Tableof Contents

 

 

 

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

| **x**                                                                                                                                                           | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|
|                                                                                                                                                            |       |                                                                                                     |
| **For the  quarterly period ended Sept. 30, 2008**                                                                                                         |
| ** **                                                                                                                                                      | ** ** | ** **                                                                                               |
| **or**                                                                                                                                                          |
|                                                                                                                                                            |       |                                                                                                     |
| **o**                                                                                                                                                           | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                                                                                                                            |       |                                                                                                     |
| **For the  transition period from            to          ** |

 

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

 

**PublicService Company of Colorado**

**(Exact name of registrant as specified in itscharter)**

 

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

 

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

 

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

 

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

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

 

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

 

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

 

| **Class**                     | ** ** | **Outstanding at Oct. 27, 2008** |
|-------------------------------|------------|------------------------------------------------------|
| Common Stock, $0.01 par value |       | 100 shares                                           |

 

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

 

 

 

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**TABLEOF CONTENTS**

** **
| **PART I  - FINANCIAL INFORMATION**     | 3                                                                                           |
|----------------------------------------------|---------------------------------------------------------------------------------------------|
|                                         |                                                                                        |   |
| Item l.                                      | Financial Statements  (Unaudited)                                                           | 3 |
| Item 2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 19 |
| Item 4                                       | Controls and  Procedures                                                                    | 24 |
|                                         |                                                                                        |   |
| **PART II  - OTHER INFORMATION**        | 24                                                                                          |
|                                         |                                                                                        |   |
| Item 1.                                      | Legal Proceedings                                                                           | 24 |
| Item 1A.                                     | Risk Factors                                                                                | 24 |
| Item 6.                                      | Exhibits                                                                                    | 25 |
|                                         |                                                                                        |   |
| **SIGNATURES**                               | 26                                                                                          |
|                                         |                                                                                        |
| 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, a Colorado corporation(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).

 

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

##### ** **

**Item 1. FINANCIAL STATEMENTS**

 

**PUBLIC SERVICE CO. OF COLORADO ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**

**(Thousands of Dollars)**

 
| ** **                                                                                                 | ** ** | **Three Months Ended Sept. 30,** | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Operating revenues**                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Electric utility                                                                                           |       | $                                                    | 924,900    |                                                | $          | 669,598 |   | $ | 2,317,753 |   | $ | 1,944,240 |   |
| Natural gas utility                                                                                        |       | 154,130                                              |       | 104,930                                             |       | 966,384 |   | 811,481 |   |
| Steam and other                                                                                            |       | 6,697                                                |       | 6,733                                               |       | 25,375 |   | 24,829 |   |
| Total operating revenues                                                                                   |       | 1,085,727                                            |       | 781,261                                             |       | 3,309,512 |   | 2,780,550 |   |
|                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| **Operating expenses**                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Electric fuel and purchased power                                                                          |       | 601,985                                              |       | 340,270                                             |       | 1,430,479 |   | 1,058,400 |   |
| Cost of natural gas sold and transported                                                                   |       | 82,721                                               |       | 35,576                                              |       | 693,781 |   | 562,086 |   |
| Cost of sales — steam and other                                                                       |       | 2,999                                                |       | 2,670                                               |       | 10,058 |   | 9,681 |   |
| Other operating and maintenance expenses                                                                   |       | 152,936                                              |       | 144,209                                             |       | 456,450 |   | 432,552 |   |
| Demand-side management program expenses                                                                    |       | 6,531                                                |       | 4,345                                               |       | 26,459 |   | 13,664 |   |
| Depreciation and amortization                                                                              |       | 62,888                                               |       | 62,032                                              |       | 189,440 |   | 184,645 |   |
| Taxes (other than income taxes)                                                                            |       | 21,159                                               |       | 19,738                                              |       | 65,394 |   | 65,226 |   |
| Total operating expenses                                                                                   |       | 931,219                                              |       | 608,840                                             |       | 2,872,061 |   | 2,326,254 |   |
|                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| **Operating income**                                                                                       |       | 154,508                                              |       | 172,421                                             |       | 437,451 |   | 454,296 |   |
|                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Interest and other income (expense), net                                                                   |       | 3,186                                                |       | 244                                                 |       | 10,497 |   | (5,238 | ) |
| Allowance for funds used during construction — equity                                                 |       | 9,699                                                |       | 3,965                                               |       | 25,326 |   | 8,707 |   |
|                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| **Interest charges and financing costs**                                                                   |       |                                                 |       |                                                |       |   |   |   |   |
| Interest charges — includes other financing costs of $1,494, $1,411,  $4,342 and $4,161, respectively |       | 40,353                                               |       | 34,337                                              |       | 113,222 |   | 101,012 |   |
| Interest and penalties related to COLI settlement                                                          |       | —                                               |       | 2,190                                               |       | — |   | 43,401 |   |
| Allowance for funds used during construction — debt                                                   |       | (4,644                                               | )          | (3,496                                              | )          | (13,154 | ) | (8,664 | ) |
| Total interest charges and financing costs                                                                 |       | 35,709                                               |       | 33,031                                              |       | 100,068 |   | 135,749 |   |
|                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Income before income taxes                                                                                 |       | 131,684                                              |       | 143,599                                             |       | 373,206 |   | 322,016 |   |
| Income taxes                                                                                               |       | 45,403                                               |       | 37,941                                              |       | 126,282 |   | 116,471 |   |
| **Net income**                                                                                             |       | $                                                    | 86,281     |                                                | $          | 105,658 |   | $ | 246,924 |   | $ | 205,545 |   |

 

**See Notes to Consolidated Financial Statements**

** **

**3**

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** **

**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

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

**(Thousands of Dollars)**

 
| ** **                                                                         | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| **Operating activities**                                                           |       |                                                |       |   |   |
| Net income                                                                         |       | $                                                   | 246,924    |   | $ | 205,545 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                                |       |   |   |
| Depreciation and amortization                                                      |       | 222,244                                             |       | 206,107 |   |
| Deferred income taxes                                                              |       | 60,286                                              |       | 63,083 |   |
| Amortization of investment tax credits                                             |       | (2,353                                              | )          | (2,943 | ) |
| Allowance for equity funds used during construction                                |       | (25,326                                             | )          | (8,707 | ) |
| Net realized and unrealized hedging and derivative transactions                    |       | (13,170                                             | )          | (13,643 | ) |
| Changes in operating assets and liabilities:                                       |       |                                                |       |   |   |
| Accounts receivable                                                                |       | 60,832                                              |       | 80,347 |   |
| Accrued unbilled revenues                                                          |       | 135,928                                             |       | (8,231 | ) |
| Inventories                                                                        |       | (63,049                                             | )          | 17,239 |   |
| Recoverable purchased natural gas and electric energy costs                        |       | (9,811                                              | )          | 136,080 |   |
| Prepayments and other                                                              |       | 21,985                                              |       | 342 |   |
| Accounts payable                                                                   |       | (166,041                                            | )          | (94,986 | ) |
| Net regulatory assets and liabilities                                              |       | (14,946                                             | )          | 572 |   |
| Other current liabilities                                                          |       | 74,536                                              |       | 44,109 |   |
| Change in other noncurrent assets                                                  |       | 6,744                                               |       | 7,416 |   |
| Change in other noncurrent liabilities                                             |       | (33,531                                             | )          | (48,113 | ) |
| Net cash provided by operating activities                                          |       | 501,252                                             |       | 584,217 |   |
|                                                                               |       |                                                |       |   |   |
| **Investing activities**                                                           |       |                                                |       |   |   |
| Utility capital/construction expenditures                                          |       | (557,624                                            | )          | (491,770 | ) |
| Allowance for equity funds used during construction                                |       | 25,326                                              |       | 8,707 |   |
| Investments in utility money pool arrangement                                      |       | (427,900                                            | )          | (494,700 | ) |
| Repayments from utility money pool arrangement                                     |       | 432,500                                             |       | 494,700 |   |
| Other investments                                                                  |       | 647                                                 |       | (8,390 | ) |
| Net cash used in investing activities                                              |       | (527,051                                            | )          | (491,453 | ) |
|                                                                               |       |                                                |       |   |   |
| **Financing activities**                                                           |       |                                                |       |   |   |
| Repayment of short-term borrowings, net                                            |       | (271,007                                            | )          | (372,500 | ) |
| Proceeds from issuance of long-term debt                                           |       | 592,884                                             |       | 343,756 |   |
| Borrowings under utility money pool arrangement                                    |       | 591,100                                             |       | 475,500 |   |
| Repayments under utility money pool arrangement                                    |       | (591,100                                            | )          | (475,500 | ) |
| Repayment of long-term debt, including reacquisition premiums                      |       | (1,077                                              | )          | (101,031 | ) |
| Capital contribution from parent                                                   |       | 113,173                                             |       | 330,176 |   |
| Dividends paid to parent                                                           |       | (203,708                                            | )          | (196,066 | ) |
| Net cash provided by financing activities                                          |       | 230,265                                             |       | 4,335 |   |
|                                                                               |       |                                                |       |   |   |
| Net increase in cash and cash equivalents                                          |       | 204,466                                             |       | 97,099 |   |
| Cash and cash equivalents at beginning of period                                   |       | 7,650                                               |       | 3,011 |   |
| Cash and cash equivalents at end of period                                         |       | $                                                   | 212,116    |   | $ | 100,110 |   |
|                                                                               |       |                                                |       |   |   |
| Supplemental disclosure of cash flow information:                                  |       |                                                |       |   |   |
| Cash paid for interest (net of amounts capitalized)                                |       | $                                                   | 87,820     |   | $ | 34,374 |   |
| Cash paid for income taxes (net of refunds received)                               |       | 33,634                                              |       | 41,939 |   |
|                                                                               |       |                                                |       |   |   |
| Supplemental disclosure of non-cash investing transactions:                        |       |                                                |       |   |   |
| Property, plant and equipment additions in accounts payable                        |       | $                                                   | 12,632     |   | $ | 29,265 |   |

 

See Notes to Consolidated Financial Statements

 

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**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**

