SOUTHWESTERN PUBLIC SERVICE CO - FORM 10-Q

SOUTHWESTERN PUBLIC SERVICE CO - FORM 10-Q - July 28, 2017

Attached files

Attached files

SOUTHWESTERN PUBLIC SERVICE CO Reports

file	filename
EX-99.01 - EXHIBIT 99.01 - SOUTHWESTERN PUBLIC SERVICE CO	spsex9901q22017.htm
EX-32.01 - EXHIBIT 32.01 - SOUTHWESTERN PUBLIC SERVICE CO	spsex3201q22017.htm
EX-31.02 - EXHIBIT 31.02 - SOUTHWESTERN PUBLIC SERVICE CO	spsex3102q22017.htm
EX-31.01 - EXHIBIT 31.01 - SOUTHWESTERN PUBLIC SERVICE CO	spsex3101q22017.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 001-03789

Southwestern Public Service Company

(Exact name of registrant as specified in its charter)



New Mexico		75-0575400
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

790 South Buchanan
Amarillo, Texas		79101
(Address of principal executive offices)		(Zip Code)

(303) 571-7511

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer ¨		Accelerated filer ¨
Non-accelerated filer x		Smaller reporting company ¨
(Do not check if smaller reporting company)		Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.



Class		Outstanding at July 28, 2017
Common Stock, $1 par value		100 shares

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

TABLE OF CONTENTS



PART I — FINANCIAL INFORMATION
Item l —	Financial Statements (Unaudited)	3
Item 2 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 4 —	Controls and Procedures	23

PART II — OTHER INFORMATION
Item 1 —	Legal Proceedings	23
Item 1A —	Risk Factors	24
Item 6 —	Exhibits	24

SIGNATURES		25

Certifications Pursuant to Section 302		1
Certifications Pursuant to Section 906		1
Statement Pursuant to Private Litigation		1

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

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PART 1 — FINANCIAL INFORMATION

Item 1 — FINANCIAL STATEMENTS

SOUTHWESTERN PUBLIC SERVICE COMPANY

STATEMENTS OF INCOME (UNAUDITED)

(amounts in thousands)



	Three Months Ended June 30						Six Months Ended June 30
	2017			2016			2017			2016
Operating revenues	$	479,796		$	440,445		$	939,868		$	831,284

Operating expenses
Electric fuel and purchased power	267,942			246,547			521,627			459,950
Operating and maintenance expenses	70,170			66,588			147,059			130,711
Demand side management expenses	3,691			3,239			7,566			6,616
Depreciation and amortization	46,815			40,893			97,233			81,224
Taxes (other than income taxes)	16,689			14,792			33,479			30,828
Total operating expenses	405,307			372,059			806,964			709,329

Operating income	74,489			68,386			132,904			121,955

Other income, net	136			392			167			426
Allowance for funds used during construction — equity	1,869			2,379			4,004			4,716

Interest charges and financing costs
Interest charges — includes other financing costs of $581, $813, $1,156, and $1,633, respectively	21,946			22,075			44,684			44,007
Allowance for funds used during construction — debt	(1,128		)	(1,397		)	(2,467		)	(2,724		)
Total interest charges and financing costs	20,818			20,678			42,217			41,283

Income before income taxes	55,676			50,479			94,858			85,814
Income taxes	20,314			18,268			34,441			31,080
Net income	$	35,362		$	32,211		$	60,417		$	54,734

See Notes to Financial Statements

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SOUTHWESTERN PUBLIC SERVICE COMPANY

STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(amounts in thousands)



	Three Months Ended June 30				Six Months Ended June 30
	2017		2016		2017		2016
Net income	$	35,362	$	32,211	$	60,417	$	54,734

Other comprehensive income

Pension and retiree medical benefits:
Amortization of losses included in net periodic benefit cost, net of tax of $9, $6, $18 and $13, respectively	15		11		30		23

Derivative instruments:
Reclassification of losses to net income, net of tax of $6, $24, $12, and $49, respectively	10		43		19		85
Other comprehensive income	25		54		49		108
Comprehensive income	$	35,387	$	32,265	$	60,466	$	54,842

See Notes to Financial Statements

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SOUTHWESTERN PUBLIC SERVICE COMPANY

STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)



	Six Months Ended June 30
	2017			2016
Operating activities
Net income	$	60,417		$	54,734
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	97,126			81,600
Demand side management program amortization	837			837
Deferred income taxes	48,099			53,217
Amortization of investment tax credits	(66		)	(106		)
Allowance for equity funds used during construction	(4,004		)	(4,716		)
Net derivative losses	31			134
Other	10			—
Changes in operating assets and liabilities:
Accounts receivable	(12,210		)	(12,997		)
Accrued unbilled revenues	(16,668		)	(25,690		)
Inventories	5,411			5,889
Prepayments and other	7,028			30,189
Accounts payable	16,799			9,888
Net regulatory assets and liabilities	(3,477		)	(3,216		)
Other current liabilities	(2,896		)	(4,862		)
Pension and other employee benefit obligations	(21,946		)	(16,357		)
Change in other noncurrent assets	(373		)	(373		)
Change in other noncurrent liabilities	(2,351		)	2,693
Net cash provided by operating activities	171,767			170,864

Investing activities
Utility capital/construction expenditures	(279,918		)	(263,653		)
Proceeds from insurance recoveries	—			987
Allowance for equity funds used during construction	4,004			4,716
Other	(493		)	(1,174		)
Net cash used in investing activities	(276,407		)	(259,124		)

Financing activities
Proceeds from short-term borrowings, net	56,000			10,000
Repayment of long-term debt	(18		)	—
Borrowings under utility money pool arrangement	572,000			391,000
Repayments under utility money pool arrangement	(511,000		)	(291,000		)
Capital contributions from parent	45,000			16,225
Dividends paid to parent	(57,585		)	(38,182		)
Net cash provided by financing activities	104,397			88,043

