Item 1 - Business
DEFINITIONS
COMPANY OVERVIEW
ELECTRIC UTILITY OPERATIONS
Overview
Summary of Recent Regulatory Developments
Ratemaking Principles
Capacity and Demand
Energy Sources
Fuel Supply and Costs
Electric Operating Statistics
ENVIRONMENTAL MATTERS
EMPLOYEES
Item 2
Item 2 - Properties
Electric utility overhead and underground transmission and distribution lines (measured in conductor miles) at Dec. 31, 2004:
SPS had 497 electric utility transmission and distribution substations at Dec. 31, 2004.
Item 3
Item 3 - Legal Proceedings
In the normal course of business, various lawsuits and claims have arisen against SPS. Management, after consultation with legal counsel, has recorded an estimate of the probable cost of settlement or other disposition for such matters.
Other Matters
For more discussion of legal claims and environmental proceedings, see Note 11 to the Consolidated Financial Statements under Item 8, incorporated by reference. For a discussion of proceedings involving utility rates, see Pending and Recently Concluded Regulatory Proceedings under Item 1, incorporated by reference.
Item 4
Item 4 - Submission of Matters to a Vote of Security Holders
This is omitted per conditions set forth in general instructions I(1)(a) and (b) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).
PART II
Item 5
Item 5 - Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
SPS is a wholly owned subsidiary and there is no market for its common equity securities.
SPS has dividend restrictions imposed by state regulatory commissions, debt agreements and the SEC under the PUHCA limiting the amount of dividends SPS can pay to Xcel Energy. These restrictions include, but may not be limited to, the following:
• maintenance of a minimum equity ratio of 30 percent;
• payment of dividends only from retained earnings; and
• debt covenant restriction under the credit agreement for debt ratio.
The dividends declared during 2004 and 2003 were as follows (thousands of dollars):
Item 6
Item 6 - Selected Financial Data
This is omitted per conditions set forth in general instructions I(1)(a) and (b) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).
Item 7
Item 7 - 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 I (1)(a) and (b) of Form 10-K for wholly owned subsidiaries. It is replaced with management’s narrative analysis and the results of operations for the
current year as set forth in general instructions I(2)(a) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).
Forward Looking Information
The following discussion and analysis by management focuses on those factors that had a material effect on the financial condition and results of operations of SPS during the periods presented, or are expected to have a material impact in the future. It should be read in conjunction with the respective accompanying Consolidated Financial Statements and Notes to the Consolidated Financial 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. Factors that could cause actual results to differ materially include, but are not limited to:
• general economic conditions, including the availability of credit and its impact on capital expenditures and the ability to obtain financing on favorable terms;
• rating agency actions;
• business conditions in the energy industry;
• competitive factors including the extent and timing of the entry of additional competition;
• unusual weather;
• changes in federal or state legislation;
• geopolitical events, including war and acts of terrorism;
• regulation; and
• the other risk factors listed from time to time by SPS in reports filed with the SEC, including Exhibit 99.01 to this Annual Report on Form 10-K for the year ended Dec. 31, 2004.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
SPS’ net income was approximately $54.9 million for 2004, compared with approximately $82.3 million for 2003.
Electric Utility, Short-Term Wholesale and Commodity Trading 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. Due to fuel cost recovery mechanisms for retail customers, most fluctuations in energy costs do not significantly affect electric margin.
SPS has two distinct forms of wholesale marketing activities: short-term wholesale and commodity trading. Short-term wholesale refers to energy related purchase and sales activity and the use of certain financial instruments associated with the fuel required for and energy produced from SPS’ generation assets and energy and capacity purchased to serve native load. Commodity trading is not associated with SPS’ generation assets or the energy and capacity purchased to serve native load.
SPS conducts an inconsequential amount of commodity trading. Margins from commodity trading activity are partially redistributed to NSP-Minnesota and PSCo pursuant to the JOA approved by the FERC. Margins received pursuant to the JOA are reflected as part of Base Electric Utility Revenues. Short-term wholesale and commodity trading margins reflect the impact of regulatory sharing, if applicable. Trading revenues, as discussed in Note 1 to the Consolidated Financial Statements, are reported net of trading costs (i.e., on a margin basis) in the Consolidated Statements of Income. Commodity trading costs include fuel, purchased power, transmission and other related costs. The following table details base electric utility and short-term wholesale activities:
The following summarizes the components of the changes in base electric revenue and base electric margin for the year ended Dec. 31:
Base Electric Revenue
Base Electric Margin
Fuel and purchased energy costs are recovered in Texas through a fixed fuel and purchased energy recovery factor, which are subject to periodic approval by the PUCT. Intervenor testimony in the regulatory proceedings to consider recovery for the period from January 2002 through December 2003 contested recovery of $49 to $86 million. SPS cannot predict what financial impact, if any, this proceeding will have on current or future operations. However, it could be material.
Non-Fuel Operating Expense and Other Costs - The following summarizes the components of the changes in other utility operating and maintenance expense for the year ended Dec. 31:
Depreciation and amortization expense increased by approximately $4.5 million, or 5.1 percent, for 2004 compared with 2003, primarily due to 2004 plant additions and increased software amortization.
Taxes (other than income taxes) increased by approximately $0.8 million, or 1.8 percent, for 2004 compared with 2003, primarily due to higher franchise taxes.
Other income decreased by $1.6 million, or 34.9 percent, for 2004 compared with 2003, primarily due to a lower allowance for funds used during construction.
Interest charges and financing costs decreased by approximately $1.2 million, or 2.3 percent, for 2004 compared with 2003. The decrease is primarily the result of the 2003 refinancing of the subordinated debt.
Income taxes decreased by approximately $20.1 million in 2004, compared with 2003. The decrease was primarily due to lower income levels. The effective tax rate was 36.3 percent for the year ended Dec. 31, 2004, compared with 38.4 percent for the same period in 2003. The decrease in the effective tax rate was primarily due to lower income levels and income tax benefits of $2.8 million recorded in 2004 related to successful resolution of audit issues and other adjustments to current and deferred taxes.
Item 7A
Item 7A - Quantitative and Qualitative Disclosures About Market Risk
Derivatives, Risk Management and Market Risk
In the normal course of business, SPS is exposed to a variety of market risks. Market risk is the potential loss that may occur as a result of changes in the market or fair value of a particular instrument or commodity. All financial and commodity related instruments, including derivatives, are subject to market risk. These risks, as applicable to SPS, are discussed in further detail below.
Commodity Price Risk - SPS is exposed to commodity price risk in its generation and retail distribution operations. Commodity price risk is managed by entering into both long- and short-term physical purchase and sales contracts for electric power, coal and fuel oil. Commodity price risk is also managed through the use of financial derivative instruments. SPS’ risk management policy allows it to manage commodity price risk within each rate-regulated operation to the extent such exposure exists.
Short-Term Wholesale and Commodity Trading Risk - SPS conducts an immaterial amount of commodity-marketing activities, including the purchase and sale of capacity, energy and energy related instruments. These marketing activities are primarily focused on specific regions where market knowledge and experience have been obtained. SPS’ risk management policy allows management to conduct the marketing activities within approved guidelines and limitations as approved by the company’s risk management committee, which is made up of management personnel not directly involved in the activities governed by the policy.
Certain contracts within the scope of these activities qualify for hedge accounting treatment under SFAS No. 133 - “Accounting for Derivative Instruments and Hedging Activities,” as amended, while others are subject to the fair value requirements of this pronouncement.
SPS did conduct limited commodity trading activities during 2004. However, the quantity and duration of activity had no material impact on the reported Value-at-Risk.
Interest Rate Risk - SPS is subject to the risk of fluctuating interest rates in the normal course of business. SPS’ risk management policy allows interest rate risk to be managed through the use of fixed rate debt, floating rate debt and interest rate derivatives such as swaps, caps, collars and put or call options, subject to regulatory approval when required.
