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 June 30, 2021

or

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

For the transition period from    to

Commission File Number: 001-03789

Southwestern Public Service Company

(Exact name of registrant as specified in its charter)

New Mexico			75-0575400
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)
790 South Buchanan Street	Amarillo	Texas	79101
(Address of principal executive offices)			(Zip Code)

(303)	571-7511
(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

Title of each class	Trading Symbol(s)	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	Outstanding at July 29, 2021
Common Stock, $1.00 par value	100 shares

Southwestern Public Service Company meets the conditions set forth in General Instructions 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 1 —	Financial Statements (unaudited)	4
	Statements of Income	4
	Statements of Cash Flows	5
	Balance Sheets	6
	Statements of Common Stockholder’s Equity	7
	Notes to Financial Statements	8
Item 2 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 4 —	Controls and Procedures	16
PART II	OTHER INFORMATION
Item 1 —	Legal Proceedings	16
Item 1A —	Risk Factors	16
Item 6 —	Exhibits	17
SIGNATURES		18

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 Securities and Exchange Commission. This report should be read in its entirety.

Definitions of Abbreviations

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	United States Environmental Protection Agency
FERC	Federal Energy Regulatory Commission
IRS	Internal Revenue Service
NMPRC	New Mexico Public Regulation Commission
PUCT	Public Utility Commission of Texas
SEC	Securities and Exchange Commission
Electric, Purchased Gas and Resource Adjustment Clauses
DSM	Demand side management
Other
ASC	FASB Accounting Standards Codification
C&I	Commercial and Industrial
CEO	Chief executive officer
CFO	Chief financial officer
COVID-19	Novel coronavirus
ETR	Effective tax rate
FASB	Financial Accounting Standards Board
FTR	Financial transmission right
GAAP	United States generally accepted accounting principles
IPP	Independent power producing entity
IRP	Integrated Resource Plan
LP&L	Lubbock Power and Light
LLC	Limited liability company
NOL	Net operating loss
NOPR	Notice of Proposed Rulemaking
O&M	Operating and maintenance
OATT	Open access transmission tariff
PFAS	Per- and PolyFluoroAlkyl Substances
PPA	Power purchase agreement
PTC	Production tax credit
ROE	Return on equity
RTO	Regional Transmission Organization
SPP	Southwest Power Pool, Inc.
VIE	Variable interest entity
Measurements
MW	Megawatts

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, including those relating to future sales, future expenses, future operating performance, estimated base capital expenditures and financing plans, projected capital additions and forecasted annual revenue requirements with respect to rider filings, expected rate increases to customers, expectations and intentions regarding regulatory proceedings, and expected impacts on our results of operations, financial condition and cash flows or resettlement calculations and credit losses relating to certain energy transactions, as well as assumptions and other statements are intended to be 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 filings with the SEC (including SPS’ Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2020, and subsequent filings), could cause actual results to differ materially from management expectations as suggested by such forward-looking information: uncertainty around the impacts and duration of the COVID-19 pandemic; operational safety; successful long-term operational planning; commodity risks associated with energy markets and production; rising energy prices and fuel costs; qualified employee work force and third-party contractor factors; ability to recover costs; changes in regulation; reductions in our credit ratings and the cost 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; effects of geopolitical events, including war and acts of terrorism; cyber security threats and data security breaches; seasonal weather patterns; 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; and costs of potential regulatory penalties.

PART I — FINANCIAL INFORMATION

ITEM 1 — FINANCIAL STATEMENTS

SOUTHWESTERN PUBLIC SERVICE COMPANY

STATEMENTS OF INCOME (UNAUDITED)

(amounts in millions)

	Three Months Ended June 30				Six Months Ended June 30
	2021		2020		2021		2020
Operating revenues	$	498	$	423	$	1,432	$	818
Operating expenses
Electric fuel and purchased power	252		199		945		386
Operating and maintenance expenses	71		58		142		128
Demand side management expenses	4		4		8		8
Depreciation and amortization	78		64		156		123
Taxes (other than income taxes)	18		18		39		40
Total operating expenses	423		343		1,290		685
Operating income	75		80		142		133
Other income (expense), net	—		—		1		(2)
Allowance for funds used during construction — equity	1		8		2		14
Interest charges and financing costs
Interest charges — includes other financing costs of $1 , $1, $2 and $2, respectively	29		25		59		50
Allowance for funds used during construction — debt	(1)		(3)		(1)		(6)
Total interest charges and financing costs	28		22		58		44
Income before income taxes	48		66		87		101
Income tax benefit	(20)		(6)		(39)		(13)
Net income	$	68	$	72	$	126	$	114
See Notes to Financial Statements

4

SOUTHWESTERN PUBLIC SERVICE COMPANY

STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in millions)

