Table of Contents

 

 

 

**UNITEDSTATES********SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

# **FORM 10-Q**

# ** **

**(MarkOne)**

 

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

 

**For the quarterly period ended March 31, 2010**

 

**or**

 

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

 

**Commission File Number: 001-03789**

 

# **Southwestern Public Service Company**

(Exact name of registrant as specified in its charter)

 

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

 

**(303) 571-7511**

 (Registrant’s telephone number,including area code)

 

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

 

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

 

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

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

 

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

 

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

 

| **Class**                  | ** ** | **Outstanding at May 3, 2010** |
|----------------------------|------------|----------------------------------------------------|
| Common Stock, $1 par value |       | 100 shares                                         |

 

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

 

 

 

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#### **TABLE OF CONTENTS**

 
| **PART I - FINANCIAL INFORMATION** |       |                                                                                        |
|-----------------------------------------|------------|---------------------------------------------------------------------------------------------|
|                                    | ** ** | ** **                                                                                  |   |   |
| Item l.                                 |       | Financial Statements (Unaudited)                                                            |   | 3 |
| Item 2.                                 |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations |   | 16 |
| Item 4.                                 |       | Controls and  Procedures                                                                    |   | 18 |
|                                    |       |                                                                                        |   |   |
| **PART II - OTHER INFORMATION**    |       |                                                                                        |
|                                    | ** ** | ** **                                                                                  |   |   |
| Item 1.                                 |       | Legal Proceedings                                                                           |   | 19 |
| Item 1A.                                |       | Risk Factors                                                                                |   | 19 |
| Item 6.                                 |       | Exhibits                                                                                    |   | 19 |
|                                    |       |                                                                                        |   |   |
| **SIGNATURES**                          |       | 20                                                                                          |

 

Certifications Pursuant to Section 302

Certifications Pursuant to Section 906

Statement Pursuant to Private Litigation

 

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

 

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**PART I. FINANCIAL INFORMATION**

 

**Item 1. FINANCIAL STATEMENTS**

 

**SOUTHWESTERN PUBLIC SERVICECOMPANY**

**STATEMENTSOF INCOME (UNAUDITED)**

*(amounts in thousands of dollars)*

 
| ** **                                                                             | ** ** | **Three  Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                             | ** ** | **2010**                               | ** ** | **2009** | ** ** |
|                                                                                   |       |                                   |       |   |   |
| **Operating revenues**                                                                 |       | $                                      | 381,482    |   | $ | 368,983 |   |
|                                                                                   |       |                                   |       |   |   |
| **Operating expenses**                                                                 |       |                                   |       |   |   |
| Electric  fuel and purchased power                                                     |       | 256,194                                |       | 247,509 |   |
| Other  operating and maintenance expenses                                              |       | 56,705                                 |       | 54,474 |   |
| Demand  side management program expenses                                               |       | 1,946                                  |       | 1,351 |   |
| Depreciation  and amortization                                                         |       | 25,654                                 |       | 25,275 |   |
| Taxes  (other than income taxes)                                                       |       | 10,155                                 |       | 10,542 |   |
| Total  operating expenses                                                              |       | 350,654                                |       | 339,151 |   |
|                                                                                   |       |                                   |       |   |   |
| **Operating income**                                                                   |       | 30,828                                 |       | 29,832 |   |
|                                                                                   |       |                                   |       |   |   |
| Other  (expense) income, net                                                           |       | (6                                     | )          | 365 |   |
| Allowance  for funds used during construction — equity                            |       | 433                                    |       | 1,115 |   |
|                                                                                   |       |                                   |       |   |   |
| **Interest charges and financing costs**                                               |       |                                   |       |   |   |
| Interest  charges — includes other financing costs of $650 and $670, respectively |       | 16,146                                 |       | 18,100 |   |
| Allowance  for funds used during construction — debt                              |       | (546                                   | )          | (770 | ) |
| Total  interest charges and financing costs                                            |       | 15,600                                 |       | 17,330 |   |
|                                                                                   |       |                                   |       |   |   |
| **Income before income taxes**                                                         |       | 15,655                                 |       | 13,982 |   |
| Income  taxes                                                                          |       | 7,956                                  |       | 4,800 |   |
| **Net income**                                                                         |       | $                                      | 7,699      |   | $ | 9,182 |   |

 

See Notes toFinancial Statements

 

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**SOUTHWESTERN PUBLIC SERVICE COMPANY**

**STATEMENTS OF CASH FLOWS(UNAUDITED)**

*(amounts in thousands of dollars)*

* *
| ** **                                                                     | ** ** | **Three  Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                     | ** ** | **2010**                               | ** ** | **2009** | ** ** |
|                                                                           |       |                                   |       |   |   |
| **Operating activities**                                                       | ** ** |                                   |       |   |   |
| Net income                                                                     |       | $                                      | 7,699      |   | $ | 9,182 |   |
| Adjustments to reconcile net income to cash  provided by operating activities: |       |                                   |       |   |   |
| Depreciation and amortization                                                  |       | 26,216                                 |       | 26,371 |   |
| Demand side management program expenses                                        |       | 476                                    |       | 295 |   |
| Deferred income taxes                                                          |       | 10,895                                 |       | (24,687 | ) |
| Amortization of investment tax credits                                         |       | (74                                    | )          | (81 | ) |
| Allowance for equity funds used during construction                            |       | (433                                   | )          | (1,115 | ) |
| Net realized and unrealized hedging and derivative  transactions               |       | 66                                     |       | (508 | ) |
| Changes in operating assets and liabilities:                                   |       |                                   |       |   |   |
| Accounts receivable                                                            |       | (1,538                                 | )          | 4,902 |   |
| Accrued unbilled revenues                                                      |       | 6,790                                  |       | 5,859 |   |
| Recoverable electric energy costs                                              |       | (896                                   | )          | 1,172 |   |
| Inventories                                                                    |       | 4,982                                  |       | 20,760 |   |
| Prepayments and other                                                          |       | 6,880                                  |       | 1,058 |   |
| Accounts payable                                                               |       | (18,594                                | )          | (35,463 | ) |
| Deferred electric energy costs                                                 |       | (20,238                                | )          | 78,270 |   |
| Net regulatory assets and liabilities                                          |       | 29                                     |       | 2,544 |   |
| Other current liabilities                                                      |       | 3,336                                  |       | 28,962 |   |
| Change in other noncurrent assets                                              |       | (1,172                                 | )          | (2,585 | ) |
| Change in other noncurrent liabilities                                         |       | (814                                   | )          | 581 |   |
| Net cash provided by operating activities                                      |       | 23,610                                 |       | 115,517 |   |
|                                                                           |       |                                   |       |   |   |
| **Investing activities**                                                       | ** ** |                                   |       |   |   |
| Utility capital/construction expenditures                                      |       | (47,281                                | )          | (44,398 | ) |
| Allowance for equity funds used during construction                            |       | 433                                    |       | 1,115 |   |
| Investments in utility money pool arrangement                                  |       | (189,900                               | )          | (378,800 | ) |
| Receipts from utility money pool arrangement                                   |       | 259,900                                |       | 450,300 |   |
| Net cash provided by investing activities                                      |       | 23,152                                 |       | 28,217 |   |
|                                                                           |       |                                   |       |   |   |
| **Financing activities**                                                       | ** ** |                                   |       |   |   |
| Repayment of long-term debt                                                    |       | (25,000                                | )          | (100,000 | ) |
| Dividends paid to parent                                                       |       | (17,240                                | )          | (15,585 | ) |
| Net cash used in financing activities                                          |       | (42,240                                | )          | (115,585 | ) |
|                                                                           |       |                                   |       |   |   |
| Net increase in cash and cash equivalents                                      |       | 4,522                                  |       | 28,149 |   |
| Cash and cash equivalents at beginning of period                               |       | 7,363                                  |       | 130,795 |   |
| Cash and cash equivalents at end of period                                     |       | $                                      | 11,885     |   | $ | 158,944 |   |
|                                                                           |       |                                   |       |   |   |
| Supplemental disclosure of cash flow information:                              |       |                                   |       |   |   |
| Cash paid for interest (net of amounts capitalized)                            |       | $                                      | (3,140     | ) | $ | (6,678 | ) |
| Cash received for income taxes, net                                            |       | 10,459                                 |       | 32 |   |
|                                                                           |       |                                   |       |   |   |
| Supplemental disclosure of non-cash investing  transactions:                   |       |                                   |       |   |   |
| Property, plant and equipment additions in accounts  payable                   |       | $                                      | 4,478      |   | $ | 6,255 |   |

