pro forma adjustments to xes expenses by affiliate class
TRANSCRIPT
E17 1
7J0
E6
1 - 9
1111
Pro Forma Adjustments to XES Expenses by Affiliate Class and FERC Account For Twelve Months ended June 30, 2017
Jill Reed
(A) (B) (C) (D) (E) (F) Line No.
Affiliate Class FERC Account Explanation for Pro Formas Sponsor Pro Formas
(Total Company) 1 Human Resources 920 - Administrative and general salaries Business Area Adjustment Jill Reed $ (27,875.23) 2 Human Resources 920 - Administrative and general salaries Financial Goals Incentive Jill Reed (33,479.39)
(184,101.48) 3 Human Resources 920 - Administrative and general salaries Incentive Arthur Freitas/Jill Reed 4 Human Resources 921 - Office supplies and expenses Business Area Adjustrnent Jill Reed (971.48)_ 5 Human Resources 926 - Employee pensions and benefits 3% Wage Adjustment Arthur Freitas/Jill Reed 11,598.41 6 Human Resources 926 - Employee pensions and benefits Pension & Benefits Adjustment Arthur Freitas/Richard Schrubbe 3,931.98 7 Human Resources 930.1 - General advertising expenses Advertising Arthur Freitas (36,266.53) 8 Human Resources 930.1 - General advertising expenses Business Area Adjustment Jill Reed (7.18) 9 Human Resources Total $ (267,170.91)
10 SS Company Benefits 920 - Administrative and general salaries Incentive Arthur Freitas/Jill Reed $ (88.25) 11 SS Company Benefits 920 - Administrative and general salaries Financial Goals Incentive Jill Reed (104,349.52) 12 SS Company Benefits 920 - Administrative and general salaries Incentive Arthur Freitas/Jill Reed (1,372.83) 13 SS Company Benefits 920 - Administrative and general salaries Long Term Incentive Jill Reed (3,870,711.41) 14 15
SS Company Benefits 926 - Employee pensions and benefits 3% Wage Adjustment Arthur Freitas/Jill Reed 151.69 SS Company Benefits 926 - Employee pensions and benefits Pension & Benefits Adjustment Arthur Freitas/Richard Schrubbe 51.43
16 SS Company Benefits Total $ (3,976,318.88)
17 Total - Witness Jill Reed $ (4,243,489.79)
Amounts may not add or tie to other schedules due to rounding
DOCKET NO.
APPLICATION OF SOUTHWESTERN § PUBLIC UTILITY COMMISSION PUBLIC SERVICE COMPANY FOR § AUTHORITY TO CHANGE RATES § OF TEXAS
DIRECT TESTIMONY of
RICHARD R. SCHRUBBE
on behalf of
SOUTHWESTERN PUBLIC SERVICE COMPANY
(Filename: SchrubbeRRDirect.doc)
Table of Contents
GLOSSARY OF ACRONYMS AND DEFINED TERMS 3
LIST OF ATTACHMENTS 5
I. WITNESS IDENTIFICATION AND QUALIFICATIONS 6
II. ASSIGNMENT AND SUMMARY OF TESTIMONY AND RECOMMENDATIONS 9
III. PENSION AND BENEFITS OVERVIEW 14
IV. RECOVERY OF CURRENT PENSION AND OTHER POST- EMPLOYMENT AND RETIREMENT BENEFITS EXPENSE 17
A. QUALIFIED PENSION 17
B. RETIREE MEDICAL 25
C. SELF-INSURED LONG-TERM DISABILITY 27
D. REASONABLENESS OF SPS'S PENSION AND OTHER POST- EMPLOYMENT AND RETIREMENT BENEFITS EXPENSE 29
V. HEALTH AND WELFARE COSTS 30
A. ACTIVE HEALTH CARE 30
B. THIRD-PARTY-INSURED LONG-TERM DISABILITY 31
C. LIFE INSURANCE 33
D. MISCELLANEOUS BENEFITS 34
E. REASONABLENESS OF HEALTH AND WELFARE COSTS 35
VI. WORKERS COMPENSATION COSTS 36
A. REASONABLENESS OF WORKERS' COMPENSATION BENEFIT COSTS 37
VII. OTHER BENEFIT COSTS 38
A. 401(K) MATCH 38
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B. MISCELLANEOUS RETIREMENT-RELATED COSTS 39
C. REASONABLENESS OF OTHER BENEFIT COSTS 40
VIII. PENSION AND OPEB RESERVE ACCOUNT 41
IX. SPS'S PREPAID PENSION ASSET 45
AFFIDAVIT 64
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GLOSSARY OF ACRONYMS AND DEFINED TERMS
Acronym/Defined Term Meaning
ADIT Accumulated Deferred Income Tax
Commission Public Utility Commission of Texas
CWIP Construction Work in Progress
ERISA Employees Retirement Income Security Act
EROA Expected Return on Assets
FAS Statement of Financial Accounting Standard
FERC Federal Energy Regulatory Commission
GAAP Generally Accepted Accounting Principles
HSA Health Savings Account
HR Human Resources
IRC Internal Revenue Code
IBNR Incurred But Not Reported
LTD Long-Term Disability
NCE New Century Energies
O&M Operation and Maintenance
OPEB Other Post-Employment Benefits
Operating Companies Northern States Power Company, a Minnesota corporation; Northern States Power Company, a Wisconsin corporation; Public Service Company of Colorado, a Colorado corporation; and SPS
PBGC Pension Benefit Guaranty Corporation
PBO Projected Benefit Obligation
PURA Public Utility Regulatory Act
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Acronym/Defined Term Meaning
RFP Rate Filing Package
SPS Southwestern Public Service Company, a New Mexico corporation
Test Year April 1, 2016 through March 31, 2017
Total Company Total SPS (before jurisdictional allocations)
Update Period April 1, 2017 through June 30, 2017
Updated Test Year July 1, 2016 through June 30, 2017
WACC Weighted Average Cost of Capital
Xcel Energy Xcel Energy Inc.
XES Xcel Energy Services Inc.
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LIST OF ATTACHMENTS
Attachment
RRS-RR-1
RRS-RR-2
RRS-RR-3
RRS-RR-4
RRS-RR-5
RRS-RR-6
RRS-RR-7
Description
Calculation of Pension, OPEB, Non-Qualified Pension, FAS 112 Long-Term Disability and Workers Compensation Costs (Filename: RRS-RR-1.xlsx)
2016 Actuarial Report (Non-native format)
2017 Actuarial Report (Non-native format)
Calculation of Health and Welfare Costs (Filename: RRS-RR-4.xlsx)
Calculation of Deferred Pension and OPEB Balances (Filename: RRS-RR-5.xlsx)
Calculation of Test Year Prepaid Pension Asset (Filename: RRS-RR-6.xlsx)
Cumulative Prepaid Pension Asset Balance Since the Adoption of FAS 87 (Filename: RRS-RR-7.xlsx)
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DIRECT TESTIMONY OF
RICHARD R. SCHRUBBE
1 I. WITNESS IDENTIFICATION AND QUALIFICATIONS
2 Q. Please state your name and business address.
3 A. My name is Richard R. Schrubbe. My business address is 414 Nicollet Mall,
4 Minneapolis, Minnesota 55401.
5 Q. On whose behalf are you testifying in this proceeding?
6 A. I am filing testimony on behalf of Southwestern Public Service Company, a New
7 Mexico corporation ("SPS") and wholly-owned electric utility subsidiary of Xcel
8 Energy Inc. ("Xcel Energy).
9 Q. By whom are you employed and in what position?
10 A. I am employed by Xcel Energy Services Inc. ("XES"), the service company
11 subsidiary of Xcel Energy, as Area Vice-President of Financial Analysis and
12 Planning.
13 Q. Please briefly outline your responsibilities as Area Vice-President of
14 Financial Analysis and Planning.
15 A. My responsibilities include the oversight and management of the Business Area
16 Finance group, which includes Energy Supply, Transmission, Distribution, Gas
17 Engineering & Operations, and Corporate Services. Within that group, I oversee
18 budget planning, reporting, and analysis. I am also responsible for the accounting
19 for all employee benefits programs, playing a liaison role with the Human
20 Resources (HR") department, external actuaries, and senior management with
21 benefit fiduciary roles for Xcel Energy and its subsidiaries. I am also responsible
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1 for coordinating the benefits operation and maintenance ("O&M") and capital
2 budgeting and forecasting processes, as well as the monthly analysis of actual
3 results against these budgets and forecasts.
4 Q. Please describe your educational background.
5 A. I received a Bachelor of Science degree, with a major in finance, frorn Marquette
6 University in 1996.
7 Q. Please describe your professional experience.
8 A. From 2000 to 2005, I was employed by the DoALL Company, first as a Staff
9 Accountant, later as Assistant Controller, and then as Corporate Controller. From
10 2005 to 2007, I was employed by Wilsons Leather as a Financial Analyst. In
11 2007, I joined XES as a Consultant. I became the Manager of Corporate
12 Accounting in 2010 and the Director of Corporate and Benefits Accounting in
13 2013. Additionally, in 2014, I was assigned responsibilities associated with the
14 oversight of the administration of XES, including accounting, billing, allocations,
15 policies and procedures, service agreements, internal audits, external audits, and
16 external reporting to state and federal regulatory agencies. In 2016, I was
17 promoted to my current position.
18 Q. Have you testified or filed testimony previously before any regulatory
19 authorities?
20 A. Yes. I testified before the Public Utility Commission of Texas (`CommissioC) in
21 Docket No. 43695 on pension and other post-employment benefit expenses, active
22 health care expenses, and the proper treatment of a prepaid pension asset, among
23 other issues. I also submitted pre-filed testimony on those issues to the
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1 Commission in SPS's last base rate case, Docket No. 45524, and I subrnitted pre-
2 filed testimony to the Commission on SPS's behalf in Docket No. 45291
3 regarding SPS's agreements with affiliates. I have also testified before the
4 Colorado Public Utilities Commission and the Minnesota Public Utilities
5 Commission on pension and benefit issues. Further, I have submitted pre-filed
6 direct testimony on SPS's behalf to the New Mexico Public Regulation
7 Commission on those issues.
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1 II. ASSIGNMENT AND SUMMARY OF TESTIMONY AND
2 RECOMMENDATIONS
3 Q. What is your assignment in this proceeding?
4 A. My testimony addresses six topics related to SPS's employee pensions and other
5 non-cash benefits:
6 1. I support SPS's request to recover its reasonable and necessary
7 expenses for qualified pension calculated under Statement of Financial
8 Accounting Standard (FAS") 87,1 retiree medical costs calculated
9 under FAS 106, and self-insured long-term disability ("LTD") costs
10 calculated under FAS 112;
11 2. I support SPS's request to recover its active health and welfare costs,
12 which include costs incurred for active health care, miscellaneous
13 benefits, life insurance, and third-party-insured LTD benefits;
14 3. I support SPS's request to recover the reasonable and necessary costs
15 incurred for workers compensation benefits;
16 4. I support SPS's request to recover other reasonable and necessary
17 benefits, such as the 401(k) match, certain benefit-related consulting
18 costs, and deferred compensation;
19 5. I support the amount of pension and other post-employment benefit
20 (OPEB") expense to be used as the baseline on a going-forward basis
21 for purposes of the tracker established under section 36.065 of the
22 Public Utility Regulatory Act (PURA"), and I quantify the current
23 deferred balance to be amortized;2 and
24 6. I quantify SPS's prepaid pension asset and support the request to
25 continue to include that prepaid pension asset in rate base.
26 In addition, I sponsor or co-sponsor the following schedules in SPS's Rate
27 Filing Package ("RFP"): Schedules B-2, B-2.1, G-2.0, G-2.1, G-2.2, and G-2.3.
i In 2009, FAS 87 was renamed Accounting Standards Codification 715-30, but for the sake of
convenience I will refer to it in this testimony as "FAS 87." I will also refer to the other accounting standards by their former FAS designations.
2 PURA is codified in Title II of the Texas Utilities Code. See Tex. Utils. Code Ann. §§ 11.001-
66.016 (Vernon 2016).
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1 Schedule B-2 lists the monthly balance of each accumulated provision
2 account (i.e., injuries and damages, property insurance, etc.), the amount accrued
3 each month, and the amount charged off each month during the Test Year.3 In
4 addition, Schedule B-2 provides the same information on an annual basis for the
5 prior three years. Schedule B-2.1 provides the information requested on Schedule
6 B-2 on a Texas retail basis only. I co-sponsor these schedules with SPS witness
7 Arthur P. Freitas.
8 The G-2 series of Schedules provides general employee benefit
9 information with specific information on pension expense provided in Schedule
10 G-2.1, postretirement benefits other than pension expense provided in Schedule
11 G-2.2, and administration fees provided in Schedule G-2.3. I co-sponsor
12 Schedule G-2 with SPS witness Jill H. Reed. The RFP requires that each of these
13 schedules be updated 45 days after the initial filing. I also support the portions of
14 the Executive Summary that contain information from these Schedules.
15 Q. Please summarize your testimony and recommendations.
16 A. I support SPS's request for recovery of pension and other post-employment and
17 retirement benefits expense, and I recommend that SPS be authorized to recover
18 $13,027,294 of pension and other post-employment and retirement benefits
19 expense on a total company basis. That amount is composed of $13,367,533 of
20 qualified pension expense, $(350,571) of FAS 106 retiree medical expense, and
21 $10,332 of FAS 112 self-insured LTD expense. SPS is not requesting recovery of
22 non-qualified pension expense.
3 The Test Year is the twelve-month period from April 1, 2016 through March 31, 2017.
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1 I also support SPS's request to recover its reasonable and necessary active
2 health and welfare costs. I recommend that SPS be authorized to recover
3 $16,145,772 (total company) for active health and welfare costs. That amount is
4 composed of $14,636,900 of active health care costs, $138,162 of life insurance
5 costs, $722,838 of miscellaneous benefit costs, and $647,872 of third-party-
6 insured LTD costs.
7 I further support SPS's request to recover third-party-insured workers'
8 compensation costs. I recommend that SPS be authorized to recover $724,311
9 (total company) of third-party-insured workers compensation costs. I further
10 recommend that SPS be authorized to recover $3,492,431 (total company) of
11 other pension and benefit-related costs, which include 401(k) matching expense,
12 consulting expense, and deferred compensation.
13 I next support SPS's request to establish a baseline for pension and OPEB
14 expense on a going-forward basis under PURA § 36.065, and I recommend that
15 the Commission set that baseline at $13,367,533 for qualified pension and
16 $(350,571) for OPEB (both total company).4 For prior periods, the amount to be
17 credited to customers as a result of the pension and OPEB baseline deferrals is
18 $(1,166,775).
19 Finally, I recommend that SPS continue to be allowed to include its
20 prepaid pension asset in rate base in accordance with the standard ratemaking
21 treatment of prepayments and Commission precedent. Customers earn a return on
22 the prepaid pension asset in the form of reduced annual pension cost, and
4 The Texas retail amounts are $7,849,415 for qualified pension and $(205,855) for OPEB.
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1 therefore it is appropriate for SPS to earn a return on the asset as well. SPS's
2 thirteen-month average net prepaid pension asset balance as of June 30, 2017 is
3 projected to be $156,513,509 on a total company basis. SPS's request to include
4 the prepaid pension asset in rate base is discussed in further detail in Section IX of
5 my testimony.
6 Q. Will your testimony be updated for actual costs incurred in the three months
7 following the Test Year, April through June 2017. (the "Update Period")?
8 A. As discussed by SPS witness William A. Grant, SPS will file an update 45 days
9 after the application has been filed. That update will include actual costs incurred
10 to replace the estimates provided in the application for the time period of April 1,
11 2017 through June 30, 2017, which is referred to as the "Update Period." The
12 Update Period costs that include certain affiliate O&M labor overheads will be
13 addressed in the case update filings made by Ms. Reed, Mr. Freitas and me.
14 Additionally, I will provide updated G-2 schedules that incorporate updates to the
15 estimates that I have presented in my direct testimony, as well as the most current
16 information available to SPS but not provided in the direct filing.
17 Q. Were Attachments RRS-RR-1 and RRS-RR-4 through RRS-RR-7 prepared
18 by you or under your direct supervision and control?
19 A. Yes.
20 Q. Are Attachments RRS-RR-2 and RRS-RR-3 true and correct copies of the
21 documents that you have represented them to be?
22 A. Yes.
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1 Q. Were the portions of the RFP Schedules and Executive Summary you
2 sponsor or co-sponsor prepared by you or under your supervision and
3 control?
4 A. Yes.
5 Q. Do you incorporate the portions of SPS's RFP Schedules and Executive
6 Summary sponsored or co-sponsored by you into this testimony?
7 A. Yes.
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1 III. PENSION AND BENEFITS OVERVIEW
2 Q. Please summarize the pension and other benefits that SPS offers to its eligible
3 employees.
4 A. In addition to the cash compensation discussed by Ms. Reed, SPS offers the
5 following non-cash benefits to its employees:
6 • Pension and other post-employment and retirement benefits, which
7 include:
8 o a defined benefit qualified pension plan that provides eligible
9 employees with a defined benefit amount upon retirement;
10 o a non-qualified pension restoration benefit that allows SPS to attract
11 and retain employees who would otherwise be disadvantaged by the
12 restrictions imposed under the qualified pension plan;
13 o a retiree medical plan available to certain retired employees; and
14 o LTD benefits;
15 • Active health and welfare benefits, which include medical, dental,
l 6 pharmaceutical, vision, life insurance, and other miscellaneous benefits;
17 • Workers compensation benefits, including both self-insured and
18 third-party-insured benefits; and
19 • Other types of benefits, including a 401(k) defined contribution plan and
20 certain types of deferred compensation.
21 As I mentioned previously, SPS is not requesting recovery of its non-qualified
22 pension expense.
23 Q. What are the requested amounts for each of the elements of non-cash
24 compensation offered by SPS?
25 A. Table RRS-RR-1 (next page) sets forth the amounts of the pension and benefit
26 costs that SPS seeks to recover in rates. Column B represents the per book
27 amount for each element of expense during the Test Year. Column C shows the
28 incremental changes that result when the estimates for the Update Period are
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1
substituted for amounts incurred during the period from April 1, 2017 through
2
June 30, 2017. Column D contains the known and measurable adjustments for
3
changes that will occur after the end of the Update Period. Finally, Column E
4
shows the amount for each element of expense that is included in the cost of
5
service in this case.
6 Table RRS-RR-1
A B C D E
Benefit
Test Year (12 months
ended March 31, 2017)
Incremental Change Due
to Update Period
Estimates
Known and Measurable Adjustment
Amount Included in
Cost of Service
Qualified Pension $13,223,807 $143,726 - $13,367,533
FAS 106 Retiree Medical (323,926) (26,645) - (350,571)
FAS 112 Long-Term Disability (Self-Insured) (68,506) 58,174 - (10,332)
Active Health Care5 14,343,330 293,570 - 14,636,900
Long-Term Disability (Third-Party-Insured) 635,682 12,190 - 647,872
Life Insurance 138,203 (41) - 138,162
Miscellaneous Benefit Programs and Costs 710,872 11,966 - 722,838
401(k) Match 3,084,365 11,710 162,433 3,258,508
Miscellaneous Retirement-Related Costs 245,613 (11,690) - 233,923
Workers Compensation (Third-Party-Insured) 708,445 15,866 - 724,311
Total Pension and Benefits Expense 32,697,885 508,824 162,433 33,369,144
5 The per book amount for active health care in the cost of service is $14,464,947. That amount is
an estimate, as explained in Section V of this testimony, and it must be adjusted to reflect health care claims that were incurred near the end of the Test Year but not reported until after the Test Year. Adding the Incurred But Not Reported (`IBNR") amount, which is ($121,617), to the per book amount creates an actual Test Year amount of $14,343,330. The $171,953 adjustment to the per book amount in the cost of service is a combination of the IBNR adjustments and the $293,570 incremental change is due to Update Period estimates.
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1 Q. Is SPS seeking to recover any other amounts related to pension and benefits?
2 A. Yes. SPS also seeks Commission approval to continue including a prepaid
3 pension asset in rate base, consistent with the Commission's treatment of prepaid
4 pension assets in prior cases.
5 Q. Is SPS providing any credits related to pension and benefits?
6 A. Yes. The cost of service includes a credit in the amount of $(1,166,775) to reflect
7 that actual pension and OPEB expense amounts have been lower than the baseline
8 established in Docket No. 45524.
