Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

# **FORM 10-Q**

# ** **

**(MarkOne)**

 
| **x**                                                  | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**   |
|--------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|
|                                                   |       |                                                                                                      |
| **For the quarterly period ended June 30,  2009** |
|                                                   |
| **or**                                                 |
|                                                   |       |                                                                                                      |
| **o**                                                  | ** ** | **TRANSITION  REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |

 

**Commission File Number: 001-03789**

 

# **Southwestern Public Service Company**

(Exact name of registrant as specified in its charter)

 

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

 

**(303) 571-7511**

 (Registrant’s telephone number,including area code)

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirement for thepast 90 days.   xYes oNo

 

Indicate by check markwhether the registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 and Regulation S-T (§232.405 of this chapter)during the preceding 12 months (or for such shorter period that the registrantwas required to submit and post such files).   oYes oNo

 

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

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

 

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

 

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

 
| **Class**                  | ** ** | **Outstanding at Aug. 3, 2009** | ** ** |
|----------------------------|------------|-----------------------------------------------------|------------|
| Common Stock, $1 par value |       | 100 shares                                          |       |

 

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

 

 

 

----

Table of Contents

 

#### **TABLEOF CONTENTS**

 
| **PART I - FINANCIAL INFORMATION**      | ** **                                                                                  | ** ** |
|----------------------------------------------|---------------------------------------------------------------------------------------------|------------|
|                                         |                                                                                        |       |   |
| Item l.                                      | Financial Statements (Unaudited)                                                            |       | 3 |
| Item 2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       | 18 |
| Item 4.                                      | Controls and  Procedures                                                                    |       | 21 |
|                                         |                                                                                        |       |   |
| **PART II - OTHER INFORMATION**         | ** **                                                                                  | ** ** |
|                                         |                                                                                        |       |   |
| Item 1.                                      | Legal Proceedings                                                                           |       | 21 |
| Item 1A.                                     | Risk Factors                                                                                |       | 22 |
| Item 6.                                      | Exhibits                                                                                    |       | 23 |
|                                         |                                                                                        |       |   |
| **SIGNATURES**                               |                                                                                        | 24         |
|                                         |                                                                                        |       |   |
| Certifications  Pursuant to Section 302 |                                                                                        |       |
| Certifications  Pursuant to Section 906 |                                                                                        |       |
| Statement  Pursuant to Private Litigation    |                                                                                        |       |

 

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

 

2

----

Table of Contents

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. FINANCIAL STATEMENTS**

 

**SOUTHWESTERN PUBLIC SERVICECOMPANY**

**STATEMENTSOF INCOME (UNAUDITED)**

*(amounts in thousands of dollars)*

 
| ** **                                                                                             | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                             | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                                                                             | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating revenues**                                                                                 |       | $                                               | 328,140    |                                          | $          | 537,873 |   | $ | 697,123 |   | $ | 956,670 |   |
|                                                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| **Operating expenses**                                                                                 | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Electric fuel and purchased power                                                                      |       | 196,010                                         |       | 425,991                                       |       | 443,519 |   | 747,683 |   |
| Other operating and maintenance expenses                                                               |       | 53,956                                          |       | 54,605                                        |       | 108,429 |   | 106,030 |   |
| Demand side management program expenses                                                                |       | 2,621                                           |       | 4,682                                         |       | 3,973 |   | 5,661 |   |
| Depreciation and amortization                                                                          |       | 25,279                                          |       | 24,386                                        |       | 50,554 |   | 48,373 |   |
| Taxes (other than income taxes)                                                                        |       | 9,231                                           |       | 9,780                                         |       | 19,773 |   | 20,103 |   |
| Total operating expenses                                                                               |       | 287,097                                         |       | 519,444                                       |       | 626,248 |   | 927,850 |   |
|                                                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| **Operating income**                                                                                   |       | 41,043                                          |       | 18,429                                        |       | 70,875 |   | 28,820 |   |
|                                                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| Interest and other (expenses) income, net                                                              |       | (323                                            | )          | 1,367                                         |       | 42 |   | 2,230 |   |
| Allowance for funds used during construction —  equity                                            |       | 975                                             |       | —                                        |       | 2,090 |   | — |   |
|                                                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| **Interest charges and financing  costs**                                                              | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest charges — includes other financing costs  of $657, $590, $1,326 and $1,181, respectively |       | 15,582                                          |       | 13,553                                        |       | 33,682 |   | 27,484 |   |
| Allowance for funds used during construction —  debt                                              |       | (675                                            | )          | (604                                          | )          | (1,445 | ) | (1,260 | ) |
| Total interest charges and financing costs                                                             |       | 14,907                                          |       | 12,949                                        |       | 32,237 |   | 26,224 |   |
|                                                                                                   |       |                                            |       |                                          |       |   |   |   |   |
| **Income before income taxes**                                                                         |       | 26,788                                          |       | 6,847                                         |       | 40,770 |   | 4,826 |   |
| Income taxes                                                                                           |       | 9,980                                           |       | 2,877                                         |       | 14,780 |   | 2,121 |   |
| **Net income**                                                                                         |       | $                                               | 16,808     |                                          | $          | 3,970 |   | $ | 25,990 |   | $ | 2,705 |   |

 

See Notes to Financial Statements

 

3

----

Table of Contents

 

**SOUTHWESTERN PUBLIC SERVICE COMPANY**

**STATEMENTS OF CASH FLOWS(UNAUDITED)**

*(amounts in thousands of dollars)*

 
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| **Operating activities**                                                           |       |                                              |       |   |   |
| Net income                                                                         |       | $                                                 | 25,990     |   | $ | 2,705 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                      |       | 52,542                                            |       | 56,733 |   |
| Deferred income taxes                                                              |       | (19,432                                           | )          | 13,791 |   |
| Amortization of investment tax credits                                             |       | (162                                              | )          | (110 | ) |
| Allowance for equity funds used during  construction                               |       | (2,090                                            | )          | — |   |
| Net realized and unrealized hedging and derivative transactions                    |       | (1,509                                            | )          | 134 |   |
| Changes in operating assets and liabilities:                                       |       |                                              |       |   |   |
| Accounts receivable                                                                |       | (6,490                                            | )          | (25,927 | ) |
| Accrued unbilled revenues                                                          |       | (10,842                                           | )          | (39,892 | ) |
| Inventories                                                                        |       | 24,835                                            |       | (5,084 | ) |
| Recoverable electric energy costs                                                  |       | 2,018                                             |       | (60,238 | ) |
| Prepayments and other                                                              |       | 1,828                                             |       | 3,505 |   |
| Accounts payable                                                                   |       | (25,550                                           | )          | 80,165 |   |
| Deferred electric energy costs                                                     |       | 92,428                                            |       | (39 | ) |
| Net regulatory assets and liabilities                                              |       | 3,655                                             |       | (1,056 | ) |
| Other current liabilities                                                          |       | (5,567                                            | )          | (13,789 | ) |
| Change in other noncurrent assets                                                  |       | (5,064                                            | )          | (5,398 | ) |
| Change in other noncurrent liabilities                                             |       | (17,291                                           | )          | 6,797 |   |
| Net cash provided by operating activities                                          |       | 109,299                                           |       | 12,297 |   |
|                                                                               |       |                                              |       |   |   |
| **Investing activities**                                                           |       |                                              |       |   |   |
| Utility capital/construction expenditures                                          |       | (96,006                                           | )          | (83,843 | ) |
| Allowance for equity funds used during  construction                               |       | 2,090                                             |       | — |   |
| Investments in utility money pool arrangement                                      |       | (567,800                                          | )          | — |   |
| Receipts from utility money pool arrangement                                       |       | 658,300                                           |       | — |   |
| Other investments                                                                  |       | —                                            |       | 2,166 |   |
| Net cash used in investing activities                                              |       | (3,416                                            | )          | (81,677 | ) |
|                                                                               |       |                                              |       |   |   |
| **Financing activities**                                                           |       |                                              |       |   |   |
| Repayment of short-term borrowings, net                                            |       | —                                            |       | 76,000 |   |
| Borrowings under utility money pool arrangement                                    |       | —                                            |       | 379,100 |   |
| Repayments under utility money pool arrangement                                    |       | —                                            |       | (354,600 | ) |
| Repayment of long-term debt, including  reacquisition premiums                     |       | (100,027                                          | )          | — |   |
| Capital contributions from parent                                                  |       | 13,044                                            |       | 2,095 |   |
| Dividends paid to parent                                                           |       | (32,959                                           | )          | (31,753 | ) |
| Net cash (used in) provided by financing  activities                               |       | (119,942                                          | )          | 70,842 |   |
|                                                                               |       |                                              |       |   |   |
| Net (decrease) increase in cash and cash  equivalents                              |       | (14,059                                           | )          | 1,462 |   |
| Cash and cash equivalents at beginning of period                                   |       | 130,795                                           |       | 714 |   |
| Cash and cash equivalents at end of period                                         |       | $                                                 | 116,736    |   | $ | 2,176 |   |
|                                                                               |       |                                              |       |   |   |
| Supplemental disclosure of cash flow information:                                  |       |                                              |       |   |   |
| Cash paid for interest (net of amounts  capitalized)                               |       | $                                                 | (33,455    | ) | $ | (25,425 | ) |
| Cash paid for income taxes (net of refunds  received)                              |       | (34,363                                           | )          | (10,007 | ) |
|                                                                               |       |                                              |       |   |   |
| Supplemental disclosure of non-cash investing  transactions:                       |       |                                              |       |   |   |
| Property, plant and equipment additions in  accounts payable                       |       | $                                                 | 3,751      |   | $ | 2,939 |   |

 

See the Notes to Financial Statements

 

4

----

Table of Contents

 

