Benefit Plans and Other Postretirement Benefits

Consistent with the process for rate recovery of pension and postretirement benefits for its employees, SPS accounts for its participation in, and related costs of, pension and other postretirement benefit plans sponsored by Xcel Energy Inc. as multiple employer plans. SPS is responsible for its share of cash contributions, plan costs and obligations and is entitled to its share of plan assets; accordingly, SPS 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 SPS employees.

Xcel Energy, which includes SPS, offers various benefit plans to its employees. Approximately 67 percent of employees that receive benefits are represented by several local labor unions under several collective-bargaining agreements. At Dec. 31, 2015, SPS had 842 bargaining employees covered under a collective-bargaining agreement, which expired in October 2014. While collective bargaining is ongoing, the terms and conditions of the expired agreement are automatically extended until the parties reach an agreement or a decision is rendered by an arbitrator.

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 net asset values.

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 equity securities and other funds — Equity securities are valued using quoted prices in active markets. Preferred stock is valued using recent trades and quoted prices of similar securities. The fair values for commingled funds, private equity investments and real estate investments are measured using net asset values, 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 net asset value with proper notice. Proper notice varies by fund and can range from daily with one or two 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. Unscheduled distributions from real estate investments 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. Based on the plan’s evaluation of its ability to redeem private equity and real estate investments, fair value measurements for private equity and real estate investments have been assigned a Level 3.

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 SPS, 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 SPS’ 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.

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. The total obligations of the SERP and nonqualified plan as of Dec. 31, 2015 and 2014 were $41.8 million and $46.5 million, respectively, of which $2.6 million and $3.1 million were attributable to SPS. In 2015 and 2014, Xcel Energy recognized net benefit cost for financial reporting for the SERP and nonqualified plans of $9.5 million and $4.7 million, respectively, of which $0.3 million and $0.2 million were attributable to SPS. Benefits for these unfunded plans are paid out of Xcel Energy’s consolidated operating cash flows.

Xcel Energy Inc. and SPS 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 SPS continually review the pension assumptions. The pension cost determination assumes a forecasted mix of investment types over the long-term.


•	Investment returns in 2015 were below the assumed levels of 7.22 percent;


•	Investment returns in 2014 were above the assumed level of 6.90 percent;


•	Investment returns in 2013 were below the assumed level of 6.49 percent; and


•	In 2016, SPS’ expected investment-return assumption is 6.78 percent.

The assets are invested in a portfolio according to Xcel Energy Inc.’s and SPS’ 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 SPS at Dec. 31 for the upcoming year:



	2015		2014
Domestic and international equity securities	36	%	39	%
Long-duration fixed income and interest rate swap securities	31		23
Short-to-intermediate fixed income securities	12		14
Alternative investments	19		22
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.

Pension Plan Assets

The following tables present, for each of the fair value hierarchy levels, SPS’ pension plan assets that are measured at fair value as of Dec. 31, 2015 and 2014:



	Dec. 31, 2015
(Thousands of Dollars)	Level 1		Level 2			Level 3		Total
Cash equivalents	$	22,999	$	—		$	—	$	22,999
Derivatives	—		553			—		553
Government securities	—		37,495			—		37,495
Corporate bonds	—		33,452			—		33,452
Asset-backed securities	—		323			—		323
Common stock	13,492		—			—		13,492
Private equity investments	—		—			19,114		19,114
Commingled funds	—		245,717			—		245,717
Real estate	—		—			7,712		7,712
Other	—		(1,944		)	—		(1,944		)
Total	$	36,491	$	315,596		$	26,826	$	378,913



	Dec. 31, 2014
(Thousands of Dollars)	Level 1		Level 2			Level 3		Total
Cash equivalents	$	17,181	$	—		$	—	$	17,181
Derivatives	—		748			—		748
Government securities	—		68,058			—		68,058
Corporate bonds	—		46,531			—		46,531
Asset-backed securities	—		494			—		494
Mortgage-backed securities	—		1,451			—		1,451
Common stock	13,439		—			—		13,439
Private equity investments	—		—			18,331		18,331
Commingled funds	—		233,232			—		233,232
Real estate	—		—			6,689		6,689
Securities lending collateral obligation and other	—		(3,885		)	—		(3,885		)
Total	$	30,620	$	346,629		$	25,020	$	402,269

The following tables present the changes in SPS’ Level 3 pension plan assets for the years ended Dec. 31, 2015, 2014 and 2013:



