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** **

 

** **

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C.  20549**

 

# ***FORM 10-Q***

# *** ***

**(MarkOne)**

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

 

**For the quarterly period ended March 31, 2010**

 

**or**

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

 

**Commission File Number: 001-3280**

 

# ***PublicService Company of Colorado***

(Exact name of registrant as specified in its charter)

 

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

 

**(303) 571-7511**

(Registrant’s telephone number, including area code)

 

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

 

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

 

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

 

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

 

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

 

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

 

| **Class**                     | ** ** | **Outstanding  at April 30, 2010** |
|-------------------------------|------------|-----------------------------------------|
| Common Stock, $0.01 par value |       | 100 shares                              |

 

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

 

 

 

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**TABLEOF CONTENTS**

 
| **PART I -  FINANCIAL INFORMATION**     | ** **                                                                                  |
|----------------------------------------------|---------------------------------------------------------------------------------------------|
|                                         |                                                                                        |   |
| Item l.                                      | Financial Statements  (Unaudited)                                                           | 3 |
| Item 2.                                      | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 24 |
| Item 4.                                      | Controls and  Procedures                                                                    | 29 |
|                                         |                                                                                        |   |
| **PART II - OTHER  INFORMATION**        | ** **                                                                                  |
|                                         |                                                                                        |   |
| Item 1.                                      | Legal Proceedings                                                                           | 29 |
| Item 1A.                                     | Risk Factors                                                                                | 29 |
| Item 6.                                      | Exhibits                                                                                    | 29 |
|                                         |                                                                                        |
| **SIGNATURES**                               | 30                                                                                          |
|                                         |                                                                                        |
| Certifications Pursuant  to Section 302 |                                                                                        |
| Certifications Pursuant  to Section 906 |                                                                                        |
| Statement Pursuant to  Private Litigation    |                                                                                        |

 

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

 

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##### **PART I— FINANCIAL INFORMATION**

##### ** **

**Item 1**—**FINANCIALSTATEMENTS**

 

**PUBLIC SERVICE CO. OF COLORADO ANDSUBSIDIARIES**

**CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)**

*(amountsin thousands of dollars)*

 
| ** **                                                                                 | ** ** | **Three  Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                 | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| **Operating revenues**                                                                     |       |                                   |       |   |   |
| Electric                                                                                   |       | $                                      | 723,634    |   | $ | 597,343 |   |
| Natural  gas                                                                               |       | 466,283                                |       | 395,121 |   |
| Steam  and other                                                                           |       | 12,780                                 |       | 10,014 |   |
| Total  operating revenues                                                                  |       | 1,202,697                              |       | 1,002,478 |   |
|                                                                                       |       |                                   |       |   |   |
| **Operating expenses**                                                                     |       |                                   |       |   |   |
| Electric  fuel and purchased power                                                         |       | 373,851                                |       | 307,269 |   |
| Cost  of natural gas sold and transported                                                  |       | 340,709                                |       | 282,436 |   |
| Cost  of sales — steam and other                                                      |       | 6,073                                  |       | 4,008 |   |
| Other  operating and maintenance expenses                                                  |       | 155,693                                |       | 154,890 |   |
| Demand  side management program expenses                                                   |       | 33,711                                 |       | 26,156 |   |
| Depreciation  and amortization                                                             |       | 66,966                                 |       | 62,547 |   |
| Taxes  (other than income taxes)                                                           |       | 24,616                                 |       | 23,189 |   |
| Total  operating expenses                                                                  |       | 1,001,619                              |       | 860,495 |   |
|                                                                                       |       |                                   |       |   |   |
| **Operating income**                                                                       |       | 201,078                                |       | 141,983 |   |
|                                                                                       |       |                                   |       |   |   |
| Other  income, net                                                                         |       | 556                                    |       | 869 |   |
| Allowance  for funds used during construction — equity                                |       | 2,978                                  |       | 10,135 |   |
|                                                                                       |       |                                   |       |   |   |
| **Interest charges and financing costs**                                                   |       |                                   |       |   |   |
| Interest  charges — includes other financing costs of $1,397 and $1,386, respectively |       | 45,813                                 |       | 40,352 |   |
| Allowance  for funds used during construction — debt                                  |       | (1,665                                 | )          | (4,962 | ) |
| Total  interest charges and financing costs                                                |       | 44,148                                 |       | 35,390 |   |
|                                                                                       |       |                                   |       |   |   |
| **Income before income taxes**                                                             |       | 160,464                                |       | 117,597 |   |
| Income  taxes                                                                              |       | 76,214                                 |       | 39,309 |   |
| **Net income**                                                                             |       | $                                      | 84,250     |   | $ | 78,288 |   |

 

See Notes to ConsolidatedFinancial Statements

 

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** **

**PUBLIC SERVICE CO. OFCOLORADO AND SUBSIDIARIES**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS (UNAUDITED)**

*(amountsin thousands of dollars)*

 
| ** **                                                                     | ** ** | **Three  Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                     | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| **Operating activities**                                                       | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Net income                                                                     |       | $                                      | 84,250     |   | $ | 78,288 |   |
| Adjustments to reconcile net income to cash  provided by operating activities: |       |                                   |       |   |   |
| Depreciation and amortization                                                  |       | 68,163                                 |       | 64,717 |   |
| Demand side management program expenses                                        |       | 7,281                                  |       | 6,531 |   |
| Deferred income taxes                                                          |       | 36,989                                 |       | 53,408 |   |
| Amortization of investment tax credits                                         |       | (584                                   | )          | (624 | ) |
| Allowance for equity funds used during construction                            |       | (2,978                                 | )          | (10,135 | ) |
| Net realized and unrealized hedging and derivative  transactions               |       | (10,048                                | )          | 30,384 |   |
| Changes in operating assets and liabilities:                                   |       |                                   |       |   |   |
| Accounts receivable                                                            |       | 5,822                                  |       | 55,175 |   |
| Accrued unbilled revenues                                                      |       | 100,139                                |       | 161,123 |   |
| Recoverable purchased natural gas and electric  energy costs                   |       | (27,484                                | )          | (13,630 | ) |
| Inventories                                                                    |       | 51,746                                 |       | 51,251 |   |
| Prepayments and other                                                          |       | 43,613                                 |       | 1,071 |   |
| Accounts payable                                                               |       | (120,659                               | )          | (163,036 | ) |
| Deferred electric energy costs                                                 |       | (5,952                                 | )          | (93,906 | ) |
| Net regulatory assets and liabilities                                          |       | 17,157                                 |       | 8,906 |   |
| Other current liabilities                                                      |       | 55,578                                 |       | 7,504 |   |
| Change in other noncurrent assets                                              |       | (1,489                                 | )          | 1,114 |   |
| Change in other noncurrent liabilities                                         |       | (12,122                                | )          | (6,974 | ) |
| Net cash provided by operating activities                                      |       | 289,422                                |       | 231,167 |   |
|                                                                           |       |                                   |       |   |   |
| **Investing activities**                                                       | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Utility capital/construction expenditures                                      |       | (115,890                               | )          | (133,177 | ) |
| Allowance for equity funds used during construction                            |       | 2,978                                  |       | 10,135 |   |
| Net cash used in investing activities                                          |       | (112,912                               | )          | (123,042 | ) |
|                                                                           |       |                                   |       |   |   |
| **Financing activities**                                                       | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Repayment of short-term borrowings, net                                        |       | (59,000                                | )          | (40,000 | ) |
| Repayment of long-term debt, including  reacquisition premiums                 |       | —                                 |       | (377 | ) |
| Borrowings under utility money pool arrangement                                |       | 147,900                                |       | 285,500 |   |
| Repayments under utility money pool arrangement                                |       | (224,900                               | )          | (307,500 | ) |
| Capital contributions from parent                                              |       | —                                 |       | 20,000 |   |
| Dividends paid to parent                                                       |       | (65,822                                | )          | (67,417 | ) |
| Net cash used in financing activities                                          |       | (201,822                               | )          | (109,794 | ) |
|                                                                           |       |                                   |       |   |   |
| Net decrease in cash and cash equivalents                                      |       | (25,312                                | )          | (1,669 | ) |
| Cash and cash equivalents at beginning of period                               |       | 33,429                                 |       | 11,198 |   |
| Cash and cash equivalents at end of period                                     |       | $                                      | 8,117      |   | $ | 9,529 |   |
|                                                                           |       |                                   |       |   |   |
| Supplemental disclosure of cash flow information:                              |       |                                   |       |   |   |
| Cash paid for interest (net of amounts capitalized)                            |       | $                                      | (34,225    | ) | $ | (40,512 | ) |
| Cash received for income taxes, net                                            |       | 35,514                                 |       | 3,555 |   |
| Supplemental disclosure of non-cash investing and  financing transactions:     |       |                                   |       |   |   |
| Property, plant and equipment additions in accounts  payable                   |       | $                                      | 9,799      |   | $ | 9,129 |   |

 

See Notes toConsolidated Financial Statements

 

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**PUBLIC SERVICE CO. OFCOLORADO AND SUBSIDIARIES**

**CONSOLIDATEDBALANCE SHEETS (UNAUDITED)**

*(amounts in thousands ofdollars)*

* *
| ** **                                                                            | ** ** | **March 31,  2010** | ** ** | **Dec. 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| **Assets**                                                                            |       |                     |       |                    |       |
| Current assets                                                                        |       |                     |       |                    |       |
| Cash and cash equivalents                                                             |       | $                        | 8,117      |                    | $          | 33,429 |   |
| Accounts receivable, net                                                              |       | 348,399                  |       | 330,279                 |       |
| Accounts receivable from affiliates                                                   |       | 20,881                   |       | 33,396                  |       |
| Accrued unbilled revenues                                                             |       | 213,814                  |       | 313,953                 |       |
| Recoverable purchased natural gas and electric  energy costs                          |       | 52,641                   |       | 25,157                  |       |
| Inventories                                                                           |       | 201,902                  |       | 253,648                 |       |
| Deferred income taxes                                                                 |       | 61,264                   |       | 81,980                  |       |
| Derivative instruments valuation                                                      |       | 15,829                   |       | 28,704                  |       |
| Prepayments and other                                                                 |       | 15,355                   |       | 58,968                  |       |
| Total current assets                                                                  |       | 938,202                  |       | 1,159,514               |       |
|                                                                                  |       |                     |       |                    |       |
| Property, plant and equipment, net                                                    |       | 8,151,564                |       | 8,104,841               |       |
|                                                                                  |       |                     |       |                    |       |
| Other assets                                                                          |       |                     |       |                    |       |
| Regulatory assets                                                                     |       | 832,486                  |       | 827,311                 |       |
| Derivative instruments valuation                                                      |       | 86,179                   |       | 104,664                 |       |
| Other                                                                                 |       | 52,583                   |       | 47,175                  |       |
| Total other assets                                                                    |       | 971,248                  |       | 979,150                 |       |
| Total assets                                                                          |       | $                        | 10,061,014 |                    | $          | 10,243,505 |   |
|                                                                                  |       |                     |       |                    |       |
| **Liabilities and Equity**                                                            |       |                     |       |                    |       |
| Current liabilities                                                                   |       |                     |       |                    |       |
| Current portion of long-term debt                                                     |       | $                        | 4,620      |                    | $          | 3,964 |   |
| Short-term debt                                                                       |       | 36,000                   |       | 95,000                  |       |
| Borrowings under utility money pool arrangement                                       |       | 7,000                    |       | 84,000                  |       |
| Accounts payable                                                                      |       | 311,433                  |       | 422,276                 |       |
| Accounts payable to affiliates                                                        |       | 27,410                   |       | 40,758                  |       |
| Deferred electric energy costs                                                        |       | 58,600                   |       | 64,552                  |       |
| Taxes accrued                                                                         |       | 130,340                  |       | 80,303                  |       |
| Dividends payable to parent                                                           |       | 66,655                   |       | 65,822                  |       |
| Derivative instruments valuation                                                      |       | 20,420                   |       | 18,285                  |       |
| Accrued interest.                                                                     |       | 51,968                   |       | 47,300                  |       |
| Other                                                                                 |       | 67,816                   |       | 67,692                  |       |
| Total current liabilities                                                             |       | 782,262                  |       | 989,952                 |       |
|                                                                                  |       |                     |       |                    |       |
| Deferred credits and other liabilities                                                |       |                     |       |                    |       |
| Deferred income taxes                                                                 |       | 1,464,350                |       | 1,447,143               |       |
| Deferred investment tax credits                                                       |       | 49,447                   |       | 50,031                  |       |
| Regulatory liabilities                                                                |       | 496,643                  |       | 510,491                 |       |
| Pension and employee benefit obligations                                              |       | 253,532                  |       | 257,881                 |       |
| Customer advances                                                                     |       | 262,461                  |       | 271,171                 |       |
| Derivative instruments valuation                                                      |       | 46,500                   |       | 49,587                  |       |
| Asset retirement obligations                                                          |       | 66,193                   |       | 65,160                  |       |
| Other                                                                                 |       | 53,168                   |       | 31,287                  |       |
| Total deferred credits and other liabilities                                          |       | 2,692,294                |       | 2,682,751               |       |
|                                                                                  |       |                     |       |                    |       |
| Commitments and contingent liabilities                                                |       |                     |       |                    |       |
| Capitalization                                                                        |       |                     |       |                    |       |
| Long-term debt                                                                        |       | 2,823,157                |       | 2,824,988               |       |
| Common stock — authorized 100 shares of $0.01 par  value; outstanding 100 shares |       | —                   |       | —                  |       |
| Additional paid-in capital                                                            |       | 2,995,470                |       | 2,995,470               |       |
| Retained earnings                                                                     |       | 759,838                  |       | 742,243                 |       |
| Accumulated other comprehensive income                                                |       | 7,993                    |       | 8,101                   |       |
| Total common stockholder’s equity                                                |       | 3,763,301                |       | 3,745,814               |       |
| Total liabilities and equity                                                          |       | $                        | 10,061,014 |                    | $          | 10,243,505 |   |

 

SeeNotes to Consolidated Financial Statements

 

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**PUBLICSERVICE CO. OF COLORADO AND SUBSIDIARIES**

**Notes to ConsolidatedFinancial Statements (UNAUDITED)**

** **

Inthe opinion of management, the accompanying unaudited consolidated financialstatements contain all adjustments necessary to present fairly, in accordancewith accounting principles generally accepted in the United States of America(GAAP), the financial position of PSCo and its subsidiaries as of March 31,2010 and Dec. 31, 2009; the results of its operations for the three monthsended March 31, 2010 and 2009; and its cash flows for the three monthsended March 31, 2010 and 2009.  Alladjustments are of a normal, recurring nature, except as otherwisedisclosed.  Management has also evaluated the impact of eventsoccurring after March 31, 2010 up to the date of issuance of theseconsolidated financial statements.  Thesestatements contain all necessary adjustments and disclosures resulting fromthat evaluation. The Dec. 31, 2009 balance sheet information hasbeen derived from the audited 2009 financial statements.  These notes to the consolidated financialstatements have been prepared pursuant to the rules and regulations of theSEC for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financialstatements prepared in accordance with GAAP have been condensed or omittedpursuant to such rules and regulations. For further information, refer to the consolidated financial statementsand notes thereto, included in the PSCo Annual Report on Form 10-K for theyear ended Dec. 31, 2009, filed with the SEC on March 1, 2010.  Due to the seasonality of PSCo’s electric andnatural gas sales, interim results are not necessarily an appropriate base fromwhich to project annual results.

