** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **ý**                                            | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------|---------------------------------------------------------------------------------------------------------|
|                                                  |                                                                                                    |
| **For the quarterly period ended June 30, 2005** |
|                                                  |                                                                                                    |
| **or**                                                |
|                                                  |                                                                                                    |
| **o**                                                 | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

 

**For the transition periodfrom               to            **

 

#### **Commission File Number: 001-03789**

#### ** **

**SOUTHWESTERN PUBLIC SERVICE COMPANY**

**(Exact name of registrant asspecified in its charter)**

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

 

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

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. ýYes o No

 

Indicate by check mark whetherthe registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act). o Yes ýNo

 

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

 
| **Class**                  | ** ** | **Outstanding  at Aug. 1, 2005** |
|----------------------------|------------|---------------------------------------|
| Common Stock, $1 par value |       | 100 shares                            |

 

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

 

 

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**Tableof Contents**

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

 

This Form 10-Qis filed by Southwestern Public Service Co. (SPS). SPS is a wholly ownedsubsidiary of Xcel Energy Inc. (Xcel Energy). Xcel Energy is a registeredholding company under the Public Utility Holding Company Act of 1935 (PUHCA).Additional information on Xcel Energy is available on various filings with theSecurities and Exchange Commission (SEC).

 

2

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**PART 1. FINANCIAL INFORMATION**

 

**Item 1. Consolidated Financial Statements**

 

**SOUTHWESTERN PUBLIC SERVICECO.**

**CONSOLIDATED STATEMENTS OFINCOME (UNAUDITED)**

**(Thousands of Dollars)**

 
| ** **                                                                                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                                                                              | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                              | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Operating revenues                                                                                                                      |       | $                                     | 381,326    |                                | $          | 347,599 |   | $ | 693,729 |   | $ | 654,156 |   |
|                                                                                                                                    |       |                                  |       |                                |       |   |   |   |   |
| Operating expenses:                                                                                                                     |       |                                  |       |                                |       |   |   |   |   |
| Electric fuel and purchased power                                                                                                       |       | 264,015                               |       | 227,329                             |       | 459,963 |   | 416,648 |   |
| Other operating and maintenance expenses                                                                                                |       | 43,908                                |       | 42,496                              |       | 89,518 |   | 87,891 |   |
| Depreciation and amortization                                                                                                           |       | 24,083                                |       | 22,745                              |       | 47,699 |   | 45,050 |   |
| Taxes (other than income taxes)                                                                                                         |       | 12,708                                |       | 11,290                              |       | 25,437 |   | 24,835 |   |
| Total operating expenses                                                                                                                |       | 344,714                               |       | 303,860                             |       | 622,617 |   | 574,424 |   |
|                                                                                                                                    |       |                                  |       |                                |       |   |   |   |   |
| Operating income                                                                                                                        |       | 36,612                                |       | 43,739                              |       | 71,112 |   | 79,732 |   |
|                                                                                                                                    |       |                                  |       |                                |       |   |   |   |   |
| Other income:                                                                                                                           |       |                                  |       |                                |       |   |   |   |   |
| Interest and other income, net of  nonoperating expenses (see Note 6)                                                                   |       | 3,457                                 |       | 777                                 |       | 3,942 |   | 1,038 |   |
| Allowance for funds used during  construction – equity                                                                             |       | 588                                   |       | 337                                 |       | 972 |   | 1,108 |   |
| Total other income                                                                                                                      |       | 4,045                                 |       | 1,114                               |       | 4,914 |   | 2,146 |   |
|                                                                                                                                    |       |                                  |       |                                |       |   |   |   |   |
| Interest charges and financing costs:                                                                                                   |       |                                  |       |                                |       |   |   |   |   |
| Interest charges — net of amounts  capitalized, includes other financing costs of $1,511, $1,630, $3,036 and  $3,386, respectively |       | 13,396                                |       | 13,232                              |       | 26,780 |   | 26,529 |   |
| Allowance for funds used during  construction – debt                                                                               |       | (497                                  | )          | (348                                | )          | (1,010 | ) | (857 | ) |
| Total interest charges and financing costs                                                                                              |       | 12,899                                |       | 12,884                              |       | 25,770 |   | 25,672 |   |
|                                                                                                                                    |       |                                  |       |                                |       |   |   |   |   |
| Income before income taxes                                                                                                              |       | 27,758                                |       | 31,969                              |       | 50,256 |   | 56,206 |   |
| Income taxes                                                                                                                            |       | 10,249                                |       | 11,896                              |       | 18,651 |   | 21,337 |   |
| Net income                                                                                                                              |       | $                                     | 17,509     |                                | $          | 20,073 |   | $ | 31,605 |   | $ | 34,869 |   |

 

See Notes to Consolidated FinancialStatements

 

3

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**SOUTHWESTERN PUBLIC SERVICECO.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)**

**(Thousands of Dollars)**

 
| ** **                                                                         | ** ** | **Six Months Ended   June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                             | ** ** | **2004** | ** ** |
| Operating activities:                                                              |       |                                 |       |   |   |
| Net income                                                                         |       | $                                    | 31,605     |   | $ | 34,869 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                 |       |   |   |
| Depreciation and amortization                                                      |       | 51,822                               |       | 49,425 |   |
| Deferred income taxes                                                              |       | 10,424                               |       | 21,413 |   |
| Amortization of investment tax credits                                             |       | (125                                 | )          | (125 | ) |
| Allowance for equity funds used during  construction                               |       | (972                                 | )          | (1,108 | ) |
| Change in recoverable electric energy costs                                        |       | (23,954                              | )          | (40,980 | ) |
| Change in accounts receivable                                                      |       | (22,918                              | )          | (14,910 | ) |
| Change in unbilled revenues                                                        |       | 464                                  |       | (12,095 | ) |
| Change in inventories                                                              |       | (54                                  | )          | 262 |   |
| Change in other current assets                                                     |       | 839                                  |       | 5,162 |   |
| Change in accounts payable                                                         |       | 1,137                                |       | 15,133 |   |
| Change in other current liabilities                                                |       | 17,684                               |       | (18,140 | ) |
| Change in other noncurrent assets                                                  |       | (8,914                               | )          | (8,356 | ) |
| Change in other noncurrent liabilities                                             |       | 4,149                                |       | 3,800 |   |
| Net cash provided by operating activities                                          |       | 61,187                               |       | 34,350 |   |
|                                                                               |       |                                 |       |   |   |
| Investing activities:                                                              |       |                                 |       |   |   |
| Capital/construction expenditures                                                  |       | (57,344                              | )          | (54,988 | ) |
| Allowance for equity funds used during  construction                               |       | 972                                  |       | 1,108 |   |
| Other investments – net                                                       |       | 1,960                                |       | 269 |   |
| Net cash used in investing activities                                              |       | (54,412                              | )          | (53,611 | ) |
|                                                                               |       |                                 |       |   |   |
| Financing activities:                                                              |       |                                 |       |   |   |
| Short-term borrowings – net                                                   |       | (4,800                               | )          | 58,000 |   |
| Proceeds from the issuance of long-term  debt                                      |       | 35,000                               |       | — |   |
| Capital contributions from parent                                                  |       | 6,736                                |       | 1,032 |   |
| Dividends paid to parent                                                           |       | (43,711                              | )          | (47,534 | ) |
| Net cash provided by (used in) financing  activities                               |       | (6,775                               | )          | 11,498 |   |
|                                                                               |       |                                 |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                              |       | —                               |       | (7,763 | ) |
| Cash and cash equivalents at beginning of  period                                  |       | 5                                    |       | 9,869 |   |
| Cash and cash equivalents at end of period                                         |       | $                                    | 5          |   | $ | 2,106 |   |
|                                                                               |       |                                 |       |   |   |
| Supplemental disclosure of cash flow  information:                                 |       |                                 |       |   |   |
| Cash paid for interest (net of amounts  capitalized)                               |       | $                                    | 22,786     |   | $ | 23,130 |   |
| Cash paid for income taxes (net of refunds  received)                              |       | $                                    | (6,666     | ) | $ | (4,115 | ) |

