Table of Contents

** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

# **FORM 10-Q**

# ** **

**(MarkOne)**

 

**x****      QUARTERLY REPORT PURSUANT TO SECTION 13 OR15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the quarterly period ended Sept. 30, 2009**

 

**or**

 

**o****         TRANSITION REPORTSPURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934**

 

**Commission File Number: 001-03789**

 

# **Southwestern Public Service Company**

(Exact name of registrant as specified in its charter)

 

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

 

**(303) 571-7511**

 (Registrant’s telephone number,including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirement for thepast 90 days.   x Yes o No

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 and Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).  o Yes o No

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated filer o                   |   | Accelerated filer o         |
|---------------------------------------------|--------|-----------------------------|
|                                        |   |                        |
| Non-accelerated filer x                     |   | Smaller Reporting company o |
| (Do not check if smaller reporting company) |   |                        |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).   o Yes x No

 

Indicate the number ofshares outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date.

 

| **Class**                  | ** ** | **Outstanding at Nov. 2, 2009** |
|----------------------------|------------|-----------------------------------------------------|
| 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-Qwith the reduced disclosure format specified in General Instruction H (2) tosuch Form 10-Q.

 

 

 

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#### **Table of Contents**

 

#### **TABLE OF CONTENTS**

 
| **PART I - FINANCIAL INFORMATION**      | ** **                                                                                  |
|----------------------------------------------|---------------------------------------------------------------------------------------------|
|                                         |                                                                                        |   |
| Item l.                                      | Financial Statements (Unaudited)                                                            | 3 |
| Item 2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 19 |
| Item 4.                                      | Controls and  Procedures                                                                    | 22 |
|                                         |                                                                                        |   |
| **PART II - OTHER INFORMATION**         | ** **                                                                                  |
|                                         |                                                                                        |   |
| Item 1.                                      | Legal Proceedings                                                                           | 22 |
| Item 1A.                                     | Risk Factors                                                                                | 22 |
| Item 6.                                      | Exhibits                                                                                    | 23 |
|                                         |                                                                                        |   |
| **SIGNATURES**                               | 24                                                                                          |
|                                         |                                                                                        |   |
| Certifications  Pursuant to Section 302 |                                                                                        |   |
| Certifications  Pursuant to Section 906 |                                                                                        |   |
| Statement  Pursuant to Private Litigation    |                                                                                        |   |
|                                              |                                                                                             |  |  |

 

This Form 10-Q is filedby Southwestern Public Service Company, a New Mexico corporation (SPS). SPS isa wholly owned subsidiary of Xcel Energy Inc. (Xcel Energy).  Additional information on Xcel Energy isavailable on various filings with the Securities and Exchange Commission (SEC).

 

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**PART I. FINANCIAL INFORMATION**

 

**Item 1. FINANCIAL STATEMENTS**

 

**SOUTHWESTERN PUBLIC SERVICECOMPANY**

**STATEMENTSOF INCOME (UNAUDITED)**

*(amounts in thousands of dollars)*

 
| ** **                                                                                         | ** ** | **Three  Months Ended Sept. 30,** | ** ** | **Nine  Months Ended Sept. 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                         | ** ** | **2009**                               | ** ** | **2008**                              | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                                               |       |                                   |       |                                  |       |   |   |   |   |
| **Operating revenues**                                                                             |       | $                                      | 397,094    |                                  | $          | 610,763 |   | $ | 1,094,217 |   | $ | 1,567,433 |   |
|                                                                                               |       |                                   |       |                                  |       |   |   |   |   |
| **Operating expenses**                                                                             |       |                                   |       |                                  |       |   |   |   |   |
| Electric  fuel and purchased power                                                                 |       | 229,607                                |       | 469,617                               |       | 673,126 |   | 1,217,300 |   |
| Other  operating and maintenance expenses                                                          |       | 52,716                                 |       | 50,743                                |       | 161,145 |   | 156,773 |   |
| Demand  side management program expenses                                                           |       | 2,673                                  |       | 2,266                                 |       | 6,646 |   | 7,927 |   |
| Depreciation  and amortization                                                                     |       | 25,970                                 |       | 24,460                                |       | 76,524 |   | 72,833 |   |
| Taxes  (other than income taxes)                                                                   |       | 9,458                                  |       | 11,072                                |       | 29,231 |   | 31,175 |   |
| Total  operating expenses                                                                          |       | 320,424                                |       | 558,158                               |       | 946,672 |   | 1,486,008 |   |
|                                                                                               |       |                                   |       |                                  |       |   |   |   |   |
| **Operating income**                                                                               |       | 76,670                                 |       | 52,605                                |       | 147,545 |   | 81,425 |   |
|                                                                                               |       |                                   |       |                                  |       |   |   |   |   |
| Other  income (expense), net                                                                       |       | (538                                   | )          | 1,738                                 |       | (496 | ) | 3,967 |   |
| Allowance  for funds used during construction - equity                                             |       | 887                                    |       | —                                |       | 2,977 |   | — |   |
|                                                                                               |       |                                   |       |                                  |       |   |   |   |   |
| **Interest charges and financing costs**                                                           |       |                                   |       |                                  |       |   |   |   |   |
| Interest  charges - includes other financing costs of $662, $597, $1,989 and $1,778,  respectively |       | 17,178                                 |       | 14,179                                |       | 50,860 |   | 41,663 |   |
| Allowance  for funds used during construction - debt                                               |       | (618                                   | )          | (638                                  | )          | (2,063 | ) | (1,898 | ) |
| Total  interest charges and financing costs                                                        |       | 16,560                                 |       | 13,541                                |       | 48,797 |   | 39,765 |   |
|                                                                                               |       |                                   |       |                                  |       |   |   |   |   |
| **Income before income taxes**                                                                     |       | 60,459                                 |       | 40,802                                |       | 101,229 |   | 45,627 |   |
| Income  taxes                                                                                      |       | 23,044                                 |       | 17,166                                |       | 37,824 |   | 19,287 |   |
| **Net income**                                                                                     |       | $                                      | 37,415     |                                  | $          | 23,636 |   | $ | 63,405 |   | $ | 26,340 |   |

 

See Notes toFinancial Statements

 

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**SOUTHWESTERN PUBLIC SERVICE COMPANY**

**STATEMENTS OF CASH FLOWS(UNAUDITED)**

*(amounts in thousands of dollars)*

 
| ** **                                                                     | ** ** | **Nine  Months Ended Sept. 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                         | ** ** | **2008** | ** ** |
|                                                                           |       |                             |       |   |   |
| **Operating activities**                                                       |       |                             |       |   |   |
| Net income                                                                     |       | $                                | 63,405     |   | $ | 26,340 |   |
| Adjustments to reconcile net income to cash  provided by operating activities: |       |                             |       |   |   |
| Depreciation and amortization                                                  |       | 79,561                           |       | 82,271 |   |
| Deferred income taxes                                                          |       | 3,745                            |       | 25,239 |   |
| Amortization of investment tax credits                                         |       | (243                             | )          | (147 | ) |
| Allowance for equity funds used during construction                            |       | (2,977                           | )          | — |   |
| Net realized and unrealized hedging and derivative  transactions               |       | (1,013                           | )          | 201 |   |
| Changes in operating assets and liabilities:                                   |       |                             |       |   |   |
| Accounts receivable                                                            |       | 9,471                            |       | (18,748 | ) |
| Accrued unbilled revenues                                                      |       | 7,104                            |       | 1,289 |   |
| Recoverable electric energy costs                                              |       | 3,978                            |       | (27,690 | ) |
| Inventories                                                                    |       | 20,543                           |       | (29,592 | ) |
| Prepayments and other                                                          |       | (27,133                          | )          | 2,712 |   |
| Accounts payable                                                               |       | (40,945                          | )          | 2,227 |   |
| Deferred electric energy costs                                                 |       | 52,547                           |       | — |   |
| Net regulatory assets and liabilities                                          |       | 1,961                            |       | (1,703 | ) |
| Other current liabilities                                                      |       | 11,441                           |       | 1,504 |   |
| Change in other noncurrent assets                                              |       | (8,019                           | )          | (8,634 | ) |
| Change in other noncurrent liabilities                                         |       | (18,110                          | )          | 6,515 |   |
| Net cash provided by operating activities                                      |       | 155,316                          |       | 61,784 |   |
|                                                                           |       |                             |       |   |   |
| **Investing activities**                                                       | ** ** | ** **                       |       |   |   |
| Utility capital/construction expenditures                                      |       | (148,543                         | )          | (127,271 | ) |
| Allowance for equity funds used during construction                            |       | 2,977                            |       | — |   |
| Investments in utility money pool arrangement                                  |       | (776,400                         | )          | — |   |
| Receipts from utility money pool arrangement                                   |       | 776,900                          |       | — |   |
| Other investments                                                              |       | —                           |       | 2,179 |   |
| Net cash used in investing activities                                          |       | (145,066                         | )          | (125,092 | ) |
|                                                                           |       |                             |       |   |   |
| **Financing activities**                                                       | ** ** | ** **                       |       |   |   |
| Repayment of short-term borrowings, net                                        |       | —                           |       | (33,000 | ) |
| Borrowings under utility money pool arrangement                                |       | —                           |       | 667,700 |   |
| Repayments under utility money pool arrangement                                |       | —                           |       | (577,200 | ) |
| Repayment of long-term debt, including  reacquisition premiums                 |       | (100,027                         | )          | — |   |
| Capital contributions from parent                                              |       | 13,044                           |       | 52,095 |   |
| Dividends paid to parent                                                       |       | (49,813                          | )          | (46,866 | ) |
| Net cash (used in) provided by financing activities                            |       | (136,796                         | )          | 62,729 |   |
|                                                                           |       |                             |       |   |   |
| Net decrease in cash and cash equivalents                                      |       | (126,546                         | )          | (579 | ) |
| Cash and cash equivalents at beginning of period                               |       | 130,795                          |       | 714 |   |
| Cash and cash equivalents at end of period                                     |       | $                                | 4,249      |   | $ | 135 |   |
|                                                                           |       |                             |       |   |   |
| Supplemental disclosure of cash flow information:                              |       |                             |       |   |   |
| Cash paid for interest (net of amounts capitalized)                            |       | $                                | (37,181    | ) | $ | (33,429 | ) |
| Cash (paid) received for income taxes, net                                     |       | (58,574                          | )          | 9,416 |   |
|                                                                           |       |                             |       |   |   |
| Supplemental disclosure of non-cash investing  transactions:                   |       |                             |       |   |   |
| Property, plant and equipment additions in accounts  payable                   |       | $                                | 3,545      |   | $ | 1,215 |   |

 

See Notes to Financial Statements

 

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**SOUTHWESTERNPUBLIC SERVICE COMPANY**

