**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **x**                                                                                              | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                                                               |       |                                                                                                     |
| **For the quarterly period ended March 31, 2008**                                             |
| ** **                                                                                         | ** ** | ** **                                                                                               |
| **or**                                                                                             |
|                                                                                               |       |                                                                                                     |
| **o**                                                                                              | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                               |       |                                                                                                     |
| **For the transition period from            to** |

 

#### **Commission File Number: 001-3280**

#### ** **

**PublicService Company of Colorado**

**(Exact name of registrant asspecified in its charter)**

** **

| **Colorado**                               | ** ** | **84-0296600**                       |
|--------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of            |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)             |       |                                 |
|                                       |       |                                 |
| **1225 17th Street, Denver**               |       |                                 |
| **Colorado**                               | ** ** | **80202**                            |
| (Address of principal executive   offices) |       | (Zip Code)                           |

 

Registrant’s telephone number, including areacode **(303) 571-7511**

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days. Yes  x   No o

 

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

 

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

 

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

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date.

 

| **Class**                     | ** ** | **Outstanding at May 5, 2008** |
|-------------------------------|------------|----------------------------------------------------|
| Common Stock, $0.01 par value |       | 100 shares                                         |

 

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

 

 

----

 

**Tableof Contents**

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

 

This Form 10-Qis filed by Public Service Co. of Colorado (PSCo). PSCo is a wholly ownedsubsidiary of Xcel Energy Inc. (Xcel Energy). Additional information on XcelEnergy is available on various filings with the Securities and ExchangeCommission (SEC).

 

2

----

 

##### **PART 1. FINANCIAL INFORMATION**

##### ** **

**Item 1. Financial Statements**

 

**PUBLIC SERVICE CO. OFCOLORADO AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**

**(Thousands of Dollars)**

 
| ** **                                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| **Operating revenues**                                                                     |       |                                                 |       |   |   |
| Electric utility                                                                           |       | $                                                    | 654,496    |   | $ | 636,500 |   |
| Natural gas utility                                                                        |       | 562,952                                              |       | 516,394 |   |
| Steam and other                                                                            |       | 11,030                                               |       | 10,797 |   |
| Total operating revenues                                                                   |       | 1,228,478                                            |       | 1,163,691 |   |
|                                                                                       |       |                                                 |       |   |   |
| **Operating expenses**                                                                     |       |                                                 |       |   |   |
| Electric fuel and purchased power                                                          |       | 369,503                                              |       | 367,733 |   |
| Cost of natural gas sold and transported                                                   |       | 442,091                                              |       | 408,355 |   |
| Cost of sales — steam and other                                                       |       | 4,201                                                |       | 4,846 |   |
| Other operating and maintenance expenses                                                   |       | 148,374                                              |       | 145,195 |   |
| Depreciation and amortization                                                              |       | 75,912                                               |       | 65,038 |   |
| Taxes (other than income taxes)                                                            |       | 23,550                                               |       | 23,842 |   |
| Total operating expenses                                                                   |       | 1,063,631                                            |       | 1,015,009 |   |
|                                                                                       |       |                                                 |       |   |   |
| **Operating income**                                                                       |       | 164,847                                              |       | 148,682 |   |
|                                                                                       |       |                                                 |       |   |   |
| Interest and other income (expense), net                                                   |       | 3,220                                                |       | (2,124 | ) |
| Allowance for funds used during  construction — equity                                |       | 7,578                                                |       | 2,044 |   |
|                                                                                       |       |                                                 |       |   |   |
| **Interest charges and financing costs**                                                   |       |                                                 |       |   |   |
| Interest charges — includes other financing  costs of $1,424 and $1,368, respectively |       | 37,150                                               |       | 34,101 |   |
| Allowance for funds used during  construction — debt                                  |       | (4,100                                               | )          | (2,131 | ) |
| Total interest charges and financing costs                                                 |       | 33,050                                               |       | 31,970 |   |
|                                                                                       |       |                                                 |       |   |   |
| Income before income taxes                                                                 |       | 142,595                                              |       | 116,632 |   |
| Income taxes                                                                               |       | 48,291                                               |       | 30,883 |   |
| **Net income**                                                                             |       | $                                                    | 94,304     |   | $ | 85,749 |   |

 

**See Notes to Consolidated Financial Statements**

 

3

----

 

**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

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

**(Thousands of Dollars)**

 
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| **Operating activities**                                                           |       |                                                 |       |   |   |
| Net income                                                                         |       | $                                                    | 94,304     |   | $ | 85,749 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                                      |       | 78,046                                               |       | 67,660 |   |
| Deferred income taxes                                                              |       | 32,038                                               |       | (10,745 | ) |
| Amortization of investment tax credits                                             |       | (784                                                 | )          | (981 | ) |
| Allowance for equity funds used during  construction                               |       | (7,578                                               | )          | (2,044 | ) |
| Net realized and unrealized hedging and  derivative transactions                   |       | 27,757                                               |       | 34,406 |   |
| Changes in operating assets and  liabilities:                                      |       |                                                 |       |   |   |
| Accounts receivable                                                                |       | 5,582                                                |       | (40,470 | ) |
| Accrued unbilled revenues                                                          |       | 91,262                                               |       | (73,699 | ) |
| Inventories                                                                        |       | 37,261                                               |       | 56,787 |   |
| Recoverable purchased natural gas and  electric energy costs                       |       | (39,813                                              | )          | 155,188 |   |
| Prepayments and other                                                              |       | 6,147                                                |       | 2,598 |   |
| Accounts payable                                                                   |       | (45,159                                              | )          | (47,107 | ) |
| Net regulatory assets and liabilities                                              |       | (4,310                                               | )          | 4,297 |   |
| Other current liabilities                                                          |       | (2,006                                               | )          | 123,244 |   |
| Change in other noncurrent assets                                                  |       | (13,197                                              | )          | (16,508 | ) |
| Change in other noncurrent liabilities                                             |       | 700                                                  |       | (719 | ) |
| Net cash provided by operating activities                                          |       | 260,250                                              |       | 337,656 |   |
|                                                                               |       |                                                 |       |   |   |
| **Investing activities**                                                           |       |                                                 |       |   |   |
| Utility capital/construction expenditures                                          |       | (145,823                                             | )          | (150,113 | ) |
| Allowance for equity funds used during construction                                |       | 7,578                                                |       | 2,044 |   |
| Investments in utility money pool                                                  |       | (199,900                                             | )          | (103,200 | ) |
| Repayments from utility money pool                                                 |       | 300,500                                              |       | 94,000 |   |
| Other investments                                                                  |       | 29                                                   |       | 7,546 |   |
| Net cash used in investing activities                                              |       | (37,616                                              | )          | (149,723 | ) |
|                                                                               |       |                                                 |       |   |   |
| **Financing activities**                                                           |       |                                                 |       |   |   |
| Payments on short-term borrowings, net                                             |       | (229,090                                             | )          | (16,500 | ) |
| Borrowings under utility money pool  arrangement                                   |       | 131,900                                              |       | 135,300 |   |
| Repayments under utility money pool  arrangement                                   |       | (60,600                                              | )          | (135,300 | ) |
| Repayment of long-term debt, including  reacquisition premiums                     |       | (356                                                 | )          | (100,344 | ) |
| Dividends paid to parent                                                           |       | (68,453                                              | )          | (64,778 | ) |
| Net cash used in financing activities                                              |       | (226,599                                             | )          | (181,622 | ) |
|                                                                               |       |                                                 |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                              |       | (3,965                                               | )          | 6,311 |   |
| Cash and cash equivalents at beginning of  period                                  |       | 7,650                                                |       | 3,011 |   |
| Cash and cash equivalents at end of period                                         |       | $                                                    | 3,685      |   | $ | 9,322 |   |
|                                                                               |       |                                                 |       |   |   |
| Supplemental disclosure of cash flow  information:                                 |       |                                                 |       |   |   |
| Cash paid for interest (net of amounts  capitalized)                               |       | $                                                    | 27,579     |   | $ | 20,984 |   |
| Cash paid (received) for income taxes (net  of refunds received)                   |       | (975                                                 | )          | 5,388 |   |
|                                                                               |       |                                                 |       |   |   |
| Supplemental disclosure of non-cash  investing transactions:                       |       |                                                 |       |   |   |
| Property, plant and equipment additions in  accounts payable                       |       | $                                                    | 10,569     |   | $ | 7,121 |   |

 

See Notes to Consolidated FinancialStatements

 

4

----

 

