**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM10-Q**

 

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

 
| **For the quarterly period ended September 30, 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’stelephone number, including area code **(303)571-7511**

 

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

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler or a non-accelerated filer. See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large Accelerated Filer o                               Accelerated  Filer o                               Non-Accelerated  Filer x |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

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

 

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

 
| **Class**                     | ** ** | **Outstanding at Oct. 29, 2007** |
|-------------------------------|------------|------------------------------------------------------|
| Common Stock, $0.01 par value |       | 100 shares                                           |

 

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

 

 

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**Tableof Contents**

 

**PARTI - FINANCIAL INFORMATION**

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

 

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

 

2

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

 

**Item 1. Financial Statements**

 

**PUBLIC SERVICE CO. OF COLORADO ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**

**(Thousands of dollars)**

 
| ** **                                                                                                 | ** ** | **Three Months Ended Sept. 30,** | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Operating revenues**                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Electric utility                                                                                           |       | $                                                    | 669,598    |                                                | $          | 644,445 |   | $ | 1,944,240 |   | $ | 1,916,376 |   |
| Natural gas utility                                                                                        |       | 104,930                                              |       | 142,422                                             |       | 811,481 |   | 885,340 |   |
| Steam and other                                                                                            |       | 6,733                                                |       | 6,857                                               |       | 24,829 |   | 26,264 |   |
| Total operating revenues                                                                                   |       | 781,261                                              |       | 793,724                                             |       | 2,780,550 |   | 2,827,980 |   |
|                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| **Operating expenses**                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Electric fuel and purchased power                                                                          |       | 340,270                                              |       | 391,011                                             |       | 1,058,400 |   | 1,157,636 |   |
| Cost of natural gas sold and transported                                                                   |       | 35,576                                               |       | 78,062                                              |       | 562,086 |   | 654,607 |   |
| Cost of sales — steam and other                                                                       |       | 2,670                                                |       | 3,203                                               |       | 9,681 |   | 14,405 |   |
| Other operating and maintenance expenses                                                                   |       | 143,287                                              |       | 139,350                                             |       | 429,401 |   | 415,635 |   |
| Depreciation and amortization                                                                              |       | 66,377                                               |       | 61,375                                              |       | 198,309 |   | 179,895 |   |
| Taxes (other than income taxes)                                                                            |       | 19,735                                               |       | 20,081                                              |       | 65,221 |   | 64,703 |   |
| Total operating expenses                                                                                   |       | 607,915                                              |       | 693,082                                             |       | 2,323,098 |   | 2,486,881 |   |
|                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| **Operating income**                                                                                       |       | 173,346                                              |       | 100,642                                             |       | 457,452 |   | 341,099 |   |
|                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Interest and other income (expense) - net  (see Note 9)                                                    |       | 3,690                                                |       | (610                                                | )          | 7,095 |   | 2,777 |   |
| Allowance for funds used during  construction - equity                                                     |       | 3,965                                                |       | 1,052                                               |       | 8,707 |   | 1,315 |   |
|                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| **Interest charges and financing costs**                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Interest charges — includes other financing  costs of $1,411, $1,509, $4,161 and $4,547, respectively |       | 34,318                                               |       | 32,952                                              |       | 100,992 |   | 101,919 |   |
| Allowance for funds used during  construction — debt                                                  |       | (3,496                                               | )          | (3,840                                              | )          | (8,664 | ) | (9,305 | ) |
| Total interest charges and financing costs                                                                 |       | 30,822                                               |       | 29,112                                              |       | 92,328 |   | 92,614 |   |
|                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Income from continuing operations before  income taxes                                                     |       | 150,179                                              |       | 71,972                                              |       | 380,926 |   | 252,577 |   |
| Income taxes                                                                                               |       | 49,256                                               |       | 29,192                                              |       | 130,948 |   | 90,856 |   |
| Income from continuing operations                                                                          |       | 100,923                                              |       | 42,780                                              |       | 249,978 |   | 161,721 |   |
| Income (loss) from discontinued operations  – net of tax (see Note 3)                                 |       | 5,272                                                |       | 4,578                                               |       | (39,578 | ) | 14,676 |   |
| **Net income**                                                                                             |       | $                                                    | 106,195    |                                                | $          | 47,358 |   | $ | 210,400 |   | $ | 176,397 |   |

 

**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)**

 
| ** **                                                                           | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| **Operating activities**                                                             |       |                                                |       |   |   |
| Net income                                                                           |       | $                                                   | 210,400    |   | $ | 176,397 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:   |       |                                                |       |   |   |
| Remove loss (income) from discontinued  operations                                   |       | 39,578                                              |       | (14,676 | ) |
| Depreciation and amortization                                                        |       | 206,107                                             |       | 190,859 |   |
| Deferred income taxes                                                                |       | 62,160                                              |       | 58,822 |   |
| Amortization of investment tax credits                                               |       | (2,943                                              | )          | (2,962 | ) |
| Allowance for equity funds used during  construction                                 |       | (8,707                                              | )          | (1,315 | ) |
| Net realized and unrealized hedging and  derivative transactions                     |       | (13,643                                             | )          | (58,220 | ) |
| Changes in operating assets and liabilities:                                         |       |                                                |       |   |   |
| Accounts receivable                                                                  |       | 57,922                                              |       | 152,982 |   |
| Accrued unbilled revenues                                                            |       | (8,231                                              | )          | 65,883 |   |
| Inventories                                                                          |       | 17,239                                              |       | 19,685 |   |
| Recoverable purchased natural gas and  electric energy costs                         |       | 136,080                                             |       | 212,713 |   |
| Prepayments and other                                                                |       | 186                                                 |       | 3,147 |   |
| Accounts payable                                                                     |       | (96,689                                             | )          | (261,802 | ) |
| Net regulatory assets and liabilities                                                |       | 572                                                 |       | (39,151 | ) |
| Other current liabilities                                                            |       | (6,710                                              | )          | 8,244 |   |
| Change in other noncurrent assets                                                    |       | 10,236                                              |       | 2,860 |   |
| Change in other noncurrent liabilities                                               |       | (48,118                                             | )          | (8,331 | ) |
| Operating cash flows provided by  discontinued operations                            |       | 28,947                                              |       | 21,842 |   |
| Net cash provided by operating activities                                            |       | 584,386                                             |       | 526,977 |   |
|                                                                                 |       |                                                |       |   |   |
| **Investing activities**                                                             |       |                                                |       |   |   |
| Capital/construction expenditures                                                    |       | (491,770                                            | )          | (399,924 | ) |
| Allowance for equity funds used during  construction                                 |       | 8,707                                               |       | 1,315 |   |
| Investments in utility money pool  arrangement                                       |       | (494,700                                            | )          | — |   |
| Receipts from utility money pool  arrangement                                        |       | 494,700                                             |       | — |   |
| Restricted cash                                                                      |       | (8,639                                              | )          | (3,200 | ) |
| Other investments                                                                    |       | —                                              |       | 1,269 |   |
| Net cash used in investing activities                                                |       | (491,702                                            | )          | (400,540 | ) |
|                                                                                 |       |                                                |       |   |   |
| **Financing activities**                                                             |       |                                                |       |   |   |
| Short-term debt repayments - net                                                     |       | (372,500                                            | )          | (98,604 | ) |
| Proceeds from issuance of long-term debt                                             |       | 343,756                                             |       | — |   |
| Borrowings under utility money pool  arrangement                                     |       | 475,500                                             |       | 934,800 |   |
| Repayments under utility money pool  arrangement                                     |       | (475,500                                            | )          | (902,400 | ) |
| Repayment of long-term debt, including  reacquisition premiums                       |       | (101,031                                            | )          | (125,997 | ) |
| Capital contribution from parent                                                     |       | 330,176                                             |       | 193,185 |   |
| Dividends paid to parent                                                             |       | (196,066                                            | )          | (129,655 | ) |
| Net cash provided by (used in) financing  activities                                 |       | 4,335                                               |       | (128,671 | ) |
|                                                                                 |       |                                                |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                |       | 97,019                                              |       | (2,234 | ) |
| Net increase (decrease) in cash and cash  equivalents – discontinued operations |       | 40                                                  |       | (37 | ) |
| Cash and cash equivalents at beginning of  period                                    |       | 3,011                                               |       | 2,848 |   |
| Cash and cash equivalents at end of period                                           |       | $                                                   | 100,070    |   | $ | 577 |   |
|                                                                                 |       |                                                |       |   |   |
| Supplemental disclosure of cash flow  information:                                   |       |                                                |       |   |   |
| Cash paid for interest (net of amounts  capitalized)                                 |       | $                                                   | 34,374     |   | $ | 86,441 |   |
| Cash paid for income taxes (net of refunds  received)                                |       | 41,939                                              |       | 30,395 |   |
|                                                                                 |       |                                                |       |   |   |
| Supplemental disclosure of non-cash  investing transactions:                         |       |                                                |       |   |   |
| Property, plant and equipment additions in  accounts payable                         |       | $                                                   | 29,265     |   | $ | 7,774 |   |

 

See Notes to Consolidated FinancialStatements

 

4

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**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**

