UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549
FORM 10-Q
(Mark One)
x☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Sept. 30, 20182019 or
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-03789
001-303475-0575400
(Commission File Number)(I.R.S. Employer Identification No.)
(Registrant, State of Incorporation or Organization, Address of Principal Executive Officers and Telephone Number)
Southwestern Public Service Company
New Mexico
(Exact name of registrant as specified in its charter)
790 South Buchanan Street
New MexicoAmarilloTexas79101
303571-7511
Securities registered pursuant to Section 12(b) of the Act:
Title of each class 75-0575400
(State or other jurisdiction of incorporation or organization)Trading Symbol (I.R.S. Employer Identification No.)Name of each exchange on which registered
N/A 
790 South Buchanan StreetN/A 
Amarillo, Texas79101
(Address of principal executive offices)(Zip Code)N/A
(303) 571-7511
(Registrant’s telephone number, including area code)
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.  x☒Yes¨☐No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 andof 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).  x☒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		☐ 
Accelerated filer ¨
Filer		☐
Non-accelerated filer x
Filer		☒ 
Smaller reporting company ¨
Reporting Company		☐
  
Emerging growth company¨☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).¨☐Yesx☒No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class Outstanding at Oct. 26, 201825, 2019
Common Stock, $1$1.00 par value 100 shares
Southwestern Public Service Company meets the conditions set forth in General Instruction H (1)H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H (2)H(2) to such Form 10-Q.
 



TABLE OF CONTENTS


PART I — FINANCIAL INFORMATION
 
Item l     —
Financial Statements (Unaudited)
35
STATEMENTS OF INCOME

5
STATEMENTS OF COMPREHENSIVE INCOME
6
STATEMENTS OF CASH FLOWS
7
BALANCE SHEETS
8
STATEMENTS OF COMMON STOCKHOLDER’S EQUITY
9
NOTES TO FINANCIAL STATEMENTS
11
Item 2    —
Management’s Discussion and Analysis of Financial Condition and Results of Operations
2217

Item 4    —
Controls and Procedures
2520

   
PART II — OTHER INFORMATION
 
Item 1     —
Legal Proceedings
2620

Item 1A  —
Risk Factors
2620

Item 6    —
Exhibits
2621

   
SIGNATURES
2722

  
Certifications Pursuant to Section 3021
Certifications Pursuant to Section 9061
Statement Pursuant to Private Litigation1


This Form 10-Q is filed by Southwestern Public Service Company, a New Mexico corporation (SPS). SPS is a wholly owned subsidiary of Xcel Energy Inc.  Xcel Energy Inc. wholly owns the following subsidiaries: Northern States Power Company, a Minnesota corporation (NSP-Minnesota); Northern States Power Company, a Wisconsin corporation (NSP-Wisconsin); Public Service Company of Colorado, a Colorado corporation (PSCo); and SPS.  NSP-Minnesota, NSP-Wisconsin, PSCo and SPS are also referred to collectively as utility subsidiaries.  Additional information on Xcel Energy Inc. and its subsidiaries (collectively, Xcel Energy) is available onin various filings with the Securities and Exchange Commission (SEC).SEC. This report should be read in its entirety.



ABBREVIATIONS AND INDUSTRY TERMS
Xcel Energy Inc.’s Subsidiaries and Affiliates (current and former)
NSP-MinnesotaNorthern States Power Company, a Minnesota corporation
NSP-WisconsinNorthern States Power Company, a Wisconsin corporation
PSCoPublic Service Company of Colorado
SPSSouthwestern Public Service Company
Utility subsidiariesNSP-Minnesota, NSP-Wisconsin, PSCo and SPS
Xcel EnergyXcel Energy Inc. and its subsidiaries
Federal and State Regulatory Agencies
D.C. CircuitUnited States Court of Appeals for the District of Columbia Circuit
EPAEnvironmental Protection Agency
FERCFederal Energy Regulatory Commission
IRSInternal Revenue Service
NERCNorth American Electric Reliability Corporation
NMPRCNew Mexico Public Regulation Commission
PUCTPublic Utility Commission of Texas
SECSecurities and Exchange Commission
Electric and Resource Adjustment Clauses
DSMDemand side management
FPPCACFuel and Purchased Power Cost Adjustment Clause
Other Terms and Abbreviations
ACEAffordable Clean Energy
ADITAccumulated deferred income tax
AFUDCAllowance for funds used during construction
ALJAdministrative Law Judge
ASCFASB Accounting Standards Codification
ASUFASB Accounting Standards Update
ATRRAnnual transmission revenue requirement
C&ICommercial and Industrial
CEOChief executive officer
CFOChief financial officer
ETREffective tax rate
FASBFinancial Accounting Standards Board
FTRFinancial transmission right
GAAPGenerally accepted accounting principles
IPPIndependent power producers
NAVNet asset value
NOLNet operating loss
O&MOperating and maintenance
OATTOpen access transmission tariff
PPAPower purchase agreement
PTCProduction tax credit
ROEReturn on equity
ROURight-of-use
RTORegional Transmission Organization
SPPSouthwest Power Pool, Inc.
TCJA2017 federal tax reform enacted as Public Law No: 115-97, commonly referred to as the Tax Cuts and Jobs Act
VIEVariable interest entity
Measurements
MWMegawatts
MWhMegawatt hours







Forward-Looking Statements
Except for the historical statements contained in this report, the matters discussed herein are forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements, assumptions and other statements identified in this document by the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should,” “will,” “would” and similar expressions. Actual results may vary materially. Forward-looking statements speak only as of the date they are made, and we expressly disclaim any obligation to update any forward-looking information. The following factors, in addition to those discussed elsewhere in this Quarterly Report on Form 10-Q and in other securities filings (including SPS’ Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2018, and subsequent securities filings), could cause actual results to differ materially from management expectations as suggested by such forward-looking information: changes in environmental laws and regulations; climate change and other weather, natural disaster and resource depletion, including compliance with any accompanying legislative and regulatory changes; ability to recover costs from customers; reductions in our credit ratings and the costs of maintaining certain contractual relationships; general economic conditions, including inflation rates, monetary fluctuations and their impact on capital expenditures and the ability of SPS to obtain financing on favorable terms; availability or cost of capital; our customers’ and counterparties’ ability to pay their debts to us; assumptions and costs relating to funding our employee benefit plans and health care benefits; tax laws; operational safety; successful long-term operational planning; commodity risks associated with energy markets and production; rising energy prices; costs of potential regulatory penalties; effects of geopolitical events, including war and acts of terrorism; cyber security threats and data security breaches; fuel costs; and employee work force and third party contractor factors.


PART 1 — FINANCIAL INFORMATION
Item 1 — FINANCIAL STATEMENTS


SOUTHWESTERN PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME (UNAUDITED)
(amounts in thousands)millions)
Three Months Ended Sept. 30 Nine Months Ended Sept. 30,Three Months Ended Sept. 30 Nine Months Ended Sept. 30
2018 2017 2018 20172019 2018 2019 2018
Operating revenues$540,063
 $551,623
 $1,468,633
 $1,491,491
$533.1
 $540.1
 $1,397.7
 $1,468.6
              
Operating expenses 
  
           
Electric fuel and purchased power284,006
 294,400
 795,592
 816,027
240.2
 284.0
 651.0
 795.6
Operating and maintenance expenses71,444
 65,540
 203,660
 211,101
74.1
 71.5
 216.6
 203.7
Demand side management expenses4,590
 4,236
 13,527
 11,802
4.5
 4.6
 12.9
 13.5
Depreciation and amortization52,204
 47,548
 150,199
 144,781
61.3
 52.2
 172.3
 150.2
Taxes (other than income taxes)16,814
 16,743
 50,033
 50,222
17.6
 16.8
 53.1
 50.0
Total operating expenses429,058
 428,467
 1,213,011
 1,233,933
397.7
 429.1
 1,105.9
 1,213.0
              
Operating income111,005
 123,156
 255,622
 257,558
135.4
 111.0
 291.8
 255.6
              
Other expense, net(1,026) (464) (2,512) (1,795)
       
Other income (expense), net1.5
 (1.0) 2.4
 (2.4)
       
Allowance for funds used during construction — equity5,019
 2,453
 11,637
 6,457
3.2
 5.0
 22.2
 11.6
              
Interest charges and financing costs 
  
           
Interest charges — includes other financing costs of
$710, $625, $2,106, and $1,781, respectively
21,006
 21,444
 61,782
 66,128
Interest charges — includes other financing costs of
$0.9, $0.7, $2.5 and $2.1, respectively
26.0
 21.0
 76.0
 61.8
Allowance for funds used during construction — debt(2,223) (1,349) (5,526) (3,816)(1.5) (2.2) (10.2) (5.5)
Total interest charges and financing costs18,783
 20,095
 56,256
 62,312
24.5
 18.8
 65.8
 56.3
              
Income before income taxes96,215
 105,050
 208,491
 199,908
115.6
 96.2
 250.6
 208.5
Income taxes14,674
 37,269
 35,400
 71,710
10.5
 14.7
 32.6
 35.4
Net income$81,541
 $67,781
 $173,091
 $128,198
$105.1
 $81.5
 $218.0
 $173.1


See Notes to Financial Statements

SOUTHWESTERN PUBLIC SERVICE COMPANY
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(amounts in thousands)millions)
 Three Months Ended Sept. 30, Nine Months Ended Sept. 30, Three Months Ended Sept. 30 Nine Months Ended Sept. 30
 2018 2017 2018 2017 2019 2018 2019 2018
Net income $81,541
 $67,781
 $173,091
 $128,198
 $105.1
 $81.5
 $218.0
 $173.1
                
Other comprehensive income  
    
  
  
    
  
                
Pension and retiree medical benefits:                
Amortization of losses included in net periodic benefit cost, net of tax of $5, $9, $15 and $27, respectively 18
 16
 55
 46
Amortization of losses included in net periodic benefit cost, net of tax of $0 —
 0.1
 0.1
 0.1
                
Derivative instruments:  
  
  
  
Reclassification of losses to net income, net of tax of $3, $6, $10 and $18, respectively 13
 10
 37
 29
Other comprehensive income 31
 26
 92
 75
 —
 0.1
 0.1
 0.1
Comprehensive income $81,572
 $67,807
 $173,183
 $128,273
 $105.1
 $81.6
 $218.1
 $173.2


See Notes to Financial Statements



SOUTHWESTERN PUBLIC SERVICE COMPANY
STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)millions)
Nine Months Ended Sept. 30,Nine Months Ended Sept. 30,
2018 20172019 2018
Operating activities   
   
Net income$173,091
 $128,198
$218.0
 $173.1
Adjustments to reconcile net income to cash provided by operating activities: 
  
 
  
Depreciation and amortization150,403
 144,664
174.0
 150.4
Demand side management program amortization1,255
 1,255
—
 1.3
Deferred income taxes14,395
 101,388
16.2
 14.4
Amortization of investment tax credits(39) (99)
Allowance for equity funds used during construction(11,637) (6,457)(22.2) (11.6)
Net derivative losses47
 47
Other, net(5) 9
Changes in operating assets and liabilities:      
Accounts receivable(25,096) (25,134)(26.5) (25.1)
Accrued unbilled revenues9,648
 (13,682)(10.4) 9.6
Inventories7,032
 (2,845)(16.3) 7.0
Prepayments and other641
 19,361
6.0
 0.6
Accounts payable(935) 7,817
(15.1) (0.9)
Net regulatory assets and liabilities58,832
 24,856
17.6
 58.8
Other current liabilities12,972
 19,748
14.1
 13.0
Pension and other employee benefit obligations(7,907) (21,638)(17.6) (7.9)
Change in other noncurrent assets3,546
 (1,697)0.7
 3.5
Change in other noncurrent liabilities(235) (18,690)1.3
 (0.2)
Net cash provided by operating activities386,008
 357,101
339.8
 386.0
      
Investing activities 
  
 
  
Utility capital/construction expenditures(621,641) (400,957)(632.8) (610.0)
Allowance for equity funds used during construction11,637
 6,457
Investments in utility money pool arrangement(46,000) —
(133.0) (46.0)
Repayments from utility money pool arrangement111,000
 —
133.0
 111.0
Other, net—
 (493)
Net cash used in investing activities(545,004) (394,993)(632.8) (545.0)
      
Financing activities 
  
 
  
