Business Segments and Organizational Overview

Continuing Operations

Xcel Energy Inc. is a public utility holding company. In 2012, Xcel Energy's continuing operations included the activity of four utility subsidiaries that serve electric and natural gas customers in eight 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 CIG to develop and lease natural gas pipelines, storage and compression facilities, and WGI, an interstate natural gas pipeline company, these companies comprise the continuing regulated utility operations.

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

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, including the 2013 full year EPS guidance and assumptions, are intended to be identified in this document by the words "anticipate," "believe," "estimate," "expect," "intend," "may," "objective," "outlook," "plan," "project," "possible," "potential," "should" and similar expressions. Actual results may vary materially. Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them to reflect changes that occur after that date. Factors that could cause actual results to differ materially include, but are not limited to: general economic conditions, including inflation rates, monetary fluctuations and their impact on capital expenditures and the ability of Xcel Energy Inc. and its subsidiaries to obtain financing on favorable terms; business conditions in the energy industry, including the risk of a slow down in the U.S. economy or delay in growth recovery; trade, fiscal, taxation and environmental policies in areas where Xcel Energy has a financial interest; customer business conditions; 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 Inc. 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 by regulatory bodies impacting our nuclear operations, including those affecting costs, operations or the approval of requests pending before the NRC; financial or regulatory accounting policies imposed by regulatory bodies; availability or cost of capital; employee work force factors; the items described under Factors Affecting Results of Continuing Operations; and the other risk factors listed from time to time by Xcel Energy Inc. in reports filed with the SEC, including "Risk Factors" in Item 1A of this Annual Report on Form 10-K and Exhibit 99.01 hereto.

Management's Strategic Plans

Xcel Energy's corporate strategy focuses on three core objectives:

· Obtain stakeholder alignment;

· Invest in our regulated utility businesses; and

· Earn a fair return on our utility investments.

Achievement of these strategic plans is designed to provide our investors with an attractive total return and our customers with clean, safe, reliable energy at a reasonable price. Below is a discussion of our three primary objectives and how they support our overall strategy.

Obtain stakeholder alignment

Successful execution of our strategy begins with obtaining stakeholder support for long-term decisions and for large investment initiatives, prior to taking action. To avoid excessive risk, it is critical that Xcel Energy reduce regulatory and legislative uncertainty before making long-term critical decisions or large capital investments. We believe stakeholder alignment is achieved by:

· Delivering operational excellence related to reliability outage performance and customer satisfaction;

· Proactively taking actions to ensure public and employee safety related to our power plants, natural gas pipelines, and our transmission and distribution system;

· Pursuing environmental leadership by reducing emissions, and expanding renewable energy in a cost-effective manner; and

· Creating value for our customers by modernizing our infrastructure and reducing our environmental impact at a reasonable cost, while providing customers with choices like DSM, conservation and renewable energy programs.

Invest in our utility business

After obtaining stakeholder support, the next phase of our strategy is to invest in our regulated utility businesses. Xcel Energy projects that it will invest approximately $13 billion in its utility businesses from 2013 through 2017. Our capital investment plan is intended to modernize our infrastructure, improve system reliability, reduce our impact on the environment, expand the amount of renewable energy available to our customers and meet customer demand. We work hard to make sure these investments provide value to our customers by selecting cost effective projects and striving to complete these projects on time, safely and within established budgets. As a result of these investments, Xcel Energy projects that the rate base, or the amount on which Xcel Energy earns a return, will grow at a compounded average annual rate of approximately 6 percent through 2014 and approximately 4 to 5 percent through 2017.

Earn a fair return on our utility investment

The third phase of our strategy is to earn a fair return on our utility investments. Xcel Energy's regulatory strategy is based on filing reasonable base rate requests designed to provide recovery of costs necessary to operate our business and to earn a reasonable return on investment, along with obtaining regulatory approval for rate riders and DSM programs. A rate rider is a mechanism that allows for recovery of certain costs and returns on investments, without filing a rate case.

