SPS is involved in various litigation matters in the ordinary course of business. The assessment of whether a loss is probable or is a reasonable possibility, and whether the loss or a range of loss is estimable, often involves a series of complex judgments about future events. Management maintains accruals for losses probable of being incurred and subject to reasonable estimation.

Management is sometimes unable to estimate an amount or range of a reasonably possible loss in certain situations, including but not limited to when (1) the damages sought are indeterminate, (2) the proceedings are in the early stages, or (3) the matters involve novel or unsettled legal theories.

In such cases, there is considerable uncertainty regarding the timing or ultimate resolution, including a possible eventual loss. For current proceedings not specifically reported herein, management does not anticipate that the ultimate liabilities, if any, would have a material effect on SPS’ financial statements. Legal fees are generally expensed as incurred.

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

SPP OATT Upgrade Costs — Costs of transmission upgrades may be recovered from other SPP customers whose transmission service depends on capacity enabled by the upgrade under the SPP OATT. SPP had not been charging its customers for these upgrades, even though the SPP OATT had allowed SPP to do so since 2008. In 2016, the FERC granted SPP’s request to recover these previously unbilled charges and SPP subsequently billed SPS approximately $13 million.

In 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 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 2020, SPP and Oklahoma Gas & Electric separately filed petitions for review of the FERC’s orders at the D.C. Circuit. In 2021, the D.C. Circuit issued a decision denying these appeals and upholding the FERC’s orders. Refunds received by SPS are expected to be given back to SPS customers through future rates.

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

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.

SPS is investigating, remediating or performing post-closure actions at two MGP, landfill or other disposal sites across its service territories, excluding sites that are being addressed under coal ash regulations.

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

Clean Air Act NOx Allowance Allocations — In June 2023, the EPA published final regulations under the "Good Neighbor" provisions of the Clean Air Act. The final rule applies to generation facilities in Texas, as well as other states outside of our service territory. The rule establishes an allowance trading program for NOx that will impact SPS’ fossil fuel-fired electric generating facilities. Applicable facilities will have to secure additional allowances, install NOx controls and/or develop a strategy of operations that utilizes the existing allowance allocations. Guidelines are also established for allowance banking and emission limit backstops.

While the financial impacts of the final rule are uncertain and dependent on market forces and anticipated generation, SPS anticipates the annual costs could be significant, but would be recoverable through regulatory mechanisms.

SPS has joined other companies in litigation challenging the EPA’s disapproval of Texas’ state implementation plan. Currently, the regulation is under a judicial stay for Texas and not applicable in that jurisdiction until litigation concludes.

In February 2024, the EPA proposed to partially disapprove New Mexico’s state implementation plan and bring New Mexico into the federal Good Neighbor plan. Xcel Energy continues to evaluate impacts to generation units at SPS.


	2023
(Millions of Dollars)	Jan. 1, 2023		Accretion		Dec. 31, 2023
Electric
Steam and other production	$	83	$	4	$	87
Wind	54		2		56
Distribution	10		—		10
Total liability	$	147	$	6	$	153


	2022
(Millions of Dollars)	Jan. 1, 2022		Accretion		Cash Flow Revisions (a)		Dec. 31, 2022
Electric
Steam and other production	$	54	$	3	$	26	$	83
Wind	52		2		—		54
Distribution	10		—		—		10
Total liability	$	116	$	5	$	26	$	147

(a) In 2022, AROs were revised for changes in estimates of cash flows. Revisions in steam and other production AROs primarily related to changes in costs for steam production ponds remediation.

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, 2023. Therefore, an ARO has not been recorded for these facilities.

SPS evaluates contracts that may contain leases, including PPAs and arrangements for the use of office space and other facilities, vehicles and equipment. A contract contains a lease if it conveys the exclusive right to control the use of a specific asset. A contract determined to contain a lease is evaluated further to determine if the arrangement is a finance lease.

ROU assets represent SPS’ rights to use leased assets. The present value of future operating lease payments is recognized in current and noncurrent operating lease liabilities. These amounts, adjusted for any prepayments or incentives, are recognized as operating lease ROU assets.

