** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 
| **x** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|--------------------------------------------------------------------------------------------------------|

 

#### **For the quarterly period ended March 31,2008**

#### ** **

**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**

#### ** **

**SouthwesternPublic Service Company**

**(Exact name of registrant asspecified 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’stelephone number, including area code **(303)571-7511**

 

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

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinitions of “large accelerated filer,” “accelerated filer,” and “smallerreporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

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

 

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

 

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

 

| **Class**                   | ** ** | **Outstanding at May 5, 2008** |
|-----------------------------|------------|----------------------------------------------------|
| 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 thereduced disclosure format specified in General Instruction H (2) to such Form 10-Q.

 

 

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**Table ofContents**

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

 

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

 

2

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** **

**PART 1.FINANCIAL INFORMATION**

** **

**Item 1.Financial Statements**

 

**SOUTHWESTERN PUBLIC SERVICECO.**

**STATEMENTS OF OPERATIONS(UNAUDITED)**

**(Thousands of Dollars)**

 
| ** **                                                                             | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| ** **                                                                             | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| **Operating revenues**                                                                 |       | $                                                | 418,797    |   | $ | 365,898 |   |
|                                                                                   |       |                                             |       |   |   |
| **Operating expenses**                                                                 |       |                                             |       |   |   |
| Electric fuel and purchased power                                                      |       | 321,692                                          |       | 264,407 |   |
| Other operating and maintenance expenses                                               |       | 51,425                                           |       | 51,093 |   |
| Depreciation and amortization                                                          |       | 24,966                                           |       | 24,688 |   |
| Taxes (other than income taxes)                                                        |       | 10,323                                           |       | 11,562 |   |
| Total operating expenses                                                               |       | 408,406                                          |       | 351,750 |   |
|                                                                                   |       |                                             |       |   |   |
| **Operating income**                                                                   |       | 10,391                                           |       | 14,148 |   |
|                                                                                   |       |                                             |       |   |   |
| Interest and other income, net                                                         |       | 863                                              |       | 803 |   |
|                                                                                   |       |                                             |       |   |   |
| **Interest charges and financing  costs**                                              |       |                                             |       |   |   |
| Interest charges — includes other financing costs  of $591 and $585, respectively |       | 13,931                                           |       | 13,034 |   |
| Allowance for funds used during construction —  debt                              |       | (656                                             | )          | (498 | ) |
| Total interest charges and financing costs                                             |       | 13,275                                           |       | 12,536 |   |
|                                                                                   |       |                                             |       |   |   |
| (Loss) income before income taxes                                                      |       | (2,021                                           | )          | 2,415 |   |
| Income taxes (benefit) expense                                                         |       | (756                                             | )          | 750 |   |
| **Net (loss) income**                                                                  |       | $                                                | (1,265     | ) | $ | 1,665 |   |

 

SeeNotes to Financial Statements

 

3

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**SOUTHWESTERN PUBLIC SERVICE CO.**

**STATEMENTS OF CASH FLOWS (UNAUDITED)**

**(Thousands of Dollars)**

 
| ** **                                                                                | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| **Operating activities**                                                                  |       |                                             |       |   |   |
| Net (loss) income                                                                         |       | $                                                | (1,265     | ) | $ | 1,665 |   |
| Adjustments to reconcile net (loss) income to net cash provided by  operating activities: |       |                                             |       |   |   |
| Depreciation and amortization                                                             |       | 26,024                                           |       | 25,586 |   |
| Deferred income taxes                                                                     |       | 4,491                                            |       | (1,044 | ) |
| Amortization of investment tax credits                                                    |       | (55                                              | )          | (63 | ) |
| Net realized and unrealized hedging and derivative transactions                           |       | 67                                               |       | 66 |   |
| Changes in operating assets and liabilities:                                              |       |                                             |       |   |   |
| Accounts receivable                                                                       |       | 3,420                                            |       | 8,577 |   |
| Accrued unbilled revenues                                                                 |       | 2,711                                            |       | (18,507 | ) |
| Recoverable electric energy costs                                                         |       | (19,683                                          | )          | 56,253 |   |
| Inventories                                                                               |       | (3,357                                           | )          | (1,457 | ) |
| Prepayments and other                                                                     |       | 1,495                                            |       | 986 |   |
| Accounts payable                                                                          |       | 42,092                                           |       | (36,576 | ) |
| Net regulatory assets and liabilities                                                     |       | (171                                             | )          | (1,178 | ) |
| Other current liabilities                                                                 |       | (13,065                                          | )          | (16,455 | ) |
| Change in other noncurrent assets                                                         |       | (2,761                                           | )          | (2,063 | ) |
| Change in other noncurrent liabilities                                                    |       | 2,526                                            |       | 921 |   |
| Net cash provided by operating activities                                                 |       | 42,469                                           |       | 16,711 |   |
|                                                                                      |       |                                             |       |   |   |
| **Investing activities**                                                                  |       |                                             |       |   |   |
| Utility capital/construction expenditures                                                 |       | (46,728                                          | )          | (29,223 | ) |
| Investments in utility money pool arrangement                                             |       | —                                           |       | (42,600 | ) |
| Receipts from utility money pool arrangement                                              |       | —                                           |       | 42,600 |   |
| Other investments                                                                         |       | 2,171                                            |       | 309 |   |
| Net cash used in investing activities                                                     |       | (44,557                                          | )          | (28,914 | ) |
|                                                                                      |       |                                             |       |   |   |
| **Financing activities**                                                                  |       |                                             |       |   |   |
| Proceeds from (repayment of) short-term borrowings – net                             |       | (73,000                                          | )          | 21,500 |   |
| Borrowings under utility money pool arrangement                                           |       | 240,500                                          |       | 107,100 |   |
| Repayments under utility money pool arrangement                                           |       | (146,000                                         | )          | (97,900 | ) |
| Dividends paid to parent                                                                  |       | (15,931                                          | )          | (18,581 | ) |
| Net cash provided by financing activities                                                 |       | 5,569                                            |       | 12,119 |   |
|                                                                                      |       |                                             |       |   |   |
| Net increase (decrease) in cash and cash equivalents                                      |       | 3,481                                            |       | (84 | ) |
| Cash and cash equivalents at beginning of period                                          |       | 714                                              |       | 297 |   |
| Cash and cash equivalents at end of period                                                |       | $                                                | 4,195      |   | $ | 213 |   |
|                                                                                      |       |                                             |       |   |   |
| Supplemental disclosure of cash flow information:                                         |       |                                             |       |   |   |
| Cash paid for interest (net of amounts capitalized)                                       |       | $                                                | 14,104     |   | $ | 6,793 |   |
| Cash paid for income taxes (net of refunds received)                                      |       | 1,172                                            |       | 3,643 |   |
|                                                                                      |       |                                             |       |   |   |
| Supplemental disclosure of non-cash investing transactions:                               |       |                                             |       |   |   |
| Property, plant and equipment additions in accounts payable                               |       | $                                                | 3,169      |   | $ | 4,754 |   |

 

Seethe Notes to Financial Statements

 

4

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**SOUTHWESTERN PUBLIC SERVICE CO**.