Xcel Energy believes that our public utility commissions will provide reasonable and timely recovery, and this is a key assumption to achieving our financial objectives. We believe constructive regulatory outcomes over the last several years are evidence of reasonable regulatory treatment and provide us confidence that we are pursuing the right strategy.

Provide an attractive total return
Successful execution of the corporate strategic plan should allow Xcel Energy to deliver an attractive total return to our shareholders. Our value proposition is to deliver an attractive total return through a combination of earnings growth and dividend yield.

Since 2005, our financial objectives have been to:

· Deliver a long-term annual EPS growth rate of 5 percent to 7 percent;

· Deliver an annual dividend increases of 2 percent to 4 percent; and

· Maintain senior unsecured debt credit ratings in the BBB+ to A range.

We have successfully achieved these financial objectives. Our ongoing earnings have grown approximately 6.8 percent and our dividend has grown approximately 3.3 percent annually since 2005. In addition, our current senior unsecured debt credit ratings for Xcel Energy and it utility subsidiaries are in the BBB+ to A range.

We believe we are positioned to continue earnings growth of 5 percent to 7 percent and dividend growth of 2 percent to 4 percent at least through 2013 or 2014. Beyond this timeframe, we anticipate that rate base and earnings growth could moderate. Should this occur, we anticipate having flexibility to increase the dividend at a faster rate in the future, while ensuring a strong balance sheet. Therefore, we believe we are positioned to continue to deliver an attractive total return.

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.

The only common equity securities that are publicly traded are common shares of Xcel Energy Inc. The earnings and EPS of each subsidiary discussed below do not represent a direct legal interest in the assets and liabilities allocated to such subsidiary but rather represent a direct interest in our assets and liabilities as a whole. EPS by subsidiary is a financial measure not recognized under GAAP that is calculated by dividing the net income or loss attributable to the controlling interest of each subsidiary by the weighted average fully diluted Xcel Energy Inc. common shares outstanding for the period. Xcel Energy's management uses this non-GAAP financial measure to evaluate and provide details of earnings results. Xcel Energy's management believes that this measurement is useful to investors to evaluate the actual and projected financial performance and contribution of our subsidiaries. This non-GAAP financial measure should not be considered as an alternative to Xcel Energy's consolidated fully diluted EPS determined in accordance with GAAP as an indicator of operating performance.

Results of Operations

The following table summarizes the diluted EPS for Xcel Energy:

Diluted Earnings (Loss) Per Share                                     2012        2011        2010
PSCo                                                                 $  0.90     $  0.82     $  0.86
NSP-Minnesota                                                           0.70        0.73        0.60
SPS                                                                     0.22        0.18        0.17
NSP-Wisconsin                                                           0.10        0.10        0.09
Equity earnings of unconsolidated subsidiaries                          0.04        0.04        0.04
Regulated utility - continuing operations                               1.96        1.87        1.76
Xcel Energy Inc. and other costs                                       (0.14 )     (0.15 )     (0.14 )
Ongoing diluted earnings per share                                      1.82        1.72        1.62
Prescription drug tax benefit, Medicare Part D and COLI settlement      0.03           -       (0.01 )
Earnings per share from continuing operations                           1.85        1.72        1.61
Earnings per share from discontinued operations                            -           -        0.01
GAAP diluted earnings per share                                      $  1.85     $  1.72     $  1.62

Xcel Energy's management believes that ongoing earnings provide a meaningful comparison of earnings results and is representative of Xcel Energy's fundamental core earnings power. Xcel Energy's management uses ongoing earnings internally for financial planning and analysis, for reporting results to the Board of Directors and when communicating its earnings outlook to analysts and investors.

2012 Adjustment to GAAP Earnings

Prescription drug tax benefit - In the third quarter of 2012, Xcel Energy implemented a tax strategy related to the allocation of funding of Xcel Energy's retiree prescription drug plan. This strategy restored a portion of the tax benefit associated with federal subsidies for prescription drug plans that had been accrued since 2004 and was expensed in 2010. As a result, Xcel Energy recognized approximately $17 million, or $0.03 per share, of income tax benefit.