 

See Notes to Consolidated FinancialStatements

 

4

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**SOUTHWESTERN PUBLIC SERVICECO.**

**CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**

**(Thousandsof Dollars)**

 
| ** **                                                                                                      | ** ** | **June 30, 2005** | ** ** | **Dec. 31,   2004** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|
| **ASSETS**                                                                                                      | ** ** | ** **                  | ** ** | ** **               | ** ** |
| Current  assets:                                                                                                |       |                        |       |                     |       |
| Cash and cash equivalents                                                                                       |       | $                           | 5          |                     | $          | 5 |   |
| Accounts receivable — net of allowance for  bad debts: $2,782 and $2,844, respectively                     |       | 81,004                      |       | 66,445                   |       |
| Accounts receivable from affiliates                                                                             |       | 10,632                      |       | 2,273                    |       |
| Accrued unbilled revenues                                                                                       |       | 61,805                      |       | 62,269                   |       |
| Recoverable electric energy costs                                                                               |       | 103,995                     |       | 80,040                   |       |
| Materials and supplies inventories — at  average cost                                                      |       | 14,422                      |       | 14,403                   |       |
| Fuel inventory — at average cost                                                                           |       | 3,032                       |       | 2,997                    |       |
| Derivative instruments valuation – at  market                                                              |       | 7,815                       |       | 8,381                    |       |
| Prepayments and other                                                                                           |       | 5,933                       |       | 6,902                    |       |
| Total current assets                                                                                            |       | 288,643                     |       | 243,715                  |       |
| Property, plant and equipment, at cost:                                                                         |       |                        |       |                     |       |
| Electric utility plant                                                                                          |       | 3,325,061                   |       | 3,291,086                |       |
| Construction work in progress and other  property                                                               |       | 67,334                      |       | 65,848                   |       |
| Total property, plant and equipment                                                                             |       | 3,392,395                   |       | 3,356,934                |       |
| Less accumulated depreciation                                                                                   |       | (1,418,981                  | )          | (1,398,497               | )          |
| Net property, plant and equipment                                                                               |       | 1,973,414                   |       | 1,958,437                |       |
| Other assets:                                                                                                   |       |                        |       |                     |       |
| Other investments                                                                                               |       | 7,942                       |       | 9,902                    |       |
| Regulatory assets                                                                                               |       | 113,394                     |       | 93,067                   |       |
| Prepaid pension asset                                                                                           |       | 137,308                     |       | 132,757                  |       |
| Derivative instruments valuation – at  market                                                              |       | 55,726                      |       | 52,431                   |       |
| Deferred charges and other                                                                                      |       | 4,375                       |       | 4,819                    |       |
| Total other assets                                                                                              |       | 318,745                     |       | 292,976                  |       |
| Total assets                                                                                                    |       | $                           | 2,580,802  |                     | $          | 2,495,128 |   |
| **LIABILITIES AND EQUITY**                                                                                      |       |                        |       |                     |       |
| Current liabilities:                                                                                            |       |                        |       |                     |       |
| Borrowings on utility money pool, weighted  average interest rate of 3.33% at June 30, 2005                |       | $                           | 31,200     |                     | $          | — |   |
| Bank borrowings on line of credit                                                                               |       | —                      |       | 36,000                   |       |
| Accounts payable                                                                                                |       | 143,041                     |       | 139,311                  |       |
| Accounts payable to affiliates                                                                                  |       | 11,512                      |       | 14,105                   |       |
| Taxes accrued                                                                                                   |       | 19,058                      |       | 901                      |       |
| Accrued interest                                                                                                |       | 10,153                      |       | 10,098                   |       |
| Dividends payable to parent                                                                                     |       | 20,058                      |       | 22,442                   |       |
| Current deferred income taxes                                                                                   |       | 14,709                      |       | 7,878                    |       |
| Derivative instruments valuation — at  market                                                              |       | 38,525                      |       | 14,772                   |       |
| Other                                                                                                           |       | 17,582                      |       | 18,109                   |       |
| Total current liabilities                                                                                       |       | 305,838                     |       | 263,616                  |       |
| Deferred credits and other liabilities:                                                                         |       |                        |       |                     |       |
| Deferred income taxes                                                                                           |       | 439,770                     |       | 438,276                  |       |
| Deferred investment tax credits                                                                                 |       | 3,591                       |       | 3,716                    |       |
| Regulatory liabilities                                                                                          |       | 108,074                     |       | 135,881                  |       |
| Derivative instruments valuation — at  market                                                              |       | 56,395                      |       | 22,449                   |       |
| Benefit obligations and other                                                                                   |       | 28,835                      |       | 24,817                   |       |
| Total deferred credits and other  liabilities                                                                   |       | 636,665                     |       | 625,139                  |       |
|                                                                                                            |       |                        |       |                     |       |
| Long-term debt                                                                                                  |       | 825,617                     |       | 825,462                  |       |
| $250 million, 5-year, unsecured credit  facility, weighted average interest rate of 3.80% at June 30, 2005 |       | 35,000                      |       | —                   |       |
|                                                                                                            |       |                        |       |                     |       |
| Common stock – authorized 200 shares of  $1.00 par value, outstanding 100 shares                           |       | —                      |       | —                   |       |
| Premium on common stock                                                                                         |       | 422,566                     |       | 415,830                  |       |
| Retained earnings                                                                                               |       | 360,708                     |       | 370,430                  |       |
| Accumulated other comprehensive loss                                                                            |       | (5,592                      | )          | (5,349                   | )          |
| Total common stockholder’s equity                                                                          |       | 777,682                     |       | 780,911                  |       |
|                                                                                                            |       |                        |       |                     |       |
| Commitments and contingencies (see Note 3)                                                                      |       |                        |       |                     |       |
| Total liabilities and equity                                                                                    |       | $                           | 2,580,802  |                     | $          | 2,495,128 |   |

 

**See Notes to Consolidated Financial Statements**

** **

**5**

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** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

In the opinionof management, the accompanying unaudited consolidated financial statementscontain all adjustments necessary to present fairly the financial position ofSPS as of June 30, 2005, and Dec. 31, 2004; the results of itsoperations for the three and six months ended June 30, 2005 and 2004; andits cash flows for the six months ended June 30, 2005 and 2004. Due to theseasonality of electric sales of SPS, quarterly results are not necessarily anappropriate base from which to project annual results.

