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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-K

(Mark One)

For the fiscal year ended Dec. 31, 2003

     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 [  ]

     Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [  ] No [X]

     Northern States Power Co. (a Minnesota corporation), Northern States Power Co. (a Wisconsin corporation), Public Service Co. of Colorado and Southwestern Public Service Co. meet the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore filing this Form 10-K with the reduced disclosure format specified in General Instruction I(2) to such Form 10-K.

     Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. All outstanding common stock is owned beneficially and of record by Xcel Energy Inc., a Minnesota corporation. Shares outstanding at Feb. 21, 2003:

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INDEX

     This combined Form 10-K is separately filed by Northern States Power Co., a Minnesota corporation (NSP-Minnesota); Northern States Power Co., a Wisconsin corporation (NSP-Wisconsin); Public Service Co. of Colorado (PSCo); and Southwestern Public Service Co. (SPS). NSP-Minnesota, NSP-Wisconsin, PSCo and SPS are all wholly owned subsidiaries of Xcel Energy Inc. Additional information on Xcel Energy is available in various filings with the U.S. Securities and Exchange Commission (SEC). Information in this report relating to any individual company is filed by such company on its own behalf. Each registrant makes representation only to itself and makes no representations as to information relating to the other registrants. This report should be read in its entirety.

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Item l. Business

COMPANY OVERVIEW

     In 2003, Xcel Energy Inc. (Xcel Energy) directly owned five utility subsidiaries that serve electric and natural gas customers in 11 states. Four of these utility subsidiaries are SEC registrants, including Northern States Power Co., a Minnesota corporation (NSP-Minnesota); Northern States Power Co., a Wisconsin corporation (NSP-Wisconsin); Public Service Co. of Colorado, a Colorado corporation (PSCo); and Southwestern Public Service Co., a New Mexico corporation (SPS).

NSP-Minnesota

     NSP-Minnesota was incorporated in 2000 under the laws of Minnesota. NSP-Minnesota is an operating utility engaged in the generation, purchase, transmission, distribution and sale of electricity in Minnesota, North Dakota and South Dakota. NSP-Minnesota also purchases, distributes and sells natural gas to retail customers and transports customer-owned natural gas in Minnesota and North Dakota. NSP-Minnesota provides electric utility service to approximately 1.3 million customers and gas utility service to approximately 440,000 customers.

     NSP-Minnesota owns the following direct subsidiaries: United Power and Land Co., which holds real estate; and NSP Nuclear Corp., which holds NSP-Minnesota’s interest in the Nuclear Management Co. NSP-Minnesota owned NSP Financing I, a special purpose financing trust, for which a certificate of cancellation was filed for dissolution on Sept. 15, 2003.

NSP-Wisconsin

     NSP-Wisconsin was incorporated in 1901 under the laws of Wisconsin. NSP-Wisconsin is an operating utility engaged in the generation, transmission and distribution of electricity to approximately 235,000 customers in northwestern Wisconsin and in the western portion of the Upper Peninsula of Michigan. NSP-Wisconsin is also engaged in the distribution, sale and transport of customer-owned natural gas in the same service territory to approximately 95,000 customers.

     NSP-Wisconsin owns the following direct subsidiaries: Chippewa and Flambeau Improvement Co., which operates hydro reserves; Clearwater Investments Inc., which owns interests in affordable housing; and NSP Lands, Inc., which holds real estate.

PSCo

     PSCo was incorporated in 1924 under the laws of Colorado. PSCo is an operating utility engaged principally in the generation, purchase, transmission, distribution and sale of electricity and the purchase, transportation, distribution and sale of natural gas. PSCo serves approximately 1.3 million electric customers and approximately 1.2 million natural gas customers in Colorado.

     PSCo owns the following direct subsidiaries: 1480 Welton, Inc., which owns certain real estate interests for PSCo; PSR Investments, Inc., which owns and manages permanent life insurance policies on certain employees; and Green and Clear Lakes Co., which owns water rights. PSCo also holds a controlling interest in several other relatively small ditch and water companies whose capital requirements are not significant. PS Colorado Credit Corp., a finance company that was owned by PSCo and financed certain of PSCo’s current assets, was dissolved in 2002. PSCo owned PSCo Capital Trust I, a special purpose financing trust, for which a certificate of cancellation was filed for dissolution on Dec. 29, 2003.

SPS

     SPS was incorporated in 1921 under the laws of New Mexico. SPS is an operating utility engaged primarily in the generation, purchase, transmission, distribution and sale of electricity. SPS serves approximately 395,000 electric customers in portions of Texas, New Mexico, Oklahoma and Kansas. The wholesale customers served by SPS comprise approximately 38 percent of the total kilowatt-hour sales. A major portion of SPS’ retail electric operating revenues is derived from operations in Texas.

     At Dec. 31, 2003, SPS owned a direct subsidiary, Southwestern Public Service Capital I (SPS Capital I), a special purpose financing trust, for which a certificate of cancellation was filed for dissolution on Jan. 5, 2004.

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UTILITY REGULATION

Ratemaking Principles

     The utility subsidiaries of Xcel Energy are subject to the regulatory oversight of the SEC under the Public Utility Holding Company Act of 1935 (PUHCA). The rules and regulations under the PUHCA impose a number of restrictions on the operations of registered holding company systems. These restrictions include, subject to certain exceptions, a requirement that the SEC approve securities issuances, payments of dividends out of capital or unearned surplus, sales and acquisitions of utility assets or of securities of utility companies and acquisitions of other businesses. PUHCA also generally limits the operations of a registered holding company to a single integrated public utility system, plus additional energy-related businesses. PUHCA rules require that transactions between affiliated companies in a registered holding company system be performed at cost, with limited exceptions.

     The Federal Energy Regulatory Commission (FERC) has jurisdiction over rates for electric transmission service in interstate commerce and electric energy sold at wholesale, hydro facility licensing, accounting practices and certain other activities of Xcel Energy’s utility subsidiaries. Federal, state and local agencies also have jurisdiction over many of the utility subsidiaries’ other activities, including regulation of retail rates and environmental matters.

     The utility subsidiaries of Xcel Energy are unable to predict the impact on their operating results from the future regulatory activities of any of these agencies. The utility subsidiaries of Xcel Energy are responsible for compliance with all rules and regulations issued by the various agencies.

NSP-Minnesota

     Retail rates, services and other aspects of NSP-Minnesota’s operations are subject to the jurisdiction of the Minnesota Public Utilities Commission (MPUC), the North Dakota Public Service Commission (NDPSC) and the South Dakota Public Utilities Commission (SDPUC) within their respective states. The MPUC has regulatory authority over aspects of NSP-Minnesota’s financial activities, including security issuances, certain property transfers, mergers with other utilities and transactions between NSP-Minnesota and its affiliates. In addition, the MPUC reviews and approves NSP-Minnesota’s electric resource plans and gas supply plans for meeting customers’ future energy needs. The MPUC also certifies the need for generating plants greater than 50 megawatts and transmission lines greater than 100 kilovolts. NSP-Minnesota is subject to the jurisdiction of the FERC with respect to its wholesale electric operations, accounting practices, wholesale sales for resale and the transmission of electricity in interstate commerce. NSP-Minnesota has received authorization from the FERC to make wholesale electricity sales at market-based prices.