2010 Adjustment to GAAP Earnings

Medicare Part D - In March 2010, the Patient Protection and Affordable Care Act was signed into law. The law includes provisions to generate tax revenue to help offset the cost of the new legislation. One of these provisions reduces the deductibility of retiree health care costs to the extent of federal subsidies received by plan sponsors that provide retiree prescription drug benefits equivalent to Medicare Part D coverage, beginning in 2013. Xcel Energy expensed approximately $17 million, or $0.04 per share, of previously recognized tax benefits relating to the federal subsidies during the first quarter of 2010.

COLI settlement - During 2007, Xcel Energy Inc. and PSCo reached a settlement with the IRS related to a dispute associated with its COLI program. These COLI policies were owned and managed by PSRI. As a follow on to the 2007 IRS COLI settlement, during 2010, the IRS reached an agreement in principle of Xcel Energy Inc.'s and PSCo's statements of account, dating back to tax year 1993. Upon completion of this review, PSRI recorded a net non-recurring tax and interest charge of approximately $9.4 million in 2010. The Tax Court proceedings were dismissed in December 2010 and January 2011. Upon final cash settlement in 2011, Xcel Energy received $0.7 million and recognized a further reduction of expense of $0.3 million. A closing agreement covering tax years 2003 through 2007 was finalized with the IRS in January 2012.

In 2010, Xcel Energy Inc., PSCo and PSRI entered into a settlement agreement with Provident related to all claims asserted by Xcel Energy Inc., PSCo and PSRI against Provident in a lawsuit associated with the discontinued COLI program. Under the terms of the settlement, Xcel Energy Inc., PSCo and PSRI were paid $25 million by Provident and Reassure America Life Insurance Company resulting in approximately $0.05 of EPS in 2010. The $25 million proceeds were not subject to income taxes.

Earnings Adjusted for Certain Items (Ongoing Earnings)

2012 Comparison with 2011

Xcel Energy - Overall, ongoing earnings increased $0.10 per share for 2012. Ongoing earnings increased largely due to increases in electric margins driven by the conclusion of various rate cases, which reflect our continued investment in our utility business and a lower ETR. Partially offsetting these positive factors were warmer than normal winter weather, increases in depreciation expense, O&M expenses and property taxes.

PSCo - PSCo's ongoing earnings increased $0.08 per share for 2012. The increase is primarily due to an electric rate increase, effective May 2012, and the impact of warmer summer weather. The increase was partially offset by decreased wholesale revenue due to the expiration of a long-term power sales agreement with Black Hills Corp, higher depreciation expense and O&M expenses.

NSP-Minnesota - NSP-Minnesota's 2012 ongoing earnings decreased $0.03 per share. The decrease is primarily due to the unfavorable impact of warmer than normal winter weather during the first quarter, electric sales decline, higher property taxes, higher O&M expenses and depreciation expense. These decreases were partially offset by the 2012 rate increase and a lower ETR.

SPS - SPS' ongoing earnings increased $0.04 per share for 2012. The increase is the result of rate increases in New Mexico and Texas, effective January 2012, partially offset by the impact of milder weather during the second half of the year, higher depreciation expense and property taxes.

NSP-Wisconsin - NSP-Wisconsin's ongoing earnings were flat for 2012. Ongoing earnings were positively impacted by rate increases, effective January 2012, offset by higher O&M expenses.

2011 Comparison with 2010

Xcel Energy - Overall, ongoing earnings increased $0.10 per share for 2011. Ongoing earnings increased primarily due to higher electric margins as a result of warmer than normal summer weather across Xcel Energy's service territories and rate increases in various states. The higher margins were partially offset by expected increases in O&M expenses, depreciation, interest expense and property taxes. The increase in expenses was largely driven by capital investment in Xcel Energy's utility business.