**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**

**(Thousandsof Dollars)**

 
| ** **                                                                            | ** ** | **March 31, 2008** | ** ** | **Dec. 31, 2007** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                       |       |                         |       |                        |       |
| Cash and cash equivalents                                                             |       | $                            | 3,685      |                        | $          | 7,650 |   |
| Investments in utility money pool  arrangement                                        |       | —                       |       | 100,600                     |       |
| Accounts receivable, net                                                              |       | 376,929                      |       | 375,265                     |       |
| Accounts receivable from affiliates                                                   |       | 27,338                       |       | 34,584                      |       |
| Accrued unbilled revenues                                                             |       | 268,929                      |       | 360,191                     |       |
| Inventories                                                                           |       | 172,659                      |       | 209,920                     |       |
| Recoverable purchased natural gas and  electric energy costs                          |       | 53,670                       |       | 13,857                      |       |
| Deferred income taxes                                                                 |       | 24,694                       |       | 59,564                      |       |
| Derivative instruments valuation                                                      |       | 27,471                       |       | 33,635                      |       |
| Prepayments and other                                                                 |       | 11,446                       |       | 17,851                      |       |
| Total current assets                                                                  |       | 966,821                      |       | 1,213,117                   |       |
|                                                                                  |       |                         |       |                        |       |
| Property, plant and equipment, net                                                    |       | 7,114,858                    |       | 7,029,155                   |       |
|                                                                                  |       |                         |       |                        |       |
| Other assets:                                                                         |       |                         |       |                        |       |
| Regulatory assets                                                                     |       | 510,793                      |       | 539,989                     |       |
| Derivative instruments valuation                                                      |       | 135,764                      |       | 141,410                     |       |
| Other investments                                                                     |       | 23,769                       |       | 23,798                      |       |
| Other                                                                                 |       | 47,390                       |       | 31,961                      |       |
| Total other assets                                                                    |       | 717,716                      |       | 737,158                     |       |
| Total assets                                                                          |       | $                            | 8,799,395  |                        | $          | 8,979,430 |   |
| ** **                                                                            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **LIABILITIES AND EQUITY**                                                            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                  |       |                         |       |                        |       |
| Current portion of long-term debt                                                     |       | $                            | 301,466    |                        | $          | 301,445 |   |
| Short-term debt                                                                       |       | 41,917                       |       | 271,007                     |       |
| Borrowings under utility money pool  arrangement                                      |       | 71,300                       |       | —                      |       |
| Accounts payable                                                                      |       | 425,053                      |       | 466,710                     |       |
| Accounts payable to affiliates                                                        |       | 23,231                       |       | 27,445                      |       |
| Taxes accrued                                                                         |       | 106,949                      |       | 76,569                      |       |
| Dividends payable to parent                                                           |       | 68,144                       |       | 68,453                      |       |
| Derivative instruments valuation                                                      |       | 21,340                       |       | 21,521                      |       |
| Accrued interest                                                                      |       | 49,472                       |       | 45,486                      |       |
| Other                                                                                 |       | 72,710                       |       | 108,979                     |       |
| Total current liabilities                                                             |       | 1,181,582                    |       | 1,387,615                   |       |
|                                                                                  |       |                         |       |                        |       |
| Deferred credits and other liabilities:                                               |       |                         |       |                        |       |
| Deferred income taxes                                                                 |       | 1,092,540                    |       | 1,090,740                   |       |
| Deferred investment tax credits                                                       |       | 54,382                       |       | 55,166                      |       |
| Regulatory liabilities                                                                |       | 518,580                      |       | 516,401                     |       |
| Pension and employee benefit obligations                                              |       | 227,921                      |       | 231,232                     |       |
| Customers advances                                                                    |       | 284,532                      |       | 280,270                     |       |
| Derivative instruments valuation                                                      |       | 79,752                       |       | 84,190                      |       |
| Asset retirement obligations                                                          |       | 44,660                       |       | 44,267                      |       |
| Other                                                                                 |       | 13,018                       |       | 12,063                      |       |
| Total deferred credits and other  liabilities                                         |       | 2,315,385                    |       | 2,314,329                   |       |
|                                                                                  |       |                         |       |                        |       |
| Commitments and contingent liabilities                                                |       |                         |       |                        |       |
| Capitalization:                                                                       |       |                         |       |                        |       |
| Long-term debt                                                                        |       | 1,891,453                    |       | 1,891,644                   |       |
| Common stock — authorized 100 shares of  $0.01 par value; outstanding 100 shares |       | —                       |       | —                      |       |
| Additional paid in capital                                                            |       | 2,759,128                    |       | 2,759,128                   |       |
| Retained earnings                                                                     |       | 639,810                      |       | 614,267                     |       |
| Accumulated other comprehensive income                                                |       | 12,037                       |       | 12,447                      |       |
| Total common stockholder’s equity                                                |       | 3,410,975                    |       | 3,385,842                   |       |
| Total liabilities and equity                                                          |       | $                            | 8,799,395  |                        | $          | 8,979,430 |   |
|                                                                                       |            |                              |            |                             |            |  |  |  |  |

 

See Notes to Consolidated FinancialStatements

 

5

----

 

**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

** **

In the opinion of management, the accompanying unaudited consolidatedfinancial statements contain all adjustments necessary to present fairly thefinancial position of PSCo and its subsidiaries as of March 31, 2008, and Dec. 31,2007; the results of its operations for the three months ended March 31,2008 and 2007; and its cash flows for the three months ended March 31,2008 and 2007.  Due to the seasonality ofelectric and natural gas sales of PSCo, quarterly results are not necessarilyan appropriate base from which to project annual results.

 

**1.     SignificantAccounting Policies**

 

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

 

***Fair ValueMeasurements******—*** PSCo presentscommodity derivatives at estimated fair values in its consolidated financialstatements.  The most observable inputsavailable are used to determine the fair value of each contract.  In the absence of a quoted price for anidentical contract in an active market, PSCo may use broker quotes foridentical or similar contracts, or internally prepared valuation models todetermine fair value.

 

**2.     RecentlyIssued Accounting Pronouncements**

 

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

 

InFebruary 2008, the FASB issued *EffectiveDate of FASB Statement No. 157* (FASB Statement of Position(FSP) No. 157-2 (FSP No. 157-2)). FSP No. 157-2 delays the effective date of SFAS No. 157 untilfiscal years beginning after Nov. 15, 2008, for fair value measurements ofnon-financial assets and non-financial liabilities, except for items that arerecognized or disclosed at fair value in an entity’s financial statements on arecurring basis (at least annually).

 

Asof Jan. 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 No. 157-2.  Theadoption did not have a material impact on its consolidated financialstatements.  For additional discussionand SFAS No. 157 required disclosures see Note 9 to the consolidatedfinancial 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 FASB issuedSFAS No. 159, which provides companies with an option to measure, atspecified election dates, many financial instruments and certain other items atfair value that are not currently measured at fair value.  A company that adopts SFAS No. 159 willreport unrealized gains and losses on items, for which the fair value optionhas been elected, in earnings at each subsequent reporting date.  This statement also establishes presentationand disclosure requirements designed to facilitate comparisons between entitiesthat choose different measurement attributes for similar types of assets andliabilities.  This statement is effectivefor fiscal years beginning after Nov. 15, 2007, effective Jan. 1,2008.  PSCo adopted SFAS No. 159 andthe adoption did not have a material impact on its consolidated financialstatements.

 

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

 

6

----

 

***Noncontrolling Interests inConsolidated Financial Statements, an Amendment of Accounting Research Bulletin(ARB) No. 51 (SFAS No. 160)*** — In December 2007, the FASBissued SFAS No. 160, which establishes accounting and reporting standardsthat require the ownership interest in subsidiaries held by parties other thanthe parent be clearly identified and presented in the consolidated balancesheets within equity, but separate from the parent’s equity; the amount ofconsolidated net income attributable to the parent and the noncontrollinginterest be clearly identified and presented on the face of the consolidatedstatement of earnings; and changes in a parent’s ownership interest while theparent retains its controlling financial interest in its subsidiary beaccounted for consistently. This statement is effective for fiscal yearsbeginning on or after Dec. 15, 2008. PSCo is evaluating the impact of SFASNo. 160 on its consolidated financial statements.

 

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

 

***Accounting for Deferred Compensationand Postretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements (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 employee thatis limited to the employee’s active service period with an employer.  EITF No. 06-4 is effective for fiscalyears beginning after Dec. 15, 2007, with earlier applicationpermitted.  Upon adoption of EITF 06-4 onJan. 1, 2008, PSCo recorded a liability of $0.6 million, net of tax, as areduction of retained earnings. Thereafter, changes in the liability will be reflected in operatingresults.

 

***Accountingfor Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF No. 06-11)****—*InJune 2007, the EITF reached a consensus on EITF No. 06-11, whichstates that an entity should recognize a realized tax benefit associated withdividends on nonvested equity shares and nonvested equity share units chargedto retained earnings as an increase in additional 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 should be applied prospectivelyto income tax benefits of dividends on equity-classified share-based paymentawards that are declared in fiscal years beginning after Dec. 15, 2007.The adoption of EITF No. 06-11 did not have a material impact on PSCo’sconsolidated financial statements.

