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EX-32.01 - EXHIBIT 32.01 - PUBLIC SERVICE CO OF COLORADOex32_01.htm
EX-31.01 - EXHIBIT 31.01 - PUBLIC SERVICE CO OF COLORADOex31_01.htm
EX-99.01 - EXHIBIT 99.01 - PUBLIC SERVICE CO OF COLORADOex99_01.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

or

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

Commission File Number: 001-3280

Public Service 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.)
     
1800 Larimer, Suite 1100
   
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 all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 and Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). o Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of 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)
   

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

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

Class
 
Outstanding at May 2, 2011
Common Stock, $0.01 par value
 
100 shares

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


 
 

 


PART I - FINANCIAL INFORMATION
 
     
Item l.
3
Item 2.
22
Item 4.
27
     
PART II - OTHER INFORMATION
 
     
Item 1.
27
Item 1A.
27
Item 6.
27
     
28
 
Certifications Pursuant to Section 302
1
Certifications Pursuant to Section 906
1
Statement Pursuant to Private Litigation
1

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

PART I FINANCIAL INFORMATION

Item 1 FINANCIAL STATEMENTS

PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(amounts in thousands of dollars)


   
Three Months Ended March 31,
 
   
2011
   
2010
 
Operating revenues
           
Electric
  $ 704,153     $ 723,634  
Natural gas
    428,191       466,283  
Steam and other
    12,103       12,780  
Total operating revenues
    1,144,447       1,202,697  
                 
Operating expenses
               
Electric fuel and purchased power
    323,797       373,851  
Cost of natural gas sold and transported
    304,938       340,709  
Cost of sales — steam and other
    5,121       6,073  
Other operating and maintenance expenses
    170,671       155,693  
Demand side management program expenses
    30,322       33,711  
Depreciation and amortization
    79,969       66,966  
Taxes (other than income taxes)
    34,321       24,616  
Total operating expenses
    949,139       1,001,619  
                 
Operating income
    195,308       201,078  
                 
Other income, net
    1,663       556  
Allowance for funds used during construction —  equity
    1,619       2,978  
                 
Interest charges and financing costs
               
Interest charges — includes other financing costs of $1,516 and $1,397, respectively
    45,399       45,813  
Allowance for funds used during construction — debt
    (726 )     (1,665 )
Total interest charges and financing costs
    44,673       44,148  
                 
Income before income taxes
    153,917       160,464  
Income taxes
    57,287       76,214  
Net income
  $ 96,630     $ 84,250  

See Notes to Consolidated Financial Statements


PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands of dollars)

   
Three Months Ended March 31,
 
   
2011
   
2010
 
Operating activities
           
Net income
  $ 96,630     $ 84,250  
Adjustments to reconcile net income to cash provided by operating activities:
               
Depreciation and amortization
    81,284       68,163  
Demand side management program amortization
    2,546       7,281  
Deferred income taxes
    47,172       36,989  
Amortization of investment tax credits
    (668 )     (584 )
Allowance for equity funds used during construction
    (1,619 )     (2,978 )
Net realized and unrealized hedging and derivative transactions
    18,520       (10,048 )
Changes in operating assets and liabilities:
               
Accounts receivable
    11,885       5,822  
Accrued unbilled revenues
    76,879       100,139  
Inventories
    37,815       51,746  
Prepayments and other
    28,913       43,613  
Accounts payable
    (55,823 )     (120,659 )
Net regulatory assets and liabilities
    2,239       (16,279 )
Other current liabilities
    43,374       55,578  
Pension and other employee benefit obligations
    (57,910 )     (4,349 )
Change in other noncurrent assets
    (283 )     (1,489 )
Change in other noncurrent liabilities
    (5,588 )     (7,773 )
Net cash provided by operating activities
    325,366       289,422  
                 
Investing activities
               
Utility capital/construction expenditures
    (115,991 )     (115,890 )
Allowance for equity funds used during construction
    1,619       2,978  
Net cash used in investing activities
    (114,372 )     (112,912 )
                 
Financing activities
               
Repayment of short-term borrowings, net
    (227,400 )     (59,000 )
Borrowings under utility money pool arrangement
    120,000       147,900  
Repayments under utility money pool arrangement
    (120,000 )     (224,900 )
Capital contributions from parent
    75,000       -  
Dividends paid to parent
    (66,828 )     (65,822 )
Net cash used in financing activities
    (219,228 )     (201,822 )
                 
Net decrease in cash and cash equivalents
    (8,234 )     (25,312 )
Cash and cash equivalents at beginning of period
    32,912       33,429  
Cash and cash equivalents at end of period
  $ 24,678     $ 8,117  
                 
Supplemental disclosure of cash flow information:
               
Cash paid for interest (net of amounts capitalized)
  $ (39,145 )   $ (34,225 )
Cash received for income taxes, net
    33,696       35,514  
Supplemental disclosure of non-cash investing transactions:
               
Property, plant and equipment additions in accounts payable
  $ 91,478     $ 9,799  

See Notes to Consolidated Financial Statements


PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(amounts in thousands of dollars)


   
March 31, 2011
   
Dec. 31, 2010
 
Assets
           
Current assets
           
Cash and cash equivalents
  $ 24,678     $ 32,912  
Accounts receivable, net
    302,830       305,469  
Accounts receivable from affiliates
    11,796       21,042  
Accrued unbilled revenues
    220,656       297,535  
Inventories
    185,243       223,058  
Regulatory assets
    157,083       176,596  
Deferred income taxes
    22,376       13,877  
Derivative instruments
    6,785       6,294  
Prepayments and other
    15,727       54,235  
Total current assets
    947,174       1,131,018  
                 
Property, plant and equipment, net
    9,231,890       9,200,556  
                 
Other assets
               
Regulatory assets
    840,051       824,205  
Derivative instruments
    16,085       18,035  
Other
    54,775       55,016  
Total other assets
    910,911       897,256  
Total assets
  $ 11,089,975     $ 11,228,830  
                 
Liabilities and Equity
               
Current liabilities
               
Current portion of long-term debt
  $ 6,504     $ 6,970  
Short-term debt
    42,000       269,400  
Accounts payable
    324,552       382,380  
Accounts payable to affiliates
    25,394       28,270  
Regulatory liabilities
    74,009       50,018  
Taxes accrued
    136,006       94,321  
Accrued interest
    53,077       48,866  
Dividends payable to parent
    68,218       66,828  
Derivative instruments
    8,465       29,047  
Other
    97,790       100,984  
Total current liabilities
    836,015       1,077,084  
                 
Deferred credits and other liabilities
               
Deferred income taxes
    1,596,092       1,539,583  
Deferred investment tax credits
    46,671       47,338  
Regulatory liabilities
    477,542       472,846  
Asset retirement obligations
    74,556       72,687  
Derivative instruments
    41,399       43,220  
Customer advances
    240,538       244,345  
Pension and employee benefit obligations
    245,998       303,946  
Other
    60,862       61,334  
Total deferred credits and other liabilities
    2,783,658       2,785,299  
                 
Commitments and contingent liabilities
               
Capitalization
               
Long-term debt
    3,228,956       3,228,253  
Common stock – authorized 100 shares of $0.01 par value; outstanding 100 shares
    -       -  
Additional paid-in capital
    3,330,586       3,255,586  
Retained earnings
    903,562       875,151  
Accumulated other comprehensive income
    7,198       7,457  
Total common stockholder's equity
    4,241,346       4,138,194  
Total liabilities and equity
  $ 11,089,975     $ 11,228,830  

See Notes to Consolidated Financial Statements


PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
Notes to Consolidated Financial Statements (UNAUDITED)

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly, in accordance with accounting principles generally accepted in the United States of America (GAAP), the financial position of PSCo and its subsidiaries as of March 31, 2011 and Dec. 31, 2010; the results of its operations for the three months ended March 31, 2011 and 2010; and its cash flows for the three months ended March 31, 2011 and 2010.  All adjustments are of a normal, recurring nature, except as otherwise disclosed.  Management has also evaluated the impact of events occurring after March 31, 2011 up to the date of issuance of these consolidated financial statements.  These statements contain all necessary adjustments and disclosures resulting from that evaluation.  The Dec. 31, 2010 balance sheet information has been derived from the audited 2010 consolidated financial statements included in the PSCo Annual Report on Form 10-K for the year ended Dec. 31, 2010.  These notes to the consolidated financial statements have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q.  Certain information and note disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations.  For further information, refer to the consolidated financial statements and notes thereto, included in the PSCo Annual Report on Form 10-K for the year ended Dec. 31, 2010, filed with the SEC on Feb. 28, 2011.  Due to the seasonality of PSCo’s electric and natural gas sales, interim results are not necessarily an appropriate base from which to project annual results.

