Table of Contents

 

** **

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

# **FORM 10-K**

 

**(Mark One)**

| **x**                                                 | **ANNUAL  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**     |
|-------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| **For  the fiscal year ended December 31, 2008** |
| ** **                                            | ** **                                                                                               |
| ** **                                            | **Or**                                                                                                   |
| ** **                                            | ** **                                                                                               |
| **o**                                                 | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
| **Commission  file number 001-03280**                 |

** **

# **PUBLICSERVICE 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 17****th Street, Denver, Colorado  80202**

(Address of principal executive offices)

 

Registrant’s Telephone number, including area code:  **303-571-7511**

 

Securitiesregistered pursuant to Section 12(b) of the Act:  **None**

 

Securitiesregistered pursuant to section 12(g) of the Act:  **None**

 

Indicateby check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405of the Securities Act.  

o Yes  x No

 

Indicateby check mark if the registrant is not required to file reports pursuant to Section 13or Section 15(d) of the Act.  

o Yes  x No

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days. x Yes o No

 

Indicateby check mark if disclosure of delinquent filers pursuant to Item 405 ofRegulations S-K (§229.405 of this chapter) is not contained herein, and willnot be contained, to the best of the registrant’s knowledge, in definitiveproxy or information statements incorporated by reference in Part III ofthis Form 10-K or any amendment to this Form 10-K.  x

 

Indicateby check mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler,” “accelerated filer” and “ smaller reporting company” in Rule 12b-2of the Exchange Act.

 

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

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Act).  oYes   xNo

 

As of March 2,2009, 100 shares of common stock, par value $0.01 per share, were outstanding,all of which were held by Xcel Energy Inc., a Minnesota corporation.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Xcel Energy Inc.’sDefinitive Proxy Statement for its 2009 Annual Meeting of Shareholders is incorporatedby reference into Part III of this Form 10-K.

 

Public ServiceCompany of Colorado meets the conditions set forth in General Instructions I(1)(a) and(b) of Form 10-K and is therefore filing this form with reduceddisclosure format permitted by 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                                                                                                                          |       |
| Public Utility Regulation                                                                                                         |       |
| Capacity and Demand                                                                                                               |       |
| Energy Sources and Related  Transmission Initiatives                                                                              |       |
| Fuel Supply and Costs                                                                                                             |       |
| Fuel Sources                                                                                                                      |       |
| Wholesale Commodity  Marketing Operations                                                                                         |       |
| Summary of Recent  Regulatory Developments                                                                                        |       |
| Electric Operating  Statistics                                                                                                    |       |
| NATURAL GAS UTILITY  OPERATIONS                                                                                                   |       |
| Public Utility Regulation                                                                                                         |       |
| 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**                                                                                                                    | ** ** |

 

ThisForm 10-K is filed by Public Service Co. of Colorado (PSCo). PSCo is awholly owned subsidiary of Xcel Energy Inc. Additional information on XcelEnergy is available in various filings with the U.S. Securities and ExchangeCommission (SEC). This report should be read in its entirety.

 

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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***                   | *** *** | *** ***                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| CAPCD                                                          |         | Colorado Air Pollution  Control Division                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 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; the sale of  wholesale electricity, in interstate commerce, including the sale of  electricity at market-based rates; hydroelectric generation licensing; and  accounting requirements for utility holding companies, service companies, and  public utilities.                                                                                                                                                                                                                                                                                                                                                           |
| IRS                                                            |         | Internal Revenue  Service                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| NERC                                                           |         | North American Electric  Reliability Corporation. A self-regulatory organization, subject to  oversight by the U.S. Federal Energy Regulatory Commission and government  authorities in Canada, to develop and enforce reliability standards.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
| 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 |

 

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|                                 |         | 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.                                                                                                                                                                                                                                                     |
|--------------------------------------|--------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 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 retail customers for  all purchased capacity payments to power suppliers, effective Jan. 1,  2007. Capacity charges are not included in PSCo’s 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 the PSCo electric  utility provides for bill credits to customers based on operational  performance standards through Dec. 31, 2010. The QSP for the PSCo  natural gas utility also expires December 2010. |
| 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. Obligations associated with the retirement of  tangible long-lived assets and the associated asset retirement costs.                                                                                                                                                                                                                                                                                              |
| BART                                 |         | Best Available Retrofit  Technology                                                                                                                                                                                                                                                                                                                                                                                                             |
| CO2                                  |         | Carbon dioxide                                                                                                                                                                                                                                                                                                                                                                                                                                  |
| CAMR                                 |         | Clean Air Mercury Rule                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 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.                                                                                                                                                                                                                                                                                                                |
| FASB                                 |         | Financial Accounting  Standards Board                                                                                                                                                                                                                                                                                                                                                                                                           |
| Fitch                                |         | Fitch Ratings                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| 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                                                                                                                                                                                                                                                                                                                                                                                                                  |
| mark-to-market                       |         | The  process whereby an asset or liability is recognized at fair value.                                                                                                                                                                                                                                                                                                                                                                         |
| MGP                                  |         | Manufactured  gas plant                                                                                                                                                                                                                                                                                                                                                                                                                         |
| MISO                                 |         | Midwest  Independent Transmission System Operator                                                                                                                                                                                                                                                                                                                                                                                               |

 

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| 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. |
| 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.                                                                                                 |
| 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. One gigawatt hour equals one billion watt hours.                                                                                                                                                                                                                                                                                |
| KV                               |         | Kilovolts  (one KV equals one thousand volts)                                                                                                                                                                                                                                                                                                    |
| KW                               |         | Kilowatts  (one KW equals one thousand watts)                                                                                                                                                                                                                                                                                                    |
| Kwh                              |         | Kilowatt  hours                                                                                                                                                                                                                                                                                                                                  |
| MMBtu                            |         | One  million BTUs                                                                                                                                                                                                                                                                                                                                |
| MW                               |         | Megawatts  (one MW equals one thousand KW)                                                                                                                                                                                                                                                                                                       |
| Watt                             |         | A  measure of power production or usage.                                                                                                                                                                                                                                                                                                         |
| 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.                                                                                                           |

 

 

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**COMPANYOVERVIEW**

 

PSCowas 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 22 percent of its total salesin 2008.  PSCo also purchases,transports, distributes and sells natural gas to retail customers andtransports customer-owned natural gas. PSCo provides electric utility service to approximately 1.4 millioncustomers and natural gas utility service to approximately 1.3 millioncustomers.  All of PSCo’s retail electricoperating revenues were derived from operations in Colorado during 2008.  Generally, PSCo’s earnings range fromapproximately 40 percent to 50 percent of Xcel Energy’s consolidated netincome.

 

PSCoowns the following direct subsidiaries: 1480 Welton, Inc., which owns certain real estate interests forPSCo; and Green and Clear Lakes Company, which owns water rights.  PSCo also owns PSRI, which held certainformer employees’ life insurance policies. Following settlement with the IRS during 2007, such policies wereterminated.  PSCo also holds acontrolling interest in several other relatively small ditch and watercompanies.

 

PSCoconducts its utility business in the following reportable segments: regulatedelectric utility, regulated natural gas utility and all other.  Comparative segment revenues and relatedfinancial information for fiscal 2008, 2007 and 2006 are set forth in Note 17to the accompanying consolidated financial statements.

 

PSCofocuses on growing through investments in electric and natural gas rate base tomeet growing customer demands, environmental and renewable energy initiativesand to maintain or increase reliability and quality of service tocustomers.  PSCo files periodic rate casesor establishes formula rate or automatic rate adjustment mechanisms with stateand federal regulators to earn a return on its investment and recover costs ofoperations.

 

**ELECTRIC UTILITY OPERATIONS**

** **

**Overview**

** **

***Climate Change and CleanEnergy***— ***Like most other utilities, PSCo is subject to a significantarray of environmental regulations focused on many different aspects of itsoperations.  There are significant futureenvironmental regulations under consideration to encourage the use of cleanenergy technologies and regulate emissions of GHGs to address c*****limate change.  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.  Numerous states have proposedor implemented clean energy policies, such as renewable energy portfoliostandards or DSM programs, in part designed to reduce the emissions ofGHGs.  Congress and federal policy makersare considering climate change legislation and a variety of national climatechange policies and regulations.  PSCo isadvocating with state and federal policy makers for climate change and cleanenergy policies that will result in significant long-term reduction in GHGemissions, develop low-emitting technologies and secure, cost-effective energysupplies for our customers and our nation.

 

WhilePSCo is not currently subject to state or federal limits on its GHG emissions,PSCo has undertaken a number of initiatives to prepare for climate changeregulation and reduce our GHG emissions. These initiatives include emission reduction programs, energy efficiencyand conservation programs, renewable energy development and technologyexploration projects.  Although theimpact of climate change policy on PSCo will depend on the specifics of stateand federal policies, legislation and regulation, PSCo believes that, based onprior state commission practice, PSCo would be granted the authority to recoverthe cost of these initiatives through rates.

 

***Utility Restructuring and RetailCompetition***— The FERC has continued with its efforts to promotemore competitive wholesale markets through open-access transmission and othermeans.  As a consequence, PSCo and itswholesale customers 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.

 

Theretail electric business faces competition as industrial and large commercialcustomers have some ability to own or operate facilities to generate their ownelectricity.  In addition, customers mayhave the option of substituting other fuels, such as natural gas orsteam/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.

 

** **

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** **

**Public Utility Regulation**

** **

***Summary of RegulatoryAgencies and Areas of Jurisdiction —***PSCo isregulated by the CPUC with respect to its facilities, rates, accounts, servicesand issuance of securities.  PSCo isregulated by the FERC with respect to its wholesale electric operations,accounting practices, hydroelectric licensing, wholesale sales for resale andthe transmission of electricity in interstate commerce.  PSCo has received authorization from the FERCto make wholesale electricity sales at market-based prices; however, PSCowithdrew its market-based rate authority with respect to sales in its own andaffiliated operating company control areas.

 

***Fuel, Purchased Energy andConservation Cost Recovery Mechanisms —***PSCo hasseveral retail adjustment clauses that recover fuel, purchased energy and otherresource costs:

 

·              *ECA —* The ECA recovers fuel andpurchase power costs.  It also includesan incentive adjustment to encourage efficient operation of base load coalplants and encourage cost reductions through purchases of economical short-termenergy.  The total incentive cannotexceed $11.25 million in any year.  TheECA mechanism is revised quarterly.  TheECA will expire at the earlier of rates taking effect after Comanche 3 isplaced in service or Dec. 31, 2010.

 

·              *PCCA —*The PCCA allows for recoveryof purchased capacity payments for most power purchase agreements. The PCCAwill expire at the earlier of rates taking effect after Comanche 3 is placed inservice or Dec. 31, 2010.

 

·              *SCA —*The SCA allows PSCo to recoverthe difference between its actual cost of fuel and the amount of these costsrecovered under its base steam service rates. The SCA rate is revised annually on Jan. 1, as well as on aninterim basis to coincide with changes in fuel costs.

 

·              *AQIR —*Effective January 2003,the AQIR recovers, over a 15-year period, the incremental cost (including fueland purchased energy) incurred by PSCo as a result of a voluntary plan toreduce emissions and improve air quality in the Denver metro area.

 

·              *DSMCA —* The DSMCA clause permits PSCo torecover DSM and interruptible service option credit (ISOC) costs andperformance initiatives based on achieving various energy savings goals on anannual basis beginning Jan. 1, 2009.

 

·              *Renewable Energy Standard Adjustment (RESA) *—The RESA recovers the incremental costs of compliance with the RES and is setat its maximum level of 2.0 percent of the customer’s total bill.

 

·              *Wind Energy Service Adjustment* *—* The Wind Energy Service Adjustment provides for therecovery of costs associated with wind energy resources from those customerssubscribed to the WindSource® program.

 

·              *Transmission Cost Adjustment (TCA)**—*Effective January 2008, the TCAprovides for the recovery outside of rate cases of transmission plant revenuerequirements and allows for a return on construction work in progress fortransmission investments.

 

PSCorecovers fuel and purchased energy costs from its wholesale electric customersthrough a fuel cost adjustment clause accepted for filing by the FERC.

 

***Performance-Based Regulation and Quality ofService Requirements***— PSCo currently operates under an electricand natural gas PBRP.  The majorcomponents of this regulatory plan include:

 

·              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 thatprovides for bill credits to customers if PSCo does not achieve certainperformance targets relating to natural gas leak repair time and customerservice through 2010.

 

PSCoregularly monitors and records as necessary an estimated customer refundobligation 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.

 

**Capacity and Demand**

** **

Theuninterrupted system peak demand for PSCo’s electric utility for each of thelast three years and the forecast for 2009, assuming normal weather, is listedbelow.

 
| **System Peak Demand (in MW)** | ** ** |
|----------------------------------------------------|------------|
| **2006**                                           | ** ** | **2007** | ** ** | **2008** | ** ** | **2009 Forecast** | ** ** |
| 6,757                                              |       | 6,950 |   | 6,903 |   | 6,958 |   |

 

 

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Thepeak demand for PSCo’s system typically occurs in the summer.  The 2008 uninterrupted system peak demand forPSCo occurred on Aug. 1, 2008.

 

**Energy Sources and RelatedTransmission Initiatives**

 

PSCoexpects to meet its system capacity requirements through existing power plants,power purchases, new generation facilities, DSM options and expansion ofexisting generation.

 

***Purchased TransmissionServices****** —***In addition tousing its own transmission system, PSCo has contracts with regionaltransmission service providers to deliver power and energy to PSCo’s customers***.***

 

***Purchased Power***— PSCo hascontracts to purchase power from other utilities and independent power producers.  Capacity is the measure of the rate at whicha 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.

 

PSCoalso makes short-term purchases to replace generation from company-owned unitsthat are unavailable due to maintenance and unplanned outages, to comply withminimum availability requirements, to obtain energy at a lower cost than thatwhich could be produced by other resource options, including company-ownedgeneration and/or long-term purchase power contracts and for various otheroperating requirements.

 

***PSCo Resource Plan ***— PSCo estimates it willpurchase approximately 35 to 45 percent of its total electric systemenergy needs for 2009 under long-term contracts and generate the remainder withPSCo-owned resources.  In November 2007,PSCo filed the Colorado Resource Plan (CRP), which details the type and amountof resources that will be added to the system for an eight year ResourceAcquisition Period (RAP) through 2015.  The CPUC issued its order in September 2008,which approved the following:

 

·                     Increasein wind portfolio of 850 MW by 2015.  PSCo would then have a total of approximately1,900 MW of wind power resources;

 

·                     Approximately200 MW from a central solar thermal facility with storage, with possibleoption of acquiring up to 600 MW of solar thermal resources withstorage as technology develops;

 

·                     Increasecustomer efficiency and conservation programs with plans to meet the CPUCgoals of annual energy sales reductions toapproximately 3,669 GWh, that would yield a demand savings inthe range of 886 MW to 994 MW by 2020;

 

·                     Retirementof two older coal-burning plants (two units at Arapahoe and two units atCameo), replacing the capacity with company owned resources, provided the costsare reasonable; and

 

·                     ReducePSCo’s CO2 emissions by 10 percent below 2005levels and for PSCo to propose additional reductions to achieve a 20 percentreduction by 2020 in its next plan.

 

InApril 2008, the CPUC approved a certificate of public convenience andnecessity application to build a new, company owned 260 MW combustion turbineproject at the existing Fort St. Vrain generating station.  Fort St. Vrain is scheduled to come online inthe second quarter of 2009.  The Fort St.Vrain project will leave PSCo 123 MW short of the necessary peaking power and 16percent short of reserve margin necessary to meet the 2009 summer peakload.  PSCo will meet the differentialfor the summer 2009 peak by purchasing short-term capacity.

 

Constructioncontinues on Comanche 3, a 750 MW pulverized coal-fired unit at the existingComanche Station located near Pueblo, Colo. and installation of additionalemission control equipment on the two existing Comanche Station units.  Completion is planned for the fall of 2009.As part of an electric rate case, PSCo is allowed to include construction workin progress associated with the Comanche 3 project in rate base without anoffset for AFDC, depending upon PSCo’s senior unsecured debt rating.

 

PSCohas an agreement with Intermountain Rural Electric Association (IREA) and HolyCross which transfers a portion of capacity ownership in the Comanche 3 unit toIREA and Holy Cross.  IREA will takeownership of 190 MW and Holy Cross will take ownership of 60 MW upon commercialoperation.

 

 

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***RES*****—** The 2007Colorado legislature adopted an increased RES that requires PSCo to generate orcause to be generated electricity from renewable resources equaling:

 

·                  At least 10 percent of itsretail sales by 2010,

 

·                  15 percent of retail sales by2015,

 

·                  20 percent of retailsales by 2020, and

 

·                  4 percent must be generatedfrom solar renewable resources with half the solar resources being located atcustomers facilities.

 

Thenew law limits the net incremental retail rate impact from these renewableresource acquisitions as compared to non-renewable resources to 2 percent.The new legislation encourages the CPUC to consider earlier and timely costrecovery for utility investment in renewable resources, including the use of aforward rider mechanism.

 

***PSCo Regulatory Policy Initiative*****—** In March 2008 open meetings, theCPUC voted to open an investigatory docket that will review the currentregulatory structure to determine if current utility incentives are alignedwith state public policy objectives and to determine if the existing structureis internally consistent in achieving these objectives.  In June 2008,a transmission investigatory docket was opened to gather information ontransmission planning in Colorado and transmission planning coordination withother states and utilities was opened. In September 2008, the CPUC opened a customer incentives docketwhose scope covers how regulatory structure and incentives influence customerdecisions.

 

Severalparties, including PSCo, filed comments in the utility incentive docket in September 2008.  The comments covered a wide array of issues,including the best method to deliver DSM services to customers and theimplications to utilities of owned generation or generation acquired throughpower purchase agreements.   The commentsalso raised questions regarding whether or not revisions should be made to thecurrent regulatory structure to reduce regulatory lag.

 

***ISOC Program —***In November 2007,PSCo submitted a request to the CPUC for permission to expand its ISOC programto make it available to customers without demand history, drop the thresholdfor participation to 300 KW, allow customers to control load through their energymanagement system, increase credits and allow customers to limit the number ofinterruptions in a day. PSCo also sought approval for current recovery of thosecredits through the DSM adjustment clause. Lastly, PSCo sought authority torecover an incentive in addition to receiving reimbursement of the credits paidto customers to reward it for successful implementation of a program thatreduces overall costs to its retail customers. In June 2008, the ALJ assigned to the case approved expansion ofthe program and removed current recovery and incentives from the currentcase.  The CPUC upheld the ALJ’srecommendation through an initial decision. Three parties filed a request for rehearing, reargument orreconsideration on limited issues.  TheCPUC granted the request and held deliberations on Oct. 15, 2008.  In its final order, the CPUC approvedexpansion of the program, higher credits and concurrent recovery effective Jan. 1,2009.

 

***RESA *****—**In December 2008, PSCo filed a request with theCPUC to increase the RESA to a full 2 percent in order to increaserenewables to levels that comply with the 20 percent renewable energyrequirement.  The CPUC approved therequest and the increase became effective on Jan. 1, 2009.

 

**Fuel Supply and Costs**

** **

Thefollowing table shows the delivered cost per MMBtu of each significant categoryof fuel consumed for electric generation, the percentage of total fuelrequirements represented by each category of fuel and the total weightedaverage cost of all fuels.

 

 

 
| ** ** | ** ** | ** ** | ** ** | ** **           | ** ** | **Weighted**          | ** ** |
|------------|------------|------------|------------|----------------------|------------|-----------------------|------------|
| ** ** | ** ** | **Coal**   | ** ** | **Natural Gas** | ** ** | **Average Fuel** | ** ** |
| ** ** | ** ** | **Cost**   | ** ** | **Percent**          | ** ** | **Cost**              | ** ** | **Percent** | ** ** | **Cost** | ** ** |
| 2008       |       | $          | 1.42       |                 | 84         | %                     | $          | 7.03 |   | 16 | % | $ | 2.31 |   |
| 2007       |       | 1.26       |       | 84                   |       | 4.34                  |       | 16 |   | 1.76 |   |
| 2006       |       | 1.24       |       | 85                   |       | 6.52                  |       | 15 |   | 2.01 |   |
|            |            |            |            |                      |            |                       |            |  |  |  |  |  |  |  |

 

Seeadditional discussion of fuel supply and costs under Item 1A — Risks Associatedwith Our Business.

 

 

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**Fuel Sources**

 

*Coal* —******Coal inventory levels may vary widely amongplants.  PSCo normally maintainsapproximately 35 days of coal inventory at each plant site.  Coal supply inventories at Dec. 31, 2008and 2007, were approximately 32 and 41 days usage, based on the maximum burnrate for all of PSCo’s coal-fired plants. PSCo’s generation stations use low-sulfur western coal purchasedprimarily under contracts with suppliers operating in Colorado andWyoming.  During 2008 and 2007, PSCo’scoal requirements for existing plants were approximately 11 million and 10million tons, respectively.

 

PSCohas contracted for coal suppliers to supply 100 percent of its coal requirementsin 2009, 49 percent of its coal requirements in 2010 and 34 percent of its coalrequirements in 2011.  Any remainingrequirements will be filled through a request for proposal process.

 

PSCohas coal transportation contracts that provide for delivery of approximately100 percent of its coal requirements 2009, 93 percent of its coalrequirements in 2010 and 93 percent of its coal requirements in 2011.  Coal delivery may be subject to short-terminterruptions or reductions due to operation of mines, transportation problems,weather and availability of equipment.

 

*Natural gas*— PSCo uses both firm andinterruptible natural gas and standby oil in combustion turbines and certainboilers.  Natural gas supplies for PSCo’spower plants are procured under contracts provide an adequate supply offuel.  The supply contracts expire in2009 and 2010.  The transportation andstorage contracts expire in various years from 2009 to 2040.  Certain natural gas supply and transportationagreements include obligations for the purchase and/or delivery of specifiedvolumes of natural gas or to make payments in lieu of delivery.  At Dec. 31, 2008, PSCo’s commitmentsrelated to supply contracts were approximately $137 million and transportationand storage contracts were approximately $1 billion.

 

**Wholesale Commodity Marketing Operations**

 

PSCoconducts various wholesale marketing operations, including the purchase andsale of electric capacity, energy and energy related products.  PSCo uses physical and financial instrumentsto reduce commodity price and credit risk and hedge supplies andpurchases.  See additional discussionunder Item 7A — Quantitative and Qualitative Disclosures About Market Risk.

 

**Summary of Recent Federal Regulatory Developments**

** **

TheFERC has jurisdiction over rates for electric transmission service ininterstate commerce and electricity sold at wholesale, hydro facilitylicensing, natural gas transportation, accounting practices and certain otheractivities of PSCo.  State and localagencies have jurisdiction over many of PSCo’s activities, including regulationof retail rates and environmental matters. In addition to the matters discussed below, see Note 14 to theconsolidated financial statements for a discussion of other regulatory matters.

 

***FERC Rules Implementing Energy PolicyAct of 2005 (Energy Act) *****—** The Energy Actrepealed PUHCA effective Feb. 8, 2006 and required the FERC to conductseveral rulemakings to adopt new regulations to implement various aspects ofthe Energy Act. Since August 2005, the FERC has completed a number ofrulemaking proceedings to modify its regulations on a number of subjects,including:

 

·                  Adopting regulations requiring NERCto establish mandatory electric reliability standards; and

 

·                  Certifying approximately 120 NERCreliability standards mandatory and subject to potential financial penalties upto $1 million per day per violation for non-compliance. The FERC alsoapproved certain WECC regional reliability standards as mandatory, which areapplicable to PSCo.

 

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.

 

***ElectricReliability Standards Matters*****—**In June 2008, PSCo wassubject to an audit of its compliance with the NERC and regional reliability standardsby the Western Electricity Coordinating Council (WECC), the NERC regionalentity for the PSCo system.  On Oct. 31,2008, the WECC audit team issued its confidential final audit report.  The report found a possible violation of onestandard related to relay maintenance. The audit report will now be subject to additional WECC procedures todetermine if violations occurred and, if so, the consequences of such afinding.

 

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In response to informationidentified during the audit, Xcel Energy conducted a comprehensive review ofthe maintenance records for all relay devices on the PSCo transmissionsystem.  That review found PSCo did nothave documentation demonstrating that all relay devices on the PSCo system hadbeen maintained on the schedule in Xcel Energy’s adopted maintenance plan.  In June 2008, PSCo filed a self-reportregarding the maintenance plan violations with the WECC.  In addition, in April 2008, PSCo filed aself-report with WECC indicating that certain tests of generation stationbatteries had not been completed in accordance with Xcel Energy’s adoptedmaintenance plan for generation station relays and batteries.  In September 2008, as a result of areview of Xcel Energy’s procedures implementing certain NERC CriticalInfrastructure Protection standards applicable to control centers effective July 1,2008, PSCo filed a self-report with the WECC disclosing certain deficiencies inrequirements applicable to access to critical infrastructure assets for theperiod July to September 2008. PSCo filed a mitigation plan with the WECC within 30 days of theself-report discussing how the deficiencies were corrected.

 

Xcel Energy is uncertain if the WECC audit reportfindings or the self-reports of reliability standards violations will result infinancial penalties being imposed on PSCo. If so, the penalties are not expected to be material.

 

***Electric Transmission Rate Regulation *****—** The FERC regulates the rates charged and terms and conditions forelectric transmission services. FERC policy encourages utilities to turn overthe functional control of their electric transmission assets the sale ofelectric transmission services to an RTO. Each RTO separately files regionaltransmission tariff rates for approval by the FERC. All members within that RTOare then subjected to those rates. PSCo is currently participating with otherutilities in the development of WestConnect, which is expected to providecertain regionalized transmission services in the first quarter of 2009 and mayprovide wholesale energy market functions in the future, but would not be anRTO.

 

InFebruary 2007, the FERC issued final rules (Order No. 890)adopting revisions to its open access transmission service rules. In December 2007,the FERC issued an order on rehearing (Order No. 890-A) making certainmodifications to Order No. 890, effective in March 2008. In June 2008,the FERC issued a further order on rehearing (Order No. 890-B) makingcertain additional modifications to Order Nos. 890 and 890-A effective in September 2008.   PSCo has submitted several compliancefilings to modify its OATT to reflect the modified FERC rules.

 

Certaintransmission service customers objected to aspects of the Xcel Energy Order No. 890,890-A and 890-B compliance filings.  Thevarious compliance filings are pending final FERC action.

 

UnderOrder No. 890, transmission providers are required to post certain informationon their OASIS systems.  In June 2008,the FERC initiated an audit of PSCo’s Order No. 890 OASIS compliancepostings.  PSCo was one of severalelectric utilities notified that the FERC was commencing such an audit.   In November 2008, the FERC issued anorder requiring certain compliance actions but did not impose financialpenalties.  PSCo concurred with the auditreport, and the audit is now completed.

 

TheFERC issued proposed rules to modify the current standards of conduct rules governingthe functional separation of the Xcel Energy electric transmission functionfrom the wholesale sales and marketing function.  On Oct. 16, 2008, the FERC issuedrevised final rules.  On Dec. 15,2008, the FERC extended the compliance deadline for certain compliance actionsto Jan. 30, 2009.  PSCo is takingactions to be compliant with the revised rules.

 

***Market Based Rate Rules *****—** In June 2007, the FERC issued a final order governing itsmarket-based rate authorizations to electric utilities. The FERC reemphasizedits commitment to market-based pricing, but is revising the tests it uses toassess whether a utility has market power and has emphasized that it intends toexercise greater oversight where it has market-based rate authorizations. Eachof the Xcel Energy utility subsidiaries has been granted market-based rateauthority and will be subject to the new rule. The Xcel Energy utility subsidiaries may not sell power at market-basedrates within the PSCo and SPS balancing authorities, where they have been foundto have market power under the FERC’s applicable analysis.  Both PSCo and SPS have cost-basedcoordination tariffs that they may use to make sales in their balancingauthorities.

 

TheFERC’s market rate orders allow mitigated utilities such as PSCo and SPS tosell at their borders at market-based rates subject to certain conditions.  Requests for rehearing addressing that aspectof the FERC’s market-based rate orders are presently pending.  Because PSCo makes such border sales, XcelEnergy sought such clarification from the FERC. The outcome of the rehearing request may impact the Xcel Energyutilities subsidiaries’ continued ability to make such border sales atmarket-based rates.

 

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***Affiliate Transaction Rules *****—** On Feb. 21, 2008, the FERC issued Order No. 707, whichamended the FERC’s regulations to codify restrictions on affiliate transactionsbetween franchised public utilities that have captive customers or that own orprovide transmission service over jurisdictional transmission facilities, andtheir market-regulated power sales affiliates or non-utility affiliates.  The Xcel Energy utility subsidiaries are subjectto the new rules.  The rules applyhistoric SEC “at cost” pricing standards to transactions between servicecompanies of utility holding company systems and their FERC jurisdictionalpublic utility affiliates.  In September 2008,the National Rural Electric Cooperative Association and the American PublicPower Association filed a petition for review of Order No. 707 with theU.S. Court of Appeals for the District of Columbia.  The appeal is pending.