	Six Months Ended June 30
	2021		2020
Operating activities
Net income	$	126	$	114
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	158		124
Deferred income taxes	(39)		11
Allowance for equity funds used during construction	(2)		(14)
Provision for bad debts	3		3
Changes in operating assets and liabilities:
Accounts receivable	(28)		(6)
Accrued unbilled revenues	(20)		(4)
Inventories	(16)		(16)
Prepayments and other	21		(4)
Accounts payable	6		4
Net regulatory assets and liabilities	(96)		(32)
Other current liabilities	1		(8)
Pension and other employee benefit obligations	(16)		(15)
Other, net	(2)		3
Net cash provided by operating activities	96		160
Investing activities
Utility capital/construction expenditures	(334)		(520)
Investments in utility money pool arrangement	(83)		(4)
Repayments from utility money pool arrangement	83		4
Net cash used in investing activities	(334)		(520)
Financing activities
Repayments of short-term borrowings, net	(250)		—
Proceeds from issuance of long-term debt, net	247		343
Borrowings under utility money pool arrangement	324		711
Repayments under utility money pool arrangement	(261)		(711)
Capital contributions from parent	304		436
Dividends paid to parent	(130)		(129)
Net cash provided by financing activities	234		650
Net change in cash, cash equivalents and restricted cash	(4)		290
Cash, cash equivalents and restricted cash at beginning of period	6		16
Cash, cash equivalents and restricted cash at end of period	$	2	$	306
Supplemental disclosure of cash flow information:
Cash paid for interest (net of amounts capitalized)	$	(54)	$	(40)
Cash received for income taxes, net	17		5
Supplemental disclosure of non-cash investing and financing transactions:
Accrued property, plant and equipment additions	$	39	$	108
Inventory transfers to property, plant and equipment	6		14
Allowance for equity funds used during construction	2		14

See Notes to Financial Statements

5

SOUTHWESTERN PUBLIC SERVICE COMPANY

BALANCE SHEETS (UNAUDITED)

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

	June 30, 2021		Dec. 31, 2020
Assets
Current assets
Cash and cash equivalents	$	2	$	6
Accounts receivable, net	116		94
Accounts receivable from affiliates	11		9
Accrued unbilled revenues	135		114
Inventories	46		36
Regulatory assets	166		76
Derivative instruments	44		10
Prepaid taxes	7		18
Prepayments and other	10		20
Total current assets	537		383
Property, plant and equipment, net	7,756		7,603
Other assets
Regulatory assets	369		357
Derivative instruments	8		9
Operating lease right-of-use assets	478		492
Other	16		15
Total other assets	871		873
Total assets	$	9,164	$	8,859
Liabilities and Equity
Current liabilities
Short-term debt	$	—	$	250
Borrowings under utility money pool arrangement	63		—
Accounts payable	176		198
Accounts payable to affiliates	16		17
Regulatory liabilities	85		57
Taxes accrued	50		54
Accrued interest	31		29
Dividends payable to parent	55		54
Derivative instruments	4		4
Operating lease liabilities	29		28
Other	25		25
Total current liabilities	534		716
Deferred credits and other liabilities
Deferred income taxes	697		725
Regulatory liabilities	718		718
Asset retirement obligations	114		112
Derivative instruments	7		9
Pension and employee benefit obligations	27		42
Operating lease liabilities	449		463
Other	9		12
Total deferred credits and other liabilities	2,021		2,081
Commitments and contingencies
Capitalization
Long-term debt	3,012		2,764
Common stock — 200 shares authorized of $1.00 par value; 100 shares outstanding at June 30, 2021 and Dec. 31, 2020, respectively	—		—
Additional paid in capital	3,094		2,790
Retained earnings	504		509
Accumulated other comprehensive loss	(1)		(1)
Total common stockholder's equity	3,597		3,298
Total liabilities and equity	$	9,164	$	8,859

See Notes to Financial Statements

6

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 Stockholder's Equity
	Shares	Par Value		Additional Paid In Capital
Three Months Ended June 30, 2021 and 2020
Balance at March 31, 2020	100	$	—	$	2,383	$	502	$	(1)	$	2,884
Net income						72				72
Dividends declared to parent						(55)				(55)
Contributions of capital by parent				404						404
Balance at June 30, 2020	100	$	—	$	2,787	$	519	$	(1)	$	3,305
Balance at March 31, 2021	100	$	—	$	3,094	$	515	$	(1)	$	3,608
Net income						68				68
Dividends declared to parent						(79)				(79)
Balance at June 30, 2021	100	$	—	$	3,094	$	504	$	(1)	$	3,597
	Common Stock Issued					Retained Earnings		Accumulated Other Comprehensive Loss		Total Common Stockholder's Equity
	Shares	Par Value		Additional Paid In Capital
Six Months Ended June 30, 2021 and 2020
Balance at Dec. 31, 2019	100	$	—	$	2,351	$	535	$	(1)	$	2,885
Net income						114				114
Dividends declared to parent						(130)				(130)
Contributions of capital by parent				436						436
Balance at June 30, 2020	100	$	—	$	2,787	$	519	$	(1)	$	3,305
Balance at Dec. 31, 2020	100	$	—	$	2,790	$	509	$	(1)	$	3,298
Net income						126				126
Dividends declared to parent						(131)				(131)
Contributions of capital by parent				304						304
Balance at June 30, 2021	100	$	—	$	3,094	$	504	$	(1)	$	3,597
See Notes to Financial Statements

7

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 GAAP, the financial position of SPS as of June 30, 2021 and Dec. 31, 2020; the results of its operations, including the components of net income and changes in stockholder’s equity for the three and six months ended June 30, 2021 and 2020; and its cash flows for the six months ended June 30, 2021 and 2020.

