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 discounted cash flow or option pricing models using highly observable inputs.

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

Specific valuation methods include the following:

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 values.

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. 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.

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

Derivative Instruments Fair Value Measurements

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

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

At June 30, 2012, accumulated OCI related to interest rate derivatives included $1.5 million of net gains expected to be reclassified into earnings during the next 12 months as the related hedged interest rate transactions impact earnings.

At June 30, 2012, PSCo had unsettled interest rate swaps outstanding with a total notional amount of $250 million. These interest rate swaps were designated as hedges, and as such, changes in fair value are recorded to OCI.

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

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

At June 30, 2012, PSCo had various vehicle fuel related contracts designated as cash flow hedges extending through December 2014. PSCo also enters into derivative instruments that mitigate commodity price risk on behalf of electric and natural gas customers but are not designated as qualifying hedging transactions. Changes in the fair value of non-trading commodity derivative instruments are recorded in OCI or deferred as a regulatory asset or liability. The classification as a regulatory asset or liability is based on commission approved regulatory recovery mechanisms. PSCo recorded immaterial amounts to income related to the ineffectiveness of cash flow hedges for the three and six months ended June 30, 2012 and 2011.

At June 30, 2012, accumulated OCI related to vehicle fuel cash flow hedges included an immaterial amount of net gains expected to be reclassified into earnings during the next 12 months as the hedged transactions occur.

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

The following table details the gross notional amounts of commodity forwards and options at June 30, 2012 and Dec. 31, 2011:

(Amounts in Thousands) (a)(b)	June 30, 2012		Dec. 31, 2011
Megawatt hours (MWh) of electricity		973		1,299
MMBtu of natural gas		6,246		32,053
Gallons of vehicle fuel		225		270

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

(b)	Notional amounts for options are also 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 six months ended June 30, 2012 and 2011, respectively, on OCI, regulatory assets and liabilities, and income:

	Three Months Ended June 30, 2012
	Fair Value Gains (Losses)					Pre-Tax (Gains) Losses Reclassified
	Recognized During the Period in:					into Income During the Period from:
	Accumulated					Accumulated					Pre-Tax Gains
	Other			Regulatory		Other			Regulatory		Recognized
	Comprehensive			(Assets) and		Comprehensive			Assets and		During the Period
(Thousands of Dollars)	Loss			Liabilities		Loss			(Liabilities)		in Income
Derivatives designated as cash flow hedges
Interest rate	$	(30,163	)	$	-	$	(582	)(a)	$	-	$	-
Vehicle fuel and other commodity		(79	)		-		(24	)(c)		-		-
Total	$	(30,242	)	$	-	$	(606	)	$	-	$	-

Other derivative instruments
Trading commodity	$	-		$	-	$	-		$	-	$	1	(b)
Natural gas commodity		-			769		-			-		-
Total	$	-		$	769	$	-		$	-	$	1

	Six Months Ended June 30, 2012
	Fair Value Gains (Losses)							Pre-Tax (Gains) Losses Reclassified
	Recognized During the Period in:							into Income During the Period from:
		Accumulated							Accumulated						Pre-Tax Gains
		Other			Regulatory				Other			Regulatory			(Losses) Recognized
		Comprehensive			(Assets) and				Comprehensive			Assets and			During the Period
(Thousands of Dollars)		Loss			Liabilities				Loss			(Liabilities)			in Income
Derivatives designated as cash flow hedges
Interest rate		$	(9,246	)	$	-			$	(1,165	)(a)	$	-		$	-
Vehicle fuel and other commodity			(4	)		-				(46	)(c)		-			-
Total		$	(9,250	)	$	-			$	(1,211	)	$	-		$	-

Other derivative instruments
Trading commodity		$	-		$	-			$	-		$	-		$	1	(b)
Natural gas commodity			-			(6,946	)			-			61,858	(d)		(109	)(b)
Total		$	-		$	(6,946	)		$	-		$	61,858		$	(108	)

	Three Months Ended June 30, 2011
	Fair Value Gains (Losses)							Pre-Tax (Gains) Losses Reclassified
	Recognized During the Period in:							into Income During the Period from:
		Accumulated							Accumulated						Pre-Tax Losses
		Other			Regulatory				Other			Regulatory			Recognized
		Comprehensive			(Assets) and				Comprehensive			Assets and			During the Period
(Thousands of Dollars)		Income			Liabilities				Income			(Liabilities)			in Income
Derivatives designated as cash flow hedges
Interest rate		$	-		$	-			$	(582	)(a)	$	-		$	-
Vehicle fuel and other commodity			(43	)		-				(27	)(c)		-			-
Total		$	(43	)	$	-			$	(609	)	$	-		$	-