1.
Summary of Significant Accounting Policies

The significant accounting policies set forth in Note 1 to the consolidated financial statements in PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 2010, appropriately represent, in all material respects, the current status of accounting policies and are incorporated herein by reference.

2.
Accounting Pronouncements

Recently issued accounting pronouncements that have been adopted in the current period did not materially impact the consolidated financial statements, and no material impact is expected from accounting pronouncements issued and pending implementation.

3.
Selected Balance Sheet Data

(Thousands of Dollars)
 
March 31, 2011
   
Dec. 31, 2010
 
Accounts receivable, net
           
Accounts receivable
  $ 325,856     $ 329,523  
Less allowance for bad debts
    (23,026 )     (24,054 )
    $ 302,830     $ 305,469  
Inventories
               
Materials and supplies
  $ 51,545     $ 51,615  
Fuel
    69,454       67,187  
Natural gas
    64,244       104,256  
    $ 185,243     $ 223,058  
Property, plant and equipment, net
               
Electric plant
  $ 9,065,460     $ 9,003,103  
Natural gas plant
    2,300,768       2,284,212  
Common and other property
    759,060       757,059  
Plant to be retired (a)
    220,939       236,606  
Construction work in progress
    255,944       231,636  
Total property, plant and equipment
    12,602,171       12,512,616  
Less accumulated depreciation
    (3,370,281 )     (3,312,060 )
    $ 9,231,890     $ 9,200,556  

(a) 
In 2009, in accordance with the Colorado Public Utility Commission (CPUC’s) approval of PSCo’s 2007 Colorado resource plan and subsequent rate case decisions, PSCo agreed to early retire its Cameo Units 1 and 2, Arapahoe Units 3 and 4 and Zuni Units 1 and 2 facilities.  In 2010, in response to the Clean Air Clean Jobs Act (CACJA), the CPUC approved the early retirement of Cherokee Units 1, 2 and 3, Arapahoe Unit 3 and Valmont Unit 5 between 2011 and 2017.  Amounts are presented net of accumulated depreciation.


4.
Income Taxes

Except to the extent noted below, the circumstances set forth in Note 7 to the consolidated financial statements included in PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 2010 appropriately represent, in all material respects, the current status of other income tax matters, and are incorporated herein by reference.

Federal Audit PSCo is a member of the Xcel Energy affiliated group that files a consolidated federal income tax return.   The statute of limitations applicable to Xcel Energy’s 2006 federal income tax return expired in August 2010.  The statute of limitations applicable to Xcel Energy’s 2007 federal income tax return expires in September 2011.  The Internal Revenue Service (IRS) commenced an examination of tax years 2008 and 2009 in the third quarter of 2010.  As of March 31, 2011, the IRS had not proposed any material adjustments to tax years 2008 and 2009.

State Audits — PSCo is a member of the Xcel Energy affiliated group that files consolidated state income tax returns.  As of March 31, 2011, PSCo’s earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2006.  As of March 31, 2011, there were no state income tax audits in progress.
 
Unrecognized Tax BenefitsThe unrecognized tax benefit balance includes permanent tax positions, which if recognized would affect the annual effective tax rate (ETR).  In addition, the unrecognized tax benefit balance includes temporary tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility.  A change in the period of deductibility would not affect the ETR but would accelerate the payment of cash to the taxing authority to an earlier period.

A reconciliation of the amount of unrecognized tax benefit is as follows:

(Millions of Dollars)
 
March 31, 2011
   
Dec. 31, 2010
 
Unrecognized tax benefit - Permanent tax positions
  $ 1.4     $ 1.3  
Unrecognized tax benefit - Temporary tax positions
    10.1       10.3  
Unrecognized tax benefit balance
  $ 11.5     $ 11.6  

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

(Millions of Dollars)
 
March 31, 2011
   
Dec. 31, 2010
 
Tax benefits associated with NOL and tax credit carryforwards
  $ (7.2 )   $ (7.2 )

PSCo’s amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS audit progresses and state audits resume.  As the IRS examination moves closer to completion, it is reasonably possible that the amount of unrecognized tax benefits could decrease up to approximately $8 million.

No amounts were accrued for penalties related to unrecognized tax benefits as of March 31, 2011 or Dec. 31, 2010.

5.
Rate Matters

Pending and Recently Concluded Regulatory Proceedings — CPUC

Base Rate

PSCo 2010 Gas Rate Case — In December 2010, PSCo filed a request with the CPUC to increase Colorado retail gas rates by $27.5 million, effective in the summer of 2011.  In March 2011, PSCo revised its requested rate increase to $25.6 million due to corrections and updates.

The revised request was based on a 2011 forecast test year, a 10.90 percent return on equity (ROE), a rate base of $1.1 billion and an equity ratio of 57.10 percent.  PSCo proposed recovering $23.2 million of test year capital and operating and maintenance (O&M) expenses associated with several pipeline integrity costs plus an amortization of similar costs that have been accumulated and deferred since the last rate case in 2006.  PSCo also proposed removing the earnings on gas in underground storage from base rates.
 

On April 11, 2011, intervenors filed answer testimony.  The CPUC Staff recommended a rate decrease of $20.1 million, based on the use of a historic test year (HTY), an ROE of 9.375 percent and an equity ratio of 51.82 percent.  The CPUC Staff also recommended certain adjustments related to pipeline integrity costs, rate base items and pension and benefits expenses.

The Colorado Office of Consumer Counsel (OCC) recommended a rate decrease of $1 million, based on an ROE of 9.0 percent, an equity ratio of 57.20 percent and by reducing cash working capital to reflect adjustments to interest on long-term debt.  The OCC also recommended adjustments to certain O&M expenses, use of a HTY and recommended that gas stored underground remain in base rates rather than move to a rider.  The impact of including gas inventory in base rates would reduce PSCo’s fuel recovery by an additional $9 million.

A final decision is expected in the summer of 2011.  The following procedural schedule has been established:
 
·
PSCo rebuttal testimony and staff and intervenor cross answer testimony is due on May 6, 2011;
 
·
Hearings are scheduled for late May 2011.

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

Wholesale Rate Case — In February 2011, PSCo filed a request with the FERC to change Colorado wholesale electric customer rates to formula based rates with an expected increase of $16.1 million annually for 2011.  The request was based on a 2011 forecast test year, a 10.9 percent ROE, a total PSCo wholesale production rate base of $407.4 million and an equity ratio of 57.1 percent.  Under the proposal, the formula rate would be estimated annually and then would be trued up to actual costs after the conclusion of the year.  The primary drivers of the revenue deficiency are the recently acquired Blue Spruce Energy Center and Rocky Mountain Energy Center generating units, as well as the costs of early retirement of certain coal plants under the CACJA emissions reduction plan, all of which were approved by the CPUC in late 2010.  In April 2011, the FERC suspended the effective date five months, allowing the rates to be placed into effect on Sept. 10, 2011, subject to refund and set the request for settlement procedures.