 

Thesignificant accounting policies of SPS are set forth in Note 1 to itsconsolidated financial statements in its Annual Report on Form 10-K forthe year ended Dec. 31, 2004. The following notes should be read inconjunction with such policies and other disclosures in the Form 10-K.

 

**1.  ****Significant AccountingPolicies**

 

***FASB Interpretation No. 47(FIN No. 47) –***In April 2005, theFinancial Accounting Standards Board (FASB) issued FIN No. 47 to clarifythe scope and timing of liability recognition for conditional asset retirementobligations pursuant to Statement of Financial Accounting Standard (SFAS) No. 143- “Accounting for Asset Retirement Obligations”.  The interpretation requires that a liabilitybe recorded for the fair value of an asset retirement obligation, if the fairvalue is estimable, even when the obligation is dependent on a futureevent.  FIN No. 47 further clarifiedthat uncertainty surrounding the timing and method of settlement of theobligation should be factored into the measurement of the conditional assetretirement obligation rather than affect whether a liability should berecognized.  Implementation is requiredto be effective no later than the end of fiscal years ending after Dec. 15,2005.  Additionally, FIN No. 47 willpermit but not require restatement of interim financial information during anyperiod of adoption.  Both recognition ofa cumulative change in accounting and disclosure of the liability on a proforma basis are required for transition purposes.  SPS is evaluating the impact of FIN No. 47,however, it is not expected to have a material impact on results of operationsor financial position due to the expected recovery in customer rates.

 

***Reclassifications***- Certain items in the statement of income for the three and six months ended June 30,2004 have been reclassified to conform to the 2005 presentation.  These reclassifications had no effect on netincome.

 

**2.  Regulation**

 

**Federal Regulation**

** **

***Market-Based Rate Authority***—The Federal Energy Regulatory Commission (FERC) regulates the wholesale sale ofelectricity.  In order to obtainmarket-based rate authorization from the FERC, utilities such as SPS have beenrequired to submit analyses demonstrating that they did not have market powerin the relevant markets.  SPS waspreviously granted market-based rate authority by the FERC.

 

In 2004, theFERC adopted two indicative screens (an uncommitted pivotal supplier analysisand an uncommitted market share analysis) as a revised test to assess marketpower.  Passage of the two screenscreates a rebuttable presumption that an applicant does not have market power,while the failure creates a rebuttable presumption that the utility does havemarket power.  An applicant or intervenorcan rebut the presumption by performing a more extensive delivered-price testanalysis.  If an applicant is determinedto have generation market power, the applicant has the opportunity to proposeits own mitigation plan or may implement default mitigation established by theFERC.  The default mitigation limitsprices for sales of power to cost-based rates within areas where an applicantis found to have market power.

 

Xcel Energyfiled the required analysis applying the FERC’s two indicative screens onbehalf of itself and SPS with the FERC on Feb. 7, 2005.  This analysis demonstrated that SPS passedthe pivotal supplier analysis in its own control area and all adjacent markets,but that it failed the market share analysis in its own control areas.  Numerous parties filed interventions and requestedthat FERC set the analysis for hearing. Certain parties asked the FERC to revoke the market-based rate authorityof SPS.

 

On June 2,2005, the FERC issued an order initiating a proceeding pursuant to Section 206of the Federal Power Act to investigate SPS’s market-based rate authoritywithin its own control area.  The refundeffective date that has been set as part of that investigation for such salesis August 12, 2005.

 

By August 1,2005, SPS must either submit a delivered price test analysis to support thegrant of market-based rate authorization for sales within its control area,make a mitigation proposal to eliminate any ability that it has to exercisemarket power, or adopt the FERC’s default mitigation proposal, namely to adoptcost-based rates that would apply to sales within its control area.

 

The FERC alsorequired that Xcel Energy make a compliance filing providing information,including information regarding the 

 

6

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FERC’saffiliate abuse component of its market power analysis and the allegationsregarding that component made by an intervenor within 30 days of the date ofissuance of its order.  The lattercompliance filing was submitted on July 5, 2005.  Xcel Energy plans to withdraw its market-basedrate authority on a prospective basis for sales with loads sinking within thePSCo and SPS control areas.  SPS expectsto make wholesale sales in these two control areas based on cost-basedarrangements.  The cost-based rate thatwill be proposed for SPS is not expected to have a significant impact oncommodity marketing operations.

 

***FERC Transmission Rate Case*****— OnSept. 2, 2004, Xcel Energy filed on behalf of SPS and Public Service Company ofColorado (PSCo), another wholly owned subsidiary of Xcel Energy, an applicationto increase wholesale transmission service and ancillary service rates withinthe Xcel Energy joint open access transmission tariff (OATT). SPS and PSCorequested an increase in annual transmission service and ancillary servicesrevenues of $6.1 million.  As a result ofa settlement with certain PSCo wholesale power customers in 2003, their powersales rates would be reduced by $1.4 million. The net increase in annualrevenues proposed is $4.7 million, of which $1.7 million is attributable toSPS.  The FERC suspended the filing anddelayed the effective date of the proposed increase to June 1, 2005.  The rate increase application also includesSPS and PSCo adopting an annual formula rate for transmission service pricingas previously approved by the FERC for other transmission providers, whichwould provide annual rate changes reflecting changes in cost and usage.  The caseis currently pending settlement judge procedures and interim rates went intoeffect on June 1, 2005, subject to refund.

** **

***Wholesale RateComplaint*** – In November 2004, severalwholesale cooperative customers of SPS filed a $3 million rate complaint at theFERC requesting that the FERC investigate SPS’ wholesale power base rates andfuel clause calculations.  In December 2004,the FERC accepted the complaint filing and ordered SPS base rates subject torefund, effective January 1, 2005. Also in November 2004, SPS filed revisions to its wholesale fuelcost adjustment clause.  The FERC set theproposed rate changes into effect on January 1, 2005, subject to refund,and consolidated the proceeding with the wholesale cooperative customers’complaint proceeding.  The FERC set theconsolidated proceeding for hearing and settlement judge procedures, which wereterminated when the parties could not reach a settlement.  A hearing judge has been appointed by theFERC and the case is set to go to hearing in December 2005.  The complainants’ initial testimony was filedon July 12, 2005, and SPS is reviewing the testimony and preparing itsanswering testimony that is due Aug. 23, 2005.  Hearings are scheduled for December 2005.