**BALANCE SHEETS (UNAUDITED)**

**(Thousands of Dollars)**

 
| ** **                                                                            | ** ** | **March 31, 2008** | ** ** | **Dec. 31, 2007** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                       |       |                         |       |                        |       |
| Cash and cash equivalents                                                             |       | $                            | 4,195      |                        | $          | 714 |   |
| Accounts receivable, net                                                              |       | 67,062                       |       | 67,254                      |       |
| Accounts receivable from affiliates                                                   |       | 5,528                        |       | 8,756                       |       |
| Accrued unbilled revenues                                                             |       | 105,614                      |       | 108,325                     |       |
| Recoverable electric energy costs                                                     |       | 42,384                       |       | 22,701                      |       |
| Inventories                                                                           |       | 20,700                       |       | 17,343                      |       |
| Derivative instruments valuation                                                      |       | 8,926                        |       | 8,926                       |       |
| Prepayments and other                                                                 |       | 5,954                        |       | 7,449                       |       |
| Deferred income taxes                                                                 |       | 779                          |       | 2,970                       |       |
| Total current assets                                                                  |       | 261,142                      |       | 244,438                     |       |
|                                                                                  |       |                         |       |                        |       |
| Property, plant and equipment, net                                                    |       | 2,061,429                    |       | 2,043,426                   |       |
|                                                                                  |       |                         |       |                        |       |
| Other assets:                                                                         |       |                         |       |                        |       |
| Prepaid pension asset                                                                 |       | 121,001                      |       | 117,948                     |       |
| Derivative instruments valuation                                                      |       | 83,245                       |       | 85,477                      |       |
| Regulatory assets                                                                     |       | 122,273                      |       | 124,900                     |       |
| Other investments                                                                     |       | 299                          |       | 2,470                       |       |
| Deferred charges and other                                                            |       | 6,644                        |       | 6,855                       |       |
| Total other assets                                                                    |       | 333,462                      |       | 337,650                     |       |
| Total assets                                                                          |       | $                            | 2,656,033  |                        | $          | 2,625,514 |   |
|                                                                                  |       |                         |       |                        |       |
| **LIABILITIES AND EQUITY**                                                            |       |                         |       |                        |       |
| Current liabilities:                                                                  |       |                         |       |                        |       |
| Current portion of long-term debt                                                     |       | $                            | 100,000    |                        | $          | — |   |
| Short-term debt                                                                       |       | 50,000                       |       | 123,000                     |       |
| Borrowings under utility money pool arrangement                                       |       | 100,000                      |       | 5,500                       |       |
| Accounts payable                                                                      |       | 189,138                      |       | 153,130                     |       |
| Accounts payable to affiliates                                                        |       | 11,443                       |       | 9,432                       |       |
| Taxes accrued                                                                         |       | 9,939                        |       | 22,902                      |       |
| Dividends payable to parent                                                           |       | 15,822                       |       | 15,931                      |       |
| Accrued interest                                                                      |       | 17,692                       |       | 12,816                      |       |
| Derivative instruments valuation                                                      |       | 4,811                        |       | 4,468                       |       |
| Other                                                                                 |       | 19,083                       |       | 24,062                      |       |
| Total current liabilities                                                             |       | 517,928                      |       | 371,241                     |       |
|                                                                                  |       |                         |       |                        |       |
| Deferred credits and other liabilities:                                               |       |                         |       |                        |       |
| Deferred income taxes                                                                 |       | 463,400                      |       | 462,228                     |       |
| Regulatory liabilities                                                                |       | 130,828                      |       | 133,025                     |       |
| Derivative instruments valuation                                                      |       | 60,838                       |       | 60,918                      |       |
| Asset retirement obligations                                                          |       | 3,638                        |       | 3,592                       |       |
| Deferred investment tax credits                                                       |       | 2,940                        |       | 2,995                       |       |
| Pension and employee benefit obligations                                              |       | 23,736                       |       | 23,871                      |       |
| Other                                                                                 |       | 10,568                       |       | 7,458                       |       |
| Total deferred credits and other liabilities                                          |       | 695,948                      |       | 694,087                     |       |
|                                                                                  |       |                         |       |                        |       |
| Commitments and contingencies (see Note 6)                                            |       |                         |       |                        |       |
| Capitalization:                                                                       |       |                         |       |                        |       |
| Long-term debt                                                                        |       | 674,066                      |       | 774,033                     |       |
| Common stock – authorized 200 shares of $1.00 par value, outstanding  100 shares |       | —                       |       | —                      |       |
| Additional paid in capital                                                            |       | 503,066                      |       | 503,066                     |       |
| Retained earnings                                                                     |       | 271,729                      |       | 289,092                     |       |
| Accumulated other comprehensive loss                                                  |       | (6,704                       | )          | (6,005                      | )          |
| Total common stockholder’s equity                                                |       | 768,091                      |       | 786,153                     |       |
| Total liabilities and equity                                                          |       | $                            | 2,656,033  |                        | $          | 2,625,514 |   |

** **

**See the Notes to Financial Statements**

** **

**5**

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** **

**SOUTHWESTERN PUBLICSERVICE CO.**

**NOTES TO FINANCIALSTATEMENTS (UNAUDITED)**

** **

In the opinion ofmanagement, the accompanying unaudited financial statements contain alladjustments necessary to present fairly the financial position of SPS as of March 31,2008, and Dec. 31, 2007; the results of its operations for the threemonths ended March 31, 2008 and 2007; and its cash flows for the threemonths ended March 31, 2008 and 2007. Due to the seasonality of electricsales of SPS, interim results are not necessarily an appropriate base fromwhich to project annual results.

 

**1.Significant Accounting Policies**

 

Except to the extent updatedor described below, the significant accounting policies set forth in Note 1 tothe financial statements in SPS’ Annual Report on Form 10-K for the yearended Dec. 31, 2007, appropriately represent, in all material respects,the current status of accounting policies and are incorporated herein byreference.

 

***FairValue Measurements —***SPS presents interest ratederivatives at estimated fair values in its financial statements, utilizingbroker quotes to establish fair value.

 

**2.   Recently Issued Accounting Pronouncements**

 

***Statementof Financial Accounting Standards (SFAS) No. 157 Fair Value Measurements************(SFAS No. 157)****** —***In September 2006,the Financial Accounting Standards Board (FASB) issued SFAS No. 157,which provides a single definition of fair value, together with a framework formeasuring it, and requires additional disclosure about the use of fair value tomeasure assets and liabilities. SFAS No. 157 also emphasizes that fairvalue is a market-based measurement, and sets out a fair value hierarchy withthe highest priority being quoted prices in active markets. Fair valuemeasurements are disclosed by level within that hierarchy. SFAS No. 157 iseffective for financial statements issued for fiscal years beginning after Nov. 15,2007.

 

In February 2008,the FASB issued *Effective Date of FASBStatement No. 157* (FASB Statement of Position (FSP) No. 157-2(FSP No. 157-2)).  FSP No. 157-2delays the effective date of SFAS No. 157 until fiscal years beginningafter Nov. 15, 2008, for fair value measurements of non-financial assetsand non-financial liabilities, except for items that are recognized ordisclosed at fair value in an entity’s financial statements on a recurringbasis (at least annually).

 

As of Jan. 1, 2008,SPS adopted SFAS No. 157 for all assets and liabilities measured at fairvalue except for non-financial assets and non-financial liabilities measured atfair value on a non-recurring basis, as permitted by FSP No. 157-2.  The adoption did not have a material impacton its financial statements.  Foradditional discussion and SFAS No. 157 required disclosures see Note 9 tothe financial statements.

 

***The Fair Value Option for Financial Assets and FinancialLiabilities - Including an Amendment of FASB Statement No. 115 (SFAS No. 159)*** — In February 2007,the FASB issued SFAS No. 159, which provides companies with an option tomeasure, at specified election dates, many financial instruments and certainother items at fair value that are not currently measured at fair value. Acompany that adopts SFAS No. 159 will report unrealized gains and losseson items, for which the fair value option has been elected, in earnings at eachsubsequent reporting date. This statement also establishes presentation anddisclosure requirements designed to facilitate comparisons between entitiesthat choose different measurement attributes for similar types of assets andliabilities. This statement is effective for fiscal years beginning after Nov. 15,2007, effective Jan. 1, 2008. SPS adopted SFAS No. 159 and theadoption did not have a material impact on its financial statements.

 

***Business Combinations (SFAS No. 141(revised 2007)) —***In December 2007, theFASB issued SFAS No. 141R, which establishes principles and requirementsfor how an acquirer in a business combination recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,and any noncontrolling interest; recognizes and measures the goodwill acquiredin the business combination or a gain from a bargain purchase; and determineswhat information to disclose to enable users of the financial statements toevaluate the nature and financial effects of the business combination. SFAS No. 141Ris to be applied prospectively to business combinations for which theacquisition date is on or after the beginning of an entity’s fiscal year thatbegins on or after Dec. 15, 2008. SPS will evaluate the impact of SFAS No. 141Ron its financial statements for any potential business combinations subsequentto Jan. 1, 2009.

 

6

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***Disclosures about Derivative Instrumentsand Hedging Activities (SFAS No. 161)*******– In March 2008, the FASB issued SFAS No. 161, which isintended to enhance disclosures to help users of the financial statementsbetter understand how derivative instruments and hedging activities affect anentity’s financial position, financial performance and cash flows.  SFAS No. 161 amends and expands thedisclosure requirements of SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities”, to require disclosures of objectives andstrategies for using derivatives, gains and losses on derivative instruments,and credit-risk-related contingent features in derivative agreements.  SFAS No. 161 is effective for financialstatements issued for fiscal years and interim periods beginning after Nov. 15,2008, with early application encouraged. SPS is currently evaluating the impact adoption of SFAS No. 161.