6.
Commitments and Contingent Liabilities

Except to the extent noted below and in Note 5 to the consolidated financial statements in this Quarterly Report on Form 10-Q the circumstances set forth in Notes 12 and 13 to the consolidated financial statements included in PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 2010, appropriately represent, in all material respects, the current status of commitments and contingent liabilities, and are incorporated herein by reference.  The following include commitments, contingencies and unresolved contingencies that are material to PSCo’s financial position.

Commitments

Variable Interest Entities — The accounting guidance for consolidation of variable interest entities requires enterprises to consider the activities that most significantly impact an entity’s financial performance, and power to direct those activities, when determining whether an enterprise is a variable interest entity’s primary beneficiary.

Purchased Power Agreements — Under certain purchased power agreements, PSCo purchases power from independent power producing entities that own natural gas fueled power plants and are required to reimburse natural gas fuel costs, or to participate in tolling arrangements under which PSCo procures the natural gas required to produce the energy that it purchases.

PSCo is not subject to risk of loss from the operations of these entities, and no significant financial support has been, or is in the future required to be provided other than contractual payments for energy and capacity set forth in the purchased power agreements.

PSCo has evaluated each of these variable interest entities for possible consolidation, including review of qualitative factors such as the length and terms of the contract, control over O&M costs, historical and estimated future fuel and electricity prices, and financing activities.  PSCo has concluded that these entities are not required to be consolidated in its consolidated financial statements because it does not have the power to direct the activities that most significantly impact the entities’ economic performance.  PSCo had approximately 1,914 megawatts (MW) and 2,010 MW of capacity under long-term purchased power agreements as of March 31, 2011 and Dec. 31, 2010 with entities that have been determined to be variable interest entities.  These agreements have expiration dates through the year 2028.

Guarantees — In connection with the purchase agreement, PSCo provides for indemnification to the counterparty for liabilities incurred as a result of a breach of a representation or warranty by the indemnifying party. These indemnification obligations generally have a discrete term and are intended to protect the parties against risks that are difficult to predict or impossible to quantify at the time of the consummation of a particular transaction.


Environmental Contingencies

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

Site RemediationThe Comprehensive Environmental Response, Compensation and Liability Act of 1980 and comparable state laws impose liability, without regarding the legality of the original conduct, on certain classes of persons responsible for the release of hazardous substances to the environment.  PSCo must pay all or a portion of the cost to remediate sites where past activities of PSCo or other parties have caused environmental contamination.  Environmental contingencies could arise from various situations, including sites of former manufactured gas plants operated by PSCo, its predecessors, or other entities; and third-party sites, such as landfills, for which PSCo is alleged to be a PRP that sent hazardous materials and wastes.  At March 31, 2011 and Dec. 31, 2010, the liability for the cost of remediating these sites was estimated to be $0.7 million and $0.8 million, respectively, of which $0.3 million was considered to be a current liability.

Asbestos Removal Some of PSCo’s facilities contain asbestos.  Most asbestos will remain undisturbed until the facilities that contain it are demolished or removed.  PSCo has recorded an estimate for final removal of the asbestos as an asset retirement obligation.  See additional discussion of asset retirement obligations in Note 13 of the PSCo Annual Report on Form 10-K for the year ended Dec. 31, 2010.  It may be necessary to remove some asbestos to perform maintenance or make improvements to other equipment.  The cost of removing asbestos as part of other work is not expected to be material and is recorded as incurred as operating expenses for maintenance projects, capital expenditures for construction projects or removal costs for demolition projects.

Other Environmental Requirements

Environmental Protection Agency (EPA) Greenhouse Gas (GHG) Rulemaking — In December 2009, the EPA issued its “endangerment” finding that GHG emissions endanger public health and welfare.  The EPA has promulgated permit requirements for GHGs for power plants.  These regulations became applicable in 2011.  In December 2010, the EPA announced a settlement with several states and environmental groups to begin preparing regulations of emissions from both new and existing steam electric generating units, such as coal-fired power plants, under the Clean Air Act (CAA).  The EPA plans to propose these regulations in July 2011 and finalize them in the first half of 2012.

Electric Generating Unit (EGU) Maximum Achievable Control Technology (MACT) Rule — In 2005, the EPA issued the Clean Air Mercury Rule (CAMR), which regulated mercury emissions from power plants.  In February 2008, the U.S. Court of Appeals for the District of Columbia vacated the CAMR, which impacted federal CAMR requirements, but not necessarily state-only mercury legislation and rules.

In March 2011, the EPA issued the proposed EGU MACT designed to address emissions of mercury and other hazardous air pollutants for coal-fired utility units greater than 25 MW.  PSCo is evaluating the proposed rule and plans to offer comments to the EPA.  The EPA intends to issue the final rule by November 2011.  PSCo anticipates that the EPA will require affected facilities to demonstrate compliance within three to four years.

Colorado Mercury Regulation — Colorado’s mercury regulations require mercury emission controls capable of achieving 80 percent capture to be installed at the Pawnee Generating Station by the end of 2011.  The expected cost estimate for the Pawnee Generating Station is $2.3 million for capital costs with an annual estimate of $1.4 million for sorbent expense.  PSCo has evaluated the Colorado mercury control requirements for its other units in Colorado and believes that, under the current regulations, no further controls will be required other than the planned controls at the Pawnee Generating Station.  The Pawnee mercury controls are included in the CACJA plan.

Regional Haze Rules — In 2005, the EPA finalized amendments to its regional haze rules regarding provisions that require the installation and operation of emission controls, known as best available retrofit technology (BART), for industrial facilities emitting air pollutants that reduce visibility in certain national parks and wilderness areas throughout the United States.


In 2006, the Colorado Air Quality Control Commission promulgated BART regulations requiring certain major stationary sources to evaluate, install, operate and maintain BART to make reasonable progress toward meeting the national visibility goal.  The Colorado Air Pollution Control Division (CAPCD) has indicated that it expects to submit a Regional Haze BART/Reasonable Further Progress State Implementation Plan (SIP) to the EPA in 2011.  In January, 2011, the Colorado Air Quality Commission approved a revised Regional Haze BART/Reasonable Further Progress SIP incorporating the Colorado CACJA emission reduction plan.  In accordance with Colorado law, the SIP is now before the Colorado general assembly for review prior to submission to the EPA.  PSCo anticipates that for those plants included in the Colorado CACJA emission reduction plan, the plan will satisfy regional haze requirements.  The Colorado SIP, however, must be approved by the EPA.  PSCo expects the cost of any required capital investment will be recoverable from customers.  Emissions controls are expected to be installed between 2012 and 2017.

In March 2010, two environmental groups petitioned the U.S. Department of the Interior (DOI) to certify that 12 coal-fired boilers and one coal-fired cement kiln in Colorado are 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 is inadequate to satisfy the CAA mandate of ensuring reasonable further progress towards restoring natural visibility conditions in the park.  It is not known when the DOI will rule on the petition.

Federal Clean Water Act (CWA Section 316 (b)) — The federal CWA requires the EPA to regulate cooling water intake structures to assure that these structures reflect the best technology available (BTA) for minimizing adverse environmental impacts to aquatic species.  In 2004, the EPA published phase II of the rule, which applies to existing cooling water intakes at steam-electric power plants.  In March 2011, the EPA released a pre-publication version of a proposed rule that was modified to address earlier court decisions.  The proposed rule sets prescriptive standards for minimization of aquatic species impingement but leaves entrainment reduction requirements at the discretion of the permit writer and the regional EPA office.  PSCo has begun an internal review of the possible changes and impacts, including possible additional capital and operating expenses.  Due to the uncertainty of the final regulatory requirements, it is not possible to provide an accurate estimate of the overall cost of this rulemaking at this time.

