** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-K**

 

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

 

**For thefiscal year ended Dec. 31, 2007**

** **

**OR**

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

 

**For the transition periodfrom                                to**

** **

**COMMISSION FILE NUMBER001-03280**

** **

**PUBLIC SERVICE COMPANY OF COLORADO**

(Exact name of registrant as specified in its charter)

 

| **Colorado**                     | ** ** | **84-0296600**       |
|----------------------------------|------------|----------------------|
| (State  or other jurisdiction of |       | (I.R.S.  Employer    |
| incorporation  or organization)  |       | Identification  No.) |

 

| **1225 17th Street**                      |
|-------------------------------------------|
| **Denver, Colorado 80202**                |
| (Address  of principal executive offices) |
| (Zip  Code)                               |

 

**(303) 571-7511**

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) ofthe Act:**None**

 

Securities registered pursuant to Section 12(g) ofthe Act:**None**

 

Indicate by check mark if the registrant is awell-known seasoned issuer, as defined by Rule 405 of the SecuritiesAct. o Yes orNo x

 

Indicate by check mark if the registrant is notrequired to file reports pursuant to Section 13 or Section 15(d) ofthe Exchange Act. o Yesor No x

 

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

 

Indicate by check mark if disclosure of delinquentfilers pursuant to Item 405 of Regulation S-K is not contained herein, and willnot be contained, to the best of registrant’s knowledge, in definitive proxy orinformation statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, a non-accelerated filer or asmaller reporting company.  See thedefinitions of a “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

o Largeaccelerated filer    oAccelerated filer    xNon-accelerated filer    oSmaller reporting company

 

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

 

As of Feb. 25, 2008, 100 shares of common stock,par value $0.01 per share, were outstanding, all of which were held by XcelEnergy Inc., a Minnesota corporation.

 

**DOCUMENTS INCORPORATED BYREFERENCE: Xcel Energy Inc.’s Definitive Proxy Statement for its 2008 AnnualMeeting of Shareholders is incorporated by reference into Part III of thisForm 10-K**

**Public Service Company of Colorado meets theconditions set forth in General Instruction I(1)(a) and (b) of Form 10-Kand is therefore filing this form with the reduced disclosure format permittedby General Instruction I(2).**

 

 

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**INDEX**

 
| **PART I**                                                                                                                   |
|-----------------------------------------------------------------------------------------------------------------------------------|
| Item  1 — Business                                                                                                           |
| DEFINITION OF ABBREVIATIONS AND INDUSTRY TERMS                                                                                    |
| COMPANY OVERVIEW                                                                                                                  |
| ELECTRIC UTILITY OPERATIONS                                                                                                       |
| Overview                                                                                                                          |
| Summary of Recent Regulatory Developments                                                                                         |
| Public Utility Regulation                                                                                                         |
| Capacity and Demand                                                                                                               |
| Energy Sources and Related Transmission  Initiatives                                                                              |
| Fuel Supply and Costs                                                                                                             |
| Commodity Marketing Operations                                                                                                    |
| Electric Operating Statistics                                                                                                     |
| NATURAL GAS UTILITY OPERATIONS                                                                                                    |
| Summary of Recent Regulatory Developments                                                                                         |
| Capability and Demand                                                                                                             |
| Natural Gas Supply and Costs                                                                                                      |
| Natural Gas Operating Statistics                                                                                                  |
| ENVIRONMENTAL MATTERS                                                                                                             |
| EMPLOYEES                                                                                                                         |
| Item  1A — Risk Factors                                                                                                      |
| Item  1B — Unresolved SEC Staff Comments                                                                                     |
| Item  2 — Properties                                                                                                         |
| Item  3 — Legal Proceedings                                                                                                  |
| Item  4 — Submission of Matters to a Vote of Security Holders                                                                |
|                                                                                                                              |
| **PART II**                                                                                                                  |
| Item  5 — Market for Registrant’s Common Equity, Related Stockholder Matters and  Issuer Purchases of Equity Securities |
| Item  6 — Selected Financial Data                                                                                            |
| Item  7 — Management’s Discussion and Analysis of Financial Condition and Results  of Operations                        |
| Item  7A — Quantitative and Qualitative Disclosures About Market Risk                                                        |
| Item  8 — Financial Statements and Supplementary Data                                                                        |
| Item  9 — Changes in and Disagreements with Accountants on Accounting and Financial  Disclosure                              |
| Item  9A(T) — Controls and Procedures                                                                                   |
| Item  9B — Other Information                                                                                                 |
|                                                                                                                              |
| **PART III**                                                                                                                 |
| Item  10 — Directors, Executive Officers and Corporate Governance                                                            |
| Item  11 — Executive Compensation                                                                                            |
| Item  12 — Security Ownership of Certain Beneficial Owners and Management and  Related Stockholder Matters                   |
| Item  13 — Certain Relationships, Related Transactions and Director Independence                                             |
| Item  14 — Principal Accounting Fees and Services                                                                            |
|                                                                                                                              |
| **PART IV**                                                                                                                  |
| Item  15 — Exhibits, Financial Statement Schedules                                                                           |
|                                                                                                                              |
| **SIGNATURES**                                                                                                                    |

 

This Form 10-K is filed by Public Service Co. of Colorado (PSCo).PSCo is a wholly owned subsidiary of Xcel Energy Inc. Additional information onXcel Energy is available in various filings with the U.S. Securities andExchange Commission (SEC). This report should be read in its entirety.

 

2

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**PART I**

 

**Item l**— **Business**

 

# **DEFINITIONOF ABBREVIATIONS AND INDUSTRY TERMS**

 
| ***Xcel  Energy Subsidiaries and Affiliates***                 | *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|----------------------------------------------------------------|--------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| NSP-Minnesota                                                  |         | Northern States Power Co.,  a Minnesota corporation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| NSP-Wisconsin                                                  |         | Northern States Power Co.,  a Wisconsin corporation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| PSCo                                                           |         | Public Service Company of  Colorado, a Colorado corporation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| PSRI                                                           |         | PSR Investments, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| SPS                                                            |         | Southwestern Public  Service Co., a New Mexico corporation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| utility subsidiaries                                           |         | NSP-Minnesota,  NSP-Wisconsin, PSCo, SPS                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Xcel Energy                                                    |         | Xcel Energy Inc., a  Minnesota corporation                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                                           |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ***Federal  and State Regulatory Agencies***                   | *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| CPUC                                                           |         | Colorado Public Utilities  Commission. The state agency that regulates the retail rates, services and  other aspects of PSCo’s operations in Colorado. The CPUC also has  jurisdiction over the capital structure and issuance of securities by PSCo.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| EPA                                                            |         | United States  Environmental Protection Agency                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| FERC                                                           |         | Federal Energy Regulatory  Commission. The U.S. agency that regulates the rates and services for  transportation of electricity and natural gas and the sale of electricity at  wholesale, in interstate commerce, including the sale of electricity at  market-based rates.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| NERC                                                           |         | North American Electric  Reliability Council                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| IRS                                                            |         | Internal Revenue Service                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| OCC                                                            |         | Colorado Office of  Consumer Counsel                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| SEC                                                            |         | Securities and Exchange  Commission                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                                           |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| ***Electric,  Purchased Gas and Resource Adjustment Clauses*** | *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| AQIR                                                           |         | Air-quality improvement  rider. Recovers, over a 15-year period, the incremental cost (including fuel  and purchased energy) incurred by PSCo as a result of a voluntary plan to  reduce emissions and improve air quality in the Denver metro area.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| DSM                                                            |         | Demand-side management.  Energy conservation and weatherization program for low-income customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| DSMCA                                                          |         | Demand-side management  cost adjustment. A clause permitting PSCo to recover demand side management  costs over five years while non-labor incremental expenses and carrying costs  associated with deferred DSM costs are recovered on an annual basis. Costs  for the low-income energy assistance program are recovered through the DSMCA.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| ECA                                                            |         | Retail electric commodity  adjustment. The ECA, effective Jan. 1, 2004, is an incentive adjustment  mechanism that compares actual fuel and purchased energy expense in a  calendar year to a benchmark formula. The ECA also provides for an $11.25  million cap on any cost sharing over or under an allowed ECA formula rate.  The current ECA mechanism expired Dec. 31, 2006. Effective Jan. 1,  2007 the ECA has been modified to include an incentive adjustment to  encourage efficient operation of base load coal plants and encourage cost  reductions through purchases of economical short-term energy. The total  incentive payment to PSCo in any calendar year will not exceed $11.25  million. The ECA mechanism will be revised quarterly and interest will accrue  monthly on the average deferred balance. The ECA will expire at the earlier  of rates taking effect after Comanche 3 is placed in service or Dec. 31,  2010. |

 

3

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| GCA                                  |         | Gas cost adjustment.  Allows PSCo to recover its actual costs of purchased natural gas and natural  gas transportation. The GCA is revised monthly to coincide with changes in  purchased gas costs.                                                                                                                                                                                                                                                                                                                                                                                |
|--------------------------------------|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| PCCA                                 |         | Purchased capacity cost  adjustment. Allows PSCo to recover from customers purchased capacity payments  to power suppliers under specifically identified power purchase agreements  not included in the determination of PSCo’s base electric rates or other  recovery mechanisms. This clause expired in 2006. A new PCCA clause will  become effective Jan. 1, 2007 permits recovery from retail customers for  all purchased capacity payments to power suppliers. Capacity charges are not  included in PSCo’s base electric rates or other recovery mechanisms. |
| QSP                                  |         | Quality of service plan.  Provides for bill credits to retail customers if the utility does not achieve  certain operational performance targets and/or specific capital investments  for reliability. The current QSP for PSCo and SPS electric utility expired in  2006. A new QSP for the PSCo electric utility provides for bill credit to  customers based upon operational performance standards through Dec. 31,  2010. The QSP for the PSCo gas utility expires December 2007.                                                                                    |
| SCA                                  |         | Steam cost adjustment.  Allows PSCo to recover the difference between its actual cost of fuel and the  amount of these costs recovered under its base steam service rates. The SCA  is revised annually to coincide with changes in fuel costs.                                                                                                                                                                                                                                                                                                                                     |
| TCR                                  |         | Transmission cost  recovery.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                 |         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| ***Other  Terms and Abbreviations*** | *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| AFDC                                 |         | Allowance for funds used  during construction. Defined in regulatory accounts as a non-cash accounting  convention that represents the estimated composite interest costs of debt and  a return on equity funds used to finance construction. The allowance is  capitalized in property accounts and included in income.                                                                                                                                                                                                                                                            |
| ALJ                                  |         | Administrative law judge.  A judge presiding over regulatory proceedings.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| ARO                                  |         | Asset Retirement  Obligation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| BART                                 |         | Best Available Retrofit  Technology                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| CO2                                  |         | Carbon dioxide                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| CAMR                                 |         | Clean Air Mercury Rule                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| CAPCD                                |         | Colorado Air Pollution  Control Division                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| COLI                                 |         | Corporate-owned life  insurance.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| derivative instrument                |         | A financial instrument or  other contract with all three of the following characteristics:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                 |         | ·      An  underlying and a notional amount or payment provision or both,                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                                 |         | ·      Requires  no initial investment or an initial net investment that is smaller than would  be required for other types of contracts that would be expected to have a  similar response to changes in market factors, and                                                                                                                                                                                                                                                                                                                         |
|                                 |         | ·      Terms  require or permit a net settlement, can be readily settled net by means outside  the contract or provides for delivery of an asset that puts the recipient in  a position not substantially different from net settlement                                                                                                                                                                                                                                                                                                               |
| distribution                         |         | The system of lines,  transformers, switches and mains that connect electric and natural gas  transmission systems to customers.                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| ERISA                                |         | Employee Retirement Income  Security Act                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| FASB                                 |         | Financial Accounting  Standards Board                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| GAAP                                 |         | Generally accepted  accounting principles                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| generation                           |         | The process of  transforming other forms of energy, such as nuclear or fossil fuels, into  electricity. Also, the amount of electric energy produced, expressed in  megawatts (capacity) or megawatt hours (energy).                                                                                                                                                                                                                                                                                                                                                                |
| GHG                                  |         | Greenhouse Gas                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| JOA                                  |         | Joint operating agreement  among the Utility Subsidiaries                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| LIBOR                                |         | London Interbank Offered  Rate                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |

 

4

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| mark-to-market                   |         | The process  whereby an asset or liability is recognized at fair value and the change in  the fair value of that asset or liability is recognized in current earnings  in the Consolidated Statements of Operations or in Other Comprehensive Income  within equity during the current period.                                                   |
|----------------------------------|--------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| MGP                              |         | Manufactured  gas plant                                                                                                                                                                                                                                                                                                                          |
| MISO                             |         | Midwest  Independent Transmission System Operator                                                                                                                                                                                                                                                                                                |
| Moody’s                     |         | Moody’s Investor Services  Inc.                                                                                                                                                                                                                                                                                                             |
| native load                      |         | The customer  demand of retail and wholesale customers whereby a utility has an obligation  to serve: e.g., an obligation to provide electric or natural gas service  created by statute or long-term contract.                                                                                                                                  |
| natural gas                      |         | A naturally  occurring mixture of hydrocarbon and non-hydrocarbon gases found in porous  geological formations beneath the earth’s surface, often in association with  petroleum. The principal constituent is methane.                                                                                                                     |
| NOx                              |         | Nitrogen  oxide                                                                                                                                                                                                                                                                                                                                  |
| nonutility                       |         | All items of  revenue, expense and investment not associated, either by direct assignment  or by allocation, with providing service to the utility customer.                                                                                                                                                                                     |
| PBRP                             |         | Performance-based  regulatory plan. An annual electric earnings test, an electric quality of  service plan and a natural gas quality of service plan established by the  CPUC.                                                                                                                                                                   |
| PUHCA                            |         | Public  Utility Holding Company Act of 2005. Successor to the Public Utility Holding  Company Act of 1935, enacted to regulate the corporate structure and  financial operations of utility holding companies. Eliminates most federal  regulation of utility holding companies. Transfers other regulatory authority  from the SEC to the FERC. |
| QF                               |         | Qualifying  facility. As defined under the Public Utility Regulatory Policies Act of  1978, a QF sells power to a regulated utility at a price equal to that which  it would otherwise pay if it were to build its own power plant or buy power  from another source.                                                                            |
| rate base                        |         | The  investor-owned plant facilities for generation, transmission and distribution  and other assets used in supplying utility service to the consumer.                                                                                                                                                                                          |
| ROE                              |         | Return on  equity                                                                                                                                                                                                                                                                                                                                |
| RTO                              |         | Regional  Transmission Organization. An independent entity, which is established to  have “functional control” over a utilities’ electric transmission systems, in  order to provide non-discriminatory access to transmission of electricity.                                                                                    |
| SFAS                             |         | Statement of  Financial Accounting Standards                                                                                                                                                                                                                                                                                                     |
| SO2                              |         | Sulfur  dioxide                                                                                                                                                                                                                                                                                                                                  |
| SPP                              |         | Southwest Power  Pool, Inc.                                                                                                                                                                                                                                                                                                                 |
| Standard &  Poor’s |         | Standard & Poor’s  Ratings Services                                                                                                                                                                                                                                                                                                |
| unbilled  revenues               |         | Amount of  service rendered but not billed at the end of an accounting period. Cycle  meter-reading practices result in unbilled consumption between the date of  last meter reading and the end of the period.                                                                                                                                  |
| underlying                       |         | A specified  interest rate, security price, commodity price, foreign exchange rate, index  of prices or rates, or other variable, including the occurrence or  nonoccurrence of a specified event such as a scheduled payment under a  contract.                                                                                                 |
| VaR                              |         | Value-at-risk                                                                                                                                                                                                                                                                                                                                    |
| wheeling or  transmission        |         | An electric  service wherein high voltage transmission facilities of one                                                                                                                                                                                                                                                                         |
|                             |         | utility  system are used to transmit power generated within or purchased from another  system.                                                                                                                                                                                                                                                   |
|                             |         |                                                                                                                                                                                                                                                                                                                                             |
| ***Measurements***               | *** *** | *** ***                                                                                                                                                                                                                                                                                                                                     |
| Btu                              |         | British  thermal unit. A standard unit for measuring thermal energy or heat commonly  used as a gauge for the energy content of natural gas and other fuels.                                                                                                                                                                                     |
| GWh                              |         | Gigawatt  hours                                                                                                                                                                                                                                                                                                                                  |
| KV                               |         | Kilovolts                                                                                                                                                                                                                                                                                                                                        |

 

5

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| KW    |   | Kilowatts                                                                                                                                                                                                                                    |
|-------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Kwh   |   | Kilowatt  hours                                                                                                                                                                                                                              |
| MMBtu |   | One million  BTUs                                                                                                                                                                                                                            |
| MW    |   | Megawatts  (one MW equals one thousand KW)                                                                                                                                                                                                   |
| Watt  |   | A measure of  power production or usage equal to the kinetic energy of an object with a  mass of 2 kilograms moving with a velocity of one meter per second for one  second.                                                                 |
| Volt  |   | The unit of  measurement of electromotive force. Equivalent to the force required to  produce a current of one ampere through a resistance of one ohm. The unit of  measure for electrical potential. Generally measured in kilovolts or KV. |

 

6

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**COMPANY OVERVIEW**

 

PSCo was incorporated in 1924 under the laws of Colorado.  PSCo is an operating utility engagedprimarily in the generation, purchase, transmission, distribution and sale ofelectricity in Colorado.  The wholesalecustomers served by PSCo comprised approximately 24 percent of the total salesin 2007.  PSCo also purchases,transports, distributes and sells natural gas to retail customers andtransports customer-owned natural gas. PSCo provides electric utility and natural gas utility service toapproximately 1.3 million customers.  Allof PSCo’s retail electric operating revenues were derived from operations inColorado during 2007.  Generally, PSCo’searnings comprise approximately 35 percent to 45 percent of Xcel Energy’sconsolidated net income.

 

PSCo owns the following direct subsidiaries:  1480 Welton, Inc., which owns certainreal estate interests for PSCo; and Green and Clear Lakes Company, which ownswater rights.  PSCo also owned PSRI,which held certain former employees’ life insurance policies.  Following settlement with the IRS during2007, such policies were terminated. PSCo also holds a controlling interest in several other relatively smallditch and water companies.

 

PSCo conducts its utility business in the following reportablesegments: regulated electric utility, regulated natural gas utility and allother.  Comparative segment revenues andrelated financial information for fiscal 2007, 2006 and 2005 are set forth inNote 15 to the accompanying consolidated financial statements.

 

PSCo focuses on growing through investments in electric and natural gasrate base to meet growing customer demands, environmental and renewable energyinitiatives and to maintain or increase reliability and quality of service tocustomers.  PSCo files periodic ratecases with state and federal regulators to earn a return on its investment andrecover costs of operations.

 

**ELECTRIC UTILITY OPERATIONS**

** **

**Overview**

** **

***Climate Changeand Clean Energy –******Like most other utilities,PSCo is subject to a significant array of environmental regulations focused onmany different aspects of its operations. There are significant future environmental regulations underconsideration to encourage the use of clean energy technologies and regulateemissions of GHGs to address c*****limate change. PSCo’s** electric generating facilities arelikely to be subject to regulation under climate change policies introduced ateither the state or federal level within the next few years.  The state in which we operate has proposed orimplemented clean energy policies, such as renewable energy portfolio standardsor DSM programs, in part designed to reduce the emissions of GHGs.  Congress and federal policy makers areconsidering climate change legislation and a variety of national climate changepolicies.  PSCo is advocating with stateand federal policy makers for climate change and clean energy policies thatwill result in significant long-term reduction in GHG emissions, developlow-emitting technologies and secure, cost-effective energy supplies for ourcustomers and our nation.

 

While PSCo is not currently subject to state or federal limits on itsGHG emissions, PSCo has undertaken a number of initiatives to prepare forclimate change regulation and reduce our GHG emissions.  These initiatives include emission reductionprograms, energy efficiency and conservation programs, renewable energydevelopment and technology exploration projects.  Although the impact of climate change policyon PSCo will depend on the specifics of state and federal policies andlegislation, PSCo believes that, based on prior state commission practice, PSCowould be granted the authority to recover the cost of these initiatives throughrates.

 

***UtilityRestructuring and Retail Competition***— The FERChas continued with its efforts to promote more competitive wholesale marketsthrough open-access transmission and other means.  As a consequence, PSCo and its wholesalecustomers can purchase from competing wholesale suppliers and use thetransmission systems of the utility subsidiaries on a comparable basis to theutility subsidiaries to serve their native load.  PSCo supports the continued development ofwholesale competition and non-discriminatory wholesale open access transmissionservices.

 

The retail electric business faces competition as industrial and largecommercial customers have some ability to own or operate facilities to generatetheir own electricity.  In addition,customers may have the option of substituting other fuels, such as natural gasor steam/chilled water for heating, cooling and manufacturing purposes, or theoption of relocating their facilities to a lower cost region.  While PSCo faces these challenges, its ratesare competitive with currently available alternatives.

 

7

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**Summary of Recent FederalRegulatory Developments**

** **

The FERC has jurisdiction over rates for electric transmission servicein interstate commerce and electricity sold at wholesale, hydro facilitylicensing, natural gas transportation, accounting practices and certain otheractivities of PSCo.  State and local agencieshave jurisdiction over many of PSCo’s activities, including regulation ofretail rates and environmental matters. In addition to the matters discussed below, see Note 12 to theconsolidated financial statements for a discussion of other regulatory matters.

 

***FERC Rules ImplementingEnergy Policy Act of 2005 (Energy Act) —***The Energy Act repealed PUHCA effective Feb. 8, 2006.  In addition, the Energy Act required the FERCto conduct several rulemakings to adopt new regulations to implement variousaspects of the Energy Act.  Since August 2005,the FERC has completed several rulemaking proceedings to modify its regulationson a number of subjects, including:

 

·              Adopting regulations to establish anational Electric Reliability Organization (ERO) to replace the voluntary NERCstructure and requiring the ERO to establish mandatory electric reliabilitystandards and imposition of financial or other penalties for violations ofadopted standards;

·              Certifyingthe NERC as the ERO and adopting rules making 83 NERC reliabilitystandards mandatory and subject to potential financial penalties up to $1million per day per violation for non-compliance effective June 18, 2007;and approving delegation agreements between NERC and various regional entities,including the Midwest Reliability Organization (MRO), SPP and WesternElectricity Coordinating Council (WECC), whereby the regional entities will beresponsible for regional enforcement of approved NERC standards.  On Dec. 21, 2007, the FERC approvedseven additional NERC mandatory standards to be effective in first quarter2008;

·              Adopting rules allowing utilities toseek to eliminate their mandatory Public Utility Regulatory Policies Act(PURPA) QF power purchase obligations for utilities in organized wholesaleenergy markets such as MISO and SPP; and

·              Adoptingrules to establish incentives for investment in new electric transmissioninfrastructure.

 

During 2007, both state and federal legislative initiatives wereintroduced, with the Xcel Energy subsidiaries taking an active role in theirdevelopment.

 

WhilePSCo cannot predict the ultimate impact the new regulations will have on itsoperations or financial results, PSCo is taking actions that are intended tocomply with and implement these new rules and regulations as they becomeeffective.

 

***ElectricTransmission Rate Regulation —*** The FERCregulates the rates charged and terms and conditions for electric transmissionservices.  FERC policy encouragesutilities to turn over the functional control over their electric transmissionassets and the related responsibility for the sale of electric transmissionservices to an RTO.  All members withinthat RTO are then subjected to those rates. PSCo is currently participating with other utilities in the developmentof WestConnect, which would provide certain regionalized transmission and wholesaleenergy market functions but would not be an RTO.

 

On Feb. 15, 2007, the FERC issued final rules (Order No. 890)adopting revisions to its open access transmission service rules.  Xcel Energy submitted the required revisionsto its Open Access Transmission Tariff (OATT) on July 13, 2007, Sept. 11,2007 and Dec. 7, 2007, as required. The compliance filings are pending FERC action.  On Dec. 28, 2007, the FERC issued anorder on rehearing making certain modifications to Order No. 890.  The revised rules will be effective in March 2008.  Xcel Energy is now reviewing the amendedfinal rules.

 

In addition, in January 2007, the FERC issued interim and proposedrules to modify the current FERC standards of conduct rules governingthe functional separation of the Xcel Energy electric transmission functionfrom the wholesale sales and marketing function.  The proposed rules are pending finalFERC action.

 

While PSCo cannot predict the ultimate impact the new regulations willhave on its operations or financial results, PSCo is taking actions that areintended to comply with and implement these new rules and regulations asthey become effective.

 

***Market Based Rate Rules ******—***In June 2007, the FERCissued a final order governing its market-based rate authorizations to electricutilities.  The FERC reemphasized itscommitment to market-based pricing, but is revising the tests it uses to assesswhether a utility has market power and has emphasized that it intends toexercise greater oversight where it has market-based rate authorizations.  PSCo has been granted market-based rateauthority and will be subject to the new rule.

 

8

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An aspect of the FERC’s market-based rate requirements is therequirement to charge mitigated rates in markets where a utility is found tohave market power.  PSCo has beenauthorized by the FERC to charge market-based rates outside of their controlareas, but are generally limited to charging mitigated rates within theircontrol areas.  PSCo uses cost-based ratecaps set out in the Western Systems Power Pool (WSPP) agreement as theirapplicable mitigated rates, an approach approved by the FERC.  However, concurrently with the issuance ofthe final order, the FERC initiated a proceeding to investigate whether the useof the WSPP rate caps for this purpose is just and reasonable.  An outcome of this proceeding may be to lowerthe mitigated rates that PSCo and SPS may charge in their control areas.

 

**Public Utility Regulation**

** **

***Summary ofRegulatory Agencies and Areas of Jurisdiction —***PSCois regulated by the CPUC with respect to its facilities, rates, accounts,services and issuance of securities. PSCo is regulated by the FERC with respect to its wholesale electricoperations, accounting practices, wholesale sales for resale and thetransmission of electricity in interstate commerce.

 

***Fuel,Purchased Energy and Conservation Cost Recovery Mechanisms —***PSCohas several retail adjustment clauses that recover fuel, purchased energy andother resource costs:

 

·              *ECA —*Effective Jan. 1, 2007 the ECA includes an incentive adjustment toencourage efficient operation of base load coal plants and encourage costreductions through purchases of economical short-term energy.  The total incentive payment to PSCo in any calendaryear will not exceed $11.25 million.  TheECA mechanism is revised quarterly and interest accrues monthly on the averagedeferred balance.  The ECA will expire atthe earlier of rates taking effect after Comanche 3 is placed in service or Dec. 31,2010.

 

·              *PCCA —*The PCCA allows for recovery of purchased capacity payments to powersuppliers under specifically identified power purchase agreements that are notincluded in the determination of PSCo’s base electric rates or other recoverymechanisms.  Effective Jan. 1, 2007,all prudently incurred purchased capacity costs are recovered through the PCCA.The PCCA will expire at the earlier of rates taking effect after Comanche 3 isplaced in service or Dec. 31, 2010.

 

·              *SCA —*The SCA allows PSCo to recover the difference between its actualcost of fuel and the amount of these costs recovered under its base steamservice rates.  The SCA rate is revisedannually on Jan. 1, as well as on an interim basis to coincide withchanges in fuel costs.

 

·              *AQIR —*The AQIR recovers, over a 15-year period, the incremental cost(including fuel and purchased energy) incurred by PSCo as a result of avoluntary plan, effective Jan. 1, 2003, to reduce emissions and improveair quality in the Denver metro area.

 

·              *DSMCA —*The DSMCA clause permits PSCo to recover DSM costs beginning Jan. 1,2006 over eight years while non-labor incremental expenses and carrying costsassociated with deferred DSM costs are recovered on an annual basis. DSM costsincurred prior to Jan. 1, 2006 are recovered over 5 years.  PSCo also has a low-income energy assistanceprogram.  The costs of this energyconservation and weatherization program for low-income customers are recoveredthrough the DSMCA.

 

·              *RenewableEnergy Service Adjustment (RESA)* *—*The RESA recovers costs associated with complying with the provisions of acitizen referred ballot initiative passed in 2004 that establishes a renewableportfolio standard for PSCo’s electric customers.  Currently, the RESA recovers the incrementalcosts of compliance with the Renewable Energy Standard (RES) and is set at alevel of 0.6 percent of the net costs.

 

·              *WindEnergy Service Adjustment (WESA*) *—*The WESA provides for the recovery of certain costs associated with theprovision of wind energy resources from those customers subscribed asWindSource renewable energy customers.

 

·                  *Transmission Cost Adjustment (TCA)**— Effective* January 2008,the TCA provides for the recovery outside of rate cases of transmission plantrevenue requirements and allows for a return on construction work in progressfor investments for grid reliability or for new or upgraded transmissionfacilities.

 

PSCo recovers fuel and purchased energy costs from its wholesaleelectric customers through a fuel cost adjustment clause accepted for filing bythe FERC.

 

9

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***Performance-BasedRegulation and Quality of Service Requirements***—PSCo currently operates under an electric and natural gas PBRP.  The major components of this regulatory planinclude:

 

·       An electric QSP thatprovides for bill credits to customers if PSCo does not achieve certainperformance targets relating to electric reliability and customer servicethrough 2010; and

 

·       A natural gas QSP that provides for bill creditsto customers if PSCo does not achieve certain performance targets relating tonatural gas leak repair time and customer service through 2010.

 

PSCo regularly monitors and records as necessary an estimated customerrefund obligation under the PBRP.  In April ofeach year following the measurement period, PSCo files its proposed rateadjustment under the PBRP.  The CPUCconducts proceedings to review and approve these rate adjustments annually.

 

***TCR Legislation***—****In****2007, a law was passed in Colorado, which****provides for rate rider recovery of allcosts a utility incurs in the planning, development and construction orexpansion of transmission facilities and for current recovery through thisrider of the utility’s weighted average cost of capital on transmissionconstruction work in progress as of the end of the prior year.  This legislation also provides forrate-regulated Colorado utilities to develop plans to construct or expand transmissionfacilities to transmission constrained zones where new electric generationfacilities, including renewable energy facilities, are likely to be located andprovides for expedited approvals for such facilities.

 

In October 2007, PSCo filed an application under the newlegislation for a Certificate of Public Convenience and Necessity to constructa 345 KV transmission line from Pawnee Substation to its Smoky HillSubstation.  The proposed newtransmission line is intended to allow for injection of new generation capacityat Pawnee Substation for delivery to PSCo’s load center located on the frontrange.  PSCo estimates the cost of thenew line to be approximately $110 million over five years.

 

**Capacity and Demand**

** **

The uninterrupted system peak demand for PSCo’s electric utility foreach of the last three years and the forecast for 2008, assuming normalweather, are listed below.

 
| ** ** | ** ** | **System Peak Demand (in MW)** | ** ** |
|------------|------------|----------------------------------------------------|------------|
| ** ** | ** ** | **2005**                                           | ** ** | **2006** | ** ** | **2007** | ** ** | **2008 Forecast** | ** ** |
| PSCo       |       | 6,975                                              |       | 6,757 |   | 6,950 |   | 6,877 |   |

 

The peak demand for PSCo’s system typically occurs in the summer.  The 2007 uninterrupted system peak demand forPSCo occurred on July 24, 2007.

 

**Energy Sources and Related TransmissionInitiatives**

 

PSCo expects to meet its system capacity requirements through existingelectric generating stations, power purchases, new generation facilities, DSMoptions and phased expansion of existing generation at select power plants.

 

***PurchasedTransmission Services****** —***In additionto using its own transmission system, PSCo has contractual arrangements withregional transmission service providers to deliver power and energy to PSCo’snative load customers, which are retail and wholesale load obligations withterms of more than one year***.***

 

***Purchased Power***—PSCo has contractual arrangements to purchase power from other utilities and independentpower producers.  Capacity is the measureof the rate at which a particular generating source produces electricity.  Energy is a measure of the amount ofelectricity produced from a particular generating source over a period oftime.  Long-term purchase power contractstypically require a periodic payment to secure the capacity from a particulargenerating source and a charge for the associated energy actually purchasedfrom such generating source.

 

PSCo also makes short-term purchases to replace generation fromcompany-owned units that are unavailable due to maintenance and unplannedoutages, to comply with minimum availability requirements, to obtain energy ata lower cost than that which could be produced by other resource options,including company-owned generation and/or long-term purchase power contractsand for various other operating requirements.

 

10

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***PSCo ResourcePlan****** —***PSCo estimates it will purchaseapproximately 40 percent of its total electric system energy needs for 2008 andgenerate the remainder with PSCo-owned resources.  Additional capacity has been secured undercontract making additional energy available for purchase, if required.  PSCo currently has under contract or throughowned generation, the resources necessary to meet its anticipated 2008 loadobligation.  In November 2007, PSCofiled the Colorado Resource Plan (CRP), which details the type and amount ofresources that will be added to the system for an eight year Resource AcquisitionPeriod (RAP) through 2015.  Based on theplan, PSCo would:

 

·                  Increasewind power resources by 800 MW by 2015. PSCo would then have a total of approximately 1,900 MW of wind powerresources.

