UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2008

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

For the transition period from to

Commission File Number: 001-03789

Southwestern Public Service Company

(Exact name of registrant as specified in its charter)

New Mexico		75-0575400
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
incorporation or organization)

Tyler at Sixth,
Amarillo, Texas		79101
(Address of principal executive		(Zip Code)
offices)

Registrant’s telephone number, including area code (303) 571-7511

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

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

Large accelerated filer o		Accelerated filer o

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

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

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

Class		Outstanding at Oct. 24, 2008
Common Stock, $1 par value		100 shares

Southwestern Public Service Company 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.

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PART 1. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

SOUTHWESTERN PUBLIC SERVICE CO.

STATEMENTS OF INCOME (UNAUDITED)

(Thousands of Dollars)

	Three Months Ended Sept. 30,						Nine Months Ended Sept. 30,
	2008			2007			2008			2007

Operating revenues	$	610,763		$	471,521		$	1,567,433		$	1,238,544

Operating expenses
Electric fuel and purchased power	469,617			339,041			1,217,300			899,962
Other operating and maintenance expenses	52,261			49,515			158,507			149,707
Depreciation and amortization	25,208			24,115			79,026			73,115
Taxes (other than income taxes)	11,072			10,117			31,175			30,920
Total operating expenses	558,158			422,788			1,486,008			1,153,704

Operating income	52,605			48,733			81,425			84,840

Interest and other income, net	1,738			834			3,967			2,164

Interest charges and financing costs
Interest charges — includes other financing costs of $597, $587, $1,778 and $1,762, respectively	14,179			14,119			41,663			40,871
Allowance for funds used during construction — debt	(638		)	(660		)	(1,898		)	(1,764		)
Total interest charges and financing costs	13,541			13,459			39,765			39,107

Income before income taxes	40,802			36,108			45,627			47,897
Income taxes	17,166			14,956			19,287			19,461
Net income	$	23,636		$	21,152		$	26,340		$	28,436

See Notes to Financial Statements

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SOUTHWESTERN PUBLIC SERVICE CO.

STATEMENTS OF CASH FLOWS (UNAUDITED)

(Thousands of Dollars)

	Nine Months Ended Sept. 30,
	2008			2007
Operating activities
Net income	$	26,340		$	28,436
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	82,271			75,831
Deferred income taxes	25,239			6,700
Amortization of investment tax credits	(147		)	(188		)
Net realized and unrealized hedging and derivative transactions	201			201
Changes in operating assets and liabilities:
Accounts receivable	(18,748		)	(20,929		)
Accrued unbilled revenues	1,289			(50,234		)
Recoverable electric energy costs	(27,690		)	63,756
Inventories	(29,592		)	1,197
Prepayments and other	2,712			1,428
Accounts payable	2,227			(22,106		)
Net regulatory assets and liabilities	(1,703		)	(6,923		)
Other current liabilities	1,504			(2,854		)
Change in other noncurrent assets	(8,634		)	(5,758		)
Change in other noncurrent liabilities	6,515			(2,946		)
Net cash provided by operating activities	61,784			65,611

Investing activities
Utility capital/construction expenditures	(127,271		)	(101,584		)
Investments in utility money pool arrangement	—			(95,000		)
Receipts from utility money pool arrangement	—			95,000
Other investments	2,179			3,212
Net cash used in investing activities	(125,092		)	(98,372		)

Financing activities
Repayment of short-term borrowings – net	(33,000		)	(1,000		)
Borrowings under utility money pool arrangement	667,700			459,000
Repayments under utility money pool arrangement	(577,200		)	(459,000		)
Borrowings under 5-year unsecured credit facility	—			125,000
Capital contributions from parent	52,095			5,354
Dividends paid to parent	(46,866		)	(52,825		)
Net cash provided by financing activities	62,729			76,529

Net (decrease) increase in cash and cash equivalents	(579		)	43,768
Cash and cash equivalents at beginning of period	714			297
Cash and cash equivalents at end of period	$	135		$	44,065

Supplemental disclosure of cash flow information:
Cash paid for interest (net of amounts capitalized)	$	33,429		$	35,499
Cash paid for income taxes (net of refunds received)	(9,416		)	18,376

Supplemental disclosure of non-cash investing transactions:
Property, plant and equipment additions in accounts payable	$	1,215		$	3,494

See the Notes to Financial Statements

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SOUTHWESTERN PUBLIC SERVICE CO.

BALANCE SHEETS (UNAUDITED)

(Thousands of Dollars)

	Sept. 30, 2008			Dec. 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	135		$	714
Accounts receivable, net	84,708			67,254
Accounts receivable from affiliates	10,050			8,756
Accrued unbilled revenues	107,036			108,325
Recoverable electric energy costs	50,391			22,701
Inventories	46,935			17,343
Derivative instruments valuation	8,926			8,926
Prepayments and other	4,737			7,449
Deferred income taxes	—			2,970
Total current assets	312,918			244,438

Property, plant and equipment, net	2,091,051			2,043,426

Other assets:
Prepaid pension asset	126,918			117,948
Derivative instruments valuation	78,782			85,477
Regulatory assets	113,763			124,900
Other investments	291			2,470
Deferred charges and other	6,975			6,855
Total other assets	326,729			337,650
Total assets	$	2,730,698		$	2,625,514

LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	100,000		$	—
Short-term debt	90,000			123,000
Borrowings under utility money pool arrangement	96,000			5,500
Accounts payable	148,543			153,130
Accounts payable to affiliates	10,218			9,432
Taxes accrued	22,594			22,902
Dividends payable to parent	14,929			15,931
Accrued interest	17,654			12,816
Deferred income taxes	3,449			—
Derivative instruments valuation	4,567			4,468
Other	21,035			24,062
Total current liabilities	528,989			371,241

Deferred credits and other liabilities:
Deferred income taxes	478,959			462,228
Regulatory liabilities	127,509			133,025
Derivative instruments valuation	58,213			60,918
Asset retirement obligations	3,233			3,592
Deferred investment tax credits	2,848			2,995
Pension and employee benefit obligations	22,607			23,871
Other	15,686			7,458
Total deferred credits and other liabilities	709,055			694,087

Commitments and contingent liabilities
Capitalization:
Long-term debt	674,131			774,033
Common stock – authorized 200 shares of $1.00 par value, outstanding 100 shares	—			—
Additional paid in capital	555,161			503,066
Retained earnings	269,293			289,092
Accumulated other comprehensive loss	(5,931		)	(6,005		)
Total common stockholder’s equity	818,523			786,153
Total liabilities and equity	$	2,730,698		$	2,625,514

See the Notes to Financial Statements

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SOUTHWESTERN PUBLIC SERVICE CO.

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

In the opinion of management, the accompanying unaudited financial statements contain all adjustments necessary to present fairly the financial position of SPS as of Sept. 30, 2008, and Dec. 31, 2007; the results of its operations for the three and nine months ended Sept. 30, 2008 and 2007; and its cash flows for the nine months ended Sept. 30, 2008 and 2007. All adjustments are of a normal, recurring nature, except as otherwise disclosed. The Dec. 31, 2007 balance sheet information has been derived from the audited 2007 financial statements. For further information, refer to the Financial Statements and notes thereto, included in the SPS Annual Report on Form 10-K for the year ended Dec. 31, 2007, filed with the Securities and Exchange Commission on Feb. 20, 2008. Due to the seasonality of electric sales of SPS, interim results are not necessarily an appropriate base from which to project annual results.

1. Significant Accounting Policies

Except to the extent updated or described below, the significant accounting policies set forth in Note 1 to the financial statements in SPS’ Annual Report on Form 10-K for the year ended Dec. 31, 2007, appropriately represent, in all material respects, the current status of accounting policies and are incorporated herein by reference.

Fair Value Measurements — SPS presents cash equivalents and interest rate derivatives at estimated fair values in its financial statements. Cash equivalents are recorded at cost plus accrued interest to approximate fair value. Changes in the observed trading prices and liquidity of cash equivalents, including commercial paper and money market funds, are also monitored as additional support for determining fair value, and losses are recorded in earnings if fair value falls below recorded cost. For interest rate derivatives, quoted prices based primarily on observable market price curves are used as a primary input to establish fair value.

2. Recently Issued Accounting Pronouncements

Statement of Financial Accounting Standards (SFAS) No. 157 Fair Value Measurements (SFAS No. 157) — In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, which provides a single definition of fair value, together with a framework for measuring it, and requires additional disclosure about the use of fair value to measure assets and liabilities. SFAS No. 157 also emphasizes that fair value is a market-based measurement, and sets out a fair value hierarchy with the highest priority being quoted prices in active markets. Fair value measurements are disclosed by level within that hierarchy. SFAS No. 157 was effective for financial statements issued for fiscal years beginning after Nov. 15, 2007.