Proposed Coal Ash Regulation — PSCo’s operations generate hazardous wastes that are subject to the Federal Resource Recovery and Conservation Act and comparable state laws that impose detailed requirements for handling, storage, treatment and disposal of hazardous waste.  In June 2010, the EPA published a proposed rule seeking comment on whether to regulate coal combustion byproducts (often referred to as coal ash) as hazardous or nonhazardous waste.  Coal ash is currently exempt from hazardous waste regulation.  If the EPA ultimately issues a final rule under which coal ash is regulated as hazardous waste, PSCo’s costs associated with the management and disposal of coal ash would significantly increase, and the beneficial reuse of coal ash would be negatively impacted.  The EPA has not announced a planned date for a final rule.  The timing, scope and potential cost of any final rule that might be implemented are not determinable at this time.

PSCo Notice of Violation (NOV) — In 2002, PSCo received an NOV from the EPA alleging violations of the New Source Review (NSR) requirements of the CAA at the Comanche Station and Pawnee Station in Colorado.  The NOV specifically alleges that various maintenance, repair and replacement projects undertaken at the plants in the mid to late 1990s should have required a permit under the NSR process.  PSCo believes it has acted in full compliance with the CAA and NSR process.  PSCo also believes that the projects identified in the NOV fit within the routine maintenance, repair and replacement exemption contained within the NSR regulations or are otherwise not subject to the NSR requirements.  PSCo disagrees with the assertions contained in 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 probable cost of settlement or other disposition.  The ultimate outcome of these matters cannot presently be determined.  Accordingly, the ultimate resolution of these matters could have a material adverse effect on PSCo’s financial position and results of operations.


Environmental Litigation

State of Connecticut vs. Xcel Energy Inc. et al. — In 2004, the attorneys general of eight states and New York City, as well as several environmental groups, filed lawsuits in U.S. District Court in the Southern District of New York against the following utilities, including Xcel Energy, the parent company of PSCo, to force reductions in carbon dioxide (CO2) emissions:  American Electric Power Co., Southern Co., Cinergy Corp. (merged into Duke Energy Corporation) and Tennessee Valley Authority.  The lawsuits allege that CO2 emitted by each company is a public nuisance.  The lawsuits do not demand monetary damages.  Instead, the lawsuits ask the court to order each utility to cap and reduce its CO2 emissions.  In September 2005, the court granted plaintiffs’ motion to dismiss on constitutional grounds.  In August 2010, this decision was reversed by the Second Circuit and is currently on appeal before the United States Supreme Court.  Oral arguments were presented to the Supreme Court on April 19, 2011 and a decision is expected in the summer of 2011.
 
Native Village of Kivalina vs. Xcel Energy Inc. et al. — In 2008, 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, the parent company of PSCo, and 23 other utilities, oil, gas and coal companies.  Plaintiffs claim that defendants’ emission of CO2 and other GHGs contribute to global warming, which is harming their village.  Xcel Energy believes the claims asserted in this lawsuit are without merit and joined with other utility defendants in filing a motion to dismiss in June 2008.  In October 2009, the U.S. District Court dismissed the lawsuit on constitutional grounds.  In November 2009, plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Ninth Circuit.  It is unknown when the Ninth Circuit will render a final opinion.  The amount of damages claimed by plaintiffs is unknown, but likely includes the cost of relocating the village of Kivalina.  Plaintiffs’ alleged relocation is estimated to cost between $95 million to $400 million.  No accrual has been recorded for this matter.

Employment, Tort and Commercial Litigation

Qwest vs. Xcel Energy Inc. — In 2004, an employee of PSCo was seriously injured when a pole owned by Qwest malfunctioned.  In September 2005, the employee commenced an action against Qwest in Colorado state court in Denver.  In April 2006, Qwest filed a third party complaint against PSCo based on terms in a joint pole use agreement between Qwest and PSCo.  In May 2007, the matter was tried and the jury found Qwest solely liable for the accident and this determination resulted in an award of damages in the amount of approximately $90 million.  In April 2009, the Colorado Court of Appeals affirmed the jury verdict insofar as it relates to claims asserted by Qwest against PSCo.  In February 2010, the Colorado Supreme Court agreed to review the Court of Appeals’ decision as to the punitive damages issue but will not review the Court of Appeals’ decision as it relates to PSCo.  Oral arguments were presented in December 2010.  It is unknown when the Colorado Supreme Court will render a decision.  No accrual has been recorded for this matter.

Cabin Creek Hydro Generating Station Accident — In October 2007, employees of RPI Coatings Inc. (RPI), a contractor retained by PSCo, were applying an epoxy coating to the inside of a penstock at PSCo’s Cabin Creek Hydro Generating Station (CCH) near Georgetown, Colo.  A fire occurred inside a pipe used to deliver water from a reservoir to the hydro facility.  Five RPI employees were unable to exit the pipe and rescue crews confirmed their deaths.  The accident was investigated by the federal Occupational Safety and Health Administration (OSHA), the U.S. Chemical Safety Board (CSB) and the Colorado Bureau of Investigations.

In March 2008, OSHA proposed penalties totaling $189,900 for 22 serious violations and three willful violations arising out of the accident.  In April 2008, Xcel Energy notified OSHA of its decision to contest all of the proposed citations.  Pursuant to a court order this proceeding has been stayed until July 1, 2011.

Three lawsuits were filed (two in Colorado state court and one in California state court) on behalf of the five deceased workers and by seven employees of RPI allegedly injured in the accident.  PSCo and Xcel Energy were among the defendants named in each lawsuit.  Settlements were subsequently reached in all three lawsuits by Xcel Energy and PSCo.  These confidential settlements did not have a material adverse effect upon PSCo’s consolidated results of operations, cash flows or financial position.

In August 2009, the U.S. Government announced that Xcel Energy and PSCo have been charged with five misdemeanor counts in federal court in Colorado for violation of an OSHA regulation related to the accident at Cabin Creek in October 2007.  RPI Coatings, the contractor performing the work at the plant, and two individuals employed by RPI have also been indicted.  In September 2009, both Xcel Energy and PSCo entered a not guilty plea, and both will vigorously defend against these charges.  The trial date has been set for May 31, 2011.  No accrual has been recorded for this proceeding nor is it expected that this proceeding will have a material adverse effect upon PSCo’s consolidated results of operations, cash flows or financial position.

In August 2010, the CSB issued a report related to its investigation of the CCH accident.  The report contains several findings and recommendations, some of which pertain to PSCo.  Consistent with its delegated authority, the CSB investigation did not result in the issuance of any fines or penalties.  PSCo has responded to the CSB concerning its recommendations.


Stone & Webster, Inc. vs. PSCo — In July 2009, Stone & Webster, Inc. (Shaw) filed a complaint against PSCo in State District Court in Denver, Colo. for damages allegedly arising out of its construction work on the Comanche Unit 3 coal-fired plant.  Shaw, a contractor retained to perform certain engineering, procurement and construction work on Comanche Unit 3, alleges, among other things, that PSCo mismanaged the construction of Comanche Unit 3.  Shaw further claims that this alleged mismanagement caused delays and damages.  The complaint also alleges that Xcel Energy and related entities guaranteed Shaw $10 million in future profits under the terms of a 2003 settlement agreement.  Shaw alleges that 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.  In total, Shaw seeks approximately $144 million in damages.

PSCo denies these allegations and believes the claims are without merit.  PSCo filed an answer and counterclaim in August 2009, denying the allegations in the complaint and alleging that Shaw has failed to discharge its contractual obligations and has caused delays, and that PSCo is entitled to liquidated damages and excess costs incurred.  In total, PSCo is seeking approximately $82 million in damages.  In June 2010, PSCo exercised its contractual right to draw on Shaw’s letter of credit in the total amount of approximately $29.6 million.  In September 2010, Shaw filed a second lawsuit related to PSCo’s decision to draw on the letter of credit.  PSCo denied the merits of this claim.

