**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

 
| **ý**                                                                                                                                                     | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------|
|                                                                                                                                                           |
| **For the quarterly period ended March 31, 2007**                                                                                                              |
| ** **                                                                                                                                                     |
| **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 telephonenumber, including area code **(303) 571-7511**

 

Indicateby check mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes  ý   No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer o                               AcceleratedFiler o                               Non-AcceleratedFiler ý

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act). Yes  o   No  ý

 

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

 
| **Class**                      | ** ** | **Outstanding at April 30, 2007** |
|--------------------------------|------------|-------------------------------------------------------|
| Common  Stock, $0.01 par value |       | 100  shares                                           |

 

Public Service Company ofColorado meets the conditions set forth in General Instruction H (1)(a) and (b)of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosureformat specified in General Instruction H (2) to such Form 10-Q.

 

 

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**Table ofContents**

 
| **PART I - FINANCIAL INFORMATION**           | ** **                                                                                  |
|----------------------------------------------|---------------------------------------------------------------------------------------------|
| Item l.                                      | Financial Statements (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-Q is filed byPublic Service Co. of Colorado (PSCo). PSCo is a wholly owned subsidiary ofXcel Energy Inc. (Xcel Energy). Additional information on Xcel Energy isavailable on various filings with the Securities and Exchange Commission (SEC).

 

 

2

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

 

**Item 1.Financial Statements**

 

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

**CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**

**(Thousands of dollars)**

 
| ** **                                                                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                  | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **Operating revenues**                                                                      |       |                                                 |       |   |   |
| Electric utility                                                                            |       | $                                                    | 636,500    |   | $ | 672,119 |   |
| Natural gas utility                                                                         |       | 516,394                                              |       | 582,901 |   |
| Steam and other                                                                             |       | 10,797                                               |       | 12,005 |   |
| Total operating revenues                                                                    |       | 1,163,691                                            |       | 1,267,025 |   |
|                                                                                        |       |                                                 |       |   |   |
| **Operating expenses**                                                                      |       |                                                 |       |   |   |
| Electric fuel and purchased power                                                           |       | 367,733                                              |       | 416,203 |   |
| Cost of natural gas sold and transported                                                    |       | 408,355                                              |       | 484,470 |   |
| Cost of sales — steam and other                                                        |       | 4,846                                                |       | 7,542 |   |
| Other operating and maintenance expenses                                                    |       | 145,195                                              |       | 142,359 |   |
| Depreciation and amortization                                                               |       | 65,038                                               |       | 58,986 |   |
| Taxes (other than income taxes)                                                             |       | 23,842                                               |       | 24,378 |   |
| Total operating expenses                                                                    |       | 1,015,009                                            |       | 1,133,938 |   |
|                                                                                        |       |                                                 |       |   |   |
| **Operating income**                                                                        |       | 148,682                                              |       | 133,087 |   |
|                                                                                        |       |                                                 |       |   |   |
| Interest and other expense, net (see Note 8)                                                |       | (2,124                                               | )          | (3,064 | ) |
| Allowance for funds used during construction — equity                                  |       | 2,044                                                |       | 142 |   |
|                                                                                        |       |                                                 |       |   |   |
| **Interest charges and financing  costs**                                                   |       |                                                 |       |   |   |
| Interest charges — including other financing costs of $1,368 and  $1,509, respectively |       | 34,101                                               |       | 35,036 |   |
| Allowance for funds used during construction — debt                                    |       | (2,131                                               | )          | (2,431 | ) |
| Total interest charges and financing costs                                                  |       | 31,970                                               |       | 32,605 |   |
|                                                                                        |       |                                                 |       |   |   |
| Income before income taxes                                                                  |       | 116,632                                              |       | 97,560 |   |
| Income taxes                                                                                |       | 30,883                                               |       | 20,714 |   |
| **Net income**                                                                              |       | $                                                    | 85,749     |   | $ | 76,846 |   |
|                                                                                             |            |                                                      |            |  |  |  |  |  |

 

**See Notes to Consolidated Financial Statements**

 

3

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**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

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

**(Thousands of dollars)**

 
| ** **                                                                         | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| **Operating activities**                                                           |       |                                                 |       |   |   |
| Net income                                                                         |       | $                                                    | 85,749     |   | $ | 76,846 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                                      |       | 67,660                                               |       | 62,240 |   |
| Deferred income taxes                                                              |       | (10,745                                              | )          | (12,554 | ) |
| Amortization of investment tax credits                                             |       | (981                                                 | )          | (987 | ) |
| Allowance for equity funds used during construction                                |       | (2,044                                               | )          | (142 | ) |
| Net realized and unrealized hedging and derivative transactions                    |       | 34,406                                               |       | (3,022 | ) |
| Changes in operating assets and liabilities:                                       |       |                                                 |       |   |   |
| Accounts receivable                                                                |       | (40,470                                              | )          | 77,193 |   |
| Accrued unbilled revenues                                                          |       | (73,699                                              | )          | 43,641 |   |
| Inventories                                                                        |       | 56,787                                               |       | 83,722 |   |
| Recoverable purchased natural gas and electric energy costs                        |       | 155,188                                              |       | 150,532 |   |
| Prepayments and other                                                              |       | 2,598                                                |       | 1,550 |   |
| Accounts payable                                                                   |       | (47,107                                              | )          | (171,306 | ) |
| Net regulatory assets and liabilities                                              |       | 4,297                                                |       | (19,321 | ) |
| Other current liabilities                                                          |       | 123,244                                              |       | 31,138 |   |
| Change in other noncurrent assets                                                  |       | (16,508                                              | )          | 9,889 |   |
| Change in other noncurrent liabilities                                             |       | (719                                                 | )          | 13,855 |   |
| Net cash provided by operating activities                                          |       | 337,656                                              |       | 343,274 |   |
|                                                                               |       |                                                 |       |   |   |
| **Investing activities**                                                           |       |                                                 |       |   |   |
| Capital/construction expenditures                                                  |       | (150,113                                             | )          | (100,408 | ) |
| Allowance for equity funds used during construction                                |       | 2,044                                                |       | 142 |   |
| Investments in utility money pool                                                  |       | (103,200                                             | )          | — |   |
| Repayments from utility money pool                                                 |       | 94,000                                               |       | — |   |
| Other investments                                                                  |       | 7,546                                                |       | 10,050 |   |
| Net cash used in investing activities                                              |       | (149,723                                             | )          | (90,216 | ) |
|                                                                               |       |                                                 |       |   |   |
| **Financing activities**                                                           |       |                                                 |       |   |   |
| Payments on short-term borrowings, net                                             |       | (16,500                                              | )          | (253,401 | ) |
| Borrowings under utility money pool arrangement                                    |       | 135,300                                              |       | — |   |
| Repayments under utility money pool arrangement                                    |       | (135,300                                             | )          | — |   |
| Repayment of long-term debt, including reacquisition premiums                      |       | (100,344                                             | )          | (333 | ) |
| Dividends paid to parent                                                           |       | (64,778                                              | )          | — |   |
| Net cash used in financing activities                                              |       | (181,622                                             | )          | (253,734 | ) |
|                                                                               |       |                                                 |       |   |   |
| Net increase (decrease) in cash and cash equivalents                               |       | 6,311                                                |       | (676 | ) |
| Cash and cash equivalents at beginning of period                                   |       | 3,011                                                |       | 3,662 |   |
| Cash and cash equivalents at end of period                                         |       | $                                                    | 9,322      |   | $ | 2,986 |   |
|                                                                               |       |                                                 |       |   |   |
| Supplemental disclosure of  cash flow information:                                 |       |                                                 |       |   |   |
| Cash paid for interest (net of amounts capitalized)                                |       | $                                                    | 20,984     |   | $ | 20,783 |   |
| Cash paid (received) for income taxes (net of refunds received)                    |       | 5,388                                                |       | (1,431 | ) |
|                                                                               |       |                                                 |       |   |   |
| Supplemental disclosure of  non-cash investing transactions:                       |       |                                                 |       |   |   |
| Property, plant and equipment additions in accounts payable                        |       | $                                                    | 7,121      |   | $ | 50,348 |   |

 

SeeNotes to Consolidated Financial Statements

 

 

 

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**PUBLIC SERVICE CO. OF COLORADO ANDSUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**

