Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

# ***FORM 10-Q***

# *** ***

**(Mark One)**

 

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

 

**For the quarterly period ended March 31,2009**

** **

**or**

 

**o** TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OFTHE SECURITIES EXCHANGE ACT OF 1934

** **

**Commission File Number: 001-3280**

 

# ***PublicService Company of Colorado***

(Exact name of registrant as specified in itscharter)

 

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

 

**(303) 571-7511**

 (Registrant’s telephone number, including areacode)

 

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

 

Indicate by check mark whether the registrant has submitted electronicallyand posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 and RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files).                                     o Yes  o No

 

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

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

 

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

 

Indicate the number of shares outstanding of each of the issuer’sclasses of common stock, as of the latest practicable date.

 

| **Class**                      | ** ** | **Outstanding at April 30, 2009** | ** ** |
|--------------------------------|------------|----------------------------------------|------------|
| Common  Stock, $0.01 par value |       | 100 shares                             |       |

 

Public Service Company of Colorado meets the conditions set forth inGeneral Instruction H (1)(a) and (b) of Form 10-Q and istherefore filing this Form 10-Q with the reduced disclosure formatspecified in General Instruction H (2) to such Form 10-Q.

 

 

 

----

Tableof Contents

 

**TABLEOF CONTENTS**

** **
| **PART I - FINANCIAL INFORMATION**      | ** **                                                                                  | ** ** |
|----------------------------------------------|---------------------------------------------------------------------------------------------|------------|
|                                         |                                                                                        |
| Item l.                                      | Financial Statements (Unaudited)                                                            | 3          |
| Item 2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 18         |
| Item 4                                       | Controls and  Procedures                                                                    | 21         |
|                                         |                                                                                        |       |
| **PART II - OTHER  INFORMATION**        | ** **                                                                                  |
|                                         |                                                                                        |       |
| Item 1.                                      | Legal Proceedings                                                                           | 21         |
| Item 1A.                                     | Risk Factors                                                                                | 21         |
| Item 6.                                      | Exhibits                                                                                    | 22         |
|                                         |                                                                                        |       |
| **SIGNATURES**                               | 23                                                                                          |
|                                         |                                                                                        |
| Certifications Pursuant to  Section 302 |                                                                                        |       |
| Certifications Pursuant to  Section 906 |                                                                                        |       |
| Statement Pursuant to  Private Litigation    |                                                                                        |       |
|                                              |                                                                                             |            |  |

 

This Form 10-Qis filed by Public Service Company 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

----

Table of Contents

 

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

##### ** **

**Item 1. FINANCIAL STATEMENTS**

 

**PUBLIC SERVICE CO. OFCOLORADO AND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**

*(amountsin thousands of dollars)*

 
| ** **                                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| **Operating revenues**                                                                     |       |                                                 |       |   |   |
| Electric                                                                                   |       | $                                                    | 597,343    |   | $ | 654,496 |   |
| Natural gas                                                                                |       | 395,121                                              |       | 562,952 |   |
| Steam and other                                                                            |       | 10,014                                               |       | 11,030 |   |
| Total operating revenues                                                                   |       | 1,002,478                                            |       | 1,228,478 |   |
|                                                                                       |       |                                                 |       |   |   |
| **Operating expenses**                                                                     |       |                                                 |       |   |   |
| Electric fuel and purchased power                                                          |       | 307,269                                              |       | 369,503 |   |
| Cost of natural gas sold and transported                                                   |       | 282,436                                              |       | 442,091 |   |
| Cost of sales — steam and other                                                       |       | 4,008                                                |       | 4,201 |   |
| Other operating and maintenance expenses                                                   |       | 154,890                                              |       | 148,374 |   |
| Demand side management program expenses                                                    |       | 26,156                                               |       | 12,702 |   |
| Depreciation and amortization                                                              |       | 62,547                                               |       | 63,210 |   |
| Taxes (other than income taxes)                                                            |       | 23,189                                               |       | 23,550 |   |
| Total operating expenses                                                                   |       | 860,495                                              |       | 1,063,631 |   |
|                                                                                       |       |                                                 |       |   |   |
| **Operating income**                                                                       |       | 141,983                                              |       | 164,847 |   |
|                                                                                       |       |                                                 |       |   |   |
| Interest and other income, net                                                             |       | 869                                                  |       | 3,220 |   |
| Allowance for funds used during  construction — equity                                |       | 10,135                                               |       | 7,578 |   |
|                                                                                       |       |                                                 |       |   |   |
| **Interest charges and financing costs**                                                   |       |                                                 |       |   |   |
| Interest charges — includes other financing  costs of $1,386 and $1,424, respectively |       | 40,352                                               |       | 37,150 |   |
| Allowance for funds used during  construction — debt                                  |       | (4,962                                               | )          | (4,100 | ) |
| Total interest charges and financing costs                                                 |       | 35,390                                               |       | 33,050 |   |
|                                                                                       |       |                                                 |       |   |   |
| Income before income taxes                                                                 |       | 117,597                                              |       | 142,595 |   |
| Income taxes                                                                               |       | 39,309                                               |       | 48,291 |   |
| **Net income**                                                                             |       | $                                                    | 78,288     |   | $ | 94,304 |   |

 

**See Notes to Consolidated Financial Statements**

 

3

----

Table of Contents

 

**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

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

*(amountsin thousands of dollars)*

 
| ** **                                                                     | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| **Operating activities**                                                       |       |                                                 |       |   |   |
| Net income                                                                     |       | $                                                    | 78,288     |   | $ | 94,304 |   |
| Adjustments to reconcile net income to cash  provided by operating activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                                  |       | 71,248                                               |       | 78,046 |   |
| Deferred income taxes                                                          |       | 53,408                                               |       | 32,038 |   |
| Amortization of investment tax credits                                         |       | (624                                                 | )          | (784 | ) |
| Allowance for equity funds used during  construction                           |       | (10,135                                              | )          | (7,578 | ) |
| Net realized and unrealized hedging and  derivative transactions               |       | 30,384                                               |       | 27,757 |   |
| Changes in operating assets and  liabilities:                                  |       |                                                 |       |   |   |
| Accounts receivable                                                            |       | 55,175                                               |       | 5,582 |   |
| Accrued unbilled revenues                                                      |       | 161,123                                              |       | 91,262 |   |
| Inventories                                                                    |       | 51,251                                               |       | 37,261 |   |
| Prepayments and other                                                          |       | (12,559                                              | )          | (33,666 | ) |
| Accounts payable                                                               |       | (163,036                                             | )          | (45,159 | ) |
| Deferred electric energy costs                                                 |       | (93,906                                              | )          | (32,135 | ) |
| Net regulatory assets and liabilities                                          |       | 8,906                                                |       | (4,310 | ) |
| Other current liabilities                                                      |       | 7,504                                                |       | 30,129 |   |
| Change in other noncurrent assets                                              |       | 1,114                                                |       | (13,197 | ) |
| Change in other noncurrent liabilities                                         |       | (6,974                                               | )          | 700 |   |
| Net cash provided by operating activities                                      |       | 231,167                                              |       | 260,250 |   |
|                                                                           |       |                                                 |       |   |   |
| **Investing activities**                                                       |       |                                                 |       |   |   |
| Utility capital/construction expenditures                                      |       | (133,177                                             | )          | (145,823 | ) |
| Allowance for equity funds used during  construction                           |       | 10,135                                               |       | 7,578 |   |
| Investments in utility money pool                                              |       | —                                               |       | (199,900 | ) |
| Repayments from utility money pool                                             |       | —                                               |       | 300,500 |   |
| Other investments                                                              |       | —                                               |       | 29 |   |
| Net cash used in investing activities                                          |       | (123,042                                             | )          | (37,616 | ) |
|                                                                           |       |                                                 |       |   |   |
| **Financing activities**                                                       |       |                                                 |       |   |   |
| Repayment of short-term borrowings, net                                        |       | (40,000                                              | )          | (229,090 | ) |
| Borrowings under utility money pool  arrangement                               |       | 285,500                                              |       | 131,900 |   |
| Repayments under utility money pool  arrangement                               |       | (307,500                                             | )          | (60,600 | ) |
| Repayment of long-term debt, including  reacquisition premiums                 |       | (377                                                 | )          | (356 | ) |
| Capital contributions from parent                                              |       | 20,000                                               |       | — |   |
| Dividends paid to parent                                                       |       | (67,417                                              | )          | (68,453 | ) |
| Net cash used in financing activities                                          |       | (109,794                                             | )          | (226,599 | ) |
|                                                                           |       |                                                 |       |   |   |
| Net decrease in cash and cash equivalents                                      |       | (1,669                                               | )          | (3,965 | ) |
| Cash and cash equivalents at beginning of  year                                |       | 11,198                                               |       | 7,650 |   |
| Cash and cash equivalents at end of quarter                                    |       | $                                                    | 9,529      |   | $ | 3,685 |   |
|                                                                           |       |                                                 |       |   |   |
| Supplemental disclosure of cash flow  information:                             |       |                                                 |       |   |   |
| Cash paid for interest (net of amounts  capitalized)                           |       | $                                                    | 40,512     |   | $ | 27,579 |   |
| Cash received for income taxes (net of  refunds received)                      |       | 3,555                                                |       | 975 |   |
|                                                                           |       |                                                 |       |   |   |
| Supplemental disclosure of non-cash investing  transactions:                   |       |                                                 |       |   |   |
| Property, plant and equipment additions in  accounts payable                   |       | $                                                    | 9,129      |   | $ | 10,569 |   |

 

See Notes to Consolidated FinancialStatements

 

4

----

Table of Contents

 

