** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**ý****                                ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

** **

**For thequarterly period ended March 31, 2005**

 

**or**

 

**o****                                ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For thetransition period from               to               **

 

#### **Commission File Number: 001-03789**

####  

**SOUTHWESTERN PUBLIC SERVICE COMPANY**

**(Exact name of registrant asspecified in its charter)**

 
| **New Mexico**                                                  | ** ** | **75-0575400**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer Identification No.) |
|                                                            |       |                                 |
| **Tyler at Sixth,  Amarillo, Texas**                            | ** ** | **79101**                            |
| (Address of principal executive  offices)                       |       | (Zip Code)                           |

 

Registrant’stelephone number, including area code **(303)571-7511**

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. ýYes o No

 

Indicate bycheck mark whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).

o Yes ý No

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

 
| **Class**                  | ** ** | **Outstanding  at April 28, 2005** |
|----------------------------|------------|-----------------------------------------|
| Common Stock, $1 par value |       | 100 shares                              |

 

SouthwesternPublic Service Company meets the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with thereduced disclosure format specified in General Instruction H (2) to such Form10-Q.

 

 

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**Tableof Contents**

 
| **PART I - FINANCIAL INFORMATION** | ** **                                |
|------------------------------------|-------------------------------------------|
| Item l.                            | Financial Statements                      |   |
| Item 2.                            | Management’s Discussion and Analysis |   |
| Item 4                             | Controls and Procedures                   |   |
| **PART II - OTHER INFORMATION**    | ** **                                |
| Item 1.                            | Legal Proceedings                         |   |
| Item 5.                            | Other Information                         |   |
| Item 6.                            | Exhibits                                  |   |

 

This Form 10-Qis filed by Southwestern Public Service Co. (SPS). SPS is a wholly ownedsubsidiary of Xcel Energy Inc. (Xcel Energy). Xcel Energy is a registeredholding company under the Public Utility Holding Company Act of 1935 (PUHCA).Additional information on Xcel Energy is available on various filings with theSecurities and Exchange Commission (SEC).

 

2

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**PART 1****. FINANCIAL INFORMATION**

 

**Item 1****. Consolidated Financial Statements**

 

**SOUTHWESTERN PUBLIC SERVICECO.**

**CONSOLIDATED STATEMENTS OFINCOME (UNAUDITED)**

**(Thousands of Dollars)**

 
| ** **                                                                                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                                              | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| ** **                                                                                                              | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Operating revenues                                                                                                      |       | $                                      | 312,403    |   | $ | 306,557 |   |
|                                                                                                                    |       |                                   |       |   |   |
| Operating expenses:                                                                                                     |       |                                   |       |   |   |
| Electric fuel and purchased power                                                                                       |       | 195,947                                |       | 189,319 |   |
| Other operating and maintenance expenses                                                                                |       | 45,610                                 |       | 45,395 |   |
| Depreciation and amortization                                                                                           |       | 23,616                                 |       | 22,305 |   |
| Taxes (other than income taxes)                                                                                         |       | 12,729                                 |       | 13,545 |   |
| Total operating expenses                                                                                                |       | 277,902                                |       | 270,564 |   |
|                                                                                                                    |       |                                   |       |   |   |
| Operating income                                                                                                        |       | 34,501                                 |       | 35,993 |   |
|                                                                                                                    |       |                                   |       |   |   |
| Other income:                                                                                                           |       |                                   |       |   |   |
| Interest and other income, net of  nonoperating expenses (see Note 6)                                                   |       | 484                                    |       | 261 |   |
| Allowance for funds used during  construction – equity                                                             |       | 384                                    |       | 771 |   |
| Total other income                                                                                                      |       | 868                                    |       | 1,032 |   |
|                                                                                                                    |       |                                   |       |   |   |
| Interest charges and financing costs:                                                                                   |       |                                   |       |   |   |
| Interest charges — net of amounts  capitalized, includes other financing costs of $1,525 and $1,756,  respectively |       | 13,384                                 |       | 13,297 |   |
| Allowance for funds used during construction  – debt                                                               |       | (513                                   | )          | (509 | ) |
| Total interest charges and financing costs                                                                              |       | 12,871                                 |       | 12,788 |   |
|                                                                                                                    |       |                                   |       |   |   |
| Income before income taxes                                                                                              |       | 22,498                                 |       | 24,237 |   |
| Income taxes                                                                                                            |       | 8,402                                  |       | 9,441 |   |
| Net income                                                                                                              |       | $                                      | 14,096     |   | $ | 14,796 |   |

 

See Notes to Consolidated Financial Statements

 

3

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**SOUTHWESTERN PUBLIC SERVICECO.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)**

