**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**Washington, D.C. 20549

**FORM 10-Q**

** **

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF1934

** **

**For the quarterly period ended June 30, 2006**

**or**

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

** **

**For the transition period from             to**

** **

**Commission File Number:001-03789**

** **

**Southwestern Public Service Company**

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

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

 

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

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90 days. xYes o No

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” inRule 12b-2 of the Exchange Act.  (Checkone):

Large Accelerated Filer o                                         AcceleratedFiler o                             Non-AcceleratedFiler x

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act). Yes  o   No  x

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

 

| Class                       | ** ** | **Outstanding at Aug. 4, 2006** |
|-----------------------------|------------|---------------------------------|
| Common Stock, $1  par value |       | 100 shares                      |
|                             |            |                                 |  |  |

 

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

 

 

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**Table ofContents**

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

 

This Form 10-Q is filedby Southwestern Public Service Co., a New Mexico corporation (SPS).  SPS is a wholly owned subsidiary of XcelEnergy Inc. (Xcel Energy).  Additionalinformation on Xcel Energy is available on various filings with the Securitiesand Exchange Commission (SEC).

 

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**PARTI. FINANCIAL INFORMATION**

**Item1. Financial Statements**

**SOUTHWESTERNPUBLIC SERVICE CO.STATEMENTS OF INCOME (UNAUDITED)(Thousands of Dollars)**

 
| ** **                                                                                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                           | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating revenues**                                                                               |       | $                                               | 423,180    |                                          | $          | 381,326 |   | $ | 835,989 |   | $ | 693,729 |   |
|                                                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| **Operating expenses**                                                                               |       |                                            |       |                                          |       |   |   |   |   |
| Electric fuel  and purchased power                                                                   |       | 308,705                                         |       | 264,015                                       |       | 604,293 |   | 459,963 |   |
| Other operating  and maintenance expenses                                                            |       | 48,917                                          |       | 43,908                                        |       | 98,735 |   | 89,518 |   |
| Depreciation and  amortization                                                                       |       | 24,012                                          |       | 24,083                                        |       | 47,909 |   | 47,699 |   |
| Taxes (other  than income taxes)                                                                     |       | 14,052                                          |       | 12,708                                        |       | 27,374 |   | 25,437 |   |
| Total operating  expenses                                                                            |       | 395,686                                         |       | 344,714                                       |       | 778,311 |   | 622,617 |   |
|                                                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| **Operating income**                                                                                 |       | 27,494                                          |       | 36,612                                        |       | 57,678 |   | 71,112 |   |
|                                                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Interest and  other income — net (see Note 6)                                                   |       | 1,193                                           |       | 3,457                                         |       | 2,668 |   | 3,942 |   |
| Allowance for  funds used during construction — equity                                          |       | 380                                             |       | 588                                           |       | 498 |   | 972 |   |
|                                                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| **Interest charges and financing  costs**                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Interest charges  — includes financing costs of $1,573, $1,511, $3,101 and $3,036, respectively |       | 13,917                                          |       | 13,396                                        |       | 27,609 |   | 26,780 |   |
| Allowance for  funds used during construction — debt                                            |       | (695                                            | )          | (497                                          | )          | (1,376 | ) | (1,010 | ) |
| Total interest  charges and financing costs                                                          |       | 13,222                                          |       | 12,899                                        |       | 26,233 |   | 25,770 |   |
|                                                                                                 |       |                                            |       |                                          |       |   |   |   |   |
| Income before income  taxes                                                                          |       | 15,845                                          |       | 27,758                                        |       | 34,611 |   | 50,256 |   |
| Income taxes                                                                                         |       | 5,854                                           |       | 10,249                                        |       | 12,743 |   | 18,651 |   |
| **Net income**                                                                                       |       | $                                               | 9,991      |                                          | $          | 17,509 |   | $ | 21,868 |   | $ | 31,605 |   |

 

See Notes to FinancialStatements

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**SOUTHWESTERNPUBLIC SERVICE CO.STATEMENTS OF CASH FLOWS (UNAUDITED)(Thousands of Dollars)**

 
| ** **                                                                         | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                         | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| **Operating  activities**                                                          |       |                                          |       |   |   |
| Net income                                                                         |       | $                                             | 21,868     |   | $ | 31,605 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                          |       |   |   |
| Depreciation and amortization                                                      |       | 51,490                                        |       | 51,822 |   |
| Deferred income taxes                                                              |       | (11,386                                       | )          | 10,424 |   |
| Amortization of investment tax credits                                             |       | (125                                          | )          | (125 | ) |
| Allowance for equity funds used during construction                                |       | (498                                          | )          | (972 | ) |
| Change in recoverable electric energy costs                                        |       | 12,527                                        |       | (23,954 | ) |
| Change in accounts receivable                                                      |       | 13,148                                        |       | (22,918 | ) |
| Change in accrued unbilled revenue                                                 |       | 23,492                                        |       | 464 |   |
| Change in inventories                                                              |       | (3,247                                        | )          | (54 | ) |
| Change in other current assets                                                     |       | (576                                          | )          | 839 |   |
| Change in accounts payable                                                         |       | 3,010                                         |       | 1,137 |   |
| Change in other current liabilities                                                |       | 14,098                                        |       | 17,684 |   |
| Change in other noncurrent assets                                                  |       | (6,725                                        | )          | (8,914 | ) |
| Change in other noncurrent liabilities                                             |       | 2,087                                         |       | 4,149 |   |
| Net cash provided by operating activities                                          |       | 119,163                                       |       | 61,187 |   |
|                                                                               |       |                                          |       |   |   |
| **Investing  activities**                                                          |       |                                          |       |   |   |
| Capital/construction expenditures                                                  |       | (48,502                                       | )          | (57,344 | ) |
| Allowance for equity funds used during construction                                |       | 498                                           |       | 972 |   |
| Other investments                                                                  |       | 1,674                                         |       | 1,960 |   |
| Net cash used in investing activities                                              |       | (46,330                                       | )          | (54,412 | ) |
|                                                                               |       |                                          |       |   |   |
| **Financing  activities**                                                          |       |                                          |       |   |   |
| Short-term borrowings — net                                                   |       | (85,000                                       | )          | (36,000 | ) |
| Borrowings under utility money pool arrangement                                    |       | 194,400                                       |       | 75,700 |   |
| Repayments under utility money pool arrangement                                    |       | (139,700                                      | )          | (44,500 | ) |
| Proceeds from issuance of long-term debt                                           |       | —                                        |       | 35,000 |   |
| Capital contributions from parent                                                  |       | 7,561                                         |       | 6,736 |   |
| Dividends paid to parent                                                           |       | (59,496                                       | )          | (43,711 | ) |
| Net cash used in financing activities                                              |       | (82,235                                       | )          | (6,775 | ) |
|                                                                               |       |                                          |       |   |   |
| Net decrease in cash and cash equivalents                                          |       | (9,402                                        | )          | — |   |
| Cash and cash equivalents at beginning of year                                     |       | 9,407                                         |       | 5 |   |
| Cash and cash equivalents at end of quarter                                        |       | $                                             | 5          |   | $ | 5 |   |
|                                                                               |       |                                          |       |   |   |
| Supplemental  disclosure of cash flow information:                                 |       |                                          |       |   |   |
| Cash paid for interest (net of amounts capitalized)                                |       | $                                             | 23,202     |   | $ | 22,786 |   |
| Cash paid for income taxes (net of refunds received)                               |       | $                                             | 29,965     |   | $ | (6,666 | ) |
|                                                                               |       |                                          |       |   |   |
| Supplemental  disclosure of non-cash investing transactions:                       |       |                                          |       |   |   |
| Property, plant  and equipment additions                                           |       | $                                             | 2,946      |   | $ | 2,974 |   |