 

**Other Regulatory Matters**

** **

***Texas Retail FuelCost***—******Fuel and purchased energy costs arerecovered in Texas through a fixed fuel and purchased energy recoveryfactor.  In May 2004, SPS filed withthe Public Utility Commission of Texas (PUCT) its periodic request for fuel andpurchased power cost recovery for electric generation and fuel managementactivities for the period from January 2002 through December 2003.  SPS requested approval of approximately $580million of Texas-jurisdictional fuel and purchased power costs for the two-yearperiod.  Intervenor and PUCT stafftestimony was filed in October 2004 and hearings were held in December 2004.  Intervenor testimony contained objections toSPS’ methodology for assigning average fuel costs to certain wholesale sales,among other things.  Recovery of $49million to $86 million of the requested amount was contested by multipleintervenors.

 

The administrative law judge issued his recommended proposal for thedecision (PFD) on April 15, 2005, which was generally favorable toSPS.  Prior to issuance of the PFD, SPShad entered into a non-unanimous stipulation with the PUCT staff and several ofthe intervenors.  The stipulation wouldprovide reasonable regulatory certainty for SPS on all key issues raised inthis proceeding.  The deadline forparties to protest the settlement and request a hearing was July 22,2005.  No parties protested thesettlement agreement.  The PUCT willconsider the settlement agreement for approval. If the PUCT does not approve the filed stipulation without modification,SPS, as well as the other signatories have the option of withdrawing from thestipulation.  If the stipulation is notapproved as submitted, it is likely that one or more signatories willwithdraw.  If this occurs, the PUCT couldrevert to the consideration of the PFD. It is uncertain as to whether the PUCT will approve the stipulation orwill adopt any or all of the administrative law judge’s recommendationscontained in the PFD.  The settlementreflects a potential liability of approximately $25 million, which isconsistent with the reserve that SPS accrued during the fourth quarter of 2004related to this proceeding.  SPS believesthis estimate is appropriate and sufficient. A PUCT decision is expected late in 2005.

 

***Texas Energy Legislation –***The2005 Texas Legislature passed and the Governor signed effective June 18,2005 a law establishing statutory authority for electric utilities outside ofthe electric reliability council of Texas (ERCOT) in the Southwest Power Poolor the Western Electricity Coordinating Council to have timely recovery oftransmission infrastructure investments. After notice and hearing, the PUCT may allow recovery on an annual basisof the reasonable and necessary expenditures for transmission infrastructureimprovement costs and changes in wholesale transmission charges under a tariffapproved by FERC.  The PUCT will initiatea rulemaking for this process that is expected to take place largely in thefourth quarter of 2005.

 

***New Mexico FuelReview***– On Jan. 28, 2005, the New Mexico PublicRegulatory Commission (NMPRC) accepted the staff petition for a review of SPS’fuel and purchased power cost.  The staffhas requested a formal review of SPS’ fuel, purchased power cost adjustmentclause (FPPCAC) for the period of Oct. 1, 2001 through August 2004.  Several parties have requested to expand theissues 

 

7

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in the case.  The case is pendingfurther action by the NMPRC.  SPS’ next fuel and purchased power costadjustment factor continuation filing in New Mexico is due Aug. 19, 2005.

 

**3.  Commitmentsand Contingent Liabilities**

 

**EnvironmentalContingencies**

 

SPS has been or is currentlyinvolved with the cleanup of contamination from certain hazardous substances atseveral sites. In many situations, SPS is pursuing or intends to pursueinsurance claims and believes it will recover some portion of these costs throughsuch claims. Additionally, where applicable, SPS is pursuing, or intends topursue, recovery from other potentially responsible parties and through therate regulatory process. To the extent any costs are not recovered through theoptions listed above, SPS would be required to recognize an expense for suchunrecoverable amounts in its consolidated financial statements.

 

***Clean Air Interstateand Mercury Rules ***- In March 2005, theEnvironmental Protection Agency (EPA) issued two significant new air qualityrules.  The Clean Air Interstate Rule (CAIR)further regulates sulfur dioxide (SO2) and nitrogen oxide (NOx)emissions, and the Clean Air Mercury Rule regulates mercury emissions frompower plants for the first time.

 

The objective of the CAIR is to cap emissions of SO2 and NOxin the eastern United States, including Texas. When fully implemented, CAIR will reduce SO2 emissions in 28eastern states and the District of Columbia by over 70 percent and NOxemissions by over 60 percent from 2003 levels. It is designed to address thetransportation of fine particulates, ozone and emission precursors tonon-attainment downwind states.  CAIR hasa two-phase compliance schedule, beginning in 2009 for NOx and 2010 for SO2,with a final compliance deadline in 2015 for both emissions.  Under CAIR, each affected state will beallocated an emissions budget for SO2 and NOX that willresult in significant emission reductions. It will be based on stringent emission controls and forms the basis fora cap-and-trade program.   State emissionbudgets or caps decline over time. States can choose to implement an emissions reduction program based onthe EPA’s proposed model program, or they can propose another method, which theEPA would need to approve.

 

On July 11, 2005, SPS, the City ofAmarillo and Occidental Permian LTD filed a lawsuit against the EPA and arequest for reconsideration with the agency to exclude West Texas from theCAIR.  El Paso Electric Co. joined in therequest for reconsideration.

 

Xcel Energy and SPS advocated that West Texas should be excluded fromCAIR, because it does not contribute significantly to nonattainment with thefine particulate matter National Ambient Air Quality Standard in any downwindjurisdiction.

 

•      Emissions from plants located in the Texaspanhandle are more than 1,000 kilometers away from cities like Chicago, St.Louis and Indianapolis and have no measurable impact on their air quality.

•      EPA should not arbitrarily include theentire state of Texas in the rule. As a result of its size, there aresignificant differences in the air quality impacts of plants in the differentregions of Texas.

•      EPA has precedent for dividing the stateinto two regions.  As part of the TexasAir Quality strategy, the Texas Commission on Environmental Quality split thestate and imposed different requirements on West Texas.  The Bush Administration adopted a similarapproach in its proposed Clear Skies Act.

•      EPA excluded Oklahoma and Kansas fromCAIR, but imposes CAIR’s burdens on plants in West Texas.  Emissions from West Texas must pass throughOklahoma and Kansas – and over power plants in those states that are notsubject to the rule – before reaching the downwind cities the rule isdesigned to protect.

