Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

# ***FORM 10-Q***

 

**(MarkOne)**

 

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

 

**For the quarterly period ended June 30, 2009**

 

**or**

 

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

 

**Commission File Number: 001-3280**

 

# ***PublicService Company of Colorado***

(Exact name of registrant as specified in its charter)

 

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

 

**(303) 571-7511**

(Registrant’s telephone number, including area code)

 

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

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 and Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). o Yes o No

 

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

 

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

 

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

 

Indicatethe number of shares outstanding of each of the issuer’s classes of commonstock, as of the latest practicable date.

 
| **Class**                      | ** ** | **Outstanding at Aug. 3, 2009** | ** ** |
|--------------------------------|------------|--------------------------------------|------------|
| Common Stock, $0.01 par  value |       | 100 shares                           |       |

 

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

 

 

 

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**TABLE OF CONTENTS**

** **
| **PART I - FINANCIAL INFORMATION**     | ** **                                                                                  |
|---------------------------------------------|---------------------------------------------------------------------------------------------|
|                                        |                                                                                        |   |
| Item l.                                     | Financial  Statements (Unaudited)                                                           | 3 |
| Item 2.                                     | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 21 |
| Item 4                                      | Controls and  Procedures                                                                    | 25 |
|                                        |                                                                                        |
| **PART II  - OTHER INFORMATION**       | ** **                                                                                  |
|                                        |                                                                                        |   |
| Item 1.                                     | Legal Proceedings                                                                           | 25 |
| Item  1A.                                   | Risk  Factors                                                                               | 26 |
| Item  6.                                    | Exhibits                                                                                    | 27 |
|                                        |                                                                                        |
| **SIGNATURES**                              | 28                                                                                          |
|                                        |                                                                                        |
| Certifications Pursuant to Section 302 |                                                                                        |
| Certifications Pursuant to Section 906 |                                                                                        |
| Statement Pursuant to Private Litigation    |                                                                                        |

 

This Form 10-Q is filedby Public Service Company of Colorado (PSCo). PSCo is a wholly owned subsidiaryof Xcel Energy Inc. (Xcel Energy). Additional information on Xcel Energy isavailable on various filings with the Securities and Exchange Commission (SEC).

 

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##### **PART I.FINANCIAL INFORMATION**

 

**Item 1. FINANCIAL STATEMENTS**

 

**PUBLIC SERVICE CO. OF COLORADO ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**

*(amountsin thousands of dollars)*

 
| ** **                                                                                                 | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2009**                                            | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Operating revenues**                                                                                     |       |                                                |       |                                              |       |   |   |   |   |
| Electric                                                                                                   |       | $                                                   | 588,467    |                                              | $          | 738,357 |   | $ | 1,185,810 |   | $ | 1,392,853 |   |
| Natural gas                                                                                                |       | 173,494                                             |       | 249,302                                           |       | 568,615 |   | 812,254 |   |
| Steam and other                                                                                            |       | 7,132                                               |       | 7,648                                             |       | 17,146 |   | 18,678 |   |
| Total operating revenues                                                                                   |       | 769,093                                             |       | 995,307                                           |       | 1,771,571 |   | 2,223,785 |   |
|                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **Operating expenses**                                                                                     |       |                                                |       |                                              |       |   |   |   |   |
| Electric fuel and purchased power                                                                          |       | 300,799                                             |       | 458,991                                           |       | 608,068 |   | 828,494 |   |
| Cost of natural gas sold and transported                                                                   |       | 92,366                                              |       | 168,969                                           |       | 374,802 |   | 611,060 |   |
| Cost of sales — steam and other                                                                       |       | 2,542                                               |       | 2,859                                             |       | 6,550 |   | 7,060 |   |
| Other operating and maintenance expenses                                                                   |       | 148,600                                             |       | 155,140                                           |       | 303,490 |   | 303,514 |   |
| Demand side management program expenses                                                                    |       | 23,510                                              |       | 7,225                                             |       | 49,666 |   | 19,927 |   |
| Depreciation and amortization                                                                              |       | 62,915                                              |       | 63,342                                            |       | 125,462 |   | 126,552 |   |
| Taxes (other than income taxes)                                                                            |       | 22,211                                              |       | 20,685                                            |       | 45,400 |   | 44,235 |   |
| Total operating expenses                                                                                   |       | 652,943                                             |       | 877,211                                           |       | 1,513,438 |   | 1,940,842 |   |
|                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **Operating income**                                                                                       |       | 116,150                                             |       | 118,096                                           |       | 258,133 |   | 282,943 |   |
|                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| Interest and other income, net                                                                             |       | 2,112                                               |       | 4,091                                             |       | 2,981 |   | 7,311 |   |
| Allowance for funds used during construction —  equity                                                |       | 9,689                                               |       | 8,048                                             |       | 19,824 |   | 15,626 |   |
|                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **Interest charges and financing  costs**                                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Interest charges — includes other financing costs  of $1,433, $1,425, $2,819 and $2,848, respectively |       | 41,781                                              |       | 35,719                                            |       | 82,133 |   | 72,869 |   |
| Allowance for funds used during construction —  debt                                                  |       | (4,367                                              | )          | (4,410                                            | )          | (9,329 | ) | (8,510 | ) |
| Total interest charges and financing costs                                                                 |       | 37,414                                              |       | 31,309                                            |       | 72,804 |   | 64,359 |   |
|                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **Income before income taxes**                                                                             |       | 90,537                                              |       | 98,926                                            |       | 208,134 |   | 241,521 |   |
| Income taxes                                                                                               |       | 29,990                                              |       | 32,587                                            |       | 69,299 |   | 80,878 |   |
| **Net income**                                                                                             |       | $                                                   | 60,547     |                                              | $          | 66,339 |   | $ | 138,835 |   | $ | 160,643 |   |

 

**See Notes to Consolidated Financial Statements**

 

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**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

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

*(amountsin thousands of dollars)*

 
| ** **                                                                     | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| **Operating activities**                                                       |       |                                              |       |   |   |
| Net income                                                                     |       | $                                                 | 138,835    |   | $ | 160,643 |   |
| Adjustments to reconcile net income to cash  provided by operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                  |       | 140,850                                           |       | 150,624 |   |
| Deferred income taxes                                                          |       | 113,503                                           |       | 70,091 |   |
| Amortization of investment tax credits                                         |       | (1,248                                            | )          | (1,568 | ) |
| Allowance for equity funds used during  construction                           |       | (19,824                                           | )          | (15,626 | ) |
| Net realized and unrealized hedging and derivative  transactions               |       | 42,588                                            |       | 3,779 |   |
| Changes in operating assets and liabilities:                                   |       |                                              |       |   |   |
| Accounts receivable                                                            |       | 78,280                                            |       | 10,419 |   |
| Accrued unbilled revenues                                                      |       | 191,712                                           |       | 117,149 |   |
| Recoverable purchased natural gas and electric  energy costs                   |       | (41,861                                           | )          | (44,434 | ) |
| Inventories                                                                    |       | 60,601                                            |       | 8,540 |   |
| Prepayments and other                                                          |       | 3,814                                             |       | 6,427 |   |
| Accounts payable                                                               |       | (179,394                                          | )          | (80,523 | ) |
| Deferred electric energy costs                                                 |       | (95,856                                           | )          | (33,950 | ) |
| Net regulatory assets and liabilities                                          |       | 8,290                                             |       | (4,399 | ) |
| Other current liabilities                                                      |       | (26,608                                           | )          | (30,841 | ) |
| Change in other noncurrent assets                                              |       | 6,325                                             |       | 5,644 |   |
| Change in other noncurrent liabilities                                         |       | (103,387                                          | )          | (33,942 | ) |
| Net cash provided by operating activities                                      |       | 316,620                                           |       | 288,033 |   |
|                                                                           |       |                                              |       |   |   |
| **Investing activities**                                                       |       |                                              |       |   |   |
| Utility capital/construction expenditures                                      |       | (306,216                                          | )          | (353,030 | ) |
| Allowance for equity funds used during  construction                           |       | 19,824                                            |       | 15,626 |   |
| Investments in utility money pool                                              |       | (60,200                                           | )          | (199,900 | ) |
| Repayments from utility money pool                                             |       | 22,200                                            |       | 300,500 |   |
| Other investments                                                              |       | —                                            |       | 1,489 |   |
| Net cash used in investing activities                                          |       | (324,392                                          | )          | (235,315 | ) |
|                                                                           |       |                                              |       |   |   |
| **Financing activities**                                                       |       |                                              |       |   |   |
| Proceeds from (repayment of) short-term  borrowings, net                       |       | (40,000                                           | )          | 46,638 |   |
| Proceeds from issuance of long-term debt                                       |       | 394,844                                           |       | — |   |
| Borrowings under utility money pool arrangement                                |       | 530,000                                           |       | 447,200 |   |
| Repayments under utility money pool arrangement                                |       | (571,000                                          | )          | (426,200 | ) |
| Repayment of long-term debt, including  reacquisition premiums                 |       | (756                                              | )          | (717 | ) |
| Capital contributions from parent                                              |       | 40,417                                            |       | 13,174 |   |
| Dividends paid to parent                                                       |       | (134,233                                          | )          | (136,597 | ) |
| Net cash provided by (used in) financing  activities                           |       | 219,272                                           |       | (56,502 | ) |
|                                                                           |       |                                              |       |   |   |
| Net increase (decrease) in cash and cash  equivalents                          |       | 211,500                                           |       | (3,784 | ) |
| Cash and cash equivalents at beginning of year                                 |       | 11,198                                            |       | 7,650 |   |
| Cash and cash equivalents at end of quarter                                    |       | $                                                 | 222,698    |   | $ | 3,866 |   |
|                                                                           |       |                                              |       |   |   |
| Supplemental disclosure of cash flow information:                              |       |                                              |       |   |   |
| Cash paid for interest (net of amounts  capitalized)                           |       | $                                                 | (66,949    | ) | $ | (62,481 | ) |
| Cash received (paid) for income taxes (net of  refunds received)               |       | 5,284                                             |       | (28,662 | ) |
|                                                                           |       |                                              |       |   |   |
| Supplemental disclosure of non-cash investing  transactions:                   |       |                                              |       |   |   |
| Property, plant and equipment additions in  accounts payable                   |       | $                                                 | 17,327     |   | $ | 16,588 |   |

 

See Notes to Consolidated Financial Statements

 