**SOUTHWESTERN PUBLIC SERVICE COMPANY**

**BALANCE SHEETS (UNAUDITED)**

*(amounts in thousands of dollars)*

 
| ** **                                                                            | ** ** | **June 30, 2009** | ** ** | **Dec. 31, 2008** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Assets**                                                                            | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Current assets                                                                        |       |                        |       |                        |       |
| Cash and cash equivalents                                                             |       | $                           | 116,736    |                        | $          | 130,795 |   |
| Investments in utility money pool arrangement                                         |       | —                      |       | 90,500                      |       |
| Accounts receivable, net                                                              |       | 57,032                      |       | 63,018                      |       |
| Accounts receivable from affiliates                                                   |       | 17,304                      |       | 4,828                       |       |
| Accrued unbilled revenues                                                             |       | 108,705                     |       | 97,863                      |       |
| Inventories                                                                           |       | 20,563                      |       | 47,082                      |       |
| Recoverable electric energy costs                                                     |       | 3,523                       |       | 5,540                       |       |
| Derivative instruments valuation                                                      |       | 8,926                       |       | 8,926                       |       |
| Deferred income taxes                                                                 |       | 56,665                      |       | 21,607                      |       |
| Prepayments and other                                                                 |       | 3,541                       |       | 5,369                       |       |
| Total current assets                                                                  |       | 392,995                     |       | 475,528                     |       |
|                                                                                  |       |                        |       |                        |       |
| Property, plant and equipment, net                                                    |       | 2,186,540                   |       | 2,141,636                   |       |
|                                                                                  |       |                        |       |                        |       |
| Other assets                                                                          |       |                        |       |                        |       |
| Regulatory assets                                                                     |       | 262,774                     |       | 269,344                     |       |
| Derivative instruments valuation                                                      |       | 72,088                      |       | 76,551                      |       |
| Other                                                                                 |       | 28,780                      |       | 24,048                      |       |
| Total other assets                                                                    |       | 363,642                     |       | 369,943                     |       |
| Total assets                                                                          |       | $                           | 2,943,177  |                        | $          | 2,987,107 |   |
|                                                                                  |       |                        |       |                        |       |
| **Liabilities and Equity**                                                            |       |                        |       |                        |       |
| Current liabilities                                                                   |       |                        |       |                        |       |
| Current portion of long-term debt                                                     |       | $                           | —     |                        | $          | 100,000 |   |
| Accounts payable                                                                      |       | 140,180                     |       | 166,909                     |       |
| Accounts payable to affiliates                                                        |       | 9,255                       |       | 10,568                      |       |
| Deferred electric energy costs                                                        |       | 113,364                     |       | 20,936                      |       |
| Taxes accrued                                                                         |       | 14,939                      |       | 20,271                      |       |
| Dividends payable to parent                                                           |       | 16,854                      |       | 15,585                      |       |
| Accrued interest                                                                      |       | 12,698                      |       | 15,136                      |       |
| Derivative instruments valuation                                                      |       | 5,125                       |       | 5,079                       |       |
| Other                                                                                 |       | 21,870                      |       | 19,800                      |       |
| Total current liabilities                                                             |       | 334,285                     |       | 374,284                     |       |
|                                                                                  |       |                        |       |                        |       |
| Deferred credits and other liabilities                                                |       |                        |       |                        |       |
| Deferred income taxes                                                                 |       | 502,180                     |       | 486,702                     |       |
| Deferred investment tax credits                                                       |       | 2,528                       |       | 2,690                       |       |
| Regulatory liabilities                                                                |       | 122,974                     |       | 126,884                     |       |
| Asset retirement obligations                                                          |       | 18,501                      |       | 17,903                      |       |
| Derivative instruments valuation                                                      |       | 55,406                      |       | 59,255                      |       |
| Pension and employee benefit obligations                                              |       | 41,496                      |       | 50,500                      |       |
| Other                                                                                 |       | 8,090                       |       | 16,461                      |       |
| Total deferred credits and other liabilities                                          |       | 751,175                     |       | 760,395                     |       |
|                                                                                  |       |                        |       |                        |       |
| Commitments and contingent liabilities                                                |       |                        |       |                        |       |
| Capitalization                                                                        |       |                        |       |                        |       |
| Long-term debt                                                                        |       | 922,285                     |       | 922,123                     |       |
| Common stock — authorized 200 shares of $1.00 par  value, outstanding 100 shares |       | —                      |       | —                      |       |
| Additional paid in capital                                                            |       | 689,749                     |       | 676,705                     |       |
| Retained earnings                                                                     |       | 250,922                     |       | 259,159                     |       |
| Accumulated other comprehensive loss                                                  |       | (5,239                      | )          | (5,559                      | )          |
| Total common stockholder’s equity                                                |       | 935,432                     |       | 930,305                     |       |
| Total liabilities and equity                                                          |       | $                           | 2,943,177  |                        | $          | 2,987,107 |   |

** **

**See the Notes to Financial Statements**

 

5

----

 

 

Table of Contents

 

**SOUTHWESTERN PUBLICSERVICE COMPANY**

**Notes to FinancialStatements (UNAUDITED)**

** **

In the opinion ofmanagement, the accompanying unaudited financial statements contain alladjustments necessary to present fairly, in accordance with accountingprinciples generally accepted in the United States of America (GAAP), thefinancial position of SPS as of June 30, 2009, and Dec. 31, 2008; theresults of its operations for the three and six months ended June 30, 2009and 2008; and its cash flows for the six months ended June 30, 2009 and2008. All adjustments are of a normal, recurring nature, except as otherwisedisclosed.  Management has also evaluated the impact of events occurringafter June 30, 2009 up to Aug. 3, 2009, which is the date of issuanceof these financial statements.  Thesestatements contain all necessary adjustments and disclosures resulting fromthat evaluation.  The Dec. 31,2008 balance sheet information has been derived from the audited 2008 financialstatements. These notes to the financial statements have been prepared pursuantto the rules and regulations of the SEC for Quarterly Reports on Form 10-Q.  Certain information and note disclosuresnormally included in financial statements prepared in accordance with GAAP havebeen condensed or omitted pursuant to such rules and regulations.  For further information, refer to thefinancial statements and notes thereto, included in the SPS Annual Report on Form 10-Kfor the year ended Dec. 31, 2008, filed with the SEC on March 2,2009.  Due to the seasonality of electricsales of SPS, interim results are not necessarily an appropriate base fromwhich to project annual results.

 

**1.     Summary of Significant Accounting Policies**

** **

Except to the extent updatedor described below, the significant accounting policies set forth in Note 1 tothe financial statements in SPS’ Annual Report on Form 10-K for the yearended Dec. 31, 2008, appropriately represent, in all material respects,the current status of accounting policies and are incorporated herein byreference.

 

**2.     Accounting Pronouncements**

 

***Recently Adopted***

 

***Business Combinations (Statement ofFinancial Accounting Standards (SFAS) No. 141 (revised 2007)) —***In December 2007,the Financial Accounting Standards Board (FASB) issued SFAS No. 141(R),which establishes principles and requirements for how an acquirer in a businesscombination recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest; recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase; and determines what informationto disclose to enable users of the financial statements to evaluate the natureand financial effects of the business combination. SFAS No. 141(R) isto be applied prospectively to business combinations for which the acquisitiondate is on or after the beginning of an entity’s fiscal year that begins on orafter Dec. 15, 2008. SPS implemented SFAS No. 141(R) on Jan. 1,2009, and the implementation did not have a material impact on its financialstatements.

 

***Noncontrolling Interests in ConsolidatedFinancial Statements, an Amendment of Accounting Research Bulletin (ARB) No. 51(SFAS No. 160) *****—** In December 2007, theFASB issued SFAS No. 160, which establishes accounting and reportingstandards that require the ownership interest in subsidiaries held by partiesother than the parent be clearly identified and presented in the consolidatedbalance sheets within equity, but separate from the parent’s equity; the amountof consolidated net income attributable to the parent and the noncontrollinginterest be clearly identified and presented on the face of the consolidatedstatement of earnings; and changes in a parent’s ownership interest while theparent retains its controlling financial interest in its subsidiary beaccounted for consistently as equity transactions. SFAS No. 160 waseffective for fiscal years beginning on or after Dec. 15, 2008. SPSimplemented SFAS No. 160 on Jan. 1, 2009, and the implementation didnot have a material impact on its financial statements.

 

***Disclosures about Derivative Instrumentsand Hedging Activities, an amendment of FASB Statement No. 133 (SFAS No. 161)******—*** In March 2008,the FASB issued SFAS No. 161, which is intended to enhance disclosures tohelp users of the financial statements better understand how derivativeinstruments and hedging activities affect an entity’s financial position, financialperformance and cash flows.  SFAS No. 161amends and expands the disclosure requirements of SFAS No. 133, *Accounting for Derivative Instruments and HedgingActivities*, to require disclosures including objectives andstrategies for using derivatives, gains and losses on derivative instruments,and credit-risk-related contingent features in derivative contracts.  SFAS No. 161 was effective for financialstatements issued for fiscal years and interim periods beginning after Nov. 15,2008.  SPS implemented SFAS No. 161on Jan. 1, 2009, and the implementation did not have a material impact onits financial statements.  For furtherdiscussion and SFAS No. 161 required disclosures, see Note 8 to thefinancial statements.

 

6

----

Table of Contents

 

***Interim Disclosures about Fair Value ofFinancial Instruments (FASB Staff Position (FSP) FAS 107-1 and AccountingPrinciples Board (APB) 28-1)******—***In April 2009, the FASBissued FSP FAS 107-1 and APB 28-1, which amends SFAS No. 107*, Disclosures About Fair Value of FinancialInstruments*, and APB Opinion No. 28, *Interim Financial Reporting*, to require disclosuresregarding the fair value of financial instruments in interim financialstatements. FSP FAS 107-1 and APB 28-1 was effective for interim periods endingafter June 15, 2009. SPS implemented FSP FAS 107-1 and APB 28-1 on April 1,2009, and the implementation did not have a material impact on its financialstatements.  For FSP FAS 107-1 and APB28-1 required disclosures, see Note 9 to the financial statements.