 

***FERC Tie Line Investigation —***In October 2007,the FERC Office of Enforcement, Division of Investigations (DOI), commenced anon-public investigation of use of network transmission service across theLamar Tie Line, a transmission facility that connects PSCo and SPS.  In July 2008, the DOI issued a preliminaryreport alleging Xcel Energy violated certain FERC policies and rules andapproved tariffs.  The report representsthe preliminary conclusions of the DOI and is subject to additionalprocedures.  The report does notconstitute a finding by the FERC, which may, accept, modify or reject any orall of the preliminary conclusions in the report.  Xcel Energy disagrees with the preliminaryreport and responded to the DOI allegations. Given the preliminary nature of this matter, Xcel Energy is unable todetermine if the resolution of this matter will have a material adverse impacton operations, cash flows or financial condition.

 

**ElectricOperating Statistics**

 
| ** **                                   | ** ** | **Year Ended Dec. 31,** | ** ** | ** ** |
|----------------------------------------------|------------|----------------------------------------|------------|------------|
| ** **                                   | ** ** | **2008**                               | ** ** | **2007**   | ** ** | **2006** | ** ** | ** ** |
| **Electric sales (millions of Kwh)**         | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential                                  |       | 8,905                                  |       | 8,904      |   | 8,557 |   |   |
| Commercial and industrial                    |       | 19,137                                 |       | 18,947     |   | 18,398 |   |   |
| Public authorities and other                 |       | 229                                    |       | 235        |   | 243 |   |   |
| **Total retail**                             |       | 28,271                                 |       | 28,086     |   | 27,198 |   |   |
| Sales for resale                             |       | 7,756                                  |       | 8,913      |   | 7,820 |   |   |
| **Total energy sold**                        |       | 36,027                                 |       | 36,999     |   | 35,018 |   |   |
|                                         |       |                                   |       |       |   |   |   |   |
| **Number of customers at end of period**     | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential                                  |       | 1,142,106                              |       | 1,126,019  |   | 1,113,293 |   |   |
| Commercial and industrial                    |       | 150,826                                |       | 149,179    |   | 147,349 |   |   |
| Public authorities and other                 |       | 58,195                                 |       | 58,559     |   | 60,381 |   |   |
| **Total retail**                             |       | 1,351,127                              |       | 1,333,757  |   | 1,321,023 |   |   |
| Wholesale                                    |       | 35                                     |       | 51         |   | 49 |   |   |
| **Total customers**                          |       | 1,351,162                              |       | 1,333,808  |   | 1,321,072 |   |   |
|                                         |       |                                   |       |       |   |   |   |   |
| **Electric revenues (thousands of dollars)** | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Residential                                  |       | $                                      | 914,531    |       | $ | 801,162 |   | $ | 756,701 |   |   |
| Commercial and industrial                    |       | 1,514,652                              |       | 1,266,800  |   | 1,251,390 |   |   |
| Public authorities and other                 |       | 44,066                                 |       | 41,426     |   | 38,775 |   |   |
| **Total retail**                             |       | 2,473,249                              |       | 2,109,388  |   | 2,046,866 |   |   |
| Wholesale                                    |       | 457,623                                |       | 438,120    |   | 408,859 |   |   |
| Other electric revenues                      |       | 52,057                                 |       | 57,880     |   | 49,720 |   |   |
| **Total electric revenues**                  |       | $                                      | 2,982,929  |       | $ | 2,605,388 |   | $ | 2,505,445 |   |   |
|                                         |       |                                   |       |       |   |   |   |   |
| Kwh sales per retail customer                |       | 20,924                                 |       | 21,058     |   | 20,589 |   |   |
| Revenue per retail customer                  |       | $                                      | 1,831      |       | $ | 1,582 |   | $ | 1,549 |   |   |
| Residential revenue per Kwh                  |       | 10.27                                  | ¢     | 9.00       | ¢ | 8.84 | ¢ |   |
| Commercial and industrial revenue per Kwh    |       | 7.91                                   |       | 6.69       |   | 6.80 |   |   |
| Wholesale revenue per Kwh                    |       | 5.90                                   |       | 4.92       |   | 5.23 |   |   |

 

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**NATURAL GAS UTILITYOPERATIONS**

** **

Themost significant recent developments in the natural gas operations of PSCo arecontinued volatility in natural gas market prices and the continued trend ofdeclining use per customer by residential customers as a result of improvedbuilding construction technologies, higher appliance efficiencies, andconservation.  From 1998 to 2008, averageannual sales to the typical PSCo residential customer declined from 92 MMBtuper year to 82 MMBtu per year on a weather-normalized basis.  Although wholesale price increases do notdirectly affect earnings because of natural gas cost recovery mechanisms, highprices can encourage further efficiency efforts by customers.

 

**Public Utility Regulation**

** **

***Summary of Regulatory Agencies and Areas ofJurisdiction***—******PSCo is regulated by the CPUC with respect to itsfacilities, rates, accounts, services and issuance of securities.  PSCo holds a FERC certificate that allows itto transport natural gas in interstate commerce without PSCo becoming subjectto full FERC jurisdiction under the federal Natural Gas Act.

 

***Purchased Gas and Conservation CostRecovery Mechanisms*******—****PSCo has two retail adjustment clausesthat recover purchased gas and other resource costs:

 

·              *GCA***— The GCA mechanism allows PSCo to recover its actual costs ofpurchased gas and transportation to meet the requirements of itscustomers.  The GCA is revised monthly toallow for changes in gas rates.

 

·              *DSMCA***— PSCo has a low-income energy assistance program. The costs of thisenergy conservation and weatherization program are recovered through the gasDSMCA.

 

***Performance-Based Regulation and Quality ofService Requirements***— The CPUC established a combined electricand natural gas quality of service plan. See further discussion under Item 1******— Electric Utility Operations.

 

*****Kinder Morgan Interstate Gas Transmission BypassPipeline*******—****************In**************August 2007, KinderMorgan Interstate Gas Transmission LLC (KMIGT) filed an application with theFERC for authorizations to construct and operate 41.4 miles of 12-inch pipelinein Weld County, Colo. The purpose of this pipeline, referred to as the “ColoradoLateral,” is to provide interstate gas transportation services of up to 55,000dekatherms per day to supply natural gas to Atmos Energy Corporation’s (Atmos)gas distribution system serving retail customers in and around Greeley andEaton, Colo. PSCo currently provides gas transportation services to Atmos tosupply its distribution system in the Greeley and Eaton areas. PSCo’s serviceswould be bypassed by the new KMIGT pipeline, resulting in a loss of annualrevenues of approximately $3.8 million. In February 2008, the FERC issuedits order approving KMIGT’s application for the Colorado Lateral project.

 

PSCofiled a complaint at the CPUC, requesting that the CPUC enter an order findingthat Atmos must cease and desist any further construction activity on theColorado Lateral project that is under the jurisdiction of the CPUC until suchtime as it applies for and is granted a certificate of public convenience andnecessity “CPCN”. In September 2008, an ALJ issued an order that theproposed construction of the bypass laterals is not in the normal course ofbusiness and ordered Atmos to file a CPCN application for CPUC considerationand approval.

 

****In hisrecommended decision, the ALJ determined that Atmos’ 11-mile section of the “ColoradoLateral” would require that Atmos obtain a CPCN prior to the facilities beingplaced into service and that the doctrine of regulatory monopoly does not applyto the gas transportation service provided by PSCo, a local distributioncompany (LDC), to a downstream LDC such as Atmos. Therefore, Atmos has noexpectation of service from PSCo and PSCo has no obligation to serve Atmosunder the doctrine of regulated monopoly. The CPUC has confirmed the ALJ’s ruling in deliberations on Feb. 5,2009, but has not yet issued a final written order at this time.****

 

Fora further discussion of rate and regulatory matters see Note 14 to theconsolidated financial statements.

 

**Capability and Demand**

** **

PSCoprojects peak day natural gas supply requirements for firm sales and backuptransportation, to be 1,874,731 MMBtu. In addition, firm transportation customers hold 598,660 MMBtu ofcapacity for PSCo without supply backup. Total firm delivery obligation for PSCo is 2,473,391 MMBtu per day.  The maximum daily deliveries for PSCo in 2008for firm and interruptible services were 1,889,099 MMBtu on Dec. 15, 2008.

 

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PSCopurchases natural gas from independent suppliers. These purchases are generallypriced based on market indices that reflect current prices. The natural gas isdelivered under transportation agreements with interstate pipelines. Theseagreements provide for firm deliverable pipeline capacity of approximately1,893,712 MMBtu/day, which includes 668,756 MMBtu of supplies held underthird-party underground storage agreements. During 2008, an additional 416,419 MMBtu/Day of firm pipeline capacitywas added to serve system growth.  Duringthis exercise to acquire additional firm pipeline capacity, 165,521 MMBtu ofstorage capacity was converted to firm transportation with balancing serviceattached.  In addition, PSCo operatesthree company-owned underground storage facilities, which provide about 35,000MMBtu of natural gas supplies on a peak day. 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.

 

PSCois required by CPUC regulations to file a natural gas purchase plan by June ofeach year projecting and describing the quantities of natural gas supplies,upstream services and the costs of those supplies and services for the 12 monthperiod of the following year.  PSCo isalso required to file a natural gas purchase report by October of eachyear reporting actual quantities and costs incurred for natural gas suppliesand upstream services for the previous 12 month period.

 

**Natural Gas Supply and Costs**

 

PSCoactively seeks natural gas supply, transportation and storage alternatives toyield a diversified portfolio that provides increased flexibility, decreasedinterruption and financial risk and economical rates.  In addition, PSCo conducts natural gas pricehedging activities that have been approved by the CPUC.  This diversification involves numerous supplysources with varied contract lengths.

 

Thefollowing table summarizes the average delivered cost per MMBtu of natural gaspurchased for resale by PSCo’s regulated retail natural gas distributionbusiness:

 
| 2008 |   | $    | 7.04   |   |
|------|--------|------|--------|--------|
| 2007 |   | 5.87 |   |
| 2006 |   | 7.09 |   |

 

PSCohas natural gas supply, transportation and storage agreements that includeobligations for the purchase and/or delivery of specified volumes of naturalgas or to make payments in lieu of delivery. At Dec. 31, 2008, PSCo was committed to approximately $1.5 billionin such obligations under these contracts, which expire in various years from2009 through 2029.

 

PSCopurchases natural gas by optimizing a balance of long-term and short-termnatural gas purchases, firm transportation and natural gas storagecontracts.  During 2008, PSCo purchasednatural gas from approximately 38 suppliers.

 

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**Natural Gas OperatingStatistics**

 
| ** **                                      | ** ** | **Year Ended Dec. 31,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                      | ** ** | **2008**                               | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Natural gas deliveries (thousands of MMBtu)** |       |                                   |       |   |   |   |   |
| Residential                                     |       | 96,871                                 |       | 93,664 |   | 87,200 |   |
| Commercial and industrial                       |       | 41,121                                 |       | 40,216 |   | 37,923 |   |
| **Total retail**                                |       | 137,992                                |       | 133,880 |   | 125,123 |   |
| Transportation and other                        |       | 115,923                                |       | 117,240 |   | 121,501 |   |
| **Total deliveries**                            |       | 253,915                                |       | 251,120 |   | 246,624 |   |
|                                            |       |                                   |       |   |   |   |   |
| **Number of customers at end of period**        |       |                                   |       |   |   |   |   |
| Residential                                     |       | 1,186,255                              |       | 1,169,306 |   | 1,154,598 |   |
| Commercial and industrial                       |       | 99,425                                 |       | 98,053 |   | 96,787 |   |
| **Total retail**                                |       | 1,285,680                              |       | 1,267,359 |   | 1,251,385 |   |
| Transportation and other                        |       | 4,313                                  |       | 4,110 |   | 3,945 |   |
| **Total customers**                             |       | 1,289,993                              |       | 1,271,469 |   | 1,255,330 |   |
|                                            |       |                                   |       |   |   |   |   |
| **Natural gas revenues (thousands of dollars)** |       |                                   |       |   |   |   |   |
| Residential                                     |       | $                                      | 941,077    |   | $ | 808,738 |   | $ | 866,176 |   |
| Commercial and industrial                       |       | 368,143                                |       | 313,805 |   | 342,404 |   |
| **Total retail**                                |       | 1,309,220                              |       | 1,122,543 |   | 1,208,580 |   |
| Transportation and other                        |       | 64,512                                 |       | 63,563 |   | 53,715 |   |
| **Total natural gas revenues**                  |       | $                                      | 1,373,732  |   | $ | 1,186,106 |   | $ | 1,262,295 |   |
|                                            |       |                                   |       |   |   |   |   |
| MMBtu sales per retail customer                 |       | 107.33                                 |       | 105.64 |   | 99.99 |   |
| Revenue per retail customer                     |       | $                                      | 1,018      |   | $ | 886 |   | $ | 966 |   |
| Residential revenue per MMBtu                   |       | 9.71                                   |       | 8.63 |   | 9.93 |   |
| Commercial and industrial revenue per MMBtu     |       | 8.95                                   |       | 7.80 |   | 9.03 |   |
| Transportation and other revenue per MMBtu      |       | 0.56                                   |       | 0.54 |   | 0.44 |   |

 

**ENVIRONMENTAL MATTERS**

** **

PSCo’sfacilities are regulated by federal and state environmental agencies.  These agencies have jurisdiction over airemissions, water quality, wastewater discharges, solid wastes and hazardoussubstances.  Various company activitiesrequire registrations, permits, licenses, inspections and approvals from theseagencies.  PSCo has received allnecessary authorizations for the construction and continued operation of itsgeneration, transmission and distribution systems.  PSCo facilities have been designed andconstructed to operate in compliance with applicable environmental standards.

 

PSCostrives to comply with all environmental regulations applicable to itsoperations.  However, it is not possibleto determine when or to what extent additional facilities or modifications ofexisting or planned facilities will be required as a result of changes toenvironmental regulations, interpretations or enforcement policies or, whateffect future laws or regulations may have upon PSCo’s operations.  For more information on environmentalcontingencies, see Note 15 to the consolidated financial statements.

 

**EMPLOYEES**

** **

Thenumber of full-time PSCo employees at Dec. 31, 2008 was 2,772.  Of these full-time employees, 2,159, or 78percent, are covered under collective bargaining agreements.  See Note 9 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.***

*** ***

***15***

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*** ***

Weare subject to comprehensive regulation by federal and state utility regulatoryagencies.  The state utility commissionsregulate many aspects of our utility operations, including siting andconstruction of facilities, customer service and the rates that we can chargecustomers.  The FERC has jurisdiction,among other things, over wholesale rates for electric transmission service andthe sale of electric energy in interstate commerce.

 

Ourprofitability is dependent on our ability to recover the costs of providingenergy and utility services to our customers. We currently provide service at rates approved by one or more regulatorycommissions.  These rates are generallyregulated based on an analysis of our expenses incurred in a test year.  Thus, the rates we are allowed to charge mayor may not match our expenses at any given time.  While rate regulation is premised onproviding 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 our customers.  Furthermore, there could be changes in theregulatory environment that would impair our ability to recover costshistorically collected from our customers. If all of our costs are not recovered through customer rates, we couldincur financial operating losses, which, over the long term, could jeopardizeour ability to meet our financial obligations.

 

Managementcurrently believes these prudently incurred costs are recoverable given theexisting regulatory mechanisms in place.  However, changes in regulations or the imposition of additionalregulations, including additional environmental regulation or regulationrelated to climate change, could have an adverse impact on our results ofoperations and hence could materially and adversely affect our ability to meetour financial obligations, including debt payments.

 

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

*** ***

Wecannot be assured that any of our current ratings will remain in effect for anygiven period of time or that a rating will not be lowered or withdrawn entirelyby a rating agency.  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 & Poor’scalculates an imputed debt associated with capacity payments from purchasepower contracts.   An increase in theoverall level of capacity payments would increase the amount of imputed debt,based on Standard & Poor’s methodology.  Therefore, our credit ratings could beadversely affected based on the level of capacity payments associated withpurchase power contracts or changes in how imputed debt is determined.  Any downgrade could lead to higher borrowingcosts.

 

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

*** ***

Ifinterest rates increase, we may incur increased interest expense on variableinterest debt, short-term borrowings or incremental long-term debt, which couldhave an adverse impact on our operating results.

 

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

*** ***

PSCo’soperations require significant capital investment in property, plant andequipment; consequently, PSCo is an active participant in debt markets.   Any disruption in capital markets could havea material impact on our ability to fund our operations.   Capital markets are global in nature and areimpacted by numerous events throughout the world economy.  Capital market disruption events, asevidenced by the collapse in the U.S. sub-prime mortgage market and subsequentbroad financial market stress, could prevent PSCo from issuing new securitiesor cause PSCo to issue securities with less than ideal terms and conditions,such as higher interest rates.

 

***Weare subject to credit risks.***

*** ***

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

 

Creditrisk also includes the risk that various counterparties that owe us money orproduct will breach their obligations. Should the counterparties to 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.

 

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PSComay at times have direct credit exposure in itsshort-term wholesale and commodity tradingactivity to various financial institutions trading for their own accounts orissuing collateral support on behalf of other counterparties.  PSCo may also have some indirect creditexposure due to participation in organized markets such as the PJMInterconnection and MISO in which any credit losses are socialized to allmarket participants.

 

PSCodoes have additional indirect credit exposures to various financial institutionsin the form of letters of credit provided as security by powersuppliers under various long-term physical purchasedpower contracts.  If any of the credit ratings of the letter ofcredit issuers were to drop below the designated investment grade ratingstipulated in the underlying long term purchased power contracts, the supplierwould need to replace that security with an acceptable substitute.  If thesecurity were not replaced, the party would be in technical default underthe contract, which would enable PSCo to exercise its contractual rights.

 

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

*** ***

Weengage in wholesale sales and purchases of electric capacity, energy andenergy-related products and are subject to market supply and commodity pricerisk.  Commodity price changes can affectthe value of our commodity trading derivatives. We mark certain derivatives to estimated fair market value on a dailybasis (mark-to-market accounting), which may cause earnings volatility.  We utilize quoted observable market prices tothe maximum extent possible in determining the value of these derivativecommodity instruments.  For positions forwhich observable market prices are not available, we utilize observable quotedmarket prices of similar assets or liabilities or indirectly observable pricesbased on forward price curves of similar markets.  For positions for which we have unobservablemarket prices, we incorporate estimates and assumptions as to a variety offactors such as pricing relationships between various energy commodities andgeographic locations.  Actual experiencecan vary significantly from these estimates and assumptions and significantchanges from our assumptions could cause significant earnings variability.

 

Ifwe encounter market supply shortages, we may be unable to fulfill contractualobligations to our retail, wholesale and other customers at previouslyauthorized or anticipated costs.  Anysuch supply shortages could cause us to seek alternative supply services atpotentially higher costs or suffer increased liability for unfulfilledcontractual 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, with which compliance could be difficult and costly.***

*** ***

Weare subject to environmental laws and regulations that affect many aspects ofour past, present and future operations, including air emissions, waterquality, wastewater discharges and the generation, transport and disposal ofsolid wastes and hazardous substances. These laws and regulations require us to obtain and comply with a widevariety of environmental registrations, licenses, permits, inspections andother approvals.  Environmental laws andregulations can also require us to restrict or limit the output of certainfacilities or the use of certain fuels, to install pollution control equipmentat our facilities, clean up spills and correct environmental hazards and othercontamination.  Both public officials andprivate individuals may seek to enforce the applicable environmental laws andregulations against us.  We may berequired to pay all or a portion of the cost to remediate (i.e. clean-up) siteswhere our past activities, or the activities of certain other parties, causedenvironmental contamination.  At Dec. 31,2008, these sites included:

 

·                  Sites of formerMGPs operated by us, our predecessors, or other entities; and

 

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

 

Weare also subject to mandates to provide customers with clean energy, renewableenergy and energy conservation offerings. These mandates are designed in part to mitigate the potentialenvironmental impacts of utility operations. Failure to meet the requirements of these mandates may result in finesor penalties, which could have a material adverse effect on our results ofoperations.  If our regulators do notallow us to recover all or a part of the cost of capital investment or theoperating and maintenance costs incurred to comply with the mandates, it couldhave a material adverse effect on our results of operations.

 

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Inaddition, existing environmental laws or regulations may be revised, new lawsor regulations seeking to protect the environment may be adopted or becomeapplicable to us and we may incur additional unanticipated obligations orliabilities under existing environmental laws and regulations.

 

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

*** ***

**There is agrowing consensus that emissions of GHGs are linked to global climatechange.  Climate change creates physicaland financial risk. **Physical risksfrom climate change include an increase in sea level and changes in weather conditions,such as an increase in changes in precipitation and extreme weatherevents.  PSCo does not serve any coastalcommunities so the possibility of sea level rises does not directly affect PSCoor its customers.  Our customers’ energyneeds vary with weather conditions, primarily temperature and humidity.  For residential customers, heating andcooling represent their largest energy use. To the extent weather conditions are affected by climate change,customers’ energy use could increase or decrease depending on the duration andmagnitude of the changes.  Increasedenergy use due to weather changes may require us to invest in more generatingassets, transmission and other infrastructure to serve increased load.  Decreased energy use due to weather changesmay affect our financial condition, through decreased revenues.  Extreme weather conditions in general requiremore system backup, adding to costs, and can contribute to increased systemstresses, including service interruptions. Weather conditions outside of the company’s service territory could alsohave an impact on PSCo’s revenues.  PSCobuys and sells electricity depending upon system needs and marketopportunities.  Extreme weatherconditions creating high energy demand on our own and/or other systems mayraise electricity prices as we buy short-term energy to serve our own system,which would increase the cost of energy we provide to our customers.  Severe weather impacts PSCo’s serviceterritories, 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.

 

Tothe extent climate change impacts a region’s economic health, it may alsoimpact PSCo’s revenues.  PSCo’s financialperformance is tied to the health of the regional economies we serve.  The price of energy, as a factor in a region’scost of living as well as an important input into the cost of goods, has animpact 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 and purchasedgoods.  To the extent financial marketsview climate change and emissions of GHGs as a financial risk, this couldnegatively 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.***

 

**Legislativeand regulatory responses related to climate change create financial risk.  Increased public awareness and concern mayresult in more regional and/or federal requirements to reduce or mitigate theeffects of GHG.  Numerous states haveannounced or adopted programs to stabilize and reduce GHG and federallegislation has been introduced in both houses of Congress.  Likewise, the EPA has issued an AdvancedNotice of Proposed Rulemaking that proposes to regulate GHGs under the CleanAir Act. **PSCo’s electricgenerating facilities are likely to be subject to regulation under climatechange laws introduced at either the state or federal level within the next fewyears.  **PSCo is advocating with state and federal policymakers to design climate change regulation that is effective, flexible,low-cost and consistent with our environmental leadership strategy.**

 

Manyof the federal and state climate change legislative proposals use a “cap andtrade” policy structure, in which GHG emissions from a broad cross-section ofthe economy would be subject to an overall cap. Under the proposals, the cap becomes more stringent with the passage oftime.  The proposals establish mechanismsfor GHG sources, such as power plants, to obtain “allowances” or permits toemit GHGs during the course of a year. The sources may use the allowances to cover their own emissions or sellthem to other sources that do not hold enough emissions for their own operations.  Proponents of the cap and trade policybelieve it will result in the most cost effective, flexible emissionreductions.  **The impact of legislation and regulations, includinga “cap and trade” structure, on PSCo and its customers will depend on a numberof factors, including whether GHG sources in multiple sectors of the economyare regulated, the overall GHG emissions cap level, the degree to which GHGoffsets are allowed, the allocation of emission allowances to specific sourcesand the indirect impact of carbon regulation on natural gas and coalprices.  An important factor is PSCo’sability to recover**

 

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**the costsincurred to comply with any regulatory requirements that are ultimatelyimposed. **We may notrecover all costs related to complying with regulatory requirements imposed onPSCo.  If our regulators do not allow usto recover all 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.

 

Forfurther discussion see Note 15 to the consolidated financial statements.

 

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

*** ***

Ouroperations 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, which arediscussed in greater detail in the Capital Markets risk section above.

 

Currenteconomic conditions may be exacerbated by insufficient financial sector liquidityleading to potential increased unemployment, which may impact customers’ability to pay timely, increase customer bankruptcies, and may lead toincreased bad debt.   It is expected thatcommercial and industrial customers will be impacted first with residentialcustomers following, if such circumstances occur.  See credit risk section for more relatedinformation.

 

Further,worldwide economic activity has an impact on the demand for basic commoditiesneeded for utility infrastructure, such as steel, copper, aluminum, etc., whichmay 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.***

*** ***

Ona periodic basis, or as needed, our utility operations file long term resourceplans with our regulators.  These plansare based on numerous assumptions over the relevant planning horizon suchas:  sales growth, economic activity,costs, regulatory mechanisms, impact of technology on sales and production,customer response and continuation of the existing utility business model.  Given the uncertainty in these planningassumptions, there is a risk that the magnitude and timing of resourceadditions 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, and threats of terrorism or disruptions in normal operatingconditions due to localized or regional events.***

*** ***

Ourgeneration plants, fuel storage facilities, transmission and distributionfacilities and information systems may be targets of terrorist activities thatcould disrupt our ability to produce or distribute some portion of our energyproducts.  Any such disruption couldresult in a significant decrease in revenues and significant additional coststo repair and insure our assets, which could have a material adverse impact onour 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.

 

Theinsurance industry has also been affected by these events and the availabilityof insurance covering risks our competitors and we typically insure against maydecrease.  In addition, the insurance weare able to obtain may have higher deductibles, higher premiums and morerestrictive policy terms.

 

Adisruption of the regional electric transmission grid, interstate natural gaspipeline infrastructure or other fuel sources, could negatively impact ourbusiness.  Because our generation,transmission systems and local natural gas distribution companies are part ofan interconnected system, we face the risk of possible loss of business due toa disruption caused by an event (severe storm, severe temperature extremes,generator or transmission facility outage, pipeline rupture, railroaddisruption, sudden and significant increase or decrease in wind generation, orany disruption of work force such as may be caused by flu epidemic) within ouroperating systems 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.

 

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*** ***

***We are subject to business continuity risksassociated with our ability to respond to unforeseen events.***

*** ***

Theterm business continuity refers to the ability of the firm to maintainday-to-day operations in response to unforeseen events, such as those in thepreceding section, which describes numerous disruptions to our normal operatingenvironment.  While the immediate responseto such events may be part of a pre-existing disaster recovery plan, businesscontinuity is a broader concept that refers to how well the company responds tosubsequent pressures on its day-to-day operations.  The company’s response may have beeninitially triggered by an event, but when combined with other factors, it hasan even greater and longer lasting impact on the firm’s on-going businessoperations.

 

Ourresponse to unforeseen events will, in part, determine the financial impact ofthe event on our financial condition and results.  It’s difficult to predict the magnitude ofsuch events and associated impacts.

 

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

*** ***

Asecurity breach of our information systems could subject us to financial harmassociated with theft or inappropriate release of certain types of information,including, but not limited to, customer or system operating information.  We are unable to quantify the potentialimpact of such an event.

 

***Rising energy prices could negatively impact our business.***

 

Higherfuel costs could significantly impact our results of operations if requests forrecovery are unsuccessful.  In addition,the higher fuel costs could reduce customer demand or increase bad debtexpense, which could also have a material impact on our results ofoperations.  Delays in the timing of thecollection of fuel cost recoveries as compared with expenditures for fuelpurchases could have an impact on our cash flows.  We are unable to predict future prices or theultimate 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.***

*** ***

Ourelectric and natural gas utility businesses are seasonal businesses, 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.***

*** ***

Thereare inherent in our natural gas distribution activities a variety of hazardsand operating risks, such as leaks, explosions and mechanical problems, whichcould cause substantial financial losses. In addition, these risks could result in loss of human life, significantdamage to property, environmental pollution, impairment of our operations andsubstantial losses to us.  In accordancewith customary industry practice, we maintain insurance against some, but notall, of these risks and losses.

 

Theoccurrence of any of these events not fully covered by insurance could have amaterial 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 could negativelyimpact our business.***

*** ***

TheEnergy Act increased the FERC’s civil penalty authority for violation of FERCstatutes, rules and orders. The FERC can now impose penalties of$1 million per violation per day. In addition, more than 120 electricreliability standards that were historically subject to voluntary complianceare now mandatory and subject to potential financial penalties by NERC or FERCfor violations. If a serious reliability incident did occur, it could have amaterial adverse effect on our operations or financial results.