 

***Accounting for Deferred Compensation andPostretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements (Emerging Issues Task Force (EITF) Issue No. 06-4)*** — In June 2006,the EITF reached a consensus on EITF No. 06-4, which provides guidance onthe recognition of a liability and related compensation costs for endorsementsplit-dollar life insurance policies that provide a benefit to an employee thatextends to postretirement periods. Therefore, this EITF would not apply to asplit-dollar life insurance arrangement that provides a specified benefit to anemployee that is limited to the employee’s active service period with anemployer.  EITF No. 06-4 is effectivefor fiscal years beginning after Dec. 15, 2007, with earlier applicationpermitted.  Upon adoption of EITF 06-4 onJan. 1, 2008, SPS recorded a liability of $0.3 million, net of tax, as areduction of retained earnings. Thereafter, changes in the liability will be reflected in operatingresults.

 

***Accounting for Income Tax Benefits ofDividends on Share-Based Payment Awards (EITF No. 06-11)***— In June 2007,the EITF reached a consensus on EITF No. 06-11, which states that anentity should recognize a realized tax benefit associated with dividends onnonvested equity shares and nonvested equity share units charged to retainedearnings as an increase in additional paid in capital. The amount recognized inadditional paid in capital should be included in the pool of excess taxbenefits available to absorb potential future tax deficiencies on share-basedpayment awards. EITF No. 06-11 should be applied prospectively to incometax benefits of dividends on equity-classified share-based payment awards thatare declared in fiscal years beginning after Dec. 15, 2007. The adoptionof EITF No. 06-11 did not have a material impact on SPS’ financialstatements.

 

**3.  Selected BalanceSheet Data**

** **
| **(Thousands of Dollars)** | ** ** | **March 31, 2008** | ** ** | **Dec. 31, 2007** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Accounts receivable, net:            |       |                         |       |                        |       |
| Accounts receivable                  |       | $                            | 70,256     |                        | $          | 70,420 |   |
| Less allowance for bad debts         |       | (3,194                       | )          | (3,166                      | )          |
|                                 |       | $                            | 67,062     |                        | $          | 67,254 |   |
|                                 |       |                         |       |                        |       |
| Inventories:                         |       |                         |       |                        |       |
| Materials and supplies               |       | $                            | 15,169     |                        | $          | 14,039 |   |
| Fuel                                 |       | 5,531                        |       | 3,304                       |       |
|                                 |       | $                            | 20,700     |                        | $          | 17,343 |   |
|                                 |       |                         |       |                        |       |
| Property, plant and equipment, net:  |       |                         |       |                        |       |
| Electric utility plant               |       | $                            | 3,501,222  |                        | $          | 3,476,146 |   |
| Construction work in progress        |       | 85,868                       |       | 78,436                      |       |
| Total property, plant and equipment  |       | 3,587,090                    |       | 3,554,582                   |       |
| Less accumulated depreciation        |       | (1,525,661                   | )          | (1,511,156                  | )          |
|                                 |       | $                            | 2,061,429  |                        | $          | 2,043,426 |   |

 

**4. IncomeTaxes**

 

***Accounting for Uncertainty in Income Taxes— an interpretation of FASB Statement No. 109 (FIN 48)*******— SPS is a member of the Xcel Energy affiliated group that filesconsolidated income tax returns. In the first quarter of 2008, the IRScompleted an examination of Xcel Energy’s federal income tax returns for 2004and 2005 (and research credits for 2003). The IRS did not propose any materialadjustments for those tax years. Tax year 2004 is the earliest open year andthe statute of limitations applicable to Xcel Energy’s 2004 federal income taxreturn remains open until Dec. 31, 2008.

 

Inthe first quarter of 2008, the state of Texas concluded an income tax auditthrough tax year 2005.  No materialadjustments were proposed for this audit. As of March 31, 2008, SPS’earliest open tax year in which an audit can be initiated by state taxingauthorities under applicable statutes of limitations is 2003.

 

7

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Theamount of unrecognized tax benefits was $2.3 million and  $2.5 million on Dec. 31,2007 and March 31, 2008, respectively. These unrecognized tax benefitamounts were reduced by the tax benefits associated with tax credit carryoversof $0.1 million as of Dec. 31, 2007 and March 31, 2008.

 

Theunrecognized tax benefit balance included $0.3 million and $0.3 million of taxpositions on Dec. 31, 2007 and March 31, 2008, respectively, which ifrecognized would affect the annual effective tax rate. In addition, theunrecognized tax benefit balance included $2.0 million and $2.2 million of taxpositions on Dec. 31, 2007 and March 31, 2008, respectively, forwhich the ultimate deductibility is highly certain but for which there isuncertainty about the timing of such deductibility. A change in the periodof deductibility would not affect the effective tax rate but would acceleratethe payment of cash to the taxing authority to an earlier period.

 

Theincrease in the unrecognized tax benefit balance of $0.2 million from Dec. 31,2007 to March 31, 2008, was due to the addition of similar uncertain taxpositions related to ongoing activity and the resolution of certain federal andstate audit matters. SPS’ amount of unrecognized tax benefits couldsignificantly change in the next 12 months when the IRS and state tax auditsresume. However, at this time, it is not reasonably possible to estimatean overall range of possible change.

 

The liability for interestrelated to unrecognized tax benefits is partially offset by the interestbenefit associated with tax credit carryovers. The change in the interestexpense liability from Dec. 31, 2007, to March 31, 2008, was notmaterial.  The liability for interest related to unrecognized tax benefitswas $0.1 million on Dec. 31, 2007 and March 31, 2008. No amounts wereaccrued for penalties as of March 31, 2008.

 

**5.****    ****Rate Matters**

 

Except to the extent noted below, the circumstancesset forth in Note 11 to the financial statements included in SPS’ Annual Reporton Form 10-K for the year ended Dec. 31, 2007 appropriatelyrepresent, in all material respects, the current status of other rate matters,and are incorporated herein by reference. The following include unresolvedproceedings that are material to SPS’ financial position.

 

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

*** ***

**Base Rate**

 

***Application to Increase Voltage-Level LineLoss Factors —***In January 2008, the PUCT approved SPS’application to update its current Texas retail fuel factors to reflect revisedloss factors. Under the Texas retail base rate case, SPS was permitted toimplement the revised line loss factors effective to May 2007. SPSrecognized $6.2 million in the fourth quarter of 2007 for the impact ofthe revised line loss factors from May 1, 2007 through Dec. 31, 2007.

 

**Electric and Resource Adjustment Clauses**

 

***Transmission Cost Recovery (TCR) FactorRulemaking —***The PUCT adopted, in November 2007, new rules relatingto TCR factor outside of a base rate case. The rule establishes themechanism by which SPS can request annual recovery of its reasonable andnecessary expenditures for transmission infrastructure improvement costs andchanges in wholesale transmission charges that are not included in existingrates. This new rule allows SPS more timely recovery of transmission costincreases in-between base rate cases.

 

***Pending and Recently ConcludedRegulatory Proceedings — New Mexico Public Regulation Commission (NMPRC)***

 

**Base Rate**

 

***New Mexico Electric RateCase —***On July 30, 2007, SPSfiled a request for a retail electric general rate increase of $17.3 millionannually, or 6.6 percent, with the NMPRC. The rate filing is based on 2006historic test year adjusted for known and measurable changes and includes arequested return on equity (ROE) of 11.0 percent, an electric rate base ofapproximately $307.3 million and an equity ratio of 51.2 percent.

 

Following is a summary of intervenor and NMPRC stafftestimony, which was filed on March 6, 2008.

 

·                  Staff recommended an increase ofapproximately $8 million based on a 9.1 percent ROE and other adjustments.

·                  The attorney general recommended a $2 millionrate decrease based on a 9.2 percent ROE and other adjustments.

 

8

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·                  Occidental Permian, a large retail customer,recommended a 9.9 percent ROE.

 

Hearings were held in April 2008.  At the close of the hearings, the partiesagreed to move consideration of the Lea Power Partners (Lea Power) ridercosts to a future rate proceeding to be initiated by Xcel Energy thissummer, which will be accompanied with a request for interim relief, sothat issues associated with lease accounting and potential contractrestructuring, discussed in the Management’s Discussion and Analysissection of this report, may be adequately addressed.  The remaining procedural schedule follows:

 
| · |   | Recommend decision |   | June 30, 2008 |
|--------|--------|--------------------|--------|--------------------|
| · |   | Final order        |   | Aug. 29, 2008 |

 

**Electric andResource Adjustment Clauses**

 

***New Mexico Fuel Factor Continuation Filing —***InAugust 2005, SPS filed with the NMPRC requesting continuation of the useof SPS’ fuel and purchased power cost adjustment clause (FPPCAC) and currentmonthly factor cost recovery methodology. This filing was required by NMPRCrule.

