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						Quarter Ended
(Millions of Dollars)						March 31, 2021						June 30, 2021						Sept. 30, 2021						Dec. 31, 2021
Operating revenues						$	395					$	423					$	615					$	437
Operating income						53						80						163						63
Net income						43						72						127						53

						Quarter Ended
(Millions of Dollars)						March 31, 2020						June 30, 2020						Sept. 30, 2020						Dec. 31, 2020
Operating revenues						$	395					$	423					$	615					$	437
Operating income						53						80						163						63
Net income						43						72						127						53

						Quarter Ended
(Millions of Dollars)						March 31, 2021						June 30, 2021						Sept. 30, 2021						Dec. 31, 2021
Operating revenues						$	395					$	423					$	615					$	437
Operating income						53						80						163						63
Net income						43						72						127						53

						Quarter Ended
(Millions of Dollars)						March 31, 2020						June 30, 2020						Sept. 30, 2020						Dec. 31, 2020
Operating revenues						$	395					$	423					$	615					$	437
Operating income						53						80						163						63
Net income						43						72						127						53

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2021 or

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

For the transition period from _____ to _____

001-03789
(Commission File Number)

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)			(IRS 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)

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

Securities registered pursuant to Section 12(g) of the Act:  None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ☒ Yes ☐ No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  ☐ Yes ☒ No

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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  ☐ Yes   ☒ No

As of Feb. 23, 2022, 100 shares of common stock, par value $1.00 per share, were outstanding, all of which were held by Xcel Energy Inc., a Minnesota corporation.

DOCUMENTS INCORPORATED BY REFERENCE

The information required by Item 14 of Form 10-K is set forth under the heading “Independent Registered Public Accounting Firm – Audit and Non-Audit Fees” in Xcel Energy Inc.’s definitive Proxy Statement for the 2022 Annual Meeting of Shareholders which definitive Proxy Statement is expected to be filed with the SEC on or about April 5, 2022. Such information set forth under such heading is incorporated herein by this reference hereto.

Southwestern Public Service Company meets the conditions set forth in General Instructions I(1)(a) and (b) of Form 10-K and is therefore filing this form with the reduced disclosure format permitted by General Instruction I(2).

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TABLE OF CONTENTS

PART I
Item 1 —			Business			3
Item 1A —			Risk Factors			8
Item 1B —			Unresolved Staff Comments			14
Item 2 —			Properties			14
Item 3 —			Legal Proceedings			15
Item 4 —			Mine Safety Disclosures			15
PART II						15
Item 5 —			Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			15
Item 6 —			[Reserved]			15
Item 7 —			Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 7A —			Quantitative and Qualitative Disclosures About Market Risk			18
Item 8 —			Financial Statements and Supplementary Data			18
Item 9 —			Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			41
Item 9A —			Controls and Procedures			41
Item 9B —			Other Information			42
Item 9C —			Disclosure Regarding Foreign Jurisdictions that Prevent Inspections			42
PART III						42
Item 10 —			Directors, Executive Officers and Corporate Governance			42
Item 11 —			Executive Compensation			42
Item 12 —			Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			42
Item 13 —			Certain Relationships and Related Transactions, and Director Independence			42
Item 14 —			Principal Accountant Fees and Services			42
PART IV						42
Item 15 —			Exhibit and Financial Statement Schedules			42
Item 16 —			Form 10-K Summary			44
Signatures						45

This Form 10-K is filed by 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.

2

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Table of Contents

PART I

ITEM l — BUSINESS

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
EPA			United States Environmental Protection Agency
FERC			Federal Energy Regulatory Commission
IRS			Internal Revenue Service
NERC			North American Electric Reliability Corporation
NMPRC			New Mexico Public Regulation Commission
PHMSA			Pipeline and Hazardous Materials Safety Administration
PUCT			Public Utility Commission of Texas
SEC			Securities and Exchange Commission
TCEQ			Texas Commission on Environmental Quality

Other
AFUDC			Allowance for funds used during construction
ARO			Asset retirement obligation
ASC			FASB Accounting Standards Codification
BART			Best available retrofit technology
C&I			Commercial and Industrial
CEO			Chief executive officer
CFO			Chief financial officer
COVID-19			Novel coronavirus
CWA			Clean Water Act
CWIP			Construction work in progress
D.C. Circuit			United States Court of Appeals for the District of Columbia Circuit
DSM			Demand side management
ELG			Effluent limitations guidelines
ETR			Effective tax rate
FASB			Financial Accounting Standards Board
Fifth Circuit			United States Court of Appeals for the Fifth Circuit
FTR			Financial transmission right

GAAP			Generally accepted accounting principles
GHG			Greenhouse gas
IPP			Independent power producing entity
ISO			Independent System Operators
LP&L			Lubbock Power and Light
MGP			Manufactured gas plant
Moody’s			Moody’s Investor Services
NAAQS			National Ambient Air Quality Standard
Native load			Customer demand of retail and wholesale customers whereby a utility has an obligation to serve under statute or long-term contract
NAV			Net asset value
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			Purchased power agreement
PTC			Production tax credit
REC			Renewable energy credit
ROE			Return on equity
ROU			Right-of-use
RTO			Regional Transmission Organization
S&P			Standard & Poor’s Global Ratings
SERP			Supplemental executive retirement plan
SO2			Sulfur dioxide
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
KV			Kilovolts
KWh			Kilowatt hours
MMBtu			Million British thermal units
MW			Megawatts
MWh			Megawatt hours

3

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Table of Contents

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 tax rates, 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 impact on our results of operations, financial condition and cash flows of 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 Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2021 (including risk factors listed from time to time by SPS in reports filed with the SEC, including “Risk Factors” in Item 1A of this Annual Report on Form 10-K hereto), 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, including workforce impacts resulting from vaccination requirements, quarantine policies or government restrictions, and sales volatility; 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; violations of our Codes of Conduct; 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, supply chain constraints, and their impact on capital expenditures and/or 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; costs of potential regulatory penalties; and regulatory changes and/or limitations to the use of natural gas as an energy source.

Where to Find More Information

SPS is a wholly owned subsidiary of Xcel Energy Inc., and Xcel Energy’s website address is www.xcelenergy.com. Xcel Energy makes available, free of charge through its website, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after the reports are electronically filed with or furnished to the SEC. The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically at http://www.sec.gov. The information on Xcel Energy’s website is not a part of, or incorporated by reference in, this annual report on Form 10-K.

Company Overview

Electric customers

0.4 million

SPS was incorporated in 1921 under the laws of New Mexico. SPS conducts business in Texas and New Mexico and generates, purchases, transmits, distributes and sells electricity.

Total assets

$9.3 billion

Rate Base (estimated)

$6.4 billion

ROE (net income / average stockholder's equity)

9.22%

Electric generating capacity

5,249 MW

Electric transmission lines (conductor miles)

40,754 miles

Electric distribution lines (conductor miles)

22,651 miles

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Electric Operations

Electric operations consist of energy supply, generation, transmission and distribution activities. SPS had electric sales volume of 29,900 (millions of KWh), 0.4 million customers and electric revenues of $2,465 (millions of dollars) for 2021.

Retail Sales/Revenue Statistics (a)

						2021						2020
KWH sales per retail customer						51,872						51,694
Revenue per retail customer						$	3,469					$	2,925
Residential revenue per KWh						11.56		¢				9.77		¢
Large C&I revenue per KWh						4.53		¢				3.65		¢
Small C&I revenue per KWh						8.08		¢				6.99		¢
Total retail revenue per KWh						6.69		¢				5.66		¢

(a) See Note 6 to the financial statements for further information.

Owned and Purchased Energy Generation — 2021

Electric Energy Sources

Total electric energy generation by source (including energy market purchases) for the year ended Dec. 31, 2021:

*Distributed generation from the Solar*Rewards® program is not included (approximately 5 million KWh for 2021).

Carbon–Free

SPS’ carbon–free energy portfolio includes wind and solar power from both owned generating facilities and PPAs. Carbon–free percentages will vary year over year based on system additions, commodity costs, weather, system demand and transmission constraints.

See Item 2 — Properties for further information.

Carbon–free energy as a percentage of total energy for 2021:

Wind

Owned — Owned and operated wind farms with corresponding capacity:

2021												2020
Wind Farms						Capacity (a)						Wind Farms						Capacity (b)
2						984 MW						2						967 MW

(a)Summer 2021 net dependable capacity.

(b)Summer 2020 net dependable capacity.

PPAs — Number of PPAs with capacity range:

2021												2020
PPAs						Range						PPAs						Range
17						1 MW — 250 MW						18						1 MW — 250 MW

Capacity — Wind capacity:

2021						2020
2,548 MW						2,535 MW

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Average Cost (Owned) — Average cost per MWh of wind energy from owned generation:

2021						2020
$	17					$	17

Average Cost (PPAs) — Average cost per MWh of wind energy under existing PPAs:

2021						2020
$	27					$	26

Solar

Solar energy PPAs:

Type						Capacity (MW)
Distributed Generation						15
Utility-Scale						192
Total						207

Average Cost (PPAs) — Average cost per MWh of solar energy under existing PPAs:

2021						2020
$	61					$	59

Fossil Fuel

SPS’ fossil fuel energy portfolio includes coal and natural gas power from both owned generating facilities and PPAs.

See Item 2 — Properties for further information.

Coal

SPS owns and operates coal units with approximately 2,100 MW of total 2021 net summer dependable capacity.

Approved early coal plant retirements:

Year

Plant Unit

Capacity

2024

Harrington (a)

1,018 MW

(a)Reflects expected conversion from coal to natural gas following the TCEQ order that Harrington cease use of coal fuel by Jan. 1, 2025, pending PUCT and NMPRC review.

Proposed
Year						Plant Unit						Capacity (MW)
2034						Tolk 1						532
2034						Tolk 2						535

Coal Fuel Cost

Delivered cost per MMBtu of coal consumed for owned electric generation and the percentage of total fuel requirements:

						Coal
						Cost						Percent
2021						$	2.07					66		%
2020						2.28						40

Natural Gas

SPS has eight natural gas plants with approximately 2,200 MW of total 2021 net summer dependable capacity.

Natural gas supplies, transportation and storage services for power plants are procured to provide an adequate supply of fuel. Remaining requirements are procured through a liquid spot market. Generally, natural gas supply contracts have variable pricing that is tied to natural gas indices. Natural gas supply and transportation agreements include obligations for the purchase and/or delivery of specified volumes or payments in lieu of delivery.

Natural Gas Cost

Delivered cost per MMBtu of natural gas consumed for owned electric generation and the percentage of total fuel requirements:

						Natural Gas
						Cost						Percent
2021 (a)						$	6.72					34		%
2020						1.43						60

(a)Reflective of Winter Storm Uri.

Capacity and Demand

Uninterrupted system peak demand and occurrence date:

System Peak Demand (MW)
2021												2020
4,054						Aug. 9						4,195						July 14

Transmission

Transmission lines deliver electricity over long distances from power sources to transmission substations closer to customers. A strong transmission system ensures continued reliable and affordable service, ability to meet state and regional energy policy goals, and support for a diverse generation mix, including renewable energy. SPS owns more than 40,000 conductor miles of transmission lines across its service territory.

Transmission projects completed in 2021 include:

Project

Miles

Size

Roadrunner-China Draw

41

345 KV

Notable upcoming projects:

Project

Miles

Size (KV)

Completion Date

Tolk Plant Substation

Bus Reconfiguration

n/a

345, 230

2022

Twist to Wilco Line

4

115

2024

See Item 2 - Properties for further information.

Distribution

Distribution lines allow electricity to travel at lower voltages from substations directly to customers. SPS has a vast distribution network, owning and operating approximately 23,000 conductor miles of distribution lines across our service territory. To continue providing reliable, affordable electric service and enable more flexibility for customers, we are working to digitize the distribution grid, while at the same time keeping it secure.

See Item 2 - Properties for further information.

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Governmental Regulations

Public Utility Regulation

See Item 7 for discussion of public utility regulation.

Environmental Regulation

Our facilities are regulated by federal and state agencies that have jurisdiction over air emissions, water quality, wastewater discharges, solid and hazardous wastes or substances. Certain SPS activities require registrations, permits, licenses, inspections and approvals from these agencies. SPS has received necessary authorizations for the construction and continued operation of its generation, transmission and distribution systems. Our facilities strive to operate in compliance with applicable environmental standards and related monitoring and reporting requirements. However, it is not possible to determine what additional facilities or modifications of existing or planned facilities will be required as a result of changes to regulations, interpretations or enforcement policies or what effect future laws or regulations may have.

SPS must comply with emission levels that may require the purchase of emission allowances.

There are significant environmental regulations to encourage use of clean energy technologies and regulate emissions of GHGs. SPS has undertaken numerous initiatives to meet current requirements and prepare for potential future regulations, reduce GHG emissions and respond to state renewable and energy efficiency goals. Future environmental regulations may result in substantial costs.

In July 2019, the EPA adopted the Affordable Clean Energy rule, which requires states to develop plans by 2022 for GHG 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 would allow the EPA to proceed with alternate regulation of coal-fired power plants. However, the Court of Appeals decision is now before the U.S. Supreme Court, where the Court is expected to rule on the nature and extent of the EPA’s GHG regulatory authority. If any new rules require additional investment, SPS believes that the cost of these initiatives or replacement generation would be recoverable through rates based on prior state commission practices.

In October 2020, the TCEQ approved an agreement that SPS will convert the Harrington plant from coal to natural gas by Jan. 1, 2025. This conversion is necessary to attain Federal Clean Air Act standards for emissions of SO2.

SPS seeks to address climate change and potential climate change regulation through efforts to reduce its GHG emissions in a balanced, cost-effective manner.

Emerging Environmental 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 from 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 operations, financial condition or cash flows. SPS will continue to monitor these regulatory developments and their potential impact on its operations.

Other

Our operations are subject to workplace safety standards under the Federal Occupational Safety and Health Act of 1970 (“OSHA”) and comparable state laws that regulate the protection of worker health and safety. In addition, the Company is subject to other government regulations impacting such matters as labor, competition, data privacy, etc. Based on information to date and because our policies and business practices are designed to comply with all applicable laws, we do not believe the effects of compliance on our operations, financial condition or cash flows are material.

General

Seasonality

Demand for electric power is affected by seasonal differences in the weather. In general, peak sales of electricity occur in the summer months. As a result, the overall operating results may fluctuate substantially on a seasonal basis. Additionally, SPS’ operations have historically generated less revenues and income when weather conditions are milder in the winter and cooler in the summer.

Competition

SPS is subject to public policies that promote competition and development of energy markets. SPS’ industrial and large commercial customers have the ability to generate their own electricity. In addition, customers may have the option of substituting other fuels or relocating their facilities to a lower cost region.

Customers have the opportunity to supply their own power with distributed generation including solar generation and in most jurisdictions can currently avoid paying for most of the fixed production, transmission and distribution costs incurred to serve them.

Several states have incentives for the development of rooftop solar, community solar gardens and other distributed energy resources. Distributed generating resources are potential competitors to SPS’ electric service business with these incentives and federal tax subsidies.

The FERC has continued to promote competitive wholesale markets through open access transmission and other means. SPS’ wholesale customers can purchase their output from generation resources of competing suppliers or non-contracted quantities and use the transmission system of SPS on a comparable basis to serve their native load.

FERC Order No. 1000 established competition for ownership of certain new electric transmission facilities under Federal regulations. Some states have state laws that allow the incumbent a Right of First Refusal to own these transmission facilities.

FERC Order 2222 requires that RTO and ISO markets allow participation of aggregations of distributed energy resources. This order is expected to incentivize distributed energy resource adoption, however implementation is expected to vary by RTO/ISO and the near, medium, and long-term impacts of Order 2222 remain unclear.

SPS has franchise agreements with cities subject to periodic renewal; however, a city could seek alternative means to access electric power, such as municipalization. No municipalization activities are occurring presently.

While facing these challenges, SPS believes its rates and services are competitive with alternatives currently available.

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Employees

As of Dec. 31, 2021, SPS had 1,099 full-time employees and one part-time employee, of which 736 were covered under collective-bargaining agreements.

ITEM 1A — RISK FACTORS

Xcel Energy, which includes SPS, is subject to a variety of risks, many of which are beyond our control. Risks that may adversely affect the business, financial condition, results of operations or cash flows are described below. Although the risks are organized by heading, and each risk is described separately, many of the risks are interrelated. These risks should be carefully considered together with the other information set forth in this report and future reports that we file with the SEC. You should not interpret the disclosure of any risk factor to imply that the risk has not already materialized. While we believe we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, financial condition, results of operations or cash flows in the future.

Oversight of Risk and Related Processes

SPS’ Board of Directors is responsible for the oversight of material risk and maintaining an effective risk monitoring process. Management and the Board of Directors have responsibility for overseeing the identification and mitigation of key risks.

At a threshold level, SPS maintains a robust compliance program through promoting a culture of compliance beginning with the tone at the top. The risk mitigation process includes adherence to our code of conduct and compliance policies, operation of formal risk management structures and overall business management. SPS further mitigates inherent risks through formal risk committees and corporate functions such as internal audit, and internal controls over financial reporting and legal.

Management identifies and analyzes risks to determine materiality and other attributes such as timing, probability and controllability. Identification and risk analysis occurs formally through risk assessment conducted by senior management, the financial disclosure process, hazard risk procedures, internal audit and compliance with financial and operational controls.

Management also identifies and analyzes risk through the business planning process, development of goals and establishment of key performance indicators, including identification of barriers to implementing our strategy. The business planning process also identifies likelihood and mitigating factors to prevent the assumption of inappropriate risk to meet goals.

Management communicates regularly with the Board of Directors and its sole stockholder regarding risk. Senior management presents and communicates a periodic risk assessment to the Board of Directors, providing information on the risks that management believes are material, including financial impact, timing, likelihood and mitigating factors. The Board of Directors regularly reviews management’s key risk assessments, which includes areas of existing and future macroeconomic, financial, operational, policy, environmental and security risks.

