**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

**FORM 10-Q**

| **x**                                                  |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934**  |
|--------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|
| ** **                                             |   | ** **                                                                                           |
| **For the  quarterly period ended June 30, 2007** |
|                                                   |   |                                                                                                 |
| **or**                                                 |
| ** **                                             |   |                                                                                                 |
| **o**                                                  |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934** |

 

#### **For thetransition periodfrom          to         **

#### **CommissionFile Number: 001-03789**

**SouthwesternPublic Service Company**

**(Exactname of registrant as specified in its charter)**

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

 

Registrant’s telephonenumber, including area code **(303) 571-7511**

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. xYes   o No

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2 ofthe Exchange Act. (Check one):

Large Accelerated Filer o                                    AcceleratedFiler o                                 Non-AcceleratedFiler x

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

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

| **Class**                   |   | **Outstanding at July 27, 2007** |
|-----------------------------|--------|------------------------------------------------------|
| Common Stock, $1  par value |   | 100 shares                                           |

 

Southwestern Public Service Company meets theconditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q andis therefore filing this Form 10-Q with the reduced disclosure format specifiedin General Instruction H (2) to such Form 10-Q.

 

----

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

 

This Form 10-Q is filedby Southwestern Public Service Co. (SPS). SPS is a wholly owned subsidiary ofXcel Energy Inc. (Xcel Energy). Additional information on Xcel Energy isavailable on various filings with the Securities and Exchange Commission (SEC).

2

----

**PART1. FINANCIAL INFORMATION**

**Item1. Financial Statements**

**SOUTHWESTERN PUBLIC SERVICECO.**

**STATEMENTS OF INCOME(UNAUDITED)**

**(Thousands of Dollars)**
| ** **                                                                                                | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                                | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating revenues**                                                                                    |       | $                                               | 401,125    |                                          | $          | 423,180 |   | $ | 767,023 |   | $ | 835,989 |   |
|                                                                                                      |       |                                            |       |                                          |       |   |   |   |   |
| **Operating expenses**                                                                                    | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Electric fuel  and purchased power                                                                        |       | 296,514                                         |       | 308,705                                       |       | 560,921 |   | 604,293 |   |
| Other operating  and maintenance expenses                                                                 |       | 49,099                                          |       | 48,917                                        |       | 100,192 |   | 98,735 |   |
| Depreciation and  amortization                                                                            |       | 24,312                                          |       | 24,012                                        |       | 49,000 |   | 47,909 |   |
| Taxes (other  than income taxes)                                                                          |       | 9,241                                           |       | 14,052                                        |       | 20,803 |   | 27,374 |   |
| Total operating  expenses                                                                                 |       | 379,166                                         |       | 395,686                                       |       | 730,916 |   | 778,311 |   |
|                                                                                                      |       |                                            |       |                                          |       |   |   |   |   |
| **Operating income**                                                                                      |       | 21,959                                          |       | 27,494                                        |       | 36,107 |   | 57,678 |   |
|                                                                                                      |       |                                            |       |                                          |       |   |   |   |   |
| Interest and  other income, net (see Note 8)                                                              |       | 527                                             |       | 1,193                                         |       | 1,330 |   | 2,668 |   |
| Allowance for  funds used during construction — equity                                               |       | —                                          |       | 380                                           |       | — |   | 498 |   |
|                                                                                                      |       |                                            |       |                                          |       |   |   |   |   |
| **Interest charges and financing  costs**                                                                 | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest charges  — includes other financing costs of $590, $1,573, $1,175 and $3,101,  respectively |       | 13,718                                          |       | 13,917                                        |       | 26,752 |   | 27,609 |   |
| Allowance for  funds used during construction — debt                                                 |       | (606                                            | )          | (695                                          | )          | (1,104 | ) | (1,376 | ) |
| Total interest  charges and financing costs                                                               |       | 13,112                                          |       | 13,222                                        |       | 25,648 |   | 26,233 |   |
|                                                                                                      |       |                                            |       |                                          |       |   |   |   |   |
| Income before income  taxes                                                                               |       | 9,374                                           |       | 15,845                                        |       | 11,789 |   | 34,611 |   |
| Income taxes                                                                                              |       | 3,755                                           |       | 5,854                                         |       | 4,505 |   | 12,743 |   |
| **Net income**                                                                                            |       | $                                               | 5,619      |                                          | $          | 9,991 |   | $ | 7,284 |   | $ | 21,868 |   |

 

SeeNotes to Financial Statements

3

----

**SOUTHWESTERN PUBLIC SERVICECO.**

**STATEMENTSOF CASH FLOWS (UNAUDITED)**

**(Thousands of Dollars)**
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                      | ** ** | **2006** | ** ** |
| **Operating activities**                                                           |       |                                          |       |   |   |
| Net income                                                                         |       | $                                             | 7,284      |   | $ | 21,868 |   |
| Adjustments to  reconcile net income to net cash provided by operating activities: |       |                                          |       |   |   |
| Depreciation and  amortization                                                     |       | 50,800                                        |       | 51,459 |   |
| Deferred income  taxes                                                             |       | (1,832                                        | )          | (11,386 | ) |
| Amortization of  investment tax credits                                            |       | (125                                          | )          | (125 | ) |
| Allowance for  equity funds used during construction                               |       | —                                        |       | (498 | ) |
| Net realized and  unrealized hedging and derivative transactions                   |       | 133                                           |       | 31 |   |
| Changes in  operating assets and liabilities:                                      |       |                                          |       |   |   |
| Recoverable  electric energy costs                                                 |       | 65,504                                        |       | 12,527 |   |
| Accounts  receivable                                                               |       | (3,812                                        | )          | 13,148 |   |
| Accrued unbilled  revenues                                                         |       | (51,738                                       | )          | 23,492 |   |
| Inventories                                                                        |       | (2,724                                        | )          | (3,247 | ) |
| Prepayments and  other                                                             |       | 2,986                                         |       | (576 | ) |
| Accounts payable                                                                   |       | (11,533                                       | )          | 3,010 |   |
| Net regulatory  assets and liabilities                                             |       | (1,357                                        | )          | (2,141 | ) |
| Other current  liabilities                                                         |       | (19,435                                       | )          | 14,098 |   |
| Change in other  noncurrent assets                                                 |       | (5,004                                        | )          | (4,566 | ) |
| Change in other  noncurrent liabilities                                            |       | (319                                          | )          | 2,069 |   |
| Net cash  provided by operating activities                                         |       | 28,828                                        |       | 119,163 |   |
|                                                                               |       |                                          |       |   |   |
| **Investing activities**                                                           |       |                                          |       |   |   |
| Capital/construction  expenditures                                                 |       | (66,104                                       | )          | (48,502 | ) |
| Allowance for  equity funds used during construction                               |       | —                                        |       | 498 |   |
| Investments in  utility money pool arrangement                                     |       | (81,800                                       | )          | — |   |
| Repayments from  utility money pool arrangement                                    |       | 81,800                                        |       | — |   |
| Other  investments                                                                 |       | 2,814                                         |       | 1,674 |   |
| Net cash used in  investing activities                                             |       | (63,290                                       | )          | (46,330 | ) |
|                                                                               |       |                                          |       |   |   |
| **Financing activities**                                                           |       |                                          |       |   |   |
| Short-term debt  repayments – net                                             |       | (17,000                                       | )          | (85,000 | ) |
| Borrowings under  utility money pool arrangement                                   |       | 251,200                                       |       | 194,400 |   |
| Repayments under  utility money pool arrangement                                   |       | (169,400                                      | )          | (139,700 | ) |
| Capital  contributions from parent                                                 |       | 5,354                                         |       | 7,561 |   |
| Dividends paid  to parent                                                          |       | (35,900                                       | )          | (59,496 | ) |
| Net cash  provided by (used in) financing activities                               |       | 34,254                                        |       | (82,235 | ) |
|                                                                               |       |                                          |       |   |   |
| Net decrease in  cash and cash equivalents                                         |       | (208                                          | )          | (9,402 | ) |
| Cash and cash  equivalents at beginning of period                                  |       | 297                                           |       | 9,407 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                             | 89         |   | $ | 5 |   |
|                                                                               |       |                                          |       |   |   |
| Supplemental disclosure  of cash flow information:                                 |       |                                          |       |   |   |
| Cash paid for  interest (net of amounts capitalized)                               |       | $                                             | 24,162     |   | $ | 23,202 |   |
| Cash paid for  income taxes (net of refunds received)                              |       | 15,982                                        |       | 29,965 |   |
|                                                                               |       |                                          |       |   |   |
| Supplemental disclosure  of non-cash investing transactions:                       |       |                                          |       |   |   |
| Property, plant and  equipment additions in accounts payable                       |       | $                                             | 3,904      |   | $ | 2,946 |   |

 

