** **

** **

**UNITED STATES**SECURITIES ANDEXCHANGE COMMISSION

**Washington, D.C. 20549**

 

**FORM 10-Q/A**

**AmendmentNo. 1**

 

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

 

**For the transition period from       to       **

 

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

#### ** **

**Public Service Company ofColorado**

**(Exact name of registrant asspecified in its charter)**

** **

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

 

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

 

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

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer o                               AcceleratedFiler o                               Non-AcceleratedFiler x

 

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

 

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

 

| **Class**                      | ** ** | **Outstanding at July 30, 2007** |
|--------------------------------|------------|------------------------------------------------------|
| Common Stock, $0.01 par  value |       | 100 shares                                           |

 

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

 

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**Table ofContents**

 
| **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 isfiled by Public Service Co. of Colorado (PSCo). PSCo is a wholly ownedsubsidiary of Xcel Energy Inc. (Xcel Energy). Additional information on XcelEnergy is available on various filings with the Securities and ExchangeCommission (SEC).

 

2

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

 

Asa result of the settlement in principle, which required the surrender of theCOLI policies, PSCo had previously classified all amounts related to PSRI as adiscontinued operation for all periods presented in our Form 10-Q for theperiod ended June 30, 2007.

 

Pursuantto a routine review of PSCo’s periodic reports by the Securities and ExchangeCommission, management reassessed the appropriateness of the treatment of PSRIas a discontinued operation under SFAS 144 “Accounting for the Impairment orDisposal of Long-Lived Assets” and determined that PSRI’s 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. 1on Form 10-Q/A (the “Report”) is being filed to amend and restate PSCo’sQuarterly Report on Form 10-Q for the quarter ended June 30, 2007,that was filed on July 27, 2007 (the “Original Report”).  The purpose of this amendment is to reflectthe restatement of PSCo’s previously issued financial statement as of and forthe three and six month periods ended June 30, 2007 and 2006, and updateother information, including Management’s Discussion and Analysis to reflectthe restatement, in each case to reflect PSRI as a continuing operation.  These revised sections of this report havenot otherwise been updated for events occurring after the date of the financialstatements, except to reflect the COLI tax settlement and the related treatmentof PSRI as a continuing operation and certain significant subsequent eventsincluded in Notes 4 and 13 to the consolidated financial statements.  All other information is unchanged andreflects the disclosures made at the time of the original filing. In addition,currently dated certifications from Xcel Energy’s Chief Executive Officer andChief Financial Officer have been included as exhibits to this Form 10-Q/A.

 

3

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##### ** **

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

** **

**Item 1. Financial Statements**

 

**PUBLIC SERVICE CO. OF COLORADOAND SUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME(UNAUDITED)**

**(Thousands of dollars)**

 
| ** **                                                                                                 | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 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                                                                                           |       | $                                                   | 638,142    |                                              | $          | 599,812 |   | $ | 1,274,642 |   | $ | 1,271,931 |   |
| Natural gas utility                                                                                        |       | 190,157                                             |       | 160,017                                           |       | 706,551 |   | 742,918 |   |
| Steam and other                                                                                            |       | 7,299                                               |       | 7,402                                             |       | 18,096 |   | 19,407 |   |
| Total operating revenues                                                                                   |       | 835,598                                             |       | 767,231                                           |       | 1,999,289 |   | 2,034,256 |   |
|                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **Operating expenses**                                                                                     |       |                                                |       |                                              |       |   |   |   |   |
| Electric fuel and purchased power                                                                          |       | 350,397                                             |       | 350,422                                           |       | 718,130 |   | 766,625 |   |
| Cost of natural gas sold and transported                                                                   |       | 118,155                                             |       | 92,075                                            |       | 526,510 |   | 576,545 |   |
| Cost of sales — steam and other                                                                       |       | 2,165                                               |       | 3,660                                             |       | 7,011 |   | 11,202 |   |
| Other operating and maintenance expenses                                                                   |       | 143,148                                             |       | 135,946                                           |       | 288,344 |   | 278,305 |   |
| Depreciation and amortization                                                                              |       | 66,894                                              |       | 59,534                                            |       | 131,932 |   | 118,520 |   |
| Taxes (other than income taxes)                                                                            |       | 21,646                                              |       | 20,246                                            |       | 45,488 |   | 44,624 |   |
| Total operating expenses                                                                                   |       | 702,405                                             |       | 661,883                                           |       | 1,717,415 |   | 1,795,821 |   |
|                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **Operating income**                                                                                       |       | 133,193                                             |       | 105,348                                           |       | 281,874 |   | 238,435 |   |
|                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| Interest and other income (expense) — net                                                             |       | (3,358                                              | )          | (3,405                                            | )          | (5,482 | ) | (6,470 | ) |
| Allowance for funds used during construction — equity                                                 |       | 2,697                                               |       | 121                                               |       | 4,742 |   | 263 |   |
|                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| **Interest charges and financing  costs**                                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Interest charges — includes other financing costs of $1,368, $1,529,  $2,750 and $3,038, respectively |       | 32,573                                              |       | 34,006                                            |       | 66,674 |   | 69,042 |   |
| Interest and penalties related to COLI settlement                                                          |       | 41,211                                              |       | —                                            |       | 41,211 |   | — |   |
| Allowance for funds used during construction — debt                                                   |       | (3,037                                              | )          | (3,032                                            | )          | (5,168 | ) | (5,465 | ) |
| Total interest charges and financing costs                                                                 |       | 70,747                                              |       | 30,974                                            |       | 102,717 |   | 63,577 |   |
|                                                                                                       |       |                                                |       |                                              |       |   |   |   |   |
| Income before income taxes                                                                                 |       | 61,785                                              |       | 71,090                                            |       | 178,417 |   | 168,651 |   |
| Income taxes                                                                                               |       | 47,647                                              |       | 18,898                                            |       | 78,530 |   | 39,612 |   |
| **Net income**                                                                                             |       | $                                                   | 14,138     |                                              | $          | 52,192 |   | $ | 99,887 |   | $ | 129,039 |   |

 

**See Notes to Consolidated Financial Statements**

** **

**4**

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** **

**PUBLIC SERVICE CO. OFCOLORADO AND SUBSIDIARIES**

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

**(Thousands of dollars)**

 
| ** **                                                                         | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007  (As restated  See Note 2)**               | ** ** | **2006  (As restated  See Note 2)** | ** ** |
| **Operating activities**                                                           |       |                                              |       |   |   |
| Net income                                                                         |       | $                                                 | 99,887     |   | $ | 129,039 |   |
| Adjustments to reconcile net income to net cash provided by operating  activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                      |       | 137,121                                           |       | 124,815 |   |
| Deferred income taxes                                                              |       | 6,125                                             |       | 19,150 |   |
| Amortization of investment tax credits                                             |       | (1,962                                            | )          | (1,974 | ) |
| Allowance for equity funds used during construction                                |       | (4,742                                            | )          | (263 | ) |
| Net realized and unrealized hedging and derivative transactions                    |       | 3,420                                             |       | (33,641 | ) |
| Changes in operating assets and liabilities:                                       |       |                                              |       |   |   |
| Accounts receivable                                                                |       | 25,209                                            |       | 152,615 |   |
| Accrued unbilled revenues                                                          |       | (51,144                                           | )          | 56,921 |   |
| Inventories                                                                        |       | 69,661                                            |       | 87,253 |   |
| Recoverable purchased natural gas and electric energy costs                        |       | 156,337                                           |       | 210,898 |   |
| Prepayments and other                                                              |       | 5,303                                             |       | 8,764 |   |
| Accounts payable                                                                   |       | (63,277                                           | )          | (233,720 | ) |
| Net regulatory assets and liabilities                                              |       | 1,702                                             |       | (24,128 | ) |
| Other current liabilities                                                          |       | 85,845                                            |       | (36,395 | ) |
| Change in other noncurrent assets                                                  |       | (38,104                                           | )          | 8,229 |   |
| Change in other noncurrent liabilities                                             |       | (8,515                                            | )          | (6,155 | ) |
| Net cash provided by operating activities                                          |       | 422,866                                           |       | 461,408 |   |
|                                                                               |       |                                              |       |   |   |
| **Investing activities**                                                           |       |                                              |       |   |   |
| Capital/construction expenditures                                                  |       | (330,465                                          | )          | (268,382 | ) |
| Allowance for equity funds used during construction                                |       | 4,742                                             |       | 263 |   |
| Investments in utility money pool arrangement                                      |       | (147,100                                          | )          | — |   |
| Repayments from utility money pool arrangement                                     |       | 147,100                                           |       | — |   |
| Other investments                                                                  |       | (6,787                                            | )          | (4,648 | ) |
| Net cash used in investing activities                                              |       | (332,510                                          | )          | (272,767 | ) |
|                                                                               |       |                                              |       |   |   |
| **Financing activities**                                                           |       |                                              |       |   |   |
| Short-term debt repayments, net                                                    |       | (197,850                                          | )          | (310,604 | ) |
| Borrowings under utility money pool arrangement                                    |       | 367,800                                           |       | 576,200 |   |
| Repayments under utility money pool arrangement                                    |       | (268,800                                          | )          | (393,600 | ) |
| Repayment of long-term debt, including reacquisition premiums                      |       | (100,691                                          | )          | (125,668 | ) |
| Capital contribution from parent                                                   |       | 240,176                                           |       | 193,185 |   |
| Dividends paid to parent                                                           |       | (130,292                                          | )          | (129,655 | ) |
| Net cash used in financing activities                                              |       | (89,657                                           | )          | (190,142 | ) |
|                                                                               |       |                                              |       |   |   |
| Net increase (decrease) in cash and cash equivalents                               |       | 699                                               |       | (1,501 | ) |
| Cash and cash equivalents at beginning of period                                   |       | 3,011                                             |       | 3,662 |   |
| Cash and cash equivalents at end of period                                         |       | $                                                 | 3,710      |   | $ | 2,161 |   |
|                                                                               |       |                                              |       |   |   |
| Supplemental disclosure of  cash flow information:                                 |       |                                              |       |   |   |
| Cash paid for interest (net of amounts capitalized)                                | ** ** | $                                                 | 59,779     |   | $ | 67,095 |   |
| Cash paid for income taxes (net of refunds received)                               |       | 39,816                                            |       | 9,491 |   |
|                                                                               |       |                                              |       |   |   |
| Supplemental disclosure of  non-cash investing transactions:                       |       |                                              |       |   |   |
| Property, plant and equipment additions in accounts payable                        |       | $                                                 | 11,798     |   | $ | 6,858 |   |