Proceeds from short-term borrowings, net35,000
 (50,000)
(Repayments of) Proceeds from short-term borrowings, net(42.0) 35.0
Proceeds from issuance of long-term debt, net—
 442,651
292.2
 —
Borrowings under utility money pool arrangement446,000
 323,000
283.0
 446.0
Repayments under utility money pool arrangement(423,000) (323,000)(283.0) (423.0)
Capital contributions from parent181,484
 45,000
400.8
 181.4
Repayment of long-term debt—
 (271,613)
Dividends paid to parent(90,705) (82,599)(255.0) (90.7)
Other, net(31) —
Net cash provided by financing activities148,748
 83,439
396.0
 148.7
      
Net change in cash and cash equivalents(10,248) 45,547
103.0
 (10.3)
Cash and cash equivalents at beginning of period10,871
 844
44.0
 10.9
Cash and cash equivalents at end of period$623
 $46,391
$147.0
 $0.6
      
Supplemental disclosure of cash flow information: 
  
 
  
Cash paid for interest (net of amounts capitalized)$(57,924) $(58,581)$(60.3) $(57.9)
Cash (paid) received for income taxes, net(15,251) 37,899
Supplemental disclosure of non-cash investing transactions: 
  
Cash paid for income taxes, net(4.4) (15.3)
Supplemental disclosure of non-cash investing and financing transactions: 
  
Property, plant and equipment additions in accounts payable$54,601
 $40,861
$67.5
 $54.6
Inventory transfer additions in PPE18.7
 17.0
Operating lease right-of-use assets548.3
 —
Allowance for equity funds used during construction22.2
 11.6


See Notes to Financial Statements

SOUTHWESTERN PUBLIC SERVICE COMPANY
BALANCE SHEETS (UNAUDITED)
(amounts in thousands,millions, except share and per share data)
Sept. 30, 2018 Dec. 31, 2017Sept. 30, 2019 Dec. 31, 2018
Assets      
Current assets      
Cash and cash equivalents$623
 $10,871
$147.0
 $44.0
Accounts receivable, net101,870
 79,581
113.9
 90.7
Accounts receivable from affiliates4,085
 1,297
6.1
 10.5
Investments in utility money pool arrangement—
 65,000
Accrued unbilled revenues120,156
 129,804
124.9
 114.5
Inventories33,401
 40,433
31.4
 33.9
Regulatory assets23,387
 31,538
20.8
 26.0
Derivative instruments28,436
 15,882
20.4
 17.8
Prepaid taxes15,821
 15,025
1.5
 14.2
Prepayments and other10,137
 10,341
17.6
 10.7
Total current assets337,916
 399,772
483.6
 362.3
      
   
Property, plant and equipment, net5,539,200
 5,095,609
6,441.9
 5,946.4
      
Other assets 
  
 
  
Regulatory assets366,885
 362,943
362.0
 366.2
Derivative instruments16,584
 18,954
13.4
 15.8
Operating lease right-of-use assets529.0
 —
Other4,602
 11,266
4.4
 5.1
Total other assets388,071
 393,163
908.8
 387.1
Total assets$6,265,187
 $5,888,544
$7,834.3
 $6,695.8
      
Liabilities and Equity 
  
 
  
Current liabilities 
  
 
  
Short-term debt$35,000
 $—
$—
 $42.0
Borrowings under utility money pool arrangement23,000
 —
Accounts payable191,874
 211,756
168.3
 191.8
Accounts payable to affiliates17,308
 22,577
14.9
 19.9
Regulatory liabilities112,585
 68,835
116.8
 85.8
Taxes accrued53,453
 35,243
51.5
 41.6
Accrued interest20,396
 23,275
29.1
 25.8
Dividends payable40,071
 26,753
Dividends payable to parent45.6
 45.2
Derivative instruments3,565
 3,565
3.7
 3.6
Other25,548
 29,641
53.0
 28.3
Total current liabilities522,800
 421,645
482.9
 484.0
      
Deferred credits and other liabilities 
  
 
  
Deferred income taxes601,294
 574,906
653.4
 619.1
Regulatory liabilities795,424
 784,564
736.5
 780.9
Asset retirement obligations29,664
 28,524
49.9
 32.4
Derivative instruments17,275
 19,949
13.7
 16.4
Pension and employee benefit obligations82,369
 90,266
75.2
 92.4
Operating lease liabilities502.2
 —
Other4,816
 8,386
9.0
 7.9
Total deferred credits and other liabilities1,530,842
 1,506,595
2,039.9
 1,549.1
      
Commitments and contingencies

 



 

Capitalization 
  
 
  
Long-term debt1,830,796
 1,829,941
2,419.3
 2,126.1
Common stock — 200 shares authorized of $1.00 par value; 100 shares outstanding at
Sept. 30, 2018 and Dec. 31, 2017, respectively
—
 —
Common stock — 200 shares authorized of $1.00 par value; 100 shares outstanding at
Sept. 30, 2019 and Dec. 31, 2018, respectively
—
 —
Additional paid in capital1,771,469
 1,590,242
2,325.3
 1,932.3
Retained earnings610,655
 541,588
568.2
 605.7
Accumulated other comprehensive loss(1,375) (1,467)(1.3) (1.4)
Total common stockholder’s equity2,380,749
 2,130,363
2,892.2
 2,536.6
Total liabilities and equity$6,265,187
 $5,888,544
$7,834.3
 $6,695.8
See Notes to Financial Statements

SOUTHWESTERN PUBLIC SERVICE COMPANY
STATEMENTS OF COMMON STOCKHOLDER’S EQUITY (UNAUDITED)
(amounts in millions, except share data)

 Common Stock Issued Retained Earnings Accumulated
Other
Comprehensive
Loss		 Total
Common
Stockholders’
Equity
 Shares Par Value Additional Paid In Capital   
Three Months Ended Sept. 30, 2019 and 2018           
Balance at June 30, 2018100
 $—
 $1,591.4
 $569.2
 $(1.5) $2,159.1
Net income      81.5
   81.5
Other comprehensive income        0.1
 0.1
Dividends declared to parent      (40.0)   (40.0)
Contributions of capital by parent    180.0
     180.0
Balance at Sept. 30, 2018100
 $—
 $1,771.4
 $610.7
 $(1.4) $2,380.7
            
Balance at June 30, 2019100
 $—
 $2,307.3
 $577.7
 $(1.3) $2,883.7
Net income      105.1
   105.1
Dividends declared to parent      (114.6)   (114.6)
Contributions of capital by parent    18.0
     18.0
Balance at Sept. 30, 2019100
 $—
 $2,325.3
 $568.2
 $(1.3) $2,892.2
            
See Notes to Financial Statements

SOUTHWESTERN PUBLIC SERVICE COMPANY
STATEMENTS OF COMMON STOCKHOLDER’S EQUITY (UNAUDITED)
(amounts in millions, except share data)

 Common Stock Issued Retained Earnings Accumulated
Other
Comprehensive
Loss		 Total
Common
Stockholders’
Equity
 Shares Par Value Additional Paid In Capital   
Nine Months Ended Sept. 30, 2019 and 2018           
Balance at Dec. 31, 2017100
 $—
 $1,590.2
 $541.6
 $(1.5) $2,130.3
Net income      173.1
   173.1
Other comprehensive income        0.1
 0.1
Dividends declared to parent      (104.0)   (104.0)
Contributions of capital by parent—
 —
 181.2
     181.2
Balance at Sept. 30, 2018100
 $—
 $1,771.4
 $610.7
 $(1.4) $2,380.7
            
Balance at Dec. 31, 2018100
 $—
 $1,932.3
 $605.7
 $(1.4) $2,536.6
Net income      218.0
   218.0
Other comprehensive income        0.1
 0.1
Dividends declared to parent      (255.5)   (255.5)
Contributions of capital by parent    393.0
     393.0
Balance at Sept. 30, 2019100
 $—
 $2,325.3
 $568.2
 $(1.3) $2,892.2
            
See Notes to Financial Statements



SOUTHWESTERN PUBLIC SERVICE COMPANY
Notes to Financial Statements (UNAUDITED)

In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (GAAP),U.S. GAAP, the financial position of SPS as of Sept. 30, 20182019 and Dec. 31, 2017;2018; the results of its operations, including the components of net income and comprehensive income, and change in stockholder’s equity for the three and nine months ended Sept. 30, 20182019 and 2017;2018; and its cash flows for the nine months ended Sept. 30, 20182019 and 2017.2018. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Management has also evaluated the impact of events occurring after Sept. 30, 20182019 up to the date of issuance of these financial statements. These statements contain all necessary adjustments and disclosures resulting from that evaluation. The Dec. 31, 20172018 balance sheet information has been derived from the audited 20172018 financial statements included in the SPS Annual Report on Form 10-K for the year ended Dec. 31, 2017.2018. These notes to the financial statements have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP on an annual basis have been condensed or omitted pursuant to such rules and regulations. For further information, refer to the financial statements and notes thereto, included in the SPS Annual Report on Form 10-K for the year ended Dec. 31, 2017,2018, filed with the SEC on Feb. 23, 2018.22, 2019. Due to the seasonality of SPS’ electric sales, interim results are not necessarily an appropriate base from which to project annual results.

1.Summary of Significant Accounting Policies

The significant accounting policies set forth in Note 1 to the financial statements in the SPS Annual Report on Form 10-K for the year ended Dec. 31, 2017,2018, appropriately represent, in all material respects, the current status of accounting policies and are incorporated herein by reference.

2.Accounting Pronouncements

Recently Issued

Leases Credit Losses— In February 2016, the FASB issued Financial Accounting Standards Board (FASB) issued Leases,Instruments - Credit Losses, Topic 842 (Accounting Standards Update (ASU) No. 2016-02)326 (ASC Topic 326), which changes how entities account for lesseeslosses on receivables and certain other assets. The guidance requires balance sheetuse of a current expected credit loss model, which may result in earlier recognition of right-of-use assets and lease liabilities for most leases. This guidance will becredit losses than under previous accounting standards. ASC Topic 326 is effective for interim and annual reporting periods beginning on or after Dec. 15, 2018. Adoption2019, and will occurbe applied on a modified-retrospective approach through a cumulative-effect adjustment to retained earnings as of Jan. 1, 2019 utilizing2020. SPS expects the practical expedients provided byimpact of adoption of the new standard and included in Targeted Improvements, Topic 842 (ASU No. 2018-11). On Jan. 1, 2019, agreements historically disclosed as operating leases for the use of real estate, equipment and certain fossil-fueled generating facilities operated under purchased power agreements (PPAs) are expected to be recognized on the consolidated balance sheet. Other thaninclude first-time recognition of these types of operating leasesexpected credit losses (i.e., bad debt expense) on unbilled revenues, with the balance sheet, the implementation is not expectedinitial allowance established at Jan. 1, 2020 charged to have a significant impact on SPS’ financial statements.retained earnings.

Recently Adopted

Revenue RecognitionLeases —In May 2014,2016, the FASB issued Revenue from Contracts with Customers, Leases, Topic 606 (ASU No. 2014-09)842(ASC Topic 842), which provides a new frameworkaccounting and disclosure guidance for leasing activities, most significantly requiring that operating leases be recognized on the recognition of revenue.balance sheet. SPS implementedadopted the guidance on a modified retrospective basis on Jan. 1, 2018. Results2019 utilizing the package of transition practical expedients provided by the new standard, including carrying forward prior conclusions on whether agreements existing before the adoption date contain leases and whether existing leases are operating or finance leases; ASC Topic 842 refers to capital leases as finance leases.
Specifically for land easement contracts, SPS has elected the practical expedient provided by ASU No. 2018-01 Leases: Land Easement Practical Expedient for Transition to Topic 842, and as a result, only those easement contracts entered on or after Jan. 1, 2019 will be evaluated to determine if lease treatment is appropriate.
SPS also utilized the transition practical expedient offered by ASU No. 2018-11 Leases: Targeted Improvements to implement the standard on a prospective basis. As a result, reporting periods in the financial statements beginning after Dec. 31, 2017 are presented in accordance withJan. 1, 2019 reflect the implementation of ASC Topic 606,842, while prior period results have not been adjusted andperiods continue to be reported in accordance with prior accounting guidance.Leases, Topic 840 (ASC Topic 840). Other than increased disclosures regarding revenues related to contracts with customers,first-time recognition of operating leases on its balance sheet, the implementation of ASC Topic 842 did not have a materialsignificant impact on SPS’ financial statements. For related disclosures, seeAdoption resulted in recognition of approximately $0.5 billion of operating lease ROU assets and current/noncurrent operating lease liabilities. See Note 129 to the financial statements.

