** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**ý****       ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934**

** **

**For the quarterly period ended March 31, 2006**

 

**or**

 

**o****       ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

** **

**For the transition periodfrom               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 |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)  |       |                                 |
|                            |       |                                 |
| **Tyler at Sixth,**             | ** ** | ** **                           |
| **Amarillo, Texas**             | ** ** | **79101**                            |
| (Address of principal executive |       | (Zip Code)                           |
| offices)                        |       |                                 |

 

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 a large accelerated filer, an acceleratedfiler or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

LargeAccelerated Filer o                               AcceleratedFiler o                               Non-AcceleratedFiler ý

 

Indicate by check mark whether the registrant is a shell company (asdefined in Rule 12b-2 of the Exchange Act). Yes  o   No  ý

 

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, 2006** |
|----------------------------|------------|-------------------------------------------------------|
| 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 of Financial Condition and  Results of Operations |       |
| Item 4.    | Controls and Procedures                                                                     |       |
| ** ** | **PART  II - OTHER INFORMATION**                                                            | ** ** |
| Item 1.    | Legal Proceedings                                                                           |       |
| 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). Additional information on XcelEnergy is available on various filings with the Securities and ExchangeCommission (SEC).

 

2

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**PART 1. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements**

 

**SOUTHWESTERN PUBLIC SERVICECO.**

**STATEMENTS OF INCOME(UNAUDITED)**

**(Thousands of Dollars)**

 
| ** **                                                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                                                            | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Operating revenues**                                                                |       | $                                                | 412,809    |   | $ | 312,403 |   |
|                                                                                  |       |                                             |       |   |   |
| **Operating expenses**                                                                |       |                                             |       |   |   |
| Electric fuel and purchased power                                                     |       | 295,588                                          |       | 195,947 |   |
| Operating and maintenance expenses                                                    |       | 49,818                                           |       | 45,610 |   |
| Depreciation and amortization                                                         |       | 23,897                                           |       | 23,616 |   |
| Taxes (other than income taxes)                                                       |       | 13,322                                           |       | 12,729 |   |
| Total operating expenses                                                              |       | 382,625                                          |       | 277,902 |   |
|                                                                                  |       |                                             |       |   |   |
| **Operating income**                                                                  |       | 30,184                                           |       | 34,501 |   |
|                                                                                  |       |                                             |       |   |   |
| Interest and other income - net (see Note  6)                                         |       | 1,475                                            |       | 484 |   |
| Allowance for funds used during  construction – equity                           |       | 118                                              |       | 384 |   |
|                                                                                  |       |                                             |       |   |   |
| **Interest charges and financing costs**                                              |       |                                             |       |   |   |
| Interest charges — including financing  costs of $1,528 and $1,525, respectively |       | 13,692                                           |       | 13,384 |   |
| Allowance for funds used during  construction – debt                             |       | (681                                             | )          | (513 | ) |
| Total interest charges and financing costs                                            |       | 13,011                                           |       | 12,871 |   |
|                                                                                  |       |                                             |       |   |   |
| Income before income taxes                                                            |       | 18,766                                           |       | 22,498 |   |
| Income taxes                                                                          |       | 6,889                                            |       | 8,402 |   |
| **Net income**                                                                        |       | $                                                | 11,877     |   | $ | 14,096 |   |

 

See Notes to Financial Statements

 

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**SOUTHWESTERN PUBLIC SERVICECO.**