 

See Notes to ConsolidatedFinancial Statements

 

5

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** **

**PUBLIC SERVICE CO. OF COLORADOAND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**

**(Thousandsof dollars)**

** **
| ** **                                                                                | ** ** | **June 30, 2007  (As restated  See Note 2)** | ** ** | **Dec. 31, 2006  (As restated  See Note 2)** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------|------------|
| **ASSETS**                                                                                | ** ** | ** **                                        | ** ** | ** **                                        | ** ** |
| Current assets:                                                                           |       |                                              |       |                                              |       |
| Cash and cash equivalents                                                                 |       | $                                                 | 3,710      |                                              | $          | 3,011 |   |
| Accounts receivable, net of allowance for bad debts of $18,161 and  $18,415, respectively |       | 306,881                                           |       | 355,738                                           |       |
| Accounts receivable from affiliates                                                       |       | 32,269                                            |       | 8,621                                             |       |
| Accrued unbilled revenues                                                                 |       | 250,505                                           |       | 199,361                                           |       |
| Recoverable purchased natural gas and electric energy costs                               |       | 1,490                                             |       | 157,827                                           |       |
| Materials and supplies inventories                                                        |       | 44,475                                            |       | 43,029                                            |       |
| Fuel inventories                                                                          |       | 36,851                                            |       | 40,997                                            |       |
| Natural gas inventories                                                                   |       | 88,606                                            |       | 155,567                                           |       |
| Derivative instruments valuation                                                          |       | 49,918                                            |       | 28,111                                            |       |
| Deferred income taxes                                                                     |       | 62,279                                            |       | 62,791                                            |       |
| Prepayments and other                                                                     |       | 27,177                                            |       | 14,654                                            |       |
| Total current assets                                                                      |       | 904,161                                           |       | 1,069,707                                         |       |
| Property, plant and  equipment, at cost:                                                  |       |                                              |       |                                              |       |
| Electric utility plant                                                                    |       | 6,504,322                                         |       | 6,409,194                                         |       |
| Natural gas utility plant                                                                 |       | 1,864,463                                         |       | 1,825,560                                         |       |
| Common utility and other property                                                         |       | 738,362                                           |       | 725,864                                           |       |
| Construction work in progress                                                             |       | 587,631                                           |       | 429,878                                           |       |
| Total property, plant and equipment                                                       |       | 9,694,778                                         |       | 9,390,496                                         |       |
| Less accumulated depreciation                                                             |       | (3,004,572                                        | )          | (2,912,233                                        | )          |
| Net property, plant and equipment                                                         |       | 6,690,206                                         |       | 6,478,263                                         |       |
| Other assets:                                                                             |       |                                              |       |                                              |       |
| Regulatory assets                                                                         |       | 542,022                                           |       | 589,016                                           |       |
| Derivative instruments valuation                                                          |       | 153,584                                           |       | 161,502                                           |       |
| Other investments                                                                         |       | 10,334                                            |       | 19,346                                            |       |
| Other                                                                                     |       | 82,945                                            |       | 45,785                                            |       |
| Total other assets                                                                        |       | 788,885                                           |       | 815,649                                           |       |
| Total assets                                                                              |       | $                                                 | 8,383,252  |                                              | $          | 8,363,619 |   |
| **LIABILITIES AND EQUITY**                                                                | ** ** | ** **                                        | ** ** | ** **                                        | ** ** |
| Current liabilities:                                                                      |       |                                              |       |                                              |       |
| Current portion of long-term debt                                                         |       | $                                                 | 1,406      |                                              | $          | 101,379 |   |
| Short-term debt                                                                           |       | 174,650                                           |       | 372,500                                           |       |
| Accounts payable                                                                          |       | 340,261                                           |       | 385,724                                           |       |
| Accounts payable to affiliates                                                            |       | 18,909                                            |       | 30,291                                            |       |
| Borrowings under utility money pool arrangement                                           |       | 99,000                                            |       | —                                            |       |
| Taxes accrued                                                                             |       | 83,738                                            |       | 84,960                                            |       |
| Dividends payable to parent                                                               |       | 65,774                                            |       | 64,778                                            |       |
| Derivative instruments valuation                                                          |       | 38,674                                            |       | 38,616                                            |       |
| Accrued interest                                                                          |       | 55,480                                            |       | 35,362                                            |       |
| Other                                                                                     |       | 137,298                                           |       | 74,381                                            |       |
| Total current liabilities                                                                 |       | 1,015,190                                         |       | 1,187,991                                         |       |
| Deferred credits and other  liabilities:                                                  |       |                                              |       |                                              |       |
| Deferred income taxes                                                                     |       | 1,011,774                                         |       | 1,004,027                                         |       |
| Deferred investment tax credits                                                           |       | 57,073                                            |       | 59,035                                            |       |
| Regulatory liabilities                                                                    |       | 462,360                                           |       | 470,255                                           |       |
| Pension and employee benefit obligations                                                  |       | 293,997                                           |       | 301,277                                           |       |
| Customers advances                                                                        |       | 277,439                                           |       | 279,011                                           |       |
| Derivative instruments valuation                                                          |       | 143,968                                           |       | 156,623                                           |       |
| Asset retirement obligations                                                              |       | 44,099                                            |       | 43,335                                            |       |
| Other liabilities                                                                         |       | 14,310                                            |       | 7,750                                             |       |
| Total deferred credits and other liabilities                                              |       | 2,305,020                                         |       | 2,321,313                                         |       |
| Commitments and contingent  liabilities                                                   |       |                                              |       |                                              |       |
| Capitalization:                                                                           |       |                                              |       |                                              |       |
| Long-term debt                                                                            |       | 1,844,884                                         |       | 1,845,278                                         |       |
| Common Stock — authorized 100 shares of $0.01 par value; outstanding  100 shares     |       | —                                            |       | —                                            |       |
| Additional paid in capital                                                                |       | 2,651,380                                         |       | 2,411,204                                         |       |
| Retained earnings                                                                         |       | 553,504                                           |       | 585,219                                           |       |
| Accumulated other comprehensive income                                                    |       | 13,274                                            |       | 12,614                                            |       |
| Total common stockholder’s equity                                                    |       | 3,218,158                                         |       | 3,009,037                                         |       |
| Total liabilities and equity                                                              |       | $                                                 | 8,383,252  |                                              | $          | 8,363,619 |   |

 

See Notes to Consolidated 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 June 30,2007, and Dec. 31, 2006; the results of its operations for the three andsix months ended June 30, 2007 and 2006; and its cash flows for the sixmonths ended June 30, 2007 and 2006. Due to the seasonality of electricand natural gas sales of PSCo, interim results are not necessarily anappropriate base from which to project annual results.

 

**1. Significant Accounting Policies**

 

Except to the extent updatedor described below, the significant accounting policies set forth in Note 1 tothe consolidated financial statements in PSCo’s Current Report on Form 8K/Afiled on Dec. 14, 2007, appropriately represent, in all material respects, thecurrent status of 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. Restatement of Financial Statements**

 

Subsequent to the issuance of PSCo’s consolidated financialstatements for the quarter ended June 30, 2007, management determined thatPSR Investments, Inc. (PSRI), a wholly owned subsidiary of PSCo should not havebeen presented as a discontinued operation, as previously reported in the Form 10-Q,rather, PSRI should have been included as part of continuing operations.  As a result, the accompanying consolidatedfinancial 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. PSRI ownedand managed these COLI life insurance policies.

 

The terms of the settlement have been previously reported.The settlement has been implemented and the policies have been surrendered.

 

Asa result of the settlement in principle, which required the surrender of theCOLI policies, PSCo had previously classified all amounts related to PSRI as adiscontinued operation for all periods presented in its Form 10-Q for theperiod ended June 30, 2007, that was filed on July 30, 2007.

