Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

# **FORM 10-Q**

# ** **

**(Mark One)**

 
| **x****  **                                   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**   |
|---------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|
| ** **                                              |
| **For the quarterly period ended  March 31, 2009** |
| ** **                                              |
| **or**                                                  |
| ** **                                              |
| **o**                                                   | **TRANSITION  REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**Commission File Number: 001-03789**

 

# **Southwestern Public Service Company**

(Exact name of registrant as specified in itscharter)

 

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

 

**(303) 571-7511**

 (Registrant’s telephone number, including areacode)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirement for the past 90 days.   xYes  oNo

 

Indicate bycheck mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 and Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).   oYes  oNo

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-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 bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).   oYes  xNo

 

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

 

| **Class**                  | ** ** | **Outstanding at May 5, 2009** |
|----------------------------|------------|----------------------------------------------------|
| Common Stock, $1 par value |       | 100 shares                                         |

 

Southwestern Public Service Company meets the conditions set forth inGeneral Instruction H (1)(a) and (b) of Form 10-Q and istherefore filing this Form 10-Q with the reduced disclosure formatspecified in General Instruction H (2) to such Form 10-Q.

 

 

 

----

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 |   | 17 |
| Item 4.                                      | Controls and Procedures |   | 19 |
|                                         |   |   |   |
| **PART II - OTHER INFORMATION**         |
|                                         |   |   |   |
| Item 1.                                      | Legal Proceedings |   | 19 |
| Item 1A.                                     | Risk Factors |   | 19 |
| Item 6.                                      | Exhibits |   | 20 |
|                                         |   |   |   |
| SIGNATURES                                   |   | 21 |
|                                         |   |   |   |
| Certifications  Pursuant to Section 302 |   |   |
| Certifications  Pursuant to Section 906 |   |   |
| Statement  Pursuant to Private Litigation    |   |   |

 

This Form 10-Qis filed by Southwestern Public Service Company (SPS). SPS is a wholly ownedsubsidiary of Xcel Energy Inc. (Xcel Energy). Additional information on XcelEnergy is available on various filings with the Securities and ExchangeCommission (SEC).

 

2

----

Tableof Contents

 

**PART 1. FINANCIAL INFORMATION**

 

**Item 1. FINANCIAL STATEMENTS**

 

**SOUTHWESTERN PUBLIC SERVICECOMPANY**

**STATEMENTSOF OPERATIONS (UNAUDITED)**

*(amounts in thousands of dollars)*

 
| ** **                                                                             | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| ** **                                                                             | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Operating revenues**                                                                 |       | $                                                    | 368,983    |   | $ | 418,797 |   |
|                                                                                   |       |                                                 |       |   |   |
| **Operating expenses**                                                                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Electric fuel and purchased power                                                      |       | 247,509                                              |       | 321,692 |   |
| Other operating and maintenance expenses                                               |       | 54,474                                               |       | 51,425 |   |
| Demand side management program expenses                                                |       | 1,351                                                |       | 980 |   |
| Depreciation and amortization                                                          |       | 25,275                                               |       | 23,986 |   |
| Taxes (other than income taxes)                                                        |       | 10,542                                               |       | 10,323 |   |
| Total operating expenses                                                               |       | 339,151                                              |       | 408,406 |   |
|                                                                                   |       |                                                 |       |   |   |
| **Operating income**                                                                   |       | 29,832                                               |       | 10,391 |   |
|                                                                                   |       |                                                 |       |   |   |
| Interest and other income, net                                                         |       | 365                                                  |       | 863 |   |
| Allowance for funds used during  construction — equity                            |       | 1,115                                                |       | — |   |
|                                                                                   |       |                                                 |       |   |   |
| **Interest charges and financing costs**                                               | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Interest charges — includes other financing  costs of $670 and $591, respectively |       | 18,100                                               |       | 13,931 |   |
| Allowance for funds used during  construction — debt                              |       | (770                                                 | )          | (656 | ) |
| Total interest charges and financing costs                                             |       | 17,330                                               |       | 13,275 |   |
|                                                                                   |       |                                                 |       |   |   |
| Income (loss) before income taxes                                                      |       | 13,982                                               |       | (2,021 | ) |
| Income tax expense (benefit)                                                           |       | 4,800                                                |       | (756 | ) |
| **Net income (loss)**                                                                  |       | $                                                    | 9,182      |   | $ | (1,265 | ) |

 

See Notes to Financial Statements

 

3

----

Table of Contents

 

**SOUTHWESTERN PUBLIC SERVICE COMPANY**

**STATEMENTS OF CASHFLOWS (UNAUDITED)**

*(amounts in thousands of dollars)*

 
| ** **                                                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| **Operating activities**                                                                  |       |                                                 |       |   |   |
| Net income (loss)                                                                         |       | $                                                    | 9,182      |   | $ | (1,265 | ) |
| Adjustments to reconcile net income (loss)  to net cash provided by operating activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                                             |       | 26,666                                               |       | 26,024 |   |
| Deferred income taxes                                                                     |       | (24,687                                              | )          | 4,491 |   |
| Amortization of investment tax credits                                                    |       | (81                                                  | )          | (55 | ) |
| Allowance for equity funds used during  construction                                      |       | (1,115                                               | )          | — |   |
| Net realized and unrealized hedging and derivative  transactions                          |       | (508                                                 | )          | 67 |   |
| Changes in operating assets and  liabilities:                                             |       |                                                 |       |   |   |
| Accounts receivable                                                                       |       | 4,902                                                |       | 3,420 |   |
| Accrued unbilled revenues                                                                 |       | 5,859                                                |       | 2,711 |   |
| Inventories                                                                               |       | 20,760                                               |       | (3,357 | ) |
| Recoverable electric energy costs                                                         |       | 1,172                                                |       | (19,683 | ) |
| Prepayments and other                                                                     |       | 1,058                                                |       | 1,495 |   |
| Accounts payable                                                                          |       | (35,463                                              | )          | 42,092 |   |
| Deferred electric energy costs                                                            |       | 78,270                                               |       | (39 | ) |
| Net regulatory assets and liabilities                                                     |       | 2,544                                                |       | (171 | ) |
| Other current liabilities                                                                 |       | 28,962                                               |       | (13,026 | ) |
| Change in other noncurrent assets                                                         |       | (2,585                                               | )          | (2,761 | ) |
| Change in other noncurrent liabilities                                                    |       | 581                                                  |       | 2,526 |   |
| Net cash provided by operating activities                                                 |       | 115,517                                              |       | 42,469 |   |
|                                                                                      |       |                                                 |       |   |   |
| **Investing activities**                                                                  |       |                                                 |       |   |   |
| Utility capital/construction expenditures                                                 |       | (44,398                                              | )          | (46,728 | ) |
| Allowance for equity funds used during  construction                                      |       | 1,115                                                |       | — |   |
| Investments in utility money pool  arrangement                                            |       | (378,800                                             | )          | — |   |
| Receipts from utility money pool  arrangement                                             |       | 450,300                                              |       | — |   |
| Other investments                                                                         |       | —                                               |       | 2,171 |   |
| Net cash provided by (used in) investing  activities                                      |       | 28,217                                               |       | (44,557 | ) |
|                                                                                      |       |                                                 |       |   |   |
| **Financing activities**                                                                  |       |                                                 |       |   |   |
| Repayment of short-term borrowings, net                                                   |       | —                                               |       | (73,000 | ) |
| Borrowings under utility money pool  arrangement                                          |       | —                                               |       | 240,500 |   |
| Repayments under utility money pool  arrangement                                          |       | —                                               |       | (146,000 | ) |
| Repayment of long-term debt, including  reacquisition premiums                            |       | (100,000                                             | )          | — |   |
| Dividends paid to parent                                                                  |       | (15,585                                              | )          | (15,931 | ) |
| Net cash (used in) provided by financing  activities                                      |       | (115,585                                             | )          | 5,569 |   |
|                                                                                      |       |                                                 |       |   |   |
| Net increase in cash and cash equivalents                                                 |       | 28,149                                               |       | 3,481 |   |
| Cash and cash equivalents at beginning of  period                                         |       | 130,795                                              |       | 714 |   |
| Cash and cash equivalents at end of period                                                |       | $                                                    | 158,944    |   | $ | 4,195 |   |
|                                                                                      |       |                                                 |       |   |   |
| Supplemental disclosure of cash flow  information:                                        |       |                                                 |       |   |   |
| Cash paid for interest (net of amounts  capitalized)                                      |       | $                                                    | (6,678     | ) | $ | (14,104 | ) |
| Cash received (paid) for income taxes (net  of refunds received)                          |       | 32                                                   |       | (1,172 | ) |
|                                                                                      |       |                                                 |       |   |   |
| Supplemental disclosure of non-cash  investing transactions:                              |       |                                                 |       |   |   |
| Property, plant and equipment additions in  accounts payable                              |       | $                                                    | 6,255      |   | $ | 3,169 |   |