·                  Acquireapproximately 25 MW from a central solar facility, with plans to bring in aplant of up to 200 MW as technology develops.

·                  Pursuean additional 29 MW of on-site, customer-owned solar installations.

·                  Increasecustomer efficiency and conservation programs with plans to double the currentcapacity of its programs to 694 MW, while tripling the amount of annual energysales reductions to approximately 2,350 GWh, by 2020.

·                  Retire two older coal-burning plants(Arapahoe and Cameo) and repower at the Arapahoe site with a 480 MW summerrated combined cycle plant.

 

Also in November 2007, PSCo terminated a purchased power agreement,purchased the assets of the Squirrel Creek LLC project and filed a Certificateof Public Convenience and Necessity application with the CPUC to use thecombustion turbines to build a new, company owned project at the existing Ft.St. Vrain generating station.  Thisfacility would come on line in 2009.  Ifapproved by the CPUC, the Fort St. Vrain project will leave PSCo 119 MW shortof the necessary peaking power and 16 percent short of reserve margin necessaryto meet the 2009 summer peak load.  PSCowill meet the differential for the summer 2009 peak by purchasing short-termcapacity.  PSCo is requesting CPUCapproval of the Fort St. Vrain application by April 2008.

 

Construction continues on a plant approved in the last resourceplanning docket (2003) of a 750 MW pulverized coal-fired unit at the existingComanche power station located near Pueblo, Colo. and installation ofadditional emission control equipment on the two existing Comanche stationunits.

 

PSCo began construction of the new facility in the fall of 2005.  Completion is planned for the fall of2009.  As part of an electric rate case,PSCo is allowed to include construction work in progress associated with the Comanche3 project in rate base without an offset for allowance for funds used duringconstruction, depending upon PSCo’s senior unsecured debt rating.

 

PSCo has signed an agreement with Intermountain Rural ElectricAssociation (IREA) and Holy Cross, which transfers a portion of capacityownership in the Comanche 3 unit to IREA and Holy Cross.

 

***Renewable EnergyStandard -***The 2007 Colorado legislature adoptedan increased RES that requires PSCo to generate or cause to be generatedelectricity from renewable resources equaling:

 

·                  At least 10 percent of its retailsales by 2010,

·                  15 percent of retail sales by 2015and

·                  20 percent of retail sales by 2020.

·                  The new law limits the incrementalretail rate impact from these acquisitions to 2 percent.  The new legislation encourages the CPUC toconsider earlier and timely cost recovery for utility investment in renewableresources, including the use of a rider mechanism and a return on constructionwork in progress.

 

***ColoradoClimate Action Plan****** —***In November 2007,Governor Ritter of Colorado published a Colorado Climate Action Plan, which callsfor a reduction in GHG emissions of 20 percent by 2020 with additionalreductions by 2050.

 

***RESA****** —***In March 2006,the CPUC approved a RESA rider of 0.6 percent. The revenues collected under the RESA will be used to acquire sufficientsolar resources to meet the on-site solar system requirements in the Coloradostatutes.  In response to the new RES,PSCo filed in late 2007 to increase the RESA to a full 2 percent in order toincrease renewables to levels that comply with the 20 percent renewable energyrequirements.

 

11

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** **

**Fuel Supply and Costs**

** **

The following table shows the delivered cost per MMBtu of eachsignificant category of fuel consumed for electric generation, the percentageof total fuel requirements represented by each category of fuel and the totalweighted average cost of all fuels.

 
| ** ** | ** ** | **Coal** | ** ** | **Natural Gas** | ** ** | **Average Fuel** | ** ** |
|------------|------------|----------|------------|----------------------|------------|-----------------------|------------|
| ** ** | ** ** | **Cost** | ** ** | **Percent**          | ** ** | **Cost**              | ** ** | **Percent** | ** ** | **Cost** | ** ** |
| 2007       |       | $        | 1.26       |                 | 84         | %                     | $          | 4.34 |   | 16 | % | $ | 1.76 |   |
| 2006       |       | 1.24     |       | 85                   |       | 6.52                  |       | 15 |   | 2.01 |   |
| 2005       |       | 1.01     |       | 85                   |       | 7.56                  |       | 15 |   | 2.00 |   |
|            |            |          |            |                      |            |                       |            |  |  |  |  |  |  |  |

 

***Fuel Sources***—******PSCo normallymaintains approximately 30 days of coal inventory at each plant site.  Coal inventory levels, however, may varywidely among plants.  Coal supplyinventories at Dec. 31, 2007, were approximately 41 days usage, based onthe maximum burn rate for all of PSCo’s coal-fired plants.  PSCo’s generation stations use low-sulfurwestern coal purchased primarily under long-term contracts with suppliersoperating in Colorado and Wyoming. During 2007, PSCo’s coal requirements for existing plants wereapproximately 10 million tons.

 

PSCo has contracted for coal suppliers to supply approximately 100percent of its coal requirements in 2008, 76 percent of its coal requirementsin 2009 and 30 percent of its coal requirements in 2010.  Any remaining requirements will be filledthrough a request for proposal process according to the fuel supply operationsprocurement strategy.

 

PSCo has coal transportation contracts that provide for delivery ofapproximately 100 percent of 2008 coal requirements, 35 percent of 2009 coalrequirements and 33 percent of 2010 coal requirements.  Coal delivery may be subject to short-terminterruptions or reductions due to transportation problems, weather and availabilityof equipment.

 

PSCo uses both firm and interruptible natural gas and standby oil incombustion turbines and certain boilers. Natural gas supplies and associated transportation and storage servicesfor PSCo’s power plants are procured under contracts with various terms toprovide an adequate supply of fuel.  Thesupply contracts expire in various years from 2008 to 2010.  The transportation and storage contractsexpire in various years from 2009 to 2040. Certain natural gas supply and transportation agreements includeobligations for the purchase and/or delivery of specified volumes of naturalgas or to make payments in lieu of delivery. At Dec. 31, 2007, PSCo’s commitments related to supply contractswere approximately $161 million and transportation and storage contracts wereapproximately $1.0 billion.

 

**Commodity Marketing Operations**

 

PSCo conducts various wholesale marketing operations, including thepurchase and sale of electric capacity, energy and energy relatedproducts.  PSCo uses physical andfinancial instruments to minimize commodity price and credit risk and hedgesupplies and purchases.  See additionaldiscussion under Item 7A — Quantitative and Qualitative Disclosures AboutMarket Risk.

 

12

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** **

**Electric Operating Statistics**

 
| ** **                                    | ** ** | **Year Ended Dec. 31,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------|------------|
| ** **                                    | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Electric  Sales (Millions of Kwh)**         | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential                                   |       | 8,904                                  |       | 8,557 |   | 8,390 |   |
| Commercial and Industrial                     |       | 18,947                                 |       | 18,398 |   | 17,857 |   |
| Public Authorities and Other                  |       | 235                                    |       | 243 |   | 234 |   |
| **Total Retail**                              |       | 28,086                                 |       | 27,198 |   | 26,481 |   |
| Sales for Resale                              |       | 8,913                                  |       | 7,820 |   | 8,112 |   |
| **Total Energy Sold**                         |       | 36,999                                 |       | 35,018 |   | 34,593 |   |
|                                          |       |                                   |       |   |   |   |   |
| **Number  of Customers at End of Period**     | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential                                   |       | 1,126,019                              |       | 1,113,293 |   | 1,091,072 |   |
| Commercial and Industrial                     |       | 149,179                                |       | 147,349 |   | 145,520 |   |
| Public Authorities and Other                  |       | 58,559                                 |       | 60,381 |   | 62,985 |   |
| **Total Retail**                              |       | 1,333,757                              |       | 1,321,023 |   | 1,299,577 |   |
| Wholesale                                     |       | 51                                     |       | 49 |   | 62 |   |
| **Total Customers**                           |       | 1,333,808                              |       | 1,321,072 |   | 1,299,639 |   |
|                                          |       |                                   |       |   |   |   |   |
| **Electric  Revenues (Thousands of Dollars)** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential                                   |       | $                                      | 801,162    |   | $ | 756,701 |   | $ | 760,919 |   |
| Commercial and Industrial                     |       | 1,266,800                              |       | 1,251,390 |   | 1,240,697 |   |
| Public Authorities and Other                  |       | 41,426                                 |       | 38,775 |   | 38,977 |   |
| **Total Retail**                              |       | 2,109,388                              |       | 2,046,866 |   | 2,040,593 |   |
| Wholesale                                     |       | 438,120                                |       | 408,859 |   | 416,503 |   |
| Other Electric Revenues                       |       | 57,880                                 |       | 49,720 |   | 46,932 |   |
| **Total Electric Revenues**                   |       | $                                      | 2,605,388  |   | $ | 2,505,445 |   | $ | 2,504,028 |   |
|                                          |       |                                   |       |   |   |   |   |
| Kwh Sales  per Retail Customer                |       | 21,058                                 |       | 20,589 |   | 20,377 |   |
| Revenue per  Retail Customer                  |       | $                                      | 1,581.54   |   | $ | 1,549.46 |   | $ | 1,570.20 |   |
| Residential  Revenue per Kwh                  |       | 9.00                                   | ¢     | 8.84 | ¢ | 9.07 | ¢ |
| Commercial  and Industrial Revenue per Kwh    |       | 6.69                                   |       | 6.80 |   | 6.95 |   |
| Wholesale  Revenue per Kwh                    |       | 4.92                                   |       | 5.23 |   | 5.13 |   |

 

**NATURAL GAS UTILITY OPERATIONS**

** **

The most significant recent developments in the natural gas operationsof PSCo are continued volatility in wholesale natural gas market prices and thecontinued trend toward declining use per customer by residential customers as aresult of improved building construction technologies and higher applianceefficiencies.  From 1997 to 2007, averageannual sales to the typical PSCo residential customer declined from 99 MMBtuper year to 79 MMBtu per year on a weather-normalized basis.  Although recent wholesale price increases donot directly affect earnings because of natural gas cost recovery mechanisms,the high prices are expected to encourage further efficiency efforts bycustomers.

 

**Summary of Recent RegulatoryDevelopments**

** **

**Public Utility Regulation**

** **

***Summary ofRegulatory Agencies and Areas of Jurisdiction***—******PSCo is regulated bythe CPUC with respect to its facilities, rates, accounts, services and issuanceof securities.  PSCo holds a FERCcertificate that allows it to transport natural gas in interstate commercewithout PSCo becoming subject to full FERC jurisdiction under the federalNatural Gas Act.

 

13

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***Purchased Gas andConservation Cost Recovery Mechanisms***—****PSCo has two retail adjustment clausesthat recover purchased gas and other resource costs:

 

·              *GCA*— The GCAmechanism allows PSCo to recover its actual costs of purchased gas, includingcosts for upstream pipeline services PSCo incurs to meet the requirements ofits local distribution system customers. The GCA is revised monthly to allow for changes in gas rates.

 

·              *DSMCA*— PSCo hasa low-income energy assistance program. The costs of this energy conservationand weatherization program for low-income customers are recovered through thegas DSMCA.

 

***Performance-BasedRegulation and Quality of Service Requirements***—The CPUC established a combined electric and natural gas quality of serviceplan.  See further discussion under Item1, Electric Utility Operations.

 

For a further discussion of rate and regulatory matters see Note 12 tothe consolidated financial statements.

 

**Capability and Demand**

** **

PSCo projects peak day natural gas supply requirements for firm salesand backup transportation, which include transportation customers contractingfor firm supply backup, to be 1,864,044 MMBtu. In addition, firm transportation customers hold 591,140 MMBtu ofcapacity for PSCo without supply backup. Total firm delivery obligation for PSCo is 2,455,184 MMBtu per day.  The maximum daily deliveries for PSCo in 2007for firm and interruptible services were 1,798,030 MMBtu on Jan. 12, 2007.

 

PSCo purchases natural gas from independent suppliers.  These purchases are generally priced based onmarket indices that reflect current prices. The natural gas is delivered under natural gas transportation agreementswith interstate pipelines.  Theseagreements provide for firm deliverable pipeline capacity of approximately1,612,234 MMBtu/day, which includes 831,866 MMBtu of supplies held underthird-party underground storage agreements. In addition, PSCo operates three company-owned underground storagefacilities, which provide about 35,000 MMBtu of natural gas supplies on a peakday.  The balance of the quantitiesrequired to meet firm peak day sales obligations are primarily purchased atPSCo’s city gate meter stations and a small amount is received directly fromwellhead sources.

 

PSCo is required by CPUC regulations to file a natural gas purchaseplan by June of each year projecting and describing the quantities ofnatural gas supplies, upstream services and the costs of those supplies andservices for the period beginning July 1 through June 30 of thefollowing year.  PSCo is also required tofile a natural gas purchase report by October of each year reportingactual quantities and costs incurred for natural gas supplies and upstreamservices for the 12-month period ending the previous June 30.

 

**Natural Gas Supply and Costs**

 

PSCo actively seeks natural gas supply, transportation and storagealternatives to yield a diversified portfolio that provides increasedflexibility, decreased interruption and financial risk and economicalrates.  In addition, PSCo conductsnatural gas price hedging activities that have been approved by the CPUC.  This diversification involves numerous supplysources with varied contract lengths.

 

The following table summarizes the average delivered cost per MMBtu ofnatural gas purchased for resale by PSCo’s regulated retail natural gasdistribution business: 

 
| 2007 |   | $    | 5.87   |   |
|------|--------|------|--------|--------|
| 2006 |   | 7.09 |   |
| 2005 |   | 8.01 |   |

 

PSCo has certain natural gas supply, transportation and storageagreements that include obligations for the purchase and/or delivery ofspecified volumes of natural gas or to make payments in lieu of delivery.  At Dec. 31, 2007, PSCo was committed toapproximately $1.9 billion in such obligations under these contracts, whichexpire in various years from 2008 through 2028.

 

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PSCo purchases natural gas by optimizing a balance of long-term andshort-term natural gas purchases, firm transportation and natural gas storagecontracts.  During 2007, PSCo purchasednatural gas from approximately 40 suppliers.

 

**Natural Gas Operating Statistics**

 
| ** **                                      | ** ** | **Year Ended Dec. 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **2007**                               | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Natural Gas Deliveries (Thousands of MMBtu)** |       |                                   |       |   |   |   |   |
| Residential                                     |       | 93,664                                 |       | 87,200 |   | 91,086 |   |
| Commercial and Industrial                       |       | 40,216                                 |       | 37,923 |   | 38,475 |   |
| **Total Retail**                                |       | 133,880                                |       | 125,123 |   | 129,561 |   |
| Transportation and Other                        |       | 117,240                                |       | 121,501 |   | 118,214 |   |
| **Total Deliveries**                            |       | 251,120                                |       | 246,624 |   | 247,775 |   |
|                                            |       |                                   |       |   |   |   |   |
| **Number of customers at end of period**        |       |                                   |       |   |   |   |   |
| Residential                                     |       | 1,169,306                              |       | 1,154,598 |   | 1,130,888 |   |
| Commercial and Industrial                       |       | 98,053                                 |       | 96,787 |   | 95,302 |   |
| **Total Retail**                                |       | 1,267,359                              |       | 1,251,385 |   | 1,226,190 |   |
| Transportation and Other                        |       | 4,110                                  |       | 3,945 |   | 3,728 |   |
| **Total Customers**                             |       | 1,271,469                              |       | 1,255,330 |   | 1,229,918 |   |
|                                            |       |                                   |       |   |   |   |   |
| **Natural Gas Revenues (Thousands of Dollars)** |       |                                   |       |   |   |   |   |
| Residential                                     |       | $                                      | 808,738    |   | $ | 866,176 |   | $ | 924,030 |   |
| Commercial and Industrial                       |       | 313,805                                |       | 342,404 |   | 356,374 |   |
| **Total Retail**                                |       | 1,122,543                              |       | 1,208,580 |   | 1,280,404 |   |
| Transportation and Other                        |       | 63,563                                 |       | 53,715 |   | 48,630 |   |
| **Total Natural Gas Revenues**                  |       | $                                      | 1,186,106  |   | $ | 1,262,295 |   | $ | 1,329,034 |   |
|                                            |       |                                   |       |   |   |   |   |
| MMBtu Sales per Retail Customer                 |       | 105.64                                 |       | 99.99 |   | 105.66 |   |
| Revenue per Retail Customer                     |       | $                                      | 885.73     |   | $ | 965.79 |   | $ | 1,044.21 |   |
| Residential Revenue per MMBtu                   |       | 8.63                                   |       | 9.93 |   | 10.14 |   |
| Commercial and Industrial Revenue per MMBtu     |       | 7.80                                   |       | 9.03 |   | 9.26 |   |
| Transportation and Other Revenue per MMBtu      |       | 0.54                                   |       | 0.44 |   | 0.41 |   |

 

**ENVIRONMENTAL MATTERS**

** **

Certain of PSCo’s facilities are regulated by federal and stateenvironmental agencies.  These agencieshave jurisdiction over air emissions, water quality, wastewater discharges,solid wastes and hazardous substances. Various company activities require registrations, permits, licenses,inspections and approvals from these agencies. PSCo has received all necessary authorizations for the construction andcontinued operation of its generation, transmission and distributionsystems.  Company facilities have beendesigned and constructed to operate in compliance with applicable environmentalstandards.

 

PSCo strives to comply with all environmental regulations applicable toits operations.  However, it is notpossible to determine when or to what extent additional facilities ormodifications of existing or planned facilities will be required as a result ofchanges to environmental regulations, interpretations or enforcement policiesor, what effect future laws or regulations may have upon PSCo’soperations.  For more information onenvironmental contingencies, see Note 13 to the consolidated financialstatements and the matter discussed below.

 

***Leyden NaturalGas Storage Facility (Leyden)***** —**In February 2001, the CPUCapproved PSCo’s plan to abandon Leyden after 40 years of operation.  In July 2001, the CPUC decided that therecovery of all Leyden costs would be addressed in a future rate proceedingwhen all costs were known.  The finalreport of post closure monitoring will be filed with the Colorado Oil and GasConservation Commission in early 2008. As of Dec. 31, 2005, PSCo had incurred approximately $5.7 millionof costs associated with engineering buffer studies, damage claims paid tolandowners and other initial closure costs. PSCo accrued an additional $0.2 million of costs through 2006 tocomplete the decommissioning and closure of the facility.  In November 2006, PSCo filed a naturalgas rate case with the CPUC requesting recovery of additional Leyden costs,plus unrecovered amounts authorized from a previous rate case, which amountedto $5.9 million to be amortized over four years.

 

15

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The total amount PSCo requested to be recovered from customers was $7.7million.  Xcel Energy reached asettlement agreement with the parties in the 2006 rate case accepting the PSCorecovery amounts.  The CPUC approved thesettlement agreement in June 2007.

 

**EMPLOYEES**

** **

The number of full-time PSCo employees at Dec. 31, 2007 was2,734.  Of these full-time employees,2,194, or 80 percent, are covered under collective bargaining agreements.  See Note 8 in the consolidated financialstatements for further discussion of the bargaining agreements.  Employees of Xcel Energy Services Inc., asubsidiary of Xcel Energy, also provide services to PSCo and are not consideredin the above amounts.

 

**Item 1A — Risk Factors**

** **

**Risks Associated with OurBusiness**

** **

***Our profitability depends in part on our ability torecover costs from our customers and there may be changes in circumstances orin the regulatory environment that impair our ability to recover costs from ourcustomers.***

*** ***

We are subject to comprehensive regulation by federal and state utilityregulatory agencies.  The state utilitycommissions regulate many aspects of our utility operations, including sitingand construction of facilities, customer service and the rates that we cancharge customers.  The FERC has jurisdiction,among other things, over wholesale rates for electric transmission service andthe sale of electric energy in interstate commerce.

 

Our profitability is dependent on our ability to recover the costs ofproviding energy and utility services to our customers.  We currently provide service at ratesapproved by one or more regulatory commissions. These rates are generally regulated based on an analysis of our expensesincurred in a test year.  Thus, the rateswe are allowed to charge may or may not match our expenses at any giventime.  While rate regulation is premisedon providing a reasonable opportunity to earn a reasonable rate of return oninvested capital, there can be no assurance that the applicable regulatorycommission will judge all of our costs to have been prudently incurred or thatthe regulatory process in which rates are determined will always result inrates that will produce full recovery of our costs.   Rising fuel costs could increase the riskthat we will not be able to fully recover our fuel costs from ourcustomers.  Furthermore, there could bechanges in the regulatory environment that would impair our ability to recovercosts historically collected from our customers.  If all of our costs are not recovered throughcustomer rates, we could incur financial operating losses, which, over the longterm, could jeopardize our ability to meet our financial obligations.

 

Management currently believes these prudently incurred costs arerecoverable given the existing regulatory mechanisms in place.   However, changes in regulations or theimposition of additional regulations, including additional environmentalregulation or regulation related to climate change, could have an adverseimpact on our results of operations and hence could materially and adverselyaffect our ability to meet our financial obligations, including debt payments.

 

***Any reductions in our credit ratings could increaseour financing costs and the cost of maintaining certain contractualrelationships.***

*** ***

We cannot be assured that any of our current ratings will remain ineffect for any given period of time or that a rating will not be lowered orwithdrawn entirely by a rating agency if, in its judgment, circumstances in thefuture so warrant.  In addition, ourcredit ratings may change as a result of the differing methodologies or changein the methodologies used by the various rating agencies.  For example, Standard and Poor’s calculatesan imputed debt associated with capacity payments from purchase powercontracts.   An increase in the overalllevel of capacity payments would increase the amount of imputed debt, based onStandard and Poor’s methodology. Therefore, our credit ratings could be adversely affected based on thelevel of capacity payments associated with purchase power contracts or changesin how imputed debt is determined.  Anydowngrade could lead to higher borrowing costs.

 

***We are subject to interest rate risk.***

*** ***

If interest rates increase, we may incur increased interest expense onvariable interest debt or short-term borrowings, which could have an adverseimpact on our operating results.

 

16

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***We are subject to capital market risk.***

*** ***

PSCo’s operations require significant capital investment in plant,property and equipment; consequently, PSCo is an active participant in debt andequity markets.   Any disruption incapital markets could have a material impact on our ability to fund ouroperations.   Capital markets are globalin nature and are impacted by numerous events throughout the worldeconomy.  Capital market disruptionevents, as evidenced by the collapse in the U.S. sub-prime mortgage market,could prevent PSCo from issuing new securities or cause PSCo to issue securitieswith less than ideal terms and conditions.

 

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

*** ***

Credit risk includes the risk that counterparties that owe us money orproduct will breach their obligations. Should the counterparties to these arrangements fail to perform, we maybe forced to enter into alternative arrangements.  In that event, our financial results could beadversely affected and we could incur losses.

 

***We are subject to commodity risks and other risksassociated with energy markets.***

*** ***

We engage in wholesale sales and purchases of electric capacity, energyand energy-related products and are subject to market supply and commodityprice risk.  Commodity price changes canaffect the value of our commodity trading derivatives.  We mark certain derivatives to estimated fairmarket value on a monthly basis (mark-to-market accounting), which may causeearnings volatility.  We utilize quotedobservable market prices to the maximum extent possible in determining thevalue of these derivative commodity instruments.  For positions for which observable marketprices are not available, we utilize observable quoted market prices of similarassets or liabilities or indirectly observable prices based on forward pricecurves of similar markets.  For positionsfor which the company has unobservable market prices, the company incorporatesestimates and assumptions as to a variety of factors such as pricingrelationships between various energy commodities and geographic locations.  Actual experience can vary significantly fromthese estimates and assumptions and significant changes from our assumptionscould cause significant earnings variability.

 

If we encounter market supply shortages, we may be unable to fulfillcontractual obligations to our retail, wholesale and other customers atpreviously authorized or anticipated costs. Any such supply shortages could cause us to seek alternative supplyservices at potentially higher costs or suffer increased liability forunfulfilled contractual obligations.  Anysignificantly higher energy or fuel costs relative to corresponding salescommitments would have a negative impact on our cash flows and couldpotentially result in economic losses.  Potential market supply shortages may not be fully resolved throughalternative supply sources and such interruptions may cause short-termdisruptions in our ability to provide electric and/or natural gas services toour customers.

 

***We are subject to environmental laws andregulations, compliance with which could be difficult and costly.***

*** ***

We are subject to a number of environmental laws and regulations thataffect many aspects of our past, present and future operations, including airemissions, water quality, wastewater discharges and the generation, transportand disposal of solid wastes and hazardous substances.  These laws and regulations require us toobtain and comply with a wide variety of environmental registrations, licenses,permits, inspections and other approvals. Environmental laws and regulations can also require us to restrict orlimit the output of certain facilities or the use of certain fuels, to installpollution control equipment at our facilities, clean up spills and correctenvironmental hazards and other contamination. Both public officials and private individuals may seek to enforce theapplicable environmental laws and regulations against us.  We may be required to pay all or a portion ofthe cost to remediate (i.e. clean-up) sites where our past activities, or theactivities of certain other parties, caused environmental contamination.  At Dec. 31, 2007, these sites included:

 

·                  The sites offormer manufactured gas plants operated by our subsidiaries or predecessors;and

·                  Third partysites, such as landfills, at which we are alleged to be a potentiallyresponsible party that sent hazardous materials and wastes.

 

We are also subject to mandates to provide customers with clean energy,renewable energy and energy conservation offerings.  These mandates are designed in part tomitigate the potential environmental impacts of utility operations.  Failure to meet the requirements of thesemandates may result in fines or penalties, which could have a material adverseeffect on our results of operations.  Ifour regulators do not allow us to recover all or a part of the cost of capitalinvestment or the 

 

17

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operating and maintenance costs incurred to comply with the mandates,it could also have a material adverse effect on our results of operations.

 

In addition, existing environmental laws or regulations may be revised,new laws or regulations seeking to protect the environment may be adopted orbecome applicable to us and we may incur additional unanticipated obligationsor liabilities under existing environmental laws and regulations.

 

***We are subject to physical and financial risksassociated with climate change.***

*** ***

**There is a growing consensus that emissions of GHGs are linked toglobal climate change.  Climate changecreates physical and financial risk. **Physicalrisks from climate change include an increase in sea level and changes inweather conditions, such as an increase in changes in precipitation and extremeweather events.  PSCo does not serve anycoastal communities so the possibility of sea level rises does not directlyaffect PSCo or its customers.  Ourcustomers’ energy needs vary with weather conditions, primarily temperature andhumidity.  For residential customers,heating and cooling represent their largest energy use.  To the extent weather conditions are affectedby climate change, customers’ energy use could increase or decrease dependingon the duration and magnitude of the changes. Increased energy use due to weather changes may require us to invest inmore generating assets, transmission and other infrastructure to serveincreased load.  Decreased energy use dueto weather changes may affect our financial condition, through decreasedrevenues.  Extreme weather conditions ingeneral require more system backup, adding to costs, and can contribute toincreased system stresses, including service interruptions.  Weather conditions outside of the company’sservice territory could also have an impact on PSCo’s revenues.  PSCo buys and sells electricity dependingupon system needs and market opportunities. Extreme weather conditions creating high energy demand on our own and/orother systems may raise electricity prices as we buy short-term energy to serveour own system, which would increase the cost of energy we provide to ourcustomers.  Severe weather impacts PSCo’sservice territories, primarily through thunderstorms, tornadoes and snow or icestorms.  We include storm restoration inour budgeting process as a normal business expense and we anticipate continuingto do so.  To the extent the frequency ofextreme weather events increases, this could increase our cost of providingservice.  Changes in precipitationresulting in droughts or water shortages could adversely affect our operations,principally our fossil generating units. A negative impact to water supplies due to long-term drought conditionscould adversely impact our ability to provide electricity to customers, as wellas increase the price they pay for energy.  We may not recover all costs related to mitigating these physical andfinancial risks.

 

To the extent climate change impacts a region’s economic health, it mayalso impact PSCo’s revenues.  PSCo’sfinancial performance is tied to the health of the regional economies weserve.  The price of energy, as a factorin a region’s cost of living as well as an important input into the cost ofgoods, has an impact on the economic health of our communities.  The cost of additional regulatoryrequirements, such as a tax on GHGs or additional environmental regulation,would normally be borne by consumers through higher prices for energy andpurchased goods.  To the extent financialmarkets view climate change and emissions of GHGs as a financial risk, thiscould negatively affect our ability to access capital markets or cause PSCo toreceive less than ideal terms and conditions.

 

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

 

**Legislative and regulatory responses related to climate change createfinancial risk.  Increased publicawareness and concern may result in more regional and/or federal requirementsto reduce or mitigate the effects of GHG. Numerous states have announced or adopted programs to stabilize andreduce GHG and federal legislation has been introduced in both houses ofCongress. **PSCo’s electricgenerating facilities are likely to be subject to regulation under climatechange policies introduced at either the state or federal level within the nextfew years.  **PSCo is advocating with state and federal policymakers to help design climate change regulation that is effective, flexible,low-cost and consistent with the our environmental leadership strategy.**

 

Many of the federal and state climate change legislative proposals usea “cap and trade” policy structure, in which GHG emissions from a broadcross-section of the economy would be subject to an overall cap.  Under the proposals, the cap becomes morestringent with the passage of time.  Theproposals establish mechanisms for GHG sources, such as power plants, to obtain“allowances” or permits to emit GHGs during the course of a year.  The sources may use the allowances to covertheir own emissions or sell them to other sources that do not hold enoughemissions for their own operations. Proponents of the cap and trade policy believe it will result in themost cost effective, flexible emission reductions.  **The impact of legislation and regulations, includinga “cap and trade” structure, on PSCo and its customers will depend on a**

** **

**18**

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** **

**number of factors, including whether GHG sources in multiple sectors ofthe economy are regulated, the overall GHG emissions cap level, the degree towhich GHG offsets are allowed, the allocation of emission allowances tospecific sources and the indirect impact of carbon regulation on natural gasand coal prices.  An important factor isPSCo’s ability to recover the costs incurred to comply with any regulatoryrequirements that are ultimately imposed. **We may not recover all costs related tocomplying with regulatory requirements imposed on PSCo.  If our regulators do not allow us to recoverall or a part of the cost of capital investment or the operating andmaintenance costs incurred to comply with the mandates, it could have amaterial adverse effect on our results of operations.

 

***Economic conditions could negatively impact ourbusiness.***

*** ***

Our operations are affected by local, national and worldwide economicconditions.  The consequences of aprolonged recession may include a lower level of economic activity anduncertainty regarding energy prices and the capital and commodity markets.  A lower level of economic activity mightresult in a decline in energy consumption, which may adversely affect ourrevenues and future growth.  Instabilityin the financial markets, as a result of recession or otherwise, also mayaffect the cost of capital and our ability to raise capital.

 

Worldwide economic activity has an impact on the demand for basiccommodities needed for utility infrastructure, such as steel, copper, aluminum,etc., which may impact our ability to acquire sufficient supplies.  Additionally, the cost of those commoditiesmay be higher than expected.

 

***Our utility operations are subject to long termplanning risks.***

*** ***

On a periodic basis, or as needed, our utility operations file longterm resource plans.  These plans arebased on numerous assumptions over the relevant planning horizon such as:  sales growth, economic activity, costs,regulatory mechanisms, impact of technology on sales and production andcustomer response.  Given the uncertaintyin these planning assumptions, there is a risk that the magnitude and timing ofresource additions and demand may not coincide. This could lead to under recovery of costs or insufficient resources tomeet customer demand.

 

***Our operations could be impacted by war, acts ofterrorism, threats of terrorism or disruptions in normal operating conditionsdue to localized or regional events.***

*** ***

Our generation plants, fuel storage facilities, transmission anddistribution facilities and information systems may be targets of terroristactivities that could disrupt our ability to produce or distribute some portionof our energy products.  Any suchdisruption could result in a significant decrease in revenues and significantadditional costs to repair and insure our assets, which could have a materialadverse impact on our financial condition and results of operations.  The potential for terrorism has subjected ouroperations to increased risks and could have a material adverse effect on ourbusiness.  While we have already incurredincreased costs for security and capital expenditures in response to theserisks, we may experience additional capital and operating costs to implementsecurity for our plants, such as additional physical plant security andadditional security personnel.

 

The insurance industry has also been affected by these events and theavailability of insurance covering risks we and our competitors typicallyinsure against may decrease.  Inaddition, the insurance we are able to obtain may have higher deductibles,higher premiums and more restrictive policy terms.