**(Thousandsof dollars)**
| ** **                                                                                | ** ** | **March 31,  2007** | ** ** | **Dec. 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                | ** ** | ** **               | ** ** | ** **              | ** ** |
| Current assets:                                                                           |       |                     |       |                    |       |
| Cash and cash equivalents                                                                 |       | $                        | 9,322      |                    | $          | 3,011 |   |
| Investments in utility money pool                                                         |       | 9,200                    |       | —                  |       |
| Accounts receivable, net of allowance for bad debts of $18,075 and  $18,415, respectively |       | 386,614                  |       | 355,738                 |       |
| Accounts receivable from affiliates                                                       |       | 18,215                   |       | 8,621                   |       |
| Accrued unbilled revenues                                                                 |       | 273,060                  |       | 199,361                 |       |
| Recoverable purchased natural gas and electric energy costs                               |       | 2,639                    |       | 157,827                 |       |
| Materials and supplies inventories                                                        |       | 45,836                   |       | 43,029                  |       |
| Fuel inventories                                                                          |       | 34,990                   |       | 40,997                  |       |
| Natural gas inventories                                                                   |       | 101,980                  |       | 155,567                 |       |
| Derivative instruments valuation                                                          |       | 25,480                   |       | 28,111                  |       |
| Deferred income taxes                                                                     |       | 80,248                   |       | 62,791                  |       |
| Prepayments and other                                                                     |       | 12,056                   |       | 14,654                  |       |
| Total current assets                                                                      |       | 999,640                  |       | 1,069,707               |       |
| Property, plant and  equipment, at cost:                                                  |       |                     |       |                    |       |
| Electric utility plant                                                                    |       | 6,459,365                |       | 6,409,194               |       |
| Natural gas utility plant                                                                 |       | 1,843,963                |       | 1,825,560               |       |
| Common utility and other property                                                         |       | 733,917                  |       | 725,864                 |       |
| Construction work in progress                                                             |       | 491,497                  |       | 429,878                 |       |
| Total property, plant and equipment                                                       |       | 9,528,742                |       | 9,390,496               |       |
| Less accumulated depreciation                                                             |       | (2,957,716               | )          | (2,912,233              | )          |
| Net property, plant and equipment                                                         |       | 6,571,026                |       | 6,478,263               |       |
| Other assets:                                                                             |       |                     |       |                    |       |
| Regulatory assets                                                                         |       | 543,611                  |       | 589,016                 |       |
| Derivative instruments valuation                                                          |       | 157,574                  |       | 161,502                 |       |
| Other investments                                                                         |       | 11,801                   |       | 19,347                  |       |
| Other                                                                                     |       | 61,919                   |       | 45,784                  |       |
| Total other assets                                                                        |       | 774,905                  |       | 815,649                 |       |
| Total assets                                                                              |       | $                        | 8,345,571  |                    | $          | 8,363,619 |   |
| **LIABILITIES AND EQUITY**                                                                | ** ** | ** **               | ** ** | ** **              | ** ** |
| Current liabilities:                                                                      |       |                     |       |                    |       |
| Current portion of long-term debt                                                         |       | $                        | 1,391      |                    | $          | 101,379 |   |
| Short-term debt                                                                           |       | 356,000                  |       | 372,500                 |       |
| Accounts payable                                                                          |       | 345,442                  |       | 385,724                 |       |
| Accounts payable to affiliates                                                            |       | 25,221                   |       | 30,291                  |       |
| Taxes accrued                                                                             |       | 139,516                  |       | 84,960                  |       |
| Dividends payable to parent                                                               |       | 65,515                   |       | 64,778                  |       |
| Derivative instruments valuation                                                          |       | 34,763                   |       | 38,616                  |       |
| Accrued interest                                                                          |       | 42,863                   |       | 35,362                  |       |
| Other                                                                                     |       | 131,184                  |       | 74,381                  |       |
| Total current liabilities                                                                 |       | 1,141,895                |       | 1,187,991               |       |
| Deferred credits and other  liabilities:                                                  |       |                     |       |                    |       |
| Deferred income taxes                                                                     |       | 1,012,816                |       | 1,004,027               |       |
| Deferred investment tax credits                                                           |       | 58,054                   |       | 59,035                  |       |
| Regulatory liabilities                                                                    |       | 472,663                  |       | 470,255                 |       |
| Pension and employee benefit obligations                                                  |       | 298,708                  |       | 301,277                 |       |
| Customers advances                                                                        |       | 279,848                  |       | 279,011                 |       |
| Derivative instruments valuation                                                          |       | 150,557                  |       | 156,623                 |       |
| Asset retirement obligations                                                              |       | 43,715                   |       | 43,335                  |       |
| Other liabilities                                                                         |       | 13,180                   |       | 7,750                   |       |
| Total deferred credits and other liabilities                                              |       | 2,329,541                |       | 2,321,313               |       |
| Commitments and contingent  liabilities (see Note 5)                                      |       |                     |       |                    |       |
| Capitalization:                                                                           |       |                     |       |                    |       |
| Long-term debt                                                                            |       | 1,845,083                |       | 1,845,278               |       |
| Common Stock — authorized 100 shares of $0.01 par value; outstanding  100 shares     |       | —                   |       | —                  |       |
| Additional paid in capital                                                                |       | 2,411,204                |       | 2,411,204               |       |
| Retained earnings                                                                         |       | 605,140                  |       | 585,219                 |       |
| Accumulated other comprehensive income                                                    |       | 12,708                   |       | 12,614                  |       |
| Total common stockholder’s equity                                                    |       | 3,029,052                |       | 3,009,037               |       |
| Total liabilities and equity                                                              |       | $                        | 8,345,571  |                    | $          | 8,363,619 |   |

See Notes to Consolidated Financial Statements

 

5

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**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

In the opinion ofmanagement, the accompanying unaudited consolidated financial statementscontain all adjustments necessary to present fairly the financial position ofPSCo and its subsidiaries as of March 31, 2007, and Dec. 31, 2006; the resultsof its operations for the three months ended March 31, 2007 and 2006; and itscash flows for the three months ended March 31, 2007 and 2006. Due to theseasonality of electric and natural gas sales of PSCo, quarterly results arenot necessarily an appropriate base from which to project annual results.

 

**1. Significant Accounting Policies**

 

Except to the extent updatedor described below, the significant accounting policies set forth in Note 1 tothe consolidated financial statements in PSCo’s Annual Report on Form 10-K forthe year ended Dec. 31, 2006 appropriately represent, in all material respects,the current status of the footnotes and are incorporated herein by reference.

 

***IncomeTaxes****** —***Consistentwith prior periods and upon adoption of Financial Accounting Standard Board (***FASB) Interpretation No.***48— “Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109”, PSCo recordsinterest and penalties related to income taxes as interest charges in theConsolidated Statements of Income.

 

***Reclassifications****** —***Certainamounts in the Consolidated Statements of Cash flows have been reclassifiedfrom prior-period presentation to conform to the 2007 presentation. Thereclassifications reflect the presentation of unbilled revenues, recoverablepurchased natural gas and electric energy costs and regulatory assets andliabilities as separate items rather than components of other assets and otherliabilities within net cash provided by operating activities.  In addition, activity related to derivativetransactions have been combined into net realized and unrealized hedging andderivative transactions.  Thesereclassifications did not affect total net cash provided by (used in)operating, investing or financing activities within the Consolidated Statementsof Cash Flows.

 

**2.   Recently Issued Accounting Pronouncements**

 

***FairValue Measurements (SFAS 157)****** —***InSeptember 2006, the FASB issued Statement of Financial Accounting Standard(SFAS) 157, which provides a single definition of fair value, togetherwith a framework for measuring it, and requires additional disclosure about theuse of fair value to measure assets and liabilities. SFAS 157 also emphasizesthat fair value is a market-based measurement, and sets out a fair valuehierarchy with the highest priority being quoted prices in active markets. Fairvalue measurements are disclosed by level within that hierarchy. SFAS 157 iseffective for financial statements issued for fiscal years beginning after Nov. 15,2007.  PSCo is evaluating the impact ofSFAS 157 on its financial condition and results of operations and does notexpect the impact of adoption to be material.

 

***The Fair Value Option for Financial Assets and FinancialLiabilities - Including an Amendment of FASB Statement No. 115 (SFAS 159)— ***InFebruary 2007, the FASB issued SFAS 159, which provides companies with anoption to measure, at specified election dates, many financial instruments andcertain other items at fair value that are not currently measured at fairvalue. A company that adopts SFAS 159 will report unrealized gains and losseson items, for which the fair value option has been elected, in earnings at eachsubsequent reporting date. This statement also establishes presentation anddisclosure requirements designed to facilitate comparisons between entitiesthat choose different measurement attributes for similar types of assets andliabilities. This statement is effective for fiscal years beginning after Nov.15, 2007.  PSCo is evaluating the impactof SFAS 159 on its financial condition and results of operations and does notexpect the impact of adoption to be material.

