UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended Sept. 30, 2019 or

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

001-3034	75-0575400
(Commission File Number)	(I.R.S. Employer Identification No.)

(Registrant, State of Incorporation or Organization, Address of Principal Executive Officers and Telephone Number)

Southwestern Public Service Company

New Mexico

790 South Buchanan Street

Amarillo Texas 79101

303 571-7511

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol	Name of each exchange on which registered
N/A	N/A	N/A

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.  ☒Yes  ☐No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of 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 such files).  ☒ Yes  ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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	☒	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   ☒ No

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

Class	Oct. 25, 2019
Common Stock, $1.00 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)	5
	STATEMENTS OF INCOME	5
	STATEMENTS OF COMPREHENSIVE INCOME	6
	STATEMENTS OF CASH FLOWS	7
	BALANCE SHEETS	8
	STATEMENTS OF COMMON STOCKHOLDER’S EQUITY	9
	NOTES TO FINANCIAL STATEMENTS	11
Item 2    —	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 4    —	Controls and Procedures	20
PART II — OTHER INFORMATION
Item 1     —	Legal Proceedings	20
Item 1A  —	Risk Factors	20
Item 6    —	Exhibits	21
SIGNATURES		22
Certifications Pursuant to Section 302
Certifications Pursuant to Section 906

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.  Additional information on Xcel Energy is available in various filings with the SEC. This report should be read in its entirety.

ABBREVIATIONS AND INDUSTRY TERMS

Xcel Energy Inc.’s Subsidiaries and Affiliates (current and former)
NSP-Minnesota	Northern States Power Company, a Minnesota corporation
NSP-Wisconsin	Northern States Power Company, a Wisconsin corporation
PSCo	Public Service Company of Colorado
SPS	Southwestern Public Service Company
Utility subsidiaries	NSP-Minnesota, NSP-Wisconsin, PSCo and SPS
Xcel Energy	Xcel Energy Inc. and its subsidiaries
Federal and State Regulatory Agencies
D.C. Circuit	United States Court of Appeals for the District of Columbia Circuit
EPA	Environmental Protection Agency
FERC	Federal Energy Regulatory Commission
IRS	Internal Revenue Service
NERC	North American Electric Reliability Corporation
NMPRC	New Mexico Public Regulation Commission
PUCT	Public Utility Commission of Texas
SEC	Securities and Exchange Commission
Electric and Resource Adjustment Clauses
DSM	Demand side management
FPPCAC	Fuel and Purchased Power Cost Adjustment Clause
Other Terms and Abbreviations
ACE	Affordable Clean Energy
ADIT	Accumulated deferred income tax
AFUDC	Allowance for funds used during construction
ALJ	Administrative Law Judge
ASC	FASB Accounting Standards Codification
ASU	FASB Accounting Standards Update
ATRR	Annual transmission revenue requirement
C&I	Commercial and Industrial
CEO	Chief executive officer
CFO	Chief financial officer
ETR	Effective tax rate
FASB	Financial Accounting Standards Board
FTR	Financial transmission right
GAAP	Generally accepted accounting principles
IPP	Independent power producers
NAV	Net asset value
NOL	Net operating loss
O&M	Operating and maintenance
OATT	Open access transmission tariff
PPA	Power purchase agreement
PTC	Production tax credit
ROE	Return on equity
ROU	Right-of-use
RTO	Regional Transmission Organization
SPP	Southwest Power Pool, Inc.
TCJA	2017 federal tax reform enacted as Public Law No: 115-97, commonly referred to as the Tax Cuts and Jobs Act
VIE	Variable interest entity
Measurements
MW	Megawatts
MWh	Megawatt hours

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, assumptions and other statements identified in this document by the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should,” “will,” “would” 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, 2018, and subsequent securities filings), could cause actual results to differ materially from management expectations as suggested by such forward-looking information: changes in environmental laws and regulations; climate change and other weather, natural disaster and resource depletion, including compliance with any accompanying legislative and regulatory changes; ability to recover costs from customers; reductions in our credit ratings and the costs of maintaining certain contractual relationships; 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; availability or cost of capital; our customers’ and counterparties’ ability to pay their debts to us; assumptions and costs relating to funding our employee benefit plans and health care benefits; tax laws; operational safety; successful long-term operational planning; commodity risks associated with energy markets and production; rising energy prices; costs of potential regulatory penalties; effects of geopolitical events, including war and acts of terrorism; cyber security threats and data security breaches; fuel costs; and employee work force and third party contractor factors.

4

PART 1 — FINANCIAL INFORMATION

Item 1 — FINANCIAL STATEMENTS

SOUTHWESTERN PUBLIC SERVICE COMPANY

STATEMENTS OF INCOME (UNAUDITED)

(amounts in millions)

	Three Months Ended Sept. 30						Nine Months Ended Sept. 30
	2019			2018			2019			2018
Operating revenues	$	533.1		$	540.1		$	1,397.7		$	1,468.6
Operating expenses
Electric fuel and purchased power	240.2			284.0			651.0			795.6
Operating and maintenance expenses	74.1			71.5			216.6			203.7
Demand side management expenses	4.5			4.6			12.9			13.5
Depreciation and amortization	61.3			52.2			172.3			150.2
Taxes (other than income taxes)	17.6			16.8			53.1			50.0
Total operating expenses	397.7			429.1			1,105.9			1,213.0
Operating income	135.4			111.0			291.8			255.6
Other income (expense), net	1.5			(1.0		)	2.4			(2.4		)
Allowance for funds used during construction — equity	3.2			5.0			22.2			11.6
Interest charges and financing costs
Interest charges — includes other financing costs of $0.9, $0.7, $2.5 and $2.1, respectively	26.0			21.0			76.0			61.8
Allowance for funds used during construction — debt	(1.5		)	(2.2		)	(10.2		)	(5.5		)
Total interest charges and financing costs	24.5			18.8			65.8			56.3
Income before income taxes	115.6			96.2			250.6			208.5
Income taxes	10.5			14.7			32.6			35.4
Net income	$	105.1		$	81.5		$	218.0		$	173.1

See Notes to Financial Statements

5

SOUTHWESTERN PUBLIC SERVICE COMPANY

STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(amounts in millions)

	Three Months Ended Sept. 30				Nine Months Ended Sept. 30
	2019		2018		2019		2018
Net income	$	105.1	$	81.5	$	218.0	$	173.1
Other comprehensive income
Pension and retiree medical benefits:
Amortization of losses included in net periodic benefit cost, net of tax of $0	—		0.1		0.1		0.1
Other comprehensive income	—		0.1		0.1		0.1
Comprehensive income	$	105.1	$	81.6	$	218.1	$	173.2

