** **

**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For thequarterly period ended Sept. 30, 2005**

 

**or**

 

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

 

**For thetransition periodfrom               to**

 

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

#### ** **

**SOUTHWESTERN PUBLIC SERVICE COMPANY**

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

 

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

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. ý Yes oNo

 

Indicate by check markwhether the registrant is an accelerated filer (as defined in Rule 12b-2 of theExchange Act). o Yes ý No

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).oYes ýNo

 

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

 
| **Class**                  | ** ** | **Outstanding at October 26, 2005** |
|----------------------------|------------|-------------------------------------|
| Common Stock, $1 par value |       | 100 shares                          |

 

Southwestern Public ServiceCompany meets the conditions set forth in General Instruction H (1)(a) and (b)of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosureformat specified in General Instruction H (2) to such Form 10-Q.

 

** **

**Table of Contents**

 
| **PART I - FINANCIAL  INFORMATION** |
|-------------------------------------|
| Item l.                             |   | Consolidated  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-Q is filed bySouthwestern Public Service Co. (SPS). SPS is a wholly owned subsidiary of XcelEnergy Inc. (Xcel Energy). Additional information on Xcel Energy is availableon various filings with the Securities 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  Sept. 30,** | ** ** | **Nine Months Ended  Sept. 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                                                           | ** ** | **2005**                               | ** ** | **2004**                              | ** ** | **2005** | ** ** | **2004** | ** ** |
| Operating revenues                                                                                                                   |       | $                                      | 487,760    |                                  | $          | 390,077 |   | $ | 1,181,489 |   | $ | 1,044,233 |   |
|                                                                                                                                 |       |                                   |       |                                  |       |   |   |   |   |
| Operating expenses:                                                                                                                  |       |                                   |       |                                  |       |   |   |   |   |
| Electric fuel and purchased power                                                                                                    |       | 346,057                                |       | 252,904                               |       | 806,020 |   | 669,552 |   |
| Other operating and maintenance expenses                                                                                             |       | 47,515                                 |       | 41,694                                |       | 137,033 |   | 129,585 |   |
| Depreciation and amortization                                                                                                        |       | 24,910                                 |       | 23,098                                |       | 72,609 |   | 68,148 |   |
| Taxes (other than income taxes)                                                                                                      |       | 13,666                                 |       | 13,328                                |       | 39,103 |   | 38,163 |   |
| Total operating expenses                                                                                                             |       | 432,148                                |       | 331,024                               |       | 1,054,765 |   | 905,448 |   |
|                                                                                                                                 |       |                                   |       |                                  |       |   |   |   |   |
| Operating income                                                                                                                     |       | 55,612                                 |       | 59,053                                |       | 126,724 |   | 138,785 |   |
|                                                                                                                                 |       |                                   |       |                                  |       |   |   |   |   |
| Other income:                                                                                                                        |       |                                   |       |                                  |       |   |   |   |   |
| Interest and other income, net of nonoperating expenses (see Note 6)                                                                 |       | 1,643                                  |       | 359                                   |       | 5,585 |   | 1,397 |   |
| Allowance for funds used during construction—equity                                                                             |       | 746                                    |       | 91                                    |       | 1,718 |   | 1,199 |   |
| Total other income                                                                                                                   |       | 2,389                                  |       | 450                                   |       | 7,303 |   | 2,596 |   |
|                                                                                                                                 |       |                                   |       |                                  |       |   |   |   |   |
| Interest charges and  financing costs:                                                                                               |       |                                   |       |                                  |       |   |   |   |   |
| Interest charges—net of amounts capitalized, includes other financing  costs of $1,542, $1,555, $4,578 and $4,941, respectively |       | 13,432                                 |       | 13,224                                |       | 40,212 |   | 39,753 |   |
| Allowance for funds used during construction—debt                                                                               |       | (382                                   | )          | (454                                  | )          | (1,392 | ) | (1,311 | ) |
| Total interest charges and financing costs                                                                                           |       | 13,050                                 |       | 12,770                                |       | 38,820 |   | 38,442 |   |
|                                                                                                                                 |       |                                   |       |                                  |       |   |   |   |   |
| Income before income taxes                                                                                                           |       | 44,951                                 |       | 46,733                                |       | 95,207 |   | 102,939 |   |
| Income taxes                                                                                                                         |       | 16,730                                 |       | 17,979                                |       | 35,381 |   | 39,316 |   |
| Net income                                                                                                                           |       | $                                      | 28,221     |                                  | $          | 28,754 |   | $ | 59,826 |   | $ | 63,623 |   |
|                                                                                                                                      |            |                                        |            |                                       |            |  |  |  |  |  |  |  |  |  |  |  |

 

See Notes to Consolidated Financial Statements

 

 

3

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**SOUTHWESTERN PUBLIC SERVICECO.**