 

See Notes to Financial Statements

 

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**SOUTHWESTERNPUBLIC SERVICE COMPANY**

**BALANCE SHEETS (UNAUDITED)**

*(amounts in thousands of dollars)*

* *
| ** **                                                                            | ** ** | **March 31,  2010** | ** ** | **Dec. 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| **Assets**                                                                            |       |                     |       |                    |       |
| Current assets                                                                        |       |                     |       |                    |       |
| Cash and cash equivalents                                                             |       | $                        | 11,885     |                    | $          | 7,363 |   |
| Investments in utility money pool arrangement                                         |       | 7,000                    |       | 77,000                  |       |
| Accounts receivable, net                                                              |       | 49,191                   |       | 47,065                  |       |
| Accounts receivable from affiliates                                                   |       | 4,509                    |       | 5,097                   |       |
| Accrued unbilled revenues                                                             |       | 98,995                   |       | 105,785                 |       |
| Inventories                                                                           |       | 22,165                   |       | 27,147                  |       |
| Recoverable electric energy costs                                                     |       | 2,055                    |       | 1,159                   |       |
| Derivative instruments valuation                                                      |       | 7,892                    |       | 8,926                   |       |
| Deferred income taxes                                                                 |       | 28,193                   |       | 36,406                  |       |
| Prepayments and other                                                                 |       | 9,047                    |       | 15,927                  |       |
| Total current assets                                                                  |       | 240,932                  |       | 331,875                 |       |
|                                                                                  |       |                     |       |                    |       |
| Property, plant and equipment, net                                                    |       | 2,276,363                |       | 2,260,984               |       |
|                                                                                  |       |                     |       |                    |       |
| Other assets                                                                          |       |                     |       |                    |       |
| Regulatory assets                                                                     |       | 287,484                  |       | 286,734                 |       |
| Derivative instruments valuation                                                      |       | 70,653                   |       | 67,625                  |       |
| Other                                                                                 |       | 9,785                    |       | 8,783                   |       |
| Total other assets                                                                    |       | 367,922                  |       | 363,142                 |       |
| Total assets                                                                          |       | $                        | 2,885,217  |                    | $          | 2,956,001 |   |
|                                                                                  |       |                     |       |                    |       |
| **Liabilities and Equity**                                                            |       |                     |       |                    |       |
| Current liabilities                                                                   |       |                     |       |                    |       |
| Accounts payable                                                                      |       | $                        | 141,719    |                    | $          | 163,253 |   |
| Accounts payable to affiliates                                                        |       | 9,610                    |       | 14,625                  |       |
| Deferred electric energy costs                                                        |       | 39,545                   |       | 59,783                  |       |
| Taxes accrued                                                                         |       | 11,396                   |       | 18,209                  |       |
| Accrued interest                                                                      |       | 24,245                   |       | 12,371                  |       |
| Dividends payable                                                                     |       | 16,896                   |       | 17,240                  |       |
| Derivative instruments valuation                                                      |       | 3,601                    |       | 3,588                   |       |
| Other                                                                                 |       | 18,142                   |       | 20,125                  |       |
| Total current liabilities                                                             |       | 265,154                  |       | 309,194                 |       |
|                                                                                  |       |                     |       |                    |       |
| Deferred credits and other liabilities                                                |       |                     |       |                    |       |
| Deferred income taxes                                                                 |       | 535,709                  |       | 533,241                 |       |
| Deferred investment tax credits                                                       |       | 2,318                    |       | 2,392                   |       |
| Regulatory liabilities                                                                |       | 125,604                  |       | 119,080                 |       |
| Asset retirement obligations                                                          |       | 19,071                   |       | 18,757                  |       |
| Derivative instruments valuation                                                      |       | 47,692                   |       | 48,654                  |       |
| Pension and employee benefit obligations                                              |       | 43,327                   |       | 44,276                  |       |
| Other                                                                                 |       | 8,459                    |       | 8,450                   |       |
| Total deferred credits and other liabilities                                          |       | 782,180                  |       | 774,850                 |       |
|                                                                                  |       |                     |       |                    |       |
| Commitments and contingent liabilities                                                |       |                     |       |                    |       |
| Capitalization                                                                        |       |                     |       |                    |       |
| Long-term debt                                                                        |       | 897,526                  |       | 922,447                 |       |
| Common stock — authorized 200 shares of $1.00 par  value; outstanding 100 shares |       | —                   |       | —                  |       |
| Additional paid in capital                                                            |       | 692,948                  |       | 692,948                 |       |
| Retained earnings                                                                     |       | 249,213                  |       | 258,409                 |       |
| Accumulated other comprehensive loss                                                  |       | (1,804                   | )          | (1,847                  | )          |
| Total common stockholder’s equity                                                |       | 940,357                  |       | 949,510                 |       |
| Total liabilities and equity                                                          |       | $                        | 2,885,217  |                    | $          | 2,956,001 |   |

 

See Notes to Financial Statements

 

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**SOUTHWESTERN PUBLICSERVICE COMPANY**

**Notes to FinancialStatements (UNAUDITED)**

** **

In the opinion ofmanagement, the accompanying unaudited financial statements contain alladjustments necessary to present fairly, in accordance with accountingprinciples generally accepted in the United States of America (GAAP), thefinancial position of SPS as of March 31, 2010, and Dec. 31, 2009;the results of its operations for the three months ended March 31, 2010and 2009; and its cash flows for the three months ended March 31, 2010 and2009.  All adjustments are of a normal,recurring nature, except as otherwise disclosed.  Management has also evaluated the impact of eventsoccurring after March 31, 2010 up to the date of issuance of thesefinancial statements.  These statementscontain all necessary adjustments and disclosures resulting from thatevaluation.  The Dec. 31, 2009balance sheet information has been derived from the audited 2009 financialstatements.  These notes to the financialstatements have been prepared pursuant to the rules and regulations of theSEC for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financialstatements prepared in accordance with GAAP have been condensed or omittedpursuant to such rules and regulations. For further information, refer to the financial statements and notesthereto included in the SPS Annual Report on Form 10-K for the year ended Dec. 31,2009, filed with the SEC on March 1, 2010. Due to the seasonality of SPS’s electric sales, interim results are notnecessarily an appropriate base from which to project annual results.

 

**1.**     Summary of Significant Accounting Policies

** **

Except to the extent updatedor described below, the significant accounting policies set forth in Note 1 tothe financial statements in SPS’ Annual Report on Form 10-K for the yearended Dec. 31, 2009, appropriately represent, in all material respects,the current status of accounting policies and are incorporated herein byreference.

