meet expected future electric generation and natural gas needs. PSCo’s risk of loss, in the form of increased costs from market price changes in fuel, is mitigated through the use of natural gas and energy cost-rate adjustment mechanisms, which provide for pass-through of most fuel, storage and transportation costs to customers.

PPAs PSCo has entered into PPAs with other utilities and energy suppliers with expiration dates through 2032 for purchased power to meet system load and energy requirements and meet operating reserve obligations. In general, these agreements provide for energy payments, based on actual energy delivered and capacity payments. Certain PPAs accounted for as executory contracts also contain minimum energy purchase commitments. Capacity and energy payments are typically contingent on the independent power producing entity meeting certain contract obligations, including plant availability requirements. Certain contractual payments are adjusted based on market indices. The effects of price adjustments on our financial results are mitigated through purchased energy cost recovery mechanisms.

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Included in electric fuel and purchased power expenses for PPAs, accounted for as executory contracts, were payments for capacity of $44.0 million, $69.5 million and $69.5 million in 2016, 2015 and 2014, respectively. At Dec. 31, 2016, the estimated future payments for capacity and energy that PSCo is obligated to purchase pursuant to these executory contracts, subject to availability, are as follows:
(Millions of Dollars)
 
Capacity
 
Energy (a)
2017
 
$
24.3

 
$
4.4

2018
 
20.1

 

2019
 
11.5

 

2020
 
3.0

 

2021
 
3.0

 

Thereafter
 
16.4

 

Total
 
$
78.3

 
$
4.4


(a) 
Excludes contingent energy payments for renewable energy PPAs.

Additional energy payments under these PPAs and PPAs accounted for as operating leases will be required to meet expected future electric demand.

Leases — PSCo leases a variety of equipment and facilities used in the normal course of business. Three of these leases qualify as capital leases and are accounted for accordingly. The assets and liabilities at the inception of a capital lease are recorded at the lower of fair market value or the present value of future lease payments and are amortized over the term of the contract.

WYCO was formed as a joint venture between Xcel Energy Inc. and Colorado Interstate Gas Company, LLC (CIG) to develop and lease natural gas pipeline, storage, and compression facilities. Xcel Energy Inc. has a 50 percent ownership interest in WYCO, and PSCo has no direct ownership interest. WYCO generally leases its facilities to CIG, and CIG operates the facilities, providing natural gas storage services to PSCo under separate service agreements.

PSCo accounts for its Totem natural gas storage service arrangement with CIG as a capital lease. As a result, PSCo had $127.0 million and $132.9 million of capital lease obligations recorded for the arrangement as of Dec. 31, 2016 and 2015, respectively.

PSCo records amortization for its capital leases as cost of natural gas sold and transported on the consolidated statements of income. Total amortization expenses under capital lease assets were approximately $8.1 million, $8.2 million, and $7.2 million for 2016, 2015 and 2014, respectively. Following is a summary of property held under capital leases:
(Millions of Dollars)
 
Dec. 31, 2016
 
Dec. 31, 2015
Gas storage facilities
 
$
200.5

 
$
200.5

Gas pipeline
 
20.7

 
20.7

Property held under capital leases
 
221.2

 
221.2

Accumulated depreciation
 
(65.3
)
 
(57.2
)
Total property held under capital leases, net
 
$
155.9

 
$
164.0


The remainder of the leases, primarily for office space, railcars, generating facilities, vehicles, aircraft and power-operated equipment, are accounted for as operating leases. Total expenses under operating lease obligations were approximately $118.2 million, $130.5 million and $126.2 million for 2016, 2015 and 2014, respectively. These expenses include capacity payments for PPAs accounted for as operating leases of $102.4 million, $113.5 million and $110.1 million in 2016, 2015 and 2014, respectively, recorded to electric fuel and purchased power expenses.


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Included in the future commitments under operating leases are estimated future capacity payments under PPAs that have been accounted for as operating leases in accordance with the applicable accounting guidance. Future commitments under operating and capital leases are:
(Millions of Dollars)
 
Operating
Leases
 
        PPA (a) (b)
Operating
Leases
 
Total
Operating
Leases
 
Capital
Leases
2017
 
$
11.0

 
$
96.3

 
$
107.3

 
$
25.7

2018
 
10.2

 
96.6

 
106.8

 
25.3

2019
 
10.3

 
97.5

 
107.8

 
25.1

2020
 
10.3

 
98.4

 
108.7

 
24.9

2021
 
9.7

 
99.4

 
109.1

 
23.8

Thereafter
 
45.2

 
483.7

 
528.9

 
462.7

Total minimum obligation
 
 
 
 
 
 
 
587.5

Interest component of obligation
 
 
 
 
 
 
 
(431.6
)
Present value of minimum obligation
 
 
 
 
 
 
 
$
155.9


(a) 
Amounts do not include PPAs accounted for as executory contracts.
(b) 
PPA operating leases contractually expire through 2032.

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

PPAs — Under certain PPAs, PSCo purchases power from independent power producing entities 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 independent power producing entity.

PSCo has determined that certain independent power producing entities are variable interest entities. PSCo is not subject to risk of loss from the operations of these entities, and no significant financial support has been, or is required to be provided other than contractual payments for energy and capacity set forth in the PPAs.

PSCo has evaluated each of these variable interest entities for possible consolidation, including review of qualitative factors such as the length and terms of the contract, control over O&M, control over dispatch of electricity, historical and estimated future fuel and electricity prices, and financing activities. 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. PSCo had approximately 1,571 MW and 1,802 MW of capacity under long-term PPAs as of Dec. 31, 2016, and 2015, respectively, with entities that have been determined to be variable interest entities. These agreements have expiration dates through the year 2032.

Environmental Contingencies

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

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


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MGP Sites PSCo is currently involved in investigating and/or remediating several MGP sites where regulated materials may have been deposited. PSCo has identified two sites where former MGP activities have or may have resulted in site contamination and are under current investigation and/or remediation. At some or all of these MGP sites, there are other parties that may have responsibility for some portion of any remediation. PSCo anticipates that the majority of the remediation at these sites will continue through at least 2017. PSCo had accrued $1.7 million for both of these sites at Dec. 31, 2016 and 2015, respectively. There may be insurance recovery and/or recovery from other PRPs that will offset any costs incurred. PSCo anticipates that any amounts spent will be fully recovered from customers.

Environmental Requirements

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

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 EPA published a final rule regulating the management and disposal of coal combustion residuals (“CCR” or coal ash) as a nonhazardous waste. In December 2016, the Water Infrastructure Improvements for the Nation Act (WIIN Act) was signed into law, which includes provisions that allow the CCR rule to be implemented through a state or federal based permit program and that give the EPA direct enforcement authority.  PSCo is in the process of evaluating whether the costs of implementing the CCR rule under the potential federal and/or state permit programs could have a material impact on the results of operations, financial position or cash flows.