** **

**3.     SelectedBalance Sheet Data**

 
| **(Thousands of Dollars)** | ** ** | **March 31, 2008** | ** ** | **Dec. 31, 2007** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Accounts receivable, net:            |       |                         |       |                        |       |
| Accounts receivable                  |       | $                            | 399,612    |                        | $          | 398,566 |   |
| Less allowance for bad debts         |       | (22,683                      | )          | (23,301                     | )          |
|                                 |       | $                            | 376,929    |                        | $          | 375,265 |   |
|                                 |       |                         |       |                        |       |
| Inventories:                         |       |                         |       |                        |       |
| Materials and supplies               |       | $                            | 40,822     |                        | $          | 40,409 |   |
| Fuel                                 |       | 45,876                       |       | 40,811                      |       |
| Natural gas                          |       | 85,961                       |       | 128,700                     |       |
|                                 |       | $                            | 172,659    |                        | $          | 209,920 |   |
|                                 |       |                         |       |                        |       |
| Property, plant and equipment, net:  |       |                         |       |                        |       |
| Electric utility plant               |       | $                            | 6,707,633  |                        | $          | 6,633,695 |   |
| Natural gas utility plant            |       | 1,901,988                    |       | 1,887,824                   |       |
| Common utility and other property    |       | 729,803                      |       | 726,049                     |       |
| Construction work in progress        |       | 908,747                      |       | 864,517                     |       |
| Total property, plant and equipment  |       | 10,248,171                   |       | 10,112,085                  |       |
| Less accumulated depreciation        |       | (3,133,313                   | )          | (3,082,930                  | )          |
|                                 |       | $                            | 7,114,858  |                        | $          | 7,029,155 |   |

 

7

----

 

**4.     IncomeTaxes**

 

***Accounting forUncertainty in Income Taxes — an interpretation of FASB Statement No. 109***(FIN 48)************— PSCois a member of the Xcel Energy affiliated group that files consolidated incometax returns.  In the first quarter of 2008, the IRS completed anexamination of Xcel Energy’s federal income tax returns for 2004 and 2005 (andresearch credits for 2003). The IRS did not propose any material adjustmentsfor those tax years. Tax year 2004 is the earliest open year and the statute oflimitations applicable to Xcel Energy’s 2004 federal income tax return remainsopen until Dec. 31, 2008.

 

As of March 31, 2008, PSCo’s earliest open tax year in which anaudit can be initiated by state taxing authorities under applicable statutes oflimitations is 2003.

 

The amount of unrecognized tax benefits was $8.8 million and $9.6million on Dec. 31, 2007 and March 31, 2008, respectively. These unrecognized tax benefit amounts were reduced by the tax benefitsassociated with net operating loss and tax credit carryovers of $3.8 millionand $4.4 million as of Dec. 31, 2007 and March 31, 2008,respectively.

 

The unrecognized tax benefit balance included $2.8 million and $2.9million of tax positions on Dec. 31, 2007 and March 31, 2008,respectively, which if recognized would affect the annual effective taxrate.  In addition, the unrecognized tax benefit balance included $6.0million and $6.7 million of tax positions on Dec. 31, 2007 and March 31,2008, respectively, for which the ultimate deductibility is highly certain butfor which there is uncertainty about the timing of such deductibility.  Achange in the period of deductibility would not affect the effective tax ratebut would accelerate the payment of cash to the taxing authority to an earlierperiod.

 

The increase in the unrecognized tax benefit balance of $0.8 millionfrom Dec. 31, 2007 to March 31, 2008, was due to the addition ofsimilar uncertain tax positions related to ongoing activity, and the resolutionof certain federal and state audit matters.  PSCo’s amount of unrecognizedtax benefits could significantly change in the next 12 months when the IRS andstate audits resume and as statutes of limitations expire.  At this time, as it relates to upcomingaudits, it is not reasonably possible to estimate an overall range of possiblechange. However, as it relates to the expiration of statutes of limitations, itis reasonably possible that the amount of unrecognized tax benefits coulddecrease up to $2.0 million.

 

The liability for interest related to unrecognized tax benefits ispartially offset by the interest benefit associated with net operating loss andtax credit carryovers.  The amount of interest expense related tounrecognized tax benefits reported within interest charges in the first quarterof 2008 was $0.1 million.  The liability for interest related tounrecognized tax benefits was $3.8 million on Dec. 31, 2007 and $3.9million on March 31, 2008.

 

No amounts were accrued for penalties in the first quarter of2008.  The liability for penaltiesrelated to unrecognized tax benefits was $1.0 million on Dec. 31, 2007 andMarch 31, 2008.

 

The effective tax rate was 33.9 percent forthe first quarter of 2008, compared with 26.5 percent for the same period in2007.  The higher effective tax rate forfirst quarter 2008 was primarily due to an increase in the forecasted annualeffective tax rate for 2008 as compared to 2007, largely as a result of PSRInvestments Inc. (PSRI) terminating the Corporate Owned Life Insurance (COLI)program in 2007.

 

**5.     RateMatters**

 

Except to the extent noted below, the circumstances set forth in Note12 to the consolidated financial statements included in PSCo’s Annual Report onForm 10-K for the year ended Dec. 31, 2007 appropriately represent,in all material respects, the current status of other rate matters, and areincorporated herein by reference. The following include unresolved proceedingsthat are material to PSCo’s financial position.

 

***Pending and RecentlyConcluded Regulatory Proceedings — Colorado Public UtilitiesCommission (CPUC)***

 

**Electric,Purchased Gas and Resource Adjustment Clauses**

** **

***Transmission CostAdjustment Rider (TCA) —***In September 2007,PSCo filed with the CPUC a request to implement a TCA, which would recoverapproximately $18.2 million in 2008. This filing is pursuant to recentlyenacted legislation, which entitled public utilities to recover, through aseparate rate adjustment clause, the costs that it prudently incurs inplanning, developing and completing the construction or expansion oftransmission. This legislation further encourages utilities to 

 

8

----

 

invest in transmission facilities by allowing the recovery of the totalbalance of construction work in progress related to those transmissioninvestments.

 

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

 

In December 2007, the CPUC issued its initial decision approvingPSCo’s application to implement the TCA. The CPUC limited the scope of thecosts that could be recovered through the rider during 2008 to only those costsassociated with transmission investment made after the new legislationauthorizing the rider became effective on March 26, 2007. The CPUC alsowill require PSCo to base its revenue requirement calculation on athirteen-month average net transmission plant balance. As a result of the CPUC’sdecision, PSCo implemented a rider on Jan. 1, 2008, to recoverapproximately $4.5 million in 2008.

 

***Enhanced Demand SideManagement (DSM) Program —***In October 2007,PSCo filed an application with the CPUC for approval to implement an expandedDSM program and to revise its DSM cost adjustment mechanism (DSMCA) to includecurrent cost recovery and incentives designed to reward PSCo for successfullyimplementing cost-effective DSM programs and measures. With this application, PSCoproposes to expand and extend its commitment to acquire a cumulative level of694 megawatts (MW) of peak demand reduction and 2,351 gigawatt hours (GWh) ofenergy savings, including achievements associated with its existing DSMprograms for 2009. Under the proposed revision to the DSMCA, PSCo would recover100 percent of its forecasted expenses associated with the DSM programduring the year in which the rider is in effect as well as an incentive basedupon the net economic benefits achieved during the prior year up to20 percent of the net present value of the benefits achieved.  PSCo filed rebuttal testimony in April 2008agreeing with a CPUC staff recommendation to 100 percent lost margins plus anincentive of up to 10 percent of the net economic benefit.

 

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

*** ***

***Pacific NorthwestFERC Refund Proceeding —***In July 2001, theFERC 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. PSCosupplied energy to the Pacific Northwest markets during this period and hasbeen an active participant in the hearings. In September 2001, thepresiding administrative law judge (ALJ) concluded that prices in the PacificNorthwest during the referenced period were the result of a number of factors,including the shortage of supply, excess demand, drought and increased naturalgas prices. Under these circumstances, the ALJ concluded that the prices in thePacific Northwest markets were not unreasonable or unjust and no refunds shouldbe ordered. Subsequent to the ruling, the FERC has allowed the parties torequest additional evidence regarding the use of certain strategies and howthey may have impacted the markets in the Pacific Northwest markets. For thereferenced period, parties have claimed that the total amount of transactionswith PSCo subject to refund are $34 million. In June 2003, the FERCissued an order terminating the proceeding without ordering furtherproceedings. Certain purchasers filed appeals of the FERC’s orders in thisproceeding with the U. S. Court of Appeals for the Ninth Circuit.