**(Thousandsof dollars)**

 
| ** **                                                                                | ** ** | **Sept. 30, 2007** | ** ** | **Dec. 31, 2006** | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                           |       |                         |       |                        |       |
| Cash and cash equivalents                                                                 |       | $                            | 100,070    |                        | $          | 3,011 |   |
| Accounts receivable, net of allowance for  bad debts of $19,760 and $18,415, respectively |       | 269,557                      |       | 332,933                     |       |
| Accounts receivable from affiliates                                                       |       | 14,075                       |       | 8,621                       |       |
| Accrued unbilled revenues                                                                 |       | 207,592                      |       | 199,361                     |       |
| Recoverable purchased natural gas and  electric energy costs                              |       | 21,747                       |       | 157,827                     |       |
| Materials and supplies inventories                                                        |       | 45,326                       |       | 43,029                      |       |
| Fuel inventories                                                                          |       | 41,827                       |       | 40,997                      |       |
| Natural gas inventories                                                                   |       | 135,201                      |       | 155,567                     |       |
| Derivative instruments valuation                                                          |       | 36,337                       |       | 28,111                      |       |
| Deferred income taxes                                                                     |       | 28,966                       |       | 47,075                      |       |
| Prepayments and other                                                                     |       | 13,933                       |       | 14,284                      |       |
| Current assets of discontinued operations                                                 |       | 22,126                       |       | 52,593                      |       |
| Total current assets                                                                      |       | 936,757                      |       | 1,083,409                   |       |
| Property, plant and equipment, at cost:                                                   |       |                         |       |                        |       |
| Electric utility plant                                                                    |       | 6,548,891                    |       | 6,409,194                   |       |
| Natural gas utility plant                                                                 |       | 1,877,749                    |       | 1,825,560                   |       |
| Common utility and other property                                                         |       | 724,994                      |       | 725,864                     |       |
| Construction work in progress                                                             |       | 690,261                      |       | 429,878                     |       |
| Total property, plant and equipment                                                       |       | 9,841,895                    |       | 9,390,496                   |       |
| Less accumulated depreciation                                                             |       | (3,032,148                   | )          | (2,912,233                  | )          |
| Net property, plant and equipment                                                         |       | 6,809,747                    |       | 6,478,263                   |       |
| Other assets:                                                                             |       |                         |       |                        |       |
| Regulatory assets                                                                         |       | 588,108                      |       | 589,016                     |       |
| Derivative instruments valuation                                                          |       | 146,403                      |       | 161,502                     |       |
| Other investments                                                                         |       | 19,941                       |       | 11,136                      |       |
| Other                                                                                     |       | 38,630                       |       | 45,785                      |       |
| Noncurrent assets of discontinued  operations                                             |       | 14,363                       |       | 15,779                      |       |
| Total other assets                                                                        |       | 807,445                      |       | 823,218                     |       |
| Total assets                                                                              |       | $                            | 8,553,949  |                        | $          | 8,384,890 |   |
| **LIABILITIES AND EQUITY**                                                                | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                      |       |                         |       |                        |       |
| Current portion of long-term debt                                                         |       | $                            | 1,425      |                        | $          | 101,379 |   |
| Short-term debt                                                                           |       | —                       |       | 372,500                     |       |
| Accounts payable                                                                          |       | 314,911                      |       | 385,054                     |       |
| Accounts payable to affiliates                                                            |       | 27,764                       |       | 30,291                      |       |
| Taxes accrued                                                                             |       | 62,813                       |       | 98,662                      |       |
| Dividends payable to parent                                                               |       | 67,792                       |       | 64,778                      |       |
| Derivative instruments valuation                                                          |       | 44,690                       |       | 38,616                      |       |
| Accrued interest                                                                          |       | 46,289                       |       | 35,362                      |       |
| Other                                                                                     |       | 88,210                       |       | 74,381                      |       |
| Current liabilities of discontinued  operations                                           |       | 37,257                       |       | 670                         |       |
| Total current liabilities                                                                 |       | 691,151                      |       | 1,201,693                   |       |
| Deferred credits and other liabilities:                                                   |       |                         |       |                        |       |
| Deferred income taxes                                                                     |       | 1,061,633                    |       | 1,011,591                   |       |
| Deferred investment tax credits                                                           |       | 56,092                       |       | 59,035                      |       |
| Regulatory liabilities                                                                    |       | 473,970                      |       | 470,255                     |       |
| Pension and employee benefit obligations                                                  |       | 256,115                      |       | 301,277                     |       |
| Customers advances                                                                        |       | 278,390                      |       | 279,011                     |       |
| Derivative instruments valuation                                                          |       | 137,044                      |       | 156,623                     |       |
| Asset retirement obligations                                                              |       | 44,487                       |       | 43,335                      |       |
| Other liabilities                                                                         |       | 13,006                       |       | 7,755                       |       |
| Total deferred credits and other liabilities                                              |       | 2,320,737                    |       | 2,328,882                   |       |
| Commitments and contingent liabilities (see  Note 6)                                      |       |                         |       |                        |       |
| Capitalization:                                                                           |       |                         |       |                        |       |
| Long-term debt                                                                            |       | 2,191,824                    |       | 1,845,278                   |       |
| Common Stock — authorized 100 shares of  $0.01 par value; outstanding 100 shares     |       | —                       |       | —                      |       |
| Additional paid in capital                                                                |       | 2,741,380                    |       | 2,411,204                   |       |
| Retained earnings                                                                         |       | 596,225                      |       | 585,219                     |       |
| Accumulated other comprehensive income                                                    |       | 12,632                       |       | 12,614                      |       |
| Total common stockholder’s equity                                                    |       | 3,350,237                    |       | 3,009,037                   |       |
| Total liabilities and equity                                                              |       | $                            | 8,553,949  |                        | $          | 8,384,890 |   |

 

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 Sept. 30, 2007, and Dec. 31, 2006; the resultsof its operations for the three and nine months ended Sept. 30, 2007 and 2006;and its cash flows for the nine months ended Sept. 30, 2007 and 2006. Due tothe seasonality of electric and natural gas sales of PSCo, interim results arenot necessarily an appropriate base from which to project annual results.

 

On Aug. 8, 2007, PSCo fileda Current Report on form 8-K to update historical financial informationincluded in PSCo’s Annual Report on form 10-K for the year ended Dec. 31, 2006to present PSR Investments, Inc. (PSRI), a wholly-owned subsidiary of PSCo, asa discontinued operation.

 

**1. Significant Accounting Policies**

 

Except to theextent updated or described below, the significant accounting policies setforth in Note 1 to the consolidated financial statements in PSCo’s CurrentReport on Form 8-K filed on Aug. 8, 2007 appropriately represent, in allmaterial respects, the current status of accounting policies and areincorporated herein by reference.

 

***Income Taxes****** —***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 records interestand penalties related to income taxes as interest charges in the ConsolidatedStatements 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 and liabilitiesas separate items rather than components of other assets and other liabilitieswithin net cash provided by operating activities. In addition, activity relatedto derivative transactions have been combined into net realized and unrealizedhedging and derivative transactions. These reclassifications did not affecttotal net cash provided by (used in) operating, investing or financingactivities within the Consolidated Statements of Cash Flows.

 

Asa result of a settlement in principle with the United States government andmanagement’s decision to surrender all corporate-owned life insurance (COLI)policies following written acceptance of the offer by the government, all theamounts related to PSRI have been classified as discontinued operations. SeeNote 3 and 4 for additional disclosure related to discontinued operations andthe COLI settlement. Financial data for PSRI has been presented as discontinuedoperations as outlined in Note 3. The financial statements have been recast forall periods presented herein.

 

**2. RecentlyIssued Accounting Pronouncements**

 

***Fair Value Measurements(Statement of Financial Accounting Standards (SFAS) 157)****** —***InSeptember 2006, the FASB issued SFAS 157, which provides a singledefinition of fair value, together with a framework for measuring it, andrequires additional disclosure about the use of fair value to measure assetsand liabilities. SFAS 157 also emphasizes that fair value is a market-basedmeasurement, and sets out a fair value hierarchy with the highest priority beingquoted prices in active markets. Fair value measurements are disclosed by levelwithin that hierarchy. SFAS 157 is effective for financial statements issuedfor fiscal years beginning after Nov. 15, 2007. PSCo is evaluating theimpact of SFAS 157 on its financial condition and results of operations.

 

***The Fair Value Option for Financial Assetsand Financial Liabilities - Including an Amendment of FASB Statement No. 115(SFAS 159) — ***In February2007, the FASB issued SFAS 159, which provides companies with an option tomeasure, at specified election dates, many financial instruments and certainother items at fair value that are not currently measured at fair value. Acompany that adopts SFAS 159 will report unrealized gains and losses on 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 impact of SFAS 159 on its financial conditionand results of operations.

 

**3. Discontinued Operations**

 

PSRI, a wholly ownedsubsidiary of PSCo, owns and manages life insurance policies on some of PSCo’semployees, known as COLI policies. On June 19, 2007, a settlement in principlewas reached between Xcel Energy and the Internal Revenue Service (IRS) inregards to the tax deductibility of interest expense associated with PSCo’sCOLI policies. PSCo started to

 

6

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report earnings from PSRI and the settlement costs as discontinuedoperations in the second quarter of 2007, as a result of the settlement in principle andmanagement’s decision to surrender the COLIpolicies, following acceptance in writing of the offer by the government.

 

On Sept. 20, 2007, XcelEnergy submitted its formal offer in compromise to settle the dispute relatingto the proper tax treatment of the COLI policies beginning with tax year 1993and for all years thereafter. On Sept. 21, 2007, the United States accepted theterms of that settlement offer. The terms of the final settlement areessentially the same as the settlement in principle reached on June 19, 2007. Thegovernment’s letter terminates the tax litigation pending between the partiesfor tax years 1993-2002 and also specifies the agreed tax treatment for certainaspects of those policies for subsequent tax years. See Note 4 for additionaldisclosure related to the COLI settlement.

 

**SummarizedFinancial Results of Discontinued Operations**

 
| **(Thousands of dollars)**               | ** ** | **PSRI**   | ** ** |
|----------------------------------------------------|------------|------------|------------|
| ** **                                         | ** ** | ** ** | ** ** |
| **Three months ended Sept. 30, 2007**         |       |       |       |
| Operating revenues                                 |       | $          | —     |   |
| Operating expense, interest and other  income, net |       | 6,579      |       |
| Pretax loss from discontinued operations           |       | (6,579     | )          |
| Income tax benefit                                 |       | (11,851    | )          |
| Net income from discontinued operations            |       | $          | 5,272      |   |
|                                               |       |       |       |
| **Three months ended Sept. 30, 2006**         | ** ** | ** ** | ** ** |
| Operating revenues                                 |       | $          | —     |   |
| Operating expense, interest and other  income, net |       | 4,571      |       |
| Pretax loss from discontinued operations           |       | (4,571     | )          |
| Income tax benefit                                 |       | (9,149     | )          |
| Net income from discontinued operations            |       | $          | 4,578      |   |

 
| **(Thousands of dollars)**               | ** ** | **PSRI**   | ** ** |
|----------------------------------------------------|------------|------------|------------|
| ** **                                         | ** ** | ** ** | ** ** |
| **Nine months ended Sept. 30, 2007**          | ** ** | ** ** | ** ** |
| Operating revenues                                 |       | $          | —     |   |
| Operating expense, interest and other  income, net |       | 58,910     |       |
| Pretax loss from discontinued operations           |       | (58,910    | )          |
| Income tax benefit                                 |       | (19,332    | )          |
| Net loss from discontinued operations              |       | $          | (39,578    | ) |
|                                               |       |       |       |
| **Nine months ended Sept. 30, 2006**          | ** ** | ** ** | ** ** |
| Operating revenues                                 |       | $          | —     |   |
| Operating expense, interest and other  income, net |       | 16,524     |       |
| Pretax loss from discontinued operations           |       | (16,524    | )          |
| Income tax benefit                                 |       | (31,200    | )          |
| Net income from discontinued operations            |       | $          | 14,676     |   |

 

The major classes of assets and liabilities related to discontinuedoperations are as follows:

 
| **(Thousands of dollars)**                    | ** ** | **Sept. 30, 2007** | ** ** | **Dec. 31, 2006** | ** ** |
|---------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                              | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Cash                                                    |       | $                            | 40         |                        | $          | — |   |
| Accounts receivables, net                               |       | 3,000                        |       | 2,576                       |       |
| Deferred income tax benefits                            |       | 10,980                       |       | 15,716                      |       |
| Other current assets                                    |       | 8,106                        |       | 34,301                      |       |
| Current assets related to discontinued  operations      |       | $                            | 22,126     |                        | $          | 52,593 |   |
| Deferred income tax benefits                            |       | 3,434                        |       | 7,569                       |       |
| Other noncurrent assets                                 |       | 10,929                       |       | 8,210                       |       |
| Noncurrent assets related to discontinued  operations   |       | $                            | 14,363     |                        | $          | 15,779 |   |
| Accounts payable                                        |       | $                            | 2,375      |                        | $          | 670 |   |
| Other current liabilities                               |       | 34,882                       |       | —                      |       |
| Current liabilities related to discontinued  operations |       | $                            | 37,257     |                        | $          | 670 |   |

 

7

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**4.Income Taxes**

 

***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 the lives of certainPSCo employees. These policies are owned by PSRI, a wholly owned subsidiary ofPSCo. PSCo is a wholly owned subsidiary of Xcel Energy.

