NEW CENTURY ENERGIES INC, 8-K, 1999-02-23

NEW CENTURY ENERGIES INC
8-K, 1999-02-23
ELECTRIC & OTHER SERVICES COMBINED

Previous: HARRIS INSIGHT FUNDS TRUST, 497, 1999-02-23

Next: VANSTAR CORP, 15-15D, 1999-02-23

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 8-K

CURRENT REPORT
PURSUANT TO SECTION 13 or 15(d) of the
SECURITIES EXCHANGE ACT OF 1934

Date of report (Date of earliest event reported) February 23, 1999

Exact name of registrant as specified in its charter,
State or other jurisdiction of incorporation or
organization, Address of principal executive offices and
Commission Registrant's Telephone Number, IRS Employer
File Number including 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

<PAGE>

This combined Form 8-K 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.

Item 5. OTHER EVENTS

Reference is made to the exhibits filed in Item 7. FINANCIAL STATEMENTS AND
EXHIBITS.

Item 7. FINANCIAL STATEMENTS AND EXHIBITS

Exhibit A. Audited financial statements of New Century Energies, Inc. and
subsidiaries, Public Service Company of Colorado and
subsidiaries and Southwestern Public Service Company for the
year ended December 31, 1998.

Exhibit B. Consent of Arthur Andersen LLP

Exhibit C. Consent of Deloitte & Touche LLP

Exhibit D. Securities and Exchange Commission Form T-1 with The Chase
Manhattan Bank as trustee for Southwestern Public Service
Company

Exhibit E. Consent of LeBoeuf, Lamb, Greene and MacRae, LLP

Exhibit 27.1 NCE Financial Data Schedule

Exhibit 27.2 PSCo Financial Data Schedule

Exhibit 27.3 SPS Financial Data Schedule

1
<PAGE>

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

NEW CENTURY ENERGIES, INC.

/s/Richard C. Kelly
-----------------------------
Richard C. Kelly
Executive Vice President and
Chief Financial Officer

PUBLIC SERVICE COMPANY OF COLORADO

/s/Brian P. Jackson
-----------------------------
Brian P. Jackson
Senior Vice President, Finance and
Administrative Services,
Chief Financial Officer and Treasurer

SOUTHWESTERN PUBLIC SERVICE COMPANY

/s/Brian P. Jackson
-----------------------------
Brian P. Jackson
Senior Vice President, Finance and
Administrative Services,
Chief Financial Officer and Treasurer

Dated: February 23, 1999

2
<PAGE>

Exhibit A

Audited Financial Statements of
New Century Energies, Inc. and Subsidiaries,
Public Service Company of Colorado and Subsidiaries and
Southwestern Public Service Company

Table of Contents

Page
Number

Report of Independent Public Accountants - New Century Energies, Inc. 1

New Century Energies, Inc and Subsidiaries
Consolidated Balance Sheets for the years ended
December 31, 1998 and 1997, Consolidated Statements of Income,
Consolidated Statements of Shareholders' Equity and
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996................................ 2

Report of Independent Public Accountants -
Public Service Company of Colorado ............................. 7

Public Service Company of Colorado and Subsidiaries
Consolidated Balance Sheets and Consolidated Statements of
Capitalization for the years ended December 31, 1998 and 1997,
Consolidated Statements of Income, Consolidated Statements of
Shareholder's Equity and Consolidated Statements of Cash Flows
for the years ended December 31, 1998, 1997 and 1996 ............ 8

Reports of Independent Public Accountants - Southwestern Public
Service Company ..................................................... 15

Southwestern Public Service Company
Balance Sheets and Statements of Capitalization for the years ended
December 31, 1998 and 1997, Statements of Income, Statements of
Shareholder's Equity and Statements of Cash Flows for the years
ended December 31, 1998 and 1997 and August 31, 1996 and for the
four months ended December 31, 1996 and 1995....................... 17

Notes to Consolidated Financial Statements of New Century Energies, Inc.,
and subsidiaries, Public Service Company of Colorado and subsidiaries
and Southwestern Public Service Company as of December 31, 1998...... 25

Definitions........................................................... 69

<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO NEW CENTURY ENERGIES, INC.:

We have audited the consolidated balance sheets of New Century Energies, Inc. (a
Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the consolidated financial statements of
Southwestern Public Service Company for the year ended December 31, 1996,
included in the consolidated financial statements of New Century Energies, Inc.,
which statements reflect total revenues constituting 31% in 1996, of the related
consolidated totals. Those statements were audited by other auditors whose
report thereon has been furnished to us, and our opinion expressed herein,
insofar as it relates to the amounts included for Southwestern Public Service
Company, is based solely upon the report of the other auditors.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of other auditors provide a reasonable
basis for our opinion.

In our opinion, based upon our audits and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of New Century Energies, Inc. and its
subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP
Denver, Colorado
February 23, 1999

1
<PAGE>

NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
December 31, 1998 and 1997

ASSETS

1998 1997
---- ----

Property, plant and equipment, at cost:
Electric .......................................... $7,097,070 $6,703,863
Gas................................................ 1,210,605 1,136,231
Steam and other.................................... 111,620 120,322
Common to all departments.......................... 423,287 437,636
Construction in progress........................... 391,100 318,124
------- -------
9,233,682 8,716,176
Less: accumulated depreciation .................... 3,351,659 3,182,800
--------- ---------
Total property, plant and equipment.............. 5,882,023 5,533,376
--------- ---------

Investments, at cost:
Investment in Yorkshire Power and other
unconsolidated subsidiaries (Note 2)............. 340,874 299,458
Other.............................................. 64,562 71,411
------- ------
Total investments................................. 405,436 370,869
------- -------

Current assets:
Cash and temporary cash investments................ 56,667 72,623
Accounts receivable, less reserve for uncollectible
accounts ($4,842 at December 31, 1998; $5,355
at December 31, 1997)............................ 319,145 315,539
Accrued unbilled revenues.......................... 130,455 110,877
Recoverable purchased gas and electric energy
costs - net ..................................... 66,154 129,292
Materials and supplies, at average cost............ 69,298 68,411
Fuel inventory, at average cost.................... 24,653 23,162
Gas in underground storage, at cost (LIFO)......... 52,624 47,394
Prepaid expenses and other......................... 83,561 56,868
------- ------
Total current assets.............................. 802,557 824,166
------- -------

Deferred charges:
Regulatory assets (Note 1)......................... 381,632 430,475
Unamortized debt expense .......................... 27,408 20,833
Other.............................................. 172,908 141,947
------- -------
Total deferred charges............................ 581,948 593,255
------- -------
$7,671,964 $7,321,666
========== ==========

The accompanying notes to consolidated financial statements are an
integral part of these financial statements.

2
<PAGE>

NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
December 31, 1998 and 1997

CAPITAL AND LIABILITIES

1998 1997
---- ----

Common stock (Note 4)................................ $1,866,386 $1,694,195
Retained earnings.................................... 740,677 659,050
Accumulated comprehensive income..................... 7,764 4,142
------- ------
Total common equity.............................. 2,614,827 2,357,387

Preferred stock of subsidiaries (Note 4):
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 SPS and PSCo
(Note 5).......................................... 294,000 100,000
Long-term debt of subsidiaries (Note 6).............. 2,205,545 1,987,955
--------- ---------
5,114,372 4,624,597

Noncurrent liabilities:
Employees' postretirement benefits other than
pensions (Note 12) ................................ 61,732 62,716
Employees' postemployment benefits (Note 12)....... 31,326 27,953
------- ------
Total noncurrent liabilities...................... 93,058 90,669
------- ------

Current liabilities:
Notes payable and commercial paper (Note 7)........ 524,394 588,343
Long-term debt due within one year................. 138,165 257,469
Preferred stock subject to mandatory redemption
within one year ................................. - 2,576
Accounts payable................................... 285,080 298,469
Dividends payable.................................. 69,271 68,296
Recovered electric energy costs - net.............. 18,760 -
Customers' deposits................................ 30,793 27,993
Accrued taxes...................................... 85,384 66,587
Accrued interest................................... 50,229 52,615
Current portion of accumulated deferred income
taxes (Note 13) ................................. 2,031 27,391
Other.............................................. 120,716 94,623
------- ------
Total current liabilities......................... 1,324,823 1,484,362
--------- ---------

Deferred credits:
Customers' advances for construction............... 55,400 53,041
Unamortized investment tax credits ................ 100,925 106,147
Accumulated deferred income taxes (Note 13)........ 947,247 922,341
Other.............................................. 36,139 40,509
------- ------
Total deferred credits............................ 1,139,711 1,122,038
--------- ---------

Commitments and contingencies (Notes 9 and 10)........
$7,671,964 $7,321,666
========== ==========

The accompanying notes to consolidated financial statements are an
integral part of these financial statements.

3
<PAGE>

NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars, Except per Share Data)
Years ended December 31, 1998, 1997 and 1996

1998 1997 1996
---- ---- ----

Operating revenues:
Electric................................ $2,697,486 $2,473,359 $2,416,539
Gas..................................... 841,276 816,596 640,497
Other................................... 72,143 52,570 39,998
------- ------- ------
3,610,905 3,342,525 3,097,034

Operating expenses:
Fuel used in generation................... 644,311 671,805 635,280
Purchased power........................... 712,887 531,487 510,582
Cost of gas sold.......................... 562,583 543,291 393,163
Other operating and maintenance expenses.. 637,743 594,359 568,581
Depreciation and amortization............. 268,743 243,078 224,865
Taxes (other than income taxes) .......... 134,137 129,280 128,980
------- ------- -------
2,960,404 2,713,300 2,461,451
--------- --------- ---------
Operating income............................ 650,501 629,225 635,583

Other income and deductions:
Merger expenses........................... (790) (34,088) (21,107)
Write-off of investments in cogeneration
projects (Note 3) ...................... - (16,052) (15,546)
Equity in earnings of Yorkshire Power and
other unconsolidated subsidiaries (Note 2) 36,101 34,166 389
Miscellaneous income and deductions - net.. (3,460) (11,215) 1,771
------ ------- ------
31,851 (27,189) (34,493)

Interest charges and preferred dividends
of subsidiaries:
Interest on long-term debt................. 168,184 165,560 144,067
Other interest............................. 31,069 32,389 23,479
Allowance for borrowed funds used during
construction ............................ (17,347) (10,921) (5,945)
Dividends on PSCo and SPS obligated
mandatorily redeemable preferred
securities of subsidiary trusts holding
solely subordinated debentures of PSCo
and SPS ................................. 17,561 7,850 1,526
Dividend requirements and redemption premium
on preferred stock of subsidiaries ...... 5,332 11,752 11,969
----- ------ ------
204,799 206,630 175,096
------- ------- -------
Income before income taxes and
extraordinary item ......................... 477,553 395,406 425,994

Income taxes (Note 13)........................ 135,596 133,919 153,653
------- ------- -------

Income before extraordinary item.............. 341,957 261,487 272,341
Extraordinary item - U.K. windfall tax (Note 2). - (110,565) -
------- -------- ------
Net income.................................... $341,957 $150,922 $272,341
======== ======== ========

Weighted average common shares outstanding:
Basic...................................... 111,859 104,805 103,059
Diluted.................................... 112,008 104,872 103,102

Earnings per share of common stock outstanding
- Basic:
Income before extraordinary item........... $3.06 $2.50 $2.64
Extraordinary item......................... - (1.06) -
---- ----- -----
Net income................................. $3.06 $1.44 $2.64
===== ===== =====
Earnings per share of common stock outstanding
- Diluted:
Income before extraordinary item........... $3.05 $2.50 $2.64
Extraordinary item......................... - (1.06) -
----- ----- -----
Net income................................. $3.05 $1.44 $2.64
===== ===== =====

The accompanying notes to consolidated financial statements are
an integral part of these financial statements.

4
<PAGE>

NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Thousands of Dollars, Except Share Information)
Years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
Accumulated
Other
Common Stock, $1 par value Paid Retained Comprehensive
Shares Amount in Capital Earnings Income Total
------ ------ ---------- -------- ------ -----

<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996.. 102,230,141 $ 102,230 $1,243,278 $ 726,065 $ - $2,071,573
Net income/Comprehensive
income ................... - - - 272,341 - 272,341
Dividends declared on common
stock .................... - - - (225,130) - (225,130)
Issuance of common stock:
Employees' Savings Plan .. 274,934 275 9,519 - - 9,794
Dividend Reinvestment Plan 809,603 810 27,818 - - 28,628
Incentive Compensation Plans 58,346 58 1,661 - - 1,719
Acquisitions (Note 3) .... 317,748 318 10,882 - - 11,200
Other....................... - - - (85) - (85)
------- ------ ------- ------- ------- -------

Balance at December 31, 1996 103,690,772 103,691 1,293,158 773,191 - 2,170,040
Comprehensive income:
Net income................ - - - 150,922 - 150,922
Foreign currency translation
adjustment ............. - - - - 4,142 4,142
-----
Comprehensive income
(Note 1) ............ 155,064
Dividends declared on common
stock ................... - - - (264,957) - (264,957)
Issuance of common stock:
Employees' Savings Plan .. 250,058 250 9,518 - - 9,768
Dividend Reinvestment Plan 818,783 819 32,512 - - 33,331
Incentive Compensation Plans 89,688 89 2,765 - - 2,854
Stock offering proceeds, net
(Note 4) .................. 5,900,000 5,900 245,493 - - 251,393
Other......................... - - - (106) - (106)
------- ------ ------- ------- ------- -------

Balance at December 31, 1997 110,749,301 110,749 1,583,446 659,050 4,142 2,357,387
Comprehensive income:
Net income.......... - - - 341,957 - 341,957
Foreign currency translation
adjustment - - - - 3,622 3,622
-----
Comprehensive income (Note 1) 345,579
Dividends declared on common stock - - - (260,330) - (260,330)
Issuance of common stock:
Employees' Savings Plan 222,387 222 10,146 - - 10,368
Dividend Reinvestment Plan 825,005 825 37,198 - - 38,023
Incentive Compensation Plans 194,079 195 6,605 - - 6,800
Stock offering proceeds, net
(Note 4) 2,500,000 2,500 114,500 - - 117,000
--------- ----- ------- ----- ----- -------
Balance at December 31, 1998 114,490,772 $ 114,491 $1,751,895 $ 740,677 $7,764 $2,614,827
=========== ========== ========== ========= ====== ==========

</TABLE>

Authorized shares of common stock were 260 million at December 31, 1998, 1997
and 1996.

The accompanying notes to consolidated financial statements are
an integral part of these financial statements.

5
<PAGE>

NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Years ended December 31, 1998, 1997 and 1996

1998 1997 1996
---- ---- -----

Operating activities:
Net income................................... $341,957 $150,922 $272,341
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.............. 279,829 253,263 225,264
Amortization of investment tax credits..... (5,222) (5,501) (7,506)
Deferred income taxes...................... 6,248 52,211 78,962
Write-off of investments in cogeneration
projects (Note 3) ....................... - 16,052 15,546
Equity in earnings of Yorkshire Power and
other unconsolidated subsidiaries, net (34,199) (31,168) (389)
Allowance for equity funds used during
construction ............................. - 1 (936)
Change in accounts receivable.............. 2,026 (29,627) (92,600)
Change in inventories...................... (7,485) (2,334) 23,479
Change in other current assets............. 16,965 (97,063) (47,226)
Change in accounts payable................. (13,704) (18,791) 141,771
Change in other current liabilities........ 69,908 (15,356) (85,321)
Change in deferred amounts................. 740 (46,134) (34,617)
Change in noncurrent liabilities........... 2,389 4,567 (9,725)
Other...................................... 87 2,832 2,139
------- ------- -------
Net cash provided by operating activities 659,539 344,439 481,182

Investing activities:
Construction expenditures.................... (608,972) (475,497)(454,968)
Allowance for equity funds used during
construction .............................. - (1) 936
Proceeds from disposition of property, plant
and equipment ............................. 9,369 2,117 24,292
Payment for purchase of companies, net of
cash acquired (Note 3) .................... (13,725) - 3,649
Investment in Yorkshire Power (Note 2)....... - (362,342) -
Purchase of other investments................ (6,131) (32,560) (17,790)
Sale of other investments.................... 5,466 11,844 664
------- ------- -------
Net cash used in investing activities.... (613,993) (856,439)(443,217)

Financing activities:
Proceeds from sale of common stock (Note 4).. 161,823 286,869 30,115
Proceeds from sale of long-term debt (Note 6) 250,497 419,819 359,715
Proceeds from sale of PSCo and SPS obligated
mandatorily redeemable preferred securities
of subsidiary trusts holding solely
subordinated debentures of PSCo
and SPS (Note 6)............................ 187,700 - 100,000
Redemption of long-term debt................. (159,323) (227,577)(175,298)
Short-term borrowings - net.................. (63,949) 289,782 (105,739)
Redemption of preferred stock of subsidiaries (181,824) (665) (1,636)
Dividends on common stock.................... (256,426) (233,620)(223,413)
-------- -------- ------
Net cash (used in) provided by financing
activities ............................ (61,502) 534,608 (16,256)
------- ------- ------

Net (decrease) increase in cash and
temporary cash investments ........... (15,956) 22,608 21,709
Cash and temporary cash investments at
beginning of year 72,623 50,015 51,553
Net decrease in cash and temporary cash
investments for SPS for the
transition period (Note 1)........... - - (23,247)
----- ----- -------
Cash and temporary cash investments at
end of year ......................... $ 56,667 $ 72,623 $50,015
======== ======== =======

The accompanying notes to consolidated financial statements are an
integral part of these financial statements.

6
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO PUBLIC SERVICE COMPANY OF COLORADO:

We have audited the accompanying consolidated balance sheets and statements of
capitalization of Public Service Company of Colorado (a Colorado corporation)
and subsidiaries as of December 31, 1998 and 1997, and the related consolidated
statements of income, shareholder's equity and cash flows for each of the three
years in the period ended December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Public Service Company of
Colorado and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP
Denver, Colorado
February 23, 1999

7
<PAGE>

PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
December 31, 1998 and 1997

ASSETS

1998 1997
---- ----

Property, plant and equipment, at cost:
Electric .......................................... $4,369,134 $4,088,447
Gas................................................ 1,171,198 1,100,003
Steam and other.................................... 71,986 78,740
Common to all departments.......................... 418,484 432,840
Construction in progress........................... 264,752 170,503
------- -------
6,295,554 5,870,533
Less: accumulated depreciation .................... 2,241,165 2,145,673
--------- ---------
Total property, plant and equipment.............. 4,054,389 3,724,860
--------- ---------

Investments, at cost:
Investment in Yorkshire Power (Note 2)............. - 290,845
Note receivable from affiliate (Note 2)............ 192,620 -
Other.............................................. 22,664 43,311
------- ------
Total investments................................. 215,284 334,156
------- -------

Current assets:
Cash and temporary cash investments................ 19,926 18,909
Accounts receivable, less reserve for uncollectible
accounts ($2,254 at December 31, 1998;
$2,272 at December 31, 1997) ................... 172,587 183,063
Accrued unbilled revenues ......................... 119,856 94,284
Recoverable purchased gas and electric energy costs
- net ............................................ 62,761 103,197
Materials and supplies, at average cost............ 47,881 48,030
Fuel inventory, at average cost.................... 22,361 20,862
Gas in underground storage, at cost (LIFO)......... 51,779 46,576
Prepaid expenses and other......................... 46,523 47,686
------- ------
Total current assets.............................. 543,674 562,607
------- -------

Deferred charges:
Regulatory assets (Note 1)......................... 269,112 310,658
Unamortized debt expense .......................... 17,874 10,800
Other.............................................. 77,303 55,794
------- ------
Total deferred charges............................ 364,289 377,252
------- -------
$5,177,636 $4,998,875
========== ==========

The accompanying notes to consolidated financial statements are
an integral part of these financial statements.

8
<PAGE>

PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Thousands of Dollars)
December 31, 1998 and 1997

CAPITAL AND LIABILITIES

1998 1997
---- ----

Common stock...................................... $1,302,119 $1,302,119
Retained earnings................................. 325,213 319,280
Accumulated comprehensive income.................. - 4,142
------- -------
Total common equity........................... 1,627,332 1,625,541

Preferred stock (Note 4):
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 5) ....... 194,000 -
Long-term debt (Note 6)........................... 1,643,130 1,338,138
--------- ---------
3,464,462 3,142,934
--------- ---------
Noncurrent liabilities:
Employees' postretirement benefits other than
pensions (Note 12) ........................... 55,537 58,695
Employees' postemployment benefits (Note 12)... 27,195 25,031
------- -------
Total noncurrent liabilities.................. 82,732 83,726
------- -------

Current liabilities:
Notes payable and commercial paper (Note 7)..... 402,795 348,555
Long-term debt due within one year.............. 44,481 257,160
Preferred stock subject to mandatory redemption
within one year .............................. - 2,576
Accounts payable................................ 226,712 189,998
Dividends payable............................... 46,461 40,975
Customers' deposits............................. 23,902 21,888
Accrued taxes................................... 57,848 42,549
Accrued interest................................ 36,729 39,177
Current portion of accumulated deferred income
taxes (Note 13) ............................. 8,142 19,872
Other........................................... 68,729 88,655
------- -------
Total current liabilities...................... 915,799 1,051,405
------- ---------

Deferred credits:
Customers' advances for construction............ 54,260 51,830
Unamortized investment tax credits ............. 94,459 99,355
Accumulated deferred income taxes (Note 13)..... 538,581 534,246
Other........................................... 27,343 35,379
------- -------
Total deferred credits......................... 714,643 720,810
------- -------

Commitments and contingencies (Notes 9 and 10)..... ---------- ----------
$5,177,636 $4,998,875
========== ==========

The accompanying notes to consolidated financial statements are
an integral part of these financial statements.