Classification and Measurement of Financial Instruments — In January 2016, the FASB issued Recognition and Measurement of Financial Assets and Financial Liabilities, Subtopic 825-10 (ASU No. 2016-01), which eliminated the available-for-sale classificationstatements for marketable equity securities and also replaced the cost method of accounting for non-marketable equity securities with a model for recognizing impairments and observable price changes. Under the new standard, other than when the consolidation or equity method of accounting is utilized, changes in the fair value of equity securities are recognized in earnings. SPS implemented the guidance on Jan. 1, 2018 and the implementation did not have a material impact on its financial statements.

Presentation of Net Periodic Benefit Cost —In March 2017, the FASB issued Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, Topic 715 (ASU No. 2017-07), which establishes that only the service cost element of pension cost may be presented as a component of operating income in the income statement. Also under the guidance, only the service cost component of pension cost is eligible for capitalization. As a result of the application of accounting principles for rate regulated entities, a similar amount of pension cost, including non-service components, will be recognized consistent with the historical ratemaking treatment, and the impacts of adoption will be limited to changes in classification of non-service costs in the statement of income. SPS implemented the new guidance on Jan. 1, 2018, and as a result, $0.7 million and $2.2 million of pension costs were retrospectively reclassified from operating and maintenance expenses to other income, net on the income statement for the three and nine months ended Sept. 30, 2017, respectively. Under a practical expedient permitted by the standard, SPS used benefit cost amounts disclosed for prior periods as the basis for retrospective application.

leasing disclosures.
3.Selected Balance Sheet Data
(Millions of Dollars) Sept. 30, 2019 Dec. 31, 2018
Accounts receivable, net    
Accounts receivable $119.5
 $96.3
Less allowance for bad debts (5.6) (5.6)
Accounts receivable, net $113.9
 $90.7
(Thousands of Dollars) Sept. 30, 2018 Dec. 31, 2017
Accounts receivable, net    
Accounts receivable $107,709
 $85,929
Less allowance for bad debts (5,839) (6,348)
  $101,870
 $79,581

(Millions of Dollars) Sept. 30, 2019 Dec. 31, 2018
Inventories    
Materials and supplies $24.8
 $25.7
Fuel 6.6
 8.2
Total inventories $31.4
 $33.9
(Thousands of Dollars) Sept. 30, 2018 Dec. 31, 2017
Inventories    
Materials and supplies $25,380
 $26,218
Fuel 8,021
 14,215
  $33,401
 $40,433

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

(Thousands of Dollars) Sept. 30, 2018 Dec. 31, 2017
Property, plant and equipment, net    
Electric plant $7,115,175
 $6,765,371
Construction work in progress 533,538
 351,875
Total property, plant and equipment 7,648,713
 7,117,246
Less accumulated depreciation (2,109,513) (2,021,637)
  $5,539,200
 $5,095,609

4.Income Taxes

Except to the extent noted below, Note 6 to the financial statements included in SPS’ Annual Report on Form 10-K for the year ended Dec. 31, 2017 appropriately represents, in all material respects, the current status of other income tax matters, and are incorporated herein by reference.


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. The following reconciles such differences:
  Nine Months Ended Sept. 30,
  2018 2017
Federal statutory rate 21.0 % 35.0 %
State tax (net of federal tax effect) 2.3
 2.3
Increases (decreases) in tax from: 
 
Regulatory differences - ARAM (a)
 (4.0) —
Regulatory differences - ARAM deferral (b)
 1.7
 —
Regulatory differences - reversal of prior quarters' ARAM deferral (b)
 (0.2) —
Regulatory differences - other utility plant items (1.3) (0.8)
Tax credits (net of federal income tax expense) (0.7) (0.7)
Other (net) (1.8) 0.1
Effective income tax rate 17.0 % 35.9 %
(a)
The average rate assumption method (ARAM); a method to flow back excess deferred taxes to customers.
(b)
ARAM has been deferred when regulatory treatment has not been established. As SPS received direction from its regulatory commissions regarding the return of excess deferred taxes to customers, the ARAM deferral was reversed. This resulted in a reduction to tax expense with a corresponding reduction to revenue.

Federal Audits — SPS is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. The statute of limitations applicable to Xcel Energy’s federal income tax returns expire as follows:
Tax Year(s)Expiration
2009 - 2014October 2019
2015September 2019
2016September 2020

In 2012, the Internal Revenue Service (IRS) commenced an examination of tax years 2010 and 2011, including the 2009 carryback claim. In 2017 Xcel Energy and the Office of Appeals (Appeals) reached an agreement and the benefit related to the agreed upon portions was recognized. SPS did not accrue any income tax benefit related to this adjustment. In the second quarter of 2018, the Joint Committee on Taxation completed its review and took no exception to the agreement. As a result, the remaining unrecognized tax benefit was released and recorded as a payable to the IRS.

In the third quarter of 2015, the IRS commenced an examination of tax years 2012 and 2013. In the third quarter of 2017, the IRS concluded the audit of tax years 2012 and 2013 and proposed an adjustment that would impact Xcel Energy’s net operating loss (NOL) and effective tax rate (ETR). Xcel Energy filed a protest with the IRS. As of Sept. 30, 2018 the case has been forwarded to Appeals and Xcel Energy has recognized its best estimate of income tax expense that will result from a final resolution of this issue; however, the outcome and timing of a resolution is unknown.

State Audits — SPS is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Sept. 30, 2018, SPS’ earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2009. There are currently no state income tax audits in progress.

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

A reconciliation of the amount of unrecognized tax benefit is as follows:
(Millions of Dollars) Sept. 30, 2018 Dec. 31, 2017
Unrecognized tax benefit — Permanent tax positions $2.8
 $2.3
Unrecognized tax benefit — Temporary tax positions 1.6
 2.0
Total unrecognized tax benefit $4.4
 $4.3


The unrecognized tax benefit amounts were reduced by the tax benefits associated with NOL and tax credit carryforwards. The amounts of tax benefits associated with NOL and tax credit carryforwards are as follows:
(Millions of Dollars) Sept. 30, 2018 Dec. 31, 2017
NOL and tax credit carryforwards $(6.9) $(5.9)

It is reasonably possible that SPS’ amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS Appeals progresses and audit resumes and state audits resume. As the IRS Appeals progresses and the IRS audit resumes, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $3 million.

Payables for interest related to unrecognized tax benefits were not material and no amounts were accrued for penalties related to unrecognized tax benefits as of Sept. 30, 2018 or Dec. 31, 2017.

5.Rate Matters

Except to the extent noted below, the circumstances set forth in Note 10 to the financial statements included in SPS’ Annual Report on Form 10-K for the year ended Dec. 31, 2017 and in Note 5 to the financial statements included in to SPS’ Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018, appropriately represent, in all material respects, the current status of other rate matters, and are incorporated herein by reference.

Tax Reform — Regulatory Proceedings

The specific impacts of the TCJA on customer rates are subject to regulatory approval. The following details the status of regulatory decisions in each state where Xcel Energy, which includes Texas and New Mexico, operates.

Texas — In June 2018, SPS, the Public Utility Commission of Texas (PUCT) Staff and various intervenors reached a settlement in the Texas electric rate case which included the impacts of the TCJA. The settlement reflects no change in customer rates or refunds and SPS’ actual capital structure, which SPS has informed the parties it intends to be up to a 57 percent equity ratio to offset the negative impacts on its credit metrics and potentially its credit ratings. A PUCT decision is expected in the fourth quarter of 2018.

New Mexico— In September 2018, the New Mexico Public Regulation Commission (NMPRC) issued its final order in SPS’ 2017 electric rate case, which included a refund of the 2018 impact of the TCJA.

Pending Regulatory Proceedings — PUCT

Texas 2017 Electric Rate Case — In 2017, SPS filed a $54 million, or 5.8 percent, retail electric, non-fuel base rate increase case in Texas with each of its Texas municipalities and the PUCT. The request was based on a historic test year (HTY) ended June 30, 2017, a requested return on equity (ROE) of 10.25 percent, an electric rate base of approximately $1.9 billion and an equity ratio of 53.97 percent.

In May 2018, SPS filed rebuttal testimony and revised its request to an overall increase in the annual base rate revenue of approximately $32 million, or 5.9 percent, net of the TCJA (after adjusting for a requested 58 percent equity ratio) and other adjustments. This request would be equivalent to approximately $17 million after adjusting for the Transmission Cost Recovery Factor (TCRF) rider.

In June 2018, SPS, the PUCT Staff and various intervenors reached a settlement, which results in no overall change to SPS’ revenues after adjusting for the impact of the TCJA and the lower costs of long-term debt.

The following are key terms:

The ability to use an equity ratio that reflects SPS' actual capital structure, up to 57 percent;
A 9.5 percent ROE for the calculation of allowance for funds used during construction (AFUDC);
TCRF rider will remain in effect;
SPS will accelerate the depreciable lives of Tolk Units 1 and 2 from 2042 and 2045, respectively, to 2037; and
SPS agrees that it will file its next base rate case no later than Dec. 31, 2019.

A PUCT decision on the settlement is expected in the fourth quarter of 2018.

Pending Regulatory Proceeding — New Mexico Public Regulation Commission (NMPRC)

New Mexico 2017 Electric Rate Case — In October 2017, SPS filed an electric rate case with the NMPRC seeking an increase in base rates of approximately $43 million. The request was based on a HTY ended June 30, 2017, a ROE of 10.25 percent, an equity ratio of 53.97 percent, a 35 percent federal income tax rate and a rate base of approximately $885 million, including rate base additions through Nov. 30, 2017.

In May 2018, SPS reduced its request to $27 million, net of the TCJA (approximately $11 million, net of the requested higher equity ratio) and other adjustments, based on a requested ROE of 10.25 percent and an equity ratio of 58.0 percent.

In June 2018, the New Mexico Hearing Examiner issued a recommended decision proposing an increase of $12 million based on a ROE of 9.4 percent and an equity ratio of 53.97 percent. She also denied SPS' requests to shorten depreciation lives related to Tolk Units 1 and 2 and Cunningham Unit 1. The Hearing Examiner rejected intervenor proposals to refund the impacts of the TCJA back to Jan. 1, 2018.

On Sept. 5, 2018, the NMPRC issued its final order resulting in a revenue increase of approximately $8 million, or 2.1 percent, effective Sept. 27, 2018, based on a ROE of 9.1 percent and a 51 percent equity ratio. The NMPRC also ordered a refund of $10 million associated with the TCJA impacts for the retroactive period of Jan. 1, 2018 through Sept. 27, 2018. SPS recorded a regulatory liability of $10 million for the customer refund in the third quarter of 2018.
On Sept. 7, 2018, SPS filed an appeal with the NMSC on the grounds that the NMPRC’s findings are contrary to the factual record and do not result in just and reasonable rates as required by law.  In addition, SPS filed a motion for stay with the NMSC to delay the implementation of the retroactive TCJA refund until the NMSC issues its decision on SPS' appeal of the rate case order.  SPS considers the refund illegal primarily because it violates the prohibition on retroactive ratemaking and results in rates that are not just and reasonable.  On Sept. 26, 2018, the NMSC granted a temporary stay to delay the implementation of the retroactive refund until further order of the Court.

Appeal of the New Mexico 2016 Electric Rate Case Dismissal — In November 2016, SPS filed an electric rate case with the NMPRC seeking an increase in base rates of approximately $41 million, representing a total revenue increase of approximately 10.9 percent. The rate filing was based on a requested ROE of 10.1 percent, an equity ratio of 53.97 percent, an electric rate base of approximately $832 million and a future test year ended June 30, 2018. In 2017, the NMPRC dismissed SPS’ rate case. SPS filed a notice of appeal in the NMSC. A decision is not expected until the second half of 2019.

Pending Regulatory Proceeding — Federal Energy Regulatory Commission (FERC)

Southwest Power Pool, Inc. (SPP) Open Access Transmission Tariff (OATT) Upgrade Costs — Under the SPP OATT, costs of participant funded, or “sponsored,” transmission upgrades may be recovered from other SPP customers whose transmission service depends on capacity enabled by the upgrade.  The SPP OATT has allowed SPP to charge for these upgrades since 2008, but SPP had not been charging its customers for these upgrades.  In 2016, the FERC granted SPP’s request to recover the charges not billed since 2008.  SPP subsequently billed SPS approximately $13 million for these charges. SPP is also billing SPS ongoing charges of approximately $0.5 million per month. In July 2018, SPS’ appeal to the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit) over the FERC rulings granting SPP the right to recover these charges was remanded to the FERC. As of September 2018, SPS’ recovery of these charges (from 2008 through 2016) is being reviewed by the FERC, which is expected to rule in the first quarter of 2019.

