** **

**UNITED STATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-Q/A**

**Amendment No. 1**

 

| **x**                                                       | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                      |
|-------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                  |
| **For the quarterly period ended  September 30, 2007** |
| ** **                                                  |
| **or**                                                      |
| ** **                                                  |
| **o**                                                       | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934**                                                                                     |
| ** **                                                  |
|                                                        | **For the transition period from             to              ** |   |
|                                                             |                                                                                                                                                                                              |  |  |

 

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

#### ** **

**PublicService Company of Colorado**

**(Exact name of registrant as specifiedin its charter)**

** **
| **Colorado**                     | ** ** | **84-0296600**                        |
|----------------------------------|------------|---------------------------------------|
| (State or other  jurisdiction of |       | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |       |                                  |

 
| **1225  17th Street, Denver**              |       |       |
|--------------------------------------------|------------|------------|
| **Colorado**                               | ** ** | **80202**  |
| (Address of  principal executive  offices) |       | (Zip Code) |

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days. Yes  x   No  o

 

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes  o   No  x

 

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

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

 

PublicService Company of Colorado meets the conditions set forth in GeneralInstruction H (1)(a) and (b) of Form 10-Q and is thereforefiling this Form 10-Q with the reduced disclosure format specified inGeneral Instruction H (2) to such Form 10-Q.

 

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** **

**Tableof Contents**

 

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

 

This Form 10-Q/A is filed by Public Service Co.of Colorado (PSCo). PSCo is a wholly owned subsidiary of Xcel Energy Inc. (XcelEnergy). Additional information on Xcel Energy is available on various filingswith the Securities and Exchange Commission (SEC).

 

2

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EXPLANATORY NOTE

 

As previously reported in our Current Report on Form 8-Kfiled on June 20, 2007, a settlement in principle was reached between XcelEnergy and representatives of the United States government on June 19,2007 concerning a tax dispute related to corporate-owned life insurance (COLI)policies purchased on the lives of Public Service Company of Colorado (PSCo)employees.  PSCo is a wholly owned subsidiary of Xcel Energy.  PSRInvestments, Inc. (PSRI), a wholly owned subsidiary of PSCo, owned andmanaged these COLI life insurance policies.

 

The terms of the settlement have been previously reported,most recently in our Form 10-Q for the quarter ended Sept. 30, 2007, filedon Oct. 26, 2007.  The settlementhas been implemented and the policies have been surrendered.

 

As a result of the settlement in principle,which required the surrender of the COLI policies, PSCo had previouslyclassified all amounts related to PSRI as a discontinued operation for allperiods presented in its Forms 10-Q for the periods ended June 30, 2007and Sept. 30, 2007.

 

Pursuant to a routine review of ourperiodic reports by the staff of the Securities and Exchange Commission,management reassessed the appropriateness of the treatment of PSRI as adiscontinued operation under SFAS 144 “Accounting for the Impairment orDisposal of Long-Lived Assets” and determined that PSRI operations, includingthe impact of the IRS settlement, should be presented for financial reportingpurposes as part of continuing operations rather than as discontinuedoperations as previously reported in the Form 10-Q.

 

This Amendment No. 1 on Form 10-Q/A(the “Report”) is being filed to amend and restate PSCo’s Quarterly Report on Form 10-Qfor the quarter ended Sept. 30, 2007 and 2006, that was filed on Oct. 26,2007 (the “Original Report”).  Thepurpose of this amendment is to reflect the restatement of PSCo’s previouslyissued financial statement as of and for the three and nine month periods endedSept. 30, 2007, and update other information, including Management’sDiscussion and Analysis to reflect the restatement, in each case to reflectPSRI as a continuing operation.  Theserevised sections of this report have not otherwise been updated for eventsoccurring after the date of the financial statements, except to reflect theCOLI tax settlement and the related treatment of PSRI as a continuing operationincluded in Note 4 to the consolidated financial statements. All otherinformation is unchanged and reflects the disclosures made at the time of theoriginal filing. In addition, currently dated certifications from PSCo’s ChiefExecutive Officer and Chief Financial Officer have been included as exhibits tothis Form 10-Q/A.

 

3

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##### ** **

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

##### ** **

**Item 1.Financial Statements**

 

**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF INCOME (UNAUDITED)**

**(Thousandsof dollars)**

 
| ** **                                                                                                 | ** ** | **Three Months Ended Sept. 30,** | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                                                 | ** ** | **2007  (As restated See Note 2)**                   | ** ** | **2006  (As restated See Note 2)**                  | ** ** | **2007  (As restated See Note 2)** | ** ** | **2006  (As restated See Note 2)** | ** ** |
| **Operating revenues**                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Electric utility                                                                                           |       | $                                                    | 669,598    |                                                | $          | 644,445 |   | $ | 1,944,240 |   | $ | 1,916,376 |   |
| Natural gas utility                                                                                        |       | 104,930                                              |       | 142,422                                             |       | 811,481 |   | 885,340 |   |
| Steam and other                                                                                            |       | 6,733                                                |       | 6,857                                               |       | 24,829 |   | 26,264 |   |
| Total operating revenues                                                                                   |       | 781,261                                              |       | 793,724                                             |       | 2,780,550 |   | 2,827,980 |   |
|                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| **Operating expenses**                                                                                     |       |                                                 |       |                                                |       |   |   |   |   |
| Electric fuel and purchased power                                                                          |       | 340,270                                              |       | 391,011                                             |       | 1,058,400 |   | 1,157,636 |   |
| Cost of natural gas sold and transported                                                                   |       | 35,576                                               |       | 78,062                                              |       | 562,086 |   | 654,607 |   |
| Cost of sales — steam and other                                                                       |       | 2,670                                                |       | 3,203                                               |       | 9,681 |   | 14,405 |   |
| Other operating and maintenance expenses                                                                   |       | 144,209                                              |       | 140,486                                             |       | 432,552 |   | 418,791 |   |
| Depreciation and amortization                                                                              |       | 66,377                                               |       | 61,375                                              |       | 198,309 |   | 179,895 |   |
| Taxes (other than income taxes)                                                                            |       | 19,738                                               |       | 20,083                                              |       | 65,226 |   | 64,707 |   |
| Total operating expenses                                                                                   |       | 608,840                                              |       | 694,220                                             |       | 2,326,254 |   | 2,490,041 |   |
|                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| **Operating income**                                                                                       |       | 172,421                                              |       | 99,504                                              |       | 454,296 |   | 337,939 |   |
|                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Interest and other income (expense) - net                                                                  |       | 244                                                  |       | (4,043                                              | )          | (5,238 | ) | (10,513 | ) |
| Allowance for funds used during construction - equity                                                      |       | 3,965                                                |       | 1,052                                               |       | 8,707 |   | 1,315 |   |
|                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| **Interest charges and financing  costs**                                                                  |       |                                                 |       |                                                |       |   |   |   |   |
| Interest charges — includes other financing costs of $1,411, $1,509,  $4,161 and $4,547, respectively |       | 34,337                                               |       | 32,951                                              |       | 101,012 |   | 101,993 |   |
| Interest and penalties related to COLI settlement                                                          |       | 2,190                                                |       | —                                              |       | 43,401 |   | — |   |
| Allowance for funds used during construction — debt                                                   |       | (3,496                                               | )          | (3,840                                              | )          | (8,664 | ) | (9,305 | ) |
| Total interest charges and financing costs                                                                 |       | 33,031                                               |       | 29,111                                              |       | 135,749 |   | 92,688 |   |
|                                                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Income before income taxes                                                                                 |       | 143,599                                              |       | 67,402                                              |       | 322,016 |   | 236,053 |   |
| Income taxes                                                                                               |       | 37,941                                               |       | 20,044                                              |       | 116,471 |   | 59,656 |   |
| **Net income**                                                                                             |       | $                                                    | 105,658    |                                                | $          | 47,358 |   | $ | 205,545 |   | $ | 176,397 |   |

 

**See Notes to Consolidated Financial Statements**

** **

**4**

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**PUBLIC SERVICE CO. OF COLORADO ANDSUBSIDIARIES**

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

**(Thousandsof dollars)**

 
| ** **                                                                         | ** ** | **Nine Months Ended Sept. 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007  (As restated  See Note 2)**                 | ** ** | **2006  (As restated  See Note 2)** | ** ** |
| **Operating activities**                                                           |       |                                                |       |   |   |
| Net income                                                                         |       | $                                                   | 205,545    |   | $ | 176,397 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                                |       |   |   |
| Depreciation and amortization                                                      |       | 206,107                                             |       | 190,859 |   |
| Deferred income taxes                                                              |       | 63,083                                              |       | 70,736 |   |
| Amortization of investment tax credits                                             |       | (2,943                                              | )          | (2,962 | ) |
| Allowance for equity funds used during construction                                |       | (8,707                                              | )          | (1,315 | ) |
| Net realized and unrealized hedging and derivative transactions                    |       | (13,643                                             | )          | (58,220 | ) |
| Changes in operating assets and liabilities:                                       |       |                                                |       |   |   |
| Accounts receivable                                                                |       | 80,347                                              |       | 144,710 |   |
| Accrued unbilled revenues                                                          |       | (8,231                                              | )          | 65,883 |   |
| Inventories                                                                        |       | 17,239                                              |       | 19,685 |   |
| Recoverable purchased natural gas and electric energy costs                        |       | 136,080                                             |       | 212,713 |   |
| Prepayments and other                                                              |       | 342                                                 |       | 3,314 |   |
| Accounts payable                                                                   |       | (94,986                                             | )          | (261,725 | ) |
| Net regulatory assets and liabilities                                              |       | 572                                                 |       | (39,151 | ) |
| Other current liabilities                                                          |       | 44,109                                              |       | 10,991 |   |
| Change in other noncurrent assets                                                  |       | 7,416                                               |       | 2,860 |   |
| Change in other noncurrent liabilities                                             |       | (48,113                                             | )          | (8,331 | ) |
| Net cash provided by operating activities                                          |       | 584,217                                             |       | 526,444 |   |
|                                                                               |       |                                                |       |   |   |
| **Investing activities**                                                           |       |                                                |       |   |   |
| Capital/construction expenditures                                                  |       | (491,770                                            | )          | (399,924 | ) |
| Allowance for equity funds used during construction                                |       | 8,707                                               |       | 1,315 |   |
| Investments in utility money pool arrangement                                      |       | (494,700                                            | )          | — |   |
| Receipts from utility money pool arrangement                                       |       | 494,700                                             |       | — |   |
| Restricted cash                                                                    |       | (8,639                                              | )          | (3,200 | ) |
| Other investments                                                                  |       | 249                                                 |       | 1,728 |   |
| Net cash used in investing activities                                              |       | (491,453                                            | )          | (400,081 | ) |
|                                                                               |       |                                                |       |   |   |
| **Financing activities**                                                           |       |                                                |       |   |   |
| Short-term debt repayments - net                                                   |       | (372,500                                            | )          | (98,604 | ) |
| Proceeds from issuance of long-term debt                                           |       | 343,756                                             |       | — |   |
| Borrowings under utility money pool arrangement                                    |       | 475,500                                             |       | 934,800 |   |
| Repayments under utility money pool arrangement                                    |       | (475,500                                            | )          | (902,400 | ) |
| Repayment of long-term debt, including reacquisition premiums                      |       | (101,031                                            | )          | (125,997 | ) |
| Capital contribution from parent                                                   |       | 330,176                                             |       | 193,185 |   |
| Dividends paid to parent                                                           |       | (196,066                                            | )          | (129,655 | ) |
| Net cash provided by (used in) financing activities                                |       | 4,335                                               |       | (128,671 | ) |
|                                                                               |       |                                                |       |   |   |
| Net increase (decrease) in cash and cash equivalents                               |       | 97,099                                              |       | (2,308 | ) |
| Cash and cash equivalents at beginning of period                                   |       | 3,011                                               |       | 3,662 |   |
| Cash and cash equivalents at end of period                                         |       | $                                                   | 100,110    |   | $ | 1,354 |   |
|                                                                               |       |                                                |       |   |   |
| Supplemental disclosure of  cash flow information:                                 |       |                                                |       |   |   |
| Cash paid for interest (net of amounts capitalized)                                | ** ** | $                                                   | 34,374     |   | $ | 86,441 |   |
| Cash paid for income taxes (net of refunds received)                               |       | 41,939                                              |       | 30,395 |   |
|                                                                               |       |                                                |       |   |   |
| Supplemental disclosure of  non-cash investing transactions:                       |       |                                                |       |   |   |
| Property, plant and equipment additions in accounts payable                        |       | $                                                   | 29,265     |   | $ | 7,774 |   |