**(Thousandsof Dollars)**

 
| ** **                                                                            | ** ** | **Sept. 30, 2008** | ** ** | **Dec. 31, 2007** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current assets:                                                                       |       |                         |       |                        |       |
| Cash and cash equivalents                                                             |       | $                            | 212,116    |                        | $          | 7,650 |   |
| Investments in utility money pool arrangement                                         |       | 96,000                       |       | 100,600                     |       |
| Accounts receivable, net                                                              |       | 320,772                      |       | 375,265                     |       |
| Accounts receivable from affiliates                                                   |       | 28,245                       |       | 34,584                      |       |
| Accrued unbilled revenues                                                             |       | 224,263                      |       | 360,191                     |       |
| Inventories                                                                           |       | 272,969                      |       | 209,920                     |       |
| Recoverable purchased natural gas and electric energy costs                           |       | 23,668                       |       | 13,857                      |       |
| Deferred income taxes                                                                 |       | 67,388                       |       | 59,564                      |       |
| Derivative instruments valuation                                                      |       | 25,283                       |       | 33,635                      |       |
| Prepayments and other                                                                 |       | 17,653                       |       | 17,851                      |       |
| Total current assets                                                                  |       | 1,288,357                    |       | 1,213,117                   |       |
|                                                                                  |       |                         |       |                        |       |
| Property, plant and equipment, net                                                    |       | 7,390,849                    |       | 7,029,155                   |       |
|                                                                                  |       |                         |       |                        |       |
| Other assets:                                                                         |       |                         |       |                        |       |
| Regulatory assets                                                                     |       | 564,094                      |       | 539,989                     |       |
| Derivative instruments valuation                                                      |       | 124,072                      |       | 141,410                     |       |
| Other                                                                                 |       | 52,297                       |       | 55,759                      |       |
| Total other assets                                                                    |       | 740,463                      |       | 737,158                     |       |
| Total assets                                                                          |       | $                            | 9,419,669  |                        | $          | 8,979,430 |   |
| ** **                                                                            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| **LIABILITIES AND EQUITY**                                                            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Current liabilities:                                                                  |       |                         |       |                        |       |
| Current portion of long-term debt                                                     |       | $                            | 501,497    |                        | $          | 301,445 |   |
| Short-term debt                                                                       |       | —                       |       | 271,007                     |       |
| Accounts payable                                                                      |       | 310,671                      |       | 466,710                     |       |
| Accounts payable to affiliates                                                        |       | 18,972                       |       | 27,445                      |       |
| Taxes accrued                                                                         |       | 85,281                       |       | 76,569                      |       |
| Dividends payable to parent                                                           |       | 67,258                       |       | 68,453                      |       |
| Derivative instruments valuation                                                      |       | 36,829                       |       | 21,521                      |       |
| Accrued interest                                                                      |       | 54,592                       |       | 45,486                      |       |
| Other                                                                                 |       | 165,833                      |       | 108,979                     |       |
| Total current liabilities                                                             |       | 1,240,933                    |       | 1,387,615                   |       |
|                                                                                  |       |                         |       |                        |       |
| Deferred credits and other liabilities:                                               |       |                         |       |                        |       |
| Deferred income taxes                                                                 |       | 1,178,704                    |       | 1,090,740                   |       |
| Deferred investment tax credits                                                       |       | 52,813                       |       | 55,166                      |       |
| Regulatory liabilities                                                                |       | 519,109                      |       | 516,401                     |       |
| Pension and employee benefit obligations                                              |       | 182,179                      |       | 231,232                     |       |
| Customer advances                                                                     |       | 290,376                      |       | 280,270                     |       |
| Derivative instruments valuation                                                      |       | 59,921                       |       | 84,190                      |       |
| Asset retirement obligations                                                          |       | 45,459                       |       | 44,267                      |       |
| Other                                                                                 |       | 20,195                       |       | 12,063                      |       |
| Total deferred credits and other liabilities                                          |       | 2,348,756                    |       | 2,314,329                   |       |
|                                                                                  |       |                         |       |                        |       |
| Commitments and contingent liabilities                                                |       |                         |       |                        |       |
| Capitalization:                                                                       |       |                         |       |                        |       |
| Long-term debt                                                                        |       | 2,289,441                    |       | 1,891,644                   |       |
| Common stock — authorized 100 shares of $0.01 par value; outstanding  100 shares |       | —                       |       | —                      |       |
| Additional paid in capital                                                            |       | 2,872,301                    |       | 2,759,128                   |       |
| Retained earnings                                                                     |       | 658,061                      |       | 614,267                     |       |
| Accumulated other comprehensive income                                                |       | 10,177                       |       | 12,447                      |       |
| Total common stockholder’s equity                                                |       | 3,540,539                    |       | 3,385,842                   |       |
| Total liabilities and equity                                                          |       | $                            | 9,419,669  |                        | $          | 8,979,430 |   |

 

See Notes to Consolidated Financial Statements

 

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** **

**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**

** **

Inthe opinion of management, the accompanying unaudited consolidated financialstatements contain all adjustments necessary to present fairly the financialposition of PSCo and its subsidiaries as of Sept. 30, 2008, and Dec. 31,2007; the results of its operations for the three and nine months endedSept. 30, 2008 and 2007; and its cash flows for the nine months endedSept. 30, 2008 and 2007.  Alladjustments are of a normal, recurring nature, except as otherwisedisclosed.  The Dec. 31, 2007balance sheet information has been derived from the audited 2007 financialstatements. For further information, refer to the Consolidated FinancialStatements and notes thereto, included in the PSCo Annual Report on Form 10-Kfor the year ended Dec. 31, 2007, filed with the Securities and ExchangeCommission on Feb. 25, 2008.  Due tothe seasonality of PSCo’s electric and natural gas sales, such interim resultsare not necessarily an appropriate base from which to project annual results.

 

**1.****             ****SignificantAccounting Policies**

 

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

 

***Fair ValueMeasurements******—*** PSCo presentscash equivalents and commodity derivatives at estimated fair values in itsconsolidated financial statements.  Cashequivalents are recorded at cost plus accrued interest to approximate fairvalue.  Changes in the observed tradingprices and liquidity of cash equivalents, including commercial paper and moneymarket funds, are also monitored as additional support for determining fair value,and losses are recorded in earnings if fair value falls below recordedcost.  For commodity derivatives, themost observable inputs available are used to determine the fair value of eachcontract.  In the absence of a quotedprice for an identical contract in an active market, PSCo may use quoted pricesfor similar contracts, or internally prepared valuation models as primaryinputs to determine fair value.

 

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

 

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

 

Asof Jan. 1, 2008, PSCo adopted SFAS No. 157 for all assets andliabilities measured at fair value except for non-financial assets andnon-financial liabilities measured at fair value on a non-recurring basis, aspermitted by FASB Staff Position No. 157-2.  The adoption did not have a material impacton its consolidated financial statements. For additional discussion and SFAS No. 157 required disclosures,see Note 10 to the consolidated financial statements.

 

***The Fair Value Option for Financial Assetsand Financial Liabilities — Including an Amendment of FASB Statement No. 115(SFAS No. 159)*** — In February 2007, the FASB issuedSFAS No. 159, which provides companies with an option to measure, atspecified election dates, many financial instruments and certain other items atfair value that are not currently measured at fair value.  A company that adopts SFAS No. 159 willreport unrealized gains and losses on items, for which the fair value optionhas been elected, in earnings at each subsequent reporting date.  This statement also establishes presentationand disclosure requirements designed to facilitate comparisons between entitiesthat choose different measurement attributes for similar types of assets andliabilities.  This statement waseffective for fiscal years beginning after Nov. 15, 2007.  Effective Jan. 1, 2008, PSCo adoptedSFAS No. 159 and the adoption did not have a material impact on itsconsolidated financial statements.

 

***Business Combinations (SFAS No. 141(revised 2007)) —***In December 2007, theFASB issued SFAS No. 141R, which establishes principles and requirementsfor how an acquirer in a business combination recognizes and measures in itsfinancial statements the identifiable assets acquired, the liabilities assumed,and any noncontrolling interest; recognizes and measures the goodwill acquiredin the business combination or a gain from a bargain purchase; and determineswhat information to disclose to enable users of the financial statements toevaluate the nature and financial effects of the business combination. SFAS No. 141Ris to be applied prospectively to business combinations for which theacquisition date is on or after the beginning of an entity’s fiscal year thatbegins on or after Dec. 15, 2008. PSCo will evaluate the impact of SFAS No. 141Ron its consolidated financial statements for any potential businesscombinations subsequent to Jan. 1, 2009.

 

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

 

***Disclosures about DerivativeInstruments and Hedging Activities (SFAS No. 161)*******— In March 2008, the FASB issued SFAS No. 161, which isintended to enhance disclosures to help users of the financial statementsbetter understand how derivative instruments and hedging activities affect anentity’s financial position, financial performance and cash flows.  SFAS No. 161 amends and expands thedisclosure requirements of SFAS No. 133, *Accountingfor Derivative Instruments and Hedging Activities*, to requiredisclosures of objectives and strategies for using derivatives, gains andlosses on derivative instruments, and credit-risk-related contingent featuresin derivative agreements.  SFAS No. 161is effective for financial statements issued for fiscal years and interimperiods beginning after Nov. 15, 2008, with early applicationencouraged.  PSCo is currently evaluatingthe impact of adoption of SFAS No. 161 on its consolidated financialstatements.

 

***The Hierarchy of Generally AcceptedAccounting Principles (GAAP) (SFAS No. 162)****** —***In May 2008,the FASB issued SFAS No. 162, which establishes the GAAPhierarchy, identifying the sources of accounting principles and the frameworkfor selecting the principles to be used in the preparation of financialstatements.  SFAS No. 162 iseffective Nov. 15, 2008*.*PSCo does notbelieve that implementation of SFAS No. 162 will have any materialimpact on its consolidated financial statements.

 

***Accounting for Deferred Compensationand Postretirement Benefit Aspects of Endorsement Split-Dollar Life InsuranceArrangements (Emerging Issues Task Force (EITF) Issue No. 06-4)*** — In June 2006, the EITF reached aconsensus on EITF No. 06-4, which provides guidance on the recognition ofa liability and related compensation costs for endorsement split-dollar lifeinsurance policies that provide a benefit to an employee that extends topostretirement periods. Therefore, this EITF would not apply to a split-dollarlife insurance arrangement that provides a specified benefit to an employeethat is limited to the employee’s active service period with an employer.  EITF No. 06-4 was effective for fiscalyears beginning after Dec. 15, 2007, with earlier applicationpermitted.  Upon adoption of EITF No. 06-4on Jan. 1, 2008, PSCo recorded a liability of $0.6 million, net of tax, asa reduction of retained earnings. Thereafter, changes in the liability are reflected in operating results.

 

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

** **

**3.****             ****SelectedBalance Sheet Data**

 
| **(Thousands of Dollars)** | ** ** | **Sept. 30, 2008** | ** ** | **Dec. 31, 2007** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Accounts receivable, net:            |       |                         |       |                        |       |
| Accounts receivable                  |       | $                            | 345,160    |                        | $          | 398,566 |   |
| Less allowance for bad debts         |       | (24,388                      | )          | (23,301                     | )          |
|                                 |       | $                            | 320,772    |                        | $          | 375,265 |   |
|                                 |       |                         |       |                        |       |
| Inventories:                         |       |                         |       |                        |       |
| Materials and supplies               |       | $                            | 41,577     |                        | $          | 40,409 |   |
| Fuel                                 |       | 43,316                       |       | 40,811                      |       |
| Natural gas                          |       | 188,076                      |       | 128,700                     |       |
|                                 |       | $                            | 272,969    |                        | $          | 209,920 |   |

 

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| Property, plant and equipment, net: |   |       |      |       |   |
|-------------------------------------|--------|------------|-----------|------------|--------|
| Electric utility plant              |   | $          | 6,914,271 |       | $      | 6,633,695 |   |
| Natural gas utility plant           |   | 1,930,042  |      | 1,887,824  |   |
| Common utility and other property   |   | 740,778    |      | 726,049    |   |
| Construction work in progress       |   | 1,021,532  |      | 864,517    |   |
| Total property, plant and equipment |   | 10,606,623 |      | 10,112,085 |   |
| Less accumulated depreciation       |   | (3,215,774 | )         | (3,082,930 | )      |
|                                |   | $          | 7,390,849 |       | $      | 7,029,155 |   |

 

**4.****             ****IncomeTaxes**

 

***Accountingfor Uncertainty 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 quarterof 2008, the IRS commenced an examination of tax years 2006 and 2007.

 

As of Sept. 30, 2008, PSCo’s earliest open tax year inwhich an audit can be initiated by state taxing authorities under applicablestatutes of limitations is 2004. There currently are no state income tax auditsin progress.

 

The amount of unrecognized tax benefits was $8.8 million and$13.1 million on Dec. 31, 2007 and Sept. 30, 2008,respectively.  These unrecognized tax benefit amounts were reduced by thetax benefits associated with net operating loss (NOL) and tax credit carryoversof $3.8 million and $5.4 million as of Dec. 31, 2007 and Sept. 30,2008, respectively.

