UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Exact name of registrant as specified in its charter,
State or other jurisdiction of incorporation or
organization, Address of principal executive
Commission offices and Registrant's Telephone Number,including IRS Employer
File Number area code Identification No.
- ----------- ------------------------------------------------- -------------
1-12927 NEW CENTURY ENERGIES, INC. 84-1334327
(a Delaware Corporation)
1225 17th Street
Denver, Colorado 80202
Telephone (303) 571-7511
1-3280 PUBLIC SERVICE COMPANY OF COLORADO 84-0296600
(a Colorado Corporation)
1225 17th Street
Denver, Colorado 80202
Telephone (303) 571-7511
1-3789 SOUTHWESTERN PUBLIC SERVICE COMPANY 75-0575400
(a New Mexico Corporation)
Tyler at Sixth
Amarillo, Texas 79101
Telephone (303) 571-7511
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.Yes X No
On November 6, 1998, 114,303,004 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of this common stock held by
nonaffiliates based on the closing price on the New York Stock Exchange was
approximately $5,557,983,570.
Public Service Company of Colorado and Southwestern Public Service Company meet
the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and
is therefore filing this Form 10-Q with the reduced disclosure format specified
in General Instruction H (2) to such Form 10-Q.
<PAGE>
Table of Contents
PART I - FINANCIAL INFORMATION
Item l. Financial Statements.............................................. 1
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................... 35
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 56
Item 6. Exhibits and Reports on Form 8-K.................................. 56
This combined Form 10-Q is separately filed by New Century Energies, Inc.,
Public Service Company of Colorado and Southwestern Public Service Company.
Information contained herein relating to any individual company is filed by such
company on its own behalf. Each registrant makes representations only as to
itself and makes no other representations whatsoever as to information relating
to the other registrants.
This report should be read in its entirety. No one section of the report deals
with all aspects of the subject matter.
FORWARD-LOOKING INFORMATION
The following discussions include "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Investors and prospective investors are
cautioned that the forward-looking statements contained herein with respect to
the revenues, earnings, capital expenditures, resolution and impact of
litigation, Year 2000 readiness, competitive performance, or other prospects for
the business of New Century Energies, Inc., Public Service Company of Colorado
and/or Southwestern Public Service Company or their affiliated companies,
including any and all underlying assumptions and other statements that are other
than statements of historical fact, may be influenced by factors that could
cause actual outcomes and results to be materially different than projected.
Such factors include, but are not limited to, the effects of weather, future
economic conditions, the performance of generating units, fuel prices and
availability, regulatory decisions and the effects of changes in state and
federal laws, the pace of deregulation of domestic retail natural gas and
electricity markets, the timing and extent of change in commodity prices for all
forms of energy, capital spending requirements, the evolution of competition,
earnings retention and dividend payout policies, changes in accounting
standards, and other factors. From time to time, New Century Energies, Inc.,
Public Service Company of Colorado and Southwestern Public Service Company may
publish or otherwise make available forward-looking statements. All such
subsequent forward-looking statements, whether written or oral and whether made
by or on behalf of each company, are also expressly qualified by these
cautionary statements.
i
<PAGE>
TERMS
The abbreviations or acronyms used in the text and notes are defined below:
Abbreviation or Acronym Term
- ----------------------- ----
AEP....................................... American Electric Power Company, Inc.
CDPHE...................................... Colorado Department of Public Health
and Environment
Cheyenne..................................Cheyenne Light, Fuel and Power Company
CPUC....................The Public Utilities Commission of the State of Colorado
Denver District Court ............................District Court in and for the
City and County of Denver
DOE.........................................................Department of Energy
DSM.......................................................Demand Side Management
Dth....................................................................Dekatherm
e prime...........................................e prime, inc. and subsidiaries
ECA.......................................................Energy Cost Adjustment
FERC........................................Federal Energy Regulatory Commission
Fort St. Vrain ......................Fort St. Vrain Electric Generating Station,
formerly a nuclear generating station
ICA....................................................Incentive Cost Adjustment
IRS.....................................................Internal Revenue Service
Kwh................................................................kilowatt-hour
Merger.............................the business combination between PSCo and SPS
Natural Fuels.........................................Natural Fuels Corporation
NCE or Company........................................New Century Energies, Inc.
NC Enterprises..............................................NC Enterprises, Inc.
NCI..............................................New Century International, Inc.
NMPUC.......................................New Mexico Public Utility Commission
NOx...............................................................Nitrogen Oxide
PSCo..........................................Public Service Company of Colorado
PUHCA.................................Public Utility Holding Company Act of 1935
PSCCC.............................................PS Colorado Credit Corporation
PUCT..........................................Public Utility Commission of Texas
QF...........................................................Qualifying Facility
QSP......................................................Quality of Service Plan
Quixx.........................................Quixx Corporation and subsidiaries
SEC...........................................Securities and Exchange Commission
SO2...............................................................Sulfur Dioxide
SPS..........................................Southwestern Public Service Company
SFAS 71.....................Statement of Financial Accounting Standards No. 71 -
"Accounting for the Effects of Certain Types of Regulation"
SFAS 112...................Statement of Financial Accounting Standards No. 112 -
"Employers' Accounting for Postemployment Benefits"
Thunder Basin.........................................Thunder Basin Coal Company
TNP...............................................Texas-New Mexico Power Company
UE..............................Utility Engineering Corporation and subsidiaries
WGI.....................................................WestGas InterState, Inc.
WPSC...........................................Wyoming Public Service Commission
Yorkshire Electricity............................Yorkshire Electricity Group plc
Yorkshire Power.......................................Yorkshire Power Group Ltd.
ii
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
ASSETS
September 30, December 31,
1998 1997
---- ----
Property, plant and equipment, at cost:
Electric........................................... $6,938,975 $6,703,863
Gas................................................ 1,186,166 1,136,231
Steam and other.................................... 121,838 120,322
Common to all departments.......................... 475,008 437,636
Construction in progress........................... 388,426 318,124
------- -------
9,110,413 8,716,176
Less: accumulated depreciation .................... 3,349,321 3,182,800
--------- ---------
Total property, plant and equipment.............. 5,761,092 5,533,376
--------- ---------
Investments, at cost:
Investment in Yorkshire Power and other
unconsolidated subsidiaries (Note 2) ......... 301,460 295,316
Other.............................................. 65,604 71,411
------- ------
Total investments................................. 367,064 366,727
------- -------
Current assets:
Cash and temporary cash investments................ 70,827 72,623
Accounts receivable, less reserve for uncollectible
accounts ($5,861 at September 30, 1998; $5,355
at December 31, 1997)............................ 313,951 315,539
Accrued unbilled revenues.......................... 116,200 110,877
Recoverable purchased gas and electric energy
costs - net ..................................... 46,884 129,292
Materials and supplies, at average cost............ 68,872 68,411
Fuel inventory, at average cost.................... 22,861 23,162
Gas in underground storage, at cost (LIFO)......... 54,359 47,394
Prepaid expenses and other......................... 66,212 56,868
------- ------
Total current assets.............................. 760,166 824,166
------- -------
Deferred charges:
Regulatory assets (Note 1)......................... 388,143 430,475
Unamortized debt expense........................... 27,829 20,833
Other.............................................. 157,534 134,704
------- -------
Total deferred charges............................ 573,506 586,012
------- -------
$7,461,828 $7,310,281
========== ==========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
1
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
CAPITAL AND LIABILITIES
September 30, December 31,
1998 1997
---- ----
Common stock......................................... $1,737,585 $1,694,195
Retained earnings.................................... 698,685 659,050
------- -------
Total common equity.............................. 2,436,270 2,353,245
Preferred stock of subsidiaries:
Not subject to mandatory redemption............... - 140,002
Subject to mandatory redemption at par............ - 39,253
PSCo and SPS obligated mandatorily redeemable
preferred securities of subsidiary trusts holding
solely subordinated debentures of PSCo and
SPS (Note 6)........................................ 294,000 100,000
Long-term debt of subsidiaries........................ 2,222,143 1,987,955
--------- ---------
4,952,413 4,620,455
--------- ---------
Noncurrent liabilities:
Employees' postretirement benefits other than
pensions ........................................ 73,684 62,716
Employees' postemployment benefits................. 27,332 27,953
------- ------
Total noncurrent liabilities...................... 101,016 90,669
------- ------
Current liabilities:
Notes payable and commercial paper................. 563,307 588,343
Long-term debt due within one year................. 121,117 257,469
Preferred stock subject to mandatory redemption
within one year ................................. - 2,576
Accounts payable................................... 236,464 298,469
Dividends payable.................................. 67,670 68,296
Customers' deposits................................ 29,805 27,993
Accrued taxes...................................... 98,893 66,587
Accrued interest................................... 41,263 52,615
Current portion of accumulated deferred income taxes 10,682 27,391
Other.............................................. 110,573 87,380
------- ------
Total current liabilities......................... 1,279,774 1,477,119
--------- ---------
Deferred credits:
Customers' advances for construction............... 54,495 53,041
Unamortized investment tax credits................. 102,311 106,147
Accumulated deferred income taxes.................. 921,693 922,341
Other.............................................. 50,126 40,509
------- ------
Total deferred credits............................ 1,128,625 1,122,038
--------- ---------
Commitments and contingencies (Notes 4 and 5)......... --------- ---------
$7,461,828 $7,310,281
========== ==========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
2
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Three Months Ended
September 30,
1998 1997
---- ----
Operating revenues:
Electric........................................... $ 784,465 $ 670,787
Gas................................................ 115,526 109,396
Other.............................................. 15,907 13,289
------- ------
915,898 793,472
Operating expenses:
Fuel used in generation............................ 200,039 199,726
Purchased power.................................... 223,685 138,149
Cost of gas sold................................... 70,054 63,403
Other operating and maintenance expenses........... 157,851 144,241
Depreciation and amortization...................... 65,520 61,359
Taxes (other than income taxes).................... 34,576 33,426
------- ------
751,725 640,304
------- -------
Operating income...................................... 164,173 153,168
Other income and deductions:
Merger expenses.................................... - (18,584)
Equity in earnings of Yorkshire Power and other
unconsolidated subsidiaries (Note 2)............. 10,247 17,047
Miscellaneous income and deductions - net.......... 905 (163)
------- ------
11,152 (1,700)
Interest charges and preferred dividends of subsidiaries:
Interest on long-term debt......................... 42,737 41,892
Other interest..................................... 7,602 10,503
Allowance for borrowed funds used during construction (3,962) (2,874)
Dividends on PSCo and SPS obligated mandatorily
redeemable preferred securities of subsidiary
trusts holding solely subordinated debentures
of PSCo and SPS (Note 6)......................... 5,763 1,963
Dividend requirements on preferred stock of
subsidiaries .................................... - 2,929
----- -----
52,140 54,413
------ ------
Income before income taxes and extraordinary item..... 123,185 97,055
Income taxes.......................................... 32,413 33,715
------- ------
Income before extraordinary item...................... 90,772 63,340
Extraordinary item - U.K. windfall tax (Note 2)....... - (110,565)
------- --------
Net income (loss)..................................... $90,772 $(47,225)
======= ========
Weighted average common shares outstanding............ 111,606 104,481
======= =======
Basic and diluted earnings per share of common
stock outstanding:
Income before extraordinary item................... $ 0.82 $ 0.61
Extraordinary item................................. - (1.06)
------- ------
Net income......................................... $ 0.82 $(0.45)
======= ======
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
3
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Nine Months Ended
September 30,
1998 1997
---- ----
Operating revenues:
Electric........................................... $2,044,218 $1,853,809
Gas................................................ 613,363 571,494
Other.............................................. 57,442 33,332
------- ------
2,715,023 2,458,635
Operating expenses:
Fuel used in generation............................ 512,238 512,498
Purchased power.................................... 526,742 389,925
Cost of gas sold................................... 419,364 385,898
Other operating and maintenance expenses........... 468,499 427,757
Depreciation and amortization...................... 195,012 182,843
Taxes (other than income taxes).................... 100,492 100,007
------- -------
2,222,347 1,998,928
--------- ---------
Operating income...................................... 492,676 459,707
Other income and deductions:
Merger expenses.................................... (790) (33,040)
Write-off of investment in Carolina Energy
Project (Note 3) - (16,052)
Equity in earnings of Yorkshire Power and other
unconsolidated subsidiaries (Note 2)............ 6,430 21,319
Miscellaneous income and deductions - net.......... (250) (8,438)
------- ------
5,390 (36,211)
Interest charges and preferred dividends of subsidiaries:
Interest on long-term debt......................... 125,928 123,969
Other interest..................................... 25,054 22,243
Allowance for borrowed funds used during construction (12,883) (7,624)
Dividends on PSCo and SPS obligated mandatorily
redeemable preferred securities of subsidiary trusts
holding solely subordinated debentures of
PSCo and SPS (Note 6)............................. 11,799 5,888
Dividend requirements on preferred stock of subsidiaries 5,332 8,814
----- -----
155,230 153,290
------- -------
Income before income taxes and extraordinary item..... 342,836 270,206
Income taxes.......................................... 109,322 94,665
------- ------
Income before extraordinary item...................... 233,514 175,541
Extraordinary item - U.K. windfall tax (Note 2)....... - (110,565)
------- --------
Net income............................................ $233,514 $ 64,976
======== ========
Weighted average common shares outstanding............ 111,320 104,247
======= =======
Basic and diluted earnings per share of common
stock outstanding:
Income before extraordinary item................... $ 2.10 $ 1.68
Extraordinary item................................. - (1.06)
------- -------
Net income......................................... $ 2.10 $ 0.62
======= =======
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
4
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Nine Months Ended
September 30,
1998 1997
---- ----
Operating activities:
Net income......................................... $233,514 $ 64,976
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary item - U.K. windfall tax (Note 2).. - 110,565
Depreciation and amortization.................... 203,036 188,969
Amortization of investment tax credits........... (3,836) (3,943)
Deferred income taxes............................ (12,328) 40,957
Equity in earnings of Yorkshire Power and other
unconsolidated subsidiaries, net............... (6,430) (20,099)
Allowance for funds used during construction..... - (4)
Write-off of investment in Carolina Energy Project - 16,052
Change in accounts receivable.................... 7,220 9,384
Change in inventories............................ (7,002) (11,951)
Change in other current assets................... 67,840 (43,100)
Change in accounts payable....................... (62,319) (87,503)
Change in other current liabilities.............. 50,545 (33,716)
Change in deferred amounts....................... 22,398 (32,371)
Change in noncurrent liabilities................. 10,347 1,885
Other............................................ (8) 921
------- -------
Net cash provided by operating activities...... 502,977 201,022
Investing activities:
Construction expenditures.......................... (411,778) (307,338)
Allowance for equity funds used during construction - 4
Proceeds from disposition of property, plant and equipment 3,755 2,163
Investment in Yorkshire Power...................... - (362,430)
Acquisition of subsidiary, net of cash acquired (Note 3) (13,725) -
Purchase of other investments...................... (4,006) (26,283)
Sale of other investments.......................... 6,313 17,971
------- -------
Net cash used in investing activities.......... (419,441) (675,913)
Financing activities:
Proceeds from sale of common stock................. 34,280 25,027
Proceeds from sale of PSCo obligated mandatorily
redeemable preferred securities (Note 6)........ 187,700 -
Proceeds from sale of long-term debt............... 247,961 333,517
Redemption of long-term notes and bonds............ (156,838) (85,468)
Short-term borrowings - net........................ (25,036) 374,331
Redemption of preferred stock of
subsidiaries (Note 6) ........................... (181,824) (666)
Dividends on common stock.......................... (191,575) (164,432)
-------- --------
Net cash (used in) provided by financing activities (85,332) 482,309
------- -------
Net (decrease) increase in cash and temporary cash
investments (1,796) 7,418
Cash and temporary cash investments at beginning
of period 72,623 50,015
------ ------
Cash and temporary cash investments at end of period $ 70,827 $ 57,433
======== ========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements
5
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
ASSETS
September 30, December 31,
1998 1997
---- ----
Property, plant and equipment, at cost:
Electric ......................................... $4,237,141 $4,088,447
Gas................................................ 1,146,250 1,100,003
Steam and other.................................... 79,113 78,740
Common to all departments.......................... 470,202 432,840
Construction in progress........................... 262,444 170,503
------- -------
6,195,150 5,870,533
Less: accumulated depreciation..................... 2,261,903 2,145,673
--------- ---------
Total property, plant and equipment.............. 3,933,247 3,724,860
--------- ---------
Investments, at cost:
Investment in Yorkshire Power (Note 2)............. - 286,703
Note receivable from affiliate (Note 2)............ 292,620 -
Other.............................................. 21,492 43,311
------- ------
Total investments................................. 314,112 330,014
------- -------
Current assets:
Cash and temporary cash investments................ 30,043 18,909
Accounts receivable, less reserve for uncollectible
accounts ($2,917 at September 30, 1998; $2,272
at December 31, 1997) ........................... 156,671 191,155
Accrued unbilled revenues.......................... 100,556 94,284
Recoverable purchased gas and electric energy
costs - net .................................... 39,659 103,197
Materials and supplies, at average cost............ 46,597 48,030
Fuel inventory, at average cost.................... 20,568 20,862
Gas in underground storage, at cost (LIFO)......... 53,287 46,576
Prepaid expenses and other......................... 36,282 39,594
------- ------
Total current assets.............................. 483,663 562,607
------- -------
Deferred charges:
Regulatory assets (Note 1)......................... 275,736 310,658
Unamortized debt expense........................... 18,136 10,800
Other.............................................. 78,949 55,794
------- ------
Total deferred charges............................ 372,821 377,252
------- -------
$5,103,843 $4,994,733
========== ==========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
6
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
CAPITAL AND LIABILITIES
September 30, December 31,
1998 1997
---- ----
Common stock........................................ $1,302,119 $1,302,119
Retained earnings................................... 315,392 319,280
------- -------
Total common equity............................. 1,617,511 1,621,399
Preferred stock:
Not subject to mandatory redemption.............. - 140,002
Subject to mandatory redemption at par........... - 39,253
PSCo obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures of PSCo (Note 6) ......... 194,000 -
Long-term debt...................................... 1,568,409 1,338,138
--------- ---------
3,379,920 3,138,792
--------- ---------
Noncurrent liabilities:
Employees' postretirement benefits other
than pensions ................................. 69,530 58,695
Employees' postemployment benefits............... 25,031 25,031
------- -------
Total noncurrent liabilities.................... 94,561 83,726
------- -------
Current liabilities:
Notes payable and commercial paper............... 404,200 348,555
Long-term debt due within one year............... 120,417 257,160
Preferred stock subject to mandatory redemption
within one year ............................... - 2,576
Accounts payable................................. 156,120 218,773
Dividends payable................................ 58,640 40,975
Customers' deposits.............................. 23,263 21,888
Accrued taxes.................................... 60,901 42,549
Accrued interest................................. 31,603 39,177
Current portion of accumulated deferred income taxes 8,267 19,872
Other............................................ 66,595 59,880
------- -------
Total current liabilities....................... 930,006 1,051,405
------- ---------
Deferred credits:
Customers' advances for construction............. 53,342 51,830
Unamortized investment tax credits............... 95,764 99,355
Accumulated deferred income taxes................ 519,754 534,246
Other............................................ 30,496 35,379
------- -------
Total deferred credits.......................... 699,356 720,810
------- -------
Commitments and contingencies (Notes 4 and 5)....... ---------- ----------
$5,103,843 $4,994,733
========== ==========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
7
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Three Months Ended
September 30,
1998 1997
---- ----
Operating revenues:
Electric........................................... $466,221 $382,360
Gas................................................ 74,635 83,372
Other.............................................. 745 850
------- -------
541,601 466,582
Operating expenses:
Fuel used in generation............................ 61,019 56,535
Purchased power.................................... 182,852 126,668
Gas purchased for resale........................... 32,928 39,503
Other operating and maintenance expenses........... 99,529 97,768
Depreciation and amortization...................... 45,344 42,374
Taxes (other than income taxes).................... 21,279 21,101
Income taxes....................................... 21,816 12,261
------- -------
464,767 396,210
------- -------
Operating income...................................... 76,834 70,372
Other income and deductions:
Merger expenses.................................... - (11,384)
Equity earnings in Yorkshire Power (Note 2)........ - 17,317
Miscellaneous income and deductions - net.......... 3,558 (2,397)
------- -------
3,558 3,536
Interest charges:
Interest on long-term debt......................... 29,628 28,949
Amortization of debt discount and expense less premium 1,153 1,019
Other interest..................................... 4,816 8,196
Allowance for borrowed funds used during construction (3,020) (1,736)
Dividends on PSCo obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of PSCo (Note 6)... 3,800 -
----- ------
36,377 36,428
------ ------
Income before extraordinary item...................... 44,015 37,480
Extraordinary item - U.K. windfall tax (Note 2)....... - (110,565)
------- --------
Net income (loss)..................................... 44,015 (73,085)
Dividend requirements on preferred stock.............. - 2,929
------- -------
Earnings (loss) available for common stock............ $44,015 $(76,014)
======= =========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
8
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Nine Months Ended
September 30,
1998 1997
---- ----
Operating revenues:
Electric........................................... $1,211,607 $1,116,457
Gas................................................ 473,288 545,470
Other.............................................. 5,946 6,542
------- -------
1,690,841 1,668,469
Operating expenses:
Fuel used in generation............................ 161,202 148,278
Purchased power.................................... 430,783 370,313
Gas purchased for resale........................... 293,468 361,998
Other operating and maintenance expenses........... 296,038 296,668
Depreciation and amortization...................... 135,035 127,413
Taxes (other than income taxes).................... 62,185 64,832
Income taxes....................................... 72,184 59,205
------- -------
1,450,895 1,428,707
--------- ---------
Operating income...................................... 239,946 239,762
Other income and deductions:
Merger expenses.................................... 418 (17,801)
Equity earnings in Yorkshire Power (Note 2)........ 3,446 21,430
Miscellaneous income and deductions - net.......... 2,223 (10,980)
------- --------
6,087 (7,351)
Interest charges:
Interest on long-term debt......................... 86,899 85,902
Amortization of debt discount and expense less premium 3,148 2,964
Other interest..................................... 14,967 17,145
Allowance for borrowed funds used during construction (8,712) (4,568)
Dividends on PSCo obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of PSCo (Note 6)... 5,911 -
----- ------
102,213 101,443
------- -------
Income before extraordinary item...................... 143,820 130,968
Extraordinary item - U.K. windfall tax (Note 2)....... - (110,565)
------- --------
Net income............................................ 143,820 20,403
Dividend requirements and redemption premium on
preferred stock ..................................... 5,332 8,814
------- -----
Earnings available for common stock................... $138,488 $11,589
======== =======
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
9
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Nine Months Ended
September 30,
1998 1997
---- ----
Operating activities:
Net income......................................... $143,820 $ 20,403
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary item - U.K. windfall tax (Note 2).. - 110,565
Depreciation and amortization.................... 139,227 130,692
Amortization of investment tax credits........... (3,591) (3,241)
Deferred income taxes............................ (14,798) 37,010
Equity in earnings of Yorkshire Power............ (3,446) (21,430)
Change in accounts receivable.................... 37,457 23,121
Change in inventories............................ (4,984) (10,061)
Change in other current assets................... 60,580 (20,894)
Change in accounts payable....................... (61,444) (93,266)
Change in other current liabilities.............. 18,111 (28,341)
Change in deferred amounts....................... (16,389) 8,432
Change in noncurrent liabilities................. 10,834 479
Other............................................ - 514
------- -------
Net cash provided by operating activities...... 305,377 153,983
Investing activities:
Construction expenditures.......................... (338,663) (217,656)
Proceeds from disposition of property,
plant and equipment ............................ 6,207 1,806
Investment in Yorkshire Power (Note 2)............. - (362,430)
Transfer of subsidiaries to NCE (Note 1)........... - (2,229)
Purchase of other investments...................... (466) (6,675)
Sale of other investments.......................... 4,394 11,979
------- -------
Net cash used in investing activities.......... (328,528) (575,205)
Financing activities:
Proceeds from sale of common stock................. - 20,517
Proceeds from sale of PSCo obligated mandatorily
redeemable preferred securities (Note 6)......... 187,700 -
Proceeds from sale of long-term debt............... 247,274 332,484
Redemption of long-term notes and bonds............ (156,414) (69,275)
Short-term borrowings - net........................ 67,600 252,536
Dividends on common stock.......................... (121,790) (102,663)
Redemption of preferred stock (Note 6)............. (181,824) (665)
Dividends and redemption premium on preferred
stock (Note 6) .................................. (8,261) (8,828)
------- ------
Net cash provided by financing activities...... 34,285 424,106
------- -------
Net increase in cash and temporary cash investments 11,134 2,884
Cash and temporary cash investments at beginning
of period ................................... 18,909 9,406
------ -----
Cash and temporary cash investments at end
of period ................................... $30,043 $12,290
======= =======
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
10
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
ASSETS
September 30, December 31,
1998 1997
---- ----
Property, plant and equipment, at cost:
Electric ....................................... $2,640,497 $2,557,579
Construction in progress........................ 120,523 144,452
------- -------
2,761,020 2,702,031
Less: accumulated depreciation.................. 1,033,792 987,487
--------- -------
Total property, plant and equipment............ 1,727,228 1,714,544
--------- ---------
Investments, at cost:
Notes receivable from affiliate................. 119,036 119,036
Other........................................... 5,646 5,832
------- -------
Total investments.............................. 124,682 124,868
------- -------
Current assets:
Cash and temporary cash investments............. 5,647 986
Accounts receivable, less reserve for
uncollectible accounts ($1,996 at September
30, 1998; $2,442 at December 31, 1997)........ 98,613 96,548
Accrued unbilled revenues....................... 13,727 15,468
Recoverable electric energy costs - net......... 4,721 23,086
Materials and supplies, at average cost......... 17,339 16,337
Fuel inventory, at average cost................. 2,293 2,301
Prepaid expenses and other...................... 4,558 3,367
------- -------
Total current assets........................... 146,898 158,093
------- -------
Deferred charges:
Regulatory assets (Note 1)...................... 111,921 119,244
Unamortized debt expense........................ 8,912 9,395
Other........................................... 32,022 55,349
------- -------
Total deferred charges......................... 152,855 183,988
------- -------
$2,151,663 $2,181,493
========== ==========
The accompanying notes to condensed financial statements are an
integral part of these financial statements.