     The Minnesota Environmental Quality Board (MEQB) is empowered to select and designate sites for new power plants with a capacity of 50 megawatts or more and wind energy conversion plants with a capacity of five megawatts or more. It also designates routes for electric transmission lines with a capacity of 100 kilovolts or more. No power plant or transmission line may be constructed in Minnesota except on a site or route designated by the MEQB. The NDPSC has regulatory authority over the need for certain generating and transmission facilities, and the siting and routing of certain new generation and transmission facilities in North Dakota.

NSP-Wisconsin

     NSP-Wisconsin is subject to regulation by the Public Service Commission of Wisconsin (PSCW) and the Michigan Public Service Commission (MPSC). In addition, each of the state commissions certifies the need for new generating plants and electric and retail gas transmission lines of designated capacities to be located within the respective states before the facilities may be sited and built. NSP-Wisconsin is subject to the jurisdiction of the FERC with respect to its wholesale electric operations, accounting practices, wholesale sales for resale and the transmission of electricity in interstate commerce. NSP-Wisconsin has received authorization from the FERC to make wholesale electricity sales at market-based prices.

     The PSCW has a biennial base rate-filing requirement. By June of each odd-numbered year, NSP-Wisconsin must submit a rate filing for the two-year test year period beginning the following January. The filing procedure and review generally allow the PSCW sufficient time to issue an order and implement new base rates effective with the start of the test year.

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PSCo

     PSCo is subject to the jurisdiction of the Colorado Public Utilities Commission (CPUC) with respect to its facilities, rates, accounts, services and issuance of securities. PSCo is subject to the jurisdiction of the FERC with respect to its wholesale electric operations, accounting practices, wholesale sales for resale and the transmission of electricity in interstate commerce. PSCo has received authorization from the FERC to make wholesale electricity sales at market-based prices. Also, PSCo holds a FERC certificate that allows it to transport natural gas in interstate commerce without PSCo becoming subject to full FERC jurisdiction under the federal Natural Gas Act.

SPS

     The Public Utility Commission of Texas (PUCT) has jurisdiction over SPS’ Texas operations as an electric utility and over its retail rates and services. The municipalities in which SPS operates in Texas have original jurisdiction over SPS’ rates in those communities. The New Mexico Public Regulation Commission (NMPRC) has jurisdiction over the issuance of securities. The NMPRC, the Oklahoma Corporation Commission and the Kansas Corporation Commission have jurisdiction with respect to retail rates and services and construction of transmission or generation in their respective states. SPS is subject to the jurisdiction of the FERC with respect to its wholesale electric operations, accounting practices, wholesale sales for resale and the transmission of electricity in interstate commerce. SPS has received authorization from the FERC to make wholesale electricity sales at market-based prices.

Fuel, Purchased Gas and Resource Adjustment Clauses

NSP-Minnesota

     NSP-Minnesota’s retail electric rate schedules in Minnesota, North Dakota and South Dakota jurisdictions provide for monthly adjustments to billings and revenues for changes in prudently incurred cost of fuel and purchased energy. NSP-Minnesota is permitted to recover these costs through fuel clause mechanisms individually approved by the regulators in each jurisdiction. The fuel clause mechanisms allow NSP-Minnesota to bill customers for the cost of fuel used to generate electricity at its plants and energy purchased from other suppliers. In general, capacity costs are not recovered through the fuel clause adjustment. NSP-Minnesota’s electric wholesale customers do not have a fuel clause provision in their contracts. Instead, the contracts have an annual price escalation factor subject to a rate cap.

     The MPUC has opened an investigation to consider the continuing usefulness of fuel clause adjustments for electric utilities in Minnesota. No action has been proposed. The MPUC has the authority to disallow recovery of certain costs if it finds the utility was not prudent in its procurement activities.

     NSP-Minnesota’s retail gas rate schedules for Minnesota and North Dakota include a purchased gas adjustment (PGA) clause that provides for prospective monthly rate adjustments to reflect the forecasted cost of purchased gas. The annual difference between the gas costs collected through PGA rates and the actual gas costs are collected or refunded over the subsequent 12-month period. The MPUC has the authority to disallow recovery of certain costs if it finds the utility was not prudent in its procurement activities.

     NSP-Minnesota is required by Minnesota law to spend a minimum of 2 percent of Minnesota electric revenue and 0.5 percent of Minnesota gas revenue on conservation improvement programs. These costs are recovered through an annual cost recovery mechanism for electric and gas conservation and energy management program expenditures. NSP-Minnesota is required to request a new cost recovery level annually.

NSP-Wisconsin

     NSP-Wisconsin does not have an automatic electric fuel adjustment clause for Wisconsin retail customers. Instead, it has a procedure that compares actual monthly and anticipated annual fuel costs with those costs that were included in the latest retail electric rates. If the comparison results in a difference outside a prescribed range, the PSCW may hold hearings limited to fuel costs and revise rates upward or downward. Any revised rates would remain in effect until the next rate change. The adjustment approved is calculated on an annual basis, but applied prospectively. NSP-Wisconsin’s wholesale electric rate schedules provide for adjustments to billings and revenues for changes in the cost of fuel and purchased energy.

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     NSP-Wisconsin has a retail gas cost recovery mechanism for Wisconsin operations to recover changes in the actual cost of natural gas and transportation and storage services. The PSCW has the authority to disallow certain costs if it finds the utility was not prudent in its procurement activities.

     NSP-Wisconsin’s gas and retail electric rate schedules for Michigan customers include gas cost recovery factors and power supply cost recovery factors, which are based on 12-month projections. After each 12-month period, a reconciliation is submitted whereby any over-collections are refunded and any under-collections are collected from the customers over the subsequent 12-month period.

PSCo

PSCo has several retail adjustment clauses that recover fuel, purchased energy and resource costs:

	•		Incentive Cost Adjustment (ICA) and Interim Adjustment Clause (IAC) - The ICA allowed for an equal sharing between retail electric customers and shareholders of certain fuel and purchased energy costs and expired Dec. 31, 2002. The collection of prudently incurred 2002 ICA costs is being amortized over the period June 1, 2002 through March 31, 2005. During 2003, the IAC provided for the recovery of prudently incurred fuel and energy costs not included in electric base rates.
	•		Electric Commodity Adjustment (ECA) - The ECA, effective Jan. 1, 2004, is an incentive adjustment mechanism that compares actual fuel and purchased energy expense in a calendar year to a benchmark formula. The ECA then provides for an $11.25 million cap on any cost sharing over or under an allowed ECA formula rate.
	•		Gas Cost Adjustment (GCA) - The GCA allows PSCo to recover its actual costs of purchased gas. The GCA rate is revised at least annually to coincide with changes in purchased gas costs. In 2002, PSCo requested to modify the GCA to allow for monthly changes in gas rates. A final decision in this proceeding is expected in 2004.
	•		Steam Cost Adjustment (SCA) - The SCA allows PSCo to recover the difference between its actual cost of fuel and the amount of these costs recovered under its base steam service rates. The SCA rate is revised annually to coincide with changes in fuel costs.
	•		Air-Quality Improvement rider (AQIR) - The AQIR recovers, over a 15-year period, the incremental cost (including fuel and purchased energy) incurred by PSCo as a result of a voluntary plan to reduce emissions and improve air quality in the Denver metro area.
	•		Demand-Side Management Cost Adjustment (DSMCA) - The DSMCA clause currently permits PSCo to recover DSM costs over five years while non-labor incremental expenses and carrying costs associated with deferred DSM costs are recovered on an annual basis. PSCo also has a low-income energy assistance program. The costs of this energy conservation and weatherization program for low-income customers are recovered through the DSMCA.
	•		Qualifying facilities capacity cost adjustment (QFCCA) - The QFCCA provides for recovery of purchased capacity costs from certain qualified facilities not otherwise reflected in base electric rates. The QFCCA expired in April 2003, but remained under collected as of Dec. 31, 2003 by $1.4 million. According to the 2002 PSCo General Rate Case Settlement Agreement, PSCo is entitled to recover the remaining balance through a recovery mechanism to be proposed once the final balance is determined.