9
<PAGE>

PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPTALIZATION
(Thousands of Dollars, Except Share Information)
December 31, 1998 and 1997

1998 1997
---- ----
Common shareholder's equity:
Common stock, $0.01 par value, authorized and
outstanding 100 shares in 1998 and 1997 $ - $ -
Paid in capital................................... 1,302,119 1,302,119
Retained earnings................................. 325,213 319,280
Accumulated comprehensive income.................. - 4,142
------- -------
Total common shareholder's equity................ 1,627,332 1,625,541
--------- ---------

Preferred stock (Note 4):
Shares Issued and Outstanding
-----------------------------
1998 1997
---- ----
$100 Par Value,
Authorized 3,000,000 Shares
Not subject to mandatory
redemption
4.20% series - 100,000 - 10,000
4.25% series (includes
$7,500 premium) - 174,997 - 17,507
4.50% series - 65,000 - 6,500
4.64% series - 159,950 - 15,995
4.90% series - 150,000 - 15,000
4.90% 2nd series - 150,000 - 15,000
7.15% series - 250,000 - 25,000
------ ------- ------- ------
- 1,049,947 - 105,002
------ --------- ------- -------
Subject to mandatory
redemption
7.50% series - 216,000 - 21,600
8.40% series - 202,294 - 20,229
------ ------- ------ ------
- 418,294 - 41,829
Less: Preferred stock
subject to mandatory
redemption within
one year - (25,760) - (2,576)
------ ------- ------ ------
- 392,534 - 39,253
------ ------- ------ ------
$25 Par Value, Authorized
4,000,000 Shares
Not subject to mandatory
redemption
8.40% series - 1,400,000 - 35,000
------ --------- ------- ------

$0.01 Par Value, Authorized
10,000,000 Shares - - - -
------ ------ ------- ------
Total preferred stock - 2,842,481 - 179,255
------ --------- ------- -------

PSCo obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures of PSCo (Note 5) ........... 194,000 -

Long-term debt (Note 6):
Public Service Company of Colorado:
First Mortgage Bonds
6-3/4% retired July 1, 1998...................... - 25,000
6% due January 1, 2001........................... 102,667 102,667
6% due April 15, 2003............................ 250,000 -
8-1/8% due March 1, 2004......................... 100,000 100,000
Pollution Control Series A and B, 5-7/8% due
March 1, 2004 ................................. 21,500 22,000
6-3/8% due November 1, 2005...................... 134,500 134,500
7-1/8% due June 1, 2006.......................... 125,000 125,000
Pollution Control Series G, 5-5/8%
due April 1, 2008 ............................. 18,000 18,000
Pollution Control Series F, 7-3/8%
due November 1, 2009 .......................... 27,250 27,250
Pollution Control Series G, 5-1/2%
due June 1, 2012. ............................. 50,000 50,000
Pollution Control Series G, 5-7/8%
due April 1, 2014 ............................. 61,500 61,500
9-7/8% due July 1, 2020.......................... 75,000 75,000
8-3/4% due March 1, 2022......................... 150,000 150,000
7-1/4% due January 1, 2024....................... 110,000 110,000
Secured Medium-Term Notes, Series A and B,
6.02% - 9.25%, due March 4, 1998 - March 5, 2007 296,500 423,500
Unamortized premium............................... - 4
Unamortized discount.............................. (4,616) (4,670)
Capital lease obligations, 6.68% -11.21% due in
installments through May 31, 2025 .............. 39,555 44,392
------ ------
$1,556,856 $1,464,143
---------- ----------
The accompanying notes to consolidated financial statements are
an integral part of these financial statements.

10
<PAGE>

PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CAPTALIZATION (continued)
(Thousands of Dollars, Except Share Information)
December 31, 1998 and 1997

1998 1997
---- ----
Long-term debt (continued)

PS Colorado Credit Corporation, Inc.:
Unsecured Medium-Term Notes, Series A,
5.86% - 6.14%, due October 13, 1998 - May 30, 2000 $100,000 $100,000

1480 Welton, Inc.:
13.25% secured promissory note, due in installments
through October 1, 2016 ........................... 30,755 31,155
------ ------
1,687,611 1,595,298
Less: maturities due within one year................. 44,481 257,160
------ -------
Total long-term debt.............................. 1,643,130 1,338,138
--------- ---------

Total capitalization.................................. $3,464,462 $3,142,934
========== ==========

The accompanying notes to consolidated financial statements are
an integral part of these financial statements.

11
<PAGE>

PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Thousands of Dollars)
Years ended December 31, 1998, 1997 and 1996

1998 1997 1996
---- ---- ----

Operating revenues:
Electric................................. $1,635,573 $1,485,196 $1,488,990
Gas...................................... 640,064 733,091 640,497
Other.................................... 8,449 11,356 7,951
------- ------ -----
2,284,086 2,229,643 2,137,438

Operating expenses:
Fuel used in generation.................. 212,184 198,706 195,442
Purchased power.......................... 589,637 493,902 490,428
Gas purchased for resale................. 380,554 467,745 393,163
Other operating and maintenance expenses. 403,292 391,177 400,008
Depreciation and amortization............ 180,913 168,451 154,631
Taxes (other than income taxes) ......... 83,994 81,496 82,899
Income taxes (Note 13) .................. 101,494 90,813 96,331
------- ------- -------
1,952,068 1,892,290 1,812,902
--------- --------- ---------
Operating income............................ 332,018 337,353 324,536

Other income and deductions:
Merger expenses.......................... 418 (18,661) (11,210)
Equity in earnings of Yorkshire
Power (Note 2) ........................ 3,446 34,926 -
Miscellaneous income and deductions -
net (Note 15) ........................ 2,535 (13,374) (13,260)
----- ------- -------
6,399 2,891 (24,470)

Interest charges:
Interest on long-term debt............... 120,082 118,438 95,826
Other interest........................... 20,849 24,117 17,238
Allowance for borrowed funds used during
construction .......................... (12,328) (6,353) (3,344)
Dividends on PSCo obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely
subordinated debentures of PSCo (Note 5) 9,711 - -
----- ----- ----
138,314 136,202 109,720
------- ------- -------

Income before extraordinary item............ 200,103 204,042 190,346
Extraordinary item - U.K. windfall tax (Note 2) - (110,565) -
----- -------- -------
Net income................................... 200,103 93,477 190,346
Dividend requirements and redemption premium
on preferred stock ......................... 5,332 11,752 11,848
----- ------ ------
Earnings available for common stock......... $194,771 $81,725 $178,498
======== ======= ========

The accompanying notes to consolidated financial statements are an
integral part of these financial statements.

12
<PAGE>

PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY
(Thousands of Dollars, Except Share Information)
Years ended December 31, 1998, 1997 and 1996

<TABLE>
<CAPTION>
Accumulated
Other
Common Stock, $1 par value Paid Retained Comprehensive
Shares Amount in Capital Earnings Income Total
------ ------ ---------- -------- ------ -----

Balance at January 1, 1996 63,358,128 $316,791 $680,315 $346,539 $ - $ 1,343,645
Net income/Comprehensive income - - - 190,346 - 190,346
Dividends declared:
Common stock........ - - - (135,111) - (135,111)
Preferred stock, $100 par value - - - (8,889) - (8,889)
Preferred stock $25 par value - - - (2,940) - (2,940)
Issuance of common stock:
Employees' Savings Plan 274,934 1,374 8,420 - - 9,794
Dividend Reinvestment Plan 809,603 4,048 24,580 - - 28,628
Management Incentive Plan 58,346 292 1,427 - - 1,719
Acquisitions (Note 4) 317,748 1,589 9,611 - - 11,200
Other................. - - - (104) - (104)
------- ------ ----- ------ ------- ------

Balance at December 31, 1996 64,818,759 324,094 724,353 389,841 - 1,438,288
Comprehensive income:
Net income.......... - - - 93,477 - 93,477
Foreign currency translation
adjustment - - - - 4,142 4,142
-----
Comprehensive income (Note 1) 97,619
Dividends declared:
Common stock, prior to
August 1, 1997 Merger - - - (76,202) - (76,202)
Common stock, to NCE - - - (76,093) - (76,093)
Preferred stock, $100 par value - - - (8,803) (8,803)
Preferred stock, $25 par value - - - (2,940) (2,940)
Issuance of common stock:
Employees' Savings Plan 250,058 1,250 8,518 - - 9,768
Dividend Reinvestment Plan 488,224 2,441 16,899 - - 19,340
Management Incentive Plan 40,404 202 993 - - 1,195
Merger with SPS:
Exchange of common stock for
NCE stock......... (65,597,345) (327,987) 327,987 - - -
Dividend of subsidiaries'
stock to NCE............ - - (49,912) - - (49,912)
Contribution of capital by
NCE (Note 4) - - 273,300 - - 273,300
Other................. - - (19) - - (19)
------ ------ ---- ------- ------- ----

Balance at December 31, 1997 100 - 1,302,119 319,280 4,142 1,625,541
Comprehensive income:
Net income.......... - - - 200,103 - 200,103
Foreign currency translation
adjustment - - - - 5,260 5,260
Sale of NCI to NC Enterprises - (9,402) (9,402)
------
Comprehensive income (Note 1) 195,961
Dividends declared
Common stock, to NCE - - - (188,845) - (188,845)
Preferred stock, $100 par value - - - (4,166) - (4,166)
Preferred stock, $25 par value - - - (1,166) - (1,166)
Other............... - - - 7 - 7
------- ------ ------- ------ ------- -----

Balance at December 31, 1998 100 $ - $1,302,119 $ 325,213 $ - $1,627,332
=== ======= ========== ========= ======= ==========
</TABLE>

(1)Authorized shares of common stock were 100 at December 31, 1998 and 1997 and
160 million at December 31, 1996. Common stock, par value was $5 through
September 18, 1997. Effective September 19, 1997, common stock, par value was
changed to $0.01.
The accompanying notes to consolidated financial statements are
an integral part of these financial statements.

13
<PAGE>

PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Years ended December 31, 1998, 1997 and 1996

1998 1997 1996
----- ---- ----
Operating activities:
Net income................................... $200,103 $ 93,477 $190,346
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.............. 186,620 173,047 159,400
Amortization of investment tax credits..... (4,896) (5,219) (7,256)
Deferred income taxes...................... 7,092 37,390 60,899
Equity in earnings of Yorkshire Power...... (3,446) (34,926) -
Allowance for equity funds used during
construction ............................. - 6 (757)
Change in accounts receivable.............. 21,540 (15,378) (88,680)
Change in inventories...................... (6,553) (2,163) 20,542
Change in other current assets............. 7,937 (52,914) (31,169)
Change in accounts payable................. 9,148 (5,413) 88,473
Change in other current liabilities........ 22,957 (15,870) (36,615)
Change in deferred amounts................. (18,289) (21,913) (19,550)
Change in noncurrent liabilities........... (995) 3,367 (9,779)
Other...................................... - (144) 1,760
------- ------- -------
Net cash provided by operating activities 421,218 263,912 327,614

Investing activities:
Construction expenditures.................... (504,727) (352,273)(321,162)
Allowance for equity funds used during
construction .............................. - (6) 757
Proceeds from disposition of property, plant
and equipment ............................. 9,102 3,187 20,454
Investment in Yorkshire Power (Note 2)....... - (362,342) -
Payment received on note receivable from NC
Enterprises (Note 2) ...................... 100,000 - -
Payment for purchase of companies, net of
cash acquired (Note 3) .................... - - 3,649
Transfer of subsidiaries to NCE (Note 1)..... - (2,229) -
Purchase of other investments................ (1,345) (19,224) (11,485)
Sale of other investments.................... 4,101 11,162 664
------- ------- -------
Net cash used in investing activities.... (392,869) (721,725)(307,123)

Financing activities:
Proceeds from sale of common stock (Note 4).. - 20,517 30,115
Contribution of capital by NCE............... - 273,300 -
Proceeds from sale of PSCo obligated mandatorily
redeemable preferred securities (Note 5)..... 187,700 - -
Proceeds from sale of long-term debt (Note 6) 247,025 412,220 217,415
Redemption of long-term debt................. (157,737) (205,550) (83,356)
Short-term borrowings - net.................. 66,195 127,530 (43,325)
Redemption of preferred stock................ (181,824) (665) (1,376)
Dividends on common stock (Notes 4 and 15)... (180,430) (148,279)(133,394)
Dividends and redemption premium on preferred
stock ..................................... (8,261) (11,757) (11,857)
------ ------- -------

Net cash (used in) provided by financing
activities ............................. (27,332) 467,316 (25,778)
------- ------- -------

Net increase (decrease) in cash and
temporary cash investments ............ 1,017 9,503 (5,287)
Cash and temporary cash investments at
beginning of year ..................... 18,909 9,406 14,693
------ ----- ------
Cash and temporary cash investments at
end of year ......................... $19,926 $18,909 $ 9,406
======= ======= =======

The accompanying notes to consolidated financial statements are an
integral part of these financial statements.

14
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

TO SOUTHWESTERN PUBLIC SERVICE COMPANY:

We have audited the accompanying balance sheets and statements of capitalization
of Southwestern Public Service Company (a New Mexico corporation) as of December
31, 1998 and 1997, and the related statements of income, shareholder's equity
and cash flows for each of the two years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Southwestern Public Service
Company as of December 31, 1998 and 1997, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1998,
in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP
Denver, Colorado
February 23, 1999

15
<PAGE>

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Southwestern Public Service Company:

We have audited the consolidated statements of income, shareholder's equity and
cash flows for the four months ended December 31, 1996 and the year ended August
31, 1996 of Southwestern Public Service Company and subsidiaries. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the results of operations and cash flows of Southwestern
Public Service Company and subsidiaries for the above stated periods, in
conformity with generally accepted accounting principles.

DELOITTE & TOUCHE LLP
Dallas, Texas
February 28, 1997
(June 19, 1997, as to the Carolina
Energy Limited Partnership in Note 3)

16
<PAGE>

SOUTHWESTERN PUBLIC SERVICE COMPANY
BALANCE SHEETS
(Thousands of Dollars)
December 31, 1998 and 1997

ASSETS

1998 1997
---- ----

Property, plant and equipment, at cost:
Electric ....................................... $2,665,115 $2,557,579
Construction in progress........................ 121,407 144,452
------- -------
2,786,522 2,702,031
Less: accumulated depreciation ................. 1,057,183 987,487
--------- -------
Total property, plant and equipment............ 1,729,339 1,714,544
--------- ---------

Investments, at cost:
Notes receivable from affiliate (Note 4)........ 119,036 119,036
Other........................................... 5,591 5,832
----- -------
Total investments.............................. 124,627 124,868
------- -------

Current assets:
Cash and temporary cash investments............. 1,350 986
Accounts receivable, less reserve for
uncollectible accounts ($1,695 at
December 31, 1998; $2,442 at December 31, 1997) 76,190 96,548
Accrued unbilled revenues ...................... 9,373 15,468
Recoverable electric energy costs - net......... - 23,086
Materials and supplies, at average cost......... 16,970 16,337
Fuel inventory, at average cost................. 2,293 2,301
Current portion of accumulated deferred income
taxes (Note 13) ............................. 6,113 -
Prepaid expenses and other...................... 5,248 3,367
----- -------
Total current assets........................... 117,537 158,093
------- -------

Deferred charges:
Regulatory assets (Note 1)...................... 111,971 119,244
Unamortized debt expense ....................... 8,767 9,395
Other........................................... 37,623 62,592
------ -------
Total deferred charges......................... 158,361 191,231
------- -------
$2,129,864 $2,188,736
========== ==========

The accompanying notes to financial statements are an
integral part of these financial statements.

17
<PAGE>

SOUTHWESTERN PUBLIC SERVICE COMPANY
BALANCE SHEETS
(Thousands of Dollars)
December 31, 1998 and 1997

CAPITAL AND LIABILITIES

1998 1997
---- ----

Common stock....................................... $ 348,402 $ 348,402
Retained earnings.................................. 389,818 349,988
------- -------
Total common equity............................ 738,220 698,390

SPS obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures of SPS (Note 5) .......... 100,000 100,000
Long-term debt (Note 6)............................ 530,618 620,598
------- -------
1,368,838 1,418,988
--------- ---------

Noncurrent liabilities:
Employees' postretirement benefits other than
pensions (Note 12) ........................... 5,941 3,800
Employees' postemployment benefits (Note 12).... 3,571 2,446
----- -----
Total noncurrent liabilities................... 9,512 6,246
----- -----

Current liabilities:
Notes payable and commercial paper (Note 7)..... 85,162 154,244
Notes payable to affiliates (Note 7)............ 9,000 25,160
Long-term debt due within one year.............. 90,113 173
Accounts payable................................ 64,275 107,465
Dividends payable............................... 20,007 22,546
Recovered electric energy costs - net........... 18,760 -
Customers' deposits............................. 5,904 5,471
Accrued taxes................................... 37,646 28,051
Accrued interest................................ 12,273 12,715
Current portion of accumulated deferred income
taxes (Note 13) ............................. - 10,740
Other........................................... 18,011 14,658
------ -------
Total current liabilities...................... 361,151 381,223
------- -------

Deferred credits:
Unamortized investment tax credits ............. 5,219 5,469
Accumulated deferred income taxes (Note 13)..... 380,655 372,447
Other........................................... 4,489 4,363
----- -------
Total deferred credits......................... 390,363 382,279
------- -------

Commitments and contingencies (Notes 9 and 10)..... ---------- ----------
$2,129,864 $2,188,736
========== ==========

The accompanying notes to financial statements are an
integral part of these financial statements.

18
<PAGE>

SOUTHWESTERN PUBLIC SERVICE COMPANY
STATEMENTS OF CAPITALIZATION
(Thousands of Dollars, Except Per Share Information)
December 31, 1998 and 1997

1998 1997
---- ----

Common shareholder's equity:
Common stock, $1 par value, authorized 200 shares
in 1998 and in 1997, outstanding 100 shares in
1998 and in 1997........ ........................ $ - $ -
Paid in capital.................................... 348,402 348,402
Retained earnings.................................. 389,818 349,988
------- -------
Total common shareholder's equity................. 738,220 698,390
------- -------

Preferred stock (Note 4):
$1 par value, 10 million shares authorized; no
shares outstanding ............................... - -
------- -------

SPS obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely subordinated
debentures of SPS, 4 million shares outstanding,
7.85% (Note 5) ...................................... 100,000 100,000
------- -------
Long-term debt (Note 6):
First Mortgage Bonds:
6-7/8% due December 1, 1999........................ 90,000 90,000
7-1/4% due July 15, 2004........................... 135,000 135,000
6-1/2% due March 1, 2006........................... 60,000 60,000
8-1/4% due July 15, 2022........................... 40,000 40,000
8-1/5% due December 1, 2022........................ 100,000 100,000
8-1/2% due February 15, 2025....................... 70,000 70,000
Pollution control obligations, securing pollution
control revenue bonds:
Not collateralized by First Mortgage Bonds:
variable rate (4.30% at December 31, 1998 and 1997)
due July 1, 2011 ................................. 44,500 44,500
variable rate (6.435% effective December 31, 1998
and 1997) due July 1, 2016 ....................... 25,000 25,000
5-3/4% series, due September 1, 2016.............. 57,300 57,300
Less: funds held by Trustee........................ (168) (161)
Other................................................. 112 286
Unamortized discount and premium-net.................. (1,013) (1,154)
------- -------
620,731 620,771
Less: maturities due within one year.................. 90,113 173
------- -------
Total long-term debt.............................. 530,618 620,598
------- -------

Total capitalization.................................. $1,368,838 $1,418,988
========== ==========

The accompanying notes to financial statements are an
integral part of these financial statements.

19
<PAGE>

SOUTHWESTERN PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(Thousands of Dollars)
Years ended December 31, 1998, 1997 and August 31, 1996 (Note 1)

1998 1997 1996
------- ------- -------

Operating revenues:
Electric..................................... $951,187 $960,355 $899,397
Other........................................ - 18,928 32,403
------- ------- -------
951,187 979,283 931,800

Operating expenses:
Fuel used in generation...................... 432,127 473,099 417,023
Purchased power.............................. 23,155 14,501 18,010
Other operating & maintenance expenses....... 138,679 166,761 165,129
Depreciation and amortization................ 78,592 70,331 69,781
Taxes (other than income taxes) ............. 47,259 46,515 45,518
Income taxes (Note 13) ...................... 65,696 48,795 65,297
------- ------- -------
785,508 820,002 780,758
------- ------- -------
Operating income................................ 165,679 159,281 151,042

Other income and deductions:
Merger expenses.............................. (1,208) (15,427) (7,878)
Write-off of investment in Carolina Energy
Project (Note 3) .......................... - (16,052) -
Miscellaneous income and deductions - net
(Notes 3 and 15) .......................... 8,819 4,877 13,226
----- ----- ------
7,611 (26,602) 5,348

Interest charges:
Interest on long-term debt................... 46,471 46,356 47,045
Other interest............................... 8,925 7,444 6,088
Allowance for borrowed funds used during
construction .............................. (4,943) (4,546) (2,516)
Dividends on SPS obligated mandatorily
redeemable preferred securities of
subsidiary trust holding solely subordinated
debentures of SPS .......................... 7,850 7,850 -
----- ----- ------
58,303 57,104 50,617
------- ------- -------

Net income...................................... 114,987 75,575 105,773
Dividend requirements on preferred stock........ - - 2,494
------- ------- -------
Earnings available for common stock............. $114,987 $75,575 $103,279
======== ======= ========

The accompanying notes to financial statements are an integral
part of these financial statements.