**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**

*(amountsin thousands of dollars)*

 
| ** **                                                                            | ** ** | **March 31, 2009** | ** ** | **Dec. 31, 2008** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                       |       |                         |       |                        |       |
| Cash and cash equivalents                                                             |       | $                            | 9,529      |                        | $          | 11,198 |   |
| Accounts receivable, net                                                              |       | 312,134                      |       | 362,401                     |       |
| Accounts receivable from affiliates                                                   |       | 24,637                       |       | 29,545                      |       |
| Accrued unbilled revenues                                                             |       | 193,403                      |       | 354,526                     |       |
| Inventories                                                                           |       | 182,697                      |       | 233,948                     |       |
| Deferred income taxes                                                                 |       | 26,333                       |       | 64,181                      |       |
| Derivative instruments valuation                                                      |       | 24,223                       |       | 22,793                      |       |
| Prepayments and other                                                                 |       | 27,669                       |       | 15,110                      |       |
| Total current assets                                                                  |       | 800,625                      |       | 1,093,702                   |       |
|                                                                                  |       |                         |       |                        |       |
| Property, plant and equipment, net                                                    |       | 7,659,055                    |       | 7,592,111                   |       |
|                                                                                  |       |                         |       |                        |       |
| Other assets:                                                                         |       |                         |       |                        |       |
| Regulatory assets                                                                     |       | 898,664                      |       | 943,012                     |       |
| Derivative instruments valuation                                                      |       | 119,589                      |       | 119,534                     |       |
| Other                                                                                 |       | 44,982                       |       | 46,610                      |       |
| Total other assets                                                                    |       | 1,063,235                    |       | 1,109,156                   |       |
| Total assets                                                                          |       | $                            | 9,522,915  |                        | $          | 9,794,969 |   |
| ** **                                                                            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **LIABILITIES AND EQUITY**                                                            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                  |       |                         |       |                        |       |
| Current portion of long-term debt                                                     |       | $                            | 201,524    |                        | $          | 201,510 |   |
| Short-term debt                                                                       |       | —                       |       | 40,000                      |       |
| Borrowings under utility money pool  arrangement                                      |       | 19,000                       |       | 41,000                      |       |
| Accounts payable                                                                      |       | 303,359                      |       | 470,158                     |       |
| Accounts payable to affiliates                                                        |       | 25,743                       |       | 28,906                      |       |
| Deferred electric energy costs                                                        |       | 20,926                       |       | 113,276                     |       |
| Taxes accrued                                                                         |       | 90,417                       |       | 72,105                      |       |
| Dividends payable to parent                                                           |       | 66,816                       |       | 67,417                      |       |
| Derivative instruments valuation                                                      |       | 24,522                       |       | 28,776                      |       |
| Accrued interest                                                                      |       | 44,292                       |       | 50,542                      |       |
| Other                                                                                 |       | 74,434                       |       | 78,192                      |       |
| Total current liabilities                                                             |       | 871,033                      |       | 1,191,882                   |       |
|                                                                                  |       |                         |       |                        |       |
| Deferred credits and other liabilities:                                               |       |                         |       |                        |       |
| Deferred income taxes                                                                 |       | 1,225,167                    |       | 1,204,861                   |       |
| Deferred investment tax credits                                                       |       | 51,782                       |       | 52,406                      |       |
| Regulatory liabilities                                                                |       | 516,698                      |       | 514,445                     |       |
| Pension and employee benefit obligations                                              |       | 525,307                      |       | 527,264                     |       |
| Customers advances                                                                    |       | 285,788                      |       | 290,937                     |       |
| Derivative instruments valuation                                                      |       | 64,529                       |       | 62,126                      |       |
| Asset retirement obligations                                                          |       | 62,480                       |       | 61,505                      |       |
| Other                                                                                 |       | 21,676                       |       | 22,491                      |       |
| Total deferred credits and other  liabilities                                         |       | 2,753,427                    |       | 2,736,035                   |       |
|                                                                                  |       |                         |       |                        |       |
| Commitments and contingent liabilities                                                |       |                         |       |                        |       |
| Capitalization:                                                                       |       |                         |       |                        |       |
| Long-term debt                                                                        |       | 2,289,048                    |       | 2,289,251                   |       |
| Common stock — authorized 100 shares of  $0.01 par value; outstanding 100 shares |       | —                       |       | —                      |       |
| Additional paid in capital                                                            |       | 2,906,657                    |       | 2,886,657                   |       |
| Retained earnings                                                                     |       | 694,987                      |       | 683,516                     |       |
| Accumulated other comprehensive income                                                |       | 7,763                        |       | 7,628                       |       |
| Total common stockholder’s equity                                                |       | 3,609,407                    |       | 3,577,801                   |       |
| Total liabilities and equity                                                          |       | $                            | 9,522,915  |                        | $          | 9,794,969 |   |

 

See Notes to Consolidated FinancialStatements

 

5

----

Table of Contents

 

**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

** **

In the opinion of management, the accompanying unaudited consolidatedfinancial statements contain all adjustments necessary to present fairly, inaccordance with accounting principles generally accepted in the United Statesof America (GAAP), the financial position of PSCo and its subsidiaries as of March 31,2009 and Dec. 31, 2008; the results of its operations for the three monthsended March 31, 2009 and 2008; and its cash flows for the three monthsended March 31, 2009 and 2008.  Alladjustments are of a normal, recurring nature, except as otherwise disclosed.  The Dec. 31, 2008 balance sheetinformation has been derived from the audited 2008 financial statements.  These notes to the consolidated financialstatements have been prepared pursuant to the rules and regulations of theSEC for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financialstatements prepared in accordance with GAAP have been condensed or omittedpursuant to such rules and regulations. For further information, refer to the Consolidated Financial Statementsand notes thereto, included in the PSCo Annual Report on Form 10-K for theyear ended Dec. 31, 2008, filed with the SEC on March 2, 2009.  Due to the seasonality of electric andnatural gas sales of PSCo, quarterly results are not necessarily an appropriatebase from which to project annual results.

 

**1.****              Summary ofSignificant Accounting Policies**

 

Except to the extent updated or described below,the significant accounting policies set forth in Note 1 to the consolidatedfinancial statements in PSCo’s Annual Report on Form 10-K for the yearended Dec. 31, 2008, appropriately represent, in all material respects,the current status of accounting policies and are incorporated herein byreference.

 

***Reclassification —***Demandside management (DSM) program expenses werereclassified as a separate item. Previously these costs were included in depreciation and amortization onthe consolidated statements of income.  This reclassification did not have an impacton total operating expenses.

 

**2.****              Accounting Pronouncements**

 

***Recently Adopted***

 

***BusinessCombinations (Statement of Financial Accounting Standards (SFAS) No. 141(revised 2007)) —***In December 2007, theFinancial Accounting Standards Board (FASB) issued SFAS No. 141(R), whichestablishes principles and requirements for how an acquirer in a businesscombination recognizes and measures in its financial statements theidentifiable assets acquired, the liabilities assumed, and any noncontrollinginterest; recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase; and determines what informationto disclose to enable users of the financial statements to evaluate the natureand financial effects of the business combination. SFAS No. 141(R) isto be applied prospectively to business combinations for which the acquisitiondate is on or after the beginning of an entity’s fiscal year that begins on orafter Dec. 15, 2008. PSCo implemented SFAS No. 141(R) on Jan. 1,2009, and the implementation did not have a material impact on its consolidatedfinancial statements.

 

***NoncontrollingInterests in Consolidated Financial Statements, an Amendment of AccountingResearch Bulletin (ARB) No. 51 (SFAS No. 160) *****—** In December 2007, the FASB issued SFAS No. 160,which establishes accounting and reporting standards that require the ownershipinterest in subsidiaries held by parties other than the parent be clearlyidentified and presented in the consolidated balance sheets within equity, butseparate from the parent’s equity; the amount of consolidated net incomeattributable to the parent and the noncontrolling interest be clearlyidentified and presented on the face of the consolidated statement of earnings;and changes in a parent’s ownership interest while the parent retains its controllingfinancial interest in its subsidiary be accounted for consistently as equitytransactions. SFAS No. 160 was effective for fiscal years beginning on orafter Dec. 15, 2008. PSCo implemented SFAS No. 160 on Jan. 1,2009, and the implementation did not have a material impact on its consolidatedfinancial statements.

 

***Disclosures aboutDerivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133(SFAS No. 161)**—***In March 2008, the FASB issued SFAS No. 161, which is intended toenhance disclosures to help users of the financial statements better understandhow derivative instruments and hedging activities affect an entity’s financialposition, financial performance and cash flows. SFAS No. 161 amends and expands the disclosure requirements of SFASNo. 133, *Accounting for DerivativeInstruments and Hedging Activities*, to require disclosures includingobjectives and strategies for using derivatives, gains and losses on derivativeinstruments, and credit-risk-related contingent features in derivativecontracts.  SFAS No. 161 waseffective for financial statements issued for fiscal years and interim periodsbeginning after Nov. 15, 2008.  PSCoimplemented SFAS No. 161 on Jan. 1, 2009, and the implementation didnot have a material impact on its consolidated 

 

6

----

Table of Contents

 

financial statements.  Forfurther discussion and SFAS No. 161 required disclosures, see Note 8 tothe consolidated financial statements.

 

***Recently Issued***

 

***Employers’ Disclosures about PostretirementBenefit Plan Assets (FASB Staff Position (FSP) FAS 132(R)-1) —***In December 2008, the FASB issued FSPFAS 132(R)-1, which amends SFAS No. 132 (revised 2003), *Employers’ Disclosures about Pensions and OtherPostretirement Benefits,*to expand an employer’s requireddisclosures about plan assets of a defined benefit pension or otherpostretirement plan to include investment policies and strategies, majorcategories of plan assets, information regarding fair value measurements, andsignificant concentrations of credit risk. FSP FAS 132(R)-1 is effective for fiscal years ending after Dec. 15,2009.  PSCo does not expect the implementation of FSP FAS132(R)-1 to have a material impact on its consolidated financial statements.

 

***Interim Disclosuresabout Fair Value of Financial Instruments (FSP FAS 107-1 and AccountingPrinciples Board (APB) 28-1) —*** In April 2009, the FASB issuedFSP FAS 107-1 and APB 28-1, which amends SFAS No. 107*, Disclosures About Fair Value of FinancialInstruments*, and APB Opinion No. 28, *Interim Financial Reporting*, to require disclosuresregarding the fair value of financial instruments in interim financialstatements. In addition, entities are required to disclose the method andsignificant assumptions used to estimate the fair value of financialinstruments. FSP FAS 107-1 and APB 28-1 are effective for interim periodsending after June 15, 2009. PSCo does not expect the implementation of FSPFAS 107-1 and APB 28-1 to have a material impact on its consolidated financialstatements.