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

**(Thousands of Dollars)**

 
| ** **                                                                         | ** ** | **Nine Months Ended  Sept. 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                              | ** ** | **2004** | ** ** |
| Operating activities:                                                              |       |                                  |       |   |   |
| Net income                                                                         |       | $                                     | 59,826     |   | $ | 63,623 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                  |       |   |   |
| Depreciation and amortization                                                      |       | 78,074                                |       | 74,601 |   |
| Deferred income taxes                                                              |       | 42,864                                |       | 23,058 |   |
| Amortization of investment tax credits                                             |       | (188                                  | )          | (188 | ) |
| Allowance for equity funds used during construction                                |       | (1,718                                | )          | (1,199 | ) |
| Change in recoverable electric energy costs                                        |       | (70,470                               | )          | (40,793 | ) |
| Change in accounts receivable                                                      |       | (46,650                               | )          | (23,014 | ) |
| Change in unbilled revenues                                                        |       | (17,450                               | )          | 4,111 |   |
| Change in inventories                                                              |       | 694                                   |       | 482 |   |
| Change in other current assets                                                     |       | (263                                  | )          | (1,171 | ) |
| Change in accounts payable                                                         |       | 46,807                                |       | 211 |   |
| Change in other current liabilities                                                |       | 31,510                                |       | 14,236 |   |
| Change in other noncurrent assets                                                  |       | (12,300                               | )          | (11,913 | ) |
| Change in other noncurrent liabilities                                             |       | 4,712                                 |       | 3,137 |   |
| Net cash provided by operating activities                                          |       | 115,448                               |       | 105,181 |   |
|                                                                               |       |                                  |       |   |   |
| Investing activities:                                                              |       |                                  |       |   |   |
| Capital/construction expenditures                                                  |       | (89,350                               | )          | (84,855 | ) |
| Allowance for equity funds used during construction                                |       | 1,718                                 |       | 1,199 |   |
| Other investments—net                                                         |       | 1,617                                 |       | 3,666 |   |
| Net cash used in investing activities                                              |       | (86,015                               | )          | (79,990 | ) |
|                                                                               |       |                                  |       |   |   |
| Financing activities:                                                              |       |                                  |       |   |   |
| Short-term borrowings—net                                                     |       | (22,400                               | )          | 45,000 |   |
| Capital contributions from parent                                                  |       | 56,736                                |       | 1,032 |   |
| Dividends paid to parent                                                           |       | (63,769                               | )          | (70,606 | ) |
| Net cash used in financing activities                                              |       | (29,433                               | )          | (24,574 | ) |
|                                                                               |       |                                  |       |   |   |
| Net increase (decrease) in cash and cash equivalents                               |       | —                                |       | 617 |   |
| Cash and cash equivalents at beginning of period                                   |       | 5                                     |       | 9,869 |   |
| Cash and cash equivalents at end of period                                         |       | $                                     | 5          |   | $ | 10,486 |   |
|                                                                               |       |                                  |       |   |   |   |   |
| Supplemental disclosure of  cash flow information:                                 |       |                                  |       |   |   |
| Cash paid for interest  (net of amounts capitalized)                               |       | $                                     | 29,616     |   | $ | 29,437 |   |
| Cash paid for income taxes  (net of refunds received)                              |       | $                                     | (1,698     | ) | $ | 6,966 |   |

 

See Notes to Consolidated Financial Statements

** **

** **

**4**

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** **

**SOUTHWESTERN PUBLIC SERVICECO.**

**CONSOLIDATED BALANCE SHEETS (UNAUDITED)**

**(Thousands of Dollars)**

** **
| ** **                                                                                   | ** ** | **Sept. 30,  2005** | ** ** | **Dec. 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------|------------|--------------------------|------------|--------------------|------------|
| **ASSETS**                                                                                   | ** ** | ** **               | ** ** | ** **         | ** ** |
| Current assets:                                                                              |       |                     |       |               |       |
| Cash and cash equivalents                                                                    |       | $                        | 5          |               | $          | 5 |   |
| Accounts receivable—net of allowance for bad debts: $2,702 and  $2,844, respectively    |       | 111,946                  |       | 66,445             |       |
| Accounts receivable from affiliates                                                          |       | 3,423                    |       | 2,273              |       |
| Accrued unbilled revenues                                                                    |       | 79,719                   |       | 62,269             |       |
| Recoverable electric energy costs                                                            |       | 150,510                  |       | 80,040             |       |
| Materials and supplies inventories—at average cost                                      |       | 13,667                   |       | 14,403             |       |
| Fuel inventory—at average cost                                                          |       | 3,040                    |       | 2,997              |       |
| Derivative instruments valuation—at market                                              |       | 24,626                   |       | 8,381              |       |
| Prepayments and other                                                                        |       | 7,165                    |       | 6,902              |       |
| Total current assets                                                                         |       | 394,101                  |       | 243,715            |       |
| Property, plant and equipment,  at cost:                                                     |       |                     |       |               |       |
| Electric utility plant                                                                       |       | 3,307,554                |       | 3,291,086          |       |
| Construction work in progress and other property                                             |       | 74,594                   |       | 65,848             |       |
| Total property, plant and equipment                                                          |       | 3,382,148                |       | 3,356,934          |       |
| Less accumulated depreciation                                                                |       | (1,400,201               | )          | (1,398,497         | )          |
| Net property, plant and equipment                                                            |       | 1,981,947                |       | 1,958,437          |       |
| Other assets:                                                                                |       |                     |       |               |       |
| Other investments                                                                            |       | 8,285                    |       | 9,902              |       |
| Regulatory assets                                                                            |       | 131,320                  |       | 93,067             |       |
| Prepaid pension asset                                                                        |       | 139,584                  |       | 132,757            |       |
| Derivative instruments valuation—at market                                              |       | 61,686                   |       | 52,431             |       |
| Deferred charges and other                                                                   |       | 4,060                    |       | 4,819              |       |
| Total other assets                                                                           |       | 344,935                  |       | 292,976            |       |
| Total assets                                                                                 |       | $                        | 2,720,983  |               | $          | 2,495,128 |   |
| **LIABILITIES AND EQUITY**                                                                   |       |                     |       |               |       |
| Current liabilities:                                                                         |       |                     |       |               |       |
| Borrowings on utility money pool, weighted average interest rate of  3.85% at Sept. 30, 2005 |       | $                        | 13,600     |               | $          | — |   |
| Bank borrowings on line of credit                                                            |       | —                   |       | 36,000             |       |
| Accounts payable                                                                             |       | 189,083                  |       | 139,311            |       |
| Accounts payable to affiliates                                                               |       | 11,372                   |       | 14,105             |       |
| Taxes accrued                                                                                |       | 27,917                   |       | 901                |       |
| Accrued interest                                                                             |       | 15,048                   |       | 10,098             |       |
| Dividends payable to parent                                                                  |       | 19,496                   |       | 22,442             |       |
| Current deferred income taxes                                                                |       | 32,869                   |       | 7,878              |       |
| Derivative instruments valuation—at market                                              |       | 29,399                   |       | 14,772             |       |
| Other                                                                                        |       | 17,655                   |       | 18,109             |       |
| Total current liabilities                                                                    |       | 356,439                  |       | 263,616            |       |
| Deferred credits and other  liabilities:                                                     |       |                     |       |               |       |
| Deferred income taxes                                                                        |       | 452,803                  |       | 438,276            |       |
| Deferred investment tax credits                                                              |       | 3,528                    |       | 3,716              |       |
| Regulatory liabilities                                                                       |       | 107,945                  |       | 135,881            |       |
| Derivative instruments valuation—at market                                              |       | 107,464                  |       | 22,449             |       |
| Benefit obligations and other                                                                |       | 29,769                   |       | 24,817             |       |
| Total deferred credits and other liabilities                                                 |       | 701,509                  |       | 625,139            |       |
|                                                                                         |       |                     |       |               |       |
| Long-term debt                                                                               |       | 825,696                  |       | 825,462            |       |
|                                                                                         |       |                     |       |               |       |
| Common stock—authorized 200 shares of $1.00 par value, outstanding  100 shares          |       | —                   |       | —             |       |
| Premium on common stock                                                                      |       | 472,566                  |       | 415,830            |       |
| Retained earnings                                                                            |       | 369,434                  |       | 370,430            |       |
| Accumulated other  comprehensive loss                                                        |       | (4,661                   | )          | (5,349             | )          |
| Total common stockholder’s equity                                                       |       | 837,339                  |       | 780,911            |       |
|                                                                                         |       |                     |       |               |       |
| Commitments and  contingencies (see Note 3)                                                  |       |                     |       |               |       |
| Total liabilities and equity                                                                 |       | $                        | 2,720,983  |               | $          | 2,495,128 |   |
|                                                                                              |            |                          |            |                    |            |  |  |  |