SPS may engage in hedges of cash flow exposure. The fair value of interest rate swaps designated as cash flow hedges is initially recorded in Other Comprehensive Income. Reclassification of unrealized gains or losses on cash flow hedges of variable rate debt instruments from Other Comprehensive Income into earnings occurs as interest payments are accrued on the debt instrument and generally offsets the change in the interest accrued on the underlying variable rate debt. The fair value of interest rate swaps is determined through counterparty valuations, internal valuations and broker quotes. There have been no material changes in the techniques or models used in the valuation of interest rate swaps during the periods presented.
At Dec. 31, 2004 and 2003, a 100-basis-point change in the benchmark rate on SPS’ variable rate debt would impact pretax interest expense by approximately $0.2 million and $0.6 million, respectively. See Note 9 to the Consolidated Financial Statements for a discussion of SPS’ interest rate swaps.
Credit Risk - In addition to the risks discussed previously, SPS is exposed to credit risk. Credit risk relates to the risk of loss resulting from the nonperformance by a counterparty of its contractual obligations. SPS maintains credit policies intended to minimize overall credit risk and actively monitors these policies to reflect changes and scope of operations.
SPS conducts standard credit reviews for all counterparties. SPS employs additional credit risk control mechanisms when appropriate, such as letters of credit, parental guarantees, standardized master netting agreements and termination provisions that allow for offsetting of positive and negative exposures. The credit exposure is monitored and, when necessary, the activity with a specific counterparty is limited until credit enhancement is provided.
Item 8
Item 8 - Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholder
Southwestern Public Service Company
We have audited the accompanying consolidated balance sheets of and consolidated statements of capitalization of Southwestern Public Service Company (a New Mexico corporation) and subsidiaries (the “Company”) as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity and comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2004. Our audit also included the financial statement schedule listed in the Index at Item 15. These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Southwestern Public Service Company and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
/S/ DELOITTE & TOUCHE LLP
Minneapolis, Minnesota
March 3,
SOUTHWESTERN PUBLIC SERVICE CO.
CONSOLIDATED STATEMENTS OF INCOME
See Notes to Consolidated Financial Statements
SOUTHWESTERN PUBLIC SERVICE CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See Notes to Consolidated Financial Statements
SOUTHWESTERN PUBLIC SERVICE CO.
CONSOLIDATED BALANCE SHEETS
See Notes to Consolidated Financial Statements
SOUTHWESTERN PUBLIC SERVICE CO.
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER’S EQUITY AND
OTHER COMPREHENSIVE INCOME (LOSS)
See Notes to Consolidated Financial Statements
SOUTHWESTERN PUBLIC SERVICE CO.
CONSOLIDATED STATEMENTS OF CAPITALIZATION
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Business and System of Accounts - SPS is principally engaged in the purchase, transmission, distribution and sale of electricity. SPS is subject to the regulatory provisions of the PUHCA and regulation by the FERC and state utility commissions. All of SPS’ accounting records conform to the FERC uniform system of accounts or to systems required by various state regulatory commissions, which are the same in all material aspects.
Principles of Consolidation - Prior to January 2004, SPS consolidated a subsidiary, for which all significant intercompany transactions and balances were eliminated.
Revenue Recognition - Revenues related to the sale of energy are generally recorded when service is rendered or energy is delivered to customers. However, the determination of the energy sales to individual customers is based on the reading of their meter, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated and the corresponding unbilled revenue is estimated.
SPS has various rate adjustment mechanisms in place that currently provide for the recovery of certain purchased natural gas and electric energy costs. These cost adjustment tariffs may increase or decrease the level of costs recovered through base rates and are revised periodically, as prescribed by the appropriate regulatory agencies, for any difference between the total amount collected under the clauses and the recoverable costs incurred. In addition, SPS presents its revenue, net of any excise or other fiduciary-type taxes or fees. A summary of significant rate adjustment mechanisms follows:
• SPS’ rates in Texas provide electric fuel and purchased energy cost recovery. In New Mexico, SPS also has a monthly fuel and purchased power cost recovery factor.
• SPS sells firm power and energy in wholesale markets, which are regulated by the FERC. These rates include monthly wholesale fuel cost recovery mechanisms.
Commodity Trading Operations - All applicable gains and losses related to commodity trading activities, whether or not settled physically, are shown on a net basis in the Consolidated Statements of Income.
Pursuant to the JOA approved by the FERC, some of the commodity trading margins from SPS are apportioned to NSP-Minnesota and PSCo. Commodity trading activities are not associated with energy produced from SPS’ generation assets or energy and capacity purchased to serve native load. Commodity trading results are recorded at fair market value in accordance with SFAS No. 133, as amended. In addition, commodity-trading results include the impacts of any margin-sharing mechanisms, if applicable. For more information, see Note 9 to the Consolidated Financial Statements.
Derivative Financial Instruments - SPS utilizes a variety of derivatives, including interest rate swaps and locks, and physical based commodity contracts to reduce exposure to commodity price and interest rate risks. These contracts consist mainly of commodity futures and options, index or fixed price swaps and basis swaps. For more information on SPS’ risk management and derivative activities, see Note 9 to the Consolidated Financial Statements.
Property, Plant, Equipment and Depreciation - Property, plant and equipment is stated at original cost. The cost of plant includes direct labor and materials, contracted work, overhead costs and applicable interest expense. The cost of plant retired is charged to accumulated depreciation and amortization. Removal costs associated with non-legal obligations are reclassified from accumulated depreciation and reflected as regulatory liabilities. Significant additions or improvements extending asset lives are capitalized, while repairs and maintenance are charged to expense as incurred. Maintenance and replacement of items determined to be less than units of property are charged to operating expenses. Property, plant and equipment also include costs associated with the engineering design of future generating stations and other property held for future use.
SPS determines the depreciation of its plant by using the straight-line method, which spreads the original cost equally over the plant’s useful life. Depreciation expense, expressed as a percentage of average depreciable property, for the years ended Dec. 31, 2004, 2003 and 2002 was 2.8 percent, 2.7 percent and 2.8 percent, respectively.
Allowance for Funds Used During Construction (AFDC) - AFDC represents the cost of capital used to finance utility construction activity. AFDC is computed by applying a composite pretax rate to qualified construction work in progress. The amount of AFDC capitalized as a utility construction cost is credited to other income and deductions (for equity capital) and interest charges (for debt capital). AFDC amounts capitalized are included in SPS’ rate base for establishing utility service rates.
Environmental Costs - Environmental costs are recorded when it is probable SPS is liable for the costs and the liability can be reasonably estimated. Costs may be deferred as a regulatory asset based on an expectation that the costs will be recovered from customers in future rates. Otherwise, the costs are expensed. If an environmental expense is related to facilities currently in use, such as pollution-control equipment, the cost is capitalized and depreciated over the life of the plant, assuming the costs are recoverable in future rates or future cash flow.
Estimated remediation costs, excluding inflationary increases, are recorded. The estimates are based on experience, an assessment of the current situation and the technology currently available for use in the remediation. The recorded costs are regularly adjusted as estimates are revised and remediation proceeds. If several designated responsible parties exist, costs are estimated and recorded only for the utility subsidiary share of the cost. Any future costs of restoring sites where operation may extend indefinitely are treated as a capitalized cost of plant retirement. The depreciation expense levels recoverable in rates include a provision for removal expenses, which has the latitude to compensate for final remediation costs. Removal costs recovered in rates are classified as a regulatory liability.
Legal Costs - Litigation settlements are recorded when it is probably SPS is liable for the costs and the liability can be reasonably estimated. Legal accruals are recorded net of insurance recovery. Legal costs related to settlements are not accrued, but expensed as incurred.