 

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

 

Except to the extent updated or described below,the significant accounting policies set forth in Note 1 to the consolidatedfinancial statements in PSCo’s Annual Report on Form 10-K for the yearended Dec. 31, 2009, appropriately represent, in all material respects,the current status of accounting policies and are incorporated herein byreference.

 

***Reclassifications****** —*** Demand sidemanagement program expenses for the three months ended March 31, 2009 werereclassified as a separate item from depreciation and amortization expenseswithin the consolidated statements of cash flows.  The reclassification did not have an impacton net cash provided by operating activities.

 

**2.**              **AccountingPronouncements**

 

***Recently Adopted***

 

***Consolidation of Variable Interest Entities***— In June 2009, the FinancialAccounting Standards Board (FASB) issued new guidance on consolidation ofvariable interest entities. The guidance affects various elements ofconsolidation, including the determination of whether an entity is a variableinterest entity and whether an enterprise is a variable interest entity’sprimary beneficiary. These updates to the FASB Accounting StandardsCodification (ASC or Codification) are effective for interim and annual periodsbeginning after Nov. 15, 2009.  PSCoimplemented the guidance on Jan. 1, 2010, and the implementation did nothave a material impact on its consolidated financial statements.  For further information and requireddisclosures regarding variable interest entities, see Note 6 to the consolidatedfinancial statements.

 

***FairValue Measurement Disclosures*** — In January 2010, the FASB issued *Fair Value Measurements and Disclosures(Topic 820) — Improving Disclosures about Fair Value Measurements(Accounting Standards Update (ASU) No. 2010-06)*, which updatesthe Codification to require new disclosures for assets and liabilities measuredat fair value. The requirements include expanded disclosure of valuationmethodologies for fair value measurements, transfers between levels of the fairvalue hierarchy, and gross rather than net presentation of certain changes inLevel 3 fair value measurements. The updates to the Codification containedin ASU No. 2010-06 were effective for interim and annual periods beginningafter Dec. 15, 2009, except for requirements related to gross presentationof certain changes in Level 3 fair value measurements, which are effectivefor interim and annual periods beginning after Dec. 15, 2010.  PSCo implemented the portions of the guidancerequired on Jan. 1, 2010, and the implementation did not have a materialimpact on its consolidated financial statements.  For further information and requireddisclosures, see Note 8 to the consolidated financial statements.

 

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**3.**              **Selected Balance Sheet Data**

 
| **(Thousands of Dollars)**   | ** ** | **March 31, 2010** | ** ** | **Dec. 31, 2009** | ** ** |
|----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Accounts receivable, net**           |       |                         |       |                        |       |
| Accounts  receivable                   |       | $                            | 372,232    |                        | $          | 354,428 |   |
| Less  allowance for bad debts          |       | (23,833                      | )          | (24,149                     | )          |
|                                   |       | $                            | 348,399    |                        | $          | 330,279 |   |
| **Inventories**                        |       |                         |       |                        |       |
| Materials  and supplies                |       | $                            | 47,367     |                        | $          | 45,809 |   |
| Fuel                                   |       | 93,776                       |       | 96,964                      |       |
| Natural  gas                           |       | 60,759                       |       | 110,875                     |       |
|                                   |       | $                            | 201,902    |                        | $          | 253,648 |   |
| **Property, plant and equipment, net** |       |                         |       |                        |       |
| Electric  plant                        |       | $                            | 7,682,043  |                        | $          | 7,635,325 |   |
| Natural  gas plant                     |       | 2,160,775                    |       | 2,133,116                   |       |
| Common  and other property             |       | 738,626                      |       | 731,511                     |       |
| Construction  work in progress         |       | 1,053,623                    |       | 1,038,013                   |       |
| Total  property, plant and equipment   |       | 11,635,067                   |       | 11,537,965                  |       |
| Less  accumulated depreciation         |       | (3,483,503                   | )          | (3,433,124                  | )          |
|                                   |       | $                            | 8,151,564  |                        | $          | 8,104,841 |   |

 

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

 

***CorporateOwned Life Insurance (******COLI)***— In 2007, Xcel Energy and theU. S. government settled an ongoing dispute regarding PSCo’s right todeduct interest expense on policy loans related to its COLI program thatinsured lives of certain PSCo employees. These COLI policies were owned and managed by P.S.R. Investments, Inc.(PSRI), a wholly owned subsidiary of PSCo. Xcel Energy paid the U. S. government a total of$64.4 million in settlement of the U. S. government’s claims fortax, penalty, and interest for tax years 1993 through 2007.  Xcel Energy surrendered the policies toits insurer on Oct. 31, 2007, without recognizing a taxable gain.  As a result of the settlement, the lawsuitfiled by Xcel Energy in the United States District Court has beendismissed and the Tax Court proceedings are in the process of being dismissed.

 

As part of the Tax Courtproceedings, during the first quarter of 2010, Xcel Energy and the IRS(Internal Revenue Service) reached an agreement in principle after a two yearfinancial reconciliation of  Xcel Energy’sstatements of account, dating back to tax year 1993.  This tax and interest analysis required acomprehensive review of all of Xcel Energy’s tax filings since 1993.  Upon completion of this review, PSRI recordeda net non-recurring adjustment of approximately $10 million (including $7.7million tax expense and $2.3 million interest expense, net of tax).  Xcel Energy anticipates that the TaxCourt proceedings will be dismissed in 2010.

 

***Medicare Part D Subsidy Reimbursements****—* In March 2010, the PatientProtection and Affordable Care Act was signed into law.  The law includesprovisions to generate tax revenue to help offset the cost of the newlegislation.  One of these provisions reduces the deductibility of retireehealth care costs to the extent of federal subsidies received by plan sponsorsthat provide retiree prescription drug benefits equivalent to Medicare Part Dcoverage, beginning in 2013.  Based on this provision, PSCo is subject toadditional taxes and is required to reverse previously recorded tax benefits inthe period of enactment.

 

As a result, PSCoexpensed approximately $9.9 million of previously recognized tax benefitsrelating to Medicare Part D subsidies during the first quarter of2010.  PSCo does not expect the $9.9 million of additional tax expense torecur in future periods.  However, the 2010 effective tax rate willincrease due to additional tax expense of approximately $2.0 million associatedwith current year retiree health care accruals.

 

***Federal Audit*****—**PSCo is a member of the Xcel Energy affiliated group thatfiles a consolidated federal income tax return. In the first quarter of2010, the IRS completed an examination of Xcel Energy’s federal income taxreturns of tax years 2006 and 2007. The IRS did not propose any materialadjustments for those tax years. The statute of limitations applicable toXcel Energy’s 2006 federal income tax return expires on Aug. 28,2010.

 

***State Audits*****—**PSCo is a member of the Xcel Energy affiliated group thatfiles consolidated state income tax returns. As of March 31, 2010, PSCo’searliest open tax year that is subject to examination by state taxingauthorities under applicable statutes of limitations is 2004. There currentlyare no state income tax audits in progress.

 

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***Unrecognized Tax Benefits*****—**The unrecognized tax benefit balanceincludes permanent tax positions, which if recognized would affect the annualeffective tax rate (ETR). In addition, the unrecognized tax benefit balanceincludes temporary tax positions for which the ultimate deductibility is highlycertain but for which there is uncertainty about the timing of suchdeductibility. A change in the period of deductibility would not affect the ETRbut would accelerate the payment of cash to the taxing authority to an earlierperiod.

 

A reconciliation of theamount of unrecognized tax benefit is as follows:

 
| **(Millions of Dollars)**                 | ** ** | **March 31,  2010** | ** ** | **Dec. 31,  2009** | ** ** |
|-----------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Unrecognized  tax benefit - Permanent tax positions |       | $                        | 1.0        |                    | $          | 1.0 |   |
| Unrecognized  tax benefit - Temporary tax positions |       | 6.0                      |       | 6.2                     |       |
| Unrecognized  tax benefit balance                   |       | $                        | 7.0        |                    | $          | 7.2 |   |

 

The unrecognized taxbenefit balance was reduced by the tax benefits associated with net operatingloss (NOL) and tax credit carryforwards. The amounts of tax benefits associatedwith NOL and tax credit carryforwards were as follows:

 
| **(Millions of Dollars)**                           | ** ** | **March 31,  2010** | ** ** | **Dec. 31,  2009** | ** ** |
|---------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Tax  benefits associated with NOL and tax credit carryforward |       | $                        | (4.2       | )                       | $          | (4.0 | ) |
|                                                               |            |                          |            |                         |            |  |  |

 

The decrease in theunrecognized tax benefit balance of $0.2 million from Dec. 31, 2009to March 31, 2010 was due to recently provided guidance pertaining toplant-related uncertain tax positions, partially offset by the addition ofsimilar uncertain tax positions related to ongoing activity. PSCo’s amount ofunrecognized tax benefits could significantly change in the next 12 monthswhen the IRS and state audits resume. At this time, due to the uncertain natureof the audit process, it is not reasonably possible to estimate an overallrange of possible change.

 

A reconciliation of thebeginning and ending amount of the payable for interest related to unrecognizedtax benefits is as follows:

 
| **(Millions of Dollars)**                                         | ** ** | **2010** | ** ** | **2009** | ** ** |
|-----------------------------------------------------------------------------|------------|----------|------------|----------|------------|
| Payable  for interest related to unrecognized tax benefits at Jan. 1   |       | $        | (0.1       | )        | $          | (0.4 | ) |
| Interest  expense related to unrecognized tax benefits                      |       | —   |       | (0.1     | )          |
| Payable  for interest related to unrecognized tax benefits at March 31 |       | $        | (0.1       | )        | $          | (0.5 | ) |

 

No amounts were accruedfor penalties related to unrecognized tax benefits as of March 31, 2010 orDec. 31, 2009.

 

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

 

Except to the extent noted below, the circumstances set forth in Note14 to the consolidated financial statements included in PSCo’s Annual Report onForm 10-K for the year ended Dec. 31, 2009 appropriately represent,in all material respects, the current status of other rate matters, and areincorporated herein by reference.

 

***Pending andRecently Concluded Regulatory Proceedings — Colorado Public UtilitiesCommission (CPUC)***

 

**Base Rate**

 

***PSCo 2010 Electric Rate Case***— In May 2009, PSCo filed with theCPUC a request to increase Colorado electric rates by $180.2 million, or6.8 percent, effective in 2010.  Therequest was based on a 2010 forecast test year, an 11.25 percent return onequity (ROE), a rate base of $4.4 billion and an equity ratio of58.05 percent.  In October 2009,PSCo filed rebuttal testimony and revised the requested rate increase to$177.4 million.

 

In November 2009,PSCo reached a settlement agreement with certain intervenors.  The settlement included an electric rate increaseof approximately $136 million, effective Jan. 1, 2010.  The settlement was based on a10.5 percent ROE and reflects PSCo’s actual capital structure.  The settlement was based on an historic testyear, adjusted for 2010 known and measurable changes related to plantinvestment as well as certain operating costs.

 

In December 2009,the CPUC approved a rate increase of approximately $128.3 million.  The difference between the settlement rateincrease and the approved amount was primarily related to adjustments relatedto rate base for non-major projects and an adjustment to interest on long-termdebt.

 

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InDecember 2009, due to the delay in Comanche Unit 3 coming online, theCPUC approved PSCo’s proposal to phase in the approved electric rate increaseto reflect the actual cost of service. This decision is not expected to have a material impact on PSCo or XcelEnergy’s financial results.  Under theplan, the following increases will be implemented:

 

·                     A rate increaseof $67 million was implemented on Jan. 1, 2010.  The adjustments to the rate increase, becauseof the delay of the in-service date of Comanche Unit 3, include reducedoperating and maintenance expenses (O&M), property taxes, the impact of adelay in changes to jurisdictional allocators and depreciation expenses;

·                     Base rates willincrease to $121 million, once Comanche Unit 3 goes into service; and

·                     Finally, baserates will increase to $128.3 million on Jan. 1, 2011 to reflect 2011property taxes.

 

Severalparties, including PSCo and the Office of Consumer Counsel (OCC), filed motionsfor reconsideration.  On April 19,2010, the CPUC granted PSCo’s request to not include long-term debt interest inthe working capital calculation, which increases the revenue deficiencyrecovered under the order by approximately $2.2 million, and denied all otherrequests for reconsideration.

