Commitments and Contingencies | 10. Commitments and Contingencies Legal 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 complex judgments about future events. Management maintains accruals for losses that are probable of being incurred and subject to reasonable estimation. Management may be unable to estimate an amount or range of a reasonably possible loss in certain situations, including 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 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. Rate Matters 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. In December 2019, the PUCT issued an order disallowing recovery of costs for Texas customers related to two specific solar PPAs. These PPAs were previously approved by the NMPRC as reasonable, necessary and economic. SPS recorded a total disallowance of approximately $6 million in December 2019. SPP OATT Upgrade Costs — Under the SPP OATT, costs of transmission upgrades may be recovered from other SPP customers whose transmission service depends on capacity enabled by the upgrade. SPP had not been charging its customers for these upgrades, even though the SPP OATT had allowed SPP to do so since 2008. In 2016, the FERC granted SPP’s request to recover previously unbilled charges and SPP subsequently billed SPS approximately $13 million . In July 2018, SPS’ appeal to the D.C. Circuit over the FERC rulings granting SPP the right to recover previously unbilled charges was remanded to the FERC. In February 2019, the FERC reversed its 2016 decision and ordered SPP to refund charges retroactively collected from its transmission customers, including SPS, related to periods before September 2015. In April 2019, several parties, including SPP, filed requests for rehearing. Timing of a FERC response to 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 SPP assessed upgrade charges to SPS in violation of the SPP OATT. The FERC granted a rehearing for further consideration in May 2018. Timing of FERC action on the SPS rehearing is uncertain. If SPS’ complaint results in additional charges or refunds, SPS will seek to recover or refund the amounts through future SPS customer rates. SPP Filing to Assign GridLiance Facilities to SPS Rate Zone — In August 2018, SPP filed a request with the FERC to amend its OATT to include 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. In September 2018, SPS protested the proposed SPP tariff charges, and asked the FERC to reject the SPP filing. On Oct. 31, 2018, the FERC issued an order accepting the proposed charges, subject to refund, as of Nov. 1, 2018, and set the case for settlement hearing procedures. Hearings are scheduled for May 2020, with the ALJs’ initial decision expected in October 2020. SPS has incurred approximately $6 million in associated charges as of Dec. 31, 2019 . SPS Filing to Modify Wholesale Transmission Rates — In 2018, SPS filed revisions to its wholesale transmission formula rate. The proposal includes an update to 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. Proposed changes would increase wholesale transmission revenues by approximately $9.4 million , with approximately $4.4 million of the total recovered in SPP regional transmission rates. SPS proposed formula rate changes be effective Feb. 1, 2019. Environmental New and changing federal and state environmental mandates can create financial liabilities for SPS, which are normally recovered through the regulated rate process. Site Remediation — Various federal and state environmental laws impose liability where hazardous substances or other regulated materials have been released to the environment. SPS may sometimes pay all or a portion of the cost to remediate sites where past activities of SPS’ predecessors or other parties have caused environmental contamination. Environmental contingencies could arise from various situations, including sites of former MGPs; and third-party sites, such as landfills, for which SPS is alleged to have sent wastes to that site. 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 costs incurred. Environmental Requirements — Water and Waste Federal CWA WOTUS Rule — In 2015, the EPA and Corps published a final rule that significantly broadened the scope of waters under the CWA that are subject to federal jurisdiction, referred to as “WOTUS”. In 2019, the EPA repealed the 2015 rule and published a draft replacement rule. Until a final rule is issued, SPS cannot estimate potential impacts, but anticipates costs will be recoverable through regulatory mechanisms. Federal CWA ELG — In 2015, the EPA issued a final ELG rule for power plants that discharge treated effluent to surface waters as well as utility-owned landfills that receive CCRs. In 2017, the EPA delayed the compliance date for flue gas desulfurization wastewater and bottom ash transport until November 2020. After 2020, SPS estimates that ELG compliance costs will be immaterial. The EPA, however, is conducting a rulemaking process to revise certain effluent limitations and pretreatment standards, which may impact compliance costs. SPS anticipates these costs will be fully recoverable through regulatory mechanisms. Environmental Requirements — Air Regional Haze Rules — The regional haze program requires SO 2 , nitrogen oxide and particulate matter emission controls at power plants to reduce visibility impairment in national parks and wilderness areas. The program includes BART and reasonable further progress. Texas’ first regional haze plan has undergone federal review as described below. BART Determination for Texas: The EPA has issued a revised final rule adopting a BART alternative Texas only SO 2 trading program that applies