11
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
CAPITAL AND LIABILITIES
September 30, December 31,
1998 1997
---- ----
Common stock........................................ $348,402 $348,402
Retained earnings................................... 386,822 349,988
------- -------
Total common equity............................. 735,224 698,390
SPS obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures of SPS .................... 100,000 100,000
Long-term debt....................................... 620,699 620,598
------- -------
1,455,923 1,418,988
--------- ---------
Noncurrent liabilities:
Employees' postretirement benefits other
than pensions .................................. 3,432 3,800
Employees' postemployment benefits................ 1,825 2,446
------- -------
Total noncurrent liabilities..................... 5,257 6,246
------- -------
Current liabilities:
Notes payable and commercial paper................ 126,107 154,244
Notes payable to affiliates....................... 9,000 25,160
Long-term debt due within one year................ 113 173
Accounts payable.................................. 75,119 107,465
Dividends payable................................. 6,168 22,546
Customers' deposits............................... 5,725 5,471
Accrued taxes..................................... 37,682 28,051
Accrued interest.................................. 9,219 12,715
Current portion of accumulated deferred income taxes 1,872 10,740
Other............................................. 20,591 7,415
------- -------
Total current liabilities........................ 291,596 373,980
------- -------
Deferred credits:
Unamortized investment tax credits................ 5,281 5,469
Accumulated deferred income taxes................. 377,978 372,447
Other............................................. 15,628 4,363
------- -------
Total deferred credits........................... 398,887 382,279
------- -------
Commitments and contingencies (Notes 4 and 5)........ --------- ---------
$2,151,663 $2,181,493
========== ==========
The accompanying notes to condensed financial statements are an
integral part of these financial statements.
12
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Three Months Ended
September 30,
1998 1997
---- ----
Operating revenues:
Electric........................................... $284,648 $279,511
Other.............................................. - 4,645
------- -------
284,648 284,156
Operating expenses:
Fuel used in generation............................ 139,021 141,907
Purchased power.................................... 9,946 3,957
Other operating & maintenance expenses............. 34,189 35,187
Depreciation and amortization...................... 17,754 17,272
Taxes (other than income taxes).................... 12,525 11,969
Income taxes....................................... 21,755 22,888
------- -------
235,190 233,180
------- -------
Operating income...................................... 49,458 50,976
Other income and deductions:
Merger expenses.................................... - (7,200)
Interest income and other - net................... 2,233 1,692
----- -----
2,233 (5,508)
Interest charges:
Interest on long-term debt......................... 10,992 11,000
Amortization of debt discount and expense less premium 561 560
Other interest..................................... 2,163 1,963
Allowance for borrowed funds used during construction (917) (1,129)
Dividends on SPS obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of SPS ............ 1,963 1,963
----- -----
14,762 14,357
------ ------
Net income............................................ $36,929 $31,111
======= =======
Theaccompanying notes to condensed financial statements are an
integral part of these financial statements.
13
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Nine Months Ended
September 30,
1998 1997
---- ----
Operating revenues:
Electric........................................... $748,386 $728,436
Other.............................................. - 20,236
------- -------
748,386 748,672
Operating expenses:
Fuel used in generation............................ 351,036 364,221
Purchased power.................................... 19,666 12,088
Other operating & maintenance expenses............. 103,650 119,755
Depreciation and amortization...................... 53,291 53,717
Taxes (other than income taxes).................... 35,918 34,819
Income taxes....................................... 54,709 36,894
------- -------
618,270 621,494
------- -------
Operating income...................................... 130,116 127,178
Other income and deductions:
Merger expenses.................................... (1,208) (15,239)
Write-off of investment in Carolina Energy
Project (Note 3) ................................ - (16,052)
Interest income and other - net................... 6,779 2,113
------- -------
5,571 (29,178)
Interest charges:
Interest on long-term debt......................... 32,972 33,057
Amortization of debt discount and expense less premium 1,682 1,683
Other interest..................................... 7,275 4,710
Allowance for borrowed funds used during construction (4,115) (3,047)
Dividends on SPS obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of SPS ............ 5,888 5,888
----- -----
43,702 42,291
------ ------
Net income............................................ $91,985 $55,709
======= =======
Theaccompanying notes to condensed financial statements are an
integral part of these financial statements.
14
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Nine Months Ended
September 30,
1998 1997
---- ----
Operating activities:
Net income......................................... $91,985 $55,709
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................... 56,593 56,290
Write-off of investment in Carolina Energy Project - 16,052
Amortization of investment tax credits........... (188) (188)
Deferred income taxes............................ (1,524) 1,957
Allowance for funds used during construction..... - (5)
Change in accounts receivable.................... (2,065) (37,112)
Change in inventories............................ (994) (1,419)
Change in other current assets................... 18,915 1,543
Change in accounts payable....................... (32,346) 39,276
Change in other current liabilities.............. 19,565 (10,565)
Change in deferred amounts....................... 38,588 (52,143)
Change in noncurrent liabilities................. (989) 1,419
Other............................................ - 312
------- -------
Net cash provided by operating activities...... 187,540 71,126
Investing activities:
Construction expenditures.......................... (64,838) (87,707)
Allowance for equity funds used during construction - 5
Proceeds from (cost of) disposition of property,
plant and equipment ............................. (2,345) 61
Proceeds from the sale of Quixx and UE, net of cash
disposed (Note 1) ............................... - (29,567)
Sale (purchase) of other investments............... 186 (4,583)
------- --------
Net cash used in investing activities.......... (66,997) (121,791)
Financing activities:
Redemption of long-term notes and bonds............ (58) (16,099)
Short-term borrowings - net........................ (44,297) 101,495
Dividends on common stock.......................... (71,527) (61,769)
------- -------
Net cash (used in) provided by financing
activities .................................. (115,882) 23,627
-------- ------
Net increase (decrease) in cash and temporary
cash investments ............................ 4,661 (27,038)
Cash and temporary cash investments at
beginning of period ......................... 986 40,610
--- ------
Cash and temporary cash investments at end of period $ 5,647 $ 13,572
======= ========
The accompanying notes to condensed financial statements
are an integral part of these financial statements
15
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Summary of Significant Accounting Policies (NCE, PSCo and SPS)
Effective August 1, 1997, following the receipt of all required state and
Federal regulatory approvals, PSCo and SPS merged in a tax-free "merger of
equals" transaction and became wholly-owned subsidiaries of NCE. Each
outstanding share of PSCo common stock was canceled and converted into the right
to receive one share of NCE common stock, and each outstanding share of SPS
common stock was canceled and converted into the right to receive 0.95 of one
share of NCE common stock. The Merger was accounted for as a
pooling-of-interests. Effective with the Merger, certain utility and non-utility
subsidiaries were transferred within NCE's common controlled subsidiaries. The
common stock of Quixx and UE, former SPS subsidiaries, was transferred through
the sale by SPS of the common stock of such subsidiaries at net book value,
aggregating approximately $119.0 million, to NC Enterprises in exchange for
notes payable of NC Enterprises. Subsidiaries of PSCo (Cheyenne, WGI, e prime
and Natural Fuels) were transferred by a declaration of a dividend of the
subsidiaries' stock, at net book value, aggregating approximately $49.9 million
to NCE. NCE subsequently made a capital contribution of the e prime and Natural
Fuels common stock, at net book value, aggregating approximately $29.5 million
to NC Enterprises. Subsequent to the Merger and effective March 31, 1998, PSCo
sold its investment in NCI to NC Enterprises (see Note 2. Investment in
Yorkshire Power).
Business, Utility Operations and Regulation
NCE is a registered holding company under PUHCA and its utility
subsidiaries (PSCo, SPS and Cheyenne) are engaged principally in the generation,
purchase, transmission, distribution and sale of electricity and in the
purchase, distribution, sale and transportation of natural gas. Both the Company
and its subsidiaries are subject to the regulatory provisions of PUHCA. The
utility subsidiaries are subject to regulation by the FERC and state utility
commissions in Colorado, Texas, New Mexico, Wyoming, Kansas and Oklahoma. Over
90% of the Company's revenues are derived from its regulated utility operations.
Regulatory Assets and Liabilities
The Company's regulated subsidiaries prepare their financial statements in
accordance with the provisions of SFAS 71, as amended. SFAS 71 recognizes that
accounting for rate regulated enterprises should reflect the relationship of
costs and revenues introduced by rate regulation. A regulated utility may defer
recognition of a cost (a regulatory asset) or recognize an obligation (a
regulatory liability) if it is probable that, through the ratemaking process,
there will be a corresponding increase or decrease in revenues.
16
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
The following regulatory assets are reflected in the accompanying
consolidated condensed balance sheets (in thousands):
September 30, 1998 NCE PSCo SPS
------ ------ -----
Income taxes ....................... $149,874 $ 73,057 $ 77,348
Nuclear decommissioning costs....... 71,571 71,571 -
Employees' postretirement benefits
other than pensions .............. 58,771 55,847 2,924
Early retirement costs.............. 1,091 - 1,091
Employees' postemployment
benefits (Note 4) ................ 24,093 23,643 -
Demand-side management costs........ 38,938 34,009 4,929
Unamortized debt reacquisition costs 34,033 16,274 17,192
Thunder Basin judgment (Note 4)..... 1,784 - 1,784
Other............................... 7,988 1,335 6,653
------ ------ ------
Total............................. $388,143 $275,736 $111,921
======== ======== ========
December 31, 1997 NCE PSCo SPS
------ ------ -----
Income taxes........................ $162,985 $ 84,356 $ 79,161
Nuclear decommissioning costs....... 76,881 76,881 -
Employees' postretirement benefits
other than pensions............... 63,023 59,995 3,028
Early retirement costs.............. 8,008 6,645 1,363
Employees' postemployment
benefits (Note 4) ................ 24,455 23,932 -
Demand-side management costs........ 42,503 38,518 3,985
Unamortized debt reacquisition costs 36,717 17,791 18,344
Thunder Basin judgment (Note 4)..... 5,912 - 5,912
Other............................... 9,991 2,540 7,451
------ ------ ------
Total............................. $430,475 $310,658 $119,244
======== ======== ========
The regulatory assets of the Company's regulated subsidiaries that are
currently being recovered as of September 30, 1998 and December 31, 1997 are
reflected in rates charged to customers over periods ranging from two to thirty
years. The recovery of regulatory assets over the next five years is estimated
to exceed $200 million. For further discussion, see the NCE, PSCo and SPS 1997
Annual Report on Form 10-K. The Company believes its utility subsidiaries will
continue to be subject to rate regulation. In the event that a portion of
regulated subsidiaries' operations are no longer subject to the provisions of
SFAS 71, as a result of a change in regulation or the effects of competition,
the Company's subsidiaries could be required to write-off their regulatory
assets, determine any impairment to other assets resulting from deregulation and
write-down any impaired assets to their estimated fair value, which could have a
material adverse effect on NCE's, PSCo's and SPS's financial position, results
of operations and cash flows.
On January 27, 1997, the CPUC issued its order on PSCo's 1996 gas rate
case. The CPUC allowed recovery of postemployment benefit costs on an accrual
basis under SFAS 112 and denied amortization of the approximately $8.9 million
regulatory asset recognized upon the adoption of SFAS 112. PSCo has appealed in
the Denver District Court the decision related to this issue. PSCo believes that
it will be successful on appeal and that the associated regulatory asset is
realizable. On April 1, 1998, in connection with PSCo's annual electric
department earnings test filing, PSCo requested approval to recover its electric
jurisdictional portion of the postemployment benefits cost regulatory asset
totaling approximately $15 million over three years. The CPUC staff and Colorado
Office of Consumer Counsel are proposing to exclude these costs from the
electric department earnings test. PSCo believes that it will be allowed
recovery of SFAS 112 costs on an accrual basis. If PSCo is ultimately
unsuccessful in its appeal of the gas rate case decision and/or in its request
to recover its electric
17
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
jurisdictional regulatory asset, all unrecoverable
amounts will be written-off (see Note 4. Regulatory Matters - Electric
Department Earnings Test and Quality of Service Plan).
As of September 30, 1998, SPS has approximately $1.8 million in remaining
regulatory assets associated with the Thunder Basin judgment. The judgment
amount which has been paid by SPS is recoverable from customers, subject to
review by various regulatory agencies (see Note 4. Regulatory Matters - Electric
Cost Adjustment Mechanisms).
Other Property
Property, plant and equipment includes approximately $18.4 million and
$25.4 million, respectively, for costs associated with the engineering design of
the future Pawnee 2 generating station and certain water rights located in
southeastern Colorado, obtained for a future generating station. PSCo is earning
a return on these investments based on its weighted average cost of debt and
preferred stock in accordance with a CPUC rate order (see Note 4. Regulatory
Matters - Electric Department Earnings Test and Quality of Service Plan).
Diversified Energy Businesses
The Company's energy-related businesses are principally involved in
engineering, design and construction management, energy trading and marketing,
energy management and consulting services, the management of real estate and
certain life insurance policies, the financing of certain current assets of PSCo
and investments in cogeneration facilities, electric wholesale generators and a
foreign utility company. The Company's international investments are subject to
regulation in the countries in which such investments are made (see Note 2.
Investment in Yorkshire Power). Financial statements of foreign subsidiaries are
translated into U.S. dollars at current exchange rates, except for revenues,
costs and expenses which are translated at average current exchange rates during
each reporting period.
Statements of Cash Flows - Non-cash Transactions:
Effective February 26, 1998, the Company issued 222,362 shares of its
common stock, valued at the market price on the date of issuance of
approximately $10 million to the Employees' Savings and Stock Ownership Plan of
Public Service Company of Colorado and Participating Subsidiary Companies. Prior
to the Merger, during 1997, PSCo issued 250,058 shares of its common stock to
the Employees' Savings and Stock Ownership Plan of Public Service Company of
Colorado and Participating Subsidiary Companies valued at the market price on
the date of issuance of approximately $10 million. The estimated issuance values
were recognized in other operating expenses during the respective preceding
years.
Comprehensive Income
The Company and its subsidiaries adopted Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income," effective January 1, 1998.
The individual and cumulative components of other comprehensive income are not
material to the Company and its subsidiaries.
General
See Note 1. of the Notes to Consolidated Financial Statements in NCE's,
PSCo's and SPS' 1997 Annual Report on Form 10-K for a summary of the companies
and their subsidiaries significant accounting policies. Certain prior year
amounts have been reclassified to conform to the current year's classification.
18
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
2. Investment in Yorkshire Power (NCE and PSCo)
Acquisition
During the second quarter of 1997, Yorkshire Power, a subsidiary equally
owned by PSCo, through NCI, and AEP, acquired indirectly all of the outstanding
ordinary shares of Yorkshire Electricity, a United Kingdom ("U.K.") regional
electricity company. NCI accounts for its investment in Yorkshire Power using
the equity method. Yorkshire Power's results of operations include 100% of
Yorkshire Electricity's results since the April 1, 1997 acquisition date. NCI's
equity in earnings of Yorkshire Power is 50%, the same as its ownership share.
In July 1997, the U.K. government enacted a windfall tax on certain
privatized business entities, payable in two installments with the first in
December 1997 and the second in December 1998. The windfall tax was a
retroactive adjustment to the privatization value based on post-privatization
profits during the 1992 to 1995 period. During the third quarter of 1997,
Yorkshire Power recorded an extraordinary charge of approximately $221 million
(135 million pounds sterling) for this windfall tax. The Company's share of this
tax was approximately $110.6 million.
Effective March 31, 1998, PSCo sold its common stock investment in NCI to
NC Enterprises, an NCE subsidiary. NCI's primary investment is Yorkshire Power.
PSCo received as consideration a 20 year promissory note from NC Enterprises in
the amount of approximately $292.6 million. Annual interest payments are
required for the first three years followed by principal and interest payments
for the remaining seventeen years. The interest rate on the note is 7.02%. NCE
intends to make additional capital contributions to NC Enterprises to provide
the necessary cash flow requirements to make payments on the promissory note to
PSCo. In late October 1998, NCE contributed $100 million to NC Enterprises and
NC Enterprises used the cash to reduce the principle balance of the promissory
note to PSCo.
Investment in Ionica
In June 1998, Yorkshire Power recognized a $54.7 million after-tax
impairment of its investment in Ionica, a wireless telecommunications company,
upon the May 22, 1998, announcement by Ionica that negotiations for release of
lines of credit from existing providers of bank facilities had been
unsuccessful. The impairment, reflecting a write-down to fair market value, was
offset, in part, by an unrelated tax adjustment of approximately $21.5 million.
Generation Sale
In October 1998, Yorkshire Electricity announced that it had agreed to
sell its 75% interest in Regional Power Generators, Ltd., which owns a
272-megawatt combined cycle, gas fired plant located in North Lincolnshire,
England. Proceeds from the sale will be used to reduce the debt of Yorkshire
Electricity. Yorkshire Electricity is focusing its main business on the
distribution and supply of electricity and the supply of natural gas. Yorkshire
Power expects to complete the sale by the end of 1998.
