PUBLIC SERVICE CO OF COLORADO - FORM 10-Q

PUBLIC SERVICE CO OF COLORADO - FORM 10-Q - October 26, 2018

Attached files

Attached files

PUBLIC SERVICE CO OF COLORADO Reports

file	filename
EX-99.01 - EXHIBIT 99.01 - PUBLIC SERVICE CO OF COLORADO	pscoex9901q32018.htm
EX-32.01 - EXHIBIT 32.01 - PUBLIC SERVICE CO OF COLORADO	pscoex3201q32018.htm
EX-31.02 - EXHIBIT 31.02 - PUBLIC SERVICE CO OF COLORADO	pscoex3102q32018.htm
EX-31.01 - EXHIBIT 31.01 - PUBLIC SERVICE CO OF COLORADO	pscoex3101q32018.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 Sept. 30, 2018



¨	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 ¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). x Yes ¨ No

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



Large accelerated filer ¨		Accelerated filer ¨

Non-accelerated filer x		Smaller reporting company ¨
		Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ 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		Oct. 26, 2018
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.

TABLE OF CONTENTS



PART I — FINANCIAL INFORMATION

Item l —	Financial Statements (Unaudited)	3
Item 2 —	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 4 —	Controls and Procedures	29

PART II — OTHER INFORMATION

Item 1 —	Legal Proceedings	30
Item 1A —	Risk Factors	30
Item 6 —	Exhibits	30

SIGNATURES		31

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 Inc. wholly owns the following subsidiaries: Northern States Power Company, a Minnesota corporation (NSP-Minnesota); Northern States Power Company, a Wisconsin corporation (NSP-Wisconsin); PSCo; and Southwestern Public Service Company, a New Mexico corporation (SPS). NSP-Minnesota, NSP-Wisconsin, PSCo and SPS are also referred to collectively as utility subsidiaries. Additional information on Xcel Energy Inc. and its subsidiaries (collectively, Xcel Energy) is available on various filings with the Securities and Exchange Commission (SEC).

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PART I — FINANCIAL INFORMATION

Item 1 — FINANCIAL STATEMENTS

PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(amounts in thousands)



	Three Months Ended Sept. 30						Nine Months Ended Sept. 30
	2018			2017			2018			2017
Operating revenues
Electric	$	894,786		$	877,604		$	2,309,255		$	2,318,912
Natural gas	157,205			142,389			707,852			691,302
Steam and other	8,688			10,300			28,736			31,529
Total operating revenues	1,060,679			1,030,293			3,045,843			3,041,743

Operating expenses
Electric fuel and purchased power	288,589			288,997			841,650			857,346
Cost of natural gas sold and transported	32,310			37,243			282,134			303,903
Cost of sales — steam and other	3,327			4,098			10,867			11,991
Operating and maintenance expenses	201,390			173,392			573,456			545,874
Demand side management expenses	39,391			34,520			105,345			92,552
Depreciation and amortization	167,961			118,289			406,121			350,796
Taxes (other than income taxes)	50,820			47,213			153,220			146,481
Total operating expenses	783,788			703,752			2,372,793			2,308,943

Operating income	276,891			326,541			673,050			732,800

Other income, net	1,399			1,023			2,429			5,546
Allowance for funds used during construction — equity	16,353			8,642			40,851			19,591

Interest charges and financing costs
Interest charges — includes other financing costs of $1,682 and $1,605, $4,855, and $4,669 respectively	53,182			49,097			154,324			141,403
Allowance for funds used during construction — debt	(6,370		)	(3,266		)	(16,156		)	(7,610		)
Total interest charges and financing costs	46,812			45,831			138,168			133,793

Income before income taxes	247,831			290,375			578,162			624,144
Income taxes	40,719			104,298			115,033			225,934
Net income	$	207,112		$	186,077		$	463,129		$	398,210

See Notes to Consolidated Financial Statements

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PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(amounts in thousands)



	Three Months Ended Sept. 30					Nine Months Ended Sept. 30
	2018			2017		2018			2017
Net income	$	207,112		$	186,077	$	463,129		$	398,210

Other comprehensive income (loss)

Pension and retiree medical benefits:
Net pension and retiree medical losses arising during the period, net of tax of $(50), $0, $(50) and $0, respectively	(153		)	—		(153		)	—
Amortization of losses included in net periodic benefit cost, net of tax of $51, $1, $51, and $3, respectively	155			1		159			3
	2			1		6			3

Derivative instruments:
Reclassification of losses to net income, net of tax of $97, $150, $294 and $455, respectively	310			257		913			753

Other comprehensive income	312			258		919			756
Comprehensive income	$	207,424		$	186,335	$	464,048		$	398,966

See Notes to Consolidated Financial Statements

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PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(amounts in thousands)



	Nine Months Ended Sept. 30
	2018			2017
Operating activities
Net income	$	463,129		$	398,210
Adjustments to reconcile net income to cash provided by operating activities:
Depreciation and amortization	409,836			353,653
Demand side management program amortization
Deferred income taxes	66,563			223,121
Amortization of investment tax credits	(2,099		)	(2,102		)
Allowance for equity funds used during construction	(40,851		)	(19,591		)
Net realized and unrealized hedging and derivative transactions	(9,852		)	907
Other	1			661
Changes in operating assets and liabilities:
Accounts receivable	(737		)	4,431
Accrued unbilled revenues	60,079			74,918
Inventories	13,557			(250		)
Prepayments and other	12,633			11,717
Accounts payable	25,303			(53,706		)
Net regulatory assets and liabilities	(23,604		)	(28,594		)
Other current liabilities	(87,867		)	(40,789		)
Pension and other employee benefit obligations	(28,958		)	(16,691		)
Change in other noncurrent assets	6,551			(1,149		)
Change in other noncurrent liabilities	(26,296		)	(1,916		)
Net cash provided by operating activities	837,388			902,830

Investing activities
Utility capital/construction expenditures	(1,231,585		)	(995,680		)
Allowance for equity funds used during construction	40,851			19,591
Investments in utility money pool arrangement	(578,000		)	(659,000		)
Repayments from utility money pool arrangement	575,000			609,000
Other, net	—			(657		)
Net cash used in investing activities	(1,193,734		)	(1,026,746		)

Financing activities
Repayments of short-term borrowings, net	—			(129,000		)
Borrowings under utility money pool arrangement	526,000			40,000
Repayments under utility money pool arrangement	(526,000		)	(40,000		)
Proceeds from issuance of long-term debt	691,439			393,795
Repayments of long-term debt	(300,000		)	—
Capital contributions from parent	246,829			158,080
Dividends paid to parent	(271,884		)	(245,291		)
Other	(118		)	(110		)
Net cash provided by financing activities	366,266			177,474

Net change in cash and cash equivalents	9,920			53,558
Cash and cash equivalents at beginning of period	7,513			5,926
Cash and cash equivalents at end of period	$	17,433		$	59,484

Supplemental disclosure of cash flow information:
Cash paid for interest (net of amounts capitalized)	$	(145,251	)	$	(145,461	)
Cash paid for income taxes, net	(86,418		)	(7,752		)
Supplemental disclosure of non-cash investing transactions:
Property, plant and equipment additions in accounts payable	$	134,994		$	133,933

See Notes to Consolidated Financial Statements

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PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(amounts in thousands, except share and per share data)



	Sept. 30, 2018			Dec. 31, 2017
Assets
Current assets
Cash and cash equivalents	$	17,433		$	7,513
Accounts receivable, net	299,980			294,403
Accounts receivable from affiliates	8,605			14,719
Investments in utility money pool arrangement	23,000			20,000
Accrued unbilled revenues	235,722			295,801
Inventories	187,412			214,489
Regulatory assets	111,996			77,337
Derivative instruments	16,562			3,197
Prepayments and other	28,207			35,720
Total current assets	928,917			963,179

Property, plant and equipment, net	14,839,033			14,025,751

Other assets
Regulatory assets	987,696			950,258
Derivative instruments	3,688			1,009
Other	20,542			27,429
Total other assets	1,011,926			978,696
Total assets	$	16,779,876		$	15,967,626

Liabilities and Equity
Current liabilities
Current portion of long-term debt	$	406,021		$	305,577
Accounts payable	467,173			492,829
Accounts payable to affiliates	48,220			58,749
Regulatory liabilities	55,587			66,126
Taxes accrued	155,131			222,517
Accrued interest	38,881			48,552
Dividends payable to parent	103,470			76,195
Derivative instruments	8,918			7,348
Other	88,500			92,333
Total current liabilities	1,371,901			1,370,226

Deferred credits and other liabilities
Deferred income taxes	1,732,686			1,644,476
Deferred investment tax credits	25,759			27,858
Regulatory liabilities	1,982,649			1,933,488
Asset retirement obligations	358,715			347,769
Derivative instruments	3,156			3,468
Customer advances	166,325			162,614
Pension and employee benefit obligations	258,509			287,783
Other	49,028			58,923
Total deferred credits and other liabilities	4,576,827			4,466,379

Commitments and contingencies
Capitalization
Long-term debt	4,592,382			4,302,698
Common stock — 100 shares authorized at $0.01 par value; 100 shares outstanding at Sept. 30, 2018 and Dec. 31, 2017, respectively	—			—
Additional paid in capital	4,278,380			4,032,826
Retained earnings	1,986,199			1,822,229
Accumulated other comprehensive loss	(25,813		)	(26,732		)
Total common stockholder’s equity	6,238,766			5,828,323
Total liabilities and equity	$	16,779,876		$	15,967,626

See Notes to Consolidated Financial Statements

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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 Sept. 30, 2018 and Dec. 31, 2017; the results of its operations, including the components of net income and comprehensive income, for the three and nine months ended Sept. 30, 2018 and 2017; and its cash flows for the nine months ended Sept. 30, 2018 and 2017. All adjustments are of a normal, recurring nature, except as otherwise disclosed. Management has also evaluated the impact of events occurring after Sept. 30, 2018 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, 2017 balance sheet information has been derived from the audited 2017 consolidated financial statements included in the PSCo Annual Report on Form 10-K for the year ended Dec. 31, 2017. 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 on an annual basis 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, 2017, filed with the SEC on Feb. 23, 2018. 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 the PSCo Annual Report on Form 10-K for the year ended Dec. 31, 2017, appropriately represent, in all material respects, the current status of accounting policies and are incorporated herein by reference.