**See Notes to Consolidated FinancialStatements**

** **

** **

**5**

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** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

In the opinion ofmanagement, the accompanying unaudited consolidated financial statementscontain all adjustments necessary to present fairly the financial position ofSPS as of Sept. 30, 2005, and Dec. 31, 2004; the results of its operationsfor the three and nine months ended Sept. 30, 2005 and 2004; and its cashflows for the nine months ended Sept. 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.

 

The significant accountingpolicies of SPS are set forth in Note 1 to its consolidated financialstatements in its Annual Report on Form 10-K for the year ended Dec. 31, 2004.The following notes should be read in conjunction with such policies and otherdisclosures in the Form 10-K.

 

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

 

***FASB Interpretation No. 47 (FIN No.47)—***In April 2005, the Financial Accounting StandardsBoard (FASB) issued FIN No. 47 to clarify the scope and timing of liabilityrecognition for conditional asset retirement obligations pursuant to Statementof Financial Accounting Standard (SFAS) No. 143—“Accounting for AssetRetirement Obligations”.  Theinterpretation requires that a liability be recorded for the fair value of anasset retirement obligation, if the fair value is estimable, even when theobligation is dependent on a future event. FIN No. 47 further clarified that uncertainty surrounding the timing andmethod of settlement of the obligation should be factored into the measurementof the conditional asset retirement obligation rather than affect whether aliability should be recognized. Implementation is required to be effective no later than the end offiscal years ending after Dec. 15, 2005. Additionally, FIN No. 47 will permit but not require restatement ofinterim financial information during any period of adoption.  Both recognition of a cumulative change inaccounting and disclosure of the liability on a pro forma basis are requiredfor transition purposes.  SPS is evaluatingthe impact of FIN No. 47, however, it is not expected to have a material impacton results of operations or financial position due to the expected recovery incustomer rates.

 

***Reclassifications***—Certain itemsin the statement of income for the three and nine months ended Sept. 30, 2004have been reclassified to conform to the 2005 presentation.  These reclassifications had no effect on netincome.

 

**2.****    ****Regulation**

 

**Federal Regulation**

** **

***Energy Legislation***—OnAug. 8, 2005, President Bush signed into law the Energy Policy Act of 2005(Energy Act), significantly changing many federal energy statutes.  The Energy Act is expected to have asubstantial long-term effect on energy markets, energy investment, andregulation of public utilities and holding company systems by the FederalEnergy Regulatory Commission (FERC), the Securities and Exchange Commission(SEC) and the United States Department of Energy (DOE).  The FERC was directed by the Energy Act toaddress many areas previously regulated by other governmental entities underthe statutes and determine whether changes to such previous regulations arewarranted.  The issues that the FERC hasbeen required to consider associated with the repeal of the Public UtilityHolding Company Act of 1935, include the expansion of FERC authority to reviewmergers and sales of public utility companies and the expansion of the FERCauthority over the books and records of public utility companies previouslygoverned by the SEC.  The FERC is invarious stages of rulemaking on these and other issues.  SPS cannot predict the impact the newrulemaking will have on its operations or financial results, if any.

 

***Market-Based Rate Authority***—The FERC regulates thewholesale sale of electricity.  In orderto obtain market-based rate authorization from the FERC, utilities such as SPShave been required to submit analyses demonstrating that they did not havemarket power in the relevant markets. SPS was previously granted market-based rate authority by the FERC.

 

In 2004, the FERC adoptedtwo indicative screens (an uncommitted pivotal supplier analysis and an uncommittedmarket share analysis) as a revised test to assess market power.  Passage of the two screens creates arebuttable presumption that an applicant does not have market power, while thefailure creates a rebuttable presumption that the utility does have marketpower.  An applicant or intervenor canrebut 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 Energy filed therequired analysis applying the FERC’s two indicative screens on behalf ofitself and SPS with the FERC on Feb. 7, 2005. This analysis demonstrated that SPS passed the pivotal supplier analysisin its own control area and all adjacent markets, but that it failed the marketshare analysis in its own control areas. Numerous parties filed interventions and requested that the FERC set theanalysis for hearing.  Certain partiesasked the FERC to revoke the market-based rate authority of SPS.

 

 

6

 

On June 2, 2005, the FERCissued an order initiating a proceeding pursuant to Section 206 of the FederalPower Act to investigate SPS’s market-based rate authority within its owncontrol area.  The refund effective datethat has been set as part of that investigation for such sales is August 12,2005.

 

On August 1, 2005, SPS andPublic Service Company of Colorado (PSCo), another wholly owned subsidiary ofXcel Energy,  submitted a filing towithdraw their market-based rate authority with respect to sales within theircontrol areas.  As part of that filing,SPS and PSCo proposed to charge existing cost-based rates for sales into theSPS and PSCo control areas.  In October2005, PSCo and SPS filed revised tariff sheets to reflect that limitation on theirmarket-based rate authority. Notwithstanding these actions, certain intervenors are still contendingthat FERC must hold an investigation regarding SPS’ market power and the ratesthat SPS is proposing to charge where it has relinquished market-based rateauthority.  The matter is pending beforethe FERC.