In 2015, industry and environmental non-governmental organizations sought judicial review of the final CCR rule. In June 2016, the D.C. Circuit issued an order remanding and vacating certain elements of the rule as a result of partial settlements with these parties. A final court decision is anticipated in the first half of 2017. Until a final decision is reached in the case, it is uncertain whether the litigation or partial settlements will have any significant impact on results of operations, financial position or cash flows on PSCo. PSCo believes that these associated costs would be recoverable through regulatory mechanisms.

Federal Clean Water Act (CWA) Effluent Limitations Guidelines (ELG) — In 2015, the EPA issued a final ELG rule for power plants that use coal, natural gas, oil or nuclear materials as fuel and discharge treated effluent to surface waters as well as utility-owned landfills that receive coal combustion residuals. PSCo estimates that the capital cost to comply with the ELG rule will range from $9 million to $21 million, and could change as PSCo continues to assess alternate compliance technologies. PSCo believes that compliance costs would be recoverable through regulatory mechanisms.

Federal CWA Section 316(b) — Section 316(b) of the federal CWA requires the EPA to regulate cooling water intake structures to assure that these structures reflect the best technology available for minimizing adverse environmental impacts to aquatic species. The EPA published the final 316(b) rule in 2014. The rule prescribes technology for protecting fish that get stuck on plant intake screens (known as impingement) and describes a process for site-specific determinations by each state for sites that must protect the small aquatic organisms that pass through the intake screens into the plant cooling systems (known as entrainment). The timing of compliance with the requirements will vary from plant-to-plant since the new rule does not have a final compliance deadline. PSCo does not anticipate the cost of compliance will have a material impact on the results of operations, financial position or cash flows.

Federal CWA Waters of the United States Rule In June 2015, the EPA and the U.S. Army Corps of Engineers 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 expansion of the term “Waters of the U.S.” 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 June 2017.


73


Air
GHG Emission Standard for Existing Sources (Clean Power Plan or CPP) — In 2015, a final rule was published by the EPA for GHG emission standards for existing power plants.  Under the rule, states were required to develop implementation plans by September 2016, with the possibility of an extension to September 2018, or submit to a federal plan for the state prepared by the EPA.  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 January 2016, the D.C. Circuit Court denied requests to stay the effectiveness of the rule. 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. During the pendency of the stay, states are not required to submit implementation plans and the EPA will not enforce deadlines or issue a federal plan for any state. Colorado is continuing formal planning efforts.

PSCo has undertaken a number of initiatives that reduce GHG emissions and respond to state renewable and energy efficiency goals.  The CPP could require additional emission reductions in Colorado.  If the state plan does not provide credit for the investments PSCo has already made to reduce GHG emissions, or if it requires additional initiatives or emission reductions, then its requirements would potentially impose additional substantial costs.  Until PSCo has more information about a SIP or the EPA finalizes its proposed federal plan for the states that do not develop related plans, PSCo cannot predict the costs of compliance with the final rule once it takes effect.  PSCo believes compliance costs will be recoverable through regulatory mechanisms.  If PSCo’s regulators do not allow recovery of all or a part of the cost of capital investment or the O&M costs incurred to comply with the CPP or cost recovery is not provided in a timely manner, it could have a material impact on results of operations, financial position or cash flows.

Implementation of the NAAQS for SO2 — The EPA adopted a more stringent NAAQS for SO2 in 2010. The EPA is requiring states to evaluate areas in three phases. The first phase includes areas near PSCo’s Pawnee plant. The Pawnee plant recently installed an SO2 scrubber to reduce SO2 emissions. In June 2016, the EPA issued final designations which found the area near the Pawnee plant is “unclassifiable.” It is anticipated that the area near the Pawnee plant will be able to show compliance with the NAAQS through air dispersion modeling performed by the Colorado Department of Public Health and Environment.

The areas near the remaining PSCo power plants, Comanche and Hayden, which utilize scrubbers to control SO2 emissions, will be evaluated in the next designation phase, ending December 2017. In late 2016, PSCo submitted air dispersion modeling to the Colorado Department of Public Health and Environment and the EPA which demonstrated that PSCo’s Comanche and Hayden plants comply with the NAAQS. If an area is designated nonattainment in 2020, the states will need to evaluate all SO2 sources in the area. The state would then submit an implementation plan, which would be due by 2022, designed to achieve the NAAQS by 2025. PSCo cannot evaluate the impacts until the designation of nonattainment areas is made and any required state plan has been developed. PSCo believes that should SO2 control systems require upgrades for a plant, compliance costs or the costs of alternative cost-effective generation will be recoverable through regulatory mechanisms and therefore does not expect a material impact on results of operations, financial position or cash flows.

Revisions to the NAAQS for Ozone — In 2015, the EPA revised the NAAQS for ozone by lowering the eight-hour standard from 75 parts per billion (ppb) to 70 ppb. The Denver Metropolitan Area is currently not meeting the prior ozone standard and will therefore not meet the new, more stringent, standard, however PSCo’s scheduled retirement of coal fired plants in Denver should help in any plan to mitigate non-attainment.

Asset Retirement Obligations

Recorded AROs — AROs have been recorded for property related to the following: electric production (steam, wind, other and hydro), electric distribution and transmission, natural gas production, natural gas transmission and distribution, natural gas storage, thermal and common general property. The electric production obligations include asbestos, ash-containment facilities, radiation sources, storage tanks and control panels. The asbestos recognition associated with electric production includes certain specific plants. The AROs recorded for PSCo steam and other production relate to ash-containment facilities such as bottom ash ponds, evaporation ponds and solid waste landfills. PSCo has also recorded AROs for the retirement and removal of assets at certain wind production facilities for which the land is leased and removal is required by contract.


74


PSCo recognized an ARO for the retirement costs of natural gas mains and lines and for the retirement of above ground gas gathering, extraction and wells related to gas storage facilities. In addition, an ARO was recognized for the removal of electric transmission and distribution equipment, which consists of many small potential obligations associated with PCBs, mineral oil, storage tanks, lithium batteries, mercury and street lighting lamps. The electric and common general AROs include small obligations related to storage tanks and radiation sources.

In April 2015, the EPA published the final rule regulating the management and disposal of coal combustion byproducts (e.g., coal ash) as a nonhazardous waste to the Federal Register. The rule became effective in October 2015. The estimated costs to comply with the final rule were incorporated into the cash flow revisions in 2015.

