UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Exact name of registrant as specified in its charter,
State or other jurisdiction of incorporation or
organization, Address of principal executive offices
Commission and 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
-------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
On August 13, 1999, 115,254,671 shares of the Registrant's Common Stock
were outstanding. The aggregate market value of this common stock held by
nonaffiliates based on the closing price on the New York Stock Exchange was
approximately $3,788,997,309.
Public Service Company of Colorado and Southwestern Public Service Company meet
the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and
are therefore filing this Form 10-Q with the reduced disclosure format specified
in General Instruction H (2) to such Form 10-Q.
<PAGE>
Table of Contents
PART I - FINANCIAL INFORMATION
Item l.Financial Statements ............................................ 1
Item 2.Management's Discussion and Analysis of Financial
Condition and Results of Operations ............................ 39
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 59
Item 6. Exhibits and Reports on Form 8-K............................... 59
This combined Form 10-Q is separately filed by New Century Energies, Inc.,
Public Service Company of Colorado and Southwestern Public Service Company.
Information contained herein relating to any individual company is filed by such
company on its own behalf. Each registrant makes representations only as to
itself and makes no other representations whatsoever as to information relating
to the other registrants.
This report should be read in its entirety. No one section of the report deals
with all aspects of the subject matter.
FORWARD-LOOKING INFORMATION
The following discussions include "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. Investors and prospective investors are
cautioned that the forward-looking statements contained herein with respect to
the revenues, earnings, capital expenditures, resolution and impact of
litigation, Year 2000 issues, competitive performance, or other prospects for
the business of New Century Energies, Inc., Public Service Company of Colorado
and/or Southwestern Public Service Company or their affiliated companies,
including any and all underlying assumptions and other statements that are other
than statements of historical fact, may be influenced by factors that could
cause actual outcomes and results to be materially different than projected.
Such factors include, but are not limited to, the effects of weather, future
economic conditions, the performance of generating units, fuel prices and
availability, regulatory decisions and the effects of changes in state and
federal laws, the pace of deregulation of domestic retail natural gas and
electricity markets, the timing and extent of change in commodity prices for all
forms of energy, capital spending requirements, the evolution of competition,
earnings retention and dividend payout policies, changes in accounting
standards, the consummation of the proposed merger with Northern States Power
Company and other factors. From time to time, New Century Energies, Inc., Public
Service Company of Colorado and Southwestern Public Service Company may publish
or otherwise make available forward-looking statements. All such subsequent
forward-looking statements, whether written or oral and whether made by or on
behalf of each company, are also expressly qualified by these cautionary
statements.
i
<PAGE>
TERMS
The abbreviations or acronyms used in the text and notes are defined below:
Abbreviation or Acronym Term
AEP......................................................American Electric Power
CERCLA......Comprehensive Environmental Response, Compensation and Liability Act
Cheyenne..................................Cheyenne Light, Fuel and Power Company
CPUC....................The Public Utilities Commission of the State of Colorado
Denver District Court....District Court in and for the City and County of Denver
DOE.........................................................Department of Energy
DSM.......................................................Demand Side Management
Dth....................................................................Dekatherm
ECA.......................................................Energy Cost Adjustment
EPA.........................................U.S. Environmental Protection Agency
e prime...........................................e prime, inc. and subsidiaries
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
ICA....................................................Incentive Cost Adjustment
IRS.....................................................Internal Revenue Service
Kwh................................................................kilowatt-hour
PSCo/SPS Merger........................business combination between PSCo and SPS
Natural Fuels..........................................Natural Fuels Corporation
NCE or Company........................................New Century Energies, Inc.
NC Enterprises..............................................NC Enterprises, Inc.
NCI..............................................New Century International, Inc.
NMPRC .................................. New Mexico Public Regulation Commission
NOx...............................................................Nitrogen Oxide
NSP................................................Northern States Power Company
PCB.....................................................Polychlorinated Biphenyl
PSCo..........................................Public Service Company of Colorado
PSRI.......................................................PSR Investments, Inc.
PUHCA.....................Public Utility Holding Company Act of 1935, as amended
PRPs.............................................Potentially Responsible Parties
PSCCC.............................................PS Colorado Credit Corporation
PUCT..........................................Public Utility Commission of Texas
QF...........................................................Qualifying Facility
Quixx.........................................Quixx Corporation and subsidiaries
SEC...........................................Securities and Exchange Commission
SO2...............................................................Sulfur Dioxide
SPS..........................................Southwestern Public Service Company
SFAS 71....................Statement of Financial Accounting Standards No. 71 -
"Accounting for the Effects of Certain Types of Regulation"
SFAS 112..................Statement of Financial Accounting Standards No. 112 -
"Employers' Accounting for Postemployment Benefits"
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"
Thunder Basin.........................................Thunder Basin Coal Company
UE..............................Utility Engineering Corporation and subsidiaries
WGI.....................................................WestGas InterState, Inc.
Y2K....................................................................Year 2000
Yorkshire Electricity............................Yorkshire Electricity Group plc
Yorkshire Power.......................................Yorkshire Power Group Ltd.
ii
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
ASSETS
June 30, December 31,
1999 1998
---- ----
Property, plant and equipment, at cost:
Electric .......................................... $7,357,881 $7,097,070
Gas................................................ 1,281,283 1,210,605
Steam and other.................................... 117,647 111,620
Common to all departments.......................... 470,895 423,287
Construction in progress........................... 278,083 391,100
------- -------
9,505,789 9,233,682
Less: accumulated depreciation .................... 3,471,139 3,351,659
--------- ---------
Total property, plant and equipment.............. 6,034,650 5,882,023
--------- ---------
Investments, at cost:
Investment in Yorkshire Power and other
unconsolidated subsidiaries (Note 3)............. 340,142 340,874
Other.............................................. 77,757 64,562
------- ------
Total investments................................. 417,899 405,436
------- -------
Current assets:
Cash and temporary cash investments................ 72,157 56,667
Accounts receivable, less reserve for uncollectible
accounts ($4,353 at June 30, 1999; $4,842 at
December 31, 1998)............................... 312,056 319,145
Accrued unbilled revenues.......................... 120,486 130,455
Recoverable purchased gas and electric energy costs 6,092 66,154
Materials and supplies, at average cost............ 74,541 69,298
Fuel inventory, at average cost.................... 32,022 24,653
Gas in underground storage, at cost (LIFO)......... 21,592 52,624
Prepaid expenses and other......................... 74,585 83,561
------- ------
Total current assets.............................. 713,531 802,557
------- -------
Deferred charges:
Regulatory assets (Note 1)......................... 362,221 381,632
Unamortized debt expense........................... 27,885 27,408
Other.............................................. 198,544 172,908
------- -------
Total deferred charges............................ 588,650 581,948
------- -------
$7,754,730 $7,671,964
========== ==========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
1
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
CAPITAL AND LIABILITIES
June 30, December 31,
1999 1998
---- ----
Common stock.......................................... $1,896,515 $1,866,386
Retained earnings..................................... 757,396 740,677
Accumulated other comprehensive income (Note 1)....... (9,410) 7,764
------- ------
Total common equity............................... 2,644,501 2,614,827
PSCo and SPS obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
subordinated debentures of PSCo and SPS (Note 7)..... 294,000 294,000
Long-term debt of subsidiaries ....................... 2,126,729 2,205,545
--------- ---------
5,065,230 5,114,372
--------- ---------
Noncurrent liabilities:
Employees' postretirement benefits other than pensions 63,840 61,732
Employees' postemployment benefits ................ 31,343 31,326
------ ------
Total noncurrent liabilities...................... 95,183 93,058
------ ------
Current liabilities:
Notes payable and commercial paper ................ 544,097 524,394