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

**CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**

*(amounts in thousands ofdollars)*

 
| ** **                                                                            | ** ** | **June 30, 2009** | ** ** | **Dec. 31, 2008** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Assets**                                                                            | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Current assets                                                                        |       |                        |       |                        |       |
| Cash and cash equivalents                                                             |       | $                           | 222,698    |                        | $          | 11,198 |   |
| Investments in utility money pool arrangement                                         |       | 38,000                      |       | —                      |       |
| Accounts receivable, net                                                              |       | 304,619                     |       | 362,401                     |       |
| Accounts receivable from affiliates                                                   |       | 10,233                      |       | 29,545                      |       |
| Accrued unbilled revenues                                                             |       | 162,549                     |       | 354,526                     |       |
| Recoverable purchased natural gas and electric  energy costs                          |       | 42,558                      |       | 697                         |       |
| Inventories                                                                           |       | 173,347                     |       | 233,948                     |       |
| Deferred income taxes                                                                 |       | 27,024                      |       | 64,181                      |       |
| Derivative instruments valuation                                                      |       | 24,932                      |       | 22,793                      |       |
| Prepayments and other                                                                 |       | 10,598                      |       | 14,413                      |       |
| Total current assets                                                                  |       | 1,016,558                   |       | 1,093,702                   |       |
|                                                                                  |       |                        |       |                        |       |
| Property, plant and equipment, net                                                    |       | 7,775,687                   |       | 7,592,111                   |       |
|                                                                                  |       |                        |       |                        |       |
| Other assets                                                                          |       |                        |       |                        |       |
| Regulatory assets                                                                     |       | 886,401                     |       | 943,012                     |       |
| Derivative instruments valuation                                                      |       | 114,200                     |       | 119,534                     |       |
| Other                                                                                 |       | 41,966                      |       | 46,610                      |       |
| Total other assets                                                                    |       | 1,042,567                   |       | 1,109,156                   |       |
| Total assets                                                                          |       | $                           | 9,834,812  |                        | $          | 9,794,969 |   |
| ** **                                                                            | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| **Liabilities and Equity**                                                            | ** ** | ** **                  | ** ** | ** **                  | ** ** |
| Current liabilities                                                                   |       |                        |       |                        |       |
| Current portion of long-term debt                                                     |       | $                           | 201,537    |                        | $          | 201,510 |   |
| Short-term debt                                                                       |       | —                      |       | 40,000                      |       |
| Borrowings under utility money pool arrangement                                       |       | —                      |       | 41,000                      |       |
| Accounts payable                                                                      |       | 298,117                     |       | 470,158                     |       |
| Accounts payable to affiliates                                                        |       | 22,500                      |       | 28,906                      |       |
| Deferred electric energy costs                                                        |       | 18,705                      |       | 113,276                     |       |
| Taxes accrued                                                                         |       | 42,920                      |       | 72,105                      |       |
| Dividends payable to parent                                                           |       | 65,960                      |       | 67,417                      |       |
| Derivative instruments valuation                                                      |       | 35,190                      |       | 28,776                      |       |
| Accrued interest                                                                      |       | 53,999                      |       | 50,542                      |       |
| Other                                                                                 |       | 75,323                      |       | 78,192                      |       |
| Total current liabilities                                                             |       | 814,251                     |       | 1,191,882                   |       |
|                                                                                  |       |                        |       |                        |       |
| Deferred credits and other liabilities                                                |       |                        |       |                        |       |
| Deferred income taxes                                                                 |       | 1,292,116                   |       | 1,204,861                   |       |
| Deferred investment tax credits                                                       |       | 51,158                      |       | 52,406                      |       |
| Regulatory liabilities                                                                |       | 508,243                     |       | 514,445                     |       |
| Pension and employee benefit obligations                                              |       | 432,549                     |       | 527,264                     |       |
| Customers advances                                                                    |       | 283,393                     |       | 290,937                     |       |
| Derivative instruments valuation                                                      |       | 56,418                      |       | 62,126                      |       |
| Asset retirement obligations                                                          |       | 63,471                      |       | 61,505                      |       |
| Other                                                                                 |       | 21,843                      |       | 22,491                      |       |
| Total deferred credits and other liabilities                                          |       | 2,709,191                   |       | 2,736,035                   |       |
|                                                                                  |       |                        |       |                        |       |
| Commitments and contingent liabilities                                                |       |                        |       |                        |       |
| Capitalization                                                                        |       |                        |       |                        |       |
| Long-term debt                                                                        |       | 2,686,701                   |       | 2,289,251                   |       |
| Common stock — authorized 100 shares of $0.01 par  value; outstanding 100 shares |       | —                      |       | —                      |       |
| Additional paid in capital                                                            |       | 2,927,073                   |       | 2,886,657                   |       |
| Retained earnings                                                                     |       | 689,575                     |       | 683,516                     |       |
| Accumulated other comprehensive income                                                |       | 8,021                       |       | 7,628                       |       |
| Total common stockholder’s equity                                                |       | 3,624,669                   |       | 3,577,801                   |       |
| Total liabilities and equity                                                          |       | $                           | 9,834,812  |                        | $          | 9,794,969 |   |

 

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, in accordancewith accounting principles generally accepted in the United States of America(GAAP), the financial position of PSCo and its subsidiaries as of June 30,2009 and Dec. 31, 2008; the results of its operations for the three andsix months ended June 30, 2009 and 2008; and its cash flows for the sixmonths ended June 30, 2009 and 2008. All adjustments are of a normal, recurring nature, except as otherwisedisclosed.  Management has also evaluated the impact of eventsoccurring after June 30, 2009 up to Aug. 3, 2009, which is the dateof issuance of these consolidated financial statements.  These statements contain all necessaryadjustments and disclosures resulting from that evaluation. The Dec. 31,2008 balance sheet information has been derived from the audited 2008 financialstatements.  These notes to theconsolidated financial statements have been prepared pursuant to the rules andregulations of the SEC for Quarterly Reports on Form 10-Q.  Certain information and note disclosuresnormally included in financial statements prepared in accordance with GAAP havebeen condensed or omitted pursuant to such rules and regulations.  For further information, refer to theconsolidated financial statements and notes thereto, included in the PSCo AnnualReport on Form 10-K for the year ended Dec. 31, 2008, filed with theSEC on March 2, 2009.  Due to theseasonality of electric and natural gas sales of PSCo, interim results are notnecessarily an appropriate base from which to project annual results.

 

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

 

The significant accounting policies set forth inNote 1 to the consolidated financial statements in PSCo’s Annual Report on Form 10-Kfor the year ended Dec. 31, 2008, appropriately represent, in all materialrespects, the current status of accounting policies and are incorporated hereinby reference.

 

**2.****             ****AccountingPronouncements**

 

***Recently Adopted***

 

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

 

***Noncontrolling Interests in ConsolidatedFinancial Statements, an Amendment of Accounting Research Bulletin (ARB) No. 51(SFAS No. 160) *****—** In December 2007, theFASB issued SFAS No. 160, which establishes accounting and reportingstandards that require the ownership interest in subsidiaries held by partiesother than the parent be clearly identified and presented in the consolidatedbalance sheets within equity, but separate from the parent’s equity; the amountof consolidated net income attributable to the parent and the noncontrollinginterest be clearly identified and presented on the face of the consolidatedstatement of earnings; and changes in a parent’s ownership interest while theparent retains its controlling financial interest in its subsidiary beaccounted for consistently as equity transactions. SFAS No. 160 waseffective for fiscal years beginning on or after Dec. 15, 2008. PSCoimplemented SFAS No. 160 on Jan. 1, 2009, and the implementation didnot have a material impact on its consolidated financial statements.

 

***Disclosures about Derivative Instrumentsand Hedging Activities, an amendment of FASB Statement No. 133 (SFAS No. 161)******—*** In March 2008,the FASB issued SFAS No. 161, which is intended to enhance disclosures tohelp users of the financial statements better understand how derivativeinstruments and hedging activities affect an entity’s financial position,financial performance and cash flows. SFAS No. 161 amends and expands the disclosure requirements of SFASNo. 133, *Accounting for DerivativeInstruments and Hedging Activities*, to require disclosures includingobjectives and strategies for using derivatives, gains and losses on derivativeinstruments, and credit-risk-related contingent features in derivativecontracts.  SFAS No. 161 waseffective for financial statements issued for fiscal years and interim periodsbeginning after Nov. 15, 2008.  PSCoimplemented SFAS No. 161 on Jan. 1, 2009, and the implementation didnot have a material impact on its consolidated financial statements.  For further discussion and SFAS No. 161required disclosures, see Note 9 to the consolidated financial statements.

 

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***Interim Disclosures about Fair Value ofFinancial Instruments (FASB Staff Position (FSP) FAS 107-1 and AccountingPrinciples Board (APB) 28-1)******—***In April 2009, the FASBissued FSP FAS 107-1 and APB 28-1, which amends SFAS No. 107*, Disclosures About Fair Value of FinancialInstruments*, and APB Opinion No. 28, *Interim Financial Reporting*, to require disclosuresregarding the fair value of financial instruments in interim financialstatements. FSP FAS 107-1 and APB 28-1 was effective for interim periods endingafter June 15, 2009. PSCo implemented FSP FAS 107-1 and APB 28-1 on April 1,2009, and the implementation did not have a material impact on its consolidatedfinancial statements. For FSP FAS 107-1 and APB 28-1 required disclosures, seeNote 10 to the consolidated financial statements.

 

***Determining Fair Value When the Volume andLevel of Activity for the Asset or Liability Have Significantly Decreased andIdentifying Transactions That Are Not Orderly (FSP FAS 157-4)******—***In April 2009, the FASBissued FSP FAS 157-4, which provides additional guidance for estimating fairvalue in accordance with SFAS No. 157, *FairValue Measurements*, when the volume and level of market activity foran asset or liability have significantly decreased.  FSP FAS 157-4 emphasizes that even if therehas been a significant decrease in the volume and level of market activity forthe asset or liability, fair value still represents the exit price in anorderly transaction between market participants.  FSP FAS 157-4 was effective for interim andannual periods ending after June 15, 2009. PSCo implemented FSP FAS 157-4 on April 1, 2009, and theimplementation did not have a material impact on its consolidated financialstatements.

 

***Recognition and Presentation ofOther-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2)******—***In April 2009, the FASBissued FSP FAS 115-2 and FAS 124-2, which changes the method for determiningwhether an other-than-temporary impairment exists for debt securities, and alsorequires additional disclosures regarding other-than-temporaryimpairments.  FSP FAS 115-2 and FAS 124-2was effective for interim and annual periods ending after June 15,2009.  PSCo implemented FSP FAS 115-2 andFAS 124-2 on April 1, 2009, and the implementation did not have a materialimpact on its consolidated financial statements.

 

***Subsequent Events******(SFAS No. 165)*** —In May 2009, the FASB issued SFAS No. 165, which establishes generalstandards of accounting and disclosure for events that occur after the balancesheet date but before financial statements are issued.  The accounting guidance contained in SFAS No. 165is consistent with the auditing literature widely used for accounting anddisclosure of subsequent events, however, SFAS No. 165 requires an entityto disclose the date through which subsequent events have been evaluated.  SFAS No. 165 was effective for interimand annual periods ending after June 15, 2009.  PSCo implemented SFAS No. 165 on April 1,2009, and the implementation did not have a material impact on its consolidatedfinancial statements.

 

***Recently Issued***

 

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

 

***Amendments to FASB Interpretation No. 46(R) (SFASNo. 167)*** — In June 2009, the FASB issued SFAS No. 167,which amends the consolidation guidance applicable to variable interestentities. The amendments will significantly affect various elements ofconsolidation guidance under FASB Interpretation No. 46(R), includingguidance for determining whether an entity is a variable interest entity andwhether an enterprise is a variable interest entity’s primary beneficiary.  SFAS No. 167 is effective for fiscalyears beginning after Nov. 15, 2009. PSCo is currently evaluating the impact of SFAS No. 167 on itsconsolidated financial statements.

 

***The FASB Accounting Standards Codificationand the Hierarchy of Generally Accepted Accounting Principles — a replacementof FASB Statement No. 162 (SFAS No. 168)*** — In June 2009,the FASB issued SFAS No. 168, which confirms that the FASB AccountingStandards Codification (Codification) will become the single source ofauthoritative GAAP, other than the guidance put forth by the SEC.  All other accounting literature not includedin the Codification will be considered non-authoritative. SFAS No. 168 iseffective for interim and annual periods ending after Sept. 15, 2009. PSCoexpects the implementation of SFAS No. 168 to have no impact on itsconsolidated financial statements.

 

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

 
| **(Thousands of Dollars)**    | ** ** | **June 30, 2009** | ** ** | **Dec. 31, 2008** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|
| **Accounts receivable, net**            |       |                        |       |                        |       |
| Accounts receivable                     |       | $                           | 331,579    |                        | $          | 391,596 |   |
| Less allowance for bad debts            |       | (26,960                     | )          | (29,195                     | )          |
|                                    |       | $                           | 304,619    |                        | $          | 362,401 |   |
| **Inventories**                         |       |                        |       |                        |       |
| Materials and supplies                  |       | $                           | 42,174     |                        | $          | 40,451 |   |
| Fuel                                    |       | 68,192                      |       | 41,456                      |       |
| Natural gas                             |       | 62,981                      |       | 152,041                     |       |
|                                    |       | $                           | 173,347    |                        | $          | 233,948 |   |
| **Property, plant and equipment,  net** |       |                        |       |                        |       |
| Electric plant                          |       | $                           | 7,512,833  |                        | $          | 7,089,763 |   |
| Natural gas plant                       |       | 1,947,299                   |       | 1,914,565                   |       |
| Common and other property               |       | 723,058                     |       | 739,453                     |       |
| Construction work in progress           |       | 948,761                     |       | 1,086,627                   |       |
| Total property, plant and equipment     |       | 11,131,951                  |       | 10,830,408                  |       |
| Less accumulated depreciation           |       | (3,356,264                  | )          | (3,238,297                  | )          |
|                                    |       | $                           | 7,775,687  |                        | $          | 7,592,111 |   |

 

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

 

***Accounting for Uncertainty in Income Taxes — an interpretation ofFASB Statement No. 109 ***(FIN48)***************—***PSCo is amember of the Xcel Energy affiliated group that files consolidated income taxreturns.