 

See the Notes to Financial Statements

 

4

----

Table of Contents

 

**SOUTHWESTERN PUBLIC SERVICE COMPANY**

**BALANCE SHEETS(UNAUDITED)**

*(amounts in thousands of dollars)*

 
| ** **                                                                            | ** ** | **March 31, 2009** | ** ** | **Dec. 31, 2008** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                       |       |                         |       |                        |       |
| Cash and cash equivalents                                                             |       | $                            | 158,944    |                        | $          | 130,795 |   |
| Investments in utility money pool  arrangement                                        |       | 19,000                       |       | 90,500                      |       |
| Accounts receivable, net                                                              |       | 55,832                       |       | 63,018                      |       |
| Accounts receivable from affiliates                                                   |       | 7,112                        |       | 4,828                       |       |
| Accrued unbilled revenues                                                             |       | 92,004                       |       | 97,863                      |       |
| Inventories                                                                           |       | 26,322                       |       | 47,082                      |       |
| Recoverable electric energy costs                                                     |       | 3,542                        |       | 5,540                       |       |
| Derivative instruments valuation                                                      |       | 8,926                        |       | 8,926                       |       |
| Deferred income taxes                                                                 |       | 54,868                       |       | 21,607                      |       |
| Prepayments and other                                                                 |       | 4,311                        |       | 5,369                       |       |
| Total current assets                                                                  |       | 430,861                      |       | 475,528                     |       |
|                                                                                  |       |                         |       |                        |       |
| Property, plant and equipment, net                                                    |       | 2,163,652                    |       | 2,141,636                   |       |
|                                                                                  |       |                         |       |                        |       |
| Other assets:                                                                         |       |                         |       |                        |       |
| Regulatory assets                                                                     |       | 265,033                      |       | 269,344                     |       |
| Prepaid pension asset                                                                 |       | 18,154                       |       | 15,612                      |       |
| Derivative instruments valuation                                                      |       | 74,319                       |       | 76,551                      |       |
| Deferred charges and other                                                            |       | 8,309                        |       | 8,436                       |       |
| Total other assets                                                                    |       | 365,815                      |       | 369,943                     |       |
| Total assets                                                                          |       | $                            | 2,960,328  |                        | $          | 2,987,107 |   |
|                                                                                  |       |                         |       |                        |       |
| **LIABILITIES AND EQUITY**                                                            |       |                         |       |                        |       |
| Current liabilities:                                                                  |       |                         |       |                        |       |
| Current portion of long-term debt                                                     |       | $                            | —     |                        | $          | 100,000 |   |
| Accounts payable                                                                      |       | 133,358                      |       | 166,909                     |       |
| Accounts payable to affiliates                                                        |       | 9,171                        |       | 10,568                      |       |
| Deferred electric energy costs                                                        |       | 99,206                       |       | 20,936                      |       |
| Taxes accrued                                                                         |       | 37,794                       |       | 20,271                      |       |
| Dividends payable to parent                                                           |       | 17,374                       |       | 15,585                      |       |
| Accrued interest                                                                      |       | 25,185                       |       | 15,136                      |       |
| Derivative instruments valuation                                                      |       | 5,102                        |       | 5,079                       |       |
| Other                                                                                 |       | 21,190                       |       | 19,800                      |       |
| Total current liabilities                                                             |       | 348,380                      |       | 374,284                     |       |
|                                                                                  |       |                         |       |                        |       |
| Deferred credits and other liabilities:                                               |       |                         |       |                        |       |
| Deferred income taxes                                                                 |       | 495,100                      |       | 486,702                     |       |
| Deferred investment tax credits                                                       |       | 2,609                        |       | 2,690                       |       |
| Regulatory liabilities                                                                |       | 126,442                      |       | 126,884                     |       |
| Asset retirement obligations                                                          |       | 18,199                       |       | 17,903                      |       |
| Derivative instruments valuation                                                      |       | 57,579                       |       | 59,255                      |       |
| Pension and employee benefit obligations                                              |       | 50,073                       |       | 50,500                      |       |
| Other                                                                                 |       | 17,468                       |       | 16,461                      |       |
| Total deferred credits and other  liabilities                                         |       | 767,470                      |       | 760,395                     |       |
|                                                                                  |       |                         |       |                        |       |
| Commitments and contingent liabilities                                                |       |                         |       |                        |       |
| Capitalization:                                                                       |       |                         |       |                        |       |
| Long-term debt                                                                        |       | 922,205                      |       | 922,123                     |       |
| Common stock — authorized 200 shares of  $1.00 par value, outstanding 100 shares |       | —                       |       | —                      |       |
| Additional paid in capital                                                            |       | 676,705                      |       | 676,705                     |       |
| Retained earnings                                                                     |       | 250,968                      |       | 259,159                     |       |
| Accumulated other comprehensive loss                                                  |       | (5,400                       | )          | (5,559                      | )          |
| Total common stockholder’s equity                                                |       | 922,273                      |       | 930,305                     |       |
| Total liabilities and equity                                                          |       | $                            | 2,960,328  |                        | $          | 2,987,107 |   |

** **

**See the Notes to Financial Statements**

 

5

----

Table of Contents

 

**SOUTHWESTERN PUBLICSERVICE COMPANY**

**NOTES TO FINANCIALSTATEMENTS (UNAUDITED)**

** **

In the opinionof management, 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 March 31, 2009, and Dec. 31, 2008;the results of its operations for the three months ended March 31, 2009and 2008; and its cash flows for the three months ended March 31, 2009 and2008. All adjustments are of a normal, recurring nature, except as otherwisedisclosed.  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 SignificantAccounting Policies**

** **

Except to theextent updated or described below, the significant accounting policies setforth in Note 1 to the financial statements in SPS’ Annual Report on Form 10-Kfor the year ended Dec. 31, 2008, appropriately represent, in all materialrespects, the current status of accounting policies and are incorporated hereinby reference.

 

***Reclassification —***Demandside management (DSM) program expenses werereclassified as a separate item. Previously these costs were included in depreciation and amortization onthe statements of operations.  This reclassification did not have an impacton total operating expenses.

 

**2.Accounting Pronouncements**

 

***Recently Adopted***

 

***BusinessCombinations (Statement of Financial Accounting Standards (SFAS) No. 141(revised 2007)) —***In December 2007, theFinancial Accounting Standards Board (FASB) issued SFAS No. 141(R), whichestablishes principles and requirements for how an acquirer in a businesscombination recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest; recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase; and determines what informationto disclose to enable users of the financial statements to evaluate the natureand financial effects of the business combination. SFAS No. 141(R) isto be applied prospectively to business combinations for which the acquisitiondate is on or after the beginning of an entity’s fiscal year that begins on orafter Dec. 15, 2008. SPS implemented SFAS No. 141(R) on Jan. 1,2009, and the implementation did not have a material impact on its financialstatements.

 

***NoncontrollingInterests in Consolidated Financial Statements, an Amendment of Accounting ResearchBulletin (ARB) No. 51 (SFAS No. 160) *****—** In December 2007, the FASB issued SFAS No. 160,which establishes accounting and reporting standards that require the ownershipinterest in subsidiaries held by parties other than the parent be clearlyidentified and presented in the consolidated balance sheets within equity, butseparate from the parent’s equity; the amount of consolidated net incomeattributable to the parent and the noncontrolling interest be clearlyidentified and presented on the face of the consolidated statement of earnings;and changes in a parent’s ownership interest while the parent retains itscontrolling financial interest in its subsidiary be accounted for consistentlyas equity transactions. SFAS No. 160 was effective for fiscal yearsbeginning on or after Dec. 15, 2008. SPS implemented SFAS No. 160 on Jan. 1,2009, and the implementation did not have a material impact on its financialstatements.