Income Taxes - Xcel Energy and its utility subsidiaries, including SPS, file consolidated federal and combined and separate state income tax returns. Income taxes for consolidated or combined subsidiaries are allocated to the subsidiaries based on separate company computations of taxable income or loss. In accordance with the PUHCA requirements, the holding company also allocates its own net income tax benefits to its direct subsidiaries based on the positive tax liability of each company in the consolidated federal or combined state returns. SPS defers income taxes for all temporary differences between the book and tax bases of assets and liabilities. The tax rates used are those that are scheduled to be in effect when the temporary differences are expected to turn around, or reverse.
Due to the effects of past regulatory practices, when deferred taxes were not required to be recorded, the reversal of some temporary differences was accounted for as current income tax expense. Investment tax credits are deferred and their benefits spread over the estimated lives of the related property. Utility rate regulation also has created certain regulatory assets and liabilities related to income taxes, which are summarized in Note 12 to the Consolidated Financial Statements. For more information on income taxes, see Note 6 to the Consolidated Financial Statements.
Use of Estimates - In recording transactions and balances resulting from business operations, SPS uses estimates based on the best information available. Estimates are used for such items as plant depreciable lives, tax provisions, uncollectible amounts, environmental costs, unbilled revenues, jurisdictional fuel and energy cost allocations and actuarially determined benefit costs. The recorded estimates are revised when better information is obtained or actual amounts are determinable. Those revisions can affect operating results. Each year the depreciable lives of certain plant assets are reviewed and revised, if appropriate.
Cash and Cash Equivalents - SPS considers investments with a remaining maturity of three months or less at the time of purchase to be cash equivalents. Those instruments are primarily commercial paper and money market funds.
Inventory - All inventories are recorded at average cost.
Regulatory Accounting - SPS accounts for certain income and expense items in accordance with SFAS No. 71 - “Accounting for the Effects of Certain Types of Regulation.” Under SFAS No. 71:
• certain costs, which would otherwise be charged to expense, are deferred as regulatory assets based on the expected ability to recover them in future rates; and
• certain credits, which would otherwise be reflected as income, are deferred as regulatory liabilities based on the expectation they will be returned to customers in future rates.
Estimates of recovering deferred costs and returning deferred credits are based on specific ratemaking decisions or precedent for each item. Regulatory assets and liabilities are amortized consistent with the period of expected regulatory treatment.
If restructuring or other changes in the regulatory environment occur, SPS may no longer be eligible to apply this accounting treatment, and may be required to eliminate such regulatory assets and liabilities from its balance sheet. Such changes could have a material effect on SPS’ results of operations in the period the write-off is recorded. See more discussion of regulatory assets and liabilities at Note 12 to the Consolidated Financial Statements.
Deferred Financing Costs - Other assets include deferred financing costs, which were amortized over the remaining maturity periods of the related debt. SPS’ deferred financing costs, net of amortization at Dec. 31, 2004, 2003 and 2002 were $4.7 million, $5.5 million and $8.4 million, respectively.
Reclassifications - Certain items in the 2002 and 2003 statements of income have been reclassified to conform to 2004 presentation. These reclassifications had no effect on net income.
2. Short-Term Borrowings
Credit Facilities - At Dec. 31, 2004, SPS had the following revolving credit facility in effect, in millions of dollars. A syndicate of lending banks supports the credit facility in exchange for a negotiated commitment fee.
Subsequent to Dec. 31, 2004, SPS arranged for the extension of the maturity date of its credit facility to May 2005. SPS’ credit facility is expected to be renewed as a five-year revolving credit facility prior to May 2005 for which borrowings will be classified as a long-term liability on the consolidated balance sheet.
The line of credit provides short-term financing in the form of notes payable to banks, letters of credit, and, depending on credit ratings, provide support for commercial paper borrowings. The borrowing rates under the line of credit are based on either the bank’s prime rate or the applicable London Interbank Offered Rate (LIBOR) plus a borrowing margin.
At Dec. 31, 2004, SPS had $36 million in notes payable to banks, which was drawn on this credit facility, at a weighted average interest rate of 5.25 percent. Also, $0.9 million of letters of credit were outstanding at Dec. 31, 2004, as discussed in Note 10 to the Consolidated Financial Statements, of which approximately $0.6 million were outstanding under the credit facility, which further reduced amounts available under the line.
Money Pool - In 2003, Xcel Energy established a money pool arrangement with the utility subsidiaries, subject to receipt of required state regulatory approvals. SPS received approval to participate in the money pool arrangement in 2004. The money pool allows for short-term loans between the utility subsidiaries and from the holding company to the utility subsidiaries at market-based interest rates. The money pool arrangement does not allow loans from the utility subsidiaries to the holding company. SPS has approval to borrow up to $100 million under the arrangement. SPS had no borrowings or loans outstanding under the arrangement at Dec. 31, 2004.
3. Long-Term Debt
Certain SPS payments under its pollution control obligations are pledged to secure obligations of the Red River Authority of Texas.
Maturities of long-term debt are listed in the following table, in millions of dollars:
SPS has no sinking fund requirements.
4. Preferred Stock
SPS has authorized the issue of the following preferred shares.
5. Mandatorily Redeemable Preferred Securities of Subsidiary Trusts
Southwestern Public Service Capital I, a wholly owned, special-purpose subsidiary trust of SPS, had $100 million of 7.85-percent trust preferred securities issued and outstanding that were originally scheduled to mature in 2036. The securities were redeemable at the option of SPS, at 100 percent of the principal amount plus accrued interest. On Oct. 15, 2003, SPS redeemed the $100 million of trust preferred securities. A certificate of cancellation was filed to dissolve SPS Capital I on Jan. 5, 2004.
Distributions paid to preferred security holders are reflected as a financing cost in the accompanying Consolidated Statements of Income along with interest expense.
6. Income Taxes
Total income tax expense from operations differs from the amount computed by applying the statutory federal income tax rate to income before income tax expense. The reasons for the difference at Dec. 31 are:
Income taxes comprise the following expense (benefit) items:
The components of deferred income tax were:
The components of net deferred tax liability (current and noncurrent portions) at Dec. 31 were:
7. Benefit Plans and Other Postretirement Benefits
Xcel Energy offers various benefit plans to its benefit employees, including those of SPS. Approximately 51 percent of benefit employees are represented by several local labor unions under several collective-bargaining agreements. At Dec. 31, 2004, SPS had 739 bargaining employees covered under a collective-bargaining agreement, which expires in October 2005.
Pension Benefits
Xcel Energy has several noncontributory, defined benefit pension plans that cover almost all employees, including those of SPS. Benefits are based on a combination of years of service, the employee’s average pay and Social Security benefits.
Xcel Energy’s policy is to fully fund into an external trust the actuarially determined pension costs recognized for ratemaking and financial reporting purposes, subject to the limitations of applicable employee benefit and tax laws.
Pension Plan Assets - Plan assets principally consist of the common stock of public companies, corporate bonds and U.S. government securities. In 2004, Xcel Energy completed a review of its pension plan asset allocation and adopted revised asset allocation targets. The target range for our pension asset allocation is 60 percent in equity investments, 20 percent in fixed income investments, no cash investments and 20 percent in nontraditional investments, such as real estate, timber ventures, private equity and a diversified commodities index.
The actual composition of pension plan assets at Dec. 31 was:
During 2003, Xcel Energy entered into a number of hedging arrangements within the pension trust designed to provide protection from a loss of asset value in the event of a broad decline in equity prices. These arrangements were closed out in December 2004.