 

***Determining FairValue When the Volume and Level of Activity for the Asset or Liability HaveSignificantly Decreased and Identifying Transactions That Are Not Orderly (FSPFAS 157-4) —*** In April 2009, the FASB issued FSP FAS 157-4, which providesadditional guidance for estimating fair value in accordance with SFAS No. 157,*Fair Value Measurements*, when thevolume and level of market activity for an asset or liability havesignificantly decreased.  FSP FAS 157-4emphasizes that even if there has been a significant decrease in the volume andlevel of market activity for the asset or liability, fair value still representsthe exit price in an orderly transaction between market participants.  FSP FAS 157-4 is effective for interim andannual periods ending after June 15, 2009. PSCo does not expect the implementation of FSP FAS 157-4 to have amaterial impact on its consolidated financial statements.

 

***Recognition andPresentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2)—*** In April 2009,the FASB issued FSP FAS 115-2 and FAS 124-2, which changes the method fordetermining whether an other-than-temporary impairment exists for debt securities,and also requires additional disclosures regarding other-than-temporaryimpairments.  FSP FAS 115-2 and FAS 124-2is effective for interim and annual periods ending after June 15,2009.  PSCo does not expect theimplementation of FSP FAS 115-2 and FAS 124-2 to have a material impact on itsconsolidated financial statements.

 

**3.****              Selected BalanceSheet Data**

 
| **(Thousands of Dollars)** | ** ** | **March 31, 2009** | ** ** | **Dec. 31, 2008** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Accounts receivable, net:            |       |                         |       |                        |       |
| Accounts receivable                  |       | $                            | 341,468    |                        | $          | 391,596 |   |
| Less allowance for bad debts         |       | (29,334                      | )          | (29,195                     | )          |
|                                 |       | $                            | 312,134    |                        | $          | 362,401 |   |
| Inventories:                         |       |                         |       |                        |       |
| Materials and supplies               |       | $                            | 40,785     |                        | $          | 40,451 |   |
| Fuel                                 |       | 62,105                       |       | 41,456                      |       |
| Natural gas                          |       | 79,807                       |       | 152,041                     |       |
|                                 |       | $                            | 182,697    |                        | $          | 233,948 |   |
| Property, plant and equipment, net:  |       |                         |       |                        |       |
| Electric plant                       |       | $                            | 7,147,324  |                        | $          | 7,089,763 |   |
| Natural gas plant                    |       | 1,929,145                    |       | 1,914,565                   |       |
| Common and other property            |       | 753,690                      |       | 739,453                     |       |
| Construction work in progress        |       | 1,130,900                    |       | 1,086,627                   |       |
| Total property, plant and equipment  |       | 10,961,059                   |       | 10,830,408                  |       |
| Less accumulated depreciation        |       | (3,302,004                   | )          | (3,238,297                  | )          |
|                                 |       | $                            | 7,659,055  |                        | $          | 7,592,111 |   |

 

7

----

Table of Contents

 

**4.****              Income Taxes**

 

***Accounting forUncertainty in Income Taxes — an interpretation of FASB Statement No. 109***(FIN 48)************— PSCois a member of the Xcel Energy affiliated group that files consolidated incometax returns.  In the first quarter of 2008, the Internal Revenue Service(IRS) completed an examination of Xcel Energy’s federal income tax returns for2004 and 2005 (and research credits for 2003). The IRS did not propose anymaterial adjustments for those tax years. Tax year 2004 is the earliest openyear and the statute of limitations applicable to Xcel Energy’s 2004 federalincome tax return remains open until Dec. 31, 2009.  In the third quarter of 2008, the IRScommenced an examination of tax years 2006 and 2007. As of March 31, 2009,the IRS had not proposed any material adjustments to tax years 2006 and 2007.

 

As of March 31, 2009, PSCo’s earliest open tax year in which anaudit can be initiated by state taxing authorities under applicable statutes oflimitations is 2004.  There currently areno state income tax audits in progress.

 

The amount of unrecognized tax benefits was $10.9 million and $10.3million on March 31, 2009 and Dec. 31, 2008, respectively. These unrecognized tax benefit amounts were reduced by the tax benefitsassociated with net operating loss and tax credit carryovers of $3.3 millionand $5.8 million as of March 31, 2009 and Dec. 31, 2008,respectively.

 

The unrecognized tax benefit balance included $1.6 million and $1.4million of tax positions on March 31, 2009 and Dec. 31, 2008,respectively, which if recognized would affect the annual effective taxrate.  In addition, the unrecognized tax benefit balance included $9.3million and $8.9 million of tax positions on March 31, 2009 and Dec. 31,2008, respectively, for which the ultimate deductibility is highly certain butfor which there is uncertainty about the timing of such deductibility.  Achange in the period of deductibility would not affect the effective tax ratebut would accelerate the payment of cash to the taxing authority to an earlierperiod.

 

The increase in the unrecognized tax benefit balance of $0.6 millionfrom Dec. 31, 2008 to March 31, 2009, was due to the addition ofsimilar uncertain tax positions related to ongoing activity.  PSCo’samount of unrecognized tax benefits could significantly change in the next 12months as the IRS audit progresses and when state audits resume.  At this time, due to the uncertain nature ofthe audit process, it is not reasonably possible to estimate an overall rangeof possible change.

 

The liability for interest related to unrecognized tax benefits ispartially offset by the interest benefit associated with net operating loss andtax credit carryovers.  The amount of interest expense related tounrecognized tax benefits reported within interest charges in the first quarterof 2009 and the first quarter of 2008 was $0.1 million.  The liability forinterest related to unrecognized tax benefits was $0.5 million and $0.4 millionon March 31, 2009 and Dec. 31, 2008.

 

No amounts were accrued for penalties as of March 31, 2009 and Dec. 31,2008.

 

**5.****              Rate Matters**

 

Except to the extent noted below, the circumstances set forth in Note14 to the consolidated financial statements included in PSCo’s Annual Report onForm 10-K for the year ended Dec. 31, 2008 appropriately represent,in all material respects, the current status of other rate matters, and areincorporated herein by reference. The following section includes unresolvedproceedings that are material to PSCo’s financial position.

 

***Pendingand Recently Concluded Regulatory Proceedings — Colorado Public UtilitiesCommission (CPUC)***

*** ***

**Base Rate**

 

***PSCo Electric RateCase* —**In November 2008, PSCo filed arequest with the CPUC to increase Colorado electric rates by$174.7 million annually, or approximately 7.4 percent. The rate filing isbased on a 2009 forecast test-year, an electric rate base of $4.2 billion,a requested return on equity (ROE) of 11.0 percent and an equity ratio of58.08 percent.  PSCo’s requestincluded a return of approximately $40 million for construction work inprogress (CWIP) associated with incremental expenditures on the Comanche 3 unitsince Jan. 1, 2007 pursuant to the 2004 Colorado least cost plansettlement agreement (a return on expenditures prior to Jan. 1, 2007 forComanche 3 is included in existing rates). Under the settlement agreement, PSCo does not record allowance for fundsused during construction (AFDC) income for the months this return is actuallyreceived from customers.

 

In February 2009, parties filed answer testimony in the case.  The CPUC staff recommended an increase of$110 million based on a 10.37 percent ROE to be phased in with $70 millionbeginning in July and another $40 million in approximately January 2010.  The Office of Consumer Counsel (OCC)recommended a $3.8 million increase based on a historic test-year and a 9.75 

 

8

----

Table of Contents

 

percent ROE.  In March 2009,PSCo filed rebuttal testimony and revised its rate increase request to $159.3million to reflect updated data.  On April 10,2009, intervenors filed surrebuttal testimony. The CPUC staff increased their revenue deficiency to $132.9 millionbased on an authorized ROE to 10.71 percent and an equity ratio of 58percent.  The CPUC staff also recommendeda phase-in of rates with $70 million effective July 2009 and the remainderto be effective in January 2010. The OCC recommended an $11 million rate increase based on a historicyear and an authorized ROE of 10 percent.

 

On April 22, 2009, a settlement agreement with CPUC staff, theOCC, Colorado Energy Consumers (an association of some of Public Service’slarger commercial customers), CF&I Steel, LP d/b/a Rocky Mountain SteelMills, Wal-Mart Stores, Inc., Sam’s West, Inc., and Energy OutreachColorado, was filed with the CPUC.  Thesettlement provides for an overall $112.2 million increase in base rates, butdoes not provide for the specific resolution of many of the disputed issues suchas return on equity and capital structure. However, the settlement provides that incremental CWIP not included inexisting rates for the Comanche Unit 3 be removed from rate base and that PSCowould be allowed to continue to record AFDC income on this balance until theComanche Unit 3 is placed into service.

 

Hearings on the settlement began on April 24, 2009 and a finaldecision is expected in the summer of 2009. The settlement provides that parties support new rates to be effectiveon July 1, 2009.

 

***Pending and Recently Concluded RegulatoryProceedings — Federal Energy Regulatory Commission (FERC)***

*** ***

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

 

In an order issued in August 2007, the Court of Appeals remandedthe proceeding back to the FERC.  TheCourt of Appeals also indicated that the FERC should consider other rulingsaddressing overcharges in the California organized markets.  The FERC has yet to act on this order onremand.

 

**6.****              Commitments andContingent Liabilities**

 

Except asnoted below, the circumstances set forth in Notes 14 and 15 to the consolidatedfinancial statements in PSCo’s Annual Report on Form 10-K for the yearended Dec. 31, 2008 and Note 5 to the consolidated financial statements inthis Quarterly Report on Form 10-Q appropriately represent, in allmaterial respects, the current status of respective commitments and contingentliabilities and are incorporated herein by reference. The following areunresolved contingencies that are material to PSCo’s financial position.

