** **

**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 June 30, 2007** |
| ** **                                       |
| **or**                                           |
|                                             |
| **o**                                            | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |

** **

**Forthe 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):

 

LargeAccelerated Filer o                               AcceleratedFiler o                               Non-AcceleratedFiler 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 July 30, 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 Form10-Q with the reduced disclosure format specified in General Instruction H (2)to such Form 10-Q.

 

 

----

 

**Tableof Contents**

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

 

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

 

2

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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 June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Operating revenues**                                                                                     |       |                                                |       |                                              |       |   |   |   |   |
| Electric utility                                                                                           |       | $                                                   | 638,142    |                                              | $          | 599,812 |   | $ | 1,274,642 |   | $ | 1,271,931 |   |
| Natural gas utility                                                                                        |       | 190,157                                             |       | 160,017                                           |       | 706,551 |   | 742,918 |   |
| Steam and other                                                                                            |       | 7,299                                               |       | 7,402                                             |       | 18,096 |   | 19,407 |   |
| Total operating revenues                                                                                   |       | 835,598                                             |       | 767,231                                           |       | 1,999,289 |   | 2,034,256 |   |
|                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **Operating expenses**                                                                                     |       |                                                |       |                                              |       |   |   |   |   |
| Electric fuel and purchased power                                                                          |       | 350,397                                             |       | 350,422                                           |       | 718,130 |   | 766,625 |   |
| Cost of natural gas sold and transported                                                                   |       | 118,155                                             |       | 92,075                                            |       | 526,510 |   | 576,545 |   |
| Cost of sales — steam and other                                                                       |       | 2,165                                               |       | 3,660                                             |       | 7,011 |   | 11,202 |   |
| Other operating and maintenance expenses                                                                   |       | 141,759                                             |       | 134,902                                           |       | 286,114 |   | 276,285 |   |
| Depreciation and amortization                                                                              |       | 66,894                                              |       | 59,534                                            |       | 131,932 |   | 118,520 |   |
| Taxes (other than income taxes)                                                                            |       | 21,645                                              |       | 20,245                                            |       | 45,486 |   | 44,622 |   |
| Total operating expenses                                                                                   |       | 701,015                                             |       | 660,838                                           |       | 1,715,183 |   | 1,793,799 |   |
|                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **Operating income**                                                                                       |       | 134,583                                             |       | 106,393                                           |       | 284,106 |   | 240,457 |   |
|                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| Interest and other income - net (see Note  9)                                                              |       | 1,663                                               |       | 2,325                                             |       | 3,405 |   | 3,387 |   |
| Allowance for funds used during  construction - equity                                                     |       | 2,697                                               |       | 121                                               |       | 4,742 |   | 263 |   |
|                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **Interest charges and financing costs**                                                                   |       |                                                |       |                                              |       |   |   |   |   |
| Interest charges — includes other financing  costs of $1,368, $1,529, $2,750 and $3,038, respectively |       | 32,573                                              |       | 33,931                                            |       | 66,674 |   | 68,967 |   |
| Allowance for funds used during  construction — debt                                                  |       | (3,037                                              | )          | (3,032                                            | )          | (5,168 | ) | (5,465 | ) |
| Total interest charges and financing costs                                                                 |       | 29,536                                              |       | 30,899                                            |       | 61,506 |   | 63,502 |   |
|                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| Income from continuing operations before  income taxes                                                     |       | 109,407                                             |       | 77,940                                            |       | 230,747 |   | 180,605 |   |
| Income taxes                                                                                               |       | 38,911                                              |       | 27,867                                            |       | 81,692 |   | 61,664 |   |
| Income from continuing operations                                                                          |       | 70,496                                              |       | 50,073                                            |       | 149,055 |   | 118,941 |   |
| Income (loss) from discontinued operations –  net of tax (see Note 3)                                 |       | (52,040                                             | )          | 2,119                                             |       | (44,850 | ) | 10,098 |   |
| **Net  income**                                                                                            |       | $                                                   | 18,456     |                                              | $          | 52,192 |   | $ | 104,205 |   | $ | 129,039 |   |

 

**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)**

 
| ** **                                                                           | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| **Operating activities**                                                             |       |                                              |       |   |   |
| Net income                                                                           |       | $                                                 | 104,205    |   | $ | 129,039 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:   |       |                                              |       |   |   |
| Remove (income)/loss from discontinued  operations                                   |       | 44,850                                            |       | (10,098 | ) |
| Depreciation and amortization                                                        |       | 137,121                                           |       | 124,815 |   |
| Deferred income taxes                                                                |       | 16,261                                            |       | 15,518 |   |
| Amortization of investment tax credits                                               |       | (1,962                                            | )          | (1,974 | ) |
| Allowance for equity funds used during  construction                                 |       | (4,742                                            | )          | (263 | ) |
| Net realized and unrealized hedging and  derivative transactions                     |       | 3,420                                             |       | (33,641 | ) |
| Changes in operating assets and  liabilities:                                        |       |                                              |       |   |   |
| Accounts receivable                                                                  |       | 4,903                                             |       | 148,612 |   |
| Accrued unbilled revenues                                                            |       | (51,144                                           | )          | 56,921 |   |
| Inventories                                                                          |       | 69,661                                            |       | 87,253 |   |
| Recoverable purchased natural gas and  electric energy costs                         |       | 156,337                                           |       | 210,898 |   |
| Prepayments and other                                                                |       | 5,316                                             |       | 8,770 |   |
| Accounts payable                                                                     |       | (65,095                                           | )          | (233,645 | ) |
| Net regulatory assets and liabilities                                                |       | 1,702                                             |       | (24,128 | ) |
| Other current liabilities                                                            |       | 28,903                                            |       | (28,272 | ) |
| Change in other noncurrent assets                                                    |       | (35,443                                           | )          | 8,229 |   |
| Change in other noncurrent liabilities                                               |       | (8,519                                            | )          | (6,155 | ) |
| Operating cash flows provided by  discontinued operations                            |       | 3,892                                             |       | 4,774 |   |
| Net cash provided by operating activities                                            |       | 409,666                                           |       | 456,653 |   |
|                                                                                 |       |                                              |       |   |   |
| **Investing activities**                                                             |       |                                              |       |   |   |
| Capital/construction expenditures                                                    |       | (330,465                                          | )          | (268,382 | ) |
| Allowance for equity funds used during  construction                                 |       | 4,742                                             |       | 263 |   |
| Investments in utility money pool  arrangement                                       |       | (147,100                                          | )          | — |   |
| Repayments from utility money pool  arrangement                                      |       | 147,100                                           |       | — |   |
| Other investments                                                                    |       | 919                                               |       | 2,101 |   |
| Net cash used in investing activities                                                |       | (324,804                                          | )          | (266,018 | ) |
|                                                                                 |       |                                              |       |   |   |
| **Financing activities**                                                             |       |                                              |       |   |   |
| Short-term debt repayments, net                                                      |       | (197,850                                          | )          | (310,604 | ) |
| Borrowings under utility money pool  arrangement                                     |       | 367,800                                           |       | 576,200 |   |
| Repayments under utility money pool  arrangement                                     |       | (268,800                                          | )          | (393,600 | ) |
| Repayment of long-term debt, including  reacquisition premiums                       |       | (100,691                                          | )          | (125,668 | ) |
| Capital contribution from parent                                                     |       | 240,176                                           |       | 193,185 |   |
| Dividends paid to parent                                                             |       | (130,292                                          | )          | (129,655 | ) |
| Net cash used in financing activities                                                |       | (89,657                                           | )          | (190,142 | ) |
|                                                                                 |       |                                              |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                                |       | (4,795                                            | )          | 493 |   |
| Net increase (decrease) in cash and cash  equivalents – discontinued operations |       | 2,747                                             |       | (997 | ) |
| Cash and cash equivalents at beginning of  period                                    |       | 3,011                                             |       | 2,848 |   |
| Cash and cash equivalents at end of period                                           |       | $                                                 | 963        |   | $ | 2,344 |   |
|                                                                                 |       |                                              |       |   |   |
| Supplemental disclosure of cash flow  information:                                   |       |                                              |       |   |   |
| Cash paid for interest (net of amounts  capitalized)                                 |       | $                                                 | 59,779     |   | $ | 67,095 |   |
| Cash paid for income taxes (net of refunds  received)                                |       | 39,816                                            |       | 9,491 |   |
|                                                                                 |       |                                              |       |   |   |
| Supplemental disclosure of non-cash  investing transactions:                         |       |                                              |       |   |   |
| Property, plant and equipment additions in  accounts payable                         |       | $                                                 | 11,798     |   | $ | 6,858 |   |