Xcel Energy bases its investment return assumption on expected long-term performance for each of the investment types included in its pension asset portfolio. Xcel Energy considers the actual historical returns achieved by its asset portfolio over the past 20-year or longer period, as well as the long-term return levels projected and recommended by investment experts. The historical weighted average annual return for the past 20 years for the Xcel Energy portfolio of pension investments is 12.8 percent, which is greater than the current assumption level. The pension cost determinations assume the continued current mix of investment types over the long-term. The Xcel Energy portfolio is heavily weighted toward equity securities, includes nontraditional investments that can provide a
higher-than-average return. As is the experience in recent years, a higher weighting in equity investments can increase the volatility in the return levels actually achieved by pension assets in any year. Investment returns in 2002 were below the assumed level of 9.5 percent, but in 2003 investment returns exceeded the assumed level of 9.25 percent and in 2004 investment returns exceeded the assumed level of 9.0 percent. Xcel Energy continually reviews its pension assumptions. For 2005, Xcel Energy has changed the investment return assumption to 8.75 percent to reflect its current expectations of investment returns.
Benefit Obligations - A comparison of the actuarially computed pension benefit obligation and plan assets, on a combined basis, is presented in the following table:
Cash Flows - Cash funding requirements can be impacted by changes to actuarial assumptions, actual asset levels and other pertinent calculations prescribed by the funding requirements of income tax and other pension-related regulations. These regulations did not require cash funding in the years 2002 through 2004 for Xcel Energy’s pension plans and are not expected to require cash funding in 2005.
Benefit Costs - The components of net periodic pension cost (credit) are:
Pension costs include an expected return impact for the current year that may differ from actual investment performance in the plan. The return assumption used for 2005 pension cost calculations will be 8.75 percent. The cost calculation uses a market-related valuation of pension assets, which reduces year-to-year volatility by recognizing the differences between assumed and actual investment returns over a five-year period.
Xcel Energy and its operating utilities also maintain noncontributory, defined benefit supplemental retirement income plans for certain qualifying executive personnel. Benefits for these unfunded plans are paid out of their operating cash flows.
Defined Contribution Plans
Xcel Energy maintains 401(k) and other defined contribution plans that cover substantially all employees. The contributions for SPS were approximately $1.1 million in 2004, $1.4 million in 2003 and $1.9 million in 2002.
Postretirement Health Care Benefits
Xcel Energy has a contributory health and welfare benefit plan that provides health care and death benefits to most Xcel Energy retirees. Employees of the former NCE who retired in 2002 continue to receive employer-subsidized health care benefits.
In conjunction with the 1993 adoption of SFAS No. 106 - “Employers’ Accounting for Postretirement Benefits Other Than Pension,” Xcel Energy elected to amortize the unrecognized accumulated postretirement benefit obligation (APBO) on a straight-line basis over 20 years.
Regulatory agencies for nearly all of Xcel Energy’s retail and wholesale utility customers have allowed rate recovery of accrued benefit costs under SFAS No. 106.
Plan Assets - Certain state agencies that regulate Xcel Energy’s utility subsidiaries also have issued guidelines related to the funding of SFAS No. 106 costs. SPS is required to fund SFAS No. 106 costs for Texas and New Mexico jurisdictional amounts collected in rates. In 2004, the investment strategy for the union asset fund was changed to increase the exposure to equity funds. Also, a portion of the assets contributed on behalf of non-bargaining retirees has been funded into a sub-account of the Xcel Energy pension plans. These assets are invested in a manner consistent with the investment strategy for the pension plan.
The actual composition of postretirement benefit plan assets at Dec. 31 was:
Xcel Energy bases its investment return assumption for the postretirement health care fund assets on expected long-term performance for each of the investment types included in its postretirement health care asset portfolio. Given the fairly short time period in which funding has been required, Xcel Energy does not consider the actual historical returns achieved by its postretirement health care fund asset portfolio to be significant in establishing long-term return assumptions. Instead, Xcel Energy considers the long-term return levels projected and recommended by investment experts, weighted for the target mix of asset categories in our portfolio and does not consider investment return volatility to be a material factor in postretirement health care costs.
Benefit Obligations - A comparison of the actuarially computed benefit obligation and plan assets for Xcel Energy postretirement health care plans that benefit employees of its utility subsidiaries is presented in the following table:
Effective Dec. 31, 2004, Xcel Energy raised its initial medical trend assumption from 6.5 percent to 9.0 percent and lowered the ultimate trend assumption from 5.5 percent to 5.0 percent. The period until the ultimate rate is reached was also increased from two years to six years. This trend assumption was used to value the actuarial benefit obligations at year-end 2004, and will be used in 2005 retiree medical cost determinations. Xcel Energy bases its medical trend assumption on the long-term cost inflation expected in the health care market, considering the levels projected and recommended by industry experts, as well as recent actual medical cost increases experienced by Xcel Energy’s retiree medical plan.
A 1-percent change in the assumed health care cost trend rate would have the following effects on SPS:
The employer subsidy for retiree medical coverage was eliminated for former New Century Energies, Inc. non-bargaining employees who retire after July 1, 2003. Curtailment and settlement gains resulted from activities of some of Xcel Energy’s nonregulated subsidiaries.
Cash Flows - The postretirement health care plans have no funding requirements under income tax and other retirement-related regulations other than fulfilling benefit payment obligations, when claims are presented and approved under the plans. Additional cash funding requirements are prescribed by certain state and federal rate regulatory authorities, as discussed previously. Xcel Energy expects to contribute approximately $73 million during 2005.
Benefit Costs - The components of net periodic postretirement benefit cost are:
Impact of 2003 Medicare Legislation - On Dec. 8, 2003, President Bush signed into law the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The Act expanded Medicare to include, for the first time, coverage for prescription drugs. This new coverage is generally effective Jan. 1, 2006. Many of Xcel Energy’s retiree medical programs provide prescription drug coverage for retirees over age 65 with coverage at least equivalent to the benefit to be provided under Medicare. While retirees remain in Xcel Energy’s postretirement health care plan without participating in the new Medicare prescription drug coverage, Medicare will share the cost of Xcel Energy’s plan. This legislation has therefore reduced Xcel Energy’s share of the obligation for future retiree medical benefits.
As of Dec. 31, 2003, Xcel Energy had reduced the postretirement health care benefit obligation by $64.6 million due to the expected sharing of the cost of the program by Medicare under the new legislation. Also, beginning in 2004, the annual net periodic postretirement benefit cost was reduced by approximately $10 million as a result of the expected sharing of the cost of the program by Medicare, with similar savings expected in subsequent years. These estimated reductions do not reflect any changes that may result in future levels of participation in the plan or the associated per capita claims cost due to the availability of prescription drug coverage for Medicare-eligible retirees. Also, in reflecting this legislation, Medicare cost sharing for a plan has been assumed only if Xcel Energy’s projected contribution to the plan is expected to be at least equal to the Medicare Part D basic benefit.
Projected Benefit Payments
The following table lists Xcel Energy’s projected benefit payments for the pension and postretirement benefit plans.
8. Detail of Interest and Other Income, net of Nonoperating Expenses
Interest and other income, net of nonoperating expenses, for the years ended Dec. 31 comprises the following:
9. Derivative Instruments
In the normal course of business, SPS is exposed to a variety of market risks. Market risk is the potential loss that may occur as a result of changes in the market or fair value of a particular instrument or commodity. SPS utilizes, in accordance with approved risk management policies, a variety of derivative instruments to mitigate market risk and to enhance our operations. The use of these derivative instruments is discussed in further detail below.
Utility Commodity Price Risk - SPS is exposed to commodity price risk in its generation and retail distribution operations. Commodity price risk is managed by entering into both long- and short-term physical purchase and sales contracts for electric power, coal and fuel oil. Commodity risk also is managed through the use of financial derivative instruments. SPS utilizes these derivative instruments to reduce the volatility in the cost of commodities acquired on behalf of its retail customers even though regulatory jurisdiction may provide for a dollar-for-dollar recovery of actual costs. In these instances, the use of derivative instruments is done consistently with the local jurisdictional cost recovery mechanism. SPS' risk management policy allows it to manage market price risk within each rate-regulated operation to the extent such exposure exists.