See Notes to Financial Statements

6

SOUTHWESTERN PUBLIC SERVICE COMPANY

STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in millions)

	Nine Months Ended Sept. 30,
	2019			2018
Operating activities
Net income	$	218.0		$	173.1
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	174.0			150.4
Demand side management program amortization	—			1.3
Deferred income taxes	16.2			14.4
Allowance for equity funds used during construction	(22.2		)	(11.6		)
Changes in operating assets and liabilities:
Accounts receivable	(26.5		)	(25.1		)
Accrued unbilled revenues	(10.4		)	9.6
Inventories	(16.3		)	7.0
Prepayments and other	6.0			0.6
Accounts payable	(15.1		)	(0.9		)
Net regulatory assets and liabilities	17.6			58.8
Other current liabilities	14.1			13.0
Pension and other employee benefit obligations	(17.6		)	(7.9		)
Change in other noncurrent assets	0.7			3.5
Change in other noncurrent liabilities	1.3			(0.2		)
Net cash provided by operating activities	339.8			386.0
Investing activities
Utility capital/construction expenditures	(632.8		)	(610.0		)
Investments in utility money pool arrangement	(133.0		)	(46.0		)
Repayments from utility money pool arrangement	133.0			111.0
Net cash used in investing activities	(632.8		)	(545.0		)
Financing activities
(Repayments of) Proceeds from short-term borrowings, net	(42.0		)	35.0
Proceeds from issuance of long-term debt, net	292.2			—
Borrowings under utility money pool arrangement	283.0			446.0
Repayments under utility money pool arrangement	(283.0		)	(423.0		)
Capital contributions from parent	400.8			181.4
Dividends paid to parent	(255.0		)	(90.7		)
Net cash provided by financing activities	396.0			148.7
Net change in cash and cash equivalents	103.0			(10.3		)
Cash and cash equivalents at beginning of period	44.0			10.9
Cash and cash equivalents at end of period	$	147.0		$	0.6
Supplemental disclosure of cash flow information:
Cash paid for interest (net of amounts capitalized)	$	(60.3	)	$	(57.9	)
Cash paid for income taxes, net	(4.4		)	(15.3		)
Supplemental disclosure of non-cash investing and financing transactions:
Property, plant and equipment additions in accounts payable	$	67.5		$	54.6
Inventory transfer additions in PPE	18.7			17.0
Operating lease right-of-use assets	548.3			—
Allowance for equity funds used during construction	22.2			11.6

See Notes to Financial Statements

7

SOUTHWESTERN PUBLIC SERVICE COMPANY

BALANCE SHEETS (UNAUDITED)

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

	Sept. 30, 2019			Dec. 31, 2018
Assets
Current assets
Cash and cash equivalents	$	147.0		$	44.0
Accounts receivable, net	113.9			90.7
Accounts receivable from affiliates	6.1			10.5
Accrued unbilled revenues	124.9			114.5
Inventories	31.4			33.9
Regulatory assets	20.8			26.0
Derivative instruments	20.4			17.8
Prepaid taxes	1.5			14.2
Prepayments and other	17.6			10.7
Total current assets	483.6			362.3
Property, plant and equipment, net	6,441.9			5,946.4
Other assets
Regulatory assets	362.0			366.2
Derivative instruments	13.4			15.8
Operating lease right-of-use assets	529.0			—
Other	4.4			5.1
Total other assets	908.8			387.1
Total assets	$	7,834.3		$	6,695.8
Liabilities and Equity
Current liabilities
Short-term debt	$	—		$	42.0
Accounts payable	168.3			191.8
Accounts payable to affiliates	14.9			19.9
Regulatory liabilities	116.8			85.8
Taxes accrued	51.5			41.6
Accrued interest	29.1			25.8
Dividends payable to parent	45.6			45.2
Derivative instruments	3.7			3.6
Other	53.0			28.3
Total current liabilities	482.9			484.0
Deferred credits and other liabilities
Deferred income taxes	653.4			619.1
Regulatory liabilities	736.5			780.9
Asset retirement obligations	49.9			32.4
Derivative instruments	13.7			16.4
Pension and employee benefit obligations	75.2			92.4
Operating lease liabilities	502.2			—
Other	9.0			7.9
Total deferred credits and other liabilities	2,039.9			1,549.1
Commitments and contingencies
Capitalization
Long-term debt	2,419.3			2,126.1
Common stock — 200 shares authorized of $1.00 par value; 100 shares outstanding at Sept. 30, 2019 and Dec. 31, 2018, respectively	—			—
Additional paid in capital	2,325.3			1,932.3
Retained earnings	568.2			605.7
Accumulated other comprehensive loss	(1.3		)	(1.4		)
Total common stockholder’s equity	2,892.2			2,536.6
Total liabilities and equity	$	7,834.3		$	6,695.8

See Notes to Financial Statements

8

SOUTHWESTERN PUBLIC SERVICE COMPANY STATEMENTS OF COMMON STOCKHOLDER’S EQUITY (UNAUDITED) (amounts in millions, except share data)
	Common Stock Issued					Retained Earnings			Accumulated Other Comprehensive Loss			Total Common Stockholders’ Equity
	Shares	Par Value		Additional Paid In Capital
Three Months Ended Sept. 30, 2019 and 2018
Balance at June 30, 2018	100	$	—	$	1,591.4	$	569.2		$	(1.5	)	$	2,159.1
Net income						81.5						81.5
Other comprehensive income									0.1			0.1
Dividends declared to parent						(40.0		)				(40.0		)
Contributions of capital by parent				180.0								180.0
Balance at Sept. 30, 2018	100	$	—	$	1,771.4	$	610.7		$	(1.4	)	$	2,380.7
Balance at June 30, 2019	100	$	—	$	2,307.3	$	577.7		$	(1.3	)	$	2,883.7
Net income						105.1						105.1
Dividends declared to parent						(114.6		)				(114.6		)
Contributions of capital by parent				18.0								18.0
Balance at Sept. 30, 2019	100	$	—	$	2,325.3	$	568.2		$	(1.3	)	$	2,892.2
See Notes to Financial Statements