Net change in cash and cash equivalents	(243		)	(217		)
Cash and cash equivalents at beginning of period	844			834
Cash and cash equivalents at end of period	$	601		$	617

Supplemental disclosure of cash flow information:
Cash paid for interest (net of amounts capitalized)	$	(40,450	)	$	(39,960	)
Cash received for income taxes, net	17,213			41,170
Supplemental disclosure of non-cash investing transactions:
Property, plant and equipment additions in accounts payable	$	34,529		$	30,172

See Notes to Financial Statements

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SOUTHWESTERN PUBLIC SERVICE COMPANY

BALANCE SHEETS (UNAUDITED)

(amounts in thousands, except share and per share data)



	June 30, 2017			Dec. 31, 2016
Assets
Current assets
Cash and cash equivalents	$	601		$	844
Accounts receivable, net	83,852			74,190
Accounts receivable from affiliates	3,575			949
Accrued unbilled revenues	136,086			119,418
Inventories	33,094			38,505
Regulatory assets	48,773			38,721
Derivative instruments	31,824			5,114
Prepaid taxes	16,968			21,779
Prepayments and other	5,638			7,855
Total current assets	360,411			307,375

Property, plant and equipment, net	4,871,791			4,695,819

Other assets
Regulatory assets	331,501			346,683
Derivative instruments	20,533			22,113
Other	7,701			7,477
Total other assets	359,735			376,273
Total assets	$	5,591,937		$	5,379,467

Liabilities and Equity
Current liabilities
Short-term debt	$	106,000		$	50,000
Borrowings under utility money pool arrangement	61,000			—
Accounts payable	180,738			176,157
Accounts payable to affiliates	16,361			14,414
Regulatory liabilities	69,170			41,577
Taxes accrued	37,789			39,742
Accrued interest	19,228			19,162
Dividends payable	25,014			30,870
Derivative instruments	3,565			3,565
Other	26,808			29,703
Total current liabilities	545,673			405,190

Deferred credits and other liabilities
Deferred income taxes	1,036,157			989,137
Regulatory liabilities	229,479			233,454
Asset retirement obligations	29,421			28,663
Derivative instruments	21,731			23,513
Pension and employee benefit obligations	86,006			107,872
Other	21,559			24,084
Total deferred credits and other liabilities	1,424,353			1,406,723

Commitments and contingencies
Capitalization
Long-term debt	1,636,478			1,635,858
Common stock — 200 shares authorized of $1.00 par value; 100 shares outstanding at June 30, 2017 and Dec. 31, 2016, respectively	—			—
Additional paid in capital	1,491,223			1,446,223
Retained earnings	495,451			486,763
Accumulated other comprehensive loss	(1,241		)	(1,290		)
Total common stockholder’s equity	1,985,433			1,931,696
Total liabilities and equity	$	5,591,937		$	5,379,467

See Notes to Financial Statements

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SOUTHWESTERN PUBLIC SERVICE COMPANY

Notes to Financial Statements (UNAUDITED)

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


1.	Summary of Significant Accounting Policies

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


2.	Accounting Pronouncements

Recently Issued

Revenue Recognition — In May 2014, the Financial Accounting Standards Board (FASB) issued Revenue from Contracts with Customers, Topic 606 (Accounting Standards Update (ASU) No. 2014-09), which provides a new framework for the recognition of revenue. SPS 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. SPS has not yet fully determined the impacts of adoption for several aspects of the standard, including a determination whether and how much an evaluation of the collectability of regulated electric and gas revenues will impact the amounts of revenue recognized upon delivery. SPS currently expects to implement the standard on a modified retrospective basis, which requires application to contracts with customers effective Jan. 1, 2018, with the cumulative impact on contracts not yet completed as of Dec. 31, 2017 recognized as an adjustment to the opening balance of retained earnings.

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

Leases — In February 2016, the FASB issued Leases, Topic 842 (ASU No. 2016-02), which for lessees requires balance sheet recognition of right-of-use assets and lease liabilities for most leases. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2018. SPS has not yet fully determined the impacts of implementation. However, adoption is expected to occur on Jan. 1, 2019 utilizing the practical expedients provided by the standard. As such, agreements entered prior to Jan. 1, 2017 that are currently considered leases are expected to be recognized on the balance sheet, including contracts for use of office space, equipment and natural gas storage assets, as well as certain purchased power agreements (PPAs) for natural gas-fueled generating facilities. SPS expects that similar agreements entered after Dec. 31, 2016 will generally qualify as leases under the new standard, but has not yet completed its evaluation of certain other contracts, including arrangements for the secondary use of assets, such as land easements.

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Presentation of Net Periodic Benefit Cost — In March 2017, the FASB issued Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, Topic 715 (ASU No. 2017-07), which establishes that only the service cost element of pension cost may be presented as a component of operating income in the income statement. Also under the guidance, only the service cost component of pension cost is eligible for capitalization. SPS has not yet fully determined the impacts of adoption of the standard, but expects that as a result of application of accounting principles for rate regulated entities, a similar amount of pension cost, including non-service components, will be recognized consistent with the current ratemaking treatment and that the impacts of adoption will be limited to changes in classification of non-service costs in the statement of income. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2017.