**STATEMENTS OF CASH FLOWS (UNAUDITED)**

**(Thousands of Dollars)**

 
| ** **                                                                         | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| **Operating activities**                                                           |       |                                             |       |   |   |
| Net income                                                                         |       | $                                                | 11,877     |   | $ | 14,096 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                             |       |   |   |
| Depreciation and amortization                                                      |       | 25,664                                           |       | 25,667 |   |
| Deferred income taxes                                                              |       | (4,040                                           | )     | 3,335 |   |
| Amortization of investment tax credits                                             |       | (63                                              | )          | (63 | ) |
| Allowance for equity funds used during  construction                               |       | (118                                             | )          | (384 | ) |
| Change in recoverable electric energy costs                                        |       | 13,261                                           |       | (2,337 | ) |
| Change in accounts receivable                                                      |       | 36,783                                           |       | 615 |   |
| Change in unbilled revenues                                                        |       | 42,299                                           |       | 14,870 |   |
| Change in inventories                                                              |       | (1,111                                           | )          | (37 | )  |
| Change in other current assets                                                     |       | 1,333                                            |       | 1,247 |   |
| Change in accounts payable                                                         |       | (32,210                                          | )          | (26,959 | ) |
| Change in other current liabilities                                                |       | (7,769                                           | )     | 21,076 |   |
| Change in other noncurrent assets                                                  |       | (2,026                                           | )          | (3,057 | ) |
| Change in other noncurrent liabilities                                             |       | 1,686                                            |       | 1,464 |   |
| Net cash provided by operating activities                                          |       | 85,566                                           |       | 49,533 |   |
|                                                                               |       |                                             |       |   |   |
| **Investing activities**                                                           |       |                                             |       |   |   |
| Capital/construction expenditures                                                  |       | (25,696                                          | )          | (26,894 | ) |
| Allowance for equity funds used during  construction                               |       | 118                                              |       | 384 |   |
| Other investments                                                                  |       | 803                                              |       | 1,419 |   |
| Net cash used in investing activities                                              |       | (24,775                                          | )          | (25,091 | ) |
|                                                                               |       |                                             |       |   |   |
| **Financing activities**                                                           |       |                                             |       |   |   |
| Short-term borrowings – net                                                   |       | (45,915                                          | )          | (2,000 | )  |
| Dividends paid to parent                                                           |       | (20,395                                          | )          | (22,442 | ) |
| Net cash used in financing activities                                              |       | (66,310                                          | )          | (24,442 | ) |
|                                                                               |       |                                             |       |   |   |
| Net decrease in cash and cash equivalents                                          |       | (5,519                                           | )     | — |   |
| Cash and cash equivalents at beginning of  period                                  |       | 9,407                                            |       | 5 |   |
| Cash and cash equivalents at end of period                                         |       | $                                                | 3,888      |   | $ | 5 |   |
|                                                                               |       |                                             |       |   |   |
| Supplemental disclosure of cash flow information:                                  |       |                                             |       |   |   |
| Cash paid for interest (net of amounts  capitalized)                               |       | $                                                | 6,645      |   | $ | 6,494 |   |
| Cash paid for income taxes (net of refunds  received)                              |       | $                                                | 3,067      |   | $ | (24,508 | )  |

 

See the Notes to Financial Statements

 

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**SOUTHWESTERN PUBLIC SERVICECO.**

**BALANCE SHEETS (UNAUDITED)**

**(Thousands of Dollars)**

** **
| ** **                                                                                  | ** ** | **March 31,  2006** | ** ** | **Dec. 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                  | ** ** | ** **               | ** ** | ** **              | ** ** |
| Current assets:                                                                             |       |                     |       |                    |       |
| Cash and cash equivalents                                                                   |       | $                        | 3,888      |                    | $          | 9,407 |   |
| Accounts receivable — net of allowance for  bad debts: $1,730 and $2,658, respectively |       | 68,494                   |       | 90,049                  |       |
| Accounts receivable from affiliates                                                         |       | 6,075                    |       | 21,303                  |       |
| Accrued unbilled revenues                                                                   |       | 39,071                   |       | 81,370                  |       |
| Recoverable electric energy costs                                                           |       | 135,090                  |       | 148,351                 |       |
| Materials and supplies inventories — at  average cost                                  |       | 18,812                   |       | 17,701                  |       |
| Fuel inventory — at average cost                                                       |       | 3,038                    |       | 3,038                   |       |
| Derivative instruments valuation                                                            |       | —                   |       | 22,507                  |       |
| Prepayments and other                                                                       |       | 4,587                    |       | 5,920                   |       |
| Total current assets                                                                        |       | 279,055                  |       | 399,646                 |       |
| Property, plant and equipment, at cost:                                                     |       |                     |       |                    |       |
| Electric utility plant                                                                      |       | 3,316,291                |       | 3,305,997               |       |
| Construction work in progress                                                               |       | 78,036                   |       | 69,657                  |       |
| Total property, plant and equipment                                                         |       | 3,394,327                |       | 3,375,654               |       |
| Less accumulated depreciation                                                               |       | (1,410,862               | )          | (1,391,905              | )          |
| Net property, plant and equipment                                                           |       | 1,983,465                |       | 1,983,749               |       |
| Other assets:                                                                               |       |                     |       |                    |       |
| Prepaid pension asset                                                                       |       | 144,652                  |       | 143,309                 |       |
| Regulatory assets                                                                           |       | 86,782                   |       | 89,214                  |       |
| Derivative instruments valuation                                                            |       | 110,022                  |       | 89,642                  |       |
| Other investments                                                                           |       | 7,265                    |       | 8,068                   |       |
| Deferred charges and other                                                                  |       | 3,803                    |       | 3,948                   |       |
| Total other assets                                                                          |       | 352,524                  |       | 334,181                 |       |
| Total assets                                                                                |       | $                        | 2,615,044  |                    | $          | 2,717,576 |   |
| ** **                                                                                  |       |                     |       |                    |       |
| **LIABILITIES  AND EQUITY**                                                                 |       |                     |       |                    |       |
| Current liabilities:                                                                        |       |                     |       |                    |       |
| Current portion of long-term debt                                                           |       | $                        | 500,000    |                    | $          | 500,000 |   |
| Short-term debt                                                                             |       | 39,085                   |       | 85,000                  |       |
| Accounts payable                                                                            |       | 113,918                  |       | 148,159                 |       |
| Accounts payable to affiliates                                                              |       | 8,373                    |       | 9,774                   |       |
| Taxes accrued                                                                               |       | 12,807                   |       | 27,123                  |       |
| Accrued interest                                                                            |       | 15,125                   |       | 10,165                  |       |
| Dividends payable to parent                                                                 |       | 19,744                   |       | 20,395                  |       |
| Deferred income taxes                                                                       |       | 36,183                   |       | 38,773                  |       |
| Derivative instruments valuation                                                            |       | 731                      |       | 26,933                  |       |
| Other                                                                                       |       | 20,773                   |       | 19,186                  |       |
| Total current liabilities                                                                   |       | 766,739                  |       | 885,508                 |       |
| Deferred credits and other liabilities:                                                     |       |                     |       |                    |       |
| Deferred income taxes                                                                       |       | 464,318                  |       | 466,415                 |       |
| Regulatory liabilities                                                                      |       | 145,310                  |       | 145,931                 |       |
| Derivative instruments valuation                                                            |       | 70,112                   |       | 45,457                  |       |
| Deferred investment tax credits                                                             |       | 3,403                    |       | 3,466                   |       |
| Benefit obligations and other                                                               |       | 32,518                   |       | 30,785                  |       |
| Total deferred credits and other  liabilities                                               |       | 715,661                  |       | 692,054                 |       |
| Commitments and contingencies (see Note 3)                                                  |       |                     |       |                    |       |
| Long-term debt                                                                              |       | 325,853                  |       | 325,776                 |       |
| Common stockholders’ equity:                                                           |       |                     |       |                    |       |
| Common stock – authorized 200 shares of  $1.00 par value, outstanding 100 shares       |       | —                   |       | —                  |       |
| Premium on common stock                                                                     |       | 467,465                  |       | 467,465                 |       |
| Retained earnings                                                                           |       | 343,774                  |       | 351,640                 |       |
| Accumulated other comprehensive loss                                                        |       | (4,448                   | )          | (4,867                  | )          |
| Total common stockholders’ equity                                                      |       | 806,791                  |       | 814,238                 |       |
| Total liabilities and equity                                                                |       | $                        | 2,615,044  |                    | $          | 2,717,576 |   |

