Business Segments and Organizational Overview

Continuing Operations

Xcel Energy is a public utility holding company. In 2008, Xcel Energy continuing operations included the activity of four utility subsidiaries that serve electric and natural gas customers in 8 states. These utility subsidiaries are NSP-Minnesota, NSP-Wisconsin, PSCo and SPS. These utilities serve customers in portions of Colorado, Michigan, Minnesota, New Mexico, North Dakota, South Dakota, Texas and Wisconsin. Along with WYCO, a joint venture formed with a subsidiary of El Paso Corporation to develop and lease natural gas pipeline, storage, and compression facilities, and WGI, an interstate natural gas pipeline company, these companies comprise the continuing regulated utility operations.

Xcel Energy's nonregulated subsidiary reported in continuing operations is Eloigne, which invests in rental housing projects that qualify for low-income housing tax credits.

Discontinued Operations

See Note 4 to the consolidated financial statements for discussion of discontinued operations.

Forward-Looking Statements

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 Xcel Energy and its subsidiaries 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 Xcel Energy and its subsidiaries; unusual weather; effects of geopolitical events, including war and acts of terrorism; state, federal and foreign legislative and regulatory initiatives that affect cost and investment recovery, have an impact on rates or have an impact on asset operation or ownership or impose environmental compliance conditions; structures that affect the speed and degree to which competition enters the electric and natural gas markets; costs and other effects of legal and administrative proceedings, settlements, investigations and claims; actions of accounting regulatory bodies; the items described under Factors Affecting Results of Continuing Operations; and the other risk factors listed from time to time by Xcel Energy in reports filed with the SEC, including "Risk Factors" in Item 1A of Xcel Energy's Form 10-K for the year ended Dec. 31, 2008 and Exhibit 99.01 to Xcel Energy's Form 10-K for the year ended Dec. 31, 2008.

Management's Strategic Plan

Xcel Energy's strategy, called Building the Core, has three primary focuses:
environmental leadership, achieving financial objectives and optimizing the management of a portfolio of operating utilities. In summary, our objective is to provide value to our customers and execute environmental initiatives by investing in our core utility businesses and earning a reasonable return on our invested capital. Below is a detailed discussion of our three primary focuses and how they support our overall Building the Core strategy.

Xcel Energy's Environmental Leadership

Overview

Xcel Energy has adopted environmental leadership as a primary focus, forming the cornerstone of our strategic initiatives. Xcel Energy believes that our environmental leadership meets customer and policy maker expectations, while appropriately managing long-term customer costs, and, in turn, creating shareholder value.

As a portfolio of regulated utilities, Xcel Energy has an obligation to serve its customers by providing them with reasonably priced, reliable electric and gas services. However, Xcel Energy's strategy goes beyond this traditional mission. Under the environmental leadership strategy, Xcel Energy takes prudent, balanced steps to reduce the impact of our

operations on the environment while promoting technological and public policy advancements that will encourage a cleaner electric system. In light of the capital-intensive nature of our business, including the long life of Xcel Energy's capital investments, Xcel Energy takes prudent steps to reduce the overall risk associated with potential new environmental mandates. Finally, Xcel Energy seeks to reduce regulatory uncertainty through favorable cost recovery for environmental initiatives provided by public policy makers, including legislatures and public utilities commissions.

The foundation for Xcel Energy's environmental leadership strategy resides with its environmental policy. Under this policy, the Xcel Energy Board of Directors, acting through the Nuclear, Environmental and Safety Committee, establishes environmental performance goals and oversees Xcel Energy's environmental compliance program and policy initiatives. The policy is available on our website at www.xcelenergy.com. Xcel Energy has created an environmental management system that provides employees with training and documentation of Xcel Energy's compliance responsibilities, creates processes designed to minimize the risk of noncompliance and audits Xcel Energy's environmental performance. Environmental performance goals, which include the goal of carbon reduction, are incorporated into officer and employee job responsibilities and compensation.