Long-term debt due within one year................. 308,972 138,165
Accounts payable................................... 269,152 285,080
Dividends payable.................................. 69,707 69,271
Recovered electric energy costs.................... 13,907 18,760
Customers' deposits................................ 30,919 30,793
Accrued taxes...................................... 26,589 85,384
Accrued interest................................... 56,734 50,229
Other.............................................. 119,687 122,747
------- -------
Total current liabilities......................... 1,439,764 1,324,823
--------- ---------
Deferred credits:
Customers' advances for construction............... 57,194 55,400
Unamortized investment tax credits ................ 98,374 100,925
Accumulated deferred income taxes.................. 961,362 947,247
Other.............................................. 37,623 36,139
------- ------
Total deferred credits............................ 1,154,553 1,139,711
--------- ---------
Commitments and contingencies (Notes 4 and 5)......... ---------- ----------
$7,754,730 $7,671,964
========== ==========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements
2
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Three Months Ended
June 30,
1999 1998
---- ----
Operating revenues:
Electric........................................... $607,277 $ 642,812
Gas................................................ 173,172 166,421
Other.............................................. 20,385 21,726
------- ------
800,834 830,959
Operating expenses:
Fuel used in generation............................ 152,857 171,280
Purchased power.................................... 130,635 137,240
Cost of gas sold................................... 114,502 112,689
Other operating and maintenance expenses-regulated. 137,040 139,075
Other operating and maintenance expenses-nonregulated 28,308 23,892
Depreciation and amortization...................... 69,895 67,074
Taxes (other than income taxes) ................... 37,477 33,043
------- ------
670,714 684,293
------- -------
Operating income...................................... 130,120 146,666
Other income and deductions:
Equity in earnings (losses) of Yorkshire Power and
other unconsolidated subsidiaries (Note 3)......... (2,787) (7,569)
Miscellaneous income and deductions - net.......... (2,609) 1,023
------ ------
(5,396) (6,546)
Interest charges and preferred dividends of subsidiaries:
Interest on long-term debt......................... 43,942 42,718
Other interest..................................... 7,362 8,958
Allowance for borrowed funds used during construction (2,611) (4,415)
Dividends on PSCo and SPS obligated mandatorily
redeemable preferred securities of subsidiary
trusts holding solely subordinated debentures of
PSCo and SPS ...................................... 5,762 4,073
Dividend requirements on preferred stock of
subsidiaries ...................................... - 2,403
---- -----
54,455 53,737
Income before income taxes............................ 70,269 86,383
Income taxes.......................................... 21,034 29,790
------- ------
Net income............................................ $49,235 $56,593
======= =======
Weighted average common shares outstanding:
Basic.............................................. 115,080 111,372
Diluted............................................ 115,103 111,528
Basic and diluted earnings per share of common stock
outstanding ....................................... $ 0.43 $ 0.50
====== ======
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
3
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Six Months Ended
June 30,
1999 1998
---- ----
Operating revenues:
Electric........................................... $1,201,808 $1,227,658
Gas................................................ 478,307 477,783
Other.............................................. 35,414 41,535
------- ------
1,715,529 1,746,976
Operating expenses:
Fuel used in generation............................ 286,706 312,199
Purchased power.................................... 257,879 270,962
Cost of gas sold................................... 333,581 329,256
Other operating and maintenance expenses-regulated. 266,466 268,680
Other operating and maintenance expenses-nonregulated 48,991 41,968
Depreciation and amortization...................... 139,397 129,492
Taxes (other than income taxes) ................... 75,097 65,916
------- ------
1,408,117 1,418,473
--------- ---------
Operating income...................................... 307,412 328,503
Other income and deductions:
Equity in earnings (losses) of Yorkshire Power and
other unconsolidated subsidiaries (Note 3)........ 13,024 (3,817)
Miscellaneous income and deductions - net.......... (6,151) (1,945)
------- ------
6,873 (5,762)
Interest charges and preferred dividends of subsidiaries:
Interest on long-term debt......................... 85,352 83,191
Other interest..................................... 14,251 17,452
Allowance for borrowed funds used during construction (5,527) (8,921)
Dividends on PSCo and SPS obligated mandatorily
redeemable preferred securities of subsidiary
trusts holding solely subordinated debentures of
PSCo and SPS ..................................... 11,525 6,036
Dividend requirements on preferred stock of
subsidiaries - 5,332
---- -----
105,601 103,090
Income before income taxes............................ 208,684 219,651
Income taxes.......................................... 58,149 76,909
------- ------
Net income............................................ $150,535 $142,742
======== ========
Weighted average common shares outstanding:
Basic.............................................. 114,881 111,174
Diluted............................................ 114,916 111,332
Basic and diluted earnings per share of common stock
outstanding ........................................ $ 1.31 $ 1.28
====== ======
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
4
<PAGE>
NEW CENTURY ENERGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Six Months Ended
June 30,
1999 1998
---- ----
Operating activities:
Net income......................................... $150,535 $142,742
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.................... 145,934 134,512
Amortization of investment tax credits........... (2,551) (2,558)
Deferred income taxes............................ 15,003 4,598
Equity in earnings of Yorkshire Power and other
unconsolidated subsidiaries, net ............... (13,024) 3,817
Allowance for equity funds used during construction (827) -
Change in accounts receivable.................... 7,089 12,845
Change in inventories............................ 18,420 19,184
Change in other current assets................... 82,069 52,508
Change in accounts payable....................... (15,928) (58,842)
Change in other current liabilities.............. (52,103) (4,727)
Change in deferred amounts....................... (22,186) 53,688
Change in noncurrent liabilities................. 2,124 4,959
Other............................................ 84 45
------- -------
Net cash provided by operating activities...... 314,639 362,771
Investing activities:
Construction expenditures.......................... (287,650) (261,302)
Allowance for equity funds used during construction 827 -
Proceeds from disposition of property, plant
and equipment ................................... 512 2,848
Acquisition of subsidiary, net of cash acquired (Note 3) - (13,725)
Purchase of other investments...................... (11,809) (2,014)
Sale of other investments.......................... 2,402 3,426
------- -------
Net cash used in investing activities.......... (295,718) (270,767)
Financing activities:
Proceeds from sale of common stock................. 20,532 23,976
Proceeds from sale of PSCo obligated mandatorily
redeemable preferred securities ................. - 194,000
Proceeds from sale of long-term debt............... 156,488 248,380
Redemption of long-term debt....................... (66,774) (80,392)
Short-term borrowings - net........................ 19,702 (134,281)
Redemption of preferred stock (Note 1)............. - (181,824)
Dividends on common stock.......................... (133,379) (126,905)
-------- --------
Net cash used in financing activities.......... (3,431) (57,046)
------- -------
Net increase in cash and temporary
cash investments ............................ 15,490 34,958
Cash and temporary cash investments at beginning
of period ................................... 56,667 72,623
------ ------
Cash and temporary cash investments at end
of period ................................... $ 72,157 $107,581
======== ========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements
5
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
Three Months Ended June 30, 1999 and 1998
(Unaudited)
(Thousands of Dollars, Except Share Information)
<TABLE>
<CAPTION>
Accumulated
Common Stock, $1 par value Paid Other
-------------------------- in Retained Comprehensive
Shares Amount Capital Earnings Income Total
------ ------ ------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance at March 31, 1998 111,239,530 $ 111,240 $1,604,912 $ 680,666 $ 9,402 $2,406,220
Comprehensive income (Note 1):
Net income.......... - - - 56,593 - 56,593
Foreign currency translation
adjustment......... - - - - (3,778) (3,778)
--------
Comprehensive income 52,815
Dividends declared on common stock - - - (64,541) - (64,541)
Issuance of common stock 252,388 252 10,877 - - 11,129
------- ------- ------- ------- ------- ------
Balance at June 30,1998 111,491,918 $ 111,492 $1,615,789 $ 672,718 $ 5,624 $2,405,623
============= ========== ========== ========= ======= ==========
Balance at March 31, 1999 114,924,982 $ 114,925 $1,769,762 $ 775,016 $(2,856) $2,656,847
Comprehensive income (Note 1):
Net income.......... - - - 49,235 - 49,235
Foreign currency translation
adjustment......... - - - - (6,554) (6,554)
-------
Comprehensive income 42,681
Dividends declared on common stock - - - (66,855) - (66,855)
Issuance of common stock 317,286 317 11,511 - - 11,828
------- ------- ------- ------- ------ ------
Balance at June 30,1999 115,242,268 $ 115,242 $1,781,273 $ 757,396 $(9,410) $2,644,501
============= ========== ========== ========= ======= ==========
</TABLE>
Authorized shares of common stock were 260 million at June 30, 1999 and 1998.
