UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2007 | |
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or | |
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o | 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: 001-3280
Public Service Company of Colorado
(Exact name of registrant as specified in its charter)
Colorado |
| 84-0296600 |
(State or other jurisdiction of |
| (I.R.S. Employer Identification No.) |
incorporation or organization) |
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1225 17th Street, Denver |
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Colorado |
| 80202 |
(Address of principal executive |
| (Zip Code) |
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. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer o Accelerated Filer o Non-Accelerated Filer x
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 July 30, 2007 |
Common Stock, $0.01 par value |
| 100 shares |
Public Service Company of Colorado meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this Form 10-Q with the reduced disclosure format specified in General Instruction H (2) to such Form 10-Q.
Table of Contents
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
Certifications Pursuant to Section 302 |
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Certifications Pursuant to Section 906 |
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Statement Pursuant to Private Litigation |
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This Form 10-Q/A is filed by Public Service Co. of Colorado (PSCo). PSCo is a wholly owned subsidiary of Xcel Energy Inc. (Xcel Energy). Additional information on Xcel Energy is available on various filings with the Securities and Exchange Commission (SEC).
2
As previously reported in our Current Report on Form 8-K filed on June 20, 2007, a settlement in principle was reached between Xcel Energy and representatives of the United States government on June 19, 2007 concerning a tax dispute related to corporate-owned life insurance (COLI) policies purchased on the lives of Public Service Company of Colorado (PSCo) employees. PSCo is a wholly owned subsidiary of Xcel Energy. PSR Investments, Inc. (PSRI), a wholly owned subsidiary of PSCo, owned and managed these COLI life insurance policies.
The terms of the settlement have been previously reported. The settlement has been implemented and the policies have been surrendered.
As a result of the settlement in principle, which required the surrender of the COLI policies, PSCo had previously classified all amounts related to PSRI as a discontinued operation for all periods presented in our Form 10-Q for the period ended June 30, 2007.
Pursuant to a routine review of PSCo’s periodic reports by the Securities and Exchange Commission, management reassessed the appropriateness of the treatment of PSRI as a discontinued operation under SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” and determined that PSRI’s operations, including the impact of the IRS settlement, should be presented for financial reporting purposes as part of continuing operations rather than as discontinued operations as previously reported in the Form 10-Q.
This Amendment No. 1 on Form 10-Q/A (the “Report”) is being filed to amend and restate PSCo’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007, that was filed on July 27, 2007 (the “Original Report”). The purpose of this amendment is to reflect the restatement of PSCo’s previously issued financial statement as of and for the three and six month periods ended June 30, 2007 and 2006, and update other information, including Management’s Discussion and Analysis to reflect the restatement, in each case to reflect PSRI as a continuing operation. These revised sections of this report have not otherwise been updated for events occurring after the date of the financial statements, except to reflect the COLI tax settlement and the related treatment of PSRI as a continuing operation and certain significant subsequent events included in Notes 4 and 13 to the consolidated financial statements. All other information is unchanged and reflects the disclosures made at the time of the original filing. In addition, currently dated certifications from Xcel Energy’s Chief Executive Officer and Chief Financial Officer have been included as exhibits to this Form 10-Q/A.
3
PART 1. FINANCIAL INFORMATION
PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(Thousands of dollars)
|
| Three Months Ended June 30, |
| Six Months Ended June 30, |
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| 2007 |
| 2006 |
| 2007 |
| 2006 |
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Operating revenues |
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Electric utility |
| $ | 638,142 |
| $ | 599,812 |
| $ | 1,274,642 |
| $ | 1,271,931 |
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Natural gas utility |
| 190,157 |
| 160,017 |
| 706,551 |
| 742,918 |
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Steam and other |
| 7,299 |
| 7,402 |
| 18,096 |
| 19,407 |
| ||||
Total operating revenues |
| 835,598 |
| 767,231 |
| 1,999,289 |
| 2,034,256 |
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Operating expenses |
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Electric fuel and purchased power |
| 350,397 |
| 350,422 |
| 718,130 |
| 766,625 |
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Cost of natural gas sold and transported |
| 118,155 |
| 92,075 |
| 526,510 |
| 576,545 |
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Cost of sales — steam and other |
| 2,165 |
| 3,660 |
| 7,011 |
| 11,202 |
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Other operating and maintenance expenses |
| 143,148 |
| 135,946 |
| 288,344 |
| 278,305 |
| ||||
Depreciation and amortization |
| 66,894 |
| 59,534 |
| 131,932 |
| 118,520 |
| ||||
Taxes (other than income taxes) |
| 21,646 |
| 20,246 |
| 45,488 |
| 44,624 |
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Total operating expenses |
| 702,405 |
| 661,883 |
| 1,717,415 |
| 1,795,821 |
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Operating income |
| 133,193 |
| 105,348 |
| 281,874 |
| 238,435 |
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Interest and other income (expense) — net |
| (3,358 | ) | (3,405 | ) | (5,482 | ) | (6,470 | ) | ||||
Allowance for funds used during construction — equity |
| 2,697 |
| 121 |
| 4,742 |
| 263 |
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Interest charges and financing costs |
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Interest charges — includes other financing costs of $1,368, $1,529, $2,750 and $3,038, respectively |
| 32,573 |
| 34,006 |
| 66,674 |
| 69,042 |
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Interest and penalties related to COLI settlement |
| 41,211 |
| — |
| 41,211 |
| — |
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Allowance for funds used during construction — debt |
| (3,037 | ) | (3,032 | ) | (5,168 | ) | (5,465 | ) | ||||
Total interest charges and financing costs |
| 70,747 |
| 30,974 |
| 102,717 |
| 63,577 |
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Income before income taxes |
| 61,785 |
| 71,090 |
| 178,417 |
| 168,651 |
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Income taxes |
| 47,647 |
| 18,898 |
| 78,530 |
| 39,612 |
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Net income |
| $ | 14,138 |
| $ | 52,192 |
| $ | 99,887 |
| $ | 129,039 |
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See Notes to Consolidated Financial Statements
4
PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Thousands of dollars)
|
| Six Months Ended June 30, |
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| 2007 |
| 2006 |
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Operating activities |
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Net income |
| $ | 99,887 |
| $ | 129,039 |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Depreciation and amortization |
| 137,121 |
| 124,815 |
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Deferred income taxes |
| 6,125 |
| 19,150 |
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Amortization of investment tax credits |
| (1,962 | ) | (1,974 | ) | ||
Allowance for equity funds used during construction |
| (4,742 | ) | (263 | ) | ||
Net realized and unrealized hedging and derivative transactions |
| 3,420 |
| (33,641 | ) | ||
Changes in operating assets and liabilities: |
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Accounts receivable |
| 25,209 |
| 152,615 |
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Accrued unbilled revenues |
| (51,144 | ) | 56,921 |
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Inventories |
| 69,661 |
| 87,253 |
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Recoverable purchased natural gas and electric energy costs |
| 156,337 |
| 210,898 |
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Prepayments and other |
| 5,303 |
| 8,764 |
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Accounts payable |
| (63,277 | ) | (233,720 | ) | ||
Net regulatory assets and liabilities |
| 1,702 |
| (24,128 | ) | ||
Other current liabilities |
| 85,845 |
| (36,395 | ) | ||
Change in other noncurrent assets |
| (38,104 | ) | 8,229 |
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Change in other noncurrent liabilities |
| (8,515 | ) | (6,155 | ) | ||
Net cash provided by operating activities |
| 422,866 |
| 461,408 |
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Investing activities |
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Capital/construction expenditures |
| (330,465 | ) | (268,382 | ) | ||
Allowance for equity funds used during construction |
| 4,742 |
| 263 |
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Investments in utility money pool arrangement |
| (147,100 | ) | — |
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Repayments from utility money pool arrangement |
| 147,100 |
| — |
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Other investments |
| (6,787 | ) | (4,648 | ) | ||
Net cash used in investing activities |
| (332,510 | ) | (272,767 | ) | ||
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Financing activities |
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Short-term debt repayments, net |
| (197,850 | ) | (310,604 | ) | ||
Borrowings under utility money pool arrangement |
| 367,800 |
| 576,200 |
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Repayments under utility money pool arrangement |
| (268,800 | ) | (393,600 | ) | ||
Repayment of long-term debt, including reacquisition premiums |
| (100,691 | ) | (125,668 | ) | ||
Capital contribution from parent |
| 240,176 |
| 193,185 |
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Dividends paid to parent |
| (130,292 | ) | (129,655 | ) | ||
Net cash used in financing activities |
| (89,657 | ) | (190,142 | ) | ||
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Net increase (decrease) in cash and cash equivalents |