9

SOUTHWESTERN PUBLIC SERVICE COMPANY STATEMENTS OF COMMON STOCKHOLDER’S EQUITY (UNAUDITED) (amounts in millions, except share data)
	Common Stock Issued					Retained Earnings			Accumulated Other Comprehensive Loss			Total Common Stockholders’ Equity
	Shares	Par Value		Additional Paid In Capital
Nine Months Ended Sept. 30, 2019 and 2018
Balance at Dec. 31, 2017	100	$	—	$	1,590.2	$	541.6		$	(1.5	)	$	2,130.3
Net income						173.1						173.1
Other comprehensive income									0.1			0.1
Dividends declared to parent						(104.0		)				(104.0		)
Contributions of capital by parent	—	—		181.2								181.2
Balance at Sept. 30, 2018	100	$	—	$	1,771.4	$	610.7		$	(1.4	)	$	2,380.7
Balance at Dec. 31, 2018	100	$	—	$	1,932.3	$	605.7		$	(1.4	)	$	2,536.6
Net income						218.0						218.0
Other comprehensive income									0.1			0.1
Dividends declared to parent						(255.5		)				(255.5		)
Contributions of capital by parent				393.0								393.0
Balance at Sept. 30, 2019	100	$	—	$	2,325.3	$	568.2		$	(1.3	)	$	2,892.2
See Notes to Financial Statements

10

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 U.S. GAAP, the financial position of SPS as of Sept. 30, 2019 and Dec. 31, 2018; the results of its operations, including the components of net income and comprehensive income, and change in stockholder’s equity for the three and nine months ended Sept. 30, 2019 and 2018; and its cash flows for the nine months ended Sept. 30, 2019 and 2018. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Management has also evaluated the impact of events occurring after Sept. 30, 2019 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, 2018 balance sheet information has been derived from the audited 2018 financial statements included in the SPS Annual Report on Form 10-K for the year ended Dec. 31, 2018. 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, 2018, filed with the SEC on Feb. 22, 2019. 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, 2018, appropriately represent, in all material respects, the current status of accounting policies and are incorporated herein by reference.

2. Accounting Pronouncements

Recently Issued

Credit Losses — In 2016, the FASB issued Financial Instruments - Credit Losses, Topic 326 (ASC Topic 326), which changes how entities account for losses on receivables and certain other assets. The guidance requires use of a current expected credit loss model, which may result in earlier recognition of credit losses than under previous accounting standards. ASC Topic 326 is effective for interim and annual periods beginning on or after Dec. 15, 2019, and will be applied on a modified-retrospective approach through a cumulative-effect adjustment to retained earnings as of Jan. 1, 2020. SPS expects the impact of adoption of the new standard to include first-time recognition of expected credit losses (i.e., bad debt expense) on unbilled revenues, with the initial allowance established at Jan. 1, 2020 charged to retained earnings.

Recently Adopted

Leases — In 2016, the FASB issued Leases, Topic 842 (ASC Topic 842), which provides new accounting and disclosure guidance for leasing activities, most significantly requiring that operating leases be recognized on the balance sheet. SPS adopted the guidance on Jan. 1, 2019 utilizing the package of transition practical expedients provided by the new standard, including carrying forward prior conclusions on whether agreements existing before the adoption date contain leases and whether existing leases are operating or finance leases; ASC Topic 842 refers to capital leases as finance leases.

Specifically for land easement contracts, SPS has elected the practical expedient provided by ASU No. 2018-01 Leases: Land Easement Practical Expedient for Transition to Topic 842, and as a result, only those easement contracts entered on or after Jan. 1, 2019 will be evaluated to determine if lease treatment is appropriate.

SPS also utilized the transition practical expedient offered by ASU No. 2018-11 Leases: Targeted Improvements to implement the standard on a prospective basis. As a result, reporting periods in the financial statements beginning Jan. 1, 2019 reflect the implementation of ASC Topic 842, while prior periods continue to be reported in accordance with Leases, Topic 840 (ASC Topic 840). Other than first-time recognition of operating leases on its balance sheet, the implementation of ASC Topic 842 did not have a significant impact on SPS’ financial statements. Adoption resulted in recognition of approximately $0.5 billion of operating lease ROU assets and current/noncurrent operating lease liabilities. See Note 9 to the financial statements for leasing disclosures.

3. Selected Balance Sheet Data

(Millions of Dollars)	Sept. 30, 2019			Dec. 31, 2018
Accounts receivable, net
Accounts receivable	$	119.5		$	96.3
Less allowance for bad debts	(5.6		)	(5.6		)
Accounts receivable, net	$	113.9		$	90.7

(Millions of Dollars)	Sept. 30, 2019		Dec. 31, 2018
Inventories
Materials and supplies	$	24.8	$	25.7
Fuel	6.6		8.2
Total inventories	$	31.4	$	33.9

(Millions of Dollars)	Sept. 30, 2019			Dec. 31, 2018
Property, plant and equipment, net
Electric plant	$	8,296.6		$	7,227.7
Construction work in progress	419.2			847.3
Total property, plant and equipment	8,715.8			8,075.0
Less accumulated depreciation	(2,273.9		)	(2,128.6		)
Property, plant and equipment, net	$	6,441.9		$	5,946.4

4. Borrowings and Other Financing Instruments

Short-Term Borrowings

SPS meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under its credit facility and the money pool.

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.

11

Money pool borrowings for SPS were as follows:

(Amounts in Millions, Except Interest Rates)	Three Months Ended Sept. 30, 2019		Year Ended Dec. 31, 2018
Borrowing limit	$	100	$	100
Amount outstanding at period end	—		—
Average amount outstanding	—		29
Maximum amount outstanding	—		100
Weighted average interest rate, computed on a daily basis	N/A		1.96		%
Weighted average interest rate at period end	N/A		N/A

Commercial Paper — Commercial paper outstanding for SPS was as follows:

(Amounts in Millions, Except Interest Rates)	Three Months Ended Sept. 30, 2019		Year Ended Dec. 31, 2018
Borrowing limit	$	500	$	400
Amount outstanding at period end	—		42
Average amount outstanding	—		30
Maximum amount outstanding	—		144
Weighted average interest rate, computed on a daily basis	N/A		2.27		%
Weighted average interest rate at period end	N/A		2.80

Letters of Credit — SPS uses letters of credit, generally with terms of one year, to provide financial guarantees for certain operating obligations. At Sept. 30, 2019 and Dec. 31, 2018, there were $2 million 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.

Amended Credit Agreement — In June 2019, SPS entered into an amended five-year credit agreement with a syndicate of banks. The amended credit agreements have substantially the same terms and conditions as the prior credit agreements with the exception of the following:

• Maturity extended from June 2021 to June 2024.

• Borrowing limit increased from $400 million to $500 million

SPS has the right to request an extension of the revolving credit facility termination date for two additional one year, periods. All extension requests are subject to majority bank group approval.

