SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 1-3280
Public Service Company of Colorado
(Exact name of registrant as specified in its charter)
Colorado 84-0296600
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1225 17th Street, Denver, Colorado 80202
(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number, including area code: (303) 571-7511
____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
At November 10, 1997, 100 shares of the registrant's Common Stock,
$5.00 par value (the only class of common stock), were outstanding.
Registrant meets the conditions of General Instruction H(1)(a) and (b)
to Form 10-Q and is therefore filing this form with a reduced disclosure
format.
<PAGE>
Table of Contents
PART I - FINANCIAL INFORMATION
Item l. Financial Statements .............................................. 1
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations .......................................... 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 23
Item 6. Exhibits and Reports on Form 8-K.................................. 23
SIGNATURE.................................................................. 24
EXHIBIT INDEX.............................................................. 25
EXHIBIT 12(a).............................................................. 26
EXHIBIT 12(b).............................................................. 27
EXHIBIT 15 ................................................................ 28
In addition to the historical information contained herein, this report
contains a number of "forward-looking statements", within the meaning of the
Securities Exchange Act of 1934. Such statements address future events and
conditions concerning capital expenditures, earnings, resolution and impact
of litigation, regulatory matters, liquidity and capital resources, and
accounting matters. Actual results in each case could differ materially from
those projected in such statements due to a variety of factors including,
without limitation, restructuring of the utility industry; future economic
conditions; earnings retention and dividend payout policies; developments in
the legislative, regulatory and competitive environments in which the Company
operates; and other circumstances that could affect anticipated revenues and
costs, such as compliance with laws and regulations. These and other factors
are discussed in the Company's filings with the Securities and Exchange
Commission, including this report.
i
<PAGE>
TERMS
The abbreviations or acronyms used in the text and notes are defined below:
Abbreviation or Acronym Term
- --------------------------------------------------------------------------------
AEP......................................................American Electric Power
Cheyenne..................................Cheyenne Light, Fuel and Power Company
Company or PSCo...............................Public Service Company of Colorado
CPUC....................The Public Utilities Commission of the State of Colorado
Denver District Court..................................District Court in and for
the City and County of Denver
DOE.........................................................Department of Energy
DSM.......................................................Demand Side Management
e prime...........................................e prime, inc. and subsidiaries
ECA.......................................................Energy Cost Adjustment
EPA.........................................U.S. Environmental Protection Agency
FERC........................................Federal Energy Regulatory Commission
Fort St. Vrain................Fort St. Vrain Nuclear Electric Generating Station
Fuelco..........Fuel Resources Development Co., a dissolved Colorado Corporation
GCA..........................................................Gas Cost Adjustment
ICA....................................................Incentive Cost Adjustment
ISFSI....................................Independent Spent Fuel Storage Facility
Merger.............................the business combination between PSCo and SPS
Natural Fuels..........................................Natural Fuels Corporation
NCE...................................................New Century Energies, Inc.
NC Enterprises..............................................NC Enterprises, Inc.
NCS...................................................New Century Services, Inc.
NOx...............................................................Nitrogen Oxide
NRC................................................Nuclear Regulatory Commission
PUHCA.................................Public Utility Holding Company Act of 1935
PSCCC.............................................PS Colorado Credit Corporation
PSRI.......................................................PSR Investments, Inc.
QF...........................................................Qualifying Facility
SO2...............................................................Sulfur Dioxide
SPS..........................................Southwestern Public Service Company
SFAS 71.....................Statement of Financial Accounting Standards No. 71 -
"Accounting for the Effects of Certain Types of Regulation"
SFAS 112...................Statement of Financial Accounting Standards No. 112 -
"Employers' Accounting for Postemployment Benefits"
SFAS 121...................Statement of Financial Accounting Standards No. 121 -
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of"
U.K...............................................................United Kingdom
WGI.....................................................WestGas InterState, Inc.
Yorkshire Electricity............................Yorkshire Electricity Group plc
Yorkshire Power......................................Yorkshire Power Group, Ltd.
ii
<PAGE>
PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Thousands of Dollars)
ASSETS
September 30, December 31,
1997 1996
---- ----
(Unaudited)
Property, plant and equipment, at cost:
Electric .......................................... $4,023,048 $3,931,413
Gas................................................ 1,067,568 1,035,394
Steam and other.................................... 77,837 78,225
Common to all departments.......................... 418,152 418,262
Construction in progress........................... 153,172 181,597
------- -------
5,739,777 5,644,891
Less: accumulated depreciation .................... 2,110,568 2,045,996
--------- ---------
Total property, plant and equipment.............. 3,629,209 3,598,895
--------- ---------
Investments, at cost:
Investment in Yorkshire Power (Note 3)............. 273,248 -
Other.............................................. 29,371 46,550
------ ------
Total investments................................. 302,619 46,550
------- ------
Current assets:
Cash and temporary cash investments................ 12,290 9,406
Accounts receivable, less reserve for uncollectible
accounts ($2,966 at September 30, 1997; $4,049
at December 31, 1996) .......... ................ 152,771 218,132
Accrued unbilled revenues ......................... 70,099 85,894
Recoverable purchased gas and electric energy costs
- net (Note 1) .................................. 70,841 31,288
Materials and supplies, at average cost............ 45,098 48,972
Fuel inventory, at average cost.................... 25,321 24,739
Gas in underground storage, at cost (LIFO)......... 52,946 42,826
Regulatory assets recoverable within one year
(Note 1) ........................................ 44,860 44,110
Prepaid expenses and other......................... 33,535 41,790
------ ------
Total current assets.............................. 507,761 547,157
------- -------
Deferred charges:
Regulatory assets (Note 1)......................... 274,433 304,456
Unamortized debt expense .......................... 10,958 10,975
Other.............................................. 46,607 64,615
------ ------
Total deferred charges............................ 331,998 380,046
------- -------
$4,771,587 $4,572,648
========== ==========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
1
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Thousands of Dollars)
CAPITAL AND LIABILITIES
September 30, December 31,
1997 1996
---- ----
(Unaudited)
Common stock (Note 1)................................. $1,028,819 $1,048,447
Retained earnings..................................... 287,182 389,841
------- -------
Total common equity............................... 1,316,001 1,438,288
Preferred stock:
Not subject to mandatory redemption................ 140,002 140,008
Subject to mandatory redemption at par............. 39,254 39,913
Long-term debt........................................ 1,339,372 1,259,528
--------- ---------
2,834,629 2,877,737
--------- ---------
Noncurrent liabilities:
Employees' postretirement benefits other than
pensions ........................................ 56,156 55,677
Employees' postemployment benefits................. 24,683 25,182
------ ------
Total noncurrent liabilities...................... 80,839 80,859
------ ------
Current liabilities:
Notes payable and commercial paper ................ 473,561 244,725
Long-term debt due within one year................. 312,112 155,030
Preferred stock subject to mandatory redemption
within one year ................................. 2,576 2,576
Accounts payable................................... 130,920 254,256
Dividends payable.................................. 48,544 36,973
Customers' deposits................................ 21,611 21,441
Accrued taxes...................................... 45,616 58,990
Accrued interest................................... 29,153 33,797
Defueling and decommissioning liability............ 2,399 8,665
Current portion of accumulated deferred income taxes 25,046 4,560
Other.............................................. 52,508 69,203
------ ------
Total current liabilities......................... 1,144,046 890,216
--------- -------
Deferred credits:
Customers' advances for construction............... 50,267 50,269
Unamortized investment tax credits ................ 100,830 105,928
Accumulated deferred income taxes ................ 531,850 539,082
Other.............................................. 29,126 28,557
------ ------
Total deferred credits............................ 712,073 723,836
------- -------
Commitments and contingencies (Notes 2 and 3)......... -------- -------
$4,771,587 $4,572,648
========== ==========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