 

See Notes to Consolidated FinancialStatements

 

4

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**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**

**(Thousandsof dollars)**

** **
| ** **                                                                                | ** ** | **June 30,  2007** | ** ** | **Dec. 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                | ** ** | ** **              | ** ** | ** **              | ** ** |
| Current assets:                                                                           |       |                    |       |                    |       |
| Cash and cash equivalents                                                                 |       | $                       | 963        |                    | $          | 3,011 |   |
| Accounts receivable, net of allowance for  bad debts of $18,161 and $18,415, respectively |       | 304,382                 |       | 332,933                 |       |
| Accounts receivable from affiliates                                                       |       | 32,269                  |       | 8,621                   |       |
| Accrued unbilled revenues                                                                 |       | 250,505                 |       | 199,361                 |       |
| Recoverable purchased natural gas and  electric energy costs                              |       | 1,490                   |       | 157,827                 |       |
| Materials and supplies inventories                                                        |       | 44,475                  |       | 43,029                  |       |
| Fuel inventories                                                                          |       | 36,851                  |       | 40,997                  |       |
| Natural gas inventories                                                                   |       | 88,606                  |       | 155,567                 |       |
| Derivative instruments valuation                                                          |       | 49,918                  |       | 28,111                  |       |
| Deferred income taxes                                                                     |       | 51,119                  |       | 47,075                  |       |
| Prepayments and other                                                                     |       | 10,994                  |       | 14,284                  |       |
| Current assets of discontinued operations                                                 |       | 32,589                  |       | 52,593                  |       |
| Total current assets                                                                      |       | 904,161                 |       | 1,083,409               |       |
| Property, plant and equipment, at cost:                                                   |       |                    |       |                    |       |
| Electric utility plant                                                                    |       | 6,504,322               |       | 6,409,194               |       |
| Natural gas utility plant                                                                 |       | 1,864,463               |       | 1,825,560               |       |
| Common utility and other property                                                         |       | 738,362                 |       | 725,864                 |       |
| Construction work in progress                                                             |       | 587,631                 |       | 429,878                 |       |
| Total property, plant and equipment                                                       |       | 9,694,778               |       | 9,390,496               |       |
| Less accumulated depreciation                                                             |       | (3,004,572              | )          | (2,912,233              | )          |
| Net property, plant and equipment                                                         |       | 6,690,206               |       | 6,478,263               |       |
| Other assets:                                                                             |       |                    |       |                    |       |
| Regulatory assets                                                                         |       | 542,022                 |       | 589,016                 |       |
| Derivative instruments valuation                                                          |       | 153,584                 |       | 161,502                 |       |
| Other investments                                                                         |       | 10,217                  |       | 11,136                  |       |
| Other                                                                                     |       | 80,190                  |       | 45,785                  |       |
| Noncurrent assets of discontinued  operations                                             |       | 25,128                  |       | 15,779                  |       |
| Total other assets                                                                        |       | 811,141                 |       | 823,218                 |       |
| Total assets                                                                              |       | $                       | 8,405,508  |                    | $          | 8,384,890 |   |
| **LIABILITIES AND EQUITY**                                                                | ** ** | ** **              | ** ** | ** **              | ** ** |
| Current liabilities:                                                                      |       |                    |       |                    |       |
| Current portion of long-term debt                                                         |       | $                       | 1,406      |                    | $          | 101,379 |   |
| Short-term debt                                                                           |       | 174,650                 |       | 372,500                 |       |
| Accounts payable                                                                          |       | 337,773                 |       | 385,054                 |       |
| Accounts payable to affiliates                                                            |       | 18,909                  |       | 30,291                  |       |
| Borrowings under utility money pool  arrangement                                          |       | 99,000                  |       | —                  |       |
| Taxes accrued                                                                             |       | 63,466                  |       | 98,662                  |       |
| Dividends payable to parent                                                               |       | 65,774                  |       | 64,778                  |       |
| Derivative instruments valuation                                                          |       | 38,674                  |       | 38,616                  |       |
| Accrued interest                                                                          |       | 32,512                  |       | 35,362                  |       |
| Other                                                                                     |       | 137,298                 |       | 74,381                  |       |
| Current liabilities of discontinued  operations                                           |       | 41,410                  |       | 670                     |       |
| Total current liabilities                                                                 |       | 1,010,872               |       | 1,201,693               |       |
| Deferred credits and other liabilities:                                                   |       |                    |       |                    |       |
| Deferred income taxes                                                                     |       | 1,034,030               |       | 1,011,591               |       |
| Deferred investment tax credits                                                           |       | 57,073                  |       | 59,035                  |       |
| Regulatory liabilities                                                                    |       | 462,360                 |       | 470,255                 |       |
| Pension and employee benefit obligations                                                  |       | 293,997                 |       | 301,277                 |       |
| Customers advances                                                                        |       | 277,439                 |       | 279,011                 |       |
| Derivative instruments valuation                                                          |       | 143,968                 |       | 156,623                 |       |
| Asset retirement obligations                                                              |       | 44,099                  |       | 43,335                  |       |
| Other liabilities                                                                         |       | 14,310                  |       | 7,755                   |       |
| Total deferred credits and other  liabilities                                             |       | 2,327,276               |       | 2,328,882               |       |
| Commitments and contingent liabilities (see  Note 6)                                      |       |                    |       |                    |       |
| Capitalization:                                                                           |       |                    |       |                    |       |
| Long-term debt                                                                            |       | 1,844,884               |       | 1,845,278               |       |
| Common Stock — authorized 100 shares of  $0.01 par value; outstanding 100 shares     |       | —                  |       | —                  |       |
| Additional paid in capital                                                                |       | 2,651,380               |       | 2,411,204               |       |
| Retained earnings                                                                         |       | 557,822                 |       | 585,219                 |       |
| Accumulated other comprehensive income                                                    |       | 13,274                  |       | 12,614                  |       |
| Total common stockholder’s equity                                                    |       | 3,222,476               |       | 3,009,037               |       |
| Total liabilities and equity                                                              |       | $                       | 8,405,508  |                    | $          | 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 June 30, 2007, and Dec. 31, 2006; the resultsof its operations for the three and six months ended June 30, 2007 and 2006;and its cash flows for the six months ended June 30, 2007 and 2006. Due to theseasonality of electric and natural gas sales of PSCo, interim results are notnecessarily an appropriate base from which to project annual results.

 

**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 AnnualReport on Form 10-K for the year ended Dec. 31, 2006 appropriately represent,in all material 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 andliabilities as separate items rather than components of other assets and otherliabilities within net cash provided by operating activities. In addition,activity related to derivative transactions have been combined into netrealized and unrealized hedging and derivative transactions. Thesereclassifications did not affect total net cash provided by (used in)operating, investing or financing activities within the Consolidated Statementsof Cash Flows.

 

Asa result of a settlement in principle and management’s decision to surrenderall corporate-owned life insurance (COLI) policies following written acceptanceof the offer by the government, all the amounts related to PSR Investments,Inc. (PSRI) have been classified as discontinued operations. See Note 3 and 4for additional disclosure related to discontinued operations and the proposedCOLI settlement. Financial data for PSRI has been presented as discontinuedoperations as outlined below. The financial statements have been recast for allperiods presented herein.