 

SeeNotes to Financial Statements

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**SOUTHWESTERNPUBLIC SERVICE CO.BALANCE SHEETS (UNAUDITED)(Thousands of Dollars)**
| ** **                                                                                  | ** ** | **June 30,  2006** | ** ** | **Dec. 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                  | ** ** | ** **              | ** ** | ** **              | ** ** |
| Current assets:                                                                             |       |                    |       |                    |       |
| Cash and cash equivalents                                                                   |       | $                       | 5          |                    | $          | 9,407 |   |
| Accounts receivable — net of allowance for bad  debts: $1,718 and $2,658, respectively |       | 87,788                  |       | 90,049                  |       |
| Accounts receivable from affiliates                                                         |       | 10,416                  |       | 21,303                  |       |
| Accrued unbilled revenues                                                                   |       | 57,878                  |       | 81,370                  |       |
| Recoverable electric energy costs                                                           |       | 135,823                 |       | 148,351                 |       |
| Materials and supplies inventories — at average cost                                   |       | 19,993                  |       | 17,701                  |       |
| Fuel inventory — at average cost                                                       |       | 3,993                   |       | 3,038                   |       |
| Derivative instruments valuation                                                            |       | —                  |       | 22,507                  |       |
| Prepayments and other                                                                       |       | 6,496                   |       | 5,920                   |       |
| Total current assets                                                                        |       | 322,392                 |       | 399,646                 |       |
| Property, plant  and equipment, at cost:                                                    |       |                    |       |                    |       |
| Electric utility plant                                                                      |       | 3,340,536               |       | 3,305,997               |       |
| Construction work in progress                                                               |       | 79,534                  |       | 69,657                  |       |
| Total property, plant and equipment                                                         |       | 3,420,070               |       | 3,375,654               |       |
| Less accumulated depreciation                                                               |       | (1,435,982              | )          | (1,391,905              | )          |
| Net property, plant and equipment                                                           |       | 1,984,088               |       | 1,983,749               |       |
| Other assets:                                                                               |       |                    |       |                    |       |
| Prepaid pension asset                                                                       |       | 147,371                 |       | 143,309                 |       |
| Regulatory assets                                                                           |       | 85,318                  |       | 89,214                  |       |
| Derivative instruments valuation                                                            |       | 107,791                 |       | 89,642                  |       |
| Other investments                                                                           |       | 6,394                   |       | 8,068                   |       |
| Deferred charges and other                                                                  |       | 3,957                   |       | 3,948                   |       |
| Total other assets                                                                          |       | 350,831                 |       | 334,181                 |       |
| Total assets                                                                                |       | $                       | 2,657,311  |                    | $          | 2,717,576 |   |
| ** **                                                                                  |       |                    |       |                    |       |
| **LIABILITIES  AND EQUITY**                                                                 |       |                    |       |                    |       |
| Current  liabilities:                                                                       |       |                    |       |                    |       |
| Current portion of long-term debt                                                           |       | $                       | 500,000    |                    | $          | 500,000 |   |
| Borrowings on utility money pool, weighted average  yield of 5.31% at June 30, 2006         |       | 54,700                  |       | —                  |       |
| Short-term debt                                                                             |       | —                  |       | 85,000                  |       |
| Accounts payable                                                                            |       | 147,381                 |       | 148,159                 |       |
| Accounts payable to affiliates                                                              |       | 10,746                  |       | 9,774                   |       |
| Taxes accrued                                                                               |       | 18,439                  |       | 27,123                  |       |
| Accrued interest                                                                            |       | 10,312                  |       | 10,165                  |       |
| Dividends payable to parent                                                                 |       | —                  |       | 20,395                  |       |
| Deferred income taxes                                                                       |       | 29,037                  |       | 38,773                  |       |
| Derivative instruments valuation                                                            |       | 666                     |       | 26,933                  |       |
| Other                                                                                       |       | 41,892                  |       | 19,186                  |       |
| Total current liabilities                                                                   |       | 813,173                 |       | 885,508                 |       |
| Deferred credits  and other liabilities:                                                    |       |                    |       |                    |       |
| Deferred income taxes                                                                       |       | 463,929                 |       | 466,415                 |       |
| Regulatory liabilities                                                                      |       | 143,989                 |       | 145,931                 |       |
| Derivative instruments valuation                                                            |       | 68,812                  |       | 45,457                  |       |
| Deferred investment tax credits                                                             |       | 3,340                   |       | 3,466                   |       |
| Asset retirement obligations                                                                |       | 4,301                   |       | 4,182                   |       |
| Benefit obligations and other                                                               |       | 28,536                  |       | 26,603                  |       |
| Total deferred credits and other liabilities                                                |       | 712,907                 |       | 692,054                 |       |
| Commitments and  contingencies (see Note 3)                                                 |       |                    |       |                    |       |
| Capitalization:                                                                             |       |                    |       |                    |       |
| Long-term debt                                                                              |       | 325,931                 |       | 325,776                 |       |
| Common stock — authorized 200 shares of $1.00 par  value, outstanding 100 shares       |       | —                  |       | —                  |       |
| Additional paid in capital                                                                  |       | 475,026                 |       | 467,465                 |       |
| Retained earnings                                                                           |       | 334,409                 |       | 351,640                 |       |
| Accumulated other comprehensive loss                                                        |       | (4,135                  | )          | (4,867                  | )          |
| Total common stockholder’s equity                                                      |       | 805,300                 |       | 814,238                 |       |
| Total  liabilities and equity                                                               |       | $                       | 2,657,311  |                    | $          | 2,717,576 |   |

**See the Notes to Financial Statements**

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**NOTESTO FINANCIAL STATEMENTS**

In the opinion ofmanagement, the accompanying unaudited financial statements contain alladjustments necessary to present fairly the financial position of SPS as ofJune 30, 2006, and Dec. 31, 2005; the results of its operations for the threeand six months ended June 30, 2006 and 2005; and its cash flows for the sixmonths ended June 30, 2006 and 2005. Due to the seasonality of electric salesof SPS, quarterly results are not necessarily an appropriate base from which toproject annual results.

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

The significant accounting policies set forth in Note1 to the financial statements in SPS’ Annual Report on Form 10-K for the yearended Dec. 31, 2005 appropriately represent, in all material respects, thecurrent status of accounting policies, and are incorporated herein byreference.

***FASB Interpretation No. 48 (FIN 48)***— In July 2006, the FASB issued FIN 48, “Accounting for Uncertainty in IncomeTaxes —an interpretation of FASB Statement No. 109”.  FIN 48 prescribes a comprehensive financialstatement model of how a company should recognize, measure, present, anddisclose uncertain tax positions that the company has taken or expects to takein its income tax returns.  FIN 48requires that only income tax benefits that meet the “more likely than not”recognition threshold be recognized or continue to be recognized on theeffective date.  Initial derecognitionamounts would be reported as a cumulative effect of a change in accountingprinciple.