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
6
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF SHAREHOLDERS' EQUITY
Six Months Ended June 30, 1999 and 1998
(Unaudited)
(Thousands of Dollars, Except Share Information)
<TABLE>
<CAPTION>
Accumulated
Common Stock, $1 par value Paid Other
-------------------------- in Retained Comprehensive
Shares Amount Capital Earnings Income Total
------ ------ ------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 110,749,301 $ 110,749 $1,583,446 $ 659,050 $ 4,142 $2,357,387
Comprehensive income (Note 1):
Net income.......... - - - 142,742 - 142,742
Foreign currency translation
adjustment......... - - - - 1,482 1,482
-----
Comprehensive income 144,224
Dividends declared on common stock - - - (129,074) - (129,074)
Issuance of common stock 742,617 743 32,343 - - 33,086
------- ------- ------ ------- ------- ------
Balance at June 30,1998 111,491,918 $ 111,492 $1,615,789 $ 672,718 $ 5,624 $2,405,623
=========== ========== ========== ========= ======== ==========
Balance at December 31, 1998 114,490,772 $ 114,491 $1,751,895 $ 740,677 $ 7,764 $2,614,827
Comprehensive income (Note 1):
Net income.......... - - - 150,535 - 150,535
Foreign currency translation
adjustment......... - - - - (17,174) (17,174)
-------
Comprehensive income 133,361
Dividends declared on common stock - - - (133,517) - (133,517)
Issuance of common stock 751,496 751 29,079 - - 29,830
------- --- ------ ------- ------- ------
Balance at June 30,1999 115,242,268 $ 115,242 $1,780,974 $ 757,695 $ (9,410) $2,644,501
============= ========== ========== ========= ======== ==========
</TABLE>
Authorized shares of common stock were 260 million at June 30, 1999 and 1998.
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
7
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
ASSETS
June 30, December 31,
1999 1998
---- ----
Property, plant and equipment, at cost:
Electric .......................................... $4,543,488 $4,369,134
Gas................................................ 1,239,871 1,171,198
Steam and other.................................... 68,954 71,986
Common to all departments.......................... 465,942 418,484
Construction in progress........................... 181,441 264,752
------- -------
6,499,696 6,295,554
Less: accumulated depreciation .................... 2,330,909 2,241,165
--------- ---------
Total property, plant and equipment.............. 4,168,787 4,054,389
--------- ---------
Investments, at cost:
Note receivable from affiliate (Note 3)............ 192,620 192,620
Other.............................................. 22,783 22,664
------- ------
Total investments................................. 215,403 215,284
------- -------
Current assets:
Cash and temporary cash investments................ 38,570 19,926
Accounts receivable, less reserve for uncollectible
accounts ($2,343 at June 30,1999; $2,254 at
December 31, 1998) ...... ....................... 155,377 172,587
Accrued unbilled revenues ......................... 85,603 119,856
Recoverable purchased gas and electric energy costs 5,359 62,761
Materials and supplies, at average cost............ 52,415 47,881
Fuel inventory, at average cost.................... 29,730 22,361
Gas in underground storage, at cost (LIFO)......... 21,147 51,779
Prepaid expenses and other......................... 35,659 46,523
------ ------
Total current assets.............................. 423,860 543,674
------- -------
Deferred charges:
Regulatory assets (Note 1)......................... 253,199 269,112
Unamortized debt expense .......................... 18,030 17,874
Other.............................................. 82,692 77,303
------- ------
Total deferred charges............................ 353,921 364,289
------- -------
$5,161,971 $5,177,636
========== ==========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
8
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
CAPITAL AND LIABILITIES
June 30, December 31,
1999 1998
---- ----
Common stock.......................................... $1,302,119 $1,302,119
Retained earnings..................................... 334,883 325,213
------- -------
Total common equity............................... 1,637,002 1,627,332
PSCo obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures of PSCo (Note 7) ............ 194,000 194,000
Long-term debt........................................ 1,452,564 1,643,130
--------- ---------
3,283,566 3,464,462
Noncurrent liabilities:
Employees' postretirement benefits other than pensions 56,511 55,537
Employees' postemployment benefits................. 27,195 27,195
------- -------
Total noncurrent liabilities...................... 83,706 82,732
------- -------
Current liabilities:
Notes payable and commercial paper................. 460,025 402,795
Long-term debt due within one year................. 217,532 44,481
Accounts payable................................... 195,933 226,712
Dividends payable.................................. 44,575 46,461
Recovered electric energy costs.................... 6,850 -
Customers' deposits................................ 23,914 23,902
Accrued taxes...................................... 21,465 57,848
Accrued interest................................... 39,344 36,729
Current portion of accumulated deferred income taxes - 8,142
Other.............................................. 67,283 68,729
------- ------
Total current liabilities......................... 1,076,921 915,799
--------- -------
Deferred credits:
Customers' advances for construction............... 55,998 54,260
Unamortized investment tax credits ................ 92,071 94,459
Accumulated deferred income taxes.................. 546,373 538,581
Other.............................................. 23,336 27,343
------- -------
Total deferred credits............................ 717,778 714,643
------- -------
Commitments and contingencies (Notes 4 and 5)......... ---------- ----------
$5,161,971 $5,177,636
========== ==========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
9
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Three Months Ended
June 30,
1999 1998
---- ----
Operating revenues:
Electric........................................... $373,690 $369,940
Gas................................................ 140,895 133,170
Other.............................................. 1,580 1,488
------- -------
516,165 504,598
Operating expenses:
Fuel used in generation............................ 54,882 49,554
Purchased power.................................... 111,963 123,874
Gas purchased for resale........................... 87,721 84,058
Other operating and maintenance expenses........... 102,037 102,564
Depreciation and amortization...................... 48,822 46,795
Taxes (other than income taxes) ................... 23,595 20,937
Income taxes ..................................... 14,768 13,550
------- -------
443,788 441,332
------- -------
Operating income...................................... 72,377 63,266
Other income and deductions - net..................... 831 1,968
Interest charges:
Interest on long-term debt......................... 29,908 30,688
Other interest..................................... 6,741 4,498
Allowance for borrowed funds used during construction (2,061) (2,971)
Dividends on PSCo obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of PSCo (Note 7) 3,800 2,111
----- -----
38,388 34,326
------ ------
Net income............................................ 34,820 30,908
Dividend requirements and redemption premium on
preferred stock ..................................... - 2,403
------- -----
Earnings available for common stock................... $34,820 $28,505
======= =======
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
10
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Six Months Ended
June 30,
1999 1998
---- ----
Operating revenues:
Electric........................................... $ 755,012 $ 745,386
Gas................................................ 395,066 398,653
Other.............................................. 4,957 5,201
------- -------
1,155,035 1,149,240
Operating expenses:
Fuel used in generation............................ 106,747 100,183
Purchased power.................................... 226,190 247,931
Gas purchased for resale........................... 260,562 260,540
Other operating and maintenance expenses........... 196,548 196,509
Depreciation and amortization...................... 97,362 89,691
Taxes (other than income taxes) ................... 47,082 40,906
Income taxes ..................................... 43,982 50,368
------- -------
978,473 986,128
------- -------
Operating income...................................... 176,562 163,112
Other income and deductions:
Equity earnings in Yorkshire Power (Note 2)........ - 3,446
Miscellaneous income and deductions - net.......... (735) (917)
---- ----
(735) 2,529
Interest charges:
Interest on long-term debt......................... 59,791 59,266
Other interest..................................... 11,961 10,151
Allowance for borrowed funds used during construction (4,284) (5,692)
Dividends on PSCo obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of PSCo (Note 7) 7,600 2,111
----- -----
75,068 65,836
------ ------
Net income............................................ 100,759 99,805
Dividend requirements and redemption premium on
preferred stock ..................................... - 5,332