2
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PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Three Months Ended
September 30,
1997 1996
---- ----
Operating revenues:
Electric.......................................... $382,360 $385,370
Gas............................................... 83,372 81,364
Other............................................. 11,532 10,127
------ ------
477,264 476,861
Operating expenses:
Fuel used in generation........................... 56,535 54,486
Purchased power................................... 126,668 122,557
Gas purchased for resale.......................... 39,503 35,655
Other operating expenses.......................... 81,800 82,689
Maintenance....................................... 15,968 14,732
Depreciation and amortization..................... 42,374 38,987
Taxes (other than income taxes)................... 21,101 21,708
Income taxes...................................... 12,261 17,825
------ ------
396,210 388,639
------- -------
Operating income..................................... 81,054 88,222
Other income and deductions:
Equity earnings in Yorkshire Power (Note 3)....... 17,317 -
Merger costs...................................... (11,384) (5,357)
Miscellaneous income and deductions - net......... (1,268) (5,480)
------ ------
4,665 (10,837)
----- -------
Interest charges:
Interest on long-term debt........................ 28,949 24,320
Amortization of debt discount and expense less
premium ........................................ 1,019 854
Other interest.................................... 20,007 13,696
Allowance for borrowed funds used during
construction ................................... (1,736) (741)
------ ----
48,239 38,129
------ ------
Income before extraordinary item..................... 37,480 39,256
Extraordinary item - U.K. windfall profits tax (Note 3) (110,565) -
-------- -------
Net income (loss).................................... (73,085) 39,256
Dividend requirements on preferred stock............. 2,929 2,962
----- -----
Earnings (loss) available for common stock........... $(76,014) $36,294
======== =======
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
3
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Nine Months Ended
September 30,
1997 1996
---- ----
Operating revenues:
Electric.......................................... $1,116,457 $1,113,251
Gas............................................... 545,470 440,987
Other............................................. 35,674 30,327
------ ------
1,697,601 1,584,565
Operating expenses:
Fuel used in generation........................... 148,278 145,499
Purchased power................................... 370,313 364,048
Gas purchased for resale.......................... 361,998 268,762
Other operating expenses.......................... 247,532 240,613
Maintenance....................................... 49,136 44,809
Depreciation and amortization..................... 127,413 113,895
Taxes (other than income taxes)................... 64,832 65,301
Income taxes...................................... 59,205 75,284
------ ------
1,428,707 1,318,211
--------- ---------
Operating income..................................... 268,894 266,354
Other income and deductions:
Equity in earnings of Yorkshire Power (Note 3).... 21,430 -
Merger costs...................................... (17,801) (9,548)
Miscellaneous income and deductions - net......... (6,058) (7,314)
------ ------
(2,429) (16,862)
Interest charges:
Interest on long-term debt........................ 85,902 68,102
Amortization of debt discount and expense less
premium ........................................ 2,964 2,696
Other interest.................................... 51,199 42,929
Allowance for borrowed funds used during
construction ................................... (4,568) (2,457)
------ ------
135,497 111,270
------- -------
Income before extraordinary item..................... 130,968 138,222
Extraordinary item - U. K. windfall profits tax
(Note 3) ........................................... (110,565) -
-------- ------
Net income........................................... 20,403 138,222
Dividend requirements on preferred stock............. 8,814 8,905
----- -----
Earnings available for common stock.................. $ 11,589 $129,317
======== ========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
4
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Nine Months Ended
September 30,
1997 1996
---- ----
Operating activities:
Net income........................................ $20,403 $138,222
Adjustments to reconcile net income to net
cash provided by operating activities:
Extraordinary item - U.K. windfall profits tax
(Note 3) ....................................... 110,565 -
Depreciation and amortization.................... 130,692 118,133
Amortization of investment tax credits........... (3,241) (3,721)
Deferred income taxes............................ 37,010 32,187
Equity in earnings of Yorkshire Power............ (20,916) -
Allowance for equity funds used during
construction .................................. 1 (765)
Change in accounts receivable.................... 23,121 (13,047)
Change in inventories............................ (10,061) 13,078
Change in other current assets................... (20,894) 24,610
Change in accounts payable....................... (93,266) (5,976)
Change in other current liabilities.............. (28,341) (24,373)
Change in deferred amounts....................... 8,432 (8,882)
Change in noncurrent liabilities................. 479 (14,663)
Other............................................ - 1,876
----- -----
Net cash provided by operating activities..... 153,984 256,679
------- -------
Investing activities:
Construction expenditures......................... (217,656) (226,067)
Allowance for equity funds used during construction (1) 765
Proceeds from disposition of property, plant
and equipment .................................. 1,806 22,220
Acquisition of Yorkshire Electricity (Note 3)..... (362,430) -
Payment for purchase of companies, net of cash
acquired ...................................... - 3,649
Transfer of subsidiaries to NCE (Note 1).......... (2,229) -
Purchase of other investments..................... (6,675) (1,823)
Sale of other investments......................... 11,979 1,702
------ -----
Net cash used in investing activities......... (575,206) (199,554)
-------- --------
Financing activities:
Proceeds from sale of common stock (Note 1)....... 20,517 22,295
Proceeds from sale of long-term debt (Note 3)..... 332,484 143,214
Redemption of long-term debt...................... (69,275) (82,121)
Short-term borrowings - net (Note 3).............. 252,536 (29,900)
Redemption of preferred stock..................... (665) (1,376)
Dividends on common stock......................... (102,663) (99,475)
Dividends on preferred stock...................... (8,828) (8,915)
------ ------
Net cash provided by(used in)financing
activities ................................. 424,106 (56,278)
------- -------
Net increase in cash and temporary cash
investments ................................ 2,884 847
Cash and temporary cash investments at
beginning of period ........................ 9,406 14,693
----- ------
Cash and temporary cash investments at end
of period .................................. $ 12,290 $ 15,540
======== ========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
5
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Accounting Policies
Merger
Effective August 1, 1997, following receipt of all required state and
Federal regulatory approvals, the Company and SPS merged in a tax-free
"merger of equals" transaction and became wholly-owned subsidiaries of NCE,
which is a registered holding company under PUHCA. NCE owns the following
direct subsidiaries: the Company, SPS, Cheyenne, WGI, NCS and NC
Enterprises. Each outstanding share of Company 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 with this transaction
being accounted for as a pooling of interest for accounting purposes.
Effective with the Merger, Cheyenne, WGI, e prime, and Natural Fuels
were transferred by a declaration of a dividend of the subsidiaries' stock,
at net book value, aggregating approximately $49.9 million, to NCE. NCE
subsequently made a capital contribution of the e prime and Natural Fuels
common stock, at net book value, aggregating approximately $29.5 million, to
NC Enterprises. The accompanying consolidated financial statements reflect
the financial position, results of operations and cash flows for Cheyenne,
WGI, e prime and Natural Fuels for all periods that include months prior to
August 1, 1997. The transfer of these subsidiaries did not have a material
impact on the Company's financial position, results of operations or cash
flows.
Business, Utility Operations and Regulation
The Company is an operating public utility engaged principally in the
generation, purchase, transmission, distribution and sale of electricity and
in the purchase, transmission, distribution, sale and transportation of
natural gas. The Company is subject to the jurisdiction of the CPUC with
respect to its retail electric and gas operations and the FERC with respect
to its wholesale electric operations and accounting policies and practices.
Effective August 1, 1997, the Company owns the following subsidiaries:
PSCCC, PSRI, 1480 Welton, Inc., Fuelco and New Century International, Inc.
which was established in 1997 in connection with the acquisition of Yorkshire
Electricity. The Company invests in electricity systems outside the United
States as discussed in Note 3. The Company's international investments are
subject to regulation in the countries in which such investments are made.
Regulatory Assets and Liabilities
The Company prepares its financial statements in accordance with the
provisions of SFAS 71, as amended. SFAS 71 recognizes that accounting for
rate regulated enterprises should reflect the relationship of costs and
revenues introduced by rate regulation. A regulated utility may defer
recognition of a cost (a regulatory asset) or recognize an obligation (a
regulatory liability) if it is probable that, through the ratemaking process,
there will be a corresponding increase or decrease in revenues. On January 1,
1996, the Company adopted SFAS 121, which imposes stricter criteria for the
continued recognition of regulatory assets on the balance sheet by requiring
that such assets be probable of future recovery at each balance sheet date.