 

After Xcel Energy filedthis suit, the IRS sent three statutory notices of deficiency of tax, penaltyand interest for 1995 through 2002. Xcel Energy filed U.S. Tax Court petitionschallenging those notices. PSRIalso continued to take deductions for interest expense on policy loans forsubsequent years. The total exposure for the tax years 1993 through 2007 wasapproximately $583 million, which included income tax, interest and potentialpenalties.

 

On June 19,2007, Xcel Energy and the United States reached a settlement in principleregarding this dispute.

 

On Sept. 20, 2007, Xcel Energy submitted its formal offer in compromiseby letter dated Sept. 21, 2007, the United States accepted the terms of thatsettlement offer. The terms of the final settlement are essentially the same asthe settlement in principle reached on June 19, 2007. The U.S. government’sletter terminates the tax litigation pending between the parties for tax years1993-2002 and also specifies the agreed tax treatment for certain aspects ofthose policies for subsequent tax years.

 

The essential financial terms of the final settlement, as accepted, areas follows:

 

**1.**              Xcel Energy will pay the government a total of $64.4million in full settlement of the government’s claims for tax, penalty, andinterest for tax years 1993-2007.

** **

**2.**              Xcel Energy will pay that settlement amount asfollows:

** **

•                  $32.2 million of that amount will besatisfied by tax and interest amounts that Xcel Energy has paid or is deemedunder the terms of the settlement to have made to the government with respectto tax years 1993 and 1994.

 

•                  Xcel Energy will satisfy theremaining settlement amount owed by paying the government $32.2 million by Oct.31, 2007.

 

**3.**              The total settlement amount will be allocated towardspecified amounts of tax, penalty, and interest owed for 1993 and 1994 andother amounts of tax and interest owed for 1995.

** **

**4.**              Except as stated above, Xcel Energy will be entitledto claim COLI-related interest deductions for tax years 1995-2007.

** **

**5.**               Xcel Energy will surrender the policies to itsinsurer by Oct. 31, 2007 without having to recognize taxable gain on thesurrender.

** **

***Accounting for Uncertainty in IncomeTaxes — an interpretation of FASB Statement No. 109******(FIN 48) —***In July2006, the FASB issued FIN 48, which prescribes how a company should recognize,measure, present and disclose uncertain tax positions that Xcel Energy 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. Followingimplementation, the ongoing recognition of changes in measurement of uncertaintax positions will be reflected as a component of income tax expense.

 

PSCo is a memberof the Xcel Energy affiliated group that files consolidated income tax returns.Xcel Energy has been audited by the IRS through tax year 2003, with a limitedexception for 2003 research tax credits. The IRS commenced an examination ofXcel Energy’s federal income tax returns for 2004 and 2005 (and researchcredits for 2003) in the third quarter of 2006, and that examination isanticipated to be complete by March 31, 2008. As of Sept. 30, 2007, theIRS had not proposed any material adjustments to tax years 2003 through 2005.The statute of limitations applicable to Xcel Energy’s 2000 through 2002federal income tax returns expired as of June 30, 2007.

 

Aspreviously disclosed, Xcel Energy has been in litigation with the federalgovernment to establish its right to deduct interest expense on COLI policyloans incurred since 1993. Xcel Energy and the IRS have reached a finalsettlement regarding this litigation (see above discussion of COLI).

 

8

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PSCois also currently under examination by the state of Colorado for years 2002through 2005. No material adjustments have been proposed as of Sept. 30, 2007. Asof Sept. 30, 2007, PSCo’s earliest open tax year in which an audit can beinitiated by state taxing authorities under applicable statutes of limitationsis 2002.

 

The amount of unrecognizedtax benefits was $11.4 million on Jan. 1, 2007 and  $10.5 million on Sept. 30, 2007. Theseamounts were offset against the tax benefits associated with net operating lossand tax credit carryovers of $7.5 million on Jan. 1, 2007 (including $1.8million reported as discontinued operations) and $6.5 million on Sept. 30, 2007(including $2.6 million reported as discontinued operations).

 

Included in the unrecognizedtax benefit balance for continuing operations was $4.5 million and $1.2 millionof tax positions on Jan. 1, 2007 and Sept. 30, 2007, respectively, which ifrecognized would affect the annual effective tax rate. In addition, theunrecognized tax benefit balance for continuing operations included $6.9million and $9.3 million of tax positions on Jan. 1, 2007 and Sept. 30, 2007,respectively, for which the ultimate deductibility is highly certain but forwhich there is uncertainty about the timing of such deductibility. A change inthe period of deductibility would not affect the effective tax rate but wouldaccelerate the payment of cash to the taxing authority to an earlier period.

 

The increase in theunrecognized tax benefit balance for continuing operations of $1.4 million fromJuly 1, 2007 to Sept. 30, 2007, was due to the addition of similar uncertaintax positions relating to third quarter activity, and the resolution of certainfederal audit matters. PSCo’s amount of unrecognized tax benefits forcontinuing operations could significantly change in the next 12 months as theIRS 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 decrease in the unrecognizedtax benefit balance for discontinued operations of $12.4 million from July 1,2007 to Sept. 30, 2007 was due to the final settlement of the COLI litigation.

 

Theinterest expense liability related to unrecognized tax benefits on Jan. 1,2007, was not material due to net operating loss and tax credit carryovers. Thechange in the interest expense liability from Jan. 1, 2007, to Sept. 30, 2007,was not material. No amounts were accrued for penalties as of Sept. 30, 2007.

 

**5.Rate Matters**

 

***Pending and Recently Concluded RegulatoryProceedings — Colorado Public Utilities Commission (CPUC)***

*** ***

***Natural GasRate 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 assumed a common equity ratio of 60.17 percent anda ROE of 11 percent. The jurisdictional rate base is approximately $1.1billion.

 

On July 3, 2007, the CPUCapproved with modifications a comprehensive settlement between PSCo, the CPUCstaff, the Colorado Office of Consumer Counsel (OCC) and Seminole EnergyServices, LLC, providing for, among other things, the following:

 

•                     An annualrevenue increase of $32.3 million, based on a 10.25 percent ROE and a 60.17percent equity ratio.

•                     Amodification to the partial decoupling mechanism to allow PSCo recovery ofadditional revenues in future years to compensate for the portion of thedecline in weather normalized residential use per customer that exceeds thefirst 1.3 percent in annual decline in use (to be reflective of 50 percent ofthe historic average annual decline in use).

 

Final rateswere implemented effective July 30, 2007.

 

***Transmission Cost Adjustment Rider -*** On Sept. 7, 2007, PSCo filed with theCPUC a request to implement a transmission cost adjustment rider, which wouldrecover approximately $18.2 million in 2008. This filing is pursuant torecently enacted legislation which entitled public utilities to recover,through a separate rate adjustment clause, the costs that it prudently incursin planning, developing, and completing the construction or expansion oftransmission facilities. This legislation further encourages utilities toinvest in transmission facilities by allowing the recovery of the total balanceof construction work in progress related to those transmission investments atPSCo’s weighted average cost of capital including its most recently authorizedrate of ROE. The CPUC staff and certain other parties are challenging the scopeof PSCo’s requested cost recovery under the rider during 2008 and have askedthe CPUC to set PSCo’s application for hearing. PSCo expects the CPUC to ruleon its application prior to Dec. 31, 2007.

 

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**6. Commitments and Contingent Liabilities**

** **

Except to the extent notedbelow, the circumstances set forth in Notes 11 and 12 to the consolidatedfinancial statements in PSCo’s Current Report on Form 8-K filed on Aug.8, 2007and Notes 4 and 5 to theconsolidated financial statements in this Quarterly Report on Form 10-Q,appropriately represent, in all material respects, the current status ofrespective commitments and contingent liabilities and are incorporated hereinby reference. The following are unresolved contingencies that are material toPSCo’s financial position:

 

**Operating Leases*****—***During the second and third quarters of 2007,PSCo commenced purchased power agreements that are being accounted for asoperating leases in accordance with Emerging Issues Task Force 01-8, “*Determining Whether an Arrangement Contains a Lease”*and SFAS 13 –”*Accounting for Leases*”.These agreements require capacity payments of $30.2 million, $35.7 million,$32.0 million, $21.3 million, $17.1 million and $355.6 million for 2007, 2008,2009, 2010, 2011 and thereafter, respectively.

 

**EnvironmentalContingencies**

 

PSCo has beenor is currently involved with the cleanup of contamination from certainhazardous substances at several sites. In many situations, PSCo believes itwill recover some portion of these costs through insurance claims.Additionally, where applicable, PSCo is pursuing, or intends to pursue,recovery from other potentially responsible parties and through the rateregulatory process. New and changing federal and state environmental mandatescan also create added financial liabilities for PSCo, which are normallyrecovered through the rate regulatory process. To the extent any costs are notrecovered through the options listed above, PSCo would be required to recognizean expense.

 

***Site Remediation****—*PSCo must pay all or a portion of thecost to remediate sites where past activities of PSCo and some other partieshave caused environmental contamination. Environmental contingencies couldarise from various 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, towhich PSCo is alleged to be a potentially responsible party (PRP) that senthazardous materials and wastes.

 

PSCo records aliability when enough information is obtained to develop an estimate of thecost of environmental remediation and revises the estimate as information isreceived. The estimated remediation cost may 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 required cleanupefforts, 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 financialstrength of other PRPs and the identification of new environmental cleanupsites.

 

Estimates arerevised as facts become known. At Sept. 30, 2007, the liability for the cost ofremediating these sites was estimated to be $1.7 million, of which $0.6 millionwas considered to be a current liability. Some of the cost of remediation maybe recovered from:

 

•          Insurance coverage;

•          Other parties that havecontributed to the contamination; and

•          Customers.

 

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

 

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

######  

***Fort Collins Manufactured Gas Plant Site*****—**Prior to 1926, Poudre Valley Gas Co., a predecessor of PSCo,operated an MGP in Fort Collins, Colo., not far from the Cache la Poudre River.In 1926, after acquiring the Poudre Valley Gas Co., PSCo shut down the MGP siteand has sold most of the property. An oily substance similar to MGP byproductswas discovered in the Cache la Poudre River. On Nov. 10, 2004, PSCoentered into an agreement with the Environmental Protection Agency (EPA), thecity of Fort Collins and Schrader Oil Co., under which PSCo performedremediation and monitoring work. PSCo has substantially completed work at thesite, with the exception of ongoing maintenance and monitoring.