 

**EnvironmentalContingencies**

 

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

 

***Site Remediation****—*PSCo must pay all or a portion of thecost to remediate sites where past activities of PSCo or other parties havecaused environmental contamination.  Environmentalcontingencies could arise from various situations including sites of formermanufactured gas plants operated by PSCo, its predecessors, or other entities;and third party sites, such as landfills, to which PSCo is alleged to be a PRPthat sent hazardous materials and wastes. At March 31, 2009, the liability for the cost of remediating thesesites was estimated to be $1.7 million, of which $1.0 million was considered tobe a current liability.

 

9

----

Table of Contents

 

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

 

***Asbestos Removal*—**Someof PSCo’s facilities contain asbestos. Most asbestos will remain undisturbed until the facilities that containit are demolished or renovated.  PSCo hasrecorded an estimate for final removal of the asbestos as an asset retirementobligation.  See additional discussion ofasset retirement obligations in Note 15 of the PSCo Annual Report on Form 10-Kfor the year ended Dec. 31, 2008. It may be necessary to remove some asbestos to perform maintenance ormake improvements to other equipment. The cost of removing asbestos as part of other work is immaterial and isrecorded as incurred as operating expenses for maintenance projects, capitalexpenditures for construction projects or removal costs for demolitionprojects.

 

***Other Environmental Requirements***

 

***EnvironmentalProtection Agency (EPA) Proposed Greenhouse Gas (GHG) Endangerment Finding***—On April 17, 2009, the EPA issued a proposed finding that GHGs threatenpublic health and welfare.  This findingwas in response to the U.S. Supreme Court’s decision in *Massachusetts v. EPA*, 549 U.S. 497 (2007),which held that GHGs are pollutants covered by the Clean Air Act and requiredthe EPA to determine whether emissions of GHGs from motor vehicles endangerpublic health or welfare.  The EPA’sproposed endangerment finding applies to the Clean Air Act’s mobile sourceprogram, and does not automatically trigger regulation under other provisionsof the Clean Air Act  that are applicableto stationary sources, such as power plants. As such, the proposed endangerment finding, in and of itself, does notimpact PSCo.

 

***Regional Haze Rules ***—In June 2005, the EPA finalized amendments to the July 1999 regionalhaze rules.  These amendments apply tothe provisions of the regional haze rule that require emission controls,known as best available retrofit technology (BART), for industrial facilitiesemitting air pollutants that reduce visibility by causing or contributing toregional haze.  Some PSCo generatingfacilities will be subject to BART requirements.

 

States are required to identify the facilities that will have to reducesulfur dioxide (SO2), nitrogen oxide (NOx) and particulate matter emissions underBART and then set BART emissions limits for those facilities.  In May 2006, the Colorado Air QualityControl Commission (AQCC) promulgated BART regulations requiring certain majorstationary sources to evaluate and install, operate and maintain BART to makereasonable progress toward meeting the national visibility goal.  PSCo estimates that the remaining cost forimplementation of BART emission control projects is approximately $141 millionin capital costs, which are included in the capital budget.  PSCo expects the cost of any required capitalinvestment will be recoverable from customers. Emissions controls are expected to be installed between 2011 and2014.  Colorado’s state implementationplan has been submitted to the EPA for approval. In January 2009, theColorado Air Pollution Control Division initiated a joint stakeholder processto evaluate what types of additional NOx controls may be necessary to meetreasonable progress goals for Colorado’s Class I areas, the new ozonestandard, and Rocky Mountain National Park nitrogen deposition reductiongoals.  The stakeholder process isexpected to continue throughout 2009.

 

***Clean Air Mercury Rule (CAMR)***—In March 2005, the EPA issued the CAMR, which regulated mercury emissionsfrom power plants.  In February 2008,the U.S. Court of Appeals for the District of Columbia vacated CAMR, whichimpacts federal CAMR requirements, but not necessarily state-only mercurylegislation and rules.  Colorado’smercury rule requires mercury emission controls capable of achieving 80percent capture be installed at the Pawnee Generating Station by 2012 and otherspecified units by 2014.  The expectedcost estimate for the Pawnee Generating Station is $2.3 million for capital costswith an annual estimate of $1.4 million for absorbent expense.  PSCo is evaluating the mercury emissioncontrols required to meet the state rule for the remaining units and iscurrently unable to provide a total capital cost estimate.

 

***Federal Clean Water Act —***Thefederal Clean Water Act requires the EPA to regulate cooling water intakestructures to assure that these structures reflect the best technologyavailable (BTA) for minimizing adverse environmental impacts.  In July 2004, the EPA published phase IIof the rule, which applies to existing cooling water intakes at steam-electricpower plants.  Several lawsuits werefiled against the EPA in the United States Court of Appeals for the SecondCircuit challenging the phase II rulemaking. In January 2007, the Court issued its decision and remanded the rule tothe EPA for reconsideration.  In June 2007,the EPA suspended the deadlines and referred any implementation to each state’sbest professional judgment until the EPA is able to fully respond to theCourt-ordered remand.  In April 2008,the U.S. Supreme Court granted limited review of the Second Circuit’s opinionto determine whether the EPA has the authority to consider costs and benefitsin assessing BTA.  On April 1, 2009,the U.S. Supreme Court issued a decision in *EntergyCorp. v. Riverkeeper, Inc.*, concluding that the EPA can, but isnot required to, consider a cost benefit analysis when establishing BTA.  The decision overturned only one aspect ofthe Court’s earlier opinion, and merely gives the EPA the discretion toconsider costs and benefits when it reconsiders its phase II rules.  Until the EPA fully responds to the Court’sdecision, the rule’s compliance requirements and associated deadlines willremain unknown.  As such, it is notpossible to provide an accurate estimate of the overall cost of this rulemakingat this time.

 

***Notice of Violation(NOV)*** — In July 2002, PSCo received an NOVfrom the EPA alleging violations of the New Source Review (NSR) requirements ofthe Clean Air Act (CAA) at the Comanche Station and Pawnee Station inColorado.  The NOV specifically allegesthat various maintenance, repair and replacement projects undertaken at theplants in the mid- to late-1990s 

 

10

----

Table of Contents

 

should have required a permit under the NSR process.  PSCo believes it has acted in full compliancewith the CAA and NSR process.  PSCobelieves that the projects identified in the NOV fit within the routinemaintenance, repair and replacement exemption contained within the NSRregulations or are otherwise not subject to the NSR requirements.  PSCo disagrees with the assertions containedin the NOV and intends to vigorously defend its position.

 

**Legal Contingencies**

** **

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

 

**Environmental Litigation**

** **

***Carbon Dioxide (CO******2)Emissions Lawsuit —***In July 2004, the attorneys general ofeight states and New York City, as well as several environmental groups, filedlawsuits in U.S. District Court in the Southern District of New York againstfive utilities, including Xcel Energy, to force reductions in CO2 emissions. The other utilities include American Electric Power Co.,Southern Co., Cinergy Corp. and Tennessee Valley Authority. The lawsuitsallege that CO2 emitted by each company is a public nuisanceas defined under state and federal common law because it has contributed toglobal warming. The lawsuits do not demand monetary damages. Instead, thelawsuits ask the court to order each utility to cap and reduce its CO2 emissions. In October 2004, Xcel Energyand the other defendants filed a motion to dismiss the lawsuit. OnSept. 19, 2005, the court granted the motion to dismiss on constitutionalgrounds. Plaintiffs filed an appeal to the U.S. Court of Appeals for the SecondCircuit. In June 2007, the Court of Appeals issued an order requesting theparties to file a letter brief regarding the impact of the United StatesSupreme Court’s decision in *Massachusetts v.EPA*, 127 S.Ct. 1438 (April 2, 2007) on the issues raised by theparties on appeal. Among other things, in its decision in *Massachusetts v. EPA*, the United StatesSupreme Court held that CO2 emissions are a “pollutant” subject toregulation by the EPA under the CAA. In July 2007, in response to therequest of the Court of Appeals, the defendant utilities filed a letter briefstating the position that the United States Supreme Court’s decision supportsthe arguments raised by the utilities on appeal. The Court of Appeals has takenthe matter under advisement and is expected to issue an opinion in due course.

 

***Comer vs. Xcel Energy Inc.et al. —***In April 2006, Xcel Energyreceived notice of a purported class action lawsuit filed in U.S. DistrictCourt in the Southern District of Mississippi. The lawsuit names more than 45oil, chemical and utility companies, including Xcel Energy, as defendants andalleges that defendants’ CO2 emissions “were a proximate and direct causeof the increase in the destructive capacity of Hurricane Katrina.” Plaintiffsallege in support of their claim, several legal theories, including negligenceand public and private nuisance and seek damages related to the loss resultingfrom the hurricane. Xcel Energy believes this lawsuit is without merit andintends to vigorously defend itself against these claims. In August 2007,the court dismissed the lawsuit in its entirety against all defendants onconstitutional grounds. In September 2007, plaintiffs filed a notice ofappeal to the U.S. Court of Appeals for the Fifth Circuit. Oral arguments werepresented to the Court of Appeals on Aug. 6, 2008. Pursuant to the court’sorder of Sept. 26, 2008, re-argument was held on Nov. 3, 2008. Noexplanation was given for the order. The Court of Appeals has taken the matterunder advisement.

 

***Native Village ofKivalina vs. Xcel Energy Inc. et al. —***InFebruary 2008, the City and Native Village of Kivalina, Alaska, filed alawsuit in U.S. District Court for the Northern District of California againstXcel Energy, the parent company of PSCo, and 23 other utilities, oil, gas andcoal companies. The suit was brought on behalf of approximately 400 nativeAlaskans, the Inupiat Eskimo, who claim that defendants’ emission of CO2 and other GHG contribute to global warming,which is harming their village. Plaintiffs claim that as a consequence, theentire village must be relocated at a cost of between $95 million and$400 million. Plaintiffs assert a nuisance claim under federal and statecommon law, as well as a claim asserting “concert of action” in whichdefendants are alleged to have engaged in tortious acts in concert with eachother. Xcel Energy was not named in the civil conspiracy claim. Xcel Energybelieves the claims asserted in this lawsuit are without merit and joined withother utility defendants in filing a motion to dismiss on June 30, 2008.The matter has now been fully briefed, with oral arguments set for May 19,2009. It is unknown when the court will render a decision.