The adoption of this statement in 1996 and the application during 1997 did
not have a material impact on the Company's results of operations, financial
position or cash flows. The following regulatory assets are reflected in the
Company's consolidated condensed balance sheets (the December 31, 1996
amounts include Cheyenne and WGI):
6
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
September 30, December 31, Recovery
1997 1996 Through
---- ---- -------
(Thousands of Dollars)
Nuclear decommissioning costs, net (Note 3) $ 78,383 $ 89,731 2005
Income taxes ............................. 88,103 98,355 2006
Employees' postretirement benefits
other than pensions..................... 58,608 54,449 2013
Early retirement costs.................... 8,860 15,505 1998
Employees' postemployment benefits........ 24,010 24,797 Undetermined
Demand-side management costs.............. 40,026 41,462 2002
Unamortized debt reacquisition costs...... 18,296 19,914 2024
Other..................................... 3,007 4,353 1999
----- -----
Total................................... 319,293 348,566
Classified as current..................... 44,860 44,110
------ ------
Classified as noncurrent.................. $274,433 $304,456
======== ========
The regulatory assets of the Company as of September 30, 1997 are
reflected in rates charged to customers over the recovery periods noted
above. The Company believes it will continue to be subject to rate regulation
to the extent necessary to recover these assets. In the event that a portion
of the Company's 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 could be required to write-off related 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 the Company's results of operations, financial position or
cash flows.
On January 27, 1997, the CPUC issued its order on the Company's 1996
gas rate case. The CPUC allowed recovery of postemployment benefit costs
associated with its gas operations on an accrual basis under SFAS 112 and
denied amortization of the approximately $8.7 million regulatory asset
recognized upon the adoption of SFAS 112. On June 9, 1997, the Company filed
its appeal in Denver District Court. The Company is assessing the impact of
this decision on the future recovery of the electric jurisdictional portion
of postemployment benefit costs totaling approximately $13.8 million. If the
appeal to the Denver District Court is unsuccessful, the Company will appeal
this issue to the Colorado Supreme Court. The Company believes it will
ultimately be successful in its appeals. If appeals are unsuccessful,
including pursuing the establishment of an alternative form of regulatory
recovery, these amounts will be written off.
Recovered/Recoverable Purchased Gas and Electric Energy Costs - Net
The Company's tariff contains clauses which allow recovery of certain
purchased gas and electric energy costs in excess of the level of such costs
included in base rates. Currently, these cost adjustment tariffs 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. The cumulative effects are recognized as a
current asset or liability until adjusted by refunds or collections through
future billings to customers. The CPUC order related to the Company's merger
rate filing modified and replaced the Company's ECA with an ICA, which allows
for a 50%/50% sharing of certain fuel and energy cost increases or decreases
among customers and shareholders.
Other Property
Property, plant and equipment includes approximately $18.4 million and
$25.4 million, respectively, for costs associated with the engineering design
of a planned future Pawnee 2 generating station and certain water
7
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
rights located in southeastern Colorado, also obtained for a future generating
station. The Company is earning a return on these investments based on the
Company's weighted average cost of debt and preferred stock in accordance with a
CPUC rate order.
Statements of Cash Flows - Non-cash Transactions
Prior to the Merger, shares of common stock (250,058 in 1997 and
274,934 in 1996), valued at the market price on the date of issuance
(approximately $10 million in 1997 and 1996), were issued to the Employees'
Savings and Stock Ownership Plan of Public Service Company of Colorado and
Participating Subsidiary Companies. The estimated issuance values were
recognized in other operating expenses during the respective preceding years.
Shares of common stock (6,470 in 1996), valued at the market price on the
date of issuance ($0.2 million in 1996), were issued to certain executives
pursuant to the applicable provisions of the executive compensation plans.
The 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 condensed
statements of cash flows.
General
See Note 1. of the Notes to Consolidated Financial Statements in the
Company's 1996 Annual Report on Form 10-K for a summary of the Company's
significant accounting policies. Certain prior year amounts have been
reclassified to conform to the current year's presentation.
2. Commitments and Contingencies
Regulatory Matters
1995 Merger Rate Filings
In connection with the Merger with SPS, in November 1995, the Company
filed comprehensive proposals with the CPUC and the FERC to obtain approval
of the Merger and the associated comprehensive proposals from such regulatory
agencies.
On November 29, 1996, and as modified on January 15, 1997, the CPUC
issued a written decision approving the Merger as well as the major
provisions of a stipulation and agreement entered into among the Company, the
CPUC Staff, the Colorado Office of Consumer Counsel ("OCC"), and
substantially all other parties. The decision establishes a five year
performance based regulatory plan and acknowledges that the Merger is in the
public interest. The major provisions of the decision include:
- a $6 million electric rate reduction, which was instituted October 1,
1996, followed by an additional $12 million electric rate reduction
effective with the implementation of new gas rates on February 1, 1997;
8
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
- 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 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 Company has established an estimated customer refund obligation of
approximately $7.4 million in connection with the electric department
sharing of earnings in excess of 11% return on equity for the results
of operations through September 30, 1997. It is expected, at a
minimum, that a similar amount will be recognized in the fourth quarter
of 1997;
- a freeze in base electric rates for the period through December 31,
2001, with the flexibility to make certain other rate changes,
including those necessary to allow for the recovery of DSM, QF and
decommissioning costs. The freeze in base electric rates does not
prohibit the Company from filing a general rate case or deny any other
party the opportunity to initiate a complaint or rate proceeding;
- a replacement of the Company's ECA with an ICA to allow for a 50%/50%
sharing of certain fuel and energy cost increases or decreases among
customers and shareholders; and
- the implementation of a Quality of Service Plan ("QSP") which provides
for bill credits totaling up to $5 million in year one and increasing
to $11 million in year five, if the Company does not achieve certain
performance measures relating to electric reliability, customer
complaints and telephone response to inquiries. On October 15, 1997,
the CPUC issued an order addressing the implementation of a Reward
Mechanism in the QSP which provides up to $3 million of annual rewards
if the Company achieves certain performance measures relating to
electric reliability. Based on performance measurements through
September 30, 1997, the Company believes the QSP will not have a
material adverse effect on the Company's results of operations,
financial position or cash flows.
In November 1997, in connection with the annual electric department
earnings test discussed above, the CPUC held a hearing to review the prudence
of merger costs, allocation methodologies of merger costs, and the ratemaking
treatment of a transmission agreement with a wholesale customer. A final
decision on these issues is expected in early 1998.
Rate Cases
On June 5, 1996, the Company 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 Company has
appealed the CPUC's decision with the Denver District Court which disallowed
the recovery of certain postemployment benefit costs under SFAS 112 (see Note
1 Accounting Policies - Business, Utility Operations and Regulation -
Regulatory Assets and Liabilities) and imputed anticipated merger related
cost savings related to the gas business.
Electric and Gas Cost Adjustment Mechanisms
During 1994 and 1995, the CPUC conducted several proceedings to review
issues related to the ECA. The CPUC opened a docket to review whether the ECA
should be maintained in its present form, altered or eliminated, and on
January 8, 1996, combined this docket with the merger docket discussed
above. The CPUC decision on the Merger
9
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
modified and replaced the ECA with an ICA. The ICA, which became effective
October 1, 1996, allows for a 50%/50% sharing of certain fuel and energy cost
increases and decreases among customers and shareholders. Management does not
believe that the sharing requirements under the ICA mechanism will have a
significant impact on the Company's results of operations, financial position or
cash flows.
Environmental Issues
Environmental Site Cleanup
As described below, the Company has been or is currently involved with
the clean-up of certain hazardous substances. In all situations, the Company
is pursuing or intends to pursue insurance claims and believes it will
recover some portion of these costs through such claims. Additionally, where
applicable, the Company intends to pursue recovery from other Potentially
Responsible Parties ("PRPs"). To the extent such costs are not recovered,
the Company currently believes it is probable that such costs will be
recovered through the rate regulatory process. To the extent any costs are
not recovered through the options listed above, the Company would be required
to recognize an expense for such unrecoverable amounts.