**(Thousands of Dollars)**

 
| ** **                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                               | ** ** | **2004** | ** ** |
| Operating activities:                                                              |       |                                   |       |   |   |
| Net income                                                                         |       | $                                      | 14,096     |   | $ | 14,796 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                   |       |   |   |
| Depreciation and amortization                                                      |       | 25,667                                 |       | 24,492 |   |
| Deferred income taxes                                                              |       | 3,335                                  |       | 8,536 |   |
| Amortization of investment tax credits                                             |       | (63                                    | )          | (63 | ) |
| Allowance for equity funds used during  construction                               |       | (384                                   | )          | (771 | ) |
| Change in recoverable electric energy costs                                        |       | (2,337                                 | )          | (24,370 | ) |
| Change in accounts receivable                                                      |       | 615                                    |       | 11,445 |   |
| Change in unbilled revenues                                                        |       | 14,870                                 |       | 8,355 |   |
| Change in inventories                                                              |       | (37                                    | )          | 229 |   |
| Change in other current assets                                                     |       | 1,247                                  |       | 1,532 |   |
| Change in accounts payable                                                         |       | (26,959                                | )          | (1,853 | ) |
| Change in other current liabilities                                                |       | 21,076                                 |       | (11,891 | ) |
| Change in other noncurrent assets                                                  |       | (3,057                                 | )          | (4,148 | ) |
| Change in other noncurrent liabilities                                             |       | 1,464                                  |       | 1,752 |   |
| Net cash provided by operating activities                                          |       | 49,533                                 |       | 28,041 |   |
|                                                                               |       |                                   |       |   |   |
| Investing activities:                                                              |       |                                   |       |   |   |
| Capital/construction expenditures                                                  |       | (26,894                                | )          | (24,161 | ) |
| Allowance for equity funds used during  construction                               |       | 384                                    |       | 771 |   |
| Other investments – net                                                       |       | 1,419                                  |       | 276 |   |
| Net cash used in investing activities                                              |       | (25,091                                | )          | (23,114 | ) |
|                                                                               |       |                                   |       |   |   |
| Financing activities:                                                              |       |                                   |       |   |   |
| Short-term borrowings – net                                                   |       | (2,000                                 | )          | 20,000 |   |
| Dividends paid to parent                                                           |       | (22,442                                | )          | (23,987 | ) |
| Net cash used in financing activities                                              |       | (24,442                                | )          | (3,987 | ) |
|                                                                               |       |                                   |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                              |       | —                                 |       | 940 |   |
| Cash and cash equivalents at beginning of  period                                  |       | 5                                      |       | 9,869 |   |
| Cash and cash equivalents at end of period                                         |       | $                                      | 5          |   | $ | 10,809 |   |

 

See the Notes to Consolidated Financial Statements

 

4

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**SOUTHWESTERN PUBLIC SERVICECO.**

**CONSOLIDATED BALANCE SHEETS (UNAUDITED)**

**(Thousands of Dollars)**

 
| ** **                                                                                  | ** ** | **March 31,  2005** | ** ** | **Dec. 31,  2004** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------|------------|
| **ASSETS**                                                                                  | ** ** | ** **               | ** ** | ** **         | ** ** |
| Current assets:                                                                             |       |                     |       |               |       |
| Cash and cash equivalents                                                                   |       | $                        | 5          |               | $          | 5 |   |
| Accounts receivable — net of allowance for  bad debts: $2,945 and $2,844, respectively |       | 62,965                   |       | 66,445             |       |
| Accounts receivable from affiliates                                                         |       | 5,137                    |       | 2,273              |       |
| Accrued unbilled revenues                                                                   |       | 47,400                   |       | 62,269             |       |
| Recoverable electric energy costs                                                           |       | 82,377                   |       | 80,040             |       |
| Materials and supplies inventories — at  average cost                                  |       | 14,404                   |       | 14,403             |       |
| Fuel inventory — at average cost                                                       |       | 3,033                    |       | 2,997              |       |
| Derivative instruments valuation – at  market                                          |       | 8,536                    |       | 8,381              |       |
| Prepayments and other                                                                       |       | 5,656                    |       | 6,902              |       |
| Total current assets                                                                        |       | 229,513                  |       | 243,715            |       |
| Property, plant and equipment, at cost:                                                     |       |                     |       |               |       |
| Electric utility plant                                                                      |       | 3,308,799                |       | 3,291,086          |       |
| Construction work in progress and other  property                                           |       | 68,866                   |       | 65,848             |       |
| Total property, plant and equipment                                                         |       | 3,377,665                |       | 3,356,934          |       |
| Less accumulated depreciation                                                               |       | (1,414,357               | )          | (1,398,497         | )          |
| Net property, plant and equipment                                                           |       | 1,963,308                |       | 1,958,437          |       |
| Other assets:                                                                               |       |                     |       |               |       |
| Other investments                                                                           |       | 8,483                    |       | 9,902              |       |
| Regulatory assets                                                                           |       | 131,026                  |       | 93,067             |       |
| Prepaid pension asset                                                                       |       | 134,847                  |       | 132,757            |       |
| Derivative instruments valuation – at  market                                          |       | 56,961                   |       | 52,431             |       |
| Deferred charges and other                                                                  |       | 4,677                    |       | 4,819              |       |
| Total other assets                                                                          |       | 335,994                  |       | 292,976            |       |
| Total assets                                                                                |       | $                        | 2,528,815  |               | $          | 2,495,128 |   |
| **LIABILITIES AND EQUITY**                                                                  |       |                     |       |               |       |
| Current liabilities:                                                                        |       |                     |       |               |       |
| Short-term debt                                                                             |       | $                        | 34,000     |               | $          | 36,000 |   |
| Accounts payable                                                                            |       | 114,518                  |       | 139,311            |       |
| Accounts payable to affiliates                                                              |       | 11,939                   |       | 14,105             |       |
| Taxes accrued                                                                               |       | 17,712                   |       | 901                |       |
| Accrued interest                                                                            |       | 15,073                   |       | 10,098             |       |
| Dividends payable to parent                                                                 |       | 21,269                   |       | 22,442             |       |
| Current deferred income taxes                                                               |       | 10,373                   |       | 7,878              |       |
| Derivative instruments valuation — at  market                                          |       | 41,296                   |       | 14,772             |       |
| Other                                                                                       |       | 17,400                   |       | 18,109             |       |
| Total current liabilities                                                                   |       | 283,580                  |       | 263,616            |       |
| Deferred credits and other liabilities:                                                     |       |                     |       |               |       |
| Deferred income taxes                                                                       |       | 438,371                  |       | 438,276            |       |
| Deferred investment tax credits                                                             |       | 3,654                    |       | 3,716              |       |
| Regulatory liabilities                                                                      |       | 106,826                  |       | 135,881            |       |
| Derivative instruments valuation — at  market                                          |       | 70,454                   |       | 22,449             |       |
| Benefit obligations and other                                                               |       | 26,279                   |       | 24,817             |       |
| Total deferred credits and other  liabilities                                               |       | 645,584                  |       | 625,139            |       |
| Long-term debt                                                                              |       | 825,539                  |       | 825,462            |       |
| Common stock – authorized 200 shares of  $1.00 par value, outstanding 100 shares       |       | —                   |       | —             |       |
| Premium on common stock                                                                     |       | 415,830                  |       | 415,830            |       |
| Retained earnings                                                                           |       | 363,258                  |       | 370,430            |       |
| Accumulated other comprehensive loss                                                        |       | (4,976                   | )          | (5,349             | )          |
| Total common stockholder’s equity                                                      |       | 774,112                  |       | 780,911            |       |
| Commitments and contingencies (see Note 3)                                                  |       |                     |       |               |       |
| Total liabilities and equity                                                                |       | $                        | 2,528,815  |               | $          | 2,495,128 |   |