As of Sept. 30, 2019, SPS had the following committed credit facility available (in millions of dollars):

Credit Facility (a)		Outstanding (b)		Available
$	500	$	2	$	498

^(a)  This credit facility expires in June 2024.

^(b)  Includes outstanding 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 as of Sept. 30, 2019 and Dec. 31, 2018.

Long-Term Borrowings

During the nine months ended Sept. 30, 2019, SPS issued $300 million of 3.75% first mortgage bonds due June 15, 2049.

5. Revenues

Revenue is classified by the type of goods/services rendered and market/customer type. SPS’ operating revenues consists of the following:

	Three Months Ended
(Millions of Dollars)	Sept. 30, 2019		Sept. 30, 2018
Major revenue types
Revenue from contracts with customers:
Residential	$	119.3	$	114.4
C&I	222.4		229.4
Other	12.8		13.0
Total retail	354.5		356.8
Wholesale	106.6		118.0
Transmission	64.4		60.7
Other	0.6		1.8
Total revenue from contracts with customers	526.1		537.3
Alternative revenue and other	7.0		2.8
Total revenues	$	533.1	$	540.1

	Nine Months Ended
(Millions of Dollars)	Sept. 30, 2019		Sept. 30, 2018
Major revenue types
Revenue from contracts with customers:
Residential	$	277.8	$	279.5
C&I	619.6		626.0
Other	32.3		34.0
Total retail	929.7		939.5
Wholesale	263.4		326.8
Transmission	181.8		175.4
Other	2.0		12.2
Total revenue from contracts with customers	1,376.9		1,453.9
Alternative revenue and other	20.8		14.7
Total revenues	$	1,397.7	$	1,468.6

12

6. Income Taxes

Note 7 to the financial statements included in SPS’ Annual Report on Form 10-K for the year ended Dec. 31, 2018 represents, in all material respects, the current status of other income tax matters except to the extent noted below, and are incorporated herein by reference.

The following table reconciles the difference between the statutory rate and the ETR:

	Nine Months Ended Sept. 30,
	2019		2018
Federal statutory rate	21.0	%	21.0	%
State tax (net of federal tax effect)	2.2		2.3
Decreases in tax from:
Plant regulatory differences (a)	(4.7	)	(3.8	)
Wind PTCs	(3.9	)	—
Other tax credits and tax credit and NOL allowances (net)	(0.6	)	(0.7	)
Prior period adjustments	(0.5	)	(1.8	)
Other (net)	(0.5	)	—
Effective income tax rate	13.0	%	17.0	%

^(a) Regulatory differences for income tax primarily relate to the credit of excess deferred taxes to customers through the average rate assumption method and the timing of regulatory decisions regarding the return of excess deferred taxes. Income tax benefits associated with the credit of excess deferred credits are offset by corresponding revenue reductions.

Federal Audits — SPS is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. Statute of limitations applicable to Xcel Energy’s federal income tax returns expire as follows:

Tax Year(s)	Expiration
2009 - 2013	June 2020
2014 - 2016	September 2020

In 2015, the IRS commenced an examination of tax years 2012 and 2013. In 2017, the IRS concluded the audit of tax years 2012 and 2013 and proposed an adjustment that would impact Xcel Energy’s NOL and ETR. Xcel Energy filed a protest with the IRS. As of Sept. 30, 2019, the case has been forwarded to the Office of Appeals and Xcel Energy has recognized its best estimate of income tax expense that will result from a final resolution of this issue; however, the outcome and timing of a resolution is unknown.

In 2018, the IRS began an audit of tax years 2014 - 2016. As of Sept. 30, 2019 no adjustments have been proposed.

State Audits — SPS is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Sept. 30, 2019, SPS’ earliest open tax year subject to examination by state taxing authorities under applicable statutes of limitations is 2009. There are currently no state income tax audits in progress.

Unrecognized Benefits — 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 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 to the taxing authority to an earlier period.

Unrecognized tax benefits — permanent vs temporary:

(Millions of Dollars)	Sept. 30, 2019		Dec. 31, 2018
Unrecognized tax benefit — Permanent tax positions	$	3.5	$	3.0
Unrecognized tax benefit — Temporary tax positions	1.5		1.5
Total unrecognized tax benefit	$	5.0	$	4.5

Unrecognized tax benefits were reduced by tax benefits associated with NOL and tax credit carryforwards:

(Millions of Dollars)	Sept. 30, 2019			Dec. 31, 2018
NOL and tax credit carryforwards	$	(4.4	)	$	(3.8	)

Net deferred tax liability associated with the unrecognized tax benefit amounts and related NOLs and tax credits carryforwards were $1.4 million and $0.8 million at Sept. 30, 2019 and Dec. 31, 2018, respectively.

As the IRS Appeals and federal audit progresses, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $3.7 million in the next 12 months.

Payables for interest related to unrecognized tax benefits were not material and no amounts were accrued for penalties related to unrecognized tax benefits as of Sept. 30, 2019 or Dec. 31, 2018.

7. 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, hierarchical framework for measuring assets and liabilities and requires disclosure about assets and liabilities measured at fair value.

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:

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

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 generally utilize observable forward prices and volatilities, as well as observable pricing adjustments for specific delivery locations, and are generally assigned a Level 2 classification. When contractual settlements relate to delivery locations for which pricing is relatively unobservable, or extend to periods beyond those readily observable on active exchanges or quoted by brokers, the significance of the use of less observable inputs on a valuation is evaluated, and may result in Level 3 classification.

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Electric commodity derivatives held by SPS include transmission congestion instruments, generally referred to as FTRs, purchased from SPP. FTRs purchased from an 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.

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. Given the limited observability of important inputs to the value of FTRs between auction processes, including expected plant operating schedules and retail and wholesale demand, fair value measurements for FTRs have been assigned a Level 3. 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 relative to the electric utility operations of SPS, the numerous unobservable quantitative inputs pertinent to the value of FTRs are insignificant to the financial statements of SPS.

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 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.

As of Sept. 30, 2019, accumulated other comprehensive loss related to interest rate derivatives included $0.1 million of net losses expected to be reclassified into earnings during the next 12 months as the related hedged interest rate transactions impact earnings, including forecasted amounts for unsettled hedges, as applicable.

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 is allowed to conduct these activities within guidelines and limitations as approved by its risk management committee, comprised 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.