 

***Determining Fair Value When the Volume andLevel of Activity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly (FSP FAS 157-4)******—***In April 2009, the FASBissued FSP FAS 157-4, which provides additional guidance for estimating fairvalue in accordance with SFAS No. 157, *FairValue Measurements*, when the volume and level of market activity foran asset or liability have significantly decreased.  FSP FAS 157-4 emphasizes that even if therehas been a significant decrease in the volume and level of market activity forthe asset or liability, fair value still represents the exit price in an orderlytransaction between market participants. FSP FAS 157-4 was effective for interim and annual periods ending after June 15,2009.  SPS implemented FSP FAS 157-4 on April 1,2009, and the implementation did not have a material impact on its financialstatements.

 

***Recognition and Presentation ofOther-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2)******—***In April 2009, the FASBissued FSP FAS 115-2 and FAS 124-2, which changes the method for determiningwhether an other-than-temporary impairment exists for debt securities, and alsorequires additional disclosures regarding other-than-temporaryimpairments.  FSP FAS 115-2 and FAS 124-2was effective for interim and annual periods ending after June 15,2009.  SPS implemented FSP FAS 115-2 andFAS 124-2 on April 1, 2009, and the implementation did not have a materialimpact on its financial statements.

 

***Subsequent Events******(SFAS No. 165)*** —In May 2009, the FASB issued SFAS No. 165, which establishes generalstandards of accounting and disclosure for events that occur after the balancesheet date but before financial statements are issued. The accounting guidancecontained in SFAS No. 165 is consistent with the auditing literaturewidely used for accounting and disclosure of subsequent events, however, SFAS No. 165requires an entity to disclose the date through which subsequent events havebeen evaluated.  SFAS No. 165 waseffective for interim and annual periods ending after June 15, 2009.  SPS implemented SFAS No. 165 on April 1,2009, and the implementation did not have a material impact on its financialstatements.

 

***Recently Issued***

 

***Employers’ Disclosures about Postretirement Benefit PlanAssets (FSP FAS 132(R)-1) —***In December 2008, the FASB issued FSP FAS132(R)-1, which amends SFAS No. 132 (revised 2003), *Employers’ Disclosures about Pensions and OtherPostretirement Benefits,*to expand an employer’s requireddisclosures about plan assets of a defined benefit pension or otherpostretirement plan to include investment policies and strategies, majorcategories of plan assets, information regarding fair value measurements, andsignificant concentrations of credit risk. FSP FAS 132(R)-1 is effective for fiscal years ending after Dec. 15,2009.  SPS does not expect the implementation of FSPFAS 132(R)-1 to have a material impact on its financial statements.

 

***Amendments to FASB Interpretation No. 46(R) (SFASNo. 167)*** — In June 2009, the FASB issued SFAS No. 167,which amends the consolidation guidance applicable to variable interestentities. The amendments will significantly affect various elements ofconsolidation guidance under FASB Interpretation No. 46(R), includingguidance for determining whether an entity is a variable interest entity andwhether an enterprise is a variable interest entity’s primary beneficiary.  SFAS No. 167 is effective for fiscalyears beginning after Nov. 15, 2009. SPS is currently evaluating the impact of SFAS No. 167 on itsfinancial statements.

 

***The FASB Accounting Standards Codificationand the Hierarchy of Generally Accepted Accounting Principles — a replacementof FASB Statement No. 162 (SFAS No. 168)*** — In June 2009,the FASB issued SFAS No. 168, which confirms that the FASB AccountingStandards Codification (Codification) will become the single source ofauthoritative GAAP, other than the guidance put forth by the SEC.  All other accounting literature not includedin the Codification will be considered non-authoritative. SFAS No. 168 iseffective for interim and annual periods ending after Sept. 15, 2009. SPSexpects the implementation of SFAS No. 168 to have no impact on itsfinancial statements.

 

7

----

Table of Contents

 

**3.   Selected Balance Sheet Data**

 
| **(Thousands of Dollars)**    | ** ** | **June 30, 2009** | ** ** | **Dec. 31, 2008** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Accounts receivable, net**            |       |                        |       |                        |       |
| Accounts receivable                     |       | $                           | 61,536     |                        | $          | 67,706 |   |
| Less allowance for bad debts            |       | (4,504                      | )          | (4,688                      | )          |
|                                    |       | $                           | 57,032     |                        | $          | 63,018 |   |
|                                    |       |                        |       |                        |       |
| **Inventories**                         |       |                        |       |                        |       |
| Materials and supplies                  |       | $                           | 16,958     |                        | $          | 15,422 |   |
| Fuel                                    |       | 3,605                       |       | 31,660                      |       |
|                                    |       | $                           | 20,563     |                        | $          | 47,082 |   |
|                                    |       |                        |       |                        |       |
| **Property, plant and equipment,  net** |       |                        |       |                        |       |
| Electric plant                          |       | $                           | 3,701,242  |                        | $          | 3,594,885 |   |
| Construction work in progress           |       | 79,772                      |       | 102,508                     |       |
| Total property, plant and equipment     |       | 3,781,014                   |       | 3,697,393                   |       |
| Less accumulated depreciation           |       | (1,594,474                  | )          | (1,555,757                  | )          |
|                                    |       | $                           | 2,186,540  |                        | $          | 2,141,636 |   |

 

**4.     Income Taxes**

 

***Accounting for Uncertainty in Income Taxes— an interpretation of FASB Statement No. 109 (FIN 48)*******— SPS is a member of the Xcel Energyaffiliated group that files consolidated income tax returns.

 

***Federal Audit —***Inthe first quarter of 2008, the Internal Revenue Service (IRS) completed anexamination of Xcel Energy’s federal income tax returns for 2004 and 2005 (andresearch credits for 2003). The IRS did not propose any material adjustmentsfor those tax years. Tax year 2004 is the earliest open year and the statute oflimitations applicable to Xcel Energy’s 2004 federal income tax return remainsopen until Dec. 31, 2009.  In thethird quarter of 2008, the IRS commenced an examination of tax years 2006 and2007. As of June 30, 2009, the IRS had not proposed any materialadjustments to tax years 2006 and 2007.

 

***State Audits —*** In the firstquarter of 2008, the state of Texas concluded an income tax audit through taxyear 2005.  No material adjustments were proposed for this audit. As of June 30,2009, SPS’ earliest open tax year for which an audit can be initiated by statetaxing authorities under applicable statutes of limitations is 2004. Therecurrently are no state income tax audits in progress.

 

***Unrecognized Tax Benefits******—***The amount of unrecognized tax benefitswas $3.7 million and $3.5 million on June 30, 2009 and Dec. 31,2008, respectively. The unrecognized tax benefit amounts were increased by apayable associated with net operating loss (NOL) and tax credit carryovers of$0.8 million on June 30, 2009.  Thetax benefits associated with NOL and tax credit carryovers were not material asof Dec. 31, 2008.

 

The unrecognized taxbenefit balance included $0.3 million of tax positions on both June 30,2009 and Dec. 31, 2008, which if recognized would affect the annualeffective tax rate. In addition, the unrecognized tax benefit balance included$3.4 million and $3.2 million of tax positions on June 30, 2009 and Dec. 31,2008, respectively, for which the ultimate deductibility is highly certain butfor which there is uncertainty about the timing of such deductibility. A changein the period of deductibility would not affect the effective tax rate butwould accelerate the payment of cash to the taxing authority to an earlierperiod.

 

The decrease in theunrecognized tax benefit balance was not material from April 1, 2009 to June 30,2009.  SPS’ amount of unrecognized taxbenefits could significantly change in the next 12 months as the IRS auditprogresses and when state audits resume. At this time, due to the uncertainnature of the audit process, it is not reasonably possible to estimate anoverall range of possible change.

 

The amount of interest expense related to unrecognizedtax benefits reported within interest charges in the second quarter of 2009 and2008 was not material. The liability for interest related to unrecognized taxbenefits was $0.3 million on both June 30, 2009 and Dec. 31, 2008.

 

No amounts were accrued for penalties as of June 30,2009 and Dec. 31, 2008.

 

8

----

Table of Contents

 

**5.     Rate Matters**

 

Except to the extent noted below, the circumstancesset forth in Note 13 to the financial statements included in SPS’ Annual Reporton Form 10-K for the year ended Dec. 31, 2008 appropriatelyrepresent, in all material respects, the current status of other rate matters,and are incorporated herein by reference. The following disclosure includesunresolved proceedings that are material to SPS’ financial position.

 

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

** **

**Base Rate**

 

***Texas Retail Base Rate Case —***In June 2008, SPS filed a rate casewith the PUCT seeking an annual rate increase of approximately$61.3 million, or approximately 5.9 percent. Base revenues are proposed to increase by $94.4 million, while fuel andpurchased power revenue would decline by $33.1 million, primarily due to fuelsavings from the Lea Power Partners (LPP) purchase power agreement.

 

Therate filing is based on a 2007 test-year adjusted for known and measurablechanges, a requested ROE of 11.25 percent, an electric rate base of $989.4million and an equity ratio of 51.0 percent. Interim rates of $18 million for costs associated with the LPP powerpurchase agreement went into effect in September 2008.

 

In January 2009, a settlement agreement was reached with various intervenors,which provided for a base rate increase of $57.4 million, a reduceddepreciation expense of $5.6 million, allowed SPS to implement the transmissionrider in 2009 and precludes SPS from filing to seek any other change in baserates until Feb. 15, 2010.  In January 2009,an administrative law judge (ALJ) approved interim rates effective Feb. 1,2009.

 

On June 2, 2009, thePUCT issued its order approving the settlement.

 

***John Deere Wind Complaint —*** In June 2007, severalJohn Deere Wind Energy subsidiaries (JD Wind) filed a complaint against SPSdisputing SPS’ payments to JD Wind for energy produced from the JD Windprojects.  SPS responded that thepayments to JD Wind for energy produced from its qualifying facility (QF) areappropriate and in accordance with SPS’ filed tariffs with the PUCT.  On March 25, 2009, the ALJ issued aproposal for decision, which recommends that SPS payment methodology to JD Windis proper and that JD Wind’s complaint be denied.    On May 1, 2009 the PUCT issued a finalorder denying JD Wind’s request for relief against SPS.  On June 25, 2009 JD Wind filed apetition for review of the final order in Texas District Court.  On July 9, 2009, SPS intervened to defend thePUCT’s order denying JD Wind’s requested relief.