As of Jan. 1, 2008, SPS adopted SFAS No. 157 for all assets and liabilities measured at fair value except for non-financial assets and non-financial liabilities measured at fair value on a non-recurring basis, as permitted by FASB Staff Position No. 157-2. The adoption did not have a material impact on its financial statements. For additional discussion and SFAS No. 157 required disclosures see Note 9 to the financial statements.

The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (SFAS No. 159) — In February 2007, the FASB issued SFAS No. 159, which provides companies with an option to measure, at specified election dates, many financial instruments and certain other items at fair value that are not currently measured at fair value. A company that adopts SFAS No. 159 will report unrealized gains and losses on items, for which the fair value option has been elected, in earnings at each subsequent reporting date. This statement also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. This statement was effective for fiscal years beginning after Nov. 15, 2007. Effective Jan. 1, 2008, SPS adopted SFAS No. 159 and the adoption did not have a material impact on its financial statements.

Business Combinations (SFAS No. 141 (revised 2007)) — In December 2007, the FASB issued SFAS No. 141R, which establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141R is to be applied prospectively to business combinations for which the acquisition date is on or after the beginning of an entity’s fiscal year that begins on or after Dec. 15, 2008. SPS will evaluate the impact of SFAS No. 141R on its financial statements for any potential business combinations subsequent to Jan. 1, 2009.

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Disclosures about Derivative Instruments and Hedging Activities (SFAS No. 161) — In March 2008, the FASB issued SFAS No. 161, which is intended to enhance disclosures to help users of the financial statements better understand how derivative instruments and hedging activities affect an entity’s financial position, financial performance and cash flows. SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, to require disclosures of objectives and strategies for using derivatives, gains and losses on derivative instruments, and credit-risk-related contingent features in derivative agreements. SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after Nov. 15, 2008, with early application encouraged. SPS is currently evaluating the impact of adoption of SFAS No. 161 on its financial statements.

The Hierarchy of Generally Accepted Accounting Principles (GAAP) (SFAS No. 162) — In May 2008, the FASB issued SFAS No. 162, which establishes the GAAP hierarchy, identifying the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements. SFAS No. 162 is effective Nov. 15, 2008. SPS does not believe that implementation of SFAS No. 162 will have any material impact on its financial statements.

Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements (Emerging Issues Task Force (EITF) Issue No. 06-4) — In June 2006, the EITF reached a consensus on EITF No. 06-4, which provides guidance on the recognition of a liability and related compensation costs for endorsement split-dollar life insurance policies that provide a benefit to an employee that extends to postretirement periods. Therefore, this EITF would not apply to a split-dollar life insurance arrangement that provides a specified benefit to an employee that is limited to the employee’s active service period with an employer. EITF No. 06-4 was effective for fiscal years beginning after Dec. 15, 2007, with earlier application permitted. Upon adoption of EITF No. 06-4 on Jan. 1, 2008, SPS recorded a liability of $0.3 million, net of tax, as a reduction of retained earnings. Thereafter, changes in the liability are reflected in operating results.

Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards (EITF No. 06-11) — In June 2007, the EITF reached a consensus on EITF No. 06-11, which states that an entity should recognize a realized tax benefit associated with dividends on nonvested equity shares and nonvested equity share units charged to retained earnings as an increase in additional paid in capital. The amount recognized in additional paid in capital should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF No. 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared in fiscal years beginning after Dec. 15, 2007. The adoption of EITF No. 06-11 did not have a material impact on SPS’ financial statements.

3. Selected Balance Sheet Data

(Thousands of Dollars)	Sept. 30, 2008			Dec. 31, 2007
Accounts receivable, net:
Accounts receivable	$	88,471		$	70,420
Less allowance for bad debts	(3,763		)	(3,166		)
	$	84,708		$	67,254

Inventories:
Materials and supplies	$	16,750		$	14,039
Fuel	30,185			3,304
	$	46,935		$	17,343

Property, plant and equipment, net:
Electric utility plant	$	3,541,989		$	3,476,146
Construction work in progress	93,600			78,436
Total property, plant and equipment	3,635,589			3,554,582
Less accumulated depreciation	(1,544,538		)	(1,511,156		)
	$	2,091,051		$	2,043,426

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4. Income Taxes

Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (FIN 48) — SPS is a member of the Xcel Energy affiliated group that files consolidated income tax returns. In the first quarter of 2008, the Internal Revenue Service (IRS) completed an examination of Xcel Energy’s federal income tax returns for 2004 and 2005 (and research credits for 2003). The IRS did not propose any material adjustments for those tax years. Tax year 2004 is the earliest open year and the statute of limitations applicable to Xcel Energy’s 2004 federal income tax return remains open until Dec. 31, 2009. In the third quarter of 2008, the IRS commenced an examination of tax years 2006 and 2007.

In the first quarter of 2008, the state of Texas concluded an income tax audit through tax year 2005. No material adjustments were proposed for this audit. As of Sept. 30, 2008, SPS’ earliest open tax year in which an audit can be initiated by state taxing authorities under applicable statutes of limitations is 2004. There currently are no state income tax audits in progress.

The amount of unrecognized tax benefits was $2.3 million and $3.3 million on Dec. 31, 2007 and Sept. 30, 2008, respectively. These unrecognized tax benefit amounts were reduced by the tax benefits associated with tax credit carryovers of $0.1 million as of Dec. 31, 2007 and Sept. 30, 2008.

The unrecognized tax benefit balance included $0.3 million and $0.3 million of tax positions on Dec. 31, 2007 and Sept. 30, 2008, respectively, which if recognized would affect the annual effective tax rate. In addition, the unrecognized tax benefit balance included $2.0 million and $3.0 million of tax positions on Dec. 31, 2007 and Sept. 30, 2008, respectively, 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 effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

The increase in the unrecognized tax benefit balance of $0.7 million from July 1, 2008 to Sept. 30, 2008, was due to the addition of similar uncertain tax positions related to ongoing activity. SPS’ amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS audit progresses and when state audits resume. However, at this time, it is not reasonably possible to estimate an overall range of possible change.

The liability for interest related to unrecognized tax benefits is partially offset by the interest benefit associated with tax credit carryovers. The liability for interest related to unrecognized tax benefits on Dec. 31, 2007, was not material. The change in the interest liability from Dec. 31, 2007, to Sept. 30, 2008, was not material. No amounts were accrued for penalties as of Sept. 30, 2008.

5. Rate Matters

Except to the extent noted below, the circumstances set forth in Note 11 to the financial statements included in SPS’ Annual Report on Form 10-K for the year ended Dec. 31, 2007 appropriately represent, in all material respects, the current status of other rate matters, and are incorporated herein by reference. The following include unresolved proceedings that are material to SPS’ financial position.

Pending and Recently Concluded Regulatory Proceedings — Public Utility Commission of Texas (PUCT)

Base Rate

Texas Retail Base Rate Case — On June 12, 2008, SPS filed with the PUCT, and the 80 cities in SPS’ Texas service territory with original rate jurisdiction, a request for a Texas system retail electric general rate increase. The filing requests an overall increase in annual revenues of approximately $61.3 million, or an increase of 5.9 percent. Base revenues are proposed to increase by $94.4 million, while fuel and purchased power revenues will decline by $33.1 million, primarily due to the fuel savings from SPS’ power purchases from the Hobbs generating facility, which is owned by Lea Power Partners, LLC (LPP). Hobbs is a natural gas combined cycle 604-megawatt (MW) plant in New Mexico, which came on line in September 2008.

The rate filing is based on a 2007 calendar year test year adjusted for known and measurable changes and includes a requested rate of ROE of 11.25 percent, net rate base of approximately $989.4 million allocated to the Texas retail jurisdiction, and an equity ratio of 51.0 percent.

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In SPS’ last Texas rate case, the parties agreed that SPS should seek, in this rate filing, interim rate relief of $18 million per year for the LPP purchase agreement. The interim rates went into effect when the LPP plant came on line in September 2008. The deadline for the PUCT to act on SPS’ request is March 31, 2009.

The filing with the PUCT also includes a request to reconcile (i.e. seek final approval for) $1.0 billion of SPS’ fuel and purchased power costs for calendar years 2006 and 2007.

On Oct. 13, 2008, the Office of Public Utility Counsel (OPUC), the Association of Xcel Municipalities (AXM) and the Texas Industrial Energy Consumers (TIEC) filed testimony on the revenue requirements portion of the case.

· The OPUC recommended a reduction to SPS’ $94.4 million base revenue request of $27.1 million based on an ROE of 9.95 percent.

· The TIEC recommended a reduction of $28.6 million based on an ROE of 10.0 percent.

· The AXM recommended a reduction of $71.7 million, based on an ROE of 9.5 percent. AXM also recommended a $3 million disallowance of fuel costs associated with the assignment of incremental cost to a wholesale contract with EPE.