 

**2.Recently Issued 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 prioritybeing quoted prices in active markets. Fair value measurements are disclosed bylevel within that hierarchy. SFAS 157 is effective for financial statementsissued for fiscal years beginning after Nov. 15, 2007. PSCo is evaluatingthe impact of SFAS 157 on its financial condition and results of operations anddoes not expect the impact of adoption to be material.

 

***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 and does not expect the impact of adoption to bematerial.

 

**3.****              DiscontinuedOperations**

 

***PSRI -***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 PSCo’s COLI policies. As a result of the settlement in principle andmanagement’s decision to surrender the COLI policies when the offer has beenaccepted in writing by the government, all the amounts related to PSRI havebeen classified as discontinued operations. See Note 4 for additionaldisclosure related to the proposed COLI settlement.

** **

**6**

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** **

**SummarizedFinancial Results of Discontinued Operations**

 
| **(Thousands of dollars)**               | ** ** | **PSRI**   | ** ** |
|----------------------------------------------------|------------|------------|------------|
| ** **                                         | ** ** | ** ** | ** ** |
| **Three months ended June 30, 2007**          | ** ** | ** ** | ** ** |
| Operating revenues                                 |       | $          | —     |   |
| Operating expense, interest and other  income, net |       | 47,623     |       |
| Pretax loss from discontinued operations           |       | (47,623    | )          |
| Income tax expense                                 |       | 4,417      |       |
| Net loss from discontinued operations              |       | $          | (52,040    | ) |
|                                               |       |       |       |
| **Three months ended June 30, 2006**          | ** ** | ** ** | ** ** |
| Operating revenues                                 |       | $          | —     |   |
| Operating expense, interest and other  income, net |       | 6,849      |       |
| Pretax loss from discontinued operations           |       | (6,849     | )          |
| Income tax benefit                                 |       | (8,968     | )          |
| Net income from discontinued operations            |       | $          | 2,119      |   |

 
| **(Thousands of dollars)**               | ** ** | **PSRI**   | ** ** |
|----------------------------------------------------|------------|------------|------------|
| ** **                                         | ** ** | ** ** | ** ** |
| **Six months ended June 30, 2007**            | ** ** | ** ** | ** ** |
| Operating revenues                                 |       | $          | —     |   |
| Operating expense, interest and other  income, net |       | 52,331     |       |
| Pretax loss from discontinued operations           |       | (52,331    | )          |
| Income tax benefit                                 |       | (7,481     | )          |
| Net loss from discontinued operations              |       | $          | (44,850    | ) |
|                                               |       |       |       |
| **Six months ended June 30, 2006**            | ** ** | ** ** | ** ** |
| Operating revenues                                 |       | $          | —     |   |
| Operating expense, interest and other  income, net |       | 11,953     |       |
| Pretax loss from discontinued operations           |       | (11,953    | )          |
| Income tax benefit                                 |       | (22,051    | )          |
| Net income from discontinued operations            |       | $          | 10,098     |   |

 

The major classes of assets and liabilities held for sale and relatedto discontinued operations are as follows:

 
| **(Thousands of dollars)**                                      | ** ** | **June 30, 2007** | ** ** | **Dec. 31, 2006** | ** ** |
|---------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| ** **                                                                | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Cash                                                                      |       | $                           | 2,747      |                        | $          | — |   |
| Accounts receivables, net                                                 |       | 2,499                       |       | 2,576                       |       |
| Deferred income tax benefits                                              |       | 11,160                      |       | 15,716                      |       |
| Other current assets                                                      |       | 16,183                      |       | 34,301                      |       |
| Current assets held for sale and related to  discontinued operations      |       | $                           | 32,589     |                        | $          | 52,593 |   |
| Deferred income tax benefits                                              |       | 22,256                      |       | 7,569                       |       |
| Other noncurrent assets                                                   |       | 2,872                       |       | 8,210                       |       |
| Noncurrent assets held for sale and related  to discontinued operations   |       | $                           | 25,128     |                        | $          | 15,779 |   |
| Accounts payable                                                          |       | $                           | 2,489      |                        | $          | 670 |   |
| Other current liabilities                                                 |       | 38,921                      |       | —                      |       |
| Current liabilities held for sale and related  to discontinued operations |       | $                           | 41,410     |                        | $          | 670 |   |

 

**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 certain lives of PSCoemployees. These policies are owned by PSRI, a wholly owned subsidiary of PSCo.

 

After Xcel Energy filedthis suit, the IRS sent three statutory notices of deficiency of tax, penaltyand interest for 1995 through 2002. Xcel Energy has filed U.S. Tax Courtpetitions challenging those notices. PSRI also continued to take deductions for interest expense on policyloans for subsequent years. The total exposure for the tax years in dispute andthrough 2007 is approximately $583 million, which includes income tax, interestand potential penalties.

 

7

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On June 19, 2007 a settlement in principle was reached between XcelEnergy and representatives of the United States Government that would resolvethis dispute. The terms of the proposed settlement are as follows:

 

•                  XcelEnergy would pay the IRS $64.4 million (or approximately $56 million, net,after tax) in full settlement of all of the government’s claims for additionaltaxes, interest and penalties relating to these COLI plans for tax years1993-2007.

•                  XcelEnergy would further agree to claim no additional deductions resulting from itsCOLI plans for any tax year after 2007 and to surrender its policies when theoffer has been accepted in writing by the government.

•                  Thegovernment would permit Xcel Energy to surrender these policies withoutincurring any tax liability on any gain from that surrender.

•                  Thissettlement requires final approval from the IRS and the Department of Justice(DOJ). There is no guarantee that such approvals will be obtained.

•                  Amongother things, the settlement process requires Xcel Energy to submit a writtensettlement offer setting forth the basic terms and for the DOJ Tax Division andthe IRS to review that offer before they decide to accept or reject it. XcelEnergy submitted this settlement offer to the government on July 2, 2007.

•                  Itis expected that a final decision on the settlement will be reached during XcelEnergy’s third quarter of 2007.

 

The COLI case was set for trial on July 23, 2007. Because a settlementin principle has been reached, the court has removed this case from the trialcalendar.

 

Asa result of the settlement in principle and management’s decision to surrenderthe COLI policies when the offer has been accepted in writing by thegovernment, Xcel Energy reported earnings from PSRI and the settlement costs asdiscontinued operations in the second quarter of 2007. See Note 3 foradditional disclosure related to discontinued operations.

 

***Accounting for Uncertainty in IncomeTaxes — an interpretation of FASB Statement No. 109******(FIN 48) —***In July2006, the FASB issued Interpretation FIN 48. FIN 48 prescribes how a companyshould recognize, measure, present and disclose uncertain tax positions thatthe company has taken or expects to take in its income tax returns. FIN 48requires that only income tax benefits that meet the “more likely than not” recognitionthreshold be recognized or continue to be recognized on its effective date. Asrequired, PSCo adopted FIN 48 as of Jan. 1, 2007 and the initial derecognitionamounts were reported as a cumulative effect of a change in accountingprinciple. The cumulative effect of the change, which is reported as anadjustment to the beginning 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 amember of the Xcel Energy affiliated group that files consolidated income taxreturns. Xcel Energy has been audited by the IRS through tax year 2003, with alimited exception for 2003 research tax credits. The IRS commenced anexamination of Xcel Energy’s federal income tax returns for 2004 and 2005 (andresearch credits for 2003) in the third quarter of 2006, and that examinationis anticipated to be complete by March 31, 2008. As of June 30, 2007,the IRS had not proposed any material adjustments to tax years 2003 through2005. 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 is currently 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 settlement inprinciple regarding this litigation (see previous discussion of COLI).

 

PSCois also currently under examination by the state of Colorado for years 1993through 1996 and 2000 through 2004. No material adjustments have been proposedas of June 30, 2007. As of June 30, 2007, PSCo’s earliest open tax year inwhich an audit can be initiated by state taxing authorities under applicablestatutes of limitations is 1993.