 

In an orderissued in August 2007, the Ninth Circuit remanded the proceeding back tothe FERC. The court of appeals preliminarily determined that it hadjurisdiction to review the FERC’s decision not to order refunds and remandedthe case back to the FERC, directing that the FERC consider evidence that hadbeen presented regarding intentional market manipulation in the Californiamarkets and its potential ties to transactions in the Pacific Northwest. Thecourt of appeals also indicated that the FERC should consider other rulings addressingovercharges 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 increase, or a 5.88 percent in wholesale rates,based on 11.5 percent requested return on equity (ROE).  The $12.5 million total increase was composedof  $8.8 million of traditional baserate recovery and $3.7 million of construction work in progress recovery forthe Comanche 3 and Fort St. Vrain projects.  The increase is applicable to all wholesale firm service customers withthe exception of Intermountain Rural Electric Cooperative, which is under arate moratorium until January 2009.

 

In March 2008,PSCo reached an agreement with Holy Cross, Yampa Valley and Grand Valley (REA’s),which will resolve all issues based on a “black box” settlement with an impliedROE of 10.4 percent.  Parties filed thesettlement with 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, was filed with the FERCon April 25, 2008.  The settlementsprovide for:

 

9

----

 

·      A traditional annual rate base rate increase of  $6.6 million with allowance for funds usedduring construction continuing for Comanche and Fort St. Vrain.

·      Implementation of new rates several months earlier than istypical in a disputed filing.

·      The ability to implement rates in PSCo’s next general rate casethat will involve Comanche 3 costs upon a nominal suspension.

 

**6.     Commitmentsand Contingent Liabilities**

 

Except asnoted below, the circumstances set forth in Notes 12 and 13 to the consolidatedfinancial statements in PSCo’s Annual Report on Form 10-K for the yearended Dec. 31, 2007 and Note 5 to the consolidated financial statements inthis Quarterly Report on Form 10-Q appropriately represent, in allmaterial respects, the current status of respective commitments and contingentliabilities and are incorporated herein by reference. The following areunresolved contingencies that are material to PSCo’s financial position.

 

**EnvironmentalContingencies**

 

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

 

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

 

·   Siteof a former manufactured gas plant (MGP) operated by PSCo, its predecessors, orother entities; and

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

 

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

 

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

 

Estimates arerevised as facts become known.  At March 31,2008, the liability for the cost of remediating these sites was estimated to be$1.7 million, of which $0.6 million was considered to be a currentliability.  Some of the cost ofremediation may be recovered from:

 

·   Insurancecoverage;

·   Otherparties that have contributed to the contamination; and

·   Customers.

 

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

 

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

######  

***Fort CollinsManufactured Gas Plant Site****** —***Prior to1926, the Poudre Valley Gas Co. operated an MGP in Fort Collins, Colo., not farfrom the Cache la Poudre River.  In 1926,after acquiring the assets of the Poudre Valley Gas Co., PSCo shut down the MGPsite and has subsequently sold most of the property.  In 2002, an oily substance similar to MGPbyproducts was discovered in the Cache la Poudre River.  In November 2004, PSCo entered into an 

 

10

----

 

agreementwith the EPA, the city of Fort Collins and Schrader Oil Co. (Schrader) underwhich PSCo performed remediation and monitoring work.  PSCo has substantially completed work at thesite, with the exception of ongoing maintenance and monitoring.

 

InNovember 2006, PSCo filed a natural gas rate case with the CPUC requestingrecovery of additional clean-up costs at the Fort Collins MGP site spentthrough September 2006, plus unrecovered amounts previously authorizedfrom the last rate case, which amounted to $10.8 million to be amortized overfour years.  In June 2007, PSCoentered into a settlement agreement that included recovery of the full $10.8million, but with a five-year amortization period.  The CPUC approved the agreement on June 18,2007.  The total amount to be recoveredfrom customers is $13.1 million. Estimated future project costs, based upon an assumed 30-year systemoperating life, including EPA oversight costs, are approximately $3.9 million.

 

In April 2005, PSCo brought a contribution action against Schraderand related parties alleging Schrader released hazardous substances into theenvironment and these releases caused MGP byproducts to migrate to the Cache laPoudre River, thereby substantially increasing the scope and cost ofremediation.  PSCo requested damages,including a portion of the costs PSCo incurred to investigate and removecontaminated sediments from the Cache la Poudre River.  In December 2005, the court deniedSchrader’s request to dismiss the PSCo suit. Schrader thereafter filed a response to the PSCo complaint and acounterclaim against PSCo for its response costs under the ComprehensiveEnvironmental Response Compensation and Liability Act (CERCLA) and under theResource Conservation and Recovery Act (RCRA). Schrader alleged as part of its counterclaim an “imminent andsubstantial endangerment” of its property as defined by RCRA.  PSCo filed a motion for partial summaryjudgment to dismiss Schrader’s RCRA claim. In October 2007, the court granted PSCo’s motion for partialsummary judgment and dismissed Schrader’s RCRA claim.  Schrader also filed a motion for summaryjudgment seeking to dismiss PSCo’s CERCLA claim.  In April 2008, the court denied  Schrader’s motion for summary judgment andscheduled the case for a September 2008 trial.  Any costs recovered from Schrader areexpected to operate as a credit to ratepayers.

 

# ***Third Party and Other Environmental SiteRemediation***

# *** ***

***Asbestos Removal*—**Someof PSCo’s facilities contain asbestos. Most asbestos will remain undisturbed until the facilities that containit are demolished or renovated.  PSCo hasrecorded an estimate for final removal of the asbestos as an asset retirementobligation.  See additional discussion ofasset retirement obligations in Note 13 of the PSCo Annual Report on Form 10-Kfor the year ended Dec. 31, 2007. It may be necessary to remove some asbestos to perform maintenance ormake improvements to other equipment. The cost of removing asbestos as part of other work is immaterial and isrecorded as 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 EPA finalized amendments to the July 1999 regionalhaze rules.  These amendments apply tothe provisions of the regional haze rule that require emission controls,known as best available retrofit technology (BART), for industrial facilitiesemitting air pollutants that reduce visibility by causing or contributing toregional haze.  Some PSCo generatingfacilities will be subject to BART requirements.

 

The EPA requires states to developimplementation plans to comply with BART by December 2007.  States are required to identify thefacilities that will have to reduce sulfur dioxide (SO2), nitrogen oxide (NOx) andparticulate matter emissions under BART and then set BART emissions limits forthose facilities.  In May 2006, theColorado Air Quality Control Commission (AQCC) promulgated BART regulationsrequiring certain major stationary sources to evaluate and install, operate andmaintain BART or an approved BART alternative to make reasonable progresstoward meeting the national visibility goal. PSCo estimates that implementation of the BART alternatives will costapproximately $211 million in capital costs, which includes approximately $62million in environmental upgrades for the existing Comanche Station project,which are included in the capital budget. PSCo expects the cost of any required capital investment will berecoverable from customers.  Emissionscontrols are expected to be installed between 2011 and 2014.  On June 4, 2007, the Colorado AirPollution Control Division (CAPCD) approved PSCo’s BART analysis and obtainedpublic comment on its BART determination and PSCo’s BART permits. The AQCC approvedthe CAPCD’s BART determination for PSCo during a public hearing in December 2007.CAPCD’s BART determinations and corresponding provisions of the regional hazestate implementation plan will be submitted to the EPA for approval in 2008. Inaddition, in early 2008, the CAPCD initiated a stakeholder process to establishreasonable progress goals for Colorado’s Class I areas. To meet thesegoals, more controls may be required from certain sources, which may or may notinclude those sources previously controlled under BART.

 

11

----

 

***Clean Air Mercury Rule ***—In March 2005, the EPA issued the Clean Air Mercury Rule (CAMR),which regulated mercury emissions from power plants.  On Feb. 8, 2008, the D.C. Circuit Courtof Appeals 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 all other Colorado units by 2014.  PSCo is in the process of installing mercurymonitors on seven Colorado units at an estimated aggregate cost ofapproximately $2.6 million.  PSCo isevaluating the mercury emission controls required to meet the state rule andis currently unable to provide a capital cost estimate.

 

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

 

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

 

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

 

**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.

 

***Cabin Creek Hydro Generating Station Accident***—On Oct. 2, 2007, employees of RPICoatings Inc. (RPI), a contractor retained by PSCo, were applying an epoxycoating to the inside of a penstock at PSCo’s Cabin Creek Hydro GeneratingStation near Georgetown, Colo. This work was being performed as part of a corrosionprevention effort. At approximately 2:00 p.m., 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), U.S. ChemicalSafety Board and the Colorado Bureau of Investigations. In March 2008,OSHA proposed penalties totaling $189,900 for twenty-two serious violations andthree willful violations arising out of the accident. On April 11, 2008,Xcel Energy notified OSHA that it intends to contest all of the proposedcitations.