**BALANCE SHEETS (UNAUDITED)**

*(amounts in thousands of dollars)*

* *
| ** **                                                                            | ** ** | **Sept.  30, 2009** | ** ** | **Dec. 31,  2008** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------|------------|-------------------------|------------|
| **Assets**                                                                            |       |                |       |                    |       |
| Current assets                                                                        |       |                |       |                    |       |
| Cash and cash equivalents                                                             |       | $                   | 4,249      |                    | $          | 130,795 |   |
| Investments in utility money pool arrangement                                         |       | 90,000              |       | 90,500                  |       |
| Accounts receivable, net                                                              |       | 53,281              |       | 63,018                  |       |
| Accounts receivable from affiliates                                                   |       | 5,094               |       | 4,828                   |       |
| Accrued unbilled revenues                                                             |       | 90,759              |       | 97,863                  |       |
| Inventories                                                                           |       | 26,539              |       | 47,082                  |       |
| Recoverable electric energy costs                                                     |       | 1,562               |       | 5,540                   |       |
| Derivative instruments valuation                                                      |       | 8,926               |       | 8,926                   |       |
| Deferred income taxes                                                                 |       | 43,377              |       | 21,607                  |       |
| Prepayments and other                                                                 |       | 32,502              |       | 5,369                   |       |
| Total current assets                                                                  |       | 356,289             |       | 475,528                 |       |
|                                                                                  |       |                |       |                    |       |
| Property, plant and equipment, net                                                    |       | 2,212,978           |       | 2,141,636               |       |
|                                                                                  |       |                |       |                    |       |
| Other assets                                                                          |       |                |       |                    |       |
| Regulatory assets                                                                     |       | 258,932             |       | 269,344                 |       |
| Derivative instruments valuation                                                      |       | 69,856              |       | 76,551                  |       |
| Other                                                                                 |       | 31,561              |       | 24,048                  |       |
| Total other assets                                                                    |       | 360,349             |       | 369,943                 |       |
| Total assets                                                                          |       | $                   | 2,929,616  |                    | $          | 2,987,107 |   |
|                                                                                  |       |                |       |                    |       |
| **Liabilities and Equity**                                                            |       |                |       |                    |       |
| Current liabilities                                                                   |       |                |       |                    |       |
| Current portion of long-term debt                                                     |       | $                   | —     |                    | $          | 100,000 |   |
| Accounts payable                                                                      |       | 125,636             |       | 166,909                 |       |
| Accounts payable to affiliates                                                        |       | 8,198               |       | 10,568                  |       |
| Deferred electric energy costs                                                        |       | 73,483              |       | 20,936                  |       |
| Taxes accrued                                                                         |       | 19,869              |       | 20,271                  |       |
| Accrued interest                                                                      |       | 24,864              |       | 15,585                  |       |
| Dividends payable                                                                     |       | 17,032              |       | 15,136                  |       |
| Derivative instruments valuation                                                      |       | 5,110               |       | 5,079                   |       |
| Other                                                                                 |       | 21,053              |       | 19,800                  |       |
| Total current liabilities                                                             |       | 295,245             |       | 374,284                 |       |
|                                                                                  |       |                |       |                    |       |
| Deferred credits and other liabilities                                                |       |                |       |                    |       |
| Deferred income taxes                                                                 |       | 511,486             |       | 486,702                 |       |
| Deferred investment tax credits                                                       |       | 2,447               |       | 2,690                   |       |
| Regulatory liabilities                                                                |       | 119,758             |       | 126,884                 |       |
| Asset retirement obligations                                                          |       | 18,807              |       | 17,903                  |       |
| Derivative instruments valuation                                                      |       | 54,766              |       | 59,255                  |       |
| Pension and employee benefit obligations                                              |       | 41,008              |       | 50,500                  |       |
| Other                                                                                 |       | 7,759               |       | 16,461                  |       |
| Total deferred credits and other liabilities                                          |       | 756,031             |       | 760,395                 |       |
|                                                                                  |       |                |       |                    |       |
| Commitments and contingent liabilities                                                |       |                |       |                    |       |
| Capitalization                                                                        |       |                |       |                    |       |
| Long-term debt                                                                        |       | 922,366             |       | 922,123                 |       |
| Common stock – authorized 200 shares of $1.00 par  value; outstanding 100 shares |       | 689,749             |       | 676,705                 |       |
| Additional paid in capital                                                            |       | —              |       | —                  |       |
| Retained earnings                                                                     |       | 271,305             |       | 259,159                 |       |
| Accumulated other comprehensive loss                                                  |       | (5,080              | )          | (5,559                  | )          |
| Total common stockholder’s equity                                                |       | 955,974             |       | 930,305                 |       |
| Total liabilities and equity                                                          |       | $                   | 2,929,616  |                    | $          | 2,987,107 |   |

 

See Notes to Financial Statements

 

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**SOUTHWESTERN PUBLICSERVICE COMPANY**

**Notes to FinancialStatements (UNAUDITED)**

** **

In the opinion ofmanagement, the accompanying unaudited financial statements contain alladjustments necessary to present fairly, in accordance with accountingprinciples generally accepted in the United States of America (GAAP), thefinancial position of SPS as of Sept. 30, 2009, and Dec. 31, 2008;the results of its operations for the three and nine months endedSept. 30, 2009 and 2008; and its cash flows for the nine months endedSept. 30, 2009 and 2008. All adjustments are of a normal, recurringnature, except as otherwise disclosed.  Management has also evaluated the impactof events occurring after Sept. 30, 2009 up to Nov. 2, 2009, which isthe date of issuance of these financial statements.  These statements contain all necessaryadjustments and disclosures resulting from that evaluation.  The Dec. 31, 2008balance sheet information has been derived from the audited 2008 financialstatements. These notes to the financial statements have been prepared pursuantto the rules and regulations of the SEC for Quarterly Reports on Form 10-Q.  Certain information and note disclosuresnormally included in financial statements prepared in accordance with GAAP havebeen condensed or omitted pursuant to such rules and regulations.  For further information, refer to thefinancial statements and notes thereto, included in the SPS Annual Report on Form 10-Kfor the year ended Dec. 31, 2008, filed with the SEC on March 2,2009.  Due to the seasonality of electricsales of SPS, interim results are not necessarily an appropriate base fromwhich to project annual results.

 

**1.             Summary of Significant Accounting Policies**

** **

Except to the extent updatedor described below, the significant accounting policies set forth in Note 1 tothe financial statements in SPS’ Annual Report on Form 10-K for the yearended Dec. 31, 2008, appropriately represent, in all material respects,the current status of accounting policies and are incorporated herein byreference.

 

***Reclassification*** — Demand sidemanagement (DSM) program expenses were reclassified as a separate item.  Previously these costs were included in otheroperating and maintenance expenses and depreciation and amortization on thestatements of income.  Thisreclassification did not have an impact on total operating expenses.

 

**2.             Accounting Pronouncements**

 

***Recently Adopted***

 

***Business Combinations*******—****In December 2007,the Financial Accounting Standards Board (FASB) issued new guidance on businesscombinations which establishes principles and requirements for how an acquirerin a business combination recognizes and measures in its financial statementsthe identifiable assets acquired, the liabilities assumed, and anynoncontrolling interest; recognizes and measures the goodwill acquired in thebusiness combination or a gain from a bargain purchase; and determines whatinformation to disclose to enable users of the financial statements to evaluatethe nature and financial effects of the business combination. This new guidanceis to be applied prospectively to business combinations for which theacquisition date is on or after the beginning of an entity’s fiscal year that beginson or after Dec. 15, 2008.  SPSimplemented the guidance on Jan. 1, 2009, and the implementation did nothave a material impact on its financial statements.

 

***Noncontrolling Interests***— Also in December 2007,the FASB issued new guidance on noncontrolling interests in consolidatedfinancial statements which establishes accounting and reporting standards thatrequire the ownership interest in subsidiaries held by parties other than theparent be clearly identified and presented in the consolidated balance sheetswithin equity, but separate from the parent’s equity; the amount ofconsolidated net income attributable to the parent and the noncontrollinginterest be clearly identified and presented on the face of the consolidatedstatement of earnings; and changes in a parent’s ownership interest while theparent retains its controlling financial interest in its subsidiary beaccounted for consistently as equity transactions. This new guidance waseffective for fiscal years beginning on or after Dec. 15, 2008.  SPS implemented the guidance on Jan. 1,2009, and the implementation did not have a material impact on its financialstatements.

 

***Derivatives and Hedging Disclosures***— In March 2008,the FASB issued new guidance on disclosures about derivative instruments andhedging activities which is intended to enhance disclosures to help users ofthe financial statements better understand how derivative instruments andhedging activities affect an entity’s financial position, financialperformance, and cash flows.  Theguidance amends and expands previousdisclosure requirements for derivative instruments and hedging activities,including disclosures of objectives and strategies for using derivatives,gains, and losses on derivative instruments, and credit-risk-related contingentfeatures in derivative contracts.  Thisnew guidance was effective for fiscal years and interim periods beginning afterNov. 15, 2008.  SPS implemented theguidance on Jan. 1, 2009, and the implementation did not have a materialimpact on its financial statements.  Forfurther discussion and the required disclosures, see Note 8 to the financialstatements.

 

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***Interim Fair Value Disclosures***—******In April 2009,the FASB issued new guidance on interim disclosures about fair value offinancial instruments, which requires that disclosures regarding the fair valueof financial instruments be included in interim financial statements.  This new guidance was effective for interimperiods ending after June 15, 2009. SPS implemented the guidance on April 1, 2009, and theimplementation did not have a material impact on its financial statements.  For further discussion and the requireddisclosures, see Note 9 to the financial statements.

 

***Fair Value in Inactive Markets***—******Also in April 2009,the FASB issued new guidance for identifying market transactions that are notorderly and determining fair value when market trading activity has decreasedsignificantly.  The new guidanceemphasizes that even if there has been a significant decrease in the volume andlevel of market activity for an asset or liability, fair value still representsthe exit price in an orderly transaction between market participants.  This new guidance was effective for interimand annual periods ending after June 15, 2009.  SPS implemented the guidance on April 1,2009, and the implementation did not have a material impact on its financialstatements.

 

***Other-Than-Temporary Impairments***—******Additionally in April 2009,the FASB issued new guidance on recognition and presentation ofother-than-temporary impairments which changes the method for determiningwhether an other-than-temporary impairment exists for debt securities, and alsorequires additional disclosures regarding other-than-temporaryimpairments.  This new guidance waseffective for interim and annual periods ending after June 15, 2009.  SPS implemented the guidance on April 1,2009, and the implementation did not have a material impact on its financialstatements.

 

***Subsequent Events***— In May 2009,the FASB issued new guidance on subsequent events, which establishes generalstandards of accounting and disclosure for events that occur after the balancesheet date but before financial statements are issued.  The guidance is consistent with the auditingliterature historically used for accounting and disclosure of subsequentevents, however, it requires an entity to disclose the date through which subsequentevents have been evaluated.  This newguidance was effective for interim and annual periods ending after June 15,2009.  SPS implemented the guidance on April 1,2009, and the implementation did not have a material impact on its financialstatements.

 

***Accounting Standards Codification***— In June 2009,the FASB issued *Topic 105 — GenerallyAccepted Accounting Principles Amendments Based on Statement of FinancialAccounting Standards No. 168 — The FASB Accounting Standards Codificationand the Hierarchy of Generally Accepted Accounting Principles (AccountingStandards Update (ASU) No. 2009-01)*, which updates the FASBAccounting Standards Codification (ASC or Codification) to state that theCodification is to be the single source of authoritative GAAP, other than theguidance put forth by the SEC.  All otheraccounting literature not included in the Codification is to be considerednon-authoritative.  The updates to theCodification contained in ASU No. 2009-01 were effective for interim andannual periods ending after Sept. 15, 2009. SPS implemented the guidance set forth by ASU No. 2009-01,recognizing the Codification as the single source of authoritative GAAP, otherthan the guidance put forth by the SEC, on July 1, 2009.  The implementation did not have a materialimpact on SPS’ financial statements.