The PUCT filed testimony on Oct. 21, 2008 recommending a reduction to SPS’ $94.4 million base revenue request of $49.8 million based on an ROE of 10.32 percent.

The remaining procedural schedule is as follows:

· PUCT staff and intervenors cross-rebuttal testimony is expected to be filed on Oct. 28, 2008;

· SPS rebuttal testimony is expected to be filed on Nov. 4, 2008;

· The hearing on the merits is expected to begin on Nov. 12, 2008; and

· Final order expected by March 31, 2009.

On June 2, 2008, SPS filed an application for approval of an energy efficiency cost recovery factor rider. On Sept. 15, 2008, the PUCT concluded that the rule under which the application was filed does not apply to SPS, but that SPS should be allowed to seek recovery of the energy efficiency costs in this base rate case. On Oct. 3, 2008, SPS made a supplemental filing in the base rate case to request recovery of the energy efficiency costs.

John Deere Wind Complaint — On June 27, 2007, several John Deere Wind Energy subsidiaries (JD Wind) filed a complaint against SPS disputing SPS’ payments to JD Wind for energy produced from the JD Wind projects. SPS responded that the payments to JD Wind for energy produced from its Qualifying Facility is appropriate and in accordance with SPS’ filed tariffs with the PUCT. The PUCT referred the complaint to the State Office of Administrative Hearings. On Aug. 14, 2008, JD Wind filed testimony claiming SPS has been underpaying JD Wind for its energy. On Sept. 15, 2008, SPS and Occidental Permian, Ltd., filed answering testimony. Hearings were held before an administrative law judge (ALJ) on Oct. 13 through 16, 2008. The matter has yet to be briefed. The ultimate outcome of this complaint proceeding is not known at this time.

Electric and Resource Adjustment Clauses

Transmission Cost Recovery (TCR) Factor Rulemaking — In November 2007, the PUCT adopted new rules relating to TCR factor outside of a base rate case. The rule establishes the mechanism by which SPS can request annual recovery of its reasonable and necessary expenditures for transmission infrastructure improvement costs and changes in wholesale transmission charges that are not included in existing rates. This new rule allows SPS more timely recovery of transmission cost increases between base rate cases.

Pending and Recently Concluded Regulatory Proceedings — New Mexico Public Regulation Commission (NMPRC)

Base Rate

New Mexico Electric Rate Case — In July 2007, SPS filed with the NMPRC requesting a New Mexico retail electric general rate increase of $17.3 million annually, or 6.6 percent. The rate filing was based on a 2006 test year adjusted for known and measurable changes and included a requested ROE of 11.0 percent, an electric rate base of approximately $307.3 million and an equity ratio of 51.2 percent.

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On Aug. 26, 2008, the NMPRC issued its final order authorizing an overall rate increase of $10.8 million based on a 10.18 percent ROE. This increase is based on a $7 million electric base rate increase and a rider to recover $3.8 million of restructuring costs. The NMPRC disallowed $3.5 million in rate base for historical DSM expenditures and certain rate case and prepaid pension expenses.

SPS implemented the base rates on Sept. 14, 2008. On Sept. 25, 2008, SPS filed for rehearing on certain issues. On Oct. 14, 2008, the NMPRC denied SPS’ motion for rehearing.

Electric and Resource Adjustment Clauses

New Mexico Fuel Factor Continuation Filing — In August 2005, SPS filed with the NMPRC requesting continuation of the use of SPS’ fuel and purchased power cost adjustment clause (FPPCAC) and current monthly factor cost recovery methodology. This filing was required by NMPRC rule.

Testimony was filed in the case by staff and intervenors objecting to SPS’ assignment of system average fuel costs to certain wholesale sales and the inclusion of certain purchased power capacity and energy payments in the FPPCAC. The testimony also proposed limits on SPS’ future use of the FPPCAC. Related to these issues, some intervenors requested disallowances for past periods, which in the aggregate total approximately $45 million. This claim was for the period from Oct. 1, 2001 through May 31, 2005 and does not include the value of incremental cost assigned for wholesale transactions from that date forward. Other issues in the case include the treatment of renewable energy certificates and sulfur dioxide (SO2) allowance credit proceeds in relation to SPS’ New Mexico retail fuel and purchased power recovery clause.

In December 2007, SPS, the NMPRC, Occidental Permian Ltd. and the New Mexico Industrial Energy Consumers filed an uncontested settlement of this matter with the NMPRC.

· The settlement resolves all issues in the fuel continuation proceeding for total consideration of $15 million, which includes customer refunds of $11.7 million.

· At Dec. 31, 2007, a reserve had been previously established for this potential exposure, with no further expense accrual required, assuming this settlement is approved.

· The settlement would also provide for significantly greater certainty surrounding system average fuel cost assignment on a going forward basis and reduce percentages of system average cost wholesale sales between now and 2019 on a stepped down basis.

· Under the terms of the settlement, SPS anticipates additional fuel cost disallowances in 2008 and a portion of 2009 of approximately $2 million per year. It does not anticipate any future disallowances beyond this period.

· Finally, the settlement provides for SPS to continue its use of the FPPCAC subject to additional reporting provisions.

A hearing on the merits of the settlement was held in April 2008. On June 3, 2008, the hearing examiner certified the unanimous stipulation to the NMPRC. The NMPRC held a hearing on Aug. 14, 2008 to enable the NMPRC to directly question the witnesses who supported the unanimous stipulation. On Aug. 26, 2008, the NMPRC issued a final order approving the unanimous stipulation.

Investigation of SPS Participation in Southwest Power Pool, Inc. (SPP) — In October 2007, the NMPRC issued an order initiating an investigation to consider the prudence and reasonableness of SPS’ participation in the SPP Regional Transmission Organization (RTO). The investigation will consider the costs and benefits of RTO participation to SPS customers in New Mexico. SPS filed its direct testimony on July 31, 2008.

The following procedural schedule has been established:

· Intervention deadline on Nov. 3, 2008;

· Staff and intervenor direct testimony due on Feb. 3, 2009;

· SPS rebuttal testimony due on March 6, 2009; and

· The hearing on the merits is expected to begin on March 31, 2009.

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

Wholesale Rate Complaints — In November 2004, Golden Spread Electric, Lyntegar Electric, Farmer’s Electric, Lea County Electric, Central Valley Electric and Roosevelt County Electric, all wholesale cooperative customers of SPS, filed a rate complaint with the FERC alleging that SPS’ rates for wholesale service were excessive and that SPS had incorrectly calculated monthly fuel cost adjustment charges to such customers (the Complaint). Among other things, the complainants asserted that SPS had inappropriately allocated average fuel and purchased power costs to other wholesale customers, effectively raising the fuel cost charges to complainants. Cap Rock Energy Corporation (Cap Rock), another full-requirements customer of SPS, Public Service Company of New Mexico (PNM) and Occidental Permian Ltd. and Occidental Power Marketing, L.P. (Occidental), SPS’ largest retail customer, intervened in the proceeding.

In May 2006, a FERC ALJ issued an initial decision in the proceeding. The ALJ found that SPS should recalculate its wholesale fuel and purchased economic energy cost adjustment clause (FCAC) billings for the period beginning Jan. 1, 1999, to reduce the fuel and purchased power costs recovered from the complaining customers by deducting from such costs the incremental fuel costs attributed to SPS’ sales of system firm capacity and associated energy to other wholesale customers served under market-based rates during this period based on the view that such sales should be treated as opportunity sales made out of temporarily excess capacity. In addition, the ALJ made recommendations on a number of base rate issues including a 9.64 percent ROE and the use of a 3-month coincident peak (3 CP) demand allocator.

Golden Spread Complaint Settlement — In December 2007, SPS reached a settlement with Golden Spread (which now includes Lyntegar Electric) and Occidental regarding base rate and fuel issues raised in the complaint described above as well as a subsequent rate proceeding. In December 2007, this comprehensive offer of settlement (the Settlement) was filed with the FERC. On April 21, 2008, the FERC approved the Settlement with a minor modification to the formula rate proposed by the FERC and accepted by the parties. The Settlement provides for:

· A $1.25 million payment by SPS to Golden Spread related to resolve a dispute concerning the quantities Golden Spread was entitled to take under its existing partial requirements agreement for the years 2006 and 2007. The Settlement caps those quantities for the period 2008 through 2011. SPS is not required to make any fuel refunds to Golden Spread that were the subject of the Complaint under the terms of the Settlement.