 

##### ***Federal Audit****—*In thefirst quarter of 2008, the Internal Revenue Service (IRS) completed anexamination of Xcel Energy’s federal income tax returns for 2004 and 2005 (andresearch credits for 2003). The IRS did not propose any material adjustmentsfor those tax years. Tax year 2004 is the earliest open year and the statute oflimitations applicable to Xcel Energy’s 2004 federal income tax return remainsopen until Dec. 31, 2009.  In the thirdquarter of 2008, the IRS commenced an examination of tax years 2006 and 2007.As of June 30, 2009, the IRS had not proposed any material adjustments totax years 2006 and 2007.

 

***State Audits —*** As of June 30,2009, PSCo’s earliest open tax year for which an audit can be initiated bystate taxing authorities under applicable statutes of limitations is 2004.  There currently are no state income taxaudits in progress.

 

***Unrecognized Tax Benefits —*** The amount ofunrecognized tax benefits was $10.3 million on both June 30, 2009 and Dec. 31,2008.  The payable associated with net operating loss (NOL) and tax creditcarryovers was not material as of June 30, 2009 and the unrecognized taxbenefit amounts were reduced by the tax benefits associated with NOL and taxcredit carryovers of $5.8 million as of Dec. 31, 2008.

 

Theunrecognized tax benefit balance included $1.1 million and $1.4 million of taxpositions on June 30, 2009 and Dec. 31, 2008, respectively, which ifrecognized would affect the annual effective tax rate.  In addition, theunrecognized tax benefit balance included $9.2 million and $8.9 million of taxpositions on June 30, 2009 and Dec. 31, 2008, respectively, for whichthe ultimate deductibility is highly certain but for which there is uncertaintyabout the timing of such deductibility.  A change in the period ofdeductibility would not affect the effective tax rate but would accelerate thepayment of cash to the taxing authority to an earlier period.

 

Thedecrease in the unrecognized tax benefit balance of $0.6 million from April 1,2009 to June 30, 2009, was due to the resolution of certain federal auditmatters, partially offset by the addition of similar uncertain tax positionsrelated to ongoing activity.  PSCo’s amount of unrecognized tax benefitscould significantly change in the next 12 months as the IRS audit progressesand when state audits resume.  At thistime, due to the uncertain nature of the audit process, it is not reasonablypossible to estimate an overall range of possible change.

 

Theamount of interest expense related to unrecognized tax benefits reported withininterest charges in the second quarter of 2009 was $0.1 million.  Theamount of interest expense related to unrecognized tax benefits reported withininterest charges in the second quarter of 2008 was $0.2 million. Theliability for interest related to unrecognized tax benefits was $0.6 millionand $0.4 million on June 30, 2009 and Dec. 31, 2008,respectively.  No amounts were accruedfor penalties as of June 30, 2009 and Dec. 31, 2008.

 

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

 

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

 

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

*** ***

**BaseRate**

 

***PSCo 2009 Electric Rate Case***** —**In November 2008, PSCo filed a request with theCPUC to increase Colorado electric rates by $174.7 million annually, orapproximately 7.4 percent.  The ratefiling is based on a 2009 forecast test-year, an electric rate base of$4.2 billion, a requested return on equity (ROE) of 11.0 percent andan equity ratio of 58.08 percent. PSCo’s request included a return of approximately $40 million forconstruction work in progress (CWIP) associated with incremental expenditureson the Comanche Unit 3 since Jan. 1, 2007. PSCo does not record allowance for funds used during construction (AFDC)income for the months this return is actually received from customers.

 

InFebruary 2009, parties filed answer testimony in the case.  In March 2009, PSCo filed rebuttaltestimony and revised its rate increase request to $159.3 million to reflectupdated data.  On April 22, 2009, asettlement agreement with the major parties was filed with the CPUC.  The settlement provides for an overall $112.2million increase in base rates, but does not provide for the specificresolution of many of the disputed issues such as ROE and capitalstructure.  However, the settlementprovides that incremental CWIP not included in existing rates for the ComancheUnit 3 be removed from rate base and that PSCo would be allowed to continue torecord AFDC income on this balance until the Comanche Unit 3 is placed intoservice.

 

OnMay 27, 2009, the CPUC approved the settlement agreement and new rateswent into effect on July 1, 2009. On June 26, 2009, one party filed forreconsideration of the CPUC’s decision approving the settlement.  On July 14, 2009, the CPUC denied therequest for reconsideration.  PSCoimplemented new rates on July 1, 2009.

 

***PSCo 2010 Electric Rate Case***** —**On May 1, 2009, PSCo filed with the CPUC arequest to increase Colorado electric rates by $180 million effective in2010.  The rate filing is based on a 2010 calendar year budget andincludes a requested ROE of 11.25 percent, an electric net rate base ofapproximately $4.4 billion allocated to the Colorado electric retailjurisdiction and an equity ratio of 58.05 percent.  Overall, the primary drivers for the increaseare related to placing the Comanche Unit 3 in service, the remaining months ofrecovery of Ft. St. Vrain, increased investment in the distribution system andhigher operating and maintenance expenses.

 

Thisrequest also shifts all or a portion of the current costs associated with theAir Quality Improvement Rider and the Demand Side Management Cost Adjustmentinto base rates, which will have no impact on customer bills.

 

The following procedural schedule has beenestablished:

 

·                  Intervenor testimony on Sept. 4, 2009;

·                  Cross and rebuttal testimony on Oct. 13,2009;

·                  Evidentiary hearings are scheduled for Oct. 26-Nov. 6,2009; and

·                  Statements of position on Nov. 16,2009.

 

PSCoexpects the CPUC to reach a decision regarding the 2010 rate case withinapproximately eight months.  Therefore,the new base rates approved in this proceeding are expected to be effective onJan 1, 2010.

 

***Transmission Cost Adjustment (TCA) Rider —***In December 2007,the CPUC approved PSCo’s application to implement a TCA rider. PSCo filed itsannual update to the TCA rider on Nov. 3, 2008, and new rates went intoeffect on Jan. 1, 2009, to recover approximately $18.0 million on anannual basis until the rates in the 2009 rate case take effect.  Coincident with the implementation of newelectric rates on July 1, 2009, approximately $16.0 million from the TCArider were included in base rates with a corresponding reduction in the TCArider.

 

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***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 a participant in the hearings. In September 2001, the presidingadministrative law judge (ALJ) concluded that prices in the Pacific Northwestduring the referenced period were the result of a number of factors, includingthe shortage of supply, excess demand, drought and increased natural gasprices. 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.  Partieshave claimed that the total amount of transactions with PSCo subject to refundis $34 million. In June 2003, the FERC issued an order terminatingthe proceeding without ordering further proceedings. Certain purchasers filedappeals of the FERC’s orders in this proceeding with the U. S. Court of Appealsfor the Ninth Circuit.

 

Inan order issued in August 2007, the Court of Appeals remanded theproceeding back to the FERC.  The Courtof Appeals also indicated that the FERC should consider other rulingsaddressing overcharges in the California organized markets.  The Court of Appeals denied a petition forrehearing in April 2009, and the mandate was issued.  The FERC hasyet to act on this order on remand; currently, certain motions concerningprocedures on remand are pending before the FERC.

** **

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

 

Except as noted below, thecircumstances set forth in Notes 14 and 15 to the consolidated financialstatements in PSCo’s Annual Report on Form 10-K for the year ended Dec. 31,2008 and Note 5 to the consolidated financial statements in this QuarterlyReport on Form 10-Q appropriately represent, in all material respects, thecurrent status of respective commitments and contingent liabilities and areincorporated herein by reference. The following are unresolved contingenciesthat are material to PSCo’s financial position.

 

**EnvironmentalContingencies**

 

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

 

***Site Remediation****—*PSCo must 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 operatedby PSCo, its predecessors, or other entities; and third party sites, such aslandfills, to which PSCo is alleged to be a PRP that sent hazardous materialsand wastes.  At June 30, 2009, theliability for the cost of remediating these sites was estimated to be $1.7million, of which $1.0 million was considered to be a current liability.

 

# ***ThirdParty and Other Environmental Site Remediation***

 

***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 15 of the PSCo Annual Report on Form 10-Kfor the year ended Dec. 31, 2008. It may be necessary to remove some asbestos to perform maintenance ormake improvements to other equipment. The cost of removing asbestos as part of other work is immaterial and isrecorded as incurred as operating expenses for maintenance projects, capitalexpenditures for construction projects or removal costs for demolitionprojects.

 

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***Other Environmental Requirements***

 

***American Clean Energy and Security Act (ACES)****—* On June 26, 2009, the U.S. House of Representatives passedACES.  Key provisions include a federalcap-and-trade program to reduce greenhouse gas (GHG) emissions by 17 percent by2020 and 83 percent by 2050 compared to 2005 levels, a national renewableenergy standard, investments in new clean energy technologies and energyefficiency, and mandates for new energy-saving standards.  The U.S. Senate has delayed consideration ofACES until September 2009, during which time the bill could changeconsiderably.  The ultimate impact of thebill on PSCo therefore remains uncertain.

 

***Environmental Protection Agency (EPA)Proposed GHG Endangerment Finding***— On April 17, 2009,the EPA issued a proposed finding that GHGs threaten public health andwelfare.  This finding was in response tothe U.S. Supreme Court’s decision in *Massachusettsv. EPA*, 549 U.S. 497 (2007), which held that GHGs are pollutantscovered by the Clean Air Act (CAA) and required the EPA to determine whetheremissions of GHGs from motor vehicles endanger public health or welfare.  The EPA’s proposed endangerment findingapplies to the CAA’s mobile source program, and does not automatically triggerregulation under other provisions of the CAA that are applicable to stationarysources, such as power plants.  As such,the proposed endangerment finding, in and of itself, does not impact PSCo.

 

***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 facilitieswill be subject to BART requirements.

 

Statesare required to identify the facilities that will have to reduce sulfur dioxide(SO2), nitrogen oxide (NOx) andparticulate matter emissions under BART and then set BART emissions limits forthose facilities.  In May 2006, theColorado Air Quality Control Commission (AQCC) promulgated BART regulationsrequiring certain major stationary sources to evaluate and install, operate andmaintain BART to make reasonable progress toward meeting the nationalvisibility goal.  PSCo estimates that theremaining cost for implementation of BART emission control projects isapproximately $141 million in capital costs, which are included in the capitalbudget.

 

PSCoexpects the cost of any required capital investment will be recoverable fromcustomers.  Emissions controls areexpected to be installed between 2012 and 2015. Colorado’s BART state implementation plan has been submitted to the EPAfor approval. In January 2009, the Colorado Air Pollution Control Division(CAPCD) initiated a joint stakeholder process to evaluate what types ofadditional NOx controls may be necessary to meet reasonable progress goals forColorado’s Class I areas, the new ozone standard, and Rocky MountainNational Park nitrogen deposition reduction goals.  The CAPCD has indicated that it expects tohave a final plan for additional point-source NOx controls by the end of 2010.

 

***Clean Air Mercury Rule (CAMR)***— In March 2005, theEPA issued the CAMR, which regulated mercury emissions from power plants.  In February 2008, the U.S. Court ofAppeals for the District of Columbia vacated CAMR, which impacts federal CAMRrequirements, but not necessarily state-only mercury legislation andrules.  Colorado’s mercury rule requiresmercury emission controls capable of achieving 80 percent capture be installedat the Pawnee Generating Station by 2012 and other specified units by2014.  The expected cost estimate for thePawnee Generating Station is $2.3 million for capital costs with an annualestimate of $1.4 million for absorbent expense. PSCo is evaluating the mercury emission controls required to meet thestate rule for the remaining units and is currently unable to provide atotal capital cost estimate.