| 699 |
| (1,501 | ) | ||
Cash and cash equivalents at beginning of period |
| 3,011 |
| 3,662 |
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Cash and cash equivalents at end of period |
| $ | 3,710 |
| $ | 2,161 |
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Supplemental disclosure of cash flow information: |
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Cash paid for interest (net of amounts capitalized) |
| $ | 59,779 |
| $ | 67,095 |
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Cash paid for income taxes (net of refunds received) |
| 39,816 |
| 9,491 |
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Supplemental disclosure of non-cash investing transactions: |
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Property, plant and equipment additions in accounts payable |
| $ | 11,798 |
| $ | 6,858 |
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See Notes to Consolidated Financial Statements
5
PUBLIC SERVICE CO. OF COLORADO AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Thousands of dollars)
|
| June 30, 2007 |
| Dec. 31, 2006 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
| $ | 3,710 |
| $ | 3,011 |
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Accounts receivable, net of allowance for bad debts of $18,161 and $18,415, respectively |
| 306,881 |
| 355,738 |
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Accounts receivable from affiliates |
| 32,269 |
| 8,621 |
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Accrued unbilled revenues |
| 250,505 |
| 199,361 |
| ||
Recoverable purchased natural gas and electric energy costs |
| 1,490 |
| 157,827 |
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Materials and supplies inventories |
| 44,475 |
| 43,029 |
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Fuel inventories |
| 36,851 |
| 40,997 |
| ||
Natural gas inventories |
| 88,606 |
| 155,567 |
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Derivative instruments valuation |
| 49,918 |
| 28,111 |
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Deferred income taxes |
| 62,279 |
| 62,791 |
| ||
Prepayments and other |
| 27,177 |
| 14,654 |
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Total current assets |
| 904,161 |
| 1,069,707 |
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Property, plant and equipment, at cost: |
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Electric utility plant |
| 6,504,322 |
| 6,409,194 |
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Natural gas utility plant |
| 1,864,463 |
| 1,825,560 |
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Common utility and other property |
| 738,362 |
| 725,864 |
| ||
Construction work in progress |
| 587,631 |
| 429,878 |
| ||
Total property, plant and equipment |
| 9,694,778 |
| 9,390,496 |
| ||
Less accumulated depreciation |
| (3,004,572 | ) | (2,912,233 | ) | ||
Net property, plant and equipment |
| 6,690,206 |
| 6,478,263 |
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Other assets: |
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Regulatory assets |
| 542,022 |
| 589,016 |
| ||
Derivative instruments valuation |
| 153,584 |
| 161,502 |
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Other investments |
| 10,334 |
| 19,346 |
| ||
Other |
| 82,945 |
| 45,785 |
| ||
Total other assets |
| 788,885 |
| 815,649 |
| ||
Total assets |
| $ | 8,383,252 |
| $ | 8,363,619 |
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LIABILITIES AND EQUITY |
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Current liabilities: |
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Current portion of long-term debt |
| $ | 1,406 |
| $ | 101,379 |
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Short-term debt |
| 174,650 |
| 372,500 |
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Accounts payable |
| 340,261 |
| 385,724 |
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Accounts payable to affiliates |
| 18,909 |
| 30,291 |
| ||
Borrowings under utility money pool arrangement |
| 99,000 |
| — |
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Taxes accrued |
| 83,738 |
| 84,960 |
| ||
Dividends payable to parent |
| 65,774 |
| 64,778 |
| ||
Derivative instruments valuation |
| 38,674 |
| 38,616 |
| ||
Accrued interest |
| 55,480 |
| 35,362 |
| ||
Other |
| 137,298 |
| 74,381 |
| ||
Total current liabilities |
| 1,015,190 |
| 1,187,991 |
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Deferred credits and other liabilities: |
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|
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Deferred income taxes |
| 1,011,774 |
| 1,004,027 |
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Deferred investment tax credits |
| 57,073 |
| 59,035 |
| ||
Regulatory liabilities |
| 462,360 |
| 470,255 |
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Pension and employee benefit obligations |
| 293,997 |
| 301,277 |
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Customers advances |
| 277,439 |
| 279,011 |
| ||
Derivative instruments valuation |
| 143,968 |
| 156,623 |
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Asset retirement obligations |
| 44,099 |
| 43,335 |
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Other liabilities |
| 14,310 |
| 7,750 |
| ||
Total deferred credits and other liabilities |
| 2,305,020 |
| 2,321,313 |
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Commitments and contingent liabilities |
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Capitalization: |
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Long-term debt |
| 1,844,884 |
| 1,845,278 |
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Common Stock — authorized 100 shares of $0.01 par value; outstanding 100 shares |
| — |
| — |
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Additional paid in capital |
| 2,651,380 |
| 2,411,204 |
| ||
Retained earnings |
| 553,504 |
| 585,219 |
| ||
Accumulated other comprehensive income |
| 13,274 |
| 12,614 |
| ||
Total common stockholder’s equity |
| 3,218,158 |
| 3,009,037 |
| ||
Total liabilities and equity |
| $ | 8,383,252 |
| $ | 8,363,619 |
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See Notes to Consolidated Financial Statements
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments necessary to present fairly the financial position of Public Service Company of Colorado (PSCo) and its subsidiaries as of June 30, 2007, and Dec. 31, 2006; the results of its operations for the three and six months ended June 30, 2007 and 2006; and its cash flows for the six months ended June 30, 2007 and 2006. Due to the seasonality of electric and natural gas sales of PSCo, 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 consolidated financial statements in PSCo’s Current Report on Form 8K/A filed on Dec. 14, 2007, appropriately represent, in all material respects, the current status of accounting policies and are incorporated herein by reference.
Income Taxes — Consistent with prior periods and upon adoption of Financial Accounting Standard Board (FASB) Interpretation No. 48 — “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109”, PSCo records interest and penalties related to income taxes as interest charges in the Consolidated Statements of Income.
Reclassifications — Certain amounts in the Consolidated Statements of Cash Flows have been reclassified from prior-period presentation to conform to the 2007 presentation. The reclassifications reflect the presentation of unbilled revenues, recoverable purchased natural gas and electric energy costs and regulatory assets and liabilities as separate items rather than components of other assets and other liabilities within net cash provided by operating activities. In addition, activity related to derivative transactions have been combined into net realized and unrealized hedging and derivative transactions. These reclassifications did not affect total net cash provided by (used in) operating, investing or financing activities within the Consolidated Statements of Cash Flows.
2. Restatement of Financial Statements
Subsequent to the issuance of PSCo’s consolidated financial statements for the quarter ended June 30, 2007, management determined that PSR Investments, Inc. (PSRI), a wholly owned subsidiary of PSCo should not have been presented as a discontinued operation, as previously reported in the Form 10-Q, rather, PSRI should have been included as part of continuing operations. As a result, the accompanying consolidated financial statements have been restated.
As previously reported in our Current Report on Form 8-K filed on June 20, 2007, a settlement in principle was reached between Xcel Energy and representatives of the United States government on June 19, 2007 concerning a tax dispute related to corporate-owned life insurance (COLI) policies purchased on the lives of Public Service Company of Colorado (PSCo) employees. PSCo is a wholly owned subsidiary of Xcel Energy. PSRI owned and managed these COLI life insurance policies.
The terms of the settlement have been previously reported. The settlement has been implemented and the policies have been surrendered.
As a result of the settlement in principle, which required the surrender of the COLI policies, PSCo had previously classified all amounts related to PSRI as a discontinued operation for all periods presented in its Form 10-Q for the period ended June 30, 2007, that was filed on July 30, 2007.
Pursuant to a routine review of PSCo’s periodic reports by the staff of the Securities and Exchange Commission, management reassessed the appropriateness of the treatment of PSRI as a discontinued operation under SFAS 144 “Accounting for the Impairment or Disposal of Long-Lived Assets” and determined that PSRI operations, including the impact of the IRS settlement, should be presented as part of continuing operations for financial reporting purposes. The inclusion of PSRI as part of continuing operations impacted Xcel Energy’s effective tax rate, which caused a change in previously reported income taxes. The effect of presenting PSRI as part of continuing operations rather than as discontinued operations as previously reported in the Form 10-Q is reflected in the tables below:
7
|
| Consolidated Statements of Income |
| ||||||||||||||||
|
| 2007 |
| 2006 |
| ||||||||||||||
(Thousands of dollars) |
| As Previously |
| Adjustment |
| As Restated |
| As Previously |
| Adjustment |
| As Restated |
| ||||||
Other operating and maintenance expenses |
| $ | 141,759 |
| $ | 1,389 |
| $ | 143,148 |
| $ | 134,902 |
| $ | 1,044 |
| $ | 135,946 |
|
Taxes (other than income taxes) |
| 21,645 |
| 1 |
| 21,646 |
| 20,245 |
| 1 |
| 20,246 |
| ||||||
Total operating expenses |
| 701,015 |
| 1,390 |
| 702,405 |
| 660,838 |
| 1,045 |
| 661,883 |
| ||||||
Operating income |
| 134,583 |
| (1,390 | ) | 133,193 |
| 106,393 |
| (1,045 | ) | 105,348 |
| ||||||
Interest and other income (expense), net |
| 1,663 |
| (5,021 | ) | (3,358 | ) | 2,325 |
| (5,730 | ) | (3,405 | ) | ||||||