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1 IV. RECOVERY OF CURRENT PENSION AND OTHER POST- 2 EMPLOYMENT AND RETIREMENT BENEFITS EXPENSE
3 Q. What topic do you discuss in this section of your testimony?
4 A. I discuss the amounts requested for pension and other post-employment and
5 retirement benefits expenses, which include qualified pension expense, FAS 106
6 retiree medical expense, and FAS 112 LTD benefits.
7 Q. Does any Texas ratemaking standard address the recovery of pension and
8 OPEB expense?
9 A. Yes. PURA § 36.065(a) provides that the Commission "shall include in the rates
10 of an electric utility expenses for pension and other post-employment benefits, as
11 determined by actuarial or other similar studies in accordance with generally
12 accepted accounting principles, in an amount the [Commission] finds reasonable."
13 Q. Are the pension and other post-employment and retirement benefit amounts
14 that SPS seeks to include in the cost of service determined by actuarial
15 studies or similar studies prepared in accordance with Generally Accepted
16 Accounting Principles ("GAAP")?
17 A. Yes. SPS's pension and other post-employment and retirement benefit expense
18 amounts are calculated in accordance with actuarial standards, and the results are
19 set forth in actuarial studies that are attached to my testimony as Attachment
20 RRS-RR-2 and Attachment RRS-RR-3.
21 A. Qualified Pension
22 Q. How are qualified pension costs determined?
23 A. Pension costs are determined under FAS 87, Employers Accounting for
24 Pensions.
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1 Q. Please describe SPS's qualified pension plan and the nature of the costs of
2 the plan.
3 A. The qualified pension plan is a traditional defined benefit pension plan, which
4 promises bargaining employees monthly pension annuity payments based upon
5 their level of pay and years of service. It promises non-bargaining employees a
6 choice of either a lump sum payout or a monthly pension annuity based upon their
7 level of pay and years of service. Under a defined benefit pension plan, the
8 promised pensions are a commitment by SPS.
9 Q. Do accounting rules and laws determine the cost for SPS's pension plan?
10 A. Yes. As I noted earlier, SPS accounts for the cost of its pension plan under the
11 rules set forth in FAS 87, which prescribes the rules that companies must follow
12 in determining whether their pension costs comply with GAAP. However, FAS
13 87 does not dictate how a company must fund the plan.
14 The funding of the plan is determined based upon prudent business
15 practices, with constraints imposed by the requirements of the Pension Protection
16 Act of 2006, the Employee Retirement Income Security Act ("ERISA"), and the
17 Internal Revenue Code (IRC"):
18 • There are minimum required contributions;
19 • There are maximum contributions that can be deducted for tax purposes;
20 and
21 • SPS has a fiduciary responsibility to prudently protect the interests of the
22 plan participants and beneficiaries.
23 The rninimum and maximum funding rules set forth under the Pension Protection
24 Act, ERISA, and the IRC are different from the methodology used under FAS 87
25 to determine pension cost. Over the long run, the cumulative employer
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1 contributions made to a plan should equal the cumulative accounting costs, but in
2 the short and intermediate run there can be significant differences.
3 Q. Please explain how FAS 87 applies to regulated industries.
4 A. Because regulatory accounting must follow specific accounting standards unless
5 superseded by regulatory requirements, FAS 87 is used for regulatory accounting
6 by the vast majority of utility companies. In addition, PURA § 36.065 requires
7 that pension costs be determined by actuarial or other similar studies in
8 accordance with GAAP. Therefore, under PURA § 36.065, pension costs are
9 based on FAS 87.
10 Q. How is pension cost determined under FAS 87?
11 A. Under FAS 87, pension cost is composed of the following:
12 1. the value of pension benefits that employees will earn during the current
13 year (service cost);
14 2. increases in the present value of the pension benefits that plan participants
15 have earned in previous years (interest cost);
16 3. investment earnings on the pension plan assets that are expected to be
17 earned during the year (expected return on assets (TRON));
18 4. recognition of costs (or income) resulting from experience that differs
19 from the assumptions (amortization of unrecognized gains and losses); and
20 5. recognition of the cost of benefit changes the plan sponsor provides for
21 service the employees have already performed (amortization of
22 unrecognized prior service cost).
23 Q. Taking each of these five components in order, how is the service cost
24 component calculated?
25 A. The service cost component recognized in a period is the actuarial present value
26 of benefits attributed by the pension benefit formula to current employees service
27 during that period. Actuarial assumptions are used to reflect the time value of
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1 money (the discount rate) and the probability of payment (assumptions as to
2 mortality, turnover, early retirement, and so forth).
3 Q. Next, how is the interest cost component calculated?
4 A. The interest cost component recognized in a fiscal year is determined as the
5 increase in the projected benefit obligation (`PBO") due to the passage of time.
6 Measuring the PBO as a present value requires accrual of an interest cost at a rate
7 equal to the assumed discount rate. Essentially, the interest cost identifies the
8 time value of money by recognizing that anticipated pension benefit payments are
9 one year closer to being paid from the pension plan.
10 Q. How is the third component, EROA, calculated?
11 A. The EROA is determined based on the expected long-term rate of return on plan
12 assets and the market-related value of plan assets. The market-related value of
13 plan assets for SPS is a calculated value that recognizes changes in the fair value
14 in a systematic and rational manner over five years.
15 Q. With regard to the fourth component, what are the unrecognized gains and
16 losses?
17 A. Unrecognized gains and losses are the asset gains and losses or the liability gains
18 and losses from prior periods. In effect, those asset or liability gains and losses
19 arise when the experience in a prior period differed from what was expected.
20 Q. Please explain the distinction between asset gains and losses and liability
21 gains and losses.
22 A. Asset gains and losses arise when the actual returns on the pension trust assets in
23 prior years are greater than or lesser than the EROA. Suppose, for example, that
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1 the plan expects a 7% return on its pension trust assets, which total $1 billion.
2 The EROA for that year would be $70 million. If the actual return in that year is
3 9%, the asset gain will be $20 million. Of course, the opposite can also occur. If
4 the EROA is 7% and the actual return on the assets is 5%, the plan suffers a $20
5 million asset loss.
6 Liability gains and losses arise when the other components of pension cost
7 differ from expectations. Those components include such things as the discount
8 rate, the expected number of retirements, mortality rates, and wage increases. For
9 example, if SPS assumes a 4% discount rate at the beginning of the year but the
10 actual discount rate measured at year end for the next year turns out to be 5%,
11 SPS will have a liability gain because the higher discount rate reduces the amount
12 SPS must set aside to satisfy future pension liabilities.
13 Q. Is the distinction between asset gains and losses and liability gains and losses
14 important?
15 A. Yes. The distinction is important because, as I will discuss in more detail below,
16 the asset gains and losses are phased in over time, whereas the liability gains and
17 losses are not. Asset gains and losses are phased into an amortization "pool," for
18 lack of a better term, over a five-year period. Liability gains and losses are not
19 phased in, but instead are placed into the amortization pool in a single year.
20 Because gains and losses may reflect refinements in estimates as well as real
21 changes in economic values, and because some gains in one period may be offset
22 by losses in another or vice versa, FAS 87 does not require recognition of gains
23 and losses as a component of net pension cost in the period in which they arise.
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1 Q. Please describe what you mean by the term "phase-in" of gains or losses.
2 A. The term "phase-in" is used to describe the process of moving asset gains or
3 losses into an amortization pool. Under FAS 87, the asset gains or losses are
4 incorporated into the calculation of pension cost over a period of five years.
5 Thus, 20% of a gain or loss is phased into the amortization pool during the first
6 year after the gain or loss occurs, another 20% is phased into the amortization
7 pool during the second year after the gain or loss occurs, and so forth until the
8 fifth year, when the full amount of the gain or loss is phased-in. Unlike asset
9 gains or losses, liability gains and losses are not phased in, as I mentioned earlier.
10 The portion of gains and losses that enter the amortization pool are then amortized
11 over a specific period of years if they satisfy the criteria I discuss below.
12 Q. Why does SPS phase-in asset gains and losses and then amortize them over
13 the average years to retirement of active employees?
14 A. When SPS moved to FAS 87 accounting in 1987, it elected to phase-in asset gains
15 and losses and to amortize these gains and losses over a period not to exceed the
16 average remaining service life (average years to retirement) of employees. The
17 purpose of the election was to reduce financial statement volatility in individual
18 accounting periods by ensuring that gains and losses are spread out over time, and
19 that they are not recognized in just the period that they occur. This phase-in and
20 amortization approach reduces volatility in recognized cost by smoothing gains
21 and losses over the longest allowed duration.
22 Q. Why are asset gains and losses phased-in but not liability gains and losses?
23 A. The assumptions used to establish pension liability (e.g., mortality rates, discount
24 rates, etc.) typically do not vary greatly from year to year, and therefore the
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1 drafters of FAS 87 did not consider it necessary to require the phase-in of liability
2 gains and losses. In contrast, the market returns on pension fund assets can vary
3 greatly from year to year, as evidenced by the dramatic difference between the
4 EROA and the actual returns that SPS experienced on its pension fund assets in
5 2008. Because of the effects that such volatility would have on businesses'
6 income statements, the drafters of FAS 87 decided that it was appropriate to
7 phase-in market gains and losses.
8 Q. How are unrecognized gains and losses amortized?
9 A. SPS aggregates its current year's gains or losses with the prior years gains or
10 losses to calculate a net unamortized gain or loss. That net unamortized gain or
11 loss is then compared to the present value of the PBO and to the market-related
12 value of the assets in the pension trust. If the net unamortized gain or loss is
13 outside a 10% corridor — that is, if it is more than 10% of the greater of the PBO
14 or the market-related value of the trust assets — SPS must amortize that net gain or
15 loss. If amortization of the unrecognized gains or losses is required, the
16 amortization amount is equal to the amount of the unrecognized gain or loss in
17 excess of the corridor divided by the average remaining future service of the
18 active participants in the plan. For SPS's bargaining employees this is
19 approximately 14 years, and for SPS's non-bargaining employees it is
20 approximately 8 years.
21 Q. Returning to the five elements of FAS 87 pension cost, what is the fifth
22 element — unrecognized prior service cost?
23 A. Unrecognized prior service cost results from pension plan amendments that
24 change benefits based on services rendered in prior periods. FAS 87 does not
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1 generally require the cost of providing such retroactive benefits (prior service
2 cost) to be included in net periodic pension cost entirely in the year of the
3 amendment but instead provides for recognition over the future years.
4 Q. How is unrecognized prior service cost amortized?
5 A. Unrecognized prior service cost is amortized in the same manner as unrecognized
6 gains and losses, with the exception of the 10% corridor.
7 Q. Please summarize the calculation that is required to be used under FAS 87 to
8 quantify annual pension cost.
9 A. Annual pension cost is quantified using the following calculation:
10 Current service cost
11 + Interest cost
12 EROA
13 +/- Loss (gain) due to difference between expected and actual experience of
14 plan assets or liabilities from prior periods
15 +/- Amortization of unfunded prior service cost
16 = Annual pension cost
17 Q. Is the annual pension cost produced by this formula always a positive
18 number?
19 A. No. In some years, the negative amounts in the calculation (i.e., the EROA and
20 the gains resulting from the difference between expected and actual experience
21 from prior periods) can be larger than the positive amounts. When that happens,
22 the annual pension cost is actually negative. And if that occurs in a rate case test
23 year, the annual pension cost included in the cost of service may be a negative
24 number, which reduces the overall cost of service. But even when the annual
25 pension cost is negative, shareholders are still providing the capital to fund the
26 prepaid pension asset.
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1 Q. What amount of qualified pension expense did SPS incur during the Test
2 Year?
3 A. The Test Year per book qualified pension expense was $13,223,807 (total
4 company) for the twelve months ended March 31, 2017.
5 Q. Has SPS determined the amount of qualified pension expense for the
6 Updated Test Year?
7 A. Yes. The Updated Test Year is the period July 1, 2016 through June 30, 2017.
8 The qualified pension expense for the Updated Test Year is $143,726 higher than
9 the expense during the Test Year. Mr. Freitas has included the qualified pension
10 expense for the Updated Test Year in his cost of service for that period. Thus,
11 SPS will not update this expense in its 45-day Update.
12 Q. Why did qualified pension expense increase during the Update Period
13 relative to the corresponding period from 2016?
14 A. The qualified pension expense increased during the Update Period relative to the
15 corresponding period from 2016 primarily due to a decrease in the discount rates
16 used to calculate the 2017 expense.
17 Q. Is SPS proposing to make any known and measurable changes to the
18 qualified pension expense for events occurring after the end of the Update
19 Period?
20 A. No.
21 B. Retiree Medical
22 Q. How are retiree medical costs determined?
23 A. Retiree medical costs are determined under FAS 106, Employers Accounting for
24 Post Retirement Benefits Other Than Pensions. The components and calculation
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1 are identical to FAS 87, with one exception: The pension asset gains and losses
2 are phased into the loss amortization calculation by 20% each year, whereas
3 retiree medical asset gains and losses are not.
4 Q. Please describe SPS's retiree medical plan and the plan expenses.
5 A. SPS's plan consists primarily of retiree medical benefits, but it also includes
6 retiree life and dental insurance. SPS eliminated those benefits for all active non-
7 bargaining ernployees more than ten years ago, and SPS bargaining employees
8 hired on or after January 1, 2012 no longer receive retiree medical benefits. Thus,
9 the current expense for retiree medical benefits is a legacy of the prior programs.
10 Q. What amount of retiree medical expense did SPS incur during the Test
1 1 Year?
12 A. The Test Year SPS retiree medical expense was $(323,926) (total company) for
13 the twelve months ending March 31, 2017.
14 Q. Has SPS determined the amount of retiree medical plan and the plan
15 expenses for the Updated Test Year?
16 A. Yes. The retiree medical expense for the Updated Test Year is $(26,645) lower
17 than the expense during the Test Year, which makes the amount in the cost of
18 service even more negative. Mr. Freitas has included the retiree medical expense
19 for the Updated Test Year in his cost of service for that period. Thus, SPS will
20 not update this estimate in its 45-day Update.
21 Q. Why did retiree medical expense decline during the Update Period relative to
22 the corresponding period from the Test Year?
23 A. The retiree medical expense decreased during the Update Period relative to the
24 corresponding period from the Test Year primarily due to favorable claims
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1 experience. That decrease was offset to some degree by a lower EROA and
2 unfavorable historical asset performance.
3 Q. Is SPS proposing to make any known and measurable changes to the retiree
4 medical expense for events occurring after the end of the Update Period?
5 A. No.
6 C. Self-Insured Long-Term Disability
7 Q. Please describe LTD in more detail and explain how it is accounted for.
8 A. The LTD costs are attributable to benefits provided by SPS to former or inactive
9 employees after employment but before retirement. The LTD plan provides
10 employees with income protection by paying a portion of an employee's income
11 while he or she is disabled by a covered physical or mental impairment.
12 SPS has two types of LTD — a self-insured benefit and a third-party-
13 insured benefit. In a third-party-insured plan, which I will discuss in more detail
14 later in this testimony, SPS purchases an insurance plan from an outside insurance
15 provider that assumes the risk. In a self-insured plan, SPS provides the benefits to
16 the covered individuals and therefore effectively acts as the insurer. For the self-
17 insured piece, SPS is required to accrue for LTD costs under FAS 112,
18 Employers Accounting for Post-employment Benefits. The FAS 112 accrual
19 represents the expected disability benefit payments for employees that are not
20 expected to return to work.
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1 Q. Which groups of employees are covered under the self-insured plan and
2 which groups are covered under the third-party-insured plan?
3 A. Within the LTD benefit, all employees disabled before January 1, 2008 are
4 covered under the self-insured plan, and all employees disabled on and after
5 January 1, 2008 are covered under a third-party-insured plan.
6 Q. What amount of expense did SPS incur during the Test Year for self-insured
7 LTD benefits?
8 A. The self-insured LTD benefit costs in the Test Year were $(68,506) (total
9 company) for the twelve months ending March 31, 2017.
10 Q. Has SPS determined the amount of LTD benefits costs for the Updated Test
1 1 Year?
12 A. Yes. The self-insured LTD expense for the Updated Test Year is $58,174 higher
13 than the expesnes during the Test Year. Mr. Feitas has included the self-insured
14 LTD expense for the Updated Test Year in his cost of service for that period.
15 Thus, SPS will not update this expense in its 45-day Update.
16 Q. Why did self-insured LTD costs increase during the Update Period relative
17 to the corresponding period from the Test Year?
18 A. The self-insured LTD expense increased during the Update Period relative to the
19 corresponding period from the Test Year due to an updated actuarial calculation
20 provided by Willis Towers Watson in 2017 to reflect the most recent assumptions
21 for 2017 costs. The main driver for the increase was a change in the discount rate
22 used to calculate the 2017 expense.
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1 Q. Is SPS proposing to make any known and measurable changes to the self-
2 insured LTD expense for events occurring after the end of the Update
3 Period?
4 A. No.
5 D. Reasonableness of SPS's Pension and Other Post-Employment
6 and Retirement Benefits Expense
7 Q. Are the amounts of SPS's pension and other post-employment and
8 retirement benefits expense reasonable?
9 A. Yes. SPS follows a well-established, objective, and verifiable process to
10 determine the assumptions used within the actuarial calculations that yield the
11 pension and other post-employment and retirement benefits expense amounts for
12 the Test Year. The assumptions and the actuarially calculated total cost amounts
13 are reflected in my Attachment RRS-RR-3, which is the actuarial study for 2017.
14 In addition, the reasonableness of Xcel Energy's Total Rewards Program design,
15 which includes pension and other post-employment and retirement benefits, is
16 discussed in the direct testimony of Ms. Reed.
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1 V. HEALTH AND WELFARE COSTS
2 Q. What topics do you discuss in this section of your testimony?
3 A. I discuss four types of active health and welfare costs, which are: (1) active
4 health care costs; (2) fully-insured LTD costs; (3) life insurance costs; and (4)
5 miscellaneous benefit costs.
6 A. Active Health Care
7 Q. What types of costs are included in active health care?
8 A. Active health care costs are all costs associated with providing health care
9 coverage to employees. Those costs include medical, pharmacy, dental and vision
10 claims, administrative fees, employee withholdings, pharmacy rebates, Health
11 Savings Account (HSN') contributions, transitional reinsurance fees, trustee
12 fees, and interest income.
13 Q. What was the Test Year amount of active health care expense?
14 A. The Test Year amount of active health care expense was $14,343,330 on a total
15 company basis for the twelve months ending March 31, 2017. That amount is
16 also shown in Table RRS-RR-1.
17 Q. Does the Test Year amount match the per book amount of active health care
1 8 costs?
19 A. No. The per book numbers for active health care amounts include estimates
20 because there is generally an average lag of approximately 30 days between when
21 health care is provided and when SPS receives a bill for that care.6 Therefore, the
22 actual amount of active health care expense was not available at the time SPS
6 The difference between the estimated amount and the actual amount is generally not material enough to restate SPS's GAAP books when the actual amount becomes known.
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1 recorded its per book amount at year-end 2016. Because SPS needs to close its
2 books before it receives all of those health care claims, it takes the actual amounts
3 recorded through a certain point in the year and estimates the additional amount
4 that will be incurred but not reported by the end of the year, which is the IBNR
5 reserve. During the following year, SPS receives the actual amounts attributable
6 to care provided in the last part of the prior year, and at that time it trues up the
7 IBNR estimate to the actual incurred expense.
8 Q. Has SPS provided the estimated amount of Active Health Care costs for the
9 Update Period?
10 A. Yes. SPS has estimated that active health care expense for the Updated Test Year
11 will be $293,570 higher than the expense was for the Test Year. SPS will update
12 this estimate with actuals in its 45-day Update.
13 Q. Why did Active Health Care expense increase during the Update Period
14 relative to the corresponding period from 2016?
15 A. The active health care expense increased 2% during the Update Period relative to
16 the corresponding period from 2016 primarily due to the normal medical trend
17 that is consistent with industry trend expectations.
18 Q. Is SPS proposing to make any known and measurable changes to the Active
19 Health Care expense for events occurring after the end of the Update Period?
20 A. No.
21 B. Third-Party-Insured Long-Term Disability
22 Q. Please describe the third-party-insured LTD costs that SPS incurs.
23 A. As explained earlier, SPS offers long-term disability coverage that provides
24 benefits to former or inactive employees after employment but before retirement.