PSCo - PSCo earnings decreased $0.04 per share for 2011. The decrease is due to the implementation of seasonal rates in June 2010 (seasonal rates were higher in the summer months and lower throughout the other months of the year), higher O&M expenses, depreciation expense and property taxes, partially offset by the favorable impact of warmer temperatures in the summer.

NSP-Minnesota - NSP-Minnesota earnings increased $0.13 per share for 2011. The increase is primarily due to higher interim electric rates effective in early 2011, subject to refund, in Minnesota and North Dakota, and conservation program incentives partially offset by higher O&M expenses, depreciation expense (net of regulatory adjustments) and property taxes.

SPS - SPS earnings increased $0.01 per share for 2011. The increase is due to
higher electric revenues, primarily due to the Texas retail rate increase
effective in the first quarter of 2011, and warmer summer weather, partially
offset by higher O&M expenses, depreciation expense and property taxes.

NSP-Wisconsin - NSP-Wisconsin earnings increased $0.01 per share for 2011. The
increase is primarily due to higher electric rates, partially offset by higher
O&M expenses and depreciation expense.

Changes in Diluted EPS

The following table summarizes significant components contributing to the
changes in the diluted EPS compared with prior periods, which are discussed in
more detail later.

Diluted Earnings (Loss) Per Share                                              Dec. 31
2011 GAAP and ongoing diluted earnings per share                               $   1.72

Components of change - 2012 vs. 2011
Higher electric margins                                                            0.15
Lower effective tax rate                                                           0.04
Lower conservation and DSM expenses (generally offset in revenues)                 0.03
Higher AFUDC - Equity                                                              0.02
Higher natural gas margins                                                         0.01
Higher operating and maintenance expenses                                         (0.05 )
Higher depreciation and amortization                                              (0.04 )
Higher taxes (other than income taxes)                                            (0.04 )
Higher interest charges                                                           (0.01 )
Other, net (including interest and premium on redemption of preferred stock)      (0.01 )
2012 ongoing diluted earnings per share                                            1.82
Prescription drug tax benefit                                                      0.03
2012 GAAP diluted earnings per share                                           $   1.85



Diluted Earnings (Loss) Per Share                                              Dec. 31
2010 GAAP diluted earnings per share                                           $   1.62
Earnings per share from discontinued operations                                   (0.01 )
2010 diluted earnings per share from continuing operations                         1.61
Medicare Part D and COLI settlement                                                0.01
2010 ongoing diluted earnings per share                                            1.62

Components of change - 2011 vs. 2010
Higher electric margins                                                            0.44
Higher natural gas margins                                                         0.04
Higher operating and maintenance expenses                                         (0.11 )
Dilution from DSPP, benefit plans and the 2010 common equity issuance             (0.08 )
Higher taxes (other than income taxes)                                            (0.06 )
Higher conservation and DSM expenses (generally offset in revenues)               (0.05 )
Higher depreciation and amortization                                              (0.04 )
Other, net (including interest and premium on redemption of preferred stock)      (0.04 )
2011 GAAP and ongoing diluted earnings per share                               $   1.72

The following table provides a reconciliation of ongoing and GAAP earnings and earnings per diluted share for the years ended Dec. 31:

(Millions of Dollars) 2012 2011 2010 Ongoing earnings $ 888.3 $ 840.9 $ 756.4 Prescription drug tax benefit, Medicare Part D and COLI settlement 16.9 0.5 (4.5 ) Total continuing operations 905.2 841.4 751.9
(Loss) income from discontinued operations - (0.2 ) 3.9 GAAP earnings $ 905.2 $ 841.2 $ 755.8

Diluted Earnings (Loss) Per Share 2012 2011 2010 Ongoing diluted earnings per share (a) $ 1.82 $ 1.72 $ 1.62 Prescription drug tax benefit, Medicare Part D and COLI settlement 0.03 - (0.01 ) Earnings per share from continuing operations (a) 1.85 1.72 1.61 Earnings per share from discontinued operations - - 0.01 GAAP diluted earnings per share (a) $ 1.85 $ 1.72 $ 1.62

(a) Includes the dividend requirements on preferred stock.