A reconciliation of PSCo’s AROs for the years ended Dec. 31, 2016 and 2015 is as follows:
(Thousands of Dollars)
 
Beginning Balance
Jan. 1, 2016
 
Liabilities
Recognized
 
Accretion
 
Cash Flow
    Revisions (a)
 
Ending Balance 
    Dec. 31, 2016 (b)
Electric plant
 
 
 
 
 
 
 
 
 
 
Steam and other production asbestos
 
$
38,676

 
$

 
$
1,877

 
$
(103
)
 
$
40,450

Steam and other production ash containment
 
70,767

 

 
3,078

 
(1,245
)
 
72,600

Wind production
 
1,992

 

 
19

 
61

 
2,072

Electric distribution
 
1,130

 

 
45

 
6,494

 
7,669

Other
 
1,054

 
214

 
46

 
206

 
1,520

Natural gas plant
 
 
 
 
 
 
 
 
 
 
Gas transmission and distribution
 
122,168

 

 
5,009

 
33,542

 
160,719

Other
 
3,925

 

 
155

 

 
4,080

Common and other property
 
 
 
 
 
 
 
 
 
 
Common miscellaneous
 
796

 

 
28

 
(371
)
 
453

Total liability
 
$
240,508

 
$
214

 
$
10,257

 
$
38,584

 
$
289,563

(a) 
In 2016, AROs were revised for changes in estimated cash flows and the timing of those cash flows. Changes in the gas transmission and distribution AROs were mainly related to increased miles of gas mains.
(b) 
There were no ARO liabilities settled during the year ended Dec. 31, 2016.
(Thousands of Dollars)
 
Beginning
Balance
Jan. 1, 2015
 
Accretion
 
Cash Flow
   Revisions (a)
 
Ending
Balance
 Dec. 31, 2015 (b)
Electric plant
 
 
 
 
 
 
 
 
Steam and other production asbestos
 
$
36,856

 
$
1,820

 
$

 
$
38,676

Steam and other production ash containment
 
61,885

 
2,769

 
6,113

 
70,767

Wind production
 
2,095

 
18

 
(121
)
 
1,992

Electric distribution
 
1,182

 
47

 
(99
)
 
1,130

Other
 
1,150

 
46

 
(142
)
 
1,054

Natural gas plant
 
 
 
 
 
 
 
 
Gas transmission and distribution
 
117,474

 
4,694

 

 
122,168

Other
 
3,886

 
153

 
(114
)
 
3,925

Common and other property
 
 
 
 
 
 
 
 
Common miscellaneous
 
768

 
28

 

 
796

Total liability
 
$
225,296

 
$
9,575

 
$
5,637

 
$
240,508

(a) 
In 2015, AROs were revised for changes in estimated cash flows and the timing of those cash flows. Changes in the ash containment ARO were mainly related to the final coal ash rule mentioned above.
(b) 
There were no ARO liabilities recognized or settled during the year ended Dec. 31, 2015.


75


Indeterminate AROs Outside of the known and recorded asbestos AROs, other plants or buildings may contain asbestos due to the age of many of PSCo’s facilities, but no confirmation or measurement of the amount of asbestos or cost of removal could be determined as of Dec. 31, 2016. Therefore, an ARO has not been recorded for these facilities.

Removal Costs — PSCo records a regulatory liability for the plant removal costs of generation, transmission and distribution facilities that are recovered currently in rates. Generally, the accrual of future non-ARO removal obligations is not required. However, long-standing ratemaking practices approved by applicable state and federal regulatory commissions have allowed provisions for such costs in historical depreciation rates. These removal costs have accumulated over a number of years based on varying rates as authorized by the appropriate regulatory entities. Given the long time periods over which the amounts were accrued and the changing of rates over time, PSCo has estimated the amount of removal costs accumulated through historic depreciation expense based on current factors used in the existing depreciation rates. Removal costs as of Dec. 31, 2016 and 2015 were $367 million and $364 million, respectively.

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.

Employment, Tort and Commercial Litigation

Pacific Northwest FERC Refund Proceeding — A complaint with the FERC posed that sales made in the Pacific Northwest in 2000 and 2001 through bilateral contracts were unjust and unreasonable under the Federal Power Act. The City of Seattle (the City) alleged between $34 million to $50 million in sales with PSCo were subject to refund. In 2003, the FERC terminated the proceeding, although it was later remanded back to the FERC in 2007 by the U.S. Court of Appeals for the Ninth Circuit (Ninth Circuit).

In May 2015, the FERC rejected the City’s claim that any of the sales made resulted in an excessive burden and concluded that the City failed to establish a causal link between any contracts and any claimed unlawful market activity. In February 2016, the City appealed this decision to the Ninth Circuit.

In October 2016, a settlement was reached that resolved all outstanding claims between and among the City and the respondents, including PSCo. Settlement terms required PSCo to pay the City $15,000 and the City to withdraw its pending appeal with the Ninth Circuit. These terms have been met, bringing this matter to a close.

Line Extension Disputes — In December 2015, Development Recovery Company (DRC) filed a lawsuit in Denver State Court, stating PSCo failed to award proper allowances and refunds for line extensions to new developments pursuant to the terms of electric service agreements entered into by PSCo and various developers. The dispute involves assigned interests in those claims by over fifty developers. In May 2016, the district court granted PSCo’s motion to dismiss the lawsuit, concluding that jurisdiction over this dispute resides with the CPUC. In June 2016, DRC filed a notice of appeal. The matter has been fully briefed and plaintiff has requested oral arguments. DRC also brought a proceeding before the CPUC as assignee on behalf of two developers, Ryland Homes and Richmond Homes of Colorado. In March 2016, the ALJ issued an order rejecting DRC’s claims for additional allowances and refunds. In June 2016, the ALJ’s determination was approved by the CPUC. DRC did not file a request for reconsideration before the CPUC contesting the decision, but filed an appeal in Denver District Court in August 2016. DRC filed its brief in February 2017 and PSCo’s answer brief will be due March 2017.

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.


76


Other Contingencies

See Note 11 for further discussion.