 

Pursuantto a routine review of PSCo’s periodic reports by the staff of the Securitiesand Exchange Commission, management reassessed the appropriateness of thetreatment of PSRI as a discontinued operation under SFAS 144 “Accounting forthe Impairment or Disposal of Long-Lived Assets” and determined that PSRIoperations, including the impact of the IRS settlement, should be presented aspart of continuing operations for financial reporting purposes.   The inclusion of PSRI as part of continuing operationsimpacted Xcel Energy’s effective tax rate, which caused a change in previouslyreported income taxes.  The effect ofpresenting PSRI as part of continuing operations rather than as discontinuedoperations as previously reported in the Form 10-Q is reflected in thetables below:

 

7

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| ** **                                            | ** ** | **Consolidated Statements of Income  For the Three Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2007**                                                                        | ** ** | **2006** | ** ** |
| **(Thousands of dollars)**                  | ** ** | **As  Previously  Reported**                                                    | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** | **As  Previously  Reported** | ** ** | **Adjustment** | ** ** | **As  Restated** | ** ** |
| Other operating and maintenance expenses              |       | $                                                                               | 141,759    |   | $ | 1,389 |   | $ | 143,148 |   | $ | 134,902 |   | $ | 1,044 |   | $ | 135,946 |   |
| Taxes (other than income  taxes)                      |       | 21,645                                                                          |       | 1 |   | 21,646 |   | 20,245 |   | 1 |   | 20,246 |   |
| Total operating expenses                              |       | 701,015                                                                         |       | 1,390 |   | 702,405 |   | 660,838 |   | 1,045 |   | 661,883 |   |
| Operating income                                      |       | 134,583                                                                         |       | (1,390 | ) | 133,193 |   | 106,393 |   | (1,045 | ) | 105,348 |   |
| Interest and other income (expense), net              |       | 1,663                                                                           |       | (5,021 | ) | (3,358 | ) | 2,325 |   | (5,730 | ) | (3,405 | ) |
| Interest charges                                      |       | 32,573                                                                          |       | — |   | 32,573 |   | 33,931 |   | 75 |   | 34,006 |   |
| Interest and penalties related to COLI settlement     |       | —                                                                          |       | 41,211 |   | 41,211 |   | — |   | — |   | — |   |
| Total interest charges and financing costs            |       | 29,536                                                                          |       | 41,211 |   | 70,747 |   | 30,899 |   | 75 |   | 30,974 |   |
| Income from continuing operations before income taxes |       | 109,407                                                                         |       | (47,622 | ) | 61,785 |   | 77,940 |   | (6,850 | ) | 71,090 |   |
| Income taxes                                          |       | 38,911                                                                          |       | 8,736 |   | 47,647 |   | 27,867 |   | (8,969 | ) | 18,898 |   |
| Income from continuing operations                     |       | 70,496                                                                          |       | (56,358 | ) | 14,138 |   | 50,073 |   | 2,119 |   | 52,192 |   |
| Income (loss) from discontinued operations            |       | (52,040                                                                         | )          | 52,040 |   | — |   | 2,119 |   | (2,119 | ) | — |   |
| Net income                                            |       | 18,456                                                                          |       | (4,318 | ) | 14,138 |   | 52,192 |   | — |   | 52,192 |   |
|                                                       |            |                                                                                 |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

** **
| ** **                                            | ** ** | **Consolidated Statements of Income  For the Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                                            | ** ** | **2007**                                                                      | ** ** | **2006** | ** ** |
| **(Thousands of dollars)**                  | ** ** | **As  Previously Reported**                                                   | ** ** | **Adjustment** | ** ** | **As  Restated** | ** ** | **As  Previously Reported** | ** ** | **Adjustment** | ** ** | **As  Restated** | ** ** |
| Other operating and maintenance expenses              |       | $                                                                             | 286,114    |   | $ | 2,230 |   | $ | 288,344 |   | $ | 276,285 |   | $ | 2,020 |   | $ | 278,305 |   |
| Taxes (other than income taxes)                       |       | 45,486                                                                        |       | 2 |   | 45,488 |   | 44,622 |   | 2 |   | 44,624 |   |
| Total operating expenses                              |       | 1,715,183                                                                     |       | 2,232 |   | 1,717,415 |   | 1,793,799 |   | 2,022 |   | 1,795,821 |   |
| Operating income                                      |       | 284,106                                                                       |       | (2,232 | ) | 281,874 |   | 240,457 |   | (2,022 | ) | 238,435 |   |
| Interest and other income (expense), net              |       | 3,405                                                                         |       | (8,887 | ) | (5,482 | ) | 3,387 |   | (9,857 | ) | (6,470 | ) |
| Interest charges                                      |       | 66,674                                                                        |       | — |   | 66,674 |   | 68,967 |   | 75 |   | 69,042 |   |
| Interest and penalties related to COLI settlement     |       | —                                                                        |       | 41,211 |   | 41,211 |   | — |   | — |   | — |   |
| Total interest charges and financing costs            |       | 61,506                                                                        |       | 41,211 |   | 102,717 |   | 63,502 |   | 75 |   | 63,577 |   |
| Income from continuing operations before income taxes |       | 230,747                                                                       |       | (52,330 | ) | 178,417 |   | 180,605 |   | (11,954 | ) | 168,651 |   |
| Income taxes                                          |       | 81,692                                                                        |       | (3,162 | ) | 78,530 |   | 61,664 |   | (22,052 | ) | 39,612 |   |
| Income from continuing operations                     |       | 149,055                                                                       |       | (49,168 | ) | 99,887 |   | 118,941 |   | 10,098 |   | 129,039 |   |
| Income (loss) from discontinued operations            |       | (44,850                                                                       | )          | 44,850 |   | — |   | 10,098 |   | (10,098 | ) | — |   |
| Net income                                            |       | 104,205                                                                       |       | (4,318 | ) | 99,887 |   | 129,039 |   | — |   | 129,039 |   |
|                                                       |            |                                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

8

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| ** **                                                                | ** ** | **Consolidated Balance Sheet** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                | ** ** | **June 30, 2007**         | ** ** | **December 31, 2006** | ** ** |
| **(Thousands of dollars)**                                      | ** ** | **As Previously  Reported**    | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** | **As Previously  Reported** | ** ** | **Adjustment** | ** ** | **As Restated** | ** ** |
| Cash and cash equivalents                                                 |       | $                              | 963        |   | $ | 2,747 |   | $ | 3,710 |   | $ | 3,011 |   | $ | — |   | $ | 3,011 |   |
| Accounts receivable                                                       |       | 304,382                        |       | 2,499 |   | 306,881 |   | 332,933 |   | 22,805 |   | 355,738 |   |
| Prepayments and other                                                     |       | 10,994                         |       | 16,183 |   | 27,177 |   | 14,284 |   | 370 |   | 14,654 |   |
| Deferred income taxes                                                     |       | 51,119                         |       | 11,160 |   | 62,279 |   | 47,075 |   | 15,716 |   | 62,791 |   |
| Current assets held for sale and related to discontinued operations       |       | 32,589                         |       | (32,589 | ) | — |   | 52,593 |   | (52,593 | ) | — |   |
| Total current assets                                                      |       | 904,161                        |       | — |   | 904,161 |   | 1,083,409 |   | (13,702 | ) | 1,069,707 |   |
| Other investments                                                         |       | 10,217                         |       | 117 |   | 10,334 |   | 11,136 |   | 8,210 |   | 19,346 |   |
| Other assets                                                              |       | 80,190                         |       | 2,755 |   | 82,945 |   | 45,785 |   | — |   | 45,785 |   |
| Noncurrent assets held for sale and related to discontinued  operations   |       | 25,128                         |       | (25,128 | ) | — |   | 15,779 |   | (15,779 | ) | — |   |
| Total other assets                                                        |       | 811,141                        |       | (22,256 | ) | 788,885 |   | 823,218 |   | (7,569 | ) | 815,649 |   |
| Total assets                                                              |       | 8,405,508                      |       | (22,256 | ) | 8,383,252 |   | 8,384,890 |   | (21,271 | ) | 8,363,619 |   |
| Accounts payable                                                          |       | 337,773                        |       | 2,488 |   | 340,261 |   | 385,054 |   | 670 |   | 385,724 |   |
| Taxes accrued                                                             |       | 63,466                         |       | 20,272 |   | 83,738 |   | 98,662 |   | (13,702 | ) | 84,960 |   |
| Accrued interest                                                          |       | 32,512                         |       | 22,968 |   | 55,480 |   | 35,362 |   | — |   | 35,362 |   |
| Current liabilities held for sale and related to discontinued  operations |       | 41,410                         |       | (41,410 | ) | — |   | 670 |   | (670 | ) | — |   |
| Total current liabilities                                                 |       | 1,010,872                      |       | 4,318 |   | 1,015,190 |   | 1,201,693 |   | (13,702 | ) | 1,187,991 |   |
| Deferred income taxes                                                     |       | 1,034,030                      |       | (22,256 | ) | 1,011,774 |   | 1,011,591 |   | (7,564 | ) | 1,004,027 |   |
| Other liabilities                                                         |       | 14,310                         |       | — |   | 14,310 |   | 7,755 |   | (5 | ) | 7,750 |   |
| Total deferred credits and other liabilities                              |       | 2,327,276                      |       | (22,256 | ) | 2,305,020 |   | 2,328,882 |   | (7,569 | ) | 2,321,313 |   |
| Retained earnings                                                         |       | 557,822                        |       | (4,318 | ) | 553,504 |   | 585,219 |   | — |   | 585,219 |   |
| Total common stockholder’s equity                                    |       | 3,222,476                      |       | (4,318 | ) | 3,218,158 |   | 3,009,037 |   | — |   | 3,009,037 |   |
| Total liabilities and  equity                                             |       | 8,405,508                      |       | (22,256 | ) | 8,383,252 |   | 8,384,890 |   | (21,271 | ) | 8,363,619 |   |
|                                                                           |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