 

The unrecognized tax benefit balance included $2.8 millionand $3.9 million of tax positions on Dec. 31, 2007 and Sept. 30,2008, respectively, which if recognized would affect the annual effective taxrate.  In addition, the unrecognized tax benefit balance included $6.0million and $9.2 million of tax positions on Dec. 31, 2007 andSept. 30, 2008, respectively, for which the ultimate deductibility ishighly certain but for which there is uncertainty about the timing of suchdeductibility.  A change in the period of deductibility would not affectthe effective tax rate but would accelerate the payment of cash to the taxingauthority to an earlier period.

 

The increase in the unrecognized tax benefit balance of $2.8million from July 1, 2008 to Sept. 30, 2008, was due to the additionof similar 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, when state audits resume and as statutes oflimitations expire.  At this time, as it relates to ongoing and upcomingaudits, it is not reasonably possible to estimate an overall range of possiblechange. However, as it relates to the expiration of statutes of limitations, itis reasonably possible that the amount of unrecognized tax benefits coulddecrease up to $3.0 million.

 

The liability for interest related to unrecognized taxbenefits is partially offset by the interest benefit associated with NOL andtax credit carryovers.  The amount of interest expense related tounrecognized tax benefits reported within interest charges in the third quarterof 2008 was $0.1 million.  The liability for interest related tounrecognized tax benefits was $3.8 million on Dec. 31, 2007 and $4.2million on Sept. 30, 2008.

 

No amounts were accrued for penalties in the thirdquarter of 2008.  The liability for penalties related to unrecognized taxbenefits was $1.0 million on Dec. 31, 2007 and Sept. 30, 2008.

 

***Other Income Tax Matters*****—**Income tax expense increased by $9.8 million for the first nine monthsof 2008, compared with the first nine months of 2007.  The increase inincome tax expense was primarily due to an increase in pretax income in 2008(excluding corporate-owned life insurance (COLI)), partially offset by $16.1million of tax expense related to the COLI settlement in 2007.  Theeffective tax rate was 33.8 percent for the first nine months of 2008, comparedwith 36.2 percent for the same period in 2007.  The higher effective taxrate for the first nine months of 2007 was primarily due to the COLIsettlement, partially offset by an increase in the forecasted annual effectivetax rate for 2008, which was largely a result of PSR Investments, Inc. (PSRI)terminating the COLI program in 2007. Without these charges and benefits, theeffective tax rate for the first nine months of 2008 and 2007 would have been34.0 percent and 35.7 percent, respectively.

 

***COLI —***On June 19, 2007, a settlement in principle wasreached between Xcel Energy and representatives of the United States Governmentregarding PSCo’s right to deduct interest expense on policy loans related toits COLI program that insured lives of certain 

 

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PSCo employees. These COLIpolicies were owned and managed by PSRI, a wholly owned subsidiary of PSCo.

 

In September 2007, XcelEnergy and the United States finalized a settlement, which terminated the taxlitigation pending between the parties. As a result of the settlement, thelawsuit filed by Xcel Energy in the United States District Court has beendismissed and the Tax Court proceedings are in the process of beingdismissed.  Xcel Energy paid thegovernment a total of $64.4 million in full settlement of the government’sclaims for tax, penalty, and interest for tax years 1993-2007.

 

**5.****             ****RateMatters**

 

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

 

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

*** ***

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

** **

***Transmission Cost Adjustment (TCA) Rider —***In September 2007,PSCo filed with the CPUC a request to implement a TCA.  In December 2007, the CPUC approved PSCo’sapplication to implement the TCA. The CPUC limited the scope of the costs thatcould be recovered through the rider during 2008 to only those costs associatedwith transmission investment made after the new legislation authorizing therider became effective on March 26, 2007. The CPUC also required PSCo tobase its revenue requirement calculation on a thirteen-month average nettransmission plant balance. As a result of the CPUC’s decision, PSCoimplemented a rider on Jan. 1, 2008, expected to recover approximately$4.5 million in 2008.  PSCo expectsto file updates to the TCA on Nov. 3, 2008 for rates to go into effect Jan. 1,2009.

 

***Enhanced Demand Side Management (DSM)Program —***In October 2007, PSCo filed an application withthe CPUC for approval to implement an expanded DSM program and to revise itsDSM cost adjustment mechanism to include current cost recovery and incentivesdesigned to reward PSCo for successfully implementing cost-effective DSMprograms and measures. In July 2008, the CPUC issued an order approvingPSCo’s proposal to expand the DSM program and recover 100 percent of itsforecasted expenses associated with the DSM program during the year in whichthe rider is in effect, beginning in 2009.  An incentivemechanism was also approved to reward PSCo for meeting and exceedingprogram goals.

 

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

*** ***

***Pacific Northwest FERC Refund Proceeding —***In July 2001,the FERC ordered a preliminary hearing to determine whether there may have beenunjust and unreasonable charges for spot market bilateral sales in the PacificNorthwest for the period Dec. 25, 2000 through June 20, 2001. PSCosupplied energy to the Pacific Northwest markets during this period and hasbeen an active participant in the hearings. In September 2001, thepresiding administrative law judge (ALJ) concluded that prices in the PacificNorthwest during the referenced period were the result of a number of factors,including the shortage of supply, excess demand, drought and increased naturalgas prices. Under these circumstances, the ALJ concluded that the prices in thePacific Northwest markets were not unreasonable or unjust and no refunds shouldbe ordered. Subsequent to the ruling, the FERC has allowed the parties torequest additional evidence regarding the use of certain strategies and howthey may have impacted the markets in the Pacific Northwest markets. For thereferenced period, parties have claimed that the total amount of transactionswith PSCo subject to refund are $34 million. In June 2003, the FERCissued an order terminating the proceeding without ordering furtherproceedings. Certain purchasers filed appeals of the FERC’s orders in thisproceeding with the U. S. Court of Appeals for the Ninth Circuit.

 

In an order issued in August 2007,the Ninth Circuit remanded the proceeding back to the FERC. The court ofappeals preliminarily determined that it had jurisdiction to review the FERC’sdecision not to order refunds and remanded the case back to the FERC, directingthat the FERC consider evidence that had been presented regarding intentionalmarket manipulation in the California markets and its potential ties totransactions in the Pacific Northwest. The court of appeals also indicated thatthe FERC should consider other rulings addressing overcharges in the Californiaorganized markets.  The FERC has yet toact on this order on remand.

 

***PSCo WholesaleRate Case —***In February 2008, PSCo requested a $12.5million, or 5.88 percent, increase in wholesale rates, based on 11.5 percentrequested return on equity (ROE).  The$12.5 million total increase was composed of $8.8 million of traditional base rate recovery and $3.7 million ofconstruction work in progress recovery for the Comanche 3 and Fort St. Vrainprojects.   The increase is applicable toall wholesale firm service customers with the exception of Intermountain RuralElectric Cooperative, which would be under a rate moratorium until January 2009.

 

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In March 2008, PSCoreached an agreement with Rural Electric Association (REA) customers HolyCross, Yampa Valley and Grand Valley, which resolved all issues based on a “blackbox” settlement with an implied ROE of 10.4 percent.  Parties filed the settlement with the FERC on April 17,2008, with rates effective May 1, 2008. PSCo has reached an agreement with the cities of Burlington and Center,as well as Aquila under the same substantive terms and conditions as the REAsettlement.  This settlement was filedwith the FERC on April 25, 2008. The settlements provide for:

 

·                  A traditionalannual rate base rate increase of  $6.6million with allowance for funds used during construction continuing forComanche and Fort St. Vrain.

·                  Implementationof new rates several months earlier than is typical in a disputed filing.

·                  The ability toimplement rates in PSCo’s next general rate case that will involve Comanche 3costs upon a nominal suspension.

 

The FERC approved the settlement agreements on June 19, 2008.

 

**6.****             ****Commitmentsand Contingent Liabilities**

 

Except as noted below, the circumstancesset forth in Notes 12 and 13 to the consolidated financial statements in PSCo’sAnnual Report on Form 10-K for the year ended Dec. 31, 2007 and Note5 to the consolidated financial statements in this Quarterly Report on Form 10-Qappropriately represent, in all material respects, the current status ofrespective commitments and contingent liabilities and are incorporated hereinby reference. The following are contingencies and unresolved contingencies thatare material to PSCo’s financial position.

 

***Operating Leases*****—****PSCo begantaking power under two purchased power agreements during the second quarter of2008 that are being accounted for as operating leases in accordance with EITF No. 01-8,*Determining Whether an Arrangement Containsa Lease,*and SFAS No. 13, *Accountingfor Leases*.  Futurecommitments under these purchase power agreements being accounted for asoperating leases are:

 
| ** ** | ** ** | **Purchase Power  Agreement  Operating Leases** | ** ** |
|------------|------------|-----------------------------------------------------------|------------|
| ** ** | ** ** | **(Millions of Dollars)**                       | ** ** |
| 2008       |       | $                                                         | 12.1       |   |
| 2009       |       | 18.2                                                      |       |
| 2010       |       | 18.2                                                      |       |
| 2011       |       | 18.2                                                      |       |
| 2012       |       | 18.2                                                      |       |
| Thereafter |       | 330.3                                                     |       |
|            |            |                                                           |            |  |

 

**EnvironmentalContingencies**

 

PSCo has been, or iscurrently, involved with the cleanup of contamination from certain hazardoussubstances at several sites. In many situations, PSCo believes it will recoversome portion of these costs through insurance claims.  Additionally, where applicable, PSCo ispursuing, or intends to pursue, recovery from other potentially responsibleparties (PRP) 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 payall or a portion of the cost to remediate sites where past activities of PSCoor other parties have caused environmental contamination.  Environmental contingencies could arise fromvarious situations including sites of former manufactured gas plants (MGPs)operated by PSCo, its predecessors, or other entities; and third party sites,such as landfills, to which PSCo is alleged to be a PRP that sent hazardousmaterials and wastes.  At Sept. 30,2008, the liability for the cost of remediating these sites was estimated to be$1.4 million, of which $0.6 million was considered to be a current liability.

 

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

######  

***Fort CollinsManufactured Gas Plant Site****** —***Prior to1926, the Poudre Valley Gas Co. operated an MGP in Fort Collins, Colo., not farfrom the Cache la Poudre River.  In 1926,after acquiring the assets of the Poudre Valley Gas Co., PSCo shut down the MGPand has subsequently sold most of the property. In 2002, an oily substance similar to MGP byproducts was discovered inthe Cache la Poudre River.  In November 2004,PSCo entered into an agreement with the Environmental Protection Agency (EPA),the city of Fort Collins and Schrader Oil Co. (Schrader) under which PSCoperformed remediation and monitoring work. PSCo has substantially 

 

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completedwork at the site, with the exception of ongoing maintenance and monitoring.

 

InNovember 2006, PSCo filed a natural gas rate case with the CPUC requestingrecovery of additional clean-up costs at the Fort Collins MGP site spentthrough September 2006, plus unrecovered amounts previously authorizedfrom the last rate case, which amounted to $10.8 million to be amortized overfour years.  In June 2007, PSCoentered into a settlement agreement that included recovery of the full $10.8million, but with a five-year amortization period.  The CPUC approved the agreement on June 18,2007.  The total amount to be recoveredfrom customers is $13.1 million. Estimated future project costs, based upon an assumed 30-year systemoperating life, including EPA oversight costs, are approximately $2.8million.  This reflects a reduction inestimated EPA oversight costs over the life of the project, based upon the mostrecent EPA oversight billing.