3.	Selected Balance Sheet Data



(Thousands of Dollars)	June 30, 2017			Dec. 31, 2016
Accounts receivable, net
Accounts receivable	$	90,138		$	80,569
Less allowance for bad debts	(6,286		)	(6,379		)
	$	83,852		$	74,190



(Thousands of Dollars)	June 30, 2017		Dec. 31, 2016
Inventories
Materials and supplies	$	25,748	$	25,453
Fuel	7,346		13,052
	$	33,094	$	38,505



(Thousands of Dollars)	June 30, 2017			Dec. 31, 2016
Property, plant and equipment, net
Electric plant	$	6,624,189		$	6,362,189
Construction work in progress	232,817			260,327
Total property, plant and equipment	6,857,006			6,622,516
Less accumulated depreciation	(1,985,215		)	(1,926,697		)
	$	4,871,791		$	4,695,819


4.	Income Taxes

Except to the extent noted below, Note 6 to the financial statements included in SPS’ Annual Report on Form 10-K for the year ended Dec. 31, 2016 appropriately represents, in all material respects, the current status of other income tax matters, and are incorporated herein by reference.

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

In 2012, the Internal Revenue Service (IRS) commenced an examination of tax years 2010 and 2011, including a 2009 carryback claim. The IRS has 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 2016 the IRS audit team and Xcel Energy presented their cases to the Office of Appeals; however, the outcome and timing of a resolution is uncertain. SPS 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. In the second quarter of 2017, the IRS proposed an adjustment to tax year 2012 that may impact Xcel Energy’s net operating loss (NOL) and effective tax rate (ETR). Xcel Energy is evaluating the IRS’ proposal and the outcome and timing of a resolution is uncertain.

State Audits — SPS is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of June 30, 2017, SPS’ earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2009. In 2016, Texas began an audit of years 2009 and 2010. As of June 30, 2017, Texas had not proposed any material adjustments, and there were no other state income tax audits in progress.

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

A reconciliation of the amount of unrecognized tax benefit is as follows:



(Millions of Dollars)	June 30, 2017		Dec. 31, 2016
Unrecognized tax benefit — Permanent tax positions	$	4.7	$	4.5
Unrecognized tax benefit — Temporary tax positions	24.4		24.2
Total unrecognized tax benefit	$	29.1	$	28.7

The unrecognized tax benefit amounts were reduced by the tax benefits associated with NOL and tax credit carryforwards. The amounts of tax benefits associated with NOL and tax credit carryforwards are as follows:



(Millions of Dollars)	June 30, 2017			Dec. 31, 2016
NOL and tax credit carryforwards	$	(6.4	)	$	(5.9	)

It is reasonably possible that SPS’ amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS Appeals and audit progress, the Texas audit progresses, and other state audits resume. As the IRS Appeals, and IRS and Texas audits progress, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $10 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)	June 30, 2017			Dec. 31, 2016
Payable for interest related to unrecognized tax benefits at beginning of period	$	(0.9	)	$	—
Interest expense related to unrecognized tax benefits recorded during the period	(0.5		)	(0.9		)
Payable for interest related to unrecognized tax benefits at end of period	$	(1.4	)	$	(0.9	)

No amounts were accrued for penalties related to unrecognized tax benefits as of June 30, 2017 or Dec. 31, 2016.


5.	Rate Matters

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

Pending and Recently Concluded Regulatory Proceedings — Public Utility Commission of Texas (PUCT)

Appeal of the Texas 2015 Electric Rate Case Decision — In 2014, SPS had requested an overall retail electric revenue rate increase of $42.1 million. In 2015, the PUCT approved an overall rate decrease of approximately $4.0 million, net of rate case expenses. In April 2016, SPS filed an appeal, with the Texas State District Court, of the PUCT’s order that had denied SPS’ request for rehearing on certain items in SPS’ Texas 2015 electric rate case related to capital structure, incentive compensation and wholesale load reductions. In March 2017, the Travis County District Court denied SPS’ appeal. In April 2017, SPS appealed the District Court’s decision to the Court of Appeals.

Texas 2016 Transmission Cost Recovery Factor (TCRF) Application — In February 2017, SPS filed with the PUCT to recover additional annual revenue of approximately $16.1 million through its TCRF, or 1.8 percent. The filing was based upon capital transmission additions made during 2016. In June 2017, the PUCT approved TCRF rider recovery of approximately $14.4 million effective immediately.

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Pending Regulatory Proceeding — New Mexico Public Regulation Commission (NMPRC)

New Mexico 2016 Electric Rate Case — In November 2016, SPS filed an electric rate case with the NMPRC seeking an increase in base rates of approximately $41.4 million, representing a total revenue increase of approximately 10.9 percent. The rate filing is based on a requested ROE of 10.1 percent, an equity ratio of 53.97 percent, an electric rate base of approximately $832 million and a future test year ending June 30, 2018.

On April 10, 2017, the hearing examiner determined that SPS’ rate filing was deficient and recommended the NMPRC extend the procedural schedule by approximately one month and restart the suspension period once it is determined that the deficiencies are resolved. On April 19, 2017, the NMPRC dismissed SPS’ rate case. On May 15, 2017, SPS filed a notice of appeal to the New Mexico Supreme Court. A decision from the New Mexico Supreme Court is not expected until the second or third quarter of 2018.


6.	Commitments and Contingencies

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

PPAs

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

SPS had approximately 897 MW of capacity under long-term PPAs as of June 30, 2017 and Dec. 31, 2016, with entities that have been determined to be variable interest entities. SPS has concluded that these entities are not required to be consolidated in its financial statements because it does not have the power to direct the activities that most significantly impact the entities’ economic performance. These agreements have expiration dates through 2041.

Environmental Contingencies

Environmental Requirements

Water and Waste

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

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

Air

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

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

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

Regional Haze Rules — The regional haze program is designed to address widespread haze that results from emissions from a multitude of sources. The Best Available Retrofit Technology (BART) requirements of the EPA’s regional haze rules require the installation and operation of emission controls for industrial facilities emitting air pollutants that reduce visibility in national parks and wilderness areas. Under BART, regional haze plans identify facilities that will have to reduce Sulfur Dioxide (SO₂₎, Nitrogen Oxide (NOx) and particulate matter emissions and set emission limits for those facilities. BART requirements can also be met through participation in interstate emission trading programs such as the Clean Air Interstate Rule (CAIR) and its successor, Cross-State Air Pollution Rule (CSAPR). Texas’ first regional haze plan is still undergoing federal review as described below. President Trump’s Administration has not yet taken any public position regarding its views of the proposed and final regional haze regulations affecting SPS facilities in Texas.