Short-Term Wholesale and Commodity Trading Risk - SPS conducts an immaterial amount of marketing and commodity trading activities, including the purchase and sale of electric capacity and energy and other energy related instruments. These activities are primarily focused on specific regions where market knowledge and experience have been obtained. SPS’ risk management policy allows management to conduct the marketing activity within approved guideline and limitations as approved by our risk management committee, which is made up of management personnel not directly involved in the activities governed by this policy.
Interest Rate Risk - SPS is subject to the risk of fluctuating interest rates in the normal course of business. SPS’ risk management policy allows interest rate risk to be managed through the use of fixed rate debt, floating rate debt and interest rate derivatives such as swaps, caps, collars and put or call options.
Types of and Accounting for Derivative Instruments
SPS uses a number of different derivative instruments in connection with its interest rate, short-term wholesale and commodity trading activities, including forward contracts, futures, swaps and options. All derivative instruments not qualifying for the normal purchases and normal sales exception, as defined by SFAS No. 133, as amended, are recorded at fair value. The classification of the fair value for these derivative instruments is dependent on the designation of a qualifying hedging relationship. The fair value of derivative instruments not designated in a qualifying hedging relationship is reflected in current earnings. This includes certain instruments used to mitigate market risk for SPS and all instruments related to the commodity trading operations. The designation of a cash flow hedge permits the classification of fair value to be recorded within Other Comprehensive Income, to the extent effective. The designation of a fair value hedge permits a derivative instrument’s gains or losses to offset the related results of the hedged item in the Consolidated Statements of Income, to the extent effective.
SFAS No. 133, as amended, requires that the hedging relationship be highly effective and that a company formally designate a hedging relationship to apply hedge accounting. SPS formally documents hedging relationships, including, among other things, the identification of the hedging instrument and the hedged transaction, as well as the risk management objectives and strategies for undertaking the hedged transaction. SPS also formally assesses, both at inception and on an ongoing basis, if required, whether the derivative instruments being used are highly effective in offsetting changes in either the fair value or cash flows of the hedged items.
Hedge effectiveness is recorded based on the nature of the item being hedged. Hedging transactions for the sales of electric energy are recorded as a component of revenue, hedging transactions for fuel used in energy generation are recorded as a component of fuel costs and hedging transactions for interest rate swaps and lock agreements are recorded as a component of interest expense. SPS is allowed to recover in electric rates the costs of certain financial instruments acquired to reduce commodity cost volatility.
Qualifying hedging relationships are designated as either a hedge of a forecasted transaction or future cash flow (cash flow hedge) or a hedge of a recognized asset, liability or firm commitment (fair value hedge). The types of qualifying hedging transactions that SPS is currently engaged in are discussed below.
Cash Flow Hedges
The effective portion of the change in the fair value of a derivative instrument qualifying as a cash flow hedge is recognized in Other Comprehensive Income, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. The ineffective portion of a derivative instrument’s change in fair value is recognized in current earnings.
Interest Rate Cash Flow Hedges - SPS enters into interest rate swap instruments that effectively fix the interest payments on certain floating rate debt obligations. These derivative instruments are designated as cash flow hedges for accounting purposes.
As of Dec. 31, 2004, SPS had net losses of approximately $0.7 million accumulated in Other Comprehensive Income that it expects to recognize in earnings during the next 12 months.
SPS also enters into interest rate lock agreements, including treasury-rate locks and forward starting swaps, that effectively fix the yield or price on a specified treasury security for a specific period. These derivative instruments are designated as cash flow hedges for accounting purposes.
As of Dec. 31, 2004, SPS had an immaterial amount accumulated in Other Comprehensive Income that it expects to recognize in earnings during the next 12 months.
SPS had no ineffectiveness related to interest rate cash flow hedges during the years ended Dec. 31, 2004 and 2003, respectively.
Financial Impacts of Qualifying Cash Flow Hedges - The impact of qualifying cash flow hedges on SPS’ Other Comprehensive Income, included in the Consolidated Statements of Stockholder’s Equity, are detailed in the following table:
Fair Value Hedges
The effective portion of the change in the fair value of a derivative instrument qualifying as a fair value hedge is offset against the change in the fair value of the underlying asset, liability or firm commitment being hedged. That is, fair value hedge accounting allows the gains or losses of a derivative instrument to offset, in the same period, the gains and losses of the hedged item. The ineffective portion of a derivative instrument’s change in fair value is recognized in current earnings.
At Dec. 31, 2004, SPS had no fair value hedges.
Normal Purchases or Normal Sales Contracts
SPS enters into contracts for the purchase and sale of various commodities for use in its business operations. SFAS No. 133 requires a company to evaluate these contracts to determine whether the contracts are derivatives. Certain contracts that literally meet the definition of a derivative may be exempted from SFAS No. 133, as amended, as normal purchases or normal sales. Normal purchases and normal sales are contracts that provide for the purchase or sale of something other than a financial instrument or derivative instrument that will be delivered in quantities expected to be used or sold over a reasonable period in the normal course of business. In addition, normal purchases and normal sales contracts must have a price based on an underlying that is clearly and closely related to the asset being purchased or sold. An underlying is a specified interest rate, security price, commodity price, foreign exchange rate, index of prices or rates, or other variable, including the occurrence or nonoccurrence of a specified event, such as a scheduled payment under a contract.
Contracts that meet the requirements of normal are documented and exempted from the accounting and reporting requirements of SFAS No. 133. In June 2003, C20 clarified the terms clearly and closely related to normal purchases and sales contracts, as included in SFAS No. 133, as amended. SPS’ implementation of C20 in 2003 had no impact on earnings.
SPS evaluates all of its contracts when such contracts are entered to determine if they are derivatives and, if so, if they qualify to meet the normal designation requirements under SFAS No. 133. None of the contracts entered into within the commodity trading operations qualify for a normal designation.
Normal purchases and normal sales contracts are accounted for as executory contracts as required under GAAP.
On Dec. 31, 2004 and 2003, SPS had interest rate swaps outstanding with a fair value that was a liability of approximately $6.7 million and $9.5 million, respectively.
10. Financial Instruments
The estimated Dec. 31 fair values of SPS’ recorded financial instruments are as follows:
The fair value of cash and cash equivalents, notes and accounts receivable and notes and accounts payable are not materially different from their carrying amounts because of the short-term nature of these instruments or because the stated rates approximate market rates. The fair value of SPS' long-term investments are estimated based on quoted market prices for those or similar investments. The fair value of SPS' long-term debt is estimated based on the quoted market prices for the same or similar issues or the current rates for debt of the same remaining maturities and credit quality.
The fair value estimates presented are based on information available to management as of Dec. 31, 2004 and 2003. These fair value estimates have not been comprehensively revalued for purposes of these Consolidated Financial Statements since that date, and current estimates of fair values may differ significantly.
Letters of Credit
SPS uses letters of credit, generally with terms of one year, to provide financial guarantees for certain operating obligations. At Dec.
31, 2004, there was $0.9 million of letters of credit outstanding. The contract amounts of these letters of credit approximate their fair value and are subject to fees determined in the marketplace.
11. Commitments and Contingent Liabilities
Leases - SPS leases a variety of equipment and facilities used in the normal course of business. The leases are accounted for as operating leases. Rental expense under operating lease obligations was approximately $3.1 million, $3.5 million and $4.6 million for 2004, 2003 and 2002, respectively.
Expected operating lease expenses are:
Fuel Contracts - SPS has contracts providing for the purchase and delivery of a significant portion of its current coal and natural gas requirements. These contracts expire in various years between 2005 and 2017. In addition, SPS is required to pay additional amounts depending on actual quantities shipped under these agreements. The potential risk of loss for SPS, in the form of increased costs, from market price changes in fuel is mitigated through the cost-of-energy adjustment provision of the ratemaking process, which provides for recovery of most fuel costs.
