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.