 

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***Increasing costs associated with ourdefined benefit retirement plans and other employee-related benefits mayadversely******affect our results of operations, financial position, or liquidity.***

 

Wehave defined benefit and postretirement plans that cover substantially all ofour employees.  Assumptions related tofuture costs, return on investments, interest rates and other actuarialassumptions have a significant impact on our funding requirements related tothese plans.  These estimates andassumptions may change based on economic conditions, actual stock marketperformance, changes in interest rates and any changes in governmentalregulations.  In addition, the PensionProtection Act of 2006, as amended, changed the minimum funding requirementsfor defined benefit pension plans beginning in 2008.  Therefore, our funding requirements andrelated contributions may change in the future.

 

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

*** ***

Thecosts of providing health care benefits to our employees and retirees haveincreased substantially in recent years. We believe that our employee benefit costs, including costs related tohealth care plans for our employees and former employees, will continue torise.  The increasing costs and fundingrequirements associated with our health care plans may adversely affect ourresults 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.***

*** ***

Ifeither Standard & Poor’s or Moody’s were to downgrade Xcel Energy’scredit rating below investment grade, Xcel Energy may be required to providecredit enhancements in the form of cash collateral, letters of credit or othersecurity 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.

 

Asof Dec. 31, 2008, Xcel Energy had approximately $7.7 billion of long-termdebt and $1.0 billion of short-term debt and current maturities.  Xcel Energy provides various guarantees andbond indemnities supporting some of its subsidiaries by guaranteeing the paymentor performance by these subsidiaries of specified agreements or transactions.

 

XcelEnergy also has other contingent liabilities resulting from various taxdisputes and other matters.  Xcel Energy’sexposure under the guarantees is based upon the net liability of the relevantsubsidiary under the specified agreements or transactions.  The majority of Xcel Energy’s guaranteeslimit its exposure to a maximum amount that is stated in the guarantees.  As of Dec. 31, 2008, Xcel Energy hadguarantees outstanding with a maximum stated amount of approximately $67.5million and $18.2 million of exposure. Xcel Energy has also provided indemnities to sureties in respect ofbonds for the benefit of its subsidiaries. The total amount of bonds with these indemnities outstanding as of Dec. 31,2008, was approximately $27.9 million. Xcel Energy’s total exposure under these indemnities cannot bedetermined at this time.  If Xcel Energywere to become obligated to make payments under these guarantees and bondindemnities or become obligated to fund the other contingent liabilities, itcould limit Xcel Energy’s ability to contribute equity or make loans to us, ormay cause Xcel Energy to seek additional or accelerated funding from us in theform of dividends.  If such event were tooccur, we may need to seek 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.***

*** ***

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

 

Wehave historically paid quarterly dividends to Xcel Energy.  In 2008, 2007 and 2006 we paid $271.0million, $263.9 million and $195.6 million of dividends to Xcel Energy,respectively.  If Xcel Energy’s cashrequirements increase, our board 

 

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ofdirectors could decide to increase the dividends we pay to Xcel Energy to helpsupport Xcel Energy’s cash needs.  Thiscould adversely affect our liquidity. The amount of dividends that we can pay is also limited to some extentby our indenture for our first mortgage bonds.

 

**Item 1B — Unresolved SEC Staff Comments**

** **

None.

 

**Item 2 — Properties**

** **

Virtuallyall of the electric utility plant of PSCo is subject to the lien of its firstmortgage bond indenture.  Electricutility generating stations:

 
| ** **                                | ** **   | ** **       | ** **   | ** **    | ** **   | **Summer 2008 Net** | ** **   |
|-------------------------------------------|--------------|------------------|--------------|---------------|--------------|-------------------------------|--------------|
| ** **                                | ** **   | ** **       | ** **   | ** **    | ** **   | **Dependable**                | ** **   |
| **Station, City and Unit** | ** **   | **Fuel**         | ** **   | **Installed** | ** **   | **Capability (MW)**      | ** **   |
| ** **                                | ** **   | ** **       | ** **   | ** **    | ** **   | ** **                    | ** **   |
| ***Steam:***                              | *** *** | *** ***     | *** *** | *** ***  | *** *** | *** ***                  | *** *** |
| Arapahoe-Denver, CO  2 Units              |         | Coal             |         | 1951-1955     |         | 153                           |         |
| 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     |         | 238                           | (b)          |
| Pawnee-Brush, CO                          |         | Coal             |         | 1981          |         | 505                           |         |
| Valmont-Boulder, CO                       |         | Coal             |         | 1964          |         | 186                           |         |
| Zuni-Denver, CO  2 Units                  |         | Natural  Gas/Oil |         | 1948-1954     |         | 91                            |         |
| *** ***                              | *** *** | *** ***     | *** *** | *** ***  | *** *** | *** ***                  | *** *** |
| ***Combustion Turbine:***                 | *** *** | *** ***     | *** *** | *** ***  | *** *** | *** ***                  | *** *** |
| Fort St. Vrain-Platteville, CO  4 Units   |         | Natural  Gas     |         | 1972-2001     |         | 695                           |         |
| 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     |         | 25                            | (c)          |
|                                      |         |             |         |          |         |                          |         |
| ***Diesel:***                             | *** *** | *** ***     | *** *** | *** ***  | *** *** | *** ***                  | *** *** |
| Cherokee-Denver, CO  2 Units              |         | Natural  Gas/Oil |         | 1967          |         | 6                             |         |
|                                      |         |             |         | Total         |         | 3,848                         |         |

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

 

(b)            Basedon PSCo’s ownership interest of 75.5 percent of unit 1and 37.4 percent of unit2.

 

(c)             Amountrepresents nameplate rating capacity.

 

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Electricutility overhead and underground transmission and distribution lines (measuredin conductor miles) at Dec. 31, 2008:

 
| **Conductor Miles** | ** ** |
|--------------------------|------------|
| 345 KV                   |       | 958 |   |
| 230 KV                   |       | 11,420 |   |
| 138 KV                   |       | 92 |   |
| 115 KV                   |       | 4,870 |   |
| Less than 115 KV         |       | 72,582 |   |

 

PSCohad 219 electric utility transmission and distribution substations at Dec. 31,2008.

 

Naturalgas utility mains at Dec. 31, 2008:

 
| **Miles**    | ** ** |
|--------------|------------|
| Transmission |       | 2,300 |   |
| Distribution |       | 21,090 |   |

 

**Item 3 — Legal Proceedings**

** **

Inthe normal course of business, various lawsuits and claims have arisen againstPSCo.  Management, after consultationwith legal counsel, has recorded an estimate of the probable cost of settlementor other disposition for such matters.

 

**AdditionalInformation**

** **

Fora discussion of legal claims and environmental proceedings, see Note 15 to theconsolidated financial statements.  For adiscussion of proceedings involving utility rates, see Public UtilityRegulation and Summary of Recent Federal Regulatory Developments under Item 1and Note 14 to the consolidated financial statements.

 

**Item4 — Submission of Matters to a Vote of Security Holders**

 

Thisis omitted per conditions set forth in general instructions I(1)(a) and (b) ofForm 10-K for wholly owned subsidiaries (reduced disclosure format).

 

**PART II**

** **

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

** **

PSCois a wholly owned subsidiary of Xcel Energy and there is no market for itscommon equity securities.

 

PSCohad dividend restrictions imposed by its debt agreements and FERC rules.  PSCo’s mortgage bonds prohibit dividends orother similar distributions unless covenants relating to PSCo’s capitalizationare met.  Dividends are also subject tothe FERC’s jurisdiction under the Federal Power Act, which prohibits thepayment of dividends out of capital accounts; payment of dividends is allowedout of retained earnings only.

 

Thedividends declared during 2008 and 2007 were as follows:

 
| **Quarter Ended  (Thousands of Dollars)** | ** ** |
|----------------------------------------------------------|------------|
| **March 31, 2008**                             | ** ** | **June 30, 2008** | ** ** | **Sept. 30, 2008** | ** ** | **Dec. 31, 2008** | ** ** |
| $                                                        | 68,144     |   | $ | 67,111 |   | $ | 67,258 |   | $ | 67,417 |   |
|                                                          |            |  |  |  |  |  |  |  |  |  |  |

 
| **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 |   |
|                                                          |            |  |  |  |  |  |  |  |  |  |  |

 

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**Item 6 — Selected Financial Data**

 

Thisis omitted per conditions set forth in general instructions I(1)(a) and (b) ofForm 10-K for wholly owned subsidiaries (reduced disclosure format).

 

**Item 7 — Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

Discussionof financial condition and liquidity for PSCo is omitted per conditions setforth in general instructions I (1)(a) and (b) of Form 10-K forwholly owned subsidiaries. It is replaced with management’s narrative analysisand the results of operations for the current year as set forth in generalinstructions I(2)(a) of Form 10-K for wholly owned subsidiaries(reduced disclosure format).

 

**Forward Looking Information**

** **

Thefollowing discussion and analysis by management focuses on those factors thathad a material effect on the financial condition and results of operations ofPSCo during the periods presented, or are expected to have a material impact inthe future. It should be read in conjunction with the respective accompanyingconsolidated financial statements and notes to the consolidated financialstatements.

 

Exceptfor the historical statements contained in this report, the matters discussedin the following discussion and analysis are forward-looking statements thatare subject to certain risks, uncertainties and assumptions.  Such forward-looking statements are intendedto be identified in this document by the words “anticipate,”  “believe,” “estimate,” “expect,” “intend,” “may,”“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 economicconditions, including the availability of credit and its impact on capitalexpenditures and the ability of PSCo to obtain financing on favorable terms;businessconditions in the energy industry; actions of credit rating agencies;competitive factors, including the extent and timing of the entry of additionalcompetition in the markets served by PSCo; unusual weather; effects ofgeopolitical events, including war and acts of terrorism; state, federal andforeign legislative and regulatory initiatives that affect cost and investmentrecovery, have an impact on rates, have an impact on asset operation orownership or impose environmental compliance conditions; structures that affectthe speed and degree to which competition enters the electric and natural gasmarkets; costs and other effects of legal and administrative proceedings,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, 2008.

 

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

** **

**Results Of Operations**

** **

PSCo’snet income was approximately $339.8 million for 2008, compared withapproximately $296.9 million for 2007. 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 resolution of this dispute resulted in areduction of net income of approximately $36.1 million in 2007.  For further discussion see Note 8 to theconsolidated financial statements.

 

**Electric Revenues and Margin**

** **

Electricfuel and purchased power expenses tend to vary with changing retail andwholesale sales requirements and unit cost changes in fuel and purchasedpower.  Due to fuel and purchased energycost-recovery mechanisms for customers, fluctuations in these costs do notmaterially affect electric margin.

 

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

 
| **(Millions of Dollars)** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------|------------|----------|------------|----------|------------|
| Electric revenues                   |       | $        | 2,983      |     | $          | 2,605 |   |
| Electric fuel and purchased power   |       | (1,819   | )          | (1,436   | )          |
| Electric margin                     |       | $        | 1,164      |     | $          | 1,169 |   |

 

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Thefollowing summarizes the components of the changes in electric revenues andmargin for the year ended Dec. 31:

 

***ElectricRevenues***

** **
| **(Millions of Dollars)**            | ** ** | **2008 vs 2007** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|
| Fuel and purchased power cost recovery         |       | $                          | 364        |   |
| RESA rider                                     |       | 19                         |       |
| Retail sales growth (excluding weather impact) |       | 12                         |       |
| Conservation and non-fuel riders               |       | 10                         |       |
| Trading revenues                               |       | 10                         |       |
| Revenues due to leap year (weather-normalized) |       | 3                          |       |
| Firm wholesale                                 |       | (25                        | )          |
| Estimated impact of weather                    |       | (11                        | )          |
| Other                                          |       | (4                         | )          |
| Total increase in electric revenues            |       | $                          | 378        |   |

 

***ElectricMargin***

 
| **(Millions of Dollars)**            | ** ** | **2008 vs 2007** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|
| Firm wholesale                                 |       | $                          | (15        | ) |
| Estimated impact of weather                    |       | (11                        | )          |
| Trading margin                                 |       | (6                         | )          |
| Transmission revenues, net of expense          |       | (6                         | )          |
| Retail sales growth (excluding weather impact) |       | 12                         |       |
| Conservation and non-fuel riders               |       | 10                         |       |
| Purchased capacity costs                       |       | 5                          |       |
| Margin due to leap year (weather-normalized)   |       | 3                          |       |
| Other                                          |       | 3                          |       |
| Total decrease in electric margin              |       | $                          | (5         | ) |

 

**NaturalGas Revenues and Margin**

** **

Thecost of natural gas tends to vary with changing sales requirements and unitcost of natural gas purchases.  PSCo hasa GCA mechanism for natural gas sales, which recognizes the majority of theeffects of changes in the cost of natural gas purchased for resale and adjustsrevenues to reflect such changes in costs upon request by PSCo.  Therefore, fluctuations in the cost of naturalgas have little effect on natural gas margin.

 

***Natural Gas***—******Thefollowing table details the natural gas revenues and margin:

 
| **(Millions of Dollars)**      | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Natural gas revenues                     |       | $        | 1,374      |     | $          | 1,186 |   |
| Cost of natural gas sold and transported |       | (994     | )          | (832     | )          |
| Natural gas margin                       |       | $        | 380        |     | $          | 354 |   |

 

Thefollowing summarizes the components of the changes in natural gas revenues andmargin for the year ended Dec. 31:

 

***NaturalGas Revenues***

*** ***
| **(Millions of Dollars)**            | ** ** | **2008 vs 2007** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|
| GCA recovery                                   |       | $                          | 163        |   |
| Base rate changes                              |       | 19                         |       |
| Retail sales growth (excluding weather impact) |       | 5                          |       |
| Revenues due to leap year (weather-normalized) |       | 1                          |       |
| Estimated impact of weather                    |       | (1                         | )          |
| Other                                          |       | 1                          |       |
| Total increase in natural gas revenues         |       | $                          | 188        |   |

*** ***

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*** ***

***NaturalGas Margin***

*** ***
| **(Millions of Dollars)**            | ** ** | **2008 vs 2007** | ** ** |
|------------------------------------------------|------------|----------------------------|------------|
| Base rate changes                              |       | $                          | 19         |   |
| Retail sales growth (excluding weather impact) |       | 5                          |       |
| Revenues due to leap year (weather-normalized) |       | 1                          |       |
| Estimated impact of weather                    |       | (1                         | )          |
| Other                                          |       | 2                          |       |
| Total increase in natural gas utility margin   |       | $                          | 26         |   |

 

**Non-FuelOperating Expenses and Other Items**

 

***Other Operating and Maintenance Expenses****—*The following summarizes the components of the changes in otheroperating and maintenance expenses for the year ended Dec. 31:

 
| **(Millions of Dollars)**                        | ** ** | **2008 vs 2007** | ** ** |
|------------------------------------------------------------|------------|----------------------------|------------|
| Lower employee benefit costs                               |       | $                          | (17        | ) |
| Lower donation costs                                       |       | (4                         | )          |
| Lower employee expenses                                    |       | (2                         | )          |
| Higher plant generation costs                              |       | 6                          |       |
| Higher labor costs                                         |       | 6                          |       |
| Higher consulting costs                                    |       | 4                          |       |
| Higher lease costs                                         |       | 3                          |       |
| Higher allowance for bad debts                             |       | 2                          |       |
| Total decrease in other operating and maintenance expenses |       | $                          | (2         | ) |

 

***DSM****—*******DSM expense increase byapproximately $15.0 million for 2008 compared with 2007.  The higher expense isattributable to the ongoing expansion of such programs as designed, in part, tomeet certain regulatory commitments in our various jurisdictions.

 

***Depreciation and Amortization****—*******Depreciation andamortization expense increased by approximately $5.1 million, or 2.1 percent,for 2008 compared with 2007, primarily due to planned system expansion.

 

***Interest and Other Income (Expense), net****—*****Interest and other income(expense), net, increased by approximately $19.1 million for 2008 compared with2007, primarily due to PSRI’s termination of the COLI program in 2007, whicheliminated certain expenses.

 

***Interest Charges and Financing Costs****—*****Interest charges andfinancing costs decreased by approximately $25.9 million, or 14.4 percent, for2008 compared with 2007, primarily due to interest incurred related to the COLIlife insurance settlement, partially offset set by an increase in long-termdebt balances.

 

***AFDC****—* AFDC increased byapproximately $26.9 million for 2008 compared with 2007, primarily dueto the ongoing construction of Comanche 3, which 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 increasedby approximately $32.3 million for 2008 compared with 2007.  The effectivetax rate was 32.9 percent for 2008, compared with 31.2 percent for 2007.  The increase in income tax expense and thehigher effective tax rate for 2008 were primarily due to an increase in pretaxincome.

 

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**Tableof Contents**

** **

**Item7A — Quantitative and Qualitative Disclosures About Market Risk**

** **

**Derivatives,Risk Management and Market Risk**

 

Inthe normal course of business, PSCo is exposed to a variety of marketrisks.  Market risk is the potential lossor gain that may occur as a result of changes in the market or fair value of aparticular instrument or commodity.  Allfinancial and commodity related instruments, including derivatives, are subjectto market risk.  These risks, asapplicable to PSCo, are discussed in further detail in Note 11 to theconsolidated financial statements.

 

PSCois exposed to the impact of changes in price for energy and energy-relatedproducts, which is partially mitigated by the company’s use of commodityderivatives.  Though no materialnon-performance risk currently exists with the counterparties to PSCo’scommodity derivative contracts, the continued turmoil in the financial marketsmay in the future impact that risk to the extent it impacts thosecounterparties.  Continued distress inthe financial markets may also impact the fair value of the master pensiontrust, as well as PSCo’s ability to earn a return on short-term investments ofexcess cash.   Also, the current state ofthe financial markets may negatively impact PSCo’s ability to obtain debtfinancing under favorable terms.

 

***Commodity Price Risk —*** PSCo is exposed tocommodity price risk in its electric and natural gas operations.  Commodity price risk is managed by enteringinto long- and short-term physical purchase and sales contracts for electriccapacity, energy and energy-related products and for various fuels used ingeneration and distribution activities. Commodity price risk is also managed through the use of financialderivative instruments.  PSCo’s riskmanagement policy allows it to manage commodity price risk within eachrate-regulated operation to the extent such exposure exists, as allowed by regulation.

 

***Short-Term Wholesale and Commodity TradingRisk —***PSCo conducts various short-term wholesale andcommodity trading activities, including the purchase and sale of electriccapacity, energy and energy-related instruments.  These marketing activities generally have termsof less than one year in length.  PSCo’srisk management policy allows management to conduct the marketing activitieswithin guidelines and limitations as approved by its risk management committee,which is made up of management personnel not directly involved in the activitiesgoverned by the policy.

 

Thefair value of the commodity trading contracts at Dec. 31, were as follows:

 
| **(Thousands of Dollars)**                                                                                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Fair value of commodity trading contract  assets (liabilities) outstanding at Jan. 1 |       | $        | 3,937      |     | $          | (620 | ) |
| Contracts realized or settled during the period                                                                                   |       | 626      |       | (1,865   | )          |
| Fair value of commodity trading contract additions and changes during  the period                                                 |       | (4,009   | )          | 6,422    |       |
| Fair value of commodity trading contract assets outstanding at  Dec. 31                                                      |       | $        | 554        |     | $          | 3,937 |   |

 

AtDec. 31, 2008, the fair values by source for the commodity trading netasset 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 Value** | ** ** |
|                                 |       | 1                                   |       | $ | (804 | ) | $ | — |   | $ | — |   | $ | — |   | $ | (804 | ) |
|                                 |       | 2                                   |       | 1,358 |   | — |   | — |   | — |   | 1,358 |   |
| Total Futures/Forwards Fair Value    |       |                                |       | $ | 554 |   | $ | — |   | $ | — |   | $ | — |   | $ | 554 |   |

----

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

 

(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 the absenceof 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.

 

Normalpurchases and sales transactions, as defined by SFAS No. 133 and certainother long-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.

 

 

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PSCo’s short-term wholesale and commodity tradingoperations measure the outstanding risk exposure to price changes ontransactions, contracts and obligations that have been entered into, but notclosed, using an industry standard methodology known as Value-at-Risk(VaR).  VaR expresses the potentialchange in fair value on the outstanding transactions, contracts and obligationsover a particular period of time under normal market conditions.

 

VaRis calculated on a consolidated basis. The VaRs for the commodity trading operations were:

 
| ** **                | ** ** | **Year ended**         | ** ** | ** **    | ** ** | **During 2008** | ** ** |
|---------------------------|------------|------------------------|------------|---------------|------------|-----------------|------------|
| **(Millions of Dollars)** | ** ** | **Dec. 31, 2008** | ** ** | **VaR Limit** | ** ** | **Average**     | ** ** | **High** | ** ** | **Low** | ** ** |
| Commodity trading (a)     |       | $                      | 0.30       |          | $          | 5.00            |       | $ | 0.30 |   | $ | 1.14 |   | $ | 0.01 |   |
|                           |            |                        |            |               |            |                 |            |  |  |  |  |  |  |  |  |  |

 
| ** **                 | ** ** | **Year  ended**         | ** ** | ** **     | ** ** | **During  2007** | ** ** |
|----------------------------|------------|-------------------------|------------|----------------|------------|------------------|------------|
| **(Millions  of Dollars)** | ** ** | **Dec. 31,  2007** | ** ** | **VaR  Limit** | ** ** | **Average**      | ** ** | **High** | ** ** | **Low** | ** ** |
| Commodity trading (a)      |       | $                       | 0.26       |           | $          | 5.00             |       | $ | 0.47 |   | $ | 1.45 |   | $ | 0.09 |   |
|                            |            |                         |            |                |            |                  |            |  |  |  |  |  |  |  |  |  |

----

(a)                      Includestransactions for NSP-Minnesota and PSCo.

 

***Interest Rate Risk —***PSCo is subjectto the risk of fluctuating interest rates in the normal course of business. PSCo’srisk management policy allows interest rate risk to be managed through the useof fixed rate debt, floating rate debt and interest rate derivatives such asswaps, caps, collars and put or call options, subject to regulatory approvalwhen required.

 

AtDec. 31, 2008, a 100-basis-point change in the benchmark rate on PSCo’svariable rate debt would impact pretax interest expense by approximately $0.8million.

 

***Credit Risk —***PSCo is alsoexposed to credit risk. Credit risk relates to the risk of loss resulting fromthe nonperformance by a counterparty of its contractual obligations. PSComaintains credit policies intended to minimize overall credit risk and activelymonitors these policies to reflect changes and scope of operations.

 

PSCoconducts standard credit reviews for all counterparties. PSCo employsadditional credit risk control mechanisms when appropriate, such as letters ofcredit, parental guarantees, standardized master netting agreements andtermination provisions that allow for offsetting of positive and negativeexposures. The credit exposure is monitored and, when necessary, the activitywith a specific counterparty is limited until credit enhancement is provided. Therecent volatility in financial markets could increase our credit risk.

 

AtDec. 31, 2008, a 10-percent increase in prices would have resulted in anet mark-to-market increase in credit risk exposure of $0.8 million, while adecrease of 10 percent would have resulted in a decrease of $0.1 million.

 

 

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**Item 8**— **FinancialStatements 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 internalcontrol system was designed to provide reasonable assurance to the company’smanagement and board of directors regarding the preparation and fairpresentation of published financial statements.

 

All internal control systems, no matter how well designed,have inherent limitations. Therefore, even those systems determined to beeffective can provide only reasonable assurance with respect to financialstatement preparation and presentation.

 

PSCo management assessed the effectiveness of thecompany’s internal control over financial reporting as of Dec. 31, 2008. Inmaking this assessment, it used the criteria set forth by the Committee ofSponsoring Organizations of the Treadway Commission (COSO) in *Internal Control — Integrated Framework.*Basedon our assessment, we believe that, as of Dec. 31, 2008, 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’s report was not subject to attestation byPSCo’s registered public accounting firm pursuant to temporary rules ofthe Securities and Exchange Commission that permit PSCo to provide onlymanagement’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* | * * | *Executive Vice President and  Chief Financial Officer* |
| March 2, 2009                       |     | March 2, 2009                                      |

 

 

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

Board of Directors and StockholdersPublic Service Company of Colorado

 

We have audited the accompanying consolidated balance sheets andconsolidated statements of capitalization of Public Service Company of Coloradoand subsidiaries (the “Company”) as of December 31, 2008 and 2007, and therelated consolidated statements of income, common stockholder’s equity andcomprehensive income, and cash flows for each of the three years in the periodended December 31, 2008.  Our audits also included the financialstatement schedule listed in the Index at Item 15.  These financial statements and financialstatement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements andfinancial statement schedule based on our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the financial statements are free of material misstatement.  TheCompany is not required to have, nor were we engaged to perform, an audit ofits internal control over financial reporting.  Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting.  Accordingly, we express nosuch opinion.  An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of Public Service Company ofColorado and subsidiaries as of December 31, 2008 and 2007, and theresults of their operations and their cash flows for each of the three years inthe period ended December 31, 2008, in conformity with accountingprinciples generally accepted in the United States of America.  Also, inour opinion, such financial statement schedule, when considered in relation tothe basic consolidated financial statements taken as a whole, presents fairly,in all material respects, the information set forth therein.

 

As discussed in Note 8 to the consolidated financial statements, theCompany adopted Financial Accounting Standards Board (FASB) Interpretation No. 48,“Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109,” as of January 1, 2007.