 

AlthoughPSCo had anticipated that Comanche Unit 3 would come online by the end of thefirst quarter of 2010, the testing of Comanche Unit 3 was initiated and hasresulted in a noise that has been objectionable to some neighbors of theplant.  PSCo has arranged for thefabrication of baffles to be installed that are expected to mitigate thenoise.  After the installation andtesting of the corrective action, PSCo expects Comanche Unit 3 to go intoservice in the second quarter of 2010.

 

***Unreasonable Rates for Natural GasFormal Complaint***— In July 2009, the trial advocacy staffof the CPUC proposed a formal draft complaint against PSCo for unjust andunreasonable rates for natural gas service associated with earnings in excessof PSCo’s authorized return that occurred in 2008.  In January 2010, the CPUC opened aproceeding and assigned this matter to an administrative law judge (ALJ).

 

Theprocedural schedule in the case has been set as follows:

 

·                     Directtestimony of CPUC staff on May 10, 2010;

·                     PSCo answertestimony on June 28, 2010;

·                     Staff rebuttaltestimony on July 19, 2010;

·                     Surrebuttaltestimony on Aug. 9, 2010; and

·                     Hearings on Aug. 23through Aug. 27, 2010.

 

PSCo filed certaininformation concerning its financial results for calendar year 2009 with theALJ on April 19, 2010, and the CPUC staff is expected to file its directcase on May 10, 2010.

 

***Renewable Energy Credit (REC) Sharing Settlement***— In August 2009, PSCo filed anapplication seeking approval of treatment of margins associated with certainsales of Colorado RECs bundled with energy into California.  In January 2010, PSCo, the OCC, the CPUCstaff, the Colorado governor’s energy office and Western Resource Advocatesentered into a unanimous settlement in this case.  The settlement establishes a pilot programand defines certain margin splits during this pilot period.  The settlement provides that 10 percentof margins will go to carbon offsets, 40 percent of the first$10 million in margins, 35 percent of the next $20 million and30 percent of all remaining margins will go to PSCo with all remainingmargins going to Colorado retail customers as a credit toward renewable energyprojects.  The unanimous settlement alsoclarified that margins associated with RECs bundled with Colorado energy wouldbe shared 20 percent to PSCo and 80 percent to customers and marginsassociated with sales of stand-alone renewable energy credits without energywould be credited 100 percent to customers.  The CPUC approved the settlement in oraldeliberations on April 21, 2010.  Awritten order is expected to follow.

 

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

 

***Wholesale Rate Case***— In 2009, PSCo proposed to increase Coloradowholesale rates by $30 million based on a 12.5 percent ROE, a58 percent equity ratio and an electric production rate base of$315 million.  PSCo has requestedthat the FERC suspend action on the filing to allow time for settlementnegotiations as PSCo is in settlement discussions with its wholesalecustomers.  PSCo expects rates subject torefund to go into effect later in 2010.

 

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

 

Except to the extent noted below and in Note 5 to theconsolidated financial statements in this Quarterly Report on Form 10-Qthe circumstances set forth in Notes 14 and 15 to the consolidated financialstatements included in PSCo’s Annual Report on Form 10-K for the yearended Dec. 31, 2009, appropriately represent, in all material respects,the current status of commitments and contingent liabilities, and areincorporated herein by reference. The following include contingencies andunresolved contingencies that are material to PSCo’s financial position.

 

**Commitments**

 

***VariableInterest Entities*****—Effective Jan. 1, 2010, PSCo adopted new guidance on consolidation ofvariable interest entities contained in *ASC 810**Consolidation*.  Theguidance requires enterprises to consider the activities that mostsignificantly impact an entity’s financial performance, and power to directthose activities, when determining whether an entity is a variable interestentity and whether an enterprise is a variable interest entity’s primarybeneficiary.

 

*Purchased Power Agreements*— PSCo has entered into agreements withother utilities and energy suppliers for purchased power to meet system load andenergy requirements, replace generation from company-owned units undermaintenance or during outages, and meet operating reserve obligations.

 

PSCo has variouspay-for-performance contracts with expiration dates through the year 2034.  In general, these contracts provide forenergy payments based on actual power taken under the contracts as well ascapacity payments.  Capacity payments aretypically contingent on the independent power producing entity meeting certaincontract obligations, including plant availability requirements.  Certain contractual payments are adjustedbased on market indices; however, the effects of price adjustments aremitigated through purchased energy cost recovery mechanisms.

 

PSCo is not subject torisk of loss from the operations of these entities, and no significantfinancial support has been, or is in the future required to be provided otherthan contractual payments for energy and capacity set forth in purchased poweragreements.

 

Certain natural gasfueled purchased power agreements that either reimburse the independent powerproducing entities for fuel costs, or contain tolling arrangements under whichPSCo procures the fuel required to produce the energy it purchases, have beendetermined to be variable interest entities.

 

PSCo has evaluated eachof these variable interest entities for possible consolidation, includingreview of qualitative factors such as the length and terms of the contract,control over operations and maintenance, historical and estimated future fueland electricity prices, and financing activities; including the maintenance ofdebt to equity financing ratios.  PSCohas concluded that these entities are not required to be consolidated in itsconsolidated financial statements because it does not have the power to directthe activities that most significantly impact the entities’ economicperformance.  As of March 31, 2010and Dec. 31, 2009, PSCo had approximately 2,921 megawatts (MW) of capacityunder long term purchased power agreements with entities that have beendetermined to be variable interest entities.

 

**Environmental Contingencies**

 

PSCo has been, or is currently, involved with thecleanup of contamination from certain hazardous substances at several sites. Inmany situations, PSCo believes it will recover some portion of these coststhrough insurance claims.  Additionally,where applicable, PSCo is pursuing, or intends to pursue, recovery from otherpotentially responsible parties (PRPs) and through the rate regulatoryprocess.  New and changing federal andstate environmental mandates can also create added financial liabilities forPSCo, which are normally recovered through the rate regulatory process.  To the extent any costs are not recoveredthrough the options listed above, PSCo would be required to recognize anexpense.

 

***Site Remediation****—*PSCo must pay all or a portion of thecost to remediate sites where past activities of PSCo or other parties havecaused environmental contamination. Environmental contingencies could arise from various situations,including sites of former manufactured gas plants operated by PSCo, itspredecessors, or other entities; and third-party sites, such as landfills, forwhich PSCo is alleged to be a PRP that sent hazardous materials and wastes.  At March 31, 2010, the liability for thecost of remediating these sites was estimated to be $1.1 million, of which $0.5million was considered to be a current liability.

 

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***Third Party and OtherEnvironmental Site Remediation***

 

***Asbestos Removal*****—**Some of PSCo’s facilities containasbestos.  Most asbestos will remainundisturbed until the facilities that contain it are demolished or renovated.  PSCo has recorded an estimate for finalremoval of the asbestos as an asset retirement obligation.  See additional discussion of asset retirementobligations in Note 15 of the PSCo Annual Report on Form 10-K for the yearended Dec. 31, 2009.  It may benecessary to remove some asbestos to perform maintenance or make improvementsto other equipment.  The cost of removingasbestos as part of other work is immaterial and is recorded as incurred asoperating expenses for maintenance projects, capital expenditures forconstruction projects or removal costs for demolition projects.

 

***Other EnvironmentalRequirements***

 

***ColoradoClean Air-Clean Jobs Act***— The Colorado Clean Air-Clean Jobs Act (the Act) wassigned into law on April 19, 2010. The Act establishes a timeline and regulatory framework forrate-regulated utilities in Colorado to develop a plan to potentially retrofit,retire or replace 900 MW or more of aging coal-fired electric generatingcapacity.  The plan must result in areduction of 70 to 80 percent in nitrogen oxide (NOx) emissions from affectedcoal-fired power plants by 2018 or sooner to meet current and reasonablyforeseeable Clean Air Act (CAA) emission reduction mandates.

 

Under the emissionreduction plan, PSCo may retrofit its existing coal-fired plants with emissioncontrols or retire and replace the plants with natural gas-fired generation orother low emitting resources.  The Actspecifically requires PSCo to study the early retirement of up to 900 MW ofexisting coal-fired capacity, but does not require any retirement unless, amongother things, the retirement can be accomplished at a reasonable cost whileprotecting system reliability.  PSCo mustsubmit its plan to the CPUC by Aug. 15, 2010 and the CPUC must act on theplan by Dec. 15, 2010.  Pursuant tothe Act, PSCo is entitled to fully recover the costs that it prudently incursin executing an approved emission reduction plan and is allowed a return onconstruction work in progress and annual changes in rates to recover plantcosts.  The Act also makes interim ratespermissible in Colorado, starting Jan. 1, 2012.

 

***Environmental Protection Agency (EPA) Greenhouse Gas (GHG)Endangerment Finding***— On Dec. 7, 2009, in response to the U. S. Supreme Court’sdecision in *Massachusetts v. EPA*, 549 U. S. 497(2007), the EPA issued its “endangerment” finding that GHG emissions endangerpublic health and welfare and that emissions from motor vehicles contribute tothe GHGs in the atmosphere.  Thisendangerment finding creates a mandatory duty for the EPA to regulate GHGs fromlight duty vehicles.  On April 1,2010, the EPA issued GHG efficiency standards for light duty vehicles, whichwill take effect on Jan. 2, 2011. The EPA takes the position that after Jan. 2, 2011, any permitissued for major stationary sources, such as power plants, must address GHGemissions through Best Available Control Technology review and emissionslimits.

 

***Clean Air Mercury Rule (CAMR) —***In March 2005, the EPA issued theCAMR, which regulated mercury emissions from power plants.  In February 2008, the U. S. Court ofAppeals for the District of Columbia vacated CAMR, which impacts federal CAMRrequirements, but not necessarily state-only mercury legislation andrules.  The EPA has agreed to finalizeMaximum Achievable Control Technology (MACT) emission standards for allhazardous air pollutants from electric utility steam generating units by November 2011to replace CAMR.  Xcel Energy anticipatesthat the EPA will require affected facilities to demonstrate compliance within 18to 36 months thereafter.

 

***Colorado Mercury Regulation***— The Colorado Air Quality ControlCommission (AQCC) passed a mercury rule, which requires mercury emissioncontrols capable of achieving 80 percent capture to be installed at thePawnee Generating Station by 2012 and other specified units by 2014.  The expected cost estimate for the PawneeGenerating Station is $2.3 million for capital costs with an annualestimate of $1.4 million for sorbent expense.  PSCo is evaluating the emission controlsrequired to meet the state rule for the remaining units and is currentlyunable to provide a total capital cost estimate.

 

***Regional Haze Rules —***In June 2005, the EPA finalizedamendments to the July 1999 regional haze rules.****** These amendments apply to the provisions ofthe regional haze rule that require emission controls, known as bestavailable retrofit technology (BART), for industrial facilities emitting airpollutants that reduce visibility by causing or contributing to regionalhaze.  Xcel Energy generating facilitiesin several states will be subject to BART requirements.

 

States are required toidentify the facilities that will have to reduce sulfur dioxide, NOx andparticulate matter emissions under BART and then set BART emissions limits forthose facilities. In May 2006, the Colorado AQCC promulgated BARTregulations requiring certain major stationary sources to evaluate and install,operate and maintain BART to make reasonable progress toward meeting thenational visibility goal.

 

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PSCo expects the cost ofany required capital investment will be recoverable from customers.  Emissions controls are expected to be installedbetween 2012 and 2015.  Colorado’s BARTstate implementation plan (SIP) has been submitted to the EPA forapproval.  The Colorado Air PollutionControl Division (CAPCD) is currently analyzing what types of additional NOxcontrols may be necessary to meet reasonable progress goals for Colorado’s Class Iareas, the new ozone standard, and Rocky Mountain National Park nitrogendeposition reduction goals.  The CAPCDhas indicated that it expects to submit a Regional Haze/Reasonable FurtherProgress SIP to the EPA in early 2011. PSCo anticipates that for those plants included in the Clean Air-CleanJobs Act’s emission reduction plan, the plan will satisfy regional hazerequirements.

 

In March 2010, twoenvironmental groups petitioned the U. S. Department of Interior (DOI) tocertify that 12 coal-fired boilers and one coal-fired cement kiln in Coloradoare contributing to visibility problems in Rocky Mountain National Park.  Four PSCo plants are named in the petition:  Cherokee, Hayden, Pawnee and Valmont.  The groups allege that the Colorado BART rule isinadequate to satisfy the CAA mandate of ensuring reasonable further progresstowards restoring natural visibility conditions in the park.  It is not known when the DOI will rule onthe petition.

 

***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 (BTA) for minimizing adverseenvironmental impacts.  In July 2004,the EPA published phase II of the rule, which applies to existing coolingwater intakes at steam-electric power plants. Several lawsuits were filed against the EPA in the United States Courtof Appeals for the Second Circuit (Court of Appeals) challenging thephase II rulemaking.  In January 2007,the Court of Appeals issued its decision and remanded the rule to the EPAfor reconsideration.  In June 2007,the EPA suspended the deadlines and referred any implementation to each state’sbest professional judgment until the EPA is able to fully respond to theremand.  In April 2008, the U. S.Supreme Court granted limited review of the Court of Appeals’ opinion todetermine whether the EPA has the authority to consider costs and benefits inassessing BTA.  On April 1, 2009,the U. S. Supreme Court issued a decision in *EntergyCorp. v. Riverkeeper, Inc.*, concluding that the EPA canconsider a cost benefit analysis when establishing BTA.  The decision overturned only one aspect ofthe Court of Appeals’ earlier opinion, and gives the EPA the discretion toconsider costs and benefits when it reconsiders its phase II rules.  Until the EPA fully responds to the Court ofAppeals’ decision, the rule’s compliance requirements and associated deadlineswill remain unknown.  As such, it is notpossible to provide an accurate estimate of the overall cost of this rulemakingat this time.