9

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| ** **                                                                    | ** ** | **Consolidated Cash Flow Statement   For the Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------|------------|
| ** **                                                                    | ** ** | **2007**                                                                      | ** ** | **2006** | ** ** |
| **(Thousands of dollars)**                                          | ** ** | **As  Previously  Reported**                                                  | ** ** | **Adjustment** | ** ** | **As  Restated** | ** ** | **As  Previously  Reported** | ** ** | **Adjustment** | ** ** | **As  Restated** | ** ** |
| Net income                                                                    |       | $                                                                             | 104,205    |   | $ | (4,318 | ) | $ | 99,887 |   | $ | — |   | $ | — |   | $ | — |   |
| Remove loss (income) from discontinued operations                             |       | 44,850                                                                        |       | (44,850 | ) | — |   | (10,098 | ) | 10,098 |   | — |   |
| Deferred income taxes                                                         |       | 16,261                                                                        |       | (10,136 | ) | 6,125 |   | 15,518 |   | 3,632 |   | 19,150 |   |
| Change in accounts  receivable                                                |       | 4,903                                                                         |       | 20,306 |   | 25,209 |   | 148,612 |   | 4,003 |   | 152,615 |   |
| Change in prepayments and other                                               |       | 5,316                                                                         |       | (13 | ) | 5,303 |   | 8,770 |   | (6 | ) | 8,764 |   |
| Change in accounts payable                                                    |       | (65,095                                                                       | )          | 1,818 |   | (63,277 | ) | (233,645 | ) | (75 | ) | (233,720 | ) |
| Change in other current liabilities                                           |       | 28,903                                                                        |       | 56,942 |   | 85,845 |   | (28,272 | ) | (8,123 | ) | (36,395 | ) |
| Change in other noncurrent assets                                             |       | (35,443                                                                       | )          | (2,661 | ) | (38,104 | ) | 8,229 |   | — |   | 8,229 |   |
| Change in other noncurrent liabilities                                        |       | (8,519                                                                        | )          | 4 |   | (8,515 | ) | (6,155 | ) | — |   | (6,155 | ) |
| Operating cash flows provided by discontinued operations                      |       | 3,892                                                                         |       | (3,892 | ) | — |   | 4,774 |   | (4,774 | ) | — |   |
| Net cash provided by operating activities                                     |       | 409,666                                                                       |       | 13,200 |   | 422,866 |   | 456,653 |   | 4,755 |   | 461,408 |   |
| Other investments                                                             |       | 919                                                                           |       | (7,706 | ) | (6,787 | ) | 2,101 |   | (6,749 | ) | (4,648 | ) |
| Net cash used in investing activities                                         |       | (324,804                                                                      | )          | (7,706 | ) | (332,510 | ) | (266,018 | ) | (6,749 | ) | (272,767 | ) |
| Net increase (decrease) in cash and cash equivalents                          |       | (4,795                                                                        | )          | 4,096 |   | (699 | ) | 493 |   | (1,994 | ) | (1,501 | ) |
| Net increase (decrease) in cash and cash equivalents-discontinued  operations |       | 2,747                                                                         |       | (2,747 | ) | — |   | (997 | ) | 997 |   | — |   |
| 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                                   |       | 963                                                                           |       | 2,747 |   | 3,710 |   | 2,344 |   | (183 | ) | 2,161 |   |
|                                                                               |            |                                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

**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 issued SFAS 159, which provides companies with an option to measure, atspecified election dates, many financial instruments and certain other items atfair value that are not currently measured at fair value. A company that adoptsSFAS 159 will report unrealized gains and losses on items, for which the fairvalue option has been elected, in earnings at each subsequent reporting date.This statement also establishes presentation and disclosure requirementsdesigned to facilitate comparisons between entities that choose differentmeasurement attributes for similar types of assets and liabilities. Thisstatement is effective for fiscal years beginning after Nov. 15, 2007.PSCo is evaluating the impact of SFAS 159 on its financial condition andresults of operations.

 

**4. IncomeTaxes**

 

***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 andpotential penalties.

 

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

 

On Sept. 20, 2007,Xcel Energy submitted its formal offer in compromise and by letter dated Sept.21, 2007, the United States accepted the terms of that settlement offer. Theterms of the final settlement are essentially the same as the settlement inprinciple reached on June 19, 2007. The U.S. government’s letter terminates thetax litigation pending between the parties for tax years 1993-2002 and alsospecifies the agreed tax treatment for certain aspects of those policies forsubsequent tax years.

 

The essentialfinancial terms of the final settlement, as accepted and implemented, are asfollows:

 

1.               Xcel Energywill pay the government a total of $64.4 million in full settlement of thegovernment’s claims for tax, penalty, and interest for tax years1993-2007.  The recognition of thissettlement in the second quarter of 2007 resulted in total expense of $56.5million, including federal and state tax, interest on the federal and state taxliabilities, penalties, and tax benefits on the interest expense.  The expense of $56.5 million includes $41.2million of interest and penalties and income tax of $15.3 million (net of taxbenefit on the interest expense of $14.3 million).

 

2.               Xcel Energywill pay that settlement amount as follows:

 

·                  $32.2 millionof that amount will be satisfied by tax and interest amounts that Xcel Energyhas paid or is deemed under the terms of the settlement to have made to thegovernment with respect to tax years 1993 and 1994.

·                  Xcel Energywill satisfy the remaining settlement amount owed by paying the government$32.2 million by Oct. 31, 2007.

 

3.               The totalsettlement amount will be allocated toward specified amounts of tax, penalty,and interest owed for 1993 and 1994 and other amounts of tax and interest owedfor 1995.

 

4.               Except asstated above, Xcel Energy will be entitled to claim COLI-related interestdeductions for tax years 1995-2007.

 

5.               Xcel Energywill surrender the policies to its insurer by Oct. 31, 2007, without having torecognize a taxable gain on the surrender.

 

***Accounting forUncertainty in Income Taxes — an interpretation of FASB Statement No. 109(FIN 48) —***In July 2006, the FASB issuedInterpretation FIN 48. FIN 48 prescribes how a company should recognize,measure, present and disclose uncertain tax positions that a company has takenor expects to take in its income tax returns. FIN 48 requires that only incometax benefits that meet the “more likely than not” recognition threshold berecognized or continue to be recognized on its effective date. As required,PSCo adopted FIN 48 as of Jan. 1, 2007 and the initial derecognitionamounts were reported as a cumulative effect of a change in accountingprinciple. The cumulative effect of the change, which is reported as anadjustment to the beginning balance of retained earnings, was not material.Following implementation, the ongoing recognition of changes in measurement ofuncertain tax positions will be reflected as a component of income tax expense.

 

PSCo is a member of the Xcel Energy affiliated group thatfiles consolidated income tax returns. Xcel Energy has been audited by the IRSthrough tax year 2003, with a limited exception for 2003 research tax credits.The IRS commenced an examination of Xcel Energy’s federal income tax returnsfor 2004 and 2005 (and research credits for 2003) in the third quarter of 2006,and that examination is anticipated to be complete by March 31, 2008. Asof June 30, 2007, the IRS had not proposed any material adjustments to taxyears 2003 through 2005. The statute of limitations applicable to Xcel Energy’s2000 through 2002 federal income tax returns expired as of June 30, 2007.

 

As previously disclosed, Xcel Energy is currently inlitigation with the federal government to establish its right to deductinterest expense on COLI policy loans incurred since 1993. Xcel Energy and theIRS have reached a settlement in principle regarding this litigation (seeprevious discussion of COLI).

 

PSCo is also currently under examination by the state ofColorado for years 1993 through 1996 and 2000 through 2004. No materialadjustments have been proposed as of June 30, 2007. As of June 30,2007, PSCo’s earliest open tax year in which an audit can be initiated by statetaxing authorities under applicable statutes of limitations is 1993.

 

The amount of unrecognized tax benefits was $11.4 million onJan. 1, 2007 and $21.5 million on June 30, 2007. These amountswere offset against the tax benefits associated with net operating loss and taxcredit carryovers of $7.5 million on Jan. 1, 2007 and $5.8 million on June 30,2007.

 

Included in the unrecognized tax benefit balance forcontinuing operations was $4.5 million and $13.7 million of tax positions on Jan. 1,2007 and June 30, 2007, respectively, which if recognized would affect theannual effective tax rate. In 

 

11

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addition, the unrecognized tax benefit balance forcontinuing operations included $6.9 million and $7.8 million of tax positionson Jan. 1, 2007 and June 30, 2007, respectively, for which theultimate deductibility is highly certain but for which there is uncertaintyabout the timing of such deductibility. A change in the period of deductibilitywould not affect the effective tax rate but would accelerate the payment of cashto the taxing authority to an earlier period.

 

The change in the unrecognized tax benefit balance forcontinuing operations from April 1, 2007 to June 30, 2007, was due tothe addition of similar uncertain tax positions relating to second quarteractivity, the resolution of certain federal audit matters, and the proposedsettlement of the COLI litigation.  PSCo’samount of unrecognized tax benefits could significantly change in the next 12months as the IRS and state tax audits progress and as the settlement of theCOLI litigation is finalized.  Thesettlement of the COLI litigation is estimated to reduce the amount ofunrecognized tax benefits by $12.4 million.

 

The interest expense liability related to unrecognized taxbenefits on Jan. 1, 2007, was not material due to net operating loss andtax credit carryovers. The change in the interest expense liability from Jan. 1,2007, to June 30, 2007, was an increase of $22.9 million, primarily due tothe proposed settlement of the COLI litigation. Penalties of $2.1 million wereaccrued as of June 30, 2007 due to the proposed settlement of the COLIlitigation.

 

**5. RateMatters**

 

***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 increase natural gas rates by$41.9 million, representing an overall increase of 2.96 percent, primarilyrelated to capital investments and rising operating costs. The request assumesa common equity ratio of 60.17 percent and a return on equity of 11 percent.The jurisdictional rate base is approximately $1.1 billion.

 

On June 18, 2007, theCPUC approved a settlement between PSCo, the CPUC staff and the Colorado Officeof Consumer Council (OCC), which granted the following:

 

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

 

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

 

Under the terms of theagreement, parties to the settlement may seek reconsideration of the CPUC’sorder, however, PSCo does not plan to seek reconsideration.

 

**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 Annual Report on Form 8-K/A filed on Dec. 17,2007, and Notes 4 and 5 to the consolidated financial statements in thisQuarterly Report on Form 10-Q/A, appropriately represent, in all materialrespects, the current status of respective commitments and contingentliabilities and are incorporated herein by reference. The following areunresolved contingencies that are material to PSCo’s financial position.