 

***Federal Clean Water Act —***The federalClean Water Act requires the EPA to regulate cooling water intake structures toassure that these structures reflect the best technology available (BTA) forminimizing adverse environmental impacts. In July 2004, the EPA publishedphase II of the rule, which applies to existing cooling water intakes atsteam-electric power plants. Several lawsuits were filed against the EPA in theUnited States Court of Appeals for the Second Circuit (Court of Appeals)challenging the phase II rulemaking. In January 2007, the Court ofAppeals issued its decision and remanded the rule to the EPA forreconsideration. In June 2007, the EPA suspended the deadlines andreferred any implementation to each state’s best professional judgment untilthe EPA is able to fully respond to the remand. In April 2008, the U.S. Supreme Court granted limited review of theSecond Circuit’s opinion to determine whether the EPA has the authority toconsider costs and benefits in assessing BTA. On April 1, 2009, the U.S. Supreme Court issued a decision in *Entergy Corp. v. Riverkeeper, Inc.*,concluding that the EPA can consider a cost benefit analysis when establishingBTA.  The decision overturned only oneaspect of the Court of Appeals, earlier opinion, and gives the EPA thediscretion to consider costs and benefits when it reconsiders its phase IIrules.  Until the EPA fully responds tothe Court of Appeals’ decision, the rule’s compliance requirements andassociated deadlines will remain unknown. As such, it is not possible to provide an accurate estimate of theoverall cost of this rulemaking at this time.

 

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***Notice of Violation (NOV)*** — In July 2002,PSCo received an NOV from the EPA alleging violations of the New Source Review(NSR) requirements of the CAA at the Comanche Station and Pawnee Station inColorado.  The NOV specifically allegesthat various maintenance, repair and replacement projects undertaken at theplants in the mid- to late-1990s should have required a permit under the NSRprocess.  PSCo believes it has acted infull compliance with the CAA and NSR process. PSCo believes that the projects identified in the NOV fit within theroutine maintenance, repair and replacement exemption contained within the NSRregulations or are otherwise not subject to the NSR requirements.  PSCo disagrees with the assertions containedin the NOV and intends to vigorously defend its position.

** **

**Legal Contingencies**

** **

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

 

**Environmental Litigation**

** **

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

 

***Comer vs. Xcel Energy Inc. etal. —***In April 2006, Xcel Energy, the parent companyof PSCo, received notice of a purported class action lawsuit filed in U.S.District Court in the Southern District of Mississippi. The lawsuit names morethan 45 oil, chemical and utility companies, including Xcel Energy, asdefendants and alleges that defendants’ CO2 emissions “werea proximate and direct cause of the increase in the destructive capacity ofHurricane Katrina.” Plaintiffs allege in support of their claim, several legaltheories, including negligence and public and private nuisance and seek damagesrelated to the loss resulting from the hurricane. Xcel Energy believes thislawsuit is without merit and intends to vigorously defend itself against theseclaims. In August 2007, the court dismissed the lawsuit in its entiretyagainst all defendants on constitutional grounds. In September 2007,plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the FifthCircuit. Oral arguments were presented to the Court of Appeals on Aug. 6,2008. Pursuant to the court’s order of Sept. 26, 2008, re-argument washeld on Nov. 3, 2008. No explanation was given for the order. The Court ofAppeals has taken the matter under advisement.

 

***Native Village of Kivalina vs. XcelEnergy Inc. 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 utilities, oil, gas and coal companies. The suitwas brought on behalf of approximately 400 native Alaskans, the Inupiat Eskimo,who claim that defendants’ emission of CO2 and otherGHGs contribute to global warming, which is harming their village. Plaintiffsclaim that as a consequence, the entire village must be relocated at a cost ofbetween $95 million and $400 million. Plaintiffs assert a nuisanceclaim under federal and state common law, as well as a claim asserting “concertof action” in which defendants are alleged to have engaged in tortious acts inconcert with each other. Xcel Energy was not named in the civil conspiracyclaim. Xcel Energy believes the claims asserted in this lawsuit are withoutmerit and joined with other utility defendants in filing a motion to dismiss onJune 30, 2008. The matter has now been fully briefed.  It is uncertain when the court will render adecision.

 

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**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 againstQwest in Colorado state court in Denver. In April 2006, Qwest filed athird party complaint against PSCo based on terms in a joint pole use agreementbetween Qwest and PSCo. Pursuant to this agreement, Qwest asserted PSCo had anaffirmative duty to properly train and instruct its employees on pole safety,including testing the pole for soundness before climbing. In May 2006,PSCo filed a counterclaim against Qwest asserting Qwest had a duty to PSCo andan obligation under the contract to maintain its poles in a safe andserviceable condition. In May 2007, the matter was tried and the juryfound Qwest solely liable for the accident and this determination resulted inan award of damages in the amount of approximately $90 million. On June 16,2008, Qwest filed its appellate brief. On April 30, 2009, the Colorado Court of Appeals affirmed the juryverdict insofar as it relates to claims asserted by Qwest against PSCo. Qwestsubsequently filed a petition for rehearing with the Colorado Court ofAppeals.  On May 28, 2009, theColorado Court of Appeals denied Qwest’s request for rehearing.  Qwest ‘s petition forcertiorari to the Colorado Supreme Court was filed June 26, 2009.  PSCo’s response brief was filed on July 27,2009 and Qwest’s reply brief will be due Aug. 7, 2009.

 

***Mallon vs. Xcel Energy Inc. —***In August 2007,Xcel Energy, PSCo and PSR Investments, Inc. (PSRI) commenced a lawsuit inColorado state court against Theodore Mallon and TransFinancial Corporationseeking damages for, among other things, breach of contract and breach offiduciary duties associated with the sale of corporate owned life insurancepolicies. In May 2008, Xcel Energy, PSCo and PSRI filed an amendedcomplaint that, among other things, adds Provident Life & Accident InsuranceCompany (Provident) as a defendant and asserts claims for breach of contract,unjust enrichment and fraudulent concealment against the insurance company. On June 23,2008, Provident filed a motion to dismiss the complaint. On Oct. 22, 2008,the court granted Provident’s motion in part, but denied the motion withrespect to a majority of the core causes of action asserted by PSCo, XcelEnergy and PSRI. In January 2009, the court granted defendant Mallon’smotion to amend his answer to, among other things, add a counterclaim forbreach of contract and fraud against plaintiffs PSRI, PSCo and Xcel Energy.Xcel Energy believes the counterclaims are without merit and filed a motion todismiss.  The court subsequently deniedthis motion at this stage of the lawsuit.

*** ***

***Cabin Creek Hydro Generating StationAccident —***In October 2007, employees of RPICoatings Inc. (RPI), a contractor retained by PSCo, were applying an epoxycoating to the inside of a penstock at PSCo’s Cabin Creek Hydro GeneratingStation near Georgetown, Colo. This work was being performed as part of acorrosion prevention effort.  A fireoccurred inside the penstock, which is a 4,000-foot long, 12-foot wide pipeused to deliver water from a reservoir to the hydro facility. Four of the nineRPI employees working inside the penstock were positioned below the fire andwere able to exit the pipe. The remaining five RPI employees were unable toexit the penstock. Rescue crews located the five employees a few hours laterand confirmed their deaths. The accident was investigated by several state andfederal agencies, including the federal Occupational Safety and HealthAdministration (OSHA) and the U.S. Chemical Safety Board and the ColoradoBureau of Investigations.

 

InMarch 2008, OSHA proposed penalties totaling $189,900 for twenty-twoserious violations and three willful violations arising out of the accident. InApril 2008, Xcel Energy notified OSHA of its decision to contest all ofthe proposed citations. On May 28, 2008, the Secretary of Labor filed itscomplaint, and Xcel Energy subsequently filed its answer on June 17, 2008.The Court ordered this proceeding stayed until March 3, 2009 andsubsequently extended the stay to October 2009. A lawsuit has been filedin Colorado state court in Denver on behalf of four of the deceased workers andfour of the injured workers (Foster, et. al. v. PSCo, et. al.). PSCo and XcelEnergy are named as defendants in that case, along with RPI Coatings andrelated companies and the two other contractors who also performed work inconnection with the relining project at Cabin Creek. A second lawsuit(Ledbetter et. al vs. PSCo et. al) has also been filed in Colorado state courtin Denver on behalf of three employees allegedly injured in the accident. Athird lawsuit was filed on behalf of one of the deceased RPI workers in theCalifornia state court (Aguirre v. RPI, et. al.), naming PSCo, RPI, and the twoother contractors as defendants. The court subsequently dismissed the Aguirrelawsuit.  Settlements were subsequentlyreached in all three lawsuits. These confidential settlements are not expectedto have a material effect on the financial statements of Xcel Energy or itssubsidiaries.

 

# ***Stone & Webster, Inc.vs. PSCo —*** On July 14,2009, Stone & Webster, Inc. (Shaw) filed a complaint against PSCoin State District Court in Denver, Colo. for damages allegedly arising out ofits construction work on the Comanche Unit 3 coal fired plant in Pueblo,Colo.  Shaw, a contractor retained to performcertain engineering, procurement and construction work on Comanche Unit 3,alleges, among other things, that PSCo was responsible for and mismanaged theconstruction of Comanche Unit 3.  Shawfurther claims that this alleged mismanagement caused delays and damages inexcess of $55 million.  The complaintalso alleges that Xcel Energy and related entities, including PSCo, guaranteedShaw $10 million in future profits under the terms of a 2003 settlementagreement.  Shaw alleges that it will notreceive the $10 million to which it is entitled.  Accordingly, Shaw seeks an amount up to $10million relating to the 2003 settlement agreement.  PSCo denies these allegations and believesthe claims are without merit.  PSCo’sresponse to the complaint is due in August 2009.  It is not anticipated that this lawsuit willaffect Comanche Unit 3’s scheduled in-service date.

 

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

 

***Commercial Paper —***At Dec. 31,2008, PSCo had commercial paper outstanding of $40.0 million with a weightedaverage interest rate of 1.55 percent. At June 30, 2009, PSCo had no commercial paper outstanding.  At June 30, 2009 and Dec. 31, 2008,PSCo had board approval to issue up to $700 million of commercial paper.

 

***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.  At June 30,2009, and Dec. 31, 2008, PSCo had money pool loans outstanding of $38.0million and money pool borrowings of $41.0 million, respectively.  The weighted average interest rates at June 30,2009 and Dec. 31, 2008, were 0.90 percent and 3.48 percent, respectively.

 

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

 

OnJune 4, 2009, PSCo issued $400 million of 5.125 percent first mortgagebonds, series due 2019.  PSCo added theproceeds from the sale of the first mortgage bonds to its general funds andapplied a portion of the net proceeds to fund the payment at maturity of $200million of 6.875 percent unsecured senior notes due July 15, 2009.

 

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

 

EffectiveJan. 1, 2009, PSCo adopted SFAS No. 161, which requires additionaldisclosures regarding why an entity uses derivative instruments, the volume ofan entity’s derivative activities, the fair value amounts recorded to theconsolidated balance sheet for derivatives, the gains and losses on derivativeinstruments included in the consolidated statement of income or deferred, andinformation regarding certain credit-risk-related contingent features inderivative contracts.

 

PSCoenters into derivative instruments, including forward contracts, futures, swapsand options, for trading purposes and to reduce risk in connection with changesin interest rates, utility commodity prices and vehicle fuel prices.  See additional information pertaining to thevaluation of derivative instruments in Note 11 to the consolidated financialstatements.

 

***Interest Rate Derivatives —***PSCo entersinto various instruments that effectively fix the interest payments on certainfloating rate debt obligations or effectively fix the yield or price on aspecified benchmark interest rate for a specific period.  These derivative instruments are designatedas cash flow hedges for accounting purposes.