(Amounts in Millions) (a)	Sept. 30, 2019	Dec. 31, 2018
Mwh of electricity	9.4	5.5

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

Consideration of Credit Risk and Concentrations — SPS continuously monitors the creditworthiness of 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. Impact of credit risk was immaterial to the fair value of unsettled commodity derivatives presented in the balance sheets. 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 Sept. 30, 2019, one of the six most significant counterparties for these activities, comprising $14.2 million or 31% of this credit exposure, had

investment grade ratings from S&P Global Ratings, Moody’s Investor Services or Fitch Ratings. Five of the six most significant counterparties, comprising $9.7 million or 21% of this credit exposure, were not rated by external rating agencies, but based on SPS’ internal analysis, had credit quality consistent with investment grade. Six of these significant counterparties are municipal or cooperative electric entities, or other utilities.

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 nine months ended Sept. 30, 2019 and 2018.

Changes in the fair value of FTRs resulting in immaterial pre-tax net gains and pre-tax net gains of $4.7 million were recognized for the three and nine months ended Sept. 30, 2019, respectively, were reclassified as regulatory assets and liabilities. For the three and nine months ended Sept. 30, 2018, changes in the fair value of FTRs resulted in pre-tax net losses of $3.3 million and pre-tax net gains of $10.1 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 $1.7 million and $1.5 million were recognized for the three and nine months ended Sept. 30, 2019, respectively, and were recorded to electric fuel and purchased power. There were immaterial FTR settlement losses and $3.4 million of FTR settlement gains recognized for the three and nine months ended Sept. 30, 2018, respectively, and were 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 nine months ended Sept. 30, 2019 and 2018.

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Recurring Fair Value Measurements — SPS’ derivative assets and liabilities measured at fair value on a recurring basis:

	Sept. 30, 2019												Dec. 31, 2018
	Fair Value												Fair Value
(Millions of Dollars)	Level 1		Level 2		Level 3		Fair Value Total		Netting (a)		Total		Level 1		Level 2		Level 3		Fair Value Total		Netting (a)			Total
Current derivative assets
Other derivative instruments:
Electric commodity	$	—	$	—	$	17.3	$	17.3	$	—	$	17.3	$	—	$	—	$	14.9	$	14.9	$	(0.2	)	$	14.7
Total current derivative assets	$	—	$	—	$	17.3	$	17.3	$	—	17.3		$	—	$	—	$	14.9	$	14.9	$	(0.2	)	14.7
PPAs (b)											3.1													3.1
Current derivative instruments											$	20.4												$	17.8
Noncurrent derivative assets
PPAs (b)											13.4													15.8
Noncurrent derivative instruments											$	13.4												$	15.8
Current derivative liabilities
Other derivative instruments:
Electric commodity	$	—	$	—	$	0.2	$	0.2	$	—	$	0.2	$	—	$	—	$	0.2	$	0.2	$	(0.2	)	$	—
Total current derivative liabilities	$	—	$	—	$	0.2	$	0.2	$	—	0.2		$	—	$	—	$	0.2	$	0.2	$	(0.2	)	—
PPAs (b)											3.5								.					3.6
Current derivative instruments											$	3.7												$	3.6
Noncurrent derivative liabilities
PPAs (b)											13.7													16.4
Noncurrent derivative instruments											$	13.7												$	16.4

^(a)  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 Sept. 30, 2019 and Dec. 31, 2018. At both Sept. 30, 2019 and Dec. 31, 2018, derivative assets and liabilities include no obligations to return cash collateral or rights to reclaim cash collateral. The counterparty netting excludes settlement receivables and payables and non-derivative amounts that may be subject to the same master netting agreements.

^(b)  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.

Changes in Level 3 commodity derivatives for the three and nine months ended Sept. 30, 2019 and 2018:

	Three Months Ended Sept. 30,
(Millions of Dollars)	2019			2018
Balance at July 1	$	22.2		$	35.4
Purchases	4.4			3.2
Settlements	(5.2		)	(10.1		)
Net transactions recorded during the period:
Net losses recognized as regulatory assets and liabilities	(4.3		)	(3.2		)
Balance at Sept. 30	$	17.1		$	25.3

	Nine Months Ended Sept. 30,
(Millions of Dollars)	2019			2018
Balance at Jan. 1	$	14.7		$	12.7
Purchases	25.5			22.5
Settlements	(24.9		)	(35.3		)
Net transactions recorded during the period:
Net gains recognized as regulatory assets and liabilities	1.8			25.4
Balance at Sept. 30	$	17.1		$	25.3

SPS recognizes transfers between fair value hierarchy levels as of the beginning of each period. There were no transfers of amounts between levels for derivative instruments for the three and nine months ended Sept. 30, 2019 and 2018.

Fair Value of Long-Term Debt

Other financial instruments for which the carrying amount did not equal fair value:

	Sept. 30, 2019				Dec. 31, 2018
(Millions of Dollars)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt	$	2,419.3	$	2,763.2	$	2,126.1	$	2,139.8

Fair value of SPS’ long-term debt is estimated based on recent trades and observable spreads from benchmark interest rates for similar securities. Fair value estimates are based on information available to management as of Sept. 30, 2019 and Dec. 31, 2018, and given the observability of the inputs, fair values presented for long-term debt were assigned as Level 2.

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8. Benefit Plans and Other Postretirement Benefits

Components of Net Periodic Benefit Cost (Credit)

	Three Months Ended Sept. 30
	2019			2018			2019			2018
(Millions of Dollars)	Pension Benefits						Postretirement Health Care Benefits
Service cost	$	2.2		$	2.4		$	0.2		$	0.3
Interest cost (a)	5.0			4.6			0.4			0.4
Expected return on plan assets (a)	(7.1		)	(7.1		)	(0.5		)	(0.6		)
Amortization of prior service credit (a)	—			—			(0.1		)	(0.1		)
Amortization of net loss (gain) (a)	2.8			3.5			(0.1		)	(0.1		)
Net periodic benefit cost (credit)	2.9			3.4			(0.1		)	(0.1		)
Credits (costs) not recognized due to the effects of regulation	0.5			(0.4		)	—			—
Net benefit cost (credit) recognized for financial reporting	$	3.4		$	3.0		$	(0.1	)	$	(0.1	)

	Nine Months Ended Sept. 30
	2019			2018			2019			2018
(Millions of Dollars)	Pension Benefits						Postretirement Health Care Benefits
Service cost	$	6.6		$	7.3		$	0.7		$	0.8
Interest cost (a)	15.1			13.8			1.3			1.2
Expected return on plan assets (a)	(21.5		)	(21.2		)	(1.5		)	(1.8		)
Amortization of prior service credit (a)	(0.1		)	(0.1		)	(0.4		)	(0.3		)
Amortization of net loss (gain) (a)	8.5			10.5			(0.3		)	(0.3		)
Net periodic benefit cost (credit)	8.6			10.3			(0.2		)	(0.4		)
Credits not recognized due to the effects of regulation	1.3			1.3			—			—
Net benefit cost (credit) recognized for financial reporting	$	9.9		$	11.6		$	(0.2	)	$	(0.4	)

^(a) The components of net periodic cost other than the service cost component are included in the line item “other expense, net” in the income statement or capitalized on the balance sheet as a regulatory asset.