 

***RecentlyIssued***

 

***Postretirement Benefit Plans***— In December 2008, the FASB issuednew guidance on employers’ disclosures about postretirement benefit planassets.  The guidance will amend and expand previous disclosure requirementsfor plan assets of a defined benefit pension or other postretirementplan to include investment policies and strategies, major categories of planassets, information regarding fair value measurements, and significantconcentrations of credit risk.  This newguidance is effective for disclosures for fiscal years ending after Dec. 15,2009.  SPS does not expect theimplementation of the guidance to have a material impact on its financialstatements.

 

***Consolidation of Variable Interest Entities***— In June 2009, the FASB issued new guidance on consolidation ofvariable interest entities.  The guidancewill significantly affect various elements of consolidation under existingaccounting standards, including the determination of whether an entity is avariable interest entity and whether an enterprise is a variable interestentity’s primary beneficiary.  This newguidance is effective for fiscal years beginning after Nov. 15, 2009.  SPS is currently evaluating the impact ofthis guidance on its financial statements.

 

***Fair Value of Liabilities***— In August 2009,the FASB issued*Fair Value Measurements andDisclosures (Topic 820) — Measuring Liabilities at Fair Value (ASU No. 2009-05),*which will update the Codification with clarifications for measuringthe fair value of liabilities.  Theliability-specific guidance includes clarifications and guidelines for using,when available, the most observable prices in active markets for identicalliabilities or similar liabilities, or the prices of identical liabilities orsimilar liabilities traded as assets, rather than more complex and lessobservable valuation techniques and inputs such as those used in a presentvalue model.  The updates to theCodification contained in ASU No. 2009-05 are effective for interim andannual periods beginning after its August, 2009 issuance.  SPS does not expect the implementation ofthese changes in the Codification to have a material impact on its financialstatements.

 

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**3.****                                     ****Selected Balance Sheet Data**

 
| **(Thousands of Dollars)**   | ** ** | **Sept.  30, 2009** | ** **      | **Dec. 31, 2008** | ** ** |
|----------------------------------------|------------|--------------------------|-----------------|-----------------------------|------------|
| **Accounts receivable, net**           |       |                     |            |                        |       |
| Accounts  receivable                   |       | $                        | 57,920          |                        | $          | 67,706 |   |
| Less  allowance for bad debts          |       | (4,639                   | )               | (4,688                      | )          |
|                                   |       | $                        |  53,281    |                        | $          | 63,018 |   |
| **Inventories**                        |       |                     |            |                        |       |
| Materials  and supplies                |       | $                        | 16,018          |                        | $          | 15,422 |   |
| Fuel                                   |       | 10,521                   |            | 31,660                      |       |
|                                   |       | $                        |  26,539    |                        | $          | 47,082 |   |
| **Property, plant and equipment, net** |       |                     |            |                        |       |
| Electric  plant                        |       | $                        | 3,712,934       |                        | $          | 3,594,885 |   |
| Construction  work in progress         |       | 98,586                   |            | 102,508                     |       |
| Total  property, plant and equipment   |       | 3,811,520                |            | 3,697,393                   |       |
| Less  accumulated depreciation         |       | (1,598,542               | )               | (1,555,757                  | )          |
|                                   |       | $                        |  2,212,978 |                        | $          | 2,141,636 |   |

 

**4.**                                      Income Taxes

** **

SPSis a member of the Xcel Energy affiliated group that files consolidated incometax returns.

 

***Federal Audit —***In the first quarter of2008, the Internal Revenue Service (IRS) completed an examination of XcelEnergy’s federal income tax returns for 2004 and 2005 (and research credits for2003).  The IRS did not propose anymaterial adjustments for those tax years. Tax year 2004 is the earliest open year and the statute of limitationsapplicable to Xcel Energy’s 2004 federal income tax return remains open until Dec. 31,2009.  The IRS commenced an examination of tax years 2006 and 2007 in thethird quarter of 2008, and this audit is expected to be completed in the firstquarter of 2010.  As of Sept. 30, 2009,the IRS had not proposed any material adjustments to tax years 2006 and 2007.

 

***State Audits —*** In the first quarter of2008, the state of Texas concluded an income tax audit through tax year2005.  No material adjustments were proposed for this audit.  As of Sept. 30, 2009, SPS’ earliest open taxyear that is subject to examination by state taxing authorities underapplicable statutes of limitations is 2004. There currently are no state income tax audits in progress.

 

***Unrecognized Tax Benefits —***The amount of unrecognizedtax benefits was $4.4 million and $3.5 million on Sept. 30, 2009 and Dec. 31,2008, respectively.  The tax benefitsassociated with net operating loss (NOL) and tax credit carryovers were notmaterial as of Sept. 30, 2009 and Dec. 31, 2008.

 

Theunrecognized tax benefit balance included $0.3 million of tax positions on bothSept. 30, 2009 and Dec. 31, 2008, which if recognized would affect theannual effective tax rate.  In addition,the unrecognized tax benefit balance included $4.1 million and $3.2 million oftax positions on Sept. 30, 2009 and Dec. 31, 2008, respectively, for whichthe ultimate deductibility is highly certain but for which there is uncertaintyabout the timing of such deductibility. A change in the period of deductibility would not affect the effective taxrate but would accelerate the payment of cash to the taxing authority to anearlier period.

 

Theincrease in the unrecognized tax benefit balance of $0.7 million from June 30,2009 to Sept. 30, 2009, was due to the addition of similar uncertain taxpositions related to ongoing activity.  SPS’ amount of unrecognized taxbenefits could significantly change in the next 12 months as the IRS auditprogresses and when state audits resume. As the IRS examination moves closer to completion, it is reasonably possiblethat the amount of unrecognized tax benefits could decrease up to approximately$2 million.

 

Theamount of interest expense related to unrecognized tax benefits reported withininterest charges in the third quarter of 2009 was $0.1 million.  The amount of interest expense related tounrecognized tax benefits reported within interest charges in the third quarterof 2008 was not material.  The liabilityfor interest related to unrecognized tax benefits was $0.4 million and $0.3million on Sept. 30, 2009 and Dec. 31, 2008, respectively.

 

Noamounts were accrued for penalties as of Sept. 30, 2009 or Dec. 31, 2008.

 

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**5.****                                     ****Rate Matters**

 

Except to the extent noted below, the circumstancesset forth in Note 13 to the financial statements included in SPS’ Annual Reporton Form 10-K for the year ended Dec. 31, 2008 appropriatelyrepresent, in all material respects, the current status of other rate matters,and are incorporated herein by reference. The following disclosure includes unresolved proceedings that arematerial to SPS’ financial position.

 

***Pending and Recently Concluded Regulatory Proceedings —Public Utility Commission of Texas (PUCT)***

** **

**Base Rate**

 

***Texas Retail Base Rate Case —***In June 2008, SPS filed a rate casewith the PUCT seeking an annual rate increase of approximately$61.3 million, or approximately 5.9 percent. Base revenues are proposed to increase by $94.4 million, while fuel andpurchased power revenue would decline by $33.1 million, primarily due to fuelsavings from the Lea Power Partners (LPP) purchase power agreement.

 

Therate filing was based on a 2007 test year adjusted for known and measurablechanges, a requested return on equity (ROE) of 11.25 percent, an electric ratebase of $989.4 million and an equity ratio of 51.0 percent.  Interim rates of $18 million for costsassociated with the LPP power purchase agreement went into effect in September 2008.

 

In January 2009, a settlement agreement was reached with variousintervenors, which provided for a base rate increase of $57.4 million, areduced depreciation expense of $5.6 million, allowed SPS to implement thetransmission rider in 2009 and precludes SPS from filing to seek any other changein base rates until Feb. 15, 2010. In January 2009, an administrative law judge (ALJ) approved interimrates effective Feb. 1, 2009.

 

On June 2, 2009, thePUCT issued its order approving the settlement.

 

***John Deere Wind Complaint —*** In June 2007, severalJohn Deere Wind Energy subsidiaries (JD Wind) filed a complaint against SPSdisputing SPS’ payments for energy produced from the JD Wind projects.  SPS responded that the payments to JD Windare appropriate and in accordance with SPS’ filed tariffs with the PUCT.  In March 2009, the ALJ recommended thatSPS payment methodology to JD Wind is proper and that JD Wind’s complaint bedenied.

 

In May 2009 the PUCTissued a final order denying JD Wind’s request for relief against SPS.  In June 2009, JD Wind filed a petitionfor review of the final order in Texas District Court. In July 2009, the PUCT filed an answer to JD Wind’s petition inTexas District Court in which the PUCT denied each and every, all and singular,the allegations contained in the JD Wind petition.

 

In September 2009,JD Wind submitted a petition to the FERC, which in effect, disputed and soughtto overturn the decision of the PUCT. SPS has responded to the JD Wind petition, asserting among other thingsthat the dispute should be resolved in Texas courts.

 

***Texas Jurisdictional Fuel AllocationMethodology —*** In May 2009, SPS filed an application torevise the calculation of Texas retail jurisdictional fuel and purchased powerexpense, effective in January 2008. SPS has determined that its current method results in a material amountof unrecovered fuel and purchased power expense.  The application seeks approval for a revisedmethodology, which matches the fuel and purchased power expenses in a monthwith the fuel factor revenue received from each kilowatt hour used thatmonth.  In July 2009, the PUCTreferred this case to the State Office of Administrative Hearings (SOAH) for acontested case hearing.

 

In August 2009, the PUCT issued a draft of the preliminaryorder.  The draft adopts SPS’ position that the PUCT should consider the fuelallocation methodology in this case; lists various issues for the case, most ofwhich are the issues identified in SPS’ filing and lists certain issues thatare not to be addressed in this case, specifically, SPS’ fuel factor, theformula used to set SPS’ fuel factor, and the reasonableness of SPS’ fuel andpurchased power costs.  In August 2009,the PUCT approved the preliminary order as drafted.  A procedural schedule was established in September 2009,however, that schedule has been delayed to allow for settlement discussions.

 

In late October 2009, SPS filed aunanimous settlement that would allow for the change in the calculation ofdeferred fuel consistent with the approach proposed by SPS.  Approval by the PUCT is pending.  If approved, the estimated impact is expectedto result in an approximate $5.9 million increase to fuel and purchased powerexpenses for the Texas retail jurisdiction for the Jan. 1, 2008 to Dec. 31,2009 period.  SPS has agreed to reduce thenew allocated portion by $3 million subsequent to adopting the new methodologygoing forward.

 

***Texas Transmission Cost RecoveryFactor (TCRF)******—*** In June 2009, SPS filed a request to implement aTCRF with proposed revenues of $7.4 million annually.  The TCRF filing is based on changes intransmission investment for the period of Jan. 1, 2008 

 

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through April 30, 2009 and increases in FERC approved transmissioncosts for 2008.  In 2007, the PUCTimplemented rules allowing utilities to request a TCRF in between ratecases for recovery of new transmission investment costs.  This is SPS’ first filing under thatrule.  In July 2009, the PUCTreferred this case to the SOAH for a contested case proceeding.  SPS anticipates the PUCT will issue an orderwith rates effective by the end of 2009.

 

On Oct. 29, 2009,intervenors filed testimony and made the following recommendations.  The Texas Industrial Energy Consumersrecommended a revenue requirement of $3.5 million and the Alliance of XcelMunicipalities recommended a revenue requirement of $3.1 million.

 

The current procedural schedule is as follows:

 

·                  PUCT staff testimony on Oct. 29, 2009;

·                  SPS rebuttal testimony on Nov. 5, 2009;

·                  Settlement and rehearing conferences on Nov. 10— Nov. 12, 2009; and

·                  Hearing on the merits on Nov. 17 — Nov. 19,2009.