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1 The LTD plan provides employees with income protection by paying a portion of
2 an employee's income while he or she is disabled by a covered physical or mental
3 impairment. In a third-party-insured plan, SPS purchases an insurance plan from
4 an outside insurance provider that assumes the risk, and the cost of the third-
5 party-insured piece is simply the cost of the insurance premium incurred each
6 year along with any other miscellaneous costs.
7 Q. What groups of employees are covered under the third-party-insured
8 benefit?
9 A. As noted earlier, all employees disabled on and after January 1, 2008 are covered
10 under the third-party-insured plan.
11 Q. What amount of expense did SPS incur during the Test Year for third-party-
12 insured LTD benefits?
13 A. SPS incurred $635,682 on a total company basis for third-party-insured LTD
14 benefits.
15 Q. Has SPS provided the estimated amount of third-party-insured LTD expense
16 for the Update Period?
17 A. Yes. SPS has estimated that third-party-insured LTD expense for the Updated
18 Test Year will be $12,190 higher than the expense was during the Test Year. SPS
19 will update this estimate with actuals in its 45-day Update.
20 Q. Why did third-party-insured LTD increase during the Update Period
21 relative to the corresponding period from 2016?
22 A. The third-party-insured LTD increased during the Update Period relative to the
23 corresponding period from 2016 due to small changes in participant counts,
24 insurance rates, and participant salary levels.
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1 Q. Is SPS proposing to make any known and measurable changes to the third-
2 party-insured LTD expense for events occurring after the end of the Update
3 Period?
4 A. No.
5 C. Life Insurance
6 Q. Please describe the life insurance cost that SPS incurs.
7 A. The life insurance category consists of life insurance premiums and offsetting
8 employee life insurance withholdings. Life insurance is provided to
9 non-bargaining employees at 100% of base pay and to SPS bargaining employees
10 at 50% of base pay. Employees also have the option to purchase additional life
11 insurance.
12 Q. What amount of expense did SPS incur during the Test Year for life
13 insurance benefits?
14 A. SPS incurred $138,203 in costs on a total company basis for life insurance
15 benefits.
16 Q. Has SPS provided the estimated amount of life insurance expense for the
17 Update Period?
18 A. Yes. SPS estimates that life insurance expense for the Updated Test Year will
19 decrease by $(40) from the level of expense in the Test Year. SPS will update
20 this estimate with actuals in its 45-day Update.
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3333
1 Q. Why did life insurance decrease during the Update Period relative to the
2 corresponding period from 2016?
3 A. The life insurance expense decreased immaterially during the Update Period
4 relative to the corresponding period from 2016 primarily due to small changes in
5 participant counts, participant salary levels, and insurance rates.
6 Q. Is SPS proposing to make any known and measurable changes to the life
7 insurance expense for events occurring after the end of the Update Period?
8 A. No.
9 D. Miscellaneous Benefits
10 Q. What types of miscellaneous benefit programs does SPS offer to its
11 employees?
12 A. The types of costs included in the miscellaneous benefit programs and costs
13 category are:
14 • Tuition reimbursement,
15 • Employee Assistance Program costs,
16 • Wellness program costs,
17 • Costs incurred by the HR Service Center to answer employee retirement
18 or benefit questions,
19 • Health and welfare plan actuarial and audit fees,
20 • Administrative fees for short-term and long-term disability plans, and
21 • Administrative fees for employee flexible spending and HSA's.
22 Q. What amount of expense did SPS incur during the Test Year for
23 miscellaneous benefits?
24 A. SPS incurred $710,872 on a total company basis for miscellaneous benefits.
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3334
1 Q. Has SPS provided the estimated amount of miscellaneous benefits expense
2 for the Update Period?
3 A. Yes. SPS estimates that miscellaneous benefits expense for the Updated Test
4 Year will be $11,966 higher than the expense was during the Test Year. SPS will
5 update this estimate with actuals in its 45-day Update.
6 Q. Why did miscellaneous benefit expense increase during the Update Period
7 relative to the corresponding period from 2016?
8 A. The miscellaneous benefit expense increased during the Update Period relative to
9 the corresponding period from 2016 primarily due to an increase in utilization of
10 SPS's various employee benefit programs and general fee increases.
11 Q. Is SPS proposing to make any known and measurable changes to the
12 miscellaneous benefit expense for events occurring after the end of the
13 Update Period?
14 A. No.
15 E. Reasonableness of Health and Welfare Costs
16 Q. Are the amounts of SPS's health and welfare expense reasonable?
17 A. Yes. It is appropriate for the Test Year cost of service to include these benefits
18 because they reflect a reasonable and necessary level of expense. As Ms. Reed
19 explains in more detail, Xcel Energy's compensation plans and benefits are
20 required for Xcel Energy and its subsidiaries to attract, retain, and motivate
21 employees needed to perform the work necessary to provide quality services for
22 SPS customers. Without these benefits, SPS and XES would have to pay
23 significantly higher current compensation to attract employees.
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3335
1 VI. WORKERS COMPENSATION COSTS
2 Q. Is SPS seeking recovery of the costs associated with workers' compensation
3 benefits?
4 A. Yes. SPS is seeking recovery of third-party-insured workers' compensation
5 benefits.
6 Q. Please briefly describe SPS's third-party-insured workers' compensation
7 program.
8 A. For employees who are injured on or after August 1, 2001, all workers
9 compensation benefits are covered under an insured program. The only cost to
10 Xcel Energy for this benefit cost is the insurance premium. In a third-party-
11 insured plan, SPS purchases an insurance plan from an outside insurance provider
12 that assumes the risk, and the cost of the third-party-insured piece is simply the
13 cost of the insurance premium incurred each year along with any other
14 miscellaneous costs.
15 Q. How are third-party-insured workers' compensation amounts determined?
16 A. The costs are calculated by actuaries of the vendor from whom SPS purchases the
17 insurance. The actuaries presumably base the costs on company-specific
18 historical loss data and payroll to determine exposure related to the policy period.
19 Q. What amount of expense did SPS incur during the Test Year for third-party-
20 insured workers' compensation benefits?
21 A. SPS incurred $708,445 on a total company basis for third-party-insured workers'
22 compensation benefits.
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3336
1 Q. Has SPS provided the estimated third-party-insured workers compensation
2 expense for the Update Period?
3 A. Yes. SPS has estimated that third-party-insured workers compensation expense
4 will increase by $15,866 from the Test Year to the Updated Test Year. SPS will
5 update this estimate with actuals in its 45-day Update.
6 Q. Why did third-party-insured workers compensation expense increase
7 during the Update Period relative to the corresponding period from 2016?
8 A. The third-party-insured workers' compensation expense increased during the
9 Update Period relative to the corresponding period from 2016 because of higher
10 annual premiums that took effect starting in November 2016.
11 Q. Is SPS proposing to make any known and measurable changes to the third-
12 party-insured workers' compensation expense for events occurring after the
13 end of the Update Period?
14 A. No.
15 A. Reasonableness of Workers' Compensation Benefit Costs
16 Q. Is it reasonable for the Test Year cost of service to include third-party-
17 insured workers' compensation costs incurred by SPS?
18 A. Yes. It is appropriate for the Test Year cost of service to include these benefits
19 because they reflect a reasonable and necessary level of expense. Xcel Energy's
20 workers' compensation plans and benefits are required for Xcel Energy and its
21 subsidiaries to attract, retain, and motivate employees needed to perform the work
22 necessary to provide quality services for SPS customers. Without these benefits,
23 SPS and XES would have to pay significantly higher current compensation to
24 attract employees.
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3337
1 VII. OTHER BENEFIT COSTS
2 Q. Is SPS seeking recovery of any retirement benefits in addition to the ones
3 discussed earlier?
4 A. Yes. SPS is seeking recovery of 401(k) match costs and miscellaneous
5 retirement-related costs.
6 A. 401(k) Match
7 Q. Please briefly describe SPS's 401(k) match plan.
8 A. SPS's retirement income plan is based on a combination of a defined benefit
9 pension plan and a 401(k) plan, which is a defined contribution plan. Unlike
10 some defined benefit pension plans, SPS's defined benefit pension plan is not
11 intended to provide an employee's total retirement income. Rather, the defined
12 benefit pension plan and 401(k) plan are designed so that the two plans in
13 combination provide retirement income to SPS and XES employees.
14 Q. How are the 401(k) match costs determined?
15 A. The 401(k) plan is a defined contribution plan to which employees must
16 contribute in order to obtain employer matching. It is based on the amount that
17 employees contribute as a percentage of their salary with a maximum match of
18 4%. For the majority of SPS's workforce, the employee must contribute 8% of
19 eligible income for SPS to contribute the maximum company match of 4% of
20 eligible income. The remaining employees, who are in the Traditional Plan,
21 receive a maximum match of $1,400.
22 Q. What amount of expense did SPS incur during the Test Year for 401(k)
23 match benefits?
24 A. SPS incurred $3,084,365 on a total company basis for 401(k) benefits.
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3338
1 Q. Has SPS provided the estimated amount 401(k) expense for the Update
2 Period?
3 A. Yes. SPS estimates that the 401(k) expense for the Updated Test Year will be
4 $11,710 higher than the level of expense in the Test Year. SPS will update this
5 estimate with actuals in its 45-day Update.
6 Q. Is SPS proposing to make any known and measurable changes to the 401(k)
7 expense for events occurring after the end of the Update Period?
8 A. Yes. SPS is requesting a known and measurable adjustment of $162,433 for
9 401(k) benefit expense. Because the 401(k) match is based on the amount that
10 employees contribute as a percentage of their salary, escalation factors of 3% and
11 2.5% have been applied to non-bargaining and bargaining employees,
12 respectively. For justification of the merit increase, please refer to Ms. Reed's
13 direct testimony.
14 B. Miscellaneous Retirement-Related Costs
15 Q. What costs are included in miscellaneous retirement-related costs?
16 A. This category includes costs such as 401(k) plan administration fees,
17 compensation consulting and survey costs, retirement plan actuarial and audit
18 fees, and a small amount for the deferred compensation plan.
19 Q. What amount of expense did SPS incur during the Test Year for
20 miscellaneous retirement-related costs?
21 A. SPS incurred $245,613 on a total company basis for miscellaneous retirement-
22 related costs.
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3339
1 Q. Has SPS provided the estimated amount of miscellaneous retirement-related
2 expense for the Update Period?
3 A. Yes. SPS estimates that miscellaneous retirement-related expense for the
4 Updated Test Year be $(11,690) lower than the level in the Test Year. SPS will
5 update this estimate with actuals in its 45-day Update.
6 Q. Why did miscellaneous retirement-related costs decrease during the Update
7 Period relative to the corresponding period from 2016?
8 A. The miscellaneous retirement-related expense decreased during the Update Period
9 relative to the corresponding period from 2016 primarily due to various changes
10 in SPS's professional consulting fee costs.
11 Q. Is SPS proposing to make any known and measurable changes to the
12 miscellaneous retirement-related costs for events occurring after the end of
13 the Update Period?
14 A. No.
15 C. Reasonableness of Other Benefit Costs
16 Q. Is it reasonable for the Test Year cost of service to include the 401(k) match
17 and miscellaneous retirement-related costs incurred by SPS?
18 A. Yes. It is appropriate for the Test Year cost of service to include these benefits
19 because they reflect a reasonable and necessary level of expense. Xcel Energy's
20 compensation plans and benefits are required for Xcel Energy and its subsidiaries
21 to attract, retain, and motivate employees needed to perform the work necessary
22 to provide quality services for SPS customers. Without these benefits, SPS and
23 XES would have to pay significantly higher current cornpensation to attract
24 employees.
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3340
1 VIII. PENSION AND OPEB RESERVE ACCOUNT
2 Q. Does SPS defer pension and OPEB expense amounts that differ from the
3 levels of pension and OPEB amounts included in base rates?
4 A. Yes. PURA § 36.065(b) allows a utility to establish a reserve account to record
5 the difference between the annual amount of pension and OPEB expense
6 approved in the utility's last general rate case and the annual amount of pension
7 and OPEB expense that the utility actually incurs. If the amount of pension and
8 OPEB expense in the utility's approved rates is greater than the actual expense,
9 the utility will have a surplus in its reserve account. If the amount of pension and
10 OPEB expense in the utility's approved rates is less than the actual expense, the
11 utility will have a shortage in its reserve account.
12 Q How is the reserve account treated for ratemaking purposes?
13 A. PURA § 36.065 states that if a reserve account for pension and OPEB expense is
14 established, the Commission:
15 at a subsequent general rate proceeding shall:
16 (1) review the amounts recorded to the reserve account to determine
17 whether the amounts are reasonable expenses;
18 (2) determine whether the reserve account has a surplus or shortage
19 under Subsection (c); and
20
(3)
subtract any surplus from or add any shortage to the electric
21
utility's rate base with the surplus or shortage amortized over a
22
reasonable time.
23 Q. Did the Commission establish baselines for the pension and OPEB tracker in
24 SPS's last rate case?
25 A. Yes. In Docket No. 45524, the parties agreed to a baseline amount of
26 $15,290,257 (total company) for qualified pension expense, with a Texas retail
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3341
1 amount of $8,796,485. The parties agreed to a OPEB expense baseline of
2 $(401,287) (total company), with the Texas retail amount being $(230,860).7
3 Q. What is the total amount of pension and OPEB costs related to the tracker
4 that SPS is requesting to recover in this case?
5 A. As noted earlier in my testimony, SPS is proposing to amortize the pension and
6 OPEB credit of $(1,166,775) for the Texas retail jurisdiction. That amount is the
7 net of two balances:
8 • The first amount represents the unamortized balance of the pension and
9 OPEB amounts deferred from prior cases, which is $415,879. That
10 amount reflects accruals in excess of the agreed upon baselines set in
11 Docket Nos. 38147, 40824 and 42004.
12 • The second amount represents the total deferrals for January 1, 2016
13 through June 30, 2017, which total $(1,582,654).
14 Mr. Freitas has reflected the $(1,166,775) of net deferred pension and OPEB
15 expense in the cost of service study he presents. The deferred amounts appear
16 under FERC Account 92603.
17 Q. How did SPS calculate the unamortized balance of the pension and OPEB
1 8 amounts deferred from prior cases?
19 A. SPS calculated the unamortized balance of pension and OPEB amounts deferred
20 from prior cases by the following steps:
21 • In Docket No. 45524, the parties agreed that SPS would be allowed to
22 recover a deferred pension and OPEB expense balance of $1,841,525 over
23 a period of 24 months beginning on July 1, 2016, which yields a monthly
24 amount of $76,730. ($1,841/525 / 24 = $76,730).
7 Docket No. 45524, Application of Southwestern Public Service Company for Authority to Change Rates, Unopposed Stipulation at 6 and Attachment D.
Schrubbe Direct — Revenue Requirement Page 42
RR 6 - 235 of 443 3342
1 • Under PURA § 36.211, the rates set in this docket are to become effective
2 155 days after filing, which will be on or about January 18, 2018. As a
3 result, approximately five and one half months worth of amortized costs
4 will remain unrecovered when the rates set in this case become effective.
5 • Multiplying 5.42 months by $76,730 per month equals an unamortized
6 balance of $415,879. The calculation appears on my Attachment
7 RRS-RR-5.
8 Q. How did SPS calculate the deferral amount to be amortized?
9 A. For the period from January 1, 2016 through July 1, 2016, SPS compared the
10 actual amounts of pension and OPEB expense to the baseline expense amounts set
11 in Docket No. 43695. For the period from August 1, 2016 to June 30, 2017, SPS
12 compared the actual amounts of pension and OPEB expense to the baseline
13 amounts established in Docket No. 45524.
14 Q. What is the total of the deferral amounts that SPS is asking to recover?
15 A. The table below shows the unamortized amounts for prior periods and the amount
16 of deferrals requested in this case:
17 Table RRS-RR-2
Pension and OPEB Deferrals
Pension and OPEB expense deferred from prior cases $415,879
Pension and OPEB expense deferred from January 1, 2016 to June 30, 2017 (1,582,654)
Total Net Pension and OPEB Deferrals (1,166,775)
18 Q. How does SPS propose to treat the amount in the reserve account?
19 A. SPS proposes to amortize the accrued amount over a one-year period and to
20 reimburse the full amount. I have supplied the accrued balance excess amount to
21 Mr. Freitas, and he has reflected it in the cost of service calculation.
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3343
1 Q. Are the amounts of pension and OPEB expense recorded in the reserve
2 account reasonable?
3 A. Yes. The pension and OPEB expense amounts are reasonable for the reasons
4 discussed earlier in connection with the forward-looking pension and OPEB
5 expense. SPS's pension plans are administered prudently and in accordance with
6 GAAP, and the amounts contributed are consistent with the actuarial projections
7 that are based on third-party projections and assumptions.
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3344
1 IX. SPS'S PREPAID PENSION ASSET
2 Q. What topic do you discuss in this section of your testimony?
3 A. I describe SPS's prepaid pension asset and explain that it should be included in
4 rate base.
5 Q. Has the Commission addressed this issue in prior cases?
6 A. Yes, this was a contested issue in Docket No. 43695. In the Docket No. 43695
7 order, the Commission allowed SPS to include its prepaid pension asset in rate
8 base.8 Thus, I am recommending the same ratemaking treatment in this case that
9 the Commission approved in Docket No. 43695. The Commission accurately
10 noted in that case that "[i]nvestment income on the prepaid pension asset reduces
11 qualified pension costs calculated under FAS 87, which benefits customers by
12 reducing the amount of pension costs included in base rates."9 The Commission
13 also allowed the utilities to include their prepaid pension assets in rate base in
14 Docket Nos. 40443,1° 39896,11 and 33309,12 among other cases.
15 Q. What is a prepaid pension asset?
16 A. A prepaid pension asset represents the difference between: (1) the cumulative
17 actuarially determined net periodic pension cost calculated in accordance with
8 Docket No. 43695, Order at 22, Finding of Fact No. 53 ("The prepaid pension asset is appropriately included in rate base because it represents a prepayment by SPS.").
9 Docket No. 43695, Order at 22, Finding of Fact No. 51. 10 Application of Southwestern Electric Power Company for Authority to Change Rates and
Reconcile Fuel Costs, Docket No. 40443, Order on Rehearing at 29, Finding of Fact Nos. 133-136 (Mar. 6, 2014).
ii Application of Entergy Texas, Inc. for Authority to Change Rates, Reconcile Fuel Costs, and Obtain Deferred Accounting Treatment, Docket No. 39896, Order on Rehearing at 14, Finding of Fact Nos. 27-28A (Nov. 1, 2012).
12 Application of AEP Texas Central Company for Authority to Change Rates, Docket No. 33309,
Order on Rehearing at 6 (Mar. 4, 2008).
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RR 6 - 238 of 443 3345
1 FAS 87; and (2) the cumulative cash amounts contributed to the pension trust
2 fund.
3 Q. Please provide an example of how the difference arises.
4 A. Suppose that the pension plan has been in existence for five years, and that the
5 cash contribution to the pension trust for each of five years has been $100 million,
6 whereas the pension cost calculated in accordance with FAS 87 has been $90
7 million in each of those five years. Table RRS-RR-3 shows how the excess of
8 cash contributions each year creates a cumulative prepaid pension asset:
9 Table RRS-RR-3 (amounts in millions)
Year Pension Contribution
Pension Cost
Cumulative Prepaid
Pension Asset
1 $100 $90 $10
2 $100 $90 $20
3 $100 $90 $30
4 $100 $90 $40
5 $100 $90 $50
Total $500 $450 $50
10
At the end of the five year period, the utility has cumulative cash contributions of
11
$500 million and cumulative pension cost of $450 million, which produces a
12
prepaid pension asset of $50 million, as shown in Figure RRS-RR-1 (on the next
13
page):
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3346
1 Figure RRS-RR-1
Prepaid Pension Asset = $50
Cumulative amount contributed to pension trust = $500 Cumulative amotmt
recognizedin annual pension cost = $450
2 Q. Why are the contributions and cost different in any given year?
3 A. As I explained earlier in my discussion of qualified pension expense, the cost
4 calculation is governed FAS 87, but the contributions are driven by federal law
5 requirements under ERISA, the IRC, and the Pension Protection Act. Although
6 the cost and contribution calculations both use accrual methodologies, the
7 assumptions, attribution methods, and periods of time over which the costs are
8 required to be recognized are different and thus can often result in different
9 annual amounts.
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Page 47
3347
1 Q. Can the utility withdraw the prepaid pension asset and use it to fund capital
2 requirements or to pay for O&M expense?