In January 2019, contributions of $150.0 million were made across four of Xcel Energy’s pension plans, of which $16.5 million was attributable to SPS. In July 2019, Xcel Energy made a $4.0 million contribution to the Xcel Energy Inc. Non-Bargaining Pension Plan (South), of which $1.2 million was attributable to SPS. Xcel Energy does not expect additional pension contributions during 2019.

9. Commitments and Contingencies

The following include commitments, contingencies and unresolved contingencies that are material to SPS’ financial position.

Legal

SPS is involved in various litigation matters 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 losses 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, would have a material effect on SPS’ financial statements. Unless otherwise required by GAAP, legal fees are expensed as incurred.

Rate Matters

SPP OATT Upgrade Costs — Under the SPP OATT, costs of transmission upgrades may be recovered from other SPP customers whose transmission service depends on capacity enabled by the upgrade. SPP had not been charging its customers for these upgrades, even though the SPP OATT had allowed SPP to do so since 2008. In 2016, the FERC granted SPP’s request to recover these previously unbilled charges and SPP subsequently billed SPS approximately $13 million.

In July 2018, SPS’ appeal to the D.C. Circuit over the FERC rulings granting SPP the right to recover these previously unbilled charges was remanded to the FERC. In February 2019, the FERC reversed its 2016 decision and ordered SPP to refund the charges retroactively collected from its transmission customers, including SPS, related to periods before September 2015. In April 2019, several parties, including SPP, filed requests for rehearing. The timing of a FERC response to the rehearing requests is uncertain. Any refunds received by SPS are expected to be given back to SPS customers through future rates.

In October 2017, SPS filed a separate complaint against SPP asserting that SPP has assessed upgrade charges to SPS in violation of the SPP OATT. The FERC granted a rehearing for further consideration in May 2018. The timing of FERC action on the SPS rehearing is uncertain. If SPS’ complaint results in additional charges or refunds, SPS will seek to recover or refund the amounts through future SPS customer rates.

SPP Filing to Assign GridLiance Facilities to SPS Rate Zone — In August 2018, SPP filed a request with the FERC to amend its OATT to include the costs of the GridLiance High Plains, LLC. facilities in the SPS rate zone. In a previous filing, the FERC determined that some of these facilities did not qualify as transmission facilities under the SPP OATT. SPP’s proposed tariff changes resulted in an increase in the ATRR of $9.5 million per year, with $6 million allocated to SPS’ retail customers. The remaining $3.5 million would be paid by other wholesale loads in the SPS rate zone.

In September 2018, SPS protested the proposed SPP tariff charges, and asked the FERC to reject the SPP filing. On Oct. 31, 2018, the FERC issued an order accepting the proposed charges, subject to refund, as of Nov. 1, 2018, and set the case for settlement hearing procedures. Hearings are scheduled for May 2020, with the ALJ’s initial decision expected in October 2020.

SPS Filing to Modify Wholesale Transmission Rates — In 2018, SPS filed revisions to its wholesale transmission formula rate. The proposal includes an update to the depreciation rates for transmission plant. The new formula rate would also provide a credit to customers of “excess” ADIT resulting from the TCJA and recover certain wholesale regulatory commission expenses.

The proposed changes would increase wholesale transmission revenues by approximately $9.4 million, with approximately $4.4 million of the total being recovered in SPP regional transmission rates. SPS proposed that the formula rate changes be effective Feb. 1, 2019.

In January 2019, the FERC issued an order accepting the proposed rate changes as of Feb. 1, 2019, subject to refund and settlement procedures. Settlement procedures started in February 2019, and are ongoing.

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Environmental

MGP, Landfill or Disposal Sites — SPS is currently remediating the site of a former facility.

SPS has recognized its best estimate of costs/liabilities that will result from final resolution of these issues, however, the outcome and timing is unknown. In addition, there may be insurance recovery and/or recovery from other potentially responsible parties, offsetting a portion of the costs incurred.

Leases

SPS evaluates contracts that may contain leases, including PPAs and arrangements for the use of office space and other facilities, vehicles and equipment. Under ASC Topic 842, adopted by SPS on Jan. 1, 2019, a contract contains a lease if it conveys the exclusive right to control the use of a specific asset. A contract determined to contain a lease is evaluated further to determine if the arrangement is a finance lease.

ROU assets represent SPS’ rights to use leased assets. Starting in 2019, the present value of future operating lease payments are recognized in other current liabilities and noncurrent operating lease liabilities. These amounts, adjusted for any prepayments or incentives, are recognized as operating lease ROU assets.

Most of SPS’ leases do not contain a readily determinable discount rate. Therefore, the present value of future lease payments is calculated using the estimated incremental borrowing rate (weighted-average of 4.4%). SPS has elected the practical expedient under which non-lease components, such as asset maintenance costs included in payments, are not deducted from minimum lease payments for the purposes of lease accounting and disclosure. Leases with an initial term of 12 months or less are classified as short-term leases and are not recognized on the balance sheet.

Operating lease ROU assets:

(Millions of Dollars)	Sept. 30, 2019
PPAs	$	500.3
Other	48.0
Gross operating lease ROU assets	548.3
Accumulated amortization	(19.3		)
Net operating lease ROU assets	$	529.0

Components of lease expense:

(Millions of Dollars)	Three Months Ended Sept. 30, 2019		Nine Months Ended Sept. 30, 2019
Operating leases
PPA capacity payments	$	11.4	$	36.8
Other operating leases (a)	1.2		3.7
Total operating lease expense (b)	$	12.6	$	40.5

^(a)  Includes short-term lease expense of $0.3 million for the three months ended Sept. 30, 2019 and $1.2 million for the nine months ended Sept. 30, 2019.

^(b)  PPA capacity payments are included in electric fuel and purchased power on the statements of income. Expense for other operating leases is included in O&M expense.

Future commitments under operating leases as of Sept. 30, 2019:

(Millions of Dollars)	PPA (a) (b) Operating Leases			Other Operating Leases			Total Operating Leases
2019	$	11.6		$	0.8		$	12.4
2020	46.2			3.4			49.6
2021	46.2			3.3			49.5
2022	46.2			3.4			49.6
2023	46.2			3.4			49.6
Thereafter	450.8			54.8			505.6
Total minimum obligation	647.2			69.1			716.3
Interest component of obligation	(165.3		)	(22.0		)	(187.3		)
Present value of minimum obligation	481.9			47.1			529.0
Less current portion							(26.8		)
Noncurrent operating lease liabilities							$	502.2
Weighted-average remaining lease term in years							14.3

^(a)  Amounts do not include PPAs accounted for as executory contracts and/or contingent payments, such as energy payments on renewable PPAs.