Trial commenced in October 2010 and addressed only those issues raised in the first complaint and did not include Shaw’s claim asserted in the second lawsuit related to the letter of credit.  In November 2010, a jury returned a verdict that awarded damages to Shaw and to PSCo.  Specifically the jury awarded a total of $84.5 million to Shaw but also awarded $70.0 million to PSCo for damages related to its counterclaims, for a net verdict to Shaw in the amount of $14.5 million.  Shaw subsequently filed post trial motions, which the court denied.  In March 2011, Shaw filed its notice of appeal on all issues raised at trial and in post-trial motions.  PSCo filed a conditional cross-appeal on April 5, 2011.  PSCo is actively participating in negotiations with Shaw.  If the jury verdict remains unchanged, it is not expected to have a material adverse effect on PSCo’s consolidated results of operations, cash flows or financial position.

Connie DeWeese vs. PSCo — In November 2008, there was an explosion in Pueblo, Colo., which destroyed a tavern and a neighboring store.  The explosion killed one person and injured seven people.  The Pueblo Fire Department and the Federal Bureau of Alcohol, Tobacco and Firearms have determined a natural gas leak from a pipeline under the street led to the explosion.  In February 2010, a wrongful death/personal injury lawsuit was filed in Colorado District Court in Pueblo, Colorado against PSCo and the City of Pueblo by several parties that were allegedly injured, as a result of this explosion.  The plaintiffs are also alleging economic and noneconomic damages.  The lawsuit alleges that the accident occurred as a result of PSCo’s negligence.  A related lawsuit was filed in March 2010 by Seneca Insurance Company, which insured Branch Inn, LLC and Branch Inn Enterprises, LLC.  The plaintiffs are alleging destruction of the building and disruption of the business.  Both lawsuits allege that the accident occurred as a result of PSCo’s negligence.  PSCo denies liability for this accident.  The cases have been consolidated.  In June 2010, the court granted, in part, PSCo’s motion to dismiss certain of plaintiffs’ claims related to, among other things, strict liability.  In July 2010, a third related lawsuit was filed by Truck Insurance Exchange against PSCo and the City of Pueblo to recover damages allegedly paid by the plaintiff insurance company to its insured as a result of the explosion.  In September 2010, six plaintiffs filed a fourth lawsuit, Vigil vs. Xcel Energy, in Hennepin County District Court in Minneapolis, Minn., alleging personal injury and property damage as a result of the November 2008 explosion.  In January 2011, the court granted Xcel Energy’s motion to dismiss this lawsuit on procedural grounds.  The damages claimed by plaintiffs in the three Colorado lawsuits are presently unknown but it is not believed that this total, if recovered, would have a material adverse effect upon PSCo’s consolidated results of operations, cash flows or financial position.  No trial date has been set for these lawsuits.


7.
Borrowings and Other Financing Instruments

Commercial Paper — PSCo meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under its credit facility.  The following table presents commercial paper outstanding for PSCo:

(Millions of Dollars)
 
Three Months Ended
March 31, 2011
   
Twelve Months Ended
Dec. 31, 2010
 
Borrowing limit
 
$
700
   
$
675
 
Amount outstanding at period end
   
42
     
269
 
Average amount outstanding
   
151
     
49
 
Maximum amount outstanding
   
304
     
275
 
Weighted average interest rate, computed on a daily basis
   
0.39
%
 
0.37
%
Weighted average interest rate at end of period
   
0.37
     
0.42
 

Credit Facilities — In order to use its commercial paper program to fulfill short-term funding needs, PSCo must have a revolving credit facility in place at least equal to the amount of its commercial paper borrowing limit and cannot issue commercial paper in an aggregate amount exceeding available capacity under the credit agreement.

During March of 2011, PSCo executed a new 4-year credit agreement.  The total size of the credit facility is $700 million and expires in March 2015.  PSCo has the right to request an extension of the final maturity date for two additional one year periods, subject to majority bank group approval.

The line of credit provides short-term financing in the form of notes payable to banks, letters of credit and back-up support for commercial paper borrowings.  Other features of PSCo’s credit facility include:

 
·
The credit facility may be increased by up to $100 million.
 
·
The credit facility has a financial covenant requiring that PSCo’s debt-to-total capitalization ratio be less than or equal to 65 percent.  PSCo was in compliance as its debt-to-total capitalization ratio was 44 percent and 46 percent at March 31, 2011 and Dec. 31, 2010, respectively.  If PSCo does not comply with the covenant, an event of default may be declared, and if not remedied, any outstanding amounts due under the facility can be declared due by the lender.
 
·
The credit facility has a cross-default provision that provides PSCo will be in default on its borrowings under the facility if it or any of its subsidiaries, comprising 15 percent or more of the consolidated assets, defaults on any indebtedness in an aggregate principal amount exceeding $75 million.
 
·
The interest rates under the line of credit are based on the Eurodollar rate, plus a borrowing margin based on the applicable credit ratings of 100 to 200 basis points per year.
 
·
The commitment fees, also based on applicable long-term credit ratings, are calculated on the unused portion of the line of credit at a range of 10 to 35 basis points per year.

At March 31, 2011, PSCo had the following committed credit facility available (in millions of dollars):

Credit Facility
   
Drawn (a)
   
Available
 
$ 700.0     $ 46.6     $ 653.4  

(a)  Includes outstanding commercial paper and letters of credit.

All credit facility bank borrowings, outstanding letters of credit and outstanding commercial paper reduce the available capacity under the credit facility.  PSCo had no direct advances on the credit facility outstanding at March 31, 2011 and Dec. 31, 2010.

Letters of Credit PSCo uses letters of credit, generally with terms of one year, to provide financial guarantees for certain operating obligations.  At March 31, 2011 and Dec. 31, 2010, there were $4.6 million and $4.7 million of letters of credit outstanding, respectively.  The contract amounts of these letters of credit approximate their fair value and are subject to fees determined in the marketplace.


Money Pool — Xcel Energy and its utility subsidiaries have established a money pool arrangement that allows for short-term investments in and borrowings between the utility subsidiaries.  The holding company may make investments in the utility subsidiaries at market-based interest rates; however, the money pool arrangement does not allow the utility subsidiaries to make investments in the holding company.

The following table presents the money pool borrowings for PSCo:

(Millions of Dollars)
 
Three Months Ended
March 31, 2011
   
Twelve Months Ended
Dec. 31, 2010
 
Borrowing limit
  $ 250     $ 250  
Amount outstanding at period end
    -       -  
Average amount outstanding
    3       8  
Maximum amount outstanding
    53       84  
Weighted average interest rate, computed on a daily basis
    0.35 %     0.33 %
Weighted average interest rate at end of period
    N/A       N/A  

8.
Fair Value of Financial Assets and Liabilities

Fair Value Measurements

The accounting guidance for fair value measurements and disclosures provides a single definition of fair value and requires certain disclosures about assets and liabilities measured at fair value.  A hierarchal framework for disclosing the observability of the inputs utilized in measuring assets and liabilities at fair value is established by this guidance.  The three Levels in the hierarchy are as follows:

Level 1 Quoted prices are available in active markets for identical assets or liabilities as of the reporting date.  The types of assets and liabilities included in Level 1 are highly liquid and actively traded instruments with quoted prices.

Level 2 Pricing inputs are other than quoted prices in active markets, but are either directly or indirectly observable as of the reporting date.  The types of assets and liabilities included in Level 2 are typically either comparable to actively traded securities or contracts, or priced with discounted cash flow or option pricing models using highly observable inputs.

