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EXCEL - IDEA: XBRL DOCUMENT - SOUTHWESTERN PUBLIC SERVICE COFinancial_Report.xls
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EX-31.01 - EXHIBIT 31.01 - SOUTHWESTERN PUBLIC SERVICE COex31_01.htm
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EX-31.02 - EXHIBIT 31.02 - SOUTHWESTERN PUBLIC SERVICE COex31_02.htm


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 June 30, 2012
 
or
 
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 001-03789

Southwestern Public Service Company
(Exact name of registrant as specified in its charter)
 
New Mexico
 
75-0575400
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
     
Tyler at Sixth
   
Amarillo, Texas
 
79101
(Address of principal executive offices)
 
(Zip Code)
 
(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 o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 and 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 and post such files).  x Yes o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer o
 
Accelerated filer o
     
Non-accelerated filer x
 
Smaller reporting company o
(Do not check if smaller reporting company)
   
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes x 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 Aug. 6, 2012
Common Stock, $1 par value
 
100 shares
 
Southwestern Public Service Company meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H (2) to such Form 10-Q.
 


 
 

 
 
 
PART I FINANCIAL INFORMATION
 
     
Item l     —
3
Item 2    —
15
Item 4    —
18
     
PART II OTHER INFORMATION
 
     
Item 1     —
18
Item 1A  —
18
Item 4    —
18
Item 5    —
        18
Item 6    —
18
     
19
   
Certifications Pursuant to Section 302
1
Certifications Pursuant to Section 906
1
Statement Pursuant to Private Litigation
1
 
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 on various filings with the Securities and Exchange Commission (SEC).
 
 
PART 1— FINANCIAL INFORMATION
Item 1— FINANCIAL STATEMENTS
 
SOUTHWESTERN PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME (UNAUDITED)
(amounts in thousands)
 
   
Three Months Ended June 30
   
Six Months Ended June 30
 
   
2012
   
2011
   
2012
   
2011
 
Operating revenues
  $ 380,201     $ 433,289     $ 720,689     $ 814,498  
                                 
Operating expenses
                               
Electric fuel and purchased power
    213,035       275,403       416,296       524,653  
Operating and maintenance expenses
    62,145       62,732       125,285       125,485  
Demand side management program expenses
    3,160       4,382       6,237       7,811  
Depreciation and amortization
    28,249       26,364       56,095       52,522  
Taxes (other than income taxes)
    11,721       10,975       23,040       21,095  
Total operating expenses
    318,310       379,856       626,953       731,566  
                                 
Operating income
    61,891       53,433       93,736       82,932  
                                 
Other income, net
    142       84       20       146  
Allowance for funds used during construction – equity
    1,702       1,358       3,392       3,284  
                                 
Interest charges and financing costs
                               
Interest charges – includes other financing costs of $754, $765,
$1,522 and $1,425, respectively
    16,935       16,068       33,641       31,866  
Allowance for funds used during construction – debt
    (1,073 )     (1,018 )     (2,156 )     (2,367 )
Total interest charges and financing costs
    15,862       15,050       31,485       29,499  
                                 
Income before income taxes
    47,873       39,825       65,663       56,863  
Income taxes
    17,579       15,153       24,009       21,953  
Net income
  $ 30,294     $ 24,672     $ 41,654     $ 34,910  
 
See Notes to Financial Statements
 
 
SOUTHWESTERN PUBLIC SERVICE COMPANY
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(amounts in thousands)
 
   
Three Months Ended June 30
   
Six Months Ended June 30
 
   
2012
   
2011
   
2012
   
2011
 
Net income
  $ 30,294     $ 24,672     $ 41,654     $ 34,910  
                                 
Other comprehensive income
                               
                                 
Derivative instruments:
                               
Reclassification of losses to net income, net of tax of $24 and $48 for each of the three and six months ended June 30, 2012 and 2011, respectively
    43       43       86       86  
                                 
Other comprehensive income
    43       43       86       86  
Comprehensive income
  $ 30,337     $ 24,715     $ 41,740     $ 34,996  
 
See Notes to Financial Statements
 
 
SOUTHWESTERN PUBLIC SERVICE COMPANY
STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
 
   
Six Months Ended June 30
 
   
2012
   
2011
 
Operating activities
           
Net income
  $ 41,654     $ 34,910  
Adjustments to reconcile net income to cash provided by operating activities:
               
Depreciation and amortization
    57,204       53,634  
Demand side management program amortization
    905       905  
Deferred income taxes
    26,162       19,709  
Amortization of investment tax credits
    (137 )     (170 )
Allowance for equity funds used during construction
    (3,392 )     (3,284 )
Net derivative losses
    134       133  
Changes in operating assets and liabilities:
               
Accounts receivable
    (15,564 )     (22,037 )
Accrued unbilled revenues
    (11,177 )     (26,881 )
Inventories
    10,385       3,174  
Prepayments and other
    (4,556 )     (741 )
Accounts payable
    (6,924 )     17,332  
Net regulatory assets and liabilities
    32,017       (6,100 )
Other current liabilities
    (1,715 )     1,614  
Pension and other employee benefit obligations
    (11,527 )     (3,922 )
Change in other noncurrent assets
    (449 )     (835 )
Change in other noncurrent liabilities
    (44 )     (5,072 )
Net cash provided by operating activities
    112,976       62,369  
                 
Investing activities
               
Utility capital/construction expenditures
    (184,909 )     (162,990 )
Allowance for equity funds used during construction
    3,392       3,284  
Investments in utility money pool arrangement
    (77,000 )     -  
Repayments from utility money pool arrangement
    72,000       -  
Other, net
    -       221  
Net cash used in investing activities
    (186,517 )     (159,485 )
                 
Financing activities
               
Proceeds from short-term borrowings, net
    -       82,000  
Proceeds from issuance of long-term debt
    108,951       -  
Borrowings under utility money pool arrangement
    231,000       258,500  
Repayments under utility money pool arrangement
    (236,000 )     (258,500 )
Capital contributions from parent
    3,811       50,000  
Dividends paid to parent
    (33,689 )     (32,218 )
Net cash provided by financing activities
    74,073       99,782  
                 