 

***Disclosures aboutDerivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133(SFAS No. 161)**—***In March 2008, the FASB issued SFAS No. 161, which is intended toenhance disclosures to help users of the financial statements better understandhow derivative instruments and hedging activities affect an entity’s financialposition, financial performance and cash flows. SFAS No. 161 amends and expands the disclosure requirements of SFASNo. 133, *Accounting for DerivativeInstruments and Hedging Activities*, to require disclosures includingobjectives and strategies for using derivatives, gains and losses on derivativeinstruments, and credit-risk-related contingent features in derivativecontracts.  SFAS No. 161 waseffective for financial statements issued for fiscal years and interim periodsbeginning after Nov. 15, 2008.  SPSimplemented SFAS No. 161 on Jan. 1, 2009, and the implementation didnot have a material impact on its financial statements.  For further discussion and SFAS No. 161required disclosures, see Note 8 to the financial statements.

 

6

----

Table of Contents

*** ***

***Recently Issued***

 

***Employers’ Disclosures about PostretirementBenefit Plan Assets (FASB Staff Position (FSP) FAS 132(R)-1) —***In December 2008, the FASB issued FSPFAS 132(R)-1, which amends SFAS No. 132 (revised 2003), *Employers’ Disclosures about Pensions and OtherPostretirement Benefits,*to expand an employer’s requireddisclosures about plan assets of a defined benefit pension or otherpostretirement plan to include investment policies and strategies, majorcategories of plan assets, information regarding fair value measurements, andsignificant concentrations of credit risk. FSP FAS 132(R)-1 is effective for fiscal years ending after Dec. 15,2009.  SPS does not expect the implementation of FSP FAS 132(R)-1 to have amaterial impact on its financial statements.

 

***Interim Disclosuresabout Fair Value of Financial Instruments (FSP FAS 107-1 and AccountingPrinciples Board (APB) 28-1) —*** In April 2009, the FASB issuedFSP FAS 107-1 and APB 28-1, which amends SFAS No. 107*, Disclosures About Fair Value of FinancialInstruments*, and APB Opinion No. 28, *Interim Financial Reporting*, to require disclosuresregarding the fair value of financial instruments in interim financialstatements. In addition, entities are required to disclose the method andsignificant assumptions used to estimate the fair value of financialinstruments. FSP FAS 107-1 and APB 28-1 are effective for interim periods endingafter June 15, 2009. SPS does not expect the implementation of FSP FAS107-1 and APB 28-1 to have a material impact on its financial statements.

 

***Determining FairValue When the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly (FSPFAS 157-4) —*** In April 2009, the FASB issued FSP FAS 157-4, which providesadditional guidance for estimating fair value in accordance with SFAS No. 157,*Fair Value Measurements*, when thevolume and level of market activity for an asset or liability havesignificantly decreased.  FSP FAS 157-4emphasizes that even if there has been a significant decrease in the volume andlevel of market activity for the asset or liability, fair value still representsthe exit price in an orderly transaction between market participants.  FSP FAS 157-4 is effective for interim andannual periods ending after June 15, 2009. SPS does not expect the implementation of FSP FAS 157-4 to have amaterial impact on its financial statements.

 

***Recognition andPresentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2)—*** In April 2009,the FASB issued FSP FAS 115-2 and FAS 124-2, which changes the method fordetermining whether an other-than-temporary impairment exists for debtsecurities, and also requires additional disclosures regardingother-than-temporary impairments.  FSPFAS 115-2 and FAS 124-2 is effective for interim and annual periods endingafter June 15, 2009.  SPS does notexpect the implementation of FSP FAS 115-2 and FAS 124-2 to have a materialimpact on its financial statements.

 

**3. Selected Balance Sheet Data**

** **
| **(Thousands of Dollars)** | ** ** | **March 31, 2009** | ** ** | **Dec. 31, 2008** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Accounts receivable, net:            |       |                         |       |                        |       |
| Accounts receivable                  |       | $                            | 60,357     |                        | $          | 67,706 |   |
| Less allowance for bad debts         |       | (4,525                       | )          | (4,688                      | )          |
|                                 |       | $                            | 55,832     |                        | $          | 63,018 |   |
|                                 |       |                         |       |                        |       |
| Inventories:                         |       |                         |       |                        |       |
| Materials and supplies               |       | $                            | 15,545     |                        | $          | 15,422 |   |
| Fuel                                 |       | 10,777                       |       | 31,660                      |       |
|                                 |       | $                            | 26,322     |                        | $          | 47,082 |   |
|                                 |       |                         |       |                        |       |
| Property, plant and equipment, net:  |       |                         |       |                        |       |
| Electric plant                       |       | $                            | 3,629,728  |                        | $          | 3,594,885 |   |
| Construction work in progress        |       | 109,665                      |       | 102,508                     |       |
| Total property, plant and equipment  |       | 3,739,393                    |       | 3,697,393                   |       |
| Less accumulated depreciation        |       | (1,575,741                   | )          | (1,555,757                  | )          |
|                                 |       | $                            | 2,163,652  |                        | $          | 2,141,636 |   |

 

**4. Income Taxes**

** **

***Accounting forUncertainty in Income Taxes — an interpretation of FASB Statement No. 109(FIN 48)***— SPS is a member of the XcelEnergy affiliated group that files consolidated income tax returns. In thefirst quarter of 2008, the Internal Revenue Service (IRS) completed anexamination of Xcel Energy’s federal income tax returns for 2004 and 2005 (andresearch credits for 2003). The IRS did not propose any material adjustmentsfor those tax years. Tax year 2004 is the earliest open year and the statute oflimitations 

 

7

----

Table of Contents

 

applicable to Xcel Energy’s 2004federal income tax return remains open until Dec. 31, 2009.  In the third quarter of 2008, the IRScommenced an examination of tax years 2006 and 2007. As of March 31, 2009,the IRS had not proposed any material adjustments to tax years 2006 and 2007.

 

Inthe first quarter of 2008, the state of Texas concluded an income tax auditthrough tax year 2005.  No material adjustments were proposed for thisaudit. As of March 31, 2009, SPS’ earliest open tax year in which an auditcan be initiated by state taxing authorities under applicable statutes oflimitations is 2004. There currently are no state income tax audits inprogress.

 

Theamount of unrecognized tax benefits was $3.7 million and $3.5 million on March 31,2009 and Dec. 31, 2008, respectively. These unrecognized tax benefitamounts were reduced by the tax benefits associated with tax credit carryovers.The tax benefit for tax credit carryovers was not material as of March 31,2009 and Dec. 31, 2008.

 

Theunrecognized tax benefit balance included $0.4 million and $0.3 million of taxpositions on March 31, 2009 and Dec. 31, 2008, respectively, which ifrecognized would affect the annual effective tax rate. In addition, theunrecognized tax benefit balance included $3.3 million and $3.2 million of taxpositions on March 31, 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 deductibilitywould not affect the effective tax rate but would accelerate the payment ofcash to the taxing authority to an earlier period.

 

Theincrease in the unrecognized tax benefit balance of $0.2 million from Dec. 31,2008 to March 31, 2009, was due to the addition of similar uncertain taxpositions related to ongoing activity. SPS’ amount of unrecognized tax benefitscould significantly change in the next 12 months as the IRS audit progressesand when state audits resume. At this time, due to the uncertain nature of theaudit process, it is not reasonably possible to estimate an overall range ofpossible change.

 

The liability for interestrelated to unrecognized tax benefits is partially offset by the interestbenefit associated with tax credit carryovers. The amount of interest expenserelated to unrecognized tax benefits reported within interest charges in thefirst quarter of 2009 and 2008 was not material. The liability for interestrelated to unrecognized tax benefits was $0.3 million on March 31, 2009and Dec. 31, 2008, respectively.

 

No amounts were accrued forpenalties as of March 31, 2009 and Dec. 31, 2008.

 

**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 section includesunresolved proceedings that are material to SPS’ financial position.

 

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

** **

**Base Rate**

 

***Texas Retail BaseRate Case —***OnJune 12, 2008, SPS filed a rate case with the PUCT seeking anannual rate increase of approximately $61.3 million, or approximately 5.9percent.  Base revenues are proposed to increaseby $94.4 million, while fuel and purchased power revenue would decline by $33.1million, primarily due to fuel savings from the Lea Power Partners (LPP)purchase power agreement.