------ -----
Earnings available for common stock................... $100,759 $94,473
======== =======
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
11
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Six Months Ended
June 30,
1999 1998
---- ----
Operating activities:
Net income......................................... $100,759 $99,805
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................... 100,369 92,182
Amortization of investment tax credits........... (2,388) (2,394)
Deferred income taxes............................ 4,735 (63)
Equity in earnings of Yorkshire Power............ - (3,446)
Change in accounts receivable.................... 17,210 46,847
Change in inventories............................ 18,729 20,140
Change in other current assets................... 102,519 58,282
Change in accounts payable....................... (30,778) (53,082)
Change in other current liabilities.............. (28,353) (18,643)
Change in deferred amounts....................... (6,977) (20,083)
Change in noncurrent liabilities................. 974 2,268
------- -------
Net cash provided by operating activities...... 276,799 221,813
Investing activities:
Construction expenditures.......................... (215,940) (213,677)
Proceeds from disposition of property, plant
and equipment ................................... 12,467 4,808
Purchase of other investments...................... (2,481) (2,172)
Sale of other investments.......................... 2,361 3,145
------- -----
Net cash used in investing activities.......... (203,593) (207,896)
Financing activities:
Proceeds from the sale of PSCo obligated mandatorily
redeemable preferred securities .................. - 194,000
Proceeds from the sale of long-term debt........... 47,666 248,130
Redemption of long-term debt....................... (66,482) (80,111)
Short-term borrowings - net........................ 57,230 (102,069)
Dividends on common stock.......................... (92,976) (80,959)
Redemption of preferred stock (Note 7)............. - (181,824)
Dividends and redemption premium on preferred
stock (Note 7) .................................. - (8,261)
--- ------
Net cash used in financing activities.......... (54,562) (11,094)
------- -------
Net increase in cash and temporary cash
investments ................................. 18,644 2,823
Cash and temporary cash investments at
beginning of period ......................... 19,926 18,909
------ ------
Cash and temporary cash investments at
end of period ............................... $ 38,570 $ 21,732
======== ========
The accompanying notes to consolidated condensed financial statements
are an integral part of these financial statements.
12
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
ASSETS
June 30, December 31,
1999 1998
---- ----
Property, plant and equipment, at cost:
Electric........................................... $2,750,574 $2,665,115
Construction in progress........................... 91,488 121,407
------ -------
2,842,062 2,786,522
Less: accumulated depreciation..................... 1,086,562 1,057,183
--------- ---------
Total property, plant and equipment............... 1,755,500 1,729,339
--------- ---------
Investments, at cost:
Notes receivable from affiliate.................... 119,036 119,036
Other.............................................. 5,700 5,591
------- -------
Total investments................................. 124,736 124,627
------- -------
Current assets:
Cash and temporary cash investments................ 6,895 1,350
Accounts receivable, less reserve for uncollectible
accounts ($1,314 at June 30,1999; $1,695 at
December 31, 1998)............................... 74,313 76,190
Accrued unbilled revenues.......................... 34,107 9,373
Materials and supplies, at average cost............ 17,544 16,970
Fuel inventory, at average cost.................... 2,292 2,293
Current portion of accumulated deferred income taxes 3,062 6,113
Prepaid expenses and other......................... 2,540 5,248
------- -------
Total current assets.............................. 140,753 117,537
------- -------
Deferred charges:
Regulatory assets (Note 1)......................... 108,555 111,971
Unamortized debt expense........................... 8,970 8,767
Other.............................................. 53,262 37,623
------- -------
Total deferred charges............................ 170,787 158,361
------- -------
$2,191,776 $2,129,864
========== ==========
The accompanying notes to condensed financial statements are
an integral part of these financial statements.
13
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
CAPITAL AND LIABILITIES
June 30, December 31,
1999 1998
---- ----
Common stock.......................................... $348,402 $ 348,402
Retained earnings..................................... 393,676 389,818
------- -------
Total common equity............................... 742,078 738,220
SPS obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures of SPS (Note 7) ............. 100,000 100,000
Long-term debt........................................ 630,531 530,618
------- -------
1,472,609 1,368,838
--------- ---------
Noncurrent liabilities:
Employees' postretirement benefits other than pensions 6,926 5,941
Employees' postemployment benefits................. 3,587 3,571
------- -------
Total noncurrent liabilities...................... 10,513 9,512
------- -------
Current liabilities:
Notes payable and commercial paper................. 49,697 85,162
Note payable to affiliate.......................... 9,000 9,000
Long-term debt due within one year................. 90,113 90,113
Accounts payable................................... 77,243 64,275
Dividends payable.................................. 22,343 20,007
Recovered electric energy costs.................... 7,057 18,760
Customers' deposits................................ 6,213 5,904
Accrued taxes...................................... 18,081 37,646
Accrued interest................................... 14,995 12,273
Other.............................................. 21,682 18,011
------- -------
Total current liabilities......................... 316,424 361,151
------- -------
Deferred credits:
Unamortized investment tax credits................. 5,094 5,219
Accumulated deferred income taxes.................. 382,831 380,655
Other.............................................. 4,305 4,489
------- -------
Total deferred credits............................ 392,230 390,363
------- -------
Commitments and contingencies (Notes 4 and 5)......... ---------- ----------
$2,191,776 $2,129,864
========== =========
The accompanying notes to condensed financial statements are
an integral part of these financial statements.
14
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Three Months Ended
June 30,
1999 1998
---- ----
Operating revenues.................................... $224,114 $264,006
Operating expenses:
Fuel used in generation............................ 97,975 121,725
Purchased power.................................... 11,404 7,079
Other operating & maintenance expenses............. 33,858 35,065
Depreciation and amortization...................... 18,435 17,761
Taxes (other than income taxes).................... 12,487 11,328
Income taxes....................................... 13,483 21,729
------- -------
187,642 214,687
------- -------
Operating income...................................... 36,472 49,319
Other income and deductions - net..................... 2,380 2,263
Interest charges:
Interest on long-term debt......................... 13,639 11,597
Other interest..................................... 960 2,533
Allowance for borrowed funds used during construction (544) (1,427)
Dividends on SPS obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of SPS ............ 1,962 1,962
----- -----
16,017 14,665
------ ------
Net income............................................ $22,835 $36,917
======= =======
The accompanying notes to condensed financial statements are
an integral part of these financial statements.
15
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Six Months Ended
June 30,
1999 1998
---- ----
Operating revenues.................................... $426,666 $463,738
Operating expenses:
Fuel used in generation............................ 180,028 212,015
Purchased power.................................... 16,509 9,720
Other operating & maintenance expenses............. 67,662 69,461
Depreciation and amortization...................... 36,907 35,537
Taxes (other than income taxes) ................... 25,871 23,393
Income taxes ...................................... 27,848 32,954
------- -------
354,825 383,080
------- -------
Operating income...................................... 71,841 80,658
Other income and deductions - net..................... 4,460 3,338
Interest charges:
Interest on long-term debt......................... 24,834 23,101
Other interest..................................... 2,549 5,112
Allowance for borrowed funds used during construction (1,233) (3,198)
Dividends on SPS obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of SPS ........... 3,925 3,925
----- -----
30,075 28,940
Net income............................................ $46,226 $55,056
======= =======
The accompanying notes to condensed financial statements are an
integral part of these financial statements.