 

See Notes toConsolidated Financial Statements

 

5

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** **

**PUBLIC SERVICE CO. OF COLORADOAND SUBSIDIARIES**

**CONSOLIDATED BALANCE SHEETS(UNAUDITED)**

**(Thousands of dollars)**

 
| ** **                                                                                | ** ** | **Sept. 30, 2007  (As restated  See Note 2)** | ** ** | **Dec. 31, 2006  (As restated  See Note 2)** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------------|------------|
| **ASSETS**                                                                                | ** ** | ** **                                              | ** ** | ** **                                             | ** ** |
| Current assets:                                                                           |       |                                                    |       |                                                   |       |
| Cash and cash equivalents                                                                 |       | $                                                       | 100,110    |                                                   | $          | 3,011 |   |
| Accounts receivable, net of allowance for bad debts of $19,760 and  $18,415, respectively |       | 269,937                                                 |       | 355,738                                                |       |
| Accounts receivable from affiliates                                                       |       | 14,075                                                  |       | 8,621                                                  |       |
| Accrued unbilled revenues                                                                 |       | 207,592                                                 |       | 199,361                                                |       |
| Recoverable purchased natural gas and electric energy costs                               |       | 21,747                                                  |       | 157,827                                                |       |
| Materials and supplies inventories                                                        |       | 45,326                                                  |       | 43,029                                                 |       |
| Fuel inventories                                                                          |       | 41,827                                                  |       | 40,997                                                 |       |
| Natural gas inventories                                                                   |       | 135,201                                                 |       | 155,567                                                |       |
| Derivative instruments valuation                                                          |       | 36,337                                                  |       | 28,111                                                 |       |
| Deferred income taxes                                                                     |       | 39,946                                                  |       | 62,791                                                 |       |
| Prepayments and other                                                                     |       | 22,038                                                  |       | 14,654                                                 |       |
| Total current assets                                                                      |       | 934,136                                                 |       | 1,069,707                                              |       |
| Property, plant and  equipment, at cost:                                                  |       |                                                    |       |                                                   |       |
| Electric utility plant                                                                    |       | 6,548,891                                               |       | 6,409,194                                              |       |
| Natural gas utility plant                                                                 |       | 1,877,749                                               |       | 1,825,560                                              |       |
| Common utility and other property                                                         |       | 724,994                                                 |       | 725,864                                                |       |
| Construction work in progress                                                             |       | 690,261                                                 |       | 429,878                                                |       |
| Total property, plant and equipment                                                       |       | 9,841,895                                               |       | 9,390,496                                              |       |
| Less accumulated depreciation                                                             |       | (3,032,148                                              | )          | (2,912,233                                             | )          |
| Net property, plant and equipment                                                         |       | 6,809,747                                               |       | 6,478,263                                              |       |
| Other assets:                                                                             |       |                                                    |       |                                                   |       |
| Regulatory assets                                                                         |       | 588,108                                                 |       | 589,016                                                |       |
| Derivative instruments valuation                                                          |       | 146,403                                                 |       | 161,502                                                |       |
| Other investments                                                                         |       | 20,012                                                  |       | 19,346                                                 |       |
| Other                                                                                     |       | 41,545                                                  |       | 45,785                                                 |       |
| Total other assets                                                                        |       | 796,068                                                 |       | 815,649                                                |       |
| Total assets                                                                              |       | $                                                       | 8,539,951  |                                                   | $          | 8,363,619 |   |
| **LIABILITIES AND EQUITY**                                                                | ** ** | ** **                                              | ** ** | ** **                                             | ** ** |
| Current liabilities:                                                                      |       |                                                    |       |                                                   |       |
| Current portion of long-term debt                                                         |       | $                                                       | 1,425      |                                                   | $          | 101,379 |   |
| Short-term debt                                                                           |       | —                                                  |       | 372,500                                                |       |
| Accounts payable                                                                          |       | 317,285                                                 |       | 385,724                                                |       |
| Accounts payable to affiliates                                                            |       | 27,764                                                  |       | 30,291                                                 |       |
| Taxes accrued                                                                             |       | 74,772                                                  |       | 84,960                                                 |       |
| Dividends payable to parent                                                               |       | 67,792                                                  |       | 64,778                                                 |       |
| Derivative instruments valuation                                                          |       | 44,690                                                  |       | 38,616                                                 |       |
| Accrued interest                                                                          |       | 71,447                                                  |       | 35,362                                                 |       |
| Other                                                                                     |       | 88,210                                                  |       | 74,381                                                 |       |
| Total current liabilities                                                                 |       | 693,385                                                 |       | 1,187,991                                              |       |
| Deferred credits and other  liabilities:                                                  |       |                                                    |       |                                                   |       |
| Deferred income taxes                                                                     |       | 1,050,256                                               |       | 1,004,027                                              |       |
| Deferred investment tax credits                                                           |       | 56,092                                                  |       | 59,035                                                 |       |
| Regulatory liabilities                                                                    |       | 473,970                                                 |       | 470,255                                                |       |
| Pension and employee benefit obligations                                                  |       | 256,115                                                 |       | 301,277                                                |       |
| Customers advances                                                                        |       | 278,390                                                 |       | 279,011                                                |       |
| Derivative instruments valuation                                                          |       | 137,044                                                 |       | 156,623                                                |       |
| Asset retirement obligations                                                              |       | 44,487                                                  |       | 43,335                                                 |       |
| Other liabilities                                                                         |       | 13,006                                                  |       | 7,750                                                  |       |
| Total deferred credits and other liabilities                                              |       | 2,309,360                                               |       | 2,321,313                                              |       |
| Commitments and contingent  liabilities                                                   |       |                                                    |       |                                                   |       |
| Capitalization:                                                                           |       |                                                    |       |                                                   |       |
| Long-term debt                                                                            |       | 2,191,824                                               |       | 1,845,278                                              |       |
| Common Stock — authorized 100 shares of $0.01 par value; outstanding  100 shares     |       | —                                                  |       | —                                                 |       |
| Additional paid in capital                                                                |       | 2,741,380                                               |       | 2,411,204                                              |       |
| Retained earnings                                                                         |       | 591,370                                                 |       | 585,219                                                |       |
| Accumulated other comprehensive income                                                    |       | 12,632                                                  |       | 12,614                                                 |       |
| Total common stockholder’s equity                                                    |       | 3,345,382                                               |       | 3,009,037                                              |       |
| Total liabilities and equity                                                              |       | $                                                       | 8,539,951  |                                                   | $          | 8,363,619 |   |

 

See Notes toConsolidated Financial Statements

 

6

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** **

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

** **

In the opinion ofmanagement, the accompanying unaudited consolidated financial statementscontain all adjustments necessary to present fairly the financial position of PublicService Company of Colorado (PSCo) and its subsidiaries as of Sept. 30, 2007,and Dec. 31, 2006; the results of its operations for the three and ninemonths ended Sept. 30, 2007 and 2006; and its cash flows for the nine monthsended Sept. 30, 2007 and 2006. Due to the seasonality of electric and naturalgas sales of PSCo, interim results are not necessarily an appropriate base fromwhich to project annual results.

 

**1. SignificantAccounting Policies**

 

Except to the extent updated or described below, thesignificant accounting policies set forth in Note 1 to the consolidatedfinancial statements in PSCo’s Current Report on Form 8-K/A filed on Dec.14, 2007, appropriately represent, in all material respects, the current statusof accounting policies and are incorporated herein by reference.

 

***Income Taxes****** —***Consistentwith prior periods and upon adoption of Financial Accounting Standard Board (***FASB) Interpretation No. ***48— “Accounting for Uncertainty in Income Taxes — an interpretation of FASBStatement No. 109”, PSCo records interestand penalties related to income taxes as interest charges in the ConsolidatedStatements of Income.

 

***Reclassifications****** —***Certainamounts in the Consolidated Statements of Cash Flows have been reclassifiedfrom prior-period presentation to conform to the 2007 presentation. Thereclassifications reflect the presentation of unbilled revenues, recoverablepurchased natural gas and electric energy costs and regulatory assets andliabilities as separate items rather than components of other assets and otherliabilities within net cash provided by operating activities. In addition,activity related to derivative transactions have been combined into netrealized and unrealized hedging and derivative transactions. Thesereclassifications did not affect total net cash provided by (used in)operating, investing or financing activities within the Consolidated Statementsof Cash Flows.

 

**2.****         ****Restatementof Financial Statements**

 

Subsequent to the issuance of PSCo’s consolidated financialstatements for the quarter ended September 30, 2007, management determinedthat PSR Investments, Inc.(PSRI), a wholly owned subsidiary of PSCo, should nothave been presented as a discontinued operation, as previously reported in theForm 10-Q, rather, PSRI should have been included as part of continuingoperations.  As a result, theaccompanying consolidated financial statements have been restated.

 

As previously reported in our Current Report on Form 8-Kfiled on June 20, 2007, a settlement in principle was reached between XcelEnergy and representatives of the United States government on June 19,2007 concerning a tax dispute related to corporate-owned life insurance (COLI)policies purchased on the lives of Public Service Company of Colorado (PSCo)employees.  PSCo is a wholly owned subsidiary of Xcel Energy.  PSRIowned and managed these COLI life insurance policies.

 

The terms of the settlement have been previouslyreported.  The settlement has beenimplemented and the policies have been surrendered.

 

As a result of the settlement in principle, which requiredthe surrender of the COLI policies, PSCo had previously classified all amountsrelated to PSRI as a discontinued operation for all periods presented in itsForms 10-Q for the periods ended June 30, 2007 and Sept. 30, 2007, thatwere filed on July 30, 2007 and Oct. 29, 2007, respectively.