 

**Operating Leases*********—***In May 2007, PSCo commenceda purchased power agreement that is being accounted for as an operating leasein accordance with Emerging Issues Task Force 01-8, Determining Whether anArrangement Contains a Lease. The 20-year agreement calls for capacity paymentsof $10.6 million, $16.1 million, $16.4 million $16.7 million, $17.1 million and$312.3 million for 2007, 2008, 2009, 2010, 2011 and thereafter, respectively.

 

**EnvironmentalContingencies**

 

PSCo has been or iscurrently involved with the cleanup of contamination from certain hazardoussubstances at several sites. In many situations, PSCo believes it will recoversome portion of these costs through insurance claims. Additionally, whereapplicable, PSCo is pursuing, or intends to pursue, recovery from otherpotentially responsible parties and through the rate regulatory process. Newand changing federal and state environmental mandates can also create addedfinancial liabilities for PSCo, which are normally recovered through the rateregulatory process. To the extent any costs are not recovered through theoptions listed above, PSCo would be required to recognize an expense.

 

12

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***Site Remediation****—*PSCo must payall or a portion of the cost to remediate sites where past activities of PSCoand some other parties have caused environmental contamination. Environmentalcontingencies could arise from various situations including the followingcategories of sites:

 

·          site of aformer 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 June 30, 2007, the liability for thecost of remediating these sites was estimated to be $1.9 million, of which $0.7million was considered to be a current liability. Some of the cost ofremediation may be recovered from:

 

·          insurancecoverage;

 

·          other partiesthat have contributed to the contamination; and

 

·          customers.

 

Neither the totalremediation cost nor the final method of cost allocation among all PRPs of theunremediated sites has been determined. Estimates have been recorded for PSCo’sfuture costs for these sites.

 

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

######  

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

 

InMay 2005, PSCo filed a natural gas rate case with the CPUC requestingrecovery of cleanup costs at the Fort Collins MGP site spent 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 agreement on June 18, 2007. The total amountto be recovered from customers is $13.1 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. In

 

13

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September 2006,PSCo filed a Motion For Partial Summary Judgment to dismiss Schrader’s RCRAclaim. PSCo believes the allegations with respect to PSCo are without merit andwill vigorously defend itself.

 

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

# *** ***

***Asbestos Removal*****—**Some of PSCo’sfacilities contain asbestos. Most asbestos will remain undisturbed until thefacilities that contain it are demolished or renovated. PSCo has recorded anestimate for final removal of the asbestos as an asset retirement obligation.See additional discussion of asset retirement obligations in Note 14 of thePSCo Annual Report on Form 8-K/A filed on Dec. 17, 2007. It may benecessary to remove some asbestos to perform maintenance or make improvementsto other equipment. The cost of removing asbestos as part of other work isimmaterial and is recorded as incurred as operating expenses for maintenanceprojects, capital expenditures for construction projects or removal costs fordemolition projects.

 

***Other Environmental Requirements***

 

***Regional Haze Rules ***— On June 15, 2005, theEPA finalized 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 sulfurdioxide (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 and2014. The CAPCD expects to finalize the regional haze state implementation planin late 2007 for submittal to the EPA in 2008. 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 requestedpublic comment on its BART determination and PSCo’s BART permits. The comment period expires July 28, 2007,after which the CAPCD will either grant, deny, or grant with conditions PSCo’sBART permits.

 

***Clean Air Mercury Rule***—****InMarch 2005, the EPA issued the Clean Air Mercury Rule (CAMR), whichregulates mercury emissions from power plants for the first time. PSCocontinues to evaluate the strategy for complying with CAMR. In February 2007,the Colorado Air Quality Control Commission passed a mercury rule toimplement CAMR in Colorado . The rule was based on a negotiated rule thatwas agreed upon by participating environmental groups, utilities, localgovernment coalitions, and the CAPCD. The rule requires mercury emissioncontrols capable of achieving 80 percent capture be installed at Pawnee Stationin 2012 and all other Colorado units by 2014. PSCo is in the process ofinstalling mercury monitors on seven Colorado units at an estimated aggregatecost of approximately $2.6 million. PSCo is evaluating the mercury emissioncontrols required to meet the new rule and is currently unable to providea capital cost estimate. The EPA has expressed concerns with allowancerestrictions after reviewing the Colorado mercury rule.

 

***Federal Clean Water Act —***The federal Clean Water Act requires the EPA toregulate cooling water intake structures to assure that these structuresreflect the “best technology available” for minimizing adverse environmentalimpacts. In July 2004, the EPA published phase II of the rule, whichapplies to existing cooling water intakes at steam-electric power plants.Several lawsuits were filed against the EPA in the United States Court ofAppeals for the Second Circuit challenging the phase II rulemaking. On Jan. 25,2007, the court issued its decision and remanded virtually every aspect of the rule tothe EPA for reconsideration. The EPA announced on March 20, 2007, it willsuspend the deadlines and refer any implementation to each state’s bestprofessional 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 a Notice of Violation (NOV) from the EPA alleging violations ofthe New Source Review (NSR) requirements of the Clean Air Act (CAA) at theComanche and Pawnee plants in Colorado. The NOV specifically alleges thatvarious maintenance, repair and replacement projects undertaken at the plantsin the mid- to late-1990s should have required a permit under the NSR process.PSCo believes it has acted in full compliance with the CAA 

 

14

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and NSR process. It believesthat the projects identified in the NOV fit within the routine maintenance,repair and replacement exemption contained within the NSR regulations or areotherwise not subject to the NSR requirements. PSCo disagrees with theassertions contained in the NOV and intends to vigorously defend its position.

 

**Legal Contingencies**

** **

In the normal course ofbusiness, PSCo is party to routine claims and litigation arising from prior andcurrent operations. PSCo is actively defending these matters and has recorded aliability related to the probable cost of settlement or other disposition, whenit can be reasonably estimated.

 

***Carbon Dioxide Emissions Lawsuit***—****On July 21, 2004, the attorneys general of eightstates and New York City, as well as several environmental groups, filedlawsuits in U.S. District Court for the Southern District of New York againstfive utilities, including Xcel Energy, to force reductions in carbon dioxide(CO2) emissions. Although PSCois not named as a party to this litigation, the requested relief that XcelEnergy cap and reduce its CO2 emissions could have a material adverse effecton PSCo. The other utilities include American Electric Power Co., Southern Co.,Cinergy Corp. and Tennessee Valley Authority. CO2 is emitted whenever fossil fuel is combusted,such as in automobiles, industrial operations and coal- or natural gas-firedpower plants. The lawsuits allege that CO2 emitted by each company is a public nuisanceas defined under state and federal common law because it has contributed toglobal warming. The lawsuits do not demand monetary damages. Instead, thelawsuits ask the court to order each utility to cap and reduce its CO2 emissions. In October 2004,Xcel Energy and four other utility companies filed a motion to dismiss the lawsuit.On Sept. 19, 2005, the judge granted the defendants’ motion to dismiss onconstitutional grounds. Plaintiffs filed an appeal to the Second Circuit Courtof Appeals. On June 21, 2007 the Second Circuit Court of Appeals issued anorder requesting the parties to file a letter brief informing the SecondCircuit Court of Appeals of their views about the impact of the United StatesSupreme Court’s decision in Massachusetts v. EPA, 127 S.Ct. 1438 ( April 2,2007) on the issues raised by the parties on appeal. Among other things, in itsdecision in Massachusetts v. EPA, the United States Supreme Court held that CO2 emissions are a “ pollutant”subject to regulation by the EPA under the Clean Air Act. In response to therequest of the Second Circuit Court of Appeals, the defendant utilities filed aletter brief on July 6, 2007, stating the position that the United StatesSupreme Court’s decision supports the arguments raised by them on appeal. It isunknown when the Second Circuit Court of Appeals will rule on the appeal.

 

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

 

***Comer vs. Xcel Energy Inc. et al.***—****On April 25, 2006, Xcel Energy received notice of apurported class action lawsuit filed in U.S. District Court for the SouthernDistrict of Mississippi. Although PSCo is not named as a party to thislitigation, if the litigation ultimately results in an unfavorable outcome forXcel Energy, it could have a material adverse effect on PSCo. The lawsuit namesmore than 45 oil, chemical and utility companies, including Xcel Energy, as defendantsand alleges that defendants’ CO2 emissions “were a proximate anddirect cause of the increase in the destructive capacity of Hurricane Katrina.”  Plaintiffs allege in support of their claim,several legal theories, including negligence, and public and private nuisanceand seek damages related to the loss resulting from the hurricane. Xcel Energybelieves this lawsuit is without merit and intends to vigorously defend itselfagainst these claims. On July 19, 2006, Xcel Energy filed a motion todismiss the lawsuit in its entirety. Oral arguments related to some of thedefenses raised by the defendants, including Xcel Energy, have been set for Aug. 30,2007.

 

***Qwest vs. Xcel Energy Inc.*** — On June 24, 2004, anemployee of PSCo was injured when a pole owned by Qwest malfunctioned. Theemployee is seeking damages of approximately $7 million. On Sept. 6, 2005, an action against Qwest relating to theincident was filed in Denver District Court by the employee. On April 18,2006, Qwest filed a third party complaint against PSCo based on terms in ajoint pole use agreement between Qwest and PSCo. Pursuant to this agreement,Qwest has asserted that PSCo had an affirmative duty to properly train andinstruct its employees on pole safety, including testing the pole for soundnessbefore climbing. PSCo filed a counterclaim on May 15, 2006, against Qwestasserting Qwest had a duty to PSCo and an obligation under the contract tomaintain its poles in a safe and serviceable condition. On May 14, 2007this matter went to trial. The trial concluded on May 22, 2007 with a juryverdict that found Qwest solely liable for the accident and damages. Qwest hasfiled post-trial motions and has indicated that, if the motions areunsuccessful, it will appeal the verdict.