Level 3 Significant inputs to pricing have little or no observability as of the reporting date.  The types of assets and liabilities included in Level 3 are those valued with models requiring significant management judgment or estimation.

Specific valuation methods include the following:

Commodity derivatives —  The methods utilized to measure the fair value of commodity derivatives include the use of forward prices and volatilities to value commodity forwards and options.  Levels are assigned to these fair value measurements based on the significance of the use of subjective forward price and volatility forecasts for commodities and delivery locations with limited observability, or the significance of contractual settlements that extend to periods beyond those readily observable on active exchanges or quoted by brokers.

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

Derivative Instruments Fair Value Measurements

PSCo enters into derivative instruments, including forward contracts, futures, swaps and options, for trading purposes and to reduce risk in connection with changes in interest rates, utility commodity prices and vehicle fuel prices.

Interest Rate Derivatives — PSCo enters into various instruments that effectively fix the interest payments on certain floating rate debt obligations or effectively fix the yield or price on a specified benchmark interest rate for an anticipated debt issuance for a specific period.  These derivative instruments are generally designated as cash flow hedges for accounting purposes.


At March 31, 2011, accumulated other comprehensive income (OCI) related to interest rate derivatives included $1.5 million of net gains expected to be reclassified into earnings during the next 12 months as the related hedged interest rate transactions impact earnings.

Short-Term Wholesale and Commodity Trading Risk — PSCo conducts various short-term wholesale and commodity trading activities, including the purchase and sale of electric capacity, energy and energy-related instruments.  PSCo’s risk management policy allows management to conduct these activities within guidelines and limitations as approved by its risk management committee, which is made up of management personnel not directly involved in the activities governed by the policy.

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

At March 31, 2011, PSCo had vehicle fuel contracts designated as cash flow hedges extending through December 2014.  PSCo also enters into derivative instruments that mitigate commodity price risk on behalf of electric and natural gas customers but are not designated as qualifying hedging transactions.  Changes in the fair value of non-trading commodity derivative instruments are recorded in OCI or deferred as a regulatory asset or liability.  The classification as a regulatory asset or liability is based on commission approved regulatory recovery mechanisms.  PSCo recorded immaterial amounts to income related to the ineffectiveness of cash flow hedges for the three months ended March 31, 2011 and 2010.

At March 31, 2011, accumulated OCI related to commodity derivative cash flow hedges included $0.1 million of net gains expected to be reclassified into earnings during the next 12 months as the hedged transactions occur.

Additionally, PSCo enters into commodity derivative instruments for trading purposes not directly related to commodity price risks associated with serving its electric and natural gas customers.  Changes in the fair value of these commodity derivatives are recorded in electric operating revenues, net of amounts credited to customers under margin-sharing mechanisms.

The following table details the gross notional amounts of commodity forwards and options at March 31, 2011 and Dec. 31, 2010:

(Amounts in Thousands) (a) (b)
 
March 31, 2011
   
Dec. 31, 2010
 
Megawatt hours (MWh) of electricity
    3,955       2,418  
MMBtu of natural gas
    24,392       59,465  
Gallons of vehicle fuel
    338       360  

(a) Amounts are not reflective of net positions in the underlying commodities.
(b) Notional amounts for options are included on a gross basis, but are weighted for the probability of exercise.

Financial Impact of Qualifying Cash Flow Hedges — The impact of qualifying interest rate and vehicle fuel cash flow hedges on PSCo’s accumulated OCI, included as a component of common stockholder’s equity, is detailed in the following table:

   
Three Months Ended March 31,
 
(Thousands of Dollars)
 
2011
   
2010
 
Accumulated other comprehensive income related to cash flow hedges at Jan. 1
  $ 7,457     $ 8,101  
After-tax net unrealized gains related to derivatives accounted for as hedges
    98       15  
After-tax net realized gains on derivative transactions reclassified into earnings
    (357 )     (123 )
Accumulated other comprehensive income related to cash flow hedges at March 31
  $ 7,198     $ 7,993  

PSCo had no derivative instruments designated as fair value hedges during the three months ended March 31, 2011 and March 31, 2010.  Therefore, no gains or losses from fair value hedges or related hedged transactions were recognized for these periods.


The following tables detail the impact of derivative activity during the three months ended March 31, 2011 and March 31, 2010, respectively, on OCI, regulatory assets and liabilities, and income:

   
Three Months Ended March 31, 2011
 
   
Fair Value Changes Recognized
   
Pre-Tax Amounts Reclassified into
   
Pre-Tax
 
   
During the Period in:
   
Income During the Period from:
   
Gains
 
   
Other
   
Regulatory
   
Other
   
Regulatory
   
Recognized
 
   
Comprehensive
   
Assets and
   
Comprehensive
   
Assets and
   
During the Period
 
(Thousands of Dollars)
 
Income
   
Liabilities
   
Loss
   
Liabilities
   
in Income
 
Derivatives designated as cash flow
                             
hedges
                             
Interest rate
  $ -     $ -     $ (576 )(a)   $ -     $ -  
Vehicle fuel and other commodity
    176       -       (18 )(c)     -       -  
Total
  $ 176     $ -     $ (594 )   $ -     $ -  
                                         
Other derivative instruments
                                       
Trading commodity
  $ -     $ -     $ -     $ -     $ 245 (b)
Natural gas commodity
    -       (5,354 )     -       44,482 (d)     -  
Total
  $ -     $ (5,354 )   $ -     $ 44,482     $ 245  


   
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
   
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 )

(a) 
Recorded to interest charges.
(b) 
Recorded to electric operating revenues.  Portions of these total gains and losses are subject to sharing with electric customers through margin-sharing mechanisms and deducted from gross revenue, as appropriate.
(c) 
Recorded to 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 and liabilities, as appropriate.

Credit Related Contingent Features  Contract provisions of the derivative instruments that PSCo enters into may require the posting of collateral or settlement of the contracts for various reasons, including if PSCo is unable to maintain its credit ratings.  If the credit ratings of PSCo were downgraded below investment grade, contracts underlying $5.0 million and $5.6 million of derivative instruments in a liability position at March 31, 2011 and Dec. 31, 2010, respectively, would have required PSCo to post collateral or settle applicable contracts, which would have resulted in payments to counterparties of $8.1 million and $9.8 million, respectively.  At March 31, 2011 and Dec. 31, 2010, there was no collateral posted on these specific contracts.


PSCo’s derivative instruments are also subject to contract provisions that contain adequate assurance clauses.  These provisions allow counterparties to seek performance assurance, including cash collateral, in the event that a given utility subsidiary’s ability to fulfill its contractual obligations is reasonably expected to be impaired.  PSCo had no collateral posted related to adequate assurance clauses in derivative contracts as of March 31, 2011 and Dec. 31, 2010.