     PSCo recovers fuel and purchased energy costs from its wholesale customers through a fuel cost adjustment clause accepted for filing by the FERC. In February 2004, the FERC approved a revised wholesale fuel adjustment clause for PSCo, which PSCo submitted as part of a settlement agreement with certain of its wholesale customers contesting past charges under PSCo’s prior fuel adjustment clause.

SPS

     Fuel and purchased energy costs are recovered in Texas through a fixed fuel and purchased energy recovery factor, which is part of SPS’ retail electric rates. In July 2003, a unanimous settlement was reached providing for the implementation of an expedited procedure for revising the fixed fuel factors on a semi-annual basis. The Texas retail fuel factors will change each November and May based on the projected cost of natural gas.

     If it appears that SPS will materially over-recover or under-recover these costs, the factor may be revised upon application by SPS or action by the PUCT. The regulations require refunding or surcharging over- or under-recovery amounts, including interest, when they exceed 4 percent of the utility’s annual fuel and purchased energy costs, as allowed by the PUCT, if this condition is expected to

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continue. In 2003, SPS has received approval and implemented two fuel surcharge applications in Texas to recover additional fuel cost under-recoveries totaling approximately $28.9 million.

     PUCT regulations require periodic examination of SPS fuel and purchased energy costs, the efficiency of the use of such fuel and purchased energy, fuel acquisition and management policies and purchase energy commitments. Under the PUCT’s regulations, SPS is required to file an application for the PUCT to retrospectively review at least every three years the operations of SPS’ electric generation and fuel management activities. In May 2003, a stipulation was approved by the PUCT, resolving all issues regarding SPS’ fuel costs and wholesale trading activities from January 2000 through December 2001. The parties agreed that SPS would reduce its December 2001 fuel under-recovery balances by $5.8 million. The net impact to SPS’ income, before tax, was a reduction of $4.7 million recorded in 2003. SPS has agreed to file its next reconciliation for electric generation and fuel management activities for the period from January 2002 through December 2003 by June 2004.

     The NMPRC regulations provide for a fuel and purchased power cost adjustment clause for SPS’ New Mexico retail jurisdiction. SPS files monthly and annual reports of its fuel and purchased power costs with the NMPRC. The NMPRC authorized SPS to implement a monthly adjustment factor beginning with the February 2002 billing cycle. In accordance with the NMPRC regulations, SPS must file its next New Mexico fuel factor continuation case no later than August 2005.

     SPS recovers fuel and purchased energy costs from its wholesale customers through a fuel cost adjustment clause accepted for filing by the FERC.

Other Regulatory Mechanisms and Requirements

General

See discussions of regional transmission organizations (RTO) at Electric Utility Operations below.

NSP-Minnesota

     “PLUS” Performance-Based Regulation — In December 2000, the NDPSC approved NSP-Minnesota’s “PLUS” performance-based regulation proposal, effective January 2001, for its electric operations in North Dakota. The plan established operating and service performance standards in the areas of system reliability, customer satisfaction, price and worker safety. NSP-Minnesota’s performance determines the range of allowed return on equity for its North Dakota electric operations. The plan will generate refunds or surcharges when earnings fall outside of the allowed return on equity range. The PLUS plan will remain in effect through 2005. In late 2003, NSP-Minnesota proposed certain changes to the performance indices for the 2004 and 2005 plan years, but it is unknown if the NDPSC will approve the changes.

     Metro Emissions Reduction Program (MERP) — On Dec. 18, 2003, the MPUC approved NSP-Minnesota’s proposal to convert two coal-fueled electric generating plants to natural gas, and to install advanced pollution control equipment at a third coal-fired plant. The program includes the installation of state-of-the-art pollution control equipment at the A. S. King plant and conversion of the High Bridge and Riverside plants to use natural gas rather than coal. These improvements are expected to significantly reduce air emissions from these facilities, while increasing the capacity at system peak by 300 megawatts. Major construction is expected to start in 2005 and be completed in 2009. The projects are expected to come on line between 2007 and 2009 at a cumulative investment of approximately $1 billion. The MPUC also approved NSP-Minnesota’s proposal to recover prudent costs of the projects through a rate adjustment provision applicable to retail electric rates beginning Jan. 1, 2006, including a rate of return on the construction work in progress. The MPUC approval has a sliding return on equity (ROE) scale based on actual construction cost compared with a target level of construction costs (based on an equity ratio of 48.5 percent and debt of 51.5 percent) to incentivize NSP-Minnesota to control construction costs.

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     Other regulatory approvals, such as environmental permitting, are needed before the proposal can be implemented.

PSCo

     The CPUC established an electric Performance-Based Regulatory Plan (PBRP) under which PSCo operates. The major components of this regulatory plan include:

•

an annual electric earnings test with the sharing between customers and shareholders of earnings in excess of the following limits:

	•		all earnings above an 11-percent return on equity for 2001 and a 10.50-percent return on equity for 2002;
	•		no earnings sharing for 2003 as PSCo established new rates in its general rate case; and
	•		an annual electric earnings test with the sharing of earnings in excess of the return on equity for electric operations of 10.75 percent for 2004 through 2006;

•		an electric quality of service plan (QSP) that provides for bill credits to customers if PSCo does not achieve certain performance targets relating to electric reliability and customer service through 2006; and
•		a natural gas QSP that provides for bill credits to customers if PSCo does not achieve certain performance targets relating to natural gas leak repair time and customer service through 2007.

     PSCo regularly monitors and records as necessary an estimated customer refund obligation under the PBRP. In April of each year following the measurement period, PSCo files its proposed rate adjustment under the PBRP. The CPUC conducts proceedings to review and approve these rate adjustments annually.

	•		In 2001, PSCo did not earn a return on equity in excess of 11 percent and met the electric and gas QSP benchmarks. The CPUC has accepted the QSP components of the PBRP filing and approved the earnings test.
	•		In 2002, PSCo did not earn a return on equity in excess of 10.5 percent, so no refund liability has been recorded. Both electric and gas QSP benchmarks were met. Therefore, no liability has been recorded for the earnings test. A CPUC decision is pending. The CPUC is considering whether PSCo’s cost of debt has been adversely affected by the financial difficulties of NRG, and if so, whether any adjustments to PSCo’s cost of capital should be made. A hearing has been set for August 2004.
	•		PSCo expects to file the 2003 QSP results in April 2004. An estimate of customer refund obligations under the electric QSP plan was recorded in 2003 relating to the electric service unavailability and customer complaint measures. No refund under the gas QSP is anticipated.