** **

**See the Notes to Financial Statements**

 

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** **

**NOTES TO FINANCIALSTATEMENTS**

** **

In the opinionof management, the accompanying unaudited financial statements contain alladjustments necessary to present fairly the financial position of SPS as ofMarch 31, 2006, and Dec. 31, 2005; the results of its operations for thethree months ended March 31, 2006 and 2005; and its cash flows for thethree months ended March 31, 2006 and 2005. 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, 2005. The followingnotes should be read in conjunction with such policies and other disclosures inthe Form 10-K.

 

**1.****  Significant Accounting Policies**

 

The significant accountingpolicies set forth in Note 1 to the financial statements in SPS’ Annual Reporton Form 10-K for the year ended Dec. 31, 2005 appropriately represent, in allmaterial respects, the current status of accounting policies, and areincorporated herein by reference.

 

**2.****  Regulation**

 

***FERC Transmission Rate Case (SPS and PSCo)*****— On Sept. 2, 2004, Xcel Energy filed on behalf of SPS and Public ServiceCompany of Colorado (PSCo), an affiliate of SPS, an application to increasewholesale transmission service and ancillary service rates within the XcelEnergy joint open access transmission tariff. PSCo and SPS requested anincrease in annual transmission service and ancillary services revenues of $6.1million. On Feb. 6, 2006, the parties in the proceedingsubmitted an uncontested offer of settlement. The settlement results in a $1.1million stated rate increase for SPS effective June 2005, and SPS can filea further rate increase effective October 1, 2006. On April 5, 2006, the FERCissued an order approving the uncontested settlement.

** **

***Wholesale RateComplaints*** - In November 2004, several wholesalecooperative customers of SPS filed a $3 million rate complaint at the FERCrequesting that the FERC investigate SPS’ wholesale power base rates and fuelcost adjustment clause calculations. In December 2004, the FERC accepted thecomplaint filing and ordered SPS base rates subject to refund, effective Jan.1, 2005. Also in November 2004, SPS filed revisions to its wholesale fuel costadjustment clause. The FERC set the proposed rate changes into effect on Jan.1, 2005, subject to refund, and consolidated the proceeding with the wholesalecooperative customers’ complaint proceeding. The FERC set the consolidatedproceeding for hearing and settlement judge procedures, which were terminatedwhen the parties could not reach a settlement. Hearings were held in Februaryand March 2006. Post hearing briefs are being submitted to the FERCAdministrative Law Judge.