3 A. No. Federal law prohibits the withdrawal of any amounts from the pension trust
4 fund except for the payment of benefits and plan expenses. After the
5 contributions are made, they are essentially locked away.
6 Q. Does SPS currently have a prepaid pension asset?
7 A. Yes. The thirteen-month average of the prepaid pension asset balance as of June
8 30, 2017 is $156,513,509 on a total company basis.
9 Q. Is SPS seeking to include that prepaid pension asset in rate base?
10 A. Yes. SPS is requesting Commission approval to include the Texas retail
11 jurisdictional share of the prepaid pension asset in rate base and to earn a return
12 on that portion of the rate base at the weighted average cost of capital ("WACC")
13 that SPS has proposed in this case, which is 7.91%.
14 Q. Do you recommend that the Commission include the prepaid pension asset in
15 rate base?
16 A. Yes. The standard ratemaking practice is for prepayments to earn a return at the
17 utility's WACC. For example, Texas retail customers effectively earn a return on
18 the Accumulated Deferred Income Tax ("ADIT") balance included in the cost of
19 service at SPS's WACC because that ADIT balance is removed from rate base,
20 meaning customers are not paying a return on the portion of rate base equal to the
21 ADIT balance. Moreover, it is reasonable and equitable to include the prepaid
22 pension asset in rate base and for SPS to earn a return on it because customers are
23 also earning a return on the prepaid pension asset.
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3348
1 Q. Please explain what you mean when you state that customers are also earning
2 a return on the prepaid pension asset.
3 A. As I explained in a prior section of my testimony, one of the components of the
4 annual pension expense calculation is the return that the pension trusts are
5 expected to earn on the assets in the trust. Suppose, for example, that a pension
6 trust has assets of $500 million and is expected to earn a return of 7% in the
7 current year. Under those assumptions, $35 million would be included in the
8 annual pension cost calculation as the EROA. As I explained in a prior section,
9 the EROA is subtracted from the service cost and other elements of the annual
10 pension cost. Therefore, in this example, the return on the pension trusts would
11 reduce annual pension cost by $35 million.
12 Q. Does the pension trust fund balance that is multiplied by the EROA include
13 the prepaid pension asset?
14 A. Yes. As shown in Figure RRS-RR-2 (on the next page), customers receive the
15 benefit of the earnings on the entire amount of assets in the pension trust, not just
16 the amount that has been recognized in annual pension cost.
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3349
1 Figure RRS-RR-213
Prepaid Pension Asset =
$50 million
Amount on which custorners earn a
return $500 million x .07 —
$35 million
Cumulative amount recogni zed in annual
pension cost = $450 million
I
2 That means all of the assets in the pension trust, including the assets that comprise
3 the prepaid pension asset, are used and useful to SPS's Texas retail customers.
4 Q. Does the fact that customers are receiving a return on the prepaid pension
5 asset portion of the trust funds justify including the prepaid pension asset in
6 rate base and allowing SPS to earn a return on it?
7 A. Yes. As demonstrated in Figure RRS-RR-3 (on the next page), including the
8 prepaid pension asset in rate base provides a return to the utility, and that return
9 offsets the reduction in the revenue requirement that results from the earnings on
I 0 the prepaid pension asset included in the annual pension cost. With an exception
1 1 I will discuss below, the return on the prepaid pension asset portion of rate base is
13 The amounts in this figure are just examples to show that customers earn a return on the entire amount in the pension trust fund, including the prepaid pension asset. The actual prepaid pension asset on which SPS's customers earn a return is larger than $50 million.
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RR 6 - 243 of 443 3350
1 simply the mirror image of the return that customers receive as a result of
2 earnings on the prepaid pension asset.
3 Figure RRS-RR-3
Amount in Pension Trust Fund
Prepaid Pension Asset
Included in Rate Base: Earns a return at weighted average cost of capital
Earns a return at EROA; return amount subtracted from annual
pension cost
i .'
',. i ,
Cumulative amount
recognized in annual
pension cost
4 Thus, if customers receive the benefit of the earnings on the prepaid pension
5 asset, it is appropriate for SPS to receive a return on the prepaid pension asset
6 portion of rate base. Conversely, if SPS does not receive a return on the prepaid
7 pension asset portion of rate base, customers should not receive the benefit of the
8 earnings on the prepaid pension asset.
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RR 6 - 244 of 443 3351
1 Q. How much are SPS's customers saving in annual pension cost as a result of
2 the prepaid pension asset?
3 A. As Table RRS-RR-4 shows, SPS's customers are saving $10.6 million per year in
4 annual pension cost as a result of the prepaid pension asset.
5 Table RRS-RR-4
Prepaid Pension Asset 13-Month
Cost Reduction from Prepaid
Pension Plan Date Average EROA Pension Asset
NCE Non- 6/30/2017 to Bargaining 6/30/2017 $32,074,372 6.90% $2,213,132
6/30/2017 to SPS Bargaining 6/30/2017 $124,439,138 6.75% $8,399,642
Total $156,513,509 510,612,773
6 Q. Please explain SPS's request regarding its prepaid pension asset.
7 A. SPS is requesting that the Test Year qualified prepaid pension asset of
8 $156,513,509 (total company) be included in rate base to provide a corresponding
9 return to shareholders. Otherwise, the qualified prepaid pension asset is solely
10 generating a return for customers through lower pension expense. The prepaid
11 pension asset represents assets that are delivering a direct benefit to customers
12 because the investment income on those assets lowers the pension expense under
13 FAS 87. It is therefore appropriate to include the prepaid pension asset in rate
14 base. The calculation to support the prepaid pension asset thirteen-month average
15 can be found in my Attachment RRS-RR-6, and the cumulative qualified prepaid
16 pension asset balance since the adoption of FAS 87 can be found in my
17 Attachment RRS-RR-7.
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3352
1 Q. If SPS had an unfunded accrued cost instead of a prepaid pension asset,
2 would you be recommending that amount be subtracted from rate base?
3 A. Yes. In fact, that is the situation with SPS's FAS 106 and FAS 112 balances. For
4 those elements of cost, the cumulative amount of expense recognized for GAAP
5 purposes is larger than the cumulative contributions by SPS to the trusts. Thus,
6 SPS has reduced its rate base to reflect those accrued liabilities.
7 Q. Is SPS's requested WACC on the prepaid pension asset in this case higher
8 than the EROA on the prepaid pension asset?
9 A. Yes. In this case, SPS's requested WACC is 7.91%, and the weighted average of
10 the 2017 forecasted EROA for the SPS Bargaining Plan and the New Century
11 Energies ("NCE")14 Non-Bargaining Plan 2017 is 6.78%.15
12 Q. Why should SPS be allowed a return on the prepaid pension asset based on
13 the WACC if the ratepayers are only receiving a reduction in cost based on
14 the lower EROA on the prepaid pension asset?
15 A. There are two reasons. First, although the simplified example in Figure
16 RRS-RR-3 shows an equivalent prepaid pension asset balance on which
17 customers and the utility are earning a return, the amounts are not equal insofar as
18 SPS is concerned. SPS's annual pension cost includes costs for three different
19 pension plans — the SPS Bargaining Plan, the NCE Non-Bargaining Plan, and the
20 XES Plan. All three of those plans have prepaid pension assets, and customers
14 NCE refers to New Century Energies, Inc., which merged with Northern States Power Company in 2000 to create Xcel Energy.
15 The EROA for the SPS Bargaining Plan is 6.75%, and the EROA for the NCE Non-Bargaining Plan is 6.90%. The weighted average of those amounts is 6.78%.
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RR 6 - 246 of 443
3353
Cumulative amount
recognized in annual
pension cost XES Plan Prepaid
Pension Asset
Prepaid pension on which CUStOZACIS
CND 2
k..
}Prepaid pensi on asset on which SPS earns a return
1 earn a return on all three plans. However, SPS does not include the XES Plan
2 portion of the prepaid pension asset in rate base because that asset belongs to
3 XES, not to SPS. Therefore, SPS's customers are receiving a return on the XES
4 Plan portion of the prepaid pension asset, but they do not pay a return on that
5 asset. To reflect SPS's actual circumstances, it is necessary to modify the figure
6 as reflected in Figure RRS-RR-4 to show the actual amount on which SPS earns a
7 return as part of rate base:
8
Figure RRS-RR-4
Atnount in Pension Trust Fund
Earns a return at EROA; return
arnount subtracted
from annual pension cost
9 As this figure shows, custorners earn a return on a larger prepaid pension asset
10 balance than SPS does.
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RR 6 - 247 of 443 3354
1 Q. What was SPS's portion of the XES Plan prepaid pension asset as of June 30,
2 2017?
3 A. SPS's portion of the XES Plan prepaid pension asset was approximately $15.7
4 million as of June 30, 2017. With an EROA of 7.10% for the XES Plan, SPS
5 customers receive $1.1 million (total company) of return on an asset on which
6 they pay no return ($15.7 million x .071 = $1.1 million). That reduces annual
7 pension expense by an equal amount.
8 Q. You testified earlier that there are two separate reasons why customers are
9 better off as a result of the prepaid pension asset. Please describe the other
10 reason that the prepaid pension asset results in a net benefit to customers.
11 A. As previously described, contributions in excess of the annual pension costs result
12 in a prepaid pension asset. These additional contributions allow SPS to avoid
13 incurring additional Pension Benefit Guaranty Corporation ("PBGC") premiums
14 that would otherwise be included within the annual pension cost charged to
15 customers.
16 Q. Please explain what the PBGC is.
17 A. The PBGC is a federal agency established by Congress as part of ERISA to insure
18 pension benefits under private sector defined benefit pension plans. If a pension
19 plan is terminated without sufficient money to pay all benefits, PBGC's insurance
20 program will pay employees the benefits promised under the pension plan, up to
21 the limits set by law. The funding for the PBGC comes partly from premiums
22 charged to pension sponsors and partly from returns on assets held by the PBGC.
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1 Q. What types of premiums does the PBGC charge?
2 A. The PBGC charges two types of premiums: (1) a per capita premium that is
3 charged to all single-employer defined benefit plans; and (2) a variable-rate
4 premium charged to underfunded plans. The amounts of the premiums are set by
5 Congress and must be paid by sponsors of defined benefit plans, such as SPS.
6 Q. Are the variable-rate premiums applicable to underfunded plans increasing?
7 A. Yes. For 2017, the variable-rate premium for a single employer plan such as that
8 of SPS was $34 per $1,000 of unfunded vested benefit. Congress has not yet set
9 the variable-rate premium for 2018, but it will likely be higher than the 2017 rate,
10 based on recent trends.
11 Q. Are SPS's pension plans currently underfunded?
12 A. Yes. And absent the prepaid pension asset, the plan would be further
13 underfunded.16
14 Q. How much would the pension plans be underfunded in the absence of the
15 prepaid pension asset?
16 A. In the absence of the prepaid pension asset, the three pension plans would have
17 been further underfunded by approximately $175 million as ofJune 30, 2017.17
16 A plan can be underfunded at the same time it has a prepaid pension asset, because they measure different things. As I testified earlier, the prepaid pension asset is the amount by which cumulative cash contributions exceed cumulative recognized pension expense. A pension plan is underfunded when its pension benefit obligations exceed the value of its assets.
17 The $175 million is the prepaid pension asset balance as of June 30, 2017. The $156 million prepaid pension asset that SPS is seeking to include in rate base is a 13-month average and does not include the XES prepaid pension asset.
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1 Q. By how much would the PBGC premiums increase in the absence of the
2 prepaid pension asset?
3 A. The PBGC premiums would be $5.3 million higher in 2017 on a total company
4 basis without the prepaid pension asset, as shown in Table RRS-RR-5.
5 Table RRS-RR-5
6 Increase in 2017 PBGC Premiums 7 without Prepaid Pension Asset (total company)
Benefit Plan Prepaid Pension Asset as of 6/30/2017 (millions)
Variable Rate per $1,000 of
Unfunded Vested Benefit
PBGC Premiums Due
(millions)
SPS Bargaining Plan
$130,297,326 $30 $3,908,920
NCE Non-Bargaining Plan
$29,579,005 $30 $887,370
Xcel Energy Services Pension Plan
$15,737,520 $30 $472,126
Total $175,613,851 $30 $5,268,416
8 Q. Is there an annual cap related to the amount of PBGC variable premiums
9 that SPS can be charged?
10 A. Yes. 2016 PBGC variable premiums were capped at $500 times the number of
11 participants included in the benefit plan. The 2016 cap for SPS PBGC premiums
12 was $5.3 million. Therefore, not all of the $5.3 million identified in Table
13 RRS-RR-5 would be true cost avoidance.
14 Q. How much PBGC cost avoidance did SPS and its customers receive in 2016
15 as a result of the prepaid pension asset?
16 A. SPS would have been liable for an additional $936,198 of PBGC premiums in
17 2016 if SPS did not have a prepaid pension asset. This additional cost would be
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RR 6 - 250 of 443
3357
1
passed on to customers as increased pension expense. That amount was calculated
2
by subtracting the amount of PBGC premiums SPS actually paid from the amount
3
of PBGC premiums it would have paid if SPS did not have the prepaid pension
4
asset:
5 Table RRS-RR-6
2016 SPS
(Total Company)
PBGC Premium Cap $1,805,326
PBGC Variable Premiums Paid $869,128
PBGC Savings from Prepaid Pension Asset $936,198
6 Q. Are PBGC premiums included in the annual pension cost?
7 A. Yes. PBGC premiums are included in the annual pension cost calculation.
8 Therefore, SPS's customers saved approximately $936,198 (total company) in
9 2016 as a result of the prepaid pension asset, and they will save even more during
10 the time the rates set in this case are in effect because the PBGC premium rate per
11 $1,000 of unfunded vested benefit will likely be higher in 2018, instead of $30 per
12 $1,000 of unfunded vested benefit in 2017.
13 Q. In light of the asymmetrical return on the XES Plan prepaid pension asset
14 and the avoidance of PBGC premiums, what conclusion do you draw about
15 the prepaid pension asset?
16 A. I conclude that the prepaid pension asset confers a net benefit to SPS's Texas
17 retail customers, even when SPS is allowed to earn a return on the prepaid
18 pension asset at its WACC. Customers receive the benefit of approximately $1.1
19 million (total company) of return on the XES Plan asset, even though they pay no
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RR 6 - 251 of 443
3358
1 return on that asset. Moreover, customers receive an effective rate reduction of
2 $936,198 (total company) through the avoidance of incremental PBGC premiums.
3 Thus, customers are better off as a result of the prepaid pension asset.18
4 Q. Can you demonstrate mathematically that SPS's customers are better off as
5 a result of the prepaid pension asset?
6 A. Yes. Multiplying the prepaid pension asset of $156.5 million by the 7.91%
7 percent WACC requested by SPS results in a return of $12.4 million on the
8 prepaid pension asset.19 Table RRS—RR-7 (on the next page), however, shows
9 that customers receive approximately $12.7 million of benefit as a result of the
10 prepaid pension asset. Thus, the prepaid pension asset results in a net benefit of
11 approximately $0.3 million as compared to a situation in which there was no
12 prepaid pension asset.
18 That is true even after the gross-up for taxes.
19 The actual net prepaid pension asset after subtracting the ADIT associated with the prepaid pension asset is approximately $100 million, not $156.5 million. But multiplying $100 million by 7.91% and then applying the tax gross-up factor of 1.5528 leads to a total of $12.3 million, which is essentially equivalent to multiplying $156.5 million by 7.91%.
Schrubbe Direct — Revenue Requirement Page 59
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1 Table RRS-RR-7
Prepaid pension asset balance (excluding the XES prepaid pension asset)
$156,513,509
Weighted average EROA for SPS Bargaining and NCE Non-Bargaining plans
X 6.78%
Initial return benefit to customers = $10,611,616
Balance of XES prepaid pension asset $15,737,520
EROA for XES prepaid pension asset X 7.10%
Return on XES prepaid pension asset = $1,117,364
Avoided PBGC premiums + $936,198
Total Pension Benefit $12,665,178
Return on prepaid pension asset at WACC - $12,380,219
Net benefit to SPS customers from prepaid pension asset
= $284,959
2
3 Q. Does SPS's prepaid pension asset include any pension cost capitalized to
4 Construction Work in Progress ("CWIP")?
5 A. No. By definition, the prepaid pension asset consists of amounts that are in
6 excess of the actuarially determined pension cost for a given year. Suppose, for
7 example, that the pension trust fund asset value increases by $25 million in a
8 given year, but the actuarially determined pension cost for that year is only $15
9 million. Some part of the $15 million will be capitalized and assigned to CWIP,
10 but none of the $15 million will be included in the prepaid pension asset. Only
11 the $10 million in excess of the $15 million will be included in the prepaid
12 pension asset, and none of that $10 million is capitalized and assigned to CWIP.
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RR 6 - 253 of 443 3360
1 Therefore, none of SPS's prepaid pension asset reflects costs that have been
2 capitalized and assigned to CWIP.
3 Q. Thus far you have been discussing the justification of including the prepaid
4 pension asset in rate base. Is including the prepaid pension asset in rate base
5 the only way of dealing with the prepaid pension asset issue?
6 A. No. Another solution would be to exclude the earnings on the assets represented
7 by the prepaid pension asset from the calculation of annual pension cost for
8 regulatory purposes. The basic point is that customers should not be earning a
9 return on the prepaid pension asset without providing a corresponding return. It
10 would be inequitable to deny SPS a return on the prepaid pension asset while
11 providing to customers all the benefits arising from the existence of this asset.
12 The entire prepaid pension asset produces investment income to offset pension
13 expenses, regardless of when the amounts were contributed or realized. Thus, if
14 the prepaid pension asset is excluded from rate base, the earnings on the prepaid
15 pension asset should be excluded from the calculation of annual pension cost, as
16 depicted on Figure RRS-RR-5:2°
20 The ADIT, FAS 106, and FAS 112 balances would have to be adjusted as well.
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RR 6 - 254 of 443 3361
Figure RRS-RR-521
Prepaid Pension Asset =
$50 million
Cumulative amount recognized in annual
pension cost — $450 million
Amount on which customers earn a
return $450 million_ x .07 —
$31.5 million
1 Q. Do you recommend that the Commission exclude the return on the prepaid
2 pension asset from rate base and from the calculation of annual pension
3 cost?
4 A. No. As I explained earlier, SPS's customers are actually better off as a result of
5 the prepaid pension asset because they receive a return on the XES prepaid
6 pension asset but do not pay a return on it. In addition, the customers receive a
7 benefit from the avoidance of incremental PBGC premiums as a result of the
8 prepaid pension asset. When all of those factors are considered, SPS's customers
21 Again, these numbers are merely illustrative, but they demonstrate that customers are worse off if the prepaid pension asset is excluded from the calculation of annual pension cost. In the example in Figure RRS-RR-5, customers get credit for $35 million in earnings, whereas without the $50 million prepaid pension asset, they get credit for only $31.5 million in earnings.
Schrubbe Direct — Revenue Requirement Page 62
RR 6 - 255 of 443
3362
1 are better off if the prepaid pension asset is included in both rate base and the
2 calculation of annual pension cost, even after the return on the prepaid pension
3 asset is grossed up for taxes.
4 Q. How would it affect SPS's annual pension cost if the earnings on the pension
5 trust assets were excluded from the cost of service?
6 A. SPS's annual pension cost would increase by $10.6 million (total company) if the
7 earnings on the pension trust assets were excluded from the cost of service.
8 Because pension costs are passed through to customers on a dollar-for-dollar
9 basis, SPS's revenue requirement would increase by the same amount.
1 0 Q. Does this conclude your pre-filed direct testimony?
11 A. Yes.
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3363
7 -
RICHARD R. SCHRUB
My Commission Expires: _
AFFIDAVIT
STATE OF MINNESOTA
COUNTY OF HENNEPIN
RICHARD R. SCHRUBBE, first being sworn on his oath, states:
1 am the witness identified in the preceding testimony. I have read the testimony and the accompanying attachment(s) and am familiar vvith the contents. Based upon my personal knowledge, the facts stated in the testimony are true. In addition, in my judgment and based upon my professional experience, the opinions and conclusions stated in the testimony are true, valid, and accurate.