Net change in cash and cash equivalents
    532       2,666  
Cash and cash equivalents at beginning of period
    650       1,778  
Cash and cash equivalents at end of period
  $ 1,182     $ 4,444  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest (net of amounts capitalized)
  $ (29,487 )   $ (28,279 )
Cash paid for income taxes, net
    (10,056 )     (4,954 )
                 
Supplemental disclosure of non-cash investing transactions:
               
Property, plant and equipment additions in accounts payable
  $ 24,540     $ 5,205  
 
See Notes to Financial Statements
 
 
SOUTHWESTERN PUBLIC SERVICE COMPANY
BALANCE SHEETS (UNAUDITED)
(amounts in thousands, except share and per share data)
 
   
June 30, 2012
   
Dec. 31, 2011
 
Assets
           
Current assets
           
Cash and cash equivalents
  $ 1,182     $ 650  
Accounts receivable, net
    75,351       65,030  
Accounts receivable from affiliates
    6,557       1,314  
Investments in utility money pool arrangement
    5,000       -  
Accrued unbilled revenues
    115,319       104,142  
Inventories
    25,190       35,575  
Regulatory assets
    23,004       25,244  
Derivative instruments
    7,892       7,892  
Deferred income taxes
    30,123       18,247  
Prepayments and other
    12,042       7,486  
Total current assets
    301,660       265,580  
                 
Property, plant and equipment, net
    2,720,775       2,594,732  
                 
Other assets
               
Regulatory assets
    292,718       294,813  
Derivative instruments
    52,895       56,841  
Other
    13,771       11,883  
Total other assets
    359,384       363,537  
Total assets
  $ 3,381,819     $ 3,223,849  
                 
Liabilities and Equity
               
Current liabilities
               
Borrowings under utility money pool arrangement
    -       5,000  
Accounts payable
    132,924       140,412  
Accounts payable to affiliates
    13,362       11,828  
Regulatory liabilities
    84,987       57,104  
Taxes accrued
    14,961       19,910  
Accrued interest
    15,087       13,842  
Dividends payable
    16,400       16,913  
Derivative instruments
    3,601       3,601  
Other
    30,948       29,841  
Total current liabilities
    312,270       298,451  
                 
Deferred credits and other liabilities
               
Deferred income taxes
    636,237       596,581  
Regulatory liabilities
    100,008       105,335  
Asset retirement obligations
    28,090       27,266  
Derivative instruments
    39,590       41,391  
Pension and employee benefit obligations
    64,666       76,307  
Other
    8,158       8,345  
Total deferred credits and other liabilities
    876,749       855,225  
                 
Commitments and contingencies
               
Capitalization
               
Long-term debt
    1,103,566       993,314  
Common stock – 200 shares authorized of $1.00 par value; 100 shares outstanding at
June 30, 2012 and Dec. 31, 2011, respectively
    -       -  
Additional paid in capital
    786,973       783,162  
Retained earnings
    303,679       295,201  
Accumulated other comprehensive loss
    (1,418 )     (1,504 )
Total common stockholder’s equity
    1,089,234       1,076,859  
Total liabilities and equity
  $ 3,381,819     $ 3,223,849  
 
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), the financial position of SPS as of June 30, 2012, and Dec. 31, 2011; the results of its operations, including the components of net income and comprehensive income, for the three and six months ended June 30, 2012 and 2011; and its cash flows for the six months ended June 30, 2012 and 2011.  All adjustments are of a normal, recurring nature, except as otherwise disclosed.  Management has also evaluated the impact of events occurring after June 30, 2012 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, 2011 balance sheet information has been derived from the audited 2011 financial statements included in the SPS Annual Report on Form 10-K for the year ended Dec. 31, 2011.  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, 2011, filed with the SEC on Feb. 27, 2012.  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, 2011, appropriately represent, in all material respects, the current status of accounting policies and are incorporated herein by reference.
 
2.
Accounting Pronouncements
 
Recently Adopted
 
Fair Value Measurement — In May 2011, the Financial Accounting Standards Board (FASB) issued Fair Value Measurement (Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (Accounting Standards Update (ASU) No. 2011-04), which provides clarifications regarding existing fair value measurement principles and disclosure requirements, and also specific new guidance for items such as measurement of instruments classified within stockholders’ equity.  These requirements were effective for interim and annual periods beginning after Dec. 15, 2011.  SPS implemented the accounting and disclosure guidance effective Jan. 1, 2012, and the implementation did not have a material impact on its financial statements.  For required fair value measurement disclosures, see Note 8.
 
Comprehensive Income — In June 2011, the FASB issued Comprehensive Income (Topic 220) — Presentation of Comprehensive Income (ASU No. 2011-05), which requires the presentation of the components of net income, the components of other comprehensive income (OCI) and total comprehensive income in either a single continuous financial statement of comprehensive income or in two separate, but consecutive financial statements of net income and comprehensive income.  These updates do not affect the items reported in OCI or the guidance for reclassifying such items to net income.  These requirements were effective for interim and annual periods beginning after Dec. 15, 2011.  SPS implemented the financial statement presentation guidance effective Jan. 1, 2012.

Recently Issued
 
Balance Sheet Offsetting — In December 2011, the FASB issued Balance Sheet (Topic 210) — Disclosures about Offsetting Assets and Liabilities (ASU No. 2011-11), which requires disclosures regarding netting arrangements in agreements underlying derivatives, certain financial instruments and related collateral amounts, and the extent to which an entity’s financial statement presentation policies related to netting arrangements impact amounts recorded to the financial statements. These disclosure requirements do not affect the presentation of amounts in the balance sheets, and are effective for annual reporting periods beginning on or after Jan. 1, 2013, and interim periods within those annual reporting periods. SPS does not expect the implementation of this disclosure guidance to have a material impact on its financial statements.
 