Seethe Notes to Financial Statements

4

----

**SOUTHWESTERNPUBLIC SERVICE CO**.

**BALANCESHEETS (UNAUDITED)**

**(Thousands of Dollars)**
| ** **                                                                              | ** ** | **June 30,  2007** | ** ** | **Dec. 31,  2006** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                              | ** ** | ** **              | ** ** | ** **              | ** ** |
| Current assets:                                                                         |       |                    |       |                    |       |
| Cash and cash  equivalents                                                              |       | $                       | 89         |                    | $          | 297 |   |
| Accounts  receivable, net of allowance for bad debts of $2,579 and $2,686, respectively |       | 61,182                  |       | 56,616                  |       |
| Accounts  receivable from affiliates                                                    |       | 8,054                   |       | 8,808                   |       |
| Accrued unbilled  revenues                                                              |       | 114,543                 |       | 62,805                  |       |
| Recoverable  electric energy costs                                                      |       | 17,596                  |       | 83,100                  |       |
| Materials and  supplies inventories                                                     |       | 20,148                  |       | 17,547                  |       |
| Fuel inventories                                                                        |       | 4,218                   |       | 4,095                   |       |
| Derivative  instruments valuation                                                       |       | 8,926                   |       | 8,926                   |       |
| Prepayments and  other                                                                  |       | 3,341                   |       | 8,326                   |       |
| Deferred income  taxes                                                                  |       | 1,210                   |       | —                  |       |
| Total current  assets                                                                   |       | 239,307                 |       | 250,520                 |       |
| Property, plant and  equipment, at cost:                                                |       |                    |       |                    |       |
| Electric utility  plant                                                                 |       | 3,443,654               |       | 3,401,108               |       |
| Construction  work in progress                                                          |       | 71,621                  |       | 53,051                  |       |
| Total property,  plant and equipment                                                    |       | 3,515,275               |       | 3,454,159               |       |
| Less accumulated  depreciation                                                          |       | (1,503,599              | )          | (1,462,787              | )          |
| Net property,  plant and equipment                                                      |       | 2,011,676               |       | 1,991,372               |       |
| Other assets:                                                                           |       |                    |       |                    |       |
| Prepaid pension  asset                                                                  |       | 111,407                 |       | 106,193                 |       |
| Regulatory  assets                                                                      |       | 159,670                 |       | 163,067                 |       |
| Derivative  instruments valuation                                                       |       | 89,939                  |       | 94,402                  |       |
| Other  investments                                                                      |       | 5,040                   |       | 5,846                   |       |
| Other                                                                                   |       | 7,379                   |       | 7,890                   |       |
| Total other  assets                                                                     |       | 373,435                 |       | 377,398                 |       |
| Total assets                                                                            |       | $                       | 2,624,418  |                    | $          | 2,619,290 |   |
| ** **                                                                              | ** ** | ** **              | ** ** | ** **              | ** ** |
| **LIABILITIES AND EQUITY**                                                              | ** ** | ** **              | ** ** | ** **              | ** ** |
| Current liabilities:                                                                    |       |                    |       |                    |       |
| Short-term debt                                                                         |       | $                       | 34,000     |                    | $          | 51,000 |   |
| Borrowings under  utility money pool arrangement                                        |       | 81,800                  |       | —                  |       |
| Accounts payable                                                                        |       | 153,166                 |       | 159,672                 |       |
| Accounts payable  to affiliates                                                         |       | 11,398                  |       | 14,783                  |       |
| Accrued interest                                                                        |       | 12,500                  |       | 12,099                  |       |
| Dividends  payable to parent                                                            |       | 16,925                  |       | 18,581                  |       |
| Taxes accrued                                                                           |       | 16,820                  |       | 33,122                  |       |
| Derivative  instruments valuation                                                       |       | 4,291                   |       | 4,307                   |       |
| Deferred income  taxes                                                                  |       | —                  |       | 6,849                   |       |
| Other                                                                                   |       | 21,123                  |       | 24,944                  |       |
| Total current  liabilities                                                              |       | 352,023                 |       | 325,357                 |       |
| Deferred credits and  other liabilities:                                                |       |                    |       |                    |       |
| Deferred income  taxes                                                                  |       | 451,255                 |       | 451,108                 |       |
| Regulatory  liabilities                                                                 |       | 140,817                 |       | 143,789                 |       |
| Derivative  instruments valuation                                                       |       | 61,616                  |       | 64,187                  |       |
| Pension and  employee benefit obligations                                               |       | 54,046                  |       | 54,647                  |       |
| Asset retirement  obligations                                                           |       | 4,464                   |       | 4,341                   |       |
| Deferred  investment tax credits                                                        |       | 3,090                   |       | 3,215                   |       |
| Other                                                                                   |       | 9,079                   |       | 3,329                   |       |
| Total deferred  credits and other liabilities                                           |       | 724,367                 |       | 724,616                 |       |
| Commitments and  contingencies (see Note 5)                                             |       |                    |       |                    |       |
| Capitalization:                                                                         |       |                    |       |                    |       |
| Long-term debt                                                                          |       | 773,968                 |       | 773,903                 |       |
| Common stock –  authorized 200 shares of $1.00 par value, outstanding 100 shares   |       | —                  |       | —                  |       |
| Additional paid  in capital                                                             |       | 483,623                 |       | 478,269                 |       |
| Retained  earnings                                                                      |       | 295,705                 |       | 323,008                 |       |
| Accumulated  other comprehensive loss                                                   |       | (5,268                  | )          | (5,863                  | )          |
| Total common  stockholder’s equity                                                 |       | 774,060                 |       | 795,414                 |       |
| Total liabilities and  equity                                                           |       | $                       | 2,624,418  |                    | $          | 2,619,290 |   |

 

**See the Notes to FinancialStatements**

5

----

**NOTESTO FINANCIAL STATEMENTS**

In the opinion ofmanagement, the accompanying unaudited financial statements contain alladjustments necessary to present fairly the financial position of SPS as ofJune 30, 2007, and Dec. 31, 2006; the results of its operations for thethree and six months ended June 30, 2007 and 2006; and its cash flows forthe six months ended June 30, 2007 and 2006. Due to the seasonality of electricsales of SPS, interim results are not necessarily an appropriate base fromwhich to project annual results.

**1.Significant Accounting 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, 2006 appropriately represent, in all materialrespects, the current status of accounting policies and are incorporated hereinby reference.

***Income Taxes*** — Consistent with priorperiods and upon adoption of Financial Accounting Standard Board (FASB)Interpretation No. 48 — “Accounting for Uncertainty in Income Taxes — aninterpretation of FASB Statement No. 109”, SPS records interest and penaltiesrelated to income taxes as interest charges in the Statements of Income.

***Reclassifications*** — Certain amounts inthe Statements of Cash Flows have been reclassified from prior-periodpresentation to conform to the 2007 presentation. The reclassifications reflectthe presentation of unbilled revenues, recoverable purchased electric energycosts and regulatory assets and liabilities as separate items rather thancomponents of other assets and other liabilities within net cash provided byoperating activities. In addition, activity related to derivative transactionshave been combined into net realized and unrealized hedging and derivativetransactions. These reclassifications did not affect total net cash provided by(used in) operating, investing or financing activities within the Statements ofCash Flows.

**2.Recently Issued Accounting Pronouncements**

***Fair Value Measurements (Statement of FinancialAccounting Standards (SFAS) 157)****** ***— In September2006, the FASB issued SFAS 157, which provides a single definition of fairvalue, together with a framework for measuring it, and requires additionaldisclosure about the use of fair value to measure assets and liabilities. SFAS157 also emphasizes that fair value is a market-based measurement, and sets outa fair value hierarchy with the highest priority being quoted prices in activemarkets. Fair value measurements are disclosed by level within that hierarchy.SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after Nov. 15, 2007. SPS is evaluating the impact of SFAS 157 on itsfinancial condition and results of operations and does not expect the impact ofadoption to be material.

***The Fair Value Option for Financial Assets and FinancialLiabilities - Including an Amendment of FASB Statement No. 115 (SFAS 159)***—  In February 2007, the FASB issued SFAS159, which provides companies with an option to measure, at specified electiondates, many financial instruments and certain other items at fair value thatare not currently measured at fair value. A company that adopts SFAS 159 willreport unrealized gains and losses on items, for which the fair value optionhas been elected, in earnings at each subsequent reporting date. This statementalso establishes presentation and disclosure requirements designed tofacilitate comparisons between entities that choose different measurementattributes for similar types of assets and liabilities. This statement iseffective for fiscal years beginning after Nov. 15, 2007. SPS is evaluating theimpact of SFAS 159 on its financial condition and results of operations anddoes not expect the impact of adoption to be material.