13.
Regulatory Assets and Liabilities

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

The components of regulatory assets shown on the consolidated balance sheets of PSCo at Dec. 31, 2016 and 2015 are:
(Thousands of Dollars)
 
See Note(s)
 
Remaining
Amortization Period
 
Dec. 31, 2016
 
Dec. 31, 2015
Regulatory Assets
 
 
 
 
 
Current
 
Noncurrent
 
Current
 
Noncurrent
Pension and retiree medical obligations (a)
 
8

 
Various
 
$
27,270

 
$
568,258

 
$
29,260

 
$
497,973

Recoverable deferred taxes on AFUDC recorded in plant
 
1

 
Plant lives
 

 
151,022

 

 
144,953

Depreciation differences
 
1

 
Pending rate case
 
15,363

 
90,426

 
14,221

 
99,835

Net AROs (b)
 
1, 12

 
Plant lives
 

 
78,050

 

 
62,948

Purchased power contract costs
 
12

 
Term of related contract
 
1,035

 
29,029

 
1,319

 
29,143

Conservation programs (c)
 
1, 11

 
One to two years
 
9,262

 
6,986

 
8,466

 
6,947

Losses on reacquired debt
 
4

 
Term of related debt
 
1,203

 
6,120

 
1,421

 
6,957

Contract valuation adjustments (d)
 
10

 
Term of related contract
 
3,444

 
6,082

 
9,376

 
9,526

Gas pipeline inspection costs
 
12

 
Two years
 

 
4,405

 
3,611

 

Property tax
 
 
 
Various
 
9,393

 
1,653

 
21,558

 
14,428

CACJA recovery rider
 
 
 
Less than one year
 
24,260

 

 

 
20,020

Other
 
 
 
Various
 
12,553

 
16,398

 
2,840

 
13,545

Total regulatory assets
 
 
 
 
 
$
103,783

 
$
958,429

 
$
92,072

 
$
906,275


(a) 
Includes $4.2 million and $4.4 million of regulatory assets related to the nonqualified pension plan, of which $0.4 million is included in the current asset at Dec. 31, 2016 and 2015, respectively.
(b) 
Includes amounts recorded for future recovery of AROs.
(c) 
Includes costs for conservation programs, as well as incentives allowed in certain jurisdictions.
(d) 
Includes the fair value of certain long-term PPAs used to meet energy capacity requirements and valuation adjustments on natural gas commodity purchases.


77


The components of regulatory liabilities shown on the consolidated balance sheets of PSCo at Dec. 31, 2016 and 2015 are:
(Thousands of Dollars)
 
See Note(s)
 
Remaining
Amortization Period
 
Dec. 31, 2016
 
Dec. 31, 2015
Regulatory Liabilities
 
 
 
 
 
Current
 
Noncurrent
 
Current
 
Noncurrent
Plant removal costs
 
1, 12

 
Plant lives
 
$

 
$
367,440

 
$

 
$
364,291

Renewable resources and environmental initiatives
 
11, 12

 
Various
 
3,600

 
67,728

 
3,311

 
40,988

Investment tax credit deferrals
 
1, 7

 
Various
 

 
18,797

 

 
20,515

Deferred income tax adjustment
 
1

 
Various
 

 
16,260

 

 
16,891

Gain from asset sales
 
 
 
Pending rate case
 

 
1,469

 

 

PSCo earnings test
 
11

 
One to two years
 
8,300

 
914

 
42,868

 
9,472

Deferred electric, natural gas and steam production costs
 
1

 
Less than one year
 
35,123

 

 
66,696

 

Conservation programs (a)
 
1, 11

 
Less than one year
 
24,077

 

 
33,460

 

Gas pipeline inspection costs
 
12

 
Less than one year
 
5,108

 

 
1,140

 
4,273

Low income discount program
 
 
 
Less than one year
 
881

 

 
1,393

 

Other
 
 
 
Various
 
24,021

 
40,325

 
3,955

 
14,991

Total regulatory liabilities (b)
 
 
 
 
 
$
101,110

 
$
512,933

 
$
152,823

 
$
471,421


(a) 
Includes costs for conservation programs, as well as incentives allowed in certain jurisdictions.
(b) 
Revenue subject to refund of $2.4 million and $9.1 million for 2016 and 2015, respectively, is included in other current liabilities.

At Dec. 31, 2016 and 2015, approximately $28 million and $54 million of PSCo’s regulatory assets represented past expenditures not currently earning a return, respectively. This amount primarily includes certain expenditures associated with renewable resources and environmental initiatives.

14.
Other Comprehensive Income

Changes in accumulated other comprehensive loss, net of tax, for the years ended Dec. 31, 2016 and 2015 were as follows:
 
 
Year Ended Dec. 31, 2016
(Thousands of Dollars)
 
Gains and Losses on Cash Flow Hedges
 
Defined Benefit and Postretirement Items
 
Total
Accumulated other comprehensive loss at Jan. 1
 
$
(23,836
)
 
$

 
$
(23,836
)
Other comprehensive loss before reclassifications
 

 
(223
)
 
(223
)
Losses reclassified from net accumulated other comprehensive loss
 
1,056

 
3

 
1,059

Net current period other comprehensive income (loss)
 
1,056

 
(220
)
 
836

Accumulated other comprehensive loss at Dec. 31
 
$
(22,780
)
 
$
(220
)
 
$
(23,000
)
 
 
 
 
 
 
 
 
 
Year Ended Dec. 31, 2015
(Thousands of Dollars)
 
Gains and Losses on Cash Flow Hedges
Accumulated other comprehensive loss at Jan. 1
 
$
(23,878
)
Other comprehensive loss before reclassifications
 
(30
)
Losses reclassified from net accumulated other comprehensive loss
 
72

Net current period other comprehensive income
 
42

Accumulated other comprehensive loss at Dec. 31
 
$
(23,836
)


78


Reclassifications from accumulated other comprehensive loss for the years ended Dec. 31, 2016 and 2015 were as follows:
 
 
Amounts Reclassified from Accumulated
Other Comprehensive Loss
 
(Thousands of Dollars)
 
Year Ended Dec. 31, 2016
 
Year Ended Dec. 31, 2015
 
Losses (gains) on cash flow hedges:
 
 
 
 
 
Interest rate derivatives
 
$
1,618

(a) 
$
54

(a) 
Vehicle fuel derivatives
 
86

(b) 
57

(b) 
Total, pre-tax
 
1,704

 
111

 
Tax benefit
 
(648
)
 
(39
)
 
Total, net of tax
 
1,056

 
72

 
Defined benefit pension and postretirement losses (gains):
 
 
 
 
 
Amortization of net losses
 
5

(c) 

 
Total, pre-tax
 
5

 

 
Tax benefit
 
(2
)
 

 
Total, net of tax
 
3

 

 
Total amounts reclassified, net of tax
 
$
1,059

 
$
72

 

(a) 
Included in interest charges.
(b) 
Included in O&M expenses.
(c) 
Included in the computation of net periodic pension and postretirement benefit costs. See Note 8 for details regarding these benefit plans.

15.
Segments and Related 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 electricity which is transmitted and distributed in 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 wholesale commodity and trading operations.
PSCo’s regulated natural gas utility segment transports, stores and distributes natural gas 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 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.