 

***Reclassifications*** — Demand side managementprogram expenses for the three months ended March 31, 2009 werereclassified as a separate item from depreciation and amortization expenseswithin the statements of cash flows.  Thereclassification did not have an impact on net cash provided by operatingactivities.

 

**2.**     **AccountingPronouncements**

 

***Recently Adopted***

 

***Consolidation of Variable Interest Entities***— In June 2009, the FinancialAccounting Standards Board (FASB) issued new guidance on consolidation ofvariable interest entities. The guidance affects various elements ofconsolidation, including the determination of whether an entity is a variableinterest entity and whether an enterprise is a variable interest entity’sprimary beneficiary. These updates to the FASB Accounting StandardsCodification (ASC or Codification) are effective for interim and annual periodsbeginning after Nov. 15, 2009.  SPSimplemented the guidance on Jan. 1, 2010, and the implementation did nothave a material impact on its financial statements.  For further information and requireddisclosures regarding variable interest entities, see Note 6 to the financialstatements.

 

***FairValue Measurement Disclosures*** — In January 2010, the FASB issued *Fair Value Measurements and Disclosures(Topic 820) — Improving Disclosures about Fair Value Measurements(Accounting Standards Update (ASU) No. 2010-06)*, which updatesthe Codification to require new disclosures for assets and liabilities measuredat fair value. The requirements include expanded disclosure of valuationmethodologies for fair value measurements, transfers between levels of the fairvalue hierarchy, and gross rather than net presentation of certain changes inLevel 3 fair value measurements. The updates to the Codification containedin ASU No. 2010-06 were effective for interim and annual periods beginningafter Dec. 15, 2009, except for requirements related to gross presentationof certain changes in Level 3 fair value measurements, which are effectivefor interim and annual periods beginning after Dec. 15, 2010.  SPS implemented the portions of the guidancerequired on Jan. 1, 2010, and the implementation did not have a materialimpact on its financial statements.  Forfurther information and required disclosures, see Note 9 to the financialstatements.

 

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**3.**     **SelectedBalance Sheet Data**

 
| **(Thousands of Dollars)**   | ** ** | **March 31, 2010** | ** ** | **Dec. 31, 2009** | ** ** |
|----------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Accounts receivable, net**           |       |                    |       |                        |       |
| Accounts  receivable                   |       | $                       | 53,491     |                        | $          | 51,480 |   |
| Less  allowance for bad debts          |       | (4,300                  | )          | (4,415                      | )          |
|                                   |       | $                       | 49,191     |                        | $          | 47,065 |   |
| **Inventories**                        |       |                    |       |                        |       |
| Materials  and supplies                |       | $                       | 16,811     |                        | $          | 15,737 |   |
| Fuel                                   |       | 5,354                   |       | 11,410                      |       |
|                                   |       | $                       | 22,165     |                        | $          | 27,147 |   |
| **Property, plant and equipment, net** |       |                    |       |                        |       |
| Electric  plant                        |       | $                       | 3,807,868  |                        | $          | 3,777,623 |   |
| Construction  work in progress         |       | 101,301                 |       | 95,652                      |       |
| Total  property, plant and equipment   |       | 3,909,169               |       | 3,873,275                   |       |
| Less  accumulated depreciation         |       | (1,632,806              | )          | (1,612,291                  | )          |
|                                   |       | $                       | 2,276,363  |                        | $          | 2,260,984 |   |

 

**4.**     Income Taxes

** **

***Medicare Part D Subsidy Reimbursements****—* In March 2010, the PatientProtection and Affordable Care Act was signed into law.  The law includesprovisions to generate tax revenue to help offset the cost of the newlegislation.  One of these provisions reduces the deductibility of retireehealth care costs to the extent of federal subsidies received by plan sponsorsthat provide retiree prescription drug benefits equivalent to Medicare Part Dcoverage, beginning in 2013.  Based on this provision, SPS is subject toadditional taxes and is required to reverse previously recorded tax benefits inthe period of enactment.

 

SPS expensedapproximately $1.9 million of previously recognized tax benefits relating toMedicare Part D subsidies during the first quarter of 2010.  SPS doesnot expect the $1.9 million of additional tax expense to recur in futureperiods.  The 2010 effective tax rate will increase due to additional taxexpense of approximately $0.5 million associated with current year retireehealth care accruals.

 

***Federal Audit*****—**SPS is a member of the Xcel Energy affiliated group thatfiles a consolidated federal income tax return. In the first quarter of2010, the IRS (Internal Revenue Service) completed an examination ofXcel Energy’s federal income tax returns of tax years 2006 and 2007. TheIRS did not propose any material adjustments for those tax years. The statuteof limitations applicable to Xcel Energy’s 2006 federal income tax returnexpires on Aug. 28, 2010.

 

***State Audits*****—**SPS is a member of the Xcel Energy affiliated group thatfiles consolidated state income tax returns. As of March 31, 2010, SPS’searliest open tax year that is subject to examination by state taxingauthorities under applicable statutes of limitations is 2005. The state ofTexas has notified Xcel Energy of its intent to audit tax years 2006 and2007. The audit will commence in the second quarter of 2010.  There currently are no other state income taxaudits in progress.

 

***Unrecognized Tax Benefits*****—**The unrecognized tax benefit balanceincludes permanent tax positions, which if recognized would affect the annualeffective tax rate (ETR). In addition, the unrecognized tax benefit balanceincludes temporary tax positions for which the ultimate deductibility is highlycertain but for which there is uncertainty about the timing of suchdeductibility. A change in the period of deductibility would not affect the ETRbut would accelerate the payment of cash to the taxing authority to an earlierperiod.

 

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A reconciliation of theamount of unrecognized tax benefit is as follows:

 
| **(Millions of Dollars)**                 | ** ** | **March 31,  2010** | ** ** | **Dec. 31,  2009** | ** ** |
|-----------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Unrecognized  tax benefit - Permanent tax positions |       | $                        | 0.2        |                    | $          | 0.2 |   |
| Unrecognized  tax benefit - Temporary tax positions |       | 2.9                      |       | 2.7                     |       |
| Unrecognized  tax benefit balance                   |       | $                        | 3.1        |                    | $          | 2.9 |   |

 

The unrecognized taxbenefit balance was reduced by the tax benefits associated with net operatingloss (NOL) and tax credit carryforwards. The amounts of tax benefits associatedwith NOL and tax credit carryforwards were as follows:

 
| **(Millions of Dollars)**                           | ** ** | **March 31,  2010** | ** ** | **Dec. 31,  2009** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Tax  benefits associated with NOL and tax credit carryforward |       | $                        | (0.1       | )                       | $          | (0.1 | ) |
|                                                               |            |                          |            |                         |            |  |  |

 

The increase in theunrecognized tax benefit balance of $0.2 million from Dec. 31, 2009to March 31, 2010 was due to the addition of similar uncertain taxpositions related to ongoing activity. SPS’s amount of unrecognized taxbenefits could significantly change in the next 12 months as the Texasaudit begins and when the IRS and other state audits resume. At this time, dueto the uncertain nature of the audit process, it is not reasonably possible toestimate an overall range of possible change.

 

A reconciliation of thebeginning and ending amount of the payable for interest related to unrecognizedtax benefits is as follows:

 
| **(Millions of Dollars)**                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Payable  for interest related to unrecognized tax benefits at Jan. 1   |       | $        | (0.1       | )        | $          | (0.3 | ) |
| Interest  expense related to unrecognized tax benefits                      |       | —   |       | —   |       |
| Payable  for interest related to unrecognized tax benefits at March 31 |       | $        | (0.1       | )        | $          | (0.3 | ) |

 

No amounts were accruedfor penalties related to unrecognized tax benefits as of March 31, 2010 orDec. 31, 2009.