 

Under CAIR’s cap and trade structure, SPS can comply through capitalinvestments in emission controls or purchase of emission “allowances” fromother utilities making reductions on their systems.  Based on the preliminary analysis of variousscenarios of capital investment and allowance purchase, capital investmentscould range from $30 million to $300 million and allowance purchases orincreased operating and maintenance expenses could range from $20 million to$28 million per year, beginning in 2010. This does not include other costs that SPS will have to incur to complywith EPA’s new mercury emission control regulations, which will apply to SPS’plants.

 

These cost estimates represent one potentialscenario on how to comply with the CAIR, if West Texas is not excluded fromCAIR.  There is uncertainty concerningimplementation of CAIR.  States arerequired to develop implementation plans within 18 months and have asignificant amount of discretion in the implementation details.  Legal challenges to CAIR rules couldalter their requirements and/or schedule. The uncertainty associated with the final CAIR rules makes itdifficult to project the ultimate amount and timing of capital expenditure andoperating expenses.

 

While SPS expects to comply with the new rules througha combination of additional capital investments in emission controls at variousfacilities and purchases of emission allowances, it is continuing to review thealternatives.  SPS believes the cost ofany required capital investment or allowance purchases will be recoverable fromcustomers.

 

8

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The EPA’s Clean Air Mercury Rule also uses a nationalcap-and-trade system and is designed to achieve a 70 percent reduction inmercury emissions.  It affects all coal-and oil-fired generating units across the country greater than 25megawatts.  Compliance with this rule alsooccurs in two phases, with the first phase beginning in 2010 and the secondphase in 2018.  States will be allocatedmercury allowances based on their baseline heat input relative to other statesand by coal type.  Each electricgenerating unit will be allocated mercury allowances based on its percentage oftotal coal heat input for the state.  SPSis evaluating the impact of the Clean Air Mercury Rule and is currentlyunable to estimate the cost.

 

***Cunningham StationGroundwater -***Cunningham Station is a natural gasfired power plant constructed in the 1960’s and has 28 water wells installed onits water rights.  The well fieldprovides water for boiler makeup, cooling water, and potable water.  Following an acid release in 2002,groundwater samples revealed elevated concentrations of inorganic saltcompounds not related to the release. The contamination was identified in wellslocated near the plant buildings.  Thesource of contamination is thought to be leakage from ponds that receiveblowdown water from the plant.  Inresponse to a request by the New Mexico Environment Department (NMED), SPSprepared a corrective action plan to address the groundwatercontamination.  Under the plan submittedto the NMED, SPS agreed to control leakage from the plant blowdown pondsthrough construction of a new lined pond, additional irrigation area tominimize percolation, and installation of additional wells to monitorgroundwater quality.  On June 23,2005, NMED issued a letter approving the corrective action plan.  The action plan is subject to continuedcompliance with New Mexico regulations and oversight by the NMED.  These actions are estimated to costapproximately $2.7 million during 2005 and 2006.

 

**Legal Contingencies**

** **

Lawsuits and claims arise inthe normal course of business. Management, after consultation with legalcounsel, has recorded an estimate of the probable cost of settlement or otherdisposition of them. The ultimate outcome of these matters cannot presently bedetermined. Accordingly, the ultimate resolution of these matters could have amaterial adverse effect on SPS’ financial position and results of operations.

 

**OtherContingencies**

 

The circumstancesset forth in Note 11 to the consolidated financial statements in SPS’ AnnualReports on Form 10-K for the year ended Dec. 31, 2004 and Note 2 ofthis Quarterly Report on Form 10-Q, appropriately represent, in allmaterial respects, the current status of commitments and contingent liabilitiesand are incorporated herein by reference.

 

**4.  FuelSupply and Costs**

 

SPS recently notified the United States Department of Energy (DOE) ofreduced inventories of coal at its electric generating stations.  Delivery of coal from the Powder River Basinregion in Wyoming has been disrupted by train derailments and other operationalproblems purportedly caused by deteriorated rail track beds of approximately100 miles in length in Wyoming. The BNSF Railway Co. (BNSF) and the UnionPacific Railroad (UPRR) jointly own the rail line.  The BNSF operates and maintains the railline.  The Powder River Basin is aprimary source of coal used by SPS in the operation of a number of itscoal-fired electric generating stations. Reduced deliveries of coal have reduced the inventories of coal at SPSelectric generating stations.

 

BNSF and UPRR have indicated that repair and reconstruction of thedeteriorated sections of rail track beds may take the balance of the year.  While BNSF and UPRR have begun to repair the railbeds, they are working with SPS to identify options in the interim to increasethe rate of coal deliveries. Additionally, SPS has been analyzing the potential magnitude, likelihoodand effects of reduced coal deliveries to its generating stations anddeveloping an interim plan to conserve coal. The interim plan includes modifying the dispatch of its coal-firedelectric generating stations to conserve existing coal supplies until coaldeliveries return to normal levels. SPS has increased power purchases fromthird parties and, where practicable, has increased the use of natural gas forelectric generation to replace the coal-fired electric generation.  Also, SPS has been in contact with itswholesale customers to identify options to reduce sales levels if necessary.

 

The cost of purchased power and natural gas for electric generation ishigher than that for coal-fired electric generation, and the use of thesesources to replace coal-fired electric generation will increase the price ofelectricity for retail and wholesale customers.

 

SPS has discussed this situation with the staffs of the regulatorycommissions in Texas and New Mexico.

 

In Texas, fuel and purchased energy costs are recovered through a fixedfuel and purchased energy recovery factor, which is part of SPS’ retailelectric rates.  If it appears that SPSwill materially over-recover or under-recover these costs, the factor may berevised upon application by SPS or action by the PUCT.  The regulations require surcharging ofunder-recovered amounts, including interest, when they exceed 4 percent of SPS’annual fuel and purchased energy costs, as allowed by the PUCT, if thecondition is expected to 

 

9

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continue.  SPS expects to filefor and obtain recovery of higher fuel and purchased energy costs resultingfrom the disruption in deliveries of coal to its electric generating stations.

 

In New Mexico, increases and decreases in fuel and purchased energycosts, including deferred amounts, are recovered through a monthly fuel andpurchased power clause with a two-month lag. Wholesale customers, under the FERC jurisdiction also pay a monthly fuelcost adjustment calculated on actual fuel and purchased power costs inaccordance with the FERC’s fuel clause regulations.

 

While SPS believes that it should be allowed to recover these highercosts, if all or a significant portion of these higher costs are not recoveredor there is a significant lag in recovery, this could have a significant impacton the 2005 financial results of SPS.