 

***FERC Transmission Rate Case***—On Sept. 2, 2004, Xcel Energy filed on behalf of SPS and PSCo anapplication to increase wholesale transmission service and ancillary servicerates within the Xcel Energy joint open access transmission tariff.  SPS and PSCo requested an increase in annualtransmission service and ancillary services revenues of $6.1 million.  As a result of a settlement with certain PSCowholesale power customers in 2003, their power sales rates would be reduced by$1.4 million. The net increase in annual revenues proposed is $4.7 million, ofwhich $1.7 million is attributable to SPS. The FERC suspended the filing and delayed the effective date of theproposed increase to June 1, 2005.  Therate increase application also includes SPS and PSCo adopting an annual formularate for transmission service pricing as previously approved by the FERC forother transmission providers, which would provide annual rate changesreflecting changes in cost and usage.  The case is currently pending settlement judge procedures and interimrates went into effect on June 1, 2005, subject to refund.

 

***Wholesale Rate Complaint***—In November2004, several wholesale cooperative customers of SPS filed a $3 million rate complaintat the FERC requesting that the FERC investigate SPS’ wholesale power baserates and fuel clause calculations.  InDecember 2004, the FERC accepted the complaint filing and ordered SPS baserates subject to refund, effective January 1, 2005.  Also in November 2004, SPS filed revisions toits wholesale fuel cost adjustment clause. The FERC set the proposed rate changes into effect on January 1, 2005,subject to refund, and consolidated the proceeding with the wholesalecooperative customers’ complaint proceeding. The FERC set the consolidated proceeding for hearing and settlementjudge procedures, which were terminated when the parties could not reach asettlement.  A hearing judge has beenappointed by the FERC and hearings have been scheduled for December 2005.

 

**OnSept. 15, 2005, Public Service Company of New Mexico (PNM) filed a separatecomplaint at the FERC in which it contended that its demand charge under anexisting interruptible power supply contract with SPS is excessive and that SPShas overcharged PNM for fuel costs under three separate agreements througherroneous fuel clause calculations.  PNM’sarguments mirror those that it made as an intervenor in the cooperatives’complaint case, and SPS believes that they have little merit.  SPS submitted a response to PNM’s complaintin October 2005, and the case is pending FERC action.**

 

***SPP Energy Imbalance Service***—OnJune 15, 2005, the Southwest Power Pool (SPP) filed proposed tariff provisionsto establish an Energy Imbalance Service (EIS), a wholesale energy market forthe SPP region, using a phased approach toward the development of afully-functional locational marginal pricing energy market with appropriatefinancial transmission rights.  On July15, 2005, Xcel Energy filed a protest addressing the EIS proposal and urgingFERC to reject the proposal and provide guidance to SPP in its effort to designand implement a fully functional Day 2 market for the SPP region to avoid “seams”between the Midwest Independent Transmission System Operator, Inc. (MISO) andSPP regions.  On Sept. 19, 2005, FERCissued an order rejecting the SPP EIS proposal and providing guidance andrecommendations to SPP; however, the FERC did not require SPP to implement afull Day 2 market similar to MISO. Requests for rehearing of the FERC order were due Oct. 19, 2005.

 

**Other Regulatory Matters**

 

***Texas Retail Fuel Cost***—Fuel andpurchased energy costs are recovered in Texas through a fixed fuel andpurchased energy recovery factor.  InMay 2004, SPS filed with the Public Utility Commission of Texas (PUCT) itsperiodic request for fuel and purchased power cost recovery for electricgeneration and fuel management activities for the period from January 2002through December 2003.  SPSrequested approval of approximately $580 million of Texas-jurisdictional fueland purchased power costs for the two-year period.  Intervenor and PUCT staff testimony was filedin 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.

 

Theadministrative law judge issued his recommended proposal for the decision (PFD)on April 15, 2005, which was generally favorable to SPS.  Prior to issuance of the PFD, SPS had enteredinto a non-unanimous stipulation with the PUCT staff and several of theintervenors.  The stipulation wouldprovide reasonable regulatory certainty for SPS on all key issues raised inthis proceeding.  The deadline forparties to protest the stipulation and request a hearing was July 22,2005.  No parties protested thestipulation.  On Oct. 7, 

 

 

7

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2005,the PUCT issued an order requesting exceptions on the PFD and stipulation andannounced it would take both into consideration in making its decision in thisproceeding.  It is anticipated that afinal order will be issued in November 2005. The PUCT order may or may not reflect the terms of the stipulation orthe PFD.  The stipulation reflects apotential liability of approximately $25 million, which is consistent with thereserve that SPS accrued during the fourth quarter of 2004 related to this proceeding.  SPS believes this estimate is appropriate andsufficient.

 

***Energy Legislation***—The 2005 Texas Legislaturepassed and the Governor signed, effective June 18, 2005, a lawestablishing  statutory authority forelectric utilities outside of the electric reliability council of Texas in theSPP or 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 the firstquarter of 2006.

 

***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 and purchased power cost adjustmentclause (FPPCAC) for the period of Oct. 1, 2001 throughAugust 2004.  Several parties haverequested to expand the issues in the case. The NMPRC decided not to expand the case and address any additionalissues in SPS’ fuel continuation case filed in August 2005.  Hearings in the fuel review case have beenscheduled for April 2006.

 

***New Mexico Fuel Factor Continuation Filing***—The filing tocontinue the use of SPS’ FPPCAC was filed on Aug. 18, 2005.  This filing is required every two yearspursuant to the NMPRC rules.  The filingproposes that the FPPCAC continue the current monthly factor cost recoverymethodology.  Certain industrialcustomers have asked the NMPRC review SPS’ assignment of system average fuelcost to certain wholesale capacity sales. Also they are asking that the NMPRC investigate the treatment ofrenewable energy credits and sulfur dioxide allowance credit proceeds inrelation to SPS’ New Mexico retail fuel and purchased power recoveryclause.   Hearings have been scheduledfor April 2006, and a NMPRC decision is expected in late 2006.