 

***PSCo Notice of Violation (NOV)***— In July 2002, PSCo received an NOVfrom the EPA alleging violations of the New Source Review (NSR) requirements ofthe CAA at the Comanche Station and Pawnee Station in Colorado.  The NOV specifically alleges that variousmaintenance, repair and replacement projects undertaken at the plants in themid to late 1990s should have required a permit under the NSR process.  PSCo believes it has acted in full compliancewith the CAA and NSR process.  PSCobelieves that the projects identified in the NOV fit within the routinemaintenance, repair and replacement exemption contained within the NSRregulations or are otherwise not subject to the NSR requirements.  PSCo disagrees with the assertions containedin the NOV and intends to vigorously defend its position.

 

**Legal Contingencies**

** **

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

 

**Environmental Litigation**

** **

***Carbon Dioxide(CO******2******) Emissions Lawsuit —***In 2004, the attorneysgeneral of eight states and New York City, as well as several environmentalgroups, filed lawsuits in U. S. District Court in the Southern District of NewYork against five utilities, including Xcel Energy, the parent company of PSCo, to forcereductions in CO2 emissions. The other utilities include American Electric Power Co., Southern Co.,Cinergy Corp. and Tennessee Valley Authority. 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 notdemand monetary damages.  Instead, thelawsuits ask the court to order each utility to cap and reduce its CO2 emissions.  On Sept. 19, 2005, the court granted amotion to dismiss on constitutional grounds. Plaintiffs filed an appeal to the U. S. Court of Appeals for the SecondCircuit.  On Sept. 21, 2009, theCourt of Appeals issued an opinion reversing the lower court decision.  A subsequent petition for rehearing and enbanc review was denied.  Defendants anticipatefiling a petition for review with the U. S. Supreme Court on or before June 2010.

 

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***Comer vs. Xcel Energy Inc. et al. —***In 2006, Xcel Energy, the parent companyof PSCo, received notice of a purported class action lawsuit filed in U. S.District Court in the Southern District of Mississippi.  The lawsuit names more than 45 oil, chemicaland utility companies, including Xcel Energy, as defendants and alleges thatdefendants’ CO2 emissions “were a proximate and direct causeof the increase in the destructive capacity of Hurricane Katrina.”  Plaintiffs allege in support of their claim,several legal theories, including negligence and public and private nuisanceand seek damages related to the loss resulting from the hurricane.  Xcel Energy believes this lawsuit is withoutmerit and intends to vigorously defend itself against these claims.  In August 2007, the court dismissed thelawsuit in its entirety against all defendants on constitutional grounds.  Plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Fifth Circuit. On Oct. 16, 2009, the U. S. Court of Appeals for the Fifth Circuitreversed the district court decision, in part, concluding that the plaintiffspleaded sufficient facts to overcome the constitutional challenges that formedthe basis for dismissal by the district court. A subsequent petition by defendants, including Xcel Energy, for en bancreview was granted.  Oral arguments areexpected to be presented to the Fifth Circuit panel on May 24, 2010.

 

***Native Village of Kivalina vs. Xcel Energy Inc. etal. —***In2008, the City and Native Village of Kivalina, Alaska, filed a lawsuit in U. S.District Court for the Northern District of California against Xcel Energy, theparent company of PSCo, and 23 other utilities, oil, gas and coalcompanies.  Plaintiffs claim thatdefendants’ emission of CO2 and other GHGs contribute to global warming,which is harming their village.  XcelEnergy believes the claims asserted in this lawsuit are without merit andjoined with other utility defendants in filing a motion to dismiss on June 30,2008.  On Oct. 15, 2009, the U. S.District Court dismissed the lawsuit on constitutional grounds.  On Nov. 5, 2009, plaintiffs filed anotice of appeal to the U. S. Court of Appeals for the Ninth Circuit.

 

***Comanche Unit 3 CAA Lawsuit***— On July 2, 2009, WildEarthGuardians (WEG) filed a lawsuit in the U. S. District Courtin Colorado againstPSCo alleging that PSCo violated the CAA by constructing Comanche Unit 3without a final MACT determination from the Colorado Department of PublicHealth and Environment, Air Pollution Control Division (APCD).  PSCo disputes these claims and has filed amotion to dismiss the suit.  ComancheUnit 3 was constructed with state-of-the-art emission controls andpursuant to a valid air permit issued by the APCD.  On Oct. 28, 2009, WEG filed a motion fora preliminary injunction, seeking to enjoin PSCo from constructing, modifying,or operating Comanche Unit 3 prior to receiving a final MACTdetermination.  PSCo strongly opposes theinjunction.  Among other issues, PSCobelieves that WEG has failed to establish a substantial likelihood of prevailingon the merits of the suit and that therefore there is no valid legal basis uponwhich an injunction should be issued. The court has yet to rule on WEG’s motion and the group sought atemporary restraining order to stop Comanche Unit 3 from comingon-line.  The court denied WEG’s requestfor a temporary restraining order on Jan. 26, 2010.  On March 9, 2010, the court partiallygranted and partially denied PSCo’s motion to dismiss.  The court requested additional briefing oncertain issues related to the MACT determination.  Briefing is expected to be finalized by May 6,2010.

 

***CherokeeOpacity Lawsuit***—On Aug. 6, 2009, WEG filed a lawsuit alleging that PSCo hadviolated the CAA through alleged opacity monitor downtime, as well as byallegedly exceeding opacity limits on 49 occasions over a five-year period atCherokee Station.  On Sept.16, 2009, PSCofiled a motion to dismiss the lawsuit and argued that opacity monitor downtimeis permitted by law.  Cherokee’s opacitymonitors were operating 98.4 percent of the time during the period inquestion.  When the monitors were not operating,it was for allowed activities, such as calibration, quality control orrepair.  On April 16, 2010, thecourt denied PSCo’s motion to dismiss, holding that whether the opacity monitordowntime is permitted is a question of fact that cannot be resolved in a motionto dismiss.  PSCo will continue tovigorously defend the lawsuit.

 

**Employment, Tort and Commercial Litigation**

** **

***Qwest vs. Xcel Energy Inc.***— In 2004, an employee of PSCo wasseriously injured when a pole owned by Qwest malfunctioned. In September 2005,the employee commenced an action against Qwest in Colorado state court inDenver.  In April 2006, Qwest fileda third party complaint against PSCo based on terms in a joint pole useagreement between Qwest and PSCo.  In May 2007,the matter was tried and the jury found Qwest solely liable for the accidentand this determination resulted in an award of damages in the amount ofapproximately $90 million.  In April 2009,the Colorado Court of Appeals affirmed the jury verdict insofar as it relatesto claims asserted by Qwest against PSCo. Qwest filed a petition for rehearing with the Colorado Supreme Court in June 2009.  On Feb. 22, 2010, the Colorado SupremeCourt issued a ruling by which it will review the Court of Appeals’ decision asto the punitive damages issue and will not review the Court of Appeals’decision as it relates to PSCo.

 

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***Mallon vs. Xcel Energy Inc. —***In August 2007, Xcel Energy, PSCoand PSRI (Plaintiffs) commenced a lawsuit in Colorado state court againstTheodore Mallon and TransFinancial Corporation seeking damages for, among otherthings, breach of contract and breach of fiduciary duties associated with thesale of COLI policies.  In May 2008,Plaintiffs filed an amended complaint that, among other things, adds ProvidentLife & Accident Insurance Company (Provident) as a defendant andasserts claims for breach of contract, unjust enrichment and fraudulentconcealment against the insurance company. On June 23, 2008, Provident filed a motion to dismiss thecomplaint.  On Oct. 22, 2008, thecourt granted Provident’s motion in part, but denied the motion with respect toa majority of the core causes of action asserted by Plaintiffs.  In September 2009, Plaintiffs reached asettlement with Mallon and TransFinancial Corporation.  Pursuant to the terms of the agreement,Mallon agreed to pay Plaintiffs a specified amount and the parties agreed tomutually release each other from all claims. Plaintiffs continue to prosecute their claims against Provident.  In November 2009, Plaintiffs andProvident filed motions for partial summary judgment, which the courtsubsequently granted in part in favor of Plaintiffs with respect to aninterpretation of the policies.  On Feb. 11,2010, the court denied Provident’s motion for partial summary judgment.  In March 2010, Plaintiffs filed a secondmotion for partial summary judgment concerning the applicable statute oflimitations.  On April 23, 2010,Provident filed a motion for summary judgment to dismiss the entire lawsuit. It is uncertain when the court will rule onthese motions.  Trial for this lawsuit isscheduled for Aug. 16, 2010.

 

***Cabin Creek Hydro Generating Station Accident***— In October 2007, employees of RPICoatings Inc. (RPI), a contractor retained by PSCo, were applying an epoxycoating to the inside of a penstock at PSCo’s Cabin Creek Hydro GeneratingStation near Georgetown, Colo.  A fireoccurred inside a pipe used to deliver water from a reservoir to the hydrofacility.  Five RPI employees were unableto exit the pipe and rescue crews confirmed their deaths.  The accident was investigated by severalstate and federal agencies, including the federal Occupational Safety andHealth Administration (OSHA) and the U. S. Chemical Safety Board and theColorado Bureau of Investigations.

 

In March 2008, OSHAproposed penalties totaling $189,900 for 22 serious violations and threewillful violations arising out of the accident. In April 2008, Xcel Energy notified OSHA of its decision to contestall of the proposed citations.  On May 28,2008, the Secretary of Labor filed its complaint, and Xcel Energy subsequentlyfiled its answer on June 17, 2008. The Court ordered this proceeding stayed until March 3, 2009 andhas subsequently extended the stay until the criminal proceedings haveconcluded.

 

A lawsuit was filed inColorado state court in Denver on behalf of four of the deceased workers andfour of the injured workers (Foster, et. al. v. PSCo, et. al.).  PSCo and Xcel Energy were named as defendantsin that case, along with RPI Coatings and related companies and the two othercontractors who also performed work in connection with the relining project at CabinCreek.  A second lawsuit (Ledbetter et.al vs. PSCo et. al) was also filed in Colorado state court in Denver on behalfof three employees allegedly injured in the accident.  A third lawsuit was filed on behalf of one ofthe deceased RPI workers in the California state court (Aguirre v. RPI, et.al.), naming PSCo, RPI, and the two other contractors as defendants. The courtsubsequently dismissed the Aguirre lawsuit. Settlements were subsequently reached in all three lawsuits.  These confidential settlements did not have amaterial effect on the financial statements of Xcel Energy or its subsidiaries.

 

On Aug. 28, 2009,the U. S. Government announced that Xcel Energy and PSCo have been charged withfive misdemeanor counts in federal court in Colorado for violation of an OSHAregulation related to the accident at Cabin Creek in October 2007.  RPI Coatings, the contractor performing thework at the plant, and two individuals employed by RPI have also beenindicted.  On Sept. 22, 2009, bothXcel Energy and PSCo entered a not guilty plea, and both will vigorously defendagainst these charges.  In December 2009,Xcel Energy and PSCo filed two separate motions to dismiss.  On March 29, 2010, the court issued anorder denying both motions.  No trialdate has yet been set.

 

***Stone & Webster, Inc. vs. PSCo***— On July 14, 2009, Stone &Webster, Inc. (Shaw) filed a complaint against PSCo in State DistrictCourt in Denver, Colo. for damages allegedly arising out of its constructionwork on the Comanche Unit 3 coal fired plant in Pueblo, Colo. Shaw, acontractor retained to perform certain engineering, procurement andconstruction work on Comanche Unit 3, alleges, among other things, thatPSCo was responsible for and mismanaged the construction of Comanche Unit 3.  Shaw further claims that this allegedmismanagement caused delays and damages in excess of $55 million.  The complaint also alleges that Xcel Energyand related entities, including PSCo, guaranteed Shaw $10 million infuture profits under the terms of a 2003 settlement agreement. Shaw allegesthat it will not receive the $10 million to which it is entitled.  Accordingly, Shaw seeks an amount up to$10 million relating to the 2003 settlement agreement.  PSCo denies these allegations and believesthe claims are without merit.  PSCo filedan answer and counterclaim in August 2009, denying the allegations in thecomplaint and alleging that Shaw has failed to discharge its contractualobligations and has caused delays, and that PSCo is entitled, among otherthings, to liquidated damages and excess costs incurred.  It is not anticipated that this lawsuit willaffect Comanche Unit 3’s expected in-service date.

 

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***Connie DeWeese vs. PSCo***— In November 2008, there was an explosion inPueblo, Colo., which destroyed a tavern and a neighboring store.  The explosion killed one person and injuredseven people.  The Pueblo Fire Departmentand the Federal Bureau of Alcohol, Tobacco and Firearms (ATF) have determined anatural gas leak from a pipeline under the street led to the explosion, statingthat natural gas passed through the soil and built up in the tavern’sbasement.  On Feb. 8, 2010, awrongful death/personal injury lawsuit was filed in Colorado District Court inPueblo, Colorado against PSCo and the City of Pueblo by several parties thatwere allegedly injured, as a result of this explosion.  The plaintiffs are also alleging economic andnoneconomic damages.  Among other things,the lawsuit alleges that the accident occurred as a result of PSCo’snegligence.  A related lawsuit was filedon March 19, 2010 by Seneca Insurance Company, which insured Branch Inn,LLC and Branch Inn Enterprises, LLC.  ThePlaintiffs are alleging destruction of the building and disruption of thebusiness.  Both lawsuits allege that theaccident occurred as a result of PSCo’s negligence.  PSCo denies liability for this accident.  The cases have been consolidated and ananswer will be filed once the Court rules on the outstanding motions inthe DeWeese matter.

 

**7.**              **Short-Term Borrowings and OtherFinancing Instruments**

 

***Commercial Paper —***The following table presents commercial paperoutstanding for PSCo:

 
| **(Millions of Dollars)**      | ** ** | **March 31,  2010** | ** ** | **Dec. 31,  2009** | ** ** |
|------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Commercial  paper outstanding            |       | $                        | 36.0       |                    | $          | 95.0 |   |
| Weighted  average interest rate          |       | 0.32                     | %          | 0.35                    | %          |
| Commercial  paper available for issuance |       | $                        | 700        |                    | $          | 700 |   |

 

***Money Pool —***Xcel Energy and its utility subsidiaries haveestablished a money pool arrangement that allows for short-term investments inand borrowings from the utility subsidiaries between each other.  The holding company may make investments inthe utility subsidiaries at market-based interest rates; however, the moneypool arrangement does not allow the utility subsidiaries to make investments inthe holding company.