 

**5.  Derivative Valuation andFinancial Impacts**

 

SPS recordsall derivative instruments on the balance sheet at fair value unless exemptedas a normal purchase or sale. Changes in non-exempt derivative instrument’sfair value are recognized currently in earnings unless the derivative has beendesignated in a qualifying hedging relationship. The application of hedgeaccounting allows a derivative instrument’s gains and losses to be reflected inOther Comprehensive Income or to offset related results of the hedged item inthe statement of income, to the extent effective. SFAS No. 133 – “Accountingfor Derivative Instruments and Hedging Activities,” as amended, requires thatthe hedging relationship be highly effective and that a company formallydesignate a hedging relationship to apply hedge accounting.

 

SPS recordsthe fair value of its derivative instruments in its Consolidated Balance Sheetas a separate line item identified as Derivative Instruments Valuation forassets and liabilities, as well as current and noncurrent.

 

**CashFlow Hedges**

 

SPS enters into various instruments that effectively fix the interestpayments on certain floating rate debt obligations or effectively fix the yieldor price on a specified benchmark interest rate for a specific period. Thesederivative instruments are designated as cash flow hedges for accountingpurposes, and the change in the fair value of these instruments is recorded asa component of Other Comprehensive Income. As of June 30, 2005, SPS had netlosses of $0.6 million accumulated in Other Comprehensive Income related tointerest cash flow hedge contracts that are expected to be recognized inearnings during the next 12 months.

 

SPS has a minimal amount of commodity trading activity designated ascash flow hedges. The fair value of these cash flow hedges is recorded ineither Other Comprehensive Income or deferred as a regulatory asset orliability. This classification is based on the regulatory recovery mechanismsin place. Amounts deferred in these accounts are recorded in earnings as thehedged purchase or sales transaction is settled.  As of June 30, 2005, SPS had no amountsaccumulated in Other Comprehensive Income related to commodity cash flow hedgecontracts that are expected to be recognized in earnings during the next 12months as the hedged transactions settle. However, due to the volatility ofcommodities markets, the value in Other Comprehensive Income will likely changeprior to its recognition in earnings.

 

Gains orlosses on hedging transactions for the sales of electric energy are recorded asa component of revenue, hedging transactions for fuel used in energy generationare recorded as a component of fuel costs, and interest rate hedgingtransactions are recorded as a component of interest expense. SPS is allowed torecover in electric rates the costs of certain financial instruments acquiredto reduce commodity cost volatility. There was no hedge ineffectiveness in the second quarter of 2005.

 

The impact ofthe components of hedges on SPS’ Other Comprehensive Income, included as acomponent of stockholder’s equity, are detailed in the following table:

 
| ** **                                                                                   | ** ** | **Six months ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| **(Millions of dollars)**                                                                    | ** ** | **2005**                           | ** ** | **2004** | ** ** |
| ** **                                                                                   | ** ** | ** **                         | ** ** | ** ** | ** ** |
| Accumulated other comprehensive loss  related to cash flow hedges at Jan. 1             |       | $                                  | (5.3       | ) | $ | (7.2 | ) |
| After-tax net unrealized gains related to  derivatives accounted for as hedges               |       | (0.2                               | )          | 1.7 |   |
| After-tax net realized (gains) losses on  derivative transactions reclassified into earnings |       | (0.1                               | )          | 0.5 |   |
| Accumulated other comprehensive loss  related to cash flow hedges at June 30            |       | $                                  | (5.6       | ) | $ | (5.0 | ) |

 

**DerivativesNot Qualifying for Hedge Accounting**

 

SPS hasextremely limited commodity trading operations that enter into derivativeinstruments. These derivative instruments are accounted for on a mark-to-marketbasis in the Consolidated Statement of Income. The results of thesetransactions are reported on a 

 

10

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net basiswithin Operating Revenue on the Consolidated Statement of Income.

 

SPS alsoenters into certain commodity-based derivative transactions, not included intrading operations, 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 forthe purchase and sale of various commodities for use in its businessoperations. SFAS No. 133 requires a company to evaluate these contracts todetermine whether the contracts are derivatives. Certain contracts thatliterally meet the definition of a derivative may be exempted from the fairvalue reporting requirements of 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 instrument or derivativeinstrument that will be delivered in quantities expected to be used or soldover a reasonable period in the normal course of business.  Contracts that meet these requirements aredocumented and exempted from the accounting and reporting requirements of SFAS No. 133.

 

SPS evaluatesall of its contracts when such contracts are entered to determine if they arederivatives and, if so, if they qualify and meet the normal designationrequirements under SFAS No. 133. None of the derivative contracts enteredinto within the commodity trading operations qualify for a normal designation.

 

Normalpurchases and normal sales contracts are accounted for as executory contractsas required under other generally accepted accounting principles.

 

**6.  Detailof Interest and Other Income, Net of Nonoperating Expenses**

 

Interest and other income, netof nonoperating expenses, for the three and six months ended June 30consists of the following:

 
| ** **                                                     | ** ** | **Three months ended   June 30** | ** ** | **Six months ended   June 30** | ** ** |
|----------------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| **(Thousands of dollars)**                                     | ** ** | **2005**                              | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                     | ** ** | ** **                            | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                                |       | $                                     | 418        |                                | $          | 598 |   | $ | 712 |   | $ | 803 |   |
| Gain on sale of assets                                         |       | 2,234                                 |       | —                              |       | 2,279 |   | — |   |
| Other nonoperating income                                      |       | 805                                   |       | 336                                 |       | 969 |   | 450 |   |
| Nonoperating expenses                                          |       | —                                |       | (157                                | )          | (18 | ) | (215 | ) |
| Total interest and other income, net of  nonoperating expenses |       | $                                     | 3,457      |                                | $          | 777 |   | $ | 3,942 |   | $ | 1,038 |   |

 

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

 

SPS has onereportable segment.  SPS operates in theRegulated Electric Utility industry, providing wholesale and retail electricservice in the states of Texas, New Mexico, Kansas and Oklahoma.  Revenues from external customers were $381.3million and $347.6 million for the three months ended June 30, 2005 and2004.  Revenues from external customerswere $693.7 million and $654.2 million for the six months ended June 30,2005 and 2004.

 

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**8.  Comprehensive Income**

 

The componentsof total comprehensive income are shown below:

 
| ** **                                                                                                | ** ** | **Three months ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| **(Millions of dollars)**                                                                                 | ** ** | **2005**                               | ** ** | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                | ** ** | ** **                             | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                                                                                |       | $                                      | 17.5       |                                 | $          | 20.1 |   | $ | 31.6 |   | $ | 34.9 |   |
| Other comprehensive income:                                                                               |       |                                   |       |                                 |       |   |   |   |   |
| After-tax net unrealized gains related to  derivatives accounted for as hedges (see Note 5)               |       | (0.5                                   | )          | 0.6                                  |       | (0.2 | ) | 1.7 |   |
| After-tax net realized losses (gains) on  derivative transactions reclassified into earnings (see Note 5) |       | (0.1                                   | )          | 0.2                                  |       | (0.1 | ) | 0.5 |   |
| Other comprehensive loss                                                                                  |       | (0.6                                   | )          | 0.8                                  |       | (0.3 | ) | 2.2 |   |
| Comprehensive income                                                                                      |       | $                                      | 16.9       |                                 | $          | 20.9 |   | $ | 31.3 |   | $ | 37.1 |   |

 

The accumulated comprehensiveincome in stockholder’s equity at June 30, 2005 and 2004, relates tovaluation adjustments on SPS’ derivative financial instruments and hedgingactivities.