 

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InMay 2005, PSCo filed a natural gas rate case with the CPUC requestingrecovery of cleanup costs at the Fort Collins MGP site spent throughMarch 2005, which amounted to $6.2 million, to be amortized over fouryears. PSCo reached a settlement agreement with the parties in the case. TheCPUC approved the settlement agreement on Jan. 19, 2006 and the finalorder became effective on Feb. 3, 2006, with rates effective Feb. 6,2006.

 

InNovember 2006, PSCo filed a natural gas rate case with the CPUC requestingrecovery of additional clean-up costs at the Fort Collins MGP site spentthrough September 2006, plus unrecovered amounts previously authorized from thelast rate case, which amounted to $10.8 million to be amortized over four years.In June 2007, PSCo entered into a settlement agreement that included recoveryof the full $10.8 million, but with a five-year amortization period. The CPUCapproved the agreement on June 18, 2007. The total amount to be recovered fromcustomers is $13.1 million. Estimated future project costs, based upon anassumed 30-year system operating life, including EPA oversight costs, areapproximately $3.9 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 requesteddamages, including a portion of the costs PSCo incurred to investigate andremove contaminated sediments from the Cache la Poudre River. On Dec. 14,2005, the court denied Schrader’s request to dismiss the PSCo suit. OnJan. 3, 2006, Schrader filed a response to the PSCo complaint and acounterclaim against PSCo for its response costs under the ComprehensiveEnvironmental Response Compensation and Liability Act (CERCLA) and under theResource Conservation and Recovery Act (RCRA). Schrader has alleged as part ofits counterclaim an “imminent and substantial endangerment” of its property asdefined by RCRA. PSCo filed a motion for partial summary judgment to dismissSchrader’s RCRA claim. Oral argument on PSCo’s motion was held  Sept. 12, 2007, and on Oct. 10, 2007 thecourt granted PSCo’s motion for partial summary judgment and dismissed Schrader’sRCRA claim. Schrader also recently filed a motion for summary judgment seekingto dismiss PSCo’s CERCLA claim. PSCo believes this motion is without merit andwill vigorously defend its claim.

 

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

# *** ***

***Asbestos Removal*—**Someof PSCo’s facilities contain asbestos. Most asbestos will remain undisturbeduntil the facilities that contain it are demolished or renovated. PSCo hasrecorded an estimate for final removal of the asbestos as an asset retirementobligation. See additional discussion of asset retirement obligations in Note12 of the PSCo Current Report on Form 8-K filed on Aug. 8, 2007. It may benecessary to remove some asbestos to perform maintenance or make improvementsto other equipment. The cost of removing asbestos as part of other work isimmaterial and is recorded as incurred as operating expenses for maintenanceprojects, capital expenditures for construction projects or removal costs fordemolition projects.

 

***Other Environmental Requirements***

 

***Regional Haze Rules***— On June 15, 2005, the EPA finalized amendments to the July 1999 regional hazerules. These amendments apply to the provisions of the regional haze rule thatrequire emission controls, known as best available retrofit technology (BART),for industrial facilities emitting air pollutants that reduce visibility bycausing or contributing to regional haze. Some PSCo generating facilities willbe 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 SO2, NOx, andparticulate matter 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 (CAPCD). As set forth in its analysis,PSCo estimates that implementation of the BART alternatives will costapproximately $211 million in capital costs, which includes approximately $62million in environmental upgrades for the existing Comanche Station project,which are included in the capital budget. PSCo expects the cost of any requiredcapital investment will be recoverable from customers. Emissions controls areexpected to be installed between 2011 and 2014. The CAPCD expects to finalizethe regional haze state implementation plan in early 2008 for submittal to theEPA later in the year. BART emission controls associated with the plan must beinstalled within five years of EPA approval. On June 4, 2007, the CAPCDapproved PSCo’s BART analysis and obtained public comment on its BARTdetermination and  PSCo’s BART permits. Apublic hearing before the Air Quality Control Commission is scheduled for Dec.20,2007 to review and consider the approval of the BART permits for PSCo.

 

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***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. In February 2007, the Colorado Air Quality ControlCommission passed a mercury rule to implement CAMR in Colorado . The rule wasbased on a negotiated rule that was agreed upon by participating environmentalgroups, utilities, local government coalitions, and the CAPCD. The rule requiresmercury emission controls capable of achieving 80 percent capture be installedat Pawnee Station in 2012 and all other Colorado units by 2014. PSCo is in theprocess of installing mercury monitors on seven Colorado units at an estimatedaggregate cost of approximately $2.6 million. PSCo is evaluating the mercuryemission controls required to meet the new rule and is currently unable toprovide a capital cost estimate. The EPA has expressed concerns with allowancerestrictions after reviewing the Colorado mercury rule.

 

***Federal Clean Water Act***— The federal Clean WaterAct requires the EPA to regulate cooling water intake structures to assure thatthese structures reflect the “best technology available” for minimizing adverseenvironmental impacts. In July 2004, the EPA published phase II of the rule,which applies to existing cooling water intakes at steam-electric power plants.Several lawsuits were filed against the EPA in the United States Court ofAppeals for the Second Circuit challenging the phase II rulemaking. On Jan. 25,2007, the court issued its decision and remanded virtually every aspect of therule to the EPA for reconsideration. In June 2007, the EPA suspended thedeadlines and referred any implementation to each state’s best professional judgmentuntil the EPA is able to fully respond to the court-ordered remands. As aresult, the rule’s compliance requirements and associated deadlines arecurrently unknown. It is not possible to provide an accurate estimate of theoverall cost of this rulemaking at this time due to the many uncertaintiesinvolved.

 

***Notice of Violation***— On July 1, 2002, PSCo received a Notice of Violation (NOV) from the EPAalleging violations of the New Source Review (NSR) requirements of the CleanAir Act (CAA) at the Comanche and Pawnee plants in Colorado. The NOVspecifically alleges that various maintenance, repair and replacement projectsundertaken at the plants in the mid- to late-1990s should have required apermit under the NSR process. PSCo believes it has acted in full compliancewith the CAA and NSR process. It believes that the projects identified in theNOV fit within the routine maintenance, repair and replacement exemptioncontained within the NSR regulations or are otherwise not subject to the NSRrequirements. PSCo disagrees with the assertions contained in the NOV andintends to vigorously defend its position.

 

**Legal Contingencies**

** **

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

 

***Carbon DioxideEmissions 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 a party to this litigation, therequested relief that Xcel Energy cap and reduce its CO2 emissions could have a materialadverse effect on PSCo. The other utilities include American Electric PowerCo., Southern Co., Cinergy Corp. and Tennessee Valley Authority. CO2 is emitted whenever fossil fuelis combusted, such as in automobiles, industrial operations and coal- ornatural gas-fired power plants. The lawsuits allege that CO2 emitted by each company is apublic nuisance as defined under state and federal common law because it hascontributed to global warming. The lawsuits do not demand monetary damages.Instead, the lawsuits ask the court to order each utility to cap and reduce itsCO2 emissions. . InOctober 2004, Xcel Energy and the other defendants filed a motion todismiss the lawsuit. On Sept. 19, 2005, the judge granted the motion to dismisson constitutional grounds. Plaintiffs filed an appeal to the Second CircuitCourt of Appeals. On June 21, 2007 the Second Circuit Court of Appeals issuedan order requesting the parties to file a letter brief regarding the impact ofthe United States Supreme Court’s decision in Massachusetts v. EPA, 127 S.Ct.1438 (April 2, 2007) on the issues raised by the parties on appeal. Among otherthings, in its decision in Massachusetts v. EPA, the United States SupremeCourt held that CO2 emissions are a “ pollutant” subject toregulation by the EPA under the Clean Air Act. In response to the request ofthe Second Circuit Court of Appeals, the defendant utilities filed a letterbrief on July 6, 2007, stating the position that the United States SupremeCourt’s decision supports the arguments raised by the utilities on appeal. Itis unknown when the Second Circuit Court of Appeals will rule on the appeal.

 

***Comanche 3 Permit Litigation***- On Aug. 4,2005, Citizens for Clean Air and Water in Pueblo and Southern Colorado andClean Energy Action filed a complaint against the Colorado Air PollutionControl Division alleging that the division improperly granted permits to PSCounder Colorado’s Prevention of Significant Deterioration program for theconstruction and operation of Comanche 3. PSCo intervened in the case. On June20, 2006, the court ruled in PSCo’s favor and held that the Comanche 3 permitshad been properly granted and plaintiffs’ claims to the contrary were withoutmerit. Plaintiffs have appealed this decision. On Nov. 22, 2006, plaintiffsfiled their opening briefs. PSCo’s response was filed Dec. 22, 2006. On

 

12

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Oct.16, 2007, oral arguments were presented to the Colorado Court of Appeals, whotook the matter under advisement and is expected to issue an opinion in duecourse.

 

***Comervs. Xcel Energy Inc. et al.***— On April 25, 2006,Xcel Energy received notice of a purported class action lawsuit filed in U.S.District Court for the Southern District of Mississippi. Although PSCo is notnamed as a party to this litigation, if the litigation ultimately results in anunfavorable outcome for Xcel Energy, it could have a material adverse effect onPSCo. The lawsuit names more than 45 oil, chemical and utility companies,including Xcel Energy, as defendants and alleges that defendants’ CO2 emissions “were a proximate anddirect cause of the increase in the destructive capacity of Hurricane Katrina.”  Plaintiffs allege in support of their claim,several legal theories, including negligence, and public and private nuisanceand seek damages related to the loss resulting from the hurricane. Xcel Energybelieves this lawsuit is without merit and intends to vigorously defend itselfagainst these claims. On July 19, 2006, Xcel Energy filed a motion to dismissthe lawsuit in its entirety. On Aug. 30, 2007, the court dismissed the lawsuitin its entirety against all defendants on constitutional grounds. On Sept. 17,2007, plaintiffs filed a notice of appeal to the Fifth Circuit.

 

***Qwest vs. Xcel Energy Inc.***- On June 24, 2004, an employee of PSCo was injured when a pole owned by Qwestmalfunctioned. The employee is seeking damages of approximately  $7 million. On Sept. 6, 2005, an actionagainst Qwest relating to the incident was filed in Denver District Court bythe employee. On April 18, 2006, Qwest filed a third party complaint againstPSCo based on terms in a joint pole use agreement between Qwest and PSCo. Pursuantto this agreement, Qwest has asserted that PSCo had an affirmative duty toproperly train and instruct its employees on pole safety, including testing thepole for soundness before climbing. PSCo filed a counterclaim on May 15, 2006,against Qwest asserting Qwest had a duty to PSCo and an obligation under thecontract to maintain its poles in a safe and serviceable condition. On May 14,2007 this matter went to trial. The trial concluded on May 22, 2007 with a juryverdict that found Qwest solely liable for the accident and damages. Qwest hasfiled post-trial motions and has indicated that, if the motions areunsuccessful, it will appeal the verdict.