 

Testimonywas filed in the case by staff and intervenors objecting to SPS’ assignment ofsystem average fuel costs to certain wholesale sales and the inclusion ofcertain purchased power capacity and energy payments in the FPPCAC. Thetestimony also proposed limits on SPS’ future use of the FPPCAC. Related tothese issues, some intervenors requested disallowances for past periods, whichin the aggregate total approximately $45 million. This claim was for theperiod from Oct. 1, 2001 through May 31, 2005 and does not includethe value of incremental cost assigned for wholesale transactions from thatdate forward. Other issues in the case include the treatment of renewableenergy certificates and sulfur dioxide (SO2)allowance creditproceeds in relation to SPS’ New Mexico retail fuel and purchased powerrecovery clause.

 

InDecember 2007, SPS, the NMPRC, Occidental Permian Ltd. and the NewMexico Industrial Energy Consumers (NMIEC) filed an uncontested settlement ofthis matter with the NMPRC.

 

·      Thesettlement resolves all issues in the fuel continuation proceeding for totalconsideration of $15 million, which includes customer refunds of $11.7million.

·      AtDec. 31, 2007, a reserve had been previously established for thispotential exposure, with no further expense accrual required, assuming thissettlement is approved.

·      Thesettlement would also provide for significantly greater certainty surroundingsystem average fuel cost assignment on a going forward basis and reducepercentages of system average cost wholesale sales between now and 2019 on astepped down basis.

·      Underthe terms of the settlement, SPS anticipates additional fuel cost disallowancesin 2008 and a portion of 2009 of approximately $2 million per year. Itdoes not anticipate any future disallowances beyond this period.

·      Finally,the settlement provides for SPS to continue its use of the FPPCAC subject toadditional reporting provisions.

 

Ahearing on the merits of the settlement was held in April 2008.  The parties are to provide the hearingexaminer with a proposed certification of the settlement on May 2, 2008,which will recommend approval of the settlement.  Any objections to the proposed certificationare due on May 9, 2008.

 

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

 

***Wholesale Rate Complaints —***In November 2004,Golden Spread Electric, Lyntegar Electric, Farmer’s Electric, Lea CountyElectric, Central Valley Electric and Roosevelt County Electric, all wholesalecooperative customers of SPS, filed a rate complaint with the FERC allegingthat SPS’ rates to them for wholesale service were excessive and that SPS hadincorrectly calculated monthly fuel cost adjustment charges to suchcustomers  (the Complaint). Among otherthings, the complainant asserted that SPS had inappropriately allocated averagefuel and purchased power costs to its other wholesale customers, effectivelyraising the fuel cost charges to complainants. Cap Rock Energy Corporation (Cap Rock), another full-requirementscustomer of SPS, Public Service Company of New Mexico (PNM) and Occidental Permian Ltd.and Occidental Power Marketing, L.P. (Occidental), SPS’ largest retailcustomer, intervened in the proceeding.

 

InMay 2006, a FERC administrative law judge (ALJ) issued an initial decisionin the proceeding. The ALJ found that SPS should recalculate its wholesale fueland purchased economic energy cost adjustment clause (FCAC) billings for theperiod beginning Jan. 1, 1999, to reduce the fuel and purchased powercosts recovered from the complaining customers by deducting from such costs theincremental fuel costs attributed to SPS’ sales of system firm capacity andassociated energy to 

 

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otherwholesale customers served under market-based rates during this period based onthe view that such sales should be treated as opportunity sales made out oftemporarily excess capacity. In addition, the ALJ made recommendations on anumber of base rate issues including a 9.64 percent ROE and the use of a3-month coincident peak (3CP) demand allocator.

 

***Golden Spread Complaint Settlement***  ***—***In December 2007, SPS  reached a settlement with Golden Spread(which now includes Lyntegar Electric) and Occidental regarding base rate andfuel issues raised in the complaint described above as well as a subsequentrate proceeding. In December 2007, this comprehensive offer of settlement(the Settlement) was filed with the FERC. On April 21, 2008, the FERCapproved the Settlement with a minor modification to the formula rate proposedby the FERC and accepted by the parties. The Settlement provides for:

 

·                  A $1.25 million payment by SPSto Golden Spread related to resolve a dispute concerning the quantities GoldenSpread  was entitled to take under itsexisting partial requirements agreement for the years 2006 and 2007. The Settlementcaps those quantities for the period 2008 through 2011. SPS is not required tomake any fuel refunds to Golden Spread that were the subject of the Complaintunder the terms of the Settlement.

·                  An extended partial requirementscontract at system average cost, with a capacity amount that ramps down overthe period 2012 through 2019 from 500 MW to 200 MW. The extended agreementrequires that the cost assignment treatment receive Texas and New Mexico stateapprovals and provides for alternative pricing terms and quantities to hold SPSharmless from cost disallowances in the event that adverse regulatory treatmentoccurs or state approvals are not obtained. Golden Spread agreed to hold SPSharmless from any future adverse regulatory treatment regarding the proposedsale and SPS agreed to contingent payments ranging from $3 million to amaximum of $12 million, payable in 2012, in the event that there is anadverse cost assignment decision or a failure to obtain state approvals.

·                  Resolution of base rates in theComplaint without any adjustment to the existing rates for the period January 2005through June 30, 2006. The Settlement also resolves all base rate issuesin SPS’ subsequent rate proceeding for the period July 1, 2006 through June 30,2008, other than the method to be used to allocate demand related costs andprovided for two sets of agreed on rates that are dependent on the ultimateresolution of that issue. If SPS prevails in its support of the 12 monthcoincident peak  (12 CP) demandallocation method, there would be no impact to earnings for this period. IfGolden Spread prevails, SPS would be required to refund Golden Spread and PNMapproximately $4 million for the period through the end of 2007.

·                  For July 1, 2008 and beyond,Golden Spread will be under a formula rate for power supply service. The ratewill be based on actual data the most recent historic year adjusted for knownand measurable changes and trued up to the actual performance in the subsequentcalendar year. Initially, the formula will be based on a 10.25 percent ROEand either party will have a right to seek changes to the ROE beginning withthe 2009 formula rate filing. SPS and Golden Spread will share margins from itssales to West Texas Municipal Power Agency (WTMPA) and El Paso Electric (EPE)in that year but will assign system average fuel and energy costs to thoseagreements for purposes of calculating Golden Spread’s monthly fuel cost.

 

***Order on Wholesale Rate Complaints******—***On April 21,2008, the FERC issued its Order on the Complaint (the Order) applied to theremaining non-settling parties.  TheOrder addresses base rate issues for the period from Jan. 1, 2005 through June 30,2006 for SPS’ full requirements customers who pay traditional cost-based ratesand requires certain refunds.

 

**Base Rates**:  The FERC determined: (1) the return onequity should be 9.33 percent; (2) rates should be based on a 12 CPallocator; and (3) the treatment of market based rate contracts in the testyear should be to credit revenues to the cost of service rather than allocatingcosts to the agreements. The revenue requirement established by the FERCresults in proposed revenues that are estimated to be approximately $25million, or approximately $6.9 million below the level charged these customersduring this 18-month period. Rates for full requirements customers, the NewMexico Cooperatives and Cap Rock, as well as an interruptible contract with PNMfor the period beginning in July 1, 2006, are the subject of settlementsthat have either been approved or are pending before FERC.  These settlements are described in Wholesale2005 Power Base Rate Application below.

 

**Fuel Clause**:  The FERC determined that the method forcalculating fuel and purchased energy cost charges to the complaining customeris to deduct from such costs incremental fuel and purchased energy costs, whichit is attributing to SPS’ market based intersystem sales on the basis thatthese are “opportunity” sales under its precedent.  The FERC ordered that refunds of fuel costcharges based on this method of determining the FCAC should begin as of Jan. 1,2005 (the refund effective date in the case). The FERC ordered SPS to file a compliance filing calculating its refundobligation within 30 days of the date of the Order and implement theinstructions in the order in calculating its FCAC charges going forward fromthat date.  While the order is subject tointerpretation with respect to aspects of the calculation of the refundobligation, SPS does not expect its refund obligation to its full requirementscustomers from Jan. 1, 2005 through March 31, 2008, to exceed 

 

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$11 million.  PNM has filed aseparate complaint that any refund obligation to PNM will be determined in thatdocket.  SPS is reviewing the Order andhas not yet determined whether to seek rehearing.

 

The FERC alsoruled on two other FCA issues.  First, itrequired that wind contracts be evaluated on an individual contract basisrather than in aggregate.  Second, theFERC determined that an after the fact screen should be applied to allQualifying Facility (QF) purchases to determine if they are economic.  While this review will require additionaleffort, it is not expected that this will result in additional refunds as theall of the individual wind contracts as well as the QF purchases are typicallyeconomic when compared to market energy prices.

 

As of March 31, 2008, SPS has accruedfor an amount, which it believes is sufficient to cover the refund obligation.