 

 

*/s/*DELOITTE & TOUCHE LLP

Minneapolis, Minnesota

March 2, 2009

 

 

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**PUBLIC SERVICE CO. OF COLORADOAND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME**

*(amounts in thousands of dollars)*

 
| ** **                                                                                         | ** ** | **Year Ended Dec. 31** | ** ** |
|----------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                                         | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Operating revenues**                                                                             |       |                                  |       |   |   |   |   |
| Electric                                                                                           |       | $                                     | 2,982,929  |   | $ | 2,605,388 |   | $ | 2,505,445 |   |
| Natural gas                                                                                        |       | 1,373,732                             |       | 1,186,106 |   | 1,262,295 |   |
| Steam and other                                                                                    |       | 36,383                                |       | 36,006 |   | 38,089 |   |
| Total operating revenues                                                                           |       | 4,393,044                             |       | 3,827,500 |   | 3,805,829 |   |
|                                                                                               |       |                                  |       |   |   |   |   |
| **Operating expenses**                                                                             |       |                                  |       |   |   |   |   |
| Electric fuel and purchased power                                                                  |       | 1,818,772                             |       | 1,435,680 |   | 1,489,714 |   |
| Cost of natural gas sold and transported                                                           |       | 994,221                               |       | 831,826 |   | 938,380 |   |
| Cost of sales — steam and other                                                               |       | 15,507                                |       | 15,646 |   | 21,043 |   |
| Other operating and maintenance expenses                                                           |       | 605,008                               |       | 607,467 |   | 569,059 |   |
| Demand-side management program expenses                                                            |       | 32,990                                |       | 18,010 |   | 15,860 |   |
| Depreciation and amortization                                                                      |       | 252,384                               |       | 247,232 |   | 224,056 |   |
| Taxes (other than income taxes)                                                                    |       | 84,597                                |       | 85,261 |   | 88,878 |   |
| Total operating expenses                                                                           |       | 3,803,479                             |       | 3,241,122 |   | 3,346,990 |   |
|                                                                                               |       |                                  |       |   |   |   |   |
| **Operating income**                                                                               |       | 589,565                               |       | 586,378 |   | 458,839 |   |
|                                                                                               |       |                                  |       |   |   |   |   |
| Interest and other income (expense), net                                                           |       | 16,748                                |       | (2,400 | ) | (14,223 | ) |
| Allowance for funds used during construction — equity                                         |       | 36,158                                |       | 14,179 |   | 2,650 |   |
|                                                                                               |       |                                  |       |   |   |   |   |
| **Interest charges and financing costs**                                                           |       |                                  |       |   |   |   |   |
| Interest charges — includes other financing costs of $5,754, $5,599  and $6,029, respectively |       | 154,313                               |       | 180,230 |   | 137,493 |   |
| Allowance for funds used during construction — debt                                           |       | (18,266                               | )          | (13,324 | ) | (13,386 | ) |
| Total interest charges and financing costs                                                         |       | 136,047                               |       | 166,906 |   | 124,107 |   |
|                                                                                               |       |                                  |       |   |   |   |   |
| Income before income taxes                                                                         |       | 506,424                               |       | 431,251 |   | 323,159 |   |
| Income taxes                                                                                       |       | 166,628                               |       | 134,357 |   | 81,701 |   |
| **Net income**                                                                                     |       | $                                     | 339,796    |   | $ | 296,894 |   | $ | 241,458 |   |

 

See Notes to Consolidated Financial Statements

 

 

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**PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF CASH FLOWS***(amounts in thousands of dollars)*

 
| ** **                                                                     | ** ** | **Year Ended Dec. 31** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                     | ** ** | **2008**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Operating activities**                                                       |       |                                  |       |   |   |   |   |
| Net income                                                                     |       | $                                     | 339,796    |   | $ | 296,894 |   | $ | 241,458 |   |
| Adjustments to reconcile net income to cash provided by operating  activities: |       |                                  |       |   |   |   |   |
| Depreciation and amortization                                                  |       | 293,863                               |       | 272,850 |   | 253,725 |   |
| Deferred income taxes                                                          |       | 85,875                                |       | 79,359 |   | 76,040 |   |
| Amortization of investment tax credits                                         |       | (2,760                                | )          | (3,869 | ) | (3,949 | ) |
| Allowance for equity funds used during construction                            |       | (36,158                               | )          | (14,179 | ) | (2,650 | ) |
| Allowance for bad debts                                                        |       | 28,372                                |       | 26,149 |   | 26,944 |   |
| Net realized and unrealized hedging and derivative transactions                |       | (19,012                               | )          | 2,583 |   | (19,497 | ) |
| Changes in operating assets and liabilities:                                   |       |                                  |       |   |   |   |   |
| Accounts receivable                                                            |       | (10,469                               | )          | (71,005 | ) | 106,747 |   |
| Accrued unbilled revenues                                                      |       | 5,665                                 |       | (160,830 | ) | 35,253 |   |
| Inventories                                                                    |       | (24,028                               | )          | 29,673 |   | 34,865 |   |
| Recoverable purchased natural gas and electric energy costs                    |       | 6,535                                 |       | 143,970 |   | 72,566 |   |
| Prepayments and other                                                          |       | 3,438                                 |       | (3,198 | ) | (2,591 | ) |
| Accounts payable                                                               |       | (607                                  | )          | 73,108 |   | (187,571 | ) |
| Deferred purchased natural gas and electric energy costs                       |       | 78,719                                |       | 30,132 |   | (1,313 | ) |
| Net regulatory assets and liabilities                                          |       | (10,310                               | )          | 26,021 |   | (36,008 | ) |
| Other current liabilities                                                      |       | 3,700                                 |       | 10,585 |   | 20,569 |   |
| Change in other noncurrent assets                                              |       | 436                                   |       | (15,878 | ) | (2,154 | ) |
| Change in other noncurrent liabilities                                         |       | (47,743                               | )          | (44,964 | ) | (29,893 | ) |
| Net cash provided by operating activities                                      |       | 695,312                               |       | 677,401 |   | 582,541 |   |
|                                                                           |       |                                  |       |   |   |   |   |
| **Investing activities**                                                       |       |                                  |       |   |   |   |   |
| Capital/construction expenditures                                              |       | (809,738                              | )          | (806,794 | ) | (537,920 | ) |
| Allowance for equity funds used during construction                            |       | 36,158                                |       | 14,179 |   | 2,650 |   |
| Investments in utility money pool arrangement                                  |       | (439,500                              | )          | (721,700 | ) | (5,600 | ) |
| Receipts from utility money pool arrangement                                   |       | 540,100                               |       | 621,100 |   | 5,600 |   |
| Other investments                                                              |       | 23,716                                |       | (4,451 | ) | 9,869 |   |
| Net cash used in investing activities                                          |       | (649,264                              | )          | (897,666 | ) | (525,401 | ) |
|                                                                           |       |                                  |       |   |   |   |   |
| **Financing activities**                                                       |       |                                  |       |   |   |   |   |
| Proceeds from (repayment of) short-term borrowings — net                  |       | (231,007                              | )          | (101,493 | ) | 36,896 |   |
| Proceeds from issuance of long-term debt                                       |       | 592,389                               |       | 343,711 |   | — |   |
| Repayment of long-term debt, including reacquisition premiums                  |       | (301,445                              | )          | (101,379 | ) | (126,334 | ) |
| Borrowings under utility money pool arrangement                                |       | 755,600                               |       | 486,500 |   | 1,426,800 |   |
| Repayments under utility money pool arrangement                                |       | (714,600                              | )          | (486,500 | ) | (1,426,800 | ) |
| Capital contributions from parent                                              |       | 127,529                               |       | 347,924 |   | 227,272 |   |
| Dividends paid to parent                                                       |       | (270,966                              | )          | (263,859 | ) | (195,625 | ) |
| Net cash provided by (used in) financing activities                            |       | (42,500                               | )          | 224,904 |   | (57,791 | ) |
|                                                                           |       |                                  |       |   |   |   |   |
| Net increase (decrease) in cash and cash equivalents                           |       | 3,548                                 |       | 4,639 |   | (651 | ) |
| Cash and cash equivalents at beginning of year                                 |       | 7,650                                 |       | 3,011 |   | 3,662 |   |
| Cash and cash equivalents at end of year                                       |       | $                                     | 11,198     |   | $ | 7,650 |   | $ | 3,011 |   |
|                                                                           |       |                                  |       |   |   |   |   |
| Supplemental disclosure of cash flow information:                              |       |                                  |       |   |   |   |   |
| Cash paid for interest (net of amounts capitalized)                            |       | $                                     | 131,098    |   | $ | 130,709 |   | $ | 125,284 |   |
| Cash paid for income taxes (net of refunds received)                           |       | 90,187                                |       | 61,718 |   | (6,640 | ) |
|                                                                           |       |                                  |       |   |   |   |   |
| Supplemental disclosure of non-cash investing transactions:                    |       |                                  |       |   |   |   |   |
| Property, plant and equipment additions in accounts payable                    |       | $                                     | 16,379     |   | $ | 10,902 |   | $ | 5,367 |   |

 

See Notes toConsolidated Financial Statements

 

 

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**PUBLIC SERVICE CO. OF COLORADO ANDSUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS**

***(amounts in thousands of dollars)***

 
| ** **                                                                            | ** ** | **Dec. 31, 2008** | ** ** | **Dec. 31, 2007** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Assets**                                                                            | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Current assets:                                                                       |       |                        |       |                        |       |
| Cash and cash equivalents                                                             |       | $                           | 11,198     |                        | $          | 7,650 |   |
| Investments in utility money pool arrangement                                         |       | —                      |       | 100,600                     |       |
| Accounts receivable, net                                                              |       | 362,401                     |       | 375,265                     |       |
| Accounts receivable from affiliates                                                   |       | 29,545                      |       | 34,584                      |       |
| Accrued unbilled revenues                                                             |       | 354,526                     |       | 360,191                     |       |
| Inventories                                                                           |       | 233,948                     |       | 209,920                     |       |
| Deferred income taxes                                                                 |       | 64,181                      |       | 59,564                      |       |
| Derivative instruments valuation                                                      |       | 22,793                      |       | 33,635                      |       |
| Prepayments and other                                                                 |       | 15,110                      |       | 31,708                      |       |
| Total current assets                                                                  |       | 1,093,702                   |       | 1,213,117                   |       |
|                                                                                  |       |                        |       |                        |       |
| Property, plant and equipment, net                                                    |       | 7,592,111                   |       | 7,029,155                   |       |
|                                                                                  |       |                        |       |                        |       |
| Other assets:                                                                         |       |                        |       |                        |       |
| Regulatory assets                                                                     |       | 943,012                     |       | 539,989                     |       |
| Derivative instruments valuation                                                      |       | 119,534                     |       | 141,410                     |       |
| Other                                                                                 |       | 46,610                      |       | 55,759                      |       |
| Total other assets                                                                    |       | 1,109,156                   |       | 737,158                     |       |
| Total assets                                                                          |       | $                           | 9,794,969  |                        | $          | 8,979,430 |   |
| ** **                                                                            | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| **Liabilities and Equity**                                                            | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                  |       |                        |       |                        |       |
| Current portion of long-term debt                                                     |       | $                           | 201,510    |                        | $          | 301,445 |   |
| Short-term debt                                                                       |       | 40,000                      |       | 271,007                     |       |
| Borrowings under utility money pool arrangement                                       |       | 41,000                      |       | —                      |       |
| Accounts payable                                                                      |       | 470,158                     |       | 466,710                     |       |
| Accounts payable to affiliates                                                        |       | 28,906                      |       | 27,445                      |       |
| Deferred purchased natural gas and electric energy costs                              |       | 113,276                     |       | 34,411                      |       |
| Taxes accrued                                                                         |       | 72,105                      |       | 76,569                      |       |
| Dividends payable to parent                                                           |       | 67,417                      |       | 68,453                      |       |
| Derivative instruments valuation                                                      |       | 28,776                      |       | 21,521                      |       |
| Accrued interest                                                                      |       | 50,542                      |       | 45,486                      |       |
| Other                                                                                 |       | 78,192                      |       | 74,568                      |       |
| Total current liabilities                                                             |       | 1,191,882                   |       | 1,387,615                   |       |
|                                                                                  |       |                        |       |                        |       |
| Deferred credits and other liabilities:                                               |       |                        |       |                        |       |
| Deferred income taxes                                                                 |       | 1,204,861                   |       | 1,090,740                   |       |
| Deferred investment tax credits                                                       |       | 52,406                      |       | 55,166                      |       |
| Regulatory liabilities                                                                |       | 514,445                     |       | 516,401                     |       |
| Pension and employee benefit obligations                                              |       | 527,264                     |       | 231,232                     |       |
| Customer advances                                                                     |       | 290,937                     |       | 280,270                     |       |
| Derivative instruments valuation                                                      |       | 62,126                      |       | 84,190                      |       |
| Asset retirement obligations                                                          |       | 61,505                      |       | 44,267                      |       |
| Other                                                                                 |       | 22,491                      |       | 12,063                      |       |
| Total deferred credits and other liabilities                                          |       | 2,736,035                   |       | 2,314,329                   |       |
|                                                                                  |       |                        |       |                        |       |
| Commitments and contingent liabilities                                                |       |                        |       |                        |       |
| Capitalization:                                                                       |       |                        |       |                        |       |
| Long-term debt                                                                        |       | 2,289,251                   |       | 1,891,644                   |       |
| Common stock — authorized 100 shares of $0.01 par value; outstanding  100 shares |       | —                      |       | —                      |       |
| Additional paid in capital                                                            |       | 2,886,657                   |       | 2,759,128                   |       |
| Retained earnings                                                                     |       | 683,516                     |       | 614,267                     |       |
| Accumulated other comprehensive income                                                |       | 7,628                       |       | 12,447                      |       |
| Total common stockholder’s equity                                                |       | 3,577,801                   |       | 3,385,842                   |       |
| Total liabilities and equity                                                          |       | $                           | 9,794,969  |                        | $          | 8,979,430 |   |

 

See Notes to Consolidated Financial Statements

 

 

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**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDER’S EQUITYAND COMPREHENSIVE INCOME**

*(amounts in thousands of dollars, exceptshare data)*

 
| ** **                                                                              | ** ** | **Common Stock** | ** ** | **Additional  Paid in** | ** ** | **Retained** | ** ** | **Accumulated  Other  Comprehensive** | ** ** | **Total  Common  Stockholder’s** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------------|------------|--------------|------------|---------------------------------------|------------|---------------------------------------|------------|
| ** **                                                                              | ** ** | **Shares**            | ** ** | **Amount**                   | ** ** | **Capital**  | ** ** | **Earnings**                          | ** ** | **Income (Loss)**                | ** ** | **Equity** | ** ** |
| **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 gain — 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 |   |
| EITF 06-4 adoption, net of tax of $(391)                                                |       |                  |       |                         |       |         |       | (617                                  | )          |                                  |       | (617 | ) |
| Net income                                                                              |       |                  |       |                         |       |         |       | 339,796                               |       |                                  |       | 339,796 |   |
| Net derivative instrument fair value changes during the period, net  of tax of $(2,910) |       |                  |       |                         |       |         |       |                                  |       | (4,819                                | )          | (4,819 | ) |
| Comprehensive income for 2008                                                           |       |                  |       |                         |       |         |       |                                  |       |                                  |       | 334,977 |   |
| Common dividends declared to parent                                                     |       |                  |       |                         |       |         |       | (269,930                              | )          |                                  |       | (269,930 | ) |
| Contribution of capital by parent                                                       |       |                  |       |                         |       | 127,529      |       |                                  |       |                                  |       | 127,529 |   |
| **Balance at Dec. 31, 2008**                                                       |       | 100                   |       | $                            | —     |         | $          | 2,886,657                             |       | $                                     | 683,516    |   | $ | 7,628 |   | $ | 3,577,801 |   |

 

See Notes to Consolidated Financial Statements

 

 

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**PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OFCAPITALIZATION**

***(amounts in thousands of dollars)***

 
| ** **                                                                                             | ** ** | **Dec. 31** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------|------------|
| ** **                                                                                             | ** ** | **2008**         | ** ** | **2007** | ** ** |
| **Long-Term Debt**                                                                                     |       |             |       |   |   |
| First Mortgage Bonds, Series due:                                                                 |       |             |       |   |   |
| Oct. 1, 2008, 4.375%                                                                              |       | $                | —     |   | $ | 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 |   |
| Aug. 1, 2018, 5.8%                                                                                |       | 300,000          |       | — |   |
| Jan. 1, 2019, 5.1% (a)                                                                            |       | 48,750           |       | 48,750 |   |
| Sept. 1, 2037, 6.25%                                                                                   |       | 350,000          |       | 350,000 |   |
| Aug. 1, 2038, 6.5%                                                                                |       | 300,000          |       | — |   |
| Unsecured Senior A Notes, due July 15, 2009, 6.875%                                               |       | 200,000          |       | 200,000 |   |
| Capital lease obligations, 11.2% due in installments through 2028                                      |       | 43,423           |       | 44,868 |   |
| Unamortized discount                                                                                   |       | (5,912           | )          | (5,029 | ) |
| Total                                                                                                  |       | 2,490,761        |       | 2,193,089 |   |
| Less current maturities                                                                                |       | 201,510          |       | 301,445 |   |
| Total long-term debt                                                                                   |       | $                | 2,289,251  |   | $ | 1,891,644 |   |
|                                                                                                   |       |             |       |   |   |
| **Common Stockholder’s Equity**                                                                   |       |             |       |   |   |
| Common stock — authorized 100 shares of $0.01 par value; outstanding  100 shares in 2008 and 2007 |       | $                | —     |   | $ | — |   |
| Additional paid in capital                                                                             |       | 2,886,657        |       | 2,759,128 |   |
| Retained earnings                                                                                      |       | 683,516          |       | 614,267 |   |
| Accumulated other comprehensive income                                                                 |       | 7,628            |       | 12,447 |   |
| Total common stockholder’s equity                                                                 |       | $                | 3,577,801  |   | $ | 3,385,842 |   |

----

(a)                      Pollutioncontrol financing.

 

See Notes to Consolidated Financial Statements

 

 

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**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

 

**1.  Summary of Significant Accounting Policies**

** **

***Business and System of 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 regulation by the FERC andthe CPUC.  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 materialrespects.

 

***Principles of Consolidation*****— 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 energy are generally recorded whenservice is rendered or energy is delivered to customers.  However, the determination of the energysales to individual customers is based on the reading of their meter, whichoccurs 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 presents its revenue net of any exciseor other fiduciary-type taxes or fees.

 

PSCohas various rate-adjustment mechanisms in place that currently provide for therecovery of purchased natural gas and electric fuel and purchased energycosts.  These cost-adjustment tariffs mayincrease or decrease the level of costs recovered through base rates, and arerevised periodically for any difference between the total amount collectedunder the clauses and the recoverable costs incurred.  Where applicable under governing stateregulatory commission rate orders, fuel costs over-recoveries (the excess offuel revenue billed to customers over fuel costs incurred) are deferred ascurrent regulatory liabilities and under-recoveries (the excess of fuel costsincurred over fuel revenues billed to customers) are deferred as currentregulatory assets.  A summary ofsignificant rate-adjustment mechanisms follows:

 

·              PSCo recovers all prudentlyincurred electric fuel and purchased energy costs through the ECA for thecompany’s retail jurisdiction.  The ECAis an incentive adjustment mechanism that compares actual fuel and purchasedenergy expense in a calendar year to a benchmark formula.  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 anycalendar year will not exceed $11.25 million. The ECA mechanism is revised quarterly and interest accrues monthly onthe average deferred balance.  The ECAwill expire at the earlier of rates taking effect after Comanche 3 is placed inservice or Dec. 31, 2010.

 

·     PSCogenerally recovers all purchased capacity costs through the PCCA for the company’sretail jurisdiction. The PCCA mechanism is revised annually.

 

·              PSCo’s rates includeannual adjustments for the recovery of conservation and energy-managementprogram costs, which are reviewed annually. PSCo is allowed to recover certaincosts associated with renewable energy resources through a specific retail raterider. In January 2008, a new recovery mechanism for transmissioncommenced.  The TCA permits PSCo torecover costs associated with investment in transmission facilities made after March 2007through a rate rider.

 

·              PSCo sells firmpower and energy in wholesale markets, which are regulated by the FERC.  Certain of these rates include monthlywholesale fuel cost-recovery mechanisms.

 

***Commodity Trading Operations*****— All applicable gains and losses related to commodity tradingactivities, whether or not settled physically, are shown on a net basis in theconsolidated statements of income.

 

Pursuantto the JOA approved by the FERC, some of the commodity trading margins fromPSCo are apportioned to NSP-Minnesota and SPS. Commodity trading activities are not associated with energy producedfrom PSCo’s generation assets or energy and capacity purchased to serve nativeload.  Commodity trading contracts arerecorded at fair market value in accordance with SFAS No. 133 *Accounting for Derivative Instruments and HedgingActivities* (SFAS No. 133). In addition, commodity-trading results include the impact of allmargin-sharing mechanisms.  For moreinformation, see Note 11 to the consolidated financial statements.

 

***Fair Value Measurements******—*** PSCo presents cashequivalents and commodity derivatives at estimated fair values in itsconsolidated financial statements.  Cashequivalents are recorded at cost plus accrued interest to approximate fairvalue.  Changes in the observed tradingprices and liquidity of cash equivalents, including commercial paper and moneymarket funds, are also monitored as additional support for determining fairvalue, and losses are recorded in earnings if fair value falls below recordedcost.  For commodity derivatives, themost observable inputs available are generally used to determine 

 

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thefair value of each contract.  In theabsence of a quoted price for an identical contract in an active market, PSComay use quoted prices for similar contracts, or internally prepared valuationmodels as primary inputs to determine fair value.

 

***Types of and Accounting for DerivativeInstruments****—*PSCo uses derivativeinstruments in connection with its interest rate, utility commodity price,vehicle fuel price, short-term wholesale and commodity trading activities,including forward contracts, futures, swaps and options.  All derivative instruments not designated andqualifying for the normal purchases and normal sales exception, as defined bySFAS No. 133, are recorded on the consolidated balance sheets at fairvalue as derivative instruments valuation. This includes certain instruments used to mitigate market risk for theutility operations and all instruments related to the commodity tradingoperations.  The classification ofchanges in fair value for those derivative instruments is dependent on the designationof a qualifying hedging relationship. Changes in fair value of derivative instruments not designated in aqualifying hedging relationship are reflected in current earnings or as aregulatory asset or liability.  Theclassification is dependent on the applicability of specific regulation.

 

Gainsor losses on hedging transactions for the sales of energy or energy-relatedproducts are primarily recorded as a component of revenue; hedging transactionsfor fuel used in energy generation are recorded as a component of fuel costs;hedging transactions for natural gas purchased for resale are recorded as acomponent of natural gas costs; vehicle fuel costs are recorded as a componentof capital project or O&M costs; and interest rate hedging transactions arerecorded as a component of interest expense. PSCo is allowed to recover in electric or natural gas rates the costs ofcertain financial instruments purchased to reduce commodity cost volatility.

 

*Cash Flow Hedges* — Qualifying hedgingrelationships are designated as a hedge of a forecasted transaction or futurecash flow (cash flow hedge).  Thedesignation of a cash flow hedge permits changes in fair value to be recordedwithin other comprehensive income (OCI), to the extent the hedge is effective,or deferred as a regulatory asset or liability.

 

SFASNo. 133 requires that the hedging relationship be highly effective andthat a company formally designate a hedging relationship to apply hedgeaccounting.  PSCo formally documents allhedging 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 hedging transaction.  Inaddition, at inception and on a quarterly basis, PSCo formally assesses whetherthe derivative instruments being used are highly effective in offsettingchanges in the cash flows of the hedged items.

 

Changesin the fair value of a derivative designated and qualified as a cash flowhedge, to the extent effective are included in OCI, or deferred as a regulatoryasset or liability until earnings are affected by the hedged transaction.  PSCo discontinues hedge accountingprospectively when it has determined that a derivative no longer qualifies asan effective hedge, or when it is no longer probable that the hedged forecastedtransaction will occur.  To test theeffectiveness of hedges, a hypothetical hedge is used to mirror all thecritical terms of the hedged transaction and the dollar-offset method isutilized to assess the effectiveness of the actual hedge at inception and on anongoing basis.  Gains and losses relatedto discontinued hedges that were previously deferred in OCI or deferred asregulatory assets or liabilities will remain deferred until the hedgedtransaction is reflected in earnings, unless it is probable that the hedgedforecasted transaction will not occur, in which case associated deferredamounts are immediately recognized in current earnings.

 

*Normal Purchases and Normal Sales* — PSCo entersinto contracts for the purchase and sale of commodities for use in theirbusiness 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.

 

PSCoevaluates all of its contracts at inception to determine if they arederivatives and, if so, if they qualify to meet the normal purchases and normalsales designation requirements under SFAS No. 133.  None of the contracts entered into within thecommodity trading operations qualify for a normal purchases and normal salesdesignation.

 

Forfurther discussion of PSCo’s risk management and derivative activities see Note11 to the consolidated financial statements.

 

***Property, Plant, and Equipment andDepreciation*****— Property, plant andequipment is stated at original cost. The cost of plant includes direct labor and materials, contracted work,overhead costs and applicable interest expense. The cost of plant retired is charged to accumulated depreciation andamortization.  Regulatory obligations toincur removal costs 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 

 

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unitsof property 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 include costs associated with property held for future use.

 

PSCorecords depreciation expense related to its plant by using the straight-linemethod over the plant’s useful life. Actuarial and semi-actuarial life studies are performed on a periodicbasis and submitted to the state and federal commissions for review.  Upon acceptance by the various commissions,the resulting lives and net salvage rates are used to calculatedepreciation.  Depreciation expense,expressed as a percentage of average depreciable property, for the years ended Dec. 31,2008, 2007 and 2006 was 2.7 percent, 2.7 percent and 2.6 percent, respectively.

 

***AFDC*****— AFDCrepresents the cost of capital used to finance utility constructionactivity.  AFDC is computed by applying acomposite pretax rate to qualified construction work in progress.  The amount of AFDC capitalized as a utilityconstruction cost is credited to other nonoperating income (for equity capital)and interest charges (for debt capital). AFDC amounts capitalized are included in PSCo’s rate base forestablishing utility service rates.

 

***Environmental Costs*****— Environmental costs are recorded on an undiscounted basis when it isprobable PSCo is liable for the costs and the liability can reasonably beestimated.  Costs may be deferred as aregulatory asset if it is probable that the costs will be recovered fromcustomers in future rates.  Otherwise,the costs are expensed.  If anenvironmental expense is related to facilities currently in use, such asemission-control equipment, the cost is capitalized and depreciated over thelife of the plant, assuming the costs are recoverable in future rates or futurecash flow.

 

Estimatedremediation costs, excluding inflationary increases, are recorded.  The estimates are based on experience, anassessment of the current situation and the technology currently available foruse in the remediation.  The recordedcosts are regularly adjusted as estimates are revised and remediationproceeds.  If several designatedresponsible parties exist, costs are estimated and recorded only for PSCo’sexpected share of the cost.  Any futurecosts of restoring sites where operation may extend indefinitely are treated asa capitalized cost of plant retirement. The depreciation expense levels recoverable in rates include a provisionfor removal expenses, which may include final remediation costs.  Removal costs recovered in rates areclassified as a regulatory liability.

 

***Legal Costs*** — Litigationaccruals are recorded when it is probable PSCo is liable for the costs and theliability can be reasonably estimated. External legal fees related to settlements are expensed as incurred.

 

***Income Taxes*****— PSCo accounts for income taxes using the asset and liability methodunder FAS 109, which requires the recognition of deferred tax assets andliabilities for the expected future tax consequences of events that have beenincluded in the financial statements. PSCo defers income taxes for all temporary differences between pretaxfinancial and taxable income, and between the book and tax bases of assets andliabilities.  PSCo uses the tax ratesthat are scheduled to be in effect when the temporary differences are expectedto turn around, or reverse. The effect of a change in tax rates on deferred taxassets and liabilities is recognized in income in the period that includes theenactment date.

 

Deferredtax assets are reduced by a valuation allowance if, based on the weight ofavailable evidence, it is more likely than not that some portion or all of thedeferred tax asset will not be realized. In making such a determination, allavailable positive and negative evidence, including scheduled reversals ofdeferred tax liabilities, projected future taxable income, tax planningstrategies and recent financial operations, is considered.

 

Investmenttax credits are deferred and their benefits amortized over the book depreciablelives of the related property.  Utilityrate regulation also has created certain regulatory assets and liabilitiesrelated to income taxes, which are summarized in Note 16 to the consolidatedfinancial statements.  For moreinformation on income taxes, see Note 8 to the consolidated financialstatements.

 

InJuly 2006, the FASB issued FIN 48, which prescribes how a company shouldrecognize, measure, present and disclose uncertain tax positions that suchcompany has taken or expects to take in its income tax returns. FIN 48 requiresthat only income tax benefits that meet the “more likely than not” recognitionthreshold be recognized or continue to be recognized on its effective date. Asrequired, PSCo adopted FIN 48 as of Jan. 1, 2007 and the initialderecognition amounts were reported as a cumulative effect of a change inaccounting principle. The cumulative effect of the change, which was reportedas an adjustment to the beginning balance of retained earnings, was notmaterial. Following implementation, the ongoing recognition of changes inmeasurement of uncertain tax positions will be reflected as a component ofincome tax expense.

 

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PSCoreports interest and penalties related to income taxes within the interestcharges section in the consolidated statements of income.

 

XcelEnergy and its subsidiaries, including PSCo, file consolidated federal incometax returns and combined and separate state income tax returns.  Federal income taxes paid by Xcel Energy, asparent of the Xcel Energy consolidated group, are allocated to the Xcel Energysubsidiaries based on separate company computations of tax.  A similar allocation is made for state incometaxes paid by Xcel Energy in connection with combined state filings. Theholding company also allocates its own net income tax benefits to its directsubsidiaries based on the positive tax liability of each company.

 

***Use of Estimates*****— In recording transactions and balances resulting from businessoperations, PSCo uses estimates based on the best information available.  Estimates are used for such items as plantdepreciable lives, AROs, decommissioning, tax provisions, uncollectibleamounts, environmental costs, unbilled revenues, jurisdictional fuel and energycost allocations and actuarially determined benefit costs.  The recorded estimates are revised whenbetter information becomes available or when actual amounts can bedetermined.  Those revisions can affectoperating results.  The depreciable livesof certain plant assets are reviewed annually, and revised, if appropriate.

 

***Cash and Cash Equivalents*****— PSCo considers investments in certain instruments, includingcommercial paper and money market funds, with a remaining maturity of threemonths or less at the time of purchase, to be cash equivalents.

 

***Restricted Cash*** — At Dec. 31,2007, PSCo had restricted cash of $23.7 million.  The restricted cash balance primarilyrepresents deposits held in conjunction with short-term wholesale and commoditytrading activities.  This balance ispresented as a component of other assets on the consolidated balance sheets.

 

***Inventory*****— All inventories are recorded at average cost.

 

***Regulatory Accounting*****— PSCo accounts for certain income and expense items in accordance withstatement of financial accounting standards SFAS No. 71 — *Accounting for the Effects of Certain Types ofRegulation* (SFAS No. 71). Under SFAS No. 71:

 

·              Certain costs,which would otherwise be charged to expense, are deferred as regulatory assetsbased on the expected ability to recover them in future rates; and

 

·              Certaincredits, which would otherwise be reflected as income, are deferred asregulatory liabilities based on the expectation they will be returned tocustomers in future rates.

 

Estimatesof recovering deferred costs and returning deferred credits are based onspecific ratemaking decisions or precedent for each item.  Regulatory assets and liabilities areamortized consistent with the period of expected regulatory treatment.

 

Ifrestructuring or other changes in the regulatory environment occur, PSCo may nolonger be eligible to apply this accounting treatment and may be required toeliminate such regulatory assets and liabilities from its balance sheet.  Such changes could have a material effect onPSCo’s results of operations in the period the write-off is recorded.  See more discussion of regulatory assets andliabilities at Note 16 to the consolidated financial statements.

 

***Deferred Financing Costs*****— Other assets include deferred financing costs, net of amortization,of approximately $16.4 million and $12.7 million at Dec. 31, 2008 and2007, respectively.  PSCo is amortizingthese financing costs over the remaining maturity periods of the related debt.