16
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Six Months Ended
June 30,
1999 1998
---- ----
Operating activities:
Net income......................................... $46,226 $55,056
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................... 38,713 37,703
Amortization of investment tax credits........... (125) (125)
Deferred income taxes............................ 6,102 1,384
Allowance for funds used during construction..... (829) -
Change in accounts receivable.................... 1,877 (8,030)
Change in inventories............................ (573) (695)
Change in other current assets................... (22,026) (734)
Change in accounts payable....................... 12,968 (34,457)
Change in other current liabilities.............. (24,566) (11,189)
Change in deferred amounts....................... (14,291) 70,005
Change in noncurrent liabilities................. 1,001 (855)
------- -------
Net cash provided by operating activities...... 44,477 108,063
Investing activities:
Construction expenditures.......................... (61,840) (43,184)
Allowance for equity funds used during construction 829 -
Cost of disposition of property, plant and equipment (2,162) (1,830)
Purchase of other investments...................... (109) (126)
------- -------
Net cash used in investing activities.......... (63,282) (45,140)
Financing activities:
Proceeds from sale of long-term debt............... 99,846 -
Redemption of long-term debt....................... - (57)
Short-term borrowings - net........................ (35,465) (9,872)
Dividends on common stock.......................... (40,031) (47,548)
------- -------
Net cash used in financing activities.......... 24,350 (57,477)
------- -------
Net increase in cash and temporary cash
investments ................................. 5,545 5,446
Cash and temporary cash investments at
beginning of period ......................... 1,350 986
------- -----
Cash and temporary cash investments at
end of period ............................... $ 6,895 $ 6,432
======== =======
The accompanying notes to condensed financial statements
are an integral part of these financial statements
17
<PAGE>
NEW CENTURY ENERGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
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 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. Accounting under
SFAS 71 is appropriate as long as: rates are established by or subject to
approval by independent, third party regulators; rates are designed to recover
an enterprise's cost-of-service; and in view of the demand for service, it is
reasonable to assume that rates are set at levels that will recover costs and
can be collected from customers.
While deregulation legislation has been enacted in certain states where
SPS operates (see Note 4. Regulatory Matters), the Company currently 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 separately have a material adverse effect on NCE's, PSCo's and/or
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):
June 30, 1999 NCE PSCo SPS
------ ------ ------
Income taxes........................ $142,520 $ 64,784 $ 78,241
Nuclear decommissioning costs....... 65,125 65,125 -
Employees' postretirement benefits
other than pensions............... 55,336 52,516 2,820
Employees' postemployment benefits.. 24,647 24,224 -
Demand-side management costs........ 34,171 29,379 4,792
Unamortized debt reacquisition costs 31,819 15,230 16,040
Other............................... 8,603 1,941 6,662
------ ------ ------
Total............................. $362,221 $253,199 $108,555
======== ======== ========
18
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
December 31, 1998 NCE PSCo SPS
------ ------ ------
Income taxes........................ $148,499 $ 69,868 $ 79,116
Nuclear decommissioning costs....... 69,490 69,490 -
Employees' postretirement benefits
other than pensions............... 57,350 54,461 2,889
Employees' postemployment benefits.. 24,888 24,416 -
Demand-side management costs........ 37,160 31,984 5,176
Unamortized debt reacquisition costs 33,138 15,769 16,808
Other............................... 11,107 3,124 7,982
------ ------ ------
Total............................. $381,632 $269,112 $111,971
======== ======== ========
The regulatory assets of the Company's regulated subsidiaries that are
currently being recovered as of June 30, 1999 and December 31, 1998 are
reflected in rates charged to customers. The recovery of regulatory assets over
the next three years is estimated to exceed $130 million. Refer to the
discussion below or the Notes to Consolidated Financial Statements included
herein and in the NCE, PSCo and SPS 1998 Annual Report on Form 10-K for a more
detailed discussion regarding recovery periods.
On January 27, 1997, the CPUC issued its order on PSCo's 1996 gas rate
case. The CPUC allowed recovery of postemployment benefit costs on an accrual
basis under SFAS 112 and denied amortization of the approximately $8.9 million
regulatory asset recognized upon the adoption of SFAS 112. PSCo has appealed in
the Denver District Court the decision related to this issue. PSCo believes that
it will be successful on appeal and that the associated regulatory asset is
realizable. On April 1, 1998, in connection with PSCo's annual electric
department earnings test filing, PSCo requested approval to recover its electric
jurisdictional portion of the postemployment benefits cost regulatory asset
totaling approximately $15 million over three years. 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 4. Regulatory Matters). PSCo
is recovering the FERC jurisdictional portion of postemployment benefits costs.
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, energy marketing and trading, non-regulated energy
services, the management of real estate and certain life insurance policies, the
financing of certain current assets of PSCo and investments in cogeneration
facilities, electric wholesale generators and a foreign utility company. The
Company's international investments are subject to applicable regulation in the
countries in which such investments are made (see Note 3. Investment in
Yorkshire Power). 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.
19
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
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.
Energy Trading Activities
The Company and its subsidiaries adopted Emerging Issues Task Force Issue
No. 98-10, "Accounting for Energy Trading and Risk Management Activities" ("EITF
98-10"), effective January 1, 1999. EITF 98-10 requires gains or losses
resulting from market value changes on energy trading contracts to be recorded
in earnings. The initial adoption of EITF 98-10 on January 1, 1999, had no
impact on the net income of NCE, PSCo or SPS. For the three and six month
periods ended June 30, 1999, NCE recognized net gains/(losses) of $688,000 and
$(551,000), respectively, and PSCo recognized net gains of $261,000 and $78,000,
respectively, for market value changes on energy trading contracts. SPS does not
currently have any trading activities.
Revenues and purchased energy costs associated with trading activities are
presented net on the income statement in electric and gas revenues. Certain
prior year amounts have been reclassified for comparative purposes.
Comprehensive Income
The Company and its subsidiaries adopted Statement of Financial Accounting
Standards 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. Comprehensive
income and its components were reported in NCE's Consolidated Condensed
Statements of Shareholders' Equity for the three and six month periods ended
June 30, 1999. Other comprehensive income consists solely of foreign currency
translation adjustments related to the investment in Yorkshire Power.
For the three and six month periods ended June 30, 1999, PSCo and SPS had
no comprehensive income items, therefore, comprehensive income equals net
income. For the same period in 1998, SPS had no comprehensive income items,
therefore, comprehensive income equals net income. For the three months ended
June 30, 1998, PSCo had no comprehensive income items, therefore, comprehensive
income equals net income.
During the three month period ended March 31, 1998, PSCo had comprehensive
income of $5.3 million, which consisted of foreign currency translation
adjustments related to the investment in Yorkshire Power. On March 31, 1998,
PSCo sold NCI (which includes Yorkshire Power and related foreign currency
translation adjustments) to NC Enterprises. The amount of the sale included
other comprehensive income of $9.4 million at March 31, 1998. As a result of
this sale, PSCo had no Accumulated Other Comprehensive Income at March 31, 1998,
and for all subsequent periods.
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.
20
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
The potentially dilutive securities included in the computation of diluted
earnings per share were 23,000 and 35,000 for the three and six month periods
ended June 30, 1999, respectively, and 156,000 and 158,000 for the three and six
month periods ended June 30, 1998, respectively. These shares had no impact on
the Company's reported earnings per share information.
Approximately 2,124,000 common shares are issuable under stock option
grants as of June 30, 1999, 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.