 

11

----

Table of Contents

 

**Employment, Tort and Commercial Litigation**

** **

***Qwest vs. XcelEnergy Inc. —***In June 2004, anemployee of PSCo was seriously injured when a pole owned by Qwestmalfunctioned. In September 2005, the employee commenced an action againstQwest in Colorado state court in Denver. In April 2006, Qwest filed athird party complaint against PSCo based on terms in a joint pole use agreementbetween Qwest and PSCo. Pursuant to this agreement, Qwest asserted PSCo had anaffirmative duty to properly train and instruct its employees on pole safety,including testing the pole for soundness before climbing. In May 2006,PSCo filed a counterclaim against Qwest asserting Qwest had a duty to PSCo andan obligation under the contract to maintain its poles in a safe andserviceable condition. In May 2007, the matter was tried and the juryfound Qwest solely liable for the accident and this determination resulted inan award of damages in the amount of approximately $90 million. On June 16,2008, Qwest filed its appellate brief. The matter has been fully briefed by theparties and oral arguments were presented on Feb. 18, 2009. PSCo iscurrently awaiting a decision by the court.

 

***Mallon vs. XcelEnergy Inc. —***In August 2007, XcelEnergy, PSCo and PSR Investments, Inc. (PSRI) commenced a lawsuit inColorado state court against Theodore Mallon and TransFinancial Corporationseeking damages for, among other things, breach of contract and breach offiduciary duties associated with the sale of COLI policies. In May 2008,Xcel Energy, PSCo and PSRI filed an amended complaint that, among other things,adds Provident Life & Accident Insurance Company (Provident) as adefendant and asserts claims for breach of contract, unjust enrichment andfraudulent concealment against the insurance company. On June 23, 2008,Provident filed a motion to dismiss the complaint. On Oct. 22, 2008, thecourt granted Provident’s motion in part, but denied the motion with respect toa majority of the core causes of action asserted by PSCo, Xcel Energy andPSRI. In January 2009, the court granted defendant Mallon’s motion toamend his answer to, among other things, add a counterclaim for breach ofcontract and fraud against plaintiffs PSRI, PSCo and Xcel Energy. Xcel Energybelieves the counterclaims are without merit and filed a motion todismiss.  The court took this motionunder advisement.  It is uncertain when adecision will be issued.

 

***Cabin Creek HydroGenerating Station Accident —***In October 2007,employees of RPI Coatings Inc. (RPI), a contractor retained by PSCo, wereapplying an epoxy coating to the inside of a penstock at PSCo’s Cabin CreekHydro Generating Station near Georgetown, Colo. This work was being performedas part of a corrosion prevention effort. A fire occurred inside the penstock,which is a 4,000-foot long, 12-foot wide pipe used to deliver water from areservoir to the hydro facility. Four of the nine RPI employees working insidethe penstock were positioned below the fire and were able to exit the pipe. Theremaining five RPI employees were unable to exit the penstock. Rescue crewslocated the five employees a few hours later and confirmed their deaths. Theaccident was investigated by several state and federal agencies, including thefederal Occupational Safety and Health Administration (OSHA) and the U.S.Chemical Safety Board and the Colorado Bureau of Investigations.

 

In March 2008, OSHA proposed penalties totaling $189,900 fortwenty-two serious violations and three willful violations arising out of theaccident. In April 2008, Xcel Energy notified OSHA of its decision tocontest all of the proposed citations. On May 28, 2008, the Secretary ofLabor filed its complaint, and Xcel Energy subsequently filed its answer on June 17,2008. The Court ordered this proceeding stayed until March 3, 2009 and subsequentlyextended the stay to October 2009. A lawsuit has been filed in Coloradostate court in Denver on behalf of four of the deceased workers and four of theinjured workers (Foster, et. al. v. PSCo, et. al.). PSCo and Xcel Energy arenamed as defendants in that case, along with RPI Coatings and related companiesand the two other contractors who also performed work in connection with therelining project at Cabin Creek. A second lawsuit (Ledbetter et. al vs. PSCoet. al) has also been filed in Colorado state court in Denver on behalf ofthree employees allegedly injured in the accident. A third lawsuit was filed onbehalf of one of the deceased RPI workers in the California state court(Aguirre v. RPI, et. al.), naming PSCo, RPI, and the two other contractors asdefendants. The court subsequently dismissed the Aguirre lawsuit, and it isanticipated that the plaintiff will refile the lawsuit in Colorado. Xcel Energyand PSCo intend to vigorously defend themselves against the claims asserted inall three lawsuits.

 

**7.****             ****Short-Term Borrowings andOther Financing Instruments**

 

***CommercialPaper —***At Dec. 31, 2008, PSCo hadcommercial paper outstanding of $40.0 million with a weighted average interestrate of 1.55 percent.  PSCo had nocommercial paper outstanding at March 31, 2009.  At March 31, 2009 and Dec. 31,2008, PSCo had board approval to issue up to $700 million of commercial paper.

 

***Money Pool****** —***XcelEnergy has established a utility money pool arrangement that allows forshort-term loans between the utility subsidiaries and from the holding companyto the utility subsidiaries at market-based interest rates. The utility moneypool arrangement does not allow loans from the utility subsidiaries to theholding company.  PSCo has approval toborrow up to $250 million under the arrangement.  At March 31, 2009, and Dec. 31,2008, PSCo had money pool borrowings of $19.0 million and $41.0 million,respectively.  The weighted averageinterest rates at March 31, 2009 and Dec. 31, 2008, were 1.20 percentand 3.48 percent, respectively.

 

12

----

Table of Contents

 

**8.****              DerivativeInstruments**

 

Effective Jan. 1, 2009, PSCo adopted SFAS No. 161, whichrequires additional disclosures regarding why an entity uses derivative instruments,the volume of an entity’s derivative activities, the fair value amountsrecorded to the consolidated balance sheet for derivatives, the gains andlosses on derivative instruments included in the consolidated statement ofincome or deferred, and information regarding certain credit-risk-relatedcontingent features in derivative contracts.

 

PSCo enters into derivative instruments, including forward contracts,futures, swaps and options, for trading purposes and to reduce risk inconnection with changes in interest rates, utility commodity prices and vehiclefuel prices.  See additional informationpertaining to the valuation of derivative instruments in Note 9 to theconsolidated financial statements.

 

***Interest RateDerivatives —***PSCo enters into various instrumentsthat effectively fix the interest payments on certain floating rate debtobligations or effectively fix the yield or price on a specified benchmarkinterest rate for a specific period. These derivative instruments are designated as cash flow hedges foraccounting purposes.

 

At March 31, 2009, accumulated other comprehensive income relatedto interest rate derivatives included $1.5 million of net gains expected to bereclassified into earnings during the next 12 months as the related hedgedinterest transactions impact earnings.

 

***CommodityDerivatives —***PSCo enters into derivativeinstruments to manage variability of future cash flows from changes incommodity prices in its electric and natural gas operations, as well as fortrading purposes.  This could include thepurchase or sale of energy or energy-related products, natural gas to generateelectric energy, gas for resale, and vehicle fuel.

 

At March 31, 2009, PSCo had various utility commodity and vehiclefuel related contracts designated as cash flow hedges extending through December 2010.  Changes in the fair value of cash flowhedges are recorded in other comprehensive income or deferred as a regulatoryasset or liability.  The classificationas a regulatory asset or liability is based on the regulatory recoverymechanisms in place.  PSCo recordedimmaterial amounts to income related to the ineffectiveness of cash flow hedgesfor the three months ended March 31, 2009 and 2008.

 

At March 31, 2009, PSCo had $4.1 million of net losses in accumulatedother comprehensive income related to utility commodity and vehicle fuel cashflow hedges; $2.6 million is expected to be reclassified into earnings duringthe next 12 months as the hedged transactions occur.

 

PSCo alsoenters into derivative instruments that mitigate commodity price risk on behalfof electric and natural gas customers but are not designated as qualifyinghedging transactions.  Changes in thefair value of these derivative instruments are deferred as a regulatory assetor liability, based on the regulatory recovery mechanisms in place.

 

Additionally, PSCoenters into commodity derivative instruments for trading purposes not directlyrelated to commodity price risks associated with serving its electric andnatural gas customers.  Changes in thefair value of these commodity derivatives are recorded in income.

 

PSCo had noderivative instruments designated as fair value hedges during the three monthsended March 31, 2009, and as such, had no gains or losses from fair valuehedges or related hedged transactions for the period.

 

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

*** ***
| ** **                           | ** ** | **March 31, 2009**                               | ** ** | **Dec. 31, 2008**                                | ** ** |
|--------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **Derivative  Instruments  Valuation –  Assets** | ** ** | **Derivative  Instruments  Valuation -  Liabilities** | ** ** | **Derivative  Instruments  Valuation -  Assets** | ** ** | **Derivative  Instruments  Valuation -  Liabilities** | ** ** |
| Long term purchased power agreements |       | $                                                          | 132,686    |                                                       | $          | 64,223 |   | $ | 137,334 |   | $ | 66,986 |   |
| Commodity derivatives                |       | 11,126                                                     |       | 24,828                                                     |       | 4,993 |   | 23,916 |   |
| Total                                |       | $                                                          | 143,812    |                                                       | $          | 89,051 |   | $ | 142,327 |   | $ | 90,902 |   |

 

13

----

Table of Contents

 

In 2003, as a result of FASBStatement 133 Implementation Issue No. C20, PSCo began recording severallong-term purchased power agreements at fair value due to accountingrequirements related to underlying price adjustments.  As these purchases are recovered throughnormal regulatory recovery mechanisms in the respective jurisdictions, thechanges in fair value for these contracts were offset by regulatory assets andliabilities.  During 2006, PSCo qualifiedthese contracts under the normal purchase exception.  Based on this qualification, the contractsare no longer adjusted to fair value and the previous carrying value of thesecontracts will be amortized over the remaining contract lives along with theoffsetting regulatory assets and liabilities.