 

**5.**     **RateMatters**

 

Except to theextent noted below, the circumstances set forth in Note 13 to the financialstatements included in SPS’ Annual Report on Form 10-K for the year ended Dec. 31,2009 appropriately represent, in all material respects, the current status ofother rate matters, and are incorporated herein by reference.

 

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

** **

**Base Rate**

 

***Lubbock Electric DistributionAssets*******— In November 2009, SPS entered into anagreement with the city of Lubbock, Texas (City of Lubbock), in which SPS willsell its electric distribution system assets within the city limits to the Cityof Lubbock for approximately $87 million. As part of this transaction, SPS will continue to provide the wholesalepower to meet the electric load for the customers that SPS currentlyserves.  The wholesale power agreementsprovide for formula rates that change annually based on the actual cost ofservice.  The formula rate with WestTexas Municipal Power Agency (WTMPA) reflects an initial 10.5 percent return onequity (ROE).  All or portions of thistransaction are subject to review and approval by the PUCT, the New MexicoPublic Regulation Commission (NMPRC) and the Federal Energy RegulatoryCommission (FERC).  This transaction isexpected to close late in 2010.  It isanticipated that any resulting gain on the sale of assets will be shared withretail customers in Texas.

 

TheFERC has accepted the amended WTMPA full-requirements contract.  Parties in the Texas proceeding have begunsettlement talks.

 

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***Pending and Recently ConcludedRegulatory Proceedings — FERC***

 

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

 

***Golden Spread Complaint Settlement***— In December 2007,SPS reached a settlement with Golden Spread (which now includes LyntegarElectric) and Occidental regarding base rate and fuel issues raised in thecomplaint described above as well as a subsequent rate proceeding.  In April 2008, the FERC approved thesettlement, which resolved all issues pertaining to Golden Spread that were thesubject of the Complaint; implemented a formula rate and extended the term ofits partial requirements sale to Golden Spread beginning 2012 at500 megawatts (MW) and ramping down to 200 MW for the two years priorto the end of the term in 2019.  Thesettlement made the extended purchase contingent on certain stateapprovals.  Golden Spread agreed to holdSPS harmless from any future adverse regulatory treatment regarding theproposed sale and SPS agreed to contingent payments ranging from$3 million to a maximum of $12 million, payable in 2012, in the eventthat there is an adverse cost assignment decision or a failure to obtain stateapprovals.  Requests for certain stateapprovals have been obtained from the PUCT and NMPRC.

 

***New Mexico Cooperatives’ ComplaintSettlement***— In January 2010, SPS reached a settlementwith Farmers’ Electric Cooperative of New Mexico, Lea County ElectricCooperative, Central Valley Electric Cooperative and Roosevelt County ElectricCooperative, all wholesale customers of SPS located in New Mexico, andOccidental regarding the same base rate and fuel issues raised in the complaintdescribed above.  The settlement withthese wholesale customers is now pending approval by the FERC.  The settlement resolves all issues arisingfrom the complaint docket and implements a replacement contract with a formulaproduction rate at 10.5 percent ROE and extended term of its requirementssale to the four wholesale customers. The four wholesale customers must reduce their system average cost powerpurchases by 90 to 100 MW in 2012, and implement staged reductions insystem average cost power purchases through the term of the agreement, whichterminates on May 31, 2026.  Thesettlement made the replacement contract contingent on certain stateapprovals.  In the event not allregulatory approvals are received, the settlement includes a one time totalcontingent payment of $12 million by SPS to these wholesalecustomers.  These wholesale customersagreed to hold SPS harmless from any future adverse regulatory treatmentregarding the proposed wholesale power sale.

 

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

 

Severalparties, including SPS, filed requests for rehearing on the order.  These requests are pending before theFERC.  In July 2008, SPS submittedits compliance report to the FERC and calculated the base rate refund for the18-month period to be $6.1 million and the fuel refund to be$4.4 million.  Several wholesalecustomers have protested the calculations. Once the final refund amounts are approved by the FERC, interest will beadded to the refund due to the remaining non-settled customers.  As of March 31, 2010, SPS has accrued anamount sufficient to cover the estimated refund obligation.

 

**6.**     Commitmentsand Contingent Liabilities

** **

Except to the extent noted below and in Note 5 to the financialstatements in this Quarterly Report on Form 10-Q, the circumstances setforth in Notes 13 and 14 to the financial statements in SPS’ Annual Report on Form 10-Kfor the year ended Dec. 31, 2009, appropriately represent, in all materialrespects, the current status of commitments and contingent liabilities and areincorporated herein by reference.  Thefollowing include contingencies and unresolved contingencies that are materialto SPS’ financial position.

 

**Commitments**

 

***VariableInterest Entities*****— EffectiveJan. 1, 2010, SPS adopted new guidance on consolidation of variableinterest entities contained in *ASC 810**Consolidation*.  Theguidance requires enterprises to consider the activities that mostsignificantly impact an entity’s financial performance, and power to directthose activities, when determining whether an entity is a variable interestentity and whether an enterprise is a variable interest entity’s primarybeneficiary.

 

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*Purchased Power Agreements*— SPS has entered into agreements withother utilities and energy suppliers for purchased power to meet system loadand energy requirements, replace generation from company-owned units undermaintenance or during outages, and meet operating reserve obligations.

 

SPS has variouspay-for-performance contracts with expiration dates through the year 2033.  In general, these contracts provide forenergy payments based on actual power taken under the contracts as well ascapacity payments.  Capacity payments aretypically contingent on the independent power producing entity meeting certaincontract obligations, including plant availability requirements.  Certain contractual payments are adjustedbased on market indices; however, the effects of price adjustments aremitigated through purchased energy cost recovery mechanisms.

 

SPS is not subject torisk of loss from the operations of these entities, and no significantfinancial support has been, or is in the future required to be provided otherthan contractual payments for energy and capacity set forth in purchased poweragreements.

 

Certain natural gaspurchased power agreements that either reimburse the independent powerproducing entities for fuel costs, or contain tolling arrangements under whichSPS procures the fuel required to produce the energy it purchases, have beendetermined to be variable interest entities.

 

SPS has evaluated each ofthese variable interest entities for possible consolidation, including reviewof qualitative factors such as the length and terms of the contract, controlover operations and maintenance, historical and estimated future fuel andelectricity prices, and financing activities; including the maintenance of debtto equity financing ratios.  SPS hasconcluded that these entities are not required to be consolidated in itsfinancial statements because it does not have the power to direct the activitiesthat most significantly impact the entities’ economic performance.  As of March 31, 2010 and Dec. 31,2009, SPS had approximately 1,027 MW of capacity under long-term purchasedpower agreements with entities that have been determined to be variableinterest entities.

 

*Fuel Contracts*— SPS purchases all of its coalrequirements for its Harrington and Tolk electric generating stations from TUCO, Inc.(TUCO) under contracts for those facilities that expire in 2016 and 2017,respectively.  TUCO arranges for thepurchase, receiving, transporting, unloading, handling, crushing, weighing, anddelivery of coal to meet SPS’ requirements. TUCO is responsible for negotiating and administering contracts withcoal suppliers, transporters and handlers.

 

No significant financialsupport has been, or is in the future, required to be provided to TUCO by SPS,other than contractual payments for delivered coal.  However, the fuel contracts have beendetermined to create a variable interest in TUCO due to SPS’ reimbursement ofcertain fuel procurement costs.  SPS hasevaluated the TUCO coal supply contracts and has concluded that it is not theprimary beneficiary because SPS does not have the power to direct theactivities that most significantly impact TUCO’s economic performance.