Continuing operations consist of the following:

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

· Other nonregulated subsidiaries and Xcel Energy Inc.

The following table summarizes the earnings contributions of Xcel Energy's business segments.

                                                 Contributions to Income
(Millions of Dollars)                          2012        2011        2010
Regulated electric income                    $  851.9     $ 789.0     $ 665.2
Regulated natural gas income                     98.1       101.8       114.6
All other (a)                                    22.1        17.9        32.4
Xcel Energy Inc. and other costs (a)            (66.9 )     (67.3 )     (60.3 )
Total income - continuing operations            905.2       841.4       751.9
(Loss) income from discontinued operations          -        (0.2 )       3.9
Total net income                             $  905.2     $ 841.2     $ 755.8



                                                            Contributions to Diluted Earnings (Loss) Per Share
Contributions to Diluted Earnings (Loss) Per Share           2012                     2011                  2010
Regulated electric                                     $           1.74         $           1.62         $      1.43
Regulated natural gas                                              0.20                     0.21                0.24
All other (a)                                                      0.05                     0.04                0.08
Xcel Energy Inc. and other costs (a) (b)                          (0.14 )                  (0.15 )             (0.14 )
Total earnings per share - continuing operations (b)               1.85                     1.72                1.61
Discontinued operations                                               -                        -                0.01
Total earnings per share - diluted (b)                 $           1.85         $           1.72         $      1.62

(a) Not a reportable segment. Included in all other segment results in Note 16 to the consolidated financial statements.

(b) Includes the dividend requirements on preferred stock.

Statement of Income Analysis

The following discussion summarizes the items that affected the individual revenue and expense items reported in the consolidated statements of income.

Estimated Impact of Temperature Changes on Regulated Earnings - Unusually hot summers or cold winters increase electric and natural gas sales while, conversely, mild weather reduces electric and natural gas sales. The estimated impact of weather on earnings is based on the number of customers, temperature variances and the amount of natural gas or electricity the average customer historically uses per degree of temperature. Accordingly, deviations in weather from normal levels can affect Xcel Energy's financial performance, from both an energy and demand perspective.

Degree-day or Temperature-Humidity Index (THI) data is used to estimate amounts of energy required to maintain comfortable indoor temperature levels based on each day's average temperature and humidity. Heating degree-days (HDD) is the measure of the variation in the weather based on the extent to which the average daily temperature falls below 65° Fahrenheit, and cooling degree-days (CDD) is the measure of the variation in the weather based on the extent to which the average daily temperature rises above 65° Fahrenheit. Each degree of temperature above 65° Fahrenheit is counted as one cooling degree-day, and each degree of temperature below 65° Fahrenheit is counted as one heating degree-day. In Xcel Energy's more humid service territories, a THI is used in place of CDD, which adds a humidity factor to CDD. HDD, CDD and THI are most likely to impact the usage of Xcel Energy's residential and commercial customers. Industrial customers are less weather sensitive.

Normal weather conditions are defined as either the 20-year or 30-year average of actual historical weather conditions. The historical period of time used in the calculation of normal weather differs by jurisdiction based on the time period used by the regulator in establishing estimated volumes in the rate setting process. To calculate the impact of weather on demand, a demand factor is applied to the weather impact on sales as defined above to derive the amount of demand associated with the weather impact.

The percentage increase (decrease) in normal and actual HDD, CDD and THI are provided in the following table:

       2012 vs.         2011 vs.         2012 vs.         2010 vs.          2011 vs.
        Normal           Normal            2011          Normal (a)         2010 (a)
HDD        (15.9 ) %         (1.0 ) %        (14.8 ) %          (4.3 ) %          3.5 %
CDD         46.1             38.1              5.7              11.9             23.4
THI         36.1             37.9              0.2              29.9              6.1

(a) Adjusted for the October 2010 sale of SPS electric distribution assets to the city of Lubbock, Texas.

Weather - The following table summarizes the estimated impact of temperature . . .