 
3. 
Selected Balance Sheet Data
 
(Thousands of Dollars)
 
June 30, 2012
   
Dec. 31, 2011
 
Accounts receivable, net
           
Accounts receivable
  $ 80,727     $ 70,410  
Less allowance for bad debts
    (5,376 )     (5,380 )
    $ 75,351     $ 65,030  
Inventories
               
Materials and supplies
  $ 18,547     $ 17,472  
Fuel
    6,643       18,103  
    $ 25,190     $ 35,575  
Property, plant and equipment, net
               
Electric plant
  $ 4,304,461     $ 4,142,389  
Construction work in progress
    154,484       153,672  
Total property, plant and equipment
    4,458,945       4,296,061  
Less accumulated depreciation
    (1,738,170 )     (1,701,329 )
    $ 2,720,775     $ 2,594,732  
 
4. 
Income Taxes
 
Except to the extent noted below, the circumstances set forth in Note 6 to the financial statements included in SPS’ Annual Report on Form 10-K for the year ended Dec. 31, 2011 appropriately represent, in all material respects, the current status of other income tax matters, and are incorporated herein by reference.
 
Federal AuditSPS 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 2007 federal income tax return expired in September 2011.  The statute of limitations applicable to Xcel Energy’s 2008 federal income tax return expires in September 2012. As of June 30, 2012, there was no federal income tax audit in progress.
 
State AuditsSPS is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of June 30, 2012, SPS’ earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2007.  As of June 30, 2012, there were no state income tax audits in progress.
 
Unrecognized Tax BenefitsThe unrecognized tax benefit balance includes permanent tax positions, which if recognized would affect the annual effective tax rate (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)
 
June 30, 2012
   
Dec. 31, 2011
 
Unrecognized tax benefit — Permanent tax positions
  $ 0.2     $ 0.2  
Unrecognized tax benefit — Temporary tax positions
    4.1       4.6  
Unrecognized tax benefit balance
  $ 4.3     $ 4.8  
 
The unrecognized tax benefit amounts were reduced by the tax benefits associated with net operating loss (NOL) and tax credit carryforwards.  The amounts of tax benefits associated with NOL and tax credit carryforwards are as follows:
 
(Millions of Dollars)
 
June 30, 2012
   
Dec. 31, 2011
 
NOL and tax credit carryforwards
  $ (1.4 )   $ (2.0 )
 
It is reasonably possible that SPS’ amount of unrecognized tax benefits could significantly change in the next 12 months as the Internal Revenue Service and state audits resume.  At this time, due to the uncertain nature of the audit process, an overall range of possible change cannot be reasonably estimated.
 
The payable for interest related to unrecognized tax benefits is partially offset by the interest benefit associated with NOL and tax credit carryforwards.  The payables for interest related to unrecognized tax benefits at June 30, 2012 and Dec. 31, 2011 were not material.  No amounts were accrued for penalties related to unrecognized tax benefits as of June 30, 2012 or Dec. 31, 2011.
 
 
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, 2011 appropriately represent, in all material respects, the current status of other rate matters, and are incorporated herein by reference.
 
Pending Regulatory Proceedings — Federal Energy Regulatory Commission (FERC)
 
Wholesale Rate Complaint — In April 2012, Golden Spread Electric Cooperative, Inc. (Golden Spread) filed a rate complaint with the FERC alleging that SPS’ rates for wholesale service were excessive.  Golden Spread alleges that the base ROE currently charged to them through their production formula rate, of 10.25 percent, and the transmission formula rate, of 10.77 percent, is unjust and unreasonable.  Golden Spread alleges that the appropriate base ROE is 9.15 percent, or an annual difference of approximately $3.3 million.  An additional 50 basis point incentive is added to the base ROE for the transmission formula rate for participation in a Regional Transmission Organization (RTO).  Golden Spread is not contesting this transmission incentive.  The FERC has taken no action on this complaint.
 
6.
Commitments and Contingencies
 
Except to the extent noted below, the circumstances set forth in Notes 10 and 11 to the financial statements in SPS’ Annual Report on Form 10-K for the year ended Dec. 31, 2011, 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.
 
Purchased Power Agreements
 
Under certain purchased power agreements, 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 purchased power agreements create a variable interest in the associated independent power producing entity.
 
SPS had approximately 827 megawatts (MW) of capacity under long-term purchased power agreements as of June 30, 2012 and Dec. 31, 2011 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 expiration dates through the year 2033.
 
Environmental Contingencies
 
Environmental Requirements
 
Greenhouse Gas (GHG) New Source Performance Standard Proposal (NSPS) and Emission Guideline for Existing Sources — In April 2012, the U.S. Environmental Protection Agency (EPA) proposed a GHG NSPS for newly constructed power plants.  The proposal requires that carbon dioxide (CO2) emission rates be equal to those achieved by a natural gas combined-cycle plant, even if the plant is coal-fired.  The EPA also proposed that NSPS not apply to modified or reconstructed existing power plants and noted that, pursuant to its general NSPS regulations, installation of control equipment on existing plants would not constitute a “modification” to those plants under the NSPS program.  Xcel Energy submitted comments on the proposed GHG NSPS in June 2012.  It is not possible to evaluate the impact of this regulation until its final requirements are known.
 
The EPA also plans to propose GHG regulations applicable to emissions from existing power plants under the Clean Air Act (CAA).  It is not known when the EPA will propose new standards for existing sources.
 
New Mexico GHG Regulations — In 2010, the New Mexico Environmental Improvement Board (EIB) adopted two regulations to limit GHG emissions, including CO2 emissions from power plants and other industrial sources.  In July 2011, SPS and other parties filed a petition to repeal each GHG rule with the EIB.  The EIB repealed both regulations in the first quarter of 2012.
 
Western Resource Advocates and New Energy Economy, Inc. have since filed appeals with the New Mexico Court of Appeals to challenge each of the EIB’s decisions to repeal the two GHG rules.  SPS has been granted intervention in one of the appeals and filed a petition to intervene in the other appeal, which has not yet been acted upon by the New Mexico Court of Appeals.
 