 

## **Environmental Contingencies**

 

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

 

***Site Remediation****—*SPS must pay all or a portion of the costto remediate sites where past activities of SPS or other parties have causedenvironmental contamination. Environmental contingencies could arise from various situations,including third party sites, for which SPS is alleged to be a PRP that senthazardous materials and wastes.  At March 31,2010, the liability for the cost of remediating these sites was estimated to be$0.1 million.

 

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

 

***Asbestos Removal*****—**Some of SPS’ facilities containasbestos.  Most asbestos will remainundisturbed until the facilities that contain it are demolished orrenovated.  SPS has recorded an estimatefor final removal of the asbestos as an asset retirement obligation.  See additional discussion of asset retirementobligations in Note 14 of the SPS Annual Report on Form 10-Kfor the year ended Dec. 31, 2009.  It may benecessary to remove some asbestos to perform maintenance or make improvementsto other equipment.  The cost of removingasbestos as part of other work is immaterial and is recorded as incurred asoperating expenses for maintenance projects, capital expenditures forconstruction projects or removal costs for demolition projects.

 

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## ***Other Environmental Requirements***

 

***Environmental Protection Agency (EPA)Greenhouse Gas (GHG) Endangerment Finding***— On Dec. 7, 2009, inresponse to the U. S. Supreme Court’s decision in *Massachusettsv. EPA*, 549 U. S. 497 (2007), the EPA issued its “endangerment”finding that GHG emissions endanger public health and welfare and thatemissions from motor vehicles contribute to the GHGs in the atmosphere.  This endangerment finding creates a mandatoryduty for the EPA to regulate GHGs from light duty vehicles.  On April 1, 2010, the EPA issued GHGefficiency standards for light duty vehicles, which will take effect on Jan. 2,2011.  The EPA takes the position thatafter Jan. 2, 2011, any permit issued for major stationary sources, suchas power plants, must address GHG emissions through Best Available ControlTechnology review and emissions limits.

 

***Clean Air Interstate Rule (CAIR)*** — In March 2005,the EPA issued the CAIR to further regulate sulfur dioxide (SO2) and nitrogenoxide (NOx) emissions.  The objective ofCAIR is to cap emissions of SO2 and NOx inthe eastern United States, including Texas. In response to the decisions by the U. S. Court of Appeals for theDistrict of Columbia, which vacated but later reinstated CAIR while the EPAdevelops revised regulations, the EPA has indicated that a CAIR replacement rule willbe proposed in May 2010 with finalization planned for 2011.

 

Ascurrently written, CAIR has a two-phase compliance schedule, beginning in 2009for NOx and 2010 for SO2, with a finalcompliance deadline in 2015 for both emissions. Under CAIR, each affected state will be allocated an emissions budgetfor SO2 and NOx that will result in significantemission reductions.  It will be based onstringent emission controls and forms the basis for a cap and tradeprogram.  State emission budgets or capsdecline over time.  States can choose toimplement an emissions reduction program based on the EPA’s proposed modelprogram, or they can propose another method, which the EPA would need toapprove.

 

UnderCAIR’s cap and trade structure, SPS can comply through capital investments inemission controls or purchase of emission allowances from other utilitiesmaking reductions on their systems.  Theremaining capital investments for NOx controls in the SPS region are estimatedat $4.5 million.  For 2009, the NOxallowance compliance costs were $1.7 million.  The estimated NOx allowance cost for 2010 is$1.2 million.  Annual purchases ofSO2 allowances are estimated in the range of$1.7 million to $7.7 million each year, beginning in 2013, forphase I.

 

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

 

***Clean Air Mercury Rule (CAMR)***— In March 2005,the EPA issued the CAMR, which regulated mercury emissions from powerplants.  The Texas Commission onEnvironmental Quality (TCEQ) adopted by reference the EPA modelprogram.  In February 2008, the U.S. Court of Appeals for the District of Columbia vacated CAMR, which impactsfederal CAMR requirements, but not necessarily state-only mercury legislationand rules.  The EPA has agreed tofinalize Maximum Achievable Control Technology emission standards for allhazardous air pollutants from electric utility steam generating units by November 2011to replace CAMR.  Xcel Energy anticipatesthat the EPA will require affected facilities to demonstrate compliance within18 to 36 months thereafter.  At this time, Texas has not adopted anystate-only mercury requirements.

 

***Regional Haze Rules ***— In June 2005,the EPA finalized amendments to the July 1999 regional haze rules.  These amendments apply to the provisions ofthe regional haze rule that require emission controls, known as bestavailable retrofit technology (BART), for industrial facilities emitting airpollutants that reduce visibility by causing or contributing to regionalhaze.  Some of SPS’ generating facilitieswill be subject to BART requirements. Some of these facilities are located in regions where CAIR iseffective.  The TCEQ had determined thatfacilities may use CAIR as a substitute for BART for NOx and SO2.

 

***Cunningham Draft Compliance Order***— On Feb. 18,2010, SPS received a draft compliance order from the New Mexico EnvironmentDepartment (NMED) for Cunningham Station. In the draft order, NMED alleges that Cunningham exceeded its permitlimits for NOx on 7,336 occasions and failed to report these exceedances asrequired by its permit.  The draft orderincludes a proposed penalty of $16.1 million.  SPS denies these allegations and will have anopportunity to discuss the alleged violations and proposed penalty with NMEDprior to the issuance of a final order. SPS will vigorously defend its position in negotiations with NMED.

 

**Legal Contingencies**

 

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

 

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**Environmental Litigation**

** **

***Carbon Dioxide(CO******2******) Emissions Lawsuit —***In 2004, the attorneysgeneral of eight states and New York City, as well as several environmentalgroups, filed lawsuits in U. S. District Court in the Southern District of NewYork against five utilities, including Xcel Energy, the parent company of SPS,to force reductions in CO2 emissions.  The other utilities include American ElectricPower Co., Southern Co., Cinergy Corp. and Tennessee Valley Authority.  The lawsuits allege that CO2 emitted by each company is a public nuisanceas defined under state and federal common law because it has contributed toglobal warming.  The lawsuits do notdemand monetary damages.  Instead, thelawsuits ask the court to order each utility to cap and reduce its CO2 emissions. On Sept. 19, 2005, the court granted a motion to dismiss onconstitutional grounds.  Plaintiffs filedan appeal to the U. S. Court of Appeals for the Second Circuit.  On Sept. 21, 2009, the Court of Appealsissued an opinion reversing the lower court decision.  A subsequent petition for rehearing and enbanc review was denied.  Defendantsanticipate filing a petition for review with the U. S. Supreme Court on orbefore June 2010.

 

***Comer vs. Xcel Energy Inc. etal. —***In 2006, Xcel Energy, the parent company of SPS,received notice of a purported class action lawsuit filed in U. S. DistrictCourt in the Southern District of Mississippi. 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 Energy believes this lawsuit is withoutmerit and intends to vigorously defend itself against these claims.  In August 2007, the court dismissed thelawsuit in its entirety against all defendants on constitutional grounds.  Plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Fifth Circuit. On Oct. 16, 2009, the U. S. Court of Appeals for the Fifth Circuitreversed the district court decision, in part, concluding that the plaintiffspleaded sufficient facts to overcome the constitutional challenges that formedthe basis for dismissal by the district court. A subsequent petition by defendants, including Xcel Energy, for en bancreview was granted.  Oral arguments areexpected to be presented to the Fifth Circuit panel on May 24, 2010.