 

The amount of unrecognizedtax benefits was $11.4 million on Jan. 1, 2007 and  $21.5 million (including $12.4 millionreported as discontinued operations) on June 30, 2007. These amounts wereoffset against the tax benefits associated with net operating loss and taxcredit carryovers of $7.5 million on Jan. 1, 2007 (including $1.8 millionreported as discontinued operations) and $5.8 million on June 30, 2007(including $2.4 million reported as discontinued operations).

 

Included in the unrecognizedtax benefit balance for continuing operations was $4.5 million and $1.3 millionof tax positions on Jan. 1, 2007 and June 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 $7.8 million of tax positions on Jan. 1, 2007 and June 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 change in theunrecognized tax benefit balance for continuing operations from April 1, 2007to June 30, 2007, was due to the addition of similar uncertain tax positionsrelating to second quarter activity, and the resolution of certain federalaudit 

 

8

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matters. PSCo’samount of unrecognized tax benefits for continuing operations couldsignificantly change in the next 12 months as the IRS and state tax auditsprogress. However, at this time due to the nature of the audit process, it isnot reasonably possible to estimate a range of the possible change.

 

The change inthe unrecognized tax benefit balance for discontinued operations from April 1,2007 to June 30, 2007 was due to the proposed settlement of the COLI litigation.PSCo’s amount of unrecognized tax benefits for discontinued operations couldsignificantly change in the next 12 months as the settlement of the COLIlitigation is finalized. This is estimated to reduce the amount of unrecognizedtax benefits for discontinued operations by $12.4 million.

 

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 June 30, 2007,was an increase of $22.9 million (reported as discontinued operations),primarily due to the proposed settlement of the COLI litigation. Penalties of$2.1 million (reported as discontinued operations) were accrued as of June 30,2007 due to the proposed settlement of the COLI litigation.

 

**5.Rate Matters**

 

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

***Natural GasRate Case**** *—******OnDec. 1, 2006, PSCo filed with the CPUC, a request to increase natural gas ratesby $41.9 million, representing an overall increase of 2.96 percent, primarilyrelated to capital investments and rising operating costs. The request assumesa common equity ratio of 60.17 percent and a return on equity of 11 percent.The jurisdictional rate base is approximately $1.1 billion.

 

On June 18, 2007, the CPUCapproved a settlement between PSCo, the CPUC staff and the Colorado Office ofConsumer Council (OCC), which granted the following:

 

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

•                  The CPUCmodified the partial decoupling mechanism under the settlement to allow PSCorecovery of additional revenues in future years to compensate for the portionof the decline in weather normalized residential use per customer that exceedsthe first 1.3 percent in decline in use (to be reflective of 50 percent of thehistoric average decline in use).

 

Underthe terms of the agreement, parties to the settlement may seek reconsiderationof the CPUC’s order, however, PSCo does not plan to seek reconsideration.

 

**6.Commitments and Contingent Liabilities**

 

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

 

**Operating Leases*****—***In May 2007, PSCocommenced a purchased power agreement that is being accounted for as anoperating lease in accordance with Emerging Issues Task Force 01-8, DeterminingWhether an Arrangement Contains a Lease. The 20-year agreement calls forcapacity payments of $10.6 million, $16.1 million, $16.4 million $16.7 million,$17.1 million and $312.3 million for 2007, 2008, 2009, 2010, 2011 andthereafter, 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.

 

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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 requiredcleanup efforts, costs of alternative cleanup methods and pollution-controltechnologies, the period over which remediation will be performed and paid for,changes in environmental remediation and pollution-control requirements, thepotential effect of technological improvements, the number and financialstrength of other PRPs and the identification of new environmental cleanupsites.

 

Estimates arerevised as facts become known. At June 30, 2007, the liability for the cost ofremediating these sites was estimated to be $1.9 million, of which $0.7 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.

 

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.

 

In April 2005, PSCo brought a contribution action against SchraderOil Co. and related parties alleging Schrader Oil Co. released hazardoussubstances into the environment and these releases caused  MGP byproducts to migrate to the Cache LaPoudre River, thereby substantially increasing the scope and cost ofremediation. PSCo requested damages, including a portion of the costs PSCoincurred to investigate and remove contaminated sediments from the Cache laPoudre River. On Dec. 14, 2005, the court denied Schrader’s request todismiss the PSCo suit. On Jan. 3, 2006, Schrader filed a response to thePSCo complaint and a counterclaim against PSCo for its response costs under theComprehensive Environmental Response Compensation and Liability Act (CERCLA)and under the Resource Conservation and Recovery Act (RCRA). Schrader hasalleged as part of its counterclaim an “imminent and substantial endangerment”of its property as defined by RCRA. In September 2006, PSCo filed a Motion ForPartial Summary Judgment to dismiss Schrader’s RCRA claim. PSCo believes theallegations with respect to PSCo are without merit and will vigorously defenditself.

 

# ***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 Annual Report on Form 10-K for the year ended Dec. 31, 2006. Itmay be necessary to remove some asbestos to perform maintenance or makeimprovements to other equipment. The cost of removing asbestos as part of otherwork is immaterial and is recorded as incurred as operating expenses formaintenance projects, capital expenditures for construction projects or removalcosts for demolition projects.

 

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***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 sulfur dioxide (SO2), NOx, and particulate matter emissionsunder BART and then set BART emissions limits for those facilities. On May 30,2006, the Colorado Air Quality Control Commission promulgated BART regulationsrequiring certain major stationary sources to evaluate and install, operate andmaintain BART technology or an approved BART alternative to make reasonableprogress toward meeting the national visibility goal. On Aug. 1, 2006, PSCosubmitted its BART alternatives analysis to the Colorado Air Pollution ControlDivision (CAPCD). As set forth in its analysis, PSCo estimates thatimplementation of the BART alternatives will cost approximately $211 million incapital costs, which includes approximately $62 million in environmentalupgrades for the existing Comanche Station project, which are included in thecapital budget. PSCo expects the cost of any required capital investment willbe recoverable from customers. Emissions controls are expected to be installedbetween 2011 and 2014. The CAPCD expects to finalize the regional haze stateimplementation plan in late 2007 for submittal to the EPA in 2008. BARTemission controls associated with the plan must be installed within five yearsof EPA approval. On June 4, 2007, the CAPCD approved PSCo’s BART analysis andrequested public comment on its BART determination and  PSCo’s BART permits. The comment periodexpires July 28, 2007, after which the CAPCD will either grant, deny, or grantwith conditions PSCo’s BART permits.

 

***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 rulerequires mercury emission controls capable of achieving 80 percent capture beinstalled at Pawnee Station in 2012 and all other Colorado units by 2014. PSCois in the process of installing mercury monitors on seven Colorado units at anestimated aggregate cost of approximately $2.6 million. PSCo is evaluating themercury emission controls required to meet the new rule and is currently unableto provide a capital cost estimate. The EPA has expressed concerns withallowance restrictions after reviewing the Colorado mercury rule.

 

***Federal Clean Water Act —***The federal Clean Water Act requires the EPA to regulate cooling waterintake structures to assure that these structures reflect the “best technologyavailable” for minimizing adverse environmental impacts. In July 2004, the EPApublished phase II of the rule, which applies to existing cooling water intakesat steam-electric power plants. Several lawsuits were filed against the EPA inthe United States Court of Appeals for the Second Circuit challenging the phaseII rulemaking. On Jan. 25, 2007, the court issued its decision and remandedvirtually every aspect of the rule to the EPA for reconsideration. The EPAannounced on March 20, 2007, it will suspend the deadlines and refer any implementationto each state’s best professional judgment until the EPA is able to fullyrespond to the court-ordered remands. As a result, the rule’s compliancerequirements and associated deadlines are currently unknown. It is not possibleto provide an accurate estimate of the overall cost of this rulemaking at thistime due to the many uncertainties involved.