 
In late 2010 and early 2011, SPS, other utilities and industry groups filed separate appeals with the New Mexico Court of Appeals challenging the validity of the adoption of these two GHG regulations.  These appeals were stayed pending the EIB’s consideration of the petitions for repeal of both rules.  In July 2012, the New Mexico Court of Appeals conditionally dismissed both appeals without prejudice.  These appeals are subject to reinstatement if the New Mexico Court of Appeals reverses the EIB’s repeal of either rule and if the originally adopted rule is revived.
 
Cross-State Air Pollution Rule (CSAPR) In July 2011, the EPA issued its CSAPR to address long range transport of particulate matter (PM) and ozone by requiring reductions in sulfur dioxide (SO2) and nitrogen oxide (NOx) from utilities located in the eastern half of the United States, including Texas.  The CSAPR sets more stringent requirements than the proposed Clean Air Transport Rule and specifically requires plants in Texas to reduce their SO2 and annual NOx emissions.  The rule also creates an emissions trading program.
 
On Dec. 30, 2011, the U.S. Court of Appeals for the District of Columbia Circuit (D.C. Circuit) issued a stay of the CSAPR, pending completion of judicial review.  Oral arguments in the case were held in April 2012 and it is anticipated the D.C. Circuit will rule on the challenges to the CSAPR during the summer of 2012.  It is not known at this time whether the CSAPR will be upheld, reversed or will require modifications pursuant to a future D.C. Circuit decision.
 
If the CSAPR is upheld and unmodified, SPS believes that the CSAPR could ultimately require the installation of additional emission controls on some of SPS’ coal-fired electric generating units.  If compliance is required in a short time frame, SPS may be required to redispatch its system to reduce coal plant operating hours in order to decrease emissions from its facilities prior to the installation of emission controls.  The expected cost for these scenarios may vary significantly and SPS has estimated capital expenditures of approximately $470 million over the next five years for the plant modifications related to the CSAPR requirements.  SPS believes the cost of any required capital investment or possible increased fuel costs would be recoverable from customers through regulatory mechanisms and does not expect a material impact on its results of operations, financial position or cash flows.  In April 2012, SPS appealed to the D.C. Circuit on a final rule that the EPA issued that made changes to certain allowance allocations under the CSAPR.  While this rule increases the allowance allocations for SO2 for SPS, it did not increase them by as much as the proposed rule.  SPS is seeking additional allowance allocations through this appeal, which, if successful, would reduce SPS’ costs to comply with the CSAPR.  The D.C. Circuit held this appeal in abeyance until it issues its decision.
 
Electric Generating Unit (EGU) Mercury and Air Toxics Standards (MATS) Rule — The final EGU MATS rule became effective April 2012.  The EGU MATS rule sets emission limits for acid gases, mercury and other hazardous air pollutants and requires coal-fired utility facilities greater than 25 MW to demonstrate compliance within three to four years of the effective date.  SPS believes these costs will be recoverable through regulatory mechanisms and does not expect a material impact on results of operations, financial position or cash flows.
 
Regional Haze Rules — In 2005, the EPA finalized amendments to its regional haze rules regarding provisions that require the installation and operation of emission controls, known as best available retrofit technology (BART), for industrial facilities emitting air pollutants that reduce visibility in certain national parks and wilderness areas throughout the United States.  SPS’ generating facilities are subject to BART requirements.  Individual states were required to identify the facilities located in their states that will have to reduce SO2, NOx and PM emissions under BART and then set emissions limits for those facilities.
 
Harrington Units 1 and 2 are potentially subject to BART.  Texas has developed a regional haze state implementation plan (SIP) that finds the Clean Air Interstate Rule (CAIR) equal to BART for EGUs, and as a result, no additional controls for these units beyond the CAIR compliance would be required.  In May 2012, the EPA deferred its review of the Texas SIP in its final rule allowing states to find that CSAPR compliance meets BART requirements for EGUs.
 
Revisions to National Ambient Air Quality Standards (NAAQS) for PM — In June 2012, the EPA proposed to lower the primary (health-based) NAAQS for annual average fine PM and to retain the current daily standard for fine PM.  In areas in which SPS operates power plants, current monitored air concentrations are below the range of the proposed annual primary standard.  The EPA also proposed to add a secondary (welfare-based) NAAQS to improve visibility, primarily in urban areas.  SPS expects the proposed visibility standard would likely be met where SPS operates power plants based on currently available information.  A final rule is expected in December 2012 and the EPA is expected to designate non-compliant locations by December 2014.  If such areas are identified, states would then study the sources of the nonattainment and make emission reduction plans to attain the standards.  It is not possible to evaluate the impact of this regulation further until its final requirements are known.
 
 
Legal Contingencies
 
Lawsuits and claims arise in the normal course of business. Management, after consultation with legal counsel, has recorded an estimate of the probable cost of settlement or other disposition. The ultimate outcome of these matters cannot presently be determined. Accordingly, the ultimate resolution of these matters could have a material effect on SPS’ financial position, results of operations, and cash flows.
 
Environmental Litigation
 
Native Village of Kivalina vs. Xcel Energy Inc. et al. — In February 2008, the City and Native Village of Kivalina, Alaska, filed a lawsuit in U.S. District Court for the Northern District of California against Xcel Energy Inc., the parent company of SPS, and 23 other utility, oil, gas and coal companies. Plaintiffs claim that defendants’ emission of CO2 and other GHGs contribute to global warming, which is harming their village. Xcel Energy Inc. believes the claims asserted in this lawsuit are without merit and joined with other utility defendants in filing a motion to dismiss in June 2008. In October 2009, the U.S. District Court dismissed the lawsuit on constitutional grounds. In November 2009, plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit (Ninth Circuit). In November 2011, oral arguments were presented. It is unknown when the Ninth Circuit will render a final opinion. The amount of damages claimed by plaintiffs is unknown, but likely includes the cost of relocating the village of Kivalina. Plaintiffs’ alleged relocation is estimated to cost between $95 million to $400 million. While Xcel Energy Inc. believes the likelihood of loss is remote, given the nature of this case and any surrounding uncertainty, it could potentially have a material impact on SPS’ results of operations, cash flows or financial position. No accrual has been recorded for this matter.
 