· An extended partial requirements contract at system average cost, with a capacity amount that ramps down over the period 2012 through 2019 from 500 MW to 200 MW. The extended agreement requires that the cost assignment treatment receive Texas and New Mexico state approvals and provides for alternative pricing terms and quantities to hold SPS harmless from cost disallowances in the event that adverse regulatory treatment occurs or state approvals are not obtained. Golden Spread agreed to hold SPS harmless from any future adverse regulatory treatment regarding the proposed sale and SPS agreed to contingent payments ranging from $3 million to a maximum of $12 million, payable in 2012, in the event that there is an adverse cost assignment decision or a failure to obtain state approvals.

· Resolution of base rates in the Complaint without any adjustment to the existing rates for the period January 2005 through June 30, 2006. The Settlement also resolves all base rate issues in SPS’ subsequent proceeding related to the period July 1, 2006 through Sept. 30, 2008, other than the method to be used to allocate demand related costs and provided for two sets of agreed on rates that are dependent on the ultimate resolution of that issue. If SPS prevails in its support of the 12-month coincident peak (12 CP) demand allocation method, there would be no impact to earnings for this period. As discussed below, the ALJ issued an initial decision finding that SPS’ proposed 12-CP demand methodology is appropriate and a hearing is not necessary.

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· For July 1, 2008 and beyond, Golden Spread will be under a formula rate for power supply service. The rate will be based on actual data the most recent historic year adjusted for known and measurable changes and trued up to the actual performance in the subsequent calendar year. Initially, the formula will be based on a 10.25 percent ROE and either party will have a right to seek changes to the ROE beginning with the 2009 formula rate filing. SPS and Golden Spread will share margins from its sales to West Texas Municipal Power Agency and El Paso Electric in that year but will assign system average fuel and energy costs to those agreements for purposes of calculating Golden Spread’s monthly fuel cost.

Order on Wholesale Rate Complaints — On April 21, 2008, the FERC issued its Order on the Complaint (the Order) applied to the remaining non-settling parties. The Order addresses base rate issues for the period from Jan. 1, 2005 through June 30, 2006 for SPS’ full requirements customers who pay traditional cost-based rates and requires certain refunds.

Base Rates: The FERC determined: (1) the ROE should be 9.33 percent; (2) rates should be based on a 12 CP allocator; and (3) the treatment of market based rate contracts in the test year should be to credit revenues to the cost of service rather than allocating costs to the agreements. The revenue requirement established by the FERC results in proposed revenues that are estimated to be approximately $25 million, or approximately $6.9 million below the level charged these customers during this 18-month period. Rates for full requirements customers, the New Mexico Cooperatives and Cap Rock, as well as an interruptible contract with PNM for the period beginning in July 1, 2006, are the subject of settlements that have either been approved or are pending before FERC. These settlements are described in Wholesale 2005 Power Base Rate Application below.

Fuel Clause: The FERC determined that the method for calculating fuel and purchased energy cost charges to the complaining customer is to deduct from such costs incremental fuel and purchased energy costs, which it is attributing to SPS’ market based intersystem sales on the basis that these are “opportunity” sales under its precedent. The FERC ordered that refunds of fuel cost charges based on this method of determining the FCAC should begin as of Jan. 1, 2005 (the refund effective date in the case). The FERC ordered SPS to file a compliance filing calculating its refund obligation within 30 days of the date of the Order and implement the instructions in the order in calculating its FCAC charges going forward from that date. While the order is subject to interpretation with respect to aspects of the calculation of the refund obligation, SPS does not expect its refund obligation to its full requirements customers from Jan. 1, 2005 through March 31, 2008, to exceed $11 million. PNM has filed a separate complaint that any refund obligation to PNM will be determined in that docket. SPS is reviewing the Order and has not yet determined whether to seek rehearing.

The FERC also ruled on two other FCA issues. First, it required that wind contracts be evaluated on an individual contract basis rather than in aggregate. Second, the FERC determined that an after the fact screen should be applied to all Qualifying Facility (QF) purchases to determine if they are economic. While this review will require additional effort, it is not expected that this will result in additional refunds as all of the individual wind contracts as well as the QF purchases are typically economic when compared to market energy prices.

On July 21, 2008, SPS submitted it compliance report to the FERC. In the report, SPS has calculated the base rate refund for the 18-month period to be equal to $6.1 million and the fuel refund to be equal to $4.4 million. Several wholesale customers have protested the calculations. Once the final refund amounts are approved by the FERC, interest will be added to the refund due the full requirements customers. As of Sept. 30, 2008, SPS has accrued an amount sufficient to cover the estimated refund obligation.

Wholesale 2005 Power Base Rate Application — In December 2005, SPS filed for a $2.5 million increase in wholesale power rates to certain electric cooperatives. In January 2006, the FERC conditionally accepted the proposed rates for filing and the $2.5 million power rate increase became effective on July 1, 2006, subject to refund. The FERC also set the rate increase request for hearing and settlement judge procedures. In September 2006, offers of settlement with respect to the five full-requirements customers and with respect to PNM were filed for approval. In September 2007, the FERC accepted the settlement with the full-requirements customers. In September 2008, the FERC issued an order accepting the contested partial settlement with PNM.

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As noted, the Power Base Rate Application relating to Golden Spread was settled in conjunction with the Complaint Settlement discussed above. Therefore, SPS has settled with all parties in the Wholesale 2005 Power Base Rate Application, except for resolution with Golden Spread of the demand cost allocation methodology. SPS and the full-requirements customers have requested that the demand allocation issue be summarily ruled on in SPS’ favor. On Aug. 29, 2008, the ALJ issued an initial decision finding that SPS’ proposed 12 CP demand methodology is appropriate and a hearing is not necessary. Therefore, SPS will owe no refunds to Golden Spread as a result of the demand allocation methodology. Golden Spread has accepted the recommended decision. The initial decision is now pending before the FERC for final action.

SPS Formula Transmission Rate Case — In December 2007, Xcel Energy submitted an application to implement a transmission formula rate for the SPS zone of the Xcel Energy Open Access Transmission Tariff (OATT). The changed rates will affect all wholesale transmission service customers using the SPS transmission network under either the SPP Regional OATT or the Xcel Energy OATT.

The proposed rates would be updated annually each July 1 based on SPS’ prior year actual costs and loads plus the revenue requirements associated with projected current year transmission plant additions. The proposed ROE is 12.7 percent, including a 50 basis point adder for SPS’ participation in the SPP RTO. The proposed rates would provide first year incremental annual transmission revenue for SPS of approximately $5.5 million.

In February 2008, the FERC accepted the proposed rates, suspending the effective date to July 6, 2008, and setting the rate filing for hearings and settlement procedures. The FERC granted a 50 basis point adder to the ROE that it will determine in this proceeding as a result of SPS’ participation in the SPP RTO. The filed rates, updated for 2007 actual costs and projected 2008 transmission plant additions, were placed into effect on July 6, 2008, subject to refund. The SPS and SPP rate filings are now in settlement procedures. The ultimate outcome of the rate filings is not known at this time.

SPS 2008 Wholesale Rate Case — On March 31, 2008, SPS filed a wholesale rate case seeking an annual revenue increase of $14.9 million or an overall 5.14 percent increase, based on 12.20 percent requested ROE. On April 21, 2008, a motion for dismissal and protest was filed by the four eastern New Mexico cooperatives.

In SPS’ answer to the motions to intervene and protest, SPS renewed its request for a nominal suspension of 60 days and asked the FERC to consider such a nominal suspension in exchange for SPS’ acceptance of two conditions. The first condition was that SPS would agree to a ROE of no more than 10.25 percent and second, SPS would agree to use a 12 CP demand allocator for the period the rates will be in effect. The SPS answer would result in an annual revenue increase of $9.9 million or an overall 3.4 percent increase.

In May 2008, the FERC accepted the answer and ordered a nominal suspension for rates to go in to effect as of the date of commercial service of the LPP plant. The LPP plant went into commercial operation on Sept. 16, 2008 and the proposed rates went into effect at that time, subject to refund. The FERC set the rate filing for hearings and settlement procedures, and the case is currently in settlement discussions. The ultimate outcome of the rate filings is not known at this time.

6. Commitments and Contingencies

Except to the extent noted below, the circumstances set forth in Notes 11 and 12 to the financial statements in SPS’ Annual Report on Form 10-K for the year ended Dec. 31, 2007 and Note 5 to the financial statements in this Quarterly Report on Form 10-Q, appropriately represent, in all material respects, the current status of commitments and contingent liabilities and are incorporated herein by reference. The following include unresolved contingencies that are material to SPS’ financial position.