 

A disruption of the regional electric transmission grid, interstatenatural gas pipeline infrastructure or other fuel sources, could negativelyimpact our business.  Because ourgeneration, transmission systems and local natural gas distribution companiesare part of an interconnected system, we face the risk of possible loss ofbusiness due to a disruption caused by an event (severe storm, generator ortransmission facility outage, pipeline rupture, railroad disruption, sudden andsignificant increase or decrease in wind generation) within our operatingsystems or on a neighboring system or the actions of a neighboringutility.  Any such disruption could resultin a significant decrease in revenues and significant additional costs torepair assets, which could have a material adverse impact on our financialcondition and results.

 

***We are subject to business continuity risksassociated with the company’s ability to respond to unforeseen events.***

*** ***

The company’s response to unforeseen events will, in part, determinethe financial impact of the event on our financial condition and results.  It’s difficult to predict the magnitude ofsuch events and associated impacts.

 

19

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***We are subject to information security risks.***

*** ***

A security breach of our information systems could subject the companyto financial harm associated with theft or inappropriate release of certaintypes of information, including, but not limited to, customer or systemoperating information.  We are unable toquantify the potential impact of such an event.

 

***Rising energy prices could negatively impactour business.***

 

Higher fuel costs could significantly impact our results of operationsif requests for recovery are unsuccessful. In addition, the higher fuel costs could reduce customer demand orincrease bad debt expense, which could also have a material impact on ourresults of operations.  Delays in thetiming of the collection of fuel cost recoveries as compared with expendituresfor fuel purchases could have an impact on our cash flows.  We are unable to predict the future prices orthe ultimate impact of such prices on our results of operations or cash flows.

 

***Our operating results may fluctuate on a seasonaland quarterly basis and can be adversely affected by milder weather.***

*** ***

Our electric utility and natural gas businesses are seasonal andweather patterns can have a material impact on our operating performance.  Demand for electricity is often greater inthe summer and winter months associated with cooling and heating.  Because natural gas is heavily used forresidential and commercial heating, the demand for this product depends heavilyupon weather patterns throughout our service territory and a significant amountof natural gas revenues are recognized in the first and fourth quarters relatedto the heating season.  Accordingly, ouroperations have historically generated less revenues and income when weatherconditions are milder in the winter and cooler in the summer.  Unusually mild winters and summers could havean adverse effect on our financial condition and results of operations.

 

***Our natural gas distribution activities involvenumerous risks that may result in accidents and other operating risks andcosts.***

*** ***

There are inherent in our natural gas distribution activities a varietyof hazards and operating risks, such as leaks, explosions and mechanicalproblems, which could cause substantial financial losses.  In addition, these risks could result in lossof human life, significant damage to property, environmental pollution,impairment of our operations and substantial losses to us.  In accordance with customary industrypractice, we maintain insurance against some, but not all, of these risks andlosses.

 

The occurrence of any of these events not fully covered by insurancecould have a material adverse effect on our financial position and results ofoperations.  For our distribution lineslocated near populated areas, including residential areas, commercial businesscenters, industrial sites and other public gathering areas, the level ofdamages resulting from these risks is greater.

 

***Increased risks of regulatory penalties couldnegatively impact our business.***

*** ***

The Energy Act increased the FERC’s civil penalty authority forviolation of FERC statutes, rules and orders.  The FERC can now impose penalties of $1million per violation per day.  EffectiveJune 2007, 83 electric reliability standards that were historicallysubject to voluntary compliance became mandatory and subject to potential civilpenalties for violations.  If a seriousreliability incident did occur, it could have a material adverse effect on ouroperations or financial results.

 

***Increasing costsassociated with our defined benefit retirement plans and other employee-relatedbenefits may adversely******affect our results of operations,financial position, or liquidity.***

 

We have defined benefit and postretirement plans that coversubstantially all of our employees. Assumptions related to future costs, return on investments, interestrates and other actuarial assumptions have a significant impact on our fundingrequirements related to these plans. These estimates and assumptions may change based on actual stock marketperformance, changes in interest rates and any changes in governmentalregulations.  In addition, the PensionProtection Act of 2006 changed the minimum funding requirements for definedbenefit pension plans beginning in 2008. Therefore, our funding requirements and related contributions may changein the future.

 

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*** ***

***Increasing costs associated with health care plansmay adversely affect our results of operations, financial position orliquidity.***

*** ***

The costs of providing health care benefits to our employees andretirees have increased substantially in recent years.  We believe that our employee benefit costs,including costs related to health care plans for our employees and former employees,will continue to rise.  The increasingcosts and funding requirements associated with our health care plans mayadversely affect our results of operations, financial position, or liquidity.

 

***As we are a subsidiary of Xcel Energy, we may benegatively affected by events at Xcel Energy and its affiliates.  If Xcel Energy were to become obligated tomake payments under various guarantees and bond indemnities or to fund itsother contingent liabilities, or if Xcel Energy’s credit ratings and access tocapital were restricted, this could limit Xcel Energy’s ability to contributeequity or make loans to us, or may cause Xcel Energy to seek additional oraccelerated funding from us in the form of dividends.  If such event were to occur, we may need toseek alternative sources of funds to meet our cash needs.***

*** ***

If either Standard & Poor’s or Moody’s were to downgrade XcelEnergy’s credit rating below investment grade, Xcel Energy may be required toprovide credit enhancements in the form of cash collateral, letters of creditor other security to satisfy part or potentially all of these exposures.  If either Standard & Poor’s or Moody’swere to downgrade Xcel Energy’s debt securities below investment grade, itwould increase Xcel Energy’s cost of capital and restrict its access to thecapital markets.  This could limit XcelEnergy’s ability to contribute equity or make loans to us, or may cause XcelEnergy to seek additional or accelerated funding from us in the form ofdividends.  If such event were to occur,we may need to seek alternative sources of funds to meet our cash needs.

 

As of Dec. 31, 2007, Xcel Energy had approximately $6.3 billion oflong-term debt and $1.7 billion of short-term debt or current maturities.  Xcel Energy provides various guarantees andbond indemnities supporting some of its subsidiaries by guaranteeing thepayment or performance by these subsidiaries of specified agreements ortransactions.

 

Xcel Energy also has other contingent liabilities resulting fromvarious tax disputes and other matters. Xcel Energy’s exposure under the guarantees is based upon the netliability of the relevant subsidiary under the specified agreements ortransactions.  The majority of XcelEnergy’s guarantees limit its exposure to a maximum amount that is stated inthe guarantees.  As of Dec. 31, 2007,Xcel Energy had guarantees outstanding with a maximum stated amount ofapproximately $76.2 million and $0.1 million of exposure.  Xcel Energy has also provided indemnities tosureties in respect of bonds for the benefit of its subsidiaries.  The total amount of bonds with theseindemnities outstanding as of Dec. 31, 2007, was approximately $31.6million.  Xcel Energy’s total exposureunder these indemnities cannot be determined at this time.  If Xcel Energy were to become obligated tomake payments under these guarantees and bond indemnities or become obligatedto fund the other contingent liabilities, it could limit Xcel Energy’s abilityto contribute equity or make loans to us, or may cause Xcel Energy to seekadditional or accelerated funding from us in the form of dividends.  If such event were to occur, we may need toseek alternative sources of funds to meet our cash needs.

 

***We are a wholly owned subsidiary of XcelEnergy.  Xcel Energy can exercisesubstantial control over our dividend policy and business and operations andmay exercise that control in a manner that may be perceived to be adverse toour interests.***

*** ***

Our boards of directors, as well as many of our executive officers, areofficers of Xcel Energy.  Our board makesdeterminations with respect to a number of significant corporate events,including the payment of our dividends.

 

We have historically paid quarterly dividends to Xcel Energy.  In 2007, 2006 and 2005 we paid $263.9million, $195.6 million and $62.6 million of dividends to Xcel Energy,respectively.  If Xcel Energy’s cashrequirements increase, our board of directors could decide to increase thedividends we pay to Xcel Energy to help support Xcel Energy’s cash needs.  This could adversely affect ourliquidity.  The amount of dividends thatwe can pay is also limited to some extent by our indenture for our firstmortgage bonds.

 

**Item 1B — Unresolved SECStaff Comments**

** **

None.

 

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** **

**Item 2 — Properties**

** **

Virtually all of the electric utility plant of PSCo is subject to thelien of its first mortgage bond indenture.

 

Electric utility generating stations:

 
| ** **                                | ** ** | ** **      | ** ** | ** **    | ** ** | **Summer 2007 Net** | ** ** |
|-------------------------------------------|------------|-----------------|------------|---------------|------------|-------------------------------|------------|
| ** **                                | ** ** | ** **      | ** ** | ** **    | ** ** | **Dependable**                | ** ** |
| **Station, City and Unit** | ** ** | **Fuel**        | ** ** | **Installed** | ** ** | **Capability (MW)**      | ** ** |
| ** **                                | ** ** | ** **      | ** ** | ** **    | ** ** | ** **                    | ** ** |
| Steam:                                    |       |            |       |          |       |                          |       |
| Arapahoe-Denver, CO 2 Units               |       | Coal            |       | 1951-1955     |       | 156                           |       |
| Cameo-Grand Junction, CO 2 Units          |       | Coal            |       | 1957-1960     |       | 73                            |       |
| Cherokee-Denver, CO 4 Units               |       | Coal            |       | 1957-1968     |       | 717                           |       |
| Comanche-Pueblo, CO 2 Units               |       | Coal            |       | 1973-1975     |       | 660                           |       |
| Craig-Craig, CO 2 Units                   |       | Coal            |       | 1979-1980     |       | 83                            | (a)        |
| Hayden-Hayden, CO 2 Units                 |       | Coal            |       | 1965-1976     |       | 237                           | (b)        |
| Pawnee-Brush, CO                          |       | Coal            |       | 1981          |       | 505                           |       |
| Valmont-Boulder, CO                       |       | Coal            |       | 1964          |       | 186                           |       |
| Zuni-Denver, CO 2 Units                   |       | Natural Gas/Oil |       | 1948-1954     |       | 107                           |       |
|                                      |       |            |       |          |       |                          |       |
| Combustion Turbines:                      |       |            |       |          |       |                          |       |
| Fort St. Vrain-Platteville, CO 4 Units    |       | Natural Gas     |       | 1972-2001     |       | 690                           |       |
| Various Locations 6 Units                 |       | Natural Gas     |       | Various       |       | 174                           |       |
|                                      |       |            |       |          |       |                          |       |
| Hydro:                                    |       |            |       |          |       |                          |       |
| Various Locations 12 Units                |       |            |       | Various       |       | 32                            |       |
| Cabin Creek-Georgetown, CO Pumped Storage |       |            |       | 1967          |       | 210                           |       |
|                                      |       |            |       |          |       |                          |       |
| Wind:                                     |       |            |       |          |       |                          |       |
| Ponnequin-Weld County, CO                 |       |            |       | 1999-2001     |       | —                        |       |
|                                      |       |            |       |          |       |                          |       |
| Diesel Generators:                        |       |            |       |          |       |                          |       |
| Cherokee-Denver, CO 2 Units               |       |            |       | 1967          |       | 6                             |       |
|                                      |       |            |       | Total         |       | 3,836                         |       |

 

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(a)             Basedon PSCo’s ownership interest of 9.7 percent.

(b)            Based onPSCo’s ownership interest of 75.5 percent of unit 1 and 37.4 percent of unit 2.

 

Electric utility overhead and underground transmission and distributionlines (measured in conductor miles) at Dec. 31, 2007:

 

 
| **Conductor Miles** |
|--------------------------|
| 345 KV                   |   | 957 |   |
| 230 KV                   |   | 11,393 |   |
| 138 KV                   |   | 92 |   |
| 115 KV                   |   | 4,871 |   |
| Less than 115 KV         |   | 72,027 |   |

 

PSCo had 216 electric utility transmission and distribution substationsat Dec. 31, 2007.

 

Natural gas utility mains at Dec. 31, 2007:

 

 
| **Miles**    |
|--------------|
| Transmission |   | 2,306 |   |
| Distribution |   | 20,815 |   |

** **

**22**

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** **

**Item 3 — Legal Proceedings**

** **

In the normal course of business, various lawsuits and claims havearisen against PSCo.  Management, afterconsultation with legal counsel, has recorded an estimate of the probable costof settlement or other disposition for such matters.

 

For a discussion of legal claims and environmental proceedings, seeNote 13 to the consolidated financial statements under Item 8, incorporated byreference.  For a discussion of proceedingsinvolving utility rates, see Pending and Recently Concluded RegulatoryProceedings under Item 1 and Note 12 to the consolidated financial statementsunder Item 8, incorporated by reference.

 

**Item 4 —Submission of Matters to a Vote of Security Holders**

 

This is omitted per conditions set forth in general instructions I(1)(a) and(b) of Form 10-K for wholly owned subsidiaries (reduced disclosureformat).

 

**PART II**

** **

**Item 5 — Market forRegistrant’s Common Equity, Related Stockholder Matters and Issuer Purchases ofEquity Securities**

** **

PSCo is a wholly owned subsidiary of Xcel Energy and there is no marketfor its common equity securities.

 

PSCo had dividend restrictions imposed by its debt agreements and FERCrules.  PSCo’s mortgage bonds prohibitdividends or other similar distributions unless covenants relating to PSCo’scapitalization are met.  Dividends arealso subject to the FERC’s jurisdiction under the Federal Power Act, whichprohibits the payment of dividends out of capital accounts; payment of dividendsis allowed out of retained earnings only.

 

The dividends declared during 2007 and 2006 were as follows:

 

** **

 
| **Quarter Ended  (Thousands of Dollars)** | ** ** |
|----------------------------------------------------------|------------|
| **March 31, 2007**                             | ** ** | **June 30, 2007** | ** ** | **Sept. 30, 2007** | ** ** | **Dec. 31, 2007** | ** ** |
| $                                                        | 65,514     |   | $ | 65,774 |   | $ | 67,792 |   | $ | 68,454 |   |
|                                                          |            |  |  |  |  |  |  |  |  |  |  |

 
| **March 31, 2006** | ** ** | **June 30, 2006** | ** ** | **Sept. 30, 2006** | ** ** | **Dec. 31, 2006** | ** ** |
|------------------------------|------------|-----------------------------|------------|------------------------------|------------|-----------------------------|------------|
| $                            | 65,033     |                        | $          | 64,622                       |       | $                           | 65,970     |   | $ | 64,777 |   |
|                              |            |                             |            |                              |            |                             |            |  |  |  |  |

 

**Item 6 — Selected FinancialData**

** **

This is omitted per conditions set forth in general instructions I(1)(a) and(b) of Form 10-K for wholly owned subsidiaries (reduced disclosureformat).

 

**Item 7 — Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

Discussion of financial condition and liquidity for PSCo is omitted perconditions set forth in general instructions I (1)(a) and (b) of Form 10-Kfor wholly owned subsidiaries. It is replaced with management’s narrativeanalysis and the results of operations for the current year as set forth ingeneral instructions I(2)(a) of Form 10-K for wholly ownedsubsidiaries (reduced disclosure format).

 

**Forward Looking Information**

** **

The following discussion and analysis by management focuses on thosefactors that had a material effect on the financial condition and results ofoperations of PSCo during the periods presented, or are expected to have amaterial impact in the future. It should be read in conjunction with therespective accompanying consolidated financial statements and notes to theconsolidated financial statements.

 

Except for the historical statements contained in this report, thematters discussed in the following discussion and analysis are forward-lookingstatements that are subject to certain risks, uncertainties andassumptions.  Such forward-lookingstatements are intended to be identified in this document by the words “anticipate,”  “believe,” “estimate,” “expect,” “intend,” “may,”

 

23

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“objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should,”and similar expressions.  Actual resultsmay vary materially.  Factors that couldcause actual results to differ materially include, but are not limited to: general economic conditions, includingthe availability of credit and its impact on capital expenditures and theability of PSCo to obtain financing on favorable terms; business conditions in the energy industry; actions of creditrating agencies; competitive factors, including the extent and timing of theentry of additional competition in the markets served by PSCo; unusual weather;effects of geopolitical events, including war and acts of terrorism; state,federal and foreign legislative and regulatory initiatives that affect cost andinvestment recovery, have an impact on rates, have an impact on asset operationor ownership or impose environmental compliance conditions; structures thataffect the speed and degree to which competition enters the electric andnatural gas markets; costs and other effects of legal and administrativeproceedings, settlements, investigations and claims; actions of accounting regulatorybodies; the items described under “Risk Factors” in Item 1A and Exhibit 99.01of PSCo’s Form 10-K for the year ended Dec. 31, 2007.

 

**Management’s Discussion andAnalysis of Financial Condition and Results of Operation**

** **

**Results Of Operations**

** **

PSCo’s net income was approximately $296.9 million for 2007, comparedwith approximately $241.5 million for 2006. During 2007, PSCo settled an ongoing dispute with the U.S. governmentregarding PSCo’s right to deduct interest expense on policy loans related toits COLI program that insured lives of certain PSCo employees.  The total exposure for the tax years indispute through 2007 was approximately $583 million, which includes income tax,interest and potential penalties.  SeeNote 7 to the consolidated financial statements.

 

**Electric Utility, Short-TermWholesale and Commodity Trading Margins**

 

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

 

PSCo has two distinct forms of wholesale sales:  short-term wholesale and commoditytrading.  Short-term wholesale refers toenergy-related purchase and sales activity and the use of certain financialinstruments associated with the fuel required for and energy produced from,PSCo’s generation assets or the energy and capacity purchased to serve nativeload.  Commodity trading is notassociated with PSCo’s generation assets or the energy and capacity purchasedto serve native load.  Short-termwholesale and commodity trading activities are considered part of the electricutility segment.

 

Margins from commodity trading activity conducted at PSCo are partiallyredistributed to NSP-Minnesota and SPS, both wholly owned subsidiaries of XcelEnergy, pursuant to the JOA approved by the FERC.  Margins received pursuant to the JOA arereflected as part of base electric utility revenues.  Short-term wholesale and commodity tradingmargins reflect the impact of regulatory sharing, if applicable.  Commodity trading revenues, as discussed inNote 1 to the consolidated financial statements, are reported net of relatedcosts (i.e., on a margin basis) in the consolidated statements of income.  Commodity trading expenses include purchasedpower, transmission, broker fees and other related costs.  Short-term wholesale and commodity tradingmargins reflect the estimated impact of regulatory sharing of margins, ifapplicable.

 

The following table details the revenues andmargin for base electric utility, short-term wholesale and commodity tradingactivities:

 

24

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| ** **                                               | ** ** | **Base**     | ** ** | ** **     | ** ** | ** **    | ** ** | ** **       | ** ** |
|----------------------------------------------------------|------------|--------------|------------|----------------|------------|---------------|------------|------------------|------------|
| ** **                                               | ** ** | **Electric** | ** ** | **Short-Term** | ** ** | **Commodity** | ** ** | **Consolidated** | ** ** |
| **(Millions of Dollars)**                      | ** ** | **Utility**  | ** ** | **Wholesale**  | ** ** | **Trading**   | ** ** | **Totals**       | ** ** |
| **2007**                                                 |       |         |       |           |       |          |       |             |       |
| Electric utility revenues (excluding  commodity trading) |       | $            | 2,521      |           | $          | 85            |       | $                | —     |   | $ | 2,606 |   |
| Electric fuel and purchased power                        |       | (1,360       | )          | (76            | )          | —        |       | (1,436           | )          |
| Commodity trading revenues                               |       | —       |       | —         |       | 168           |       | 168              |       |
| Commodity trading expenses                               |       | —       |       | —         |       | (169          | )          | (169             | )          |
| Gross margin before operating expenses                   |       | $            | 1,161      |           | $          | 9             |       | $                | (1         | ) | $ | 1,169 |   |
| Margin as a percentage of revenues                       |       | 46.1         | %          | 10.6           | %          | —        | %          | 42.1             | %          |
|                                                     |       |         |       |           |       |          |       |             |       |
| **2006**                                                 |       |         |       |           |       |          |       |             |       |
| Electric utility revenues (excluding  commodity trading) |       | $            | 2,472      |           | $          | 29            |       | $                | —     |   | $ | 2,501 |   |
| Electric fuel and purchased power                        |       | (1,465       | )          | (25            | )          | —        |       | (1,490           | )          |
| Commodity trading revenues                               |       | —       |       | —         |       | 466           |       | 466              |       |
| Commodity trading expenses                               |       | —       |       | —         |       | (461          | )          | (461             | )          |
| Gross margin before operating expenses                   |       | $            | 1,007      |           | $          | 4             |       | $                | 5          |   | $ | 1,016 |   |
| Margin as a percentage of revenues                       |       | 40.7         | %          | 13.8           | %          | 1.1           | %          | 34.2             | %          |

 

The following summarizes the components of the changes in base electricrevenues and base electric margin for the year ended Dec. 31:

 

***BaseElectric Revenues***

** **
| **(Millions of Dollars)**             | ** ** | **2007 vs 2006** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|
| Fuel and purchased power cost recovery          |       | $                          | (113       | ) |
| Retail rate increase                            |       | 112                        |       |
| Retail sales growth (excluding weather  impact) |       | 21                         |       |
| Conservation and non-fuel riders                |       | 21                         |       |
| Transmission revenues                           |       | 13                         |       |
| Estimated impact of weather                     |       | 5                          |       |
| Firm wholesale                                  |       | (4                         | )          |
| Sales mix and other                             |       | (6                         | )          |
| Total increase in base electric revenues        |       | $                          | 49         |   |

 

***BaseElectric Margin***

*** ***
| **(Millions of Dollars)**             | ** ** | **2007 vs 2006** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|
| Retail rate  increase                           |       | $                          | 112        |   |
| Retail sales  growth (excluding weather impact) |       | 21                         |       |
| ECA refund  recorded in 2006                    |       | 12                         |       |
| Fuel and  purchased power cost recovery         |       | (11                        | )          |
| Transmission  revenues, net of expense          |       | 9                          |       |
| Conservation and  non-fuel riders               |       | 8                          |       |
| Estimated impact  of weather                    |       | 5                          |       |
| Sales mix and  other                            |       | (2                         | )          |
| Total increase  in base electric margin         |       | $                          | 154        |   |

 

***Natural Gas UtilityRevenues and Margin*****— The following table details the change in natural gasrevenues and margin. The cost of natural gas tends to vary with changing salesrequirements and unit cost of natural gas purchases.  PSCo has a GCA mechanism for natural gassales, which recognizes the majority of the effects of changes in the cost ofnatural gas purchased for resale and adjusts revenues to reflect such changesin costs upon request by PSCo. Therefore, fluctuations in the cost of natural gas have little effect onnatural gas margin.

 

25

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| **(Millions of Dollars)**            | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|
| Natural gas utility revenues                   |       | $        | 1,186      |     | $          | 1,262 |   |
| Cost of natural gas purchased and  transported |       | (832     | )          | (938     | )          |
| Natural gas utility margin                     |       | $        | 354        |     | $          | 324 |   |

 

The following summarizes the components of the changes in natural gasrevenues and margin for the year ended Dec. 31:

 

***NaturalGas Revenues***

*** ***
| **(Millions of Dollars)**       | ** ** | **2007 vs 2006** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|
| Purchased  natural gas cost recovery      |       | $                          | (108       | ) |
| Base rate change                          |       | 10                         |       |
| Estimated impact  of weather              |       | 8                          |       |
| Transportation                            |       | 4                          |       |
| Service and  facility fee revenues        |       | 3                          |       |
| Sales decline  (excluding weather impact) |       | (1                         | )          |
| Other                                     |       | 8                          |       |
| Total decrease  in natural gas revenues   |       | $                          | (76        | ) |

 

***NaturalGas Margin***

*** ***
| **(Millions of Dollars)**       | ** ** | **2007 vs 2006** | ** ** |
|-------------------------------------------|------------|----------------------------|------------|
| Base rate change                          |       | $                          | 10         |   |
| Estimated impact  of weather              |       | 8                          |       |
| Transportation                            |       | 4                          |       |
| Service and  facility fee revenues        |       | 3                          |       |
| Sales decline  (excluding weather impact) |       | (1                         | )          |
| Other                                     |       | 6                          |       |
| Total increase  in natural gas margin     |       | $                          | 30         |   |

 

***Operating andMaintenance Expenses****—*Operating and maintenance expenses for 2007 increased$38.4 million, or 6.7 percent, compared to 2006.  The following summarizes the components ofthe changes for the year ended Dec. 31:

 
| **(Millions of Dollars)**                   | ** ** | **2007 vs 2006** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|
| Lower employee  benefit costs                         |       | $                          | (18        | ) |
| Higher  combustion/hydro plant costs                  |       | 13                         |       |
| Higher donation  costs                                |       | 10                         |       |
| Higher labor  costs                                   |       | 9                          |       |
| Higher  contractor costs                              |       | 8                          |       |
| Gains/losses on  sale or disposals of assets, net     |       | 6                          |       |
| Higher material  costs                                |       | 3                          |       |
| Higher license  and permit fees                       |       | 2                          |       |
| Other                                                 |       | 5                          |       |
| Total increase  in operating and maintenance expenses |       | $                          | 38         |   |

 

***Depreciation and amortization -***Depreciation and amortization expenseincreased by approximately $25.3 million, or 10.6 percent, for 2007 comparedwith 2006, primarily due to normal plant additions and the approved change indepreciation rates for 2007 from the 2006 Colorado rate case settlementresulting in an additional depreciation expense of $17.0 million.

 

***Interest and otherincome (expense), net -***Interest and other income(expense), net, increased by approximately $11.8 million, or 83.1 percent,primarily due to lower interest expense, net of interest income on COLI loansand interest income accrued on deferred fuel costs.

 

***Interest charges andfinancing costs -***Interest charges and financingcosts increased by approximately $42.7 million, or 31.1 percent, for 2007compared with 2006, primarily due to interest incurred related to the COLI lifeinsurance settlement.

 

26

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***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 $11.5million, or 71.5 percent, for 2007 compared with 2006, primarily due to the construction of Comanche 3.  The increase was partially offset by thecurrent recovery from customers of the financing costs related to thisconstruction through base rates, resulting in a lower recognition of AFDC.

 

***Income taxes -***Income tax expense increased by approximately$52.7 million for 2007 compared with 2006. The increase was primarily due to an increase in pretax income(excluding COLI) and $16.1 million of tax expense related to the COLIsettlement in 2007.  The effective taxrate was 31.2 percent for 2007, compared with 25.3 percent for 2006.  The higher effective tax rate for 2007 wasprimarily due to the COLI settlement. Without these charges, the effective tax rate for 2007 would have been24.1 percent.

 

**Item 7A — Quantitative andQualitative Disclosures About Market Risk**

** **

**DERIVATIVES, RISK MANAGEMENTAND MARKET RISK**

** **

In the normal course of business, PSCo is exposed to a variety ofmarket risks.  Market risk is thepotential loss or gain that may occur as a result of changes in the market orfair value of a particular instrument or commodity.  All financial and commodity relatedinstruments, including derivatives, are subject to market risk.  These risks, as applicable to PSCo, arediscussed in further detail below.

 

***Commodity Price Risk—*** PSCo is exposed to commodity price risk in itselectric and natural gas operations. Commodity price risk is managed by entering into both long- andshort-term physical purchase and sales contracts for electric capacity, energyand energy-related products and for various fuels used in generation anddistribution activities.  Commodity pricerisk is also managed through the use of financial derivative instruments.  PSCo’s risk management policy allows it tomanage commodity price risk within each rate-regulated operation to the extentsuch exposure exists.

 

***Short-Term Wholesaleand Commodity Trading Risk —***PSCo conducts variousshort-term wholesale and commodity trading activities, including the purchaseand sale of capacity, energy and energy related instruments.  These marketing activities generally haveterms of less than one year in length. PSCo’s risk management policy allows management to conduct the marketingactivities within guidelines and limitations as approved by its risk managementcommittee, which is made up of management personnel not directly involved inthe activities governed by the policy.

 

The fair value of the commodity trading contracts at Dec. 31,2007, were as follows:

 
| ** **                                                            | ** ** | **(Millions of Dollars)** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------|------------|
| Fair value of  trading contracts outstanding at Jan. 1, 2007     |       | $                                   | (0.6       | ) |
| Contracts realized  or settled during the year                        |       | (1.9                                | )          |
| Fair value of  trading contract additions and changes during the year |       | 6.4                                 |       |
| Fair value of trading  contracts outstanding at Dec. 31, 2007    |       | $                                   | 3.9        |   |

 

At Dec. 31, 2007, the fair values by source for the commoditytrading net asset or liability balances were as follows:

 
| ** **                           | ** ** | **Futures/Forwards**                | ** ** |
|--------------------------------------|------------|-------------------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **Source of  Fair Value** | ** ** | **Maturity  Less Than  1 Year** | ** ** | **Maturity  1 to 3 Years** | ** ** | **Maturity  4 to 5  Years** | ** ** | **Maturity  Greater  Than 5 Years** | ** ** | **Total Futures/  Forwards Fair  Fair Value** | ** ** |
| Futures/Forwards Fair Value          |       | 1                                   |       | $ | (657 | ) | $ | — |   | $ | — |   | $ | — |   | $ | (657 | ) |
|                                 |       | 2                                   |       | 3,893 |   | 701 |   | — |   | — |   | 4,594 |   |
|                                 |       |                                |       | $ | 3,236 |   | $ | 701 |   | $ | — |   | $ | — |   | $ | 3,937 |   |

 

----

(1)  —     Pricesactively quoted or based on actively quoted prices.

 

27

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(2)  —     Prices basedon models and other valuation methods. These represent the fair value of positions calculated using internalmodels when directly and indirectly quoted external prices or prices derivedfrom external sources are not available. Internal models incorporate the use of options pricing and estimates ofthe present value of cash flows based upon underlying contractual terms.   The models reflect management’s estimates,taking into account observable market prices, estimated market prices in theabsence of quoted market prices, the risk-free market discount rate, volatilityfactors, estimated correlations of commodity prices and contractualvolumes.  Market price uncertainty andother risks also are factored into the model.

 

Normal purchasesand sales transactions, as defined by SFAS No. 133 and certain otherlong-term power purchase contracts are not included in the fair values bysource tables as they are not recorded at fair value as part of commoditytrading operations.

 

PSCo’s short-term wholesale and commodity trading operations measurethe outstanding risk exposure to price changes on transactions, contracts andobligations that have been entered into, but not closed, using an industrystandard methodology known as VaR. VaR expresses the potential change in fairvalue on the outstanding transactions, contracts and obligations over aparticular period of time, with a given confidence interval under normal marketconditions.  PSCo utilizes thevariance/covariance approach in calculating VaR.  The VaR model employs a 95-percent confidenceinterval level based on historical price movement, lognormal price distributionassumption, delta half-gamma approach for non-linear instruments and athree-day holding period for both electricity and natural gas.

 

VaR is calculated on a consolidated basis.  The VaRs for the commodity trading operationswere:

 
| ** **                          | ** ** | **Year ended**         | ** ** | **During 2007** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|----------------------|------------|
| **(Millions of Dollars)** | ** ** | **Dec. 31, 2007** | ** ** | **Average**          | ** ** | **High** | ** ** | **Low** | ** ** |
| Commodity trading (a)               |       | $                           | 0.26       |                 | $          | 0.47 |   | $ | 1.45 |   | $ | 0.09 |   |
|                                     |            |                             |            |                      |            |  |  |  |  |  |  |  |  |

 
| ** **                          | ** ** | **Year ended**         | ** ** | **During 2006** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|----------------------|------------|
| **(Millions of Dollars)** | ** ** | **Dec. 31, 2006** | ** ** | **Average**          | ** ** | **High** | ** ** | **Low** | ** ** |
| Commodity trading (a)               |       | $                           | 0.49       |                 | $          | 1.32 |   | $ | 2.60 |   | $ | 0.39 |   |
|                                     |            |                             |            |                      |            |  |  |  |  |  |  |  |  |

 

----

(a)             Comprisestransactions for NSP-Minnesota, PSCo and SPS.

 

***Interest Rate Risk —***PSCo is subject to the risk of fluctuatinginterest rates in the normal course of business.  PSCo’s risk management policy allows interestrate risk to be managed through the use of fixed rate debt, floating rate debtand interest rate derivatives such as swaps, caps, collars and put or calloptions, subject to regulatory approval when required.

 

At Dec. 31, 2007, a 100-basis-point change in the benchmark rateon PSCo’s variable rate debt would impact pretax interest expense byapproximately $2.0 million.

 

***Credit Risk —***PSCois also exposed to credit risk. Credit risk relates to the risk of lossresulting from the nonperformance by a counterparty of its contractualobligations.  PSCo maintains creditpolicies intended to minimize overall credit risk and actively monitors thesepolicies to reflect changes and scope of operations.

 

PSCo conducts standard credit reviews for all counterparties. PSCoemploys additional credit risk control mechanisms when appropriate, such asletters of credit, parental guarantees, standardized master netting agreementsand termination provisions that allow for offsetting of positive and negativeexposures.  The credit exposure ismonitored and, when necessary, the activity with a specific counterparty islimited until credit enhancement is provided.