Comer vs. Xcel Energy Inc. et al. — In May 2011, less than a year after their initial lawsuit was dismissed, plaintiffs in this purported class action lawsuit filed a second lawsuit against more than 85 utility, oil, chemical and coal companies in U.S. District Court in Mississippi.  The complaint alleges defendants’ CO2 emissions intensified the strength of Hurricane Katrina and increased the damage plaintiffs purportedly sustained to their property.  Plaintiffs base their claims on public and private nuisance, trespass and negligence.  Among the defendants named in the complaint are Xcel Energy Inc. and SPS.  The amount of damages claimed by plaintiffs is unknown.  The defendants, including Xcel Energy Inc., believe this lawsuit is without merit and filed a motion to dismiss the lawsuit.  In March 2012, the U.S. District Court granted this motion for dismissal.  In April 2012, plaintiffs appealed this decision to the U.S. Court of Appeals for the Fifth Circuit.  While Xcel Energy Inc. believes the likelihood of loss is remote, given the nature of this case and any surrounding uncertainty, it could potentially have a material impact on SPS’ results of operations, cash flows or financial position.  No accrual has been recorded for this matter.
 
Employment, Tort and Commercial Litigation
 
Exelon Wind (formerly John Deere Wind) Complaint  Four lawsuits and a regulatory petition have been filed arising out of a dispute concerning SPS’ payments for energy produced from the John Deere Wind Energy subsidiaries’ (JD Wind) projects.
 
State Lawsuit Regarding the PUCT’s May 2009 Order
The first lawsuit was filed in June 2009 in Texas State District Court against the Public Utility Commission of Texas (PUCT).  In this lawsuit, JD Wind filed a petition seeking review of a May 2009 PUCT order denying JD Wind’s request for relief against SPS.  In April 2011, JD Wind filed a non-suit of this case dropping the state appeal of the PUCT order.
 
Federal Lawsuit Regarding the PUCT’s May 2009 Order
A second lawsuit was filed in December 2009 by JD Wind against the PUCT in U.S. District Court for the Western District of Texas.  This lawsuit was filed shortly after a declaratory order issued by the FERC stated that the PUCT’s May 2009 order is not consistent with the FERC’s regulations.  In this lawsuit, JD Wind seeks declaratory and injunctive relief against the PUCT.  The U.S. District Court issued an order preventing this lawsuit from proceeding pending the outcome of the Texas State District Court proceeding against the PUCT.  As a result of the non-suit of the Texas State District Court proceeding, this case has moved forward.  In March and June 2012, the U.S. District Court heard oral arguments on motions and cross motions for summary judgment, and took the motions under advisement.  If the U.S. District Court does not grant one of these dispositive motions, the case will proceed with a trial date in October 2013 at the earliest.
 
State Lawsuit Regarding Disputed Energy Payments
In January 2010, a third lawsuit was filed by JD Wind against SPS in Texas State District Court related to payments made by SPS for energy produced from the JD Wind projects.  On April 12, 2012, the Texas State District Court heard oral arguments on SPS’ motion to dismiss and took the motion under advisement.  As the damages sought are indeterminate and given the uncertainty surrounding the circumstances of this case, SPS is unable to estimate the range or amount of possible damages.  No accrual has been recorded for this lawsuit nor is it expected that this proceeding will have a material effect on SPS’ results of operations, cash flows or financial position.
 

Petition Regarding the PUCT’s Approval of SPS’ Revised Qualifying Facilities Tariff
In November 2010, JD Wind filed a petition in Texas State District Court seeking review of the PUCT’s approval of SPS’ revised tariff applicable to purchases of non-firm energy from qualifying facilities.  The PUCT has denied all allegations contained in this petition.  A hearing is scheduled for Sept. 6, 2012.  On June 29, 2012, Exelon Wind filed a complaint with the FERC against the PUCT raising essentially the same alleged violations of federal law as those presented in the petition filed in November 2010.  On July 30, 2012, the PUCT filed an answer to this complaint defending its order and SPS filed an intervention and protest in support of the PUCT’s order.
 
State Lawsuit Regarding Wind Facility Registration with Southwest Power Pool (SPP)
On April 3, 2012, SPS filed a lawsuit against Exelon Wind in Texas State District Court to enforce Exelon Wind’s contractual obligation to register its wind facilities with SPP effective April 1, 2012.  SPS is not seeking monetary damages in this lawsuit.  Instead, SPS intends to withhold certain payments to Exelon Wind pending the outcome of this lawsuit.  On May 7, 2012, Exelon Wind filed a counter-claim seeking recovery of the payments withheld by SPS.  A procedural schedule has not yet been established.  For the period April 1, 2012 to June 20, 2012, SPS has accrued approximately $2 million, which is subject to adjustments as the amount, if any, owed to Exelon Wind will be a litigated issue in this lawsuit.  This lawsuit is not expected to have a material effect on SPS’ results of operations, cash flows or financial position.
 
Registration Agreement Filed by SPP with the FERC
On June 21, 2012, the FERC conditionally accepted SPP’s filing of an unsigned Market Participation Agreement between SPP and Exelon covering Exelon’s wind facilities.
 
7. 
Borrowings and Other Financing Instruments
 
Commercial Paper — SPS meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under its credit facility.  The following table presents commercial paper outstanding for SPS:
 
(Amounts in Millions, Except Interest Rates)
 
Three Months Ended
June 30, 2012
   
Twelve Months Ended
Dec. 31, 2011
 
Borrowing limit
  $ 300     $ 300  
Amount outstanding at period end
    -       -  
Average amount outstanding
    55       54  
Maximum amount outstanding
    106       161  
Weighted average interest rate, computed on a daily basis
    0.39 %     0.37 %
Weighted average interest rate at period end
    N/A       N/A  
 
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 the credit agreement.  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.
 
At June 30, 2012, SPS had the following committed credit facility available (in millions of dollars):
 
Credit Facility
   
Drawn
   
Available
 
$ 300.0     $ -     $ 300.0  
 
All credit facility bank borrowings, outstanding letters of credit and outstanding commercial paper reduce the available capacity under the credit facility.  SPS had no direct advances on the credit facility outstanding at June 30, 2012 and Dec. 31, 2011.
 