 

***Texas Jurisdictional Fuel AllocationMethodology —*** On May 28, 2009, SPS filed an application torevise the calculation of Texas retail jurisdictional fuel and purchased powerexpense, effective as of the start of the current fuel reconciliation period,which began in January 2008.  SPShas determined that its current method of calculating the monthly amountresults in a material amount of unrecovered fuel and purchased powerexpense.  The application seeks approvalfor a revised methodology, which matches the fuel and purchased power expensesin a month with the fuel factor revenue received from each kilowatt-hour usedthat month.  For the period January 2008through June 2009, the revised methodology would increase the amount ofTexas retail jurisdictional fuel and purchased power cost to be recovered fromcustomers by approximately $5.0 million.

 

ThePUCT has referred this case to the State Office of Administrative Hearings(SOAH) for a contested case hearing.  Noprocedural schedule has yet been established.

 

***Texas Transmission Cost Recovery Factor(TCRF)******—*** On June 22, 2009, SPS filed a request toimplement a TCRF with proposed revenues of $7.4 million annually.  The TCRF filing is based on changes intransmission investment for the period of Jan. 1, 2008 through April 30,2009 and increases in FERC approved transmission costs for 2008.  The PUCT implemented rules in late 2007allowing utilities to request a TCRF in between rate cases for costs of newtransmission investment and FERC approved transmission costs.  This is SPS’ first filing under thatrule.  SPS anticipates the PUCT to issuean order with rates effective by the end of 2009.  On July 20, 2009, the PUCT referred thiscase to the SOAH for a contested case proceeding.  A prehearing conference was scheduled for July 30,2009 to establish a procedural schedule.

 

9

----

Table of Contents

 

***Pending and RecentlyConcluded Regulatory Proceedings — New Mexico Public Regulation Commission(NMPRC)***

 

**Base Rate**

 

***2008 New Mexico Retail Electric Rate Case —*******In December 2008, SPSfiled with the NMPRC a request to increase electric rates in New Mexico byapproximately $24.6 million, or 6.2 percent. The request is based on a historictest-year (split year based on the year-ending June 30, 2008), an electricrate base of $321 million, and an equity ratio of 50.0 percent and a requestedROE of 12.0 percent.  SPS also requestedinterim rates of $7.6 million per year to recover capacity costs of the LeaPower facility, which became operational in September 2008.

 

OnMarch 26, 2009, the NMPRC approved a partial stipulated settlement betweenthe parties that allows SPS to recover approximately $5.7 million of interimrates, effective May 1, 2009, through an LPP cost rider until the finalrates from the remainder of the case are effective.

 

OnMay 28, 2009, the parties filed an uncontested stipulation that resolvesall issues in the case.  Under thestipulation, SPS receives a base rate increase of $14.2 million, effective July 1,2009.  SPS has agreed that Dec. 1,2010 is the earliest date it will file its next base rate case, subject to aforce majeure provision triggered by additional environmental compliance costs.

 

OnJuly 14, 2009, the NMPRC issued an order approving the stipulation if theparties accept revisions requiring SPS to fund audits of its fuel and purchasedpower costs and its renewable energy certificate (REC) transactions, with SPSbeing able to recover the costs of the audits in rates and requiring SPS toprovide the NMPRC with notice about certain REC prices.  Under the order, the NMPRC’s approval becomeseffective automatically, without the need for a further NMPRC order, when theparties make their filing accepting the revisions or stating they do not opposethe revisions.   On July 15, 2009,SPS filed an amendment to the stipulation that stated SPS’ acceptance of therevisions and stating that the NMPRC staff and all intervenors accept or do notoppose the revisions.  SPS implementedthe new rates on July 15, 2009.

 

***Pending and RecentlyConcluded Regulatory 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 for wholesale service were excessive and that SPS hadincorrectly calculated monthly fuel cost adjustment charges to such customers(the Complaint). Among other things, the complainants asserted that SPS hadinappropriately allocated average fuel and purchased power costs to otherwholesale customers, effectively raising the fuel cost charges to thecomplainants. Cap Rock Energy Corporation (Cap Rock), another full-requirementscustomer of SPS, Public Service Company of New Mexico (PNM) and OccidentalPermian Ltd. and Occidental Power Marketing, L.P. (Occidental), SPS’largest retail customer, intervened in the proceeding.

 

InMay 2006, a FERC ALJ issued an initial decision in the proceeding. The ALJfound that SPS should recalculate its fuel and purchased economic energy costadjustment clause (FCAC) billings for the period beginning Jan. 1, 1999,to reduce the fuel and purchased power costs recovered from the complainingcustomers by deducting the incremental fuel costs attributed to SPS’ sales ofcapacity and energy to other wholesale customers served under market-basedrates during this period based on the view that such sales should be treated asopportunity sales made out of temporarily excess capacity. In addition, the ALJmade recommendations on a number of base rate issues including a9.64 percent ROE.

 

***Golden Spread Complaint Settlement***  ***—***In December 2007, SPS reached asettlement with Golden Spread (which now includes Lyntegar Electric) andOccidental regarding base rate and fuel issues raised in the complaintdescribed above as well as a subsequent rate proceeding.  In December 2007, this comprehensiveoffer of settlement (the Settlement) was filed with the FERC.  On April 21, 2008, the FERC approved theSettlement, which resolved all issues that were the subject of the Complaint;implemented a formula rate and extended the term of its partial requirementssale to Golden Spread beginning 2012 at 500 MW and ramping down to 200 MW atthe end of the new term in 2019.  TheSettlement made the extended purchase contingent on certain stateapprovals.  Golden Spread agreed to holdSPS harmless from any future adverse regulatory treatment regarding theproposed sale and SPS agreed to contingent payments ranging from$3 million to a maximum of $12 million, payable in 2012, in the eventthat there is an adverse cost assignment decision or a failure to obtain stateapprovals. The NMPRC ALJ has recommended approval of the replacement poweragreement.  SPS’ applications before theNMPRC and the PUCT are currently pending.

 

10

----

Table of Contents

 

***Order on Wholesale Rate Complaints******—***In April 2008,the FERC issued its Order on the Complaint applied to the remainingnon-settling parties.  The Order addressesbase 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 FERCdetermined: (1) the ROE should be 9.33 percent; (2) rates should bebased on a 12 CP allocator; and (3) the treatment of market based ratecontracts in the test-year should be to credit revenues to the cost of servicerather than allocating costs to the agreements. The revenue requirementestablished by the FERC results in proposed revenues that are estimated to beapproximately $25 million, or approximately $6.9 million below the levelcharged to these customers during this 18-month period. Rates for fullrequirements customers, the New Mexico Cooperatives and Cap Rock, as well as aninterruptible contract with PNM for the period beginning July 1, 2006, arethe subject of settlements that have either been approved or are pending beforethe FERC.

 

·                     **Fuel Clause**:  The FERCdetermined that the method for calculating fuel and purchased energy costcharges to the complaining customer is to deduct from such costs incrementalfuel and purchased energy costs, which it is attributing to SPS’ market basedintersystem sales on the basis that these are “opportunity” sales under itsprecedent.  The FERC ordered that refundsof fuel cost charges based on this method of determining the FCAC should beginas of Jan. 1, 2005 (the refund effective date in the case).  The FERC ordered SPS to file a compliancefiling calculating its refund obligation and implement the instructions in theorder in calculating its FCAC charges going forward from that date.  While the order is subject to interpretationwith respect to aspects of the calculation of the refund obligation, SPS doesnot expect its refund obligation to its full requirements customers from Jan. 1,2005 through March 31, 2008, to exceed $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 also ruled on two other FCAissues.  First, it required that windcontracts be evaluated on an individual contract basis rather than inaggregate.  Second, the FERC determinedthat an after-the-fact screen should be applied to all QF purchases todetermine if they are economic.  Whilethis review will require additional effort, it is not expected that this willresult in additional refunds as all of the individual wind contracts as well asthe QF purchases are typically economic when compared to market energy prices.

 

Severalparties, including SPS, filed requests for rehearing on the order.  These requests are pending before theFERC.  In July 2008, SPS submittedits compliance report to the FERC.  Inthe report, SPS has calculated the base rate refund for the 18-month period tobe equal to $6.1 million and the fuel refund to be equal to $4.4 million.  Several wholesale customers have protestedthe calculations.  Once the final refundamounts are approved by the FERC, interest will be added to the refund due tothe full requirements customers.  As of June 30,2009, SPS has accrued an amount sufficient to cover the estimated refundobligation.

 

OnJune 5, 2009, SPS, the New Mexico Cooperatives and Cap Rock filed a letterwith FERC indicating that the parties had reached an agreement in principleregarding this matter and asked that the FERC not issue an order uponreconsideration to allow the parties an opportunity to formalize the Settlementand file it with the NMPRC.  SPS, the NewMexico Cooperatives and Cap Rock are now finalizing the settlementdocuments.  The FERC, after receivingcomments from interested parties, is expected to consider the proposedsettlement.  With this settlement, SPSwill have settled with all of the complainants in the case.

 

***SPS 2008 Wholesale RateCase —***In March 2008, SPSfiled a wholesale rate case seeking an annual revenue increase of $14.9 millionor an overall 5.14 percent increase, based on12.20 percent requested ROE. Four NewMexico Cooperatives filed a motion for dismissal and protest in April 2008.

 

On May 30, 2008, theFERC conditionally accepted and suspended the rates and established hearing andsettlement procedures.  The FERC granteda one-day suspension of rates instead of 180 days.  Lea Power achieved commercial operations in September 2008and the proposed base rates of $9.9 million, based on a 10.25 percent ROE and a12 CP demand allocator, became effective, subject to refund.

 

The parties reached asettlement in principle, and an uncontested settlement was filed with the FERCon April 23, 2009.  As a result ofthe settlement, SPS will receive an annual revenue increase of approximately$9.6 million or an overall percentage increase of 3.3 percent. SPS expects theFERC to approve the uncontested settlement.