(Thousands of Dollars)	Jan. 1, 2015		Net Realized Gains (Losses)		Net Unrealized Gains (Losses)			Purchases, Issuances and Settlements, Net			Transfers Out of Level 3		Dec. 31, 2015
Private equity investments	$	18,331	$	4,248	$	(1,541	)	$	(1,924	)	$	—	$	19,114
Real estate	6,689		1,071		(447		)	399			—		7,712
Total	$	25,020	$	5,319	$	(1,988	)	$	(1,525	)	$	—	$	26,826



(Thousands of Dollars)	Jan. 1, 2014		Net Realized Gains (Losses)		Net Unrealized Gains (Losses)			Purchases, Issuances and Settlements, Net			Transfers Out of Level 3		Dec. 31, 2014
Private equity investments	$	18,222	$	3,101	$	(1,894	)	$	(1,098	)	$	—	$	18,331
Real estate	5,755		431		(219		)	722			—		6,689
Total	$	23,977	$	3,532	$	(2,113	)	$	(376	)	$	—	$	25,020



(Thousands of Dollars)	Jan. 1, 2013		Net Realized Gains (Losses)			Net Unrealized Gains (Losses)			Purchases, Issuances and Settlements, Net			Transfers Out of Level 3 ^(a)			Dec. 31, 2013
Asset-backed securities	$	1,755	$	—		$	—		$	—		$	(1,755	)	$	—
Mortgage-backed securities	4,331		—			—			—			(4,331		)	—
Private equity investments	17,049		2,630			(1,055		)	(402		)	—			18,222
Real estate	6,969		(322		)	1,475			1,128			(3,495		)	5,755
Total	$	30,104	$	2,308		$	420		$	726		$	(9,581	)	$	23,977


^(a)	Transfers out of Level 3 into Level 2 were principally due to diminished use of unobservable inputs that were previously significant to these fair value measurements and were subsequently sold during 2013.

Benefit Obligations — A comparison of the actuarially computed pension benefit obligation and plan assets for SPS is presented in the following table:



(Thousands of Dollars)	2015			2014
Accumulated Benefit Obligation at Dec. 31	$	429,726		$	458,793

Change in Projected Benefit Obligation:
Obligation at Jan. 1	$	500,690		$	434,307
Service cost	11,006			9,184
Interest cost	20,184			20,444
Actuarial (gain) loss	(35,154		)	63,209
Transfer to other plan	(2,843		)	(1,939		)
Benefit payments	(26,489		)	(24,515		)
Obligation at Dec. 31	$	467,394		$	500,690



(Thousands of Dollars)	2015			2014
Change in Fair Value of Plan Assets:
Fair value of plan assets at Jan. 1	$	402,269		$	393,393
Actual (loss) return on plan assets	(6,013		)	30,159
Employer contributions	11,651			4,869
Transfer (to) from other plan	(2,505		)	(1,637		)
Benefit payments	(26,489		)	(24,515		)
Fair value of plan assets at Dec. 31	$	378,913		$	402,269



(Thousands of Dollars)	2015			2014
Funded Status of Plans at Dec. 31:
Funded status ^(a)	$	(88,481	)	$	(98,421	)


^(a)	Amounts are recognized in noncurrent liabilities on SPS’ balance sheets.



(Thousands of Dollars)	2015		2014
Amounts Not Yet Recognized as Components of Net Periodic Benefit Cost:
Net loss	$	236,107	$	252,063
Prior service cost	—		39
Total	$	236,107	$	252,102



(Thousands of Dollars)	2015		2014
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	$	13,690	$	14,437
Noncurrent regulatory assets	222,417		237,665
Total	$	236,107	$	252,102



Measurement date	Dec. 31, 2015	Dec. 31, 2014



	2015		2014
Significant Assumptions Used to Measure Benefit Obligations:
Discount rate for year-end valuation	4.66	%	4.11	%
Expected average long-term increase in compensation level	4.00		3.75
Mortality table	RP 2014		RP 2014

Mortality — In 2014, the Society of Actuaries published a new mortality table and projection scale that increased the overall life expectancy of males and females. SPS has reviewed its own population through a credibility analysis and adopted the RP 2014 table, with modifications, based on its population and specific experience. During 2015, a new projection table was released (MP 2015). SPS evaluated the updated projection table and concluded that the methodology adopted at Dec. 31, 2014 is consistent with the recently updated table and continues to be representative of its population.

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 2013 through 2016 to meet minimum funding requirements.