FIN 48is effective for fiscal years beginning after Dec. 15, 2006.  SPS is assessing the impact of the new guidance on all ofits open tax positions.

**2.****     Regulation**

***FERC Transmission Rate Case****** ***— On Sept. 2, 2004, Xcel Energy filed on behalf of SPS and Public ServiceCompany of Colorado (PSCo), an affiliate of SPS, an application to increasewholesale transmission service and ancillary service rates within the XcelEnergy joint open access transmission tariff. PSCo and SPS requested an increase in annual transmission service andancillary services revenues of $6.1 million. OnFeb. 6, 2006, the parties in the proceeding submitted an uncontested offerof settlement. The settlement results in a $1.1 million stated rate increasefor SPS effective June 2005, and SPS can file a further rate increaseeffective Oct. 1, 2006.  On April 5,2006, the Federal EnergyRegulatory Commission (FERC) issued an order approving the uncontested settlement.

Most transmission service users of the SPSsystem take service under the Southwest Power Pool (SPP) regional open accesstransmission tariff.  On May 6, 2006, SPPsubmitted a compliance filing to the April 5, 2006 FERC order to include theSPS settlement rates in the SPP tariff effective retroactive to June 1,2005.  Certain customer parties protestedthe SPP filing as inconsistent with the Feb. 6, 2006 settlement.  SPP and SPS filed answers responding to theprotests.   Final FERC action is pending.

***Wholesale Rate Complaints*** - InNovember 2004, Golden Spread Electric, Lyntegar Electric, Farmer’sElectric, Lea County Electric, Central Valley Electric and Roosevelt CountyElectric, wholesale cooperative customers of SPS, filed a rate complaint at theFERC. The complaint alleged that SPS’rates for wholesale service were excessive and that SPS had incorrectlycalculated monthly fuel cost adjustments using the fuel cost adjustment clause(FCAC) provisions contained in SPS’ wholesale rate schedules. Among otherthings, the complainants asserted that SPS was not properly calculating thefuel costs that are eligible for FCAC recovery to reflect fuel costs recoveredfrom certain wholesale sales to other utilities, and that SPS had inappropriatelyallocated average fuel and purchased power costs to other of SPS’ wholesalecustomers, effectively raising the fuel costs charges to complainants. Cap RockEnergy Corporation, another full-requirements customer, Public Service Companyof New Mexico (PNM) and Occidental Permian Ltd. and Occidental Power Marketing,L.P. intervened in the proceeding. Hearings on the complaint were held inFebruary and March 2006.

On May 24, 2006, a FERCadministrative law judge (ALJ) issued an initial recommended decision in theproceeding.  The FERC will review theinitial recommendation and issue a final order. SPS and others have filed exceptions to the ALJ’s initialrecommendation.  FERC’s order may or maynot follow any of the ALJ’s recommendation.

In the recommendeddecision, the ALJ resolved a number of disputed cost of service issues andordered a compliance filing to determine the extent to which base revenuesrecovered under currently effective rates for the period beginning Jan. 1,2005, through June 30, 2006 should be refunded to wholesale customers. The ALJalso found that SPS should recalculate its FCAC billings for the periodbeginning Jan. 1, 1999, to reduce the fuel and purchased power costs recoveredfrom the complaining customers by allocating incremental fuel costs incurred bySPS in making wholesale sales of system firm capacity and associated energy toother firm customers at market-based rates during this period based on the viewthat such sales should be treated as opportunity sales.

SPS believes the ALJhas erred on significant and material issues that contradict FERC policy orrules of law.  Specifically, SPSbelieves, based on FERC rules and precedent, that it has appropriately appliedits’ FCAC tariff to the proper classes of customers.  

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These sales were of along-term duration under FERC precedent and were made from SPS’ entiresystem.  Accordingly, SPS believes thatthe ALJ erred in concluding that these transactions were opportunity sales,which require the assignment of incremental costs.

The FERC has approvedsystem average cost allocation treatment in previous filings by SPS for saleshaving similar service characteristics and previously accepted for filingcertain of the challenged agreements with average fuel cost pricing.  The ALJ failed to acknowledge either factor.

Moreover, SPS believesthat the ALJ’s recommendation constituted a violation of the Filed RateDoctrine in that it effectively results in a retroactive amendment to the SPSFERC-approved FCAC tariff provisions. Under existing rules of law and FERC regulations, the FERC may modify apreviously approved FCAC on a prospective basis.  Accordingly, SPS believes it has applied itsFCAC correctly and has sought review of the recommended decision by the FERC byfiling a brief on the exceptions.

Based on FERC’sregulations and rules of law, SPS has evaluated all sales made from Jan. 1,1999, to Dec. 31, 2005.  Notwithstandingthat, SPS believes that it should ultimately prevail in this proceeding.  SPS has accrued approximately $7 million, ofwhich $4 million was recorded in the second quarter of 2006, related to boththe base-rate and fuel items.  However,if the FERC were to adopt the majority of the ALJ’s recommendations, SPS’refund exposure could be approximately $50 million.

On Sept. 15, 2005,PNM filed a separate complaint at the FERC in which it contended that itsdemand charge under an existing interruptible power supply contract with SPS isexcessive and that SPS has overcharged PNM for fuel costs under three separateagreements through erroneous FCAC calculations.  PNM’s arguments mirrorthose that it made as an intervenor in the cooperatives’ complaint case, andSPS believes that they have little merit.  SPS submitted a response to PNM’scomplaint in October 2005.  In November 2005, the FERC acceptedPNM’s complaint.  In July 2006, SPS andPNM reached a settlement in principle. A final settlement agreement will befiled for FERC approval. Hearings scheduled for December 2006 will be held inabeyance. Based on the fact that many of these issues are already beingreviewed by the FERC in the complaint case filed by the cooperatives discussedabove, the current status and expected outcome of this proceeding, SPS does notanticipate any additional liability.

***Wholesale Power Base Rate Application***—On Dec. 1, 2005, SPS filed for a $2.5 million increase in wholesale power ratesto certain electric cooperatives. On Jan. 31, 2006, the FERC conditionallyaccepted the proposed rates for filing, and set the $2.5 million power rate increaseto become effective on July 1, 2006, subject to refund. The FERC also set therate increase request for hearing and settlement judge procedures. The case ispresently in the settlement judge procedures and an agreement in principle hasbeen reached for base rates for the full-requirements customers and PNM; otherwholesale customers have not settled, however. The revised base rates wereplaced in effect July 1, 2006, subject to refund.

***SPP Energy Imbalance Service*-**OnJune 15, 2005, SPP, of which SPS is a member, filed proposed tariffprovisions to establish an Energy Imbalance Service (EIS) wholesale energymarket for the SPP region, using a phased approach toward the development of afully-functional locational marginal pricing energy market with appropriateFTRs, to be effective March 1, 2006. On Sept. 19, 2005, the FERC issued anorder rejecting the SPP EIS proposal and providing guidance and recommendationsto SPP; however, the FERC did not require SPP to implement a full Day 2 marketsimilar to MISO. On Jan. 4, 2006, SPP submitted proposed tariff revisions toimplement an EIS market and establish a market monitoring and market powermitigation plan. On March 20, 2006, the FERC issued an order conditionallyaccepting the proposed market, suspending the implementation until Oct. 1,2006. The FERC found the proposal lacking, particularly with respect to thehiring of an external market monitor, the loss compensation mechanisms and thelack of several standard forms for service. The FERC directed SPP to implementsafeguards for the first six months of the imbalance markets including a twotier cap, a market readiness certification and price correction authority. SPPand market participants engaged in a series of technical conferences in orderto comply with the FERC’s order. On May 19, 2006, SPP filed proposed tariffrevisions pursuant to the FERC’s January 4 Order.  Several parties filed comments and proteststo the SPP compliance filing, including SPS. SPP filed an answer to the protests. On July 20, 2006, the FERC accepted in part, and rejected in part, SPP’sproposed market provisions, to become effective on Oct. 1, 2006.  On July 25, 2006, SPP changed theimplementation date to Nov. 1, 2006.  SPShas not yet requested New Mexico Public Regulation Commission (NMPRC) or PublicUtility Commission of Texas (PUCT) approval regarding accounting and ratemakingtreatment of EIS costs.