 

***SPS 2008 Transmission Formula Rate Case —***In December 2007,Xcel Energy submitted an application to implement a transmission formula ratefor the SPS zone of the Xcel Energy Open Access Transmission Tariff (OATT). Thechanged rates will affect all wholesale transmission service customers usingthe SPS transmission network under either the Southwest Power Pool, Inc.(SPP) Regional OATT or the Xcel Energy OATT.

 

11

----

Table of Contents

 

Asfiled, SPS’ transmission 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 ROE was 12.7 percent, including a 50 basis point adder for SPS’participation in the SPP Regional Transmission Organization (RTO). The proposedrates would provide first year incremental annual transmission revenue for SPSof approximately $5.5 million. In February 2008, the FERC acceptedthe proposed rates, suspending the effective date to July 6, 2008, andsetting the rate filing for hearings and settlement procedures. The FERCgranted a 50 basis point adder to the ROE that it will determine in thisproceeding as a result of SPS’ participation in the SPP RTO. The filed rates,updated for 2007 actual costs and projected 2008 transmission plant additions,were placed into effect on July 6, 2008, subject to refund.

 

On July 1, 2009, SPSand the parties notified the ALJ that a settlement in principle had beenreached on all issues except the ratemaking and rate design treatment ofcertain radial transmission lines under the SPP Regional OATT.  The settlement terms are not yet public.  The radial line issue remains in settlementdiscussions; if the parties do not reach a settlement in principle by Sept. 4,2009, SPS expects the issue to be set for litigated proceedings.  The outcome of the litigation is not expectedto have a material impact on SPS.

 

**6.     Commitmentsand Contingent Liabilities**

** **

Except to the extent noted below, the circumstances set forth in Notes13 and 14 to the financial statements in SPS’ Annual Report on Form 10-Kfor the year ended Dec. 31, 2008 and Note 5 to the financial statements inthis Quarterly Report on Form 10-Q, appropriately represent, in allmaterial respects, the current status of commitments and contingent liabilitiesand are incorporated herein by reference. The following include unresolvedcontingencies that are material to SPS’ financial position.

 

## **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 (PRPs) 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 recovered throughthe options listed above, SPS would be required to recognize an expense.

 

***Site Remediation****—*SPS must pay all or a portion of the costto remediate sites where past activities of SPS or other parties have causedenvironmental contamination.  Environmentalcontingencies could arise from various situations, including third party sites,to which SPS is alleged to be a PRP that sent hazardous materials andwastes.  At June 30, 2009, theliability for the cost of remediating these sites was estimated to be $0.1million.

 

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

 

***Asbestos Removal*****—**Some of SPS’ facilities containasbestos.  Most asbestos will remainundisturbed until the facilities that contain it are demolished orrenovated.  SPS has recorded an estimatefor final removal of the asbestos as an asset retirement obligation.  See additional discussion of asset retirementobligations in Note 14 of the SPS Annual Report on Form 10-Kfor the year ended Dec. 31, 2008.  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***

## ** **

***American Clean Energy and Security Act (ACES)****—* On June 26, 2009, the U.S. House of Representatives passedACES.  Key provisions include a federalcap-and-trade program to reduce greenhouse gas (GHG) emissions by 17 percent by2020 and 83 percent by 2050 compared to 2005 levels, a national renewableenergy standard, investments in new clean energy technologies and energyefficiency, and mandates for new energy-saving standards.  The U.S. Senate has delayed consideration ofACES until September 2009, during which time the bill could changeconsiderably.  The ultimate impact of thebill on SPS therefore remains uncertain.

 

12

----

Table of Contents

 

***Environmental Protection Agency (EPA) Proposed GHG Endangerment Finding***— On April 17, 2009, the EPA issued a proposed finding that GHGsthreaten public health and welfare.  Thisfinding was in response to the U.S. Supreme Court’s decision in *Massachusetts v. EPA*, 549 U.S. 497 (2007),which held that GHGs are pollutants covered by the Clean Air Act (CAA) andrequired the EPA to determine whether emissions of GHGs from motor vehiclesendanger public health or welfare.  TheEPA’s proposed endangerment finding applies to the CAA’s mobile source program,and does not automatically trigger regulation under other provisions of the CAAthat are applicable to stationary sources, such as power plants.  As such, the proposed endangerment finding,in and of itself, does not impact SPS.

 

***Clean Air Interstate Rule (CAIR)*********—******In March 2005,the EPA issuedthe CAIR to further regulate sulfur dioxide (SO2) and nitrogenoxide (NOx) emissions.  The objective ofCAIR was to cap emissions of SO2 and NOx in the eastern United States,including Texas.  In July 2008,the U. S. Court of Appeals for the District of Columbia vacated CAIR andremanded the rule to EPA.  On Dec. 23,2008, the court reinstated CAIR while the EPA develops new regulations inaccordance with the court’s July opinion.

 

As currently written, CAIR has a two-phase complianceschedule, beginning in 2009 for NOx and 2010 for SO2,with a final compliance deadline in 2015 for both emissions. Under CAIR, eachaffected state will be allocated an emissions budget for SO2 and NOx thatwill result in significant emission reductions. It will be based on stringentemission controls and forms the basis for a cap-and-trade program. State emissionbudgets or caps decline over time. States can choose to implement an emissionsreduction program based on the EPA’s proposed model program, or they canpropose another method, which the EPA would need to approve.

 

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.   The remainingcapital investments for NOx controls in the SPS region are estimated at $4.5million. For 2009, the estimated NOx allowance compliance costs are $1.4million to $2.0 million. Annual purchases of SO2 allowances are estimated in therange of $1.7 million to $7.7 million each year, beginning in 2013,for phase I.

 

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

 

***Clean Air Mercury Rule (CAMR)***— In March 2005,the EPA issued the CAMR, which regulated mercury emissions from power plants.The Texas Commission on Environmental Quality (TCEQ) has adopted byreference the EPA model program.  In February 2008,the U.S. Court of Appeals for the District of Columbia vacated CAMR, whichimpacts federal CAMR requirements but not necessarily state-only rules.  At this time, Texas has not adopted any state-only mercury requirements.

 

***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 had determined that facilities mayuse CAIR as a substitute for BART for NOx and SO2.

 

**Legal Contingencies**

** **

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

 

**Environmental Litigation**

** **

***Carbon Dioxide (CO******2******) Emissions Lawsuit —***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, the parentcompany of SPS, to force reductions in CO2 emissions.The other utilities include American Electric Power Co.,Southern Co., Cinergy Corp. and Tennessee Valley Authority. The lawsuitsallege that CO2 emitted by each company is a public nuisanceas defined under state and federal common law because it has contributed toglobal warming. The lawsuits do not demand monetary damages. Instead, thelawsuits ask the court to order each utility to cap and reduce its CO2 emissions. In October 2004, Xcel Energyand the other defendants filed a motion to dismiss the lawsuit. OnSept. 19, 2005, the court granted the motion to dismiss on constitutionalgrounds. Plaintiffs filed an appeal to the U.S. Court of Appeals for the SecondCircuit. In June 2007, the Court of Appeals issued an order requesting theparties to file a letter brief regarding the impact of the United StatesSupreme Court’s decision in *Massachusetts v.EPA*, 127 S.Ct. 1438 (April 2, 2007) on the issues raised by theparties on appeal. Among other things, in its decision in *Massachusetts v. EPA*, the United StatesSupreme Court held that CO2 emissions are a “pollutant”subject to regulation by 

 

13

----

Table of Contents

 

theEPA under the CAA. In July 2007, in response to the request of the Courtof Appeals, the defendant utilities filed a letter brief stating the positionthat the United States Supreme Court’s decision supports the arguments raisedby the utilities on appeal. The Court of Appeals has taken the matter underadvisement and is expected to issue an opinion in due course.

 

***Comer vs. Xcel Energy Inc. etal. —***In April 2006, Xcel Energy, the parent companyof SPS, received notice of a purported class action lawsuit filed in U.S.District Court in the Southern District of Mississippi. The lawsuit names morethan 45 oil, chemical and utility companies, including Xcel Energy, asdefendants and alleges that defendants’ CO2 emissions “werea proximate and direct cause of the increase in the destructive capacity ofHurricane Katrina.” Plaintiffs allege in support of their claim, several legaltheories, including negligence and public and private nuisance and seek damagesrelated to the loss resulting from the hurricane. Xcel Energy believes thislawsuit is without merit and intends to vigorously defend itself against theseclaims. In August 2007, the court dismissed the lawsuit in its entiretyagainst all defendants on constitutional grounds. In September 2007,plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the FifthCircuit. Oral arguments were presented to the Court of Appeals on Aug. 6,2008. Pursuant to the court’s order of Sept. 26, 2008, re-argument washeld on Nov. 3, 2008. No explanation was given for the order. The Court ofAppeals has taken the matter under advisement.

 

***Native Village of Kivalina vs. XcelEnergy Inc. et al. —***In February 2008, theCity and Native Village of Kivalina, Alaska, filed a lawsuit in U.S. DistrictCourt for the Northern District of California against Xcel Energy, the parentcompany of SPS, and 23 other utilities, oil, gas and coal companies. The suitwas brought on behalf of approximately 400 native Alaskans, the Inupiat Eskimo,who claim that defendants’ emission of CO2 and otherGHGs contribute to global warming, which is harming their village. Plaintiffsclaim that as a consequence, the entire village must be relocated at a cost ofbetween $95 million and $400 million. Plaintiffs assert a nuisanceclaim under federal and state common law, as well as a claim asserting “concertof action” in which defendants are alleged to have engaged in tortious acts inconcert with each other. Xcel Energy was not named in the civil conspiracyclaim. Xcel Energy believes the claims asserted in this lawsuit are withoutmerit and joined with other utility defendants in filing a motion to dismiss onJune 30, 2008. The matter has now been fully briefed.  It is uncertain when the court will render adecision.