The overall oversight, management and mitigation of risk is an integral and continuous part of the Board of Directors’ governance of SPS. Processes are in place to ensure appropriate risk oversight, as well as identification and consideration of new risks.

Operational Risks

Our electric generation, transmission and distribution operations involve numerous risks that may result in accidents and other operating risks and costs.

Our electric generation, transmission and distribution activities include inherent hazards and operating risks such as contact, fire and outages. These risks could result in loss of life, significant property damage, environmental pollution, impairment of our operations and substantial financial losses. Our natural gas transmission activities include inherent hazards and operating risks, such as leaks, explosions, outages and mechanical problems. We maintain insurance against most, but not all, of these risks and losses to employees, third-party contractors, customers or the public. The occurrence of these events, if not fully covered by insurance, could have a material effect on our financial condition, results of operations and cash flows as well as potential loss of reputation.

Other uncertainties and risks inherent in operating and maintaining SPS’ facilities include, but are not limited to:

•Risks associated with facility start-up operations, such as whether the facility will achieve projected operating performance on schedule and otherwise as planned.

•Failures in the availability, acquisition or transportation of fuel or other necessary supplies.

•The impact of unusual or adverse weather conditions and natural disasters, including, but not limited to, tornadoes, icing events, floods and droughts.

•Performance below expected or contracted levels of output or efficiency (e.g., performance guarantees).

•Availability of replacement equipment.

•Availability of adequate water resources and ability to satisfy water intake and discharge requirements.

•Inability to identify, manage properly or mitigate equipment defects.

•Use of new or unproven technology.

•Risks associated with dependence on a specific type of fuel or fuel source, such as commodity price risk, availability of adequate fuel supply and transportation and lack of available alternative fuel sources.

•Increased competition due to, among other factors, new facilities, excess supply, shifting demand and regulatory changes.

Additionally, compliance with existing and potential new regulations related to the operation and maintenance of our natural gas infrastructure could result in significant costs. The PHMSA is responsible for administering the Department of Transportation’s national regulatory program to assure the safe transportation of natural gas, petroleum and other hazardous materials by pipelines. The PHMSA continues to develop regulations and other approaches to risk management to assure safety in design, construction, testing, operation, maintenance and emergency response of natural gas pipeline infrastructure. We have programs in place to comply with these regulations and systematically monitor and renew infrastructure over time, however, a significant incident or material finding of non-compliance could result in penalties and higher costs of operations.

Our electric transmission and distribution operations and natural gas transmission operations are dependent upon complex information technology systems and network infrastructure, the failure of which could disrupt our normal business operations, which could have a material adverse effect on our ability to process transactions and provide services.

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Our utility operations are subject to long-term planning and project risks.

Most electric utility investments are planned to be used for decades. Transmission and generation investments typically have long lead times and are planned well in advance of in-service dates and typically subject to long-term resource plans. These plans are based on numerous assumptions such as: sales growth, customer usage, commodity prices, economic activity, costs, regulatory mechanisms, customer behavior, available technology and public policy. Our long-term resource plan is dependent on our ability to obtain required approvals, develop necessary technical expertise, allocate and coordinate sufficient resources and adhere to budgets and timelines.

In addition, the long-term nature of both our planning and our asset lives are subject to risk. The electric utility sector is undergoing significant change (e.g., increases in energy efficiency, wider adoption of distributed generation and shifts away from fossil fuel generation to renewable generation).

Customer adoption of these technologies and increased energy efficiency could result in excess transmission and generation resources, downward pressure on sales growth, and potentially stranded costs if we are not able to fully recover costs and investments.

The magnitude and timing of resource additions and changes in customer demand may not coincide with evolving customer preference for generation resources and end-uses, which introduces further uncertainty into long-term planning. Efforts to electrify the transportation and building sectors to reduce GHG emissions may result in higher electric demand and lower natural gas demand over time. Higher electric demand may require us to adopt new technologies and make significant transmission and distribution investments including advanced grid infrastructure, which increases exposure to overall grid instability and technology obsolescence. Evolving stakeholder preference for lower emissions from generation sources and end-uses, like heating, may impact our resource mix and put pressure on our ability to recover capital investments in natural gas generation and delivery. Multiple states may not agree as to the appropriate resource mix, which may lead to costs to comply with one jurisdiction that are not recoverable across all jurisdictions served by the same assets.

We are subject to longer-term availability of inputs such as coal, natural gas and water to cool our facilities. Lack of availability of these resources could jeopardize long-term operations of our facilities or make them uneconomic to operate.

Our utilities are highly dependent on suppliers to deliver components in accordance with short and long-term project schedules.

Our products contain components that are globally sourced from suppliers who, in turn, source components from their suppliers. A shortage of key components in which an alternative supplier is not identified could significantly impact project plans. Such impacts could include timing of projects, including potential for project cancellation. Failure to adhere to project budgets and timelines could adversely impact our results of operations, financial condition or cash flows.

We are subject to commodity risks and other risks associated with energy markets and energy production.

In the event fuel costs increase, customer demand could decline and bad debt expense may rise, which may have a material impact on our results of operations. Despite existing fuel recovery mechanisms, higher fuel costs could significantly impact our results of operations if costs are not recovered. Delays in the timing of the collection of fuel cost recoveries could impact our cash flows and liquidity.

A significant disruption in supply could cause us to seek alternative supply services at potentially higher costs and supply shortages may not be fully resolved, which could cause disruptions in our ability to provide services to our customers. Failure to provide service due to disruptions may also result in fines, penalties or cost disallowances through the regulatory process. Also, significantly higher energy or fuel costs relative to sales commitments could negatively impact our cash flows and results of operations.

We also engage in wholesale sales and purchases of electric capacity, energy and energy-related products as well as natural gas. In many markets, emission allowances and/or RECs are also needed to comply with various statutes and commission rulings. As a result, we are subject to market supply and commodity price risk.

Commodity price changes can affect the value of our commodity trading derivatives. We mark certain derivatives to estimated fair market value on a daily basis. Settlements can vary significantly from estimated fair values recorded and significant changes from the assumptions underlying our fair value estimates could cause earnings variability. The management of risks associated with hedging and trading is based, in part, on programs and procedures which utilize historical prices and trends.

Due to the inherent uncertainty involved in price movements and potential deviation from historical pricing, SPS is unable to fully assure that its risk management programs and procedures would be effective to protect against all significant adverse market deviations. In addition, SPS cannot fully assure that its controls will be effective against all potential risks, including, without limitation, employee misconduct. If such programs and procedures are not effective, SPS’ results of operations, financial condition or cash flows could be materially impacted.

Failure to attract and retain a qualified workforce could have an adverse effect on operations.

In 2021, the competition for talent has become increasingly intense as a result of the ongoing “great resignation”, and we may experience increased employee turnover due to this tightening labor market. In addition, specialized knowledge is required of our technical employees for construction and operation of transmission, generation and distribution assets, which may pose additional difficulty for us as we work to recruit, retain and motivate employees in this climate. Failure to hire and adequately train replacement employees, including the transfer of significant internal historical knowledge and expertise to new employees or future availability and cost of contract labor may adversely affect the ability to manage and operate our business. Inability to attract and retain these employees could adversely impact our results of operations, financial condition or cash flows.

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Our operations use third-party contractors in addition to employees to perform periodic and ongoing work.

We rely on third-party contractors to perform operations, maintenance and construction work. Our contractual arrangements with these contractors typically include performance standards, progress payments, insurance requirements and security for performance. Poor vendor performance or contractor unavailability could impact ongoing operations, restoration operations, our reputation and could introduce financial risk or risks of fines.

Our employees, directors, third-party contractors, or suppliers may violate or be perceived to violate our Codes of Conduct, which could have an adverse effect on our reputation.

We are exposed to risk of employee or third-party contractor fraud or other misconduct. All employees and members of the Board of Directors are subject to comply with our Code of Conduct and are required to participate in annual training. Additionally, suppliers are subject to comply with our supplier Code of Conduct. SPS does not tolerate discrimination, violations of our Code of Conduct or other unacceptable behaviors. However, it is not always possible to identify and deter misconduct by employees and other third-parties, which may result in governmental investigations, other actions or lawsuits. If such actions are taken against us we may suffer loss of reputation and such actions could have a material effect on our financial condition, results of operations and cash flows.

We are a wholly owned subsidiary of Xcel Energy Inc. Xcel Energy Inc. can exercise substantial control over our dividend policy and business and operations and may exercise that control in a manner that may be perceived to be adverse to our interests.

All of the members of our Board of Directors, as well as many of our executive officers, are officers of Xcel Energy Inc. Our Board or Directors makes determinations with respect to a number of significant corporate events, including the payment of our dividends.

We have historically paid quarterly dividends to Xcel Energy Inc. In 2021, 2020 and 2019 we paid $310 million, $313 million and $333 million of dividends to Xcel Energy Inc., respectively. If Xcel Energy Inc.’s cash requirements increase, our Board of Directors could decide to increase the dividends we pay to Xcel Energy Inc. to help support Xcel Energy Inc.’s cash needs. This could adversely affect our liquidity. The most restrictive dividend limitation for SPS is imposed by its state regulatory commissions. State regulatory commissions indirectly limit the amount of dividends that SPS can pay Xcel Energy Inc., by requiring a minimum equity-to-total capitalization ratio.

See Note 5 to the financial statements for further information.

Financial Risks

Our profitability depends on our ability to recover costs from our customers and changes in regulation may impair our ability to recover costs from our customers.

We are subject to comprehensive regulation by federal and state utility regulatory agencies, including siting and construction of facilities, customer service and the rates that we can charge customers.

The profitability of our operations is dependent on our ability to recover the costs of providing energy and utility services and earn a return on our capital investment. Our rates are generally regulated and based on an analysis of our costs incurred in a test year. We are subject to both future and historical test years depending upon the regulatory jurisdiction. Thus, the rates we are allowed to charge may or may not match our costs at any given time. Rate regulation is premised on providing an opportunity to earn a reasonable rate of return on invested capital.

There can also be no assurance that our regulatory commissions will judge all our costs to be prudent, which could result in disallowances, or that the regulatory process will always result in rates that will produce full recovery. Overall, management believes prudently incurred costs are recoverable given the existing regulatory framework. However, there may be changes in the regulatory environment that could impair our ability to recover costs historically collected from customers, or we could exceed caps on capital costs required by commissions and result in less than full recovery.

Changes in the long-term cost-effectiveness or to the operating conditions of our assets may result in early retirements of utility facilities. While regulation typically provides cost recovery relief for these types of changes, there is no assurance that regulators would allow full recovery of all remaining costs.

Higher than expected inflation or tariffs may increase costs of construction and operations. Also, rising fuel costs could increase the risk that we will not be able to fully recover our fuel costs from our customers.

Adverse regulatory rulings or the imposition of additional regulations could have an adverse impact on our results of operations and materially affect our ability to meet our financial obligations, including debt payments.

Any reductions in our credit ratings could increase our financing costs and the cost of maintaining certain contractual relationships.

We cannot be assured that our current credit ratings will remain in effect, or that a rating will not be lowered or withdrawn by a rating agency. Significant events including disallowance of costs use of historic test years, elimination or riders or interim rates, increasing depreciation lives, lower returns on equity, changes to equity ratios and impacts of tax policy may impact our cash flows and credit metrics, potentially resulting in a change in our credit ratings. In addition, our credit ratings may change as a result of the differing methodologies or change in the methodologies used by the various rating agencies.

Any credit ratings downgrade could lead to higher borrowing costs or lower proceeds from equity issuances. It could also impact our ability to access capital markets. Also, we may enter into contracts that require posting of collateral or settlement if credit ratings fall below investment grade.

We are subject to capital market and interest rate risks.

Utility operations require significant capital investment. As a result, we frequently need to access capital markets. Any disruption in capital markets could have a material impact on our ability to fund our operations. Capital market disruption and financial market distress could prevent us from issuing short-term commercial paper, issuing new securities or cause us to issue securities with unfavorable terms and conditions, such as higher interest rates or lower proceeds from equity issuances. Higher interest rates on short-term borrowings with variable interest rates could also have an adverse effect on our operating results.

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We are subject to credit risks.

Credit risk includes the risk that our customers will not pay their bills, which may lead to a reduction in liquidity and an increase in bad debt expense. Credit risk is comprised of numerous factors including the price of products and services provided, the economy and unemployment rates. Credit risk also includes the risk that counterparties that owe us money or product will become insolvent and may breach their obligations. Should the counterparties fail to perform, we may be forced to enter into alternative arrangements. In that event, our financial results could be adversely affected and incur losses.

We may have direct credit exposure in our short-term wholesale and commodity trading activity to financial institutions trading for their own accounts or issuing collateral support on behalf of other counterparties. We may also have some indirect credit exposure due to participation in organized markets, (e.g., SPP, PJM Interconnection, LLC, Midcontinent Independent System Operator, Inc. and the Electric Reliability Council of Texas), in which any credit losses are socialized to all market participants.

We have additional indirect credit exposure to financial institutions from letters of credit provided as security by power suppliers under various purchased power contracts. If any of the credit ratings of the letter of credit issuers were to drop below investment grade, the supplier would need to replace that security with an acceptable substitute. If the security were not replaced, the party could be in default under the contract.

As we are a subsidiary of Xcel Energy Inc. we may be negatively affected by events impacting the credit or liquidity of Xcel Energy Inc. and its affiliates.

If either S&P or Moody’s were to downgrade Xcel Energy Inc.’s debt securities below investment grade, it would increase Xcel Energy Inc.’s cost of capital and restrict its access to the capital markets. This could limit Xcel Energy Inc.’s ability to contribute equity or make loans to us, or may cause Xcel Energy Inc. to seek additional or accelerated funding from us in the form of dividends. If such event were to occur, we may need to seek alternative sources of funds to meet our cash needs.

As of Dec. 31, 2021, Xcel Energy Inc. and its utility subsidiaries had approximately $21.8 billion of long-term debt and $1.6 billion of short-term debt and current maturities. Xcel Energy Inc. provides various guarantees and bond indemnities supporting some of its subsidiaries by guaranteeing the payment or performance by these subsidiaries for specified agreements or transactions.

Xcel Energy also has other contingent liabilities resulting from various tax disputes and other matters. Xcel Energy Inc.’s exposure under the guarantees is based upon the net liability of the relevant subsidiary under the specified agreements or transactions. The majority of Xcel Energy Inc.’s guarantees limit its exposure to a maximum amount that is stated in the guarantees.

As of Dec. 31, 2021, Xcel Energy had guarantees outstanding with a $1 million maximum stated amount and immaterial exposure. Xcel Energy also had additional guarantees of $59 million at Dec. 31, 2021 for performance and payment of surety bonds for the benefit of itself and its subsidiaries, with total exposure that cannot be estimated at this time. If Xcel Energy Inc. were to become obligated to make payments under these guarantees and bond indemnities or become obligated to fund other contingent liabilities, it could limit Xcel Energy Inc.’s ability to contribute equity or make loans to us or may cause Xcel Energy Inc. to seek additional or accelerated funding from us in the form of dividends. If such event were to occur, we may need to seek alternative sources of funds to meet our cash needs.

Increasing costs of our defined benefit retirement plans and employee benefits may adversely affect our results of operations, financial condition or cash flows.

We have defined benefit pension and postretirement plans that cover most of our employees. Assumptions related to future costs, return on investments, interest rates and other actuarial assumptions have a significant impact on our funding requirements of these plans. Estimates and assumptions may change. In addition, the Pension Protection Act sets the minimum funding requirements for defined benefit pension plans. Therefore, our funding requirements and contributions may change in the future. Also, the payout of a significant percentage of pension plan liabilities in a single year due to high numbers of retirements or employees leaving would trigger settlement accounting and could require SPS to recognize incremental pension expense related to unrecognized plan losses in the year liabilities are paid. Changes in industry standards utilized in key assumptions (e.g., mortality tables) could have a significant impact on future obligations and benefit costs.

Increasing costs associated with health care plans may adversely affect our results of operations.

Increasing levels of large individual health care claims and overall health care claims could have an adverse impact on our results of operations, financial condition or cash flows. Health care legislation could also significantly impact our benefit programs and costs.

Federal tax law may significantly impact our business.

SPS collects estimated federal, state and local tax payments through regulated rates. Changes to federal tax law may benefit or adversely affect our earnings and customer costs. Tax depreciable lives and the value of various tax credits or the timeliness of their utilization may impact the economics or selection of resources. If tax rates are increased, there could be timing delays before regulated rates provide for recovery of such tax increases in revenues. In addition, certain IRS tax policies such as tax normalization may impact our ability to economically deliver certain types of resources relative to market prices.

Macroeconomic Risks

Economic conditions impact our business.

Our operations are affected by local, national and worldwide economic conditions, which correlates to customers/sales growth (decline). Economic conditions may be impacted by insufficient financial sector liquidity leading to potential increased unemployment, which may impact customers’ ability to pay their bills which could lead to additional bad debt expense.

Additionally, SPS faces competitive factors, which could have an adverse impact on our financial condition, results of operations and cash flows. Further, worldwide economic activity impacts the demand for basic commodities necessary for utility infrastructure, which may inhibit our ability to acquire sufficient supplies.

We operate in a capital intensive industry and federal trade policy could significantly impact the cost of materials we use. There may be delays before these additional material costs can be recovered in rates.

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We face risks related to health epidemics and other outbreaks, which may have a material effect on our financial condition, results of operations and cash flows.

The global outbreak of COVID-19 continues to impact countries, communities, supply chains and markets. A high degree of uncertainty continues to exist regarding the pandemic; the duration and magnitude of business restrictions (domestically and globally); the potential shortages of employees and third-party contractors due to quarantine policies, vaccination requirements or government restrictions; re-shutdowns, if any, and the level and pace of economic recovery.