19
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Summarized income statement information for the nine months ended
September 30, 1998, and from the date of acquisition, April 1, 1997 to September
30, 1997, is presented below (in millions):
1998 1997
---- ----
Yorkshire Power:
Operating revenues....................... $1,677.3 $ 917.6
-------- --------
Operating income......................... 264.8 124.1
-------- --------
Income before extraordinary item......... 13.6 42.8
-------- --------
Extraordinary item - U.K. windfall tax... - (221.1)
------ ------
Net income (loss)........................ $ 13.6 $ (178.3)
======== =========
NCI's equity in earnings (losses):
Equity in earnings of Yorkshire Power.... 6.8 21.4
Extraordinary item - U.K. windfall tax... - (110.6)
------ ---------
$ 6.8 $ (89.2)
======== =========
The unaudited pro forma financial information presented below for NCE
assumes that Yorkshire Power was acquired on January 1, 1997. The pro forma
adjustments include recognition of equity in the estimated earnings of Yorkshire
Power, an adjustment for interest expense on debt associated with the investment
in Yorkshire Power and related income taxes. The estimated earnings of Yorkshire
Power were based on historical earnings of Yorkshire Electricity, prior to its
acquisition by Yorkshire Power, adjusted for the estimated effects of purchase
accounting (including the amortization of goodwill), conversion to United States
generally accepted accounting principles, interest expense on debt issued by
Yorkshire Power associated with the acquisition and related income taxes. Sales
of electricity are affected by seasonal weather patterns and, therefore, the
results of Yorkshire Power/Yorkshire Electricity will not be distributed evenly
during the year. Equity in earnings (losses) of Yorkshire Power has been
converted at the average exchange rates for the nine months ended September 30,
1998 and September 30, 1997, of $1.652/pound and $1.631/pound, respectively.
Based on the above assumptions, shown below is unaudited pro forma
financial information for the nine months ended September 30, 1998 and 1997 (in
millions, except per share amounts):
NCE Earnings
Available for
common stock Per share (1)
------------ -------------
1998 1997 1998 1997
---- ---- ---- ----
Net income before extraordinary item... $233.5 $175.5 $2.10 $1.68
===== =====
Pro forma adjustments:
Equity in earnings of
Yorkshire Power, net of
U.S. tax benefits (2)............... - (10.1)
Interest expense, net of tax......... - (3.5)
----- ------
Pro forma result....................... $233.5 $161.9 $2.10 $1.55
====== ====== ===== =====
(1) Based on the weighted average number of common shares outstanding for the
period.
(2) The nine months ended September 30, 1997 amount includes $24.0
million ($17.9 million after-tax) of write-offs related to certain computer
development costs, acquisition expenses and costs incurred for the
preparation for deregulation.
20
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
The unaudited pro forma financial information presented below for PSCo
assumes that NCI (primarily representing Yorkshire Power) was sold to NC
Enterprises effective January 1, 1997. NCI was formed in connection with the
investment in Yorkshire Power and had no operations during the first three
months of 1997. The pro forma adjustments represent the removal of NCI's net
income from PSCo and the inclusion of interest income, net of tax, from the
promissory note to PSCo from NC Enterprises.
Based upon the above assumptions, shown below is unaudited pro forma
financial information for the nine months ended September 30, 1998 and 1997 (in
millions):
PSCo
Earnings
1998 1997
---- ----
Net income before extraordinary item..................... $143.8 $131.0
Pro forma adjustments:
NCI's net income before extraordinary item............. (2.8) (22.4)
Interest income from promissory note, net of tax....... 3.2 6.3
----- -----
Pro forma result......................................... $144.2 $114.9
====== ======
3. Acquisition and Divestiture of Investments
Acquisition of the Planergy Group (NCE)
Effective April 1, 1998, the Company acquired all of the outstanding
common stock of Falcon Seaboard Energy Services, Inc. ("the Planergy Group") and
assumed other outstanding debt. The Planergy Group includes Planergy, Inc. and
Planergy Services. Such acquisition was accounted for using the purchase method
and the acquired assets and liabilities have been valued at their estimated fair
market values as of the date of acquisition. The Planergy Group has been
consolidated as a subsidiary of NC Enterprises in the Company's consolidated
financial statements. The Planergy Group is primarily engaged in energy
consulting, energy efficiency management, conservation programs and mass market
services.
Carolina Energy Limited Partnership Investment (NCE and SPS)
The Carolina Energy Partnership, a waste-to-energy cogeneration facility,
was originally scheduled to be completed in 1997, but was halted pending an
independent analysis of the project's engineering and financial viability. The
banks providing debt financing to the project withheld funds for continued
construction. Quixx, UE, other equity owners, senior creditors and the
construction contractor were unable to restructure the project on mutually
agreeable terms and the senior creditors took possession of the assets of the
facility. As a consequence, in June 1997, Quixx wrote-off its investment of
approximately $13.6 million in the Carolina Energy Partnership. Additionally, UE
wrote-off its net investment of approximately $2.4 million in this same
partnership. Quixx holds a one-third ownership interest, including a 1% general
partnership interest, in the partnership. UE's net investment in the partnership
was comprised of subordinated debt, the related interest receivable, as well as
fees for engineering services.
21
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
4. Regulatory Matters (NCE, PSCo and SPS)
Merger Rate Filings
The discussion below summarizes the significant conditions imposed by the
state utility regulatory commissions in Colorado, Texas, New Mexico, Wyoming,
Oklahoma and Kansas in their respective approvals of the Merger.
PSCo
The CPUC decision approving the Merger established a five-year performance
based regulatory plan and acknowledged that the Merger was in the public
interest. The major provisions of the decision include the following, some of
which are discussed in other sections of this note:
- a $6 million annual electric rate reduction, which was instituted October
1, 1996, followed by an additional $12 million annual electric rate
reduction effective with the implementation of new gas rates on February
1, 1997;
- an annual electric department earnings test with the sharing of earnings
in excess of an 11% return on equity for the calendar years 1997-2001 and
the implementation of a Quality of Service Plan;
- a freeze in base electric rates for the period through December 31, 2001
with the flexibility to make certain other rate changes, including those
necessary to allow for the recovery of DSM, QF capacity and
decommissioning costs. The freeze in base electric rates does not prohibit
PSCo from filing a general rate case or deny any party the opportunity to
initiate a complaint or show cause proceeding; and
- the replacement of the ECA with an ICA.
Subsequent to the CPUC's decision approving the Merger, the CPUC approved
the recovery of merger costs, amortized from the effective date of the Merger
through December 31, 2001. PSCo has expensed merger costs as incurred and
recovery of such costs will be reflected in the electric department earnings
test, discussed below in Electric Department Earnings Test and Quality of
Service Plan. Merger costs attributable to Colorado gas retail customers were
included in the gas rate case approved by the CPUC, discussed below in Rate
Cases- PSCo Retail Gas.
SPS
Under the various regulatory commission approvals, SPS is required to
provide credits to customers over five years for one-half of the measured
non-fuel operation and maintenance expense savings associated with the Merger.
SPS will provide guaranteed minimum annual credits to retail customers of $3
million in Texas, $1.2 million in New Mexico (which will be discontinued
effective with the new retail rates as discussed below in Rate Cases - SPS - New
Mexico), $100,000 in Oklahoma and $10,000 in Kansas and $1.5 million to
wholesale customers.
Cheyenne
The WPSC approved the Merger on August 16, 1996. Cheyenne agreed not to
file a retail electric rate case for two years after August 1, 1997, the
effective date of the Merger. Cheyenne expects to file a combined gas and
electric rate case with the WPSC in 1999, following the expiration of the two
year moratorium.
Electric Department Earnings Test and Quality of Service Plan
PSCo
The CPUC's decision on the Merger implemented an electric department
earnings test with the sharing of earnings in excess of an 11% return on equity
for the calendar years 1997-2001 as follows:
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Electric Department Sharing of Excess Earnings
Return on Equity Customers Shareholders
---------------- --------- ------------
11-12% 65% 35%
12-14% 50% 50%
14-15% 35% 65%
over 15% 100% 0%
The CPUC's decision on the Merger also implemented a QSP which provides
for bill credits totaling up to $5 million in year one and increasing to $11
million in year five, if PSCo does not achieve certain performance measures
relating to electric reliability, customer complaints and telephone response to
inquiries. On October 15, 1997, the CPUC issued an order addressing the
implementation of a reward mechanism in the QSP which provides up to $3 million
of annual rewards if PSCo achieves certain performance measures relating to
electric reliability. During the third quarter of 1998, PSCo reached a
settlement agreement with the Staff of the CPUC and the Colorado Office of
Consumer Counsel ("OCC") which modifies the current bill credit structure and
eliminates the reward structure for the years 1999 through 2001. Approval of
this modification, by the CPUC, is expected in the fourth quarter of 1998.
On April 1, 1998, PSCo filed with the CPUC its proposed Performanced-Based
Regulatory Plan adjustment for calendar year 1997. This adjustment will provide
the means for implementing the sharing mechanism for the customers' portion of
earnings over PSCo's authorized return on equity threshold resulting from the
1997 electric department earnings test, net of QSP reward earned revenue. As of
December 31, 1997, PSCo recorded an estimated customer refund obligation of
approximately $16.4 million related to the 1997 electric department earnings
test, net of QSP rewards. A final refund obligation has not been determined.
PSCo believes that its accrued obligation will be adequate.
PSCo, the OCC and the CPUC staff have all filed testimony in connection
with the 1997 electric earnings test. The significant issues, which have not
been resolved and will impact the determination of the final refund, include the
recovery of postemployment benefit costs under SFAS 112, regulatory capital
structure and the recovery of costs associated with certain future use plant and
water rights (see Note 1. Summary of Significant Accounting Policies - Business,
Utility Operations and Regulation - Other Property). Hearings are scheduled to
begin on November 16, 1998 and settlement discussions are continuing. For the
nine months ended September 30, 1998, PSCo has recorded an estimated refund
obligation of approximately $7.4 million for the 1998 electric department
earnings test.
Rate Cases
PSCo
Retail - Gas
On June 5, 1996, PSCo filed a retail rate case with the CPUC requesting an
annual increase in its jurisdictional gas department revenues of approximately
$34 million. In early 1997, the CPUC approved an overall increase of
approximately $18 million with an 11.25% return on equity, effective February 1,
1997 and as modified on May 15, 1997. The CPUC disallowed the recovery of
certain postemployment benefit costs under SFAS 112 and imputed anticipated
merger related savings net of costs related to the gas business (see Note 1.
Summary of Significant Accounting Policies). PSCo filed a petition with the
Denver District Court appealing the CPUC's decision. A decision from the Denver
District Court is expected during the fourth quarter of 1998.
On November 2, 1998, PSCo filed a retail gas rate case with the CPUC
requesting an annual increase in rates of approximately $23.4 million. The
request for a rate increase reflects revenues for additional plant investment, a
12.0% return on equity and the recovery of incremental year 2000 costs (see Note
5. Commitments and Contingencies - Year 2000 Costs). The recovery of
postemployment benefit costs was not included in this request pending a decision
from the Denver District Court, as discussed above. If approved, the new rates
would become effective July 1, 1999.
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
SPS
New Mexico
On November 17, 1997, the NMPUC issued an order investigating SPS's rates.
In the order, the NMPUC determined that because of the rapid changes occurring
in the electric industry the NMPUC would require rate case filings by the major
electricity suppliers who have not adopted a plan to provide retail open access
and customer choice of suppliers. SPS made a compliance filing on May 5, 1998,
which proposed a $1.7 million annual rate reduction for certain retail customers
in New Mexico, and incorporated the $1.2 million guaranteed minimum annual
credits, discussed above. On October 2, 1998, SPS entered into an uncontested
stipulation agreement settling the rate investigation case. As part of this
settlement, SPS would institute a $6 million annual reduction in base rates
(discontinuing the $1.2 million in guaranteed minimum annual credits) for
certain retail customers with an anticipated effective date during December
1998. Additionally, SPS will implement full normalization in its accounting for
income taxes with recovery of the New Mexico jurisdictional portion of the tax
regulatory asset over 16.8 years. This settlement is currently pending NMPUC
approval.
Wholesale - FERC
On December 19, 1989, the FERC issued its final order regarding a 1985
wholesale rate case. SPS appealed certain portions of the order that related to
recognition in rates of the reduction of the federal income tax rate from 46% to
34%. The United States Court of Appeals for the District of Columbia Circuit
remanded the case directing the FERC to reconsider SPS's claim of an offsetting
cost and limiting the FERC's actions. The FERC issued its Order on Remand in
July 1992, the required filings were made and a hearing was completed in
February 1994. In October 1994, the Administrative Law Judge ("ALJ") issued a
favorable initial decision that, if approved by the FERC, would result in a
revenue recovery for SPS. Negotiated settlements with SPS's partial requirements
customers and TNP were approved by the FERC in July 1993 and September 1993,
respectively, and SPS received approximately $2.8 million, including interest.
In a settlement with SPS's New Mexico rural electric cooperative customers, SPS
received approximately $7.0 million, including interest. The FERC approved this
settlement in July 1995. Resolutions of these matters with the remaining
wholesale customers, the Golden Spread member cooperatives and Lyntegar Electric
Cooperative, were not achieved. On May 5, 1998, the FERC issued its opinion
substantially modifying the ALJ's initial decision. The net positive impact from
this decision, which was recorded in June 1998, was approximately $7.7 million
($4.9 million after tax). SPS, Golden Spread and Lyntegar Electric Cooperative
have sought rehearing by FERC of its order. The requests for rehearing are
pending.
Cheyenne
On May 12, 1997, Cheyenne filed an application with the WPSC for an
overall annual increase in retail gas revenues of approximately $1.25 million.
On September 23, 1997, the WPSC approved an increase in retail gas revenues of
approximately $1.19 million with an 11.71% return on equity, effective October
1, 1997.
Electric Cost Adjustment Mechanisms
SPS
Texas
A PUCT substantive rule requires periodic examination of SPS's fuel and
purchased power costs, the efficiency of the use of such fuel and purchased
power, fuel acquisition and management policies and purchase power commitments.
Under the PUCT's regulations, SPS is required to file an application for the
Commission to retrospectively review, at least every three years, the operations
of a utility's electricity generation and fuel management activities. In June
1998, SPS filed its reconciliation for the generation and fuel management
activities totaling
24
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
approximately $690 million, for the period from January 1995
through December 1997. For this same period, SPS had approximately $21.4 million
in underrecovered fuel costs associated with the Texas retail jurisdiction.
Currently, Texas retail customers are being surcharged for approximately $6.4
million of such underrecovered fuel costs. The Company has also requested the
prospective sharing of margins from wholesale non-firm sales. The outcome of
this fuel reconciliation proceeding is pending.
On May 1, 1995, SPS filed with the PUCT a petition for a fuel
reconciliation for the months of January 1992 through December 1994. The PUCT
issued an order in January 1996 requiring SPS to make a $3.9 million fuel refund
consisting of $2.1 million of overrecovered fuel costs and $1.8 million of
disallowed fuel costs for the period. This refund was made and the expense
recorded in April 1996. Additionally, the order required SPS to pass through to
customers 100% of margins from wholesale non-firm sales as of January 1995.
Prior PUCT rulings had allowed SPS to retain 25% of these margins. The 100% flow
through is required by PUCT rules, absent a waiver. A motion for rehearing on
the fuel disallowance (which was adjusted to $1.9 million) was subsequently
denied by the PUCT and SPS was ordered to flow through 100% of the non-firm
off-system sales margin effective with the first billing cycle after the date of
the order. Upon appeal by SPS to the Travis County District Court in May 1996,
the PUCT's decision on the disallowed fuel costs was upheld. SPS appealed the
decision and, on January 29, 1998, the Texas Court of Appeals upheld the PUCT
decision to disallow fuel costs. On March 16, 1998, SPS filed an appeal to the
Supreme Court of Texas which, on August 25, 1998, refused to hear the appeal.
SPS was named as a defendant in a case entitled Thunder Basin Coal Co. vs.
Southwestern Public Service Co., No. 93-CV304B (D. Wyo.). On November 1, 1994,
the jury returned a verdict in favor of Thunder Basin and awarded damages of
approximately $18.8 million. SPS appealed the judgment to the Tenth Circuit
Court of Appeals and, on January 7, 1997, that Court found in favor of Thunder
Basin and upheld the judgment. SPS filed a motion for rehearing which was
denied. In February 1997, SPS recorded the liability for the judgment including
interest and court costs. The amount of approximately $22.3 million was paid in
April 1997.
On September 17, 1996, the FERC issued an order granting SPS conditional
approval to collect the FERC jurisdictional portion of the Thunder Basin
judgment from wholesale customers. On October 24, 1997, the NMPUC issued an
order granting recovery of the New Mexico retail jurisdictional portion of the
judgment. On May 1, 1997, SPS filed a request with the PUCT to surcharge
undercollected fuel and purchased power expenses, which included $9.1 million of
the Thunder Basin judgment. In November 1997, the PUCT issued a decision which
denied recovery of the judgment through a surcharge, on the grounds that the
costs were not classified as fuel costs. In 1997, SPS expensed approximately
$12.1 million of the Texas retail jurisdictional portion of the Thunder Basin
judgment and recognized an equal amount as deferred revenue in anticipation of
future recovery through the pending fuel reconciliation proceeding.
SPS believes that recovery of the Thunder Basin costs for the Texas retail
jurisdiction will be approved in the pending fuel reconciliation proceeding.
Under the PUCT regulations, a utility may recover eligible fuel expenses or
fuel-related expenses, which result in benefits to customers that exceed the
costs that customers would otherwise have to pay. The Thunder Basin costs
resulted in total net savings to customers of approximately $8.5 million, with
approximately $4.6 million net savings attributable to Texas retail
jurisdictional customers.
5. Commitments and Contingencies (NCE, PSCo and SPS)
Environmental Issues
The Company and its subsidiaries are subject to various environmental
laws, including regulations governing air and water quality and the storage and
disposal of hazardous or toxic wastes. The Company and its subsidiaries assess,
on an ongoing basis, measures to ensure compliance with laws and regulations
related to air and water quality, hazardous materials and hazardous waste
compliance and remediation activities.
25
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Environmental Site Cleanup
As described below, PSCo has been or is currently involved with the
cleanup of contamination from certain hazardous substances. In many situations,
PSCo is pursuing or intends to pursue insurance claims and believes it will
recover some portion of these costs through such claims. Additionally, where
applicable, PSCo is pursuing, or intends to pursue, recovery from other
Potentially Responsible Parties ("PRPs") and through the rate regulatory
process. To the extent any costs are not recovered through the options listed
above, PSCo would be required to recognize an expense for such unrecoverable
amounts.
Under the Comprehensive Environmental Response, Compensation and Liability
Act ("CERCLA"), the U.S. Environmental Protection Agency ("EPA") identified, and
a Phase II environmental assessment revealed, low level, widespread
contamination from hazardous substances at the Barter Metals Company ("Barter")
properties located in central Denver. For an estimated 30 years, PSCo sold scrap
metal and electrical equipment to Barter for reprocessing. PSCo has completed
the cleanup of this site at a cost of approximately $9 million and has received
responses from the Colorado Department of Public Health and Environment
("CDPHE") indicating that no further action is required related to these
properties. On January 3, 1996, in a lawsuit by PSCo against its insurance
providers, the Denver District Court entered final judgment in favor of PSCo in
the amount of $5.6 million for certain cleanup costs at Barter. Several appeals
and cross appeals have been filed by one of the insurance providers and PSCo in
the Colorado Court of Appeals. The insurance provider has posted supersedeas
bonds in the amount of $9.7 million ($7.7 million attributable to the Barter
judgment). On July 10, 1997, the Colorado Court of Appeals overturned the
previously awarded $7.7 million judgment on the basis that the jury had not been
properly instructed by the Judge regarding a narrow issue associated with
certain policies. Previously, PSCo had received certain insurance settlement
proceeds from other insurance providers for Barter and other contaminated sites
and a portion of those funds remains to be allocated to this site by the trial
court. Both sides of the litigation filed petitions for certiorari to the
Colorado Supreme Court which granted a hearing on several issues, although the
matter is still pending. In addition, in August 1996, PSCo filed a lawsuit
against four PRPs seeking recovery of certain Barter related costs. Settlement
has been achieved with two smaller PRP's. On December 16, 1997, the U. S.
District Court awarded summary judgment in favor of the remaining PRPs, on the
basis that PSCo failed to follow CERCLA guidelines in the cleanup. On January
15, 1998, PSCo appealed the summary judgment to the U.S. Court of Appeals. In
March 1998, PSCo sold the remaining Barter properties, and the total proceeds
were $1.2 million.
Polychlorinated Biphenyl ("PCB") presence was identified in the basement
of an historic office building located in downtown Denver. The Company was
negotiating the future cleanup with the current owners; however, in October
1993, the owners filed a civil action against PSCo in the Denver District Court.
The action alleged that PSCo was responsible for the PCB releases and
additionally claimed other damages in unspecified amounts. In August, 1994, the
Denver District Court entered a judgment approving a $5.3 million offer of
settlement between PSCo and the building owners resolving all claims. In
December 1995, complaints were filed by PSCo against all applicable insurance
carriers in the Denver District Court. In June 1997, the Court ruled in favor of
the carriers on summary judgment motions addressing late notice and other
issues. In August 1997, PSCo filed an appeal of the decision with the Colorado
Court of Appeals, which is still pending. One carrier was excluded from the
summary judgment; subsequently, that carrier received approval to be dismissed
on the same basis as the other carriers. In March 1998, PSCo reached a
settlement with another carrier who was not part of the Denver District Court
action. PSCo is pursuing the recovery of approximately $3.3 million net costs
in the electric department earnings test.