Statements of Cash Flows - Non-cash Transactions:
Shares of common stock (200,880 in 1999 and 222,362 in 1998), valued at
the market price on date of issuance (approximately $10 million in 1999 and
1998), were issued to a savings plan of the Company. The estimated issuance
values were recognized in other operating expenses during the respective
preceding years. The stock issuances were non-cash financing 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 NCE,
PSCo and SPS 1998 Annual Report on Form 10-K for a summary of the companies and
their subsidiaries significant accounting policies.
2. Proposed Merger with Northern States Power Company (NCE, PSCo and SPS)
On March 24, 1999, NCE and Northern States Power Company, a Minnesota
corporation ("NSP"), entered into an Agreement and Plan of Merger (the "NCE/NSP
Merger Agreement") providing for a strategic business combination of NCE and
NSP. Pursuant to the NCE/NSP Merger Agreement, NCE will be merged with and into
NSP with NSP as the surviving corporation in the merger (the "NCE/NSP Merger")
and the holding company for the combined assets and operations. NSP will be
renamed Xcel Energy Inc. ("Xcel Energy"). Concurrently with the closing of the
NCE/NSP Merger, NSP will contribute all of its utility assets, other than shares
that it owns in subsidiaries, to a newly formed wholly-owned subsidiary. At the
same time, the new subsidiary will assume all of NSP's liabilities associated
with the assets that it receives in the contribution. If difficulties arise in
obtaining the approvals and consents required to transfer NSP's utility assets
to a new utility subsidiary, NCE and NSP may negotiate a mutually acceptable
alternative.
Subject to the terms of the NCE/NSP Merger Agreement, at the time of the
NCE/NSP Merger, each share of NCE common stock, par value $1.00 per share ("NCE
Common Stock") (other than certain shares to be canceled), together with any
associated purchase rights, will be converted into the right to receive 1.55
shares of Xcel Energy common stock, par value $2.50 per share ("Xcel Energy
Common Stock"). Cash will be paid in lieu of any fractional shares of Xcel
Energy Common Stock which holders of NCE Common Stock would otherwise receive.
Based on outstanding common stock of NCE and NSP at June 30, 1999, the NCE/NSP
Merger would result in the common shareholders of NCE owning 54% of the common
equity of Xcel Energy and the common shareholders of NSP owning 46% of the
common equity of Xcel Energy. The NCE/NSP Merger is expected to be a tax-free
stock-for-stock exchange for shareholders of both companies and to be accounted
for as a pooling-of-interests.
It is anticipated that Xcel Energy will initially adopt the NCE dividend
payment level, adjusted for the exchange ratio, resulting in a pro forma
dividend of $1.50 per share on an annual basis, following completion of the
NCE/NSP Merger. The actual dividend level will be dependent upon the combined
company's results of operations, financial position, cash flows and other
factors, and will be evaluated by the Board of Directors of Xcel Energy.
21
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
NCE and NSP estimate regulated cost savings of approximately $1.1 billion,
net of merger costs and costs to achieve the savings, in the first 10 years
after the transaction is completed. Nonrecurring costs directly attributable to
the NCE/NSP Merger are being deferred by NCE and are expected to be amortized to
expense in periods subsequent to the consummation of the merger consistent with
the anticipated recovery in rates.
The shareholders of the Company and NSP approved the Agreement and Plan of
Merger on June 28, 1999. Additionally, consummation of the NCE/NSP Merger is
subject to certain closing conditions, including, among others, approval or
completion of regulatory review by certain state utility regulators, the SEC
under the PUHCA, the FERC, the Nuclear Regulatory Commission, the Federal
Communications Commission and expiration or termination of the waiting period
applicable to the NCE/NSP Merger under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended. Applications or submissions to the state
utility regulators, where required, and the FERC were completed in July 1999. In
general, such filings propose the sharing of cost savings among customers and
shareholders for up to five years. NCE and NSP have each agreed to certain
undertakings and limitations regarding the conduct of their respective
businesses prior to the closing of the transaction. The NCE/NSP Merger is
expected to take another 9 to 15 months to complete.
A merger integration team, consisting of executives from each company, was
formed and will oversee merger-related activities and the integration of
operations of NCE and NSP. It is Management's intention that the combined
company begin realizing certain savings upon the consummation of the NCE/NSP
Merger.
The following unaudited summarized pro forma financial information gives
effect to the NCE/NSP Merger as if it had occurred at June 30, 1999 for balance
sheet information and at January 1, 1999 for income statement information. This
financial information should be read in conjunction with the historical
financial statements and related notes of NCE and NSP, which are included in the
Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q of the respective
companies.
The unaudited summarized pro forma financial information has been prepared
using information provided by NSP. This information does not necessarily
indicate what the combined company's financial position or operating results
would have been if the merger had been completed on the assumed completion dates
and does not necessarily indicate future operating results of the combined
company.
Unaudited Summarized Pro Forma Balance Sheet information as of June 30, 1999 (in
millions):
NSP NCE Adjustments Pro Forma
--- --- ----------- ---------
Utility plant - net..... $4,378 $6,035 $1,213 $11,626
Current assets.......... 886 714 - 1,600
Other assets............ 3,275 1,006 (1,213) 3,068
------ ------ ------ ------
Total assets.......... $8,539 $7,755 $ - $16,294
====== ====== ====== =======
Common equity........... $2,487 $2,644 $ - $ 5,131
Preferred securities.... 305 294 - 599
Long-term debt.......... 2,153 2,127 - 4,280
------ ------ ------ ------
Total capitalization.. 4,945 5,065 - 10,010
Current liabilities..... 2,060 1,440 - 3,500
Other liabilities....... 1,534 1,250 - 2,784
------ ------ ------ ------
Total equity and
liabilities $8,539 $7,755 $ - $16,294
====== ====== ====== =======
22
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NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
Unaudited Summarized Pro Forma Income Statement information for the six months
ended June 30 (in millions):
1999 NSP NCE Adjustments Pro Forma
--- --- ----------- ---------
Revenues................ $1,402 $1,716 $ 167 $3,285
Operating income........ 154 307 56 517
Net income.............. 63 151 - 214
Earnings available
for common ........... 60 151 - 211
Earnings per share...... $0.40 $1.31 - $0.64
1998
Revenues................ $1,340 $1,747 $ 110 $3,197
Operating income........ 144 329 58 531
Net income.............. 92 143 - 235
Earnings available
for common ........... 89 143 - 232
Earnings per share...... $0.59 $1.28 - $0.72
3. Investment in Yorkshire Power (NCE and PSCo)
Yorkshire Power is a joint venture initially equally owned by PSCo and
AEP, which 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 and NCI's equity in
earnings of Yorkshire Power is 50%, the same as its ownership share.
On August 12, 1999, the Office of Gas and Electricity Markets (the U.K.
regulator of gas and electricity rates) published draft price proposals for the
U.K.'s regional electric distribution businesses that would be effective for the
five-year period beginning April 1, 2000. The draft price proposals reflect
average reductions of 16% to 21%. The new distribution rates proposed for
Yorkshire call for a 15% to 20% reduction in distribution revenues. Yorkshire is
in the process of evaluating the impacts of the proposed price reductions.
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 of which $192.6 remains outstanding
at June 30, 1999. 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
principal balance of the promissory note to PSCo.
Summarized income statement information for the six months ended June
30,1999 and 1998, respectively is presented below (in millions):
1999 1998
---- ----
Yorkshire Power:
Operating revenues....................... $1,156.7 $1,167.1
-------- --------
Operating income......................... 152.0 182.2
-------- --------
Net income (loss)........................ $ 30.2 $ (7.9)
======== ========
NCI's equity in earnings (losses) of
Yorkshire Power ......................... $ 15.1 $ (4.0)
======== ========
23
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
NCI's equity in earnings of Yorkshire Power increased by approximately
$19.1 million for the six months ended June 30,1999, when compared to the same
period in 1998, primarily due to the impact of one-time items recognized in
1998. In the second quarter of 1998, Yorkshire Power recognized an 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 finance had been unsuccessful. In
November 1998, Ionica was placed into receivership and an administrator was
appointed to oversee its operations and distribute its remaining assets. The
impairment, reflecting a write down to fair market value, was offset, in part,
by an unrelated tax adjustment. These two items reduced NCI's equity earnings in
Yorkshire Power by approximately $16 million. The investment in Ionica was
subsequently sold with no further adverse financial impact expected. In
addition, during 1998 Yorkshire Power recognized a penalty, which was applicable
to all United Kingdom regional electricity utilities, designed to recognize the
effects of the delay in implementation of full competition. This charge reduced
NCI's equity earnings in Yorkshire Power by approximately $4 million.