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


•	$125.0 million in January 2016, of which $18.0 million was attributable to SPS;


•	$90.1 million in 2015, of which $11.7 million was attributable to SPS


•	$130.6 million in 2014, of which $4.9 million was attributable to SPS; and


•	$192.4 million in 2013, of which $22.0 million was attributable to SPS.

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

Plan Amendments — In 2015 and 2014, there were no plan amendments made which affected the benefit obligation.

Benefit Costs — The components of SPS’ net periodic pension cost were:



(Thousands of Dollars)	2015			2014			2013
Service cost	$	11,006		$	9,184		$	9,615
Interest cost	20,184			20,444			17,908
Expected return on plan assets	(28,610		)	(26,179		)	(23,970		)
Amortization of prior service cost	39			54			870
Amortization of net loss	15,087			13,326			17,148
Net periodic pension cost	17,706			16,829			21,571
Credits (costs) not recognized due to effects of regulation	2,597			3,170			(1,269		)
Net benefit cost recognized for financial reporting	$	20,303		$	19,999		$	20,302



	2015		2014		2013
Significant Assumptions Used to Measure Costs:
Discount rate	4.11	%	4.75	%	4.00	%
Expected average long-term increase in compensation level	3.75		3.75		3.75
Expected average long-term rate of return on assets	7.22		6.90		6.49

In addition to the benefit costs in the table above, for the pension plans sponsored by Xcel Energy Inc., costs are allocated to SPS based on Xcel Energy Services Inc. employees’ labor costs. Amounts allocated to SPS were $4.8 million, $4.1 million and $4.9 million in 2015, 2014 and 2013, 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 2016 pension cost calculations is 6.78 percent. The cost calculation uses a market-related valuation of pension assets. Xcel Energy, including SPS, 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 SPS, maintains 401(k) and other defined contribution plans that cover substantially all employees. The expense to these plans for SPS was approximately $2.6 million in 2015 and 2014, and $2.4 million in 2013.

Postretirement Health Care Benefits

Xcel Energy, which includes SPS, 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 SPS 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.

Regulatory agencies for nearly all retail and wholesale utility customers have allowed rate recovery of accrued postretirement benefit costs.

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. SPS is required to fund postretirement benefit costs for Texas and New Mexico jurisdictional amounts collected in rates. 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 SPS at Dec. 31 for the upcoming year:



	2015		2014
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 SPS base 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 SPS’ 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.

The following tables present, for each of the fair value hierarchy levels, SPS’ proportionate allocation of the total postretirement benefit plan assets that are measured at fair value as of Dec. 31, 2015 and 2014:



	Dec. 31, 2015
(Thousands of Dollars)	Level 1		Level 2			Level 3		Total
Cash equivalents	$	1,873	$	—		$	—	$	1,873
Government securities	—		3,742			—		3,742
Insurance contracts	—		4,501			—		4,501
Corporate bonds	—		6,949			—		6,949
Asset-backed securities	—		2,736			—		2,736
Mortgage-backed securities	—		3,396			—		3,396
Commingled funds	—		19,527			—		19,527
Other	—		(40		)	—		(40		)
Total	$	1,873	$	40,811		$	—	$	42,684



	Dec. 31, 2014
(Thousands of Dollars)	Level 1		Level 2			Level 3		Total
Cash equivalents ^(a)	$	2,513	$	—		$	—	$	2,513
Derivatives	—		18			—		18
Government securities	—		4,639			—		4,639
Insurance contracts	—		4,807			—		4,807
Corporate bonds	—		5,175			—		5,175
Asset-backed securities	—		345			—		345
Mortgage-backed securities	—		1,074			—		1,074
Commingled funds	—		26,960			—		26,960
Other	—		(175		)	—		(175		)
Total	$	2,513	$	42,843		$	—	$	45,356


^(a)	Includes restricted cash of $0.1 million at Dec. 31, 2014.

For the years ended Dec. 31, 2015 and 2014, there were no assets transferred in or out of Level 3. The following table presents the changes in SPS’ Level 3 postretirement benefit plan assets for the year ended Dec. 31, 2013:



(Thousands of Dollars)	Jan. 1, 2013		Net Realized Gains (Losses)		Net Unrealized Gains (Losses)		Purchases, Issuances and Settlements, Net		Transfers Out of Level 3 ^(a)			Dec. 31, 2013
Asset-backed securities	$	73	$	—	$	—	$	—	$	(73	)	$	—
Mortgage-backed securities	3,841		—		—		—		(3,841		)	—
Total	$	3,914	$	—	$	—	$	—	$	(3,914	)	$	—


^(a)	Transfers out of Level 3 into Level 2 were principally due to diminished use of unobservable inputs that were previously significant to these fair value measurements and were subsequently sold during 2013.