 

The following table presentsthe money pool borrowings for PSCo:

 
| **(Millions of Dollars)** | ** ** | **March 31,  2010** | ** ** | **Dec. 31,  2009** | ** ** |
|-------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Money  pool outstanding             |       | $                        | 7.0        |                    | $          | 84.0 |   |
| Weighted  average interest rate     |       | 0.30                     | %          | 0.36                    | %          |
| Money  pool available for borrowing |       | $                        | 250        |                    | $          | 250 |   |

 

**8.**              **Derivative Instruments and Fair Value Measurements**

 

PSCo enters intoderivative instruments, including forward contracts, futures, swaps andoptions, for trading purposes and to reduce risk in connection with changes ininterest rates, utility commodity prices and vehicle fuel prices.

 

***Short-Term Wholesale and Commodity Trading Risk —***PSCo conducts various short-termwholesale and commodity trading activities, including the purchase and sale ofelectric capacity, energy and energy-related instruments.  PSCo’s risk management policy allowsmanagement to conduct the marketing activities within guidelines andlimitations as approved by its risk management committee, which is made up ofmanagement personnel not directly involved in the activities governed by thepolicy.

 

***Interest Rate Derivatives —***PSCo enters into various instruments thateffectively fix the interest payments on certain floating rate debt obligationsor effectively fix the yield or price on a specified benchmark interest ratefor a specific period.  These derivativeinstruments are generally designated as cash flow hedges for accounting purposes.

 

At March 31, 2010,accumulated other comprehensive income related to interest rate derivativesincluded $1.5 million of net gains, expected to be reclassified into earningsduring the next 12 months as the related hedged interest rate transactionsimpact earnings.

 

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***Commodity Derivatives —***PSCo enters into derivative instruments to managevariability of future cash flows from changes in commodity prices in itselectric and natural gas operations, as well as for trading purposes.  This could include the purchase or sale ofenergy or energy-related products, natural gas to generate electric energy, gasfor resale, and vehicle fuel.

 

At March 31, 2010,PSCo had various vehicle fuel related contracts designated as cash flow hedgesextending through December 2012. PSCo also enters into derivative instruments that mitigate commodityprice risk on behalf of electric and natural gas customers but are not designatedas qualifying hedging transactions. Changes in the fair value of non-trading commodity derivativeinstruments are recorded in other comprehensive income or deferred as aregulatory asset or liability.  Theclassification as a regulatory asset or liability is based on commissionapproved regulatory recovery mechanisms. PSCo recorded immaterial amounts to income related to theineffectiveness of cash flow hedges for the three months ended March 31,2010.

 

At March 31, 2010,accumulated other comprehensive income related to commodity derivative cashflow hedges included $0.8 million of net losses expected to be reclassifiedinto earnings during the next 12 months as the hedged transactions occur.

 

Additionally, PSCo enters into commodity derivativeinstruments for trading purposes not directly related to commodity price risksassociated with serving its electric and natural gas customers.  Changes in the fair value of these commodityderivatives are recorded in income subject to applicable customer margin-sharingmechanisms.

 

The followingtable details the gross notional amounts of futures, forwards and financialtransmission rights of commodity derivative contracts at March 31, 2010and Dec. 31, 2009:

 
| **(Amounts in Thousands)****(a)(b)** | ** ** | **March 31, 2010** | ** ** | **Dec. 31,  2009** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-------------------------|------------|
| Megawatt  hours (MWh) of electricity |       | 5,089                        |       | 3,559                   |       |
| MMBtu  of natural gas                |       | 21,286                       |       | 45,352                  |       |
| Gallons  of vehicle fuel             |       | 1,214                        |       | 1,559                   |       |

 

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(a) Amounts are not reflective of netpositions in the underlying commodities.

(b) Notional amounts for options are alsoincluded on a gross basis, but are weighted for the probability of exercise.

 

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

 
| ** **                                                                                    | ** ** | **Three  Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| **(Thousands of Dollars)**                                                          | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Accumulated  other comprehensive income related to cash flow hedges at Jan. 1            |       | $                                      | 8,101      |   | $ | 7,628 |   |
| After-tax  net unrealized gains related to derivatives accounted for as hedges                |       | 15                                     |       | 13 |   |
| After-tax  net realized (gains) losses on derivative transactions reclassified into  earnings |       | (123                                   | )          | 122 |   |
| Accumulated  other comprehensive income related to cash flow hedges at March 31          |       | $                                      | 7,993      |   | $ | 7,763 |   |

 

PSCo had no derivativeinstruments designated as fair value hedges during the three months ended March 31,2010 and March 31, 2009.  Therefore,no gains or losses from fair value hedges or related hedged transactions wererecognized for these periods.

 

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Thefollowing tables detail the impact of derivative activity during the threemonths ended March 31, 2010 and March 31, 2009, respectively, onother comprehensive income, regulatory assets and liabilities, and income:

 
| ** **                                        | ** ** | **Three  Months Ended March 31, 2010** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **Fair  Value Changes Recognized**          | ** ** | **Pre-Tax  Amounts Reclassified into** | ** ** | **Pre-Tax** | ** ** |
| ** **                                        | ** ** | **During  the Period in:**                  | ** ** | **Income  During the Period from:** | ** ** | **Gains  (Losses)** | ** ** |
| ** **                                        | ** ** | **Other**                                   | ** ** | **Regulatory** | ** ** | **Other** | ** ** | **Regulatory** | ** ** | **Recognized** | ** ** |
| ** **                                        | ** ** | **Comprehensive**                           | ** ** | **Assets  and** | ** ** | **Comprehensive** | ** ** | **Assets  and** | ** ** | **During  the Period** | ** ** |
| **(Thousands of Dollars)**              | ** ** | **Income  (Loss)**                          | ** ** | **Liabilities** | ** ** | **Income  (Loss)** | ** ** | **Liabilities** | ** ** | **in  Income** | ** ** |
| **Derivatives designated as cash flow****hedges** |       |                                        |       |   |   |   | ** ** | ** ** |   |   |   |
| Interest  rate                                    |       | $                                           | —     |   | $ | — |   | $ | (576) | (a) | $ | — |   | $ | — |   |
| Vehicle  fuel and other commodity                 |       | 24                                          |       | — |   | 377 | (c) | — |   | — |   |
| Total                                             |       | $                                           | 24         |   | $ | — |   | $ | (199 | ) | $ | — |   | $ | — |   |
|                                              |       |                                        |       |   |   |   |   |   |   |   |   |
| **Other derivative instruments**                  |       |                                        |       |   |   |   |   |   |   |   |   |
| Trading  commodity                                |       | $                                           | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | (249) | (b) |
| Natural  gas commodity                            |       | —                                      |       | (27,564 | ) | — |   | 3,637 | (d) | — |   |
| Vehicle  fuel and other commodity                 |       | —                                      |       | — |   | — |   | — |   | 50 | (b) |
| Total                                             |       | $                                           | —     |   | $ | (27,564 | ) | $ | — |   | $ | 3,637 |   | $ | (199 | ) |

 
| ** **                                        | ** ** | **Three  Months Ended March 31, 2009** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------|------------|
| ** **                                        | ** ** | **Fair  Value Changes Recognized**          | ** ** | **Pre-Tax  Amounts Reclassified into** | ** ** | **Pre-Tax** | ** ** |
| ** **                                        | ** ** | **During  the Period in:**                  | ** ** | **Income  During the Period from:** | ** ** | **Gains  (Losses)** | ** ** |
| ** **                                        | ** ** | **Other**                                   | ** ** | **Regulatory** | ** ** | **Other** | ** ** | **Regulatory** | ** ** | **Recognized** | ** ** |
| ** **                                        | ** ** | **Comprehensive**                           | ** ** | **Assets  and** | ** ** | **Comprehensive** | ** ** | **Assets  and** | ** ** | **During  the Period** | ** ** |
| **(Thousands of Dollars)**              | ** ** | **Income  (Loss)**                          | ** ** | **Liabilities** | ** ** | **Income  (Loss)** | ** ** | **Liabilities** | ** ** | **in  Income** | ** ** |
| **Derivatives designated as cash flow****hedges** | ** ** | ** **                                  |       |   |   |   | ** ** | ** ** |   |   |   |
| Interest  rate                                    |       | $                                           | —     |   | $ | — |   | $ | (592) | (a) | $ | — |   | $ | — |   |
| Natural  gas commodity                            |       | —                                      |       | (15,681 | ) | — |   | 65,700 | (d) | (22,243) | (d) |
| Vehicle  fuel and other commodity                 |       | 20                                          |       | — |   | 790 | (c) | — |   | — |   |
| Total                                             |       | $                                           | 20         |   | $ | (15,681 | ) | $ | 198 |   | $ | 65,700 |   | $ | (22,243 | ) |
|                                              |       |                                        |       |   |   |   |   |   |   |   |   |
| **Other derivative instruments**                  |       |                                        |       |   |   |   |   |   |   |   |   |
| Trading  commodity                                |       | $                                           | —     |   | $ | — |   | $ | — |   | $ | — |   | $ | 1,409 | (b) |
| Natural  gas commodity                            |       | —                                      |       | (14,646 | ) | — |   | 15 | (d) | — |   |
| Total                                             |       | $                                           | —     |   | $ | (14,646 | ) | $ | — |   | $ | 15 |   | $ | 1,409 |   |

 

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| (a) | Recorded  to interest charges.                                                                                                                                                                                                                                                           |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) | Recorded  to electric operating revenues. Portions of these gains and losses are shared  with electric customers through margin-sharing mechanisms and deducted from  gross revenue, as appropriate.                                                                                     |
| (c) | Recorded  to other O&M expenses.                                                                                                                                                                                                                                                     |
| (d) | Recorded  to cost of natural gas sold and transported; these derivative settlement  gains and losses are shared with natural gas customers through purchased  natural gas cost-recovery mechanisms, and reclassified out of income as  regulatory assets or liabilities, as appropriate. |

 

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***Credit Related Contingent Features******—***Contract provisionsof the derivative instruments that the utility subsidiaries enter into mayrequire the posting of collateral or settlement of the contracts for variousreasons, including if the applicable utility subsidiary is unable to maintainits credit rating.  If the credit ratingof PSCo were downgraded below investment grade, contracts underlying $3.5million and $0.6 million of derivative instruments in a net liability positionat March 31, 2010 and Dec. 31, 2009, respectively, would haverequired Xcel Energy to post collateral or settle applicable contracts, whichwould have resulted in payments to counterparties of $6.0 million and $3.4million, respectively.  At March 31,2010 and Dec. 31, 2009, there was no collateral posted on these specificcontracts.

 

PSCo’s derivativeinstruments are also subject to contract provisions that contain adequateassurance clauses.  These provisionsallow counterparties to seek performance assurance, including cash collateral,in the event that a given utility subsidiary’s ability to fulfill itscontractual obligations is reasonably expected to be impaired.  PSCo had no collateral posted related toadequate assurance clauses in derivative contracts as of March 31, 2010and Dec. 31, 2009.

 

***Fair Value Measurements***

 

***ASC 820 Fair Value Measurementsand Disclosures***provides a single definition of fair value and requires enhanced disclosuresabout assets and liabilities measured at fair value.  A hierarchal framework for disclosing theobservability of the inputs utilized in measuring assets and liabilities atfair value was established by this guidance. The three levels in the hierarchy and examples of each level are asfollows:

** **

Level 1 — Quoted prices are available in activemarkets for identical assets or liabilities as of the reported date. The typesof assets and liabilities included in Level 1 are highly liquid and activelytraded instruments with quoted prices, such as commodity derivative contractslisted on the New York Mercantile Exchange.

 

Level 2 — Pricing inputs are other than quoted pricesin active markets, but are either directly or indirectly observable as of thereported date.  The types of assets andliabilities included in Level 2 are typically either comparable to activelytraded contracts, such as energy forwards with pricing interpolated from recenttrades at a similar location, or priced with models using highly observableinputs, such as commodity forwards and options priced using observable forwardprices and volatilities.

 

Level 3 — Significant inputs to pricing have little orno observability as of the reported date. The types of assets and liabilities included in Level 3 are those withinputs requiring significant management judgment or estimation, such as thelong-term commodity price forecasts used to determine the fair value oflong-term energy forwards.  Certaincommodity forwards and options require the significant use of subjectiveforward price and volatility forecasts for commodities and locations withlimited observability, or settlements that extend to periods beyond thosereadily observable on active exchanges or quoted by brokers, and are includedin Level 3.

 

PSCocontinuously monitors the creditworthiness of the counterparties to itscommodity derivative contracts and assesses each counterparty’s ability toperform on the transactions set forth in the contracts.  Given this assessment, as well as anassessment of the impact of PSCo’s own credit risk when determining the fairvalue of commodity derivative liabilities, the impact of considering creditrisk was immaterial to the fair value of commodity derivative assets andliabilities presented in the consolidated balance sheets.