***Texas Energy Legislation -***The 2005Texas Legislature passed a law, effective June 18, 2005, establishingstatutory authority for electric utilities outside of the Electric ReliabilityCouncil of Texas in the SPP or the Western Electricity Coordinating Council tohave timely recovery of transmission infrastructure investments. After noticeand hearing, the PUCT may allow recovery on an annual basis of the reasonableand necessary expenditures for transmission infrastructure improvement costsand changes in wholesale transmission charges under a tariff approved by theFERC. The PUCT will initiate a rulemaking for this process that is expected totake place in the second half of 2006.

***Fuel Cost Recovery Mechanisms***—Fueland purchased energy costs are recovered in Texas through a fixed-fuel andpurchased energy recovery factor, which is part of SPS’ retail electricrates.  The Texas retail fuel factorschange each November and May based on the projected cost of natural gas.  If it appears that SPS will materiallyover-recover or under-recover these costs, the factor may be revised based onapplication by SPS or action by the PUCT. In the first quarter of 2006, SPS revised its estimate of the allocationof 

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fuel under-recoveries toits Texas jurisdiction for 2004 and 2005 and recorded an asset of approximately$7 million.  In the second quarter of2006, SPS finalized its fuel analysis based on a distribution system lossapproach.  Pursuant to this analysis, thetotal unrecovered fuel balance is $21.7 million.  Because of uncertainty regarding ultimaterecovery, a settlement reserve was recorded equal to the entire amount.  SPS filed a fuel reconciliation applicationin May 2006.  See discussion below.

***Texas Retail Fuel Factor Change****—* On March 7, 2006, SPS filed anapplication to change its fuel factors effective May 1, 2006, to moreaccurately track fuel cost during the summer months.  On April 17, 2006, the proposed factors wereapproved on an interim basis, and on May 25, 2006, the factors were grantedfinal approval.

***Texas Retail Fuel Surcharge Case****—* On May 5, 2006, SPS requested authorityto surcharge approximately $43.9 million of Texas retail fuel and purchasedenergy cost under-collection that accrued from October 2005 through March2006.  The case has been referred to theState Office Of Administrative Hearings (SOAH) for a contested hearing.  Intervenors requested that this case beconsolidated with SPS’ pending fuel reconciliation case discussed below, sincefindings in the fuel reconciliation case could reduce the amount of theunder-collection. At a pre-hearing conference on June 26, 2006, theadministrative law judge denied the motion to consolidate and set the case forhearing on its merits on Aug. 14, 2006.

***Texas Retail Base Rate And Fuel Reconciliation Case****—* OnMay 31, 2006, SPS filed a Texas retail electric rate case requesting anincrease in annual revenues of approximately $48 million, or 6.0 percent.  The rate filing is based on a historical testyear, an electric rate base of $943 million, a requested return on equity of11.6 percent and a common equity ratio of 51.1 percent.  Finalrates are expected to be effective in the first quarter of 2007.  No interim rate increase has beenimplemented.  Following is the expectedprocedural schedule.
| · | Intervenor  Testimony           |   | October 24 & 31, 2006       |
|--------|---------------------------------|--------|---------------------------------|
| · | PUCT Staff  Testimony           |   | November 7, 2006                |
| · | Hearings                        |   | November 28 - December 21, 2006 |
| · | Proposal for  Decision          |   | To be determined                |
| · | Agreed  Jurisdictional Deadline |   | March 2, 2007                   |

 

The fuelreconciliation portion requests approval of approximately $957 million of Texasjurisdictional fuel and purchased power costs for the 2004-2005 period. Thefuel reconciliation case was transferred to the SOAH with the base rate caseand has the same procedural schedule.  Asa part of the fuel reconciliation case, fuel and purchased energy costs, whichare recovered in Texas through a fixed-fuel and purchased energy recoveryfactor as a part of SPS’ retail electric rates, will be reviewed.

***New Mexico Fuel Review***-On Jan. 28, 2005, the NMPRC accepted the staff petition for a review ofSPS’ fuel and purchased power cost. The staff requested a formal review of SPS’fuel and purchased power cost adjustment clause (FPPCAC) for the period ofOct. 1, 2001 through August 2004. The hearing in the fuel review casewas held April 22, 2006. A proposed recommended decision was filed by the partieson July 28, 2006 and a NMPRC decision is expected in late 2006.

***New Mexico Fuel Factor Continuation Filing**—*****On Aug. 18, 2005, SPS filed with the NMPRC requestingcontinuation of the use of SPS’ FPPCAC and current monthly factor cost recoverymethodology. This filing was required by NMPRC rule. The filing requests thatthe FPPCAC continue the current monthly factor cost recovery methodology.Testimony was filed in the case by staff and intervenors objecting to SPS’assignment of system average fuel costs to certain wholesale sales and theinclusion of ineligible purchased power capacity and energy payments in theFPPCAC. The testimony also proposed limits on SPS’ future use of the FPPCAC.Related to these issues some intervenors have requested disallowances for pastperiods, which in the aggregate total approximately $45 million. Other issuesin the case include the treatment of renewable energy certificates and sulfurdioxide allowance credit proceeds in relation to SPS’ New Mexico retail fueland purchased power recovery clause. The hearing was held in April 2006, and aNMPRC decision is expected in late 2006.

**3.Commitments and Contingent Liabilities**

**EnvironmentalContingencies**

SPS has been or is currently involved with the cleanupof contamination from certain hazardous substances at several sites. In manysituations, SPS is pursuing or intends to pursue insurance claims and believesit will recover some portion of these costs through such claims. Additionally,where applicable, SPS is pursuing, or intends to pursue, recovery from otherpotentially responsible parties and through the rate regulatory process.  New and changing federal and stateenvironmental mandates can also create added financial liabilities for SPS,which are normally recovered through the rate regulatory process.   To the extent any costs are not recoveredthrough the options listed above, SPS would be required to recognize an expensefor such unrecoverable amounts in its Financial Statements.

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***Clean Air Interstate Rule***—In March 2005, the U. S. Environmental Protection Agency (EPA) issued theClean Air Interstate Rule (CAIR), which further regulates sulfur dioxide(SO2) and nitrogen oxide (NOx)emissions.  Under CAIR’s cap-and-tradestructure, utilities can comply through capital investments in emissioncontrols or purchase of emission “allowances” from other utilities makingreductions on their systems.  There isuncertainty concerning implementation of CAIR. States are required to developimplementation plans within 18 months of the issuance of the new rules and havea significant amount of discretion in the implementation details. Legalchallenges to CAIR rules could alter their requirements and/or schedule.The uncertainty associated with the final CAIR rules makes it difficult topredict the ultimate amount and timing of capital expenditures and operatingexpenses.