 

***Financial Impact ofQualifying Cash Flow Hedges —***The impact ofqualifying interest rate and vehicle fuel cash flow hedges on PSCo’saccumulated other comprehensive income, included as a component of commonstockholder’s equity, is detailed in the following table:

 
| ** **                                                                                   | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Thousands of Dollars)**                                                         | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Accumulated other comprehensive income  related to cash flow hedges at Jan. 1           |       | $                                                    | 7,628      |   | $ | 12,447 |   |
| After-tax net unrealized gains (losses)  related to derivatives accounted for as hedges      |       | 13                                                   |       | (26 | ) |
| After-tax net realized (gains) losses on  derivative transactions reclassified into earnings |       | 122                                                  |       | (384 | ) |
| Accumulated other comprehensive income  related to cash flow hedges at March 31         |       | $                                                    | 7,763      |   | $ | 12,037 |   |

 

The followingtable details the fair value of derivatives recorded to derivative instrumentsvaluation in the consolidated balance sheet, by category:

 
| ** **                                  | ** ** | **March 31, 2009** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|
| ** **                                  | ** ** | ** **                   | ** ** | ** ** | ** ** | **Derivative** | ** ** |
| ** **                                  | ** ** | ** **                   | ** ** | **Counterparty** | ** ** | **Instruments** | ** ** |
| **(Thousands of Dollars)**        | ** ** | **Fair Value**               | ** ** | **Netting (a)** | ** ** | **Valuation** | ** ** |
| ** **                                  | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Current derivative assets**               |       |                         |       |   |   |   |   |
| Derivatives designated as cash flow hedges: |       |                         |       |   |   |   |   |
| Natural gas commodity                       |       | $                            | 323        |   | $ | (6 | ) | $ | 317 |   |
| Other derivative instruments:               |       |                         |       |   |   |   |   |
| Trading commodity                           |       | 13,499                       |       | (8,188 | ) | 5,311 |   |
| Total current derivative assets             |       | $                            | 13,822     |   | $ | (8,194 | ) | $ | 5,628 |   |
| ** **                                  | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Noncurrent derivative assets**            |       |                         |       |   |   |   |   |
| Other derivative instruments:               |       |                         |       |   |   |   |   |
| Trading commodity                           |       | $                            | 4,003      |   | $ | 1,417 |   | $ | 5,420 |   |
| Natural gas commodity                       |       | 78                           |       | — |   | 78 |   |
| Total noncurrent derivative assets          |       | $                            | 4,081      |   | $ | 1,417 |   | $ | 5,498 |   |
| ** **                                  | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Current derivative liabilities**          |       |                         |       |   |   |   |   |
| Derivatives designated as cash flow hedges: |       |                         |       |   |   |   |   |
| Natural gas commodity                       |       | $                            | 1,974      |   | $ | (672 | ) | $ | 1,302 |   |
| Vehicle fuel and other commodity            |       | 2,773                        |       | — |   | 2,773 |   |
|                                        |       | 4,747                        |       | (672 | ) | 4,075 |   |
| Other derivative instruments:               |       |                         |       |   |   |   |   |
| Trading commodity                           |       | 12,488                       |       | (11,878 | ) | 610 |   |
| Natural gas commodity                       |       | 18,516                       |       | (9,730 | ) | 8,786 |   |
|                                        |       | 31,004                       |       | (21,608 | ) | 9,396 |   |
| Total current derivative liabilities        |       | $                            | 35,751     |   | $ | (22,280 | ) | $ | 13,471 |   |
| ** **                                  | ** ** | ** **                   | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Noncurrent derivative liabilities**       |       |                         |       |   |   |   |   |
| Derivatives designated as cash flow hedges: |       |                         |       |   |   |   |   |
| Vehicle fuel and other commodity            |       | $                            | 1,665      |   | $ | — |   | $ | 1,665 |   |
| Other derivative instruments:               |       |                         |       |   |   |   |   |
| Trading commodity                           |       | 2,848                        |       | 1,417 |   | 4,265 |   |
| Natural gas commodity                       |       | 5,427                        |       | — |   | 5,427 |   |
|                                        |       | 8,275                        |       | 1,417 |   | 9,692 |   |
| Total noncurrent derivative liabilities     |       | $                            | 9,940      |   | $ | 1,417 |   | $ | 11,357 |   |

 

----

(a)     FASB Interpretation No. 39*Offsetting of Amounts Relating to CertainContracts*, as amended by FASB Staff Position FIN 39-1 *Amendment of FASB*

 

14

----

Table of Contents

 

*Interpretation No. 39*,permits the netting of receivables and payables for derivatives and relatedcollateral amounts when a legally enforceable master netting agreement existsbetween PSCo and a counterparty.  Amaster netting agreement is an agreement between two parties who have multiplecontracts with each other that provides for the net settlement of all contractsin the event of default on or termination of any one contract.

 

The following tabledetails the impact of derivative activity during the three months ended March 31,2009, on other comprehensive income, regulatory assets and liabilities, andincome:

 
| ** **                                   | ** ** | **Fair Value Changes Recognized  During the Period in:** | ** ** | **Pre-Tax Amounts Reclassified  into Income  During the Period from:** | ** ** | **Pre-Tax Gains  (Losses)** | ** ** |
|----------------------------------------------|------------|----------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **Other**                                                | ** ** | **Regulatory**                                                         | ** ** | **Other**                   | ** ** | **Regulatory** | ** ** | **Recognized** | ** ** |
| ** **                                   | ** ** | **Comprehensive**                                        | ** ** | **Assets and**                                                         | ** ** | **Comprehensive**           | ** ** | **Assets and** | ** ** | **During the Period** | ** ** |
| **(Thousands  of Dollars)**                  | ** ** | **Income (Loss)**                                        | ** ** | **Liabilities**                                                        | ** ** | **Income (Loss)**           | ** ** | **Liabilities** | ** ** | **in Income** | ** ** |
| Derivatives designated as cash  flow hedges: |       |                                                     |       |                                                                   |       |                        |       |   |   |   |   |
| Interest rate                                |       | $                                                        | —     |                                                                   | $          | —                      |       | $ | (592 | )(a) | $ | — |   | $ | — |   |
| Natural gas commodity                        |       | —                                                   |       | (15,681                                                                | )          | —                      |       | 65,700 | (c) | (22,243) | (c) |
| Vehicle fuel and other commodity             |       | 20                                                       |       | —                                                                 |       | 790                         | (d)        | — |   | — |   |
|                                         |       | $                                                        | 20         |                                                                   | $          | (15,681                     | )          | $ | 198 |   | $ | 65,700 |   | $ | 22,243 |   |
|                                         |       |                                                     |       |                                                                   |       |                        |       |   |   |   |   |
| Other derivative instruments:                |       |                                                     |       |                                                                   |       |                        |       |   |   |   |   |
| Trading commodity                            |       | $                                                        | —     |                                                                   | $          | —                      |       | $ | — |   | $ | — |   | $ | 1,409 | (b) |
| Natural gas commodity                        |       | —                                                   |       | (14,646                                                                | )          | —                      |       | 15 | (c) | — |   |
|                                         |       | $                                                        | —     |                                                                   | $          | (14,646                     | )          | $ | — |   | $ | 15 |   | $ | 1,409 |   |
|                                              |            |                                                          |            |                                                                        |            |                             |            |  |  |  |  |  |  |  |  |  |  |

 

----

(a)          Recorded to interestcharges.

(b)         Recorded to electric operating revenues.

(c)          Recorded to cost ofnatural gas sold and transported; these derivative settlement gains and lossesare shared with natural gas customers through purchased natural gascost-recovery mechanisms, and reclassified out of income as regulatory assets or liabilities, asappropriate.

(d)         Recordedto other operating and maintenance expenses.

 

At March 31,2009, commodity derivatives recorded to derivative instruments valuationincluded derivative contracts with gross notional amounts of approximately4,118,000 megawatt (MW) hours of electricity, 22,466,000 MMBtu of natural gas,and 2,401,000 gallons of vehicle fuel. These amounts reflect the gross notional amounts of futures andforwards, and are not reflective of net positions in the underlyingcommodities.  Notional amounts foroptions are also included on a gross basis, but are weighted for theprobability of exercise.

 

***Credit Related Contingent Features******—***Contract provisionsof PSCo’s derivative instruments may require the posting of collateral orsettlement of the contracts for various reasons, including if PSCo is unable tomaintain its credit rating.  If thecredit rating of PSCo at March 31, 2009 were downgraded below investmentgrade, contracts underlying $2.6 million of derivative instruments in aliability position would have required PSCo to post collateral or settle thecontracts, which would have resulted in payments to applicable counterpartiesof $2.6 million.  At March 31, 2009,there was no collateral posted on these specific contracts.

 

Certain of PSCo’sderivative instruments are also subject to contract provisions that containadequate assurance clauses.  Theseprovisions allow counterparties to seek performance assurance, including cashcollateral, in the event that PSCo’s ability to fulfill its contractualobligations is reasonably expected to be impaired.  As of March 31, 2009, PSCo had nocollateral posted related to adequate assurance clauses in derivativecontracts.

 

**9.****              Fair ValueMeasurements**

 

**Effective Jan. 1, 2008, PSCo adopted *Fair Value Measurements* (SFAS No. 157)for recurring fair value measurements. SFAS No. 157 provides a single definition of fair value andrequires enhanced disclosures about assets and liabilities measured at fairvalue. SFAS No. 157 establishes a hierarchal framework for disclosing theobservability of the inputs utilized in measuring assets and liabilities atfair value. The three levels defined by the SFAS No. 157 hierarchy andexamples of each level are as follows:**

** **

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

 

15

----

Table of Contents

 

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

 

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

 

PSCo continuously monitors the creditworthiness of the counterpartiesto its commodity derivative contracts and assesses each counterparty’s abilityto perform on the transactions set forth in the contracts.  Given this assessment, as well an assessmentof the impact of PSCo’s own credit risk when determining the fair value ofcommodity derivative liabilities, the impact of considering credit risk wasimmaterial to the fair value of commodity derivative assets and liabilitiespresented in the consolidated balance sheets.