Actions affecting Harrington Units: Texas developed a State Implementation Plan (SIP) that finds the CAIR equal to BART for electric generating units. As a result, no additional controls beyond CAIR compliance would be required. In 2014, the EPA proposed to approve the BART portion of the SIP, with substitution of CSAPR compliance for Texas’ reliance on CAIR. In January 2016, the EPA adopted a final rule that defers its approval of CSAPR compliance as BART until the EPA considers further adjustments to CSAPR emission budgets under the D.C. Circuit Court’s remand of the Texas SO₂emission budgets. In June 2016, the EPA issued a memorandum which allows Texas to voluntarily adopt the CSAPR emission budgets limiting annual SO₂ and NOx emissions and rely on those emission budgets to satisfy Texas’ BART obligations under the regional haze rules. The Texas Commission on Environmental Quality has not utilized this option. The EPA then published a proposed rule in January 2017 that could have the effect of requiring installation of dry scrubbers to reduce SO₂ emissions from Harrington Units 1 and 2. Investment costs associated with dry scrubbers for Harrington Units 1 and 2 could be approximately $400 million. The EPA’s deadline to issue a final rule for Texas is September 2017.

Actions affecting Tolk units: In January 2016, the EPA adopted a final rule establishing a federal implementation plan for the state of Texas, which imposed SO₂ emission limitations that reflect the installation of dry scrubbers on Tolk Units 1 and 2, with compliance required by February 2021. Investment costs associated with dry scrubbers could be approximately $600 million. SPS appealed the EPA’s decision and requested a stay of the final rule. The United States Court of Appeals for the Fifth Circuit (Fifth Circuit) granted the stay and decided that they are the appropriate venue for this case. In March 2017, the Fifth Circuit remanded the rule to the EPA for reconsideration, while leaving the stay in effect. The Fifth Circuit is now holding the case in abeyance until the EPA completes its reconsideration of the rule. It is likely that Texas and other affected entities including SPS would continue to challenge the determinations to date. The risk of these controls being imposed along with the risk of investments to provide cooling water to Tolk have caused SPS to seek to decrease the remaining depreciable life of the Tolk units.

Legal Contingencies

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

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7.	Borrowings and Other Financing Instruments

Short-Term Borrowings

Money Pool — Xcel Energy Inc. and its utility subsidiaries have established a money pool arrangement that allows for short-term investments in and borrowings between the utility subsidiaries. Xcel Energy Inc. may make investments in the utility subsidiaries at market-based interest rates; however, the money pool arrangement does not allow the utility subsidiaries to make investments in Xcel Energy Inc. Money pool borrowings for SPS were as follows:



(Amounts in Millions, Except Interest Rates)	Three Months Ended June 30, 2017			Year Ended Dec. 31, 2016
Borrowing limit	$	100		$	100
Amount outstanding at period end	61			—
Average amount outstanding	11			28
Maximum amount outstanding	99			100
Weighted average interest rate, computed on a daily basis	1.21		%	0.67		%
Weighted average interest rate at period end	1.22			N/A

Commercial Paper — SPS meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under its credit facility and the money pool. Commercial paper outstanding for SPS was as follows:



(Amounts in Millions, Except Interest Rates)	Three Months Ended June 30, 2017			Year Ended Dec. 31, 2016
Borrowing limit	$	400		$	400
Amount outstanding at period end	106			50
Average amount outstanding	134			43
Maximum amount outstanding	176			140
Weighted average interest rate, computed on a daily basis	1.20		%	0.67		%
Weighted average interest rate at period end	1.37			0.95

Letters of Credit — SPS uses letters of credit, generally with terms of one year, to provide financial guarantees for certain operating obligations. At June 30, 2017 and Dec. 31, 2016, there were $3 million and $5 million, respectively, of letters of credit outstanding under the credit facility. The contract amounts of these letters of credit approximate their fair value and are subject to fees.

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

At June 30, 2017, SPS had the following committed credit facility available (in millions of dollars):



Credit Facility ^(a)		Drawn ^(b)		Available
$	400	$	109	$	291


^(a)	This credit facility expires in June 2021.


^(b)	Includes outstanding commercial paper and letters of credit.

All credit facility bank borrowings, outstanding letters of credit and outstanding commercial paper reduce the available capacity under the credit facility. SPS had no direct advances on the credit facility outstanding at June 30, 2017 and Dec. 31, 2016.

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8.	Fair Value of Financial Assets and Liabilities

Fair Value Measurements

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

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

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

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

Specific valuation methods include the following:

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

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

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

Electric commodity derivatives held by SPS include transmission congestion instruments, generally referred to as financial transmission rights (FTRs), purchased from Southwest Power Pool Inc. (SPP). FTRs purchased from a regional transmission organization (RTO) are financial instruments that entitle or obligate the holder to monthly revenues or charges based on transmission congestion across a given transmission path. The value of an FTR is derived from, and designed to offset, the cost of transmission congestion. In addition to overall transmission load, congestion is also influenced by the operating schedules of power plants and the consumption of electricity pertinent to a given transmission path. Unplanned plant outages, scheduled plant maintenance, changes in the relative costs of fuels used in generation, weather and overall changes in demand for electricity can each impact the operating schedules of the power plants on the transmission grid and the value of an FTR. The valuation process for FTRs utilizes complex iterative modeling to predict the impacts of forecasted changes in these drivers of transmission system congestion on the historical pricing of FTR purchases.