 

In April 2005, PSCo brought a contribution actionagainst Schrader and related parties (collectively “Schrader”) alleging Schraderreleased hazardous substances into the environment and these releases causedMGP byproducts to migrate to the Cache la Poudre River, thereby substantiallyincreasing the scope and cost of remediation. PSCo requested damages, including a portion of the costs PSCo incurredto investigate and remove contaminated sediments from the Cache la PoudreRiver.  PSCo and Schrader have reached anagreement in principle and are in the process of finalizing a settlement agreement.  Net proceeds from thesettlement will be credited to ratepayers.

 

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

# *** ***

***Asbestos Removal*****—**Some of PSCo’sfacilities contain asbestos.  Mostasbestos will remain undisturbed until the facilities that contain it aredemolished or renovated.  PSCo hasrecorded an estimate for final removal of the asbestos as an asset retirementobligation.  See additional discussion ofasset retirement obligations in Note 13 of the PSCo Annual Report on Form 10-Kfor the year ended Dec. 31, 2007. It may be necessary to remove some asbestos to perform maintenance ormake improvements to other equipment. The cost of removing asbestos as part of other work is immaterial and isrecorded as incurred as operating expenses for maintenance projects, capitalexpenditures for construction projects or removal costs for demolitionprojects.

 

***Other Environmental Requirements***

 

***Regional Haze Rules ***— In June 2005, the EPAfinalized amendments to the July 1999 regional haze rules.  These amendments apply to the provisions ofthe regional haze rule that require emission controls, known as bestavailable retrofit technology (BART), for industrial facilities emitting airpollutants that reduce visibility by causing or contributing to regionalhaze.  Some PSCo generating facilities willbe subject to BART requirements.

 

The EPA required states to develop implementationplans to comply with BART by December 2007.  States are required to identify thefacilities that will have to reduce sulfur dioxide (SO2), nitrogen oxide (NOx) and particulate matter emissions under BART andthen 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 or anapproved BART alternative to make reasonable progress toward meeting thenational visibility goal.  PSCo estimatesthat implementation of the BART alternatives will cost approximately $201million in capital costs, which includes approximately $59 million inenvironmental upgrades for the existing Comanche Station project, which areincluded in the capital budget.  PSCoexpects the cost of any required capital investment will be recoverable fromcustomers.  Emissions controls areexpected to be installed between 2011 and 2014. Colorado’s state implementation plan has been submitted to EPA forapproval. In early 2008, the Colorado Air Pollution Control Division (CAPCD)initiated a stakeholder process to establish reasonable progress goals forColorado’s Class I areas. To meet these goals, more controls may berequired from certain sources, which may or may not include those sourcespreviously controlled under BART. The reasonable progress stakeholder processhas been placed on hold by the CAPCD due to limited resources and is expectedto resume in early 2009.

 

***Clean Air Mercury Rule (CAMR)***— In March 2005, theEPA issued the CAMR, which regulated mercury emissions from power plants.  In February 2008, the D.C. Circuit Courtof Appeals vacated CAMR, which impacts federal CAMR requirements, but notnecessarily state-only mercury legislation and rules.  Colorado’s mercury rule requires mercuryemission controls capable of achieving 80 percent capture be installed at thePawnee Generating Station by 2012 and all other Colorado units by 2014.  PSCo is in the process of installing mercurymonitors on five Colorado units at an estimated aggregate cost of approximately$1.9 million.  PSCo is evaluating themercury emission controls required to meet the state rule and is currentlyunable to provide a capital cost estimate.

 

***Federal Clean Water Act***— The Federal Clean WaterAct requires the EPA to regulate cooling water intake structures to assure thatthese structures reflect the “best technology available” (BTA) for minimizingadverse environmental impacts.  In July 2004,the EPA published phase II of the rule, which applies to existing cooling waterintakes at steam-electric power plants. Several lawsuits were filed against theEPA in the United States Court of Appeals for the Second Circuit challengingthe phase II rulemaking.  In January 2007,the court issued its decision and remanded virtually every aspect of the rule tothe EPA for reconsideration.  In 

 

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June 2007, the EPAsuspended the deadlines and referred any implementation to each state’s bestprofessional judgment until the EPA is able to fully respond to thecourt-ordered remand.  As a result, therule’s compliance requirements and associated deadlines are currentlyunknown.  It is not possible to providean accurate estimate of the overall cost of this rulemaking at this time due tothe many uncertainties involved.  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.  A decision is notexpected until 2009.

 

***Notice of Violation*** — In July 2002,PSCo received a Notice of Violation (NOV) from the EPA alleging violations ofthe New Source Review (NSR) requirements of the Clean Air Act (CAA) at theComanche and Pawnee plants in Colorado. The NOV specifically alleges that various maintenance, repair andreplacement projects undertaken at the plants in the mid- to late-1990s shouldhave required a permit under the NSR process. PSCo believes it has acted in full compliance with the CAA and NSRprocess.  PSCo believes that the projectsidentified in the NOV fit within the routine maintenance, repair andreplacement exemption contained within the NSR regulations or are otherwise notsubject to the NSR requirements.  PSCodisagrees with the assertions contained in the NOV and intends to vigorouslydefend its position.

 

***Cherokee Station Alleged CAA Violations*** — In January 2008,Xcel Energy, the parent company of PSCo, received a notice letter from RockyMountain Clean Air Action stating that the group intends to sue Xcel Energy foralleged CAA violations at Cherokee Station. The group claims that Cherokee Station’s opacity emissions have exceededallowable limits over the past five years and that its opacity monitorsexceeded downtime limits.  Xcel Energydisputes these claims and believes they are without merit.  The CAA requires notice be given 60 daysprior to filing a lawsuit.  If the groupdoes in fact file its threatened lawsuit, Xcel Energy will vigorously defenditself against these claims.

 

**Legal Contingencies**

** **

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

 

**CabinCreek Hydro Generating 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, OSHAproposed penalties totaling $189,900 for twenty-two serious violations andthree willful violations arising out of the accident.  In April 2008, Xcel Energy notified OSHAof its decision to contest all of the proposed citations. On May 28, 2008the Secretary of Labor filed its complaint, and Xcel Energy subsequently filedits answer on June 17, 2008.  TheCourt ordered this proceeding stayed until March 3, 2009 and indicated anextension of the stay is possible.  Alawsuit has been filed in Denver District Court on behalf of four of thedeceased workers and four of the injured workers.  PSCo and XcelEnergy Inc. are named as defendants, along with RPI Coatings, its parentcompany, Prezioso, and two other contractors who performed work in connectionwith the relining project at Cabin Creek. A second lawsuit (Ledbetter et. al vs. Xcel Energy et. al) has also beenfiled by and on behalf of three employees allegedly injured in the accident.Neither complaint filed in court has been served upon Xcel Energy or PSCo. XcelEnergy and PSCo intend to vigorously defend themselves against the claimsasserted in the lawsuits.

 

**Environmental Litigation**

** **

***Carbon Dioxide EmissionsLawsuit******—***In July 2004,the attorneys general of eight states and New York City, as well as severalenvironmental groups, filed lawsuits in U.S. District Court in the SouthernDistrict of New York against five utilities, including Xcel Energy, the parentcompany of PSCo, to force reductions in carbon dioxide (CO2) emissions.  The other utilitiesinclude American Electric Power Co., Southern Co., Cinergy Corp. and TennesseeValley Authority.  The lawsuits allegethat CO2 emitted by each company is a public nuisanceas defined under state and federal common law because it has contributed toglobal warming.  The lawsuits do notdemand monetary damages.  Instead, thelawsuits ask the court to order each utility to cap and reduce its CO2 emissions.  In October 2004, Xcel Energy and theother defendants filed a motion to dismiss the lawsuit.  On Sept. 19, 2005, the court granted themotion to dismiss on constitutional grounds. Plaintiffs filed an appeal to the Second Circuit Court of Appeals.  In 

 

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June 2007,the Second Circuit Court of Appeals issued an order requesting the parties tofile a letter brief regarding the impact of the United States Supreme Court’sdecision in Massachusetts v. EPA, 127 S.Ct. 1438 (April 2, 2007) on theissues raised by the parties on appeal. Among other things, in its decision in Massachusetts v. EPA, the UnitedStates Supreme Court held that CO2 emissions are a “pollutant” subject toregulation by the EPA under the CAA.  Inresponse to the request of the Second Circuit Court of Appeals, in June 2007,the defendant utilities filed a letter brief stating the position that theUnited States Supreme Court’s decision supports the arguments raised by theutilities on appeal.  The Court ofAppeals has taken the matter under advisement ***and is expected to issue anopinion in due course.***

 

***Comer vs. Xcel Energy Inc. et al.******—*** In April 2006,Xcel Energy received notice of a purported class action lawsuit filed in U.S.District Court in the Southern District of Mississippi.  The lawsuit names more than 45 oil, chemicaland utility companies, including Xcel Energy, the parent company of PSCo,****as defendants and alleges that defendants’ CO2 emissions “were a proximate anddirect cause of the increase in the destructive capacity of Hurricane Katrina.”  Plaintiffs allege in support of their claim,several legal theories, including negligence and public and private nuisanceand seek damages related to the loss resulting from the hurricane.  Xcel Energy believes this lawsuit is withoutmerit and intends to vigorously defend itself against these claims.  In August 2007, the court dismissed thelawsuit in its entirety against all defendants on constitutional grounds.  In September 2007, plaintiffs filed anotice of appeal to the Fifth Circuit Court of Appeals. *** ***Oral arguments were presentedto the Court of Appeals on Aug. 6, 2008. On Sept. 26, 2008, the Court of Appeals notified theparties that this matter was set for re-argument on Nov. 3, 2008. Noexplanation was given for the decision.

 

***Native Village of Kivalina vs. Xcel EnergyInc. et al.******—*** In February 2008, theCity and Native Village of Kivalina, Alaska, filed a lawsuit in U.S. DistrictCourt for the Northern District of California against Xcel Energy, the parentcompany of PSCo, and 23 other oil, gas and coal companies.  The suit was brought on behalf ofapproximately 400 native Alaskans, the Inupiat Eskimo, who claim thatDefendants’ emission of CO2 and other greenhouse gases (GHG) contribute toglobal warming, which is harming their village. Plaintiffs claim that as a consequence, the entire village must berelocated at a cost of between $95 million and $400 million.  Plaintiffs assert a nuisance claim underfederal and state common law, as well as a claim asserting “concert of action”in which defendants are alleged to have engaged in tortious acts in concertwith each other.  Xcel Energy was notnamed in the civil conspiracy claim. Xcel Energy believes the claims asserted in this lawsuit are withoutmerit and joined with other utility defendants in filing a motion to dismiss on June 30, 2008.

 

**Employment, Tort and Commercial Litigation**

** **

***Qwest vs. Xcel Energy Inc.******—*** In June 2004,an employee of PSCo was seriously injured when a pole owned by Qwestmalfunctioned.  In September 2005,the employee commenced an action against Qwest in Denver state court.  In April 2006, Qwest filed a third partycomplaint against PSCo based on terms in a joint pole use agreement betweenQwest and PSCo. Pursuant to this agreement, Qwest asserted PSCo had anaffirmative duty to properly train and instruct its employees on pole safety,including testing the pole for soundness before climbing.  In May 2006, PSCo filed a counterclaimagainst Qwest asserting Qwest had a duty to PSCo and an obligation under thecontract to maintain its poles in a safe and serviceable condition.  In May 2007, the matter was tried andthe jury found Qwest solely liable for the accident and this determinationresulted in an award of damages in the amount of approximately $90million.  On June 16, 2008, Qwestfiled its appellate brief.  After thematter is fully briefed by the parties, oral arguments will be scheduled.