 

***Native Village of Kivalina vs. XcelEnergy Inc. et al. —***In 2008, the City and NativeVillage of Kivalina, Alaska, filed a lawsuit in U. S. District Court for theNorthern District of California against Xcel Energy, the parent company of SPS,and 23 other utilities, oil, gas and coal companies.  Plaintiffs claim that defendants’ emission ofCO2 and other GHGs contribute to global warming,which is harming their village.  XcelEnergy believes the claims asserted in this lawsuit are without merit andjoined with other utility defendants in filing a motion to dismiss on June 30,2008.  On Oct. 15, 2009, the U. S.District Court dismissed the lawsuit on constitutional grounds.  On Nov. 5, 2009, plaintiffs filed anotice of appeal to the U. S. Court of Appeals for the Ninth Circuit.

 

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

 

***Commercial Paper —***At March 31, 2010 and Dec. 31,2009, SPS had no commercial paper outstanding. At March 31, 2010 and Dec. 31, 2009, SPS had approval by theBoard of Directors to issue up to $250 million of commercial paper.

 

***Money Pool*** — XcelEnergy and its utility subsidiaries have established a money pool arrangementthat allows for short-term investments in and borrowings from the utilitysubsidiaries between each other.  Theholding company may make investments in the utility subsidiaries atmarket-based interest rates; however, the utility money pool arrangement doesnot allow the utility subsidiaries to make investments in the holding company.

 

The following table presents the money poolinvestments for SPS:

 
| **(Millions of Dollars)** | ** ** | **March 31,  2010** | ** ** | **Dec. 31,  2009** | ** ** |
|-------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Money  pool outstanding             |       | $                        | 7          |                    | $          | 77 |   |
| Weighted  average interest rate     |       | 0.30                     | %          | 0.36                    | %          |
| Money  pool available for borrowing |       | $                        | 100        |                    | $          | 100 |   |

 

**8.**     Long-TermBorrowings and Other Financing Instruments

** **

In February 2010,SPS redeemed its $25.0 million pollution control obligations, securingpollution control revenue bonds, due July 1, 2016.

 

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**9.**     **DerivativeInstruments and Fair Value Measurements**

 

SPSmay enter into derivative instruments, including forward contracts, futures,swaps and options, to reduce risk in connection with changes in interest ratesand electric utility commodity prices.

 

***Short-TermWholesale and Commodity Trading Risk —***SPS conducts an immaterial amount of short-termwholesale and commodity trading activities, including the purchase and sale ofelectric capacity, energy and energy related instruments.  SPS’ risk management policy allows managementto conduct these activities within guidelines and limitations as approved byits risk management committee, which is made up of management personnel notdirectly involved in the activities governed by the policy.

 

***Interest Rate Derivatives —***SPS may enterinto various instruments that effectively fix the interest payments on certainfloating rate debt obligations or effectively fix the yield or price on aspecified benchmark interest rate for a specific period.  These derivative instruments are generallydesignated as cash flow hedges for accounting purposes.

 

AtMarch 31, 2010, accumulated other comprehensive losses related to interestrate derivatives included $0.2 million of net losses expected to bereclassified into earnings during the next 12 months as the related hedgedinterest rate transactions impact earnings.

 

Accumulatedother comprehensive losses related to interest rate derivatives reclassifiedinto earnings during the three months ended March 31, 2010 and March 31,2009 were $0.1 million and $0.2 million, respectively.

 

***Commodity Derivatives —***SPS may enterinto derivative instruments to manage variability of future cash flows fromchanges in commodity prices in its electric utility operations.  This could include the purchase or sale ofenergy or energy-related products.  At March 31, 2010 and Dec. 31, 2009, SPS held nocommodity derivatives.  Changes in the fair value of non-trading commodityderivative instruments are recorded in other comprehensive income or deferredas a regulatory asset or liability.  Theclassification as a regulatory asset or liability is based on the commissionapproved regulatory recovery mechanisms.

 

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

 
| ** **                            | ** ** | **March 31, 2010** | ** ** | **Dec. 31, 2009** | ** ** |
|---------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                            | ** ** | **Derivative**               | ** ** | **Derivative**              | ** ** | **Derivative** | ** ** | **Derivative** | ** ** |
| ** **                            | ** ** | **Instruments**              | ** ** | **Instruments**             | ** ** | **Instruments** | ** ** | **Instruments** | ** ** |
| ** **                            | ** ** | **Valuation -**         | ** ** | **Valuation -**        | ** ** | **Valuation -** | ** ** | **Valuation -** | ** ** |
| **(Thousands of Dollars)**  | ** ** | **Assets**                   | ** ** | **Liabilities**             | ** ** | **Assets** | ** ** | **Liabilities** | ** ** |
| Long-term  purchased power agreements |       | $                            | 78,545     |                        | $          | 51,293 |   | $ | 76,551 |   | $ | 52,242 |   |
|                                       |            |                              |            |                             |            |  |  |  |  |  |  |  |  |

 

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

 

***Financial Impact of Qualifying Cash Flow Hedges—***The impact of qualifying interest rate cash flow hedges on SPS’accumulated other comprehensive income, included as a component of commonstockholder’s equity, is detailed in the following table:

 
| ** **                                                                           | ** ** | **Three  Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| **(Thousands of Dollars)**                                                 | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Accumulated  other comprehensive loss related to cash flow hedges at Jan. 1     |       | $                                      | (1,847     | ) | $ | (5,559 | ) |
| After-tax  net realized losses on derivative transactions reclassified into earnings |       | 43                                     |       | 159 |   |
| Accumulated  other comprehensive loss related to cash flow hedges at March 31   |       | $                                      | (1,804     | ) | $ | (5,400 | ) |

 

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***FairValue Measurements***

 

*ASC 820Fair Value Measurements and Disclosures* provides a singledefinition of fair value and requires enhanced disclosures about assets andliabilities measured at fair value. A hierarchal framework for disclosing theobservability of the inputs utilized in measuring assets and liabilities atfair value was established by this guidance. The three levels in the hierarchyand examples of each level are as follows:

 

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

 

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

 

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

 

SPShad no interest rate derivative contracts or cash equivalents measured at fairvalue on a recurring basis as of March 31, 2010 and Dec. 31, 2009.

 

**10.  Financial Instruments**

** **

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

 
| ** **                                 | ** ** | **March 31,  2010** | ** ** | **Dec. 31,  2009** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **Carrying**             | ** ** | ** **              | ** ** | **Carrying** | ** ** | ** ** | ** ** |
| **(Thousands of Dollars)**       | ** ** | **Amount**               | ** ** | **Fair  Value**         | ** ** | **Amount** | ** ** | **Fair  Value** | ** ** |
| Other  investments                         |       | $                        | 238        |                    | $          | 238 |   | $ | 263 |   | $ | 263 |   |
| Long-term  debt, including current portion |       | 897,526                  |       | 967,833                 |       | 922,447 |   | 977,029 |   |
|                                            |            |                          |            |                         |            |  |  |  |  |  |  |  |  |

 

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

 

The fair value estimates presented are based oninformation available to management as of March 31, 2010 and Dec. 31,2009.  These fair value estimates havenot been comprehensively revalued for purposes of these financial statementssince that date and current estimates of fair value may differ significantly.

 

***Letters of Credit***— SPS uses letters of credit, generally with terms ofone year, to provide financial guarantees for certain operating obligations.  At March 31, 2010 and Dec. 31,2009, there were $10.0 million of letters of credit outstanding,respectively.  The contract amounts ofthese letters of credit approximate their fair values and are subject to feesdetermined in the marketplace.

