Commitments and Contingencies

Commitments

Capital Commitments — SPS has made commitments in connection with a portion of its projected capital expenditures. SPS’ capital commitments primarily relate to transmission project plans.

Transmission NTC — SPS has accepted NTCs for several hundred miles of transmission line and related substation projects based on needs identified through SPP’s various planning processes, including those associated with economics, reliability, generator interconnection or the load addition processes. Most significant are the 345 KV transmission line from TUCO to Yoakum County to Hobbs Plant and the Hobbs Plant to China Draw 345 KV transmission line.

Fuel Contracts — SPS has entered into various long-term commitments for the purchase and delivery of a significant portion of its current coal and natural gas requirements. These contracts expire in various years between 2016 and 2033. SPS is required to pay additional amounts depending on actual quantities shipped under these agreements.

The estimated minimum purchases for SPS under these contracts as of Dec. 31, 2015, are as follows:



(Millions of Dollars)	Coal		Natural gas supply		Natural gas storage and transportation
2016	$	242.0	$	9.6	$	31.5
2017	108.2		—		22.7
2018	—		—		20.8
2019	—		—		21.5
2020	—		—		21.5
Thereafter	—		—		74.4
Total	$	350.2	$	9.6	$	192.4

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

PPAs — SPS has entered into PPAs with other utilities and energy suppliers with expiration dates through 2033 for purchased power to meet system load and energy requirements and meet operating reserve obligations. In general, these agreements provide for energy payments, based on actual energy delivered and capacity payments. Capacity payments are typically contingent on the independent power producing entity meeting certain contract obligations, including plant availability requirements. Certain contractual payments are adjusted based on market indices. The effects of price adjustments on our financial results are mitigated through purchased energy cost recovery mechanisms.

Included in electric fuel and purchased power expenses for PPAs accounted for as executory contracts, were payments for capacity of $56.7 million, $52.4 million and $38.4 million in 2015, 2014 and 2013, respectively. At Dec. 31, 2015, the estimated future payments for capacity that SPS is obligated to purchase pursuant to these executory contracts, subject to availability, are as follows:



(Millions of Dollars)	Capacity
2016	$	56.8
2017	58.0
2018	57.0
2019	19.4
2020	11.8
Thereafter	42.6
Total	$	245.6

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

Leases — SPS leases a variety of equipment and facilities used in the normal course of business. These leases, primarily for office space, generating facilities, trucks, aircraft, cars and power-operated equipment, are accounted for as operating leases. Total expenses under operating lease obligations were approximately $54.5 million, $63.1 million and $64.2 million for 2015, 2014 and 2013, respectively. These expenses included capacity payments for PPAs accounted for as operating leases of $48.6 million, $57.1 million and $59.0 million in 2015, 2014 and 2013, respectively, recorded to electric fuel and purchased power expenses.

Included in the future commitments under operating leases are estimated future capacity payments under PPAs that have been accounted for as operating leases in accordance with the applicable accounting guidance. Future commitments under operating leases are:



(Millions of Dollars)	Operating Leases		PPA ^{(a) (b)} Operating Leases		Total Operating Leases
2016	$	3.7	$	51.5	$	55.2
2017	4.5		48.5		53.0
2018	4.7		48.6		53.3
2019	4.7		48.6		53.3
2020	4.5		48.6		53.1
Thereafter	61.7		617.3		679.0


^(a)	Amounts do not include PPAs accounted for as executory contracts.


^(b)	PPA operating leases contractually expire through 2033.

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

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

SPS has evaluated each of these variable interest entities for possible consolidation, including review of qualitative factors such as the length and terms of the contract, control over O&M, control over dispatch of electricity, historical and estimated future fuel and electricity prices, and financing activities. 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. SPS had approximately 827 MW of capacity under long-term PPAs as of Dec. 31, 2015 and 2014, with entities that have been determined to be variable interest entities. These agreements have expiration dates through the year 2033.

Fuel Contracts — SPS purchases all of its coal requirements for its Harrington and Tolk electric generating stations from TUCO under contracts for those facilities that expire in December 2016 and December 2017, respectively. TUCO arranges for the purchase, receiving, transporting, unloading, handling, crushing, weighing, and delivery of coal to meet SPS’ requirements. TUCO is responsible for negotiating and administering contracts with coal suppliers, transporters and handlers.

No significant financial support has been, or is in the future, required to be provided to TUCO by SPS, other than contractual payments for delivered coal. However, the fuel contracts create a variable interest in TUCO due to SPS’ reimbursement of certain fuel procurement costs. SPS has determined that TUCO is a variable interest entity. SPS has concluded that it is not the primary beneficiary of TUCO because SPS does not have the power to direct the activities that most significantly impact TUCO’s economic performance.