 

**Environmental Litigation**

** **

***Comanche 3Permit Litigation******—***In August 2005,Citizens for Clean Air and Water in Pueblo and Southern Colorado and CleanEnergy Action filed a complaint in Colorado state court against the CAPCDalleging that the division improperly granted permits to PSCo under Colorado’sPrevention of Significant Deterioration program for the construction andoperation of Comanche 3.  PSCo intervenedin the case.  In June 2006, thecourt ruled in PSCo’s favor and held that the Comanche 3 permits had beenproperly granted and plaintiffs’ claims to the contrary were without merit.  Plaintiffs appealed the decision.   

 

12

----

 

In February 2008, the Colorado Court ofAppeals affirmed the state court’s ruling. Plaintiffs filed a petition with the Colorado Supreme Court seeking discretionaryreview of the appellate court decision.

 

***Carbon DioxideEmissions Lawsuit******—***In July 2004,the attorneys general of eight states and New York City, as well as severalenvironmental groups, filed lawsuits in U.S. District Court in the Southern Districtof New York against five utilities, including Xcel Energy, to force reductionsin carbon dioxide (CO2)emissions.  The other utilities includeAmerican Electric Power Co., Southern Co., Cinergy Corp. and Tennessee ValleyAuthority.  The lawsuits allege that CO2 emitted by each company is a public nuisanceas defined under state and federal common law because it has contributed toglobal warming.  The lawsuits do notdemand monetary damages.  Instead, thelawsuits ask the court to order each utility to cap and reduce its CO2 emissions. In October 2004, Xcel Energy and the other defendants filed amotion to dismiss the lawsuit.  On Sept.19, 2005, the court granted the motion to dismiss on constitutionalgrounds.  Plaintiffs filed an appeal tothe Second Circuit Court of Appeals.  In June 2007,the Second Circuit Court of Appeals issued an order requesting the parties tofile a letter brief regarding the impact of the United States Supreme Court’sdecision in Massachusetts v. EPA, 127 S.Ct. 1438 (April 2, 2007) on theissues raised by the parties on appeal. Among other things, in its decision in Massachusetts v. EPA, the UnitedStates Supreme Court held that CO2 emissions are a “ pollutant” subject toregulation by the EPA under the CAA.  Inresponse to the request of the Second Circuit Court of Appeals, in June 2007,the defendant utilities filed a letter brief stating the position that theUnited States Supreme Court’s decision supports the arguments raised by theutilities on appeal.  The Court of Appealshas taken the matter under advisement ***and is expected to issue an opinion in due course.***

 

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

 

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

 

**Employment, Tort and Commercial Litigation**

** **

***Qwest vs. XcelEnergy Inc.******—*** In June 2004, an employee of PSCo wasseriously injured when a pole owned by Qwest malfunctioned.  In September 2005, the employeecommenced an action against Qwest in Denver state court.  In April 2006, Qwest filed a third partycomplaint against PSCo based on terms in a joint pole use agreement betweenQwest and PSCo. Pursuant to this agreement, Qwest asserted PSCo had anaffirmative duty to properly train and instruct its employees on pole safety,including testing the pole for soundness before climbing.  In May 2006, PSCo filed a counterclaimagainst Qwest asserting Qwest had a duty to PSCo and an obligation under thecontract to maintain its poles in a safe and serviceable condition.  In May 2007, the matter was tried andthe jury found Qwest solely liable for the accident and this determinationresulted in an award of damages in the amount of approximately $90million.  In January 2008, Qwestfiled a notice of appeal.

 

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

 

13

----

 

dismissed the complaint in the Mallon Federal Action and Mallon andTransFinancial subsequently withdrew their motion to stay the Mallon StateCourt Action.

 

**7.     Short-TermBorrowings and Financing Activities**

 

***CommercialPaper —***At March 31, 2008 and Dec. 31,2007, PSCo had commercial paper outstanding of approximately $41.9 million and$271.0 million, respectively.  Theweighted average interest rates at March 31, 2008 and Dec. 31, 2007were 3.50 percent and 5.64 percent, respectively.

 

***Money Pool****** —***XcelEnergy has established a utility money pool arrangement that allows for short-termloans between the utility subsidiaries and from the holding company to theutility subsidiaries at market-based interest rates. The utility money poolarrangement does not allow loans from the utility subsidiaries to the holdingcompany.  PSCo has approval to borrow upto $250 million under the arrangement. At March 31, 2008 and Dec. 31, 2007, PSCo had money poolborrowings of $71.3 million and money pool loans outstanding of $100.6 million,respectively.  The weighted averageinterest rates at March 31, 2008 and Dec. 31, 2007, were 3.45 percentand 5.64 percent, respectively.

 

**8.     DerivativeInstruments**

 

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

 

**CashFlow Hedges**

 

***Commodity Cash Flow Hedges***— PSCo enters into derivative instruments to manage variability of future cashflows from changes in commodity prices. These derivative instruments are designated as cash flow hedges foraccounting purposes.  At March 31,2008, PSCo had various commodity-related contracts designated as cash flowhedges extending through December 2009.  The fair value of these cashflow hedges is recorded in other comprehensive income or deferred as aregulatory asset or liability.  Thisclassification is based on the regulatory recovery mechanisms in place.  This could include the purchase or sale ofenergy or energy-related products, the use of natural gas to generate electricenergy or gas purchased for resale.

 

At March 31, 2008, PSCo had $0.3 million in accumulated othercomprehensive income that is expected to be recognized in earnings during thenext 12 months as the hedged transactions settle.

 

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

 

At March 31, 2008, PSCo had net gains of approximately $1.5million in accumulated other comprehensive income that is  expected to be recognized in earnings duringthe next 12 months.

 

Thefollowing table shows the major components of the derivative instrumentsvaluation in the consolidated balance sheets at March 31 and Dec. 31:

*** ***
| ** **                                                   | ** ** | **March 31, 2008**                               | ** ** | **Dec. 31, 2007**                                | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **(Thousands of Dollars)**                         | ** ** | **Derivative  Instruments  Valuation –  Assets** | ** ** | **Derivative  Instruments  Valuation -  Liabilities** | ** ** | **Derivative  Instruments  Valuation -  Assets** | ** ** | **Derivative  Instruments  Valuation -  Liabilities** | ** ** |
| Long term purchased power agreements                         |       | $                                                          | 151,279    |                                                       | $          | 92,846 |   | $ | 155,928 |   | $ | 96,654 |   |
| Electricity and natural gas trading and  hedging instruments |       | 11,956                                                     |       | 8,246                                                      |       | 19,117 |   | 9,057 |   |
| Total                                                        |       | $                                                          | 163,235    |                                                       | $          | 101,092 |   | $ | 175,045 |   | $ | 105,711 |   |

 

In 2003, as a result of FASBStatement 133 Implementation Issue No. C20, PSCo began recording severallong-term purchased power agreements at fair value due to accountingrequirements related to underlying price adjustments. As these purchases arerecovered through normal regulatory recovery mechanisms in the respectivejurisdictions, the changes in fair value for these contracts were offset byregulatory assets and liabilities. During the first quarter of 2006, PSCoqualified these contracts under the normal purchase exception. Based on thisqualification, the contracts are no longer adjusted to fair value 

 

14

----

 

and the previous carryingvalue of these contracts will be amortized over the remaining contract livesalong with the offsetting regulatory assets and liabilities.

 

The impact ofqualifying cash flow hedges on PSCo’s accumulated other comprehensive income,included as a component of common stockholder’s equity, is detailed in thefollowing table:

 
| ** **                                                                              | ** ** | **Three months ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Thousands of Dollars)**                                                    | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Accumulated other comprehensive income  related to cash flow hedges at Jan. 1      |       | $                                                    | 12,447     |   | $ | 12,614 |   |
| After-tax net unrealized (losses) gains  related to derivatives accounted for as hedges |       | (26                                                  | )          | 465 |   |
| After-tax net realized gains on derivative  transactions reclassified into earnings     |       | (384                                                 | )          | (371 | ) |
| Accumulated other comprehensive income  related to cash flow hedges at March 31    |       | $                                                    | 12,037     |   | $ | 12,708 |   |

 

**9.     FairValue Measurements**

 

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

** **

Level1 – Quoted prices are available in active markets for identical assets orliabilities as of the reported date. The types of assets and liabilitiesincluded in Level 1 are highly liquid and actively traded instruments withquoted prices, such as commodity derivative contracts listed on the New YorkMercantile Exchange.

 

Level2 – Pricing inputs are other than quoted prices in active markets, but areeither directly or indirectly observable as of the reported date.  The types of assets and liabilities includedin Level 2 are typically either comparable to actively traded contracts, suchas energy forwards with pricing interpolated from recent trades at a similarlocation, or priced with models using highly observable inputs, such ascommodity options priced using observable forward prices and volatilities.

 

Level3 – Significant inputs to pricing have little or no observability as of thereporting date.  The types of assets andliabilities included in Level 3 are those with inputs requiring significantmanagement judgment or estimation, such as the long-term commodity priceforecasts used to determine the fair value of long-term energy forwards.