** **

**See the Notes to Consolidated Financial Statements**

** **

**5**

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** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

In the opinionof management, the accompanying unaudited consolidated financial statementscontain all adjustments necessary to present fairly the financial position ofSPS as of March 31, 2005, and Dec. 31, 2004; the results of its operationsfor the three months ended March 31, 2005 and 2004; and its cash flows forthe three months ended March 31, 2005 and 2004. Due to the seasonality ofelectric sales of SPS, quarterly results are not necessarily an appropriatebase from which to project annual results.

 

The accountingpolicies of SPS are set forth in Note 1 to its financial statements in itsAnnual Report on Form 10-K for the year ended Dec. 31, 2004. The followingnotes should be read in conjunction with such policies and other disclosures inthe Form 10-K.

 

**1.****     AccountingPolicies**

 

The significant accountingpolicies set forth in Note 1 to the consolidated financial statements in SPS’Annual Report on Form 10-K for the year ended Dec. 31, 2004 appropriatelyrepresent, in all material respects, the current status of accounting policies,and are incorporated herein by reference.

 

***FASB InterpretationNo. 47 (FIN No. 47) –***In April 2005, theFinancial Accounting Standards Board (FASB) issued FIN No. 47 to clarify thescope and timing of liability recognition for conditional asset retirementobligations pursuant to Statement of Financial Accounting Standard (SFAS) No.143 - “Accounting for Asset Retirement Obligations”.  The interpretation requires that a liabilitybe recorded for the fair value of an asset retirement obligation, if the fairvalue is estimable, even when the obligation is dependent on a future event.  FIN No. 47 further clarified that uncertaintysurrounding the timing and method of settlement of the obligation should befactored into the measurement of the conditional asset retirement obligationrather than affect whether a liability should be recognized.  Implementation is required to be effective nolater than the end of fiscal years ending after Dec. 15, 2005.  Additionally, FIN No. 47 will permit but notrequire restatement of interim financial information during any period ofadoption.  Both recognition of acumulative change in accounting and disclosure of the liability on a pro formabasis are required for transition purposes. SPS is evaluating the impact of FIN No. 47, however, it is not expectedto have a material impact on results of operations or financial position due tothe expected recovery of asset retirement costs in customer rates.

 

**2.****     Regulation**

 

**Federal Regulation**

** **

***Market-Based Rate Authority***—The Federal Energy Regulatory Commission (FERC) regulates the wholesale sale ofelectricity.  In addition to the FERC’straditional cost of service methodology for determining the rates allowed to becharged for wholesale electric sales, in the 1990’s the FERC began to allowutilities to make sales at market-based rates. In order to obtain market-based rate authorization from the FERC,utilities such as SPS have been required to submit analyses demonstrating thatthey did not have market power in the relevant markets.  SPS was previously granted market-based rateauthority by the FERC.

 

In 2004, theFERC adopted two indicative screens (an uncommitted pivotal supplier analysisand an uncommitted market share analysis) as a revised test to assess marketpower.  Passage of the two screenscreates a rebuttable presumption that an applicant does not have market power,while the failure creates a rebuttable presumption that the utility does havemarket power.  An applicant or intervenorcan rebut the presumption by performing a more extensive delivered-price testanalysis.  If an applicant is determinedto have generation market power, the applicant has the opportunity to proposeits own mitigation plan or may implement default mitigation established by theFERC.  The default mitigation limitsprices for sales of power to cost-based rates within areas where an applicantis found to have market power.

 

Xcel Energyfiled the required analysis applying the FERC’s two indicative screens onbehalf of itself and SPS with the FERC on Feb. 7, 2005.  This analysis demonstrated that SPS passedthe pivotal supplier analysis in its own control area and all adjacent markets,but that it failed the market share analysis in its own control areas.  Numerous parties filed interventions andrequested that FERC set the analysis for hearing.  Certain parties asked the FERC to revoke themarket-based rate authority of SPS.  Itis accordingly expected that the FERC will set the market-based rateauthorizations for investigation and hearing under Section 206 of theFederal Power Act.  At that time, SPSexpects to submit a delivered-price test analysis to support the continuance ofmarket-based rate authority in its control area.  SPS does not expect the mitigation measuresimposed, if any, to have a significant financial impact on its commoditymarketing operations.

 

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**Other Regulatory Matters**

** **

***Texas Retail FuelCost***—******Fuel and purchased energy costs arerecovered in Texas through a fixed fuel and purchased energy recoveryfactor.  In May 2004, SPS filed with thePublic Utility Commission of Texas (PUCT) its periodic request for fuel andpurchased power cost recovery for electric generation and fuel managementactivities for the period from January 2002 through December 2003.  SPS requested approval of approximately $580million of Texas-jurisdictional fuel and purchased power costs for the two-yearperiod.  Intervenor and PUCT stafftestimony was filed in October 2004 and hearings were held in December 2004.  Intervenor testimony contained objections toSPS’ methodology for assigning average fuel costs to wholesale sales, amongother things.  Recovery of $49 million to$86 million of the requested amount was contested by multiple intervenors.