2.	Accounting Pronouncements

Recently Issued

Leases — In February 2016, the Financial Accounting Standards Board (FASB) issued Leases, Topic 842 (Accounting Standards Update (ASU) No. 2016-02), which for lessees requires balance sheet recognition of right-of-use assets and lease liabilities for most leases. This guidance will be effective for interim and annual reporting periods beginning after Dec. 15, 2018. Adoption will occur on Jan. 1, 2019 utilizing the practical expedients provided by the standard and included in Targeted Improvements, Topic 842 (ASU No. 2018-11). On Jan. 1, 2019, agreements historically disclosed as operating leases for the use of real estate, equipment and certain fossil-fueled generating facilities operated under purchased power agreements (PPAs) are expected to be recognized on the consolidated balance sheet. Other than first-time recognition of these types of operating leases on the consolidated balance sheet, the implementation is not expected to have a significant impact on PSCo’s consolidated financial statements.

Recently Adopted

Revenue Recognition — In May 2014, the FASB issued Revenue from Contracts with Customers, Topic 606 (ASU No. 2014-09), which provides a new framework for the recognition of revenue. PSCo implemented the guidance on a modified retrospective basis on Jan. 1, 2018. Results for reporting periods beginning after Dec. 31, 2017 are presented in accordance with Topic 606, while prior period results have not been adjusted and continue to be reported in accordance with prior accounting guidance. Other than increased disclosures regarding revenues related to contracts with customers, the implementation did not have a material impact on PSCo’s consolidated financial statements. For related disclosures, see Note 13 to the consolidated financial statements.

Classification and Measurement of Financial Instruments — In January 2016, the FASB issued Recognition and Measurement of Financial Assets and Financial Liabilities, Subtopic 825-10 (ASU No. 2016-01), which eliminated the available-for-sale classification for marketable equity securities and also replaced the cost method of accounting for non-marketable equity securities with a model for recognizing impairments and observable price changes. Under the new standard, other than when the consolidation or equity method of accounting is utilized, changes in the fair value of equity securities are recognized in earnings. PSCo implemented the guidance on Jan. 1, 2018 and the implementation did not have a material impact on its consolidated financial statements.

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Presentation of Net Periodic Benefit Cost — In March 2017, the FASB issued Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, Topic 715 (ASU No. 2017-07), which establishes that only the service cost element of pension cost may be presented as a component of operating income in the income statement. Also under the guidance, only the service cost component of pension cost is eligible for capitalization. As a result of the application of accounting principles for rate regulated entities, a similar amount of pension cost, including non-service components, will be recognized consistent with the historical ratemaking treatment, and the impacts of adoption will be limited to changes in classification of non-service costs in the consolidated statement of income. PSCo implemented the new guidance on Jan. 1, 2018, and as a result, $0.5 million and $1.5 million of pension costs were retrospectively reclassified from operating and maintenance expenses to other income, net on the consolidated income statement for the three and nine months ended Sept. 30, 2017, respectively. Under a practical expedient permitted by the standard, PSCo used benefit cost amounts disclosed for prior periods as the basis for retrospective application.


3.	Selected Balance Sheet Data



(Thousands of Dollars)	Sept. 30, 2018			Dec. 31, 2017
Accounts receivable, net
Accounts receivable	$	320,572		$	314,009
Less allowance for bad debts	(20,592		)	(19,606		)
	$	299,980		$	294,403



(Thousands of Dollars)	Sept. 30, 2018		Dec. 31, 2017
Inventories
Materials and supplies	$	58,198	$	68,940
Fuel	62,409		73,893
Natural gas	66,805		71,656
	$	187,412	$	214,489



(Thousands of Dollars)	Sept. 30, 2018			Dec. 31, 2017
Property, plant and equipment, net
Electric plant	$	12,401,598		$	12,627,592
Natural gas plant	4,269,700			4,102,075
Common and other property	1,046,991			1,022,333
Plant to be retired ^(a)	337,087			10,949
Construction work in progress	1,575,102			1,014,338
Total property, plant and equipment	19,630,478			18,777,287
Less accumulated depreciation	(4,791,445		)	(4,751,536		)
	$	14,839,033		$	14,025,751

^(a)

In the third quarter of 2018, the Colorado Public Utilities Commission (CPUC) approved early retirement of PSCo’s Comanche Units 1, 2 and shared Common plant in approximately 2022, 2025 and 2025, respectively. PSCo also expects Craig Unit 1 to be early retired in approximately 2025. In the third quarter of 2017, PSCo early retired Valmont Unit 5 and converted Cherokee Unit 4 from a coal-fueled generating facility to natural gas. Amounts are presented net of accumulated depreciation.


4.	Income Taxes

Except to the extent noted below, Note 7 to the consolidated financial statements included in PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 2017 appropriately represents, in all material respects, the current status of other income tax matters, and are incorporated herein by reference.

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Total income tax expense from operations differs from the amount computed by applying the statutory federal income tax rate to income before income tax expense. The following reconciles such differences:



	Nine Months Ended Sept. 30
	2018		2017
Federal statutory rate	21.0	%	35.0	%
State tax (net of federal tax effect)	3.7		3.0
Increases (decreases) in tax from:
Regulatory differences - ARAM ^(a)	(2.5	)	—
Regulatory differences - ARAM deferral ^(b)	2.2		—
Regulatory differences - reversal of prior quarters' ARAM deferral ^(b)	(1.5	)	—
Regulatory differences - other utility plant items	(1.3	)	(1.0	)
Tax credits (net of federal income tax expense)	(0.9	)	(0.8	)
Other (net)	(0.8	)	—
Effective income tax rate	19.9	%	36.2	%


^(a)	The average rate assumption method (ARAM); a method to flow back excess deferred taxes to customers.


^(b)	ARAM has been deferred when regulatory treatment has not been established. As PSCO received direction from its regulatory commission regarding the return of excess deferred taxes to customers, the ARAM deferral was reversed. This resulted in a reduction to tax expense with a corresponding reduction to revenue.

Federal Audits — 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 federal income tax returns expire as follows:



Tax Year(s)		Expiration
2009 - 2014		October 2019
2015		September 2019
2016		September 2020

In 2012, the Internal Revenue Service (IRS) commenced an examination of tax years 2010 and 2011, including the 2009 carryback claim. In 2017 Xcel Energy and the Office of Appeals (Appeals) reached an agreement and the benefit related to the agreed upon portions was recognized. PSCo did not accrue any income tax benefit related to this adjustment. In the second quarter of 2018, the Joint Committee on Taxation completed its review and took no exception to the agreement. As a result, the remaining unrecognized tax benefit was released and recorded as a payable to the IRS.

In the third quarter of 2015, the IRS commenced an examination of tax years 2012 and 2013. In the third quarter of 2017, the IRS concluded the audit of tax years 2012 and 2013 and proposed an adjustment that would impact Xcel Energy’s net operating loss (NOL) and effective tax rate (ETR). Xcel Energy filed a protest with the IRS. As of Sept. 30, 2018, the case has been forwarded to Appeals and Xcel Energy has recognized its best estimate of income tax expense that will result from a final resolution of this issue; however, the outcome and timing of a resolution is unknown.

State Audits — PSCo is a member of the Xcel Energy affiliated group that files consolidated state income tax returns. As of Sept. 30, 2018, PSCo’s earliest open tax year that is subject to examination by state taxing authorities under applicable statutes of limitations is 2009. There are currently no state income tax audits in progress.

Unrecognized Benefits — The unrecognized tax benefit balance includes permanent tax positions, which if recognized would affect the annual 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)	Sept. 30, 2018		Dec. 31, 2017
Unrecognized tax benefit — Permanent tax positions	$	5.1	$	4.0
Unrecognized tax benefit — Temporary tax positions	4.9		6.1
Total unrecognized tax benefit	$	10.0	$	10.1

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The unrecognized tax benefit amounts were reduced by the tax benefits associated with NOL and tax credit carryforwards. The amounts of tax benefits associated with NOL and tax credit carryforwards are as follows:



(Millions of Dollars)	Sept. 30, 2018			Dec. 31, 2017
NOL and tax credit carryforwards	$	(5.5	)	$	(4.0	)

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

Payables for interest related to unrecognized tax benefits were not material and no amounts were accrued for penalties related to unrecognized tax benefits as of Sept. 30, 2018 or Dec. 31, 2017.