     In 2003, PSCo filed an application to put into effect a purchased-capacity cost-adjustment mechanism that would allow it to recover 100 percent of its incremental purchased-capacity costs over the level of these costs in rates. As a part of this application, PSCo proposed to modify the PBRP for 2004 through 2006 to provide that 100 percent of any earnings in excess of a 10.75-percent return on equity for electric operations be returned to customers. The application is pending approval of the CPUC.

SPS

     Texas Earnings Test — Prior to June 2001, SPS operated under an earnings test in Texas, which required all excess earnings to be refunded to retail customers. SPS did not operate under an earnings test in Texas in 2003, 2002 or the remainder of 2001.

     Texas Service Reliability — As a result of the order approving the merger to form Xcel Energy in August 2000, the PUCT requires that SPS meet certain service reliability standards and telephone response time standards. If these standards are not met, SPS is subject to a maximum annual rebate to customers of $950,000. The rebate is credited to the customer’s electric bill if they are served by one of the distribution feeders that fail to meet the service reliability standard. However, the rebate for the telephone response time standard, if not met, is refunded on a per capita basis to all customers. Refunds for 2002 and 2001 were $800,000 and $756,000, respectively. The 2003 refunds are expected to be less than $300,000.

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     Texas-New Mexico Power Company (TNP) Acquisition Surcharge — In September 1995, SPS acquired the Texas Panhandle properties of TNP and has been surcharging the acquisition premium to those specific customers. At the end of 2003, SPS had $214,000 remaining to collect of the $15.3 million total amount related to the TNP acquisition. SPS expects to have collected the remaining TNP acquisition amount in the first quarter of 2004, at which time the surcharge will terminate. The expiration of the TNP Surcharge is expected to reduce revenue by approximately $1.4 million in 2004.

Pending Regulatory Matters

General

     Section 206 Investigation Against of All Wholesale Electric Sellers — In November 2001, the FERC issued an order under Section 206 of the Federal Power Act initiating a “generic” investigation proceeding against all jurisdictional electric suppliers making sales in interstate commerce at market-based rates. NSP-Minnesota, NSP-Wisconsin, PSCo, and SPS previously received FERC authorization to make wholesale sales at market-based rates, and have been engaged in such sales subject to a tariff on file at the FERC. The order proposed that all wholesale electric sales at market-based rates conducted starting 60 days after publication of the FERC order in the Federal Register would be subject to refund conditioned on factors determined by the FERC. In December 2001, the FERC issued a supplemental order delaying the effective date of the subject-to-refund condition, but subject to further investigation and proceedings.

     In November 2003, the FERC issued a final order requiring amendments to the market-based wholesale tariffs of all FERC-jurisdictional electric utilities, to impose new market behavior rules, and requiring submission of compliance tariff amendments in December 2003. NSP-Minnesota, NSP-Wisconsin, PSCo and SPS each made a timely compliance filing. Violations of the new tariffs could result in the loss of certain wholesale sales revenues or the loss of authority to makes sales at market-based rates.

     Additionally, in connection with their market-based rate authority, NSP-Minnesota, NSP-Wisconsin, PSCo and SPS have an obligation to file, on a periodic basis, an updated market power analysis based on a supply margin assessment (SMA). Xcel Energy, on behalf of itself and the Xcel Energy operating companies with market-based rate authority, filed such an updated market power analysis on Jan. 6, 2004. The analysis shows that the Xcel Energy operating companies with market-based rate authority do not have undue market power, based on application of the FERC market power assessment screen (the SMA screen). However, the FERC is presently evaluating on a generic basis continued use of the SMA screen. The Xcel Energy analysis showed that if the screen is modified to take into account load obligations, the Xcel Energy companies do not possess market power. Depending on what market screen it ultimately adopts, the FERC may deny the Xcel Energy operating companies continued market-based rate authority, or, more likely, make continued authorization subject to certain mitigation in certain geographic markets.

     SEC Trading Investigation - Pursuant to a formal order of investigation, on June 26, 2002, the SEC issued a subpoena to Xcel Energy requesting all documents concerning any so-called “round trip trades” with Reliant Resources, Inc. Pursuant to another formal order of investigation, on Oct. 3, 2002, the SEC issued a subpoena to Xcel Energy calling for additional information concerning certain energy trades between Xcel Energy on the one hand and Duke Energy Corporation and Mirant Corporation on the other, involving the same product, quantity and price executed on the same day. Xcel Energy and PSCo have produced documents and have cooperated in these investigations, but cannot predict the outcome of any investigation.

     FERC Transmission Inquiry — In October 2002, the FERC Office of Market Oversight and Investigations began a formal, non-public standard industry inquiry relating to the treatment by certain public utility companies of affiliates in generator interconnection and other transmission matters. In connection with the inquiry, the FERC asked Xcel Energy’s utility subsidiaries for certain information and documents. Xcel Energy’s utility subsidiaries have responded to the requests. This standard audit process is pending.

NSP-Minnesota

     Minnesota Service Quality Investigation – In 2002, the MPUC directed the Office of the Attorney General and the Minnesota Department of Commerce (state agencies) to investigate the accuracy of NSP-Minnesota’s electric reliability records, which are summarized and reported to the MPUC on a monthly basis with an annual true-up.

     On Sept. 24, 2003, NSP-Minnesota and the state agencies announced that they had reached a settlement agreement that would be submitted to the MPUC for its approval. Among the provisions are:

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	•		$1 million in refunds to Minnesota customers who have experienced the longest duration of outages, which have been accrued at Sept. 30, 2003;
	•		additional actions to improve system reliability in an effort to reduce outage frequency and duration. These actions, including tree trimming and cable replacement, will target the primary outage causes. At least an additional $15 million, above amounts being currently recovered in rates, is to be spent in Minnesota on these outage prevention improvements by Jan. 1, 2005; and
	•		development of a revised service quality plan containing a standard for service outage documentation, new performance measures, new thresholds for current performance measures and a new structure for consequences that will result from failure to meet these performance measures.

     On Nov. 14, 2003, NSP-Minnesota submitted a proposed service quality plan and an update regarding certain service quality settlement agreement provisions already implemented by NSP-Minnesota. On Jan. 22, 2004, the MPUC voted to modify the settlement to include an annual independent audit of NSP-Minnesota’s service outage records and under-performance payments for any future finding of inaccurate data by an independent auditor. Both state agencies and NSP-Minnesota have the option to void the settlement if they choose not to accept the MPUC’s modification. On March 10, 2004, the MPUC issued its order formally approving the settlement agreement as modified. All parties to the proceeding have twenty days from the date of the order to seek clarification or rehearing.

     South Dakota Service Quality — In 2002, the SDPUC investigated NSP-Minnesota’s electric service quality. In particular, the investigation focused on NSP-Minnesota operations in the Sioux Falls area. NSP-Minnesota committed to a number of actions to improve reliability, which were implemented; and in December 2003 provided the SDPUC with an updated 10-year capacity plan. NSP-Minnesota has completed the commitments made in December 2002 relating to service quality in the Sioux Falls area. In 2002, NSP-Minnesota also worked with the SDPUC to provide information and to answer inquiries regarding service quality. No docket was opened and the matter is resolved.

