Third Quarter 2012 Compared with Third Quarter 2011

Gross margin increased primarily due to a $9.6 million increase related to rate adjustments that include a return on significant capital investments at Colorado Electric, partially offset by a $0.7 million decrease in wholesale and transmission margins as a result of decreased pricing, a decrease of $0.3 million in off-system sales and a decrease of $0.6 million from expiration of a reserve capacity agreement with PacifiCorp.

Operations and maintenance decreased primarily due to a $2.1 million reduction of major maintenance accruals related to the power plants announced for retirement and cost containment efforts, partially offset by costs associated with operating the new generating facility in Pueblo, Colo. including increased corporate allocations.

Depreciation and amortization increased primarily due to a higher asset base associated with the new 180 megawatt generating facility constructed in Pueblo, Colo. and the capital lease assets associated with the 200 megawatt generating facility providing capacity and energy from Colorado IPP.

Interest expense, net increased primarily due to interest associated with the financing of the Pueblo generating facility completed in December 2011. Interest costs were capitalized during construction in the prior year.

Gas Utilities
  Three Months Ended     Nine Months Ended  
Sept. 30, Variance Sept. 30, Variance
2012   2011   2012 vs. 2011 2012   2011   2012 vs. 2011
(in millions)
Gross margin $ 39.3     $ 39.5     $ (0.2 ) $ 149.7     $ 163.4     $ (13.7 )
   
Operations and maintenance 28.3 28.3 88.1 91.1 (3.0 )
Depreciation and amortization 6.3     6.1     0.2   18.7     18.0     0.7  
Operating income 4.6 5.1 (0.5 ) 42.9 54.3 (11.4 )
 
Interest expense, net (5.4 ) (6.3 ) 0.9 (17.7 ) (19.6 ) 1.9
Other expense (income), net 0.1 0.2 (0.1 )
Income tax (expense) 0.8     1.8     (1.0 ) (8.9 )   (10.5 )   1.6  
Income (loss) from continuing operations $     $ 0.6     $ (0.6 ) $ 16.4     $ 24.3     $ (7.9 )
 
  Three Months Ended Sept. 30,   Nine Months Ended Sept. 30,
Operating Statistics: 2012   2011   2012   2011
   
Total gas sales - Dth 5,448,719 5,753,975 31,419,468 39,958,801
Total transport volumes - Dth 14,584,979 14,385,819 46,009,382 44,510,873
 

Third Quarter 2012 Compared with Third Quarter 2011

Operating income was comparable to the same period in the prior year reflecting normal seasonality of our Gas Utilities.

Interest expense, net decreased primarily due to lower interest rates.

Income tax benefit (expense): The deviation in the effective tax rate from the statutory rate is the result of a favorable true-up adjustment that had a more pronounced impact in 2012 due to significantly lower pre-tax net loss. The prior year also realized a favorable true up adjustment for flow-through treatment of certain property-related temporary differences.

Non-Regulated Energy Group

Income from continuing operations from the Non-regulated Energy group for the three months ended Sept. 30, 2012, was $24.2 million, compared to $1.0 million for the same period in 2011.

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