If forecasted costs of electric transmission congestion increase or decrease for a given FTR path, the value of that particular FTR instrument will likewise increase or decrease. Fair value measurements for FTRs have been assigned a Level 3 given the limited observability of management’s forecasts for several of the inputs to this complex valuation model. Non-trading monthly FTR settlements are expected to be recovered through fuel and purchased energy cost recovery mechanisms, and therefore changes in the fair value of the yet to be settled portions of FTRs are deferred as a regulatory asset or liability. Given this regulatory treatment and the limited magnitude of FTRs, the numerous unobservable quantitative inputs to the complex model used for valuation of FTRs are insignificant to the financial statements of SPS.

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Derivative Instruments Fair Value Measurements

SPS enters into derivative instruments, including forward contracts, for trading purposes and to manage risk in connection with changes in interest rates and electric utility commodity prices.

Interest Rate Derivatives — SPS may enter into various instruments that effectively fix the interest payments on certain floating rate debt obligations or effectively fix the yield or price on a specified benchmark interest rate for an anticipated debt issuance for a specific period. These derivative instruments are generally designated as cash flow hedges for accounting purposes.

At June 30, 2017, accumulated other comprehensive losses related to interest rate derivatives included an immaterial amount 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.

Wholesale and Commodity Trading Risk — SPS conducts various wholesale and commodity trading activities, including the purchase and sale of electric capacity, energy and energy-related instruments, including derivatives. SPS’ 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 — SPS enters into derivative instruments to manage variability of future cash flows from changes in commodity prices in its electric utility operations. This could include the purchase or sale of energy or energy-related products and FTRs.

The following table details the gross notional amounts of commodity FTRs at June 30, 2017 and Dec. 31, 2016:


^(a)	Amounts are not reflective of net positions in the underlying commodities.

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

During the three and six months ended June 30, 2017, changes in the fair value of FTRs resulted in pre-tax net gains of $0.2 million and $2.3 million, respectively, and were recognized as regulatory assets and liabilities. For the three and six months ended June 30, 2016, changes in the fair value of FTRs resulted in pre-tax net gains of $0.5 million and $1.8 million, respectively, and were recognized as regulatory assets and liabilities. The classification as a regulatory asset or liability is based on expected recovery of FTR settlements through fuel and purchased energy cost recovery mechanisms.

FTR settlement gains of $1.2 million and $2.4 million were recognized for the three and six months ended June 30, 2017, recorded to electric fuel and purchased power. For the three and six months ended June 30, 2016, FTR settlement losses of $3.1 million and $3.2 million, respectively, were recognized and recorded to electric fuel and purchased power. These derivative settlement gains and losses are shared with electric customers through fuel and purchased energy cost-recovery mechanisms, and reclassified out of income as regulatory assets or liabilities, as appropriate.

SPS had no derivative instruments designated as fair value hedges during the three and six months ended June 30, 2017 and 2016. Therefore, no gains or losses from fair value hedges or related hedged transactions were recognized for these periods.

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Consideration of Credit Risk and Concentrations — SPS 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 SPS’ own credit risk when determining the fair value of derivative liabilities, the impact of credit risk was immaterial to the fair value of unsettled commodity derivatives presented in the balance sheets.

SPS 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.

SPS’ 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 June 30, 2017, seven of the most significant counterparties, comprising $50.8 million or 55 percent of this credit exposure, were not rated by Standard & Poor’s, Moody’s or Fitch Ratings, but based on SPS’ internal analysis, had credit quality consistent with investment grade. Another of these significant counterparties, comprising $0.4 million or less than 1 percent of this credit exposure, had credit quality less than investment grade, based on SPS’ internal analysis. Seven of these significant counterparties are municipal or cooperative electric entities or other utilities.

Recurring Fair Value Measurements — The following table presents for each of the fair value hierarchy levels, SPS’ derivative assets and liabilities measured at fair value on a recurring basis at June 30, 2017:



	June 30, 2017
	Fair Value						Fair Value Total		Counterparty Netting ^(b)
(Thousands of Dollars)	Level 1		Level 2		Level 3		Fair Value Total		Counterparty Netting ^(b)			Total
Current derivative assets
Other derivative instruments:
Electric commodity	$	—	$	—	$	32,492	$	32,492	$	(3,827	)	$	28,665
Total current derivative assets	$	—	$	—	$	32,492	$	32,492	$	(3,827	)	28,665
PPAs ^(a)												3,159
Current derivative instruments												$	31,824
Noncurrent derivative assets
PPAs ^(a)												$	20,533
Noncurrent derivative instruments												$	20,533
Current derivative liabilities
Other derivative instruments:
Electric commodity	$	—	$	—	$	3,827	$	3,827	$	(3,827	)	$	—
Total current derivative liabilities	$	—	$	—	$	3,827	$	3,827	$	(3,827	)	—
PPAs ^(a)												3,565
Current derivative instruments												$	3,565
Noncurrent derivative liabilities
PPAs ^(a)												$	21,731
Noncurrent derivative instruments												$	21,731


^(a)	During 2006, SPS 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)

SPS nets derivative instruments and related collateral in its balance sheet when supported by a legally enforceable master netting agreement, and all derivative instruments and related collateral amounts were subject to master netting agreements at June 30, 2017. At June 30, 2017, derivative assets and liabilities include no obligations to return cash collateral or rights to reclaim cash collateral. The counterparty netting amounts presented exclude settlement receivables and payables and non-derivative amounts that may be subject to the same master netting agreements.