Xcel Energy andSPS advocated that West Texas should be excluded from CAIR, because it does notcontribute significantly to nonattainment with the fine particulate matterNational Ambient Air Quality Standard in any downwind jurisdiction. On July 11,2005, SPS, the City of Amarillo, Texas and Occidental Permian LTD filed alawsuit against the EPA and a request for reconsideration with the agency toexclude West Texas from CAIR. El Paso Electric Co. joined in the request forreconsideration. On March 15, 2006, the EPA denied the petition forreconsideration.  On June 27, 2006, XcelEnergy and the other parties filed a petition for review of the denial of thepetition for reconsideration, as well as a petition for review of the FederalImplementation Plan, with the United States Court of Appeals for the Districtof Columbia Circuit.

Based on thepreliminary analysis of various scenarios of capital investment and allowancepurchases, the preferred scenario is capital investments of approximately $30million for NOx controls with NOx allowance purchases of an estimated $4million in 2009.  Annual purchases of SO2 allowances are estimated in the range of $15million to $25 million each year, beginning in 2012 for Phase I based onallowance costs and fuel quality as of July 2006.

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

***Polychlorinated Biphenyl (PCB) Storage andDisposal*—**In August 2004, SPS received notice from theEPA contending that SPS violated PCB storage and disposal regulations withrespect to storage of a drained transformer and related solids. The EPAcontended the fine for the alleged violation was approximately $1.2 million.  SPS contested the fine and submitted avoluntary disclosure to the EPA.  OnApril 17, 2006, SPS received a notice of determination from the EPA statingthat the voluntary disclosure had been reviewed and that SPS had met allconditions of the EPA’s audit policy. Accordingly, the EPA will mitigate 100 percent of the gravity-basedpenalty for the disclosed violation, and no economic penalty will be assessed.

***Clean Air Mercury Rule***— InMarch 2005, the EPA issued the Clean Air Mercury Rule (CAMR), which regulatesmercury emissions from power plants for the first time.******SPS continues toevaluate the strategy for complying with CAMR. Compliance may be achieved by either adding mercury controls orpurchasing allowances or a combination of both. The capital cost is estimated at $14.5 million for the mercury controlequipment.

**LegalContingencies**

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.

***Carbon Dioxide Emissions Lawsuit***— OnJuly 21, 2004, the attorneys general of eight states and New York City, aswell as several environmental groups, filed lawsuits in U.S. District Court forthe Southern District of New York against five utilities, including XcelEnergy, to force reductions in carbon dioxide (CO2) emissions.  Although SPSis not named as a party to this litigation, the requested relief that XcelEnergy cap and reduce its CO2emissions could have a material adverse effect on SPS.  The other utilities include American ElectricPower Co., Southern Co., Cinergy Corp. and Tennessee Valley Authority.  CO2is emitted whenever fossil fuel is combusted, such as in automobiles,industrial operations and coal- or gas-fired power plants.  The lawsuits allege that CO2 emitted by each company is a publicnuisance as defined under state and federal common law because it hascontributed to global warming.  Thelawsuits do not demand monetary damages. Instead, the lawsuits ask the court to order each utility to cap andreduce its CO2 emissions.  In October 2004, Xcel Energy and fourother utility companies filed a motion to dismiss the lawsuit, contending,among other reasons, that the lawsuit is an attempt to usurp the policy-settingrole of the U.S. Congress and the president. On Sept. 19, 2005, the judge granted the defendants’ motion to dismisson constitutional grounds.  Plaintiffsfiled an appeal to the Second Circuit. Oral arguments were presented on June 7,2006 and SPS is awaiting a decision.

***Comer vs. Xcel Energy Inc. et al.***— OnApril 25, 2006, Xcel Energy received notice of a purported class action lawsuitfiled in United States District Court for the Southern District ofMississippi.  Although SPS is not namedas a party to this litigation, if the litigation ultimately results in anunfavorable outcome for Xcel Energy, it could have a material adverse effect onSPS.  The lawsuit names more than 45 oil,chemical and utility companies, including Xcel Energy, as defendants andalleges that defendants’ carbon dioxide emissions “were a proximate and directcause of 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 hurricane. Xcel Energy believes this lawsuit is without merit and intends tovigorously defend itself against these claims. On July 19, 2006, Xcel Energy filed a motion to dismiss the lawsuit inits entirety.

**Other Contingencies**

Except as set forth above, the circumstances in Note11 to the financial statements in SPS’ Annual Report on Form 10-K for the yearended Dec. 31, 2005 and Note 2 of this Quarterly Report on Form 10-Q,appropriately represent, in all material respects, the current 

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status of commitments and contingent liabilities andare incorporated herein by reference.

**4.****             Long-term Debt**

In March 2006, SPS filed a registration statement withthe SEC to register $500 million of unsecured debt securities. The registrationstatement was declared effective on July 25, 2006.

SPS plans to issueprior to Nov. 1, 2006, up to $500 million of unsecured debt securities torefinance a scheduled long-term debt maturity. SPS intends to enter into an additional liquidity facility to providecontingency financing for the planned long-term debt issuance.

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

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

Allderivative instruments not qualifying for the normal purchases and normal salesexception, as defined by SFAS No. 133-”Accounting for Derivative Instrumentsand Hedging Activities,” as amended (SFAS No. 133), are recorded at fair value.The presentation of these derivative instruments is dependent on thedesignation of a qualifying hedging relationship.  The adjustment to fair value of derivativeinstruments not designated in a qualifying hedging relationship are reflectedin current earnings or as a regulatory balance. This classification is dependent on the applicability of any regulatorymechanism in place. This includes certain instruments used to mitigate marketrisk for SPS and all instruments related to the commodity tradingoperations.  The designation of a cashflow hedge permits the classification of fair value to be recorded within OtherComprehensive Income, to the extent effective. The designation of a fair value hedge permits a derivative instrument’sgains or losses to offset the related results of the hedged item in theStatements of Income.

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

Thefair value of all interest rate swaps is determined through counterpartyvaluations, internal valuations and broker quotes. There have been no materialchanges in the techniques or models used in the valuation of interest rateswaps during the periods presented.

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

**CashFlow Hedges**

SPS enters intoderivative instruments to manage variability of future cash flows from changesin commodity prices and interest rates. These derivative instruments are designated as cash flow hedges foraccounting purposes and changes in the fair value of these instruments are recordedas a component of  Other ComprehensiveIncome or deferred as a regulatory asset or liability. This classification isbased on the regulatory recovery mechanisms in place. Amounts deferred in theseaccounts are recorded in earnings as the hedged purchase or sales transactionis settled.  This could include thepurchase or sale of energy or energy-related products or the use of natural gasto generate electric energy.  As of June30, 2006, SPS had no commodity-related contracts classified as cash flow hedges.

SPS enters into variousinstruments that effectively fix the interest payments on certain floating ratedebt obligations or effectively fix the yield or price on a specified benchmarkinterest rate for a specific period. These derivative instruments aredesignated as cash flow hedges for accounting purposes, and the change in thefair value of these instruments is recorded as a component of OtherComprehensive Income. As of June 30, 2006, SPS had net losses of approximately$0.5 million in Accumulated Other Comprehensive Loss related to interest ratecash flow hedge contracts that are expected to be recognized in earnings duringthe next 12 months.