 

On Sept. 15, 2005, Public Service Company of New Mexico (PNM) filed aseparate complaint at the FERC in which it contended that its demand chargeunder an existing interruptible power supply contract with SPS is excessive andthat SPS has overcharged PNM for fuel costs under three separate agreementsthrough erroneous fuel clause calculations.  PNM’s arguments mirror thosethat it made as an intervenor in the cooperatives’ complaint case, and SPSbelieves that they have little merit.  SPS submitted a response to PNM’scomplaint in October 2005.  In November 2005, the FERC acceptedPNM’s complaint, set it for hearing, suspended hearings and set the matter forsettlement judge procedures. PNM and SPS have held several rounds of settlementdiscussions. On April 18, 2006, the settlement judge determined that thesettlement procedures should be terminated and the matter set for hearing.

 

***Wholesale Power BaseRate Application***– On Dec. 1, 2005, SPS filed, asamended, for a $2.5 million increase in wholesale power rates to the electriccooperatives, Cap Rock Energy and PNM. On Jan. 31, 2006, the FERC conditionallyaccepted the proposed rates for filing, and set the $2.5 million power rateincrease to become effective on July 1, 2006, subject to refund. The FERC alsoset the rate increase request for hearing and settlement judge procedures. Thecase is presently in the settlement judge procedures.

 

***SPP Energy ImbalanceService*-**On June 15, 2005, Southwest PowerPool, Inc. (SPP), of which SPS is a member, filed proposed tariff provisions toestablish an Energy Imbalance Service (EIS) wholesale energy market for the SPPregion, using a phased approach toward the development of a fully-functionallocational marginal pricing energy market with appropriate financialtransmission rights, to be effective March 1, 2006. On Sept. 19, 2005, the FERCissued an order rejecting the SPP EIS proposal and providing guidance andrecommendations to SPP; however, the FERC did not require SPP to implement afull Day 2 market similar to the Midwest Independent Transmission SystemOperator, Inc. (MISO). On Jan. 6, 2006, SPP filed its revised EIS tariff. OnMarch 20, 2006, the FERC issued an order conditionally accepting the proposedmarket, suspending the implementation until Oct. 1, 2006. The FERC found theproposal lacking, particularly with respect to the hiring of an external marketmonitor, the loss compensation mechanisms and the lack of several standardforms for service. The FERC directed SPP to implement safeguards for the firstsix months of the imbalance markets including a two tier cap, a marketreadiness certification and price correction authority. SPP and marketparticipants are currently engaging in a series of technical conferences inorder to comply with the FERC’s order. SPS has not yet requested New MexicoPublic Regulation

 

6

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Commission (NMPRC) or Public Utility Commission of Texas (PUCT)approval regarding accounting and ratemaking treatment of EIS costs.

 

***Fuel Cost Recovery Mechanisms***– Fuel and purchased energy costs are recovered in Texas through a fixed-fueland purchased energy recovery factor, which is part of SPS’ retail electricrates. The Texas retail fuel factors change each November and May based on theprojected cost of natural gas. If it appears that SPS will materiallyover-recover or under-recover these costs, the factor may be revised based onapplication by SPS or action by the PUCT. In the first quarter of 2006, SPSrevised its estimate of the allocation of fuel under-recoveries to its Texasjurisdiction for 2004 and 2005. The revised estimate resulted in the deferralof an additional $7 million of fuel expense, which was recorded in the firstquarter of 2006. SPS plans to file a fuel factor application in May 2006.

 

***Texas EnergyLegislation -***The 2005 Texas Legislature passed alaw, effective June 18, 2005, establishing statutory authority for electricutilities outside of the electric reliability council of Texas in the SPP orthe Western Electricity Coordinating Council to have timely recovery oftransmission infrastructure investments. After notice and hearing, the PUCT mayallow recovery on an annual basis of the reasonable and necessary expendituresfor transmission infrastructure improvement costs and changes in wholesaletransmission charges under a tariff approved by FERC. The PUCT will initiate arulemaking for this process that is expected to take place in the first half of2006.

 

***New Mexico FuelReview***- On Jan. 28, 2005, the NMPRC acceptedthe staff petition for a review of SPS’s fuel and purchased power cost. Thestaff requested a formal review of SPS’s fuel and purchased power costadjustment clause (FPPCAC) for the period of Oct. 1, 2001 through August 2004.The hearing in the fuel review case was held April 22, 2006.

 

***New Mexico FuelFactor Continuation Filing**–*****On Aug.18, 2005, SPS made a filing with the NMPRC requesting to continue the use ofSPS’s FPPCAC. This filing was required at this time by the NMPRC. The filingrequests that the FPPCAC continue the current monthly factor cost recoverymethodology. Testimony has been filed in the case by staff and intervenorsobjecting to SPS’s assignment of system average fuel costs to certain wholesalesales and the inclusion of ineligible purchased power capacity and energypayments in the FPPCAC. The testimony also proposed limits on SPS’s future useof the FPPCAC. Related to these issues some intervenors have requesteddisallowances for past periods, which in the aggregate total approximately $40million. Other issues in the case include the treatment of renewable energycertificates and sulfur dioxide allowance credit proceeds in relation to SPS’sNew Mexico retail fuel and purchased power recovery clause. The hearing washeld on April 18 – 23, 2006, and a NMPRC decision is expected in late 2006.