 

The following tables present, for each of the SFAS No. 157hierarchy levels, PSCo’s assets and liabilities that are measured at fair valueon a recurring basis:

 
| ** **                           | ** ** | **March 31, 2009** | ** ** |
|--------------------------------------|------------|-------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **Level 1**        | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Counterparty  Netting** | ** ** | **Net Balance** | ** ** |
| Commodity derivative assets          |       | $                       | —     |   | $ | 14,070 |   | $ | 3,833 |   | $ | (6,777 | ) | $ | 11,126 |   |
| Commodity derivative liabilities     |       | —                  |       | 44,006 |   | 1,685 |   | (20,863 | ) | 24,828 |   |
|                                      |            |                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                           | ** ** | **Dec. 31, 2008** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **Level 1**       | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Counterparty  Netting** | ** ** | **Net Balance** | ** ** |
| Commodity derivative assets          |       | $                      | —     |   | $ | 12,607 |   | $ | 1,358 |   | $ | (8,972 | ) | $ | 4,993 |   |
| Commodity derivative liabilities     |       | —                 |       | 55,935 |   | 1,384 |   | (33,403 | ) | 23,916 |   |
|                                      |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**The following table presents the changes inLevel 3 net commodity derivatives for the three months ended March 31:**

 
| **(Thousands of Dollars)**                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------------------------|------------|----------|------------|----------|------------|
| Balance Jan. 1                                    |       | $        | (26        | )        | $          | 4,121 |   |
| Purchases, issuances, and settlements, net             |       | (353     | )          | (1,330   | )          |
| Gains (losses) recognized in earnings                  |       | 2,465    |       | (242     | )          |
| Gains recognized as regulatory assets and  liabilities |       | 62       |       | —   |       |
| Balance March 31                                  |       | $        | 2,148      |     | $          | 2,549 |   |

 

Gains on Level3 commodity derivatives recognized in earnings for the three months ended March 31,2009, include $2.5 million of net unrealized gains relating to commodityderivatives held at March 31, 2009. Losses on Level 3 commodity derivatives recognized in earnings for thethree months ended March 31, 2008, include $0.3 million of net unrealizedlosses relating to commodity derivatives held at March 31, 2008.  Realized and unrealized gains and losses oncommodity trading activities are included in electric revenues.  Realized and unrealized gains and losses onshort-term wholesale activities reflect the impact of regulatory recovery andare deferred as regulatory assets and liabilities.

 

**10.****               Detail of Interestand Other Income (Expenses), Net**

 

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

 
| ** **                                       | ** ** | **Three months ended March 31,** | ** ** |
|--------------------------------------------------|------------|-------------------------------------------------|------------|
| **(Thousands of Dollars)**             | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| Interest income                                  |       | $                                               | 467        |   | $ | 2,227 |   |
| Other non-operating income                       |       | 354                                             |       | 577 |   |
| Insurance policy income                          |       | 125                                             |       | 416 |   |
| Other non-operating expenses                     |       | (77                                             | )          | — |   |
| Total interest and other income (expenses),  net |       | $                                               | 869        |   | $ | 3,220 |   |

 

16

----

Table of Contents

 

**11.****               Segment Information**

 

PSCo has two reportablesegments, regulated electric and regulated natural gas. Commodity tradingoperations are not a reportable segment and commodity trading results areincluded in the regulated electric segment.

 
| **(Thousands of Dollars)**       | ** ** | **Regulated  Electric** | ** ** | **Regulated  Natural  Gas** | ** ** | **All  Other** | ** ** | **Reconciling  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|----------------|------------|-------------------------------|------------|-------------------------|------------|
| **Three months ended March 31, 2009** |       |                    |       |                        |       |           |       |                          |       |                    |       |
| Revenues from:                             |       |                    |       |                        |       |           |       |                          |       |                    |       |
| External customers                         |       | $                       | 597,343    |                        | $          | 395,121        |       | $                             | 10,014     |                    | $          | — |   | $ | 1,002,478 |   |
| Internal customers                         |       | 93                      |       | 31                          |       | —         |       | (124                          | )          | —                  |       |
| Total revenues                             |       | $                       | 597,436    |                        | $          | 395,152        |       | $                             | 10,014     |                    | $          | (124 | ) | $ | 1,002,478 |   |
| Segment net income                         |       | $                       | 42,311     |                        | $          | 31,239         |       | $                             | 4,738      |                    | $          | — |   | $ | 78,288 |   |
|                                       |       |                    |       |                        |       |           |       |                          |       |                    |       |
| **Three months ended March 31, 2008** |       |                    |       |                        |       |           |       |                          |       |                    |       |
| Revenues from:                             |       |                    |       |                        |       |           |       |                          |       |                    |       |
| External customers                         |       | $                       | 654,496    |                        | $          | 562,952        |       | $                             | 11,030     |                    | $          | — |   | $ | 1,228,478 |   |
| Internal customers                         |       | 78                      |       | 33                          |       | —         |       | (111                          | )          | —                  |       |
| Total revenues                             |       | $                       | 654,574    |                        | $          | 562,985        |       | $                             | 11,030     |                    | $          | (111 | ) | $ | 1,228,478 |   |
| Segment net income                         |       | $                       | 51,930     |                        | $          | 38,753         |       | $                             | 3,621      |                    | $          | — |   | $ | 94,304 |   |

 

**12.****               ComprehensiveIncome**

 

The componentsof total comprehensive income are shown below:

 
| ** **                                                                                   | ** ** | **Three months ended March 31,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(Thousands of Dollars)**                                                         | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| Net income                                                                                   |       | $                                               | 78,288     |   | $ | 94,304 |   |
| Other comprehensive income:                                                                  |       |                                            |       |   |   |
| After-tax net unrealized gains (losses)  related to derivatives accounted for as hedges      |       | 13                                              |       | (26 | ) |
| After-tax net realized losses (gains) on  derivative transactions reclassified into earnings |       | 122                                             |       | (384 | ) |
| Other comprehensive income (loss)                                                            |       | 135                                             |       | (410 | ) |
| Comprehensive income                                                                         |       | $                                               | 78,423     |   | $ | 93,894 |   |

 

17

----

Tableof Contents

 

**13.    BenefitPlans 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(Credit)**

 
| ** **                                                                                     | ** ** | **Three months ended March 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2009**                                             | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **(Thousands of Dollars)**                                                           | ** ** | **Pension Benefits**                            | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel  Energy Inc.**                                                                          | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                                                   |       | $                                                    | 15,986     |   | $ | 16,773 |   | $ | 1,276 |   | $ | 1,464 |   |
| Interest cost                                                                                  |       | 41,849                                               |       | 40,583 |   | 12,156 |   | 12,546 |   |
| Expected return on plan assets                                                                 |       | (63,360                                              | )          | (68,472 | ) | (5,394 | ) | (7,500 | ) |
| Amortization of transition obligation                                                          |       | —                                               |       | — |   | 3,496 |   | 3,644 |   |
| Amortization of prior service cost (credit)                                                    |       | 6,155                                                |       | 5,166 |   | (652 | ) | (544 | ) |
| Amortization of net loss                                                                       |       | 2,929                                                |       | 2,859 |   | 4,885 |   | 2,718 |   |
| Net periodic benefit cost (credit)                                                             |       | 3,559                                                |       | (3,091 | ) | 15,767 |   | 12,328 |   |
| (Cost) credits not recognized and  additional cost recognized due to the effects of regulation |       | (487                                                 | )          | 2,592 |   | 973 |   | 973 |   |
| Net benefit cost (credit) recognized for  financial reporting                                  |       | $                                                    | 3,072      |   | $ | (499 | ) | $ | 16,740 |   | $ | 13,301 |   |
|                                                                                           |       |                                                 |       |   |   |   |   |   |   |
| **PSCo**                                                                                       | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net periodic benefit cost                                                                      |       | $                                                    | 3,761      |   | $ | 2,665 |   | $ | 9,574 |   | $ | 6,997 |   |
| Additional cost recognized due to the  effects of regulation                                   |       | —                                               |       | — |   | 973 |   | 973 |   |
| Net benefit cost recognized for financial  reporting                                           |       | $                                                    | 3,761      |   | $ | 2,665 |   | $ | 10,547 |   | $ | 7,970 |   |

 

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

** **

Discussion of financialcondition and liquidity for PSCo is omitted per conditions set forth in generalinstructions H (1) (a) and (b) of Form 10-Q for whollyowned subsidiaries.  It is replaced withmanagement’s narrative analysis of the results of operations set forth ingeneral 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 PSCo’s financial condition, results of operations and cashflows during the periods presented, or are expected to have a material impactin the future. It should be read in conjunction with the accompanying unauditedfinancial statements and the related notes to the consolidated financialstatements.  Due to the seasonality ofPSCo’s electric and natural gas sales, such interim results are not necessarilyan appropriate base from which to project annual results

 

Except for thehistorical statements contained in this report, the matters discussed in thefollowing discussion and analysis are forward-looking statements that aresubject to certain risks, uncertainties and assumptions. Such forward-lookingstatements are intended to be identified in this document by the words “anticipate,”“believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,”“project,” “possible,” “potential,” “should” and similar expressions. Actualresults may vary materially. Forward-looking statements speak only as of thedate they are made, and we do not undertake any obligation to update them toreflect changes that occur after that date. Factors that could cause actual results to differ materially include,but are not limited to: general economic conditions, including the availabilityof credit and its impact on capital expenditures and the ability of PSCo andits subsidiaries to obtain financing on favorable terms; business conditions inthe energy industry; actions of credit rating agencies; competitive factors,including the extent and timing of the entry of additional competition in themarkets served by PSCo and its subsidiaries; unusual weather; effects ofgeopolitical events, including war and acts of terrorism; state, federal andforeign legislative and regulatory initiatives that affect cost and investmentrecovery, have an impact on rates or have an impact on asset operation orownership or impose environmental compliance conditions; structures that affectthe speed and degree to which competition enters the electric and natural gasmarkets; costs and other effects of legal and administrative proceedings,settlements, investigations and claims; actions of accounting regulatorybodies; the items described under 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’s Form 10-Kfor the year ended Dec. 31, 2008, and Exhibit 99.01 to this 

 

18

----

Tableof Contents

 

Quarterly Reporton Form 10-Q for the quarter ended March 31, 2009.