 

**3.Commitments and 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 coststhrough such claims. Additionally, where applicable, SPS is pursuing, orintends to pursue, recovery from other potentially responsible parties andthrough 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 consolidated financial statements.

 

***Clean Air Interstate and MercuryRules***—In March 2005, the Environmental ProtectionAgency (EPA) issued two significant new air quality rules.  The Clean Air Interstate Rule (CAIR) furtherregulates sulfur dioxide (SO2) and nitrogen oxide (NOx) emissions,and the Clean Air Mercury Rule regulates mercury emissions from power plantsfor the first time.

 

Theobjective of the CAIR is to cap emissions of SO2 and NOx in theeastern 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 of Amarillo and Occidental Permian LTDfiled a lawsuit against the EPA and a request for reconsideration with theagency to exclude West Texas from the CAIR. El Paso Electric Co. joined in the request for reconsideration.

 

Xcel Energy and SPS advocatedthat West Texas should be excluded from CAIR, because it does not contributesignificantly to nonattainment with the fine particulate matter NationalAmbient Air Quality Standard in any downwind jurisdiction.

 

•                  Emissions from plantslocated in the Texas panhandle are more than 1,000 kilometers away from citieslike Chicago, St. Louis and Indianapolis and have no measurable impact on theirair quality.

 

 

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•                  EPA should not arbitrarilyinclude the entire state of Texas in the rule. As a result of its size, thereare significant differences in the air quality impacts of plants in thedifferent regions of Texas.

•                  EPA has precedent fordividing the state into two regions.  Aspart of the Texas Air Quality strategy, the Texas Commission on EnvironmentalQuality split the state and imposed different requirements on West Texas.  The Bush Administration adopted a similarapproach in its proposed Clear Skies Act.

•                  EPA excluded Oklahoma andKansas from CAIR, 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 not subjectto the rule—before reaching the downwind cities the rule is designed toprotect.

 

Under CAIR’s cap and trade structure, SPS cancomply through capital investments in emission controls or purchase of emission“allowances” from other 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 representone potential scenario on how to comply with the CAIR, if West Texas is notexcluded from CAIR.  There is uncertaintyconcerning implementation of CAIR. States are required to develop implementation plans within 18 months ofthe issuance of the new rules and have a significant amount of discretion inthe implementation details.  Legalchallenges to CAIR rules could alter their requirements and/orschedule.  The uncertainty associatedwith the final CAIR rules makes it difficult to project the ultimateamount and timing of capital expenditure and operating expenses.

 

While SPS expects to comply with the newrules through a combination of additional capital investments in emission controlsat various facilities and purchases of emission allowances, it is continuing toreview the alternatives.  SPS believesthe cost of any required capital investment or allowance purchases will berecoverable from customers.

 

The EPA’s Clean Air Mercury Rule also uses anational cap-and-trade system and is designed to achieve a 70 percent reductionin mercury emissions.  It affects allcoal- and oil-fired generating units across the country greater than 25 megawatts.  Compliance with this rule also occurs in twophases, with the first phase beginning in 2010 and the second phase in2018.  States will be allocated mercuryallowances based on their baseline heat input relative to other states and bycoal type.  Each electric generating unitwill be allocated mercury allowances based on its percentage of total coal heatinput for the state.  SPS is evaluatingthe impact of the Clean Air Mercury Rule and is currently unable to estimatethe cost.

 

***Cunningham Station Groundwater***—CunninghamStation is a natural gas fired power plant constructed in the 1960’s and has 28water wells installed on its water rights. The well field provides water for boiler makeup, cooling water, andpotable water.  Following an acid releasein 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 $3.8 million through 2008.

** **

**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.

 

***Carbon Dioxide Emissions Lawsuit***—OnJuly 21, 2004, the attorneys general of eight states and New York City, as wellas several environmental groups, filed lawsuits in U.S. District Court for theSouthern District of New York against five utilities, including Xcel Energy, toforce reductions in carbon dioxide (CO2) emissions.  Although SPS is not named as a party to thislitigation, the requested relief that Xcel Energy 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.  CO2 is emitted whenever fossilfuel is combusted, such as in automobiles, industrial operations and coal- orgas-fired power plants.  The lawsuitsallege that CO2 emitted by each company is a public nuisance asdefined under state and federal common law because it has contributed to globalwarming.  The lawsuits do not demandmonetary damages.  Instead, the lawsuitsask the court to order each utility to cap and reduce its CO2

 

 

9

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emissions.  In October 2004, Xcel Energy and four otherutility companies filed a motion to dismiss the lawsuit, contending, amongother reasons, that the lawsuit should be dismissed because it is an attempt tousurp the policy-setting role of the U.S. Congress and the president.  On Sept. 19, 2005, the judge granted thedefendants’ motion to dismiss on constitutional grounds.  Plaintiffs have filed a notice of appeal.

 

**OtherContingencies**

 

The circumstances setforth 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 of thisQuarterly Report on Form 10-Q, appropriately represent, in all materialrespects, the current status of commitments and contingent liabilities and areincorporated herein by reference.

 

**4.  Fuel Supply and Costs**

 

SPSpreviously notified the DOE of reduced inventories of coal at its electricgenerating stations.  Delivery of coalfrom the Powder River Basin region in Wyoming has been disrupted by trainderailments and other operational problems purportedly caused by deterioratedrail track beds of approximately 100 miles in length in Wyoming. The BNSFRailway Co. (BNSF) and the Union Pacific Railroad (UPRR) jointly own the railline.  The BNSF operates and maintainsthe rail line.  The Powder River Basin isa primary source of coal used by SPS in the operation of its two coal-firedelectric generating stations.

 

BNSFand UPRR have indicated that repair and reconstruction of the deterioratedsections of rail track beds may take the balance of the year.  While BNSF and UPRR have begun to repair therail beds, they continue to work with SPS in identifying options in the interimto increase the rate of coal deliveries. Additionally, SPS analyzed the magnitude, likelihood and effects ofreduced coal deliveries to its generating stations and developed an interimplan to conserve coal.  The interim planincluded temporarily modifying the dispatch of its coal-fired electricgenerating stations to conserve existing coal supplies.  SPS has increased power purchases from thirdparties and, where practicable, has increased the use of natural gas forelectric generation to replace the coal-fired electric generation.  Also, SPS has contacted wholesale customersto identify options to reduce sales levels, if necessary.