 

***Wholesale 2005 Power Base RateApplication —***In December 2005, SPS filed for a$2.5 million increase in wholesale power rates to certain electriccooperatives. In January 2006, the FERC conditionally accepted the proposedrates for filing and the $2.5 million power rate increase became effectiveon July 1, 2006, subject to refund. The FERC also set the rate increaserequest for hearing and settlement judge procedures. In September 2006,offers of settlement with respect to the five full-requirements customers andwith respect to PNM were filed for approval. In September 2007, the FERCaccepted the settlement with the full-requirements customers. The PNMsettlement is still pending before the FERC.

 

Asnoted, the Wholesale 2005 Power Base Rate Application relating to Golden Spreadwas settled in conjunction with the Complaint Settlement discussed above.Therefore, SPS has settled with all parties in the Wholesale 2005 Power BaseRate Application except for resolution with Golden Spread of the demand costallocation methodology .  A hearing onthe demand allocation methodology has been set for July 29, 2008.  An initial decision is expected by the end ofSeptember 2008.

 

***SPS Formula Transmission Rate Case —***In December 2007, Xcel Energy submitted an application toimplement a transmission formula rate for the SPS zone of the Xcel Energy OpenAccess Transmission Tariff (OATT). The Southwest Power Pool, Inc. (SPP)made a companion filing in January 2008, to implement the same pricing inthe SPS zone of the SPP regional OATT. The changed rates will affect allwholesale transmission service customers using the SPS transmission networkunder either the SPP Regional OATT or the Xcel Energy OATT.

 

Aformula rate will help facilitate the financing and construction of the newtransmission facilities while providing an adequate rate of return on investedcapital. The proposed rates would be updated annually each July 1 basedon SPS’ prior year actual costs and loads plus the revenue requirementsassociated with projected current year transmission plant additions. Theproposed rate of return on common equity is 12.7 percent, including a 50basis point adder for SPS’ participation in the SPP Regional TransmissionOrganization, consistent with FERC precedent. The proposed rates would providefirst year incremental annual transmission revenue for SPS of approximately$5.5 million.

 

InFebruary 2008, the FERC issued an order accepting the proposed rates,suspending the effective date to July 6, 2008, and setting the rate filingfor hearings and settlement procedures. The FERC granted a 50 basis point adderto the ROE that it will determine in this proceeding as a result of SPS’participation in the SPP regional transmission organization. In March 2008,the FERC accepted the companion SPP rate change filing subject to the outcomeof the SPS rate filing. The SPS and SPP rate filings are now in settlementprocedures.  The ultimate outcome of therate filings is not known at this time.

 

***SPS 2008 Wholesale Rate Case —***OnMarch 31, 2008, SPS filed a wholesale power base rate case in thefull-requirements customers’ base rates. SPS is seeking an annual revenueincrease of $14.9 million or an overall 5.14 percent increase, based on 12.20 percent requested ROE.  On April 21, 2008, a motion fordismissal and protest was filed by the four eastern New Mexicocooperatives.  A FERC decision isexpected later in 2008.

 

**6. Commitments and Contingencies**

** **

Except to the extent noted below, the circumstancesset forth in Notes 11 and 12 to the financial statements in SPS’ Annual Reporton Form 10-K for the year ended Dec. 31, 2007 and Note 5 to thefinancial statements in this Quarterly Report on Form 10-Q, appropriatelyrepresent, in all material respects, the current status of commitments andcontingent liabilities and are incorporated herein by reference. The followinginclude unresolved contingencies that are material to SPS’ financial position.

 

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## ** **

## **Environmental Contingencies**

## ** **

SPS has been, or iscurrently, involved with the cleanup of contamination from certain hazardoussubstances at several sites. In many situations, SPS believes it will recoversome portion of these costs through insurance claims.  Additionally, where applicable, SPS ispursuing, or intends to pursue, recovery from other potentially responsibleparties and through the rate regulatory process.  New and changing federal and stateenvironmental mandates can also create added financial liabilities for SPS,which are normally recovered through the rate regulatory process.  To the extent any costs are not recoveredthrough the options listed above, SPS would be required to recognize anexpense.

 

***Site Remediation****—*SPS must pay all or a portion of the costto remediate sites where past activities of SPS and some other parties havecaused environmental contamination.  At March 31,2008, SPS was a party to third party and other sites, such as landfills, towhich SPS is alleged to be a potentially responsible party (PRP) that senthazardous materials and wastes.

 

SPS records a liabilitywhen enough information is obtained to develop an estimate of the cost ofenvironmental remediation and revises the estimate as information isreceived.  The estimated remediation costmay vary materially from the initial estimate.

 

To estimate the remediation cost for these sites,assumptions are made when facts are not fully known.  For instance, assumptions may be made aboutthe nature and extent of site contamination, the extent of required cleanupefforts, costs of alternative cleanup methods and pollution-controltechnologies, the period over which remediation will be performed and paid for,changes in environmental remediation and pollution-control requirements, thepotential effect of technological improvements, the number and financialstrength of other PRPs and the identification of new environmental cleanupsites.

 

Estimates are revised as facts become known.  At March 31, 2008, the liability for thecost of remediating these sites was estimated to be $0.1 million.  Some of the cost of remediation may berecovered from:

 

·              Insurancecoverage;

·              Otherparties that havecontributed to the contamination; and

·              Customers.

 

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

 

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

 

***Asbestos Removal*****—**Some of SPS’ facilities containasbestos.  Most asbestos will remainundisturbed until the facilities that contain it are demolished orrenovated.  SPS has recorded an estimatefor final removal of the asbestos as an asset retirement obligation.  See additional discussion of asset retirementobligations in Note 12 of the SPS Annual Report on Form 10-Kfor the year ended Dec. 31, 2007.  It may benecessary to remove some asbestos to perform maintenance or make improvementsto other equipment.  The cost of removingasbestos as part of other work is immaterial and is recorded as incurred asoperating expenses for maintenance projects, capital expenditures forconstruction projects or removal costs for demolition projects.

 

## ***Other Environmental Requirements***

## ** **

***Clean Air Interstate Rule ***—******In March 2005,the Environmental Protection Agency (EPA) issued the Clean Air Interstate Rule (CAIR)to further regulate SO2 and nitrogen oxide (NOx) emissions.  The objective of CAIR is to cap emissions ofSO2 and NOx in the eastern United States, including Texas.  CAIR addresses the transportation of fineparticulates, ozone and emission precursors to nonattainment downwindstates.  CAIR has a two-phase complianceschedule, beginning in 2009 for NOx and 2010 for SO2 with a finalcompliance deadline in 2015 for both emissions. Under CAIR, each affected state will be allocated an emissions budgetfor SO2 and NOx that will result in significant emission reductions.It will be based on stringent emission controls and forms the basis for acap-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.

 

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

 

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InMarch 2006, the EPA denied the petition for reconsideration.  On June 27, 2006, Xcel Energy and theother parties filed a petition for review of the denial of the petition forreconsideration, as well as a petition for review of the Federal ImplementationPlan, with the D.C. Circuit Court of Appeals. The Court has taken this matter under advisement and a decision isexpected in due course.

 

UnderCAIR’s cap-and-trade structure, SPS can comply through capital investments inemission controls or purchase of emission “allowances” from other utilitiesmaking reductions on their systems. Based on the preliminary analysis of various scenarios of capitalinvestment and allowance purchase, SPS currently believes that after theinstallation of low NOx burners on Harrington 3 in 2006, the remaining capitalinvestments for NOx controls in the SPS region are estimated at $12 million.Purchases of NOx allowances are estimated at $2.1 million in 2009 with no NOxallowance needs in 2010.  Annualpurchases of SO2 allowances are estimated inthe range of $5 million to $25 million each year, beginning in 2012 for phaseI, based on allowance costs and fuel quality as of March 2007.  These cost estimates represent one potentialscenario on complying with CAIR, if West Texas is not excluded.

 

WhileSPS expects to comply with the new rules through a combination ofadditional capital investments in emission controls at various facilities andpurchases of emission allowances, it is continuing to review the alternatives.SPS believes the cost of any required capital investment or allowance purchaseswill be recoverable from customers in rates.

 

***Clean Air Mercury Rule ***— In March 2005,the EPA issued the Clean Air Mercury Rule (CAMR), which regulated mercuryemissions from power plants. The Texas Commission ofEnvironmental Quality (TCEQ) has adopted by reference the EPA modelprogram.  In February 2008, the D.C.Circuit Court of Appeals vacated CAMR, which impacts federal CAMR requirementsbut not necessarily state-only rules.   Given the manyuncertainties created by the court’s opinion, it is not possible at this timeto provide an accurate summary of applicable federal mercury requirements orcost estimates.