 

**3.   Income Taxes**

 

***Corporate-Owned Life Insurance (COLI)******—***InApril 2004, Xcel Energy filed a lawsuit against the U.S. government in theU.S. District Court for the District of Minnesota to establish its right todeduct the interest expense that had accrued during tax years 1993 and 1994 onpolicy loans related to its COLI policies that insured certain lives of PublicService Company of Colorado (PSCo). These policies are owned by PSR Investments, Inc. (PSRI), a wholly ownedsubsidiary of PSCo.

 

After Xcel Energy filedthis suit, the Internal Revenue Service (IRS) sent two statutory notices ofdeficiency of tax, penalty and interest for 1995 through 1999. Xcel Energy hasfiled U.S. Tax Court petitions challenging those notices. Xcel Energyanticipates the dispute relating to its interest expense deductions will beresolved in the refund suit that is pending in the Minnesota Federal DistrictCourt and the Tax Court petitions will be held in abeyance pending the outcomeof the refund litigation. In the third quarter of 2006, Xcel Energy alsoreceived a statutory notice of deficiency from the IRS for tax years 2000through 2002 and timely filed a Tax Court petition challenging the denial ofthe COLI interest expense deductions for those years.

 

6

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On May 5, 2006,Xcel Energy filed a second motion for summary judgment. On Aug. 18, 2006,the U.S. government filed a second motion for summary judgment. OnFeb. 14, 2007, the Magistrate Judge issued a report to the District CourtJudge concerning both motions.  In thereport, the Magistrate Judge recommended both motions be denied due to factissues in dispute. Both parties filed objections to the recommendations. OnMarch 23, 2007, Xcel Energy received a decision from the District Court Judgeessentially adopting the Magistrate Judge’s recommendation denying both sides’motions for summary judgment and reconfirming the July 24, 2007, trial date.

 

Xcel Energy believesthat the tax deduction for interest expense on the COLI policy loans is in fullcompliance with the tax law. Accordingly, PSRIhas not recorded any provision for income tax or related interest or penalties,and has continued to take deductions for interest expense on policy loans onits income tax returns for subsequent years. The litigation could take two tothree years to reach final resolution. Defense of Xcel Energy’s position mayrequire significant cash outlays, which may or may not be recoverable in acourt proceeding. The ultimate resolution of this matter is uncertain and couldhave a material adverse effect on PSCo’s financial position, results ofoperations and cash flows.

 

Should the IRSultimately prevail on this issue, tax and interest payable throughMarch 31, 2007, would reduce earnings by an estimated $437 million. XcelEnergy has received formal notification that the IRS will seek penalties. Ifpenalties (plus associated interest) also are included, the total estimatedexposure through March 31, 2007, was estimated to be approximately $520million.  If COLI interest expensedeductions were no longer available, first quarter 2007 earnings would havedecreased by $12 million, after tax.

 

# ***Accounting forUncertainty in Income Taxes — an interpretation of FASB StatementNo. 109******(FIN 48)******—***In July 2006, the FASB issued***Interpretation No. (***FIN) 48.  FIN 48 prescribes how a company should recognize,measure, present and disclose uncertain tax positions that the company hastaken or expects to take in its income tax returns. FIN 48 requires that onlyincome tax benefits that meet the “more likely than not” recognition thresholdbe recognized or continue to be recognized on its effective date. As required,PSCo adopted FIN 48 as of Jan. 1, 2007 and the initial derecognition amountswere reported as a cumulative effect of a change in accounting principle. Thecumulative effect of the change, which is reported as an adjustment to thebeginning balance of retained earnings, was not material.  Following implementation, the ongoing recognition of changesin measurement of uncertain tax positions will be reflected as a component ofincome tax expense.

 

PSCo is a member of the Xcel Energy affiliated group that filesconsolidated income tax returns.  XcelEnergy has been audited by the Internal Revenue Service (IRS) through tax year2003, with a limited exception for 2003 research tax credits.  The IRS commenced an examination of XcelEnergy’s federal income tax returns for 2004 and 2005 (and research credits for2003) in the third quarter of 2006, and that examination is anticipated to becomplete by March 31, 2008.  As of March31, 2007, the IRS had not proposed any material adjustments.  However, Xcel Energy is currently inlitigation with the federal government to establish its right to deductinterest expense on COLI policy loans incurred since 1993 (see discussion ofCOLI above).  All COLI tax benefits continueto be recognized in full.  As of March31, 2007, Xcel Energy’s 2000 through 2002 federal income tax returns remainopen under applicable statutes of limitations.

 

PSCo is currently underexamination by the state of Colorado for years 1993 through 1996 and 2000through 2004.  No material adjustmentshave been proposed as of March 31, 2007. As of March 31, 2007, PSCo’s earliest open tax year in which an auditcan be initiated by state taxing authorities under applicable statutes oflimitations is 1993.

 

The amount of unrecognized tax benefits was $11.4 million and $12.1 million on Jan. 1, 2007and March 31, 2007, respectively.  Ofthese amounts, $7.5 million and $7.9 million were offset against the taxbenefits associated with net operating loss and tax credit carryovers as ofJan. 1, 2007 and March 31, 2007, respectively.

 

Included in the unrecognized tax benefit balance was $4.5 million and$4.7 million of tax positions on Jan. 1, 2007 and March 31, 2007, respectively,which if recognized would affect the annual effective tax rate.  In addition, the unrecognized tax benefitbalance included $6.9 million and $7.4 million of tax positions on Jan. 1, 2007and March 31, 2007, respectively, for which the ultimate deductibility ishighly certain but for which there is uncertainty about the timing of suchdeductibility.  A change in the period ofdeductibility would not affect the effective tax rate but would accelerate thepayment of cash to the taxing authority to an earlier period.  The change in the unrecognized tax benefitbalance from Jan. 1, 2007 to March 31, 2007, was due to the addition of similaruncertain tax positions relating to first quarter activity.

 

PSCo’s amount of unrecognized tax benefits could significantly change inthe next 12 months as the IRS and state tax audits progress.  However, at this time due to the nature ofthe audit process, it is not reasonably possible to estimate a range of thepossible change.

 

The interest expense liability related to unrecognized tax benefits onJan. 1, 2007, was not material.  The change inthe interest expense liability from Jan. 1, 2007, to March 31, 2007, was notmaterial.  No amounts were accrued forpenalties.

 

7

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**4.   Rate Matters**

 

***Pendingand Recently Concluded Regulatory Proceedings — Colorado PublicUtilities Commission (CPUC)***

***NaturalGas Rate Case**** **—***On Dec. 1, 2006, PSCo filed with the CPUC, arequest to increase natural gas rates by $41.9 million, representing an overallincrease of 2.96 percent, primarily related to capital investments and risingoperating costs.  The request assumes acommon equity ratio of 60.17 percent and a return on equity (ROE) of 11percent.  The jurisdictional rate base isapproximately $1.1 billion.

 

On April 6, 2007, the CPUC staff and the Colorado Office of ConsumerCouncil (OCC) filed answer testimony to PSCo’s requested increase in revenuerequirements. The CPUC staff recommended an overall revenue increase of $30.5million, based on a 10 percent ROE and a 60.17 percent common equityratio.  The CPUC staff recommended onesignificant adjustment to PSCo’s request associated with the ROE request. TheCPUC staff also raised policy concerns regarding PSCo’s partial decouplingproposal, but concluded that they neither supported nor opposed decoupling.

 

The OCC recommended an overall revenue decrease of $4.8 million relatedto three major adjustments.  First, theyrecommended an ROE of 9 percent assuming a 60.17 percent common equity ratio.Second, they proposed a consolidated income tax adjustment, the effect of whichis a revenue requirement decrease of $11.9 million.  Third, they proposed an adjustment todepreciation and amortization expense, resulting in a revenue requirementdecrease of $10.5 million.  The OCC alsorecommended the disallowance of annual incentive compensation costs of $1.2million, the revision of the weather normalization of test year revenues, therejection of PSCo’s partial decoupling proposal, and policy changes regardingPSCo’s line extension policy.

 

Rebuttaland cross-answer testimony is due on May 11, 2007, with hearings beginning onJune 4, 2007.  It is anticipated that theCPUC will act on the request such that the rates ultimately approved willbecome effective in the third quarter of 2007.

# *** ***

**5. Commitmentsand Contingent Liabilities**

 

The circumstances setforth  in Notes 11 and 12 to theconsolidated financial statements in PSCo’s Annual Report on Form 10-K for theyear ended Dec. 31, 2006 and Notes 4 and 5 to the consolidated financialstatemtents in this Quarterly Report on Form 10-Q, appropriately represent, inall material respects, the current status of respective commitments andcontingent liabilities and are incorporated herein by reference. The followingare unresolved contingencies that are material to PSCo’s financial position:

 

**EnvironmentalContingencies**

 

PSCo has been or iscurrently involved with the cleanup of contamination from certain hazardoussubstances at several sites. In many situations, PSCo believes it will recoversome portion of these costs through insurance claims. Additionally, whereapplicable, PSCo is pursuing, or intends to pursue, recovery from otherpotentially responsible parties and through the rate regulatory process. Newand changing federal and state environmental mandates can also create addedfinancial liabilities for PSCo, which are normally recovered through the rateregulatory process. To the extent any costs are not recovered through theoptions listed above, PSCo would be required to recognize an expense.