 

At Dec. 31, 2007, a 10-percent increase in prices would haveresulted in a net mark-to-market increase in credit risk exposure of $16.0million, while a decrease of 10 percent would have resulted in a decrease of$9.4 million.

 

28

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**Item 8**— **Financial Statements and Supplementary Data**

 

**Management Report on Internal Controls OverFinancial Reporting**

** **

The management of PSCo is responsible for establishingand maintaining adequate internal control over financial reporting.  PSCo’s internal control system was designedto provide reasonable assurance to the company’s management and board ofdirectors regarding the preparation and fair presentation of publishedfinancial statements.

 

All internal control systems, no matter how welldesigned, have inherent limitations. Therefore, even those systems determined to be effective can provideonly reasonable assurance with respect to financial statement preparation andpresentation.

 

PSCo management assessed the effectiveness of thecompany’s internal control over financial reporting as of Dec. 31,2007.  In making this assessment, it usedthe criteria set forth by the Committee of Sponsoring Organizations of theTreadway Commission (COSO) in *InternalControl — Integrated Framework. *Basedon our assessment, we believe that, as of Dec. 31, 2007, the company’sinternal control over financial reporting is effective based on those criteria.

 

This annual report does not include an attestationreport of PSCo’s registered public accounting firm regarding internal controlover financial reporting.  Management’sreport was not subject to attestation by PSCo’s registered public accountingfirm pursuant to temporary rules of the Securities and Exchange Commissionthat permit PSCo to provide only management’s report in this annual report.

 
| /S/ TIM E. TAYLOR                        |                                          | /S/ BENJAMIN G.S. FOWKE  III |
|------------------------------------------|-----------------------------------------------|------------------------------|
| Tim E. Taylor                            | Benjamin  G.S. Fowke III                      |
| *President  and Chief Executive Officer* | *Vice President and Chief  Financial Officer* |
| February 25, 2008                   | February 25, 2008                        |

 

29

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**Reportof Independent Registered Public Accounting Firm**

 

Board of Directors and StockholderPublic Service Company of Colorado

 

We have audited the accompanying consolidatedbalance sheets and statements of capitalization of Public Service Company ofColorado and subsidiaries (the “Company”) as of December 31, 2007 and2006, and the related consolidated statements of income, common stockholder’sequity and comprehensive income, and cash flows for each of the three years inthe period ended December 31, 2007.  Our audits also included thefinancial statement schedule listed in the Index at Item 15.  Thesefinancial statements and financial statement schedule are the responsibility ofthe Company’s management.  Our responsibility is to express an opinion onthe financial statements and financial statement schedule based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that we plan and perform the audit toobtain reasonable assurance about whether the financial statements are free ofmaterial misstatement.  The Company is not required to have, nor were weengaged to perform, an audit of its internal control over financialreporting.  Our audits includedconsideration of internal control as a basis for designing audit proceduresthat are appropriate in the circumstances, but not for the purpose ofexpressing an opinion on the effectiveness of the Company’s internal controlover financial reporting. Accordingly, we express no such opinion. An auditalso includes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements, assessing the accounting principlesused and significant estimates made by management, as well as evaluating theoverall financial statement presentation.  We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, such consolidated financialstatements present fairly, in all material respects, the financial position ofPublic Service Company of Colorado and subsidiaries as of December 31,2007 and 2006, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2007, inconformity with accounting principles generally accepted in the United Statesof America.  Also, in our opinion, such financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly, in all material respects, the information set forththerein.

 

As discussed in Note 7 to the consolidated financialstatements, the Company adopted Financial Accounting Standards Board (FASB)Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – aninterpretation of FASB Statement No. 109,” as of January 1, 2007.

 

*/s/*DELOITTE & TOUCHE LLP

Minneapolis,Minnesota

February 20,2008

 

30

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**PUBLIC SERVICE CO. OF COLORADO ANDSUBSIDIARIESCONSOLIDATED STATEMENTSOF INCOME**

**(Thousands of Dollars)**

 
| ** **                                                                                    | ** ** | **Year Ended Dec. 31** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                    | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Operating revenues**                                                                        |       |                                  |       |   |   |   |   |
| Electric utility                                                                              |       | $                                     | 2,605,388  |   | $ | 2,505,445 |   | $ | 2,504,028 |   |
| Natural gas utility                                                                           |       | 1,186,106                             |       | 1,262,295 |   | 1,329,034 |   |
| Steam and other                                                                               |       | 36,006                                |       | 38,089 |   | 33,501 |   |
| Total operating revenues                                                                      |       | 3,827,500                             |       | 3,805,829 |   | 3,866,563 |   |
|                                                                                          |       |                                  |       |   |   |   |   |
| **Operating expenses**                                                                        |       |                                  |       |   |   |   |   |
| Electric fuel and purchased power                                                             |       | 1,435,680                             |       | 1,489,714 |   | 1,507,248 |   |
| Cost of natural gas sold and transported                                                      |       | 831,826                               |       | 938,380 |   | 1,032,504 |   |
| Cost of sales — steam and other                                                          |       | 15,646                                |       | 21,043 |   | 19,231 |   |
| Operating and maintenance expenses                                                            |       | 607,467                               |       | 569,059 |   | 546,608 |   |
| Depreciation and amortization                                                                 |       | 265,242                               |       | 239,916 |   | 238,402 |   |
| Taxes (other than income taxes)                                                               |       | 85,261                                |       | 88,878 |   | 91,438 |   |
| Total operating expenses                                                                      |       | 3,241,122                             |       | 3,346,990 |   | 3,435,431 |   |
|                                                                                          |       |                                  |       |   |   |   |   |
| **Operating income**                                                                          |       | 586,378                               |       | 458,839 |   | 431,132 |   |
|                                                                                          |       |                                  |       |   |   |   |   |
| Interest and other income (expense), net                                                      |       | (2,400                                | )          | (14,223 | ) | (11,884 | ) |
| Allowance for funds used during  construction - equity                                        |       | 14,179                                |       | 2,650 |   | 2,655 |   |
|                                                                                          |       |                                  |       |   |   |   |   |
| **Interest charges and financing costs**                                                      |       |                                  |       |   |   |   |   |
| Interest charges — including financing  costs of $5,599, $6,029 and $6,744, respectively |       | 180,230                               |       | 137,493 |   | 144,835 |   |
| Allowance for funds used during  construction - debt                                          |       | (13,324                               | )          | (13,386 | ) | (4,589 | ) |
| Total interest charges and financing costs                                                    |       | 166,906                               |       | 124,107 |   | 140,246 |   |
|                                                                                          |       |                                  |       |   |   |   |   |
| Income before income taxes                                                                    |       | 431,251                               |       | 323,159 |   | 281,657 |   |
| Income taxes                                                                                  |       | 134,357                               |       | 81,701 |   | 70,240 |   |
| Net income                                                                                    |       | $                                     | 296,894    |   | $ | 241,458 |   | $ | 211,417 |   |

 

See Notes to Consolidated FinancialStatements

 

31

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**PUBLIC SERVICE CO. OF COLORADO ANDSUBSIDIARIESCONSOLIDATED STATEMENTSOF CASH FLOWS(Thousands of Dollars)**

 
| ** **                                                                     | ** ** | **Year Ended Dec. 31** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                     | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Operating activities**                                                       |       |                                  |       |   |   |   |   |
| Net income                                                                     |       | $                                     | 296,894    |   | $ | 241,458 |   | $ | 211,417 |   |
| Adjustments to reconcile net income to cash  provided by operating activities: |       |                                  |       |   |   |   |   |
| Depreciation and amortization                                                  |       | 272,850                               |       | 253,725 |   | 251,668 |   |
| Deferred income taxes                                                          |       | 79,359                                |       | 76,040 |   | 111,455 |   |
| Amortization of investment tax credits                                         |       | (3,869                                | )          | (3,949 | ) | (3,971 | ) |
| Allowance for equity funds used during  construction                           |       | (14,179                               | )          | (2,650 | ) | (2,655 | ) |
| Net realized and unrealized hedging and  derivative transactions               |       | 2,583                                 |       | (19,497 | ) | 17,684 |   |
| Changes in operating assets and  liabilities:                                  |       |                                  |       |   |   |   |   |
| Accounts receivable                                                            |       | (44,856                               | )          | 133,691 |   | (137,782 | ) |
| Accrued unbilled revenues                                                      |       | (160,830                              | )          | 35,253 |   | (61,760 | ) |
| Inventories                                                                    |       | 29,673                                |       | 34,865 |   | (56,043 | ) |
| Recoverable purchased natural gas and  electric energy costs                   |       | 143,970                               |       | 72,566 |   | (58,178 | ) |
| Prepayments and other                                                          |       | (3,198                                | )          | (2,591 | ) | (2,901 | ) |
| Accounts payable                                                               |       | 73,108                                |       | (187,571 | ) | 154,481 |   |
| Net regulatory assets and liabilities                                          |       | 26,021                                |       | (36,008 | ) | (68,504 | ) |
| Other current liabilities                                                      |       | 40,717                                |       | 19,256 |   | 6,193 |   |
| Change in other noncurrent assets                                              |       | (15,878                               | )          | (2,154 | ) | (5,181 | ) |
| Change in other noncurrent liabilities                                         |       | (44,964                               | )          | (29,893 | ) | 29,870 |   |
| Net cash provided by operating activities                                      |       | 677,401                               |       | 582,541 |   | 385,793 |   |
|                                                                           |       |                                  |       |   |   |   |   |
| **Investing activities**                                                       |       |                                  |       |   |   |   |   |
| Capital/construction expenditures                                              |       | (806,794                              | )          | (537,920 | ) | (424,292 | ) |
| Allowance for equity funds used during  construction                           |       | 14,179                                |       | 2,650 |   | 2,655 |   |
| Investments in utility money pool  arrangement                                 |       | (721,700                              | )          | (5,600 | ) | (27,800 | ) |
| Receipts from utility money pool  arrangement                                  |       | 621,100                               |       | 5,600 |   | 27,800 |   |
| Other investments                                                              |       | (4,451                                | )          | 9,869 |   | 6,520 |   |
| Net cash used in investing activities                                          |       | (897,666                              | )          | (525,401 | ) | (415,117 | ) |
|                                                                           |       |                                  |       |   |   |   |   |
| **Financing activities**                                                       |       |                                  |       |   |   |   |   |
| Proceeds from (repayment of) short-term  borrowings — net                 |       | (101,493                              | )          | 36,896 |   | 138,649 |   |
| Proceeds from issuance of long-term debt                                       |       | 343,711                               |       | — |   | 129,500 |   |
| Repayment of long-term debt, including  reacquisition premiums                 |       | (101,379                              | )          | (126,334 | ) | (375,354 | ) |
| Borrowings under utility money pool  arrangement                               |       | 486,500                               |       | 1,426,800 |   | — |   |
| Repayments under utility money pool  arrangement                               |       | (486,500                              | )          | (1,426,800 | ) | — |   |
| Borrowings under 5-year unsecured credit  facility                             |       | —                                |       | — |   | 293,000 |   |
| Repayments under 5-year unsecured credit  facility                             |       | —                                |       | — |   | (293,000 | ) |
| Capital contribution from parent                                               |       | 347,924                               |       | 227,272 |   | 202,029 |   |
| Dividends paid to parent                                                       |       | (263,859                              | )          | (195,625 | ) | (62,564 | ) |
| Net cash provided by (used in) financing  activities                           |       | 224,904                               |       | (57,791 | ) | 32,260 |   |
|                                                                           |       |                                  |       |   |   |   |   |
| Net increase (decrease) in cash and cash  equivalents                          |       | 4,639                                 |       | (651 | ) | 2,936 |   |
| Cash and cash equivalents at beginning of  year                                |       | 3,011                                 |       | 3,662 |   | 726 |   |
| Cash and cash equivalents at end of year                                       |       | $                                     | 7,650      |   | $ | 3,011 |   | $ | 3,662 |   |
|                                                                           |       |                                  |       |   |   |   |   |
| Supplemental disclosure of cash flow  information:                             |       |                                  |       |   |   |   |   |
| Cash paid for interest (net of amounts  capitalized)                           |       | $                                     | 130,709    |   | $ | 125,284 |   | $ | 139,414 |   |
| Cash paid for income taxes (net of refunds  received)                          |       | 61,718                                |       | (6,640 | ) | (16,042 | ) |
|                                                                           |       |                                  |       |   |   |   |   |
| Supplemental disclosure of non-cash  investing transactions:                   |       |                                  |       |   |   |   |   |
| Property, plant and equipment additions in  accounts payable                   |       | $                                     | 10,902     |   | $ | 5,367 |   | $ | 13,404 |   |

 

See Notes toConsolidated Financial Statements

 

32

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**PUBLIC SERVICE CO. OF COLORADO ANDSUBSIDIARIES**

**CONSOLIDATED BALANCESHEETS**

**(Thousands of Dollars)**

 
| ** **                                                                                    | ** ** | **Dec. 31, 2007** | ** ** | **Dec. 31, 2006** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                    |       |                        |       |                        |       |
| Current assets:                                                                               |       |                        |       |                        |       |
| Cash and cash equivalents                                                                     |       | $                           | 7,650      |                        | $          | 3,011 |   |
| Accounts receivable — net of allowance for  bad debts: $23,301 and $18,415, respectively |       | 375,265                     |       | 355,738                     |       |
| Accounts receivable from affiliates                                                           |       | 34,584                      |       | 8,621                       |       |
| Investments in utility money pool  arrangement                                                |       | 100,600                     |       | —                      |       |
| Accrued unbilled revenues                                                                     |       | 360,191                     |       | 199,361                     |       |
| Recoverable purchased natural gas and  electric energy costs                                  |       | 13,857                      |       | 157,827                     |       |
| Materials and supplies inventories                                                            |       | 40,409                      |       | 43,029                      |       |
| Fuel inventories                                                                              |       | 40,811                      |       | 40,997                      |       |
| Natural gas inventories                                                                       |       | 128,700                     |       | 155,567                     |       |
| Derivative instruments valuation                                                              |       | 33,635                      |       | 28,111                      |       |
| Deferred income taxes                                                                         |       | 59,564                      |       | 62,791                      |       |
| Prepayments and other                                                                         |       | 17,851                      |       | 14,654                      |       |
| Total current assets                                                                          |       | 1,213,117                   |       | 1,069,707                   |       |
| Property, plant and equipment:                                                                |       |                        |       |                        |       |
| Electric utility plant                                                                        |       | 6,633,695                   |       | 6,409,194                   |       |
| Natural gas utility plant                                                                     |       | 1,887,824                   |       | 1,825,560                   |       |
| Common utility and other property                                                             |       | 726,049                     |       | 725,864                     |       |
| Construction work in progress                                                                 |       | 864,517                     |       | 429,878                     |       |
| Total property, plant and equipment                                                           |       | 10,112,085                  |       | 9,390,496                   |       |
| Less accumulated depreciation                                                                 |       | (3,082,930                  | )          | (2,912,233                  | )          |
| Net property, plant and equipment                                                             |       | 7,029,155                   |       | 6,478,263                   |       |
| Other assets:                                                                                 |       |                        |       |                        |       |
| Regulatory assets                                                                             |       | 539,989                     |       | 589,016                     |       |
| Derivative instruments valuation                                                              |       | 141,410                     |       | 161,502                     |       |
| Other investments                                                                             |       | 23,798                      |       | 19,347                      |       |
| Other                                                                                         |       | 31,961                      |       | 45,784                      |       |
| Total other assets                                                                            |       | 737,158                     |       | 815,649                     |       |
| Total assets                                                                                  |       | $                           | 8,979,430  |                        | $          | 8,363,619 |   |
|                                                                                          |       |                        |       |                        |       |
| **LIABILITIES AND EQUITY**                                                                    |       |                        |       |                        |       |
| Current liabilities:                                                                          |       |                        |       |                        |       |
| Current portion of long-term debt                                                             |       | $                           | 301,445    |                        | $          | 101,379 |   |
| Short-term debt                                                                               |       | 271,007                     |       | 372,500                     |       |
| Accounts payable                                                                              |       | 466,710                     |       | 385,724                     |       |
| Accounts payable to affiliates                                                                |       | 27,445                      |       | 30,291                      |       |
| Taxes accrued                                                                                 |       | 76,569                      |       | 84,960                      |       |
| Dividends payable to parent                                                                   |       | 68,453                      |       | 64,778                      |       |
| Derivative instruments valuation                                                              |       | 21,521                      |       | 38,616                      |       |
| Accrued interest                                                                              |       | 45,486                      |       | 35,362                      |       |
| Other                                                                                         |       | 108,979                     |       | 74,381                      |       |
| Total current liabilities                                                                     |       | 1,387,615                   |       | 1,187,991                   |       |
| Deferred credits and other liabilities:                                                       |       |                        |       |                        |       |
| Deferred income taxes                                                                         |       | 1,090,740                   |       | 1,004,027                   |       |
| Deferred investment tax credits                                                               |       | 55,166                      |       | 59,035                      |       |
| Regulatory liabilities                                                                        |       | 516,401                     |       | 470,255                     |       |
| Pension and employee benefit obligations                                                      |       | 231,232                     |       | 301,277                     |       |
| Customers advances                                                                            |       | 280,270                     |       | 279,011                     |       |
| Derivative instruments valuation                                                              |       | 84,190                      |       | 156,623                     |       |
| Asset retirement obligations                                                                  |       | 44,267                      |       | 43,335                      |       |
| Other liabilities                                                                             |       | 12,063                      |       | 7,750                       |       |
| Total deferred credits and other  liabilities                                                 |       | 2,314,329                   |       | 2,321,313                   |       |
| Commitments and contingent liabilities                                                        |       |                        |       |                        |       |
| Capitalization:                                                                               |       |                        |       |                        |       |
| Long-term debt                                                                                |       | 1,891,644                   |       | 1,845,278                   |       |
| Common stock — authorized 100 shares of $0.01  par value; outstanding 100 shares         |       | —                      |       | —                      |       |
| Additional paid in capital                                                                    |       | 2,759,128                   |       | 2,411,204                   |       |
| Retained earnings                                                                             |       | 614,267                     |       | 585,219                     |       |
| Accumulated other comprehensive income                                                        |       | 12,447                      |       | 12,614                      |       |
| Total common stockholder’s equity                                                        |       | 3,385,842                   |       | 3,009,037                   |       |
| Total liabilities and equity                                                                  |       | $                           | 8,979,430  |                        | $          | 8,363,619 |   |

 

See Notes to Consolidated FinancialStatements

 

33

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**PUBLIC SERVICE CO. OF COLORADO ANDSUBSIDIARIESCONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS’ EQUITYAND COMPREHENSIVE INCOME**

**(Thousands)**

 
| ** **                                                                            | ** ** | ** **            | ** ** | ** **       | ** ** | ** **     | ** ** | ** **        | ** ** | **Accumulated**        | ** ** | **Total**  | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------|------------|----------------|------------|-------------------|------------|------------------------|------------|------------|------------|
| ** **                                                                            | ** ** | ** **            | ** ** | ** **       | ** ** | **Additional** | ** ** | ** **        | ** ** | **Other**              | ** ** | **Common** | ** ** |
| ** **                                                                            | ** ** | **Common Stock** | ** ** | **Paid in** | ** ** | **Retained**   | ** ** | **Comprehensive** | ** ** | **Stockholder’s** | ** ** |
| ** **                                                                            | ** ** | **Shares**            | ** ** | **Amount**       | ** ** | **Capital**    | ** ** | **Earnings**      | ** ** | **Income (Loss)** | ** ** | **Equity** | ** ** |
| **Balance at Dec. 31, 2004**                                                     |       | 100                   |       | $                | —     |           | $          | 1,981,903         |       | $                      | 392,746    |       | $          | (88,097 | ) | $ | 2,286,552 |   |
| Net income                                                                            |       |                  |       |             |       |           |       | 211,417           |       |                   |       | 211,417    |       |
| Minimum pension liability adjustment, net  of tax of $(9,898)                         |       |                  |       |             |       |           |       |              |       | (16,644                | )          | (16,644    | )          |
| Net derivative instrument fair value changes  during the period, net of tax of $(936) |       |                  |       |             |       |           |       |              |       | (1,482                 | )          | (1,482     | )          |
| Unrealized gain — marketable securities,  net of tax of $71                      |       |                  |       |             |       |           |       |              |       | 117                    |       | 117        |       |
| Comprehensive income for 2005                                                         |       |                  |       |             |       |           |       |              |       |                   |       | 193,408    |       |
| Contribution of capital by parent                                                     |       |                  |       |             |       | 202,029        |       |              |       |                   |       | 202,029    |       |
| **Balance at Dec. 31, 2005**                                                     |       | 100                   |       | $                | —     |           | $          | 2,183,932         |       | $                      | 604,163    |       | $          | (106,106 | ) | $ | 2,681,989 |   |
| Net income                                                                            |       |                  |       |             |       |           |       | 241,458           |       |                   |       | 241,458    |       |
| Minimum pension liability adjustment, net  of tax of $19,239                          |       |                  |       |             |       |           |       |              |       | 31,589                 |       | 31,589     |       |
| Net derivative instrument fair value  changes during the period, net of tax of $(981) |       |                  |       |             |       |           |       |              |       | (1,607                 | )          | (1,607     | )          |
| Unrealized loss — marketable securities,  net of tax of $(46)                    |       |                  |       |             |       |           |       |              |       | (75                    | )          | (75        | )          |
| Comprehensive income for 2006                                                         |       |                  |       |             |       |           |       |              |       |                   |       | 271,365    |       |
| SFAS No. 158 adoption, net of tax of  $53,995                                    |       |                  |       |             |       |           |       |              |       | 88,813                 |       | 88,813     |       |
| Common dividends declared to parent                                                   |       |                  |       |             |       |           |       | (260,402          | )          |                   |       | (260,402   | )          |
| Contribution of capital by parent                                                     |       |                  |       |             |       | 227,272        |       |              |       |                   |       | 227,272    |       |
| **Balance at Dec. 31, 2006**                                                     |       | 100                   |       | $                | —     |           | $          | 2,411,204         |       | $                      | 585,219    |       | $          | 12,614 |   | $ | 3,009,037 |   |
| FIN 48 adoption                                                                       |       |                  |       |             |       |           |       | (312              | )          |                   |       | (312       | )          |
| Net income                                                                            |       |                  |       |             |       |           |       | 296,894           |       |                   |       | 296,894    |       |
| Net derivative instrument fair value  changes during the period, net of tax of $(92)  |       |                  |       |             |       |           |       |              |       | (167                   | )          | (167       | )          |
| Comprehensive income for 2007                                                         |       |                  |       |             |       |           |       |              |       |                   |       | 296,727    |       |
| Common dividends declared to parent                                                   |       |                  |       |             |       |           |       | (267,534          | )          |                   |       | (267,534   | )          |
| Contribution of capital by parent                                                     |       |                  |       |             |       | 347,924        |       |              |       |                   |       | 347,924    |       |
| **Balance at Dec. 31, 2007**                                                     |       | 100                   |       | $                | —     |           | $          | 2,759,128         |       | $                      | 614,267    |       | $          | 12,447 |   | $ | 3,385,842 |   |

 

See Notes to Consolidated FinancialStatements

 

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**PUBLIC SERVICE CO. OF COLORADO ANDSUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CAPITALIZATION**

**(Thousands of Dollars)**

 
| ** **                                                                                             | ** ** | **Dec. 31** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                             | ** ** | **2007**         | ** ** | **2006** | ** ** |
| **Long-Term Debt**                                                                                     |       |             |       |   |   |
| First Mortgage Bonds, Series due:                                                                 |       |             |       |   |   |
| Oct. 1, 2008, 4.375%                                                                              |       | $                | 300,000    |   | $ | 300,000 |   |
| Oct. 1, 2012, 7.875%                                                                              |       | 600,000          |       | 600,000 |   |
| March 1, 2013, 4.875%                                                                             |       | 250,000          |       | 250,000 |   |
| April 1, 2014, 5.5%                                                                               |       | 275,000          |       | 275,000 |   |
| Sept. 1, 2017, 4.375% (a)                                                                              |       | 129,500          |       | 129,500 |   |
| Jan. 1, 2019, 5.1% (a)                                                                            |       | 48,750           |       | 48,750 |   |
| Sept. 1, 2037, 6.25%                                                                                   |       | 350,000          |       | — |   |
| Unsecured Senior A Notes, due July 15,  2009, 6.875%                                              |       | 200,000          |       | 200,000 |   |
| Secured Medium-Term Notes, due  March 5, 2007, 7.11%                                              |       | —           |       | 100,000 |   |
| Capital lease obligations, 11.2% due in  installments through 2028                                     |       | 44,868           |       | 46,247 |   |
| Unamortized discount                                                                                   |       | (5,029           | )          | (2,840 | ) |
| Total                                                                                                  |       | 2,193,089        |       | 1,946,657 |   |
| Less current maturities                                                                                |       | 301,445          |       | 101,379 |   |
| Total long-term debt                                                                                   |       | $                | 1,891,644  |   | $ | 1,845,278 |   |
|                                                                                                   |       |             |       |   |   |
| **Common Stockholder’s Equity**                                                                   |       |             |       |   |   |
| Common stock — authorized 100 shares of  $0.01 par value; outstanding 100 shares in 2007 and 2006 |       | $                | —     |   | $ | — |   |
| Additional paid in capital                                                                             |       | 2,759,128        |       | 2,411,204 |   |
| Retained earnings                                                                                      |       | 614,267          |       | 585,219 |   |
| Accumulated other comprehensive income                                                                 |       | 12,447           |       | 12,614 |   |
| Total common stockholder’s equity                                                                 |       | $                | 3,385,842  |   | $ | 3,009,037 |   |

 

----

(a)             Pollutioncontrol financing.

 

See Notes to Consolidated FinancialStatements

 

35

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.  Summary of Significant Accounting Policies**

** **

***Business and Systemof Accounts*****—PSCo is principally engaged in the generation, purchase, transmission,distribution and sale of electricity and in the purchase, transportation,distribution and sale of natural gas. PSCo is subject to the regulatory of the FERC and state utilitycommissions.  All of PSCo’s accountingrecords conform to the FERC uniform system of accounts or to systems requiredby various state regulatory commissions, which are the same in all materialaspects.

 

***Principles ofConsolidation*****—PSCo has subsidiaries, which have been consolidated and for which allintercompany transactions and balances have been eliminated.

 

***Revenue Recognition*****— Revenues related to the sale of energyare generally recorded when service is rendered or energy is delivered tocustomers.  However, the determination ofthe energy sales to individual customers is based on the reading of theirmeter, which occurs on a systematic basis throughout the month.  At the end of each month, amounts of energydelivered to customers since the date of the last meter reading are estimatedand the corresponding unbilled revenue is estimated.

 

PSCo has various rate-adjustment mechanisms in place that currentlyprovide for the recovery of purchased natural gas and electric fuel andpurchased energy costs.  These costadjustment tariffs may increase or decrease the level of costs recoveredthrough base rates and are revised periodically, for any difference between thetotal amount collected under the clauses and the recoverable costsincurred.  Where applicable undergoverning state regulatory commission rate orders, fuel costs over-recoveries(the excess of fuel revenue billed to customers over fuel costs incurred) aredeferred as current regulatory liabilities and under-recoveries (the excess offuel costs incurred over fuel revenues billed to customers) are deferred ascurrent regulatory assets.  In addition,PSCo presents its revenue net of any excise or other fiduciary-type taxes orfees.  A summary of significantrate-adjustment mechanisms follows:

 

·              PSCo generallyrecovers all prudently incurred electric fuel and purchased energy coststhrough the ECA.  The ECA is an incentiveadjustment mechanism that compares actual fuel and purchased energy expense ina calendar year to a benchmark formula. Effective January 2007, the ECA has been modified to include anincentive adjustment to encourage efficient operation of base load coal plantsand encourage cost reductions through purchases of economical short-termenergy.  The total incentive payment toPSCo in any calendar year will not exceed $11.25 million.  The ECA mechanism is revised quarterly andinterest accrues monthly on the average deferred balance.  The ECA will expire at the earlier of ratestaking effect after Comanche 3 is placed in service or Dec. 31, 2010.

 

·              PSCo’srates include annual adjustments for the recovery of conservation andenergy-management program costs, which are reviewed annually. PSCo is allowedto recover certain costs associated with renewable energy resources through aspecific retail rate rider. In January 2008, a new recovery mechanism fortransmission commenced.  The TCA permitsPSCo to recover costs associated with investment in transmission facilitiesmade after March 2007 through a rate rider.

 

·              PSCosells firm power and energy in wholesale markets, which are regulated by theFERC.  Certain of these rates includemonthly wholesale fuel cost-recovery mechanisms.

 

***Commodity TradingOperations*****—All applicable gains and losses related to commodity trading activities, whetheror not settled physically, are shown on a net basis in the consolidatedstatements of income.

 

Pursuant to the JOA approved by the FERC, some of the commodity tradingmargins from PSCo are apportioned to NSP-Minnesota and SPS.  Commodity trading activities are notassociated with energy produced from PSCo’s generation assets or energy andcapacity purchased to serve native load. Commodity trading contracts are recorded at fair market value inaccordance with SFAS No. 133 “Accounting for Derivative Instruments andHedging Activities” (SFAS No. 133). In addition, commodity-trading results include the impacts of allmargin-sharing mechanisms.  For moreinformation, see Note 10 to the consolidated financial statements.

 

***Types of andAccounting for Derivative Instruments****—*PSCo uses derivative instruments inconnection with its utility commodity price, interest rate, short-termwholesale and commodity trading activities, including forward contracts,futures, swaps and options.  All derivativeinstruments not designated and qualifying for the normal purchases and normalsales exception, as defined by SFAS No. 133, are recorded on theconsolidated balance sheets at fair value as derivative instrumentsvaluation.  The classification of thefair value for those derivative instruments is dependent on the designation of

 

36

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a qualifying hedging relationship. The adjustment to fair value of derivative instruments not designated ina qualifying hedging relationship is reflected in current earnings or as aregulatory asset or liability.  Theclassification is dependent on the applicability of specific regulation.  This includes certain instruments used tomitigate market risk for the utility operations and all instruments related tothe commodity trading operations.

 

Gains or losses on hedging transactions for the sales of energy orenergy-related products are primarily recorded as a component of revenue;hedging transactions for fuel used in energy generation are recorded as acomponent of fuel costs; hedging transactions for natural gas purchased forresale are recorded as a component of natural gas costs; and interest ratehedging transactions are recorded as a component of interest expense.  PSCo is allowed to recover in electric ornatural gas rates the costs of certain financial instruments purchased toreduce commodity cost volatility.

 

*Cash Flow Hedges* –Qualifying hedging relationships are designated as a hedge of a forecastedtransaction or future cash flow (cash flow hedge).  The designation of a cash flow hedge permitsthe classification of fair value to be recorded within Other ComprehensiveIncome (OCI), to the extent effective.

 

SFAS No. 133 requires that the hedging relationship be highlyeffective and that a company formally designate a hedging relationship to applyhedge accounting.  PSCo formallydocuments all hedging relationships in accordance with SFAS No. 133.  The documentation includes, among otherfactors, the identification of the hedging instrument and the hedgedtransaction, as well as the risk management objectives and strategies forundertaking the hedged transaction.  Inaddition, at inception and on a quarterly basis, PSCo formally assesses whetherthe derivative instruments being used are highly effective in offsettingchanges in either the fair value or cash flows of the hedged items.

 

Changes in the fair value of a derivative designated and qualified as acash flow hedge, to the extent effective, are included in OCI, until earningsare affected by the hedged transaction. PSCo discontinues hedge accounting prospectively when it has determinedthat a derivative no longer qualifies as an effective hedge, or when it is nolonger probable that the hedged forecasted transaction will occur.  To test the effectiveness of hedges, ahypothetical hedge is used to mirror all the critical terms of the underlyingdebt and the dollar offset method is utilized to assess the effectiveness ofthe actual hedge at inception and on an ongoing basis.  The fair value of interest rate derivativesis determined through counterparty valuations, internal valuations and brokerquotes.  Gains and losses related todiscontinued hedges that were previously accumulated in OCI will remain in OCIuntil the underlying contract is reflected in earnings; unless it is probablethat the hedged forecasted transaction will not occur at which time associateddeferred amounts in OCI are immediately recognized in current earnings.

 

*Normal Purchases and Normal Sales*– PSCo enters into contracts for the purchase and sale of commodities for usein their business operations.  SFAS No. 133requires a company to evaluate these contracts to determine whether thecontracts are derivatives.  Certaincontracts that meet the definition of a derivative may be exempted from SFAS No. 133as normal purchases or normal sales.

 

PSCo evaluates all of its contracts when such contracts are entered todetermine if they are derivatives and, if so, if they qualify to meet thenormal designation requirements under SFAS No. 133.  None of the contracts entered into within thecommodity trading operations qualify for a normal designation.  For further discussion of PSCo’s riskmanagement and derivative activities see Note 10 to the consolidated financialstatements.