Current Initiatives

Xcel Energy pursues environmental leadership through management of environmental policy initiatives. Xcel Energy actively evaluates public policy proposals and promotes environmental initiatives that are designed to assure compliance with state initiatives, appropriately manage long-term customer costs and, where appropriate, provide growth opportunities. These initiatives include the following:

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º Xcel Energy is the nation's largest utility wind energy provider and the nation's fifth largest solar energy provider. Xcel Energy is pursuing new wind, solar and other renewable energy acquisitions and investments to meet some of the nation's most aggressive RESs in the states in which Xcel Energy operates. These standards provide for favorable cost recovery mechanisms and investment opportunities in order to allow Xcel Energy to meet the requirements.

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º Xcel Energy has implemented voluntary emission reduction programs in Minnesota and Colorado. These programs have resulted or will result in substantial emission reductions from existing facilities. They also incorporate enhanced cost recovery mechanisms that allow for a construction work-in-process return and an incentive based ROE mechanism.

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º Xcel Energy has announced plans for construction of the largest biomass generating plant in the Midwest. Xcel Energy has proposed installing technology at the Bay Front Generating Station in Ashland, Wis. to allow it to generate electricity from biomass in all three operating units. Xcel Energy currently has 67 MW of biomass generating capacity in Minnesota and Wisconsin.

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º Xcel Energy has a number of environmental initiatives focused on our customers. Xcel Energy has the largest customer-driven wind program in the nation called WindSource®. In Colorado, Xcel Energy manages a growing customer-sited solar program, known as Solar*Rewards. Xcel Energy also has an increasing portfolio of customer energy efficiency and conservation programs. Xcel Energy is allowed financial performance incentives associated with our programs in Minnesota and Colorado.

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º Xcel Energy is also working to apply intelligence to its electric grid, creating a smart grid, to provide customers with more choice, reliability and control over their energy use. Xcel Energy is building the nation's first fully integrated SmartGridCity™ in Boulder, Colo.

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º Xcel Energy is a leader in promoting new clean energy technologies for the future. Pursuant to state statute, NSP-Minnesota manages a renewable development fund derived from customer renewable energy charges in Minnesota that allows it to promote renewable technology advancement. Xcel Energy has recently proposed the creation of an innovative clean technology program in Colorado that creates a funding mechanism to explore innovative renewable and other environmentally sustainable technologies. Xcel Energy has also undertaken small-scale projects to study the technical and economic aspects of energy storage and the use of hydrogen. Xcel Energy is a leader in supporting the advancement of solar energy technology. Xcel Energy is also exploring the use of clean coal and is evaluating whether and how to best take advantage of state and federal incentives for clean coal development.

Greenhouse Gas Emissions

While Xcel Energy is not currently subject to state or federal regulation of its GHG emissions, as one of the nation's largest electric generating companies, Xcel Energy is committed to addressing climate change through efforts to reduce its GHG emissions. This year, Xcel Energy has adopted a new methodology for calculating CO2 emissions based on the recently issued reporting protocols of The Climate Registry. (Xcel Energy is a "founding reporter" under The Climate Registry.) Although actual historic emissions from facilities providing power to Xcel Energy customers have not changed, the new accounting methodology has resulted in an increase in Xcel Energy's reported CO2 intensity and mass emission numbers. To enable accurate comparisons and analysis of emissions trends, Xcel Energy has recalculated historical emissions data to reflect the new accounting methodology. As third-party CO2 reporting protocols continue to evolve, Xcel Energy expects additional changes in reporting methodology and reported CO2 emissions.