 

Debtpremiums, discounts, expenses and amounts received or paid to settle hedges areamortized over the life of the related debt. The premiums and costs associated with refinanced debt are deferred andamortized over the life of the related new issuance, in accordance withregulatory guidelines.  If PSCoextinguishes the debt, all unamortized balances shall be expensed at the timeof the redemption.

 

***Accounts Receivable and Allowance for Bad Debts*****—**Accounts receivable arestated at the actual billed amount net of write-offs and an allowance for baddebts.  PSCo establishes an allowance foruncollectible receivables based on a reserve policy that reflects its expectedexposure to the credit risk of customers.

 

***Renewable Energy Credits (RECs)******—***RECs are******marketable environmental commodities that represent proofthat energy was generated from eligible renewable energysources.  RECs are awarded upon deliveryof the associated energyand can be bought and sold. RECs are typically used asa form of measurement of compliance to Renewable Portfolio Standards (RPS) 

 

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enactedby those states that are encouraging construction and consumption of renewableenergy, but can also be sold separately from the energy produced.  Currently, PSCo acquires RECs from thegeneration 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 expense.  The net margin on salesof RECs for trading purposes is recorded as electric utility operatingrevenues, net of any margin sharing requirements.***

*** ***

***Emission Allowances*****—**Emission allowances are recorded at cost, includingthe annual SO2 and NOx emission allowance entitlementreceived at no cost from the EPA.  PSCofollows the inventory accounting model for all allowances.  The sales of allowances are reported in theoperating activities section of the consolidated statements of cash flows.  The net margin on sales of emissionallowances is included in electric utility operating revenues as it is integralto the production process of energy and our revenue optimization strategy forour utility operations.

 

***Reclassifications****** —*** DSM program expenses were reclassified as a separateitem from depreciation and amortization on the consolidated statements of income. Activity from the allowance for bad debtswas reclassified from the change in accounts receivable on the consolidatedstatements of cash flows. These reclassifications did not have animpact on total operating expenses or net cash provided by operating activities.

 

**2.**             Accounting Pronouncements

** **

***RecentlyIssued***

** **

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

 

***Noncontrolling Interests in ConsolidatedFinancial Statements, an Amendment of ARB No. 51 (SFAS No. 160) —***In December 2007, the FASB issued SFAS No. 160, whichestablishes accounting and reporting standards that require the ownershipinterest in subsidiaries held by parties other than the parent be clearlyidentified and presented in the consolidated balance sheets within equity, butseparate from the parent’s equity; the amount of consolidated net incomeattributable to the parent and the noncontrolling interest be clearlyidentified and presented on the face of the consolidated statement of earnings;and changes in a parent’s ownership interest while the parent retains itscontrolling financial interest in its subsidiary be accounted for consistentlyas equity transactions. This statement is effective for fiscal years andinterim periods beginning on or after Dec. 15, 2008. PSCo does not expectthe implementation of SFAS No. 160 to have a material impact on itsconsolidated financial statements.

 

***Disclosures about Derivative Instruments and HedgingActivities, an Amendment of FASB Statement No. 133 (SFAS No. 161) —***In March 2008, the FASB issued SFAS No. 161,which is intended to enhance disclosures to help users of the financialstatements better understand how derivative instruments and hedging activitiesaffect an entity’s financial position, financial performance and cash flows.SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133,*Accounting for Derivative Instruments andHedging Activities*, to require disclosures of objectives andstrategies for using derivatives, gains and losses on derivative instruments,and credit-risk-related contingent features in derivative agreements. SFAS No. 161is effective for fiscal years and interim periods beginning after Nov. 15,2008, with early application encouraged. PSCo does not expect theimplementation of SFAS No. 161 to have a material impact on itsconsolidated financial statements.

 

***Employers’ Disclosures about Postretirement Benefit PlanAssets (FSP FAS 132(R)-1) —***In December 2008, the FASB issued FSP FAS132(R)-1, which amends SFAS No. 132 (revised 2003), *Employers’ Disclosures about Pensions and OtherPostretirement Benefits,*to expand on an employer’s requireddisclosures about plan assets of a defined benefit pension or otherpostretirement plan to include investment policies and strategies, majorcategories of plan assets, information regarding fair value measurements, andsignificant concentrations of credit risk. FSP FAS 132(R)-1 is effective for fiscal years ending 

 

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after Dec. 15,2009.   PSCo does not expect theimplementation of FSP FAS 132(R)-1 to have a material impact on itsconsolidated financial statements.

 

***RecentlyAdopted***

** **

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

 

OnJan. 1, 2008, PSCo adopted SFAS No. 157 for all assets andliabilities measured at fair value except for non-financial assets andnon-financial liabilities measured at fair value on a non-recurring basis, aspermitted by FSP FAS 157-2, *Effective Dateof FASB Statement No. 157*. The adoption did not have a material impact on PSCo’s consolidatedfinancial statements.  For additionaldiscussion and SFAS No. 157 required disclosures, see Note 13 to theconsolidated financial statements.

 

***The Fair Value Option for Financial Assetsand Financial Liabilities — Including an Amendment of FASB Statement No. 115(SFAS No. 159)*** — In February 2007, the FASBissued SFAS No. 159, which provides companies with an option to measure,at specified election dates, many financial instruments and certain other itemsat fair value that are not currently measured at fair value. A company thatadopts SFAS No. 159 will report unrealized gains and losses on items forwhich the fair value option has been elected in earnings at each subsequentreporting date. This statement also establishes presentation and disclosurerequirements designed to facilitate comparisons between entities that choose differentmeasurement attributes for similar types of assets and liabilities. Thisstatement was effective for fiscal years beginning after Nov. 15, 2007.PSCo adopted SFAS No. 159 on Jan. 1, 2008, and the adoption did nothave a material impact on its consolidated financial statements.

 

***Determining the Fair Value of a FinancialAsset When the Market for That Asset is Not Active  (FSP FAS 157-3)*** — In October 2008,the FASB issued FSP FAS 157-3, which clarifies the application of SFAS No. 157in a market that is not active. FSP FAS 157-3 was effective immediately uponissuance, and applied to prior periods for which financial statements had notyet been issued.  PSCo adopted FSP FAS157-3 as of Sept. 30, 2008, and the adoption did not have a material impact onits consolidated financial statements.

 

***Accounting for Deferred Compensation and PostretirementBenefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements(Emerging Issues Task Force (EITF) Issue No. 06-4)*****—**In June 2006, the EITF reached aconsensus on EITF No. 06-4, which provides guidance on the recognition ofa liability and related compensation costs for endorsement split-dollar lifeinsurance policies that provide a benefit to an employee that extends topostretirement periods. Therefore, this EITF would not apply to a split-dollarlife insurance arrangement that provides a specified benefit to an employeethat is limited to the employee’s active service period with an employer. EITF No. 06-4was effective for fiscal years beginning after Dec. 15, 2007, with earlierapplication permitted. Upon adoption of EITF No. 06-4 on Jan. 1,2008, PSCo recorded a liability of $0.6 million, net of tax, as a reduction ofretained earnings. Thereafter, changes in the liability are reflected inoperating results.

 

***Amendment of FASB Interpretation No. 39(FSP FIN 39-1) —***In April 2007, the FASBissued FSP FIN 39-1, which amends FIN 39, *Offsettingof Amounts Related to Certain Contracts*, to permit companies tooffset fair value amounts recognized for the right to reclaim cash collateral(a receivable) or the obligation to return cash collateral (a payable) againstfair value amounts recognized for derivative instruments executed with the samecounterparty under a master netting arrangement. FSP FIN 39-1 was effective forfiscal years beginning after Nov. 15, 2007.  PSCo adopted FSP FIN 39-1 on Jan. 1,2008, and the adoption did not have a material impact on its consolidatedfinancial statements.

 

***Accounting for Income Tax Benefits of Dividends onShare-Based Payment Awards (EITF No. 06-11) —***In June 2007, the EITF reached aconsensus on EITF No. 06-11, which states that an entity should recognizea realized tax benefit associated with dividends on nonvested equity shares andnonvested equity share units charged to retained earnings as an increase inadditional paid in capital.  The amountrecognized in additional paid in capital should be included in the pool ofexcess tax benefits available to absorb potential future tax deficiencies onshare-based payment awards. EITF No. 06-11 was to be applied prospectivelyto income tax benefits of dividends on equity-classified share-based paymentawards that were declared in fiscal years beginning after Dec. 15, 2007.PSCo adopted EITF No. 06-11 on Jan. 1, 2008, and the adoption did nothave a material impact on its consolidated financial statements.

 

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***The Hierarchy of GAAP (SFAS No. 162) —***In May 2008, the FASB issued SFAS No. 162,which establishes the GAAP hierarchy, identifying the sources of accountingprinciples and the framework for selecting the principles to be used in thepreparation of financial statements. SFAS No. 162 was effective Nov. 15,2008*.*PSCo adopted SFAS No. 162on Dec. 31, 2008, and the adoption did not have a material impact on itsconsolidated financial statements.

 

***Disclosures by Public Entities (Enterprises) about Transfersof Financial Assets and Interests in Variable Interest Entities (FSP FAS 140-4and FIN 46(R)-8)******—***In December 2008,the FASB issued FSP FAS 140-4 and FIN 46(R)-8, which amends******SFAS No. 140***,****Accounting for Transfers and Servicing of FinancialAssets and Extinguishments of Liabilities,*to require publicentities to provide additional disclosures about transfers of financialassets.   It also amends FIN 46 (revised December 2003),*Consolidation of Variable Interest Entities,*to require public enterprises, including sponsors that have avariable interest in a variable interest entity, to provide additionaldisclosures about their involvement with variable interest entities.  FSP FAS 140-4 and FIN 46(R)-8 was effectivefor the interim and annual periods ending after Dec. 15, 2008.  PSCo adopted FSP FAS 140-4 and FIN 46(R)-8 onDec. 31, 2008, and the adoption did not have a material impact on itsconsolidated financial statements.

 

**3.****             ****SelectedBalance Sheet Data**

 
| **(Thousands of Dollars)** | ** ** | **Dec. 31, 2008** | ** ** | **Dec. 31, 2007** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Accounts receivable, net:            |       |                        |       |                        |       |
| Accounts receivable                  |       | $                           | 391,596    |                        | $          | 398,566 |   |
| Less allowance for bad debts         |       | (29,195                     | )          | (23,301                     | )          |
|                                 |       | $                           | 362,401    |                        | $          | 375,265 |   |
|                                 |       |                        |       |                        |       |
| Inventories:                         |       |                        |       |                        |       |
| Materials and supplies               |       | $                           | 40,451     |                        | $          | 40,409 |   |
| Fuel                                 |       | 41,456                      |       | 40,811                      |       |
| Natural gas                          |       | 152,041                     |       | 128,700                     |       |
|                                 |       | $                           | 233,948    |                        | $          | 209,920 |   |
|                                 |       |                        |       |                        |       |
| Property, plant and equipment, net:  |       |                        |       |                        |       |
| Electric utility plant               |       | $                           | 7,089,763  |                        | $          | 6,633,695 |   |
| Natural gas utility plant            |       | 1,914,565                   |       | 1,887,824                   |       |
| Common utility and other property    |       | 739,453                     |       | 726,049                     |       |
| Construction work in progress        |       | 1,086,627                   |       | 864,517                     |       |
| Total property, plant and equipment  |       | 10,830,408                  |       | 10,112,085                  |       |
| Less accumulated depreciation        |       | (3,238,297                  | )          | (3,082,930                  | )          |
|                                 |       | $                           | 7,592,111  |                        | $          | 7,029,155 |   |

 

**4.   Short-TermBorrowings**

 

***Commercial Paper*****— At Dec. 31, 2008 and 2007, PSCo had commercial paper outstandingof approximately $40.0 million and $271.0 million, respectively.  PSCo has board approval to issue up to $700million of commercial paper.  Theweighted average interest rates at Dec. 31, 2008 and 2007, were 1.55percent and 5.64 percent, respectively.

 

***Money Pool*****— Xcel Energy and its utility subsidiaries have 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. 31,2008 and 2007, PSCo had money pool borrowings of $41.0 million and money poolloans outstanding of $100.6 million, respectively.  The weighted average interest rates at Dec. 31,2008 and 2007, were 3.48 percent and 5.64 percent, respectively.

 

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**5.   Long-Term Debt**

 

***Credit Facilities***— At Dec. 31, 2008, PSCo had thefollowing committed credit facility in effect, in millions of dollars: 

 
| **Credit**

**Facility** | ** **  | **Credit Facility**

**Borrowings** | ** ** | **Available*** | ** ** | **Original   Term** | ** ** | **Maturity** | ** ** |
|--------------------------|-------------|------------------------------------------|------------|----------------|------------|---------------------|------------|--------------|------------|
| $                        |  675.1 |                                     | $          | —         |       | $                   | 630.2      |         | Five  year |   | December 2011 |   |
|                          |             |                                          |            |                |            |                     |            |              |            |  |  |  |

 

----

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

 

Theline of credit provides short-term financing in the form of notes payable tobanks, 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 creditfacility has one financial covenant requiring that PSCo’s debt to totalcapitalization ratio be less than or equal to 65 percent with which PSCo was incompliance at Dec. 31, 2008 and 2007. If PSCo does not comply with the covenant, it is deemed an event ofdefault and any outstanding amounts due under the facility can be declared dueby the lender.

 

·                  The creditfacility has a cross default provision that provides the borrower will be indefault on its borrowings under the facility if any of its subsidiaries,comprising more than 15 percent of the consolidated assets, defaults on any ofits indebtedness greater than $50 million.

 

·                  The interestrate is based on either the agent bank’s prime rate or the applicable LIBOR,plus a borrowing margin as based on PSCo’s senior unsecured credit ratings fromMoody’s, Standard & Poor’s and Fitch. The commitment fees are calculated for the unused portion of the creditfacility at 8 basis points for PSCo.

 

·                  At Dec. 31,2008, PSCo had no direct borrowings on this line of credit; however, the creditfacility was used to provide back-up support for $40.0 million of commercialpaper outstanding and $4.9 million of letters of credit.

 

·                  At Dec. 31,2007, PSCo had no direct borrowings on this line of credit; however, the creditfacility was used to provide back-up support for $271.0 million of commercialpaper outstanding and $5.1 million of letters of credit.

 

***Long-Term Borrowings***

 

On Aug. 13, 2008,PSCo issued $300 million of 5.80 percent first mortgage bonds; series due Aug. 1,2018 and $300 million of 6.50 percent first mortgage bonds, series due Aug. 1,2038.  PSCo added the net proceedsfrom the sale of the first mortgage bonds to its general funds and applied a portion of such netproceeds to fund the payment at maturity of $300 million of 4.375 percent firstmortgage bonds due Oct. 1, 2008.

 

OnAug. 15, 2007, PSCo issued $350 million of 6.25 percent firstmortgage bonds, series due Sept. 1, 2037. PSCo added the net proceeds fromthe sale of the first mortgage bonds to its general funds and applied a portionof the proceeds to the repayment of commercial paper, including commercialpaper incurred to fund the payment at maturity of $100 million of7.11 percent secured medium-term notes, which matured on March 5,2007.

 

Maturitiesof long-term debt are:

 
| **(Millions of Dollars)** | ** ** | ** ** | ** ** |
|---------------------------|------------|------------|------------|
| 2009                      |       | $          | 201.5      |   |
| 2010                      |       | 1.6        |       |
| 2011                      |       | 1.6        |       |
| 2012                      |       | 601.7      |       |
| 2013                      |       | 251.8      |       |
|                           |            |            |            |  |

 

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** **

**6.   PreferredStock**

** **

PSCohas authorized the issuance of preferred stock.

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

** **

**7.   JointPlant Ownership**

** **

Followingare the investments by PSCo in jointly owned plants and the related ownershippercentages as of Dec. 31, 2008:

 
| **(Thousands of Dollars)**                               | ** ** | **Plant in  Service** | ** ** | **Accumulated  Depreciation** | ** ** | **Construction  Work in  Progress** | ** ** | **Ownership%** | ** ** |
|----------------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|------------------------------------------|------------|----------------|------------|
| Hayden Unit 1                                            |       | $                          | 88,386     |                          | $          | 54,319                                   |       | $              | 411        |   | 75.5 |   |
| Hayden Unit 2                                            |       | 81,504                     |       | 51,680                        |       | 2,047                                    |       | 37.4           |       |
| Hayden Common Facilities                                 |       | 31,563                     |       | 11,479                        |       | 414                                      |       | 53.1           |       |
| Craig Units 1 and 2                                      |       | 53,421                     |       | 31,334                        |       | 358                                      |       | 9.7            |       |
| Craig Common Facilities, Units 1, 2 and 3                |       | 33,205                     |       | 14,058                        |       | 456                                      |       | 6.5  - 9.7     |       |
| Comanche Unit 3                                          |       | —                     |       | —                        |       | 672,144                                  |       | 66.7           |       |
| Transmission and other facilities, including substations |       | 141,119                    |       | 52,803                        |       | 529                                      |       | 11.6  - 68.1   |       |
| Total                                                    |       | $                          | 429,198    |                          | $          | 215,673                                  |       | $              | 676,359    |   |   |   |

 

PSCo’scurrent operational assets include approximately 320 MW of jointly ownedgenerating capacity.  PSCo’s share ofoperating expenses and construction expenditures are included in the applicableutility accounts.  Each of the respectiveowners is responsible for funding its portion of the construction costs.  PSCo began major construction on a newjointly 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.

 

**8.   Income Taxes**

 

***COLI*** — Aspreviously disclosed, Xcel Energy and the U.S. government settled an ongoingdispute regarding PSCo’s right to deduct interest expense on policy loansrelated to its COLI program that insured lives of certain PSCo employees.  These COLI policies were owned and managed byPSRI, a wholly owned subsidiary of PSCo. The total exposure for the tax years in dispute through 2007 wasapproximately $583 million, which includes income tax, interest and potentialpenalties.  In September 2007, XcelEnergy and the United States finalized a settlement, which terminated the taxlitigation 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:

 

·              $32.2million was satisfied by tax and interest amounts that Xcel Energy hadpreviously paid or deemed under the terms of the settlement to have been paid.

 

·              $32.2 millionwas paid by Xcel Energy on Oct. 31, 2007.

 

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.

 

 

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***Accounting for Uncertainty in Income Taxes — aninterpretation of FASB Statement No. 109******(FIN 48) —***PSCo is a memberof the Xcel Energy affiliated group that files consolidated income tax returns.In the first quarter of 2008, the IRS completed an examination of Xcel Energy’sfederal income tax returns for 2004 and 2005 (and research credits for 2003).The IRS did not propose any material adjustments for those tax years. Tax year2004 is the earliest open year and the statute of limitations applicable toXcel Energy’s 2004 federal income tax return remains open until Dec. 31,2009. In the third quarter of 2008, the IRS commenced an examination of taxyears 2006 and 2007. As of Dec. 31, 2008, the IRS had not proposed anymaterial adjustments to tax years 2006 and 2007.

 

As of Dec. 31, 2008,PSCo’s earliest open tax year in which an audit can be initiated by statetaxing authorities under applicable statutes of limitations is 2004. Therecurrently are no state income tax audits in progress.

 

The amount of unrecognized tax benefits was $8.8million and $10.3 million on Dec. 31, 2007 and 2008, respectively.  Areconciliation of the beginning and ending amount of unrecognized tax benefitis as follows:

 
| **(Millions of Dollars)**                                     | ** ** | **2008** | ** ** | **2007** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|----------|------------|----------|------------|------------|------------|------------|------------|
| Balance at Jan. 1                                        |       | $        | 8.8        |     | $          | 11.4       |       |       |       |   |   |
| Additions based on tax positions related to the current year  |       | 2.9      |       | 3.0      |       |       |       |       |       |
| Reductions based on tax positions related to the current year |       | (0.5     | )          | —   |       |       |       |       |       |
| Additions for tax positions of prior years                    |       | 2.0      |       | 33.2     |       |       |       |       |       |
| Reductions for tax positions of prior years                   |       | (0.2     | )          | (0.8     | )          |       |       |       |       |
| Settlements with taxing authorities                           |       | —   |       | (38.0    | )          |       |       |       |       |
| Lapse of applicable statute of limitations                    |       | (2.7     | )          | —   |       |       |       |       |       |
| Balance at Dec. 31                                       |       | $        | 10.3       |     | $          | 8.8        |       |       |       |   |   |

 

These unrecognized taxbenefit amounts were reduced by the tax benefits associated with net operatingloss and tax credit carryovers of $3.8 million and $5.8 million as of Dec. 31,2007 and 2008, respectively.

 

The unrecognized taxbenefit balance included $2.8 million and $1.4 million of tax positions on Dec. 31,2007 and 2008, respectively, which if recognized would affect the annualeffective tax rate.  In addition, the unrecognized tax benefit balanceincluded $6.0 million and $8.9 million of tax positions on Dec. 31, 2007and 2008, respectively, for which the ultimate deductibility is highly certainbut for which there is uncertainty about the timing of suchdeductibility.  A change in the period of deductibility would not affectthe effective tax rate but would accelerate the payment of cash to the taxingauthority to an earlier period.

 

The increase in theunrecognized tax benefit balance of $1.5 million from Dec. 31, 2007 to Dec. 31,2008, was due to the addition of similar uncertain tax positions related toongoing activity, partially offset by a decrease due to the expiration ofstatutes of limitations.  PSCo’s amount of unrecognized tax benefits couldsignificantly change in the next 12 months as the IRS audit progresses and whenstate audits resume.  At this time, due to the uncertain nature of theaudit process, it is not reasonably possible to estimate an overall range ofpossible change.

 

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 interest expense related to unrecognized taxbenefits reported within interest charges in 2007 was $44.8 million. Theamount of interest income related to unrecognized tax benefits reported withininterest charges in 2008 was $3.4 million.  The liability for interest relatedto unrecognized tax benefits was $3.8 and $0.4 million on Dec. 31, 2007and 2008.

 

The amount of penaltyexpense related to unrecognized tax benefits reported within interest chargesin 2007 was $3.2 million. The liability for penalties related to unrecognizedtax benefits was $1.0 million on Dec. 31, 2007. In 2008, theliability for penalties related to unrecognized tax benefits was reversed and a$1.0 million benefit was reported within interest charges in 2008. No amountswere accrued for penalties as of Dec. 31, 2008.

 

***Other Income Tax Matters —***PSCo’sfederal net operating loss carryforward is estimated to be $40.1 million and$102.6 million as of Dec. 31, 2008 and Dec. 31, 2007,respectively.  PSCo’s federal tax creditcarryforward is estimated to be $12.1 million and $11.1 million as of Dec. 31,2008 and Dec. 31, 2007, respectively. The carryforward periods expire between 2021 and 2028.  PSCo also has a state net operating losscarryforward of $63.6 million and $72.3 million as of Dec. 31, 2008 and Dec. 31,2007, respectively, and state tax credit carryforwards of $5.8 million and $4.4million as of Dec. 31, 2008 and Dec. 31, 2007, respectively.  The state carryforward periods expire between2016 and 2027.

 

 

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

 
| ** **                                                | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal statutory rate                                    |       | 35.0     | %          | 35.0     | %          | 35.0     | %          |
| Increases (decreases) in tax from:                        |       |     |       |     |       |     |       |
| State income taxes, net of federal income tax benefit     |       | 1.7      |       | 1.2      |       | 4.3      |       |
| Regulatory differences — utility plant items         |       | (2.2     | )          | (0.8     | )          | 0.2      |       |
| Life insurance policies                                   |       | (0.2     | )          | (7.2     | )          | (10.3    | )          |
| Tax credits recognized, net of federal income tax expense |       | (1.1     | )          | (1.6     | )          | (1.9     | )          |
| Resolution of income tax audits and other                 |       | 0.3      |       | (1.8     | )          | (1.0     | )          |
| FIN 48 expense — unrecognized tax benefits           |       | (0.3     | )          | 6.6      |       | —   |       |
| Other, net                                                |       | (0.3     | )          | (0.2     | )          | (1.0     | )          |
| Effective income tax rate                                 |       | 32.9     | %          | 31.2     | %          | 25.3     | %          |

 

The components of income taxexpense for the years ending Dec. 31 were:

 
| **(Thousands of Dollars)**  | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current federal tax expense (benefit) |       | $        | 77,865     |     | $          | 29,496   |       | $ | (2,691 | ) |
| Current state tax expense (benefit)   |       | 6,219    |       | (2,077   | )          | 12,301   |       |
| Current FIN 48 tax (benefit) expense  |       | (571     | )          | 31,448   |       | —   |       |
| Deferred federal tax expense          |       | 81,326   |       | 78,508   |       | 71,756   |       |
| Deferred state tax expense            |       | 8,859    |       | 7,414    |       | 6,807    |       |
| Deferred FIN 48 tax benefit           |       | (841     | )          | (2,782   | )          | —   |       |
| Deferred tax credits                  |       | (3,469   | )          | (3,781   | )          | (2,523   | )          |
| Deferred investment tax credits       |       | (2,760   | )          | (3,869   | )          | (3,949   | )          |
| Total income tax expense              |       | $        | 166,628    |     | $          | 134,357  |       | $ | 81,701 |   |

 

The components of deferredincome tax at Dec. 31 were:

 
| **(Thousands of Dollars)**                                                                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax expense excluding items below                                                                     |       | $        | 109,504    |     | $          | 89,940 |   |
| Amortization and adjustments to deferred income taxes on income tax  regulatory assets and liabilities         |       | (26,540  | )          | (10,226  | )          |
| FIN 48 adoption: Deferred tax benefit reported as an adjustment to  the beginning balance of retained earnings |       | —   |       | (447     | )          |
| Tax expense allocated to other comprehensive income and other                                                  |       | 2,911    |       | 92       |       |
| Deferred tax expense                                                                                           |       | $        | 85,875     |     | $          | 79,359 |   |

 

Thecomponents of net deferred tax liability (current and noncurrent portions) at Dec. 31were:

 
| **(Thousands of Dollars)**               | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax liabilities:                          |       |     |       |     |       |
| Differences between book and tax bases of property |       | $        | 1,176,313  |     | $          | 1,075,552 |   |
| Deferred costs                                     |       | 35,442   |       | 66,899   |       |
| Regulatory assets                                  |       | 52,728   |       | 44,974   |       |
| Employee benefits                                  |       | 33,819   |       | 24,940   |       |
| Other                                              |       | 17,024   |       | 6,252    |       |
| Total deferred tax liabilities                     |       | $        | 1,315,326  |     | $          | 1,218,617 |   |

 

 

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| Deferred tax assets:   |   |   |      |   |   |
|----------------------------------|--------|--------|-----------|--------|--------|
| Unbilled revenues                |   | $      | 78,175    |   | $      | 74,134 |   |
| Net operating loss carry forward |   | 24,420 |      | 43,814 |   |
| Tax credit carry forward         |   | 17,931 |      | 15,560 |   |
| Deferred investment tax credits  |   | 19,891 |      | 20,875 |   |
| Regulatory liabilities           |   | 16,166 |      | 14,057 |   |
| Bad debts                        |   | 11,082 |      | 8,817  |   |
| Rate refunds                     |   | 3,678  |      | 8,362  |   |
| Other                            |   | 3,303  |      | 1,822  |   |
| Total deferred tax assets        |   | $      | 174,646   |   | $      | 187,441 |   |
| Net deferred tax liability       |   | $      | 1,140,680 |   | $      | 1,031,176 |   |

 

**9.  Benefit Plans and Other PostretirementBenefits**

** **

Pensionand other postretirement disclosures below generally represent Xcel Energyconsolidated information unless specifically identified as being attributableto PSCo.

 

XcelEnergy offers various benefit plans to its employees, including those ofPSCo.  Approximately 50 percent of XcelEnergy employees that receive benefits are represented by several local laborunions under several collective-bargaining agreements.  At Dec. 31, 2008, PSCo had 2,159bargaining 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 a regulatoryasset rather than as a charge to accumulated other comprehensive income, asfuture 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**

** **

XcelEnergy has several noncontributory, defined benefit pension plans that coveralmost all employees, including those of PSCo. Benefits are based on a combination of years of service, the employee’saverage 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 assetsprincipally consist of the common stock of public companies, corporate bondsand U.S. government securities. The target range for our pension assetallocation is 52 percent in equity investments, 25 percent in fixed incomeinvestments and 23 percent in nontraditional investments, such as real estate,private equity and a diversified commodities index.