 

AtJune 30, 2009, accumulated other comprehensive income related to interestrate derivatives included $1.5 million of net gains expected to be reclassifiedinto earnings during the next 12 months as the related hedged interesttransactions impact earnings.

 

***Commodity Derivatives —***PSCo entersinto derivative instruments to manage variability of future cash flows fromchanges in commodity prices in its electric and natural gas operations, as wellas for trading purposes.  This couldinclude the purchase or sale of energy or energy-related products, natural gasto generate electric energy, gas for resale, and vehicle fuel.

 

AtJune 30, 2009, PSCo had various utility commodity and vehicle fuel relatedcontracts designated as cash flow hedges extending through December 2012.PSCo also enters into derivative instruments that mitigate commodity price riskon behalf of electric and natural gas customers but are not designated asqualifying hedging transactions.  Changesin the fair value ofthese derivative instruments are recorded in other comprehensive income ordeferred as a regulatory asset or liability. The classification as a regulatory asset or liability is based on thecommission approved regulatory recovery mechanisms.  PSCo recorded immaterial amounts to incomerelated to the ineffectiveness of cash flow hedges for the six months ended June 30,2009 and 2008.

 

AtJune 30, 2009, PSCo had $2.5 million of net losses in accumulated othercomprehensive income related to utility commodity and vehicle fuel cash flowhedges of which $1.8 million is expected to be reclassified into earningsduring the next 12 months as the hedged transactions occur.

 

Additionally, PSCo enters into commodityderivative instruments for trading purposes not directly related to commodityprice risks associated with serving its electric and natural gascustomers.  Changes in the fair value ofthese commodity derivatives are recorded in income.

 

PSCo had no derivativeinstruments designated as fair value hedges during the six months ended June 30,2009.  Therefore, no gains or losses fromfair value hedges or related hedged transactions were recognized for theperiod.

 

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Thefollowing table shows the major components of derivative instruments valuationin the consolidated balance sheets:

*** ***
| ** **                           | ** ** | **June 30, 2009**                                | ** ** | **Dec. 31, 2008**                                     | ** ** |
|--------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **Derivative  Instruments  Valuation –  Assets** | ** ** | **Derivative  Instruments  Valuation –  Liabilities** | ** ** | **Derivative  Instruments  Valuation –  Assets** | ** ** | **Derivative  Instruments  Valuation –  Liabilities** | ** ** |
| Long term purchased power agreements |       | $                                                          | 128,037    |                                                            | $          | 61,460 |   | $ | 137,334 |   | $ | 66,986 |   |
| Commodity derivatives                |       | 11,095                                                     |       | 30,148                                                          |       | 4,993 |   | 23,916 |   |
| Total                                |       | $                                                          | 139,132    |                                                            | $          | 91,608 |   | $ | 142,327 |   | $ | 90,902 |   |

 

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 offset by regulatory assets and liabilities.  During 2006, PSCo qualified these contractsunder the normal purchase exception. Based on this qualification, the contracts are no longer adjusted tofair value and the previous carrying value of these contracts will be amortizedover the remaining contract lives along with the offsetting regulatory assetsand liabilities.

 

***Financial Impact of Qualifying Cash FlowHedges —***The impact of qualifying interest rate and vehiclefuel cash flow hedges on PSCo’s accumulated other comprehensive income,included as a component of common stockholder’s equity, is detailed in thefollowing table:

 
| ** **                                                                          | ** ** | **Three months ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|------------------------------------------------|------------|
| **(Thousands of Dollars)**                                                | ** ** | **2009**                                       | ** ** | **2008** | ** ** |
| Accumulated other comprehensive income related to  cash flow hedges at April 1 |       | $                                              | 7,763      |   | $ | 12,037 |   |
| After-tax net unrealized gains related to  derivatives accounted for as hedges      |       | 586                                            |       | 202 |   |
| After-tax net realized gains on derivative  transactions reclassified into earnings |       | (328                                           | )          | (382 | ) |
| Accumulated other comprehensive income related to  cash flow hedges at June 30 |       | $                                              | 8,021      |   | $ | 11,857 |   |

 
| ** **                                                                          | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Thousands of Dollars)**                                                | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| Accumulated other comprehensive income related to  cash flow hedges at Jan. 1  |       | $                                                 | 7,628      |   | $ | 12,447 |   |
| After-tax net unrealized gains related to  derivatives accounted for as hedges      |       | 599                                               |       | 176 |   |
| After-tax net realized gains on derivative  transactions reclassified into earnings |       | (206                                              | )          | (766 | ) |
| Accumulated other comprehensive income related to  cash flow hedges at June 30 |       | $                                                 | 8,021      |   | $ | 11,857 |   |

 

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The following table details the fair value ofderivatives recorded to derivative instruments valuation in the consolidatedbalance sheet, by category:

 
| ** **                                  | ** ** | **June 30, 2009** | ** ** |
|---------------------------------------------|------------|-----------------------------|------------|
| **(Thousands of Dollars)**        | ** ** | **Fair Value**              | ** ** | **Counterparty  Netting****(a)** | ** ** | **Derivative  Instruments  Valuation** | ** ** |
| ** **                                  | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Current derivative assets**               |       |                        |       |   |   |   |   |
| Other derivative instruments:               |       |                        |       |   |   |   |   |
| Trading commodity                           |       | $                           | 7,215      |   | $ | (3,163 | ) | $ | 4,052 |   |
| Natural gas commodity                       |       | 2,132                       |       | 154 |   | 2,286 |   |
| Total current derivative assets             |       | $                           | 9,347      |   | $ | (3,009 | ) | $ | 6,338 |   |
|                                        |       |                        |       |   |   |   |   |
| **Noncurrent derivative assets**            |       |                        |       |   |   |   |   |
| Derivates designated as cash flow hedges:   |       |                        |       |   |   |   |   |
| Vehicle fuel and other commodity            |       | $                           | 47         |   | $ | — |   | $ | 47 |   |
| Other derivative instruments:               | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Trading commodity                           |       | 3,348                       |       | 937 |   | 4,285 |   |
| Natural gas commodity                       |       | 215                         |       | 210 |   | 425 |   |
|                                        |       | 3,563                       |       | 1,147 |   | 4,710 |   |
| Total noncurrent derivative assets          |       | $                           | 3,610      |   | $ | 1,147 |   | $ | 4,757 |   |
|                                        |       |                        |       |   |   |   |   |
| **Current derivative liabilities**          |       |                        |       |   |   |   |   |
| Derivatives designated as cash flow hedges: | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Natural gas commodity                       |       | $                           | 1,659      |   | $ | — |   | $ | 1,659 |   |
| Vehicle fuel and other commodity            |       | 1,975                       |       | — |   | 1,975 |   |
|                                        |       | 3,634                       |       | — |   | 3,634 |   |
| Other derivative instruments:               |       |                        |       |   |   |   |   |
| Trading commodity                           |       | 6,702                       |       | (3,672 | ) | 3,030 |   |
| Natural gas commodity                       |       | 17,889                      |       | 154 |   | 18,043 |   |
|                                        |       | 24,591                      |       | (3,518 | ) | 21,073 |   |
| Total current derivative liabilities        |       | $                           | 28,225     |   | $ | (3,518 | ) | $ | 24,707 |   |
|                                        |       |                        |       |   |   |   |   |
| **Noncurrent derivative  liabilities**      |       |                        |       |   |   |   |   |
| Derivatives designated as cash flow hedges: | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Vehicle fuel and other commodity            |       | $                           | 760        |   | $ | — |   | $ | 760 |   |
| Other derivative instruments:               |       |                        |       |   |   |   |   |
| Trading commodity                           |       | 1,657                       |       | 936 |   | 2,593 |   |
| Natural gas commodity                       |       | 1,878                       |       | 210 |   | 2,088 |   |
|                                        |       | 3,535                       |       | 1,146 |   | 4,681 |   |
| Total noncurrent derivative liabilities     |       | $                           | 4,295      |   | $ | 1,146 |   | $ | 5,441 |   |

 

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(a)         FASB Interpretation No. 39 *Offsetting of Amounts Relating to Certain Contracts*,as amended by FASB Staff Position FIN 39-1 *Amendmentof FASB Interpretation No. 39*, permits the netting ofreceivables and payables for derivatives and related collateral amounts when alegally enforceable master netting agreement exists between PSCo and acounterparty.  A master netting agreementis an agreement between two parties who have multiple contracts with each otherthat provides for the net settlement of all contracts in the event of defaulton or termination of any one contract.

 

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The following table details the impact of derivativeactivity during the three months and six months ended June 30, 2009, onother comprehensive income, regulatory assets and liabilities, and income:

 
| ** **                                  | ** ** | **Three  Months Ended June 30, 2009**               | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                  | ** ** | **Fair Value Changes Recognized  During the Period in:** | ** ** | **Pre-Tax Amounts Reclassified into Income  During the Period from:** | ** ** | **Pre-Tax Gains  (Losses)** | ** ** |
| **(Thousands of Dollars)**                  | ** ** | **Other  Comprehensive  Income (Loss)**                  | ** ** | **Regulatory  Assets and  Liabilities** | ** ** | **Other  Comprehensive  Income (Loss)** | ** ** | **Regulatory  Assets and  Liabilities** | ** ** | **Recognized  During the Period  in Income** | ** ** |
| Derivatives designated as cash flow hedges: |       |                                                     |       |   |   |   |   |   |   |   |   |
| Interest rate                               |       | $                                                        | (632       | ) | $ | — |   | $ | (593 | )(d) | $ | — |   | $ | — |   |
| Natural gas commodity                       |       | —                                                   |       | (417 | ) | — |   | 409 | (c) | — |   |
| Vehicle fuel and other  commodity           |       | 944                                                      |       | — |   | 695 | (a) | — |   | — |   |
|                                        |       | $                                                        | 312        |   | $ | (417 | ) | $ | 102 |   | $ | 409 |   | $ | — |   |
|                                        |       |                                                     |       |   |   |   |   |   |   |   |   |
| Other derivative  instruments:              |       |                                                     |       |   |   |   |   |   |   |   |   |
| Trading commodity                           |       | $                                                        | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 1,134 | (b) |
| Natural gas commodity                       |       | —                                                   |       | 6,444 |   | — |   | — |   | — |   |
|                                        |       | $                                                        | —     |   | $ | 6,444 |   | $ | — |   | $ | — |   | $ | 1,134 |   |

 
| ** **                                  | ** ** | **Six  Months Ended June 30, 2009**                 | ** ** |
|---------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                  | ** ** | **Fair Value Changes Recognized  During the Period in:** | ** ** | **Pre-Tax Amounts Reclassified into Income  During the Period from:** | ** ** | **Pre-Tax Gains  (Losses)** | ** ** |
| **(Thousands of Dollars)**                  | ** ** | **Other  Comprehensive  Income (Loss)**                  | ** ** | **Regulatory  Assets and  Liabilities** | ** ** | **Other  Comprehensive  Income (Loss)** | ** ** | **Regulatory  Assets and  Liabilities** | ** ** | **Recognized  During the Period  in Income** | ** ** |
| Derivatives designated as cash flow hedges: |       |                                                     |       |   |   |   |   |   |   |   |   |
| Interest rate                               |       | $                                                        | (632       | ) | $ | — |   | $ | (1,185 | )(d) | $ | — |   | $ | — |   |
| Natural gas commodity                       |       | —                                                   |       | (16,098 | ) | — |   | 66,109 | (c) | (22,243 | )(c) |
| Vehicle fuel and other  commodity           |       | 964                                                      |       | — |   | 1,486 | (a) | — |   | — |   |
|                                        |       | $                                                        | 332        |   | $ | (16,098 | ) | $ | 301 |   | $ | 66,109 |   | $ | (22,243 | ) |
|                                        |       |                                                     |       |   |   |   |   |   |   |   |   |
| Other derivative  instruments:              |       |                                                     |       |   |   |   |   |   |   |   |   |
| Trading commodity                           |       | $                                                        | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 2,543 | (b) |
| Natural gas commodity                       |       | —                                                   |       | (8,202 | ) | — |   | 15 |   | — |   |
|                                        |       | $                                                        | —     |   | $ | (8,202 | ) | $ | — |   | $ | 15 |   | $ | 2,543 |   |

 

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(a)              Recorded to other operating and maintenance expenses.