 

***Pacific Northwest FERC Refund Proceeding****-*In July 2001, the FERC ordered a preliminaryhearing to determine whether there may have been unjust and unreasonablecharges for spot market bilateral sales in the Pacific Northwest for the periodDec. 25, 2000 through June 20, 2001. PSCo supplied energy to the Pacific Northwestmarkets during this period and has been an active participant in the hearings.In September 2001, the presiding administrative law judge (ALJ) concluded thatprices in the Pacific Northwest during the referenced period were the result ofa number of factors, including the shortage of supply, excess demand, droughtand increased natural gas prices. Under these circumstances the ALJ concludedthat the prices in the Pacific Northwest markets were not unreasonable orunjust and no refunds should be ordered. Subsequent to the ruling the FERC hasallowed the parties to request additional evidence regarding the use of certainstrategies and how they may have impacted the markets in the Pacific Northwestmarkets. For the referenced period, parties have claimed that the total amountof transactions with PSCo subject to refund are $34 million. On June 25, 2003,the FERC issued an order terminating the proceeding without ordering furtherproceedings. On Nov. 10, 2003, in response to requests for rehearing, FERC reaffirmedthis ruling to terminate the proceeding without refunds. Certain purchasersfiled appeals of the FERC’s orders in this proceeding  with the United States Court of Appeals forthe Ninth Circuit

 

Inan order issued on Aug. 24, 2007, the Ninth Circuit issued an order remandingthe proceeding back to the FERC. The court preliminarily determined that it hadjurisdiction to review the FERC’s decision not to order refunds. In remandingthe case back to FERC, the court directed that the FERC consider evidence thathad been presented regarding intentional market manipulation in the Californiamarkets and its potential ties to transactions in the Pacific Northwest. Thecourt also indicated that the FERC should consider other of its rulingsaddressing overcharges in the California organized markets.

 

# ***Mallon v. Xcel Energy Inc.***—.On July 6, 2007 Theodore Mallonand TransFinancial Corporation filed a declaratory judgment action against XcelEnergy in United States District Court in Colorado (Mallon Federal Action). Inthis lawsuit, plaintiffs seek a determination that Xcel Energy is not entitledto assert claims against plaintiffs related to the 1984 and 1985 sale of COLIto PSCo, a predecessor of Xcel Energy. On Aug. 15, 2007, Xcel Energy, PSCo andPSRI commenced a lawsuit in state court in Boulder County, Colo. against Mallonand TransFinancial Corporation (Mallon State Action). In the Mallon StateAction, Xcel Energy, PSCo and PSRI, a subsidiary of PSCo seek damages againstMallon and TransFinancial for, among other things, breach of contract andbreach of fiduciary duties associated with the sale of the COLI policies. OnAug. 15, 2007, Xcel Energy also filed a motion to stay or, in the alternative,to dismiss the Mallon Federal Action. A motion to stay the Mallon State Courtaction was subsequently filed by plaintiffs Mallon and TransFinancial on Sept.18, 2007. The motions in both the state and federal court proceedings are stillpending and it is uncertain when a decision will be issued by either court.

 

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**7. Long-Term Borrowings and Other FinancingInstruments**

 

On Aug. 15, 2007, PSCo issued $350 million of 6.25 percent firstmortgage bonds, series due 2037. PSCo added the net proceeds from the sale ofthe first mortgage bonds to its general funds and applied a portion of theproceeds to the repayment of commercial paper, including commercial paperincurred to fund the payment at maturity of $100 million of 7.11 percentsecured medium-term notes, which matured on March 5, 2007.

 

**8.Derivative Valuation and Financial Impacts**

 

PSCo uses derivative instruments in connection with its utilitycommodity price, interest rate, short-term wholesale and commodity tradingactivities, including forward contracts, futures, swaps and options.

 

All derivative instruments not qualifying for the normal purchases andnormal sales exception, as defined by SFAS 133 -”Accounting forDerivative Instruments and Hedging Activities,” as amended (SFAS 133),are recorded at fair value. The presentation of these derivative instruments isdependent on the designation of a qualifying hedging relationship. Theadjustment to fair value of derivative instruments not designated in aqualifying hedging relationship is reflected in current earnings or as aregulatory balance.

 

PSCo records the fair value of its derivative instruments in itsConsolidated Balance Sheets as separate line items identified as DerivativeInstruments Valuation in both current and noncurrent assets and liabilities.

 

Qualifying hedging relationships are designated aseither a hedge of a forecasted transaction or future cash flow (cash flowhedge), or a hedge of a recognized asset, liability or firm commitment (fairvalue hedge). The types of qualifying hedging transactions that PSCo iscurrently engaged in are discussed below.

 

**CashFlow Hedges**

 

PSCo entersinto derivative instruments to manage variability of future cash flows fromchanges in commodity prices and interest rates.

 

As of Sept. 30, 2007, PSCohad various commodity-related contracts classified as cash flow hedgesextending through December 2009. The fair value of these cash flow hedges isrecorded in Other Comprehensive Income or deferred as a regulatory asset orliability. This classification is based on the regulatory recovery mechanismsin place.  This could include the purchase or sale of energy orenergy-related products, the use of natural gas to generate electric energy orgas purchased for resale.

 

PSCo entersinto****various instruments thateffectively fix the interest payments on certain floating rate debt obligationsor effectively fix the yield or price on a specified benchmark interest ratefor a specific period. These derivative instruments are designated as cash flowhedges for accounting purposes, and the change in the fair value ofthese instruments is recorded as a component of Other Comprehensive Income.

 

As of Sept.30, 2007, PSCo had net gains of approximately $1.5 million in Accumulated OtherComprehensive Income related to interest rate cash flow hedge contracts that itexpects to recognize in earnings during the next 12 months.

 

Gains orlosses on hedging transactions for the sales of energy or energy-relatedproducts are primarily recorded as a component of revenue, hedging transactionsfor fuel used in energy generation are recorded as a component of fuel costs,hedging transactions for gas purchased for resale are recorded as a componentof gas costs and interest rate hedging transactions are recorded as a componentof interest expense. PSCo is allowed to recover in electric or gas rates thecosts of certain financial instruments purchased to reduce commodity costvolatility. There was an immaterial amount of ineffectiveness in the thirdquarter of 2007.

 

The impact ofqualifying cash flow hedges on PSCo’s Accumulated Other Comprehensive Income,included as a component of common stockholder’s equity, is detailed in thefollowing table:

 
| ** **                                                                          | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Millions of Dollars)**                                                 | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| Accumulated other comprehensive income  related to cash flow hedges at Jan. 1       |       | $                                                   | 12.6       |   | $ | 14.2 |   |
| After-tax net unrealized gains related to  derivatives accounted for as hedges      |       | 1.1                                                 |       | — |   |
| After-tax net realized gains on derivative  transactions reclassified into earnings |       | (1.1                                                | )          | (1.1 | ) |
| Accumulated other comprehensive income  related to cash flow hedges at Sept. 30     |       | $                                                   | 12.6       |   | $ | 13.1 |   |

 

14

----

 

**DerivativesNot Qualifying for Hedge Accounting**

 

PSCo entersinto certain commodity-based derivative transactions, not included in tradingoperations, which do not qualify for hedge accounting treatment. Thesederivative instruments are accounted for on a mark-to-market basis inaccordance with SFAS 133. The results of these transactions are reported in theConsolidated Statements of Income.

 

**NormalPurchases or Normal Sales Contracts**

 

PSCo enters intocontracts for the purchase and sale of various commodities for use in itsbusiness operations. SFAS 133 requires a company to evaluate these contracts todetermine whether the contracts are derivatives. Certain contracts that meetthe definition of a derivative may be exempted from SFAS 133 as normalpurchases or normal sales.

 

PSCo evaluatesall of its contracts when such contracts are entered to determine if they arederivatives and, if so, if they qualify to meet the normal designationrequirements under SFAS 133. None of the contracts entered into within thecommodity trading operations qualify for a normal designation.

 

**9. Detail of Interest and Other Income, Net**

 

Interest and other income, net of nonoperating expenses, for the threeand nine months ended Sept. 30 consisted of the following:

 
| ** **                                      | ** ** | **Three months ended Sept. 30,** | ** ** | **Nine months ended Sept. 30,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Thousands of dollars)**            | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                 |       | $                                                    | 2,993      |                                                | $          | 253 |   | $ | 5,736 |   | $ | 2,234 |   |
| Other nonoperating income                       |       | 923                                                  |       | 595                                                 |       | 1,919 |   | 3,095 |   |
| Other nonoperating expense                      |       | (226                                                 | )          | (1,458                                              | )          | (560 | ) | (2,552 | ) |
| Total interest and other income (expense),  net |       | $                                                    | 3,690      |                                                | $          | (610 | ) | $ | 7,095 |   | $ | 2,777 |   |

 

**10. Segment Information**

 

PSCo has two reportablesegments, Regulated Electric Utility and Regulated Natural Gas Utility.Commodity trading operations are not a reportable segment and commodity tradingresults are included in the Regulated Electric Utility segment.

 
| **(Thousands of dollars)**                               | ** ** | **Regulated  Electric Utility** | ** ** | **Regulated  Natural  Gas Utility** | ** ** | **All Other** | ** ** | **Reconciling  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|--------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|--------------------|------------|-------------------------------|------------|-------------------------|------------|
| **Three months ended September 30, 2007** |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| Revenues from:                                                     |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| External customers                                                 |       | $                                    | 669,598    |                                     | $          | 104,930            |       | $                             | 6,733      |                    | $          | — |   | $ | 781,261 |   |
| Internal customers                                                 |       | 27                                   |       | (30                                      | )          | —             |       | 3                             |       | —                  |       |
| Total revenue                                                      |       | $                                    | 669,625    |                                     | $          | 104,900            |       | $                             | 6,733      |                    | $          | 3 |   | $ | 781,261 |   |
| Income from continuing operations                                  |       | $                                    | 87,991     |                                     | $          | 9,289              |       | $                             | 3,643      |                    | $          | — |   | $ | 100,923 |   |
|                                                               |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| **Three months ended September 30, 2006**                          |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| Revenues from:                                                     |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| External customers                                                 |       | $                                    | 644,445    |                                     | $          | 142,422            |       | $                             | 6,857      |                    | $          | — |   | $ | 793,724 |   |
| Internal customers                                                 |       | 35                                   |       | 5                                        |       | —             |       | (40                           | )          | —                  |       |
| Total revenue                                                      |       | $                                    | 644,480    |                                     | $          | 142,427            |       | $                             | 6,857      |                    | $          | (40 | ) | $ | 793,724 |   |
| Income (loss) from continuing operations                           |       | $                                    | 39,622     |                                     | $          | 5,653              |       | $                             | (2,495     | )                       | $          | — |   | $ | 42,780 |   |

 