Interest charges |
| 32,573 |
| — |
| 32,573 |
| 33,931 |
| 75 |
| 34,006 |
| ||||||
Interest and penalties related to COLI settlement |
| — |
| 41,211 |
| 41,211 |
| — |
| — |
| — |
| ||||||
Total interest charges and financing costs |
| 29,536 |
| 41,211 |
| 70,747 |
| 30,899 |
| 75 |
| 30,974 |
| ||||||
Income from continuing operations before income taxes |
| 109,407 |
| (47,622 | ) | 61,785 |
| 77,940 |
| (6,850 | ) | 71,090 |
| ||||||
Income taxes |
| 38,911 |
| 8,736 |
| 47,647 |
| 27,867 |
| (8,969 | ) | 18,898 |
| ||||||
Income from continuing operations |
| 70,496 |
| (56,358 | ) | 14,138 |
| 50,073 |
| 2,119 |
| 52,192 |
| ||||||
Income (loss) from discontinued operations |
| (52,040 | ) | 52,040 |
| — |
| 2,119 |
| (2,119 | ) | — |
| ||||||
Net income |
| 18,456 |
| (4,318 | ) | 14,138 |
| 52,192 |
| — |
| 52,192 |
| ||||||
|
| Consolidated Statements of Income |
| ||||||||||||||||
|
| 2007 |
| 2006 |
| ||||||||||||||
(Thousands of dollars) |
| As Previously Reported |
| Adjustment |
| As Restated |
| As Previously Reported |
| Adjustment |
| As Restated |
| ||||||
Other operating and maintenance expenses |
| $ | 286,114 |
| $ | 2,230 |
| $ | 288,344 |
| $ | 276,285 |
| $ | 2,020 |
| $ | 278,305 |
|
Taxes (other than income taxes) |
| 45,486 |
| 2 |
| 45,488 |
| 44,622 |
| 2 |
| 44,624 |
| ||||||
Total operating expenses |
| 1,715,183 |
| 2,232 |
| 1,717,415 |
| 1,793,799 |
| 2,022 |
| 1,795,821 |
| ||||||
Operating income |
| 284,106 |
| (2,232 | ) | 281,874 |
| 240,457 |
| (2,022 | ) | 238,435 |
| ||||||
Interest and other income (expense), net |
| 3,405 |
| (8,887 | ) | (5,482 | ) | 3,387 |
| (9,857 | ) | (6,470 | ) | ||||||
Interest charges |
| 66,674 |
| — |
| 66,674 |
| 68,967 |
| 75 |
| 69,042 |
| ||||||
Interest and penalties related to COLI settlement |
| — |
| 41,211 |
| 41,211 |
| — |
| — |
| — |
| ||||||
Total interest charges and financing costs |
| 61,506 |
| 41,211 |
| 102,717 |
| 63,502 |
| 75 |
| 63,577 |
| ||||||
Income from continuing operations before income taxes |
| 230,747 |
| (52,330 | ) | 178,417 |
| 180,605 |
| (11,954 | ) | 168,651 |
| ||||||
Income taxes |
| 81,692 |
| (3,162 | ) | 78,530 |
| 61,664 |
| (22,052 | ) | 39,612 |
| ||||||
Income from continuing operations |
| 149,055 |
| (49,168 | ) | 99,887 |
| 118,941 |
| 10,098 |
| 129,039 |
| ||||||
Income (loss) from discontinued operations |
| (44,850 | ) | 44,850 |
| — |
| 10,098 |
| (10,098 | ) | — |
| ||||||
Net income |
| 104,205 |
| (4,318 | ) | 99,887 |
| 129,039 |
| — |
| 129,039 |
| ||||||
8
|
| Consolidated Balance Sheet |
| ||||||||||||||||
|
| June 30, 2007 |
| December 31, 2006 |
| ||||||||||||||
(Thousands of dollars) |
| As Previously |
| Adjustment |
| As Restated |
| As Previously |
| Adjustment |
| As Restated |
| ||||||
Cash and cash equivalents |
| $ | 963 |
| $ | 2,747 |
| $ | 3,710 |
| $ | 3,011 |
| $ | — |
| $ | 3,011 |
|
Accounts receivable |
| 304,382 |
| 2,499 |
| 306,881 |
| 332,933 |
| 22,805 |
| 355,738 |
| ||||||
Prepayments and other |
| 10,994 |
| 16,183 |
| 27,177 |
| 14,284 |
| 370 |
| 14,654 |
| ||||||
Deferred income taxes |
| 51,119 |
| 11,160 |
| 62,279 |
| 47,075 |
| 15,716 |
| 62,791 |
| ||||||
Current assets held for sale and related to discontinued operations |
| 32,589 |
| (32,589 | ) | — |
| 52,593 |
| (52,593 | ) | — |
| ||||||
Total current assets |
| 904,161 |
| — |
| 904,161 |
| 1,083,409 |
| (13,702 | ) | 1,069,707 |
| ||||||
Other investments |
| 10,217 |
| 117 |
| 10,334 |
| 11,136 |
| 8,210 |
| 19,346 |
| ||||||
Other assets |
| 80,190 |
| 2,755 |
| 82,945 |
| 45,785 |
| — |
| 45,785 |
| ||||||
Noncurrent assets held for sale and related to discontinued operations |
| 25,128 |
| (25,128 | ) | — |
| 15,779 |
| (15,779 | ) | — |
| ||||||
Total other assets |
| 811,141 |
| (22,256 | ) | 788,885 |
| 823,218 |
| (7,569 | ) | 815,649 |
| ||||||
Total assets |
| 8,405,508 |
| (22,256 | ) | 8,383,252 |
| 8,384,890 |
| (21,271 | ) | 8,363,619 |
| ||||||
Accounts payable |
| 337,773 |
| 2,488 |
| 340,261 |
| 385,054 |
| 670 |
| 385,724 |
| ||||||
Taxes accrued |
| 63,466 |
| 20,272 |
| 83,738 |
| 98,662 |
| (13,702 | ) | 84,960 |
| ||||||
Accrued interest |
| 32,512 |
| 22,968 |
| 55,480 |
| 35,362 |
| — |
| 35,362 |
| ||||||
Current liabilities held for sale and related to discontinued operations |
| 41,410 |
| (41,410 | ) | — |
| 670 |
| (670 | ) | — |
| ||||||
Total current liabilities |
| 1,010,872 |
| 4,318 |
| 1,015,190 |
| 1,201,693 |
| (13,702 | ) | 1,187,991 |
| ||||||
Deferred income taxes |
| 1,034,030 |
| (22,256 | ) | 1,011,774 |
| 1,011,591 |
| (7,564 | ) | 1,004,027 |
| ||||||
Other liabilities |
| 14,310 |
| — |
| 14,310 |
| 7,755 |
| (5 | ) | 7,750 |
| ||||||
Total deferred credits and other liabilities |
| 2,327,276 |
| (22,256 | ) | 2,305,020 |
| 2,328,882 |
| (7,569 | ) | 2,321,313 |
| ||||||
Retained earnings |
| 557,822 |
| (4,318 | ) | 553,504 |
| 585,219 |
| — |
| 585,219 |
| ||||||
Total common stockholder’s equity |
| 3,222,476 |
| (4,318 | ) | 3,218,158 |
| 3,009,037 |
| — |
| 3,009,037 |
| ||||||
Total liabilities and equity |
| 8,405,508 |
| (22,256 | ) | 8,383,252 |
| 8,384,890 |
| (21,271 | ) | 8,363,619 |
| ||||||
9
|
| Consolidated Cash Flow Statement |
| ||||||||||||||||
|
| 2007 |
| 2006 |
| ||||||||||||||
(Thousands of dollars) |
| As Previously |
| Adjustment |
| As Restated |
| As Previously |
| Adjustment |
| As Restated |
| ||||||
Net income |
| $ | 104,205 |
| $ | (4,318 | ) | $ | 99,887 |
| $ | — |
| $ | — |
| $ | — |
|
Remove loss (income) from discontinued operations |
| 44,850 |
| (44,850 | ) | — |
| (10,098 | ) | 10,098 |
| — |
| ||||||
Deferred income taxes |
| 16,261 |
| (10,136 | ) | 6,125 |
| 15,518 |
| 3,632 |
| 19,150 |
| ||||||
Change in accounts receivable |
| 4,903 |
| 20,306 |
| 25,209 |
| 148,612 |
| 4,003 |
| 152,615 |
| ||||||
Change in prepayments and other |
| 5,316 |
| (13 | ) | 5,303 |
| 8,770 |
| (6 | ) | 8,764 |
| ||||||
Change in accounts payable |
| (65,095 | ) | 1,818 |
| (63,277 | ) | (233,645 | ) | (75 | ) | (233,720 | ) | ||||||
Change in other current liabilities |
| 28,903 |
| 56,942 |
| 85,845 |
| (28,272 | ) | (8,123 | ) | (36,395 | ) | ||||||
Change in other noncurrent assets |
| (35,443 | ) | (2,661 | ) | (38,104 | ) | 8,229 |
| — |
| 8,229 |
| ||||||
Change in other noncurrent liabilities |
| (8,519 | ) | 4 |
| (8,515 | ) | (6,155 | ) | — |
| (6,155 | ) | ||||||
Operating cash flows provided by discontinued operations |
| 3,892 |
| (3,892 | ) | — |
| 4,774 |
| (4,774 | ) | — |
| ||||||
Net cash provided by operating activities |
| 409,666 |
| 13,200 |
| 422,866 |
| 456,653 |
| 4,755 |
| 461,408 |
| ||||||
Other investments |
| 919 |
| (7,706 | ) | (6,787 | ) | 2,101 |
| (6,749 | ) | (4,648 | ) | ||||||
Net cash used in investing activities |
| (324,804 | ) | (7,706 | ) | (332,510 | ) | (266,018 | ) | (6,749 | ) | (272,767 | ) | ||||||
Net increase (decrease) in cash and cash equivalents |
| (4,795 | ) | 4,096 |
| (699 | ) | 493 |
| (1,994 | ) | (1,501 | ) | ||||||
Net increase (decrease) in cash and cash equivalents-discontinued operations |
| 2,747 |
| (2,747 | ) | — |
| (997 | ) | 997 |
| — |
| ||||||
Cash and cash equivalents at beginning of year |
| 3,011 |
| — |
| 3,011 |
| 2,848 |
| 814 |
| 3,662 |
| ||||||
Cash and cash equivalents at end of quarter |
| 963 |
| 2,747 |
| 3,710 |
| 2,344 |
| (183 | ) | 2,161 |
| ||||||
3. Recently Issued Accounting Pronouncements
Fair Value Measurements (Statement of Financial Accounting Standards (SFAS) 157) — In September 2006, the FASB issued SFAS 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 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 157 is effective for financial statements issued for fiscal years beginning after Nov. 15, 2007. PSCo is evaluating the impact of SFAS 157 on its financial condition and results of operations.
The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115 (SFAS 159) — In February 2007, the FASB issued SFAS 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 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 is effective for fiscal years beginning after Nov. 15, 2007. PSCo is evaluating the impact of SFAS 159 on its financial condition and results of operations.
4. Income Taxes
COLI — In April 2004, Xcel Energy filed a lawsuit against the U.S. government in the U.S. District Court for the District of Minnesota to establish its right to deduct the interest expense that had accrued during tax years 1993 and 1994 on policy
10
loans related to its COLI policies that insured certain lives of PSCo employees. These policies are owned by PSRI, a wholly owned subsidiary of PSCo.
After Xcel Energy filed this suit, the IRS sent three statutory notices of deficiency of tax, penalty and interest for 1995 through 2002. Xcel Energy filed U.S. Tax Court petitions challenging those notices. PSRI also continued to take deductions for interest expense on policy loans for subsequent years. The total exposure for the tax years 1993 through 2007 is approximately $583 million, which includes income tax, interest and potential penalties.
On June 19, 2007, Xcel Energy and the United States reached a settlement in principle regarding this dispute.
On Sept. 20, 2007, Xcel Energy submitted its formal offer in compromise and by letter dated Sept. 21, 2007, the United States accepted the terms of that settlement offer. The terms of the final settlement are essentially the same as the settlement in principle reached on June 19, 2007. The U.S. government’s letter terminates the tax litigation pending between the parties for tax years 1993-2002 and also specifies the agreed tax treatment for certain aspects of those policies for subsequent tax years.
The essential financial terms of the final settlement, as accepted and implemented, are as follows:
1. Xcel Energy will pay the government a total of $64.4 million in full settlement of the government’s claims for tax, penalty, and interest for tax years 1993-2007. The recognition of this settlement in the second quarter of 2007 resulted in total expense of $56.5 million, including federal and state tax, interest on the federal and state tax liabilities, penalties, and tax benefits on the interest expense. The expense of $56.5 million includes $41.2 million of interest and penalties and income tax of $15.3 million (net of tax benefit on the interest expense of $14.3 million).
2. Xcel Energy will pay that settlement amount as follows:
· $32.2 million of that amount will be satisfied by tax and interest amounts that Xcel Energy has paid or is deemed under the terms of the settlement to have made to the government with respect to tax years 1993 and 1994.
· Xcel Energy will satisfy the remaining settlement amount owed by paying the government $32.2 million by Oct. 31, 2007.
3. The total settlement amount will be allocated toward specified amounts of tax, penalty, and interest owed for 1993 and 1994 and other amounts of tax and interest owed for 1995.
4. Except as stated above, Xcel Energy will be entitled to claim COLI-related interest deductions for tax years 1995-2007.