 

The following table presents, for each of these hierarchy levels, PSCo’sassets and liabilities that are measured at fair value on a recurring basis asof March 31, 2008:

 
| **(Thousands of Dollars)** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Counterparty  Netting (a)** | ** ** | **Net Balance** | ** ** |
|--------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------------------------|------------|----------------------|------------|
| Commodity derivative assets          |       | $                | 285        |             | $          | 15,663           |       | $                                  | 6,390      |                 | $          | (10,382 | ) | $ | 11,956 |   |
| Commodity derivative liabilities     |       | —           |       | 14,787           |       | 3,841            |       | (10,382                            | )          | 8,246                |       |
|                                      |            |                  |            |                  |            |                  |            |                                    |            |                      |            |  |  |  |  |  |

 

----

(a) FIN 39 permits thenetting of receivables and payables when a legally enforceable master nettingagreement exists between PSCo and a counterparty. A master netting agreement isan agreement between two parties who have multiple contracts with each otherthat provides for the net settlement of all contracts in the event of default on or termination of any one contract.

 

**The following table presents the changes inLevel 3 recurring fair value measurements for the three months ended March 31,2008:**

** **
| **(Thousands of Dollars)**       | ** ** | **Commodity  Derivatives,  Net** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| Balance, Jan. 1, 2008                 |       | $                                | 4,121      |   |
| Purchases, issuances, and settlements, net |       | (1,330                           | )          |
| Losses recognized in earnings              |       | (242                             | )          |
| Balance, March 31, 2008               |       | $                                | 2,549      |   |

 

Losses on Level 3 commodity derivatives recognized inearnings for the three months ended March 31, 2008, include $0.3 millionof net unrealized losses relating to commodity derivatives held at March 31,2008.  Realized and unrealized gains andlosses on commodity trading activities are included in electric utilityrevenues.

 

15

----

 

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

 

Interest and other income (expense), net, for the three months ended March 31consisted of the following:

 
| ** **                                      | ** ** | **Three months ended  March 31,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Thousands of Dollars)**            | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Interest income                                 |       | $                                                | 2,227      |   | $ | 1,588 |   |
| Other nonoperating income                       |       | 577                                              |       | 500 |   |
| Insurance policy income (expense)               |       | 416                                              |       | (4,212 | ) |
| Total interest and other income (expense),  net |       | $                                                | 3,220      |   | $ | (2,124 | ) |

 

**11.     Segment Information**

 

PSCo has two reportablesegments, regulated electric utility and regulated natural gas utility.Commodity trading operations are not a reportable segment and commodity tradingresults are included in the regulated electric utility segment.

 
| **(Thousands of Dollars)**        | ** ** | **Regulated  Electric  Utility** | ** ** | **Regulated  Natural  Gas Utility** | ** ** | **All  Other** | ** ** | **Reconciling  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|------------------------------------------|------------|----------------|------------|-------------------------------|------------|-------------------------|------------|
| **Three  months ended March 31, 2008** | ** ** | ** **                       | ** ** | ** **                               | ** ** | ** **     | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues from:                              |       |                             |       |                                     |       |           |       |                          |       |                    |       |
| External customers                          |       | $                                | 654,496    |                                     | $          | 562,952        |       | $                             | 11,030     |                    | $          | — |   | $ | 1,228,478 |   |
| Internal customers                          |       | 78                               |       | 33                                       |       | —         |       | (111                          | )          | —                  |       |
| Total revenues                              |       | $                                | 654,574    |                                     | $          | 562,985        |       | $                             | 11,030     |                    | $          | (111 | ) | $ | 1,228,478 |   |
| Segment net income                          |       | $                                | 51,930     |                                     | $          | 38,753         |       | $                             | 3,621      |                    | $          | — |   | $ | 94,304 |   |
|                                        |       |                             |       |                                     |       |           |       |                          |       |                    |       |
| **Three  months ended March 31, 2007** | ** ** | ** **                       | ** ** | ** **                               | ** ** | ** **     | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues from:                              |       |                             |       |                                     |       |           |       |                          |       |                    |       |
| External customers                          |       | $                                | 636,500    |                                     | $          | 516,394        |       | $                             | 10,797     |                    | $          | — |   | $ | 1,163,691 |   |
| Internal customers                          |       | 86                               |       | 50                                       |       | —         |       | (136                          | )          | —                  |       |
| Total revenues                              |       | $                                | 636,586    |                                     | $          | 516,444        |       | $                             | 10,797     |                    | $          | (136 | ) | $ | 1,163,691 |   |
| Segment net income                          |       | $                                | 47,403     |                                     | $          | 31,748         |       | $                             | 6,598      |                    | $          | — |   | $ | 85,749 |   |
|                                             |            |                                  |            |                                          |            |                |            |                               |            |                         |            |  |  |  |  |  |  |  |  |  |  |

 

**12.     Comprehensive Income**

 

The componentsof total comprehensive income are shown below:

 
| ** **                                                                              | ** ** | **Three months ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(Thousands of Dollars)**                                                    | ** ** | **2008**                                         | ** ** | **2007** | ** ** |
| Net income                                                                              |       | $                                                | 94,304     |   | $ | 85,749 |   |
| Other comprehensive income:                                                             |       |                                             |       |   |   |
| After-tax net unrealized (losses) gains  related to derivatives accounted for as hedges |       | (26                                              | )          | 465 |   |
| After-tax net realized gains on derivative  transactions reclassified into earnings     |       | (384                                             | )          | (371 | ) |
| Other comprehensive (loss) income                                                       |       | (410                                             | )          | 94 |   |
| Comprehensive income                                                                    |       | $                                                | 93,894     |   | $ | 85,843 |   |

 

**13.     Benefit Plans and Other PostretirementBenefits**

 

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

 

16

----

 

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

 
| ** **                                                    | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                    | ** ** | **2008 (1)**                                    | ** ** | **2007 (1)** | ** ** | **2008** | ** ** | **2007** | ** ** |
| **(Thousands of Dollars)**                          | ** ** | **Pension Benefits**                            | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel  Energy Inc.**                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                  |       | $                                                    | 16,773     |   | $ | 16,485 |   | $ | 1,464 |   | $ | 1,701 |   |
| Interest cost                                                 |       | 40,583                                               |       | 39,598 |   | 12,546 |   | 13,603 |   |
| Expected return on plan assets                                |       | (68,472                                              | )          | (65,891 | ) | (7,500 | ) | (7,618 | ) |
| Amortization of transition obligation                         |       | —                                               |       | — |   | 3,644 |   | 3,611 |   |
| Amortization of prior service cost (credit)                   |       | 5,166                                                |       | 6,487 |   | (544 | ) | (545 | ) |
| Amortization of net loss                                      |       | 2,859                                                |       | 3,867 |   | 2,718 |   | 4,994 |   |
| Net periodic benefit cost (credit)                            |       | (3,091                                               | )          | 546 |   | 12,328 |   | 15,746 |   |
| Credits not recognized due to the effects  of regulation      |       | 2,592                                                |       | 2,680 |   | — |   | — |   |
| Additional cost recognized due to the  effects of regulation  |       | —                                               |       | — |   | 973 |   | 973 |   |
| Net benefit cost (credit) recognized for  financial reporting |       | $                                                    | (499       | ) | $ | 3,226 |   | $ | 13,301 |   | $ | 16,719 |   |
|                                                          |       |                                                 |       |   |   |   |   |   |   |
| **PSCo**                                                      | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net periodic benefit cost                                     |       | $                                                    | 2,665      |   | $ | 4,331 |   | $ | 6,997 |   | $ | 8,798 |   |
| Additional cost recognized due to the  effects of regulation  |       | —                                               |       | — |   | 973 |   | 973 |   |
| Net benefit cost recognized for financial  reporting          |       | $                                                    | 2,665      |   | $ | 4,331 |   | $ | 7,970 |   | $ | 9,771 |   |

 

----

(1)  Includes qualified and non-qualified pension net periodicbenefit cost.

 

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

** **

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

 

**Forward-LookingInformation**

 

The following discussionand analysis by management focuses on those factors that had a material effecton the financial condition and results of operations of PSCo during the periodspresented, or are expected to have a material impact in the future. It shouldbe read in conjunction with the accompanying unaudited financial statements andnotes.