Based on The Climate Registry's current reporting protocol, Xcel Energy has estimated that its current electric generating portfolio, which includes coal- and gas-fired plants, emitted approximately 66 million tons of CO2 in 2008. Xcel Energy has also estimated emissions associated with electricity purchased for resale to Xcel Energy customers from generation facilities owned by third parties. Xcel Energy estimates that these third-party facilities emitted approximately 21 million tons of CO2 in 2008. Estimated total CO2 emissions, associated with service to Xcel Energy electricity customers, declined by 3.2 million tons in 2008 compared to 2007, with a combined cumulative reduction of over 21.9 million tons of CO2 since 2003. Xcel Energy anticipates that its ownership share of Comanche 3, a new coal-fired generation project scheduled for completion in the fall of 2009, will result in CO2 emissions of approximately 762,650 tons in 2009. Thereafter, based on Xcel Energy's emissions estimates, 3.4 million tons of CO2 per year will be attributable to Xcel Energy's ownership share of Comanche 3. Comanche 3, an efficient supercritical pulverized coal unit, will provide low-cost, base load power and help maintain a reliable, reasonably priced and environmentally sound electricity supply in Colorado. Operation of Comanche 3 will help support Xcel energy's efforts to develop renewable energy, retire older, less-efficient resources and take other steps to reduce emissions across its system. Xcel Energy plans to implement aggressive clean resource development and conservation plans that will result in overall reductions in Xcel Energy's CO2 emissions, both in absolute terms and per Kwh of electricity produced.

State Resource Plans

In 2007, Xcel Energy filed resource plans in Minnesota and Colorado that propose significant new clean energy resources. During 2008, the Colorado plan was approved substantially as proposed, and the Minnesota plan is still under review. Under these plans, Xcel Energy would:

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º Increase overall system wind capacity from approximately 2,800 MW at the end of 2008 to approximately 7,400 MW by 2020;

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º Add between 200 MW and 600 MW of concentrating solar thermal technology;

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º Increase the size of our customer energy efficiency and conservation programs, resulting in a reduction of retail demand;

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º Retire and replace several existing coal-fired electric generation facilities;

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º Improve the efficiency and reduction of CO2, mercury, SO2 and NOx emissions at several existing fossil plants; and

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º Upgrade the capacity of existing nuclear facilities.

Xcel Energy has designed these plans so that, depending on fuel, commodity and other assumptions, Xcel Energy would maintain a reasonably priced product and continue to provide reliable power to our customers. At the same time, if approved, the plans would result in a significant reduction in GHG emissions. The proposed Minnesota plan would reduce NSP-Minnesota's CO2 emissions by 22 percent below 2005 levels by 2020. The proposed Colorado plan would reduce PSCo's CO2 emissions by 10 percent below 2005 levels by 2017 and position PSCo to propose additional reductions to achieve a 20 percent reduction by 2020.

Our environmental leadership strategy has resulted in numerous environmental awards and recognition. For example, Xcel Energy was named to the Dow Jones Sustainability Index for North America for 2008-2009, which was the second consecutive year that Xcel Energy has earned this distinction. Xcel Energy strives to provide the public with detailed information regarding environmental performance and risk. Among other things, our utility companies operating in Minnesota, Colorado, and New Mexico use a carbon proxy cost mandated by the state commissions to

evaluate the impact of potential future GHG regulation on its future resource acquisition plans. Xcel Energy publishes a Triple Bottom Line report annually, which is available on our website, www.xcelenergy.com. The Triple Bottom Line report discloses Xcel Energy's environmental, economic and social performance. Xcel Energy also provides detailed information to environmental research organizations, such as Trucost, the Carbon Disclosure Project and The Climate Registry.

Achieving Financial Objectives

Xcel Energy's financial objectives of Building the Core also has three phases:
obtaining legislative and regulatory support for large investment initiatives, investing in the utility business and earning a fair return on utility system investments.

The first phase, as noted above, is obtaining legislative and regulatory support for large investment initiatives, prior to making the investment. To avoid excessive risk, it is critical that Xcel Energy reduce regulatory uncertainty before making large capital investments. Xcel Energy has accomplished this for both the MERP in Minnesota and the Comanche 3 coal unit in Colorado. Transmission legislation has been passed in Minnesota, Colorado, Texas and several other jurisdictions where Xcel Energy operates. In addition, various jurisdictions have adopted legislation allowing for rider recovery of investments in renewable energy.