20
<PAGE>

SOUTHWESTERN PUBLIC SERVICE COMPANY
STATEMENTS OF INCOME
(Thousands of Dollars)
For the four months ended December 31, 1996 and 1995 (Note 1)

1996 1995
---- ----
(Unaudited)
Operating revenues:
Electric.......................................... $295,579 $267,427
Other............................................. 10,701 11,055
-------- -------
306,280 278,482

Operating expenses:
Fuel used in generation........................... 141,896 119,081
Purchased power................................... 4,900 2,756
Other operating & maintenance expenses............ 55,582 52,134
Depreciation and amortization..................... 23,782 23,329
Taxes (other than income taxes)................... 15,152 14,590
Income taxes (Note 13)............................ 10,987 18,963
-------- -------
252,299 230,853
------- -------
Operating income..................................... 53,981 47,629

Other income and deductions, net:
Merger expenses................................... (2,019) (2,171)
Write-off of investment in BCH project (Note 3)... (15,546) -
Miscellaneous income and deductions - net......... 759 737
-------- -------
(16,806) (1,434)
Interest charges:
Interest on long-term debt........................ 16,302 15,106
Other interest.................................... 1,102 950
Allowance for borrowed funds used during
construction ................................... (892) (807)
Dividends on SPS obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of SPS .......... 1,526 -
-----
18,038 15,249
------ ------

Net income........................................... 19,137 30,946
Dividend requirements on preferred stock............. - 2,373
-------- -------
Earnings available for common stock.................. $ 19,137 $ 28,573
======== ========

The accompanying notes to financial statements
are an integral part of these financial statements
21
<PAGE>

SOUTHWESTERN PUBLIC SERVICE COMPANY
STATEMENTS OF SHAREHOLDER'S EQUITY
(Thousands of Dollars, Except Share Information)
Year ended December 31, 1998, 1997, four months ended December 31, 1996 and
year ended August 31, 1996 (Note 1)

Common Stock, $1 par value Retained
Shares Amount Paid in Capital Earnings Total
------ ------ --------------- -------- -----

<S> <C> <C> <C> <C> <C>
Balance at August 31, 1995.. 40,917,908 40,918 306,376 373,458 720,752
Net income.................. - - - 105,773 105,773
Retirements of cumulative
preferred stock ........... - - 1,108 (921) 187
Dividends declared
Common stock.............. - - - (90,020) (90,020)
Cumulative preferred stock - - - (1,573) (1,573)
-------- ------ ------- ------ -------

Balance at August 31, 1996.. 40,917,908 40,918 307,484 386,717 735,119
Net income ................. - - - 19,137 19,137
Dividends declared on
common stock .............. - - - (22,504) (22,504)
------ ------- ------ ------- -------

Balance at December 31, 1996 40,917,908 40,918 307,484 383,350 731,752
Net income.................. - - - 75,575 75,575
Dividends declared
Common stock, prior to
August 1, 1997 Merger ... - - - (63,845) (63,845)
Common stock, to NCE...... - - - (45,092) (45,092)
Merger with PSCo
Exchange of common shares
for NCE stock ............ (40,917,808) (40,918) 40,918 - -
----------- ------- ------ ------- -------

Balance at December 31, 1997 100 - 348,402 349,988 698,390
Net income.................. - - - 114,987 114,987
Dividends declared
Common stock, to NCE...... - - - (75,157) (75,157)
-------- ------ ------- ------- -------

Balance at December 31, 1998 100 $ - $ 348,402 $ 389,818 $ 738,220
====== ======= ========== ========= ==========

</TABLE>

Authorized shares of common stock were 200 at December 31, 1998 and 1997 and 100
million at December 31, 1996 and August 31, 1996.

The accompanying notes to financial statements are an integral
part of these financial statements.

22
<PAGE>

SOUTHWESTERN PUBLIC SERVICE COMPANY
STATEMENTS OF CASH FLOWS
(Thousands of Dollars, Except Share Information) Years
ended December 31, 1998, 1997, and August 31, 1996 (Note 1)

1998 1997 1996
---- ----- ----

Operating activities:
Net income................................... $114,987 $75,575 $105,773
Adjustments to reconcile net income to net
cash provided by operating activities
(Note 1):
Depreciation and amortization.............. 83,103 76,929 65,448
Write-off of investment in Carolina Energy
Project (Note 3)......................... - 16,052 -
Amortization of investment tax credits..... (250) (250) (250)
Deferred income taxes...................... (8,600) 3,587 16,423
Allowance for equity funds used during
construction ............................. - (5) (60)
Change in accounts receivable.............. 20,358 (39,842) (4,697)
Change in inventories...................... (625) 301 134
Change in other current assets............. 27,300 (3,061) (7,688)
Change in accounts payable................. (43,190) 45,683 10,024
Change in other current liabilities........ 31,699 (10,000) (7,271)
Change in deferred amounts................. 30,309 (48,934) (11,381)
Other...................................... 3,358 276 13,571
------- ------- -------
Net cash provided by operating activities 258,449 116,311 180,026

Investing activities:
Construction expenditures.................... (92,218) (118,550)(111,986)
Allowance for equity funds used during
construction .............................. - 5 60
Cost of disposition of property, plant and
equipment ................................. (2,897) (2,371) -
Proceeds from the sale of Quixx and UE, net
of cash disposed (Note 1) ................. - (29,567) -
Purchase of other investments................ (673) (4,639) (1,768)
Sale of other investments.................... 820 - -
Acquisition of TNP properties (Note 3)....... - - (29,200)
------- ------- -------
Net cash used in investing activities.... (94,968) (155,122)(142,894)

Financing activities:
Proceeds from sale of long-term debt......... - - 60,000
Redemption of long-term debt................. (179) (14,986) (4,445)
Short-term borrowings - net.................. (85,242) 100,564 69,624
Retirement of preferred stock................ - - (75,434)
Dividends on common stock (Notes 4 and 15)... (77,696) (86,391) (90,020)
Dividends on preferred stock................. - - (2,494)
------- ------- -------
Net cash used in financing activities.... (163,117) (813) (42,769)
-------- ------- -------
Net increase (decrease) in cash and
temporary cash investments ........... 364 (39,624) (5,637)
Cash and temporary cash investments at
beginning of year .................... 986 40,610 36,860
--- ------ ------
Cash and temporary cash investments at
end of year $ 1,350 $ 986 $31,223
======= ======= =======

The accompanying notes to financial statements are an integral
part of these financial statements.

23
<PAGE>

SOUTHWESTERN PUBLIC SERVICE COMPANY
STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
Four months ended December 31, 1996 and 1995 (Note 1)

1996 1995
---- ----
(Unaudited)

Operating activities:
Net income......................................... $19,137 $30,946
Adjustments to reconcile net income to net
cash provided by operating activities (Note 1):
Depreciation and amortization.................... 22,289 21,873
Write-off of investment in BCH Project (Note 3).. 15,546 -
Deferred income taxes and investment tax credits 4,806 3,166
Allowance for equity funds used during construction (179) (60)
Change in accounts receivable.................... 10,180 9,402
Change in inventories............................ 1,417 928
Change in other current assets................... (5,674) 9,977
Change in accounts payable....................... 628 (10,673)
Change in other current liabilities.............. (12,487) (11,021)
Other............................................ (14,674) 7,627
------- -------
Net cash provided by operating activities...... 40,989 62,165

Investing activities:
Construction expenditures.......................... (66,031) (44,950)
Purchase of other investments...................... (2,297) (3,741)
Acquisition of TNP properties (Note 3)............. - (29,200)
------- -------
Net cash used in investing activities.......... (68,328) (77,891)

Financing activities:
Proceeds from sale of long-term notes and bonds (Note 6) 82,300 -
Proceeds from sale of SPS obligated mandatorily
redeemable preferred securities of subsidiary trust
holding solely subordinated debentures of SPS 100,000 -
Retirement of long-term notes and bonds............ (84,776) (1,717)
Short-term borrowings - net........................ (15,788) 116,250
Retirement of preferred stock...................... - (74,672)
Dividends on common stock.......................... (45,010) (45,010)
Dividends on preferred stock....................... - (2,373)
------- -------
Net cash provided by (used in) financing activities 36,726 (7,522)
------ ------
Net increase (decrease) in cash and temporary
cash investments ........................... 9,387 (23,248)
Cash and temporary cash investments at beginning
of period .................................. 31,223 36,860
------ ------
Cash and temporary cash investments at end of period $40,610 $13,612
======= =======

The accompanying notes to financial statements are an integral
part of these financial statements.

24
<PAGE>

NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
PUBLIC SERVICE COMPANY OF COLORADO AND SUBSIDIARIES
SOUTHWESTERN PUBLIC SERVICE COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998

1. Summary of Significant Accounting Policies (NCE, PSCo and SPS)

Business, Utility Operations and Regulation

NCE is a registered holding company under PUHCA and its domestic utility
subsidiaries (PSCo, SPS and Cheyenne) are engaged principally in the generation,
purchase, transmission, distribution and sale of electricity and in the
purchase, transportation, distribution and sale of natural gas. Both the Company
and its subsidiaries are subject to the regulatory provisions of the 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 Statement of Financial Accounting Standards
("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. The Company believes its utility subsidiaries
will continue to be subject to rate regulation. In the event that a portion of a
subsidiaries' operations is 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 or cash flows.

The following regulatory assets are reflected in the Company's
consolidated balance sheets (in thousands):

1998 NCE PSCo SPS
------ ------ ------

Income taxes (Note 13).............. $148,499 $ 69,868 $ 79,116
Nuclear decommissioning costs....... 69,490 69,490 -
Employees' postretirement benefits
other than pensions (Note 12)..... 57,350 54,461 2,889
Employees' postemployment benefits
(Note 12) ......................... 24,888 24,416 -
Demand-side management costs........ 37,160 31,984 5,176
Unamortized debt reacquisition costs 33,138 15,769 16,808
Early retirement costs.............. 1,000 - 1,000
Thunder Basin judgment (Note 9)..... 548 - 548
Other............................... 9,559 3,124 6,434
------ ------ ------
Total............................. $381,632 $269,112 $111,971
======== ======== ========

25
<PAGE>

1997 NCE PSCo SPS
------ ------ ------

Income taxes (Note 13).............. $162,985 $ 84,356 $ 79,161
Nuclear decommissioning costs....... 76,881 76,881 -
Employees' postretirement benefits
other than pensions (Note 12)..... 63,023 59,995 3,028
Employees' postemployment benefits
(Note 12) ......................... 24,455 23,932 -
Demand-side management costs........ 42,503 38,518 3,985
Unamortized debt reacquisition costs 36,717 17,791 18,344
Early retirement costs.............. 8,008 6,645 1,363
Thunder Basin judgment (Note 9)..... 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 December 31, 1998 and 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. Refer to the discussion below or the Notes to Consolidated
Financial Statements as identified in the above table for a more detailed
discussion regarding recovery periods.

Effective July 1, 1993, PSCo began collecting from customers the costs
approved by the CPUC for the decommissioning of Fort St. Vrain. This recoverable
amount totaled approximately $124.4 million (plus a 9% carrying cost). Such
amount, which is being collected over a twelve-year period, represented the
inflation-adjusted estimated remaining cost of decommissioning activities not
previously recognized as expense at the time of CPUC approval. PSCo is
recovering approximately $13.9 million per year from its customers, including
carrying costs.

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 (see Note 12. Employee
Benefits - Postemployment Benefits). 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. In December 1998, the CPUC approved
a settlement agreement on this matter which deferred the final determination of
the regulatory treatment of these costs pending the outcome of the current
appeal of the decision on PSCo's gas rate case. 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 jurisdictional regulatory asset, all unrecoverable
amounts will be written off (see Note 9. Regulatory Matters).

Certain costs associated with PSCo's DSM programs are deferred and
recovered in rates over five to seven-year periods through the DSMCA. Non-labor
incremental expenses, carrying costs associated with deferred DSM costs and
incentives associated with approved DSM programs are recovered on an annual
basis. Costs associated with SPS's DSM programs are also deferred and, as part
of a negotiated settlement agreement reached in July 1995, will be included in
rate base and cost of service in future PUCT proceedings.

Costs incurred to reacquire debt prior to scheduled maturity dates are
deferred and amortized over the life of the debt issued to finance the
reacquisition, or as approved by the applicable regulatory authority.

26
<PAGE>

Recovered/Recoverable Purchased Gas and Electric Energy Costs -Net

The Company's utility subsidiaries have adjustment mechanisms in place
which currently provide for the recovery of certain purchased gas and electric
energy costs. These cost adjustment tariffs may increase or decrease the level
of costs recovered through base rates and are revised periodically, as
prescribed by the appropriate regulatory agencies, for any difference between
the total amount collected under the clauses and the recoverable costs incurred
(see Note 9. Regulatory Matters).

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, also obtained for a future generating station. PSCo is
earning a return on these investments based on its weighted average cost of debt
in accordance with a CPUC rate order.

Non-utility Subsidiaries and International Investments

The Company's non-utility subsidiaries are principally involved in
energy-related businesses including the following: engineering, design and
construction management, non-regulated energy services, including gas and power
marketing, 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
and U.K. Windfall Tax). Financial statements of foreign subsidiaries are
translated into U.S. dollars at current rates, except for revenues, costs and
expenses, which are translated at average current rates during each reporting
period.

Consolidation and Financial Statement Presentation

The Company follows the practice of consolidating the accounts of its
majority owned and controlled subsidiaries. The Company recognizes equity in
income from its unconsolidated investments accounted for under the equity method
of accounting. All intercompany items and transactions have been eliminated.
Certain prior year amounts have been reclassified to conform to the current
year's presentation.

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, were 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.

On April 22, 1997, SPS changed its fiscal year from a twelve-month period
ending August 31 to twelve-month period ending December 31. SPS filed a
Transition report on Form 10-K for the period September 1, to December 31, 1996
("Transition Period"). The fiscal year periods presented in SPS's statements of
income and cash flows are for the twelve-months ending December 31, 1998 and
1997 and August 31, 1996.

27
<PAGE>

Revenue Recognition

The Company's utility subsidiaries accrue for estimated unbilled revenues
for services provided after the meters were last read on a cycle billing basis
through the end of each year.

Risk Management

The Company and its subsidiaries have initiated the utilization of a
variety of energy contracts, both financial and commodity based, in the energy
trading and energy non-trading operations to reduce their exposure to commodity
price risk. These contracts consist mainly of commodity futures and options,
index or fixed price swaps and basis swaps.

Energy contracts entered into for the trading operations are accounted for
using the mark-to-market method of accounting. Under mark-to-market accounting,
natural gas and power trading contracts, including both physical transactions
and financial instruments, are recorded at fair value and recognized as an
increase or decrease to purchased power or cost of gas sold upon contract
execution. Changes in the market value of the portfolio are recognized as gains
or losses in the period of change and the resulting unrealized gains and losses
are recorded as other current assets and liabilities. Such amounts are
recognized as net positions in the consolidated balance sheets and income
statements as NCE and its subsidiaries have master netting agreements in place
with counterparties.

Energy contracts are also utilized in the Company and its subsidiaries'
non-trading operations to reduce commodity price risk. Hedge accounting is
applied only if the contract reduces the price risk of the underlying hedged
item and is designated as a hedge at its inception. Gains and losses related to
qualifying hedges of firm commitments or anticipated transactions are deferred
and recognized as a component of purchased power or cost of gas sold when
settlement occurs. If, subsequent to being hedged, underlying transactions are
no longer likely to occur, the related gains and losses are recognized currently
in income (see Note 8. Financial Instruments - Risk Management for further
discussion of the Company's risk management activities).

Comprehensive Income

The Company and its subsidiaries adopted SFAS No. 130, "Reporting
Comprehensive Income," effective January 1, 1998. This statement establishes
standards for the reporting and display of comprehensive income (net income plus
all other changes in net assets from non-owner sources) and its components in
financial statements. Other comprehensive income for NCE and PSCo was reported
in the consolidated Statements of Shareholders' Equity and consists of foreign
currency translation adjustments related to the investment in Yorkshire Power.

Basic and Diluted Earnings Per Share

Effective in calendar year 1997, the FASB issued SFAS No. 128, "Earnings
per Share" ("SFAS 128") requiring presentation of basic and diluted earnings per
share. Basic earnings per share is based upon the weighted average common shares
outstanding during the year. Diluted earnings per share reflects the potential
dilution that could occur if securities or other agreements to issue common
stock were exercised or converted into common stock. Diluted earnings per share
is based upon the weighted average common and common equivalent shares
outstanding during each year. Employee stock options are the Company's only
common stock equivalents. There are no other potentially dilutive securities (in
thousands, except per share data).

28
<PAGE>

For the year ended December 31, 1998
------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ------
Basic EPS
Net income.......................... $341,957 111,859 $ 3.06
=======

Effect of Dilutive Securities:
Common stock options................ - 149
-------- -------

Diluted EPS
Net income and assumed conversion... $341,957 112,008 $ 3.05
======== ======= =======

SFAS 128 had no effect on the Company's 1997 and 1996 reported earnings per
share information.

Approximately 780,000 common stock options were outstanding during 1998,
but were not included in the computation of diluted earnings per share because
the options' exercise prices were greater than the average market price of the
common stock.

Income Taxes

The Company and its subsidiaries file consolidated Federal and
consolidated and separate state income tax returns. Income taxes are allocated
to the subsidiaries based on separate company computations of taxable income or
loss. Investment tax credits have been deferred and are being amortized over the
service lives of the related property. Deferred taxes are provided on temporary
differences between the financial accounting and tax bases of assets and
liabilities using the tax rates which are in effect at the balance sheet date
(see Note 13. Income Taxes).

Stock-based Compensation

The Company uses the intrinsic value based method of accounting for its
stock-based compensation plan (see Note 12. Employee Benefits - Incentive
Compensation).

Temporary Cash Investments and Statements of Cash Flows

For purposes of the consolidated statements of cash flows, the Company and
its subsidiaries consider all temporary cash investments to be cash equivalents.
These temporary cash investments are securities having original maturities of
three months or less or having longer maturities but with put dates of three
months or less. At December 31, 1998, approximately $14.3 million of cash
balances are restricted for operational uses as they have been committed for
investments in cogeneration projects.

Income Taxes and Interest (Excluding Amounts Capitalized) Paid (in
thousands):

NCE 1998 1997 1996
------- ------- -------

Income taxes ............................... $135,776 $99,938 $117,121
Interest.................................... $249,405 $230,507 $197,073

PSCo 1998 1997 1996
------- ------- -------

Income taxes, including amounts paid to NCE $114,340 $ 75,439 $ 66,871
Interest.................................... $188,443 $172,470 $144,533

29
<PAGE>

SPS 1998 1997 1996
------- ------- -------

Income taxes, including amounts paid to NCE $69,111 $37,752 $50,250
Interest.................................... $55,739 $56,486 $52,540

Non-cash Transactions:

Shares of NCE's common stock in 1998 and PSCo's common stock in 1997 and
1996 (222,387 in 1998, 250,058 in 1997 and 274,934 in 1996), valued at the
market price on date of issuance (approximately $10 million for each year), were
issued to a savings plan of the Company. The estimated issuance values were
recognized in other operating expenses during the respective preceding years.

Effective March 31, 1998, PSCo sold its common stock investment in NCI to
NC Enterprises, an NCE subsidiary. PSCo received as consideration a 20-year
promissory note from NC Enterprises in the amount of approximately $292.6
million (see Note 2. Investment in Yorkshire Power and U.K. Windfall Tax).

Stock issuances and the dividend of subsidiaries' stock in connection with
the Merger discussed above were non-cash financing and investing activities and
are not reflected in the consolidated statements of cash flows.

During 1996, PSCo exchanged shares of its common stock in connection with
the acquisition of TOG and TOP (see Note 3. Acquisitions and Divestitures).

Property and Depreciation

Property, plant and equipment is stated at original cost. Replacements and
capital improvements, representing units of property, are capitalized.
Maintenance and repairs of property and replacements of items of property
determined to be less than a unit of property are charged to operations as
maintenance expense. The cost of units of property retired, together with cost
of removal, less salvage, is charged to accumulated depreciation.

Depreciation expense, for financial accounting purposes, is computed on
the straight-line basis based on the estimated service lives and costs of
removal of the various classes of property. Depreciation expense, expressed as a
percentage of average depreciable property, for NCE, PSCo and SPS ranged from
approximately 2.7%-2.9% for the years ended December 31, 1998, 1997 and 1996.
For income tax purposes, the Company and its subsidiaries use accelerated
depreciation and other elections provided by the tax laws.

Allowance for Funds Used During Construction

AFDC, as defined in the system of accounts prescribed by the FERC,
represents the net cost during the period of construction of borrowed funds used
for construction purposes and a reasonable rate on funds derived from other
sources. AFDC does not represent current cash earnings. The Company's regulated
subsidiaries capitalize AFDC as a part of the cost of utility plant.

Gas in Underground Storage (NCE and PSCo)

Gas in underground storage is accounted for under the last-in, first-out
("LIFO") cost method. The estimated replacement cost of gas in underground
storage at December 31, 1998 and 1997, exceeded the LIFO cost by approximately
$13.0 million and $36.0 million, respectively.

30
<PAGE>

Cash Surrender Value of Life Insurance Policies (NCE and PSCo)

The following amounts related to corporate-owned life insurance ("COLI")
contracts, issued by one major insurance company, are recorded as a component of
Investments, at cost, on the consolidated balance sheets (in thousands):

1998 1997
---- ----
Cash surrender value of contracts..................... $461,752 $408,425
Borrowings against contracts.......................... 458,104 405,285
------- -------
Net investment in life insurance contracts......... $ 3,648 $ 3,140
======== =======

Refer to Note 10. "Commitments and Contingencies", for discussion of
certain tax matters.

Management Estimates

The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

2. Investment in Yorkshire Power and U.K. Windfall Tax (NCE and PSCo)

Acquisition

During the second quarter of 1997, Yorkshire Power, a joint venture
initially equally owned by PSCo and AEP, acquired indirectly all of the
outstanding ordinary shares of Yorkshire Electricity, a 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.

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 October 1998, NCE contributed $100 million to NC Enterprises, which was
used to reduce the principle balance of the promissory note to PSCo.

U.K. Windfall Tax

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.

Investment in Ionica

During the second quarter of 1998, Yorkshire Electricity 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. In November of 1998, Ionica was placed into
receivership and an administrator was appointed to

<PAGE>

oversee its operations and distribute its remaining assets. Due to the
complexity of Ionica operations it may take considerable time to complete this
process. Yorkshire Electricity continues to assess the recoverability of the
remaining book value of this investment (approximately $7 million at December
31, 1998).

Generation Sale

In the fourth quarter of 1998, Yorkshire Power recognized a $42.1 million
after-tax gain on the sale of its generation assets. This included the sale of
its 75% interest in Regional Power Generators, Ltd., which owned a 272-megawatt
combined cycle, gas fired plant located in North Lincolnshire, England and the
sale of other generation capacity. Proceeds from these sales were used to reduce
the debt of Yorkshire Power. Yorkshire Electricity is focusing its main business
on the distribution and supply of electricity and the supply of natural gas.

