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 68 percent of employees that receive benefits are represented by several local labor unions under several collective-bargaining agreements. At Dec. 31, 2017, SPS had 791 bargaining employees covered under a collective-bargaining agreement, which expires in October 2019.

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

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

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

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

Specific valuation methods include the following:

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

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

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

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

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

Pension Benefits

Xcel Energy, which includes 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, with distributions attributable to SPS funded by SPS’ operating cash flows. The total obligations of the SERP and nonqualified plan as of Dec. 31, 2017 and 2016 were $37 million and $44 million, respectively, of which $2 million and $3 million were attributable to SPS. In 2017 and 2016, Xcel Energy recognized net benefit cost for financial reporting for the SERP and nonqualified plans of $5 million and $8 million, respectively, of which immaterial amounts were attributable to SPS.

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

Xcel Energy Inc. and 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 2017 were above the assumed level of 6.78 percent;


•	Investment returns in 2016 were below the assumed level of 6.78 percent;


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


•	In 2018, 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 funding for plan obligations and minimize contributions to the plan, within appropriate levels of risk. The principal mechanism for achieving these objectives is the projected asset allocation 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:



	2017		2016
Domestic and international equity securities	34	%	36	%
Long-duration fixed income and interest rate swap securities	31		31
Short-to-intermediate fixed income securities	19		15
Alternative investments	14		16
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, 2017 and 2016:



	Dec. 31, 2017
(Thousands of Dollars)	Level 1			Level 2		Level 3		Investments Measured at NAV		Total
Cash equivalents	$	26,934		$	—	$	—	$	—	$	26,934
Commingled funds:
U.S. equity funds	68,103			—		—		—		68,103
Non U.S. equity funds	12,156			—		—		26,427		38,583
U.S. corporate bond funds	54,830			—		—		—		54,830
Emerging market equity funds	—			—		—		41,706		41,706
Emerging market debt funds	9,967			—		—		22,063		32,030
Private equity investments	—			—		—		11,168		11,168
Real estate	—			—		—		25,896		25,896
Other commingled funds	643			—		—		15,476		16,119
Debt securities:
Government securities	—			57,578		—		—		57,578
U.S. corporate bonds	—			41,041		—		—		41,041
Non U.S. corporate bonds	—			6,717		—		—		6,717
Equity securities:
U.S. equities	15,157			—		—		—		15,157
Other	(3,271		)	566		—		72		(2,633		)
Total	$	184,519		$	105,902	$	—	$	142,808	$	433,229



	Dec. 31, 2016
(Thousands of Dollars)	Level 1		Level 2			Level 3		Investments Measured at NAV		Total
Cash equivalents	$	29,237	$	—		$	—	$	—	$	29,237
Commingled funds:
U.S. equity funds	62,899		—			—		—		62,899
Non U.S. equity funds	24,472		—			—		21,931		46,403
U.S. corporate bond funds	41,226		—			—		—		41,226
Emerging market equity funds	—		—			—		24,637		24,637
Emerging market debt funds	9,825		—			—		10,574		20,399
Commodity funds	—		—			—		2,876		2,876
Private equity investments	—		—			—		12,098		12,098
Real estate	—		—			—		23,232		23,232
Other commingled funds	—		—			—		28,247		28,247
Debt securities:
Government securities	—		38,105			—		—		38,105
U.S. corporate bonds	—		36,293			—		—		36,293
Non U.S. corporate bonds	—		5,818			—		—		5,818
Mortgage-backed securities	—		821			—		—		821
Asset-backed securities	—		389			—		—		389
Equity securities:
U.S. equities	10,477		—			—		—		10,477
Other	—		(2,762		)	—		—		(2,762		)
Total	$	178,136	$	78,664		$	—	$	123,595	$	380,395

There were no assets transferred in or out of Level 3 for the years ended Dec. 31, 2017, 2016 or 2015.

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)	2017			2016
Accumulated Benefit Obligation at Dec. 31	$	478,843		$	453,317

Change in Projected Benefit Obligation:
Obligation at Jan. 1	$	483,601		$	467,394
Service cost	9,758			9,761
Interest cost	19,710			21,259
Plan amendments	(984		)	—
Actuarial loss	31,218			25,053
Transfer to other plan	—			(3,305		)
Benefit payments	(27,424		)	(36,561		)
Obligation at Dec. 31	$	515,879		$	483,601



(Thousands of Dollars)	2017			2016
Change in Fair Value of Plan Assets:
Fair value of plan assets at Jan. 1	$	380,395		$	378,913
Actual return on plan assets	56,756			23,306
Employer contributions	23,502			18,088
Transfer to other plan	—			(3,351		)
Benefit payments	(27,424		)	(36,561		)
Fair value of plan assets at Dec. 31	$	433,229		$	380,395