5.	Rate Matters

Except to the extent noted below, the circumstances set forth in Note 11 to the consolidated financial statements included in PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 2017 and in Note 5 to the consolidated financial statements to PSCo’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018, appropriately represent, in all material respects, the current status of other rate matters, and are incorporated herein by reference.

Tax Reform — Regulatory Proceedings

The specific impacts of the TCJA on customer rates are subject to regulatory approval. The following details the status of regulatory decisions.

Natural Gas — In February 2018, the administrative law judge (ALJ) recommended approval of PSCo and the CPUC Staff’s TCJA settlement agreement which included a $20 million reduction to provisional rates effective March 1, 2018. In September 2018, PSCo submitted a TCJA true-up filing and revised its TCJA benefit estimate to $24 million and requested an equity ratio of 56 percent to offset the negative impact of the TCJA on credit metrics. A decision is expected in the fourth quarter of 2018. The true-up of the estimated TCJA benefit is expected to be retroactive to January 2018.

Electric — In April 2018, PSCo, the CPUC Staff, and the Office of Consumer Counsel (OCC) filed a TCJA settlement agreement for 2018 that included a customer refund of $42 million in 2018, with the remainder of the $59 million of TCJA benefits to be used to accelerate the amortization of an existing prepaid pension asset. In June 2018, the CPUC approved the customer refund of $42 million. In October 2018, the accelerated amortization of the prepaid pension asset was effective by operation of law. For 2019, the expected customer refund is estimated to be $67 million, and amortization of the prepaid pension asset is estimated to be $34 million. Impacts of the TCJA for 2020 and beyond are expected to be addressed in a future electric rate case.

Pending Regulatory Proceedings — CPUC

Colorado 2017 Multi-Year Natural Gas Rate Case — In June 2017, PSCo filed a multi-year request with the CPUC seeking to increase retail natural gas rates approximately $139 million over three years. The request was based on forward test years, a 10.0 percent ROE and an equity ratio of 55.25 percent.

In August 2018, the CPUC issued an interim decision that included application of a 2016 historic test year (HTY), with a 13-month average rate base, an ROE of 9.35 percent, an equity ratio of 54.6 percent and provided no return on the prepaid pension and retiree medical asset. With these adjustments, the total rate increase, prior to TCJA impacts, would be $47 million. PSCo filed an interim rehearing request to preserve its rights and the CPUC decided that any reconsideration can be brought after a final order incorporating TCJA impacts. The CPUC is expected to issue its order on the natural gas rate case and the final decision related to the impacts of the TCJA in the fourth quarter of 2018.

PSIA Rider

In October 2018, PSCo, CPUC Staff, and the OCC filed a settlement agreement to extend the PSIA rider through 2021. The CPUC is expected to rule on the settlement in the fourth quarter of 2018.

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6.	Commitments and Contingencies

Except to the extent noted below and in Note 5 to the consolidated financial statements, the circumstances set forth in Notes 11 and 12 to the consolidated financial statements included in PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 2017 and in Notes 5 and 6 to PSCo’s Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018, 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.

PPAs

PSCo purchases power from independent power producing entities that own natural gas fueled power plants for which PSCo is 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. These specific PPAs create a variable interest in the associated independent power producing entity.

PSCo had approximately 1,571 Megawatts (MW) of capacity under long-term PPAs as of Sept. 30, 2018 and Dec. 31, 2017, with entities that have been determined to be variable interest entities. 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. These agreements have various expiration dates through 2032.

Environmental Contingencies

Manufactured Gas Plant (MGP), Landfill or Disposal Sites — PSCo is currently involved in investigating and/or remediating several MGP, landfill or other disposal sites. PSCo has identified four sites where investigation and/or remediation activities are currently underway. Other parties may have responsibility for some portion of the investigation and/or remediation activities. PSCo anticipates that these investigation or remediation activities will continue through at least 2019. PSCo accrued $1 million as of Sept. 30, 2018 and an immaterial amount as of Dec. 31, 2017, for these sites. There may be insurance recovery and/or recovery from other responsible parties that will offset any costs incurred.

Environmental Requirements

Water and Waste

Coal Ash Regulation — PSCo’s operations are subject to federal and state laws that impose requirements for handling, storage, treatment and disposal of solid waste. In 2015, the United States Environmental Protection Agency published a final rule regulating the management, storage, and disposal of coal combustion residuals (CCRs) as a nonhazardous waste (CCR Rule).

Under the CCR Rule, utilities are required to complete certain groundwater sampling around their CCR landfills and surface impoundments. PSCo has identified at least one site where there are impoundments and/or landfills present and where a statistically significant increase of certain constituents exist in the groundwater. However, at that location, closure activities are already underway. PSCo is currently conducting additional groundwater sampling and will evaluate whether corrective action is required at any CCR landfills or surface impoundments. Until PSCo completes additional groundwater sampling, it is uncertain what impact, if any, there will be on the operations, financial position or cash flows. PSCo believes that any associated costs would be recoverable through regulatory mechanisms.

Legal Contingencies

PSCo is involved in various litigation matters that are being defended and handled in the ordinary course of business. The assessment of whether a loss is probable or is a reasonable possibility, and whether the loss or a range of loss is estimable, often involves a series of complex judgments about future events. Management maintains accruals for such losses that are probable of being incurred and subject to reasonable estimation. Management is sometimes unable to estimate an amount or range of a reasonably possible loss in certain situations, including but not limited to when (1) the damages sought are indeterminate, (2) the proceedings are in the early stages, or (3) the matters involve novel or unsettled legal theories. In such cases, there is considerable uncertainty regarding the timing or ultimate resolution of such matters, including a possible eventual loss. For current proceedings not specifically reported herein, management does not anticipate that the ultimate liabilities, if any, arising from such current proceedings would have a material effect on PSCo’s financial statements. Unless otherwise required by GAAP, legal fees are expensed as incurred.

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Employment, Tort and Commercial Litigation

Line Extension Disputes — In December 2015, Development Recovery Company (DRC) filed a lawsuit in the Denver District Court, stating PSCo failed to award proper allowances and refunds for line extensions to new developments pursuant to the terms of electric and gas service agreements entered into by PSCo and various developers. The dispute involved claims by over fifty developers. In February 2018, the Colorado Supreme Court denied DRC’s petition to appeal the Denver District Court’s dismissal of the lawsuit, effectively terminating this litigation. However, in January 2018, DRC filed a new lawsuit in Boulder County District Court, asserting a single claim that PSCo was required to file its line extension agreements with the CPUC but failed to do so. This claim is substantially similar to the arguments previously raised by DRC. PSCo filed a motion to dismiss this claim, which was granted in May 2018. DRC subsequently filed an appeal to the Colorado Court of Appeals. It is uncertain when a decision will be rendered regarding this appeal.

PSCo has concluded that a loss is remote with respect to this matter as the service agreements were developed to implement CPUC approved tariffs and PSCo has complied with the tariff provisions. Also, if a loss were sustained, PSCo believes it would be allowed to recover these costs through traditional regulatory mechanisms. The amount or range in dispute is presently unknown and no accrual has been recorded for this matter.


7.	Borrowings and Other Financing Instruments

Short-Term Borrowings

Money Pool — Xcel Energy Inc. and its utility subsidiaries have established a money pool arrangement that allows for short-term investments in and borrowings between the utility subsidiaries. Xcel Energy Inc. 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 Xcel Energy Inc. Money pool borrowings for PSCo were as follows:



(Amounts in Millions, Except Interest Rates)	Three Months Ended Sept. 30, 2018		Year Ended Dec. 31, 2017
Borrowing limit	$	250	$	250
Amount outstanding at period end	—		—
Average amount outstanding	—		—
Maximum amount outstanding	—		20
Weighted average interest rate, computed on a daily basis	N/A		0.92		%
Weighted average interest rate at period end	N/A		N/A

Commercial Paper — PSCo meets its short-term liquidity requirements primarily through the issuance of commercial paper and borrowings under its credit facility and the money pool. Commercial paper outstanding for PSCo was as follows:



(Amounts in Millions, Except Interest Rates)	Three Months Ended Sept. 30, 2018		Year Ended Dec. 31, 2017
Borrowing limit	$	700	$	700
Amount outstanding at period end	—		—
Average amount outstanding	—		54
Maximum amount outstanding	—		268
Weighted average interest rate, computed on a daily basis	N/A		1.08		%
Weighted average interest rate at period end	N/A		N/A

Letters of Credit — PSCo uses letters of credit, generally with terms of one year, to provide financial guarantees for certain operating obligations. At Sept. 30, 2018 and Dec. 31, 2017, there were $10 million and $3 million, respectively, of letters of credit outstanding under the credit facility. The contract amounts of these letters of credit approximate their fair value and are subject to fees.