 

**9.  BenefitPlans and Other Postretirement Benefits**

 

**Componentsof Net Periodic Benefit Cost**

 
| ** **                                                    | ** ** | **Three months ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                             | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **(Thousands of dollars)**                                    | ** ** | **Pension Benefits**                 | ** ** | **Postretirement Health   Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                          | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                  |       | $                                    | 12,980     |   | $ | 13,124 |   | $ | 1,599 |   | $ | 1,425 |   |
| Interest cost                                                 |       | 39,496                               |       | 44,499 |   | 13,663 |   | 13,402 |   |
| Expected return on plan assets                                |       | (69,484                              | )          | (79,307 | ) | (6,267 | ) | (6,351 | ) |
| Amortization of transition (asset)  obligation                |       | —                               |       | (2 | ) | 3,644 |   | 3,590 |   |
| Amortization of prior service cost (credit)                   |       | 7,496                                |       | 7,405 |   | (544 | ) | (540 | ) |
| Amortization of net (gain) loss                               |       | (39                                  | )          | (2,577 | ) | 6,460 |   | 5,276 |   |
| Net periodic benefit cost (credit)                            |       | (9,551                               | )          | (16,858 | ) | 18,555 |   | 16,802 |   |
| Settlements and curtailments                                  |       | —                               |       | 703 |   | — |   | — |   |
| Credits not recognized due to the effects  of regulation      |       | 6,500                                |       | 8,568 |   | — |   | — |   |
| Additional cost recognized due to the  effects of regulation  |       | —                               |       | — |   | 973 |   | 972 |   |
| Net benefit cost (credit) recognized for  financial reporting |       | $                                    | (3,051     | ) | $ | (7,587 | ) | $ | 19,528 |   | $ | 17,774 |   |
|                                                          |       |                                 |       |   |   |   |   |   |   |
| **SPS**                                                       |       |                                 |       |   |   |   |   |   |   |
| Net benefit cost (credit) recognized for  financial reporting |       | $                                    | (2,461     | ) | $ | (2,925 | ) | $ | 2,011 |   | $ | 1,235 |   |

 

12

 
| ** **                                                    | ** ** | **Six months ended June 30,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                    | ** ** | **2005**                           | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **(Thousands of dollars)**                                    | ** ** | **Pension Benefits**               | ** ** | **Postretirement Health   Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                  |       | $                                  | 30,230     |   | $ | 29,474 |   | $ | 3,342 |   | $ | 3,050 |   |
| Interest cost                                                 |       | 80,492                             |       | 82,674 |   | 27,530 |   | 26,302 |   |
| Expected return on plan assets                                |       | (139,758                           | )          | (151,532 | ) | (12,850 | ) | (11,626 | ) |
| Amortization of transition (asset)  obligation                |       | —                             |       | (4 | ) | 7,289 |   | 7,290 |   |
| Amortization of prior service cost (credit)                   |       | 15,018                             |       | 15,006 |   | (1,089 | ) | (1,090 | ) |
| Amortization of net (gain) loss                               |       | 3,410                              |       | (7,718 | ) | 13,123 |   | 10,826 |   |
| Net periodic benefit cost (credit)                            |       | (10,608                            | )          | (32,100 | ) | 37,345 |   | 34,752 |   |
| Settlements and curtailments                                  |       | —                             |       | 703 |   | — |   | — |   |
| Credits not recognized due to the effects  of regulation      |       | 9,684                              |       | 18,745 |   | — |   | — |   |
| Additional cost recognized due to the  effects of regulation  |       | —                             |       | — |   | 1,946 |   | 1,945 |   |
| Net benefit cost (credit) recognized for  financial reporting |       | $                                  | (924       | ) | $ | (12,652 | ) | $ | 39,291 |   | $ | 36,697 |   |
|                                                          |       |                               |       |   |   |   |   |   |   |
| **SPS**                                                       |       |                               |       |   |   |   |   |   |   |
| Net benefit cost (credit) recognized for  financial reporting |       | $                                  | (4,551     | ) | $ | (5,582 | ) | $ | 3,427 |   | $ | 2,755 |   |

 

**Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS**

 

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

 

**Forward-LookingInformation**

 

The followingdiscussion and analysis by management focuses on those factors that had amaterial effect on the financial condition and results of operations of SPSduring the periods presented, or are expected to have a material impact in thefuture. It should be read in conjunction with the accompanying unauditedfinancial statements and notes.

 

Except for thehistorical statements contained in this report, the matters discussed in thefollowing discussion and analysis are forward-looking statements that aresubject to certain risks, uncertainties and assumptions. Such forward-lookingstatements are intended to be identified in this document by the words “anticipate,”“estimate,” “expect,” “objective,” “outlook,” “possible,” “potential” andsimilar expressions. Actual results may vary materially. Factors that couldcause actual 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;

•    Demandfor electricity in the nonregulated marketplace;

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

•    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;

 

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•    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 or in other publicly disseminated written documents.

 

**MarketRisks**

 

SPS is exposedto market risks, including changes in commodity prices and interest rates, asdisclosed in Item 7A – Quantitative and Qualitative Disclosures About MarketRisk in its Annual Report on Form 10-K for the year ended Dec. 31,2004.  Commodity price and interest raterisks for SPS are mitigated in most jurisdictions due to cost-based rateregulation. At June 30, 2005, there were no material changes to thefinancial market risks that affect the quantitative and qualitative disclosurespresented as of Dec. 31, 2004.

 

**RESULTSOF OPERATIONS**

 

SPS’ netincome was approximately $31.6 million for the first six months of 2005,compared with approximately $34.9 million for the first six months of 2004.

 

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

 

The followingtable details the change in electric revenue and margin. Electric productionexpenses tend to vary with changing retail and wholesale sales requirements andunit cost changes in fuel and purchased power. Due to fuel clause cost recoverymechanisms for retail customers, most fluctuations in energy costs do notaffect electric margin.

 

SPS has two distinct forms of wholesalemarketing activities:  short-termwholesale and commodity trading.  Short-termwholesale refers to energy related purchase and sales activity and the use ofcertain financial instruments associated with the fuel required for and energyproduced from SPS’ generation assets and energy and capacity purchased to servenative load.  Commodity trading is notassociated with SPS’ generation assets or the energy and capacity purchased toserve native load.