(b)             Recorded to electric operating revenues.

(c)              Recorded to cost of natural gassold and transported; these derivative settlement gains and losses are sharedwith natural gas customers through purchased natural gas cost-recovery mechanisms, and reclassified out of income as regulatoryassets or liabilities, as appropriate.

(d)             Recorded to interest charges.

 

At June 30,2009, commodity derivatives recorded to derivative instruments valuationincluded derivative contracts with gross notional amounts of approximately3,604,000-megawatt (MW) hours of electricity, 45,145,000 MMBtu of natural gas, and2,240,000 gallons of vehicle fuel.  Theseamounts reflect the gross notional amounts of futures and forwards, and are notreflective of net positions in the underlying commodities.  Notional amounts for options are alsoincluded on a gross basis, but are weighted for the probability of exercise.

 

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***Credit Related Contingent Features******—***Contract provisionsof PSCo’s derivative instruments may require the posting of collateral orsettlement of the contracts for various reasons, including if PSCo is unable tomaintain its credit rating.  If thecredit rating of PSCo at June 30, 2009 were downgraded below investment grade,contracts underlying $0.8 million of derivative instruments in a liabilityposition would have required PSCo to post collateral or settle the contracts,which would have resulted in payments to applicable counterparties of $0.8million.  At June 30, 2009, therewas no collateral posted on these specific contracts.

 

Certain of PSCo’sderivative instruments are also subject to contract provisions that containadequate assurance clauses.  Theseprovisions allow counterparties to seek performance assurance, including cashcollateral, in the event that PSCo’s ability to fulfill its contractualobligations is reasonably expected to be impaired.  As of June 30, 2009, PSCo had nocollateral posted related to adequate assurance clauses in derivativecontracts.

 

**10.   Financial Instruments**

 

The estimated fair values ofPSCo’s recorded financial instruments are as follows:

 
| ** **                                | ** ** | **June 30,  2009** | ** ** | **Dec. 31,  2008** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| **(Thousands of Dollars)**      | ** ** | **Carrying  Amount**    | ** ** | **Fair Value**     | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| Other investments                         |       | $                       | 2          |                    | $          | 2 |   | $ | 2 |   | $ | 2 |   |
| Long-term debt, including current portion |       | 2,888,238               |       | 3,093,042               |       | 2,490,761 |   | 2,654,256 |   |
|                                           |            |                         |            |                         |            |  |  |  |  |  |  |  |  |

 

Thefair value of cash and cash equivalents, notes and accounts receivable andnotes and accounts payable are not materially different from their carryingamounts.  The fair value of PSCo’s otherinvestments is estimated based on quoted market prices for those or similarinvestments.  The fair value of PSCo’slong-term debt is estimated based on the quoted market prices for the same orsimilar issues or the current rates for debt of the same remaining maturitiesand credit quality.

 

Thefair value estimates presented are based on information available to managementas of June 30, 2009 and Dec. 31, 2008. These fair value estimateshave not been comprehensively revalued for purposes of these consolidatedfinancial statements since that date and current estimates of fair values maydiffer significantly.

 

***Letters ofCredit***— PSCo uses letters ofcredit, generally with terms of one year, to provide financial guarantees forcertain operating obligations.  At June 30,2009 and Dec. 31, 2008, there were $4.5 million and $4.9 million ofletters of credit outstanding, respectively. The contract amounts of these letters of credit approximate their fairvalue and are subject to fees determined in the marketplace.

 

**11.****      ****Fair ValueMeasurements**

 

**Effective Jan. 1, 2008, PSCo adopted *Fair Value Measurements* (SFAS No. 157)for recurring fair value measurements. SFAS No. 157 provides a single definition of fair value and requiresenhanced disclosures about assets and liabilities measured at fair value. SFAS No. 157establishes a hierarchal framework for disclosing the observability of theinputs utilized in measuring assets and liabilities at fair value. The threelevels defined by the SFAS No. 157 hierarchy and examples of each levelare 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 are highlyliquid and actively traded instruments with quoted prices, such as commodityderivative contracts listed on the New York Mercantile Exchange.

 

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 contracts, such as energy forwards withpricing interpolated from recent trades of similar location, or priced withmodels using highly observable inputs, such as commodity options priced usingobservable forward prices and volatilities.

 

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, such as the long-term commodity price forecasts used todetermine the fair value of long-term energy forwards.

 

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

 

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Thefollowing tables present, for each of the SFAS No. 157 hierarchy levels,PSCo’s assets and liabilities that are measured at fair value on a recurringbasis:

 
| ** **                           | ** ** | **June 30, 2009** | ** ** |
|--------------------------------------|------------|------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **Level 1**       | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Counterparty  Netting** | ** ** | **Net Balance** | ** ** |
| Cash equivalents                     |       | $                      | —     |   | $ | 207,000 |   | $ | — |   | $ | — |   | $ | 207,000 |   |
| Commodity derivative assets          |       | —                 |       | 6,993 |   | 5,964 |   | (1,862 | ) | 11,095 |   |
| Commodity derivative liabilities     |       | —                 |       | 29,229 |   | 3,291 |   | (2,372 | ) | 30,148 |   |
|                                      |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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

 

The following tables present the changes inLevel 3 net commodity derivatives for the three and six months ended June 30:

 
| ** **                                             | ** ** | **Three months ended June 30,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|------------|
| **(Thousands of Dollars)**                             | ** ** | **2009**                             | ** ** | **2008** | ** ** |
| Balance April 1                                   |       | $                                    | 2,148      |   | $ | 2,549 |   |
| Purchases, issuances, and settlements, net             |       | (819                                 | )          | (1,347 | ) |
| Transfers into level 3                                 |       | 588                                  |       | — |   |
| Gains recognized in earnings, net                      |       | 291                                  |       | 1,306 |   |
| Gains recognized as regulatory assets and  liabilities |       | 465                                  |       | — |   |
| Balance June 30                                   |       | $                                    | 2,673      |   | $ | 2,508 |   |

 
| ** **                                             | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------|------------|------------------------------------|------------|
| **(Thousands of Dollars)**                             | ** ** | **2009**                           | ** ** | **2008** | ** ** |
| Balance Jan. 1                                    |       | $                                  | (26        | ) | $ | 4,121 |   |
| Purchases, issuances, and settlements, net             |       | (1,172                             | )          | (2,643 | ) |
| Transfers into level 3                                 |       | 588                                |       | — |   |
| Gains recognized in earnings, net                      |       | 2,755                              |       | 1,030 |   |
| Gains recognized as regulatory assets and  liabilities |       | 528                                |       | — |   |
| Balance June 30                                   |       | $                                  | 2,673      |   | $ | 2,508 |   |

 

Gains on Level 3 commodityderivatives recognized in earnings for the three and six months ended June 30,2009, include $0.3 million and $2.8 million of net unrealized gains relating tocommodity derivatives held at June 30, 2009.  Gains on Level 3 commodity derivativesrecognized in earnings for the three and six months ended June 30, 2008,include $1.2 million and $1.0 million of net unrealized gains relating tocommodity derivatives held at June 30, 2008.  Realized and unrealized gains and losses oncommodity trading activities are included in electric revenues.  Realized and unrealized gains and losses onshort-term wholesale activities reflect the impact of regulatory recovery andare deferred as regulatory assets and liabilities.

 

**12.****              ****Interest and Other Income (Expenses), Net**

 

Interestand other income (expenses), net, consisted of the following:

 
| ** **                                      | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Thousands of Dollars)**            | ** ** | **2009**                                            | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Interest income                                 |       | $                                                   | 600        |                                              | $          | 1,327 |   | $ | 1,067 |   | $ | 3,554 |   |
| Other nonoperating income                       |       | 2,099                                               |       | 1,202                                             |       | 2,454 |   | 1,779 |   |
| Insurance policy (expenses) income              |       | (587                                                | )          | 1,562                                             |       | (463 | ) | 1,978 |   |
| Other nonoperating expenses                     |       | —                                              |       | —                                            |       | (77 | ) | — |   |
| Total interest and other income (expenses), net |       | $                                                   | 2,112      |                                              | $          | 4,091 |   | $ | 2,981 |   | $ | 7,311 |   |

 

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**13.     SegmentInformation**

 

PSCo has two reportable segments, regulatedelectric and regulated natural gas. Commodity trading operations are not areportable segment and commodity trading results are included in the regulatedelectric segment.

 
| **(Thousands of Dollars)**       | ** ** | **Regulated  Electric** | ** ** | **Regulated  Natural  Gas** | ** ** | **All  Other** | ** ** | **Reconciling  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|----------------|------------|-------------------------------|------------|-------------------------|------------|
| **Three months ended  June 30, 2009** | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **     | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues from:                             |       |                    |       |                        |       |           |       |                          |       |                    |       |
| External customers                         |       | $                       | 588,467    |                        | $          | 173,494        |       | $                             | 7,132      |                    | $          | — |   | $ | 769,093 |   |
| Internal customers                         |       | 53                      |       | 16                          |       | —         |       | (69                           | )          | —                  |       |
| Total revenues                             |       | $                       | 588,520    |                        | $          | 173,510        |       | $                             | 7,132      |                    | $          | (69 | ) | $ | 769,093 |   |
| Segment net income                         |       | $                       | 44,749     |                        | $          | 11,616         |       | $                             | 4,182      |                    | $          | — |   | $ | 60,547 |   |
|                                       |       |                    |       |                        |       |           |       |                          |       |                    |       |
| **Three months ended  June 30, 2008** | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **     | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues from:                             |       |                    |       |                        |       |           |       |                          |       |                    |       |
| External customers                         |       | $                       | 738,357    |                        | $          | 249,302        |       | $                             | 7,648      |                    | $          | — |   | $ | 995,307 |   |
| Internal customers                         |       | 52                      |       | 35                          |       | —         |       | (87                           | )          | —                  |       |
| Total revenues                             |       | $                       | 738,409    |                        | $          | 249,337        |       | $                             | 7,648      |                    | $          | (87 | ) | $ | 995,307 |   |
| Segment net income                         |       | $                       | 50,139     |                        | $          | 12,225         |       | $                             | 3,975      |                    | $          | — |   | $ | 66,339 |   |

 
| **(Thousands of Dollars)**     | ** ** | **Regulated  Electric** | ** ** | **Regulated  Natural  Gas** | ** ** | **All  Other** | ** ** | **Reconciling  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|----------------|------------|-------------------------------|------------|-------------------------|------------|
| **Six months ended June 30,  2009** | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **     | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues from:                           |       |                    |       |                        |       |           |       |                          |       |                    |       |
| External customers                       |       | $                       | 1,185,810  |                        | $          | 568,615        |       | $                             | 17,146     |                    | $          | — |   | $ | 1,771,571 |   |
| Internal customers                       |       | 146                     |       | 47                          |       | —         |       | (193                          | )          | —                  |       |
| Total revenues                           |       | $                       | 1,185,956  |                        | $          | 568,662        |       | $                             | 17,146     |                    | $          | (193 | ) | $ | 1,771,571 |   |
| Segment net income                       |       | $                       | 87,060     |                        | $          | 42,855         |       | $                             | 8,920      |                    | $          | — |   | $ | 138,835 |   |
| ** **                               | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **     | ** ** | ** **                    | ** ** | ** **              | ** ** |
| **Six months ended June 30,  2008** | ** ** | ** **              | ** ** | ** **                  | ** ** | ** **     | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues from:                           |       |                    |       |                        |       |           |       |                          |       |                    |       |
| External customers                       |       | $                       | 1,392,853  |                        | $          | 812,254        |       | $                             | 18,678     |                    | $          | — |   | $ | 2,223,785 |   |
| Internal customers                       |       | 130                     |       | 68                          |       | —         |       | (198                          | )          | —                  |       |
| Total revenues                           |       | $                       | 1,392,983  |                        | $          | 812,322        |       | $                             | 18,678     |                    | $          | (198 | ) | $ | 2,223,785 |   |
| Segment net income                       |       | $                       | 102,069    |                        | $          | 50,978         |       | $                             | 7,596      |                    | $          | — |   | $ | 160,643 |   |