 

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***Recurring Fair Value Measurements***

 

The following table presentsfor each of the hierarchy levels, PSCo’s assets and liabilities that aremeasured at fair value on a recurring basis at March 31, 2010:

 
| ** **                                   | ** ** | **March 31,  2010** | ** ** |
|----------------------------------------------|------------|--------------------------|------------|
| ** **                                   | ** ** | **Fair  Value**          | ** ** | **Fair  Value** | ** ** | **Counterparty** | ** ** | ** ** | ** ** |
| **(Thousands of Dollars)**         | ** ** | **Level 1**         | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Netting****(b)** | ** ** | **Total** | ** ** |
| **Current derivative assets**                |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Derivatives  designated as cash flow hedges: |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Vehicle  fuel and other commodity            |       | $                        | —     |   | $ | 9 |   | $ | — |   | $ | 9 |   | $ | (9 | ) | $ | — |   |
| Other  derivative instruments:               |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Trading  commodity                           |       | 1,591                    |       | 10,761 |   | — |   | 12,352 |   | (10,266 | ) | 2,086 |   |
| Total  current derivative assets             |       | $                        | 1,591      |   | $ | 10,770 |   | $ | — |   | $ | 12,361 |   | $ | (10,275 | ) | 2,086 |   |
| Purchased  power agreements (a)         |       |                     |       |   |   |   |   |   |   |   |   | 13,743 |   |
| Current  derivative instruments valuation    |       |                     |       |   |   |   |   |   |   |   |   | $ | 15,829 |   |
| **Noncurrent derivative assets**             |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Derivatives  designated as cash flow hedges: |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Vehicle  fuel and other commodity            |       | $                        | —     |   | $ | 62 |   | $ | — |   | $ | 62 |   | $ | — |   | $ | 62 |   |
| Other  derivative instruments:               |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Trading  commodity                           |       | —                   |       | 4,414 |   | 485 |   | 4,899 |   | (1,206 | ) | 3,693 |   |
| Total  noncurrent derivative assets          |       | $                        | —     |   | $ | 4,476 |   | $ | 485 |   | $ | 4,961 |   | $ | (1,206 | ) | 3,755 |   |
| Purchased  power agreements (a)         |       |                     |       |   |   |   |   |   |   |   |   | 82,424 |   |
| Noncurrent  derivativeinstruments valuation  |       |                     |       |   |   |   |   |   |   |   |   | $ | 86,179 |   |
|                                         |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| **Current derivative liabilities**           |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Derivatives  designated as cash flow hedges: |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Vehicle  fuel and other commodity            |       | $                        | —     |   | $ | 908 |   | $ | — |   | $ | 908 |   | $ | (9 | ) | $ | 899 |   |
| Other  derivative instruments:               |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Trading  commodity                           |       | 1,435                    |       | 10,771 |   | 18 |   | 12,224 |   | (11,506 | ) | 718 |   |
| Natural  gas commodity                       |       | —                   |       | 20,809 |   | — |   | 20,809 |   | (7,750 | ) | 13,059 |   |
| Other  commodity                             |       | —                   |       | — |   | 4 |   | 4 |   | — |   | 4 |   |
| Total  current derivative liabilities        |       | $                        | 1,435      |   | $ | 32,488 |   | $ | 22 |   | $ | 33,945 |   | $ | (19,265 | ) | 14,680 |   |
| Purchased  power agreements (a)         |       |                     |       |   |   |   |   |   |   |   |   | 5,740 |   |
| Current  derivative instruments valuation    |       |                     |       |   |   |   |   |   |   |   |   | $ | 20,420 |   |
| **Noncurrent derivative liabilities**        |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Other  derivative instruments:               |       |                     |       |   |   |   |   |   |   |   |   |   |   |
| Trading  commodity                           |       | $                        | —     |   | $ | 3,316 |   | $ | 132 |   | $ | 3,448 |   | $ | (1,206 | ) | $ | 2,242 |   |
| Natural  gas commodity                       |       | —                   |       | 281 |   | — |   | 281 |   | — |   | 281 |   |
| Total  noncurrent derivative liabilities     |       | $                        | —     |   | $ | 3,597 |   | $ | 132 |   | $ | 3,729 |   | $ | (1,206 | ) | 2,523 |   |
| Purchased  power agreements (a)         |       |                     |       |   |   |   |   |   |   |   |   | 43,977 |   |
| Noncurrent  derivativeinstruments valuation  |       |                     |       |   |   |   |   |   |   |   |   | $ | 46,500 |   |

 

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| (a) | In  2003, as a result of implementing new guidance on the normal purchase  exception for derivative accounting contained in *ASC 815  Derivatives and Hedging*, PSCo began recording several long-term purchased  power agreements at fair value due to accounting requirements related to  underlying price adjustments. As these purchases are recovered through normal  regulatory recovery mechanisms in the respective jurisdictions, the changes  in fair value for these contracts were offset by regulatory assets and  liabilities. During 2006, PSCo qualified these contracts under the normal  purchase exception. Based on this qualification, the contracts are no longer  adjusted to fair value and the previous carrying value of these contracts  will be amortized over the remaining contract lives along with the offsetting  regulatory assets and liabilities. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) | *ASC  815 Derivatives and Hedging*permits the netting of  receivables and payables for derivatives and related collateral amounts when  a legally enforceable master netting agreement exists between PSCo and a  counterparty. A master netting agreement is an agreement between two parties  who have multiple contracts with each other that provides for the net  settlement of all contracts in the event of default on or termination of any  one contract.                                                                                                                                                                                                                                                                                                                                                                                                                    |

 

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PSCo recognizes transfersbetween levels as of the beginning of each period.  The following table presentsthe transfers that occurred between Level 2 and Level 3 during the three monthsended March 31, 2010:

 
| ** **                                       | ** ** | **From  Level 3 to   Level 2****(a) (b)** | ** ** |
|--------------------------------------------------|------------|------------------------------------------------|------------|
| **(Thousands of Dollars)**             | ** ** | **Trading    commodity**                       | ** ** |
| Derivatives  not designated as cash flow hedges: |       |                                           |       |
| Current  assets                                  |       | $                                              | 1,740      |   |
| Noncurrent  assets                               |       | 4,988                                          |       |
| Current  liabilities                             |       | (1,265                                         | )          |
| Noncurrent  liabilities                          |       | (2,891                                         | )          |
| Total                                            |       | $                                              | 2,572      |   |

 

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| (a) | The  transfer of amounts from Level 3 to Level 2 is primarily due to the passing  of time and resulting increased availability of observable inputs to value  certain long-term derivative contracts. |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) | There  were no transfers of amounts from Level 2 to Level 3.                                                                                                                                          |

 

Thefollowing table presents for each of the hierarchy levels, PSCo’s assets andliabilities that are measured at fair value on a recurring basis at Dec. 31,2009:

 
| ** **                                  | ** ** | **Dec. 31,  2009** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|
| ** **                                  | ** ** | **Fair  Value**         | ** ** | **Fair  Value** | ** ** | **Counterparty** | ** ** | ** ** | ** ** |
| **(Thousands of Dollars)**        | ** ** | **Level 1**        | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Netting****(b)** | ** ** | **Total** | ** ** |
| **Current derivative assets**               |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Other  derivative instruments:              |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Trading  commodity                          |       | $                       | —     |   | $ | 2,380 |   | $ | 986 |   | $ | 3,366 |   | $ | (2,120 | ) | $ | 1,246 |   |
| Natural  gas commodity                      |       | —                  |       | 8,752 |   | — |   | 8,752 |   | 111 |   | 8,863 |   |
| Total  current derivative assets            |       | $                       | —     |   | $ | 11,132 |   | $ | 986 |   | $ | 12,118 |   | $ | (2,009 | ) | 10,109 |   |
| Purchased  power agreements (a)        |       |                    |       |   |   |   |   |   |   |   |   | 18,595 |   |
| Current  derivative instruments valuation   |       |                    |       |   |   |   |   |   |   |   |   | $ | 28,704 |   |
| **Noncurrent derivative assets**            |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Derivatives  designated as cash flow hedges |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Vehicle  fuel and other commodity           |       | $                       | —     |   | $ | 69 |   | $ | — |   | $ | 69 |   | $ | — |   | $ | 69 |   |
| Other  derivative instruments:              |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Trading  commodity                          |       | —                  |       | 1,514 |   | 1,535 |   | 3,049 |   | 677 |   | 3,726 |   |
| Natural  gas commodity                      |       | —                  |       | 476 |   | — |   | 476 |   | 248 |   | 724 |   |
| Total  noncurrent derivative assets         |       | $                       | —     |   | $ | 2,059 |   | $ | 1,535 |   | $ | 3,594 |   | $ | 925 |   | 4,519 |   |
| Purchased  power agreements (a)        |       |                    |       |   |   |   |   |   |   |   |   | 100,145 |   |
| Noncurrent  derivativeinstruments valuation |       |                    |       |   |   |   |   |   |   |   |   | $ | 104,664 |   |

 

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| ** **                                      | ** ** | **Dec. 31,  2009** | ** ** |
|-------------------------------------------------|------------|-------------------------|------------|
| ** **                                      | ** ** | **Fair  Value**         | ** ** | **Fair  Value** | ** ** | **Counterparty** | ** ** | ** ** | ** ** |
| **(Thousands of Dollars)**            | ** ** | **Level 1**        | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Netting****(b)** | ** ** | **Total** | ** ** |
|                                            |       |                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Current derivative liabilities**              |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Derivatives  designated as cash flow hedges     |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Vehicle  fuel and other commodity               |       | $                       | —     |   | $ | 1,338 |   | $ | — |   | $ | 1,338 |   | $ | — |   | $ | 1,338 |   |
| Other  derivative instruments:                  |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Trading  commodity                              |       | —                  |       | 3,555 |   | 834 |   | 4,389 |   | (2,589 | ) | 1,800 |   |
| Natural  gas commodity                          |       | —                  |       | 6,090 |   | — |   | 6,090 |   | 111 |   | 6,201 |   |
| Total  current derivative liabilities           |       | $                       | —     |   | $ | 10,983 |   | $ | 834 |   | $ | 11,817 |   | $ | (2,478 | ) | 9,339 |   |
| Purchased  power agreements (a)            |       |                    |       |   |   |   |   |   |   |   |   | 8,946 |   |
| Current  derivative instruments  valuation |       |                    |       |   |   |   |   |   |   |   |   | $ | 18,285 |   |
| **Noncurrent derivative liabilities**           |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Other  derivative instruments:                  |       |                    |       |   |   |   |   |   |   |   |   |   |   |
| Trading  commodity                              |       | $                       | —     |   | $ | 489 |   | $ | 883 |   | $ | 1,372 |   | $ | 676 |   | $ | 2,048 |   |
| Natural  gas commodity                          |       | —                  |       | 302 |   | — |   | 302 |   | 248 |   | 550 |   |
| Total  noncurrent derivative liabilities        |       | $                       | —     |   | $ | 791 |   | $ | 883 |   | $ | 1,674 |   | $ | 924 |   | 2,598 |   |
| Purchased  power agreements (a)            |       |                    |       |   |   |   |   |   |   |   |   | 46,989 |   |
| Noncurrent  derivativeinstruments valuation     |       |                    |       |   |   |   |   |   |   |   |   | $ | 49,587 |   |

 

----

| (a) | In  2003, as a result of implementing new guidance on the normal purchase  exception for derivative accounting contained in *ASC 815  Derivatives and Hedging*, PSCo began recording several long-term  purchased power agreements at fair value due to accounting requirements  related to underlying price adjustments. As these purchases are recovered  through normal regulatory recovery mechanisms in the respective  jurisdictions, the changes in fair value for these contracts were offset by  regulatory assets and liabilities. During 2006, PSCo qualified these  contracts under the normal purchase exception. Based on this qualification,  the contracts are no longer adjusted to fair value and the previous carrying  value of these contracts will be amortized over the remaining contract lives  along with the offsetting regulatory assets and liabilities. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (b) | *ASC 815 Derivatives and Hedging*permits the  netting of receivables and payables for derivatives and related collateral  amounts when a legally enforceable master netting agreement exists between  PSCo and a counterparty. A master netting agreement is an agreement between  two parties who have multiple contracts with each other that provides for the  net settlement of all contracts in the event of default on or termination of  any one contract.                                                                                                                                                                                                                                                                                                                                                                                                                     |

 

Thefollowing tables present the changes in Level 3 recurring fair valuemeasurements for the three months ended March 31, 2010 and 2009:

 
| ** **                                             | ** ** | **Three  Months Ended March 31** | ** ** |
|--------------------------------------------------------|------------|---------------------------------------|------------|
| **(Thousands of Dollars)**                   | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| Balance  at Jan. 1                                |       | $                                     | 804        |   | $ | (26 | ) |
| Purchases  and settlements, net                        |       | (149                                  | )          | (353 | ) |
| Transfers  out of Level 3                              |       | (2,572                                | )          | — |   |
| Gains  recognized in earnings                          |       | 2,248                                 |       | 2,465 |   |
| Gains  recognized as regulatory assets and liabilities |       | —                                |       | 62 |   |
| Balance  at March 31                              |       | $                                     | 331        |   | $ | 2,148 |   |

 

Gainson Level 3 commodity derivatives recognized in earnings for the three monthsended March 31, 2010, include $2.2 million of net unrealized gains relating to commodityderivatives held at March 31, 2010. Gains on Level 3 commodity derivatives recognized in earnings for thethree months ended March 31, 2009, included $2.5 million of net unrealizedgains relating to commodityderivatives held at March 31, 2009. Realized and unrealized gains and losses on commodity trading activitiesare included in electric revenues. Realized and unrealized gains and losses on non-trading derivativeinstruments are recorded in other comprehensive income or deferred asregulatory assets and liabilities.  Theclassification as a regulatory asset or liability is based on the commissionapproved regulatory recovery mechanisms.

 

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**9.****             ****Financial Instruments**

 

The estimated fair valuesof PSCo’s recorded financial instruments are as follows:

 
| ** **                                 | ** ** | **March 31,  2010** | ** ** | **Dec. 31,  2009** | ** ** |
|--------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                 | ** ** | **Carrying**             | ** ** | ** **              | ** ** | **Carrying** | ** ** | ** ** | ** ** |
| **(Thousands of Dollars)**       | ** ** | **Amount**               | ** ** | **Fair  Value**         | ** ** | **Amount** | ** ** | **Fair  Value** | ** ** |
| Other  investments                         |       | $                        | 8          |                    | $          | 8 |   | $ | 8 |   | $ | 8 |   |
| Long-term  debt, including current portion |       | 2,827,777                |       | 3,071,092               |       | 2,828,952 |   | 3,050,249 |   |
|                                            |            |                          |            |                         |            |  |  |  |  |  |  |  |  |

 

The fair value of cashand cash equivalents, notes and accounts receivable and notes and accounts payableare not materially different from their carrying amounts.  The fair value of PSCo’s other investments isestimated based on quoted market prices for those or similar investments.  The fair value of PSCo’s long-term debt isestimated based on the quoted market prices for the same or similar issues, orthe current rates for debt of the same remaining maturities and credit quality.