to all Harrington and Tolk units. Under the trading program, SPS expects the allowance allocations to be sufficient for SO 2 emissions. The anticipated costs of compliance are not expected to have a material impact; and SPS believes that compliance costs would be recoverable through regulatory mechanisms. Several parties have challenged whether the final rule issued by the EPA should be considered to have met the requirements imposed in a Consent Decree entered by the United States District Court for the District of Columbia that established deadlines for the EPA to take final action on state regional haze plan submissions. The court has required status reports from the parties while the EPA works on the reconsideration rulemaking. In December 2017, the National Parks Conservation Association, Sierra Club, and Environmental Defense Fund appealed the EPA’s 2017 final BART rule to the Fifth Circuit and filed a petition for administrative reconsideration. In January 2018, the court granted SPS’ motion to intervene in the Fifth Circuit litigation in support of the EPA’s final rule. The court has held the litigation in abeyance while the EPA decided whether to reconsider the rule. In August 2018, the EPA started a reconsideration rulemaking, which was supplemented by an additional agency notice in November 2019. It is not known when the EPA will make a final decision on this proposal. Reasonable Progress Rule: In 2016, the EPA adopted a final rule establishing a federal implementation plan for reasonable further progress under the regional haze program for the state of Texas. The rule imposes SO 2 emission limitations that would require the installation of dry scrubbers on Tolk Units 1 and 2, with compliance required by February 2021. Investment costs associated with dry scrubbers could be $600 million . SPS appealed the EPA’s decision and obtained a stay of the final rule. In March 2017, the Fifth Circuit remanded the rule to the EPA for reconsideration, leaving the stay in effect. In a future rulemaking, the EPA will address whether SO 2 emission reductions beyond those required in the BART alternative rule are needed at Tolk under the “reasonable progress” requirements. The EPA has not announced a schedule for acting on the remanded rule. Implementation of the NAAQS for SO 2 — The EPA has designated all areas near SPS’ generating plants as attaining the SO 2 NAAQS with an exception. The EPA issued final designations, which found the area near the Harrington plant as “unclassifiable.” The area near the Harrington plant is to be monitored for three years and a final designation is expected to be made by December 2020. If the area near the Harrington plant is designated nonattainment in 2020, the TCEQ will need to develop an implementation plan, designed to achieve the NAAQS by 2025. The TCEQ could require additional SO 2 controls at Harrington as part of such a plan. SPS cannot evaluate the impacts until the final designation is made and any required state plans are developed. SPS believes that should SO 2 AROs — AROs have been recorded for SPS’ assets. SPS’ AROs were as follows: 2019 (Millions of Dollars) Jan. 1, 2019 Amounts Incurred (a) Amounts (b) Accretion Cash Flow Revisions (c) Dec. 31, 2019 Electric Steam and other production $ 22.0 $ — $ (1.6 ) $ 1.4 $ 29.5 $ 51.3 Wind — 16.0 — 0.4 — 16.4 Distribution 9.1 — — 0.4 — 9.5 Miscellaneous 1.3 — — — (1.2 ) 0.1 Total liability $ 32.4 $ 16.0 $ (1.6 ) $ 2.2 $ 28.3 $ 77.3 (a) Amounts incurred related to the Hale wind farm placed in service in 2019. (b) Amounts settled related to asbestos abatement projects. (c) In 2019, AROs were revised for changes in timing and estimates of cash flows. Changes in steam production AROs primarily related to the cost estimates to remediate ponds at production facilities. 2018 (Millions of Dollars) Jan. 1, 2018 Accretion Cash Flow Revisions (a) Dec. 31, 2018 (b) Electric Steam and other production $ 20.3 $ 1.2 $ 0.5 $ 22.0 Distribution 7.0 0.3 1.8 9.1 Miscellaneous 1.2 0.1 — 1.3 Total liability $ 28.5 $ 1.6 $ 2.3 $ 32.4 (a) In 2018, AROs were revised for changes in timing and estimates of cash flows. Changes in electric distribution AROs were primarily related to increased labor costs. (b) There were no ARO amounts incurred or settled in 2018. Indeterminate AROs — Outside of the recorded asbestos AROs, other plants or buildings may contain asbestos due to the age of many of SPS’ facilities, but no confirmation or measurement of the cost of removal could be determined as of Dec. 31, 2019 . Therefore, an ARO has not been recorded for these facilities. Removal Costs — SPS records a regulatory liability for the plant removal costs that are recovered currently in rates. Removal costs have accumulated based on varying rates as authorized by the appropriate regulatory entities. SPS has estimated the amount of removal costs accumulated through historic depreciation expense based on current factors used in the existing depreciation rates. Removal costs as of Dec. 31, 2019 and 2018 were $174.5 million and $187.7 million , respectively. 