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Gains or losses onhedging transactions for the sales of energy or energy-related products areprimarily recorded as a component of revenue, hedging transactions for fuelused in energy generation are recorded as a component of fuel costs andinterest rate hedging transactions are recorded as a component of interestexpense.  SPS is allowed to recover in electricrates the costs of certain financial instruments acquired to reduce commoditycost volatility.  There was no hedgeineffectiveness in the second quarter of 2006.

The impact of thecomponents of hedges on SPS’ Accumulated Other Comprehensive Loss, included asa component of stockholder’s equity, are detailed in the following table:

 
| ** **                                                                                   | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Millions of dollars)**                                                          | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                                   | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Accumulated  other comprehensive loss relatebd to cash flow hedges at Jan. 1                 |       | $                                                 | (4.8       | ) | $ | (5.3 | ) |
| After-tax net  unrealized gains related to derivatives accounted for as hedges               |       | 0.6                                               |       | (0.2 | ) |
| After-tax net  realized (gains) losses on derivative transactions reclassified into earnings |       | 0.1                                               |       | (0.1 | ) |
| Accumulated other  comprehensive loss related to cash flow hedges at June 30                 |       | $                                                 | (4.1       | ) | $ | (5.6 | ) |

 

**Fair Value Hedges**

The effective portion ofthe change in the fair value of a derivative instrument qualifying as a fairvalue hedge is offset against the change in the fair value of the underlyingasset, liability or firm commitment being hedged. That is, fair value hedgeaccounting allows the gains or losses of the derivative instrument to offset,in the same period, the gains and losses of the hedged item.

**Derivatives Not Qualifying forHedge Accounting**

SPS has extremely limitedcommodity trading operations that enter into derivative instruments. Thesederivative instruments are accounted for on a mark-to-market basis in theStatements of Income. The results of these transactions are recorded as acomponent of Operating revenues on the Statements of Income.

SPS may also enter intocertain commodity-based derivative transactions, not included in tradingoperations, which do not qualify for hedge accounting treatment. Thesederivative instruments are accounted for on a mark-to-market basis inaccordance with SFAS No. 133.

**NormalPurchases or Normal Sales Contracts**

SPS enters into contracts for the purchase and sale ofvarious commodities for use in its business operations. SFAS No. 133 requires acompany to evaluate these contracts to determine whether the contracts arederivatives. Certain contracts that literally meet the definition of aderivative may be exempted from SFAS No. 133 as normal purchases or normalsales. Normal purchases and normal sales are contracts that provide for thepurchase or sale of something other than a financial or derivative instrumentthat will be delivered in quantities expected to be used or sold over areasonable period in the normal course of business.  In addition, normal purchases and normalsales contracts must have a price based on an underlying that is clearly andclosely related to the asset being purchased or sold.  An underlying is a specified interest rate,security price, commodity price, foreign exchange rate, index of prices or rates,or other variable, including the occurrence or nonoccurrence of a specifiedevent, such as a scheduled payment under a contract.

SPS evaluates all of itscontracts when such contracts are entered to determine if they are derivativesand, if so, if they qualify and meet the normal designation requirements underSFAS No. 133. None of the derivative contracts entered into within thecommodity trading operations qualify for a normal designation.

In 2003, as a result ofFASB Statement 133 Implementation Issue No. C20, SPS began recording several long-termpower purchase agreements at fair value due to accounting requirements relatedto underlying price adjustments.  Asthese purchases are recovered through normal regulatory recovery mechanisms inthe respective jurisdictions, the changes in fair value for these contractswere offset by regulatory assets and liabilities.  During the first quarter of 2006, SPSqualified these contracts under the normal purchase exception.  Based on this qualification, the contractswill no longer be adjusted to fair value and the previous carrying value ofthese contracts will be amortized over the remaining contract lives along withthe offsetting regulatory balances.

Normal purchases andnormal sales contracts are accounted for as executory contracts as requiredunder other generally accepted accounting principles.

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**6.Detail of Interest and Other Income - Net**

Interest and other income, net of nonoperatingexpenses, for the three and six months ended June 30 consisted of thefollowing:
| ** **                                 | ** ** | **Three months ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|--------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Thousands of dollars)**       | ** ** | **2006**                                              | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                 | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                            |       | $                                                     | 696        |                                                | $          | 418 |   | $ | 1,952 |   | $ | 712 |   |
| Other  nonoperating income                 |       | 593                                                   |       | 3,039                                               |       | 830 |   | 3,248 |   |
| Employee-related  insurance policy expense |       | (92                                                   | )          | —                                              |       | (110 | ) | (18 | ) |
| Other operating  expenses                  |       | (4                                                    | )          | —                                              |       | (4 | ) | — |   |
| Total interest  and other income - net     |       | $                                                     | 1,193      |                                                | $          | 3,457 |   | $ | 2,668 |   | $ | 3,942 |   |

 

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

SPS has one reportablesegment.  SPS operates in the RegulatedElectric Utility industry, providing wholesale and retail electric service inthe states of Texas, New Mexico, Kansas and Oklahoma.  Revenues from external customers were $836.0million and $693.7 million for the six months ended June 30, 2006 and2005, respectively.

Effective July 31, 2006,SPS completed the sale of its delivery system operations in Oklahoma and Kansasto Tri-County Electric Cooperative.

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

The components of totalcomprehensive income are shown below:
| ** **                                                                                                | ** ** | **Three months ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Millions of dollars)**                                                                       | ** ** | **2006**                                              | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                                                | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                                |       | $                                                     | 10.0       |                                                | $          | 17.5 |   | $ | 21.9 |   | $ | 31.6 |   |
| Other  comprehensive income:                                                                              |       |                                                  |       |                                                |       |   |   |   |   |
| After-tax net unrealized gains related to  derivatives accounted for as hedges (see Note 5)               |       | 0.2                                                   |       | (0.5                                                | )          | 0.6 |   | (0.2 | ) |
| After-tax net realized losses (gains) on derivative  transactions reclassified into earnings (see Note 5) |       | 0.1                                                   |       | (0.1                                                | )          | 0.1 |   | (0.1 | ) |
| Other  comprehensive income (loss)                                                                        |       | 0.3                                                   |       | (0.6                                                | )          | 0.7 |   | (0.3 | ) |
| Comprehensive income                                                                                      |       | $                                                     | 10.3       |                                                | $          | 16.9 |   | $ | 22.6 |   | $ | 31.3 |   |

 

The accumulated other comprehensive loss instockholder’s equity at June 30, 2006 and Dec. 31, 2005 relates to valuationadjustments on SPS’ derivative financial instruments and hedging activities.