 

**MarketRisks**

 

PSCo is exposed to market risks, including changes in commodity pricesand interest rates, as disclosed in Item 7A, Quantitative and QualitativeDisclosures About Market Risk, in its Annual Report on Form 10-K for theyear ended Dec. 31, 2008.  Commodityprice and interest rate risks for PSCo are mitigated in most jurisdictions dueto cost-based rate regulation.

 

Continued distress in the financial markets may alsoimpact the fair value of the debt and equity securities in pension andpostretirement health care plan trusts, as well as PSCo’s ability to earn areturn on short-term investments of excess cash.  As of March 31, 2009, there have been nomaterial changes to market risks from that set forth in PSCo’s Annual Report onForm 10-K for the year ended Dec. 31, 2008.

 

**Resultsof Operations**

 

PSCo’s net income wasapproximately $78.3 million for the first three months of 2009, compared withapproximately $94.3 million for the first three months of 2008.

 

**Electric Revenues and Margin**

** **

Electric fuel and purchased power expenses tend to vary with changingretail and wholesale sales requirements and unit cost changes in fuel andpurchased power.  Due to fuel andpurchased energy cost-recovery mechanisms for customers, fluctuations in thesecosts do not materially affect electric margin.

 

***Electric***—******Thefollowing tables detail the electric revenues and margin:

 
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|
| **(Millions of Dollars)** | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Electric revenues                   |       | $                                                    | 597        |   | $ | 654 |   |
| Electric fuel and purchased power   |       | (307                                                 | )          | (370 | ) |
| Electric margin                     |       | $                                                    | 290        |   | $ | 284 |   |

 

The following summarizes the components of the changes in electricrevenues and margin for the three months ended March 31:

 

***ElectricRevenues***

** **
| **(Millions of Dollars)**              | ** ** | **2009 vs. 2008** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| Fuel and purchased power cost recovery           |       | $                           | (45        | ) |
| Trading revenues                                 |       | (20                         | )          |
| Estimated impact of weather                      |       | (3                          | )          |
| Revenues due to leap year  (weather-normalized)  |       | (3                          | )          |
| Retail sales decline (excluding weather  impact) |       | (2                          | )          |
| Conservation and demand side management  riders  |       | 15                          |       |
| Sales mix and other                              |       | 1                           |       |
| Total decrease in electric revenues              |       | $                           | (57        | ) |

# *** ***

***Electric Margin***

 
| **(Millions of Dollars)**              | ** ** | **2009 vs. 2008** | ** ** |
|--------------------------------------------------|------------|-----------------------------|------------|
| Conservation and demand side management  riders  |       | $                           | 15         |   |
| Estimated impact of weather                      |       | (3                          | )          |
| Revenues due to leap year  (weather-normalized)  |       | (3                          | )          |
| Retail sales decline (excluding weather  impact) |       | (2                          | )          |
| Sales mix and other                              |       | (1                          | )          |
| Total increase in electric margin                |       | $                           | 6          |   |

 

19

----

Table of Contents

 

**NaturalGas Revenues and Margin**

 

The cost of natural gas tends to vary with changing sales requirementsand unit cost of natural gas purchases. PSCo has a GCA mechanism for natural gas sales, which recognizes themajority 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 thecost of natural gas have little effect on natural gas margin.

 

***Natural Gas***—******Thefollowing tables detail the natural gas revenues and margin:

 
| ** **                               | ** ** | **Three Months ended March 31,** | ** ** |
|------------------------------------------|------------|------------------------------------------------------|------------|
| **(Millions of Dollars)**      | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| Natural gas revenues                     |       | $                                                    | 395        |   | $ | 563 |   |
| Cost of natural gas sold and transported |       | (282                                                 | )          | (442 | ) |
| Natural gas margin                       |       | $                                                    | 113        |   | $ | 121 |   |

 

The following summarizes the components of the changes in natural gasrevenues and margin for the three months ended March 31:

 

***Natural Gas Revenues***

 
| **(Millions of Dollars)**    | ** ** | **2009 vs. 2008** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|
| Purchased natural gas cost recovery    |       | $                           | (159       | ) |
| Estimated impact of weather            |       | (8                          | )          |
| Non-fuel riders                        |       | 4                           |       |
| Other                                  |       | (5                          | )          |
| Total decrease in natural gas revenues |       | $                           | (168       | ) |

*** ***

***Natural Gas Margin***

*** ***
| **(Millions of Dollars)**  | ** ** | **2009 vs. 2008** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| Estimated impact of weather          |       | $                           | (8         | ) |
| Non-fuel riders                      |       | 4                           |       |
| Other                                |       | (4                          | )          |
| Total decrease in natural gas margin |       | $                           | (8         | ) |

 

**Non-FuelOperating Expense and Other Items**

 

***Other Operating andMaintenance Expenses****—*The following summarizes the components of the changes inother operating and maintenance expenses for the three months ended March 31:

 
| **(Millions of Dollars)**                         | ** ** | **2009 vs. 2008** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------|------------|
| Higher employee benefit costs                               |       | $                           | 7          |   |
| Higher labor costs                                          |       | 2                           |       |
| Lower contract labor costs                                  |       | (1                          | )          |
| Other                                                       |       | (1                          | )          |
| Total increase in other operating and  maintenance expenses |       | $                           | 7          |   |

 

***DSM****—*******DSM expense increased by approximately $13.5million for the first three months of 2009, compared with the first threemonths of 2008.  The higherexpense is attributable to the ongoing expansion of such programs as designed,in part, to meet certain regulatory commitments in Colorado.

 

***Interest and otherincome, net***—******Interest and other income, net, decreased byapproximately $2.4 million for the first three months of 2009, compared withthe first three months of 2008, primarily due to lower interest income, net ofinterest expense on COLI loans, lower interest income accrued on deferred fuelcosts, and lower interest income on temporary cash investments.

 

*****AFDC*********— AFDC increased by approximately $3.4million, or 29.3 percent, for the first three months of 2009, compared with thefirst three months of 2008.  Thisincrease was primarily due to the ongoing construction of Comanche3, which is nearing its final phase of construction.

 

20

----

Table of Contents

 

***Interest charges andfinancing costs***—******Interest charges and financing costsincreased by approximately $3.2 million, or 8.6 percent, for the first threemonths of 2009, compared with the first three months of 2008, primarily due toincreased long-term borrowings, partially offset by lower short-termborrowings.

 

***Income taxes***—Income tax expense decreased by $9.0 million for the first quarter of 2009,compared with the same period in 2008. The decrease in income tax expensewas primarily due to a decrease in pretax income. The effective tax rate was33.4 percent for the first quarter of 2009, compared with 33.9 percent for thesame period in 2008.

 

**Summary of Recent Federal Regulatory Developments**

 

TheFERC has jurisdiction over rates for electric transmission service ininterstate commerce and electricity sold at wholesale, hydro facilitylicensing, natural gas transportation, accounting practices and certain otheractivities of Xcel Energy’s utility subsidiaries. State and local agencies havejurisdiction over many of PSCo’s utility activities, including regulation ofretail rates and environmental matters. See additional discussion in thesummary of recent federal regulatory developments and public utility regulationsections of the PSCo Annual Report on Form 10-K for the year ended Dec. 31,2008.  See Note 5 to the consolidated financial statements for a discussion ofother regulatory matters.

 

**Item 4. CONTROLS ANDPROCEDURES**

** **

**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 (Exchange Act) is recorded, processed,summarized and reported within the time periods specified in SEC rules andforms.  In addition, the disclosurecontrols and procedures, include, without limitation, controls and proceduresdesigned to ensure that information required to be disclosed by us in reportsunder the Exchange Act is accumulated and communicated to management, includingthe chief executive officer (CEO) and chief financial officer (CFO), allowingtimely decisions regarding required disclosure. 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 the CFO, of the effectiveness of ourdisclosure controls and the procedures, the CEO and CFO have concluded thatPSCo’s disclosure controls and procedures were effective.

 

**Internal Control Over Financial Reporting**

** **

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

 

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

##### ** **

**Item1. Legal Proceedings**

 

In the normal course ofbusiness, various lawsuits and claims have arisen against PSCo.  After consultation with legal counsel, PSCohas recorded an estimate of the probable cost of settlement or otherdisposition for such matters.

 

**AdditionalInformation**

 

See Notes 5 and 6 of theFinancial Statements in this Quarterly Report on Form 10-Q for furtherdiscussion of legal proceedings, including Regulatory Matters and Commitmentsand Contingent Liabilities, which are hereby incorporated by reference.  Reference also is made to Item 3 and Notes 14and 15 of PSCo’s consolidated financial statements in its Annual Report on Form 10-Kfor the year ended Dec. 31, 2008 for a description of certain legalproceedings presently pending.  Except asdiscussed herein, there are no new significant cases to report against PSCo andthere have been no notable changes in the previously reported proceedings.

 

**Item1A. Risk Factors**

 

PSCo’s risk factors are documented in Item 1A of Part I of itsAnnual Report on Form 10-K for the year ended Dec. 31, 2008, which isincorporated herein by reference.  Therehave been no material changes to the risk factors.

 

21

----

Table of Contents

 

**Item6. Exhibits**

 

----

* Indicatesincorporation by reference

 
| 3.01* |   | Amended and  Restated Articles of Incorporation dated July 15, 1998 (Form 10-K,  Dec. 31, 1998, Exhibit 3(a)(1)).                                                                           |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.02* |   | By-laws  dated Nov. 20, 1997 (For 10-K, Dec. 31, 1997,  Exhibit 3(b)(1)).                                                                                                                        |
| 31.01 |   | Principal  Executive Officer’s and Principal Financial Officer’s certifications pursuant  to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. |
| 32.01 |   | Certification  pursuant to 18 U.S.C. Section 1350, as adopted pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                             |
| 99.01 |   | Statement  pursuant to Private Securities Litigation Reform Act of 1995.                                                                                                                                        |

 

22

----

Table of Contents

 

**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 April 30, 2009.

 

Public Service Company ofColorado

(Registrant)

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

 

23

----