 

***Pendingand Recently Concluded Regulatory Proceedings — New Mexico Public RegulationCommission (NMPRC)***

*** ***

**Base Rate**

 

***2008 New Mexico Retail Electric Rate Case —*******In December 2008, SPSfiled with the NMPRC a request to increase electric rates in New Mexico byapproximately $24.6 million, or 6.2 percent. The request was based on a historic test year (split year based on theyear ending June 30, 2008), an electric rate base of $321 million, and anequity ratio of 50.0 percent and a requested ROE of 12.0 percent.  SPS also requested interim rates of $7.6million per year to recover capacity costs of the Lea Power facility, whichbecame operational in September 2008.

 

InMarch 2009, the NMPRC approved a partial stipulated settlement between theparties that allows SPS to recover approximately $5.7 million of interim rates,effective May 1, 2009, through an LPP cost rider until the final ratesfrom the remainder of the case are effective.

 

InMay 2009, the parties filed an uncontested stipulation that resolves allissues in the case.  Under thestipulation, SPS receives a base rate increase of $14.2 million, effective July 1,2009.  SPS has agreed that Dec. 1,2010 is the earliest date it will file its next base rate case, subject to aforce majeure provision triggered by additional environmental compliance costs.

 

InJuly 2009, the NMPRC issued an order approving the stipulationagreement.  SPS implemented the new rateson July 15, 2009.

 

***Pending and RecentlyConcluded Regulatory Proceedings —FERC***

*** ***

***Wholesale Rate Complaints —***In November 2004,Golden Spread Electric, Lyntegar Electric, Farmer’s Electric, Lea CountyElectric, Central Valley Electric and Roosevelt County Electric, all wholesalecooperative customers of SPS, filed a rate complaint with the FERC allegingthat SPS’ rates for wholesale service were excessive and that SPS hadincorrectly calculated monthly fuel cost adjustment charges to such customers(the Complaint).  Among other things, thecomplainants asserted that SPS had inappropriately allocated average fuel andpurchased power costs to other wholesale customers, effectively raising thefuel cost charges to the complainants. Cap Rock Energy Corporation (Cap Rock), another full-requirementscustomer of SPS, Public Service Company of New Mexico (PNM) and OccidentalPermian Ltd. and Occidental Power Marketing, L.P. (Occidental), SPS’largest retail customer, intervened in the proceeding.

 

InMay 2006, a FERC ALJ found that SPS should recalculate its fuel andpurchased economic energy cost adjustment clause (FCAC) billings for the periodbeginning Jan. 1, 1999, to reduce the fuel and purchased power costsrecovered from the complaining customers by deducting the incremental fuelcosts attributed to SPS’ sales of capacity and energy to other wholesalecustomers served under market-based rates during this period based on the viewthat such sales should be treated as opportunity sales made out of temporarilyexcess capacity. In addition, the ALJ made recommendations on a number of baserate issues including a 9.64 percent ROE.

 

***Golden Spread Complaint Settlement***  ***—***In December 2007, SPS reached asettlement with Golden Spread (which now includes Lyntegar Electric) andOccidental regarding base rate and fuel issues raised in the complaintdescribed above as well as a subsequent rate proceeding.  In December 2007, this comprehensiveoffer of settlement (the Settlement) was filed with the FERC.  In April 2008, the FERC approved theSettlement, which resolved all issues that were the subject of the Complaint;implemented a formula rate and extended the term of its partial requirementssale to Golden Spread beginning 2012 at 500 MW and ramping down to 200 MW atthe end of the new term in 2019.  TheSettlement made the extended purchase contingent on certain state approvals.  Golden Spread 

 

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agreedto hold SPS harmless from any future adverse regulatory treatment regarding theproposed sale and SPS agreed to contingent payments ranging from$3 million to a maximum of $12 million, payable in 2012, in the eventthat there is an adverse cost assignment decision or a failure to obtain stateapprovals.  The approvals are currentlypending before the NMPRC and the PUCT.

 

***Order on Wholesale Rate Complaints******—***In April 2008,the FERC issued its Order on the Complaint applied to the remainingnon-settling parties.  The Orderaddresses base rate issues for the period from Jan. 1, 2005 through June 30,2006, for SPS’ full requirements customers who pay traditional cost-based ratesand requires certain refunds.

 

·                  **Base Rates**:  The FERC determined the ROE should be9.33 percent and the treatment of market based rate contracts should be tocredit revenues to the cost of service rather than allocating costs to theagreements.  The revenue requirementestablished by the FERC results are estimated to be approximately $25 million,or approximately $6.9 million below the level charged to these customers duringthis 18-month period.  Rates for full requirementscustomers, the New Mexico Cooperatives and Cap Rock, as well as aninterruptible contract with PNM for the period beginning July 1, 2006, arethe subject of settlements that have either been approved or are pending beforethe FERC.

 

·                  **Fuel Clause**:  The FERC determined that the method forcalculating fuel and purchased energy charges to the complaining customer is todeduct from such costs incremental fuel and purchased energy costs, which it isattributing to SPS’ market based intersystem sales on the basis that these are “opportunity”sales.  The FERC ordered that refunds offuel cost charges based on this method of determining the FCAC should begin asof Jan. 1, 2005.  While the order issubject to interpretation with respect to the calculation of the refundobligation, SPS does not expect its refund obligation to its full requirementscustomers from Jan. 1, 2005 through March 31, 2008, to exceed $11million.  PNM has filed a separatecomplaint that any refund obligation to PNM will be determined in that docket

 

Severalparties, including SPS, filed requests for rehearing on the order.  These requests are pending before theFERC.  In July 2008, SPS submittedits compliance report to the FERC and calculated the base rate refund for the 18-monthperiod to be $6.1 million and the fuel refund to be $4.4 million.  Several wholesale customers have protestedthe calculations.  Once the final refundamounts are approved by the FERC, interest will be added to the refund due tothe full requirements customers.  As ofSept. 30, 2009, SPS has accrued an amount sufficient to cover the estimatedrefund obligation.

 

OnJune 5, 2009, SPS, the New Mexico Cooperatives and Cap Rock filed a letterwith FERC indicating that the parties had reached an agreement in principleregarding this matter and asked that the FERC not issue an order uponreconsideration to allow the parties an opportunity to formalize the Settlementand file it with the NMPRC.  The partieshave filed subsequent letters with the FERC requesting that it not take uptheir reconsideration requests as the parties continue to work to finalize theterms of the agreement.

 

***SPS 2008 Wholesale RateCase —***In March 2008, SPSfiled a wholesale rate case seeking an annual revenue increase of $14.9 millionor an overall 5.14 percent increase, based on12.20 percent requested ROE.

 

In May 2008, the FERCconditionally accepted and suspended the rates and established hearing andsettlement procedures.  The FERC granteda one-day suspension of rates instead of 180 days.  Lea Power achieved commercial operations in September 2008and the proposed base rates of $9.9 million, based on a 10.25 percent ROE and a12 coincident peak demand allocator, became effective, subject to refund.

 

In April 2009, theparties reached a settlement in which SPS will receive an annual revenueincrease of approximately $9.6 million or an overall percentage increase of 3.3percent.  The FERC issued an orderapproving the uncontested settlement in September 2009.

 

***SPS 2008 Transmission Formula Rate Case —***In December 2007,Xcel Energy submitted an application to implement a transmission formula ratefor the SPS zone of the Xcel Energy Open Access Transmission Tariff(OATT).  The changed rates will affectall wholesale transmission service customers using the SPS transmission networkunder either the Southwest Power Pool, Inc. (SPP) Regional OATT or theXcel Energy OATT.

 

Asfiled, SPS’ transmission rates would be updated annually each July 1 basedon SPS’ prior year actual costs and loads plus the revenue requirementsassociated with projected current year transmission plant additions.  The proposed ROE was 12.7 percent,including a 50 basis point adder for SPS’ participation in the SPP RegionalTransmission Organization (RTO).  Theproposed rates would provide first year incremental annual transmission revenuefor SPS of approximately $5.5 million.

 

InFebruary 2008, the FERC accepted the proposed rates, suspending theeffective date to July 6, 2008, and setting the rate filing for hearingsand settlement procedures.  The FERCgranted a 50 basis point adder to the ROE that it will determine in thisproceeding as a result of SPS’ participation in the SPP RTO.  The filed rates were placed into effect on July 6,2008, subject to refund.

 

In July 2009, SPS andthe parties reached a settlement in principle regarding all issues except theratemaking and rate design treatment of certain radial transmission lines underthe SPP Regional OATT.  In September 2009,Xcel Energy, on behalf of SPS and the other 

 

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parties to the proceeding,filed an uncontested offer of settlement and settlement agreement with the FERCwhich resolves all issues in the proceeding with the exception of the radialline issue.

 

The settlement provides fora formula rate using a fully forecasted test year effective Jan. 1, 2009,with a stated ROE of 11.27 percent (including the 50 basis point adder for SPPRTO participation), with rates for the locked in 2008 period established bysettlement.  The settlement will resultin approximately $0.8 million in refunds for 2008 and 2009 but will allow SPS toupdate its transmission rates annually for predicted costs and loads, subjectto an annual true-up.  In October 2009,the ALJ approved placing the settlement rates into effect on Oct. 1, 2009,subject to approval of the settlement, and certified the settlement for FERCapproval as uncontested.  The settlementis pending FERC approval.  Additionallyin October 2009, SPS announced the 2010 costs and charges pursuant to theformula rate and are expected to provide $2.7 million in additional revenue,subject to true-up.

 

On Sept. 25, 2009, the FERCset the issue of cost allocation for radial lines for hearings.  The ALJ is scheduled to issue an initialdecision in August 2010.  Theoutcome of the litigation is not expected to have a material impact on SPS.

 

**6.**                                      Commitments and Contingent Liabilities

** **

Except to the extent noted below, the circumstances set forth in Notes13 and 14 to the financial statements in SPS’ Annual Report on Form 10-Kfor the year ended Dec. 31, 2008 and Note 5 to the financial statements inthis Quarterly Report on Form 10-Q, appropriately represent, in allmaterial respects, the current status of commitments and contingent liabilitiesand are incorporated herein by reference. The following include unresolved contingencies that are material to SPS’financial position.

 

## **Environmental Contingencies**

## ** **

SPS has been, or iscurrently, involved with the cleanup of contamination from certain hazardoussubstances at several sites.  In manysituations, SPS believes it will recover some portion of these costs throughinsurance claims.  Additionally, whereapplicable, SPS is pursuing, or intends to pursue, recovery from otherpotentially responsible parties (PRPs) and through the rate regulatoryprocess.  New and changing federal andstate environmental mandates can also create added financial liabilities forSPS, which are normally recovered through the rate regulatory process.  To the extent any costs are not recoveredthrough the options listed above, SPS would be required to recognize anexpense.

 

***Site Remediation****—*SPS must pay all or a portion of the costto remediate sites where past activities of SPS or other parties have causedenvironmental contamination. Environmental contingencies could arise from various situations,including third party sites, to which SPS is alleged to be a PRP that senthazardous materials and wastes.  At Sept.30, 2009, the liability for the cost of remediating these sites was estimatedto be $0.1 million.