 

***Site Remediation****—*PSCo must payall or a portion of the cost to remediate sites where past activities of PSCoand some other parties have caused environmental contamination.  Environmental contingencies could arise fromvarious situations including the following categories of sites:

·       site of a formermanufactured gas plant (MGP) operated by PSCo or its predecessors; and

·       third party sites, such as landfills, to which PSCo isalleged to be a potentially responsible party (PRP) that sent hazardousmaterials 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.

 

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

 

Estimates arerevised as facts become known.  At March31, 2007, the liability for the cost of remediating these sites was estimatedto be $1.5 million, of which $0.7 million was considered to be a currentliability.  Some of the cost ofremediation may be recovered from:

·       insurance coverage;

·       other parties that havecontributed to the contamination; and

·       customers.

 

Neither the totalremediation cost nor the final method of cost allocation among all PRPs of theunremediated sites has been determined. Estimates have been recorded for PSCo’sfuture costs for these sites.

 

8

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

 

***Fort Collins Manufactured Gas Plant Site*****—**Prior to 1926, Poudre Valley Gas Co., a predecessorof PSCo, operated an MGP in Fort Collins, Colo., not far from the Cache laPoudre River. In 1926, after acquiring the Poudre Valley Gas Co., PSCo shutdown the MGP site and has sold most of the property.  An oily substance similar to MGP byproductswas discovered in the Cache la Poudre River. On Nov. 10, 2004, PSCo entered into an agreement with the EnvironmentalProtection Agency (EPA), the city of Fort Collins and Schrader Oil Co., underwhich PSCo performed remediation and monitoring work.  PSCo has substantially completed work at thesite, with the exception of ongoing maintenance and monitoring.  In May 2005, PSCo filed a natural gasrate case with the CPUC requesting recovery of cleanup costs at the FortCollins MGP site spent through March 2005, which amounted to $6.2 million,to be amortized over four years.  PSCoreached a settlement agreement with the parties in the case.  The CPUC approved the settlement agreement onJan. 19, 2006 and the final order became effective on Feb. 3, 2006,with rates effective Feb. 6, 2006. In November 2006, PSCo filed a natural gas rate case with the CPUCrequesting recovery of additional clean-up costs at the Fort Collins MGP sitespent through September 2006, plus unrecovered amounts previously authorizedfrom the last rate case, which amounted to $10.8 million to be amortized overfour years.  The total amount PSCo isrequesting be recovered from customers is $13.1 million.

 

InApril 2005, PSCo brought a contribution action against Schrader Oil Co.and related parties alleging Schrader Oil Co. released hazardous substancesinto the environment and these releases caused MGP byproducts to migrate to the Cache La Poudre River, therebysubstantially increasing the scope and cost of remediation.  PSCo requested damages, including a portionof the costs PSCo incurred to investigate and remove contaminated sedimentsfrom the Cache la Poudre River.  OnDec. 14, 2005, the court denied Schrader’s request to dismiss the PSCosuit.  On Jan. 3, 2006, Schraderfiled a response to the PSCo complaint and a counterclaim against PSCo for itsresponse costs under the Comprehensive Environmental Response Compensation andLiability Act (CERCLA) and under the Resource Conservation and Recovery Act(RCRA).  Schrader has alleged as part ofits counterclaim an “imminent and substantial endangerment” of its property asdefined by RCRA.  In September 2006, PSCofiled a Motion For Partial Summary Judgment to dismiss Schrader’s RCRAclaim.  PSCo believes the allegationswith respect to PSCo are without merit and will vigorously defend itself.

 

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

 

***Asbestos Removal*****—**Some of PSCo’sfacilities contain asbestos. Most asbestos will remain undisturbed until thefacilities that contain it are demolished or renovated.  PSCo has recorded an estimate for finalremoval of the asbestos as an asset retirement obligation.  See additional discussion of asset retirementobligations in Note 12 of the PSCo Annual Report on Form 10-K for the yearended Dec. 31, 2006.  It may be necessaryto remove some asbestos to perform maintenance or make improvements to otherequipment. The cost of removing asbestos as part of other work is immaterialand is recorded as incurred as operating expenses for maintenance projects,capital expenditures for construction projects or removal costs for demolitionprojects.

 

***Other Environmental Requirements***

 

***Regional Haze Rules*** — On June 15, 2005, the EPAfinalized amendments to the July 1999 regional haze rules. These amendmentsapply to the provisions of the regional haze rule that require emissioncontrols, known as best available retrofit technology (BART), for industrialfacilities emitting air pollutants that reduce visibility by causing orcontributing to regional haze.  Some PSCogenerating facilities will be subject to BART requirements.

 

TheEPA requires states to develop implementation plans to comply with BART byDecember 2007. States are required to identify the facilities that willhave to reduce emissions under BART and then set BART emissions limits forthose facilities. On May 30, 2006, the Colorado Air Quality Control Commissionpromulgated BART regulations requiring certain major stationary sources toevaluate and install, operate and maintain BART technology or an approved BARTalternative to make reasonable progress toward meeting the national visibilitygoal. On Aug. 1, 2006, PSCo submitted its BART alternatives analysis to theColorado Air Pollution Control Division. As set forth in its analysis, PSCoestimates that implementation of the BART alternatives will cost approximately$211 million in capital costs, which includes approximately $62 million inenvironmental upgrades for the existing Comanche Station project, which areincluded in the capital budget. PSCo expects the cost of any required capitalinvestment will be recoverable from customers. Emissions controls are expectedto be installed between 2010 and 2012.

 

***Clean Air Mercury Rule***— In March 2005, theEPA issued the Clean Air Mercury Rule (CAMR), which regulates mercury emissionsfrom power plants for the first time. PSCo continues to evaluate the strategyfor complying with CAMR. Compliance may be achieved by either adding mercurycontrols or purchasing allowances or a combination of both.  In February 2007, the Colorado Air QualityControl Commission passed a mercury rule. The rule was based on a negotiated rule that was agreed upon byparticipating environmental groups, utilities, local government coalitions, andthe Colorado Air Pollution Control Division. The rule requires controls to beinstalled at Pawnee Station in 2012 and all other Colorado units by 2014.  PSCo is evaluating the emission controls requiredto meet the new rule and is currently unable to provide a capital costestimate.

 

***Federal Clean Water Act —***The federal Clean Water Act requires theEPA to regulate cooling water intake structures to assure that these structuresreflect the “best technology available” for minimizing adverse environmentalimpacts. In July 2004, 

 

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the EPA publishedphase II of the rule, which applies to existing cooling water intakes atsteam-electric power plants. Several lawsuits were filed against the EPA in theUnited States Court of Appeals for the Second Circuit challenging the phase IIrulemaking. On Jan. 25, 2007, the court issued its decision and remandedvirtually every aspect of the rule to the EPA for reconsideration. The EPAannounced on March 20, 2007, it will suspend the deadlines and refer anyimplementation to each state’s best professional judgment until the EPA is ableto fully respond to the court-ordered remands. As a result, the rule’scompliance requirements and associated deadlines are currently unknown.  It is not possible to provide an accurateestimate of the overall cost of this rulemaking at this time due to the manyuncertainties involved.

 

***Notice of Violation*** — On July 1, 2002,PSCo received a Notice of Violation (NOV) from the EPA alleging violations ofthe New Source Review (NSR) requirements of the Clean Air Act (CAA) at theComanche and Pawnee plants in Colorado. The NOV specifically alleges thatvarious maintenance, repair and replacement projects undertaken at the plantsin the mid- to late-1990s should have required a permit under the NSRprocess.  PSCo believes it has acted infull compliance with the CAA and NSR process. It believes that the projectsidentified in the NOV fit within the routine maintenance, repair and replacementexemption contained within the NSR regulations or are otherwise not subject tothe NSR requirements.  PSCo disagreeswith the assertions contained in the NOV and intends to vigorously defend itsposition. As required by the CAA, the EPA met with PSCo in September 2002to discuss the NOV.

 

**Legal Contingencies**

** **

In the normal course ofbusiness, PSCo is party to routine claims and litigation arising from prior andcurrent operations. PSCo is actively defending these matters and has recorded aliability related to the probable cost of settlement or other disposition, whenit can be reasonably estimated.