Amended Credit Agreement — In July 2012, SPS entered into an amended five-year credit agreement with a syndicate of banks, replacing the previous four-year credit agreement. The amended credit agreement has substantially the same terms and conditions as the prior credit agreement with an improvement in pricing and an extension of maturity from March 2015 to July 2017. The Eurodollar borrowing margin on the line of credit was reduced from a range of 100 to 200 basis points per year, to a range of 87.5 to 175 basis points per year based on applicable long-term credit ratings.  The commitment fees, calculated on the unused portion of the line of credit, were reduced from a range of 10 to 35 basis points per year, to a range of 7.5 to 27.5 basis points per year, also based on applicable long-term credit ratings.
 
SPS has the right to request an extension of the revolving termination date for two additional one-year periods, subject to majority bank group approval.
 
 
Letters of Credit — SPS uses letters of credit, generally with terms of one-year, to provide financial guarantees for certain operating obligations.  At June 30, 2012 and Dec. 31, 2011, there were no letters of credit outstanding.
 
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 utility money pool arrangement does not allow the utility subsidiaries to make investments in Xcel Energy Inc.  The following table presents the money pool borrowings for SPS:
 
(Amounts in Millions, Except Interest Rates)
 
Three Months Ended
June 30, 2012
   
Twelve Months Ended
Dec. 31, 2011
 
Borrowing limit
  $ 100     $ 100  
Amount outstanding at period end
    -       5  
Average amount outstanding
    14       12  
Maximum amount outstanding
    65       71  
Weighted average interest rate, computed on a daily basis
    0.35 %     0.35 %
Weighted average interest rate at period end
    N/A       0.35  
 
Long-Term Borrowings
 
In June 2012, SPS issued an additional $100 million of its 4.5 percent first mortgage bonds due Aug. 15, 2041 at a premium of $10.1 million.  Including the $200 million of this series previously issued in August 2011, total principal outstanding for this series is $300 million.
 
8. 
Fair Value of Financial Assets and Liabilities
 
Fair Value Measurements
 
SPS had no assets or liabilities measured at fair value on a recurring basis as of June 30, 2012 and Dec. 31, 2011.
 
Derivative Instruments
 
SPS may enter into derivative instruments, including forward contracts, futures, swaps and options, to reduce 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.
 
At June 30, 2012, accumulated other comprehensive losses related to interest rate derivatives included $0.2 million of net losses expected to be reclassified into earnings during the next 12 months as the related hedged interest rate transactions impact earnings.
 
Accumulated other comprehensive losses related to interest rate derivatives reclassified into earnings during the three months ended June 30, 2012 and 2011 were $0.1 million.   Accumulated other comprehensive losses related to interest rate derivatives reclassified into earnings during the six months ended June 30, 2012 and 2011 were $0.1 million.
 
Short-Term Wholesale and Commodity Trading Risk — SPS conducts an immaterial amount of short-term wholesale and commodity trading activities, including the purchase and sale of electric capacity, energy and energy-related products.  SPS’ risk management policy allows management to conduct these activities within guidelines and limitations as approved by its risk management committee, which is made up of management personnel not directly involved in the activities governed by the policy.
 
Commodity Derivatives — SPS may enter 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.  At June 30, 2012 and Dec. 31, 2011, SPS held no commodity derivatives.  Changes in the fair value of non-trading commodity derivative instruments are recorded in OCI or deferred as a regulatory asset or liability.  The classification as a regulatory asset or liability is based on commission approved regulatory recovery mechanisms.
 
 
At June 30, 2012 and Dec. 31, 2011, derivative instruments presented on SPS’ balance sheets consist of amounts related to long-term purchased power agreements.  In 2003, as a result of implementing new guidance on the normal purchase exception for derivative accounting, SPS began recording several long-term purchased power agreements at fair value due to accounting requirements related to underlying price adjustments.  As these purchases are recovered through normal regulatory recovery mechanisms in the respective jurisdictions, the changes in fair value for these contracts were offset by regulatory assets and liabilities.  During 2006, SPS qualified these contracts under the normal purchase exception.  Based on this qualification, the contracts are no longer adjusted to fair value and the previous carrying value of these contracts will be amortized over the remaining contract lives along with the offsetting regulatory assets and liabilities.
 
Fair Value of Long-Term Debt
 
As of June 30, 2012 and Dec. 31, 2011, other financial instruments for which the carrying amount did not equal fair value were as follows:
 
   
June 30, 2012
   
Dec. 31, 2011
 
(Thousands of Dollars)
 
Carrying
Amount
   
Fair Value
   
Carrying
Amount
   
Fair Value
 
Long-term debt, including current portion
  $ 1,103,566     $ 1,306,907     $ 993,314     $ 1,176,020  
 
The fair value of SPS’ long-term debt is estimated based on recent trades and observable spreads from benchmark interest rates for similar securities.  The fair value estimates are based on information available to management as of June 30, 2012 and Dec. 31, 2011, and given the observability of the inputs to these estimates, the fair values presented for long-term debt have been assigned a Level 2.  These fair value estimates have not been comprehensively revalued for purposes of these financial statements since those dates and current estimates of fair values may differ significantly.
 
9. 
Other Income, Net
 
Other income (expense), net consisted of the following:
 
   
Three Months Ended June 30
   
Six Months Ended June 30
 
(Thousands of Dollars)
 
2012
   
2011
   
2012
   
2011
 
Interest income
  $ 139     $ 90     $ 182     $ 234  
Other nonoperating income
    3       1       31       3  
Insurance policy expense
    -       (7 )     (193 )     (91 )
Other income, net
  $ 142     $ 84     $ 20     $ 146  
 
10. 
Segment Information
 
SPS has only one reportable segment as a regulated electric utility providing wholesale and retail electric service in the states of Texas and New Mexico.  Operating results from the regulated electric utility segment serve as the primary basis for the chief operating decision maker to evaluate the performance of SPS.
 
 
Revenues from external customers were $380.2 million and $433.3 million for the three months ended June 30, 2012 and 2011, respectively, and $720.7 million and $814.5 million for the six months ended June 30, 2012 and 2011, respectively.
 