Credit Facility — 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 this credit facility. The credit facility provides short-term financing in the form of notes payable to banks, letters of credit and back-up support for commercial paper borrowings.

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At Sept. 30, 2018, PSCo had the following committed credit facility available (in millions of dollars):



Credit Facility ^(a)		Drawn ^(b)		Available
$	700	$	10	$	690

^(a) This credit facility expires in June 2021.

^(b) 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 Sept. 30, 2018 and Dec. 31, 2017.


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 hierarchical 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 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:

Cash equivalents — The fair values of cash equivalents are generally based on cost plus accrued interest; money market funds are measured using quoted net asset value.

Interest rate derivatives — The fair values of interest rate derivatives are based on broker quotes that utilize current market interest rate forecasts.

Commodity derivatives — The methods used to measure the fair value of commodity derivative forwards and options utilize forward prices and volatilities, as well as pricing adjustments for specific delivery locations, and are generally assigned a Level 2 classification. When contractual settlements extend to periods beyond those readily observable on active exchanges or quoted by brokers, the significance of the use of less observable forecasts of long-term forward prices and volatilities on a valuation is evaluated, and may result in Level 3 classification.

Derivative Instruments Fair Value Measurements

PSCo enters into derivative instruments, including forward contracts, futures, swaps and options, for trading purposes and to manage 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 Sept. 30, 2018, accumulated other comprehensive losses related to interest rate derivatives included $1.2 million of net losses expected to be reclassified into earnings during the next 12 months as the related hedged interest rate transactions impact earnings, including forecasted amounts for unsettled hedges, as applicable.

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Wholesale and Commodity Trading Risk — PSCo conducts various wholesale and commodity trading activities, including the purchase and sale of electric capacity, energy, energy-related instruments and natural gas related instruments, including derivatives. 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 this 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, natural gas for resale, and vehicle fuel.

PSCo enters into derivative instruments that mitigate commodity price risk on behalf of electric and natural gas customers but may not be designated as qualifying hedging transactions. Changes in the fair value of non-trading commodity derivative instruments are recorded in other comprehensive income 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 had no income related to the ineffectiveness of cash flow hedges for the three and nine months ended Sept. 30, 2018 and 2017.

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 Sept. 30, 2018 and Dec. 31, 2017:


^(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.

The following tables detail the impact of derivative activity during the three and nine months ended Sept. 30, 2018 and 2017 on accumulated other comprehensive loss, regulatory assets and liabilities, and income:



	Three Months Ended Sept. 30, 2018
	Pre-Tax Fair Value (Losses) Recognized During the Period in:					Pre-Tax Losses Reclassified into Income During the Period from:
(Thousands of Dollars)	Accumulated Other Comprehensive Loss		Regulatory (Assets) and Liabilities			Accumulated Other Comprehensive Loss			Regulatory Assets and (Liabilities)			Pre-Tax Gains Recognized During the Period in Income
Derivatives designated as cash flow hedges
Interest rate	$	—	$	—		$	407	^(a)	$	—		$	—
Total	$	—	$	—		$	407		$	—		$	—
Other derivative instruments
Commodity trading	$	—	$	—		$	—		$	—		$	2,004	^(b)
Natural gas commodity	—		(1,187		)	—			—		^(c)	—		^(c)
Total	$	—	$	(1,187	)	$	—		$	—		$	2,004

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	Nine Months Ended Sept. 30, 2018
	Pre-Tax Fair Value (Losses) Recognized During the Period in:					Pre-Tax Losses Reclassified into Income During the Period from:						Pre-Tax Gains (Losses) Recognized During the Period in Income
(Thousands of Dollars)	Accumulated Other Comprehensive Loss		Regulatory (Assets) and Liabilities			Accumulated Other Comprehensive Loss			Regulatory Assets and (Liabilities)
Derivatives designated as cash flow hedges
Interest rate	$	—	$	—		$	1,207	^(a)	$	—		$	—
Total	$	—	$	—		$	1,207		$	—		$	—
Other derivative instruments
Commodity trading	$	—	$	—		$	—		$	—		$	2,728		^(b)
Natural gas commodity	—		(1,607		)	—			2,749		^(c)	(1,581		)	^(c)
Total	$	—	$	(1,607	)	$	—		$	2,749		$	1,147



	Three Months Ended Sept. 30, 2017
	Pre-Tax Fair Value (Losses) Recognized During the Period in:					Pre-Tax Losses Reclassified into Income During the Period from:
(Thousands of Dollars)	Accumulated Other Comprehensive Loss		Regulatory (Assets) and Liabilities			Accumulated Other Comprehensive Loss			Regulatory Assets and (Liabilities)		Pre-Tax Losses Recognized During the Period in Income
Derivatives designated as cash flow hedges
Interest rate	$	—	$	—		$	407	^(a)	$	—	$	—
Total	$	—	$	—		$	407		$	—	$	—
Other derivative instruments
Commodity trading	$	—	$	—		$	—		$	—	$	(211	)	^(b)
Natural gas commodity	—		(1,635		)	—			—		—			^(c)
Total	$	—	$	(1,635	)	$	—		$	—	$	(211	)

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	Nine Months Ended Sept. 30, 2017
	Pre-Tax Fair Value (Losses) Recognized During the Period in:					Pre-Tax Losses Reclassified into Income During the Period from:
(Thousands of Dollars)	Accumulated Other Comprehensive Loss		Regulatory (Assets) and Liabilities			Accumulated Other Comprehensive Loss			Regulatory Assets and (Liabilities)			Pre-Tax Losses Recognized During the Period in Income
Derivatives designated as cash flow hedges
Interest rate	$	—	$	—		$	1,208	^(a)	$	—		$	—
Total	$	—	$	—		$	1,208		$	—		$	—
Other derivative instruments
Commodity trading	$	—	$	—		$	—		$	—		$	(23	)	^(b)
Natural gas commodity	—		(8,643		)	—			282		^(c)	(2,990		)	^(c)
Total	$	—	$	(8,643	)	$	—		$	282		$	(3,013	)


^(a)	Amounts are recorded to interest charges.


^(b)	Amounts are recorded to interest charges. Amounts are recorded to electric operating revenues. Portions of these gains and losses are subject to sharing with electric customers through margin-sharing mechanisms and deducted from gross revenue as appropriate.

^(c)

Certain derivatives are utilized to mitigate natural gas price risk for electric generation and are recorded to electric fuel and purchased power, subject to cost-recovery mechanisms and reclassified to a regulatory asset, as appropriate. Amounts for the three and nine months ended Sept. 30, 2018 included no settlement gains or losses and $1.2 million of settlement losses, respectively. Amounts for the three and nine months ended Sept. 30, 2017 included no settlement gains or losses and $0.9 million of settlement gains, respectively. The remaining derivative settlement gains and losses for the three and nine months ended Sept. 30, 2018 and 2017 relate to natural gas operations and are recorded to cost of natural gas sold and transported. These gains and losses are subject to cost-recovery mechanisms and reclassified out of income to a regulatory asset or liability, as appropriate.

PSCo had no derivative instruments designated as fair value hedges during the three and nine months ended Sept. 30, 2018 and 2017. Therefore, no gains or losses from fair value hedges or related hedged transactions were recognized for these periods.

Consideration of Credit Risk and Concentrations — PSCo continuously monitors the creditworthiness of the counterparties to its interest rate derivatives and commodity derivative contracts prior to settlement, 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 derivative liabilities, the impact of credit risk was immaterial to the fair value of unsettled commodity derivatives presented in the consolidated balance sheets.

PSCo employs additional credit risk control mechanisms when appropriate, such as letters of credit, parental guarantees, standardized master netting agreements and termination provisions that allow for offsetting of positive and negative exposures. Credit exposure is monitored and, when necessary, the activity with a specific counterparty is limited until credit enhancement is provided.

PSCo’s most significant concentrations of credit risk with particular entities or industries are contracts with counterparties to its wholesale, trading and non-trading commodity activities. At Sept. 30, 2018, four of PSCo’s 10 most significant counterparties for these activities, comprising $24.1 million or 42 percent of this credit exposure, had investment grade credit ratings from Standard & Poor’s, Moody’s or Fitch Ratings. Five of the 10 most significant counterparties, comprising $16.6 million or 29 percent of this credit exposure, were not rated by these external agencies, but based on PSCo’s internal analysis, had credit quality consistent with investment grade. The one remaining significant counterparty, comprising $1.1 million or 2 percent of this credit exposure, had credit quality less than investment grade, based on ratings from external analysis. Eight of these significant counterparties are municipal or cooperative electric entities, or other utilities.

Credit Related Contingent Features — Contract provisions for derivative instruments that PSCo enters into, including those accounted for as normal purchase-normal sale contracts and therefore not reflected on the balance sheet, may require the posting of collateral or settlement of the contracts for various reasons, including if PSCo’s credit ratings are downgraded below its investment grade credit rating by any of the major credit rating agencies or for cross-default contractual provisions that could result in the settlement of such contracts if there was a failure under other financing arrangements related to payment terms or other covenants. At Sept. 30, 2018 and Dec. 31, 2017, there were no derivative instruments in a material liability position with such underlying contract provisions.