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**9.Benefit Plans 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**
| ** **                                                    | ** ** | **Three months ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **(Thousands of dollars)**                          | ** ** | **Pension Benefits**                           | ** ** | **Postretirement Health   Care Benefits** | ** ** |
| **Xcel  Energy Inc.**                                         | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                  |       | $                                                   | 14,380     |   | $ | 12,980 |   | $ | 1,479 |   | $ | 1,599 |   |
| Interest cost                                                 |       | 38,197                                              |       | 39,496 |   | 13,287 |   | 13,663 |   |
| Expected return  on plan assets                               |       | (67,551                                             | )          | (69,484 | ) | (7,110 | ) | (6,267 | ) |
| Amortization of  transition obligation                        |       | —                                              |       | — |   | 3,577 |   | 3,644 |   |
| Amortization of  prior service cost (credit)                  |       | 7,421                                               |       | 7,496 |   | (545 | ) | (544 | ) |
| Amortization of  net (gain) loss                              |       | 4,165                                               |       | (39 | ) | 5,875 |   | 6,460 |   |
| Net periodic  benefit cost (credit)                           |       | (3,388                                              | )          | (9,551 | ) | 16,563 |   | 18,555 |   |
| Credits not  recognized due to the effects of regulation      |       | 3,893                                               |       | 6,500 |   | — |   | — |   |
| Additional cost  recognized due to the effects of regulation  |       | —                                              |       | — |   | 973 |   | 973 |   |
| Net benefit cost (credit) recognized for financial  reporting |       | $                                                   | 505        |   | $ | (3,051 | ) | $ | 17,536 |   | $ | 19,528 |   |
|                                                          |       |                                                |       |   |   |   |   |   |   |
| **SPS**                                                       | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net benefit cost  (credit) recognized for financial reporting |       | $                                                   | (2,720     | ) | $ | (2,461 | ) | $ | 1,648 |   | $ | 2,011 |   |

 

 
| ** **                                                    | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                    | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **(Thousands of dollars)**                          | ** ** | **Pension Benefits**                         | ** ** | **Postretirement Health   Care Benefits** | ** ** |
| **Xcel  Energy Inc.**                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                  |       | $                                                 | 30,814     |   | $ | 30,230 |   | $ | 3,316 |   | $ | 3,342 |   |
| Interest cost                                                 |       | 77,706                                            |       | 80,492 |   | 26,470 |   | 27,530 |   |
| Expected return  on plan assets                               |       | (134,032                                          | )          | (139,758 | ) | (13,378 | ) | (12,850 | ) |
| Amortization of  transition obligation                        |       | —                                            |       | — |   | 7,222 |   | 7,289 |   |
| Amortization of  prior service cost (credit)                  |       | 14,848                                            |       | 15,018 |   | (1,090 | ) | (1,089 | ) |
| Amortization of  net loss                                     |       | 8,676                                             |       | 3,410 |   | 12,398 |   | 13,123 |   |
| Net periodic  benefit cost (credit)                           |       | (1,988                                            | )          | (10,608 | ) | 34,938 |   | 37,345 |   |
| Credits not  recognized due to the effects of regulation      |       | 6,318                                             |       | 9,684 |   | — |   | — |   |
| Additional cost  recognized due to the effects of regulation  |       | —                                            |       | — |   | 1,946 |   | 1,946 |   |
| Net benefit cost (credit) recognized for financial  reporting |       | $                                                 | 4,330      |   | $ | (924 | ) | $ | 36,884 |   | $ | 39,291 |   |
|                                                          |       |                                              |       |   |   |   |   |   |   |
| **SPS**                                                       | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net benefit cost  (credit) recognized for financial reporting |       | $                                                 | (4,062     | ) | $ | (4,551 | ) | $ | 3,353 |   | $ | 3,427 |   |

 

 

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**Item2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

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

**Forward-LookingInformation**

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

Except for the historicalstatements contained in this report, the matters discussed in the followingdiscussion and analysis are forward-looking statements that are subject to certainrisks, uncertainties and assumptions. Such forward-looking statements areintended to be identified in this document by the words “anticipate,” “estimate,”“expect,” “objective,” “outlook,” “possible,” “potential” and similarexpressions. Actual results may vary materially. Factors that could causeactual results to differ materially include, but are not limited to:

·             Economicconditions, including their impact on capital expenditures and the ability ofthe SPS to obtain financing on favorable terms, inflation rates and monetaryfluctuations;

·             Businessconditions in the energy business;

·             Trade,monetary, fiscal, taxation and environmental policies of governments, agenciesand similar organizations in geographic areas where SPS has a financial interest;

·             Customerbusiness conditions, including demand for their products or services and supplyof labor and materials used in creating their products and services;

·             Financialor regulatory accounting principles or policies imposed by the FinancialAccounting Standards Board, the Securities and Exchange Commission, the FederalEnergy Regulatory Commission and similar entities with regulatory oversight;

·             Availabilityor cost of capital such as changes in: interest rates; market perceptions ofthe utility industry, SPS, Xcel Energy or any of its other subsidiaries; orsecurity ratings;

·             Factorsaffecting utility operations such as unusual weather conditions; catastrophicweather-related damage; unscheduled generation outages, maintenance or repairs;unanticipated changes to fossil fuel or natural gas supply costs oravailability due to higher demand, shortages, transportation problems or otherdevelopments; environmental incidents; or electric transmission or natural gaspipeline constraints;

·             Employeeworkforce factors, including loss or retirement of key executives, collectivebargaining agreements with union employees, or work stoppages;

·             Increasedcompetition in the utility industry;

·             Stateand federal legislative and regulatory initiatives that affect cost andinvestment recovery, have an impact on rate structures and affect the speed anddegree to which competition enters the electric markets; industry restructuringinitiatives; transmission system operation and/or administration initiatives;recovery of investments made under traditional regulation; nature ofcompetitors entering the industry; retail wheeling; a new pricing structure;and former customers entering the generation market;

·             Rate-settingpolicies or procedures of regulatory entities, including environmentalexternalities, which are values established by regulators assigningenvironmental costs to each method of electricity generation when evaluatinggeneration resource options;

·             Socialattitudes regarding the utility and power industries;

·             Costand other effects of legal and administrative proceedings, settlements,investigations and claims;

·             Technologicaldevelopments that result in competitive disadvantages and create the potentialfor impairment of existing assets;

·             Significantslowdown in growth or decline in the U.S. economy, delay in growth or recoveryof the U.S. economy or increased cost for insurance premiums, security andother items;

·             Risksassociated with implementation of new technologies; and

·             Otherbusiness or investment considerations that may be disclosed from time to timein SPS’ SEC filings, including “Risk Factors” in Item 1A of SPS’ Annual Reporton Form 10-K for the year ended Dec. 31, 2005 and Exhibit 99.01 to thisreport on Form 10-Q for the quarter ended June 30, 2006.

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**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, 2005. Commodity priceand interest rate risks for SPS is mitigated in most jurisdictions due tocost-based rate regulation.  At June 30,2006, there were no material changes to the financial market risks that affectthe quantitative and qualitative disclosures presented as of Dec. 31, 2005.

**ManagementChanges**

Gary Gibson, presidentand CEO of SPS, announced his plans to retire on Nov. 30, 2006.  Effective July 19, 2006, David Eves waselected CEO by the SPS board of directors. Gary will continue as president of SPS until his retirement.

**RESULTSOF OPERATIONS**

SPS’ net income wasapproximately $21.9 million for the first six months of 2006, compared withapproximately $31.6 million for the first six months of 2005.

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

Electric fuel andpurchased power expenses tend to vary with changing retail and wholesale salesrequirements and unit cost changes in fuel and purchased power.  Due to fuel and purchased energycost-recovery mechanisms for retail customers, most fluctuations in energycosts do not affect electric utility margin.