The unaudited pro forma financial information, for the six months ended June
30, 1998, presented below for PSCo assumes that NCI was sold to NC Enterprises,
effective January 1, 1998. 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
six months ended June 30, 1998 (in millions):
PSCo Earnings
1998
----
Net income............................................... $ 99.8
Pro forma adjustments:
NCI's net income....................................... (2.8)
Interest income from promissory note, net of tax....... 3.3
------
Pro forma result......................................... $100.3
======
4. 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 PSCo/SPS 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. Subsequent to the approval of the
performance based regulatory plan the reward structure was eliminated for
the years 1999-2001; and
- - an Incentive Cost Adjustment ("ICA") which provides for the sharing of
energy costs and savings relative to an annual target cost/delivered Kwh.
PSCo filed with the CPUC its proposed Performance Based Regulatory Plan
adjustment for calendar year 1998. This adjustment provides the means for
implementing the sharing mechanism for the customers' portion of earnings over
PSCo's authorized return on equity threshold. PSCo recorded a customer refund
obligation of $15.9 million for the 1997 earnings test and an estimated refund
obligation of $8 million for the 1998 earnings
24
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
test. The final determination, by the CPUC, for 1998 is pending. In July 1998,
PSCo began refunding the 1997 earnings test refund obligation to customers
through bill credits. PSCo has recorded an estimated refund obligation of
approximately $5.8 million as of June 30, 1999 for anticipated sharing of
earnings for 1999.
Additionally, PSCo agreed to freeze base electric rates after the PSCo/SPS
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.
PSCo Wholesale - FERC
On March 30, 1999, PSCo received authorization from the FERC to engage in
market-based wholesale power sales. The authorization allows PSCo to sell energy
to e prime, subject to certain conditions, as well as third parties.
SPS Merger Related Rate Reductions
Under the various regulatory commission approvals, SPS is required to
provide credits to customers over five years from the date of the Merger, August
1, 1997, for one-half of the measured non-fuel operation and maintenance expense
savings associated with the PSCo/SPS 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. SPS has
also requested the prospective sharing of margins from wholesale non-firm sales.
Intervening parties are contesting a portion of the recovery of fuel costs. SPS
has entered into a settlement agreement with the General Counsel of the PUCT,
which, if approved, would provide for the recovery of substantially all fuel
costs. The final outcome of this fuel reconciliation proceeding is pending.
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
25
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
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 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. In the previously discussed proposed settlement
agreement with the General Counsel's office at the PUCT, the General Counsel has
agreed with SPS's proposed recovery of the Thunder Basin costs.
Effective in April 1999, the PUCT authorized SPS to reduce its fixed fuel
factor for SPS's Texas retail jurisdiction, by approximately $44 million on an
annual basis. The PUCT also authorized SPS to refund its over collected fuel
costs for the period January 1998 through January 1999. This one-time $16
million fuel refund, including interest, was applied to the monthly billings
during April 1999. This rate reduction and fuel cost refund are primarily due to
lower coal transportation costs between SPS's coal supplier and the railroad
company which began in late 1998.
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 exceeds
$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. In January 1999, SPS implemented new annual
fixed fuel cost recovery factors to reflect lower fuel costs primarily as a
result of the previously discussed 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
26
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
16.8 years. On November 30, 1998, the
NMPRC approved the stipulation and the new rates 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 June 1998, SPS recorded $7.7 million of additional revenues in connection
with the settlement. For the year ended December 31, 1998, SPS recorded $16.9
million of additional revenues and $7.6 million of additional depreciation
expense.
Cheyenne Rate Case
On August 13, 1999, Cheyenne filed a combined gas and electric rate case
with the Public Service Commission of Wyoming ("WPSC") requesting a $2.3 million
increase electric and a $1.3 million increase in gas base rates, including a 12%
return on equity. This follows the expiration of the two year moratorium on
filing rate cases in connection with the WPSC approval of the PSCo/SPS Merger.
Deregulation Legislation (NCE and SPS)
New Mexico
On April 8, 1999, New Mexico enacted the Electric Utility Restructuring
Act of 1999, which allows customer choice for residential, small commercial and
educational customers beginning January 1, 2001. All remaining customers will be
allowed customer choice on January 1, 2002. Customers of a municipal utility and
customers of a distribution cooperative utility will be afforded choice only if
the respective utility elects to participate. The legislation provides for
recovery of no less than 50% of stranded costs quantified by the NMPRC.
Transition costs must be approved by the NMPRC prior to being recovered through
a non-by-passable wires charge, which must be included in a transition plan
filing. All public electric utilities operating in New Mexico must file a
transition plan with the NMPRC by March 1, 2000. Before January 1, 2001, SPS
must separate its operations into two segments; energy generation, transmission
and distribution, and a retail business either by the creation of separate
affiliates that may be owned by a common holding company or by the sale of
assets to one or more third parties. A regulated company will be prohibited from
providing unregulated service.
Texas
On June 18, 1999, an electric utility restructuring act was passed in
Texas, which allows for retail competition, for most areas of the state,
beginning January 1, 2002. The legislation requires, among other things, a rate
freeze for all customers, effective September 1, 1999 until January 1, 2002; a
rate reduction for those residential and small commercial customers who choose
not to switch suppliers at the start of retail competition; the unbundling of
business activities, costs and rates relating to generation, transmission and
distribution and retail services; reductions in NOx and SO2 emissions and the
recovery of stranded costs. The PUCT can delay the date for retail competition
if a power region is unable to offer fair competition and reliable service
during pilot projects which begin for all utilities on June 1, 2001 for 5% of
the utility's combined load of all customer classes.
The legislation specifically addresses competition in the Texas Panhandle,
where SPS operates, recognizing that certain transmission constraints exist
within the region that require full retail customer choice to develop on a more
structured schedule than the rest of the state. SPS must file a transition to
competition plan with the PUCT by December 1, 2000. SPS, with no estimated
stranded costs, must direct any excess earnings during the period January 1,
1999
27
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
through December 31, 2001 to improvements in transmission and distribution
facilities, to capital expenditures to improve air quality or to accelerate the
amortization of regulatory assets (subject to PUCT approval).
Additionally, the Texas legislation requires that no generation company
can own and control more than 20% of the installed capacity located in or
capable of delivering electricity to a power region. Utilities owning more than
400 Mw must sell, at auction, entitlements to at least 15% of the utility's
installed generation capacity. The power sales auctions are to continue for 5
years or until 40% of the utilities residential and small commercial customers
served prior to the start date of competition are served by non-affiliated
companies. The legislation includes several possible remedies to market power
abuses. These provisions are not immediately applicable to SPS due to the
existing transmission constraints and market power issues in the Panhandle
region.
Financial Reporting Considerations
The Emerging Issues Task Force of the Financial Accounting Standards Board
reached a consensus in Issue No. 97-4, "Deregulation of the Pricing of
Electricity" ("97-4") indicating that when deregulatory legislation is passed or
when a rate order (whichever is necessary to effect change in the jurisdiction)
that contains sufficient detail for an enterprise to reasonably determine how
the transition plan will affect the separable portion of its business whose
pricing is being deregulated is issued, the enterprise should stop applying SFAS
71 to that separable portion of its business. The Company is evaluating the
provisions of 97-4 related to the recently enacted legislation and, at the time
that such provisions have been met, SPS will no longer apply SFAS 71.