Under the Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), the EPA identified, and a Phase II environmental
assessment has revealed, low level, widespread contamination from hazardous
substances at the Barter Metals Company ("Barter") properties located in
central Denver. For an estimated 30 years, the Company sold scrap metal and
electrical equipment to Barter for reprocessing. The Company 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 the Company against
its insurance providers, the Denver District Court entered final judgment in
favor of the Company 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 the Company in the Colorado Court of Appeals. The
insurance provider has posted supersedes 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 some of the policies. A
retrial is expected. Previously, the Company had received certain insurance
settlement proceeds from other insurance providers for Barter and other
contaminated sites and a portion of those funds remains to be allocated to
this site by the trial court. The Company also plans to appeal the Colorado
Court of Appeals decision to the Colorado Supreme Court. In addition, the
Company expects to recoup additional expenditures beyond insurance proceeds
through the sale of the Barter property and from other PRPs. In August 1996,
the Company filed a lawsuit against four PRPs seeking recovery of certain
Barter related costs.
Polychlorinated biphenyl ("PCB") presence was identified in the
basement of an historic office building located in downtown Denver. The
Company was negotiating the future cleanup with the current owners; however,
on October 5, 1993, the owners filed a civil action against the Company in
the Denver District Court. The action alleged that the Company was
responsible for the PCB releases and additionally claimed other damages in
unspecified amounts. On August 8, 1994, the Denver District Court entered a
judgment approving a $5.3 million offer of settlement between the Company and
the building owners resolving all claims. In December 1995, complaints were
filed by the Company against all applicable insurance carriers in the Denver
District Court. On June 30, 1997, the Denver District Court ruled in favor
of the insurance carriers on summary judgment motions addressing late notice
and other issues. The Company is pursuing recovery from one carrier. On
August 27, 1997, the Company filed an appeal of the decision with the
Colorado Court of Appeals.
In addition to these sites, the Company has identified several sites
where cleanup of hazardous substances may be required. While potential
liability and settlement costs are still under investigation and negotiation,
the Company believes that the resolution of these matters will not have a
material adverse effect on its financial position, results of
10
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
operations or cash flows. The Company fully intends to pursue the recovery of
all significant costs incurred for such projects through insurance claims and/or
the rate regulatory process.
Environmental Matters Related to Air Quality
Under the Clean Air Act Amendments of 1990, coal burning power plants
are required to reduce SO2 and NOx emissions to specified levels through a
phased approach. The Company's facilities must comply with the Phase II
requirements which will be effective in the year 2000. Currently, these
regulations permit compliance with sulfur dioxide emission limitations by
using S02 allowances allocated to plants by the EPA, using allowances
generated by reducing emissions at existing plants and by using allowances
purchased from other companies. The Company expects to meet the Phase II
emission standards placed on SO2 through the combination of: a) use of low
sulfur coal, b) the operation of air quality control equipment on certain
generation facilities, and c) allowances issued by the EPA. The Company will
be required to modify certain boilers by the year 2000 to reduce NOx
emissions in order to comply with Phase II requirements. The estimated Phase
II costs for future plant modifications to meet NOx requirements is
approximately $13 million. The Company is studying its options to reduce NOx
and SO2 emissions. PSCo has recently announced its intention to spend
approximately $211 million in the Denver and Boulder metro area to further
reduce such emissions.
Craig Steam Electric Generating Station
On October 9, 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. Tri-State Generation and Transmission Association, Inc. is the
operator of the Craig station and the Company owns an undivided interest
(acquired in April 1992) in each of two units at the station totaling
approximately 9.7%. The plaintiff alleged that: 1) the station exceeded the
20% opacity limitations in excess of 14,000 six minute intervals during the
period extending from the first quarter of 1991 through the second quarter of
1996, and 2) the owners failed to operate the station in a manner consistent
with good air pollution control practices. The complaint seeks, among other
things, civil monetary penalties and injunctive relief. The Act provides for
penalties of up to $25,000 per day per violation, but the level of penalties
imposed in any particular instance is discretionary. A pre-trial conference
has been rescheduled for December 1997. Management does not believe that
this potential liability or the future impact of this litigation on plant
operations will have a material adverse impact on the Company's consolidated
financial position, results of operations or cash flows. The issues raised
in this litigation are similar to the Hayden Station complaint which was
settled in 1996 and disclosed in the Company's 1996 Annual Report on Form
10-K.
Fort St. Vrain
In 1989, the Company announced its decision to end nuclear operations
at Fort St. Vrain and to proceed with the defueling and decommissioning of
the reactor. While the defueling of the reactor to the ISFSI was completed in
June 1992, several issues related to the ultimate storage/disposal of Fort
St. Vrain's spent nuclear fuel remained unresolved.
On February 9, 1996, the Company and the DOE entered into an agreement
resolving all the defueling issues. As part of this agreement, the Company
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 the Company $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) the Company 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. This request is being reviewed by the NRC and the Company
anticipates approval no earlier than mid-1998.
11
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
On March 22, 1996, the Company and the decommissioning contractors
announced that the physical decommissioning activities at the facility were
completed. On August 5, 1997, the NRC approved the Company's request to
terminate the Part 50 operating license. This concludes the decommissioning
activities and the facilities and site are suitable to be released for
unrestricted use. Under the Price-Anderson Act, the Company remains subject
to potential assessments levied in response to any nuclear incidents prior to
early 1994, as disclosed in the Company's 1996 Annual Report on Form 10-K.
At September 30, 1997, a remaining $2.4 million defueling and decommissioning
liability was reflected on the consolidated condensed balance sheet.
Management believes this remaining decommissioning liability is adequate to
finalize the payment of all related obligations.
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 for the first quarter of 1996 were
positively impacted by approximately $16 million. 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 costs incurred
by the Company, including legal fees, is to be refunded or credited to
customers. The Company established an $8 million refund liability in the
first quarter of 1996. During the first quarter of 1997, such obligation was
reduced by approximately $1.1 million after amounts to be refunded were
finally determined and approved by the CPUC. Such amounts are being refunded
over a three year period.
Employee Litigation
Several employee lawsuits have been filed against the Company involving
alleged discrimination, sexual harassment or worker's compensation issues
which have arisen during the normal course of business. Also, lawsuits have
been filed against the Company alleging breach of certain fiduciary duties to
employees. The plaintiffs lawsuits are in various stages of litigation
and/or appeal(s) including settlement discussions, with the appropriate state
judicial courts. The Company intends to contest, or is actively contesting,
all such lawsuits, and management believes that the ultimate outcome will not
have a material adverse impact on the Company's results of operations,
financial position or cash flows.
During 1996, ninety former Information Technology and Systems ("IT&S")
employees filed a lawsuit against the Company. The complaint alleges that
the Company unfairly amended its severance plan in connection with a
restructuring in late 1994 to exclude the IT&S function/positions that were
outsourced to IBM, effective February 1, 1995. On June 16, 1997, the Denver
District Court issued a decision in favor of the former IT&S employees and
awarded approximately $1.6 million in severance costs and, in a judgment on
October 10, 1997 the former IT&S employees were awarded interest and attorney
fees as well, making the total judgment against the Company $2.1 million. The
Company has been informed that approximately 150 additional former IT&S
employees have filed an identical claim, although the Company has not been
served with this lawsuit. Such amounts, including estimated interest and
attorney fees were accrued during the second and third quarters of 1997. The
Company has appealed the decision and believes that the amended severance
plan is lawful and enforceable.
Certain employees terminated as part of the Company's 1991/1992
organizational analysis asserted breach of contract and promissory estoppel
with respect to job security and breach of the covenant of good faith and
fair dealing. Of the 21 actions filed, the trial court directed verdicts in
favor of the Company in 19 cases. A jury entered verdicts adverse to the
Company in two cases which were subsequently appealed by the Company. On
February 6, 1997, the Colorado Court of Appeals issued a decision on all
issues in favor of the Company and on April 3, 1997 the employees appealed
the decision of the Colorado Court of Appeals to the Colorado Supreme Court.
In October 1997, the Colorado Supreme Court denied the petition for appeal,
effectively ending this lawsuit.