In addition to these sites, PSCo has identified several other sites where
clean up of hazardous substances may be required. While potential liability and
settlement costs are still under investigation and negotiation, PSCo believes
that the resolution of these matters will not have a material adverse effect on
PSCo's financial position, results of operations or cash flows. PSCo will pursue
the recovery of all significant costs incurred for such projects through
insurance claims and/or the rate regulatory process.
26
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Other Environmental Matters
Under the Clean Air Act Amendments of 1990 ("CAAA"), coal fueled power
plants are required to reduce SO2 and NOx emissions to specified levels through
a phased approach. PSCo's and SPS's facilities must comply with the Phase II
requirements, which will be effective in the year 2000. Currently, these
regulations permit compliance with SO2 emission limitations by using SO2
allowances allocated to plants by the EPA, using allowances generated by
reducing emissions at existing plants and by using allowances purchased from
other companies. The Company expects to meet the Phase II emission standards
placed on SO2 through the combination of: a) use of low sulfur coal, b) the
operation of air quality control equipment on certain generation facilities, and
c) allowances issued by the EPA and purchased from other companies. In addition,
PSCo and SPS will be required to modify certain boilers by the year 2000 to
reduce the NOx emissions in order to comply with Phase II requirements. The
estimated Phase II costs for future plant modifications to meet NOx requirements
total approximately $14.4 million and pertain to the following plants: PSCo's
Cherokee Unit 1 and 2 and Arapahoe Unit 3.
PSCo has announced its intention to spend approximately $211 million on
its Denver and Boulder Metro area coal-fueled power plants to further reduce
such emissions below the required regulatory levels discussed above, but will
only do so if the following three conditions are met: 1) the Colorado General
Assembly and the CPUC approve recovery of these costs, 2) PSCo obtains
flexibility in operating the plants and 3) PSCo is assured the emission
reduction plan is sufficient to meet future state requirements for 15 years.
Legislation was passed and signed into law during the second quarter of 1998.
During the third quarter of 1998, PSCo and the CDPHE entered into a voluntary
emissions reduction agreement under the legislation. The Company intends to file
for recovery of these costs with the CPUC in the fourth quarter of 1998. The
voluntary emissions reduction agreement will be effective only if the CPUC
approves a cost recovery mechanism acceptable to PSCo.
Hayden Steam Electric Generating Station
In May 1996, PSCo and the other joint owners of Hayden Station reached an
agreement resolving violations alleged in complaints filed by a conservation
organization, the CDPHE and the EPA against the joint owners. PSCo is the
operator and owns an average undivided interest of approximately 53% of the
station's two generating units. In connection with the settlement, the joint
owners of the Hayden station were required to install emission control equipment
of approximately $130 million (PSCo's portion is approximately $70 million). The
settlement included stipulated future penalties for failure to comply with the
terms of the agreement, including specific provisions related to meeting
construction deadlines associated with the installation of additional emission
control equipment and complying with particulate, SO2 and NOx emissions
limitations. In August 1996, the U.S. District Court for the District of
Colorado entered the settlement agreement which effectively resolved this
litigation. Installation of emission control equipment is in process and on
schedule in accordance with the settlement agreement.
Craig Steam Electric Generating Station
In October 1996, a conservation organization filed a complaint in the U.S.
District Court pursuant to provisions of the Federal Clean Air Act (the "Act")
against the joint owners of the Craig Steam Electric Generating Station located
in western Colorado. Tri-State Generation and Transmission Association, Inc. is
the operator of the Craig station and PSCo owns an undivided interest (acquired
in April 1992) in each of two units at the station totaling approximately 9.7%.
The plaintiff alleged that: 1) the station exceeded the 20% opacity limitations
in excess of 14,000 six minute intervals during the period extending from the
first quarter of 1991 through the second quarter of 1996, and 2) the owners
failed to operate the station in a manner consistent with good air pollution
control practices. The complaint seeks, among other things, civil monetary
penalties and injunctive relief. The Act provides for penalties of up to $25,000
per day per violation, but the level of penalties imposed in any particular
instance is discretionary. A settlement conference was held in February 1998,
although no settlement was achieved. There have been no further settlement
discussions. Resolution of this matter may require the installation of emission
control equipment. Management does not believe that this potential liability,
the future impact of this litigation on plant operations, or any related cost
will have a material adverse impact on PSCo's financial position, results of
operations or cash flows.
27
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Pepsi Center
Hazardous substances resulting from manufactured gas plant operations have
been identified at the site of the Pepsi Center, a sports arena under
construction in lower downtown Denver. In September 1998, a settlement with the
site owners was achieved, and subsequently, a cleanup plan was approved by the
state of Colorado. Neither the settlement nor the approved cleanup plan will
have a material adverse impact on PSCo's financial position, results of
operations or cash flows.
Fort St. Vrain
In 1989, PSCo announced its decision to end nuclear operations at Fort St.
Vrain. Defueling of the reactor to the Independent Spent Fuel Storage
Installation ("ISFSI") was completed in June 1992. In March 1996, PSCo and the
decommissioning contractors announced that the physical decommissioning
activities at the facility had been completed. The final site survey was
completed in late October 1996. On August 5, 1997, the NRC approved PSCo's
request to terminate the Part 50 license. This concluded the decommissioning
activities as the facilities and site were released for unrestricted use.
On February 9, 1996, PSCo and the DOE entered into an agreement resolving
all the defueling issues. As part of this agreement, PSCo has agreed to the
following: 1) the DOE assumed title to the fuel currently stored in the ISFSI,
2) the DOE will assume title to the ISFSI and will be responsible for the future
defueling and decommissioning of the facility, 3) the DOE agreed to pay PSCo $16
million for the settlement of claims associated with the ISFSI, 4) ISFSI
operating and maintenance costs, including licensing fees and other regulatory
costs, will be the responsibility of the DOE, and 5) PSCo provided to the DOE a
full and complete release of claims against the DOE resolving all contractual
disputes related to storage/disposal of Fort St. Vrain spent nuclear fuel. On
December 17, 1996, the DOE submitted a request to the Nuclear Regulatory
Commission ("NRC") to transfer the title of the ISFSI. This request is being
reviewed by the NRC and PSCo anticipates approval in late-1998.
Under the Price-Anderson Act, PSCo remains subject to potential
assessments levied in response to any nuclear incidents prior to early 1994.
PSCo continues to maintain primary commercial nuclear liability insurance of
$100 million for the Fort St. Vrain site and the adjoining ISFSI. PSCo also
maintains coverage of $20.4 million to provide property damage and
decontamination protection in the event of an accident involving the ISFSI.
Leyden Gas Storage Facility
During August 1998, a Jefferson County, Colorado District Court jury found
PSCo liable for approximately $1.8 million for the reduction in land value and
related damages resulting from the allegations that natural gas had migrated
from the Leyden Gas Storage facility. The affected land is located north of, but
not immediately adjacent to, the storage facility. PSCo intends to appeal the
judgment.
Employee Matters
The Company and its subsidiaries are engaged in certain employment related
litigation and intend to contest, or are actively contesting, all such claims,
and believe that the ultimate outcome will not have a material adverse impact on
the Company's financial position, results of operations or cash flows.
Tax Matters
PSR Investments, Inc., a subsidiary of PSCo, owns and manages permanent
life insurance policies on certain past and present employees. These corporate
owned life insurance ("COLI") policies were entered into prior to July 1, 1986.
In 1996, Congress passed legislation to phase out the tax benefits with certain
COLI policies, however, the Company's policies were grandfathered under this
legislation. On August 27, 1998, the IRS issued a Notice of Proposed
28
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Adjustment proposing to disallow the 1993 and 1994 deductions of interest
expense related to policy loans on the COLI policies totaling approximately
$54.6 million. The IRS Auditing Agent is requesting technical advice from the
IRS National Office with respect to the proposed adjustment.
Management plans to vigorously contest this issue. PSCo has not recorded
any provision for income tax or interest expense related to this matter.
Management believes that the Company's tax deduction of interest expense on life
insurance policy loans was in full compliance with IRS regulations and believes
that the resolution of this matter will not have a material adverse impact on
PSCo's financial position, results of operations or cash flows.
Year 2000 Issue
The Year 2000 ("Y2K") issue is a result of a universal programming
standard that records dates as six digits, e.g., mm/dd/yy, using only the last
two digits for the year. Any automated system software or firmware that uses
two-digit fields could understand the year 2000 as the year 1900 if the issue is
not corrected. This situation is not limited to computers; it has the potential
to affect many systems, components and devices which have embedded computer
chips which may be date sensitive. The Y2K issue could result in a major system
failure or miscalculations and does impact many NCE systems considered critical
or important to the Company's business operations. The Company will assess and
modify all potential Y2K failure points identified in its critical automated
systems to maintain service to its customers and to mitigate legal and financial
risks.
In 1997, the Company established the Y2K Program Office to oversee all
corporate-wide Y2K initiatives. These initiatives encompass all computer
software, embedded systems, as well as contingency planning. Teams of internal
and external specialists were established to inventory and assess and test
critical computer programs and automated operational systems and modify those
that may not be Y2K compliant. The inventory phase and assessment phase for
information technology ("IT") systems have been completed. Approximately seventy
percent of the remediation and testing phase for all critical IT systems will be
completed in 1998 with the remaining portion being completed in the first
quarter of 1999. For non-IT systems, which exist primarily in the generation,
transmission and distribution areas of the business, the inventory and
assessment phases are complete. Remediation and testing for non-IT systems is
expected to be completed in the third quarter of 1999.
The Company has identified third parties with which it has material
business relationships, including interconnected utilities, telecommunications
service providers, fuel and water suppliers, equipment suppliers, leased
facilities and financial institutions. Inquiries as to the status of their Y2K
readiness have been made and follow-ups are scheduled to be completed in late
1998. Subject matter experts, along with functional managers, continue to
evaluate the current list of third parties and have ongoing discussions with
these and other critical suppliers about their Y2K readiness and contingency
planning efforts.
The Company has refined its second quarter cost estimate of approximately
$30 million for such activities and currently expects to incur costs of
approximately $25 million to modify its computer software, hardware and other
automated systems used in operations enabling proper data processing relating to
the year 2000 and beyond. Furthermore, the Company expects to spend
approximately $15 million more for the accelerated replacement of eight
non-compliant IT systems. The work associated with the replacement of these
eight systems is scheduled to be completed throughout 1999. The majority of
these costs will be incurred by PSCo and SPS. A significant portion of the costs
incurred to address the Company's Y2K issues will represent the redeployment of
existing information technology resources. The table below details the actual
costs incurred to date and the estimated costs to be incurred in subsequent
periods.
29
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Estimated
Actual Fourth
Costs Quarter Estimated Estimated
To Date 1998 1999 Total
------- ---- ---- -----
(in millions)
Operating expenses..................... $ 6.1 $ 7.8 $ 11.4 $ 25.3
Capital expenditures .................. 2.0 4.9 7.8 14.7
The most reasonably likely worst case scenario resulting during Y2K
critical dates is a significant loss of electric system capacity, along with
loss of a portion of the communication system that is critical to generation and
distribution control. If this were to occur, the Company's operating utilities
may be required to "island" (separate from neighboring interconnected utilities)
their generation and distribution systems in their service territories. As part
of this scenario, difficulty could be encountered with the restart of generating
units. The overall blackout recovery plan for NCE is designed so that this most
reasonably likely worst case scenario would be addressed and electricity
restored. Critical components of this plan will be tested to provide assurance
that the Company will be prepared for risks which could result from the Y2K
millennium change.
The Company continues to evaluate appropriate courses of preventive
corrective action, including the replacement of certain systems. If such
modifications and conversions are not completed on a timely basis, the Y2K
issues may have a material impact on the operations of the Company and its
subsidiaries. Management, however, does not anticipate these activities will
have a material adverse impact on the financial position, results of operations
or cash flows of the Company or its subsidiaries.
6. Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts Holding Solely Subordinated Debentures (NCE, PSCo and SPS)
In May 1998, PSCo Capital Trust I, a wholly-owned trust of PSCo, issued
7,760,000 shares of its 7.60% Trust Originated Preferred Securities for $194
million. The sole asset of the trust is $200 million principal amount of PSCo's
7.60% Deferrable Interest Subordinated Debentures, due June 30, 2038. Holders of
the securities are entitled to receive quarterly dividends at an annual rate of
7.60% of the liquidation preference value of $25. The securities are redeemable
at the option of PSCo on and after May 11, 2003 at 100% of the principal amount
outstanding plus accrued interest. In addition to PSCo's obligations under the
Subordinated Debentures, PSCo has agreed, pursuant to a guarantee issued to the
trust and the provisions of the trust agreement establishing the trust, on a
subordinated basis, payment of distributions on the preferred securities (but
not if the trust does not have sufficient funds to pay such distributions) and
to pay all of the expenses of the trust (collectively, the "Back-up
Undertakings"). Considered together, the Back-up Undertakings constitute a full
and unconditional guarantee by the Company of the trust obligations under the
preferred securities. The proceeds from the sale of the 7.60% Trust Originated
Preferred Securities were used to redeem all $181.8 million of PSCo's
outstanding preferred stock on June 10, 1998 and for general corporate purposes.
In October 1996, Southwestern Public Service Capital I, a wholly-owned
trust of SPS, issued in a public offering $100 million of its 7.85% Trust
Preferred Securities, Series A. The sole asset of the trust is $103 million
principal amount of the Company's 7.85% Deferrable Interest Subordinated
Debentures, Series A due September 1, 2036. The securities are redeemable at the
option of SPS on and after October 21, 2001 at 100% of the principal amount plus
accrued interest. In addition to SPS's obligations under the Subordinated
Debentures, SPS has agreed, pursuant to a guarantee issued to the trust, the
provisions of the trust agreement establishing the trust and a related expense
agreement to guarantee, on a subordinated basis, payment of distributions on the
preferred securities (but not if the trust does not have sufficient funds to pay
such distributions) and to pay all of the expenses of the trust. Considered
together, the Back-up Undertakings constitute a full and unconditional guarantee
by the Company of the trust obligations under the preferred securities.
30
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
7. Management's Representations (NCE, PSCo and SPS)
In the opinion of the registrants, the accompanying unaudited consolidated
condensed financial statements for NCE, PSCo and SPS include all adjustments
necessary for the fair presentation of the financial position of the Company and
its subsidiaries at September 30, 1998 and December 31, 1997 and the results of
operations for the three and nine months ended September 30, 1998 and 1997 and
cash flows for the nine months ended September 30, 1998 and 1997. The unaudited
consolidated condensed financial information and notes thereto should be read in
conjunction with the consolidated financial statements and notes included in the
combined 1997 Form 10-K for NCE, PSCo and SPS.
Because of seasonal and other factors, the results of operations for the
three and nine months ended September 30, 1998 should not be taken as an
indication of earnings for all or any part of the balance of the year.
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO NEW CENTURY ENERGIES, INC.:
We have reviewed the accompanying consolidated condensed balance sheet of New
Century Energies, Inc. (a Delaware corporation) and subsidiaries as of September
30, 1998, and the related consolidated condensed statements of income for the
three and nine-month periods ended September 30, 1998 and 1997 and the
consolidated condensed statements of cash flows for the nine-month periods ended
September 30, 1998 and 1997. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of New Century Energies, Inc. and
subsidiaries as of December 31, 1997, and the related consolidated statements of
income, shareholders' equity and cash flows for the year then ended (not
presented separately herein), and in our report dated February 13, 1998, we
expressed an unqualified opinion on those statements. In our opinion, the
information set forth in the accompanying consolidated condensed balance sheet
as of December 31, 1997, is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
Denver, Colorado, ARTHUR ANDERSEN LLP
November 5, 1998
32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO PUBLIC SERVICE COMPANY OF COLORADO:
We have reviewed the accompanying consolidated condensed balance sheet of Public
Service Company of Colorado (a Colorado corporation) and subsidiaries as of
September 30, 1998, and the related consolidated condensed statements of income
for the three and nine-month periods ended September 30, 1998 and 1997 and the
consolidated condensed statements of cash flows for the nine-month periods ended
September 30, 1998 and 1997. These financial statements are the responsibility
of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet and statement of capitalization of
Public Service Company of Colorado and subsidiaries as of December 31, 1997, and
the related consolidated statements of income, shareholder's equity and cash
flows for the year then ended (not presented separately herein), and in our
report dated February 13, 1998, we expressed an unqualified opinion on those
statements. In our opinion, the information set forth in the accompanying
consolidated condensed balance sheet as of December 31, 1997, is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
Denver, Colorado, ARTHUR ANDERSEN LLP
November 5, 1998
33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO SOUTHWESTERN PUBLIC SERVICE COMPANY:
We have reviewed the accompanying condensed balance sheet of Southwestern Public
Service Company (a New Mexico corporation) as of September 30, 1998, and the
related condensed statements of income for the three and nine-month periods
ended September 30, 1998 and 1997 and the condensed statements of cash flows for
the nine-month periods ended September 30, 1998 and 1997. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet and statement of capitalization of Southwestern
Public Service Company as of December 31, 1997, and the related statements of
income, shareholder's equity and cash flows for the year then ended (not
presented separately herein), and in our report dated February 13, 1998, we
expressed an unqualified opinion on those statements. In our opinion, the
information set forth in the accompanying condensed balance sheet as of December
31, 1997, is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
Denver, Colorado, ARTHUR ANDERSEN LLP
November 5, 1998
34
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (NCE, PSCo and SPS)
NCE's Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997
Earnings
Earnings per share were $0.82 for the third quarter of 1998 as compared to
a net loss of $0.45 per share for the third quarter of 1997. The net loss in
1997 was primarily attributed to the recognition of an extraordinary charge
related to the U.K. windfall tax of approximately $110.6 million, or $1.06 per
share, by Yorkshire Electricity, a 50% owned investment (see Note 2. Investment
in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). Income before this
extraordinary charge increased approximately $27.4 million, or $0.21 per share
from the previous year. Higher earnings were primarily attributed to increased
electric sales resulting from continued customer growth and warmer than normal
weather.
Electric Operations
The following table details the change in electric operating revenues and
energy costs for the third quarter of 1998 as compared to the same period in
1997 (thousands of dollars).
Increase (Decrease)
-------------------
Electric operating revenues:
Retail............................................... $31,284
Wholesale............................................ 55,620
Non-regulated power marketing........................ 19,949
Other (including unbilled revenues and provision for
rate refunds) ................................ 6,825
-----
Total revenues...................................... 113,678
Fuel used in generation............................... 313
Purchased power....................................... 85,536
-------
Net increase in electric margin..................... $27,829
=======
The following table compares electric Kwh sales by major customer classes
for the third quarter of 1998 and 1997.
Millions of Kwh Sales
1998 1997 % Change *
---- ---- ----------
Residential ............................... 2,885 2,634 9.5%
Commercial and Industrial ................ 7,572 7,334 3.2
Public Authority .......................... 247 219 12.8
----- -----
Total Retail............................. 10,704 10,187 5.1
Wholesale.................................. 5,189 3,516 47.6
Non-regulated power marketing.............. 666 205 **
----- -----
Total...................................... 16,559 13,908 19.1
====== ======
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful
Electric margin increased in the third quarter of 1998, when compared to
the third quarter of 1997, due primarily to a 5.1% increase in total retail
sales and a 19.1% increase in total sales resulting from customer growth and
hotter than normal weather. In addition, PSCo's margin was positively impacted
by lower accruals of approximately $5.6 million for the customer refund
obligation associated with the earnings test in Colorado (see Note 4. Regulatory
Matters in Item 1. FINANCIAL STATEMENTS). PSCo's higher wholesale electric
sales, reflecting increased marketing activities for economy, short-term firm
and off-system sales, contributed to
35
<PAGE>
increased operating revenues, but the margin on such sales was minimal. SPS's
higher retail and wholesale sales resulted primarily from hotter and dryer than
normal weather during the third quarter of 1998 and a resulting increase in the
air conditioning and irrigation load in Texas and New Mexico.
The Company's regulated subsidiaries have cost adjustment mechanisms which
recognize the majority of the effects of changes in fuel used in generation and
purchased power costs and allow recovery of such costs on a timely basis. PSCo's
ICA, which allows for a 50%/50% sharing of certain fuel and energy cost
increases and decreases among customers and shareholders, did not significantly
impact electric margin for the third quarter of 1998 or 1997.
Fuel used in generation expense increased slightly during the third
quarter of 1998 as compared to the same quarter in 1997 due primarily to
increased generation levels.
Purchased power expense increased $85.5 million during the third quarter
of 1998, as compared to the same quarter in 1997, primarily due to purchases
related to wholesale marketing activities at PSCo ($56.2 million) and an
increase in power marketing activities at the Company's non-regulated
subsidiaries ($23.3 million). Purchased power at SPS increased $6.0 million due
to a 48% increase in wholesale purchases and higher spot market prices. SPS
generates substantially all of its power for sale to its firm retail and
wholesale customers and sells non-firm energy as the market demands. Similarly,
SPS purchases low-cost non-firm energy when available.
Gas Operations
The following table details the change in revenues from gas sales and gas
purchased for resale for the third quarter of 1998 as compared to the same
period in 1997 (thousands of dollars).
Increase (Decrease)
-------------------
Revenues from gas sales (including unbilled revenues). $ 6,130
Gas purchased for resale.............................. 6,651
-------
Net decrease in gas sales margin..................... $ (521)
========
The following table compares gas Dth deliveries by major customer classes
for the third quarter of 1998 and 1997.