Subscribed and sworn to before me this day of August, 2017 by RICHARD R. SCHRUBBE
VIRGINIA J SAIWR NOTArlY PUBLIC - MINNESOTA
MY COMMISSION EXPIRES 01131/2021
Notary Public, State of Minnesota
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Attachment RRS-RR-1 Page 1 of 1
2017 TX Rate Case
Southo estern Public Service Company
Calculation of Pension, OPEB, FAS 112 Long-Term Disability and Workers Compensation Costs
12 Months Ended June 30, 2017
T tal Cost Arnounts from Actuarial Re orts
QUALIFIED PENSION OPEB RETIREE MEDICAL FAS 112 LONG-TERM
DISABILITY 2016 2017 2016 2017 2016 2017
SPS-NCE $ 5,137,000 $ 4,748,000 SPS-Barg 10,267,000 9,818,000 SPS Total $ 15,404,000 $ 14566,000 $ (765,000) $ (840,000) $ (6,000) $ 78,000
Xcel Set-% ice 27,013,000 28.256.000 $ 1,350,000 $ 1,491,000 $ (557,000) $ 17,000
(1 ) (2) (3) (4) (5) (6)
Calculation of Total Cost Amounts to Cost of Service Amounts
SPS
QUALIFIED PENSION
OPEB RETIREE MEDICAL
TOTAL PENSION & OPEB RETIREE
MEDICAL
FAS 112 LONG- TERM
DISABILITY
SPS-NCE Total Cost 4,942,500 SPS-Barg Total Cost 10.042,500 Total SPS 14,985,000 $ (802,500) $ 14,182,500 36,000 Percent to SPS O&M FERC 926 66 08% 65 87% 66 10% 66 10% Amount to SPS O&M FERC 926 9,902,764 $ (528,605) $ 9,374,159 23,797
Xcel Service Xcel Service Total Cost 27,634,500 $ 1,420,500 $ 29,055,000 $ (270,000) Percent to SPS O&M FERC 926 12 54% 12 53% 12 54% 12 64% Amount to SPS O&M FERC 926 3,464,544 $ 178,046 $ 3,642,590 $ (34,131)
Affiliate Charges/misc 225 $ (12) $ 213 2
Total Amount to SPS O&M FERC 926 $ 13,367,533 $ (350,571) 13,016,962 (10,332)
1) Attachment RRS-RR-2, Exhibit I Page 1 of 6 2) Attachment RRS-RR-3, Exhibit I Page 1 of 6 3) Attachment RRS-RR-2, Exhibit III Page 1 of 6 4) Attachment RRS-RR-3, Exhibit III Page 1 of 6 5) Attachment RRS-RR-2, Exhibit VI 6) Attachment RRS-RR-3, Exhibit VI
Page 1 of 1
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Attachment RRS-RR-2 Page 1 of 16
2017 TX Rate Case
WillisTowersWatson 1619 hi
May 13, 2016
Mr. Richard R. Schrubbe Director, Corporate and Benefits Accounting Xcel Energy Inc. 414 Nicollet Mall Minneapolis, Minnesota 55401
2016 VALUATION RESULTS AND 2017-2021 CONTRIBUTION AND COST ESTIMATES
Dear Rick:
This letter summarizes the results of the 2016 plan year IRS funding valuations for Xcel Energys qualified pension plans. Also included are costs for the Long-Term Disability (LTD) and Workers Compensation plans that have been updated from the February 17, 2016, results to reflect 2016 census data and the final 2016 discount rate developed using cash flows based on the 2016 census data. Costs for the PSCo Bargaining Plan have been updated to reflect the negotiated Retirement Spending Account contribution increase and Nonqualified Plan settlement charges have been updated to reflect known 2016 and expected 2017 lump sum payments. Costs for all other plans are unchanged from February 17, 2016.
Attached to this letter are updated PBGC variable premium and IRS funded status forecasts followed by the previously provided benefit cost exhibits with the updates mentioned above. Also included is an exhibit that provides plan specific details of the cost reconciliations for the qualified pension plans.
PENSION PLAN FUNDING
Summary of Key Results
The key results for each plan are provided in the following table:
($ in Millions)
Xcei Energy Pension
Plan
NCE Npnbargaining
Plan
SPS Bargaining
Plan
PSCo Bargaining
Plan
Effective Interest Rate 5.94% 5.81% 6.07% 6.04%
Minimum Required Contribution as of January 1, $89 6 $12.8 $4.6 $17.6 2016, for the 2016 Plan Year Before Funding Balance Minimum Required Contribution as of January 1, $0.0 $0.0 $0.0 $0.0 2016, for the 2016 Plan Year After Funding Balance
PBGC Variable Premiums $0.9 0.4 $3.4
Suite 1700 8400 Normandale Lake Boulevard Minneapolis, MN 55437
T +1 952 842 7000 F +1 952 842 7001 W willistowerswatson.com
Towers Watson Delaware Inc
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Xcel Energy Pension Plan
$:11f..3
NCE Non- bargaining
Plan
4 Orto•
SPS Bargaining
* fnan
PSCo Bargaining
.Plan •
. .
(51,0) (7.9) 0.0 0.0
57.9 9.5 15.0 10.0
(0,5) (0.1) (0.2) (0.7)
0.0 0.0 0.0 ao
0.2 (0.2) 0.0 0.0
j•BaJances at Janua'ry 1> 2O15
in Millions)
Funding Balances used during 2015
Excess contributions elected to be added to funding balance
interest adjustments
Amount of funding balance forfeited for AFTAP purposes
Funding balance transferred as a result of the non-deminimis asset transfer
Attachment RRS-RR-2 Page 2 of 16
2017 TX Rate Case
WillisTowel8Watsan Mr. Richard R. Schrubbe May 13, 2016
Funded Status
A plan's funded status is measured by comparing the present value of plan benefits to the value of plan assets. The following table summarizes the 2016 plan year funded percentages:
:Minimum Funding and Bendit " ‘ 'Restrictions - 2016 4.$ in Thousands)
,., Xce) Energy
PensiorfPlan
NCE Nonbargaining
Plan
SPS Bargaining
Plan
psco Bargaining
Plan 1. Effective interest Rate 5.94% 5.81% 6,07% 6.04% 2. Target Liability as of January 1 $1,536,975 $254,236 $295,577 $862,991 3. Actuarial Value of Assets as of January 1 $1,622,100 $260,638 $338,291 $933,741 4 Funding Balance as of January 1 $123,850 $16,239 $39,695 $96,068 5. Funded Percentage before funding balance
reduction from plan assets [(3) / (2)) 105.5% 102.5% 114.4% 108.1%
6. Funded Percentage with funding balance reduction from plan assets (FTAP) 97.4% 96.1% 101.0% 97.0%
R(3)- (4)) / (2)1
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Benefit Restrictions
Based on the 2016 funding results, no benefit restrictions will apply for the 2016 plan year since the preliminary AFTAP for each plan exceeds 80.0%. We will provide our certification of the funded status for the plans prior to the September 30, 2016 deadline.
Funding Balances
The following summarizes the funding balance activity for the Xcel Energy pension plans.
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Attachment RRS-RR-2 Page 3 of 16
2017 TX Rate Case
WillisTowers Watson Mirk, Mr. Richard R. Schrubbe May 13, 2016
PBGC Premiums
The PBGC variable premium amounts for the Xcel Energy Pension Plan and the SPS Bargaining Plan are based on the Alternative Premium Funding Target, determined without regard to 25-year average interest rate corridors. The variable premium amounts for the NCE Nonbargaining and PSCo Bargaining Plans are based on the Standard Premium Funding Target. However, the NCE Nonbargaining Plan is above the per-participant cap and the variable rate premium is limited to $500 per participant. All other plans remain below the per-participant cap and variable rate premiums are equal to 3.0% of the unfunded vested liability.
The Xcel Energy Pension Plan, NCE Nonbargaining Plan, SPS Bargaining Plan, and PSCo Bargaining Plan can eliminate variable premium with September 15, 2016 contributions of $114.0 million, $34.4 million, $15.0 million and $117.6 million, respectively.
ER1SA 4010 Funded Status
An ERISA 4010 filing is required if any 4010 Funding Target Attainment Percentage (4010 FTAP) for a plan within the controlled group of the plan sponsor is less than 80%. For this purpose, the target liability is calculated using interest rates that ignore the MAP-21/HATFA/BBA interest rate corridors and plan assets are reduced by the amount of the prefunding balance and funding standard carryover balance. This determination is done as of the valuation date for the plan year ending within the information year ending December 31, 2016 (i.e., the 2016 plan year). The valuation date for the 2016 plan year is January 1, 2016. The January 1, 2016 4010 FTAPs for all Xcel Energy pension plans are as follows:
4010 FTAP — 2016 ($ :n Trtot:santh) Xcel Energy
Pension Plan
NCE Nonbargaining
Plan
SPS Bargaining
Plan
PSCo Bargaining
Plan
1. Effective interest Rate 4.11% 388% 4.30% 4.25% 2. Target Liability as of January 1 $1,786,466 $289,163 $358,608 $1,039,267 3. Actuarial Value of Assets as of January 1 $1,622,100 $260,638 $338,291 $933,741 4. Funding Balance as of January 1 $123,850 $16,239 $39,695 $96,068 5. Funded Percentage with funding balance
reduction from plan assets (4010 FTAP) 83.9% 84.6% 83.3% 80.6%
[03)— / (2))
Based on the results above, no filing will be required for the 2016 information year. However, the forecasted 2017 4010 FTAPs for all plans are below 80% and a 4010 filing may be required for the 2017 information year. If a 4010 filing is required for the 2017 information year, the submission deadline will be April 15, 2018. We will continue to monitor interest rates and asset returns throughout the year and can address contribution/funding balance forfeiture strategies to avoid a filing as part of the contribution planning process in the fall.
LONG-TERM DISABILITY AND WORKERS COMPENSATION RESULTS
The combined 2016 Workers' Compensation (WC) and Long-Term Disability (LTD) cost/(income) is $0.3 million, a $0.1 million decrease from our February cost estimate of $0.4 million for the plans combined. Updating the BOND:Link model results to use the cash flows based on the 2016 census data increases the discount rate from an estimated rate of 4.39% to 4.46%.
The decrease in LTD cost from $0.0 million in the February 17 cost estimates to the final 2016 result of ($0.7) million is due to lower projected December 31, 2016 liabilities, which is the result of fewer participants receiving payments from the plan in 2016 than expected.
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2017 TX Rate Case
WIs wttrs IIl r Mr. Richard R. Schrubbe May 13, 2016
The increase in WC cost from $0.4 million in the February 17 cost estimates to the final 2016 result of $1.1 million is due to higher projected December 31, 2016 liabilities, which is the result of increases in small claims from the 1988-1991 experience years that are below reinsurance levels.
RESULTS EXHIBITS
Pension contribution and PBGC variable premium forecasts are attached to the end of this letter. The planned funding schedule provided by Xcel Energy is assumed to sufficiently cover all minimum required contributions. Contribution and PBGC premium forecasts include 5% liability increases starting in 2017 to estimate the impact of potential mortality updates. Benefit cost forecasts for all plans except PSCo Bargaining, Nonqualified Plan and LTD and Workers Compensation have not been updated from the forecasts provided on February 17, 2016. Estimates of 2017-2021 benefit costs summarized by legal entity are also presented in the attached exhibits as follows:
• Exhibit I: Benefit Cost Estimates — Qualified Pension Plans
Exhibit II: Benefit Cost Estimates — Nonqualified Pension Plans
Exhibit Benefit Cost Estimates — Retiree Medical and Life Insurance Plan
• Exhibit IV: Liabilities — LTD and Workers' Compensation
• Exhibit V: Claims and Expenses — LTD and Workers' Compensation
• Exhibit VI: Benefit Cost Estimates — LTD and Workers' Compensation
• Exhibit VII: Benefit Cost Reconciliation Details — Qualified Pension Plans
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Attachment RRS-RR-2 Page 5 of 16
2017 TX Rate Case
WillisTowersWatson 111191'11i Mr. Richard R. Schrubbe May 13, 2016
Plans Valued
The attached exhibits include estimates for the following employee benefit plans maintained by Xcel Energy Inc. (Xcel Energy):
• Xcel Energy Pension Plan
• Xcel Energy Inc. Nonbargaining Pension Plan (South) [NCE Nonbargaining Plan]
• New Century Energies Inc. Retirement Plan for SPS Bargaining Unit Employees and Former Nonbargaining Unit Employees [SPS Bargaining Plan]
• New Century Energies Inc. Retirement Plan for PSCo Bargaining Unit Employees and Former Nonbargaining Unit Employees [PSCo Bargaining Plan]
• Xcel Energy Nonqualified Defined Benefit Plan
• Xcel Energy SERP
12 SPS SERP
▪ Employment Agreements
• Fort St. Vrain Nuclear Operations Personnel Plan
• NMC SERP Part A
• Xcel Energy Retiree Medical and Life Insurance Plan (including Executive Life Insurance)
▪ Xcel Energy Workers Compensation
• Xcel Energy Long-Term Disability (LTD) Income
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3370
Attachment RRS-RR-2
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2017 TX Rate Case
WsTowersWeson lei 111.1 Mr. Richard R. Schrubbe May 13, 2016
FORECAST RESULTS
Forecast results are based on the information summarized below and do not reflect potential de-risking activities such as a terminated vested lump sum window or a small benefit retiree annuity purchase.
The following provides a reconciliation of actual 2016 costs to 2017 estimated costs, prior to regulatory effects:
Reconciliation of Benefit Costs (prior to regulatory effects)
• iNorkórs' Qualified Nonqualified Retiree CompeA- Long:term
'($ in Millions) Pension1 Pension' 3 Medical satiori Disability Total
:046 • $1.1'. Historical asset performance 5,4 0.0 0.0 0.0 0 0 5.4 Expected liability, asset, and loss amortization changes
(11.3) (1.7) (0.6) (0.6) 1 3 (12 9)
I Qualified Pension Plan costs reflect the assumption that NSP-MN and Xcel Energy Nuclear costs are determined under the Aggregate Cost Compensation Method. No additional regulatory deferrals have been reflected. See Exhibit VII for additional details,
2 2016 Includes estimated settlement charge of $1,9 million related to Mr. Connellys and other participants expected payments. 3 2017 Includes estimated settlement charge of $1.4 million assuming $3.0 million of lump sum payments are made in 2017 ($2.1
million of known and $0.9 million of expected).
DATA, ASSUMPTIONS, METHODS AND PLAN PROVISIONS
The 2016 benefit costs, 2016 funding results and estimated 2017-2021 costs reflect the following data, assumptions, methods and plan provisions:
Data
The 2016 benefit cost results and results for 2017-2021 are based on participant data as of January 1, 2015, projected to the end of the year based on status, compensation and benefit changes through November 30, 2015, and known retirements for December 2015, Actual new entrants through November 30, 2015, and expected new entrants through December 31, 2015, are included. See our February 17, 2016, letter for more details. The 2016 pension funding, Workers Compensation and Long-Term Disability results are based on data as of January 1, 2016.
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Attachment RRS-RR-2 Page 7 of 16
2017 TX Rate Case
WillisTowersWatson lil Mr. Richard R. Schrubbe May 13, 2016
Economic Assumptions
The key assumptions used to determine the actual 2016 and estimated 2017 - 2021 benefit cost results are provided below. The assumptions used to calculate the cost under the aggregate cost method are the same as used to prepare the ASC 715 results, except as noted. Actual asset returns net of administrative expenses are assumed to equal the expected return on assets assumptions throughout the forecast period.
Bene it Coit
Discount Rate — ASC 715:
May 13, 2016 resutts
• Xcel Energy Pension Plan 4.64%
• NCE Nonbargaining Pension Plan 4.48%
• SPS Bargaining Pension Plan 4.73%
• PSCo Bargaining Pension Plan 4.71%
• Nonqualified Pension Plan 4.34%
• Retiree Medical and Life Insurance Plan 4.65%
• Workers Compensation and LTD 4.46%
Expected Return on Assets Assumption — Pension:
• Xcel Energy Pension Plan 7.10%
• NCE Nonbargaining Pension Plan 6.90%
• SPS Bargaining Pension Plan 6.75%
• PSCo Bargaining Pension Plan 6.50%
• Weighted Average Expected Return 6.87%
Expected Retum on Assets Assumption — VEBA 5.80% (Bargaining/Nonbargaining)
Discount Rate — Aggregate Cost 7.10%
Salary Scale1 4.00%
Initial Medical Trend 6.00%
Ultimate Medical Trend 4.50%
Year Ultimate Trend is Reached 2019 ,IMMISTANAF411Fie* IIM01111,—.3~...1111111•6 A11.11111110111111M1101111011.11111.11,•
Weighted average of age-graded table (nonbargaining) and service-graded table (bargaining)
• The interest rate for converting lump sums to annuities and annuities to lump sums was updated from 4.00% to 4.25% in all years. The pre-PPA lump sum conversion interest rate was updated from 3.00% to 3.25%.
• The interest crediting rate for the 5% cash balance formula was updated form 3.00% to 3.25%. The interest crediting rate for the Retirement Spending Account was updated from 1.25% to 1.50%.
• The HRA trend assumption is 2.0%.
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2017 TX Rate Case
WillisTowersWatsan Irrig hi Mr. Richard R. Schrubbe May 13, 2016
We have assumed Xcel Energy continues to use the 24-month average of the three-segment interest rates as of September in the year prior to the valuation date. The underlying three-segment rates from April 2016 were assumed to remain constant throughout the forecast period. This methodology produces the following effective interest rates:
Xcel Energy Pension Plan 5.94% 5.75% 5.56% 5.39% 5.24% 4.83%
NCE Nonbargaining Plan 5.81% 5.63% 5.44% 5.27% 5.12% 4.71%
SPS Bargaining Plan 6.07% 5.88% 5.69% 5.52% 5.37% 4.96%
PSCo Bargaining Plan 6.04% 5,85% 5.66% 5.49% 5.34% 4.93%
Demographic Assumptions
a Active participant counts are assumed to remain level throughout the forecast period.
• When not prescribed by the IRS, the mortality assumption is the RP-2014 tables (blue collar for bargaining participants and white collar for nonbargaining participants, as adjusted for 2014 Xcel Energy mortality study) projected with generational mortality improvements using an adjusted SOA MP-2014 methodology.
a When not prescribed by the IRS, the mortality assumption for converting lump sums to annuities or annuities to lump is a combined annuitant and non-annuitant RP-2014 table projected with scale MP-2014 to the commencement year plus an additional 10 years.
• Liabilities that are required to use IRS prescribed mortality are based on the tables applicable for 2016 with projections to the valuation year and increased by 5% starting in 2017 to estimate the impact of potential mortality updates.
▪ Demographic assumptions have been updated based on a review of experience from 2010 through 2014 and future expectations, as provided in our November 19, 2015, letter and approved by the Pension Trust Administration Committee on December 16, 2015.
Pension Contributions
The forecasts reflect actual 2016 contributions of $125 million made on January 4, 2016, and planned contributions provided by Xcel Energy for 2017 through 2020. Contributions for 2021 are assumed to be equal to 2020. The table below summarizes the amounts assigned to each plan over the forecast period:
Xcel Energy Pension Plan $ 90.0 $ 90.0 $ 90.0 $ 80.0 $ 46.0 $ 46.0
NCE Nonbargaining Plan 10.0 10,0 12.0 17.0 17.0 17.0
SPS Bargaining Plan 15,0 15.0 8,0 8.0 7.0 7.0
PSCo Bargaining Plan 10,0 10,0 15.0 20,0 55.0 55,0
Total Contribution $ 125.0 $ 125.0 $ 125.0 $ 126.0 $ 125.0 $ 126.0
' Current projections indicate that an additional $87 million in Xcel Energy Pension Plan contributions may be required ln 2021 to meet the minimum requirements.
r) Contributions in 2017 and beyond are assumed to be paid on January 15 and assigned to the prior plan year.
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Attachment RRS-RR-2 Page 9 of 16
2017 TX Rate Case
WillisTowersWatson IiIPtll Mr. Richad R. Schrubbe May 13, 2016
PBGC Premiums
• The PBGC Variable Premium estimates reflect the increase in premium rates under The Bipartisan Budget Act of 2015, actual January 1, 2016, asset values, demographic experience, and 5% liability increases starting in 2017 to estimate the impact of potential mortality updates.
• The estimates also assume the Xcel Energy Pension Plan and the SPS Bargaining Plan continue to use the alternative interest rate method, and the NCE Nonbargaining Plan and the PSCo Bargaining Plan continue to use the standard interest rate method.
• The PSCo Bargaining Plan is expected to be at the per-participant variable rate premium cap starting in 2017 and extending through the remainder of the forecast period. The NCE Nonbargaining Plan is expected to be at the per-participant variable rate premium cap starting in 2016 and extending through 2020.