The second phase is investing in the utility business. In addition to Xcel Energy's normal level of capital investment, Xcel Energy expects to have significant investment opportunity, in part attributable to the environmental strategy described above. Those opportunities include the following:

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º Xcel Energy is making, as part of our MERP program, nearly $1 billion of improvements at three Twin Cities coal-fired generating plants, A. S. King, High Bridge and Riverside, to significantly reduce air emissions from those facilities while increasing the amount of electricity they can produce by approximately 300 MW. New state-of-the-art emission control equipment was placed in service for the A.S. King plant in 2007 and the existing High Bridge facility was replaced with a 575 MW natural gas combined-cycle unit that went into service in May 2008. The final phase of the MERP, the new Riverside combined-cycle plant, is currently scheduled to be placed in service by May 2009.

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º Invest approximately $1.3 billion through 2010 for Comanche 3, a project to build a new 750 MW supercritical coal unit in Colorado, scheduled to be completed in late 2009. The CPUC has approved sharing one-third ownership of this plant with other parties. Consequently, PSCo's investment in Comanche 3 will be approximately $1 billion.

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º Invest approximately $192 million for the planned addition of two gas fired units totaling 300 MW at the Fort St. Vrain generating facility located in Colorado, scheduled to be completed in mid-2009.

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º Invest over a $1 billion investment through 2015 to extend the lives and increase the output of our two nuclear facilities, Monticello and Prairie Island.

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º Spending approximately $206 million for a new 100 MW wind farm located near Grand Meadows, Minn. The new plant was placed in service in December 2008.

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º Invest approximately $900 million over three years for a 201 MW project in southwestern Minnesota called the Nobles Wind Project, and a 150 MW project in southeastern North Dakota, called the Merricourt Wind Project, expected to be operational by the end of 2010 and 2011, respectively.

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º Investment by the CapX 2020 coalition of utilities of approximately $1.7 billion to expand the transmission system in the upper Midwest with major construction targeted to begin in 2010 and ending three to five years later, of which Xcel Energy's share of the investment is expected to be approximately $900 million, depending on the route and configuration approved by the MPUC.

As a result of these investments, as well as continued investments in the transmission and distribution system, Xcel Energy expects that the rate base, or the amount on which Xcel Energy earns a return, will grow annually, on average, approximately 7 percent from 2008 through 2012.

The third phase is earning a fair return on utility system investments. To this end, the regulatory strategy is to receive regulatory approval for rate riders as well as general rate cases. A rate rider is a mechanism that allows recovery of certain costs and returns on investments without the costs and delays of filing a rate case. These riders allow for timely revenue recovery of the costs of large projects or other costs that vary over time. Xcel Energy's regulatory strategy is based on filing reasonable rate requests designed to provide recovery of legitimate expenses and a return on utility

investments. Xcel Energy believes that the public utility commissions will provide reasonable recovery, and it is important to note that the financial plans include this assumption. Constructive results over the last several years are evidence of reasonable regulatory treatment and give Xcel Energy confidence that Xcel Energy is pursuing the right strategy. With any strategic plan, there are goals and objectives. Xcel Energy feels the following financial objectives continue to be both realistic and achievable:

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º A long-term annual earnings-per-share growth rate target of 5 percent to 7 percent;

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º Annual dividend increases of 2 percent to 4 percent; and

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º Senior unsecured debt credit ratings in the BBB+ to A range.

Successful execution of the Building the Core strategic plan should allow Xcel Energy to achieve the outlined financial objectives, which in turn, should provide investors with an attractive total return on a low-risk investment. However, our operations are affected by current local, national and worldwide economic conditions. The consequences of the current recession being prolonged may include a lower level of economic activity and uncertainty regarding energy prices and the capital and commodity markets. A lower level of economic activity might result in a decline in energy consumption, which may impact the financial objectives discussed above.

Optimizing the Management of a Portfolio of Operating Utilities

Optimizing the management of a portfolio of operating utilities is the third area of focus related to the Building the Core strategy. Even though Xcel Energy ultimately manages the business based on the revenue streams provided by electric and natural gas, Xcel Energy continues to evolve the management of the portfolio of utility investments. While Xcel Energy has four separate operating companies, there are certain similarities and differences that require us to effectively manage this portfolio. More specifically, Xcel Energy's goal is to build on the similarities among the companies, which maximizes efficiencies from centralized management and deployment of common initiatives, such as market branding and environmental policy research. From an organizational perspective, examples of similarities include corporate center services as well as certain operational functions, such as management of the generation fleet, asset management, environmental compliance and safety.