In October 2017, SPS filed a complaint against SPP regarding the amounts billed asserting that SPP has assessed upgrade charges to SPS in violation of the SPP OATT. In March 2018, the FERC denied SPS’ complaint. SPS sought rehearing in April 2018, and the FERC granted a rehearing for purposes of further consideration in May 2018. The timing of FERC action on the SPS rehearing is uncertain. If SPS’ complaint results in additional charges or refunds, SPS will seek to recover or refund the differential in future rate proceedings.

SPP Filing to Assign GridLiance Facilities to SPS Rate Zone — In August 2018, SPP filed a request with the FERC to amend its OATT to include the costs of the GridLiance High Plains, LLC. facilities in the SPS rate zone. The FERC initially determined the facilities did not qualify as transmission facilities under the SPP OATT. SPP’s proposed tariff changes could result in an increase in the annual transmission revenue requirement (ATRR) of $9.5 million per year, with $6 million allocated to SPS’ retail customers. The remaining $3.5 million would be paid by other wholesale loads in the SPS rate zone. In September 2018, SPS protested the proposed SPP tariff charges, and asked the FERC to reject the SPP filing. The FERC is expected to take initial action in the fourth quarter of 2018.

6.Commitments and Contingencies

Except to the extent noted below and in Note 5 above, the circumstances set forth in Notes 10, 11 and 12 to the financial statements included in SPS’ Annual Report on Form 10-K for the year ended Dec. 31, 2017 and in Notes 5 and 6 to the financial statements included in SPS’ Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018, appropriately represent, in all material respects, the current status of commitments and contingent liabilities and are incorporated herein by reference. The following include commitments, contingencies and unresolved contingencies that are material to SPS’ financial position.

PPAs

SPS purchases power from independent power producing entities that own natural gas fueled power plants for which SPS is required to reimburse natural gas fuel costs, or to participate in tolling arrangements under which SPS procures the natural gas required to produce the energy that it purchases. These specific PPAs create a variable interest in the associated independent power producing entity.

SPS had approximately 967 Megawatts (MW) of capacity under long-term PPAs as of Sept. 30, 2018 and 897 MW as of Dec. 31, 2017, with entities that have been determined to be variable interest entities. SPS has concluded that these entities are not required to be consolidated in its financial statements because it does not have the power to direct the activities that most significantly impact the entities’ economic performance. These agreements have various expiration dates through 2041.

Environmental Contingencies

Manufactured Gas Plant (MGP), Landfill or Disposal Sites— SPS is currently involved in investigating and/or remediating an MGP, landfill or other disposal site. SPS has identified one site where investigation and/or remediation activities are currently underway. Other parties may have responsibility for some portion of the investigation and/or remediation activities. SPS anticipates that the investigation or remediation activities will continue through at least 2019. SPS accrued $0.1 million for the site as of Sept. 30, 2018 and Dec. 31, 2017, respectively. There may be insurance recovery and/or recovery from other responsible parties that will offset any costs incurred.

Legal Contingencies

SPS is involved in various litigation matters that are being defended and handled in the ordinary course of business. The assessment of whether a loss is probable or is a reasonable possibility, and whether the loss or a range of loss is estimable, often involves a series of complex judgments about future events. Management maintains accruals for such losses that are probable of being incurred and subject to reasonable estimation. Management is sometimes unable to estimate an amount or range of a reasonably possible loss in certain situations, including but not limited to when (1) the damages sought are indeterminate, (2) the proceedings are in the early stages, or (3) the matters involve novel or unsettled legal theories. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss. For current proceedings not specifically reported herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on SPS’ financial statements. Unless otherwise required by GAAP, legal fees are expensed as incurred.






7.4. Borrowings and Other Financing Instruments

Short-Term Borrowings

SPS meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under its credit facility and the money pool.
Money Pool — Xcel Energy Inc. and its utility subsidiaries have established a money pool arrangement that allows for short-term investments in and borrowings between the utility subsidiaries. Xcel Energy Inc. may make investments in the utility subsidiaries at market-based interest rates; however, the money pool arrangement does not allow the utility subsidiaries to make investments in Xcel Energy Inc.







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

(Amounts in Millions, Except Interest Rates) Three Months Ended Sept. 30, 2018 Year Ended Dec. 31, 2017
Borrowing limit $100
 $100
Amount outstanding at period end 23
 —
Average amount outstanding 76
 13
Maximum amount outstanding 100
 100
Weighted average interest rate, computed on a daily basis 1.97% 1.12%
Weighted average interest rate at period end 1.99
 N/A

Commercial Paper — SPS meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under its credit facility and the money pool. Commercial paper outstanding for SPS was as follows:
(Amounts in Millions, Except Interest Rates) Three Months Ended Sept. 30, 2019 Year Ended Dec. 31, 2018
Borrowing limit $500
 $400
Amount outstanding at period end —
 42
Average amount outstanding —
 30
Maximum amount outstanding —
 144
Weighted average interest rate, computed on a daily basis N/A
 2.27%
Weighted average interest rate at period end N/A
 2.80

(Amounts in Millions, Except Interest Rates) Three Months Ended Sept. 30, 2018 Year Ended Dec. 31, 2017
Borrowing limit $400
 $400
Amount outstanding at period end 35
 —
Average amount outstanding 63
 69
Maximum amount outstanding 144
 176
Weighted average interest rate, computed on a daily basis 2.25% 1.13%
Weighted average interest rate at period end 2.35
 N/A

Letters of Credit — SPS uses letters of credit, generally with terms of one year, to provide financial guarantees for certain operating obligations. As ofAt Sept. 30, 20182019 and Dec. 31, 2017,2018, there were $2 million and $3 million, respectively, of letters of credit outstanding under the credit facility. The contract amounts of these letters of credit approximate their fair value and are subject to fees.

Credit Facility — In order to use its commercial paper program to fulfill short-term funding needs, SPS must have a revolving credit facility in place at least equal to the amount of its commercial paper borrowing limit and cannot issue commercial paper in an aggregate amount exceeding available capacity under this credit facility. The line of credit provides short-term financing in the form of notes payable to banks, letters of credit and back-up support for commercial paper borrowings.

Amended Credit Agreement —In June 2019, SPS entered into an amended five-year credit agreement with a syndicate of banks. The amended credit agreements have substantially the same terms and conditions as the prior credit agreements with the exception of the following:
Maturity extended from June 2021 to June 2024.
•
Borrowing limit increased from $400 million to $500 million
SPS has the right to request an extension of the revolving credit facility termination date for 2 additional one year, periods. All extension requests are subject to majority bank group approval.
As of Sept. 30, 2018,2019, SPS had the following committed credit facility available (in millions of dollars):

Credit Facility (a)
Credit Facility (a)
 
Drawn (b)
 Available
Credit Facility (a)
 
Outstanding (b)
 Available
$400
 $37
 $363
500
 $2
 $498
(a) 
This credit facility expires in June 2021.2024.
(b) 
Includes outstanding commercial paper and letters of credit.

All credit facility bank borrowings, outstanding letters of credit and outstanding commercial paper reduce the available capacity under the credit facility. SPS had no0 direct advances on the credit facility outstanding as of Sept. 30, 20182019 and Dec. 31, 2017.2018.
Long-Term Borrowings
During the nine months ended Sept. 30, 2019, SPS issued $300 million of 3.75% first mortgage bonds due June 15, 2049.
5. Revenues
Revenue is classified by the type of goods/services rendered and market/customer type. SPS’ operating revenues consists of the following:
  Three Months Ended
(Millions of Dollars) Sept. 30, 2019 Sept. 30, 2018
Major revenue types    
Revenue from contracts with customers:    
Residential $119.3
 $114.4
C&I 222.4
 229.4
Other 12.8
 13.0
Total retail 354.5
 356.8
Wholesale 106.6
 118.0
Transmission 64.4
 60.7
Other 0.6
 1.8
Total revenue from contracts with customers 526.1
 537.3
Alternative revenue and other 7.0
 2.8
Total revenues $533.1
 $540.1
  Nine Months Ended
(Millions of Dollars) Sept. 30, 2019 Sept. 30, 2018
Major revenue types    
Revenue from contracts with customers:    
Residential $277.8
 $279.5
C&I 619.6
 626.0
Other 32.3
 34.0
Total retail 929.7
 939.5
Wholesale 263.4
 326.8
Transmission 181.8
 175.4
Other 2.0
 12.2
Total revenue from contracts with customers 1,376.9
 1,453.9
Alternative revenue and other 20.8
 14.7
Total revenues $1,397.7
 $1,468.6



6.Income Taxes
Note 7 to the financial statements included in SPS’ Annual Report on Form 10-K for the year ended Dec. 31, 2018 represents, in all material respects, the current status of other income tax matters except to the extent noted below, and are incorporated herein by reference.
The following table reconciles the difference between the statutory rate and the ETR:
  Nine Months Ended Sept. 30,
  2019 2018
Federal statutory rate 21.0 % 21.0 %
State tax (net of federal tax effect) 2.2
 2.3
Decreases in tax from: 
 
Plant regulatory differences (a)
 (4.7) (3.8)
Wind PTCs (3.9) —
Other tax credits and tax credit and NOL allowances (net) (0.6) (0.7)
Prior period adjustments (0.5) (1.8)
Other (net) (0.5) —
Effective income tax rate 13.0 % 17.0 %
8.
(a)
Regulatory differences for income tax primarily relate to the credit of excess deferred taxes to customers through the average rate assumption method and the timing of regulatory decisions regarding the return of excess deferred taxes. Income tax benefits associated with the credit of excess deferred credits are offset by corresponding revenue reductions.
Federal Audits — SPS is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return. Statute of limitations applicable to Xcel Energy’s federal income tax returns expire as follows:
Tax Year(s)Expiration
2009 - 2013June 2020
2014 - 2016September 2020

In 2015, the IRS commenced an examination of tax years 2012 and 2013. In 2017, the IRS concluded the audit of tax years 2012 and 2013 and proposed an adjustment that would impact Xcel Energy’s NOL and ETR. Xcel Energy filed a protest with the IRS. As of Sept. 30, 2019, the case has been forwarded to the Office of Appeals and Xcel Energy has recognized its best estimate of income tax expense that will result from a final resolution of this issue; however, the outcome and timing of a resolution is unknown.
In 2018, the IRS began an audit of tax years 2014 - 2016. As of Sept. 30, 2019 0 adjustments have been proposed.
State Audits — SPS is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Sept. 30, 2019, SPS’ earliest open tax year subject to examination by state taxing authorities under applicable statutes of limitations is 2009. There are currently no state income tax audits in progress.
Unrecognized Benefits — Unrecognized tax benefit balance includes permanent tax positions, which if recognized would affect the annual ETR. In addition, the unrecognized tax benefit balance includes temporary tax positions for which ultimate deductibility is highly certain, but for which there is uncertainty about the timing of such deductibility. A change in the period of deductibility would not affect the ETR but would accelerate the payment to the taxing authority to an earlier period.
Unrecognized tax benefits — permanent vs temporary:
(Millions of Dollars) Sept. 30, 2019 Dec. 31, 2018
Unrecognized tax benefit — Permanent tax positions $3.5
 $3.0
Unrecognized tax benefit — Temporary tax positions 1.5
 1.5
Total unrecognized tax benefit $5.0
 $4.5

Unrecognized tax benefits were reduced by tax benefits associated with NOL and tax credit carryforwards:
(Millions of Dollars) Sept. 30, 2019 Dec. 31, 2018
NOL and tax credit carryforwards $(4.4) $(3.8)

Net deferred tax liability associated with the unrecognized tax benefit amounts and related NOLs and tax credits carryforwards were $1.4 million and $0.8 million at Sept. 30, 2019 and Dec. 31, 2018, respectively.
As the IRS Appeals and federal audit progresses, it is reasonably possible that the amount of unrecognized tax benefit could decrease up to approximately $3.7 million in the next 12 months.
Payables for interest related to unrecognized tax benefits were not material and 0 amounts were accrued for penalties related to unrecognized tax benefits as of Sept. 30, 2019 or Dec. 31, 2018.
7.Fair Value of Financial Assets and Liabilities

Fair Value Measurements

The accounting guidance for fair value measurements and disclosures provides a single definition of fair value, hierarchical framework for measuring assets and liabilities and requires certain disclosuresdisclosure 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. The three levels in the hierarchy are as follows:

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 the following:include:

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

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

Commodity derivatives— The methods used to measure the fair value of commodity derivative forwards and options generally utilize observable forward prices and volatilities, as well as observable pricing adjustments for specific delivery locations, and are generally assigned a Level 2 classification. When contractual settlements relate to delivery locations for which pricing is relatively unobservable, or extend to periods beyond those readily observable on active exchanges or quoted by brokers, the significance of the use of less observable forecasts of long-term forward prices and volatilitiesinputs 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 financial transmission rights (FTRs),FTRs, purchased from SPP. FTRs purchased from a regional transmission organization (RTO)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. The valuation process for FTRs utilizes the cleared prices for each FTR for the most recent auction.