79


The accounting policies of the segments are the same as those described in Note 1.
(Thousands of Dollars)
 
Regulated
Electric
 
Regulated
Natural Gas
 
All Other
 
Reconciling
Eliminations
 
Consolidated
Total
2016
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)
 
$
3,049,352

 
$
957,721

 
$
40,723

 
$

 
$
4,047,796

Intersegment revenues
 
275

 
110

 

 
(385
)
 

Total revenues
 
$
3,049,627

 
$
957,831

 
$
40,723

 
$
(385
)
 
$
4,047,796

 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
337,583

 
$
101,663

 
$
4,309

 
$

 
$
443,555

Interest charges and financing costs
 
136,274

 
37,881

 
431

 

 
174,586

Income tax expense (benefit)
 
228,825

 
45,960

 
(867
)
 

 
273,918

Net income
 
383,973

 
75,426

 
4,092

 

 
463,491

(Thousands of Dollars)
 
Regulated
Electric
 
Regulated
Natural Gas
 
All Other
 
Reconciling
Eliminations
 
Consolidated
Total
2015
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)
 
$
3,115,257

 
$
1,006,666

 
$
41,590

 
$

 
$
4,163,513

Intersegment revenues
 
301

 
67

 

 
(368
)
 

Total revenues
 
$
3,115,558

 
$
1,006,733

 
$
41,590

 
$
(368
)
 
$
4,163,513

 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
311,122

 
$
96,384

 
$
4,161

 
$

 
$
411,667

Interest charges and financing costs
 
136,397

 
34,935

 
576

 

 
171,908

Income tax expense (benefit)
 
234,873

 
44,192

 
(625
)
 

 
278,440

Net income
 
391,257

 
74,267

 
1,278

 

 
466,802

(Thousands of Dollars)
 
Regulated
Electric
 
Regulated
Natural Gas
 
All Other
 
Reconciling
Eliminations
 
Consolidated
Total
2014
 
 
 
 
 
 
 
 
 
 
Operating revenues (a)
 
$
3,125,937

 
$
1,215,324

 
$
41,888

 
$

 
$
4,383,149

Intersegment revenues
 
339

 
180

 

 
(519
)
 

Total revenues
 
$
3,126,276

 
$
1,215,504

 
$
41,888

 
$
(519
)
 
$
4,383,149

 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
$
285,968

 
$
89,186

 
$
4,048

 
$

 
$
379,202

Interest charges and financing costs
 
124,118

 
29,987

 
535

 

 
154,640

Income tax expense (benefit)
 
208,095

 
50,874

 
(15,378
)
 

 
243,591

Net income
 
349,793

 
84,324

 
21,071

 

 
455,188


(a) 
Operating revenues include $13 million, $13 million and $14 million of intercompany revenue for the years ended Dec. 31, 2016, 2015 and 2014, respectively. See Note 16 for further discussion of related party transactions by reportable segment.

16.
Related Party Transactions

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

Xcel Energy Inc., NSP-Minnesota, PSCo and SPS have established a utility money pool arrangement. See Note 4 for further discussion.


80


The table below contains significant affiliate transactions among the companies and related parties for the years ended Dec. 31:
(Thousands of Dollars)
 
2016
 
2015
 
2014
Operating revenues:
 
 
 
 
 
 
Electric
 
$
8,809

 
$
8,632

 
$
9,614

Other
 
4,525

 
4,441

 
4,441

Operating expenses:
 
 
 
 
 
 
Purchased power
 
56

 

 
23

Other operating expenses — paid to Xcel Energy Services Inc.
 
446,086

 
414,620

 
454,250

Interest expense
 
149

 
211

 
158

Interest income
 

 
45

 
61


Accounts receivable and payable with affiliates at Dec. 31 were:
 
 
2016
 
2015
(Thousands of Dollars)
 
Accounts
Receivable
 
Accounts
Payable
 
Accounts
Receivable
 
Accounts
Payable
NSP-Minnesota
 
$
7,669

 
$

 
$
4,419

 
$

NSP-Wisconsin
 
974

 

 
71

 

SPS
 
745

 

 
414

 

Other subsidiaries of Xcel Energy Inc.
 
33

 
98,797

 
5

 
76,643

 
 
$
9,421

 
$
98,797

 
$
4,909

 
$
76,643


17.
Summarized Quarterly Financial Data (Unaudited)
 
 
Quarter Ended
(Thousands of Dollars)
 
March 31, 2016
 
June 30, 2016
 
Sept. 30, 2016
 
Dec. 31, 2016
Operating revenues
 
$
1,057,841

 
$
909,852

 
$
1,059,177

 
$
1,020,926

Operating income
 
223,190

 
180,629

 
315,605

 
170,197

Net income
 
115,874

 
87,344

 
173,607

 
86,666

 
 
Quarter Ended
(Thousands of Dollars)
 
March 31, 2015
 
June 30, 2015
 
Sept. 30, 2015
 
Dec. 31, 2015
Operating revenues
 
$
1,135,450

 
$
952,521

 
$
1,044,704

 
$
1,030,838

Operating income
 
215,400

 
195,176

 
315,174

 
173,951

Net income
 
110,966

 
98,500

 
173,081

 
84,255


Item 9 — Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A — Controls and Procedures

Disclosure Controls and Procedures

PSCo maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.  In addition, the disclosure controls and procedures ensure that information required to be disclosed is accumulated and communicated to management, including the chief executive officer (CEO) and chief financial officer (CFO), allowing timely decisions regarding required disclosure.  As of Dec. 31, 2016, based on an evaluation carried out under the supervision and with the participation of PSCo’s management, including the CEO and CFO, of the effectiveness of its disclosure controls and the procedures, the CEO and CFO have concluded that PSCo’s disclosure controls and procedures were effective.


81


Internal Control Over Financial Reporting

No change in PSCo’s internal control over financial reporting has occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, PSCo’s internal control over financial reporting.  PSCo maintains internal control over financial reporting to provide reasonable assurance regarding the reliability of the financial reporting.  PSCo has evaluated and documented its controls in process activities, general computer activities, and on an entity-wide level.  During the year and in preparation for issuing its report for the year ended Dec. 31, 2016 on internal controls under section 404 of the Sarbanes-Oxley Act of 2002, PSCo conducted testing and monitoring of its internal control over financial reporting.  Based on the control evaluation, testing and remediation performed, PSCo did not identify any material control weaknesses, as defined under the standards and rules issued by the Public Company Accounting Oversight Board and as approved by the SEC and as indicated in Management Report on Internal Controls herein.

In 2016, PSCo implemented the general ledger modules of a new enterprise resource planning system to improve certain financial and related transaction processes. PSCo plans to initiate deployment of work management systems modules, including the conversion of existing work management systems, to this same system during 2017. In connection with this ongoing implementation, PSCo is updating its internal control over financial reporting, as necessary, to accommodate modifications to its business processes and accounting systems. PSCo does not believe that this implementation will have an adverse effect on its internal control over financial reporting.