 

***Lamb County Electric Cooperative (LCEC) —***In 1995, LCECpetitioned the PUCT for a cease and desist order against SPS alleging SPS wasunlawfully providing service to oil field customers in LCEC’s certificatedarea. In May 2003, the PUCT issued an order denying LCEC’s petition basedon its determination that SPS in 1976 was granted a certificate to serve thedisputed customers. LCEC appealed the decision to the Texas state court. In August 2004,the court affirmed the decision of the PUCT. In September 2004, LCECappealed the decision to the Court of Appeals for the Third Supreme JudicialDistrict. In November 2008, the Court of Appeals issued an opinionaffirming the decision in favor of SPS. In December 2008, LCEC filed a petition for review with the SupremeCourt of Texas. On Feb. 27, 2009, the Supreme Court of Texas denied LCEC’srequest for review.

 

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.  Becausethe PUCT May 2003 order has now been affirmed, on June 16, 2009, LCECfiled a motion to dismiss this case.

 

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

 

***Commercial Paper —***At June 30, 2009 and Dec. 31,2008, SPS had no commercial paper outstanding. At June 30, 2009 and Dec. 31, 2008, SPS had board approval toissue up to $250 million of commercial paper.

 

***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 theholding company. SPS has approval to borrow up to $100 million under thearrangement. At Dec. 31, 2008, SPS had money pool loans outstanding of$90.5 million with a weighted average interest rate of 3.48 percent.  At June 30, 2009, SPS had no money poolloans outstanding or money pool borrowings.

 

**8.****    ****DerivativeInstruments**

 

EffectiveJan. 1, 2009, SPS adopted SFAS No. 161, which requires additionaldisclosures regarding why an entity uses derivative instruments, the volume ofan entity’s derivative activities, the fair value amounts recorded to thebalance sheet for derivatives, the gains and losses on derivative instrumentsincluded in the statement of operations or deferred, and information regardingcertain credit-risk-related contingent features in derivative contracts.

 

14

----

Table of Contents

 

SPSmay enter into derivative instruments, including forward contracts, futures,swaps and options, to reduce risk in connection with changes in interest ratesand electric utility commodity prices. See additional information pertaining to the valuation of derivativeinstruments in Note 10 to the financial statements.

 

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

 

AtJune 30, 2009, accumulated other comprehensive losses related to interestrate derivatives included $0.6 million of net losses expected to bereclassified into earnings during the next 12 months as the related hedgedinterest transactions impact earnings.

 

Accumulatedother comprehensive losses related to interest rate derivatives reclassifiedinto earnings during the three and six months ended June 30, 2009 were$0.3 million and $0.5 million, respectively.

 

AtJune 30, 2009, SPS had one unsettled interest rate swap outstanding with anotional amount of $25 million.  Theinterest rate swap is not designated as a hedging instrument, and as such,gains from changes in fair value of $1.3 million and $2.0 million for the threeand six months ended June 30, 2009, respectively, were recorded toearnings.

 

***Commodity Derivatives —***SPS may enterinto derivative instruments to manage variability of future cash flows fromchanges in commodity prices in its electric utility operations.  This could include the purchase or sale ofenergy or energy-related products.  At June 30, 2009 and Dec. 31, 2008, SPS held nocommodity derivatives.  Changes in the fair value of derivative instruments arerecorded in other comprehensive income or deferred as a regulatory asset orliability.  The classification as aregulatory asset or liability is based on the commission approved regulatoryrecovery mechanisms.

 

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

*** ***
| ** **                           | ** ** | **June 30, 2009**                                | ** ** | **Dec. 31, 2008**                                | ** ** |
|--------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **Derivative  Instruments  Valuation -  Assets** | ** ** | **Derivative  Instruments  Valuation -  Liabilities** | ** ** | **Derivative  Instruments  Valuation -  Assets** | ** ** | **Derivative  Instruments  Valuation -  Liabilities** | ** ** |
| Long term purchased power agreements |       | $                                                     | 81,014     |                                                       | $          | 54,037 |   | $ | 85,477 |   | $ | 55,831 |   |
| Interest rate derivatives            |       | —                                                |       | 6,494                                                      |       | — |   | 8,503 |   |
| Total                                |       | $                                                     | 81,014     |                                                       | $          | 60,531 |   | $ | 85,477 |   | $ | 64,334 |   |

 

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.  Asthese purchases are recovered through normal regulatory recovery mechanisms inthe respective jurisdictions, the changes in fair value for these contractswere offset by regulatory assets and liabilities.  During 2006, SPS qualified these contractsunder the normal purchase exception. Based on this qualification, the contracts are no longer adjusted tofair value and the previous carrying value of these contracts will be amortizedover the remaining contract lives along with the offsetting regulatory assetsand liabilities.

 

***Financial Impact of Qualifying Cash FlowHedges —***The impact of qualifying interest rate cash flowhedges on SPS’s accumulated other comprehensive income, included as a componentof common stockholder’s equity, is detailed in the following table:

 
| ** **                                                                           | ** ** | **Three months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| **(Thousands of Dollars)**                                                 | ** ** | **2009**                                       | ** ** | **2008** | ** ** |
| Accumulated other comprehensive loss related to  cash flow hedges at April 1    |       | $                                              | (5,400     | ) | $ | (6,704 | ) |
| After-tax net unrealized gains related to  derivatives accounted for as hedges       |       | —                                         |       | 751 |   |
| After-tax net realized losses on derivative  transactions reclassified into earnings |       | 161                                            |       | 43 |   |
| Accumulated other comprehensive loss related to  cash flow hedges at June 30    |       | $                                              | (5,239     | ) | $ | (5,910 | ) |

 
| ** **                                                                           | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Thousands of Dollars)**                                                 | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| Accumulated other comprehensive loss related to  cash flow hedges at Jan. 1     |       | $                                                 | (5,559     | ) | $ | (6,005 | ) |
| After-tax net unrealized gains related to  derivatives accounted for as hedges       |       | —                                            |       | 9 |   |
| After-tax net realized losses on derivative  transactions reclassified into earnings |       | 320                                               |       | 86 |   |
| Accumulated other comprehensive loss related to  cash flow hedges at June 30    |       | $                                                 | (5,239     | ) | $ | (5,910 | ) |

 

15

----

Table of Contents

 

***CreditRelated Contingent Features*****—** If the credit rating of SPS were downgraded belowinvestment grade, the counterparty to an interest rate swap agreement with SPSwould have the ability to terminate the contract, which at June 30, 2009,would have resulted in the payment of the fair value of the derivativeliability to the counterparty of approximately $6.5 million. There was nocollateral posted on this contract at June 30, 2009.

 

Certain of SPS’s derivative instruments may also besubject to contract provisions that contain adequate assurance clauses. Theseprovisions allow counterparties to seek performance assurance, including cashcollateral, in the event that SPS’s ability to fulfill its contractualobligations is reasonably expected to be impaired. As of June 30, 2009,SPS had no collateral posted related to adequate assurance clauses inderivative contracts.

 

**9.      Financial Instruments**

** **

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

 
| ** **                                | ** ** | **June 30, 2009** | ** ** | **Dec. 31, 2008** | ** ** |
|-------------------------------------------|------------|------------------------|------------|------------------------|------------|
| **(Thousands of Dollars)**      | ** ** | **Carrying  Amount**   | ** ** | **Fair Value**    | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| Other investments                         |       | $                      | 268        |                   | $          | 268 |   | $ | 290 |   | $ | 290 |   |
| Long-term debt, including current portion |       | 922,285                |       | 943,504                |       | 1,022,123 |   | 1,001,703 |   |
|                                           |            |                        |            |                        |            |  |  |  |  |  |  |  |  |

 

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

 

The fair value estimates presented are based oninformation available to management as of June 30, 2009 and Dec. 31,2008. These fair value estimates have not been comprehensively revalued forpurposes of these financial statements since that date and current estimates offair value may differ significantly.

 

***Letters of Credit***— SPS uses letters of credit, generally with terms ofone year, to provide financial guarantees for certain operatingobligations.  At June 30, 2009 and Dec. 31,2008, there were $10.0 million and $11.6 million of letters of creditoutstanding, respectively.  The contractamounts of these letters of credit approximate their fair values and aresubject to fees determined in the marketplace.

 

**10.  Fair Value Measurements**

 

Effective Jan. 1, 2008,SPS adopted *Fair Value Measurements*(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.

 

Cash equivalents recorded tothe balance sheets consist of money market funds.  Money market funds are recorded at cost plusestimated accrued interest to approximate fair value.  Changes in the observed trading prices andliquidity of money market funds are also monitored as additional support fordetermining fair value, and losses are recorded in earnings if fair value fallsbelow recorded cost.

 

SPS uses quoted prices,based primarily on observable benchmark interest rate forecasts, to measure thefair value of interest rate derivatives.

 

16

----

Table of Contents

 

Thefollowing tables present, for each of the SFAS No. 157 hierarchy levels,SPS’s assets and liabilities that are measured at fair value on a recurringbasis:

 
| ** **                           | ** ** | **June 30, 2009** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **Level 1**            | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Net Balance** | ** ** |
| **Assets**                           |       |                        |       |   |   |   |   |   |   |
| Cash equivalents                     |       | $                           | —     |   | $ | 100,500 |   | $ | — |   | $ | 100,500 |   |
| **Liabilities**                      |       |                        |       |   |   |   |   |   |   |
| Interest rate derivatives            |       | —                      |       | 6,494 |   | — |   | 6,494 |   |
|                                      |            |                             |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                           | ** ** | **Dec. 31, 2008** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **Level 1**            | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Net Balance** | ** ** |
| **Assets**                           |       |                        |       |   |   |   |   |   |   |
| Cash equivalents                     |       | $                           | —     |   | $ | 50,000 |   | $ | — |   | $ | 50,000 |   |
| **Liabilities**                      |       |                        |       |   |   |   |   |   |   |
| Interest rate derivatives            |       | —                      |       | 8,503 |   | — |   | 8,503 |   |
|                                      |            |                             |            |  |  |  |  |  |  |  |  |  |  |

 

**11.  Interest and Other (Expenses) Income, Net**

 

Interest and other (expenses) income, net,consisted of the following:

 
| ** **                                      | ** ** | **Three months ended   June 30,** | ** ** | **Six months ended   June 30,** | ** ** |
|-------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Thousands of dollars)**            | ** ** | **2009**                                              | ** ** | **2008**                                            | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                                      | ** ** | ** **                                            | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest (expenses) income                      |       | $                                                     | (89        | )                                                   | $          | 1,207 |   | $ | 192 |   | $ | 2,033 |   |
| Other nonoperating income                       |       | 1                                                     |       | 51                                                  |       | 5 |   | 98 |   |
| Insurance policy (expenses) income              |       | (224                                                  | )          | 109                                                 |       | (144 | ) | 99 |   |
| Other nonoperating expenses                     |       | (11                                                   | )          | —                                              |       | (11 | ) | — |   |
| Total interest and other (expenses) income, net |       | $                                                     | (323       | )                                                   | $          | 1,367 |   | $ | 42 |   | $ | 2,230 |   |

 

**12.****      ****SegmentInformation**

 

SPShas one reportable segment.  SPS operatesin the regulated electric industry, providing wholesale and retail electricservice in the states of Texas and New Mexico. Revenues from external customers were $328.1 million and $537.9 millionfor the three months ended June 30, 2009 and 2008, respectively, and$697.1 million and $956.7 million for the six months ended June 30, 2009and 2008, respectively.