Although the financial impact of the pandemic on our financial results has largely been mitigated, we cannot ultimately predict whether it will have a material impact on our future liquidity, financial condition or results of operations. Nor can we predict the impact of the virus on the health of our employees, our supply chain or our ability to recover higher costs associated with managing through the pandemic. The impact of COVID-19 may exacerbate other risks discussed herein, which could have a material effect on us. The situation is evolving and additional impacts may arise.

Operations could be impacted by war, terrorism or other events.

Our generation plants, fuel storage facilities, transmission and distribution facilities and information and control systems may be targets of terrorist activities. Any disruption could impact operations or result in a decrease in revenues and additional costs to repair and insure our assets. These disruptions could have a material impact on our financial condition, results of operations or cash flows.

The potential for terrorism has subjected our operations to increased risks and could have a material effect on our business. We have already incurred increased costs for security and capital expenditures in response to these risks. The insurance industry has also been affected by these events and the availability of insurance may decrease. In addition, insurance may have higher deductibles, higher premiums and more restrictive policy terms.

A disruption of the regional electric transmission grid, interstate natural gas pipeline infrastructure or other fuel sources, could negatively impact our business, brand and reputation. Because our facilities are part of an interconnected system, we face the risk of possible loss of business due to a disruption caused by the actions of a neighboring utility.

We also face the risks of possible loss of business due to significant events such as severe storms, severe temperature extremes, wildfires, widespread pandemic, generator or transmission facility outage, pipeline rupture, railroad disruption, operator error, sudden and significant increase or decrease in wind generation or a workforce disruption.

In addition, major catastrophic events throughout the world may disrupt our business. Xcel Energy participates in a global supply chain, which includes materials and components that are globally sourced. A prolonged disruption could result in the delay of equipment and materials that may impact our ability to reliably serve our customers.

A major disruption could result in a significant decrease in revenues and additional costs to repair assets, which could have a material impact on our results of operations, financial condition or cash flows. SPS participates in GridEx, which is the largest grid security exercise in North America. These efforts, led by the NERC, test and further develop the coordination, threat sharing and interaction between utilities and various government agencies relative to potential cyber and physical threats against the nation’s electric grid.

A cyber incident or security breach could have a material effect on our business.

We operate in an industry that requires the continued operation of sophisticated information technology, control systems and network infrastructure. In addition, we use our systems and infrastructure to create, collect, use, disclose, store, dispose of and otherwise process sensitive information, including company data, customer energy usage data, and personal information regarding customers, employees and their dependents, contractors and other individuals.

Our generation, transmission, distribution and fuel storage facilities, information technology systems and other infrastructure or physical assets, as well as information processed in our systems (e.g., information regarding our customers, employees, operations, infrastructure and assets) could be affected by cyber security incidents, including those caused by human error. Our industry has been the target of several attacks on operational systems and has seen an increased volume and sophistication of cyber security incidents from international activist organizations, Nation States and individuals. During the normal course of business, we have experienced and expect to continue to experience attempts to compromise our information technology and control systems, network infrastructure and other assets. To date, no cybersecurity incident or attack has had a material impact on our business or results of operation.

Cyber security incidents could harm our businesses by limiting our generating, transmitting and distributing capabilities, delaying our development and construction of new facilities or capital improvement projects to existing facilities, disrupting our customer operations or causing the release of customer information, all of which would likely receive state and federal regulatory scrutiny and could expose us to liability.

Our generation, transmission systems and natural gas pipelines are part of an interconnected system. Therefore, a disruption caused by the impact of a cyber security incident of the regional electric transmission grid, natural gas pipeline infrastructure or other fuel sources of our third-party service providers’ operations, could also negatively impact our business.

Our supply chain for procurement of digital equipment and services may expose software or hardware to these risks and could result in a breach or significant costs of remediation. We are unable to quantify the potential impact of cyber security threats or subsequent related actions. Cyber security incidents and regulatory action could result in a material decrease in revenues and may cause significant additional costs (e.g., penalties, third-party claims, repairs, insurance or compliance) and potentially disrupt our supply and markets for natural gas, oil and other fuels.

We maintain security measures to protect our information technology and control systems, network infrastructure and other assets. However, these assets and the information they process may be vulnerable to cyber security incidents, including asset failure or unauthorized access to assets or information. A failure or breach of our technology systems or those of our third-party service providers could disrupt critical business functions and may negatively impact our business, our brand, and our reputation. The cyber security threat is dynamic and evolves continually, and our efforts to prioritize network protection may not be effective given the constant changes to threat vulnerability.

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Our operating results may fluctuate on a seasonal and quarterly basis and can be adversely affected by milder weather.

Our electric utility business is seasonal and weather patterns can have a material impact on our operating performance. Demand for electricity is often greater in the summer and winter months associated with cooling and heating. Accordingly, our operations have historically generated less revenues and income when weather conditions are milder in the winter and cooler in the summer. Unusually mild winters and summers could have an adverse effect on our financial condition, results of operations, or cash flows.

Public Policy Risks

We may be subject to legislative and regulatory responses to climate change, with which compliance could be difficult and costly.

Legislative and regulatory responses related to climate change may create financial risk as our facilities may be subject to additional regulation at either the state or federal level in the future. International agreements could additionally lead to future federal or state regulations.

In 2015, the United Nations Framework Convention on Climate Change reached consensus among 190 nations on an agreement (the Paris Agreement) that establishes a framework for GHG mitigation actions by all countries, with a goal of holding the increase in global average temperature to below 2º Celsius above pre-industrial levels and an aspiration to limit the increase to 1.5º Celsius. In April 2021, ahead of the United Nations Climate Change Conference in Glasgow, the Biden Administration committed the U.S. to a Nationally Determined Contribution of 50-52% net GHG emissions reduction economy-wide from 2005 levels. This commitment and other agreements made in Glasgow could result in future additional GHG reductions in the United States. In addition, the Biden Administration has announced plans to implement new climate change programs, including potential regulation of GHG emissions targeting the utility industry.

Many states and localities continue to pursue their own climate policies. The steps SPS has taken to date to reduce GHG emissions, including energy efficiency measures, adding renewable generation or retiring or converting coal plants to natural gas, occurred under state-endorsed resource plans, renewable energy standards and other state policies.

We may be subject to climate change lawsuits. An adverse outcome could require substantial capital expenditures and possibly require payment of substantial penalties or damages. Defense costs associated with such litigation can also be significant and could affect results of operations, financial condition or cash flows if such costs are not recovered through regulated rates.

If our regulators do not allow us to recover all or a part of the cost of capital investment or the O&M costs incurred to comply with the mandates, it could have a material effect on our results of operations, financial condition or cash flows.

Increased risks of regulatory penalties could negatively impact our business.

The Energy Act increased civil penalty authority for violation of FERC statutes, rules and orders. The FERC can impose penalties of up to $1.3 million per violation per day, particularly as it relates to energy trading activities for both electricity and natural gas. In addition, NERC electric reliability standards and critical infrastructure protection requirements are mandatory and subject to potential financial penalties. Also, the PHMSA, Occupational Safety and Health Administration and other federal agencies have the authority to assess penalties. In the event of serious incidents, these agencies may pursue penalties. In addition, certain states have the authority to impose substantial penalties. If a serious reliability, cyber or safety incident did occur, it could have a material effect on our results of operations, financial condition or cash flows.

The continued use of natural gas for power generation has increasingly become a public policy advocacy target. These efforts may result in a limitation of natural gas as an energy source for power generation, which could impact our ability to reliably and affordably serve our customers.

In recent years, there have been various local and state agency proposals within and outside our service territories that would attempt to restrict the use and availability of natural gas. If such policies were to prevail, we may be forced to make new resource investment decisions which could potentially result in stranded costs if we are not able to fully recover costs and investments and impact the overall reliability of our service.

Environmental Risks

We are subject to environmental laws and regulations, with which compliance could be difficult and costly.

We are subject to environmental laws and regulations that affect many aspects of our operations, including air emissions, water quality, wastewater discharges and the generation, transport and disposal of solid wastes and hazardous substances. Laws and regulations require us to obtain permits, licenses, and approvals and to comply with a variety of environmental requirements.

Environmental laws and regulations can also require us to restrict or limit the output of facilities or the use of certain fuels, shift generation to lower-emitting facilities, install pollution control equipment, clean up spills and other contamination and correct environmental hazards. Failure to meet requirements of environmental mandates may result in fines or penalties. We may be required to pay all or a portion of the cost to remediate sites where our past activities, or the activities of other parties, caused environmental contamination.

Changes in environmental policies and regulations or regulatory decisions may result in early retirements of our generation facilities. While regulation typically provides relief for these types of changes, there is no assurance that regulators would allow full recovery of all remaining costs.

We are subject to mandates to provide customers with clean energy, renewable energy and energy conservation offerings. It could have a material effect on our results of operations, financial condition or cash flows if our regulators do not allow us to recover the cost of capital investment or O&M costs incurred to comply with the requirements.

In addition, existing environmental laws or regulations may be revised and new laws or regulations may be adopted. We may also incur additional unanticipated obligations or liabilities under existing environmental laws and regulations.

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We are subject to physical and financial risks associated with climate change and other weather, natural disaster and resource depletion impacts.

Climate change can create physical and financial risk. Physical risks include changes in weather conditions and extreme weather events.

Our customers’ energy needs vary with weather. To the extent weather conditions are affected by climate change, customers’ energy use could increase or decrease. Increased energy use due to weather changes may require us to invest in generating assets, transmission and infrastructure. Decreased energy use due to weather changes may result in decreased revenues.

Climate change may impact the economy, which could impact our sales and revenues. The price of energy has an impact on the economic health of our communities. The cost of additional regulatory requirements, such as regulation of GHG, could impact the availability of goods and prices charged by our suppliers, which would normally be borne by consumers through higher prices for energy and purchased goods. To the extent financial markets view climate change and emissions of GHGs as a financial risk, this could negatively affect our ability to access capital markets or cause us to receive less than ideal terms and conditions.

We have committed to a number of long-term climate change goals, which in part are dependent on future technologies not currently in existence. Given the long-term nature of these goals, there is an inherent uncertainty due to internal and external factors regarding our ability to achieve our stated climate change goals. To the extent climate change goals are not met, this could negatively impact our reputation and potentially result in financial risk.

Severe weather impacts our service territories, primarily when thunderstorms, flooding, tornadoes, wildfires and snow or ice storms occur. Extreme weather conditions in general require system backup and can contribute to increased system stress, including service interruptions. Extreme weather conditions creating high energy demand may raise electricity prices, increasing the cost of energy we provide to our customers.

To the extent the frequency of extreme weather events increases, this could increase our cost of providing service. Periods of extreme temperatures could impact our ability to meet demand. Changes in precipitation resulting in droughts or water shortages could adversely affect our operations. Drought conditions also contribute to the increase in wildfire risk from our electric generation facilities. While we carry liability insurance, given an extreme event, if SPS was found to be liable for wildfire damages, amounts that potentially exceed our coverage could negatively impact our results of operations, financial condition or cash flows. Drought or water depletion could adversely impact our ability to provide electricity to customers, cause early retirement of power plants and increase the cost for energy. Adverse events may result in increased insurance costs and/or decreased insurance availability. We may not recover all costs related to mitigating these physical and financial risks.

ITEM 1B — UNRESOLVED STAFF COMMENTS

None.

ITEM 2 — PROPERTIES

Virtually all of the utility plant property of SPS is subject to the lien of its first mortgage bond indenture.

Station, Location and Unit at Dec. 31, 2021						Fuel						Installed						MW (a)
Steam:
Cunningham-Hobbs, NM, 2 Units						Natural Gas						1957 - 1965						225
Harrington-Amarillo, TX, 3 Units (b)						Coal						1976 - 1980						1,018
Jones-Lubbock, TX, 2 Units						Natural Gas						1971 - 1974						486
Maddox-Hobbs, NM, 1 Unit						Natural Gas						1967						112
Nichols-Amarillo, TX, 3 Units						Natural Gas						1960 - 1968						457
Plant X-Earth, TX, 4 Units						Natural Gas						1952 - 1964						298
Tolk-Muleshoe, TX, 2 Units (d)						Coal						1982 - 1985						1,067
Combustion Turbine:
Cunningham-Hobbs, NM, 2 Units						Natural Gas						1997						207
Jones-Lubbock, TX, 2 Units						Natural Gas						2011 - 2013						334
Maddox-Hobbs, NM, 1 Unit						Natural Gas						1963 - 1976						61
Wind:
Hale-Plainview, TX, 239 Units						Wind						2019						477			(c)
Sagamore-Dora, NM, 240 Units						Wind						2020						507			(c)
												Total						5,249

(a)Summer 2021 net dependable capacity.

(b)    Harrington is expected to be converted to natural gas by the end of 2024.

(c)     Values disclosed are the generation levels at the point-of-interconnection for these wind units. Capacity is attainable only when wind conditions are sufficiently available (on-demand net dependable capacity is zero).

(d)    Tolk Unit 1 and 2 are proposed to be retired in 2034.

Electric utility overhead and underground transmission and distribution lines (measured in conductor miles) at Dec. 31, 2021:

Conductor Miles
Transmission
500 KV			—
345 KV			11,688
230 KV			9,763
161 KV			—
138 KV			—
115 KV			14,880
Less than 115 KV			4,423
Total Transmission			40,754
Distribution
Less than 115 KV			22,651
Total			63,405

SPS had 458 electric utility transmission and distribution substations at Dec. 31, 2021.

Natural gas utility mains at Dec. 31, 2021:

Miles
Transmission			20

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ITEM 3 — 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 10 to the financial statements, Item 1 and Item 7 for further information.

ITEM 4 — MINE SAFETY DISCLOSURES

None.

PART II

ITEM 5 — MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

SPS is a wholly owned subsidiary of Xcel Energy Inc. and there is no market for its common equity securities.

See Note 5 to the financial statements for further information.

The dividends declared during 2021 and 2020 were as follows:

(Millions of Dollars)						2021						2020
First quarter						$	52					$	76
Second quarter						79						55
Third quarter						123						136
Fourth quarter						60						54

ITEM 6 — [RESERVED]

ITEM 7 — 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 I(1)(a) and (b) of Form 10-K for wholly owned subsidiaries. It is replaced with management’s narrative analysis and the results of operations for the current year as set forth in general instructions I(2)(a) of Form 10-K 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 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.

Earnings Adjusted for Certain Items (Ongoing Earnings)

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

We believe these measurements are useful to investors to evaluate the actual and projected financial performance and contribution of SPS. For the years ended Dec. 31, 2021 and 2020, there were no such adjustments to GAAP earnings and therefore GAAP earnings equal ongoing earnings.

Results of Operations

2021 Comparison with 2020

SPS’ net income was $318 million for 2021, compared with net income of $295 million for 2020. The increase was primarily due to capital investment recovery, other regulatory outcomes and higher sales and demand, partially offset by decreased AFUDC.

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.

Electric revenues and fuel and purchased power expenses are impacted by fluctuations in the price of natural gas and coal. However, these price fluctuations generally have minimal impact on earnings impact due to fuel recovery mechanisms. In addition, electric customers receive a credit for PTCs generated, which reduce electric revenue and income taxes.

Electric Revenues, Fuel and Purchased Power and Electric Margin

(Millions of Dollars)						2021						2020
Electric revenues						$	2,465					$	1,870
Electric fuel and purchased power						(1,432)						(835)
Electric margin						$	1,033					$	1,035

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Changes in Electric Margin

(Millions of Dollars)						2021 vs. 2020
Texas 2019 rate case surcharge (a)						$	(70)
PTCs flowed back to customers (offset by lower ETR)						(45)
Wholesale transmission revenue (net)						14
Sales and demand						23
Regulatory rate outcomes (Texas and New Mexico)						63
Other (net)						13
Total decrease in electric margin						$	(2)

(a)Impact is due to the Texas rate case outcome, which resulted in a revenue increase that was recognized in the third quarter of 2020 (largely offset by recognition of previously deferred costs).

Non-Fuel Operating Expense and Other Items

AFUDC, Equity and Debt — AFUDC decreased $41 million year-to-date, primarily due to the Sagamore wind farm being placed in service at the end of 2020.

Income Taxes — Income tax benefit increased $49 million for 2021. The increase was primarily driven by an increase in wind PTCs. Wind PTCs are generally credited to customers (recorded as a reduction to revenue) and do not have a material impact on net income.

Other

Winter Storm Uri

In February 2021, the United States experienced Winter Storm Uri. Extreme cold temperatures impacted certain operational assets as well as the availability of renewable generation. 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. 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).

Regulatory Overview — Xcel Energy has natural gas, fuel and purchased energy mechanisms in each jurisdiction for recovering incurred costs. However, the utility subsidiaries have deferred February 2021 cost increases for future recovery and sought recovery of the cost increases over a period of up to 30 months to mitigate the impact to customer bills. Additionally, we did not request recovery of financing costs in order to further limit the impact to our customers.

Proceedings initiated:

Jurisdiction			Regulatory Status
Texas			As part of the Texas fuel surcharge filing, SPS filed for recovery of $76 million, over 24 months, in under-collected purchased power and fuel costs through March 2021, subject to revision due to re-settlements. Of this amount, $62 million was attributed to Winter Storm Uri. In the third quarter, SPS filed a supplemental application and testimony to recover an additional $26 million in under-collected purchased power and fuel costs through June 2021 resulting primarily from SPP resettlements and continued increases in natural gas prices. In November 2021, the Administrative Law Judge abated the hearing schedule to allow the parties to continue settlement negotiations. In December 2021, SPS filed its triennial Fuel Reconciliation, under which the PUCT will consider prudence of SPS’ fuel costs for the period July 2018 - June 2021, including Winter Storm Uri. In January 2022, SPS and other parties filed a stipulation/motion for interim rates. The filing covers all fuel under-collections occurring between January 2020 and August 2021, totaling $121 million. The settlement does not address the prudence of Winter Storm Uri costs nor the retention of $11 million related to market sales during the event. These items will be reviewed through the triennial Fuel Reconciliation proceeding and are subject to a final PUCT decision. Interim rates, designed to collect up to $110 million over a period of 30 months, will begin on Feb. 1, 2022.
New Mexico			In March 2021, the NMPRC approved SPS' request to recover $26 million of fuel costs over 24 months with no financing charge, subject to NMPRC review.