 

***Property, Plant, andEquipment and Depreciation*****— Property, plant and equipment is statedat original cost.  The cost of plantincludes direct labor and materials, contracted work, overhead costs andapplicable interest expense.  The cost ofplant retired is charged to accumulated depreciation and amortization.  Removal costs associated with regulatoryobligations are recorded as regulatory liabilities.  Significant additions or improvementsextending asset lives are capitalized, while repair and maintenance costs arecharged to expense as incurred. Maintenance and replacement of items determined to be less than units ofproperty are charged to operating expenses as incurred.  Planned major maintenance activities arecharged to operating expense unless the cost represents the acquisition of anadditional unit of property or the replacement of an existing unit ofproperty.  Property, plant and equipmentalso includes costs associated with other property held for future use.

 

PSCo records depreciation expense related to its plant by using thestraight-line method over the plant’s useful life.  Actuarial and semi-actuarial life studies areperformed on a periodic basis and submitted to the state and federalcommissions for review.  Upon acceptanceby the various commissions, the resulting lives and net salvage rates are usedto calculate depreciation.  Depreciationexpense, expressed as a percentage of average depreciable property, for theyears ended Dec. 31, 2007, 2006 and 2005 was 2.7 percent, 2.6 percent and2.6 percent, respectively.

 

37

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***AFDC*****— AFDC represents the cost of capitalused to finance utility construction activity. AFDC is computed by applying a composite pretax rate to qualifiedconstruction work in progress.  Theamount of AFDC capitalized as a utility construction cost is credited to otherincome (for equity capital) and interest charges (for debt capital).  AFDC amounts capitalized are included in PSCo’srate base for establishing utility service rates.

 

***Environmental Costs*****— Environmental costs are recorded on anundiscounted basis when it is probable PSCo is liable for the costs and theliability can be reasonably estimated. Costs may be deferred as a regulatory asset if it is probable that the costswill be recovered from customers in future rates.  Otherwise, the costs are expensed.  If an environmental expense is related tofacilities currently in use, such as emission-control equipment, the cost iscapitalized and depreciated over the life of the plant, assuming the costs arerecoverable in future rates or future cash flow.

 

Estimated remediation costs, excluding inflationary increases, arerecorded.  The estimates are based onexperience, an assessment of the current situation and the technology currentlyavailable for use in the remediation. The recorded costs are regularly adjusted as estimates are revised andremediation proceeds.  If severaldesignated responsible parties exist, costs are estimated and recorded only forPSCo’s expected share of the cost.  Anyfuture costs of restoring sites where operation may extend indefinitely aretreated as a capitalized cost of plant retirement.  The depreciation expense levels recoverablein rates include a provision for removal expenses, which may include finalremediation costs.  Removal costsrecovered in rates are classified as a regulatory liability.

 

***Legal Costs***— Litigation accruals are recorded when it is probable PSCo is liable for thecosts and the liability can be reasonably estimated.  External legal fees related to settlementsare expensed as incurred.

 

***Income Taxes*****— PSCo accounts for income taxes usingthe asset and liability method under FAS 109, which requires the recognition ofdeferred tax assets and liabilities for the expected future tax consequences ofevents that have been included in the financial statements.  PSCo defers income taxes for all temporarydifferences between pretax financial and taxable income, and between the bookand tax bases of assets and liabilities.  PSCo uses the tax rates that are scheduled tobe in effect when the temporary differences are expected to turn around, orreverse. The effect of a change in tax rates on deferred tax assets andliabilities is recognized in income in the period that includes the enactmentdate.

 

Deferred tax assets are reduced by a valuation allowance if, based onthe weight of available evidence, it is more likely than not that some portionor all of the deferred tax asset will not be realized. In making such adetermination, all available positive and negative evidence, includingscheduled reversals of deferred tax liabilities, projected future taxableincome, tax planning strategies and recent financial operations, is considered.

 

Investment tax credits are deferred and their benefits amortized overthe estimated lives of the related property. Utility rate regulation also has created certain regulatory assets andliabilities related to income taxes, which are summarized in Note 14 to theconsolidated financial statements.  Formore information on income taxes, see Note 7 to the consolidated financialstatements.

 

In July 2006, the FASB issued FIN 48, which prescribes how acompany should recognize, measure, present and disclose uncertain tax positionsthat such company has taken or expects to take in its income tax returns. FIN48 requires that only income tax benefits that meet the “more likely than not”recognition threshold be recognized or continue to be recognized on itseffective date. As required, PSCo adopted FIN 48 as of Jan. 1, 2007 andthe initial derecognition amounts were reported as a cumulative effect of achange in accounting principle. The cumulative effect of the change, which wasreported as an adjustment to the beginning balance of retained earnings, wasnot material. Following implementation, the ongoing recognition of changes inmeasurement of uncertain tax positions will be reflected as a component ofincome tax expense.

 

PSCo reports interest and penalties related to income taxes within theinterest charges section in the consolidated statements of income.

 

Xcel Energy and its utility subsidiaries, including PSCo, fileconsolidated federal and combined and separate state income tax returns.  Income taxes for consolidated or combinedsubsidiaries are allocated to the subsidiaries based on separate companycomputations of taxable income or loss. The holding company also allocates its own net income tax benefits toits direct subsidiaries based on the positive tax liability of each company inthe consolidated federal or combined state returns as a contribution ofcapital.

 

38

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***Use of Estimates*****— In recording transactions and balancesresulting from business operations, PSCo uses estimates based on the bestinformation available.  Estimates areused for such items as plant depreciable lives, AROs, decommissioning, taxprovisions, uncollectible amounts, environmental costs, unbilled revenues,jurisdictional fuel and energy cost allocations and actuarially determinedbenefit costs.  The recorded estimatesare revised when better information is obtained or actual amounts aredeterminable.  Those revisions can affectoperating results.  Each year thedepreciable lives of certain plant assets are reviewed and revised, if appropriate.

 

***Cash and CashEquivalents*****—PSCo considers investments in certain instruments, including commercial paperand money market funds, with a remaining maturity of three months or less atthe time of purchase to be cash equivalents.

 

***Restricted Cash***— At Dec. 31, 2007 and 2006, PSCo had restricted cash of $23.7 million and$11.1 million, respectively.  Therestricted cash balances primarily represent margin deposits held inconjunction with electric futures trading contracts.  These balances are presented as a componentof other long-term assets on the consolidated balance sheets.

 

***Inventory*****— All inventories are recorded at averagecost.

 

***RegulatoryAccounting*****—PSCo accounts for certain income and expense items in accordance with statementof financial accounting standards SFAS No. 71 — “Accounting for theEffects of Certain Types of Regulation” (SFAS No. 71).  Under SFAS No. 71:

 

·              Certain costs, which would otherwise becharged to expense, are deferred as regulatory assets based on the expectedability to recover them in future rates; and

 

·              Certain credits, which would otherwise bereflected as income, are deferred as regulatory liabilities based on theexpectation they will be returned to customers in future rates.

 

Estimates of recovering deferred costs and returning deferred creditsare based on specific ratemaking decisions or precedent for each item.  Regulatory assets and liabilities areamortized consistent with the period of expected regulatory treatment.

 

If restructuring or other changes in the regulatory environment occur,PSCo may no longer be eligible to apply this accounting treatment and may berequired to eliminate such regulatory assets and liabilities from its balancesheet.  Such changes could have amaterial effect on PSCo’s results of operations in the period the write-off isrecorded.  See more discussion ofregulatory assets and liabilities at Note 14 to the consolidated financialstatements.

 

***Deferred FinancingCosts*****—Other assets include deferred financing costs, net of amortization, ofapproximately $12.7 million and $11.4 million at Dec. 31, 2007 and 2006,respectively.  PSCo is amortizing thesefinancing costs over the remaining maturity periods of the related debt.

 

Debt premiums, discounts, expenses and amounts received or incurred tosettle hedges are amortized over the life of the related debt.  The premiums and costs associated withmodified debt are deferred and amortized over the life of the related newissuance, in accordance with regulatory guidelines.  If PSCo extinguishes the debt, allunamortized balances shall be expensed at the time of the redemption.

 

***Accounts Receivableand Allowance for Bad Debts*—**Accounts receivableare stated at the actual billed amount net of the allowance foruncollectibles.  PSCo establishes anallowance for uncollectibles based on a reserve policy that reflects itsexpected exposure to the credit risk of customers.

 

***Renewable Energy Credits******—***Renewable EnergyCredits (RECs) are******marketable environmental commodities thatrepresent proof that energy was generated from eligible renewable energysources.  These credits can be bought and sold. RECs are typically used as aform of measurement of compliance to Renewable Portfolio Standards (RPS)enacted by those states that are encouraging construction and consumption ofrenewable energy, but can also be sold separately from the energyproduced.  Currently, PSCo acquires RECsfrom the generation or purchase of renewable power.

 

***When RECs are acquired in thecourse of generation or purchase as a result of meeting the load obligation,they are recorded as inventory at actual cost. RECs acquired for trading purposes are recorded as other investments atactual cost.  The cost of RECs that areretired for compliance purposes are recorded as electric fuel and purchasedpower.  The net margin on sales of RECsfor trading purposes is recorded as electric utility operating revenues net ofany margin sharing requirements.  As a***

*** ***

***39***

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*** ***

***result of state regulatory orders,we reduce recoverable fuel costs for the value of certain RECs and record thecost of RECs to satisfy future compliance requirements that are recoverable infuture rates as regulatory assets under the criteria of SFAS No. 71.***

*** ***

***Emission Allowances*—**Emission allowances are recorded at cost, including the annual SO2and NOx emission allowance entitlement received at no cost from the EPA.  PSCo follows the inventory model for allallowances.  The sales of allowances arereported in the operating activities section of the consolidated statements ofcash flows.  The net margin on sales ofemission allowances is included in electric utility operating revenues as it isintegral to the production process of energy and our revenue optimizationstrategy for our utility operations.

 

***Reclassifications****** —***Certainamounts in the consolidated statements of cash flows have been reclassifiedfrom prior-period presentation. The reclassifications reflect the presentationof net regulatory assets and liabilities as separate items rather thancomponents of other assets and other liabilities within net cash provided byoperating activities.  In addition,activity related to derivative transactions have been combined into netrealized and unrealized hedging and derivative transactions.  These reclassifications did not affect totalnet cash provided by (used in) operating, investing or financing activitieswithin the consolidated statements of cash flows.

 

**2.**             Recently Issued Accounting Pronouncements

** **

***Fair Value Measurements (SFAS No. 157)*—** In September 2006, the FASB issued SFAS No. 157, which providesa single definition of fair value, together with a framework for measuring itand requires additional disclosure about the use of fair value to measureassets and liabilities.  SFAS No. 157also emphasizes that fair value is a market-based measurement and sets out afair value hierarchy with the highest priority being quoted prices in activemarkets.  Fair value measurements aredisclosed by level within that hierarchy. SFAS No. 157 is effective for financial statements issued forfiscal years beginning after Nov. 15, 2007.  PSCo is evaluating the impact of SFAS No. 157on its consolidated financial statements and does not expect the impact ofimplementation to be material.

 

***The Fair ValueOption for Financial Assets and Financial Liabilities - Including an Amendmentof FASB Statement No. 115 (SFAS No. 159)***— In February 2007, the FASB issued SFAS No. 159, which providescompanies with an option to measure, at specified election dates, manyfinancial instruments and certain other items at fair value that are notcurrently measured at fair value.  Acompany that adopts SFAS No. 159 will report unrealized gains and losseson items, for which the fair value option has been elected, in earnings at eachsubsequent reporting date.  Thisstatement also establishes presentation and disclosure requirements designed tofacilitate comparisons between entities that choose different measurementattributes for similar types of assets and liabilities.  This statement is effective for fiscal yearsbeginning after Nov. 15, 2007, effective Jan. 1, 2008.  PSCo adopted SFAS No. 159 and theadoption did not have a material impact on its consolidated financialstatements.

 

***Business Combinations (SFAS No. 141 (revised2007))*** —In December 2007, the FASB issued SFAS No. 141R, which establishesprinciples and requirements for how an acquirer in a business combinationrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed and any noncontrolling interest; recognizesand measures the goodwill acquired in the business combination or a gain from abargain purchase; and determines what information to disclose to enable usersof the financial statements to evaluate the nature and financial effects of thebusiness combination.  SFAS No. 141Ris to be applied prospectively to business combinations for which theacquisition date is on or after the beginning of an entity’s fiscal year thatbegins on or after Dec. 15, 2008. PSCo is evaluating the impact of SFAS No. 141R on its consolidatedfinancial statements for any potential business combinations subsequent to Jan. 1,2009.

 

***Noncontrolling Interests in ConsolidatedFinancial Statements, an Amendment of ARB No. 51(SFAS No. 160)*** — In December 2007, the FASBissued SFAS No. 160, which establishes accounting and reporting standardsthat require the ownership interest in subsidiaries held by parties other thanthe parent be clearly identified and presented in the consolidated balancesheets within equity, but separate from the parent’s equity; the amount ofconsolidated 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.  Thisstatement is effective for fiscal years beginning on or after Dec. 15,2008. PSCo is evaluating the impact of SFAS No. 160 on its consolidatedfinancial statements.

 

40

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*** ***

**3.   Short- Term Borrowings**

*** ***

***Commercial Paper*****— At Dec. 31, 2007 and 2006, PSCohad commercial paper outstanding of approximately $271.0 million and $372.5million, respectively.  The weightedaverage interest rates at Dec. 31, 2007 and 2006, were 5.64 percent and5.43 percent, respectively.

 

***Money Pool*****- Xcel Energy has established a utilitymoney pool arrangement that allows for short-term loans between the utilitysubsidiaries and from the holding company to the utility subsidiaries atmarket-based interest rates. The utility money pool arrangement does not allowloans from the utility subsidiaries to the holding company.  PSCo has approval to borrow up to $250million under the arrangement.  At Dec. 31,2007, PSCo had money pool loans outstanding of $100.6 million with a weightedaverage interest rate of 5.64 percent.

 

**4.   Long-Term Debt**

 

***Credit Facilities*—**At Dec. 31, 2007, PSCo had the following committed credit facility ineffect, in millions of dollars:

 
| **Credit  Facility** | ** ** | **Credit Facility  Borrowings** | ** ** | **Available*** | ** ** | **Term** | ** ** | **Maturity** | ** ** |
|----------------------|------------|--------------------------------------|------------|----------------|------------|----------|------------|--------------|------------|
| $                    | 700        |                                 | $          | —         |       | $        | 423.9      |         | Five year  |   | December 2011 |   |
|                      |            |                                      |            |                |            |          |            |              |            |  |  |  |

 

----

* Net of credit facility borrowings, issued and outstanding letters ofcredit and commercial paper borrowings.

 

The line of credit provides short-term financing in the form of notespayable to banks, letters of credit and back-up support for commercial paperborrowings.  PSCo has the right torequest an extension of the final maturity date by one year.  The maturity extension is subject to majoritybank group approval.  The credit facilityhas one financial covenant requiring that PSCo’s debt to total capitalizationratio be less than or equal to 65 percent with which PSCo was in compliance at Dec. 31,2007.  If PSCo does not comply with thecovenant, it is deemed an event of default and any outstanding amounts dueunder the facility can be declared due by the lender.  The credit facility has a cross defaultprovision that provides the borrower will be in default on its borrowings underthe facility if any of its subsidiaries, comprising more than 15 percent of theconsolidated assets, defaults on any of its indebtedness greater than $50million.  The interest rate is based oneither the agent bank’s prime rate or the applicable LIBOR, plus a borrowingmargin as based on PSCo’s senior unsecured credit ratings from Moody’s,Standard & Poor’s and Fitch.

 

·                  At Dec. 31, 2007, PSCo had nodirect borrowings on this line of credit; however, the credit facility was usedto provide back-up support for $271.0 million of commercial paper outstandingand $5.1 million of letters of credit.

 

·                  At Dec. 31,2006, PSCo had no direct borrowings on this line of credit; however, the creditfacility was used to provide back-up support for $372.5 million of commercialpaper outstanding and $6.0 million of letters of credit.

 

·                  At Dec. 31,2007, $5.1 million letters of credit were outstanding, of which $5.1 millionwere outstanding under the above credit facility.

 

·                  At Dec. 31,2006, $6.0 million letters of credit were outstanding, of which $6.0 millionwere outstanding under the above credit facility.

 

***Long-Term Borrowings***

 

OnAug. 15, 2007, PSCo issued $350 million of 6.25 percent first mortgagebonds, series due Sept. 1, 2037.  PSCoadded the net proceeds from the sale of the first mortgage bonds to its generalfunds and applied a portion of the proceeds to the repayment of commercialpaper, including commercial paper incurred to fund the payment at maturity of$100 million of 7.11 percent secured medium-term notes, which matured on March 5,2007.

 

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Maturities of long-term debt are:

 

 
| **(Millions of Dollars)** |   |   |   |   |
|-------------------------------------|--------|--------|--------|--------|
| 2008                                |   | $      | 301.4  |   |
| 2009                                |   | 201.5  |   |
| 2010                                |   | 1.6    |   |
| 2011                                |   | 1.6    |   |
| 2012                                |   | 601.7  |   |

 

**5.   PreferredStock**

** **

PSCo has authorized the issuance of preferred stock.

 
| **Preferred Shares** | ** ** | ** **         | ** ** | **Preferred Shares** | ** ** |
|---------------------------|------------|--------------------|------------|---------------------------|------------|
| **Authorized**            | ** ** | **Par Value** | ** ** | **Outstanding**           | ** ** |
| 10,000,000                |       | $                  | 0.01       |                      | None       |   |
|                           |            |                    |            |                           |            |  |

** **

**6.   JointPlant Ownership**

 

Following are the investments by PSCo in jointly owned plants and therelated ownership percentages as of Dec. 31, 2007:

 
| ** **                                                | ** ** | ** **        | ** ** | ** **       | ** ** | **Construction** | ** ** | ** **     | ** ** |
|-----------------------------------------------------------|------------|-------------------|------------|------------------|------------|------------------|------------|----------------|------------|
| ** **                                                | ** ** | **Plant in** | ** ** | **Accumulated**  | ** ** | **Work in** | ** ** | ** **     | ** ** |
| **(Thousands of Dollars)**                      | ** ** | **Service**       | ** ** | **Depreciation** | ** ** | **Progress**     | ** ** | **Ownership%** | ** ** |
| Hayden Unit 1                                             |       | $                 | 87,160     |             | $          | 51,527           |       | $              | 494        |   | 75.5 |   |
| Hayden Unit 2                                             |       | 80,523            |       | 50,191           |       | 1,160            |       | 37.4           |       |
| Hayden Common Facilities                                  |       | 30,019            |       | 10,634           |       | 176              |       | 53.1           |       |
| Craig Units 1 and 2                                       |       | 53,145            |       | 30,467           |       | 327              |       | 9.7            |       |
| Craig Common Facilities, Units 1, 2 and 3                 |       | 32,584            |       | 13,344           |       | 643              |       | 6.5 - 9.7      |       |
| Comanche Unit 3                                           |       | —            |       | —           |       | 479,499          |       | 66.7           |       |
| Transmission and other facilities,  including substations |       | 141,031           |       | 51,341           |       | 1,101            |       | 11.6 - 68.1    |       |
| Total                                                     |       | $                 | 424,462    |             | $          | 207,504          |       | $              | 483,400    |   |   |   |

 

PSCo’s current operational assets include approximately 320 MWs ofjointly owned generating capacity.  PSCo’sshare of operating expenses and construction expenditures are included in theapplicable utility accounts.  Each of therespective owners is responsible for funding its portion of the constructioncosts.  PSCo began major construction ona new jointly owned 750 MW coal-fired unit in Pueblo, Colo. in January 2006.  Major construction on the new unit, Comanche3, is expected to be completed in the fall of 2009.  PSCo is the operating agent under the jointownership agreement.

 

**7.   Income Taxes**

 

***COLI***— As previously disclosed, Xcel Energy and the U.S. government settled anongoing dispute regarding PSCo’s right to deduct interest expense on policyloans related to its COLI program that insured lives of certain PSCoemployees.  These COLI policies wereowned and managed by PSRI, a wholly owned subsidiary of PSCo.  The total exposure for the tax years indispute through 2007 was approximately $583 million, which includes income tax,interest and potential penalties.  In September 2007,Xcel Energy and the United States finalized a settlement, which terminated thetax litigation pending between the parties. As a result of the settlement, the lawsuit filed by Xcel Energy in theUnited States District Court has been dismissed and the Tax Court proceedingsare in the process of being dismissed.

 

**Terms of the FinalSettlement**

** **

1.                  Xcel Energy paid the government a totalof $64.4 million in full settlement of the government’s claims for tax,penalty, and interest for tax years 1993-2007. Xcel Energy paid the settlement as follows:

 

·              $32.2 million wassatisfied by tax and interest amounts that Xcel Energy had previously paid ordeemed under the terms of the settlement to have been paid.

·              $32.2 million waspaid by Xcel Energy on Oct. 31, 2007.

 

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2.                  The recognition of this settlementresulted in total expense of $59.5 million, including federal and state tax,interest on the federal and state tax liabilities, penalties, and tax benefitson the interest expense for the nine months ended Sept. 30, 2007.  The expense of $59.5 million includes $43.4million of interest and penalties and income tax of $16.1 million (net of taxbenefit on the interest expense of $14.3 million).

 

3.                  XcelEnergy surrendered the policies to its insurer on Oct. 31, 2007, withoutrecognizing a taxable gain.

 

***Accounting for Uncertainty in Income Taxes —an interpretation of FASB Statement No. 109******(FIN 48) —***PSCo adopted FIN 48as of Jan. 1, 2007.  PSCo is amember of the Xcel Energy affiliated group that files consolidated income taxreturns.  Xcel Energy has been audited bythe IRS through tax year 2003, with a limited exception for 2003 research taxcredits.  The IRS commenced anexamination of Xcel Energy’s federal income tax returns for 2004 and 2005 (andresearch credits for 2003) in the third quarter of 2006, and that examinationis anticipated to be complete by March 31, 2008.  As of Dec. 31, 2007, the IRS had notproposed any material adjustments to tax years 2003 through 2005.  The statute of limitations applicable to XcelEnergy’s 2000 through 2002 federal income tax returns expired as of June 30,2007.

 

As previouslydisclosed, Xcel Energy was in litigation with the federal government toestablish its right to deduct interest expense on COLI policy loans incurredsince 1993.  Xcel Energy and the IRS havereached a final settlement regarding this litigation (see above discussion ofCOLI).

 

In the fourth quarter of2007, the state of Colorado concluded an income tax audit through tax year2005.  As of Dec. 31, 2007, PSCo’searliest open tax year in which an audit can be initiated by state taxing authoritiesunder applicable statutes of limitations is 2002.

 

The amount of unrecognized tax benefits was $11.4million on Jan. 1, 2007 and $8.8 million on Dec. 31, 2007.  Areconciliation of the beginning and ending amount of unrecognized tax benefitis as follows:

 
| ** **                                                    | ** ** | **(Million of Dollars)** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------|------------|
| Balance at Jan. 1, 2007                                  |       | $                                  | 11.4       |   |
| Additions based on tax positions related to  the current year |       | 3.0                                |       |
| Additions for tax positions of prior years                    |       | 33.2                               |       |
| Reductions for tax positions of prior years                   |       | (0.8                               | )          |
| Settlements with taxing authorities                           |       | (38.0                              | )          |
| Balance at Dec. 31, 2007                                 |       | $                                  | 8.8        |   |

 

Theseunrecognized tax benefit amounts were reduced by the tax benefits associatedwith net operating loss and tax credit carryovers of $7.5 million and $3.8million as of Jan. 1, 2007 and Dec. 31, 2007, respectively.

 

Theunrecognized tax benefit balance included $4.5 million and $2.8 million of taxpositions on Jan. 1, 2007 and Dec. 31, 2007, respectively, which ifrecognized would affect the annual effective tax rate.  In addition, the unrecognized tax benefitbalance included $6.9 million and $6.0 million of tax positions on Jan. 1,2007 and Dec. 31, 2007, respectively, for which the ultimate deductibilityis highly certain but for which there is uncertainty about the timing of such deductibility.  A change in the period of deductibility wouldnot affect the effective tax rate but would accelerate the payment of cash tothe taxing authority to an earlier period.

 

The decreasein the unrecognized tax benefit balance of $2.6 million from Jan. 1, 2007to Dec. 31, 2007, was due to the addition of similar uncertain taxpositions related to ongoing activity, and the resolution of certain federaland state audit matters.  PSCo’s amountof unrecognized tax benefits could significantly change in the next 12 monthsas audits progress.  At this time, due tothe uncertain nature of the audit process, it is not reasonably possible toestimate an overall range of possible change. However, as the IRS completes the audit that is currently in progress andas statutes of limitations expire, it is reasonably possible that the amount ofunrecognized tax benefits could decrease up to $2.0 million.

 

The liability forinterest related to unrecognized tax benefits is partially offset by theinterest benefit associated with net operating loss and tax creditcarryovers.  The amount of interestexpense related to unrecognized tax benefits reported within interest chargesin 2007 was $44.8 million.  The liabilityfor interest related to unrecognized tax benefits was $3.8 million on Dec. 31,2007.

 

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The amount of penaltyexpense related to unrecognized tax benefits reported within interest chargesin 2007 was $3.2 million.  The liabilityfor penalties related to unrecognized tax benefits was $1.0 million on Dec. 31,2007.

 

***Other Income Tax Matters –***PSCo’sfederal net operating loss and tax credit carry forwards are estimated to be$102.6 million and $11.1 million, respectively, as of Dec. 31, 2007.  The carry forward periods expire between 2021and 2027.  PSCo also has state netoperating loss and tax credit carry forwards of $72.3 million and $4.4 million,respectively, as of Dec. 31, 2007. The state carry forward periods expire between 2016 and 2026.

 

Total income taxexpense from operations differs from the amount computed by applying thestatutory federal income tax rate to income before income tax expense.  The following is a table reconciling suchdifferences for the years ending Dec. 31:

 
| ** **                                                 | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal statutory rate                                     |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| Increases (decreases) in tax from:                         |       |     |       |     |       |     |       |
| State income taxes, net of federal income  tax benefit     |       | 1.2      |       | 4.3      |       | 2.3      |       |
| Regulatory differences — utility plant  items         |       | (0.8     | )          | 0.2      |       | 0.4      |       |
| Life insurance policies                                    |       | (7.2     | )          | (10.3    | )          | (10.9    | )          |
| Tax credits recognized, net of federal  income tax expense |       | (1.6     | )          | (1.9     | )          | (2.5     | )          |
| Resolution of income tax audits and other                  |       | (1.8     | )          | (1.0     | )          | 0.6      |       |
| FIN 48 expense – unrecognized tax benefits            |       | 6.6      |       | —   |       | —   |       |
| Other — net                                           |       | (0.2     | )          | (1.0     | )          | —   |       |
| Effective income tax rate                                  |       | 31.2     | %          | 25.3     | %          | 24.9     | %          |

 

The componentsof income tax expense (benefit) for the years ending Dec. 31 were:

 
| **(Thousands of Dollars)**  | ** ** | **2007** | ** **    | **2006** | ** ** | **2005**     | ** ** |
|---------------------------------------|------------|----------|---------------|----------|------------|--------------|------------|
| Current federal tax expense (benefit) |       | $        |  29,496  |     | $          |  (2,691 | )          | $ |  (32,833 | ) |
| Current state tax expense (benefit)   |       | (2,077   | )             | 12,301   |       | (4,411       | )          |
| Current FIN 48 tax expense            |       | 31,448   |          | —   |       | —       |       |
| Deferred federal tax expense          |       | 78,508   |          | 71,756   |       | 102,132      |       |
| Deferred state tax expense            |       | 7,414    |          | 6,807    |       | 12,512       |       |
| Deferred FIN 48 tax expense (benefit) |       | (2,782   | )             | —   |       | —       |       |
| Deferred tax credits                  |       | (3,781   | )             | (2,523   | )          | (3,189       | )          |
| Deferred investment tax credits       |       | (3,869   | )             | (3,949   | )          | (3,971       | )          |
| Total income tax expense              |       | $        |  134,357 |     | $          |  81,701 |       | $ |  70,240 |   |

 

The componentsof deferred income tax at Dec. 31 were:

 
| **(Thousands of Dollars)**                                                                           | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax expense excluding items below                                                                     |       | $        | 89,940     |     | $          | 149,056 |   |
| Amortization and adjustments to deferred  income taxes on income tax regulatory assets and liabilities         |       | (10,226  | )          | (808     | )          |
| FIN 48 adoption: Deferred tax expense  reported as an adjustment to the beginning balance of retained earnings |       | (447     | )          | —   |       |
| Tax expense (benefit) allocated to other  comprehensive income and other                                       |       | 92       |       | (72,208  | )          |
| Deferred tax expense                                                                                           |       | $        | 79,359     |     | $          | 76,040 |   |

 

44

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The components of net deferred tax liability (current and noncurrentportions) at Dec. 31 were:

 
| **(Thousands of Dollars)**                | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-----------------------------------------------------|------------|------------|------------|------------|------------|
| Deferred tax liabilities:                           |       |       |       |       |       |
| Differences between book and tax bases of  property |       | $          | 1,075,552  |       | $          | 1,007,626 |   |
| Deferred costs                                      |       | 66,899     |       | 57,518     |       |
| Regulatory assets                                   |       | 44,974     |       | 39,947     |       |
| Employee benefits                                   |       | 24,940     |       | 20,907     |       |
| Other comprehensive income                          |       | 7,577      |       | 7,669      |       |
| Other                                               |       | 2,426      |       | 5,934      |       |
| Total deferred tax liabilities                      |       | $          | 1,222,368  |       | $          | 1,139,601 |   |
|                                                |       |       |       |       |       |
| **Deferred tax assets:**                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Unbilled revenue                                    |       | $          | 74,134     |       | $          | 71,986 |   |
| Net operating loss carry forward                    |       | 43,814     |       | 59,362     |       |
| Tax credit carry forward                            |       | 15,560     |       | 16,454     |       |
| Deferred investment tax credits                     |       | 20,875     |       | 22,332     |       |
| Regulatory liabilities                              |       | 14,057     |       | 13,626     |       |
| Bad debts                                           |       | 8,817      |       | 6,963      |       |
| Rate refunds                                        |       | 8,362      |       | 4,928      |       |
| Other                                               |       | 5,573      |       | 2,714      |       |
| Total deferred tax assets                           |       | $          | 191,192    |       | $          | 198,365 |   |
| Net deferred tax liability                          |       | $          | 1,031,176  |       | $          | 941,236 |   |

 

**8.  Benefit Plans and Other Postretirement Benefits**

** **

Pension and other postretirement disclosures below generally representXcel Energy consolidated information unless specifically identified as beingattributable to PSCo.

 

Xcel Energy offers various benefit plans to its benefit employees,including those of PSCo.  Approximately52 percent of Xcel Energy employees that receive benefits are represented byseveral local labor unions under several collective-bargaining agreements.  At Dec. 31, 2007, PSCo had 2,194bargaining employees covered under a collective-bargaining agreement, whichexpires in May 2009.

 

**Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans—an amendment of FASB Statements No. 87,88, 106 and 132(R) (SFAS No. 158)** — In September 2006,the FASB issued SFAS No. 158, which requires companies to fully recognizethe funded status of each pension and other postretirement benefit plan as aliability or asset on their balance sheets with all unrecognized amounts to berecorded in other comprehensive income. PSCo applied regulatory accounting treatment for unrecognized amounts ofregulated utility subsidiary employees, which allowed recognition as aregulatory asset rather than as a charge to accumulated other comprehensiveincome, as future costs are expected to be included in rates.  The effect of adopting in 2006 for theremaining unrecognized amounts was an increase in accumulated othercomprehensive income of $88.8 million.

 

**Pension Benefits**

 

Xcel Energy has several noncontributory, defined benefit pension plansthat cover almost all employees, including those of PSCo.  Benefits are based on a combination of yearsof service, the employee’s average pay and Social Security benefits.

 

Xcel Energy’s policy is to fully fund into an external trust theactuarially determined pension costs recognized for ratemaking and financialreporting purposes, subject to the limitations of applicable employee benefitand tax laws.

 

***Pension Plan Assets***—Plan assets principally consist of the common stock of public companies,corporate bonds and U.S. government securities. The target range for ourpension asset allocation is 60 percent in equity investments, 20 percent infixed income investments and 20 percent in nontraditional investments, such asreal estate, private equity and a diversified commodities index.