The estimated minimum purchase for SPS under these contracts as of Dec. 31, 2004, is as follows:
Purchased Power Agreements - SPS has entered into agreements with utilities and other energy suppliers for purchased power to meet system load and energy requirements, replace generation from company-owned units under maintenance and during outages, and meet operating reserve obligations. SPS has various pay-for-performance contracts with expiration dates through the year 2024. In general, these contracts provide for capacity payments, subject to meeting certain contract obligations and energy payments based on actual power taken under the contracts. Certain contractual payment obligations are adjusted based on indexes. However, the effect of these price adjustments are mitigated through cost-of-energy adjustment mechanisms.
At Dec. 31, 2004, the estimated future payments for capacity that SPS is obligated to purchase, subject to availability, are as follows (Thousands of dollars):
Plant Removal Costs - SPS records a regulatory liability for plant removal costs for generation, transmission and distribution facilities. The recording of the obligation has no income statement impact due to the deferral of adjustments, through the establishment of a regulatory asset pursuant to SFAS No. 71. Generally, the accrual of future non-legal removal obligations is not required. However, long-standing ratemaking practices approved by applicable state and federal regulatory commissions have allowed provisions for such costs in historical depreciation rates. These removal costs have accumulated over a number of years based on varying rates as authorized by the appropriate regulatory entities. Given the long periods over which the amounts were accrued and the changing of rates through time, 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, 2004 and 2003 are $104 million and $102 million, respectively.
Environmental Contingencies
SPS is subject to regulations covering air and water quality, the storage of natural gas and the storage and disposal of hazardous or toxic wastes. We continuously assess our compliance. Regulations, interpretations and enforcement policies can change, which may impact the cost of building and operating our facilities.
Site Remediation - SPS must pay all or a portion of the cost to remediate sites where past activities of SPS and some other parties have caused environmental contamination. At Dec. 31, 2004, SPS was a party to third party and other sites, such as landfills, to which we are alleged to be a potentially responsible party (PRP) that sent hazardous materials and wastes.
SPS records a liability when it has enough information to develop an estimate of the cost of remediating a site and revise the estimate as information is received. The estimated remediation cost may vary materially.
To estimate the cost to remediate these sites, SPS may have to make assumptions where facts are not fully known. For instance, assumptions may be made about the nature and extent of site contamination, the extent of required cleanup efforts, costs of alternative cleanup methods and pollution control technologies, the period over which remediation will be performed and paid for, changes in environmental remediation and pollution control requirements, the potential effect of technological improvements, the number and financial strength of other PRPs and the identification of new environmental cleanup sites.
Estimates are revised as facts become known, but at Dec. 31, 2004, SPS estimated its liability for the cost of remediating sites was $0.2 million, of which $0.1 million was considered to be a current liability.
Some of the cost of remediation may be recovered from:
• insurance coverage;
• other parties that have contributed to the contamination; and
• customers.
Neither the total remediation cost nor the final method of cost allocation among all PRPs of the unremediated sites has been determined. SPS has recorded estimates of its share of future costs for these sites.
Asbestos Removal - Some of our facilities contain asbestos. Most asbestos will remain undisturbed until the facilities that contain it are demolished or renovated. Since we intend to operate most of these facilities indefinitely, we cannot estimate the amount or timing of payments for its final removal. 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 immaterial and is recorded as incurred as operating expenses for maintenance projects, capital expenditures for construction projects or removal costs for demolition projects.
Polychlorinated Biphenyl (PCB) Storage and Disposal - In August 2004, SPS received notice from the EPA contending SPS violated PCB storage and disposal regulations with respect to storage of a drained transformer and related solids. The EPA contends the fine for the alleged violation is approximately $1.2 million. SPS is contesting the fine and is in discussions with the EPA.
Legal Contingencies
In the normal course of business, SPS is party to routine claims and litigation arising from prior and current operations. SPS is actively defending these matters and has recorded an estimate of the probable cost of settlement or other disposition.
Carbon Dioxide Emissions Lawsuit - On July 21, 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 five utilities, including Xcel Energy, to force reductions in carbon dioxide (CO2) emissions. Although SPS is not named as a party to this litigation, the requested relief that Xcel Energy cap and reduce its CO2 emissions could have a material adverse effect on SPS. The other utilities include American Electric Power Co., Southern Co., Cinergy Corp. and Tennessee Valley Authority. CO2 is emitted whenever fossil fuel is combusted, such as in automobiles, industrial operations and coal- or gas-fired power plants. The lawsuits allege that CO2 emitted by each company is a public nuisance as defined under state and federal common law because it has contributed to global warming. 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 October 2004, Xcel Energy and four other utility companies filed a motion to dismiss the lawsuit contending, among other reasons, that the lawsuit should be dismissed because it is an attempt to usurp the policy-setting role of the U.S Congress and the president. The ultimate financial impact of these lawsuits, if any, is not determinable at this time.
The issue of global climate change is receiving increased attention. Debate continues in the scientific community concerning the extent to which the earth’s climate is warming, the causes of climate variations that have been observed, and the ultimate impacts that might result from a changing climate. There also is considerable debate regarding public policy for the approach that the United States should follow to address the issue. The United Nations-sponsored Kyoto Protocol, which establishes greenhouse gas reduction targets for developed nations, entered into force on Feb. 16, 2005. President Bush has declared that the United States will not ratify the protocol and is opposed to legislative mandates, preferring a program based on voluntary efforts and research on new technologies. SPS is closely monitoring the issue from both scientific and policy perspectives. While it is not possible to know the eventual outcome, SPS believes the issue merits close attention and is taking actions it believes are prudent to be best positioned for a variety of possible future outcomes. Xcel Energy, including SPS, is participating in a voluntary carbon management program and has established goals to reduce its volume of carbon dioxide emissions by 12 million tons by 2009 and to reduce carbon intensity by 7 percent by 2012. SPS also is involved in other projects to improve available methods for managing carbon.
Lamb County Electric Cooperative - On July 24, 1995, Lamb County Electric Cooperative, Inc. (LCEC) petitioned the PUCT for a cease and desist order against SPS alleging that SPS was unlawfully providing service to oil field customers in LCEC’s certificated area. On May 23, 2003, the PUCT issued an order denying LCEC’s petition based on its determination that SPS was granted a certificate in 1976 to serve the disputed customers. LCEC appealed the decision to the District Court in Travis County, Texas and on Aug. 12, 2004, the District Court affirmed the decision of the PUCT. On Sept. 9, 2004, LCEC appealed the District Court’s decision to the Court of Appeals for the Third Supreme Judicial District of the state of Texas, which appeal is currently pending. Briefs have been filed with the Court of Appeals and oral arguments are scheduled for March 23, 2005.
On October 18, 1996, LCEC filed a suit for damages against SPS in the District Court in Lamb County, Texas, based on the same facts as alleged in its petition for a cease and desist order at the PUCT. This suit has been dormant since it was filed, awaiting a final determination at the PUCT of the legality of SPS providing electric service to the disputed customers. The PUCT order of May 23, 2003, found that SPS was legally serving the disputed customers thus collaterally determining the issue of liability contrary to LCEC’s position in the suit. An adverse ruling on the appeal of the May 23, 2003 PUCT order could result in a re-determination of the legality of SPS’ service to the disputed customers.
Other Contingencies
Texas Retail Fuel Cost Recovery - Fuel and purchased energy costs are recovered in Texas through a fixed fuel and purchased energy recovery factor. In May 2004, SPS filed with the PUCT its periodic request for fuel and purchased power cost recovery for electric generation and fuel management activities for the period from January 2002 through December 2003. SPS requested approval of approximately $580 million of Texas-jurisdictional fuel and purchased power costs for the two-year period. Intervenor and PUCT staff testimony was filed in October 2004 and hearings were held in December 2004. Intervenor testimony contained objections to SPS' methodology for assigning average fuel costs to wholesale sales, among other things. Recovery of $49 million to $86 million of the requested amount was contested by multiple intervenors. SPS has recorded its best estimate of any potential liability related to the impact of this proceeding. In January 2005, SPS filed its post-hearing briefs disputing the intervenor objections. Reply briefs were filed on Feb. 15, 2005, the administrative law judge is expected to issue his recommended proposal for decision by the end of April 2005, and PUCT action is expected by the end of May 2005. SPS is pursuing a settlement agreement with the parties involved.