15

----

 
| **(Thousands of dollars)**     | ** ** | **Regulated  Electric Utility** | ** ** | **Regulated  Natural Gas  Utility** | ** ** | **All Other** | ** ** | **Reconciling  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|--------------------|------------|-------------------------------|------------|-------------------------|------------|
| **Nine months ended September 30, 2007** | ** ** | ** **                           | ** ** | ** **                               | ** ** | ** **         | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues from:                           |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| External customers                       |       | $                                    | 1,944,240  |                                     | $          | 811,481            |       | $                             | 24,829     |                    | $          | — |   | $ | 2,780,550 |   |
| Internal customers                       |       | 184                                  |       | 22                                       |       | —             |       | (206                          | )          | —                  |       |
| Total revenue                            |       | $                                    | 1,944,424  |                                     | $          | 811,503            |       | $                             | 24,829     |                    | $          | (206 | ) | $ | 2,780,550 |   |
| Income from continuing operations        |       | $                                    | 194,419    |                                     | $          | 49,846             |       | $                             | 5,713      |                    | $          | — |   | $ | 249,978 |   |
|                                     |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| **Nine months ended September 30, 2006** | ** ** | ** **                           | ** ** | ** **                               | ** ** | ** **         | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues from:                           |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| External customers                       |       | $                                    | 1,916,376  |                                     | $          | 885,340            |       | $                             | 26,264     |                    | $          | — |   | $ | 2,827,980 |   |
| Internal customers                       |       | 155                                  |       | 61                                       |       | —             |       | (216                          | )          | —                  |       |
| Total revenue                            |       | $                                    | 1,916,531  |                                     | $          | 885,401            |       | $                             | 26,264     |                    | $          | (216 | ) | $ | 2,827,980 |   |
| Income (loss) from continuing operations |       | $                                    | 125,854    |                                     | $          | 39,761             |       | $                             | (3,894     | )                       | $          | — |   | $ | 161,721 |   |

 

**11. Comprehensive Income**

 

The componentsof total comprehensive income are shown below:

 
| ** **                                                                                           | ** ** | **Three months ended   Sept. 30,** | ** ** | **Nine months ended   Sept. 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **(Millions of dollars)**                                                                  | ** ** | **2007**                                               | ** ** | **2006**                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                                                           |       | $                                                      | 106.2      |                                                  | $          | 47.4 |   | $ | 210.4 |   | $ | 176.4 |   |
| Other comprehensive income:                                                                          |       |                                                   |       |                                                  |       |   |   |   |   |
| After-tax net unrealized gains (losses)  related to derivatives accounted for as hedges (see Note 8) |       | (0.3                                                   | )          | —                                                |       | 1.1 |   | — |   |
| After-tax net realized gains on derivative  transactions reclassified into earnings (see Note 8)     |       | (0.4                                                   | )          | (0.4                                                  | )          | (1.1 | ) | (1.1 | ) |
| Other comprehensive income                                                                           |       | (0.7                                                   | )          | (0.4                                                  | )          | — |   | (1.1 | ) |
| Comprehensive income                                                                                 |       | $                                                      | 105.5      |                                                  | $          | 47.0 |   | $ | 210.4 |   | $ | 175.3 |   |

 

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

 

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

 

**Components of Net Periodic Benefit Cost**

 
| ** **                                                   | ** ** | **Three months ended Sept. 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                   | ** ** | **2007 (1)**                                    | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(Thousands of dollars)**                         | ** ** | **Pension Benefits**                            | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                         | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                 |       | $                                                    | 15,520     |   | $ | 15,406 |   | $ | 1,453 |   | $ | 1,659 |   |
| Interest cost                                                |       | 41,313                                               |       | 38,854 |   | 12,619 |   | 13,234 |   |
| Expected return on plan assets                               |       | (66,208                                              | )          | (67,017 | ) | (7,600 | ) | (6,690 | ) |
| Amortization of transition obligation                        |       | —                                               |       | — |   | 3,644 |   | 3,611 |   |
| Amortization of prior service cost (credit)                  |       | 6,487                                                |       | 7,424 |   | (545 | ) | (544 | ) |
| Amortization of net loss                                     |       | 4,211                                                |       | 4,339 |   | 3,550 |   | 6,200 |   |
| Net periodic benefit cost (credit)                           |       | 1,323                                                |       | (994 | ) | 13,121 |   | 17,470 |   |
| Credits not recognized due to the effects  of regulation     |       | 2,787                                                |       | 3,159 |   | — |   | — |   |
| Additional cost recognized due to the  effects of regulation |       | —                                               |       | — |   | 972 |   | 972 |   |
| Net benefit cost recognized for financial  reporting         |       | $                                                    | 4,110      |   | $ | 2,165 |   | $ | 14,093 |   | $ | 18,442 |   |
|                                                         |       |                                                 |       |   |   |   |   |   |   |
| **PSCo**                                                     | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net periodic benefit cost                                    |       | $                                                    | 4,780      |   | $ | 4,667 |   | $ | 7,165 |   | $ | 9,994 |   |
| Additional cost recognized due to the  effects of regulation |       | —                                               |       | — |   | 972 |   | 973 |   |
| Net benefit cost recognized for financial  reporting         |       | $                                                    | 4,780      |   | $ | 4,667 |   | $ | 8,137 |   | $ | 10,967 |   |
|                                                              |            |                                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

16

----

 
| ** **                                                   | ** ** | **Nine months ended Sept. 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2007 (1)**                                   | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(Thousands of dollars)**                         | ** ** | **Pension Benefits**                           | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                         | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                 |       | $                                                   | 46,560     |   | $ | 46,220 |   | $ | 4,359 |   | $ | 4,975 |   |
| Interest cost                                                |       | 123,939                                             |       | 116,560 |   | 37,857 |   | 39,704 |   |
| Expected return on plan assets                               |       | (198,624                                            | )          | (201,049 | ) | (22,800 | ) | (20,068 | ) |
| Amortization of transition obligation                        |       | —                                              |       | — |   | 10,932 |   | 10,833 |   |
| Amortization of prior service cost (credit)                  |       | 19,461                                              |       | 22,272 |   | (1,635 | ) | (1,634 | ) |
| Amortization of net loss                                     |       | 12,633                                              |       | 13,015 |   | 10,650 |   | 18,598 |   |
| Net periodic benefit cost (credit)                           |       | 3,969                                               |       | (2,982 | ) | 39,363 |   | 52,408 |   |
| Credits not recognized due to the effects  of regulation     |       | 8,361                                               |       | 9,477 |   | — |   | — |   |
| Additional cost recognized due to the  effects of regulation |       | —                                              |       | — |   | 2,918 |   | 2,918 |   |
| Net benefit cost recognized for financial reporting          |       | $                                                   | 12,330     |   | $ | 6,495 |   | $ | 42,281 |   | $ | 55,326 |   |

 
| **PSCo**                                                     | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
| Net periodic benefit cost                                    |       | $          | 14,340     |       | $          | 14,000     |       | $          | 21,496     |   | $ | 29,982 |   |
| Additional cost recognized due to the  effects of regulation |       | —     |       | —     |       | 2,918      |       | 2,918      |       |
| Net benefit cost recognized for financial  reporting         |       | $          | 14,340     |       | $          | 14,000     |       | $          | 24,414     |   | $ | 32,900 |   |

 

----

**(1)  Includes qualified andnon-qualified pension net periodic benefit cost.**

** **

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

** **

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

 

**Forward-Looking Information**

 

The followingdiscussion and analysis by management focuses on those factors that had amaterial effect on the financial condition and results of operations of PSCoduring the periods presented, or are expected to have a material impact in thefuture. It should be read in conjunction with the accompanying unauditedfinancial statements and notes.

 

Exceptfor the historical statements contained in this report, the matters discussedin the following discussion and analysis are forward-looking statements thatare subject to certain risks, uncertainties and assumptions. Suchforward-looking statements are intended to be identified in this document bythe words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “objective,”“outlook,” “plan,” “project,” “possible,” “potential,” “should” and similarexpressions. Actual results may vary materially. Forward-lookingstatements speak only as of the date they are made, and we do not undertake anyobligation to update them to reflect changes that occur after that date. Factors that could cause actual results todiffer materially include, but are not limited to: general economic conditions,including the availability of credit and its impact on capital expenditures andthe ability of PSCo to obtain financing on favorable terms; business conditionsin the energy industry; actions of credit rating agencies; competitive factors,including the extent and timing of the entry of additional competition in themarkets served by PSCo; unusual weather; effects of geopolitical events,including war and acts of terrorism; state, federal and foreign legislative andregulatory initiatives that affect cost and investment recovery, have an impacton rates or have an impact on asset operation or ownership; structures thataffect the speed and degree to which competition enters the electric andnatural gas markets; costs and other effects of legal and administrativeproceedings, settlements, investigations and claims, including the COLIsettlement discussed below; actions of accounting regulatory bodies; the itemsdescribed under Factors Affecting Results of Continuing Operations; and the otherrisk factors listed from time to time by PSCo in reports filed with the SEC,including “Risk Factors” in Item 1A of PSCo’s Form 10-K for the year endedDec. 31, 2006 and Exhibit 99.01 to this report on Form 10-Q forthe quarter ended Sept. 30, 2007.

 

**MarketRisks**

 

PSCo is exposed to marketrisks, including changes in commodity prices and interest rates, as disclosedin Item 7A — Quantitative and Qualitative Disclosures About Market Risk in its Current Report on Form 8-K filed onAug. 8, 2007. Commodity price and interest rate risks for PSCo are mitigateddue to cost-based rate regulation. At Sept. 30, 2007, there were no materialchanges to the financial market risks that affect the quantitative andqualitative disclosures presented as of Dec. 31, 2006.

 

17

----

 

**ManagementChanges**

 

On May 31, 2007, Patricia K. Vincent, chiefexecutive officer and president of PSCo, announced her resignation, effectiveJune 5, 2007. Ms. Vincent was a named executive officer of Xcel Energy Inc. inits most recent proxy statement of April 18, 2007.

 

On Friday, Sept. 21, 2007, Tim E. Taylor wasnamed the chief executive officer and president of PSCo.

 

**RESULTSOF OPERATIONS**

 

PSCo’s netincome was approximately $210.4 million for the first nine months of 2007,compared with approximately $176.4 million for the first nine months of 2006. Asa result of the settlement in principle and management’s decision to surrenderthe COLI policies following acceptancein writing of the offer by the government, PSCo started to report earnings fromPSRI and the settlement costs as discontinued operations in the second quarter of 2007. See Note 3 to theconsolidated financial statements for a further discussion of discontinuedoperations.

 

**Electric Utility, Short-term Wholesale and CommodityTrading Margins**

** **

Electric fueland purchased power expenses tend to vary with changing retail and wholesalesales requirements and unit cost changes in fuel and purchased power. Due tofuel and purchased energy cost-recovery mechanisms for customers, mostfluctuations in these costs do not materially affect electric utility margin.

 

PSCo has twodistinct forms of wholesale sales: short-term wholesale and commodity trading. Short-termwholesale refers to energy-related purchases and sales activity and the use ofcertain financial instruments associated with the fuel required for, and energyproduced from, PSCo’s generation assets or the energy and capacity purchased toserve native load. Commodity trading is not associated with PSCo’s generationassets or the energy and capacity purchased to serve native load. Short-termwholesale and commodity trading activities are considered part of the electricutility segment.