This annual report does not include an attestation report of PSCo’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by PSCo’s independent registered public accounting firm pursuant to the rules of the SEC that permit PSCo to provide only management’s report in this annual report.

Item 9B — Other Information

None.

PART III

Items 10, 11, 12 and 13 of Part III of Form 10-K have been omitted from this report for PSCo in accordance with conditions set forth in general instructions I (1) (a) and (b) of Form 10-K for wholly-owned subsidiaries.

Item 10 — Directors, Executive Officers and Corporate Governance

Item 11 — Executive Compensation

Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13 — Certain Relationships and Related Transactions, and Director Independence

Information required under this Item is contained in Xcel Energy Inc.’s Proxy Statement for its 2017 Annual Meeting of Shareholders, which is incorporated by reference.

Item 14 — Principal Accountant Fees and Services

The information required by Item 14 of From 10-K is set forth under the heading “Independent Registered Public Accounting Firm - Audit and Non-Audit Fees” in Xcel Energy Inc.’s definitive Proxy Statement for the 2017 Annual Meeting of Stockholders which definitive Proxy Statement is expected to be filed with the SEC on or about April 4, 2017. Such information set forth under such heading is incorporated herein by this reference hereto.


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PART IV

Item 15Exhibits, Financial Statement Schedules
1.
Consolidated Financial Statements:
 
 
 
Management Report on Internal Controls Over Financial Reporting  For the year ended Dec. 31, 2016.
 
Report of Independent Registered Public Accounting Firm  Financial Statements
 
Consolidated Statements of Income  For the three years ended Dec. 31, 2016, 2015, and 2014.
 
Consolidated Statements of Comprehensive Income  For the three years ended Dec. 31, 2016, 2015, and 2014.
 
Consolidated Statements of Cash Flows  For the three years ended Dec. 31, 2016, 2015, and 2014.
 
Consolidated Balance Sheets  As of Dec. 31, 2016 and 2015.
 
Consolidated Statements of Common Stockholder’s Equity  For the three years ended Dec. 31, 2016, 2015 and 2014.
 
Consolidated Statements of Capitalization — As of Dec. 31, 2016 and 2015.
 
 
2.
Schedule II  Valuation and Qualifying Accounts and Reserves for the years ended Dec. 31, 2016, 2015, and 2014.
3.
Exhibits
Indicates incorporation by reference
+
Executive Compensation Arrangements and Benefit Plans Covering Executive Officers and Directors
t   
Certain portions of this agreement have been omitted pursuant to a request for confidential treatment and have been filed separately with the SEC.
2.01* t
Purchase and Sale Agreement by and between Riverside Energy Center, LLC and Calpine Development Holdings, Inc., as Sellers, and PSCo, as Purchaser, dated as of April 2, 2010 (excluding certain schedules and exhibits referred to in the agreement, as amended, which the Registrant agrees to furnish supplemental to the SEC upon request) (Exhibit 2.01 to Form 10-Q of Xcel Energy (file no. 001-03034) for the quarter ended June 30, 2010).
3.01*
Amended and Restated Articles of Incorporation dated July 15, 1998 (Form 10-K, Dec. 31, 1998, Exhibit 3(a)(1)).
3.02*
By-Laws of PSCo as Amended and Restated on Sept. 26, 2013 (Exhibit 3.02 to Form 10-Q/A for the quarter ended Sept. 30, 2013 (file no. 001-03280)).
4.01*
Indenture, dated as of Oct. 1, 1993, between PSCo and Morgan Guaranty Trust Company of New York, as trustee,
providing for the issuance of First Collateral Trust Bonds (Form 10-Q, Sept. 30, 1993 — Exhibit 4(a)).
4.02*
Indentures supplemental to Indenture dated as of Oct. 1, 1993, between PSCo and Morgan Guaranty Trust Company of New York, as trustee:
Dated as of
 
Previous Filing:
Form; Date or
file no.
 
Exhibit
No.
Nov. 1, 1993
 
S-3, (33-51167)
 
4(b)(2)
Jan. 1, 1994
 
10-K, 1993
 
4(b)(3)
Sept. 2, 1994
 
8-K, September 1994
 
4(b)
Nov. 1, 1996
 
10-K, 1996 (001-03280)
 
4(b)(3)
Feb. 1, 1997
 
10-Q, March 31, 1997 (001-03280)
 
4(a)
April 1, 1998
 
10-Q, March 31, 1998 (001-03280)
 
4(b)
Aug. 15, 2002
 
10-Q, Sept. 30, 2002 (001-03280)
 
4.03
Aug. 1, 2005
 
PSCo 8-K, Aug. 18, 2005 (001-03280)
 
4.02
4.03*
Indenture dated July 1, 1999, between PSCo and The Bank of New York, providing for the issuance of Senior Debt Securities and First Supplemental Indenture dated July 15, 1999, between PSCo and The Bank of New York (Exhibits 4.1 and 4.2 to Form 8-K (file no. 001-03280) dated July 13, 1999).
4.04*
Financing Agreement between Adams County, Colorado and PSCo, dated as of Aug. 1, 2005 relating to $129.5 million Adams County, Colorado Pollution Control Refunding Revenue Bonds, 2005 Series A (Exhibit 4.01 to PSCo Current Report on Form 8-K, dated Aug. 18, 2005, file no. 001-03280).
4.05*
Supplemental Indenture, dated Aug. 1, 2007, between PSCo and U.S. Bank Trust National Association, as successor Trustee (Exhibit 4.01 to PSCo Form 8-K (file no. 001-03280) dated Aug. 18, 2007).