Retiree Medical and Life insurance Plan Effects of Health Care Reform
▪ Our estimates continue to assume the same effects as noted in our 2016 ASC 715 cost report dated April 27, 2016.
Plan Changes
• Effective January 1, 2016, the annual credits contributed to the Retirement Spending Account increased from $1,400 to $1,700 for service after January 1, 2016 for the PSCo Bargaining Plan.
ACTUARIAL CERTIFICATION
As requested by Xcel Energy Inc., this report provides results of the actuarial valuations of the Xcel Energy Inc. employee benefit plans indicated above. This report should not be used for other purposes, distributed to others outside Xcel Energy Inc. or relied upon by any other person without prior written consent from Willis Towers Watson. Except where we expressly agree in writing, this report should not be disclosed or provided to any third party, other than as provided below. In the absence of such consent and an express assumption of responsibility, no responsibility whatsoever is accepted by us for any consequences arising from any third party relying on this report or any advice relating to its contents.
Xcel Energy Inc. may make a copy of this report available to auditors or appropriate governmental agencies of the plan or the plan sponsor, but we make no representation as to the suitability of this report for any purpose other than that for which it was originally provided and accept no responsibility or liability to the auditors in this regard. Xcel Energy Inc. should draw the provisions of this paragraph to the attention of the auditors or appropriate governmental agencies when providing this report to them.
In preparing this valuation, we have relied upon information and data provided to us by Xcel Energy Inc. and other persons or organizations designated by Xcel Energy Inc. An audit of the financial and participant data provided was not performed, but we have checked the data for reasonableness as appropriate based on the purpose of the valuation. The results presented in this report are directly dependent upon the accuracy and completeness of the underlying data and information. Any material inaccuracy in the data, assets, plan provisions or other information provided to us may have produced results that are not suitable for the purposes of this report and such inaccuracies, as corrected by Xcel Energy Inc., may produce materially different results that could require that a revised report be issued.
This valuation reflects our understanding of the relevant provisions of the Pension Protection Act of 2006. The IRS has yet to issue final guidance with respect to certain aspects of this law. It is possible that such guidance may conflict with our understanding of the law and could therefore affect results shown in this report.
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2017 TX Rate Case
113Towers Watson NIT IA Mr. Richard R. Schrubbe May 13, 2016
The results summarized in this report involve actuarial calculations that require assumptions about future events. We believe the assumptions and methods used in this report are reasonable and appropriate for the purposes for which they have been used. In our opinion, all methods, assumptions and calculations are in accordance with requirements of the Internal Revenue Code and ERISA, and the applicable financial accounting standards, including ASC 712 and 715 and the procedures followed and presentation of results are in conformity with generally accepted actuarial principles and practices.
Assumptions for determining benefit cost results were selected by Xcel Energy Inc. Xcel Energy Inc. uses the standards set out in ASC 715 to calculate pension cost for each plan in total; pension cost for the subsidiaries is calculated based on plan assets allocated to each subsidiary in proportion to the PBO for each subsidiary. Beginning in fiscal 2010, Discontinued Operations is allocated assets in proportion to its PBO, similar to nondiscontinued operations. The gain/(loss) amortization is allocated to each subsidiary in proportion to the gain/(loss) balance for each subsidiary (excluding deferred asset gains and losses). This methodology is consistent with former NSP's methodology since 1998 and has been applied to the former NCE pension plans since January 1, 2001. A similar methodology is used for the ASC 715 costs for the Retiree Medical and Life Plan, except separate asset amounts are used for each subsidiary.
Except as otherwise provided herein, the results presented are based on the data, assumptions, methods and plan provisions outlined in the actuarial valuation reports to determine accounting requirements for the plan for the plan year ending December 31, 2015, and beginning January 1, 2016 dated April 27, 2016 Therefore, the descriptions of the data, assumptions, methods, plan provisions and limitations of the valuation and its use should be considered part of this letter report.
The undersigned consultants with actuarial credentials meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinions contained herein. Our objectivity is not impaired by any relationship between the Xcel Energy inc. and our employer, Towers Watson Delaware Inc., a subsidiary of Willis Towers Watson PLC.
NEXT STEPS
If you have any questions or would like to discuss, please contact Jim at 952-842-6354 or Mark at +1 952 842 6445.
Sincerely,
ea. James W. Shaddy, ASA Consulting Actuary
cc: Todd Degrugillier Xcel Energy Inc. Darla Figoli — Xcel Energy Inc. Levi Glines — Xcel Energy Inc. Nate Hertz — Xcel Energy Inc. Kris Lindemann —Xcel Energy Inc. Ruth Lowenthal — Xcel Energy Inc. Garrett Mikrut Xcel Energy Inc. Jill Reed —Xcel Energy Inc. Debbie Robin — Xcel Energy inc. Jeff Savage — Xcel Energy Inc. Brian Van Abel — Xcel Energy inc. Greg Zick — Xcel Energy Inc.
Mark A. Afdahl, FSA Consulting Actuary
Ross Athman — Willis Towers Watson Mark Bilderback —Willis Towers Watson Beth Fernandez — Willis Towers Watson Kristoff Hendrickson — Willis Towers Watson Scott Lund — Willis Towers Watson Nick Principe — Willis Towers Watson Tyler Tanck — Willis Towers Watson
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Ett J o
69 Z
- 9
2111
Estimated Cash Flow ($ in NH ions) and lEstïrnaed Funded Status at January I
• Calendar Year
2016
2017
2018
2019
2020
2 & ,
Xcel Energy Pension Plan 106% 98% 97% 99% 98%
Contributions $90.0 $0.0 $90.0 $0.0 $90.0 i $0.0 $80.0 $0.0 $46,0 $0.0
PBGC Variable Premiums $0.0 $3.3 $0.0 56.2 $0.0 i $5.6 $0.0 $5.6 $0.0 55.5
NCE Nonbargalning Plan 103% 93% 92% 96% 98%
Contributions $10.0 $0.0 $10.0 $0.0 $12.0 $0.0 517.0 $0.0 517.0 $0.0
PBGC Variable Premiums $0.0 $0.9 $0.0 $0.9 $0.0 50.9 $0.0 1 $1.0 50.0 $0.9
SPS Bargaining Plan 114% 108% 104% 103% 103%
Contributions 515.0 $0.0 515.0 $0.0 $8.0 $0.0 58.0 $0.0 $7,0 1 50.0
PBGC Variable Premiums $0.0 $0.4 $0.0 $1.0 $0.0 $1.1 $0.0 $1.3 $0.0 $1.1
PSCo Bargaining Plan 108% 99% 94% 93% 96%
Contributions 510.0 $0.0 $10,0 1 $0.0 $15.0 50.0 520.0 $0.0 $55,0 $0.0
PBGC Variable Premiums 50.0 $3.4 $0.0 53.7 $0.0 $3.8 $0.0 $3.9 $0.0 $4.0
Total 107% 99% 97% 97% 98%
Contributions $125.0 $125.0 $125.0 $125.0 $125.0
PBGC Variable Premiums 58.0 $11.8 511.4 $11.8 $11„5
Based on January 1, 2016 asset values and expected returns for the forecast period. Assumes Xcel Energy elects to use September three-segment rates. Target Liability effective rates (2016, 2017, 2018, 2019, 2020):
- XEPP: 5.94%, 5.75%, 5.56%, 5.39%, 5.24% - NICE:
SPS: 5.81%, 6.07%,
5.63%, 5.88%,
5.44%, 5.69%,
5.27%, 5.52%,
5.12% 5.37%
- PSCo: 6.04%, 5.85%, 5.66%, 5.49%, 5.34% Funding balance used to satisfy minimum required contributions and forfeited to avoid benefit restrictions and at-risk status.
WillisTowersWatson hPrki
• Funded status equals actuarial value of assets divided by target liability. • Effective rates were calculated by assuming spot segment rates from mid-April
2016 of 1.36%, 3.63% and 4.68% remain unchanged throughout the remainder of the forecast period. The actual segment rates used are a 24-month average of the spot rates through August of the year prior to the valuation year, subject to the corridors of BBA.
• Forecasts do not reflect potential de-risking activities such as a terminated vested lump sum window or a small benefit retiree annuity purchase.
2018 Wills Towers Watson. AU nghts reserved. Proprietary and Confidential. For Milts Towers Watson and Wes Towers Watson dent use only,
Z -In
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y
Net Cost
Aggregate Cost Compensation
Method
Aggregate Cost 20-year Amortization
Method ,
2,148 N/A NIA 5,666 3,150 2,608
44,841 30,831 25.528 7,579 NIA N/A
27,013 N/A NIA (15) NIA NIA
87,232 33.981 26.136
95 N/A N/A 3,502 NIA NIA 5,137 N/A NIA
10.734 N/A NVA
10,267 N/A N/A 10,267 N/A NvA
309 N/A N/A 28,620 N/A WA 28.929 NIA N/A
137,162 33,981 28,136
January 1 Prepaid
(Accrued)1 Contribution PBO
35.936 3,805 78,354 (7,363) 4.629 94,849
378,989 44.773 928.274 53,939 7,436 152,545 85,540 29,333 605.484
(185) 24 495 346,856 90,000 1,860,001
1,608 IW 3,940 19,102 6.906 205,036 34,788 2.96-i 87,844 55,496 10.000 296,628
110,335 15.000 379,750 110,336 15,000 379,750
6,755 115 11,934 297,435 9,885 1,019,820 304,190 10,000 1,031,754
1,016,877 125,000 3,568,133
XCEL ENERGY INC, - Qualified Pension Plans EXHIBIT i Benefit Cost by Legal Entity Page*, of 6
($ in Thousands)
E1r 17
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ITN
Amortizations
Service Expected Retum Prior Service Net 2016 Cost Interest Cost on Assets Cost (Gain)/Loss
Xcel Energy Pension Plan (XEPP) Discontinued Operations' .. 3.513 (4,715) - 3,353 Xcel Energy Nuclear 6,523 4,248 (5,706) 44 559 NSP - MN 21,784 41,185 (55,238) 842 36,218 NSP - WI 4,417 6,816 (9,157) 111 5,392 Xcel Services. 23.328 2.6.949 (38,170) 245 12,661 XEPC (former EMI) 22 (30) .. (7) Total XEPP 56,052 82.728 (111,016) 1.292 58,176
NCE Non-Bargaining Pension Plan Discontinued Operations - Cheyenne - 170 (232) PSCo 5,190 8.803 (12,001) SP6 3.087 3,770 (5.141) Total NCE 8 283 12,743 (17,374)
SPS Bargaining Plan SPS 8,674 17,489 (22,461) 8.665 Total SPS 8,874 17,489 (22,461) 8,585
PSC," Bargaining Plan Discontinued Operations - Cheyenne - 540 (680) _ 449 PSCo 20,730 46,602 (58,768) (3,212) 23,268 Total PSCo 20,730 47,142 (59,448) (3,212) 23,717
Total Xcel Energy 91,739 160.102 (210,299) (1,919) 97,539
Includes 54.128 transfer from NCE to XEPP for non-de minimis asset transfer on December 31, 2015 2Includes NRG. BMG, Viking, Natro Gas, Utility Engineering, Seren, Quixx, Crockett and QPS 'Includes Eloigne
157 3.503 3,421 7,081
Assumptions Discount Rate - U.S, GAAP
XEPP 4.64% NICE 4.48% SPS 4.73% PSCo 4.71%
Discount Rate - Aggregate Normal Cost 7.10% Salary Scale 4,00% Expected Retum on Assets
XEPP 7.10% NCE 6.90% SPS 6.75% PSCo 6.50%
Assumed Mortality Table Bargaining Participants RP-2014 Blue Collar projected with generabonal mortality improvements using an adjusted SOA MP-2014 methodology Non-bargaining Participants RP-2014 White Collar, as adjusted for 2014 Xcel Energy mortality study, projected with generational mortality improvements using an adjusted SOA MP-2014 methodology
See May 13, 2016 letter for additional information on data, assumptions, methods, and plan provisions. Contributions already rnade are allocated in accordance vAth the January 4. 2016 contribution directives provided by XceJ Energy on January 26, 2016.
5/13/201e
V/illisTowersWaison li!`;41,: http/Matcttnternel.towerswatson.comiclente/605084JRETActueria42O16/Docements/Projections/Usty - ProjectIons/Projections - 051320(8 to Xcelarlsr. Quelled
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XCEL ENERGY INC. - Nonqualified Pension Plans EXHIBIT II Benefit Cost by Legal Entity Page 1 of 6
($ in Thousands)
Amortizations
2016 Service Cost Expected Retum
Interest Cost on Assets Prior Service
Cost Net
(Gain)/Loss FAS 88
Settlement` Net Cost
January 1 Prepaid
(Accrued) Expected Benefit
Payments
Discontinued Operations' - 57 12 69 (1,286) 159 Xcel Energy Nuclear 73 42 (24) 91 (1,299) 175 NSP - MN 16 164 305 458 (982) 613 NSP - WI 15 3/ 11 57 (641) 65 PSCo2 37 144 404 585 4$8 567 SPS 17 105 126 245 (1,308) 315 Xcel Services3 1,827 1.126 240 1.253 1,900 6,345 (14,637) 4.766 XEPC (former EMI) .., (4) (4) (37)
Total Xcel Energy 1,985 1,669 24C 2,086 1,900 7,880 (19,732) 5,650
Includes NRG, BMG, Viking, Natrogas, Ouixx, Seren and UE
2Includes Fort St Vrain
3 Includes Eloigne 4Estimated settlement amount for payments expected to be made to Mr. Connelly and other participants.
Assumptions
Discount Rate 4.34%
Salary Scale 4.00%
Assumed Mortality Table RP-2014 White Collar, as adjusted for 2014 Xcel Energy mortality study, projected with generational mortality irnprovements using an adjusted SOA MP-2014 methodology
See May 13, 2016 letter for additional information on data, assumptions, methods and plan provisions.
5/13/2016 hUp://natctintematowetswatson.comktients/609084/RETAotuatial-2016/Documents/Projections/May - Projections/Projections - 05132016 to Xcel.xlsx Nonqualified
WitlislbwersWatsain WPM
XCEL ENERGY INC. - Postretirement Benefits
EXHIBIT III Benefit Cost by Legal Entity
Page 1 of 6
2016 Service Cost Interest Cost Expected Return
on Assets
($ in Thousands)
Amortizations
Net Cost January 1 Prepaid
(Accrued) Contribution Prior Service
Cost Net
(Gain)/Loss
Discontinued Operation& 391 (79) (103) 106 316 (5,424) 694 Xcel Enemy Nuclear 14 33 49 (14) 82 (567) 14 NSP - MN2 109 3,892 (172) (3,085) 1,617 2,361 (65,753) 8,560 NSP 24 651 (24) (351) 330 630 (8,383) 1,435 PSCo 768 18,070 (22,299) (6,247) 1,931 (7,777) 11,152 - SPS1 775 1,821 (2.377) (401) (583) (765) (16,081) _ Xcel Services' 38 1,248 (44) (549) 659 1.350 (13,339) 1.626 XEPC (former EMI) (4) (2; (125) e Total Xcel Energy 1,727 26,107 (24,995) (10,686) 4,042 (3,805) (98,520) 12.335
'Includes NRG BMG, Ming, Natrogas, Cheyenne, Quixx and UE. 'Includes Elcigne and Seren. 'Includes Executive Life Insurance benefits
Assumptions Discount Rate
4.65% Expected Return on Assets
5.80%
£17 1
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Medical Trend Initial (2016)
6.00% Ultimate
4.50% Year Ultimate Reached
2019 Assumed Mortality Table
Bargaining:
RP-2014 Blue Collar headcount-weighted table adjusted for Xcel Energy mortality study, projected with generational mortality improvements using an adjusted SOA MP-2014 methodology.
Non-bargaining:
RP-2014 White Collar headcount-weighted table adjusted for Xcel Energy mortality study, projected with generational mortality improvements using an adjusted SOA MP-2014 methodology.
Contributions for PSCo and SPS are assumed equal to the net cost, but not less than zero. Contributions for other legal entities are assumed equal to the expected benefit payments. See May 13, 2016 letter for additional information on data, assumptions, methods, and plan provisions.
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XCEL ENERGY INC. - LTD and Workers Compensation EXHIBIT VI Benefit Cost Estimates by Legal Entity
(S in Thousands)
Fiscal Year Ending ASC 712
2015 2016 2017 2018 202 2020 2021 Actual Budget Budget Budget Budget Budget Budget _ _
Discount Rate- Workers' ComperTsation —3.86% 4.46% 4.46% 4.46% 4.46% 4A6% 4.46%
Former NSP - Workers' Compensation' MN/SD 1,009 1,162 400 375 349 326 304 MI/VIfi 46 (115) 11 9 11 9 9 Subtotal 1.055 1,047 411 384 360 335 313
Former NCE - Workers' Compensation 7 Colorado - PSCo (43) 9 66 63 61 59 57
Deductible States - Workers' Compensation Deductible States - SPS (KS, OK, NM, and TX) - - - . - -
Total Xcel Energy Workers' Compensation 1,012 1,056 477 447 421 394 370
Discount Rate - LTD Income 3.86% 4.46% 4.46% 4.46% 4.46% 4.46% 4.46%
LTD Income Discontinued Operations - Cheyenne 100 172 5 5 3 2 3 Discontinued Operations 2 (1) (80) 25 25 23 22 20 NSP-MN 837 (684) 326 309 293 276 261 NSP-WI 255 58 67 64 60 57 55 PSCo 223 302 91 71 54 39 31 sps 166 (6) 34 30 24 19 14 Utility Engineering 59 55 2 2 2 2 1 XceI Services 733 (557) 16 14 10 8 6 XEPC 9 5 2 1 1 - -
Total Xcel Energy LTD income 2,381 (735) 568 521 470 425 391
Total Xcel Energy ASC 712 3,393 321 1,045 968 891 819 781
Results for former NSP states include income replacement and medical benefits as well as reserve for bankrupt insurers. Colorado results include reserve for bankrupt insurers.
2 Includes NRG, BMG, Viking and Natrogas. The results above are based on the data, assumptions, methods, and plan provisions described in our May 13, 2016 letter.
6/13/2016
WillisTowersWatson 1,1991.; http://natctintemaktowerswatson.cornaents/609084/RETActuarial-2016/Documents/ProjectionsiMay - Projections/Projections - 05132016 to Xeel.xlsx: ASC 712 Cost
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Final demographic experience Final discount rates Final asset values PSCo RSA contribution level increase
7 171) (248) (80) 174 408
(1,991) 5) (321) (1,350) (4,107) (1.088) 1
1,349 322 119 138 1,928 766 653
5 85 - . 483
i
Historical asset performance 3,049 583 521 2,005 6,158 1,701 Expected liability, asset and loss amortization changes (11,160) (1,594) (1,513) (1,640) (15,907) (6,879)
Ortiate.
699 (2,298)
(1,123)
Xcel Energy Inc. - Qualified Pension Plans Benefit Cost Reconciliation Details ($ in Thousands)
Exhibit VII
ASC 7151
NSP-MN & Xcel Energy Nuclear
regate Cosi Aggregate Cost Ag -g 20-Year ASC 715' Compensation .
Amortization Method Method
XEPP
NCE
SPS
PSCo
Total
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Experience study assumption changes Estimated demographic experience2 Discount rates3 Asset performance Pension contributions increased from $90M to $125M E +-cted rate of return updates
(3,113) (432) 79 (446) (3,912)
1,678 977 (37) 859 3,477
(3,634) (452) (1,157) (3,187) (8,430)
4,143 1,074 515 1,319 7,051
(2,087) (557) 194 (2,450)
2,350 501 1,669 2,292 6 812
(2,128) (1,646) 522 96 346 351
(2,096) 13 10 2,317 1,521 1.122
(1,146) 1,289 1,372 955
Does not include potential settlement charges. 2 Estimated impact of updated participant status and compensation data through September 30, 2015, with the primary factors being mortailty and termination losses, 3 December 31, 2015 discount rates assumed to be equal to the discount rates from Willis Towers Watson's BOND:Link model results as of November 30, 2015. 4 2015 asset retums equal actual returns through November 30, 2015 plus expected retums for the remainder of 2015 for an estimated pension return of 1% for 2015 5 Weighted average rate of retum for the pension plan assets was updated from 7.09% to 6.87%. 6 Estimated impact of updated participant status and compensation data through November 30, 2015,
See May 13, 2016 letter for additional information on data, assumptions, methods and plan provisions.