Net income was $30.3 million and $24.7 million for the three months ended June 30, 2012 and 2011, respectively, and $41.7 million and $34.9 million, for the six months ended June 30, 2012 and 2011, respectively.
 
Capital expenditures during the six months ended June 30, 2012 and June 30, 2011 were $185.9 million and $158.7 million, respectively.
 
As of June 30, 2012 and Dec. 31, 2011, SPS’ total assets were $3.4 billion and $3.2 billion, respectively.
 
11. 
Benefit Plans and Other Postretirement Benefits
 
SPS calculates base pension expense in accordance with accounting guidance for retirement benefits.  In 2011, the Texas retail electric jurisdiction began to allow the deferral of allocated pension costs to the extent that those costs exceed test year pension expenses included in rates, within prescribed limits.  Differences between regulatory-based pension expense for the Texas retail electric jurisdiction and expense as calculated under applicable accounting guidance are deferred as a regulatory asset or liability.
 
 
Components of Net Periodic Benefit Cost
 
   
Three Months Ended June 30
 
   
2012
   
2011
   
2012
   
2011
 
               
Postretirement Health
 
(Thousands of Dollars)
 
Pension Benefits
   
Care Benefits
 
Service cost
  $ 2,127     $ 1,896     $ 302     $ 254  
Interest cost
    4,920       5,087       745       684  
Expected return on plan assets
    (6,217 )     (6,559 )     (674 )     (754 )
Amortization of transition obligation
    -       -       387       418  
Amortization of prior service cost (credit)
    359       377       (37 )     (13 )
Amortization of net loss
    3,265       2,576       345       216  
Net periodic benefit cost
    4,454       3,377       1,068       805  
Cost not recognized due to the effects of regulation
    (1,075 )     (575 )     -       -  
Net benefit cost recognized for financial reporting
  $ 3,379     $ 2,802     $ 1,068     $ 805  
 
 
   
Six Months Ended June 30
 
   
2012
   
2011
   
2012
   
2011
 
               
Postretirement Health
 
(Thousands of Dollars)
 
Pension Benefits
   
Care Benefits
 
Service cost
  $ 4,260     $ 3,845     $ 630     $ 546  
Interest cost
    9,800       10,018       1,416       1,361  
Expected return on plan assets
    (12,464 )     (13,158 )     (1,351 )     (1,503 )
Amortization of transition obligation
    -       -       773       835  
Amortization of prior service cost (credit)
    719       753       (74 )     (26 )
Amortization of net loss
    6,407       4,523       628       428  
Net periodic benefit cost
    8,722       5,981       2,022       1,641  
Cost not recognized due to the effects of regulation
    (2,150 )     (1,150 )     -       -  
Net benefit cost recognized for financial reporting
  $ 6,572     $ 4,831     $ 2,022     $ 1,641  
 
In January 2012, contributions of $190.5 million were made across four of Xcel Energy’s pension plans, of which $12.9 million was attributable to SPS.  Xcel Energy does not expect additional pension contributions during 2012.
 
In June 2012, to manage volatility in equity pricing within the pension master trust, Xcel Energy entered into equity collar contracts with a net-zero cost at initiation on a portion of the equity securities.  The equity collar strategy is designed to reduce potential equity losses while limiting gains, resulting in lower equity volatility for the pension plans.  At June 30, 2012, the mark-to-market value of these arrangements was not material to the value of the pension trust assets.  These arrangements will expire in December 2012.
 
Item 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
Discussion of financial condition and liquidity for SPS is omitted per conditions set forth in general instructions H (1) (a) and (b) of Form 10-Q for wholly owned subsidiaries. It is replaced with management’s narrative analysis of the results of operations set forth in general instructions H (2) (a) of Form 10-Q for wholly owned subsidiaries (reduced disclosure format).
 
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 in the following discussion and analysis are forward-looking statements that are subject to certain risks, uncertainties, and assumptions.  Such forward-looking statements are intended to be identified in this document by the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should” and similar expressions. Actual results may vary materially. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them to reflect changes that occur after that date. Factors that could cause actual results to differ materially include, but are not limited to: 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; business conditions in the energy industry, including the risk of a slow down in the U.S. economy or delay in growth recovery; trade, fiscal, taxation and environmental policies in areas where SPS has a financial interest; customer business conditions; actions of credit rating agencies; competitive factors, including the extent and timing of the entry of additional competition in the markets served by SPS; unusual weather; effects of geopolitical events, including war and acts of terrorism; state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rates or have an impact on asset operation or ownership or impose environmental compliance conditions; structures that affect the speed and degree to which competition enters the electric market; costs and other effects of legal and administrative proceedings, settlements, investigations and claims; financial or regulatory accounting policies imposed by regulatory bodies; availability or cost of capital; employee work force factors; the items described under Factors Affecting Results of Operations; and the other risk factors listed from time to time by SPS in reports filed with the SEC, including “Risk Factors” in Item 1A of SPS’ Form 10-K for the year ended Dec. 31, 2011, and Item 1A and Exhibit 99.01 to this Quarterly Report on Form 10-Q for the quarter ended June 30, 2012.
 
Results of Operations
 
SPS’ net income was approximately $41.7 million for the six months ended June 30, 2012, compared with net income of approximately $34.9 million for the same period in 2011.  The increase is the result of rate increases in New Mexico and Texas, effective January 2012, partially offset by higher depreciation expense due to Jones Unit 3 going into service in June 2011 and higher property taxes.
 