SPS has two distinct forms of wholesale marketingactivities:  short-term wholesale andcommodity trading.  Short-term wholesalerefers to energy related purchase and sales activity and the use of certainfinancial instruments associated with the fuel required for and energy producedfrom, SPS’ generation assets and energy and capacity purchased to serve nativeload.  Commodity trading is notassociated with SPS’ generation assets or the energy and capacity purchased toserve native load.  Short-term wholesaleand commodity trading activities are considered part of the electric utilitysegment.

SPS conducts an inconsequential amount of commoditytrading.  Margins from commodity tradingactivity are partially redistributed to Northern States Power Company, aMinnesota corporation, and Public Service Company of Colorado, both whollyowned subsidiaries of Xcel Energy, pursuant to the joint operating agreement(JOA) approved by the FERC.  Marginsreceived pursuant to the JOA are reflected as part of Base Electric UtilityRevenues.  Short-term wholesale andcommodity trading margins reflect the impact of regulatory sharing or realizedmargins, if applicable.  Commoditytrading revenues are reported net of trading costs (i.e., on a margin basis) inthe Statements of Income.  Commoditytrading costs include purchased power, transmission, broker fees and otherrelated costs.

The following table details base electric utility andshort-term wholesale activities:

| (Millions of dollars)         | ** ** | **Base  Electric  Utility** | ** ** | **Short-term  Wholesale** | ** ** | **Consolidated  Total** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **              | ** ** |
| **Six  months ended June 30, 2006**     | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **              | ** ** |
| Electric utility  revenue               |       | $                           | 833        |                      | $          | 3                       |       | $ | 836 |   |
| Electric fuel  and purchased power      |       | (601                        | )          | (3                        | )          | (604                    | )          |
| Gross margin  before operating expenses |       | $                           | 232        |                      | $          | —                  |       | $ | 232 |   |
| Margin as a  percentage of revenue      |       | 27.9                        | %          | —                    | %          | 27.8                    | %          |
|                                    |       |                        |       |                      |       |                    |       |
| **Six  months ended June 30, 2005**     | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **              | ** ** |
| Electric utility  revenue               |       | $                           | 692        |                      | $          | 2                       |       | $ | 694 |   |
| Electric fuel  and purchased power      |       | (458                        | )          | (2                        | )          | (460                    | )          |
| Gross margin  before operating expenses |       | $                           | 234        |                      | $          | —                  |       | $ | 234 |   |
| Margin as a percentage  of revenue      |       | 33.8                        | %          | —                    | %          | 33.7                    | %          |

 

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The following summarizes the components of the changesin base electric revenue and base electric margin for the six months endedJune 30:

***Base Electric Revenue***

| (Millions of dollars)                  | ** ** | **2006 vs. 2005** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| Fuel cost  recovery                              |       | $                           | 136        |   |
| Sales growth  (excluding weather impact)         |       | 9                           |       |
| Capacity sales                                   |       | (2                          | )          |
| Reserve for  potential firm wholesale settlement |       | (7                          | )          |
| Other                                            |       | 5                           |       |
| Total base electric revenue increase             |       | $                           | 141        |   |

 

***Base ElectricMargin***

| (Millions of dollars)                  | ** ** | **2006 vs. 2005** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| Reserve for  potential firm wholesale settlement |       | $                           | (7         | ) |
| Unrecoverable  purchased power                   |       | (3                          | )          |
| Transmission  costs                              |       | (2                          | )          |
| Weather                                          |       | 2                           |       |
| Sales growth  (excluding weather impact)         |       | 9                           |       |
| Other                                            |       | (1                          | )          |
| Total base electric margin decrease              |       | $                           | (2         | ) |

 

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

The following summarizes the components of the changesin other utility operating and maintenance expense for the six months endedJune 30:

| (Millions of dollars)                                 | ** ** | **2006 vs. 2005** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------|------------|
| Higher plant  maintenance and overhaul costs                    |       | $                           | 4          |   |
| Higher legal  arbitration and settlement costs                  |       | 2                           |       |
| Higher employee  benefit costs                                  |       | 1                           |       |
| Higher  regulatory fees and assessments                         |       | 1                           |       |
| Other                                                           |       | 1                           |       |
| Total other  utility operating and maintenance expense increase |       | $                           | 9          |   |

 

Taxes (other than incometaxes) increased by approximately $1.9 million, or 7.6 percent, for the firstsix months of 2006, compared with the first six months of 2005. The increase isprimarily due to an increase in franchise tax fees and gross receipts taxes.

Other income decreased byapproximately $1.7 million for the first six months of 2006, compared with the firstsix months of 2005. The decrease is primarily due to a gain on the sale ofAmarillo water rights in May of 2005, partially offset by an increase ininterest income collected on the Texas deferred fuel balance.

Income taxes decreased byapproximately $5.9 million for the first six months of 2006 compared with thefirst six months of 2005.  The decreasewas primarily due to a decrease in pretax income. The effective tax rate was36.8 percent for the first six months of 2006, compared with 37.1 percent forthe same period in 2005.

**Item4. CONTROLS AND PROCEDURES**

**Disclosure Controls**

SPS maintains a set ofdisclosure controls and procedures designed to ensure that information requiredto be disclosed in reports that it files or submits under the Securities ExchangeAct of 1934 is recorded, processed, summarized and reported within the timeperiods specified in Securities and Exchange Commission rules andforms.  In addition, the disclosurecontrols and procedures ensure that information required to be disclosed isaccumulated and communicated to management, including the chief executiveofficer (CEO) and chief financial officer (CFO), allowing timely decisionsregarding required disclosure.  As of theend of the period covered by this report, based on an evaluation carried outunder the supervision and with the participation of SPS’ management, includingthe CEO and CFO, of the effectiveness of our disclosure controls andprocedures, the CEO and CFO have concluded that SPS’ disclosure controls andprocedures are effective.

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**Internal Control Over Financial Reporting**

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

#### **Part II. OTHERINFORMATION**

## **Item1. LEGAL PROCEEDINGS**

In the normal course of business, various lawsuits andclaims have arisen against SPS. Management, after consultation with legalcounsel, has recorded an estimate of the probable cost of settlement or otherdisposition for such matters. See Notes 2 and 3 of the Financial Statements inthis Quarterly Report on Form 10-Q for further discussion of legal proceedings,including Regulatory Matters and Commitments and Contingent Liabilities, whichare hereby incorporated by reference. Reference also is made to Item 3 andNote 11 of SPS’ Annual Report on Form 10-K for the year ended Dec. 31,2005 for a description of certain legal proceedings presently pending. Exceptas discussed herein, there are no new significant cases to report against SPSand there have been no notable changes in the previously reported proceedings.

**Item 1A.Risk Factors**

SPS’ are documented inItem 1A of Part I of its 2005 Annual Report on Form 10-K, which is incorporatedherein by reference.  There have been nomaterial changes to the risk factors.

## **Item6. EXHIBITS**

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

 

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized on Aug. 4, 2006.

 
| Southwestern Public Service Co.                  |
|--------------------------------------------------|
| (Registrant)                                     |
|                                             |
|                                             |
|  /s/ TERESA S. MADDEN                       |   |
|  Teresa S. Madden                           |   |
|  Vice President and Controller              |   |
|                                             |   |
|                                             |   |
|  /s/ BENJAMIN G.S. FOWKE III                |   |
|  Benjamin G.S. Fowke III                    |   |
|  Vice President and Chief Financial Officer |   |

 

 

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