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 current and noncurrent operating lease liabilities. These amounts, adjusted for any prepayments or incentives, are recognized as operating lease ROU assets. Most of SPS’ leases do not contain a readily determinable discount rate. Therefore, the present value of future lease payments is generally calculated using the estimated incremental borrowing rate (weighted-average of 4.4% ). SPS has elected the practical expedient under which non-lease components, such as asset maintenance costs included in payments, are not deducted from minimum lease payments for the purposes of lease accounting and disclosure. Leases with an initial term of 12 months or less are classified as short-term leases and are not recognized on the balance sheet. Operating lease ROU assets: (Millions of Dollars) Dec. 31, 2019 PPAs $ 500.3 Other 48.0 Gross operating lease ROU assets 548.3 Accumulated amortization (25.9 ) Net operating lease ROU assets $ 522.4 Components of lease expense: (Millions of Dollars) 2019 2018 2017 Operating leases PPA capacity payments $ 48.1 $ 51.1 $ 51.4 Other operating leases (a) 4.9 7.9 6.4 Total operating lease expense (b) $ 53.0 $ 59.0 $ 57.8 (a) Includes short-term lease expense of $1.5 million , $1.1 million and $1.2 million for 2019 , 2018 and 2017 , respectively. (b) PPA capacity payments are included in electric fuel and purchased power on the statements of income. Expense for other operating leases is included in O&M expense. Commitments under operating leases as of Dec. 31, 2019 : (Millions of Dollars) PPA (a) (b) Operating Leases Other Operating Leases Total Leases 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 2024 46.2 3.5 49.7 Thereafter 404.5 51.3 455.8 Total minimum obligation 635.5 68.3 703.8 Interest component of obligation (160.0 ) (21.6 ) (181.6 ) Present value of minimum obligation 475.5 46.7 522.2 Less current portion (26.9 ) Noncurrent operating lease liabilities $ 495.3 Weighted-average remaining lease term in years 14.1 (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. Commitments under operating leases as of Dec. 31, 2018 : (Millions of Dollars) PPA (a) (b) Operating Leases Other Operating Leases Total 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. Non-Lease PPAs — SPS has entered into PPAs with other utilities and energy suppliers with various expiration dates through 2024 for purchased power to meet system load and energy requirements and operating reserve obligations. In general, these agreements provide for energy payments, based on actual energy delivered and capacity payments. Capacity payments are contingent on the IPP meeting contract obligations, including plant availability requirements. Certain contractual payments are adjusted based on market indices. The effects of price adjustments on financial results are mitigated through purchased energy cost recovery mechanisms. Included in electric fuel and purchased power expenses for PPAs accounted for as executory contracts, were payments for capacity of $19.9 million , $57.6 million and $58.4 million in 2019 , 2018 and 2017 , respectively. At Dec. 31, 2019 , the estimated future payments for capacity that SPS is obligated to purchase pursuant to these executory contracts, subject to availability, were as follows: (Millions of Dollars) Capacity 2020 $ 12.3 2021 12.5 2022 12.7 2023 13.0 2024 5.9 Thereafter — Total $ 56.4 Fuel Contracts — SPS has entered into various long-term commitments for the purchase and delivery of a significant portion of its coal and natural gas requirements. These contracts expire between 2020 and 2033 . SPS is required to pay additional amounts depending on actual quantities shipped under these agreements. Estimated minimum purchases under these contracts as of Dec. 31, 2019 : (Millions of Dollars) Coal Natural gas Natural gas 2020 $ 96.7 $ 12.3 $ 28.9 2021 67.7 — 23.3 2022 38.8 — 17.4 2023 — — 12.7 2024 — — 6.7 Thereafter — — 26.3 Total $ 203.2 $ 12.3 $ 115.3 VIEs Under certain PPAs, SPS purchases power from IPPs for which SPS is required to reimburse fuel costs, or to participate in tolling arrangements under which SPS procures the natural gas required to produce the energy that it purchases. SPS has determined that certain IPPs are VIEs. SPS is not subject to risk of loss from the operations of these entities, and no significant financial support is required other than contractual payments for energy and capacity. In addition, certain solar PPAs provide an option to purchase emission allowances or sharing provisions related to production credits generated by the solar facility under contract. These specific PPAs create a variable interest in the IPP. SPS evaluated each of these VIEs for possible consolidation, including review of qualitative factors such as the length and terms of the contract, control over O&M, control over dispatch of electricity, historical and estimated future fuel and electricity prices, and financing activities. SPS concluded that these entities are not required to be consolidated in its financial statements because it does not have the power to direct the activities that most significantly impact the entities’ economic performance. SPS had approximately 1,197 MW of capacity under long-term PPAs at both Dec. 31, 2019 and 2018 with entities that have been determined to be VIEs. These agreements have expiration dates through 2041 . Fuel Contracts — SPS purchases all of its coal requirements for its Harrington and Tolk plant from TUCO Inc. under contracts that will expire in December 2022 . TUCO arranges for the purchase, receiving, transporting, unloading, handling, crushing, weighing, and delivery of coal to meet SPS’ requirements. TUCO is responsible for negotiating and administering contracts with coal suppliers, transporters and handlers. SPS has not provided any significant financial support to TUCO, other than contractual payments for delivered coal. However, the fuel contracts create a variable interest in TUCO due to SPS’ reimbursement of fuel procurement costs. SPS has determined that TUCO is a VIE. SPS has concluded that it is not the primary beneficiary of TUCO, because SPS does not have the power to direct the activities that most significantly impact TUCO’s economic performance. |