Millions of Dth Deliveries
1998 1997 % Change *
---- ---- ----------
Residential................................ 6.6 6.2 5.9%
Commercial................................. 4.1 4.0 3.0
Non-regulated gas marketing................ 16.4 13.7 19.3
----- -----
Total Sales.............................. 27.1 23.9 13.1
Transportation............................. 25.8 22.3 15.6
----- -----
Total.................................... 52.9 46.2 14.3
===== =====
* Percentages are calculated using unrounded amounts
Gas sales margin decreased slightly during the third quarter of 1998, when
compared to the third quarter of 1997. Total gas sales increased 13.1% during
the third quarter of 1998 as compared with the prior year primarily as a result
of non-regulated sales. However, the gross margin on these non-regulated gas
sales declined $0.4 million. PSCo's gas sales increased 3.7% during the quarter
primarily due to a 2.8% increase in customers.
Gas transportation, gathering and processing revenues increased
approximately $0.4 million during the third quarter of 1998, when compared to
the third quarter of 1997, primarily due to higher deliveries. The increase in
transport deliveries continues to be impacted by the shifting of various
commercial customers to transport customers.
36
<PAGE>
PSCo and Cheyenne have in place a GCA mechanism for natural gas sales,
which recognizes the majority of the effects of changes in the cost of gas
purchased for resale and adjusts revenues to reflect such changes in cost on a
timely basis. As a result, the changes in revenues associated with these
mechanisms during the third quarter of 1998, as compared to the third quarter of
1997, had little impact on net income. However, the fluctuations in gas sales
impact the amount of gas the Company's gas utilities must purchase and,
therefore, along with the increases and decreases in the per-unit cost of gas,
affect total gas purchased for resale. The higher per-unit average cost of gas
during the third quarter of 1998, along with an increase in the quantity of gas
purchased, contributed to the increase in cost of gas purchased for resale.
Other Operating Revenues
Other operating revenues increased approximately $2.6 million due to
higher revenues from diversified energy businesses, primarily engineering,
design and construction management, energy management and consulting services.
Non-Fuel Operating Expenses and Other Income and Deductions
Other operating and maintenance expenses increased $13.6 million during
the third quarter of 1998, as compared to the same period in 1997, due in large
part to higher operating costs from non-regulated operations ($7.0 million) as a
result of the acquisition of new businesses, severence payments made to former
executives and growth of existing businesses. Increases in other operating and
maintenance expenses at PSCo is primarily due to higher gas and electric
distribution expenses and at SPS the result of higher maintenance costs at
generation stations.
Depreciation and amortization expense increased $4.2 million primarily due
to an increase in electric property, plant and equipment at PSCo and SPS and
higher amortization of software costs at PSCo.
Other income and deductions increased approximately $12.9 million during
the third quarter of 1998, when compared to the third quarter of 1997, primarily
due to the absence of merger related expenses in 1998 ($18.6 million).
Interest charges and preferred dividends of subsidiaries decreased $2.3
million during the third quarter of 1998, when compared to the same quarter in
1997. Proceeds from the issuance, by PSCo, of $250 million of long-term debt in
April 1998 were used, in part, to reduce short-term debt. Higher interest costs
on additional long-term debt, net of retirements, was offset, in part, by lower
interest rates. Other interest expense decreased primarily due to lower
short-term borrowings. The increase in dividends on PSCo obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely subordinated
debentures of PSCo resulted from the May 1998 issuance of such securities (see
Note 6. PSCo Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trust Holding Solely Subordinated Debentures in Item 1. FINANCIAL STATEMENTS).
Income taxes declined $1.3 million during the third quarter of 1998, when
compared to the same quarter in 1997 primarily due to an increase in foreign tax
credits recognized and non-deductible merger costs in 1997 offset, in part, by
higher pre-tax income.
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
Earnings
Earnings per share were $2.10 for the first nine months of 1998 as
compared to $0.62 for the first nine months of 1997. The higher earnings were
primarily attributable to increases in electric and gas sales resulting from
continued customer growth, hotter than normal weather during the second and
third quarters of 1998, the
37
<PAGE>
recognition of an extraordinary item related to the one-time U.K. windfall tax
of approximately $110.6 million, or $1.06 per share, by Yorkshire Power in 1997,
the absence of significant merger costs in 1998, and the write-off of the
Carolina Energy Project in June 1997. Earnings for the nine months ended
September 30, 1998 were reduced by an investment impairment, net of
non-recurring tax adjustments, by Yorkshire Power in the second quarter of 1998,
which reduced earnings approximately 15 cents per share (see Note 2. Investment
in Yorkshire Power in Item 1. FINANCIAL STATEMENTS).
Electric Operations
The following table details the change in electric operating revenues and
energy costs for the first nine months of 1998 as compared to the same period in
1997 (thousands of dollars).
Increase (Decrease)
-------------------
Electric operating revenues:
Retail............................................... $ 55,424
Wholesale............................................ 88,633
Non-regulated power marketing........................ 43,862
Other (including unbilled revenues and provision for
rate refunds) ..................................... 2,490
-----
Total revenues...................................... 190,409
Fuel used in generation............................... (260)
Purchased power....................................... 136,817
-------
Net increase in electric margin..................... $53,852
=======
The following table compares electric Kwh sales by major customer classes
for the first nine months of 1998 and 1997.
Millions of Kwh Sales
1998 1997 %Change *
---- ---- ---------
Residential ............................... 7,781 7,370 5.6%
Commercial and Industrial ................ 20,849 20,370 2.4
Public Authority .......................... 625 578 8.0
----- -----
Total Retail............................. 29,255 28,318 3.3
Wholesale.................................. 11,623 8,478 37.1
Non-regulated power marketing.............. 2,269 783 **
----- -----
Total ..................................... 43,147 37,579 14.8
====== ======
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful
Electric margin increased in the first nine months of 1998, when compared
to the prior year, primarily due to higher retail sales resulting from hotter
than normal weather during the second and third quarters of 1998. Also
contributing to the higher margin was the favorable $7.7 million impact of a
FERC decision in a 1985 wholesale rate case proceeding at SPS (see Note 4.
Regulatory Matters in Item 1. FINANCIAL STATEMENTS). Higher wholesale and
non-regulated power marketing electric sales, reflecting marketing activities
for economy, short-term firm and off-system sales, contributed to increased
revenues, but had little impact on electric margin.
The Company's regulated subsidiaries have cost adjustment mechanisms which
recognize the majority of the effects of changes in fuel used in generation and
purchased power costs and allow recovery of such costs on a timely basis. PSCo's
ICA, which allows for a 50%/50% sharing of certain fuel and energy cost
increases and decreases among customers and shareholders, did not significantly
impact electric margin for the first nine months of 1998 or 1997.
Fuel used in generation expense for the first nine months of 1998 and 1997
were comparable. Lower per unit cost of coal and natural gas were offset by
increased generation levels.
38
<PAGE>
Purchased power expense increased $136.8 million during the first nine
months of 1998, as compared to the same period in 1997, due to an increase in
power marketing activities at the Company's non-regulated subsidiaries and
purchases related to wholesale marketing activities at PSCo.
Gas Operations
The following table details the change in revenues from gas sales and gas
purchased for resale for the first nine months of 1998 as compared to the same
period in 1997 (thousands of dollars).
Increase
--------
Revenues from gas sales (including unbilled revenues). $39,565
Gas purchased for resale.............................. 33,466
-------
Net increase in gas sales margin..................... $ 6,099
=======
The following table compares gas Dth deliveries by major customer classes
for the first nine months of 1998 and 1997.
Millions of Dth Deliveries
1998 1997 % Change *
---- ---- ----------
Residential................................ 65.2 64.3 1.3%
Commercial................................. 32.8 35.1 (6.6)
Non-regulated gas marketing................ 48.2 44.4 8.7
----- -----
Total Sales.............................. 146.2 143.8 1.6
Transportation, gathering and processing... 80.6 69.9 15.6
----- -----
Total.................................... 226.8 213.7 6.2
===== =====
* Percentages are calculated using unrounded amounts
Gas sales margin increased during the first nine months of 1998, when
compared to the first nine months of 1997, due to higher margin at PSCo of
approximately $2.8 million resulting primarily from a rate increase effective
February 1, 1997, an increase in the margin at Cheyenne of approximately $1.5
million resulting from increases in base rates and an increase in the quantity
of gas sold, and growth of the Company's non-regulated gas marketing business.
Gas transportation, gathering and processing revenues increased $2.3
million during the first nine months of 1998, when compared to the first nine
months of 1997, primarily due to higher transportation rates effective February
1, 1997, resulting from PSCo's 1996 rate case and an increase in transport
deliveries. The increase in transport deliveries continues to be impacted by the
shifting of various commercial customers to transport customers as retail
customers procure their unbundled gas supply from other sources.
PSCo and Cheyenne have in place a GCA mechanism for natural gas sales,
which recognizes the majority of the effects of changes in the cost of gas
purchased for resale and adjusts revenues to reflect such changes in cost on a
timely basis. As a result, the changes in revenues associated with these
mechanisms during the first nine months of 1998, as compared to the first nine
months of 1997, had little impact on net income. However, the fluctuations in
gas sales impact the amount of gas the Company's gas utilities must purchase
and, therefore, along with the increases and decreases in the per-unit cost of
gas, affect total gas purchased for resale. The higher per-unit average cost of
gas during the first nine months of 1998, along with an increase in the quantity
of gas purchased, contributed to the increase in cost of gas purchased for
resale.
39
<PAGE>
Other Operating Revenues
Other operating revenues increased approximately $24.1 million due to
higher revenues from diversified energy businesses, primarily engineering,
design and construction management and consulting services.
Non-Fuel Operating Expenses and Other Income and Deductions
Other operating and maintenance expenses increased $40.7 million during
the first nine months of 1998, as compared to the same period in 1997, primarily
due to higher operating costs from non-regulated operations ($30.5 million). The
increase in non-regulated operations operating and maintenance expenses is due
to the acquisition of subsidiaries and growth of existing businesses. The
remaining increase is primarily due to higher electric operating and
distribution expenses and a reduction, in 1997, of the nuclear defueling and
decommissioning liability, which served to lower expense, at PSCo ($12.2
million) offset, in part, by lower pension and benefit costs at SPS ($2.5
million).
Other income and deductions increased approximately $41.6 million during
the first nine months of 1998, when compared to the first nine months of 1997,
primarily due to a decrease in merger expenses ($32.2 million), the write-off of
the investment in the Carolina Energy Project in 1997, (see Note 3. Acquisition
and Divestiture of Investments in Item 1. FINANCIAL STATEMENTS), ($16.1 million)
and accruals for estimated legal and other costs associated with employee
lawsuits in 1997. Equity in earnings of Yorkshire Power were lower ($14.6
million) as a result of the second quarter 1998 impairment of its investment in
Ionica, a wireless telecommunications company, which was partially offset by
unrelated tax adjustments.
Interest charges and preferred dividends of subsidiaries increased $1.9
million during the first nine months of 1998, when compared to the same period
in 1997, primarily due to interest on borrowings utilized to finance capital
expenditures and the April 1997 investment in Yorkshire Power (see Note 2.
Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS).
Commitments and Contingencies
Year 2000 Issue
The Year 2000 ("Y2K") issue is a result of a universal programming
standard that records dates as six digits, e.g., mm/dd/yy, using only the last
two digits for the year. Any automated system software or firmware that uses
two-digit fields could understand the year 2000 as the year 1900 if the issue is
not corrected. This situation is not limited to computers; it has the potential
to affect many systems, components and devices which have embedded computer
chips which may be date sensitive. The Y2K issue could result in a major system
failure or miscalculations and does impact many NCE systems considered critical
or important to the Company's business operations. The Company will assess and
modify all potential Y2K failure points identified in its critical automated
systems to maintain service to its customers and to mitigate legal and financial
risks.
In 1997, the Company established the Y2K Program Office to oversee all
corporate-wide Y2K initiatives. These initiatives encompass all computer
software, embedded systems, as well as contingency planning. Teams of internal
and external specialists were established to inventory and assess and test
critical computer programs and automated operational systems and modify those
that may not be Y2K compliant. The inventory phase and assessment phase for
information technology ("IT") systems have been completed. Approximately seventy
percent of the remediation and testing phase for all critical IT systems will be
completed in 1998 with the remaining portion being completed in the first
quarter of 1999. For non-IT systems, which exist primarily in the generation,
transmission and distribution areas of the business, the inventory and
assessment phases are complete. Remediation and testing for non-IT systems is
expected to be completed in the third quarter of 1999.
The Company has identified third parties with which it has material
business relationships, including interconnected utilities, telecommunications
service providers, fuel and water suppliers, equipment suppliers,
40
<PAGE>
leased facilities and financial institutions. Inquiries as to the status of
their Y2K readiness have been made and follow-ups are scheduled to be completed
in late 1998. Subject matter experts, along with functional managers, continue
to evaluate the current list of third parties and have ongoing discussions with
these and other critical suppliers about their Y2K readiness and contingency
planning efforts.
The Company has refined its second quarter cost estimate of approximately
$30 million for such activities and currently expects to incur costs of
approximately $25 million to modify its computer software, hardware and other
automated systems used in operations enabling proper data processing relating to
the year 2000 and beyond. Furthermore, the Company expects to spend
approximately $15 million more for the accelerated replacement of eight
non-compliant IT systems. The work associated with the replacement of these
eight systems is scheduled to be completed throughout 1999. The majority of
these costs will be incurred by PSCo and SPS. A significant portion of the costs
incurred to address the Company's Y2K issues will represent the redeployment of
existing information technology resources. The table below details the actual
costs incurred to date and the estimated costs to be incurred in subsequent
periods.
Estimated
Actual Fourth
Costs Quarter Estimated Estimated
To Date 1998 1999 Total
------- ----- ---- -----
(in millions)
Operating expenses..................... $ 6.1 $ 7.8 $ 11.4 $ 25.3
Capital expenditures .................. 2.0 4.9 7.8 14.7
The most reasonably likely worst case scenario resulting during Y2K
critical dates is a significant loss of electric system capacity, along with
loss of a portion of the communication system that is critical to generation and
distribution control. If this were to occur, the Company's operating utilities
may be required to "island" (separate from neighboring interconnected utilities)
their generation and distribution systems in their service territories. As part
of this scenario, difficulty could be encountered with the restart of generating
units. The overall blackout recovery plan for NCE is designed so that this most
reasonably likely worst case scenario would be addressed and electricity
restored. Critical components of this plan will be tested to provide assurance
that the Company will be prepared for risks which could result from the Y2K
millennium change.
The Company continues to evaluate appropriate courses of preventive
corrective action, including the replacement of certain systems. If such
modifications and conversions are not completed on a timely basis, the Y2K
issues may have a material impact on the operations of the Company and its
subsidiaries. Management, however, does not anticipate these activities will
have a material adverse impact on the financial position, results of operations
or cash flows of the Company or its subsidiaries.
Tax Matters
PSR Investments, Inc., a subsidiary of PSCo, owns and manages permanent
life insurance policies on certain past and present employees. These corporate
owned life insurance ("COLI") policies were entered into prior to July 1, 1986.
In 1996, Congress passed legislation to phase out the tax benefits with certain
COLI policies, however, the Company's policies were grandfathered under this
legislation. On August 27, 1998, the IRS issued a Notice of Proposed Adjustment
proposing to disallow the 1993 and 1994 deductions of interest expense related
to policy loans on the COLI policies totaling approximately $54.6 million. The
IRS Auditing Agent is requesting technical advice from the IRS National Office
with respect to the proposed adjustment.
Management plans to vigorously contest this issue. PSCo has not recorded
any provision for income tax or interest expense related to this matter.
Management believes that the Company's tax deduction of interest expense on life
41
<PAGE>
insurance policy loans was in full compliance with IRS regulations and believes
that the resolution of this matter will not have a material adverse impact on
PSCo's financial position, results of operations or cash flows.
Other
Issues relating to regulatory matters, environmental issues and employee
lawsuits are discussed in Notes 4 and 5 in Item 1. FINANCIAL STATEMENTS. These
matters and the future resolution thereof may impact the Company's future
financial position, results of operations or cash flows.
Common Stock Dividend
The Board of Directors approved a $0.58 per share dividend payable to
shareholders of the Company for the third quarter of 1998 and $1.74 per share
for the year-to-date. The Company's common stock dividend level is dependent
upon the Company's financial position, results of operations, cash flows and
other factors. The Board of Directors of the Company will continue to evaluate
the common stock dividend on a quarterly basis.
Liquidity and Capital Resources
Cash Flows - Nine Months Ended September 30
1998 1997 Increase
---- ---- --------
Net cash provided by operating
activities (in millions) ............... $503.0 $201.0 $302.0
Cash provided by operating activities increased during the first nine
months of 1998, when compared to the first nine months of 1997, primarily due to
higher earnings from utility operations and a decrease in payments to gas
suppliers resulting from lower gas costs during the 1998 period. A portion of
these lower gas costs have been deferred through the GCA and have reduced the
amount to be recovered from customers in the future. Additionally, SPS and a
non-regulated subsidiary of NCE recorded combined cash proceeds of approximately
$67 million for the recovery of deferred costs and income from the investment in
a non-regulated energy development project during the second quarter of 1998.
1998 1997 Decrease
---- ---- --------
Net cash used in investing
activities (in millions) ................ $(419.4) $(675.9) $(256.5)
Cash used in investing activities decreased during 1998, when compared to
1997, primarily due to the acquisition of Yorkshire Electricity in 1997
partially offset by higher 1998 construction expenditures and payment for the
purchase of an energy management and consulting services company in 1998.
1998 1997 Decrease
---- ---- --------
Net cash (used in) provided by financing
activities (in millions) ................. $(85.3) $482.3 $(567.6)
Cash provided by financing activities decreased during 1998, when compared
to 1997, primarily due to PSCo's issuance of medium-term notes in January and
March 1997. The proceeds from the $75 million financing by PSCo in January 1997
and the $250 million financing by PSCo in March 1997 were used to fund
construction expenditures and the investment in Yorkshire Power (See Note 2.
Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). Proceeds from
PSCo's issuance of $250 million of long-term debt in April 1998 were used to
repay short-term and other debt. In May 1998, the PSCo Capital Trust I issued
$194 million of Trust Originated Preferred Securities the proceeds of which were
used to redeem all of PSCo's outstanding preferred stock (totaling $181.8
million) on June 10, 1998. Additionally, cash provided by operations during 1998
has increased significantly allowing the Company to reduce its short-term
borrowings.
42
<PAGE>
Financing Activities
Common Stock
NCE has an effective registration statement covering the issuance of 9
million shares of common stock. NCE sold 5.9 million shares under this
registration statement in December 1997 and sold 2.5 million of the remaining
shares in November 1998. The proceeds of this November 1998 financing, totaling
approximately $116.6 million, were used for general corporate purposes and to
reduce short-term borrowings.
Long-Term Debt
On April 20, 1998, PSCo issued $250 million of 6% First Collateral
Trust Bonds due April 15, 2003, which are not redeemable prior to maturity. The
principal and accrued interest on the bonds are secured by PSCo's First Mortgage
Bonds. Substantially all properties of PSCo are subject to the liens securing
its First Mortgage Bonds. The proceeds from the issuance were used for general
corporate purposes and to repay short-term and other debt incurred for such
purposes.
PSCo Obligated Mandatorily Redeemable Preferred Securities
In May 1998, PSCo Capital Trust I, a wholly-owned trust of PSCo, issued in
a public offering $194 million of its 7.60% Trust Originated Preferred
Securities. The sole asset of the trust is $200 million principal amount of
PSCo's 7.60% Deferrable Interest Subordinated Debentures, due June 30, 2038. The
net proceeds from the sale of the 7.60% Trust Originated Preferred Securities
were used to redeem all of PSCo's outstanding preferred stock totaling $181.8
million on June 10, 1998 and for general corporate purposes.
Bank Lines of Credit and Compensating Bank Balances
In August of 1997, NCE entered into a $225 million credit facility with
several banks. Originally, the credit facility provided for $100 million of
direct borrowings by NCE until the outstanding common stock of PSCCC, a
wholly-owned subsidiary of PSCo, was transferred to NCE. On June 30, 1998, the
credit facility was amended to eliminate the PSCCC common stock restriction and
to provide for $200 million of direct borrowings by NCE. In addition, Cheyenne
was added as a borrower of up to $25 million with an NCE guaranty. The credit
facility expires August 11, 2002.
During the second quarter of 1998, PSCo entered into a credit facility,
which provides for $150 million in committed lines of credit, replacing an
existing $125 million credit facility. During the first quarter of 1998, SPS
entered into a credit facility which provides for $200 million in committed
lines of credit, replacing the two existing credit facilities totaling $180
million.
Electric Utility Industry
Electric utilities have historically operated in a highly regulated
environment in which they have an obligation to provide electric service to
their customers in return for an exclusive franchise within their service
territory with an opportunity to earn a regulated rate of return. This
regulatory environment is changing. The generation sector has experienced
competition from nonutility power producers and the FERC is requiring utilities,
including the Company's subsidiaries, to provide wholesale transmission service
to others and may order electric utilities to enlarge their transmission systems
to facilitate transmission services without impairing reliability. State
regulatory authorities are in the process of changing utility regulations in
response to federal and state statutory changes and evolving markets, including
consideration of providing open access to retail customers. All of the Company's
jurisdictions continue to evaluate utility regulations with respect to
competition. The Company is unable to predict what financial impact or effect
the adoption of these proposals would have on its operations.