 

**13.****      ****ComprehensiveIncome**

 

The components of totalcomprehensive income are shown below:

 
| ** **                                                                           | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Thousands of Dollars)**                                                 | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income                                                                           |       | $                                               | 16,808     |                                          | $          | 3,970 |   | $ | 25,990 |   | $ | 2,705 |   |
| Other comprehensive income:                                                          |       |                                            |       |                                          |       |   |   |   |   |
| After-tax net unrealized gains related to  derivatives accounted for as hedges       |       | —                                          |       | 751                                           |       | — |   | 9 |   |
| After-tax net realized losses on derivative  transactions reclassified into earnings |       | 161                                             |       | 43                                            |       | 320 |   | 86 |   |
| Other comprehensive income                                                           |       | 161                                             |       | 794                                           |       | 320 |   | 95 |   |
| Comprehensive income                                                                 |       | $                                               | 16,969     |                                          | $          | 4,764 |   | $ | 26,310 |   | $ | 2,800 |   |

 

17

----

Table of Contents

 

**14.  BenefitPlans and Other Postretirement Benefits**

** **

Pension and otherpostretirement benefit disclosures below generally represent Xcel Energyconsolidated information unless specifically identified as being attributableto SPS.

 

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

 
| ** **                                                                                     | ** ** | **Three months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2009**                                            | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **(Thousands of Dollars)**                                                           | ** ** | **Pension Benefits**                           | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                                                   |       | $                                                   | 16,744     |   | $ | 14,929 |   | $ | 1,057 |   | $ | 1,211 |   |
| Interest cost                                                                                  |       | 43,046                                              |       | 44,677 |   | 13,050 |   | 12,894 |   |
| Expected return on plan assets                                                                 |       | (64,909                                             | )          | (68,697 | ) | (5,993 | ) | (8,425 | ) |
| Amortization of transition obligation                                                          |       | —                                              |       | — |   | 3,726 |   | 3,644 |   |
| Amortization of prior service cost (credit)                                                    |       | 6,154                                               |       | 5,166 |   | (711 | ) | (544 | ) |
| Amortization of net loss                                                                       |       | 3,299                                               |       | 3,511 |   | 4,779 |   | 3,031 |   |
| Net periodic benefit cost (credit)                                                             |       | 4,334                                               |       | (414 | ) | 15,908 |   | 11,811 |   |
| (Cost) credits not recognized and additional cost  recognized due to the effects of regulation |       | (959                                                | )          | 1,925 |   | 973 |   | 973 |   |
| Net benefit cost recognized for financial  reporting                                           |       | $                                                   | 3,375      |   | $ | 1,511 |   | $ | 16,881 |   | $ | 12,784 |   |
| **SPS**                                                                                        |       |                                                |       |   |   |   |   |   |   |
| Net benefit (credit) cost recognized for financial  reporting                                  |       | $                                                   | (1,544     | ) | $ | (2,486 | ) | $ | 1,309 |   | $ | 866 |   |

 
| ** **                                                                                     | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2009**                                          | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **(Thousands of Dollars)**                                                           | ** ** | **Pension Benefits**                         | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                                                   |       | $                                                 | 32,730     |   | $ | 31,702 |   | $ | 2,333 |   | $ | 2,675 |   |
| Interest cost                                                                                  |       | 84,895                                            |       | 85,260 |   | 25,206 |   | 25,440 |   |
| Expected return on plan assets                                                                 |       | (128,269                                          | )          | (137,169 | ) | (11,388 | ) | (15,925 | ) |
| Amortization of transition obligation                                                          |       | —                                            |       | — |   | 7,222 |   | 7,288 |   |
| Amortization of prior service cost (credit)                                                    |       | 12,309                                            |       | 10,332 |   | (1,363 | ) | (1,088 | ) |
| Amortization of net loss                                                                       |       | 6,228                                             |       | 6,370 |   | 9,665 |   | 5,749 |   |
| Net periodic benefit cost (credit)                                                             |       | 7,893                                             |       | (3,505 | ) | 31,675 |   | 24,139 |   |
| (Cost) credits not recognized and additional cost  recognized due to the effects of regulation |       | (1,446                                            | )          | 4,517 |   | 1,946 |   | 1,946 |   |
| Net benefit cost recognized for financial  reporting                                           |       | $                                                 | 6,447      |   | $ | 1,012 |   | $ | 33,621 |   | $ | 26,085 |   |
| **SPS**                                                                                        |       |                                              |       |   |   |   |   |   |   |
| Net benefit (credit) cost recognized for financial  reporting                                  |       | $                                                 | (3,322     | ) | $ | (5,240 | ) | $ | 2,500 |   | $ | 1,741 |   |

 

**Item 2.    MANAGEMENT’SDISCUSSION AND ANALYSIS OF 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 of theresults of operations set forth in general instructions H (2) (a) of Form 10-Qfor wholly owned subsidiaries (reduced disclosure format).

 

18

----

Table of Contents

 

**Forward-LookingInformation**

 

The following discussion andanalysis by management focuses on those factors that had a material effect onSPS’ financial condition, results of operations, and cash flows during theperiods presented, or are expected to have a material impact in the future. Itshould be read in conjunction with the accompanying unaudited financialstatements and the related notes to the financial statements.  Due to the seasonality of SPS’ electricsales, such interim results are not necessarily an appropriate base from whichto project annual results.  Except forthe historical statements contained in this report, the matters discussed inthe following discussion and analysis are forward-looking statements that aresubject to certain risks, uncertainties and assumptions. Such forward-lookingstatements are intended to be identified in this document by the words “anticipate,”“believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,”“project,” “possible,” “potential,” “should” and similar expressions. Actualresults may vary materially. Forward-looking statements speak only as of thedate they are made, and we do not undertake any obligation to update them toreflect changes that occur after that date. Factors that could cause actual resultsto differ materially include, but are not limited to: general economicconditions, including the availability of credit and its impact on capitalexpenditures and the ability of SPS to obtain financing on favorable terms;business conditions in the energy industry; actions of credit rating agencies;competitive factors, including the extent and timing of the entry of additionalcompetition in the markets served by SPS; unusual weather; effects ofgeopolitical events, including war and acts of terrorism; state, federal andforeign legislative and regulatory initiatives that affect cost and investmentrecovery, have an impact on rates or have an impact on asset operation orownership or impose environmental compliance conditions; structures that affectthe speed and degree to which competition enters the electric market; costs andother effects of legal and administrative proceedings, settlements,investigations and claims; 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, 2008 and Exhibit 99.01 to this report on Form 10-Qfor the quarter ended June 30, 2009.

 

**Market Risks**

 

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, 2008.  Commodity price and interest rate risks forSPS are mitigated in most jurisdictions due to cost-based rate regulation.

 

Continued distress in thefinancial markets may impact the fair value of the debt and equity securitiesin pension and postretirement health care plan trusts, as well as SPS’s abilityto earn a return on short-term investments of excess cash.  As of June 30, 2009, there have been nomaterial changes to market risks from that set forth in SPS’ Annual Report on Form 10-Kfor the year ended Dec. 31, 2008.

 

## **Resultsof Operations**

## ** **

SPS’ net income wasapproximately $26.0 million for the first six months of 2009, compared with netincome of approximately $2.7 million for the first six months of 2008.

 

**ElectricRevenues and Margin**

 

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

 

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

 
| ** **                          | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------|------------|------------------------------------|------------|
| **(Millions of Dollars)** | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| Electric revenues                   |       | $                                  | 697        |   | $ | 957 |   |
| Electric fuel and purchased power   |       | (444                               | )          | (748 | ) |
| Electric margin                     |       | $                                  | 253        |   | $ | 209 |   |

 

19

----

Table of Contents

 

The following summarizes thecomponents of the changes in electric revenues and electric margin for the sixmonths ended June 30:

 

***Electric Revenues***

 
| **(Millions of Dollars)**           | ** ** | **2009 vs. 2008** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| Fuel and purchased power cost recovery        |       | $                           | (335       | ) |
| Retail rate increases (Texas and New Mexico)  |       | 21                          |       |
| 2008 fuel cost allocation regulatory accruals |       | 12                          |       |
| Firm wholesale                                |       | 9                           |       |
| Transmission revenues                         |       | 6                           |       |
| Other, net                                    |       | 27                          |       |
| Total decrease in electric revenues           |       | $                           | (260       | ) |

 

##### ***Electric Margin***

 
| **(Millions of Dollars)**           | ** ** | **2009 vs. 2008** | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| Retail rate increases (Texas and New Mexico)  |       | $                           | 21         |   |
| 2008 fuel cost allocation regulatory accruals |       | 12                          |       |
| Firm wholesale                                |       | 9                           |       |
| Fuel and purchased power cost recovery        |       | 9                           |       |
| Transmission revenues                         |       | 6                           |       |
| Purchased capacity costs                      |       | (22                         | )          |
| Other, net                                    |       | 9                           |       |
| Total increase in electric margin             |       | $                           | 44         |   |

 

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

## ** **

***Other Operating andMaintenance Expenses****—*Other operating and maintenance expenses for the firstsix months of 2009 increased $2.4 million, or 2.3 percent, compared to firstsix months of 2008.  The followingsummarizes the components of the changes for the six months ended June 30:

 
| **(Millions of Dollars)**                         | ** ** | **2009 vs. 2008** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|
| Higher employee benefit costs                               |       | $                           | 4          |   |
| Higher plant generation costs                               |       | 1                           |       |
| Lower consulting costs                                      |       | (1                          | )          |
| Lower material costs                                        |       | (1                          | )          |
| Other, net                                                  |       | (1                          | )          |
| Total increase in other operating and maintenance  expenses |       | $                           | 2          |   |

 

***Allowance for Funds Used During Construction, Debt andEquity (AFDC)***—AFDC is a non-cash amount capitalized as a part of construction costsrepresenting the cost of financing the construction.  Generally, these costs are recovered fromcustomers, in future rates, as the related property is depreciated.  AFDC increased by approximately $2.3 millionfor the first six months of 2009 compared with 2008.  This increase was due to the debt to equitysplit that began in January of 2009.