 

***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, the requested reliefthat Xcel Energy cap and reduce its CO2 emissions could have a material adverse effecton PSCo. The other utilities include American Electric Power Co., Southern Co.,Cinergy Corp. and Tennessee Valley Authority. CO2 is emitted whenever fossil fuel is combusted,such as in automobiles, industrial operations and coal- or natural gas-firedpower plants. The lawsuits allege that CO2 emitted by each company is a public nuisanceas defined under 

 

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state and federal common law because it has contributed to globalwarming. The lawsuits do not demand monetary damages. Instead, the lawsuits askthe court to order each utility to cap and reduce its CO2 emissions. InOctober 2004, Xcel Energy and four other utility companies filed a motionto dismiss the lawsuit. On Sept. 19, 2005, the judge granted the defendants’motion to dismiss on constitutional grounds. Plaintiffs filed an appeal to theSecond Circuit Court of Appeals. On June 21, 2007 the Second Circuit Court ofAppeals issued an order requesting the parties to file a letter brief informingthe Second Circuit Court of Appeals of their views about the impact of theUnited 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 to regulation by theEPA under the Clean Air Act. In response to the request of the Second CircuitCourt of Appeals, the defendant utilities filed a letter brief on July 6, 2007,stating the position that the United States Supreme Court’s decision supportsthe arguments raised by them on appeal. It is unknown when the Second CircuitCourt of Appeals will rule on the appeal.

 

***Comanche 3 Permit Litigation***-On Aug. 4, 2005, Citizens for Clean Air and Water in Pueblo and SouthernColorado and Clean Energy Action filed a complaint against the Colorado AirPollution Control Division alleging that the Division improperly grantedpermits to PSCo under Colorado’s Prevention of Significant Deteriorationprogram for the construction and operation of Comanche 3. PSCo intervened inthe case. On June 20, 2006, the court ruled in PSCo’s favor and held that theComanche 3 permits had been properly granted and plaintiffs’ claims to thecontrary were without merit. Plaintiffs have appealed this decision. On Nov.22, 2006, plaintiffs filed their opening briefs. PSCo’s response was filed Dec.22, 2006. The Colorado Court of Appeals is expected to rule on the appeal in2007.

 

***Comer vs. Xcel Energy Inc. et al.***— On April25, 2006, Xcel Energy received notice of a purported class action lawsuit filedin U.S. District Court for the Southern District of Mississippi. Although PSCois not named as a party to this litigation, if the litigation ultimatelyresults in an unfavorable outcome for Xcel Energy, it could have a materialadverse effect on PSCo. The lawsuit names more than 45 oil, chemical andutility companies, including Xcel Energy, as defendants and alleges thatdefendants’ CO2 emissions “were a proximate and direct cause of the increase inthe destructive capacity of Hurricane Katrina.” Plaintiffs allege in support of their claim, several legal theories,including negligence, and public and private nuisance and seek damages relatedto the loss resulting from the hurricane. Xcel Energy believes this lawsuit iswithout merit and intends to vigorously defend itself against these claims. OnJuly 19, 2006, Xcel Energy filed a motion to dismiss the lawsuit in itsentirety. Oral arguments related to some of the defenses raised by the defendants,including Xcel Energy, have been set for Aug. 30, 2007.

 

***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.

 

***Payne et al. vs. PSCo et al.******—***In lateOctober 2003, there was a wildfire in Boulder County, Colorado. There wasno loss of life, but there was property damage associated with this fire. OnOct. 28, 2005, an action against PSCo relating to this fire was filed inBoulder County District Court. There are 22 plaintiffs, including individuals,the City of Jamestown and two companies, and three co-defendants, includingPSCo. Plaintiffs asserted that a tree falling into PSCo distribution lines mayhave caused the fire. The matter was ultimately settled in March 2007 and thesettlement did not have a material effect on PSCo’s financial results.

 

**OtherContingencies**

 

•          Tax Matters — See Note 4to the consolidated financial statements for discussion of exposures regardingthe tax deductibility of COLI.

 

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

 

As of June 30,2007, PSCo had $174.7 million of short-term debt outstanding at a weightedaverage interest rate of 5.41 percent and $99.0 million of utility money poolborrowings at a weighted average interest rate of 5.40 percent.

 

During the third quarter of 2007, PSCo anticipates issuing up to $350million of long-term debt securities to refinance a prior debt maturity and tofund capital expenditures.

 

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**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. Allderivative instruments not qualifying for the normal purchases and normal salesexception, as defined by SFAS 133 -“Accounting for DerivativeInstruments and Hedging Activities,” as amended (SFAS 133), are recordedat fair value. The presentation of the fair value for these derivativeinstruments is dependent on the designation of a qualifying hedgingrelationship. The adjustment to fair value of derivative instruments notdesignated in a qualifying hedging relationship is reflected in currentearnings or as a regulatory balance.

 

PSCo records the fair value of its derivative instruments in itsConsolidated Balance Sheet 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 June 30, 2007, PSCohad various commodity-related contracts classified as cash flow hedgesextending through December 2009. The fair value of these cash flow hedges isdeferred as a regulatory asset or liability. This classification is based onthe regulatory recovery mechanisms in place.  This could include thepurchase or sale of energy or energy-related products, the use of natural gasto generate electric energy or gas 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 of theseinstruments is recorded as a component of Other Comprehensive Income.

 

As of June 30,2007, PSCo had net gains of approximately $1.7 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 revenues, hedgingtransactions for fuel used in energy generation are recorded as a component offuel costs, hedging transactions for gas purchased for resale are recorded as acomponent of gas costs and interest rate hedging transactions are recorded as acomponent of interest expense. PSCo is allowed to recover in electric or gasrates the costs of certain financial instruments purchased to reduce commoditycost volatility. There was immaterial ineffectiveness in the second quarter of2007.

 

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

 

 
| ** **                                                                          | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| **(Millions of Dollars)**                                                 | ** ** | **June 30, 2007**    | ** ** | **June 30, 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      |       | 1.4                            |       | — |   |
| After-tax net realized gains on derivative  transactions reclassified into earnings |       | (0.7                           | )          | (0.7 | ) |
| Accumulated other comprehensive income  related to cash flow hedges at June 30      |       | $                              | 13.3       |   | $ | 13.5 |   |

 

**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 and are recorded on a net basis within OperatingRevenues on the Consolidated Statements of Income.

 

**NormalPurchases or Normal Sales Contracts**

 

PSCo enters intocontracts for the purchase and sale of commodities for use in its businessoperations. 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.

 

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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 six months ended June 30 consisted of the following:

 
| ** **                           | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Thousands of dollars)** | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                      |       | $                                                   | 1,351      |                                              | $          | 983 |   | $ | 2,743 |   | $ | 1,981 |   |
| Other nonoperating income            |       | 494                                                 |       | 1,669                                             |       | 996 |   | 2,500 |   |
| Other nonoperating expense           |       | (182                                                | )          | (327                                              | )          | (334 | ) | (1,094 | ) |
| Total interest and other income, net |       | $                                                   | 1,663      |                                              | $          | 2,325 |   | $ | 3,405 |   | $ | 3,387 |   |

 