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The following table presents for each of the fair value hierarchy levels, SPS’ derivative assets and liabilities measured at fair value on a recurring basis at Dec. 31, 2016:



	Dec. 31, 2016
	Fair Value						Fair Value Total		Counterparty Netting ^(b)
(Thousands of Dollars)	Level 1		Level 2		Level 3		Fair Value Total		Counterparty Netting ^(b)			Total
Current derivative assets
Other derivative instruments:
Electric commodity	$	—	$	—	$	3,254	$	3,254	$	(1,299	)	$	1,955
Total current derivative assets	$	—	$	—	$	3,254	$	3,254	$	(1,299	)	1,955
PPAs ^(a)												3,159
Current derivative instruments												$	5,114
Noncurrent derivative assets
PPAs ^(a)												$	22,113
Noncurrent derivative instruments												$	22,113
Current derivative liabilities
Other derivative instruments:
Electric commodity	$	—	$	—	$	1,299	$	1,299	$	(1,299	)	$	—
Total current derivative liabilities	$	—	$	—	$	1,299	$	1,299	$	(1,299	)	—
PPAs ^(a)												3,565
Current derivative instruments												$	3,565
Noncurrent derivative liabilities
PPAs ^(a)												$	23,513
Noncurrent derivative instruments												$	23,513


^(a)	During 2006, SPS 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)

SPS nets derivative instruments and related collateral in its 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.

The following table presents the changes in Level 3 commodity derivatives for the three and six months ended June 30, 2017 and 2016:




	Three Months Ended June 30
(Thousands of Dollars)	2017			2016
Balance at April 1	$	1,192		$	1,730
Purchases	35,822			1,956
Settlements	(14,098		)	(7,130		)
Net transactions recorded during the period:
Net gains recognized as regulatory assets and liabilities	5,749			4,514
Balance at June 30	$	28,665		$	1,070




	Six Months Ended June 30
(Thousands of Dollars)	2017			2016
Balance at Jan. 1	$	1,955		$	5,060
Purchases	39,333			3,800
Settlements	(30,498		)	(14,122		)
Net transactions recorded during the period:
Net gains recognized as regulatory assets and liabilities	17,875			6,332
Balance at June 30	$	28,665		$	1,070

SPS recognizes transfers between levels as of the beginning of each period. There were no transfers of amounts between levels for derivative instruments for the three and six months ended June 30, 2017 and 2016.

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Fair Value of Long-Term Debt

As of June 30, 2017 and Dec. 31, 2016, other financial instruments for which the carrying amount did not equal fair value were as follows:



	June 30, 2017				Dec. 31, 2016
(Thousands of Dollars)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt, including current portion	$	1,636,478	$	1,777,264	$	1,635,858	$	1,741,502

The fair value of SPS’ long-term debt is estimated based on recent trades and observable spreads from benchmark interest rates for similar securities. The fair value estimates are based on information available to management as of June 30, 2017 and Dec. 31, 2016, and given the observability of the inputs to these estimates, the fair values presented for long-term debt have been assigned a Level 2.


9.	Other Income, Net

Other income, net consisted of the following:



	Three Months Ended June 30					Six Months Ended June 30
(Thousands of Dollars)	2017			2016		2017			2016
Interest income	$	147		$	94	$	192		$	179
Other nonoperating income (expense)	1			298		(1		)	247
Insurance policy expense	(12		)	—		(24		)	—
Other income, net	$	136		$	392	$	167		$	426


10.	Benefit Plans and Other Postretirement Benefits

Components of Net Periodic Benefit Cost (Credit)



	Three Months Ended June 30
	2017			2016			2017			2016
(Thousands of Dollars)	Pension Benefits						Postretirement Health Care Benefits
Service cost	$	2,440		$	2,440		$	219		$	194
Interest cost	4,927			5,315			415			455
Expected return on plan assets	(6,971		)	(6,901		)	(589		)	(594		)
Amortization of prior service credit	—			—			(100		)	(100		)
Amortization of net loss (gain)	3,245			2,997			(155		)	(146		)
Net periodic benefit cost (credit)	3,641			3,851			(210		)	(191		)
Credits not recognized due to the effects of regulation	574			638			—			—
Net benefit cost (credit) recognized for financial reporting	$	4,215		$	4,489		$	(210	)	$	(191	)

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	Six Months Ended June 30
	2017			2016			2017			2016
(Thousands of Dollars)	Pension Benefits						Postretirement Health Care Benefits
Service cost	$	4,880		$	4,880		$	438		$	388
Interest cost	9,855			10,630			830			910
Expected return on plan assets	(13,942		)	(13,802		)	(1,178		)	(1,188		)
Amortization of prior service credit	—			—			(200		)	(200		)
Amortization of net loss (gain)	6,490			5,994			(310		)	(292		)
Net periodic benefit cost (credit)	7,283			7,702			(420		)	(382		)
Credits not recognized due to the effects of regulation	722			716			—			—
Net benefit cost (credit) recognized for financial reporting	$	8,005		$	8,418		$	(420	)	$	(382	)

In January 2017, contributions of $150.0 million were made across four of Xcel Energy’s pension plans, of which $23.0 million was attributable to SPS. Xcel Energy does not expect additional pension contributions during 2017.


11.	Other Comprehensive Income

Changes in accumulated other comprehensive loss, net of tax, for the three and six months ended June 30, 2017 and 2016 were as follows:



	Three Months Ended June 30, 2017
(Thousands of Dollars)	Gains and Losses on Cash Flow Hedges			Defined Benefit and Postretirement Items			Total
Accumulated other comprehensive loss at April 1	$	(669	)	$	(597	)	$	(1,266	)
Losses reclassified from net accumulated other comprehensive loss	10			15			25
Net current period other comprehensive income	10			15			25
Accumulated other comprehensive loss at June 30	$	(659	)	$	(582	)	$	(1,241	)



	Three Months Ended June 30, 2016
(Thousands of Dollars)	Gains and Losses on Cash Flow Hedges			Defined Benefit and Postretirement Items			Total
Accumulated other comprehensive loss at April 1	$	(775	)	$	(452	)	$	(1,227	)
Other comprehensive loss before reclassifications	—			11			11
Losses reclassified from net accumulated other comprehensive loss	43			—			43
Net current period other comprehensive income	43			11			54
Accumulated other comprehensive loss at June 30	$	(732	)	$	(441	)	$	(1,173	)