 

Thecost of purchased power and natural gas for electric generation is higher thanthat for coal-fired electric generation, and the use of these sources toreplace coal-fired electric generation increased the price of electricity forretail and wholesale customers.

 

SPS has discussed this situation with thestaffs of the regulatory commissions in Texas and New Mexico.

 

InTexas, fuel and purchased energy costs are recovered through a fixed fuel andpurchased energy recovery factor, which is part of SPS’ retail electricrates.  If it appears that SPS willmaterially over-recover or under-recover these costs, the factor may be revisedupon application by SPS or action by the PUCT. The regulations require surcharging of under-recovered amounts, includinginterest, when they exceed 4 percent of SPS’ annual fuel and purchased energycosts, as allowed by the PUCT, if the condition is expected to continue.  SPS expects to file a fuel surcharge torecover under-recovered costs in November 2005.

 

InNew Mexico, increases and decreases in fuel and purchased energy costs,including deferred amounts, are recovered through a monthly fuel and purchasedpower 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.

 

WhileSPS believes that it should be allowed to recover these higher costs, theultimate success of recovery could significantly impact the 2005 financialresults of SPS.

 

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

 

SPS records all derivativeinstruments on the balance sheet at fair value unless exempted as a normalpurchase or sale. Changes in a non-exempt derivative instrument’s fair valueare recognized currently in earnings unless the derivative has been designatedin a qualifying hedging relationship. The application of hedge accountingallows a derivative instrument’s gains and losses to be reflected in OtherComprehensive Income or to offset related results of the hedged item in thestatement of income, to the extent effective. SFAS No. 133—“Accounting forDerivative Instruments and Hedging Activities,” as amended, requires that thehedging relationship be highly effective and that a company formally designatea hedging relationship to apply hedge accounting.

 

SPS records the fair valueof its derivative instruments in its Consolidated Balance Sheet as a separateline item identified as Derivative Instruments Valuation for assets andliabilities, as well as current and noncurrent.

 

 

10

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**Cash FlowHedges**

 

SPS has a minimal amount of short-termwholesale marketing activity designated as cash flow hedges. The fair value ofthese cash flow hedges is recorded in either Other Comprehensive Income ordeferred as a regulatory asset or liability. This classification is based onthe regulatory recovery mechanisms in place. Amounts deferred in these accountsare recorded in earnings as the hedged purchase or sales transaction is settled.  As of Sept. 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.

 

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 Sept. 30, 2005, SPS had net losses of $0.6million in accumulated in Other Comprehensive Income related to interest ratecash flow hedge contracts that are expected to be recognized in earnings duringthe next 12 months.

 

Gains or losses on hedgingtransactions for the sales of electric energy are recorded as a component ofrevenue, hedging transactions for fuel used in energy generation are recordedas a component of fuel costs, and interest rate hedging transactions arerecorded as a component of interest expense. SPS is allowed to recover inelectric rates the costs of certain financial instruments acquired to reducecommodity cost volatility.  There was nohedge ineffectiveness in the third quarter of 2005.

 

The impact of the componentsof hedges on SPS’ Other Comprehensive Income, included as a component ofstockholder’s equity, are detailed in the following table:

 
| ** **                                                                                   | ** ** | **Nine months ended Sept. 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               |       | 0.8                                  |       | 0.9 |   |
| After-tax net realized  (gains) losses on derivative transactions reclassified into earnings |       | (0.2                                 | )          | 0.7 |   |
| Accumulated other  comprehensive loss related to cash flow hedges at Sept. 30           |       | $                                    | (4.7       | ) | $ | (5.6 | ) |
|                                                                                              |            |                                      |            |  |  |  |  |  |  |

 

**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 theConsolidated Statement of Income. The results of these transactions arereported on a net basis within Operating Revenue on the Consolidated Statementof Income.

 

SPS also enters into certaincommodity-based derivative transactions, not included in trading operations,which do not qualify for hedge accounting treatment. These derivativeinstruments are accounted for on a mark-to-market basis in accordance with SFASNo. 133.

 

**NormalPurchases or Normal Sales Contracts**

 

SPS enters into contracts forthe purchase and sale of various commodities for use in its business operations.SFAS No. 133 requires a company to evaluate these contracts to determinewhether the contracts are derivatives. Certain contracts that literally meetthe definition of a derivative may be exempted from the fair value reportingrequirements of SFAS No. 133 as normal purchases or normal sales. Normalpurchases and normal sales are contracts that provide for the purchase or saleof something other than a financial instrument or derivative instrument thatwill be delivered in quantities expected to be used or sold over a reasonableperiod in the normal course of business. Contracts that meet these requirements are documented and exempted fromthe accounting and reporting requirements of SFAS No. 133.

 

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.

 

Normal purchases and normalsales contracts are accounted for as executory contracts as required underother generally accepted accounting principles.

 

 

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

 

Interest and other income, netof nonoperating expenses, for the three and nine months ended Sept. 30consists of the following:

 
| ** **                                                    | ** ** | **Three months ended  Sept. 30** | ** ** | **Nine months   ended  Sept. 30** | ** ** |
|---------------------------------------------------------------|------------|---------------------------------------|------------|----------------------------------------|------------|
| **(Thousands of dollars)**                                    | ** ** | **2005**                              | ** ** | **2004**                               | ** ** | **2005** | ** ** | **2004** | ** ** |
| Interest income                                               |       | $                                     | 1,745      |                                   | $          | 360 |   | $ | 2,457 |   | $ | 1,163 |   |
| Gain on sale of assets                                        |       | —                                |       | —                                 |       | 2,279 |   | — |   |
| Other nonoperating income                                     |       | 23                                    |       | 15                                     |       | 992 |   | 434 |   |
| Nonoperating expenses                                         |       | (125                                  | )          | (16                                    | )          | (143 | ) | (200 | ) |
| Total interest and other income, net of nonoperating expenses |       | $                                     | 1,643      |                                   | $          | 359 |   | $ | 5,585 |   | $ | 1,397 |   |

 

**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 $487.8million and $390.1 million for the three months ended Sept. 30, 2005 and2004.  Revenues from external customerswere $1,181.5 million and $1,044.2 million for the nine months ended Sept. 30,2005 and 2004.