 

***Regional Haze Rules ***— In June 2005,the EPA finalized amendments to the July 1999 regional haze rules. Theseamendments apply to the provisions of the regional haze rule that requireemission controls, known as best available retrofit technology (BART), forindustrial facilities emitting air pollutants that reduce visibility by causingor contributing to regional haze.  Someof SPS’ generating facilities will be subject to BART requirements.  Some of these facilities are located inregions where CAIR is effective. The TCEQ has determined that facilities mayuse CAIR as a substitute for BART for NOx and SO2.  If West Texas is excluded from CAIR by theD.C. Circuit Court of Appeals, then these facilities will be subject to BARTrequirements for NOx, SO2 and particulatematter.  Due to the uncertainties of thelitigation outcome, SPS is not able to estimate the cost impact at this time.

 

***Maddox Station Groundwater******  —*** The New Mexico EnvironmentDepartment (NMED) is requiring wastewater activity at Maddox Station to bepermitted. SPS is developing the permit application and engineering wastewatermanagement facilities. The estimated cost of the project is $1.8 million withan anticipated completion date in the third quarter of 2009.

 

**LegalContingencies**

** **

Lawsuitsand claims arise in the normal course of business. Management, after consultationwith legal counsel, has recorded an estimate of the probable cost of settlementor other disposition of them. The ultimate outcome of these matters cannotpresently be determined. Accordingly, the ultimate resolution of these matterscould have a material adverse effect on SPS’ financial position and results ofoperations.

 

**Environmental Litigation**

** **

***Carbon Dioxide EmissionsLawsuit******—***In July 2004,the attorneys general of eight states and New York City, as well as severalenvironmental groups, filed lawsuits in U.S. District Court in the SouthernDistrict of New York against five utilities, including Xcel Energy, to forcereductions in carbon dioxide (CO2)emissions.  The other utilities includeAmerican Electric Power Co., Southern Co., Cinergy Corp. and Tennessee ValleyAuthority.  The lawsuits allege that CO2 emitted byeach company is a public nuisance as defined under state and federal common lawbecause it has contributed to global warming. The lawsuits do not demand monetary damages. Instead, the lawsuits askthe court to order each utility to cap and reduce its CO2emissions.  In October 2004, XcelEnergy and the other defendants filed a motion to dismiss the lawsuit.  On Sept. 19, 2005, the court granted themotion to dismiss on constitutional grounds. Plaintiffs filed an appeal to the Second Circuit Court of Appeals.  In June 2007, the Second Circuit Courtof Appeals issued an order requesting the parties to file a letter briefregarding the impact of the United States Supreme Court’s decision inMassachusetts v. EPA, 127 S.Ct. 1438 (April 2, 2007) on the issues raisedby the parties on appeal.  Among otherthings, in its decision in Massachusetts v. EPA, the United States SupremeCourt held that CO2 emissionsare a 

 

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“pollutant”subject to regulation by the EPA under the Clean Air Act.  In response to the request of the SecondCircuit Court of Appeals, in June 2007, the defendant utilities filed aletter brief stating the position that the United States Supreme Court’sdecision supports the arguments raised by the utilities on appeal.  The Court of Appeals has taken the matterunder advisement ***and isexpected to issue an opinion in due course.***

 

***Comer vs. Xcel EnergyInc. et al.******—***In April 2006,Xcel Energy received notice of a purported class action lawsuit filed in U.S.District Court in the Southern District of Mississippi.  The lawsuit names more than 45 oil, chemicaland utility companies, including Xcel Energy, as defendants and alleges thatdefendants’ CO2 emissions “werea proximate and direct cause of the increase in the destructive capacity ofHurricane Katrina.”  Plaintiffs allege insupport of their claim, several legal theories, including negligence and publicand private nuisance and seek damages related to the loss resulting from thehurricane.  Xcel Energy believes thislawsuit is without merit and intends to vigorously defend itself against theseclaims.  In August 2007, the courtdismissed the lawsuit in its entirety against all defendants on constitutionalgrounds.  In September 2007,plaintiffs filed a notice of appeal to the Fifth Circuit Court of Appeals. ***  ******The Court of Appeals hastaken the matter under advisement and is expected to issue an opinion in duecourse.***

 

## ***NativeVillage of Kivalina vs. Xcel Energy Inc. et al. —*** In February 2008,the City and Native Village of Kivalina, Alaska, filed a lawsuit against XcelEnergy and 23 other oil, gas and coal companies.  The suit was brought on behalf ofapproximately 400 native Alaskans, the Inupiat Eskimo, who claim thatDefendants’ emission of carbon dioxide and other greenhouse gases contribute toglobal warming, which is harming their village. Plaintiffs claim that as a consequence, the entire village must berelocated at a cost of between $95 million and $400 million.  Plaintiffs assert a nuisance claim underfederal and state common law, as well as a claim asserting “concert of action”in which defendants are alleged to have engaged in tortious acts in concertwith each other.  Xcel Energy was notnamed in the civil conspiracy claim. Xcel Energy believes the claims asserted in this lawsuit are withoutmerit. A response to the complaint is due on or before June 30, 2008.

## ** **

**Employment, Tort and Commercial Litigation**

 

***LambCounty Electric Cooperative (LCEC) —***In 1995,LCEC petitioned the PUCT for a cease and desist order against SPS alleging SPSwas unlawfully providing service to oil field customers in LCEC’s certificatedarea.  In May 2003, the PUCT issuedan order denying LCEC’s petition based on its determination that SPS in 1976was granted a certificate to serve the disputed customers.  LCEC appealed the decision to the DistrictCourt in Travis County, Texas.  In August 2004,the court affirmed the decision of the PUCT. In September 2004, LCEC appealed the District Court’s decision tothe Court of Appeals for the Third Supreme Judicial District of the state ofTexas.  This appeal is currently pending.

 

In 1996, LCEC filed asuit for damages against SPS in the District Court in Lamb County, Texas, basedon the same facts alleged in the petition for a cease and desist order at thePUCT.  This suit has been dormant sinceit was filed, awaiting a final determination of the legality of SPS providingelectric service to the disputed customers. The PUCT order from May 2003, which found SPS was legally servingthe disputed customers, collaterally determines the issue of liability contraryto LCEC’s position in the suit.  Anadverse ruling on the appeal of May 2003 PUCT order could result in adifferent determination of the legality of SPS’ service to the disputedcustomers.

 

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

 

***Commercial Paper —***At March 31, 2008 and Dec. 31,2007, SPS had commercial paper outstanding of approximately $50.0 million and $123.0 million, respectively.  The weighted average interest rates at March 31,2008 and Dec. 31, 2007 were 3.59 percent and 5.58 percent, respectively.

 

***Money Pool*** — XcelEnergy has established a utility money pool arrangement that allows forshort-term loans between the utility subsidiaries and from the holding companyto the utility subsidiaries at market-based interest rates. The utility moneypool arrangement does not allow loans from the utility subsidiaries to the holdingcompany. SPS has approval to borrow up to $100 million under the arrangement.At March 31, 2008 and Dec. 31, 2007, SPS had money pool borrowings of$100.0 million and $5.5 million, respectively. The weighted average interest rates at March 31, 2008 and Dec. 31,2007 were 3.45 percent and 5.64 percent, respectively.

 

**8.****    ****Derivative Instruments**

 

SPSuses derivative instruments in connection with its utility commodity price,interest rate, short-term wholesale and commodity trading activities, includingforward contracts, futures, swaps and options. Qualifying hedging relationships are 

 

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designatedas a hedge of a forecasted transaction or future cash flow (cash flowhedge).  The types of qualifying hedgingtransactions that SPS is currently engaged in are discussed below.

 

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**Cash FlowHedges**

 

***Commodity Cash Flow Hedges******—***SPS enters intoderivative instruments to manage variability of future cash flows from changesin commodity prices.  These derivativeinstruments are designated as cash flow hedges for accounting purposes.  At March 31, 2008, SPS had nocommodity-related contracts designated as cash flow hedges.

 

***Interest Rate Cash Flow Hedges*** — SPS entersinto interest rate swap instruments that effectively fix the interest paymentson certain floating rate debt obligations. These derivative instruments are designated as cash flow hedges foraccounting purposes.

 

AtMarch 31, 2008, SPS had net losses of $0.2 million in accumulated othercomprehensive income that are expected to be recognized in earnings during thenext 12 months.