 

***Carbon Dioxide Emissions Lawsuit***— On July 21, 2004, theattorneys general of eight states and New York City, as well as severalenvironmental groups, filed lawsuits in U.S. District Court for the SouthernDistrict of New York against five utilities, including Xcel Energy, to forcereductions in carbon dioxide (CO2) emissions. Although PSCo is not named as aparty to this litigation, the requested relief that Xcel Energy cap and reduceits CO2 emissionscould have a material adverse effect on PSCo. The other utilities includeAmerican Electric Power Co., Southern Co., Cinergy Corp. and Tennessee ValleyAuthority. CO2 is emittedwhenever fossil fuel is combusted, such as in automobiles, industrialoperations and coal- or natural gas-fired power plants. The lawsuits allegethat CO2 emitted byeach company is a public nuisance as defined under state and federal common lawbecause it has contributed to global warming. The lawsuits do not demandmonetary damages. Instead, the lawsuits ask the court to order each utility tocap and reduce its CO2 emissions. InOctober 2004, Xcel Energy and four other utility companies filed a motionto dismiss the lawsuit, contending, among other reasons, that the lawsuit is anattempt to usurp the policy-setting role of the U.S. Congress and thepresident. On Sept. 19, 2005, the judge granted the defendants’ motion todismiss on constitutional grounds. Plaintiffs filed an appeal to the SecondCircuit Court of Appeals. Oral arguments were presented on June 7, 2006 and adecision on the appeal is pending.

 

***Comanche 3 Permit Litigation***- On Aug. 4, 2005, Citizensfor Clean Air and Water in Pueblo and Southern Colorado and Clean Energy Actionfiled a complaint against the Colorado Air Pollution Control Division allegingthat the Division improperly granted permits to PSCo under Colorado’sPrevention of Significant Deterioration program for the construction andoperation of Comanche 3. PSCo intervened in the case.  On June 20, 2006, the court ruled in PSCo’sfavor and held that the Comanche 3 permits had been properly granted andplaintiffs’ claims to the contrary were without merit. Plaintiffs have appealedthis decision.  On Nov. 22, 2006,plaintiffs filed their opening briefs. PSCo’s response was filed Dec. 26, 2006.The Colorado Court of Appeals is expected to rule on the appeal in 2007.

 

***Comer vs. Xcel Energy Inc. et al.***— On April 25,2006, Xcel Energy received notice of a purported class action lawsuit filed inU.S. District Court for the Southern District of Mississippi. Although PSCo isnot named as a party to this litigation, if the litigation ultimately resultsin an unfavorable outcome for Xcel Energy, it could have a material adverseeffect on PSCo. The lawsuit names more than 45 oil, chemical and utilitycompanies, including Xcel Energy, as defendants and alleges that defendants’CO2 “were a proximate and direct cause of the increase in the destructivecapacity of Hurricane Katrina.” Plaintiffs allege in support of their claim, several legal theories,including negligence, and public and private nuisance and seek damages relatedto the loss resulting from the hurricane. Xcel Energy believes this lawsuit iswithout merit and intends to vigorously defend itself against these claims. OnJuly 19, 2006, Xcel Energy filed a motion to dismiss the lawsuit in itsentirety.

 

***Qwest vs. Xcel Energy Inc.*** - On June 24, 2004, anemployee of PSCo was injured when a pole owned by Qwest malfunctioned.  The employee is seeking damages ofapproximately  $7 million. On Sept. 6,2005, an action against Qwest relating to the incident was filed in DenverDistrict Court by the employee.  On April18, 2006, Qwest filed a third party complaint against PSCo based on terms in ajoint pole use agreement between Qwest and PSCo.  Pursuant to this agreement, Qwest hasasserted that PSCo had an affirmative duty to properly train and instruct itsemployees on pole safety, including testing the pole for soundness beforeclimbing.  PSCo filed a counterclaim onMay 15, 2006, against Qwest asserting Qwest had a duty to PSCo and anobligation under the contract to maintain its poles in a safe and serviceablecondition.  This case is still in thediscovery phase and set for jury trial beginning May 14, 2007.

 

***Payneet al. vs. PSCo et al.******—***In late October 2003, there was a wildfire inBoulder County, Colorado. There was no loss of life, but there was propertydamage associated with this fire. On Oct. 28, 2005, an action against PSCorelating to this fire was filed in Boulder 

 

10

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County District Court. Thereare 22 plaintiffs, including individuals, the City of Jamestown and twocompanies, and three co-defendants, including PSCo. Plaintiffs asserted that atree falling into PSCo distribution lines may have caused the fire.  The matter was ultimately settled in March2007 and  the settlement did not have amaterial effect on Xcel Energy’s financial results.

 

**OtherContingencies**

 

•               Tax Matters — SeeNote 3 to the consolidated financial statements for discussion of exposuresregarding the tax deductibility of COLI.

 

**6. Short-Term Borrowings and Financing Activities**

 

As of March 31, 2007, PSCohad $356.0 million in short-term debt outstanding at a weighted averageinterest rate of 5.40 percent.

 

**7.Derivative Valuation and Financial Impacts**

 

PSCouses derivative instruments in connection with its utility commodity price,interest rate, short-term wholesale and commodity trading activities, includingforward contracts, futures, swaps and options. All derivative instruments not qualifying for the normal purchases andnormal sales exception, as defined by SFAS 133 -”Accounting for Derivative Instruments and HedgingActivities,” as amended (SFAS 133), are recorded at fairvalue. The classification of the fair value for these derivative instruments isdependent on the designation of a qualifying hedging relationship.  The adjustment to fair value of derivative instrumentsnot designated in a qualifying hedging relationship is reflected in currentearnings or as a regulatory balance. This classification is dependent on the applicability of specificregulation.  This includes certaininstruments used to mitigate market risk for PSCo and all instruments relatedto the commodity trading operations.  Thedesignation of a cash flow hedge permits the classification of fair value to berecorded within Other Comprehensive Income, to the extent effective.  The designation of a fair value hedge permitsa derivative instrument’s gains or losses to offset the related results of thehedged item in the Consolidated Statements of Income.

 

PSCorecords the fair value of its derivative instruments in its ConsolidatedBalance Sheet as separate line items identified as Derivative InstrumentsValuation in both current and noncurrent assets and liabilities.

 

Qualifyinghedging relationships are designated as either a hedge of a forecastedtransaction or future cash flow (cash flow hedge), or a hedge of a recognized asset,liability or firm commitment (fair value hedge).  The types of qualifying hedging transactionsthat PSCo is currently engaged in are discussed below.

 

**Cash FlowHedges**

 

PSCo enters into derivativeinstruments to manage variability of future cash flows from changes incommodity prices and interest rates. These derivative instruments aredesignated as cash flow hedges for accounting purposes, and the changes in thefair value of these instruments are recorded as a component of AccumulatedOther Comprehensive Income or deferred as a regulatory asset or liability.

 

As of March 31, 2007, PSCo had variouscommodity-related contracts classified as cash flow hedges extending throughDecember 2009.  The fair value of thesecash flow hedges is recorded in either Accumulated Other Comprehensive Incomeor deferred as a regulatory asset or liability. This classification is based onthe regulatory recovery mechanisms in place.  Amounts deferred in theseaccounts are recorded in earnings as the hedged purchase or sales transactionis settled. This could include the purchase or sale of energy or energy-relatedproducts, the use of natural gas to generate electric energy or gas purchasedfor resale.

 

As of March 31, 2007, PSCo had no amounts inAccumulated Other Comprehensive Income related to commodity cash flow hedgecontracts that are expected to be recognized in earnings during the next 12months as the hedged transactions settle.

 

PSCo enters into****various instruments that effectively fixthe interest payments on certain floating rate debt obligations or effectivelyfix the yield or price on a specified benchmark interest rate for a specificperiod.  These derivative instruments aredesignated as cash flow hedges for accounting purposes and the change in the fair value of theseinstruments is recorded as a component of Other Comprehensive Income.

 

As of March 31, 2007, PSCohad net gains of approximately $1.5 million in Accumulated Other ComprehensiveIncome that it expects to recognize in earnings during the next 12 months.

 

Gains or losses on hedgingtransactions for the sales of energy or energy-related products are primarilyrecorded as a component of revenues, hedging transactions for fuel used inenergy generation are recorded as a component of fuel costs, hedgingtransactions for gas purchased for resale are recorded as a component of gascosts and interest rate hedging transactions are recorded as a component ofinterest expense. PSCo is allowed to recover in electric or gas rates the costsof certain financial instruments purchased to reduce commodity cost volatility.There was no hedge ineffectiveness in the first quarter of 2007.