 

45

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The actual composition of pension plan assets at Dec. 31 was:

 
| ** **                 | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|
| Equity securities          |       | 60       | %          | 63       | %          |
| Debt securities            |       | 22       |       | 22       |       |
| Real estate                |       | 4        |       | 4        |       |
| Cash                       |       | 2        |       | 2        |       |
| Nontraditional investments |       | 12       |       | 9        |       |
|                       |       | 100      | %          | 100      | %          |

 

Xcel Energy bases its investment-return assumption on expectedlong-term performance for each of the investment types included in its pensionasset portfolio.  Xcel Energy considersthe actual historical returns achieved by its asset portfolio over the past20-year or longer period, as well as the long-term return levels projected andrecommended by investment experts. The historical weighted average annualreturn for the past 20 years for the Xcel Energy portfolio of pensioninvestments is 11.8 percent, which is greater than the current assumptionlevel.  The pension cost determinationassumes the continued current mix of investment types over the long term.  The Xcel Energy portfolio is heavily weightedtoward equity securities and includes nontraditional investments.  A higher weighting in equity investments canincrease the volatility in the return levels achieved by pension assets in anyyear.  Investment returns in 2007 werebelow the assumed level of 8.75 percent while returns in 2006 and 2005 exceededthe assumed level of 8.75 percent.  XcelEnergy continually reviews its pension assumptions.  In 2008, Xcel Energy will continue to use aninvestment-return assumption of 8.75 percent.

 

***Benefit Obligations***—A comparison of the actuarially computed pension benefit obligation and planassets, on a combined basis, is presented in the following table:

 
| **(Thousands of Dollars)**                                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| **Accumulated Benefit Obligation at  Dec. 31**                              |       | $        | 2,497,898  |     | $          | 2,486,370 |   |
|                                                                             |       |     |       |     |       |
| **Change in Projected Benefit Obligation**                                       |       |     |       |     |       |
| Obligation at Jan. 1                                                        |       | $        | 2,666,555  |     | $          | 2,796,780 |   |
| Service cost                                                                     |       | 61,392   |       | 61,627   |       |
| Interest cost                                                                    |       | 162,774  |       | 155,413  |       |
| Plan amendments                                                                  |       | (19,955  | )          | (16,569  | )          |
| Actuarial (gain) loss                                                            |       | 23,325   |       | (82,339  | )          |
| Benefit payments                                                                 |       | (231,332 | )          | (248,357 | )          |
| Obligation at Dec. 31                                                       |       | $        | 2,662,759  |     | $          | 2,666,555 |   |
|                                                                             |       |     |       |     |       |
| **Change in Fair Value of Plan Assets**                                          |       |     |       |     |       |
| Fair value of plan assets at Jan. 1                                         |       | $        | 3,183,375  |     | $          | 3,093,536 |   |
| Actual return on plan assets                                                     |       | 199,230  |       | 306,196  |       |
| Employer contributions                                                           |       | 35,000   |       | 32,000   |       |
| Benefit payments                                                                 |       | (231,332 | )          | (248,357 | )          |
| Fair value of plan assets at Dec. 31                                        |       | $        | 3,186,273  |     | $          | 3,183,375 |   |
|                                                                             |       |     |       |     |       |
| **Funded Status of Plans at Dec. 31**                                       |       |     |       |     |       |
| Funded status                                                                    |       | $        | 523,514    |     | $          | 516,820 |   |
| Noncurrent assets                                                                |       | 568,055  |       | 586,712  |       |
| Noncurrent liabilities                                                           |       | (44,541  | )          | (69,892  | )          |
| Net pension amounts recognized on  consolidated balance sheets                   |       | $        | 523,514    |     | $          | 516,820 |   |
|                                                                             |       |     |       |     |       |
| **PSCo Amounts Not Yet Recognized as  Components of Net Periodic Benefit Cost:** |       |     |       |     |       |
| Net loss                                                                         |       | $        | 156,521    |     | $          | 164,970 |   |
| Prior service cost                                                               |       | 20,122   |       | 24,387   |       |
| Total                                                                            |       | $        | 176,643    |     | $          | 189,357 |   |

 

46

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| **SFAS No. 158 Amounts Have Been  Recorded as Follows Based Upon Expected Recovery in Rates:** |   |                    |    |                    |   |
|-----------------------------------------------------------------------------------------------------|--------|-------------------------|---------|-------------------------|--------|
| Regulatory assets                                                                                   |   | $                       | 176,643 |                    | $      | 189,357 |   |
| Total                                                                                               |   | $                       | 176,643 |                    | $      | 189,357 |   |
|                                                                                                |   |                    |    |                    |   |
| PSCo accrued benefit liability recorded                                                             |   | $                       | 39,781  |                    | $      | 68,513 |   |
|                                                                                                |   |                    |    |                    |   |
| **Measurement Date**                                                                                |   | Dec. 31, 2007 |    | Dec. 31, 2006 |   |
|                                                                                                |   |                    |    |                    |   |
| **Significant Assumptions Used to Measure  Benefit Obligations**                                    |   |                    |    |                    |   |
| Discount rate for year-end valuation                                                                |   | 6.25                    | %       | 6.00                    | %      |
| Expected average long-term increase in  compensation level                                          |   | 4.00                    |    | 4.00                    |   |

 

At Dec. 31, 2007, PSCo Bargaining Pension Plan had projectedbenefit obligations of $732.7 million, which exceeded plan assets of $688.1million.  At Dec. 31, 2006, theprojected benefit obligations of $728.1 million, exceeded plan assets of $658.2million.  All other Xcel Energy plans inthe aggregate had plan assets of $2.5 billion and projected benefit obligationsof $1.9 billion on Dec. 31, 2007.

 

***Cash Flows***—Cash funding requirements can be impacted by changes to actuarial assumptions,actual asset levels and other calculations prescribed by the fundingrequirements of income tax and other pension-related regulations.  These regulations did not require cashfunding for 2005 through 2007 for Xcel Energy’s pension plans and are notexpected to require cash funding in 2008. Voluntary contributions were made to the PSCo Bargaining Pension Plan of$35 million in 2007, $30 million in 2006 and $15 million in 2005.  During 2008, Xcel Energy expects tovoluntarily contribute approximately $35 million to the PSCo pension plan forbargaining employees.

 

***Plan Changes*—**The Pension Protection Act of 2006 (PPA) was effective Dec. 31, 2006.  PPA requires a change in the conversion basisfor lump-sum payments, three-year vesting for plans with account balance orpension equity benefits.  These changes are reflected as a planamendment for purposes of SFAS No. 87 – “Employers’ Accounting forPensions” (SFAS No. 87).

 

***Benefit Costs***—******The components ofnet periodic pension cost (credit) are:

 
| **(Thousands of Dollars)**                       | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                                               |       | $        | 61,392     |     | $          | 61,627   |       | $ | 60,461 |   |
| Interest cost                                              |       | 162,774  |       | 155,413  |       | 160,985  |       |
| Expected return on plan assets                             |       | (264,831 | )          | (268,065 | )          | (280,064 | )          |
| Amortization of prior service cost                         |       | 25,056   |       | 29,696   |       | 30,035   |       |
| Amortization of net loss                                   |       | 15,845   |       | 17,353   |       | 6,819    |       |
| Net periodic pension cost (credit) under  SFAS No. 87 |       | $        | 236        |     | $          | (3,976   | )          | $ | (21,764 | ) |
|                                                       |       |     |       |     |       |     |       |
| **PSCo**                                                   |       |     |       |     |       |     |       |
| Net periodic pension cost                                  |       | $        | 18,348     |     | $          | 18,666   |       | $ | 14,252 |   |
|                                                       |       |     |       |     |       |     |       |
| **Significant Assumptions Used to Measure  Costs**         |       |     |       |     |       |     |       |
| Discount rate                                              |       | 6.00     | %          | 5.75     | %          | 6.00     | %          |
| Expected average long-term increase in  compensation level |       | 4.00     |       | 3.50     |       | 3.50     |       |
| Expected average long-term rate of return  on assets       |       | 8.75     |       | 8.75     |       | 8.75     |       |

 

Pension costs include an expected return impact for the current yearthat may differ from actual investment performance in the plan.  The return assumption used for 2008 pensioncost calculations will be 8.75 percent. The cost calculation uses a market-related valuation of pension assets.  Xcel Energy uses a calculated value method todetermine the market-related value of the plan assets.  The market-related value begins with the fairmarket value of assets as of the beginning of the year. The market-relatedvalue is determined by adjusting the fair market value of assets to reflect theinvestment gains and losses (the difference between the actual investmentreturn and the expected investment return on the market-related value) duringeach of the previous five years at the rate of 20 percent per year.

 

47

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Xcel Energy also maintains noncontributory, defined benefitsupplemental retirement income plans for certain qualifying executivepersonnel.  Benefits for these unfundedplans are paid out of Xcel Energy’s operating cash flows.

 

**Defined Contribution Plans**

** **

Xcel Energy maintains 401(k) plans that cover substantially allemployees.  The contributions for PSCowere approximately $7.9 million in 2007, $6.2 million in 2006 and $6.2 millionin 2005.

 

**Postretirement Health CareBenefits**

** **

Xcel Energy has a contributory health and welfare benefit plan thatprovides health care and death benefits to most Xcel Energy retirees.  Employees of the former New Century Energies, Inc.(NCE) who retired in 2002 continue to receive employer-subsidized health carebenefits.  Nonbargaining employees of theformer NCE, who retired after June 30, 2003, are eligible to participatein the Xcel Energy health care program with no employer subsidy.

 

In conjunction with the 1993 adoption of SFAS No. 106 — “Employers’Accounting for Postretirement Benefits Other Than Pensions” (SFAS No. 106),Xcel Energy elected to amortize the unrecognized accumulated postretirementbenefit obligation (APBO) on a straight-line basis over 20 years.

 

Regulatory agencies for nearly all of Xcel Energy’s retail andwholesale utility customers have allowed rate recovery of accrued benefit costsunder SFAS No. 106.  PSCotransitioned to full accrual accounting for SFAS No. 106 costs between1993 and 1997, consistent with the accounting requirements for rate-regulatedenterprises.  The Colorado jurisdictionalSFAS No. 106 costs deferred during the transition period are beingamortized to expense on a straight-line basis over the 15-year period from 1998to 2012.

 

***Plan Assets***—Certain state agencies that regulate Xcel Energy’s utility subsidiaries alsohave issued guidelines related to the funding of SFAS No. 106 costs.  PSCo is required to fund SFAS No. 106costs in irrevocable external trusts that are dedicated to the payment of thesepostretirement benefits.  Also, a portionof the assets contributed on behalf of non-bargaining retirees has been fundedinto a sub-account of the Xcel Energy pension plans.  These assets are invested in a mannerconsistent with the investment strategy for the pension plan.

 

The actual composition of postretirement benefit plan assets at Dec. 31was:

 
| ** **                               | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Equity and equity mutual fund securities |       | 67       | %          | 67       | %          |
| Fixed income/debt securities             |       | 21       |       | 21       |       |
| Cash equivalents                         |       | 11       |       | 11       |       |
| Nontraditional investments               |       | 1        |       | 1        |       |
|                                     |       | 100      | %          | 100      | %          |

 

Xcel Energy bases its investment-return assumption for thepostretirement health care fund assets on expected long-term performance foreach of the investment types included in its postretirement health care assetportfolio.  Investment-return volatilityis not considered to be a material factor in postretirement health care costs.

 

48

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***Benefit Obligations***—A comparison of the actuarially computed benefit obligation and plan assets forXcel Energy postretirement health care plans that benefit employees of itsutility subsidiaries is presented in the following table:

 
| **(Thousands of Dollars)**                   | ** ** | **2007** | ** ** | **2006** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
| **Change in Benefit Obligation**                       |       |     |       |     |       |
| Obligation at Jan. 1                              |       | $        | 918,693    |     | $          | 938,172 |   |
| Service cost                                           |       | 5,813    |       | 6,633    |       |
| Interest cost                                          |       | 50,475   |       | 52,939   |       |
| Medicare subsidy reimbursements                        |       | 2,526    |       | 3,561    |       |
| Plan amendments                                        |       | —   |       | (945     | )          |
| Plan participants’ contributions                  |       | 13,211   |       | 11,870   |       |
| Actuarial gain                                         |       | (86,576  | )          | (27,511  | )          |
| Benefit payments                                       |       | (73,827  | )          | (66,026  | )          |
| Obligation at Dec. 31                             |       | $        | 830,315    |     | $          | 918,693 |   |
|                                                   |       |     |       |     |       |
| **Change in Fair Value of Plan Assets**                |       |     |       |     |       |
| Fair value of plan assets at Jan. 1               |       | $        | 406,305    |     | $          | 351,863 |   |
| Actual return on plan assets                           |       | 24,623   |       | 41,409   |       |
| Plan participants’ contributions                  |       | 13,211   |       | 11,870   |       |
| Employer contributions                                 |       | 57,147   |       | 67,188   |       |
| Benefit payments                                       |       | (73,827  | )          | (66,025  | )          |
| Fair value of plan assets at Dec. 31              |       | $        | 427,459    |     | $          | 406,305 |   |
|                                                   |       |     |       |     |       |
| **Funded Status at Dec. 31**                      |       |     |       |     |       |
| Funded status                                          |       | $        | (402,856   | )        | $          | (512,388 | ) |
| Current liabilities                                    |       | (1,755   | )          | (2,211   | )          |
| Noncurrent liabilities                                 |       | (401,101 | )          | (510,177 | )          |
| Net amounts recognized on consolidated  balance sheets |       | $        | (402,856   | )        | $          | (512,388 | ) |

 
| **PSCo Amounts Not Yet Recognized as Components of Net Periodic Cost:** | ** ** | ** **              | ** ** | ** **              | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Net loss                                                                                                                  |       | $                       | 74,361     |                    | $          | 106,450 |   |
| Prior service credit                                                                                                      |       | (2,185                  | )          | (2,613                  | )          |
| Transition obligation                                                                                                     |       | 55,805                  |       | 66,809                  |       |
| Total                                                                                                                     |       | $                       | 127,981    |                    | $          | 170,646 |   |
|                                                                                                                      |       |                    |       |                    |       |
| **SFAS No. 158 Amounts Have Been  Recorded as Follows Based Upon Expected Recovery in Rates:**                       |       |                    |       |                    |       |
| Regulatory assets                                                                                                         |       | $                       | 127,981    |                    | $          | 170,646 |   |
| Total                                                                                                                     |       | $                       | 127,981    |                    | $          | 170,646 |   |
|                                                                                                                      |       |                    |       |                    |       |
| PSCo accrued benefit liability recorded                                                                                   |       | $                       | 161,712    |                    | $          | 207,992 |   |
|                                                                                                                      |       |                    |       |                    |       |
| **Measurement Date**                                                                                                      |       | Dec. 31, 2007 |       | Dec. 31, 2006 |       |
|                                                                                                                      |       |                    |       |                    |       |
| **Significant Assumptions Used to Measure  Benefit Obligations**                                                          |       |                    |       |                    |       |
| Discount rate for year-end valuation                                                                                      |       | 6.25                    | %          | 6.00                    | %          |

 

Effective Dec. 31, 2007, Xcel Energy reduced its initial medicaltrend assumption from 9.0 percent to 8.0 percent.  The ultimate trend assumption remainedunchanged at 5.0 percent.  The period untilthe ultimate rate is reached is six years. Xcel Energy bases its medical trend assumption on the long-term costinflation expected in the health care market, considering the levels projectedand recommended by industry experts, as well as recent actual medical costincreases experienced by Xcel Energy’s retiree medical plan.

 

49

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A 1-percent change in the assumed health care cost trend rate wouldhave the following effects on PSCo:

 
| **(Millions of Dollars)**                                             | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|
| 1-percent increase in APBO components at  Dec. 31, 2007                    |       | $          | 56.3       |   |
| 1-percent decrease in APBO components at  Dec. 31, 2007                    |       | (47.1      | )          |
| 1-percent increase in service and interest  components of the net periodic cost |       | 4.6        |       |
| 1-percent decrease in service and interest  components of the net periodic cost |       | (3.8       | )          |
|                                                                                 |            |            |            |  |

 

***Plan Changes***- The employer subsidy for retiree medical coverage was eliminated for formerNCE non-bargaining employees who retire after July 1, 2003.

 

***Cash Flows***—The postretirement health care plans have no funding requirements under incometax and other retirement-related regulations other than fulfilling benefitpayment obligations, when claims are presented and approved under the plans.Additional cash funding requirements are prescribed by certain state andfederal rate regulatory authorities, as discussed previously.  Xcel Energy expects to contributeapproximately $49 million during 2008.

 

***Benefit Costs***—The components of net periodic postretirement benefit cost are:

 
| **(Thousands of Dollars)**                              |   | **2007** | ** ** | **2006** | ** ** | **2005** |   |
|-------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|--------|
| Service cost                                                      |   | $        | 5,813      |     | $          | 6,633    |   | $ | 6,684 |   |
| Interest cost                                                     |   |     | 50,475     |     |       | 52,939   |   |   | 55,060 |   |
| Expected return on plan assets                                    |   |     | (30,401    |     |       | (26,757  |   |   | (25,700 | ) |
| Amortization of transition obligation                             |   |     | 14,577     |     |       | 14,444   |   |   | 14,578 |   |
| Amortization of prior service credit                              |   |     | (2,178     |     |       | (2,178   |   |   | (2,178 | ) |
| Amortization of net loss                                          |   |     | 14,198     |     |       | 24,797   |   |   | 26,246 |   |
| Net periodic postretirement benefit cost  under SFAS No. 106 |   | $        | 52,484     |     | $          | 69,878   |   | $ | 74,690 |   |

 
| **PSCo**                                                                      | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Net periodic postretirement benefit cost  recognized — SFAS No. 106 |       | 28,661     |       | 39,976     |       | 43,841     |       |
| Additional cost recognized due to effects  of regulation                      |       | 3,891      |       | 3,891      |       | 3,891      |       |
| Net cost recognized for financial reporting                                   |       | $          | 32,552     |       | $          | 43,867     |       | $ | 47,732 |   |
|                                                                          |       |       |       |       |       |       |       |
| **Significant assumptions used to measure  costs (income)**                   |       |       |       |       |       |       |       |
| Discount rate                                                                 |       | 6.00       | %          | 5.75       | %          | 6.00       | %          |
| Expected average long-term rate of return  on assets (before tax)             |       | 7.5        |       | 7.5        |       | 5.5-8.5    |       |
|                                                                               |            |            |            |            |            |            |            |  |  |  |

 

**Projected Benefit Payments**

 

The following table lists Xcel Energy’s projected benefit payments forthe pension and postretirement benefit plans.

 
| ** **                           | ** ** | ** **                 | ** ** | **Gross Projected**       | ** ** | ** **                     | ** ** | **Net Projected**         | ** ** |
|--------------------------------------|------------|----------------------------|------------|--------------------------------|------------|--------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | ** **                 | ** ** | **Postretirement Health** | ** ** | ** **                     | ** ** | **Postretirement Health** | ** ** |
| ** **                           | ** ** | **Projected Pension** | ** ** | **Care Benefit**          | ** ** | **Expected Medicare**     | ** ** | **Care Benefit**          | ** ** |
| **(Thousands of Dollars)** | ** ** | **Benefit Payments**  | ** ** | **Payments**                   | ** ** | **Part D Subsidies** | ** ** | **Payments**                   | ** ** |
| 2008                                 |       | $                          | 215,127    |                           | $          | 60,706                         |       | $                              | 5,841      |   | $ | 54,865 |   |
| 2009                                 |       | 215,407                    |       | 62,674                         |       | 6,280                          |       | 56,394                         |       |
| 2010                                 |       | 222,771                    |       | 64,508                         |       | 6,693                          |       | 57,815                         |       |
| 2011                                 |       | 222,743                    |       | 66,428                         |       | 7,031                          |       | 59,397                         |       |
| 2012                                 |       | 227,616                    |       | 67,497                         |       | 7,415                          |       | 60,082                         |       |
| 2013-2017                            |       | 1,196,905                  |       | 348,035                        |       | 40,849                         |       | 307,186                        |       |
|                                      |            |                            |            |                                |            |                                |            |                                |            |  |  |  |  |

 

50

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**9.   Detail of Interest and Other Income(Expense), Net**

 

Interest and other income, net of nonoperating expenses, for the yearsended Dec. 31 consisted of the following:

 
| **(Thousands of Dollars)**                                             | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|----------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest income                                                                  |       | $        | 9,876      |     | $          | 4,462    |       | $ | 2,801 |   |
| Other nonoperating income                                                        |       | 2,373    |       | 2,581    |       | 3,621    |       |
| Interest expense on corporate-owned life  insurance and other insurance policies |       | (14,642  | )          | (20,404  | )          | (18,273  | )          |
| Other nonoperating expense                                                       |       | (7       | )          | (862     | )          | (33      | )          |
| Total interest and other expense, net                                            |       | $        | (2,400     | )        | $          | (14,223  | )          | $ | (11,884 | ) |

 

**10.    Derivative Instruments**

 

In the normal course of business, PSCo is exposed to a variety ofmarket risks.  Market risk is thepotential loss or gain that may occur as a result of changes in the market orfair value of a particular instrument or commodity.  PSCo utilizes, in accordance with approvedrisk management policies, a variety of derivative instruments to mitigatemarket risk and to enhance its operations.

 

***Commodity Price Risk—*** PSCo is exposed to commodity price risk in itselectric and natural gas operations. Commodity price risk is managed by entering into both long- andshort-term physical purchase and sales contracts for electric capacity, energyand other energy-related products and for various fuels used in the generationof electricity and natural gas utility operations.  Commodity risk is also managed through theuse of financial derivative instruments. PSCo utilizes these derivative instruments to reduce the volatility inthe cost of commodities acquired on behalf of its retail customers even thoughregulatory jurisdiction may provide for recovery of actual costs.  The use of derivative instruments is doneconsistently with the local jurisdictional cost-recovery mechanism.  PSCo’s risk management policy allows it tomanage commodity price risk within each rate-regulated operation to the extentsuch exposure exists.

 

***Short-Term Wholesaleand Commodity Trading Risk —*** PSCo conducts variousshort-term wholesale and commodity trading activities, including the purchaseand sale of electric capacity and energy and other energy-relatedinstruments.  PSCo’s risk managementpolicy allows management to conduct these activities within guidelines andlimitations as approved by our risk management committee, which is made up ofmanagement personnel not directly involved in the activities governed by thispolicy.

 

***Interest Rate Risk —***PSCo is subject to the risk of fluctuatinginterest rates in the normal course of business.  PSCo’s risk management policy allows interestrate risk to be managed through the use of fixed rate debt, floating rate debtand interest rate derivatives such as swaps, caps, collars and put or calloptions, subject to regulatory approval when required.

 

**Types of and Accounting forDerivative Instruments**

 

PSCo uses derivative instruments in connection with its utilitycommodity price, interest rate, short-term wholesale and commodity tradingactivities, including forward contracts, futures, swaps and options.  Qualifying hedging relationships aredesignated as a hedge of a forecasted transaction or future cash flow (cashflow hedge).  The types of qualifyinghedging transactions that PSCo is currently engaged in are discussed below.

 

**Cash Flow Hedges**

** **

***Commodity Cash FlowHedges*** — PSCo enters into derivative instrumentsto manage variability of future cash flows from changes in commodityprices.  These derivative instruments aredesignated as cash flow hedges for accounting purposes.  At Dec. 31, 2007, PSCo had variouscommodity-related contracts designated as cash flow hedges extending through December 2009.

 

At Dec. 31, 2007, PSCo had $0.3 million in accumulated othercomprehensive income that is expected to be recognized in earnings during thenext 12 months as the hedged transactions settle.

 

PSCo had immaterial ineffectiveness related to commodity cash flowhedges during 2007 and 2006.

 

51

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***Interest Rate CashFlow Hedges*** — PSCo enters into interest rate lockagreements, including treasury-rate locks and forward starting swaps thateffectively fix the yield or price on a specified treasury security for aspecific period.  These derivativeinstruments are designated as cash flow hedges for accounting purposes.

 

At Dec. 31, 2007, PSCo had net gains of approximately $1.5 millionin accumulated other comprehensive income that it expects to recognize inearnings during the next 12 months.

 

PSCo had no ineffectiveness related to interest rate cash flow hedgesduring 2007 and 2006.

 

The following table shows the major components of thederivative instruments valuation in the consolidated balance sheets at Dec. 31:

*** ***
| ** **                                                   | ** ** | **2007**                                                  | ** ** | **2006**                                                       | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------------|------------|----------------------------------------------------------------|------------|
| **(Thousands of Dollars)**                         | ** ** | **Derivative  Instruments  Valuation - Assets** | ** ** | **Derivative  Instruments  Valuation - Liabilities** | ** ** | **Derivative  Instruments  Valuation - Assets** | ** ** | **Derivative  Instruments  Valuation - Liabilities** | ** ** |
| Long term purchased power agreements                         |       | $                                                         | 155,928    |                                                           | $          | 96,654 |   | $ | 174,523 |   | $ | 180,017 |   |
| Electricity and natural gas trading and  hedging instruments |       | 19,117                                                    |       | 9,057                                                          |       | 15,090 |   | 15,222 |   |
| Total                                                        |       | $                                                         | 175,045    |                                                           | $          | 105,711 |   | $ | 189,613 |   | $ | 195,239 |   |

 

In 2003, as a result of FASB Statement 133Implementation Issue No. C20, PSCo 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 the first quarter of 2006, PSCoqualified these contracts under the normal purchase exception.  Based on this qualification, the contractsare no longer adjusted to fair value and the previous carrying value of thesecontracts will be amortized over the remaining contract lives along with theoffsetting regulatory assets and liabilities.

 

***Financial Impact ofQualifying Cash Flow Hedges*** — The impact ofqualifying cash flow hedges on PSCo’s accumulated other comprehensive income,included in the consolidated statements of common stockholder’s equity andcomprehensive income, is detailed in the following table:

 
| ** **                                                                          | ** ** | **(Millions of Dollars)** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------------|------------|
| Accumulated other comprehensive income  related to hedges at Dec. 31, 2004     |       | $                                   | 15.7       |   |
|                                                                                |       |                                |       |
| After-tax net unrealized gains related to  derivative accounted for as hedges       |       | 11.9                                |       |
| After-tax net realized gains on derivative  transactions reclassified into earnings |       | (13.4                               | )          |
| Accumulated other comprehensive income  related to hedges at Dec. 31, 2005     |       | $                                   | 14.2       |   |
|                                                                                |       |                                |       |
| After-tax net unrealized losses related to  derivatives accounted for as hedges     |       | (0.1                                | )          |
| After-tax net realized gains on derivative  transactions reclassified into earnings |       | (1.5                                | )          |
| Accumulated other comprehensive income  related to hedges at Dec. 31, 2006     |       | $                                   | 12.6       |   |
|                                                                                |       |                                |       |
| After-tax net unrealized gains related to  derivatives accounted for as hedges      |       | 1.3                                 |       |
| After-tax net realized gains on derivative  transactions reclassified into earnings |       | (1.5                                | )          |
| Accumulated other comprehensive income  related to hedges at Dec. 31, 2007     |       | $                                   | 12.4       |   |

 

**11.    Financial Instruments**

** **

The estimated Dec. 31 fair values of PSCo’s recorded financialinstruments are as follows:

 
| ** **                                | ** ** | **2007**             | ** ** | **2006**            | ** ** |
|-------------------------------------------|------------|----------------------|------------|---------------------|------------|
| **(Thousands of Dollars)**      | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| Other investments                         |       | $                    | 23,718     |                | $          | 23,718 |   | $ | 11,144 |   | $ | 11,144 |   |
| Long-term debt, including current portion |       | 2,193,089            |       | 2,297,047           |       | 1,946,657 |   | 2,023,551 |   |
|                                           |            |                      |            |                     |            |  |  |  |  |  |  |  |  |

 

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The fair value of cash and cash equivalents, notes and accountsreceivable and notes and accounts payable are not materially different fromtheir carrying amounts.  The fair valueof PSCo’s long-term investments are estimated based on quoted market prices forthose or similar investments.  The fairvalue of PSCo’s long-term debt is estimated based on the quoted market pricesfor the same or similar issues or the current rates for debt of the sameremaining maturities and credit quality.

 

The fair value estimates presented are based on information availableto management as of Dec. 31, 2007 and 2006. These fair value estimateshave not been comprehensively revalued for purposes of these consolidatedfinancial statements since that date and current estimates of fair values maydiffer significantly.

 

**Letters of Credit**

 

PSCo use letters of credit, generally with terms of one year, toprovide financial guarantees for certain operating obligations.  At Dec. 31, 2007 and 2006, there were$5.1 million and $6.0 million of letters of credit outstanding.  The contract amounts of these letters ofcredit approximate their fair value and are subject to fees determined in themarketplace.

 

**12. Rate Matters**

** **

***Pendingand Recently Concluded Regulatory Proceedings — CPUC***

*** ***

**Base Rate**

** **

***Natural GasRate Case**** **—***In December 2006, PSCo filed with theCPUC, a request to increase natural gas rates by $41.9 million, or 2.96percent.  The request assumed a commonequity ratio of 60.17 percent, an ROE of 11 percent and a rate base isapproximately $1.1 billion.

 

In July 2007,the CPUC approved with modifications a comprehensive settlement between PSCo,the CPUC staff, the OCC and Seminole Energy Services, LLC, providing for, amongother things, the following:

 

·              An annual revenue increase of $32.3million, based on a 10.25 percent ROE and a 60.17 percent equity ratio.

 

·              A modification to the partial decouplingmechanism to allow PSCo recovery of additional revenues in future years tocompensate for the portion of the decline in weather normalized residential useper customer that exceeds the first 1.3 percent in annual decline in use (to bereflective of 50 percent of the historic average annual decline in use).

 

Final rateswere implemented effective July 30, 2007. Under the provisions of this settlement, PSCo will be filing its PhaseII (cost allocation and rate design) on or before March 31, 2008, tospread among PSCo’s customer classes the settled revenue requirement from thiscase.

 

**Electric, Purchased Gas andResource Adjustment Clauses**

** **

***Transmission Cost Adjustment Rider -*** OnSept. 7, 2007, PSCo filed with the CPUC a request to implement a transmissioncost adjustment rider (TCA), which would recover approximately $18.2 million in2008.  This filing is pursuant torecently enacted legislation which entitled public utilities to recover,through a separate rate adjustment clause, the costs that it prudently incursin planning, developing and completing the construction or expansion oftransmission.  This legislation furtherencourages utilities to invest in transmission facilities by allowing therecovery of the total balance of construction work in progress related to thosetransmission investments at PSCo’s weighted average cost of capital includingits most recently authorized rate of ROE. The CPUC staff and certain other parties challenged the scope of PSCo’srequested cost recovery under the rider during 2008.

 

In November 2007,PSCo updated its estimate of costs to be recovered through the TCA commencing Jan. 1,2008, reducing its requested recovery during 2008 to $8.7 million.

 

In December 2007,the CPUC issued its initial decision approving PSCo’s application to implementthe TCA.  However, the CPUC limited thescope of the costs that could be recovered through the rider during 2008 toonly those costs associated with transmission investment made after the newlegislation authorizing the rider became effective on March 26, 2007.  The CPUC also will require PSCo to base itsrevenue requirement calculation on a thirteen month average net transmissionplant balance.  As a result of the CPUC’sdecision, PSCo will implement a rider on Jan. 1, 2008 to recoverapproximately $4.5 million in 2008.  PSCosought reconsideration of that aspect of the decision requiring it to base therider on a thirteen-month

 

53

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average nettransmission plant balance.  In February 2008,the CPUC voted to deny rehearing.

 

***Enhanced DSM Program*** – In October 2007,PSCo filed an application with the CPUC for approval to implement an expandedDSM program and to revise its DSMCA to include current cost recovery andincentives designed to reward PSCo for successfully implementing cost-effectiveDSM programs and measures.  Under the DSMprogram currently in place, PSCo is committed to using its best efforts to acquire, on average, 40 MW of demand reductionand 100 GWh of energy savings per year from cost-effective DSM programs overthe period beginning Jan. 1, 2006 and ending Dec. 31, 2013, so thatby Jan. 1, 2014 PSCo will have achieved a cumulative level of 320 MW oftotal demand reduction and 800 GWh of annual energy savings.  With this application, PSCo proposes toexpand and extend its commitment to acquire a cumulative level of 694 MW ofpeak demand reduction and 2,351 GWh of energy savings, including achievementsassociated with its existing DSM programs over the period Jan. 1, 2009through Dec. 31 2009.  Under theproposed revision to the DSMCA, PSCo would recover 100 percent of itsforecasted expenses associated with the DSM program during the year in whichthe rider is in effect as well as an incentive based upon the net economicbenefits achieved during the prior year up to 20 percent of the net presentvales of the benefits achieved.

 

***Interruptible Service Option Credit Program***- In November 2007 PSCo requested to expand its interruptible serviceoption credit program (ISOC) to make it available to customers withinterruptible demands of 300 KW and above. PSCo also seeks to change the basis upon which it pays credits tocustomers who participate in the program and to obtain approval for currentrecovery of those credits through the DSM Adjustment Clause.  Lastly, PSCo seeks authority to recover anincentive in addition to receiving reimbursement of the credits paid tocustomers to reward it for successful implementation of a program that reducesoverall costs to its retail customers.