 

**8. Comprehensive Income**

 

The components of totalcomprehensive income are shown below:

 
| ** **                                                                                                | ** ** | **Three month  ended  Sept. 30,** | ** ** | **Nine months   ended  Sept. 30,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-----------------------------------|------------|------------------------------------|------------|
| **(Millions of dollars)**                                                                                 | ** ** | **2005**                          | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income                                                                                                |       | $                                 | 28.2       |                               | $          | 28.8 |   | $ | 59.8 |   | $ | 63.6 |   |
| Other comprehensive  income:                                                                              |       |                              |       |                               |       |   |   |   |   |
| After-tax net unrealized gains (losses) related to derivatives  accounted for as hedges (see Note 5)      |       | 1.0                               |       | (0.7                               | )          | 0.8 |   | 0.9 |   |
| After-tax net realized losses (gains) on derivative transactions  reclassified into earnings (see Note 5) |       | (0.1                              | )          | 0.2                                |       | (0.2 | ) | 0.7 |   |
| Other comprehensive income  (loss)                                                                        |       | 0.9                               |       | (0.5                               | )          | 0.6 |   | 1.6 |   |
| Comprehensive income                                                                                      |       | $                                 | 29.1       |                               | $          | 28.3 |   | $ | 60.4 |   | $ | 65.2 |   |
|                                                                                                           |            |                                   |            |                                    |            |  |  |  |  |  |  |  |  |  |

 

The accumulated comprehensiveincome in stockholder’s equity at Sept. 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 Sept. 30,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                   | ** ** | **2005**                         | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **(Thousands of dollars)**                                   | ** ** | **Pension Benefits**             | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                         | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                 |       | $                                | 15,115     |   | $ | 14,143 |   | $ | 1,671 |   | $ | 1,525 |   |
| Interest cost                                                |       | 40,246                           |       | 41,349 |   | 13,765 |   | 13,151 |   |
| Expected return on plan  assets                              |       | (70,290                          | )          | (75,690 | ) | (6,425 | ) | (5,812 | ) |
| Amortization of transition  (asset) obligation               |       | —                           |       | (2 | ) | 3,645 |   | 3,644 |   |
| Amortization of prior  service cost (credit)                 |       | 7,509                            |       | 7,503 |   | (545 | ) | (544 | ) |
| Amortization of net (gain)  loss                             |       | 1,705                            |       | (3,688 | ) | 6,562 |   | 5,412 |   |
| Net periodic benefit cost  (credit)                          |       | (5,715                           | )          | (16,385 | ) | 18,673 |   | 17,376 |   |
| Settlements and  curtailments                                |       | —                           |       | (223 | ) | — |   | — |   |
| Credits not recognized due  to the effects of regulation     |       | 4,842                            |       | 10,480 |   | — |   | — |   |
| Additional cost recognized  due to the effects of regulation |       | —                           |       | — |   | 972 |   | 973 |   |
| Net benefit cost (credit) recognized for financial reporting |       | $                                | (873       | ) | $ | (6,128 | ) | $ | 19,645 |   | $ | 18,349 |   |
|                                                         |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| **SPS**                                                      |       |                             |       |   |   |   |   |   |   |   |   |   |   |
| Net benefit cost (credit) recognized for financial reporting |       | $                                | (2,276     | ) | $ | (2,801 | ) | $ | 1,714 |   | $ | 1,377 |   |
|                                                              |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

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| ** **                                                   | ** ** | **Nine months ended Sept. 30,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                   | ** ** | **2005**                        | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **(Thousands of dollars)**                                   | ** ** | **Pension Benefits**            | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                         | ** ** | ** **                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                 |       | $                               | 45,345     |   | $ | 43,617 |   | $ | 5,013 |   | $ | 4,575 |   |
| Interest cost                                                |       | 120,738                         |       | 124,023 |   | 41,295 |   | 39,453 |   |
| Expected return on plan assets                               |       | (210,048                        | )          | (227,222 | ) | (19,275 | ) | (17,438 | ) |
| Amortization of transition (asset) obligation                |       | —                          |       | (6 | ) | 10,934 |   | 10,934 |   |
| Amortization of prior service cost (credit)                  |       | 22,527                          |       | 22,509 |   | (1,634 | ) | (1,634 | ) |
| Amortization of net (gain) loss                              |       | 5,115                           |       | (11,406 | ) | 19,685 |   | 16,238 |   |
| Net periodic benefit cost (credit)                           |       | (16,323                         | )          | (48,485 | ) | 56,018 |   | 52,128 |   |
| Settlements and curtailments                                 |       | —                          |       | (926 | ) | — |   | — |   |
| Credits not recognized due to the effects of regulation      |       | 14,526                          |       | 29,225 |   | — |   | — |   |
| Additional cost recognized due to the effects of regulation  |       | —                          |       | — |   | 2,918 |   | 2,918 |   |
| Net benefit cost (credit) recognized for financial reporting |       | $                               | (1,797     | ) | $ | (20,186 | ) | $ | 58,936 |   | $ | 55,046 |   |

 
| **SPS**                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |
|---------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
| Net benefit cost (credit)  recognized for financial reporting |   | $      | (6,827 | )      | $      | (8,383 | )      | $      | 5,140  |   | $      | 4,132  |   |

 

 

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

 

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 discussion andanalysis by management focuses on those factors that had a material effect onthe 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 tocertain risks, uncertainties and assumptions. Such forward-looking statementsare intended 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;

•               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;

 

 

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•               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 environmental externalities,which are values established by regulators assigning environmental costs toeach method of electricity generation when evaluating generation resourceoptions;

•               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 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, 2004.  Commodity price and interest rate risks forSPS are mitigated in most jurisdictions due to cost-based rate regulation. AtSept. 30, 2005, there were no material changes to the financial market risksthat affect the quantitative and qualitative disclosures presented as of Dec.31, 2004.

 

**RESULTS OFOPERATIONS**

 

SPS’ net income wasapproximately $59.8 million for the first nine months of 2005, compared withapproximately $63.6 million for the first nine months of 2004.  The decrease is primarily due to a higherdepreciation and operating and maintenance expenses, partially offset the gainson the sale of water rights.