(Thousands of Dollars)	2017			2016
Funded Status of Plans at Dec. 31:
Funded status ^(a)	$	(82,650	)	$	(103,206	)


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



(Thousands of Dollars)	2017			2016
Amounts Not Yet Recognized as Components of Net Periodic Benefit Cost:
Net loss	$	237,024		$	247,381
Prior service credit	(1,372		)	—
Total	$	235,652		$	247,381



(Thousands of Dollars)	2017		2016
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	$	13,851	$	13,524
Noncurrent regulatory assets	221,801		233,857
Total	$	235,652	$	247,381



Measurement date	Dec. 31, 2017	Dec. 31, 2016



	2017		2016
Significant Assumptions Used to Measure Benefit Obligations:
Discount rate for year-end valuation	3.63	%	4.13	%
Expected average long-term increase in compensation level	3.75		3.75
Mortality table	RP-2014		RP-2014

Mortality — In 2014, the Society of Actuaries published a new mortality table (RP-2014) that increased the overall life expectancy of males and females. In 2014, SPS adopted this mortality table, with modifications, based on its population and specific experience. During 2017, a new projection table was released (MP-2017). SPS evaluated the updated projection table and concluded that the methodology currently in use and adopted in 2016 is consistent with the recently updated 2017 table and continues to be representative of SPS’ 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 2015 through 2018 to meet minimum funding requirements.

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


•	$150 million in January 2018, of which $8 million was attributable to SPS;


•	$162 million in 2017, of which $24 million was attributable to SPS


•	$125 million in 2016, of which $18 million was attributable to SPS; and


•	$90 million in 2015, of which $12 million was attributable to SPS.

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

Plan Amendments — Xcel Energy, which includes SPS, amended the Xcel Energy Inc. Nonbargaining Pension Plan (South) in 2017 to reduce supplemental benefits for non-bargaining participants as well as to allow the transfer of a portion of non-qualified pension obligations into the qualified plans. In 2016, 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)	2017			2016			2015
Service cost	$	9,758		$	9,761		$	11,006
Interest cost	19,710			21,259			20,184
Expected return on plan assets	(27,883		)	(27,602		)	(28,610		)
Amortization of prior service cost	—			—			39
Amortization of net loss	12,981			11,986			15,087
Net periodic pension cost	14,566			15,404			17,706
Credits not recognized due to effects of regulation	306			2,042			2,597
Net benefit cost recognized for financial reporting	$	14,872		$	17,446		$	20,303



	2017		2016		2015
Significant Assumptions Used to Measure Costs:
Discount rate	4.13	%	4.66	%	4.11	%
Expected average long-term increase in compensation level	3.75		4.00		3.75
Expected average long-term rate of return on assets	6.78		6.78		7.22

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 $8 million, $4 million and $5 million in 2017, 2016 and 2015, 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 2018 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 $3 million in 2017, 2016 and 2015.

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:



	2017		2016
Domestic and international equity securities	24	%	25	%
Short-to-intermediate fixed income securities	60		57
Alternative investments	9		13
Cash	7		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 contributions to the plan, within appropriate levels of risk. The principal mechanism for achieving these objectives is the projected asset allocation 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, 2017 and 2016:



	Dec. 31, 2017
(Thousands of Dollars)	Level 1		Level 2		Level 3		Investments Measured at NAV		Total
Cash equivalents	$	2,787	$	—	$	—	$	—	$	2,787
Insurance contracts	—		4,716		—		—		4,716
Commingled funds:
U.S. equity funds	7,032		—		—		—		7,032
U.S fixed income funds	3,245		—		—		—		3,245
Emerging market debt funds	3,836		—		—		—		3,836
Debt securities:
Government securities	—		5,480		—		—		5,480
U.S. corporate bonds	—		5,995		—		—		5,995
Non U.S. corporate bonds	—		2,027		—		—		2,027
Asset-backed securities	—		2,218		—		—		2,218
Mortgage-backed securities	—		3,276		—		—		3,276
Equity securities:
Non U.S. equities	3,323		—		—		—		3,323
Other	—		104		—		—		104
Total	$	20,223	$	23,816	$	—	$	—	$	44,039