 

In January 2005, SPS filed its post-hearing briefs disputing theintervenor objections.  Theadministrative law judge issued his recommended proposal for the decision (PFD)on April 15, 2005, which was generally favorable to SPS.  Prior to issuance of the PFD, SPS had enteredinto a non-unanimous stipulation with the PUCT staff and several of theintervenors.  The stipulation wouldprovide reasonable regulatory certainty for SPS on all key issues raised inthis proceeding.  Certain intervenors,although not presently signatories to the non-unanimous stipulation, areexpected to file agreement with the majority of the stipulation principles,while opposing certain other provisions. If the PUCT does not approve the filed stipulation without modification,SPS, as well as the other signatories have the option of withdrawing from thestipulation.  If one or more signatorieswithdraw from the stipulation, the PUCT could revert to the consideration ofthe PFD or continue consideration of the non-unanimous stipulation with theremaining signatories.  It is uncertainas to whether the PUCT will approve the stipulation or will adopt any or all ofthe administrative law judge’s recommendations contained in the PFD.  The settlement reflects a potential liabilityof approximately $25 million, which is consistent with the reserve that SPSaccrued during the fourth quarter of 2004 related to this proceeding.  SPS believes this estimate is appropriate andsufficient, if either the stipulation is accepted or if a litigated outcomedevelops.  A PUCT decision is expected inlate May 2005.

 

**3.Commitments and Contingent Liabilities**

 

**EnvironmentalContingencies**

 

SPS has been or is currentlyinvolved with the cleanup of contamination from certain hazardous substances atseveral sites. In many situations, SPS is pursuing or intends to pursueinsurance claims and believes it will recover some portion of these coststhrough such claims. Additionally, where applicable, SPS is pursuing, orintends to pursue, recovery from other potentially responsible parties andthrough the rate regulatory process. To the extent any costs are not recoveredthrough the options listed above, SPS would be required to recognize an expensefor such unrecoverable amounts in its consolidated financial statements.

 

***Clean Air Interstateand Mercury Rules***- In March 2005, theEnvironmental Protection Agency (EPA) issued two significant new air qualityrules.  The Clean Air Interstate Rule(CAIR) further regulates sulfur dioxide (SO2) and nitrogen oxide(NOx) emissions, and the Clean Air Mercury Rule regulates mercury emissionsfrom power plants for the first time.

 

The objective of the CAIR is to cap emissions of SO2 and NOxin the eastern United States, including Texas. When fully implemented, CAIR will reduce SO2 emissions in 28eastern states and the District of Columbia by over 70 percent and NOxemissions by over 60 percent from 2003 levels. It is designed to address thetransportation of fine particulates, ozone and emission precursors tonon-attainment downwind states.  CAIR hasa two-phase compliance schedule, beginning in 2009 for NOx and 2010 for SO2,with a final compliance deadline in 2015 for both emissions.  Under CAIR, each affected state will beallocated an emissions budget for SO2 and NOX that willresult in significant emission reductions. It will be based on stringent emission controls and forms the basis fora cap-and-trade program.   State emissionbudgets or caps decline over time. States can choose to implement an emissions reduction program based onthe EPA’s proposed model program, or they can propose another method, which theEPA would need to approve.

 

The EPA’s Clean Air Mercury Rule also uses a national cap-and-tradesystem and is designed to achieve a 70 percent reduction in mercuryemissions.  It affects all coal- andoil-fired generating units across the country greater than 25 megawatts.  Compliance with this rule also occurs in twophases, with the first phase beginning in 2010 and the second phase in2018.  States will be allocated mercuryallowances based on their baseline heat input relative to other states and bycoal type.  Each electric generating unitwill be allocated mercury allowances based on its percentage of total coal heatinput for the state.

 

Currently, there are severaluncertainties concerning implementation of both rules.  States are required to develop implementationplans within 18 months and have a significant amount of discretion in theimplementation details.  Legal challengesto both rules are

 

7

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expected, which could altertheir substance or schedule.  Due tothese uncertainties, SPS has not yet completed an analysis of the probableimpact on operations of the CAIR and mercury rules.  However, SPS’ emission reduction initiativeshave reduced the potential impact of the rules on its operations.  Based on currently available information, SPSexpects that it will comply using a combination of additional capitalinvestments in emission controls at various facilities and purchases ofemissions allowances.  These new rulescould have a material impact on future capital expenditures and operating andmaintenance expenses.  SPS expects thatit may begin to make capital investments in 2007 or sooner and may begin topurchase allowances prior to the applicable compliance dates.  Although regulatory treatment may vary fromstate to state, the cost of any required capital investment or allowancepurchase are expected to generally be recoverable in the same manner as othersimilar costs through the filing of rate cases. In some circumstances, the costs may be recoverable through a rider oradjustment clause mechanism.  SPS has notdetermined the applicable cost recovery strategy for each jurisdiction in whichit operates.

 

**Legal Contingencies**

 

Lawsuits and claims arise inthe normal course of business. Management, after consultation with legalcounsel, has recorded an estimate of the probable cost of settlement or otherdisposition of them. The ultimate outcome of these matters cannot presently bedetermined. Accordingly, the ultimate resolution of these matters could have amaterial adverse effect on SPS’ financial position and results of operations.

 

**OtherContingencies**

 

The circumstancesset forth in Note 11 to the financial statements in SPS’ Annual Reports on Form10-K for the year ended Dec. 31, 2004 and Notes 2 and 3 of this QuarterlyReport on Form 10-Q, appropriately represent, in all material respects, thecurrent status of commitments and contingent liabilities and are incorporatedherein by reference.