3. Acquisition of Yorkshire Electricity and U.K. Windfall Profits Tax
On April 1, 1997, Yorkshire Power (through Yorkshire Holdings plc, a
wholly-owned subsidiary equally owned by the Company and AEP) acquired
substantially all of the outstanding ordinary shares of Yorkshire
Electricity, a United Kingdom regional electricity company. Yorkshire Power
is a 50/50 joint venture between
12
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
the Company and AEP. The Company accounts for its investment in Yorkshire Power
using the equity method. Yorkshire Power's results of operations includes 100%
of Yorkshire Electricity's results since April 1, 1997. The Company's equity
earnings in Yorkshire Power is 50%, the same as its ownership share.
The total consideration paid by Yorkshire Power was approximately $2.4
billion (1.5 billion pounds sterling). The acquisition was financed by
Yorkshire Power through a combination of approximately 25% equity and 75%
debt, including the assumption of the existing debt of Yorkshire
Electricity. The funds for the acquisition were obtained from the Company's
and AEP's investment in Yorkshire Power of approximately $360 million (220
million pounds sterling) each, with the remainder obtained by Yorkshire Power
through the issuance of non-recourse debt. The Company funded its entire
equity investment in Yorkshire Power through $250 million of publicly issued
secured medium-term notes with varying maturities and drawings of
approximately $110 million on its short-term lines of credit pursuant to its
short-term credit agreement with Bank of America, as agent.
In July 1997, the U.K. government enacted a windfall profits tax on
certain privatized business entities which will be payable in two
installments with the first in December 1997 and the second installment a
year later. The windfall profits 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 profits tax. The Company's share of this tax is
approximately $110.6 million.
Summarized income statement information for the period April 1, 1997
(date of acquisition) to September 30, 1997 is presented below (in millions):
Yorkshire Power:
Operating revenues....................... $ 917.6
Operating income......................... 124.1
Income before extraordinary item......... 42.8
Extraordinary item - U.K. windfall
profits tax ........................... (221.1)
------
Net loss................................. $(178.3)
=======
Company's equity in the earnings (losses):
Extraordinary item - U.K. windfall
profits tax ........................... $(110.6)
Equity in earnings of Yorkshire Power (1) 21.4
----
$ (89.2)
=======
(1) Includes the impact of approximately $10 million related to the change
in the U.K. corporate income tax rate from 33% to 31%.
The pro forma financial information presented below assumes that the
acquisition of Yorkshire Power was acquired on the first day of each
respective period. 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 Company's investment in Yorkshire Power
and related income taxes. The estimated earnings of Yorkshire Power was
based on prior 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 of Yorkshire Power
has been converted at the average exchange rates for the nine months ended
September 30, 1997 and September 30, 1996, $1.6318/pound and $1.5367/pound,
respectively.
13
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Continued)
Nine months ended
September 30,
1997 1996
---- ----
(in millions)
Company's income before extraordinary item $131.0 $138.2
Pro forma adjustments:
Equity in earnings of Yorkshire Power,
net of U.S. tax benefits (1)......... (10.1) 19.6
Interest expense, net of tax........... (3.5) (10.4)
---- -----
Pro forma result.......................... $117.4 $147.4
====== ======
(1) The nine months ended September 30, 1997 amount include $24.0 million
($17.9 million after-tax) of nonrecurring write-offs of certain computer
development costs, acquisition expenses and costs incurred for the
preparation for deregulation.
4. Management's Representations
In the opinion of the Company, the accompanying unaudited consolidated
condensed financial statements include all adjustments necessary for the fair
presentation of the financial position of the Company and its subsidiaries at
September 30, 1997 and December 31, 1996, and the results of operations for
the three and nine months ended September 30, 1997 and 1996 and cash flows
for the nine months ended September 30, 1997 and 1996. The consolidated
condensed financial information and notes thereto should be read in
conjunction with the consolidated financial statements and notes for the
years ended December 31, 1996, 1995 and 1994 included in the Company's 1996
Annual Report on Form 10-K.
Because of seasonal and other factors, including the reorganization
associated with the Merger, the results of operations for the three months
and nine months ended September 30, 1997 should not be taken as an indication
of earnings for all or any part of the balance of the year.
14
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO PUBLIC SERVICE COMPANY OF COLORADO
We have reviewed the accompanying consolidated condensed balance sheet of
Public Service Company of Colorado (a Colorado corporation) and subsidiaries
as of September 30, 1997, and the related consolidated condensed statements
of income for the three and nine month periods ended September 30, 1997 and
1996 and consolidated condensed statements of cash flows for the nine month
periods ended September 30, 1997 and 1996. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be
in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Public Service Company of
Colorado and subsidiaries as of December 31, 1996 (not presented herein),
and, in our report dated February 24, 1997, we expressed an unqualified
opinion on that statement. In our opinion, the information set forth in the
accompanying consolidated condensed balance sheet as of December 31, 1996, is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Denver, Colorado,
November 10, 1997
15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Merger
Effective August 1, 1997, following receipt of all required state and
Federal regulatory approvals, the Company and SPS merged in a tax-free
"merger of equals" transaction and became wholly-owned subsidiaries of NCE,
which is a registered holding company under PUCHA. This transaction was
accounted for as a pooling of interests for accounting purposes. Effective
with the Merger, Cheyenne, WGI, e prime and Natural Fuels were transferred by
a declaration of a dividend of the subsidiaries' stock, at net book value,
aggregating approximately $49.9 million, to NCE. NCE subsequently made a
capital contribution of the e prime and Natural Fuels common stock, at net
book value, aggregating approximately $29.5 million, to NC Enterprises. See
Note 1 Accounting Policies - Merger in Item 1. Financial Statements for
additional discussion regarding the Company, the Merger and the transfer of
Cheyenne, WGI, e prime and Natural Fuels.
The consolidated condensed statements of income and cash flows reflect
the results of operations of Cheyenne, WGI, e prime and Natural Fuels through
July 31, 1997. Where relevant, additional information has been presented to
discuss the impact of the transfer of these subsidiaries.
Three Months Ended September 30, 1997 Compared to the Three Months Ended
September 30, 1996
Earnings
The Company recognized a loss of $76.0 million for the third quarter of
1997 as compared to net earnings of $36.3 million for the third quarter of
1996. The net loss was primarily attributable to the recognition of an
extraordinary item related to the one-time U.K. windfall profits tax of
approximately $110.6 million by Yorkshire Electricity, a 50% owned
investment. Excluding the impact of this extraordinary charge, quarterly
earnings decreased approximately 5% from the previous year. An increase in
merger and business integration costs resulting from the August 1, 1997
closing of the Merger and electric rate decreases instituted in October 1996
and February 1997 contributed to the lower earnings. Ongoing operations of
Yorkshire Electricity, however, positively impacted the Company's earnings by
approximately $14.1 million after borrowing costs, net of income taxes.
Electric Operations
The following table details the change in electric operating revenues
and energy costs for the third quarter of 1997 as compared to the same period
in 1996.
Increase (Decrease)
(Thousands of Dollars)
----------------------
Cheyenne
PSCo & e prime Total
---- --------- -----
Electric operating revenues:
Retail............................. $(4,269) $(6,286) $(10,555)
Wholesale - Regulated.............. 10,539 - 10,539
Non-regulated power marketing...... - (57) (57)
Other (including unbilled revenues) (2,996) 59 (2,937)
------ -- ------
Total revenues.................... 3,274 (6,284) (3,010)
Fuel used in generation............. 2,049 - 2,049
Purchased power..................... 8,738 (4,627) 4,111
----- ------ -----
Net decrease in electric margin... $(7,513) $(1,657) $ (9,170)
======= ======= ========
16
<PAGE>
The following table compares electric Kwh sales by major customer classes
for the third quarter of 1997 and 1996.