	Dec. 31, 2016
(Thousands of Dollars)	Level 1		Level 2		Level 3		Investments Measured at NAV		Total
Cash equivalents	$	1,966	$	—	$	—	$	—	$	1,966
Insurance contracts	—		4,519		—		—		4,519
Commingled funds:
U.S. equity funds	5,208		—		—		—		5,208
U.S fixed income funds	2,593		—		—		—		2,593
Emerging market debt funds	2,911		—		—		—		2,911
Other commingled funds	—		—		—		5,258		5,258
Debt securities:
Government securities	—		3,611		—		—		3,611
U.S. corporate bonds	—		5,962		—		—		5,962
Non U.S. corporate bonds	—		1,653		—		—		1,653
Asset-backed securities	—		1,810		—		—		1,810
Mortgage-backed securities	—		2,748		—		—		2,748
Equity securities:
Non U.S. equities	3,919		—		—		—		3,919
Other	—		139		—		—		139
Total	$	16,597	$	20,442	$	—	$	5,258	$	42,297

There were no assets transferred in or out of Level 3 for the years ended Dec. 31, 2017, 2016 or 2015.

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



(Thousands of Dollars)	2017			2016
Change in Projected Benefit Obligation:
Obligation at Jan. 1	$	41,860		$	40,864
Service cost	875			775
Interest cost	1,659			1,821
Medicare subsidy reimbursements	14			31
Plan participants’ contributions	637			653
Actuarial loss	4,688			1,293
Benefit payments	(2,764		)	(3,577		)
Obligation at Dec. 31	$	46,969		$	41,860



(Thousands of Dollars)	2017			2016
Change in Fair Value of Plan Assets:
Fair value of plan assets at Jan. 1	$	42,297		$	42,684
Actual return on plan assets	3,686			1,978
Plan participants’ contributions	637			653
Employer contributions	183			559
Benefit payments	(2,764		)	(3,577		)
Fair value of plan assets at Dec. 31	$	44,039		$	42,297



(Thousands of Dollars)	2017			2016
Funded Status of Plans at Dec. 31:
Funded status ^(a)	$	(2,930	)	$	437


^(a)	Amounts are recognized in noncurrent liabilities and noncurrent assets on SPS’ balance sheet as of Dec. 31, 2017 and 2016, respectively.



(Thousands of Dollars)	2017			2016
Amounts Not Yet Recognized as Components of Net Periodic Benefit Credit:
Net gain	$	(8,620	)	$	(12,595	)
Prior service credit	(2,229		)	(2,630		)
Total	$	(10,849	)	$	(15,225	)



(Thousands of Dollars)	2017			2016
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	$	(827	)	$	(1,004	)
Noncurrent regulatory liabilities	(10,022		)	(14,221		)
Total	$	(10,849	)	$	(15,225	)



Measurement date	Dec. 31, 2017	Dec. 31, 2016



	2017		2016
Significant Assumptions Used to Measure Benefit Obligations:
Discount rate for year-end valuation	3.62	%	4.13	%
Mortality table	RP 2014		RP 2014
Health care costs trend rate — initial Pre-65	7.00	%	5.50	%
Health care costs trend rate — initial Post-65	5.50	%	5.50	%

Beginning with the Dec. 31, 2017 measurement, Xcel Energy Inc. and SPS separated its initial medical trend assumption for pre-Medicare (Pre-65) and post-Medicare (Post-65) claims costs of 7.0 percent and 5.5 percent, respectively, in order to reflect different short-term expectations based on recent experience differences. The ultimate trend assumption remained at 4.5 percent for both Pre-65 and Post-65 claims costs as similar long-term trend rates are expected for both populations. The period until the ultimate rate is reached is five 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	$	4,559	$	(3,858	)
Service and interest components	266		(225		)

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 $20 million, $18 million and $18 million during 2017, 2016 and 2015, respectively, of which the amounts attributable to SPS were immaterial. Xcel Energy expects to contribute approximately $12 million during 2018, of which amounts attributable to SPS will be zero.

Plan Amendments — In 2017 and 2016, 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)	2017			2016			2015
Service cost	$	875		$	775		$	954
Interest cost	1,659			1,821			1,745
Expected return on plan assets	(2,355		)	(2,377		)	(2,540		)
Amortization of prior service credit	(401		)	(401		)	(401		)
Amortization of net gain	(618		)	(583		)	(639		)
Net periodic postretirement benefit credit	$	(840	)	$	(765	)	$	(881	)



	2017		2016		2015
Significant Assumptions Used to Measure Costs:
Discount rate	4.13	%	4.65	%	4.08	%
Expected average long-term rate of return on assets	5.80		5.80		5.80

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
2018	$	30,475	$	3,277	$	22	$	3,255
2019	28,755		3,189		19		3,170
2020	29,621		3,229		21		3,208
2021	29,721		3,351		25		3,326
2022	30,712		3,384		30		3,354
2023-2027	155,784		14,773		141		14,632