Summarized income statement information for the year ended December 31,
1998 and from the date of acquisition, April 1, 1997 to December 31, 1997, is
presented below (in millions):

1998 1997
------------------ -------
Year 3 Months
Ended Ended (NCE
December 31, March 31, and
(NCE) (PSCo) PSCo)
Yorkshire Power:
Operating revenues............... $2,281.7 $ 663.2 $1,492.9
-------- -------- --------

Operating income................. 324.9 65.5 202.3
-------- -------- --------

Income before extraordinary item. 76.9 6.9 69.8
-------- -------- --------

Extraordinary item - U.K. windfall
tax ........................... - (221.1)
-------- ------ --------

Net income (loss)................ $ 76.9 $ 6.9 $ (151.3)
======== ======== ========

NCI's equity in earnings (losses):
Equity in earnings of Yorkshire Power 38.5 3.5 34.9
Extraordinary item - U.K. windfall tax - - (110.6)
-------- ------- --------
$ 38.5 $ 3.5 $ (75.7)
======== ======== ========

NCI's investment in Yorkshire Power at December 31, 1998 and 1997 was
approximately $333 million and $290 million, respectively. Summarized balance
sheet information for Yorkshire Power as of December 31, 1998 and 1997, is
presented below (in millions):
1998 1997
---- ----
Assets:
Property, plant and equipment............ $1,602 $1,645
Current assets........................... 552 602
Goodwill (net)........................... 1,547 1,602
Other assets............................. 295 293
------ ------
$3,996 $4,142
====== ======
Capitalization and Liabilities:
Common shareholders' equity.............. $ 655 $ 542
Long-term debt........................... 2,121 704
Other non-current liabilities............ 413 489
Current liabilities...................... 807 2,407
------ ------
$3,996 $4,142
====== ======

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

<PAGE>

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 year ended December 31, 1997 and
December 31, 1996, of $1.639/pound and $1.561/pound, respectively.

Based on the above assumptions, shown below is unaudited pro forma
financial information for the years ended December 31, 1997 and 1996 (in
millions, except per share amounts):

NCE Earnings
Available for
common stock EPS-Basic (1)
1997 1996 1997 1996
---- ---- ---- ----

Net income before extraordinary item... $261.5 $272.3 $2.50 $2.64
===== =====

Pro forma adjustments:

Equity in earnings of
Yorkshire Power, net of
U.S. tax benefits (2)............... (10.1) 19.3

Interest expense, net of tax......... (3.5) (13.8)
----- ------

Pro forma result....................... $247.9 $ 277.8 $2.37 $2.70
====== ======= ===== =====

(1) Based on the weighted average number of common shares outstanding for the
period.
(2) The years ending December 31, 1997 and 1996 amounts include $24.0
million and $18.9 million ($17.9 million and $11.7 million after-tax),
respectively, of write-offs related to certain computer development costs,
acquisition expenses and costs incurred for the preparation for
deregulation.

The unaudited pro forma financial information presented below for PSCo
assumes that NCI 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 years ended December 31, 1998 and 1997 (in
millions):
PSCo Earnings
1998 1997
---- ----

Net income before extraordinary item..................... $200.1 $204.0

Pro forma adjustments:

NCI's net income before extraordinary item............. (2.8) (35.9)
Interest income from promissory note, net of tax....... 3.2 9.5
----- -----

Pro forma result......................................... $200.5 $177.6
====== ======

33
<PAGE>

3. Acquisitions and Divestitures

Acquisition of Planergy (NCE)

Effective April 1, 1998, the Company acquired all of the outstanding
common stock of Falcon Seaboard Energy Services, Inc. ("Planergy") and assumed
other outstanding debt. Planergy includes Planergy, Inc. and Planergy Services
and is primarily engaged in energy consulting, energy efficiency management,
conservation programs and mass-market services.. Such acquisition was accounted
for using the purchase method and the acquired assets and liabilities were
valued at their estimated fair market values as of the date of acquisition.
Planergy has been consolidated as a subsidiary of NC Enterprises in the
Company's consolidated financial statements.

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. 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.

BCH Energy Limited Partnership Investment (NCE and SPS)

Quixx holds a 49% limited partnership interest in BCH Energy Limited
Partnership which owned a waste-to-energy cogeneration facility located near
Fayetteville, North Carolina. Limited commercial operation of the BCH project
began in June 1996; however, the facility did not achieve the expected
performance level. An effort was made to restructure the project but it was not
possible to achieve the required improvements on economically viable terms. In
late 1996, senior creditors took possession of the assets of the facility. In
December 1996, Quixx wrote-off its investment of approximately $16 million in
this project.

Quixx Underground Water Rights (NCE and SPS)

During 1996, Quixx sold a portion of its underground water rights for
approximately $14 million. Quixx recognized an after-tax gain on the sale of
these water rights of approximately $11.7 million, which is reflected, in
Miscellaneous income and deductions net for the year ended December 31, 1996.

Acquisition of Texas-Ohio Gas, Inc. and Texas-Ohio Pipeline, Inc. (NCE and PSCo)

Effective September 1, 1996, e prime acquired all of the outstanding stock
of TOG and TOP in exchange for a combination of common stock of PSCo and cash.
Such acquisitions were accounted for using the purchase method and the acquired
assets and liabilities were valued at their estimated fair market values as of
the date of acquisition. These companies are primarily engaged in gas brokering
and marketing activities and interstate gas transmission and are subsidiaries of
e prime.

Acquisition of TNP Properties (SPS)

In September 1995, SPS purchased properties of TNP located in the Texas
Panhandle area for $29.2 million. The purchase added approximately 8,000
customers and was accounted for using the purchase method. Cost recovery of this
amount was allowed by the PUCT through a rate surcharge over a ten-year period.

<PAGE>

4. Capital Stock (NCE, PSCo and SPS)

Shareholder Rights

On April 30, 1997, the Board of Directors declared that a dividend of one
right for each Common Share be paid on the effective date of the business
combination among the Company, PSCo and SPS to shareholders of record of the
common shares issued and outstanding at the close of business on the day before
the effective date of the business combination. Each right represents the right
to purchase one one-hundredth of a share of Series A Junior Participating
Preferred Stock at a price of $100 per one one-hundredth share. Additionally,
the Board of Directors created a Series A Junior Participating Preferred Stock,
$1 par value, and reserved 2.6 million shares for issuance upon exercise of the
Rights. In the event any person or group acquires 10% or more of the Company's
common stock, the holders of the rights generally will be entitled to receive,
upon exercise, common stock of the Company having a value equal to two times the
exercise price of the right. In addition, the Board of Directors may, at its
option after a person or group acquires 10% or more of the Company's common
stock, exchange all or part of the rights for shares of the Company's common
stock. In the event that the Company is acquired in a merger or other business
combination or 50% or more of the Company's assets or earning power is sold or
transferred, the holders of the rights have the right to receive, upon exercise,
common stock of the acquiring company having a value equal to two times the
exercise price of the right. The Company may redeem the rights at a price of
$0.001 per right at any time prior to the tenth day following the date any
person or group acquires 10% or more of the Company's common stock. The rights
expire 10 years after the record date, unless earlier redeemed or exchanged by
the Company.

Common Stock Issuances

In November 1998, NCE issued 2.5 million shares of common stock. The net
proceeds totaling $117.0 million were used for general corporate purposes and
the retirement of short-term debt. In December 1997, NCE issued 5.9 million
shares of common stock, resulting in net proceeds (after deducting issuance
costs) totaling approximately $251.4 million. The proceeds from the sale of
stock were used for general corporate purposes, including retirement of
short-term debt and a capital contribution to PSCo. PSCo used such proceeds to
retire short-term debt.

35
<PAGE>

Preferred Stock of NCE

NCE has 20 million shares of preferred stock authorized. At December 31,
1998, the Company has not issued any of the preferred stock.

Preferred Stock of Subsidiaries
December 31, 1998 December 31, 1997
Shares Amount Shares Amount
(Thousands (Thousands
of Dollars) of Dollars)
PSCo cumulative preferred stock, $100
par value, 3 million shares authorized:
Issued and outstanding:
Not subject to mandatory redemption (1):
4.20% series................... - - 100,000 $ 10,000
41/4% series (includes $7,500 premium) - - 174,997 17,507
41/2% series.................... - - 65,000 6,500
4.64% series................... - - 159,950 15,995
4.90% series................... - - 150,000 15,000
4.90% 2nd series............... - - 150,000 15,000
7.15% series................... - - 250,000 25,000
------ ------- ------- -------

Total.......................... - - 1,049,947 $105,002
====== ======= ========== ========

Subject to mandatory redemption (2):
7.50% series .................. - - 216,000 $ 21,600
8.40% series................... - - 202,294 20,229
------ ------- ------- --------
- - 418,294 41,829
Less: Preferred stock subject to
mandatory redemption within one year - - (25,760) (2,576)
------ ------- -------- --------
Total........................ - - 392,534 $ 39,253
====== ======= ======== ========

PSCo cumulative preferred stock, $25
par value, 4 million shares authorized:
Issued and outstanding:
Not subject to mandatory redemption (1):
8.40% series................... - - 1,400,000 $ 35,000
====== ======= ========= ========

PSCo cumulative preferred stock, $0.01
par value, 10 million shares authorized
with no shares outstanding (3) - - - $ -
=== ======= ====== =======
SPS cumulative preferred stock, $1
par value, 10 million shares authorized
with no shares outstanding (4) - - - $ -
=== ======= ====== ========

(1) On June 10, 1998, PSCo redeemed all of the preferred stock, $100 par value,
at a value of $101 per share plus accrued dividends and all of the preferred
stock, $25 par value, at a value of $25.25 per share plus accrued dividends.

(2) On June 10, 1998, PSCo redeemed all outstanding shares of the 7.50% series
subject to mandatory redemption for $101.50 per share plus accrued dividends and
all of the 8.40% series subject to mandatory redemption for $101.75 per share
plus accrued dividends. In 1997, PSCo repurchased 6,598 shares of the 8.40%
cumulative preferred series subject to mandatory redemption. In 1996, PSCo
repurchased 13,760 shares of the 8.40% cumulative preferred series subject to
mandatory redemption.

(3) On July 10, 1998, the shareholders of PSCo approved an amendment to the
Restated Articles of Incorporation to replace the existing authorized preferred
stock and to provide for a class of 10 million authorized shares of preferred
stock, $0.01 par value. This preferred stock may be issued from time to time in
such series and having such designations, preferences, limitations and relative
rights as the Board of Directors may determine.

(4) On January 31, 1996, the shareholders of SPS approved an amendment to the
Restated Articles of Incorporation to replace the existing authorized preferred
stock and to provide for a class of 10 million authorized shares of preferred
stock, $1.00 par value. This preferred stock may be issued from time to time in
such series and having such designations, preferences, limitations and relative
rights as the Board of Directors may determine.

36
<PAGE>

5. 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 PSCo 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 $100 million of its 7.85% Trust Preferred Securities,
Series A. The sole asset of the trust is $103 million principal amount of SPS'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 SPS of the trust
obligations under the preferred securities. The proceeds from the sale were used
to reduce short-term debt.

37
<PAGE>

6. Long-Term Debt of Subsidiaries (NCE, PSCo and SPS)
1998 1997
---- ----
(Thousands of Dollars)
First Mortgage Bonds:
6-3/4% retired July 1, 1998........................ $ - $25,000
6-7/8% due December 1, 1999........................ 90,000 90,000
6.00% due January 1, 2001.......................... 102,667 102,667
7-7/8% due April 1, 2003........................... 4,000 4,000
6.00% due April 15, 2003........................... 250,000 -
8-1/8% due March 1, 2004........................... 100,000 100,000
5-7/8% due March 1, 2004........................... 21,500 22,000
7-1/4% due July 15, 2004........................... 135,000 135,000
6-3/8% due November 1, 2005........................ 134,500 134,500
6-1/2% due March 1, 2006........................... 60,000 60,000
7-1/8% due June 1, 2006............................ 125,000 125,000
5-5/8% due April 1, 2008........................... 18,000 18,000
7-3/8% due November 1, 2009........................ 27,250 27,250
5-1/2% due June 1, 2012............................ 50,000 50,000
5-7/8% due April 1, 2014........................... 61,500 61,500
9-7/8% due July 1, 2020............................ 75,000 75,000
Variable rate (4.05% and 3.80% at December 31, 1998
and 1997) due September 1, 2021 .................. 7,000 7,000
8-3/4% due March 1, 2022........................... 150,000 150,000
8-1/4% due July 15, 2022........................... 40,000 40,000
8.20% due December 1, 2022......................... 100,000 100,000
7-1/4% due January 1, 2024......................... 110,000 110,000
7.50% due January 1, 2024.......................... 8,000 8,000
8.50% due February 15, 2025........................ 70,000 70,000
Variable rate (2.90% and 3.80% at December 31, 1998
and 1997) due March 1, 2027 ...................... 10,000 10,000
Secured Medium-Term Notes, 6.02% - 9.25%, due
March 4, 1998 - March 5, 2007 ................... 296,500 423,500
Other secured long-term debt 13.25%, due in
installments through October 1, 2016 .............. 30,755 31,155
Pollution control obligations, securing pollution
control revenue bonds:
Not collateralized by First Mortgage Bonds:
Variable rate (4.30% at December 31, 1998 and
1997), due July 1, 2011 ....................... 44,500 44,500
Variable rate (6.435% effective at December 31,
1998 and 1997), due July 1, 2016 .............. 25,000 25,000
5-3/4% series, due September 1, 2016............. 57,300 57,300
Less: funds held by Trustee:....................... (168) (161)
Unsecured Medium-Term Notes:
5.86% - 6.14% due October 13, 1998 - May 30, 2000 100,000 100,000
Capital lease obligations, 4.21% - 11.21% due in
installments through May 31, 2025 ................. 39,751 44,747
Other................................................ 6,284 286
Unamortized discount and premium - net............... (5,629) (5,820)
------ ------
2,343,710 2,245,424
Less: maturities due within one year.................... 138,165 257,469
------- -------
$2,205,545 $1,987,955
========== ==========

The First Mortgage Bonds include all debt (including First Collateral
Trust Bonds) issued by the Company's utility subsidiaries under various mortgage
indentures. Substantially all properties of the Company's utility subsidiaries,
other than expressly excepted property, are subject to the liens securing the
First Mortgage Bonds. Additionally, the SPS Indenture provides for certain
restrictions on the payment of dividends by SPS.

The Red River Authority of Texas has issued certain obligations, based on
long-term installment sale agreements executed by SPS, that relate to the
pollution control facilities installed at SPS's coal-fueled generating units.
SPS's payments under the pollution control obligations are pledged to secure the
Red River Authority Pollution Control Revenue Bonds.

38
<PAGE>

The annual maturities and sinking fund requirements during the five years
subsequent to December 31, 1998 are (in thousands of dollars):

Year Maturities Sinking Fund Requirements Total
---- ---------- ------------------------- -----
NCE 1999 $138,165 $ 560 $138,725
2000 131,721 1,310 133,031
2001 140,969 1,310 142,279
2002 16,806 2,810 19,616
2003 281,848 2,810 284,658

PSCo 1999 $ 44,481 $ 500 $ 44,981
2000 131,656 1,250 132,906
2001 140,969 1,250 142,219
2002 16,806 2,750 19,556
2003 281,848 2,750 284,598

SPS 1999 $ 90,113 $ - $ 90,113
2000 - - -
2001 - - -
2002 - - -
2003

The sinking fund requirements relate to PSCo and Cheyenne and they expect
to satisfy substantially all of their sinking fund obligations in accordance
with the terms of their respective indentures through the application of
property additions. SPS has no significant sinking fund requirements.

7. Short-term Borrowing Arrangements (NCE, PSCo and SPS)

Notes Payable and Commercial Paper

Information regarding notes payable and commercial paper for the years
ended December 31, 1998 and 1997 is as follows (in thousands of dollars, except
interest rates):

1998 1997
---- ----
NCE
Notes payable to banks............................... $ 36,437 $147,500
Commercial paper..................................... 487,957 440,843
------- -------
$524,394 $588,343

Weighted average interest rate at year end.............. 5.57% 5.74%

PSCo
Notes payable to banks............................... $ - $ 50,000
Commercial paper..................................... 402,795 286,599
Note payable to affiliates (by NCI to Quixx)......... - 11,956
-------- --------
$402,795 $348,555

Weighted average interest rate at year end.............. 5.72% 5.78%

SPS
Commercial paper..................................... $85,162 $154,244
Note payable to affiliates (UE)...................... 9,000 9,000
Note payable to affiliates (Quixx)................... - 16,160
------- -------
$94,162 $179,404

Weighted average interest rate at year end.............. 5.50% 5.60%

39
<PAGE>

Bank Lines of Credit and Compensating Bank Balances

In August 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. As of December 31, 1998, NCE had used $37
million.

PSCo and its subsidiaries have entered into a credit facility with several
banks providing $300 million in committed bank lines of credit. The credit
facility, which is used primarily to support the issuance of commercial paper by
PSCo and PSCCC, alternatively provides for direct borrowings thereunder. 1480
Welton, Inc. and PSRI are provided access to the credit facility with direct
borrowings guaranteed by PSCo. The facility expires November 17, 2000.
Additionally, PSCo has a credit facility which provides $150 million in
committed lines of credit and expires on June 25, 1999. SPS has a credit
facility which provides $200 million in committed bank lines of credit and
expires February 26, 1999. As of December 31, 1998, PSCo had used $404 million
and SPS had used $86 million.

Borrowings permitted under the committed bank lines of credit totaled $705
million at December 31, 1998. Arrangements by the Company and its subsidiaries
for committed lines of credit are maintained by a combination of fee payments
and compensating balances.

PSCo and SPS may borrow under uncommitted preapproved lines of credit upon
request; however, the banks have no firm commitment to make such loans.
Individual PSCo arrangements for uncommitted bank lines of credit totaled $50
million at December 31, 1997, of which all were used. None were used or
outstanding as of December 31, 1998.

8. Financial Instruments (NCE, PSCo and SPS)

Fair Value of Financial Instruments

The following tables present the carrying amounts and fair values of the
Company's and subsidiaries' significant financial instruments at December 31,
1998 and 1997. The carrying amount of all other financial instruments
approximates fair value. SFAS No. 107, "Disclosures about Fair Value of
Financial Instruments," defines the fair value of a financial instrument as the
amount at which the instrument could be exchanged in a current transaction
between willing parties, other than in a forced or liquidation sale.

1998 1997
---------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Thousands of Dollars)
NCE
Investments, at cost................ $35,885 $ 35,256 $36,936 $ 36,072
Preferred stock of subsidiaries
subject to mandatory redemption ... - - 41,829 42,893
PSCo and SPS obligated mandatorily
redeemable preferred securities
of subsidiary trust holding solely
subordinated debentures of SPS
and PSCo........................... 294,000 308,250 100,000 104,752
Long-term debt of subsidiaries...... 2,343,710 2,434,249 2,245,424 2,251,523

PSCo
Investments, at cost................ $ 30,355 $ 31,324 $ 36,936 $ 36,072
Preferred stock subject to mandatory
redemption ........................ - - 41,829 42,893
PSCo obligated mandatorily redeemable
preferred securities of
subsidiary trust holding solely
subordinated debentures of PSCo 194,000 204,000 - -
Long-term debt...................... 1,687,611 1,590,226 1,595,298 1,604,160

40
<PAGE>

1998 1997
---------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(Thousands of Dollars)
SPS
Investments, at cost................ $ 5,530 $ 3,932 $ - $ -
SPS obligated mandatorily redeemable
preferred securities of subsidiary
trust holding solely subordinated
debentures of SPS ................ 100,000 104,250 100,000 104,752
Long-term debt..................... 620,731 661,823 620,771 625,348

The fair value of the debt and equity securities included in Investments,
at cost, is estimated based on quoted market prices for the same or similar
investments. The debt securities are classified as held-to-maturity and the
equity securities are classified as available-for-sale. The unrealized holding
gains and losses for these debt and equity securities are not significant.

The PSCo and SPS obligated mandatorily redeemable preferred securities and
long-term debt are based on quoted market prices of the same or similar
instruments. Since PSCo, SPS and Cheyenne are subject to regulation, any gains
or losses related to the difference between the carrying amount and the fair
value of these financial instruments would not be realized by the Company's
shareholders.

The fair value estimates presented herein are based on pertinent
information available to management as of December 31, 1998 and 1997. These fair
value estimates have not been comprehensively revalued for purposes of these
financial statements since that date, and current estimates of fair values may
differ significantly from the amounts presented herein.

Off-Balance-Sheet Financial Instruments

NCE has entered in to a construction contract guarantee which assures
Quixx's performance under its engineering, procurement, and construction
contract with Borger Energy Associates, L.P. ("BEA"). Quixx, which owns 45% of
BEA, is constructing a 230 Mw cogeneration facility at a Phillips Petroleum site
near Borger, Texas. The maximum aggregate amount of this guarantee at December
31, 1998 was $88.4 million. This maximum amount decreases to $25.0 million at
commercial operation of the facility, currently estimated in March 1999, and
remains in effect for a period of no longer than 24 months before expiring.
Based upon the current state of construction of the facility, this guarantee is
not expected to have any financial impact on NCE.

As of December 31, 1998, NCE had $59.9 million of guarantees outstanding
to e prime. These guarantees were made to facilitate e prime's energy marketing
and trading activities. Also, e prime, inc. has guaranteed obligations relating
to the sale and purchase of energy and capacity for TOG. These guarantees
totaled $13.3 million at December 31, 1998.

In connection with an agreement for the sale of electric power, SPS
guaranteed certain obligations of a customer totaling $48 million. These
obligations related to the construction of certain utility property that, in the
event of default by the customer, would revert to SPS.

NCE and YGSC have guaranteed 50% of amounts financed under a $32 million
Credit Agreement among Young Storage and various lending institutions entered
into on June 27, 1995. This debt financing is for the development, construction
and operation of an underground natural gas storage facility in northeastern
Colorado. (see Note 3.
Acquisition and Divestiture of Investments).

NC Enterprises has guarantees totaling $10 million of New Century Cadence
as of December 31, 1998. These guarantees relate to the capital requirements and
operations of Cadence Network LLC, in which New Century Cadence is a 33.3%
partner.