Recurring Fair Value Measurements  The following table presents for each of the hierarchy Levels, PSCo’s assets and liabilities that are measured at fair value on a recurring basis at March 31, 2011:

   
March 31, 2011
 
   
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
  $ -     $ 107     $ -     $ 107     $ -     $ 107  
Other derivative instruments:
                                               
Trading commodity
    13       7,712       -       7,725       (4,285 )     3,440  
Natural gas commodity
    -       1,417       -       1,417       (908 )     509  
Total current derivative assets
  $ 13     $ 9,236     $ -     $ 9,249     $ (5,193 )     4,056  
Purchased power agreements (a)
                                            2,729  
Current derivative instruments
                                          $ 6,785  
Noncurrent derivative assets
                                               
Derivatives designated as cash flow hedges:
                                               
Vehicle fuel and other commodity
  $ -     $ 183     $ -     $ 183     $ -     $ 183  
Other derivative instruments:
                                               
Trading commodity
    -       6,198       -       6,198       (2,029 )     4,169  
Total noncurrent derivative assets
  $ -     $ 6,381     $ -     $ 6,381     $ (2,029 )     4,352  
Purchased power agreements (a)
                                            11,733  
Noncurrent derivative instruments
                                          $ 16,085  
                                                 
                                                 
Current derivative liabilities
                                               
Other derivative instruments:
                                               
Trading commodity
  $ 59     $ 7,111     $ -     $ 7,170     $ (5,423 )   $ 1,747  
Natural gas commodity
    -       1,886       -       1,886       (908 )     978  
Total current derivative liabilities
  $ 59     $ 8,997     $ -     $ 9,056     $ (6,331 )     2,725  
Purchased power agreements (a)
                                            5,740  
Current derivative instruments
                                          $ 8,465  
Noncurrent derivative liabilities
                                               
Other derivative instruments:
                                               
Trading commodity
  $ -     $ 5,190     $ -     $ 5,190     $ (2,029 )   $ 3,161  
Total noncurrent derivative liabilities
  $ -     $ 5,190     $ -     $ 5,190     $ (2,029 )     3,161  
Purchased power agreements (a)
                                            38,238  
Noncurrent derivative instruments
                                          $ 41,399  

(a) 
In 2003, as a result of implementing new guidance on the normal purchase exception for derivative accounting, 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) 
The accounting for 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.


PSCo recognizes transfers between Levels as of the beginning of each period.  There were no transfers of amounts between Levels for the three months ended March 31, 2011.  The following table presents the transfers that occurred from Level 3 to Level 2 for the three months ended March 31, 2010:

(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  

There were no transfers to or from Level 1 for the three months ended March 31, 2010, and the transfer of amounts from Level 3 to Level 2 is due to the passing of time and resulting increased availability of observable inputs to value certain long-term derivative contracts.

The following table presents for each of the hierarchy Levels, PSCo’s assets and liabilities that are measured at fair value on a recurring basis at Dec. 31, 2010:

   
Dec. 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
  $ -     $ 56     $ -     $ 56     $ -     $ 56  
Other derivative instruments:
                                               
Trading commodity
    -       5,765       -       5,765       (2,633 )     3,132  
Natural gas commodity
    -       1,396       -       1,396       (1,019 )     377  
Total current derivative assets
  $ -     $ 7,217     $ -     $ 7,217     $ (3,652 )     3,565  
Purchased power agreements (a)
                                            2,729  
Current derivative instruments
                                          $ 6,294  
Noncurrent derivative assets
                                               
Derivatives designated as cash flow hedges:
                                               
Vehicle fuel and other commodity
  $ -     $ 68     $ -     $ 68     $ -     $ 68  
Other derivative instruments:
                                               
Trading commodity
    -       6,770       -       6,770       (2,118 )     4,652  
Natural gas commodity
    -       1,111       -       1,111       (211 )     900  
Total noncurrent derivative assets
  $ -     $ 7,949     $ -     $ 7,949     $ (2,329 )     5,620  
Purchased power agreements (a)
                                            12,415  
Noncurrent derivative instruments
                                          $ 18,035  

 
   
Dec. 31, 2010
 
   
Fair Value
                   
                     
Fair Value
   
Counterparty
       
(Thousands of Dollars)
 
Level 1
   
Level 2
   
Level 3
   
Total
   
Netting (b)
   
Total
 
Current derivative liabilities
                                   
Other derivative instruments:
                                   
Trading commodity
  $ -     $ 5,192     $ -     $ 5,192     $ (2,669 )   $ 2,523  
Natural gas commodity
    -       41,753       -       41,753       (20,969 )     20,784  
Total current derivative liabilities
  $ -     $ 46,945     $ -     $ 46,945     $ (23,638 )     23,307  
Purchased power agreements (a)
                                            5,740  
Current derivative instruments
                                          $ 29,047  
Noncurrent derivative liabilities
                                               
Other derivative instruments:
                                               
Trading commodity
  $ -     $ 5,526     $ -     $ 5,526     $ (2,118 )   $ 3,408  
Natural gas commodity
    -       350       -       350       (211 )     139  
Total noncurrent derivative liabilities
  $ -     $ 5,876     $ -     $ 5,876     $ (2,329 )     3,547  
Purchased power agreements (a)
                                            39,673  
Noncurrent derivative instruments
                                          $ 43,220  

(a) 
In 2003, as a result of implementing new guidance on the normal purchase exception for derivative accounting, 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) 
The accounting for 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.

There were no Level 3 recurring value measurements at March 31, 2011.  The following table presents the changes in Level 3 recurring fair value measurements for the three months ended March 31, 2010:

(Thousands of Dollars)
 
March 31, 2010
 
Balance at Jan. 1
  $ 804  
Purchases
    (55 )
Settlements
    (94 )
Transfers out of Level 3
    (2,572 )
Gains recognized in earnings (a)
    2,248  
Balance at March 31
  $ 331  

(a) These amounts relate to commodity derivatives held at the end of the period.

Realized and unrealized gains and losses on commodity trading activities are included in electric revenues.  Realized and unrealized gains and losses on non-trading derivative instruments are recorded in OCI or deferred as regulatory assets and liabilities.  The classification as a regulatory asset or liability is based on the commission approved regulatory recovery mechanisms.

Fair Value of Long-Term Debt Recorded at Carrying Amount

The carrying amounts and fair values of PSCo’s long-term debt as follows:

   
March 31, 2011
   
Dec. 31, 2010
 
   
Carrying
         
Carrying
       
(Thousands of Dollars)
 
Amount
   
Fair Value
   
Amount
   
Fair Value
 
Long-term debt, including current portion
  $ 3,235,460     $ 3,487,803     $ 3,235,223     $ 3,531,729  


The fair value of PSCo’s long-term debt is estimated based on the quoted market prices for the same or similar issues, or the current rates for debt of the same remaining maturities and credit quality.  The fair value estimates presented are based on information available to management as of March 31, 2011 and Dec. 31, 2010.  These fair value estimates have not been comprehensively revalued for purposes of these consolidated financial statements since that date and current estimates of fair values may differ significantly.

As of March 31, 2011 and Dec. 31, 2010, the fair value of cash and cash equivalents, notes and accounts receivable, notes and accounts payable and short-term debt are representative of fair value because of the short-term nature of these instruments.

9. 
Other Income, Net

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

   
Three Months Ended March 31,
 
(Thousands of Dollars)
 
2011
   
2010
 
Interest income
  $ 1,303     $ 378  
Other nonoperating income
    607       431  
Insurance policy expenses
    (247 )     (253 )
Other income, net
  $ 1,663     $ 556  

10. 
Segment Information

PSCo has the following reportable segments:  regulated electric, regulated natural gas and all other.

·
PSCo’s regulated electric utility segment generates, transmits and distributes electricity in Colorado.  In addition, this segment includes sales for resale and provides wholesale transmission service to various entities in the United States.  Regulated electric utility also includes PSCo’s commodity trading operations.
·
PSCo’s regulated natural gas utility segment transports, stores and distributes natural gas in portions of Colorado.
·
Revenues from operating segments not included above are below the necessary quantitative thresholds and are therefore included in the all other category.  Those primarily include steam revenue, appliance repair services and nonutility real estate activities.

Operating results from the regulated electric utility and regulated natural gas utility serve as the primary basis for the chief operating decision maker to evaluate the dual performance of PSCo.  The accounting policies of the segments are the same as those described in Note 1 to the consolidated financial statements included in PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 2010. These segments are managed separately because the revenue streams are dependent upon regulated rate recovery which is separately determined for each segment.

Asset and capital expenditure information is not provided for PSCo’s reportable segments because as an integrated electric and natural gas utility, PSCo operates significant assets that are not dedicated to a specific business segment, and reporting assets and capital expenditures by business segment would require arbitrary and potentially misleading allocations which may not necessarily reflect the assets that would be required for the operation of the business segments on a stand-alone basis.