All adjustments are of a normal, recurring nature, except as otherwise disclosed. Management has also evaluated the impact of events occurring after June 30, 2021 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, 2020 balance sheet information has been derived from the audited 2020 financial statements included in the SPS Annual Report on Form 10-K for the year ended Dec. 31, 2020.

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, 2020, filed with the SEC on Feb. 17, 2021. 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, 2020 appropriately represent, in all material respects, the current status of accounting policies and are incorporated herein by reference.

2. Accounting Pronouncements

Recently Adopted

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.

SPS implemented the guidance using a modified-retrospective approach, recognizing an immaterial cumulative effect charge (after tax) to retained earnings on Jan. 1, 2020. The Jan. 1, 2020 adoption of ASC Topic 326 did not have a significant impact on SPS’ financial statements.

3. Selected Balance Sheet Data

(Millions of Dollars)	June 30, 2021		Dec. 31, 2020
Accounts receivable, net
Accounts receivable	$	126	$	102
Less allowance for bad debts	(10)		(8)
Accounts receivable, net	$	116	$	94

(Millions of Dollars)	June 30, 2021		Dec. 31, 2020
Inventories
Materials and supplies	$	28	$	27
Fuel	18		9
Total inventories	$	46	$	36

(Millions of Dollars)	June 30, 2021		Dec. 31, 2020
Property, plant and equipment, net
Electric plant	$	9,418	$	9,229
Plant to be retired (a)	308		316
CWIP	231		146
Total property, plant and equipment	9,957		9,691
Less accumulated depreciation	(2,201)		(2,088)
Property, plant and equipment, net	$	7,756	$	7,603

(a)Includes expected retirement of Tolk and conversion of Harrington to natural gas.

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.

Money pool borrowings for SPS:

(Amounts in Millions, Except Interest Rates)	Three Months Ended June 30, 2021			Year Ended Dec. 31, 2020
Borrowing limit	$	100		$	100
Amount outstanding at period end	63			—
Average amount outstanding	6			43
Maximum amount outstanding	94			100
Weighted average interest rate, computed on a daily basis	0.02		%	0.54		%
Weighted average interest rate at period end	0.02			N/A

Commercial Paper — Commercial paper outstanding for SPS:

(Amounts in Millions, Except Interest Rates)	Three Months Ended June 30, 2021		Year Ended Dec. 31, 2020
Borrowing limit	$	500	$	500
Amount outstanding at period end	—		250
Average amount outstanding	—		44
Maximum amount outstanding	—		250
Weighted average interest rate, computed on a daily basis	N/A		1.11		%
Weighted average interest rate at period end	N/A		0.29

Letters of Credit — SPS uses letters of credit, generally with terms of one year, to provide financial guarantees for certain obligations. At both June 30, 2021 and Dec. 31, 2020, there were $2 million of letters of credit outstanding under the credit facility. Amounts approximate their fair value and are subject to fees.

8

Revolving Credit Facility — In order to issue its commercial paper, 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 exceeding available capacity under this credit facility. The credit facility provides short-term financing in the form of notes payable to banks, letters of credit and back-up support for commercial paper borrowings.

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 June 30, 2021, SPS had the following committed revolving credit facility available (in millions of dollars):

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

(a)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 June 30, 2021 and Dec. 31, 2020.

Long-Term Borrowings

During the six months ended June 30, 2021, SPS issued $250 million of 3.15% first mortgage bonds due 2050.

5. Revenues

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

	Three Months Ended June 30
(Millions of Dollars)	2021		2020
Major revenue types
Revenue from contracts with customers:
Residential	$	85	$	85
C&I	201		164
Other	10		8
Total retail	296		257
Wholesale	118		82
Transmission	72		76
Other	2		—
Total revenue from contracts with customers	488		415
Alternative revenue and other	10		8
Total revenues	$	498	$	423

	Six Months Ended June 30
(Millions of Dollars)	2021		2020
Major revenue types
Revenue from contracts with customers:
Residential	$	176	$	158
C&I	389		333
Other	19		16
Total retail	584		507
Wholesale	676		155
Transmission	143		139
Other	5		1
Total revenue from contracts with customers	1,408		802
Alternative revenue and other	24		16
Total revenues	$	1,432	$	818

6. Income Taxes

Note 7 to the financial statements included in SPS’ Annual Report on Form 10-K for the year ended Dec. 31, 2020 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.