	Six Months Ended June 30, 2017
(Thousands of Dollars)	Gains and Losses on Cash Flow Hedges			Defined Benefit and Postretirement Items			Total
Accumulated other comprehensive loss at Jan. 1	$	(678	)	$	(612	)	$	(1,290	)
Losses reclassified from net accumulated other comprehensive loss	19			30			49
Net current period other comprehensive income	19			30			49
Accumulated other comprehensive loss at June 30	$	(659	)	$	(582	)	$	(1,241	)

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	Six Months Ended June 30, 2016
(Thousands of Dollars)	Gains and Losses on Cash Flow Hedges			Defined Benefit and Postretirement Items			Total
Accumulated other comprehensive loss at Jan. 1	$	(817	)	$	(464	)	$	(1,281	)
Other comprehensive loss before reclassifications	—			23			23
Losses reclassified from net accumulated other comprehensive loss	85			—			85
Net current period other comprehensive income	85			23			108
Accumulated other comprehensive loss at June 30	$	(732	)	$	(441	)	$	(1,173	)

Reclassifications from accumulated other comprehensive loss for the three and six months ended June 30, 2017 and 2016 were as follows:




	Amounts Reclassified from Accumulated Other Comprehensive Loss
(Thousands of Dollars)	Three Months Ended June 30, 2017				Three Months Ended June 30, 2016
Losses on cash flow hedges:
Interest rate derivatives	$	16		^(a)	$	67		^(a)
Total, pre-tax	16				67
Tax benefit	(6		)		(24		)
Total, net of tax	10				43
Defined benefit pension and postretirement losses:
Amortization of net loss	24			^(b)	—			^(b)
Total, pre-tax	24				—
Tax benefit	(9		)		—
Total, net of tax	15				—
Total amounts reclassified, net of tax	$	25			$	43



	Amounts Reclassified from Accumulated Other Comprehensive Loss
(Thousands of Dollars)	Six Months Ended June 30, 2017				Six Months Ended June 30, 2016
Losses on cash flow hedges:
Interest rate derivatives	$	31		^(a)	$	134		^(a)
Total, pre-tax	31				134
Tax benefit	(12		)		(49		)
Total, net of tax	19				85
Defined benefit pension and postretirement losses:
Amortization of net loss	48			^(b)	—			^(b)
Total, pre-tax	48				—
Tax benefit	(18		)		—
Total, net of tax	30				—
Total amounts reclassified, net of tax	$	49			$	85


^(a)	Included in interest charges.


^(b)	Included in the computation of net periodic pension and postretirement benefit costs. See Note 10 for details regarding these benefit plans.

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

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

Financial Review

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

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 Quarterly Report on Form 10-Q and in other securities filings (including SPS’ Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2016 and subsequent securities filings, could cause actual results to differ materially from management expectations as suggested by such forward-looking information: general economic conditions, including inflation rates, monetary fluctuations and their impact on capital expenditures and the ability of SPS 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 SPS 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 SPS; unusual weather; effects of geopolitical events, including war and acts of terrorism; cyber security threats and data security breaches; state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rates or have an impact on asset operation or ownership or impose environmental compliance conditions; structures that affect the speed and degree to which competition enters the electric and natural gas markets; costs and other effects of legal and administrative proceedings, settlements, investigations and claims; financial or regulatory accounting policies imposed by regulatory bodies; outcomes of regulatory proceedings; availability or cost of capital; and employee work force factors.

Results of Operations

SPS’ net income was approximately $60.4 million for 2017 year-to-date, compared with approximately $54.7 million for the same period in 2016. The increase is due to higher electric margins due to rate increases in Texas and New Mexico, partially offset by increased depreciation and timing of O&M expenses.

Electric Revenues and Margin

Electric fuel and purchased power expenses tend to vary with changing retail and wholesale sales requirements and unit cost changes in fuel and purchased power. The design of fuel and purchased power cost recovery mechanisms of the Texas and New Mexico jurisdictions may not allow for complete recovery of all expenses and, therefore, changes in fuel or purchased power costs can impact earnings. The following tables detail the electric revenues and margin:



	Six Months Ended June 30
(Millions of Dollars)	2017			2016
Electric revenues	$	940		$	831
Electric fuel and purchased power	(522		)	(460		)
Electric margin	$	418		$	371

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The following tables summarize the components of the changes in electric revenues and electric margin for the six months ended June 30, 2017:

Electric Revenues



(Millions of Dollars)	2017 vs 2016
Fuel and purchased power cost recovery	$	45
Retail rate increases (Texas, New Mexico)	40
Wholesale transmission revenue, net of costs	15
Demand revenue	8
Other, net	1
Total increase in electric revenues	$	109

Electric Margin



(Millions of Dollars)	2017 vs 2016
Retail rate increases (Texas, New Mexico)	$	40
Demand revenue	8
Renewable energy credits	2
Fuel handling	(4		)
Other, net	1
Total increase in electric margin	$	47

Non-Fuel Operating Expense and Other Items

O&M Expenses — O&M expenses increased $16.3 million, or 12.5 percent, for 2017 year-to-date. The increase was due to increases in employee benefits expense and the impact of previously deferred 2016 expenses associated with the Texas 2016 electric rate case (approximately $8 million) recognized in 2017 in connection with the settlement, offset by revenue recovery.

Depreciation and Amortization — Depreciation and amortization increased $16.0 million, or 19.7 percent, for 2017 year-to-date. The increase was primarily attributable to capital investments.

Income Taxes — Income tax expense increased $3.4 million, for 2017 year-to-date. The increase in income tax expense was primarily due to higher pretax earnings in 2017. The ETR was 36.3 percent for 2017 year-to-date, compared with 36.2 percent for the same period in 2016.