 

**14.****              ****Comprehensive Income**

 

The components of totalcomprehensive income are shown below:

 
| ** **                                                                          | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Thousands of Dollars)**                                                     | ** ** | **2009**                                        | ** ** | **2008**                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net income                                                                          |       | $                                               | 60,547     |                                          | $          | 66,339 |   | $ | 138,835 |   | $ | 160,643 |   |
| Other comprehensive income:                                                         |       |                                            |       |                                          |       |   |   |   |   |
| After-tax net unrealized gains related to  derivatives accounted for as hedges      |       | 586                                             |       | 202                                           |       | 599 |   | 176 |   |
| After-tax net realized gains on derivative  transactions reclassified into earnings |       | (328                                            | )          | (382                                          | )          | (206 | ) | (766 | ) |
| Other comprehensive income (loss)                                                   |       | 258                                             |       | (180                                          | )          | 393 |   | (590 | ) |
| Comprehensive income                                                                |       | $                                               | 60,805     |                                          | $          | 66,159 |   | $ | 139,228 |   | $ | 160,053 |   |

 

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**15.    Benefit Plans and OtherPostretirement Benefits**

 

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

 

**Components of Net Periodic Benefit Cost (Credit)**

 
| ** **                                                                                     | ** ** | **Three months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2009**                                            | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **(Thousands of Dollars)**                                                           | ** ** | **Pension Benefits**                           | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                                                   |       | $                                                   | 16,744     |   | $ | 14,929 |   | $ | 1,057 |   | $ | 1,211 |   |
| Interest cost                                                                                  |       | 43,046                                              |       | 44,677 |   | 13,050 |   | 12,894 |   |
| Expected return on plan assets                                                                 |       | (64,909                                             | )          | (68,697 | ) | (5,993 | ) | (8,425 | ) |
| Amortization of transition obligation                                                          |       | —                                              |       | — |   | 3,726 |   | 3,644 |   |
| Amortization of prior service cost (credit)                                                    |       | 6,154                                               |       | 5,166 |   | (711 | ) | (544 | ) |
| Amortization of net loss                                                                       |       | 3,299                                               |       | 3,511 |   | 4,779 |   | 3,031 |   |
| Net periodic benefit cost (credit)                                                             |       | 4,334                                               |       | (414 | ) | 15,908 |   | 11,811 |   |
| (Cost) credits not recognized and additional cost  recognized due to the effects of regulation |       | (959                                                | )          | 1,925 |   | 973 |   | 973 |   |
| Net benefit cost recognized for financial  reporting                                           |       | $                                                   | 3,375      |   | $ | 1,511 |   | $ | 16,881 |   | $ | 12,784 |   |
|                                                                                           |       |                                                |       |   |   |   |   |   |   |
| **PSCo**                                                                                       | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net periodic benefit cost                                                                      |       | $                                                   | 3,163      |   | $ | 3,274 |   | $ | 10,565 |   | $ | 6,498 |   |
| Additional cost recognized due to the effects of  regulation                                   |       | —                                              |       | — |   | 973 |   | 973 |   |
| Net benefit cost recognized for financial  reporting                                           |       | $                                                   | 3,163      |   | $ | 3,274 |   | $ | 11,538 |   | $ | 7,471 |   |

 
| ** **                                                                                     | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2009**                                          | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **(Thousands of Dollars)**                                                           | ** ** | **Pension Benefits**                         | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                                                           | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                                                   |       | $                                                 | 32,730     |   | $ | 31,702 |   | $ | 2,333 |   | $ | 2,675 |   |
| Interest cost                                                                                  |       | 84,895                                            |       | 85,260 |   | 25,206 |   | 25,440 |   |
| Expected return on plan assets                                                                 |       | (128,269                                          | )          | (137,169 | ) | (11,388 | ) | (15,925 | ) |
| Amortization of transition obligation                                                          |       | —                                            |       | — |   | 7,222 |   | 7,288 |   |
| Amortization of prior service cost (credit)                                                    |       | 12,309                                            |       | 10,332 |   | (1,363 | ) | (1,088 | ) |
| Amortization of net loss                                                                       |       | 6,228                                             |       | 6,370 |   | 9,665 |   | 5,749 |   |
| Net periodic benefit cost (credit)                                                             |       | 7,893                                             |       | (3,505 | ) | 31,675 |   | 24,139 |   |
| (Cost) credits not recognized and additional cost  recognized due to the effects of regulation |       | (1,446                                            | )          | 4,517 |   | 1,946 |   | 1,946 |   |
| Net benefit cost recognized for financial  reporting                                           |       | $                                                 | 6,447      |   | $ | 1,012 |   | $ | 33,621 |   | $ | 26,085 |   |
|                                                                                           |       |                                              |       |   |   |   |   |   |   |
| **PSCo**                                                                                       | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net periodic benefit cost                                                                      |       | $                                                 | 6,924      |   | $ | 5,939 |   | $ | 20,139 |   | $ | 13,495 |   |
| Additional cost recognized due to the effects of  regulation                                   |       | —                                            |       | — |   | 1,946 |   | 1,946 |   |
| Net benefit cost recognized for financial  reporting                                           |       | $                                                 | 6,924      |   | $ | 5,939 |   | $ | 22,085 |   | $ | 15,441 |   |

 

**Item2.    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 withmanagement’s narrative analysis of the results of operations set forth ingeneral instructions H (2) (a) of Form 10-Q for wholly ownedsubsidiaries (reduced disclosure format).

 

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**Forward-Looking Information**

 

The following discussion andanalysis by management focuses on those factors that had a material effect onPSCo’s financial condition, results of operations and cash flows during theperiods presented, or are expected to have a material impact in the future. Itshould be read in conjunction with the accompanying unaudited financialstatements and the related notes to the consolidated financial statements.  Due to the seasonality of PSCo’s electric andnatural gas sales, such interim results are not necessarily an appropriate basefrom which to project annual results

 

Except for thehistorical statements contained in this report, the matters discussed in thefollowing discussion and analysis are forward-looking statements that aresubject to certain risks, uncertainties and assumptions. Such forward-lookingstatements are intended to be identified in this document by the words “anticipate,”“believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,”“project,” “possible,” “potential,” “should” and similar expressions. Actualresults may vary materially. Forward-looking statements speak only as of thedate they are made, and we do not undertake any obligation to update them toreflect changes that occur after that date. Factors that could cause actual results to differ materially include,but are not limited to: general economic conditions, including the availabilityof credit and its impact on capital expenditures and the ability of PSCo andits subsidiaries to obtain financing on favorable terms; business conditions inthe energy industry; actions of credit rating agencies; competitive factors,including the extent and timing of the entry of additional competition in themarkets served by PSCo and its subsidiaries; unusual weather; effects ofgeopolitical events, including war and acts of terrorism; state, federal andforeign legislative and regulatory initiatives that affect cost and investmentrecovery, have an impact on rates or have an impact on asset operation orownership or impose environmental compliance conditions; structures that affectthe speed and degree to which competition enters the electric and natural gasmarkets; costs and other effects of legal and administrative proceedings,settlements, investigations and claims; actions of accounting regulatorybodies; the items described under Factors Affecting Results of ContinuingOperations; and the other risk factors listed from time to time by PSCo inreports filed with the SEC, including “Risk Factors” in Item 1A of PSCo’s Form 10-Kfor the year ended Dec. 31, 2008, and Exhibit 99.01 to this QuarterlyReport on Form 10-Q for the quarter ended June 30, 2009.

 

**MarketRisks**

 

PSCois exposed to market risks, including changes in commodity prices and interestrates, as disclosed in Item 7A, Quantitative and Qualitative Disclosures AboutMarket Risk, in its Annual Report on Form 10-K for the year ended Dec. 31,2008.  Commodity price and interest raterisks for PSCo are mitigated in most jurisdictions due to cost-based rateregulation.

 

Continued distress in the financial markets may alsoimpact the fair value of the debt and equity securities in pension andpostretirement health care plan trusts, as well as PSCo’s ability to earn areturn on short-term investments of excess cash.  As of June 30, 2009, there have been nomaterial changes to market risks from that set forth in PSCo’s Annual Report onForm 10-K for the year ended Dec. 31, 2008.

 

**Results ofOperations**

 

PSCo’s net income wasapproximately $138.8 million for the first six months of 2009, compared withapproximately $160.6 million for the first six months of 2008.

 

**Electric Revenues and Margin**

** **

Electricfuel and purchased power expenses tend to vary with changing retail andwholesale sales requirements and unit cost changes in fuel and purchasedpower.  Due to fuel and purchased energycost-recovery mechanisms for customers, fluctuations in these costs do notmaterially affect electric margin.

 

***Electric***—******The following tables detailthe electric revenues and margin:

 
| ** **                          | ** ** | **Six months ended June 30,** | ** ** |
|-------------------------------------|------------|---------------------------------------------------|------------|
| **(Millions of Dollars)** | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| Electric revenues                   |       | $                                                 | 1,186      |   | $ | 1,393 |   |
| Electric fuel and purchased power   |       | (608                                              | )          | (828 | ) |
| Electric margin                     |       | $                                                 | 578        |   | $ | 565 |   |

 

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Thefollowing summarizes the components of the changes in electric revenues andmargin for the six months ended June 30:

 

***ElectricRevenues***

** **
| **(Millions of Dollars)**                            | ** ** | **2009 vs. 2008** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|
| Fuel and purchased power cost recovery                         |       | $                           | (193       | ) |
| Trading                                                        |       | (25                         | )          |
| Estimated impact of weather                                    |       | (7                          | )          |
| Revenues due to leap year (weather-normalized)                 |       | (3                          | )          |
| Firm wholesale                                                 |       | (2                          | )          |
| Retail sales decline (excluding weather impact)                |       | (1                          | )          |
| Demand side management revenues (generally offset  by expense) |       | 30                          |       |
| Other                                                          |       | (6                          | )          |
| Total decrease in electric revenues                            |       | $                           | (207       | ) |

# *** ***

***Electric Margin***

 
| **(Millions of Dollars)**                            | ** ** | **2009 vs. 2008** | ** ** |
|----------------------------------------------------------------|------------|-----------------------------|------------|
| Demand side management revenues (generally offset  by expense) |       | $                           | 30         |   |
| Trading                                                        |       | 7                           |       |
| Estimated impact of weather                                    |       | (7                          | )          |
| Margin due to leap year (weather-normalized)                   |       | (3                          | )          |
| Purchased capacity costs                                       |       | (3                          | )          |
| Fuel handling and procurement                                  |       | (2                          | )          |
| Transmission expense, net                                      |       | (2                          | )          |
| Retail sales decline (excluding weather impact)                |       | (1                          | )          |
| Other (including sales mix and fuel recovery)                  |       | (6                          | )          |
| Total increase in electric margin                              |       | $                           | 13         |   |

 

**NaturalGas Revenues and Margin**

 

Thecost of natural gas tends to vary with changing sales requirements and unitcost of natural gas purchases.  PSCo hasa GCA mechanism for natural gas sales, which recognizes the majority of theeffects of changes in the cost of natural gas purchased for resale and adjustsrevenues to reflect such changes in costs upon request by PSCo.  Therefore, fluctuations in the cost ofnatural gas have little effect on natural gas margin.