Environmental Contingencies

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

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

Environmental Requirements

Water and Waste

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

Federal Clean Water Act (CWA) Effluent Limitations Guidelines (ELG) — In September 2015, the EPA issued a final ELG rule for power plants that use coal, natural gas, oil or nuclear materials as fuel and discharge treated effluent to surface waters as well as utility-owned landfills that receive coal combustion residuals. SPS has reviewed the final rule and does not anticipate costs of compliance will have a material impact on the results of operations, financial position or cash flows.

Federal CWA Waters of the United States Rule — In June 2015, the EPA and the U.S. Army Corps of Engineers published a final rule that significantly expands the types of water bodies regulated under the CWA and broadens the scope of waters subject to federal jurisdiction. The expansion of the term “Waters of the U.S.” will subject more utility projects to federal CWA jurisdiction, thereby potentially delaying the siting of new generation projects, pipelines, transmission lines and distribution lines, as well as increasing project costs and expanding permitting and reporting requirements. The rule went into effect in August 2015. In October 2015, the U.S. Court of Appeals for the Sixth Circuit issued a nationwide stay of the final rule, pending further legal proceedings.

Air

GHG Emission Standard for Existing Sources (CPP) — In October 2015, a final rule was published by the EPA for GHG emission standards for existing power plants. States must develop implementation plans by September 2016, with the possibility of an extension to September 2018, or the EPA will prepare a federal plan for the state. Among other things, the rule requires that state plans include enforceable measures to ensure emissions from existing power plants achieve the EPA’s state-specific interim (2022-2029) and final (2030 and thereafter) emission performance targets. The CPP is currently being challenged by multiple parties in the D.C. Circuit. In January 2016, the D.C. Circuit denied requests to stay the effectiveness of the rule as well as ordered expedited review of the CPP, with briefings to be completed and oral arguments held by June 2016. Following the D.C. Circuit's denial of motions for stay, multiple parties filed requests for stay with the U.S. Supreme Court. In February 2016, the U.S. Supreme Court issued an order staying the final CPP rule. The stay will remain in effect until, first, the D.C. Circuit and then the U.S. Supreme Court have ruled on the challenges to the CPP.

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

CSAPR — CSAPR addresses long range transport of PM and ozone by requiring reductions in SO₂ and NOx from utilities in the eastern half of the United States, including Texas, using an emissions trading program. CSAPR compliance in 2015 did not and 2016 is not expected to have a material impact on the results of operations, financial position or cash flows.

CSAPR was adopted to address interstate emissions impacting downwind states’ attainment of the 1997 ozone NAAQS and the 1997 and 2006 particulate NAAQS. As the EPA revises the NAAQS, it will consider whether to make any further reductions to CSAPR emission budgets and whether to change which states are included in the emissions trading program. In December 2015, the EPA proposed adjustments to CSAPR emission budgets which address attainment of the more stringent 2008 ozone NAAQS. If adopted as proposed, the ozone season emission budget for NOx in Texas would be reduced by approximately 14 percent, which may lead to increased cost to purchase emission allowances.

Regional Haze Rules — The regional haze program is designed to address widespread haze that results from emissions from a multitude of sources. In 2005, the EPA amended the BART requirements of its regional haze rules, which require the installation and operation of emission controls for industrial facilities emitting air pollutants that reduce visibility in certain national parks and wilderness areas. In its first regional haze SIP, Texas identified the SPS facilities that will have to reduce SO₂, NOx and PM emissions under BART and set emissions limits for those facilities.

Harrington Units 1 and 2 are potentially subject to BART. Texas developed a SIP that finds the CAIR equal to BART for EGUs. As a result, no additional controls beyond CAIR compliance would be required. In May 2012, the EPA deferred its review of the SIP in its final rule allowing states to find that CSAPR compliance meets BART requirements for EGUs. In December 2014, the EPA proposed to approve the BART portion of the SIP, with the exception that the EPA would substitute 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 in relation to the 2012 particle NAAQS.

In May 2014, the EPA issued a request for information under the CAA related to SO₂ control equipment at Tolk Units 1 and 2. In December 2014, the EPA proposed to disapprove the reasonable progress portions of the SIP and instead adopt a FIP. The EPA proposed to require dry scrubbers on both Tolk units to reduce SO₂ emissions to help achieve reasonable progress goals for Texas and Oklahoma national parks and wilderness areas. In January 2016, the EPA adopted a final rule establishing a FIP for the state of Texas. As part of this final rule, the EPA 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 plans to appeal the EPA’s decision. SPS believes these costs would be recoverable through regulatory mechanisms if required, and therefore does not expect a material impact on results of operations, financial position or cash flows.

Implementation of the NAAQS for SO₂ — The EPA adopted a more stringent NAAQS for SO₂ in 2010. In 2013, the EPA designated areas as not attaining the revised NAAQS, which did not include any areas where Xcel Energy operates power plants. However, many other areas of the country were unable to be classified by the EPA due to a lack of air monitors.