 

Pursuant to a routine review of PSCo’s periodic reports bythe staff of the Securities and Exchange Commission management reassessed theappropriateness of the treatment of PSRI as a discontinued operation under SFAS144 “Accounting for the Impairment or Disposal of Long-Lived Assets” anddetermined that PSRI operations, including the impact of the IRS settlement,should be presented as part of continuing operations for financial reportingpurposes.   The inclusion of PSRI as partof continuing operations impacted Xcel Energy’s effective tax rate, whichcaused a change in previously reported income taxes.  The effect of presenting PSRI as part ofcontinuing operations rather than as discontinued operations as previouslyreported in the Form 10-Q is reflected in the tables below:

 

7

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** **
| ** **                                            | ** ** | **Consolidated Statements of Income**             | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                            | ** ** | **For the Three Months Ended September 30,** | ** ** |
| ** **                                            | ** ** | **2007**                                          | ** ** | **2006** | ** ** |
| **(Thousands of dollars)**                  | ** ** | **As Previously Reported**                        | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** | **As Previously Reported** | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Other operating and maintenance expenses              |       | $                                                 | 143,287    |   | $ | 922 |   | $ | 144,209 |   | $ | 139,350 |   | $ | 1,136 |   | $ | 140,486 |   |
| Taxes (other than income taxes)                       |       | 19,735                                            |       | 3 |   | 19,738 |   | 20,081 |   | 2 |   | 20,083 |   |
| Total operating expenses                              |       | 607,915                                           |       | 925 |   | 608,840 |   | 693,082 |   | 1,138 |   | 694,220 |   |
| Operating income                                      |       | 173,346                                           |       | (925 | ) | 172,421 |   | 100,642 |   | (1,138 | ) | 99,504 |   |
| Interest and other income (expense), net              |       | 3,690                                             |       | (3,446 | ) | 244 |   | (610 | ) | (3,433 | ) | (4,043 | ) |
| Interest charges                                      |       | 34,318                                            |       | 19 |   | 34,337 |   | 32,951 |   | — |   | 32,951 |   |
| Interest and penalties related to COLI settlement     |       | —                                            |       | 2,190 |   | 2,190 |   | — |   | — |   | — |   |
| Total interest charges and financing costs            |       | 30,822                                            |       | 2,209 |   | 33,031 |   | 29,111 |   | — |   | 29,111 |   |
| Income from continuing operations before income taxes |       | 150,179                                           |       | (6,580 | ) | 143,599 |   | 71,972 |   | (4,570 | ) | 67,402 |   |
| Income taxes                                          |       | 49,256                                            |       | (11,315 | ) | 37,941 |   | 29,192 |   | (9,148 | ) | 20,044 |   |
| Income from continuing operations                     |       | 100,923                                           |       | 4,735 |   | 105,658 |   | 42,780 |   | 4,578 |   | 47,358 |   |
| Income (loss) from discontinued operations            |       | 5,272                                             |       | (5,272 | ) | — |   | 4,578 |   | (4,578 | ) | — |   |
| Net income                                            |       | 106,195                                           |       | (537 | ) | 105,658 |   | 47,358 |   | — |   | 47,358 |   |
|                                                       |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **
| ** **                                            | ** ** | **Consolidated Statements of Income**            | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                            | ** ** | **For the Nine Months Ended September 30,** | ** ** |
| ** **                                            | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **(Thousands of dollars)**                  | ** ** | **As Previously Reported**                       | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** | **As Previously Reported** | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Other operating and maintenance expenses              |       | $                                                | 429,401    |   | $ | 3,151 |   | $ | 432,552 |   | $ | 415,635 |   | $ | 3,156 |   | $ | 418,791 |   |
| Taxes (other than income taxes)                       |       | 65,221                                           |       | 5 |   | 65,226 |   | 64,703 |   | 4 |   | 64,707 |   |
| Total operating expenses                              |       | 2,323,098                                        |       | 3,156 |   | 2,326,254 |   | 2,486,881 |   | 3,160 |   | 2,490,041 |   |
| Operating income                                      |       | 457,452                                          |       | (3,156 | ) | 454,296 |   | 341,099 |   | (3,160 | ) | 337,939 |   |
| Interest and other income (expense), net              |       | 7,095                                            |       | (12,333 | ) | (5,238 | ) | 2,777 |   | (13,290 | ) | (10,513 | ) |
| Interest charges                                      |       | 100,992                                          |       | 20 |   | 101,012 |   | 101,919 |   | 74 |   | 101,993 |   |
| Interest and penalties related to COLI settlement     |       | —                                           |       | 43,401 |   | 43,401 |   | — |   | — |   | — |   |
| Total interest charges and financing costs            |       | 92,328                                           |       | 43,421 |   | 135,749 |   | 92,614 |   | 74 |   | 92,688 |   |
| Income from continuing operations before income taxes |       | 380,926                                          |       | (58,910 | ) | 322,016 |   | 252,577 |   | (16,524 | ) | 236,053 |   |
| Income taxes                                          |       | 130,948                                          |       | (14,477 | ) | 116,471 |   | 90,856 |   | (31,200 | ) | 59,656 |   |
| Income from continuing operations                     |       | 249,978                                          |       | (44,433 | ) | 205,545 |   | 161,721 |   | 14,676 |   | 176,397 |   |
| Income (loss) from discontinued operations            |       | (39,578                                          | )          | 39,578 |   | — |   | 14,676 |   | (14,676 | ) | — |   |
| Net income                                            |       | 210,400                                          |       | (4,855 | ) | 205,545 |   | 176,397 |   | — |   | 176,397 |   |
|                                                       |            |                                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

8

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| ** **                                     | ** ** | **Consolidated Balance Sheet** | ** ** |
|------------------------------------------------|------------|--------------------------------|------------|
| ** **                                     | ** ** | **Sept. 30, 2007**             | ** ** | **December 31, 2006** | ** ** |
| **(Thousands of dollars)**           | ** ** | **As Previously Reported**     | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** | **As Previously Reported** | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Cash and cash equivalents                      |       | $                              | 100,070    |   | $ | 40 |   | $ | 100,110 |   | $ | 3,011 |   | $ | — |   | $ | 3,011 |   |
| Accounts receivable                            |       | 269,557                        |       | 380 |   | 269,937 |   | 332,933 |   | 22,805 |   | 355,738 |   |
| Prepayments and other                          |       | 13,933                         |       | 8,105 |   | 22,038 |   | 14,284 |   | 370 |   | 14,654 |   |
| Deferred income taxes                          |       | 28,966                         |       | 10,980 |   | 39,946 |   | 47,075 |   | 15,716 |   | 62,791 |   |
| Current assets of discontinued operations      |       | 22,126                         |       | (22,126 | ) | — |   | 52,593 |   | (52,593 | ) | — |   |
| Total current assets                           |       | 936,757                        |       | (2,621 | ) | 934,136 |   | 1,083,409 |   | (13,702 | ) | 1,069,707 |   |
| Other investments                              |       | 19,941                         |       | 71 |   | 20,012 |   | 11,136 |   | 8,210 |   | 19,346 |   |
| Other assets                                   |       | 38,630                         |       | 2,915 |   | 41,545 |   | 45,785 |   | — |   | 45,785 |   |
| Noncurrent assets of discontinued operations   |       | 14,363                         |       | (14,363 | ) | — |   | 15,779 |   | (15,779 | ) | — |   |
| Total other assets                             |       | 807,445                        |       | (11,377 | ) | 796,068 |   | 823,218 |   | (7,569 | ) | 815,649 |   |
| Total assets                                   |       | 8,553,949                      |       | (13,998 | ) | 8,539,951 |   | 8,384,890 |   | (21,271 | ) | 8,363,619 |   |
| Accounts payable                               |       | 314,911                        |       | 2,374 |   | 317,285 |   | 385,054 |   | 670 |   | 385,724 |   |
| Taxes accrued                                  |       | 62,813                         |       | 11,959 |   | 74,772 |   | 98,662 |   | (13,702 | ) | 84,960 |   |
| Accrued interest                               |       | 46,289                         |       | 25,158 |   | 71,447 |   | 35,362 |   | — |   | 35,362 |   |
| Current liabilities of discontinued operations |       | 37,257                         |       | (37,257 | ) | — |   | 670 |   | (670 | ) | — |   |
| Total current liabilities                      |       | 691,151                        |       | 2,234 |   | 693,385 |   | 1,201,693 |   | (13,702 | ) | 1,187,991 |   |
| Deferred income taxes                          |       | 1,061,633                      |       | (11,377 | ) | 1,050,256 |   | 1,011,591 |   | (7,564 | ) | 1,004,027 |   |
| Other liabilities                              |       | 13,006                         |       | — |   | 13,006 |   | 7,755 |   | (5 | ) | 7,750 |   |
| Total deferred credits and other liabilities   |       | 2,320,737                      |       | (11,377 | ) | 2,309,360 |   | 2,328,882 |   | (7,569 | ) | 2,321,313 |   |
| Retained earnings                              |       | 596,225                        |       | (4,855 | ) | 591,370 |   | 585,219 |   | — |   | 585,219 |   |
| Total common stockholder’s equity         |       | 3,350,237                      |       | (4,855 | ) | 3,345,382 |   | 3,009,037 |   | — |   | 3,009,037 |   |
| Total liabilities and equity                   |       | 8,553,949                      |       | (13,998 | ) | 8,539,951 |   | 8,384,890 |   | (21,271 | ) | 8,363,619 |   |
|                                                |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

9

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| ** **                                                                    | ** ** | **Consolidated Cash Flow Statement**    | ** ** |
|-------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                    | ** ** | **For the Nine Months Ended Sept. 30,** | ** ** |
| ** **                                                                    | ** ** | **2007**                                | ** ** | **2006** | ** ** |
| **(Thousands of dollars)**                                          | ** ** | **As Previously Reported**              | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** | **As Previously Reported** | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Net income                                                                    |       | $                                       | 210,400    |   | $ | (4,855 | ) | $ | 205,545 |   | $ | 176,397 |   | $ | — |   | $ | 176,397 |   |
| Remove loss (income) from discontinued operations                             |       | 39,578                                  |       | (39,578 | ) | — |   | (14,676 | ) | 14,676 |   | — |   |
| Deferred income taxes                                                         |       | 62,160                                  |       | 923 |   | 63,083 |   | 58,822 |   | 11,914 |   | 70,736 |   |
| Change in accounts receivable                                                 |       | 57,922                                  |       | 22,425 |   | 80,347 |   | 152,982 |   | (8,272 | ) | 144,710 |   |
| Change in prepayments and other                                               |       | 186                                     |       | 156 |   | 342 |   | 3,147 |   | 167 |   | 3,314 |   |
| Change in accounts payable                                                    |       | (96,689                                 | )          | 1,703 |   | (94,986 | ) | (261,802 | ) | 77 |   | (261,725 | ) |
| Change in other current liabilities                                           |       | (6,710                                  | )          | 50,819 |   | 44,109 |   | 8,244 |   | 2,747 |   | 10,991 |   |
| Change in other noncurrent assets                                             |       | 10,236                                  |       | (2,820 | ) | 7,416 |   | 2,860 |   | — |   | 2,860 |   |
| Change in other noncurrent liabilities                                        |       | (48,118                                 | )          | 5 |   | (48,113 | ) | (8,331 | ) | — |   | (8,331 | ) |
| Operating cash flows provided by discontinued operations                      |       | 28,947                                  |       | (28,947 | ) | — |   | 21,842 |   | (21,842 | ) | — |   |
| Net cash provided by operating activities                                     |       | 584,386                                 |       | (169 | ) | 584,217 |   | 526,977 |   | (533 | ) | 526,444 |   |
| Other investments                                                             |       | —                                  |       | 249 |   | 249 |   | 1,269 |   | 459 |   | 1,728 |   |
| Net cash used in investing activities                                         |       | (491,702                                | )          | 249 |   | (491,453 | ) | (400,540 | ) | 459 |   | (400,081 | ) |
| Net increase (decrease) in cash and cash equivalents                          |       | 97,019                                  |       | 80 |   | 97,099 |   | (2,234 | ) | (74 | ) | (2,308 | ) |
| Net increase (decrease) in cash and cash equivalents-discontinued  operations |       | 40                                      |       | (40 | ) | — |   | (37 | ) | 37 |   | — |   |
| Cash and cash equivalents at beginning of year                                |       | 3,011                                   |       | — |   | 3,011 |   | 2,848 |   | 814 |   | 3,662 |   |
| Cash and cash equivalents at end of quarter                                   |       | 100,070                                 |       | 40 |   | 100,110 |   | 577 |   | 777 |   | 1,354 |   |
|                                                                               |            |                                         |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**3. RecentlyIssued Accounting Pronouncements**

** **

***Fair Value Measurements(Statement of Financial Accounting Standards (SFAS) 157)****** —***In September 2006,the FASB issued SFAS 157, which provides a single definition of fairvalue, together with a framework for measuring it, and requires additionaldisclosure about the use of fair value to measure assets and liabilities. SFAS157 also emphasizes that fair value is a market-based measurement, and sets outa fair value hierarchy with the highest priority being quoted prices in activemarkets. Fair value measurements are disclosed by level within that hierarchy.SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after Nov. 15, 2007. PSCo is evaluating the impact of SFAS 157on its financial condition and results of operations.