 

15

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***Payne et al. vs. PSCo et al.******—***In late October 2003,there was a wildfire in Boulder County, Colorado. There was no loss of life,but there was property damage associated with this fire. On Oct. 28, 2005,an action against PSCo relating to this fire was filed in Boulder CountyDistrict Court. There are 22 plaintiffs, including individuals, the City ofJamestown and two companies, and three co-defendants, including PSCo.Plaintiffs asserted that a tree falling into PSCo distribution lines may havecaused the fire. The matter was ultimately settled in March 2007 and thesettlement did not have a material effect on PSCo’s financial results.

 

**OtherContingencies**

 

·          Tax Matters— See Note 4 to these consolidated financial statements for discussion ofexposures regarding the tax deductibility of COLI.

 

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

 

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

 

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

 

**8.Derivative Valuation and Financial Impacts**

 

PSCouses derivative instruments in connection with its utility commodity price,interest rate, short-term wholesale and commodity trading activities, includingforward contracts, futures, swaps and options. All derivative instruments notqualifying for the normal purchases and normal sales exception, as defined bySFAS 133 — “Accountingfor Derivative Instruments and Hedging Activities,” as amended (SFAS 133), are recordedat fair value. The presentation of the fair value for these derivativeinstruments is dependent on the designation of a qualifying hedgingrelationship. The adjustment to fair value of derivative instruments notdesignated in a qualifying hedging relationship is reflected in currentearnings or as a regulatory balance.

 

PSCorecords the fair value of its derivative instruments in its ConsolidatedBalance Sheet as separate line items identified as Derivative InstrumentsValuation in both current and noncurrent assets and liabilities.

 

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

 

**Cash FlowHedges**

 

PSCo enters into derivativeinstruments to manage variability of future cash flows from changes incommodity prices and interest rates.

 

As of June 30, 2007, PSCohad various commodity-related contracts classified as cash flow hedgesextending through December 2009. The fair value of these cash flow hedgesis deferred as a regulatory asset or liability. This classification is based onthe regulatory recovery mechanisms in place.  This could include thepurchase or sale of energy or energy-related products, the use of natural gasto generate electric energy or gas purchased for resale.

 

PSCo enters into****various instruments that effectively fixthe interest payments on certain floating rate debt obligations or effectivelyfix the yield or price on a specified benchmark interest rate for a specificperiod. These derivative instruments are designated as cash flow hedges foraccounting purposes andthe change in the fair value of these instruments is recorded as a component ofOther Comprehensive Income.

 

As of June 30, 2007,PSCo had net gains of approximately $1.7 million in Accumulated Other ComprehensiveIncome related to interest rate cash flow hedge contracts that it expects torecognize in earnings during the next 12 months.

 

Gains or losses on hedgingtransactions for the sales of energy or energy-related products are primarilyrecorded as a component of revenues, hedging transactions for fuel used inenergy generation are recorded as a component of fuel costs, hedgingtransactions for gas purchased for resale are recorded as a component of gascosts and interest rate hedging 

 

16

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transactions are recorded asa component of interest expense. PSCo is allowed to recover in electric or gasrates the costs of certain financial instruments purchased to reduce commoditycost volatility. There was immaterial ineffectiveness in the second quarter of2007.

 

The impact of qualifyingcash flow hedges on PSCo’s Accumulated Other Comprehensive Income, included asa component of stockholder’s equity, is detailed in the following table:

 
| ** **                                                                          | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| **(Millions of Dollars)**                                                 | ** ** | **June 30, 2007**    | ** ** | **June 30, 2006** | ** ** |
| Accumulated other  comprehensive income related to cash flow hedges at Jan. 1  |       | $                              | 12.6       |   | $ | 14.2 |   |
| After-tax net unrealized  gains related to derivatives accounted for as hedges      |       | 1.4                            |       | — |   |
| After-tax net realized gains  on derivative transactions reclassified into earnings |       | (0.7                           | )          | (0.7 | ) |
| Accumulated other  comprehensive income related to cash flow hedges at June 30 |       | $                              | 13.3       |   | $ | 13.5 |   |

 

**DerivativesNot Qualifying for Hedge Accounting**

 

PSCo enters into certaincommodity-based derivative transactions, not included in trading operations,which do not qualify for hedge accounting treatment. These derivativeinstruments are accounted for on a mark-to-market basis in accordance with SFAS133 and are recorded on a net basis within Operating Revenues on theConsolidated Statements of Income.

 

**NormalPurchases or Normal Sales Contracts**

 

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

 

PSCo evaluates all of itscontracts when such contracts are entered to determine if they are derivativesand, if so, if they qualify to meet the normal designation requirements underSFAS 133. None of the contracts entered into within the commodity tradingoperations qualify for a normal designation.

 

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

 

Interestand other income, net of nonoperating expenses, for the three and six monthsended June 30 consisted of the following:

 
| ** **                                 | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Thousands of dollars)**       | ** ** | **2007**                                            | ** ** | **2006**                                          | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | ** **                                          | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                            |       | $                                                   | 1,524      |                                              | $          | 1,106 |   | $ | 3,111 |   | $ | 2,127 |   |
| Other nonoperating income                  |       | 494                                                 |       | 1,665                                             |       | 996 |   | 2,481 |   |
| Employee-related insurance  policy expense |       | (5,376                                              | )          | (6,095                                            | )          | (9,588 | ) | (10,297 | ) |
| Other nonoperating expense                 |       | —                                              |       | (81                                               | )          | (1 | ) | (781 | ) |
| Total interest and other income, net       |       | $                                                   | (3,358     | )                                                 | $          | (3,405 | ) | $ | (5,482 | ) | $ | (6,470 | ) |

 

17

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**10. Segment Information**

 

PSCo has two reportablesegments, Regulated Electric Utility and Regulated Natural Gas Utility.Commodity trading operations are not a reportable segment and commodity tradingresults are included in the Regulated Electric Utility segment.

 
| **(Thousands of dollars)**                          | ** ** | **Regulated   Electric Utility** | ** ** | **Regulated  Natural  Gas Utility** | ** ** | **All Other** | ** ** | **Reconciling  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------------------|------------|--------------------|------------|-------------------------------|------------|-------------------------|------------|
| **Three months ended June 30, 2007** | ** ** | ** **                                 | ** ** | ** **                               | ** ** | ** **         | ** ** | ** **                    | ** ** | ** **              | ** ** |
| Revenues from:                                                |       |                                       |       |                                     |       |               |       |                          |       |                    |       |
| External customers                                            |       | $                                          | 638,142    |                                     | $          | 190,157            |       | $                             | 7,299      |                    | $          | — |   | $ | 835,598 |   |
| Internal customers                                            |       | 71                                         |       | 3                                        |       | —             |       | (74                           | )          | —                  |       |
| Total revenue                                                 |       | $                                          | 638,213    |                                     | $          | 190,160            |       | $                             | 7,299      |                    | $          | (74 | ) | $ | 835,598 |   |
| Segment net income (loss)                                     |       | $                                          | 59,025     |                                     | $          | 8,809              |       | $                             | (53,696    | )                       | $          | — |   | $ | 14,138 |   |
|                                                          |       |                                       |       |                                     |       |               |       |                          |       |                    |       |
| **Three months ended  June 30, 2006**                    |       |                                       |       |                                     |       |               |       |                          |       |                    |       |
| Revenues from:                                                |       |                                       |       |                                     |       |               |       |                          |       |                    |       |
| External customers                                            |       | $                                          | 599,812    |                                     | $          | 160,017            |       | $                             | 7,402      |                    | $          | — |   | $ | 767,231 |   |
| Internal customers                                            |       | 57                                         |       | 19                                       |       | —             |       | (76                           | )          | —                  |       |
| Total revenue                                                 |       | $                                          | 599,869    |                                     | $          | 160,036            |       | $                             | 7,402      |                    | $          | (76 | ) | $ | 767,231 |   |
| Segment net income                                            |       | $                                          | 39,980     |                                     | $          | 7,456              |       | $                             | 4,756      |                    | $          | — |   | $ | 52,192 |   |

 
| **(Thousands of dollars)**     | ** ** | **Regulated  Electric Utility** | ** ** | **Regulated  Natural  Gas Utility** | ** ** | **All Other** | ** ** | **Reconciling  Eliminations** | ** ** | **Consolidated  Total** | ** ** |
|------------------------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|--------------------|------------|-------------------------------|------------|-------------------------|------------|
| **Six months ended June 30,  2007** |       |                                 |       |                                |       |               |       |                          |       |                    |       |
| Revenues from:                           |       |                                 |       |                                |       |               |       |                          |       |                    |       |
| External customers                       |       | $                                    | 1,274,642  |                                | $          | 706,551            |       | $                             | 18,096     |                    | $          | — |   | $ | 1,999,289 |   |
| Internal customers                       |       | 157                                  |       | 53                                  |       | —             |       | (210                          | )          | —                  |       |
| Total revenue                            |       | $                                    | 1,274,799  |                                | $          | 706,604            |       | $                             | 18,096     |                    | $          | (210 | ) | $ | 1,999,289 |   |
| Segment net income (loss)                |       | $                                    | 106,427    |                                | $          | 40,557             |       | $                             | (47,097    | )                       | $          | — |   | $ | 99,887 |   |
|                                     |       |                                 |       |                                |       |               |       |                          |       |                    |       |
| **Six months ended June 30,  2006** |       |                                 |       |                                |       |               |       |                          |       |                    |       |
| Revenues from:                           |       |                                 |       |                                |       |               |       |                          |       |                    |       |
| External customers                       |       | $                                    | 1,271,931  |                                | $          | 742,918            |       | $                             | 19,407     |                    | $          | — |   | $ | 2,034,256 |   |
| Internal customers                       |       | 120                                  |       | 56                                  |       | —             |       | (176                          | )          | —                  |       |
| Total revenue                            |       | $                                    | 1,272,051  |                                | $          | 742,974            |       | $                             | 19,407     |                    | $          | (176 | ) | $ | 2,034,256 |   |
| Segment net income                       |       | $                                    | 86,232     |                                | $          | 34,108             |       | $                             | 8,699      |                    | $          | — |   | $ | 129,039 |   |