 

**4.Short-Term Borrowings and Financing Activities**

 

At March 31,2005, SPS had $34 million of short-term debt outstanding at a weighted averageinterest rate of 3.96 percent.

 

SPS renewedits credit facility on April 21, 2005. The $250 million facility has a term of 5 years and is unsecured.  The credit facility has one financial covenant,requiring that the debt to total capitalization ratio be less than or equal to65 percent.

 

**5.****     DerivativeValuation and Financial Impacts**

 

SPS recordsall derivative instruments on the balance sheet at fair value unless exemptedas a normal purchase or sale. Changes in non-exempt derivative instrument’sfair value are recognized currently in earnings unless the derivative has beendesignated in a qualifying hedging relationship. The application of hedgeaccounting allows a derivative instrument’s gains and losses to be reflected inOther Comprehensive Income or to offset related results of the hedged item inthe statement of income, to the extent effective. Statement of FinancialAccounting Standard (SFAS) No. 133 – “Accounting for Derivative Instruments andHedging Activities,” as amended, (SFAS No. 133) requires that the hedgingrelationship be highly effective and that a company formally designate ahedging relationship to apply hedge accounting.

 

The impact ofthe components of hedges on SPS’ Other Comprehensive Income, included as acomponent of stockholder’s equity, are detailed in the following table:

 
| ** **                                                                                   | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **(Millions of dollars)**                                                                    | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                                                   | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Balance at Jan. 1,                                                                           |       | $                                     | (5.3       | ) | $ | (7.2 | ) |
| After-tax net unrealized gains related to  derivatives accounted for as hedges               |       | 0.4                                   |       | 1.1 |   |
| After-tax net realized (gains) losses on  derivative transactions reclassified into earnings |       | (0.1                                  | )          | 0.2 |   |
| Accumulated other comprehensive loss  related to cash flow hedges — March 31,      |       | $                                     | (5.0       | ) | $ | (5.9 | ) |

 

**CashFlow Hedges**

 

SPS entersinto various instruments that effectively fix the interest payments on certainfloating rate debt obligations or effectively fix the yield or price on aspecified benchmark interest rate for a specific period. These derivative instrumentsare designated as cash flow 

 

8

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hedges foraccounting purposes, and the change in the fair value of these instruments isrecorded as a component of Other Comprehensive Income. As of March 31,2005, SPS had net losses of $0.7 million in accumulated in Other ComprehensiveIncome related to interest cash flow hedge contracts that are expected to berecognized in earnings during the next 12 months.

 

Gains orlosses on hedging transactions for the sales of electric energy are recorded asa component of revenue, hedging transactions for fuel used in energy generationare recorded as a component of fuel costs, and interest rate hedgingtransactions are recorded as a component of interest expense. SPS is allowed torecover in electric rates the costs of certain financial instruments acquiredto reduce commodity cost volatility. There was no hedge ineffectiveness in the first quarter of 2005.

 

**DerivativesNot Qualifying for Hedge Accounting**

 

SPS has extremelylimited commodity trading operations that enter into derivative instruments.These derivative instruments are accounted for on a mark-to-market basis in theConsolidated Statement of Income. The results of these transactions arerecorded as a component of Operating Revenue on the Consolidated Statement ofIncome.

 

SPS alsoenters into certain commodity-based derivative transactions, not included in tradingoperations, which do not qualify for hedge accounting treatment. Thesederivative instruments are accounted for on a mark-to-market basis inaccordance with SPAS No. 133.

 

**NormalPurchases or Normal Sales Contracts**

 

SPS enters into contracts forthe purchase and sale of various commodities for use in its businessoperations. SFAS No. 133 requires a company to evaluate these contracts todetermine whether the contracts are derivatives. Certain contracts thatliterally meet the definition of a derivative may be exempted from SFAS No. 133as normal purchases or normal sales. Normal purchases and normal sales arecontracts that provide for the purchase or sale of something other than afinancial instrument or derivative instrument that will be delivered inquantities expected to be used or sold over a reasonable period in the normalcourse of business.  Contracts that meetthese requirements are documented and exempted from the accounting andreporting requirements of SFAS No. 133.

 

SPS evaluatesall of their contracts when such contracts are entered to determine if they arederivatives and, if so, if they qualify and meet the normal designationrequirements under SFAS No. 133. None of the derivative contracts entered intowithin the commodity trading operations qualify for a normal designation.

 

Normalpurchases and normal sales contracts are accounted for as executory contractsas required under other generally accepted accounting principles.

 

**6.Detail of Interest and Other Income, Net of Nonoperating Expenses**

 

Interest and other income, netof nonoperating expenses, for the three months ended March 31 comprises ofthe following:

 

| ** **                                                     | ** ** | **Three months ended  March 31** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|
| **(Thousands of dollars)**                                     | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                     | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Interest income                                                |       | $                                     | 293        |   | $ | 205 |   |
| Gain on sale of assets                                         |       | 45                                    |       | — |   |
| Other nonoperating income                                      |       | 166                                   |       | 114 |   |
| Nonoperating expenses                                          |       | (20                                   | )          | (58 | ) |
| Total interest and other income, net of  nonoperating expenses |       | $                                     | 484        |   | $ | 261 |   |

 

**7.****     SegmentInformation**

 

SPS has onereportable segment.  SPS operates in theRegulated Electric Utility industry, providing wholesale and retail electricservice in the states of Texas, New Mexico, Kansas and Oklahoma.  Revenues from external customers were $312.4million and $306.6 million for the three months ended March 31, 2005 and2004.