     Renewable Transmission Cost Recovery — In 2002, NSP-Minnesota filed for MPUC approval to establish a Renewable Cost Recovery (RCR) adjustment mechanism to recover the costs of transmission investments incurred to deliver renewable energy resources. The MPUC approved the RCR adjustment mechanism and the two-phase filing mechanism in April 2003. In February 2004, the MPUC conditionally approved the initial Phase 1 facility eligibility determination filing. NSP-Minnesota then filed for approval to recover $6 million of annual additional transmission costs from May 2004 to December 2004. The request is pending MPUC approval. The RCR adjustment mechanism provides for annual filings to set the RCR adjustment rates using updated transmission cost information.

     Time-of-Use Pilot Project — As required by MPUC Orders, NSP-Minnesota has been working to develop a time-of-use pilot project that would attempt to measure customer response and conservation potential of such a program. This pilot project explores providing customers with pricing signals and information that could better inform customers about their use of electricity and its costs. NSP-Minnesota has petitioned the MPUC for recovery of program costs. The 2002 program costs were approximately $2 million. The Department of Commerce has supported deferred accounting to provide for recovery of prudent, otherwise unrecovered and appropriate costs, subject to a normal prudence review process. The Office of the Attorney General has argued that cost recovery should be denied for several reasons. A MPUC hearing was held in January 2004 and requested NSP-Minnesota to further substantiate the prudence and appropriateness of the costs incurred. A final decision by the MPUC is expected in the second half of 2004.

NSP-Wisconsin

     2004 General Rate Case — On June 1, 2003, NSP-Wisconsin filed its required biennial rate application with the PSCW requesting no change in Wisconsin retail electric and natural gas base rates. NSP-Wisconsin requested the PSCW approve its application without hearing, pending completion of the Staff’s audit.

     On Dec. 22, 2003, the PSCW issued an interim order in the rate case approving NSP-Wisconsin’s request for alternative accounting treatment of the loss on reacquired debt associated with the refinancing of $110 million first mortgage bonds. In November 2003, NSP-Wisconsin had filed a proposal to amortize the loss on reacquired debt over the 15-year term of the new $150 million issue, as opposed to the “revenue neutral” method, which was specified in the PSCW order approving the refinancing and resulted in a shorter amortization period. Because the alternative method approved by the PSCW results in a longer amortization period, NSP-Wisconsin lowered financing costs by $394,000 in 2003 and expects to lower financing costs by $1,894,000 in 2004.

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     On Feb. 19, 2004, the PSCW verbally approved NSP-Wisconsin’s request for no change in retail electric and natural gas rates and determined to forego a public rate hearing based on the results of the PSCW’s staff audit. A final written order was issued on Feb. 23, 2004. In approving NSP-Wisconsin’s request, the current 11.9 percent return on common equity was retained and the existing fuel credit factor was rolled into base rates, effective March 15, 2004. The PSCW also allowed NSP-Wisconsin the option of filing updated fuel costs in the fall of 2004 for the purpose of resetting the fuel component of rates in 2005.

PSCo

     Incentive Cost Adjustment and Interim Adjustment Clause – PSCo’s ICA mechanism was in place for periods prior to 2003. The CPUC conducted a proceeding to review and approve the incurred and recoverable 2001 costs under the ICA. On July 10, 2003, a stipulation and settlement agreement was filed with the CPUC, which resolved all issues. The stipulation and settlement agreement also provides for a prospective revenue adjustment related to the maximum allowable natural gas hedging costs that will be a part of the electric commodity adjustment for 2004 and is expected to reduce 2004 rates by an estimated $4.6 million. The stipulation and settlement agreement was approved by the CPUC in August 2003. An evaluation of the 2002 recoverable ICA costs is pending before the CPUC with a decision expected no later than September 2004. In 2003, PSCo’s prudently incurred fuel and purchased energy costs are fully recoverable under the IAC and are not subject to sharing; however, they will still be subject to a future review by the CPUC.

     Wholesale Electric Rate Case – On June 19, 2003, PSCo filed a wholesale electric rate case with the FERC, proposing to increase the annual electric sales rates charged to wholesale customers, other than Cheyenne Light Fuel & Power Co., a wholly owned subsidiary of Xcel Energy. On Aug. 1, 2003, PSCo submitted a revised filing correcting an error in the calculation of income taxes. The revised filing requested an approximately $2 million annual increase with new rates effective in January 2004, subject to refund. In August 2003, PSCo reached a settlement in principle in this case. In December 2003, PSCo filed the offer of settlement for FERC approval, which was accepted by the FERC in February 2004.

     Electric Commodity Trading Investigation – In the comprehensive settlement agreement that concluded the PSCo 2002 general retail rate case, PSCo agreed to file an application with the CPUC in January 2004 for a review of the Colorado regulatory treatment of its wholesale electric commodity trading operations. In the filing, PSCo offered to replace the margin sharing between shareholders and retail customers that resulted from the rate case settlement with a defined trading benefit that would reduce retail electric rates by $2.02 million in 2005 and by $1.3 million in 2006. In return for this defined benefit, PSCo proposed to retain for shareholders all margins earned from electric commodity trading in 2005 and 2006 and to bear all risk of loss associated with electric commodity trading. PSCo’s proposal is pending before the CPUC. A decision is expected in October 2004.

     PSCo Wholesale Fuel Adjustment Clause Proceedings - Certain wholesale electric sales customers of PSCo filed complaints with the FERC in 2002 alleging PSCo has been improperly collecting certain fuel and purchased energy costs through the wholesale fuel cost adjustment clause included in their rates related to the periods 1996 through 2002. The FERC consolidated these complaints and set them for hearing. Claims were estimated at approximately $30 million. In August 2003, PSCo reached agreements in principle with all of the complainants under which such claims, as well as issues those customers had raised in response to PSCo’s proposal to change the base demand and energy rates applicable to wholesale requirements sales, were compromised and settled. Under the proposed settlement agreements, PSCo accrued a liability of $1.1 million in 2003 and made either cash payments or billing credits to respective customers in January 2004. The settlements also provide for revisions to the base demand and energy rates filed in the PSCo wholesale electric rate case that is currently pending before the FERC in a separate docket, as discussed above. As a part of the settlement, the customers agreed to withdraw their fuel clause investigation complaints. In January 2004, the customers filed motions to conditionally withdraw their complaints pending approval of the base rate settlement proposals. The settlement proposal is pending FERC acceptance.

     Electric Department Earnings Test Proceedings – PSCo has filed with the CPUC its annual electric department earnings test reports for 2002. PSCo did not earn above its allowed authorized return on equity and, accordingly, has not recorded any refund obligations. The CPUC has opened a docket to consider whether PSCo’s cost of debt has been adversely affected by the financial difficulties at NRG and, if so, whether any adjustments to PSCo’s cost of capital should be made. The 2002 proceeding has been set for hearing in September 2004.