Difference between the statutory rate and ETR:

	Six Months Ended June 30
	2021		2020 (a)
Federal statutory rate	21.0	%	21.0	%
State tax (net of federal tax effect)	2.6		2.3
Decreases in tax from:
Wind PTCs	(61.6)		(26.7)
Plant regulatory differences (b)	(5.0)		(6.4)
Amortization of excess nonplant deferred taxes	(1.2)		(0.9)
Other (net)	(0.6)		(2.2)
Effective income tax rate	(44.8)	%	(12.9)	%

(a)Prior periods have been restated to conform to current year presentation.

(b)Regulatory differences for income tax primarily relate to the credit of excess deferred taxes to customers through the average rate assumption method. 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 consolidated federal income tax returns expire as follows:

Tax Years	Expiration
2014 — 2016	January 2022
2017	September 2021

Additionally, the statute of limitations related to a federal tax loss carryback claim filed in 2020 has been extended. 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.

State Audits — SPS is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of June 30, 2021, SPS’ earliest open tax year subject to examination by state taxing authorities under applicable statutes of limitations is 2012. In April 2021, Texas began an audit of tax years 2016 - 2019. No material adjustments have been proposed.

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

Unrecognized tax benefits — permanent vs temporary:

(Millions of Dollars)	June 30, 2021		Dec. 31, 2020
Unrecognized tax benefit — Permanent tax positions	$	3	$	3
Unrecognized tax benefit — Temporary tax positions	4		4
Total unrecognized tax benefit	$	7	$	7

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

(Millions of Dollars)	June 30, 2021		Dec. 31, 2020
NOL and tax credit carryforwards	$	(7)	$	(6)

9

As the IRS audit resumes and state audit progresses, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $5 million in the next 12 months.

Payable for interest related to unrecognized tax benefits is partially offset by the interest benefit associated with NOL and tax credit carryforwards.

Interest payable related to unrecognized tax benefits:

(Millions of Dollars)	June 30, 2021		Dec. 31, 2020
(Payable) receivable for interest related to unrecognized tax benefits at beginning of period	$	(1)	$	1
Interest expense related to unrecognized tax benefits	—		(2)
Payable for interest related to unrecognized tax benefits at end of period	$	(1)	$	(1)

No amounts were accrued for penalties related to unrecognized tax benefits as of June 30, 2021 or Dec. 31, 2020.

7. Fair Value of Financial Assets and Liabilities

Fair Value Measurements

Accounting guidance for fair value measurements and disclosures provides a single definition of fair value and requires disclosures about assets and liabilities measured at fair value. A hierarchical framework for disclosing the observability of the inputs utilized in measuring assets and liabilities at fair value is established by this guidance.

•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 net asset value.

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

Commodity derivatives — The methods used to measure the fair value of commodity derivative forwards and options utilize forward prices and volatilities, as well as pricing adjustments for specific delivery locations and are generally assigned a Level 2 classification. When contractual settlements relate to inactive delivery locations 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.

Electric commodity derivatives held by SPS include transmission congestion instruments, generally referred to as FTRs, purchased from SPP. FTRs purchased from a 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 certain 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 most 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 immaterial 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 interest payments on certain floating rate debt obligations or effectively fix the yield or price on a specified benchmark interest rate for an anticipated debt issuance for a specific period. These derivative instruments are generally designated as cash flow hedges for accounting purposes. As of June 30, 2021, accumulated other comprehensive loss related to interest rate derivatives included immaterial 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. Sharing of any margins is determined through state regulatory proceedings as well as the operation of the FERC approved joint operating agreement.

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)	June 30, 2021	Dec. 31, 2020
Megawatt hours of electricity	18	5

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

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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 on 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 June 30, 2021, two of the eight most significant counterparties for these activities, comprising $13 million, or 36%, of this credit exposure, had investment grade credit ratings from S&P Global Ratings, Moody’s Investor Services or Fitch Ratings. Five of the eight most significant counterparties, comprising $24 million, or 64%, of this credit exposure, were not rated by external ratings agencies, but based on SPS’ internal analysis, had credit quality consistent with investment grade. One of these significant counterparties, comprising an immaterial amount of this credit exposure, had credit quality less than investment grade, based on internal analysis. Eight of these significant counterparties are municipal or cooperative electric entities, RTOs or other utilities.

Impact of Derivative Activities on Income and Accumulated Other Comprehensive Loss — There were no gains or immaterial losses related to interest rate derivatives reclassified from accumulated other comprehensive loss into earnings for the three and six months ended June 30, 2021 and 2020, respectively.

Changes in the fair value of FTRs resulting in pre-tax net gains of $8 million and $10 million recognized for the three and six months ended June 30, 2021, respectively, which were reclassified as regulatory assets or liabilities. There were $3 million of pre-tax net losses recognized for the three and six months ended June 30, 2020, respectively, which were reclassified as a regulatory assets or 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 losses of $4 million and gains of $11 million were recognized for the three and six months ended June 30, 2021, respectively, and were recorded to electric fuel and purchased power. Settlement gains of $2 million and $5 million were recognized for the three and six months ended June 30, 2020, respectively and were recorded to electric fuel and purchases power. These derivative settlement gains and losses are shared with electric customers through fuel and purchased energy cost-recovery mechanisms, and reclassified out of income as regulatory assets or liabilities, as appropriate.