Most of SPS’ leases do not contain a readily determinable discount rate. Therefore, the present value of future lease payments is generally calculated using the estimated incremental borrowing rate (weighted average of 4.4%). For currently existing asset classes, SPS has elected to utilize the practical expedient under which non-lease components, such as asset maintenance costs included in payments, are not deducted from minimum lease payments for the purposes of lease accounting and disclosure.


(Millions of Dollars)	Dec. 31, 2023		Dec. 31, 2022
PPAs	$	500	$	500
Other	44		44
Gross operating lease ROU assets	544		544
Accumulated amortization	(141)		(110)
Net operating lease ROU assets	$	403	$	434


(Millions of Dollars)	2023		2022		2021
Operating leases
PPA capacity payments	$	53	$	53	$	53
Other operating leases (a)	4		4		4
Total operating lease expense (b)	$	57	$	57	$	57

(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.


(Millions of Dollars)	PPA (a) (b) Operating Leases		Other Operating Leases		Total Operating Leases
2024	$	46	$	3	$	49
2025	46		3		49
2026	46		3		49
2027	46		4		50
2028	46		4		50
Thereafter	220		33		253
Total minimum obligation	450		50		500
Interest component of obligation	(85)		(12)		(97)
Present value of minimum obligation	365		38		403
Less current portion					(32)
Noncurrent operating and finance lease liabilities					$	371

Weighted-average remaining lease term in years					10

(a)Amounts do not include PPAs accounted for as executory contracts and/or contingent payments, such as energy payments on renewable PPAs.

Non-Lease PPAs — SPS has entered into PPAs with other utilities and energy suppliers for purchased power to meet system load and energy requirements, operating reserve obligations and as part of wholesale and commodity trading activities. In general, these agreements provide for energy payments, based on actual energy delivered and capacity payments. Certain PPAs, accounted for as executory contracts with various expiration dates through 2026, contain minimum energy purchase requirements. Total energy payments on those contracts were $29 million in 2023.

Included in electric fuel and purchased power expenses for PPAs accounted for as executory contracts, were payments for capacity of $12 million in 2023, 2022 and 2021.

Capacity and energy payments are contingent on the IPPs meeting contract obligations, including plant availability requirements. Certain contractual payments are adjusted based on market indices.

At Dec. 31, 2023, the estimated future payments for capacity and energy that SPS is obligated to purchase pursuant to these executory contracts, subject to availability, were as follows:


(Millions of Dollars)	Capacity		Energy (a)
2024	$	14	$	33
2025	16		40
2026	16		38
2027	—		—
2028	—		—
Thereafter	—		—
Total	$	46	$	111

Amounts exclude approximately $1 billion of minimum payments related to SPS’ extension of a non-lease PPA that otherwise expires in 2026, pending PUCT and NMPRC approvals to extend the agreement to 2039. Approval processes are expected to conclude in 2024.

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 2024 and 2033. SPS is required to pay additional amounts depending on actual quantities shipped under these agreements.


(Millions of Dollars)	Coal		Natural gas supply		Natural gas storage and transportation
2024	$	86	$	21	$	33
2025	20		—		29
2026	20		—		24
2027	20		—		24
2028	20		—		17
Thereafter	—		—		6
Total	$	166	$	21	$	133

PPAs — Under certain PPAs, SPS purchases power from IPPs for which SPS is required to reimburse fuel costs, or to participate in tolling arrangements under which SPS procures the natural gas required to produce the energy that it purchases. SPS has determined that certain IPPs are VIEs. SPS is not subject to risk of loss from the operations of these entities, and no significant financial support is required other than contractual payments for energy and capacity.

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

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

SPS had approximately 1,197 MW of capacity under long-term PPAs at both Dec. 31, 2023 and 2022 with entities that have been determined to be VIEs. These agreements have expiration dates through 2041.

Fuel Contracts — SPS purchases all of its coal requirements for its Harrington and Tolk plants from TUCO Inc. under contracts that will expire in December 2024 and December 2027, respectively. 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, however it has concluded that SPS is not the primary beneficiary because it does not have the power to direct the activities that most significantly impact TUCO’s economic performance.