 

***Mallon v. Xcel Energy Inc.******—***In July 2007, TheodoreMallon and TransFinancial Corporation filed a declaratory judgment actionagainst Xcel Energy in U.S. District Court in Colorado (Mallon FederalAction).  In this lawsuit, plaintiffsseek a determination that Xcel Energy is not entitled to assert claims againstplaintiffs related to the 1984 and 1985 sale of COLI to PSCo, a predecessor ofXcel Energy.  In August 2007, XcelEnergy, PSCo and PSRI commenced a lawsuit in Colorado state court againstMallon and TransFinancial Corporation (Mallon State Action).  In the Mallon State Action, Xcel Energy, PSCoand PSRI seek damages against Mallon and TransFinancial for, among otherthings, breach of contract and breach of fiduciary duties associated with thesale of the COLI policies.  In August 2007,Xcel Energy also filed a motion to stay or, in the alternative, to dismiss theMallon Federal Action.  In September 2007,a motion to stay the Mallon State Court action was subsequently filed by Mallonand TransFinancial.  In November 2007,the U.S. District Court in Colorado dismissed the complaint in the MallonFederal Action and Mallon and TransFinancial subsequently withdrew their motionto stay the Mallon State Court Action. In May 2008, Xcel Energy, PSCo andPSRI filed a second amended complaint that, among other things, adds ProvidentLife & Accident Insurance Company (Provident) as a defendant andasserts claims for breach of contract, unjust enrichment and fraudulentconcealment against the insurance company. On June 23, 2008, Providentfiled a motion to dismiss the complaint. Xcel Energy, PSCo and PSRI filed abrief in opposition to the motion on July 28, 2008. Oral arguments werepresented to the court on Sept. 19, 2008. On Oct. 22, 2008, Judge Morris Sandstead, Jr. grantedProvident’s motion in part, but denied the motion with respect to a majority ofthe core causes of action asserted by PSCo, Xcel Energy Inc. and PSRIInvestments.

 

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

 

***Commercial Paper —***AtSept. 30, 2008 and Dec. 31, 2007, PSCo had commercial paperoutstanding of $0.0 million and $271.0 million, respectively.  The weighted average interest rate at Dec. 31,2007 was 5.64 percent.

 

***Money Pool****** —***Xcel Energy has established a utility moneypool arrangement that allows for short-term loans between the utilitysubsidiaries and from the holding company to the utility subsidiaries atmarket-based interest rates. The utility money pool arrangement does not allowloans from the utility subsidiaries to the holding company.  PSCo has approval to borrow up to $250million under the arrangement.  AtSept. 30, 2008 and Dec. 31, 2007, PSCo had money pool loansoutstanding of $96.0 million and $100.6 million, respectively.  The weighted average interest rates atSept. 30, 2008 and Dec. 31, 2007, were 3.00 percent and 5.64 percent,respectively.

 

**8.****             ****Long-TermBorrowings and Other Financing Instruments**

 

On Aug. 13, 2008,PSCo issued $300 million of 5.80 percent first mortgage bonds, series due Aug. 1,2018 and $300 million of 6.50 percent first mortgage bonds, series due Aug. 1,2038.  PSCo added the net proceedsfrom the sale of the first mortgage bonds to its general funds and applied a portion of such netproceeds to fund the payment at maturity of $300 million of 4.375 percent firstmortgage bonds due Oct. 1, 2008.

 

**9.****             ****DerivativeInstruments**

 

PSCo usesderivative instruments in connection with its interest rate hedging, short-termwholesale, and commodity trading activities, including forward contracts,futures, swaps and options.  Qualifyinghedging relationships are designated as a hedge of a forecasted transaction orfuture cash flow (cash flow hedge).  Thetypes of qualifying hedging transactions that PSCo is currently engaged in arediscussed below.

 

**CashFlow Hedges**

 

***Commodity Cash Flow Hedges*** — PSCo enters intoderivative instruments to manage variability of future cash flows from changesin commodity prices.  This could include the purchase or saleof energy or energy-related products, the use of natural gas to generateelectric energy, or gas purchased for resale and fuel for fleet vehicles.  These derivative instrumentsare designated as cash flow hedges for accounting purposes.  At Sept. 30, 2008, PSCo had variouscommodity-related contracts designated as cash flow hedges extending through December 2010. Changes in the fair value of cash flow hedges are recorded in othercomprehensive income or deferred as a regulatory asset or liability.  This classification is based on theregulatory recovery mechanisms in place.

 

AtSept. 30, 2008, PSCo had $1.4 million of net losses in accumulated othercomprehensive income related to commodity cash flow hedge contracts; $0.7million is expected to be recognized in earnings during the next 12 months asthe hedged transactions settle.

 

***Interest Rate Cash Flow Hedges*** — PSCo entersinto various instruments that effectively fix the yield or price on a specifiedbenchmark interest rate for a specific period. These derivative instruments are designated as cash flow hedges foraccounting purposes.

 

AtSept. 30, 2008, PSCo had $1.5 million of net gains in accumulated othercomprehensive income related to interest rate derivatives that are expected tobe recognized in earnings during the next 12 months.

 

Thefollowing table shows the major components of the derivative instrumentsvaluation in the consolidated balance sheets at Sept. 30 and Dec. 31:

*** ***
| ** **                                                  | ** ** | **Sept. 30, 2008**                               | ** ** | **Dec. 31, 2007**                                | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
| **(Thousands of Dollars)**                        | ** ** | **Derivative  Instruments  Valuation –  Assets** | ** ** | **Derivative  Instruments  Valuation -  Liabilities** | ** ** | **Derivative  Instruments  Valuation - Assets** | ** ** | **Derivative  Instruments  Valuation -  Liabilities** | ** ** |
| Long term purchased power agreements                        |       | $                                                          | 141,982    |                                                       | $          | 69,748 |   | $ | 155,928 |   | $ | 96,654 |   |
| Electricity and natural gas trading and hedging instruments |       | 7,373                                                      |       | 27,002                                                     |       | 19,117 |   | 9,057 |   |
| Total                                                       |       | $                                                          | 149,355    |                                                       | $          | 96,750 |   | $ | 175,045 |   | $ | 105,711 |   |

 

In 2003, as a result of FASB Statement 133Implementation Issue No. C20, PSCo began recording several long-termpurchased power agreements at fair value due to accounting requirements relatedto underlying price adjustments.  Asthese purchases are recovered through normal regulatory recovery mechanisms inthe respective jurisdictions, the changes in fair value for these contractswere 

 

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offset by regulatory assetsand liabilities.  During 2006, PSCoqualified these 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.

 

The impact of qualifyingcash flow hedges on PSCo’s accumulated other comprehensive income, included asa component of common stockholder’s equity, is detailed in the following table:

 
| ** **                                                                              | ** ** | **Nine months ended Sept. 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Thousands of Dollars)**                                                    | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Accumulated other comprehensive income related to cash flow hedges at  Jan. 1      |       | $                                                   | 12,447     |   | $ | 12,614 |   |
| After-tax net unrealized (losses) gains related to derivatives  accounted for as hedges |       | (1,120                                              | )          | 1,150 |   |
| After-tax net realized gains on derivative transactions reclassified  into earnings     |       | (1,150                                              | )          | (1,132 | ) |
| Accumulated other comprehensive income related to cash flow hedges at  Sept. 30    |       | $                                                   | 10,177     |   | $ | 12,632 |   |

 

**10.****      ****Fair ValueMeasurements**

 

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

** **

Level 1 – Quoted pricesare available in active markets for identical assets or liabilities as of thereported date. The types of assets and liabilities included in Level 1 arehighly liquid and actively traded instruments with quoted prices.

 

Level 2 – Pricing inputsare other than quoted prices in active markets, but are either directly orindirectly observable as of the reported date. The types of assets and liabilities included in Level 2 are typicallyeither comparable to actively traded securities or contracts or priced withmodels using highly observable inputs.

 

Level 3 – Significantinputs to pricing have little or no observability as of the reportingdate.  The types of assets and liabilitiesincluded in Level 3 are those with inputs requiring significant managementjudgment or estimation.

 

PSCo held several commodityderivatives measured at fair value on a recurring basis as of Sept. 30,2008.  Fair value for these commodityderivatives was primarily determined based on observable prices for identicalor similar forward contracts, or internally prepared option valuation modelsusing observable forward curves and volatilities.  For certain instruments, it may be necessaryto use inputs requiringsignificant management judgment or estimation, such as the long-term commodityprice forecasts used to determine the fair value of long-term energyforwards.  PSCo continuously monitorsthe creditworthiness of the counterparties to its commodity derivativecontracts and assesses each counterparty’s ability to perform on thetransactions set forth in the contracts. Given this assessment, as well an assessment of the impact of PSCo’s owncredit risk when determining the fair value of commodity derivativeliabilities, the impact of considering credit risk was immaterial to the fairvalue of commodity derivative assets and liabilities at Sept. 30, 2008.

 

Thefollowing table presents, for each of the SFAS No. 157 hierarchy levels,PSCo’s assets and liabilities that are measured at fair value on a recurringbasis as of Sept. 30, 2008:

 
| **(Thousands of Dollars)** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Counterparty  Netting (a)** | ** ** | **Net Balance** | ** ** |
|--------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|------------------------------------|------------|----------------------|------------|
| Commodity derivative assets          |       | $                | 107        |             | $          | 5,189            |       | $                                  | 5,947      |                 | $          | (3,870 | ) | $ | 7,373 |   |
| Commodity derivative liabilities     |       | 1,437            |       | 26,862           |       | 3,815            |       | (5,112                             | )          | 27,002               |       |
|                                      |            |                  |            |                  |            |                  |            |                                    |            |                      |            |  |  |  |  |  |

 

----

(a) FASB Interpretation No. 39*Offsetting of Amounts Relating to CertainContracts*, as amended by FASB Staff Position FIN 39-1 *Amendment of FASB 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. A master netting agreement is an agreementbetween two parties who have multiple contracts with each other that providesfor the net settlement of all contracts in the event of default on or termination of any one contract.

 

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**The following tables present the changes inLevel 3 recurring fair value measurements for the three and nine months endedSept. 30, 2008:**

** **
| **(Thousands of Dollars)**       | ** ** | **Commodity  Derivatives,  Net** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| Balance, July 1, 2008                 |       | $                                | 2,508      |   |
| Purchases, issuances, and settlements, net |       | (2,011                           | )          |
| Gains recognized in earnings               |       | 1,635                            |       |
| Balance, Sept. 30, 2008               |       | $                                | 2,132      |   |

 
| **(Thousands of Dollars)**       | ** ** | **Commodity  Derivatives,  Net** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| Balance, Jan. 1, 2008                 |       | $                                | 4,121      |   |
| Purchases, issuances, and settlements, net |       | (3,615                           | )          |
| Gains recognized in earnings               |       | 1,626                            |       |
| Balance, Sept. 30, 2008               |       | $                                | 2,132      |   |

 

Gains on Level 3 commodity derivatives recognized inearnings for the three and nine months ended Sept. 30, 2008, include $0.6million and $1.1 million, respectively, of net unrealized gains relating tocommodity derivatives held at Sept. 30, 2008.  Realized and unrealized gains and losses oncommodity trading activities are included in electric utility revenues.