 

**Other**

** **

***Pendingand Recently Concluded Regulatory Proceedings — FERC***

*** ***

***Pacific NorthwestFERC Refund Proceeding****-*In July 2001, the FERC ordered a preliminary hearingto determine whether there may have been unjust and unreasonable charges forspot market bilateral sales in the Pacific Northwest for the period Dec. 25,2000 through June 20, 2001. PSCo supplied energy to the Pacific Northwestmarkets during this period and has been an active participant in thehearings.  In September 2001, thepresiding ALJ concluded that prices in the Pacific Northwest during thereferenced period were the result of a number of factors, including theshortage of supply, excess demand, drought and increased natural gas prices.  Under these circumstances, the ALJ concludedthat the prices in the Pacific Northwest markets were not unreasonable orunjust and no refunds should be ordered. Subsequent to the ruling, the FERC has allowed the parties to requestadditional evidence regarding the use of certain strategies and how they mayhave impacted the markets in the Pacific Northwest markets.  For the referenced period, parties haveclaimed that the total amount of transactions with PSCo subject to refund are$34 million.  In June 2003, the FERCissued an order terminating the proceeding without ordering furtherproceedings.  Certain purchasers filedappeals of the FERC’s orders in this proceeding with the United States Court ofAppeals for the Ninth Circuit.

 

In an order issued on Aug. 24, 2007, the Ninth Circuit issued anorder remanding the proceeding back to the FERC.  The court of appeals determined that it hadjurisdiction to review the FERC’s decision not to order refunds and remandedthe case back to the FERC, directing that the FERC consider evidence that hadbeen presented regarding intentional market manipulation in the Californiamarkets and its potential ties to transactions in the Pacific Northwest.  The court of appeals also indicated that theFERC should consider other rulings addressing overcharges in the Californiaorganized markets.

 

**13.   Commitments and Contingent Liabilities**

** **

***Leases*****— PSCo leases a variety of equipment andfacilities used in the normal course of business.  Two of these leases qualify as capital leasesand are accounted for accordingly.  Thecapital leases contractually expire in 2025 and 2028.  The assets and liabilities acquired undercapital leases are recorded at the lower of fair-market value or the presentvalue of future lease payments and are amortized over their actual contractterm in accordance with practices allowed by regulators.

 

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Following is a summary of assets held under capital leases:

 
| **(Millions of Dollars)**    | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Storage, leaseholds and rights         |       | $        | 40.5       |     | $          | 40.5 |   |
| Gas pipeline                           |       | 20.7     |       | 20.7     |       |
|                                   |       | 61.2     |       | 61.2     |       |
| Less: Accumulated amortization         |       | (16.3    | )          | (15.0    | )          |
| Total assets held under capital leases |       | $        | 44.9       |     | $          | 46.2 |   |

 

The remainder of the leases, primarily for office space, railcars,generating facilities, trucks, cars and power-operated equipment are accountedfor as operating leases.  Rental expenseunder operating lease obligations was approximately $44.6 million, $17.1million and $19.6 million for 2007, 2006 and 2005, respectively.  Purchase power agreements contributed $26.1million in 2007.

 

Included in the future commitments under operating leases are estimatedfuture payments under purchase power agreements that have been accounted for asoperating leases in accordance with Emerging Issues Task Force 01-8, “*Determining whether an Arrangement Contains a Lease*”and SFAS No. 13, “*Accounting for Leases*.”  Future commitments under operating andcapital leases for continuing operations are:

 
| **(Millions of Dollars)** | ** ** | **Other  Operating Leases** | ** ** | **Purchased Power  Agreement  Operating Leases** | ** ** | **Total  Operating Leases** | ** ** | **Capital Leases** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|------------------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|
| 2008                                |       | $                                | 9.2        |                                                       | $          | 45.0                             |       | $                       | 54.2       |   | $ | 6.1 |   |
| 2009                                |       | 8.1                              |       | 45.4                                                       |       | 53.5                             |       | 6.0                     |       |
| 2010                                |       | 8.1                              |       | 41.6                                                       |       | 49.7                             |       | 5.8                     |       |
| 2011                                |       | 7.9                              |       | 30.9                                                       |       | 38.8                             |       | 5.7                     |       |
| 2012                                |       | 7.5                              |       | 26.9                                                       |       | 34.4                             |       | 5.5                     |       |
| Thereafter                          |       | 26.6                             |       | 431.2                                                      |       | 457.8                            |       | 56.9                    |       |
| Total minimum obligation            |       |                             |       |                                                       |       |                             |       | 86.0                    |       |
| Interest component of obligation    |       |                             |       |                                                       |       |                             |       | (41.1                   | )          |
| Present value of minimum obligation |       |                             |       |                                                       |       |                             |       | $                       | 44.9       |   |
|                                     |            |                                  |            |                                                            |            |                                  |            |                         |            |  |  |  |  |

 

***Capital Commitments—***The estimated cost, as of Dec. 31, 2007, ofthe capital expenditure programs and other capital requirements of PSCo isapproximately $825 million in 2008, $505 million in 2009 and $530 million in2010.  PSCo’s capital expenditureforecast includes the following major project:

 

*Comanche 3 -*Comanche3, a 750-MW coal-fired plant being built in Colorado is expected to costapproximately $1.35 billion, with major construction initiated in 2006 andexpected to be completed in the fall of 2009. The CPUC has approved sharing one-third ownership of this plant withother parties.  Consequently, PSCo’sinvestment in Comanche 3 will be approximately $1 billion.

 

The capital expenditure programs of PSCo are subject to continuingreview and modification.  Actual utilityconstruction expenditures may vary from the estimates due to changes inelectric and natural gas projected load growth regulatory decisions, thedesired reserve margin and the availability of purchased power, as well asalternative plans for meeting PSCo’s long-term energy needs.  In addition, PSCo’s ongoing evaluation ofcompliance with future requirements to install emission-control equipment andmerger, acquisition and divestiture opportunities to support corporatestrategies may impact actual capital requirements.

 

***Fuel Contracts*****— PSCo has contracts providing for thepurchase and delivery of a significant portion of its current coal and naturalgas requirements.  These contracts expirein various years between 2008 and 2028. In addition, PSCo may be required to pay additional amounts depending onactual quantities shipped under these agreements.  The potential risk of loss, in the form ofincreased costs from market price changes in fuel, is mitigated through thecost-rate adjustment mechanisms, which provide for pass through of most fuel,storage and transportation costs.

 

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The estimated minimum purchase obligation for PSCo under thesecontracts as of Dec. 31, 2007, is as follows:

 
| **Coal** |   | **Natural Gas  Supply**        |   | **Gas Storage &  Transportation** |   |
|----------|--------|-------------------------------------|--------|-------------------------------------------------|--------|
|     |   | **(Millions of Dollars)** |   |                                            |   |
| $        | 687    |                                | $      | 979                                             |   | $ | 2,088 |   |
|          |        |                                     |        |                                                 |        |  |  |  |

 

***Purchased PowerAgreements****—*PSCohas entered into agreements with utilities and other energy suppliers forpurchased power to meet system load and energy requirements, replace generationfrom company-owned units under maintenance and during outages and meetoperating reserve obligations.  PSCo hasvarious pay-for-performance contracts with expiration dates through the year2027.  In general, these contractsprovide for capacity payments, subject to meeting certain contract obligationsand energy payments based on actual power taken under the contracts.  Certain contractual payment obligations areadjusted based on indices.  However, theeffects of these price adjustments are mitigated through cost-of-energy rate adjustmentmechanisms.

 

PSCo has also executed three additional purchase power agreements thatare conditional upon achievement of certain conditions, including becomingoperational.  Estimated payments underthese conditional obligations are $13.6 million for 2008, $18.2 million for2009 through 2011, $28.8 million for 2012 and $477.7 million thereafter,respectively.

 

At Dec. 31, 2007, the estimated future payments for capacity,accounted for as executory contracts, that PSCo is obligated to purchase, subjectto availability, were as follows:

 
| **(Millions of Dollars)** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|------------|------------|
| 2008                                |       | $          | 345.3      |   |
| 2009                                |       | 327.6      |       |
| 2010                                |       | 300.8      |       |
| 2011                                |       | 288.0      |       |
| 2012                                |       | 229.9      |       |
| 2013 and thereafter                 |       | 506.8      |       |
| Total                               |       | $          | 1,998.4    |   |

 

**EnvironmentalContingencies**

 

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

 

***Site Remediation****—*PSCo must pay all or a portion of thecost to remediate sites where past activities of PSCo and some other partieshave caused environmental contamination. Environmental contingencies could arise from various situationsincluding the following categories of sites:

 

·          Site of a former MGP operated by PSCo, itspredecessors, or other entities; and

·          Third party sites, such as landfills, towhich PSCo is alleged to be a potentially responsible party (PRP) that senthazardous materials and wastes.

 

PSCo records aliability when enough information is obtained to develop an estimate of thecost of environmental remediation and revises the estimate as information isreceived.  The estimated remediation costmay vary materially from the initial estimate.

 

To estimate the remediationcost for these sites, assumptions are made where facts are not fullyknown.  For instance,  assumptions may be made about the nature andextent of site contamination, the extent of required cleanup efforts, costs ofalternative cleanup methods and pollution-control technologies, the period overwhich remediation will be performed and paid for, changes in environmentalremediation and pollution-control requirements, the potential effect oftechnological improvements, the number and financial strength of other PRPs andthe identification of new environmental cleanup sites.

 

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Estimates arerevised as facts become known.  At Dec. 31,2007, the liability for the cost of remediating these sites was estimated to be$1.7 million, of which $0.6 million was considered to be a currentliability.  Some of the cost ofremediation may be recovered from:

 

·          Insurance coverage;

·          Other parties that have contributed to thecontamination; and

·          Customers.

 

Neither thetotal remediation cost nor the final method of cost allocation among all PRPsof the unremediated sites has been determined. Estimates have been recorded for PSCo’s future costs for these sites.

 

###### ***Manufactured Gas Plant Site***

######  

***Fort Collins Manufactured Gas Plant Site****** —***Prior to1926, the Poudre Valley Gas Co. operated an MGP in Fort Collins, Colo., not farfrom the Cache la Poudre River.  In 1926,after acquiring the assets of the Poudre Valley Gas Co., PSCo shut down the MGPsite and has subsequently sold most of the property.  In 2002, an oily substance similar to MGPbyproducts was discovered in the Cache la Poudre River.  In November 2004, PSCo entered into anagreement with the EPA, the city of Fort Collins and Schrader Oil Co. underwhich PSCo performed remediation and monitoring work.  PSCo has substantially completed work at thesite, with the exception of ongoing maintenance and monitoring.

 

In May 2005, PSCofiled a natural gas rate case with the CPUC requesting recovery of cleanupcosts at the Fort Collins MGP site spent through March 2005, whichamounted to $6.2 million, to be amortized over four years.  PSCo reached a settlement agreement with theparties in the case.  In January 2006,the CPUC approved the settlement agreement, rates were effective Feb. 6,2006.

 

In November 2006,PSCo filed a natural gas rate case with the CPUC requesting recovery ofadditional clean-up costs at the Fort Collins MGP site spent through September 2006,plus unrecovered amounts previously authorized from the last rate case, whichamounted to $10.8 million to be amortized over four years.  In June 2007, PSCo entered into asettlement agreement that included recovery of the full $10.8 million, but witha five year amortization period.  TheCPUC approved the agreement on June 18, 2007.  The total amount to be recovered fromcustomers is $13.1 million.  Estimatedfuture project costs, based upon an assumed 30-year system operating life,including EPA oversight costs, are approximately $3.9 million.

 

In April 2005, PSCobrought a contribution action against Schrader Oil Co. and related parties allegingSchrader Oil Co. released hazardous substances into the environment and thesereleases caused MGP byproducts to migrate to the Cache la Poudre River, therebysubstantially increasing the scope and cost of remediation.  PSCo requested damages, including a portionof the costs PSCo incurred to investigate and remove contaminated sedimentsfrom the Cache la Poudre River.  In December 2005,the court denied Schrader’s request to dismiss the PSCo suit.  Schrader thereafter filed a response to thePSCo complaint and a counterclaim against PSCo for its response costs under theComprehensive Environmental Response Compensation and Liability Act (CERCLA)and under the Resource Conservation and Recovery Act (RCRA).  Schrader alleged as part of its counterclaiman “imminent and substantial endangerment” of its property as defined byRCRA.  PSCo filed a motion for partialsummary judgment to dismiss Schrader’s RCRA claim.  In October 2007, the court granted PSCo’smotion for partial summary judgment and dismissed Schrader’s RCRA claim.  Schrader also filed a motion for summaryjudgment seeking to dismiss PSCo’s CERCLA claim.  PSCo believes this motion is without meritand will vigorously defend its claim. Any costs recovered from Schrader are expected to operate as a credit toratepayers.

 

# **ThirdParty and Other Environmental Site Remediation**

#  

***Asbestos Removal*—**Someof PSCo’s facilities contain asbestos. Most asbestos will remain undisturbed until the facilities that containit are demolished or renovated.  PSCo hasrecorded an estimate for final removal of the asbestos as an ARO.  See additional discussion of AROs below.  It may be necessary to remove some asbestosto perform maintenance or make improvements to other equipment.  The cost of removing asbestos as part ofother work is immaterial and is recorded as incurred as operating expenses formaintenance projects, capital expenditures for construction projects or removalcosts for demolition projects.

 

57

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***Other Environmental Requirements***

 

***Regional Haze Rules ***—In June 2005, the EPA finalized amendments to the July 1999 regionalhaze rules.  These amendments apply tothe provisions of the regional haze rule that require emission controls,known as BART, for industrial facilities emitting air pollutants that reducevisibility by causing or contributing to regional haze.  Some PSCo generating facilities will besubject to BART requirements.

 

The EPA requires states to develop implementation plans to comply withBART by December 2007.  States arerequired to identify the facilities that will have to reduce SO2, NOx and particulate matteremissions under BART and then set BART emissions limits for thosefacilities.  In May 2006, theColorado Air Quality Control Commission promulgated BART regulations requiringcertain major stationary sources to evaluate and install, operate and maintainBART technology or an approved BART alternative to make reasonable progresstoward meeting the national visibility goal. PSCo estimates that implementation of the BART alternatives will costapproximately $211 million in capital costs, which includes approximately $62million in environmental upgrades for the existing Comanche Station project,which are included in the capital budget. PSCo expects the cost of any required capital investment will berecoverable from customers.  Emissionscontrols are expected to be installed between 2011 and 2014.  On June 4, 2007, the CAPCD approved PSCo’sBART analysis and obtained public comment on its BART determination and  PSCo’s BART permits.  The Air Quality Control Commission approvedthe CAPCD’s BART determination for PSCo during a public hearing in December 2007.  CAPCD’s BART determinations and correspondingprovisions of the regional haze state implementation plan will be submitted tothe EPA for approval in 2008.  Inaddition, in early 2008, the CAPCD plans to embark on a stakeholder process todevelop presumptive standards for significant source categories and establishreasonable progress goals for Colorado’s Class I areas.  To meet these goals, more controls may berequired from certain sources, which may or may not include those sourcespreviously controlled under BART.

 

***CAMR***— In March 2005,the EPA issued the CAMR, which regulated mercury emissions from powerplants.  On Feb. 8, 2008, the D.C.Circuit Court of Appeals vacated CAMR, which impacts federal CAMR requirements,but not necessarily state-only mercury legislation and rules.  Colorado’s mercury rule requires mercuryemission controls capable of achieving 80 percent capture be installed atPawnee Station by 2012 and all other Colorado units by 2014.  PSCo is in the process of installing mercurymonitors on seven Colorado units at an estimated aggregate cost ofapproximately $2.6 million.  PSCo isevaluating the mercury emission controls required to meet the new rule andis currently unable to provide a capital cost estimate.

 

***Federal Clean Water Act***—The federal Clean Water Act requires the EPA to regulate cooling water intakestructures to assure that these structures reflect the “best technologyavailable” for minimizing adverse environmental impacts.  In July 2004, the EPA published phase IIof the rule, which applies to existing cooling water intakes at steam-electricpower plants. Several lawsuits were filed against the EPA in the United StatesCourt of Appeals for the Second Circuit challenging the phase IIrulemaking.  In January 2007, thecourt issued its decision and remanded virtually every aspect of the rule tothe EPA for reconsideration.  In June 2007,the EPA suspended the deadlines and referred any implementation to each state’sbest professional judgment until the EPA is able to fully respond to thecourt-ordered remand.  As a result, therule’s compliance requirements and associated deadlines are currentlyunknown.  It is not possible to providean accurate estimate of the overall cost of this rulemaking at this time due tothe many uncertainties involved.

 

***Notice of Violation***— In July 2002, PSCo received a Notice of Violation (NOV) from the EPAalleging violations of the New Source Review (NSR) requirements of the CleanAir Act (CAA) at the Comanche and Pawnee plants in Colorado.  The NOV specifically alleges that variousmaintenance, repair and replacement projects undertaken at the plants in themid- to late-1990s should have required a permit under the NSR process.  PSCo believes it has acted in full compliancewith the CAA and NSR process.  Itbelieves that the projects identified in the NOV fit within the routine maintenance,repair and replacement exemption contained within the NSR regulations or areotherwise not subject to the NSR requirements. PSCo disagrees with the assertions contained in the NOV and intends tovigorously defend its position.

 

***Cherokee Station Alleged Clean Air ActViolations*** — In January 2008, Xcel Energyreceived a notice letter from Rocky Mountain Clean Air Action stating that thegroup intends to sue Xcel Energy for alleged Clean Air Act violations atCherokee Station.  The group claims thatCherokee Station’s opacity emissions have exceeded allowable limits over thepast five years and that its opacity monitors exceeded downtime limits.  Xcel Energy disputes these claims andbelieves they are without merit.  TheClean Air Act requires notice be given 60 days prior to filing a lawsuit.  If the group does in fact file its threatenedlawsuit, Xcel Energy will vigorously defend itself against these claims.

 

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**AssetRetirement Obligations**

 

PSCo records future plant removal obligations as a liability at fairvalue with a corresponding increase to the carrying values of the relatedlong-lived assets in accordance with SFAS No. 143 — “Accounting for AssetRetirement Obligations” (SFAS No. 143). This liability will be increased over time by applying the interestmethod of accretion to the liability and the capitalized costs will bedepreciated over the useful life of the related long-lived assets.  The recording of the obligation for regulatedoperations has no income statement impact due to the deferral of theadjustments through the establishment of a regulatory asset pursuant to SFAS No. 71.

 

***Recorded ARO —***ARO’s have been recorded for steam production, electric transmission anddistribution and natural gas distribution. The steam production obligation includes asbestos and ash-containmentfacilities.  The asbestos recognitionassociated with the steam production includes certain plants at PSCo.  Generally, this asbestos abatement removalobligation originated in 1973 with the Clean Air Act, which applied to thedemolition of buildings or removal of equipment containing asbestos that canbecome airborne on removal.  AROs alsohave been recorded  for PSCo steamproduction related to ash-containment facilities such as bottom ash ponds,evaporation ponds and solid waste landfills. The origination date on the AROrecognition for ash-containment facilities at steam plants was the in-servicedate of various facilities.

 

PSCo recognized an ARO for the retirement costs of its natural gasmains.  In addition, an ARO wasrecognized for the removal of electric, transmission and distributionequipment.  The electric transmission anddistribution ARO consists of many small potential obligations associated withpolychlorinated biphenyls (PCBs), mineral oil, storage tanks, treated poles,lithium batteries, mercury and street lighting lamps.  These electric and natural gas assets havemany in-service dates for which it is difficult to assign the obligation to aparticular year.  Therefore, theobligation was measured using an average service life.

 

A reconciliation of the beginning and ending aggregate carrying amountsof PSCo’s AROs is shown in the table below for the 12 months ended Dec. 31,2007 and 2006, respectively:

 
| **(Thousands of Dollars)**   | ** ** | **Beginning  Balance  Jan. 1, 2007** | ** ** | **Liabilities  Recognized** | ** ** | **Liabilities  Settled** | ** ** | **Accretion** | ** ** | **Revisions  To Prior  Estimates** | ** ** | **Ending  Balance  Dec. 31, 2007** | ** ** |
|----------------------------------------|------------|------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|---------------|------------|-----------------------------------------|------------|----------------------------------------------|------------|
| ** **                             | ** ** | ** **                                     | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **    | ** ** | ** **                              | ** ** | ** **                                   | ** ** |
| **Electric Utility Plant:**            | ** ** | ** **                                     | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **    | ** ** | ** **                              | ** ** | ** **                                   | ** ** |
| Steam production asbestos              |       | $                                              | 9,634      |                        | $          | —                   |       | $             | —     |                                    | $          | 567                                          |       | $ | — |   | $ | 10,201 |   |
| Steam production ash containment       |       | 3,906                                          |       | —                      |       | —                   |       | 241           |       | (89                                     | )          | 4,058                                        |       |
| Electric transmission and distribution |       | 593                                            |       | —                      |       | —                   |       | 13            |       | (524                                    | )          | 82                                           |       |
| **Gas Utility Plant:**                 | ** ** | ** **                                     | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **    | ** ** | ** **                              | ** ** | ** **                                   | ** ** |
| Gas transmission and distribution      |       | 29,202                                         |       | —                      |       | —                   |       | 724           |       | —                                  |       | 29,926                                       |       |
| Total liability                        |       | $                                              | 43,335     |                        | $          | —                   |       | —        |       | $                                       | 1,545      |                                         | $          | (613 | ) | $ | 44,267 |   |
|                                        |            |                                                |            |                             |            |                          |            |               |            |                                         |            |                                              |            |  |  |  |  |  |  |

 
| **(Thousands of Dollars)**   | ** ** | **Beginning  Balance  Jan. 1, 2006** | ** ** | **Liabilities  Recognized** | ** ** | **Liabilities  Settled** | ** ** | **Accretion** | ** ** | **Revisions  To Prior  Estimates** | ** ** | **Ending  Balance  Dec. 31, 2006** | ** ** |
|----------------------------------------|------------|------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|---------------|------------|-----------------------------------------|------------|----------------------------------------------|------------|
| ** **                             | ** ** | ** **                                     | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **    | ** ** | ** **                              | ** ** | ** **                                   | ** ** |
| **Electric Utility Plant:**            | ** ** | ** **                                     | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **    | ** ** | ** **                              | ** ** | ** **                                   | ** ** |
| Steam production asbestos              |       | $                                              | 9,099      |                        | $          | —                   |       | $             | —     |                                    | $          | 535                                          |       | $ | — |   | $ | 9,634 |   |
| Steam production ash containment       |       | 3,720                                          |       | —                      |       | —                   |       | 230           |       | (44                                     | )          | 3,906                                        |       |
| Electric transmission and distribution |       | 700                                            |       | —                      |       | —                   |       | 18            |       | (125                                    | )          | 593                                          |       |
| **Gas Utility Plant:**                 | ** ** | ** **                                     | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **    | ** ** | ** **                              | ** ** | ** **                                   | ** ** |
| Gas transmission and distribution      |       | 28,449                                         |       | —                      |       | —                   |       | 706           |       | 47                                      |       | 29,202                                       |       |
| Total liability                        |       | $                                              | 41,968     |                        | $          | —                   |       | —        |       | $                                       | 1,489      |                                         | $          | (122 | ) | $ | 43,335 |   |
|                                        |            |                                                |            |                             |            |                          |            |               |            |                                         |            |                                              |            |  |  |  |  |  |  |

 

***IndeterminateAROs******—***PSCo has underground natural gas storagefacilities that have special closure requirements for which the final removaldate cannot be determined, therefore an ARO has not been recorded.

 

59

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***Removal Costs***-PSCo accrues an obligation for plant removal costs for generation, transmissionand distribution facilities.  Generally,the accrual of future non-ARO removal obligations is not required.  However, long-standing ratemaking practicesapproved by applicable state and federal regulatory commissions have allowedprovisions for such costs in historical depreciation rates.  These removal costs have accumulated over anumber of years based on varying rates as authorized by the appropriate regulatoryentities.  Given the long periods overwhich the amounts were accrued and the changing of rates through time, PSCo hasestimated the amount of removal costs accumulated through historic depreciationexpense based on current factors used in the existing depreciation rates.  Accordingly, the recorded amounts ofestimated future removal costs are considered regulatory liabilities under SFASNo. 71.  Removal costs as of Dec. 31,2007 and Dec. 31, 2006 were $374 million and $389 million, respectively.

 

**LegalContingencies**

 

In the normalcourse of business, PSCo is party to routine claims and litigation arising fromprior and current operations. PSCo is actively defending these matters and hasrecorded a liability related to the probable cost of settlement or otherdisposition, when it can be reasonably estimated.

 

**Environmental Litigation**

** **

***Comanche 3 Permit Litigation******—***In August 2005,Citizens for Clean Air and Water in Pueblo and Southern Colorado and CleanEnergy Action filed a complaint in Colorado state court against the CAPCDalleging that the division improperly granted permits to PSCo under Colorado’sPrevention of Significant Deterioration program for the construction andoperation of Comanche 3.  PSCo intervenedin the case.  In June 2006, thecourt ruled in PSCo’s favor and held that the Comanche 3 permits had beenproperly granted and plaintiffs’ claims to the contrary were withoutmerit.  Plaintiffs appealed thedecision.   In February 2008, theColorado Court of Appeals affirmed the state court’s ruling.

 

***Carbon DioxideEmissions 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, to forcereductions in CO2 emissions. The other utilities include American Electric Power Co., Southern Co.,Cinergy Corp. and Tennessee Valley Authority. The lawsuits allege that CO2 emitted by each company is apublic nuisance as defined under state and federal common law because it hascontributed to global warming.  Thelawsuits do not demand monetary damages. Instead, the lawsuits ask the court to order each utility to cap andreduce its CO2 emissions.  In October 2004,Xcel Energy and the other defendants filed a motion to dismiss thelawsuit.  On Sept. 19, 2005, the courtgranted the motion to dismiss on constitutional grounds.  Plaintiffs filed an appeal to the SecondCircuit Court of Appeals.  In June 2007the Second Circuit Court of Appeals issued an order requesting the parties tofile a letter brief regarding the impact of the United States Supreme Court’sdecision in Massachusetts v. EPA, 127 S.Ct. 1438 ( April 2, 2007) on theissues raised by the parties on appeal. Among other things, in its decision in Massachusetts v. EPA, the UnitedStates Supreme Court held that CO2 emissions are a “ pollutant”subject to regulation by the EPA under the Clean Air Act.  In response to the request of the SecondCircuit Court of Appeals, in June 2007, the defendant utilities filed aletter brief stating the position that the United States Supreme Court’sdecision supports the arguments raised by the utilities on appeal.  The Court of Appeals has taken the matterunder advisement ***and isexpected to issue an opinion in due course.***

 

***Comer vs. XcelEnergy Inc. et al.******—***In April 2006, Xcel Energy received notice of a purported class action lawsuit filed inU.S. District Court in the Southern District of Mississippi.  The lawsuit names more than 45 oil, chemicaland utility companies, including Xcel Energy, as defendants and alleges thatdefendants’ CO2 emissions “were a proximate and direct cause of theincrease in the destructive capacity of Hurricane Katrina.”  Plaintiffs allege in support of their claim,several legal theories, including negligence and public and private nuisanceand seek damages related to the loss resulting from the hurricane.  Xcel Energy believes this lawsuit is withoutmerit and intends to vigorously defend itself against these claims.  In August 2007, the court dismissed thelawsuit in its entirety against all defendants on constitutional grounds.  In  September 2007,plaintiffs filed a notice of appeal to the Fifth Circuit Court of Appeals. *** ******The Court of Appeals hastaken the matter under advisement and is expected to issue an opinion in duecourse.***

 

**Employment, Tort and Commercial Litigation**

** **

***Qwest vs. XcelEnergy Inc.*** – In June 2004, an employee ofPSCo was seriously injured when a pole owned by Qwest malfunctioned.  In  September 2005,the employee commenced an action against Qwest in Denver state court.  In April 2006, Qwest filed a third partycomplaint against PSCo based on terms in a joint pole use agreement betweenQwest and PSCo. Pursuant to this agreement, Qwest asserted PSCo had anaffirmative duty to properly train and instruct its employees on pole

 

60

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safety, including testing the pole for soundness before climbing.  In May 2006, PSCo filed a counterclaimagainst Qwest asserting Qwest had a duty to PSCo and an obligation under thecontract to maintain its poles in a safe and serviceable condition.  In May 2007, the matter was tried andthe jury found Qwest solely liable for the accident and this determinationresulted in an award of damages in the amount of approximately $90million.  In January 2008, Qwestfiled a notice of appeal.

 

***Mallon v. XcelEnergy Inc.************—*** In  July 2007,Theodore Mallon and TransFinancial Corporation filed a declaratory judgmentaction against Xcel Energy in U.S. District Court in Colorado (Mallon FederalAction).  In this lawsuit, plaintiffsseek a determination that Xcel Energy is not entitled to assert claims againstplaintiffs related to the 1984 and 1985 sale of COLI to PSCo, a predecessor ofXcel Energy.  In August 2007, XcelEnergy, PSCo and PSRI commenced a lawsuit in Colorado state court againstMallon and TransFinancial Corporation (Mallon State Action).  In the Mallon State Action, Xcel Energy, PSCoand PSRI seek damages against Mallon and TransFinancial for, among otherthings, breach of contract and breach of fiduciary duties associated with thesale of the COLI policies.  In August 2007,Xcel Energy also filed a motion to stay or, in the alternative, to dismiss theMallon Federal Action.  In September, amotion to stay the Mallon State Court action was subsequently filed by Mallonand TransFinancial.  In November 2007,the U.S. District Court in Colorado dismissed the complaint in the Mallon Federal Action and Mallon andTransFinancial subsequently withdrew their motion to stay the Mallon StateCourt Action.

 

**14.   Regulatory Assets and Liabilities**

** **

PSCo’s consolidated financial statements are prepared in accordancewith the provisions of SFAS No. 71, as discussed in Note 1 to theconsolidated financial statements.  UnderSFAS No. 71, regulatory assets and liabilities can be created for amountsthat regulators may allow to be collected, or may require to be paid back tocustomers in future electric and natural gas rates.  Any portion of the business that is not rateregulated cannot use SFAS No. 71 accounting.  If changes in the utility industry or thebusiness of PSCo no longer allow for the application of SFAS No. 71 underGAAP, PSCo would be required to recognize the write-off of regulatory assetsand liabilities in its consolidated statement of income.  The components of unamortized regulatoryassets and liabilities on the consolidated balance sheets of PSCo are:

 

61

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| ** **                                                        | ** ** | **See**    | ** ** | **Remaining**                | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|------------|------------|
| **(Thousands of Dollars)**                              | ** ** | **Note**   | ** ** | **Amortization Period** | ** ** | **2007**   | ** ** | **2006**   | ** ** |
| **Regulatory Assets**                                        | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
|                                                              |       |       |       |                         |       |       |       |       |       |
| Current regulatory asset – Unrecovered fuel  costs           |       | 1          |       | Less than  one year          |       | $          | 13,857     |       | $          | 157,827 |   |
|                                                              |       |       |       |                         |       |       |       |       |       |
| Pension and other postretirement benefits                         |       | 8          |       | Various                      |       | $          | 328,137    |       | $          | 386,346 |   |
| Conservation programs (a)                                         |       |       |       | Various                      |       | 78,415     |       | 70,572     |       |
| AFDC recorded in plant (a)                                        |       |       |       | Plant lives                  |       | 44,913     |       | 39,722     |       |
| Contract valuation adjustments (b)                                |       | 10         |       | Term of  related contract    |       | 22,931     |       | 39,131     |       |
| Losses on reacquired debt                                         |       | 1          |       | Term of  related debt        |       | 22,404     |       | 24,315     |       |
| Net asset retirement obligations                                  |       |       |       | Plant lives                  |       | 15,545     |       | 13,664     |       |
| Environmental costs                                               |       | 13         |       | Four to five  years          |       | 15,174     |       | 8,522      |       |
| Renewable resource costs                                          |       |       |       | One to two  years            |       | 5,273      |       | —     |       |
| Rate case costs                                                   |       | 1          |       | Various                      |       | 1,523      |       | 2,190      |       |
| Other                                                             |       |       |       | Various                      |       | 5,674      |       | 4,554      |       |
| Total noncurrent regulatory assets                                |       |       |       |                         |       | $          | 539,989    |       | $          | 589,016 |   |
|                                                              |       |       |       |                         |       |       |       |       |       |
| **Regulatory Liabilities**                                        |       |       |       |                         |       |       |       |       |       |
|                                                              |       |       |       |                         |       |       |       |       |       |
| Current regulatory liability –  Overrecovered fuel costs (c) |       |       |       |                         |       | $          | 34,411     |       | $          | 4,151 |   |
|                                                              |       |       |       |                         |       |       |       |       |       |
| Plant removal costs                                               |       | 11         |       |                         |       | $          | 374,213    |       | $          | 389,056 |   |
| Contract valuation adjustments                                    |       |       |       |                         |       | 59,275     |       | —     |       |
| Investment tax credit deferrals                                   |       |       |       |                         |       | 33,471     |       | 35,764     |       |
| Deferred income tax adjustments                                   |       |       |       |                         |       | 28,403     |       | 31,146     |       |
| Gain on sale of emission allowances                               |       |       |       |                         |       | 18,031     |       | —     |       |
| Other                                                             |       |       |       |                         |       | 3,008      |       | 14,289     |       |
| Total noncurrent regulatory liabilities                           |       |       |       |                         |       | $          | 516,401    |       | $          | 470,255 |   |

 

----

(a)      Earns a return on investment in the ratemakingprocess. These amounts are amortized consistent with recovery in rates.