 

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

 

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

 
| **(Millions of dollars)**                      | ** ** | **Base  Electric  Utility** | ** ** | **Short-term  Wholesale** | ** ** | **Commodity  Trading** | ** ** | **Consolidated  Total** | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|------------------------|------------|-------------------------|------------|
| **Nine months ended Sept. 30, 2007**                     | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **             | ** ** | ** **              | ** ** |
| Electric utility revenues (excluding  commodity trading) |       | $                           | 1,883      |                      | $          | 61                     |       | $                       | —     |   | $ | 1,944 |   |
| Electric fuel and purchased power                        |       | (1,005                      | )          | (53                       | )          | —                 |       | (1,058                  | )          |
| Commodity trading revenues                               |       | —                      |       | —                    |       | 127                    |       | 127                     |       |
| Commodity trading costs                                  |       | —                      |       | —                    |       | (127                   | )          | (127                    | )          |
| Gross margin before operating expenses                   |       | $                           | 878        |                      | $          | 8                      |       | $                       | —     |   | $ | 886 |   |
| Margin as a percentage of revenues                       |       | 46.6                        | %          | 13.1                      | %          | —                 | %          | 42.8                    | %          |
|                                                     |       |                        |       |                      |       |                   |       |                    |       |
| **Nine months ended Sept. 30, 2006**                     | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **             | ** ** | ** **              | ** ** |
| Electric utility revenues (excluding  commodity trading) |       | $                           | 1,884      |                      | $          | 29                     |       | $                       | —     |   | $ | 1,913 |   |
| Electric fuel and purchased power                        |       | (1,132                      | )          | (26                       | )          | —                 |       | (1,158                  | )          |
| Commodity trading revenues                               |       | —                      |       | —                    |       | 404                    |       | 404                     |       |
| Commodity trading costs                                  |       | —                      |       | —                    |       | (400                   | )          | (400                    | )          |
| Gross margin before operating expenses                   |       | $                           | 752        |                      | $          | 3                      |       | $                       | 4          |   | $ | 759 |   |
| Margin as a percentage of revenues                       |       | 39.9                        | %          | 10.3                      | %          | 1.0                    | %          | 32.8                    | %          |

 

18

----

 

The following summarizes thecomponents of the changes in base electric revenues and base electric marginfor the nine months ended Sept. 30:

 

# ***Base Electric Revenues***

 
| **(Millions of dollars)**             | ** ** | **2007 vs. 2006** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | ** **                  | ** ** |
| Fuel and purchased power cost recovery          |       | $                           | (133       | ) |
| Retail rate increase                            |       | 85                          |       |
| Retail sales growth (excluding weather  impact) |       | 18                          |       |
| Non-fuel riders                                 |       | 14                          |       |
| Transmission revenue                            |       | 8                           |       |
| Estimated impact of weather                     |       | 5                           |       |
| Sales mix and other                             |       | 2                           |       |
| Total decrease in base electric revenues        |       | $                           | (1         | ) |

 

***Base Electric Margin***

 
| **(Millions of dollars)**             | ** ** | **2007 vs. 2006** | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | ** **                  | ** ** |
| Retail rate increase                            |       | $                           | 85         |   |
| Retail sales growth (excluding weather  impact) |       | 18                          |       |
| Non-fuel riders                                 |       | 14                          |       |
| ECA incentive                                   |       | 12                          |       |
| Transmission revenue                            |       | 8                           |       |
| Estimated impact of weather                     |       | 5                           |       |
| Fuel and purchased power cost recovery          |       | (10                         | )          |
| Sales mix and other                             |       | (6                          | )          |
| Total increase in base electric margin          |       | $                           | 126        |   |

 

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

##### ** **

The following table detailsthe change in natural gas revenues and margin. The cost of natural gas tends tovary with changing sales requirements and unit cost of natural gas purchases.PSCo has a gas cost adjustment mechanism for natural gas sales, whichrecognizes the majority of the effects of changes in the cost of natural gaspurchased for resale and adjusts revenues to reflect such changes in costs uponrequest by PSCo. Therefore, fluctuations in the cost of natural gas have littleeffect on natural gas margin.

 
| ** **                               | ** ** | **Nine Months ended Sept. 30,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Millions of dollars)**      | ** ** | **2007**                                            | ** ** | **2006** | ** ** |
| ** **                               | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Natural gas utility revenues             |       | $                                                   | 811        |   | $ | 885 |   |
| Cost of natural gas sold and transported |       | (562                                                | )          | (655 | ) |
| Natural gas utility margin               |       | $                                                   | 249        |   | $ | 230 |   |

 

The following summarizes thecomponents of the changes in natural gas revenues and margin for the ninemonths ended Sept. 30:

 

***Natural Gas Revenues***

 
| **(Millions of dollars)**      | ** ** | **2007 vs. 2006** | ** ** |
|------------------------------------------|------------|-----------------------------|------------|
| ** **                               | ** ** | ** **                  | ** ** |
| Purchased gas adjustment clause recovery |       | $                           | (94        | ) |
| Estimated impact of weather              |       | 8                           |       |
| Base rate changes                        |       | 4                           |       |
| Service and facility fees                |       | 3                           |       |
| Transport                                |       | 3                           |       |
| Other                                    |       | 2                           |       |
| Total decrease in natural gas revenues   |       | $                           | (74        | ) |

 

19

----

 

***Natural Gas Margin***

 
| **(Millions of dollars)**  | ** ** | **2007 vs. 2006** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| ** **                           | ** ** | ** **                  | ** ** |
| Estimated impact of weather          |       | $                           | 8          |   |
| Base rate changes                    |       | 3                           |       |
| Service and facility fees            |       | 3                           |       |
| Transport                            |       | 3                           |       |
| Other                                |       | 2                           |       |
| Total increase in natural gas margin |       | $                           | 19         |   |

 

**Non-FuelOperating Expense and Other Costs**

 

***Other Operating and Maintenance Expenses*** - The following summarizes the components ofthe changes in other operating and maintenance expense for the nine monthsended Sept. 30:

 
| **(Millions of dollars)**                        | ** ** | **2007 vs. 2006** | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                 | ** ** | ** **                  | ** ** |
| Higher donation costs                                      |       | $                           | 6          |   |
| Higher uncollectible receivable costs                      |       | 4                           |       |
| Higher consulting costs                                    |       | 4                           |       |
| Higher material costs                                      |       | 2                           |       |
| Higher combustion/hydro plant costs                        |       | 1                           |       |
| Lower employee benefit costs                               |       | (7                          | )          |
| Other                                                      |       | 4                           |       |
| Total increase in other operating and  maintenance expense |       | $                           | 14         |   |

 

***Depreciation and Amortization***- Depreciation and amortization expenseincreased by approximately $18.4 million, or 10.2 percent, for the first ninemonths of 2007, compared with the first nine months of 2006. The increase wasdue to normal plant additions and the approved change in depreciationaccruals for 2007 from the 2006 Colorado rate case settlement resulting in anadditional depreciation expense of $10.4 million year-to-date.

 

***Interest and other income*** - Interest and other income increased by approximately $4.3 millionfor the first nine months of 2007, compared with the first nine months of 2006.The increase was primarily due to interest income accrued on deferred fuelcosts and note receivables related to third party use of interconnectionfacilities.

 

***Allowance for funds used during construction, equity and debt (AFDC)***- AFDC is a non-cash amount capitalized as apart of construction costs representing the cost of financing the construction.Generally, these costs are recovered from customers, in future rates, as therelated property is depreciated. AFDC increased by approximately $6.8 million,or 63.6 percent for the first nine months of 2007, compared with the first ninemonths in 2006. The increase was primarily due to the construction ofComanche 3. The increase was partially offset by the current recovery fromcustomers of the financing costs related to this construction through baserates, resulting in a lower recognition of AFDC.

 

***Income Taxes -***Incometax expense for continuing operations increased by approximately $40.1 millionfor the first nine months of 2007 compared with the first nine months of 2006.The increase was primarily due to higher pretax income. The effective tax ratefor continuing operations was 34.4 percent for the first nine months of 2007,compared with 36.0 percent for the same period in 2006. The decrease in theeffective tax rate was primarily due to a decrease in the forecasted effectivetax rate for 2007 as compared to 2006.

 

**FactorsAffecting Results of Continuing Operations**

** **

***Cabin Creek Hydro Generating Station***

 

OnOct. 2, 2007, employees of RPI Coatings Inc. (RPI), a contractor retained byPSCo, were applying an epoxy coating to the inside of a penstock at Xcel Energy’sCabin Creek Hydro Generating Station near Georgetown, Colo. This work was beingperformed as part of a corrosion prevention maintenance effort. Atapproximately 2:00 p.m. a fire occurred inside the penstock, which is a4,000-foot long, 12-foot wide pipe used to deliver water from a reservoir tothe hydro facility. Four of the nine RPI employees working inside the penstockwere positioned below the fire and were able to exit the pipe. The remainingfive RPI employees were unable to exit the penstock. Rescue crews located thefive employees a few hours later and confirmed their deaths. The accident isbeing investigated by several state and federal agencies, including the federal

 

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OccupationalSafety and Health Administration (OSHA), U.S. Chemical Safety Board and theColorado Bureau of Investigations. It is uncertain when the agencies willconclude their investigations, but it is possible these investigations couldtake several weeks or even months. Once OSHA’s investigation is completed, wewill assess the damage to the penstock and make a determination as to the stepsthat need to be taken in order to place this facility back in service.

 

***Kinder Morgan Interstate Gas Transmission Bypass Pipeline***

 

On Aug. 6,2007, Kinder Morgan Interstate Gas Transmission LLC (KMIGT) filed anapplication with the FERC for authorizations pursuant to Section 7(c) of theNatural Gas Act to construct, own and operate 41.4 miles of 12-inch pipelineand associated delivery metering facilities in Weld County, Colo. The statedpurpose of this pipeline, referred to as the “Colorado Lateral,” is to provideinterstate gas transportation services of up to 55,000 dekatherms per day tosupply natural gas to Atmos Energy Corporation’s (Atmos) gas distributionsystem serving retail customers in and around Greeley and Eaton, Colo. PSCocurrently provides gas transportation services to Atmos to supply itsdistribution system in the Greeley and Eaton areas. PSCo’s services would be, forthe most part, bypassed by the new KMIGT pipeline. PSCo estimates that acomplete bypass of its current services to Atmos in this area could potentiallyresult in a loss of annual revenues of approximately $3.8 million.

 

***Regulation***

** **

**Summary of Recent Federal Regulatory Developments**

 

The FERC has jurisdiction over rates for electric transmission servicein interstate commerce and electric energy sold at wholesale, hydro facilitylicensing, natural gas transportation, accounting practices and certain otheractivities of PSCo. State and local agencies have jurisdiction over many ofPSCo’s activities, including regulation of retail rates and environmentalmatters. In addition to the matters discussed below, see Note 4 to the consolidated financialstatements for a discussion of other regulatory matters.