 

SPS conductsan inconsequential amount of commodity trading. Margins from commodity trading activity are partially redistributed to NorthernStates Power Company, a Minnesota corporation, and Public Service Company ofColorado, both wholly owned subsidiaries of Xcel Energy, pursuant to the jointoperating agreement (JOA) approved by the FERC. Margins received pursuant to the JOA are reflected as part of BaseElectric Utility Revenues.  Short-termwholesale and commodity trading margins reflect the impact of regulatorysharing, if applicable.  Trading revenuesare reported net of trading costs (i.e., on a margin basis) in the ConsolidatedStatements of Income.  Commodity tradingcosts include fuel, purchased power, transmission and other related costs. Asone of the expected outcomes of the fuel reconciliation proceeding discussed inNote 2, the recovery of costs associated with Renewable Energy Credits (REC)may change.  As a part of this change inregulatory recovery, SPS anticipates conducting additional marketing activitiesof RECs.  However, the ultimate impact ofthis change in recovery and additional marketing activity is not expected to besignificant.  The net results of thisactivity will be presented as a component of Base Electric Utility Revenues.

 

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The following table details the revenue andmargin for base electric utility and short-term wholesale activities:

 
| **(Millions of dollars)**               | ** ** | **Base   Electric Utility** | ** ** | **Short-term  Wholesale** | ** ** | **Consolidated  Total** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|---------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | ** **                       | ** ** | ** **                | ** ** | ** **              | ** ** |
| **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                             | %          | 0.0                       | %          | 33.7                    | %          |
|                                    |       |                             |       |                      |       |                    |       |
| **Six months ended June 30, 2004** |       |                             |       |                      |       |                    |       |
| Electric utility revenue                |       | $                                | 652        |                      | $          | 2                       |       | $ | 654 |   |
| Electric fuel and purchased power       |       | (415                             | )          | (2                        | )          | (417                    | )          |
| Gross margin before operating expenses  |       | $                                | 237        |                      | $          | —                  |       | $ | 237 |   |
| Margin as a percentage of revenue       |       | 36.3                             | %          | 0.0                       | %          | 36.2                    | %          |

 

The followingsummarizes the components of the changes in base electric revenue and baseelectric margin for the six months ended June 30:

 

***Base Electric Revenue***

 
| **(Millions of dollars)**               | ** ** | **2005 vs. 2004** | ** ** |
|-----------------------------------------|------------|-------------------|------------|
| ** **                              | ** ** | ** **        | ** ** |
| Sales growth (excluding weather impact) |       | $                 | 4          |   |
| Capacity sales                          |       | (5                | )          |
| Fuel cost recovery                      |       | 38                |       |
| Transmission and other                  |       | 3                 |       |
| Total base electric revenue increase    |       | $                 | 40         |   |

 

***Base Electric Margin***

 
| **(Millions of dollars)**               | ** ** | **2005 vs. 2004** | ** ** |
|-----------------------------------------|------------|-------------------|------------|
| ** **                              | ** ** | ** **        | ** ** |
| Sales growth (excluding weather impact) |       | $                 | 3          |   |
| Capacity sales                          |       | (5                | )          |
| Other                                   |       | (1                | )          |
| Total base electric margin decrease     |       | $                 | (3         | ) |

 

**Non-FuelOperating Expense and Other Costs**

 

The following summarizes thecomponents of the changes in other utility operating and maintenance expensefor the six months ended June 30:

 
| **(Millions of dollars)**                                       | ** ** | **2005 vs. 2004** | ** ** |
|-----------------------------------------------------------------|------------|-------------------|------------|
| Higher pension and medical costs                                |       | $                 | 3          |   |
| Higher outside legal costs                                      |       | 1                 |       |
| Higher bad debt costs                                           |       | 1                 |       |
| Lower plant outage costs                                        |       | (2                | )          |
| Lower incentive compensation                                    |       | (1                | )          |
| Total other utility operating and  maintenance expense increase |       | $                 | 2          |   |

 

Other incomeincreased by approximately $2.8 million, or 129 percent, for the first sixmonths of 2005, compared with the first six months of 2004. The increase isprimarily due to gains on the sale of water rights.

 

Income taxesdecreased by approximately $2.7 million for the first six months of 2005,compared with the first six months of 2004. The decrease was primarily due to lowerincome levels and a decrease in plant-related permanent taxable incomeitems for 2005 as compared to 2004.  The effective tax rate was 37.1 percent forthe first six months of 2005, compared with 38.0 percent for the same period in2004.

 

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**Item 4. CONTROLS AND PROCEDURES**

 

**Disclosure Controls andProcedures**

** **

SPS maintainsa set of disclosure controls and procedures designed to ensure that informationrequired to be disclosed in reports that it files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in Securities and Exchange Commission rules andforms. As of the end of the period covered by this report, based on anevaluation carried out under the supervision and with the participation of SPS’management, including the chief executive officer (CEO) and chief financialofficer (CFO), of the effectiveness of its disclosure controls and procedures,the CEO and CFO have concluded that SPS’ disclosure controls and procedures areeffective.

 

**Internal Control Over FinancialReporting**

** **

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

 

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

#### ** **

## **Item 1. LEGAL PROCEEDINGS**

## ** **

In the normal course ofbusiness, various lawsuits and claims have arisen against SPS. Management,after consultation with legal counsel, has recorded an estimate of the probablecost of settlement or other disposition for such matters. See Notes 2 and 3 tothe consolidated financial statements in this Quarterly Report on Form 10-Qfor further discussion of legal proceedings, including Regulatory Matters andCommitments and Contingent Liabilities, which are hereby incorporated byreference. Reference also is made to Item 3 of and Note 11 to theconsolidated financial statements in SPS’ Annual Report on Form 10-K forthe year ended Dec. 31, 2004 for a description of certain legalproceedings presently pending. Except as discussed herein, there are no newsignificant cases to report against SPS and there have been no notable changesin the previously reported proceedings.

 

## **Item 6. EXHIBITS**

## ** **

**(a) Exhibits**

 

The followingExhibits are filed with this report:

 

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* Incorporated by reference.

 
| 10.01* |   | Xcel Energy  Inc. 2005 Omnibus Incentive Plan (Appendix B to Schedule 14A, Definitive  Proxy Statement filed April 11, 2005, file no. 001-03034)                                                                                       |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.02* |   | Xcel Energy  Inc. Executive Annual Incentive Award Plan (effective May 25, 2005)  (Appendix C to Schedule 14A, Definitive Proxy Statement filed  April 11, 2005, file no. 001-03034)                                              |
| 10.03* |   | Amended  Employment Agreement, dated as of June 29, 2005, by and between Xcel  Energy Inc., a Minnesota corporation, and Wayne H. Brunetti.  (Exhibit 10.01 to Xcel Energy Current Report on Form 8-K, dated  June 29, 2005) |
| 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 tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized on Aug. 1, 2005.

 
| 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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