41
<PAGE>

Risk Management

Energy Financial Contracts - Trading

The Company and its subsidiaries use the mark-to-market method of
accounting for energy trading activities and recognized a gain related to e
prime's power trading activities and a loss related to e prime's gas trading
activities. These gains and losses were recognized as part of purchased power
and gas purchased for resale, respectively, and totaled less than $500,000. The
following table displays the mark-to-market values of the energy trading
financial instruments of the Company and its subsidiaries at December 31, 1998
and the average value for the period then ended.
Assets Liabilities
Net Notional Average Dec. 31, 1998 Average Dec. 31, 1998
Amount Value Value Value Value
------ ----- ----- ----- -----
(in thousands of dollars)(in thousands of dollars)
Natural Gas (Mmbtus) 30,000 $ 335 $ 467 $ 344 $ 489
Power (Mwhs) 61,800 149 426 256 795

In addition, PSCo and SPS did not hold any energy trading financial
instruments at December 31, 1998. There were no energy trading financial
instruments held by NCE and its subsidiaries at December 31, 1997.

Energy Financial Contracts - Other than Trading

Various energy financial instruments are used by NCE and its subsidiaries
as hedging mechanisms against future contractual energy related obligations. The
weighted average maturity of these instruments is less than one year. At
December 31, 1998, the Company, as part of e prime's retail gas marketing
business, held notional long volumetric positions of approximately 14.2 million
Mmbtus of natural gas related to these financial instruments which had related
unrealized losses of approximately $6.4 million. At December 31, 1997, e prime
held notional long volumetric positions of approximately $5.2 million Mmbtus of
natural gas related to these financial instruments which had related unrealized
losses of approximately $0.7 million. In addition, PSCo and SPS did not hold any
energy financial instruments at December 31, 1998.

Financial Derivatives - Interest Rates

SPS has an interest rate swap agreement, which, in effect, fixes the
interest rate on a $25 million notional amount at 6.435%. Amounts paid or
received under this agreement are accrued as interest rates change and are
recognized over the life of the agreement as an adjustment to interest expense.
SPS is exposed to interest rate risk in the event of nonperformance by
counterparties; however, SPS does not anticipate such nonperformance.

Credit Risk

In addition to the risks discussed above, NCE and its subsidiaries are
exposed to credit risk in its risk management activities. Credit risk relates to
the risk of loss resulting from the nonperformance of a counterparty of its
contractual obligations. As the Company continues to expand its gas and power
marketing and trading activities, the Company's exposure to credit risk and
counterparty default may increase. NCE and its subsidiaries maintain credit
policies intended to minimize overall credit risk.

NCE and its subsidiaries conduct standard credit review for all of its
counterparties. The Company employs additional credit risk control mechanisms
when appropriate, such as letters of credit, parental guarantees and
standardized master netting agreements that allow for offsetting of positive and
negative exposures. The credit exposure is monitored and, when necessary, the
activity with a specific counterparty is limited until credit enhancement is
provided.

42
<PAGE>

Concentration of Credit Risk - Accounts Receivable

No individual customer or group of customers engaged in similar activities
represents a material concentration of credit risk to the Company and its
subsidiaries.

9. Regulatory Matters (NCE, PSCo and SPS)

Electric Utility Matters

PSCo Performance Based Regulatory Plan

PSCo's base electric rates are based on traditional cost of service
ratemaking principles. The CPUC established a performance based regulatory plan
in connection with the CPUC's decision to approve the Merger. The major
components of this regulatory plan include the following:

- - 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;
- - a Quality of Service Plan ("QSP") designed with performance measures to
effectively penalize or reward PSCo based on the quality of service
provided to retail customers; and
- - an Incentive Cost Adjustment ("ICA") which provides for the sharing of
energy costs and savings relative to an annual target cost/delivered Kwh.

The sharing of earnings in excess of an 11% return on equity for the
calendar years 1997-2001 are as follows:
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 QSP provides for bill credits if PSCo does not achieve certain
performance measures relating to electric reliability, customer complaints and
telephone response to inquiries. For 1997, the QSP provided for up to $3 million
of rewards for its performance and PSCo's actual reward totaled approximately
$1.5 million. During the third quarter of 1998, PSCo reached a settlement
agreement with the CPUC Staff and the OCC which modified the bill credit
structure for 1998 electric reliability and eliminated the reward structure for
the years 1999 through 2001. Approval of this modification was obtained in
November 1998.

In April 1998, PSCo filed with the CPUC its proposed Performance Based
Regulatory Plan adjustment for calendar year 1997. This adjustment provides 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 earnings test, net of QSP rewards. PSCo recorded a customer refund
obligation of $15.1 million for the 1997 earnings test. In July 1998, PSCo began
refunding a portion of this amount to customers through bill credits. As of
December 31, 1998, PSCo recorded an estimated refund obligation of approximately
$8.1 million for the 1998 earnings test.

Additionally, a $6 million annual electric rate reduction was instituted
October 1, 1996, followed by an additional $12 million annual electric rate
reduction effective with the implementation of new retail gas rates on February
1, 1997. PSCo agreed to freeze base electric rates after the Merger rate
reductions for the period through December 31, 2001 with the flexibility to make
certain other rate changes, including those necessary for the recovery of DSM,
QF capacity costs 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.

43
<PAGE>

PSCo FERC Rate Case

PSCo filed a rate case with the FERC on December 29, 1995, requesting a
slight overall rate increase (less than 1%) from its wholesale electric
customers. This filing, among other things, requested approval for recovery of
OPEB costs under SFAS 106, postemployment benefit costs under SFAS 112 and new
depreciation rates based on the Company's most recent depreciation study. In
March 1997, the FERC issued an order accepting for filing and suspending certain
proposed rate changes. Settlement agreements were reached with all parties and
filed with the FERC, which, resulted in a slight decrease in rates overall. A
final order accepting the settlement agreements was received in June 1997.

SPS Merger Related Rate Reductions

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, $100,000 in Oklahoma and $10,000 in Kansas and $1.5 million to
wholesale customers.

Under a settlement reached with the NMPRC, effective December 30, 1998,
SPS discontinued the merger savings credit of $1.2 million per year with the
implementation of new retail rates in New Mexico as discussed below.

SPS Electric Cost Adjustment Mechanisms

Substantially all fuel and purchased power costs are recoverable from
utility customers, as determined on a jurisdictional basis, using approved cost
adjustment mechanisms. As a result of amendments during 1998 to contracts
between the coal supplier to SPS and the railroad company it employs, coal
transportation costs are projected to decline significantly for the period from
November 1998 through December 2002. These savings will be passed on to
customers.

Texas

The PUCT's regulations require 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.
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
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. The
Company has also requested the prospective sharing of margins from wholesale
non-firm sales. The outcome of this fuel reconciliation proceeding is pending
and a hearing has been set for June 1999.

SPS was named as a defendant in a case entitled Thunder Basin Coal Co. vs.
Southwestern Public Service Co. In November, 1994, the jury returned a verdict
in favor of Thunder Basin and awarded damages of approximately $18.8 million.
SPS appealed the judgment and, in January 1997, that Court found in favor of
Thunder Basin and upheld the judgment. 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.

During 1996 and 1997, SPS obtained conditional approval to collect
portions of the Thunder Basin judgment from wholesale customers from the FERC
and the NMPRC issued an order granting recovery of the New Mexico retail
jurisdictional portion of the judgment. In May 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. 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

44
<PAGE>

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.

New Mexico

In October 1997, the NMPRC approved a fixed fuel factor for SPS's New
Mexico retail jurisdiction, effective January 1998. This employs an over/under
fuel collection calculation made on a monthly basis. SPS is required to petition
for a change in the fixed fuel factor if the over/under recovery balance reaches
$5 million. In addition, on an annual basis SPS files with the NMPRC a report of
SPS's fuel and purchase power costs, which includes the current over/under
recovery balance and proposed rate changes to refund or surcharge the balance.
The methodology of the over/under calculation, plus interest, is similar to the
Texas fixed fuel factor calculation. Previously, New Mexico's retail
jurisdictional electric rates applied a monthly fuel factor. In January 1999,
SPS implemented new annual fixed fuel cost recovery factors to reflect lower
fuel costs primarily as a result of the aforementioned coal transportation cost
settlement between SPS's coal supplier and the railroad company.

SPS Rate Cases

New Mexico

In November 1997, the NMPRC issued an order investigating SPS's rates. In
the order, the NMPRC determined that because of the rapid changes occurring in
the electric industry the NMPRC 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 in May 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. In October 1998, SPS entered into an uncontested
stipulation agreement settling the rate investigation case. As part of this
settlement, SPS instituted a $6 million annual reduction in base rates
(discontinuing the $1.2 million in guaranteed minimum annual credits) for
certain retail customers. Additionally, SPS implemented 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. On November 30, 1998, the
NMPRC approved the stipulation and the rate reduction became effective December
30, 1998.

Wholesale - FERC

In 1989, the FERC issued its final order regarding a 1985 wholesale rate
case. SPS appealed certain portions of that order that related to recognition of
rates of the reduction of the federal income tax rates from 46% to 34%. The
United States Court of Appeals remanded the case, directing the FERC to
reconsider SPS's claim. Negotiated settlements with certain customers were
reached, and approved by the FERC, in 1993 and 1995, with SPS receiving
approximately $10 million, including interest. Settlement agreements were
reached with the two remaining customers during 1998 and approved by the FERC.
In connection with these settlements, SPS recorded $16.9 million of additional
revenues and $7.6 million of additional depreciation expense.

Cheyenne Electric Cost Adjustment Mechanism

Cheyenne filed for an increase in its ECA rates of approximately $3
million and new rates became effective January 1, 1999. This increase, however,
is being contested and hearings are scheduled for March 1999.

45
<PAGE>

Gas Utility Matters

PSCo Rate Cases

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. The District Court judge
requested oral arguments in the proceeding. The Company anticipates a decision
during 1999.

In November 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. Hearings are set for April
1999. The new rates, if approved, would become effective July 1, 1999.

Cheyenne Rate Case

In May 1997, Cheyenne filed an application with the WPSC for an overall
annual increase in retail gas revenues of approximately $1.25 million. 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.

10. 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.

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 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 CERCLA, the U.S. 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

46
<PAGE>

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 PRPs. 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, which is still pending. In March 1998,
PSCo sold the remaining Barter properties, and the total proceeds were $1.1
million.

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, PSCo filed complaints
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. In December 1998, the CPUC approved recovery
of the electric jurisdictional net costs totaling approximately $3.1 million
through PSCo's electric department earnings test over a five-year amortization
period.

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.

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 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) the 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 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 these future plant modifications to meet NOx requirements total
approximately $2.5 million and pertain to 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. In November 1998, the
Company filed for recovery of these costs with the CPUC. The voluntary emissions
reduction agreement will be effective only if the CPUC approves a cost recovery
mechanism acceptable to PSCo.

47
<PAGE>

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 this emission control equipment is in process and on
schedule in accordance with the settlement agreement. The initial installation
of some equipment at Unit 1 was completed in late 1998.

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. Settlement discussions were held in 1998, although no
settlement was achieved. There have been no further settlement discussions.
Resolution of this matter may require the installation of additional 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.

Fort St. Vrain Defueling and Decommissioning

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 the site was released for unrestricted use.
PSCo is currently operating a gas-fired combined cycle steam generation plant at
this facility.

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 NRC to transfer the title
of the ISFSI. The NRC is reviewing this request and PSCo anticipates approval in
early 1999.

As a result of the DOE settlement, coupled with a complete review of
expected remaining decommissioning costs and establishment of the anticipated
refund to customers, pre-tax earnings were positively impacted for 1997 and 1996
by approximately $5 million and $16 million, respectively. In accordance with
the 1991 CPUC approval to recover certain decommissioning costs, 50% of any cash
amounts received from the DOE as part of a settlement, net of

48
<PAGE>

costs incurred by PSCo, including legal fees, is to be refunded or credited to
customers. At December 31, 1998, a $4.7 million refund to customers has been
recorded on the consolidated balance sheet.

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. PSCo appealed the judgment. The affected
land is located north of, but not immediately adjacent to, the storage facility.

Fuel Purchase Requirements

Coal Purchases and Transportation

PSCo and SPS have in place various long-term contracts for the purchase
and transportation of coal (and with respect to SPS, the processing of coal for
deliveries to its bunkers) which are used in the generation of electricity.
These contracts expire on various dates through 2017 and at December 31, 1998,
the total estimated obligations, based on 1998 prices, for PSCo were
approximately $729.2 million, and for SPS were approximately $1.2 billion.

Gas Purchases and Transportation

PSCo and Cheyenne have long-term contracts for the purchase, firm
transportation and storage of natural gas. These contracts, excluding the
thirty-year contract with Young Storage which has been accounted for as a
capital lease, are primarily used to support distribution of natural gas and the
majority of these contracts expire on various dates through 2002. At December
31, 1998, PSCo has minimum annual obligations under such contracts of
approximately $167 million in 1999 declining thereafter for a total estimated
commitment of approximately $245 million. The combined PSCo and Cheyenne minimum
annual obligation at December 31, 1998, under such contracts is approximately
$169 million in 1999 declining thereafter for a total estimated commitment of
approximately $248 million. SPS does not have any long-term contracts with
minimum obligations.

Purchased Power

PSCo, SPS and Cheyenne have entered into agreements with utilities and QFs
for purchased power to meet system load and energy requirements, replace
generation from company-owned units under maintenance and during outages, and
meet operating reserve obligations.

PSCo and SPS have various pay-for-performance contracts with QFs having
expiration dates through the year 2022. In general, these contracts provide for
capacity payments, subject to the QFs meeting certain contract obligations, and
energy payments based on actual power taken under the contracts. The capacity
and energy costs are recovered through base rates and other cost recovery
mechanisms. Additionally, the Company's regulated utilities have long-term
purchased power contracts with various regional utilities expiring through 2018.
Total capacity and energy payments associated with such contracts for NCE were
$490 million, $477 million, and $473 million; for PSCo such payments were $439
million, $452 million and $453 million; and, for SPS such payments were $23
million, $15 million and $20 million in 1998, 1997 and 1996, respectively.

49
<PAGE>

At December 31, 1998, the estimated future payments for capacity that NCE,
PSCo and SPS are obligated to purchase, subject to availability, are as follows
(in thousands):
Regional
QFs Utilities Total
--- --------- -----
NCE
1999.............................. $ 156,489 $182,969 $339,458
2000.............................. 153,808 163,990 317,798
2001.............................. 151,903 142,301 294,204
2002.............................. 139,656 130,534 270,190
2003.............................. 128,171 119,397 247,568
2004 and thereafter............... 1,053,855 1,018,503 2,072,359
--------- --------- ---------
Total............................ $1,783,882 $1,757,694 $3,541,576
========== ========== ==========

PSCo
1999.............................. $ 140,445 $166,620 $307,065
2000.............................. 137,497 155,227 292,724
2001.............................. 135,323 142,301 277,624
2002.............................. 122,802 130,534 253,336
2003.............................. 111,035 119,397 230,432
2004 and thereafter............... 758,917 1,018,504 1,777,421
-------- --------- ---------
Total............................ $1,406,019 $1,732,583 $3,138,602
========== ========== ==========

SPS
1999.............................. $ 16,044 $ 7,923 $ 23,967
2000.............................. 16,311 - 16,311
2001.............................. 16,580 - 16,580
2002.............................. 16,854 - 16,854
2003.............................. 17,136 - 17,136
2004 and thereafter............... 294,938 - 294,938
--------- ------- --------
Total............................ $ 377,863 $ 7,923 $385,786
========= ======= ========

Historically, all minimum coal, coal transportation, natural gas and
purchased power requirements have been met.

System Purchase Option

SPS and the City of Las Cruces, New Mexico ("the City") entered into a
System Purchase Option and Rate Agreement in August 1994, which grants the City
the option to sell to SPS the electric utility system serving the City
(including distribution, subtransmission and transmission facilities), which the
City plans to acquire from El Paso Electric Company ("EPE") by purchase or
through condemnation proceedings. The agreement has a three-year term beginning
at the time the City acquires the facilities and ending no later than January 1,
2002. The purchase price which would be paid by SPS would be equal to the amount
required to retire all outstanding debt incurred by the City in acquiring the
facilities plus the City's reasonable costs in acquiring the facilities. SPS has
the right to terminate the agreement if, in SPS's sole discretion, it determines
that any proposed condemnation award is excessive or upon the occurrence of
certain other events. The agreement also provides that, if the City abandons or
dismisses condemnation proceedings as a consequence of SPS's termination of the
agreement, SPS will reimburse the City for one-half of its reasonable litigation
expenses and for any of EPE's damages and litigation expenses that the City is
obligated to pay by final court order. It is anticipated that the City will file
a in suit in State District Court in 1999 seeking to condemn the electric
distribution facilities of EPE. In conjunction with the agreement, the NMPRC has
initiated Case 2651 to investigate whether the agreement constitutes a security,
or the guarantee of a security, under the New Mexico Public Utility Act. SPS has
responded to the Commission's Order to Show Cause and does not believe the
agreement to be a security or the guarantee of a security. A hearing was
conducted in Case 2651 in July 1997. On November 24, 1998, the NMPRC issued an
order dismissing the investigation.

50
<PAGE>

Other
In connection with an agreement for the sale of electric power, SPS
guaranteed certain obligations of a customer totaling $48 million at December
31, 1997. These obligations are related to the construction of certain utility
property that, in the event of default by the customer, would revert to SPS.
Additionally, the Company and its subsidiaries have commitments related to the
purchase of materials, plant and equipment additions, DSM expenditures and other
various items resulting from the normal course of business.

Tax Matters

PSRI, 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. In August 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. A
Request for Technical Advice was filed with the IRS National Office on January
15, 1999, 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. Systems posing the
greatest business risks to the Company include power generation and distribution
systems, telecommunications systems, energy trading systems and billing systems.
The Company is addressing 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 were completed in 1998. Additionally,
approximately 77% of the remediation and testing phase for all critical IT
systems was completed in 1998 with the remaining remediation and testing planned
to be completed by June 30, 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 were approximately 46% complete at December 31, 1998; the remainder is
expected to be completed by September 30, 1999. Systems critical to the
generation and delivery of energy are expected to be completed by June 30, 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. 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.

51
<PAGE>

The Company 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.
This includes approximately $19 million for inventory, assessment, remediation
and testing and approximately $6 million for the replacement of automated system
components. Furthermore, the Company expects to spend approximately $15 million
in capital expenditures for the accelerated replacement of certain non-compliant
IT systems, which are expected to be implemented by September 30, 1999. The
majority of all Y2K 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 through December 31, 1998, and the estimated
costs to be incurred during 1999 (in millions).

Actual Costs Estimated Estimated
1998 and Prior 1999 Total
-------------- ---- -----

Operating expenses....................... $ 8.2 $ 11.1 $ 19.3
Capital expenditures .................... 7.1 13.4 20.5

Yorkshire Power has also undertaken activities to address Y2K issues. The
estimated proportionate share of Yorkshire Power's incremental Y2K costs (costs
which would not have been required in the normal course of business) that will
flow through to the Company's earnings as a result of such activities is not
expected to have a material impact on the financial condition or results of
operations of the Company.

The most reasonably likely worst case scenario resulting during Y2K
critical dates is a loss of production capacity from certain of the Company's
generating units, 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
have been and continue to be tested to provide assurance that the Company will
be prepared for risks which could result from the Y2K millennium change.

If correction or replacement of non-compliant systems 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.

Leasing Program

The Company's subsidiaries lease various equipment and facilities used in
the normal course of business, some of which are accounted for as capital
leases. Expiration of the capital leases range from 1999 to 2025. The net book
value of property under capital leases was $39.8 million and $39.6 million for
NCE and PSCo, respectively at December 31, 1998 and $44.7 million and $44.4
million for NCE and PSCo, respectively, at December 31, 1997. Assets acquired
under capital leases are recorded as property at the lower of fair-market value
or the present value of future lease payments and are amortized over their
actual contract term in accordance with practices allowed by regulators. The
related obligation is classified as long-term debt. Executory costs are excluded
from the minimum lease payments.

The majority of the operating leases are under a leasing program that has
initial noncancellable terms of one year, while the remaining leases have
various terms. These leases may be renewed or replaced. No material restrictions
exist in these leasing agreements concerning dividends, additional debt, or
further leasing. Rental expense for 1998, 1997 and 1996 was $15.5 million, $36.2
million and $26.9 million, respectively, for NCE; $12.2 million, $31.1 million
and $25.0 million, respectively, for PSCo; and $2.4 million, $4.3 million and
$3.7 million, respectively, for SPS. SPS's rental expense for the Transition
Period was $1.2 million.

52
<PAGE>

Estimated future minimum lease payments at December 31, 1998, are as
follows (in thousands):

Capital Leases
NCE PSCo
--- ----
1999 .............................................. $ 8,020 $ 7,890
2000............................................... 5,158 5,092
2001............................................... 5,035 5,035
2002............................................... 4,820 4,820
2003............................................... 4,646 4,646
All years thereafter............................... 71,711 71,711
------- -------
Total future minimum lease payments 99,390 99,194
Less amounts representing interest............. 59,639 59,639
------- -------
Present value of net minimum lease payments.... $39,751 $39,555
======= =======

Operating Leases
NCE PSCo SPS
--- ---- ---
1999.................................. $13,512 $10,451 $ 2,292
2000.................................. 10,647 8,012 2,195
2001.................................. 5,450 3,297 1,860
2002.................................. 499 347 31
2003.................................. 379 245 26
All years thereafter................. 7,752 7,313 52
------- ------- -------
Total future minimum lease payments $38,239 $29,665 $ 6,456
======= ======= =======

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 financial position, results of operations or cash flows of the Company or
its subsidiaries.

Union Contracts

PSCo

The current Collective Bargaining Agreement is a three-year agreement
extending from June 1, 1997 through May 31, 2000 with wage increases of 3%, 3%
and 3.25% beginning in each year of the agreement 1997, 1998 and 1999,
respectively. Approximately 1,946 employees, or 62% of PSCo's total workforce at
December 31, 1998, are represented by the International Brotherhood of
Electrical Workers, ("IBEW"), Local 111.