 

***The Fair Value Option for Financial Assetsand Financial Liabilities - Including an Amendment of FASB Statement No. 115(SFAS 159) —***In February 2007, the FASB issuedSFAS 159, which provides companies with an option to measure, at specifiedelection dates, many financial instruments and certain other items at fairvalue that are not currently measured at fair value. A company that adopts SFAS159 will report unrealized gains and losses on items, for which the fair valueoption has been elected, in earnings at each subsequent reporting date. This statementalso establishes presentation and disclosure requirements designed tofacilitate comparisons between entities that choose different measurementattributes for similar types of assets and liabilities. This statement iseffective for fiscal years beginning after Nov. 15, 2007. PSCo isevaluating the impact of SFAS 159 on its financial condition and results ofoperations.

 

**4. Income Taxes**

 

***COLI***— In April 2004,Xcel Energy filed a lawsuit against the U.S. government in the U.S. DistrictCourt for the District of Minnesota to establish its right to deduct theinterest expense that had accrued during tax years 1993 and 1994 on policy 

 

10

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loansrelated to its COLI policies that insured certain lives of PSCo employees.These policies are owned by PSRI, a wholly owned subsidiary of PSCo.

 

After Xcel Energyfiled this suit, the IRS sent three statutory notices of deficiency of tax,penalty and interest for 1995 through 2002. Xcel Energy filed U.S. Tax Courtpetitions challenging those notices. PSRI also continued to take deductions for interest expense on policyloans for subsequent years. The total exposure for the tax years 1993 through2007 is approximately $583 million, which includes income tax, interest and potentialpenalties.

 

OnJune 19, 2007, Xcel Energy and the United States reached a settlement inprinciple regarding this dispute.

 

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

 

Theessential financial terms of the final settlement, as accepted and implemented,are as follows:

 
| 1. | Xcel Energy will pay the government a total of $64.4 million in full  settlement of the government’s claims for tax, penalty, and interest for tax  years 1993-2007. The recognition of this settlement resulted in total expense  of $59.5 million, including federal and state tax, interest on the federal  and state tax liabilities, penalties, and tax benefits on the interest  expense for the nine months ended Sept. 30, 2007. The expense of $59.5  million includes $43.4 million of interest and penalties and income tax of  $16.1 million (net of tax benefit on the interest expense of $14.3 million). |
|----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 
| 2. | Xcel Energy will pay that settlement amount as follows: |
|----|---------------------------------------------------------|

 
| • | $32.2 million of that amount will be satisfied by tax and interest  amounts that Xcel Energy has paid or is deemed under the terms of the  settlement to have made to the government with respect to tax years 1993 and  1994. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| • | Xcel Energy will satisfy the remaining settlement amount owed by  paying the government $32.2 million by Oct. 31, 2007.                                                                                                        |

 
| 3.     | The total settlement amount will be allocated toward specified  amounts of tax, penalty, and interest owed for 1993 and 1994 and other  amounts of tax and interest owed for 1995. |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                               |   |
| 4.     | Except as stated above, Xcel Energy will be entitled to claim  COLI-related interest deductions for tax years 1995-2007.                                                           |
|   |                                                                                                                                                                               |   |
| 5.     | Xcel Energy will surrender the policies to its insurer by Oct. 31,  2007 without having to recognize a taxable gain on the surrender.                                              |

 

***Accounting for Uncertainty in Income Taxes — aninterpretation of FASB Statement No. 109 (FIN 48) —***In July 2006, the FASB issued FIN48, which prescribes how a company should recognize, measure, present anddisclose uncertain tax positions that a company has taken or expects to take inits income tax returns. FIN 48 requires that only income tax benefits that meetthe “more likely than not” recognition threshold be recognized or continue tobe recognized on its effective date. As required, PSCo adopted FIN 48 as of Jan. 1,2007 and the initial derecognition amounts were reported as a cumulative effectof a change in accounting principle. The cumulative effect of the change, whichis reported as an adjustment to the beginning balance of retained earnings, wasnot material. Following implementation, the ongoing recognition of changes inmeasurement of uncertain tax positions will be reflected as a component ofincome tax expense.

 

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

 

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

 

PSCo is also currentlyunder examination by the state of Colorado for years 2002 through 2005. Nomaterial adjustments have been proposed as of Sept. 30, 2007. As of Sept. 30,2007, PSCo’s earliest open tax year in which an audit can be initiated by statetaxing authorities under applicable statutes of limitations is 2002.

 

The amount ofunrecognized tax benefits was $11.4 million on Jan. 1, 2007 and $10.5 million on Sept. 30, 2007. These amounts were offset against the taxbenefits associated with net operating loss and tax credit carryovers of $7.5million on Jan. 1, 2007 and $6.5 million on Sept. 30, 2007.

 

11

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

 

The decrease in theunrecognized tax benefit balance for continuing operations of $11.0 millionfrom July 1, 2007 to Sept. 30, 2007, was due to the addition of similaruncertain tax positions relating to third quarter activity, the resolution ofcertain federal audit matters, and the final settlement of the COLI litigation.PSCo’s amount of unrecognized tax benefits could significantly change in thenext 12 months as the IRS and state tax audits progress. However, at this timedue to the nature of the audit process, it is not reasonably possible toestimate a range of the possible change.

 

The interest expenseliability related to unrecognized tax benefits on Jan. 1, 2007, was notmaterial due to net operating loss and tax credit carryovers. The change in theinterest expense liability from Jan. 1, 2007, to Sept. 30, 2007, was notmaterial. No amounts were accrued for penalties as of Sept. 30, 2007.

 

**5. Rate Matters**

 

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

*** ***

***Natural Gas Rate Case**** **—***On Dec. 1, 2006, PSCo filed with the CPUC, a request to increasenatural gas rates by $41.9 million, representing an overall increase of 2.96percent, primarily related to capital investments and rising operating costs.The request assumed a common equity ratio of 60.17 percent and a ROE of 11percent. The jurisdictional rate base is approximately $1.1 billion.

 

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

 

·                     An annual revenue increase of$32.3 million, based on a 10.25 percent ROE and a 60.17 percent equity ratio.

 

·                     A modification to the partialdecoupling mechanism to allow PSCo recovery of additional revenues in futureyears to compensate for the portion of the decline in weather normalizedresidential use per customer that exceeds the first 1.3 percent in annualdecline in use (to be reflective of 50 percent of the historic average annualdecline in use).

 

Final rates were implemented effective July 30, 2007.

 

***Transmission Cost AdjustmentRider —*** OnSept. 7, 2007, PSCo filed with the CPUC a request to implement a transmissioncost adjustment rider, which would recover approximately $18.2 million in 2008.This filing is pursuant to recently enacted legislation which entitled publicutilities to recover, through a separate rate adjustment clause, the costs thatit prudently incurs in planning, developing, and completing the construction orexpansion of transmission facilities. This legislation further encouragesutilities to invest in transmission facilities by allowing the recovery of thetotal balance of construction work in progress related to those transmissioninvestments at PSCo’s weighted average cost of capital including its mostrecently authorized rate of ROE. The CPUC staff and certain other parties arechallenging the scope of PSCo’s requested cost recovery under the rider during2008 and have asked the CPUC to set PSCo’s application for hearing. PSCoexpects the CPUC to rule on its application prior to Dec. 31, 2007.

 

**6. Commitments and Contingent Liabilities**

** **

Except to the extent notedbelow, the circumstances set forth in Notes 13 and 14 to the consolidatedfinancial statements in PSCo’s Current Report on Form 8-K/A filedon Dec. 17, 2007 and Notes4 and 5 to the consolidated financial statements in this Quarterly Report on Form 10-Q/A,appropriately represent, in all material respects, the current status ofrespective commitments and contingent liabilities and are incorporated hereinby reference. The following are unresolved contingencies that are material toPSCo’s financial position:

 

**Operating Leases*****—***During the second and third quarters of 2007,PSCo commenced purchased power agreements that are being accounted for asoperating leases in accordance with Emerging Issues Task Force 01-8, “*Determining Whether an Arrangement Contains a Lease”*and SFAS 13 —“*Accounting for Leases*”.These agreements require capacity payments of

 

12

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$30.2 million, $35.7million, $32.0 million, $21.3 million, $17.1 million and $355.6 million for2007, 2008, 2009, 2010, 2011 and thereafter, respectively.

 

**Environmental Contingencies**

 

PSCo has been or is currently involved with thecleanup of contamination from certain hazardous substances at several sites. Inmany situations, PSCo believes it will recover some portion of these coststhrough insurance claims. Additionally, where applicable, PSCo is pursuing, orintends to pursue, recovery from other potentially responsible parties andthrough 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 extentany costs are not recovered through the options listed above, PSCo would berequired to recognize an expense.

 

***Site Remediation****—*PSCo must pay all or a portion of thecost to remediate sites where past activities of PSCo and some other partieshave caused environmental contamination. Environmental contingencies couldarise from various situations including the following categories of sites:

 

·          Site of a former manufactured gas plant(MGP) operated by PSCo or its predecessors; and

 

·          Third party sites, such as landfills, towhich PSCo is alleged to be a potentially responsible party (PRP) that senthazardous materials and wastes.

 

PSCo records aliability when enough information is obtained to develop an estimate of thecost of environmental remediation and revises the estimate as information isreceived. The estimated remediation cost may vary materially.

 

To estimate the cost toremediate these sites, assumptions are made where facts are not fully known.For instance,  assumptions may be madeabout the nature and extent of site contamination, the extent of requiredcleanup efforts, costs of alternative cleanup methods and pollution-controltechnologies, the period over which remediation will be performed and paid for,changes in environmental remediation and pollution-control requirements, thepotential effect of technological improvements, the number and financialstrength of other PRPs and the identification of new environmental cleanupsites.

 

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

 

·          Insurance coverage;

 

·          Other parties that have contributed to thecontamination; and

 

·          Customers.

 

Neither the total remediation cost nor the finalmethod of cost allocation among all PRPs of the unremediated sites has beendetermined. Estimates have been recorded for PSCo’s future costs for thesesites.

 

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

######  

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

 

InMay 2005, PSCo filed a natural gas rate case with the CPUC requestingrecovery of cleanup costs at the Fort Collins MGP site spent through March 2005,which amounted to $6.2 million, to be amortized over four years. PSCo reached asettlement agreement with the parties in the case. The CPUC approved thesettlement agreement on Jan. 19, 2006 and the final order became effectiveon Feb. 3, 2006, with rates effective Feb. 6, 2006.

 

InNovember 2006, PSCo filed a natural gas rate case with the CPUC requestingrecovery of additional clean-up costs at the Fort Collins MGP site spentthrough September 2006, plus unrecovered amounts previously authorizedfrom the last rate case, which amounted to $10.8 million to be amortized overfour years. In June 2007, PSCo entered into a settlement agreement thatincluded recovery of the full $10.8 million, but with a five-year amortizationperiod. The CPUC approved the 

 

13

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agreementon June 18, 2007. The total amount to be recovered from customers is $13.1million. Estimated future project costs, based upon an assumed 30-year systemoperating life, including EPA oversight costs, are approximately $3.9 million.