5. Xcel Energy will surrender the policies to its insurer by Oct. 31, 2007, without having to recognize a taxable gain on the surrender.
Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109 (FIN 48) — In July 2006, the FASB issued Interpretation FIN 48. FIN 48 prescribes how a company should recognize, measure, present and disclose uncertain tax positions that a company has taken or expects to take in its income tax returns. FIN 48 requires that only income tax benefits that meet the “more likely than not” recognition threshold be recognized or continue to be recognized on its effective date. As required, PSCo adopted FIN 48 as of Jan. 1, 2007 and the initial derecognition amounts were reported as a cumulative effect of a change in accounting principle. The cumulative effect of the change, which is reported as an adjustment to the beginning balance of retained earnings, was not material. Following implementation, the ongoing recognition of changes in measurement of uncertain tax positions will be reflected as a component of income tax expense.
PSCo is a member of the Xcel Energy affiliated group that files consolidated income tax returns. Xcel Energy has been audited by the IRS through tax year 2003, with a limited exception for 2003 research tax credits. The IRS commenced an examination of Xcel Energy’s federal income tax returns for 2004 and 2005 (and research credits for 2003) in the third quarter of 2006, and that examination is anticipated to be complete by March 31, 2008. As of June 30, 2007, the IRS had not proposed any material adjustments to tax years 2003 through 2005. The statute of limitations applicable to Xcel Energy’s 2000 through 2002 federal income tax returns expired as of June 30, 2007.
As previously disclosed, Xcel Energy is currently in litigation with the federal government to establish its right to deduct interest expense on COLI policy loans incurred since 1993. Xcel Energy and the IRS have reached a settlement in principle regarding this litigation (see previous discussion of COLI).
PSCo is also currently under examination by the state of Colorado for years 1993 through 1996 and 2000 through 2004. No material adjustments have been proposed as of June 30, 2007. As of June 30, 2007, PSCo’s earliest open tax year in which an audit can be initiated by state taxing authorities under applicable statutes of limitations is 1993.
The amount of unrecognized tax benefits was $11.4 million on Jan. 1, 2007 and $21.5 million on June 30, 2007. These amounts were offset against the tax benefits associated with net operating loss and tax credit carryovers of $7.5 million on Jan. 1, 2007 and $5.8 million on June 30, 2007.
Included in the unrecognized tax benefit balance for continuing operations was $4.5 million and $13.7 million of tax positions on Jan. 1, 2007 and June 30, 2007, respectively, which if recognized would affect the annual effective tax rate. In
11
addition, the unrecognized tax benefit balance for continuing operations included $6.9 million and $7.8 million of tax positions on Jan. 1, 2007 and June 30, 2007, 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 change in the unrecognized tax benefit balance for continuing operations from April 1, 2007 to June 30, 2007, was due to the addition of similar uncertain tax positions relating to second quarter activity, the resolution of certain federal audit matters, and the proposed settlement of the COLI litigation. PSCo’s amount of unrecognized tax benefits could significantly change in the next 12 months as the IRS and state tax audits progress and as the settlement of the COLI litigation is finalized. The settlement of the COLI litigation is estimated to reduce the amount of unrecognized tax benefits by $12.4 million.
The interest expense liability related to unrecognized tax benefits on Jan. 1, 2007, was not material due to net operating loss and tax credit carryovers. The change in the interest expense liability from Jan. 1, 2007, to June 30, 2007, was an increase of $22.9 million, primarily due to the proposed settlement of the COLI litigation. Penalties of $2.1 million were accrued as of June 30, 2007 due to the proposed settlement of the COLI litigation.
5. Rate Matters
Pending and Recently Concluded Regulatory Proceedings — Colorado Public Utilities Commission (CPUC)
Natural Gas Rate Case — On Dec. 1, 2006, PSCo filed with the CPUC, a request to increase natural gas rates by $41.9 million, representing an overall increase of 2.96 percent, primarily related to capital investments and rising operating costs. The request assumes a common equity ratio of 60.17 percent and a return on equity of 11 percent. The jurisdictional rate base is approximately $1.1 billion.
On June 18, 2007, the CPUC approved a settlement between PSCo, the CPUC staff and the Colorado Office of Consumer Council (OCC), which granted the following:
· An annual revenue increase of $32.3 million, based on a 10.25 percent return on equity and a 60.17 percent equity ratio.
· The CPUC modified the partial decoupling mechanism under the settlement to allow PSCo recovery of additional revenues in future years to compensate for the portion of the decline in weather normalized residential use per customer that exceeds the first 1.3 percent in decline in use (to be reflective of 50 percent of the historic average decline in use).
Under the terms of the agreement, parties to the settlement may seek reconsideration of the CPUC’s order, however, PSCo does not plan to seek reconsideration.
6. Commitments and Contingent Liabilities
Except to the extent noted below, the circumstances set forth in Notes 13 and 14 to the consolidated financial statements in PSCo’s Annual Report on Form 8-K/A filed on Dec. 17, 2007, and Notes 4 and 5 to the consolidated financial statements in this Quarterly Report on Form 10-Q/A, appropriately represent, in all material respects, the current status of respective commitments and contingent liabilities and are incorporated herein by reference. The following are unresolved contingencies that are material to PSCo’s financial position.
Operating Leases — In May 2007, PSCo commenced a purchased power agreement that is being accounted for as an operating lease in accordance with Emerging Issues Task Force 01-8, Determining Whether an Arrangement Contains a Lease. The 20-year agreement calls for capacity payments of $10.6 million, $16.1 million, $16.4 million $16.7 million, $17.1 million and $312.3 million for 2007, 2008, 2009, 2010, 2011 and thereafter, respectively.
Environmental Contingencies
PSCo has been or is currently involved with the cleanup of contamination from certain hazardous substances at several sites. In many situations, PSCo believes it will recover some portion of these costs through insurance claims. Additionally, where applicable, PSCo is pursuing, or intends to pursue, recovery from other potentially responsible parties and through the rate regulatory process. New and changing federal and state environmental mandates can also create added financial liabilities for PSCo, which are normally recovered through the rate regulatory process. To the extent any costs are not recovered through the options listed above, PSCo would be required to recognize an expense.
12
Site Remediation — PSCo must pay all or a portion of the cost to remediate sites where past activities of PSCo and some other parties have caused environmental contamination. Environmental contingencies could arise from various situations including the following categories of sites:
· site of a former manufactured gas plant (MGP) operated by PSCo or its predecessors; and
· third party sites, such as landfills, to which PSCo is alleged to be a potentially responsible party (PRP) that sent hazardous materials and wastes.
PSCo records a liability when enough information is obtained to develop an estimate of the cost of environmental remediation and revises the estimate as information is received. The estimated remediation cost may vary materially.
To estimate the cost to remediate these sites, assumptions are made where facts are not fully known. For instance, assumptions may be made about the nature and extent of site contamination, the extent of required cleanup efforts, costs of alternative cleanup methods and pollution-control technologies, the period over which remediation will be performed and paid for, changes in environmental remediation and pollution-control requirements, the potential effect of technological improvements, the number and financial strength of other PRPs and the identification of new environmental cleanup sites.
Estimates are revised as facts become known. At June 30, 2007, the liability for the cost of remediating these sites was estimated to be $1.9 million, of which $0.7 million was considered to be a current liability. Some of the cost of remediation may be recovered from:
· insurance coverage;
· other parties that have contributed to the contamination; and
· customers.
Neither the total remediation cost nor the final method of cost allocation among all PRPs of the unremediated sites has been determined. Estimates have been recorded for PSCo’s future costs for these sites.
Manufactured Gas Plant Site
Fort Collins Manufactured Gas Plant Site — Prior to 1926, Poudre Valley Gas Co., a predecessor of PSCo, operated an MGP in Fort Collins, Colo., not far from the Cache la Poudre River. In 1926, after acquiring the Poudre Valley Gas Co., PSCo shut down the MGP site and has sold most of the property. An oily substance similar to MGP byproducts was discovered in the Cache la Poudre River. On Nov. 10, 2004, PSCo entered into an agreement with the Environmental Protection Agency (EPA), the city of Fort Collins and Schrader Oil Co., under which PSCo performed remediation and monitoring work. PSCo has substantially completed work at the site, with the exception of ongoing maintenance and monitoring.
In May 2005, PSCo filed a natural gas rate case with the CPUC requesting recovery of cleanup costs at the Fort Collins MGP site spent through March 2005, which amounted to $6.2 million, to be amortized over four years. PSCo reached a settlement agreement with the parties in the case. The CPUC approved the settlement agreement on Jan. 19, 2006 and the final order became effective on Feb. 3, 2006, with rates effective Feb. 6, 2006.
In November 2006, PSCo filed a natural gas rate case with the CPUC requesting recovery of additional clean-up costs at the Fort Collins MGP site spent through September 2006, plus unrecovered amounts previously authorized from the last rate case, which amounted to $10.8 million to be amortized over four years. In June 2007, PSCo entered into a settlement agreement that included recovery of the full $10.8 million, but with a five year amortization period. The CPUC approved the agreement on June 18, 2007. The total amount to be recovered from customers is $13.1 million.
In April 2005, PSCo brought a contribution action against Schrader Oil Co. and related parties alleging Schrader Oil Co. released hazardous substances into the environment and these releases caused MGP byproducts to migrate to the Cache La Poudre River, thereby substantially increasing the scope and cost of remediation. PSCo requested damages, including a portion of the costs PSCo incurred to investigate and remove contaminated sediments from the Cache la Poudre River. On Dec. 14, 2005, the court denied Schrader’s request to dismiss the PSCo suit. On Jan. 3, 2006, Schrader filed a response to the PSCo complaint and a counterclaim against PSCo for its response costs under the Comprehensive Environmental Response Compensation and Liability Act (CERCLA) and under the Resource Conservation and Recovery Act (RCRA). Schrader has alleged as part of its counterclaim an “imminent and substantial endangerment” of its property as defined by RCRA. In
13
September 2006, PSCo filed a Motion For Partial Summary Judgment to dismiss Schrader’s RCRA claim. PSCo believes the allegations with respect to PSCo are without merit and will vigorously defend itself.
Third Party and Other Environmental Site Remediation
Asbestos Removal — Some of PSCo’s facilities contain asbestos. Most asbestos will remain undisturbed until the facilities that contain it are demolished or renovated. PSCo has recorded an estimate for final removal of the asbestos as an asset retirement obligation. See additional discussion of asset retirement obligations in Note 14 of the PSCo Annual Report on Form 8-K/A filed on Dec. 17, 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
Regional Haze Rules — On June 15, 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 PSCo generating facilities will be subject to BART requirements.
