6.	Commitments and Contingent Liabilities

Except to the extent noted below and in Note 5 to the financial statements in this Quarterly Report on Form 10-Q, the circumstances set forth in Notes 11 and 12 to the financial statements in SPS' Annual Report on Form 10-K for the year ended Dec. 31, 2010, 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.

Commitments

Variable Interest Entities - The accounting guidance for consolidation of variable interest entities requires enterprises to consider the activities that most significantly impact an entity's financial performance, and power to direct those activities, when determining whether an enterprise is a variable interest entity's primary beneficiary.

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.

SPS has evaluated each of these variable interest entities for possible consolidation, including review of qualitative factors such as the length and terms of the contract, control over operating and maintenance (O&M) expenses, historical and estimated future fuel and electricity prices, and financing activities. 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. SPS had approximately 1,027 megawatts (MW) of capacity under long-term purchased power agreements as of Sept. 30, 2011 and Dec. 31, 2010 with entities that have been determined to be variable interest entities. These agreements have expiration dates through the year 2033.

Guarantees - In connection with its Lubbock sale agreement in 2010, SPS provides for indemnification to the counterparty for liabilities incurred as a result of a breach of a representation or warranty by the indemnifying party. These indemnification obligations generally have a discrete term and are intended to protect the parties against risks that are difficult to predict or impossible to quantify at the time of the consummation of a particular transaction.

The following table presents guarantees issued and outstanding for SPS:

(Millions of Dollars)		Sept. 30, 2011				Dec. 31, 2010
Guarantees issued and outstanding (a)		$	87.0			$	87.0

(a)

SPS has provided indemnification to Lubbock for losses arising out of any breach of the representations, warranties and covenants under the related asset purchase agreement and for losses arising out of certain other matters, including pre-closing unknown liabilities. The indemnification provisions are capped at the purchase price, $87 million, in the aggregate. As of Sept. 30, 2011 and Dec. 31, 2010, no claims have been made. The indemnification provisions for most representations and warranties expire 12 months after the closing date. Certain representations and warranties, including those having to do with transaction authorization survive indefinitely. The indemnification for covenants survives until the applicable covenant is performed.

Environmental Contingencies

SPS has been, or is currently, involved with the cleanup of contamination from certain hazardous substances at several sites. In many situations, SPS believes it will recover some portion of these costs through insurance claims. Additionally, where applicable, SPS is pursuing, or intends to pursue, recovery from other potentially responsible parties (PRPs) and through the rate regulatory process. New and changing federal and state environmental mandates can also create added financial liabilities for SPS, which are normally recovered through the rate regulatory process. To the extent any costs are not recovered through the options listed above, SPS would be required to recognize an expense.

Site Remediation - The Comprehensive Environmental Response, Compensation and Liability Act of 1980 and comparable state laws impose liability, without regarding the legality of the original conduct, on certain classes of persons responsible for the release of hazardous substances to the environment. SPS must pay all or a portion of the cost to remediate sites where past activities of SPS or other parties have caused environmental contamination. Environmental contingencies could arise from various situations, including third party sites, for which SPS is alleged to be a PRP that sent hazardous materials and wastes. At Sept. 30, 2011 and Dec. 31, 2010, the liability for the cost of remediating these sites was estimated to be $0.1 million.

Asbestos Removal - Some of SPS' facilities contain asbestos. Most asbestos will remain undisturbed until the facilities that contain it are demolished or removed. SPS has recorded an estimate for final removal of the asbestos as an asset retirement obligation. See additional discussion of asset retirement obligations in Note 12 of the SPS Annual Report on Form 10-K for the year ended Dec. 31, 2010. It may be necessary to remove some asbestos to perform maintenance or make improvements to other equipment. The cost of removing asbestos as part of other work is not expected to be material and is recorded as incurred as operating expenses for maintenance projects, capital expenditures for construction projects or removal costs for demolition projects.

Other Environmental Requirements

Environmental Protection Agency (EPA) Greenhouse Gas (GHG) Regulation - In December 2009, the EPA issued its “endangerment” finding that GHG emissions endanger public health and welfare. In January 2011, new EPA permitting requirements became effective for GHG emissions of new and modified large stationary sources, which are applicable to the construction of new power plants or power plant modifications that increase emissions above a certain threshold.

GHG New Source Performance Standard Proposal - The EPA plans to propose GHG regulations applicable to emissions from new and existing power plants under the Clean Air Act (CAA). The EPA had planned to release its proposal in September 2011, but has delayed it without establishing a new proposal date.