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 transparency inobservability of important inputs to the value of FTRs between auction process,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 limited transparency associated withelectric utility operations of SPS, the valuationnumerous unobservable quantitative inputs pertinent to the value of FTRs isare insignificant to the financial statements of SPS.

Derivative Instruments Fair Value Measurements

SPS enters into derivative instruments, including forward contracts, for trading purposes and to manage risk in connection with changes in interest rates and electric utility commodity prices.

Interest Rate Derivatives — SPS may enter into various instruments that effectively fix the 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 Sept. 30, 2018,2019, accumulated other comprehensive lossesloss related to interest rate derivatives included immaterial$0.1 million of net losses expected to be reclassified into earnings during the next 12 months as the related hedged interest rate transactions impact earnings, including forecasted amounts for unsettled hedges, as applicable.

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

The following table details the gross notional amounts of commodity FTRs as of Sept. 30, 2018 and Dec. 31, 2017:
(Amounts in Thousands) (a) 
 Sept. 30, 2018 Dec. 31, 2017
Megawatt hours of electricity 8,594
 4,251

(Amounts in Millions) (a) 
 Sept. 30, 2019 Dec. 31, 2018
Mwh of electricity 9.4
 5.5
(a) 
Amounts are not reflective of net positions in the underlying commodities.

Consideration of Credit Risk and Concentrations — SPS continuously monitors the creditworthiness of counterparties to its interest rate derivatives and commodity derivative contracts prior to settlement, and assesses each counterparty’s ability to perform on the transactions set forth in the contracts. Impact of credit risk was immaterial to the fair value of unsettled commodity derivatives presented in the balance sheets. SPS’ most significant concentrations of credit risk with particular entities or industries are contracts with counterparties to its wholesale, trading and non-trading commodity activities. At Sept. 30, 2019, 1 of the 6 most significant counterparties for these activities, comprising $14.2 million or 31% of this credit exposure, had
investment grade ratings from S&P Global Ratings, Moody’s Investor Services or Fitch Ratings. NaN of the 6 most significant counterparties, comprising $9.7 million or 21% of this credit exposure, were not rated by external rating agencies, but based on SPS’ internal analysis, had credit quality consistent with investment grade. NaN of these significant counterparties are municipal or cooperative electric entities, or other utilities.
Impact of Derivative Activities on Income and Accumulated Other Comprehensive Loss — Pre-tax losses related to interest rate derivatives reclassified from accumulated other comprehensive loss into earnings were immaterial for each of the three and nine months ended Sept. 30, 20182019 and 2017.2018.

DuringChanges in the fair value of FTRs resulting in immaterial pre-tax net gains and pre-tax net gains of $4.7 million were recognized for the three and nine months ended Sept. 30, 2019, respectively, were reclassified as regulatory assets and liabilities. For the three and nine months ended Sept. 30, 2018, changes in the fair value of FTRs resulted in pre-tax net losses of $3.3 million and pre-tax net gains of $10.1 million, respectively, and were recognized as regulatory assets and liabilities. For the three and nine months ended Sept. 30, 2017, changes in the fair value of FTRs resulted in pre-tax net losses of $2.5 million and $0.2 million, respectively, and were recognized as regulatory assets and liabilities. The classification as a regulatory asset or liability is based on expected recovery of FTR settlements through fuel and purchased energy cost recovery mechanisms.

FTR settlement gains of $1.7 million and $1.5 million were recognized for the three and nine months ended Sept. 30, 2019, respectively, and were recorded to electric fuel and purchased power. There were immaterial FTR settlement losses and $3.4 million of FTR settlement gains recognized for the three and nine months ended Sept. 30, 2018, respectively, and were recorded to electric fuel and purchased power. For the three and nine months ended Sept. 30, 2017, FTR settlement losses of $2.2 million and gains of $0.1 million, respectively, 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 no0 derivative instruments designated as fair value hedges during the three and nine months ended Sept. 30, 20182019 and 2017. Therefore, no gains or losses from fair value hedges or related hedged transactions were recognized for these periods.2018.

Consideration of Credit Risk and Concentrations — SPS continuously monitors the creditworthiness of the 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. Given this assessment, as well as an assessment of the impact of SPS’ own credit risk when determining the fair value of derivative liabilities, the impact of credit risk was immaterial to the fair value of unsettled commodity derivatives presented in the balance sheets.

SPS employs additional credit risk control mechanisms when appropriate, such as letters of credit, parental guarantees, standardized master netting agreements and termination provisions that allow for offsetting of positive and negative exposures. Credit exposure is monitored and, when necessary, the activity with a specific counterparty is limited until credit enhancement is provided.

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. As of Sept. 30, 2018, two of SPS’ most significant counterparties, comprising $16.9 million or 34 percent of this credit exposure, had investment grade credit ratings from Standard & Poor’s, Moody’s or Fitch Ratings. Five of the most significant counterparties, comprising $10.7 million or 22 percent of this credit exposure, were not rated by these external agencies, but based on SPS’s internal analysis, had credit quality consistent with investment grade. All seven of these significant counterparties are municipal or cooperative electric entities or other utilities.


Recurring Fair Value Measurements — The following table presents for each of the fair value hierarchy levels, SPS’ derivative assets and liabilities measured at fair value on a recurring basis as of Sept. 30, 2018:basis:
 Sept. 30, 2018 Sept. 30, 2019 Dec. 31, 2018
 Fair Value Fair Value Total 
Counterparty Netting (b)
   Fair Value       Fair Value      
(Thousands of Dollars) Level 1 Level 2 Level 3 Total
(Millions of Dollars) Level 1 Level 2 Level 3 
Fair Value
Total
 

Netting (a)
 Total Level 1 Level 2 Level 3 
Fair Value
Total
 

Netting (a)
 Total
Current derivative assets                                    
Other derivative instruments:                                    
Electric commodity $—
 $—
 $25,666
 $25,666
 $(389) $25,277
 $—
 $—
 $17.3
 $17.3
 $—
 $17.3
 $—
 $—
 $14.9
 $14.9
 $(0.2) $14.7
Total current derivative assets $—
 $—
 $25,666
 $25,666
 $(389) 25,277
 $—
 $—
 $17.3
 $17.3
 $—
 17.3
 $—
 $—
 $14.9
 $14.9
 $(0.2) 14.7
PPAs (a)
           3,159
PPAs (b)
           3.1
           3.1
Current derivative instruments           $28,436
           $20.4
           $17.8
Noncurrent derivative assets                                    
PPAs (a)
           $16,584
PPAs (b)
           13.4
           15.8
Noncurrent derivative instruments           $16,584
           $13.4
           $15.8
Current derivative liabilities                                    
Other derivative instruments:                                    
Electric commodity $—
 $—
 $389
 $389
 $(389) $—
 $—
 $—
 $0.2
 $0.2
 $—
 $0.2
 $—
 $—
 $0.2
 $0.2
 $(0.2) $—
Total current derivative liabilities $—
 $—
 $389
 $389
 $(389) —
 $—
 $—
 $0.2
 $0.2
 $—
 0.2
 $—
 $—
 $0.2
 $0.2
 $(0.2) —
PPAs (a)
           3,565
PPAs (b)
           3.5
       .
   3.6
Current derivative instruments           $3,565
           $3.7
           $3.6
Noncurrent derivative liabilities                                    
PPAs (a)
           $17,275
PPAs (b)
           13.7
           16.4
Noncurrent derivative instruments           $17,275
           $13.7
           $16.4
(a)
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 is being amortized over the remaining contract lives along with the offsetting regulatory assets and liabilities.
(b)
SPS nets derivative instruments and related collateral in its balance sheet when supported by a legally enforceable master netting agreement, and all derivative instruments and related collateral amounts were subject to master netting agreements at Sept. 30, 2019 and Dec. 31, 2018. At both Sept. 30, 2019 and Dec. 31, 2018, derivative assets and liabilities include no0 obligations to return cash collateral or rights to reclaim cash collateral. The counterparty netting amounts presented excludeexcludes settlement receivables and payables and non-derivative amounts that may be subject to the same master netting agreements.


The following table presents for each of the fair value hierarchy levels, SPS’ derivative assets and liabilities measured at fair value on a recurring basis as of Dec. 31, 2017:
  Dec. 31, 2017
  Fair Value Fair Value Total 
Counterparty Netting (b)
  
(Thousands of Dollars) Level 1 Level 2 Level 3   Total
Current derivative assets            
Other derivative instruments:            
Electric commodity $—
 $—
 $14,717
 $14,717
 $(1,994) $12,723
Total current derivative assets $—
 $—
 $14,717
 $14,717
 $(1,994) 12,723
PPAs (a)
           3,159
Current derivative instruments           $15,882
Noncurrent derivative assets            
PPAs (a)
           $18,954
Noncurrent derivative instruments           $18,954
Current derivative liabilities            
Other derivative instruments:            
Electric commodity $—
 $—
 $1,994
 $1,994
 $(1,994) $—
Total current derivative liabilities $—
 $—
 $1,994
 $1,994
 $(1,994) —
PPAs (a)
           3,565
Current derivative instruments           $3,565
Noncurrent derivative liabilities            
PPAs (a)
           $19,949
Noncurrent derivative instruments           $19,949

(a)(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 is beingwill be amortized over the remaining contract lives along with the offsetting regulatory assets and liabilities.
(b)
SPS nets derivative instruments and related collateral in its balance sheet when supported by a legally enforceable master netting agreement, and all derivative instruments and related collateral amounts were subject to master netting agreements at Dec. 31, 2017. At Dec. 31, 2017, derivative assets and liabilities include no obligations to return cash collateral or rights to reclaim cash collateral. The counterparty netting amounts presented exclude settlement receivables and payables and non-derivative amounts that may be subject to the same master netting agreements.

The following table presents the changes
Changes in Level 3 commodity derivatives for the three and nine months ended Sept. 30, 20182019 and 2017:2018:
     Three Months Ended Sept. 30,
 Three Months Ended Sept. 30,
(Thousands of Dollars) 2018 2017
(Millions of Dollars) 2019 2018
Balance at July 1 $35,389
 $28,665
 $22.2
 $35.4
Purchases 3,169
 43
 4.4
 3.2
Settlements (10,068) (9,939) (5.2) (10.1)
Net transactions recorded during the period:        
Net (losses) gains recognized as regulatory assets and liabilities (3,213) 1,669
Net losses recognized as regulatory assets and liabilities (4.3) (3.2)
Balance at Sept. 30 $25,277
 $20,438
 $17.1
 $25.3

     Nine Months Ended Sept. 30,
 Nine Months Ended Sept. 30,
(Thousands of Dollars) 2018 2017
(Millions of Dollars) 2019 2018
Balance at Jan. 1 $12,723
 $1,955
 $14.7
 $12.7
Purchases 22,517
 39,376
 25.5
 22.5
Settlements (35,305) (40,437) (24.9) (35.3)
Net transactions recorded during the period:        
Net gains recognized as regulatory assets and liabilities 25,342
 19,544
 1.8
 25.4
Balance at Sept. 30 $25,277
 $20,438
 $17.1
 $25.3

SPS recognizes transfers between fair value hierarchy levels as of the beginning of each period. There were no0 transfers of amounts between levels for derivative instruments for the three and nine months ended Sept. 30, 20182019 and 2017.2018.

Fair Value of Long-Term Debt

As of Sept. 30, 2018 and Dec. 31, 2017, otherOther financial instruments for which the carrying amount did not equal fair value were as follows:
value:
  Sept. 30, 2018 Dec. 31, 2017
(Thousands of Dollars) 
Carrying
Amount
 Fair Value 
Carrying
Amount
 Fair Value
Long-term debt, including current portion $1,830,796
 $1,832,158
 $1,829,941
 $2,001,992
  Sept. 30, 2019 Dec. 31, 2018
(Millions of Dollars) 
Carrying
Amount
 Fair Value 
Carrying
Amount
 Fair Value
Long-term debt $2,419.3
 $2,763.2
 $2,126.1
 $2,139.8


The fairFair value of SPS’ long-term debt is estimated based on recent trades and observable spreads from benchmark interest rates for similar securities. The fairFair value estimates are based on information available to management as of Sept. 30, 20182019 and Dec. 31, 2017,2018, and given the observability of the inputs, to these estimates, the fair values presented for long-term debt have beenwere assigned aas Level 2.