SPS had no derivative instruments designated as fair value hedges during the three and six months ended June 30, 2021 and 2020.

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

	June 30, 2021												Dec. 31, 2020
	Fair Value						Fair Value Total		Netting (a)		Total		Fair Value						Fair Value Total		Netting (a)		Total
(Millions of Dollars)	Level 1		Level 2		Level 3								Level 1		Level 2		Level 3
Current derivative assets
Other derivative instruments:
Electric commodity	$	—	$	—	$	41	$	41	$	—	$	41	$	—	$	—	$	7	$	7	$	—	$	7
Total current derivative assets	$	—	$	—	$	41	$	41	$	—	41		$	—	$	—	$	7	$	7	$	—	7
PPAs (b)											3												3
Current derivative instruments											$	44											$	10
Noncurrent derivative assets
PPAs (b)											8												9
Noncurrent derivative instruments											$	8											$	9

	June 30, 2021							Dec. 31, 2020
	Fair Value			Fair Value Total	Netting (a)	Total		Fair Value			Fair Value Total	Netting (a)	Total
(Millions of Dollars)	Level 1	Level 2	Level 3					Level 1	Level 2	Level 3
Current derivative liabilities
Other derivative instruments:
PPAs (b)						$	4						$	4
Current derivative instruments						$	4						$	4
Noncurrent derivative liabilities
PPAs (b)						$	7						$	9
Noncurrent derivative instruments						$	7						$	9

(a)SPS nets derivative instruments and related collateral on its balance sheets when supported by a legally enforceable master netting agreement, and all derivative instruments and related collateral amounts were subject to master netting agreements at June 30, 2021 and Dec. 31, 2020. At June 30, 2021 and Dec. 31, 2020, 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.

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Changes in Level 3 commodity derivatives for the three and six months ended June 30, 2021 and 2020:

	Three Months Ended June 30
(Millions of Dollars)	2021		2020
Balance at April 1	$	12	$	16
Purchases	9		9
Settlements	(12)		(12)
Net transactions recorded during the period:
Net gains recognized as regulatory assets and liabilities	32		3
Balance at June 30	$	41	$	16
	Six Months Ended June 30
(Millions of Dollars)	2021		2020
Balance at Jan. 1	$	7	$	12
Purchases	9		21
Settlements	(21)		(17)
Net transactions recorded during the period:
Net gains recognized as regulatory assets and liabilities	46		—
Balance at June 30	$	41	$	16

SPS recognizes transfers between levels as of the beginning of each period. There were no transfers of amounts between levels for derivative instruments for the three and six months ended June 30, 2021 and 2020.

Fair Value of Long-Term Debt

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

	June 30, 2021				Dec. 31, 2020
(Millions of Dollars)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt	$	3,012	$	3,482	$	2,764	$	3,381

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 June 30, 2021 and Dec. 31, 2020 and given the observability of the inputs, fair values presented for long-term debt were assigned as Level 2.

8. Benefit Plans and Other Postretirement Benefits

Components of Net Periodic Benefit Cost (Credit)

	Three Months Ended June 30
	2021		2020		2021		2020
(Millions of Dollars)	Pension Benefits				Postretirement Health Care Benefits
Service cost	$	3	$	2	$	—	$	—
Interest cost (a)	4		5		—		—
Expected return on plan assets (a)	(8)		(7)		(1)		—
Amortization of net loss (a)	3		3		—		—
Net periodic benefit cost (credit)	$	2	$	3	$	(1)	$	—
Effects of regulation	1		—		—		—
Net benefit cost (credit) recognized for financial reporting	$	3	$	3	$	(1)	$	—

	Six Months Ended June 30
	2021		2020		2021		2020
(Millions of Dollars)	Pension Benefits				Postretirement Health Care Benefits
Service cost	$	5	$	5	$	—	$	—
Interest cost (a)	8		9		—		1
Expected return on plan assets (a)	(15)		(15)		(1)		(1)
Amortization of net loss (a)	7		7		—		—
Net periodic benefit cost (credit)	$	5	$	6	$	(1)	$	—
Effects of regulation	1		1		—		—
Net benefit cost (credit) recognized for financial reporting	$	6	$	7	$	(1)	$	—

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

In January 2021, contributions of $125 million were made across four of Xcel Energy’s pension plans, of which $14 million was attributable to SPS. Xcel Energy does not expect additional pension contributions during 2021.

9. Commitments and Contingencies

The following includes 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. Legal fees are generally expensed as incurred.

SPP OATT Upgrade Costs — Costs of transmission upgrades may be recovered from other SPP customers whose transmission service depends on capacity enabled by the upgrade under the SPP OATT. 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 previously unbilled charges was remanded to the FERC. In February 2019, the FERC reversed its 2016 decision and ordered SPP to refund charges retroactively collected from its transmission customers, including SPS, related to periods before September 2015.