43
<PAGE>
New Accounting Standards
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed for Internal Use". This statement requires companies expense
costs as incurred in the preliminary project stage, training, data conversion,
internal maintenance and other indirect payroll related costs. This Statement is
not expected to have a material impact on the Company's consolidated financial
statements. This Statement is effective for fiscal years beginning after
December 15, 1998, with earlier adoption encouraged. The Company will adopt this
accounting standard as required by January 1, 1999.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities". This Statement requires companies to record derivatives
on the balance sheet as assets and liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The Company is currently evaluating the potential impact
of this new accounting standard. This Statement is effective for fiscal years
beginning after June 15, 1999, with earlier adoption encouraged. The Company
will adopt this accounting standard as required by January 1, 2000.
44
<PAGE>
PSCo's Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997
Merger
Effective August 1, 1997, following receipt of all required state and
Federal regulatory approvals, PSCo and SPS merged in a tax-free "merger of
equals" transaction and became wholly-owned subsidiaries of NCE, which is a
registered holding company under PUHCA. This transaction was accounted for as a
pooling of interests for accounting purposes. Effective with the Merger,
Cheyenne, WGI, e prime and Natural Fuels were transferred by a declaration of a
dividend of the subsidiaries' stock, at net book value, aggregating
approximately $49.9 million, to NCE. NCE subsequently made a capital
contribution of the e prime and Natural Fuels common stock, at net book value,
aggregating approximately $29.5 million, to NC Enterprises. See Note 1. Summary
of Significant Accounting Policies in Item 1. FINANCIAL STATEMENTS for
additional discussion regarding PSCo, the Merger and the transfer of Cheyenne,
WGI, e prime and Natural Fuels. The consolidated condensed statements of income
for the three and nine months ended September 30, 1997 and statement of cash
flows for the nine months ended September 30, 1997, reflect the results of
operations through July 31, 1997 for Cheyenne, WGI, e prime and Natural Fuels.
Where relevant, additional information has been presented to discuss the impact
of the transfer of these subsidiaries.
Earnings Available for Common Stock
Earnings available for common stock increased to approximately $44.0
million for the third quarter of 1998, as compared a net loss of approximately
$76.0 million for the third quarter of 1997. The increase was primarily
attributable to the recognition of an extraordinary charge related to the U.K.
windfall tax of approximately $110.6 million in the third quarter of 1997 (see
Note 2. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS).
Excluding the impact of this extraordinary charge, quarterly earnings increased
approximately $9.5 million or 27% from the previous year. The increase was
attributable to an increase in the current period electric margin resulting from
higher electric sales in 1998 and the recognition of merger and business
integration costs in 1997.
Electric Operations
The following table details the change in electric operating revenues and
energy costs for the three months ended September 30, 1998, as compared to the
same period in 1997 (in thousands of dollars).
Increase (Decrease)
-------------------
Cheyenne
PSCo Only &e prime Consolidated
--------- -------- ------------
Electric operating revenues:
Retail....................................... $16,046 $ (2,944) $13,102
Wholesale - regulated........................ 42,999 - 42,999
Non-regulated power marketing................ - (1,715) (1,715)
Other (including unbilled revenues and
provision for rate refunds) ................ 29,593 (118) 29,475
------ --- ------
Total revenues.............................. 88,638 (4,777) 83,861
Fuel used in generation....................... 4,484 - 4,484
Purchased power............................... 60,170 (3,986) 56,184
------- -------- -------
Net increase (decrease) in electric margin.. $23,984 $ (791) $23,193
======= ======== =======
45
<PAGE>
The following table compares electric Kwh sales by major customer classes
for the three months ended September 30, 1998 and 1997.
Millions of Kwh Sales % Change *
1998 1997 Consolidated PSCo Only
---- ---- ----------- ---------
Residential ..................... 1,779 1,669 6.6% 7.6%
Commercial and Industrial ....... 4,278 4,224 1.3 2.5
Public Authority ................ 54 49 10.2 10.9
------ ------
Total Retail................... 6,111 5,942 2.9 4.0
Wholesale - Regulated............ 2,389 1,232 94.0 94.0
Non-regulated Power Marketing.... - 81 ** -
------ ------
Total............................ 8,500 7,255 17.2 19.6
====== ======
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful
Electric margin increased in the third quarter of 1998, when compared to
the third quarter of 1997, primarily due to an overall 4% increase in PSCo's
electric retail sales resulting primarily from customer growth (approximately
1.9%) and the effects of warmer than normal weather. Estimated customer refund
obligations decreased in the third quarter of 1998, when compared to the third
quarter of 1997, by approximately $5.6 million in connection with the sharing of
earnings in excess of an 11% return on equity resulting from the 1996 settlement
of the Merger proceedings in Colorado (see Note 4. Regulatory Matters in Item 1.
FINANCIAL STATEMENTS). Higher wholesale electric sales, reflecting increased
marketing activities for economy, short-term firm and off-system sales, also
contributed to increased operating revenues; however, the margin on such sales
is minimal.
PSCo has cost adjustment mechanisms which recognize the majority of the
effects of changes in fuel used in generation and purchased power costs and
allow recovery of such costs on a timely basis. PSCo's ICA, which allows for a
50%/50% sharing of certain fuel and energy cost increases and decreases among
customers and shareholders, did not significantly impact the electric margin for
the third quarter of 1998 or 1997.
Fuel used in generation expense increased approximately $4.5 million
during the third quarter of 1998, as compared to the same quarter in 1997,
primarily due to increased generation levels at PSCo's power plants.
Purchased power expense increased $56.2 million during the third quarter
of 1998, as compared to the same quarter in 1997, primarily due to purchases
related to wholesale marketing activities.
Gas Operations
The following table details the change in revenues from gas sales and gas
purchased for resale for the third quarter of 1998, as compared to the same
period in 1997 (in thousands of dollars).
Increase (Decrease)
-------------------
Cheyenne,
Natural Fuels,
WGI &
PSCo Only e prime Consolidated
--------- ------- ------------
Revenues from gas sales (including
unbilled revenues) $3,744 $(12,699) $ (8,955)
Gas purchased for resale........................ 4,086 (10,661) (6,575)
------ ------- -------
Net decrease in gas sales margin.............. $ (342) $ (2,038) $ (2,380)
====== ======= ========
46
<PAGE>
The following table compares gas Dth deliveries by major customer classes
for the third quarter of 1998 and 1997.
Millions of Dth Deliveries % Change *
1998 1997 Consolidated PSCo Only
---- ---- ------------ ---------
Residential................... 6.4 6.1 4.5% 5.7%
Commercial.................... 3.8 3.9 (1.3) 0.5
Non-regulated gas marketing... - 4.5 ** -
------ --------
Total sales................. 10.2 14.5 (29.6) 3.7
Transportation, gathering and
processing ................ 22.2 19.8 12.6 18.5
----- --------
Total....................... 32.4 34.3 (5.3) 13.4
======= ========
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful
Gas sales margin decreased slightly during the third quarter of 1998, when
compared to the third quarter of 1997, primarily due to a $1.4 million decrease
in unbilled revenues, which is gas delivered to customers that has not been
billed, offset, in part by the effects of higher gas sales. Gas sales increased
3.7% during the third quarter of 1998 primarily due to a 2.8% increase in
customers.
PSCo has in place a GCA mechanism for natural gas sales, which recognizes
the majority of the effects of changes in the cost of gas purchased for resale
and adjusts revenues to reflect such changes in cost on a timely basis. As a
result, the changes in revenues associated with these mechanisms during the
third quarter of 1998, as compared to the second quarter of 1997, had little
impact on net income. However, the fluctuations in gas sales impact the amount
of gas PSCo must purchase and, therefore, along with the increases and decreases
in the per-unit cost of gas, affect total gas purchased for resale. The decrease
in the quantity of gas purchased in the third quarter of 1998 resulted in an
overall decrease in the total cost of gas purchased for resale.
Gas transportation, gathering and processing revenues increased $0.2
million during the third quarter of 1998, compared to the third quarter of 1997,
primarily due to higher deliveries. The increase in transport deliveries
continues to be impacted by the shifting of various commercial customers to
transport customers.
Non-Fuel Operating Expenses and Other Income and Deductions
Depreciation and amortization increased $3.0 million during the third
quarter of 1998, as compared to the third quarter of 1997, primarily due to the
depreciation of property additions and the higher amortization of software
costs.
Income taxes increased approximately $9.6 million during the third quarter
of 1998, as compared to the third quarter of 1997, primarily due to higher
pre-tax income.
Other income and deductions was relatively flat when comparing the third
quarter of 1998 to the third quarter of 1997. On March 31, 1998, NCI and its
subsidiaries were transferred through the sale by PSCo of all the outstanding
common stock of NCI at net book value (approximately $292.6 million), to NC
Enterprises, an intermediate holding company of NCE, and received as
consideration a promissory note from NC Enterprises (see Note 2. Investment in
Yorkshire Power in Item 1. FINANCIAL STATEMENTS). The third quarter of 1998
includes approximately $5.1 million of interest income on the promissory note
compared to the recognition of equity earnings associated with PSCo's investment
in Yorkshire Power of approximately $17.3 million in the third quarter of 1997.
The third quarter of 1997 also reflects the recognition of merger and business
integration costs of approximately $11.4 million.
Interest charges and dividends on preferred stock decreased approximately
$3.0 million during the third quarter of 1998 as compared to the third quarter
of 1997. Proceeds from the issuance of $250 million of long-
47
<PAGE>
term debt in April 1998 were used, in part, to reduce short-term debt. Higher
interest costs on additional long-term debt, net of retirements, was offset, in
part, by lower interest rates. Other interest expense decreased primarily due to
lower short-term borrowings. The increase in dividends on PSCo obligated
mandatorily redeemable preferred securities of subsidiary trust holding solely
subordinated debentures of PSCo resulted from the issuance in May 1998 (see Note
6. PSCo Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trust Holding Solely Subordinated Debentures in Item 1. FINANCIAL STATEMENTS).
Nine Months Ended September 30, 1998 Compared to the Nine Months Ended
September 30, 1997
Earnings Available for Common Stock
Earnings available for common stock were $138.5 million for the first nine
months of 1998, as compared to $11.6 million for the first nine months of 1997.
The significant increase was primarily attributable to the recognition of an
extraordinary charge related to the U.K. windfall tax of approximately $110.6
million in 1997. Excluding the impact of this extraordinary charge, earnings
increased approximately $16.3 million or 13% from the previous year. The
increase was primarily attributable to an increase in electric margin resulting
from higher sales in 1998 and higher merger and business integration costs in
1997.
Electric Operations
The following table details the change in electric operating revenues and
energy costs for the nine months ended September 30, 1998 as compared to the
same period in 1997 (in thousands of dollars).
Increase (Decrease)
Cheyenne
PSCo Only &e prime Consolidated
--------- -------- ------------
Electric operating revenues:
Retail....................................... $34,806 $(21,492) $13,314
Wholesale - regulated........................ 64,915 - 64,915
Non-regulated power marketing................ - (10,448) (10,448)
Other (including unbilled revenues and
provision for rate refunds) ................ 27,388 (19) 27,369
Total revenues.............................. 127,109 (31,959) 95,150
------- ------- ------
Fuel used in generation....................... 12,924 - 12,924
Purchased power............................... 86,281 (25,811) 60,470
------- -------- -------
Net increase (decrease) in electric margin. $27,904 $ (6,148) $21,756
======= ======== =======
The following table compares electric Kwh sales by major customer classes
for the nine months ended September 30, 1998 and 1997.
Millions of Kwh Sales % Change *
--------------------- ----------
1998 1997 Consolidated PSCo Only
---- ---- ------------ ---------
Residential ..................... 5,135 5,044 1.8% 4.4%
Commercial and Industrial ...... 11,754 11,909 (1.3) 1.8
Public Authority ................ 140 138 1.8 3.5
------ ------
Total Retail................... 17,029 17,091 (0.4) 2.6
Wholesale - Regulated............ 5,291 3,110 70.2 70.2
Non-regulated Power Marketing.... - 660 ** -
------ ------
Total............................ 22,320 20,861 7.0 13.2
====== ======
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful
Electric margin increased (excluding the results of Cheyenne and e prime)
in the first nine months of 1998, when compared to the first nine months of
1997, primarily due to an overall increase in PSCo's retail sales
48
<PAGE>
of 2.6% resulting from customer growth of approximately 1.9% and a $25.1 million
increase in unbilled revenues, which is electricity delivered to customers that
has not been billed at the end of the period. Higher wholesale electric sales,
reflecting increased marketing activities for economy, short-term firm and
off-system sales, contributed to increased operating revenues; however, the
margin on such sales is minimal.
PSCo has cost adjustment mechanisms which recognize the majority of the
effects of changes in fuel used in generation and purchased power costs and
allow recovery of such costs on a timely basis. PSCo's ICA, which allows for a
50%/50% sharing of certain fuel and energy cost increases and decreases among
customers and shareholders, did not significantly impact the electric margin for
the first nine months of 1998 or 1997.
Fuel used in generation expense increased approximately $12.9 million
during the first nine months of 1998, as compared to the same period in 1997 due
to increased generation levels at PSCo's power plants.
Purchased power expense increased approximately $60.5 million during the
first nine months of 1998, as compared to the same period in 1997, primarily due
to purchases related to wholesale marketing activities.
Gas Operations
The following table details the change in revenues from gas sales and gas
purchased for resale for the first nine months of 1998 as compared to the same
period in 1997 (in thousands of dollars).
Increase (Decrease)
-------------------
Cheyenne
Natural Fuels
WGI &
PSCo Only e prime Consolidated
--------- ------- ------------
Revenues from gas sales (including
unbilled revenues) ......................... $35,959 $(110,064) $(74,105)
Gas purchased for resale...................... 33,120 (101,650) (68,530)
------ -------- --------
Net increase (decrease) in gas sales margin. $2,839 $ (8,414) $(5,575)
====== ========= =======
The following table compares gas Dth deliveries by major customer classes
for the first nine months of 1998 and 1997.
Millions of Dth Deliveries % Change *
-------------------------- ----------
1998 1997 Consolidated PSCo Only
---- ---- ------------ ---------
Residential................... 63.3 64.2 (1.5)% 1.2%
Commercial.................... 31.1 35.1 (11.3) (7.8)
Non-regulated gas marketing... - 35.2 ** -
------ --------
Total sales................. 94.4 134.5 (29.8) (1.9)
Transportation, gathering and
processing ................. 68.3 67.3 1.5 18.1
---- ----
Total....................... 162.7 201.8 (19.4) 5.6
======= ========
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful
Gas sales margin increased (excluding the results of Cheyenne, WGI,
Natural Fuels and e prime) during the first nine months of 1998, when compared
to the first nine months of 1997, primarily due to an increase in PSCo's base
revenues associated with the higher rates effective February 1, 1997, resulting
from the 1996 general rate case. This increase was offset, in part, by a 1.9%
decrease in PSCo's sales which resulted from warmer weather during the first
nine months of 1998, despite a 2.8% increase in customers.
Gas transportation, gathering and processing revenues increased
approximately $1.9 million during the first nine months of 1998, when compared
to the first nine months of 1997, primarily due to higher transportation
49
<PAGE>
rates, effective February 1, 1997, resulting from PSCo's 1996 general rate case
and an increase in transport deliveries. The increase in transport deliveries
continues to be impacted by the shifting of various commercial customers to
transport customers as such customers procure their unbundled gas supply from
other sources.
PSCo has in place a GCA mechanism for natural gas sales, which recognizes
the majority of the effects of changes in the cost of gas purchased for resale
and adjusts revenues to reflect such changes in costs on a timely basis. As a
result, the changes in revenues associated with these mechanisms during the
first nine months of 1998, as compared to the first nine months of 1997, had
little impact on net income. However, the fluctuations in gas sales impact the
amount of gas PSCo must purchase and, therefore, along with the increases and
decreases in the per-unit cost of gas, affect total gas purchased for resale.
The decrease in the quantity of gas purchased during the first nine months of
1998 resulted in a decrease in cost of gas purchased for resale.
Non-Fuel Operating Expenses and Other Income and Deductions
Depreciation and amortization expense increased $7.6 million in the first
nine months of 1998, as compared to the same period in 1997, primarily due to
the depreciation of property additions and the higher amortization of software
costs.
Income taxes increased approximately $13.0 million during the first nine
months of 1998, as compared to the first nine months of 1997, primarily due to
higher pre-tax income.
Other income and deductions increased approximately $13.4 million during
the first nine months of 1998, when compared to the first nine months of 1997,
primarily due to the recognition of merger and business integration costs in
1997. On March 31, 1998, NCI and its subsidiaries, including Yorkshire Power,
were transferred through the sale by PSCo of all the outstanding common stock at
net book value (approximately $292.6 million), to NC Enterprises, an
intermediate holding company for NCE, and received as consideration a promissory
note from NC Enterprises (see Note 2. Investment in Yorkshire Power in Item 1.
FINANCIAL STATEMENTS). The second and third quarter of 1998 include
approximately $10.2 million of interest income on the promissory note compared
to equity earnings associated with the Company's investment in Yorkshire Power
($3.4 million) during the first quarter of 1998 offset, in part, equity earnings
of Yorkshire Power during the second and third quarter of 1997 ($21.4 million).
Accruals for estimated legal and other costs associated with various employee
lawsuits are also included in 1997.
Interest charges and dividends on preferred stock decreased approximately
$2.7 million during the first nine months of 1998 as compared to the first nine
months of 1997. Proceeds from the issuance of $250 million of long-term debt in
April 1998 were used, in part, to reduce short-term debt. Higher interest costs
on additional long-term debt, net of retirements, was offset, in part, by lower
interest rates. Other interest expense decreased primarily due to lower
short-term borrowings. The increase in dividends on PSCo obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely subordinated
debentures of PSCo resulted from the issuance in May 1998 (see Note 6. PSCo
Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust
Holding Solely Subordinated Debentures in Item 1. FINANCIAL STATEMENTS).
50
<PAGE>
Commitments and Contingencies
See Note 5. Commitments and Contingencies in Item 1. FINANCIAL
STATEMENTS.
Liquidity and Capital Resources
Cash Flows - Nine Months Ended September 30
1998 1997 Increase
---- ---- --------
Net cash provided by operating
activities (in millions) ........... $305.4 $154.0 $151.4
Cash provided by operating activities increased during the first nine
months of 1998, when compared to the first nine months of 1997, primarily due to
the decrease in payments to gas suppliers resulting from lower gas costs during
the first nine months of 1998 as compared to the first nine months of 1997. A
portion of these lower gas costs have been deferred through the GCA and have
reduced the amount to be recovered from customers in the future. Higher earnings
from utility operations have also contributed to the increase.
1998 1997 Decrease
---- ---- --------
Net cash used in investing
activities (in millions) ............ $(328.5) $(575.2) $246.7
Cash used in investing activities decreased during the first nine months
of 1998, when compared to the first nine months of 1997, primarily due to PSCo's
acquisition of Yorkshire Electricity in April 1997 for approximately $360
million offset, in part by higher construction expenditures and the purchase of
certain leased assets in 1998.
1998 1997 Decrease
---- ---- --------
Net cash provided by financing
activities (in millions) ............ $34.3 $424.1 $(389.8)
Cash provided by financing activities decreased during the first nine
months of 1998, when compared to the first nine months of 1997, primarily due to
the issuance of $75 million and $250 million of medium-term notes in January and
March 1997, respectively. The proceeds from these financings were used to fund
PSCo's construction program and the investment in Yorkshire Power. See Note 2.
Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS. In April 1998,
$250 million of 5 year 6% First Collateral Trust Bonds were issued. The proceeds
were used for general corporate purposes. Additionally, in May 1998, $194
million of Trust Originated Preferred Securities were issued. The proceeds were
used to redeem all of PSCo's outstanding preferred stock (totaling $181.8
million) on June 10, 1998. See Note 6. Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debentures
in Item 1. FINANCIAL STATEMENTS.
Financing Activities
Discussion relating to PSCo's financing activities is covered under
"Financing Activities" in NCE's Management's Discussion and Analysis of
Financial Condition and Results of Operations.
51
<PAGE>
SPS's Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended September 30, 1998 Compared to the Three Months Ended
September 30, 1997
Merger
Effective August 1, 1997, following receipt of all required state and
Federal regulatory approvals, SPS and PSCo merged in a tax-free "merger of
equals" transaction and became wholly-owned subsidiaries of NCE, which is a
registered holding company under PUHCA. This transaction was accounted for as a
pooling of interests for accounting purposes. Effective with the Merger, Quixx
and UE, previously wholly-owned subsidiaries, were transferred through the sale
by SPS of all of the outstanding common stock of such subsidiaries at net book
value, to NC Enterprises, an intermediate holding company of NCE. The statements
of income for the three and nine months ended September 30, 1997 and the
statement of cash flows for the nine months ended September 30, 1997 reflect the
results of operations of Quixx and UE through July 31, 1997.
Earnings Available for Common Stock
Earnings available for common stock increased $5.8 million during the
third quarter of 1998 compared to the same quarter in 1997. Earnings in the
prior year were impacted by the recognition of merger related costs ($7.2
million).
Operating Revenues
Electric Operations
Substantially all of SPS's operating revenues result from the sale of
electric energy. The principal factors impacting revenues are the amount and
price of energy sold. The following table details the change in electric
operating revenues and energy costs for the three months ended September 30,
1998, as compared to the same period in 1997 (thousands of dollars).
Increase (Decrease)
-------------------
Electric operating revenues:
Retail.............................. $15,244
Wholesale........................... 12,619
Other (including unbilled revenues). (22,726)
-------
Total revenues.................... 5,137
Fuel used in generation.............. (2,886)
Purchased power...................... 5,989
-------
Net increase in electric margin... $ 2,034
=======
The following table compares electric Kwh sales by major customer classes
for the three months ended September 30, 1998 and 1997.