Other derivative instruments
Trading commodity		$	-		$	-			$	-		$	-		$	(150	)(b)
Natural gas commodity			-			(7,792	)			-			738	(d)		-
Total		$	-		$	(7,792	)		$	-		$	738		$	(150	)

	Six Months Ended June 30, 2011
	Fair Value Gains (Losses)					Pre-Tax (Gains) Losses Reclassified
	Recognized During the Period in:					into Income During the Period from:
	Accumulated					Accumulated						Pre-Tax Gains
	Other		Regulatory			Other			Regulatory			Recognized
	Comprehensive		(Assets) and			Comprehensive			Assets and			During the Period
(Thousands of Dollars)	Income		Liabilities			Income			(Liabilities)			in Income
Derivatives designated as cash flow hedges
Interest rate	$	-	$	-		$	(1,159	)(a)	$	-		$	-
Vehicle fuel and other commodity		133		-			(45	)(c)		-			-
Total	$	133	$	-		$	(1,204	)	$	-		$	-

Other derivative instruments
Trading commodity	$	-	$	-		$	-		$	-		$	95	(b)
Natural gas commodity		-		(13,146	)		-			45,220	(d)		-
Total	$	-	$	(13,146	)	$	-		$	45,220		$	95

(a)	Recorded to interest charges.

(b)	Recorded to electric operating revenues. Portions of these gains and losses are shared with electric customers through margin-sharing mechanisms and deducted from gross revenue, as appropriate.

(c)	Recorded to operating and maintenance (O&M) expenses.

(d)	Recorded to cost of natural gas sold and transported; these derivative settlement gains and losses are shared with natural gas customers through purchased natural gas cost-recovery mechanisms, and reclassified out of income as regulatory assets and liabilities, as appropriate.

PSCo had no derivative instruments designated as fair value hedges during the three and six months ended June 30, 2012 and June 30, 2011. Therefore, no gains or losses from fair value hedges or related hedged transactions were recognized for these periods.

Credit Related Contingent Features- Contract provisions of the derivative instruments that PSCo enters into may require the posting of collateral or settlement of the contracts for various reasons, including if PSCo is unable to maintain its credit ratings. If the credit ratings of PSCo were downgraded below investment grade, contracts underlying $5.6 million and $6.9 million of derivative instruments in a gross liability position at June 30, 2012 and Dec. 31, 2011, respectively, would have required PSCo to post collateral or settle applicable contracts, which would have resulted in payments to counterparties of $8.8 million and $9.2 million, respectively. At June 30, 2012 and Dec. 31, 2011, there was no collateral posted on these specific contracts.

PSCo's derivative instruments are also subject to contract provisions that contain adequate assurance clauses. These provisions allow counterparties to seek performance assurance, including cash collateral, in the event that 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 June 30, 2012 and Dec. 31, 2011.

Recurring Fair Value Measurements- The following table presents for each of the hierarchy levels, PSCo's assets and liabilities that are measured at fair value on a recurring basis at June 30, 2012:

	June 30, 2012
	Fair Value
							Fair Value		Counterparty
(Thousands of Dollars)	Level 1		Level 2		Level 3		Total		Netting (b)			Total
Current derivative assets
Derivatives designated as cash flow hedges:
Vehicle fuel and other commodity	$	-	$	40	$	-	$	40	$	-		$	40
Other derivative instruments:
Trading commodity		-		6,483		-		6,483		(3,443	)		3,040
Natural gas commodity		-		806		-		806		(37	)		769
Total current derivative assets	$	-	$	7,329	$	-	$	7,329	$	(3,480	)		3,849
Purchased power agreements (a)													1,716
Current derivative instruments												$	5,565
Noncurrent derivative assets
Derivatives designated as cash flow hedges:
Vehicle fuel and other commodity	$	-	$	26	$	-	$	26	$	-		$	26
Other derivative instruments:
Trading commodity		-		4,624		-		4,624		(1,809	)		2,815
Total noncurrent derivative assets	$	-	$	4,650	$	-	$	4,650	$	(1,809	)		2,841
Purchased power agreements (a)													9,464
Noncurrent derivative instruments												$	12,305