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 cases 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.

See Rate Matters within Note 10 to the financial statements for further information.

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Summary of Regulatory Agencies / RTO and Areas of Jurisdiction

Regulatory Body / RTO						Additional Information
PUCT						Retail electric operations, rates, services, construction of transmission or generation and other aspects of SPS’ electric operations. The municipalities in which SPS operates in Texas have original jurisdiction over rates in those communities. The municipalities’ rate setting decisions are subject to PUCT review.
NMPRC						Retail electric operations, retail rates and services and the construction of transmission or generation.
FERC						Wholesale electric operations, accounting practices, wholesale sales for resale, the transmission of electricity in interstate commerce, compliance with NERC electric reliability standards, asset transactions and mergers, and natural gas transactions in interstate commerce.
SPP RTO and SPP Integrated and Wholesale Markets						SPS is a transmission owning member of the SPP RTO and operates within the SPP RTO and SPP integrated and wholesale markets. SPS is authorized to make wholesale electric sales at market-based prices.

Recovery Mechanisms

Mechanism						Additional Information
Distribution Cost Recovery Factor						Recovers distribution costs not included in rates in Texas.
Energy Efficiency Cost Recovery Factor						Recovers costs for energy efficiency programs in Texas.
Energy Efficiency Rider						Recovers costs for energy efficiency programs in New Mexico.
Fuel and Purchased Power Cost Adjustment Clause						Adjusts monthly to recover actual fuel and purchased power costs in New Mexico.
Power Cost Recovery Factor						Allows recovery of purchased power costs not included in Texas rates.
Renewable Portfolio Standards						Recovers deferred costs for renewable energy programs in New Mexico.
Transmission Cost Recovery Factor						Recovers certain transmission infrastructure improvement costs and changes in wholesale transmission charges not included in Texas base rates.
Fixed Fuel and Purchased Recovery Factor						Provides for the over- or under-recovery of energy expenses in Texas. Regulations require refunding or surcharging over- or under- recovery amounts, including interest, when they exceed 4% of the utility’s annual fuel and purchased energy costs on a rolling 12-month basis, if this condition is expected to continue.
Wholesale Fuel and Purchased Energy Cost Adjustment						SPS recovers fuel and purchased energy costs from its wholesale customers through a monthly wholesale fuel and purchased energy cost adjustment clause accepted by the FERC. Wholesale customers also pay the jurisdictional allocation of production costs.

Pending and Recently Concluded Regulatory Proceedings

2021 New Mexico Electric Rate Case — In January 2021, SPS filed an electric rate case with the NMPRC with a current requested base rate increase of approximately $84 million.

In June 2021, SPS and various parties filed an uncontested stipulation with the NMPRC, which reflected a $62 million rate increase, a change in the depreciation life of the Tolk coal plant to 2032, an equity ratio of 54.72% and ROE of 9.35% for reconciliation statements and determining the revenue requirements for the Sagamore and Hale wind projects. In December 2021, the Hearing Examiner issued a recommendation that the NMPRC approve the rate case settlement agreement without modification.

On Feb. 2, 2022, the NMPRC voted 3-2 to reject the uncontested stipulation as filed. The NMPRC then approved a modified settlement, which would maintain the proposed revenue requirement increase of $62 million, but would adjust the class cost allocation such that all rate classes would have a uniform increase of 4.89%. The NMPRC required the parties to either file their acceptance or opposition to the modified settlement.

On Feb. 9, 2022, the signatories informed the NMPRC they did not unanimously support the modifications. Accordingly, the Hearing Examiner will issue a procedural order for further proceedings on SPS’ originally filed application.

On Feb. 10, 2022, SPS filed a motion requesting the NMPRC either approve the original settlement or approve the modified settlement.

On Feb. 16, 2022, the NMPRC voted to reconsider its order and voted 3-2 to approve the stipulation without modification. New rates will go into effect on Feb. 26, 2022.

2021 Texas 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 $140 million. SPS’ proposed net rate increase to Texas customers was approximately $71 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).

On Jan. 26, 2022, SPS and intervenors filed a blackbox settlement. Key terms include:

•A base rate increase of approximately $89 million effective back to March 15, 2021.

•A 9.35% ROE and 7.01% weighted average cost of capital for AFUDC purposes only.

•The depreciation lives for Tolk moved up to 2034 and Harrington coal assets moved up to 2024.

In February 2022, the ALJ issued an order approving interim rates to be effective on March 1, 2022. A PUCT decision is expected in the first quarter of 2022.

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, SPS would prospectively discontinue charging their current 50 basis point ROE incentive adders. Amounts related to a discontinuance of the adder would ultimately be offset by an increase in retail rates, subject to future rate cases.

Purchased Power Arrangements and Transmission Service Providers

SPS expects to use electric generating stations, power purchases, DSM and new generation options to meet its system capacity requirements.

Purchased Power — SPS purchases power from other utilities and IPPs. Long-term purchased power contracts typically require periodic capacity and energy charges. SPS also makes short-term purchases to meet system load and energy requirements to replace owned generation, meet operating reserve obligations or obtain energy at a lower cost.

Purchased Transmission Services — SPS has contractual arrangements with SPP and regional transmission service providers to deliver power and energy to its native load customers.

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Natural Gas

SPS does not provide retail natural gas service, but purchases and transports natural gas for its generation facilities and operates limited natural gas pipeline facilities connecting the generation facilities to interstate natural gas pipelines. SPS is subject to the jurisdiction of the FERC with respect to natural gas transactions in interstate commerce and the PHMSA and PUCT for pipeline safety compliance.

Wholesale and Commodity Marketing Operations

SPS conducts various wholesale marketing operations, including the purchase and sale of electric capacity, energy, ancillary services and energy related products. SPS uses physical and financial instruments to minimize commodity price and credit risk and to hedge sales and purchases.

ITEM 7A — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Derivatives, Risk Management and Market Risk

SPS is exposed to a variety of market risks in the normal course of business. Market risk is the potential loss that may occur as a result of adverse changes in the market or fair value of a particular instrument or commodity. All financial and commodity-related instruments, including derivatives, are subject to market risk.

See Note 8 to the financial statements for further information.

SPS is exposed to the impact of adverse changes in price for energy and energy-related products, which is partially mitigated by the use of commodity derivatives. In addition to ongoing monitoring and maintaining credit policies intended to minimize overall credit risk, management takes steps to mitigate changes in credit and concentration risks associated with its derivatives and other contracts, including parental guarantees and requests of collateral. While SPS expects that the counterparties will perform under the contracts underlying its derivatives, the contracts expose SPS to certain credit and non-performance risk.

Distress in the financial markets may impact counterparty risk, the fair value of the securities in the pension fund, and SPS’ ability to earn a return on short-term investments.

Commodity Price Risk — SPS is exposed to commodity price risk in its electric operations. Commodity price risk is managed by entering into long- and short-term physical purchase and sales contracts for electric capacity, energy and energy-related products. Commodity price risk is also managed through the use of financial derivative instruments.

SPS’ risk management policy allows it to manage commodity price risk per commission approved hedge plans.

Wholesale and Commodity Trading Risk — SPS conducts wholesale and commodity trading activities, including the purchase and sale of electric capacity, energy and energy-related instruments, including derivatives. SPS’ risk management policy allows management to conduct these activities within guidelines and limitations as approved by its risk management committee.

Interest Rate Risk — SPS is subject to interest rate risk. SPS’ risk management policy allows interest rate risk to be managed through the use of fixed rate debt, floating rate debt and interest rate derivatives such as swaps, caps, collars and put or call options.

A 100-basis-point change in the benchmark rate on SPS’ variable rate debt would have a $2 million and $3 million impact on pretax interest expense annually in 2021 and 2020, respectively.

Credit Risk — SPS is also exposed to credit risk. Credit risk relates to the risk of loss resulting from counterparties’ nonperformance on their contractual obligations. SPS maintains credit policies intended to minimize overall credit risk and actively monitor these policies to reflect changes and scope of operations.

At Dec. 31, 2021, a 10% increase in commodity prices would have resulted in an increase in credit exposure of $3 million, while a decrease in prices of 10% would have resulted in a decrease in credit exposure of $3 million. At Dec. 31, 2020, a 10% increase in commodity prices would have resulted in an increase in credit exposure of $1 million, while a decrease in prices of 10% would have resulted in a decrease in credit exposure of $1 million.

SPS conducts credit reviews for all counterparties and employs credit risk controls, such as letters of credit, parental guarantees, master netting agreements and termination provisions. Credit exposure is monitored and, when necessary, the activity with a specific counterparty is limited until credit enhancement is provided. Distress in the financial markets could increase SPS’ credit risk.

Fair Value Measurements

SPS uses derivative contracts such as futures, forwards, interest rate swaps, options and FTRs to manage commodity price and interest rate risk. Derivative contracts, with the exception of those designated as normal purchase-normal sale contracts, are reported at fair value. SPS’ investments held in rabbi trusts, pension and other postretirement funds are also subject to fair value accounting.

Commodity Derivatives — SPS monitors the creditworthiness of the counterparties to its commodity derivative contracts and assesses each counterparty’s ability to perform on the transactions. Given the typically short duration of these contracts, the impact of discounting commodity derivative assets for counterparty credit risk was not material to the fair value of commodity derivative assets at Dec. 31, 2021.

Adjustments to fair value for credit risk of commodity trading instruments are recorded in electric revenues. Credit risk adjustments for other commodity derivative instruments are recorded as other comprehensive income or deferred as regulatory assets and liabilities. Classification as a regulatory asset or liability is based on commission approved regulatory recovery mechanisms. The impact of discounting commodity derivative liabilities for credit risk was immaterial at Dec. 31, 2021.

See Note 8 to the financial statements for further information.

ITEM 8 — FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Item 15-1 for an index of financial statements included herein.

See Note 12 to the financial statements for further information.

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Management Report on Internal Control Over Financial Reporting

The management of SPS is responsible for establishing and maintaining adequate internal control over financial reporting. SPS’ internal control system was designed to provide reasonable assurance to Xcel Energy Inc.’s and SPS’ management and board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

SPS management assessed the effectiveness of SPS’ internal control over financial reporting as of Dec. 31, 2021. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control — Integrated Framework (2013). Based on our assessment, we believe that, as of Dec. 31, 2021, SPS’ internal control over financial reporting is effective at the reasonable assurance level based on those criteria.

/s/ ROBERT C. FRENZEL						/s/ BRIAN J. VAN ABEL
Robert C. Frenzel						Brian J. Van Abel
Chairman, Chief Executive Officer and Director						Executive Vice President, Chief Financial Officer and Director
Feb. 23, 2022						Feb. 23, 2022

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholder and the Board of Directors of Southwestern Public Service Company

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Southwestern Public Service Company (the "Company") as of December 31, 2021 and 2020, the related statements of income, comprehensive income, common stockholder's equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and the schedule listed in the Index at Item 15 (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Regulatory Assets and Liabilities - Impact of Rate Regulation on the Financial Statements — Refer to Notes 4 and 10 to the financial statements.

Critical Audit Matter Description

The Company is subject to rate regulation by state utility regulatory agencies, which have jurisdiction with respect to the rates of electric transmission and distribution companies in New Mexico and Texas. The Company is also subject to the jurisdiction of the Federal Energy Regulatory Commission for its wholesale electric operations, accounting practices, wholesale sales for resale, transmission of electricity in interstate commerce, compliance with North American Electric Reliability Corporation standards, asset transactions and mergers and natural gas transactions in interstate commerce, (collectively with state utility regulatory agencies, the “Commissions”). Management has determined it meets the requirements under accounting principles generally accepted in the United States of America to prepare its financial statements applying the specialized rules to account for the effects of cost-based rate regulation. Accounting for the economics of rate regulation affects multiple financial statement line items and disclosures, including property, plant and equipment, regulatory assets and liabilities, operating revenues and expenses, and income taxes.

The Company is subject to regulatory rate setting processes. Rates are determined and approved in regulatory proceedings based on an analysis of the Company’s costs to provide utility service and a return on, and recovery of, the Company’s investment in assets required to deliver services to customers. Accounting for the Company’s regulated operations provides that rate-regulated entities report assets and liabilities consistent with the recovery of those incurred costs in rates, if it is probable that such rates will be charged and collected. The Commissions’ regulation of rates is premised on the full recovery of incurred costs and a reasonable rate of return on invested capital. Decisions by the Commissions in the future will impact the accounting for regulated operations, including decisions about the amount of allowable costs and return on invested capital included in rates and any refunds that may be required. In the rate setting process, the Company’s rates result in the recording of regulatory assets and liabilities based on the probability of future cash flows. Regulatory assets generally represent incurred or accrued costs that have been deferred because future recovery from customers is probable. Regulatory liabilities generally represent amounts that are expected to be refunded to customers in future rates or amounts collected in current rates for future costs.

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We identified the impact of rate regulation as a critical audit matter due to the significant judgments made by management to support its assertions about impacted account balances and disclosures and the high degree of subjectivity involved in assessing the impact of future regulatory orders on the financial statements. Management judgments include assessing the likelihood of (1) recovery in future rates of incurred costs, (2) a disallowance of part of the cost of recently completed plant, and 3) a refund due to customers. Given that management’s accounting judgments are based on assumptions about the outcome of future decisions by the Commissions, auditing these judgments required specialized knowledge of accounting for rate regulation and the rate setting process due to its inherent complexities.

How the Critical Audit Matter Was Addressed in the Audit

Our audit procedures related to the uncertainty of future decisions by the Commissions included the following, among others:

•We tested the effectiveness of management’s controls over the evaluation of the likelihood of (1) the recovery in future rates of costs deferred as regulatory assets, and (2) a refund or a future reduction in rates that should be reported as regulatory liabilities. We also tested the effectiveness of management’s controls over the recognition of regulatory assets or liabilities and the monitoring and evaluation of regulatory developments that may affect the likelihood of recovering costs in future rates or of a future reduction in rates.

•We evaluated the Company’s disclosures related to the impacts of rate regulation, including the balances recorded and regulatory developments.

•We read relevant regulatory orders issued by the Commissions for the Company, regulatory statutes, interpretations, procedural schedules and memorandums, filings made by intervenors, experts’ testimony and other publicly available information to assess the likelihood of recovery in future rates or of a future reduction in rates based on precedents of the Commissions’ treatment of similar costs under similar circumstances. We also evaluated regulatory filings for any evidence that intervenors are challenging full recovery of the cost of any capital projects. If the full recovery of project costs is being challenged by intervenors, we evaluated management’s assessment of the probability of a disallowance. We evaluated the external information and compared to the Company’s recorded regulatory assets and liabilities for completeness.

•We obtained management’s analysis and correspondence from counsel, as appropriate, regarding regulatory assets or liabilities not yet addressed in a regulatory order to assess management’s assertion that amounts are probable of recovery or a future reduction in rates.

/s/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
February 23, 2022
We have served as the Company’s auditor since 2002.

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SOUTHWESTERN PUBLIC SERVICE CO.

STATEMENTS OF INCOME

(amounts in millions)

						Year Ended Dec. 31
						2021						2020						2019
Operating revenues						$	2,465					$	1,870					$	1,826
Operating expenses
Electric fuel and purchased power						1,432						835						875
Operating and maintenance expenses						271						275						285
Demand side management expenses						17						16						17
Depreciation and amortization						300						295						230
Taxes (other than income taxes)						79						90						72
Total operating expenses						2,099						1,511						1,479
Operating income						366						359						347
Other income (expense), net						1						(2)						2
Allowance for funds used during construction — equity						4						33						27
Interest charges and financing costs
Interest charges — includes other financing costs of $4, $4 and $3, respectively						114						119						99
Allowance for funds used during construction — debt						(2)						(14)						(12)
Total interest charges and financing costs						112						105						87
Income before income taxes						259						285						289
Income tax (benefit) expense						(59)						(10)						26
Net income						$	318					$	295					$	263

See Notes to Financial Statements

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SOUTHWESTERN PUBLIC SERVICE CO.

STATEMENTS OF CASH FLOWS

(amounts in millions)

			Year Ended Dec. 31
			2021						2020						2019
Operating activities
Net income			$	318					$	295					$	263
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization			303						298						232
Deferred income taxes			(47)						22						29
Allowance for equity funds used during construction			(4)						(33)						(27)
Provision for bad debts			6						6						6
Changes in operating assets and liabilities:
Accounts receivable			(29)						(14)						(9)
Accrued unbilled revenues			(10)						—						(1)
Inventories			(21)						(35)						(21)
Prepayments and other			16						(14)						3
Accounts payable			4						8						(9)
Net regulatory assets and liabilities			(154)						(115)						14
Other current liabilities			(1)						13						6
Pension and other employee benefit obligations			(18)						(16)						(18)
Other, net			(4)						(1)						5
Net cash provided by operating activities			359						414						473
Investing activities
Utility capital/construction expenditures			(580)						(1,142)						(844)
Investments in utility money pool arrangement			(83)						(4)						(133)
Receipts from utility money pool arrangement			83						4						133
Net cash used in investing activities			(580)						(1,142)						(844)
Financing activities
(Repayments of) proceeds from short-term borrowings, net			(113)						250						(42)
Proceeds from issuance of long-term debt, net			247						343						292
Borrowings under utility money pool arrangement			539						561						296
Repayments under utility money pool arrangement			(448)						(561)						(296)
Capital contributions from parent			301						438						426
Dividends paid to parent			(310)						(313)						(333)
Net cash provided by financing activities			216						718						343
Net change in cash and cash equivalents			(5)						(10)						(28)
Cash, cash equivalents and restricted cash at beginning of period			6						16						44
Cash, cash equivalents and restricted cash at end of period			$	1					$	6					$	16
Supplemental disclosure of cash flow information:
Cash paid for interest (net of amounts capitalized)			$	(108)					$	(98)					$	(84)
Cash received for income taxes, net			21						10						12
Supplemental disclosure of non-cash investing and financing transactions:
Accrued property, plant and equipment additions			$	37					$	99					$	95
Inventory transfers to property, plant and equipment			6						31						23
Operating lease right-of-use assets			—						—						548
Allowance for equity funds used during construction			4						33						27

See Notes to Financial Statements

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SOUTHWESTERN PUBLIC SERVICE CO.