 

***FERC Rules Implementing EnergyPolicy Act of 2005 (Energy Act) —***  The Energy Act repealed the PublicUtility Holding Company Act of 1935 effective Feb. 8, 2006. In addition,the Energy 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. In addition to the previous disclosure in Item1 of PSCo’s Form 10-K for the year ended Dec. 31, 2006, the FERC issued final rules making certainreliability standards mandatory and subject to potential financial penalties upto $1 million per day per violation for non-compliance effective June 18,2007.

 

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

 

***Electric Transmission RateRegulation —*** The FERC also regulates the rates charged and terms and conditions forelectric transmission services. FERC policy encourages utilities to turn overthe functional control over their electric transmission assets and the relatedresponsibility for the sale of electric transmission services to a RegionalTransmission Organization (RTO). Each RTO separately files regionaltransmission tariff rates for approval by the FERC. All members within that RTOare then subjected to those rates. PSCo is currently participating with otherutilities in the development of WestConnect, which would provide certainregionalized transmission and wholesale energy market functions but would notbe an RTO.

 

On Feb. 15, 2007, the FERC issued final rules adopting revisions to its1996 open access transmission rules. PSCo submitted the initial requiredrevisions to its Open Access Transmission Tariff (OATT) on July 13, 2007 andSept. 11, 2007, as required.

 

Inaddition, in January 2007, the FERC issued interim and proposed rules to modifythe current FERC rules governing the functional separation of the PSCo electrictransmission function from the wholesale sales and marketing function. Theproposed rules 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.

 

***Market Based RateRules******—***OnJune 21, 2007, the FERC issued a final order amending its regulations governingits market-based rate authorizations to electric utilities such as PSCo. TheFERC reemphasized its commitment to market-based pricing, but is revising thetests it’s using to assess whether a utility has market power and hasemphasized that it intends to

 

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exercise greater oversight where it has market-based rateauthorizations. PSCo has been granted market-based rate authority and will besubject to the new rule. PSCo is presently analyzing the new rule.

 

An aspect ofFERC’s market-based rate requirements is the requirement to charge mitigatedrates in markets where a utility is found to have market power or where autility cannot establish the absence of market power. PSCo has been authorizedby the FERC to charge market-based rates outside of their control areas, but isgenerally limited to charging mitigated rates within their control areas. Consistentwith the approach followed by many other utilities subject to the FERC’smitigation requirement, PSCo uses cost-based rate caps set out in the WesternSystems Power Pool (WSPP) agreement as their applicable mitigated rates, anapproach expressly approved by the FERC. However, concurrently with theissuance of the final order, the FERC initiated a proceeding to investigatewhether the use of the WSPP rate caps for this purpose is just and reasonable. Anoutcome of this proceeding may be to lower the mitigated rates that PSCo maycharge in their control areas.

 

**OtherRegulatory Matters — PSCo**

 

***Renewable Energy Standard -***The2007 Colorado legislature adopted an increased RES that requires PSCo togenerate or cause to be generated electricity from renewable resources equalingat least 10 percent of its retail sales by 2010, 15 percent of retail sales by2015 and 20 percent of retail sales by 2020. The new law limits the incrementalretail rate impact from these acquisitions to 2 percent. The new legislationencourages the CPUC to consider earlier and timely cost recovery for utilityinvestment in renewable resources, including the use of a rider mechanism and areturn on construction work in progress.

 

***Transmission Cost Recovery Legislation*-**The 2007 Colorado legislature enacted legislation that is intended toencourage investment in transmission infrastructure in Colorado. The newlegislation provides for recovery through a rate rider of all costs a utilityincurs in the planning, development and construction or expansion oftransmission facilities and for current recovery through this rider of theutility’s weighted average cost of capital on transmission construction work inprogress as of the end of the prior year. This legislation also provides forrate-regulated Colorado utilities to develop plans to construct or expandtransmission facilities to transmission constrained zones where new electricgeneration facilities, including renewable energy facilities, are likely to belocated and provides for expedited approvals for such facilities.

 

***2003 Least Cost Plan (LCP) Investigation*** - In January 2007, PSCo filed withthe CPUC its final report on its evaluation of the bids submitted in responseto PSCo’s 2005 All Source request for proposal under PSCo’s 2003 LCP. In thereport, PSCo stated it intended to negotiate extensions to power purchaseagreements for the output from three existing gas-fired facilities for a totalof 465 MW of the 896 MW needed for 2013. The final report explained that PSCowas intentionally waiting to fill the remaining 430MW resources needed in 2013until PSCo’s 2007 LCP and that PSCo was rejecting uneconomic bids received fornew coal generation and for renewal of contracts with existing naturalgas-fired generators.

 

On March 1,2007, the CPUC issued an order requiring PSCo to apply for approval of a 2013contingency plan. On April 2, 2007, PSCo filed its 2013 contingency plan, whichrecommended addressing the remaining 2013 resource need in the 2007 LCP . PSCo’scontingency plan also listed other options, which PSCo predicts will be lesscostly than accepting the uneconomic coal and natural gas bids.

 

On May 25,2007, PSCo amended its 2013 contingency plan to include amendments to two powerpurchase agreements with Tri-State Generation and Transmission Association,Inc. under which PSCo would return Tri-State generation capacity currentlyunder contract to PSCo in the years 2009 through 2012 and then recapture thatcapacity in the years 2013 through 2016. PSCo explained this capacity swapwould save PSCo an estimated $49 million on a net present value basis. PSCostill planned to enter into contract extensions with three existing gas-firedfacilities and to meet the remaining 2013 need through its 2007 LCP. The CPUCheld hearings on the PSCo 2013 contingency plan on July 9, 2007. The PSCocontingency plan was opposed by the CPUC trial staff and by a intervenor, butwas supported by the Colorado Office of Consumer Counsel. The opponents askedfor all 2013 resource acquisition decisions to be deferred to the 2007 LCP. OnSept. 7, 2007, the CPUC issued an order approving the PSCo 2013 contingencyplan and ruling that the amendments to the Tri-State agreements were exemptfrom the resource planning rules and need not be included in an approvedcontingency plan. PSCo has entered into the contract amendments with Tri-Stateand one of the winning gas bidders and is currently in negotiation with oneother winning gas bidders. The third winning gas bidder has withdrawn itsextension offer. The remaining 2013 resource need will be addressed in the PSCo2007 Resource Plan.

 

On July 3,2007, the CPUC issued an order soliciting comments to determine whether the LCPrules needed to be changed on an emergency basis to govern utility filings inOctober 2007. On Sept. 28, 2007, the CPUC adopted emergency rule changes togovern PSCo’s resource plan filing in October 2007. The rule changesinclude:  altering the requirements for “leastcost” resource procurement and fuel neutrality to allow for selection of morerenewable resources and demand-side management resources; requiring utilitiesto file at least three alternative plans with different levels of renewableresources and demand-side management resources so that the costs and benefitsof various levels of these resources can be considered; and

 

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employing anindependent evaluator to assist the CPUC in reviewing the utility’s evaluationof competitive bids for resource additions. PSCo requested an extension to makeits resource filing on Nov.16, 2007. On Oct. 24, 2007, the CPUC acted to grantthis request.

 

**Item 4. CONTROLS AND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

PSCo maintainsa set of disclosure controls and procedures designed to ensure that informationrequired to be disclosed in reports that it files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized and reportedwithin the time periods specified in Securities and Exchange Commissionrules and forms. In addition, the disclosure controls and proceduresensure that information required to be disclosed is accumulated andcommunicated to management, including the chief executive officer (CEO) andchief financial officer (CFO), allowing timely decisions regarding requireddisclosure. As of the end of the period covered by this report, based on anevaluation carried out under the supervision and with the participation of PSCo’smanagement, including the CEO and CFO, of the effectiveness of our disclosurecontrols and procedures, the CEO and CFO have concluded that PSCo’s disclosurecontrols and procedures are effective.

 

**Internal Control Over FinancialReporting**

** **

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

 

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

##### ** **

**Item 1. Legal Proceedings**

 

In the normal course ofbusiness, various lawsuits and claims have arisen against PSCo. Afterconsultation with legal counsel, PSCo has recorded an estimate of the probablecost of settlement or other disposition for such matters. See Notes 4 and 6 ofthe Financial Statements in this Quarterly Report on Form 10-Q for furtherdiscussion of legal proceedings, including Regulatory Matters and Commitmentsand Contingent Liabilities, which are hereby incorporated by reference. Referencealso is made to Item 3 and Note 12 of PSCo’s Annual Report on Form 10-K for theyear ended Dec. 31, 2006 for a description of certain legal proceedingspresently pending.

 

**Item 1A. Risk Factors**

 

PSCo’s risk factors are documented in Item 1A of Part I ofits 2006 Annual Report on Form 10-K, which is incorporated herein by reference.As a result of developments in our business since the filing of the 2006 AnnualReport on Form 10-K and the Quarterly Report on Form 10-Q for the quarter endedJune 30, 2007, we are providing below an update of the risk factor relating toCOLI.

 

***PSCo has received anotice from the IRS proposing to disallow certain interest expense deductionsthat PSCo claimed under a COLI policy. We have reached a settlement inprinciple, the terms of which have been accepted by the IRS and the Departmentof Justice and require Xcel Energy to make certain payments to thegovernment  and surrender the COLIpolicies by Oct. 31, 2007.***

*** ***

On Sept. 20, 2007, Xcel Energy submitted its formal offer in compromiseto settle the dispute relating to the proper tax treatment of the COLI policiesbeginning with tax year 1993 and for all years thereafter. By letter datedSept. 21, 2007, the United States accepted the terms of that settlement offer. Theterms of the final settlement are essentially the same as the settlement inprinciple reached on June 19, 2007. The U.S. government’s letter terminates thetax litigation pending between the parties for tax years 1993-2002 and alsospecifies the agreed tax treatment for certain aspects of those policies forsubsequent tax years. See Note 4 to PSCo’s consolidated financial statementsfor additional disclosure related to the COLI settlement.

 

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**Item 6. Exhibits**

 

The followingExhibits are filed with this report:

 
| 4.01   |   | Supplemental Indenture, dated Aug. 1, 2007, between Public Service  Company of Colorado (a Colorado corporation) and U.S. Bank Trust  National Association, as successor Trustee. (Exhibit 4.01 to PSCo  Form 8-K (file no. 001-3280) dated Aug. 14, 2007). |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                  |
| 10.01  |   | Letter dated Sept. 19, 2007, from Xcel Energy Inc. to the US  Deparment of Justice (DOJ) submitting its offer to settle the COLI tax  dispute and Letter dated Sept. 21, 2007, from the DOJ to Xcel Energy Inc.  accepting the settlement offer.                      |
|   |   |                                                                                                                                                                                                                                                                  |
| 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 requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorizedon Oct. 29, 2007.

 

PublicService Co. of Colorado

(Registrant)

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

 

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