 

InApril 2005, PSCo brought a contribution action against Schrader Oil Co.and related parties alleging Schrader Oil Co. released hazardous substancesinto the environment and these releases caused MGP byproducts to migrate to the Cache La Poudre River, therebysubstantially increasing the scope and cost of remediation. PSCo requesteddamages, including a portion of the costs PSCo incurred to investigate andremove contaminated sediments from the Cache la Poudre River. On Dec. 14,2005, the court denied Schrader’s request to dismiss the PSCo suit. On Jan. 3,2006, Schrader filed a response to the PSCo complaint and a counterclaimagainst PSCo for its response costs under the Comprehensive EnvironmentalResponse Compensation and Liability Act (CERCLA) and under the ResourceConservation and Recovery Act (RCRA). Schrader has alleged as part of itscounterclaim an “imminent and substantial endangerment” of its property asdefined by RCRA. PSCo filed a motion for partial summary judgment to dismissSchrader’s RCRA claim. Oral argument on PSCo’s motion was held  Sept. 12, 2007, and on Oct. 10, 2007 thecourt granted PSCo’s motion for partial summary judgment and dismissed Schrader’sRCRA claim. Schrader also recently filed a motion for summary judgment seekingto dismiss PSCo’s CERCLA claim. PSCo believes this motion is without merit andwill vigorously defend its claim.

 

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

# *** ***

***Asbestos Removal*****—**Some of PSCo’s facilities containasbestos. Most asbestos will remain undisturbed until the facilities thatcontain it are demolished or renovated. PSCo has recorded an estimate for finalremoval of the asbestos as an asset retirement obligation. See additionaldiscussion of asset retirement obligations in Note 14 of the PSCo CurrentReport on Form 8-K/A filed on Dec. 17, 2007. It may be necessary toremove some asbestos to perform maintenance or make improvements to otherequipment. The cost of removing asbestos as part of other work is immaterialand is recorded as incurred as operating expenses for maintenance projects,capital expenditures for construction projects or removal costs for demolitionprojects.

 

***Other EnvironmentalRequirements***

 

***Regional Haze Rules ***— On June 15, 2005, the EPAfinalized amendments to the July 1999 regional haze rules. Theseamendments apply to the provisions of the regional haze rule that requireemission controls, known as best available retrofit technology (BART), forindustrial facilities emitting air pollutants that reduce visibility by causingor contributing to regional haze. Some PSCo generating facilities will besubject to BART requirements.

 

TheEPA requires states to develop implementation plans to comply with BART by December 2007.States are required to identify the facilities that will have to reduce SO2, NOx, andparticulate matter emissions under BART and then set BART emissions limits forthose facilities. On May 30, 2006, the Colorado Air Quality ControlCommission promulgated BART regulations requiring certain major stationarysources to evaluate and install, operate and maintain BART technology or anapproved BART alternative to make reasonable progress toward meeting thenational visibility goal. On Aug. 1, 2006, PSCo submitted its BARTalternatives analysis to the Colorado Air Pollution Control Division (CAPCD).As set forth in its analysis, PSCo estimates that implementation of the BARTalternatives will cost approximately $211 million in capital costs, whichincludes approximately $62 million in environmental upgrades for the existingComanche Station project, which are included in the capital budget. PSCoexpects the cost of any required capital investment will be recoverable fromcustomers. Emissions controls are expected to be installed between 2011 and 2014.The CAPCD expects to finalize the regional haze state implementation plan inearly 2008 for submittal to the EPA later in the year. BART emission controlsassociated with the plan must be installed within five years of EPA approval.On June 4, 2007, the CAPCD approved PSCo’s BART analysis and obtainedpublic comment on its BART determination and PSCo’s BART permits. A public hearing before the Air Quality ControlCommission is scheduled for Dec.20, 2007 to review and consider the approval ofthe BART permits for PSCo.

 

***Clean Air Mercury Rule ***— In March 2005, the EPA issued theClean Air Mercury Rule (CAMR), which regulates mercury emissions frompower plants for the first time. PSCo continues to evaluate the strategy forcomplying with CAMR. In February 2007, the Colorado Air Quality ControlCommission passed a mercury rule to implement CAMR in Colorado. The rule wasbased on a negotiated rule that was agreed upon by participatingenvironmental groups, utilities, local government coalitions, and the CAPCD.The rule requires mercury emission controls capable of achieving 80percent capture be installed at Pawnee Station in 2012 and all other Coloradounits by 2014. PSCo is in the process of installing mercury monitors on sevenColorado units at an estimated aggregate cost of approximately $2.6 million.PSCo is evaluating the mercury emission controls required to meet the new rule andis currently unable to provide a capital cost estimate. The EPA has expressedconcerns with allowance restrictions after reviewing the Colorado mercury rule.

 

14

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*** ***

***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” 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 challenging the phase IIrulemaking. On Jan. 25, 2007, the court issued its decision and remandedvirtually every aspect of the rule to the EPA for reconsideration. In June 2007,the EPA suspended the deadlines and referred any implementation to each state’sbest professional judgment until the EPA is able to fully respond to thecourt-ordered remands. As a result, the rule’s compliance requirements andassociated deadlines are currently unknown. It is not possible to provide anaccurate estimate of the overall cost of this rulemaking at this time due tothe many uncertainties involved.

 

***Notice of Violation*** — On July 1, 2002, PSCo received aNotice of Violation (NOV) from the EPA alleging violations of the New SourceReview (NSR) requirements of the Clean Air Act (CAA) at the Comanche and Pawneeplants in Colorado. The NOV specifically alleges that various maintenance,repair and replacement projects undertaken at the plants in the mid- tolate-1990s should have required a permit under the NSR process. PSCo believesit has acted in full compliance with the CAA and NSR process. It believes thatthe projects identified in the NOV fit within the routine maintenance, repairand replacement exemption contained within the NSR regulations or are otherwisenot subject to the NSR requirements. PSCo disagrees with the assertions contained in the NOV and intends tovigorously defend its position.

 

**Legal Contingencies**

** **

In the normal course of business, PSCo is party toroutine claims and litigation arising from prior and current operations. PSCois actively defending these matters and has recorded a liability related to theprobable cost of settlement or other disposition, when it can be reasonablyestimated.

 

***Carbon Dioxide Emissions Lawsuit***— On July 21, 2004, the attorneysgeneral of eight states and New York City, as well as several environmentalgroups, filed lawsuits in U.S. District Court for the Southern District of NewYork against five utilities, including Xcel Energy, to force reductions incarbon dioxide (CO2) emissions. Although PSCo is not named as aparty to this litigation, the requested relief that Xcel Energy cap and reduceits CO2 emissions could have a material adverse effect on PSCo. Theother utilities include American Electric Power Co., Southern Co., CinergyCorp. and Tennessee Valley Authority. CO2 is emitted whenever fossilfuel is combusted, such as in automobiles, industrial operations and coal- ornatural gas-fired power plants. The lawsuits allege that CO2 emittedby each company is a public nuisance as defined under state and federal commonlaw because it has contributed to global warming. The lawsuits do not demandmonetary damages. Instead, the lawsuits ask the court to order each utility tocap and reduce its CO2 emissions. . In October 2004, XcelEnergy and the other defendants filed a motion to dismiss the lawsuit. On Sept.19, 2005, the judge granted the motion to dismiss on constitutional grounds.Plaintiffs filed an appeal to the Second Circuit Court of Appeals. On June 21,2007 the Second Circuit Court of Appeals issued an order requesting the partiesto file a letter brief regarding the impact of the United States Supreme Court’sdecision in Massachusetts v. EPA, 127 S.Ct. 1438 (April 2, 2007) on theissues raised by the parties on appeal. Among other things, in its decision inMassachusetts v. EPA, the United States Supreme Court held that CO2emissions are a “ pollutant” subject to regulation by the EPA under the CleanAir Act. In response to the request of the Second Circuit Court of Appeals, thedefendant utilities filed a letter brief on July 6, 2007, stating theposition that the United States Supreme Court’s decision supports the argumentsraised by the utilities on appeal. It is unknown when the Second Circuit Courtof Appeals will rule on the appeal.

 

***Comanche 3 Permit Litigation***— On Aug. 4,2005, Citizens for Clean Air and Water in Pueblo and Southern Colorado andClean Energy Action filed a complaint against the Colorado Air PollutionControl Division alleging that the division improperly granted permits to PSCounder Colorado’s Prevention of Significant Deterioration program for theconstruction and operation of Comanche 3. PSCo intervened in the case. On June 20,2006, the court ruled in PSCo’s favor and held that the Comanche 3 permits hadbeen properly granted and plaintiffs’ claims to the contrary were withoutmerit. Plaintiffs have appealed this decision. On Nov. 22, 2006,plaintiffs filed their opening briefs. PSCo’s response was filed Dec. 22,2006. On Oct. 16, 2007, oral arguments were presented to the ColoradoCourt of Appeals, who took the matter under advisement and is expected to issuean opinion in due course.

 

***Comer vs. Xcel Energy Inc. et al.***— On April 25, 2006, Xcel Energyreceived notice of a purported class action lawsuit filed in U.S. DistrictCourt for the Southern District of Mississippi. Although PSCo is not named as aparty to this litigation, if the litigation ultimately results in anunfavorable outcome for Xcel Energy, it could have a material adverse effect onPSCo. The lawsuit names more than 45 oil, chemical and utility companies,including Xcel Energy, as defendants and alleges that defendants’ CO2emissions “were a proximate and direct cause of the increase in the destructivecapacity of Hurricane Katrina.” Plaintiffs allege in support of their claim, several legal theories,including negligence, and public and private nuisance and seek damages relatedto the loss resulting from the hurricane. Xcel Energy believes this lawsuit iswithout merit 

 

15

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andintends to vigorously defend itself against these claims. On July 19,2006, Xcel Energy filed a motion to dismiss the lawsuit in its entirety. On Aug. 30,2007, the court dismissed the lawsuit in its entirety against all defendants onconstitutional grounds. On Sept. 17, 2007, plaintiffs filed a notice of appealto the Fifth Circuit.

 

***Qwest vs. XcelEnergy Inc.*** —On June 24, 2004, an employee of PSCo was injured when a pole owned byQwest malfunctioned. The employee is seeking damages of approximately  $7 million. On Sept. 6, 2005, an actionagainst Qwest relating to the incident was filed in Denver District Court bythe employee. On April 18, 2006, Qwest filed a third party complaintagainst PSCo based on terms in a joint pole use agreement between Qwest andPSCo. Pursuant to this agreement, Qwest has asserted that PSCo had anaffirmative duty to properly train and instruct its employees on pole safety,including testing the pole for soundness before climbing. PSCo filed acounterclaim on May 15, 2006, against Qwest asserting Qwest had a duty toPSCo and an obligation under the contract to maintain its poles in a safe andserviceable condition. On May 14, 2007 this matter went to trial. Thetrial concluded on May 22, 2007 with a jury verdict that found Qwestsolely liable for the accident and damages. Qwest has filed post-trial motionsand has indicated that, if the motions are unsuccessful, it will appeal theverdict.