BALANCE SHEETS

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

						Dec. 31
						2021						2020
Assets
Current assets
Cash and cash equivalents						$	1					$	6
Accounts receivable, net						115						94
Accounts receivable from affiliates						9						9
Accrued unbilled revenues						125						114
Inventories						51						36
Regulatory assets						193						76
Derivative instruments						30						10
Prepaid taxes						3						18
Prepayments and other						21						20
Total current assets						548						383
Property, plant and equipment, net						7,838						7,603
Other assets
Regulatory assets						380						357
Derivative instruments						6						9
Operating lease right-of-use assets						463						492
Other						27						15
Total other assets						876						873
Total assets						$	9,262					$	8,859
Liabilities and Equity
Current liabilities
Short-term debt						$	137					$	250
Borrowings under utility money pool arrangement						91						—
Accounts payable						172						198
Accounts payable to affiliates						16						17
Regulatory liabilities						54						57
Taxes accrued						47						54
Accrued interest						30						29
Dividends payable to parent						58						54
Derivative instruments						4						4
Operating lease liabilities						30						28
Other						24						25
Total current liabilities						663						716
Deferred credits and other liabilities
Deferred income taxes						702						725
Regulatory liabilities						709						718
Asset retirement obligations						116						112
Derivative instruments						6						9
Pension and employee benefit obligations						8						42
Operating lease liabilities						434						463
Other						8						12
Total deferred credits and other liabilities						1,983						2,081
Commitments and contingencies
Capitalization
Long-term debt						3,013						2,764
Common stock — 200 shares authorized of $1.00 par value; 100 shares outstanding at Dec. 31, 2021 and Dec. 31, 2020, respectively						—						—
Additional paid in capital						3,091						2,790
Retained earnings						513						509
Accumulated other comprehensive loss						(1)						(1)
Total common stockholder's equity						3,603						3,298
Total liabilities and equity						$	9,262					$	8,859

See Notes to Financial Statements

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SOUTHWESTERN PUBLIC SERVICE CO.

STATEMENTS OF COMMON STOCKHOLDER’S EQUITY

(amounts in millions, except share data)

			Common Stock Issued																								Accumulated Other Comprehensive Income (Loss)						Total Common Stockholder’s Equity
			Shares						Par Value						Additional Paid In Capital						Retained Earnings
Balance at Dec. 31, 2018			100						$	—					$	1,932					$	606					$	(1)					$	2,537
Net income																					263												263
Common dividends declared to parent																					(334)												(334)
Contribution of capital by parent															419																		419
Balance at Dec. 31, 2019			100						$	—					$	2,351					$	535					$	(1)					$	2,885
Net income																					295												295
Common dividends declared to parent																					(321)												(321)
Contribution of capital by parent															439																		439
Balance at Dec. 31, 2020			100						$	—					$	2,790					$	509					$	(1)					$	3,298
Net income																					318												318
Common dividends declared to parent																					(314)												(314)
Contribution of capital by parent															301																		301
Balance at Dec. 31, 2021			100						$	—					$	3,091					$	513					$	(1)					$	3,603

See Notes to Financial Statements

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SOUTHWESTERN PUBLIC SERVICE COMPANY

Notes to Financial Statements

1. Summary of Significant Accounting Policies

General — SPS is engaged in the regulated generation, purchase, transmission, distribution and sale of electricity.

SPS’ financial statements are presented in accordance with GAAP. All of SPS’ underlying accounting records also conform to the FERC uniform system of accounts or to systems required by various state regulatory commissions. Certain amounts in the financial statements or notes have been reclassified for comparative purposes; however, such reclassifications did not affect net income, total assets, liabilities, equity or cash flows.

SPS has evaluated events occurring after Dec. 31, 2021 up to the date of issuance of these financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation.

Use of Estimates — SPS uses estimates based on the best information available in recording transactions and balances resulting from business operations. Estimates are used for items such as plant depreciable lives or potential disallowances, AROs, certain regulatory assets and liabilities, tax provisions, uncollectible amounts, environmental costs, unbilled revenues, jurisdictional fuel and energy cost allocations and actuarially determined benefit costs. Recorded estimates are revised when better information becomes available or actual amounts can be determined. Revisions can affect operating results.

Regulatory Accounting — SPS accounts for income and expense items in accordance with accounting guidance for regulated operations. Under this guidance:

•Certain costs, which would otherwise be charged to expense or other comprehensive income, are deferred as regulatory assets based on the expected ability to recover the costs in future rates.

•Certain credits, which would otherwise be reflected as income or other comprehensive income, are deferred as regulatory liabilities based on the expectation the amounts will be returned to customers in future rates or because the amounts were collected in rates prior to the costs being incurred.

Estimates of recovering deferred costs and returning deferred credits are based on specific ratemaking decisions or precedent for each item. Regulatory assets and liabilities are amortized consistent with the treatment in the rate setting process.

If changes in the regulatory environment occur, SPS may no longer be eligible to apply this accounting treatment and may be required to eliminate regulatory assets and liabilities from its balance sheet. Such changes could have a material effect on SPS’ results of operations, financial condition and cash flows.

See Note 4 for further information.

Income Taxes — SPS accounts for income taxes using the asset and liability method, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. SPS defers income taxes for all temporary differences between pretax financial and taxable income and between the book and tax bases of assets and liabilities. SPS uses rates that are scheduled to be in effect when the temporary differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in the period that includes the enactment date.

The effects of SPS’ tax rate changes are generally subject to a normalization method of accounting. Therefore, the revaluation of most of its net deferred taxes upon a tax rate reduction results in the establishment of a net regulatory liability, which would be refundable to utility customers over the remaining life of the related assets. SPS anticipates that a tax rate increase would result in the establishment of a regulatory asset, subject to an evaluation of whether future recovery is expected.

Tax credits are recorded when earned unless there is a requirement to defer the benefit and amortize it over the book depreciable lives of the related property. The requirement to defer and amortize tax credits only applies to federal investment tax credits related to public utility property. Utility rate regulation also has resulted in the recognition of regulatory assets and liabilities related to income taxes. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

SPS follows the applicable accounting guidance to measure and disclose uncertain tax positions that it has taken or expects to take in its income tax returns. SPS recognizes a tax position in its financial statements when it is more likely than not that the position will be sustained upon examination based on the technical merits of the position. Recognition of changes in uncertain tax positions are reflected as a component of income tax expense.

SPS reports interest and penalties related to income taxes within other (expense) income or interest charges in the statements of income.

Xcel Energy Inc. and its subsidiaries, including SPS, file consolidated federal income tax returns as well as consolidated or separate state income tax returns. Federal income taxes paid by Xcel Energy Inc. are allocated to its subsidiaries based on separate company computations. A similar allocation is made for state income taxes paid by Xcel Energy Inc. in connection with consolidated state filings. Xcel Energy Inc. also allocates its own income tax benefits to its direct subsidiaries.

See Note 7 for further information.

Property, Plant and Equipment and Depreciation in Regulated Operations — Property, plant and equipment is stated at original cost. The cost of plant includes direct labor and materials, contracted work, overhead costs and AFUDC. The cost of plant retired is charged to accumulated depreciation and amortization. Amounts recovered in rates for future removal costs are recorded as regulatory liabilities. Significant additions or improvements extending asset lives are capitalized, while repairs and maintenance costs are charged to expense as incurred. Maintenance and replacement of items determined to be less than a unit of property are charged to operating expenses as incurred. Planned maintenance activities are charged to operating expense unless the cost represents the acquisition of an additional unit of property or the replacement of an existing unit of property.

Property, plant and equipment is tested for impairment when it is determined that the carrying value of the assets may not be recoverable. A loss is recognized in the current period if it becomes probable that part of a cost of a plant under construction or recently completed plant will be disallowed for recovery from customers and a reasonable estimate of the disallowance can be made. For investments in property, plant and equipment that are abandoned and not expected to go into service, incurred costs and related deferred tax amounts are compared to the discounted estimated future rate recovery, and a loss is recognized, if necessary.

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SPS records depreciation expense using the straight-line method over the plant’s commission-approved useful life. Actuarial life studies are performed and submitted to the state and federal commissions for review. Upon acceptance by the various commissions, the resulting lives and net salvage rates are used to calculate depreciation. Plant removal costs are recovered in rates as authorized by the appropriate regulatory entities. The amount of removal costs is based on current factors used in existing depreciation rates. Depreciation expense, expressed as a percentage of average depreciable property, was 3.3% in 2021, 3.1% in 2020 and 2.9% in 2019.

See Note 3 for further information.

AROs — SPS accounts for AROs under accounting guidance that requires a liability for the fair value of an ARO to be recognized in the period in which it is incurred if it can be reasonably estimated, with the offsetting associated asset retirement costs capitalized as a long-lived asset. The liability is generally increased over time by applying the effective interest method of accretion, and the capitalized costs are depreciated over the useful life of the long-lived asset. Changes resulting from revisions to the timing or amount of expected asset retirement cash flows are recognized as an increase or a decrease in the ARO.

See Note 10 for further information.

Benefit Plans and Other Postretirement Benefits — SPS maintains pension and postretirement benefit plans for eligible employees. Recognizing the cost of providing benefits and measuring the projected benefit obligation of these plans requires management to make various assumptions and estimates.

Certain unrecognized actuarial gains and losses and unrecognized prior service costs or credits are deferred as regulatory assets and liabilities, rather than recorded as other comprehensive income, based on regulatory recovery mechanisms.

See Note 9 for further information.

Environmental Costs — Environmental costs are recorded when it is probable SPS is liable for remediation costs and the liability can be reasonably estimated. Costs are deferred as a regulatory asset if it is probable that the costs will be recovered from customers in future rates. Otherwise, the costs are expensed. For certain environmental costs related to facilities currently in use, such as for emission-control equipment, the cost is capitalized and depreciated over the life of the plant.

Estimated remediation costs are regularly adjusted as estimates are revised and remediation proceeds. If other participating potentially responsible parties exist and acknowledge their potential involvement with a site, costs are estimated and recorded only for SPS’ expected share of the cost.

Future costs of restoring sites are treated as a capitalized cost of plant retirement. The depreciation expense levels recoverable in rates include a provision for removal expenses. Removal costs recovered in rates before the related costs are incurred are classified as a regulatory liability.

See Note 10 for further information.

Revenue from Contracts with Customers — Performance obligations related to the sale of energy are satisfied as energy is delivered to customers. SPS recognizes revenue that corresponds to the price of the energy delivered to the customer. The measurement of energy sales to customers is generally based on the reading of their meters, which occurs systematically throughout the month. At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is recognized.

SPS does not recognize a separate financing component of its collections from customers as contract terms are short-term in nature. SPS presents its revenues net of any excise or sales taxes or fees.

SPS participates in SPP. SPS recognizes physical sales to customers (native load and wholesale) on a gross basis in electric revenues and cost of sales. Revenues and charges for short-term physical wholesale sales of excess energy transacted through RTOs are also recorded on a gross basis. Other revenues and charges settled/facilitated through an RTO are recorded on a net basis in cost of sales.

See Note 6 for further information.

Cash and Cash Equivalents — SPS considers investments in instruments with a remaining maturity of three months or less at the time of purchase to be cash equivalents.

Accounts Receivable and Allowance for Bad Debts — Accounts receivable are stated at the actual billed amount net of an allowance for bad debts. SPS establishes an allowance for uncollectible receivables based on a policy that reflects its expected exposure to the credit risk of customers.

As of Dec. 31, 2021 and 2020, the allowance for bad debts was $12 million and $8 million, respectively.

Inventory — Inventory is recorded at average cost and consisted of the following:

(Millions of Dollars)						Dec. 31, 2021						Dec. 31, 2020
Inventories
Materials and supplies						$	29					$	27
Fuel						22						9
Total inventories						$	51					$	36

Fair Value Measurements — SPS presents cash equivalents, interest rate derivatives and commodity derivatives at estimated fair values in its financial statements. Cash equivalents are recorded at cost plus accrued interest; money market funds are measured using quoted NAVs. For interest rate derivatives, quoted prices based primarily on observable market interest rate curves are used to establish fair value. For commodity derivatives, the most observable inputs available are generally used to determine the fair value of each contract. In the absence of a quoted price, SPS may use quoted prices for similar contracts or internally prepared valuation models to determine fair value. For the pension and postretirement plan assets published trading data and pricing models, generally using the most observable inputs available, are utilized to estimate fair value for each security.

See Notes 8 and 9 for further information.

Derivative Instruments — SPS uses derivative instruments in connection with its utility commodity price and interest rate activities, including forward contracts, futures, swaps and options. Any derivative instruments not qualifying for the normal purchases and normal sales exception are recorded on the balance sheets at fair value as derivative instruments. Classification of changes in fair value for those derivative instruments is dependent on the designation of a qualifying hedging relationship. Changes in fair value of derivative instruments not designated in a qualifying hedging relationship are reflected in current earnings or as a regulatory asset or liability. Classification as a regulatory asset or liability is based on expected recovery of derivative instrument settlements through fuel and purchased energy cost recovery mechanisms. Interest rate hedging transactions are recorded as a component of interest expense.

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Normal Purchases and Normal Sales — SPS enters into contracts for purchases and sales of commodities for use in its operations. At inception, contracts are evaluated to determine whether a derivative exists and/or whether an instrument may be exempted from derivative accounting if designated as a normal purchase or normal sale.

See Note 8 for further information.

Other Utility Items

AFUDC — AFUDC represents the cost of capital used to finance utility construction activity. AFUDC is computed by applying a composite financing rate to qualified CWIP. The amount of AFUDC capitalized as a utility construction cost is credited to other nonoperating income (for equity capital) and interest charges (for debt capital). AFUDC amounts capitalized are included in SPS’ rate base for establishing utility rates.

Alternative Revenue — Certain rate rider mechanisms (including DSM programs) qualify as alternative revenue programs. These mechanisms arise from costs imposed upon the utility by action of a regulator or legislative body related to an environmental, public safety or other mandate or from other instances where the regulator authorizes a future surcharge in response to past activities or completed events. When certain criteria are met, including expected collection within 24 months, revenue is recognized equal to the revenue requirement, which may include incentives and return on rate base items. Billing amounts are revised periodically for differences between total amount collected and revenue earned, which may increase or decrease the level of revenue collected from customers. Alternative revenues arising from these programs are presented on a gross basis and disclosed separately from revenue from contracts with customers.

See Note 6 for further information.

Conservation Programs — SPS has implemented programs in its jurisdictions to assist customers in conserving energy and reducing peak demand on the electric system. These programs include commercial motor, air conditioner and lighting upgrades, as well as residential rebates for participation in air conditioner interruption and home weatherization.

The costs incurred for some DSM programs are deferred as permitted by the applicable regulatory jurisdiction. For those programs, costs are deferred if it is probable future revenue will be provided to permit recovery of the incurred cost. Revenues recognized for incentive programs designed for recovery of lost margins and/or conservation performance incentives are limited to amounts expected to be collected within 24 months from the annual period in which they are earned. SPS recovers approved conservation program costs in base rate revenue or through a rider.

Emission Allowances — Emission allowances are recorded at cost, including broker commission fees. The inventory accounting model is utilized for all emission allowances and sales of these allowances are included in electric revenues.

RECs — Cost of RECs that are utilized for compliance is recorded as electric fuel and purchased power expense. SPS reduces recoverable fuel and purchased power costs for the cost of RECs received. An inventory accounting model is used to account for RECs recognized on the balance sheet, however these assets are classified as regulatory assets if amounts are recoverable in future rates.

Sales of RECs are recorded in electric revenues on a gross basis. Cost of these RECs and amounts credited to customers under margin-sharing mechanisms are recorded in electric fuel and purchased power expense.

Segment Information — SPS has only one reportable segment. SPS is a wholly owned subsidiary of Xcel Energy Inc. and operates in the regulated electric utility industry providing wholesale and retail electric service in the states of Texas and New Mexico.

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. Property, Plant and Equipment

Major classes of property, plant and equipment

(Millions of Dollars)						Dec. 31, 2021						Dec. 31, 2020
Property, plant and equipment, net
Electric plant						$	9,639					$	9,229
Plant to be retired (a)						299						316
CWIP						171						146
Total property, plant and equipment						10,109						9,691
Less accumulated depreciation						(2,271)						(2,088)
Property, plant and equipment, net						$	7,838					$	7,603

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

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4. Regulatory Assets and Liabilities

Regulatory assets and liabilities are created for amounts that regulators may allow to be collected or may require to be paid back to customers in future electric rates. SPS would be required to recognize the write-off of regulatory assets and liabilities in net income or other comprehensive income if changes in the utility industry no longer allow for the application of regulatory accounting guidance under GAAP.

Components of regulatory assets:

(Millions of Dollars)						See Note(s)						Remaining Amortization Period						Dec. 31, 2021												Dec. 31, 2020
Regulatory Assets																		Current						Noncurrent						Current						Noncurrent
Pension and retiree medical obligations						9						Various						$	11					$	135					$	12					$	178
Texas revenue surcharges												One to two years						20						64						54						17
Excess deferred taxes — TCJA						7						Various						2						50						3						51
Recoverable deferred taxes on AFUDC												Plant lives						—						41						—						42
Net AROs (a)						1, 10						Various						—						40						—						33
Losses on reacquired debt												Term of related debt						1						19						1						20
Conservation programs (b)						1						One to two years						3						2						1						2
Deferred natural gas and electric energy/fuel costs												One to three years						146						4						—						—
Other												Various						10						25						5						14
Total regulatory assets																		$	193					$	380					$	76					$	357

(a)Includes amounts recorded for future recovery of AROs.