     Capacity Cost Adjustment - In October 2003, PSCo filed with the CPUC an application to recover approximately $31.5 million of incremental capacity costs through a purchased capacity cost adjustment (PCCA) rider beginning March 1, 2004. The purpose of the PCCA is to recover purchased capacity payments to third party power suppliers that will not be recovered in PSCo’s current base electric rates or other recovery mechanisms. In addition, PSCo has proposed to return to its retail customers 100 percent of any electric earnings in excess of its authorized rate of return on equity allowed in the last rate case, currently 10.75 percent. In February 2004, PSCo updated its filing which will reduce the recovery amount from the original filing, and proposed that the PCCA rider become effective in the later part of 2004; a decision by the CPUC is pending.

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     Home Builders Association of Metropolitan Denver — In February 2001, Home Builders Association of Metropolitan Denver (HBA) filed a complaint with the CPUC seeking a reparations award of $13.6 million for PSCo’s failure to update its gas extension policy construction allowances from 1996 to 2002 under its tariff. On Sept. 24, 2003, the CPUC issued its decision, directing PSCo to pay a portion of the reclaimed reparations to HBA members, including interest, based on a revised construction allowance for the period Feb. 24, 1999, through May 31, 2002. In March 2004, PSCo filed a settlement which, if approved by the CPUC, would provide for payment of approximately $700,000 to HBA.

     California Refund Proceeding - A number of parties purchasing energy in markets operated by the California Independent System Operator (California ISO) or the California Power Exchange (PX) have asserted prices paid for such energy were unjust and unreasonable and that refunds should be made in connection with sales in those markets for the period Oct. 2, 2000 through June 20, 2001. PSCo supplied energy to these markets during this period and has been an active participant in the proceedings. The FERC ordered an investigation into the California ISO and PX spot markets and concluded that the electric market structure and market rules for wholesale sales of energy in California were flawed and have caused unjust and unreasonable rates for short-term energy under certain conditions. The FERC ordered modifications to the market structure and rules in California and established an administrative law judge (ALJ) to make findings with respect to, among other things, the amount of refunds owed by each supplier based on the difference between what was charged and what would have been charged in a more functional market, i.e., the “market clearing price,” which is based on the unit providing energy in an hour with the highest incremental cost. The initial proceeding related to California’s demand for $8.9 billion in refunds from power sellers. The ALJ subsequently stated that after assessing a refund of $1.8 billion for power prices, power suppliers were owed $1.2 billion because the State was holding funds owed to suppliers. Because of the low volume of sales that PSCo had into California after this date, PSCo’s exposure is estimated at approximately $1.2 million, which is offset by amounts owed by the California ISO to PSCo in excess of that amount.

     Certain California parties have sought rehearing of this decision. Among other things, they have asserted that the refund effective date should be set at an earlier date. They have based this request in part on the argument that the use by sellers of certain trading strategies in the California market resulted in unjust and unreasonable rates, thereby justifying an earlier refund effective date. The FERC subsequently allowed the purchasing parties to request from sellers, including PSCo, additional information regarding the market participants’ use of certain strategies and the effect those strategies may have had on the market. Based on the additional information they obtained, these purchasing entities argued to the FERC that use of these strategies did justify an earlier refund effective date. PSCo has estimated that the requested earlier effective date could increase PSCo’s refund exposure to approximately $15 million.

     In an order issued on October 16, 2003, the FERC determined that the refund effective date should not be reset to an earlier date, and gave clarification how refunds should be determined for the previously set refund period. The proceeding is still pending at the FERC to address the refund level issue. Certain California parties have filed appeals of the FERC’s decision not to establish an earlier refund effective date.

     FERC Investigation Against Wholesale Electric Sellers – On June 25, 2003, the FERC issued two show cause orders addressing alleged improper market behavior in the California electricity markets. In the first show cause order, the FERC found that 24 entities may have worked in concert through partnerships, alliances or other arrangements to engage in activities that constitute gaming and/or anomalous market behavior. The FERC initiated proceedings against these 24 entities requiring that they show cause why their behavior did not constitute gaming and/or anomalous market behavior. PSCo was not named in this order. In a second show cause order, the FERC indicated that various California parties, including the California ISO, have alleged that 43 entities individually engaged in one or more of seven specific types of practices that the FERC has identified as constituting gaming or anomalous market behavior within the meaning of the California ISO and California Power Exchange tariffs. PSCo was listed in an attachment to that show cause order as having been alleged to have engaged in one of the seven identified practices, namely circular scheduling. Subsequent to the show cause order, PSCo provided information to the FERC staff showing PSCo did not engage in circular scheduling. Subsequently, certain California parties requested that FERC make PSCo subject to the show cause proceeding addressing partnerships and expand the scope of the show cause order addressing gaming and/or anomalous to have PSCo address an allegation that it engaged in another of the specified activities, namely “load shift.”

     On Aug. 29, 2003, the FERC trial staff filed a motion to dismiss PSCo from the show cause proceeding. On Jan. 22, 2004, the FERC granted its Trial Staff’s motions to dismiss certain parties, including PSCo, of the show cause proceedings addressing the use of gaming or anomalous market behavior. The FERC also rejected requests to expand the scope of the show cause proceedings. On February 23, 2004, certain California parties sought rehearing of the FERC’s orders.

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     Pacific Northwest FERC Refund Proceeding - In July 2001, the FERC ordered a preliminary hearing to determine whether there may have been unjust and unreasonable charges for spot market bilateral sales in the Pacific Northwest for the period Dec. 25, 2000 through June 20, 2001. PSCo supplied energy to the Pacific Northwest markets during this period and has been an active participant in the hearings. In September 2001, the presiding ALJ concluded that prices in the Pacific Northwest during the referenced period were the result of a number of factors, including the shortage of supply, excess demand, drought and increased natural gas prices. Under these circumstances the ALJ concluded that the prices in the Pacific Northwest markets were not unreasonable or unjust and no refunds should be ordered. Subsequent to the ruling the FERC has allowed the parties to request additional evidence regarding the use of certain strategies and how they may have impacted the markets in the Pacific Northwest markets. For the referenced period, parties have claimed the total amount of transactions with PSCo subject to refund are $34 million.

     On June 25, 2003, the FERC issued an order terminating the proceeding without ordering further proceedings. On Nov. 10, 2003, in response to requests for rehearing, the FERC reaffirmed this ruling to terminate the proceeding without refunds. Certain purchasers have filed appeals of the FERC’s orders in this proceeding.

     CPUC Reliability Inquiry – In January 2004, the CPUC staff issued an initial report regarding its formal inquiry of PSCo’s electric distribution system reliability (Initial Report). The Initial Report makes several recommendations for improving reliability and noted that PSCo had already taken steps toward improvement. In February 2004, PSCo also provided the CPUC with its written and oral responses to the Initial Report describing its action plan to improve electric distribution system reliability. PSCo identified $24.9 million in expenditures directed at this effort that it would make during 2004.

     The Initial Report recommends audits of PSCo’s electric distribution system operations and maintenance practices and its IT systems supporting electric distribution reliability. PSCo believes the audits are unnecessary in light of its action plan to address the reliability concerns raised in the Initial Report. The CPUC has taken the Initial Report and PSCo’s response under advisement.

SPS

     Texas Fuel Surcharge Application — In November 2003, SPS submitted a fuel cost surcharge factor application in Texas to recover an additional $25 million of fuel cost under recoveries accrued during June through September 2003. In February 2004, the parties in the proceeding submitted a unanimous settlement for SPS to collect net under-recoveries experienced through December 2003 of $22 million. The surcharge will go into effect May 2004 and will continue for 12 months. The settlement is pending review and approval by the PUCT.