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

Future commitments under operating leases as of Dec. 31, 2018:

(Millions of Dollars)	PPA (a) (b) Operating Leases		Other Operating Leases		Total Operating Leases
2019	$	46.7	$	5.2	$	51.9
2020	46.2		5.2		51.4
2021	46.2		5.1		51.3
2022	46.2		5.1		51.3
2023	46.2		5.1		51.3
Thereafter	450.8		56.3		507.1

^(a)  Amounts do not include PPAs accounted for as executory contracts and/or contingent payments, such as energy payments on renewable PPAs.

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

Variable Interest Entities

Under certain PPAs, SPS purchases power from IPPs and is required to reimburse the IPPs for 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 IPP.

SPS had approximately 1,197 MW of capacity under long-term PPAs as of Sept. 30, 2019 and Dec. 31, 2018, with entities that have been determined to be VIEs. SPS 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 significantly impact the entities’ economic performance. These agreements have expiration dates through 2041.

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).

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Non-GAAP Financial Measures

The following discussion includes financial information prepared in accordance with GAAP, as well as certain non-GAAP financial measures such as, electric margin and ongoing earnings. Generally, a non-GAAP financial measure is a measure of a company’s financial performance, financial position or cash flows that excludes (or includes) amounts that are adjusted from measures calculated and presented in accordance with GAAP. SPS’s management uses non-GAAP measures for financial planning and analysis, for reporting of results to the Board of Directors, in determining performance-based compensation, and communicating its earnings outlook to analysts and investors. Non-GAAP financial measures are intended to supplement investors’ understanding of our performance and should not be considered alternatives for financial measures presented in accordance with GAAP. These measures are discussed in more detail below and may not be comparable to other companies’ similarly titled non-GAAP financial measures.

Electric Margins

Electric margin is presented as electric revenues less electric fuel and purchased power expenses. Expenses incurred for electric fuel and purchased power are generally recovered through various regulatory recovery mechanisms. As a result, changes in these expenses are generally offset in operating revenues. Management believes electric margins provide the most meaningful basis for evaluating our operations because they exclude the revenue impact of fluctuations in these expenses. These margins can be reconciled to operating income, a GAAP measure, by including other operating revenues, O&M expenses, DSM expenses, depreciation and amortization and taxes (other than income taxes).

Earnings Adjusted for Certain Items (Ongoing Earnings)

Ongoing earnings reflect adjustments to GAAP earnings (net income) for certain items. Management uses these non-GAAP financial measures to evaluate and provide details of SPS’ core earnings and underlying performance.

For the three and nine months ended Sept. 30, 2019 and 2018, there were no such adjustments to GAAP earnings and therefore GAAP earnings equal ongoing earnings for these periods.

Results of Operations

SPS’ net income was approximately $218.0 million for the nine months ended Sept. 30, 2019 compared with approximately $173.1 million for the prior year. The increase reflects higher electric margin attributable to regulatory rate outcomes and sales growth despite unfavorable weather. Higher electric margin and AFUDC associated with the Hale Wind farm were partially offset by increased depreciation, O&M and interest expenses.

Electric Margin

Electric revenues and fuel and purchased power expenses tend to vary with changing retail and wholesale sales requirements and unit cost changes in fuel and purchased power.

Changes in fuel or purchased power costs can impact earnings as the fuel and purchased power cost recovery mechanisms of the Texas and New Mexico jurisdictions may not allow for complete recovery of all expenses.

Electric revenues and margin:

	Nine Months Ended Sept. 30
(Millions of Dollars)	2019			2018
Electric revenues	$	1,397.7		$	1,468.6
Electric fuel and purchased power	(651.0		)	(795.6		)
Electric margin	$	746.7		$	673.0

Changes in electric margin:

(Millions of Dollars)	2019 vs 2018
Purchased capacity costs	$	31.9
Regulatory rate outcomes	23.7
Demand revenue	19.2
Wholesale transmission, net	14.5
Non-fuel riders	9.8
Retail sales growth	3.4
Firm wholesale	(16.9		)
PTC sharing	(4.4		)
Estimated weather impact	(4.2		)
Other, net	(3.3		)
Total increase in electric margin	$	73.7

Non-Fuel Operating Expense and Other Items

O&M Expenses — O&M expenses increased $12.9 million, or 6.3%, for the nine months ended Sept. 30, 2019 compared with the prior year. The increase was primarily driven by plant generation, distribution and business system expenses. Plant generation expenses increased due to timing of planned maintenance and overhauls. Distribution expenses increased as a result of additional pole inspections. Business system costs increased due to additional consulting fees.

Depreciation and Amortization — Depreciation and amortization increased $22.1 million, or 14.7%, for the nine months ended Sept. 30, 2019 compared with the prior year. The increase was primarily due to increased capital investments as well as accelerated depreciation at Tolk generating facility for the Texas jurisdiction.

AFUDC, Equity and Debt — AFUDC increased $15.3 million, for the nine months ended Sept. 30, 2019 compared with the prior year. The increase was primarily due to an increase in wind construction projects, primarily the Hale Wind farm.

Interest Charges — Interest charges increased $14.2 million, or 23.0%, for the nine months ended Sept. 30, 2019 compared with the prior year. The increase was related to higher debt levels to fund capital investments, changes in short-term interest rates and implementation of lease accounting standard (offset in electric margin).

Income Taxes — Income tax expense decreased $2.8 million for the nine months ended Sept. 30, 2019 compared with the prior year. The decrease was primarily driven by an increase in wind PTCs and an increase in plant-related regulatory differences. This was partially offset by higher pretax earnings. Wind PTCs are credited to customers (recorded as a reduction to revenue) and do not have a material impact on net income. ETR was 13.0%, for the nine months ended Sept. 30, 2019 compared with 17.0% for the prior year, largely due to the items referenced above. See Note 6 to the financial statements.

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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, 2018 and in Item 2 of SPS’ Quarterly Report on Form 10-Q for the quarterly periods ended March 31, 2019 and June 30, 2019, appropriately represent, in all material respects, the current status of public utility regulation and are incorporated herein by reference.

FERC and State Regulation — 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 NERC mandatory electric reliability standards. State and local agencies have jurisdiction over many of SPS’ activities, including regulation of retail rates and environmental matters.