(b)     Includes the fair value of certain long-term purchasedpower agreements used to meet energy capacity requirements.

(c)      Included in other current liabilities of $108,979and $74,381 at Dec. 31, 2007 and 2006, respectively, on the consolidatedbalance sheets.

 

**15. Segments andRelated Information**

** **

PSCo has two reportable segments, regulated electric utility andregulated natural gas utility.

 

·              PSCo’s regulated electric utilitygenerates, transmits and distributes electricity in Colorado.  In addition, this segment includes sales forresale and provides wholesale transmission service to various entities in theUnited States.  Regulated electricutility also includes PSCo’s commodity trading operations.

·              PSCo’s regulated natural gas utilitytransports, stores and distributes natural gas in portions of Colorado.

 

Revenues from operating segments not included above are below thenecessary quantitative thresholds and are therefore included in the all othercategory.  Those primarily include steamrevenue, appliance repair services and nonutility real estate activities.

 

Operating results from the regulated electric utility and regulatednatural gas utility serve as the primary basis for the chief operating decisionmaker (CODM) to evaluate the dual performance of PSCo.

 

To report net income for regulated electric and regulated natural gasutility segments, PSCo must assign or allocate all costs and certain otherincome.  In general, costs are:

 

·              directly assigned wherever applicable;

·              allocated based on cost causationallocators wherever applicable; or

 

62

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·              allocated based on a general allocatorfor all other costs not assigned by the above two methods.

 

The accounting policies of the segments are the same as those describedin Note 1 to the consolidated financial statements. These segments are managedseparately because the revenue streams are dependent upon regulated raterecovery which are separately determined for each segment.

 
| **(Thousands of Dollars)**       | ** ** | **Regulated   Electric   Utility** | ** ** | **Regulated   Natural Gas   Utility** | ** ** | **All   Other** | ** ** | **Reconciling   Eliminations** | ** ** | **Consolidated   Total** | ** ** |
|--------------------------------------------|------------|----------------------------------------------|------------|------------------------------------------------------|------------|----------------------|------------|-------------------------------------|------------|-------------------------------|------------|
| **2007**                                   |       |                                         |       |                                                 |       |                 |       |                                |       |                          |       |
| Operating revenues from external customers |       | $                                            | 2,605,388  |                                                 | $          | 1,186,106            |       | $                                   | 36,006     |                          | $          | — |   | $ | 3,827,500 |   |
| Intersegment revenues                      |       | 183                                          |       | 29                                                   |       | —               |       | (212                                | )          | —                        |       |
| Total revenues                             |       | $                                            | 2,605,571  |                                                 | $          | 1,186,135            |       | $                                   | 36,006     |                          | $          | (212 | ) | $ | 3,827,500 |   |
| Depreciation and amortization              |       | $                                            | 199,776    |                                                 | $          | 58,914               |       | $                                   | 6,552      |                          | $          | — |   | $ | 265,242 |   |
| Financing costs, mainly interest expense   |       | 97,208                                       |       | 24,311                                               |       | 46,169               |       | (782                                | )          | 166,906                       |       |
| Income tax expense (benefit)               |       | 134,671                                      |       | 35,482                                               |       | (35,796              | )          | —                              |       | 134,357                       |       |
| Net income (loss)                          |       | $                                            | 241,955    |                                                 | $          | 81,348               |       | $                                   | (26,409    | )                             | $          | — |   | $ | 296,894 |   |
| **2006**                                   |       |                                         |       |                                                 |       |                 |       |                                |       |                          |       |
| Operating revenues from external customers |       | $                                            | 2,505,445  |                                                 | $          | 1,262,295            |       | $                                   | 38,089     |                          | $          | — |   | $ | 3,805,829 |   |
| Intersegment revenues                      |       | 201                                          |       | 90                                                   |       | —               |       | (291                                | )          | —                        |       |
| Total revenues                             |       | $                                            | 2,505,646  |                                                 | $          | 1,262,385            |       | $                                   | 38,089     |                          | $          | (291 | ) | $ | 3,805,829 |   |
| Depreciation and amortization              |       | $                                            | 177,239    |                                                 | $          | 56,054               |       | $                                   | 6,533      |                          | $          | — |   | $ | 239,916 |   |
| Financing costs, mainly interest expense   |       | 95,674                                       |       | 26,984                                               |       | 1,750                |       | (301                                | )          | 124,107                       |       |
| Income tax expense (benefit)               |       | 93,429                                       |       | 30,049                                               |       | (41,777              | )          | —                              |       | 81,701                        |       |
| Net income                                 |       | $                                            | 170,997    |                                                 | $          | 57,475               |       | $                                   | 12,986     |                          | $          | — |   | $ | 241,458 |   |
| **2005**                                   |       |                                         |       |                                                 |       |                 |       |                                |       |                          |       |
| Operating revenues from external customers |       | $                                            | 2,504,028  |                                                 | $          | 1,329,034            |       | $                                   | 33,501     |                          | $          | — |   | $ | 3,866,563 |   |
| Intersegment revenues                      |       | 263                                          |       | 97                                                   |       | —               |       | (360                                | )          | —                        |       |
| Total revenues                             |       | $                                            | 2,504,291  |                                                 | $          | 1,329,131            |       | $                                   | 33,501     |                          | $          | (360 | ) | $ | 3,866,563 |   |
| Depreciation and amortization              |       | $                                            | 179,774    |                                                 | $          | 52,009               |       | $                                   | 6,619      |                          | $          | — |   | $ | 238,402 |   |
| Financing costs, mainly interest expense   |       | 108,824                                      |       | 30,150                                               |       | 2,241                |       | (969                                | )          | 140,246                       |       |
| Income tax expense (benefit)               |       | 89,579                                       |       | 23,112                                               |       | (42,451              | )          | —                              |       | 70,240                        |       |
| Net income                                 |       | $                                            | 153,436    |                                                 | $          | 43,458               |       | $                                   | 14,523     |                          | $          | — |   | $ | 211,417 |   |

 

**16.   Related Party Transactions**

** **

Xcel Energy Services Inc. provides management, administrative and otherservices for the subsidiaries of Xcel Energy, including PSCo.  The services are provided and billed to eachsubsidiary in accordance with Service Agreements executed by each subsidiary.  Costs are charged directly to the subsidiarywhich uses the service whenever possible and are allocated if they cannot bedirectly assigned.

 

Xcel Energy has established a utility money pool arrangement with theutility subsidiaries.  See Note 3 forfurther discussion of this borrowing arrangement.

 

Utility Engineering Corp. (UE), a former Xcel Energy subsidiary,provided construction services to PSCo, for which it was paid $3.3 million in2005.  UE was sold in April 2005.

 

Cheyenne Light, Fuel and Power (Cheyenne), a former Xcel Energysubsidiary, purchased all of its electricity requirements from PSCo.  During 2004, Xcel Energy reached an agreementto sell Cheyenne.  The sale was completedin January 2005.

 

The table below contains significant affiliate transactions among thecompanies and related parties for the years ended Dec. 31:

 

63

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| **(Thousands of Dollars)**                      | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating revenues:                                       |       |     |       |     |       |     |       |
| Electric utility                                          |       | $        | —     |     | $          | —   |       | $ | 2,378 |   |
| Operating expenses:                                       |       |     |       |     |       |     |       |
| Other operations — paid to Xcel Energy  Services Inc |       | 270,778  |       | 267,307  |       | 256,290  |       |
| Interest expense                                          |       | 966      |       | 4,894    |       | 725      |       |
|                                                           |            |          |            |          |            |          |            |  |  |  |

 

Accounts receivable and payable with affiliates at Dec. 31, was:

 
| ** **                           | ** ** | **2007**       | ** ** | **2006**     | ** ** |
|--------------------------------------|------------|----------------|------------|--------------|------------|
| ** **                           | ** ** | **Accounts**   | ** ** | **Accounts** | ** ** | **Accounts** | ** ** | **Accounts** | ** ** |
| **(Thousands of Dollars)** | ** ** | **Receivable** | ** ** | **Payable**  | ** ** | **Receivable** | ** ** | **Payable** | ** ** |
| NSP-Minnesota                        |       | $              | 17,440     |         | $          | — |   | $ | 6,598 |   | $ | — |   |
| NSP-Wisconsin                        |       | —         |       | 2            |       | 1,285 |   | — |   |
| SPS                                  |       | —         |       | 337          |       | — |   | 1,189 |   |
| Other subsidiaries of Xcel Energy    |       | 17,144         |       | 27,106       |       | 738 |   | 29,102 |   |
|                                 |       | $              | 34,584     |         | $          | 27,445 |   | $ | 8,621 |   | $ | 30,291 |   |

 

**17. SummarizedQuarterly Financial Data (Unaudited)**

 
| ** **                           | ** ** | **Quarter Ended**       | ** ** |
|--------------------------------------|------------|------------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **March 31, 2007** | ** ** | **June 30, 2007** | ** ** | **Sept. 30, 2007** | ** ** | **Dec. 31, 2007** | ** ** |
|                                 |       |                         |       |   |   |   |   |   |   |
| Revenue                              |       | $                            | 1,163,691  |   | $ | 835,598 |   | $ | 781,261 |   | $ | 1,046,950 |   |
| Operating income                     |       | 148,682                      |       | 133,193 |   | 172,421 |   | 132,082 |   |
| Net income                           |       | 85,749                       |       | 14,138 |   | 105,658 |   | 91,349 |   |
|                                      |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                           | ** ** | **Quarter Ended**       | ** ** |
|--------------------------------------|------------|------------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **March 31, 2006** | ** ** | **June 30, 2006** | ** ** | **Sept. 30, 2006** | ** ** | **Dec. 31, 2006** | ** ** |
|                                 |       |                         |       |   |   |   |   |   |   |
| Revenue                              |       | $                            | 1,267,025  |   | $ | 767,231 |   | $ | 793,724 |   | $ | 977,849 |   |
| Operating income                     |       | 133,087                      |       | 105,348 |   | 99,504 |   | 120,900 |   |
| Net income                           |       | 76,846                       |       | 52,193 |   | 47,358 |   | 65,061 |   |
|                                      |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 

**Item 9 — Changes in andDisagreements With Accountants on Accounting and Financial Disclosure**

** **

During 2006 and 2007, and through the date of this report, there wereno disagreements with the independent public accountants for PSCo on accountingprinciples or practices, financial statement disclosures or audit scope orprocedures.

 

**Item 9A(T) — Controlsand Procedures**

** **

**Disclosure Controls andProcedures**

** **

PSCo maintains a set of disclosure controls and procedures designed toensure that information required to be disclosed in reports that it files orsubmits under the Securities Exchange Act of 1934 is recorded, processed,summarized and reported within the time periods specified in Securities andExchange Commission rules and forms. In addition, the disclosure controls and procedures ensure thatinformation required to be disclosed is accumulated and communicated tomanagement, including the chief executive officer (CEO) and chief financialofficer (CFO), allowing timely decisions regarding required disclosure.  As of Dec. 31, 2007, based on anevaluation carried out under the supervision and with the participation of PSCo’smanagement, including the CEO and the CFO, of the effectiveness of itsdisclosure controls and the procedures, the CEO and CFO have concluded thatPSCo’s disclosure controls and procedures are effective.

 

**InternalControl Over Financial Reporting**

 

No change in PSCo’s internal control over financial reporting hasoccurred during the most recent fiscal quarter that has materially affected, oris reasonably likely to materially affect, PSCo’s internal control over financialreporting.

 

64

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PSCo maintains internal control over financial reporting to providereasonable assurance regarding the reliability of the financial reporting.  PSCo has evaluated and documented its controlsin process activities, in general computer activities, and on an entity-widelevel.  During the year and inpreparation for issuing its report for the year ended Dec. 31, 2007 oninternal controls under section 404 of the Sarbanes-Oxley Act of 2002,PSCo conducted testing and monitoring of its internal control over financialreporting.  Based on the controlevaluation, testing and remediation performed, PSCo did not identify anymaterial control weaknesses, as defined under the standards and rules issuedby the Public Company Accounting Oversight Board (PCAOB) and as approved by theSEC and as indicated in Management Report on Internal Controls herein.

 

This annual report does not include an attestationreport of PSCo’s registered public accounting firm regarding internal controlover financial reporting.  Management’sreport was not subject to attestation by PSCo’s registered public accountingfirm pursuant to temporary rules of the Securities and Exchange Commissionthat permit PSCo to provide only management’s report in this annual report.

 

**Item 9B — Other Information**

 

None.

 

**PART III**

** **

Items 10, 11, 12 and 13 of Part III of Form 10-K have beenomitted from this report for PSCo in accordance with conditions set forth ingeneral instructions I (1) (a) and (b) of Form 10-K forwholly-owned subsidiaries.

 

**Item 10 — Directors,Executive Officers and Corporate Governance**

** **

**Item 11 — ExecutiveCompensation**

** **

**Item 12 — Security Ownershipof Certain Beneficial Owners and Management and Related Stockholder Matters**

** **

**Item 13 — Certain Relationships, RelatedTransactions and Director Independence**

 

**Item 14 — Principal Accounting Fees andServices**

 

Information concerning fees paid to the principal accountant for eachof the last two years is contained in the Xcel Energy Proxy Statement for its2008 Annual Meeting of Shareholders, which is incorporated by reference.

 

**PART IV**

 

**Item 15**— **Exhibits, Financial Statement Schedules**

 

1.         Consolidated Financial Statements:

 

ManagementReport on Internal Controls **—**Forthe year ended Dec. 31, 2007.

Report ofIndependent Registered Public Accounting Firm **—**For the years ended Dec. 31, 2007, 2006 and 2005.

ConsolidatedStatements of Income **—**For the three years ended Dec. 31, 2007,2006 and 2005.

ConsolidatedStatements of Cash Flows **—** For thethree years ended Dec. 31, 2007, 2006 and 2005.

ConsolidatedBalance Sheets **—**As of Dec. 31,2007 and 2006.

 

2.         Schedule II **—**Valuation and Qualifying Accounts and Reserves for the years ended Dec. 31,2007, 2006 and 2005.

 

3.         Exhibits

 
|        |   | *Indicates incorporation by reference                                                                                                                                  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | +Executive Compensation Arrangements and Benefit  Plans Covering Executive Officers and Directors                                                                      |
| 2.01*  |   | Merger Agreement and Plan of Reorganization dated Aug. 22,  1995 (Form 8-K, dated Aug. 22, 1995, File No. 1-3280 — Exhibit 2).           |
| 3.01*  |   | Amended and Restated Articles of Incorporation dated  July 15, 1998 (Form 10-K, Dec. 31, 1998, Exhibit 3(a)(1)).                                   |
| 3.02*  |   | By-laws dated Nov. 20, 1997 (Form 10-K, Dec. 31,  1997, Exhibit 3(b)(1)).                                                                          |
| 4.01*  |   | Indenture, dated as of Oct. 1, 1993, providing  for the issuance of First Collateral Trust Bonds (Form 10-Q,  Sept. 30, 1993 — Exhibit 4(a)). |

 

65

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| 4.02* |   | Indentures supplemental to Indenture dated as of Oct. 1,  1993: |
|-------|--------|----------------------------------------------------------------------|

 
| ** **                | ** ** | **Previous Filing:**   | ** ** | ** **  | ** ** | ** **                | ** ** | **Previous Filing:**                  | ** ** | ** **  | ** ** |
|---------------------------|------------|-----------------------------|------------|-------------|------------|---------------------------|------------|--------------------------------------------|------------|-------------|------------|
| ** **                | ** ** | **Form; Date or** | ** ** | **Exhibit** | ** ** | ** **                | ** ** | **Form; Date or**                | ** ** | **Exhibit** | ** ** |
| **Dated as of** | ** ** | **file no.**           | ** ** | **No.**     | ** ** | **Dated as of** | ** ** | **file no.**                          | ** ** | **No.**     | ** ** |
| ** **                | ** ** | ** **                  | ** ** | ** **  | ** ** | ** **                | ** ** | ** **                                 | ** ** | ** **  | ** ** |
| Nov. 1, 1993         |       | S-3,  (33-51167)            |       | 4(b)(2)     |       | Aug. 15,  2002       |       | 10-Q, Sept.  30, 2002                      |       | 4.03        |       |
| Jan. 1, 1994         |       | 10-K, 1993                  |       | 4(b)(3)     |       | Sept. 1,  2002            |       | 8-K, Sept.  18, 2002                       |       | 4.01        |       |
| Sept. 2, 1994             |       | 8-K,  September 1994   |       | 4(b)        |       | Sept. 15,  2002           |       | 10-Q, Sept.  30, 2002                      |       | 4.04        |       |
| May 1, 1996          |       | 10-Q,  June 30, 1996   |       | 4(b)        |       | March 1,  2003       |       | S-3,  April 14, 2003 (333-104504)     |       | 4(b)(3)     |       |
| Nov. 1, 1996         |       | 10-K, 1996                  |       | 4(b)(3)     |       | April 1,  2003       |       | 10-Q  May 15, 2003 (001-03034         |       | 4.02        |       |
| Feb. 1, 1997         |       | 10-Q,  March 31, 1997  |       | 4(b)        |       | May 1,  2003         |       | S-4,  June 11, 2003 (333-106011)      |       | 4.9         |       |
| April 1, 1998        |       | 10-Q, March 31,  1998  |       | 4(b)        |       | Sept. 1,  2003            |       | 8-K, Sept.  2, 2003 (001-03280             |       | 4.02        |       |
|                      |       |                        |       |        |       | Sept. 15,  2003           |       | Xcel 10-K,  Mar. 15, 2004 (001-03034) |       | 4.100       |       |
|                      |       |                        |       |        |       | Aug. 1,  2005        |       | PSCo 8-K,  Aug. 18, 2005 (001-03280)  |       | 4.02        |       |
|                      |       |                        |       |        |       | Aug. 1,  2007        |       | PSCo 8-K,  Aug. 14, 2007 (001-03280)  |       | 4.01        |       |

 
| 4.03*   |   | Indenture dated July 1, 1999, between Public  Service Co. of Colorado and The Bank of New York, providing for the issuance  of Senior Debt Securities and Supplemental Indenture dated July 15, 1999,  between PSCo and The Bank of New York (Exhibits 4.1 and 4.2 to Form 8-K  (file no. 001-03280) dated July 13, 1999). |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 4.04*   |   | Financing Agreement between Adams County, Colorado  and PSCo, dated as of Aug. 1, 2005 relating to $129,500,000 Adams  County, Colorado Pollution Control Refunding Revenue Bonds, 2005 Series A.  (Exhibit 4.01 to PSCo Current Report on Form 8-K, dated Aug. 18,  2005, file number 001-3280).                     |
| 4.05*   |   | $700,000,000 Credit Agreement dated Dec. 14,  2006 between PSCo and various lenders (Exhibit 99.01 to Form 8-K  (file no. 001-03280) dated Dec. 14, 2006).                                                                                                                                                                 |
| 4.06*   |   | Supplemental Indenture,  dated Aug. 1, 2007, between PSCo and U.S. Bank Trust National  Association, as successor Trustee. (Exhibit 4.01 to PSCo Form 8-K  (file no 001-3280) dated Aug. 14, 2007).                                                                                                                        |
| 10.01*+ |   | Xcel Energy Omnibus Incentive Plan (Exhibit A  to Form DEF-14A (file no. 001-03034) filed Aug. 29, 2000).                                                                                                                                                                                                                       |
| 10.02*+ |   | Employment Agreement dated March 24, 1999,  among Northern States Power Co. (a Minnesota corporation), New Century  Energies, Inc. and Wayne H. Brunetti (Exhibit 10(b) to New  Century Energies, Inc. Form 10-Q, (file no. 001-12927) dated March 31,  1999).                                              |
| 10.03*+ |   | Amended and Restated Executive Long-Term Incentive  Award Stock Plan. (Exhibit 10.02 to NSP-Minnesota Form 10-Q (file  no. 001-03034) for the quarter ended March 31, 1998).                                                                                                                                                    |
| 10.04*+ |   | New Century Energies Omnibus Incentive Plan, (Exhibit A  to New Century Energies, Inc. Form DEF 14A (file no. 001-12927)  filed March 26, 1998.                                                                                                                                                                            |
| 10.05*+ |   | Supplemental Executive Retirement Plan (Exhibit 10(e) (1) to  New Century Energies, Inc. Form 10-K (file no. 001-12927) dated Dec. 31,  1998).                                                                                                                                                                   |
| 10.06*+ |   | Supplemental Executive Retirement Plan for Key  Management Employees, as amended and restated March 26, 1991 (Exhibit 10(e)(2) to  PSCo Form 10-K (file no. 001-3280) dated Dec. 31, 1991).                                                                                                                           |
| 10.07*+ |   | Supplemental Retirement Income Plan as amended July 23,  1991 (Exhibit 10(d) to SPS Form 10-K, (file no. 001-03789)  dated Aug. 31, 1996).                                                                                                                                                                            |
| 10.08*+ |   | Xcel Energy Senior Executive Severance and  Change-in-Control Policy dated Oct. 22, 2003 (Exhibit 10.10 to SPS Form S-4,  (file no. 333-112032) dated Jan. 21, 2004).                                                                                                                                                      |
| 10.09*+ |   | Stock Equivalent Plan for Non-Employee Directors of  Xcel Energy as amended and restated Jan. 1, 2004 (Exhibit B to Form DEF-14A  (file no. 001-03034) dated Apr. 9, 2004).                                                                                                                                                |
| 10.10*+ |   | Xcel Energy Nonqualified Deferred Compensation Plan  (2002 restatement) (Exhibit 10.23 to Xcel Energy Form 10-K (file  no. 001-03034) dated March 15, 2004).                                                                                                                                                               |
| 10.11*+ |   | Xcel Energy Non-employee Directors’ Deferred  Compensation Plan (Exhibit 10.24 to Xcel Energy Form 10-K (file  no. 001-03034) dated March 15, 2004).                                                                                                                                                                  |

 

66

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| 10.12*  |   | Form of Services Agreement between Xcel Energy  Services Inc. and utility companies (Exhibit H-1 to Form U5B (file  no. 001-03034) dated Nov. 16, 2000).                                                                                                                                                                    |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.13*  |   | Securities Litigation Settlement Agreement as of Dec. 31,  2004 and approved Jan. 14, 2005 (Exhibit 10.01 to Form 8-K  (file no. 001-03034) dated Jan. 14, 2005).                                                                                                                                                           |
| 10.14*  |   | ERISA Actions Settlement Agreement as of Dec. 31,  2004 and approved Jan. 14, 2005 (Exhibit 10.02 to Form 8-K  (file no. 001-03034) dated Jan. 14, 2005).                                                                                                                                                                   |
| 10.15*  |   | Shareholder Derivative Action Settlement Agreement  as of Dec. 31, 2004 and approved Jan. 14, 2005 (Exhibit 10.03  to Form 8-K (file no. 001-03034) dated Jan. 14, 2005).                                                                                                                                                   |
| 10.16*+ |   | Employment Agreement, effective Dec. 15, 1997,  between company and Mr. Paul J. Bonavia, as amended (Exhibit 10.25  to Xcel Energy Form 10-K (file no. 001-03034) for the year ended Dec. 31,  2004).                                                                                                                       |
| 10.17*+ |   | Xcel Energy Executive Annual Incentive Award Plan Form of  Restricted Stock Agreement (Exhibit 10.06 to Xcel Energy Form 10-Q  (file no. 001-03034) dated June 30, 2005).                                                                                                                                                        |
| 10.18*+ |   | Xcel Energy Omnibus Incentive Plan Form of  Restricted Stock Unit Agreement (Exhibit 10.05 to Xcel Energy Form 10-Q  (file no. 001-03034) dated June 30, 2005).                                                                                                                                                                  |
| 10.19*+ |   | Xcel Energy Omnibus Incentive Plan Form of  Performance Share Agreement (Exhibit 10.04 to Xcel Energy Form 10-Q  (file no. 001-03034) dated June 30, 2005).                                                                                                                                                                      |
| 10.20*+ |   | Xcel Energy Omnibus Incentive Plan Form of  Restricted Stock Unit Agreement (Exhibit 10.07 to Xcel Energy Form 10-Q  (file no. 001-03034) dated June 30, 2005).                                                                                                                                                                  |
| 10.21*+ |   | Xcel Energy Omnibus 2005 Incentive Plan (Exhibit 10.01  to Form 8-K (file no. 001-03034) dated May 25, 2005).                                                                                                                                                                                                                         |
| 10.22*+ |   | Xcel Energy Executive Annual Incentive Award Plan (Exhibit 10.02  to Form 8-K (file no. 001-03034) dated May 25, 2005).                                                                                                                                                                                                               |
| 10.23*+ |   | Xcel Energy Amended Employment Agreement, between  Xcel Energy Inc. and Wayne H. Brunetti (Exhibit 10.01 to Form 8-K  (file no. 001-03034) dated June 29, 2005).                                                                                                                                                                      |
| 10.24*+ |   | Xcel Energy Supplemental Executive Retirement Plan (Exhibit 10.01  to Form 8-K (file no. 001-03034) dated Dec. 13, 2005).                                                                                                                                                                                                             |
| 10.25*+ |   | First Amendment to the Xcel  Energy Senior Executive Severance and Change-In-Control Policy dated Oct. 25,  2006.                                                                                                                                                                                                                               |   |
| 10.26*+ |   | Agreement, dated March 20,  2007 between Mr. Gary R. Johnson and Xcel Energy Inc. (Exhibit 10.1  to Form 8-K (file no. 001-03034) dated March 20, 2007).                                                                                                                                                                    |   |
| 10.27*  |   | Letter dated Sept. 19,  2007, from Xcel Energy Inc. to the U.S. Department of Justice (DOJ)  submitting its offer to settle the COLI tax dispute and Letter dated Sept.  21, 2007 from the DOJ to Xcel Energy Inc. accepting the settlement offer. (Exhibit 10.1  to Form 10-Q (file no. 001-03034) for the quarter ended Sept. 30, 2007). |   |
| 10.28*+ |   | Second Amendment to the  Xcel Energy Senior Executive Severance and Change-in-Control Policy. (Exhibit 10.01  to Xcel Energy’s Form 8-K (file no. 001-03034) dated May 23, 2007).                                                                                                                                                |   |
| 10.29*+ |   | Amendment Four to  Employment Agreement between Xcel Energy Inc. and Paul Bonavia (Exhibit 10.02  to Xcel Energy’s Form 8-K (file no. 001-03034) dated May 23, 2007).                                                                                                                                                            |   |
| 10.30*  |   | Amended and Restated Coal Supply Agreement entered  into Oct. 1, 1984 but made effective as of Jan. 1, 1976 between  Public Service Co. of Colorado and Amax Inc. on behalf of its division, Amax  Coal Co. (Form 10-K (file no. 001-03280) Dec. 31, 1984 — Exhibit 10(c)(1)).                                         |
| 10.31*  |   | First Amendment to Amended and Restated Coal Supply  Agreement entered into May 27, 1988 but made effective Jan. 1, 1988  between Public Service Co. of Colorado and Amax Coal Co. (Form 10-K  (file no. 001-03280) Dec. 31, 1988 — Exhibit 10(c)(2)).                                                                 |
| 10.32*  |   | Proposed Settlement Agreement excerpts, as filed  with the CPUC (Exhibit 99.02 to Form 8-K (file no. 001-03034) dated  Dec. 3, 2004).                                                                                                                                                                                                 |
| 10.33*  |   | Settlement Agreement among Public Service Co. of  Colorado and Concerned Environmental and Community Parties, dated Dec. 3,  2004 (Exhibit 99.03 to Form 8-K (file no. 001-03034) dated Dec. 3,  2004).                                                                                                                          |
| 12.01   |   | Statement of Computation of Ratio of Earnings to  Fixed Charges.                                                                                                                                                                                                                                                                                     |
| 23.01   |   | Consent of Independent Registered Public Accounting  Firm.                                                                                                                                                                                                                                                                                           |
| 31.01   |   | Principal Executive Officer’s certification pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002.                                                                                                                                                                               |
| 31.02   |   | Principal Financial Officer’s certification 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.                                                                                                                                                                                                                                                                             |
|         |        |                                                                                                                                                                                                                                                                                                                                                      |  |  |  |

 

67

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**SCHEDULEII**

 

**PUBLIC SERVICE CO. OF COLORADO ANDSUBSIDIARIES**

**VALUATION AND QUALIFYING ACCOUNTS**

**Years Ended Dec. 31, 2007, 2006 and 2005**

**(Thousands of Dollars)**

 
| ** **                            | ** ** | ** **          | ** ** | **Additions**              | ** ** | ** **            | ** ** | ** **            | ** ** |
|---------------------------------------|------------|---------------------|------------|----------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                            | ** ** | **Balance at** | ** ** | **Charged**                | ** ** | **Charged**           | ** ** | **Deductions**        | ** ** | **Balance** | ** ** |
| ** **                            | ** ** | **beginning**       | ** ** | **to costs and** | ** ** | **to other**     | ** ** | **from**              | ** ** | **at end** | ** ** |
| ** **                            | ** ** | **of period**  | ** ** | **expenses**               | ** ** | **accounts (1)** | ** ** | **reserves (2)** | ** ** | **of period** | ** ** |
| Reserve deducted from related assets: |       |                |       |                       |       |                  |       |                  |       |   |   |
| Allowance for bad debts:              |       |                |       |                       |       |                  |       |                  |       |   |   |
| 2007                                  |       | $                   | 18,415     |                       | $          | 26,149                |       | $                     | 9,582      |   | $ | 30,845 |   | $ | 23,301 |   |
| 2006                                  |       | 19,381              |       | 26,944                     |       | 7,375                 |       | 35,285                |       | 18,415 |   |
| 2005                                  |       | 14,734              |       | 24,214                     |       | 6,216                 |       | 25,783                |       | 19,381 |   |
|                                       |            |                     |            |                            |            |                       |            |                       |            |  |  |  |  |  |  |  |

 

----

1)                 Recovery ofamounts previously written off.

2)                 Principallybad debts written off or transferred.

 

68

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**SIGNATURES**

 

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this annual report to be signed on itsbehalf by the undersigned, thereunto duly authorized.

 

 
|            | **PUBLIC SERVICE COMPANY OF COLORADO**     |
|------------|--------------------------------------------|
| ** ** | ** **                                 |
|       | /s/ BENJAMIN G.S. FOWKE III                |
|       | Benjamin G.S. Fowke III                    |
|       | Vice President and Chief Financial Officer |
|       | (Principal Financial Officer)              |

 

**February 25,2008**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report signed belowby the following persons on behalf of the registrant and in the capacities andon the date indicated above.

 

 
| /s/ TIM E. TAYLOR                               |                                                 | /s/ RICHARD C. KELLY        |
|-------------------------------------------------|------------------------------------------------------|-----------------------------|
| Tim E. Taylor                                   | Richard C. Kelly                                     |
| President, Chief Executive Officer and Director | Chairman and Director                                |
| (Principal Executive Officer)                   |                                                 |
|                                            |                                                 |
| /s/ TERESA S. MADDEN                            |                                                 | /s/ BENJAMIN G.S. FOWKE III |
| Teresa S. Madden                                | Benjamin G.S. Fowke III                              |
| Vice President and Controller                   | Vice President, Chief Financial Officer and Director |
| (Principal Accounting Officer)                  | (Principal Financial Officer)                        |
|                                            |                                                 |
| /s/ PAUL J. BONAVIA                             |                                                 |                        |   |
| Paul J. Bonavia                                 |                                                 |
| Vice President and Director                     |                                                 |

 

 

**SUPPLEMENTAL INFORMATION TO BE FURNISHED WITHREPORTS FILED PURSUANT TO SECTION 15(D) OF THE ACT BY REGISTRANTSWHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO SECTION 12 OF THE ACT**

 

PSCo has notsent, and does not expect to send, an annual report or proxy statement to itssecurity holder.

 

69

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