 

The rate filing is 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 costs associated with the LPP power purchase agreement wentinto effect in September 2008.

 

In January 2009, SPS reached an agreement with intervenors, whichprovided for a base rate increase of $57.4 million.  Key terms of the settlement include thefollowing:

 

·                  Anadjustment, which reduced depreciation expense by $5.6 million from currentlyauthorized rates;

·                  Allows SPS toimplement the transmission cost recovery factor in 2009;

·                  Precludes SPSfrom filing to seek any other change in base rates until Feb. 15, 2010;and

·                  Resolves allfuel reconciliation issues for 2006-07 with one adjustment for $0.6 millionrelated to the sharing of certain wholesale sales revenues.

 

The overall settlement is now pending final PUCT approval and thesettlement rates are in effect subject to this final approval.

 

8

----

Tableof Contents

 

***John Deere WindComplaint* —** In June 2007, several JohnDeere Wind Energy subsidiaries (JD Wind) filed a complaint against SPSdisputing SPS’ payments to JD Wind for energy produced from the JD Windprojects. SPS responded that the payments to JD Wind for energy produced fromits qualifying facility (QF) are appropriate and in accordance with SPS’ filedtariffs with the PUCT. On March 25, 2009, the administrative law judge(ALJ) issued a proposal for decision, which recommends that SPS paymentmethodology to JD Wind is proper and that JD Wind’s complaint be denied.  The PUCT approved the proposal for decisionduring the April 23, 2009 open meeting.

 

***Pending and RecentlyConcluded Regulatory Proceedings — New Mexico Public Regulation Commission(NMPRC)***

*** ***

**Base Rate**

 

***2008 New MexicoRetail Electric Rate Case —***On Dec. 18,2008, SPS filed with the NMPRC a request to increase electric rates in NewMexico by approximately $24.6 million, or 6.2 percent. The request is based ona historic test-year (split year based on the year-ending June 30, 2008),an electric rate base of $321 million, and an equity ratio of 50 percent and arequested ROE of 12 percent.  SPS alsorequested interim rates of $7.6 million per year to recover capacity costs ofthe Lea Power facility, which became operational in September 2008.

 

On March 26, 2009, the NMPRC approved a partial stipulatedsettlement between the parties that allows SPS to recover approximately $5.7million of interim rates, effective May 1, 2009, through an LPP cost rideruntil the final rates from the remainder of the case are effective.

 

InApril 2009, the parties reached an agreement in principle on key issues suchas the amount of the rate increase and the earliest date that SPS can file itsnext base rate case, subject to a force majeure provision.  The parties are working out the details toresolve other issues before a settlement agreement can be concluded, filed withthe NMPRC and disclosed publicly.   SPSexpects to file the settlement documents with the NMPRC by the end of May 2009.

 

***Pending and RecentlyConcluded Regulatory Proceedings — Federal Energy Regulatory Commission (FERC)***

*** ***

***Wholesale RateComplaints —***In November 2004, Golden SpreadElectric, Lyntegar Electric, Farmer’s Electric, Lea County Electric, CentralValley Electric and Roosevelt County Electric, all wholesale cooperativecustomers of SPS, filed a rate complaint with the FERC alleging that SPS’ ratesfor wholesale service were excessive and that SPS had incorrectly calculatedmonthly fuel cost adjustment charges to such customers (the Complaint). Amongother things, the complainants asserted that SPS had inappropriately allocatedaverage fuel and purchased power costs to other wholesale customers,effectively raising the fuel cost charges to the complainants. Cap Rock EnergyCorporation (Cap Rock), another full-requirements customer of SPS, PublicService Company of New Mexico (PNM) and Occidental Permian Ltd. andOccidental Power Marketing, L.P. (Occidental), SPS’ largest retailcustomer, intervened in the proceeding.

 

In May 2006, a FERC ALJ issued an initial decision in theproceeding. The ALJ found that SPS should recalculate its fuel and purchasedeconomic energy cost adjustment clause (FCAC) billings for the period beginningJan. 1, 1999, to reduce the fuel and purchased power costs recovered fromthe complaining customers by deducting from such costs the incremental fuelcosts attributed to SPS’ sales of system firm capacity and associated energy toother wholesale customers served under market-based rates during this periodbased on the view that such sales should be treated as opportunity sales madeout of temporarily excess capacity. In addition, the ALJ made recommendationson a number of base rate issues including a 9.64 percent ROE and the useof a 3-month coincident peak (CP) demand allocator.

 

***Golden SpreadComplaint 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 comprehensive offer of settlement (the Settlement) was filed with theFERC. On April 21, 2008, the FERC approved the Settlement with a minormodification to the formula rate proposed by the FERC and accepted by theparties.  The Settlement provides for:

 

·                  A$1.25 million payment by SPS to Golden Spread to resolve a disputeconcerning the quantities Golden Spread was entitled to take under its existingpartial requirements agreement for the years 2006 and 2007. The Settlement capsthose quantities for the period 2008 through 2011. SPS is not required to make anyfuel refunds to Golden Spread that were the subject of the Complaint under theterms of the Settlement.

 

·                  An extendedpartial requirements contract at system average cost, with a capacity amountthat ramps down over the period 2012 through 2019 from 500 megawatt (MW) to 200MW.  Golden Spread agreed to hold SPSharmless from any future adverse regulatory treatment regarding the proposedsale and SPS agreed to contingent payments ranging from $3 million to amaximum of $12 million, payable in 2012, in the event that there is anadverse cost assignment decision or a failure to obtain state approvals.

 

9

----

Table of Contents

 

·                  Resolution ofbase rates in the Complaint without any adjustment to the existing rates forthe period January 2005 through June 30, 2006. The Settlement alsoresolves all base rate issues in SPS’ subsequent proceeding related to theperiod July 1, 2006 through Sept. 30, 2008, other than the method tobe used to allocate demand related costs and provided for two sets of agreed-onrates that are dependent on the ultimate resolution of that issue.

 

·                  For July 1,2008 and beyond, Golden Spread will be under a formula rate for power supplyservice. The rate will be based on actual data from the most recent historicyear adjusted for known and measurable changes and trued up to the actualperformance in the subsequent calendar year.

 

***Order on WholesaleRate Complaints******—***In April 2008, the FERC issuedits Order on the Complaint applied to the remaining non-settling parties.  The Order addresses base rate issues for theperiod from Jan. 1, 2005 through June 30, 2006, for SPS’ fullrequirements customers who pay traditional cost-based rates and requirescertain refunds.

 

·                     **Base Rates**: The FERC determined: (1) the ROE should be 9.33 percent; (2) ratesshould be based on a 12 CP allocator; and (3) the treatment of marketbased rate contracts in the test-year should be to credit revenues to the costof service rather than allocating costs to the agreements. The revenuerequirement established by the FERC results in proposed revenues that areestimated to be approximately $25 million, or approximately $6.9 million below thelevel charged to these customers during this 18-month period. Rates for fullrequirements customers, 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 cost charges to the complaining customeris to deduct from such costs incremental fuel and purchased energy costs, whichit is attributing to SPS’ market based intersystem sales on the basis thatthese are “opportunity” sales under its precedent.  The FERC ordered that refunds of fuel costcharges based on this method of determining the FCAC should begin as of Jan. 1,2005 (the refund effective date in the case). The FERC ordered SPS to file a compliance filing calculating its refundobligation and implement the instructions in the order in calculating its FCACcharges going forward from that date. While the order is subject to interpretation with respect to aspects ofthe calculation of the refund obligation, SPS does not expect its refundobligation to its full requirements customers from Jan. 1, 2005 through March 31,2008, to exceed $11 million. PNM has filed a separate complaint that any refundobligation to PNM will be determined in that docket.  SPS is reviewing the Order and has not yetdetermined whether to seek rehearing.

 

·                  The FERC alsoruled on two other FCA issues.  First, itrequired that wind contracts be evaluated on an individual contract basisrather than in aggregate.  Second, theFERC determined that an after-the-fact screen should be applied to all QFpurchases to determine if they are economic. While this review will require additional effort, it is not expectedthat this will result in additional refunds as all of the individual windcontracts as well as the QF purchases are typically economic when compared to marketenergy prices.