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Certain 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 PSCo’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 Sept. 30, 2018 and Dec. 31, 2017.

Recurring Fair Value Measurements — The following table presents, for each of the fair value hierarchy levels, PSCo’s assets and liabilities measured at fair value on a recurring basis at Sept. 30, 2018:



	Sept. 30, 2018
	Fair Value						Fair Value Total		Counterparty Netting ^(b)
(Thousands of Dollars)	Level 1		Level 2		Level 3		Fair Value Total		Counterparty Netting ^(b)			Total
Current derivative assets
Other derivative instruments:
Commodity trading	$	695	$	21,035	$	—	$	21,730	$	(6,861	)	$	14,869
Natural gas commodity	—		1,233		—		1,233		—			1,233
Total current derivative assets	$	695	$	22,268	$	—	$	22,963	$	(6,861	)	16,102
PPAs ^(a)												460
Current derivative instruments												$	16,562
Noncurrent derivative assets
Other derivative instruments:
Commodity trading	$	6	$	3,682	$	—	$	3,688	$	—		$	3,688
Total noncurrent derivative assets	$	6	$	3,682	$	—	$	3,688	$	—		3,688
PPAs ^(a)												—
Noncurrent derivative instruments												$	3,688



	Sept. 30, 2018
	Fair Value						Fair Value Total		Counterparty Netting ^(b)
(Thousands of Dollars)	Level 1		Level 2		Level 3		Fair Value Total		Counterparty Netting ^(b)			Total
Current derivative liabilities
Other derivative instruments:
Commodity trading	$	580	$	20,219	$	13	$	20,812	$	(15,853	)	$	4,959
Total current derivative liabilities	$	580	$	20,219	$	13	$	20,812	$	(15,853	)	4,959
PPAs ^(a)												3,959
Current derivative instruments												$	8,918
Noncurrent derivative liabilities
Other derivative instruments:
Commodity trading	$	—	$	3,156	$	—	$	3,156	$	—		$	3,156
Total noncurrent derivative liabilities	$	—	$	3,156	$	—	$	3,156	$	—		3,156
PPAs ^(a)												—
Noncurrent derivative instruments												$	3,156


^(a)	During 2006, PSCo qualified these contracts under the normal purchase exception. Based onthis qualification, the contracts are no longer adjusted to fair value and the previous carrying value of these contracts is being amortized over the remaining contract lives along with the offsetting regulatory assets and liabilities.

^(b)

PSCo nets derivative instruments and related collateral in its consolidated balance sheet when supported by a legally enforceable master netting agreement, and all derivative instruments and related collateral amounts were subject to master netting agreements at Sept. 30, 2018. At Sept. 30, 2018, derivative assets and liabilities include no obligations to return cash collateral and rights to reclaim cash collateral of $9.0 million. The counterparty netting amounts presented exclude settlement receivables and payables and non-derivative amounts that may be subject to the same master netting agreements.

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The following table presents, for each of the fair value hierarchy levels, PSCo’s assets and liabilities measured at fair value on a recurring basis at Dec. 31, 2017:



	Dec. 31, 2017
	Fair Value						Fair Value Total		Counterparty Netting ^(b)
(Thousands of Dollars)	Level 1		Level 2		Level 3		Fair Value Total		Counterparty Netting ^(b)			Total
Current derivative assets
Other derivative instruments:
Commodity trading	$	528	$	4,488	$	12	$	5,028	$	(3,554	)	$	1,474
Natural gas commodity	—		18		—		18		(10		)	8
Total current derivative assets	$	528	$	4,506	$	12	$	5,046	$	(3,564	)	1,482
PPAs ^(a)												1,715
Current derivative instruments												$	3,197
Noncurrent derivative assets
Other derivative instruments:
Commodity trading	$	—	$	1,541	$	—	$	1,541	$	(563	)	$	978
Total noncurrent derivative assets	$	—	$	1,541	$	—	$	1,541	$	(563	)	978
PPAs ^(a)												31
Noncurrent derivative instruments												$	1,009



	Dec. 31, 2017
	Fair Value						Fair Value Total		Counterparty Netting ^(b)
(Thousands of Dollars)	Level 1		Level 2		Level 3		Fair Value Total		Counterparty Netting ^(b)			Total
Current derivative liabilities
Other derivative instruments:
Commodity trading	$	446	$	4,285	$	6	$	4,737	$	(3,431	)	$	1,306
Natural gas commodity	—		1,016		—		1,016		(10		)	1,006
Total current derivative liabilities	$	446	$	5,301	$	6	$	5,753	$	(3,441	)	2,312
PPAs ^(a)												5,036
Current derivative instruments												$	7,348
Noncurrent derivative liabilities
Commodity trading	$	—	$	1,362	$	—	$	1,362	$	(563	)	$	799
Total noncurrent derivative liabilities	$	—	$	1,362	$	—	$	1,362	$	(563	)	799
PPAs ^(a)												$	2,669
Noncurrent derivative instruments												$	3,468


^(a)	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 is being amortized over the remaining contract lives along with the offsetting regulatory assets and liabilities.

^(b)

PSCo nets derivative instruments and related collateral in its consolidated balance sheet when supported by a legally enforceable master netting agreement, and all derivative instruments and related collateral amounts were subject to master netting agreements at Dec. 31, 2017. At Dec. 31, 2017, derivative assets and liabilities include no obligations to return cash collateral or rights to reclaim cash collateral. The counterparty netting amounts presented exclude settlement receivables and payables and non-derivative amounts that may be subject to the same master netting agreements.

There were immaterial gains and losses recognized in earnings for Level 3 commodity trading derivatives in the three and nine months ended Sept. 30, 2018 and 2017.

PSCo recognizes transfers between levels as of the beginning of each period. There were no transfers of amounts between levels for derivative instruments for the three and nine months ended Sept. 30, 2018 and 2017.

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Fair Value of Long-Term Debt

As of Sept. 30, 2018 and Dec. 31, 2017, other financial instruments for which the carrying amount did not equal fair value were as follows:



	Sept. 30, 2018				Dec. 31, 2017
(Thousands of Dollars)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt, including current portion	$	4,998,403	$	5,090,696	$	4,608,275	$	5,024,840

The fair value of PSCo’s long-term debt is estimated based on recent trades and observable spreads from benchmark interest rates for similar securities. The fair value estimates are based on information available to management as of Sept. 30, 2018 and Dec. 31, 2017, and given the observability of the inputs to these estimates, the fair values presented for long-term debt have been assigned a Level 2.


9.	Other Income, Net

Other income, net consisted of the following:



	Three Months Ended Sept. 30						Nine Months Ended Sept. 30
(Thousands of Dollars)	2018			2017			2018			2017
Interest income	$	1,366		$	1,422		$	1,738		$	2,406
Other nonoperating income	1,098			193			2,051			4,940
Other nonoperating expense	(3		)	—			—			—
Insurance policy expense	(74		)	(79		)	(224		)	(261		)
Benefits non-service cost	(988		)	(513		)	(1,136		)	(1,539		)
Other income, net	$	1,399		$	1,023		$	2,429		$	5,546


10.	Segment Information

Operating results from the regulated electric utility and regulated natural gas utility are each separately and regularly reviewed by PSCo’s chief operating decision maker. PSCo evaluates performance based on profit or loss generated from the product or service provided. These segments are managed separately because the revenue streams are dependent upon regulated rate recovery, which is separately determined for each segment.

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


•	PSCo’s regulated electric utility segment generates, transmits and distributes electricity primarily in portions of 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 primarily 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.

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 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 operating and maintenance (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.

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(Thousands of Dollars)	Regulated Electric		Regulated Natural Gas		All Other		Reconciling Eliminations			Consolidated Total
Three Months Ended Sept. 30, 2018
Operating revenues ^(a)(b)	$	894,786	$	157,205	$	8,688	$	—		$	1,060,679
Intersegment revenues	32		292		—		(324		)	—
Total revenues	$	894,818	$	157,497	$	8,688	$	(324	)	$	1,060,679
Net income	$	191,742	$	15,070	$	300	$	—		$	207,112



(Thousands of Dollars)	Regulated Electric		Regulated Natural Gas		All Other		Reconciling Eliminations			Consolidated Total
Three Months Ended Sept. 30, 2017
Operating revenues ^(a)(b)	$	877,604	$	142,389	$	10,300	$	—		$	1,030,293
Intersegment revenues	47		222		—		(269		)	—
Total revenues	$	877,651	$	142,611	$	10,300	$	(269	)	$	1,030,293
Net income	$	178,648	$	5,815	$	1,614	$	—		$	186,077

^(a)Operating revenues include an immaterial amount of affiliate electric revenue for the three months ended Sept. 30, 2018 and 2017.

^(b)Operating revenues include $1 million of other affiliate revenue for the three months ended Sept. 30, 2018 and 2017.