**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 June 30, 2007** |       |                                       |       |                                     |       |               |       |                          |       |                    |       |
| Revenues from:                                                |       |                                       |       |                                     |       |               |       |                          |       |                    |       |
| External customers                                            |       | $                                          | 638,142    |                                     | $          | 190,157            |       | $                             | 7,299      |                    | $          | — |   | $ | 835,598 |   |
| Internal customers                                            |       | 71                                         |       | 3                                        |       | —             |       | (74                           | )          | —                  |       |
| Total revenue                                                 |       | $                                          | 638,213    |                                     | $          | 190,160            |       | $                             | 7,299      |                    | $          | (74 | ) | $ | 835,598 |   |
| Income from continuing operations                             |       | $                                          | 59,025     |                                     | $          | 8,809              |       | $                             | 2,662      |                    | $          | — |   | $ | 70,496 |   |
|                                                          |       |                                       |       |                                     |       |               |       |                          |       |                    |       |
| **Three months ended June 30, 2006**                          |       |                                       |       |                                     |       |               |       |                          |       |                    |       |
| Revenues from:                                                |       |                                       |       |                                     |       |               |       |                          |       |                    |       |
| External customers                                            |       | $                                          | 599,812    |                                     | $          | 160,017            |       | $                             | 7,402      |                    | $          | — |   | $ | 767,231 |   |
| Internal customers                                            |       | 57                                         |       | 19                                       |       | —             |       | (76                           | )          | —                  |       |
| Total revenue                                                 |       | $                                          | 599,869    |                                     | $          | 160,036            |       | $                             | 7,402      |                    | $          | (76 | ) | $ | 767,231 |   |
| Income from continuing operations                             |       | $                                          | 39,980     |                                     | $          | 7,456              |       | $                             | 2,637      |                    | $          | — |   | $ | 50,073 |   |

 
| **(Thousands of dollars)**     | ** ** | **Regulated  Electric Utility** | ** ** | **Regulated  Natural Gas  Utility** | ** ** | **All Other** | ** ** | **Reconciling  Eliminations** | ** ** | **Consolidated    Total** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|--------------------|------------|-------------------------------|------------|-------------------------------------|------------|
| **Six months ended June 30, 2007**       | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** **         | ** ** | ** **                    | ** ** | ** **                          | ** ** |
| Revenues from:                           |       |                                 |       |                                |       |               |       |                          |       |                                |       |
| External customers                       |       | $                                    | 1,274,642  |                                | $          | 706,551            |       | $                             | 18,096     |                                | $          | — |   | $ | 1,999,289 |   |
| Internal customers                       |       | 157                                  |       | 53                                  |       | —             |       | (210                          | )          | —                              |       |
| Total revenue                            |       | $                                    | 1,274,799  |                                | $          | 706,604            |       | $                             | 18,096     |                                | $          | (210 | ) | $ | 1,999,289 |   |
| Income from continuing operations        |       | $                                    | 106,427    |                                | $          | 40,557             |       | $                             | 2,071      |                                | $          | — |   | $ | 149,055 |   |
|                                     |       |                                 |       |                                |       |               |       |                          |       |                                |       |
| **Six months ended June 30, 2006**       | ** ** | ** **                           | ** ** | ** **                          | ** ** | ** **         | ** ** | ** **                    | ** ** | ** **                          | ** ** |
| Revenues from:                           |       |                                 |       |                                |       |               |       |                          |       |                                |       |
| External customers                       |       | $                                    | 1,271,931  |                                | $          | 742,918            |       | $                             | 19,407     |                                | $          | — |   | $ | 2,034,256 |   |
| Internal customers                       |       | 120                                  |       | 56                                  |       | —             |       | (176                          | )          | —                              |       |
| Total revenue                            |       | $                                    | 1,272,051  |                                | $          | 742,974            |       | $                             | 19,407     |                                | $          | (176 | ) | $ | 2,034,256 |   |
| Income (loss) from continuing operations |       | $                                    | 86,233     |                                | $          | 34,108             |       | $                             | (1,400     | )                                   | $          | — |   | $ | 118,941 |   |

 

14

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**11. Comprehensive Income**

 

The componentsof total comprehensive income are shown below:

 
| ** **                                                                                       | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Millions of dollars)**                                                              | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                                                       |       | $                                               | 18.5       |                                          | $          | 52.2 |   | $ | 104.2 |   | $ | 129.0 |   |
| Other comprehensive income:                                                                      |       |                                            |       |                                          |       |   |   |   |   |
| After-tax net unrealized gains related to  derivatives accounted for as hedges (see Note 8)      |       | 0.9                                             |       | 1.6                                           |       | 1.4 |   | — |   |
| After-tax net realized gains on derivative  transactions reclassified into earnings (see Note 8) |       | (0.3                                            | )          | (1.9                                          | )          | (0.7 | ) | (0.7 | ) |
| Other comprehensive income                                                                       |       | 0.6                                             |       | (0.3                                          | )          | 0.7 |   | (0.7 | ) |
| Comprehensive income                                                                             |       | $                                               | 19.1       |                                          | $          | 51.9 |   | $ | 104.9 |   | $ | 128.3 |   |

 

**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 June 30,** | ** ** |
|--------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                            | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(Thousands of dollars)**                         | ** ** | **Pension Benefits**                           | ** ** | **Postretirement Health   Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                         | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                 |       | $                                                   | 14,555     |   | $ | 14,380 |   | $ | 1,205 |   | $ | 1,479 |   |
| Interest cost                                                |       | 43,028                                              |       | 38,197 |   | 11,635 |   | 13,287 |   |
| Expected return on plan assets                               |       | (66,525                                             | )          | (67,551 | ) | (7,582 | ) | (7,110 | ) |
| Amortization of transition obligation                        |       | —                                              |       | — |   | 3,677 |   | 3,577 |   |
| Amortization of prior service cost (credit)                  |       | 6,487                                               |       | 7,421 |   | (545 | ) | (545 | ) |
| Amortization of net loss                                     |       | 4,555                                               |       | 4,165 |   | 2,106 |   | 5,875 |   |
| Net periodic benefit cost (credit)                           |       | 2,100                                               |       | (3,388 | ) | 10,496 |   | 16,563 |   |
| Credits not recognized due to the effects  of regulation     |       | 2,894                                               |       | 3,893 |   | — |   | — |   |
| Additional cost recognized due to the  effects of regulation |       | —                                              |       | — |   | 973 |   | 973 |   |
| Net benefit cost recognized for financial  reporting         |       | $                                                   | 4,994      |   | $ | 505 |   | $ | 11,469 |   | $ | 17,536 |   |
|                                                         |       |                                                |       |   |   |   |   |   |   |
| **PSCo**                                                     | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net periodic benefit cost                                    |       | $                                                   | 5,229      |   | $ | 4,196 |   | $ | 5,532 |   | $ | 9,041 |   |
| Additional cost recognized due to the  effects of regulation |       | —                                              |       | — |   | 973 |   | 973 |   |
| Net benefit cost recognized for financial  reporting         |       | $                                                   | 5,229      |   | $ | 4,196 |   | $ | 6,505 |   | $ | 10,014 |   |

** **
| ** **                                                   | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                   | ** ** | **2007**                                          | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(Thousands of dollars)**                         | ** ** | **Pension Benefits**                         | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                 |       | $                                                 | 31,040     |   | $ | 30,814 |   | $ | 2,906 |   | $ | 3,316 |   |
| Interest cost                                                |       | 82,626                                            |       | 77,706 |   | 25,238 |   | 26,470 |   |
| Expected return on plan assets                               |       | (132,416                                          | )          | (134,032 | ) | (15,200 | ) | (13,378 | ) |
| Amortization of transition obligation                        |       | —                                            |       | — |   | 7,288 |   | 7,222 |   |
| Amortization of prior service cost (credit)                  |       | 12,974                                            |       | 14,848 |   | (1,090 | ) | (1,090 | ) |
| Amortization of net loss                                     |       | 8,422                                             |       | 8,676 |   | 7,100 |   | 12,398 |   |
| Net periodic benefit cost (credit)                           |       | 2,646                                             |       | (1,988 | ) | 26,242 |   | 34,938 |   |
| Credits not recognized due to the effects  of regulation     |       | 5,574                                             |       | 6,318 |   | — |   | — |   |
| Additional cost recognized due to the  effects of regulation |       | —                                            |       | — |   | 1,946 |   | 1,946 |   |
| Net benefit cost recognized for financial  reporting         |       | $                                                 | 8,220      |   | $ | 4,330 |   | $ | 28,188 |   | $ | 36,884 |   |
| ** **                                                   | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **PSCo**                                                     | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net periodic benefit cost                                    |       | $                                                 | 9,560      |   | $ | 9,333 |   | $ | 14,331 |   | $ | 19,988 |   |
| Additional cost recognized due to the  effects of regulation |       | —                                            |       | — |   | 1,946 |   | 1,945 |   |
| Net benefit cost recognized for financial  reporting         |       | $                                                 | 9,560      |   | $ | 9,333 |   | $ | 16,277 |   | $ | 21,933 |   |

 

15

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** **

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

** **

Discussion of financialcondition and liquidity for PSCo is omitted per conditions set forth in generalinstructions H (1) (a) and (b) of Form 10-Q for 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.