 

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

** **

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

 
| ** **                           | ** ** | **Three  Months Ended March 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Interest  income                     |       | $                                      | 63         |   | $ | 281 |   |
| Other  nonoperating income           |       | 1                                      |       | 4 |   |
| Insurance  policy (expenses) income  |       | (70                                    | )          | 80 |   |
| Other  (expense) income, net         |       | $                                      | (6         | ) | $ | 365 |   |

 

**12.**  **SegmentInformation**

 

SPS has one reportablesegment.  SPS operates in the regulatedelectric industry, providing wholesale and retail electric service in thestates of Texas and New Mexico.  Revenuesfrom external customers were $381.5 million and $369.0 million for the threemonths ended March 31, 2010 and 2009, respectively.

 

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**13.**  **ComprehensiveIncome**

 

The components of totalcomprehensive income are shown below:

 
| ** **                                                                           | ** ** | **Three  Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| **(Thousands  of Dollars)**                                                          | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Net  income                                                                          |       | $                                      | 7,699      |   | $ | 9,182 |   |
| Other  comprehensive income:                                                         |       |                                   |       |   |   |
| After-tax  net realized losses on derivative transactions reclassified into earnings |       | 43                                     |       | 159 |   |
| Comprehensive  income                                                                |       | $                                      | 7,742      |   | $ | 9,341 |   |

 

**14.**  **BenefitPlans and Other Postretirement Benefits**

 

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

 

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

** **
| ** **                                                                                  | ** ** | **Three  Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                  | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                                  | ** ** | ** **                             | ** ** | ** ** | ** ** | **Postretirement  Health** | ** ** |
| **(Thousands of Dollars)**                                                        | ** ** | **Pension  Benefits**                  | ** ** | **Care  Benefits** | ** ** |
| **Xcel Energy Inc.**                                                                        |       |                                   |       |   |   |   |   |   |   |
| Service  cost                                                                               |       | $                                      | 17,618     |   | $ | 15,986 |   | $ | 1,038 |   | $ | 1,276 |   |
| Interest  cost                                                                              |       | 40,652                                 |       | 41,849 |   | 10,529 |   | 12,156 |   |
| Expected  return on plan assets                                                             |       | (58,124                                | )          | (63,360 | ) | (7,134 | ) | (5,394 | ) |
| Amortization  of transition obligation                                                      |       | —                                 |       | — |   | 3,611 |   | 3,496 |   |
| Amortization  of prior service cost (credit)                                                |       | 5,164                                  |       | 6,155 |   | (1,233 | ) | (652 | ) |
| Amortization  of net loss                                                                   |       | 11,024                                 |       | 2,929 |   | 2,709 |   | 4,885 |   |
| Net  periodic benefit cost                                                                  |       | 16,334                                 |       | 3,559 |   | 9,520 |   | 15,767 |   |
| Costs  not recognized and additional cost recognized due to the effects of  regulation |       | (7,326                                 | )          | (487 | ) | 973 |   | 973 |   |
| Net  benefit cost recognized for financial reporting                                        |       | $                                      | 9,008      |   | $ | 3,072 |   | $ | 10,493 |   | $ | 16,740 |   |
|                                                                                        |       |                                   |       |   |   |   |   |   |   |
| **SPS**                                                                                     |       |                                   |       |   |   |   |   |   |   |
| Net  benefit cost (credit) recognized for financial reporting                               |       | $                                      | 1,188      |   | $ | (1,778 | ) | $ | 829 |   | $ | 1,191 |   |

 

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**Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

** **

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

 

**Forward-LookingStatements**

 

The following discussion andanalysis by management focuses on those factors that had a material effect onSPS’ financial condition, results of operations, and cash flows during theperiods presented, or are expected to have a material impact in the future. Itshould be read in conjunction with the accompanying unaudited financialstatements and the related notes to the financial statements.  Due to the seasonality of SPS’ electricsales, such interim results are not necessarily an appropriate base from whichto project annual results.  Except forthe historical statements contained in this report, the matters discussed inthe following discussion and analysis are forward-looking statements that aresubject to certain risks, uncertainties and assumptions. Such forward-lookingstatements are intended to be identified in this document by the words “anticipate,”“believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,”“project,” “possible,” “potential,” “should” and similar expressions. Actualresults may vary materially. Forward-looking statements speak only as of thedate they are made, and we do not undertake any obligation to update them toreflect changes that occur after that date. Factors that could cause actualresults to differ materially include, but are not limited to: general economicconditions, including the availability of credit and its impact on capitalexpenditures and the ability of SPS to obtain financing on favorable terms;business conditions in the energy industry; actions of credit rating agencies;competitive factors, including the extent and timing of the entry of additionalcompetition in the markets served by SPS; unusual weather; effects ofgeopolitical 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 or impose environmental compliance conditions; structures that affectthe speed and degree to which competition enters the electric market; costs andother effects of legal and administrative proceedings, settlements,investigations and claims; environmental laws and regulations; actions ofaccounting regulatory bodies; the items described under Factors AffectingResults of Continuing Operations; and the other risk factors listed from timeto time by SPS in reports filed with the SEC, including “Risk Factors” in Item1A of SPS’ Form 10-K for the year ended Dec. 31, 2009, and Item 1Aand Exhibit 99.01 to this Quarterly Report on Form 10-Q for thequarter ended March 31, 2010.

 

**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, 2009.  Commodity price and interest rate risks forSPS are mitigated in most jurisdictions due to cost-based rate regulation.

 

Distressin the financial markets may impact the fair value of the debt and equitysecurities in pension and postretirement health care plan trusts, as well asSPS’s ability to earn a return on short-term investments of excess cash.  As of March 31, 2010, there have been nomaterial changes to market risks from that set forth in SPS’s Annual Report on Form 10-Kfor the year ended Dec. 31, 2009.

 

## **Resultsof Operations**

## ** **

SPS’ net income wasapproximately $7.7 million for the first three months of 2010, compared withnet income of approximately $9.2 million for the first three months of 2009.

 

**ElectricRevenues and Margin**

 

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

 

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

 
| ** **                         | ** ** | **Three  Months Ended March 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| **(Millions  of Dollars)**         | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Electric  revenues                 |       | $                                      | 381        |   | $ | 369 |   |
| Electric  fuel and purchased power |       | (256                                   | )          | (248 | ) |
| Electric  margin                   |       | $                                      | 125        |   | $ | 121 |   |

 

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Thefollowing tables summarize the components of the changes in electric revenuesand electric margin:

 

***Electric Revenues***

*** ***
| **(Millions  of Dollars)**                        | ** ** | **2010  vs. 2009** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|
| Fuel  and purchased power cost recovery           |       | $                  | 23         |   |
| Retail  rate increases (Texas and New Mexico)     |       | 8                  |       |
| Estimated  impact of weather                      |       | 2                  |       |
| Retail  sales increase (excluding weather impact) |       | 2                  |       |
| Firm  wholesale                                   |       | (1                 | )          |
| Transmission  revenue                             |       | (1                 | )          |
| Non-fuel  riders                                  |       | (1                 | )          |
| Other,  net                                       |       | (20                | )          |
| Total  increase in electric revenues              |       | $                  | 12         |   |

 

***Electric Margin***

*** ***
| **(Millions  of Dollars)**                        | ** ** | **2010  vs. 2009** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|
| Retail  rate increases (Texas and New Mexico)     |       | $                  | 8          |   |
| Estimated  impact of weather                      |       | 2                  |       |
| Retail  sales increase (excluding weather impact) |       | 2                  |       |
| Fuel  recovery timing                             |       | (4                 | )          |
| Transmission  revenue, net of expense             |       | (3                 | )          |
| Firm  wholesale                                   |       | (1                 | )          |
| Non-fuel  riders                                  |       | (1                 | )          |
| Other,  net                                       |       | 1                  |       |
| Total  increase in electric margin                |       | $                  | 4          |   |