The EPA requires states to develop implementation plans to comply with BART by December 2007. States are required to identify the facilities that will have to reduce sulfur dioxide (SO2), NOx, and particulate matter emissions under BART and then set BART emissions limits for those facilities. On May 30, 2006, the Colorado Air Quality Control Commission promulgated BART regulations requiring certain major stationary sources to evaluate and install, operate and maintain BART technology or an approved BART alternative to make reasonable progress toward meeting the national visibility goal. On Aug. 1, 2006, PSCo submitted its BART alternatives analysis to the Colorado Air Pollution Control Division (CAPCD). As set forth in its analysis, PSCo estimates that implementation of the BART alternatives will cost approximately $211 million in capital costs, which includes approximately $62 million in environmental upgrades for the existing Comanche Station project, which are included in the capital budget. PSCo expects the cost of any required capital investment will be recoverable from customers. Emissions controls are expected to be installed between 2011 and 2014. The CAPCD expects to finalize the regional haze state implementation plan in late 2007 for submittal to the EPA in 2008. BART emission controls associated with the plan must be installed within five years of EPA approval. On June 4, 2007, the CAPCD approved PSCo’s BART analysis and requested public comment on its BART determination and PSCo’s BART permits. The comment period expires July 28, 2007, after which the CAPCD will either grant, deny, or grant with conditions PSCo’s BART permits.
Clean Air Mercury Rule — In March 2005, the EPA issued the Clean Air Mercury Rule (CAMR), which regulates mercury emissions from power plants for the first time. PSCo continues to evaluate the strategy for complying with CAMR. In February 2007, the Colorado Air Quality Control Commission passed a mercury rule to implement CAMR in Colorado . The rule was based on a negotiated rule that was agreed upon by participating environmental groups, utilities, local government coalitions, and the CAPCD. The rule requires mercury emission controls capable of achieving 80 percent capture be installed at Pawnee Station in 2012 and all other Colorado units by 2014. PSCo is in the process of installing mercury monitors on seven Colorado units at an estimated aggregate cost of approximately $2.6 million. PSCo is evaluating the mercury emission controls required to meet the new rule and is currently unable to provide a capital cost estimate. The EPA has expressed concerns with allowance restrictions after reviewing the Colorado mercury rule.
Federal Clean Water Act — The federal Clean Water Act requires the EPA to regulate cooling water intake structures to assure that these structures reflect the “best technology available” for minimizing adverse environmental impacts. In July 2004, the EPA published phase II of the rule, which applies to existing cooling water intakes at steam-electric power plants. Several lawsuits were filed against the EPA in the United States Court of Appeals for the Second Circuit challenging the phase II rulemaking. On Jan. 25, 2007, the court issued its decision and remanded virtually every aspect of the rule to the EPA for reconsideration. The EPA announced on March 20, 2007, it will suspend the deadlines and refer any implementation to each state’s best professional judgment until the EPA is able to fully respond to the court-ordered remands. As a result, the rule’s compliance requirements and associated deadlines are currently unknown. It is not possible to provide an accurate estimate of the overall cost of this rulemaking at this time due to the many uncertainties involved.
Notice of Violation — On July 1, 2002, PSCo received a Notice of Violation (NOV) from the EPA alleging violations of the New Source Review (NSR) requirements of the Clean Air Act (CAA) at the Comanche and Pawnee plants in Colorado. The NOV specifically alleges that various maintenance, repair and replacement projects undertaken at the plants in the mid- to late-1990s should have required a permit under the NSR process. PSCo believes it has acted in full compliance with the CAA
14
and NSR process. It believes that the projects identified in the NOV fit within the routine maintenance, repair and replacement exemption contained within the NSR regulations or are otherwise not subject to the NSR requirements. PSCo disagrees with the assertions contained in the NOV and intends to vigorously defend its position.
Legal Contingencies
In the normal course of business, PSCo is party to routine claims and litigation arising from prior and current operations. PSCo is actively defending these matters and has recorded a liability related to the probable cost of settlement or other disposition, when it can be reasonably estimated.
Carbon Dioxide Emissions Lawsuit — On July 21, 2004, the attorneys general of eight states and New York City, as well as several environmental groups, filed lawsuits in U.S. District Court for the Southern District of New York against five utilities, including Xcel Energy, to force reductions in carbon dioxide (CO2) emissions. Although PSCo is not named as a party to this litigation, the requested relief that Xcel Energy cap and reduce its CO2 emissions could have a material adverse effect on PSCo. The other utilities include American Electric Power Co., Southern Co., Cinergy Corp. and Tennessee Valley Authority. CO2 is emitted whenever fossil fuel is combusted, such as in automobiles, industrial operations and coal- or natural gas-fired power plants. 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 four other utility companies filed a motion to dismiss the lawsuit. On Sept. 19, 2005, the judge granted the defendants’ motion to dismiss on constitutional grounds. Plaintiffs filed an appeal to the Second Circuit Court of Appeals. On June 21, 2007 the Second Circuit Court of Appeals issued an order requesting the parties to file a letter brief informing the Second Circuit Court of Appeals of their views about 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, the defendant utilities filed a letter brief on July 6, 2007, stating the position that the United States Supreme Court’s decision supports the arguments raised by them on appeal. It is unknown when the Second Circuit Court of Appeals will rule on the appeal.
Comanche 3 Permit Litigation — On Aug. 4, 2005, Citizens for Clean Air and Water in Pueblo and Southern Colorado and Clean Energy Action filed a complaint against the Colorado Air Pollution Control Division alleging that the Division improperly granted permits to PSCo under Colorado’s Prevention of Significant Deterioration program for the construction and operation of Comanche 3. PSCo intervened in the case. On June 20, 2006, the court ruled in PSCo’s favor and held that the Comanche 3 permits had been properly granted and plaintiffs’ claims to the contrary were without merit. Plaintiffs have appealed this decision. On Nov. 22, 2006, plaintiffs filed their opening briefs. PSCo’s response was filed Dec. 22, 2006. The Colorado Court of Appeals is expected to rule on the appeal in 2007.
Comer vs. Xcel Energy Inc. et al. — On April 25, 2006, Xcel Energy received notice of a purported class action lawsuit filed in U.S. District Court for the Southern District of Mississippi. Although PSCo is not named as a party to this litigation, if the litigation ultimately results in an unfavorable outcome for Xcel Energy, it could have a material adverse effect on PSCo. The lawsuit names more than 45 oil, chemical and utility companies, including Xcel Energy, 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. On July 19, 2006, Xcel Energy filed a motion to dismiss the lawsuit in its entirety. Oral arguments related to some of the defenses raised by the defendants, including Xcel Energy, have been set for Aug. 30, 2007.
Qwest vs. Xcel Energy Inc. — On June 24, 2004, an employee of PSCo was injured when a pole owned by Qwest malfunctioned. The employee is seeking damages of approximately $7 million. On Sept. 6, 2005, an action against Qwest relating to the incident was filed in Denver District Court by the employee. On April 18, 2006, Qwest filed a third party complaint against PSCo based on terms in a joint pole use agreement between Qwest and PSCo. Pursuant to this agreement, Qwest has asserted that PSCo had an affirmative duty to properly train and instruct its employees on pole safety, including testing the pole for soundness before climbing. PSCo filed a counterclaim on May 15, 2006, against Qwest asserting Qwest had a duty to PSCo and an obligation under the contract to maintain its poles in a safe and serviceable condition. On May 14, 2007 this matter went to trial. The trial concluded on May 22, 2007 with a jury verdict that found Qwest solely liable for the accident and damages. Qwest has filed post-trial motions and has indicated that, if the motions are unsuccessful, it will appeal the verdict.
15
Payne et al. vs. PSCo et al. — In late October 2003, there was a wildfire in Boulder County, Colorado. There was no loss of life, but there was property damage associated with this fire. On Oct. 28, 2005, an action against PSCo relating to this fire was filed in Boulder County District Court. There are 22 plaintiffs, including individuals, the City of Jamestown and two companies, and three co-defendants, including PSCo. Plaintiffs asserted that a tree falling into PSCo distribution lines may have caused the fire. The matter was ultimately settled in March 2007 and the settlement did not have a material effect on PSCo’s financial results.
Other Contingencies
· Tax Matters — See Note 4 to these consolidated financial statements for discussion of exposures regarding the tax deductibility of COLI.
7. Short-Term Borrowings and Other Financing Instruments
As of June 30, 2007, PSCo had $174.7 million of short-term debt outstanding at a weighted average interest rate of 5.41 percent and $99.0 million of utility money pool borrowings at a weighted average interest rate of 5.40 percent.
During the third quarter of 2007, PSCo anticipates issuing up to $350 million of long-term debt securities to refinance a prior debt maturity and to fund capital expenditures.
8. Derivative Valuation and Financial Impacts
PSCo uses derivative instruments in connection with its utility commodity price, interest rate, short-term wholesale and commodity trading activities, including forward contracts, futures, swaps and options. All derivative instruments not qualifying for the normal purchases and normal sales exception, as defined by SFAS 133 — “Accounting for Derivative Instruments and Hedging Activities,” as amended (SFAS 133), are recorded at fair value. The presentation of the fair value for these derivative instruments is dependent on the designation of a qualifying hedging relationship. The adjustment to fair value of derivative instruments not designated in a qualifying hedging relationship is reflected in current earnings or as a regulatory balance.
PSCo records the fair value of its derivative instruments in its Consolidated Balance Sheet as separate line items identified as Derivative Instruments Valuation in both current and noncurrent assets and liabilities.
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 PSCo is currently engaged in are discussed below.
Cash Flow Hedges
PSCo enters into derivative instruments to manage variability of future cash flows from changes in commodity prices and interest rates.
As of June 30, 2007, PSCo had various commodity-related contracts classified as cash flow hedges extending through December 2009. The fair value of these cash flow hedges is deferred as a regulatory asset or liability. This classification is based on the regulatory recovery mechanisms in place. This could include the purchase or sale of energy or energy-related products, the use of natural gas to generate electric energy or gas purchased for resale.
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 a specific period. These derivative instruments are designated as cash flow hedges for accounting purposes and the change in the fair value of these instruments is recorded as a component of Other Comprehensive Income.