SPS

The current Collective Bargaining Agreement is a three-year agreement
extending from November 1, 1996 through November 1, 1999 with wage increases of
3% in each year of the agreement. Approximately 805 employees, or 60% of SPS's
total workforce at December 31, 1998, are represented by the IBEW, Local 602.

53
<PAGE>

11. Jointly-Owned Electric Utility Plants (NCE and PSCo)

The Company's investments in jointly-owned plants (PSCo participation) and
its ownership percentages as of December 31, 1998, are (in thousands):
Plant Construction
in Accumulated Work in
Service Depreciation Progress Ownership %
------- ------------ -------- -----------

Hayden Unit 1................ $70,191 $31,785 $ 2,841 75.50
Hayden Unit 2................ 58,257 35,518 11,191 37.40
Hayden Common Facilities..... 23,411 720 1,350 53.10
Craig Units 1 & 2............ 57,660 25,985 50 9.72
Craig Common Facilities
Units 1 & 2 ............... 10,990 3,388 30 9.72
Craig Common Facilities
Units 1,2 & 3 ............. 8,773 3,698 1 6.47
Transmission Facilities,
Including Substations ..... 79,722 24,703 92 42.0-73.0
------- -------- ------

$309,004 $125,797 $ 15,555
======== ======== ========

These assets include approximately 320 Mw of net dependable generating
capacity. PSCo is responsible for its proportionate share of operating expenses
(reflected in PSCo's and the Company's consolidated statements of income) and
construction expenditures. The increase in plant in service in 1998 and the
construction work in progress amounts for Hayden Unit 1, Hayden Unit 2 and
Hayden Common Facilities include construction expenditures for installing
emission control equipment for these facilities as discussed in Note 10.

12. Employee Benefits (NCE, PSCo and SPS)

The FASB issued SFAS No.132, "Employers' Disclosures about Pensions &
Other Postretirement Benefits", effective for 1998. This standard does not
change the measurement or recognition of costs for pension or other
postretirement plans but rather standardizes disclosures.

Pensions

The Company and its subsidiaries maintain tax qualified noncontributory
defined benefit pension plans which cover substantially all employees. At
December 31, 1998, there were 5,839, 3,118, and 1,276 NCE, PSCo and SPS
employees, respectively, participating in these plans. NCE, as the plan sponsor,
has overall responsibility for directly allocating such costs of each individual
plan to each of the participating employers. This allocation was determined by
the plans' actuary based on benefit obligations for active participants.

Plan assets are held in a master trust. Plan assets are stated at fair
value and are comprised primarily of corporate debt and equity securities, a
real estate fund and government securities held either directly or in commingled
funds. The Company's funding policy is to contribute annually, at a minimum, the
amount necessary to satisfy the IRS funding standards.

A comparison of the actuarially computed benefit obligation and plan
assets at December 31, 1998 and 1997, is presented in the following table (in
thousands).

Change in Benefit Obligation 1998 1997
------ ------

Obligation at January 1............ $ 991,973 $919,452
Service cost....................... 23,902 18,418
Interest cost...................... 66,735 68,327
Plan amendments *.................. (60,014) -
Actuarial loss..................... 52,416 42,460
Benefit payments................... (61,221) (54,412)
Curtailment........................ - (2,272)
------- ------
Obligation at December 31.......... $1,013,791 $991,973
========== ========

54
<PAGE>

Change in Fair Value of Plan Assets 1998 1997
------ -----
Fair value of plan assets at
January 1 ....................... $1,131,270 $ 996,085
Actual return on plan assets....... 168,872 189,597
Benefit payments................... (61,221) (54,412)
------- -------
Fair value of plan assets at
December 31 ..................... $1,238,921 $1,131,270
========== ==========
Funded Status
Funded status at December 31....... $255,130 $139,297
Unrecognized transition asset...... (30,871) (38,109)
Unrecognized prior-service cost (credit) (33,073) 26,477
Unrecognized gain.................. (120,838) (111,190)
-------- --------
NCE prepaid pension asset.......... $40,348 $16,475
======= =======
PSCo prepaid pension asset........ $15,089 $9,925
======= ======
SPS prepaid pension asset......... $24,611 $7,243
======= ======

* Effective July 1, 1998, a new cash balance plan was established by NCE. The
NCE board of directors approved amendments to the existing pension plans and the
plan assets and obligation for all non-bargaining unit employees were
transferred into this plan.

1998 1997
---- ----
Significant assumptions:
Discount rate 6.75% 7.0%
Expected long-term increase
in compensation level 4.0% 4.0%

Cumulative variances between actual experience and assumptions for costs
and returns on assets, outside of a 10% corridor of the greater of plan assets
and obligations, are amortized over the average remaining service lives of
employees in the plans.

The components of net periodic pension cost (credit) are as follows (in
thousands):

NCE 1998 1997 1996
- --- ----- ------ -----

Service cost............................... $ 23,902 $18,418 $21,226
Interest cost.............................. 66,735 68,327 66,503
Expected return on plan assets............. (103,928) (89,567) (75,723)
Curtailment................................ - 126 -
Amortization of transition asset........... (7,238) (7,238) (7,238)
Amortization of prior-service cost (credit) (464) 2,431 2,440
Amortization of net gain................... (2,880) (2,395) (801)
------- ------ ------
NCE net periodic pension cost (credit)..... $(23,873) $(9,898) $ 6,407
======== ======= =======
PSCo net periodic pension cost (credit).... $ (5,093) $ 2,318 $ 6,856
======== ======= =======
SPS net periodic pension cost (credit)..... $(15,175) $(10,968) $ 855
======== ======== =======

SPS
Transition
1996 PSCo SPS Period
- ---- ------ ------ --------

Service cost............................... $14,317 $ 6,846 $ 2,390
Interest cost.............................. 46,497 20,266 7,066
Expected return on plan assets............ (53,739) (20,984) (8,263)
Amortization of transition asset........... (3,674) (3,564) (1,188)
Amortization of prior-service cost......... 2,304 136 45
Amortization of net loss (gain)............ 1,151 (1,845) (59)
------- ------ ------
Net periodic pension cost.................. $ 6,856 $ 855 $ (9)
======= ======= ======

1998 1997 1996
------- ------ -----------
PSCo SPS
Significant assumptions:
Discount rate............................ 7.0% 7.5-8.0% 7.25% 8.0%
Expected long-term increase in
compensation level ................... 4.0% 4.25-6.0% 4.0% 6.0%
Expected weighted average long-term rate
of return on assets .................. 9.5% 9.75% 9.75% 8.0%

55
<PAGE>

Additionally, the Company maintains noncontributory defined benefit
supplemental retirement income plans ("Supplemental Plan") for certain
qualifying executive personnel. The Supplemental Plan benefits are paid out
of/or funded through the Company's general fund.

Defined Contribution Plans

The Company and its subsidiaries maintain defined contribution plans which
cover substantially all employees. Total contributions to these plans by the
Company and its subsidiaries were approximately $12 million in 1998, 1997, and
1996.

Postretirement Benefits Other Than Pensions

The Company and its subsidiaries provide certain postretirement health
care and life insurance benefits for substantially all employees who reach
retirement age while working for the Company. PSCo, SPS, NCS and other NCE
affiliates participate in these plans. NCE, as the plan sponsor, will continue
to reflect the costs of these plans in accordance with SFAS 106 and directly
allocate such costs to each of the participating employers. Historically, the
Company recorded the cost of these benefits for these plans on a pay-as-you-go
basis. The Company's subsidiaries have adopted SFAS 106 which requires the
accrual, during the years that an employee renders service to the Company, of
the expected cost of providing these benefits to the employee. The Company is
amortizing the transition obligations for these plans over a period of 20 years.

Plan assets are stated at fair value and are comprised primarily of
corporate debt and equity securities, a real estate fund, government securities
and other short-term investments held either directly or in commingled funds.

PSCo adopted SFAS 106 based on a level of expense determined in accordance
with the CPUC. PSCo transitioned to full accrual accounting for OPEB costs
between January 1, 1993 and December 31, 1997, consistent with the accounting
requirements for rate regulated enterprises. All OPEB costs deferred during the
transition period will be amortized on a straight line basis over the subsequent
15 years.

Additionally, certain state agencies, which regulate the Company's utility
subsidiaries, have issued guidelines related to the recovery or funding of OPEB
costs. SPS is required to fund SFAS 106 costs for Texas and New Mexico
jurisdictional amounts collected in rates and PSCo and Cheyenne are required to
fund SFAS 106 costs in irrevocable external trusts which are dedicated to the
payment of these postretirement benefits.

A comparison of the actuarially computed benefit obligation and plan
assets at December 31, 1998 and 1997, is presented in the following table (in
thousands):

Change in Benefit Obligation 1998 1997
------ ------

Obligation at January 1............ $376,685 $350,354
Service cost....................... 4,917 6,120
Interest cost...................... 26,503 26,537
Plan amendments.................... (14,346) -
Actuarial loss..................... 20,310 16,627
Benefit payments................... (16,874) (21,253)
Curtailment........................ - (1,700)
------ ------
Obligation at December 31.......... $397,195 $376,685
======== ========

56
<PAGE>

Change in Fair Value of Plan Assets 1998 1997
------ ------

Fair value of plan assets at
January 1 ....................... $112,324 $88,673
Actuarial return on plan assets.... 14,158 1,423
Employer contributions............. 26,928 28,908
Employee contributions............. 535 1,886
Benefit payments................... (7,717) (8,566)
------ ------
Fair value of plan assets at
December 31 ..................... $146,228 $112,324
======== ========

Funded Status
Funded status at December 31....... $250,967 $264,361
Unrecognized transition obligation. (212,648) (227,724)
Unrecognized prior-service credit.. 13,588 -
Unrecognized gain.................. 9,825 26,079
------ ------
NCE accrued benefit cost........... $61,732 $62,716
======= =======
PSCo accrued benefit cost.......... $55,537 $58,695
======= =======
SPS accrued benefit cost........... $5,941 $3,800
====== ======

1998 1997
---- ----
Significant assumptions:
Discount rate 6.75% 7.0%
Expected long-term increase in
compensation level 4.0% 4.0%

The components of net periodic postretirement benefit cost are as follows
(in thousands):

NCE 1998 1997 1996
- --- ----- ---- -----

Service cost............................. $ 4,917 $ 6,121 $ 8,191
Interest cost............................ 26,503 26,537 27,998
Expected return on plan assets........... (10,767) (8,078) (6,233)
Curtailment.............................. - 3,323 -
Amortization of transition obligation.... 15,076 14,992 15,388
Amortization of prior-service cost (credit) (757) - -
Amortization of net gain................. (786) (1,162) (90)
------ ------ ------
Net periodic postretirement benefit costs 34,186 41,733 45,254
OPEB expense recognized in accordance with
current regulations ................... (39,859) (36,351) (37,981)
------ ------ -------

Increase (decrease) in regulatory asset
(Note 1) ............................... (5,673) 5,382 7,273
Regulatory asset at beginning of year.... 63,023 57,641 50,368
------- ------ ------
Regulatory asset at end of period........ $57,350 $63,023 $57,641
======= ======= =======

1998 1997
---------------- --------------
PSCo SPS PSCo SPS
---- --- ---- ---

Net periodic postretirement benefit
costs.. ............................. $26,044 $3,295 $29,025 $8,199
OPEB expense recognized in accordance
with current regulations ............ (31,578) (3,434) (23,479) (8,363)
------ ------ ------ ------
Increase (decrease) in regulatory asset
(Note 1) ............................ (5,534) (139) 5,546 (164)
Regulatory asset at beginning of year.. 59,995 3,028 54,449 3,192
------- ------ ------- ------
Regulatory asset at end of period...... $54,461 $2,889 $59,995 $3,028
======= ====== ======= ======

SPS
Transition
1996 PSCo SPS Period
- ---- ------ ------ --------

Service cost........................... $ 6,928 $ 1,266 $ 419
Interest cost.......................... 22,982 5,109 1,608
Expected return on plan assets......... (4,500) (1,589) (674)
Amortization of transition obligation.. 12,710 2,674 892
Amortization of net gain............... - - (87)
------- ------- ------
Net periodic postretirement benefit costs.. 38,120 7,460 2,158
OPEB expense recognized in accordance
with current regulations ............. (31,271) (6,715) (2,230)
------- ------ ------
Increase in regulatory asset (Note 1).. 6,849 745 (72)
Regulatory asset at beginning of year.. 47,600 2,519 3,264
------- ------- ------
Regulatory asset at end of period.......... $54,449 $ 3,264 $3,192
======= ======= ======

57
<PAGE>

1998 1997 1996
------- ------ -----------
PSCo SPS
Significant assumptions:
Discount rate............................ 7.0% 7.5-8.0% 7.25% 8.0%
Expected long-term increase in
compensation level ..................... 4.0% 4.0-6.0% 4.0% 6.0%
Expected weighted average long-term rate
of return on assets .................... 9.5% 9.75% 9.75% 8.0%

The assumed health care cost trend rate for 1998 is 8.5%, decreasing to
4.5% in 2007 in 0.5% annual increments. A 1% increase in the assumed health care
cost trend rate would have the following effects (in thousands):

<TABLE>
<CAPTION>
NCE PSCo SPS
---------------- ---------------- ---------------
1% Increase 1% Decrease 1% Increase 1% Decrease 1% Increase 1% Decrease
----------- ----------- ----------- ----------- ----------- -----------

<S> <C> <C> <C> <C> <C> <C>
Effect on total
of service and interest
cost components of net
periodic postretirement
benefit cost......... $ 3,300 $ (2,600) $ 2,364 $(1,911) $ 787 $ (634)

Effect on the accumulated
postretirement
benefit obligation... $38,200 $(31,300) $27,290 $(22,509) $ 9,414 $(7,681)
</TABLE>

Postemployment Benefits

The Company and its subsidiaries provide certain benefits to former or
inactive employees after employment but before retirement (postemployment
benefits). At December 31, 1998, the Company has recorded a $31.3 million
liability on the consolidated balance sheet, using an assumed discount rate of
6.75%. The costs of the benefit were historically recorded on a pay-as-you-go
basis prior to the adoption of SFAS 112 in 1994, which required accrual
accounting. PSCo and Cheyenne recorded regulatory assets upon the adoption of
SFAS 112 in anticipation of obtaining future rate recovery of these costs (see
Note 1. Summary of Significant Accounting Policies - Regulatory Assets and
Liabilities). PSCo received FERC approval in 1997 to recover the electric
wholesale jurisdictional portion of its regulatory asset and Cheyenne received
WPSC approval in 1997 to recover its gas jurisdictional portion. The CPUC
allowed recovery of postemployment benefit costs on an accrual basis in
connection with PSCo's 1996 gas rate case, but denied PSCo's request to amortize
its approximately $8.9 million regulatory asset (gas jurisdictional) portion.
PSCo has appealed to the Denver District Court the decision related to this
issue. A final determination on the recovery of PSCo's retail electric
jurisdictional portion has not been made. Management believes it is probable
that the Company will receive the required regulatory approvals to recover these
costs in the future.

Incentive Compensation

The Company and its subsidiaries have Incentive Compensation Plans
("Incentive Plans"), which provide for annual and long-term incentive awards for
key employees. Approximately 5 million shares of common stock have been
authorized for these Incentive Plans for the issuance of restricted shares
and/or stock options, with certain vesting and/or exercise requirements. The
Company recognizes compensation expense for restricted stock awards based on the
fair value of the Company's common stock on the date of grant, consistent with
Statement of Financial Accounting Standards ("SFAS 123"). Cash, restricted stock
and stock option awards were made under these plans during 1998, 1997 and 1996.

The Company applies APB Opinion No. 25 in accounting for its stock-based
compensation and, accordingly, no compensation cost is recognized for the
issuance of stock options as the exercise price of the options equals the
fair-market value of the Company's common stock at the date of grant. Assuming
compensation cost for the Company, PSCo and SPS had been determined consistent
with SFAS 123 using the fair-value based method, the Company's net income would
have been reduced by approximately $1.1 million and $2.8 million in 1998 and
1997, respectively, which would have reduced earnings per share by approximately
$0.01 and $0.03, respectively. The net income would have been reduced by an
insignificant amount with no impact on earnings per share for 1996.

58
<PAGE>

SFAS 123's method of accounting for stock-based compensation plans has not been
applied to options granted prior to January 1, 1995, and as a result the pro
forma compensation cost may not be representative of that to be expected in
future years. A summary of the Company's stock options at December 31, 1998,
1997 and 1996 and changes during the years then ended is presented in the table
below:

<TABLE>
<CAPTION>
NCE* PSCo SPS
--------------- --------------- ---------------
Weighted- Weighted- Weighted-
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
<S> <C> <C> <C> <C> <C> <C>
1998
Outstanding at
beginning of year 2,085,632 $ 41.10
Granted 570,200 47.55
Exercised 187,198 34.61
Forfeited 38,607 45.10
------
Outstanding at end
of year 2,430,027 43.07
=========
Exercisable at end
of year 1,650,088 40.99
=========
Weighted-average
fair value
of options granted $ 4.40

1997
Outstanding at
beginning of year 477,783 $ 31.46 441,227 $31.38 38,480 $ 30.80
Granted 1,690,147 43.32 62,100 39.00 2,147 37.24
Exercised 78,647 30.34 40,404 29.57 3,666 30.81
Forfeited 3,651 33.41 3,651 33.41 - -
Converted to NCE
options at
Merger date - - 459,272 32.56 36,961 32.70
------ ------- ------
Outstanding at end
of year 2,085,632 41.10 - - - -
========= ======= =====
Exercisable at end
of year 431,071 32.66 - - - -
======= ======= =====

Weighted-average
fair value
of options granted $ 5.45 $ 4.23 $ 3.70

1996
Outstanding at
beginning of year 407,117 $29.78 347,931 $29.33 62,301 $30.78
Granted 158,270 35.13 158,270 35.13 - -
Exercised 74,303 30.87 51,673 30.21 21,647 30.76
Forfeited 13,301 32.48 13,301 32.84 - -
------ ------ -----
Outstanding at year
of year 477,783 31.46 441,227 31.38 40,654 30.79
======= ======= ======
Exercisable at end
of year 158,970 29.05 158,970 29.05 - -
======= ======= =====

Weighted-average
fair value
of options granted $ 4.31 $ 4.31 $ -

SPS Transition Period
Outstanding at beginning of year 40,654 $30.79
Granted - -
Exercised 2,174 30.69
Forfeited - -
-----
Outstanding at year of year 38,480 30.80
======
Exercisable at end of year -
=====
</TABLE>

* For 1997 and 1996 the amounts reflect the conversion of SPS and PSCo stock
options to NCE stock options.

The fair value of each option grant is estimated on the date of grant using the
Black-Scholes Option-Pricing Model with the following weighted-average
assumptions:
1998 1997 1996
------ ---- ----

Expected option life..................... 10 years 10 years 10 years
Stock volatility.......................... 13.8% 13.3% 11.95%
Risk-free interest rate................... 5.08% 6.15% 6.21%
Dividend yield............................ 5.4% 5.4% 5.8%

59
<PAGE>

Additionally, NCE, PSCo and SPS have other plans, which provide for cash
awards to all employees based on the achievement of corporate goals, of which
certain goals were met in each of the last three years. The expenses accrued
under the incentive programs for the years 1998, 1997 and 1996 are as follows
(in millions):

1998 1997 1996
---- ---- ----

NCE........................................ $ 11.3 $ 4.2 $ 10.9
PSCo....................................... 3.4 2.7 7.8
SPS........................................ 1.9 1.1 3.1

In accordance with the terms of the Company's Incentive Plans, certain
unexercisable stock options, restricted stock awards and dividend equivalents
became exercisable or vested on the effective date of the Merger. The NCE
Omnibus Incentive Plan, which was adopted in 1997, contains a change in control
provision under which all stock-based awards, such as options and restricted
shares, will vest 100% and all cash-based awards will be paid out immediately in
cash as if the performance objectives have been achieved through the effective
date of the change in control.