Le) 5/13/2016 (Al 11natctinternaltowerswatson.corn Dev1/0oot1clients160008.41RETAcTuarial-2016‘ Documents Projections1May - Projections1RePon of Expense ExhibitxlsxExhiblt QC Feek
WillisTowarsWatson Id`Pist
Attachment RRS-RR-3 Page 1 of 16
2017 TX Rate Case
WillisTowersWatson 1111961
May 17, 2017
Mr. Richard R. Schrubbe AVP, Financial Analysis & Planning Xcel Energy Inc. 414 Nicollet Mall Minneapolis, Minnesota 55401
2017 VALUATION RESULTS AND 2018-2022 CONTRIBUTION AND COST ESTIMATES
Dear Rick:
This letter summarizes the results of the 2017 plan year IRS funding valuations for Xcel Energy's qualified pension plans. Also included are costs for the Long-Term Disability (LTD) and Workers Compensation plans that have been updated from the February 8, 2017, results to reflect 2017 census data and the final 2017 discount rate developed using cash flows based on the 2017 census data. Costs for ail other plans are unchanged from February 8, 2017.
Attached to this letter are updated PBGC variable premium and IRS funded status forecasts followed by the previously provided benefit cost exhibits. Also included is an exhibit that provides plan specific details of the cost reconciliations for the qualified pension plans.
PENSION PLAN FUNDING
Summary at Key Results
The key results for each plan are provided in the following table:
t$ in Millions) xcel Energy
Pension Plan
NCE Nonbargaining
Plan
SPS Bargaining
Plan
PSCo Bargaining
Plan
Effective Interest Rate
Contributions
5.72% 5 64% 5.88% 5.85%
Minimum Required Contribution as of January 1, 2017, for the 2017 Plan Year Before Funding Balance
$ 104.2 $ 13.2 9.5 18.4
Minimum Required Contribution as of January 1, 2017, for the 2017 Plan Year After Funding Balance
S 0 0 0 7 $ 0.0 0,0
Suite 1700 8900 Normandale Lake Boulevard Minneapolis, MN 55437
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Page l of 11
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3382
Attachment RRS-RR-3 Page 2 of 16
2017 TX Rate Case
WillisTowersWatson 1•11IIIII M. Richard R Schrubbe May 17, 2017
NCE
SPS
PSCo Xcel Energy
Nonbargaining
Bargaining
Bargaining ($ in Millions)
PensiOn Plan
Plan
Plan
Plan
PBGC Premiums
PBGC Variable Premiums $ 3.6 0 9 $ 0.1 $ 3 5
4•411,.. • 41W a • ,
1`,4.14A .1.0.,WICSAtt*
Funded Status
A plan's funded status is measured by comparing the present value of plan benefits to the value of plan assets. The following table summarizes the 2017 plan year funded percentages:
Minimum Funding and Benefit Restrictions - 2017 (5 in Thousands) Xcel Energy
Pension Plan
NCE Nonbargaining
Plan
SPS Bargaining
Plan
PSC() Bargaining
Plan
1. Effective Interest Rate 5.72% 5.64% 5.88% 5.85% 2. Target Liability as of January 1 $1,575,157 $245,384 5299,296 5866,198 3. Actuarial Value of Assets as of January 1 $1,607,054 5242,069 $341,514 $893,403 4. Funding Balance as ofJanuary 1 5148,546 $12,475 557,387 $93,232 5 Funded Percentage before funding balance
reduction from plan assets j(3)/ (2)) 102.0% 98.6% 114.1% 103.1%
6 Funded Percentage with funding balance reduction from plan assets (FTAP) f((3) - (4)) / (2)1
92.6% 93.6% 94.9% 92.4%
• .61.4•11•Sw.,I.S. ••••*S.V.. .111kaiinVIIIAM OW • ,
Benefit Restrictions
Based on the 2017 funding results, no benefit restrictions will apply for the 2017 plan year since the preliminary AFTAP for each plan exceeds 80.0%. We will provide our certification of the funded status for the plans prior to the September 30, 2017 deadline.
Funding Balances
The following summarizes the funding balance activity for the Xcel Energy pension plans.
($ in Millions)
Funding Balances at3anuary 1, 20 0
Xcel Energy Pension Plan
:123.9
NCE Nonbargaining
Plan
SPS Bargaining
Plan
PSCo Bargaining
Plan
-79.611
Funding Balances used during 2016
Excess contributions elected to be added to funding balance
Interest adjustments
Amount of funding balance forfeited for AFTAP purposes
Funding balance transferred as a result of the non-deminimis asset transfer
(56,6)
75.4
4 5
0.0
1.3
(12,8)
lai
0.3
0.0
(1 3)
0.0
151
2.6
0.0
0.0
(8 1)
0.0
5.2
0 0
0 0
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Page 7 011
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Attachment RRS-RR-3 Page 3 of 16
2017 TX Rate Case
WillisTowersWatson hi tiI Mr. Richard R. Schrubbe May 17, 2017
PBGC Premiums
The PBGC variable premium amounts for the qualified plans are based on the Standard Premium Funding Target. The PSCo Bargaining Plan and the NCE Nonbargaining Plan are above the per-participant cap and the variable rate premium is limited to $517 per participant. The Xcel Energy Pension Plan and the SPS Bargaining Plan remain below the per-participant cap and variable rate premiums are equal to 3.4% of the unfunded vested liability.
The Xcel Energy Pension Plan, NCE Nonbargaining Plan, SPS Bargaining Plan, and PSCo Bargaining Plan can eliminate variable premium with September 15, 2017 contributions of $109.8 million, $35.0 million, $3.2 million and $136.8 million, respectively.
ERISA 4010 Funded Status
An ERISA 4010 filing is required if any 4010 Funding Target Attainment Percentage (4010 FTAP) for a plan within the controlled group of the plan sponsor is less than 80%. For this purpose, the target liability is calculated using interest rates that ignore the MAP-21/HATFA/BBA interest rate corridors and plan assets are reduced by the amount of the prefunding balance and funding standard carryover balance. This determination is done as of the valuation date for the plan year ending within the information year ending December 31, 2017 (i.e., the 2017 plan year). The valuation date for the 2017 plan year is January 1, 2017. The January 1, 2017 4010 FTAPs for all Xcel Energy pension plans are as follows:
4010 FTAP -- 2017 (S In Thousands) Xcel Energy
Pension Plan
NCE Nonbargaining
Plan
SPS Bargaining
Plan
PSCo Bargaining
Plan 1 Effective Interest Rate 3.88% 3.74% 4.08% 4.04% 2. Target Liability as of January 1 $1,824,554 $279,695 $364,334 $1,045,405 3. Actuarial Value of Assets as of January 1 $1,607,054 $242,069 $341,514 $893,403 4. Funding Balance as of January 1 $148,546 $12,475 $57,387 $93,232 5 Funcied Percentage with funding balance
reduction from plan assets (4010 FTAP) 79.9% 82.1% 78.0% 76.5% R(3) — (4)) / (2)]
*a' ws.o.•
Based on the results above, a filing will be required for the 2017 information (fiscal) year unless additional contributions for the 2016 plan year are made on or before September 15, 2017, Alternatively, funding balances may be forfeited such that the 4010 FTAP for each plan is above 80%. More specifically, Xcel Energy can avoid an ER1SA 4010 filing with contributions and/or funding balance forfeitures by September 15, 2017 of $1.2 million, $7.7 million, and $37.7 million to the Xcel Energy Pension Plan, SPS Bargaining Plan, and PSCo Bargaining Plan respectively. If no action is taken and a 4010 filing is required for the 2017 information year, the submission deadline will be April 15, 2018.
letviThatctintemal towerswetson.cornkgentsit309084A/XcetRETAefuerial-2017/Doeumeres/Projections/May Projectionsk,p5172017__Schnkbe 2017 Cost Fureenof mai ck,..,x Page 3 of 11
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Attachment RRS-RR-3 Page 4 of 16
2017 TX Rate Case
WillisfowersWatso hll J, Mr, Richard R Schrubbe May 17, 2017
LONG-TERM DISABILITY AND WORKERS COMPENSATION RESULTS
The combined 2017 Workers' Compensation (WC) and Long-Term Disability (LTD) cost/(income) is $1.2 rnillion, a $0.7 million decrease from our February cost estimate of $1.9 million for the plans combined. Updating the BOND:Link model results to use the cash flows based on the 2017 census data increases the discount rate from an estimated rate of 3.95% to 3.96%.
The decrease in LTD cost from $1.0 million in the February 8 cost estimates to the final 2017 result of $0.7 million is due to lower projected December 31, 2017 liabilities, which is the result of fewer participants receiving payments from the plan in 2017 than expected
The decrease in WC cost from $1.0 million in the February 8 cost estimates to the final 2017 result of $0.5 million is due to lower projected December 31, 2017 liabilities, which is the result of decreases in small claims from the 1988-1991 experience years that are below reinsurance levels.
RESULTS EXHIBITS
Pension contribution and PBGC variable premium forecasts are attached to the end of this letter. The planned funding schedule provided by Xcel Energy is assumed to sufficiently cover all minimum required contributions. Contribution and PBGC premium forecasts include 2% liability increases for Xcel Energy Pension Plan and NCE Nonbargaining Plan and 4% liability increases for SPS Bargaining Plan and PSCo Bargaining Plan starting in 2018 to estimate the impact of anticipated IRS mortality assumption updates. Benefit cost forecasts for all except LTD and Workers' Compensation plans have not been updated from the forecasts provided on February 8, 2017. Estimates of 2018-2022 benefit costs summarized by legal entity are also presented in the attached exhibits as follows:
• Exhibit I: Benefit Cost Estimates — Qualified Pension Plans
ff Exhibit 11: Benefit Cost Estimates — Nonqualified Pension Plans
• Exhibit III: Benefit Cost Estimates — Retiree Medical and Life Insurance Plan
• Exhibit IV: Liabilities — LTD and Workers' Compensation
• Exhibit V: Claims and Expenses — LTD and Workers' Compensation
• Exhibit Vl: Benefit Cost Estimates — LTD and Workers' Compensation
• Exhibit VII: Benefit Cost Reconciliation Details — Qualified Pension Plans
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Attachment RRS-RR-3 Page 5 of 16
2017 TX Rate Case
WillisibwersWatson WPM Mr Rtchard R Schrubbe May 17, 2017
Plans Valued
The attached exhibits include estimates for the following employee benefit plans maintained by Xcel Energy Inc. (Xcel Energy):
• Xcet Energy Pension Plan
a Xcel Energy Inc. Nonbargaining Pension Plan (South) [NCE Nonbargaining Plan]
• New Century Energies Inc. Retirement Plan for SPS Bargaining Unit Employees and Former Nonbargaining Unit Employees [SPS Bargaining Plan]
• New Century Energies Inc. Retirement Plan for PSCo Bargaining Unit Employees and Former Nonbargaining Unit Employees [PSCo Bargaining Plan]
• Xcel Energy Nongualified Defined Benefit Plan
• Xcel Energy SERP
• SPS SERP
a Employment Agreements
• Fort St. Vrain Nuclear Operations Personnel Plan
• NMC SERP Part A
• Xcel Energy Retiree Medical and Life Insurance Plan (including Executive Life Insurance)
• Xcel Energy Workers Compensation
• Xcel Energy Long-Term Disability (LTD) Income
http.finatainternoLtoworswatsoo comictient5/509084NXceIRETActuatial-2017Flor,unents1Projections/May ProteottonsiL 05172017_Schrubt,e_2017_Cost jundno_Final docx No 5 ot 11
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Attachment RRS-RR-3 Page 6 of 16
2017 TX Rate Case
WillisTowersWatson hllll MI Richard R. Schrubbe May 17 2017
FORECAST RESULTS
Forecast results are based on the information summarized below.
The following provides a reconciliation of actual 2017 costs to 2018 estimated costs, prior to regulatory effects:
Reconciliation of Benefit Costs (prior to regulatory effects)
Workers' Qualified Nonqualified Retiree Compen- Long Term Pension' Pensto& Medical sation Disability Total ($ in Millions)
.„ Historical asset performance Expected liability, asset, and loss amortization changes
;
8,8
(13 8)
0.0
(2.0)
0 0
(0.6)
0.0
(0.0)
I Qualified Pension Plan costs reflect the assumption that NSP-MN and Xcel Energy Nuclear costs are determined under the Aggregate Cost Compensation Method. No additional regulatory deferrals have been reflected. See Exhibit Vll for additional details.
2 2017 Includes estimated settlement charge of $1.4 million assuming $3.0 million of lump sum payments are made in 2017 ($2 1 million of known and $0.9 million of expected).
DATA, ASSUMPTIONS, METHODS AND PLAN PROVISIONS
The 2017 benefit costs, 2017 funding results and estimated 2018-2022 costs reflect the following data, assumptions, methods and plan provisions:
Data
The 2017 benefit cost results and results for 2018-2022 are based on participant data as of January 1, 2016, projected to the end of the year based on status, compensation and benefit changes through November 30, 2016, and known retirements for December 2016. Actual new entrants through November 30, 2016, and expected new entrants through December 31, 2016, are included. See our February 8, 2017, letter for more details. The 2017 pension funding, Workers Compensation and Long-Term Disability results are based on data as of January 1, 2017.
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Attachment RRS-RR-3 Page 7 of 16
2017 TX Rate Case
WillisTowersWatson Weld Mr Richard R. Schrubbe May 17, 2017
Economic Assumptions
The key assumptions used to determine the actual 2017 and estimated 2018 - 2022 benefit cost results are provided below. The assumptions used to calculate the cost under the aggregate cost method are the same as used to prepare the ASC 715 results, except as noted. Actual asset returns net of administrative expenses are assumed to equal the expected return on assets assumptions throughout the forecast period.
May 17, 2017 results
'Benefit Cost
Discount Rate — ASC 715:
• Xcel Energy Pension Plan 4.11%
• NCE Nonbargaining Pension Plan 3.97%
• SPS Bargaining Pension Plan 4.25%
• PSCo Bargaining Pension Plan 4.21% • Nongualified Pension Plan 3.99%
• Retiree Medical and Life insurance Plan 4.13%
• Workers Compensation and LTD 3.96%
Expected Return on Assets Assumption — Pension:
• Xcel Energy Pension Plan 7.10%
• NCE Nonbargaining Pension Plan 6.90%
• SPS Bargaining Pension Plan 6.75%
• PSCo Bargaining Pension Plan 6.50%
• Weighted Average Expected Return 6.87%
Expected Return on Assets Assumption — VEBA 5.80% (Bargaining/Nonbargaining)
Discount Rate — Aggregate Cost 7.10%
Salary Scale' 3.75% Initial Medical Trend 5.50%
Ultimate Medical Trend 4.50%
Year Ultimate Trend is Reached 2019 •WWitIVAR AVM(
' Career average of age-graded table (nonbargalning) and service-graded table (bargaining)
• The interest rate for converting lump sums to annuities and annuities to lump sums was updated from 4.25% to 4.00% in all years. The pre-PPA lump sum conversion interest rate was updated from 3.25% to 3.00%.
▪ The interest crediting rate for the 5% cash balance formula was updated form 3.25% to 3.00%. The interest crediting rate for the Retirement Spending Account was updated from 1.50% to 1.75%.
▪ The HRA trend assumption is 2.0%.
littplinalct internal towerswatson cont/clienisf609084A/XceRE7Acttranal-201110ocurneras/ProiectionsAilay Projection$/1_05172017_Schrubbe_2n17_Cost Funding_Final.docx Page 7 of 11
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Attachment RRS-RR-3 Page 8 of 16
2017 TX Rate Case
OillisTowersWatson WPM Mr Richard R. Schrubbe May 17, 2017
We have assumed Xcel Energy continues to use the 24-month average of the three-segment interest rates as of September in the year prior to the valuation date. The underlying three-segment rates from April 2017 were assumed to remain constant throughout the forecast period. This methodology produces the following effective interest rates:
Year
2017 2018 2019 2020 2021 2022
Xcel Energy Pension Plan 5.72% 5.53% 5 36% 5.23% 4.82% 4,42%
NCE Nonbargaining Plan 5,64% 5.44% 5.28% 5,14% 4,74% 4.34% SPS Bargaining Plan 5.88% 5.69% 5.53% 5.39% 4,97% 4.57%
PSCo Bargaining Plan 5.85% 5.65% 5.49% 5.35% 4.94% 4.54% • • • U•01, •••• . • •
Demographic Assumptions
• Active participant counts are assumed to remain level throughout the forecast period.
• When not prescribed by the IRS, the mortality assumption is the RP-2014 tables (blue collar for bargaining participants and white collar for nonbargaining participants, as adjusted for 2014 Xcel Energy mortality study) projected with generational mortality improvements using an adjusted SOA MP-2016 methodology.
▪ When not prescribed by the IRS, the mortality assumption for converting lump sums to annuities or annuities to lump is a combined annuitant and non-annuitant RP-2014 table projected with scale MP-2016 to the commencement year plus an additional 10 years.
▪ Liabilities that are required to use IRS prescribed mortality are based on the tables applicable for 2017 with projections to the valuation year and increased by 2% for the Xcel Energy Pension Plan and NCE Nonbargaining Plan and 4% for the SPS Bargaining Plan and PSC() Bargaining Plan starting in 2018 to estimate the impact of potential mortality updates.
Pension Contributions
The forecasts reflect actual 2017 contributions of $150 million made on January 3, 2017, and planned contributions provided by Xcel Energy for 2018 through 2022. The table below summarizes the amounts assigned to each plan over the forecast period:
2017 2018 Year
2019 2020 2021 2 22
Xcel Energy Pension Plan $ 110.0 $ 110.0 $ 95.0 $ 95 0 $ 80 0 45 0
NCE Nonbargaining Plan 10,0 10 0 20,0 20.0 15.0 15,0 SPS Bargaining Plan 20 0 15.0 15,0 10.0 10 0 7
PSCo Bargaining Plan 10 0 15,0 20.0 25.0 45 0 83 0 Total Contribution $ 150.0 $ 150.0 160.0 150.0 160.0 150.0
>, • C .11...—mawaw•ttet .mervem.•
• Contributions in 2018 and beyond are assumed to be paid on January 15 and assigned to the prior plan year.
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Attachment RRS-RR-3 Page 9 of 16
2017 TX Rate Case
WillisTowers Watson iglirhi Mr, Richard R. Schnibbe May 17 2017
PEGG Premiums
▪ The PBGC Variable Premium estimates reflect the increase in premium rates under The Bipartisan Budget Act of 2015, actual January 1, 2017, asset values, demographic experience, and 2% liability increases for the Xcel Energy Pension Plan and NCE Nonbargaining Plan and 4% liability increases for the SPS Bargaining Plan and PSCo Bargaining Plan starting in 2018 to estimate the impact of potential mortality updates.
o The estimates also assume all qualified plans use the standard interest rate method.
• The PSCo Bargaining Plan is at the per-participant variable rate premium cap starting in 2017 and extending through 2021. The NCE Nonbargaining Plan is at the per-participant variable rate premium cap starting in 2017 and extending through 2019.
Retiree Medical and Life Insurance Plan — Effects of Health Care Reform
• Our estimates continue to assume the same effects as noted in our 2017 ASC 715 cost report dated March 31, 2017.
Plan Changes
• PPA "greater-or was extended for NSP bargaining terminations and retirements prior to December 31, 2019,
ACTUARIAL CERTIFICATION
As requested by Xcel Energy Inc., this report provides results of the actuarial valuations of the Xcel Energy inc. employee benefit plans indicated above. This report should not be used for other purposes, distributed to others outside Xcel Energy Inc. or relied upon by any other person without prior written consent from Willis Towers Watson. Except where we expressly agree in writing, this report should not be disclosed or provided to any third party, other than as provided below. In the absence of such consent and an express assumption of responsibility, no responsibility whatsoever is accepted by us for any consequences arising from any third party relying on this report or any advice relating to its contents.
Xcel Energy Inc. may make a copy of this report available to auditors or appropriate governmental agencies of the plan or the plan sponsor, but we make no representation as to the suitability of this report for any purpose other than that for which it was originally provided and accept no responsibility or liability to the auditors in this regard. Xcel Energy Inc. should draw the provisions of this paragraph to the attention of the auditors or appropriate governmental agencies when providing this report to them.