(b)Includes costs for conservation programs, as well as incentives allowed in certain jurisdictions.

Components of regulatory liabilities:

(Millions of Dollars)						See Note(s)						Remaining Amortization Period						Dec. 31, 2021												Dec. 31, 2020
Regulatory Liabilities																		Current						Noncurrent						Current						Noncurrent
Deferred income tax adjustments and TCJA refunds (a)						7						Various						$	15					$	486					$	6					$	513
Plant removal costs						1, 10						Various						—						190						—						177
Revenue subject to refund												One to two years						6						4						4						4
Gain from asset sales												Various						—						2						—						2
Deferred natural gas and electric energy/fuel costs												Less than one year						—						—						35						—
Contract valuation adjustments (b)						1, 8						One to three years						27						1						7						—
Other												Various						6						26						5						22
Total regulatory liabilities																		$	54					$	709					$	57					$	718

(a)Includes the revaluation of recoverable/regulated plant accumulated deferred income taxes and revaluation impact of non-plant accumulated deferred income taxes due to the TCJA.

(b)Includes the fair value of certain long-term PPAs used to meet energy capacity requirements..

At Dec. 31, 2021 and 2020, SPS’ regulatory assets not earning a return primarily included the unfunded portion of pension and retiree medical obligations and net AROs. In addition, SPS’ regulatory assets included $292 million and $114 million at Dec. 31, 2021 and 2020, respectively, of past expenditures not earning a return. Amounts are related to the Texas deferred fuel balance, losses on reacquired debt and certain rate case expenditures.

5. 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:

(Millions of Dollars, Except Interest Rates)						Three Months Ended Dec. 31, 2021						Year Ended Dec. 31
												2021						2020						2019
Borrowing limit						$	100					$	100					$	100					$	100
Amount outstanding at period end						91						91						—						—
Average amount outstanding						100						51						43						8
Maximum amount outstanding						100						100						100						100
Weighted average interest rate, computed on a daily basis						0.05		%				0.05		%				0.54		%				2.42		%
Weighted average interest rate at end of period						0.05						0.05						N/A						N/A

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Commercial Paper — Commercial paper outstanding:

(Millions of Dollars, Except Interest Rates)						Three Months Ended Dec. 31, 2021						Year Ended Dec. 31
												2021						2020						2019
Borrowing limit						$	500					$	500					$	500					$	400
Amount outstanding at period end						137						137						250						—
Average amount outstanding						69						63						44						72
Maximum amount outstanding						137						342						250						316
Weighted average interest rate, computed on a daily basis						0.17		%				0.21		%				1.11		%				2.68		%
Weighted average interest rate at end of period						0.26						0.26						0.29						N/A

Letters of Credit — SPS may use letters of credit, typically with terms of one year, to provide financial guarantees for certain operating obligations. At both Dec. 31, 2021 and 2020, 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.

Features of SPS’ credit facility:

Debt-to-Total Capitalization Ratio (a)												Amount Facility May Be Increased (millions of dollars)						Additional Periods for Which a One-Year Extension May Be Requested (b)
2021						2020
47%						48%						$50						2

(a)The credit facility has a financial covenant requiring that the debt-to-total capitalization ratio be less than or equal to 65%.

(b)All extension requests are subject to majority bank group approval.

The credit facility has a cross-default provision that SPS would be in default on its borrowings under the facility if SPS or any of its future significant subsidiaries whose total assets exceed 15% of SPS’ total assets default on indebtedness in an aggregate principal amount exceeding $75 million.

If SPS does not comply with the covenant, an event of default may be declared, and if not remedied, any outstanding amounts due under the facility can be declared due by the lender. As of Dec. 31, 2021, SPS was in compliance with all financial covenants.

SPS had the following committed credit facility available as of Dec. 31, 2021 (in millions) of dollars:

Credit Facility (a)						Drawn (b)						Available
$500						$139						$361

(a)This credit facility matures in June 2024.

(b)Includes letters of credit and outstanding commercial paper.

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 facility outstanding at Dec. 31, 2021 and 2020.

Long-Term Borrowings and Other Financing Instruments

Generally, all property of SPS is subject to the lien of its first mortgage indenture. Debt premiums, discounts and expenses are amortized over the life of the related debt. The premiums, discounts and expenses for refinanced debt are deferred and amortized over the life of the new issuance.

Long-term debt obligations for SPS as of Dec. 31 (in millions of dollars):

Financing Instrument						Interest Rate						Maturity Date						2021						2020
First mortgage bonds						3.30		%				June 15, 2024						$	150					$	150
First mortgage bonds						3.30						June 15, 2024						200						200
Unsecured senior notes						6.00						Oct. 1, 2033						100						100
Unsecured senior notes						6.00						Oct. 1, 2036						250						250
First mortgage bonds						4.50						Aug. 15, 2041						200						200
First mortgage bonds						4.50						Aug. 15, 2041						100						100
First mortgage bonds						4.50						Aug. 15, 2041						100						100
First mortgage bonds						3.40						Aug. 15, 2046						300						300
First mortgage bonds						3.70						Aug. 15, 2047						450						450
First mortgage bonds						4.40						Nov. 15, 2048						300						300
First mortgage bonds						3.75						June 15, 2049						300						300
First mortgage bonds (b)						3.15						May 1, 2050						350						350
First mortgage bonds (a)						3.15						May 1, 2050						250						—
Unamortized discount																		(9)						(10)
Unamortized debt issuance cost																		(28)						(26)
Total long-term debt																		$	3,013					$	2,764

(a)2020 financing re-opened in 2021.

(b)2020 financing.

Maturities of long-term debt:

(Millions of Dollars)
2022						$	—
2023						—
2024						350
2025						—
2026						—

Deferred Financing Costs — Deferred financing costs of approximately $28 million and $26 million, net of amortization, are presented as a deduction from the carrying amount of long-term debt at Dec. 31, 2021 and 2020, respectively. SPS is amortizing these financing costs over the remaining maturity periods of the related debt.

Capital Stock — SPS has the following preferred stock:

Preferred Stock Authorized (Shares)						Par Value of Preferred Stock						Preferred Stock Outstanding (Shares) 2021 and 2020
10,000,000						1.00						—

Dividend Restrictions — SPS dividends are subject to the FERC’s jurisdiction, which prohibits the payment of dividends out of capital accounts. Dividends are solely to be paid from retained earnings. SPS is required to be current on particular interest payments before dividends can be paid.

SPS’ state regulatory commissions additionally impose dividend limitations, which are more restrictive than those imposed by the FERC.

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Requirements and actuals as of Dec. 31, 2021:

Equity to Total Capitalization Ratio Required Range												Equity to Total Capitalization Ratio Actual (a)
Low						High						2021
45.0		%				55.0		%				54.5		%

(a)Excludes short-term debt.

Unrestricted Retained Earnings						Total Capitalization						Limit on Total Capitalization (a)
$	513	million				$	6,615	million				N/A

(a)SPS may not pay a dividend that would cause it to lose its investment grade bond rating.

6. Revenues

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

						Year Ended Dec. 31
(Millions of Dollars)						2021						2020						2019
Major revenue types
Revenue from contracts with customers:
Residential						$	375					$	359					$	352
C&I						842						739						800
Other						38						39						41
Total retail						1,255						1,137						1,193
Wholesale						873						345						361
Transmission						287						279						240
Other						6						4						3
Total revenue from contracts with customers						2,421						1,765						1,797
Alternative revenue and other						44						105						29
Total revenues						$	2,465					$	1,870					$	1,826

7. Income Taxes

Federal Tax Loss Carryback Claims — In 2020, Xcel Energy identified certain expenses related to tax years 2009 - 2011 that qualify for an extended carryback claim. SPS is not expected to accrue any income tax expense related to this adjustment.

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

Tax Year(s)						Expiration
2014 - 2016						December 2022
2018						September 2022

Additionally, the statute of limitations related to the federal tax credit carryforwards will remain open until those credits are utilized in subsequent returns. Further, the statute of limitations related to the additional 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 Dec. 31, 2021, SPS’ earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2016. In April 2021, Texas began an audit of tax years 2016 - 2019. As of Dec. 31, 2021, no material adjustments have been proposed.

Unrecognized Tax Benefits — 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)						Dec. 31, 2021						Dec. 31, 2020
Unrecognized tax benefit — Permanent tax positions						$	4					$	3
Unrecognized tax benefit — Temporary tax positions						4						4
Total unrecognized tax benefit						$	8					$	7

Changes in unrecognized tax benefits:

(Millions of Dollars)						2021						2020						2019
Balance at Jan. 1						$	7					$	5					$	5
Additions based on tax positions related to the current year						1						1						—
Additions for tax positions of prior years						—						5						—
Reductions for tax positions of prior years						—						(4)						—
Balance at Dec. 31						$	8					$	7					$	5

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

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

As the IRS progresses its review of the tax loss carryback claim and as state audits progress, 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)						2021						2020						2019
(Payable) receivable for interest related to unrecognized tax benefits at Jan. 1						$	(1)					$	1					$	1
Interest expense related to unrecognized tax benefits						—						(2)						—
(Payable) receivable for interest related to unrecognized tax benefits at Dec. 31						$	(1)					$	(1)					$	1

No amounts were accrued for penalties related to unrecognized tax benefits as of Dec. 31, 2021, 2020 or 2019.

Other Income Tax Matters — NOL amounts represent the tax loss that is carried forward and tax credits represent the deferred tax asset. NOL and tax credit carryforwards as of Dec. 31 were as follows:

(Millions of Dollars)						2021						2020
Federal NOL carryforward						$	336					$	—
Federal tax credit carryforwards						187						83
State NOL carryforwards						111						1

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Federal carryforward periods expire between 2031 and 2041 and state carryforward periods expire starting 2034.

Total income tax expense from operations differs from the amount computed by applying the statutory federal income tax rate to income before income tax expense.

Effective income tax rate for years ended Dec. 31:

						2021						2020 (a)						2019 (a)
Federal statutory rate						21.0		%				21.0		%				21.0		%
State income tax on pretax income, net of federal tax effect						2.5						2.3						2.2
Increases (decreases) in tax from:
Wind PTCs						(39.7)						(18.3)						(7.9)
Plant regulatory differences (b)						(4.8)						(6.4)						(5.0)
Amortization of excess nonplant deferred taxes						(1.1)						(0.8)						(0.9)
Change in unrecognized tax benefits						0.5						0.3						0.2
Other, net						(1.2)						(1.6)						(0.6)
Effective income tax rate						(22.8)		%				(3.5)		%				9.0		%

(a)Prior periods have been reclassified 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.

Components of income tax expense for years ended Dec. 31:

(Millions of Dollars)						2021						2020						2019
Current federal tax benefit						$	(11)					$	(31)					$	(4)
Current state tax (benefit) expense						(1)						(1)						1
Current change in unrecognized tax expense						—						—						—
Deferred federal tax (benefit) expense						(57)						13						22
Deferred state tax expense						9						8						6
Deferred change in unrecognized tax expense						1						1						1
Total income tax (benefit) expense						$	(59)					$	(10)					$	26

Components of deferred income tax expense as of Dec. 31:

(Millions of Dollars)						2021						2020						2019
Deferred tax (benefit) expense excluding items below						$	(23)					$	53					$	53
Amortization and adjustments to deferred income taxes on income tax regulatory assets and liabilities						(24)						(31)						(24)
Deferred tax (benefit) expense						$	(47)					$	22					$	29

Components of the net deferred tax liability as of Dec. 31:

(Millions of Dollars)						2021						2020 (a)
Deferred tax liabilities:
Differences between book and tax bases of property						$	942					$	838
Operating lease assets						103						109
Regulatory assets						65						59
Deferred fuel costs						34						(9)
Pension expense						34						33
Other						2						2
Total deferred tax liabilities						$	1,180					$	1,032
Deferred tax assets:
Operating lease liabilities						$	103					$	109
Regulatory liabilities						98						104
Tax credit carryforward						187						83
NOL carryforward						76						—
Other employee benefits						7						7
Other						7						4
Total deferred tax assets						478						307
Net deferred tax liability						$	702					$	725

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

8. 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 NAV.

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

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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 forecasts of forward prices and volatilities 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 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 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 Dec. 31, 2021, accumulated other comprehensive loss related to settled 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. As of Dec. 31, 2021, SPS had no unsettled interest rate derivatives.

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.

Gross notional amounts of FTRs:

(Amounts in Millions) (a)

Dec. 31, 2021

Dec. 31, 2020

MWh of electricity

8

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 Dec. 31, 2021, two of the eight most significant counterparties for these activities, comprising $8 million or 24% of this credit exposure, had investment grade ratings from S&P, Moody’s or Fitch Ratings. Five of the eight most significant counterparties, comprising $26 million or 76% of this credit exposure, were not rated by external rating agencies, but based on SPS’ internal analysis, had credit quality consistent with investment grade. One of these significant counterparties, comprising an immaterial amount or less than 1% 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 — Changes in the fair value of FTRs resulting in a pre-tax net gain of $28 million and $7 million in Dec. 31, 2021 and 2019, respectively and $7 million in pre-tax net losses in the year ended Dec. 31, 2020, were reclassified 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 were $20 million and $6 million for the years ended Dec. 31, 2021 and 2019, respectively. For the year ended Dec. 31, 2020, FTR settlement losses were immaterial. Settlement gains and losses were recognized and 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 years ended Dec. 31, 2021, 2020 and 2019.

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

						Dec. 31, 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						$	—					$	—					$	27					$	27					$	—					$	27					$	—					$	—					$	7					$	7					$	—					$	7
Total current derivative assets						$	—					$	—					$	27					$	27					$	—					27						$	—					$	—					$	7					$	7					$	—					7
PPAs (b)																																				3																																				3
Current derivative instruments																																				$	30																																			$	10
Noncurrent derivative assets
PPAs (b)																																				$	6																																			$	9
Noncurrent derivative instruments																																				$	6																																			$	9
Current derivative liabilities
Other derivative instruments:
PPAs (b)																																				$	4																																			$	4
Current derivative instruments																																				$	4																																			$	4
Noncurrent derivative liabilities
PPAs (b)																																				$	6																																			$	9
Noncurrent derivative instruments																																				$	6																																			$	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 Dec. 31, 2021 and 2020. At Dec. 31, 2021 and 2020, derivative assets and liabilities include no obligations to return cash collateral, respectively. At Dec. 31, 2021 and 2020, derivative assets and liabilities include no rights to reclaim cash collateral, respectively. 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 years ended Dec. 31, 2021, 2020 and 2019:

						Year Ended Dec. 31
(Millions of Dollars)						2021						2020						2019
Balance at Jan. 1						$	7					$	12					$	14
Purchases						10						23						27
Settlements						(79)						(23)						(34)
Net transactions recorded during the period:
Net gains (losses) recognized as regulatory assets						89						(5)						5
Balance at Dec. 31						$	27					$	7					$	12

SPS recognizes transfers between levels as of the beginning of each period. There were no transfers of amounts between levels for derivative instruments for Dec. 31, 2021, 2020 and 2019.

Fair Value of Long-Term Debt

As of Dec. 31, other financial instruments for which the carrying amount did not equal fair value:

						2021												2020
(Millions of Dollars)						Carrying Amount						Fair Value						Carrying Amount						Fair Value
Long-term debt						$	3,013					$	3,454					$	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 Dec. 31, 2021 and 2020, and given the observability of the inputs, fair values presented for long-term debt were assigned as Level 2.

9. Benefit Plans and Other Postretirement Benefits

Pension and Postretirement Health Care Benefits

Xcel Energy, which includes SPS, has several noncontributory, qualified, defined benefit pension plans that cover almost all employees. All newly hired or rehired employees participate under the Cash Balance formula, which is based on pay credits using a percentage of annual eligible pay and annual interest credits. The average annual interest crediting rates for these plans was 2.35, 2.37 and 3.12 percent in 2021, 2020, and 2019, respectively. Some employees may participate under legacy formulas such as the traditional final average pay or pension equity. Xcel Energy’s policy is to fully fund into an external trust the actuarially determined pension costs subject to the limitations of applicable employee benefit and tax laws.

In addition to the qualified pension plans, Xcel Energy maintains a SERP and a nonqualified pension plan. The SERP is maintained for certain executives who participated in the plan in 2008, when the SERP was closed to new participants. The nonqualified pension plan provides benefits for compensation that is in excess of the limits applicable to the qualified pension plans, with distributions funded by Xcel Energy’s consolidated operating cash flows. Obligations of the SERP and nonqualified plan as of Dec. 31, 2021 and 2020 were $43 million and $43 million, respectively, of which $2 million was attributable to SPS in both years. In 2021 and 2020, Xcel Energy recognized net benefit cost for the SERP and nonqualified plans of $4 million and $6 million, respectively, of which immaterial amounts were attributable to SPS.

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Xcel Energy, which includes SPS, investment-return assumption considers the expected long-term performance for each of the asset classes in its pension and postretirement health care portfolio. Xcel Energy considers the historical returns achieved by its asset portfolios over long time periods, as well as long-term projected return levels. 20 years or longer period, as well as long-term projected return levels. Xcel Energy and SPS continually review pension assumptions.

Pension cost determination assumes a forecasted mix of investment types over the long-term.

•Investment returns in 2021 were above the assumed level of 6.39%.

•Investment returns in 2020 were above the assumed level of 6.78%.

•Investment returns in 2019 were above the assumed level of 6.78%.

•In 2022, SPS’s expected investment-return assumption is 6.39%.