As of June 30, 2007, PSCo had net gains of approximately $1.7 million in Accumulated Other Comprehensive Income related to interest rate cash flow hedge contracts that it expects to recognize in earnings during the next 12 months.
Gains or losses on hedging transactions for the sales of energy or energy-related products are primarily recorded as a component of revenues, hedging transactions for fuel used in energy generation are recorded as a component of fuel costs, hedging transactions for gas purchased for resale are recorded as a component of gas costs and interest rate hedging
16
transactions are recorded as a component of interest expense. PSCo is allowed to recover in electric or gas rates the costs of certain financial instruments purchased to reduce commodity cost volatility. There was immaterial ineffectiveness in the second quarter of 2007.
The impact of qualifying cash flow hedges on PSCo’s Accumulated Other Comprehensive Income, included as a component of stockholder’s equity, is detailed in the following table:
|
| Six Months Ended |
| ||||
(Millions of Dollars) |
| June 30, 2007 |
| June 30, 2006 |
| ||
Accumulated other comprehensive income related to cash flow hedges at Jan. 1 |
| $ | 12.6 |
| $ | 14.2 |
|
After-tax net unrealized gains related to derivatives accounted for as hedges |
| 1.4 |
| — |
| ||
After-tax net realized gains on derivative transactions reclassified into earnings |
| (0.7 | ) | (0.7 | ) | ||
Accumulated other comprehensive income related to cash flow hedges at June 30 |
| $ | 13.3 |
| $ | 13.5 |
|
Derivatives Not Qualifying for Hedge Accounting
PSCo enters into certain commodity-based derivative transactions, not included in trading operations, which do not qualify for hedge accounting treatment. These derivative instruments are accounted for on a mark-to-market basis in accordance with SFAS 133 and are recorded on a net basis within Operating Revenues on the Consolidated Statements of Income.
Normal Purchases or Normal Sales Contracts
PSCo enters into contracts for the purchase and sale of commodities for use in its business operations. SFAS 133 requires a company to evaluate these contracts to determine whether the contracts are derivatives. Certain contracts that meet the definition of a derivative may be exempted from SFAS 133 as normal purchases or normal sales.
PSCo evaluates all of its contracts when such contracts are entered to determine if they are derivatives and, if so, if they qualify to meet the normal designation requirements under SFAS 133. None of the contracts entered into within the commodity trading operations qualify for a normal designation.
9. Detail of Interest and Other Income, Net
Interest and other income, net of nonoperating expenses, for the three and six months ended June 30 consisted of the following:
|
| Three months ended June 30, |
| Six months ended June 30, |
| ||||||||
(Thousands of dollars) |
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
|
|
|
|
|
|
|
|
|
| ||||
Interest income |
| $ | 1,524 |
| $ | 1,106 |
| $ | 3,111 |
| $ | 2,127 |
|
Other nonoperating income |
| 494 |
| 1,665 |
| 996 |
| 2,481 |
| ||||
Employee-related insurance policy expense |
| (5,376 | ) | (6,095 | ) | (9,588 | ) | (10,297 | ) | ||||
Other nonoperating expense |
| — |
| (81 | ) | (1 | ) | (781 | ) | ||||
Total interest and other income, net |
| $ | (3,358 | ) | $ | (3,405 | ) | $ | (5,482 | ) | $ | (6,470 | ) |
17
10. Segment Information
PSCo has two reportable segments, Regulated Electric Utility and Regulated Natural Gas Utility. Commodity trading operations are not a reportable segment and commodity trading results are included in the Regulated Electric Utility segment.
(Thousands of dollars) |
| Regulated |
| Regulated |
| All Other |
| Reconciling |
| Consolidated |
| |||||
Three months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues from: |
|
|
|
|
|
|
|
|
|
|
| |||||
External customers |
| $ | 638,142 |
| $ | 190,157 |
| $ | 7,299 |
| $ | — |
| $ | 835,598 |
|
Internal customers |
| 71 |
| 3 |
| — |
| (74 | ) | — |
| |||||
Total revenue |
| $ | 638,213 |
| $ | 190,160 |
| $ | 7,299 |
| $ | (74 | ) | $ | 835,598 |
|
Segment net income (loss) |
| $ | 59,025 |
| $ | 8,809 |
| $ | (53,696 | ) | $ | — |
| $ | 14,138 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Three months ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues from: |
|
|
|
|
|
|
|
|
|
|
| |||||
External customers |
| $ | 599,812 |
| $ | 160,017 |
| $ | 7,402 |
| $ | — |
| $ | 767,231 |
|
Internal customers |
| 57 |
| 19 |
| — |
| (76 | ) | — |
| |||||
Total revenue |
| $ | 599,869 |
| $ | 160,036 |
| $ | 7,402 |
| $ | (76 | ) | $ | 767,231 |
|
Segment net income |
| $ | 39,980 |
| $ | 7,456 |
| $ | 4,756 |
| $ | — |
| $ | 52,192 |
|
(Thousands of dollars) |
| Regulated |
| Regulated |
| All Other |
| Reconciling |
| Consolidated |
| |||||
Six months ended June 30, 2007 |
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues from: |
|
|
|
|
|
|
|
|
|
|
| |||||
External customers |
| $ | 1,274,642 |
| $ | 706,551 |
| $ | 18,096 |
| $ | — |
| $ | 1,999,289 |
|
Internal customers |
| 157 |
| 53 |
| — |
| (210 | ) | — |
| |||||
Total revenue |
| $ | 1,274,799 |
| $ | 706,604 |
| $ | 18,096 |
| $ | (210 | ) | $ | 1,999,289 |
|
Segment net income (loss) |
| $ | 106,427 |
| $ | 40,557 |
| $ | (47,097 | ) | $ | — |
| $ | 99,887 |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Six months ended June 30, 2006 |
|
|
|
|
|
|
|
|
|
|
| |||||
Revenues from: |
|
|
|
|
|
|
|
|
|
|
| |||||
External customers |
| $ | 1,271,931 |
| $ | 742,918 |
| $ | 19,407 |
| $ | — |
| $ | 2,034,256 |
|
Internal customers |
| 120 |
| 56 |
| — |
| (176 | ) | — |
| |||||
Total revenue |
| $ | 1,272,051 |
| $ | 742,974 |
| $ | 19,407 |
| $ | (176 | ) | $ | 2,034,256 |
|
Segment net income |
| $ | 86,232 |
| $ | 34,108 |
| $ | 8,699 |
| $ | — |
| $ | 129,039 |
|
11. Comprehensive Income
The components of total comprehensive income are shown below:
|
| Three months ended |
| Six months ended |
| ||||||||
(Millions of dollars) |
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
Net income |
| $ | 14.1 |
| $ | 52.2 |
| $ | 99.9 |
| $ | 129.0 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
| ||||
After-tax net unrealized gains related to derivatives accounted for as hedges (see Note 8) |
| 0.9 |
| 1.6 |
| 1.4 |
| — |
| ||||
After-tax net realized gains on derivative transactions reclassified into earnings (see Note 8) |
| (0.3 | ) | (1.9 | ) | (0.7 | ) | (0.7 | ) | ||||
Other comprehensive income |
| 0.6 |
| (0.3 | ) | 0.7 |
| (0.7 | ) | ||||
Comprehensive income |
| $ | 14.7 |
| $ | 51.9 |
| $ | 100.6 |
| $ | 128.3 |
|
18
12. Benefit Plans and Other Postretirement Benefits
Pension and other postretirement benefit disclosures below generally represent Xcel Energy consolidated information unless specifically identified as being attributable to PSCo.
Components of Net Periodic Benefit Cost
|
| Three months ended June 30, |
| ||||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
(Thousands of dollars) |
| Pension Benefits |
| Postretirement Health |
| ||||||||
Xcel Energy Inc. |
|
|
|
|
|
|
|
|
| ||||
Service cost |
| $ | 14,555 |
| $ | 14,380 |
| $ | 1,205 |
| $ | 1,479 |
|
Interest cost |
| 43,028 |
| 38,197 |
| 11,635 |
| 13,287 |
| ||||
Expected return on plan assets |
| (66,525 | ) | (67,551 | ) | (7,582 | ) | (7,110 | ) | ||||
Amortization of transition obligation |
| — |
| — |
| 3,677 |
| 3,577 |
| ||||
Amortization of prior service cost (credit) |
| 6,487 |
| 7,421 |
| (545 | ) | (545 | ) | ||||
Amortization of net loss |
| 4,555 |
| 4,165 |
| 2,106 |
| 5,875 |
| ||||
Net periodic benefit cost (credit) |
| 2,100 |
| (3,388 | ) | 10,496 |
| 16,563 |
| ||||
Credits not recognized due to the effects of regulation |
| 2,894 |
| 3,893 |
| — |
| — |
| ||||
Additional cost recognized due to the effects of regulation |
| — |
| — |
| 973 |
| 973 |
| ||||
Net benefit cost recognized for financial reporting |
| $ | 4,994 |
| $ | 505 |
| $ | 11,469 |
| $ | 17,536 |
|
|
|
|
|
|
|
|
|
|
| ||||
PSCo |
|
|
|
|
|
|
|
|
| ||||
Net periodic benefit cost |
| $ | 5,229 |
| $ | 4,196 |
| $ | 5,532 |
| $ | 9,041 |
|
Additional cost recognized due to the effects of regulation |
| — |
| — |
| 973 |
| 973 |
| ||||
Net benefit cost recognized for financial reporting |
| $ | 5,229 |
| $ | 4,196 |
| $ | 6,505 |
| $ | 10,014 |
|
|
| Six months ended June 30, |
| ||||||||||
|
| 2007 |
| 2006 |
| 2007 |
| 2006 |
| ||||
(Thousands of dollars) |
| Pension Benefits |
| Postretirement Health |
| ||||||||
Xcel Energy Inc. |
|
|
|
|
|
|
|
|
| ||||
Service cost |
| $ | 31,040 |
| $ | 30,814 |
| $ | 2,906 |
| $ | 3,316 |
|
Interest cost |
| 82,626 |
| 77,706 |
| 25,238 |
| 26,470 |
| ||||
Expected return on plan assets |
| (132,416 | ) | (134,032 | ) | (15,200 | ) | (13,378 | ) | ||||
Amortization of transition obligation |
| — |
| — |
| 7,288 |
| 7,222 |
| ||||
Amortization of prior service cost (credit) |
| 12,974 |
| 14,848 |
| (1,090 | ) | (1,090 | ) | ||||
Amortization of net loss |
| 8,422 |
| 8,676 |
| 7,100 |
| 12,398 |
| ||||
Net periodic benefit cost (credit) |
| 2,646 |
| (1,988 | ) | 26,242 |
| 34,938 |
| ||||
Credits not recognized due to the effects of regulation |
| 5,574 |
| 6,318 |
| — |
| — |
| ||||
Additional cost recognized due to the effects of regulation |
| — |
| — |
| 1,946 |
| 1,946 |
| ||||
Net benefit cost recognized for financial reporting |
| $ | 8,220 |
| $ | 4,330 |
| $ | 28,188 |
| $ | 36,884 |
|
|
|
|
|
|
|
|
|
|
| ||||
PSCo |
|
|
|
|
|
|
|
|
| ||||
Net periodic benefit cost |
| $ | 9,560 |
| $ | 9,333 |
| $ | 14,331 |
| $ | 19,988 |
|
Additional cost recognized due to the effects of regulation |
| — |
| — |
| 1,946 |
| 1,945 |
| ||||
Net benefit cost recognized for financial reporting |
| $ | 9,560 |
| $ | 9,333 |
| $ | 16,277 |
| $ | 21,933 |
|
13. Subsequent Events
PSCo Natural Gas Rate Case — On June 18, 2007, the CPUC approved a settlement between PSCo, the CPUC staff and the Colorado Office of Consumer Council (OCC), which granted the following:
· An annual revenue increase of $32.3 million, based on a 10.25 percent return on equity and a 60.17 percent equity ratio.