 

**11.     Detail ofInterest and Other Income (Expense), Net**

 

Interest and other income (expense), net, for the three and nine monthsended Sept. 30 consisted of the following:

 
| ** **                                     | ** ** | **Three months ended Sept. 30,** | ** ** | **Nine months ended Sept. 30,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Thousands of Dollars)**           | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| Interest income                                |       | $                                                    | 2,470      |                                                | $          | 3,328 |   | $ | 6,024 |   | $ | 6,439 |   |
| Other nonoperating income                      |       | 531                                                  |       | 923                                                 |       | 2,310 |   | 1,918 |   |
| Insurance policy income (expense)              |       | 185                                                  |       | (4,007                                              | )          | 2,163 |   | (13,595 | ) |
| Total interest and other income (expense), net |       | $                                                    | 3,186      |                                                | $          | 244 |   | $ | 10,497 |   | $ | (5,238 | ) |

 

**12.          SegmentInformation**

 

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

 
| **(Thousands of Dollars)**       | ** ** | **Regulated  Electric  Utility** | ** ** | **Regulated  Natural  Gas Utility** | ** ** | **All  Other** | ** ** | **Reconciling  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|------------------------------------------|------------|----------------|------------|-------------------------------|------------|-------------------------|------------|
| **Three months ended Sept. 30, 2008** | ** ** | ** **                       | ** ** | ** **                               | ** ** | ** **     | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues from:                             |       |                             |       |                                     |       |           |       |                          |       |                    |       |
| External customers                         |       | $                                | 924,900    |                                     | $          | 154,130        |       | $                             | 6,697      |                    | $          | — |   | $ | 1,085,727 |   |
| Internal customers                         |       | 52                               |       | 10                                       |       | —         |       | (62                           | )          | —                  |       |
| Total revenues                             |       | $                                | 924,952    |                                     | $          | 154,140        |       | $                             | 6,697      |                    | $          | (62 | ) | $ | 1,085,727 |   |
| Segment net income                         |       | $                                | 75,308     |                                     | $          | 8,065          |       | $                             | 2,908      |                    | $          | — |   | $ | 86,281 |   |
|                                       |       |                             |       |                                     |       |           |       |                          |       |                    |       |
| **Three months ended Sept. 30, 2007** | ** ** | ** **                       | ** ** | ** **                               | ** ** | ** **     | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues from:                             |       |                             |       |                                     |       |           |       |                          |       |                    |       |
| External customers                         |       | $                                | 669,598    |                                     | $          | 104,930        |       | $                             | 6,733      |                    | $          | — |   | $ | 781,261 |   |
| Internal customers                         |       | 27                               |       | (30                                      | )          | —         |       | 3                             |       | —                  |       |
| Total revenues                             |       | $                                | 669,625    |                                     | $          | 104,900        |       | $                             | 6,733      |                    | $          | 3 |   | $ | 781,261 |   |
| Segment net income                         |       | $                                | 87,991     |                                     | $          | 9,289          |       | $                             | 8,378      |                    | $          | — |   | $ | 105,658 |   |

 

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| **(Thousands of Dollars)**      | ** ** | **Regulated  Electric  Utility** | ** ** | **Regulated  Natural  Gas Utility** | ** ** | **All  Other** | ** ** | **Reconciling  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|------------------------------------------|------------|----------------|------------|-------------------------------|------------|-------------------------|------------|
| **Nine months ended Sept. 30, 2008** | ** ** | ** **                       | ** ** | ** **                               | ** ** | ** **     | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues from:                            |       |                             |       |                                     |       |           |       |                          |       |                    |       |
| External customers                        |       | $                                | 2,317,753  |                                     | $          | 966,384        |       | $                             | 25,375     |                    | $          | — |   | $ | 3,309,512 |   |
| Internal customers                        |       | 182                              |       | 78                                       |       | —         |       | (260                          | )          | —                  |       |
| Total revenues                            |       | $                                | 2,317,935  |                                     | $          | 966,462        |       | $                             | 25,375     |                    | $          | (260 | ) | $ | 3,309,512 |   |
| Segment net income                        |       | $                                | 177,377    |                                     | $          | 59,043         |       | $                             | 10,504     |                    | $          | — |   | $ | 246,924 |   |

 
| **(Thousands of Dollars)**      | ** ** | **Regulated  Electric  Utility** | ** ** | **Regulated  Natural  Gas Utility** | ** ** | **All  Other** | ** ** | **Reconciling  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|-------------------------------------------|------------|----------------------------------|------------|------------------------------------------|------------|----------------|------------|-------------------------------|------------|-------------------------|------------|
| **Nine months ended Sept. 30, 2007** | ** ** | ** **                       | ** ** | ** **                               | ** ** | ** **     | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues from:                            |       |                             |       |                                     |       |           |       |                          |       |                    |       |
| External customers                        |       | $                                | 1,944,240  |                                     | $          | 811,481        |       | $                             | 24,829     |                    | $          | — |   | $ | 2,780,550 |   |
| Internal customers                        |       | 184                              |       | 22                                       |       | —         |       | (206                          | )          | —                  |       |
| Total revenues                            |       | $                                | 1,944,424  |                                     | $          | 811,503        |       | $                             | 24,829     |                    | $          | (206 | ) | $ | 2,780,550 |   |
| Segment net income                        |       | $                                | 194,419    |                                     | $          | 49,846         |       | $                             | (38,720    | )                       | $          | — |   | $ | 205,545 |   |

** **

**13.****              ****Comprehensive Income**

 

The components of totalcomprehensive income are shown below:

 
| ** **                                                                              | ** ** | **Three months ended  Sept. 30,** | ** ** | **Nine months ended  Sept. 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------|------------|
| **(Thousands of Dollars)**                                                    | ** ** | **2008**                                         | ** ** | **2007**                                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net income                                                                              |       | $                                                | 86,281     |                                            | $          | 105,658 |   | $ | 246,924 |   | $ | 205,545 |   |
| Other comprehensive income:                                                             |       |                                             |       |                                            |       |   |   |   |   |
| After-tax net unrealized (losses) gains related to derivatives  accounted for as hedges |       | (1,296                                           | )          | (257                                            | )          | (1,120 | ) | 1,150 |   |
| After-tax net realized gains on derivative transactions reclassified  into earnings     |       | (384                                             | )          | (385                                            | )          | (1,150 | ) | (1,132 | ) |
| Other comprehensive (loss) income                                                       |       | (1,680                                           | )          | (642                                            | )          | (2,270 | ) | 18 |   |
| Comprehensive income                                                                    |       | $                                                | 84,601     |                                            | $          | 105,016 |   | $ | 244,654 |   | $ | 205,563 |   |

 

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**14.          Benefit Plans and Other PostretirementBenefits**

 

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

 

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

 
| ** **                                                  | ** ** | **Three months ended Sept. 30,** | ** ** |
|-------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008 (1)**                                    | ** ** | **2007 (1)** | ** ** | **2008** | ** ** | **2007** | ** ** |
| **(Thousands of Dollars)**                        | ** ** | **Pension Benefits**                            | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                        | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                |       | $                                                    | 15,851     |   | $ | 15,520 |   | $ | 1,338 |   | $ | 1,453 |   |
| Interest cost                                               |       | 42,630                                               |       | 41,313 |   | 12,720 |   | 12,619 |   |
| Expected return on plan assets                              |       | (68,584                                              | )          | (66,208 | ) | (7,963 | ) | (7,600 | ) |
| Amortization of transition obligation                       |       | —                                               |       | — |   | 3,644 |   | 3,644 |   |
| Amortization of prior service cost (credit)                 |       | 5,166                                                |       | 6,487 |   | (544 | ) | (545 | ) |
| Amortization of net loss                                    |       | 3,185                                                |       | 4,211 |   | 2,875 |   | 3,550 |   |
| Net periodic benefit (credit) cost                          |       | (1,752                                               | )          | 1,323 |   | 12,070 |   | 13,121 |   |
| Credits not recognized due to the effects of regulation     |       | 2,258                                                |       | 2,787 |   | — |   | — |   |
| Additional cost recognized due to the effects of regulation |       | —                                               |       | — |   | 972 |   | 972 |   |
| Net benefit cost recognized for financial reporting         |       | $                                                    | 506        |   | $ | 4,110 |   | $ | 13,042 |   | $ | 14,093 |   |
|                                                        |       |                                                 |       |   |   |   |   |   |   |
| **PSCo**                                                    | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net periodic benefit cost                                   |       | $                                                    | 2,969      |   | $ | 4,780 |   | $ | 6,747 |   | $ | 7,165 |   |
| Additional cost recognized due to the effects of regulation |       | —                                               |       | — |   | 972 |   | 972 |   |
| Net benefit cost recognized for financial reporting         |       | $                                                    | 2,969      |   | $ | 4,780 |   | $ | 7,719 |   | $ | 8,137 |   |

 

----

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

 
| ** **                                                  | ** ** | **Nine months ended Sept. 30,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008 (1)**                                   | ** ** | **2007 (1)** | ** ** | **2008** | ** ** | **2007** | ** ** |
| **(Thousands of Dollars)**                        | ** ** | **Pension Benefits**                           | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                        | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                |       | $                                                   | 47,553     |   | $ | 46,560 |   | $ | 4,013 |   | $ | 4,359 |   |
| Interest cost                                               |       | 127,890                                             |       | 123,939 |   | 38,160 |   | 37,857 |   |
| Expected return on plan assets                              |       | (205,753                                            | )          | (198,624 | ) | (23,888 | ) | (22,800 | ) |
| Amortization of transition obligation                       |       | —                                              |       | — |   | 10,932 |   | 10,932 |   |
| Amortization of prior service cost (credit)                 |       | 15,498                                              |       | 19,461 |   | (1,632 | ) | (1,635 | ) |
| Amortization of net loss                                    |       | 9,555                                               |       | 12,633 |   | 8,624 |   | 10,650 |   |
| Net periodic benefit (credit) cost                          |       | (5,257                                              | )          | 3,969 |   | 36,209 |   | 39,363 |   |
| Credits not recognized due to the effects of regulation     |       | 6,775                                               |       | 8,361 |   | — |   | — |   |
| Additional cost recognized due to the effects of regulation |       | —                                              |       | — |   | 2,918 |   | 2,918 |   |
| Net benefit cost recognized for financial reporting         |       | $                                                   | 1,518      |   | $ | 12,330 |   | $ | 39,127 |   | $ | 42,281 |   |
|                                                        |       |                                                |       |   |   |   |   |   |   |
| **PSCo**                                                    | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net periodic benefit cost                                   |       | $                                                   | 8,908      |   | $ | 14,340 |   | $ | 20,242 |   | $ | 21,496 |   |
| Additional cost recognized due to the effects of regulation |       | —                                              |       | — |   | 2,918 |   | 2,918 |   |
| Net benefit cost recognized for financial reporting         |       | $                                                   | 8,908      |   | $ | 14,340 |   | $ | 23,160 |   | $ | 24,414 |   |

 

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

 

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

** **

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

 

**Forward-LookingInformation**

 

The following discussion andanalysis by management focuses on those factors that had a material effect onthe financial condition and results of operations of PSCo during the periodspresented, or are expected to have a material impact in the future.  It should be read in conjunction with theaccompanying unaudited consolidated financial statements and notes.