Xcel Energy, which includes SPS, attempts to mitigate the risk of regulatory penalties through formal training on prohibited practices and a compliance function that reviews interaction with the markets under FERC and Commodity Futures Trading Commission jurisdictions.

Public campaigns are conducted to raise awareness of public safety issues of interacting with our electric systems.

While programs to comply with regulatory requirements are in place, there is no guarantee compliance programs or other measures will be sufficient to ensure against violations. Decisions by these regulators can significantly impact SPS’ results of operations.

Pending Regulatory Proceedings

2019 Texas Rate Case — In August 2019, SPS filed an electric rate case with the PUCT seeking an increase in retail electric base rates of approximately $141 million. The filing requests an ROE of 10.35%, a 54.65% equity ratio, a rate base of approximately $2.6 billion and is built on a 12 month period that ended June 30, 2019. In September 2019, SPS filed an update to the electric rate case and revised its requested increase to approximately $136 million.

The following table summarizes SPS’ base rate increase request:

Revenue Request (Millions of Dollars)
Hale Wind Farm	$	62
Capital investments	47
Depreciation rate change (including Tolk)	34
Cost of capital	10
Expiring purchased power contracts	(28		)
Other, net	11
New revenue request	$	136

The procedural schedule is as follows:

• Intervenor testimony — Feb. 10, 2020

• Staff testimony — Feb. 18, 2020

• Rebuttal testimony — March 11, 2020

• Public hearing begins — March 30, 2020

• Final order deadline — Sept. 7, 2020

The final rates established at the end of the rate case are expected to be made effective relating back to Sept. 12, 2019. SPS expects a decision from the PUCT in the second quarter of 2020.

2019 New Mexico Rate Case — In July 2019, SPS filed an electric rate case with the NMPRC seeking an increase in retail electric base rates of approximately $51 million. The rate request is based on a ROE of 10.35%, a 54.77% equity ratio, a rate base of approximately $1.3 billion and a historic test year with rate base additions through Aug. 31, 2019. SPS anticipates final rates will go into effect in the second or third quarter of 2020.

SPS' proposed increase in base rates would be partially mitigated by savings to New Mexico customers achieved through fuel cost reductions and PTCs attributable to wind energy provided by the Hale Wind Farm. SPS’ $51 million requested increase in base rates would be offset by approximately $25 million of savings resulting in a net revenue increase of approximately $26 million, or 5.7%.

The following table summarizes SPS’ base rate increase request:

Revenue Request (Millions of Dollars)
Hale Wind Farm	$	28
Other plant investment	22
Wholesale sales reduction	17
Allocator changes due to load growth	15
Depreciation rate change (including Tolk)	15
Base rate sales growth	(41		)
Other, net	(5		)
New revenue request	$	51

The procedural schedule is as follows:

• Filing of stipulation, if any — Nov. 15, 2019

• Staff and intervenor testimony or testimony in support of a stipulation — Nov. 22, 2019

• Testimony in opposition to a stipulation, if any — Dec. 6, 2019

• Rebuttal testimony — Dec. 20, 2019

• Public hearing begins — Jan. 7, 2020

• End of 9-month suspension — April 30, 2020

Wind Development — In 2018, the NMPRC and PUCT approved SPS’ proposal to add 1,230 MW of new wind generation, including construction and ownership of the 478 MW Hale and 522 MW Sagamore wind farms. The Hale wind farm was placed into commercial operation in June 2019. Sagamore is expected to go into service in 2020 and cost approximately $900 million.

Texas State Right of First Refusal (ROFR) Litigation — In May 2019, the Governor signed into law Senate Bill 1938, which grants incumbent utilities a ROFR to build transmission infrastructure when it directly interconnects to the utility’s existing facility. In June 2019, a complaint was filed in the United States District Court for the Western District of Texas claiming the new ROFR law to be unconstitutional.

Texas Fuel Reconciliation — In December 2018, SPS filed an application with the PUCT for reconciliation of fuel costs for the period Jan. 1, 2016, through June 30, 2018, to determine whether all fuel costs incurred were eligible for recovery. On Oct. 17, 2019, the assigned Administrative Law Judges (ALJs) issued a Proposal for Decision recommending the PUCT disallow approximately $3 million of costs related to the reconciliation period, based on the ALJs’ determination that entering into two specific solar PPAs was imprudent. The related solar facilities are located in New Mexico and were previously approved by the NMPRC as reasonable, necessary and economic. SPS plans to file exceptions regarding the proposed disallowance and assert, among other points, that the ALJs erred in failing to account for the capacity value of the solar projects.

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New Mexico Fuel Continuation — In October 2019, SPS filed an application to the NMPRC to approve SPS’ continued use of its FPPCAC and for reconciliation of fuel costs for the period Sept. 1, 2015, through June 30, 2019, which will determine whether all fuel costs incurred are eligible for recovery. No procedural schedule has yet been established for this matter.

Environmental Matters

In June 2019, the EPA issued the final ACE rule to replace the Obama-era Clean Power Plan. The final ACE rule may require implementation of heat rate improvement projects at some of our coal-fired power plants. It is not known what the costs associated with the final rule might be until state plans are developed to implement the final regulation. SPS believes the costs would be recoverable through rates based on prior state commission practice.

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 CEO and CFO, allowing timely decisions regarding required disclosure.  As of Sept. 30, 2019, 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

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

SPS is involved in various litigation matters 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 losses 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, would have a material effect on SPS’ financial statements. Unless otherwise required by GAAP, legal fees are expensed as incurred.

See Note 9 to the financial statements and Part I Item 2 for further information.

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, 2018, which is incorporated herein by reference. There have been no material changes from the risk factors previously disclosed in the Form 10-K.

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Item 6 — EXHIBITS

* Indicates incorporation by reference

+ Executive Compensation Arrangements and Benefit Plans Covering Executive Officers and Directors

Exhibit Number	Description	Report or Registration Statement	SEC File or Registration Number	Exhibit Reference
3.01*	Amended and Restated Articles of Incorporation dated Sept. 30, 1997	SPS Form 10-Q for the quarter ended Sept. 30, 2017	001-03789	3.01
3.02*	By-Laws of SPS as Amended and Restated on Jan. 25, 2019	SPS Form 10-K for the year ended Dec. 31, 2018	001-03789	3.02
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.
101.INS	XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	XBRL Schema
101.CAL	XBRL Calculation
101.DEF	XBRL Definition
101.LAB	XBRL Label
101.PRE	XBRL Presentation
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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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
Oct. 25, 2019	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)

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