 

Several parties, including SPS, filed requests for rehearing on theorder.  These requests are pending beforethe FERC.  In July 2008, SPSsubmitted its compliance report to the FERC. In the report, SPS has calculated the base rate refund for the 18-monthperiod to be equal to $6.1 million and the fuel refund to be equal to $4.4million.  Several wholesale customershave protested the calculations.  Once thefinal refund amounts are approved by the FERC, interest will be added to therefund due to the full requirements customers. As of March 31, 2009, SPS has accrued an amount sufficient to coverthe estimated refund obligation.

 

***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. Four NewMexico Cooperatives filed a motion for dismissal and protest in April 2008.

 

On May 30,2008, the FERC conditionally accepted and suspended the rates and establishedhearing and settlement procedures.  TheFERC granted a 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 CP demand allocator, became effective, subject to refund.

 

The partiesreached a settlement in principle, and an uncontested settlement was filed withthe FERC on April 23, 2009.  As aresult of the settlement, SPS will receive an annual revenue increase ofapproximately $9.6 million or an overall percentage increase of 3.3 percent.SPS expects the FERC to approve the uncontested settlement.

 

10

----

Tableof Contents

 

**6.   Commitments and Contingencies**

** **

Except to the extentnoted below, the circumstances set forth in Notes 13 and 14 to the financialstatements in SPS’ Annual Report on Form 10-K for the year ended Dec. 31,2008 and Note 5 to the financial statements in this Quarterly Report on Form 10-Q,appropriately represent, in all material respects, the current status ofcommitments and contingent liabilities and are incorporated herein byreference. The following include unresolved contingencies that are material toSPS’ financial position.

 

## **Environmental Contingencies**

## ** **

SPS has been,or is currently, involved with the cleanup of contamination from certainhazardous substances at several sites. In many situations, SPS believes it willrecover some portion of these costs through insurance claims.  Additionally, where applicable, SPS ispursuing, or intends to pursue, recovery from other potentially responsibleparties (PRPs) and through the rate regulatory process.  New and changing federal and stateenvironmental mandates can also create added financial liabilities for SPS,which are normally recovered through the rate regulatory process.  To the extent any costs are not recoveredthrough the options listed above, SPS would be required to recognize anexpense.

 

***Site Remediation****—*SPSmust pay all or a portion of the cost to remediate sites where past activitiesof SPS or other parties have caused environmental contamination.  Environmental contingencies could arise fromvarious situations, including third party sites, to which SPS is alleged to bea PRP that sent hazardous materials and wastes. At March 31, 2009, the liability for the cost of remediating thesesites was estimated to be $0.1 million.

 

***Third Party and Other Environmental SiteRemediation***

 

***Asbestos Removal*****—**Someof SPS’ facilities contain asbestos. Most asbestos will remain undisturbed until the facilities that containit are demolished or renovated.  SPS hasrecorded an estimate for final removal of the asbestos as an asset retirementobligation.  See additional discussion ofasset retirement obligations in Note 14 of the SPS Annual Report on Form 10-Kfor the year ended Dec. 31, 2008.  It may be necessary to remove some asbestosto perform maintenance or make improvements to other equipment.  The cost of removing asbestos as part ofother work is immaterial and is recorded as incurred as operating expenses formaintenance projects, capital expenditures for construction projects or removalcosts for demolition projects.

 

## ***Other Environmental Requirements***

## ** **

***Environmental Protection Agency (EPA)Proposed Greenhouse Gas (GHG) Endangerment Finding***—On April 17, 2009, the EPA issued a proposed finding that GHGs threatenpublic health and welfare.  This findingwas in response to the U.S. Supreme Court’s decision in *Massachusetts v. EPA*, 549 U.S. 497 (2007),which held that GHGs are pollutants covered by the Clean Air Act and requiredthe EPA to determine whether emissions of GHGs from motor vehicles endangerpublic health or welfare.  The EPA’sproposed endangerment finding applies to the Clean Air Act’s mobile sourceprogram, and does not automatically trigger regulation under other provisionsof the Clean Air Act that are applicable to stationary sources, such as powerplants.  As such, the proposedendangerment finding, in and of itself, does not impact SPS.

 

***Clean Air Interstate Rule (CAIR)*********—******In March 2005,the EPA issued the CAIR tofurther regulate sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions.  The objective of CAIR was to cap emissions ofSO2 andNOx in the eastern United States, including Texas.  In July 2008, the U. S. Court ofAppeals for the District of Columbia vacated CAIR and remanded the rule toEPA.  On Dec. 23, 2008, the courtreinstated CAIR while the EPA develops new regulations in accordance with thecourt’s July opinion.

 

As currently written, CAIRhas a two-phase compliance schedule, beginning in 2009 for NOx and 2010 for SO2, with a final compliance deadline in 2015 for both emissions. UnderCAIR, each affected state will be allocated an emissions budget for SO2 and NOx that will result insignificant emission reductions. It will be based on stringent emissioncontrols and forms the basis for a cap-and-trade program. State emissionbudgets or caps decline over time. States can choose to implement an emissionsreduction program based on the EPA’s proposed model program, or they canpropose another method, which the EPA would need to approve.

 

Under CAIR’s cap-and-trade structure, SPS can comply through capitalinvestments in emission controls or purchase of emission “allowances” fromother utilities making reductions on their systems.   The remaining capital investments forNOx controls in the SPS region are estimated at $4.5 million. For 2009, the estimatedNOx allowance compliance costs are $1.9 million. Annual purchases of SO2 allowances are estimated in the range of$1.7 million to $7.7 million each year, beginning in 2013, forphase I.

 

Allowance cost estimates for SPS are based onMarch 2009 allowance costs and fuel quality.  SPSbelieves the cost of any required capital investment or allowance purchaseswill be recoverable from customers in rates.

 

11

----

Table of Contents

 

***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 by reference the EPA model program.  In February 2008, the U.S. Court ofAppeals for the District of Columbia vacated CAMR, which impacts federal CAMRrequirements but not necessarily state-only rules.   At this time, Texas has notadopted any state-only mercury requirements.

 

***Regional Haze Rules ***—In June 2005, the EPA finalized amendments to the July 1999 regionalhaze rules. These amendments apply to the provisions of the regional haze rule thatrequire emission 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 of business. Management,after consultation with legal counsel, has recorded an estimate of the probablecost of settlement or other disposition of them. The ultimate outcome of thesematters cannot presently be determined. Accordingly, the ultimate resolution ofthese matters could have a material adverse effect on SPS’ financial positionand results of operations.

 

**Environmental Litigation**

** **

***Carbon Dioxide (CO******2)Emissions Lawsuit —***In July 2004, the attorneys general ofeight states and New York City, as well as several environmental groups, filedlawsuits in U.S. District Court in the Southern District of New York againstfive utilities, including Xcel Energy, to force reductions in CO2 emissions. The other utilities includeAmerican Electric Power Co., Southern Co., Cinergy Corp. andTennessee Valley Authority. The lawsuits allege 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 toregulation by the EPA under the CAA. In July 2007, in response to the requestof the Court of Appeals, the defendant utilities filed a letter brief statingthe position that the United States Supreme Court’s decision supports thearguments raised by the utilities on appeal. The Court of Appeals has taken thematter under advisement and is expected to issue an opinion in due course.

 

***Comer vs. XcelEnergy Inc. et al. —***In April 2006,Xcel Energy 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 “were aproximate 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 believes thislawsuit is without merit and intends to vigorously defend itself against theseclaims. In August 2007, the court dismissed the lawsuit in its entiretyagainst 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. No explanation was given for the order. The Court ofAppeals has taken the matter under advisement.