Electric Revenues and Margin
 
Electric fuel and purchased power expenses tend to vary with changing retail and wholesale sales requirements and unit cost changes in fuel and purchased power.  The design of fuel and purchased power cost recovery mechanisms of the Texas and New Mexico jurisdictions may not allow for complete recovery of all expenses and, therefore, changes in fuel or purchased power costs can impact earnings.  The following tables detail the electric revenues and margin:
 
    Six Months Ended June 30  
(Millions of Dollars)
 
2012
 
2011
 
Electric revenues
  $ 721     $ 814  
Electric fuel and purchased power
    (416 )     (525 )
Electric margin
  $ 305     $ 289  
 
The following tables summarize the components of the changes in electric revenues and electric margin:
 
Electric Revenues
 
(Millions of Dollars)
 
2012 vs. 2011
 
Fuel and purchased power cost recovery
  $ (123 )
Firm wholesale
    (3 )
Estimated impact of weather
    (3 )
Demand side management incentive
    (2 )
Retail rate increase (Texas and New Mexico)
    17  
Transmission revenue
    15  
Demand revenue
    3  
Trading
    2  
Other, net
    1  
Total decrease in electric revenues
  $ (93 )
 
 
Electric Margin
 
(Millions of Dollars)
 
2012 vs. 2011
 
Retail rate increase (Texas and New Mexico)
  $ 17  
Transmission revenue, net of costs
    4  
Demand revenue
    3  
Estimated impact of weather
    (3 )
Firm wholesale
    (2 )
Demand side management incentive
    (2 )
Other, net
    (1 )
Total increase in electric margin
  $ 16  
 
Non-Fuel Operating Expense and Other Items
 
Demand Side Management (DSM) Program Expenses — DSM program expenses decreased by approximately $1.6 million, or 20.2 percent for the first six months of 2012 compared with the same period in 2011.  The decrease is primarily attributable to a decrease in the rider rates used to recover the program expenses.  DSM program expenses are generally recovered in SPS’ major jurisdictions concurrently through riders and base rates.
 
Depreciation and Amortization — Depreciation and amortization expenses increased $3.6 million, or 6.8 percent for the six months ended June 30, 2012 compared with the same period in 2011.  The increase is primarily due to Jones Unit 3 going into service in June 2011 and normal system expansion.
 
Taxes (Other Than Income Taxes) — Taxes (other than income taxes) increased $1.9 million, or 9.2 percent for the six months ended June 30, 2012 compared with the same period in 2011.  The increase is primarily due to an increase in property taxes in Texas.
 
Interest Charges — Interest charges increased $1.8 million, or 5.6 percent, for the six months ended June 30, 2012 compared with the same period in 2011.  The increase is primarily due to higher long-term debt levels, partially offset by lower interest rates.
 
Income Taxes — Income tax expense increased $2.1 million for the first six months of 2012 compared with the same period in 2011. The increase in income tax expense was primarily due to higher pretax earnings in 2012.  The effective tax rate was 36.6 percent for the first six months of 2012, compared with 38.6 percent for the same period in 2011.  The lower effective tax rate for the first six months of 2012 was primarily due to a lower forecasted annual effective tax rate in 2012, largely due to decreased state income taxes and increased permanent plant-related deductions.
 
Summary of Recent Federal Regulatory Developments
 
The FERC has jurisdiction over rates for electric transmission service in interstate commerce and electricity sold at wholesale, accounting practices and certain other activities of SPS, including enforcement of North American Electric Reliability Corporation 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, 2011.  In addition to the matters discussed below, see Note 5 to the financial statements for a discussion of other regulatory matters.
 
FERC Order 1000, Transmission Planning and Cost Allocation (Order 1000)  In July 2011, the FERC issued Order 1000 adopting new requirements for transmission planning, cost allocation, and development.  SPS believes that statutes in Texas also protect the right of incumbent utilities to construct and own transmission interconnected to their systems, so SPS does not expect that this aspect of Order 1000 will impact the portion of SPS in Texas.  However, the portion of SPS in New Mexico may be impacted by the provisions of Order 1000 that impact an incumbent’s right to build transmission because New Mexico does not have legislation protecting the rights of utilities to develop transmission projects in their service areas.  Compliance filings to address these new requirements are due October 2012, though SPP has recently filed for an extension, and are effective prospectively.
 
In May 2012, the FERC issued Order 1000-A, its order on rehearing of Order 1000.  Order 1000-A declined all motions for rehearing and offered limited clarification of aspects of the final rule.  Several parties filed requests for clarification of Order 1000-A.  Several appeals of Order 1000 have also been filed and these appeals have been consolidated into the D.C. Circuit.  These appeals are expected to be heard over the next 12 months with a ruling expected sometime in mid-2013.
 
 
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 the 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) and chief financial officer (CFO), allowing timely decisions regarding required disclosure. As of June 30, 2012, 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 change in SPS’ internal control over financial reporting has occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, SPS’ internal control over financial reporting.
 
Part II — OTHER INFORMATION
 
Item 1 — LEGAL PROCEEDINGS
 
In the normal course of business, various lawsuits and claims have arisen against SPS.  SPS has recorded an estimate of the probable cost of settlement or other disposition for such matters.
 
Additional Information
 
See Note 6 to the financial statements for further discussion of legal claims and environmental proceedings.
 
Item1A — 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, 2011, which is incorporated herein by reference.
 
Item 4 — MINE SAFETY DISCLOSURES
 
None.
 
Item 5 — OTHER INFORMATION
 
None.
 
Item 6 — EXHIBITS
 
Indicates incorporation by reference
+
Furnished, herewith, not filed.  Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
 
3.01*
 
Amended and Restated Articles of Incorporation of SPS dated Sept. 30, 1997 (Exhibit 3(a)(2) to Form 10-K (file no. 001-03789) dated March 3, 1998).
3.02*
 
By-Laws of SPS dated Sept. 29, 1997 (Exhibit 3(b)(2) to Form 10-K (file no. 001-03789) dated March 3, 1998).
 
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.
 
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.
 
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Statement pursuant to Private Securities Litigation Reform Act of 1995.
101
 
The following materials from SPS’ Quarterly Report on Form 10-Q for the quarter ended June 30, 2012 are formatted 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 Condensed Financial Statements, and (vi) document and entity information.
 
 
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
Aug. 6, 2012    
     
 
By:
/s/ JEFFREY S. SAVAGE
   
Jeffrey S. Savage
   
Vice President and Controller
     
   
/s/ TERESA S. MADDEN
   
Teresa S. Madden
   
Senior Vice President, Chief Financial Officer and Director
 
 
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