9.Other Expense, Net

Other expense, net consisted of the following:
  Three Months Ended Sept. 30 Nine Months Ended Sept. 30,
(Thousands of Dollars) 2018 2017 2018 2017
Interest income $473
 $296
 $771
 $488
Other nonoperating income —
 1
 2
 —
Other nonoperating expense (1) —
 —
 —
Insurance policy expense (11) (12) (35) (36)
Benefits non-service cost (1,487) (749) (3,250) (2,247)
Other expense, net $(1,026) $(464) $(2,512) $(1,795)

10.8.Benefit Plans and Other Postretirement Benefits

Components of Net Periodic Benefit Cost (Credit)
  Three Months Ended Sept. 30
  2019 2018 2019 2018
(Millions of Dollars) Pension Benefits 
Postretirement Health
Care Benefits
Service cost $2.2
 $2.4
 $0.2
 $0.3
Interest cost (a)
 5.0
 4.6
 0.4
 0.4
Expected return on plan assets (a)
 (7.1) (7.1) (0.5) (0.6)
Amortization of prior service credit (a)
 —
 —
 (0.1) (0.1)
Amortization of net loss (gain) (a)
 2.8
 3.5
 (0.1) (0.1)
Net periodic benefit cost (credit) 2.9
 3.4
 (0.1) (0.1)
Credits (costs) not recognized due to the effects of regulation 0.5
 (0.4) —
 —
Net benefit cost (credit) recognized for financial reporting $3.4
 $3.0
 $(0.1) $(0.1)
  Three Months Ended Sept. 30
  2018 2017 2018 2017
(Thousands of Dollars) Pension Benefits 
Postretirement Health
Care Benefits
Service cost $2,429
 $2,439
 $280
 $219
Interest cost (a)
 4,603
 4,928
 410
 415
Expected return on plan assets (a)
 (7,082) (6,971) (615) (589)
Amortization of prior service credit (a)
 (34) —
 (101) (100)
Amortization of net loss (gain) (a)
 3,517
 3,245
 (114) (155)
Net periodic benefit cost (credit) 3,433
 3,641
 (140) (210)
(Costs) credits not recognized due to the effects of regulation (468) 553
 —
 —
Net benefit cost (credit) recognized for financial reporting $2,965
 $4,194
 $(140) $(210)



 Nine Months Ended Sept. 30 Nine Months Ended Sept. 30
 2018 2017 2018 2017 2019 2018 2019 2018
(Thousands of Dollars) Pension Benefits Postretirement Health
Care Benefits
(Millions of Dollars) Pension Benefits 
Postretirement Health
Care Benefits
Service cost $7,289
 $7,319
 $839
 $657
 $6.6
 $7.3
 $0.7
 $0.8
Interest cost (a)
 13,808
 14,783
 1,231
 1,245
 15.1
 13.8
 1.3
 1.2
Expected return on plan assets (a)
 (21,246) (20,913) (1,846) (1,767) (21.5) (21.2) (1.5) (1.8)
Amortization of prior service credit (a)
 (103) —
 (302) (300) (0.1) (0.1) (0.4) (0.3)
Amortization of net loss (gain) (a)
 10,551
 9,735
 (340) (465) 8.5
 10.5
 (0.3) (0.3)
Net periodic benefit cost (credit) 10,299
 10,924
 (418) (630) 8.6
 10.3
 (0.2) (0.4)
Credits not recognized due to the effects of regulation 1,267
 1,275
 —
 —
 1.3
 1.3
 —
 —
Net benefit cost (credit) recognized for financial reporting $11,566
 $12,199
 $(418) $(630) $9.9
 $11.6
 $(0.2) $(0.4)

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

In January 2018,2019, contributions of $150$150.0 million were made across four4 of Xcel Energy’s pension plans, of which $8.0$16.5 million was attributable to SPS. In July 2019, Xcel Energy made a $4.0 million contribution to the Xcel Energy Inc. Non-Bargaining Pension Plan (South), of which $1.2 million was attributable to SPS. Xcel Energy does not expect additional pension contributions during 2018.

2019.
11.9.Other Comprehensive Income (Loss)Commitments and Contingencies

The following include commitments, contingencies and unresolved contingencies that are material to SPS’ financial position.
ChangesLegal
SPS is involved in accumulatedvarious litigation matters in the ordinary course of business. The assessment of whether a loss is probable or is a reasonable possibility, and whether the loss or a range of loss is estimable, often involves a series of complex judgments about future events. Management maintains accruals for losses probable of being incurred and subject to reasonable estimation. Management is sometimes unable to estimate an amount or range of a reasonably possible loss in certain situations, including but not limited to, when (1) the damages sought are indeterminate, (2) the proceedings are in the early stages or (3) the matters involve novel or unsettled legal theories. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss.

For current proceedings not specifically reported herein, management does not anticipate that the ultimate liabilities, if any, would have a material effect on SPS’ financial statements. Unless otherwise required by GAAP, legal fees are expensed as incurred.
Rate Matters
SPP OATT Upgrade Costs — Under the SPP OATT, costs of transmission upgrades may be recovered from other comprehensive loss, netSPP customers whose transmission service depends on capacity enabled by the upgrade. SPP had not been charging its customers for these upgrades, even though the SPP OATT had allowed SPP to do so since 2008. In 2016, the FERC granted SPP’s request to recover these previously unbilled charges and SPP subsequently billed SPS approximately $13 million.
In July 2018, SPS’ appeal to the D.C. Circuit over the FERC rulings granting SPP the right to recover these previously unbilled charges was remanded to the FERC. In February 2019, the FERC reversed its 2016 decision and ordered SPP to refund the charges retroactively collected from its transmission customers, including SPS, related to periods before September 2015. In April 2019, several parties, including SPP, filed requests for rehearing. The timing of tax,a FERC response to the rehearing requests is uncertain. Any refunds received by SPS are expected to be given back to SPS customers through future rates.
In October 2017, SPS filed a separate complaint against SPP asserting that SPP has assessed upgrade charges to SPS in violation of the SPP OATT. The FERC granted a rehearing for further consideration in May 2018. The timing of FERC action on the threeSPS rehearing is uncertain. If SPS’ complaint results in additional charges or refunds, SPS will seek to recover or refund the amounts through future SPS customer rates.
SPP Filing to Assign GridLiance Facilities to SPS Rate Zone — In August 2018, SPP filed a request with the FERC to amend its OATT to include the costs of the GridLiance High Plains, LLC. facilities in the SPS rate zone. In a previous filing, the FERC determined that some of these facilities did not qualify as transmission facilities under the SPP OATT. SPP’s proposed tariff changes resulted in an increase in the ATRR of $9.5 million per year, with $6 million allocated to SPS’ retail customers. The remaining $3.5 million would be paid by other wholesale loads in the SPS rate zone.
In September 2018, SPS protested the proposed SPP tariff charges, and nine months ended Sept. 30,asked the FERC to reject the SPP filing. On Oct. 31, 2018, the FERC issued an order accepting the proposed charges, subject to refund, as of Nov. 1, 2018, and 2017 wereset the case for settlement hearing procedures. Hearings are scheduled for May 2020, with the ALJ’s initial decision expected in October 2020.
SPS Filing to Modify Wholesale Transmission Rates — In 2018, SPS filed revisions to its wholesale transmission formula rate. The proposal includes an update to the depreciation rates for transmission plant. The new formula rate would also provide a credit to customers of “excess” ADIT resulting from the TCJA and recover certain wholesale regulatory commission expenses.
The proposed changes would increase wholesale transmission revenues by approximately $9.4 million, with approximately $4.4 million of the total being recovered in SPP regional transmission rates. SPS proposed that the formula rate changes be effective Feb. 1, 2019.
In January 2019, the FERC issued an order accepting the proposed rate changes as follows:
of Feb. 1, 2019, subject to refund and settlement procedures. Settlement procedures started in February 2019, and are ongoing.
  Three Months Ended Sept. 30, 2018
(Thousands of Dollars) Gains and Losses on Cash Flow Hedges Defined Benefit and Postretirement Items Total
Accumulated other comprehensive loss at July 1 $(752) $(654) $(1,406)
Losses reclassified from net accumulated other comprehensive loss 13
 18
 31
Net current period other comprehensive income 13
 18
 31
Accumulated other comprehensive loss at Sept. 30 $(739) $(636) $(1,375)

Environmental
  Three Months Ended Sept. 30, 2017
(Thousands of Dollars) Gains and Losses on Cash Flow Hedges Defined Benefit and Postretirement Items Total
Accumulated other comprehensive loss at July 1 $(659) $(582) $(1,241)
Losses reclassified from net accumulated other comprehensive loss 10
 16
 26
Net current period other comprehensive income 10
 16
 26
Accumulated other comprehensive loss at Sept. 30 $(649) $(566) $(1,215)
MGP, Landfill or Disposal Sites — SPS is currently remediating the site of a former facility.

SPS has recognized its best estimate of costs/liabilities that will result from final resolution of these issues, however, the outcome and timing is unknown. In addition, there may be insurance recovery and/or recovery from other potentially responsible parties, offsetting a portion of the costs incurred.
Leases
SPS evaluates contracts that may contain leases, including PPAs and arrangements for the use of office space and other facilities, vehicles and equipment. Under ASC Topic 842, adopted by SPS on Jan. 1, 2019, a contract contains a lease if it conveys the exclusive right to control the use of a specific asset. A contract determined to contain a lease is evaluated further to determine if the arrangement is a finance lease.
ROU assets represent SPS’ rights to use leased assets. Starting in 2019, the present value of future operating lease payments are recognized in other current liabilities and noncurrent operating lease liabilities. These amounts, adjusted for any prepayments or incentives, are recognized as operating lease ROU assets.
Most of SPS’ leases do not contain a readily determinable discount rate. Therefore, the present value of future lease payments is calculated using the estimated incremental borrowing rate (weighted-average of 4.4%). SPS has elected the practical expedient under which non-lease components, such as asset maintenance costs included in payments, are not deducted from minimum lease payments for the purposes of lease accounting and disclosure. Leases with an initial term of 12 months or less are classified as short-term leases and are not recognized on the balance sheet.
Operating lease ROU assets:
(Millions of Dollars) Sept. 30, 2019
PPAs $500.3
Other 48.0
Gross operating lease ROU assets 548.3
Accumulated amortization (19.3)
Net operating lease ROU assets $529.0

Components of lease expense:
  Nine Months Ended Sept. 30, 2018
(Thousands of Dollars) Gains and Losses on Cash Flow Hedges Defined Benefit and Postretirement Items Total
Accumulated other comprehensive loss at Jan. 1 $(776) $(691) $(1,467)
Losses reclassified from net accumulated other comprehensive loss 37
 55
 92
Net current period other comprehensive income 37
 55
 92
Accumulated other comprehensive loss at Sept. 30 $(739) $(636) $(1,375)


  Nine Months Ended Sept. 30, 2017
(Thousands of Dollars) Gains and Losses on Cash Flow Hedges Defined Benefit and Postretirement Items Total
Accumulated other comprehensive loss at Jan. 1 $(678) $(612) $(1,290)
Losses reclassified from net accumulated other comprehensive loss 29
 46
 75
Net current period other comprehensive income 29
 46
 75
Accumulated other comprehensive loss at Sept. 30 $(649) $(566) $(1,215)

Reclassifications from accumulated other comprehensive loss for the three and nine months ended Sept. 30, 2018 and 2017 were as follows:

  
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
 
(Thousands of Dollars) Three Months Ended Sept. 30, 2018 Three Months Ended Sept. 30, 2017 
Losses on cash flow hedges:  
  
 
Interest rate derivatives $16
(a) 
$16
(a) 
Total, pre-tax 16
 16
 
Tax benefit (3) (6) 
Total, net of tax 13
 10
 
Defined benefit pension and postretirement losses:     
Amortization of net loss 23
(b) 
24
(b) 
Total, pre-tax 23
 24
 
Tax benefit (5) (8) 
Total, net of tax 18
 16
 
Total amounts reclassified, net of tax $31
 $26
 

  
Amounts Reclassified from
Accumulated Other
Comprehensive Loss
 
(Thousands of Dollars) Nine Months Ended Sept. 30, 2018 Nine Months Ended Sept. 30, 2017 
Losses on cash flow hedges:  
  
 
Interest rate derivatives $47
(a) 
$47
(a) 
Total, pre-tax 47
 47
 
Tax benefit (10) (18) 
Total, net of tax 37
 29
 
Defined benefit pension and postretirement losses:     
Amortization of net loss 70
(b) 
72
(b) 
Total, pre-tax 70
 72
 
Tax benefit (15) (26) 
Total, net of tax 55
 46
 
Total amounts reclassified, net of tax $92
 $75
 
(a) Included in interest charges.
(Millions of Dollars) Three Months Ended Sept. 30, 2019 Nine Months Ended Sept. 30, 2019
Operating leases    
PPA capacity payments $11.4
 $36.8
Other operating leases (a)
 1.2
 3.7
Total operating lease expense (b)
 $12.6
 $40.5
(a)
Includes short-term lease expense of $0.3 million for the three months ended Sept. 30, 2019 and $1.2 million for the nine months ended Sept. 30, 2019.
(b) 
IncludedPPA capacity payments are included in electric fuel and purchased power on the computationstatements of net periodic pension and postretirement benefit costs. See Note 10 to the financial statementsincome. Expense for details regarding these benefit plans.other operating leases is included in O&M expense.