 

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

## ** **

***Other Operating and Maintenance Expenses****—*Other operating and maintenance expensesfor the first three months of 2010 increased $2.2 million, or 4.1 percent,compared to first three months of 2009. The following summarizes the components of the changes for the threemonths ended March 31:

 
| **(Millions  of Dollars)**                                   | ** ** | **2010  vs. 2009** | ** ** |
|--------------------------------------------------------------|------------|--------------------|------------|
| Higher  labor costs                                          |       | $                  | 1          |   |
| Other,  net (including contract labor and employee expenses) |       | 1                  |       |
| Total  increase in other operating and maintenance expenses  |       | $                  | 2          |   |

 

***Allowance for Funds Used During Construction, Debt andEquity (AFUDC)***—AFUDCdecreased by approximately $0.9 million for the first three months of 2010compared with 2009.  This decrease wasprimarily due to lower AFUDC rates, primarily driven by lower interest rates.

 

***Interest Charges***— Interest charges for the first three months of 2010decreased by approximately $2.0 million, or 10.8 percent, compared with2009.  The decrease was primarily due toretirement of long-term debt in March 2009 and interest paid on partialrefunds to wholesale customers in 2009.

 

***Income Taxes***— Income tax expense increased by $3.2 millionfor the first three months of 2010, compared with the first three months of2009.  The increase in income tax expense was primarily due to a write-offof tax benefits previously recorded for Medicare Part D subsidies.  The effective tax rate was 50.8 percent forthe first three months of 2010, compared with 34.3 percent for the same periodin 2009.  The higher effective tax rate for the first threemonths of 2010 was primarily due to the write-off of tax benefit for Medicare Part Dsubsidies.  Without this write-off, theeffective tax rate for the first three months of 2010 would have been 38.9percent.

 

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**Factors Affecting Results of Continuing Operations**

** **

**PublicUtility Regulation**

** **

***Southwest Power Pool, Inc. (SPP) Transmission CostRecovery ******—****** ***The SPP transmission tariffcurrently establishes the mechanism for recovering costsassociated with base plan transmission projects, which aretransmission projects required to maintain reliability, and for balancedportfolio transmission projects that promote economic expansion ofthe SPP grid.  Currently, for base plan transmission projects,one-third of the costs are collected on an SPP region-wide basis and theremaining two-thirds are recovered from individual pricing zone(s) inSPP using a power flow analysis.  For balancedportfolio projects, 100 percent of the costs are recovered on an SPPregion-wide basis.  During the SPP Board of Directors’ meeting onMarch 31, 2010, the SPP board approved the tariff filing for this costallocation methodology asfollows:

 

·      For projects rated at avoltage level less than 100 kilovolts (KV), all costs would berecovered from the pricing zone of the project;

 

·      For projects rated at avoltage level between 100 KV and 300 KV, one-third of the costs would berecovered on an SPP region-wide basis and two-thirds would be recovered fromthe pricing zone of the project; and

 

·      For projects rated at avoltage level greater than 300 KV, 100 percent of costs would berecovered on an SPP region-wide basis.

 

## **Summaryof Recent Federal Regulatory Developments**

## ** **

TheFERC has jurisdiction over rates for electric transmission service ininterstate commerce and electricity sold at wholesale, accounting practices andcertain other activities of SPS, including enforcement of North AmericanElectric Reliability Corporation (NERC) mandatory electric reliabilitystandards. State and local agencies have jurisdiction over many of SPS’activities, including regulation of retail rates and environmental matters. See additionaldiscussion in the summary of recent federal regulatory developments and publicutility regulation sections of the SPS Annual Report on Form 10-K for theyear ended Dec. 31, 2009.  Inaddition to the matters discussed below, see Note 5 to the financialstatements for a discussion of other regulatory matters.

 

***FERC PenaltyGuideline Policy Statement***—******On March 18, 2010, the FERC issued aPenalty Guideline Policy Statement based on the U. S. Federal SentencingGuidelines.  The penaltyguidelines propose substantial financial penalties for violations of NERCreliability standards and other FERC rules. On April 15, 2010, the FERC issued an order suspendingthe policy statement and requested written comments within 60 days.

 

***Electric Reliability Standards Compliance***

 

ComplianceAudits

 

InMarch 2010, the SPP conducted a compliance spot check to evaluatecompliance with the NERC Critical Energy Infrastructure (CIP) standards, whichwere effective July 1, 2008.  Thepreliminary report found that that the Xcel Energy utility subsidiaries may notbe in compliance with several of the CIP standards.  Xcel Energy will respond to the reportindicating where it disagrees with the conclusions.  To what extent NERC may seek to impose penalties forpotential violations is unknown at this time.

 

**Item 4. CONTROLS AND PROCEDURES**

 

**Disclosure Controls and Procedures**

** **

SPSmaintains a set of disclosure controls and procedures designed to ensure thatinformation required to be disclosed in reports that it files or submits underthe Securities Exchange Act of 1934 is recorded, processed, summarized, andreported within the time periods specified in SEC rules and forms. Inaddition, the disclosure controls and procedures ensure that informationrequired to be disclosed is accumulated and communicated to management,including the chief executive officer (CEO) and chief financial officer (CFO),allowing timely decisions regarding required disclosure. As of March 31,2010, based on an evaluation carried out under the supervision and with theparticipation of SPS’s management, including the CEO and CFO, of theeffectiveness of its disclosure controls and the procedures, the CEO and CFO haveconcluded that SPS’s disclosure controls and procedures were effective.

 

**Internal Control Over Financial Reporting**

** **

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

 

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

#### ** **

## **Item 1. LEGAL PROCEEDINGS**

## ** **

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

 

**Additional Information**

 

See Notes 5 and 6 of the financial statementsin this Quarterly Report on Form 10-Q for further discussion of legalproceedings, including Regulatory Matters and Commitments and ContingentLiabilities, which are hereby incorporated by reference. Reference also is madeto Item 3 and Notes 13 and 14 of SPS’ financial statements in its AnnualReport on Form 10-K for the year ended Dec. 31, 2009 for adescription of certain legal proceedings presently pending.

 

**Item 1A. RISK FACTORS**

 

SPS’risk factors are documented in Item 1A of Part I of its Annual Report on Form 10-Kfor the year ended Dec. 31, 2009, which is incorporated herein byreference.  There have been no material changes to riskfactors.

 

## **Item 6. EXHIBITS**

 

----

* Indicates incorporation by reference

 
| 3.01* |   | Amended and Restated Articles of Incorporation dated Sept. 30, 1997  (Exhibit 3(a)(2) to Form 10-K for the year ended Dec. 31,  1997 (file no. 001-03789) dated March 3, 1998).        |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.02* |   | By-laws dated Sept. 29, 1997 (Exhibit 3(b)(2) to  Form 10-K for the year ended Dec. 31, 1997 (file no. 001-03789)  dated March 3, 1998).                                               |
| 31.01 |   | Principal Executive  Officer’s and Principal Financial Officer’s certifications pursuant to 18  U.S.C. Section 1350, as adopted pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002. |
| 32.01 |   | Certification pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                             |
| 99.01 |   | Statement pursuant to  Private Securities Litigation Reform Act of 1995.                                                                                                                                        |

 

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#### **SIGNATURES**

#### ** **

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorizedon May 3, 2010.

 

Southwestern Public ServiceCompany

(Registrant)

 

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

 

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