At the same time, Xcel Energy realizes there are unique differences in each of our service territories such as local community focus and priorities, regulatory environment, physical plant infrastructure and age, weather, as well as others that require Xcel Energy to organize and align these utility specific areas to most effectively address these utility distinct characteristics. To that end, Xcel Energy has operating presidents, each located in their respective jurisdiction. The objective of this organizational structure is to optimize Xcel Energy's operating efficiency while maximizing accountability.

Financial Review

The following discussion and analysis by management focuses on those factors that had a material effect on Xcel Energy's financial condition, results of operations and cash flows during the periods presented, or are expected to have a material impact in the future. It should be read in conjunction with the accompanying consolidated financial statements and the related notes to consolidated financial statements.

Summary of Financial Results

The following table summarizes the earnings contributions of Xcel Energy's business segments on the basis of GAAP. Continuing operations consist of the following:

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º Regulated utility subsidiaries, operating in the electric and natural gas segments; and

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º Other nonregulated subsidiaries and the holding company.

Discontinued operations consist of the following:

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º Quixx Corp., a major portion of which was sold in October 2006;

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º UE, which was sold in April 2005;

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º Seren, a portion of which was sold in November 2005 with the remainder sold in January 2006;

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º Cheyenne, which was sold in January 2005;

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º NRG, which emerged from bankruptcy and was divested in late 2003; and

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º Xcel Energy International and e prime Inc. (e prime), which were classified as held for sale in late 2003 based on the decision to divest them.

See Note 4 to the consolidated financial statements for a further discussion of discontinued operations.

                                                   Contribution to Earnings
                                                  2008         2007      2006
                                                     (Millions of Dollars)
          GAAP income by segment
          Regulated electric utility income -
          continuing operations                  $  552.3     $ 554.7   $ 503.1
          Regulated natural gas utility
          income - continuing operations            129.3       108.0      70.6
          Other regulated utility income(a)          27.0       (26.7 )    32.3

               Total utility income -
               continuing operations                708.6       636.0     606.0
          Holding company costs and other
          results(a)                                (62.9 )     (60.1 )   (37.3 )

               Total income - continuing
               operations                           645.7       575.9     568.7
          Discontinued operations                    (0.1 )       1.4       3.1

                   Total GAAP net income         $  645.6     $ 577.3   $ 571.8

                                               Contribution to earnings per share
                                              2008            2007            2006
   GAAP earnings per share contribution
   by segment
   Regulated electric utility -
   continuing operations                   $      1.25     $      1.28     $      1.17
   Regulated natural gas utility -
   continuing operations                          0.29            0.25            0.16
   Other regulated utility(a)                     0.06           (0.06 )          0.08

        Total utility earnings per
        share - continuing operations             1.60            1.47            1.41
   Holding company costs and other
   results(a)                                    (0.14 )         (0.12 )         (0.06 )

        Total earnings per share -
        continuing operations                     1.46            1.35            1.35
   Discontinued operations                           -               -            0.01

             Total GAAP earnings per
             share - diluted               $      1.46     $      1.35     $      1.36

Earnings from continuing operations for 2008 were higher than in 2007 primarily attributed to lower operating and maintenance expense, higher electric and gas margins, and higher allowance for funds used during construction - equity. Partially offsetting these positive factors were higher depreciation and amortization, higher conservation and demand-side management program expenses, increased interest expense and a higher effective tax rate.

Earnings from continuing operations for 2007 were higher than in 2006 primarily attributed to higher electric and gas margins, reflecting various rate increases, weather-normalized retail sales growth, higher rider recovery, and the impact of favorable temperatures, which also increased sales. Partially offsetting these positive factors were higher operating and maintenance expense, increased interest expense and a higher effective tax rate.

During 2007, Xcel Energy entered into a settlement agreement with the IRS related to a dispute associated with its COLI program. The following table provides a reconciliation of GAAP earnings and earnings per share to ongoing earnings and earnings per share for the years ended Dec. 31:

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