In March 2020, SPP and Oklahoma Gas & Electric separately filed petitions for review of the FERC’s orders at the D.C. Circuit. SPS has intervened in both appeals in support of the FERC. Any refunds received by SPS are expected to be given back to SPS customers through future rates.

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In October 2017, SPS filed a separate related complaint asserting SPP assessed upgrade charges to SPS in violation of the SPP OATT. In March 2018, the FERC issued an order denying the SPS complaint. SPS filed a request for rehearing in April 2018. The FERC issued a tolling order granting a rehearing for further consideration in May 2018. If SPS’ complaint results in additional charges or refunds, SPS will seek to recover or refund the amount through future SPS customer rates. In October 2020, SPS filed a petition for review of the FERC’s March 2018 order and May 2018 tolling order at the D.C. Circuit. This appeal is stayed pending the outcome of the separate appeal initiated in 2020 by Oklahoma Gas & Electric and SPP.

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 annual transmission revenue requirement of $10 million per year, with $6 million allocated to SPS’ retail customers. The remaining $4 million would be paid by other wholesale loads in the SPS rate zone. On March 16, 2020, GridLiance also filed additional rate increases for 2020 which would raise their annual revenue requirement to $14 million, with approximately $9 million allocated to SPS’ retail customers.

In August 2020, FERC issued an order on a question certified by the hearing judge for the FERC’s review, in which FERC made certain findings in SPS’ favor regarding the legal standard that applies to the ongoing hearing proceeding. In November 2020, FERC denied GridLiance’s request for rehearing of the August 2020 order. In December 2020, GridLiance filed a petition for review at the D.C. Circuit of the August 2020 and November 2020 orders on the certified question.

The hearing portion of this proceeding was concluded in September 2020. The initial post-hearing brief was filed in October 2020. On June 3, 2021, the Administrative Law Judge issued a recommended decision, subject to FERC approval, that supports that the GridLiance facilities are transmission facilities and eligible for rate recovery under the SPP OATT. The FERC will then rule on the judge’s decision and either sustain it, overturn it, or order further proceedings. SPS has incurred approximately $19 million in associated charges as of June 30, 2021.

Contract Termination — SPS and LP&L have a 25-year, 170 MW partial requirements contract. In May 2021, SPS and LP&L finalized a settlement which would terminate the contract upon LP&L’s move from the SPP to the ERCOT (expected in 2023) or, absent a move by LP&L to ERCOT, upon LP&L’s election. The settlement agreement requires LP&L to pay SPS $78 million (lump sum or annual installments), to the benefit of SPS’ remaining customers. LP&L would remain obligated to pay for SPP transmission charges associated with LP&L’s load in SPP. The settlement agreement is subject to approval by the PUCT and FERC.

FERC NOPR on ROE Incentive Adders — In April 2021, the FERC issued a NOPR proposing to limit collection of ROE incentive adders for RTO membership to the first three years after an entity begins participation in an RTO. If adopted as a final rule, following a comment period expected to be complete by the end of 2021 or 2022, SPS would prospectively discontinue charging their current 0.5% ROE incentive adders. Amounts related to a discontinuance of the adder would ultimately be offset by an increase in retail rates, following future rate cases.

Environmental

Manufactured Gas Plant, Landfill and Disposal Sites — SPS is remediating a former disposal site. 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 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. A contract contains a lease if it conveys the exclusive right to control the use of a specific asset.

Components of lease expense:

	Three Months Ended June 30
(Millions of Dollars)	2021		2020
Operating leases
PPA capacity payments	$	13	$	12
Other operating leases (a)	1		1
Total operating lease expense (b)	$	14	$	13

(a)Includes immaterial short-term lease expense for 2021 and 2020.

(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 and electric fuel and purchased power.

	Six Months Ended June 30
(Millions of Dollars)	2021		2020
Operating leases
PPA capacity payments	$	26	$	23
Other operating leases (a)	2		2
Total operating lease expense (b)	$	28	$	25

(a)Includes short-term lease expense of $1 million for 2021 and 2020, respectively.

(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 and electric fuel and purchased power.

Commitments under operating leases as of June 30, 2021:

(Millions of Dollars)	PPA Operating Leases		Other Operating Leases		Total Operating Leases
Total minimum obligation	$	567	$	57	$	624
Interest component of obligation	(130)		(16)		(146)
Present value of minimum obligation	$	437	$	41	478
Less current portion					(29)
Noncurrent operating and finance lease liabilities					$	449

VIEs

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

SPS had approximately 1,197 MW of capacity under long-term PPAs at both June 30, 2021 and Dec. 31, 2020 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 most significantly impact the entities’ economic performance. The PPAs have expiration dates through 2041.

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

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

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’ 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 Margin

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).

Results of Operations

SPS’ net income was approximately $126 million for the six months ended June 30, 2021 compared with approximately $114 million for the prior year, reflecting higher electric margin (capital investment recovery and regulatory outcomes), partially offset by increased depreciation and O&M 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:

	Six Months Ended June 30
(Millions of Dollars)	2021		2020
Electric revenues (a)	$	1,432	$	818
Electric fuel and purchased power (a)	(945)		(386)
Electric margin	$	487	$	432

(a)The increase in revenue and electric fuel and purchased power is primarily due to Winter Storm Uri, resulting in higher fuel prices, as well as additional long-term energy and SPP market purchases.