 

**8.****     ComprehensiveIncome**

 

The componentsof total comprehensive income are shown below:

 

| ** **                                                                                                | ** ** | **Three months ended  March 31** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **(Millions of dollars)**                                                                                 | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| ** **                                                                                                | ** ** | ** **                            | ** ** | ** ** | ** ** |
| Net income                                                                                                |       | $                                     | 14.1       |   | $ | 14.8 |   |
| Other comprehensive income (loss):                                                                        |       |                                  |       |   |   |
| After-tax net unrealized gains related to  derivatives accounted for as hedges (see Note 5)               |       | 0.4                                   |       | 1.1 |   |
| After-tax net realized losses (gains) on  derivative transactions reclassified into earnings (see Note 5) |       | (0.1                                  | )          | 0.2 |   |
| Other comprehensive income                                                                                |       | 0.3                                   |       | 1.3 |   |
| Comprehensive income                                                                                      |       | $                                     | 14.4       |   | $ | 16.1 |   |

 

9

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The accumulated comprehensiveincome in stockholder’s equity at March 31, 2005 and 2004, relates tovaluation adjustments on SPS’ derivative financial instruments and hedgingactivities.

 

**9.Benefit Plans and Other Postretirement Benefits**

 

**Componentsof Net Periodic Benefit Cost**

 
| ** **                                                    | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                              | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **(Thousands of dollars)**                                    | ** ** | **Pension Benefits**                  | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                          | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                  |       | $                                     | 17,250     |   | $ | 16,350 |   | $ | 1,743 |   | $ | 1,625 |   |
| Interest cost                                                 |       | 40,996                                |       | 38,175 |   | 13,867 |   | 12,900 |   |
| Expected return on plan assets                                |       | (70,274                               | )          | (72,225 | ) | (6,583 | ) | (5,275 | ) |
| Amortization of transition (asset)  obligation                |       | —                                |       | (2 | ) | 3,645 |   | 3,700 |   |
| Amortization of prior service cost (credit)                   |       | 7,522                                 |       | 7,601 |   | (545 | ) | (550 | ) |
| Amortization of net (gain) loss                               |       | 3,449                                 |       | (5,141 | ) | 6,663 |   | 5,550 |   |
| Net periodic benefit cost (credit)                            |       | (1,057                                | )          | (15,242 | ) | $ | 18,790 |   | $ | 17,950 |   |
| Costs not recognized due to the effects of  regulation        |       | 3,184                                 |       | 10,177 |   | — |   | — |   |
| Additional cost recognized due to the  effects of regulation  |       | —                                |       | — |   | 973 |   | 973 |   |
| Net benefit cost (credit) recognized for  financial reporting |       | $                                     | 2,127      |   | $ | (5,065 | ) | $ | 19,763 |   | $ | 18,923 |   |
|                                                          |       |                                  |       |   |   |   |   |   |   |
| **SPS**                                                       |       |                                  |       |   |   |   |   |   |   |
| Net benefit cost (credit) recognized for  financial reporting |       | $                                     | (2,090     | ) | $ | (2,657 | ) | $ | 1,416 |   | $ | 1,520 |   |

 

**Item 2****. MANAGEMENT’S DISCUSSION AND ANALYSIS**

 

Discussion offinancial condition and liquidity for SPS is omitted per conditions set forthin general instructions H (1) (a) and (b) of Form 10-Q for wholly owned subsidiaries.It is replaced with management’s narrative analysis and the results ofoperations set forth in general instructions H (2) (a) of Form 10-Q for whollyowned subsidiaries (reduced disclosure format).

 

**Forward-LookingInformation**

 

The followingdiscussion and analysis by management focuses on those factors that had amaterial effect on the financial condition and results of operations of SPSduring the periods presented, or are expected to have a material impact in thefuture. It should be read in conjunction with the accompanying unauditedfinancial statements and notes.

 

Except for thehistorical statements contained in this report, the matters discussed in thefollowing discussion and analysis are forward-looking statements that aresubject to certain risks, uncertainties and assumptions. Such forward-lookingstatements are intended to be identified in this document by the words “anticipate,”“estimate,” “expect,” “objective,” “outlook,” “possible,” “potential” andsimilar expressions. Actual results may vary materially. Factors that couldcause actual results to differ materially include, but are not limited to:

 

•             Economicconditions, including their impact on capital expenditures and the ability ofthe SPS to obtain financing on favorable terms, inflation rates and monetaryfluctuations;

•             Businessconditions in the energy business;

•             Demandfor electricity in the nonregulated marketplace;

 

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•             Trade,monetary, fiscal, taxation and environmental policies of governments, agenciesand similar organizations in geographic areas where SPS has a financialinterest;

•             Customerbusiness conditions, including demand for their products or services and supplyof labor and materials used in creating their products and services;

•             Financialor regulatory accounting principles or policies imposed by the FinancialAccounting Standards Board, the Securities and Exchange Commission, the FederalEnergy Regulatory Commission and similar entities with regulatory oversight;

•             Availabilityor cost of capital such as changes in: interest rates; market perceptions ofthe utility industry, SPS, Xcel Energy or any of its other subsidiaries; orsecurity ratings;

•             Factorsaffecting utility operations such as unusual weather conditions; catastrophicweather-related damage; unscheduled generation outages, maintenance or repairs;unanticipated changes to fossil fuel or natural gas supply costs oravailability due to higher demand, shortages, transportation problems or otherdevelopments; environmental incidents; or electric transmission or natural gaspipeline constraints;

•             Employeeworkforce factors, including loss or retirement of key executives, collectivebargaining agreements with union employees, or work stoppages;

•             Increasedcompetition in the utility industry;

•             Stateand federal legislative and regulatory initiatives that affect cost andinvestment recovery, have an impact on rate structures and affect the speed anddegree to which competition enters the electric markets; industry restructuringinitiatives; transmission system operation and/or administration initiatives;recovery of investments made under traditional regulation; nature ofcompetitors entering the industry; retail wheeling; a new pricing structure;and former customers entering the generation market;