**3.  Income Taxes**

***Accounting for Uncertainty in Income Taxes — aninterpretation of FASB Statement No. 109 (FIN 48)***— InJuly 2006, the FASB issued Interpretation FIN 48. FIN 48 prescribes how acompany should recognize, measure, present and disclose uncertain tax positionsthat the company has taken or expects to take in its income tax returns. FIN 48requires that only income tax benefits that meet the “more likely than not”recognition threshold be recognized or continue to be recognized on itseffective date. As required, SPS adopted FIN 48 as of Jan. 1, 2007 and theinitial derecognition amounts were reported as a cumulative effect of a changein accounting principle. The cumulative effect of the change, which is reportedas an adjustment to the beginning balance of retained earnings, was notmaterial. Following implementation, the ongoing recognition of changes inmeasurement of uncertain tax positions will be reflected as a component ofincome tax expense.

SPS is a member of theXcel Energy affiliated group that files consolidated income tax returns. XcelEnergy has been audited by the Internal Revenue Service (IRS) through tax year2003, with a limited exception for 2003 research tax credits. The IRS commencedan examination of Xcel Energy’s federal income tax returns for 2004 and 2005(and research credits for 2003) in the third quarter of 2006, and thatexamination is anticipated to be complete by March 31, 2008. As of June 30,2007, the IRS had not proposed any material adjustments to tax years 2003through 2005.  The statute of limitationsapplicable to Xcel Energy’s 2000 through 2002 federal income tax returnsexpired as of June 30, 2007.

6

----

A Texas Franchise Taxaudit for report years 2004 through 2006 will commence in July 2007.  As of June 30, 2007, SPS’ earliest open taxyears in which an audit can be initiated by state taxing authorities underapplicable statutes of limitations is 2002.

The amount ofunrecognized tax benefits was $5.0 million and $4.9 million on Jan. 1, 2007 and June 30, 2007, respectively.  Of these amounts, $0.2 million and $0.1million were offset against the tax benefits associated with net tax creditcarryovers as of Jan. 1, 2007 and June 30, 2007, respectively.

Included in theunrecognized tax benefit balance was $0.2 million of tax positions on Jan.1,2007 and June 30, 2007, which if recognized would affect the annual effectivetax rate. In addition the unrecognized tax benefit balance included $4.8million and $4.7 million of tax positions on Jan. 1, 2007 and June 30, 2007,respectively, for which the ultimate deductibility is highly certain but forwhich there is uncertainty about the timing of such deductibility. A change inthe period of deductibility would not affect the effective tax rate but wouldaccelerate the payment of cash to the taxing authority to an earlier period.The change in the unrecognized tax benefit balance from April 1, 2007 to June30, 2007, was due to the addition of similar uncertain tax positions relatingto second quarter activity and the resolution of certain federal audit matters.

SPS’ amount ofunrecognized tax benefits could significantly change in the next 12 months asthe IRS and state tax audits progress. However, at this time due to the natureof the audit process, it is not reasonably possible to estimate a range of thepossible change.

The interest expenseliability related to unrecognized tax benefits on Jan. 1, 2007, was notmaterial. The change in the interest expense liability from Jan. 1, 2007, toJune 30, 2007, was not material. No amounts were accrued for penalties.

**4.****  Rate Matters**

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

***Wholesale Rate Complaints*** ***—***In November 2004, GoldenSpread Electric, Lyntegar Electric, Farmer’s Electric, Lea County Electric,Central Valley Electric and Roosevelt County Electric, wholesale cooperativecustomers of SPS, filed a ratecomplaint at the FERC. The complaintalleged that SPS’ rates for wholesale service were excessive and that SPS hadincorrectly calculated monthly fuel cost adjustments contained in SPS’wholesale rate schedules. Among other things, the complainants asserted thatSPS was not properly calculating the fuel costs that are eligible for recoveryto reflect fuel costs recovered from certain wholesale sales to otherutilities, and that SPS had inappropriately allocated average fuel andpurchased power costs to other of SPS’ wholesale customers, effectively raisingthe fuel cost charges to complainants. Cap Rock Energy Corporation (Cap Rock),another full-requirements customer, Public Service Company of New Mexico (PNM)and Occidental Permian Ltd. and Occidental Power Marketing, L.P. (Occidental)intervened in the proceeding.

OnMay 24, 2006, a FERC administrative law judge (ALJ) issued an initial recommendeddecision in the proceeding. The FERC will review the initial recommendation andissue a final order. SPS and others have filed exceptions to the ALJ’s initialrecommendation. The FERC’s order may or may not follow any of the ALJ’srecommendation. In the recommended decision, the ALJ found that SPS shouldrecalculate its wholesale fuel and purchased economic energy cost adjustmentclause (FCAC) billings for the period beginning Jan. 1, 1999, to reducethe fuel and purchased power costs recovered from the complaining customers byallocating incremental fuel costs incurred by SPS in making wholesale sales ofsystem firm capacity and associated energy to other firm customers atmarket-based rates during this period based on the view that such sales shouldbe treated as opportunity sales.

SPSbelieves the ALJ erred on significant and material issues that contradict FERCpolicy or rules of law. Specifically, SPS believes, based on FERCrules and precedent, that it has appropriately applied its FCAC tariff tothe proper classes of customers. These market-based sales were of a long-termduration under FERC precedent and were made from SPS’ entire system.Accordingly, SPS believes that the ALJ erred in concluding that thesetransactions were opportunity sales, which require the assignment ofincremental costs.

TheFERC has approved system average cost allocation treatment in previous filingsby SPS for sales having similar service characteristics and previously acceptedfor filing certain of the challenged agreements with average fuel cost pricing.

Moreover,SPS believes that the ALJ’s recommendation constituted a violation of the FiledRate Doctrine in that it effectively results in a retroactive amendment to theSPS FERC-approved FCAC tariff provisions. Under existing regulations, the FERCmay modify a previously approved FCAC on a prospective basis. Accordingly, SPSbelieves it has applied its FCAC correctly and has sought review of therecommended decision by the FERC by filing a brief on the exceptions.

WhileSPS believes it should ultimately prevail in this proceeding; however, if theFERC were to adopt the majority of the ALJ’s recommendations, SPS’ refundexposure could be approximately $50 million, based on an evaluation of allsales made from Jan. 1, 1999 to Dec. 31, 2006. FERC action is pending. Additionally, SPS has entered into settlementdiscussions with the wholesale cooperative customers.  As of June 30, 2007, based upon management’sestimate of this potential liability, SPS believes the appropriate accrual hasbeen recorded for this matter.

7

----

This case was on the July 19, 2007 FERC Open Meetingagenda.  On July 17, 2007, Golden Spreadand SPS filed a joint motion requesting the FERC to defer the final order for60 days.  The New Mexico cooperatives,Cap Rock and Occidental either supported the motion or did not oppose it.  Public Service Company of New Mexico filed inopposition to the request.  The FERCremoved the case from the agenda. This provides additional time for settlement with all parties to thecase.

***Wholesale Power Base Rate Application*** ***—***On Dec. 1, 2005, SPS filedfor a $2.5 million increase in wholesale power rates to certain electriccooperatives. On Jan. 31, 2006, the FERC conditionally accepted theproposed rates for filing, and the $2.5 million power rate increase becameeffective on July 1, 2006, subject to refund. The FERC also set the rateincrease request for hearing and settlement judge procedures. The case ispresently in the settlement judge procedures and an agreement in principle hasbeen reached for base rates for the full-requirements customers and PNM. Oneother wholesale customer has not settled. On Sept. 7, 2006, the offer ofsettlement with respect to the full-requirements customer was filed forapproval and on Sept. 19, 2006, the offer of settlement with respect to PNM wasfiled for approval. Subsequent to filing rebuttal testimony, on March 29, 2007,SPS and the remaining wholesale customer entered into settlement negotiations.The current hearing schedule has been postponed.

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

***Texas Retail Base Rate And Fuel Reconciliation Case****** —***On May 31, 2006, SPS filed a Texas retailelectric rate case requesting an increase in annual revenues of approximately$48 million. The rate filing was based on a historical test year, an electricrate base of $943 million, a requested ROE of 11.6 percent and a common equityratio of 51.1 percent.

In addition, SPSsubmitted a fuel reconciliation filing, which requested approval ofapproximately $957 million of Texas-jurisdictional fuel and purchased powercosts for 2004 through 2005. As a part of the fuel reconciliation case, fueland purchased energy costs were reviewed.

On March 27, 2007, SPS and various intervenors filed a unanimousstipulation agreement related to the Texas retail rate case as well as the fuelreconciliation portion of the proceeding. The agreement includes the followingterms:

·                     The settlement provides foran annual base rate increase of $23 million, or approximately 3 percent.

·                     The settlement is a “black box” agreement,with no stipulated ROE or capital structure.

·                     The settlement disallows approximately $27million of SPS’ 2004 and 2005 fuel expense.

·                     An additional $2.3 million will be deductedfrom SPS’ next fuel reconciliation filing to be made in 2008, associated withthe 2006-2007 fuel reconciliation period.