Benefit Obligations — A comparison of the actuarially computed benefit obligation and plan assets for SPS is presented in the following table:



(Thousands of Dollars)	2015			2014
Change in Projected Benefit Obligation:
Obligation at Jan. 1	$	44,342		$	54,982
Service cost	954			1,246
Interest cost	1,745			2,572
Medicare subsidy reimbursements	45			18
Plan participants’ contributions	687			728
Actuarial gain	(3,793		)	(11,828		)
Benefit payments	(3,116		)	(3,376		)
Obligation at Dec. 31	$	40,864		$	44,342



(Thousands of Dollars)	2015			2014
Change in Fair Value of Plan Assets:
Fair value of plan assets at Jan. 1	$	45,356		$	46,738
Actual (loss) return on plan assets	(421		)	1,073
Plan participants’ contributions	687			728
Employer contributions	178			193
Benefit payments	(3,116		)	(3,376		)
Fair value of plan assets at Dec. 31	$	42,684		$	45,356



(Thousands of Dollars)	2015		2014
Funded Status of Plans at Dec. 31:
Funded status ^(a)	$	1,820	$	1,014


^(a)	Amounts are recognized in noncurrent assets and noncurrent liabilities on SPS’ balance sheet as of Dec. 31, 2015 and 2014, respectively.



(Thousands of Dollars)	2015			2014
Amounts Not Yet Recognized as Components of Net Periodic Benefit Credit:
Net gain	$	(14,870	)	$	(14,677	)
Prior service credit	(3,031		)	(3,432		)
Total	$	(17,901	)	$	(18,109	)



(Thousands of Dollars)	2015			2014
Amounts Not Yet Recognized as Components of Net Periodic Benefit Credit Have Been Recorded as Follows Based Upon Expected Recovery in Rates:
Current regulatory liabilities	$	(985	)	$	(892	)
Noncurrent regulatory liabilities	(16,916		)	(17,217		)
Total	$	(17,901	)	$	(18,109	)



Measurement date	Dec. 31, 2015	Dec. 31, 2014



	2015		2014
Significant Assumptions Used to Measure Benefit Obligations:
Discount rate for year-end valuation	4.65	%	4.08	%
Mortality table	RP 2014		RP 2014
Health care costs trend rate — initial	6.00	%	6.50	%

Effective Jan. 1, 2016, the initial medical trend rate was decreased from 6.5 percent to 6.0 percent. The ultimate trend assumption remained at 4.5 percent. The period until the ultimate rate is reached is three years. Xcel Energy Inc. and SPS 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.

A one-percent change in the assumed health care cost trend rate would have the following effects on SPS:



	One-Percentage Point
(Thousands of Dollars)	Increase		Decrease
APBO	$	3,944	$	(3,355	)
Service and interest components	307		(255		)

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 SPS, contributed $18.3 million, $17.1 million and $17.6 million during 2015, 2014 and 2013, respectively, of which $0.2 million, $0.2 million and $0.1 million were attributable to SPS. Xcel Energy expects to contribute approximately $12.3 million during 2016, of which amounts attributable to SPS will be zero.

Plan Amendments — In 2015 and 2014, there were no plan amendments made which affected the benefit obligation.

Benefit Costs — The components of SPS’ net periodic postretirement benefit costs were:



(Thousands of Dollars)	2015			2014			2013
Service cost	$	954		$	1,246		$	1,368
Interest cost	1,745			2,572			2,352
Expected return on plan assets	(2,540		)	(3,247		)	(3,183		)
Amortization of prior service credit	(401		)	(401		)	(484		)
Amortization of net gain	(639		)	(321		)	(6		)
Net periodic postretirement benefit (credit) cost	$	(881	)	$	(151	)	$	47



	2015		2014		2013
Significant Assumptions Used to Measure Costs:
Discount rate	4.08	%	4.82	%	4.10	%
Expected average long-term rate of return on assets	5.80		7.20		7.11

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 SPS based on Xcel Energy Services Inc. employees’ labor costs.

Projected Benefit Payments — The following table lists SPS’ 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
2016	$	27,031	$	3,418	$	24	$	3,394
2017	27,341		3,307		25		3,282
2018	28,230		3,155		29		3,126
2019	29,159		3,036		25		3,011
2020	29,777		3,024		25		2,999
2021-2025	156,982		14,657		153		14,504