 

***Native Village ofKivalina vs. Xcel Energy Inc. et al. —***InFebruary 2008, the City and Native Village of Kivalina, Alaska, filed alawsuit in U.S. District Court for the Northern District of California againstXcel Energy, the parent company of SPS, and 23 other utilities, oil, gas andcoal companies. The suit was brought on behalf of approximately 400 nativeAlaskans, the Inupiat Eskimo, who claim that defendants’ emission of CO2 and other GHG contribute to global warming,which is harming their village. Plaintiffs claim that as a consequence, theentire village must be relocated at a cost of between $95 million and$400 million. Plaintiffs assert a nuisance claim under federal and statecommon law, as well as a claim asserting “concert of action” in which defendantsare alleged to have engaged in tortious acts in concert with each other. XcelEnergy was not named in the civil conspiracy claim. Xcel Energy believes theclaims asserted in this lawsuit are without merit and joined with other utilitydefendants in filing a motion to dismiss on June 30, 2008. The matter hasnow been fully briefed, with oral arguments set for May 19, 2009. It isunknown when the court will render a decision.

 

***Lamb County Electric Cooperative (LCEC) —***In1995, LCEC petitioned the PUCT for a cease and desist order against SPSalleging SPS was unlawfully providing service to oil field customers in LCEC’scertificated area. In May 2003, the PUCT issued an order denying LCEC’spetition based on its determination that SPS in 1976 was granted a certificateto serve the disputed customers. LCEC 

 

12

----

Tableof Contents

 

appealed thedecision to the Texas state court. In August 2004, the court affirmed thedecision of the PUCT. In September 2004, LCEC appealed the decision to theCourt of Appeals for the Third Supreme Judicial District. In November 2008,the Court of Appeals issued an opinion affirming the decision in favor ofSPS.  In December 2008, LCEC filed apetition for review with the Supreme Court of Texas. On Feb. 27, 2009, theSupreme Court of Texas denied LCEC’s request 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 been affirmed, SPS will move for summaryjudgment if LCEC does not dismiss this case.

 

**7.   Short-Term Borrowings and OtherFinancing Instruments**

 

***Commercial Paper —***AtMarch 31, 2009 and Dec. 31, 2008, SPS had no commercial paperoutstanding.  At March 31, 2009 and Dec. 31,2008, SPS had board approval to issue up to $250 million of commercial paper.

 

***Money Pool*** — Xcel Energy has established a utility moneypool arrangement that allows for short-term loans between the utilitysubsidiaries and from the holding company to the utility subsidiaries atmarket-based interest rates. The utility money pool arrangement does not allowloans from the utility subsidiaries to the holding company. SPS has approval toborrow up to $100.0 million under the arrangement. At March 31, 2009 and Dec. 31,2008, SPS had money pool loans outstanding of $19.0 million and $90.5 million,respectively.  The weighted averageinterest rates at March 31, 2009 and Dec. 31, 2008 were 1.20 percentand 3.48 percent, respectively.

 

**8.   DerivativeInstruments**

 

Effective Jan. 1, 2009, SPS adopted SFAS No. 161, whichrequires additional disclosures regarding why an entity uses derivativeinstruments, the volume of an entity’s derivative activities, the fair valueamounts recorded to the balance sheet for derivatives, the gains and losses onderivative instruments included in the statement of operations or deferred, andinformation regarding certain credit-risk-related contingent features inderivative contracts.

 

SPS may enter into derivative instruments, including forward contracts,futures, swaps and options, to reduce risk in connection with changes ininterest rates and electric utility commodity prices.  See additional information pertaining to thevaluation of derivative instruments in Note 9 to the financial statements.

 

***Interest RateDerivatives —***SPS may enter into variousinstruments that effectively fix the interest payments on certain floating ratedebt obligations or effectively fix the yield or price on a specified benchmarkinterest rate for a specific period. These derivative instruments are designated as cash flow hedges foraccounting purposes.

 

At March 31, 2009, accumulated other comprehensive income relatedto interest rate derivatives included $0.6 million of net losses expected to bereclassified into earnings during the next 12 months as the related hedgedinterest transactions impact earnings.

 

During the three months ended March 31, 2009, $0.2 million of netlosses in accumulated other comprehensive income related to interest ratederivatives were reclassified into earnings.

 

At March 31, 2009, SPS had one unsettled interest rate swapoutstanding with a notional amount of $25 million.  The interest rate swap is not designated as ahedging instrument, and as such, gains from changes in fair value of $0.8million for the three months ended March 31, 2009 were recorded toearnings.

 

***CommodityDerivatives —***SPS may enter into derivativeinstruments to manage variability of future cash flows from changes incommodity prices in its electric utility operations.  This could include the purchase or sale ofenergy or energy-related products.  At March 31, 2009 and Dec. 31,2008, SPS held no commodity derivatives.

 

Changes in the fair value of designated cash flow hedges arerecorded in other comprehensive income or deferred as a regulatory asset orliability.  The classification as aregulatory asset or liability is based on the regulatory recovery mechanisms inplace.  At March 31, 2009, SPS hadno amounts in accumulated other comprehensive income related to commodity cashflow hedge contracts that are expected to be recognized in earnings during thenext 12 months.

 

SPS may alsoenter into derivative instruments that mitigate commodity price risk on behalfof electric utility customers but are not designated as qualifying hedgingtransactions.  Changes in the fairvalue of these derivative instruments are deferred as a regulatory asset orliability, based on the regulatory recovery mechanisms in place.

 

13

----

Tableof Contents

 

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

*** ***
| ** **                           | ** ** | **March 31, 2009**                          | ** ** | **Dec. 31, 2008**                                | ** ** |
|--------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **Derivative  Instruments  Valuation -  Assets** | ** ** | **Derivative  Instruments  Valuation -  Liabilities** | ** ** | **Derivative  Instruments  Valuation -  Assets** | ** ** | **Derivative  Instruments  Valuation -  Liabilities** | ** ** |
| Long term purchased power agreements |       | $                                                     | 83,245     |                                                       | $          | 54,934 |   | $ | 85,477 |   | $ | 55,831 |   |
| Interest rate derivatives            |       | —                                                |       | 7,747                                                      |       | — |   | 8,503 |   |
| Total                                |       | $                                                     | 83,245     |                                                       | $          | 62,681 |   | $ | 85,477 |   | $ | 64,334 |   |

 

In 2003, as a result of FASBStatement 133 Implementation Issue No. C20, SPS began recording severallong-term purchased power agreements at fair value due to accountingrequirements related to underlying price adjustments.  As these purchases are recovered throughnormal regulatory recovery mechanisms in the respective jurisdictions, thechanges in fair value for these contracts were offset by regulatory assets andliabilities.  During 2006, SPS qualifiedthese contracts under the normal purchase exception.  Based on this qualification, the contractsare no longer adjusted to fair value and the previous carrying value of thesecontracts will be amortized over the remaining contract lives along with theoffsetting regulatory assets and liabilities.

 

***Financial Impact ofQualifying Cash Flow Hedges —***The impact ofqualifying interest rate cash flow hedges on SPS’s accumulated othercomprehensive income, included as a component of common stockholder’s equity,is detailed in the following table:

 
| ** **                                                                           | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(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      |       | —                                               |       | (742 | ) |
| After-tax net realized losses on derivative  transactions reclassified into earnings |       | 159                                                  |       | 43 |   |
| Accumulated other comprehensive loss  related to cash flow hedges at March 31   |       | $                                                    | (5,400     | ) | $ | (6,704 | ) |

 

***Credit Related Contingent Features* —* ***If the credit rating of SPS were downgradedbelow investment grade, the counterparty to an interest rate swap agreementwith SPS would have the ability to terminate the contract, which at March 31,2009, would have resulted in the payment of the fair value of the derivativeliability to the counterparty of approximately $7.7 million. There was nocollateral posted on this contract at March 31, 2009.

 

Certain of SPS’s derivative instruments mayalso be subject to contract provisions that contain adequate assurance clauses.These provisions allow counterparties to seek performance assurance, includingcash collateral, in the event that SPS’s ability to fulfill its contractualobligations is reasonably expected to be impaired. As of March 31, 2009,SPS had no collateral posted related to adequate assurance clauses inderivative contracts.

 

**9.Fair Value Measurements**

 

Effective Jan. 1,2008, SPS adopted *Fair Value Measurements*(SFAS No. 157) for recurring fair value measurements.  SFAS No. 157 provides a singledefinition of fair value and requires enhanced disclosures about assets andliabilities measured at fair value. SFAS No. 157 establishes a hierarchalframework for disclosing the observability of the inputs utilized in measuringassets and liabilities at fair value. The three levels defined by the SFAS No. 157hierarchy and examples of each level are as follows:

 

Level 1 — Quoted prices areavailable in active markets for identical assets or liabilities as of thereported date. The types of assets and liabilities included in Level 1 arehighly liquid and actively traded instruments with quoted prices.