NMPRC Billing Practices Investigation - In 2003, the NMPRC opened an investigation of SPS’s billing practices as a result of certain customers receiving estimated billings for an extended period of time. The NMPRC ordered SPS to implement temporary billing measures for customers whose billings were estimated, which was completed in 2003. On Sept. 28, 2004, the hearing examiner issued a recommended decision. It stated that SPS is now in compliance with the required meter reading and estimated billing practices. It would require SPS to file semi-annual compliance reports regarding meter reading and estimated billing activities. The hearing examiner also recommended a penalty of $50,000, proposed by the NMPRC staff, be suspended subject to SPS’s continued compliance with meter reading and estimated billing rules. The reporting period and suspended penalty will terminate after three years of the date of the NMPRC’s issuance of a final order in this case, or the date of the NMPRC’s issuance of a final order in SPS’s next general rate case, whichever occurs first. On Oct. 12, 2004, the NMPRC adopted the hearing examiner’s recommended decision.
12. Regulatory Assets and Liabilities
SPS’ financial statements are prepared in accordance with the provisions of SFAS No. 71, as discussed in Note 1 to the Consolidated Financial Statements. Under SFAS No. 71, regulatory assets and liabilities can be created for amounts that regulators may allow to be collected, or may require to be paid back to customers in future electric rates. Any portion of the business that is not rate regulated cannot use SFAS No. 71 accounting. The components of unamortized regulatory assets and liabilities on the balance sheets of SPS are:
(a) Regulatory liabilities created by the implementation of C20. See Note 9.
(b) Earns a return on investment in the ratemaking process. These amounts are amortized consistent with recovery in rates.
13. Segment and Related Information
SPS has only one reportable segment. SPS operates in the Regulated Electric Utility industry providing wholesale and retail electric service in the states of Texas, New Mexico, Kansas and Oklahoma. Revenues from external customers were $1,333.8 million, $1,201.3 million and $1,025.2 million for the years ended Dec. 31, 2004, 2003 and 2002, respectively.
14. Related Party Transactions
In 2003, Xcel Energy established a money pool arrangement with the utility subsidiaries, subject to receipt of required state regulatory approvals. SPS received approval to participate in the money pool arrangement in 2004. The money pool allows for short-term loans between the utility subsidiaries and from the holding company to the utility subsidiaries at market-based interest rates. The money pool arrangement does not allow loans from the utility subsidiaries to the holding company. SPS has approval to borrow up to $100 million under the arrangement. SPS had no borrowings or loans outstanding under the arrangement at Dec. 31, 2004.
Xcel Energy Services Inc. provides management, administrative and other services for the subsidiaries of Xcel Energy, including SPS. The services are provided and billed to each subsidiary in accordance with Service Agreements approved by the SEC and executed by each subsidiary. Costs are charged directly to the subsidiary which uses the service whenever possible, and are allocated using an SEC approved method if they cannot be directly assigned.
Utility Engineering Corp., an additional Xcel Energy subsidiary, provided construction services to SPS, for which it was paid $14.6 million in 2004, $15.9 million in 2003 and $13.5 million in 2002.
SPS purchases electricity from Borger Energy Associates, which is partially owned by one of Xcel Energy’s subsidiaries.
The table below contains significant affiliate transactions among the companies and related parties for the years ended Dec. 31:
Accounts receivable and payable with affiliates at Dec. 31 was:
15. Summarized Quarterly Financial Data (Unaudited)
(a) Fourth-quarter results were decreased by an accrual recorded to reflect SPS' best estimate of any potential liability for the impact of its retail fuel cost recovery proceeding in Texas.
Item 9
Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
During 2003 and 2004, and through the date of this report, there were no disagreements with the independent public accountants for SPS on accounting principles or practices, financial disclosures or audit scope or procedures.
Item 9A
Item 9A - 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 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 Securities and Exchange Commission rules and forms. As of the end of the period covered by this report, based on an evaluation carried out under the supervision and with the participation of SPS’ management, including the Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of its disclosure controls and procedures, the CEO and CFO have concluded that the Company’s disclosure controls and procedures are effective.
Internal Control Over Financial Reporting
No change in SPS’ internal control over financial reporting has occurred during SPS' most recent fiscal quarter that has materially affected, or is reasonably likely to affect, SPS’ internal control over financial reporting.
Item 9B
Item 9B - Other Information
None
PART III
Items 10, 11, 12 and 13 of Part III of Form 10-K have been omitted from this report for SPS in accordance with conditions set forth in general instructions I (1) (a) and (b) of Form 10-K for wholly-owned subsidiaries.
Item 10
Item 10 - Directors and Executive Officers of the Registrant
Item 11
Item 11 - Executive Compensation
Item 12
Item 12 - Security Ownership of Certain Beneficial Owners and Management
Item 13
Item 13 - Certain Relationships and Related Transactions
Item 14
Item 14 - Principal Accounting Fees and Services
Information concerning fees paid to the principal accountant for each of the last two years is contained in the Xcel Energy Proxy Statement for its 2005 Annual Meeting of Shareholders, which is incorporated by reference.
PART IV
Item 15
Item 15 - Exhibits, Financial Statement Schedules
Montreal and The Bank of New York dated Feb. 17, 2004 (Exhibit 4.107 to Xcel Energy Form 10-K (file no. 001-03034) dated Mar. 31, 2004).
4.07*
Registration Rights Agreement dated Oct. 6, 2003 among Southwestern Public Service Co., Citigroup Global Markets Inc. and Credit Suisse First Boston LLC.
10.01*+
Xcel Energy Omnibus Incentive Plan (Exhibit A to Xcel Energy Form DEF-14A (file no. 001-03034) filed Aug. 29, 2000).
10.02*+
Xcel Energy Executive Annual Incentive Award Plan (Exhibit B to Xcel Energy Form DEF-14A (file no. 001-03034) filed Aug. 29, 2000).
10.03*+
Employment Agreement dated March 24, 1999, among Northern States Power Co. (a Minnesota corporation), New Century Energies, Inc. and Wayne H. Brunetti (Exhibit 10(b) to New Century Energies, Inc. Form 10-Q, (file no. 001-12927) dated March 31, 1998).
10.04*+
Amended and Restated Executive Long-Term Incentive Award Stock Plan. (Exhibit 10.02 to NSP-Minnesota Form 10-Q (file no. 001-03034) for the quarter ended March 31, 1998).
10.05*+
Stock Equivalent Plan for Non-Employee Directors of Xcel Energy As Amended and Restated Effective Oct. 1, 1997. (Exhibit 10.15 to NSP-Minnesota Form 10-K (file no. 001-03034) for the year 1997).
10.06*+
Senior Executive Severance Policy, effective March 24, 1999, between New Century Energies, Inc. and Senior Executives (Exhibit 10(a)(2) to New Century Energies, Inc. Form 10-Q, (File no. 001-12927) dated March 31, 1999).
10.07*+
New Century Energies Omnibus Incentive Plan (Exhibit A to New Century Energies, Inc. Form DEF 14A (file no. 001-12927) filed March 26, 1998).
10.08*+
Directors’ Voluntary Deferral Plan (Exhibit 10(d) (1) to New Century Energies, Inc. Form 10-K (file no. 001-12927) dated Dec. 31, 1998).
10.09*+
Supplemental Executive Retirement Plan (Exhibit 10(e) (1) to New Century Energies, Inc. Form 10-K (file no. 001-12927) dated Dec. 31, 1998).
10.10*+
Salary Deferral and Supplemental Savings Plan for Executive Officers (Exhibit 10(f) (1) to New Century Energies, Inc. Form 10-K (file no. 001-12927) dated Dec. 31, 1998).