     Lamb County Electric Cooperative - On July 24, 1995, Lamb County Electric Cooperative, Inc. (LCEC) petitioned the PUCT for a cease and desist order against SPS. LCEC alleged that SPS had been unlawfully providing service to oil field customers and their facilities in LCEC’s singly-certificated area. The PUCT denied LCEC’s petition. See further discussion under Item 3 - Legal Proceedings.

     NMPRC Billing Practices Investigation - In 2003, the NMPRC opened an investigation of SPS’ billing practices as a result of certain customers receiving estimated billings for an extended period of time. The NMPRC ordered SPS to implement temporary billing measures for customers whose bills were estimated, which was completed in 2003. The NMPRC is expected to close its investigation in 2004.

ELECTRIC UTILITY OPERATIONS

Competition and Industry Restructuring

     Retail competition and the unbundling of regulated energy service could have a significant financial impact on Xcel Energy’s utility subsidiaries, due to an impairment of assets, a loss of retail customers, lower profit margins and increased costs of capital. During the past several years, there have been several restructuring initiatives initiated in the various states Xcel Energy’s utility subsidiaries operate, as well as the Federal level. However, we believe such risk has been mitigated, to a certain degree, as a result of less focus recently on such initiatives. The total impacts of restructuring may have a significant financial impact on the financial position, results of operation and cash flows of Xcel Energy’s utility subsidiaries. Xcel Energy’s utility subsidiaries cannot predict when they will be subject to changes in legislation or regulation, nor can they predict the impacts of such changes on their financial position, results of operation or cash flows. Xcel Energy believes that the prices its utility subsidiaries charge for electricity and the quality and reliability of their service currently place them in a position to compete effectively in the energy market.

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     Retail Business Competition — The retail electric business faces some competition as industrial and large commercial customers have some ability to own or operate facilities to generate their own electricity. In addition, customers may have the option of substituting other fuels, such as natural gas or steam/chilled water for heating, cooling and manufacturing purposes, or the option of relocating their facilities to a lower cost region. While each of Xcel Energy’s utility subsidiaries face these challenges, these subsidiaries believe their rates are competitive with currently available alternatives. Xcel Energy’s utility subsidiaries are taking actions to manage their operating costs and are working with their customers to analyze energy efficiency and load management in order to better position Xcel Energy’s utility subsidiaries to more effectively operate in a competitive environment.

     Wholesale Business Competition — The wholesale electric business faces competition in the supply of bulk power, due to federal and state initiatives, to provide open access to utility transmission systems. Under current FERC rules, investor-owned utilities are required to provide wholesale open access transmission services and to unbundle wholesale merchant and transmission operations. Xcel Energy’s utility subsidiaries are operating under a joint tariff in compliance with these rules. To date, these provisions have not had a material impact on the operations of Xcel Energy’s utility subsidiaries.

     Utility Industry Changes - The structure of the electric and natural gas utility industry has been subject to change. Merger and acquisition activity in the past had been significant as utilities combined to capture economies of scale or establish a strategic niche in preparing for the future, although such activity slowed substantially after 2001. All investor-owned utilities were required to provide nondiscriminatory access to the use of their transmission systems in 1996. The FERC continues to pursue the expansion of competitive wholesale electricity markets through regional transmission organizations and standard market design rules. In addition, the FERC issued a series of regulatory orders in 2003. These orders, among other things, standardized the methods and pricing of power generation interconnections, establish new standards of conduct rules for transmission providers and new market behavioral rules for utilities with wholesale market-based sales rate authority. Xcel Energy has not yet estimated the full impact of the new FERC regulatory orders, but it could be material.

     Some states had begun to allow retail customers to choose their electricity supplier, while other states have delayed or canceled industry restructuring. There were no significant retail electric or natural gas restructuring efforts in the states served by Xcel Energy in 2003. In 1999, the state of Texas implemented retail restructuring legislation and major portions of the state have restructured and are providing retail competition. In Xcel Energy’s Texas service area, which is outside the Electric Reliability Council of Texas, retail electric competition has been delayed until at least 2007. The State of New Mexico repealed its Electric Industry Restructuring Act of 1999.

     Xcel Energy cannot predict the outcome of restructuring proceedings in the electric utility jurisdictions it serves at this time. The resolution of these matters may have a significant impact on the financial position, results of operations and cash flows of Xcel Energy’s utility subsidiaries.

     For more information on the delay of restructuring for SPS in Texas and New Mexico, see Note 10 to the Consolidated Financial Statements.

     Midwest ISO Operations — In August 2000, NSP-Minnesota and NSP-Wisconsin joined the Midwest Independent Transmission System Operator, Inc. (MISO). In December 2001, the FERC approved the MISO as the first regional transmission organization (RTO) in the United States under FERC Order No. 2000. On Feb. 1, 2002, the MISO began interim operations, including regional transmission tariff administration services for the NSP-Minnesota and NSP-Wisconsin electric transmission systems. In 2002, NSP-Minnesota and NSP-Wisconsin received all required regulatory approvals to transfer functional control of their high voltage (100 kilovolts and above) transmission systems to the MISO. The MISO membership grants MISO functional control over the operations of these facilities and the facilities of neighboring electric utilities.

     In October 2001, the FERC issued an order in a separate proceeding to establish the initial MISO regional transmission tariff rates, ruling that all transmission services, with limited exceptions, in the MISO region must be subject to the MISO regional tariff and administrative surcharges to prevent discrimination between wholesale transmission service users. The FERC order unilaterally modified the agreement with the MISO signed in August 2000. The FERC order increased wholesale transmission costs to NSP-Minnesota and NSP-Wisconsin by approximately $9 million per year.

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     On July 25, 2003, MISO filed proposed changes to its regional open access transmission tariff to implement a new Transmission and Energy Markets Tariff (TEMT) that would establish certain wholesale energy and transmission service rates based on locational marginal cost pricing effective in 2004. NSP-Minnesota and NSP-Wisconsin presently receive transmission services from MISO for service to their retail loads and would be subject to the new tariff, if approved by the FERC. On Oct. 17, 2003, MISO filed to withdraw the TEMT, after numerous parties filed protests to the proposal. The FERC issued an order approving the withdrawal and provided guidance on MISO’s proposals on Oct. 29, 2003. MISO is now conducting a stakeholder consultation process to prepare and submit a revised TEMT in March 2004 to be effective Dec. 1, 2004. Management believes any new tariff, if approved by the FERC, could have a material effect on wholesale power supply or transmission service costs to NSP-Minnesota and NSP-Wisconsin.

     Southwest Power Pool (SPP) Restructuring – SPS is a member of the SPP regional reliability council, and SPP acts as tariff administrator for the SPS system. In October 2003, SPP filed for FERC authorization to transform its operation into an RTO under FERC Order No. 2000. In addition, SPP made unilateral changes to the existing SPP membership agreement, which increases the current costs of SPS membership in SPP by approximately $1.5 million per year, in order to fund the start of RTO operations. On Oct. 31, 2003, SPS submitted a conditional notice of withdrawal from SPP in order to preserve flexibility with regard to future RTO membership. On Feb. 10, 2004, the FERC conditionally approved SPP’s proposed formation as an RTO, subject to SPP meeting certain requirements. The order also provides that SPS may only terminate its current membership in SPP with FERC approval. If SPS elects to be a member of the SPP RTO, SPS will be required to transfer functional control of its electric transmission system to SPP and take all transmission services, including services required to serve retail native loads, under the SPP regional tariff.