12. Revenues

SPS principally generates revenue from the generation, transmission, distribution and saleFuture commitments under operating leases as of electricity to wholesale and retail customers. Performance obligations related to the sale of energy are satisfied as energy is delivered to customers. SPS recognizes revenue in an amount that corresponds directly 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 on a systematic basis 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. Contract terms are generally short-term in nature, and as such SPS does not recognize a separate financing component of its collections from customers. SPS presents its revenues net of any excise or other fiduciary-type taxes or fees.

SPS participates in SPP. SPS recognizes sales to both native load and other end use customers on a gross basis in electric revenues and cost of sales. Revenues and charges for short term wholesale sales of excess energy transacted through RTOs are recorded on a gross basis. Other revenues and charges related to participating and transacting in RTOs are also recorded on a net basis in cost of sales. SPS has various rate-adjustment mechanisms in place that provide for the recovery of natural gas, electric fuel and purchased energy costs. These cost-adjustment tariffs may increase or decrease the level of revenue collected from customers and are revised periodically for differences between the total amount collected under the clauses and the costs incurred.

When applicable, under governing regulatory commission rate orders, fuel cost over-recoveries (the excess of fuel revenue billed to customers over fuel costs incurred) are deferred as regulatory liabilities and under-recoveries (the excess of fuel costs incurred over fuel revenues billed to customers) are deferred as regulatory assets.

Certain rate rider mechanisms qualify as alternative revenue programs under GAAP. 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. When certain criteria are met (including collection within 24 months), revenue is recognized equal to the revenue requirement, which may include return on rate base items and incentives. The mechanisms are revised periodically for differences between the total amount collected and the revenue recognized, which may increase or decrease the level of revenue collected from customers. Alternative revenue is recorded on a gross basis and is disclosed separate from revenue from contracts with customers in the period earned.

In the following tables, regulated electric revenue is classified by the type of goods/services rendered and market/customer type.Sept. 30, 2019:
  Three Months Ended
(Thousands of Dollars) Sept. 30, 2018 Sept. 30, 2017
Major product lines    
Revenue from contracts with customers:    
Residential $114,387
 $113,380
Commercial and industrial (C&I) 229,457
 241,295
Other 12,983
 13,399
Total retail 356,827
 368,074
Wholesale 117,949
 116,635
Transmission 60,726
 56,143
Other 1,792
 3,862
Total revenue from contracts with customers 537,294
 544,714
Alternative revenue and other 2,769
 6,909
Total revenues $540,063
 $551,623
(Millions of Dollars) 
PPA (a) (b)
Operating
Leases
 
Other Operating
Leases
 
Total
Operating
Leases
2019 $11.6
 $0.8
 $12.4
2020 46.2
 3.4
 49.6
2021 46.2
 3.3
 49.5
2022 46.2
 3.4
 49.6
2023 46.2
 3.4
 49.6
Thereafter 450.8
 54.8
 505.6
Total minimum obligation 647.2
 69.1
 716.3
Interest component of obligation (165.3) (22.0) (187.3)
Present value of minimum obligation 481.9
 47.1
 529.0
Less current portion     (26.8)
Noncurrent operating lease liabilities     $502.2
       
Weighted-average remaining lease term in years     14.3
(a)
Amounts do not include PPAs accounted for as executory contracts and/or contingent payments, such as energy payments on renewable PPAs.
(b)
PPA operating leases contractually expire at various dates through 2033.


Future commitments under operating leases as of Dec. 31, 2018:
  Nine Months Ended
(Thousands of Dollars) Sept. 30, 2018 Sept. 30, 2017
Major product lines    
Revenue from contracts with customers:    
Residential $279,543
 $277,169
C&I 625,988
 658,057
Other 34,010
 35,253
Total retail 939,541
 970,479
Wholesale 326,810
 309,669
Transmission 175,342
 166,715
Other 12,181
 7,872
Total revenue from contracts with customers 1,453,874
 1,454,735
Alternative revenue and other 14,759
 36,756
Total revenues $1,468,633
 $1,491,491
(Millions of Dollars) 
PPA (a) (b)
Operating
Leases
 
Other Operating
Leases
 
Total
Operating
Leases
2019 $46.7
 $5.2
 $51.9
2020 46.2
 5.2
 51.4
2021 46.2
 5.1
 51.3
2022 46.2
 5.1
 51.3
2023 46.2
 5.1
 51.3
Thereafter 450.8
 56.3
 507.1
(a)
Amounts do not include PPAs accounted for as executory contracts and/or contingent payments, such as energy payments on renewable PPAs.
(b)
PPA operating leases contractually expire at various dates through 2033.

Variable Interest Entities
Under certain PPAs, SPS purchases power from IPPs and is required to reimburse the IPPs for fuel costs, or to participate in tolling arrangements under which SPS procures the natural gas required to produce the energy that it purchases. These specific PPAs create a variable interest in the associated IPP.
SPS had approximately 1,197 MW of capacity under long-term PPAs as of Sept. 30, 2019 and Dec. 31, 2018, with entities that have been determined to be VIEs. SPS concluded that these entities are not required to be consolidated in its financial statements because it does not have the power to direct the activities that significantly impact the entities’ economic performance. These agreements have expiration dates through 2041.
Item 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Financial Review

The following discussion and analysis by management focuses on those factors that had a material effect on SPS’ financial condition, results of operations, and cash flows during the periods presented, or are expected to have a material impact in the future. It should be read in conjunction with the accompanying unaudited financial statements and the related notes to the financial statements.  Due to the seasonality of SPS’ electric sales, such interim results are not necessarily an appropriate base from which to project annual results.

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 our 2018 earnings per share
guidance, the TCJA’s impact to SPS and its customers, long-term earnings per share and dividend growth rate, as well as assumptions and other statements are intended to be identified in this document by the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should,” “will,” “would” and similar expressions. Actual results may vary materially. Forward-looking statements speak only as of the date they are made, and we expressly disclaim any obligation to update any forward-looking information. The following factors, in addition to those discussed elsewhere in this Quarterly Report on Form 10-Q and in other securities filings (including SPS’ Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2017, and subsequent securities filings), could cause actual results to differ materially from management expectations as suggested by such forward-looking information: changes in environmental laws and regulations; unusual weather and climate change, including compliance with any accompanying legislative and regulatory changes; ability to recover costs from customers; actions of credit rating agencies; general economic conditions, including inflation rates, monetary fluctuations and their impact on capital expenditures and the ability of SPS to obtain financing on favorable terms; availability or cost of capital; our customers’ and counterparties’ ability to pay their debts to us; assumptions and costs relating to funding our employee benefit plans and health care benefits; tax laws; operational safety; successful long-term operational planning; commodity risks associated with energy markets and production; costs of potential regulatory penalties; effects of geopolitical events, including war and acts of terrorism; cyber security threats and data security breaches; fuel costs; and employee work force factors.









Non-GAAP Financial Measures

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

Electric Margins

Electric margin is presented as electric revenues less electric fuel and purchased power expenses. Expenses incurred for electric fuel and purchased power are generally recovered through various regulatory recovery mechanisms, and asmechanisms. As a result, changes in these expenses are generally offset in operating revenues. Management believes electric margin providesmargins provide the most meaningful basis for evaluating our operations because they exclude the revenue impact of fluctuations in these expenses.

These margins can be reconciled to operating income, a GAAP measure, by including other operating and maintenance (O&M)revenues, O&M expenses, demand side management (DSM)DSM expenses, depreciation and amortization and taxes (other than income taxes).

Earnings Adjusted for Certain Items (Ongoing Earnings)
Ongoing earnings reflect adjustments to GAAP earnings (net income) for certain items. Management uses these non-GAAP financial measures to evaluate and provide details of SPS’ core earnings and underlying performance.
For the three and nine months ended Sept. 30, 2019 and 2018, there were no such adjustments to GAAP earnings and therefore GAAP earnings equal ongoing earnings for these periods.
Results of Operations

SPS’ net income was approximately $173$218.0 million for 2018 year-to-date,the nine months ended Sept. 30, 2019 compared with approximately $128$173.1 million for the same period in 2017.prior year. The year-to-date increase was primarily duereflects higher electric margin attributable to higherregulatory rate outcomes and sales growth despite unfavorable weather. Higher electric margin and AFUDC related toassociated with the Hale County wind project, timing of O&M expenses, the favorable impact of weather, sales growth, and lower interest expense,Wind farm were partially offset by higherincreased depreciation, expense.

O&M and interest expenses.
Electric Revenues and Margin

Electric revenues and fuel and purchased power expenses tend to vary with changing retail and wholesale sales requirements and unit cost changes in fuel and purchased power.
Changes in fuel or purchased power costs can impact earnings as the fuel and purchased power cost recovery mechanisms of the Texas and New Mexico jurisdictions may not allow for complete recovery of all expenses. The following tables detail the electric
Electric revenues and margin:
 Nine Months Ended Sept. 30 Nine Months Ended Sept. 30
(Millions of Dollars) 2018 2017 2019 2018
Electric revenues before impact of the TCJA $1,513
 $1,491
Electric revenues $1,397.7
 $1,468.6
Electric fuel and purchased power (802) (816) (651.0) (795.6)
Electric margin before impact of the TCJA $711
 $675
Impact of the TCJA (offset as a reduction in income tax expense) (38) —
Electric margin $673
 $675
 $746.7
 $673.0

The following tables summarize the components of the changesChanges in electric revenuesmargin:
(Millions of Dollars) 2019 vs 2018
Purchased capacity costs $31.9
Regulatory rate outcomes 23.7
Demand revenue 19.2
Wholesale transmission, net 14.5
Non-fuel riders 9.8
Retail sales growth 3.4
Firm wholesale (16.9)
PTC sharing (4.4)
Estimated weather impact (4.2)
Other, net (3.3)
Total increase in electric margin $73.7
Non-Fuel Operating Expense and electric marginOther Items
O&M Expenses — O&M expenses increased $12.9 million, or 6.3%, for the nine months ended Sept. 30, 2018:

Electric Revenue
(Millions of Dollars) 2018 vs 2017
Fuel and purchased power cost recovery $(72)
Firm wholesale (12)
Trading 42
Wholesale transmission revenue 25
Estimated impact of weather 18
Sales Growth 5
Demand revenue 5
Other, net 11
Total increase in electric revenues before impact of the TCJA $22
Impact of TCJA (offset as a reduction in income tax expense) (44)
Total decrease in electric revenues $(22)

Electric Margin
(Millions of Dollars) 2018 vs 2017
Firm wholesale $(12)
Estimated impact of weather 18
Wholesale transmission revenue, net of costs 12
Sales growth 5
Demand revenue 5
Other, net 8
Total increase in electric margin before impact of the TCJA $36
Impact of TCJA (offset as a reduction in income tax expense) (38)
Total decrease in electric margin $(2)

Non-Fuel Operating Expense2019 compared with the prior year. The increase was primarily driven by plant generation, distribution and Other Items

O&M Expenses — O&Mbusiness system expenses. Plant generation expenses decreased $7 million, or 3.5 percent, for 2018 year-to-date. The decrease primarily relatesincreased due to timing of O&M expenses.planned maintenance and overhauls. Distribution expenses increased as a result of additional pole inspections. Business system costs increased due to additional consulting fees.

Depreciation and Amortization — Depreciation and amortization increased $5$22.1 million, or 3.7 percent14.7%, for 2018 year-to-date.the nine months ended Sept. 30, 2019 compared with the prior year. The increase was primarily relatesdue to increased capital investments as well as accelerated depreciation at Tolk generating facility for the Texas jurisdiction.
AFUDC, Equity and Debt — AFUDC increased $15.3 million, for the nine months ended Sept. 30, 2019 compared with the prior year. The increase was primarily due to an increase in wind construction projects, primarily the Hale Wind farm.
Interest Charges — Interest charges increased $14.2 million, or 23.0%, for the nine months ended Sept. 30, 2019 compared with the prior year. The increase was related to higher debt levels to fund capital investments, changes in short-term interest rates and planned system investments.implementation of lease accounting standard (offset in electric margin).