(Thousands of Dollars)	Regulated Electric		Regulated Natural Gas		All Other		Reconciling Eliminations			Consolidated Total
Nine Months Ended Sept. 30, 2018
Operating revenues (a)(b)	$	2,309,255	$	707,852	$	28,736	$	—		$	3,045,843
Intersegment revenues	220		435		—		(655		)	—
Total revenues	$	2,309,475	$	708,287	$	28,736	$	(655	)	$	3,045,843
Net income	$	373,249	$	89,745	$	135	$	—		$	463,129



(Thousands of Dollars)	Regulated Electric		Regulated Natural Gas		All Other		Reconciling Eliminations			Consolidated Total
Nine Months Ended Sept. 30, 2017
Operating revenues (a)(b)	$	2,318,912	$	691,302	$	31,529	$	—		$	3,041,743
Intersegment revenues	206		318		—		(524		)	—
Total revenues	$	2,319,118	$	691,620	$	31,529	$	(524	)	$	3,041,743
Net income	$	342,195	$	53,133	$	2,882	$	—		$	398,210

^(a)Operating revenues include an immaterial amount and $1 million of affiliate electric revenue for the nine months ended Sept. 30, 2018 and 2017.

^(b)Operating revenues include $3 million of other affiliate revenue for the nine months ended Sept. 30, 2018 and 2017.


11.	Benefit Plans and Other Postretirement Benefits

Components of Net Periodic Benefit Cost (Credit)



	Three Months Ended Sept. 30
	2018			2017			2018			2017
(Thousands of Dollars)	Pension Benefits						Postretirement Health Care Benefits
Service cost	$	7,272		$	6,820		$	153		$	192
Interest cost ^(a)	11,813			12,639			3,748			4,191
Expected return on plan assets ^(a)	(17,130		)	(17,134		)	(5,675		)	(5,476		)
Amortization of prior service credit ^(a)	(844		)	(803		)	(1,545		)	(1,562		)
Amortization of net loss ^(a)	7,814			7,089			1,021			961
Net periodic benefit cost (credit)	8,925			8,611			(2,298		)	(1,694		)
(Costs) credits not recognized due to the effects of regulation	(4,088		)	736			1,426			—
Net benefit cost (credit) recognized for financial reporting	$	4,837		$	9,347		$	(872	)	$	(1,694	)

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	Nine Months Ended Sept. 30
	2018			2017			2018			2017
(Thousands of Dollars)	Pension Benefits						Postretirement Health Care Benefits
Service cost	$	21,814		$	20,460		$	457		$	576
Interest cost ^(a)	35,441			37,919			11,245			12,573
Expected return on plan assets ^(a)	(51,390		)	(51,402		)	(17,024		)	(16,428		)
Amortization of prior service credit ^(a)	(2,534		)	(2,409		)	(4,634		)	(4,686		)
Amortization of net loss ^(a)	23,444			21,267			3,063			2,883
Net periodic benefit cost (credit)	26,775			25,835			(6,893		)	(5,082		)
(Costs) credits not recognized due to the effects of regulation	(1,718		)	1,898			1,426			—
Net benefit cost (credit) recognized for financial reporting	$	25,057		$	27,733		$	(5,467	)	$	(5,082	)


^(a)	The components of net periodic cost other than the service cost component are included in the line item “other income, net” in the income statement or capitalized on the balance sheet as a regulatory asset.

In January 2018, contributions of $150 million were made across four of Xcel Energy’s pension plans, of which $22.0 million was attributable to PSCo. Xcel Energy does not expect additional pension contributions during 2018.


12.	Other Comprehensive Income (Loss)

Changes in accumulated other comprehensive loss, net of tax, for the three and nine months ended Sept. 30, 2018 and 2017 were as follows:



	Three Months Ended Sept. 30, 2018
(Thousands of Dollars)	Gains and Losses on Cash Flow Hedges			Defined Benefit and Postretirement Items			Total
Accumulated other comprehensive loss at July 1	$	(25,862	)	$	(263	)	$	(26,125	)
Other comprehensive loss before reclassifications	—			(153		)	(153		)
Losses reclassified from net accumulated other comprehensive loss	310			155			465
Net current period other comprehensive income	310			2			312
Accumulated other comprehensive loss at Sept. 30	$	(25,552	)	$	(261	)	$	(25,813	)



	Three Months Ended Sept. 30, 2017
(Thousands of Dollars)	Gains and Losses on Cash Flow Hedges			Defined Benefit and Postretirement Items			Total
Accumulated other comprehensive loss at July 1	$	(22,284	)	$	(218	)	$	(22,502	)
Losses reclassified from net accumulated other comprehensive loss	257			1			258
Net current period other comprehensive income	257			1			258
Accumulated other comprehensive loss at Sept. 30	$	(22,027	)	$	(217	)	$	(22,244	)



	Nine Months Ended Sept. 30, 2018
(Thousands of Dollars)	Gains and Losses on Cash Flow Hedges			Defined Benefit and Postretirement Items			Total
Accumulated other comprehensive loss at Jan. 1	$	(26,465	)	$	(267	)	$	(26,732	)
Other comprehensive loss before reclassifications	—			(153		)	(153		)
Losses reclassified from net accumulated other comprehensive loss	913			159			1,072
Net current period other comprehensive income	913			6			919
Accumulated other comprehensive loss at Sept. 30	$	(25,552	)	$	(261	)	$	(25,813	)

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	Nine Months Ended Sept. 30, 2017
(Thousands of Dollars)	Gains and Losses on Cash Flow Hedges			Defined Benefit and Postretirement Items			Total
Accumulated other comprehensive loss at Jan. 1	$	(22,780	)	$	(220	)	$	(23,000	)
Losses reclassified from net accumulated other comprehensive loss	753			3			756
Net current period other comprehensive income	753			3			756
Accumulated other comprehensive loss at Sept. 30	$	(22,027	)	$	(217	)	$	(22,244	)

Reclassifications from accumulated other comprehensive loss for the three and nine months ended Sept. 30, 2018 and 2017 were as follows:



	Amounts Reclassified from Accumulated Other Comprehensive Loss
(Thousands of Dollars)	Three Months Ended Sept. 30, 2018				Three Months Ended Sept. 30, 2017
Losses on cash flow hedges:
Interest rate derivatives	$	407		^(a)	$	407		^(a)
Total, pre-tax	407				407
Tax benefit	(97		)		(150		)
Total, net of tax	310				257
Defined benefit pension and postretirement losses:
Amortization of net loss	206			^(b)	2			^(b)
Total, pre-tax	206				2
Tax benefit	(51		)		(1		)
Total, net of tax	155				1
Total amounts reclassified, net of tax	$	465			$	258



	Amounts Reclassified from Accumulated Other Comprehensive Loss
(Thousands of Dollars)	Nine Months Ended Sept. 30, 2018				Nine Months Ended Sept. 30, 2017
Losses on cash flow hedges:
Interest rate derivatives	$	1,207		^(a)	$	1,208		^(a)
Total, pre-tax	1,207				1,208
Tax benefit	(294		)		(455		)
Total, net of tax	$	913			$	753
Defined benefit pension and postretirement losses:
Amortization of net loss	$	210		^(b)	$	6		^(b)
Total, pre-tax	210				6
Tax benefit	(51		)		(3		)
Total, net of tax	159				3
Total amounts reclassified, net of tax	$	1,072			$	756


^(a)	Included in interest charges.


^(b)	Included in the computation of net periodic pension and postretirement benefit costs. See Note 11 to the consolidated financial statements for details regarding these benefit plans.


13.	Revenues

PSCo principally generates revenue from the generation, transmission, distribution and sale of electricity and the transportation, distribution and sale of natural gas to wholesale and retail customers. Performance obligations related to the sale of energy are satisfied as energy is delivered to customers. PSCo recognizes revenue in an amount that corresponds directly to the price of the energy delivered to the customer. The measurement of energy sales to customers is generally based on the reading of their meters, which occurs on a systematic basis throughout the month. At the end of each month, amounts of energy delivered to customers since the date of the last meter reading are estimated, and the corresponding unbilled revenue is recognized. Contract terms are generally short-term in nature, and as such PSCo does not recognize a separate financing component of its collections from customers. PSCo presents its revenues net of any excise or other fiduciary-type taxes or fees.

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PSCo has various rate-adjustment mechanisms in place that provide for the recovery of natural gas, electric fuel and purchased energy costs. These cost-adjustment tariffs may increase or decrease the level of revenue collected from customers and are revised periodically for differences between the total amount collected under the clauses and the costs incurred. When applicable, under governing regulatory commission rate orders, fuel cost over-recoveries (the excess of fuel revenue billed to customers over fuel costs incurred) are deferred as regulatory liabilities and under-recoveries (the excess of fuel costs incurred over fuel revenues billed to customers) are deferred as regulatory assets.

Certain rate rider mechanisms qualify as alternative revenue programs under GAAP. These mechanisms arise from costs imposed upon the utility by action of a regulator or legislative body related to an environmental, public safety or other mandate. When certain criteria are met (including collection within 24 months), revenue is recognized equal to the revenue requirement, which may include return on rate base items and incentives. The mechanisms are revised periodically for differences between the total amount collected and the revenue recognized, which may increase or decrease the level of revenue collected from customers. Alternative revenue is recorded on a gross basis and is disclosed separate from revenue from contracts with customers in the period earned.