 

Theactual composition of pension plan assets at Dec. 31 was:

 
| ** **                 | ** ** | **2008** | ** ** | **2007** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|------------|------------|------------|------------|
| Equity securities          |       | 55       | %          | 60       | %          |       |       |       |       |
| Debt securities            |       | 26       |       | 22       |       |       |       |       |       |
| Real estate                |       | 5        |       | 4        |       |       |       |       |       |
| Cash                       |       | 3        |       | 2        |       |       |       |       |       |
| Nontraditional investments |       | 11       |       | 12       |       |       |       |       |       |
|                       |       | 100      | %          | 100      | %          |       |       |       |       |

 

XcelEnergy bases its investment-return assumption on expected long-term performancefor each of the investment types included in its pension asset portfolio. XcelEnergy considers the actual historical returns achieved by its asset portfolioover the past 20-year or longer period, as well as the long-term return levelsprojected and recommended by investment experts. 

 

 

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Thehistorical weighted average annual return for the past 20 years for theXcel Energy portfolio of pension investments is 9.56 percent, which isgreater than the current assumption level. The pension cost determinationassumes the continued current mix of investment types over the long term. TheXcel Energy portfolio is heavily weighted toward equity securities and includesnontraditional investments. A higher weighting in equity investments canincrease the volatility in the return levels achieved by pension assets in anyyear.  Investment returns in 2008 and2007 were below the assumed level of 8.75 percent while returns in 2006exceeded the assumed level of 8.75 percent. Xcel Energy continuallyreviews its pension assumptions. In 2009, Xcel Energy will use aninvestment-return assumption of 8.50 percent.

 

***Benefit Obligations***— A comparisonof the actuarially computed pension benefit obligation and plan assets, on acombined basis, is presented in the following table:

 
| **(Thousands of Dollars)**                                                                | ** ** | **2008**                | ** ** | **2007**                | ** ** |
|-----------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **Accumulated Benefit Obligation at Dec. 31**                                                  |       | $                       | 2,435,513  |                    | $          | 2,497,898 |   |
|                                                                                                |       |                    |       |                    |       |
| **Change in Projected Benefit Obligation:**                                                         |       |                    |       |                    |       |
| Obligation at Jan. 1                                                                           |       | $                       | 2,662,759  |                    | $          | 2,666,555 |   |
| Service cost                                                                                        |       | 62,698                  |       | 61,392                  |       |
| Interest cost                                                                                       |       | 167,881                 |       | 162,774                 |       |
| Plan amendments                                                                                     |       | —                  |       | (19,955                 | )          |
| Actuarial (gain) loss                                                                               |       | (47,509                 | )          | 23,325                  |       |
| Benefit payments                                                                                    |       | (247,797                | )          | (231,332                | )          |
| Obligation at Dec. 31                                                                          |       | $                       | 2,598,032  |                    | $          | 2,662,759 |   |
|                                                                                                |       |                    |       |                    |       |
| **Change in Fair Value of Plan Assets:**                                                            |       |                    |       |                    |       |
| Fair value of plan assets at Jan. 1                                                            |       | $                       | 3,186,273  |                    | $          | 3,183,375 |   |
| Actual (loss) return on plan assets                                                                 |       | (788,273                | )          | 199,230                 |       |
| Employer contributions                                                                              |       | 35,000                  |       | 35,000                  |       |
| Benefit payments                                                                                    |       | (247,797                | )          | (231,332                | )          |
| Fair value of plan assets at Dec. 31                                                           |       | $                       | 2,185,203  |                    | $          | 3,186,273 |   |
|                                                                                                |       |                    |       |                    |       |
| **Funded Status of Plans at Dec. 31****:**                                                     |       |                    |       |                    |       |
| Funded status                                                                                       |       | $                       | (412,829   | )                       | $          | 523,514 |   |
| Noncurrent assets                                                                                   |       | 15,612                  |       | 568,055                 |       |
| Noncurrent liabilities                                                                              |       | (428,441                | )          | (44,541                 | )          |
| Net pension amounts recognized on consolidated balance sheets                                       |       | $                       | (412,829   | )                       | $          | 523,514 |   |
|                                                                                                |       |                    |       |                    |       |
| **PSCo Amounts Not Yet Recognized as Components of  Net Periodic Benefit Cost:**                    | ** ** | ** **              | ** ** | ** **              | ** ** |
| Net loss                                                                                            |       | $                       | 394,045    |                    | $          | 156,521 |   |
| Prior service cost                                                                                  |       | 17,287                  |       | 20,122                  |       |
| Total                                                                                               |       | $                       | 411,332    |                    | $          | 176,643 |   |
| **SFAS No. 158 Amounts Have Been Recorded as  Follows Based Upon Expected Recovery in Rates:** | ** ** | ** **              | ** ** | ** **              | ** ** |
| Regulatory assets                                                                                   |       | $                       | 411,332    |                    | $          | 176,643 |   |
| Total                                                                                               |       | $                       | 411,332    |                    | $          | 176,643 |   |
|                                                                                                |       |                    |       |                    |       |
| PSCo accrued benefit liability recorded                                                             |       | $                       | 251,178    |                    | $          | 39,781 |   |
|                                                                                                |       |                    |       |                    |       |
| **Measurement Date**                                                                                |       | Dec. 31, 2008 |       | Dec. 31, 2007 |       |
|                                                                                                |       |                    |       |                    |       |
| **Significant Assumptions Used to Measure Benefit  Obligations:**                                   |       |                    |       |                    |       |
| Discount rate for year-end valuation                                                                |       | 6.75                    | %          | 6.25                    | %          |
| Expected average long-term increase in compensation level                                           |       | 4.00                    |       | 4.00                    |       |
| Mortality table                                                                                     |       | RP  2000                |       | RP  2000                |       |

 

 

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AtDec. 31, 2008, one of Xcel Energy’s pension plans had plan assets of$259.9 million, which exceeded projected benefit obligations of$244.3 million.  At Dec. 31,2007, the plan assets of $369.8 million exceeded projected benefitobligations of $253.6 million.  Allother Xcel Energy plans in the aggregate had plan assets of $1.9 billion and$2.8 billion and projected benefit obligations of $2.4 billion and$2.4 billion on Dec. 31, 2008 and 2007.

 

***Cash Flows —***Cash fundingrequirements can be impacted by changes to actuarial assumptions, actual assetlevels and other calculations prescribed by the funding requirements of incometax and other pension-related regulations. These regulations did not requirecash funding for 2006 through 2008 for Xcel Energy’s pension plans and are notexpected to require cash funding in 2009.

 

·                  Voluntary contributions were made tothe PSCo Bargaining Pension Plan of $35 million in 2008, $35 million in2007 and $30 million in 2006.

 

·                  Voluntary contributions were made tothe NCE Non-Bargaining Pension Plan of $2 million in 2006.  No voluntary contributions were made to theplan during 2007 or 2008.

 

·                  Xcel Energy projects cash funding of$70 million to $130 million in 2009. Pension funding contributions for 2010, which will be dependent onseveral factors including, realized asset performance, future discount rate,IRS and legislative initiatives as well as other actuarial assumptions, areestimated to range between $150 million to $250 million.

 

***Plan Changes —***The PensionProtection Act of 2006 (PPA) was effective Dec. 31, 2006. PPA requires a changein the conversion basis for lump-sum payments and three-year vesting for planswith account balance or pension equity benefits. These changes are reflected asa plan amendment for purposes of SFAS No. 87, *Employers’ Accounting for Pensions*.

 

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

 
| **(Thousands of Dollars)**                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Service cost                                              |       | $        | 62,698     |     | $          | 61,392   |       | $ | 61,627 |   |
| Interest cost                                             |       | 167,881  |       | 162,774  |       | 155,413  |       |
| Expected return on plan assets                            |       | (274,338 | )          | (264,831 | )          | (268,065 | )          |
| Amortization of prior service cost                        |       | 20,584   |       | 25,056   |       | 29,696   |       |
| Amortization of net loss                                  |       | 11,156   |       | 15,845   |       | 17,353   |       |
| Net periodic pension (credit) cost under SFAS No. 87 |       | $        | (12,019    | )        | $          | 236      |       | $ | (3,976 | ) |
|                                                      |       |     |       |     |       |     |       |
| **PSCo:**                                                 |       |     |       |     |       |     |       |
| Net periodic pension cost                                 |       | $        | 11,120     |     | $          | 18,348   |       | $ | 18,666 |   |
|                                                      |       |     |       |     |       |     |       |
| **Significant Assumptions Used to Measure Costs:**        |       |     |       |     |       |     |       |
| Discount rate                                             |       | 6.25     | %          | 6.00     | %          | 5.75     | %          |
| Expected average long-term increase in compensation level |       | 4.00     |       | 4.00     |       | 3.50     |       |
| Expected average long-term rate of return on assets       |       | 8.75     |       | 8.75     |       | 8.75     |       |

 

Pensioncosts include an expected return impact for the current year that may differfrom actual investment performance in the plan. The return assumption used for2009 pension cost calculations will be 8.50 percent. The cost calculationuses a market-related valuation of pension assets. Xcel Energy uses acalculated value method to determine the market-related value of the planassets. The market-related value begins with the fair market value of assets asof the beginning of the year. The market-related value is determined byadjusting the fair market value of assets to reflect the investment gains andlosses (the difference between the actual investment return and the expectedinvestment return on the market-related value) during each of the previous fiveyears at the rate of 20 percent per year.

 

XcelEnergy also maintains noncontributory, defined benefit supplemental retirementincome plans for certain qualifying executive personnel.  Benefits for these unfunded plans are paid outof Xcel Energy’s operating cash flows.

 

**Defined Contribution Plans**

** **

XcelEnergy maintains 401(k) and other defined contribution plans that coversubstantially all employees.  Thecontributions for PSCo were approximately $6.1 million in 2008, $7.9 million in2007 and $6.2 million in 2006.

 

** **

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** **

**Postretirement Health CareBenefits**

** **

XcelEnergy has a contributory health and welfare benefit plan that provides healthcare 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.

 

Inconjunction with the 1993 adoption of SFAS No. 106, *Employers’ Accounting for Postretirement BenefitsOther Than Pension*, Xcel Energy elected to amortize the unrecognizedaccumulated postretirement benefit obligation (APBO) on a straight-line basisover 20 years.

 

Regulatoryagencies for nearly all of Xcel Energy’s retail and wholesale utility customershave allowed rate recovery of accrued benefit costs under SFAS No. 106.  PSCo transitioned to full accrual accountingfor SFAS No. 106 costs between 1993 and 1997, consistent with theaccounting requirements for rate-regulated enterprises.  The Colorado jurisdictional SFAS No. 106costs deferred during the transition period are being amortized to expense on astraight-line basis over the 15-year period from 1998 to 2012.

 

***Plan Assets***— Certain stateagencies that regulate Xcel Energy’s utility subsidiaries also have issuedguidelines 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.

 

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

 
| ** **                               | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------|------------|----------|------------|----------|------------|
| Equity and equity mutual fund securities |       | 49       | %          | 67       | %          |
| Fixed income/debt securities             |       | 29       |       | 21       |       |
| Cash equivalents                         |       | 22       |       | 11       |       |
| Nontraditional investments               |       | —   |       | 1        |       |
|                                     |       | 100      | %          | 100      | %          |

 

XcelEnergy bases its investment-return assumption for the postretirement healthcare fund assets on expected long-term performance for each of the investmenttypes included in its postretirement health care asset portfolio.  Investment-return volatility is notconsidered to be a material factor in postretirement health care costs.

 

***Benefit Obligations***— A comparisonof the actuarially computed benefit obligation and plan assets for Xcel Energypostretirement health care plans that benefit employees of its utilitysubsidiaries is presented in the following table:

 
| **(Thousands of Dollars)**      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------|------------|----------|------------|----------|------------|
| **Change in Benefit Obligation:**         |       |     |       |     |       |
| Obligation at Jan. 1                 |       | $        | 830,315    |     | $          | 918,693 |   |
| Service cost                              |       | 5,350    |       | 5,813    |       |
| Interest cost                             |       | 51,047   |       | 50,475   |       |
| Medicare subsidy reimbursements           |       | 6,178    |       | 2,526    |       |
| Plan participants’ contributions     |       | 13,892   |       | 13,211   |       |
| Actuarial gain                            |       | (46,827  | )          | (86,576  | )          |
| Benefit payments                          |       | (65,358  | )          | (73,827  | )          |
| Obligation at Dec. 31                |       | $        | 794,597    |     | $          | 830,315 |   |
|                                      |       |     |       |     |       |
| **Change in Fair Value of Plan Assets:**  |       |     |       |     |       |
| Fair value of plan assets at Jan. 1  |       | $        | 427,459    |     | $          | 406,305 |   |
| Actual (loss) return on plan assets       |       | (132,226 | )          | 24,623   |       |
| Plan participants’ contributions     |       | 13,892   |       | 13,211   |       |
| Employer contributions                    |       | 55,799   |       | 57,147   |       |
| Benefit payments                          |       | (65,358  | )          | (73,827  | )          |
| Fair value of plan assets at Dec. 31 |       | $        | 299,566    |     | $          | 427,459 |   |

 

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| **Funded Status at Dec. 31****:**                                                                                |       |       |       |       |       |
|-----------------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------|------------|
| Funded status                                                                                                         |       | $          | (495,031   | )          | $          | (402,856 | ) |
| Current liabilities                                                                                                   |       | (4,928     | )          | (1,755     | )          |
| Noncurrent liabilities                                                                                                |       | (490,103   | )          | (401,101   | )          |
| Net amounts recognized on consolidated balance sheets                                                                 |       | $          | (495,031   | )          | $          | (402,856 | ) |
| ** **                                                                                                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| **PSCo Amounts Not Yet Recognized as Components of Net Periodic  Cost:** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net loss                                                                                                              |       | $          | 181,157    |       | $          | 74,361 |   |
| Prior service credit                                                                                                  |       | (1,757     | )          | (2,185     | )          |
| Transition obligation                                                                                                 |       | 44,801     |       | 55,805     |       |
| Total                                                                                                                 |       | $          | 224,201    |       | $          | 127,981 |   |
|                                                                                                                  |       |       |       |       |       |
| **SFAS No. 158 Amounts Have Been Recorded as  Follows Based Upon Expected Recovery in Rates:**                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Regulatory assets                                                                                                     |       | $          | 224,201    |       | $          | 127,981 |   |
| Total                                                                                                                 |       | $          | 224,201    |       | $          | 127,981 |   |
|                                                                                                                  |       |       |       |       |       |
| PSCo accrued benefit liability recorded                                                                               |       | $          | 254,003    |       | $          | 161,712 |   |

 
| ** **                                                        | ** ** | **2008**                | ** ** | **2007**                | ** ** |
|-------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **Measurement Date**                                              |       | Dec. 31, 2008 |       | Dec. 31, 2007 |       |
|                                                              |       |                    |       |                    |       |
| **Significant Assumptions Used to Measure Benefit  Obligations:** |       |                    |       |                    |       |
| Discount rate for year-end valuation                              |       | 6.75                    | %          | 6.25                    | %          |
| Mortality table                                                   |       | RP  2000                |       | RP  2000                |       |

 

EffectiveDec. 31, 2008, Xcel Energy reduced its initial medical trend assumptionfrom 8.0 percent to 7.4 percent. The ultimate trend assumptionremained unchanged at 5.0 percent. The period until the ultimate rate isreached is five years. Xcel Energy bases its medical trend assumption on thelong-term cost inflation expected in the health care market, considering thelevels projected and recommended by industry experts, as well as recent actualmedical cost increases experienced by Xcel Energy’s retiree medical plan.

 

A1-percent change in the assumed health care cost trend rate would have thefollowing effects on PSCo:

 
| **(Thousands of Dollars)**                                            | ** ** | ** ** | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|
| 1-percent increase in APBO components at Dec. 31, 2008                     |       | $          | 51,475     |   |
| 1-percent decrease in APBO components at Dec. 31, 2008                     |       | (43,439    | )          |
| 1-percent increase in service and interest components of the net  periodic cost |       | 4,526      |       |
| 1-percent decrease in service and interest components of the net  periodic cost |       | (3,736     | )          |
|                                                                                 |            |            |            |  |

 

***Plan Changes******—*** The employersubsidy for retiree medical coverage was eliminated for former NCEnon-bargaining employees who retire after July 1, 2003.

 

***Cash Flows —***Thepostretirement health care plans have no funding requirements under income taxand other retirement-related regulations other than fulfilling benefit paymentobligations, when claims are presented and approved under the plans. Additionalcash funding requirements are prescribed by certain state and federal rateregulatory authorities, as discussed previously. Xcel Energy contributed $55.6million during 2008 and expects to contribute approximately $63.1 millionduring 2009.

 

 

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

 
| **(Thousands of Dollars)**                                          | ** ** | **2008**   | ** ** | **2007**   | ** ** | **2006**   | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| Service cost                                                                  |       | $          | 5,350      |       | $          | 5,813      |       | $ | 6,633 |   |
| Interest cost                                                                 |       | 51,047     |       | 50,475     |       | 52,939     |       |
| Expected return on plan assets                                                |       | (31,851    | )          | (30,401    | )          | (26,757    | )          |
| Amortization of transition obligation                                         |       | 14,577     |       | 14,577     |       | 14,444     |       |
| Amortization of prior service credit                                          |       | (2,175     | )          | (2,178     | )          | (2,178     | )          |
| Amortization of net loss                                                      |       | 11,498     |       | 14,198     |       | 24,797     |       |
| Net periodic postretirement benefit cost under SFAS No. 106              |       | $          | 48,446     |       | $          | 52,484     |       | $ | 69,878 |   |
| **PSCo:**                                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net periodic postretirement benefit cost recognized — SFAS  No. 106 |       | 26,989     |       | 28,661     |       | 39,976     |       |
| Additional cost recognized due to effects of regulation                       |       | 3,891      |       | 3,891      |       | 3,891      |       |
| Net cost recognized for financial reporting                                   |       | $          | 30,880     |       | $          | 32,552     |       | $ | 43,867 |   |
|                                                                          |       |       |       |       |       |       |       |
| **Significant assumptions used to measure costs  (income):**                  |       |       |       |       |       |       |       |
| Discount rate                                                                 |       | 6.25       | %          | 6.00       | %          | 5.75       | %          |
| Expected average long-term rate of return on assets (pretax)                  |       | 7.50       |       | 7.50       |       | 7.50       |       |

 

**ProjectedBenefit Payments**

** **

Thefollowing table lists Xcel Energy’s projected benefit payments for the pensionand 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**                   | ** ** |
| 2009                                 |       | $                          | 224,558    |                           | $          | 62,975                         |       | $                              | 5,725      |   | $ | 57,250 |   |
| 2010                                 |       | 226,585                    |       | 64,468                         |       | 6,117                          |       | 58,351                         |       |
| 2011                                 |       | 226,446                    |       | 66,390                         |       | 6,433                          |       | 59,957                         |       |
| 2012                                 |       | 230,763                    |       | 67,400                         |       | 6,804                          |       | 60,596                         |       |
| 2013                                 |       | 234,149                    |       | 68,008                         |       | 7,127                          |       | 60,881                         |       |
| 2014-2018                            |       | 1,237,114                  |       | 351,249                        |       | 38,796                         |       | 312,453                        |       |
|                                      |            |                            |            |                                |            |                                |            |                                |            |  |  |  |  |

 

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

 

Interestand other income (expense), net of nonoperating expenses, for the years ended Dec. 31consisted of the following:

 
| **(Thousands of Dollars)**           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Interest income                                |       | $        | 10,283     |     | $          | 9,876    |       | $ | 4,462 |   |
| Other nonoperating income                      |       | 2,954    |       | 2,373    |       | 2,581    |       |
| Insurance policy income (expense)              |       | 3,515    |       | (14,642  | )          | (20,404  | )          |
| Other nonoperating expense                     |       | (4       | )          | (7       | )          | (862     | )          |
| Total interest and other income (expense), net |       | $        | 16,748     |     | $          | (2,400   | )          | $ | (14,223 | ) |

 

**11.    Derivative Instruments**

** **

Inthe normal course of business, PSCo is exposed to a variety of marketrisks.  Market risk is the potential lossor gain that may occur as a result of changes in the market or fair value of aparticular instrument or commodity.  PSCoutilizes, in accordance with approved risk management policies, a variety ofderivative instruments to mitigate market risk and to enhance its operations.

 

***Commodity Price Risk —*** PSCo isexposed to commodity price risk in its electric and natural gasoperations.  Commodity price risk ismanaged by entering into long- and short-term physical purchase and salescontracts for electric capacity, energy and energy-related products and forvarious fuels used for generation and distribution activities.  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 thoughthe regulatory jurisdiction may 

 

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providefor recovery of actual costs.  PSCo’srisk management policy allows it to manage commodity price risk within eachrate-regulated operation to the extent such exposure exists.

 

***Short-Term Wholesale and Commodity TradingRisk —*** PSCo conducts various short-term wholesale andcommodity trading activities, including the purchase and sale of electriccapacity, energy and energy-related instruments.  PSCo’s risk management policy allows managementto conduct these activities within guidelines and limitations as approved bythe risk management committee, which is made up of management personnel notdirectly involved in the activities governed by this policy.

 

***Interest Rate Risk —***PSCo is subjectto the risk of fluctuating interest rates in the normal course ofbusiness.  PSCo’s risk management policyallows interest rate risk to be managed through the use of fixed rate debt,floating rate debt and interest rate derivatives such as swaps, caps, collarsand put or call options, subject to regulatory approval when required.

 

**Types of and Accounting forDerivative Instruments**

** **

PSCouses derivative instruments in connection with its interest rate, utilitycommodity price, vehicle fuel price, short-term wholesale and commodity tradingactivities, including forward contracts, futures, swaps and options.  All derivative instruments not designated andqualifying for the normal purchases and normal sales exception, as defined bySFAS No. 133, are recorded on the consolidated balance sheets at fairvalue as derivative instruments valuation. This includes certain instruments used to mitigate market risk for PSCoand all instruments related to the commodity trading operations.  The classification of changes in fair valuefor those derivative instruments is dependent on the designation of aqualifying hedging relationship.  Changesin fair value of derivative instruments not designated in a qualifying hedgingrelationship are reflected in current earnings or as a regulatory asset orliability.  The classification isdependent on the applicability of specific regulation.

 

Qualifyinghedging relationships are designated as a hedge of a forecasted transaction orfuture cash flow (cash flow hedge).  Thetypes of qualifying hedging transactions that PSCo is currently engaged in arediscussed below.

 

**Cash Flow Hedges**

** **

***Commodity Cash Flow Hedges*** — PSCo entersinto derivative instruments to manage variability of future cash flows fromchanges in commodity prices.  This couldinclude the purchase or sale of energy or energy related products, natural gasto generate electric energy, gas for resale, and vehicle fuel.  Certain derivative instruments entered intoto manage this variability are designated as cash flow hedges for accountingpurposes.  At Dec. 31, 2008, PSCohad various commodity-related contracts designated as cash flow hedgesextending through December 2010. Changes in the fair value of cash flow hedges are recorded in othercomprehensive income or deferred as a regulatory asset or liability.  This classification is based on theregulatory recovery mechanisms in place.

 

AtDec. 31, 2008, PSCo had $4.9 million of net losses in accumulated othercomprehensive income related to commodity cash flow hedge contracts; $2.8million is expected to be recognized in earnings during the next 12 monthsas the hedged transactions settle.

 

PSCohad immaterial ineffectiveness related to commodity cash flow hedges during2008 and 2007.

 

***Interest Rate Cash Flow Hedges*** — PSCo entersinto interest rate lock agreements, including treasury-rate locks and forwardstarting swaps that effectively fix the yield or price on a specified benchmarkinterest rate for a specific period. These derivative instruments are designated as cash flow hedges foraccounting purposes.

 

AtDec. 31, 2008, PSCo had net gains of approximately $1.5 million inaccumulated other comprehensive income related to interest rate hedges that itexpects to recognize in earnings during the next 12 months.

 

PSCohad no ineffectiveness related to interest rate cash flow hedges during 2008and 2007.

 

 

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

*** ***
| ** **                                                  | ** ** | **2008**                                                         | ** ** | **2007**                                                              | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| **(Thousands of Dollars)**                        | ** ** | **Derivative  Instruments  Valuation –   Assets** | ** ** | **Derivative  Instruments  Valuation –   Liabilities** | ** ** | **Derivative  Instruments  Valuation –   Assets** | ** ** | **Derivative  Instruments  Valuation –   Liabilities** | ** ** |
| Long term purchased power agreements                        |       | $                                                                | 137,334    |                                                                  | $          | 66,986 |   | $ | 155,928 |   | $ | 96,654 |   |
| Electricity and natural gas trading and hedging instruments |       | 4,993                                                            |       | 23,916                                                                |       | 19,117 |   | 9,057 |   |
| Total                                                       |       | $                                                                | 142,327    |                                                                  | $          | 90,902 |   | $ | 175,045 |   | $ | 105,711 |   |

 

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 of Qualifying Cash FlowHedges*** — The impact of qualifying cash flow hedges on PSCo’saccumulated other comprehensive income, included in the consolidated statementsof common stockholder’s equity and comprehensive income, is detailed in thefollowing table:

 
| **(Millions of Dollars)**                                                 | ** ** | ** ** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------|------------|
| Accumulated other comprehensive income related to hedges at  Dec. 31, 2005     |       | $          | 14.2       |   |
| After-tax net unrealized losses related to derivative 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       |   |
| After-tax net unrealized losses related to derivatives accounted for  as hedges     |       | (3.3       | )          |
| After-tax net realized gains on derivative transactions reclassified  into earnings |       | (1.5       | )          |
| Accumulated other comprehensive income related to hedges at  Dec. 31, 2008     |       | $          | 7.6        |   |

** **

**12.    Financial Instruments**

** **

Theestimated Dec. 31 fair values of PSCo’s recorded financial instruments areas follows:

 
| ** **                                | ** ** | **2008**             | ** ** | **2007**            | ** ** |
|-------------------------------------------|------------|----------------------|------------|---------------------|------------|
| **(Thousands of Dollars)**      | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| Other investments                         |       | $                    | 2          |                | $          | 2 |   | $ | 23,718 |   | $ | 23,718 |   |
| Long-term debt, including current portion |       | 2,490,761            |       | 2,654,256           |       | 2,193,089 |   | 2,297,047 |   |
|                                           |            |                      |            |                     |            |  |  |  |  |  |  |  |  |

 

Thefair value of cash and cash equivalents, notes and accounts receivable andnotes and accounts payable are not materially different from their carryingamounts.  The fair value of PSCo’s otherinvestments is estimated based on quoted market prices for those or similarinvestments.  The fair value of PSCo’slong-term debt is estimated based on the quoted market prices for the same orsimilar issues or the current rates for debt of the same remaining maturitiesand credit quality.

 

Thefair value estimates presented are based on information available to managementas of Dec. 31, 2008 and 2007. These fair value estimates have not beencomprehensively revalued for purposes of these consolidated financialstatements since that date and current estimates of fair values may differsignificantly.

 

 

 

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** **

**Letters of Credit**

** **

PSCouse letters of credit, generally with terms of one year, to provide financialguarantees for certain operating obligations. At Dec. 31, 2008 and 2007, there were $4.9 million and $5.1 millionof letters of credit outstanding.  Thecontract amounts of these letters of credit approximate their fair value andare subject to fees determined in the marketplace.

 

**13.    Fair Value Measurements**

** **

Effective Jan. 1, 2008, PSCo adopted SFAS No. 157 forrecurring fair value measurements.  SFAS No. 157provides a single definition of fair value and requires enhanced disclosuresabout assets and liabilities measured at fair value. SFAS No. 157establishes a hierarchal framework for disclosing the observability of theinputs utilized in measuring assets and liabilities at fair value. The threelevels defined by the SFAS No. 157 hierarchy and examples of each levelare as follows:

 

Level 1 — Quoted pricesare available in active markets for identical assets or liabilities as of thereported date. The types of assets and liabilities included in Level 1 arehighly liquid and actively traded instruments with quoted prices.

 

Level 2 — Pricing inputsare other than quoted prices in active markets, but are either directly orindirectly observable as of the reported date. The types of assets and liabilities included in Level 2 are typicallyeither comparable to actively traded securities or contracts, or priced withmodels using highly observable inputs.

 

Level 3 — Significantinputs to pricing have little or no observability as of the reportingdate.  The types of assets andliabilities included in Level 3 are those with inputs requiring significantmanagement judgment or estimation.

 

PSCo held several commodityderivatives measured at fair value on a recurring basis as of Dec. 31,2008.  Fair value for these commodityderivatives was primarily determined based on observable prices for similarforward contracts, or internally prepared option valuation models usingobservable forward curves and volatilities. For certain instruments, it may be necessary to use inputs requiring significant managementjudgment or estimation, such as the long-term commodity price forecasts used todetermine the fair value of long-term energy forwards.  PSCo continuously monitorsthe creditworthiness of the counterparties to its commodity derivativecontracts and assesses each counterparty’s ability to perform on thetransactions set forth in the contracts. Given this assessment, as well an assessment of the impact of PSCo’s owncredit risk when determining the fair value of commodity derivativeliabilities, the impact of considering credit risk was immaterial to the fairvalue of commodity derivative assets and liabilities at Dec. 31, 2008.