 

Level 2 — Pricing inputs areother than quoted prices in active markets, but are either directly orindirectly observable as of the reported date. The types of assets and liabilities included in Level 2 are typicallyeither comparable to actively traded securities or contracts or priced withmodels using highly observable inputs.

 

Level 3 — Significant inputsto pricing have little or no observability as of the reporting date.  The types of assets and liabilities includedin Level 3 are those with inputs requiring significant management judgment orestimation.

 

Cash equivalentsrecorded to the balance sheets consists of money market funds.  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.

 

SPS usesquoted prices, based primarily on observable benchmark interest rate forecasts,to measure the fair value of interest rate derivatives.

 

14

----

Table of Contents

 

The following tables present, for each of the SFAS No. 157hierarchy levels, SPS’s assets and liabilities that are measured at fair valueon a recurring basis:

 
| ** **                           | ** ** | **March 31, 2009** | ** ** |
|--------------------------------------|------------|------------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **Level 1**             | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Net Balance** | ** ** |
| **Assets******                       |       |                         |       |   |   |   |   |   |   |
| Cash equivalents                     |       | $                            | —     |   | $ | 30,000 |   | $ | — |   | $ | 30,000 |   |
| **Liabilities******                  |       |                         |       |   |   |   |   |   |   |
| Interest rate derivatives            |       | —                       |       | 7,747 |   | — |   | 7,747 |   |
|                                      |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                           | ** ** | **Dec. 31, 2008** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **Level 1**            | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Net Balance** | ** ** |
| **Assets******                       |       |                        |       |   |   |   |   |   |   |
| Cash equivalents                     |       | $                           | —     |   | $ | 50,000 |   | $ | — |   | $ | 50,000 |   |
| **Liabilities******                  |       |                        |       |   |   |   |   |   |   |
| Interest rate derivatives            |       | —                      |       | 8,503 |   | — |   | 8,503 |   |
|                                      |            |                             |            |  |  |  |  |  |  |  |  |  |  |

 

**10.Detail of Interest and Other Income (Expenses), Net**

 

Interest and other income(expenses), net, for the three months ended March 31, consisted of thefollowing:

 
| ** **                                       | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Thousands of Dollars)**             | ** ** | **2009**                                         | ** ** | **2008** | ** ** |
| Interest income                                  |       | $                                                | 281        |   | $ | 826 |   |
| Other non-operating income                       |       | 4                                                |       | 47 |   |
| Insurance policy income (expenses)               |       | 80                                               |       | (10 | ) |
| Total interest and other income (expenses),  net |       | $                                                | 365        |   | $ | 863 |   |

 

**11. Segment Information**

 

SPS has one reportable segment. SPS operates in the regulated electric industry, providing wholesale andretail electric service in the states of Texas and New Mexico.  Revenues from external customers were $369.0million and $418.8 million for the three months ended March 31, 2009 and2008, respectively.

 

**12. Comprehensive Income (Loss)**

 

The componentsof total comprehensive income (loss) are shown below:

 
| ** **                                                                           | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Thousands of Dollars)**                                                 | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Net income (loss)                                                                    |       | $                                                    | 9,182      |   | $ | (1,265 | ) |
| Other comprehensive income:                                                          |       |                                                 |       |   |   |
| After-tax net unrealized losses related to  derivatives accounted for as hedges      |       | —                                               |       | (742 | ) |
| After-tax net realized losses on derivative  transactions reclassified into earnings |       | 159                                                  |       | 43 |   |
| Other comprehensive income (loss)                                                    |       | 159                                                  |       | (699 | ) |
| Comprehensive income (loss)                                                          |       | $                                                    | 9,341      |   | $ | (1,964 | ) |

 

15

----

Tableof Contents

 

**13. Benefit Plans andOther Postretirement Benefits**

** **

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

 

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

 
| ** **                                                                                     | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2009**                                             | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **(Thousands of Dollars)**                                                           | ** ** | **Pension Benefits**                            | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                                                           | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                                                   |       | $                                                    | 15,986     |   | $ | 16,773 |   | $ | 1,276 |   | $ | 1,464 |   |
| Interest cost                                                                                  |       | 41,849                                               |       | 40,583 |   | 12,156 |   | 12,546 |   |
| Expected return on plan assets                                                                 |       | (63,360                                              | )          | (68,472 | ) | (5,394 | ) | (7,500 | ) |
| Amortization of transition obligation                                                          |       | —                                               |       | — |   | 3,496 |   | 3,644 |   |
| Amortization of prior service cost (credit)                                                    |       | 6,155                                                |       | 5,166 |   | (652 | ) | (544 | ) |
| Amortization of net loss                                                                       |       | 2,929                                                |       | 2,859 |   | 4,885 |   | 2,718 |   |
| Net periodic benefit (credit) cost                                                             |       | 3,559                                                |       | (3,091 | ) | 15,767 |   | 12,328 |   |
| (Cost) credits not recognized and  additional cost recognized due to the effects of regulation |       | (487                                                 | )          | 2,592 |   | 973 |   | 973 |   |
| Net benefit cost (credit) recognized for  financial reporting                                  |       | $                                                    | 3,072      |   | $ | (499 | ) | $ | 16,740 |   | $ | 13,301 |   |
| **SPS**                                                                                        |       |                                                 |       |   |   |   |   |   |   |
| Net benefit (credit) cost recognized for  financial reporting                                  |       | $                                                    | (1,778     | ) | $ | (2,754 | ) | $ | 1,191 |   | $ | 875 |   |

 

16

----

Table of Contents

 

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

** **

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

 

**Forward-LookingInformation**

 

The followingdiscussion and analysis by management focuses on those factors that had amaterial effect on SPS’ financial condition, results of operations, and cashflows during the periods presented, or are expected to have a material impactin the future. It should be read in conjunction with the accompanying unauditedfinancial statements and the related notes to the financial statements.  Due to the seasonality of SPS’ electricsales, such interim results are not necessarily an appropriate base from whichto project annual results.

 

Exceptfor the historical statements contained in this report, the matters discussedin the following discussion and analysis are forward-looking statements thatare subject to certain risks, uncertainties and assumptions. Suchforward-looking statements are intended to be identified in this document bythe words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “objective,”“outlook,” “plan,” “project,” “possible,” “potential,” “should” and similarexpressions. Actual results may vary materially. Forward-lookingstatements speak only as of the date they are made, and we do not undertake anyobligation to update them to reflect changes that occur after that date. Factors that could cause actual results todiffer materially 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 and degree to which competition enters the electricmarket; costs and other effects of legal and administrative proceedings,settlements, investigations and claims; 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 Exhibit 99.01 to this report on Form 10-Qfor the quarter ended March 31, 2009.

 

**MarketRisks**

 

SPS is exposed to market risks, including changes in commodity pricesand interest rates, as disclosed in Item 7A, Quantitative and QualitativeDisclosures About Market Risk, in its Annual Report on Form 10-K for theyear ended Dec. 31, 2008.  Commodityprice and interest rate risks for SPS are mitigated in most jurisdictions dueto cost-based rate regulation.

 

Continueddistress in the financial markets may impact the fair value of the debt andequity securities in pension and postretirement health care plan trusts, aswell as SPS’s ability to earn a return on short-term investments of excesscash.  As of March 31, 2009, therehave been no material changes to market risks from that set forth in SPS’Annual Report on Form 10-K for the year ended Dec. 31, 2008.

 

## **RESULTS OF OPERATIONS**

## ** **

SPS’ netincome was approximately $9.2 million for the first three months of 2009,compared with a net loss of approximately $1.3 million for the first threemonths of 2008.