13. Income Taxes (NCE, PSCo and SPS)

The provisions for income taxes for NCE and PSCo for the years ended
December 31, 1998, 1997 and 1996, and for SPS for the years ended December 31,
1998, 1997 and August 31, 1996 and for the four months ended December 31, 1996
consist of the following (in thousands):

1998 NCE PSCo SPS
--- ---- ---
Current income taxes:
Federal.......................... $126,122 $91,122 $71,954
State............................ 8,448 8,176 2,592
-------- ------- -------
Total current income taxes.......... 134,570 99,298 74,546
-------- ------- -------
Deferred income taxes:
Federal.......................... 5,433 6,014 (8,266)
State............................ 815 1,078 (334)
-------- ------- -------
Total deferred income taxes...... 6,248 7,092 (8,600)
-------- ------- -------

Investment tax credits - net........ (5,222) (4,896) (250)
-------- ------- -------

Total provision for income taxes.... $135,596 $101,494 $65,696
======== ======== =======

1997 NCE PSCo SPS
--- ---- ---
Current income taxes:
Federal.......................... $ 82,337 $55,041 $43,401
State............................ 4,872 3,601 2,057
-------- ------- -------
Total current income taxes.......... 87,209 58,642 45,458
-------- ------- -------
Deferred income taxes:
Federal.......................... 45,537 31,548 3,045
State............................ 6,674 5,842 542
-------- ------- -------
Total deferred income taxes...... 52,211 37,390 3,587
-------- ------- -------

Investment tax credits - net........ (5,501) (5,219) (250)
-------- ------- -------

Total provision for income taxes.... $133,919 $90,813 $48,795
======== ======= =======

60
<PAGE>

1996 NCE PSCo SPS
--- ---- ---
Current income taxes:
Federal.......................... $ 79,365 $41,737 $46,435
State............................ 2,832 951 2,689
-------- ------- -------
Total current income taxes..... 82,197 42,688 49,124
-------- ------- -------
Deferred income taxes:
Federal.......................... 70,964 53,612 15,776
State............................ 7,998 7,287 647
-------- ------- -------
Total deferred income taxes...... 78,962 60,899 16,423
-------- ------- -------

Investment tax credits - net........ (7,506) (7,256) (250)
-------- ------- -------

Total provision for income taxes.... $153,653 $96,331 $65,297
======== ======= =======

Four Months Ending December 31,
SPS - Transition Period 1996 1995
-------- -------
(unaudited)
Current income taxes:
Federal.......................... $ 5,991 $14,799
State............................ 190 998
-------- -------
Total current income taxes..... 6,181 15,797
-------- -------
Deferred income taxes:
Federal.......................... 4,697 3,117
State............................ 192 132
-------- -------
Total deferred income taxes...... 4,889 3,249
-------- -------

Investment tax credits - net........ (83) (83)
-------- -------

Total provision for income taxes.... $ 10,987 $18,963
======== =======

A reconciliation of the statutory U.S. income tax rates and the effective
tax rates follows (in thousands):

1998
<TABLE>
<CAPTION>
NCE PSCo SPS
--- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Tax computed at U.S. statutory
rate on pre-tax accounting
income... .................... $169,010 35.0% $105,559 35.0% $63,239 35.0%
Increase (decrease) in tax from:
Allowance for funds used
during construction......... (6,072) (1.3) (4,315) (1.4) (1,730) (1.0)
Amortization of investment
tax credits ............... (5,221) (1.1) (4,896) (1.6) (250) (0.1)
State income taxes, net of
Federal income tax benefit 6,010 1.2 6,015 2.0 1,468 0.8
Cash surrender value of life
insurance policies.......... (14,553) (3.0) (14,478) (4.8) (76) -
Amortization of prior
flow-through amounts ....... 10,509 2.2 10,446 3.5 - -
Merger related costs -
non-deductible ............ 1,482 0.3 - - 562 0.3
Foreign tax credit........... (15,457) (3.2) (1,363) (0.5) - -
International treaty tax relief (12,806) (2.7) (1,129) (0.4) - -
Other-net.................... 2,694 0.7 5,655 1.9 2,483 1.4
----- ----- ------ --- ----- ----
Total income taxes.......... $135,596 28.1% $101,494 33.7% $65,696 36.4%
======== ===== ======== ===== ======= =====
</TABLE>

61
<PAGE>

1997
<TABLE>
<CAPTION>
NCE PSCo SPS
--- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Tax computed at U.S. statutory
rate on pre-tax accounting
income........................ $142,506 35.0% $103,199 35.0% $43,529 35.0%
Increase (decrease) in tax from:
Allowance for funds used
during construction......... (2,220) (0.6) (2,222) (0.8) (2) -
Amortization
of investment tax credits..... (5,501) (1.4) (5,219) (1.8) (250) (0.2)
State income taxes, net of
Federal income tax benefit 6,617 1.6 5,250 1.8 1,689 1.4
Cash surrender value of life
insurance policies.......... (12,952) (3.2) (12,876) (4.4) (76) (0.1)
Amortization of prior
flow-through amounts ....... 10,509 2.6 10,483 3.6 - -
Merger related costs -
non-deductible ............. 8,274 2.0 4,921 1.7 3,352 2.7
Foreign tax credit........... (7,043) (1.7) (7,043) (2.4) - -
International treaty tax relief (6,309) (1.4) (6,309) (2.1) - -
Other-net.................... 38 0.0 629 .2 553 0.4
----- ----- ------ ---- ------ ----
Total income taxes.......... $133,919 32.9% $90,813 30.8% $48,795 39.2%
======== ===== ======= ===== ======= =====

1996
NCE PSCo SPS
--- ---- ---
Tax computed at U.S. statutory
rate on pre-tax accounting
income... .................. $153,287 35.0% $100,337 35.0% $59,874 35.0%
Increase (decrease) in tax from:
Allowance for funds used
during construction........ (1,685) (0.3) (1,438) (0.5) (248) (0.1)
Amortization of investment
tax credits ............... (7,506) (1.7) (7,256) (2.5) (250) (0.1)
State income taxes, net of
Federal income tax benefit 6,579 1.5 5,356 1.9 1,748 0.9
Cash surrender value of life
insurance policies.......... (11,265) (2.6) (11,265) (3.9) (76) -
Amortization of prior
flow-through amounts ....... 10,509 2.4 10,509 3.6 - -
Merger related costs -
non-deductible ............ 4,258 1.0 2,574 0.9 2,006 1.2
Other-net.................... (524) (0.2) (2,486) (0.9) 2,243 1.3
----- ----- ------ ---- ----- ----
Total income taxes.......... $153,653 35.1% $96,331 33.6% $65,297 38.2%
======== ===== ======= ===== ======= =====
</TABLE>

SPS Transition Period Four Months Ending December 31,
1996 1995
----- -----
(unaudited)
Tax computed at U.S. statutory
rate on pre-tax accounting
income... .................... $10,544 35.0% $17,468 35.0%
Increase (decrease) in tax from:
Allowance for funds used
during construction......... (144) (0.5) (180) (0.4)
Amortization of investment tax
credits .................... (83) (0.3) (83) (0.2)
State income taxes, net of
Federal income tax benefit.. 123 0.4 649 1.3
Merger related costs -
non-deductible ............. 488 1.6 620 1.2
Other-net.................... 59 0.3 489 1.1
----- --- --- ---
Total income taxes.......... $10,987 36.5% $18,963 38.0%
======= ===== ======= =====

The Company and its regulated subsidiaries have historically provided for
deferred income taxes to the extent allowed by their regulatory agencies whereby
deferred taxes were not provided on all differences between financial statement
and taxable income (the flow-through method). At December 31, 1998, PSCo and SPS
are fully normalized for FERC jurisdictional purposes. For state jurisdictional
purposes, PSCo is fully normalized in Colorado and Wyoming, respectfully and SPS
is fully normalized in Texas, Oklahoma, and New Mexico (see Note 9. Regulatory
Matters -SPS Electric Cost adjustment Mechanisms). SPS is fully normalized to
the extent allowed by its regulators in Kansas, with flow-through treatment of
certain temporary differences. To give effect to temporary differences for which
deferred taxes were not previously required to be provided, a regulatory asset
was recognized. The regulatory asset represents temporary differences primarily
associated with prior flow-through amounts and the equity component of allowance
for funds used during construction, net of temporary differences related to
unamortized investment tax credits and excess deferred income taxes that have
resulted from historical reductions in tax rates (see Note 1. Summary of
Significant Accounting Policies).

62
<PAGE>

The tax effects of significant temporary differences representing deferred
tax liabilities and assets as of December 31, 1998 and 1997 are as follows (in
thousands):

1998 NCE PSCo SPS
--- ---- ---
Deferred income tax liabilities:
Accelerated depreciation and
amortization ................... $ 762,538 $ 471,776 $ 280,949
Plant basis differences (prior
flow-through) .................. 150,210 98,208 52,383
Allowance for equity funds used
during construction ............ 74,903 45,137 29,664
Pensions.......................... 29,915 35,053 (6,648)
Other............................. 114,456 64,045 36,169
-------- ------- --------
Total............................ 1,132,022 714,219 392,517
Deferred income tax assets:
Investment tax credits............ 61,912 58,315 2,925
Contributions in aid of construction 87,685 84,720 2,172
Other............................. 33,147 24,461 12,878
-------- ------- --------
Total............................ 182,744 167,496 17,975
-------- ------- --------
Net deferred income tax liability... $949,278 $546,723 $374,542
======== ======== ========

1997 NCE PSCo SPS
--- ---- ---
Deferred income tax liabilities:
Accelerated depreciation and
amortization .................. $ 724,879 $432,453 $278,566
Plant basis differences (prior
flow-through) ................. 173,523 118,332 54,384
Allowance for equity funds used
during construction ........... 77,925 46,715 31,103
Pensions.......................... 31,832 33,105 (1,693)
Other............................. 116,912 75,143 39,424
-------- ------- --------
Total............................ 1,125,071 705,748 401,784
Deferred income tax assets:
Investment tax credits............ 65,111 61,333 3,065
Contributions in aid of construction 72,424 69,560 2,172
Other............................. 37,804 20,737 13,360
-------- ------- --------
Total............................ 175,339 151,630 18,597
-------- ------- --------
Net deferred income tax liability... $949,732 $554,118 $383,187
======== ======== ========

As of December 31, 1998, the consolidated group does not have any
cumulative Federal or state tax credits which have not been realized. A
valuation allowance has not been recorded as the Company expects that all
deferred income tax assets will be realized in the future. The Company's
management intends to reinvest indefinitely, its earnings from the foreign
operations of Yorkshire Power. According, deferred income taxes have not been
provided on any cumulative amount of unremitted earnings.

Note 14. Business Segment Information (NCE, PSCo and SPS)

NCE:
NCE has three reportable segments: electric utility, gas utility and
international. The electric utility segment consists primarily of the activities
of the three regulated operating companies that provide wholesale and retail
electric service in the states of Colorado, Texas, New Mexico, Wyoming, Kansas
and Oklahoma. The gas utility segment consists primarily of the activities of
three regulated operating companies providing retail gas service in the state of
Colorado and Wyoming. The international segment consists of equity investments
in foreign operations held by NCI since 1997. Revenues from operating segments
below the quantitative thresholds are included in the all other category. Those
primarily segments include a company involved in non-regulated power and gas
marketing activities throughout the United States; a company that invests in and
develops cogeneration and energy related projects; a company that is engaged in
engineering, design construction management and other miscellaneous services and
a company engaged in energy consulting, energy efficiency management,
conservation programs and mass market services.

The accounting policies of the segments are the same as those described in
Note 1. Summary of Significant Accounting Policies. NCE evaluates performance by
each legal entity based on profit or loss generated from the product or service
provided. NCE segment information is as follows (in thousands):

63
<PAGE>

Electric Gas All
1998 Utility Utility International Other Total
- ---- ------- ------- ------------- ----- -----
Revenues:
External customers. $2,626,644 $653,438 $ - $330,823 $3,610,905
Intersegment....... 316 5,281 - 75,209 80,806
Electric margin..... 1,339,201 - - 1,087 1,340,288
Gas margin.......... - 265,971 - 12,722 278,693
Equity in earnings of
nonconsolidated
subsidiaries ..... - - 38,127 (2,026) 36,101
Interest charges and
preferred dividend
requirements 153,462 28,589 745 15,530 198,326
Income taxes........ 164,189 14,273 (15,817) (12,075) 150,570
Depreciation &
amortization ...... 216,288 43,889 121 8,445 268,743
Segment profit (loss) 278,726 29,859 51,978 9,396 369,959
Segment assets...... 4,777,189 973,263 333,069 482,560 6,566,081
Construction
expenditures ...... 412,005 99,038 - 97,929 608,972

Electric Gas All
1997 Utility Utility International Other Total
- ---- ------- ------- ------------- ----- -----
Revenues:
External customers. $2,450,498 $640,248 $ - $251,779 $3,342,525
Intersegment....... 293 3,825 - 25,819 29,937
Electric margin..... 1,269,080 - - 987 1,270,067
Gas margin.......... - 268,423 - 4,882 273,305
Equity in earnings of
nonconsolidated
subsidiaries ..... - - 35,499 (1,333) 34,166
Interest charges and
preferred dividend
requirements ...... 151,718 27,376 186 14,168 193,448
Income taxes........ 146,621 18,555 (1,186) (26,875) 137,115
Depreciation &
amortization ...... 193,877 39,833 89 9,279 243,078
Segment profit (loss) 215,712 27,034 35,946 1,746 280,438
Segment assets...... 4,770,091 1,060,633 290,845 90,401 6,211,970
Construction
expenditures ...... 365,219 105,894 - 4,384 475,497

Electric Gas All
1996 Utility Utility International Other Total
- ---- ------- ------- ------------- ----- -----
Revenues:
External customers. $2,408,733 $571,329 $ - $116,972 $3,097,034
Intersegment....... 733 - - 7,008 7,741
Electric margin..... 1,270,520 - - 157 1,270,677
Gas margin.......... - 239,521 - 7,813 247,334
Equity in earnings of
nonconsolidated
subsidiaries ..... - - - 389 389
Interest charges and
preferred dividend
requirements ...... 141,380 23,665 - 14,759 179,804
Income taxes........ 163,657 12,913 - (22,917) 153,653
Depreciation &
amortization ...... 182,667 34,166 - 8,032 224,865
Segment profit (loss) 239,442 17,356 - 13,862 270,660
Segment assets...... 4,529,294 933,666 - 135,362 5,598,322
Construction
expenditures ...... 357,201 96,842 - 925 454,968

Reconciliations: 1998 1997 1996
---- ---- ----
Revenues
Total revenues for reportable
segments .................... $3,280,398 $3,090,746 $2,980,062
Intersegment revenue.......... 80,806 29,937 7,741
Other revenues................ 330,507 251,779 116,972
Elimination of intersegment
revenues .................... (80,806) (29,937) (7,741)
-------- ------- --------
Total consolidated revenues $3,610,905 $3,342,525 $3,097,034
========== ========== ==========

64
<PAGE>

1998 1997 1996
-------- -------- --------
Profit or Loss
Total profit for reportable
segments ................... $360,563 $278,692 $ 256,798
Other profit (loss)........... 9,396 1,743 13,862
Other unallocated amounts..... (28,002) (18,954) 3,643
Elimination of intercompany profit - 6 (1,962)
----- ----- ---------
Income before extraordinary item $341,957 $261,487 $ 272,341
======== ======== =========

Assets
Total assets for reportable
segments ................... $6,083,521 $6,121,049 $5,462,960
Other assets.................. 482,559 90,401 135,362
Unallocated assets............ 1,105,884 1,109,696 1,019,120
--------- --------- ---------
Total consolidated assets.. $7,671,964 $7,321,146 $6,617,442
========== ========== ==========

Segment Consolidated
1998 Totals Adjustments Totals
- ---- -------- ----------- ---------
Other Significant Items
Interest charges & preferred
dividends ................... $198,326 $ 6,473 $204,799
Income taxes.................. 150,570 (14,974) 135,596
Depreciation and amortization. 268,743 - 268,743
Equity in earnings of
unconsolidated subsidiaries. 36,101 - 36,101
Construction expenditures..... 608,972 - 608,972

1997
Other Significant Items
Interest charges & preferred
dividends .................. $193,448 $ 13,182 $206,630
Income taxes.................. 137,115 (3,196) 133,919
Depreciation and amortization. 243,078 - 243,078
Equity in earnings of
unconsolidated subsidiaries. 34,166 - 34,166
Construction expenditures..... 475,497 - 475,497

1996
Other Significant Items
Interest charges & preferred
dividends .................. $179,804 $ (4,708) $175,096
Income taxes.................. 153,653 - 153,653
Depreciation and amortization. 224,865 - 224,865
Equity in earnings of
unconsolidated subsidiaries. 389 - 389
Construction expenditures..... 454,968 - 454,968

PSCo:
PSCo has three reportable segments: electric utility, gas utility, and
international. During 1998, the electric utility segment consists primarily of
the activities of PSCo's regulated operations that provide wholesale and retail
electric service in the state of Colorado. For the years ended December 31, 1997
and 1996, this segment also included Cheyenne's regulated operations in the
state of Wyoming. During 1998, the gas utility segment consists primarily of the
activities of PSCo's regulated gas operations in Colorado. For the years ended
December 31, 1997 and 1996, this segment also included Cheyenne's regulated
operations in the state of Wyoming and WGI's regulated operations in the states
of Colorado and Wyoming. Revenues from operating segments below the quantitative
thresholds are included in the all other category. Those segments primarily
include a real estate company which owns certain real estate interests of PSCo,
a company which owns and manages permanent life insurance policies on certain
past and present employees and a finance company that finances certain of PSCo's
current assets.

The accounting policies of the segments are the same as those described in
Note 1. Summary of Significant Accounting Policies. PSCo evaluates performance
by each legal entity based on profit or loss generated from the product or
service provided. PSCo segment information is as follows (in thousands):

65
<PAGE>

Electric Gas All
1998 Utility Utility International Other Total
- ---- ------- ------- ------------- ----- -----
Revenues from
external customers. $1,635,573 $640,064 $ - $ 8,449 $2,284,086
Electric margin..... 833,752 - - - 833,752
Gas margin.......... - 259,509 - - 259,509
Equity in earnings of
Yorkshire Power... - - 3,446 - 3,446
Interest charges and
preferred dividend
requirements ...... 93,579 27,745 192 14,291 135,807
Income taxes........ 97,924 13,997 427 (10,854) 101,494
Depreciation &
amortization ...... 135,876 43,036 40 1,961 180,913
Segment profit...... 166,066 29,207 2,799 15,015 213,087
Segment assets...... 2,981,154 944,456 - 433,417 4,359,027
Construction
expenditures ...... 313,825 95,692 - 95,211 504,728

Electric Gas All
1997 Utility Utility International Other Total
- ---- ------- ------- ------------- ----- -----
Revenues from
external customers. $1,485,196 $733,091 $ - $ 11,356 $2,229,643
Electric margin..... 792,588 - - - 792,588
Gas margin.......... - 265,346 - - 265,346
Equity in earnings of
Yorkshire Power... - - 34,926 - 34,926
Interest charges and
preferred dividend
requirements ...... 92,684 26,980 186 13,885 133,735
Income taxes........ 92,930 18,496 (1,186) (19,427) 90,813
Depreciation &
amortization ...... 125,418 38,983 89 3,961 168,451
Segment profit...... 137,899 25,813 35,946 14,091 213,749
Segment assets...... 2,955,537 1,027,060 290,845 55,212 4,328,654
Construction
expenditures ...... 246,015 103,957 - 2,301 352,273

Electric Gas All
1996 Utility Utility International Other Total
- ---- ------- ------- ------------- ----- -----
Revenues from
external customers. $1,488,990 $640,497 $ - $ 7,951 $2,137,438
Electric margin..... 803,120 - - - 803,120
Gas margin.......... - 239,521 - 7,813 247,334
Interest charges and
preferred dividend
requirements ...... 87,001 23,665 - 14,115 124,781
Income taxes........ 106,615 12,913 - (23,197) 96,331
Depreciation &
amortization ...... 116,802 34,166 - 3,663 154,631
Segment profit...... 151,139 17,356 - 11,900 180,395
Segment assets...... 2,840,481 930,474 - 71,109 3,842,064
Construction
expenditures ...... 223,395 96,842 - 925 321,162

Reconciliations: 1998 1997 1996
-------- -------- --------
Revenues
Total revenues for reportable
segments ................... $2,275,637 $2,218,287 $2,129,487
Other revenues................ 8,449 11,356 7,951
-------- -------- --------
Total consolidated revenues $2,284,086 $2,229,643 $2,137,438
========== ========== ==========

Profit or Loss
Total profit or loss for reportable
segments .................... $198,072 $199,658 $179,679
Other profit or loss.......... 15,015 14,091 11,926
Other unallocated amounts..... (18,316) (21,458) (13,107)
Elimination of intersegment profit - (1) -
----- ------ ------
Income before extraordinary item $194,771 $192,290 $178,498
======== ======== ========

66
<PAGE>

1998 1997 1996
-------- -------- --------
Assets
Total assets for reportable
segments .................... $3,925,610 $4,273,442 $3,770,955
Other assets.................. 433,417 55,212 71,109
Other unallocated amounts..... 818,609 666,079 730,584
-------- -------- --------
Consolidated total......... $5,177,636 $4,994,733 $4,572,648
========== ========== ==========

Segment Consolidated
1998 Totals Adjustments Totals
- ---- -------- ----------- ---------
Other Significant Items
Interest charges & preferred
dividends ................... $135,807 $ 7,839 $143,646
Income taxes.................. 101,494 - 101,494
Depreciation and amortization. 180,913 - 180,913
Equity in earnings of Yorkshire
Power ....................... 3,446 - 3,446
Construction expenditures..... 504,727 - 504,727

1997
Other Significant Items
Interest charges & preferred
dividends ................... $133,735 $ 14,219 $147,954
Income taxes.................. 90,813 - 90,813
Depreciation and amortization. 168,451 - 168,451
Equity in earnings of Yorkshire
Power ....................... 34,926 - 34,926
Construction expenditures..... 352,273 - 352,273

1996
Other Significant Items
Interest charges & preferred
dividends ................... $124,781 $ (3,213) $121,568
Income taxes.................. 96,331 - 96,331
Depreciation and amortization. 154,631 - 154,631
Construction expenditures..... 321,162 - 321,162

SPS:
SPS operates in the regulated electric utility industry providing wholesale
and retail electric service in the states of Texas, New Mexico, Kansas and
Oklahoma. Revenues from external customers for this reportable segment were
$951.2 million, $979.3 million, $931.8 million, $306.3 million, and $278.5
million for the fiscal years ended December 31, 1998, 1997 and August 31, 1996
and for the four months ended December 1996 and 1995, respectively. During the
fiscal years ended December 31, 1997 and August 31, 1996, operating results
included the activities of Quixx and UE, subsidiaries that were subsequently
transferred to NC Enterprises in connection with the Merger. Neither of these
two segments has ever met any of the quantitative thresholds for determining
reportable segments.

15. Transactions with Affiliates (PSCo and SPS)

PSCo and SPS receive various administrative, management, environmental and
other support services from NCS, which began operations on May 1, 1997 and
construction services from UE. In addition, PSCo and SPS pay interest expense on
any short-term borrowings from NCE. Dividends on common stock declared by PSCo
and SPS are paid to NCE.

PSCo sells firm and interruptible transportation services to e prime for
gas delivered into the Denver/Pueblo operating area. PSCo also receives interest
income from NC Enterprises on the note receivable related to the sale of NCI
effective March 31, 1998 (see Note 2. "Investment in Yorkshire Power and U.K.
Windfall Tax"). SPS receives interest income from NC Enterprises on the note
receivable related to the sale of Quixx and UE as part of the Merger. The table
below contains the various significant affiliate transactions among the
companies and related parties for the years ended December 31, 1998 and 1997 (in
thousands).

67
<PAGE>

PSCo SPS
------------------- --------------------
1998 1997 1998 1997
------- ------- ------- --------

Gas revenues................. $ 5,281 $ 3,825 $ - $ -
Operating expenses........... 197,862 108,096 63,108 36,317
Interest income.............. 14,188 - 8,630 3,618
Interest expenses............ 1,714 156 1,390 747
Dividends paid to NCE........ 188,845 76,093 75,157 45,092
Construction services........ 68,744 16,934 6,465 3,832

There were no significant related party transactions for the year ended December
31, 1996.