·                     All of SPS’ existing long-term firm and interruptiblecapacity wholesale sales will be assigned system average cost for purposes ofTexas retail ratemaking, except for sales to El Paso Electric (EPE), which willbe determined by the PUCT separately.

·                     The settlement also creates standards forcost assignment that would apply to future wholesale sale transactions, and establishesmargin sharing of market based wholesale demand revenues.

·                     If SPS files a general rate case in 2008, the settlement would allowfor an interim rate increase associated with a purchased power agreement withLea Power Partners of approximately $1.5 million per month from the date ofcommercial operations. Interim rates would be subject to a true-up based on theoutcome of the rate case proceeding and actual capacity costs incurred.

An estimated settlementallowance and reserve was established in 2006 and prior periods, whichapproximated the settled amounts of previously deferred or recovered fuelexpense.

On March 27, 2007, the ALJapproved SPS’ request to implement the $23 million base rate increase,effective April 2007, on an interim basis until the PUCT acts on thestipulation. The $23 million base rate increase includes approximately $14million of coal cost that was previously recovered through the fuel costrecovery mechanism, and approximately $6.2 million that results frominterruptible customers converting to firm service.

On July 27, 2007 the PUCT issued a written orderadopting the settlement and assigning incremental costs to the EPE sale.  The effect of this decision under the termsof the settlement is an additional $3 million in fuel costs assigned to EPE,which SPS will not recover either through its FCA or its contract.  For 2008 this amount will reach $6.3 million.SPS has previously given notice to EPE to terminate the agreement based on aregulatory provision and SPS expects that the termination will be effective in2009.

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

***New Mexico FuelFactor Continuation Filing***** —**On Aug. 18, 2005, SPS filedwith the NMPRC requesting continuation of the use of SPS’ fuel and purchasedpower cost adjustment clause (FPPCAC) and current monthly factor cost recoverymethodology. This filing was required by NMPRC rule.

8

----

Testimony was filed in the case by staff andintervenors objecting to SPS’ assignment of system average fuel costs tocertain wholesale sales and the inclusion of certain purchased power capacityand energy payments in the FPPCAC. The testimony also proposed limits on SPS’future use of the FPPCAC. Related to these issues some intervenors requesteddisallowances for past periods, which in the aggregate total approximately $45million. This claim was for the period from Oct. 1, 2001 through May 31, 2005and does not include the value of incremental cost assigned for wholesaletransactions from that date forward. Other issues in the case include thetreatment of renewable energy certificates and sulfur dioxide allowance creditproceeds in relation to SPS’ New Mexico retail fuel and purchased powerrecovery clause.

On May 2, 2007, the hearing examiner issued hisrecommended decision in which he determined the following:

·                     TheNMPRC is barred from granting the retroactive refunds or financial penaltiesrequested by the parties.

·                     Theissues related to the assignment of system average fuel cost to SPS’ firmwholesale sales, subsequent to March 7, 2006, should be litigated in SPS’ nextrate case that will be filed this summer, or in a separate parallel proceedingwith the results to be incorporated into the next rate case.

·                     TheNMPRC lacked legal authority to apply any change in cost assignment methodologyretroactively until such date that SPS was put on notice of any concern withits longstanding assignment practice.

·                     March7, 2006 was the first time that SPS was put on notice with respect to anychange in New Mexico’s assignment practice.

·                     Thefuture litigation recommendation would determine both the proper allocation andassignment of fixed and fuel costs and examine the prudence of SPS’ firmwholesale contracts and affiliate transactions related to those wholesalesales.

·                     Chargescollected through the FPPCAC since March 7, 2006, should be subject to refundpending further order of the NMPRC.  The hearing examiner also noted thatspecific allegations regarding affiliate transactions could also be resolved inthese proceedings.

Under the recommended decision, SPS would also beordered to refund approximately $1.6 million of long-term purchased powercapacity costs that it acknowledged were erroneously collected through the FPPCAC. SPS would be authorized to continue its use of the FPPCAC pending a final orderin the next rate case.  The hearing examiner also determined that noaction was required on renewable energy certificates and that SPS should seek adetermination of proper treatment of SO2 allowances in a separate proceeding. Although there is no deadline for NMPRC action, SPS expects the NMPRC will actduring the third quarter of 2007. As of June 30, 2007, based upon management’sestimate of this potential liability, SPS believes the appropriate accrual hasbeen recorded for this matter.

**5.  Commitments and Contingent Liabilities**

Exceptto the extent noted below, the circumstances set forth in Note 10 and 11 to thefinancial statements in SPS’ Annual Report on Form 10-K for the year ended Dec.31, 2006 and Notes 4 and 5 to the financial statements in this Quarterly Reporton Form 10-Q, appropriately represent, in all material respects, the currentstatus of commitments 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 iscurrently, involved with the cleanup of contamination from certain hazardoussubstances at several sites. In many situations, SPS believes it will recoversome portion of these costs through insurance claims. Additionally, whereapplicable, SPS is pursuing, or intends to pursue, recovery from otherpotentially responsible parties and through the rate regulatory process. Newand changing federal and state environmental mandates can also create addedfinancial liabilities for SPS, which are normally recovered through the rateregulatory process. To the extent any costs are not recovered through the optionslisted above, SPS would be required to recognize an expense.

***Site Remediation****—*SPS must pay all or a portion of thecost to remediate sites where past activities of SPS and some other partieshave caused environmental contamination. At June 30, 2007, SPS was a party tothird party and other sites, such as landfills, to which SPS is alleged to be apotentially responsible party (PRP) that sent hazardous materials and wastes.

SPS records aliability when enough information is obtained to develop an estimate of thecost of environmental remediation and revises the estimate as information isreceived.  The estimated remediation costmay vary materially.

To estimate the cost to remediate these sites,assumptions are made when facts are not fully known. For instance, assumptionsmay be made about the nature and extent of site contamination, the extent ofrequired cleanup efforts, costs of alternative cleanup methods andpollution-control technologies, the period over which remediation will beperformed and paid for, changes in environmental remediation andpollution-control requirements, the potential effect of technologicalimprovements, the number and financial strength of other PRPs and theidentification of new environmental cleanup sites.

9

----

Estimates are revised as facts become known.  At June 30, 2007, the liability for the costof remediating these sites was estimated to be $0.2 million, of which $0.1 millionwas considered to be a current liability. Some of the cost of remediation may be recovered from:

·                     insurancecoverage;

·                     other partiesthat have contributed to the contamination; and

·                     customers.

Neither the total remediation cost nor the finalmethod of cost allocation among all PRPs of the unremediated sites has beendetermined.  Estimates have been recordedfor SPS’ future costs for these sites.

***Third Party andOther Environmental Site Remediation***

***Asbestos Removal*—**Some of SPS’ facilities contain asbestos. Most asbestos will remainundisturbed until the facilities that contain it are demolished or renovated.  SPS has recorded an estimate for finalremoval of the asbestos as an asset retirement obligation.  See additional discussion of asset retirementobligations in Note 11 to the SPS Annual Report on Form 10-K for the year endedDec. 31, 2006.  It may be necessary toremove some asbestos to perform maintenance or make improvements to otherequipment. The cost of removing asbestos as part of other work is immaterialand is recorded as incurred as operating expenses for maintenance projects,capital expenditures for construction projects or removal costs for demolitionprojects.

***Cunningham Station Groundwater***—Cunningham Station is a natural gas-fired power plant constructed in the 1960’sby SPS and has 28 water wells installed on its water rights.  The well field provides water for boilermakeup, cooling water and potable water. Following an acid release in 2002, groundwater samples revealed elevatedconcentrations of inorganic salt compounds not related to the release. Thecontamination was identified in wells located near the plant buildings.  The source of contamination is thought to beleakage from ponds that receive blow down water from the plant.

Inresponse to a request by the New Mexico Environment Department (NMED), SPSprepared a corrective action plan to address the groundwatercontamination.  Under the plan submittedto the NMED, SPS agreed to control leakage from the plant blow down pondsthrough construction of a new lined pond, additional irrigation areas tominimize percolation, and installation of additional wells to monitorgroundwater quality.  On June 23, 2005,NMED issued a letter approving the corrective action plan.  The action plan was subject to continuedcompliance with New Mexico regulations and oversight by the NMED.  The Cunningham wastewater management projecthas been completed at a  final costof  $3.5 million.  Upon completion of the project, NMEDfinalized the wastewater permit.  SPSbegan the implementation of a similar process at the Maddox Station in2007.  The permitting process for MaddoxStation has begun and is estimated to cost approximately $1.3 million through2008 and will be capitalized or expensed as incurred.