 

The following tableshows the major components of the derivative instruments valuation in thebalance sheets at March 31 and Dec. 31:

*** ***
| ** **                           | ** ** | **March 31, 2008**                          | ** ** | **Dec. 31, 2007**                                | ** ** |
|--------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **Derivative  Instruments  Valuation -  Assets** | ** ** | **Derivative  Instruments  Valuation -  Liabilities** | ** ** | **Derivative  Instruments  Valuation -  Assets** | ** ** | **Derivative  Instruments  Valuation -  Liabilities** | ** ** |
| Long term purchased power agreements |       | $                                                     | 92,171     |                                                       | $          | 58,522 |   | $ | 94,403 |   | $ | 59,419 |   |
| Interest rate hedging instruments    |       | —                                                |       | 7,127                                                      |       | — |   | 5,967 |   |
| Total                                |       | $                                                     | 92,171     |                                                       | $          | 65,649 |   | $ | 94,403 |   | $ | 65,386 |   |

 

In 2003, as a result of FASB Statement 133Implementation Issue No. C20, SPS began recording several long-termpurchased power agreements at fair value due to accounting requirements relatedto underlying price adjustments. As these purchases are recovered throughnormal regulatory recovery mechanisms in the respective jurisdictions, thechanges in fair value for these contracts were offset by regulatory assets andliabilities. During the first quarter of 2006, SPS qualified these contractsunder the normal purchase exception. Based on this qualification, the contractsare no longer adjusted to fair value and the previous carrying value of thesecontracts will be amortized over the remaining contract lives along with theoffsetting regulatory assets and liabilities.

 

The impact of qualifyingcash flow hedges on SPS’ accumulated other comprehensive income, included as acomponent of common stockholders’ equity, is detailed in the following table:

 
| ** **                                                                           | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Thousands of Dollars)**                                                 | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Accumulated other comprehensive loss related to cash flow hedges at  Jan. 1     |       | $                                                    | (6,005     | ) | $ | (5,860 | ) |
| After-tax net unrealized losses related to derivatives accounted for  as hedges      |       | (742                                                 | )          | (8 | ) |
| After-tax net realized losses on derivative transactions reclassified  into earnings |       | 43                                                   |       | 42 |   |
| Accumulated other comprehensive loss related to cash flow hedges at  March 31   |       | $                                                    | (6,704     | ) | $ | (5,826 | ) |

 

**9. FairValue Measurements**

 

Effective Jan. 1,2008, SPS adopted SFAS No. 157 for recurring fair value measurements.  SFAS No. 157 provides a singledefinition of fair value and requires enhanced disclosures about assets andliabilities measured at fair value. SFAS No. 157 establishes a hierarchalframework for disclosing the observability of the inputs utilized in measuringassets and liabilities at fair value. The three levels defined by the SFAS No. 157hierarchy and examples of each level are as follows:

 

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

 

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

 

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

 

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SPS had one interest ratederivative contract measured at fair value on a recurring basis as of March 31,2008.  SPS uses broker quotes, basedprimarily on observable benchmark interest rate forecasts, to measure the fairvalue of interest rate derivatives. Given the observability of the primary inputs to pricing, the interestrate derivative liability of $7.1 million was assigned a Level 2 under the SFASNo. 157 hierarchy.

 

**10. Detailof Interest and Other Income, Net**

 

Interest and other income, netof nonoperating expenses, for the three months ended March 31 consisted ofthe following:

 
| ** **                           | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------|------------|--------------------------------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Interest income                      |       | $                                                | 826        |   | $ | 846 |   |
| Other nonoperating income            |       | 47                                               |       | 45 |   |
| Insurance policy expenses            |       | (10                                              | )          | (61 | ) |
| Other nonoperating expenses          |       | —                                           |       | (27 | ) |
| Total interest and other income, net |       | $                                                | 863        |   | $ | 803 |   |

 

**11. Segment Information**

 

SPS has one reportablesegment.  SPS operates in the regulatedelectric utility industry, providing wholesale and retail electric service inthe states of Texas and New Mexico.  Revenuesfrom external customers were $418.8 million and $365.9 million for the threemonths ended March 31, 2008 and 2007, respectively.

 

**12. Comprehensive (Loss) Income**

 

The components of totalcomprehensive (loss) income are shown below:

 
| ** **                                                                           | ** ** | **Three months ended  March 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Thousands of Dollars)**                                                 | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Net (loss) income                                                                    |       | $                                                | (1,265     | ) | $ | 1,665 |   |
| Other comprehensive income:                                                          |       |                                             |       |   |   |
| Unrealized gain – marketable securities                                         |       | —                                           |       | 4 |   |
| After-tax net unrealized losses related to derivatives accounted for  as hedges      |       | (742                                             | )          | (9 | ) |
| After-tax net realized losses on derivative transactions reclassified  into earnings |       | 43                                               |       | 42 |   |
| Other comprehensive (loss) income                                                    |       | (699                                             | )          | 37 |   |
| Comprehensive (loss) income                                                          |       | $                                                | (1,964     | ) | $ | 1,702 |   |

 

**13. BenefitPlans and Other Postretirement Benefits**

 

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

 

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

 
| ** **                                                   | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2008 (1)**                                    | ** ** | **2007 (1)** | ** ** | **2008** | ** ** | **2007** | ** ** |
| **(Thousands of Dollars)**                         | ** ** | **Pension Benefits**                            | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                 |       | $                                                    | 16,773     |   | $ | 16,485 |   | $ | 1,464 |   | $ | 1,701 |   |
| Interest cost                                                |       | 40,583                                               |       | 39,598 |   | 12,546 |   | 13,603 |   |
| Expected return on plan assets                               |       | (68,472                                              | )          | (65,891 | ) | (7,500 | ) | (7,618 | ) |
| Amortization of transition obligation                        |       | —                                               |       | — |   | 3,644 |   | 3,611 |   |
| Amortization of prior service cost (credit)                  |       | 5,166                                                |       | 6,487 |   | (544 | ) | (545 | ) |
| Amortization of net loss                                     |       | 2,859                                                |       | 3,867 |   | 2,718 |   | 4,994 |   |
| Net periodic benefit cost (credit)                           |       | (3,091                                               | )          | 546 |   | 12,328 |   | 15,746 |   |
| Credits not recognized due to the effects of regulation      |       | 2,592                                                |       | 2,680 |   | — |   | — |   |
| Additional cost recognized due to the effects of regulation  |       | —                                               |       | — |   | 973 |   | 973 |   |
| Net benefit cost (credit) recognized for financial reporting |       | $                                                    | (499       | ) | $ | 3,226 |   | $ | 13,301 |   | $ | 16,719 |   |
| **SPS**                                                      |       |                                                 |       |   |   |   |   |   |   |
| Net benefit cost (credit) recognized for financial reporting |       | $                                                    | (2,754     | ) | $ | (2,006 | ) | $ | 875 |   | $ | 1,548 |   |

 

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(1)     Includes qualified and non-qualifiedpension net periodic benefit cost.

 

**Item 2. MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

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

 

Exceptfor the historical statements contained in this report, the matters discussed inthe following discussion and analysis are forward-looking statements that aresubject to certain risks, uncertainties and assumptions. Such forward-lookingstatements are intended to be identified in this document by the words “anticipate,”“believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,”“project,” “possible,” “potential,” “should” and similar expressions. Actualresults may vary materially. Forward-looking statements speak only as ofthe date they are made, and we do not undertake any obligation to update themto reflect changes that occur after that date. Factors that could cause actual results to differ materially include,but are not limited to: general economic conditions, including the availabilityof credit and its impact on capital expenditures and the ability of SPS toobtain financing on favorable terms; business conditions in the energyindustry; actions of credit rating agencies; competitive factors, including theextent and timing of the entry of additional competition in the markets servedby SPS; unusual weather; effects of geopolitical events, including war and actsof terrorism; state, federal and foreign legislative and regulatory initiativesthat affect cost and investment recovery, have an impact on rates or have animpact on asset operation or ownership or impose environmentalcompliance conditions; structures thataffect the speed and degree to which competition enters the electric market;costs and other effects of legal and administrative proceedings, settlements,investigations and claims; actions of accounting regulatory bodies; the itemsdescribed under Factors Affecting Results of Continuing Operations; and theother risk factors listed from time to time by SPS in reports filed with theSEC, including “Risk Factors” in Item 1A of SPS’ Form 10-K for the yearended Dec. 31, 2007 and Exhibit 99.01 to this report on Form 10-Qfor the quarter ended March 31, 2008.

 

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**MarketRisks**

 

SPS is exposed to marketrisks, including changes in commodity prices and interest rates, as disclosedin Item 7A — Quantitative and Qualitative Disclosures About Market Risk in itsAnnual Report on Form 10-K for the year ended Dec. 31, 2007.Commodity price and interest rate risks for SPS are mitigated in mostjurisdictions due to cost-based rate regulation. At March 31, 2008, therewere no material changes to the financial market risks that affect thequantitative and qualitative disclosures presented as of Dec. 31, 2007.