 

Except for thehistorical statements contained in this report, the matters discussed in thefollowing discussion and analysis are forward-looking statements that aresubject to certain risks, uncertainties and assumptions. Such forward-lookingstatements are intended to be identified in this document by the words “anticipate,”“believe” “estimate,” “expect,” “intend” “may” “objective,” “outlook,” “plan” “projected,”“possible,” “potential” “should” and similar expressions. Actual results mayvary materially. Factors that could cause actual results to differ materiallyinclude, but are not limited to:

 

·   Economic conditions, including their impact on capitalexpenditures and the ability of PSCo to obtain financing on favorable terms,inflation rates and monetary fluctuations;

·   Business conditions in the energy business;

·   Trade, monetary, fiscal, taxation and environmental policies ofgovernments, agencies and similar organizations in geographic areas where PSCohas a financial interest;

·   Customer business conditions, including demand for their productsor services and supply of labor and materials used in creating their productsand services;

·   Financial or regulatory accounting principles or policies imposedby the Financial Accounting Standards Board, the SEC, the Federal EnergyRegulatory Commission and similar entities with regulatory oversight;

·   Availability or cost of capital such as changes in: interestrates; market perceptions of the utility industry, PSCo; or security ratings;

·   Factors affecting utility and nonutility operations such asunusual weather conditions; catastrophic weather-related damage; unscheduledgeneration outages, maintenance or repairs; unanticipated changes to fossilfuel or natural gas supply costs or availability due to higher demand,shortages, transportation problems or other developments; environmentalincidents; or electric transmission or natural gas pipeline constraints;

 

17

----

 

·   Employee workforce factors, including loss or retirement of keyexecutives, collective bargaining agreements with union employees, or workstoppages;

·   Increased competition in the utility industry or additionalcompetition in the markets served by PSCo;

·   State, federal and foreign legislative and regulatory initiativesthat affect cost and investment recovery, have an impact on rate structures andaffect the speed and degree to which competition enters the electric andnatural gas markets; industry restructuring initiatives; transmission systemoperation and/or administration initiatives; recovery of investments made undertraditional regulation; nature of competitors entering the industry; retailwheeling; a new pricing structure; and former customers entering the generationmarket;

·   Rate-setting policies or procedures of regulatory entities,including environmental externalities, which are values established byregulators assigning environmental costs to each method of electricitygeneration when evaluating generation resource options;

·   Social attitudes regarding the utility and power industries;

·   Risks associated with the California power market;

·   Cost and other effects of legal and administrative proceedings,settlements, investigations and claims;

·   Technological developments that result in competitivedisadvantages and create the potential for impairment of existing assets;

·   Significant slowdown in growth or decline in the U.S. economy,delay in growth or recovery of the U.S. economy or increased cost for insurancepremiums, security and other items as a consequence of the Sept. 11, 2001terrorist attacks;

·   Risks associated with implementation of new technologies;

·   Other business or investment considerationsthat may be disclosed from time to time in PSCo’s SEC filings or in otherpublicly disseminated written documents; and

·   The other risk factors listed from time totime by PSCo in reports filed with the SEC, including Risk Factors in Item 1Aof PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 2007and Exhibit 99.01 to this report on Form 10-Q for the quarter ended March 31,2008.

 

**MarketRisks**

 

PSCo is exposed to marketrisks, including changes in commodity prices and interest rates, as disclosedin Item 7A — Quantitative and Qualitative Disclosures About Market Risk in its Annual Report on Form 10-K forthe year ended Dec. 31, 2007. Commodity price and interest rate risks for PSCo are mitigated due tocost-based rate regulation.  At March 31,2008, there were no material changes to the financial market risks that affectthe quantitative and qualitative disclosures presented as of Dec. 31,2007.

 

**RESULTSOF OPERATIONS**

 

PSCo’s net income wasapproximately $94.3 million for the first three months of 2008, compared withapproximately $85.7 million for the first three months of 2007.

 

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

 

Electric fueland purchased power expenses tend to vary with changing retail and wholesalesales requirements and unit cost changes in fuel and purchased power.  Due to fuel and purchased energycost-recovery mechanisms for customers, most fluctuations in these costs do notmaterially affect electric utility margin.

 

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

 

Margins fromcommodity trading activity conducted at PSCo are partially redistributed to Northern States Power Co., a Minnesotacorporation (NSP-Minnesota) and SouthwesternPublic Service Co., a New Mexico corporation (SPS), both wholly ownedsubsidiaries of Xcel Energy, pursuant to the joint operating agreement (JOA) approved by the FERC.  Margins received pursuant to the JOA arereflected as part of base electric utility revenues.  Short-term wholesale and commodity tradingmargins reflect the impact of regulatory sharing, if applicable. Tradingrevenues are reported net of related costs (i.e., on a margin basis) in theConsolidated Statements of Income. Commodity trading expenses include purchasedpower, transmission, broker fees and other related costs.  Short-term wholesale and commodity tradingmargins reflect the estimated impact of regulatory sharing of margins, ifapplicable.

 

18

----

 

The followingtable details base electric utility, short-term wholesale and commodity tradingrevenues and margin:

 
| **(Millions of Dollars)**                      | ** ** | **Base  Electric  Utility** | ** ** | **Short-term  Wholesale** | ** ** | **Commodity  Trading** | ** ** | **Consolidated  Total** | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|------------------------|------------|-------------------------|------------|
| **Three  months ended March 31, 2008**              | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **             | ** ** | ** **              | ** ** |
| Electric utility revenues (excluding  commodity trading) |       | $                           | 630        |                      | $          | 25                     |       | $                       | —     |   | $ | 655 |   |
| Electric fuel and purchased power                        |       | (347                        | )          | (23                       | )          | —                 |       | (370                    | )          |
| Commodity trading revenues                               |       | —                      |       | —                    |       | 14                     |       | 14                      |       |
| Commodity trading expenses                               |       | —                      |       | —                    |       | (15                    | )          | (15                     | )          |
| Gross margin before operating expenses                   |       | $                           | 283        |                      | $          | 2                      |       | $                       | (1         | ) | $ | 284 |   |
| Margin as a percentage of revenues                       |       | 44.9                        | %          | 8.0                       | %          | (7.1                   | )%         | 42.5                    | %          |
|                                                     |       |                        |       |                      |       |                   |       |                    |       |
| **Three  months ended March 31, 2007**              | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **             | ** ** | ** **              | ** ** |
| Electric utility revenues (excluding  commodity trading) |       | $                           | 634        |                      | $          | 4                      |       | $                       | —     |   | $ | 638 |   |
| Electric fuel and purchased power                        |       | (365                        | )          | (3                        | )          | —                 |       | (368                    | )          |
| Commodity trading revenues                               |       | —                      |       | —                    |       | 30                     |       | 30                      |       |
| Commodity trading expenses                               |       | —                      |       | —                    |       | (31                    | )          | (31                     | )          |
| Gross margin before operating expenses                   |       | $                           | 269        |                      | $          | 1                      |       | $                       | (1         | ) | $ | 269 |   |
| Margin as a percentage of revenues                       |       | 42.4                        | %          | 25.0                      | %          | (3.3                   | )%         | 40.3                    | %          |

 

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

 

# ***Base Electric Revenues***

 
| **(Millions of Dollars)**                         | ** ** | **2008 vs. 2007** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|
| Fuel and purchased power cost recovery                      |       | $                           | (15        | ) |
| Firm wholesale                                              |       | (7                          | )          |
| Conservation and non-fuel riders                            |       | 7                           |       |
| Retail sales growth (excluding weather  impact)             |       | 3                           |       |
| Increased revenue due to leap year  (weather-normalized)    |       | 3                           |       |
| Sales mix and other, including estimated  impact of weather |       | 5                           |       |
| Total decrease in base electric revenues                    |       | $                           | (4         | ) |

 

# ***Base Electric Margin***

 
| **(Millions of Dollars)**                         | ** ** | **2008 vs. 2007** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|
| Firm wholesale                                              |       | $                           | (6         | ) |
| Purchased capacity costs                                    |       | 4                           |       |
| Retail sales growth (excluding weather  impact)             |       | 3                           |       |
| Increased margin due to leap year  (weather-normalized)     |       | 3                           |       |
| Conservation and non-fuel riders                            |       | 3                           |       |
| Fuel handling and procurement costs                         |       | 2                           |       |
| Sales mix and other, including estimated  impact of weather |       | 5                           |       |
| Total increase in base electric margin                      |       | $                           | 14         |   |

 

**The decrease in firm wholesale revenue is largelydue to the loss of Cheyenne Light, Fuel, & Power as acustomer.   The decrease due to the loss of this customer ispartially offset by increased sales with several other major customers.**

 

**The favorable change in purchased capacitycosts from the prior year is due to more of these costs being recovered fromretail customers as a result of a higher percentage of the sales coming fromretail vs. wholesale customers.**

 

##### **Natural Gas Utility Margin**

##### ** **

The following table detailsthe change in natural gas revenue and margin. The cost of natural gas tends to vary with changing sales requirementsand unit cost of natural gas purchases. PSCo has a Gas Cost Adjustment (GCA) mechanism for natural gas sales,which recognizes the majority of the effects of changes in the cost of naturalgas purchased for resale and adjusts 

 

19

----

 

revenues to reflect suchchanges in costs upon request by PSCo. Therefore, fluctuations in the cost of natural gas have little effect onnatural gas margin.