Cross State Air Pollution Rule (CSAPR)- On July 7, 2011, the EPA issued its CSAPR. The rule, previously called the Clean Air Transport Rule (CATR), addresses long range transport of particulate matter and ozone by requiring reductions in sulfur dioxide (SO2) and nitrogen oxide (NOx) from utilities located in the eastern half of the U.S., including Texas. The CSAPR sets more stringent requirements than the proposed CATR and, in contrast to that proposal, specifically requires plants in Texas to reduce their SO2 and annual NOx emissions. The rule creates an emissions trading program. SPS may comply by reducing emissions and/or purchasing allowances. The CSAPR is a final rule and requires compliance beginning in 2012.

At this time, SPS believes that the CSAPR will ultimately require the installation of additional emission controls on some of SPS' coal-fired electric generating units. SPS is still evaluating compliance options, however SPS believes the cost of any required capital investment will be recoverable from customers. Because the CSAPR requires compliance in 2012, SPS will be required to take additional short-term action, including redispatching its system to reduce coal plant operating hours, in order to decrease emissions from its facilities prior to the installation of emission controls. Texas was not included in the annual SO2 and NOx reductions requirements of the proposed rule. Without additional notice, the EPA determined in the final CSAPR that Texas would be required to reduce SO2 emissions, comply with the annual NOx emission limits, and be in compliance beginning in 2012. Since the final CSAPR was published on Aug. 8, 2011, SPS has analyzed compliance scenarios and concluded that, unless a new CSAPR allowance market develops quickly, SPS would have to redispatch its system to run its natural gas plants as base load units. Additionally, SPS would have to substantially reduce coal plant operations in order to comply with the CSAPR using the emission allowances allocated to SPS by the EPA, which requires, for example, a 46 percent reduction in SO2 emissions in 2012. SPS has estimated that such a substantial change in operations could cost up to $250 million in 2012, mostly due to increased fuel costs, as well as increase risk to reliability on its system. SPS also expects that in order to comply with the CSAPR, its entire system will have to reduce NOx emissions by 33 percent in 2012. SPS expects it will be able to recover these costs through regulatory mechanisms and it does not expect a material impact on its results of operations.

On Oct. 6, 2011, the EPA proposed two relevant changes to revise the CSAPR. SPS' initial analysis indicates that this proposed rule, if finalized, would not appreciably change the CSAPR's adverse impact on SPS and its customers, because SPS is constrained by both NOx and SO2 emission reduction obligations under the rule. SPS remains concerned that the allowance market will not develop to the extent necessary to defray the cost and reliability risks associated with the CSAPR. SPS has preliminarily concluded that the proposal may reduce the cost of compliance by a modest amount if finalized, but it would not significantly alleviate the risks associated with the 2012 compliance date.

SPS filed two petitions with the EPA for reconsideration and stay of the CSAPR as it applies to the requirement for annual emission reductions in Texas. In addition, SPS filed a petition for review of the CSAPR with the U.S. Court of Appeals for the D.C. Circuit (D.C. Circuit) that challenges the inclusion of Texas in the CSAPR's annual reduction programs and the 2012 compliance date. Along with the petition for review, SPS also filed a motion for stay of the CSAPR with the D.C. Circuit. SPS expects that the court will rule on the motion for stay by the end of 2011. Success in these legal actions could reduce SPS' costs to comply with the CSAPR substantially. SPS expects it will be able to recover legal costs through regulatory mechanisms and it does not expect a material impact on its results of operations.

SPS continues to evaluate its compliance strategy. SPS believes the cost of any required capital investment, allowance purchases or costs associated with redispatch will be recoverable from customers.

Clean Air Interstate Rule (CAIR) - In 2005, the EPA issued the CAIR to further regulate SO2 and NOx emissions. In 2008, the D.C. Circuit vacated and remanded the CAIR, but subsequently allowed the CAIR to continue into effect pending the EPA's adoption of a new rule that addressed the deficiencies found by the court. In 2011, the EPA finalized the CSAPR to replace CAIR beginning in 2012. The CAIR applies to Texas.

Under the CAIR's cap and trade structure, companies can comply through capital investments in emission controls or purchase of emission allowances from other utilities making reductions on their systems. The remaining scheduled capital investments for NOx controls in the SPS region are estimated at $16.4 million. At Sept. 30, 2011, the estimated annual CAIR NOx allowance cost for SPS was $0.1 million. At the end of 2011, the CAIR will end and compliance efforts will transition to the CSAPR beginning in 2012. No allowance trading is allowed between the CAIR and CSAPR programs.

Electric Generating Unit (EGU) Maximum Achievable Control Technology (MACT) Rule - In 2005, the EPA issued the Clean Air Mercury Rule (CAMR), which regulated mercury emissions from power plants. In February 2008, the U.S. Court of Appeals for the District of Columbia vacated the CAMR, which impacted federal CAMR requirements, but not necessarily state-only mercury legislation and rules.