 

 

11

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The impact of qualifyingcash flow hedges on PSCo’s Accumulated Other Comprehensive Income, included asa component of stockholder’s equity, is detailed in the following table:

 
| ** **                                                                                   | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| **(Millions of Dollars)**                                                          | ** ** | **March 31, 2007**     | ** ** | **March 31, 2006** | ** ** |
| Accumulated other comprehensive income related to cash flow hedges at  Jan. 1                |       | $                                | 12.6       |   | $ | 14.2 |   |
| After-tax net unrealized gains (losses) related to derivatives  accounted for as hedges      |       | 0.5                              |       | (1.6 | ) |
| After-tax net realized (gains) losses on derivative transactions  reclassified into earnings |       | (0.4                             | )          | 1.2 |   |
| Accumulated other comprehensive income related to cash flow hedges at  March 31              |       | $                                | 12.7       |   | $ | 13.8 |   |

 

**Fair Value Hedges**

 

The effective portion of thechange in the fair value of a derivative instrument qualifying as a fair valuehedge is offset against the change in the fair value of the underlying asset,liability or firm commitment being hedged. That is, fair value hedge accountingallows the gains or losses of the derivative instrument to offset, in the sameperiod, the gains and losses of the hedged item.

 

**DerivativesNot Qualifying for Hedge Accounting**

 

PSCo has commodity tradingoperations that enter into derivative instruments. These derivative instrumentsare accounted for on a mark-to-market basis in the Consolidated Statement ofIncome. The results of these transactions are recorded as a component ofOperating Revenues on the Consolidated Statements of Income.

 

PSCo also enters intocertain commodity-based derivative transactions, not included in tradingoperations, which do not qualify for hedge accounting treatment. These derivativeinstruments are accounted for on a mark-to-market basis in accordance with SFAS133.

 

**NormalPurchases or Normal Sales Contracts**

 

PSCo enters intocontracts for the purchase and sale of commodities for use in its businessoperations.  SFAS 133 requires a companyto evaluate these contracts to determine whether the contracts arederivatives.  Certain contracts that meetthe definition of a derivative may be exempted from SFAS 133 as normalpurchases or normal sales.

 

PSCo evaluates all of itscontracts when such contracts are entered to determine if they are derivativesand, if so, if they qualify to meet the normal designation requirements underSFAS 133.  None of the contracts enteredinto within the commodity trading operations qualify for a normal designation.

 

Normal purchases and normalsales contracts are accounted for as executory contracts.

 

**8.Detail of Interest and Other Expense, Net**

 

Interest andother income, net, for the three months ended March 31 consisted of thefollowing:

 
| ** **                                                                                        | ** ** | **Three months ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Thousands of dollars)**                                                              | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                                                                        | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Interest income                                                                                   |       | $                                                    | 1,588      |   | $ | 1,021 |   |
| Other nonoperating income                                                                         |       | 501                                                  |       | 831 |   |
| Interest expense on corporate-owned life insurance and other  employee-related insurance policies |       | (4,212                                               | )          | (4,202 | ) |
| Other nonoperating expenses                                                                       |       | (1                                                   | )          | (714 | ) |
| Total interest and other expense, net                                                             |       | $                                                    | (2,124     | ) | $ | (3,064 | ) |

 

 

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**9. Segment Information**

 

PSCo has two reportable segments, Regulated ElectricUtility and Regulated Natural Gas Utility. Commodity trading operations are nota reportable segment and commodity trading results are included in theRegulated Electric Utility segment.

 
| **(Thousands of dollars)**   | ** ** | **Regulated  Electric  Utility** | ** ** | **Regulated  Natural  Gas Utility** | ** ** | **All  Other** | ** ** | **Reconciling  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|------------------------------------------|------------|----------------|------------|-------------------------------|------------|-------------------------|------------|
| **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 |   |
|                                   |       |                             |       |                                     |       |           |       |                          |       |                    |       |
| **Three months ended March 31,  2006** | ** ** | ** **                       | ** ** | ** **                               | ** ** | ** **     | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues from:                         |       |                             |       |                                     |       |           |       |                          |       |                    |       |
| External customers                     |       | $                                | 672,119    |                                     | $          | 582,901        |       | $                             | 12,005     |                    | $          | — |   | $ | 1,267,025 |   |
| Internal customers                     |       | 63                               |       | 37                                       |       | —         |       | (100                          | )          | —                  |       |
| Total revenues                         |       | 672,182                          |       | 582,938                                  |       | 12,005         |       | (100                          | )          | 1,267,025               |       |
| Segment net income                     |       | $                                | 46,252     |                                     | $          | 26,652         |       | $                             | 3,942      |                    | $          | — |   | $ | 76,846 |   |

 

**10. Comprehensive Income**

 

The components of totalcomprehensive income are shown below:

 
| ** **                                                                                                | ** ** | **Three months ended   March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **(Millions of dollars)**                                                                       | ** ** | **2007**                                               | ** ** | **2006** | ** ** |
| ** **                                                                                                | ** ** | ** **                                             | ** ** | ** ** | ** ** |
| Net income                                                                                                |       | $                                                      | 85.7       |   | $ | 76.8 |   |
| Other comprehensive  income:                                                                              |       |                                                   |       |   |   |
| After-tax net unrealized gains (losses) related to derivatives  accounted for as hedges (see Note 7)      |       | 0.5                                                    |       | (1.6 | ) |
| After-tax net realized (gains) losses on derivative transactions  reclassified into earnings (see Note 7) |       | (0.4                                                   | )          | 1.2 |   |
| Other comprehensive income  (loss)                                                                        |       | 0.1                                                    |       | (0.4 | ) |
| Comprehensive income                                                                                      |       | $                                                      | 85.8       |   | $ | 76.4 |   |

 

The accumulated other comprehensive income instockholder’s equity at March 31, 2007 and Dec. 31, 2006, relates to valuationadjustments on PSCo’s derivative financial instruments and hedging activities,the mark-to-market component of PSCo’s marketable securities and unrealizedlosses related to its minimum pension liability.

 

 

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

 

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

 

**Components of Net Periodic Benefit Cost**

 
| ** **                                                   | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                             | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(Thousands of dollars)**                         | ** ** | **Pension Benefits**                            | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                 |       | $                                                    | 16,485     |   | $ | 16,434 |   | $ | 1,701 |   | $ | 1,837 |   |
| Interest cost                                                |       | 39,598                                               |       | 39,509 |   | 13,603 |   | 13,183 |   |
| Expected return on plan  assets                              |       | (65,891                                              | )          | (66,481 | ) | (7,618 | ) | (6,268 | ) |
| Amortization of transition  obligation                       |       | —                                               |       | — |   | 3,611 |   | 3,645 |   |
| Amortization of prior  service cost (credit)                 |       | 6,487                                                |       | 7,427 |   | (545 | ) | (545 | ) |
| Amortization of net loss                                     |       | 3,867                                                |       | 4,511 |   | 4,994 |   | 6,523 |   |
| Net periodic benefit cost                                    |       | 546                                                  |       | 1,400 |   |   | 15,746 |   |   | 18,375 |   |
| Credits not recognized due  to the effects of regulation     |       | 2,680                                                |       | 2,425 |   | — |   | — |   |
| Additional cost recognized  due to the effects of regulation |       | —                                               |       | — |   | 973 |   | 973 |   |
| Net benefit cost recognized for financial reporting          |       | $                                                    | 3,226      |   | $ | 3,825 |   | $ | 16,719 |   | $ | 19,348 |   |
|                                                         |       |                                                 |       |   |   |   |   |   |   |
| **PSCo**                                                     | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net periodic benefit cost                                    |       | $                                                    | 4,331      |   | $ | 5,137 |   | $ | 8,798 |   | $ | 10,947 |   |
| Additional cost recognized  due to the effects of regulation |       | —                                               |       | — |   | 973 |   | 973 |   |
| Net benefit cost  recognized for financial reporting         |       | $                                                    | 4,331      |   | $ | 5,137 |   | $ | 9,771 |   | $ | 11,920 |   |

 

**Item 2. MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

Discussion of financial condition and liquidity forPSCo is omitted per conditions set forth in general instructions H (1) (a) and(b) of Form 10-Q for wholly owned subsidiaries. It is replaced with management’snarrative analysis and the results of operations set forth in generalinstructions H (2) (a) of Form 10-Q for wholly owned subsidiaries (reduceddisclosure format).