Income Taxes — Income tax expense decreased $36$2.8 million for the first nine months of 2018ended Sept. 30, 2019 compared with the same period in 2017.prior year. The decrease was primarily driven by a lower federal tax rate due to the TCJAan increase in wind PTCs and an increase in plant-related regulatory differences relateddifferences. This was partially offset by higher pretax earnings. Wind PTCs are credited to ARAM (net of deferrals). Thecustomers (recorded as a reduction to revenue) and do not have a material impact on net income. ETR was 17.0 percent13.0%, for the first nine months of 2018,ended Sept. 30, 2019 compared with 35.9 percent17.0% for the same period in 2017. The lower ETR in 2018 is primarilyprior year, largely due to the items referenced above. See Note 46 to the financial statements.

AFUDC, Equity and Debt — AFUDC increased $3 million for the third quarter of 2018 and increased $7 million year-to-date. The increase was primarily due to the Hale wind project and other capital investments.

Interest Charges — Interest charges decreased $4 million, or 6.6 percent, year-to-date. The decrease was related to refinancing at lower interest rates, partially offset by higher debt levels to fund capital investments.

Public Utility Regulation

Except to the extent noted below, and in Note 5 in the notes to the financial statements, the circumstances set forth in Public Utility Regulation included in Item 1 of SPS’ Annual Report on Form 10-K10‑K for the year ended Dec. 31, 20172018 and in Public Utility Regulation included in Item 2 of SPS’ Quarterly ReportsReport on Form 10-Q for the quarterly periods ended March 31, 20182019 and June 30, 2018,2019, appropriately represent, in all material respects, the current status of public utility regulation and are incorporated herein by reference.


TexasFERC and State Right of First Refusal (ROFR) Request for Declaratory Order Regulation — In February 2017, SPS and SPP filed a joint petition with the PUCT for a declaratory order regarding SPS’ ROFR. SPS contended that Texas law grants an incumbent electric utility, operating in areas outside of Electric Reliability Council of Texas, the ROFR to construct new transmission facilities located in the utility’s service area. SPP stated that Texas law does not provide a clear statement regarding the ROFR for incumbent utilities and therefore SPP was abiding by the portion of its OATT, which requires competitive solicitation to construct and operate new transmission facilities within areas of Texas’ SPP footprint.

In October 2017, the PUCT issued an order finding that SPS does not possess an exclusive right to construct and operate transmission facilities within its service area. In January 2018, SPS and two other parties filed appeals of the PUCT’s order in the Texas State District Court. In September 2018, the District Court affirmed the PUCT’s ROFR order. SPS plans to file an appeal in the fourth quarter of 2018.
Summary of Recent Federal Regulatory Developments

FERC

The FERC has jurisdiction over rates for electric transmission service in interstate commerce and electricity sold at wholesale, asset transactions and mergers, accounting practices and certain other activities of SPS, including enforcement of North American Electric Reliability CorporationNERC mandatory electric reliability standards. State and local agencies have jurisdiction over many of SPS’ activities, including regulation of retail rates and environmental matters. See additional discussion in the summary of recent federal regulatory developments and public utility regulation sections of the SPS Annual Report on Form 10-K for the year ended Dec. 31, 2017 and Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018. In addition to the matters discussed below, see Note 5 to the financial statements for a discussion of other regulatory matters.

Xcel Energy, which includes SPS, attempts to mitigate the risk of regulatory penalties through formal training on
prohibited practices and a compliance function that reviews interaction with the markets under FERC and Commodity Futures Trading Commission jurisdictions.
Public campaigns are conducted to raise awareness of the public safety issues of interacting with our electric systems.
While programs to comply with regulatory requirements are in place, there is no guarantee the compliance programs or other measures will be sufficient to ensure against violations. Decisions by these regulators can significantly impact SPS’ results of operations.
Pending Regulatory Proceedings
2019 Texas Rate Case — In August 2019, SPS filed an electric rate case with the PUCT seeking an increase in retail electric base rates of approximately $141 million. The filing requests an ROE of 10.35%, a 54.65% equity ratio, a rate base of approximately $2.6 billion and is built on a 12 month period that ended June 30, 2019. In September 2019, SPS filed an update to the electric rate case and revised its requested increase to approximately $136 million.
The following table summarizes SPS’ base rate increase request:
Revenue Request (Millions of Dollars)  
Hale Wind Farm $62
Capital investments 47
Depreciation rate change (including Tolk) 34
Cost of capital 10
Expiring purchased power contracts (28)
Other, net 11
New revenue request $136
The procedural schedule is as follows:
Intervenor testimony — Feb. 10, 2020
Staff testimony — Feb. 18, 2020
Rebuttal testimony — March 11, 2020
Public hearing begins — March 30, 2020
Final order deadline — Sept. 7, 2020
The final rates established at the end of the rate case are expected to be made effective relating back to Sept. 12, 2019. SPS expects a decision from the PUCT in the second quarter of 2020.



2019 New Mexico Rate Case — In July 2019, SPS filed an electric rate case with the NMPRC seeking an increase in retail electric base rates of approximately $51 million. The rate request is based on a ROE of 10.35%, a 54.77% equity ratio, a rate base of approximately $1.3 billion and a historic test year with rate base additions through Aug. 31, 2019. SPS anticipates final rates will go into effect in the second or third quarter of 2020.
SPS' proposed increase in base rates would be partially mitigated by savings to New Mexico customers achieved through fuel cost reductions and PTCs attributable to wind energy provided by the Hale Wind Farm. SPS’ $51 million requested increase in base rates would be offset by approximately $25 million of savings resulting in a net revenue increase of approximately $26 million, or 5.7%.
The following table summarizes SPS’ base rate increase request:
Revenue Request (Millions of Dollars)  
Hale Wind Farm $28
Other plant investment 22
Wholesale sales reduction 17
Allocator changes due to load growth 15
Depreciation rate change (including Tolk) 15
Base rate sales growth (41)
Other, net (5)
New revenue request $51
The procedural schedule is as follows:
Filing of stipulation, if any — Nov. 15, 2019
Staff and intervenor testimony or testimony in support of a stipulation — Nov. 22, 2019
Testimony in opposition to a stipulation, if any — Dec. 6, 2019
Rebuttal testimony — Dec. 20, 2019
Public hearing begins — Jan. 7, 2020
End of 9-month suspension — April 30, 2020
Wind Development — In 2018, the NMPRC and PUCT approved SPS’ proposal to add 1,230 MW of new wind generation, including construction and ownership of the 478 MW Hale and 522 MW Sagamore wind farms. The Hale wind farm was placed into commercial operation in June 2019. Sagamore is expected to go into service in 2020 and cost approximately $900 million.
Texas State Right of First Refusal (ROFR) Litigation — In May 2019, the Governor signed into law Senate Bill 1938, which grants incumbent utilities a ROFR to build transmission infrastructure when it directly interconnects to the utility’s existing facility. In June 2019, a complaint was filed in the United States District Court for the Western District of Texas claiming the new ROFR law to be unconstitutional.
Texas Fuel Reconciliation —In December 2018,SPS filed an application with the PUCT for reconciliation of fuel costs for the period Jan. 1, 2016, through June 30, 2018, to determine whether all fuel costs incurred were eligible for recovery. On Oct. 17, 2019, the assigned Administrative Law Judges (ALJs) issued a Proposal for Decision recommending the PUCT disallow approximately $3 million of costs related to the reconciliation period, based on the ALJs’ determination that entering into two specific solar PPAs was imprudent. The related solar facilities are located in New Mexico and were previously approved by the NMPRC as reasonable, necessary and economic. SPS plans to file exceptions regarding the proposed disallowance and assert, among other points, that the ALJs erred in failing to account for the capacity value of the solar projects.

New Mexico Fuel Continuation —In October 2019, SPS filed an application to the NMPRC to approve SPS’ continued use of its FPPCAC and for reconciliation of fuel costs for the period Sept. 1, 2015, through June 30, 2019, which will determine whether all fuel costs incurred are eligible for recovery. No procedural schedule has yet been established for this matter.
Environmental Matters
In June 2019, the EPA issued the final ACE rule to replace the Obama-era Clean Power Plan. The final ACE rule may require implementation of heat rate improvement projects at some of our coal-fired power plants. It is not known what the costs associated with the final rule might be until state plans are developed to implement the final regulation. SPS believes the costs would be recoverable through rates based on prior state commission practice.
Item 4 — CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

SPS maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.  In addition, the disclosure controls and procedures ensure that information required to be disclosed is accumulated and communicated to management, including the chief executive officer (CEO)CEO and chief financial officer (CFO),CFO, allowing timely decisions regarding required disclosure.  As of Sept. 30, 2018,2019, based on an evaluation carried out under the supervision and with the participation of SPS’ management, including the CEO and CFO, of the effectiveness of its disclosure controls and the procedures, the CEO and CFO have concluded that SPS’ disclosure controls and procedures were effective.

Internal Control Over Financial Reporting

No changes in SPS’ internal control over financial reporting occurred during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, SPS’ internal control over financial reporting.



Part II — OTHER INFORMATION

Item 1— LEGAL PROCEEDINGS

Legal Proceedings
SPS is involved in various litigation matters that are being defended and handled in the ordinary course of business. The assessment of whether a loss is probable or is a reasonable possibility, and whether the loss or a range of loss is estimable, often involves a series of complex judgments about future events. Management maintains accruals for such losses that are probable of being incurred and subject to reasonable estimation. Management is sometimes unable to estimate an amount or range of a reasonably possible loss in certain situations, including but not limited to, when (1) the damages sought are indeterminate, (2) the proceedings are in the early stages or (3) the matters involve novel or unsettled legal theories. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss.

Additional Information

For current proceedings not specifically reported herein, management does not anticipate that the ultimate liabilities, if any, would have a material effect on SPS’ financial statements. Unless otherwise required by GAAP, legal fees are expensed as incurred.
See Note 69 to the financial statements for further discussion of legal claims and environmental proceedings.  See Part I Item 2 and Note 5 to the financial statements for a discussion of proceedings involving utility rates and other regulatory matters.

further information.
Item 1A — RISK FACTORS

SPS’ risk factors are documented in Item 1A of Part I of its Annual Report on Form 10-K for the year ended Dec. 31, 2017,2018, which is incorporated herein by reference. There have been no material changes from the risk factors previously disclosed in the Form 10-K.10-K.

Item 6 — EXHIBITS
* Indicates incorporation by reference
+ Executive Compensation Arrangements and Benefit Plans Covering Executive Officers and Directors
* Indicates incorporation by reference
Exhibit NumberDescriptionReport or Registration StatementSEC File or Registration NumberExhibit Reference
3.01*
Amended and Restated Articles of Incorporation dated Sept. 30, 1997 (Exhibit 3.01 to
SPS Form 10-Q for the quarter ended Sept. 30, 2017 (file no. 001-03789)).001-037893.01
3.02*
By-Laws of SPS as Amended and Restated on Sept. 26, 2013 (Exhibit 3.02 toJan. 25, 2019
SPS Form 10-Q/A10-K for the quarteryear ended Sept. 30, 2013 (file no. 001-03789)).Dec. 31, 2018001-037893.02
31.01
Principal Executive Officer’s certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02
Principal Financial Officer’s certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.01
101.INS
Statement pursuant to Private Securities Litigation Reform Act of 1995.
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.
101101.SCHThe following materials from SPS’ Quarterly Report on Form 10-Q for the quarter ended Sept. 30, 2018 are formattedXBRL Schema
101.CALXBRL Calculation
101.DEFXBRL Definition
101.LABXBRL Label
101.PREXBRL Presentation
104Cover Page Interactive Data File (formatted as Inline XBRL and contained in XBRL (eXtensible Business Reporting Language):  (i) the Statements of Income, (ii) the Statements of Comprehensive Income (iii) the Statements of Cash Flows, (iv) the Balance Sheets, (v) Notes to Financial Statements, and (vi) document and entity information.Exhibit 101)



SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
  Southwestern Public Service Company
   
Oct. 26, 201825, 2019By:/s/ JEFFREY S. SAVAGE
  Jeffrey S. Savage
  Senior Vice President, Controller
  (Principal Accounting Officer)
   
  /s/ ROBERT C. FRENZEL
  Robert C. Frenzel
  Executive Vice President, Chief Financial Officer and Director
  (Principal Financial Officer)


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