In the following tables, revenue is classified by the type of goods/services rendered and market/customer type. The tables also reconcile revenue to the reportable segments.



	Three Months Ended Sept. 30, 2018
(Thousands of Dollars)	Electric		Natural Gas		All Other		Total
Major revenue types
Revenue from contracts with customers:
Residential	$	315,726	$	84,411	$	2,668	$	402,805
Commercial and industrial (C&I)	458,448		29,111		4,897		492,456
Other	11,822		—		—		11,822
Total retail	785,996		113,522		7,565		907,083
Wholesale	41,200		—		—		41,200
Transmission	16,298		—		—		16,298
Other	10,593		18,332		—		28,925
Total revenue from contracts with customers	854,087		131,854		7,565		993,506
Alternative revenue and other	40,699		25,351		1,123		67,173
Total revenues	$	894,786	$	157,205	$	8,688	$	1,060,679



	Three Months Ended Sept. 30, 2017
(Thousands of Dollars)	Electric		Natural Gas		All Other		Total
Major revenue types
Revenue from contracts with customers:
Residential	$	302,371	$	83,000	$	3,184	$	388,555
C&I	457,285		30,651		5,993		493,929
Other	12,237		—		—		12,237
Total retail	771,893		113,651		9,177		894,721
Wholesale	40,443		—		—		40,443
Transmission	14,541		—		—		14,541
Other	17,616		17,564		—		35,180
Total revenue from contracts with customers	844,493		131,215		9,177		984,885
Alternative revenue and other	33,111		11,174		1,123		45,408
Total revenues	$	877,604	$	142,389	$	10,300	$	1,030,293

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	Nine Months Ended Sept. 30, 2018
(Thousands of Dollars)	Electric		Natural Gas		All Other		Total
Major revenue types
Revenue from contracts with customers:
Residential	$	766,062	$	416,157	$	7,924	$	1,190,143
C&I	1,185,381		154,043		17,382		1,356,806
Other	35,453		—		60		35,513
Total retail	1,986,896		570,200		25,366		2,582,462
Wholesale	125,238		—		—		125,238
Transmission	41,709		—		—		41,709
Other	44,120		62,106		—		106,226
Total revenue from contracts with customers	2,197,963		632,306		25,366		2,855,635
Alternative revenue and other	111,292		75,546		3,370		190,208
Total revenues	$	2,309,255	$	707,852	$	28,736	$	3,045,843



	Nine Months Ended Sept. 30, 2017
(Thousands of Dollars)	Electric		Natural Gas		All Other		Total
Major revenue types
Revenue from contracts with customers:
Residential	$	762,726	$	426,303	$	8,387	$	1,197,416
C&I	1,209,262		161,925		19,710		1,390,897
Other	36,623		—		63		36,686
Total retail	2,008,611		588,228		28,160		2,624,999
Wholesale	125,598		—		—		125,598
Transmission	42,360		—		—		42,360
Other	51,148		60,214		—		111,362
Total revenue from contracts with customers	2,227,717		648,442		28,160		2,904,319
Alternative revenue and other	91,195		42,860		3,369		137,424
Total revenues	$	2,318,912	$	691,302	$	31,529	$	3,041,743

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.

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Forward-Looking Statements

Except for the historical statements contained in this report, the matters discussed herein, are forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements including the TCJA’s impact to PSCo and its customers, as well as assumptions and other statements are intended to be identified in this document by the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should,” “will,” “would” and similar expressions. Actual results may vary materially. Forward-looking statements speak only as of the date they are made, and we expressly disclaim any obligation to update any forward-looking information. The following factors, in addition to those discussed elsewhere in this Quarterly Report on Form 10-Q and in other securities filings (including PSCo’s Annual Report on Form 10-K for the fiscal year ended Dec. 31, 2017 and subsequent securities filings), could cause actual results to differ materially from management expectations as suggested by such forward-looking information: changes in environmental laws and regulations; unusual weather and climate change, including compliance with any accompanying legislative and regulatory changes; ability to recover costs from customers; actions of credit rating agencies; 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; availability or cost of capital; our customers’ and counterparties’ ability to pay their debts to us; assumptions and costs relating to funding our employee benefit plans and health care benefits;; tax laws; operational safety; successful long-term operational planning; commodity risks associated with energy markets and production; costs of potential regulatory penalties; effects of geopolitical events, including war and acts of terrorism; cyber security threats and data security breaches; fuel costs; and employee work force factors.

Non-GAAP Financial Measures

The following discussion includes financial information prepared in accordance with GAAP, as well as certain non-GAAP financial measures such as electric margin and natural gas margin. Generally, a non-GAAP financial measure is a numerical measure of a company’s financial performance, financial position or cash flows that excludes (or includes) amounts that are adjusted from the most directly comparable measure calculated and presented in accordance with GAAP. PSCo’s management uses non-GAAP measures internally for financial planning and analysis, for reporting of results to the Board of Directors and when communicating its earnings outlook to analysts and investors. Non-GAAP financial measures are intended to supplement investors’ understanding of our operating performance and should not be considered alternatives for financial measures presented in accordance with GAAP. These measures are discussed in more detail below and may not be comparable to other companies’ similarly titled non-GAAP financial measures.

Electric and Natural Gas Margins

Electric margin is presented as electric revenues less electric fuel and purchased power expenses and natural gas margin is presented as natural gas revenues less the cost of natural gas sold and transported. Expenses incurred for electric fuel and purchased power and the cost of natural gas sold and transported are generally recovered through various recovery mechanisms, and as a result, changes in these expenses are offset in operating revenues. Management believes electric and natural gas margins provide the most meaningful basis for evaluating our operations because they exclude the revenue impact of fluctuations in these expenses.

These margins can be reconciled to operating income, a GAAP measure, by including steam and other operating revenues, cost of sales - steam and other, O&M expenses, demand side management (DSM) expenses, depreciation and amortization and taxes (other than income taxes).

Results of Operations

PSCo’s net income was approximately $463 million for the third quarter of 2018, compared with approximately $398 million for the same period of 2017. The increase was driven by higher natural gas margins due to the impact of a natural gas rate increase, higher electric margins reflecting favorable weather and sales growth, and increased allowance for funds used during construction (AFUDC) primarily related to the Rush Creek wind project. These items were partially offset by higher operating and maintenance (O&M) expenses, interest charges, depreciation expense and property taxes.

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Electric Revenues and Margin

Electric revenues and fuel and purchased power expenses are impacted by fluctuations in the price of natural gas and coal used in the generation of electricity. However, these price fluctuations have minimal impact on electric margin due to fuel recovery mechanisms that recover fuel expenses. The following table details the electric revenues and margin:



	Nine Months Ended Sept. 30
(Millions of Dollars)	2018			2017
Electric revenues before impact of the TCJA	$	2,358		$	2,319
Electric fuel and purchased power	(842		)	(857		)
Electric margin before impact of the TCJA	$	1,516		$	1,462
Impact of the TCJA (offset as a reduction in income tax expense)	(49		)	—
Electric margin	$	1,467		$	1,462

The following tables summarize the components of the changes in electric revenues and electric margin for the nine months ended Sept. 30:

Electric Revenues



(Millions of Dollars)	2018 vs. 2017
DSM program revenues (offset by expenses)	$	11
Estimated impact of weather	9
Retail sales growth, excluding weather impact	8
Non-fuel riders	7
Trading	3
Firm wholesale	3
DSM incentive	2
Fuel and purchased power cost recovery	(7		)
Other, net	3
Total increase in electric revenues before impact of the TCJA	$	39
Impact of the TCJA (offset as a reduction in income tax expense)	(49		)
Total decrease in electric revenues	$	(10	)

Electric Margin



(Millions of Dollars)	2018 vs. 2017
DSM program revenues (offset by expenses)	$	11
Estimated impact of weather	9
Retail sales growth (excluding weather impact)	8
Non-fuel riders	7
Firm wholesale	3
DSM incentive	2
Trading	2
Other, net	12
Total increase in electric margin before impact of the TCJA	$	54
Impact of the TCJA (offset as a reduction in income tax expense)	(49		)
Total increase in electric margin	$	5

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Natural Gas Revenues and Margin

Total natural gas expense varies with changing sales and the cost of natural gas. However, fluctuations in the cost of natural gas has minimal impact on natural gas margin due to natural gas cost recovery mechanisms. The following table details natural gas revenues and margin:



	Nine Months Ended Sept. 30
(Millions of Dollars)	2018			2017
Natural gas revenues before impact of the TCJA	$	728		$	691
Cost of natural gas sold and transported	(282		)	(304		)
Natural gas margin before impact of the TCJA	$	446		$	387
Impact of the TCJA (offset as a reduction in income tax expense)	(20		)	—
Natural gas margin	$	426		$	387

The following tables summarize the components of the changes in natural gas revenues and natural gas margin for the nine months ended Sept. 30:

Natural Gas Revenues



(Millions of Dollars)	2018 vs. 2017
Retail rate increase	$	36
Infrastructure and integrity riders	13
Estimated impact of weather	4
Retail sales growth (excluding weather impact)	2
Purchased natural gas adjustment clause recovery	(21		)
Other, net	3
Total increase in natural gas revenues before impact of the TCJA	$	37
Impact of the TCJA (offset as a reduction in income tax expense)	(20		)
Total increase in natural gas revenues	$	17

Natural Gas Margin



(Millions of Dollars)	2018 vs. 2017
Retail rate increase	$	36
Infrastructure and integrity riders	13
Estimated impact of weather	4
Retail sales growth (excluding weather impact)	2
Other, net	4
Total increase in natural gas margin before impact of the TCJA	$	59
Impact of the TCJA (offset as a reduction in income tax expense)	(20		)
Total increase in natural gas margin	$	39

Non-Fuel Operating Expenses and Other Items

O&M Expenses — O&M expenses increased 28 million, or 5.1 percent, for 2018 year-to-date. The year-to-date change largely reflects expense timing and increased system maintenance due to hot summer weather. The significant changes are summarized in the table below:



(Millions of Dollars)	2018 vs. 2017
Distribution costs	$	10
Natural gas systems damage prevention	7
Business systems and contract labor	4
Plant generation costs	(4		)
Other, net	11
Total increase in O&M expenses	$	28

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•	Distribution costs reflect high maintenance expenses, including vegetation management; and


•	Business systems and contract labor costs increased due to growing network and storage needs, cybersecurity initiatives, to support our customer strategy, and various projects and initiatives to improve business processes.