10.11*+
Salary Deferral and Supplemental Savings Plan for Key Managers (Exhibit 10(g) (1) to New Century Energies, Inc. Form 10-K (file no. 001-12927) dated Dec. 31, 1998).
10.12*+
Supplemental Executive Retirement Plan for Key Management Employees, as amended and restated March 26, 1991 (Exhibit 10(e)(2) to PSCo Form 10-K (File no. 001-3280) dated Dec. 31, 1991).
10.13*+
Form of Key Executive Severance Agreement, as amended on Aug. 22, and Nov. 27, 1995. (Exhibit 10(e)(4) to PSCo Form 10-K (File no. 001-3280) dated Dec. 31, 1995).
10.14*+
Supplemental Retirement Income Plan as amended July 23, 1991 (Exhibit 10(d) to SPS Form 10-K, (File no. 001-03789) dated Aug. 31, 1996).
10.15*+
Xcel Energy Senior Executive Severance and Change-in Control Policy dated Oct. 22, 2003 (Exhibit 10.10 to SPS Form S-4, (file no. 333-112032) dated Jan. 21, 2004).
10.16*+
Stock Equivalent Plan for Non-employee Directors of Xcel Energy as amended and restated Jan. 1, 2004 (Exhibit B to Xcel Energy Form DEF-14A (file no. 001-03034) dated Apr. 9, 2004).
10.17*+
Xcel Energy Nonqualified Deferred Compensation Plan (2002 restatement) (Exhibit 10.23 to Xcel Energy Form 10-K (file no. 001-03034) dated March 15, 2004).
10.18*+
Xcel Energy Inc. Non-employee Directors’ Deferred Compensation Plan (Exhibit 10.24 to Xcel Energy Form 10-K (file no. 001-03034) dated March 15, 2004).
10.19*+
Xcel Energy 401(k) Savings Plan, amended and restated as of Jan. 1, 2002 (Exhibit 10.19 to SPS Form S-4 (file no. 333-112032) dated Jan. 21, 2004).
10.20*+
New Century Energies, Inc. Employee Investment Plan for Bargaining Unit Employees and Former Non-bargaining Unit Employees, as amended and restated effective Jan. 1, 2002 but with certain retroactive amendments (Exhibit 10.20 to SPS Form S-4 (file no 333-112032) dated Jan. 21, 2004).
10.21*
Form of Services Agreement between Xcel Energy Services Inc. and utility companies (Exhibit H-1 to Xcel Energy Form U5B (file no. 001-03034) dated Nov. 16, 2000).
10.22*
Securities Litigation Settlement Agreement as of Dec. 31, 2004 and approved Jan. 14, 2005 (Exhibit 10.01 to Xcel Energy Form 8-K (file no. 001-03034) dated Jan. 14, 2005).
10.23*
ERISA Actions Settlement Agreement as of Dec. 31, 2004 and approved Jan. 14, 2005 (Exhibit 10.02 to Xcel Energy Form 8-K (file no. 001-03034) dated Jan. 14, 2005).
10.24*
Shareholder Derivative Action Settlement Agreement as of Dec. 31, 2004 and approved Jan. 14, 2005 (Exhibit 10.03 to Xcel Energy Form 8-K (file no. 001-03034) dated Jan. 14, 2005).
10.25*+
Employment Agreement, effective Dec. 15, 1997, between company and Mr. Paul J. Bonavia, as amended (Exhibit 10.25 to Xcel Energy Form 10-K (file no. 001-03034) dated March 3, 2005).
10.26*+
Compensation and reimbursement practices for Xcel Energy non-employee directors (Exhibit 10.26 to Xcel Energy Form 10-K (file no. 001-03034) dated March 3, 2005).
10.27*+
Xcel Energy executive officer salaries, annual bonus targets and long-term compensation awards for 2005 (Exhibit 10.27 to Xcel Energy Form 10-K (file no. 001-03034) dated March 3, 2005).
10.28*+
Amended Schedule of Participants for Xcel Energy Senior Executive Severance and Change-in-Control Policy (Exhibit 10.28 to Xcel Energy Form 10-K (file no. 001-03034) dated March 3, 2005).
10.29*+
Xcel Energy Executive Annual Incentive Award Plan Form of Restricted Stock Agreement (Exhibit 10.29 to Xcel Energy Form 10-K (file no. 001-03034) dated March 3, 2005).
10.30*+
Xcel Energy Omnibus Incentive Plan Form of Restricted Stock Unit Agreement (Exhibit 10.30 to Xcel Energy Form 10-K (file no. 001-03034) dated March 3, 2005).
10.31*+
Xcel Energy Omnibus Incentive Plan Form of Performance Share Agreement (Exhibit 10.31 to Xcel Energy Form 10-K (file no. 001-03034) dated March 3, 2005).
10.32*+
Xcel Energy Omnibus Incentive Plan Form of Restricted Stock Unit Agreement (Exhibit 10.32 to Xcel Energy Form 10-K (file no. 001-03034) dated March 3, 2005).
10.33*
Coal Supply Agreement (Harrington Station) between Southwestern Public Service Co. and TUCO, dated May 1, 1979 (Form 8-K (file no. 001-03789), May 14, 1979 - Exhibit 3).
10.34*
Master Coal Service Agreement between Swindell-Dressler Energy Supply Co. and TUCO, dated July 1, 1978 (Form 8-K, (file no. 001-03789) May 14, 1979 - Exhibit 5(A)).
10.35*
Guaranty of Master Coal Service Agreement between Swindell-Dressler Energy Supply Co. and TUCO (Form 8-K, (file no. 3789) May 14, 1979 - Exhibit 5(B)).
10.36*
Coal Supply Agreement (Tolk Station) between Southwestern Public Service Co. and TUCO dated April 30, 1979, as amended Nov. 1, 1979 and Dec. 30, 1981 (Form 10-Q, (file no. 3789) Feb. 28, 1982 - Exhibit 10(b)).
10.37*
Master Coal Service Agreement between Wheelabrator Coal Services Co. and TUCO dated Dec. 30, 1981, as amended Nov. 1, 1979 and Dec. 30, 1981 (Form 10-Q, (file no. 3789) Feb. 28, 1982 - Exhibit 10(c)).
10.38*
Power Purchase Agreement dated May 23, 1997 between Borger Energy Associates, L.P, and Southwestern Public Service Co.
12.01
Statement of Computation of Ratio of Earnings to Fixed Charges.
31.01
Principal Executive Officer’s certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02
Principal Financial Officer’s certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.01
Statement pursuant to Private Securities Litigation Reform Act of 1995.
SCHEDULE II
SOUTHWESTERN PUBLIC SERVICE COMPANY
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years Ended Dec. 31, 2004, 2003 and 2002
(1) Uncollectible accounts written off or transferred to other parties.
Supplemental information to be furnished with reports filed pursuant to Section 15(d) of the Act by Registrants which have not registered securities in pursuant to Section 12 of the Act.
SPS has not sent, and does not expect to send, an annual report or proxy statement to its security holder.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 3,
Pursuant to the requirements of the Securities Exchange Act of 1934, this report signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ GARY L. GIBSON
/s/ WAYNE H. BRUNETTI
Gary L. Gibson
Wayne H. Brunetti
President, Chief Executive Officer and Director
Chairman and Director
(Principal Executive Officer)
/s/ TERESA S. MADDEN
/s/ GARY R. JOHNSON
Teresa S. Madden
Gary R. Johnson
Vice President and Controller
Vice President, General Counsel and Director
(Principal Accounting Officer)
/s/ RICHARD C. KELLY
/s/ BENJAMIN G.S. FOWKE III
Richard C. Kelly
Benjamin G.S. Fowke III
Vice President and Director
Vice President and Chief Financial Officer
(Principal Financial Officer)