 

Thefollowing table presents, for each of the SFAS No. 157 hierarchy levels,PSCo’s assets and liabilities that are measured at fair value on a recurringbasis as of Dec. 31, 2008:

 
| **(Thousands of Dollars)** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Counterparty  Netting (a)** | ** ** | **Net Balance** | ** ** |
|--------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------------------------|------------|----------------------|------------|
| Commodity derivative assets          |       | $                | —     |             | $          | 12,607           |       | $                                  | 1,358      |                 | $          | (8,972 | ) | $ | 4,993 |   |
| Commodity derivative liabilities     |       | —           |       | 55,935           |       | 1,384            |       | (33,403                            | )          | 23,916               |       |
|                                      |            |                  |            |                  |            |                  |            |                                    |            |                      |            |  |  |  |  |  |

----

(a)                                  FASBInterpretation No. 39 *Offsetting ofAmounts Relating to Certain Contracts*, as amended by FASB StaffPosition FIN 39-1 *Amendment of FASBInterpretation No. 39*, permits the netting of receivables andpayables for derivatives and related collateral amounts when a legallyenforceable master netting agreement exists between PSCo and a counterparty. Amaster netting agreement is an agreement between two parties who have multiplecontracts with each other that provides for the net settlement of all contractsin the event of default on or terminationof any one contract.

 

The following table presents the changes in Level 3 recurring fairvalue measurements for the year ended Dec. 31, 2008:

 
| **(Thousands of Dollars)**                  | ** ** | **Commodity  Derivatives,  Net** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| Balance, Jan. 1, 2008                            |       | $                                | 4,121      |   |
| Purchases, issuances, and settlements, net            |       | (4,396                           | )          |
| Losses recognized in earnings                         |       | (1,384                           | )          |
| Gains recognized as regulatory assets and liabilities |       | 1,633                            |       |
| Balance, Dec. 31, 2008                           |       | $                                | (26        | ) |

 

Gainson Level 3 commodity derivatives recognized in earnings for the year ended Dec. 31,2008, include $0.8 million of net unrealized gains relating to commodityderivatives held at Dec. 31, 2008. Realized and unrealized gains and losses on 

 

 

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commoditytrading activities are included in electric utility revenues.  Realized and unrealized gains and losses onshort-term wholesale activities reflect the impact of regulatory recovery andare deferred as regulatory assets and liabilities.

 

**14.    Rate Matters**

** **

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

*** ***

**BaseRate**

 

***PSCo Electric Rate Case***** —**On Nov. 14, 2008, PSCo filed a request with theCPUC to increase Colorado electric rates by $174.7 million annually, orapproximately 7.4 percent. The rate filing is based on a 2009 forecast testyear, an electric rate base of $4.2 billion, a requested ROE of11.0 percent and an equity ratio of 58.08 percent.

 

OnFeb. 13, 2009, parties filed answer testimony in the case.  The CPUC staff accepted PSCo’s forecasttest-year and recommended an increase of $110 million based on a 10.37 percentROE.  The CPUC staff also recommended that the increase be split into twoparts, the first part consisting of $69.9 million, effective in July 2009and the remaining $40 million to take effect on or about Jan. 1, 2010 tocoincide with the implementation of rates from the next rate case.  Inaddition to ROE, the primary CPUC staff adjustments are related to the salesforecast, debt rate, incentive pay, and wage increases.  The CPUC staff also recommends an earningstest to refund any earnings above authorized levels to customers.

 

TheOffice of Consumer Council (OCC) recommended a $3.8 million increase based on ahistoric test year increase of $69.9 million. The OCC recommended an ROE of9.75 percent and an equity ratio of 53 percent.  The OCC recommendedadjustments to the cash working capital and rate case expense.

 

Otherparties filing testimony affecting the revenue requirements were the ColoradoEnergy Consumers which supported use of a historic test year; Ratepayers Unitedof Colorado, which recommended a 9.5 percent ROE; and Leslie Glustrom, acitizen intervenor, who raised concerns about the Comanche 3 project as well asPSCo’s consulting and personal communication costs.

 

Afinal decision is expected in the summer of 2009.  The following procedural schedule has beenestablished:

 

·                  PSCo rebuttal testimony on March 20, 2009;

 

·                  Staff and intervenor surrebuttal testimony on April 10, 2009; and

 

·                  The hearing on the merits are scheduled for April 20-May 1,2009.

 

***Natural Gas Rate Case — Phase II —*** In July 2007,the CPUC issued a final written order approving a natural gas rate increase ofapproximately $32.3 million, based on a 10.25 percent ROE and a60.17 percent equity ratio.  Finalrates were implemented effective July 30, 2007, through a general rateschedule adjustment (GRSA) applied to all customer classes. Under theprovisions of the settlement between PSCo and the CPUC, PSCo filed itsPhase II (cost allocation and rate design) in April 2008 to spreadthe settled revenue requirement from its 2006 Phase I gas rate case among PSCo’scustomer classes.

 

InDecember 2008, the CPUC issued its final order in which the CPUC approvedwith certain exceptions PSCo’s proposed reallocation of its revenuerequirement, including the $32.3 million final written order referenced above,among rate classes.

 

Inthis same order, the CPUC rejected  PSCo’sproposal to raise its fixed monthly service and facilities charges.  The CPUC also approved the recovery of PSCo’s$15 million pilot low-income assistance program through customers’ service andfacilities charges.  The costs of thislow-income program are in addition to the $32.3 million base-rate increaseapproved in July 2007.

 

**On Jan. 1, 2009, PSCo implemented the CPUC’sapproved reallocation of the revenue requirement, eliminated the GRSA and beganrecovering the costs of its low-income program.**

** **

**Electric, Purchased Gasand Resource Adjustment Clauses**

** **

***TCA Rider —***In September 2007,PSCo filed with the CPUC a request to implement a TCA.  In December 2007, the CPUC approved PSCo’sapplication to implement the TCA rider. The CPUC limited the scope of the coststhat could be recovered through the rider during 2008 to only those costsassociated with transmission investment made after the new legislationauthorizing the TCA rider became effective on March 26, 2007. The CPUCalso required PSCo to base its revenue 

 

 

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requirementcalculation on a thirteen-month average net transmission plant balance. As aresult of the CPUC’s decision, PSCo implemented a rider on Jan. 1, 2008,designed to recover approximately $4.5 million in 2008.  PSCo filed updates to the TCA rider on Nov. 3,2008, and new rates went into effect on Jan. 1, 2009, to recoverapproximately $18.0 million on an annual basis until the time rates in thepending rate case take effect.

 

***Enhanced DSM Program —***In July 2008,the CPUC issued an order approving PSCo’s proposal to expand theDSM program and recover 100 percent of its forecasted expenses associatedwith the DSM program during the year in which the rider is in effect, beginningin 2009.  An incentive mechanism was also approved to reward PSCo formeeting and exceeding program goals.

 

***Pending and Recently Concluded RegulatoryProceedings — FERC***

*** ***

***Pacific Northwest FERC Refund Proceeding —***In July 2001,the FERC ordered a preliminary hearing to determine whether there may have beenunjust and unreasonable charges for spot market bilateral sales in the PacificNorthwest for the period Dec. 25, 2000 through June 20, 2001. PSCo suppliedenergy to the Pacific Northwest markets during this period and has been aparticipant in the hearings. In September 2001, the presiding ALJconcluded that prices in the Pacific Northwest during the referenced periodwere the result of a number of factors, including the shortage of supply,excess demand, drought and increased natural gas prices. Under thesecircumstances, the ALJ concluded that the prices in the Pacific Northwestmarkets were not unreasonable or unjust and no refunds should be ordered.Subsequent to the ruling, the FERC has allowed the parties to requestadditional evidence.  Parties haveclaimed that the total amount of transactions with PSCo subject to refund is$34 million. In June 2003, the FERC issued an order terminating theproceeding without ordering further proceedings. Certain purchasers filedappeals of the FERC’s orders in this proceeding with the U. S. Court of Appealsfor the Ninth Circuit.

 

Inan order issued in August 2007, the Court of Appeals remanded theproceeding back to the FERC.  The Courtof Appeals also indicated that the FERC should consider other rulingsaddressing overcharges in the California organized markets.  The FERC has yet to act on this order onremand.

 

***PSCo Wholesale Rate Case —***In February 2008,PSCo requested a $12.5 million, or 5.88 percent, increase in wholesale rates,based on an 11.5 percent requested ROE. The $12.5 million total increase was composed of $8.8 million oftraditional base rate recovery and $3.7 million of construction work in progressrecovery for the Comanche 3 and Fort St. Vrain projects.  The increase would be applicable to allwholesale firm service customers with the exception of Intermountain RuralElectric Cooperative, which would be under a rate moratorium until January 2009.

 

InMarch 2008, PSCo reached an agreement with Rural Electric Association(REA) customers Holy Cross, Yampa Valley and Grand Valley, which resolved allissues based on a “black box” settlement with an implied ROE of 10.4percent.  Parties filed the settlementwith the FERC on April 17, 2008, with rates effective May 1,2008.  PSCo has reached an agreement withthe cities of Burlington and Center, as well as Aquila under the samesubstantive terms and conditions as the REA settlement.  This settlement was filed with the FERC on April 25,2008.  The settlements provide for:

 

·                  A traditionalannual rate base rate increase of $6.6 million with AFDC continuing forComanche Station and Fort St. Vrain.

 

·                  Implementationof new rates several months earlier than is typical in a disputed filing.

 

·                  The ability toimplement rates in PSCo’s next general rate case that will involve Comanche 3costs upon a nominal suspension.

 

The FERC approved the settlement agreements on June 19,2008.

 

**Additionally, PSCo reached a settlement withIntermountain Rural Electric Association on similar terms. The FERC approvedthe settlement on Dec. 29, 2008. Rates took effect on Jan. 1, 2009. This agreement will increase base rates for Intermountain by $1.7million in 2009.**

** **

**15.    Commitmentsand Contingent Liabilities**

** **

***Capital Commitments —***As of Dec. 31,2008, the estimated cost of the capital expenditure programs and other capitalrequirements of PSCo is approximately $610 million in 2009, $600 million in2010 and $600 million in 2011.  PSCo’scapital expenditure forecast includes the following major project:

 

 

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*Comanche 3* — Comanche 3, a 750 MWcoal-fired plant being built in Colorado, is expected to cost approximately$1.3 billion, with major construction initiated in 2006 and is expected tobe completed in the fall of 2009. The CPUC has approved sharing one-thirdownership of this plant with other parties.

 

**The capital expenditure programs of PSCo are subjectto continuing review and modification. Actual utility construction expenditures may vary from the estimates dueto changes in electric and natural gas projected load growth regulatorydecisions, the desired reserve margin and the availability of purchased power,as well as alternative 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 the purchase and delivery of asignificant portion of its current coal and natural gas requirements.  These contracts expire in various yearsbetween 2009 and 2040.  In addition, PSComay be required to pay additional amounts depending on actual quantitiesshipped under these agreements.  Thepotential risk of loss, in the form of increased costs from market pricechanges in fuel, is mitigated through the cost-rate adjustment mechanisms,which provide for pass through of most fuel, storage and transportation coststo customers.

 

Theestimated minimum purchases for PSCo under these contracts as of Dec. 31,2008, is as follows:

 
| **Coal**   | ** ** | **Natural Gas  Supply** | ** ** | **Gas Storage &  Transportation** | ** ** |
|------------|------------|------------------------------|------------|-------------------------------------------------|------------|
| ** ** | ** ** | **(Millions of Dollars)**    | ** ** | ** **                                      | ** ** |
| $          | 689        |                         | $          | 527                                             |       | $ | 2,086 |   |
|            |            |                              |            |                                                 |            |  |  |  |

** **

***Purchased Power Agreements****—*PSCo has entered into agreements with utilities and other energysuppliers for purchased power to meet system load and energy requirements,replace generation from company-owned units under maintenance and duringoutages and meet operating reserve obligations. PSCo has various pay-for-performance contracts with expiration datesthrough the year 2027.  In general, thesecontracts provide for capacity payments, subject to meeting certain contractobligations and energy payments based on actual power taken under thecontracts.  Certain contractual paymentobligations are adjusted based on indices. However, the effects of these price adjustments are mitigated throughcost-of-energy rate adjustment mechanisms.

 

AtDec. 31, 2008, the estimated future payments for capacity, accounted foras executory contracts, that PSCo is obligated to purchase, subject toavailability, were as follows:

 
| **(Millions of Dollars)** | ** ** | ** ** | ** ** |
|---------------------------|------------|------------|------------|
| 2009                      |       | $          | 381.8      |   |
| 2010                      |       | 354.9      |       |
| 2011                      |       | 344.2      |       |
| 2012                      |       | 288.9      |       |
| 2013                      |       | 223.5      |       |
| 2014 and thereafter       |       | 1,115.6    |       |
| Total                     |       | $          | 2,708.9    |   |

** **

***Leases*****— PSCo leases a variety of equipment and facilities used in the normalcourse of business.  Two of these leasesqualify as capital leases and are accounted for accordingly.  The capital leases contractually expire in2025 and 2028.  The assets andliabilities acquired under capital leases are recorded at the lower offair-market value or the present value of future lease payments and areamortized over their actual contract term in accordance with practices allowedby regulators.

 

Followingis a summary of assets held under capital leases:

 
| **(Millions of Dollars)**    | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------|------------|----------|------------|----------|------------|
| Storage, leaseholds and rights         |       | $        | 40.5       |     | $          | 40.5 |   |
| Gas pipeline                           |       | 20.7     |       | 20.7     |       |
|                                   |       | 61.2     |       | 61.2     |       |
| Less: Accumulated amortization         |       | (17.8    | )          | (16.3    | )          |
| Total assets held under capital leases |       | $        | 43.4       |     | $          | 44.9 |   |

 

 

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Theremainder of the leases, primarily for office space, railcars, generatingfacilities, trucks, cars and power-operated equipment are accounted for asoperating leases.  Total rental expenseunder operating lease obligations was approximately $85.6 million, $44.6million and $17.1 million for 2008, 2007 and 2006, respectively.  Included in total rental expense werepurchase power agreement payments of $67.5 million, $26.1 million and $0.0 million in 2008, 2007 and 2006,respectively.

 

Includedin the future commitments under operating leases are estimated future paymentsunder purchase power agreements that have been accounted for as operatingleases 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 are:

 
| **(Millions of Dollars)** | ** ** | **Other  Operating Leases** | ** ** | **Purchased Power  Agreement  Operating Leases (a) (b)** | ** ** | **Total  Operating Leases** | ** ** | **Capital Leases** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|-------------------------------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|
| 2009                                |       | $                                | 12.5       |                                                                    | $          | 63.6                             |       | $                       | 76.1       |   | $ | 6.0 |   |
| 2010                                |       | 12.5                             |       | 59.8                                                                    |       | 72.3                             |       | 5.8                     |       |
| 2011                                |       | 11.9                             |       | 49.1                                                                    |       | 61.0                             |       | 5.7                     |       |
| 2012                                |       | 10.6                             |       | 45.0                                                                    |       | 55.6                             |       | 5.5                     |       |
| 2013                                |       | 10.4                             |       | 47.7                                                                    |       | 58.1                             |       | 5.3                     |       |
| Thereafter                          |       | 25.8                             |       | 713.8                                                                   |       | 739.6                            |       | 51.5                    |       |
| Total minimum obligation            |       |                             |       |                                                                    |       |                             |       | 79.8                    |       |
| Interest component of obligation    |       |                             |       |                                                                    |       |                             |       | (36.4                   | )          |
| Present value of minimum obligation |       |                             |       |                                                                    |       |                             |       | $                       | 43.4       |   |
|                                     |            |                                  |            |                                                                         |            |                                  |            |                         |            |  |  |  |  |

----

(a)                      Amounts not included in purchase poweragreement estimated future payments above.

 

(b)                     Purchase poweragreement operating leases contractually expire through 2028.

 

**EnvironmentalContingencies**

 

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

 

***Site Remediation****—*PSCo must payall or a portion of the cost to remediate sites where past activities of PSCoor other parties have caused environmental contamination.  Environmental contingencies could arise fromvarious situations including sites of former MGPs operated by PSCo, itspredecessors, or other entities; and third party sites, such as landfills, towhich PSCo is alleged to be a PRP that sent hazardous materials andwastes.  At Dec. 31, 2008, theliability for the cost of remediating these sites was estimated to be $1.7million, of which $0.2 million was considered to be a current liability.

 

###### ***MGP Sites***

######  

***Fort Collins MGP 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 MGPand has subsequently sold most of the property. In 2002, an oily substance similar to MGP byproducts was discovered inthe Cache la Poudre River.  In November 2004,PSCo entered into an agreement with the EPA, the city of Fort Collins andSchrader Oil Co. under which PSCo performed remediation and monitoringwork.  PSCo has substantially completedwork at the site, with the exception of ongoing maintenance and monitoring.

 

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 $2.8 million.  This reflects a reduction in estimated EPAoversight costs over the life of the project, based upon the most recent EPAoversight billing.

 

 

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InApril 2005, PSCo brought a contribution action against Schrader andrelated parties (collectively “Schrader”) alleging Schrader released hazardoussubstances into the environment and these releases caused MGP byproducts tomigrate to the Cache la Poudre River, thereby substantially increasing thescope and cost of remediation.  PSCorequested damages, including a portion of the costs PSCo incurred, toinvestigate and remove contaminated sediments from the Cache la PoudreRiver.  In November 2008, PSCo andSchrader entered into a settlement agreement whereby Schrader paid $2.75million to PSCo, and will make additional payments of $50,000 per year for thenext five years for a total settlement of $3.0 million. Net proceeds from thesettlement will be credited to customers.

 

# **ThirdParty and Other Environmental Site Remediation**

#  

***Asbestos Removal*****—**Some of PSCo’sfacilities contain asbestos.  Mostasbestos will remain undisturbed until the facilities that contain it aredemolished or renovated.  PSCo has recordedan estimate for final removal of the asbestos as an asset retirementobligation.  See additional discussion ofasset retirement obligations below.  Itmay be necessary to remove some asbestos to perform maintenance or makeimprovements to other equipment.  Thecost of removing asbestos as part of other work is immaterial and is recordedas incurred as operating expenses for maintenance projects, capitalexpenditures for construction projects or removal costs for demolitionprojects.

 

***Other Environmental Requirements***

 

***Regional Haze Rules ***— In June 2005, the EPAfinalized amendments to the July 1999 regional haze rules.  These amendments apply to the provisions ofthe regional haze rule that require emission controls, known as BART, forindustrial facilities emitting air pollutants that reduce visibility by causingor contributing to regional haze.  SomePSCo generating facilities will be subject to BART requirements.

 

TheEPA required states to develop implementation plans to comply with BART by December 2007.  States are required to identify thefacilities that will have to reduce SO2, NOx and particulate matter emissions under BARTand then set BART emissions limits for those facilities.  In May 2006, the Colorado Air QualityControl Commission (AQCC) promulgated BART regulations requiring certain majorstationary sources to evaluate and install, operate and maintain BART to makereasonable progress toward meeting the national visibility goal.  PSCo estimates that implementation of BARTwill cost approximately $254 million in capital costs, which includesapproximately $113 million in environmental upgrades for the existing ComancheStation Units 1 and 2 project, which are included in the capital budget.  PSCo expects the cost of any required capitalinvestment will be recoverable from customers. Emissions controls are expected to be installed between 2011 and2014.  Colorado’s state implementationplan has been submitted to EPA for approval. In January 2009, the CAPCDinitiated a joint stakeholder process to evaluate what types of additional NOxcontrols may be necessary to meet reasonable progress goals for Colorado’s Class Iareas, the new ozone standard, and Rocky Mountain National Park nitrogendeposition reduction goals.  Thestakeholder process will continue throughout 2009.

 

***CAMR***— In March 2005, the EPA issued the CAMR, whichregulated mercury emissions from power plants. In February 2008, the U.S. Court of Appeals for the District ofColumbia vacated CAMR, which impacts federal CAMR requirements, but notnecessarily state-only mercury legislation and rules.  Colorado’s mercury rule requires mercuryemission controls capable of achieving 80 percent capture be installed at thePawnee Generating Station by 2012 and other specified units by 2014.  The expected cost estimate for the PawneeGenerating Station is $2.3 million for capital costs with an annual estimate of$1.4 million for absorbent expense.  PSCois evaluating the mercury emission controls required to meet the state rule forthe remaining units and is currently unable to provide a total capital costestimate.

 

***Federal Clean Water Act***— The Federal Clean WaterAct requires the EPA to regulate cooling water intake structures to assure thatthese structures reflect the best technology available (BTA) for minimizingadverse environmental impacts.  In July 2004,the EPA published phase II of the rule, which applies to existing cooling waterintakes at steam-electric power plants. Several lawsuits were filed against theEPA in the United States Court of Appeals for the Second Circuit challengingthe phase II rulemaking.  In January 2007,the court 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.  In April 2008,the U.S. Supreme Court granted limited review of the Second Circuit’s opinionto determine whether the EPA has the authority to consider costs and benefitsin assessing BTA.  A decision is notexpected until 2009.

 

 

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***Notice of Violation (NOV)*** — In July 2002,PSCo received an NOV from the EPA alleging violations of the New Source Review(NSR) requirements of the Clean Air Act (CAA) at the Comanche Station andPawnee Station in Colorado.  The NOVspecifically alleges that various maintenance, repair and replacement projectsundertaken at the plants in the mid- to late-1990s should have required apermit under the NSR process.  PSCobelieves it has acted in full compliance with the CAA and NSR process.  PSCo believes that the projects identified inthe NOV fit within the routine maintenance, repair and replacement exemptioncontained within the NSR regulations or are otherwise not subject to the NSRrequirements.  PSCo disagrees with theassertions contained in the NOV and intends to vigorously defend its position.

 

**AssetRetirement Obligations**

 

PSCorecords future plant removal obligations as a liability at fair value with acorresponding increase to the carrying values of the related long-lived assetsin accordance with FASB Statement No. 143, *Accounting for Asset Retirement Obligations*, (SFAS No. 143).  This liability will be increased over time byapplying the interest method of accretion to the liability and the capitalizedcosts will be depreciated over the useful life of the related long-livedassets.  The recording of the obligationfor regulated operations has no income statement impact due to the deferral ofthe adjustments through the establishment of a regulatory asset pursuant toSFAS No. 71.

 

***Recorded ARO —*** AROs have beenrecorded for steam production, electric transmission and distribution andnatural gas distribution.  The steamproduction obligation includes asbestos, ash-containment facilities andradiation sources.  The asbestosrecognition associated with the steam production includes certain plants atPSCo.  Generally, this asbestos abatementremoval obligation originated in 1973 with the Clean Air Act, which applied tothe demolition of buildings or removal of equipment containing asbestos thatcan become airborne on removal.  AROsalso have been recorded for PSCo steam production related to ash-containmentfacilities such as bottom ash ponds, evaporation ponds and solid wastelandfills. The origination date on the ARO recognition for ash-containmentfacilities at steam plants was the in-service date of various facilities.  Additional AROs have been recorded for steamproduction plant related to radiation sources in equipment used to monitor theflow of coal, lime and other materials through feeders.

 

PSCorecognized an ARO for the retirement costs of its natural gas mains.  In addition, an ARO was recognized for theremoval of electric, transmission and distribution equipment.  The electric transmission and distributionARO 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.

 

Areconciliation of the beginning and ending aggregate carrying amounts of PSCo’sAROs is shown in the table below for the 12 months ended Dec. 31, 2008 and2007, respectively:

 
| **(Thousands of Dollars)**   | ** ** | **Beginning  Balance  Jan. 1, 2008** | ** ** | **Liabilities  Recognized** | ** ** | **Liabilities  Settled** | ** ** | **Accretion** | ** ** | **Revisions  To Prior  Estimates** | ** ** | **Ending  Balance  Dec. 31, 2008** | ** ** |
|----------------------------------------|------------|------------------------------------------------|------------|-----------------------------|------------|--------------------------|------------|---------------|------------|-----------------------------------------|------------|----------------------------------------------|------------|
| **Electric Utility Plant:**            | ** ** | ** **                                     | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **    | ** ** | ** **                              | ** ** | ** **                                   | ** ** |
| Steam production asbestos              |       | $                                              | 10,201     |                        | $          | 8,231                    |       | $             | —     |                                    | $          | 647                                          |       | $ | 37,046 |   | $ | 56,125 |   |
| Steam production ash containment       |       | 4,058                                          |       | —                      |       | —                   |       | 251           |       | 97                                      |       | 4,406                                        |       |
| Steam production radiation sources     |       | —                                         |       | 274                         |       | —                   |       | 2             |       | —                                  |       | 276                                          |       |
| Electric transmission and distribution |       | 82                                             |       | —                      |       | —                   |       | 5             |       | 32                                      |       | 119                                          |       |
| **Gas Utility Plant:**                 | ** ** | ** **                                     | ** ** | ** **                  | ** ** | ** **               | ** ** | ** **    | ** ** | ** **                              | ** ** | ** **                                   | ** ** |
| Gas transmission and distribution      |       | 29,926                                         |       | —                      |       | —                   |       | 741           |       | (30,088                                 | )          | 579                                          |       |
| Total liability                        |       | $                                              | 44,267     |                        | $          | 8,505                    |       | —        |       | $                                       | 1,646      |                                         | $          | 7,087 |   | $ | 61,505 |   |
|                                        |            |                                                |            |                             |            |                          |            |               |            |                                         |            |                                              |            |  |  |  |  |  |  |

 

PSCoincurred revisions to prior estimates and new liabilities for asbestos due to anew dismantling cost study.  There werealso revised gas distribution, ash ponds and electric transmission anddistribution asset retirement obligations due to new estimates and end of lifedates.

 

 

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| **(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 |   |
|                                        |            |                                                |            |                             |            |                          |            |               |            |                                         |            |                                              |            |  |  |  |  |  |  |

 

***Indeterminate AROs******—***PSCo has underground naturalgas storage facilities that have special closure requirements for which thefinal removal date cannot be determined, therefore an ARO has not beenrecorded.

 

***Removal Costs —*** PSCo accruesan obligation for plant removal costs for generation, transmission anddistribution facilities.  Generally, theaccrual 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 appropriateregulatory entities.  Given the longperiods over which the amounts were accrued and the changing of rates throughtime, PSCo has estimated the amount of removal costs accumulated throughhistoric depreciation expense based on current factors used in the existingdepreciation rates.  Accordingly, therecorded amounts of estimated future removal costs are considered regulatoryliabilities under SFAS No. 71.  Removal costs as of Dec. 31, 2008 and Dec. 31,2007 were $379 million and $374 million, respectively.

 

**Legal Contingencies**

 

Lawsuits and claims arise in the normal course of business. Management,after consultation with legal counsel, has recorded an estimate of the probablecost of settlement or other disposition of them. The ultimate outcome of thesematters cannot presently be determined. Accordingly, the ultimate resolution ofthese matters could have a material adverse effect on PSCo’s financial positionand results of operations.

 

**Environmental Litigation**

** **

***Carbon Dioxide Emissions Lawsuit*** — In July 2004, the attorneys general of eightstates and New York City, as well as several environmental groups, filedlawsuits in U.S. District Court in the Southern District of New York againstfive utilities, including Xcel Energy, to force reductions in CO2 emissions. Theother utilities include American Electric Power Co., Southern Co., CinergyCorp. and Tennessee Valley Authority. The lawsuits allege that CO2 emitted by eachcompany is a public nuisance as defined under state and federal common lawbecause it has contributed to global warming. The lawsuits do not demandmonetary damages. Instead, the lawsuits ask the court to order each utility tocap and reduce its CO2 emissions. In October 2004, Xcel Energyand the other defendants filed a motion to dismiss the lawsuit. On Sept. 19,2005, the court granted the motion to dismiss on constitutional grounds.Plaintiffs filed an appeal to the U.S. Court of Appeals for the Second Circuit.In June 2007 the Court of Appeals issued an order requesting the partiesto file 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 the issues raised by the parties on appeal. Among other things, in itsdecision in Massachusetts v. EPA, the United States Supreme Court held that CO2 emissions are a“pollutant” subject to regulation by the EPA under the CAA. In July 2007,in response to the request of the Court of Appeals, the defendant utilitiesfiled a letter brief stating the position that the United States Supreme Court’sdecision supports the arguments raised by the utilities on appeal. The Court ofAppeals has taken the matter under advisement and is expected to issue anopinion in due course.