***Clean Air Interstate Rule ***-In March 2005, the Environmental Protection Agency (EPA) issued the CleanAir Interstate Rule (CAIR) to further regulate SO2 and nitrogen oxide (NOx) emissions.  The objective of CAIR is to cap emissions ofSO2 and NOx in the eastern UnitedStates, including Minnesota, Texas and Wisconsin, which are within Xcel Energy’sservice territory.  Xcel Energygenerating facilities in other states are not affected.  CAIR addresses the transportation of fineparticulates, ozone and emission precursors to nonattainment downwindstates.  CAIR has a two-phase complianceschedule, beginning in 2009 for NOx and 2010 for SO2, with a final compliance deadline in2015 for both emissions.  Under CAIR,each affected state will be allocated an emissions budget for SO2 and NOX that will result in significant emission reductions.  It will be based on stringent emissioncontrols and forms the basis for a cap-and-trade program.   State emission budgets or caps decline overtime.  States can choose to implement anemissions reduction program based on the EPA’s proposed model program, or theycan propose another method, which the EPA would need to approve.

On July 11, 2005, SPS, the City of Amarillo,Texas and Occidental Permian LTD filed a lawsuit against the EPA and a requestfor reconsideration with the agency to exclude West Texas from the CAIR.  El Paso Electric Co. joined in the requestfor reconsideration.  Xcel Energy and SPSadvocated that West Texas should be excluded from CAIR because it does notcontribute significantly to nonattainment with the fine particulate matterstandards in any downwind jurisdiction.

OnMarch 15, 2006, the EPA denied the petition for reconsideration. On June 27,2006, Xcel Energy and the other parties filed a petition for review of thedenial of the petition for reconsideration, as well as a petition for review ofthe Federal Implementation Plan, with the D.C. Court of Appeals.  Pursuant to the court’s scheduling order,briefing is expected to be finalized in September 2007.

UnderCAIR’s cap-and-trade structure, SPS can comply through capital investments inemission controls or purchase of emission “allowances” from other utilitiesmaking reductions on their systems. Based on the preliminary analysis of various scenarios of capitalinvestment and allowance purchase, SPS currently believes that following theinstallation of low NOx burners on Harrington 3 in 2006, additional capitalinvestments, estimated at $12 million, will be remaining for NOx controls inthe SPS region.  Purchases of

10

----

NOxallowances in the first phase are estimated at $1.4 million.   Annual purchases of SO2 allowances are estimated in the range of $13million to $25 million each year, beginning in 2012 for phase I, based onallowance costs and fuel quality as of March 2007.

These costestimates represent one potential scenario on complying with CAIR, if WestTexas is not excluded.  There isuncertainty concerning implementation of CAIR. States are required to develop implementation plans within 18 months ofthe issuance of the new rules and have a significant amount of discretionin the implementation details.  Legalchallenges to CAIR rules could alter their requirements and/orschedule.  The uncertainty associatedwith the final CAIR rules makes it difficult to project the ultimateamount and timing of capital expenditures and operating expenses.

While SPS expectsto comply with the new rules through a combination of additional capitalinvestments in emission controls at various facilities and purchases ofemission allowances, it is continuing to review the alternatives.  Xcel Energy believes the cost of any requiredcapital investment or allowance purchases will be recoverable from customers.

***Clean Air Mercury Rule***— In March 2005, the EPA issued the Clean Air Mercury Rule (CAMR), whichregulates mercury emissions from power plants for the first time.  The EPA’s CAMR  uses a nationalcap-and-trade system, where compliance may be achieved by either adding mercurycontrols or purchasing allowances or a combination of both and is designed toachieve a 70 percent reduction in mercury emissions.  It affects all coal- and oil-fired generatingunits across the country that are greater than 25 MW.  Compliance with this rule occurs in twophases, with the first phase beginning in 2010 and the second phase in 2018.The Texas Commission on Environmental Quality (TCEQ) has adopted by referencethe EPA model program.   States will beallocated mercury allowances based on coal type and their baseline heat inputrelative to other states.  Each electricgenerating unit will be allocated mercury allowances based on its percentage oftotal coal heat input for the state. Similar to CAIR, states can choose to implement an emissions reductionprogram based on the EPA’s proposed model program, or they can propose anothermethod, which the EPA would need to approve.

Under CAMR, SPS cancomply through capital investments in emission controls or purchase of emission“allowances” from other utilities making reductions on their systems.   SPS’ preliminary analysis for phase Icompliance suggests capital costs of approximately $14.5 million and increasedoperating and maintenance expenses of approximately $7.9 million, beginning in2010.  Testing at Harrington Station nearAmarillo is underway and additional testing at Tolk Station is planned during2007 to confirm these costs or determine whether different measures will benecessary, which could result in higher costs. Additional costs will be incurred to meet phase II requirements in 2018.

***Regional Haze Rules*** — On June 15,2005, the EPA finalized amendments to the July 1999 regional haze rules. Theseamendments apply to the provisions of the regional haze rule that requireemission controls, known as best available retrofit technology (BART), forindustrial facilities emitting air pollutants that reduce visibility by causingor contributing to regional haze.  Someof SPS’ generating facilities will be subject to BART requirements.  Some of these facilities are located inregions where CAIR is effective.  TheTCEQ has determined that facilities may use CAIR as a substitute for BART forNOx and SO2. If WestTexas is excluded from CAIR by the D.C. Court of Appeals, then these facilitieswill be subject to BART requirements for NOx, SO2, and particulate matter.  Due to the uncertainties of the litigationoutcome, SPS is not able to estimate the cost impact at this time.

**LegalContingencies**

In the normal course ofbusiness, SPS is party to routine claims and litigation arising from prior andcurrent operations.  SPS is activelydefending these matters and has recorded a liability related to the probablecost of settlement or other disposition, when it can be reasonably estimated.

***Carbon Dioxide Emissions Lawsuit***— OnJuly 21, 2004, the attorneys general of eight states and New York City, aswell as several environmental groups, filed lawsuits in U.S. District Court forthe Southern District of New York against five utilities, including XcelEnergy, to force reductions in carbon dioxide (CO2) emissions. Although SPS is not named asa party to this litigation, the requested relief that Xcel Energy cap andreduce its CO2 emissions could have a material adverse effecton SPS. The other utilities include American Electric Power Co., Southern Co.,Cinergy Corp. and Tennessee Valley Authority. CO2 is emitted whenever fossil fuel is combusted, such as in automobiles,industrial operations and coal- or natural gas-fired power plants. The lawsuitsallege that CO2 emitted by each company is a public nuisanceas defined under state and federal common law because it has contributed toglobal warming. The lawsuits do not demand monetary damages. Instead, thelawsuits ask the court to order each utility to cap and reduce its CO2 emissions. In October 2004, Xcel Energyand four other utility companies filed a motion to dismiss the lawsuit. OnSept. 19, 2005, the judge granted the defendants’ motion to dismiss onconstitutional grounds. Plaintiffs filed an appeal to the Second Circuit Courtof Appeals.  On June 21, 2007 the SecondCircuit Court of Appeals issued an order requesting the parties to file a letterbrief informing the Second Circuit Court of Appeals of their views about theimpact of the United States Supreme Court’s decision in Massachusetts v. EPA,127 S.Ct. 1438 ( April 2, 2007) on the issues raised by the parties onappeal.  Among other things, in its decisionin Massachusetts v. EPA, the United States Supreme Court  held that CO2 emissions are a “ pollutant” subject toregulation by the EPA under the Clean Air Act. In response to the request of the Second Circuit Court of Appeals, thedefendant utilities filed a letter brief on July 6, 2007, stating the positionthat the United States Supreme Court’s decision supports the arguments raisedby them on appeal.  It is unknown whenthe Second Circuit Court of Appeals will rule on the appeal.

11

----

***Lamb CountyElectric Cooperative*** - On July 24, 1995, Lamb CountyElectric Cooperative, Inc. (LCEC) petitioned the PUCT for a cease and desistorder against SPS alleging that SPS was unlawfully providing service to oilfield customers in LCEC’s certificated area. On May 23, 2003, the PUCT issuedan order denying LCEC’s petition based on its determination that SPS wasgranted a certificate in 1976 to serve the disputed customers. LCEC appealedthe decision to the District Court in Travis County, Texas and on Aug. 12,2004, the District Court affirmed the decision of the PUCT. On Sept. 9, 2004,LCEC appealed the District Court’s decision to the Court of Appeals for theThird Supreme Judicial District of the state of Texas, which appeal iscurrently pending. Oral arguments in the case were heard March 23, 2005. SPS isawaiting the Court of Appeals decision.

On October 18, 1996, LCEC filed a suit for damagesagainst SPS in the District Court in Lamb County, Texas, based on the samefacts as alleged in its petition for a cease and desist order at the PUCT. Thissuit has been dormant since it was filed, awaiting a final determination at thePUCT of the legality of SPS providing electric service to the disputedcustomers. The PUCT order of May 23, 2003, found that SPS was legally servingthe disputed customers thus collaterally determining the issue of liabilitycontrary to LCEC’s position in the suit. An adverse ruling on the appeal of theMay 23, 2003 PUCT order could result in a re-determination of the legality of SPS’service to the disputed customers.