 

Exceptfor the historical statements contained in this report, the matters discussedin the following discussion and analysis are forward-looking statements thatare subject to certain risks, uncertainties and assumptions.  Such forward-looking statements are intendedto be identified in this document by the words “anticipate,” “believe,” “estimate,”“expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,”“potential,” “should” and similar expressions. Actual results may vary materially. Forward-looking statements speak only as of the date they are made, andwe do not undertake any obligation to update them to reflect changes that occurafter that date.  Factors that couldcause actual results to differ materially include, but are not limited to:general economic conditions, including the availability of credit and itsimpact on capital expenditures and the ability of Xcel Energy and itssubsidiaries to obtain financing on favorable terms; business conditions in theenergy industry; actions of credit rating agencies; competitive factors, includingthe extent and timing of the entry of additional competition in the marketsserved by PSCo; unusual weather; effects of geopolitical events, including warand acts of terrorism; state, federal and foreign legislative and regulatoryinitiatives that affect cost and investment recovery, have an impact on ratesor have an impact on asset operation or ownership or impose environmentalcompliance conditions; structures that affect the speed and degree to whichcompetition enters the electric and natural gas markets; costs and othereffects of legal and administrative proceedings, settlements, investigationsand claims; actions of accounting regulatory bodies; the items described underFactors Affecting Results of Continuing Operations; and the other risk factorslisted from time to time by PSCo in reports filed with the SEC, including “RiskFactors” in Item 1A of PSCo’s Form 10-K for the year ended Dec. 31,2007 and Exhibit 99.01 to this report on Form 10-Q for the quarterended Sept. 30, 2008.

 

**MarketRisks**

 

PSCo is exposed to marketrisks, including changes in commodity prices and interest rates, as disclosedin Item 7A — Quantitative and Qualitative Disclosures About Market Risk in itsAnnual Report on Form 10-K for the year ended Dec. 31, 2007 and inItem 1A — Risk Factors in this Quarterly Report on Form 10-Q.  Commodity price and interest rate risks forPSCo are mitigated in most jurisdictions due to cost-based rateregulation.  Continued distress in thefinancial markets may impact the fair value of the debt and equity securitiesin PSCo’s pension and postretirement health care plan trusts, as well as PSCo’sability to earn a return on short-term investments of excess cash.

 

**RESULTS OFOPERATIONS**

 

PSCo’s net income wasapproximately $246.9 million for the first nine months of 2008, compared withapproximately $205.5 million for the first nine months of 2007.

 

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

 

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

 

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

 

Margins from commoditytrading activity conducted at PSCo are partially redistributed to Northern StatesPower Co., a Minnesota corporation (NSP-Minnesota) and SouthwesternPublic Service Co., a New Mexico corporation (SPS), both wholly ownedsubsidiaries of Xcel Energy, pursuant to the joint operating agreement(JOA) approved by the FERC.  Marginsreceived pursuant to 

 

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the JOA are reflected aspart of base electric utility revenues. Short-term wholesale and commodity trading margins reflect the impact ofregulatory sharing, if applicable.  Tradingrevenues are reported net of related costs (i.e., on a margin basis) in theConsolidated Statements of Income. Commodity trading expenses include purchased power, transmission, brokerfees and other related costs.  Short-termwholesale and commodity trading margins reflect the estimated impact ofregulatory sharing of margins, if applicable.

 

The following table detailsbase electric utility, short-term wholesale and commodity trading revenues andmargin:

 
| **(Millions of Dollars)**                     | ** ** | **Base  Electric  Utility** | ** ** | **Short-term  Wholesale** | ** ** | **Commodity  Trading** | ** ** | **Consolidated  Total** | ** ** |
|---------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|------------------------|------------|-------------------------|------------|
| **Nine months ended Sept. 30, 2008**               | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **             | ** ** | ** **              | ** ** |
| Electric utility revenues (excluding commodity trading) |       | $                           | 2,233      |                      | $          | 85                     |       | $                       | —     |   | $ | 2,318 |   |
| Electric fuel and purchased power                       |       | (1,350                      | )          | (80                       | )          | —                 |       | (1,430                  | )          |
| Commodity trading revenues                              |       | —                      |       | —                    |       | 59                     |       | 59                      |       |
| Commodity trading expenses                              |       | —                      |       | —                    |       | (59                    | )          | (59                     | )          |
| Gross margin before other operating expenses            |       | $                           | 883        |                      | $          | 5                      |       | $                       | —     |   | $ | 888 |   |
| Margin as a percentage of revenues                      |       | 39.5                        | %          | 5.9                       | %          | —                 | %          | 37.4                    | %          |
|                                                    |       |                        |       |                      |       |                   |       |                    |       |
| **Nine months ended Sept. 30, 2007**               | ** ** | ** **                  | ** ** | ** **                | ** ** | ** **             | ** ** | ** **              | ** ** |
| Electric utility revenues (excluding commodity trading) |       | $                           | 1,883      |                      | $          | 61                     |       | $                       | —     |   | $ | 1,944 |   |
| Electric fuel and purchased power                       |       | (1,005                      | )          | (53                       | )          | —                 |       | (1,058                  | )          |
| Commodity trading revenues                              |       | —                      |       | —                    |       | 127                    |       | 127                     |       |
| Commodity trading expenses                              |       | —                      |       | —                    |       | (127                   | )          | (127                    | )          |
| Gross margin before other operating expenses            |       | $                           | 878        |                      | $          | 8                      |       | $                       | —     |   | $ | 886 |   |
| Margin as a percentage of revenues                      |       | 46.6                        | %          | 13.1                      | %          | —                 | %          | 42.8                    | %          |

 

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

 

# ***Base Electric Revenues***

 
| **(Millions of Dollars)**                             | ** ** | **2008 vs. 2007** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------|------------|
| Fuel and purchased power cost recovery                          |       | $                           | 344        |   |
| Renewable Energy Standard Adjustment (RESA) rider               |       | 14                          |       |
| Conservation and non-fuel riders                                |       | 10                          |       |
| Retail sales growth (excluding weather impact)                  |       | 10                          |       |
| Increased revenues due to leap year (weather-normalized impact) |       | 3                           |       |
| Firm wholesale                                                  |       | (18                         | )          |
| Estimated impact of weather                                     |       | (11                         | )          |
| Other                                                           |       | (2                          | )          |
| Total increase in base electric revenues                        |       | $                           | 350        |   |

 

# ***Base Electric Margin***

 
| **(Millions of Dollars)**                           | ** ** | **2008 vs. 2007** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| Conservation and non-fuel riders                              |       | $                           | 10         |   |
| Retail sales growth (excluding weather impact)                |       | 10                          |       |
| Purchased capacity costs                                      |       | 5                           |       |
| Fuel handling and procurement                                 |       | 4                           |       |
| Increased margin due to leap year (weather-normalized impact) |       | 3                           |       |
| Firm wholesale                                                |       | (12                         | )          |
| Estimated impact of weather                                   |       | (11                         | )          |
| Other                                                         |       | (4                          | )          |
| Total increase in base electric margin                        |       | $                           | 5          |   |

 

**Thedecrease in firm wholesale revenues is largely due to the loss ofCheyenne Light, Fuel, & Power as a customer.**

 

**Thefavorable change in purchased capacity costs from the prior year is due to moreof these costs being recovered from retail customers as a result of a higherpercentage of the sales coming from retail vs. wholesale customers.**

** **

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** **

# ***Natural Gas Utility Margins***

# *** ***

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

 
| ** **                               | ** ** | **Nine Months ended Sept. 30,** | ** ** |
|------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Millions of Dollars)**      | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| Natural gas utility revenues             |       | $                                                   | 966        |   | $ | 811 |   |
| Cost of natural gas sold and transported |       | (694                                                | )          | (562 | ) |
| Natural gas utility margin               |       | $                                                   | 272        |   | $ | 249 |   |

 

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

 

***Natural Gas Revenues***

 
| **(Millions of Dollars)**                             | ** ** | **2008 vs. 2007** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------|------------|
| Purchased natural gas adjustment clause recovery                |       | $                           | 132        |   |
| Base rate changes                                               |       | 19                          |       |
| Retail sales growth (excluding weather impact)                  |       | 4                           |       |
| Transportation                                                  |       | 1                           |       |
| Increased revenues due to leap year (weather-normalized impact) |       | 1                           |       |
| Other                                                           |       | (2                          | )          |
| Total increase in natural gas revenues                          |       | $                           | 155        |   |

 

***Natural Gas Margin***

 
| **(Millions of Dollars)**                           | ** ** | **2008 vs. 2007** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| Base rate changes                                             |       | $                           | 19         |   |
| Retail sales growth (excluding weather impact)                |       | 4                           |       |
| Increased margin due to leap year (weather-normalized impact) |       | 1                           |       |
| Transportation                                                |       | 1                           |       |
| Other                                                         |       | (2                          | )          |
| Total increase in natural gas margin                          |       | $                           | 23         |   |

 

**Non-FuelOperating Expense and Other Items**

 

***Other operating and maintenance expenses —***The following summarizes the components ofthe changes in other operating and maintenance expenses for the nine monthsended Sept. 30:

 
| **(Millions of Dollars)**                        | ** ** | **2008 vs. 2007** | ** ** |
|------------------------------------------------------------|------------|-----------------------------|------------|
| Higher plant generation costs                              |       | $                           | 15         |   |
| Higher consulting costs                                    |       | 7                           |       |
| Higher labor costs                                         |       | 6                           |       |
| Higher supplemental gas amortization                       |       | 2                           |       |
| Lower employee benefit costs                               |       | (8                          | )          |
| Other                                                      |       | 2                           |       |
| Total increase in other operating and maintenance expenses |       | $                           | 24         |   |

 

***Conservation and DSM*** — Conservation and DSMexpense increased approximately $12.8 million for the first nine months of2008, compared with the first nine months of 2007.  The higher expense is attributable to theongoing expansion of such programs as designed, in part, to meet certainregulatory commitments in our various jurisdictions.

 

***Interest and other income (expense),net***—******Interest and other income (expense), net, increased byapproximately $15.7 million for the first nine months of 2008 compared with thefirst nine months of 2007, primarily due to lower interest expense, net ofinterest income largely as a result of PSRI terminating the COLI program in2007.

 

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***Allowance for funds used during construction, equity and debt (AFDC)*****— AFDC is a non-cash amount capitalized as a part of construction costsrepresenting the cost of financing the construction.  Generally, these costs are recovered fromcustomers, in future rates, as the related property is depreciated.  AFDC increased by $21.1 million for the firstnine months of 2008, compared with the first nine months of 2007.  This increase was primarily due to the ongoingconstruction of Comanche 3, which was partially offset by thecurrent recovery from customers of the financing costs related to thisconstruction through base rates, resulting in a lower recognition of AFDC.

 

***Interest charges and financing costs***—******Interestcharges and financing costs increased by approximately $12.2 million, or 12.1percent, for the first nine months of 2008 compared with the first nine monthsof 2007, primarily due to increased long-term borrowings, partially offset bydecreased short-term borrowings.

 

***Income taxes***—Income tax expense increased by $9.8 million for the first nine months of 2008,compared with the first nine months of 2007.  The increase in income taxexpense was primarily due to an increase in pretax income in 2008 (excludingCOLI), partially offset by $16.1 million of tax expense related to the COLIsettlement in 2007.  The effective tax rate was 33.8 percent for the firstnine months of 2008, compared with 36.2 percent for the same period in2007.  The higher effective tax rate for the first nine months of 2007 wasprimarily due to the COLI settlement, partially offset by an increase in theforecasted annual effective tax rate for 2008, which was largely a result ofPSRI terminating the COLI program in 2007. Without these charges and benefits,the effective tax rate for the first nine months of 2008 and 2007 would havebeen 34.0 percent and 35.7 percent, respectively.