Millions of Kwh Sales % Change *
--------------------- ----------
1997 1996 Consolidated PSCo Only
---- ---- ------------ ---------
Residential .................. 1,669 1,655 0.8% 2.6%
Commercial and Industrial ... 4,224 4,225 - 2.5
Public Authority ............. 49 52 (6.6) (5.5)
-- --
Total Retail................ 5,942 5,932 0.1 2.5
Wholesale..................... 1,232 842 46.2 46.2
Non-regulated power marketing. 81 101 (19.7) -
-- ---
Total......................... 7,255 6,875 5.5 8.1
===== =====
* Percentages are calculated using unrounded amounts
Electric margin decreased in the third quarter of 1997, when compared
to the third quarter of 1996, primarily due to the retail rate reductions
(approximately $4.8 million) implemented in October 1996 and February 1997,
the recognition of an estimated customer refund obligation (approximately
$7.4 million) in connection with the earnings sharing in excess of 11% return
on equity and the effect of the ICA which resulted from the settlement of the
Merger proceedings in Colorado (see Note 2. Commitments and Contingencies -
Regulatory Matters in Item 1. Financial Statements). Higher wholesale
electric sales also contributed to increased operating revenues, however, the
margin on such sales is minimal.
The Company has cost adjustment mechanisms which recognize the majority
of the effects of changes in fuel used in generation and purchased power
costs and allow recovery of such costs on a timely basis. In its decision on
the Merger, the CPUC replaced the Company's ECA with an ICA, effective
October 1, 1996, which allows for a 50%/50% sharing of certain fuel and
energy cost increases and decreases among customers and shareholders. (see
Note 2. Commitments and Contingencies - Regulatory Matters in Item 1.
Financial Statements).
Fuel used in generation expense increased approximately 3.8% during the
third quarter of 1997, as compared to the same quarter in 1996, due to
increased generation levels at the Company's power plants offset, in part, by
lower coal supply costs.
Purchased power expense increased 3.4% during the third quarter of
1997, as compared to the same quarter in 1996, primarily due to purchases to
meet increased wholesale requirements and other customer demands, offset, in
part, by the recognition of only one month of Cheyenne expenses.
Gas Operations
The following table details the change in revenues from gas sales and
gas purchased for resale for the third quarter of 1997 as compared to the
same period in 1996.
Increase (Decrease)
-------------------
(Thousands of Dollars)
Cheyenne
WGI &
PSCo e prime Total
---- ------- -----
Revenues from gas sales
(including unbilled revenues) ....... $ 1,860 $ (490) $ 1,370
Gas purchased for resale............... 3,309 539 3,848
----- --- -----
Net decrease in gas sales margin..... $(1,449) $(1,029) $(2,478)
======= ======= =======
17
<PAGE>
The following table compares gas dekatherm (Dth) deliveries by major
customer classes for the third quarter of 1997 and 1996.
Millions of
Dth Deliveries % Change *
-------------- ----------
1997 1996 Consolidated PSCo Only
---- ---- ------------ ---------
Residential................... 6.1 6.4 (3.9)% (2.3)%
Commercial.................... 3.9 5.3 (26.7) (11.9)
Non-regulated gas marketing... 4.5 4.3 5.2 -
--- ---
Total Sales................. 14.5 16.0 (9.0) (6.2)
Gathering and Processing...... - 0.3 ** **
Transportation................ 19.8 20.6 (4.3) 9.6
---- ----
Total....................... 34.3 36.9 (7.2) 3.6
==== ====
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful
Gas sales margin decreased slightly in the third quarter of 1997, when
compared to the third quarter of 1996, primarily due to a 6.2% decrease in
sales, offset, in part, by higher rates effective February 1, 1997, resulting
from the Company's 1996 rate case.
Gas transportation, gathering, processing and other revenues increased
$0.6 million during the third quarter of 1997, when compared to the third
quarter of 1996, primarily due to an increase in deliveries and higher
transportation rates effective February 1, 1997, resulting from the Company's
1996 rate case.
The Company has in place a GCA mechanism for natural gas sales, which
recognizes the majority of the effects of changes in the cost of gas
purchased for resale and adjusts revenues to reflect such changes in cost on
a timely basis. As a result, the changes in revenues associated with these
mechanisms during the third quarters of 1997 and 1996 had little impact on
net income. However, the fluctuations in gas sales impact the amount of gas
the Company must purchase and, therefore, along with the increases and
decreases in the per-unit cost of gas, affect total gas purchased for resale.
Non-Fuel Operating Expenses
Depreciation and amortization expense increased $3.4 million in the
third quarter of 1997, as compared to the same period in 1996, primarily due
to the depreciation of property additions and the higher amortization of
software costs.
The decrease in income taxes for the third quarter of 1997, as compared
to the same period in 1996, is primarily due to lower pretax income.
Additional income tax expense was recognized in the current period due to
higher 1997 non-deductible merger and executive severance costs.
Other income and deductions increased $15.5 million primarily due to
the recognition of equity earnings in Yorkshire Power ($17.3 million), of
which approximately $10 million is related to the change in the U.K.
corporate income tax rate from 33% to 31%. See Note 3. Acquisition of
Yorkshire Electricity and U.K. Windfall Profits Tax in Item 1. Financial
Statements. This increase was offset, in part, by increased merger and
business integration costs (approximately $6.0 million), including executive
severance costs, resulting from the closing of the Merger effective August 1,
1997. While costs associated with the Merger, transition planning and
implementation have negatively impacted earnings during 1997 and 1996,
management anticipates that future operating results will benefit from
synergies resulting from the Merger.
Interest charges increased $10.1 million during the third quarter of
1997, when compared to the same quarter in 1996, primarily due to interest on
borrowings utilized to finance capital expenditures and the April
18
<PAGE>
1997 acquisition of Yorkshire Electricity. These borrowings included the
issuance of $75 million and $250 million of medium-term notes in January and
March 1997, respectively.
Nine Months Ended September 30, 1997 Compared to the Nine Months Ended
September 30, 1996
Earnings
Earnings were $11.6 million for the first nine months of 1997 as
compared to $129.3 million during the same period in 1996. The significant
decrease was primarily attributable to the recognition of an extraordinary
item related to the one-time U.K. windfall profits tax of approximately
$110.6 million by Yorkshire Power, a 50% owned investment. While earnings
were positively impacted by continued customer growth contributing to
increased electric and gas sales as well as the equity earnings in ongoing
operations at Yorkshire Electricity, income before the extraordinary item
decreased $7.3 million for the nine months ended in 1997 as compared to the
same period in 1996. This decline was attributable to the favorable impact
in 1996 of the February 9, 1996 settlement agreement with the DOE resolving
all spent nuclear fuel storage and disposal issues at Fort St. Vrain (see
Note 2. Commitments and Contingencies - Fort St. Vrain in Item 1. Financial
Statements), the recognition of higher 1997 merger and business integration
costs and higher interest costs.
Electric Operations
The following table details the change in electric operating revenues
and energy costs for the first nine months of 1997 as compared to the same
period in 1996.
Increase (Decrease)
-------------------
(Thousands of Dollars)
Electric operating revenues:
Retail............................................... $(27,287)
Wholesale............................................ 17,970
Non-regulated power marketing........................ 8,676
Other (including unbilled revenues).................. 3,847
-----
Total revenues...................................... 3,206
Fuel used in generation............................... 2,779
Purchased power....................................... (6,265)
------
Net decrease in electric margin..................... $ (5,838)
========
The following table compares electric Kwh sales by major customer
classes for the first nine months of 1997 and 1996.
Millions of Kwh Sales
---------------------
1997 1996 %Change *
---- ---- ---------
Residential ............................... 5,044 4,992 1.0%
Commercial and Industrial ................ 11,909 11,838 0.6
Public Authority .......................... 138 146 (5.9)
--- ---
Total Retail............................. 17,091 16,976 0.7
Wholesale.................................. 3,110 2,270 36.9
Non-regulated power marketing.............. 660 101 **
--- ---
Total...................................... 20,861 19,347 7.8
====== ======
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful
Electric margin decreased in the first nine months of 1997, when
compared to the first nine months of 1996. Although customer growth
contributed to higher electric Kwh retail sales, the decrease in electric
margin was primarily attributable to retail rate reductions implemented in
October 1996 and February 1997 (approximately $12.1 million) and the
recognition of an estimated customer refund obligation (approximately $7.4
19
<PAGE>
million) in connection with the earnings sharing in excess of 11% return on
equity which resulted from the settlement of the Merger proceedings in
Colorado (see Note 2. Commitments and Contingencies - Regulatory Matters in
Item 1. Financial Statements). Power marketing activities by non-regulated
subsidiaries initiated in the third quarter of 1996 and higher wholesale
electric sales also contributed to increased operating revenues, however, the
margin on such sales is minimal.