In preparing this valuation, we have relied upon information and data provided to us by Xcel Energy Inc. and other persons or organizations designated by Xcel Energy Inc. An audit of the financial and participant data provided was not performed, but we have checked the data for reasonableness as appropriate based on the purpose of the valuation. The results presented in this report are directly dependent upon the accuracy and completeness of the underlying data and information. Any material inaccuracy in the data, assets, plan provisions or other information provided to us may have produced results that are not suitable for the purposes of this report and such inaccuracies, as corrected by Xcel Energy Inc., may produce materially different results that could require that a revised report be issued.
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Attachment RRS-RR-3 Page 10 of 16
2017 TX Rate Case
WillisTowersWatson 11111111d Mr. Richard R. Schrubbe May 17, 2017
This valuation reflects our understanding of the relevant provisions of the Pension Protection Act of 2006, The IRS has yet to issue final guidance with respect to certain aspects of this law. It is possible that such guidance may conflict with our understanding of the law and could therefore affect results shown in this report.
The results summarized in this report involve actuarial calculations that require assumptions about future events. We believe the assumptions and methods used in this report are reasonable and appropriate for the purposes for which they have been used. In our opinion, all methods, assumptions and calculations are in accordance with requirements of the Internal Revenue Code and ERISA, and the applicable financial accounting standards, including ASC 712 and 715 and the procedures followed and presentation of results are in conformity with generally accepted actuarial principles and practices.
Assumptions for determining benefit cost results were selected by Xcel Energy Inc. Xcel Energy Inc. uses the standards set out in ASC 715 to calculate pension cost for each plan in total; pension cost for the subsidiaries is calculated based on plan assets allocated to each subsidiary in proportion to the PBO for each subsidiary. Beginning in fiscal 2010, Discontinued Operations is allocated assets in proportion to its PBO, similar to nondiscontinued operations. The gain/(loss) amortization is allocated to each subsidiary in proportion to the gain/(loss) balance for each subsidiary (excluding deferred asset gains and losses). This methodology is consistent with former NSP's methodology since 1998 and has been applied to the former NCE pension plans since January 1, 2001. A similar methodology is used for the ASC 715 costs for the Retiree Medical and Life Plan, except separate asset accounts are used for each subsidiary.
Except as otherwise provided herein, the results presented are based on the data, assumptions, methods and plan provisions outlined in the actuarial valuation reports to determine accounting requirements for the plan for the plan year ending December 31, 2016, and beginning January 1, 2017 dated March 31, 2017. Therefore, the descriptions of the data, assumptions, methods, plan provisions and limitations of the valuation and its use should be considered part of this letter report.
The undersigned consultants with actuarial credentials meet the Qualification Standards of the American Academy of Actuaries to render the actuarial opinions contained herein. Our objectivity is not impaired by any relationship between the Xcel Energy Inc, and our employer, Towers Watson Delaware Inc., a subsidiary of Willis Towers Watson PLC.
Nip llnalaintemal lawerswalson coaddentst6090WINXceIRETActuanal-20-17/DocutpentaiRejecOonsiteay Projections/L_05172017_Schrubbe_2017_Cos1J-unding_Finadocx Page 10 011
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Attachment RRS-RR-3 Page 11 of 16
2017 TX Rate Case
Willis-rowersWatson 11I lil Mt, Richard R. Schrubbe May 17, 2017
NEXT STEPS
If you have any questions or would like to discuss, please contact Jim at 952-842-6354 or Mark at 952-842-6445.
Sincerely,
James W. Shaddy, ASA, EA Consulting Actuary
cc: Todd Degrugillier Xcel Energy Inc Darla Figoli — Xcel Energy Inc. Levi Glines Xcel Energy Inc. Kris Lindemann — Xcel Energy Inc. Ruth Lowenthal — Xcel Energy Inc. Garrett Mikrut Xcel Energy Inc. Jill Reed — Xcel Energy Inc. Debbie Robin — Xcel Energy Inc. Jeff Savage — Xcel Energy Inc. Brian Van Abel — Xcel Energy lnc. Greg Zick Xcel Energy Inc.
Mark A. Afdahl, FSA, EA Consulting Actuary
Ross Athman — Willis Towers Watson Mark Bilderback — Willis Towers Watson Beth Fernandez — Willis Towers Watson Kristoff Hendrickson — Willis Towers Watson Scott Lund — Willis Towers Watson Nick Principe — Willis Towers Watson Tyler Tanck — Willis Towers Watson
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3392
XCEL ENERGY INC. - Qualified Pension Plans EXHIBIT Benefit Cost by Legal Entity Page 1 of 6
(S in Thousands)
Ett
JO
98
Z - 9
11 -2
1
Net Cost
Aggregate Cosi Compensation
Method
Aggregate Cost 20-year Amortization '
Method
2,199 N/A. N/A 5,498 3,308 2 743
43,643 31,554 28,166 7.640 IN/A wa,
28,256 N/A N/A ;13; WA N/A
87,223 34,862 28,909
103 N/A N/A 5 179 WA N/A 4 749 N/A NIA
10,030 NM N/A
9.318 N'A NIA 9.919 N/A NM
302 24,'A N/A 29,268 N/A NIA 29,570 N/A hM
135,641 34.862 28,909
January 1 Prepaid
(Accrued) Contribution P60
37,594 4.568 77,413'6 (8,397) 5,71, 98 345
378,945 53,700 938,153 53,800 3,061 157.457 05,517 37,024 658,883
(146; 32 537 557,313 110,000 1,930,788
1.545 "32 16,497 3.883 204,341 28,980 2 985 87 994 47,122 10,000 296,452
115.195 20,000 395,607 115,195 20.000 395 607
6.561 111 11.290 278.738 9,689 1,047,481 285.299 "0.00C 1,058,771
1,004.929 150 000 3,681.618
Amortizations
Service Expected Retum Prior Service Nei 2017
Cost Interest Cost on Assets Cost (Gain)/Loss
Xcel Energy Pension Plan (XEPP) Discontinued Operations - 3,070 (4,547) 3.676 Xcel Energy Nuclear 6,578 3,905 (5,777) 44 746 NSP - MN 21.253 35,802 (54,289) 1,016 38.88'. NSP - 1/16 4 61/3 1,218 (9.180) 131 5 846 Xcel Services. 24,702 25,913 (38,193) 245 15.589 XEPC (former EMI) „ 22 (32) . (3) Total XEPP 57,151 75,930 (1)2,018) t ,442 64.717
NCE Non-Bargaining Pension Plan Discontinued Operations - Cheyenne - 155 (2aet 174 PSCo 4 825 7,769 (11,356) 3.937 SPE 3,008 3,333 (4,871i 3.278 Total NCE 7,836 11.257 (15 453) 1 7.389
SPS Bargaining Plan BPS
6.752 16,377 (23,012) 9,703 Total SPS
6.750 16,377 (23,012) 9.703
PSCo Bargaining Plan Discontinued Operations - Cheyenne .. 456 (508) - 4 84 PSCo 22,452 42,789 (57,179) (3.212) 24,418 Total PSCo 22.452 43,245 (57,787) (3.212) 24,872
Total Xcei Energy
94.189 146,809 (209,270) (1,768) 106 88,
includes NRG. BMG, Natro Gas, Utility Engineering, Seren, Quixx. Crockett and OPS 2 includes Eloigne
Assumptions Discount Rate - U.S. GAAP
XEPP 4.11% NCE 3.97% SP5 4.25% PSCo 4.21%
Discount Rate - Aggregate Normal Cost 7.10% Salary Scale 3.75% Expected Retum on Assets
XEPP 7.10% NCE 6.90% SPS 6.75% PSCo 8.50%
Assumed Mortality Table Bargaining Participants RP-2014 Blue Collar projected with generational mot-talky knprovements using an adjusted SOA 6AP-2016 methodology Non-bargaining Participants RP-2014 \Attie Collar, as adjusted for 2014 Xcel Energy mortality study, projected with generational mortality improvements using an adjusted SOA MP-2016 methodology
See May 17, 2017 letter for addisonal information on data, assumptions, methods and plan provisions. Contributions already made are allocated in accordance with the January 3, 2017 contnbution directives provided by Xcel Energy on January 23, 2017.
CA) 5/17/2017 httotctinternatowerswatsoscornktentat609084A/XceIRETActoarial-20171Docurnents/ProjectonsMay Projections/Promo:Dons - 05172017 to Xcel.xlcr Osuil nett
WillisToweraWatson
XCEL ENERGY INC. - Nonqualified Pension Plans
EXHIBIT 0 Benefit Cost by Legal Entity
Page 1 of 6
($ in Thousands)
Amortizations
2017 Service Cost Expected Return
Interest Cost on Assets Phor Service
Cost Net
(Gain)/Loss FAS 88
Settlement" Net Cost
January 1 Prepaid
(Accrued) apected Benefit
Payments
Discontinued Operators 30 ..55i (25 (1,350) 92
Xcel Energy Nuclear 81 47 10 136 (1,144) 136
NSP - MN 23 188 '.195 586 (607) 669
NSP - WI 16 29 12 57 (6421 65
PSCc? 38 142 399 579 212 444
SPS 2 94 168 283 (850i 328
Xcel Services4 1,193 1,117 240 1,187 1,400 5.137 (17,150) 3 729 XEPC (former EMI) l33)
Total Xcel Energy 1,372 1,627 240 2.113 1 400 6.752 (21.564) 5.465
C,I1
'Includes NRG, BMG, Viking, Natrogas, Quixx, Seren and IJE 2 includes Fort St. Vrain
3 Includes Eloigne i 'Estimated settlement amount assuming $3.0 million of lump sum payments are made in 2017 ($2.1 million of known and $0.9 million of expected),
t\-.) 00 Assumptions -.....1
0 Discount Rate 3.99% 1-1-, Salary Scale 175%
-F, Assumed Mortality Table RP-2014 White Collar, as adjusted for 2014 Xcel Energy mortality study, projected with generational mortality improvements using an adjusted SOA MP-2016 methodology (4.)
See May 17. 2017 letter for additional information on data, assumptions, methods and plan provisions,
Co4 5/17/2017 http.11natctinterOaltowerswatsonzoottlients602054A/XceiRETACtuarlal-2017/DOotiments/ProjectionsiMay Projecbons/Projectrons - 05172017 10 Xcelicisx: Nonqualifie0
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XCEL ENERGY INC. - Postretirement Benefits
EXHIBIT 111 Benefit Cost by Legal Entity
Page 1 of 6
($ in Thousands)
2017 Service Cost interest Cost
Amortizations
Net Cost January 1 Prepaid
(Accrued) Contribution Expected Retum
on Assets Prior Service
Cost Net
(Gam)/Loss
Discontinued Operations. .. 346 (88) (• 03) 143 298 (4.920) 7C6 Xcel Energy Nuclear 15 33 49 (15) 32 649; '5 NSP - MN° 129 3 382 :214) (3,085) 2.041 2.253 (59,479) 7,992 NSP - vvi as 590 (31 (35' 'i 436 673 (7,681) 1,355 PSCo 767 16,765 (21,905) (6.247) 3.843 (6,777) 22.396 SPSz' 875 1,659 (2355) (40'.) '618) (840) (14,788) Xcel Services 44 1,161 l29 (549) 864 ',491 (13,583) 1.748 XEPC (former EMI) .. 1 1 (5) (.3) ;,123j a Total Xcel Energy 1,359 23.937 (24,622) (10,686) 6.689 (2,823) (78,827) 11 na
'Includes NRG, BMG, Viking, Natrogas, Cheyenne, Quixx and UE. 2lnaudes Eloigne and Sew. 3Includes Executive Life Insurance benefits.
Assumptions Discount Rate
4.13% Expected Retum on Assets
5.80%
Ett
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Z - 91
111
Medical Trend Initial (2017) 5.50% Ultimate 4.50% Year Ultimate Reached 2019
Assurneo Mortality Table Bargaining- RPH-2014 Blue Collar headcount-weighted table adjusted for Xcel Energy mortality study, projected with generational mortality improvements using an adjusted SOA
MP-2016 methodology. Non-bargaining: RPH-2014 White Collar headcount-weighted table adjusted for Xcel Energy mortality study, projected with generational mortality improvements using an adjusted SOA
MP-2016 methodology. Contributions for PSCo and SPS are assumed equal to the net cost, but not less than zero. Contributions for other legal entities are assumed equal to the expected benefit payments See May 17, 2017 letter for additional information on data, assumptions, methods, and plan provisions.
t.o.) f.44
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WillisTowersWatson lJllJ
XCEL ENERGY INC. - LTD and Workers' Compensation EXHIBIT VI Benefit Cost Estimates by Legal Entity
($ in Thousands)
Fiscal Year Ending ASC 712
20 2017 2018 2019 n20 2021 2022 Actual Actual Budget Budget Budget Budget
3.96%r
Budget
3.96% Discount Rate- Workers Compensation
Former NSP - Workers' Compensation '
446% 3.96% 3.96% 3.96% 3.96%
MN/SD 1,162 509 338 316 294 274 2.54 MIMI (115) 12 9 8 9 8 7
Subtotal 1,047 521 347 324 303 282 261
Former NCE - Workers' Compensation 1 Colorado - PSCo 9 162 60 67 56 54 Si
Deductible States - Workers' Compensation Deductible States - SPS (KS, OK, NM, and TX) - - - - - - -
Total Xcel Energy Workers' Compensation 1,056 6 3 407 381 368 336 312
Discount Rate - LTD Income 4.46% 3.96% 3.96% 3.96% 3.96% 3.96% 3.98%
LTD Income Discontinued Operations : Cheyenne 172 14 4 3 2 2 2 Discontinued Operations'` (80) 78 23 22 21 19 19 NSP-MN (684) 120 269 266 240 227 214 AISP-WI 58 207 62 58 55 53 49 PSCo 302 26 65 48 37 29 23 SPS (6) 78 28 22 18 13 9 Utility Engineering 55 4 2 2 1 2 1 Xcel Services (557) 17 12 9 8 6 5 XEPC 5 5 1 - - .. ,
Total Xcel Energy LTD Income (736) 549 466 419 382 351 322
Total Xcel Energy ASC 712 321 1.232 873 800 740 687 634
Results for former NSP states include income replacement and medical benefits as well as reserve for bankrupt insurers. Colorado results include reserve for bankrupt insurers.
2 includes NRG, BMG, Viking and Natrogas.
--i -0 (A, -
See May 17, 2017 letter for additional information on data, assumptions, methods, and plan provisions. 5' r (-)
C.#4 51/7/2017
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2I
6
t\..) Final demographic experience' Final discount rates Final 2016 asset returns
.... ,097 (799) 2.125 943 2,1
(552) (219) (406) (1,292) (293) 5 (798) 133) 160) (1,155) (385) 2
84) 3
1,049
Lk..) Historical asset performance Expected liability, asset and loss amortization changes (11,892)
9,727 2 744 1,799 1,308 7 0 4 (6,380) (2,819) 1 95),
'Up
Xcel Energy inc. - Qualified Pension Plans Benefit Cost Reconciliation Details ($ in Thousands)
Exhibit Vll
ASC 715'
NSP-NIN & Xcel Energy Nuclear
XEPP NCE SPS PSCo Tod! ASC 7151 Aggregate Cost Compensation
Method
Aggregate Cost 20-Year
Amortization Method
4174- Estimated demographic experience' 2.677 517 199
-4 2.391 1,472 989 663 (1,002)
Decrease salary increase assumption' (2,641) (255) (527) !SAS) (4.268) (1,479) 1568) (800) Extend "greater-or for NSP bargaining contract 744 - - - 744 547 106 80 Mortality assumption (1,063) 38 (57414 (1,672) (3,271) (680) (353) 270 Updated retiree claims and participant contributions4 - - _
Discount rates5 6,573 967 1.494 4,421 13.455 3.637 f3) (41 Estimated 2016 asset performance' 1427 191 121 446 2.185 787 76C 56C Pension contributions increased from $125M to $150M (1,362) 324) - (1,686) (737)
Does not include potential settlement charges. 2 Estimated impact of updated participant status and compensation data through September 30, 2016, with the primary factors being
fewer deaths than expected and 2016 compensation approximately 0.4% larger than expected
3 Increase assumptions reduced by 0.25% at each age for nonbargaining participants and each service increment for bargaining participants. a Per capita claims cost increased 5.8% (8.2% pre-65, 5.2% post-65) versus expected increase of 6.0%. Expected Medicare Part D
reimbursement for efigible retirees decreased 4.0% versus expected increase of 6.0%, increasing costs by 50.8 million. Also reflects 1.0% increase versus 6.0% expected increase in PSCo retiree premiums due to bargaining contract methodology ($0.5 million increase).
5 December 31, 2016 discount rates assumed to be equal to the discount rates from Willis Towers Watson BOND:Link model results as of October 31, 2016 plus 25 basis points for approximate month to date rate movement in November. Bond model excludes collateralized bonds.
5 Estimate assumes year-end asset values equal estimated November 18, 2016 values, which produce full year 2016 returns of 5%. 7 Impact of updated participant status and compensation data through November 30, 2016, final benefit payment experience,
and the transfer of participants between XEPP and NCE.
See May 17, 2017 letter for additional information on data, assumptions, methods and plan provisions
C.A4 5/17/2017 WillisTowers Watson 1•19.
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Southwestern Public Service Company
Calculation of Health and Welfare Costs
Calculation of Total Cost Amounts to Cost of Service Amounts
MISC BENEFIT PROGRAMS
ACTIVE
AND LIFE HEALTH CARE INSURANCE
Updated Test
Updated Test Year
Year 12 Months
12 Months Ending
Ending Line. No
SPS 6/30/17 6/30/17 6/30/17
1 Total Cost on Incurred Basis $ 14,152,757 $ 1,102,850 $ 15,255,607 2 Percent to SPS O&M FERC 926 66.49% 66.45% 66.49% 3 Amount to SPS O&M FERC 926 $ 9,410,640 $ 732,824 $ 10,143,464
Xcel Energy Services 4 Total Cost on Incurred Basis $ 36,460,531 $ 6,221,443 $ 42,681,974 5 Percent to SPS O&M FERC 926 14.33% 12.47% 14.06% 6 Amount to SPS O&M FERC 926 $ 5,226,061 $ 776,030 $ 6,002,091
7 Affiliate Charges $ 199 $ 17 $ 216
Total 8 Amount to SPS O&M FERC 926 $ 14,636,900 $ 1,508,871 $ 16,145,771
TOTAL HEALTH AND
WELFARE Updated Test
Year 12 Months
Ending
Attachment RRS-RR-5 Page 1 of 1
2017 TX Rate Case
Southwestern Public Service Company
Calculation of Deferred Pension and OPEB Balances
January 2016 - June 2017 Deferrals/Additional Expense Prior Year
Current Year Deferral/Expense
Deferrals/Expense True-ups Total Jan 2016 $ (63,181) $ (63,181)
Feb 2016 (63,181) (63,181)
Mar 2016 (63,181) (63,181)
Apr 2016 (63,181) (63,181)
May 2016 (63,181) (63,181)
Jun 2016 (63,181) (63,181)
Jul 2016 (63,181) (63,181)
Aug 2016 (63,181) (63,181)
Sept 2016 (63,181) (63,181)
Oct 2016 (63,181) (63,181)
Nov 2016 (63,181) (63,181)
Dec 2016 (114,624) (114,624)
Jan 2017 (109,723) $ (106,637) (216,360)
Feb 2017 (105,653) (105,653)
Mar 2017 (107,688) (107,688)
Apr 2017 (107,688) (107,688)
May 2017 (107,688) (107,688)
Jun 2017 (107,688) $ (20,272) (127,960)
Total Increase to Expense $ (1,455,745) $ (126,909) $ (1,582,654)
Amortization Unamortized Balance May 31, 2016 $ 1,841,526
Jun 2016 (149,312.92)
Jul 2016 (149,312.92)
Aug 2016 (149,312.92)
Sep 2016 (149,312.92)
Oct 2016 (149,312.92)
Nov 2016 (149,312.92)
Dec 2016 (149,312.92)
Jan 2017 435,496
Feb 2017 (76,730.20)
Mar 2017 (76,730.20)
Apr 2017 (76,730.20)
May 2017 (76,730.20)
Jun 2017 (76,730.20)
Jul 2017 (4,147.48)
Aug 2017 (76,730.20)
Sep 2017 (76,730.20)
Oct 2017 (76,730.20)
Nov 2017 (76,730.20)
Dec 2017 (76,730.20)
Jan 2018 (44,503)
Unamortized Balance as of January 17, 2018 $ 415,879
Total Recovery Request (1,166,775)
RR 6 - 292 of 443 3399