Following a lawsuit alleging that the EPA had not completed its area designations in the time required by the CAA and under a consent decree the EPA is requiring states to evaluate areas in three phases. The first phase includes areas near SPS’ Tolk and Harrington plants. The Tolk and Harrington Plants utilize low sulfur coal to reduce SO₂ emissions. The Texas Commission on Environmental Quality (TCEQ) made recommendations for unclassified and nonattainment areas to the EPA in September 2015. The EPA’s final decision is expected by summer 2016.

If an area is designated nonattainment, the respective states will need to evaluate all SO₂ sources in the area. The state would then submit an implementation plan for the respective areas which would be due in 18 months, designed to achieve the NAAQS within five years. The TCEQ could require additional SO₂ controls on one or more of the units at Tolk and Harrington. SPS cannot evaluate the impacts of this ruling until the designation of nonattainment areas is made and any required state plans are developed. SPS believes that, should SO₂ control systems be required for a plant, compliance costs will be recoverable through regulatory mechanisms and therefore does not expect a material impact on results of operations, financial position or cash flows.

Revisions to the NAAQS for Ozone — In October 2015, the EPA revised the NAAQS for ozone by lowering the eight-hour standard from 75 parts per billion (ppb) to 70 ppb. In areas where SPS operates, current monitored air quality concentrations meet the 70 ppb level in the Texas panhandle. In documents issued with the new standard, the EPA projects this area will meet the new standard. Therefore, SPS does not expect a material impact on results of operations, financial position or cash flows.

Asset Retirement Obligations

Recorded AROs — AROs have been recorded for property related to the following: electric steam production, electric distribution and transmission, and general property. The electric production obligations include asbestos, ash-containment facilities, storage tanks and control panels. The asbestos recognition associated with electric production includes certain specific plants. AROs also have been recorded for steam production related to ash-containment facilities such as bottom ash ponds, evaporation ponds and solid waste landfills.

An ARO was recognized for the removal of electric transmission and distribution equipment, which consists of many small potential obligations associated with PCBs, mineral oil, storage tanks, lithium batteries, mercury and street lighting lamps. The electric general AROs include small obligations related to storage tanks, radiation sources and office buildings.

In April 2015, the EPA published the final rule regulating the management and disposal of coal combustion byproducts (e.g., coal ash) as a nonhazardous waste to the Federal Register. The rule became effective in October 2015. No cash flow revisions were necessary, as a result of the final rule, as of Dec. 31, 2015.

A reconciliation of SPS’ AROs for the years ended Dec. 31, 2015 and 2014 is as follows:



(Thousands of Dollars)	Beginning Balance Jan. 1, 2015		Accretion		Cash Flow Revisions			Ending Balance Dec. 31, 2015 ^(a)
Electric plant
Steam production asbestos	$	16,957	$	1,024	$	—		$	17,981
Steam production ash containment	1,609		85		(181		)	1,513
Electric distribution	6,327		232		—			6,559
Other	1,138		42		—			1,180
Total liability	$	26,031	$	1,383	$	(181	)	$	27,233


^(a)	There were no ARO liabilities recognized or settled during the year ended Dec. 31, 2015.



(Thousands of Dollars)	Beginning Balance Jan. 1, 2014		Liabilities Recognized		Accretion		Cash Flow Revisions ^(a)		Ending Balance Dec. 31, 2014 ^(b)
Electric plant
Steam production asbestos	$	11,608	$	—	$	795	$	4,554	$	16,957
Steam production ash containment	809		—		51		749		1,609
Electric distribution	6,104		—		223		—		6,327
Other	854		136		31		117		1,138
Total liability	$	19,375	$	136	$	1,100	$	5,420	$	26,031


^(a)	In 2014, revisions were made to various AROs due to revised estimated cash flows and the timing of those cash flows. Changes in the asbestos AROs were related to updated costs from the 2014 dismantling study.


^(b)	There were no ARO liabilities settled during the year ended Dec. 31, 2014.

Indeterminate AROs — Outside of the known and recorded asbestos AROs, other plants or buildings may contain asbestos due to the age of many of SPS’ facilities, but no confirmation or measurement of the amount of asbestos or cost of removal could be determined as of Dec. 31, 2015. Therefore, an ARO has not been recorded for these facilities.

Removal Costs — SPS records a regulatory liability for the plant removal costs of generation, transmission and distribution facilities that are recovered currently in rates. Generally, the accrual of future non-ARO removal obligations is not required. However, long-standing ratemaking practices approved by applicable state and federal regulatory commissions have allowed provisions for such costs in historical depreciation rates. These removal costs have accumulated over a number of years based on varying rates as authorized by the appropriate regulatory entities. Given the long time periods over which the amounts were accrued and the changing of rates over time, SPS has estimated the amount of removal costs accumulated through historic depreciation expense based on current factors used in the existing depreciation rates. Accordingly, the recorded amounts of estimated future removal costs are considered regulatory liabilities. Removal costs as of Dec. 31, 2015 and 2014 were $204 million and $68 million, respectively.

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.

Other Contingencies

See Note 10 for further discussion.