 

The fair value estimatespresented are based on information available to management as of March 31,2010 and Dec. 31, 2009.  These fairvalue estimates have not been comprehensively revalued for purposes of theseconsolidated financial statements since that date and current estimates of fairvalues may differ significantly.

 

***Letters ofCredit***— PSCo uses letters ofcredit, generally with terms of one year, to provide financial guarantees forcertain operating obligations.  At March 31,2010 and Dec. 31, 2009, there were $4.8 million and $4.6 million ofletters of credit outstanding, respectively. The contract amounts of these letters of credit approximate their fairvalue and are subject to fees determined in the marketplace.

** **

**10.     Other Income, Net**

 

Other income (expense), net,consisted of the following:

 
| ** **                           | ** ** | **Three  Months Ended March 31,** | ** ** |
|--------------------------------------|------------|----------------------------------------|------------|
| **(Thousands of Dollars)** | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Interest  income                     |       | $                                      | 378        |   | $ | 467 |   |
| Other  nonoperating income           |       | 431                                    |       | 354 |   |
| Insurance  policy (expenses) income  |       | (253                                   | )          | 125 |   |
| Other  nonoperating expenses         |       | —                                 |       | (77 | ) |
| Other  income, net                   |       | $                                      | 556        |   | $ | 869 |   |

 

**11.     Segment Information**

 

PSCohas two reportable segments: regulated electric utility and regulated naturalgas utility.  Commodity tradingoperations are not a reportable segment and are included in the regulatedelectric segment.  All other revenuesprimarily include steam revenue, appliance repair services and nonutility realestate activities.

 
| ** **                                  | ** ** | **Regulated** | ** ** | **Regulated**        | ** ** | **All**   | ** ** | **Reconciling**  | ** ** | **Consolidated** | ** ** |
|---------------------------------------------|------------|---------------|------------|----------------------|------------|-----------|------------|------------------|------------|------------------|------------|
| **(Thousands of Dollars)**        | ** ** | **Electric**  | ** ** | **Natural Gas** | ** ** | **Other** | ** ** | **Eliminations** | ** ** | **Total**        | ** ** |
| **Three Months Ended March 31, 2010**  |       |          |       |                 |       |      |       |             |       |             |       |
| Operating  revenues from external customers |       | $             | 723,634    |                 | $          | 466,283   |       | $                | 12,780     |             | $          | — |   | $ | 1,202,697 |   |
| Intersegment  revenues                      |       | 1,012         |       | 72                   |       | —    |       | (1,084           | )          | —           |       |
| Total  revenues                             |       | $             | 724,646    |                 | $          | 466,355   |       | $                | 12,780     |             | $          | (1,084 | ) | $ | 1,202,697 |   |
| Net  income (loss)                          |       | $             | 57,354     |                 | $          | 34,674    |       | $                | (7,778     | )                | $          | — |   | $ | 84,250 |   |
|                                        |       |          |       |                 |       |      |       |             |       |             |       |
| **Three Months Ended March 31, 2009**  |       |          |       |                 |       |      |       |             |       |             |       |
| Operating  revenues from external customers |       | $             | 597,343    |                 | $          | 395,121   |       | $                | 10,014     |             | $          | — |   | $ | 1,002,478 |   |
| Intersegment  revenues                      |       | 93            |       | 31                   |       | —    |       | (124             | )          | —           |       |
| Total  revenues                             |       | $             | 597,436    |                 | $          | 395,152   |       | $                | 10,014     |             | $          | (124 | ) | $ | 1,002,478 |   |
| Net  income                                 |       | $             | 42,311     |                 | $          | 31,239    |       | $                | 4,738      |             | $          | — |   | $ | 78,288 |   |

 

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**12.****    ****Comprehensive Income**

 

The components of totalcomprehensive income are shown below:

 
| ** **                                                                                    | ** ** | **Three  Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| **(Thousands of Dollars)**                                                          | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Net  income                                                                                   |       | $                                      | 84,250     |   | $ | 78,288 |   |
| Other  comprehensive (loss) income:                                                           |       |                                   |       |   |   |
| After-tax  net unrealized gains related to derivatives accounted for as hedges                |       | 15                                     |       | 13 |   |
| After-tax  net realized (gains) losses on derivative transactions reclassified into  earnings |       | (123                                   | )          | 122 |   |
| Other  comprehensive (loss) income                                                            |       | (108                                   | )          | 135 |   |
| Comprehensive  income                                                                         |       | $                                      | 84,142     |   | $ | 78,423 |   |

 

**13.****   ****BenefitPlans and Other Postretirement Benefits**

 

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

 

**Componentsof Net Periodic Benefit Cost**

 
| ** **                                                                                  | ** ** | **Three  Months Ended March 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                                                  | ** ** | **2010**                               | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| **(Thousands of Dollars)**                                                        | ** ** | **Pension  Benefits**                  | ** ** | **Postretirement  Health Care  Benefits** | ** ** |
| **Xcel Energy Inc.**                                                                        | ** ** | ** **                             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service  cost                                                                               |       | $                                      | 17,618     |   | $ | 15,986 |   | $ | 1,038 |   | $ | 1,276 |   |
| Interest  cost                                                                              |       | 40,652                                 |       | 41,849 |   | 10,529 |   | 12,156 |   |
| Expected  return on plan assets                                                             |       | (58,124                                | )          | (63,360 | ) | (7,134 | ) | (5,394 | ) |
| Amortization  of transition obligation                                                      |       | —                                 |       | — |   | 3,611 |   | 3,496 |   |
| Amortization  of prior service cost (credit)                                                |       | 5,164                                  |       | 6,155 |   | (1,233 | ) | (652 | ) |
| Amortization  of net loss                                                                   |       | 11,024                                 |       | 2,929 |   | 2,709 |   | 4,885 |   |
| Net  periodic benefit cost                                                                  |       | 16,334                                 |       | 3,559 |   | 9,520 |   | 15,767 |   |
| Costs  not recognized and additional cost recognized due to the effects of  regulation |       | (7,326                                 | )          | (487 | ) | 973 |   | 973 |   |
| Net  benefit cost recognized for financial reporting                                        |       | $                                      | 9,008      |   | $ | 3,072 |   | $ | 10,493 |   | $ | 16,740 |   |
|                                                                                        |       |                                   |       |   |   |   |   |   |   |
| **PSCo:**                                                                                   |       |                                   |       |   |   |   |   |   |   |
| Net  periodic benefit cost                                                                  |       | $                                      | 3,323      |   | $ | 3,761 |   | $ | 5,513 |   | $ | 9,574 |   |
| Additional  cost recognized due to the effects of regulation                                |       | —                                 |       | — |   | 973 |   | 973 |   |
| Net  benefit cost recognized for financial reporting                                        |       | $                                      | 3,323      |   | $ | 3,761 |   | $ | 6,486 |   | $ | 10,547 |   |

 

**14.**   Subsequent Event

 

In April 2010, PSCo reached an agreement withRiverside Energy Center LLC and Calpine Development Holdings, Inc. topurchase the Rocky Mountain Energy Center and Blue Spruce Energy Center naturalgas generation assets for $739 million. The acquisition is expected to close in December 2010.  The acquisition is subject to state andfederal regulatory approvals including cost recovery.  The acquisition developed out of the 2007resource plan in which the assets were offered as part of the CPUC competitivebidding process.  The offer was the leastcost option for thermal resources to be acquired under the plan.

 

The Rocky Mountain Energy Center is a 621 MW combinedcycle natural gas-fired power plant that began commercial operations in2004.  The Blue Spruce Energy Center is a310 MW simple cycle natural gas-fired power plant that began commercialoperations in 2003.  Both power plantscurrently provide energy and capacity to PSCo under power purchase agreements,which were set to expire in 2013 and 2014.

 

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**Item2 — MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

Discussionof financial condition and liquidity for PSCo is omitted per conditions setforth in general instructions H (1) (a) and (b) of Form 10-Qfor wholly owned subsidiaries.  It isreplaced with management’s narrative analysis of the results of operations setforth in general instructions H (2) (a) of Form 10-Q for whollyowned subsidiaries (reduced disclosure format).

 

**Financial Review**

 

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

 

**Forward-Looking Statements**

 

Except for thehistorical statements contained in this report, the matters discussed in thefollowing discussion and analysis are forward-looking statements that aresubject to certain risks, uncertainties and assumptions. Such forward-lookingstatements are intended to be identified in this document by the words “anticipate,”“believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,”“project,” “possible,” “potential,” “should” and similar expressions. Actualresults may vary materially. Forward-looking statements speak only as of thedate they are made, and we do not undertake any obligation to update them toreflect changes that occur after that date. Factors that could cause actual results to differ materially include,but are not limited to: general economic conditions, including the availabilityof credit and its impact on capital expenditures and the ability of PSCo andits subsidiaries to obtain financing on favorable terms; business conditions inthe energy industry; actions of credit rating agencies; competitive factors,including the extent and timing of the entry of additional competition in themarkets served by PSCo and its subsidiaries; unusual weather; effects ofgeopolitical events, including war and acts of terrorism; state, federal andforeign legislative and regulatory initiatives that affect cost and investmentrecovery, have an impact on rates or have an impact on asset operation orownership or impose environmental compliance conditions; structures that affectthe speed and degree to which competition enters the electric and natural gasmarkets; costs and other effects of legal and administrative proceedings,settlements, investigations and claims; environmental laws and regulations;actions of accounting regulatory bodies; the items described under FactorsAffecting Results of Continuing Operations; and the other risk factors listedfrom time to time by PSCo in reports filed with the SEC, including “RiskFactors” in Item 1A of PSCo’s Form 10-K for the year ended Dec. 31,2009, and Item 1A and Exhibit 99.01 to this Quarterly Report on Form 10-Qfor the quarter ended March 31, 2010.

 

**MarketRisks**

 

PSCois exposed to market risks, including changes in commodity prices and interestrates, as disclosed in Item 7A, Quantitative and Qualitative Disclosures AboutMarket Risk, in its Annual Report on Form 10-K for the year ended Dec. 31,2009.  Commodity price and interest raterisks for PSCo are mitigated in most jurisdictions due to cost-based rateregulation.

 

Distressin the financial markets may impact the fair value of the debt and equitysecurities in pension and postretirement health care plan trusts, as well asPSCo’s ability to earn a return on short-term investments of excess cash.  As of March 31, 2010, there have been nomaterial changes to market risks from that set forth in PSCo’s Annual Report onForm 10-K for the year ended Dec. 31, 2009.

 

**Results ofOperations**

 

PSCo’s net income wasapproximately $84.3 million for the first three months of 2010, compared withapproximately $78.3 million for the first three months of 2009.

 

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** **

**Electric Revenues and Margin**

** **

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

 
| ** **                         | ** ** | **Three  Months Ended March 31,** | ** ** |
|------------------------------------|------------|----------------------------------------|------------|
| **(Millions  of Dollars)**         | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Electric  revenues                 |       | $                                      | 724        |   | $ | 597 |   |
| Electric  fuel and purchased power |       | (374                                   | )          | (307 | ) |
| Electric  margin                   |       | $                                      | 350        |   | $ | 290 |   |

 

**The following summarizesthe components of the changes in electric revenues and margin for the threemonths ended March 31:**

** **

***Electric Revenues***

** **
| **(Millions  of Dollars)**                        | ** ** | **2010  vs. 2009** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|
| Fuel  and purchased power cost recovery           |       | $                  | 50         |   |
| Retail  rate increase                             |       | 42                 |       |
| Trading                                           |       | 18                 |       |
| DSM  revenues (generally offset by expenses)      |       | 5                  |       |
| Retail  sales increase (excluding weather impact) |       | 4                  |       |
| Estimated  impact of weather                      |       | 3                  |       |
| Other,  net                                       |       | 5                  |       |
| Total  increase in electric revenues              |       | $                  | 127        |   |

** **

***Electric Margin***

** **
| **(Millions  of Dollars)**                        | ** ** | **2010  vs. 2009** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|
| Retail  rate increase                             |       | $                  | 42         |   |
| DSM  revenues (generally offset by expenses)      |       | 5                  |       |
| Retail  sales increase (excluding weather impact) |       | 4                  |       |
| Trading                                           |       | 3                  |       |
| Estimated  impact of weather                      |       | 3                  |       |
| Firm  wholesale                                   |       | 3                  |       |
| Total  increase in electric margin                |       | $                  | 60         |   |

** **

**NaturalGas Revenues and Margin**

** **

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

 
| ** **                                | ** ** | **Three  Months Ended March 31,** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|
| **(Millions  of Dollars)**                | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Natural  gas revenues                     |       | $                                      | 466        |   | $ | 395 |   |
| Cost  of natural gas sold and transported |       | (341                                   | )          | (282 | ) |
| Natural  gas margin                       |       | $                                      | 125        |   | $ | 113 |   |

 

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Thefollowing summarizes the components of the changes in natural gas revenues andmargin for the three months ended March 31:

 

***Natural Gas Revenues***

*** ***
| **(Millions  of Dollars)**                        | ** ** | **2010  vs. 2009** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|
| Purchased  natural gas cost recovery              |       | $                  | 58         |   |
| Estimated  impact of weather                      |       | 8                  |       |
| DSM  revenues (generally offset by expenses)      |       | 2                  |       |
| Retail  sales increase (excluding weather impact) |       | 1                  |       |
| Other,  net                                       |       | 2                  |       |
| Total  increase in natural gas revenues           |       | $                  | 71         |   |

*** ***

***Natural Gas Margin***

*** ***
| **(Millions  of Dollars)**                        | ** ** | **2010  vs. 2009** | ** ** |
|---------------------------------------------------|------------|--------------------|------------|
| Estimated  impact of weather                      |       | $                  | 8          |   |
| DSM  revenues (generally offset by expenses)      |       | 2                  |       |
| Retail  sales increase (excluding weather impact) |       | 1                  |       |
| Other,  net                                       |       | 1                  |       |
| Total  increase in natural gas margin             |       | $                  | 12         |   |

 

**Non-FuelOperating Expense and Other Items**

 

***Other Operatingand Maintenance Expenses****—*Other operating and maintenance expenses for the first three months of2010 increased $0.8 million compared with the first three months of 2009.  The following summarizes thecomponents of the changes for the three months ended March 31:

 
| **(Millions  of Dollars)**                                  | ** ** | **2010  vs. 2009** | ** ** |
|-------------------------------------------------------------|------------|--------------------|------------|
| Lower  employee benefit costs                               |       | $                  | (5         | ) |
| Higher  plant generation costs                              |       | 1                  |       |
| Higher  contract labor costs                                |       | 1                  |       |
| Higher  information technology costs                        |       | 1                  |       |
| Other,  net                                                 |       | 3                  |       |
| Total  increase in other operating and maintenance expenses |       | $                  | 1          |   |

 

Lower employee benefits costs are primarily the resultof lower active and retiree health care costs.