 

***Pacific Northwest FERC Refund Proceeding****—*In July 2001, the FERC ordered a preliminaryhearing to determine whether there may have been unjust and unreasonablecharges for spot market bilateral sales in the Pacific Northwest for the periodDec. 25, 2000 through June 20, 2001. PSCo supplied energy to thePacific Northwest markets during this period and has been an active participantin the hearings. In September 2001, the presiding administrative law judge(ALJ) concluded that prices in the Pacific Northwest during the referencedperiod were the result of a number of factors, including the shortage ofsupply, excess demand, drought and increased natural gas prices. Under thesecircumstances the ALJ concluded that the prices in the Pacific Northwestmarkets were not unreasonable or unjust and no refunds should be ordered.Subsequent to the ruling the FERC has allowed the parties to request additionalevidence regarding the use of certain strategies and how they may have impactedthe markets in the Pacific Northwest markets. For the referenced period,parties have claimed that the total amount of transactions with PSCo subject torefund are $34 million. On June 25, 2003, the FERC issued an orderterminating the proceeding without ordering further proceedings. On Nov. 10,2003, in response to requests for rehearing, FERC reaffirmed this ruling toterminate the proceeding without refunds. Certain purchasers filed appeals ofthe FERC’s orders in this proceeding with the United States Court of Appealsfor the Ninth Circuit

 

In an order issued on Aug. 24,2007, the Ninth Circuit issued an order remanding the proceeding back to theFERC. The court preliminarily determined that it had jurisdiction to review theFERC’s decision not to order refunds. In remanding the case back to FERC, thecourt directed that the FERC consider evidence that had been presentedregarding intentional market manipulation in the California markets and itspotential ties to transactions in the Pacific Northwest. The court alsoindicated that the FERC should consider other of its rulings addressingovercharges in the California organized markets.

 

# ***Mallon v. Xcel Energy Inc.***—.On July 6,2007 Theodore Mallon and TransFinancial Corporation filed a declaratoryjudgment action against Xcel Energy in United States District Court in Colorado(Mallon Federal Action). In this lawsuit, plaintiffs seek a determination thatXcel Energy is not entitled to assert claims against plaintiffs related to the1984 and 1985 sale of COLI to PSCo, a predecessor of Xcel Energy. On Aug. 15,2007, Xcel Energy, PSCo and PSRI commenced a lawsuit in state court in BoulderCounty, Colo. against Mallon and TransFinancial Corporation (Mallon StateAction). In the Mallon State Action, Xcel Energy, PSCo and PSRI, a subsidiaryof PSCo seek damages against Mallon and TransFinancial for, among other things,breach of contract and breach of fiduciary duties associated with the sale ofthe COLI policies. On Aug. 15, 2007, Xcel Energy also filed a motion tostay or, in the alternative, to dismiss the Mallon Federal Action. A motion tostay the Mallon State Court action was subsequently filed by plaintiffs Mallonand TransFinancial on Sept. 18, 2007. The motions in both the state and federalcourt proceedings are still pending and it is uncertain when a decision will beissued by either court.

# *** ***

**7.Long-Term Borrowings and Other Financing Instruments**

 

On Aug. 15, 2007,PSCo issued $350 million of 6.25 percent first mortgage bonds, series due 2037.PSCo added the net proceeds from the sale of the first mortgage bonds to itsgeneral funds and applied a portion of the proceeds to the repayment ofcommercial paper, including commercial paper incurred to fund the payment atmaturity of $100 million of 7.11 percent secured medium-term notes, whichmatured on March 5, 2007.

 

**8. Derivative Valuation and FinancialImpacts**

 

PSCo uses derivativeinstruments in connection with its utility commodity price, interest rate,short-term wholesale and commodity trading activities, including forwardcontracts, futures, swaps and options.

 

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All derivativeinstruments not qualifying for the normal purchases and normal sales exception,as defined by SFAS 133 -”Accounting for Derivative Instruments and HedgingActivities,” as amended (SFAS 133), are recorded at fair value. Thepresentation of these derivative instruments is dependent on the designation ofa qualifying hedging relationship. The adjustment to fair value of derivativeinstruments not designated in a qualifying hedging relationship is reflected incurrent earnings or as a regulatory balance.

 

PSCo records the fairvalue of its derivative instruments in its Consolidated Balance Sheets asseparate line items identified as Derivative Instruments Valuation in bothcurrent and noncurrent assets and liabilities.

 

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

 

**Cash Flow Hedges**

 

PSCo enters into derivative instruments to managevariability of future cash flows from changes in commodity prices and interestrates.

 

As of Sept. 30, 2007, PSCo had variouscommodity-related contracts classified as cash flow hedges extending through December 2009.The fair value of these cash flow hedges is recorded in Other ComprehensiveIncome or deferred as a regulatory asset or liability. This classification isbased on the regulatory recovery mechanisms in place.  This could includethe purchase or sale of energy or energy-related products, the use of naturalgas to generate electric energy or gas purchased for resale.

 

PSCo enters into****variousinstruments that effectively fix the interest payments on certain floating ratedebt obligations or effectively fix the yield or price on a specified benchmarkinterest rate for a specific period. These derivative instruments aredesignated as cash flow hedges for accounting purposes, and the change in the fairvalue of these instruments is recorded as a component of Other ComprehensiveIncome.

 

As of Sept. 30, 2007, PSCo had net gains ofapproximately $1.5 million in Accumulated Other Comprehensive Income related tointerest rate cash flow hedge contracts that it expects to recognize inearnings during the next 12 months.

 

Gains or losses on hedging transactions for the salesof energy or energy-related products are primarily recorded as a component ofrevenue, hedging transactions for fuel used in energy generation are recordedas a component of fuel costs, hedging transactions for gas purchased for resaleare recorded as a component of gas costs and interest rate hedging transactionsare recorded as a component of interest expense. PSCo is allowed to recover inelectric or gas rates the costs of certain financial instruments purchased toreduce commodity cost volatility. There was an immaterial amount ofineffectiveness in the third quarter of 2007.

 

The impact of qualifying cash flow hedges on PSCo’sAccumulated Other Comprehensive Income, included as a component of commonstockholder’s equity, is detailed in the following table:

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

 

**Derivatives Not Qualifying for HedgeAccounting**

 

PSCo enters into certain commodity-based derivativetransactions, not included in trading operations, which do not qualify forhedge accounting treatment. These derivative instruments are accounted for on amark-to-market basis in accordance with SFAS 133. The results of thesetransactions are reported in the Consolidated Statements of Income.

 

17

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**Normal Purchases or Normal SalesContracts**

 

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

 

PSCo evaluates all of its contracts when suchcontracts are entered to determine if they are derivatives and, if so, if they qualifyto meet the normal designation requirements under SFAS 133. None of thecontracts entered into within the commodity trading operations qualify for anormal designation.

 

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

 

Interest and otherincome, net of nonoperating expenses, for the three and nine months ended Sept.30 consisted of the following:

 
| ** **                                     | ** ** | **Three months ended Sept. 30,** | ** ** | **Nine months ended Sept. 30,** | ** ** |
|------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(Thousands of dollars)**           | ** ** | **2007**                                             | ** ** | **2006**                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                     | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                |       | $                                                    | 3,328      |                                                | $          | 391 |   | $ | 6,439 |   | $ | 2,518 |   |
| Other nonoperating income                      |       | 923                                                  |       | 594                                                 |       | 1,919 |   | 3,075 |   |
| Employee-related insurance policy expense      |       | (4,007                                               | )          | (3,605                                              | )          | (13,595 | ) | (13,902 | ) |
| Other nonoperating expense                     |       | —                                               |       | (1,423                                              | )          | (1 | ) | (2,204 | ) |
| Total interest and other income (expense), net |       | $                                                    | 244        |                                                | $          | (4,043 | ) | $ | (5,238 | ) | $ | (10,513 | ) |

 

**10.Segment Information**

 

PSCo has two reportable segments, Regulated ElectricUtility and Regulated Natural Gas Utility. Commodity trading operations are nota reportable segment and commodity trading results are included in theRegulated Electric Utility segment.

 
| **(Thousands of dollars)**            | ** ** | **Regulated  Electric Utility** | ** ** | **Regulated  Natural Gas  Utility** | ** ** | **All Other** | ** ** | **Reconciling  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|-------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|--------------------|------------|-------------------------------|------------|-------------------------|------------|
| **Three months ended  September 30, 2007** |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| Revenues from:                                  |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| External customers                              |       | $                                    | 669,598    |                                     | $          | 104,930            |       | $                             | 6,733      |                    | $          | — |   | $ | 781,261 |   |
| Internal customers                              |       | 27                                   |       | (30                                      | )          | —             |       | 3                             |       | —                  |       |
| Total revenue                                   |       | $                                    | 669,625    |                                     | $          | 104,900            |       | $                             | 6,733      |                    | $          | 3 |   | $ | 781,261 |   |
| Segment net income                              |       | $                                    | 87,991     |                                     | $          | 9,289              |       | $                             | 8,378      |                    | $          | — |   | $ | 105,658 |   |
|                                            |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| **Three months ended  September 30, 2006** |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| Revenues from:                                  |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| External customers                              |       | $                                    | 644,445    |                                     | $          | 142,422            |       | $                             | 6,857      |                    | $          | — |   | $ | 793,224 |   |
| Internal customers                              |       | 35                                   |       | 5                                        |       | —             |       | (40                           | )          | —                  |       |
| Total revenue                                   |       | $                                    | 644,480    |                                     | $          | 142,427            |       | $                             | 6,857      |                    | $          | (40 | ) | $ | 793,224 |   |
| Segment net income                              |       | $                                    | 39,622     |                                     | $          | 5,653              |       | $                             | 2,083      |                    | $          | — |   | $ | 47,358 |   |

 

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| **(Thousands of dollars)**           | ** ** | **Regulated  Electric Utility** | ** ** | **Regulated  Natural Gas  Utility** | ** ** | **All Other** | ** ** | **Reconciling  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|------------------------------------------------|------------|--------------------------------------|------------|------------------------------------------|------------|--------------------|------------|-------------------------------|------------|-------------------------|------------|
| **Nine months ended  September 30, 2007** |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| Revenues from:                                 |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| External customers                             |       | $                                    | 1,944,240  |                                     | $          | 811,481            |       | $                             | 24,829     |                    | $          | — |   | $ | 2,780,550 |   |
| Internal customers                             |       | 184                                  |       | 22                                       |       | —             |       | (206                          | )          | —                  |       |
| Total revenue                                  |       | $                                    | 1,944,424  |                                     | $          | 811,503            |       | $                             | 24,829     |                    | $          | (206 | ) | $ | 2,780,550 |   |
| Segment net income (loss)                      |       | $                                    | 194,419    |                                     | $          | 49,846             |       | $                             | (38,720    | )                       | $          | — |   | $ | 205,545 |   |
|                                           |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| **Nine months ended  September 30, 2006** |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| Revenues from:                                 |       |                                 |       |                                     |       |               |       |                          |       |                    |       |
| External customers                             |       | $                                    | 1,916,376  |                                     | $          | 885,340            |       | $                             | 26,264     |                    | $          | — |   | $ | 2,827,980 |   |
| Internal customers                             |       | 155                                  |       | 61                                       |       | —             |       | (216                          | )          | —                  |       |
| Total revenue                                  |       | $                                    | 1,916,531  |                                     | $          | 885,401            |       | $                             | 26,264     |                    | $          | (216 | ) | $ | 2,827,980 |   |
| Segment net income                             |       | $                                    | 125,854    |                                     | $          | 39,761             |       | $                             | 10,782     |                    | $          | — |   | $ | 176,397 |   |

 

**11.Comprehensive Income**

 