83


4.06*
Supplemental Indenture dated as of Aug. 1, 2008, between PSCo and U.S. Bank Trust National Association, as successor Trustee, creating $300 million principal amount of 5.80 percent First Mortgage Bonds, Series No. 18 due 2018 and $300 million principal amount of 6.50 percent First Mortgage Bonds, Series No. 19 due 2038 (Exhibit 4.01 of Form 8-K of PSCo dated Aug. 6, 2008 (file no. 001-03280)).
4.07*
Supplemental Indenture dated as of May 1, 2009 between PSCo and U.S. Bank Trust National Association, as successor Trustee, creating $400 million principal amount of 5.125 percent First Mortgage Bonds, Series No. 20 due 2019 (Exhibit 4.01 of Form 8-K of PSCo dated May 28, 2009 (file no. 001-03280)).
4.08*
Supplemental Indenture dated as of Nov. 1, 2010 between PSCo and U.S. Bank National Association, as successor Trustee, creating $400 million principal amount of 3.200 percent First Mortgage Bonds, Series No. 21 due 2020 (Exhibit 4.01 of Form 8-K of PSCo dated Nov. 18, 2010 (file no. 001-03280)).
4.09*
Supplemental Indenture dated as of Aug. 1, 2011 between PSCo and U.S. Bank National Association, as successor Trustee, creating $250 million principal amount of 4.75 percent First Mortgage Bonds, Series No. 22 due 2041 (Exhibit 4.01 to Form 8-K of PSCo dated Aug. 9, 2011 (file no. 001-03280)).
4.10*
Supplemental Indenture dated as of Sept. 1, 2012 between PSCo and U.S. Bank National Association, as successor Trustee, creating $300 million principal amount of 2.25 percent First Mortgage Bonds, Series No. 23 due 2022 and $500 million principal amount of 3.60 percent First Mortgage Bonds, Series No. 24 due 2042 (Exhibit 4.01 to Form 8-K dated Sept. 11, 2012 (file no. 001-03280)).
4.11*
Supplemental Indenture dated as of March 1, 2013 between PSCo and U.S. Bank National Association, as successor Trustee, creating $250 million principal amount of 2.50 percent First Mortgage Bonds, Series No. 25 due 2023 and $250 million principal amount of 3.95 percent First Mortgage Bonds, Series No. 26 due 2043 (Exhibit 4.01 to Form 8-K of PSCo dated March 26, 2013 (file no. 001-03280)).
4.12*
Supplemental Indenture dated as of March 1, 2014 between PSCo and U.S. Bank National Association, as successor Trustee, creating $300 million principal amount of 4.30 percent First Mortgage Bonds, Series No. 27 due 2044. (Exhibit 4.01 to Form 8-K of PSCo dated March 10, 2014 (file no. 001-03280)).
4.13*
Supplemental Indenture dated as of May 1, 2015 between PSCo and U.S. Bank National Association, as successor Trustee, creating $250 million principal amount of 2.90 percent First Mortgage Bonds, Series No. 28 due 2025. (Exhibit 4.01 to Form 8-K of PSCo dated May 12, 2015 (file no. 001-03280)).
4.14*
Supplemental Indenture dated as of June 1, 2016 between PSCo and U.S. Bank National Association, as successor Trustee, creating $250 million principal amount of 3.55 percent First Mortgage Bonds, Series No. 29 due 2046. (Exhibit 4.01 to Form 8-K of PSCo dated June 13, 2016 (file no. 001-03280)).
10.01*+
Xcel Energy Inc. Nonqualified Pension Plan (2009 Restatement) (Exhibit 10.02 to Form 10-K of Xcel Energy (file no. 001-03034) for the year ended Dec. 31, 2008).
10.02*+
Xcel Energy Senior Executive Severance and Change-in-Control Policy (2009 Amendment and Restatement) (Exhibit 10.05 to Form 10-K of Xcel Energy (file no. 001-03034) for the year ended Dec. 31, 2008).
10.03*+
Xcel Energy Inc. Non-Employee Directors’ Deferred Compensation Plan as amended and restated on Jan. 1, 2009 (Exhibit 10.08 to Form 10-K of Xcel Energy (file no. 001-03034) for the year ended Dec. 31, 2008).
10.04*+
Form of Services Agreement between Xcel Energy Services Inc. and utility companies (Exhibit H-1 to Form U5B (file no. 001-03034) dated Nov. 16, 2000).
10.05*+
Xcel Energy Inc. Supplemental Executive Retirement Plan as amended and restated Jan. 1, 2009 (Exhibit 10.17 to Form 10-K of Xcel Energy (file no. 001-03034) for the year ended Dec. 31, 2008).
10.06*
Amended and Restated Coal Supply Agreement entered into Oct. 1, 1984 but made effective as of Jan. 1, 1976 between PSCo and Amax Inc. on behalf of its division, Amax Coal Co. (Form 10-K (file no. 001-03280) Dec. 31, 1984 — Exhibit 10(c)(1)).
10.07*
First Amendment to Amended and Restated Coal Supply Agreement entered into May 27, 1988 but made effective Jan. 1, 1988 between PSCo and Amax Coal Co. (Form 10-K (file no. 001-03280) Dec. 31, 1988 — Exhibit 10(c)(2)).
10.08*
Proposed Settlement Agreement excerpts, as filed with the CPUC (Exhibit 99.02 to Form 8-K of Xcel Energy (file no. 001-03034) dated Dec. 3, 2004).
10.09*
Settlement Agreement among PSCo and Concerned Environmental and Community Parties, dated Dec. 3, 2004 (Exhibit 99.03 to Form 8-K of Xcel Energy (file no. 001-03034) dated Dec. 3, 2004).
10.10*+
Amendment dated Aug. 26, 2009 to the Xcel Energy Senior Executive Severance and Change-in-Control Policy (Exhibit 10.06 to Form 10-Q of Xcel Energy (file no. 001-03034) for the quarter ended Sept. 30, 2009).
10.11*+
Xcel Energy Inc. Executive Annual Incentive Award Plan Form of Restricted Stock Agreement (Exhibit 10.08 to Form 10-Q of Xcel Energy (file no. 001-03034) for the quarter ended Sept. 30, 2009).
10.12*+
Xcel Energy Inc. Executive Annual Incentive Award Plan (as amended and restated effective Feb. 17, 2010) (incorporated by reference to Appendix A to Schedule 14A, Definitive Proxy Statement to Xcel Energy (file no. 001-03034) dated April 6, 2010).