 

***Demand SideManagement (DSM) Program Expenses****—*****DSM program expenses increased byapproximately $7.6 million, or 28.9 percent, for the first three months of2010, compared with the first three months of 2009.  The higher expense is attributable to theongoing expansion of such programs as designed, in part, to meet certainregulatory commitments in Colorado.

 

***Depreciation and Amortization****—*Depreciationand amortization increased by approximately $4.4 million, or 7.1 percent, forthe first three months of 2010, compared with the first three months of2009.  The increase is primarily due to planned systemexpansion.

 

*****Allowancefor Funds Used During Construction, Equity and Debt (AFUDC)*********— AFUDC decreased by approximately $10.5million for the first three months of 2010, compared with the first threemonths of 2009.  This decrease wasprimarily due to lower AFUDC rates, primarily driven by lower interest rates.

 

***Interest Charges***—******Interest charges increased by approximately $5.5 million, or13.5 percent, for the first three months of 2010, compared with the first threemonths of 2009, primarily due to increased long-term borrowings.

 

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***Income Taxes —***Income taxexpense increased by $36.9 million for the first three months of 2010, comparedwith the first three months of 2009.  The increase in income tax expensewas primarily due to an increase in pretax income, a write-off of tax benefitpreviously recorded for Medicare Part D subsidies, and an adjustment atPSRI related to the COLI Tax Court proceedings. For furtherinformation, see Note 4 to the consolidated financial statements.  The effective tax rate was47.5 percent for the first three months of 2010, compared with 33.4 percent forthe same period in 2009.  The higher effective tax rate for thefirst three months of 2010 was primarily due to the write-off of tax benefitfor Medicare Part D subsidies and the adjustment at PSRI.  Without these two charges, the effective taxrate for the first three months of 2010 would have been 36.5 percent.

 

**Factors Affecting Results of Continuing Operations**

** **

**Public Utility Regulation**

 

***PSCo Resource Plan***— In September 2008,the CPUC issued its order detailing the amount of resources that will be added,including the following:

 

·                     Increase inwind portfolio of 850 MW by 2015. PSCo would then have a total of approximately 1,900 MW of windpower resources;

·                     Add up to250 MW of concentrating solar thermal technology with thermal storage;

·                     Increasecustomer efficiency and conservation programs with plans to meet the CPUC goalsof annual energy sales reductions to approximately 3,669 gigawatt hours (GWh),that would yield a demand savings in the range of 886 MW to 994 MW by2020;

·                     Retirement oftwo older coal-burning plants (two units at Arapahoe and two units at Cameo),replacing the capacity with company owned resources, provided the costs arereasonable; and

·                     Reduce PSCo’sCO2 emissions between 10 and 15 percent below2005 levels and for PSCo to propose additional reductions to achieve a20 percent reduction by 2020 in its next plan.

 

PSCoacquired 174 MW of wind resources and 19 MW of central stationphotovoltaic (PV) solar resources through separate request for proposal (RFP)sand those contracts were specifically approved by the CPUC.  In January 2009, PSCo issued anall-source RFPs to fill the approved resource plan. Bids were received in April 2009,and PSCo filed its bid evaluation report with the CPUC in August 2009.

 

InOctober 2009, the CPUC approved the acquisitions of the resourcesidentified in the evaluation report. With minor modification, the CPUC adopted PSCo’s preferred plan, whichincludes an incremental 900 MW of additional intermittent renewable energyresources (wind and PV solar) and approximately 280 MW of “new technology”renewable energy sources.  The CPUCapproved the negotiation of purchased power contracts from a pool of PV solarbidders, rather than designating specific bidders.  The CPUC approved the selection of about 800MW of traditional gas-fired resources. The CPUC preferred that PSCo file its next resource plan in the normalcourse of business in the fall of 2011 rather than making an interim filing in2010.  The Colorado OCC has appealed theCPUC’s approval of the resource plan to Denver District Court, arguing that theCPUC erred in approving a portfolio where PSCo obtained an ownership interestin gas-fired generation and that this portfolio will not result in just andreasonable rates.

 

***RES***— The 2007 Coloradolegislature adopted an increased RES that requires PSCo to generate or cause tobe generated electricity from renewable resources equaling 20 percent by2020.  The CPUC approved all materialaspects of PSCo’s 2009 RES compliance plan in August 2009.  The 2010 compliance plan was filed in October 2009and is pending before the CPUC.

 

InMarch 2010, Colorado enacted a law that increases the RES for PSCo andremoves the solar standard and replaces it with a distributed generationstandard.  Within the distributedgeneration standard, at least one-half of the distributed generation must beretail distributed generation, i.e., generation that is on customer premisesbehind the customer meter.  The lawrequires that PSCo generate or cause to be generated electricity from renewableresources equaling:

 

·                     At least 12percent of its retail sales for the years 2011 through 2014;

·                     At least 20percent of its retail sales for the years 2015 through 2019; and

·                     At least 30percent of its retail sales for the years 2020 and thereafter.

 

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Inaddition, distributed generation must equal:

 

·                     At least 1percent of retail sales in the years 2011 and 2012 and 1.25 percent of retailsales in the years 2013 and 2014;

·                     At least 1.75percent of retail sales in the years 2015 and 2016 and 2 percent of retailsales in the years 2017, 2018 and 2019;

·                     At least 3percent of retail sales in those years.

 

TheCPUC has discretion to review the reasonableness of the increase in thedistributed generation percentage in 2014.

 

***San Luis Valley-Calumet-ComancheUnit 3 Transmission Project*****—** PSCo and Tri-StateGeneration and Transmission Association filed a joint application with the CPUCfor a certificate of need and public convenience in May 2009.  The project consists of four components ofboth 230 kilovolt (KV) and 345 KV line and substation construction. The line isintended to assist in bringing solar power in the San Luis Valley to load.  The line was originally expected to be placedin-service in 2013; however, thatappears unlikely now due to delays in the siting and permitting of theline.  Several landowners are opposingthis transmission line, including two large ranches.  Hearings before an ALJ were conducted in February 2010,and additional hearings are scheduledfor May 2010.

 

***Colorado Clean Air-Clean Jobs Act***— The ColoradoClean Air-Clean Jobs Act was signed into law on April 19, 2010.  TheAct requires PSCo to file a comprehensive plan with the CPUC by Aug. 15,2010 to reduce annual emissions of NOx by at least 70 to 80 percent from 2008levels from the coal-fired generation identified in the plan.  The plan must consider emission controls,plant refueling, or plant retirement of at least 900 MW of coal-firedgenerating units in Colorado by Jan. 1, 2018.  The legislation requires PSCo to preparecomparative evaluations of different scenarios, including a scenario whereemission controls are installed on the coal plants and a scenario where coalplants are repowered or replaced by natural gas by Jan. 1, 2015.  The legislation further encourages PSCo tosubmit long-term gas contracts to the CPUC for approval.  If approved, PSCo would be entitled torecover the costs it incurs under these long-term gas contracts, notwithstandingany change in the market price of natural gas during the term of the contract.

 

The Act further provides for full recovery of allprudently incurred costs in executing the approved emission reduction plan andrequires the CPUC to employ rate-making mechanisms that allow for currentrecovery without the filing of a general rate case if PSCo includes the earlyconversion or closure of coal-based generation by Jan. 1, 2015 in itsapproved plan.  The Act permits the CPUCto consider interim rate increases after Jan. 1, 2012 while the ratefiling is pending.

 

**Summaryof Recent Federal Regulatory Developments**

 

The FERC has jurisdictionover rates for electric transmission service in interstate commerce andelectricity sold at wholesale, hydro facility licensing, natural gastransportation, accounting practices, and certain other activities of XcelEnergy’s utility subsidiaries, including enforcement of North American ElectricReliability Corporation (NERC) mandatory electric reliability standards.  State and local agencies have jurisdictionover many of PSCo’s utility activities, including regulation of retail ratesand environmental matters.  Seeadditional discussion in the summary of recent federal regulatory developmentsand public utility regulation sections of the PSCo Annual Report on Form 10-Kfor the year ended Dec. 31, 2009. In addition to the matters discussed below, see Note 5 to theconsolidated financial statements for a discussion of other regulatory matters.

 

***FERC PenaltyGuideline Policy Statement***—******On March 18, 2010, the FERC issued aPenalty Guideline Policy Statement based on the U. S. Federal SentencingGuidelines.  The penaltyguidelines propose substantial financial penalties for violations of NERCreliability standards and other FERC rules. On April 15, 2010, the FERC issued an order suspendingthe policy statement and requested written comments within 60 days.

 

***Electric Reliability StandardsCompliance***

 

ComplianceAudits

In 2008, PSCo was subject to an audit of itscompliance with the NERC and regional reliability standards by the WesternElectricity Coordinating Council (WECC), the NERC regional entity for the PSCosystem.  On Oct. 31, 2008, the WECCauditors issued their final audit report on PSCo’s compliance with electric reliabilitystandards.  The report found a possibleviolation of one reliability standard related to relay maintenance.

 

In2008, PSCo filed self-reports with the WECC relating to failure to completecertain generation station battery tests, relay maintenance intervals andrecord keeping associated with certain critical infrastructure protectionstandards.  In 2009, PSCo reachedagreement with the WECC that would resolve the open 2008 audit finding and the2008 self reports by payment of a non-material penalty.  PSCo is in the process of developing adefinitive settlement agreement.  Thissettlement agreement will be subject to NERC and FERC approval.

 

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InMarch 2010, WECC conducted a compliance spot check to evaluate compliancewith the NERC Critical Energy Infrastructure (CIP) standards, which wereeffective July 1, 2008.  Thepreliminary report found that the Xcel Energy utility subsidiaries may not bein compliance with several of the CIP standards.  Xcel Energy will respond to the reportindicating where it disagrees with the conclusions.  To what extent NERC may seek to impose penalties forpotential violations is unknown at this time.

 

**Item 4**— CONTROLS AND PROCEDURES

** **

**DisclosureControls and Procedures**

 

PSCo maintains aset of disclosure controls and procedures designed to ensure that informationrequired to be disclosed in reports that it files or submits under theSecurities Exchange Act of 1934 is recorded, processed, summarized, andreported within the time periods specified in SEC rules and forms. Inaddition, the disclosure controls and procedures ensure that informationrequired to be disclosed is accumulated and communicated to management,including the chief executive officer (CEO) and chief financial officer (CFO),allowing timely decisions regarding required disclosure. As of March 31,2010, based on an evaluation carried out under the supervision and with theparticipation of PSCo’s management,including the CEO and CFO, of the effectiveness of its disclosure controls andthe procedures, the CEO and CFO have concluded that PSCo’s disclosure controls and procedures wereeffective.

 

**InternalControl Over Financial Reporting**

** **

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

 

##### **Part II**— OTHERINFORMATION

##### ** **

**Item 1**—**Legal Proceedings**

 

In the normal course of business, various lawsuits andclaims have arisen against PSCo.  Afterconsultation with legal counsel, PSCo has recorded an estimate of the probablecost of settlement or other disposition for such matters.

 

**Additional Information**

 

See Notes 5 and 6 of the financial statements in thisQuarterly Report on Form 10-Q for further discussion of legal proceedings,including Regulatory Matters and Commitments and Contingent Liabilities, whichare hereby incorporated by reference. Reference also is made to Item 3 and Notes 14 and 15 of PSCo’sconsolidated financial statements in its Annual Report on Form 10-K forthe year ended Dec. 31, 2009 for a description of certain legalproceedings presently pending.

 

**Item 1A**—**Risk Factors**

 

PSCo’s risk factors aredocumented in Item 1A of Part I of its Annual Report on Form 10-K forthe year ended Dec. 31, 2009, which is incorporated herein byreference.  There have been no materialchanges to risk factors.

 

**Item 6**—**Exhibits**

 

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* Indicates incorporation byreference

 

| 3.01* |   | Amended and Restated  Articles of Incorporation dated July 15, 1998 (Form 10-K,  Dec. 31, 1998, Exhibit 3(a)(1)).                                                                           |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.02* |   | By-laws dated  Nov. 20, 1997 (For 10-K, Dec. 31, 1997, Exhibit 3(b)(1)).                                                                                                                         |
| 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 authorized.

 
|                 |   | **Public  Service Company of Colorado**     |
|----------------------|--------|---------------------------------------------|
|                 |   | (Registrant)                                |
|                 |   |                                        |
| April 30,  2010 |   | /s/  TERESA S. MADDEN                       |
|                 |   | Teresa  S. Madden                           |
|                 |   | Vice  President and Controller              |
|                 |   |                                        |
|                 |   | /s/  DAVID M. SPARBY                        |
|                 |   | David  M. Sparby                            |
|                 |   | Vice  President and Chief Financial Officer |

 

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