· A modification to the partial decoupling mechanism to allow PSCo recovery of additional revenues in future years to compensate for the portion of the decline in weather normalized residential use per customer that exceeds the first 1.3 percent in annual decline in use (to be reflective of 50 percent of the historic average annual decline in use).
Final rates were implemented effective July 30, 2007.
19
For more information, see Note 5 to the Consolidated Financial Statements.
Long-Term Borrowings
On Aug. 15, 2007, PSCo issued $350 million of 6.25 percent first mortgage bonds, series due 2037. PSCo added the net proceeds from the sale of the first mortgage bonds to its general funds and applied a portion of the proceeds to the repayment of commercial paper, including commercial paper incurred to fund the payment at maturity of $100 million of 7.11 percent secured medium-term notes, which matured on March 5, 2007.
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Discussion of financial condition and liquidity for PSCo is omitted per conditions set forth in general instructions H (1) (a) and (b) of Form 10-Q for wholly owned subsidiaries. It is replaced with management’s narrative analysis 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 PSCo during the periods presented, or are expected to have a material impact in the future and gives effect to the restatement discussed in Note 2 to the consolidated financial statements. It should be read in conjunction with the accompanying unaudited financial statements and notes.
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. 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 PSCo 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 PSCo; 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; structures that affect the speed and degree to which competition enters the electric and natural gas markets; costs and other effects of legal and administrative proceedings, settlements, investigations and claims, including the COLI settlement discussed below; 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 PSCo in reports filed with the SEC, including “Risk Factors” in Item 1A of PSCo’s Form 10-K for the year ended Dec. 31, 2006 and Exhibit 99.01 to this report on Form 10-Q/A for the quarter ended June 30, 2007.
Market Risks
PSCo 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 Current Report on Form 8-K/A filed on Dec. 14, 2007. Commodity price and interest rate risks for PSCo are mitigated due to cost-based rate regulation. At June 30, 2007, there were no material changes to the financial market risks that affect the quantitative and qualitative disclosures presented as of Dec. 31, 2006.
Management Changes
On May 31, 2007, Patricia K. Vincent, chief executive officer and president of PSCo, announced her resignation, effective June 5, 2007. Ms. Vincent was a named executive officer of Xcel Energy Inc. in its most recent proxy statement of April 18, 2007.
RESULTS OF OPERATIONS
PSCo’s net income was approximately $99.9 million for the first six months of 2007, compared with approximately $129.0 million for the first six months of 2006.
20
Electric Utility, Short-term Wholesale and Commodity Trading Margins
Electric fuel and purchased power expenses tend to vary with changing retail and wholesale sales requirements and unit cost changes in fuel and purchased power. Due to fuel and purchased energy cost-recovery mechanisms for customers, most fluctuations in these costs do not materially affect electric utility margin.
PSCo has two distinct forms of wholesale sales: short-term wholesale and commodity trading. Short-term wholesale refers to energy-related purchases and sales activity and the use of certain financial instruments associated with the fuel required for, and energy produced from, PSCo’s generation assets or the energy and capacity purchased to serve native load. Commodity trading is not associated with PSCo’s generation assets or the energy and capacity purchased to serve native load. Short-term wholesale and commodity trading activities are considered part of the electric utility segment.
Margins from commodity trading activity conducted at PSCo are partially redistributed to Northern States Power Co., a Minnesota corporation (NSP-Minnesota) and Southwestern Public Service Co., a New Mexico corporation (SPS), both wholly owned subsidiaries of Xcel Energy, pursuant to the joint operating agreement (JOA) approved by the FERC. Margins received pursuant to the JOA are reflected as part of base electric utility revenues. Short-term wholesale and commodity trading margins reflect the impact of regulatory sharing, if applicable. Commodity trading revenues are reported net of related costs (i.e., on a margin basis) in the Consolidated Statements of Income. Commodity trading costs include fuel, purchased power, transmission, broker fees and other related costs. Short-term wholesale and commodity trading margins reflect the estimated impact of regulatory sharing of margins, if applicable.
The following table details base electric utility, short-term wholesale and commodity trading revenues and margin:
(Millions of dollars) |
| Base |
| Short-term |
| Commodity |
| Consolidated |
| ||||
Six months ended June 30, 2007 |
|
|
|
|
|
|
|
|
| ||||
Electric utility revenues (excluding commodity trading) |
| $ | 1,254 |
| $ | 22 |
| $ | — |
| $ | 1,276 |
|
Electric fuel and purchased power |
| (700 | ) | (18 | ) | — |
| (718 | ) | ||||
Commodity trading revenues |
| — |
| — |
| 82 |
| 82 |
| ||||
Commodity trading costs |
| — |
| — |
| (83 | ) | (83 | ) | ||||
Gross margin before operating expenses |
| $ | 554 |
| $ | 4 |
| $ | (1 | ) | $ | 557 |
|
Margin as a percentage of revenues |
| 44.2 | % | 18.2 | % | (1.2 | )% | 41.0 | % | ||||
|
|
|
|
|
|
|
|
|
| ||||
Six months ended June 30, 2006 |
|
|
|
|
|
|
|
|
| ||||
Electric utility revenues (excluding commodity trading) |
| $ | 1,254 |
| $ | 13 |
| $ | — |
| $ | 1,267 |
|
Electric fuel and purchased power |
| (755 | ) | (12 | ) | — |
| (767 | ) | ||||
Commodity trading revenues |
| — |
| — |
| 282 |
| 282 |
| ||||
Commodity trading costs |
| — |
| — |
| (277 | ) | (277 | ) | ||||
Gross margin before operating expenses |
| $ | 499 |
| $ | 1 |
| $ | 5 |
| $ | 505 |
|
Margin as a percentage of revenues |
| 39.8 | % | 7.7 | % | 1.8 | % | 32.6 | % |
The following summarizes the components of the changes in base electric revenues and base electric margin for the six months ended June 30:
Base Electric Revenues
(Millions of dollars) |
| 2007 vs. 2006 |
| |
Purchased power and fuel cost recovery |
| $ | (62 | ) |
Retail rate increase |
| 54 |
| |
Sales growth (excluding weather impact) |
| 11 |
| |
Transmission revenue |
| 5 |
| |
Estimated impact of weather |
| (4 | ) | |
Sales mix and other |
| (4 | ) | |
Total change in base electric revenues |
| $ | — |
|
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Base Electric Margin
(Millions of dollars) |
| 2007 vs. 2006 |
| |
Retail rate increase |
| $ | 54 |
|
Sales growth (excluding weather impact) |
| 11 |
| |
Transmission revenue |
| 5 |
| |
Purchased power and fuel cost recovery |
| (10 | ) | |
Estimated impact of weather |
| (4 | ) | |
Sales mix and other |
| (1 | ) | |
Total increase in base electric margin |
| $ | 55 |
|
Natural Gas Utility Margin
The following table details the change in natural gas revenues and margin. The cost of natural gas tends to vary with changing sales requirements and unit cost of natural gas purchases. PSCo has a gas cost adjustment mechanism for natural gas sales, which recognizes the majority of the effects of changes in the cost of natural gas purchased for resale and adjusts revenues to reflect such changes in costs upon request by PSCo. Therefore, fluctuations in the cost of natural gas have little effect on natural gas margin.
|
| Six Months ended June 30, |
| |||||
(Millions of dollars) |
| 2007 |
| 2006 |
| |||
Natural gas utility revenues |
| $ | 707 |
| $ | 743 |
| |
Cost of natural gas sold and transported |
| (527 | ) | (577 | ) | |||
Natural gas utility margin |
| $ | 180 |
| $ | 166 |
| |
The following summarizes the components of the changes in natural gas revenues and margin for the six months ended June 30:
Natural Gas Revenues
(Millions of dollars) |
| 2007 vs. 2006 |
| |
Purchased gas adjustment clause recovery |
| $ | (51 | ) |
Estimated impact of weather on firm sales volume |
| 9 |
| |
Sales mix |
| 2 |
| |
Transport and other |
| 4 |
| |
Total decrease in natural gas revenues |
| $ | (36 | ) |
Natural Gas Margin
(Millions of dollars) |
| 2007 vs. 2006 |
| |
Estimated impact of weather on firm sales volume |
| $ | 9 |
|
Sales mix |
| 2 |
| |
Transport and other |
| 3 |
| |
Total increase in natural gas margin |
| $ | 14 |
|
Non-Fuel Operating Expense and Other Costs
Other Operating and Maintenance Expenses — The following summarizes the components of the changes in other operating and maintenance expense for the six months ended June 30:
(Millions of dollars) |
| 2007 vs. 2006 |
| |
Higher donation costs |
| $ | 5 |
|
Higher labor costs |
| 4 |
| |
Higher consulting costs |
| 3 |
| |
Higher material costs |
| 2 |
| |
Lower employee benefit costs |
| (4 | ) | |
Total increase in other operating and maintenance expense |
| $ | 10 |
|
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Income Taxes — Income tax expense increased by approximately $38.9 million for the first six months of 2007 compared with the first six months of 2006. The increase in income tax expense was primarily due to an increase in pretax income (excluding COLI) and $15.3 million of tax expense related to the COLI settlement in 2007. The effective tax rate was 44.0 percent for the first six months of 2007, compared with 23.5 percent for the same period in 2006. The higher effective tax rate for the first six months of 2007 was primarily due to the COLI settlement. Without these charges, the effective tax rate for 2007 would have been 27.5 percent.