 

**11. Comprehensive Income**

 

The components of totalcomprehensive income are shown below:

 
| ** **                                                                                       | ** ** | **Three months ended  June 30,** | ** ** | **Six months ended  June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| **(Millions of dollars)**                                                              | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                                                       |       | $                                               | 14.1       |                                          | $          | 52.2 |   | $ | 99.9 |   | $ | 129.0 |   |
| Other comprehensive  income:                                                                     |       |                                            |       |                                          |       |   |   |   |   |
| After-tax net unrealized gains related to derivatives accounted for  as hedges (see Note 8)      |       | 0.9                                             |       | 1.6                                           |       | 1.4 |   | — |   |
| After-tax net realized gains on derivative transactions reclassified  into earnings (see Note 8) |       | (0.3                                            | )          | (1.9                                          | )          | (0.7 | ) | (0.7 | ) |
| Other comprehensive income                                                                       |       | 0.6                                             |       | (0.3                                          | )          | 0.7 |   | (0.7 | ) |
| Comprehensive income                                                                             |       | $                                               | 14.7       |                                          | $          | 51.9 |   | $ | 100.6 |   | $ | 128.3 |   |

 

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

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

 

**13. Subsequent Events**

** **

***PSCo Natural Gas RateCase****—*On June 18,2007, the CPUC approved a settlement between PSCo, the CPUC staff and theColorado Office of Consumer Council (OCC), which granted the following:

 

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

 

·                     A modification to the partial decoupling mechanism to allow PSCorecovery of additional revenues in future years to compensate for the portionof the decline in weather normalized residential use per customer that exceedsthe first 1.3 percent in annual decline in use (to be reflective of 50 percentof the historic average annual decline in use).

 

Final rates were implemented effective July 30,2007.

 

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Formore information, see Note 5 to the Consolidated Financial Statements.

 

# ***Long-Term Borrowings***

# *** ***

OnAug. 15, 2007, PSCo issued $350 million of 6.25 percent first mortgagebonds, series due 2037. PSCo added the net proceeds from the sale of the firstmortgage bonds to its general funds and applied a portion of the proceeds tothe repayment of commercial paper, including commercial paper incurred to fundthe payment at maturity of $100 million of 7.11 percent secured medium-termnotes, which matured on March 5, 2007.

 

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

** **

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

 

**Forward-Looking Information**

 

The following discussion andanalysis by management focuses on those factors that had a material effect onthe financial condition and results of operations of PSCo during the periodspresented, or are expected to have a material impact in the future and giveseffect to the restatement discussed in Note 2 to the consolidated financialstatements. It should be read in conjunction with the accompanying unauditedfinancial statements and notes.

 

Exceptfor the historical statements contained in this report, the matters discussedin the following discussion and analysis are forward-looking statements thatare subject to certain risks, uncertainties and assumptions. Suchforward-looking statements are intended to be identified in this document bythe words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “objective,”“outlook,” “plan,” “project,” “possible,” “potential,” “should” and similarexpressions. Actual results may vary materially. Factors that could causeactual results to differ materially include, but are not limited to: generaleconomic conditions, including the availability of credit and its impact oncapital expenditures and the ability of PSCo to obtain financing on favorableterms; business conditions in the energy industry; actions of credit ratingagencies; competitive factors, including the extent and timing of the entry ofadditional competition in the markets served by PSCo; unusual weather; effectsof geopolitical events, including war and acts of terrorism; state, federal andforeign legislative and regulatory initiatives that affect cost and investmentrecovery, have an impact on rates or have an impact on asset operation orownership; structures that affect the speed and degree to which competitionenters the electric and natural gas markets; costs and other effects of legaland administrative proceedings, settlements, investigations and claims,including the COLI settlement discussed below; actions of accounting regulatorybodies; the items described under Factors Affecting Results of ContinuingOperations; and the other risk factors listed from time to time by PSCo inreports filed with the SEC, including “Risk Factors” in Item 1A of PSCo’s Form 10-Kfor the year ended Dec. 31, 2006 and Exhibit 99.01 to this report on Form 10-Q/Afor the quarter ended June 30, 2007.

 

**MarketRisks**

 

PSCo is exposed to marketrisks, including changes in commodity prices and interest rates, as disclosedin Item 7A — Quantitative and Qualitative Disclosures About Market Risk in its 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 June 30, 2007, there wereno material changes to the financial market risks that affect the quantitativeand qualitative disclosures presented as of Dec. 31, 2006.

 

**ManagementChanges**

 

On May 31, 2007, Patricia K. Vincent, chiefexecutive officer and president of PSCo, announced her resignation, effective June 5,2007. Ms. Vincent was a named executive officer of Xcel Energy Inc. in itsmost recent proxy statement of April 18, 2007.

 

**RESULTS OFOPERATIONS**

 

PSCo’s net income was approximately $99.9 million forthe first six months of 2007, compared with approximately $129.0 million forthe first six months of 2006.

 

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

 

Electric fuel and purchasedpower expenses tend to vary with changing retail and wholesale salesrequirements and unit cost changes in fuel and purchased power. Due to fuel andpurchased energy cost-recovery mechanisms for customers, most fluctuations inthese costs do not materially affect electric utility margin.

 

PSCo has two distinct formsof wholesale sales: short-term wholesale and commodity trading. Short-termwholesale refers to energy-related purchases and sales activity and the use ofcertain financial instruments associated with the fuel required for, and energyproduced from, PSCo’s generation assets or the energy and capacity purchased toserve native load. Commodity trading is not associated with PSCo’s generationassets or the energy and capacity purchased to serve native load. Short-termwholesale and commodity trading activities are considered part of the electricutility segment.

 

Margins from commodity tradingactivity conducted at PSCo are partially redistributed to Northern StatesPower Co., a Minnesota corporation (NSP-Minnesota) and SouthwesternPublic Service Co., a New Mexico corporation (SPS), both wholly ownedsubsidiaries of Xcel Energy, pursuant to the joint operating agreement(JOA) approved by the FERC. Margins received pursuant to the JOA arereflected as part of base electric utility revenues. Short-term wholesale andcommodity trading margins reflect the impact of regulatory sharing, if applicable.Commodity trading revenues are reported net of related costs (i.e., on a marginbasis) in the Consolidated Statements of Income. Commodity trading costsinclude fuel, purchased power, transmission, broker fees and other relatedcosts. Short-term wholesale and commodity trading margins reflect the estimatedimpact of regulatory sharing of margins, if applicable.

 

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

 
| **(Millions of dollars)**                      | ** ** | **Base  Electric  Utility** | ** ** | **Short-term  Wholesale** | ** ** | **Commodity  Trading** | ** ** | **Consolidated  Total** | ** ** |
|----------------------------------------------------------|------------|-----------------------------|------------|---------------------------|------------|------------------------|------------|-------------------------|------------|
| **Six months ended June 30,  2007**                 |       |                        |       |                      |       |                   |       |                    |       |
| Electric utility revenues  (excluding commodity trading) |       | $                           | 1,254      |                      | $          | 22                     |       | $                       | —     |   | $ | 1,276 |   |
| Electric fuel and  purchased power                       |       | (700                        | )          | (18                       | )          | —                 |       | (718                    | )          |
| Commodity trading revenues                               |       | —                      |       | —                    |       | 82                     |       | 82                      |       |
| Commodity trading costs                                  |       | —                      |       | —                    |       | (83                    | )          | (83                     | )          |
| Gross margin before  operating expenses                  |       | $                           | 554        |                      | $          | 4                      |       | $                       | (1         | ) | $ | 557 |   |
| Margin as a percentage of  revenues                      |       | 44.2                        | %          | 18.2                      | %          | (1.2                   | )%         | 41.0                    | %          |
|                                                     |       |                        |       |                      |       |                   |       |                    |       |
| **Six months ended June 30,  2006**                 |       |                        |       |                      |       |                   |       |                    |       |
| Electric utility revenues  (excluding commodity trading) |       | $                           | 1,254      |                      | $          | 13                     |       | $                       | —     |   | $ | 1,267 |   |
| Electric fuel and  purchased power                       |       | (755                        | )          | (12                       | )          | —                 |       | (767                    | )          |
| Commodity trading revenues                               |       | —                      |       | —                    |       | 282                    |       | 282                     |       |
| Commodity trading costs                                  |       | —                      |       | —                    |       | (277                   | )          | (277                    | )          |
| Gross margin before  operating expenses                  |       | $                           | 499        |                      | $          | 1                      |       | $                       | 5          |   | $ | 505 |   |
| Margin as a percentage of  revenues                      |       | 39.8                        | %          | 7.7                       | %          | 1.8                    | %          | 32.6                    | %          |

 

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

 

# ***Base Electric Revenues***

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

 

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***Base Electric Margin***

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

 

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

##### ** **

The following table 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.

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

 

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

 

***Natural Gas Revenues***

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

 

***Natural Gas Margin***

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

 

**Non-FuelOperating Expense and Other Costs**

 

***Other Operating and Maintenance Expenses*** — The following summarizes the components ofthe changes in other operating and maintenance expense for the six months endedJune 30:

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

 

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***Income Taxes —*** Income tax expense increased by approximately $38.9million for the first six months of 2007 compared with the first six months of2006. The increase in income tax expense was primarily due to an increase inpretax income (excluding COLI) and $15.3 million of tax expense related to the COLIsettlement in 2007.  The effective taxrate was 44.0 percent for the first six months of 2007, compared with 23.5percent for the same period in 2006. The higher effective tax rate for thefirst six months of 2007 was primarily due to the COLI settlement.  Without these charges, the effective tax ratefor 2007 would have been 27.5 percent.