 

Except for the historical statements contained in this report, thematters discussed in the following discussion and analysis are forward-lookingstatements that are subject to certain risks, uncertainties and assumptions.Such forward-looking statements are intended to be identified in this documentby the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “objective,”“outlook,” “plan,” “project,” “possible,” “potential,” “should” and similarexpressions. Actual results may vary materially. Factors that could causeactual results to differ materially include, but are not limited to: generaleconomic conditions, including the availability of credit and its impact oncapital expenditures and the ability of PSCo to obtain financing on favorableterms; business conditions in the energy industry; actions of credit ratingagencies; competitive factors, including the extent and timing of the entry ofadditional competition in the markets served by PSCo; unusual weather; effectsof geopolitical events, including war and acts of terrorism; state, federal andforeign legislative and regulatory initiatives that affect cost and investmentrecovery, have an impact on rates or have an impact on asset operation orownership; structures that affect the speed and degree to which competitionenters the electric and natural gas markets; costs and other effects of legaland administrative proceedings, settlements, investigations and claims,including the COLI settlement discussed below; actions of accounting regulatorybodies; the items described under Factors Affecting Results of ContinuingOperations; and the other risk factors listed from time to time by PSCo inreports filed with the SEC, including “Risk Factors” in Item 1A of PSCo’sForm 10-K for the year ended Dec. 31, 2006 and Exhibit 99.01 tothis report on Form 10-Q for the quarter ended June 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 Annual Report on Form 10-K for theyear ended Dec. 31, 2006. Commodity price and interest rate risks for PSCo aremitigated due to cost-based rate regulation. At June 30, 2007, there were nomaterial changes to the financial market risks that affect the quantitative andqualitative disclosures presented as of Dec. 31, 2006.

 

**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.

 

**RESULTSOF OPERATIONS**

 

PSCo’s netincome was approximately $104.2 million for the first six months of 2007,compared with approximately $129.0 million for the first six months of 2006. Discontinuedoperations include PSRI due to a settlement in principle and management’sdecision to surrender all COLI policies when the offer has been accepted inwriting by the government.

See Note 3 to theconsolidated financial statements for a further discussion of discontinuedoperations.

 

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

 

Electric fueland purchased power expenses tend to vary with changing retail and wholesalesales requirements and unit cost changes in fuel and purchased power. Due 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

 

16

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trading is notassociated with PSCo’s generation assets or the energy and capacity purchasedto serve native load. Short-term wholesale and commodity trading activities areconsidered part of the electric utility 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** | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|------------------------|------------|-------------------------|------------|
| ** **                                               | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **             | ** ** | ** **              | ** ** |
| **Six months ended June 30, 2007**                       | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **             | ** ** | ** **              | ** ** |
| Electric utility revenues (excluding  commodity trading) |       | $                           | 1,254      |                      | $          | 22                     |       | $                       | —     |   | $ | 1,276 |   |
| Electric fuel and purchased power                        |       | (700                        | )          | (18                       | )          | —                 |       | (718                    | )          |
| Commodity trading revenues                               |       | —                      |       | —                    |       | 82                     |       | 82                      |       |
| Commodity trading costs                                  |       | —                      |       | —                    |       | (83                    | )          | (83                     | )          |
| Gross margin before operating expenses                   |       | $                           | 554        |                      | $          | 4                      |       | $                       | (1         | ) | $ | 557 |   |
| Margin as a percentage of revenues                       |       | 44.2                        | %          | 18.2                      | %          | (1.2                   | )%         | 41.0                    | %          |
|                                                     |       |                        |       |                      |       |                   |       |                    |       |
| **Six months ended June 30, 2006**                       | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **             | ** ** | ** **              | ** ** |
| Electric utility revenues (excluding  commodity trading) |       | $                           | 1,254      |                      | $          | 13                     |       | $                       | —     |   | $ | 1,267 |   |
| Electric fuel and purchased power                        |       | (755                        | )          | (12                       | )          | —                 |       | (767                    | )          |
| Commodity trading revenues                               |       | —                      |       | —                    |       | 282                    |       | 282                     |       |
| Commodity trading costs                                  |       | —                      |       | —                    |       | (277                   | )          | (277                    | )          |
| Gross margin before operating expenses                   |       | $                           | 499        |                      | $          | 1                      |       | $                       | 5          |   | $ | 505 |   |
| Margin as a percentage of revenues                       |       | 39.8                        | %          | 7.7                       | %          | 1.8                    | %          | 32.6                    | %          |

 

The following summarizes thecomponents of the changes in base electric revenues and base electric marginfor the six months ended June 30:

 

# ***Base Electric Revenues***

 

| **(Millions of dollars)**     | ** ** | **2007 vs. 2006** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | ** **                  | ** ** |
| Purchased power and fuel cost recovery  |       | $                           | (62        | ) |
| Retail rate increase                    |       | 54                          |       |
| Sales growth (excluding weather impact) |       | 11                          |       |
| Transmission revenue                    |       | 5                           |       |
| Estimated impact of weather             |       | (4                          | )          |
| Sales mix and other                     |       | (4                          | )          |
| Total change in base electric revenues  |       | $                           | —     |   |

 

***Base Electric Margin***

 

| **(Millions of dollars)**     | ** ** | **2007 vs. 2006** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|
| ** **                              | ** ** | ** **                  | ** ** |
| Retail rate increase                    |       | $                           | 54         |   |
| Sales growth (excluding weather impact) |       | 11                          |       |
| Transmission revenue                    |       | 5                           |       |
| Purchased power and fuel cost recovery  |       | (10                         | )          |
| Estimated impact of weather             |       | (4                          | )          |
| Sales mix and other                     |       | (1                          | )          |
| Total increase in base electric margin  |       | $                           | 55         |   |

 

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

##### ** **

The following table details thechange 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 

 

17

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gas sales, which recognizesthe majority of the effects of changes in the cost of natural gas purchased forresale and adjusts revenues to reflect such changes in costs upon request byPSCo. Therefore, fluctuations in the cost of natural gas have little effect onnatural gas margin.

 

| ** **                               | ** ** | **Six Months ended June 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------------------|------------|
| **(Millions of dollars)**      | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| ** **                               | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Natural gas utility revenues             |       | $                                                 | 707        |   | $ | 743 |   |
| Cost of natural gas sold and transported |       | (527                                              | )          | (577 | ) |
| Natural gas utility margin               |       | $                                                 | 180        |   | $ | 166 |   |

 

The following summarizes thecomponents of the changes in natural gas revenues and margin for the six monthsended June 30:

 

***Natural Gas Revenues***

 

| **(Millions of dollars)**               | ** ** | **2007 vs. 2006** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | ** **                  | ** ** |
| Purchased gas adjustment clause recovery          |       | $                           | (51        | ) |
| Estimated impact of weather on firm sales  volume |       | 9                           |       |
| Sales mix                                         |       | 2                           |       |
| Transport and other                               |       | 4                           |       |
| Total decrease in natural gas revenues            |       | $                           | (36        | ) |

 

***Natural Gas Margin***

 

| **(Millions of dollars)**               | ** ** | **2007 vs. 2006** | ** ** |
|---------------------------------------------------|------------|-----------------------------|------------|
| ** **                                        | ** ** | ** **                  | ** ** |
| Estimated impact of weather on firm sales  volume |       | $                           | 9          |   |
| Sales mix                                         |       | 2                           |       |
| Transport and other                               |       | 3                           |       |
| Total increase in natural gas margin              |       | $                           | 14         |   |

 

**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 six months endedJune 30:

 

| **(Millions of dollars)** | ** ** | **2007 vs. 2006** | ** ** |
|-------------------------------------|------------|-----------------------------|------------|
| ** **                          | ** ** | ** **                  | ** ** |
| Higher donation costs               |       | $                           | 5          |   |
| Higher labor costs                  |       | 4                           |       |
| Higher consulting costs             |       | 3                           |       |
| Higher material costs               |       | 2                           |       |
| Lower employee benefit costs        |       | (4                          | )          |
| Total                               |       | $                           | 10         |   |

 

***Income Taxes -***Incometax expense for continuing operations increased by approximately $20.0 millionfor the first six months of 2007 compared with the first six months of 2006. Theincrease was primarily due to higher pretax income. The effective tax rate forcontinuing operations was 35.4 percent for the first six months of 2007,compared with 34.1 percent for the same period in 2006. The lower effective taxfor the first six months of 2006 was primarily due to the resolution of variousaudit issues in 2006. Excluding these benefits, the effective tax rate for thefirst six months of 2006 would have been 35.1 percent.