Changes in electric margin:

(Millions of Dollars)	Six Months Ended June 30, 2021 vs. 2020
Regulatory rate outcomes (Texas and New Mexico)	$	45
Sales and demand	10
Wholesale transmission revenue (net)	9
Proprietary commodity trading, net of sharing - Winter Storm Uri	4
PTCs flowed back to customers (offset by lower ETR)	(27)
Other (net)	14
Total increase in electric margin	$	55

Non-Fuel Operating Expense and Other Items

Depreciation and Amortization — Depreciation and amortization increased $33 million, or 26.8%, year-to-date. The increase was primarily due to the Sagamore wind farm being placed in service in December 2020, in addition to system expansion. The increase is also due to new FERC transmission rates applied in March 2020 and implementation of new depreciation rates in both New Mexico and Texas as part of regulatory outcomes in 2020.

O&M Expenses — O&M expenses increased $14 million, or 10.9%, year-to-date. The increase was primarily due to expenses related to new wind farms and software infrastructure & security costs, partially offset by continuous improvement initiatives. Timing impacts also occurred throughout 2020 due to cost control initiatives to mitigate the adverse impact of COVID-19 on sales.

AFUDC, Equity and Debt — AFUDC decreased $17 million for the first six months of 2021, primarily due to construction of the Sagamore wind farm and various transmission construction projects during 2020.

Income Taxes — Income tax benefit increased $26 million for the first six months of 2021. The increase was primarily driven by an increase in wind PTCs. Wind PTCs are largely credited to customers (recorded as a reduction to revenue) and do not have a material impact on net income.

See Note 6 to the financial statements for further information.

Other

Winter Storm Uri

In February 2021, the central portion of the United States experienced a major winter storm (Winter Storm Uri). Extreme cold temperatures impacted certain operational assets as well as the availability of renewable generation across the region. The cold weather also affected the country’s supply and demand for natural gas. These factors contributed to extremely high market prices for natural gas and electricity.

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As a result of the extremely high market prices, SPS incurred net natural gas, fuel and purchased energy costs of approximately $100 million (largely deferred as regulatory assets) in the first quarter. Certain energy transactions are subject to final/settlement calculation adjustments, including the impacts of credit losses shared among market participants.

Regulatory Overview — SPS has electric fuel and purchased energy mechanisms in each jurisdiction for recovering incurred costs. However, February cost increases were deferred for future recovery with recovery proposed over a period of up to two years to significantly mitigate the impact to customer bills.

The following proceedings have been initiated:

Jurisdiction	Regulatory Status
Texas	SPS filed for a surcharge in the second quarter to recover $62 million in fuel costs over 24 months, subject to revision due to re-settlements. Prudence of costs will be subject to review in SPS' upcoming fuel reconciliation case.
New Mexico	The NMPRC approved SPS' request to recover $26 million of fuel costs over 24 months with no financing charge, subject to revision due to re-settlements and NMPRC review.

Supply Chain and Capital Expenditures

SPS’ ability to meet customer energy requirements, respond to storm-related disruptions and execute our capital expenditure program are dependent on maintaining an efficient supply chain. Overall, as a result of COVID-19, manufacturing processes have experienced disruptions related to scarcity of raw materials and interruptions in production and shipping. These disruptions have been further exacerbated by inflationary pressures, storms and labor shortages. The Company continues to monitor the availability of materials and seek alternative suppliers as necessary.

Public Utility Regulation

The FERC and state and local regulatory commissions regulate SPS. SPS is subject to rate regulation by state utility regulatory agencies, which have jurisdiction with respect to the rates of electric distribution companies in New Mexico and Texas.

Rates are designed to recover plant investment, operating costs and an allowed return on investment. SPS requests changes in utility rates through commission filings. Changes in operating costs can affect SPS’ financial results, depending on the timing of rate case filings and implementation of final rates. Other factors affecting rate filings are new investments, sales, conservation and DSM efforts, and the cost of capital.

In addition, the regulatory commissions authorize the ROE, capital structure and depreciation rates in rate proceedings. Decisions by these regulators can significantly impact SPS’ results of operations.

Except to the extent noted below, the circumstances set forth in Public Utility Regulation included in Item 7 of SPS’ Annual Report on Form 10-K for the year ended Dec. 31, 2020 and in Item 2 of SPS’ Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021, appropriately represent, in all material respects, the current status of public utility regulation and are incorporated herein by reference.

Pending and Recently Concluded Regulatory Proceedings

Proceeding	Amount (in millions)	Filing Date	Approval
2021 New Mexico Electric Rate Case	$88	January 2021	Pending
2021 Texas Electric Rate Case	$143	February 2021	Pending

Additional Information:

2021 New Mexico Electric Rate Case — In January 2021, SPS filed an electric rate case with the NMPRC seeking an increase in base rates of approximately $88 million. SPS' net rate increase to New Mexico customers is expected to be approximately $48 million, or 10%, as a result of the offsetting fuel cost reductions and PTCs from the Sagamore wind project. PTCs are credited to customers through the fuel clause. In June 2021, SPS revised its requested base rate increase to $84 million.