 

**3.Commitments and Contingent Liabilities**

 

**EnvironmentalContingencies**

 

SPS has beenor is currently involved with the cleanup of contamination from certain hazardoussubstances at several sites. In many situations, SPS is pursuing or intends topursue insurance claims and believes it will recover some portion of thesecosts through such claims. Additionally, where applicable, SPS is pursuing, orintends to pursue, recovery from other potentially responsible parties andthrough the rate regulatory process. New and changing federal and stateenvironmental mandates can also create added financial liabilities for SPS,which are normally recovered through the rate regulatory process. To the extentany costs are not recovered through the options listed above, SPS would berequired to recognize an expense for such unrecoverable amounts in itsFinancial 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 sulfurdioxide (SO2) and nitrogen oxide(NOx) emissions, and the Clean Air Mercury Rule (CAMR) regulates mercury emissionsfrom power plants for the first time.

 

Xcel Energy and SPS advocated that West Texas should be excluded fromCAIR, because it does not contribute significantly to nonattainment with thefine particulate matter National Ambient Air Quality Standard in any downwindjurisdiction. On July 11, 2005, SPS, the City of Amarillo, Texas and OccidentalPermian LTD filed a lawsuit against the EPA and a request for reconsiderationwith the agency to exclude West Texas from CAIR. El Paso Electric Co. joined inthe request for reconsideration. On March 15, 2006, the EPA denied the petitionfor reconsideration. SPS still has the option to continue to litigate thedecision.

 

Under CAIR’s cap-and-trade structure, SPS can comply through capitalinvestments in emission controls or purchase of emission “allowances” fromother utilities making reductions on their systems. Based on the preliminaryanalysis of various scenarios of capital investment and allowance purchase,capital investments could range from $30 million to $300 million and allowancepurchases or increased operating and maintenance expenses could range from $20million to $30 million per year, beginning in 2011 based on the cost ofallowances on Feb. 15, 2006. This does not include other costs that SPS willhave to incur to comply with EPA’s new mercury emission control regulations,which will apply to SPS’ plants.

 

These cost estimates representone potential scenario to comply with CAIR, if West Texas is not excluded. Thereis uncertainty concerning implementation of CAIR. States are required todevelop implementation plans within 18 months of the issuance of the new rulesand have a significant amount of discretion in the implementation details. Legalchallenges to CAIR rules could alter their requirements and/or schedule. Theuncertainty associated with the final CAIR rules makes it difficult toproject the ultimate amount and timing of capital expenditures and operatingexpenses.

 

7

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While SPS expects to comply with the new rules through a combination ofadditional capital investments in emission controls at various facilities andpurchases of emission allowances, it is continuing to review the alternatives. SPSbelieves the cost of any required capital investment or allowance purchaseswill be recoverable from customers.

 

***PolychlorinatedBiphenyl (PCB) Storage and Disposal*****—**In August 2004,SPS received notice from the EPA contending that SPS violated PCB storage anddisposal regulations with respect to storage of a drained transformer andrelated solids. The EPA contended the fine for the alleged violation wasapproximately $1.2 million. SPS contested the fine and submitted a voluntarydisclosure to the EPA. On April 17, 2006, SPS received a notice of determinationfrom the EPA stating that the voluntary disclosure had been reviewed and thatSPS had met all conditions of the EPA’s audit policy. Accordingly, the EPA willmitigate 100 percent of the gravity-based penalty for the disclosed violation,and no economic penalty will be assessed.

 

**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**

 

Except as setforth above, the circumstances in Note 11 to the financial statements in SPS’Annual Report on Form 10-K for the year ended Dec. 31, 2005 and Note 2 of thisQuarterly Report on Form 10-Q, appropriately represent, in all materialrespects, the current status of commitments and contingent liabilities and areincorporated herein by reference.

 

***Comer vs. XcelEnergy Inc. et al.***– On April 25, 2006 Xcel Energyreceived notice of a purported class action lawsuit filed in United StatesDistrict Court for the Southern District of Mississippi. Although SPS is notnamed as a party to this litigation, it could have a material adverse effect onSPS. The lawsuit names more than 45 oil, chemical and utility companies,including Xcel Energy, as defendants and alleges that defendants’ carbondioxide emissions “were a proximate and direct cause of the increase in thedestructive capacity of Hurricane Katrina.” Plaintiffs allege in support of their claim, several legal theories,including negligence, and public and private nuisance and seek damages relatedto the hurricane. Xcel Energy believes this lawsuit is without merit andintends to vigorously defend itself against these claims.

 

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

 

AtMarch 31, 2006, SPS had $39.1 million of short-term debt outstanding at aweighted average interest rate of 4.82 percent.

 

SPS plans torefinance existing long-term debt or scheduled long-term debt maturities basedon prevailing market conditions. To facilitate potential long-term debtissuances, SPS intends to file a long-term debt shelf registration statementwith the SEC for up to $500 million in 2006.