 

**Forward-Looking Information**

 

The following discussion andanalysis by management focuses on those factors that had a material effect onthe 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 the historical statementscontained in this report, the matters discussed in the following discussion andanalysis are forward-looking statements that are subject to certain risks,uncertainties and assumptions. Such forward-looking statements are intended tobe identified in this document by the words “anticipate,” “estimate,” “expect,”“objective,” “outlook,” “projected,” “possible,” “potential” and similarexpressions. Actual results may vary materially. Factors that could causeactual results to differ materially include, but are not limited to:

 

·       Economic conditions,including their impact on capital expenditures and the ability of PSCo toobtain financing on favorable terms, inflation rates and monetary fluctuations;

·       Business conditions in theenergy business;

·       Trade, monetary, fiscal,taxation and environmental policies of governments, agencies and similarorganizations in geographic areas where PSCo has a financial interest;

·       Customer businessconditions, including demand for their products or services and supply of laborand materials used in creating their products and services;

·       Financial or regulatoryaccounting principles or policies imposed by the Financial Accounting StandardsBoard, the SEC, the Federal Energy Regulatory Commission and similar entities withregulatory oversight;

·       Availability or cost ofcapital such as changes in: interest rates; market perceptions of the utilityindustry, PSCo; or security ratings;

·       Factors affecting utilityand nonutility operations such as unusual weather conditions; catastrophicweather-related damage; unscheduled generation outages, maintenance or repairs;unanticipated changes to fossil fuel or natural gas supply costs oravailability due to higher demand, shortages, transportation problems or otherdevelopments; environmental incidents; or electric 

 

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             transmission or natural gas pipeline constraints;

·       Employee workforce factors,including loss or retirement of key executives, collective bargainingagreements with union employees, or work stoppages;

·       Increased competition in theutility industry or additional competition in the markets served by PSCo;

·       State, federal and foreignlegislative and regulatory initiatives that affect cost and investmentrecovery, have an impact on rate structures and affect the speed and degree towhich competition enters the electric and natural gas markets; industryrestructuring initiatives; transmission system operation and/or administrationinitiatives; recovery of investments made under traditional regulation; natureof competitors entering the industry; retail wheeling; a new pricing structure;and former customers entering the generation market;

·       Rate-setting policies orprocedures of regulatory entities, including environmental externalities, whichare values established by regulators assigning environmental costs to eachmethod of electricity generation when evaluating generation resource options;

·       Social attitudes regardingthe utility and power industries;

·       Risks associated with theCalifornia power market;

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

·       Technological developmentsthat result in competitive disadvantages and create the potential forimpairment of existing assets;

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

·       Risks associated withimplementation of new technologies;

·        Other business orinvestment considerations that may be disclosed from time to time in PSCo’s SECfilings or in other publicly disseminated written documents; and

·        The other risk factors listedfrom time to time by PSCo in reports filed with the SEC, including Risk Factorsin Item 1A of PSCo’s Annual Report on Form 10-K for the year ended December 31,2006 and Exhibit 99.01 to this report on Form 10-Q for the quarterended March 31, 2007.

 

**MarketRisks**

 

PSCo is exposed to market risks, including changesin commodity prices and interest rates, as disclosed in Item 7A —Quantitative and Qualitative Disclosures About Market Risk in its Annual Report on Form 10-K for theyear ended Dec. 31, 2006. Commodity price and interest rate risks for PSCo aremitigated due to cost-based rate regulation. At March 31, 2007, there were nomaterial changes to the financial market risks that affect the quantitative andqualitative disclosures presented as of Dec. 31, 2006.

 

**RESULTS OFOPERATIONS**

 

PSCo’s net income was approximately $85.7 millionfor the first three months of 2007, compared with approximately $76.8 millionfor the first three months of 2006.

 

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

 

Electric fuel and purchasedpower expenses tend to vary with changing retail and wholesale salesrequirements 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 two distinct formsof wholesale sales: short-term wholesale and commodity trading.  Short-term wholesale refers to energy-relatedpurchase and sales activity and the use of certain financial instrumentsassociated with the fuel required for, and energy produced from, PSCo’sgeneration assets or the energy and capacity purchased to serve nativeload.  Commodity trading is notassociated with PSCo’s generation assets or the energy and capacity purchasedto serve native load.  Short-termwholesale and commodity trading activities are considered part of the electricutility segment.

 

Margins from commoditytrading activity conducted at PSCo are partially redistributed to Northern StatesPower Co., a Minnesota corporation (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 receivedpursuant to the JOA are reflected as part of Base Electric UtilityRevenue.  Short-term wholesale andcommodity trading margins reflect the impact of regulatory sharing, ifapplicable. Trading revenues are reported net of related costs (i.e., on a marginbasis) in the Consolidated Statements of Income. Commodity trading costsinclude purchased power, transmission, broker fees and other relatedcosts.  Short-term wholesale andcommodity trading margins reflect the estimated impact of regulatory sharing ofmargins, if applicable.

 

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The following table detailsbase electric utility, short-term wholesale and commodity trading revenues andmargin:
| **(Millions of dollars)**                     | ** ** | **Base  Electric  Utility** | ** ** | **Short-term  Wholesale** | ** ** | **Commodity  Trading** | ** ** | **Consolidated  Total** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                              | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **             | ** ** | ** **              | ** ** |
| **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 costs                                 |       | —                      |       | —                    |       | (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                    | %          |
|                                                    |       |                        |       |                      |       |                   |       |                    |       |
| **Three months ended March 31, 2006**                   | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **             | ** ** | ** **              | ** ** |
| Electric utility revenues (excluding commodity trading) |       | $                           | 660        |                      | $          | 3                      |       | $                       | —     |   | $ | 663 |   |
| Electric fuel and purchased power                       |       | (413                        | )          | (3                        | )          | —                 |       | (416                    | )          |
| Commodity trading revenues                              |       | —                      |       | —                    |       | 202                    |       | 202                     |       |
| Commodity trading costs                                 |       | —                      |       | —                    |       | (193                   | )          | (193                    | )          |
| Gross margin before operating expenses                  |       | $                           | 247        |                      | $          | —                 |       | $                       | 9          |   | $ | 256 |   |
| Margin as a percentage of revenues                      |       | 37.4                        | %          | —                    | %          | 4.5                    | %          | 29.6                    | %          |

 

The following summarizes the components of thechanges in base electric revenues and base electric margin for the three monthsended March 31:

 

# ***Base Electric Revenues***

| **(Millions of dollars)**       | ** ** | **2007 vs. 2006** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | ** **                  | ** ** |
| Purchased power and fuel  cost recovery   |       | $                           | (55        | ) |
| Retail rate increase                      |       | 27                          |       |
| Sales growth                              |       | 6                           |       |
| Weather                                   |       | 4                           |       |
| Firm wholesale revenues                   |       | (3                          | )          |
| Sales mix and other                       |       | (5                          | )          |
| Total decrease in base  electric revenues |       | $                           | (26        | ) |

 

***Base Electric Margin***

| **(Millions of dollars)**     | ** ** | **2007 vs. 2006** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | ** **                  | ** ** |
| Retail rate increase                    |       | $                           | 27         |   |
| Sales growth                            |       | 6                           |       |
| Weather                                 |       | 4                           |       |
| Purchased power and fuel  cost recovery |       | (7                          | )          |
| Firm wholesale revenues                 |       | (3                          | )          |
| Sales mix and other                     |       | (5                          | )          |
| Total increase in base  electric margin |       | $                           | 22         |   |

 

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

 

The following table details the change in naturalgas revenue and margin. The cost of natural gas tends to vary with changing salesrequirements and unit cost of natural gas purchases. PSCo has a Gas CostAdjustment (GCA) mechanism for natural gas sales, which recognizes the majorityof the effects of changes in the cost of natural gas purchased for resale andadjusts revenues to reflect such changes 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)**       | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Natural gas utility  revenues             |       | $                                                    | 516        |   | $ | 583 |   |
| Cost of natural gas sold  and transported |       | (408                                                 | )          | (485 | ) |
| Natural gas utility margin                |       | $                                                    | 108        |   | $ | 98 |   |

 

 

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The following summarizes the components of thechanges in natural gas revenues and margin for the three months ended March 31:

 

***Natural Gas Revenues***

 

| **(Millions of dollars)**               | ** ** | **2007 vs. 2006** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | ** **                  | ** ** |
| Purchased gas adjustment  clause recovery         |       | $                           | (76        | ) |
| Estimated impact of  weather on firm sales volume |       | 6                           |       |
| Transportation                                    |       | 2                           |       |
| Other                                             |       | 1                           |       |
| Total decrease in natural gas revenues            |       | $                           | (67        | ) |

 

***Natural Gas Margin***

 

| **(Millions of dollars)**               | ** ** | **2007 vs. 2006** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | ** **                  | ** ** |
| Estimated impact of  weather on firm sales volume |       | $                           | 6          |   |
| Transportation                                    |       | 2                           |       |
| Other                                             |       | 2                           |       |
| Total increase in natural gas margin              |       | $                           | 10         |   |

 

**Non-FuelOperating Expense and Other Costs**

 

***Other Operatingand Maintenance Expenses*** - The following summarizes the components of the changes in otheroperating and maintenance expense for the three months ended March 31:

 

| **(Millions of dollars)** | ** ** | **2007 vs. 2006** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | ** **                  | ** ** |
| Higher consulting costs             |       | $                           | 2          |   |
| Higher employee benefit  costs      |       | 2                           |       |
| Higher donation costs               |       | 1                           |       |
| Lower information  technology costs |       | (2                          | )          |
| Total                               |       | $                           | 3          |   |

 

***Income Taxes -***Income tax expense increasedby approximately $10.2 million for the first three months of 2007 compared withthe first three months of 2006.  Theincrease was primarily due to higher pretax income.  The effective tax rate was 26.5 percent forthe first three months of 2007, compared with 21.2 percent for the same periodin 2006.  The increase in the effectivetax rate was primarily due to an increase in the forecasted annual effectivetax rate for 2007 as compared to 2006. The increase in the forecasted annual effective tax rate was primarilydue to higher forecasted pretax income for 2007 as compared to 2006.