 

***Demand Side Management (DSM)****—*The DSM expenses for the first six months of 2009 decreased byapproximately $1.7 million, or 29.8 percent, compared with 2008.  This decrease was due to the settlement ofthe Texas rate case in 2009 which extended the amortization period from 4 yearsto 10 years.

 

***Interest Charges***— Interest charges for the first six months of 2009 increasedby approximately $6.2 million, or 22.6 percent, compared with 2008. Theincrease was primarily due to increased long-term debt levels necessary torepay short-term borrowings and to fund capital investments.

 

***Income Taxes***— Income tax expense increased by $12.7 million forthe first six months of 2009 compared with 2008. The increase in income taxexpense was primarily due to an increase in pretax income. The effective taxrate was 36.3 percent for the first six months of 2009, compared with 43.9 percentfor the same period in 2008. The lower effective tax rate for the firstsix months of 2009 was primarily due to a lower forecasted annual effective taxrate for 2009 as compared to 2008.

 

20

----

Table of Contents

 

**PublicUtility Regulation**

** **

***New Mexico Energy Efficiency Disincentive Rulemaking*******—** During the last legislativesession, increased energy efficiency goals and more affirmative disincentivelanguage were adopted.  The NMPRC iscurrently conducting a rulemaking proceeding to update the energy efficiencyrule, consistent with the legislative changes. The NMPRC heldan evidentiary hearing on the rule on June 26, 2009.  It is likely that the NMPRC will act on theproposed rule late in the third quarter or early in the fourth quarter of2009.

 

## **Summaryof Recent Federal Regulatory Developments**

## ** **

TheFERC has jurisdiction over rates for electric transmission service ininterstate commerce and electricity sold at wholesale, accounting practices andcertain other activities of SPS, including enforcement of North AmericanElectric Reliability Corporation (NERC) mandatory electric reliabilitystandards. State and local agencies have jurisdiction over many of SPS’activities, including regulation of retail rates and environmental matters. See additionaldiscussion in the summary of recent federal regulatory developments and publicutility regulation sections of the SPS Annual Report on Form 10-K for theyear ended Dec. 31, 2008.  Inaddition to the matters discussed below, see Note 5 to the financialstatements for a discussion of other regulatory matters.

 

***Compliance with NERC Protective Maintenance Standards***********—**In 2008, SPS filedself-reports with the SPP, the NERC Regional Entity for the SPS system,relating to failure to complete certain generation station battery tests, relaymaintenance intervals and certain critical infrastructure protectionstandards.  SPS expects that penaltiesmay be assessed by SPP in conjunction with some of the self-reports. Thepenalties are not expected to be material.

 

**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 (Exchange Act) is recorded, processed, summarized andreported within the time periods specified in SEC rules and forms. Inaddition, the disclosure controls and procedures include, without limitation,controls and procedures designed to ensure that information required to bedisclosed by us in reports under the Exchange Act is accumulated andcommunicated to management, including the chief executive officer (CEO) andchief financial officer (CFO), allowing timely decisions regarding requireddisclosure. As of the end of the period covered by this report, based on anevaluation carried out under the supervision and with the participation of SPS’management, including the CEO and CFO, of the effectiveness of our disclosurecontrols and procedures, the CEO and CFO have concluded that SPS’ disclosurecontrols and procedures were effective.

 

**Internal Control Over FinancialReporting**

** **

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

 

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

#### ** **

## **Item 1. LEGAL PROCEEDINGS**

## ** **

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

 

**Additional Information**

 

See Notes 5 and 6 of the financial statementsin this Quarterly Report on Form 10-Q for further discussion of legalproceedings, including Regulatory Matters and Commitments and ContingentLiabilities, which are hereby incorporated by reference. Reference also is madeto Item 3 and Notes 13 and 14 of SPS’ financial statements in its AnnualReport on Form 10-K for the year ended Dec. 31, 2008 for adescription of certain legal proceedings presently pending.

 

21

----

Table of Contents

 

**Item 1A. RISK FACTORS**

 

Exceptto the extent updated or described below, SPS’ risk factors are documented inItem 1A of Part I of its Annual Report on Form 10-K for the yearended Dec. 31, 2008, which is incorporated herein by reference.

 

***We are subject to credit risks.***

 

Creditrisk includes the risk that our retail customers will not pay their bills,which may lead to a reduction in liquidity and an eventual increase in bad debtexpense.  Retail credit risk is comprisedof numerous factors including the overall economy and the price of products andservices provided.

 

Creditrisk also includes the risk that various counterparties that owe us money orproduct will breach their obligations. Should the counterparties to thesearrangements fail to perform, we may be forced to enter into alternativearrangements. In that event, our financial results could be adversely affectedand we could incur losses.

 

Onealternative available to address counterparty credit risk is to transact onliquid commodity exchanges.  The creditrisk is then socialized through the exchange central clearinghouse function.  While exchanges do remove counterparty creditrisk, all participants are subject to margin requirements, which creates anadditional need for liquidity to post margin as exchange positions change valuedaily.  Additional margin requirementscould impact our liquidity.

 

SPSmay at times have direct credit exposure in its short-term wholesale andcommodity trading activity to various financial institutions trading for theirown accounts or issuing collateral support on behalf of othercounterparties.  SPS may also have someindirect credit exposure due to participation in organized markets such as thePJM Interconnection and MISO in which any credit losses are socialized to allmarket participants.

 

SPSdoes have additional indirect credit exposures to various financialinstitutions in the form of letters of credit provided as security bypower suppliers under various long-term physical purchasedpower contracts.    If any ofthe credit ratings of the letter of credit issuers were to drop below thedesignated investment grade rating stipulated in the underlying long termpurchased power contracts, the supplier would need to replace that securitywith an acceptable substitute.  If the security were not replaced, theparty would be in technical default under the contract, which would enableSPS to exercise its contractual rights.

 

***We may be subject to legislative andregulatory responses to climate change, with which compliance could bedifficult and costly.***

 

**Legislative and regulatory responsesrelated to climate change create financial risk.  Increased public awareness and concern mayresult in more regional and/or federal requirements to reduce or mitigate theeffects of GHG.  Numerous states haveannounced or adopted programs to stabilize and reduce GHG and federal legislationhas been introduced in both houses of Congress. Likewise, the EPA has issued an Advanced Notice of Proposed Rulemakingthat proposes to regulate GHGs under the Clean Air Act. **SPS’ electricgenerating facilities are likely to be subject to regulation under climatechange laws introduced at either the state or federal level within the next fewyears.

 

Many of the federal andstate climate change legislative proposals, such as ACES, use a “cap and trade”policy structure, in which GHG emissions from a broad cross-section of theeconomy would be subject to an overall cap. Under the proposals, the cap becomes more stringent with the passage oftime.  The proposals establish mechanismsfor GHG sources, such as power plants, to obtain “allowances” or permits toemit GHGs during the course of a year. The sources may use the allowances to cover their own emissions or sellthem to other sources that do not hold enough emissions allowances for theirown operations.  Proponents of the capand trade policy believe it will result in the most cost effective, flexibleemission reductions. **The impactof legislation and regulations, including a “cap and trade” structure, on SPSand its customers will depend on a number of factors, including whether GHGsources in multiple sectors of the economy are regulated, the overall GHGemissions cap level, the degree to which GHG offsets are allowed, theallocation of emission allowances to specific sources and the indirect impactof carbon regulation on natural gas and coal prices.  An important factor is SPS’ ability torecover the costs incurred to comply with any regulatory requirements that areultimately imposed. **Wemay not recover all costs related to complying with regulatory requirementsimposed on SPS.  If our regulators do notallow us to recover all or a part of the cost of capital investment or theoperating and maintenance costs incurred to comply with the mandates, it couldhave a material adverse effect on our results of operations.

 

Forfurther discussion see Note 6 to the financial statements.

 

22

----

Table of Contents

 

## **Item6. EXHIBITS**

 

----

*Indicates incorporation by reference

 
| 3.01*  |   | Amended and Restated  Articles of Incorporation dated Sept. 30, 1997 (Exhibit 3(a)(2) to  Form 10-K (file no. 001-03789) dated March 3, 1998).                                              |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.02*  |   | By-laws dated Sept. 29,  1997 (Exhibit 3(b)(2) to Form 10-K (file no. 001-03789) dated  March 3, 1998).                                                                                     |
| 10.01* |   | Amendment  dated as of April 13, 2009 to the SPS Credit Agreement dated as of  Dec. 14, 2006 (Exhibit 10.04 of Form 10-Q of Xcel Energy dated  July 31, 2009 (file no. 001-03034)).    |
| 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.                                                                                                                                        |

 

23

----

Table of Contents

 

#### **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 Aug. 3, 2009.

 

Southwestern Public ServiceCompany

(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 |

 

24

----