To report income from continuing operations for regulated electric and regulated natural gas utility segments the majority of costs are directly assigned to each segment. However, some costs, such as common depreciation, common O&M expenses and interest expense are allocated based on cost causation allocators.  A general allocator is used for certain general and administrative expenses, including office supplies, rent, property insurance and general advertising.

   
Regulated
   
Regulated
   
All
   
Reconciling
   
Consolidated
 
(Thousands of Dollars)
 
Electric
   
Natural Gas
   
Other
   
Eliminations
   
Total
 
Three Months Ended March 31, 2011
                             
Operating revenues from external customers
  $ 704,153     $ 428,191     $ 12,103     $ -     $ 1,144,447  
Intersegment revenues
    114       46       -       (160 )     -  
Total revenues
  $ 704,267     $ 428,237     $ 12,103     $ (160 )   $ 1,144,447  
Net income
  $ 65,715     $ 28,878     $ 2,037     $ -     $ 96,630  



   
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  

11. 
Comprehensive Income

The components of total comprehensive income are shown below:

   
Three Months Ended March 31,
 
(Thousands of Dollars)
 
2011
   
2010
 
Net income
  $ 96,630     $ 84,250  
Other comprehensive (loss) income:
               
After-tax net unrealized gains related to derivatives accounted for as hedges
    98       15  
After-tax net realized gains on derivative transactions reclassified into earnings
    (357 )     (123 )
Other comprehensive loss
    (259 )     (108 )
Comprehensive income
  $ 96,371     $ 84,142  

12. 
Benefit Plans and Other Postretirement Benefits

Pension and other postretirement benefit disclosures below generally represent Xcel Energy consolidated information unless specifically identified as being attributable to PSCo.

Components of Net Periodic Benefit Cost

   
Three Months Ended March 31,
 
   
2011
   
2010
   
2011
   
2010
 
(Thousands of Dollars)   Pension Benefits    
Postretirement Health Care Benefits
 
Xcel Energy
                       
Service cost
  $ 18,112     $ 17,618     $ 1,315     $ 1,038  
Interest cost
    39,915       40,652       10,551       10,529  
Expected return on plan assets
    (55,286 )     (58,124 )     (7,968 )     (7,134 )
Amortization of transition obligation
    -       -       3,611       3,611  
Amortization of prior service cost (credit)
    5,633       5,164       (1,233 )     (1,233 )
Amortization of net loss
    18,729       11,024       3,343       2,709  
Net periodic benefit cost
    27,103       16,334       9,619       9,520  
Costs not recognized and additional cost recognized due
                               
to the effects of regulation
    (7,885 )     (7,326 )     973       973  
Net benefit cost recognized for financial reporting
  $ 19,218     $ 9,008     $ 10,592     $ 10,493  
                                 
PSCo
                               
Net periodic benefit cost
  $ 7,210     $ 3,323     $ 5,570     $ 5,513  
Additional cost recognized due to the effects of regulation
    -       -       973       973  
Net benefit cost recognized for financial reporting
  $ 7,210     $ 3,323     $ 6,543     $ 6,486  

Voluntary contributions of $134 million were made to three of Xcel Energy’s pension plans in January 2011, including $58.3 million related to PSCo. Based on updated valuation results received in March 2011 for the NCE Non-Bargaining Pension Plan, Xcel Energy plans to make a required contribution of $3.3 million to the NCE Non-Bargaining Pension Plan in mid-2011.


Item 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

Financial Review

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

Forward-Looking Statements

Except for the historical statements contained in this report, the matters discussed in the following discussion and analysis are forward-looking statements that are subject to certain risks, uncertainties and assumptions.  Such forward-looking statements 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.  Actual results may vary materially.  Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them to reflect 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 inflation rates, monetary fluctuations and their impact on capital expenditures and the ability of PSCo and its subsidiaries to obtain financing on favorable terms; business conditions in the energy industry; including the risk of a slow down in the U.S. economy or delay in growth recovery; trade, fiscal, taxation and environmental policies in areas where PSCo has a financial interest; customer business conditions; competitive factors, including the extent and timing of the entry of additional competition in the markets served by PSCo and its subsidiaries; unusual weather; effects of geopolitical events, including war and acts of terrorism; state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rates or have an impact on asset operation or ownership or impose environmental compliance conditions; structures that affect the speed and degree to which competition enters the electric and natural gas markets; costs and other effects of legal and administrative proceedings, settlements, investigations and claims; financial or regulatory accounting policies imposed by regulatory bodies; availability or cost of capital; employee work force factors; the items described under Factors Affecting Results of Continuing Operations; and the other risk factors listed from time to time by PSCo in reports filed with the SEC, including “Risk Factors” in Item 1A of PSCo’s Form 10-K for the year ended Dec. 31, 2010, and Item 1A and Exhibit 99.01 to this Quarterly Report on Form 10-Q for the quarter ended March 31, 2011.

Results of Operations

PSCo’s net income was approximately $96.6 million for the first three months of 2011, compared with approximately $84.3 million for the first three months of 2010.  The increase is due to higher income tax expense in 2010 related to a write-off of tax benefits previously recorded for Medicare Part D subsidies and an adjustment at P.S.R. Investments, Inc. (PSRI) related to the corporate- owned life insurance (COLI) Tax Court proceedings in 2010.  The decrease in income tax expense was partially offset by a decrease in revenues due to seasonal rates, which were implemented in June 2010, and higher O&M expenses, property taxes and depreciation expense.  Seasonal rates are designed to be revenue neutral on an annual basis.  Therefore, the quarterly pattern of revenue collection is different than in the past, as seasonal rates are higher in the summer months and lower throughout the latter part of the year.


Electric Revenues and Margin

Electric revenues and fuel and purchased power expenses are largely impacted by the fluctuation in the price of natural gas and coal used in the generation of electricity, but as a result of the design of fuel recovery mechanisms to recover current expenses, these price fluctuations have little impact on electric margin.  The following table details the electric revenues and margin:

   
Three Months Ended March 31,
 
(Millions of Dollars)
 
2011
 
2010
 
Electric revenues
  $ 704     $ 724  
Electric fuel and purchased power
    (324 )     (374 )
Electric margin
  $ 380     $ 350  

The following tables summarize the components of the changes in electric revenues and margin for the three months ended March 31:

Electric Revenues

(Millions of Dollars)
 
2011 vs. 2010
 
Fuel and purchased power cost recovery
  $ (51 )
Retail rate increase, offset by impact of seasonal rates
    (4 )
Firm wholesale
    (3 )
Revenue requirements for PSCo generation acquisition (a)
    34  
Renewable energy credit sales
    2  
Service and facility fees
    2  
Total decrease in electric revenues
  $ (20 )

Electric Margin

(Millions of Dollars)
 
2011 vs. 2010
 
Revenue requirements for PSCo generation acquisition (a)
  $ 34  
Service and facility fees
    2  
Retail rate increase, offset by impact of seasonal rates
    (4 )
Renewable energy credit sales
    (2 )
Total increase in electric margin
  $ 30  

(a) 
The increase in revenue requirements for PSCo generation reflects the acquisition of the Rocky Mountain and Blue Spruce natural gas facilities in 2010.  These revenue requirements are partially offset by increased O&M expense, depreciation expense, property taxes and financing costs.

Natural Gas Revenues and Margin

The cost of natural gas tends to vary with changing sales requirements and unit cost of natural gas purchases.  However, due to the design of purchased natural gas cost recovery mechanisms to recover current expenses for sales to retail customers, fluctuations in the cost of natural gas have little effect on natural gas margin.  The following table details the natural gas revenues and margin:

   
Three Months Ended March 31,
 
(Millions of Dollars)
 
2011
   
2010
 
Natural gas revenues
  $