 

**5.****  Derivative Valuation and Financial Impacts**

 

SPS uses anumber of different derivative instruments in connection with its utilitycommodity price, interest rate, and limited short-term wholesale and commoditytrading activities, including forward contracts, futures, swaps and options.

 

All derivative instruments not qualifying for the normal purchases andnormal sales exception, as defined by SFAS No. 133-“Accounting forDerivative Instruments and Hedging Activities,” as amended (SFAS No. 133), arerecorded at fair value. The presentation of these derivative instruments isdependent on the designation of a qualifying hedging relationship. The adjustmentto fair value of derivative instruments not designated in a qualifying hedgingrelationship are reflected in current earnings or as a regulatory balance. Thisclassification is dependent on the applicability of any regulatory mechanism inplace. This includes certain instruments used to mitigate market risk for SPSand all instruments related to the commodity trading operations. Thedesignation of a cash flow hedge permits the classification of fair value to berecorded within Other Comprehensive Income, to the extent effective. Thedesignation of a fair value hedge permits a derivative instrument’s gains orlosses to offset the related results of the hedged item in the Statements ofIncome, to the extent effective.

 

SPS records the fair value of its derivative instruments in its BalanceSheet as separate line items identified as Derivative Instruments Valuation inboth current and noncurrent assets and liabilities.

 

Qualifyinghedging relationships are designated as either a hedge of a forecasted transactionor future cash flow (cash flow hedge), or a hedge of a recognized asset,liability or firm commitment (fair value hedge). The types of qualifyinghedging transactions that SPS is currently engaged in are discussed below.

 

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**CashFlow Hedges**

 

SPS enters into derivative instruments to managevariability of future cash flows from changes in commodity prices and interestrates. These derivative instruments are designated as cash flow hedges foraccounting purposes and changes in the fair value of these instruments are acomponent of Other Comprehensive Income or deferred as a regulatory asset orliability. This classification is based on the regulatory recovery mechanismsin place. Amounts deferred in these accounts are recorded in earnings as thehedged purchase or sales transaction is settled. This could include thepurchase or sale of energy or energy-related products or the use of natural gasto generate electric energy. As of March 31, 2006, SPS had no commodity-relatedcontracts classified as cash flow hedges.

 

SPS enters into various instruments that effectively fix the interestpayments on certain floating rate debt obligations or effectively fix the yieldor price on a specified benchmark interest rate for a specific period. Thesederivative instruments are designated as cash flow hedges for accountingpurposes, and the change in the fair value of these instruments is recorded asa component of Other Comprehensive Income. As of March 31, 2006, SPS had netlosses of $0.5 million in Accumulated Other Comprehensive Income related tointerest rate cash flow hedge contracts that are expected to be recognized inearnings during the next 12 months.

 

Gains orlosses on hedging transactions for the sales of energy or energy-relatedproducts are primarily recorded as a component of revenue, hedging transactionsfor fuel used in energy generation are recorded as a component of fuel costsand interest rate hedging transactions are recorded as a component of interest expense.SPS is allowed to recover in electric rates the costs of certain financialinstruments acquired to reduce commodity cost volatility. There was no hedgeineffectiveness in the first quarter of 2006.

 

The impact ofthe components of hedges on SPS’ Accumulated Other Comprehensive Income,included as a component of stockholders’ equity, are detailed in the followingtable:

 
| ** **                                                                           | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Millions of dollars)**                                                  | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Accumulated other comprehensive loss related to cash flow hedges at  Jan. 1          |       | $                                                    | (4.8       | ) | $ | (5.3 | ) |
| After-tax net unrealized gains related to  derivatives accounted for as hedges       |       | 0.4                                                  |       | 0.4 |   |
| After-tax net realized losses on derivative  transactions reclassified into earnings |       | —                                               |       | (0.1 | ) |
| Accumulated other comprehensive loss  related to cash flow hedges at March 31   |       | $                                                    | (4.4       | ) | $ | (5.0 | ) |

 

**DerivativesNot Qualifying for Hedge Accounting**

 

SPS hasextremely limited commodity trading operations that enter into derivativeinstruments. These derivative instruments are accounted for on a mark-to-marketbasis in the Statement of Income. The results of these transactions arerecorded as a component of Operating Revenue on the Statement of Income.

 

SPS may alsoenter into certain commodity-based derivative transactions, not included intrading operations, which do not qualify for hedge accounting treatment. Thesederivative instruments are accounted for on a mark-to-market basis inaccordance with SFAS 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 or derivative instrument that will be delivered in quantitiesexpected to be used or sold over a reasonable period in the normal course ofbusiness. In addition, normal purchases and normal sales contracts must have aprice based on an underlying that is clearly and closely related to the assetbeing purchased or sold. An underlying is a specified interest rate securityprice, commodity price, foreign exchange rate, index of prices or rates, orother variable, including the occurrence or nonoccurrence of a specified event,such as a scheduled payment under a contract.