Millions of Kwh Sales
---------------------
1998 1997 % Change*
---- ------ ---------
Residential ............ 1,060 936 13.2%
Commercial ............ 940 881 6.7
Industrial ............ 2,193 2,120 3.5
Public Authority ....... 192 170 13.4
----- -----
Total Retail.......... 4,385 4,107 6.8
Wholesale............... 2,800 2,284 22.6
----- -----
Total................... 7,185 6,391 12.4
===== =====
* Percentages are calculated using unrounded amounts.
52
<PAGE>
Electric operating revenues increased $5.1 million or 1.8% during the
third quarter in 1998, when compared to the same period in 1997, primarily due
to higher retail and wholesale electric sales offset, in part by approximately
$1.0 million of merger savings which are passed on to customers. The hotter than
normal weather contributed to the increased sales in 1998, with an increase in
the irrigation load in Texas and New Mexico. Under the various state regulatory
approvals, SPS is required to provide credits to retail customers over five
years for one-half of the measured non-fuel operation and maintenance expense
savings associated with the Merger. SPS will provide a guaranteed minimum annual
savings to retail customers of $3.0 million in Texas, $1.2 million in New Mexico
(which will be discontinued effective with the new retail rate decrease, see
Note 4. Regulatory Matters in Item 1. FINANCIAL STATEMENTS), $100,000 in
Oklahoma, $10,000 in Kansas and $1.5 million to wholesale customers.
Fuel used in generation expense decreased $2.9 million or 2.0% during the
third quarter of 1998, when compared to the same period in 1997, primarily due
to lower coal expense for the quarter offset, in part, by higher gas expense and
increased generation levels required to serve retail and wholesale customers.
The decrease in coal expense is primarily due to the expiration of a coal supply
contract in 1997 and negotiation with a new supplier in 1998 for consumption at
the Harrington generating station. SPS coal generation levels increased slightly
in 1998 as compared to the same period of the prior year. Cost of natural gas
used in generation increased $1.7 million during the third quarter of 1998
primarily due to generation at the new Cunningham Station combustion turbine
unit offset, in part, by lower gas prices during the current period.
SPS has fuel cost adjustment mechanisms which recognize the majority of
the effects of changes in fuel used in generation and purchased power costs and
allow recovery of such costs on a timely basis. As a result, the changes in
revenues associated with these mechanisms during the third quarter of 1998, when
compared to the third quarter of 1997, had little impact on net income.
Purchased power increased $6.0 million during the third quarter of 1998,
when compared to the same period in 1997, due to higher spot market prices and a
48% increase wholesale purchases. SPS generates substantially all of its power
for sale to its firm retail and wholesale customers and sells non-firm energy as
the market demands. Similarly, SPS will purchase low-cost non-firm energy when
available and as needed to meet customer requirements.
Other Operating Revenues
Other operating revenues decreased $4.6 million during the third quarter
of 1998, when compared to the same period in 1997, primarily due to the sale of
Quixx and UE in connection with the Merger as discussed above.
Non-Fuel Operating Expenses
Other operating and maintenance expenses decreased $1.0 million or 2.8%
during the third quarter of 1998 as compared to the same period in 1997.
Excluding the effects of Quixx and UE, other operating and maintenance expenses
increased $1.7 million primarily due to higher maintenance costs at generation
stations.
Income taxes decreased $1.1 million during the third quarter of 1998, as
compared to the same period in 1997, primarily due to the additional income tax
expense recognized in 1997 for non-deductible merger costs offset, in part, by
the effect of higher pre-tax income. The effective income tax rates for the
third quarters of 1998 and 1997 were 37.1% and 42.4%, respectively.
Other Income and Deductions
Other income and deductions increased $7.7 million during the third
quarter of 1998, as compared to the same period in 1997, primarily due to the
absence of merger and business integration expenses in 1998 ($7.2
53
<PAGE>
million in 1997) and higher interest income in 1998 related to the note
receivable from NC Enterprises for the sale of Quixx and UE.
Nine Months ended September 30, 1998 Compared to the Nine Months ended
September 30, 1997
Earnings Available for Common Stock
Earnings available for common stock were $92.0 million and $55.7 million
during the nine months ended September 30, 1998 and 1997, respectively.
Operating income increased due to the increase in electric margin and lower
operating and maintenance expense. The 1997 write-off of the investment in the
Carolina Energy Project and lower merger related costs in 1998 also favorably
impacted 1998 net income compared to the prior period.
Operating Revenues
Electric Operations
Substantially all of SPS's operating revenues result from the sale of
electric energy. The principal factors impacting revenues are the amount and
price of energy sold. The following table details the change in electric
operating revenues and energy costs for the nine months ended September 30, 1998
as compared to the same period in 1997 (thousands of dollars).
Increase (Decrease)
-------------------
Electric operating revenues:
Retail.............................. $20,429
Wholesale........................... 23,717
Other (including unbilled revenues). (24,196)
-------
Total revenues.................... 19,950
Fuel used in generation.............. (13,185)
Purchased power...................... 7,578
-------
Net increase in electric margin... $25,557
=======
The following table compares electric Kwh sales by major customer classes
for the nine months ended September 30, 1998 and 1997.
Millions of Kwh Sales
---------------------
1998 1997 % Change*
----- ------ ---------
Residential ............ 2,490 2,296 8.5%
Commercial ............ 2,315 2,246 3.1
Industrial ............ 6,306 6,106 3.3
Public Authority ....... 481 439 9.5
----- -----
Total Retail.......... 11,592 11,087 4.6
Wholesale............... 6,332 5,368 18.0
----- -----
Total................... 17,924 16,455 8.9
====== ======
* Percentages are calculated using unrounded amounts.
Electric operating revenues increased $20.0 million or 2.7% during the
nine months ended September 30, 1998, when compared to the same period in 1997,
primarily due to higher retail and wholesale electric sales. The increase in
revenues is substantially attributable to the effects of hotter than normal
weather during the second and third quarters of 1998 resulting in an increase in
the irrigation load in Texas and New Mexico. The decrease in other electric
operating revenues was due in part to the recognition in 1997 of higher deferred
fuel revenues related to the Texas jurisdictional portion of the Thunder Basin
judgment offset, in part, by $7.7 million of
54
<PAGE>
additional revenue recognized in 1998 from the resolution of a 1985 FERC rate
case. Under the various state regulatory approvals, SPS is required to provide
credits to retail customers over five years for one-half of the measured
non-fuel operation and maintenance expense savings associated with the Merger.
SPS will provide a guaranteed minimum annual savings to retail customers of $3.0
million in Texas, $1.2 million in New Mexico (which will be discontinued
effective with the new retail rate decrease, see Note 4. Regulatory Matters in
Item 1. FINANCIAL STATEMENTS), $100,000 in Oklahoma, $10,000 in Kansas and $1.5
million to wholesale customers.
Fuel used in generation expense decreased $13.2 million or 3.6% during the
nine months ended September 30, 1998, when compared to the same period in 1997,
primarily due to lower prices of coal and natural gas offset, in part, by
increased generation levels to required to serve retail and wholesale customers.
The decrease in coal costs was primarily due to: a) the expiration of a coal
supply contract in 1997 and negotiation with a new supplier in 1998 for
consumption at the Harrington generating station, and b) the recognition of the
Thunder Basin judgment costs in 1997. Cost of natural gas used in generation and
SPS gas generation levels for the nine months ended September 30, 1998
increased, when compared to the same period in 1997, primarily due to generation
at the new Cunningham Station combustion turbine unit.
SPS has fuel cost adjustment mechanisms which recognize the majority of
the effects of changes in fuel used in generation and purchased power costs and
allow recovery of such costs on a timely basis. As a result, the changes in
revenues associated with these mechanisms during the nine months ended September
30, 1998, when compared to the same period in 1997, had little impact on net
income.
Purchased power increased $7.6 million or 63% during the nine months ended
September 30, 1998, when compared to the same period in 1997, primarily due to
an increase in spot market prices and a 15.2% increase in wholesale purchases.
SPS generates substantially all of its power for sale to its firm retail and
wholesale customers and sells non-firm energy as the market demands. Similarly,
SPS purchases low-cost non-firm energy when available and as needed to meet
customer requirements.
Other Operating Revenues
Other operating revenues decreased $20.2 million during the nine months
ended September 30, 1998, when compared to the same period in 1997, primarily
due to the sale of Quixx and UE in connection with the Merger as discussed
above.
Non-Fuel Operating Expenses
Other operating and maintenance expenses decreased $16.1 million or 13.4%
during the nine months ended September 30, 1998, as compared to the same period
in 1997. Excluding the effects of the sale of Quixx and UE, other operating and
maintenance expenses decreased $2.5 million, primarily due to lower pension and
benefit costs.
Income taxes increased $17.8 million during the nine months ended September
30, 1998, when compared to the same period in 1997, primarily due to higher
pre-tax income. Additional income tax expense was recognized in 1997 for
non-deductible merger costs. The effective income tax rate for the nine months
ended September 30 was 37.3% in 1998 and 39.8% in 1997.
Other Income and Deductions
Other income and deductions increased $34.7 million during the nine months
ended September 30, 1998, as compared to the same period in 1997, primarily due
to the 1997 write-off of the investment in the Carolina Energy Project ($16.1
million), the absence of merger and business integration expenses in 1998 ($14.0
million) and higher interest income in 1998 related to the note receivable from
NC Enterprises for the sale of Quixx and UE.
55
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Part 1. See Note 5. Commitments and Contingencies in Item 1, Part 1.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10(a) Employment Agreement, effective December 15, 1997, between the
Company and Mr. Paul J. Bonavia.
12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed
Charges for PSCo is set forth at page 59 herein.
12(b) Computation of Ratio of Consolidated Earnings to Consolidated Fixed
Charges for SPS is set forth at page 60 herein.
15(a) Letter from Arthur Andersen LLP regarding unaudited interim
information is set forth at page 61 herein for NCE.
15(b) Letter from Arthur Andersen LLP regarding unaudited interim
information is set forth at page 62 herein for PSCo.
15(c) Letter from Arthur Andersen LLP regarding unaudited interim
information is set forth at page 63 herein for SPS.
27(a) Financial Data Schedule for NCE as of September 30, 1998.
27(b) Financial Data Schedule for PSCo as of September 30, 1998.
27(c) Financial Data Schedule for SPS as of September 30, 1998.
(b) Reports on Form 8-K
The following report on Form 8-K was filed by NCE since the beginning of the
third quarter of 1998.
- A report on Form 8-K dated October 19, 1998, was filed by NCE on October
19, 1998. The item reported was Item 5. Other Events: The Company's earnings
release for the quarter ended September 30, 1998, including summary income
statement information.
- A report on Form 8-K dated October 29, 1998, 1998, was filed by NCE on
November 2, 1998. The item reported was Item 5. Other Events: Filing of a
Purchase Agreement in connection with the sale of 2,500,000 shares of common
stock together with associated preferred stock purchase rights.
56
<PAGE>
NEW CENTURY ENERGIES, INC.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, New Century Energies, Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on the 9th
day of November, 1998.
NEW CENTURY ENERGIES, INC.
By /s/ R. C. Kelly
---------------------------------
R. C. Kelly
Executive Vice President and
and Chief Financial Officer
PUBLIC SERVICE COMPANY OF COLORADO
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Public Service Company of Colorado has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized
on the 9th day of November, 1998.
PUBLIC SERVICE COMPANY OF COLORADO
By /s/Brian P. Jackson
---------------------------------
Brian P. Jackson
Senior Vice President, Finance and
Administrative Services and
Chief Financial Officer
SOUTHWESTERN PUBLIC SERVICE COMPANY
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Southwestern Public Service Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized
on the 9th day of November, 1998.
SOUTHWESTERN PUBLIC SERVICE COMPANY
By /s/Brian P. Jackson
---------------------------------
Brian P. Jackson
Senior Vice President, Finance and
Administrative Services and
Chief Financial Officer
57
<PAGE>
EXHIBIT INDEX
10(a) Employment Agreement, effective December 15, 1997, between the Company
and Mr. Paul J. Bonavia.
12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed
Charges for PSCo is set forth at page 59 herein.
12(b) Computation of Ratio of Consolidated Earnings to Consolidated Fixed
Charges for SPS is set forth at page 60 herein.
15(a) Letter from Arthur Andersen LLP regarding unaudited interim information is
set forth at page 61 herein for NCE.
15(b) Letter from Arthur Andersen LLP regarding unaudited interim information is
set forth at page 62 herein for PSCo.
15(c) Letter from Arthur Andersen LLP regarding unaudited interim information is
set forth at page 63 herein for SPS.
27(a) Financial Data Schedule for NCE as of September 30, 1998.
27(b) Financial Data Schedule for PSCo as of September 30, 1998.
27(c) Financial Data Schedule UT for SPS as of September 30, 1998.
58
<PAGE>
EXHIBIT 12(a)
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS
TO CONSOLIDATED FIXED CHARGES
(not covered by Report of Independent Public Accountants)
Nine Months Ended
September 30,
1998 1997
---- ----
(Thousands of Dollars, except ratios)
Fixed charges:
Interest on long-term debt................... $ 86,899 $85,902
Interest on borrowings against corporate-owned
life insurance contracts................... 38,004 34,049
Other interest............................... 14,967 17,150
Amortization of debt discount and expense
less premium .............................. 3,148 2,964
Interest component of rental expense......... 6,166 6,887
Dividends on PSCo obligated mandatorily
redeemable preferred securities............ 5,911 -
------ ------
Total ..................................... $155,095 $146,952
======== ========
Earnings (before fixed charges and taxes on income):
Net income................................... $143,820 $130,968
Fixed charges as above....................... 155,095 146,952
Provisions for Federal and state taxes on income,
net of investment tax credit amortization.... 72,184 59,205
------ ------
Total...................................... $371,099 $337,125
======== ========
Ratio of earnings to fixed charges.............. 2.39 2.29
====== ======
59
<PAGE>
EXHIBIT 12(b)
SOUTHWESTERN PUBLIC SERVICE COMPANY
AND SUBSIDIARIES
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS
TO CONSOLIDATED FIXED CHARGES
(not covered by Report of Independent Public Accountants)
Nine Months Ended
September 30,
1998 1997
---- ----
(Thousands of Dollars, except ratios)
Fixed charges:
Interest on long-term debt................... $ 32,972 $ 33,057
Dividends on SPS obligated mandatorily
redeemable preferred securities............ 5,888 5,888
Other interest............................... 7,275 4,710
Amortization of debt discount and expense
less premium .............................. 1,682 1,683
Interest component of rental expense......... 606 934
------ ------
Total ..................................... $ 48,423 $ 46,272
======== ========
Earnings (before fixed charges and taxes on income):
Net income................................... $ 91,985 $ 55,709
Fixed charges as above....................... 48,423 46,272
Provisions for Federal and state taxes on income,
net of investment tax credit amortization.... 54,709 36,894
-------- --------
Total...................................... $195,117 $138,875
======== ========
Ratio of earnings to fixed charges.............. 4.03 3.00
===== =====
60
<PAGE>
EXHIBIT 15(a)
November 5, 1998
New Century Energies, Inc.:
We are aware that New Century Energies, Inc. has incorporated by reference
in its Registration Statement (Form S-8, File No. 333-28639) pertaining to the
Omnibus Incentive Plan; its Registration Statement (Form S-3, File No.
333-28637) pertaining to the Dividend Reinvestment and Cash Payment Plan and its
Registration Statements (Form S-3, File Nos. 333-40361 and 333-64067) pertaining
to the registration of NCE Common Stock; its Registration Statement (Form S-8,
File No. 333-58117) pertaining to the NCE Employee Investment Plan and NCE
Employees' Savings and Stock Ownership Plan and its Form 10-Q for the quarter
ended September 30, 1998, which includes our report dated November 5, 1998,
covering the unaudited consolidated condensed financial statements contained
therein. Pursuant to Regulation C of the Securities Act of 1933, that report is
not considered a part of the registration statement prepared or certified by our
Firm or a report prepared or certified by our Firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
61
<PAGE>
EXHIBIT 15(b)
November 5, 1998
Public Service Company of Colorado:
We are aware that Public Service Company of Colorado has incorporated by
reference in its Registration Statement (Form S-3, File No. 33-62233) pertaining
to the Automatic Dividend Reinvestment and Common Stock Purchase Plan; its
Registration Statement (Form S-3, File No. 33-37431) as amended on December 4,
1990, pertaining to the shelf registration of Public Service Company of
Colorado's First Mortgage Bonds; its Registration Statement (Form S-8, File No.
33-55432) pertaining to the Omnibus Incentive Plan; its Registration Statement
(Form S-3, File No. 33-51167) pertaining to the shelf registration of Public
Service Company of Colorado's First Collateral Trust Bonds; its Registration
Statement (Form S-3, File No. 33-54877) pertaining to the shelf registration of
Public Service Company of Colorado's First Collateral Trust Bonds and Cumulative
Preferred Stock and its Form 10-Q for the quarter ended September 30, 1998,
which includes our report dated November 5, 1998, covering the unaudited
consolidated condensed financial statements contained therein. Pursuant to
Regulation C of the Securities Act of 1933, that report is not considered a part
of the registration statement prepared or certified by our Firm or a report
prepared or certified by our Firm within the meaning of Sections 7 and 11 of the
Act.
Very truly yours,
ARTHUR ANDERSEN LLP
62
<PAGE>
EXHIBIT 15(c)
November 5, 1998
Southwestern Public Service Company:
We are aware that Southwestern Public Service Company has incorporated by
reference in its Registration Statement (Form S-3, File No. 333-05199)
pertaining to Southwestern Public Service Company's Preferred Stock and Debt
Securities; its Registration Statement (Form S-8, File No. 33-27452) pertaining
to Southwestern Public Service Company's 1989 Stock Incentive Plan and its
Registration Statement (Form S-8, File No. 33-57869) pertaining to Southwestern
Public Service Company's Employee Investment Plan and Non-Qualified Salary
Deferral Plan and its Form 10-Q for the quarter ended September 30, 1998, which
includes our report dated November 5, 1998, covering the unaudited condensed
financial statements contained therein. Pursuant to Regulation C of the
Securities Act of 1933, that report is not considered a part of the registration
statement prepared or certified by our Firm or a report prepared or certified by
our Firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
63
<PAGE>
EXHIBIT 10(a)
EMPLOYMENT AGREEMENT
BETWEEN
NEW CENTURY ENERGIES, INC.
AND
PAUL J. BONAVIA
<PAGE>
Contents
Section 1. Term of Employment
Section 2. Position and Responsibilities
Section 3. Executive to Devote Full Time
Section 4. Compensation
Section 5. Expenses
Section 6. Disability
Section 7. Termination of Employment
Section 8. Compensation Upon Termination
Section 9. Offset for Compensation Earned Subsequent to Termination
Section 10. Covenants
Section 11. Indemnification
Section 12. Assignment
Section 13. Income Tax
Section 14. Dispute Resolution and Notice
Section 15. Miscellaneous
Section 16. Governing Law
<PAGE>
This Employment Agreement is made and entered into this 28th day of
September, 1998, and is effective retroactive to December 15, 1997, by and
between New Century Energies, Inc., (hereinafter referred to as "NCE" or, as
defined in Section 12, below, as the "Company"), having its principal offices at
1225 17th Street, Denver, Colorado, and Paul J. Bonavia (hereinafter referred to
as the "Executive"):
WHEREAS, Executive possesses considerable experience in, and knowledge of,
the electric and natural gas utility industries; and
WHEREAS, the Company desires to employ Executive in an executive capacity
for the Company;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and agreements of the parties set forth in this Agreement, and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, agree as
follows:
Section 1. Term of Employment
The Company hereby agrees to employ Executive, and Executive hereby
agrees to serve the Company, in accordance with the terms and conditions set
forth herein, commencing as of the effective date of this Agreement, as
indicated above, and ending on December 14, 2000, unless earlier terminated as
provided herein.
Section 2. Position and Responsibilities
Executive shall serve as Senior Vice President and General Counsel of
the Company, or in any other similar executive capacity for the Company, if so
elected by the Board of Directors, and shall report to either the Chief
Executive Officer or Chief Operating Officer of the Company . Any change in
these terms will be by mutual agreement of the Executive and the Board of
Directors.
Section 3. Executive to Devote Full Time
During the term of this Agreement, Executive agrees to devote
substantially his full time, attention, and energies to the Company's business
and shall not be engaged directly or indirectly in any other business activity,
whether or not such business activity is pursued for gain, profit, or other
pecuniary advantage without prior approval of the Board of Directors, as
expressed by formal resolution. This prohibition does not include charitable,
civic, nonprofit, or other community service activities, nor shall it be
construed as preventing the Executive from investing assets in such form or
manner as will not require his services in the daily operations of the affairs
of the companies in which such investments are made, or serving as a director of
other companies (subject to the covenants of Section 10 herein).
<PAGE>
Section 4. Compensation
4.1 Base Salary. The Company shall pay Executive a salary at a rate
(hereinafter referred to as "Base Salary") that shall be established from time
to time by the Board of Directors of the Company or the Board's designee;
provided, however, that such Base Salary shall not be less than Two Hundred and
Seventy Thousand Dollars ($270,000.00) per year. This Base Salary shall be paid
to Executive in equal semi-monthly installments throughout the year, consistent
with the normal payroll practices of the Company. Base Salary shall be reviewed
periodically by the Board of Directors or the Board's designee following the
effective date of this Agreement, while this Agreement is in force, to ascertain
whether, in the judgment of the Board or the Board's designee, such Base Salary
should be increased (but not decreased). If so increased, that salary shall
become the Base Salary for all purposes of this Agreement.
4.2 Incentive Compensation.
(a) Annual Bonus. During the term of this Agreement, the Executive
shall be eligible to participate in the New Century Energies, Inc.