***Comer vs. XcelEnergy Inc. et al.***— On April 25, 2006, Xcel Energyreceived notice of a purported class action lawsuit filed in United StatesDistrict Court for the Southern District of Mississippi. Although SPS is notnamed as a party to this litigation, if the litigation ultimately results in anunfavorable outcome for Xcel Energy, it could have a material adverse effect onSPS. The lawsuit names more than 45 oil, chemical and utility companies,including Xcel Energy, as defendants and alleges that defendants’ CO2 emissions “were a proximate and direct causeof the increase in the destructive capacity of Hurricane Katrina.”  Plaintiffs allege in support of their claim,several legal theories, including negligence and public and private nuisanceand seek damages related to the loss resulting from the hurricane. Xcel Energybelieves this lawsuit is without merit and intends to vigorously defend itselfagainst these claims. On July 19, 2006, Xcel Energy filed a motion to dismissthe lawsuit in its entirety.  Oralarguments related to some of the defenses raised by the defendants, includingXcel Energy, have been set for Aug. 30, 2007.

**6.  Short-Term Borrowings and Other FinancingInstruments**

As of June 30, 2007,SPS had $34.0 million of short-term debt outstanding and $81.8 million ofutility money pool borrowings at a weighted average interest rate of 5.40percent.

**7.  Derivative Valuation and Financial Impacts**

SPS uses a number ofdifferent derivative instruments in connection with its utility commodityprice, interest rate, and limited short-term wholesale and commodity tradingactivities, including forward contracts, futures, swaps and options.

Allderivative instruments not qualifying for the normal purchases and normal salesexception, as defined by SFAS 133-”Accounting for Derivative Instruments andHedging Activities,” as amended (SFAS 133), are recorded at fair value. Thepresentation of these derivative instruments is dependent on the designation ofa qualifying hedging relationship. The adjustment to fair value of derivativeinstruments not designated in a qualifying hedging relationship is reflected incurrent earnings or as a regulatory balance.

SPSrecords the fair value of its derivative instruments in its Balance Sheet asseparate line items identified as Derivative Instruments Valuation in bothcurrent and noncurrent assets and liabilities.

Qualifying hedgingrelationships are designated as either a hedge of a forecasted transaction orfuture cash flow (cash flow hedge), or a hedge of a recognized asset, liabilityor firm commitment (fair value hedge). The types of qualifying hedgingtransactions that SPS is currently engaged in are discussed below.

**CashFlow Hedges**

SPSenters into derivative instruments to manage variability of future cash flowsfrom changes in commodity prices and interest rates.

As ofJune 30, 2007, SPS had no commodity-related contracts classified as cash flowhedges.

SPS enters into****various instruments that effectively fixthe interest payments on certain floating rate debt obligations or effectivelyfix the yield or price on a specified benchmark interest rate for a specificperiod.  These derivative instruments aredesignated as cash flow hedges for accounting purposes and the change in thefair value of these instruments is recorded as a component of OtherComprehensive Income.

As of June 30,2007, SPS had net losses of approximately $0.6 million in Accumulated OtherComprehensive Income related to interest rate cash flow hedge contracts thatare expected to be recognized in earnings during the next 12 months.

12

----

Gains or losses onhedging transactions for the sales of energy or energy-related products areprimarily recorded as a component of revenues, hedging transactions for fuelused in energy generation are recorded as a component of fuel costs andinterest rate hedging transactions are recorded as a component of interestexpense. SPS is allowed to recover in electric rates the costs of certainfinancial instruments acquired to reduce commodity cost volatility. There wasno hedge ineffectiveness in the second quarter of 2007.

The impact of thecomponents of hedges on SPS’ Accumulated Other Comprehensive Income, includedas a component of stockholders’ equity, are detailed in the following table:
| ** **                                                                           | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Millions of dollars)**                                                  | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **                                                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Accumulated  other comprehensive loss related to cash flow hedges at Jan. 1          |       | $                                                 | (5.9       | ) | $ | (4.8 | ) |
| After-tax net  unrealized gains related to derivatives accounted for as hedges       |       | 0.5                                               |       | 0.6 |   |
| After-tax net  realized losses on derivative transactions reclassified into earnings |       | 0.1                                               |       | 0.1 |   |
| Accumulated other  comprehensive loss related to cash flow hedges at June 30         |       | $                                                 | (5.3       | ) | $ | (4.1 | ) |

 

**Derivatives Not Qualifying forHedge Accounting**

SPS may enter intocertain commodity-based derivative transactions, not included in tradingoperations, which do not qualify for hedge accounting treatment. Thesederivative instruments are accounted for on a mark-to-market basis inaccordance with SFAS 133 and are recorded on a net basis within operatingrevenues on the Statements of Income.

**NormalPurchases or Normal Sales Contracts**

SPS enters into contracts for the purchase and sale ofvarious commodities for use in its business operations. SFAS 133 requires a companyto evaluate these contracts to determine whether the contracts are derivatives.Certain contracts that meet the definition of a derivative may be exempted fromSFAS 133 as normal purchases or normal sales.

SPS evaluates all of itscontracts when such contracts are entered to determine if they are derivativesand, if so, if they qualify and meet the normal designation requirements underSFAS 133. None of the derivative contracts entered into within the commoditytrading operations qualify for a normal designation.

**8.  Detail of Interest and Other Income, Net**

Interest and other income, net of nonoperatingexpenses, for the three and six months ended June 30 consisted of thefollowing:
|                                       | ** ** | **Three months ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Thousands of dollars)**  | ** ** | **2007**                                              | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                            | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                       |       | $                                                     | 608        |                                                | $          | 696 |   | $ | 1,454 |   | $ | 1,952 |   |
| Other  nonoperating income            |       | 2                                                     |       | 594                                                 |       | 47 |   | 831 |   |
| Other  nonoperating expense           |       | (83                                                   | )          | (97                                                 | )          | (171 | ) | (115 | ) |
| Total interest  and other income, net |       | $                                                     | 527        |                                                | $          | 1,193 |   | $ | 1,330 |   | $ | 2,668 |   |

 

**9.****  Segment Information**

SPS has one reportablesegment. SPS operates in the Regulated Electric Utility industry, providingwholesale and retail electric service in the states of Texas and NewMexico.  Revenues from external customerswere $767.0 million and $836.0 million for the six months ended June 30,2007 and 2006, respectively.

13

----

**10.  Comprehensive Income**

The components oftotal comprehensive income are shown below:
|                                                                                                    | ** ** | **Three months ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Millions of dollars)**                                                                | ** ** | **2007**                                              | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                                                         |       | $                                                     | 5.6        |                                                | $          | 10.0 |   | $ | 7.3 |   | $ | 21.9 |   |
| Other  comprehensive income:                                                                       |       |                                                  |       |                                                |       |   |   |   |   |
| After-tax net  unrealized gains related to derivatives accounted for as hedges (see Note 7)        |       | 0.5                                                   |       | 0.2                                                 |       | 0.5 |   | 0.6 |   |
| After-tax net  realized losses on derivative transactions reclassified into earnings (see  Note 7) |       | —                                                |       | 0.1                                                 |       | 0.1 |   | 0.1 |   |
| Other  comprehensive income                                                                        |       | 0.5                                                   |       | 0.3                                                 |       | 0.6 |   | 0.7 |   |
| Comprehensive income                                                                               |       | $                                                     | 6.1        |                                                | $          | 10.3 |   | $ | 7.9 |   | $ | 22.6 |   |

 