 

***Third Party and Other Environmental Site Remediation***

 

***Asbestos Removal*****—**Some of SPS’ facilities containasbestos.  Most asbestos will remainundisturbed until the facilities that contain it are demolished orrenovated.  SPS has recorded an estimatefor final removal of the asbestos as an asset retirement obligation.  See additional discussion of asset retirementobligations in Note 14 of the SPS Annual Report on Form 10-Kfor the year ended Dec. 31, 2008.  It may benecessary to remove some asbestos to perform maintenance or make improvementsto other equipment.  The cost of removingasbestos as part of other work is immaterial and is recorded as incurred asoperating expenses for maintenance projects, capital expenditures forconstruction projects or removal costs for demolition projects.

 

## ***Other Environmental Requirements***

## ** **

***Environmental Protection Agency (EPA) Proposed Greenhouse Gas (GHG)Endangerment Finding***— On April 17, 2009, the EPA issued aproposed finding that GHGs threaten public health and welfare.  This finding was in response to the U.S.Supreme Court’s decision in *Massachusetts v.EPA*, 549 U.S. 497 (2007), which held that GHGs are pollutantscovered by the Clean Air Act (CAA) and required the EPA to determine whetheremissions of GHGs from motor vehicles endanger public health or welfare.  The EPA’s proposed endangerment findingapplies to the CAA’s mobile source program, and does not automatically triggerregulation under other provisions of the CAA that are applicable to stationarysources, such as power plants.  As such,the proposed endangerment finding, in and of itself, does not impact SPS.

 

***Clean Air Interstate Rule (CAIR)*********—******In March 2005,the EPA issuedthe CAIR to further regulate sulfur dioxide (SO2) and nitrogenoxide (NOx) emissions.  The objective ofCAIR was to cap emissions of SO2 and NOx in the eastern United States,including Texas.  In July 2008,the U. S. Court of Appeals for the District of Columbia vacated CAIR andremanded the rule to EPA.  On Dec. 23,2008, the court reinstated CAIR while the EPA develops new regulations inaccordance with the court’s July opinion. The EPA has indicated that a CAIR replacement rule will be proposedin early 2010 with finalization planned for early 2011.

 

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As currently written, CAIR has a two-phase complianceschedule, 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 will result in significantemission reductions.  It will be based onstringent emission controls and forms the basis for a cap-and-trade program.State emission budgets or caps decline over time. States can choose toimplement an emissions reduction program based on the EPA’s proposed modelprogram, or they can propose another method, which the EPA would need toapprove.

 

UnderCAIR’s cap-and-trade structure, SPS can comply through capital investments inemission controls or purchase of emission allowances from other utilitiesmaking reductions on their systems.   The remainingcapital investments for NOx controls in the SPS region are estimated at $4.5million. For 2009, the estimated NOx allowance compliance costs are $0.8million to $1.0 million. Annual purchases of SO2 allowances are estimated in therange of $1.7 million to $7.7 million each year, beginning in 2013,for phase I.

 

Allowance cost estimates for SPS are based on fuel quality and currentmarket data.  SPS believes the cost of any requiredcapital investment or allowance purchases will be recoverable from customers inrates.

 

***Clean Air Mercury Rule (CAMR)***— In March 2005,the EPA issued the CAMR, which regulated mercury emissions from power plants.The Texas Commission on Environmental Quality (TCEQ) has adopted byreference the EPA model program.  In February 2008,the U.S. Court of Appeals for the District of Columbia vacated CAMR, whichimpacts federal CAMR requirements but not necessarily state-only rules.   The EPA is inthe process of developing a Maximum Achievable Control Technology (MACT) rule toreplace CAMR.  The EPA is expected topropose the new MACT rule for electric generating units in 2010.  At this time, Texas has not adopted any state-onlymercury requirements.

 

***Regional Haze Rules ***— In June 2005,the EPA finalized amendments to the July 1999 regional haze rules. Theseamendments apply to the provisions of the regional haze rule that requireemission controls, known as best available retrofit technology (BART), forindustrial facilities emitting air pollutants that reduce visibility by causingor contributing to regional haze.  Someof SPS’ generating facilities will be subject to BART requirements.  Some of these facilities are located inregions where CAIR is effective. The TCEQ had determined that facilities mayuse CAIR as a substitute for BART for NOx and SO2.

 

**Legal Contingencies**

** **

Lawsuits and claims arise in the normal course ofbusiness. Management, after consultation with legal counsel, has recorded anestimate of the probable cost of settlement or other disposition of them. Theultimate outcome of these matters cannot presently be determined. Accordingly,the ultimate resolution of these matters could have a material adverse effecton SPS’ financial position and results of operations.

 

**Environmental Litigation**

** **

***Carbon Dioxide (CO******2******) Emissions Lawsuit —***In July 2004,the attorneys general of eight states and New York City, as well as severalenvironmental groups, filed lawsuits in U.S. District Court in the Southern Districtof New York against five utilities, including Xcel Energy, the parent companyof SPS, to force reductions in CO2 emissions.The other utilities include American Electric Power Co.,Southern Co., Cinergy Corp. and Tennessee Valley Authority. The lawsuitsallege that CO2 emitted by each company is a public nuisanceas defined under state and federal common law because it has contributed toglobal warming. The lawsuits do not demand monetary damages. Instead, thelawsuits ask the court to order each utility to cap and reduce its CO2 emissions. In October 2004, Xcel Energyand the other defendants filed a motion to dismiss the lawsuit. OnSept. 19, 2005, the court granted the motion to dismiss on constitutionalgrounds. Plaintiffs filed an appeal to the U.S. Court of Appeals for the SecondCircuit. In June 2007, the Court of Appeals issued an order requesting theparties to file a letter brief regarding the impact of the United StatesSupreme Court’s decision in *Massachusetts v.EPA*, 127 S.Ct. 1438 (April 2, 2007) on the issues raised by theparties on appeal. Among other things, in its decision in *Massachusetts v. EPA*, the United StatesSupreme Court held that CO2 emissions are a “pollutant”subject to regulation by the EPA under the CAA. In July 2007, in responseto the request of the Court of Appeals, the defendant utilities filed a letterbrief stating the position that the United States Supreme Court’s decisionsupports the arguments raised by the utilities on appeal. On Sept. 21, 2009,the Court of Appeals issued an opinion reversing the lower court decision.  Xcel Energy intends to file a petition forrehearing or rehearing en banc on or before Nov. 5, 2009.

 

***Comer vs. Xcel Energy Inc. etal. —***In April 2006, Xcel Energy, the parent companyof SPS, received notice of a purported class action lawsuit filed in U.S.District Court in the Southern District of Mississippi. The lawsuit names morethan 45 oil, chemical and utility companies, including Xcel Energy, asdefendants and alleges that defendants’ CO2 emissions “werea proximate and direct cause of the increase in the destructive capacity ofHurricane Katrina.” Plaintiffs allege in support of their claim, several legaltheories, including negligence and public and private nuisance and seek damagesrelated to the loss resulting from the hurricane. Xcel Energy 

 

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believesthis lawsuit is without merit and intends to vigorously defend itself againstthese claims. In August 2007, the court dismissed the lawsuit in itsentirety against all defendants on constitutional grounds. In September 2007,plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the FifthCircuit. Oral arguments were presented to the Court of Appeals on Aug. 6,2008. Pursuant to the court’s order of Sept. 26, 2008, re-argument washeld on Nov. 3, 2008. On Oct. 16, 2009, the U.S. Court of Appeals forthe Fifth Circuit reversed the district court decision, in part, concludingthat the plaintiffs pleaded sufficient facts to overcome the constitutionalchallenges that formed the basis for dismissal by the district court. It isanticipated that Xcel Energy will file a petition for rehearing or rehearing enbanc.

 

***Native Village of Kivalina vs. XcelEnergy Inc. et al. —***In February 2008, theCity and Native Village of Kivalina, Alaska, filed a lawsuit in U.S. DistrictCourt for the Northern District of California against Xcel Energy, the parentcompany of SPS, and 23 other utilities, oil, gas and coal companies. The suitwas brought on behalf of approximately 400 native Alaskans, the Inupiat Eskimo,who claim that defendants’ emission of CO2 and otherGHGs contribute to global warming, which is harming their village. Plaintiffsclaim that as a consequence, the entire village must be relocated at a cost ofbetween $95 million and $400 million. Plaintiffs assert a nuisanceclaim under federal and state common law, as well as a claim asserting “concertof action” in which defendants are alleged to have engaged in tortious acts inconcert with each other. Xcel Energy was not named in the civil conspiracyclaim. Xcel Energy believes the claims asserted in this lawsuit are withoutmerit and joined with other utility defendants in filing a motion to dismiss onJune 30, 2008. On Oct. 15, 2009, the U.S. District Court dismissedthe lawsuit on constitutional grounds. It is unknown whether plaintiffs intendto appeal this decision.

 

***Lamb County Electric Cooperative (LCEC) —***In 1995, LCECpetitioned the PUCT for a cease and desist order against SPS alleging SPS wasunlawfully providing service to oil field customers in LCEC’s certificatedarea. In May 2003, the PUCT issued an order denying LCEC’s petition basedon its determination that SPS in 1976 was granted a certificate to serve thedisputed customers. LCEC appealed the decision to the Texas state court. In August 2004,the court affirmed the decision of the PUCT. In September 2004, LCECappealed the decision to the Court of Appeals for the Third Supreme JudicialDistrict. In November 2008, the Court of Appeals issued an opinionaffirming the decision in favor of SPS. In December 2008, LCEC filed a petition for review with the SupremeCourt of Texas. On Feb. 27, 2009, the Supreme Court of Texas denied LCEC’srequest for review.

 

In 1996, LCEC filed asuit for damages against SPS in the District Court in Lamb County, Texas, basedon the same facts alleged in the petition for a cease and desist order at thePUCT.  This suit has been dormant sinceit was filed, awaiting a final determination of the legality of SPS providingelectric service to the disputed customers. The PUCT order from May 2003, which found SPS was legally servingthe disputed customers, collaterally determines the issue of liability contraryto LCEC’s position in the suit.  Becausethe PUCT May 2003 order has now been affirmed, on June 16, 2009, LCECfiled a motion to dismiss this case.  OnSept. 16, 2009, the District Court entered a dismissal order, disposing of allclaims that have been or could have been asserted in this case.

 

**7.****                                     ****Short-Term Borrowingsand Other Financing Instruments**

 

***Commercial Paper —***At Sept. 30, 2009 and Dec. 31,2008, SPS had no commercial paper outstanding. At Sept. 30, 2009 and Dec. 31, 2008, SPS had board approval toissue up to $250 million of commercial paper.

 

***Money Pool*** — XcelEnergy has established a utility money pool arrangement that allows forshort-term loans between the utility subsidiaries and from the holding companyto the utility subsidiaries at market-based interest rates. The utility moneypool arrangement does not allow loans from the utility subsidiaries to theholding company. SPS has approval to borrow up to $100 million under thearrangement. At Sept. 30, 2009 and Dec. 31, 2008, SPS had money pool loansoutstanding of $90.0 million and $90.5 million with a weighted average interestrate of 0.38 percent and 3.48 percent, respectively.

 

**8.****                                     ****Derivative Instruments**

 

EffectiveJan. 1, 2009, SPS adopted new guidance on disclosures about derivativeinstruments and hedging activities contained in *ASC 815 Derivatives and Hedging*, which requires additionaldisclosures regarding why an entity uses derivative instruments, the volume ofan entity’s derivative activities, the fair value amounts recorded to thebalance sheet for derivatives, the gains and losses on derivative instrumentsincluded in the statement of income or deferred, and information regardingcertain credit-risk-related contingent features in derivative contracts.

 

SPSmay enter into derivative instruments, including forward contracts, futures,swaps and options, to reduce risk in connection with changes in interest ratesand electric utility commodity prices. See additional information pertaining to the valuation of derivativeinstruments in Note 10 to the financial statements.