84


10.13*+
Xcel Energy Inc. 2005 Long-Term Incentive Plan (as amended and restated effective Feb. 17, 2010) (incorporated by reference to Appendix B to Schedule 14A, Definitive Proxy Statement to Xcel Energy (file no. 001-03034) dated April 6, 2010).
10.14*+
Stock Equivalent Plan for Non-Employee Directors of Xcel Energy Inc. as amended and restated effective Feb. 23, 2011 (Appendix A to the Xcel Energy Definitive Proxy Statement (file no. 001-03034) filed Apr. 5, 2011).
10.15*+
Xcel Energy Inc. Nonqualified Deferred Compensation Plan (2009 Restatement) (Exhibit 10.07 to Form 10-K of Xcel Energy (file no. 001-03034) for the year ended Dec. 31, 2008).
10.16*+
First Amendment effective Nov. 29, 2011 to the Xcel Energy Inc. Nonqualified Deferred Compensation Plan (2009 Restatement) (Exhibit 10.17 to Form 10-K of Xcel Energy (file no. 001-03034) for the year ended Dec. 31, 2011).
10.17*+
Second Amendment dated Oct. 26, 2011 to the Xcel Energy Senior Executive Severance and Change-in-Control Policy (Exhibit 10.18 to Form 10-K of Xcel Energy (file no. 001-03034) for the year ended Dec. 31, 2011).
10.18*+
First Amendment dated Feb. 20, 2013 to the Xcel Energy Inc. Executive Annual Incentive Award Plan (as amended and restated effective Feb. 17, 2010) (Exhibit 10.01 to Form 10-Q of Xcel Energy (file no. 001-03034) for the quarter ended March 31, 2013).
10.19*+
Fourth Amendment dated Feb. 20, 2013 to the Xcel Energy Senior Executive Severance and Change-in-Control Policy (Exhibit 10.02 to Form 10-Q of Xcel Energy (file no. 001-03034) for the quarter ended March 31, 2013).
10.20*+
First Amendment dated May 21, 2013 to the Xcel Energy Inc. 2005 Long-Term Incentive Plan (as amended and restated effective Feb. 17, 2010) (Exhibit 10.21 to Form 10-K of Xcel Energy (file no. 001-03034) for the year ended Dec. 31, 2013).
10.21*+
Second Amendment dated May 21, 2013 to the Xcel Energy Inc. Nonqualified Deferred Compensation Plan (2009 Restatement) (Exhibit 10.22 to Form 10-K of Xcel Energy (file no. 001-03034) for the year ended Dec. 31, 2013).
10.22*+
Xcel Energy Inc. 2005 Long-Term Incentive Plan Form of Long-Term Incentive Award Agreement (Exhibit 10.23 to Form 10-K of Xcel Energy (file no. 001-03034) for the year ended Dec. 31, 2013).
10.23*+
Xcel Energy Inc. 2015 Omnibus Incentive Plan (incorporated by reference to Appendix B to Schedule 14A, Definitive Proxy Statement to Xcel Energy Inc. (file no. 001-03034) dated April 6, 2015).
10.24*+
Stock Equivalent Program for Non-Employee Directors of Xcel Energy Inc. (As First Effective May 20, 2015) under the Xcel Energy Inc. 2015 Omnibus Incentive Plan. (Exhibit 10.02 to Form 8-K of Xcel Energy, dated May 26, 2015 (file no. 001-03034).
10.25*+
Form of Xcel Energy Inc. 2015 Omnibus Incentive Plan Award Agreement and Award Terms and Conditions (Restricted Stock Units and Performance Share Units) under the Xcel Energy Inc. 2015 Omnibus Incentive Plan. (Exhibit 10.03 to Form 8-K of Xcel Energy, dated May 26, 2015 (file no. 001-03034).
10.26*+
Xcel Energy Inc. 2015 Omnibus Incentive Plan Form of Award Agreement. (Exhibit 10.28 to Form 10-K of Xcel Energy (file no. 001-03034) for the year ended Dec. 31, 2015).
10.27*+
Xcel Energy Inc. Executive Annual Incentive Award Sub-plan pursuant to the Xcel Energy Inc. 2015 Omnibus Incentive Plan. (Exhibit 10.29 to Form 10-K of Xcel Energy (file no. 001-03034) for the year ended Dec. 31, 2015).
10.28*+
Fifth Amendment dated May 3, 2016 to the Xcel Energy Senior Executive Severance and Change-in-Control Policy (Exhibit 10.01 to Form 10-Q of Xcel Energy (file no. 001-03034) for the quarter ended June 30, 2016).
10.29*
Second Amended and Restated Credit Agreement, dated as of June 20, 2016 among PSCo, as Borrower, the several lenders from time to time parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A. and Barclays Bank Plc, as Syndication Agents, and Wells Fargo Bank, National Association and The Bank of Tokyo-Mitsubishi UFJ, Ltd., as Documentation Agents. (Exhibit 99.03 to Form 8-K of Xcel Energy dated June 20, 2016 (file no. 001-03034)).
10.30*+
Third Amendment dated Sept. 30, 2016 to the Xcel Energy Inc. Nonqualified Deferred Compensation Plan (2009 Restatement) (Exhibit 10.01 to Form 10-Q of Xcel Energy (file no. 001-03034) for the quarter ended Sept. 30, 2016).
10.31*+
Form of Xcel Energy Inc. 2015 Omnibus Incentive Plan Award Agreement and Award Terms and Conditions (Restricted Stock Units and Performance Share Units) under the Xcel Energy Inc. 2015 Omnibus Incentive Plan. (Exhibit 10.33 to Form 10-K of Xcel Energy (file no. 001-03034) for the year ended Dec. 31, 2016).

85


Statement of Computation of Ratio of Earnings to Fixed Charges.
Consent of Independent Registered Public Accounting Firm.
Principal Executive Officer’s certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Principal Financial Officer’s certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Statement pursuant to Private Securities Litigation Reform Act of 1995.
101
The following materials from PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 2016 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Balance Sheets, (v) the Consolidated Statements of Stockholder’s Equity, (vi) the Consolidated Statements of Capitalization, (vii) Notes to Consolidated Financial Statements, (viii) document and entity information, and (ix) Schedule II.


86


SCHEDULE II

PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DEC. 31, 2016, 2015 AND 2014
(amounts in thousands)
 
 
 
Additions
 
 
 
 
 
Balance at
Jan. 1
 
Charged to Costs and Expenses
 
Charged to Other Accounts(a)
 
Deductions from
Reserves(b)
 
Balance at
Dec. 31
Allowance for bad debts:
 
 
 
 
 
 
 
 
 
2016
$
20,122

 
$
14,121

 
$
4,447

 
$
19,078

 
$
19,612

2015
23,122

 
13,052

 
5,175

 
21,227

 
20,122

2014
22,505

 
17,005

 
6,240

 
22,628

 
23,122


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


87


SIGNATURES

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

 
 
PUBLIC SERVICE COMPANY OF COLORADO
 
 
 
Feb. 24, 2017

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

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the date indicated above.

/s/ BEN FOWKE
 
/s/ DAVID L. EVES
Ben Fowke
 
David L. Eves
Chairman, Chief Executive Officer and Director
 
President and Director
(Principal Executive Officer)
 
 
 
 
 
/s/ ROBERT C. FRENZEL
 
/s/ JEFFREY S. SAVAGE
Robert C. Frenzel
 
Jeffrey S. Savage
Executive Vice President, Chief Financial Officer and Director
 
Senior Vice President, Controller
(Principal Financial Officer)
 
(Principal Accounting Officer)
 
 
 
/s/ MARVIN E. MCDANIEL, JR.
 
 
Marvin E. McDaniel, Jr.
 
 
Director
 
 

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

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


88