•             Rate-settingpolicies or procedures of regulatory entities, including environmentalexternalities, which are values established by regulators assigningenvironmental costs to each method of electricity generation when evaluatinggeneration resource options;

•             Socialattitudes regarding the utility and power industries;

•             Costand other effects of legal and administrative proceedings, settlements,investigations and claims;

•             Technologicaldevelopments that result in competitive disadvantages and create the potentialfor impairment of existing assets;

•             Significantslowdown in growth or decline in the U.S. economy, delay in growth or recoveryof the U.S. economy or increased cost for insurance premiums, security and otheritems;

•             Risksassociated with implementation of new technologies; and

•             Otherbusiness or investment considerations that may be disclosed from time to timein SPS’ SEC filings or in other publicly disseminated written documents.

 

**MarketRisks**

 

SPS is exposedto market risks, including changes in commodity prices and interest rates, asdisclosed in Item 7A – Quantitative and Qualitative Disclosures About MarketRisk in its Annual Report on Form 10-K for the year ended Dec. 31, 2004.Commodity price and interest rate risks for SPS is mitigated in mostjurisdictions due to cost-based rate regulation. At March 31, 2005, therewere no material changes to the financial market risks that affect thequantitative and qualitative disclosures presented as of Dec. 31, 2004.

 

**RESULTSOF OPERATIONS**

 

SPS’ netincome was approximately $14.1 million for the first three months of 2005,compared with approximately $14.8 million for the first three months of 2004.

 

**ElectricUtility, Short-term Wholesale and Commodity Trading Margins**

 

The followingtable details the change in electric revenue and margin. Electric productionexpenses tend to vary with changing retail and wholesale sales requirements andunit cost changes in fuel and purchased power. Due to fuel clause cost recoverymechanisms for retail customers, most fluctuations in energy costs do notaffect electric margin.

 

SPS has two distinct forms of wholesalemarketing activities:  short-termwholesale and commodity trading. Short-term wholesale refers to energy related purchase and salesactivity and the use of certain financial instruments associated with the fuelrequired for and energy produced from SPS’ generation assets and energy andcapacity purchased to serve native load. Commodity trading is not associated with SPS’ generation assets or theenergy and capacity purchased to serve native load.

 

SPS conducts aninconsequential amount of commodity trading. Margins from commodity trading activity are partially redistributed toNorthern States Power Company, a Minnesota corporation, and Public ServiceCompany of Colorado, both wholly owned

 

11

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subsidiaries of Xcel Energy,pursuant to the joint operating agreement (JOA) approved by the FERC.  Margins received pursuant to the JOA arereflected as part of Base Electric Utility Revenues.  Short-term wholesale and commodity tradingmargins reflect the impact of regulatory sharing, if applicable.  Trading revenues are reported net of tradingcosts (i.e., on a margin basis) in the Consolidated Statements of Income.  Commodity trading costs include fuel,purchased power, transmission and other related costs.

 

As oneof the expected outcomes of the fuel reconciliation proceeding discussed in Note2, the recovery of costs associated with Renewable Energy Credits (REC) maychange.  As a part of this change inregulatory recovery, SPS anticipates conducting additional marketing activitiesof RECs.  However, the ultimate impact ofthis change in recovery and additional marketing activity is not expected to besignificant.  The net results of thisactivity will be presented as a component of Base Electric Utility Revenues.

 

The following table details base electricutility and short-term wholesale activities:

 
| **(Millions of dollars)**              | ** ** | **Base  Electric  Utility** | ** ** | **Short-term  Wholesale** | ** ** | **Consolidated  Total** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                             | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **              | ** ** |
| **Three months ended 3/31/2005**       | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **              | ** ** |
| Electric utility revenue               |       | $                           | 312        |                      | $          | 1                       |       | $ | 313 |   |
| Electric fuel and purchased power      |       | (195                        | )          | (1                        | )          | (196                    | )          |
| Gross margin before operating expenses |       | $                           | 117        |                      | $          | —                  |       | $ | 117 |   |
| Margin as a percentage of revenue      |       | 37.5                        | %          | 0.0                       | %          | 37.4                    | %          |
|                                   |       |                        |       |                      |       |                    |       |
| **Three months ended 3/31/2004**       |       |                        |       |                      |       |                    |       |
| Electric utility revenue               |       | $                           | 306        |                      | $          | 1                       |       | $ | 307 |   |
| Electric fuel and purchased power      |       | (188                        | )          | (1                        | )          | (189                    | )          |
| Gross margin before operating expenses |       | $                           | 118        |                      | $          | —                  |       | $ | 118 |   |
| Margin as a percentage of revenue      |       | 38.6                        | %          | 0.0                       | %          | 38.4                    | %          |

 

The followingsummarizes the components of the changes in base electric revenue and baseelectric margin for the three months ended March 31:

 

***Base Electric Revenue***

 
| **(Millions of dollars)**               | ** ** | **2005 vs. 2004** | ** ** |
|-----------------------------------------|------------|-------------------|------------|
| ** **                              | ** ** | ** **        | ** ** |
| Sales growth (excluding weather impact) |       | $                 | 3          |   |
| Capacity sales                          |       | (3                | )          |
| Fuel cost recovery                      |       | 2                 |       |
| Transmission and other                  |       | 4                 |       |
| Total base electric revenue increase    |       | $                 | 6          |   |

 

***Base Electric Margin***

 
| **(Millions of dollars)**               | ** ** | **2005 vs. 2004** | ** ** |
|-----------------------------------------|------------|-------------------|------------|
| ** **                              | ** ** | ** **        | ** ** |
| Sales growth (excluding weather impact) |       | $                 | 2          |   |
| Capacity sales                          |       | (3                | )          |
| Total base electric margin decrease     |       | $                 | (1         | ) |