 

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***Interest Rate Derivatives —***SPS may enterinto 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 instruments are generallydesignated as cash flow hedges for accounting purposes.

 

AtSept. 30, 2009, accumulated other comprehensive losses related to interest ratederivatives included $0.6 million of net losses expected to be reclassifiedinto earnings during the next 12 months as the related hedged interestrate transactions impact earnings.

 

Accumulatedother comprehensive losses related to interest rate derivatives reclassifiedinto earnings during the three and nine months ended Sept. 30, 2009 were $0.3million and $0.8 million, respectively.

 

AtSept. 30, 2009, SPS had one unsettled interest rate swap outstanding with anotional amount of $25 million.  Theinterest rate swap is not designated as a hedging instrument, and as such,losses of $0.2 million and gains of $1.8 million from changes in fair value forthe three and nine months ended Sept. 30, 2009, respectively, were recorded toearnings.

 

***Commodity Derivatives —***SPS may enterinto derivative instruments to manage variability of future cash flows from changesin commodity prices in its electric utility operations.  This could include the purchase or sale ofenergy or energy-related products.  At Sept. 30, 2009 and Dec. 31, 2008, SPS held nocommodity derivatives.  Changes in the fair value of non-trading commodityderivative instruments are recorded in other comprehensive income or deferredas a regulatory asset or liability.  Theclassification as a regulatory asset or liability is based on the commissionapproved regulatory recovery mechanisms.

 

The following tableshows the major components of derivative instruments valuation in the balancesheets:

*** ***
| ** **                            | ** ** | **Sept.  30, 2009** | ** ** | **Dec. 31, 2008** | ** ** |
|---------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **Derivative**           | ** ** | **Derivative**              | ** ** | **Derivative** | ** ** | **Derivative** | ** ** |
| ** **                            | ** ** | **Instruments**          | ** ** | **Instruments**             | ** ** | **Instruments** | ** ** | **Instruments** | ** ** |
| ** **                            | ** ** | **Valuation -**     | ** ** | **Valuation -**        | ** ** | **Valuation -** | ** ** | **Valuation -** | ** ** |
| **(Thousands of Dollars)**  | ** ** | **Assets**               | ** ** | **Liabilities**             | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
| Long  term purchased power agreements |       | $                        | 78,782     |                        | $          | 53,139 |   | $ | 85,477 |   | $ | 55,831 |   |
| Interest  rate derivatives            |       | —                   |       | 6,737                       |       | — |   | 8,503 |   |
| Total                                 |       | $                        | 78,782     |                        | $          | 59,876 |   | $ | 85,477 |   | $ | 64,334 |   |

 

In 2003, as a result of implementing new guidance onthe normal purchase exception for derivative accounting contained in *ASC815 Derivatives and Hedging*, SPS began recording several long-term purchased poweragreements at fair value due to accounting requirements related to underlyingprice adjustments.  As these purchasesare recovered through normal regulatory recovery mechanisms in the respectivejurisdictions, the changes in fair value for these contracts were offset byregulatory assets and liabilities. During 2006, SPS qualified these contracts under the normal purchaseexception.  Based on this qualification,the contracts are no longer adjusted to fair value and the previous carryingvalue of these contracts will be amortized over the remaining contract livesalong with the offsetting regulatory assets and liabilities.

 

***Financial Impact of Qualifying Cash FlowHedges —***The impact of qualifying interest rate cash flowhedges on SPS’ accumulated other comprehensive income, included as a componentof common stockholder’s equity, is detailed in the following tables:

 
| ** **                                                                           | ** ** | **Three  Months Ended Sept. 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| **(Thousands of Dollars)**                                                 | ** ** | **2009**                          | ** ** | **2008** | ** ** |
| Accumulated  other comprehensive loss related to cash flow hedges at July 1     |       | $                                 | (5,239     | ) | $ | (5,910 | ) |
| After-tax  net unrealized losses related to derivatives accounted for as hedges      |       | —                            |       | (64 | ) |
| After-tax  net realized losses on derivative transactions reclassified into earnings |       | 159                               |       | 43 |   |
| Accumulated  other comprehensive loss related to cash flow hedges at Sept. 30        |       | $                                 | (5,080     | ) | $ | (5,931 | ) |

 
| ** **                                                                           | ** ** | **Nine  Months Ended Sept. 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(Thousands of Dollars)**                                                 | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Accumulated  other comprehensive loss related to cash flow hedges at Jan. 1     |       | $                                | (5,559     | ) | $ | (6,005 | ) |
| After-tax  net unrealized losses related to derivatives accounted for as hedges      |       | —                           |       | (55 | ) |
| After-tax  net realized losses on derivative transactions reclassified into earnings |       | 479                              |       | 129 |   |
| Accumulated  other comprehensive loss related to cash flow hedges at Sept. 30   |       | $                                | (5,080     | ) | $ | (5,931 | ) |

 

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***CreditRelated Contingent Features*****—** Contract provisions of thederivative instruments that SPS enters into may require the posting ofcollateral or settlement of the contracts for various reasons, including if SPSis unable to maintain its credit rating. If thecredit rating of SPS were downgraded below investment grade, the counterpartyto an interest rate swap agreement would have the ability to terminate the contract,which at Sept. 30, 2009, would have resulted in the payment of the fair valueof the derivative liability to the counterparty of approximately $6.7 million.At Sept. 30, 2009, there was no collateral posted on this contract.

 

Certain of SPS’ derivative instruments may also besubject to contract provisions that contain adequate assurance clauses. Theseprovisions allow counterparties to seek performance assurance, including cashcollateral, in the event that SPS’ ability to fulfill its contractual obligationsis reasonably expected to be impaired. As of Sept. 30, 2009, SPS had nocollateral posted related to adequate assurance clauses in derivativecontracts.

 

**9.**          FinancialInstruments

** **

The estimated fair values of SPS’ recorded financialinstruments are as follows:

 
| ** **                                 | ** ** | **Sept.  30, 2009**  | ** ** | **Dec. 31,  2008** | ** ** |
|--------------------------------------------|------------|----------------------|------------|-------------------------|------------|
| **(Thousands of Dollars)**       | ** ** | **Carrying  Amount** | ** ** | **Fair  Value**         | ** ** | **Carrying  Amount** | ** ** | **Fair  Value** | ** ** |
| Other  investments                         |       | $                    | 268        |                    | $          | 268 |   | $ | 290 |   | $ | 290 |   |
| Long-term  debt, including current portion |       | 922,366              |       | 994,290                 |       | 1,022,123 |   | 1,001,703 |   |
|                                            |            |                      |            |                         |            |  |  |  |  |  |  |  |  |

 

The fair values of cash andcash equivalents, notes and accounts receivable and notes and accounts payableare not materially different from their carrying amounts.  The fair value of SPS’ long-term investmentsare estimated based on quoted market prices for those or similarinvestments.  The fair value of SPS’long-term debt is estimated based on the quoted market prices for the same orsimilar issues or the current rates for debt of the same remaining maturitiesand credit quality.

 

The fair value estimates presented are based oninformation available to management as of Sept. 30, 2009 and Dec. 31,2008. These fair value estimates have not been comprehensively revalued forpurposes of these financial statements since that date and current estimates offair value may differ significantly.

 

***Letters of Credit***— SPS uses letters of credit, generally with terms ofone year, to provide financial guarantees for certain operatingobligations.  At Sept. 30, 2009 and Dec. 31,2008, there were $10.0 million and $11.6 million of letters of creditoutstanding, respectively.  The contractamounts of these letters of credit approximate their fair values and aresubject to fees determined in the marketplace.

 

**10.****                              ****Fair Value Measurements**

 

Effective Jan. 1, 2008,SPS adopted new guidance forrecurring fair value measurements contained in *ASC820 Fair Value Measurements and Disclosures* which provides a singledefinition of fair value and requires enhanced disclosures about assets andliabilities measured at fair value. A hierarchal framework for disclosing theobservability of the inputs utilized in measuring assets and liabilities atfair value was established by this guidance. The three levels in the hierarchyand examples of each level are as follows:

 

Level 1 — Quoted prices are available in activemarkets for identical assets or liabilities as of the reported date. The typesof assets and liabilities included in Level 1 are highly liquid and activelytraded instruments with quoted prices.

 

Level 2 — Pricing inputs are other than quoted pricesin active markets, but are either directly or indirectly observable as of thereported date.  The types of assets andliabilities included in Level 2 are typically either comparable to activelytraded securities or contracts or priced with models using highly observableinputs.

 

Level 3 — Significant inputs to pricing have little orno observability as of the reporting date. The types of assets and liabilities included in Level 3 are those withinputs requiring significant management judgment or estimation.

 

SPShad one investment in a money market fund included in cash equivalents andmeasured at fair value on a recurring basis as of Dec. 31, 2008.  Money market funds are recorded at cost plusestimated accrued interest to approximate fair value.  Changes in the observed trading prices andliquidity of money market funds are also monitored as additional support fordetermining fair value, and losses are recorded in earnings if fair value fallsbelow recorded cost.  Given the observabilityof the primary inputs to pricing, the $50.0 million investment in a moneymarket fund at Dec. 31, 2008 was assigned a Level 2 under the hierarchy.

 

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SPShad one interest rate derivative contract measured at fair value on a recurringbasis as of Sept. 30, 2009 and Dec. 31, 2008.  SPS uses quoted prices, based primarily onobservable benchmark interest rate forecasts, to measure the fair value ofinterest rate derivatives.  Given theobservability of the primary inputs to pricing, the interest rate derivativeliability of $6.7 million and $8.5 million at Sept. 30, 2009 and Dec. 31,2008, respectively, was assigned a Level 2 under the hierarchy.

 

**11.****                              ****Other Income (Expense), Net**

 

Other income (expense), net, consisted of thefollowing:

 
| ** **                           | ** ** | **Three  Months Ended Sept. 30,** | ** ** | **Nine  Months Ended Sept. 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **2009**                          | ** ** | **2008**                         | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest  (expense) income           |       | $                                 | (135       | )                                | $          | 1,567 |   | $ | 57 |   | $ | 3,599 |   |
| Other  nonoperating income           |       | 23                                |       | 192                              |       | 28 |   | 290 |   |
| Insurance  policy (expenses) income  |       | (233                              | )          | (21                              | )          | (377 | ) | 78 |   |
| Other  nonoperating expenses         |       | (193                              | )          | —                           |       | (204 | ) | — |   |
| Other  income (expense), net         |       | $                                 | (538       | )                                | $          | 1,738 |   | $ | (496 | ) | $ | 3,967 |   |

 

**12.          Segment Information**

 

SPShas one reportable segment.  SPS operatesin the regulated electric industry, providing wholesale and retail electricservice in the states of Texas and New Mexico. Revenues from external customers were $397.1 million and $610.8 millionfor the three months ended Sept. 30, 2009 and 2008, respectively, and $1,094.2million and $1,567.4 million for the nine months ended Sept. 30, 2009 and 2008,respectively.