Annual Incentive Plan. Executive's annual target bonus potential shall
not be less than forty-five (45%) of Base Salary. Awards under this
Plan may be made in cash or stock, at the election of Executive, and
are conditioned upon the attainment of certain goals established by
Company management and approved by the Compensation Committee of the
Board. In addition, upon the commencement of Executive's employment
with the Company, Executive shall receive a guaranteed award of $20,000
under the Annual Incentive Plan for the plan year 1997, payable not
earlier than January 5, 1998. This is in addition to Executive's actual
participation in the Plan for the month of December 1997.
(b) Long Term Incentive Plan. Executive will participate in the New
Century Energies, Inc., Long Term Incentive Plan with a target award of
not less than 65% of Base Salary. As currently designed, two-thirds of
the awards under this Plan are provided through the issuance of
non-qualified stock options and the remaining one-third is provided
through a Value Creation Plan. Executive's initial stock option grant
under this Plan is 88,000 shares of New Century Energies, Inc., common
stock, which shall vest on December 15, 1998. This grant covers the
years 1998, 1999, and 2000. The grant price will be the fair market
value (the closing price) of New Century Energies Inc., common stock on
December 15, 1997. The Company reserves the right to amend or modify
the design of the Long Term Incentive Plan subject to approval of the
Compensation Committee.
4.3 Executive Benefits. The Company shall provide to the Executive all
benefits which other officers and employees of the Company are entitled to
receive, as commensurate with the Executive's position, pursuant and subject to
the terms and conditions of all then applicable plans. Such benefits shall
include, but not be limited to, group term life insurance, comprehensive health
and major medical insurance,
<PAGE>
long-term disability, accidental death and dismemberment insurance, travel
accident insurance, and participation in any supplemental benefit plans
(including a supplemental executive retirement plan), employee savings plans,
supplemental savings plan, all employee welfare benefit plans, and employee
pension benefit plans.
4.4 Supplemental Retirmenet Benefit. Executive shall be entitled under this
Agreement to a supplemental retirement benefit. Assuming full vesting and
accrual, such benefit shall be equal each year to fifty-five percent (55%) of
Executive's Annual Compensation, minus any benefit received by Executive in that
year pursuant to any Company qualified retirement plan or Company SERP Plan.
"Annual Compensation" is defined as the average of the highest three of
Executive's last five years of both Annual Base Salary and annual incentives
earned in the corresponding year. The Company may modify its salary and
incentive compensation structure after the date hereof, provided that no such
modification shall have the effect of reducing the monetary value of Executive's
benefit under this Section. So long as Executive shall be employed by the
Company, the benefit shall accrue at the rate of five percent (5%) of Annual
Compensation per year of service, to reach fifty-five (55%) of Annual
Compensation not later than December 15, 2008. The benefit shall become one
hundred percent (100%) vested on December 15, 2002, or upon a Change in Control
as that term is defined in the Change in Control Agreement, whichever occurs
earlier. Yearly benefit payments shall commence at age 60 or at separation from
service, whichever occurs later. The benefit shall be funded in a mutually
acceptable manner through a rabbi trust or other funding vehicle.
4.4A SERP Plan. Executive shall be a participant in the Supplemental
Executive Retirement Plan for key management employees, which may be amended or
revised from time to time by the Company ("SERP Plan"). Terms and conditions
applicable to any benefit to which Executive may be entitled thereunder shall be
governed by the SERP Plan documents.
4.5 Executive Life Insurance. The Company shall provide Executive with
a life insurance policy with a death benefit equal to 400% of Base Salary if
death occurs during employment, and equal to 200% of final Base Salary if death
occurs during retirement.
4.6 Paid time Off. Executive shall be entitled each calendar year to
paid vacation in accordance with the standard vacation policy of the Company
with regard to vacations of Executive Officers. Executive shall receive a sick
leave accrual according to standard Company policy with regard to sick leave for
Executive Officers as of the date hereof.
4.7 Perquisites. The Company shall provide to Executive, at the
Company's cost, all perquisites to which other officers of the Company are
entitled. The Company also shall provide such other perquisites which are
suitable to the character of Executive's position with the Company and adequate
for the performance of his duties hereunder, including, but not limited to, In
addition, executive shall receive: (i) a monthly flexible perquisite allowance
of $750.00; (ii) an annual allowance for financial/estate planning and tax
<PAGE>
preparation of $3500.00; (iii) an annual medical examination at the Company's
expense; and (iv) a furnished executive office and a full-time secretary located
at the Company's corporate headquarters. Executive shall likewise have the
benefit of any additional benefits, as may be established during the term of
this Agreement, by written policy of the Company
4.8 Participation in Programs. In addition, and without limiting the
generality of the foregoing, during the term hereof: (A) the Executive shall be
entitled to participate in all applicable incentive, savings and retirement
plans, practices, policies and programs of the Company and its affiliates to the
same extent as other senior executives of the Company; and (B) the Executive
and/or the Executive's family, as the case may be, shall be eligible for
participation in, and shall receive all benefits under, all applicable welfare
benefit plans, practices, policies and programs provided by the Company and its
affiliates, other than severance plans, practices, policies and programs but
including, without limitation, medical, prescription, dental, disability, sick
leave, employee life insurance, group life insurance, accidental death and
travel accident plans and programs, to the same extent as other senior
executives of the Company.
4.9 Modifications to Programs. Sections 4.2, 4.3, 4.4A, and 4.5 herein
refer to plans or programs in effect or under consideration as of the date
hereof. By reason of such sections, the Company shall not be obligated to
institute, maintain, or refrain from changing, amending, or discontinuing any
benefit plan, program, or perquisite, so long as such changes are similarly
applicable to the Company's senior executive employees generally. However,
notwithstanding any change or amendment to, discontinuance of, or benefit
limitation set forth in any plan or program, Executive shall be entitled under
this Agreement (a) during Executive's term of employment under this Agreement,
to incentive compensation opportunities at least equal in monetary value to
those provided for in Section 4.2, above, and (b) during and after Executive's
term of employment, to the supplemental retirement benefit as provided in
Section 4.4, above.
Section 5. Expenses
5.1 Moving and Relocation Expenses. The Company shall pay, or reimburse
Executive, for reasonable and necessary moving and relocation expenses incurred
in the relocation of Executive's principal residence, in accordance with the
Company's existing relocation policy.
5.2 Ongoing Expenses. The Company shall pay, or reimburse Executive in
accordance with Company policies, for all ordinary and necessary expenses, in a
reasonable amount, which Executive incurs in performing his duties under this
Agreement, including, but not limited to, travel, entertainment, professional
dues and subscriptions, and all dues, fees, and expenses associated with
membership in various professional, business, social, and civic associations and
societies in which Executive's participation is in the best interests of the
Company.
<PAGE>
Section 6. Disability
6.1 Long Term Disability. The Company will provide to the Executive
benefits pursuant and subject to the terms and conditions of the Long Term
Disability Plan then in effect.
Section 7. Termination of Employment
7.1 Termination for Good Reason. "Good Reason" means the occurrence,
on or after the date of a Change In Control (as that term is
defined in the Change in Control Agreement between Paul J. Bonavia
and New Century Energies, Inc., effective December 15, 1997,
referred to in this Agreement as the "Change in Control
Agreement") and which is Executive's written consent, of any of
the following events or circumstances, as determined in good faith
by Executive:
(a) A reduction in Executive's base salary in effect immediately
prior to the Change in Control
(b) A material reduction in Executive's target
opportunity, measured as a percentage of base salary, to
earn annual or long-term incentives or bonuses.
(c) A failure to provide to Executive employee benefits
and perquisites (other than amounts described in
subsections (a) and (b)) which are reasonably equivalent
in the aggregate to those provided to Executive
immediately prior to the Change In Control.
(d) A material reduction by NCE of Executive's job duties
and responsibilities that existed immediately prior to the
Change In Control, including but not limited to the
assignment to Executive of duties and responsibilities
which are materially inconsistent with those of
Executive's position immediately prior to the Change In
Control.
(e) Assignment or reassignment of Executive to another
place of employment that is more than 50 miles (measured
by the shortest paved highway route) from Executive's
place of employment immediately prior to the Change In
Control.
(f) A failure by NCE to pay to Executive when due any
deferred compensation that was deferred by Executive prior
to the Change In Control.
(g) A failure by NCE to comply with the terms and
conditions of this Agreement.
<PAGE>
Notwithstanding the foregoing:
aa) An event or circumstance shall not constitute Good
Reason unless Executive provides written notice to NCE
specifying the basis for Executive's determination that
Good Reason exists within six months after the first day
on which such Good Reason existed. If NCE cures the event
or circumstance within 30 days of receiving such written
notice (including retroactive restoration of any lost
compensation or benefits, where reasonably possible), Good
Reason shall be deemed never to have existed.
bb) NCE and Executive may, upon mutual written agreement,
waive any provision of this Section which would otherwise
constitute Good Reason.
7.2 Termination by Notice. Either the Company or the Executive may
terminate this Agreement without cause by delivering proper written notice to
the other party, as follows:
(a) Notice by Executive. Executive may terminate this
Agreement at any time by giving the Company's Board of
Directors a minimum of ninety (90) days' prior written notice
of his intent to terminate. In such case, the Company shall
pay Executive his full Base Salary through the ninety (90) day
period, with termination being effective on whatever date
during that period is designated by the Board of Directors,
but in any event not later than the last day of the ninety
(90) day period. As of the last day of the ninety (90) day
period, Executive shall forfeit all rights and benefits (other
than vested benefits) he would otherwise have been entitled to
receive under this Agreement (including, if applicable, the
Executive's annual expected target bonus for that year). The
Company and Executive thereafter shall have no further
obligations under this Agreement.
(b) Notice by the Company. The Company may terminate this
Agreement at any time by the Board of Directors giving
Executive written notice of the Company's intent to terminate.
Subject to the consulting requirements of Section 8 herein,
Executive's obligation to serve the Company, and the Company's
obligation to employ Executive under the terms of this
Agreement shall terminate simultaneously on the date specified
in the written notice, and the Executive shall receive those
benefits specified in Section 8 herein.
7.3 Termination for Cause. Nothing in this Agreement shall be
construed to prevent the Company's Board of Directors from terminating
Executive's employment under this Agreement for cause. "Termination for cause"
shall have the same definition herein as the term "Discharge for Cause" in the
Change in Control Agreement.
<PAGE>
In the event this Agreement is terminated by the Company for cause,
the Company shall pay Executive his full Base Salary through the date of
termination, and Executive shall immediately thereafter forfeit all rights and
benefits (other than vested benefits) he would otherwise have been entitled to
receive under this Agreement (including, if applicable, the Executive's annual
expected target bonus for that year). The Company and Executive thereafter shall
have no further obligations under this Agreement, except as set forth in Section
15.6.
7.4 Termination After a Change in Control. In the event of a Change in
Control (as defined in Executive's Change in Control Agreement), the Executive
shall be entitled to the greater of: (a) the payments he would otherwise be
entitled to receive for the remaining term of employment under this Agreement;
or (b) those payments provided for under the Change in Control Agreement. If it
is determined that payments will be made pursuant to this Agreement following a
Change in Control, the Executive shall be entitled to tax-free reimbursements of
any excise taxes that may arise as a result of such payments.
Section 8. Compensation Upon Termination
In the event this Agreement is terminated for good reason (as provided
in Section 7.1 herein) or by notice by the Company as provided in Section 7.2(b)
herein, the Company shall continue the Executive's total compensation package
for the remaining term of this Agreement which shall constitute the following
amounts upon the effective date of such termination, or as otherwise specified:
(a) Executive's annual Base Salary (as stated in Section 4.1
herein and adjusted by the Board from time to time), continued
for the remaining term of this Agreement, paid to the
Executive in equal semi-monthly installments consistent with
the normal payroll practices of the Company;
(b) For annual incentive plan(s) in place and operational on
the date of termination, the greater of target or actual bonus
paid for the year in which employment termination occurs, as
provided in the annual incentive plan and subject to the
authority of the Board under such plan, continued for the
remaining term of this Agreement;
(c) For long-term incentive plan(s) in place and operational
on the date of termination, an immediate vesting of all
outstanding long-term incentive awards held by the Executive,
plus the economic equivalent value of any long-term incentive
awards the Executive would have received had the Executive
remained employed for the remaining term of this Agreement, as
provided in the long-term incentive plan and subject to the
authority of the Board under such plan;
<PAGE>
(d) For the supplemental retirement benefit provided for in
Section 4.4 and the SERP Plan (or any successor plan) in place
and operational on the date of termination, payment, in
accordance with the terms of the plan, of the Executive's
accrued benefits, vested or otherwise; plus, Executive shall
receive credit for such additional years of service equal to
the number of years, or partial years, remaining under this
Agreement at the time of termination;
(e) For the Supplemental Savings Plan (or any successor plan)
in place and operational on the date of termination, payment,
in accordance with the terms of the plan, within thirty (30)
days of termination, of the Executive's account balances
therein; plus credit for the maximum additional Company
contributions the Executive would have been entitled to
receive had the Executive remained employed for the remaining
term of this Agreement;
(f) For welfare benefit plan(s) in place and operational on
the date of termination, Executive shall receive full benefit
coverage for the remaining term of this Agreement;
(g) For all qualified retirement plans in place and
operational on the date of termination, Executive shall
receive, by direct payment from the Company, the present value
of the benefits that would have been paid under the qualified
plans if the Executive had received credit for additional
years of service equal to the number of years remaining under
this Agreement at the time of termination; plus the maximum
Company matching contributions and accruals under any such
retirement plans Executive would have been entitled to receive
had his employment continued for the remaining term of this
Agreement; and
(h) For all perquisite programs in place and operational on
the date of termination, Executive shall receive full
perquisites for the remaining term of this Agreement.
As consideration for the continuation of the above-stated benefits,
Executive agrees to make himself available during the remaining term of the
Agreement, at reasonable times and location, to the Company and/or to the
successor to his position at the Company, to provide consulting advice (as
requested).
Section 9. Offset for Compensation Earned Subsequent to Termination
In the event this Agreement is terminated for good reason (as
provided in Section 7.1 herein) or by notice by the Company as provided in
Section 7.2 herein, the continuation of the Executive's Base Salary (as provided
in Section 8(a) herein), any annual incentive award, if applicable (as provided
in Section 8(b) herein), long-term incentive plan(s) awards, if any (as provided
in Section 8(c) herein), the SERP Plan and supplemental retirement benefit, if
any (as provided in Section 8(d) herein), and
<PAGE>
the Supplemental Savings Plan, if any (as provided in Section 8(e) herein),
shall not be offset by compensation earned from a subsequent employer during the
remaining term of employment under this Agreement.
Section 10. Covenants
10.1 Non-competition. Without the prior written consent of the Company,
for the greater of twenty-four (24) months following the termination of
Executive's employment under Section 7 of this Agreement, or the remaining term
of employment under this Agreement, the Executive shall not, as a shareholder,
employee, officer, director, partner, consultant, or otherwise, engage directly
or indirectly in any business or enterprise which is "in competition" with the
Company or its successors or assigns.
A business or enterprise is deemed to be "in competition" if
it is engaged in the business of generation, purchase, transmission,
distribution, or sale of electricity, or in the purchase, transmission,
distribution, sale or transportation of natural gas, within the states of
Colorado, Wyoming or Texas.
10.2 Disclosure of Information. Executive recognizes that he will have
access to and knowledge of certain confidential and proprietary information of
the Company and its subsidiaries which is essential to the performance of his
duties under this Agreement. Executive will not, during or after the term of his
employment by the Company, in whole or in part, disclose such information to any
person, firm, corporation, association, or other entity for any reason or
purpose whatsoever, nor shall he make any use of any such information for his
own purposes.
10.3 Covenants Regarding Other Employees. For the greater of
twenty-four (24) months following a termination under Section 7 of this
Agreement, or the remaining term of employment under this Agreement, the
Executive agrees not to induce any employees of the Company to terminate their
employment, accept employment with anyone else, or to interfere in a similar
manner with the business of the Company.
Section 11. Indemnification
The Company hereby covenants and agrees to indemnify and hold harmless
Executive fully, completely, and absolutely against, and in respect to any and
all actions, suits, proceedings, claims, demands, judgments, costs, expenses
(including attorneys' fees), losses, and damages resulting from Executive's good
faith performance of his duties and obligations under the terms of this
Agreement.
Section 12. Assignment and Successors
This Agreement shall be binding upon and shall inure to the benefit of
any successor to or assign of NCE. The term "Company" as used in this Agreement
is defined as NCE and any successor or assign. The term "successor" is defined
to include any person, firm, corporation or entity which at any time and by any
means,
<PAGE>
directly or indirectly (a) merges or consolidates with NCE; (b) acquires all or
the majority of NCE's voting shares or assets; or (c) obtains control of NCE,
its voting shares, assets or business activities. NCE (if it should continue to
exist following the occurrence of any such event) shall remain jointly and
severally liable for all of its obligations hereunder.
Except as herein provided, this Agreement may not be assigned by the
Company without the written consent of the Executive
This Agreement shall inure to the benefit of, and be enforceable by,
Executive's personal or legal representatives, executors, and administrators,
successors, heirs, distributees, devisees, and legatees. If Executive should die
while any amounts payable to Executive hereunder remain outstanding, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to Executive's devisee, legatee, or other designee or,
in the absence of such designee, the Executive's estate.
Other than a transfer by reason of death, the rights and
duties of Executive hereunder are personal and may not be assigned or
transferred.
Section 13. Income Tax
The Company may withhold, from any benefits payable under this
Agreement, all federal, state, city, or other taxes as may be required pursuant
to any law or governmental regulation or ruling.
Section 14. Dispute Resolution and Notice
14.1 Dispute Resolution. The parties agree that any dispute or
controversy arising under or in connection with this Agreement shall be
submitted to arbitration as the exclusive forum; provided that if a party gives
notice to the other party of his or its desire that the arbitration hearing be
held forthwith and a hearing is not conducted within ninety (90) days following
said notice, the party having given such notice may initiate litigation, in
which case the Court's jurisdiction shall supersede and replace that of the
arbitrators. The arbitrators shall have all powers of a court to grant legal or
equitable relief to remedy any breach of this Agreement.
Arbitration proceedings shall be conducted before a panel of
three (3) arbitrators sitting in a location selected by the Executive within
fifty (50) miles from the location of his principal place of employment, in
accordance with the rules of the American Arbitration Association then in
effect. Judgment may be entered on the award of the arbitrators in any court
having competent jurisdiction.
The arbitrators' fees shall be divided and paid equally by
Executive and the Company. Executive and the Company shall pay his/its own costs
and attorneys' fees, if any, in the arbitration proceedings, preliminary and
ancillary proceedings, and any court proceedings to enforce or vacate an
arbitration award, provided that if
<PAGE>
Executive recovers through such action some amount or benefit (regardless of
size or value) in excess of what NCE had offered prior to commencement of the
proceeding, NCE will pay or reimburse Executive for all arbitration expenses,
costs and attorney's fees.
14.2 Notice. Any notices, requests, demands, and other communications
provided for by this Agreement he be sufficient if in writing and if sent by
registered or certified mail to Executive at the last address he has filed in
writing with the Company or, in the case of the Company, at its principal
executive offices.
Section 15. Miscellaneous
15.1 Waiver. A waiver of any breach of this Agreement, or a failure to
enforce any provision hereof, shall not be a waiver of any subsequent breach of
the Agreement.
15.2 Modification. This Agreement shall not be varied, altered,
modified, canceled, changed, or in any way amended except by mutual agreement of
the parties in a written instrument executed by the parties hereto or their
legal representatives.
15.3 Severability. In the event that any provision or portion of this
Agreement shall be determined to be invalid or unenforceable for any reason, the
remaining provisions of this Agreement shall be unaffected thereby and shall
remain in full force and effect.
15.4 Integration Clause. This Agreement and the Change in Control
Agreement set forth the complete agreement between the parties, and supersede
all prior statements, stipulations, representations, promises, or agreements, if
any, between the parties. No other consideration, other than that set forth in
this Agreement and the Change in Control Agreement, is due between the parties.
15.5 Counterparts. This Agreement may be executed in one (1) or more
counterparts, each of which shall be deemed to be an original, but all of which
together will constitute one (1) and the same Agreement.
15.6 Survival of Obligations According to Their Terms. The provisions
of Sections 4.4, 4.9, 8, 9, 10, 11, 12, 13 and 14 shall survive the termination
of this Agreement for any reason, whether such termination is by NCE, by
Executive, or otherwise, and shall survive the expiration of Executive's term of
employment. Such obligations shall continue thereafter in full force and effect.
15.7 No Attachment. Except as required by law, no right to receive
payments under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge or hypothecation or to
execution, attachment, levy or similar process or assignment by operation of
law,
<PAGE>
and any attempt, voluntary or involuntary, to effect such action shall be
null, void and of no effect.
Section 16. Governing Law
This Agreement shall be construed and enforced in accordance with the laws of
the State of Colorado. The parties understand and intend that this Agreement is
a fully enforceable contract and not a benefit plan within the meaning of ERISA.
IN WITNESS WHEREOF, Executive has executed, and the Company (pursuant
to a resolution adopted at a duly constituted meeting of its Board of Directors)
has executed this Agreement, effective as December 15, 1997.
ATTEST: NEW CENTURY ENERGIES, INC.
/s/Cathy Hart /s/ Wayne Brunetti
- --------------------------- ----------------------------
By: Cathy Hart By: __________________________
Its: Corporate Secretary Its: __________________________
EXECUTIVE
/s/ Paul Bonavia
----------------------------
Paul J. Bonavia
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<CAPITAL-LEASE-OBLIGATIONS> 35,902
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