DSM Program Expenses — DSM program expenses increased $13 million, or 13.8 percent, for 2018 year-to-date. The increase was due to increases in conservation programs to help customers reduce energy use. DSM expenses are generally recovered concurrently through riders and base rates. Timing of recovery may not correspond to the period in which costs were incurred.

Depreciation and Amortization — Depreciation and amortization expense increased $55 million, or 15.8 percent, for 2018 year-to-date. The increase was primarily driven by capital expenditures due to planned system investments and additional amortization of a prepaid pension asset related to the electric TCJA settlement, which is offset by lower income taxes (approximately $46 million year-to-date).

Taxes (Other than Income Taxes) — Taxes (other than income taxes) increased 6.7 million, or 4.6 percent, for 2018 year-to-date. The increase was primarily due to higher property taxes in Colorado.

AFUDC, Equity and Debt — AFUDC increased $30 million for 2018 year-to-date. The increase was primarily due to the Rush Creek wind project.

Interest Charges — Interest charges increased $13 million, or 9.1 percent, for 2018 year-to-date. The increase was primarily due to higher debt levels to fund capital investments, partially offset by refinancings at lower interest rates.

Income Taxes — Income tax expense decreased $111 million for the first nine months of 2018 compared with the same period in 2017. The decrease was primarily driven by a lower federal tax rate due to the TCJA and lower pretax earnings and an increase in plant-related regulatory differences related to ARAM (net of deferrals). The ETR was 19.9 percent for the first nine months of 2018 compared with 36.2 percent for the same period of 2017. The lower ETR in 2018 is primarily due to the lower federal tax rate. See Note 4 to the consolidated financial statements.

Public Utility Regulation

Except to the extent noted below and in Note 5 to the consolidated financial statements, the circumstances set forth in Public Utility Regulation included in Item 1 of PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 2017 and Public Utility Regulation included in Item 2 of PSCo’s Quarterly Report on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018, appropriately represent, in all material respects, the current status of public utility regulation and are incorporated herein by reference.

Colorado Energy Plan (CEP) — In September 2018, the CPUC issued a written order approving PSCo’s preferred CEP portfolio, which included the retirement of the two coal-fired generation units, Comanche Unit 1 (in 2022) and Comanche Unit 2 (in 2025), and the following additions:



	Total Capacity	PSCo's Ownership
Wind generation	1,100 MW	500 MW
Solar generation	700 MW	—
Battery storage	275 MW	—
Natural gas generation	380 MW	380 MW

PSCo is required to file a CPCN for the owned wind generation, the purchase of natural gas generation facility and the transmission investment, which is anticipated for later this year. PSCo’s investment is expected to be approximately $1 billion, including investments in required transmission to support the significant increase in renewable generation in the state.

EVRAZ — In October 2018, the CPUC approved the application for an agreement with EVRAZ, a steelmaker in Colorado, to stabilize its rates for over 23 years through a specific customer contract and the development of a 240 MW, customer-sited solar facility. EVRAZ is PSCo’s largest customer and sought a long-term solution from state and local authorities in order to maintain and grow its operations in Colorado.

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Boulder, Colorado Municipalization — In 2011, City of Boulder, Colorado (Boulder) voters passed a ballot measure authorizing the formation of an electric municipal utility, subject to certain conditions. Since that time, there have been various legal proceedings in multiple venues with jurisdiction over Boulder’s plan. In 2014, the Boulder City Council passed an ordinance to establish an electric utility. PSCo challenged the formation of this utility as premature and the Colorado Court of Appeals ruled in PSCo’s favor, vacating a lower court decision. In June 2018, the Colorado Supreme Court rejected Boulder’s request to dismiss the case and remanded it to Boulder District Court where the litigation process has started.

Boulder has filed multiple separation applications with the CPUC, which have been challenged by PSCo and other intervenors. In September 2017, the CPUC issued a written decision, agreeing with several key aspects of PSCo’s position. The CPUC approved the designation of some electrical distribution assets for transfer, subject to Boulder completing certain filings. Those filings are due to be submitted in the fourth quarter of 2018. Boulder does not have authorization from the CPUC to initiate a condemnation proceeding at this time.

Summary of Recent Federal Regulatory Developments

FERC

The FERC has jurisdiction over rates for electric transmission service in interstate commerce and electricity sold at wholesale, hydro facility licensing, natural gas transportation, asset transactions and mergers, accounting practices and certain other activities of PSCo, including enforcement of North American Electric Reliability Corporation mandatory electric reliability standards. State and local agencies have jurisdiction over many of PSCo’s activities, including regulation of retail rates and environmental matters. See additional discussion in the summary of recent federal regulatory developments and public utility regulation sections of the PSCo Annual Report on Form 10-K for the year ended Dec. 31, 2017 and Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2018 and June 30, 2018. In addition to the matters discussed below, see Note 5 to the consolidated financial statements for a discussion of other regulatory matters.

Xcel Energy, which includes PSCo, attempts to mitigate the risk of regulatory penalties through formal training on prohibited practices and a compliance function that reviews interaction with the markets under FERC and Commodity Futures Trading Commission jurisdictions. Public campaigns are conducted to raise awareness of the public safety issues of interacting with our electric systems. While programs to comply with regulatory requirements are in place, there is no guarantee the compliance programs or other measures will be sufficient to ensure against violations.

Item 4 — CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

PSCo maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms. In addition, the disclosure controls and procedures ensure that information required 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 Sept. 30, 2018, based on an evaluation carried out under the supervision and with the participation of PSCo’s management, including the CEO and CFO, of the effectiveness of its disclosure controls and the procedures, the CEO and CFO have concluded that PSCo’s disclosure controls and procedures were effective.

Internal Control Over Financial Reporting

No changes in PSCo’s internal control over financial reporting occurred during the most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, PSCo’s internal control over financial reporting.

Part II — OTHER INFORMATION

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Item 1 — LEGAL PROCEEDINGS

Additional Information

See Note 6 to the consolidated financial statements for further discussion of legal claims and environmental proceedings. See Part I Item 2 and Note 5 to the consolidated financial statements for a discussion of proceedings involving utility rates and other regulatory matters.

Item 1A — RISK FACTORS

PSCo’s risk factors are documented in Item 1A of Part I of its Annual Report on Form 10-K for the year ended Dec. 31, 2017, which is incorporated herein by reference. There have been no material changes from the risk factors previously disclosed in the Form 10-K.

Item 6 — EXHIBITS



*	Indicates incorporation by reference



3.01*	Amended and Restated Articles of Incorporation dated July 15, 1998 (Exhibit 3.01 to Form 10-Q for the quarter ended Sept. 30, 2017 (file no. 001-03280)).
3.02*	By-Laws of PSCo as Amended and Restated on Sept. 26, 2013 (Exhibit 3.02 to Form 10-Q/A for the quarter ended Sept. 30, 2013 (file no. 001-03280)).
31.01	Principal Executive Officer’s certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.02	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.
101	The following materials from PSCo’s Quarterly Report on Form 10-Q for the quarter ended Sept. 30, 2018 are formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Statements of Income, (ii) the Consolidated Statements of Comprehensive Income (iii) the Consolidated Statements of Cash Flows, (iv) the Consolidated Balance Sheets, (v) Notes to Consolidated Financial Statements, and (vi) document and entity information.

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		Public Service Company of Colorado

Oct. 26, 2018	By:	/s/ JEFFREY S. SAVAGE
		Jeffrey S. Savage
		Senior Vice President, Controller
		(Principal Accounting Officer)

		/s/ ROBERT C. FRENZEL
		Robert C. Frenzel
		Executive Vice President, Chief Financial Officer and Director
		(Principal Financial Officer)

(Amounts in Thousands) ^(a)(b)

Sept. 30, 2018

Dec. 31, 2017

Megawatt hours of electricity

Million British thermal units of natural gas