 

**13.****                              ****Comprehensive Income**

 

The components of total comprehensiveincome are shown below:

 
| ** **                                                                           | ** ** | **Three  Months Ended Sept. 30,** | ** ** | **Nine  Months Ended Sept. 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------|------------|----------------------------------|------------|
| **(Thousands of Dollars)**                                                           | ** ** | **2009**                          | ** ** | **2008**                         | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  income                                                                          |       | $                                 | 37,415     |                             | $          | 23,636 |   | $ | 63,405 |   | $ | 26,340 |   |
| Other  comprehensive income (loss):                                                  |       |                              |       |                             |       |   |   |   |   |
| After-tax  net unrealized losses related to derivatives accounted for as hedges      |       | —                            |       | (64                              | )          | — |   | (55 | ) |
| After-tax  net realized losses on derivative transactions reclassified into earnings |       | 159                               |       | 43                               |       | 479 |   | 129 |   |
| Other  comprehensive income (loss)                                                   |       | 159                               |       | (21                              | )          | 479 |   | 74 |   |
| Comprehensive  income                                                                |       | $                                 | 37,574     |                             | 23,615     |   | $ | 63,884 |   | 26,414 |   |
|                                                                                      |            |                                   |            |                                  |            |  |  |  |  |  |  |  |  |

 

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**14.          BenefitPlans and Other Postretirement Benefits**

 

Pension and other postretirement benefit disclosuresbelow generally represent Xcel Energy consolidated information unlessspecifically identified as being attributable to SPS.

 

**Componentsof Net Periodic Benefit Cost (Credit)**

** **
| ** **                                                                                           | ** ** | **Three  Months Ended Sept. 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                                           | ** ** | **2009**                          | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                           | ** ** | ** **                        | ** ** | ** ** | ** ** | **Postretirement  Health** | ** ** |
| **(Thousands of Dollars)**                                                                 | ** ** | **Pension  Benefits**             | ** ** | **Care  Benefits** | ** ** |
| **Xcel Energy Inc.**                                                                                 | ** ** | ** **                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  cost                                                                                        |       | $                                 | 16,365     |   | $ | 15,851 |   | $ | 1,166 |   | $ | 1,338 |   |
| Interest  cost                                                                                       |       | 42,448                            |       | 42,630 |   | 12,603 |   | 12,720 |   |
| Expected  return on plan assets                                                                      |       | (64,135                           | )          | (68,584 | ) | (5,694 | ) | (7,963 | ) |
| Amortization  of transition obligation                                                               |       | —                            |       | — |   | 3,611 |   | 3,644 |   |
| Amortization  of prior service cost (credit)                                                         |       | 6,155                             |       | 5,166 |   | (681 | ) | (544 | ) |
| Amortization  of net loss                                                                            |       | 3,114                             |       | 3,185 |   | 4,832 |   | 2,875 |   |
| Net  periodic benefit cost (credit)                                                                  |       | 3,947                             |       | (1,752 | ) | 15,837 |   | 12,070 |   |
| (Cost)  credits not recognized and additional cost recognized due to the effects  of regulation |       | (723                              | )          | 2,258 |   | 972 |   | 972 |   |
| Net  benefit cost recognized for financial reporting                                                 |       | $                                 | 3,224      |   | $ | 506 |   | $ | 16,809 |   | $ | 13,042 |   |
|                                                                                                 |       |                              |       |   |   |   |   |   |   |
| **SPS**                                                                                              |       |                              |       |   |   |   |   |   |   |
| Net  benefit (credit) cost recognized for financial reporting                                        |       | $                                 | (1,661     | ) | $ | (2,620 | ) | $ | 1,250 |   | $ | 871 |   |

** **
| ** **                                                                                           | ** ** | **Nine  Months Ended Sept. 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                           | ** ** | **2009**                         | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                           | ** ** | ** **                       | ** ** | ** ** | ** ** | **Postretirement  Health** | ** ** |
| **(Thousands of Dollars)**                                                                 | ** ** | **Pension  Benefits**            | ** ** | **Care  Benefits** | ** ** |
| **Xcel Energy Inc.**                                                                                 | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  cost                                                                                        |       | $                                | 49,095     |   | $ | 47,553 |   | $ | 3,499 |   | $ | 4,013 |   |
| Interest  cost                                                                                       |       | 127,343                          |       | 127,890 |   | 37,809 |   | 38,160 |   |
| Expected  return on plan assets                                                                      |       | (192,404                         | )          | (205,753 | ) | (17,082 | ) | (23,888 | ) |
| Amortization  of transition obligation                                                               |       | —                           |       | — |   | 10,833 |   | 10,932 |   |
| Amortization  of prior service cost (credit)                                                         |       | 18,464                           |       | 15,498 |   | (2,044 | ) | (1,632 | ) |
| Amortization  of net loss                                                                            |       | 9,342                            |       | 9,555 |   | 14,497 |   | 8,624 |   |
| Net  periodic benefit cost (credit)                                                                  |       | 11,840                           |       | (5,257 | ) | 47,512 |   | 36,209 |   |
| (Cost)  credits not recognized and additional cost recognized due to the effects  of regulation |       | (2,169                           | )          | 6,775 |   | 2,918 |   | 2,918 |   |
| Net  benefit cost recognized for financial reporting                                                 |       | $                                | 9,671      |   | $ | 1,518 |   | $ | 50,430 |   | $ | 39,127 |   |
|                                                                                                 |       |                             |       |   |   |   |   |   |   |
| **SPS**                                                                                              |       |                             |       |   |   |   |   |   |   |
| Net  benefit (credit) cost recognized for financial reporting                                        |       | $                                | (4,983     | ) | $ | (7,860 | ) | $ | 3,750 |   | $ | 2,612 |   |

 

During 2009, voluntarycontributions were made by SPS to the Xcel Energy Inc. Non Bargaining PensionPlan (South) of $8.0 million.

 

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** **

**Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

Discussion of financialcondition and liquidity for SPS is omitted per conditions set forth in generalinstructions H (1) (a) and (b) of Form 10-Q for whollyowned subsidiaries. It is replaced with management’s narrative analysis of theresults of operations set forth in general instructions H (2) (a) of Form 10-Qfor wholly owned subsidiaries (reduced disclosure format).

 

**Forward-Looking Information**

 

The following discussion and analysis by management focuses on thosefactors that had a material effect on SPS’ financial condition, results ofoperations, and cash flows during the periods presented, or are expected tohave a material impact in the future. It should be read in conjunction with theaccompanying unaudited financial statements and the related notes to thefinancial statements.  Due to theseasonality of SPS’ electric sales, such interim results are not necessarily anappropriate base from which to project annual results.  Except for the historical statementscontained in this report, the matters discussed in the following discussion andanalysis are forward-looking statements that are subject to certain risks,uncertainties and assumptions. Such forward-looking statements are intended tobe identified in this document by the words “anticipate,” “believe,” “estimate,”“expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,”“potential,” “should” and similar expressions. Actual results may varymaterially. Forward-looking statements speak only as of the date they are made,and we do not undertake any obligation to update them to reflect changes thatoccur after that date. Factors that could cause actual results to differmaterially include, but are not limited to: general economic conditions,including the availability of credit and its impact on capital expenditures andthe ability of SPS to obtain financing on favorable terms; business conditionsin the energy industry; actions of credit rating agencies; competitive factors,including the extent and timing of the entry of additional competition in themarkets served by SPS; unusual weather; effects of geopolitical events,including war and acts of terrorism; state, federal and foreign legislative andregulatory initiatives that affect cost and investment recovery, have an impacton rates or have an impact on asset operation or ownership or imposeenvironmental compliance conditions; structures that affect the speed anddegree to which competition enters the electric market; costs and other effectsof legal and administrative proceedings, settlements, investigations andclaims; environmental laws and regulations; actions of accounting regulatorybodies; the items described under Factors Affecting Results of ContinuingOperations; and the other risk factors listed from time to time by SPS inreports filed with the SEC, including “Risk Factors” in Item 1A of SPS’ Form 10-Kfor the year ended Dec. 31, 2008, and Item 1A and Exhibit 99.01 tothis report on Form 10-Q for the quarter ended Sept. 30, 2009.

 

**Market Risks**

 

SPS is exposed to marketrisks, including changes in commodity prices and interest rates, as disclosedin Item 7A, Quantitative and Qualitative Disclosures About Market Risk, in itsAnnual Report on Form 10-K for the year ended Dec. 31, 2008.  Commodity price and interest rate risks forSPS are mitigated in most jurisdictions due to cost-based rate regulation.

 

Continued distress in thefinancial markets may also impact the fair value of the debt and equitysecurities in pension and postretirement health care plan trusts, as well asSPS’ ability to earn a return on short-term investments of excess cash.  As of Sept. 30, 2009, there have been nomaterial changes to market risks from that set forth in SPS’ Annual Report on Form 10-Kfor the year ended Dec. 31, 2008.

 

## **Resultsof Operations**

## ** **

SPS’ net income wasapproximately $63.4 million for the first nine months of 2009, compared withnet income of approximately $26.3 million for the first nine months of 2008.

 

**ElectricRevenues and Margin**

 

Electricfuel and purchased power expenses tend to vary with changing retail andwholesale sales requirements and unit cost changes in fuel and purchasedpower.  The fuel and purchased power cost recovery mechanismsof the Texas and New Mexico jurisdictions may not allow for complete recoveryof all expenses and, therefore, dramatic changes in costs or periods of extremetemperatures can impact earnings.

 

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***Electric***—******The following tables detailthe electric revenues and margin:

 
| ** **                         | ** ** | **Nine  Months Ended Sept. 30,** | ** ** |
|------------------------------------|------------|----------------------------------|------------|
| **(Millions of Dollars)**          | ** ** | **2009**                         | ** ** | **2008** | ** ** |
| Electric  revenues                 | ** ** | **$**                            | 1,094      | ** ** | **$** | 1,567 | ** ** |
| Electric  fuel and purchased power |       | (673                             | )          | (1,217 | ) |
| Electric  margin                   | ** ** | **$**                            | 421        | ** ** | **$** | 350 | ** ** |

 

The following summarizes the components of the changes in electricrevenues and electric margin for the nine months ended Sept. 30:

 

***Electric Revenues***

 
| **(Millions of Dollars)**                                   | ** ** | **2009  vs. 2008** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|
| Fuel  and purchased power cost recovery                     |       | **$**              |  (582 | ) |
| Retail  rate increases (Texas and New Mexico)               |       | 47                 |       |
| Firm  wholesale                                             |       | 13                 |       |
| 2008  SPS fuel cost allocation regulatory accruals          |       | 12                 |       |
| Transmission  revenue                                       |       | 7                  |       |
| Non-fuel  riders (partially offset by amortization expense) |       | 5                  |       |
| Other,  net                                                 |       | 25                 |       |
| Total  decrease in base electric revenue                    | ** ** | **$**              | (473       | ) |

 

***Electric Margin***

*** ***
| **(Millions of Dollars)**                                   | ** ** | **2009  vs. 2008** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|
| Retail  rate increases (Texas and New Mexico)               |       | **$**              |  47   |   |
| Firm  wholesale                                             |       | 13                 |       |
| 2008  SPS fuel cost allocation regulatory accruals          |       | 12                 |       |
| Retail  fuel recovery                                       |       | 9                  |       |
| Non-fuel  riders (partially offset by amortization expense) |       | 5                  |       |
| Transmission  revenue, net of expense                       |       | 3                  |       |
| Purchased  capacity costs                                   |       | (34                | )          |
| Other,  net                                                 |       | 16                 |       |
| Total  increase in base electric margin                     | ** ** | **$**              | 71         | ** ** |

 

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## **Table of Contents**

 

## **Non-Fuel Operating Expense and Other Items**

## ** **

***Other Operating andMaintenance Expenses****—*Other operating and maintenance expenses for the firstnine months of 2009 increased $4.4 million, or 2.8 percent, compared to firstnine months of 2008.  The followingsummarizes the components of the changes for the nine months ended Sept. 30:

 
| **(Millions of Dollars)**                                      | ** ** | **2009  vs. 2008** | ** ** |
|----------------------------------------------------------------|------------|--------------------|------------|
| Higher  employee benefit costs                                 | ** ** | **$**              | 7          | ** ** |
| Higher  plant generation costs                                 |       | 2                  |       |
| Lower  consulting costs                                        |       | (2                 | )          |
| Lower  material costs                                          |       | (1                 | )          |
| Lower  fleet costs                                             |       | (1                 | )          |
| Other  (including contract labor & employee expenses) |       | (1                 | )          |
| Total  increase in other operating and maintenance expenses    | ** ** | **$**              | 4          | ** ** |

 

***Demand Side Management (DSM) ProgramExpenses****—* DSM program expenses forthe first nine months of 2009 decreased by approximately $1.3 million, or 16.2percent, compared with 2008.  Thisdecrease was due to the settlement of the Texas rate case in 2009 whichextended the amortization period from 4 years to 10 years.