 

The followingsummarizes the components of the changes in electric revenues and electricmargin for the three months ended March 31:

 

***Electric Revenues***

 
| **(Millions of Dollars)**                   | ** ** | **2009 vs. 2008** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|
| Fuel and purchased power recovery                     |       | $                           | (100       | ) |
| 2008 SPS fuel cost allocation regulatory  accruals    |       | 12                          |       |
| Retail rate increases (Texas interim and  New Mexico) |       | 10                          |       |
| Transmission revenue                                  |       | 4                           |       |
| Firm wholesale                                        |       | 3                           |       |
| Other                                                 |       | 21                          |       |
| Total decrease in electric revenues                   |       | $                           | (50        | ) |

 

17

----

Table of Contents

 

##### ***ElectricMargin***

 
| **(Millions of Dollars)**                   | ** ** | **2009 vs. 2008** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|
| 2008 SPS fuel cost allocation regulatory  accruals    |       | $                           | 12         |   |
| Retail rate increases (Texas interim and  New Mexico) |       | 10                          |       |
| Firm wholesale                                        |       | 3                           |       |
| Fuel and purchased power recovery                     |       | 2                           |       |
| Purchased capacity costs                              |       | (11                         | )          |
| Other                                                 |       | 8                           |       |
| Total increase in electric margin                     |       | $                           | 24         |   |

 

## **Non-FuelOperating Expense and Other Items**

## ** **

***Other Operating and Maintenance Expenses****—*Other operating and maintenance expenses forthe first three months of 2009 increased $3.0 million, or 5.9 percent, comparedto first three months of 2008.  Thefollowing summarizes the components of the changes for the three months ended March 31:

 
| **(Millions of Dollars)**                         | ** ** | **2009 vs. 2008** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|
| Higher employee benefit costs                               |       | $                           | 3          |   |
| Higher plant generation costs                               |       | 1                           |       |
| Other                                                       |       | (1                          | )          |
| Total increase in other operating and  maintenance expenses |       | $                           | 3          |   |

 

***Allowance for Funds Used DuringConstruction, Equity (AFDC)***— AFDC increased by approximately $1.1 million for the first threemonths of 2009, compared with 2008.

 

***Interest Charges***— Interest charges for the first three monthsof 2009 increased by approximately $4.2 million, or 29.9 percent, compared with2008. The increase was primarily due to increased long-term debt levels necessaryto repay short-term borrowings and to fund capital investments.

 

***Income Taxes***— Income tax expense increased by $5.6million for the first three months of 2009 compared with 2008. The increase inincome tax expense was primarily due to an increase in pretax income. Theeffective tax rate was 34.3 percent for the first three months of 2009,compared with 37.4 percent for the same period in 2008. The lowereffective tax rate for the first three months of 2009 was primarily due to alower forecasted annual effective tax rate for 2009 as compared to 2008.

 

**PublicUtility Regulation**

** **

***Texas EnergyEfficiency Cost Recovery Factor (EECRF) Rider***— PUCT regulations established the mechanism underwhich electric utilities may recover costs associated with providing energyefficiency programs.  That mechanism, anEECRF Rider, must be included in a utility’s tariff and may be established in autility’s base rate case or through a separate request seeking to establish anEECRF.  In accordance with this rule, SPShas removed its energy efficiency costs from its recent base rate proceeding,and has requested implementation of its EECRF Rider to recover the remainingunamortized balance of historic costs and its projected 2008 and 2009 energyefficiency costs.  In September 2008,the PUCT concluded that the rule under which the application was fileddoes not apply to SPS and the energy efficiency costs could be recovered in thepending Texas retail base rate case.  SPS filed supplemental testimony in the currently pending Texas retailbase rate case seeking cost recovery.  Aspart of the joint stipulation filed by the parties in the currently pendingTexas retail base rate case, the parties asked the ALJs to certify a question tothe PUCT asking whether SPS could recover or return amounts spent above orbelow the base rate amount, and if so, what mechanism could be used to recoveror refund those amounts.  Parties filedbriefs addressing the issue on March 19, 2009.  At its March 27, 2009 open meeting, thePUCT determined that SPS is allowed to accrue the additional energy efficiencyexpenditures as a regulatory asset for recovery in its next general rate case.

*** ***

***Texas RenewableEnergy Zone*s*** *—In 2007, the PUCT designated competitive renewable energy zones (CREZs), whichare regions of the state that are sufficient to develop renewable energygeneration sources, such as wind. Several CREZ areas within the SPS service region were designated forpotential development. On Aug. 15, 2008, the PUCT issued a final orderidentifying a transmission plan to deliver approximately 18,000 MW of windenergy to load centers in Electric Reliability Council of Texas (ERCOT). Theplan includes lines in the Texas Panhandle. Cost of this transmission plan isalmost $5 billion, not including collector lines, and it will be paid for byERCOT customers, not by SPS. A proceeding is now underway at the PUCT to selecttransmission providers to construct CREZ lines and associated facilities.  In a unanimous decision, lines in PanhandleCREZs were assigned to Sharyland Utilities, Cross 

 

18

----

Tableof Contents

 

Texas Transmission and Wind Energy Transmission Texas (WETT).  Priority lines located in central and westTexas CREZs were mostly assigned to Oncor and LCRA.  These transmission providers will beginpreparing certification applications. The PUCT has initiated two proceedings to determine the sequence ofcertificate of convenience and necessity applications for the CREZ priorityprojects and for the subsequent priority CREZ projects.

 

***New Mexico Energy Efficiency DisincentiveRulemaking*** — During the last legislative session,increased energy efficiency goals and more affirmative disincentive languagewere adopted.  The NMPRC is currentlyholding a rulemaking to update the energy efficiency rule, consistent with thelegislative changes.  The NMPRC issued anotice of proposed rulemaking, including a proposed rule.  Evidentiary hearing on the testimony isexpected to be held in May of 2009***.***

 

## **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. State and local agencies have jurisdictionover many of SPS’ activities, including regulation of retail rates andenvironmental matters. See additional discussion in the summary ofrecent federal regulatory developments and public utility regulation sectionsof the SPS Annual Report on Form 10-K for the year ended Dec. 31,2008.  See Note 5 to the financial statements for a discussion of otherregulatory matters.

 

**Item 4. CONTROLS ANDPROCEDURES**

 

**Disclosure Controls andProcedures**

** **

SPS maintainsa set of disclosure controls and procedures designed to ensure that informationrequired to be disclosed in reports that it files or submits under theSecurities Exchange Act of 1934 (Exchange Act) is recorded, processed, summarizedand reported within the time periods specified in SEC rules and forms.Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by usin reports under the Exchange Act is accumulated and communicated tomanagement, including the chief executive officer (CEO) and chief financialofficer (CFO), allowing timely decisions regarding required disclosure. As ofthe end of the period covered by this report, based on an evaluation carriedout under the supervision and with the participation of SPS’ management,including the CEO and the CFO, of the effectiveness of our disclosure controlsand procedures, the CEO and CFO have concluded that SPS’ disclosure controlsand procedures were effective.

 

**Internal Control Over FinancialReporting**

** **

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

 

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

#### ** **

## **Item 1. LEGALPROCEEDINGS**

## ** **

In the normal course ofbusiness, various lawsuits and claims have arisen against SPS. Management,after consultation with legal counsel, has recorded an estimate of the probablecost of settlement or other disposition for such matters.

 

**AdditionalInformation**

 

See Notes 5 and 6 of thefinancial statements in this Quarterly Report on Form 10-Q for furtherdiscussion of legal proceedings, including Regulatory Matters and Commitmentsand Contingent Liabilities, which are hereby incorporated by reference.Reference also is made to Item 3 and Notes 13 and 14 of SPS’ financialstatements in its Annual Report on Form 10-K for the year ended Dec. 31,2008 for a description of certain legal proceedings presently pending.

 

**Item 1A. RISK FACTORS**

 

SPS’ risk factors are documented in Item 1A of Part I of itsAnnual Report on Form 10-K for the year ended Dec. 31, 2008, which isincorporated herein by reference. There have been no material changes to riskfactors.

 

19

----

Tableof Contents

 

## **Item 6.EXHIBITS**

 

----

* 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).                                                                                    |
| 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.                                                                                                                                     |

 

20

----

Table of Contents

 

#### **SIGNATURES**

#### ** **

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized on May 5, 2009.

 

SouthwesternPublic Service Company

(Registrant)

 

 
|   | /s/ TERESA  S. MADDEN                       |
|--------|---------------------------------------------|
|   | Teresa S.  Madden                           |
|   | Vice  President and Controller              |
|   |                                        |
|   |                                        |
|   | /s/ BENJAMIN  G.S. FOWKE III                |
|   | Benjamin G.S. Fowke III                     |
|   | Vice  President and Chief Financial Officer |

 

21

----