The Company has cost adjustment mechanisms which recognize the majority
of the effects of changes in fuel used in generation and purchased power
costs and allow recovery of such costs on a timely basis. As discussed in
Note 1. Accounting Policies - Recovered/Recoverable Purchased Gas and
Electric Energy Costs - Net in Item 1. Financial Statements, in its decision
on the Merger, the CPUC replaced the Company's ECA with an ICA, effective
October 1, 1996, which allows for a 50%/50% sharing of certain fuel and
energy cost increases and decreases among customers and shareholders.
Fuel used in generation expense increased slightly during the first
nine months of 1997, as compared to the same period in 1996, due to increased
generation levels at the Company's power plants offset, in part, by lower
coal supply costs in the first nine months of 1997.
Purchased power expense also increased slightly during the first nine
months of 1997, as compared to the same period in 1996, due to purchases to
meet wholesale requirements and other customer demands and increased power
marketing activities, offset, in part, by the recognition of only seven
months of Cheyenne costs in 1997 verses nine months in 1996.
Gas Operations
The following table details the change in revenues from gas sales and
gas purchased for resale for the first nine months of 1997 as compared to the
same period in 1996.
Increase (Decrease)
-------------------
(Thousands of Dollars)
Revenues from gas sales (including unbilled revenues). $102,175
Gas purchased for resale.............................. (93,236)
-------
Net increase in gas sales margin..................... $ 8,939
========
The following table compares gas Dth deliveries by major customer
classes for the first nine months of 1997 and 1996.
Millions of Dth Deliveries
--------------------------
1997 1996 % Change *
---- ---- ----------
Residential................................ 64.2 63.9 0.4%
Commercial and resale...................... 35.1 39.2 (10.4)
Non-regulated gas marketing................ 35.2 5.7 **
---- ---
Total Sales.............................. 134.5 108.8 23.6
Gathering and processing................... 0.1 0.9 **
Transportation............................. 67.2 67.6 (0.6)
---- ----
Total.................................... 201.8 177.3 13.8
===== =====
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful
Gas sales margin increased in the first nine months of 1997, when
compared to the first nine months of 1996, primarily due to an increase in
the Company's base revenues associated with the higher rates effective
February 1, 1997, resulting from the Company's 1996 rate case. Gas marketing
activities by non-regulated subsidiaries favorably contributed to the
increase in gas sales margin. Gas costs were higher during the first nine
20
<PAGE>
months of 1997, as compared to the same period of 1996, as a result of higher
gas prices incurred through the winter heating season.
Gas transportation, gathering, processing and other revenues increased
$2.3 million during the first nine months of 1997, when compared to the first
nine months of 1996, primarily due to an increase in transportation rates
effective February 1, 1997, resulting from the Company's 1996 rate case and a
3.8% increase in transportation deliveries. The higher transportation
deliveries are attributable to the shifting of various Company commercial
sales customers to firm transportation customers. Historically, this
shifting has not had an impact on gas margin and is not expected to have an
impact in the future.
The Company has in place a GCA mechanism for natural gas sales, which
recognizes the majority of the effects of changes in the cost of gas
purchased for resale and adjusts revenues to reflect such changes in cost on
a timely basis. As a result, the changes in revenues associated with these
mechanisms during the first nine months of 1997 and 1996 had little impact on
net income. However, the fluctuations in gas sales impact the amount of gas
the Company must purchase and, therefore, along with the increases and
decreases in the per-unit cost of gas, affect total gas purchased for resale.
Non-Fuel Operating Expenses
Other operating and maintenance expenses increased $11.2 million during
the nine months ended September 30, 1997, when compared to the same period in
1996, primarily due to the favorable impact on 1996 earnings of the February
9, 1996 settlement agreement with the DOE resolving all spent nuclear fuel
storage and disposal issues at Fort St. Vrain (approximately $16 million).
In addition, higher electric production and distribution maintenance costs
and higher operating costs at non-regulated subsidiaries negatively impacted
current year results. However, lower employee benefit costs and other
general reductions resulting from the Company's cost containment efforts
favorably impacted current year results.
Depreciation and amortization expense increased $13.5 million in the
first nine months of 1997, as compared to the same period in 1996, primarily
due to the depreciation of property additions and the higher amortization of
software costs.
The decrease in income taxes for the first nine months of 1997, as
compared to the same period in 1996, is primarily due to lower pre-tax income
and the prior year accrual for additional tax liabilities. However,
additional income tax expense was recognized in the current period for higher
non-deductible merger and executive severance costs.
Other income and deductions increased $14.4 million primarily due the
recognition of equity earnings in Yorkshire Electricity ($21.4 million), of
which approximately $10 million is related to the change in the U.K.
corporate income tax rate from 33% to 31% (see Note 3. Acquisition of
Yorkshire Electricity and U.K. Windfall Profits Tax in Item 1. Financial
Statements). This increase was offset, in part, by increased merger and
business integration costs, including executive severance costs, resulting
from the closing of the Merger effective August 1, 1997. While costs
associated with the Merger, transition planning and implementation have
negatively impacted earnings during 1997 and 1996, management anticipates
that future operating results will benefit from synergies resulting from the
Merger.
Interest expense increased $24.2 million during the nine months ended
September 30, 1997, when compared to the same period in 1996, primarily due
to interest on borrowings utilized to finance capital expenditures and the
April 1997 acquisition of Yorkshire Electricity. These borrowings included
the issuance of $75 million and $250 million of medium-term notes in January
and March 1997, respectively.
21
<PAGE>
Commitments and Contingencies
Issues relating to regulatory and environmental matters are discussed
in Note 2 Commitments and Contingencies in Item 1. Financial Statements.
These matters and the future resolution thereof may impact the Company's
future results of operations, financial position or cash flows.
Based on a preliminary analysis, NCE and its subsidiaries expect to incur
costs of approximately $50-65 million over the next two years to modify its
computer software, hardware and other automated systems used in operations
enabling proper data processing relating to the year 2000 and beyond.
Approximately two-thirds of these costs are expected to be incurred by or
allocated to the Company. The Company continues to evaluate appropriate courses
of corrective action, including the replacement of certain systems. A
significant portion of these costs will represent the redeployment of existing
information technology resources. Management does not anticipate these
activities will have a material adverse impact on the Company's financial
position, results of operations or cash flows.
Liquidity and Capital Resources
Cash Flows - Nine Months Ended September 30
1997 1996 Decrease
---- ---- --------
Net cash provided by operating activities
(in millions) ............................ $154.0 $256.7 $(102.7)
Cash provided by operating activities decreased in the first nine
months of 1997, when compared to the same period in 1996, primarily due to
the increase in payments to gas suppliers resulting from the higher gas costs
in late 1996 and early 1997. A portion of these higher gas costs have been
deferred through the GCA and will be recovered from customers in the future.
1997 1996 Increase
---- ---- --------
Net cash used in investing activities
(in millions) ........................... $(575.2) $(200.0) $375.2
Cash used in investing activities increased during the nine months
ended September 30, 1997, when compared to the same period in 1996, primarily
due to the Company's April 1, 1997 acquisition of an equity interest in
Yorkshire Electricity for approximately $362 million.
1997 1996 Increase
---- ---- --------
Net cash provided by (used in) financing
activities (in millions) ............... $424.1 $ (56.3) $480.4
Cash provided by financing activities increased (indicating that there
were more borrowings) in the first nine months of 1997, when compared to the
same period in 1996, primarily due to the issuance of $75 million and $250
million of medium term notes in January and March 1997, respectively. The
proceeds from the $75 million financing were used to fund the Company's
construction program. The Company used the proceeds from the $250 million
medium term notes, together with additional borrowings of approximately $110
million on its short-term lines of credit, to fund its acquisition of
Yorkshire Electricity. See Note 3. Acquisition of Yorkshire Electricity and
U.K. Windfall Profits Tax in Item 1. Financial Statements. As a result of
the increase in recoverable purchased gas and electric energy costs and
reduced cash flows resulting from lower electric rates, coupled with
increased merger and business integration costs, the Company has utilized the
proceeds from additional short-term borrowings to finance ongoing
construction expenditures. With the consummation of the Merger effective
August 1, 1997, management anticipates that future operating results and
related cash flows will benefit from synergies resulting from the Merger.