 

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

 

The following table detailsthe change in electric revenue and margin. Electric production expenses tend tovary with changing retail and wholesale sales requirements and unit costchanges 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-term wholesale refers to energy related purchase and salesactivity and the use of certain financial instruments associated with the fuelrequired for and energy produced from SPS’ generation assets and energy andcapacity purchased to serve native load. Commodity trading is not associated with SPS’ generation assets or theenergy and capacity purchased to serve native load.

 

SPSconducts an inconsequential amount of commodity trading.  Margins from commodity trading activity arepartially redistributed to Northern States Power Company, a Minnesotacorporation, and Public Service Company of Colorado, both wholly ownedsubsidiaries of Xcel Energy, pursuant to the joint operating agreement (JOA)approved by the FERC.  Margins received pursuantto the JOA are reflected as part of Base Electric Utility Revenues.  Short-term wholesale and commodity tradingmargins reflect the impact of regulatory sharing, if applicable.  Trading revenues are reported net of tradingcosts (i.e., on a margin basis) in the Consolidated Statements of Income.  Commodity trading costs include purchasedpower, transmission, broker fees and other related costs.

 

As oneof 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.

 

 

14

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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** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|---------------------------|------------|-------------------------|------------|
| **Nine months ended Sept. 30,  2005**   | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **              | ** ** |
| Electric utility revenue                |       | $                           | 1,178      |                      | $          | 3                       |       | $ | 1,181 |   |
| Electric fuel and  purchased power      |       | (803                        | )          | (3                        | )          | (806                    | )          |
| Gross margin before  operating expenses |       | $                           | 375        |                      | $          | —                  |       | $ | 375 |   |
| Margin as a percentage of  revenue      |       | 31.8                        | %          | 0.0                       | %          | 31.8                    | %          |
|                                    |       |                        |       |                      |       |                    |       |
| **Nine months ended Sept. 30,  2004**   |       |                        |       |                      |       |                    |       |
| Electric utility revenue                |       | $                           | 1,041      |                      | $          | 3                       |       | $ | 1,044 |   |
| Electric fuel and  purchased power      |       | (668                        | )          | (2                        | )          | (670                    | )          |
| Gross margin before  operating expenses |       | $                           | 373        |                      | $          | 1                       |       | $ | 374 |   |
| Margin as a percentage of  revenue      |       | 35.8                        | %          | 33.3                      | %          | 35.8                    | %          |

 

The following summarizes thecomponents of the changes in base electric revenue and base electric margin forthe nine months ended Sept. 30:

***Base Electric Revenue***

| **(Millions of dollars)**                | ** ** | **2005 vs. 2004** | ** ** |
|------------------------------------------|------------|-------------------|------------|
| Sales growth (excluding  weather impact) |       | $                 | 8          |   |
| Capacity sales                           |       | (7                | )          |
| Fuel cost recovery                       |       | 125               |       |
| Transmission and other                   |       | 11                |       |
| Total base electric revenue increase     |       | $                 | 137        |   |

***Base Electric Margin***

| **(Millions of dollars)**                | ** ** | **2005 vs. 2004** | ** ** |
|------------------------------------------|------------|-------------------|------------|
| Sales growth (excluding  weather impact) |       | $                 | 5          |   |
| Capacity sales                           |       | (7                | )          |
| Other                                    |       | 4                 |       |
| Total base electric margin increase      |       | $                 | 2          |   |

 

**Non-FuelOperating Expense and Other Costs**

The followingsummarizes the components of the changes in other utility operating andmaintenance expense for the nine months ended Sept. 30:

 

| **(Millions of dollars)**                                      | ** ** | **2005 vs. 2004** | ** ** |
|----------------------------------------------------------------|------------|-------------------|------------|
| Higher pension and medical  costs                              |       | $                 | 5          |   |
| Higher outside legal costs                                     |       | 1                 |       |
| Higher plant overhaul  costs                                   |       | 1                 |       |
| Total other utility operating and maintenance expense increase |       | $                 | 7          |   |

 

Depreciationand amortization expense increased by approximately $4.5 million, or 6.5percent, for the first nine months of 2005, compared with the first nine monthsof 2004.  The increase is primarily dueto plant additions and higher software amortization.

Otherincome increased by approximately $4.7 million, or 181 percent, for the firstnine months of 2005, compared with the first nine months of 2004. The increaseis primarily due to gains on the sale of water rights.

Incometax expense decreased by approximately $3.9 million for the first nine monthsof 2005, compared with the same period of 2004. The decrease was primarily due to lower income levels and a decrease inplant-related regulatory items for 2005 as compared to 2004.  The effective tax rate was 37.2 percent forthe first nine months of 2005, compared with 38.2 percent for the same periodin 2004.

 

 

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**Item 4. CONTROLS AND PROCEDURES**

** **

**Disclosure Controls andProcedures**

 

SPSmaintains a set of disclosure controls and procedures designed to ensure thatinformation required to be disclosed in reports that it files or submits underthe Securities Exchange Act of 1934 is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms. As of the end of the period covered by this report,based on an evaluation carried out under the supervision and with theparticipation of SPS’ management, including the chief executive officer (CEO)and chief financial officer (CFO), of the effectiveness of its disclosurecontrols and procedures, the CEO and CFO have concluded that SPS’ disclosurecontrols and procedures are effective.

**Internal Control Over FinancialReporting**

 

No change in SPS’ internalcontrol over financial reporting has occurred during the most recent fiscalquarter that has materially affected, or is reasonably likely to materiallyaffect, its internal control over financial reporting.  SPS has made certain changes in its internalcontrols over financial reporting during the most recent fiscal quarter inorder to make the control environment more effective and efficient.

 

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

 

## **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-Q forfurther 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 for theyear ended Dec. 31, 2004 for a description of certain legal proceedingspresently pending. Except as discussed herein, there are no new significantcases to report against SPS and there have been no notable changes in thepreviously reported proceedings.

 

## **Item 6. EXHIBITS**

 

**(a)Exhibits**

 

The following Exhibits arefiled with this report:

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*Incorporated by reference.

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

 

 

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SIGNATURES

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorizedon Oct. 31, 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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