 

***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.

 

18

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***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 new regulationsto implement various aspects of the Energy Act. Since August 2005, theFERC has completed or initiated proceedings to modify its regulations on anumber of subjects. In addition to the previous disclosure in Item 1 ofPSCo’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, asrequired.

 

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 has emphasizedthat it intends to 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 s been authorized bythe 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 Renewable Energy Standard thatrequires PSCo to generate or purchase electricity from renewable resourcesequaling at least 10 percent of its retail sales by 2010, 15 percent of retailsales by 2015 and 20 percent of retail sales by 2020. The new law limits theincremental retail rate impact from these acquisitions to 2 percent. The newlegislation encourages favorable cost recovery for utility investment inrenewable resources, including the use of a rider mechanism and a return onconstruction 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, developing and construction or expansion oftransmission facilities and for current recovery through this rider of theutilities 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 with the CPUC its final report on its evaluationof the bids submitted in response to PSCo’s 2005 All Source request forproposal under PSCo’s 2003 LCP. In the report, PSCo 

 

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stated it intended to negotiate extensions to power purchase agreementsfor the output from three existing gas-fired facilities for a total of 465 MWof the 896 MW needed for 2013. The final report explained that PSCo wasintentionally 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 forapproval of a 2013 contingency plan. On April 2, 2007, PSCo filed its 2013contingency plan, which recommended addressing the remaining 2013 resource needin the 2007 LCP to be filed in October 2007. PSCo’s contingency plan alsolisted other options, which PSCo predicts will be less costly than acceptingthe uneconomic coal and natural gas bids.

 

On April 25, 2007, the CPUC asked its staff to provide the CPUC with areport that addresses at a minimum, whether the PSCo’s negotiations with coalbidders were made in good faith; any specific concerns the staff may have withrespect to PSCo’s evaluation of 2013 resources; and what changes to the CPUCrules or practices may be warranted in light of the staff’s conclusions.

 

The CPUC staff filed a report, which argues that the PSCo should havemade more concessions to the coal bidders in contract negotiations and PSCo’sconclusion that the coal bids were not economic was based upon flawed modeling.The CPUC staff recommends changes to the LCP rules that would require modelcontracts to be approved by the CPUC as part of the upfront LCP process andwould require the CPUC to use an independent evaluator to identify the utility’sleast cost resource portfolio. Staff further recommends restrictions onresource modeling practices and assumptions and on utility actions that departfrom an approved resource plan.

 

On May 25, 2007, PSCo amended its 2013 contingency plan to includeamendments to two power purchase agreements with Tri-State Generation andTransmission Association, Inc. under which PSCo would return Tri-Stategeneration capacity currently under contract to PSCo in the years 2009 through2012 and then recapture that capacity in the years 2013 through 2015. PSCoexplained this capacity swap would save PSCo an estimated $49 million on a netpresent value basis. PSCo still would meet the remaining 2013 need through its2007 LCP. The CPUC held hearings on the PSCo 2013 contingency plan on July 9,2007. The PSCo contingency plan was opposed by the CPUC trial staff and by aintervenor, but was supported by the Colorado Office of Consumer Counsel. Theopponents have asked for all 2013 resource acquisition decisions to be deferredto the 2007 LCP. A CPUC decision is not expected until mid-August 2007.

 

On July 3,2007, the CPUC issued an order soliciting comments to determine whether the LCPRules need to be changed on an emergency basis to govern utility filings inOctober 2007. PSCo filed comments responding to this order suggesting the LCPrules require revisions, but not the revisions suggested by the CPUC staffwhich include the recommendation of using an independent evaluator to assessall bids. CPUC action, if any, to issue emergency changes to the LCP rules isexpected to occur in August 2007.

 

**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, 

 

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including Regulatory Mattersand Commitments and Contingent Liabilities, which are hereby incorporated byreference. Reference also is made to Item 3 and Note 12 of PSCo’s Annual Reporton Form 10-K for the year ended Dec. 31, 2006 for a description of certainlegal proceedings presently 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 2006 AnnualReport on Form 10-K, we are providing below an update of the risk factorrelating to COLI.

 

***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. Should a settlement not be approved and the IRS ultimately prevailson this issue, our liquidity position and financial results could be materiallyadversely affected.***

*** ***

Our whollyowned subsidiary PSRI owns and manages permanent life insurance policies onsome of our employees, known as COLI. At various times, borrowings have beenmade against the cash values of these COLI policies and deductions taken on theinterest expense on these borrowings. The IRS has challenged the deductibilityof such interest expense deductions and has disallowed the deductions taken intax years 1993 through 1999.

 

InApril 2004, Xcel Energy filed a lawsuit against the U.S. government in the U.S.District Court for the District of Minnesota to establish its right to deductthe interest expense that had accrued during tax years 1993 and 1994 on policyloans related to its COLI policies that insured certain lives of PSCo employees.These policies are owned by PSRI, a wholly owned subsidiary of PSCo.

 

AfterXcel Energy filed this suit, the IRS sent three statutory notices of deficiencyof tax, penalty and interest for 1995 through 2002. Xcel Energy has filed U.S.Tax Court petitions challenging those notices. PSRI also continued to takedeductions for interest expense on policy loans for subsequent years. The totalexposure for the tax years in dispute and through 2007 is approximately $583million, which includes income tax, interest and potential penalties.

 

On June 19, 2007, a settlement in principlewas reached between Xcel Energy and representatives of the United States Governmentthat would resolve this dispute. The terms of the proposed settlement are asfollows:

 

•                  Xcel Energy would pay the IRS $64.4 million(or approximately $56 million, net, after tax) in full settlement of all of thegovernment’s claims for additional taxes, interest and penalties relating tothese COLI plans for tax years 1993-2007.

•                  Xcel Energy would further agree to claim noadditional deductions resulting from its COLI plans for any tax year after 2007and to surrender its policies when the offer has been accepted in writing bythe government.

•                  The government would permit Xcel Energy tosurrender these policies without incurring any tax liability on any gain fromthat surrender.

•                  This settlement requires final approval fromthe IRS and the Department of Justice (DOJ). There is no guarantee that suchapprovals will be obtained.

•                  Among other things, the settlement processrequires Xcel Energy to submit a written settlement offer setting forth thebasic terms and for the DOJ Tax Division and the IRS to review that offerbefore they decide to accept or reject it. Xcel Energy submitted thissettlement offer to the government on July 2, 2007.

•                  It is expected that a final decision on thesettlement will be reached during Xcel Energy’s third quarter of 2007.

 

Should the settlement not be approved and the IRS ultimately prevails,tax and interest payable through June 30, 2007, would reduce earnings byan estimated $450 million. Xcel Energy had received formal notification thatthe IRS would seek penalties. If penalties (plus associated interest) also areincluded, the total estimated exposure through June 30, 2007, is estimatedto be approximately $538 million.

 

**Item 6. Exhibits**

 

The followingExhibits are filed with this report:

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

 

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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 July 30, 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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