 

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

 
| ** **                               | ** ** | **Six months ended June 30,** | ** ** |
|------------------------------------------|------------|---------------------------------------------------|------------|
| **(Millions of Dollars)**      | ** ** | **2009**                                          | ** ** | **2008** | ** ** |
| Natural gas revenues                     |       | $                                                 | 569        |   | $ | 812 |   |
| Cost of natural gas sold and transported |       | (375                                              | )          | (611 | ) |
| Natural gas margin                       |       | $                                                 | 194        |   | $ | 201 |   |

 

Thefollowing summarizes the components of the changes in natural gas revenues andmargin for the six months ended June 30:

 

***Natural Gas Revenues***

 
| **(Millions of Dollars)**    | ** ** | **2009 vs. 2008** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|
| Purchased natural gas cost recovery    |       | $                           | (235       | ) |
| Estimated impact of weather            |       | (9                          | )          |
| DSM revenues                           |       | 6                           |       |
| Other                                  |       | (5                          | )          |
| Total decrease in natural gas revenues |       | $                           | (243       | ) |

 

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***Natural Gas Margin***

*** ***
| **(Millions of Dollars)**  | ** ** | **2009 vs. 2008** | ** ** |
|--------------------------------------|------------|-----------------------------|------------|
| Estimated impact of weather          |       | $                           | (9         | ) |
| DSM revenues                         |       | 6                           |       |
| Other                                |       | (4                          | )          |
| Total decrease in natural gas margin |       | $                           | (7         | ) |

 

**Non-FuelOperating Expense and Other Items**

 

***Other Operating and Maintenance Expenses****—*The following summarizes the components of the changes in otheroperating and maintenance expenses for the six months ended June 30:

 
| **(Millions of Dollars)**                       | ** ** | **2009 vs. 2008** | ** ** |
|-----------------------------------------------------------|------------|-----------------------------|------------|
| Higher employee benefit costs                             |       | $                           | 10         |   |
| Higher labor costs                                        |       | 2                           |       |
| Lower material costs                                      |       | (2                          | )          |
| Lower contract labor costs                                |       | (2                          | )          |
| Lower consulting costs                                    |       | (4                          | )          |
| Other                                                     |       | (4                          | )          |
| Total change in other operating and maintenance  expenses |       | $                           | —     |   |

 

***Demand Side Management (DSM)****—*******DSM expense increased byapproximately $29.7 million for the first six months of 2009, compared with thefirst six months of 2008.  The higherexpense is attributable to the ongoing expansion of such programs as designed,in part, to meet certain regulatory commitments in Colorado.

 

***Interest and Other Income, Net***—******Interest and otherincome, net, decreased by approximately $4.3 million for the first six monthsof 2009, compared with the first six months of 2008, primarily due to lowerinterest income and a life insurance policy experience refund received in 2008.

 

*****AFDC*********— AFDC increased by approximately $5.0million, or 20.8 percent, for the first six months of 2009, compared with thefirst six months of 2008.  This increasewas primarily due to the ongoing construction of Comanche Unit 3, which isnearing its final phase of construction.

 

***Interest Charges***—******Interest chargesincreased by approximately $9.3 million, or 12.7 percent, for the first sixmonths of 2009, compared with the first six months of 2008, primarily due to increasedlong-term borrowings, partially offset by lower short-term borrowings.

 

***Income Taxes***— Income tax expense decreased by $11.6 millionfor the first six months of 2009, compared with the first six months of2008.  The decrease in income tax expense was primarily due to a decreasein pre-tax income. The effective tax rate was 33.3 percent for the first sixmonths of 2009, compared with 33.5 percent for the same period in 2008.

 

**Public Utility Regulation**

 

***PSCo Resource Plan ***— PSCo estimates it willpurchase approximately 35 to 45 percent of its total electric systemenergy needs for 2009 under long-term contracts and generate the remainder withPSCo-owned resources.  In November 2007,PSCo filed the Colorado Resource Plan (CRP), which details the type and amountof resources that will be added to the system for an eight year resourceacquisition period (RAP) through 2015.  The CPUC issued its order in September 2008,which approved the following:

 

·                  Increasein wind portfolio of 850 MW by 2015.  PSCo would then have a total of approximately1,900 MW of wind power resources;

·                  Approximately200 MW from a central solar thermal facility with storage, with possibleoption of acquiring up to 600 MW of solar thermal resources withstorage as technology develops;

·                  Increasecustomer 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;

·                  Retirementof two older coal-burning plants (two units at Arapahoe and two units atCameo), replacing the capacity with company owned resources, provided the costsare reasonable; and

 

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·                  ReducePSCo’s CO2 emissionsby 10 percent below 2005 levels and for PSCo to propose additional reductionsto achieve a 20 percent reduction by 2020 in its next plan.

 

PSCo expects to file its bid evaluation report with the CPUCin August 2010.

 

###### ***San Luis Valley-Calumet-Comanche Transmission Project*******— PSCo and Tri-State Generationand Transmission Association filed a joint application for a certificate ofneed and public convenience (CPCN) in May 2009. The project consists of four components of both 230 KV and 345 KV lineand substation construction.  The line isintended to assist in bringing solar power in the San Luis Valley to load.  The line is expected to be placed in-servicein 2013 if no significant issues in the siting and permitting of the line areencountered.  The CPUC issued itsdecision on June 26, 2009. Initially, the case will follow a 180-day schedule, and an initialdecision is expected to be issued by Nov. 10, 2009.  However, the case could shift to a 210-dayschedule depending on the outcome of a motion filed by one of the partiescontesting PSCo’s ability to classify this project under Senate Bill 100.  Evidentiary hearings are expected to begin onSept. 21, 2009. Pole Canyon, a transmission company that is in the process ofpurchasing right-of-way to construct a transmission line that may be inproximity to the proposed Calumet-Comanche line was permitted to intervene.

######  

**Summary of Recent Federal Regulatory Developments**

 

TheFERC has jurisdiction over rates for electric transmission service ininterstate commerce and electricity sold at wholesale, hydro facilitylicensing, natural gas transportation, accounting practices and certain otheractivities of Xcel Energy’s utility subsidiaries, including enforcement ofNorth American Electric Reliability Corporation (NERC) mandatory electricreliability standards. State and local agencies have jurisdiction over many ofPSCo’s utility activities, including regulation of retail rates andenvironmental matters. See additional discussion in the summary ofrecent federal regulatory developments and public utility regulation sectionsof the PSCo Annual Report on Form 10-K for the year ended Dec. 31,2008.  In addition to the mattersdiscussed below, see Note 5 tothe consolidated financial statements for a discussion of other regulatorymatters.

 

***ElectricReliability Standards Matters*****—**In 2008, PSCo wassubject to an audit of its compliance with the NERC and regional reliabilitystandards by the Western Electricity Coordinating Council (WECC), the NERCregional entity for the PSCo system.  On Oct. 31,2008, the WECC auditors issued their final audit report.  The report found a possible violation of onestandard related to relay maintenance. PSCo is uncertain if the WECC audit report will result in financialpenalties being imposed on PSCo.

 

In2008, PSCo filed self-reports with the WECC relating to failure to completecertain generation station battery tests, relay maintenance intervals andcertain critical infrastructure protection standards.  PSCo expects that penalties may be assessedby WECC in conjunction with some of the self-reports.  The penalties are not expected to bematerial.

 

**Item 4. CONTROLS ANDPROCEDURES**

 

**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.  In addition, the disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by us in reports under theExchange Act is accumulated and communicated to management, including the chiefexecutive officer (CEO) and chief financial officer (CFO), allowing timelydecisions regarding required disclosure. As of the end of the period covered by this report, based on anevaluation carried out under the supervision and with the participation of PSCo’smanagement, including the CEO and CFO, of the effectiveness of our disclosurecontrols and procedures, the CEO and CFO have concluded that PSCo’s disclosurecontrols and procedures were effective.

 

**Internal Control Over Financial Reporting**

 

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

 

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**AdditionalInformation**

 

See Notes 5 and 6 of thefinancial statements in this Quarterly Report on Form 10-Q for furtherdiscussion of legal proceedings, including Regulatory Matters and Commitmentsand Contingent Liabilities, which are hereby incorporated by reference.  Reference also is made to Item 3 and Notes 14and 15 of PSCo’s consolidated financial statements in its Annual Report on Form 10-Kfor the year ended Dec. 31, 2008 for a description of certain legalproceedings presently pending.

 

**Item 1A.Risk Factors**

 

Exceptto the extent updated or described below, PSCo’s risk factors are documented inItem 1A of Part I of its Annual Report on Form 10-K for the yearended Dec. 31, 2008, which is incorporated herein by reference.

 

***Weare 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 bad debtexpense.  Retail credit risk is comprisedof numerous factors including the overall economy and the price of products andservices provided.

 

Creditrisk also includes the risk that various counterparties that owe us money orproduct will breach their obligations. Should the counterparties to these arrangements fail to perform, we maybe forced to enter into alternative arrangements.  In that event, our financial results could beadversely affected and we could incur losses.

 

Onealternative available to address counterparty credit risk is to transact onliquid commodity exchanges.  The creditrisk is then socialized through the exchange central clearinghousefunction.  While exchanges do removecounterparty credit risk, all participants are subject to margin requirements,which creates an additional need for liquidity to post margin as exchangepositions change value daily.  Additionalmargin requirements could impact our liquidity.

 

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 the PJMInterconnection and MISO in which any credit losses are socialized to allmarket 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.

 

***We may be subject to legislative andregulatory responses to climate change, with which compliance could bedifficult and costly.***

 

**Legislativeand regulatory responses related to climate change create financial risk.  Increased public awareness and concern mayresult in more regional and/or federal requirements to reduce or mitigate theeffects of GHG.  Numerous states haveannounced or adopted programs to stabilize and reduce GHG and federallegislation has been introduced in both houses of Congress.  Likewise, the EPA has issued an AdvancedNotice of Proposed Rulemaking that proposes to regulate GHGs under the CleanAir Act. **PSCo’s electricgenerating facilities are likely to be subject to regulation under climatechange laws introduced at either the state or federal level within the next fewyears.

 

Manyof the federal and state climate change legislative proposals, such as ACES,use a “cap and trade” policy structure, in which GHG emissions from a broadcross-section of the economy would be subject to an overall cap.  Under the proposals, the cap becomes more stringentwith the passage of time.  The proposalsestablish mechanisms for GHG sources, such as power plants, to obtain “allowances”or permits to emit GHGs during the course of a year.  The sources may use the allowances to covertheir own emissions or sell them to other sources that do not hold enoughemissions allowances for their own operations. Proponents of the cap and trade policy believe it will result in themost cost effective, flexible emission reductions.  **The impact of legislation and regulations, includinga “cap and trade” structure, on PSCo and its customers will depend on a numberof factors, including whether GHG sources in multiple sectors of the economyare regulated, the overall GHG emissions cap level, the degree to which GHGoffsets are allowed, the allocation of emission allowances to specific sourcesand the indirect impact of carbon regulation on natural gas and coalprices.  An important factor is PSCo’sability to recover the costs incurred to comply with any regulatory requirementsthat are ultimately**

 

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**imposed. **We may not recover all costsrelated to complying with regulatory requirements imposed on PSCo.  If our regulators do not allow us to recoverall or a part of the cost of capital investment or the operating andmaintenance costs incurred to comply with the mandates, it could have amaterial adverse effect on our results of operations.

 

Forfurther discussion see Note 6 to the consolidated financial statements.

 

**Item 6.Exhibits**

 

----

* Indicates incorporation byreference

 
| 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)).                                                                                                                                                                                                                                                 |
| 4.01*  |   | Supplemental Indenture  dated as of May 1, 2009 between PSCo and U.S. Bank Trust National  Association, as successor Trustee, creating $400,000,000 principal amount of  5.125% First Mortgage Bonds, Series No. 20 due 2019 (Exhibit 4.01  of Form 8-K of PSCo dated May 28, 2009 (file no. 001-03280)). |
| 10.01* |   | Amendment dated as of  April 13, 2009 to the PSCo Credit Agreement dated as of Dec. 14,  2006 (Exhibit 10.03 of Form 10-Q of Xcel Energy dated July 31,  2009 (file no. 001-03034)).                                                                                                                           |
| 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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Table ofContents

 

**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 Aug. 3, 2009.

 

Public Service Company ofColorado

(Registrant)

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

 

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