 

***Regulation***

** **

**Summary ofRecent Federal Regulatory Developments**

 

The FERC has jurisdiction over rates forelectric transmission service in interstate commerce and electric energy soldat wholesale, hydro facility licensing, natural gas transportation, accountingpractices and certain other activities of PSCo. State and local agencies havejurisdiction over many of PSCo’s activities, including regulation of retailrates and environmental matters. In addition to the matters discussed below, see Note 4 tothe consolidated financial statements for a discussion of other regulatorymatters.

 

***FERC Rules Implementing Energy Policy Act of 2005 (EnergyAct) —***  The Energy Act repealed the Public UtilityHolding Company Act of 1935 effective Feb. 8, 2006. In addition, theEnergy Act required the FERC to conduct several rulemakings to adopt newregulations to implement various aspects of the Energy Act. SinceAugust 2005, the FERC has completed or initiated proceedings to modify itsregulations on a number of subjects.  Inaddition to the previous disclosure in Item 1 of PSCo’sForm 10-K for the year ended Dec. 31, 2006, the FERC issued finalrules making certain reliability standards mandatory and subject to potentialfinancial penalties up to $1 million per day per violation for non-complianceeffective June 1, 2007.

 

While PSCo cannot predict the ultimate impactthe new regulations will have on its operations or financial results, PSCo istaking actions that are intended to comply with and implement these newrules and regulations as they become effective.

 

***Electric Transmission Rate Regulation —***The FERC alsoregulates the rates charged and terms and conditions for electric transmissionservices.  FERC policy encouragesutilities to turn over the functional control over their electric transmissionassets and the related responsibility for the sale of electric transmissionservices to a Regional Transmission Organization (RTO). Each RTO separatelyfiles regional transmission tariff rates for approval by the FERC. All memberswithin that RTO are then subjected to those 

 

 

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rates. PSCo is currently participating with other utilities in the developmentof WestConnect, which would provide certain regionalized transmission andwholesale energy market functions but would not be an RTO.

 

On Feb. 15, 2007, the FERC issued final rulesadopting revisions to its 1996 open access transmission rules.  The final rules are effective May 14,2007.  PSCo will be required to completeseveral compliance actions.

 

In addition, in January 2007, the FERC issuedinterim and proposed rules to modify its 2004 standards of conduct rules forelectric and natural gas transmission providers, in response to a 2006 courtappeal partially vacating the rules.  Theproposed rules would modify the current FERC rules governing the functionalseparation of the PSCo electric transmission function from the wholesale salesand marketing function.  The proposedrules are pending final FERC action.

 

While PSCo cannot predictthe ultimate impact the new regulations will have on its operations orfinancial results, PSCo is taking actions that are intended to comply with andimplement these new rules and regulations as they become effective.

 

**Other Regulatory Matters — PSCo**

 

***Renewable EnergyStandard -***The2007 Colorado legislature adopted an increased Renewable Energy Standard that placesadditional requirements on PSCo above those called for by Amendment 37.  Under Amendment 37, PSCo wasrequired to generate or purchase electricity from renewable resources equalingat least 10 percent of its retail sales by 2015.  Under the new legislation, PSCo must meetthat level by 2011, 15 percent of retail sales by 2015 and 20 percent of retailsales by 2020. The new law limitsthe incremental retail rate impact from these acquisitions (compared with newnon-renewable resources) to 2 percent. The new legislation supplements theexisting incentives allowed under Amendment 37 and permits and encouragesfavorable cost recovery for utility investment in renewable resources,including the use of a rider mechanism and a return on construction work inprogress.

 

***Transmission CostRecovery Legislation*****-**The 2007 Colorado legislature enacted legislation that is intended to encourageinvestment in transmissioninfrastructure in Colorado.  The new legislationprovides for recovery through a rate rider of all costs a utility incurs in theplanning, developing and construction or expansion of transmission facilitiesand for current recovery through this rider of the utilities weighted averagecost of capital on transmission construction work in progress as of the end ofthe prior calendar year.   Thislegislation also provides for rate-regulated Colorado utilities to developplans to construct or expand transmission facilities to transmissionconstrained zones where new electric generation facilities, including renewableenergy facilities, are likely to be located and provides for expeditedapprovals for such facilities.

 

***2003 Least Cost Plan (LCP) Investigation*** - In January2007, PSCo filed its final report on its evaluation of the bids submitted inresponse to PSCo’s 2005 All Source request for proposal under PSCo’s 2003 LCPwith the CPUC.  The final reportexplained that PSCo was intentionally waiting to fill the remaining 430MWresources needed in 2013 until PSCo’s 2007 LCP and that PSCo was rejectinguneconomic bids received for new coal generation and for renewal of contractswith existing natural gas-fired generators. On March 1, 2007, the CPUC issued an order requiring PSCo to apply forapproval of a 2013 contingency plan.  TheCPUC further ordered its staff to prepare for the CPUC’s consideration, a draftcomplaint to determine whether PSCo had violated any CPUC rules by failing tofill the remaining 2013 resource need. On April 2, 2007, PSCo filed its 2013 contingency plan, whichrecommended addressing the remaining 2013 resource need in the 2007 LCP to befiled in October 2007.  PSCo’scontingency plan also listed other options, which PSCo predicts will be lesscostly than accepting the uneconomic coal and natural gas bids.  The CPUC decided on April 25, 2007 not toissue the draft complaint prepared by its staff. However, the CPUC asked itsstaff to provide the CPUC with a report that addresses at a minimum, whether PSCo’snegotiations with coal bidders were made in good faith; any specific concernsthe staff may have with respect to PSCo’s evaluation of 2013 resources; andwhat changes to the CPUC rules or practices may be warranted in light of thestaff’s conclusions.  It is expected thatall interested parties will have an opportunity to comment on the staff’sreport.

 

**Item 4.CONTROLS AND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

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

 

 

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**InternalControl Over Financial Reporting**

** **

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

 

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

 

**Item 1.Legal Proceedings**

 

In the normal course of business, various lawsuitsand claims have arisen against PSCo. After consultation with legal counsel, PSCo has recorded an estimate ofthe probable cost of settlement or other disposition for such matters.  See Notes 4 and 5 of the Financial Statementsin this Quarterly Report on Form 10-Q for further discussion of legalproceedings, including Regulatory Matters and Commitments and ContingentLiabilities, which are hereby incorporated by reference.  Reference also is made to Item 3 and Note 12of PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 2006 for adescription 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.

 

***Payneet al. vs. PSCo et al.******—***In late October 2003, there was a wildfire inBoulder County, Colorado. There was no loss of life, but there was propertydamage associated with this fire. On Oct. 28, 2005, an action against PSCorelating to this fire was filed in Boulder County District Court. There are 22plaintiffs, including individuals, the City of Jamestown and two companies, andthree co-defendants, including PSCo. Plaintiffs asserted that a tree fallinginto PSCo distribution lines may have caused the fire.  The matter was ultimately settled in March2007 and  the settlement did not have amaterial effect on Xcel Energy’s financial results.

 

**Item 1A.Risk Factors**

 

PSCo’s risk factors are documented in Item 1Aof Part I of its 2006 Annual Report on Form 10-K, which is incorporated hereinby reference.  There have been nomaterial changes to the risk factors.

 

**Item 6.Exhibits**

 

The following Exhibits arefiled with this report:

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

 

 

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SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized on April 30, 2007.

 

Public Service Co. ofColorado

(Registrant)

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

 

 

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