Electric Utility Industry
Electric utilities have historically operated in a highly regulated
environment in which they have an obligation to provide electric service to
their customers in return for an exclusive franchise within their service
22
<PAGE>
territory with an opportunity to earn a regulated rate of return. This
regulatory environment is changing. The generation sector has experienced
competition from nonutility power producers and the FERC is requiring
utilities, including the Company, to provide wholesale transmission service
to others and may order electric utilities to enlarge their transmission
systems to facilitate transmission services without impairing reliability.
State regulatory authorities are in the process of changing utility
regulations in response to federal and state statutory changes and evolving
markets, including consideration of providing open access to retail
customers. All of the Company's jurisdictions continue to evaluate utility
regulations with respect to competition. The Company is unable to predict
what financial impact or effect the adoption of these proposals would have on
its operations. The Merger between the Company and SPS was, in part, in
response to these changing conditions.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Part 1. See Note 2. Commitments and Contingencies in Item 1, Part 1.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12(a) Computation of Ratio of Consolidated Earnings to Consolidated
Fixed Charges is set forth at page 26 herein.
12(b) Computation of Ratio of Consolidated Earnings to Consolidated
Combined Fixed Charges and Preferred Stock Dividends is set forth
at page 27 herein.
15 Letter from Arthur Andersen LLP regarding unaudited interim
information is set forth at page 28 herein.
27 Financial Data Schedule UT
(b) Reports on Form 8-K
- A report dated July 2, 1997 was filed on September 26, 1997 which
included Item 5. Other Events.
23
<PAGE>
SIGNATURE
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.
PUBLIC SERVICE COMPANY OF COLORADO
By /s/ R. C. Kelly
_________________________________
R. C. KELLY
Executive Vice President
and Chief Financial Officer
Dated: November 14, 1997
24
<PAGE>
EXHIBIT INDEX
12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed
Charges is set forth at page 26 herein.
12(b) Computation of Ratio of Consolidated Earnings to Consolidated
Combined Fixed Charges and Preferred Stock Dividends is set forth at
page 27 herein.
15 Letter from Arthur Andersen LLP regarding unaudited interim
information is set forth at page 28 herein.
27 Financial Data Schedule UT.
25
<PAGE>
EXHIBIT 12(a)
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS
TO CONSOLIDATED FIXED CHARGES
(not covered by Report of Independent Public Accountants)
Nine Months Ended
September 30,
1997 1996
---- ----
(Thousands of Dollars, except ratios)
Fixed charges:
Interest on long-term debt................... $ 85,902 $ 68,102
Interest on borrowings against corporate-owned
life insurance contracts................... 34,049 29,586
Other interest............................... 17,150 13,343
Amortization of debt discount and expense
less premium .............................. 2,964 2,696
Interest component of rental expense......... 6,887 7,991
----- -----
Total ..................................... $146,952 $121,718
======== ========
Earnings (before fixed charges and taxes on income):
Income before extraordinary item............. $130,968 $138,222
Fixed charges as above....................... 146,952 121,718
Provisions for Federal and state taxes on income,
net of investment tax credit amortization.... 59,205 75,284
------ ------
Total...................................... $337,125 $335,224
======== ========
Ratio of earnings to fixed charges.............. 2.29 2.75
==== ====
26
<PAGE>
EXHIBIT 12(b)
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS
TO CONSOLIDATED COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
(not covered by Report of Independent Public Accountants)
Nine Months Ended
September 30,
1997 1996
---- ----
(Thousands of Dollars, except ratios)
Fixed charges and preferred stock dividends:
Interest on long-term debt................... $ 85,902 $ 68,102
Interest on borrowings against corporate-owned
life insurance contracts................... 34,049 29,586
Other interest............................... 17,150 13,343
Amortization of debt discount and expense
less premium .............................. 2,964 2,696
Interest component of rental expense......... 6,887 7,991
Preferred stock dividend requirement......... 8,814 8,905
Additional preferred stock dividend requirement 3,984 4,850
----- -----
Total ..................................... $159,750 $135,473
======== ========
Earnings (before fixed charges and taxes on income):
Income before extraordinary item............. $130,968 $138,222
Interest on long-term debt................... 85,902 68,102
Interest on borrowings against corporate-owned
life insurance contracts................... 34,049 29,586
Other interest............................... 17,150 13,343
Amortization of debt discount and expense
less premium .............................. 2,964 2,696
Interest component of rental expense......... 6,887 7,991
Provisions for Federal and state taxes on income,
net of investment tax credit amortization.... 59,205 75,284
------ ------
Total...................................... $337,125 $335,224
======== ========
Ratio of earnings to fixed charges
and preferred stock dividends................... 2.11 2.47
==== ====
27
<PAGE>
EXHIBIT 15
November 10, 1997
Public Service Company of Colorado:
We are aware that Public Service Company of Colorado has incorporated
by reference in its Registration Statement (Form S-3, File No. 33-62233)
pertaining to the Automatic Dividend Reinvestment and Common Stock Purchase
Plan; the Company's Registration Statement (Form S-3, File No. 33-37431), as
amended on December 4, 1990, pertaining to the shelf registration of the
Company's First Mortgage Bonds; the Company's Registration Statement (Form
S-8, File No. 33-55432) pertaining to the Omnibus Incentive Plan; the
Company's Registration Statement (Form S-3, File No. 33-51167) pertaining to
the shelf registration of the Company's First Collateral Trust Bonds; and the
Company"s Registration Statement (Form S-3, File No. 33-54877) pertaining to
the shelf registration of the Company's First Collateral Trust Bonds and
Cumulative Preferred Stock, its Form 10-Q for the quarter ended September 30,
1997, which includes our report dated November 10, 1997, covering the
unaudited consolidated condensed financial statements contained therein.
Pursuant to Regulation C of the Securities Act of 1933, that report is not
considered a part of the registration statement prepared or certified by our
Firm or a report prepared or certified by our Firm within the meaning of
Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN LLP
28
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM PUBLIC
SERVICE COMPANY OF COLORADO AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE
SHEET AS OF SEPTEMBER 30, 1997 AND CONSOLIDATED CONDENSED STATEMENTS OF INCOME
AND CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1997
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 3,629,209
<OTHER-PROPERTY-AND-INVEST> 302,619
<TOTAL-CURRENT-ASSETS> 507,761
<TOTAL-DEFERRED-CHARGES> 331,998
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 4,771,587
<COMMON> 1
<CAPITAL-SURPLUS-PAID-IN> 1,028,818
<RETAINED-EARNINGS> 287,182
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,316,001
39,254
140,002
<LONG-TERM-DEBT-NET> 1,298,553
<SHORT-TERM-NOTES> 50,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 423,561
<LONG-TERM-DEBT-CURRENT-PORT> 307,357
2,576
<CAPITAL-LEASE-OBLIGATIONS> 40,819
<LEASES-CURRENT> 4,755
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,148,709
<TOT-CAPITALIZATION-AND-LIAB> 4,771,587
<GROSS-OPERATING-REVENUE> 1,697,601
<INCOME-TAX-EXPENSE> 59,205
<OTHER-OPERATING-EXPENSES> 1,369,502
<TOTAL-OPERATING-EXPENSES> 1,428,707
<OPERATING-INCOME-LOSS> 268,894
<OTHER-INCOME-NET> (2,429)
<INCOME-BEFORE-INTEREST-EXPEN> 266,465
<TOTAL-INTEREST-EXPENSE> 135,497
<NET-INCOME> 20,403
8,814
<EARNINGS-AVAILABLE-FOR-COMM> 11,589
<COMMON-STOCK-DIVIDENDS> 114,249
<TOTAL-INTEREST-ON-BONDS> 85,902
<CASH-FLOW-OPERATIONS> 153,984
<EPS-PRIMARY> 0.000
<EPS-DILUTED> 0.000
</TABLE>