The components of total comprehensive income are shownbelow:

 
| ** **                                                                                           | ** ** | **Three months ended   Sept. 30,** | ** ** | **Nine months ended   Sept. 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|-------------------------------------------------------|------------|
| **(Millions of dollars)**                                                                  | ** ** | **2007**                                               | ** ** | **2006**                                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                                                           |       | $                                                      | 105.7      |                                                  | $          | 47.4 |   | $ | 205.5 |   | $ | 176.4 |   |
| Other comprehensive income:                                                                          |       |                                                   |       |                                                  |       |   |   |   |   |
| After-tax net unrealized gains (losses) related to derivatives  accounted for as hedges (see Note 8) |       | (0.3                                                   | )          | —                                                |       | 1.1 |   | — |   |
| After-tax net realized gains on derivative transactions reclassified  into earnings (see Note 8)     |       | (0.4                                                   | )          | (0.4                                                  | )          | (1.1 | ) | (1.1 | ) |
| Other comprehensive income                                                                           |       | (0.7                                                   | )          | (0.4                                                  | )          | — |   | (1.1 | ) |
| Comprehensive income                                                                                 |       | $                                                      | 105.0      |                                                  | $          | 47.0 |   | $ | 205.5 |   | $ | 175.3 |   |

 

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**12.Benefit Plans and Other Postretirement 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**

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

 
| ** **                                                  | ** ** | **Nine months ended Sept. 30,** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                  | ** ** | **2007 (1)**                                   | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **(Thousands of dollars)**                        | ** ** | **Pension Benefits**                           | ** ** | **Postretirement Health  Care Benefits** | ** ** |
| **Xcel Energy Inc.**                                        |       |                                                |       |   |   |   |   |   |   |
| Service cost                                                |       | $                                                   | 46,560     |   | $ | 46,220 |   | $ | 4,359 |   | $ | 4,975 |   |
| Interest cost                                               |       | 123,939                                             |       | 116,560 |   | 37,857 |   | 39,704 |   |
| Expected return on plan assets                              |       | (198,624                                            | )          | (201,049 | ) | (22,800 | ) | (20,068 | ) |
| Amortization of transition obligation                       |       | —                                              |       | — |   | 10,932 |   | 10,833 |   |
| Amortization of prior service cost (credit)                 |       | 19,461                                              |       | 22,272 |   | (1,635 | ) | (1,634 | ) |
| Amortization of net loss                                    |       | 12,633                                              |       | 13,015 |   | 10,650 |   | 18,598 |   |
| Net periodic benefit cost (credit)                          |       | 3,969                                               |       | (2,982 | ) | 39,363 |   | 52,408 |   |
| Credits not recognized due to the effects of regulation     |       | 8,361                                               |       | 9,477 |   | — |   | — |   |
| Additional cost recognized due to the effects of regulation |       | —                                              |       | — |   | 2,918 |   | 2,918 |   |
| Net benefit cost recognized for financial reporting         |       | $                                                   | 12,330     |   | $ | 6,495 |   | $ | 42,281 |   | $ | 55,326 |   |
|                                                        |       |                                                |       |   |   |   |   |   |   |
| **PSCo**                                                    |       |                                                |       |   |   |   |   |   |   |
| Net periodic benefit cost                                   |       | $                                                   | 14,340     |   | $ | 14,000 |   | $ | 21,496 |   | $ | 29,982 |   |
| Additional cost recognized due to the effects of regulation |       | —                                              |       | — |   | 2,918 |   | 2,918 |   |
| Net benefit cost recognized for financial reporting         |       | $                                                   | 14,340     |   | $ | 14,000 |   | $ | 24,414 |   | $ | 32,900 |   |

** **

----

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

 

**20**

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

** **

** **

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

 

**Forward-LookingInformation**

 

The following discussion and analysis by managementfocuses on those factors that had a material effect on the financial conditionand results of operations of PSCo during the periods presented, or are expectedto have a material impact in the future and gives effect to the restatementdiscussed in Note 2 to the consolidated financial statements. It should be readin conjunction with the accompanying unaudited financial statements and notes.

 

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 intendedto be identified in this document by the words “anticipate,” “believe,” “estimate,”“expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,”“potential,” “should” and similar expressions. Actual results may varymaterially. Forward-looking statements speak only as of the date theyare made, and we do not undertake any obligation to update them to reflectchanges that occur after that date. Factorsthat could cause actual results to differ materially include, but are notlimited to: general economic conditions, including the availability of creditand its impact on capital expenditures and the ability of PSCo to obtainfinancing on favorable terms; business conditions in the energy industry;actions of credit rating agencies; competitive factors, including the extentand timing of the entry of additional competition in the markets served byPSCo; unusual weather; effects of geopolitical events, including war and actsof terrorism; state, federal and foreign legislative and regulatory initiativesthat affect cost and investment recovery, have an impact on rates or have animpact on asset operation or ownership; structures that affect the speed anddegree to which competition enters the electric and natural gas markets; costsand other effects of legal and administrative proceedings, settlements,investigations and claims, including the COLI settlement discussed below;actions of accounting regulatory bodies; the items described under FactorsAffecting Results of Continuing Operations; and the other risk factors listedfrom time to time by PSCo in reports filed with the SEC, including “RiskFactors” in Item 1A of PSCo’s Form 10-K for the year ended Dec. 31,2006 and Exhibit 99.01 to this report on Form 10-Q/A for the quarterended Sept. 30, 2007.

 

**Market Risks**

 

PSCo is exposed to market risks, including changes incommodity prices and interest rates, as disclosed in Item 7A — Quantitative andQualitative Disclosures About Market Risk in its Current Report on Form 8-K/Afiled on Dec 14, 2007. Commodity price and interest rate risks for PSCo aremitigated due to cost-based rate regulation. At Sept. 30, 2007, there were nomaterial changes to the financial market risks that affect the quantitative andqualitative disclosures presented as of Dec. 31, 2006.

 

**Management Changes**

 

On May 31,2007, Patricia K. Vincent, chief executive officer and president of PSCo, announcedher resignation, effective June 5, 2007. Ms. Vincent was a namedexecutive officer of Xcel Energy Inc. in its most recent proxy statement of April 18,2007.

 

OnFriday, Sept. 21, 2007, Tim E. Taylor was named the chief executive officer andpresident of PSCo.

 

**RESULTS OF OPERATIONS**

 

PSCo’s net income was approximately $205.5 million forthe first nine months of 2007, compared with approximately $176.4 million forthe first nine months of 2006.

 

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

** **

Electric fuel and purchased power expenses tend tovary with changing retail and wholesale sales requirements and unit costchanges in fuel and purchased power. Due to fuel and purchased energycost-recovery mechanisms for customers, most fluctuations in these costs do notmaterially affect electric utility margin.

 

21

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PSCohas two distinct forms of wholesale sales: short-term wholesale and commoditytrading. Short-term wholesale refers to energy-related purchases and salesactivity and the use of certain financial instruments associated with the fuelrequired for, and energy produced from, PSCo’s generation assets or the energyand capacity purchased to serve native load. Commodity trading is notassociated with PSCo’s generation assets or the energy and capacity purchasedto serve native load. Short-term wholesale and commodity trading activities areconsidered part of the electric utility segment.

 

Margins from commodity trading activity conducted atPSCo are partially redistributed to Northern States Power Co., a Minnesotacorporation (NSP-Minnesota) and Southwestern Public Service Co., a New Mexicocorporation (SPS), both wholly owned subsidiaries of Xcel Energy, pursuant tothe joint operating agreement (JOA) approved by the FERC. Margins receivedpursuant to the JOA are reflected as part of base electric utility revenues.Short-term wholesale and commodity trading margins reflect the impact ofregulatory sharing, if applicable. Commodity trading revenues are reported netof related costs (i.e., on a margin basis) in the Consolidated Statements ofIncome. Commodity trading costs include fuel, purchased power, transmission,broker fees and other related costs. Short-term wholesale and commodity tradingmargins reflect the estimated impact of regulatory sharing of margins, ifapplicable.

 

The following table details base electric utility,short-term wholesale and commodity trading revenues and margin:

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

 

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

 

# ***Base Electric Revenues***

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

 

 

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***Base ElectricMargin***

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

 

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

##### ** **

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

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

 

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

 

***Natural GasRevenues***

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

 

***Natural Gas Margin***

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

 

 

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**Non-Fuel Operating Expense and OtherCosts**

 

***Other Operating and Maintenance Expenses*** — The following summarizes thecomponents of the changes in other operating and maintenance expense for thenine months ended Sept. 30:

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

 

***Depreciation andAmortization***—Depreciation and amortization expense increased by approximately $18.4 million,or 10.2 percent, for the first nine months of 2007, compared with the firstnine months of 2006. The increase was due to normal plant additions and theapproved change in depreciation accruals for 2007 from the 2006 Colorado ratecase settlement resulting in an additional depreciation expense of $10.4million year-to-date.

 

***Interest and otherincome***— Interest and other income increased byapproximately $4.3 million for the first nine months of 2007, compared with thefirst nine months of 2006. The increase was primarily due to interest incomeaccrued on deferred fuel costs and note receivables related to third party useof interconnection facilities.

 

***Allowance for fundsused during construction, equity and debt (AFDC)***— AFDC is a non-cash amount capitalized asa part of construction costs representing the cost of financing theconstruction. Generally, these costs are recovered from customers, in futurerates, as the related property is depreciated. AFDC increased by approximately$6.8 million, or 63.6 percent for the first nine months of 2007, compared withthe first nine months in 2006. The increase was primarily due to theconstruction of Comanche 3. The increase was partially offset by the currentrecovery from customers of the financing costs related to this construction throughbase rates, resulting in a lower recognition of AFDC.

 

***Income Taxes***—******Income tax expense increased byapproximately $56.8 million for the first nine months of 2007 compared with thefirst nine months of 2006. The increase was primarily due to higher pretaxincome. The effective tax rate was 36.2 percent for the first nine months of2007, compared with 25.3 percent for the same period in 2006. The highereffective tax rate for the first nine months of 2007 was primarily due to theCOLI settlement.  Without these charges,the effective tax rate for 2007 would have been 26.8 percent.

 

**FactorsAffecting Results of Continuing Operations**

** **

***Cabin Creek Hydro Generating Station***

 

On Oct. 2,2007, employees of RPI Coatings Inc. (RPI), a contractor retained by PSCo, wereapplying an epoxy coating to the inside of a penstock at Xcel Energy’s CabinCreek Hydro Generating Station near Georgetown, Colo. This work was beingperformed as part of a corrosion prevention maintenance effort. Atapproximately 2:00 p.m. a fire occurred inside the penstock, which is a4,000-foot long, 12-foot wide pipe used to deliver water from a reservoir tothe hydro facility. Four of the nine RPI employees working inside the penstockwere positioned below the fire and were able to exit the pipe. The remainingfive RPI employees were unable to exit the penstock. Rescue crews located thefive employees a few hours later and confirmed their deaths. The accident isbeing investigated by several state and federal agencies, including the federalOccupational Safety andHealth Administration (OSHA), U.S. Chemical Safety Board and the ColoradoBureau of Investigations. It is uncertain when the agencies will conclude theirinvestigations, but it is possible these investigations could take severalweeks or even months. Once OSHA’s investigation is completed, we will assessthe damage to the penstock and make a determination as to the steps that needto be taken in order to place this facility back in service.

 

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

 

On Aug. 6, 2007, Kinder Morgan Interstate GasTransmission LLC (KMIGT) filed an application with the FERC for authorizationspursuant to Section 7(c) of the Natural Gas Act to construct, own andoperate 41.4 miles of 12-inch pipeline

 

 

24

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and associated delivery metering facilities in WeldCounty, Colo. The stated purpose of this pipeline, referred to as the “ColoradoLateral,” is to provide interstate gas transportation services of up to 55,000 dekathermsper day to supply natural gas to Atmos Energy Corporation’s (Atmos) gasdistribution system serving retail customers in and around Greeley and Eaton,Colo. PSCo currently provides gas transportation services to Atmos to supplyits distribution system in the Greeley and Eaton areas. PSCo’s services wouldbe, for the most part, bypassed by the new KMIGT pipeline. PSCo estimates thata complete bypass of its current services to Atmos in this area couldpotentially result in a loss of annual revenues of approximately $3.8 million.