 

SPS evaluatesall of its 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.

 

In 2003, as aresult of FASB Statement 133 Implementation Issue No. C20, SPS began recordingseveral long-term power purchase agreements at fair value due to accountingrequirements related to underlying price adjustments. As these purchases arerecovered through normal regulatory recovery mechanisms in the respectivejurisdictions, the changes in fair value for these contracts were offset byregulatory assets and liabilities. During the first quarter of 2006, SPSqualified these contracts under the normal purchase

 

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exception. Basedon this qualification, the contracts will no longer be adjusted to fair valueand the previous carrying value of these contracts will be amortized over theremaining contract lives along with the offsetting regulatory balances.

 

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**

 

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

 

| ** **                                | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|
| **(Thousands of dollars)**      | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Interest income                           |       | $                                                | 1,256      |   | $ | 293 |   |
| Gain on sale of assets                    |       | —                                           |       | 45 |   |
| Other nonoperating income                 |       | 237                                              |       | 166 |   |
| Employee-related insurance policy expense |       | (18                                              | )          | (20 | ) |
| Total interest and other income - net     |       | $                                                | 1,475      |   | $ | 484 |   |

 

**7.****  Segment Information**

 

SPS has onereportable segment. SPS operates in the Regulated Electric Utility industry,providing wholesale and retail electric service in the states of Texas, NewMexico, Kansas and Oklahoma. Revenues from external customers were $412.8million and $312.4 million for the three months ended March 31, 2006 and2005, respectively.

 

**8.****  Comprehensive Income**

 

The componentsof total comprehensive income are shown below:

 

| ** **                                                                                        | ** ** | **Three months ended  March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Millions of dollars)**                                                               | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Net income                                                                                        |       | $                                                | 11.9       |   | $ | 14.1 |   |
| Other comprehensive income:                                                                       |       |                                             |       |   |   |
| After-tax net unrealized gains related to  derivatives accounted for as hedges (see Note 5)       |       | 0.4                                              |       | 0.4 |   |
| After-tax net realized losses on derivative  transactions reclassified into earnings (see Note 5) |       | —                                           |       | (0.1 | ) |
| Other comprehensive income                                                                        |       | 0.4                                              |       | 0.3 |   |
| Comprehensive income                                                                              |       | $                                                | 12.3       |   | $ | 14.4 |   |

 

The accumulated othercomprehensive loss in stockholders’ equity at March 31, 2006 and Dec. 31,2005 relates to valuation adjustments on SPS’ derivative financial instrumentsand hedging activities.

 

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

 

Pension and otherpostretirement benefit disclosures below generally represent Xcel Energyconsolidated information unless specifically identified as being attributableto SPS.

 

**Componentsof Net Periodic Benefit Cost**

 
| ** **                                                    | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                             | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **(Thousands of dollars)**                          | ** ** | **Pension Benefits**                            | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel  Energy Inc.**                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                  |       | $                                                    | 16,434     |   | $ | 17,250 |   | $ | 1,837 |   | $ | 1,743 |   |
| Interest cost                                                 |       | 39,509                                               |       | 40,996 |   | 13,183 |   | 13,867 |   |
| Expected return on plan assets                                |       | (66,481                                              | )          | (70,274 | ) | (6,268 | ) | (6,583 | ) |
| Amortization of transition (asset)  obligation                |       | —                                               |       | — |   | 3,645 |   | 3,645 |   |
| Amortization of prior service cost (credit)                   |       | 7,427                                                |       | 7,522 |   | (545 | ) | (545 | ) |
| Amortization of net loss                                      |       | 4,511                                                |       | 3,449 |   | 6,523 |   | 6,663 |   |
| Net periodic benefit cost (credit)                            |       | 1,400                                                |       | (1,057 | ) | $ | 18,375 |   | $ | 18,790 |   |
| Credits not recognized due to the effects  of regulation      |       | 2,425                                                |       | 3,184 |   | — |   | — |   |
| Additional cost recognized due to the  effects of regulation  |       | —                                               |       | — |   | 973 |   | 973 |   |
| Net benefit cost recognized for financial  reporting          |       | $                                                    | 3,825      |   | $ | 2,127 |   | $ | 19,348 |   | $ | 19,763 |   |
|                                                          |       |                                                 |       |   |   |   |   |   |   |
| **SPS**                                                       |       |                                                 |       |   |   |   |   |   |   |
| Net benefit cost (credit) recognized for  financial reporting |       | $                                                    | (1,343     | ) | $ | (2,090 | ) | $ | 1,705 |   | $ | 1,416 |   |

 

**Item 2. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

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 ownedsubsidiaries. It is replaced with management’s narrative analysis and theresults of operations set forth in general instructions H (2) (a) of Form 10-Qfor wholly owned 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;

•    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

 

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to higher demand,shortages, transportation problems or other developments; environmentalincidents; or electric transmission or natural gas pipeline 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 andother items;

•    Risksassociated with implementation of new technologies; and

•    Otherbusiness or investment considerations that may be disclosed from time to timein SPS’ SEC filings, including “Risk Factors” in Item 1A of SPS’ Annual Reporton Form 10-K for the year ended Dec. 31, 2005, or in other publiclydisseminated 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, 2005.Commodity price and interest rate risks for SPS is mitigated in mostjurisdictions due to cost-based rate regulation. At March 31, 2006, therewere no material changes to the financial market risks that affect thequantitative and qualitative disclosures presented as of Dec. 31, 2005.