Current derivative liabilities
Derivatives designated as cash flow hedges:
Interest rate	$	-	$	38,876	$	-	$	38,876	$	-		$	38,876
Other derivative instruments:
Trading commodity		-		6,009		-		6,009		(2,737	)		3,272
Natural gas commodity		-		37		-		37		(37	)		-
Total current derivative liabilities	$	-	$	44,922	$	-	$	44,922	$	(2,774	)		42,148
Purchased power agreements (a)													5,428
Current derivative instruments												$	47,576
Noncurrent derivative liabilities
Other derivative instruments:
Trading commodity	$	-	$	4,152	$	-	$	4,152	$	(1,809	)	$	2,343
Total noncurrent derivative liabilities	$	-	$	4,152	$	-	$	4,152	$	(1,809	)		2,343
Purchased power agreements (a)													31,414
Noncurrent derivative instruments												$	33,757

(a)

In 2003, as a result of implementing new guidance on the normal purchase exception for derivative accounting, PSCo began recording several long-term purchased power agreements at fair value due to accounting requirements related to underlying price adjustments. As these purchases are recovered through normal regulatory recovery mechanisms, the changes in fair value for these contracts were offset by regulatory assets and liabilities. During 2006, PSCo qualified these contracts under the normal purchase exception. Based on this qualification, the contracts are no longer adjusted to fair value and the previous carrying value of these contracts will be amortized over the remaining contract lives along with the offsetting regulatory assets and liabilities.

(b)

The accounting guidance for derivatives and hedging permits the netting of receivables and payables for derivatives and related collateral amounts when a legally enforceable master netting agreement exists between PSCo and a counterparty. A master netting agreement is an agreement between two parties who have multiple contracts with each other that provides for the net settlement of all contracts in the event of default on or termination of any one contract.

The following table presents for each of the hierarchy levels, PSCo's assets and liabilities that are measured at fair value on a recurring basis at Dec. 31, 2011:

	Dec. 31, 2011
	Fair Value
							Fair Value		Counterparty
(Thousands of Dollars)	Level 1		Level 2		Level 3		Total		Netting (b)			Total
Current derivative assets
Derivatives designated as cash flow hedges:
Vehicle fuel and other commodity	$	-	$	76	$	-	$	76	$	(76	)	$	-
Other derivative instruments:
Trading commodity		-		6,550		-		6,550		(3,712	)		2,838
Total current derivative assets	$	-	$	6,626	$	-	$	6,626	$	(3,788	)		2,838
Purchased power agreements (a)													2,092
Current derivative instruments												$	4,930
Noncurrent derivative assets
Derivatives designated as cash flow hedges:
Vehicle fuel and other commodity	$	-	$	48	$	-	$	48	$	-		$	48
Other derivative instruments:
Trading commodity		-		8,292		-		8,292		(3,305	)		4,987
Total noncurrent derivative assets	$	-	$	8,340	$	-	$	8,340	$	(3,305	)		5,035
Purchased power agreements (a)													10,322
Noncurrent derivative instruments												$	15,357

Current derivative liabilities
Derivatives designated as cash flow hedges:
Interest rate	$	-	$	29,630	$	-	$	29,630	$	-		$	29,630
Other derivative instruments:
Trading commodity		-		6,076		-		6,076		(2,846	)		3,230
Natural gas commodity		-		54,525		-		54,525		(7,410	)		47,115
Total current derivative liabilities	$	-	$	90,231	$	-	$	90,231	$	(10,256	)		79,975
Purchased power agreements (a)													5,543
Current derivative instruments												$	85,518
Noncurrent derivative liabilities
Other derivative instruments:
Trading commodity	$	-	$	7,502	$	-	$	7,502	$	(3,305	)	$	4,197
Total noncurrent derivative liabilities	$	-	$	7,502	$	-	$	7,502	$	(3,305	)		4,197
Purchased power agreements (a)													34,128
Noncurrent derivative instruments												$	38,325

(a)

(b)

There were no changes in Level 3 recurring fair value measurements for the three and six months ended June 30, 2012 and 2011.

PSCo recognizes transfers between levels as of the beginning of each period. There were no transfers of amounts between levels for the three and six months ended June 30, 2012 and 2011.

Fair Value of Long-Term Debt

As of June 30, 2012 and Dec. 31, 2011, other financial instruments for which the carrying amount did not equal fair value were as follows:

	June 30, 2012				Dec. 31, 2011
	Carrying				Carrying
	Amount		Fair Value		Amount		Fair Value
Long-term debt, including current portion	$	3,483,964	$	4,005,198	$	3,486,275	$	4,020,083

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 June 30, 2012 and Dec. 31, 2011, and given the observability of the inputs to these estimates, the fair values presented for long-term debt have been assigned a Level 2. These fair value estimates have not been comprehensively revalued for purposes of these consolidated financial statements since those dates and current estimates of fair values may differ significantly.