 
| ** **                               | ** ** | **Three Months ended March 31,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| **(Millions of Dollars)**      | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Natural gas utility revenues             |       | $                                                    | 563        |   | $ | 516 |   |
| Cost of natural gas sold and transported |       | (442                                                 | )          | (408 | ) |
| Natural gas utility margin               |       | $                                                    | 121        |   | $ | 108 |   |

 

The following summarizes thecomponents of the changes in natural gas revenues and margin for the threemonths ended March 31:

 

***Natural Gas Revenues***

 
| **(Millions of Dollars)**                      | ** ** | **2008 vs. 2007** | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|
| Purchased gas adjustment clause recovery                 |       | $                           | 34         |   |
| Base rate changes                                        |       | 11                          |       |
| Service and facility fees revenue                        |       | 2                           |       |
| Increased revenue due to leap year  (weather-normalized) |       | 1                           |       |
| Sales growth excluding weather impact                    |       | 1                           |       |
| Transportation                                           |       | 1                           |       |
| Estimated impact of weather on firm sales  volume        |       | (3                          | )          |
| Total increase in natural gas revenues                   |       | $                           | 47         |   |

 

***Natural Gas Margin***

 
| **(Millions of Dollars)**                     | ** ** | **2008 vs. 2007** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|
| Base rate changes                                       |       | $                           | 11         |   |
| Service and facility fees revenue                       |       | 2                           |       |
| Increased margin due to leap year  (weather-normalized) |       | 1                           |       |
| Sales growth excluding weather impact                   |       | 1                           |       |
| Transportation                                          |       | 1                           |       |
| Estimated impact of weather on firm sales  volume       |       | (3                          | )          |
| Total increase in natural gas margin                    |       | $                           | 13         |   |

 

**Non-FuelOperating Expense and Other Costs**

 

***Operating and Maintenance Expenses —***Operating and maintenance expenses for thefirst three months of 2008 increased $3.2 million, or 2.2 percent, compared tothe first three months of 2007.  Thefollowing summarizes the components of the changes for the three months ended March 31:

 
| **(Millions of Dollars)**                   | ** ** | **2008 vs. 2007** | ** ** |
|-------------------------------------------------------|------------|-----------------------------|------------|
| Lower employee benefit costs                          |       | $                           | (5         | ) |
| Higher combustion/hydro plant costs                   |       | 4                           |       |
| Higher consulting and contract labor costs            |       | 2                           |       |
| Other                                                 |       | 2                           |       |
| Total increase in operating and maintenance  expenses |       | $                           | 3          |   |

 

***Depreciation and amortization -***Depreciation and amortization expenseincreased by $10.9 million, or 16.7 percent, for the first three months of2008, compared with the first three months of 2007, primarily due to normalsystem expansion and regulatory amortization expense for DSM programs.

 

***Interest and otherincome (expense), net -***Interest and other income(expense), net, increased by approximately $5.3 million for the first threemonths of 2008 compared with the first three months of 2007, primarily due tolower interest expense, net of interest income largely as a result of PSRIterminating the COLI program in 2007.

 

20

----

 

***Allowancefor funds used during construction, equity and debt (AFDC)****-* AFDC is a non-cash amount capitalizedas a part of construction costs representing the cost of financing theconstruction.  Generally, these costs arerecovered from customers, in future rates, as the related property isdepreciated.  AFDC increased by $7.5million for the first three months of 2008, compared with the first threemonths of 2007, primarily due to theconstruction of Comanche 3.

 

***Interest charges andfinancing costs -***Interest charges and financingcosts increased by approximately $3.0 million, or 8.9 percent, for the firstthree months of 2008 compared with the first three months of 2007, primarilydue to increased long-term borrowings.

 

***Income taxes***—Income tax expense increased by $17.4 million for the first three months of2008, compared with the first three months of 2007.  The increase in income tax expense wasprimarily due to an increase in pretax income and an increase in the forecastedannual effective tax rate in 2008. The effective tax rate was 33.9 percent forthe first quarter of 2008, compared with 26.5 percent for the same period in2007.  The higher effective tax rate forfirst quarter 2008 was primarily due to an increase in the forecasted annualeffective tax rate for 2008 as compared to 2007, largely as a result of PSRIterminating the COLI program in 2007.

 

***Regulation***

** **

**Summary of Recent Regulatory Developments**

 

The FERC has jurisdiction over rates for electric transmission servicein interstate commerce and electricity sold at wholesale, hydro facilitylicensing, natural gas transportation, accounting practices and certain otheractivities of Xcel Energy’s utility subsidiaries. State and local agencies havejurisdiction over many of PSCo’s utility activities, including regulation ofretail rates and environmental matters. See additional discussion in thesummary of recent federal regulatory developments and public utility regulationsections of the PSCo Annual Report on Form 10-K for the year ended Dec. 31,2007.  In addition to the matters discussed below, see Note 5 to theconsolidated financial statements for a discussion of other regulatory matters.

 

**OtherRegulatory Matters**

 

***RenewableEnergy Standard (RES) *—** The 2007 Coloradolegislature adopted an increased RES that requires PSCo to generate or cause tobe generated electricity from renewable resources equaling:

 

·      At least 10 percent of its retailsales by 2010,

·      15 percent of retail sales by 2015and

·      20 percent of retail sales by2020.

·      4 percent must be generated from solar renewable resources withhalf the solar resources being located at customers facilities.

 

The new law limits the net incremental retail rateimpact from these renewable resource acquisitions as compared to non-renewableresources to 2 percent. The new legislation encourages the CPUC toconsider earlier and timely cost recovery for utility investment in renewableresources, including the use of a forward rider mechanism.

 

***ColoradoClimate Action Plan *—** In November 2007,Governor Ritter of Colorado published a Colorado Climate Action Plan, whichcalls for a reduction in Greenhouse Gas emissions of 20 percent by 2020with additional reductions by 2050.

 

***PSCo RegulatoryPolicy Initiative*****—** At its March 2008 open meetings, the CPUC bothdiscussed and voted to open an investigatory docket that will review thecurrent regulatory structure to determine if current utility incentives arealigned with state public policy objectives and to determine if the existingstructure is internally consistent in achieving these objectives.  TheCPUC expects to explore alternative forms of ratemaking for utilities and tobetter understand the state of the art on different mechanisms across thenation. An official order has not yet been issued.

 

**Item4. CONTROLS AND PROCEDURES**

** **

**Disclosure Controls and Procedures**

 

PSCo maintainsa set of disclosure controls and procedures designed to ensure that informationrequired to be disclosed in reports that it files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reported

 

21

----

 

within thetime periods specified in Securities and Exchange Commission rules andforms. In addition, the disclosure controls and procedures ensure thatinformation required to be disclosed is accumulated and communicated tomanagement, including the chief executive officer (CEO) and chief financialofficer (CFO), allowing timely decisions regarding required disclosure. As ofthe end of the period covered by this report, based on an evaluation carriedout under the supervision and with the participation of PSCo’s management,including the CEO and the CFO, of the effectiveness of our disclosure controlsand the procedures, the CEO and CFO have concluded that PSCo’s disclosurecontrols and procedures are effective.

 

**Internal Control Over FinancialReporting**

** **

No change inPSCo’s internal control over financial reporting has occurred during the mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, PSCo’s internal control over financial reporting.

 

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

##### ** **

**Item 1. Legal Proceedings**

 

In the normal course ofbusiness, various lawsuits and claims have arisen against PSCo.  After consultation with legal counsel, PSCohas recorded an estimate of the probable cost of settlement or otherdisposition for such matters.  See Notes5 and 6 of the Financial Statements in this Quarterly Report on Form 10-Qfor further discussion of legal proceedings, including Regulatory Matters andCommitments and Contingent Liabilities, which are hereby incorporated by reference.  Reference also is made to Item 3 and Notes 12and 13 of PSCo’s Annual Report on Form 10-K for the year ended Dec. 31,2007 for a description of certain legal proceedings presently pending.  Except as discussed herein, there are no newsignificant cases to report against PSCo and there have been no notable changesin the previously reported proceedings.

 

**Item 1A. Risk Factors**

 

PSCo’s risk factors are documented in Item 1A of Part I of its2007 Annual Report on Form 10-K, which is incorporated herein byreference.  There have been no materialchanges to the risk factors.

 

**Item 6. Exhibits**

 

The followingExhibits are filed with this report:

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

 

22

----

 

**SIGNATURES**

 

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

 

PublicService Co. of Colorado

(Registrant)

 
|   |   |   |   /s/ TERESA S. MADDEN                                          |
|--------|--------|--------|---------------------------------------------------------------------------|
|   |   |   |     Teresa S. Madden                                  |   |
|   |   |   |     Vice President and  Controller                    |   |
|   |   |   |                                                                      |   |
|   |   |   | /s/ BENJAMIN G.S. FOWKE III                                               |
|   |   |   |      Benjamin G.S.  Fowke III                    |   |
|   |   |   |      Vice  President and Chief Financial Officer |   |

 

23

----