 

**RESULTSOF OPERATIONS**

 

SPS’ netincome was approximately $11.9 million for the first three months of 2006,compared with approximately $14.1 million for the first three months of 2005.

 

**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 relatedpurchase and sales activity and the use of certain financial instruments associatedwith the fuel required for and energy produced from SPS’ generation assets andenergy and capacity purchased to serve native load. Commodity trading is notassociated with SPS’ generation assets or the energy and capacity purchased toserve native load.

 

SPSconducts an inconsequential amount of commodity trading. Margins from commoditytrading activity are partially redistributed to Northern States Power Company,a Minnesota corporation, and Public Service Company of Colorado, both whollyowned subsidiaries of Xcel Energy, pursuant to the joint operating agreement(JOA) approved by the FERC. Margins received pursuant to the JOA are reflectedas part of Base Electric Utility Revenues. Short-term wholesale and commoditytrading margins reflect the impact of regulatory sharing or realized margins,if applicable. Commodity trading revenues are reported net of trading costs(i.e., on a margin basis) in the Statements of Income. Commodity trading costsinclude purchased power, transmission, broker fees and other related costs.

 

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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 March 31, 2006** | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **              | ** ** |
| Electric utility revenue               |       | $                           | 411        |                      | $          | 2                       |       | $ | 413 |   |
| Electric fuel and purchased power      |       | (294                        | )          | (2                        | )          | (296                    | )          |
| Gross margin before operating expenses |       | $                           | 117        |                      | $          | —                  |       | $ | 117 |   |
| Margin as a percentage of revenue      |       | 28.5                        | %          | —                    | %          | 28.3                    | %          |
|                                   |       |                        |       |                      |       |                    |       |
| **Three  months ended March 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                        | %          | —                    | %          | 37.4                    | %          |

 

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)**     | ** ** | **2006 vs. 2005** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| Fuel cost recovery                      |       | $                           | 99         |   |
| Capacity sales                          |       | (2                          | )          |
| Sales growth (excluding weather impact) |       | 2                           |       |
| Total base electric revenue increase    |       | $                           | 99         |   |

 

***Base Electric Margin***

 

| **(Millions of dollars)**     | ** ** | **2006 vs. 2005** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| Under recovery (timing) of fuel costs   |       | $                           | (7         | )  |
| 2004-2005 fuel adjustment               |       | 7                           |       |
| Sales growth (excluding weather impact) |       | 2                           |       |
| Other                                   |       | (2                          | )          |
| Total base electric margin increase     |       | $                           | —     |   |

 

## **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)**                             | ** ** | **2006 vs. 2005** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------|------------|
| Higher regulatory fees and assessments                          |       | $                           | 2          |   |
| Higher employee benefit costs                                   |       | 2                           |       |
| Lower uncollectible receivable costs                            |       | (1                          | )          |
| Other                                                           |       | 1                           |       |
| Total other utility operating and  maintenance expense increase |       | $                           | 4          |   |

 

Taxes (otherthan income taxes) increased by approximately $0.6 million, or 4.6 percent, forthe first three months of 2006, compared with the first three months of 2005.The increase is primarily due to higher franchise taxes.

 

Other incomeincreased by approximately $0.7 million, or 83.5 percent, for the first threemonths of 2006, compared with the first three months of 2005. The increase isprimarily due to interest income on deferred fuel assets.

 

Incometaxes decreased by approximately $1.5 million for the first three months of2006 compared with the first three months of 2005. The decrease is primarilydue to lower income. The effective tax rate was 36.7 percent for the firstthree months of 2006, compared with 37.3 percent for the same period in 2005. Thedecrease in the effective tax rate was primarily due to a decrease inplant-related permanent tax expense items for 2006 compared to 2005.

 

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**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 Commissionrules and forms. In addition, the disclosure controls and proceduresensure that information required to be disclosed is accumulated andcommunicated to management, including the chief executive officer (CEO) andchief financial officer (CFO), allowing timely decisions regarding requireddisclosure. 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 CEO and CFO, of the effectiveness of our disclosurecontrols and procedures, the CEO and CFO have concluded that SPS’ disclosurecontrols and procedures are effective.

 

**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.

 

#### **Part II. OTHER INFORMATION**

#### ** **

## **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, 2005 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 6. EXHIBITS**

## ** **

The followingExhibits are filed with this report:

 
| 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 has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized on May 1, 2006.

 
| 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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