     TRANSLink Transmission Co., LLC (TRANSLink) — In September 2001, Xcel Energy and several other mid-continent electric utilities applied to the FERC to integrate operations of their electric transmission systems into a single system through the formation of TRANSLink, a for-profit, independent transmission-only company. The utilities were to participate in TRANSLink through a combination of divestiture, leases and operating agreements. TRANSLink was intended to be a cost-effective option to manage transmission and to comply with the Order No. 2000 regulations issued by the FERC that required investor-owned electric utilities to transfer operational control of their transmission system to an independent RTO.

     Under the proposal, TRANSLink would have been responsible for planning, managing and operating both local and regional transmission assets. TRANSLink would also have constructed and owned new transmission system additions. In November 2003, however, the formation activity for TRANSLink was suspended due to continued market and regulatory uncertainty.

     Generation Interconnection Rules – In August 2003, the FERC issued final rules requiring the standardization of generation interconnection procedures and agreements for interconnection of new electric generators of 20 megawatts or more to the transmission systems of all FERC-jurisdictional electric utilities, including Xcel Energy’s utility subsidiaries. The FERC also established pricing rules for interconnections and related transmission system upgrades. As required by the FERC, Xcel Energy’s utility subsidiaries submitted a compliance filing on Jan. 20, 2004. The FERC approval of the compliance changes to Xcel Energy’s utility subsidiaries’ tariff, the MISO regional tariff, and the SPP regional tariff, which will govern most generation interconnections to Xcel Energy’s utility subsidiaries’ transmission system, are pending. On March 5, 2004, the FERC issued an order on rehearing adopting certain changes to the pricing provisions of the final rules.

     Standards of Conduct Rulemaking — In November 2003, the FERC issued final standards of conduct rules affecting all FERC jurisdictional transmission utilities, which will require a greater functional separation of electric transmission functions from the wholesale energy marketing and sales functions and from “energy affiliates”. Xcel Energy’s utility subsidiaries filed their initial compliance plan on Feb. 9, 2004. Full compliance is required by June 1, 2004. Xcel Energy and other parties have requested the FERC to grant clarification or rehearing of certain aspects of the final rules. Management has estimated the cost of compliance with the new standards of conduct rules at approximately $1 million in 2004.

     Standard Market Design Rulemaking — In July 2002, the FERC issued a notice of proposed rulemaking on wholesale standard market design (SMD) for regulated utilities. If implemented as proposed, the rulemaking would substantially change how wholesale electric supply markets operate throughout the United States. The proposed rulemaking expands the FERC’s intent to unbundle transmission operations from integrated utilities and ensure robust competition in wholesale markets. The rule contemplates that all wholesale and retail customers will be on a single network transmission service tariff. The rule also contemplates the implementation of a bid-based system for buying and selling energy in wholesale electric markets using location marginal pricing. RTOs or independent transmission providers will administer the market. RTOs will also be responsible for regional plans that identify opportunities to construct new transmission, generation or demand-side programs to reduce transmission constraints and meet regional energy requirements. Finally, the rule envisions the development of regional market monitors responsible for ensuring that individual participants do not exercise unlawful market power. The FERC later extended the comment period, but the final rules could be in

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place in 2004 and the contemplated market changes in 2004 or 2005. Recent MISO actions indicate that the MISO plans to establish a market design similar to SMD by December 2004, which would impact wholesale markets on the NSP-Minnesota and NSP-Wisconsin systems. The SPP RTO proposal approved by the FERC in February 2004 anticipates establishing a wholesale electric market applying certain aspects of SMD beginning in 2005, which would impact wholesale markets on the SPS system.

NSP-Minnesota

     Minnesota Restructuring — In 2001, the Minnesota Legislature passed an energy security bill that included provisions intended to streamline the siting process of new generation and transmission facilities. It also included voluntary benchmarks for achieving renewable energy as a portion of the utility’s supply portfolio; however, the benchmarks are mandatory for NSP-Minnesota (subject to certain conditions). In 2003, the Minnesota Legislature revised the 2001 statute to require Minnesota utilities to develop and submit analyses to the MPUC of the transmission upgrades required to deliver the benchmark quantities of renewable energy as part of biennial transmission planning process established by the 2001 energy security bill. There was no other action on restructuring in 2002 or 2003.

     North Dakota Restructuring — In 1997, the North Dakota Legislature established, by statute, an Electric Utility Competition Committee (EUC). While its legislated scope is quite broad, the committee focused much of its initial efforts on the study of the state’s current tax treatment of the electric utility industry. In 2003, the legislature expanded the membership of the committee and extended its life to 2007.

NSP-Wisconsin

     Wisconsin Restructuring — The State of Wisconsin passed legislation in 2001 that reduced the wholesale gross receipts tax on the sale of electricity by 50 percent starting in 2003. This legislation eliminates the double taxation on wholesale sales from non-utility generators. Additional legislation was passed that enables regulated utilities to enter into leased generation contracts with unregulated generation affiliates. The new legislation provides utilities a new financing mechanism and option to meet their customers’ energy needs. In 2002, the PSCW approved the first power plant proposal utilizing the new leased generation contract arrangement. While industry-restructuring changes continue in Wisconsin, the movement towards retail customer choice has virtually ceased.

     Michigan Restructuring — Since Jan. 1, 2002, NSP-Wisconsin has been providing its Michigan electric customers with the opportunity to select an alternative electric energy provider. This action was required by Michigan’s Customer Choice and Electricity Reliability Act, which became law in June 2000. NSP-Wisconsin developed and successfully implemented internal procedures, and obtained MPSC approval for these procedures to meet the Jan. 1, 2002 deadline. Key elements of internal procedures included the development of retail open access tariffs and unbundled billing, environmental and fuel disclosure information, and a code of conduct compliance plan. To date, no NSP-Wisconsin retail electric customers have converted to a competing supplier.

PSCo

     Colorado Restructuring — There was no legislative action with respect to restructuring in Colorado during the 2001, 2002 or 2003 legislative sessions. None is expected in 2004.

SPS

     New Mexico Restructuring — In March 2001, the State of New Mexico enacted legislation that delayed customer choice until 2007 and amended the Electric Utility Restructuring Act of 1999. In April 2003, the State of New Mexico repealed the Electric Utility Restructuring Act of 1999. The repeal legislation provided utilities the opportunity to recover their transition costs incurred to comply with the Restructuring Act of 1999. Utilities may retain these transition costs as a regulatory asset on their books pending recovery, which shall be completed by Jan. 1, 2010. At Dec. 31, 2003, SPS had deferred $5.1 million of New Mexico restructuring costs.

     Texas Restructuring — In June 2001, the Governor of Texas signed legislation postponing the retail competition and restructuring of SPS until at least 2007. This legislation amended the 1999 legislation, Senate Bill No. 7 (SB-7), which provided for retail electric competition beginning January 2002. Under the