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Operating Leases — SPS began taking power under a purchased power agreement during the third quarter of 2008 that is being accounted for as an operating lease in accordance with EITF No. 01-8, Determining Whether an Arrangement Contains a Lease, and SFAS No. 13, Accounting for Leases. Future commitments under this purchase power agreement being accounted for as an operating lease are:

		Purchase Power Agreement Operating Leases
		(Millions of Dollars)
2008		$13.0
2009		44.4
2010		44.4
2011		44.4
2012		44.4
Thereafter		921.7

Variable Interest Entities (VIE) — SPS has certain long-term power purchase agreements with independent power producing entities that contain tolling arrangements under which SPS procures the fuel required to produce the energy purchased. SPS enters into these agreements to meet electric system capacity and energy needs. SPS is not subject to risk of loss from the operations of these potential VIEs. SPS has evaluated such entities for possible consolidation under “FASB Interpretation No. 46R Consolidation of Variable Interest Entities”. We have concluded that SPS is not the primary beneficiary of these entities, and therefore, these entities are not required to be consolidated in SPS’s financial statements. See additional discussion of purchased power agreements in Note 12 of the SPS Annual Report on Form 10-K for the year ended Dec. 31, 2007.

Environmental Contingencies

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

Site Remediation — SPS must pay all or a portion of the cost to remediate sites where past activities of SPS or other parties have caused environmental contamination. At Sept. 30, 2008, SPS was a party to third party and other sites, such as landfills, to which SPS is alleged to be a PRP that sent hazardous materials and wastes. At Sept. 30, 2008, the liability for the cost of remediating these sites was estimated to be $0.1 million.

Third Party and Other Environmental Site Remediation

Asbestos Removal — Some of SPS’ facilities contain asbestos. Most asbestos will remain undisturbed until the facilities that contain it are demolished or renovated. SPS has recorded an estimate for final removal of the asbestos as an asset retirement obligation. See additional discussion of asset retirement obligations in Note 12 of the SPS Annual Report on Form 10-K for the year ended Dec. 31, 2007. It may be necessary to remove some asbestos to perform maintenance or make improvements to other equipment. The cost of removing asbestos as part of other work is immaterial and is recorded as incurred as operating expenses for maintenance projects, capital expenditures for construction projects or removal costs for demolition projects.

Other Environmental Requirements

Clean Air Interstate Rule (CAIR) — In March 2005, the Environmental Protection Agency (EPA) issued the CAIR to further regulate SO₂ and nitrogen oxide (NOx) emissions. The objective of CAIR was to cap emissions of SO₂ and NOx in the eastern United States, including Texas. In July 2008, a three-judge panel of the D.C. Circuit Court of Appeals vacated CAIR and remanded the rule to the EPA. The EPA subsequently requested a rehearing en banc, or by the full court. The D.C. Circuit Court of Appeals has yet to rule on the EPA’s petition for rehearing.

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Clean Air Mercury Rule (CAMR) — In March 2005, the EPA issued the CAMR, which regulated mercury emissions from power plants. The Texas Commission of Environmental Quality (TCEQ) has adopted by reference the EPA model program. In February 2008, the D.C. Circuit Court of Appeals vacated CAMR, which impacts federal CAMR requirements but not necessarily state-only rules. Given the many uncertainties created by the court’s opinion, it is not possible at this time to provide an accurate cost estimate.

Regional Haze Rules — In June 2005, the EPA finalized amendments to the July 1999 regional haze rules. These amendments apply to the provisions of the regional haze rule that require emission controls, known as best available retrofit technology (BART), for industrial facilities emitting air pollutants that reduce visibility by causing or contributing to regional haze. Some of SPS’ generating facilities will be subject to BART requirements. Some of these facilities are located in regions where CAIR is effective. The TCEQ had determined that facilities may use CAIR as a substitute for BART for NOx and SO₂. The TCEQ is currently reviewing this determination in light of the D.C. Circuit Court of Appeals’ decision vacating CAIR. The TCEQ has not indicated any desire to develop state rules at this time.

Maddox Station Groundwater — The New Mexico Environment Department (NMED) is requiring wastewater activity at Maddox Station to be permitted. SPS is developing the engineering wastewater management facilities and submitted the permit application in July 2008. The estimated cost of the project is $1.8 million with an anticipated completion date in June 2009.

Legal Contingencies

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

Environmental Litigation

Carbon Dioxide Emissions Lawsuit — In July 2004, the attorneys general of eight states and New York City, as well as several environmental groups, filed lawsuits in U.S. District Court in the Southern District of New York against five utilities, including Xcel Energy, the parent company of SPS, to force reductions in carbon dioxide (CO₂) emissions. The other utilities include American Electric Power Co., Southern Co., Cinergy Corp. and Tennessee Valley Authority. The lawsuits allege that CO₂ emitted by each company is a public nuisance as defined under state and federal common law because it has contributed to global warming. The lawsuits do not demand monetary damages. Instead, the lawsuits ask the court to order each utility to cap and reduce its CO₂ emissions. In October 2004, Xcel Energy and the other defendants filed a motion to dismiss the lawsuit. On Sept. 19, 2005, the court granted the motion to dismiss on constitutional grounds. Plaintiffs filed an appeal to the Second Circuit Court of Appeals. In June 2007, the Second Circuit Court of Appeals issued an order requesting the parties to file a letter brief regarding the impact of the United States Supreme Court’s decision in Massachusetts v. EPA, 127 S.Ct. 1438 (April 2, 2007) on the issues raised by the parties on appeal. Among other things, in its decision in Massachusetts v. EPA, the United States Supreme Court held that CO₂ emissions are a “pollutant” subject to regulation by the EPA under the Clean Air Act. In response to the request of the Second Circuit Court of Appeals, in June 2007, the defendant utilities filed a letter brief stating the position that the United States Supreme Court’s decision supports the arguments raised by the utilities on appeal. The Court of Appeals has taken the matter under advisement and is expected to issue an opinion in due course.

Comer vs. Xcel Energy Inc. et al. — In April 2006, Xcel Energy received notice of a purported class action lawsuit filed in U.S. District Court in the Southern District of Mississippi. The lawsuit names more than 45 oil, chemical and utility companies, including Xcel Energy, the parent company of SPS, as defendants and alleges that defendants’ CO₂ emissions “were a proximate and direct cause of the increase in the destructive capacity of Hurricane Katrina.” Plaintiffs allege in support of their claim, several legal theories, including negligence and public and private nuisance and seek damages related to the loss resulting from the hurricane. Xcel Energy believes this lawsuit is without merit and intends to vigorously defend itself against these claims. In August 2007, the court dismissed the lawsuit in its entirety against all defendants on constitutional grounds. In September 2007, plaintiffs filed a notice of appeal to the Fifth Circuit Court of Appeals. Oral arguments were presented to the Court of Appeals on Aug. 6, 2008. On Sept. 26, 2008 the Court of Appeals notified the parties that this matter was set for re-argument on Nov. 3, 2008. No explanation was given for the decision.

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Native Village of Kivalina vs. Xcel Energy Inc. et al. — In February 2008, the City and Native Village of Kivalina, Alaska, filed a lawsuit in U.S. District Court for the Northern District of California against Xcel Energy, the parent company of SPS, and 23 other oil, gas and coal companies. The suit was brought on behalf of approximately 400 native Alaskans, the Inupiat Eskimo, who claim that Defendants’ emission of CO₂ and other greenhouse gases contribute to global warming, which is harming their village. Plaintiffs claim that as a consequence, the entire village must be relocated at a cost of between $95 million and $400 million. Plaintiffs assert a nuisance claim under federal and state common law, as well as a claim asserting “concert of action” in which defendants are alleged to have engaged in tortious acts in concert with each other. Xcel Energy was not named in the civil conspiracy claim. Xcel Energy believes the claims asserted in this lawsuit are without merit and joined with other utility defendants in filing a motion to dismiss on June 30, 2008.

Employment, Tort and Commercial Litigation

Lamb County Electric Cooperative (LCEC) — In 1995, LCEC petitioned the PUCT for a cease and desist order against SPS alleging SPS was unlawfully providing service to oil field customers in LCEC’s certificated area. In May 2003, the PUCT issued an order denying LCEC’s petition based on its determination that SPS in 1976 was granted a certificate to serve the disputed customers. LCEC appealed the decision to the District Court in Travis County, Texas. In August 2004, the court affirmed the decision of the PUCT. In September 2004, LCEC appealed the District Court’s decision to the Court of Appeals for the Third Supreme Judicial District of the state of Texas. This appeal is currently pending.

In 1996, LCEC filed a suit for damages against SPS in the District Court in Lamb County, Texas, based on the same facts alleged in the petition for a cease and desist order at the PUCT. This suit has been dormant since it was filed, awaiting a final determination of the legality of SPS providing electric service to the disputed customers. The PUCT order from May 2003, which found SPS was legally serving the disputed customers, collaterally determines the issue of liability contrary to LCEC’s position in the suit. An adverse ruling on the appeal of May 2003 PUCT order could result in a different determination of the legality of SPS’ service to the disputed customers.