Pension plan and postretirement benefit assets are invested in a portfolio according to Xcel Energy’s return, liquidity and diversification objectives to provide a source of funding for plan obligations and minimize contributions to the plan, within appropriate levels of risk. The principal mechanism for achieving these objectives is the asset allocation given the long-term risk, return, correlation and liquidity characteristics of each particular asset class.

There were no significant concentrations of risk in any industry, index, or entity. Market volatility can impact even well-diversified portfolios and significantly affect the return levels achieved by the assets in any year.

State agencies also have issued guidelines to the funding of postretirement benefit costs. SPS is required to fund postretirement benefit costs for Texas and New Mexico amounts collected in rates. These assets are invested in a manner consistent with the investment strategy for the pension plan.

Xcel Energy’s ongoing investment strategy is based on plan-specific investment recommendations that seek to minimize potential investment and interest rate risk as a plan’s funded status increases over time. The investment recommendations consider many factors and generally result in a greater percentage of long-duration fixed income securities being allocated to specific plans having relatively higher funded status ratios and a greater percentage of growth assets being allocated to plans having relatively lower funded status ratios.

Plan Assets

For each of the fair value hierarchy levels, SPS’ pension plan assets measured at fair value:

						Dec. 31, 2021 (a)																														Dec. 31, 2020 (a)
(Millions of Dollars)						Level 1						Level 2						Level 3						Measured at NAV						Total						Level 1						Level 2						Level 3						Measured at NAV						Total
Cash equivalents						$	20					$	—					$	—					$	—					$	20					$	31					$	—					$	—					$	—					$	31
Commingled funds						202						—						—						169						371						211						—						—						160						371
Debt securities						—						148						1						—						149						—						110						1						—						111
Equity securities						10						—						—						—						10						11						—						—						—						11
Other						—						2						—						5						7						2						1						—						—						3
Total						$	232					$	150					$	1					$	174					$	557					$	255					$	111					$	1					$	160					$	527

(a)See Note 8 for further information on fair value measurement inputs and methods.

For each of the fair value hierarchy levels, SPS’ proportionate allocation of the total postretirement benefit plan assets that were measured at fair value:

						Dec. 31, 2021 (a)																														Dec. 31, 2020 (a)
(Millions of Dollars)						Level 1						Level 2						Level 3						Measured at NAV						Total						Level 1						Level 2						Level 3						Measured at NAV						Total
Cash equivalents						$	3					$	—					$	—					$	—					$	3					$	3					$	—					$	—					$	—					$	3
Insurance contracts						—						5						—						—						5						—						5						—						—						5
Commingled funds						6						—						—						7						13						7						—						—						7						14
Debt securities						—						22						—						—						22						—						22						—						—						22
Total						$	9					$	27					$	—					$	7					$	43					$	10					$	27					$	—					$	7					$	44

(a)See Note 8 for further information on fair value measurement inputs and methods.

No assets were transferred in or out of Level 3 for 2021 or 2020.

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Funded Status — Benefit obligations for both pension and postretirement plans decreased from Dec. 31, 2020 to Dec. 31, 2021, due primarily to benefit payments and increases in discount rates used in actuarial valuations. Comparisons of the actuarially computed benefit obligation, changes in plan assets and funded status of the pension and postretirement health care plans for SPS are as follows:

						Pension Benefits												Postretirement Benefits
(Millions of Dollars)						2021						2020						2021						2020
Change in Benefit Obligation:
Obligation at Jan. 1						$	562					$	519					$	38					$	44
Service cost						11						10						1						1
Interest cost						15						18						1						1
Plan amendments						—						—						—						—
Actuarial (gain) loss						(13)						45						(3)						(5)
Plan participants’ contributions						—						—						—						1
Benefit payments						(30)						(30)						(3)						(4)
Obligation at Dec. 31						$	545					$	562					$	34					$	38
Change in Fair Value of Plan Assets:
Fair value of plan assets at Jan. 1						$	527					$	458					$	44					$	44
Actual return on plan assets						46						84						1						3
Employer contributions						14						15						—						—
Plan participants’ contributions						—						—						1						1
Benefit payments						(30)						(30)						(3)						(4)
Fair value of plan assets at Dec. 31						$	557					$	527					$	43					$	44
Funded status of plans at Dec. 31						$	12					$	(35)					$	9					$	6
Amounts recognized in the Balance Sheet at Dec. 31:
Noncurrent assets						12						—						9						6
Noncurrent liabilities						—						(35)						—						—
Net amounts recognized						$	12					$	(35)					$	9					$	6

						Pension Benefits												Postretirement Benefits
Significant Assumptions Used to Measure Benefit Obligations:						2021						2020						2021						2020
Discount rate for year-end valuation						3.08		%				2.71		%				3.09		%				2.65		%
Expected average long-term increase in compensation level						3.75		%				3.75		%				N/A						N/A
Mortality table						Pri-2012						Pri-2012						Pri-2012						Pri-2012
Health care costs trend rate — initial: Pre-65						N/A						N/A						5.30		%				5.50		%
Health care costs trend rate — initial: Post-65						N/A						N/A						4.90		%				5.00		%
Ultimate trend assumption — initial: Pre-65						N/A						N/A						4.50		%				4.50		%
Ultimate trend assumption — initial: Post-65						N/A						N/A						4.50		%				4.50		%
Years until ultimate trend is reached						N/A						N/A						4						5

Accumulated benefit obligation for the pension plan was $506 million and $519 million as of Dec. 31, 2021 and 2020, respectively.

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Net Periodic Benefit Cost (Credit) — Net periodic benefit cost (credit), other than the service cost component, is included in other income (expense) in the statements of income.

Components of net periodic benefit cost (credit) and amounts recognized in other comprehensive income and regulatory assets and liabilities:

						Pension Benefits																		Postretirement Benefits
(Millions of Dollars)						2021						2020						2019						2021						2020						2019
Service cost						$	11					$	10					$	9					$	1					$	1					$	1
Interest cost						15						18						20						1						1						2
Expected return on plan assets						(30)						(29)						(28)						(2)						(2)						(2)
Amortization of prior service credit						—						—						—						—						—						(1)
Amortization of net loss						14						12						11						(1)						—						—
Settlement charge (a)						—						—						2						—						—						—
Net periodic pension cost						10						11						14						(1)						—						—
Effects of regulation						—						2						1						—						—						—
Net benefit cost recognized for financial reporting						$	10					$	13					$	15					$	(1)					$	—					$	—
Significant Assumptions Used to Measure Costs:
Discount rate						2.71		%				3.49		%				4.31		%				2.65		%				3.47		%				4.32		%
Expected average long-term increase in compensation level						3.75						3.75						3.75						—		%				—						—
Expected average long-term rate of return on assets						6.39						6.78						6.78						4.10						4.50						5.30

(a)A settlement charge is required when the amount of all lump-sum distributions during the year is greater than the sum of the service and interest cost components of the annual net periodic pension cost. In 2019, as a result of lump-sum distributions during each plan year, SPS recorded a total pension settlement charge of $2 million. A total of $1 million of that amount was recorded in the income statement in 2019. There were no settlement charges recorded to the qualified pension plans in 2021 or 2020.

						Pension Benefits												Postretirement Benefits
(Millions of Dollars)						2021						2020						2021						2020
Amounts Not Yet Recognized as Components of Net Periodic Benefit Cost:
Net loss						$	143					$	186					$	(19)					$	(18)
Prior service credit						(1)						(1)						(1)						(1)
Total						$	142					$	185					$	(20)					$	(19)
Amounts Not Yet Recognized as Components of Net Periodic Benefit Cost Have Been Recorded as Follows Based Upon Expected Recovery in Rates:
Current regulatory assets						$	11					$	11					$	—					$	—
Noncurrent regulatory assets						131						174						—						—
Current regulatory liabilities						—						—						(1)						(1)
Noncurrent regulatory liabilities						—						—						(19)						(18)
Total						$	142					$	185					$	(20)					$	(19)

Measurement date

Dec. 31, 2021

Dec. 31, 2020

Dec. 31, 2021

Dec. 31, 2020

Cash Flows — Funding requirements can be impacted by changes to actuarial assumptions, actual asset levels and other calculations prescribed by the requirements of income tax and other pension-related regulations. Required contributions were made in 2019 - 2022 to meet minimum funding requirements.

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

•$50 million in January 2022, of which none was attributable to SPS.

•$131 million in 2021, of which $15 million was attributable to SPS.

•$150 million in 2020, of which $14 million was attributable to SPS.

•$154 million in 2019, of which $18 million was attributable to SPS.

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

The postretirement health care plans have no funding requirements other than fulfilling benefit payment obligations when claims are presented and approved. Additional cash funding requirements are prescribed by certain state and federal rate regulatory authorities. Xcel Energy’s voluntary postretirement funding contributions were as follows:

•$9 million during 2022.

•$15 million during 2021.

•$11 million during 2020.

•$15 million during 2019.

•Amounts attributable to SPS were immaterial.

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Target asset allocations:

						Pension Benefits												Postretirement Benefits
						2021						2020						2021						2020
Domestic and international equity securities						33		%				35		%				15		%				15		%
Long-duration fixed income securities						37						35						—						—
Short-to-intermediate fixed income securities						11						13						71						72
Alternative investments						17						15						8						9
Cash						2						2						6						4
Total						100		%				100		%				100		%				100		%

The asset allocations above reflect target allocations approved in the calendar year to take effect in the subsequent year

Plan Amendments — In 2020 and 2019, there were no significant plan amendments made which affected the benefit obligation.

In 2021, Xcel Energy amended the Xcel Energy Pension Plan and Xcel Energy Inc. Nonbargaining Pension Plan (South) to reduce supplemental benefits for non-bargaining participants as well as to allow the transfer of a portion of non-qualified pension obligations into the qualified plans.

Projected Benefit Payments

SPS’ projected benefit payments:

(Millions of Dollars)						Projected Pension Benefit Payments						Gross Projected Postretirement Health Care Benefit Payments						Expected Medicare Part D Subsidies						Net Projected Postretirement Health Care Benefit Payments
2022						$	33					$	3					$	—					$	3
2023						31						2						—						2
2024						31						2						—						2
2025						32						2						—						2
2026						31						2						—						2
2027-2031						153						11						—						11

Defined Contribution Plans

Xcel Energy, which includes SPS, maintains 401(k) and other defined contribution plans that cover most employees. The expense to these plans for SPS was approximately $3 million in 2021, 2020 and 2019.

10. Commitments and Contingencies

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, 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.

Rate Matters

SPS is involved in various regulatory proceedings arising in the ordinary course of business. Until resolution, typically in the form of a rate order, uncertainties may exist regarding the ultimate rate treatment for certain activities and transactions. Amounts have been recognized for probable and reasonably estimable losses that may result. Unless otherwise disclosed, any reasonably possible range of loss in excess of any recognized amount is not expected to have a material effect on the financial statements.

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. In August 2021, the D.C Circuit issued a decision denying these appeals and upholding the FERC’s orders. Refunds received by SPS are expected to be given back to SPS customers through future rates. The timing of these refunds is uncertain.

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. FERC has asked that this appeal be stayed until early 2022, in order to provide FERC with time to issue an order on SPS’ April 2018 rehearing request. FERC’s order is expected in the first quarter of 2022. The D.C. Circuit appeal may resume after that FERC order is issued.

Wind Operating Commitments — PUCT and NMPRC orders related to the Hale and Sagamore wind projects included certain operating and savings minimums. In general, annual generation must exceed a net capacity factor of 48%. If annual generation is below the guaranteed level, SPS would be obligated to refund an amount equal to foregone PTCs and fuel savings. Additionally, retail customer savings must exceed project costs included in base rates over the first ten years of operations. SPS would be required to refund excess costs, if any, after ten years of operations. As of Dec. 31, 2021, the full-year net capacity factor was 48.4%, resulting in no refund liability for 2021.

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Contract Termination — SPS and LP&L are parties to 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). 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.

Environmental

New and changing federal and state environmental mandates can create financial liabilities for SPS, which are normally recovered through the regulated rate process.

Site Remediation

Various federal and state environmental laws impose liability where hazardous substances or other regulated materials have been released to the environment. SPS may sometimes pay all or a portion of the cost to remediate sites where past activities of SPS’ predecessors or other parties have caused environmental contamination. Environmental contingencies could arise from various situations, including sites of former MGPs; and third-party sites, such as landfills, for which SPS is alleged to have sent wastes to that site.

Historical MGP, Landfill and Disposal Sites

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

Environmental Requirements — Water and Waste

Federal CWA Waters of the U.S. Rule — SPS is monitoring ongoing changes to the definition of Waters of the U.S. under the CWA. Regardless of which definition is applicable in the states in which we operate, SPS does not anticipate that compliance costs will be material.

Federal CWA ELG — In 2015, the EPA issued a final ELG rule for power plants that discharge treated effluent to surface waters as well as utility-owned landfills that receive coal combustion residuals. In October 2020, the EPA published a final rule revising the regulations. SPS anticipates that compliance costs will not be material and will be fully recoverable through regulatory mechanisms.

Environmental Requirements — Air

Regional Haze Rules — The regional haze program requires SO2, nitrogen oxide and particulate matter emission controls at power plants to reduce visibility impairment in national parks and wilderness areas. The program includes BART and reasonable further progress. Texas’ first regional haze plan has undergone federal review.

All states are now subject to a second round of regional haze planning/rulemaking, focusing on additional reductions to meet reasonable progress requirements. Any additional impacts to SPS facilities are expected to be minimal.

BART Determination for Texas: The EPA has issued a revised final rule adopting a BART alternative Texas only SO2 trading program that applies to all Harrington and Tolk units. Under the trading program, SPS expects the allowance allocations to be sufficient for SO2 emissions. The anticipated costs of compliance are not expected to have a material impact; and SPS believes that compliance costs would be recoverable through regulatory mechanisms.

Several parties have challenged whether the final rule issued by the EPA should be considered to have met the requirements imposed in a Consent Decree entered by the D.C. Circuit that established deadlines for the EPA to take final action on state regional haze plan submissions. The court has required status reports from the parties while the EPA works on the reconsideration rulemaking.

In December 2017, the National Parks Conservation Association, Sierra Club, and Environmental Defense Fund appealed the EPA’s 2017 final BART rule to the Fifth Circuit and filed a petition for administrative reconsideration. The court has held the litigation in abeyance while the EPA decided whether to reconsider the rule. In August 2018, the EPA started a reconsideration rulemaking. The EPA reaffirmed the rule in August 2020 with minor changes.

The 2020 EPA Action has been challenged. All pending actions could be consolidated and may proceed in the Fifth Circuit or the D.C. Circuit, where a parallel challenge has been filed. The timing of final decisions is unclear.

Reasonable Progress Rule: In 2016, the EPA adopted a final rule establishing a federal implementation plan for reasonable further progress under the regional haze program for the state of Texas. The rule imposes SO2 emission limitations that would require the installation of dry scrubbers on Tolk Units 1 and 2; compliance would have been required by February 2021. Investment costs associated with dry scrubbers could be $600 million. SPS appealed the EPA’s decision and obtained a stay of the final rule.

In March 2017, the Fifth Circuit remanded the rule to the EPA for reconsideration, leaving the stay in effect. In a future rulemaking, the EPA will address whether SO2 emission reductions beyond those required in the BART alternative rule referenced above are needed at Tolk under the “reasonable progress” requirements. As states are now proceeding with the second regional haze planning period, the EPA may choose not to act on the remanded rule.

Implementation of the NAAQS for SO2 — The EPA has designated all areas near SPS’ generating plants as attaining the SO2 NAAQS with one exception. The EPA issued final designations, which found the area near the Harrington plant as “unclassifiable.” The area near the Harrington plant was monitored for the three years ending in 2019 and the monitoring showed the area to be exceeding the standard.

To address this issue, SPS negotiated an order with the TCEQ providing for the end of coal combustion and the conversion of the Harrington plant to a natural gas fueled facility by Jan. 1, 2025.

SPS believes compliance costs or the costs of alternative cost-effective generation will be recoverable through regulatory mechanisms and therefore does not expect a material impact on results of operations, financial condition or cash flows.

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AROs — AROs have been recorded for SPS’ assets.

SPS’ AROs were as follows:

						2021
(Millions of Dollars)						Jan. 1, 2021																		Accretion						Dec. 31, 2021 (a)
Electric
Steam and other production						$	52																	$	2					$	54
Wind						50																		2						52
Distribution						10																		—						10
Total liability						$	112																	$	4					$	116

(a)There were no ARO amounts incurred, settled or revised in 2021.

						2020
(Millions of  Dollars)						Jan. 1, 2020						Amounts Incurred (a)						Amounts Settled (b)						Accretion						Dec. 31, 2020 (c)
Electric
Steam and other production						$	51					$	—					$	(2)					$	3					$	52
Wind						16						33						—						1						50
Distribution						10						—						—						—						10
Total liability						$	77					$	33					$	(2)					$	4					$	112

(a)Amounts incurred related to the Sagamore wind farm placed in service in 2020.

(b)Amounts settled related to asbestos abatement projects.

(c)No AROs were revised in 2020.

Indeterminate AROs — Outside of the recorded asbestos AROs, other plants or buildings may contain asbestos due to the age of many of SPS’ facilities, but no confirmation or measurement of the cost of removal could be determined as of Dec. 31, 2021. Therefore, an ARO has not been recorded for these facilities.

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. 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. The present value of future operating lease payments is recognized in current 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 generally calculated using the estimated incremental borrowing rate (weighted average of 4.4%). SPS has elected to utilize 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)						Dec. 31, 2021						Dec. 31, 2020
PPAs						$	500					$	500
Other						45						50
Gross operating lease ROU assets						545						550
Accumulated amortization						(82)						(58)
Net operating lease ROU assets						$	463					$	492

Components of lease expense:

(Millions of Dollars)						2021						2020						2019
Operating leases
PPA capacity payments						$	53					$	48					$	48
Other operating leases (a)						4						3						5
Total operating lease expense (b)						$	57					$	51					$	53

(a)Includes short-term lease expense of $1 million, $1 million and $2 million for 2021, 2020 and 2019, 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.