Regulation
Summary of Recent Federal Regulatory Developments
The FERC has jurisdiction over rates for electric transmission service in interstate commerce and electric energy sold at wholesale, hydro facility licensing, natural gas transportation, accounting practices and certain other activities of PSCo. State and local agencies have jurisdiction over many of PSCo’s activities, including regulation of retail rates and environmental matters. In addition to the matters discussed below, see Note 5 to the consolidated financial statements for a discussion of other regulatory matters.
FERC Rules Implementing Energy Policy Act of 2005 (Energy Act) — The Energy Act repealed the Public Utility Holding Company Act of 1935 effective Feb. 8, 2006. In addition, the Energy Act required the FERC to conduct several rulemakings to adopt new regulations to implement various aspects of the Energy Act. Since August 2005, the FERC has completed or initiated proceedings to modify its regulations on a number of subjects. In addition to the previous disclosure in Item 1 of PSCo’s Form 10-K for the year ended Dec. 31, 2006, the FERC issued final rules making certain reliability standards mandatory and subject to potential financial penalties up to $1 million per day per violation for non-compliance effective June 18, 2007.
While PSCo cannot predict the ultimate impact the new regulations will have on its operations or financial results, PSCo is taking actions that are intended to comply with and implement these new rules and regulations as they become effective.
Electric Transmission Rate Regulation — The FERC also regulates the rates charged and terms and conditions for electric transmission services. FERC policy encourages utilities to turn over the functional control over their electric transmission assets and the related responsibility for the sale of electric transmission services to a Regional Transmission Organization (RTO). Each RTO separately files regional transmission tariff rates for approval by the FERC. All members within that RTO are then subjected to those rates. PSCo is currently participating with other utilities in the development of WestConnect, which would provide certain regionalized transmission and wholesale energy market functions but would not be an RTO.
On Feb. 15, 2007, the FERC issued final rules adopting revisions to its 1996 open access transmission rules. PSCo submitted the initial required revisions to its Open Access Transmission Tariff (OATT) on July 13, 2007, as required.
In addition, in January 2007, the FERC issued interim and proposed rules to modify the current FERC rules governing the functional separation of the PSCo electric transmission function from the wholesale sales and marketing function. The proposed rules are pending final FERC action.
While PSCo cannot predict the ultimate impact the new regulations will have on its operations or financial results, PSCo is taking actions that are intended to comply with and implement these new rules and regulations as they become effective.
Market Based Rate Rules — On June 21, 2007, the FERC issued a final order amending its regulations governing its market-based rate authorizations to electric utilities such as PSCo. The FERC reemphasized its commitment to market-based pricing, but is revising the tests it’s using to assess whether a utility has market power and has emphasized that it intends to exercise greater oversight where it has market-based rate authorizations. PSCo has been granted market-based rate authority and will be subject to the new rule. PSCo is presently analyzing the new rule.
An aspect of FERC’s market-based rate requirements is the requirement to charge mitigated rates in markets where a utility is found to have market power or where a utility cannot establish the absence of market power. PSCo s been authorized by the FERC to charge market-based rates outside of their control areas, but is generally limited to charging mitigated rates within their control areas. Consistent with the approach followed by many other utilities subject to the FERC’s mitigation requirement, PSCo uses cost-based rate caps set out in the Western Systems Power Pool (WSPP) agreement as their applicable mitigated rates, an approach expressly approved by the FERC. However, concurrently with the issuance of the final order, the FERC initiated a proceeding to investigate whether the use of the WSPP rate caps for this purpose is just and reasonable. An outcome of this proceeding may be to lower the mitigated rates that PSCo may charge in their control areas.
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Other Regulatory Matters — PSCo
Renewable Energy Standard — The 2007 Colorado legislature adopted an increased Renewable Energy Standard that requires PSCo to generate or purchase electricity from renewable resources equaling at least 10 percent of its retail sales by 2010, 15 percent of retail sales by 2015 and 20 percent of retail sales by 2020. The new law limits the incremental retail rate impact from these acquisitions to 2 percent. The new legislation encourages favorable cost recovery for utility investment in renewable resources, including the use of a rider mechanism and a return on construction work in progress.
Transmission Cost Recovery Legislation — The 2007 Colorado legislature enacted legislation that is intended to encourage investment in transmission infrastructure in Colorado. The new legislation provides for recovery through a rate rider of all costs a utility incurs in the planning, developing and construction or expansion of transmission facilities and for current recovery through this rider of the utilities weighted average cost of capital on transmission construction work in progress as of the end of the prior year. This legislation also provides for rate-regulated Colorado utilities to develop plans to construct or expand transmission facilities to transmission constrained zones where new electric generation facilities, including renewable energy facilities, are likely to be located and provides for expedited approvals for such facilities.
2003 Least Cost Plan (LCP) Investigation — In January 2007, PSCo filed with the CPUC its final report on its evaluation of the bids submitted in response to PSCo’s 2005 All Source request for proposal under PSCo’s 2003 LCP. In the report, PSCo stated it intended to negotiate extensions to power purchase agreements for the output from three existing gas-fired facilities for a total of 465 MW of the 896 MW needed for 2013. The final report explained that PSCo was intentionally waiting to fill the remaining 430MW resources needed in 2013 until PSCo’s 2007 LCP and that PSCo was rejecting uneconomic bids received for new coal generation and for renewal of contracts with existing natural gas-fired generators.
On March 1, 2007, the CPUC issued an order requiring PSCo to apply for approval of a 2013 contingency plan. On April 2, 2007, PSCo filed its 2013 contingency plan, which recommended addressing the remaining 2013 resource need in the 2007 LCP to be filed in October 2007. PSCo’s contingency plan also listed other options, which PSCo predicts will be less costly than accepting the uneconomic coal and natural gas bids.
On April 25, 2007, the CPUC asked its staff to provide the CPUC with a report that addresses at a minimum, whether the PSCo’s negotiations with coal bidders were made in good faith; any specific concerns the staff may have with respect to PSCo’s evaluation of 2013 resources; and what changes to the CPUC rules or practices may be warranted in light of the staff’s conclusions.
The CPUC staff filed a report, which argues that the PSCo should have made more concessions to the coal bidders in contract negotiations and PSCo’s conclusion that the coal bids were not economic was based upon flawed modeling. The CPUC staff recommends changes to the LCP rules that would require model contracts to be approved by the CPUC as part of the upfront LCP process and would require the CPUC to use an independent evaluator to identify the utility’s least cost resource portfolio. Staff further recommends restrictions on resource modeling practices and assumptions and on utility actions that depart from an approved resource plan.
On May 25, 2007, PSCo amended its 2013 contingency plan to include amendments to two power purchase agreements with Tri-State Generation and Transmission Association, Inc. under which PSCo would return Tri-State generation capacity currently under contract to PSCo in the years 2009 through 2012 and then recapture that capacity in the years 2013 through 2015. PSCo explained this capacity swap would save PSCo an estimated $49 million on a net present value basis. PSCo still would meet the remaining 2013 need through its 2007 LCP. The CPUC held hearings on the PSCo 2013 contingency plan on July 9, 2007. The PSCo contingency plan was opposed by the CPUC trial staff and by a intervenor, but was supported by the Colorado Office of Consumer Counsel. The opponents have asked for all 2013 resource acquisition decisions to be deferred to the 2007 LCP. A CPUC decision is not expected until mid-August 2007.
On July 3, 2007, the CPUC issued an order soliciting comments to determine whether the LCP Rules need to be changed on an emergency basis to govern utility filings in October 2007. PSCo filed comments responding to this order suggesting the LCP rules require revisions, but not the revisions suggested by the CPUC staff which include the recommendation of using an independent evaluator to assess all bids. CPUC action, if any, to issue emergency changes to the LCP rules is expected to occur in August 2007.
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Item 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
PSCo maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. In addition, the disclosure controls and procedures ensure that information required to be disclosed is accumulated and communicated to management, including the chief executive officer (CEO) and chief financial officer (CFO), allowing timely decisions regarding required disclosure. As of the end of the period covered by this report, based on an evaluation carried out under the supervision and with the participation of PSCo’s management, including the CEO and CFO, of the effectiveness of our disclosure controls and procedures, the CEO and CFO have concluded that PSCo’s disclosure controls and procedures are effective.
Internal Control Over Financial Reporting
No change in PSCo’s internal control over financial reporting has occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.
Part II. OTHER INFORMATION
In the normal course of business, various lawsuits and claims have arisen against PSCo. After consultation with legal counsel, PSCo 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/A 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 Note 12 of PSCo’s Annual Report on Form 10-K for the year ended Dec. 31, 2006, for a description of certain legal proceedings presently pending.
PSCo’s risk factors are documented in Item 1A of Part I of its 2006 Annual Report on Form 10-K, which is incorporated herein by reference. As a result of developments in our business since the filing of 2006 Annual Report on Form 10-K, we are providing below an update of the risk factor relating to COLI.
PSCo has received a notice from the IRS proposing to disallow certain interest expense deductions that PSCo claimed under a COLI policy. We have reached a settlement in principle, the terms of which have been accepted by the IRS and the Department of Justice and require Xcel Energy to make certain payments to the government and surrender the COLI policies by Oct. 31, 2007.
On Sept. 20, 2007, Xcel Energy submitted its formal offer in compromise to settle the dispute relating to the proper tax treatment of the COLI policies beginning with tax year 1993 and for all years thereafter. By letter dated Sept. 21, 2007, the United States accepted the terms of that settlement offer. The terms of the final settlement are essentially the same as the settlement in principle reached on June 19, 2007. The U.S. government’s letter terminates the tax litigation pending between the parties for tax years 1993-2002 and also specifies the agreed tax treatment for certain aspects of those policies for subsequent tax years. See Note 4 to PSCo’s consolidated financial statements for additional disclosure related to the COLI settlement.
The following Exhibits are filed with this report:
31.01 |
| Principal Executive Officer’s and Principal Financial Officer’s certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
32.01 |
| Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
99.01 |
| Statement pursuant to Private Securities Litigation Reform Act of 1995. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on Dec. 17, 2007.
Public Service Co. of Colorado
(Registrant)
/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 |
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