7. Short-Term Borrowings and Other Financing Activities

Commercial Paper — At Sept. 30, 2008 and Dec. 31, 2007, SPS had commercial paper outstanding of $90.0 million and $123.0 million, respectively. The weighted average interest rates at Sept. 30, 2008 and Dec. 31, 2007 were 2.98 percent and 5.58 percent, respectively.

Money Pool — Xcel Energy has established a utility money pool arrangement that allows for short-term loans between the utility subsidiaries and from the holding company to the utility subsidiaries at market-based interest rates. The utility money pool arrangement does not allow loans from the utility subsidiaries to the holding company. SPS has approval to borrow up to $100.0 million under the arrangement. At Sept. 30, 2008 and Dec. 31, 2007, SPS had money pool borrowings of $96.0 million and $5.5 million, respectively. The weighted average interest rates at Sept. 30, 2008 and Dec. 31, 2007 were 3.00 percent and 5.64 percent, respectively.

Credit Facilities — On Oct. 10, 2008, SPS borrowed $125 million under the SPS $250 million credit agreement. SPS took this step to provide additional certainty of short-term funding until liquidity improves in the A2/P2 commercial paper market.

8. Derivative Instruments

SPS uses derivative instruments in connection with its interest rate hedging, short-term wholesale, and commodity trading activities, including forward contracts, futures, swaps and options. Qualifying hedging relationships are designated as either a hedge of a forecasted transaction or future cash flow (cash flow hedge), or a hedge of a recognized asset, liability or firm commitment (fair value hedge). The types of qualifying hedging transactions that SPS is currently engaged in are discussed below.

Cash Flow Hedges

Commodity Cash Flow Hedges — SPS enters into derivative instruments to manage variability of future cash flows from changes in commodity prices. These derivative instruments are designated as cash flow hedges for accounting purposes. At Sept. 30, 2008, SPS had no commodity-related contracts designated as cash flow hedges.

Interest Rate Cash Flow Hedges — SPS enters into various instruments that effectively fix the interest payments on certain floating rate debt obligations. These derivative instruments are designated as cash flow hedges for accounting purposes.

At Sept. 30, 2008, SPS had $0.2 million of net losses in accumulated other comprehensive income related to interest rate derivatives that are expected to be recognized in earnings during the next 12 months.

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The following table shows the major components of the derivative instruments valuation in the balance sheets at Sept. 30 and Dec. 31:

	Sept. 30, 2008				Dec. 31, 2007
(Thousands of Dollars)	Derivative Instruments Valuation - Assets		Derivative Instruments Valuation - Liabilities		Derivative Instruments Valuation - Assets		Derivative Instruments Valuation - Liabilities
Long term purchased power agreements	$	87,708	$	56,728	$	94,403	$	59,419
Interest rate hedging instruments	—		6,052		—		5,967
Total	$	87,708	$	62,780	$	94,403	$	65,386

In 2003, as a result of FASB Statement 133 Implementation Issue No. C20, SPS began recording several long-term purchased power agreements at fair value due to accounting requirements related to underlying price adjustments. As these purchases are recovered through normal regulatory recovery mechanisms in the respective jurisdictions, the changes in fair value for these contracts were offset by regulatory assets and liabilities. During 2006, SPS 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.

The impact of qualifying cash flow hedges on SPS’ accumulated other comprehensive income, included as a component of common stockholders’ equity, is detailed in the following table:

	Nine months ended Sept. 30,
(Thousands of Dollars)	2008			2007
Accumulated other comprehensive loss related to cash flow hedges at Jan. 1	$	(6,005	)	$	(5,860	)
After-tax net unrealized (losses) gains related to derivatives accounted for as hedges	(55		)	117
After-tax net realized losses on derivative transactions reclassified into earnings	129			128
Accumulated other comprehensive loss related to cash flow hedges at Sept. 30	$	(5,931	)	$	(5,615	)

9. Fair Value Measurements

Effective Jan. 1, 2008, SPS adopted SFAS No. 157 for recurring fair value measurements. SFAS No. 157 provides a single definition of fair value and requires enhanced disclosures about assets and liabilities measured at fair value. SFAS No. 157 establishes a hierarchal framework for disclosing the observability of the inputs utilized in measuring assets and liabilities at fair value. The three levels defined by the SFAS No. 157 hierarchy and examples of each level are as follows:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities as of the reported 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 reported 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 with inputs requiring significant management judgment or estimation.

SPS had one interest rate derivative contract measured at fair value on a recurring basis as of Sept. 30, 2008. SPS uses quoted prices, based primarily on observable benchmark interest rate forecasts, to measure the fair value of interest rate derivatives. Given the observability of the primary inputs to pricing, the interest rate derivative liability of $6.1 million at Sept. 30, 2008, was assigned a Level 2 under the SFAS No. 157 hierarchy.

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10. Detail of Interest and Other Income, Net

Interest and other income, net of nonoperating expenses, for the three and nine months ended Sept. 30 consisted of the following:

	Three months ended Sept. 30,						Nine months ended Sept. 30,
(Thousands of Dollars)	2008			2007			2008		2007

Interest income	$	1,567		$	730		$	3,599	$	2,184
Other nonoperating income	192			194			290		205
Insurance policy income (expenses)	(21		)	(90		)	78		(225		)
Total interest and other income, net	$	1,738		$	834		$	3,967	$	2,164

11. Segment Information

SPS has one reportable segment. SPS operates in the regulated electric utility industry, providing wholesale and retail electric service in the states of Texas and New Mexico. Revenues from external customers were $610.8 million and $471.5 million for the three months ended Sept. 30, 2008 and 2007, respectively, and $1,567.4 million and $1,238.5 million for the nine months ended Sept. 30, 2008 and 2007, respectively.

12. Comprehensive Income

The components of total comprehensive income are shown below:

	Three months ended Sept. 30,						Nine months ended Sept. 30,
(Thousands of Dollars)	2008			2007			2008			2007
Net income	$	23,636		$	21,152		$	26,340		$	28,436
Other comprehensive income (loss):
Unrealized gain – marketable securities	—			—			—			4
After-tax net unrealized (losses) gains related to derivatives accounted for as hedges	(64		)	(390		)	(55		)	117
After-tax net realized losses on derivative transactions reclassified into earnings	43			43			129			128
Other comprehensive (loss) income	(21		)	(347		)	74			249
Comprehensive income	$	23,615		$	20,805		$	26,414		$	28,685

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13. Benefit Plans and Other Postretirement Benefits

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

Components of Net Periodic Benefit Cost (Credit)

	Three months ended Sept. 30,
	2008 (1)			2007 (1)			2008			2007
(Thousands of Dollars)	Pension Benefits						Postretirement Health Care Benefits
Xcel Energy Inc.
Service cost	$	15,851		$	15,520		$	1,338		$	1,453
Interest cost	42,630			41,313			12,720			12,619
Expected return on plan assets	(68,584		)	(66,208		)	(7,963		)	(7,600		)
Amortization of transition obligation	—			—			3,644			3,644
Amortization of prior service cost (credit)	5,166			6,487			(544		)	(545		)
Amortization of net loss	3,185			4,211			2,875			3,550
Net periodic benefit (credit) cost	(1,752		)	1,323			12,070			13,121
Credits not recognized due to the effects of regulation	2,258			2,787			—			—
Additional cost recognized due to the effects of regulation	—			—			972			972
Net benefit cost recognized for financial reporting	$	506		$	4,110		$	13,042		$	14,093
SPS
Net benefit (credit) cost recognized for financial reporting	$	(2,620	)	$	(1,909	)	$	871		$	1,560

(1) Includes qualified and non-qualified pension net periodic benefit cost.

	Nine months ended Sept. 30,
	2008 (1)			2007 (1)			2008			2007
(Thousands of Dollars)	Pension Benefits						Postretirement Health Care Benefits
Xcel Energy Inc.
Service cost	$	47,553		$	46,560		$	4,013		$	4,359
Interest cost	127,890			123,939			38,160			37,857
Expected return on plan assets	(205,753		)	(198,624		)	(23,888		)	(22,800		)
Amortization of transition obligation	—			—			10,932			10,932
Amortization of prior service cost (credit)	15,498			19,461			(1,632		)	(1,635		)
Amortization of net loss	9,555			12,633			8,624			10,650
Net periodic benefit (credit) cost	(5,257		)	3,969			36,209			39,363
Credits not recognized due to the effects of regulation	6,775			8,361			—			—
Additional cost recognized due to the effects of regulation	—			—			2,918			2,918
Net benefit cost recognized for financial reporting	$	1,518		$	12,330		$	39,127		$	42,281
SPS
Net benefit (credit) cost recognized for financial reporting	$	(7,860	)	$	(5,728	)	$	2,612		$	4,679

(1) Includes qualified and non-qualified pension net periodic benefit cost.