Public Utility Regulation

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

Wind Development — During the first quarter of 2017, Xcel Energy announced plans to significantly expand its wind capacity by adding 1,230 MW of new wind generation at SPS by the end of 2020. SPS has filed to own and place in rate base 1,000 MW of these wind projects, while 230 MW would be through PPAs. The PUCT and NMPRC are expected to rule on SPS’ wind projects by the end of the first quarter of 2018.

Key dates in the PUCT procedural schedule are as follows:


•	Intervenor testimony — Oct. 2, 2017;


•	Staff testimony — Oct. 9, 2017;


•	Rebuttal testimony — Oct. 23, 2017; and


•	Hearing — Nov. 6 - Nov. 17, 2017.

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Key dates in the NMPRC procedural schedule are as follows:


•	Staff and intervenor testimony — Oct. 24, 2017;


•	Rebuttal testimony — Nov. 9, 2017; and


•	Hearing — Nov. 28 - Dec. 1, 2017.

If approved by the PUCT and the NMPRC, these wind projects would qualify for 100 percent of the production tax credit and are intended to provide billions of dollars of savings to our customers and substantial environmental benefits. Projected savings/benefits assume fuel costs and generation mix consistent with those included in various commission approved resource plans and generation need filings.

The following table details these wind projects:



Project Name	Capacity (MW)	State	Estimated Year of Completion	Ownership/PPA
Hale	478	TX	2019	SPS
Sagamore	522	NM	2020	SPS
Total Ownership	1,000

Bonita	230	TX	2019	PPA
Total PPA	230

SPS’ total capital investment for the proposed wind ownership projects is approximately $1.6 billion for 2017-2020.

TUCO Substation to Yoakum County Substation to Hobbs Plant Substation 345 Kilovolt (KV) Transmission Line — In March 2016, the PUCT approved SPS’ Certificate of Convenience and Necessity (CCN) for the 33-mile Yoakum County to Texas/New Mexico State line portion of this 345 KV line project. A CCN for the 111-mile TUCO to Yoakum County substation segment was filed in June 2016. Assuming approval of this CCN, this segment is scheduled to be in service in 2020. A 36-mile CCN for the Texas/New Mexico state line to Hobbs Plant segment was filed in June 2017. The estimated project cost for all three segments is approximately $242 million.

Wholesale Customer Participation in Electric Reliability Council of Texas (ERCOT) — In March 2016, the PUCT Staff requested comments on Lubbock Power & Light’s (LP&L’s) proposal to transition a portion of its load (approximately 430 MW on a peak basis) to the ERCOT in June 2019. LP&L’s proposal would result in an approximate seven percent reduction of load in SPS, or a loss of approximately $18 million in wholesale transmission revenue. The remaining portion of LP&L’s load (approximately 170 MW) would continue to be served by SPS. Should LP&L join ERCOT, costs to SPS’ remaining customers would increase as SPS’ transmission costs would be spread across a smaller base of customers.

The PUCT has indicated there will be a two-step process regarding LP&L’s possible transfer to ERCOT. The first step will be a proceeding to determine whether the proposed transfer is in the public interest and to consider certain protections for non-LP&L customers who would be affected by LP&L’s transfer. If the PUCT determines the transfer is in the public interest, the second step will be for LP&L to file a CCN application for transmission facilities to connect with ERCOT. The PUCT asked SPP and ERCOT to perform reliability and economic studies to better understand the implications of LP&L’s proposal. SPP and ERCOT filed the studies on June 30, 2017. LP&L is expected to file an application with the PUCT for a public interest determination in August 2017. SPS intends to participate in the PUCT’s processes to protect its customers’ interests.

No final decision regarding LP&L’s departure or its potential timing is expected until completion of the PUCT proceedings.

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Summary of Recent Federal Regulatory Developments

FERC

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

Status of FERC Commissioners — The FERC is normally comprised of five commissioners appointed by the President and confirmed by the Senate. There is currently only one sitting commissioner. Without three commissioners, the FERC does not have a 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 certificate of public convenience and necessity for construction of interstate natural gas pipeline facilities to serve the utility subsidiaries. SPS does not expect any disruption in operations or material delay in decisions on contested matters pending before the FERC. President Trump has submitted nominations to fill three of the vacant seats and has indicated his intent to submit one additional nomination. The three submitted nominations are pending confirmation by the full Senate.

Item 4 — CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

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

Internal Control Over Financial Reporting

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

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

Part II — OTHER INFORMATION

Item 1 — LEGAL PROCEEDINGS

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Additional Information

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

Item 1A — RISK FACTORS

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

Item 6 — EXHIBITS



*	Indicates incorporation by reference
+	Executive Compensation Arrangements and Benefit Plans Covering Executive Officers and Directors



3.01*	Amended and Restated Articles of Incorporation of SPS dated Sept. 30, 1997 (Exhibit 3(a)(2) to Form 10-K (file no. 001-03789) dated March 3, 1998).
3.02*	By-Laws of SPS 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. 001-03789)).
31.01	Principal Executive Officer’s certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02	Principal Financial Officer’s certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.01	Statement pursuant to Private Securities Litigation Reform Act of 1995.
101	The following materials from SPS’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Statements of Income, (ii) the Statements of Comprehensive Income (iii) the Statements of Cash Flows, (iv) the Balance Sheets, (v) Notes to Financial Statements, and (vi) document and entity information.

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SIGNATURES

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



		Southwestern Public Service Company

July 28, 2017	By:	/s/ JEFFREY S. SAVAGE
		Jeffrey S. Savage
		Senior Vice President, Controller
		(Principal Accounting Officer)

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

(Amounts in Thousands) ^(a)

June 30, 2017

Dec. 31, 2016

Megawatt hours of electricity