 

***Regulation***

** **

**Summary of Recent Federal Regulatory Developments**

 

TheFERC has jurisdiction over rates for electric transmission service ininterstate commerce and electric energy sold at wholesale, hydro facilitylicensing, natural gas transportation, accounting practices and certain otheractivities of PSCo. State and local agencies have jurisdiction over many ofPSCo’s activities, including regulation of retail rates and environmentalmatters. In addition to the matters discussed below, see Note 5 to theconsolidated financial statements for a discussion of other regulatory matters.

 

***FERC Rules Implementing Energy PolicyAct of 2005 (Energy Act) —*** The Energy Act repealed thePublic Utility Holding Company Act of 1935 effective Feb. 8, 2006. Inaddition, the Energy Act required the FERC to conduct several rulemakings toadopt new regulations to implement various aspects of the Energy Act. Since August 2005,the FERC has completed or initiated proceedings to modify its regulations on anumber of subjects. In addition to the previous disclosure in Item 1 of PSCo’sForm 10-K for 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.

 

WhilePSCo cannot predict the ultimate impact the new regulations will have on itsoperations or financial results, PSCo is taking actions that are intended tocomply with and implement these new rules and regulations as they becomeeffective.

 

***Electric Transmission RateRegulation —***The FERC also regulates the rates charged andterms and conditions for electric transmission services. FERC policy encouragesutilities to turn over the functional control over their electric transmissionassets and the related responsibility for the sale of electric transmissionservices to a Regional Transmission Organization (RTO). Each RTO separatelyfiles regional transmission tariff rates for approval by the FERC. All memberswithin that RTO are then subjected to those rates. PSCo is currentlyparticipating with other utilities in the development of WestConnect, whichwould provide certain regionalized transmission and wholesale energy marketfunctions but would not be an RTO.

 

On Feb. 15, 2007, the FERC issued final rules adoptingrevisions to its 1996 open access transmission rules. PSCo submitted theinitial required revisions to its Open Access Transmission Tariff (OATT) on July 13,2007, as required.

 

Inaddition, in January 2007, the FERC issued interim and proposed rules tomodify the current FERC rules governing the functional separation of thePSCo electric transmission function from the wholesale sales and marketingfunction. The proposed rules are pending final FERC action.

 

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

 

***Market Based Rate Rules******—***On June 21, 2007, theFERC issued a final order amending its regulations governing its market-basedrate authorizations to electric utilities such as PSCo. The FERC reemphasizedits commitment to market-based pricing, but is revising the tests it’s using toassess whether a utility has market power and has emphasized that it intends toexercise greater oversight where it has market-based rate authorizations. PSCohas been granted market-based rate authority and will be subject to the newrule. PSCo is presently analyzing the new rule.

 

An aspect of FERC’smarket-based rate requirements is the requirement to charge mitigated rates inmarkets where a utility is found to have market power or where a utility cannotestablish the absence of market power. PSCo s been authorized by the FERC tocharge market-based rates outside of their control areas, but is generallylimited to charging mitigated rates within their control areas. Consistent withthe approach followed by many other utilities subject to the FERC’s mitigationrequirement, PSCo uses cost-based rate caps set out in the Western SystemsPower Pool (WSPP) agreement as their applicable mitigated rates, an approachexpressly approved by the FERC. However, concurrently with the issuance of thefinal order, the FERC initiated a proceeding to investigate whether the use ofthe WSPP rate caps for this purpose is just and reasonable. An outcome of thisproceeding may be to lower the mitigated rates that PSCo may charge in theircontrol areas.

 

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**Other Regulatory Matters — PSCo**

 

***Renewable Energy Standard —***The 2007 Coloradolegislature adopted an increased Renewable Energy Standard that requires PSCoto generate or purchase electricity from renewable resources equaling at least10 percent of its retail sales by 2010, 15 percent of retail sales by 2015 and20 percent of retail sales by 2020. The new law limits the incremental retailrate impact from these acquisitions to 2 percent. The new legislationencourages favorable cost recovery for utility investment in renewableresources, including the use of a rider mechanism and a return on constructionwork in progress.

 

***Transmission Cost Recovery Legislation*****—**The 2007 Colorado legislature enacted legislationthat is intended to encourage investment in transmission infrastructure inColorado. The new legislation provides for recovery through a rate rider of allcosts a utility incurs in the planning, developing and construction orexpansion of transmission facilities and for current recovery through thisrider of the utilities weighted average cost of capital on transmissionconstruction work in progress as of the end of the prior year. This legislationalso provides for rate-regulated Colorado utilities to develop plans toconstruct or expand transmission facilities to transmission constrained zoneswhere new electric generation facilities, including renewable energyfacilities, are likely to be located and provides for expedited approvals forsuch facilities.

 

***2003 Least Cost Plan (LCP) Investigation*** — In January 2007,PSCo filed with the CPUC its final report on its evaluation of the bidssubmitted in response to PSCo’s 2005 All Source request for proposal under PSCo’s2003 LCP. In the report, PSCo stated it intended to negotiate extensions topower purchase agreements for the output from three existing gas-firedfacilities for a total of 465 MW of the 896 MW needed for 2013. The finalreport explained that PSCo was intentionally waiting to fill the remaining430MW resources needed in 2013 until PSCo’s 2007 LCP and that PSCo wasrejecting uneconomic bids received for new coal generation and for renewal ofcontracts with existing natural gas-fired generators.

 

OnMarch 1, 2007, the CPUC issued an order requiring PSCo to apply forapproval of a 2013 contingency plan. On April 2, 2007, PSCo filed its 2013contingency plan, which recommended addressing the remaining 2013 resource needin the 2007 LCP to be filed in October 2007. PSCo’s contingency plan alsolisted other options, which PSCo predicts will be less costly than acceptingthe uneconomic coal and natural gas bids.

 

OnApril 25, 2007, the CPUC asked its staff to provide the CPUC with a reportthat addresses at a minimum, whether the PSCo’s negotiations with coal bidderswere made in good faith; any specific concerns the staff may have with respectto PSCo’s evaluation of 2013 resources; and what changes to the CPUC rules orpractices may be warranted in light of the staff’s conclusions.

 

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

 

OnMay 25, 2007, PSCo amended its 2013 contingency plan to include amendmentsto two power purchase agreements with Tri-State Generation and TransmissionAssociation, Inc. under which PSCo would return Tri-State generationcapacity currently under contract to PSCo in the years 2009 through 2012 andthen recapture that capacity in the years 2013 through 2015. PSCo explainedthis capacity swap would save PSCo an estimated $49 million on a net presentvalue basis. PSCo still would meet the remaining 2013 need through its 2007LCP. The CPUC held hearings on the PSCo 2013 contingency plan on July 9,2007. The PSCo contingency plan was opposed by the CPUC trial staff and by aintervenor, but was supported by the Colorado Office of Consumer Counsel. Theopponents have asked for all 2013 resource acquisition decisions to be deferredto the 2007 LCP. A CPUC decision is not expected until mid-August 2007.

 

On July 3, 2007, theCPUC issued an order soliciting comments to determine whether the LCP Rules needto be changed on an emergency basis to govern utility filings in October 2007.PSCo filed comments responding to this order suggesting the LCP rules requirerevisions, but not the revisions suggested by the CPUC staff which include therecommendation of using an independent evaluator to assess all bids. CPUCaction, if any, to issue emergency changes to the LCP rules is expected tooccur in August 2007.

 

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**Item 4. CONTROLS AND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

PSCo maintains a set ofdisclosure controls and procedures designed to ensure that information requiredto be disclosed in reports that it files or submits under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported within thetime periods specified in Securities and Exchange Commission rules andforms. In addition, the disclosure controls and procedures ensure thatinformation required to be disclosed is accumulated and communicated tomanagement, including the chief executive officer (CEO) and chief financialofficer (CFO), allowing timely decisions regarding required disclosure. As ofthe end of the period covered by this report, based on an evaluation carriedout under the supervision and with the participation of PSCo’s management,including the CEO and CFO, of the effectiveness of our disclosure controls andprocedures, the CEO and CFO have concluded that PSCo’s disclosure controls andprocedures are effective.

 

**Internal Control Over FinancialReporting**

** **

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

 

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

##### ** **

**Item 1. Legal Proceedings**

 

In the normal course ofbusiness, various lawsuits and claims have arisen against PSCo. Afterconsultation with legal counsel, PSCo has recorded an estimate of the probablecost of settlement or other disposition for such matters. See Notes 5 and 6 ofthe Financial Statements in this Quarterly Report on Form 10-Q/A forfurther discussion of legal proceedings, including Regulatory Matters andCommitments and Contingent Liabilities, which are hereby incorporated byreference. Reference also is made to Item 3 and Note 12 of PSCo’s Annual Reporton Form 10-K for the year ended Dec. 31, 2006, for a description ofcertain legal proceedings presently pending.

 

**Item 1A. Risk Factors**

 

PSCo’s risk factors are documented in Item1A of Part I of its 2006 Annual Report on Form 10-K, which isincorporated herein by reference. As a result of developments in our businesssince the filing of 2006 Annual Report on Form 10-K, we are providingbelow an update of the 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 the governmentand surrender the COLI policies 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.

 

**Item 6. Exhibits**

 

The following Exhibits arefiled with this report:

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

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorizedon Dec. 17, 2007.

 

PublicService Co. of Colorado

(Registrant)

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

 

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