 

## ***Comer vs. Xcel Energy Inc. et al. —*** In April 2006, Xcel Energy receivednotice of a purported class action lawsuit filed in U.S. District Court in theSouthern 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 the increase in the destructive capacityof Hurricane Katrina.” Plaintiffs allege in support of their claim, severallegal theories, including negligence and public and private nuisance and seekdamages related to the loss resulting from the 

 

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## hurricane.Xcel Energy believes this lawsuit is without merit and intends to vigorouslydefend itself against these claims. In August 2007, the court dismissedthe lawsuit in its entirety against all defendants on constitutional grounds.In September 2007, plaintiffs filed a notice of appeal to the U.S. Courtof Appeals for the Fifth Circuit. Oral arguments were presented to the Court ofAppeals on Aug. 6, 2008. Pursuant to the court’s order of Sept. 26, 2008,re-argument was held on Nov. 3, 2008. No explanation was given for theorder.  The Court of Appeals has takenthe matter under advisement.

##  

***Native Village of Kivalina vs. Xcel EnergyInc. et al.******—*** In February 2008, theCity and Native Village of Kivalina, Alaska, filed a lawsuit in U.S. DistrictCourt for the Northern District of California against Xcel Energy, the parentcompany of PSCo, and 23 other utilities, oil, gas and coal companies.  The suit was brought on behalf ofapproximately 400 native Alaskans, the Inupiat Eskimo, who claim thatDefendants’ emission of CO2 and other greenhouse gases (GHG)contribute to global warming, which is harming their village.  Plaintiffs claim that as a consequence, theentire village must be relocated at a cost of between $95 million and $400million.  Plaintiffs assert a nuisanceclaim under federal and state common law, as well as a claim asserting “concertof action” in which defendants are alleged to have engaged in tortious acts inconcert with each other.  Xcel Energy wasnot named in the civil conspiracy claim. Xcel Energy believes the claims asserted in this lawsuit are withoutmerit and joined with other utility defendants in filing a motion to dismiss on June 30,2008.  The matter has now been fully briefed, with oralarguments set for May 19, 2009.  Itis unknown when the court will render a decision.

 

**Employment, Tort and Commercial Litigation**

** **

***Qwest vs. Xcel Energy Inc. —***In June 2004,an employee of PSCo was seriously injured when a pole owned by Qwest malfunctioned.In September 2005, the employee commenced an action against Qwest inColorado state court in Denver. 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 safety,including testing the pole for soundness before climbing. In May 2006,PSCo filed a counterclaim against Qwest asserting Qwest had a duty to PSCo andan obligation under the contract to maintain its poles in a safe andserviceable condition. In May 2007, the matter was tried and the juryfound Qwest solely liable for the accident and this determination resulted inan award of damages in the amount of approximately $90 million.  On June 16, 2008, Qwest filed itsappellate brief.   The matter has been fully briefed by theparties and oral arguments were presented on Feb. 18, 2009.  PSCo is currently awaiting a decision by thecourt.

 

***Mallon vs. Xcel Energy Inc. —***In August 2007,Xcel Energy, PSCo and PSRI commenced a lawsuit in Colorado state court againstTheodore Mallon and TransFinancial Corporation seeking damages for, among otherthings, breach of contract and breach of fiduciary duties associated with thesale of COLI policies. In May 2008, Xcel Energy, PSCo and PSRI filed anamended complaint that, among other things, adds Provident Life &Accident Insurance Company (Provident) as a defendant and asserts claims forbreach of contract, unjust enrichment and fraudulent concealment against theinsurance company. On June 23, 2008, Provident filed a motion to dismissthe complaint. On Oct. 22, 2008, the court granted Provident’s motion inpart, but denied the motion with respect to a majority of the core causes ofaction asserted by PSCo, Xcel Energy Inc. and PSRI.  In January 2009, the court granteddefendant Mallon’s motion to amend his answer to, among other things, add acounterclaim for breach of contract and fraud against plaintiffs PSRI, PSCo andXcel Energy.  Xcel Energy believes thecounterclaims are without merit and intend to vigorously defend against them.

 

***Cabin Creek Hydro Generating Station Accident******—***InOctober 2007, employees of RPI Coatings Inc. (RPI), a contractor retainedby PSCo, were applying an epoxy coating to the inside of a penstock at PSCo’sCabin Creek Hydro Generating Station near Georgetown, Colo. This work was beingperformed as part of a corrosion prevention effort. A fire occurred inside thepenstock, which is a 4,000-foot long, 12-foot wide pipe used to deliver waterfrom a reservoir to the hydro facility. Four of the nine RPI employees workinginside the penstock were positioned below the fire and were able to exit thepipe. The remaining five RPI employees were unable to exit the penstock. Rescuecrews located the five employees a few hours later and confirmed their deaths.The accident was investigated by several state and federal agencies, includingthe federal Occupational Safety and Health Administration (OSHA) and the U.S.Chemical Safety Board and the Colorado Bureau of Investigations.

 

InMarch 2008, OSHA proposed penalties totaling $189,900 for twenty-twoserious violations and three willful violations arising out of theaccident.  In April 2008, XcelEnergy notified OSHA of its decision to contest all of the proposed citations.On May 28, 2008 the Secretary of Labor filed its complaint, and XcelEnergy subsequently filed its answer on June 17, 2008.  The Court ordered this proceeding stayeduntil March 3, 2009 and indicated an extension of the stay is possible. Alawsuit has been filed in Colorado state court in Denver on behalf of four ofthe deceased workers and four of the injured workers (Foster, et. al. v. PSCo,et. al.).  PSCo and Xcel Energy are named as defendants in thatcase, along with RPI Coatings and related companies and the two othercontractors who also performed work in connection with the relining project atCabin 

 

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Creek.  A second lawsuit (Ledbetter et. al vs. PSCoet. al) has also been filed in Colorado state court in Denver on behalf ofthree employees allegedly injured in the accident. A third lawsuit was filed onbehalf of one of the deceased RPI workers in the California state court(Aguirre v. RPI, et. al.), naming PSCo, RPI, and the two other contractors asdefendants.  The court  subsequently dismissed the Aguirre lawsuit,and it is anticipated that the plaintiff will refile the lawsuit inColorado.  Xcel Energy, Inc and PSCointend to vigorously defend themselves against the claims asserted in all threelawsuits.

 

**16.   Regulatory Assets and Liabilities**

** **

PSCo’sconsolidated financial statements are prepared in accordance with theprovisions of SFAS No. 71, as discussed in Note 1 to the consolidatedfinancial statements.  Under SFAS No. 71,regulatory assets and liabilities can be created for amounts that regulatorsmay allow to be collected, or may require to be paid back to customers infuture electric and natural gas rates. Any portion of the business that is not rate regulated cannot use SFAS No. 71accounting.  If changes in the utilityindustry or the business of PSCo no longer allow for the application of SFAS No. 71under GAAP, PSCo would be required to recognize the write-off of regulatoryassets and liabilities in its consolidated statement of income.  The components of unamortized regulatoryassets and liabilities on the consolidated balance sheets of PSCo are:

 
| ** **                                                   | ** ** | **See**    | ** ** | **Remaining**                | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------------------------|------------|------------|------------|------------|------------|
| **(Thousands of Dollars)**                         | ** ** | **Note**   | ** ** | **Amortization Period** | ** ** | **2008**   | ** ** | **2007**   | ** ** |
| **Regulatory Assets**                                   | ** ** | ** ** | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| Current regulatory asset — Unrecovered fuel costs       |       | 1          |       | Less than one year           |       | $          | 697        |       | $          | 13,857 |   |
|                                                         |       |       |       |                         |       |       |       |       |       |
| Pension and other employee benefit obligations               |       | 9          |       | Various                      |       | $          | 655,563    |       | $          | 328,137 |   |
| Conservation programs (a)                                    |       |       |       | Various                      |       | 75,543     |       | 78,415     |       |
| AFDC recorded in plant (a)                                   |       |       |       | Plant lives                  |       | 65,382     |       | 44,913     |       |
| Contract valuation adjustments (b)                           |       | 11         |       | Term of related contract     |       | 60,903     |       | 22,931     |       |
| Net asset retirement obligations                             |       |       |       | Plant lives                  |       | 25,983     |       | 15,545     |       |
| Losses on reacquired debt                                    |       | 1          |       | Term of related debt         |       | 20,486     |       | 22,404     |       |
| Environmental costs                                          |       | 15         |       | Four to five years           |       | 11,542     |       | 15,174     |       |
| Renewable resource costs                                     |       |       |       | One to two years             |       | 10,319     |       | 5,273      |       |
| Purchased power contracts costs                              |       | 11         |       | Term of related contract     |       | 7,487      |       | —     |       |
| Rate case costs                                              |       | 1          |       | Various                      |       | 1,248      |       | 1,523      |       |
| Other                                                        |       |       |       | Various                      |       | 8,556      |       | 5,674      |       |
| Total noncurrent regulatory assets                           |       |       |       |                         |       | $          | 943,012    |       | $          | 539,989 |   |
|                                                         |       |       |       |                         |       |       |       |       |       |
| **Regulatory Liabilities**                                   |       |       |       |                         |       |       |       |       |       |
| Current regulatory liability — Overrecovered fuel costs |       |       |       |                         |       | $          | 113,276    |       | $          | 34,411 |   |
|                                                         |       |       |       |                         |       |       |       |       |       |
| Plant removal costs                                          |       | 15         |       |                         |       | $          | 378,863    |       | $          | 374,213 |   |
| Contract valuation adjustments                               |       |       |       |                         |       | 71,675     |       | 59,275     |       |
| Investment tax credit deferrals                              |       |       |       |                         |       | 32,061     |       | 33,471     |       |
| Deferred income tax adjustments                              |       |       |       |                         |       | 23,743     |       | 28,403     |       |
| Gain on sale of emission allowances                          |       |       |       |                         |       | 5,093      |       | 18,031     |       |
| Other                                                        |       |       |       |                         |       | 3,010      |       | 3,008      |       |
| Total noncurrent regulatory liabilities                      |       |       |       |                         |       | $          | 514,445    |       | $          | 516,401 |   |

 

----

(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.

 

**17.   Segments and Related Information**

** **

PSCohas two reportable segments, regulated electric utility and regulated naturalgas utility.

 

·                     PSCo’s regulated electric utilitysegment generates, 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 gasutility segment transports, stores and distributes natural gas in portions ofColorado.

 

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Revenuesfrom operating segments not included above are below the necessary quantitativethresholds and are therefore included in the all other category.  Those primarily include steam revenue,appliance repair services and nonutility real estate activities.

 

Operatingresults from the regulated electric utility and regulated natural gas utilityserve as the primary basis for the chief operating decision maker to evaluatethe dual performance of PSCo.

 

Toreport net income for regulated electric and regulated natural gas utilitysegments, PSCo must assign or allocate all costs and certain other income.  In general, costs are:

 

·                     Directly assigned whereverapplicable;

 

·                     Allocated based on costcausation allocators wherever applicable; or

 

·                     Allocated based on a generalallocator for all other costs not assigned by the above two methods.

 

Theaccounting policies of the segments are the same as those described in Note 1to the consolidated financial statements. These segments are managed separatelybecause the revenue streams are dependent upon regulated rate recovery which isseparately determined for each segment.

 
| **(Thousands of Dollars)**       | ** ** | **Regulated   Electric** | ** ** | **Regulated   Natural Gas** | ** ** | **All   Other** | ** ** | **Reconciling   Eliminations** | ** ** | **Consolidated   Total** | ** ** |
|--------------------------------------------|------------|-------------------------------|------------|---------------------------------------|------------|----------------------|------------|-------------------------------------|------------|-------------------------------|------------|
| **2008**                                   |       |                          |       |                                  |       |                 |       |                                |       |                          |       |
| Operating revenues from external customers |       | $                             | 2,982,929  |                                  | $          | 1,373,732            |       | $                                   | 36,383     |                          | $          | — |   | $ | 4,393,044 |   |
| Intersegment revenues                      |       | 229                           |       | 100                                   |       | —               |       | (329                                | )          | —                        |       |
| Total revenues                             |       | $                             | 2,983,158  |                                  | $          | 1,373,832            |       | $                                   | 36,383     |                          | $          | (329 | ) | $ | 4,393,044 |   |
| Depreciation and amortization              |       | $                             | 190,544    |                                  | $          | 55,638               |       | $                                   | 6,202      |                          | $          | — |   | $ | 252,384 |   |
| Interest charges and financing costs       |       | 110,263                       |       | 25,505                                |       | 465                  |       | (186                                | )          | 136,047                       |       |
| Income tax expense (benefit)               |       | 132,315                       |       | 53,075                                |       | (18,762              | )          | —                              |       | 166,628                       |       |
| Net income                                 |       | $                             | 230,417    |                                  | $          | 87,505               |       | $                                   | 21,874     |                          | $          | — |   | $ | 339,796 |   |
| **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              |       | $                             | 184,367    |                                  | $          | 56,313               |       | $                                   | 6,552      |                          | $          | — |   | $ | 247,232 |   |
| Interest charges and financing costs       |       | 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              |       | $                             | 163,860    |                                  | $          | 53,663               |       | $                                   | 6,533      |                          | $          | — |   | $ | 224,056 |   |
| Interest charges and financing costs       |       | 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 |   |

 

**18.   Related Party Transactions**

** **

XcelEnergy Services Inc. provides management, administrative and other services forthe 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.

 

XcelEnergy has established a utility money pool arrangement with the utilitysubsidiaries.  See Note 4 for furtherdiscussion of this borrowing arrangement.

 

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Thetable below contains significant affiliate transactions among the companies andrelated parties for the years ended Dec. 31:

 
| **(Thousands of Dollars)**                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Operating expenses:                                       |       |     |       |     |       |     |       |
| Other operations — paid to Xcel Energy Services Inc. |       | $        | 285,423    |     | $          | 270,778  |       | $ | 267,307 |   |
| Interest expense                                          |       | 1,361    |       | 966      |       | 4,894    |       |
|                                                           |            |          |            |          |            |          |            |  |  |  |

 

Accountsreceivable and payable with affiliates at Dec. 31, was:

 
| ** **                           | ** ** | **2008**       | ** ** | **2007**     | ** ** |
|--------------------------------------|------------|----------------|------------|--------------|------------|
| ** **                           | ** ** | **Accounts**   | ** ** | **Accounts** | ** ** | **Accounts** | ** ** | **Accounts** | ** ** |
| **(Thousands of Dollars)** | ** ** | **Receivable** | ** ** | **Payable**  | ** ** | **Receivable** | ** ** | **Payable** | ** ** |
| NSP-Minnesota                        |       | $              | 15,987     |         | $          | — |   | $ | 17,440 |   | $ | — |   |
| NSP-Wisconsin                        |       | 71             |       | —       |       | — |   | 2 |   |
| SPS                                  |       | —         |       | 191          |       | — |   | 337 |   |
| Other subsidiaries of Xcel Energy    |       | 13,487         |       | 28,715       |       | 17,144 |   | 27,106 |   |
|                                 |       | $              | 29,545     |         | $          | 28,906 |   | $ | 34,584 |   | $ | 27,445 |   |

 

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

 

Due to the seasonality ofPSCo’s electric and natural gas sales, such interim results are not necessarilyan appropriate base from which to project annual results.  Summarized quarterly unaudited financial datais as follows:

 
| ** **                           | ** ** | **Quarter Ended**       | ** ** |
|--------------------------------------|------------|------------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **March 31, 2008** | ** ** | **June 30, 2008** | ** ** | **Sept. 30, 2008** | ** ** | **Dec. 31, 2008** | ** ** |
|                                 |       |                         |       |   |   |   |   |   |   |
| Operating revenues                   |       | $                            | 1,228,478  |   | $ | 995,307 |   | $ | 1,085,727 |   | $ | 1,083,532 |   |
| Operating income                     |       | 164,847                      |       | 118,096 |   | 154,508 |   | 152,114 |   |
| Net income                           |       | 94,304                       |       | 66,339 |   | 86,281 |   | 92,872 |   |
|                                      |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                           | ** ** | **Quarter Ended**       | ** ** |
|--------------------------------------|------------|------------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **March 31, 2007** | ** ** | **June 30, 2007** | ** ** | **Sept. 30, 2007** | ** ** | **Dec. 31, 2007** | ** ** |
|                                 |       |                         |       |   |   |   |   |   |   |
| Operating revenues                   |       | $                            | 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 |   |
|                                      |            |                              |            |  |  |  |  |  |  |  |  |  |  |

 

**Item 9 — Changes in and Disagreements With Accountants onAccounting and Financial Disclosure**

** **

During2007 and 2008, and through the date of this report, there were no disagreementswith the independent public accountants for PSCo on accounting principles orpractices, financial statement disclosures or audit scope or procedures.

 

**Item 9A(T) — Controls and Procedures**

** **

**Disclosure Controls andProcedures**

** **

PSComaintains a set of disclosure controls and procedures designed to ensure thatinformation required to be disclosed in reports that it files or submits underthe Securities Exchange Act of 1934 is recorded, processed, summarized andreported within the time periods specified in Securities and ExchangeCommission rules and forms.  Inaddition, the disclosure controls and procedures ensure that informationrequired to be disclosed is accumulated and communicated to management,including the chief executive officer (CEO) and chief financial officer (CFO),allowing timely decisions regarding required disclosure.  As of Dec. 31, 2008, 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 were effective.

 

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**InternalControls Over Financial Reporting**

 

No change in PSCo’sinternal control over financial reporting has occurred during the most recentfiscal quarter that has materially affected, or is reasonably likely tomaterially affect, PSCo’s internal control over financial reporting.

 

PSCo maintains internalcontrol over financial reporting to provide reasonable assurance regarding thereliability of the financial reporting. PSCo has evaluated and documented its controls in process activities, ingeneral computer activities, and on an entity-wide level.  During the year and in preparation forissuing its report for the year ended Dec. 31, 2008 on internal controlsunder section 404 of the Sarbanes-Oxley Act of 2002, PSCo conductedtesting and monitoring of its internal control over financial reporting.  Based on the control evaluation, testing andremediation performed, PSCo did not identify any material control weaknesses,as defined under the standards and rules issued by the Public CompanyAccounting Oversight Board (PCAOB) and as approved by the SEC and as indicatedin Management Report on Internal Controls herein.

 

This annual report does not include an attestation report of PSCo’sregistered public accounting firm regarding internal control over financialreporting. Management’s report was not subject to attestation by PSCo’sregistered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit PSCo to provide onlymanagement’s report in this annual report.

 

**Item 9B — Other Information**

** **

None.

 

**PART III**

** **

Items 10, 11, 12 and 13of Part III of Form 10-K have been omitted from this report for PSCoin accordance with conditions set forth in general instructions I(1) (a) and (b) of Form 10-K for wholly-owned subsidiaries.

** **

**Item 10 — Directors, Executive Officers andCorporate Governance**

** **

**Item 11 — Executive Compensation**

** **

**Item 12 — Security Ownership of Certain BeneficialOwners and Management and Related Stockholder Matters**

** **

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

** **

**Item 14 — Principal Accounting Fees and Services**

** **

Information concerningfees paid to the principal accountant for each of the last two years iscontained in the Xcel Energy Proxy Statement for its 2009 Annual Meeting ofShareholders, which is incorporated by reference.

 

**PART IV**

 

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

 

1.     Consolidated Financial Statements:

 

Management Report on Internal Controls **—**For the year ended Dec. 31, 2008.

Report of Independent Registered Public AccountingFirm **—**For the years endedDec. 31, 2008, 2007 and 2006.

Consolidated Statementsof Income **—**For the three yearsended Dec. 31, 2008, 2007 and 2006.

Consolidated Statements of Cash Flows **—** For the three years ended Dec. 31,2008, 2007 and 2006.

Consolidated Balance Sheets **—**As of Dec. 31, 2008 and 2007.

 

2.     Schedule II **—**Valuation and Qualifying Accounts and Reserves for the yearsended Dec. 31, 2008, 2007 and 2006.

 

 

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3.     Exhibits

 
|   |   | *Indicates incorporation by reference                                                                                                                                  |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | +Executive Compensation Arrangements and Benefit  Plans Covering Executive Officers and Directors                                                                      |
| 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)). |
| 4.02*  |   | Indentures supplemental to Indenture dated as of  Oct. 1, 1993:                                                                                                   |

 
| **Dated as of** | ** ** | **Previous Filing:  Form; Date or  file no.** | ** ** | **Exhibit  No.** | ** ** | **Dated as of** | ** ** | **Previous Filing:  Form; Date or  file no.** | ** ** | **Exhibit  No.** |
|---------------------------|------------|-------------------------------------------------------------------|------------|------------------|------------|---------------------------|------------|-------------------------------------------------------------------|------------|------------------|
| ** **                | ** ** | ** **                                                        | ** ** | ** **       | ** ** | ** **                | ** ** | ** **                                                        | ** ** | ** **       |
| Nov. 1, 1993         |       | S-3, (33-51167)                                                   |       | 4(b)(2)          |       | Aug. 15, 2002        |       | 10-Q, Sept. 30, 2002  (001-03280)                                 |       | 4.03             |
| Jan. 1, 1994         |       | 10-K, 1993                                                        |       | 4(b)(3)          |       | Sept. 1, 2002             |       | 8-K, Sept. 18,  2002(001-03280)                                   |       | 4.01             |
| Sept. 2, 1994             |       | 8-K,  September 1994                                         |       | 4(b)             |       | Sept. 15, 2002            |       | 10-Q, Sept. 30,  2002(001-03280)                                  |       | 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 (001-03280)                                            |       | 4(b)(3)          |       | April 1, 2003        |       | 10-Q May 15, 2003  (001-03280)                               |       | 4.02             |
| Feb. 1, 1997         |       | 10-Q, March 31,  1997 (001-03280)                            |       | 4(a)             |       | May 1, 2003          |       | S-4, June 11, 2003  (333-106011)                             |       | 4.94             |
| April 1, 1998        |       | 10-Q, March 31,  1998 (001-03280)                            |       | 4(b)             |       | Sept. 1, 2003             |       | 8-K, Sept. 2, 2003  (001-03280)                                   |       | 4.02             |
|                      |       |                                                              |       |             |       | Sept. 15, 2003            |       | Xcel 10-K,  March 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 of  Xcel Energy (file no. 001-03034) 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).                                                                                                                                                                                                                                                    |
| 4.07*   |   | Supplemental Indenture dated as of Aug. 1,  2008, between PSCo and U.S. Bank Trust National Association, as successor  Trustee, creating $300,000,000 principal amount of 5.80% First Mortgage  Bonds, Series No. 18 due 2018 and $300,000,000 principal amount of  6.50% First Mortgage Bonds, Series No. 19 due 2038 (Exhibit 4.01  of Form 8-K of Public Service Company of Colorado dated Aug. 6,  2008 (file no. 001-03280)). |
| 10.01*+ |   | Xcel Energy Omnibus Incentive Plan (Exhibit A  to Form DEF-14A (file no. 001-03034) filed Aug. 29, 2000).                                                                                                                                                                                                                                                                                                                                                   |
| 10.02*+ |   | Xcel Energy Inc. Non-Qualified Pension Plan (2009  Restatement) (Exhibit 10.02 to Form 10-K of Xcel Energy (file no. 001-03034)  for the year ended Dec. 31, 2008).                                                                                                                                                                                                                                                                                                        |
| 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*+ |   | Xcel Energy Senior Executive Severance Policy (2009  Amendment and Restatement) (Exhibit 10.05 to Form 10-K of Xcel Energy (file  no. 001-03034) for the year ended Dec. 31, 2008)                                                                                                                                                                                                                                                                                         |
| 10.06*+ |   | Stock Equivalent Plan for Non-Employee Directors of  Xcel Energy as amended and restated Jan. 1, 2009 (Exhibit 10.06 to Form  10-K of Xcel Energy (file no. 001-03034) for the year ended Dec. 31, 2008.                                                                                                                                                                                                                                                              |
| 10.07*+ |   | Xcel Energy Nonqualified Deferred Compensation Plan  as amended and restated Jan. 1, 2009 (Exhibit 10.07 to Form 10-K of Xcel  Energy (file no. 001-03034) for the year ended Dec. 31, 2008).                                                                                                                                                                                                                                                                              |
| 10.08*+ |   | Xcel Energy Non-employee Directors’ Deferred  Compensation Plan as amended and restated on Jan. 1, 2009 (Exhibit 10.08  to Form 10-K of Xcel Energy (file no. 001-03034) for the year ended Dec.  31, 2008).                                                                                                                                                                                                                                                |
| 10.09*+ |   | 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).                                                                                                                                                                                                                                                                                               |
| 10.10*+ |   | 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).                                                                                                                                                                                                                                             |

 

 

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| 10.11*+ |   | 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).                                                                                                                                                        |
|---------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.12*+ |   | 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).                                                                                                                                                                  |
| 10.13*+ |   | 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).                                                                                                                                                                      |
| 10.14*+ |   | 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).                                                                                                                                                                  |
| 10.15*+ |   | Xcel Energy Omnibus 2005 Incentive Plan (Appendix B  to Exhibit 14A, Definitive Proxy Statement dated April 11, 2005).                                                                                                                                                                                                                               |
| 10.16*+ |   | Xcel Energy Executive Annual Incentive Award Plan  (Appendix C to Exhibit 14A, Definitive Proxy Statement dated April 11, 2005).                                                                                                                                                                                                                     |
| 10.17*+ |   | Xcel Energy Supplemental Executive Retirement Plan  as amended and restated Jan. 1, 2009 (Exhibit 10.17 to Form 10-K of  Xcel Energy (file no. 001-03034) for the year ended Dec. 31, 2008).                                                                                                                                               |
| 10.18*+ |   | 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).                                                                                                                                                                    |
| 10.19*+ |   | 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). |
| 10.20*+ |   | 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).                                                                                                                                                            |
| 10.21*+ |   | First Amendment to the Xcel Energy Inc. Executive  Annual Incentive Award Plan effective as of Jan. 1, 2009 (Exhibit 10.21 to  Form 10-K of Xcel Energy (file no. 001-03034) for the year ended Dec. 31,  2008).                                                                                                                                     |
| 10.22*+ |   | First Amendment to the Xcel Energy Inc. Omnibus  Incentive Award Plan as of Jan. 1, 2009 (Exhibit 10.22 to Form 10-K of Xcel  Energy (file no. 001-03034) for the year ended Dec. 31, 2008).                                                                                                                                                         |
| 10.23*  |   | 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 10I(1)).                 |
| 10.24*  |   | 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 10I(2)).                                              |
| 10.25*  |   | Proposed Settlement Agreement excerpts, as filed  with the CPUC (Exhibit 99.02 to Form 8-K (file no. 001-03034) dated  Dec. 3, 2004).                                                                                                                                                                                                 |
| 10.26*  |   | 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.                                                                                                                                                                                                                                                                             |

 

 

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Table of Contents

** **

**SCHEDULE II**

 

**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

**VALUATIONAND QUALIFYING ACCOUNTS**

**YearsEnded Dec. 31, 2008, 2007 and 2006**

*(amountsin thousands of dollars)*

 
| ** **                             | ** ** | ** **                                     | ** ** | **Additions**                                 | ** ** | ** **                                    | ** ** | ** **                              | ** ** |
|----------------------------------------|------------|------------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------------|------------|-----------------------------------------|------------|
| ** **                             | ** ** | **Balance at  beginning  of period** | ** ** | **Charged  to costs and  expenses** | ** ** | **Charged  to other  accounts (1)** | ** ** | **Deductions  from  reserves (2)** | ** ** | **Balance  at end  of period** | ** ** |
| ** **                             | ** ** | ** **                                     | ** ** | ** **                                    | ** ** | ** **                                    | ** ** | ** **                              | ** ** | ** ** | ** ** |
| Reserve deducted  from related assets: |       |                                           |       |                                          |       |                                          |       |                                    |       |   |   |
| Allowance for  bad debts:              |       |                                           |       |                                          |       |                                          |       |                                    |       |   |   |
| 2008                                   |       | $                                              | 23,301     |                                          | $          | 28,372                                        |       | $                                       | 8,146      |   | $ | 30,624 |   | $ | 29,195 |   |
| 2007                                   |       | 18,415                                         |       | 26,149                                        |       | 9,582                                         |       | 30,845                                  |       | 23,301 |   |
| 2006                                   |       | 19,381                                         |       | 26,944                                        |       | 7,375                                         |       | 35,285                                  |       | 18,415 |   |
|                                        |            |                                                |            |                                               |            |                                               |            |                                         |            |  |  |  |  |  |  |  |

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(1)       Recovery of amounts previously writtenoff

 

(2)       Principally bad debts written off or transferred

 

 

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** **

**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this annual report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

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

 

March 2, 2009

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report signed below by the following persons onbehalf of the registrant and in the capacities and on 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                   | Executive Vice President, Chief Financial Officer  and Director |
| (Principal Accounting Officer)                  | (Principal Financial Officer)                                   |

 

**SUPPLEMENTALINFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TOSECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTEREDSECURITIES PURSUANT TO SECTION 12 OF THE ACT**

 

PSCo has not sent, and does not expect to send, anannual report or proxy statement to its security holder.

 

 

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