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

Discussion of financial condition and liquidity for SPS 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 and the results of operations set forth in general instructions H (2) (a) of Form 10-Q for wholly owned subsidiaries (reduced disclosure format).

Forward-Looking Information

The following discussion and analysis by management focuses on those factors that had a material effect on the financial condition and results of operations of SPS 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 financial statements and notes.

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Except for the historical statements contained in this report, the matters discussed in the following discussion and analysis are forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements are intended to be identified in this document by the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should” and similar expressions. Actual results may vary materially. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them to reflect changes that occur after that date. Factors that could cause actual results to differ materially include, but are not limited to: general economic conditions, including the availability of credit and its impact on capital expenditures and the ability of SPS to obtain financing on favorable terms; business conditions in the energy industry; actions of credit rating agencies; competitive factors, including the extent and timing of the entry of additional competition in the markets served by SPS; unusual weather; effects of geopolitical events, including war and acts of terrorism; state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rates or have an impact on asset operation or ownership or impose environmental compliance conditions; structures that affect the speed and degree to which competition enters the electric market; costs and other effects of legal and administrative proceedings, settlements, investigations and claims; actions of accounting regulatory bodies; the items described under Factors Affecting Results of Continuing Operations; and the other risk factors listed from time to time by SPS in reports filed with the SEC, including “Risk Factors” in Item 1A of SPS’ Form 10-K for the year ended Dec. 31, 2007 and Exhibit 99.01 to this report on Form 10-Q for the quarter ended Sept. 30, 2008.

Market Risks

SPS is exposed to market risks, including changes in commodity prices and interest rates, as disclosed in Item 7A — Quantitative and Qualitative Disclosures About Market Risk in its Annual Report on Form 10-K for the year ended Dec. 31, 2007 and in Item 1A — Risk Factors in this Quarterly Report on Form 10-Q. Commodity price and interest rate risks for SPS are mitigated in most jurisdictions due to cost-based rate regulation. Continued distress in the financial markets may impact the fair value of the debt and equity securities in SPS’s pension and postretirement health care plan trusts, as well as SPS’s ability to earn a return on short-term investments of excess cash.

RESULTS OF OPERATIONS

SPS’ net income was approximately $26.3 million for the first nine months of 2008, compared with net income of approximately $28.4 million for the first nine months of 2007.

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

Base Electric Revenues

(Millions of Dollars)	2008 vs. 2007
Fuel and purchased power cost recovery	$	309
Retail sales growth (excluding weather impact)	14
Firm wholesale	8
SPS regulatory settlements	3
Increased revenues due to leap year (weather-normalized impact)	2
Retail customer sales mix	(7		)
Total increase in base electric revenues	$	329

Base Electric Margin

(Millions of Dollars)	2008 vs. 2007
Retail sales growth (excluding weather impact)	$	14
Firm wholesale	8
Retail fuel recovery	4
Increased revenues due to leap year (weather-normalized impact)	2
Fuel handling and procurement	(8		)
Retail customer sales mix	(7		)
Purchased capacity costs	(3		)
Other	2
Total increase in base electric margin	$	12

Non-Fuel Operating Expense and Other Items

Other operating and maintenance expenses — Other operating and maintenance expenses for the first nine months of 2008 increased $8.8 million, or 5.9 percent, compared to first nine months of 2007. The following summarizes the components of the changes for the nine months ended Sept. 30:

(Millions of Dollars)	2008 vs. 2007
Higher labor, contract labor and consulting costs	$	6
Higher plant generation costs	2
Higher license fees and permits	1
Lower employee benefit costs	(5		)
Other (including fleet, insurance and materials and supplies costs)	5
Total increase in other operating and maintenance expenses	$	9

Income taxes — Income tax expense decreased by approximately $0.2 million for the first nine months of 2008 compared with the first nine months of 2007. The effective tax rate was 42.3 percent for the first nine months of 2008, compared with 40.6 percent for the same period in 2007. The decrease in income tax expense and the increase in the effective tax rate were primarily due to a decrease in pretax income.

Regulation

Summary of Recent Regulatory Developments

The FERC has jurisdiction over rates for electric transmission service in interstate commerce and electricity sold at wholesale, hydro facility licensing, natural gas transportation, accounting practices and certain other activities of SPS. State and local agencies have jurisdiction over many of SPS’ 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 SPS Annual Report on Form 10-K for the year ended Dec. 31, 2007. In addition to the matters discussed below, see Note 5 to the financial statements for a discussion of other regulatory matters.

FERC Tie Line Investigation — In October 2007, the FERC Office of Enforcement, Division of Investigations (DOI), commenced a non-public investigation of use of network transmission service across the Lamar Tie Line, a transmission facility that connects PSCo, an affiliate of SPS, and SPS. Xcel Energy is fully cooperating with the DOI investigation. In July 2008, the DOI issued a preliminary report alleging Xcel Energy violated FERC policies and rules and approved tariffs. The report represents the preliminary conclusions of the DOI and is subject to additional procedures. The report does not constitute a finding by the FERC, which may, among other things, accept, modify or reject any or all of the preliminary conclusions set forth in the report. Xcel Energy disagrees with the preliminary report and has responded to the DOI allegations; SPS is not able to predict the outcome of the investigation or what, if any, actions the FERC may take. As previously discussed under “Item 1A – Risk Factors” in Xcel Energy’s 2007 Annual Report on Form 10-K, the Energy Policy Act of 2005 has increased the FERC’s civil penalty authority for violation of FERC statutes, rules and orders. Given the preliminary nature of this matter, Xcel Energy is unable to determine if the resolution of this matter will have a material adverse impact on operations, cash flows or financial condition.

Electric Reliability Standards Matters — In April 2008, a self-report was filed with Southwest Power Pool (SPP) indicating that certain tests of generation station batteries had not been completed in accordance with Xcel Energy’s adopted maintenance plan for generation station relays and batteries. In June 2008, PSCo was subject to an audit of its compliance with North American Electric Reliability Corporation (NERC) and regional reliability standards by Western Electricity Coordinating Council (WECC), the NERC Regional Entity for the PSCo system. In response to information identified during the audit, Xcel Energy conducted a comprehensive review of the maintenance records for all relay devices on the SPS transmission system. That review found SPS did not have documentation demonstrating that all relay devices on the SPS system had been maintained on the schedule in Xcel Energy’s adopted maintenance plan. In June 2008, SPS filed a self-report regarding the maintenance plan violations with the SPP, the NERC Regional Entity for the SPS system. In September 2008, as a result of a review of Xcel Energy’s procedures implementing certain NERC critical infrastructure protection standards applicable to control centers effective July 1, 2008, SPS filed a self-report with the SPP disclosing certain deficiencies in requirements applicable to access to critical infrastructure assets for the period July to September 2008. SPS filed a mitigation plan with the SPP within 30 days of the self-reports discussing how the deficiencies were corrected Xcel Energy is uncertain if the self-reports will result in financial penalties being imposed on SPS.

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Other Regulatory Matters

Performance-Based Regulation and Quality of Service Requirements — In Texas, SPS is subject to a quality of service plan requiring SPS to comply with electric service reliability performance targets. In January 2008, the PUCT staff served SPS with notice that it had initiated an investigation to determine whether SPS is in compliance with the Texas Statutes and PUCT rules on reliability and continuity of service. SPS agreed to settle this compliance issue with a $48,000 penalty.

Texas Energy Efficiency Cost Recovery Factor (EECRF) Rider — On June 2, 2008, SPS filed with the PUCT for approval of an EECRF Rider. PUCT regulations established the mechanism under which electric utilities may recover costs associated with providing energy efficiency programs. That mechanism, an EECRF Rider, must be included in a utility’s tariff and may be established in a utility’s base rate case or through a separate request seeking to establish an EECRF. In accordance with this rule, SPS has removed its energy efficiency costs from its recent base rate proceeding, and has requested implementation of its EECRF Rider to recover the remaining unamortized balance of historic costs and its projected 2008 and 2009 energy efficiency costs. SPS requests that the rider be implemented on Jan. 1, 2009. On Sept. 15, 2008, the PUCT concluded that the rule under which the application was filed does not apply to SPS and the energy efficiency costs could be recovered in the pending Texas retail base rate case.

Texas Interruptible Credit Option and Saver’s Switch — On May 13, 2008, SPS filed an application with the PUCT and each of the 80 municipalities in SPS Texas service territory with original rate jurisdiction to revise its Interruptible Credit Option (ICO) tariff and to institute a new Saver’s Switch tariff for residential and small commercial customers. The purpose of these programs is to mitigate peak demand on SPS’ system starting with the 2009 summer peak. The issue of cost recovery will be handled in the Texas rate case. SPS filed its unopposed settlement and proposed final order in October 2008. The tariffs will be effective Jan. 1, 2009.