In March 2011, the EPA issued the proposed EGU MACT designed to address emissions of mercury and other hazardous air pollutants for coal-fired utility units greater than 25 MW. The EPA has indicated that it intends to issue the final rule in December 2011. SPS anticipates that the EPA will require affected facilities to demonstrate compliance within three to four years. SPS believes these costs would be recoverable through regulatory mechanisms, and it does not expect a material impact on its results of operations.

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 U.S. Some of SPS' generating facilities will be subject to BART requirements. Some of these facilities are located in regions where the CAIR is effective. Individual states are required to identify the facilities located in their states that will have to reduce SO2, NOx and particulate matter emissions under BART and then set emissions limits for those facilities. The Texas Commission on Environmental Quality has determined that facilities may use the CAIR as a substitute for BART for NOx and SO2.

Proposed Coal Ash Regulation - SPS' operations generate hazardous wastes that are subject to the Federal Resource Recovery and Conservation Act and comparable state laws that impose detailed requirements for handling, storage, treatment and disposal of hazardous waste. In June 2010, the EPA published a proposed rule seeking comment on whether to regulate coal combustion byproducts (often referred to as coal ash) as hazardous or nonhazardous waste. Coal ash is currently exempt from hazardous waste regulation. If the EPA ultimately issues a final rule under which coal ash is regulated as hazardous waste, SPS' costs associated with the management and disposal of coal ash would significantly increase, and the beneficial reuse of coal ash would be negatively impacted. The EPA has not announced a planned date for a final rule. The timing, scope and potential cost of any final rule that might be implemented are not determinable at this time.

Cunningham Compliance Order - In February 2010, SPS received a draft compliance order from the New Mexico Environment Department (NMED) for Cunningham Station. In the draft order, the NMED alleges that Cunningham exceeded its permit limits for NOx and failed to report these exceedances as required by its permit. Prior to the formal administrative hearings, SPS negotiated a penalty of $0.8 million. The final agreement is currently being completed by both parties.

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 and results of operations.

Environmental Litigation

State of Connecticut vs. Xcel Energy Inc. et al. - In 2004, the attorneys general of eight states and New York City, as well as several environmental groups, filed lawsuits in U.S. District Court for the Southern District of New York against the following utilities, including Xcel Energy Inc., the parent company of SPS, to force reductions in carbon dioxide (CO2) emissions: American Electric Power Co., Southern Co., Cinergy Corp. (merged into Duke Energy Corporation) and Tennessee Valley Authority. The lawsuits allege that CO2 emitted by each company is a public nuisance. The lawsuits do not demand monetary damages. Instead, the lawsuits ask the court to order each utility to cap and reduce its CO2 emissions. In September 2005, the court granted plaintiffs' motion to dismiss on constitutional grounds. In August 2010, this decision was reversed by the Second Circuit and was appealed to the U.S. Supreme Court. In June 2011, the Supreme Court issued a ruling reversing the Second Circuit's decision, thereby dismissing plaintiffs' federal claims and remanding the case for further proceedings regarding the state law claims. In September 2011, plaintiffs submitted a letter to the Second Circuit seeking to voluntarily dismiss the complaint.

Native Village of Kivalina vs. Xcel Energy Inc. et al. - In 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. and SPS believe 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. Oral arguments are set for Nov. 28, 2011. 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. No accrual has been recorded for this matter.

Comer vs. Xcel Energy Inc. et al. - On May 27, 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., SPS, PSCo, NSP-Wisconsin and NSP-Minnesota. The amount of damages claimed by plaintiffs is unknown. It is believed that this lawsuit is without merit. No accrual has been recorded for this matter.

Employment, Tort and Commercial Litigation

Exelon Wind (formerly John Deere Wind) Complaint - Three lawsuits have been filed by John Deere Wind Energy subsidiaries (JD Wind) arising out of a dispute concerning SPS' payments for energy produced from JD Wind projects. 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. The PUCT has denied all allegations contained in this petition. On April 21, 2011, JD Wind filed a non-suit of this case dropping the state appeal of the PUCT order so it could pursue its U.S. District Court action.

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 Federal Energy Regulatory Commission (FERC) stated that the PUCT's May 2009 order (approving SPS' payments to JD Wind) 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 state court proceeding against the PUCT. As a result of the non-suit of the state court proceeding, this case will now move forward with a trial date set for October 2012.

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. This lawsuit seeks unspecified damages against SPS. It is uncertain when this lawsuit will conclude. No accrual has been recorded for this lawsuit nor is it expected that this proceeding will have a material effect upon SPS' results of operations, cash flows or financial position.

On Dec. 9, 2010, all the JD Wind entities were purchased by Exelon Generation Company, LLC and the names of each of the JD Wind entities has been changed to Exelon Wind. The captions in the U.S. District Court case and the Texas State District Court case have been changed to reflect the change in the names and ownership.