 

***Regulation***

** **

##### **Summary of Recent Regulatory Developments**

##### ** **

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

 

***FERC Tie Line Investigation —***In October 2007,the FERC Office of Enforcement, Division of Investigations (DOI), commenced anon-public investigation of use of network transmission service across theLamar Tie Line, a transmission facility that connects PSCo and SPS, anaffiliate of PSCo.  Xcel Energy is fullycooperating with the DOI investigation. In July 2008, the DOI issued a preliminary report alleging XcelEnergy violated FERC policies and rules and approved tariffs.  The report represents the preliminaryconclusions of the DOI and is subject to additional procedures.  The report does not constitute a finding bythe FERC, which may, among other things, accept, modify or reject any or all ofthe preliminary conclusions set forth in the report.  Xcel Energy disagrees with the preliminaryreport and has responded to the DOI allegations; Xcel Energy is not able to predictthe outcome of the investigation or what, if any, actions the FERC maytake.  As previously discussed under “Item1A — Risk Factors” in Xcel Energy’s 2007 Annual Report on Form 10-K, theEnergy Policy Act of 2005 has increased the FERC’s civil penalty authority forviolation of FERC statutes, rules and orders.  Given the preliminary nature of this matter,Xcel Energy is unable to determine if the resolution of this matter will have amaterial adverse impact on operations, cash flows or financial condition.

 

***ElectricReliability Standards Matters*****—**In June 2008, PSCo wassubject to an audit of its compliance with the North American ElectricReliability Corporation  (NERC) andregional reliability standards by Western Electricity Coordinating Council(WECC), the NERC regional entity for the PSCo system.  On Sept. 29, 2008, the WECC audit team issuedits confidential final audit report.  Thereport finds possible violations of two standards related to relay maintenance.  The audit report will now be subject toadditional WECC procedures to determine if violations occurred and, if so, theconsequences of such a finding.

 

In response to informationidentified in during the audit, Xcel Energy conducted a comprehensive review ofthe maintenance records for all relay devices on the PSCo transmissionsystem.  That review found PSCo did nothave documentation demonstrating that all relay devices on the PSCo system hadbeen maintained on the schedule in Xcel Energy’s adopted maintenance plan.  In June 2008, PSCo filed a self-reportregarding the maintenance plan violations with the WECC.  In addition, in April, 2008, PSCo filed aself-report with WECC indicating that certain tests of generation stationbatteries had not been completed in accordance with Xcel Energy’s adoptedmaintenance plan for generation station relays and batteries.  In September 2008, as a result of areview of Xcel Energy’s procedures implementing certain NERC CriticalInfrastructure Protection standards applicable to control centers effective July 1,2008, PSCo filed a self-report with the WECC disclosing certain deficiencies inrequirements applicable to access to critical infrastructure assets for theperiod July to September 2008. PSCo filed a mitigation plan with the WECC within 30 days of theself-report discussing how the deficiencies were corrected.

 

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In April 2008, a self-report was filed with WECCindicating that certain tests of generation station batteries had not beencompleted in accordance with Xcel Energy’s adopted maintenance plan forgeneration station relays and batteries. In September 2008, as a result of a review of Xcel Energy’sprocedures implementing certain NERC critical infrastructure protectionstandards applicable to control centers effective July 1, 2008, PSCo fileda self-report with the WECC disclosing certain deficiencies in requirementsapplicable to access to critical infrastructure assets for the period July toSeptember 2008.  PSCo filed amitigation plan with the MRO within 30 days of the self-report discussing howthe deficiencies were corrected.

 

Xcel Energy is uncertain if the WECC audit reportfindings or the self-reports of reliability standards violations will result infinancial penalties being imposed on PSCo. If so, the penalties are not expected to be material.

 

##### **OtherRegulatory Matters**

##### ** **

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

 

·                  Atleast 10 percent of its retail sales by 2010,

·                  15 percentof retail sales by 2015 and

·                  20 percent of retailsales by 2020.

·                  4 percent must be generatedfrom solar renewable resources with half the solar resources being located atcustomers facilities.

 

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

 

***Colorado Climate Action Plan *****—** In November 2007, Governor Ritter of Colorado published aColorado Climate Action Plan, which calls for a reduction in GHG emissions of20 percent by 2020 with additional reductions by 2050.

 

***PSCo Regulatory Policy Initiative*****—** In February 2008, the CPUC held adeliberation meeting in which they identified and discussed a set of policyinitiatives that they intended to pursue over the course of 2008.  At its March 2008 open meetings,the CPUC both discussed and voted to open an investigatory docket that willreview the current regulatory structure to determine if current utilityincentives are aligned with state public policy objectives and to determine ifthe existing structure is internally consistent in achieving theseobjectives.  The CPUC expects to explore alternative forms of ratemakingfor utilities and to better understand the state of the art on differentmechanisms across the nation.  Other policy initiatives included atransmission investigatory docket, which was opened on June 13, 2008,whose focus is to gather information on transmission planning in Colorado andtransmission planning coordination with other states and utilities.  On Sept. 17, 2008, the CPUC opened a customerincentives docket whose scope covers how regulatory structure and incentivesinfluence customer decisions.

 

Severalparties, including PSCo filed comments in the utility incentive docket in September 2008.  The comments covered a wide array of issuesincluding the best way to deliver DSM services to customers, the implicationsto utilities of owning generation or acquiring it through power purchaseagreements and whether there should be revisions to the current regulatorystructure including continued use of rate riders, and other measures to reduceregulatory lag.  The CPUC held a hearingon Oct. 16, 2008 to gain further information from parties.

 

***PSCo Resource Plan ***— PSCo estimates it willpurchase approximately 40 to 50 percent of its total electric systemenergy needs for 2008 and generate the remainder with PSCo-owned resources.Additional capacity has been secured under contract making additional energyavailable for purchase, if required. PSCo currently has under contract orthrough owned generation, the resources necessary to meet its anticipated 2008load obligation. In November 2007, PSCo filed the Colorado Resource Plan(CRP), which details the type and amount of resources that will be added to thesystem for an eight year Resource Acquisition Period (RAP) through2015.  Hearings concluded on July 11, 2008 and a written orderwas issued on Sept. 19, 2008.   The approved plan:

 

·                  Increasesrenewable portfolio to 850 megawatts (MW) by 2015.  PSCo would then have a total of approximately1,900 MW of wind power resources.

·                  Providesfor approximately 200 MW from a central solar thermal facility with storage,with possible option of acquiring up to 600 MW of solar thermalresources with storage as technology develops.

·                  Increasescustomer efficiency and conservation programs with plans to meet the CPUCgoals of annual energy sales reductions toapproximately 3,669 gigawatt hours, that would yield a demandsavings in the range of 886 MW to 994 MW by 2020.

·                  Retirestwo older coal-burning plants (two units at Arapahoe and two units at Cameo)replacing the capacity with company owned resources providing the costs arereasonable.

 

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**Item 4. CONTROLS AND PROCEDURES**

** **

**Disclosure Controls and Procedures**

 

PSCo maintains a set ofdisclosure controls and procedures designed to ensure that information requiredto be disclosed in reports that it files or submits under the SecuritiesExchange Act of 1934 (Exchange Act) is recorded, processed, summarized andreported within the time periods specified in SEC rules and forms.Disclosure controls and procedures include, without limitation, controls andprocedures designed to ensure that information required to be disclosed by usin reports under the Exchange Act is accumulated and communicated tomanagement, including the chief executive officer (CEO) and chief financialofficer (CFO), allowing timely decisions regarding required disclosure. As ofthe end of the period covered by this report, based on an evaluation carriedout under the supervision and with the participation of PSCo’s management,including the CEO and the CFO, of the effectiveness of our disclosure controlsand procedures, the CEO and CFO have concluded that PSCo’s disclosure controlsand procedures are effective.

 

**Internal Control Over FinancialReporting**

** **

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

 

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

##### ** **

**Item 1. LEGAL PROCEEDINGS**

 

In the normal course ofbusiness, various lawsuits and claims have arisen against PSCo.  After consultation with legal counsel, PSCohas recorded an estimate of the probable cost of settlement or other dispositionfor such matters.  See Notes 5 and 6 ofthe consolidated financial statements in this Quarterly Report on Form 10-Qfor further discussion of legal proceedings, including Regulatory Matters andCommitments and Contingent Liabilities, which are hereby incorporated byreference.  Reference also is made toItem 3 and Notes 12 and 13 of PSCo’s Annual Report on Form 10-K for theyear ended Dec. 31, 2007 for a description of certain legal proceedingspresently pending.

 

**Item 1A. RISK FACTORS**

 

PSCo’srisk factors are documented in Item 1A of Part I of its 2007 Annual Reporton Form 10-K, which is incorporated herein by reference.  As a result of developments in the financialmarkets since the filing of the 2007 Annual Report on Form 10-K, we areproviding updates below of the risk factors as follows.

 

***We are subject to credit risks.***

 

Creditrisk includes the risk that our retail customers will not pay their bills,which may lead to a reduction in liquidity and an eventual increase in baddebt.  Retail credit risk is comprised ofnumerous factors including the overall level of economic activity in ourvarious service territories and price of products and services provided.

 

Creditrisk also includes the risk that short-term wholesale and commodity tradingcounterparties that owe us money or product will breach their obligations.  Should the counterparties to thesearrangements fail to perform, we may be forced to enter into alternativearrangements.  In that event, ourfinancial results could be adversely affected and we could incur losses.

 

PSComay at times have direct credit exposure in itsshort-term wholesale and commodity tradingactivity to various financial institutions trading for their own accounts orissuing collateral support on behalf of other counterparties.  PSCo may also have some indirect creditexposure due to participation in organized markets such as PJM and MidwestIndependent Transmission System Operator, Inc. (MISO) in which any creditlosses are socialized to all market participants.

 

PSCodoes have additional indirect credit exposures to various financialinstitutions in the form of letters of credit provided as security bypower suppliers under various long-term physical purchasedpower contracts.  If any of the credit ratings of the letter ofcredit issuers were to drop below the designated investment grade ratingstipulated in the underlying long term purchased power contracts, the supplierwould need to replace that security with an acceptable substitute.  If thesecurity were not replaced, the party would be in technical default underthe contract, which would enable PSCo to exercise its contractual rights.

 

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***Economic conditions could negatively impact ourbusiness.***

*** ***

Ouroperations are affected by local, national and worldwide economic conditions.The consequences of a prolonged recession may include a lower level of economicactivity and uncertainty regarding energy prices and the capital and commoditymarkets. A lower level of economic activity might result in a decline in energyconsumption, which may adversely affect our revenues and future growth.   Instability in the financial markets, as aresult of recession or otherwise, also may affect the cost of capital and ourability to raise capital, which are discussed in greater detail in the CapitalMarkets risk section in the 2007 Annual Report on Form 10-K.

 

Currenteconomic conditions may be exacerbated by insufficient financial sectorliquidity leading to potential increased unemployment, which may impactcustomers ability to pay timely, increase customer bankruptcies, and may leadto increased bad debt.   It is expectedthat commercial and industrial customers will be impacted first withresidential customers following, if such circumstances occur.  See credit risk section for more relatedinformation.

 

Furtherworldwide economic activity has an impact on the demand for basic commoditiesneeded for utility infrastructure, such as steel, copper, aluminum, etc., whichmay impact our ability to acquire sufficient supplies. Additionally, the costof those commodities may be higher than expected.

 

**Item 6. EXHIBITS**

 

The following Exhibits arefiled with this report:

 
| 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.                                                                                                                                        |

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorizedon Oct. 27, 2008.

 

PublicService Co. of Colorado

(Registrant)

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

 

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