 

**RESULTS OFOPERATIONS**

 

SPS’ net loss wasapproximately $1.3 million for the first three months of 2008, compared withnet income of approximately $1.7 million for the first three months of 2007.

 

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

 

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

 

SPS has two distinct forms of wholesalesales:  short-term wholesale andcommodity trading. Short-term wholesale refers to energy related purchase andsales activity and the use of certain financial instruments associated with thefuel required for and energy produced from SPS’ generation assets and energyand capacity purchased to serve native load. Commodity trading is notassociated with SPS’ generation assets or the energy and capacity purchased toserve native load.

 

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

 

The following table details base electricutility, short-term wholesale and commodity trading activities:

 
| **(Millions of Dollars)**                     | ** ** | **Base  Electric  Utility** | ** ** | **Short-Term  Wholesale** | ** ** | **Commodity  Trading** | ** ** | **Total** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|------------------------|------------|-----------|------------|
| **Three months ended March 31, 2008**              |       |                        |       |                      |       |                   |       |      |       |
| Electric utility revenues (excluding commodity trading) |       | $                           | 413        |                      | $          | 6                      |       | $         | —     |   | $ | 419 |   |
| Electric fuel and purchased power                       |       | (316                        | )          | (6                        | )          | —                 |       | (322      | )          |
| Commodity trading revenues                              |       | —                      |       | —                    |       | —                 |       | —    |       |
| Commodity trading expenses                              |       | —                      |       | —                    |       | —                 |       | —    |       |
| Gross margin before operating expenses                  |       | $                           | 97         |                      | $          | —                 |       | $         | —     |   | $ | 97 |   |
| Margin as a percentage of revenues                      |       | 23.5                        | %          | —                    | %          | —                 | %          | 23.2      | %          |
|                                                    |       |                        |       |                      |       |                   |       |      |       |
| **Three months ended March 31, 2007**              |       |                        |       |                      |       |                   |       |      |       |
| Electric utility revenues (excluding commodity trading) |       | $                           | 364        |                      | $          | 3                      |       | $         | —     |   | $ | 367 |   |
| Fuel and purchased power                                |       | (261                        | )          | (3                        | )          | —                 |       | (264      | )          |
| Commodity trading revenues                              |       | —                      |       | —                    |       | —                 |       | —    |       |
| Commodity trading expenses                              |       | —                      |       | —                    |       | (1                     | )          | (1        | )          |
| Gross margin before operating expenses                  |       | $                           | 103        |                      | $          | —                 |       | $         | (1         | ) | $ | 102 |   |
| Margin as a percentage of revenues                      |       | 28.3                        | %          | —                    | %          | —                 | %          | 27.8      | %          |

 

The following summarizes thecomponents of the changes in base electric revenues and base electric marginfor the three months ended March 31:

 

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***Base Electric Revenues***

 
| **(Millions of Dollars)**            | ** ** | **2008 vs. 2007** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| Fuel and purchased power cost recovery         |       | $                           | 46         |   |
| Retail sales growth (excluding weather impact) |       | 4                           |       |
| Firm wholesale                                 |       | 4                           |       |
| SPS potential regulatory settlements           |       | 3                           |       |
| Sales mix                                      |       | (6                          | )          |
| Estimated impact of weather                    |       | (1                          | )          |
| Other                                          |       | (1                          | )          |
| Total increase in base electric revenues       |       | $                           | 49         |   |

 

##### ***Base ElectricMargin***

 
| **(Millions of Dollars)**            | ** ** | **2008 vs. 2007** | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| Retail sales growth (excluding weather impact) |       | $                           | 4          |   |
| Firm wholesale                                 |       | 4                           |       |
| SPS potential regulatory settlements           |       | 1                           |       |
| Fuel handling and procurement                  |       | (6                          | )          |
| Sales mix                                      |       | (6                          | )          |
| Purchased capacity costs                       |       | (2                          | )          |
| Estimated impact of weather                    |       | (1                          | )          |
| Total decrease in base electric margin         |       | $                           | (6         | ) |

 

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

## ** **

***Taxes (other than income taxes) -***Taxes (other than incometaxes) decreased by approximately $1.2 million, or 10.7 percent, for the firstthree months of 2008, compared with the first three months of 2007. Thedecrease was primarily due to a reduction in Texas property taxes.

 

***Income taxes***- Income tax expense decreased by approximately $1.5million for the first three months of 2008 compared with the first three monthsof 2007. The decrease in income tax expense was primarily due to a decrease inpretax income. The effective tax rate was 37.4 percent for the first threemonths of 2008, compared with 31.1 percent for the same period in 2007. Thehigher effective tax rate for the first three months of 2008 was primarily dueto an increase in the forecasted annual effective tax rate for 2008 as comparedto 2007.

 

***Regulation***

** **

**Summary of Recent Regulatory Developments**

 

TheFERC has jurisdiction over rates for electric transmission service ininterstate commerce and electricity sold at wholesale, hydro facilitylicensing, natural gas transportation, accounting practices and certain otheractivities of SPS. State and local agencies have jurisdiction over many of SPS’activities, including regulation of retail rates and environmental matters. See additionaldiscussion in the summary of recent federal regulatory developments and publicutility regulation sections of the SPS Annual Report on Form 10-K for theyear ended Dec. 31, 2007.  In addition tothe matters discussed below, see Note 5 to the financial statements for adiscussion of other regulatory matters.

 

**OtherRegulatory Matters**

 

***Performance-Based Regulation andQuality of Service Requirements *****—** In Texas, SPSis subject to a quality of service plan requiring SPS to comply with electricservice reliability performance targets. In January 2008, the PUCT staffserved SPS with notice that it had initiated an investigation to determinewhether SPS is in compliance with the Texas Statutes and PUCT rules onreliability and continuity of service. If SPS is found not to be in compliance, the PUCT may initiate anenforcement action and impose administrative penalties up to $25,000 per day.

 

***Lea Power Purchase Power Agreement*** — Lea Power is a naturalgas combined cycle 602MW plant currently being constructed near Hobbs, NewMexico.  SPS is expected to start takingenergy beginning in the summer of 2008 when Lea Power reaches commercialoperations.  On April 24, 2008,however, SPS sent Lea Power a notice of default related to its failure to meettwo construction milestones. It is uncertain to what extent, if any, thisfailure will have on Lea Power’s ability 

** **

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** **

**to begin commercial operations inthe summer of 2008.  The purchase poweragreement, which was executed in 2006, provides for SPS to have exclusiverights to dispatch the facility.  SPS iscurrently evaluating the accounting implications of this contract, includingcapital lease and/or consolidation requirements.  Further, restructuring of the contract isbeing considered.  In addition, SPS isalso evaluating the three additional purchase power agreements expected toreach commercial operations in the second quarter of 2008.**

** **

**Item 4. CONTROLS AND PROCEDURES**

 

**Disclosure Controls andProcedures**

** **

SPS maintains a set ofdisclosure controls and procedures designed to ensure that information requiredto be disclosed in reports that it files or submits under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in Securities and Exchange Commission rules andforms. In addition, the disclosure controls and procedures ensure thatinformation required to be disclosed is accumulated and communicated tomanagement, including the chief executive officer (CEO) and chief financialofficer (CFO), allowing timely decisions regarding required disclosure. As ofthe end of the period covered by this report, based on an evaluation carriedout under the supervision and with the participation of SPS’ management,including the CEO and the CFO, of the effectiveness of our disclosure controlsand the procedures, the CEO and CFO have concluded that SPS’ disclosurecontrols and procedures are effective.

 

**Internal Control Over Financial Reporting**

** **

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

 

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

#### ** **

## **Item 1. LegalProceedings**

## ** **

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 5 and 6 ofthe Financial Statements in this Quarterly Report on Form 10-Q for furtherdiscussion of legal proceedings, including Regulatory Matters and Commitmentsand Contingent Liabilities, which are hereby incorporated by reference.Reference also is made to Item 3 and Notes 11 and 12 of SPS’ Annual Reporton Form 10-K for the year ended Dec. 31, 2007 for a description ofcertain legal proceedings presently pending.

 

**Item 1A. Risk Factors**

 

SPS’risk factors are documented in Item 1A of Part I of its 2007 Annual Reporton Form 10-K, which is incorporated herein by reference. There have beenno material changes to the risk factors.

 

## **Item 6.Exhibits**

## ** **

The following Exhibits arefiled with this report:

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

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorizedon May 5, 2008.

 

Southwestern Public ServiceCo.

(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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