 

***Regulation***

** **

**Summaryof Recent Federal Regulatory Developments**

 

The FERC has jurisdictionover rates for electric transmission service in interstate commerce andelectric energy sold at wholesale, hydro facility licensing, natural gastransportation, accounting practices and certain other activities of PSCo.State and local agencies have jurisdiction over many of PSCo’s activities,including regulation of retail rates and environmental matters. In addition tothe matters discussed below, see Note 5 to the consolidated financialstatements for a discussion of other regulatory matters.

 

***FERC Rules Implementing Energy Policy Act of 2005(Energy Act) — ***The Energy Act repealed the Public Utility HoldingCompany Act of 1935 effective Feb. 8, 2006. In addition, the Energy Actrequired the FERC to conduct several rulemakings to adopt new regulations toimplement various aspects of the Energy Act. Since August 2005, the FERChas completed or initiated proceedings to modify its regulations on a number ofsubjects. In addition to the previous disclosure in Item 1 of PSCo’s Form 10-Kfor the year ended Dec. 31, 2006, the FERC issued final rules makingcertain reliability standards mandatory and subject to potential financialpenalties up to $1 million per day per violation for non-compliance effective June 18,2007.

 

While PSCo cannot predictthe ultimate impact the new regulations will have on its operations orfinancial results, PSCo is taking actions that are intended to comply with andimplement these new rules and regulations as they become effective.

 

***Electric Transmission Rate Regulation —*** The FERC also regulates the ratescharged and terms and conditions for electric transmission services. FERCpolicy encourages utilities to turn over the functional control over theirelectric transmission assets and the related responsibility for the sale ofelectric transmission services to a Regional Transmission Organization (RTO).Each RTO separately files regional transmission tariff rates for approval bythe FERC. All members within that RTO are then subjected to those rates. PSCois currently participating with other utilities in the development ofWestConnect, which would provide certain regionalized transmission andwholesale energy market functions but would not be an RTO.

 

On Feb. 15,2007, the FERC issued final rules adopting revisions to its 1996 openaccess transmission rules. PSCo submitted the initial required revisions to itsOpen Access Transmission Tariff (OATT) on July 13, 2007 and Sept. 11,2007, as required.

 

In addition, in January 2007,the FERC issued interim and proposed rules to modify the current FERC rules governingthe functional separation of the PSCo electric transmission function from thewholesale sales and marketing function. The proposed rules are pendingfinal FERC action.

 

While PSCo cannot predict the ultimate impact the newregulations will have on its operations or financial results, PSCo is takingactions that are intended to comply with and implement these new rules andregulations as they become effective.

 

***Market Based Rate Rules ******—***On June 21,2007, the FERC issued a final order amending its regulations governing itsmarket-based rate authorizations to electric utilities such as PSCo. The FERCreemphasized its commitment to market-based pricing, but is revising the testsit’s using to assess whether a utility has market power and has emphasized thatit intends to exercise greater oversight where it has market-based rateauthorizations. PSCo has been granted market-based rate authority and will besubject to the new rule. PSCo is presently analyzing the new rule.

 

An aspect of FERC’s market-based rate requirements isthe requirement to charge mitigated rates in markets where a utility is foundto have market power or where a utility cannot establish the absence of marketpower. PSCo has been authorized by the FERC to charge market-based ratesoutside of their control areas, but is generally limited to charging mitigatedrates within their control areas. Consistent with the approach followed by manyother utilities subject to the FERC’s mitigation requirement, PSCo usescost-based rate caps set out in the Western Systems Power Pool (WSPP) agreementas their applicable mitigated rates, an approach expressly approved by theFERC. However, concurrently with the issuance of the 

 

 

25

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final order, the FERC initiated a proceeding toinvestigate whether the use of the WSPP rate caps for this purpose is just andreasonable. An outcome of this proceeding may be to lower the mitigated ratesthat PSCo may charge in their control areas.

 

**OtherRegulatory Matters — PSCo**

 

***Renewable EnergyStandard***—******The 2007 Colorado legislature adopted an increased RESthat requires PSCo to generate or cause to be generated electricity fromrenewable resources equaling at least 10 percent of its retail sales by 2010,15 percent of retail sales by 2015 and 20 percent of retail sales by 2020. Thenew law limits the incremental retail rate impact from these acquisitions to 2percent. The new legislation encourages the CPUC to consider earlier and timelycost recovery for utility investment in renewable resources, including the useof a rider mechanism and a return on construction work in progress.

 

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

 

***2003 Least CostPlan (LCP) Investigation***— In January 2007, PSCo filed with the CPUC its final report on itsevaluation of the bids submitted in response to PSCo’s 2005 All Source requestfor proposal under PSCo’s 2003 LCP. In the report, PSCo stated it intended tonegotiate extensions to power purchase agreements for the output from threeexisting gas-fired facilities for a total of 465 MW of the 896 MW needed for2013. The final report explained that PSCo was intentionally waiting to fillthe remaining 430MW resources needed in 2013 until PSCo’s 2007 LCP and thatPSCo was rejecting uneconomic bids received for new coal generation and forrenewal of contracts with existing natural gas-fired generators.

 

On March 1, 2007, the CPUC issued an orderrequiring PSCo to apply for approval of a 2013 contingency plan. On April 2,2007, PSCo filed its 2013 contingency plan, which recommended addressing theremaining 2013 resource need in the 2007 LCP. PSCo’s contingency plan alsolisted other options, which PSCo predicts will be less costly than acceptingthe uneconomic coal and natural gas bids.

 

On May 25, 2007, PSCo amended its 2013contingency plan to include amendments to two power purchase agreements withTri-State Generation and Transmission Association, Inc. under which PSCowould return Tri-State generation capacity currently under contract to PSCo inthe years 2009 through 2012 and then recapture that capacity in the years 2013through 2016. PSCo explained this capacity swap would save PSCo an estimated$49 million on a net present value basis. PSCo still planned to enter intocontract extensions with three existing gas-fired facilities and to meet theremaining 2013 need through its 2007 LCP. The CPUC held hearings on the PSCo2013 contingency plan on July 9, 2007. The PSCo contingency plan wasopposed by the CPUC trial staff and by a intervenor, but was supported by theColorado Office of Consumer Counsel. The opponents asked for all 2013 resourceacquisition decisions to be deferred to the 2007 LCP. On Sept. 7, 2007, theCPUC issued an order approving the PSCo 2013 contingency plan and ruling thatthe amendments to the Tri-State agreements were exempt from the resource planningrules and need not be included in an approved contingency plan. PSCo hasentered into the contract amendments with Tri-State and one of the winning gasbidders and is currently in negotiation with one other winning gas bidders. Thethird winning gas bidder has withdrawn its extension offer. The remaining 2013resource need will be addressed in the PSCo 2007 Resource Plan.

 

On July 3, 2007, the CPUC issued an ordersoliciting comments to determine whether the LCP rules needed to bechanged on an emergency basis to govern utility filings in October 2007.On Sept. 28, 2007, the CPUC adopted emergency rule changes to govern PSCo’sresource plan filing in October 2007. The rule changes include:  altering the requirements for “least cost”resource procurement and fuel neutrality to allow for selection of morerenewable resources and demand-side management resources; requiring utilitiesto file at least three alternative plans with different levels of renewableresources and demand-side management resources so that the costs and benefitsof various levels of these resources can be considered; and employing anindependent evaluator to assist the CPUC in reviewing the utility’s evaluationof competitive bids for resource additions. PSCo requested an extension to makeits resource filing on Nov.16, 2007. On Oct. 24, 2007, the CPUC acted togrant this request.

 

 

26

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**Item 4.CONTROLS AND PROCEDURES**

 

**DisclosureControls and Procedures**

 

PSCo maintains a set of disclosure controls andprocedures designed to ensure that information required to be disclosed inreports that it files or submits under the Securities Exchange Act of 1934 isrecorded, processed, summarized and reported within the time periods specifiedin Securities and Exchange Commission rules and forms. In addition, thedisclosure controls and procedures ensure that information required to bedisclosed 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 bythis report, based on an evaluation carried out under the supervision and withthe participation of PSCo’s management, including the CEO and CFO, of theeffectiveness of our disclosure controls and procedures, the CEO and CFO haveconcluded that PSCo’s disclosure controls and procedures are effective.

 

**Internal Control Over Financial Reporting**

** **

No change in PSCo’s internal control over financialreporting has occurred during the most recent fiscal quarter that hasmaterially affected, or is reasonably likely to materially affect, its internalcontrol over financial reporting.

 

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

##### ** **

**Item 1.Legal Proceedings**

 

In the normal course of business, various lawsuits andclaims have arisen against PSCo. After consultation with legal counsel, PSCohas recorded an estimate of the probable cost of settlement or otherdisposition for such matters. See Notes 5 and 6 of the Financial Statements inthis Quarterly Report on Form 10-Q/A for further discussion of legalproceedings, including Regulatory Matters and Commitments and ContingentLiabilities, which are hereby incorporated by reference. Reference also is madeto Item 3 and Note 12 of PSCo’s Annual Report on Form 10-K for the yearended Dec. 31, 2006, for a description of certain legal proceedingspresently pending.

 

**Item 1A.Risk Factors**

 

PSCo’s risk factors are documented inItem 1A of Part I of its 2006 Annual Report on Form 10-K, which is incorporatedherein by reference. As a result of developments in our business since thefiling of the 2006 Annual Report on Form 10-K and the Quarterly Report on Form 10-Q/Afor the quarter ended June 30, 2007, we are providing below an update ofthe risk factor relating to COLI.

 

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

*** ***

On Sept. 20, 2007, XcelEnergy submitted its formal offer in compromise to settle the dispute relatingto the proper tax treatment of the COLI policies beginning with tax year 1993and for all years thereafter. By letter dated Sept. 21, 2007, the United Statesaccepted the terms of that settlement offer. The terms of the final settlementare essentially the same as the settlement in principle reached on June 19,2007. The U.S. government’s letter terminates the tax litigation pendingbetween the parties for tax years 1993-2002 and also specifies the agreed taxtreatment for certain aspects of those policies for subsequent tax years. SeeNote 4 to PSCo’s consolidated financial statements for additional disclosurerelated to the COLI settlement.

 

 

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**Item 6.Exhibits**

 

The following Exhibits are filed with this report:

 
| 4.01   |   | Supplemental Indenture,  dated Aug. 1, 2007, between Public Service Company of Colorado (a  Colorado corporation) and U.S. Bank Trust National Association, as successor  Trustee. (Exhibit 4.01 to PSCo Form 8-K (file no. 001-3280) dated  Aug. 14, 2007). |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                             |
| 10.01  |   | Letter dated Sept. 19,  2007, from Xcel Energy Inc. to the US Deparment of Justice (DOJ) submitting  its offer to settle the COLI tax dispute and Letter dated Sept. 21, 2007,  from the DOJ to Xcel Energy Inc. accepting the settlement offer.                                 |
|   |   |                                                                                                                                                                                                                                                                             |
| 31.01  |   | Principal Executive Officer’s and Principal  Financial Officer’s certifications pursuant to 18 U.S.C. Section 1350,  as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                   |
|   |   |                                                                                                                                                                                                                                                                             |
| 32.01  |   | Certification pursuant to 18 U.S.C.  Section 1350, as adopted pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                             |
| 99.01  |   | Statement pursuant to Private Securities Litigation  Reform Act of 1995.                                                                                                                                                                                                         |

 

 

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**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized on Dec. 17,2007.

 

Public Service Co. 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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