**11.   Benefit Plans and Other PostretirementBenefits**

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

**Componentsof Net Periodic Benefit Cost**
|                                                               | ** ** | **Three months ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(Thousands of dollars)**                          | ** ** | **Pension Benefits**                           | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel  Energy Inc.**                                         | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                  |       | $                                                   | 14,555     |   | $ | 14,380 |   | $ | 1,205 |   | $ | 1,479 |   |
| Interest cost                                                 |       | 43,028                                              |       | 38,197 |   | 11,635 |   | 13,287 |   |
| Expected return  on plan assets                               |       | (66,525                                             | )          | (67,551 | ) | (7,582 | ) | (7,110 | ) |
| Amortization of  transition obligation                        |       | —                                              |       | — |   | 3,677 |   | 3,577 |   |
| Amortization of  prior service cost (credit)                  |       | 6,487                                               |       | 7,421 |   | (545 | ) | (545 | ) |
| Amortization of  net loss                                     |       | 4,555                                               |       | 4,165 |   | 2,106 |   | 5,875 |   |
| Net periodic  benefit cost (credit)                           |       | 2,100                                               |       | (3,388 | ) | 10,496 |   | 16,563 |   |
| Credits not  recognized due to the effects of regulation      |       | 2,894                                               |       | 3,893 |   | — |   | — |   |
| Additional cost  recognized due to the effects of regulation  |       | —                                              |       | — |   | 973 |   | 973 |   |
| Net benefit cost recognized for financial reporting           |       | $                                                   | 4,994      |   | $ | 505 |   | $ | 11,469 |   | $ | 17,536 |   |
| **SPS**                                                       |       |                                                |       |   |   |   |   |   |   |
| Net benefit cost  (credit) recognized for financial reporting |       | $                                                   | (1,813     | ) | $ | (2,720 | ) | $ | 1,571 |   | $ | 1,648 |   |

 
|                                                               | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                    | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(Thousands of dollars)**                          | ** ** | **Pension Benefits**                         | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel  Energy Inc.**                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                  |       | $                                                 | 31,040     |   | $ | 30,814 |   | $ | 2,906 |   | $ | 3,316 |   |
| Interest cost                                                 |       | 82,626                                            |       | 77,706 |   | 25,238 |   | 26,470 |   |
| Expected return  on plan assets                               |       | (132,416                                          | )          | (134,032 | ) | (15,200 | ) | (13,378 | ) |
| Amortization of  transition obligation                        |       | —                                            |       | — |   | 7,288 |   | 7,222 |   |
| Amortization of  prior service cost (credit)                  |       | 12,974                                            |       | 14,848 |   | (1,090 | ) | (1,090 | ) |
| Amortization of  net loss                                     |       | 8,422                                             |       | 8,676 |   | 7,100 |   | 12,398 |   |
| Net periodic  benefit cost (credit)                           |       | 2,646                                             |       | (1,988 | ) | 26,242 |   | 34,938 |   |
| Credits not  recognized due to the effects of regulation      |       | 5,574                                             |       | 6,318 |   | — |   | — |   |
| Additional cost  recognized due to the effects of regulation  |       | —                                            |       | — |   | 1,946 |   | 1,946 |   |
| Net benefit cost recognized for financial reporting           |       | $                                                 | 8,220      |   | $ | 4,330 |   | $ | 28,188 |   | $ | 36,884 |   |
| **SPS**                                                       |       |                                              |       |   |   |   |   |   |   |
| Net benefit cost  (credit) recognized for financial reporting |       | $                                                 | (3,819     | ) | $ | (4,062 | ) | $ | 3,119 |   | $ | 3,353 |   |

 

14

----

**Item2.**      MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

**Forward-LookingInformation**

The following discussionand analysis by management focuses on those factors that had a material effecton the financial condition and results of operations of SPS during the periodspresented, or are expected to have a material impact in the future. It shouldbe read in conjunction with the accompanying unaudited financial statements andnotes.

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. Factors that could causeactual results to differ materially include, but are not limited to: generaleconomic conditions, including the availability of credit and its impact oncapital expenditures and the ability of SPS to obtain financing on favorableterms; business conditions in the energy industry; actions of credit ratingagencies; competitive factors, including the extent and timing of the entry ofadditional competition in the markets served by SPS; unusual weather; effectsof geopolitical events, including war and acts of terrorism; state, federal andforeign legislative and regulatory initiatives that affect cost and investmentrecovery, have an impact on rates or have an impact on asset operation orownership; structures that affect the speed and degree to which competitionenters the electric market; costs and other effects of legal and administrativeproceedings, settlements, investigations and claims; actions of accountingregulatory bodies; the items described under Factors Affecting Results ofContinuing Operations; and the other risk factors listed from time to time bySPS in reports filed with the SEC, including “Risk Factors” in Item 1A of SPS’Form 10-K for the year ended Dec. 31, 2006 and Exhibit 99.01 tothis report on Form 10-Q for the quarter ended June 30, 2007.

**MarketRisks**

SPS is exposed to marketrisks, including changes in commodity prices and interest rates, as disclosedin Item 7A – Quantitative and Qualitative Disclosures About Market Risk in itsAnnual Report on Form 10-K for the year ended Dec. 31, 2006. Commodity priceand interest rate risks for SPS are mitigated in most jurisdictions due tocost-based rate regulation. At June 30, 2007, there were no materialchanges to the financial market risks that affect the quantitative andqualitative disclosures presented as of Dec. 31, 2006.

**RESULTSOF OPERATIONS**

SPS’ net income wasapproximately $7.3 million for the first six months of 2007, compared withapproximately $21.9 million for the first six months of 2006.  The decrease was due to lower electricmargin, primarily as the result of accruals for potential fuel contingencies,partially offset by lower property taxes, and lower income taxes as a result of  the lower pre-tax income.

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

Electric fuel and purchased power expenses tend to vary with changing retail and wholesale requirements and unit cost changes in fuel and purchased power. Due to fuel and purchased energy cost recovery mechanisms for customers, most fluctuations in these costs do not materially affect electric utility margin.

SPS has two distinct forms of wholesale sales:  short-term wholesale and commodity trading.Short-term wholesale refers to energy related purchase and sales activity andthe use of certain financial instruments associated with the fuel required forand energy produced from SPS’ generation assets and energy and capacitypurchased to serve native load. Commodity trading is not associated with SPS’generation assets or the energy and capacity purchased to serve native load.

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

15

----

The following table details base electric utility andshort-term wholesale activities:
| (Millions of Dollars)                          | ** ** | **Base  Electric  Utility** | ** ** | **Short-Term  Wholesale** | ** ** | **Commodity  Trading** | ** ** | **Total** | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|------------------------|------------|-----------|------------|
| **Six  months ended June 30, 2007**                      |       |                        |       |                      |       |                   |       |      |       |
| Electric utility  revenues (excluding commodity trading) |       | $                           | 756        |                      | $          | 12                     |       | $         | —     |   | $ | 768 |   |
| Fuel and  purchased power                                |       | (550                        | )          | (11                       | )          | —                 |       | (561      | )          |
| Commodity  trading revenues                              |       | —                      |       | —                    |       | —                 |       | —    |       |
| Commodity  trading costs                                 |       | —                      |       | —                    |       | (1                     | )          | (1        | )          |
| Gross margin before operating expenses                   |       | $                           | 206        |                      | $          | 1                      |       | $         | (1         | ) | $ | 206 |   |
| Margin as a  percentage of revenues                      |       | 27.2                        | %          | 8.3                       | %          | —                 | %          | 26.8      | %          |
|                                                     |       |                        |       |                      |       |                   |       |      |       |
| **Six  months ended June 30, 2006**                      |       |                        |       |                      |       |                   |       |      |       |
| Electric utility  revenues (excluding commodity trading) |       | $                           | 833        |                      | $          | 3                      |       | $         | —     |   | $ | 836 |   |
| Fuel and  purchased power                                |       | (601                        | )          | (3                        | )          | —                 |       | (604      | )          |
| Commodity  trading revenues                              |       | —                      |       | —                    |       | —                 |       | —    |       |
| Commodity  trading costs                                 |       | —                      |       | —                    |       | —                 |       | —    |       |
| Gross margin before operating expenses                   |       | $                           | 232        |                      | $          | —                 |       | $         | —     |   | $ | 232 |   |
| Margin as a percentage  of revenues                      |       | 27.9                        | %          | —                    | %          | —                 | %          | 27.8      | %          |

 

The following summarizesthe components of the changes in base electric revenues and base electricmargin for the six months ended June 30:

***Base Electric Revenues***
| (Millions of dollars)           | ** ** | **2007 vs. 2006** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| Fuel and  purchased power cost recovery   |       | $                           | (60        | ) |
| SPS potential  regulatory settlements     |       | (13                         | )          |
| Texas surcharge  settlement               |       | (5                          | )          |
| Sales growth  (excluding weather impact)  |       | (3                          | )          |
| Estimated impact  of weather              |       | (2                          | )          |
| Transmission  revenue                     |       | 5                           |       |
| Sales mix and  other                      |       | 1                           |       |
| Total decrease  in base electric revenues |       | $                           | (77        | ) |

 

##### ***Base Electric Margin***

| (Millions of dollars)          | ** ** | **2007 vs. 2006** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|
| SPS potential  regulatory settlements    |       | $                           | (13        | ) |
| Texas surcharge  settlement              |       | (5                          | )          |
| Sales growth  (excluding weather impact) |       | (3                          | )          |
| Purchased  capacity costs                |       | (3                          | )          |
| Estimated impact  of weather             |       | (2                          | )          |
| Transmission fee  classification change  |       | (2                          | )          |
| Transmission  revenue                    |       | 5                           |       |
| Sales mix and  other                     |       | (3                          | )          |
| Total decrease  in base electric margin  |       | $                           | (26        | ) |

 

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

***Other Operating and Maintenance Expenses -***Thefollowing summarizes the components of the changes in other operating andmaintenance expense for the six months ended June 30:
| (Millions of dollars)                             | ** ** | **2007 vs. 2006** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|
| Higher combustion/hydro  plant costs                        |       | $                           | 5          |   |
| Higher  uncollectible receivable costs                      |       | 1                           |       |
| Transmission fee  classification change                     |       | (2                          | )          |
| Lower regulatory  fees                                      |       | (1                          | )          |
| Other                                                       |       | (2                          | )          |
| Total increase  in other operating and maintenance expenses |       | $                           | 1          |   |

 

16

----

***Taxes (other than income taxes) -***Taxes(other than income taxes) decreased by approximately $6.6 million, or 24.0percent, for the first six months of 2007, compared with the first six monthsof 2006.  The decrease was primarily dueto taxes that are now classified as income taxes as opposed to taxes (otherthan income taxes).