16. Quarterly Financial Data (Unaudited) (NCE, PSCo and SPS)

The following summarized quarterly information for 1998 and 1997 is
unaudited, but includes all adjustments (consisting only of normal recurring
accruals) which the Company considers necessary for a fair presentation of the
results for the periods. Information for any one quarterly period is not
necessarily indicative of the results which may be expected for a twelve-month
period due to seasonal and other factors (in thousands, except per share data).

NCE Three Months ended
--------------------------------
1998 March 31 June 30 September 30 December 31
------- -------- ------- ------------ -----------

Operating revenues............. $939,504 $859,621 $915,898 $895,882
Operating income .............. 181,837 146,666 164,173 157,825
Net income .................... 86,149 56,593 90,772 108,443
Earnings per share of common
stock outstanding:
Basic........................ $0.78 $0.50 $0.82 $0.96
Diluted...................... $0.78 $0.50 $0.82 $0.95

1997
Operating revenues............. $890,011 $776,742 $793,472 $882,300
Operating income .............. 176,000 130,336 153,168 169,721
Net income (loss).............. 78,156 34,045 (47,225) 85,946
Basic and diluted earnings per
share of common stock
outstanding:
Income before extraordinary
item.... ................... $0.75 $0.33 $ 0.61 $0.81
Extraordinary item (1) ..... - - (1.06) -
Net income (loss)............ $0.75 $0.33 $(0.45) $0.81

PSCo Three Months ended
----------------------------------
1998 March 31 June 30 September 30 December 31
------- -------- ------- ------------ -----------

Operating revenues.............. $644,642 $504,598 $541,601 $593,245
Operating income ............... 99,846 63,266 76,834 92,072
Net income...................... 68,897 30,908 44,015 56,283

1997
Operating revenues.............. $668,717 $533,520 $466,582 $560,824
Operating income ............... 95,981 73,271 70,372 97,729
Net income...................... 62,881 30,607 (73,085)(1) 73,074

SPS Three Months ended
----------------------------------
1998 March 31 June 30 September 30 December 31
------- -------- ------- ------------ -----------

Operating revenues.............. $199,732 $264,006 $284,648 $202,801
Operating income ............... 31,339 49,319 49,458 35,563
Net income...................... 18,139 36,917 36,929 23,002
1997

Operating revenues.............. $221,295 $243,221 $284,156 $230,611
Operating income ............... 34,457 41,744 50,976 32,104
Net income...................... 18,218 6,380(2) 31,111 19,866

(1) Includes the extraordinary U.K. windfall tax recognized in the third quarter
1997.
(2) Includes the write-off of Quixx's & UE's investment in the Carolina Energy
Project.

68
<PAGE>

DEFINITIONS

The abbreviations or acronyms used in the financial statements are defined
below:

Abbreviation or Acronym Term
- ----------------------- ----
AEP............................................American Electric Power Company
AFDC..............................Allowance for Funds Used During Construction
Arapahoe............................Arapahoe Steam Electric Generating Station
CERCLA ...Comprehensive Environmental Response, Compensation and Liability Act
Cherokee........................... Cherokee Steam Electric Generating Station
Cheyenne ...............................Cheyenne Light, Fuel and Power Company
Company or NCE........................New Century Energies, Inc., a registrant
CPUC .....................Public Utilities Commission of the State of Colorado
Craig..................................Craig Steam Electric Generating Station
Denver District Court..District Court in and for the City and County of Denver
DOE..................................................U.S. Department of Energy
DSM.....................................................Demand Side Management
DSMCA...................................Demand Side Management Cost Adjustment
Dth..................................................................Dekatherm
e prime.........................................e prime, inc. and subsidiaries
ECA.....................................................Energy Cost Adjustment
EPA.......................................U.S. Environmental Protection Agency
FASB......................................Financial Accounting Standards Board
FERC......................................Federal Energy Regulatory Commission
Fort St. Vrain..................... Fort St. Vrain Electric Generating Station,
formerly a nuclear generating station
Fuelco .......Fuel Resources Development Co., a dissolved Colorado corporation
GCA .......................................................Gas Cost Adjustment
Hayden ...............................Hayden Steam Electric Generating Station
ICA..................................................Incentive Cost Adjustment
IRS...................................................Internal Revenue Service
Kwh..............................................................kilowatt-hour
Merger...................... the business combination between the PSCo and SPS
Mw....................................................................Megawatt
NMPRC........................New Mexico Public Regulation Commission formerly,
the New Mexico Public Utility Commission
Natural Fuels .......................................Natural Fuels Corporation
NC Enterprises............................................NC Enterprises, Inc.
NCI............................................New Century International, Inc.
NCS.................................................New Century Services, Inc.
New Century Cadence..................................New Century Cadence, Inc.
NOx.............................................................Nitrogen Oxide
OCC .......................................Colorado Office of Consumer Counsel
OPEB ...................................Other Postretirement Employee Benefits
PCB...................................................Polychlorinated biphenyl
Pawnee ...............................Pawnee Steam Electric Generating Station
Pawnee 2...........Pawnee Steam Electric Generating Station, Unit 2 (proposed)
Planergy..............................................The Planergy Group, Inc.
PRPs ..........................................Potentially Responsible Parties
PSCCC...........................................PS Colorado Credit Corporation
PSCo..........................Public Service Company of Colorado, a registrant
PSRI ....................................................PSR Investments, Inc.
PUHCA ..............................Public Utility Holding Company Act of 1935
PUCT........................................Public Utility Commission of Texas
QF.........................................................Qualifying Facility

69
<PAGE>

Abbreviation or Acronym Term
- ----------------------- ----
QSP....................................................Quality of Service Plan
Quixx.......................................Quixx Corporation and subsidiaries
SFAS...............................Statement of Financial Accounting Standards
SFAS 106................Statement of Financial Accounting Standards No. 106 -
"Employers' Accounting for Postretirement Benefits Other Than Pensions"
SFAS 112................Statement of Financial Accounting Standards No. 112 -
"Employers' Accounting for Postemployment Benefits"
SFAS 123................Statement of Financial Accounting Standards No. 123 -
"Accounting for Stock-Based Compensation"
SO2.............................................................Sulfur Dioxide
SPS..........................Southwestern Public Service Company, a registrant
TNP.............................................Texas-New Mexico Power Company
TOG.......................................................Texas-Ohio Gas, Inc.
TOP..................................................Texas-Ohio Pipeline, Inc.
Transition Period..........................Four month period September 1, 1996
through December 31, 1996
UE............................Utility Engineering Corporation and subsidiaries
U.K. ...........................................................United Kingdom
WGI ..................................................WestGas InterState, Inc.
WPSC......................................Public Service Commission of Wyoming
Young Storage..................................Young Gas Storage Company, Ltd.
YGSC.................................................Young Gas Storage Company
Yorkshire Electricity..........................Yorkshire Electricity Group plc
Yorkshire Power.....................................Yorkshire Power Group Ltd.

70
<PAGE>

EXHIBIT B

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation
by reference of our report included in this Current Report on Form 8-K, into New
Century Energies, Inc.'s previously filed Registration Statement (Form S-8, File
No. 333-28639) pertaining to the Omnibus Incentive Plan; New Century Energies,
Inc.'s Registration Statement (Form S-3, File No. 333-28637) pertaining to the
Dividend Reinvestment and Cash Payment Plan; New Century Energies, Inc.'s
Registration Statement (Form S-3, File Nos. 333-40361 and 333-6407) pertaining
to the registration of NCE Common Stock and New Century Energies, Inc.'s
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
to all references to our firm included in this Current Report on Form 8-K.

As independent public accountants, we hereby consent to the incorporation
by reference of our report included in this Current Report on Form 8-K, into
Public Service Company of Colorado's previously filed Registration Statement
(Form S-3, File No. 33-62233) pertaining to the Automatic Dividend Reinvestment
and Common Stock Purchase Plan; Public Service Company of Colorado's
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; Public Service Company of Colorado's
Registration Statement (Form S-8, File No. 33-55432) pertaining to the Omnibus
Incentive Plan; Public Service Company of Colorado's 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 and Public Service
Company of Colorado's 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 to all
references to our firm included in this Current Report on Form 8-K.

As independent public accountants, we hereby consent to the incorporation
by reference of our report included in this Current Report on Form 8-K, into
Southwestern Public Service Company's previously filed Registration Statement
(Form S-3, File No. 333-05199) pertaining to Southwestern Public Service
Company's Preferred Stock and Debt Securities; Southwestern Public Service
Company's Registration Statement (Form S-8, File No. 33-27452) pertaining to
Southwestern Public Service Company's 1989 Stock Incentive Plan and Southwestern
Public Service Company's 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 to all references to our firm included in
this Current Report on Form 8-K.

ARTHUR ANDERSEN LLP

Denver, Colorado
February 23, 1999

<PAGE>

EXHIBIT C
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

We consent to the incorporation by reference in Registration Statement No.
333-05199 on Form S-3 and Registration Statements No. 33-27452 and 33-57869 on
Form S-8 of Southwestern Public Service Company and Registration Statements No.
333-28637 and 333-40361 on Form S-3 and Registration Statement No. 333-28639 on
Form S-8 of New Century Energies, Inc. of our report dated February 28, 1997
(June 19, 1997, as to the Carolina Energy Limited Partnership in Note 3) on
Southwestern Public Service Company, appearing in this Current Report on Form
8-K of New Century Energies, Inc. and Southwestern Public Service Company dated
February 23, 1999.

DELOITTE & TOUCHE LLP
Dallas, Texas
February 23, 1999

<PAGE>

EXHIBIT D

-------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
-------------------------

FORM T-1

STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
-------------------------------------------
CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF
A TRUSTEE PURSUANT TO SECTION 305(b)(2) ________
----------------------------------------

THE CHASE MANHATTAN BANK
(Exact name of trustee as specified in its charter)

New York 13-4994650
(State of incorporation (I.R.S. employer
if not a national bank) identification No.)

270 Park Avenue
New York, New York 10017
(Address of principal executive offices) (Zip Code)

William H. McDavid
General Counsel
270 Park Avenue
New York, New York 10017
Tel: (212) 270-2611
(Name, address and telephone number of agent for service)
--------------------------------------------
Southwestern Public Service Company
(Exact name of obligor as specified in its charter)

New Mexico 75-057540
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)

Tyler at Sixth
Amarillo, Texas 79101
(Address of principal executive offices) (Zip Code)

Unsecured Debt Securities
(Title of the indenture securities)

<PAGE>

GENERAL

Item 1. General Information.

Furnish the following information as to the trustee:

(a)Name and address of each examining or supervising authority to
which it is subject.

New York State Banking Department, State House, Albany,New York 12110.

Board of Governors of the Federal Reserve System, Washington,
D.C., 20551

Federal Reserve Bank of New York, District No. 2, 33 Liberty Street,
New York, N.Y.

Federal Deposit Insurance Corporation, Washington, D.C., 20429.

(b) Whether it is authorized to exercise corporate trust powers.

Yes.

Item 2. Affiliations with the Obligor.

If the obligor is an affiliate of the trustee, describe each such
affiliation.

None.

- 2 -

<PAGE>

Item 16. List of Exhibits

List below all exhibits filed as a part of this Statement of
Eligibility.

1. A copy of the Articles of Association of the Trustee as now in
effect, including the Organization Certificate and the Certificates of Amendment
dated February 17, 1969, August 31, 1977, December 31, 1980, September 9, 1982,
February 28, 1985, December 2, 1991 and July 10, 1996 (see Exhibit 1 to Form T-1
filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).

2. A copy of the Certificate of Authority of the Trustee to Commence
Business (see Exhibit 2 to Form T-1 filed in connection with Registration
Statement No. 33-50010, which is incorporated by reference. On July 14, 1996, in
connection with the merger of Chemical Bank and The Chase Manhattan Bank
(National Association), Chemical Bank, the surviving corporation, was renamed
The Chase Manhattan Bank).

3. None, authorization to exercise corporate trust powers being
contained in the documents identified above as Exhibits 1 and 2.

4. A copy of the existing By-Laws of the Trustee (see Exhibit 4 to Form
T-1 filed in connection with Registration Statement No. 333-06249, which is
incorporated by reference).

5. Not applicable.

6. The consent of the Trustee required by Section 321(b) of the Act (see
Exhibit 6 to Form T-1 filed in connection with Registration Statement No.
33-50010, which is incorporated by reference. On July 14, 1996, in connection
with the merger of Chemical Bank and The Chase Manhattan Bank (National
Association), Chemical Bank, the surviving corporation, was renamed The Chase
Manhattan Bank).

7. A copy of the latest report of condition of the Trustee, published
pursuant to law or the requirements of its supervising or examining authority.

8. Not applicable.

9. Not applicable.

SIGNATURE

Pursuant to the requirements of the Trust Indenture Act of 1939 the
Trustee, The Chase Manhattan Bank, a corporation organized and existing under
the laws of the State of New York, has duly caused this statement of eligibility
to be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of New York and State of New York, on the 22nd day of February, 1999.

THE CHASE MANHATTAN BANK

By _/s/_W.B. Dodge_______________
/s/ W.B. Dodge
Vice President

- 3 -

<PAGE>

Exhibit 7 to Form T-1

Bank Call Notice

RESERVE DISTRICT NO. 2
CONSOLIDATED REPORT OF CONDITION OF

The Chase Manhattan Bank
of 270 Park Avenue, New York, New York 10017
and Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System,

at the close of business September 30, 1998, in
accordance with a call made by the Federal Reserve Bank of this
District pursuant to the provisions of the Federal Reserve Act.

Dollar Amounts
ASSETS in Millions

Cash and balances due from depository institutions:
Noninterest-bearing balances and
currency and coin..................................... $ 11,951
Interest-bearing balances............................. 4,551
Securities:..............................................
Held to maturity securities.............................. 1,740
Available for sale
securities.............................................. 48,537
Federal funds sold and securities purchased under
agreements to resell.................................. 29,730
Loans and lease financing receivables:
Loans and leases, net of unearned income $127,379
Less: Allowance for loan and lease losses 2,719
Less: Allocated transfer risk reserve ..... 0
--------
Loans and leases, net of unearned income,
allowance, and reserve................................ 124,660
Trading Assets
......................................................... 51,549
Premises and fixed assets (including capitalized
leases)................................................. 3,009
Other real estate owned.................................. 272
Investments in unconsolidated subsidiaries and
associated companies.................................. 300
Customers' liability to this bank on acceptances
outstanding........................................... 1,329
Intangible assets........................................ 1,429
Other assets............................................. 13,563
------
TOTAL ASSETS............................................. $292,620
========

- 4 -

<PAGE>

LIABILITIES

Deposits
In domestic offices.................................... $ 98,760
Noninterest-bearing...................... $39,071
Interest-bearing......................... 59,689
------
In foreign offices, Edge and Agreement,
subsidiaries and IBF's................................. 75,403
Noninterest-bearing .................................... $ 3,877
Interest-bearing........................................ 71,526

Federal funds purchased and securities sold under agree-
ments to repurchase....................................... 34,471
Demand notes issued to the U.S. Treasury................... 1,000
Trading liabilities........................................ 41,589

Other borrowed money (includes mortgage indebtedness
and obligations under capitalized leases):
With a remaining maturity of one year or less .......... 3,781
With a remaining maturity of more than one year.
through three years................................ 213
With a remaining maturity of more than three years.. 104
Bank's liability on acceptances executed and outstanding 1,329
Subordinated notes and debentures.......................... 5,408
Other liabilities.......................................... 12,041

TOTAL LIABILITIES.......................................... 274,099
-------
EQUITY CAPITAL

Perpetual preferred stock and related surplus 0
Common stock............................................... 1,211
Surplus (exclude all surplus related to preferred stock).. 10,441
Undivided profits and capital reserves..................... 6,287
Net unrealized holding gains (losses)
on available-for-sale securities.......................... 566
Cumulative foreign currency translation adjustments........ 16

TOTAL EQUITY CAPITAL....................................... 18,521
------
TOTAL LIABILITIES AND EQUITY CAPITAL....................... $292,620
========

I, Joseph L. Sclafani, E.V.P. & Controller of the above-named bank, do hereby
declare that this Report of Condition has been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and is true
to the best of my knowledge and belief.

JOSEPH L. SCLAFANI

We, the undersigned directors, attest to the correctness of this Report of
Condition and declare that it has been examined by us, and to the best of our
knowledge and belief has been prepared in conformance with the instructions
issued by the appropriate Federal regulatory authority and is true and correct.

WALTER V. SHIPLEY )
THOMAS G. LABRECQUE )DIRECTORS
WILLIAM B. HARRISON, JR.)
-5-
<PAGE>

EXHIBIT E

LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, N.Y. 10019-5389

February 23, 1999

Southwestern Public Service Company
P.O. Box 1261
Amarillo, TX 79170

Dear Sirs:

In connection with the Registration Statement No.333-05199 on Form S-3
relating to the registration of Debt Securities and Preferred Stock of
Southwestern Public Service Company, we hereby consent to any reference to our
firm in such Registration Statement and any amendments or prospectus supplements
thereto under the caption "Legal Opinions".

Very truly yours,

LEBOEUF, LAMB, GREENE & MACRAE, L.L.P.

WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NEW
CENTURY ENERGIES, INC. CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1998
AND CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS FOR THE YEAR ENDED
DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 5,882,023
<OTHER-PROPERTY-AND-INVEST> 405,436
<TOTAL-CURRENT-ASSETS> 802,557
<TOTAL-DEFERRED-CHARGES> 581,948
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 7,671,964
<COMMON> 114,491
<CAPITAL-SURPLUS-PAID-IN> 1,751,895
<RETAINED-EARNINGS> 740,677
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,614,827
294,000
0
<LONG-TERM-DEBT-NET> 2,169,954
<SHORT-TERM-NOTES> 36,438
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 487,956
<LONG-TERM-DEBT-CURRENT-PORT> 134,005
0
<CAPITAL-LEASE-OBLIGATIONS> 35,591
<LEASES-CURRENT> 4,160
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,895,033
<TOT-CAPITALIZATION-AND-LIAB> 7,671,964
<GROSS-OPERATING-REVENUE> 3,610,905
<INCOME-TAX-EXPENSE> 135,596
<OTHER-OPERATING-EXPENSES> 2,960,404
<TOTAL-OPERATING-EXPENSES> 2,960,404
<OPERATING-INCOME-LOSS> 650,501
<OTHER-INCOME-NET> 31,851
<INCOME-BEFORE-INTEREST-EXPEN> 682,352
<TOTAL-INTEREST-EXPENSE> 199,467
<NET-INCOME> 341,957
5,332
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 260,330
<TOTAL-INTEREST-ON-BONDS> 185,745
<CASH-FLOW-OPERATIONS> 659,539
<EPS-PRIMARY> 3.06
<EPS-DILUTED> 3.05

</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.

<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PUBLIC
SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AS
OF DECEMBER 31, 1998 AND CONSOLIDATED STATEMENTS OF INCOME AND CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,054,389
<OTHER-PROPERTY-AND-INVEST> 215,284
<TOTAL-CURRENT-ASSETS> 543,674
<TOTAL-DEFERRED-CHARGES> 364,289
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 5,177,636
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 1,302,119
<RETAINED-EARNINGS> 325,213
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,627,332
194,000
0
<LONG-TERM-DEBT-NET> 1,607,604
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 402,795
<LONG-TERM-DEBT-CURRENT-PORT> 40,451
0
<CAPITAL-LEASE-OBLIGATIONS> 35,526
<LEASES-CURRENT> 4,030
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,265,898
<TOT-CAPITALIZATION-AND-LIAB> 5,177,636
<GROSS-OPERATING-REVENUE> 2,284,086
<INCOME-TAX-EXPENSE> 101,494
<OTHER-OPERATING-EXPENSES> 1,850,574
<TOTAL-OPERATING-EXPENSES> 1,952,068
<OPERATING-INCOME-LOSS> 332,018
<OTHER-INCOME-NET> 6,399
<INCOME-BEFORE-INTEREST-EXPEN> 338,417
<TOTAL-INTEREST-EXPENSE> 138,314
<NET-INCOME> 200,103
5,332
<EARNINGS-AVAILABLE-FOR-COMM> 194,771
<COMMON-STOCK-DIVIDENDS> 188,845
<TOTAL-INTEREST-ON-BONDS> 129,793
<CASH-FLOW-OPERATIONS> 421,218
<EPS-PRIMARY> 0.000
<EPS-DILUTED> 0.000

</TABLE>

<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
SOUTHWESTERN PUBLIC SERVICE COMPANY BALANCE SHEET AS OF DECEMBER 31, 1998
AND STATEMENTS OF INCOME AND CASH FLOWS FOR THE YEAR ENDED DECEMBER 31,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,729,339
<OTHER-PROPERTY-AND-INVEST> 124,627
<TOTAL-CURRENT-ASSETS> 117,537
<TOTAL-DEFERRED-CHARGES> 158,361
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,129,864
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 348,402
<RETAINED-EARNINGS> 389,818
<TOTAL-COMMON-STOCKHOLDERS-EQ> 738,220
100,000
0
<LONG-TERM-DEBT-NET> 530,618
<SHORT-TERM-NOTES> 9,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 85,162
<LONG-TERM-DEBT-CURRENT-PORT> 90,113
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 576,751
<TOT-CAPITALIZATION-AND-LIAB> 2,129,864
<GROSS-OPERATING-REVENUE> 951,187
<INCOME-TAX-EXPENSE> 65,696
<OTHER-OPERATING-EXPENSES> 719,812
<TOTAL-OPERATING-EXPENSES> 785,508
<OPERATING-INCOME-LOSS> 165,679
<OTHER-INCOME-NET> 7,611
<INCOME-BEFORE-INTEREST-EXPEN> 173,290
<TOTAL-INTEREST-EXPENSE> 58,303
<NET-INCOME> 114,987
0
<EARNINGS-AVAILABLE-FOR-COMM> 114,987
<COMMON-STOCK-DIVIDENDS> 75,157
<TOTAL-INTEREST-ON-BONDS> 54,321
<CASH-FLOW-OPERATIONS> 258,449
<EPS-PRIMARY> 0.000
<EPS-DILUTED> 0.000

</TABLE>