 

**Non-FuelOperating Expense and Other Costs**

 

The following summarizes thecomponents of the changes in other utility operating and maintenance expensefor the three months ended March 31:

 
| **(Millions of dollars)**                                       | ** ** | **2005 vs. 2004** | ** ** |
|-----------------------------------------------------------------|------------|-------------------|------------|
| Lower plant outage costs                                        |       | $                 | (2         | ) |
| Lower incentive compensation                                    |       | (1                | )          |
| Lower shared asset costs                                        |       | (1                | )          |
| Equipment deposit adjustment due to vendor  bankruptcy          |       | 2                 |       |
| Higher pension and medical costs                                |       | 1                 |       |
| Other                                                           |       | 1                 |       |
| Total other utility operating and  maintenance expense increase |       | $                 | —     |   |

 

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Taxes (otherthan income taxes) decreased by approximately $0.8 million, or 6.0 percent, forthe first three months of 2005, compared with the first three months of 2004.The decrease is primarily due to lower franchise taxes in Texas.

 

Other incomedecreased by approximately $0.2 million, or 15.9 percent, for the first threemonths of 2005, compared with the first three months of 2004. The decrease isprimarily due to a lower allowance for funds used during construction-equityresulting from a lower proportion of equity to total capitalization.

 

Income taxesdecreased by approximately $1.0 million for the first three months of 2005,compared with the first three months of 2004. The decrease is primarily due tolower income levels and a decrease in plant-related permanent taxable incomeitems for 2005 as compared to 2004.  Theeffective tax rate was 37.3 percent for the first three months of 2005,compared to 39.0 percent for the same period in 2004.  The decrease in the effective tax rate wasprimarily due to the decrease in pretax income and plant-related permanenttaxable income items and an increase in research and development tax credits.

 

**Item 4****. CONTROLS AND PROCEDURES**

 

**Disclosure Controls**

** **

SPS maintainsa set of disclosure controls and procedures designed to ensure that informationrequired to be disclosed in reports that it files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in Securities and Exchange Commission rulesand forms. As of the end of the period covered by this report, based on anevaluation carried out under the supervision and with the participation of SPS’management, including the chief executive officer (CEO) and chief financialofficer (CFO), of the effectiveness of its disclosure controls and procedures,the CEO and CFO have concluded that SPS’ disclosure controls and procedures areeffective.

 

**Internal Control Over FinancialReporting**

** **

No change inSPS’ internal control over financial reporting has occurred during the mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, its internal control over financial reporting.

 

**PartII****. OTHERINFORMATION**

 

## **Item 1**. LEGAL PROCEEDINGS

##  

In the normal course ofbusiness, various lawsuits and claims have arisen against SPS. Management,after consultation with legal counsel, has recorded an estimate of the probablecost of settlement or other disposition for such matters. See Notes 2 and 3 ofthe Financial Statements in this Quarterly Report on Form 10-Q for furtherdiscussion of legal proceedings, including Regulatory Matters and Commitmentsand Contingent Liabilities, which are hereby incorporated by reference.Reference also is made to Item 3 and Note 11 of SPS’ Annual Report on Form10-K for the year ended Dec. 31, 2004 for a description of certain legalproceedings presently pending. Except as discussed herein, there are no newsignificant cases to report against SPS and there have been no notable changesin the previously reported proceedings.

 

**Item 5.****OTHER INFORMATION**

 

On April 21, 2005, SPS enteredinto a new five-year $250 million credit facility. The facility is described inNote 4 and is filed as Exhibit 4.01 hereto.

 

On April 25, 2005, SPS enteredinto a non-unanimous stipulation relating to its fuel reconciliationproceeding. This stipulation is described in Note 2 and is filed as Exhibit10.01 hereto.

 

## **Item 6**. EXHIBITS

##  

**(a)Exhibits**

 

The followingExhibits are filed with this report:

 

----

* Incorporated by reference.

 
| 4.01* |   | $250,000,000 Credit Agreement among Southwestern Public Service  Company, as Borrower, the several lenders from time to time parties hereto,  Barclays Bank PLC and Harris Nesbitt Financing, INC., as documentation  agents, The Bank of New York and Wells Fargo Bank, National |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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|   |   | Association, as syndication agents, and JPMorgan Chase Bank, N.A., as  administrative agent dated as of April 21, 2005 (Exhibit 4.03 to Xcel  Energy Form 10-Q for the quarter ended March 31, 2005 (file number 001-03034)) |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.01* |   | Southwestern Public Service Non-Unanimous Stipulation dated  April 25, 2005. (Exhibit 10.01 to Xcel Energy Form 10-Q for the quarter  ended March 31, 2005 (file number 001-03034))                                          |
| 31.01  |   | Principal Executive Officer’s and Principal Financial Officer’s  certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002                          |
| 32.01  |   | Certification pursuant to 18 U.S.C. Section 1350, as adopted  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                                                      |
| 99.01  |   | Statement pursuant to Private Securities Litigation Reform Act of 1995.                                                                                                                                                                |

 

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SIGNATURES

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized on May 2, 2005.

 
| Southwestern  Public Service Co.                  |
|---------------------------------------------------|
| (Registrant)                                      |
|                                              |
|                                              |
|  /s/  TERESA S. MADDEN                       |   |
|  Teresa  S. Madden                           |   |
|  Vice  President and Controller              |   |
|                                              |   |
|                                              |   |
|  /s/  BENJAMIN G.S. FOWKE III                |   |
|  Benjamin  G.S. Fowke III                    |   |
|  Vice  President and Chief Financial Officer |   |

 

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