***Income taxes***- Income tax expensedecreased by approximately $8.2 million for the first six months of 2007compared with the first six months of 2006. The effective tax rate was 38.2 percent for the first six months of2007, compared with 36.8 percent for the same period in 2006.  The decrease in income tax expense and theincrease in the effective tax rate were primarily due to a decrease in pretaxincome.

***Regulation***

**Summary ofRecent Federal Regulatory Developments**

The FERC has jurisdictionover rates for electric transmission service in interstate commerce andelectric energy sold at wholesale, hydro facility licensing, accountingpractices and certain other activities of SPS. State and local agencies havejurisdiction over many of SPS’ activities, including regulation of retail ratesand environmental matters.In addition to the matters discussed below, see Note 4 to the financialstatements for a discussion of other regulatory matters.

***FERC Rules Implementing Energy PolicyAct of 2005 (Energy Act) —***  The Energy Act repealed the Public Utility Holding Company Actof 1935, effective Feb. 8, 2006. In addition, the Energy Act required theFERC to conduct several rulemakings to adopt new regulations to implementvarious aspects of the Energy Act. Since Aug. 2005, the FERC has completedor initiated  proceedings to modify itsregulations on a number of subjects.  Inaddition to the previous disclosure in Item 1 of SPS’ Form 10-K forthe year ended Dec. 31, 2006, the FERC issued final rules making certain reliability standards mandatory andsubject to potential financial penalties up to $1 million per day per violationfor non-compliance effective June 18, 2007.

WhileSPS cannot predict the ultimate impact the new regulations will have on itsoperations or financial results, SPS is taking actions that are intended tocomply with and implement these new rules and regulations as they becomeeffective.

***Electric Transmission RateRegulation —*** The FERC also regulates the rates charged and terms and conditions forelectric transmission services. FERC policy encourages utilities to turn overthe functional control over their electric transmission assets and the relatedresponsibility for the sale of electric transmission services to a RegionalTransmission Organization (RTO). SPS is a member of the Southwest Power Pool,Inc. (SPP). Each RTO separately files regional transmission tariff rates forapproval by the FERC. All members within that RTO are then subjected to thoserates.

OnFeb. 15, 2007, the FERC issued final rules adopting revisions to its 1996 openaccess transmission rules. SPS submitted the initial required revisions to itsOpen Access Transmission Tariff (OATT) on July 13, 2007, as required.

Inaddition, in January 2007, the FERC issued interim and proposed rules to modifythe current FERC rules governing the functional separation of the SPS electrictransmission function from the wholesale sales and marketing function.  The proposed rules are pending final FERCaction.

WhileSPS cannot predict the ultimate impact the new regulations will have on itsoperations or financial results, SPS is taking actions that are intended tocomply with and implement these new rules and regulations as they becomeeffective.

***Market Based Rate Rules******—***On June 21, 2007, the FERCissued a final order amending its regulations governing its market-based rateauthorizations to electric utilities such as SPS.  The FERC reemphasized its commitment tomarket-based pricing, but is revising the tests it’s using to assess whether autility has market power and has emphasized that it intends to exercise greateroversight where it has market-based rate authorizations.  SPS has been granted market-based rateauthority and will be subject to the new rule. SPS is presently analyzing the new rule.

An aspect of FERC’smarket-based rate requirements is the requirement to charge mitigated rates inmarkets where a utility is found to have market power or where a utility cannotestablish the absence of market power. SPS has been authorized by the FERC to charge market-based rates outsideof their control areas, but is generally limited to charging mitigated rateswithin their control areas.  Consistentwith the approach followed by many other utilities subject to the FERC’smitigation requirement, SPS uses cost-based rate caps set out in the WesternSystems Power Pool (WSPP) agreement as their applicable mitigated rates, anapproach expressly approved by the FERC. However, concurrently with the issuance of the final order, the FERCinitiated a proceeding to investigate whether the use of the WSPP rate caps forthis purpose is just and reasonable. An outcome of this proceeding may be tolower the mitigated rates that SPS may charge in their control areas.

17

----

**Other Regulatory Matters — SPS**

***New Mexico Renewable Portfolio Standard***- The 2007 New Mexico legislature enacted a renewable portfolio standard, in which,renewable energy must comprise no less than 5 percent of retail sales by 2006;10 percent by 2011; 15 percent by 2015; and twenty percent by 2020.  The legislation also allows, by NMPRC rule orutility application, performance-based incentives to encourage the acquisitionof renewable energy supplies beyond the requirements.  The NMPRC is in the process of implementingrevised rules related to the increased requirements; performance-basedincentives have been deferred to a future rulemaking process.  The NMPRC has interpreted the diversificationrequirement to mean one in which no less than twenty percent of the standardrequirement is met using wind energy, no less than twenty percent is met usingsolar energy, no less than ten percent is met using one or more of the otherrenewable energy technologies, and no less than ten percent is met throughdistributed generation.

***Texas RenewableEnergy Zones*****-**The PUCT isexpected to designate competitive renewable energy zones (CREZs) later thissummer.  CREZs are regions of the statein which renewable energy resources and suitable land areas are sufficient todevelop electric generating capacity from renewable energy technologies, suchas wind.  The PUCT will determine theavailability of renewable resources in a candidate CREZ, the financialcommitment of generators, and the major transmission improvements necessary todeliver the energy generated by renewable resources. A statewide studyconducted by the Electric Reliability Council of Texas (ERCOT) identifies theTexas Panhandle as having the top four of the State’s primary areas for windenergy expansion.  Several transmissionproposals have been filed in the CREZ proceeding, including plans tointerconnect CREZs with the SPP, and plans that would collect wind energy fromPanhandle CREZs and deliver it into ERCOT.

**Item4. CONTROLS AND PROCEDURES**

**Disclosure Controls and Procedures**

SPS maintains a set ofdisclosure controls and procedures designed to ensure that information requiredto be disclosed in reports that it files or submits under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in Securities and Exchange Commission rules andforms. In addition, the disclosure controls and procedures ensure thatinformation required to be disclosed 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 CFO, of the effectiveness of our disclosure controls andprocedures, the CEO and CFO have concluded that SPS’ disclosure controls andprocedures are effective.

**Internal Control Over Financial Reporting**

No change in SPS’internal control over financial reporting has occurred during the most recentfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, its internal control over financial reporting.

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

## **Item1. Legal Proceedings**

In the normal course of business, various lawsuits andclaims have arisen against SPS. Management, after consultation with legalcounsel, has recorded an estimate of the probable cost of settlement or otherdisposition for such matters. See Notes 4 and 5 of the Financial Statements inthis Quarterly Report on Form 10-Q for further discussion of legal proceedings,including Regulatory Matters and Commitments and Contingent Liabilities, whichare hereby incorporated by reference. Reference also is made to Item 3 andNote 11 of SPS’ Annual Report on Form 10-K for the year ended Dec. 31,2006 for a description of certain legal proceedings presently pending.

**Item 1A.Risk Factors**

SPS’ risk factors aredocumented in Item 1A of Part I of its 2006 Annual Report on Form 10-K, whichis incorporated herein by reference. There have been no material changes to the risk factors.

18

----

## **Item6. Exhibits**

The following Exhibitsare filed with this report:
| 31.01 |   | Principal Executive Officer’s and Principal  Financial Officer’s certifications pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
|-------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 32.01 |   | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                                                            |
| 99.01 |   | Statement pursuant to Private Securities Litigation  Reform Act of 1995.                                                                                                                                      |

 

19

----

SIGNATURES

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized on July 27, 2007.
| Southwestern Public Service Co.             |
|---------------------------------------------|
| (Registrant)                                |
|                                        |
|                                        |
| /s/ TERESA S. MADDEN                        |   |
| Teresa S. Madden                            |   |
| Vice President  and Controller              |   |
|                                        |   |
|                                        |   |
| /s/ BENJAMIN  G.S. FOWKE III                |   |
| Benjamin G.S.  Fowke III                    |   |
| Vice President  and Chief Financial Officer |   |

 

20

----