 

***Allowance for Funds Used During Construction, Debt andEquity (AFDC)***—AFDC is a non-cash amount capitalized as a part of construction costsrepresenting the cost of financing the construction.  Generally, these costs are recovered fromcustomers, in future rates, as the related property is depreciated.  AFDC increased by approximately $3.1 millionfor the first nine months of 2009 compared with 2008.  This increase was due to the debt to equitysplit that began in January of 2009.

 

***Interest Charges***— Interest charges for the first nine months of 2009increased by approximately $9.2 million, or 22.1 percent, compared with 2008.The increase was primarily due to increased long-term debt levels necessary torepay short-term borrowings and to fund capital investments.

 

***Income Taxes***— Income tax expense increased by $18.5 millionfor the first nine months of 2009 compared with 2008. The increase in incometax expense was primarily due to an increase in pretax income. The effectivetax rate was 37.4 percent for the first nine months of 2009, compared with 42.3percent for the same period in 2008. The lower effective tax rate for the firstnine months of 2009 was primarily due to a lower forecasted annual effectivetax rate for 2009 as compared to 2008. The lower forecasted annual effective tax rate for 2009 is primarily dueto higher pretax income and higher plant-related tax benefits in 2009.

 

**Factors Affecting Results of Continuing Operations**

** **

**PublicUtility Regulation**

** **

***SPS Participation in the SPP RTO*****—**In October 2007, as part of the resolution ofthe 2007 SPS New Mexico retail rate case, the NMPRC ordered an investigation ofthe benefits of SPS’ participation in the SPP RTO.  In June 2009, the NMPRC expanded thescope of the docket to include theissue of placing SPS retail loads in New Mexico under Network IntegrationTransmission Service (NITS) under the SPP OATT effective Jan. 1,2010.  The conversion to service underthe SPP Tariff is mandatory for SPS by Feb. 1, 2010 under the SPPmembership agreement.  In September 2009,the parties filed a stipulation resolving all issues in the proceeding for afive year interim period, subject to certain reporting by SPS.  A hearing on the stipulation is scheduled forNov. 17, 2009 before the NMPRC hearing examiner.

 

## **Summaryof Recent Federal Regulatory Developments**

## ** **

TheFERC has jurisdiction over rates for electric transmission service ininterstate commerce and electricity sold at wholesale, accounting practices andcertain other activities of SPS, including enforcement of North AmericanElectric Reliability Corporation (NERC) mandatory electric reliabilitystandards. State and local agencies have jurisdiction over many of SPS’activities, including regulation of retail rates and environmental matters. See additionaldiscussion in the summary of recent federal regulatory developments and publicutility regulation sections of the SPS Annual Report on Form 10-K for theyear ended Dec. 31, 2008.  Inaddition to the matters discussed below, see Note 5 to the financialstatements for a discussion of other regulatory matters.

 

***Compliance with NERC ProtectiveMaintenance Standards***********—**In 2008, SPSfiled self-reports with the SPP, the NERC Regional Entity for the SPS system,relating to failure to complete certain generation station battery tests, relaymaintenance intervals and certain critical infrastructure protectionstandards.  In August and September of2009, SPS reached agreement with the SPP that would 

 

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resolveall open audit findings and self reports by payment of a non-materialpenalty.  SPS is in the process ofdeveloping a definitive settlement agreement. This settlement agreement will be subject to NERC and FERC approval.

 

**Item 4. CONTROLS AND PROCEDURES**

 

**Disclosure Controls andProcedures**

** **

SPS maintains a set ofdisclosure controls and procedures designed to ensure that information requiredto be disclosed in reports that it files or submits under the SecuritiesExchange Act of 1934 (Exchange Act) is recorded, processed, summarized andreported within the time periods specified in SEC rules and forms. Inaddition, the disclosure controls and procedures include, without limitation,controls and procedures designed to ensure that information required to bedisclosed by us in reports under the Exchange Act 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 were effective.

 

**Internal Control Over FinancialReporting**

** **

No change in SPS’ internalcontrol over financial reporting has occurred during the most recent fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, SPS’ internal control over financial reporting.

 

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

#### ** **

## **Item 1. LEGAL PROCEEDINGS**

## ** **

In the normal course of business, variouslawsuits and claims have arisen against SPS. After consultation with legalcounsel, SPS has recorded an estimate of the probable cost of settlement orother disposition for such matters.

 

**Additional Information**

 

See Notes 5 and 6 of the financial statementsin this Quarterly Report on Form 10-Q for further discussion of legalproceedings, including Regulatory Matters and Commitments and ContingentLiabilities, which are hereby incorporated by reference. Reference also is madeto Item 3 and Notes 13 and 14 of SPS’ financial statements in its AnnualReport on Form 10-K for the year ended Dec. 31, 2008 for adescription of certain legal proceedings presently pending.

 

**Item 1A. RISK FACTORS**

 

Exceptto the extent updated or described below, SPS’ risk factors are documented inItem 1A of Part I of its Annual Report on Form 10-K for the yearended Dec. 31, 2008, which is incorporated herein by reference.

 

***We are subject to credit risks.***

 

Creditrisk includes the risk that our retail customers will not pay their bills,which may lead to a reduction in liquidity and an eventual increase in bad debtexpense.  Retail credit risk is comprisedof numerous factors including the overall economy and the price of products andservices provided.

 

Creditrisk also includes the risk that various counterparties that owe us money orproduct will breach their obligations. Should the counterparties to thesearrangements fail to perform, we may be forced to enter into alternative arrangements.In that event, our financial results could be adversely affected and we couldincur losses.

 

Onealternative available to address counterparty credit risk is to transact onliquid commodity exchanges.  The creditrisk is then socialized through the exchange central clearinghousefunction.  While exchanges do removecounterparty credit risk, all participants are subject to margin requirements,which creates an additional need for liquidity to post margin as exchangepositions change value daily.  Additionalmargin requirements could impact our liquidity.

 

SPSmay at times have direct credit exposure in its short-term wholesale andcommodity trading activity to various financial institutions trading for theirown accounts or issuing collateral support on behalf of othercounterparties.  SPS may also have someindirect credit exposure due to participation in organized markets such as thePJM Interconnection and MISO in which any credit 

 

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lossesare socialized to all market participants.

 

SPSdoes have additional indirect credit exposures to various financialinstitutions in the form of letters of credit provided as security bypower suppliers under various long-term physical purchasedpower contracts.    If any ofthe credit ratings of the letter of credit issuers were to drop below thedesignated investment grade rating stipulated in the underlying long term purchasedpower contracts, the supplier would need to replace that security with anacceptable substitute.  If the security were not replaced, the party wouldbe in technical default under the contract, which would enable SPS toexercise its contractual rights.

 

***We may be subject to litigation,legislative and regulatory responses to climate change, with which compliancecould be difficult and costly.***

 

Legislative andregulatory responses related to climate change and new interpretations ofexisting laws through climate change litigationcreate financial risk. Increased public awareness and concern may result in more regionaland/or federal requirements to reduce or mitigate the effects of GHGs.  Numerous states have announced or adoptedprograms to stabilize and reduce GHG and federal legislation has beenintroduced in both houses of Congress. Likewise, the EPA has drafted regulations pursuant to which GHGs fromcertain stationary sources would be regulated under the Clean Air Act by March 2010.  SPS’s electric generating facilities arelikely to be subject to regulation under climate change laws introduced ateither the state or federal level within the next few years. Xcel Energy, theparent company of SPS, is also currently a party to climate change lawsuits andmay be subject to additional climate change lawsuits, including lawsuitssimilar to those described in the Note 6, Commitments and ContingentLiabilities, in our Notes to our Financial Statements.  While Xcel Energy believes such lawsuits arewithout merit, an adverse outcome in any of these cases could requiresubstantial capital expenditures that cannot be determined at this time andcould possibly require payment of substantial penalties or damages.   Defense costs associated with suchlitigation can also be significant.  Suchpayments or expenditures could affect results of operations, cash flows, andfinancial condition if such costs are not recovered through regulated rates.

 

Many of the federal andstate climate change legislative proposals, such as ACES, use a “cap and trade”policy structure, in which GHG emissions from a broad cross-section of theeconomy would be subject to an overall cap. Under the proposals, the cap becomes more stringent with the passage oftime.  The proposals establish mechanismsfor GHG sources, such as power plants, to obtain “allowances” or permits toemit GHGs during the course of a year. The sources may use the allowances to cover their own emissions or sellthem to other sources that do not hold enough emissions allowances for theirown operations.  Proponents of the capand trade policy believe it will result in the most cost effective, flexibleemission reductions. **The impactof legislation and regulations, including a “cap and trade” structure, on SPSand its customers will depend on a number of factors, including whether GHGsources in multiple sectors of the economy are regulated, the overall GHGemissions cap level, the degree to which GHG offsets are allowed, theallocation of emission allowances to specific sources and the indirect impactof carbon regulation on natural gas and coal prices.  Another important factor is SPS’ ability torecover the costs incurred to comply with any regulatory requirements that areultimately imposed. **Wemay not recover all costs related to complying with regulatory requirementsimposed on SPS.  If our regulators do notallow us to recover all or a part of the cost of capital investment or theoperating and maintenance costs incurred to comply with the mandates, it couldhave a material adverse effect on our results of operations.

 

Forfurther discussion see Note 6 to the financial statements.

 

## **Item 6. EXHIBITS**

 

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* Indicates incorporation by reference

 
| 3.01*  |   | Amended and Restated Articles of Incorporation dated Sept. 30, 1997  (Exhibit 3(a)(2) to Form 10-K (file no. 001-03789) dated  March 3, 1998).                                              |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.02*  |   | By-laws dated Sept. 29, 1997 (Exhibit 3(b)(2) to  Form 10-K (file no. 001-03789) dated March 3, 1998).                                                                                      |
| 10.01* |   | Credit  Agreement dated Dec. 14, 2006 between SPS and various lenders  (Exhibit 10.04 to Form 10-Q of Xcel Energy dated Oct. 30, 2009  (file no. 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 to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorizedon Nov. 2, 2009.

 

Southwestern Public ServiceCompany

(Registrant)

 

 
|   | /s/ TERESA S. MADDEN                        |
|--------|---------------------------------------------|
|   | Teresa S. Madden                            |
|   | Vice President and  Controller              |
|   |                                        |
|   |                                        |
|   | /s/ DAVID M. SPARBY                         |
|   | David M. Sparby                             |
|   | Vice President and Chief  Financial Officer |

 

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