Commitments under operating leases as of Dec. 31, 2021:

(Millions of Dollars)						PPA (a) (b) Operating Leases						Other Operating Leases						Total Operating Leases
2022						$	46					$	3					$	49
2023						46						3						49
2024						46						3						49
2025						46						4						50
2026						46						4						50
Thereafter						312						40						352
Total minimum obligation						542						57						599
Interest component of obligation						(120)						(15)						(135)
Present value of minimum obligation						422						42						464
Less current portion																		(30)
Noncurrent operating and finance lease liabilities																		$	434
Weighted-average remaining lease term in years																		12

(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.

PPAs and Fuel Contracts

Non-Lease PPAs — SPS has entered into PPAs with other utilities and energy suppliers for purchased power to meet system load and energy requirements, operating reserve obligations and as part of wholesale and commodity trading activities. In general, these agreements provide for energy payments, based on actual energy delivered and capacity payments. Certain PPAs, accounted for as executory contracts with various expiration dates through 2024, contain minimum energy purchase requirements.

Included in electric fuel and purchased power expenses for PPAs accounted for as executory contracts, were payments for capacity of $12 million, $12 million and $20 million in 2021, 2020 and 2019, respectively.

At Dec. 31, 2021, the estimated future payments for capacity that SPS is obligated to purchase pursuant to these executory contracts, subject to availability, were as follows:

(Millions of Dollars)						Capacity
2022						$	12
2023						12
2024						6
2025						—
2026						—
Thereafter						—
Total						$	30

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Fuel Contracts — SPS has entered into various long-term commitments for the purchase and delivery of a significant portion of its coal and natural gas requirements. These contracts expire between 2022 and 2033. SPS is required to pay additional amounts depending on actual quantities shipped under these agreements.

Estimated minimum purchases under these contracts as of Dec. 31, 2021:

(Millions of Dollars)						Coal						Natural gas supply						Natural gas storage and transportation
2022						$	211					$	44					$	32
2023						50						—						29
2024						31						—						16
2025						—						—						12
2026						—						—						6
Thereafter						—						—						14
Total						$	292					$	44					$	109

VIEs

PPAs — 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. SPS has determined that certain IPPs are VIEs. SPS is not subject to risk of loss from the operations of these entities, and no significant financial support is required other than contractual payments for energy and capacity.

In addition, certain solar PPAs provide an option to purchase emission allowances or sharing provisions related to production credits generated by the solar facility under contract. These specific PPAs create a variable interest in the IPP.

SPS evaluated each of these VIEs for possible consolidation, including review of qualitative factors such as the length and terms of the contract, control over O&M, control over dispatch of electricity, historical and estimated future fuel and electricity prices, and financing activities. SPS concluded that these entities are not required to be consolidated in its financial statements because it does not have the power to direct the activities that most significantly impact the entities’ economic performance.

SPS had approximately 1,197 MW of capacity under long-term PPAs at both Dec. 31, 2021 and 2020 with entities that have been determined to be VIEs. These agreements have expiration dates through 2041.

Fuel Contracts — SPS purchases all of its coal requirements for its Harrington and Tolk plants from TUCO Inc. under contracts that will expire in December 2022. TUCO arranges for the purchase, receiving, transporting, unloading, handling, crushing, weighing, and delivery of coal to meet SPS’ requirements. TUCO is responsible for negotiating and administering contracts with coal suppliers, transporters and handlers.

SPS has not provided any significant financial support to TUCO, other than contractual payments for delivered coal. However, the fuel contracts create a variable interest in TUCO due to SPS’ reimbursement of fuel procurement costs. SPS has determined that TUCO is a VIE. SPS has concluded that it is not the primary beneficiary of TUCO, because SPS does not have the power to direct the activities that most significantly impact TUCO’s economic performance.

11. Related Party Transactions

Xcel Energy Services Inc. provides management, administrative and other services for the subsidiaries of Xcel Energy Inc., including SPS. The services are provided and billed to each subsidiary in accordance with service agreements executed by each subsidiary. SPS uses services provided by Xcel Energy Services Inc. whenever possible. Costs are charged directly to the subsidiary and are allocated if they cannot be directly assigned.

Xcel Energy, Inc., NSP-Minnesota, NSP-Wisconsin, PSCo and SPS have established a utility money pool arrangement.

See Note 5 for further information.

Significant affiliate transactions among the companies and related parties for the years ended Dec. 31:

(Millions of Dollars)						2021						2020						2019
Operating expenses:
Other operating expenses — paid to Xcel Energy Services Inc.						$	209					$	200					$	192

Accounts receivable and payable with affiliates at Dec. 31 were:

						2021												2020
(Millions of Dollars)						Accounts Receivable						Accounts Payable						Accounts Receivable						Accounts Payable
NSP-Minnesota						$	2					$	—					$	3					$	—
PSCo						7						—						6						—
Other subsidiaries of Xcel Energy Inc.						—						16						—						17
						$	9					$	16					$	9					$	17

ITEM 9 — CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A — 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 Dec. 31, 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 SPS’ most recent fiscal quarter ended Dec. 31, 2021 that materially affected, or are reasonably likely to materially affect, SPS’ internal control over financial reporting. SPS maintains internal control over financial reporting to provide reasonable assurance regarding the reliability of the financial reporting. SPS has evaluated and documented its controls in process activities, general computer activities, and on an entity-wide level.

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During the year and in preparation for issuing its report for the year ended Dec. 31, 2021 on internal controls under section 404 of the Sarbanes-Oxley Act of 2002, SPS conducted testing and monitoring of its internal control over financial reporting. Based on the control evaluation, testing and remediation performed, SPS did not identify any material control weaknesses, as defined under the standards and rules issued by the Public Company Accounting Oversight Board, as approved by the SEC and as indicated in SPS’ Management Report on Internal Controls over Financial Reporting, which is contained in Item 8 herein.

This annual report does not include an attestation report of SPS’ independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by SPS’ independent registered public accounting firm pursuant to the rules of the SEC that permit SPS to provide only management’s report in this annual report.

ITEM 9B — OTHER INFORMATION

None.

ITEM 9C — DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS

Not applicable.

PART III

Items 10, 11, 12 and 13 of Part III of Form 10-K have been omitted from this report for SPS in accordance with conditions set forth in general instructions I(1)(a) and (b) of Form 10-K for wholly-owned subsidiaries.

ITEM 10 — DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM 11 — EXECUTIVE COMPENSATION

ITEM 12 — SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 13 — CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information required under this Item is contained in Xcel Energy Inc.’s definitive Proxy Statement for its 2022 Annual Meeting of Shareholders, which is incorporated by reference.

ITEM 14 — PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information required under this Item (aggregate fees billed to us by our principal accountant, Deloitte & Touche LLP (PCAOB ID No. 34)) is contained in Xcel Energy Inc.’s Proxy Statement for its 2022 Annual Meeting of Shareholders, which is incorporated by reference.

PART IV

ITEM 15 — EXHIBIT AND FINANCIAL STATEMENT SCHEDULES

1			Financial Statements
			Management Report on Internal Controls Over Financial Reporting — For the year ended Dec. 31, 2021.
			Report of Independent Registered Public Accounting Firm — Financial Statements
			Statements of Income — For each of the three years ended Dec. 31, 2021, 2020 and 2019.
			Statements of Comprehensive Income — For each of the three years ended Dec. 31, 2021, 2020 and 2019.
			Statements of Cash Flows — For each of the three years ended Dec. 31, 2021, 2020 and 2019.
			Balance Sheets — As of Dec. 31, 2021 and 2020.
			Statements of Common Stockholder’s Equity — For each of the three years ended Dec. 31, 2021, 2020 and 2019.
2			Schedule II — Valuation and Qualifying Accounts and Reserves for each of the years ended Dec. 31, 2021, 2020 and 2019.
3			Exhibits
*			Indicates incorporation by reference
+			Executive Compensation Arrangements and Benefit Plans Covering Executive Officers and Directors

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*			By-Laws of SPS as Amended and Restated on Jan. 25, 2019			SPS Form 10-K for the year ended Dec. 31, 2018			3.02
4.01*			Indenture dated Feb. 1, 1999 between SPS and the Chase Manhattan Bank			SPS Form 8-K dated Feb. 25, 1999			99.2
4.02*			Supplemental Indenture dated Oct. 1, 2003 between SPS and JPMorgan Chase Bank, as successor Trustee, creating $100 million principal amount of 6% Series C and Series D Notes due 2033			Xcel Energy Inc. Form 10-Q for the quarter ended Sept. 30, 2003			4.04
4.03*			Supplemental Indenture dated Oct. 1, 2006 between SPS and the Bank of New York, as successor Trustee, creating $200 million principal amount of 5.6% Series E Notes due 2016 and $250 million principal amount of 6% Series F Notes due 2036			SPS Form 8-K dated Oct. 3, 2006			4.01
4.04*			Indenture dated as of Aug. 1, 2011 between SPS and U.S. Bank National Association, as Trustee			SPS Form 8-K dated Aug. 10, 2011			4.01
4.05*			Supplemental Indenture dated as of Aug. 3, 2011 between SPS and U.S. Bank National Association, as Trustee, creating $200 million principal amount of 4.50% First Mortgage Bonds, Series due 2041			SPS Form 8-K dated Aug. 10, 2011			4.02

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4.06*			Supplemental Indenture dated as of June 1, 2014 between SPS and U.S. Bank National Association, as Trustee, creating $150 million principal amount of 3.30% First Mortgage Bonds, Series due 2024			SPS Form 8-K dated June 9, 2014			4.02
4.07*			Supplemental Indenture dated as of Aug. 1, 2016 between SPS and U.S. Bank National Association, as Trustee, creating $300 million principal amount of 3.40% First Mortgage Bonds, Series due 2046			SPS Form 8-K dated Aug. 12, 2016			4.02
4.08*			Supplemental Indenture dated as of Aug. 1, 2017 between SPS and U.S. Bank National Association, as Trustee, creating $450 million principal amount of 3.70% First Mortgage Bonds, Series due 2047			SPS Form 8-K dated Aug. 9, 2017			4.02
4.09*			Supplemental Indenture dated as of Oct. 1, 2018 between SPS and U.S. Bank National Association, as Trustee, creating $300 million principal amount of 4.40% First Mortgage Bonds, Series due 2048			SPS Form 8-K dated Nov. 5, 2018			4.02
4.10*			Supplemental Indenture dated as of June 1, 2019 between SPS and U.S. Bank National Association, as Trustee, creating $300 million principal amount of 3.75% First Mortgage Bonds, Series due 2049			SPS Form 8-K dated June 18, 2019			4.02
4.11*			Supplemental Indenture No. 8, dated as of May 1, 2020 between SPS and U.S. Bank National Association, as Trustee, creating $600 million principal amount of 3.15% First Mortgage Bonds, Series due 2050			SPS Form 8-K dated May 18, 2020			4.02
10.01*+			Xcel Energy Inc. Nonqualified Pension Plan (2009 Restatement)			Xcel Energy Inc. Form 10-K for the year ended Dec. 31, 2008			10.02
10.02*+			Xcel Energy Senior Executive Severance and Change-in-Control Policy (2009 Restatement)			Xcel Energy Inc. Form 10-K for the year ended Dec. 31, 2008			10.05
10.03*+			Second Amendment to Exhibit 10.02 dated Oct. 26, 2011			Xcel Energy Inc. Form 10-K for the year ended Dec. 31, 2011			10.18
10.04*+			Fifth Amendment to Exhibit 10.02 dated May 3, 2016			Xcel Energy Inc. Form 10-Q for the quarter ended June 30, 2016			10.01
10.05*+			Seventh Amendment to Exhibit 10.02 dated May 7, 2018			Xcel Energy Inc. Form 10-Q for the quarter ended June 30, 2018			10.01
10.06*+			Eighth Amendment to Exhibit 10.02 dated March 31, 2020			Xcel Energy Inc. Form 10-Q for the quarter ended March 31, 2020			10.02
10.07*+			Ninth Amendment to Exhibit 10.02 dated May 22, 2020			Xcel Energy Inc. Form 10-Q for the quarter ended June 30, 2020			10.01
10.08*+			Xcel Energy Inc. Supplemental Executive Retirement Plan as amended and restated Jan. 1, 2009			Xcel Energy Inc. Form 10-K for the year ended Dec. 31, 2008			10.17
10.09*+			Xcel Energy Inc. Executive Annual Incentive Plan (as amended and restated effective Feb. 17, 2010)			Xcel Energy Inc. Definitive Proxy Statement dated April 6, 2010			Appendix A
10.10*+			First Amendment to Exhibit 10.09 dated Feb. 20, 2013			Xcel Energy Inc. Form 10-Q for the quarter ended March 31, 2013			10.01
10.11*+			Xcel Energy Inc. Executive Annual Incentive Award Plan Form of Restricted Stock Agreement			Xcel Energy Inc. Form 10-Q for the quarter ended Sept. 30, 2009			10.08
10.12*+			Xcel Energy Inc. Nonqualified Deferred Compensation Plan (2009 Restatement)			Xcel Energy Inc. Form 10-K for the year ended Dec. 31, 2008			10.07
10.13*+			First Amendment to Exhibit 10.12 effective Nov. 29, 2011			Xcel Energy Inc. Form 10-K for the year ended Dec. 31, 2011			10.17
10.14*+			Second Amendment to Exhibit 10.12 dated May 21, 2013			Xcel Energy Inc. Form 10-K for the year ended Dec. 31, 2013			10.22
10.15*+			Third Amendment to Exhibit 10.12 dated Sept. 30, 2016			Xcel Energy Inc. Form 10-Q for the quarter ended Sept. 30, 2016			10.01
10.16*+			Fourth Amendment to Exhibit 10.12 dated Oct. 23, 2017			Xcel Energy Inc. Form 10-Q for the quarter ended Sept. 30, 2017			10.1
10.17*+			Xcel Energy Inc. Amended and Restated 2015 Omnibus Incentive Plan			Xcel Energy Inc. Form 10-K for the year ended Dec. 31, 2018			10.34
10.18*+			Form of Terms and Conditions under the Xcel Energy Inc. Amended and Restated 2015 Omnibus Incentive Plan for Awards of Restricted Stock Units and/or Performance Share Units			Xcel Energy Inc. Form 10-K for the year ended Dec. 31, 2018			10.35
10.19*+			Form of Award Agreement for Restricted Stock Units and/or Performance Share Units under the Xcel Energy Inc. 2015 Omnibus Incentive Plan Award Agreement for awards since 2020			Xcel Energy Inc. Form 10-K for the year ended Dec. 31, 2019			10.32
10.20*+			Stock Equivalent Plan for Non-Employee Directors of Xcel Energy Inc. as amended and restated effective Feb. 23, 2011			Xcel Energy Inc. Definitive Proxy Statement dated April 5, 2011			Appendix A
10.21*+			Stock Equivalent Program for Non-Employee Directors of Xcel Energy Inc. under the Xcel Energy Inc. 2015 Omnibus Incentive Plan			Xcel Energy Inc. Form 8-K dated May 26, 2015			10.02
10.22*+			Summary of Non-Employee Director Compensation, effective as of Oct. 1, 2021			Xcel Energy Inc. Form 10-Q for the quarter ended Sept. 30, 2021			10.01
10.23*+			Stock Program for Non-Employee Directors of Xcel Energy Inc. as Amended and Restated on Dec. 12, 2017 under the 2015 Omnibus Incentive Plan			Xcel Energy Inc. Form 10-K for the year ended Dec. 31, 2018			10.36
10.24*+			Form of Services Agreement between Xcel Energy Services Inc. and utility companies			Xcel Energy Inc. Form U5B dated Nov. 16, 2000			H-1
10.25*			Third Amended and Restated Credit Agreement, dated as of June 7, 2019 among SPS, as Borrower, the several lenders from time to time parties thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Bank of America, N.A. and Barclays Bank Plc, as Syndication Agents, Wells Fargo Bank, National Association, MUFG Bank, Ltd., and Citibank, N.A., as Documentation Agents			Xcel Energy Inc. Form 8-K dated June 7, 2019			99.04
23.01			Consent of Independent Registered Public Accounting Firm.
31.01			Principal Executive Officer’s certification 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 certification 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			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

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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)

SCHEDULE II

Southwestern Public Service Co. Valuation and Qualifying Accounts Years Ended Dec. 31

						Allowance for bad debts
(Millions of Dollars)						2021						2020						2019
Balance at Jan. 1						$	8					$	5					$	6
Additions charged to costs and expenses						6						6						6
Additions charged to other accounts (a)						3						2						2
Deductions from reserves (b)						(5)						(5)						(9)
Balance at Dec. 31						$	12					$	8					$	5

(a)Recovery of amounts previously written-off.

(b)Deductions related primarily to bad debt write-offs.

ITEM 16 — FORM 10-K SUMMARY

None.

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Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned thereunto duly authorized.

						SOUTHWESTERN PUBLIC SERVICE COMPANY
Feb. 23, 2022						/s/ BRIAN J. VAN ABEL
						Brian J. Van Abel
						Executive Vice President, Chief Financial Officer and Director

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on the date indicated above.

/s/ ROBERT C. FRENZEL						/s/ DAVID T. HUDSON
Robert C. Frenzel						David T. Hudson
Chairman, Chief Executive Officer and Director						President and Director
(Principal Executive Officer)
/s/ BRIAN J. VAN ABEL						/s/ JEFFREY S. SAVAGE
Brian J. Van Abel						Jeffrey S. Savage
Executive Vice President, Chief Financial Officer and Director						Senior Vice President, Controller
(Principal Financial Officer)						(Principal Accounting Officer)

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT

SPS has not sent, and does not expect to send, an annual report or proxy statement to its security holder.

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