Texas Renewable Energy Zones — In 2007, the PUCT designated competitive renewable energy zones (CREZs), which are regions of the state that are sufficient to develop renewable energy generation sources, such as wind. Several CREZ areas within the SPS service region were designated for potential development. A statewide study conducted by the Electric Reliability Council of Texas (ERCOT) identifies the Texas panhandle as having the top four of the state’s primary areas for wind energy expansion. On Aug. 15, 2008, the PUCT issued a final order identifying a transmission plan to deliver approximately 18,000 MW of wind energy to load centers in ERCOT. The plan includes lines in the Texas Panhandle. Cost of this transmission plan is almost $5 billion, not including collector lines, and it will be paid for by ERCOT customers, not by SPS. A proceeding is now underway at the PUCT to select transmission providers to construct CREZ lines and associated facilities. This step is expected to be completed in the first quarter 2009, after which transmission providers will begin preparing certification applications.

New Mexico Energy Efficiency Disincentive Rulemaking — During the last legislative session, increased energy efficiency goals and more affirmative disincentive language were adopted. The NMPRC is currently holding a rulemaking to update the energy efficiency rule, consistent with the legislative changes.

LPP Purchase Power Agreement — The LPP project is a natural gas combined cycle 604 MW plant near Hobbs, New Mexico. SPS has a purchase power agreement, which was executed in 2006, that provides for SPS to have exclusive rights to dispatch the facility. The LPP plant started commercial operations on Sept. 16, 2008 at which time SPS began taking energy and the proposed rates went into effect, subject to refund. The FERC set the rate filing for hearings and settlement procedures and the case is currently in settlement discussions. The ultimate outcome of the rate filings is not known at this time.

Item 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

SPS 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 (Exchange Act) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports under the Exchange Act 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 the end of the period covered by this report, based on an evaluation carried out under the supervision and with the participation of SPS’ management, including the CEO and the CFO, of the effectiveness of our disclosure controls and procedures, the CEO and CFO have concluded that SPS’ disclosure controls and procedures are effective.

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Internal Control Over Financial Reporting

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

Part II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

In the normal course of business, various lawsuits and claims have arisen against SPS. Management, after consultation with legal counsel, has recorded an estimate of the probable cost of settlement or other disposition for such matters. See Notes 5 and 6 of the financial statements in this Quarterly Report on Form 10-Q for further discussion of legal proceedings, including Regulatory Matters and Commitments and Contingent Liabilities, which are hereby incorporated by reference. Reference also is made to Item 3 and Notes 11 and 12 of SPS’ Annual Report on Form 10-K for the year ended Dec. 31, 2007 for a description of certain legal proceedings presently pending.

Item 1A. RISK FACTORS

SPS’ risk factors are documented in Item 1A of Part I of its 2007 Annual Report on Form 10-K, which is incorporated herein by reference. As a result of developments in the financial markets since the filing of the 2007 Annual Report on Form 10-K, we are providing updates below of the risk factors as follows.

We are subject to credit risks.

Credit risk includes the risk that our retail customers will not pay their bills, which may lead to a reduction in liquidity and an eventual increase in bad debt. Retail credit risk is comprised of numerous factors including the overall level of economic activity in our various service territories and price of products and services provided.

Credit risk also includes the risk that short-term wholesale and commodity trading counterparties that owe us money or product will breach their obligations. Should the counterparties to these arrangements fail to perform, we may be forced to enter into alternative arrangements. In that event, our financial results could be adversely affected and we could incur losses.

SPS does have additional indirect credit exposures to various financial institutions in the form of letters of credit provided as security by power suppliers under various long-term physical purchased power contracts. If any of the credit ratings of the letter of credit issuers were to drop below the designated investment grade rating stipulated in the underlying long term purchased power contracts, the supplier would need to replace that security with an acceptable substitute. If the security were not replaced, the party would be in technical default under the contract, which would enable SPS to exercise its contractual rights.

Economic conditions could negatively impact our business.

Our operations are affected by local, national and worldwide economic conditions. The consequences of a prolonged recession may include a lower level of economic activity and uncertainty regarding energy prices and the capital and commodity markets. A lower level of economic activity might result in a decline in energy consumption, which may adversely affect our revenues and future growth. Instability in the financial markets, as a result of recession or otherwise, also may affect the cost of capital and our ability to raise capital, which are discussed in greater detail in the Capital Markets risk section in the 2007 Annual Report on Form 10-K.

Current economic conditions may be exacerbated by insufficient financial sector liquidity leading to potential increased unemployment, which may impact customers ability to pay timely, increase customer bankruptcies, and may lead to increased bad debt. It is expected that commercial and industrial customers will be impacted first with residential customers following, if such circumstances occur. See credit risk section for more related information.

Further worldwide economic activity has an impact on the demand for basic commodities needed for utility infrastructure, such as steel, copper, aluminum, etc., which may impact our ability to acquire sufficient supplies. Additionally, the cost of those commodities may be higher than expected.

PART I - FINANCIAL INFORMATION

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

PART II - OTHER INFORMATION

Item 1.		Legal Proceedings
Item 1A.		Risk Factors
Item 6.		Exhibits

SIGNATURES

Certifications Pursuant to Section 302
Certifications Pursuant to Section 906
Statement Pursuant to Private Litigation

*3.01		Amended and Restated Articles of Incorporation dated Sept. 30, 1997 (Exhibit 3(a)(2) to Form 10-K (file no. 001-03789) dated March 3, 1998).
*3.02		By-laws dated Sept. 29, 1997 (Exhibit 3(b)(2) to Form 10-K (file no. 001-03789) dated March 3, 1998).
31.01		Principal Executive Officer’s and Principal Financial Officer’s certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.01		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.01		Statement pursuant to Private Securities Litigation Reform Act of 1995.

	/s/ TERESA S. MADDEN
	Teresa S. Madden
	Vice President and Controller


	/s/ BENJAMIN G.S. FOWKE III
	Benjamin G.S. Fowke III
	Vice President and Chief Financial Officer

Date: Oct. 24, 2008

	/s/ DAVID L. EVES
	David L. Eves
	President and Chief Executive Officer

Date: Oct. 24, 2008

	/s/ BENJAMIN G.S. FOWKE III
	Benjamin G.S. Fowke III
	Vice President and Chief Financial Officer

For the quarterly period ended September 30, 2008

For the transition period from to

Commission File Number: 001-03789

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Environmental Contingencies

Other Environmental Requirements

Base Electric Margin

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Non-Fuel Operating Expense and Other Items

Part II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

Item 6. EXHIBITS

(1)		The Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)		The information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of SPS as of the dates and for the periods expressed in the Form 10-Q.

·		Economic conditions, including inflation rates, monetary fluctuations and their impact on capital expenditures;
·		The risk of a significant slowdown in growth or decline in the U.S. economy, the risk of delay in growth recovery in the U.S. economy or the risk of increased cost for insurance premiums, security and other items;
·		Trade, monetary, fiscal, taxation and environmental policies of governments, agencies and similar organizations in geographic areas where SPS has a financial interest;
·		Customer business conditions, including demand for their products or services and supply of labor and materials used in creating their products and services;
·		Financial or regulatory accounting principles or policies imposed by the Financial Accounting Standards Board, the SEC, the Federal Energy Regulatory Commission and similar entities with regulatory oversight;
·		Availability or cost of capital such as changes in: interest rates; market perceptions of the utility industry, SPS, Xcel Energy or any of its other subsidiaries; or security ratings;
·		Factors affecting utility operations such as unusual weather conditions; catastrophic weather-related damage; unscheduled generation outages, maintenance or repairs; unanticipated changes to fossil fuel or natural gas supply costs or availability due to higher demand, shortages, transportation problems or other developments; environmental incidents; or electric transmission or gas pipeline constraints;
·		Employee workforce factors, including loss or retirement of key executives, collective bargaining agreements with union employees, or work stoppages;
·		Increased competition in the utility industry;
·		State and federal legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rate structures and affect the speed and degree to which competition enters the electric market; industry restructuring initiatives; transmission system operation and/or administration initiatives; recovery of investments made under traditional regulation; nature of competitors entering the industry; retail wheeling; a new pricing structure; and former customers entering the generation market;
·		Rate-setting policies or procedures of regulatory entities, including environmental externalities, which are values established by regulators assigning environmental costs to each method of electricity generation when evaluating generation resource options;
·		Social attitudes regarding the utility and power industries;
·		Risks associated with the California power market;
·		Cost and other effects of legal and administrative proceedings, settlements, investigations and claims;
·		Technological developments that result in competitive disadvantages and create the potential for impairment of existing assets;
·		Risks associated with implementation of new technologies; and
·		Other business or investment considerations that may be disclosed from time to time in SPS’ SEC filings or in other publicly disseminated written documents.