The request was based on a historic test year ended Sept. 30, 2020, including expected capital additions through Feb. 28, 2021, a ROE of 10.35%, an equity ratio of 54.72% and a retail rate base of approximately $1.9 billion.

In June 2021, SPS and various parties filed an uncontested comprehensive stipulation, which includes:

•Base rate revenue increase of $62 million.

•ROE of 9.35% for purposes of filings related to (1) the Hale and Sagamore wind projects; and (2) reconciliation of the settlement revenue requirement.

•Equity ratio of 54.72%.

•Increase in depreciation expense of $6 million. This includes a change in the depreciable lives of the Tolk power plant to 2032 and coal handling assets at the Harrington facility to 2024.

A public hearing is scheduled for July 26 - Aug. 6, 2021. A NMPRC decision and implementation of final rates is anticipated in the fourth quarter of 2021.

2021 Texas Electric Rate Case — In February 2021, SPS filed an electric rate case with the PUCT and its municipalities seeking an increase in base rates of approximately $143 million. SPS' net rate increase to Texas customers is expected to be approximately $74 million, or 9.2%, as a result of the offsetting $69 million in fuel cost reductions and PTCs from the Sagamore wind project.

The request is based on a ROE of 10.35%, an equity ratio of 54.60%, a rate base of approximately $3.3 billion and a historic test year based on the 12-month period ended Dec. 31, 2020.

The request includes the effect of losing approximately 400 MW from a wholesale transmission customer and changes to depreciation lives of SPS’ Tolk power plant (from 2037 to 2032) and coal handling assets at the Harrington facility (to 2024).

Procedural schedule expected to be as follows:

•Intervenor testimony — Aug. 13, 2021.

•Staff testimony — Aug. 20, 2021.

•Rebuttal testimony — Sept. 15, 2021.

•Public hearing — Oct. 18 - Oct. 28, 2021.

The PUCT set current rates as temporary as of March 15, 2021. Once final rates are approved, a surcharge will be requested from March 15, 2021 through the effective date of new base rates. A PUCT decision is expected in the first quarter of 2022.

New Mexico Integrated Resource Plan — In July 2021, SPS filed an IRP with the NMPRC, as required every three years. SPS is forecasting sufficient resources through 2025. A projected capacity deficit was identified totaling approximately 174 MW in 2031, increasing to 4,194 MW by 2041.

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SPS has provided a number of alternatives, including a proposed portfolio of resources incorporating the addition of wind generation, solar generation, firm and dispatchable peaking generation, and purchased power agreements. SPS will continue to evaluate other options including energy storage and emerging technologies, taking into consideration cost-effectiveness. The IRP is subject to public comment and potential public hearings and will ultimately be reviewed by the NMPRC for approval.

Environmental

Affordable Clean Energy

In July 2019, the EPA adopted the Affordable Clean Energy rule, which requires states to develop plans by 2022 for greenhouse gas reductions from coal-fired power plants. In January 2021, the U.S. Court of Appeals for the D.C. Circuit issued a decision vacating and remanding the Affordable Clean Energy rule. That decision, if not successfully appealed or reconsidered, would allow the EPA to proceed with alternate regulation of coal-fired power plants. If the new rules require additional investment, SPS believes, based on prior state commission practices, that the cost of these initiatives or replacement generation would be recoverable through rates.

Emerging Regulation

New regulations and legislation are being considered to regulate PFAS in drinking water, water discharges, commercial products, wastes, and other areas. PFAS are man-made chemicals found in many consumer products that can persist and accumulate in the environment. These chemicals have received heightened attention by environmental regulators. Increased regulation of PFAS and other emerging contaminants at the federal, state, and local level could have a potential adverse effect on our operations but at this time, it is uncertain what impact, if any, there will be on our results of operations, financial condition or cash flows. SPS will continue to monitor these regulatory developments and their potential impact on its operations

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 June 30, 2021, 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 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. Legal fees are generally 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, 2020, 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

Exhibit Number	Description	Report or Registration Statement	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	3.01
3.02*	Amended and Restated Bylaws of SPS, dated Jan. 25, 2019	SPS Form 10-K for the year ended Dec. 31, 2018	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	Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS	Inline 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	Inline XBRL Schema
101.CAL	Inline XBRL Calculation
101.DEF	Inline XBRL Definition
101.LAB	Inline XBRL Label
101.PRE	Inline 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
July 29, 2021	By:	/s/ JEFFREY S. SAVAGE
		Jeffrey S. Savage
		Senior Vice President, Controller
		(Principal Accounting Officer)
		/s/ BRIAN J. VAN ABEL
		Brian J. Van Abel
		Executive Vice President, Chief Financial Officer and Director
		(Principal Financial Officer)

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