Gas Utility Matters
PSCo Rate Cases
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). On June 8, 1999, the CPUC
approved an increase in base rates of approximately $15 million with an 11.25%
return on equity, effective July 1, 1999. PSCo was also allowed recovery of
certain environmental costs. Prudently incurred year 2000 costs will be
recovered under a separate mechanism beginning in 2000.
On June 5, 1996, PSCo filed a retail rate case with the CPUC requesting an
annual increase in its jurisdictional gas department revenues equal to
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 (associated with the PSCo/SPS merger)
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. PSCo anticipates a decision during 1999.
PSCo Unbundling and Deregulation of the Retail Natural Gas Supply Business
On April 26, 1999, the Colorado legislature approved a bill, which allows
natural gas public utilities to voluntarily submit plans to the CPUC to open
their markets and enable customers to choose their natural gas supplier. This
bill was signed by the governor on June 6, 1999. Currently, PSCo provides a
traditional bundled gas service with rates designed for the recovery of actual
gas costs through the GCA and for providing transportation and delivery
services. Delivery of natural gas will continue to be regulated, with delivery
companies required to offer nondiscriminatory pipeline access to competitors.
PSCo will continue to be subject to the reporting requirements of SFAS 71 as a
regulated distribution company.
28
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
5. Commitments and Contingencies (NCE, PSCo and SPS)
Environmental Issues
The Company and its subsidiaries are subject to various environmental
laws, including regulations governing air and water quality and the storage and
disposal of hazardous or toxic wastes. The Company and its subsidiaries assess,
on an ongoing basis, measures to ensure compliance with laws and regulations
related to air and water quality, hazardous materials and hazardous waste
compliance and remediation activities.
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 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. In January 1996, 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
$9.8 million including the judgement and interest. In July 1997, the Colorado
Court of Appeals sent back to trial court the previously awarded judgment on the
basis that the jury had not been properly instructed by the Judge regarding a
narrow issue associated with certain policies. Previously, PSCo had received
certain insurance settlement proceeds from other insurance providers for Barter
and other contaminated sites and a portion of those funds remains to be
allocated to this site by the trial court. Both sides of the litigation filed
petitions for certiorari to the Colorado Supreme Court, which granted a hearing
on several issues, although the matter is still pending. Settlement has been
achieved with two small PRPs, although the Company has been ultimately
unsuccessful recovering from the remaining PRP's. In March 1998, PSCo sold the
remaining Barter properties, and the total proceeds were $1.1 million.
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: (1) the use of low sulfur coal, (2)
the operation of air quality control equipment on certain generation facilities,
and (3) 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
29
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
plant modifications to meet NOx requirements total approximately $1.5 million
and pertains to PSCo's Cherokee Unit 1 and 2 and Arapahoe Unit 3.
PSCo has obtained all necessary conditions to proceed with its plans 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. The cost of these controls will be recovered
through rates.
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 certain portions of this emission control equipment
has been completed with the remaining requirements in process and on schedule in
accordance with the settlement agreement. The joint owners completed
installation and began operating the emission control equipment required for
Unit 1 on time in accordance with the settlement agreement in late 1998. In May
1999, Unit 2 began operating with the required particulate and NOx emission
control equipment. The operation of SO2 emission control equipment has been
delayed due to equipment problems. The joint owners have filed a notice of
"force majeure" to excuse any equipment related delays. The joint owners will
withdraw this notice if they resolve the equipment problems within the terms of
the settlement agreement.
Craig Steam Electric Generating Station
In October 1996, a conservation organization filed a complaint in the U. S.
District Court pursuant to provisions of the Federal Clean Air Act (the "Act")
against the joint owners of the Craig Steam Electric Generating Station located
in western Colorado. Tri-State Generation and Transmission Association, Inc. is
the operator of the Craig station and PSCo owns an undivided interest (acquired
in April 1992) in each of two units at the station totaling approximately 9.7%.
The plaintiff alleged that: (1) the station exceeded the 20% opacity limitations
in excess of 14,000 six minute intervals during the period extending from the
first quarter of 1991 through the second quarter of 1996, and (2) the owners
failed to operate the station in a manner consistent with good air pollution
control practices. The complaint seeks, among other things, civil monetary
penalties and injunctive relief. The Act provides for penalties of up to $25,000
per day per violation, but the level of penalties imposed in any particular
instance is discretionary. Settlement discussions were held in 1998, although no
settlement was achieved. On March 8, 1999, the U. S. District Court ruled on all
pending motions in the case. It held that: (1) the conservation organization has
standing to bring the litigation; (2) the conservation organization may rely on
continuous opacity monitor data to demonstrate the plant's violation of the
opacity standard; (3) the Craig Station owners may challenge the accuracy of the
monitor data at trial; and (4) the conservation organization must prove at trial
that the station has not operated with good pollution control practices. The U.
S. District Court held a pretrial conference in June 1999 and ordered all
parties to participate in a settlement conference. Resolution of this matter may
require the installation of additional emission control equipment. Management
does not believe that any 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
PSCo has completed all decommissioning activities at Fort St. Vrain and
the site has been released for unrestricted use. PSCo is currently operating a
gas-fired combined cycle steam generation plant at this facility. Spent nuclear
fuel is currently being stored on-site in the Independent Spent Fuel Storage
Installation ("ISFSI"). In 1996,
30
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
PSCo and the DOE entered into an agreement resolving all the defueling issues,
as discussed in Notes to Consolidated Financial Statements in NCE's and PSCo's
1998 annual report on Form 10-K.
On June 4, 1999, the Nuclear Regulatory Commission ("NRC") approved the
transfer of the ISFSI to the DOE. The license was revised to reflect the DOE as
the licensee for the ISFSI and to reflect the conditions necessary to support
the NRC's approval of the license transfer.
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 and recorded a
liability for estimated costs related to this issue. The appeal is pending. The
affected land is located north of, but not immediately adjacent to, the storage
facility.
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, PSCo'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 from the IRS National Office with respect to the proposed
adjustment is pending.
Management is vigorously contesting this issue. PSCo has not recorded any
provision for income tax or interest expense related to this matter. Management
believes that PSCo'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 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 correcting 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 and assessment phases for
information technology ("IT") systems were completed in 1998. As of June 30,
1999, all of the remediation and testing phases for all critical IT systems have
been completed. For non-IT systems, which exist primarily in the generation,
transmission and distribution areas of the business, the inventory, assessment,
remediation and testing phases have also been completed. NCE has achieved "Y2K
Ready" status for all mission-critical electrical generating and transmission
facilities. Readiness was accomplished by June 30, 1999, in
31
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
accordance with the guidelines established by the North American Electric
Reliability Council ("NERC"). NCE is a participant in the NERC Y2K Program that
has established reporting criteria and milestone dates for electric utilities.
The final step of this program was the submittal of a letter to the president of
NERC, certifying that the company has met the NERC Y2K goal. NCE submitted its
Y2K certification letter, without exceptions, with its June 1999 NERC report.
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.
The Company currently expects to incur costs of approximately $19 million
of operating and capital expenditures 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 revised estimate reflects a $6
million reduction from previously estimated costs due primarily to finding fewer
Y2K related problems than originally estimated and lower contingency planning
costs. The Company expects to spend approximately $15 million in operating and
capital expenditures for the accelerated replacement of certain non-compliant IT
systems. The majority of these costs will be incurred by PSCo and SPS. A
significant portion of the costs incurred to address the Company's Y2K issues
will represent the redeployment of existing information technology resources.
The table below details the actual costs incurred during 1998 and prior periods;
the actual costs incurred through the six months ended June 30, 1999; and the
estimated costs to be incurred during the remainder of 1999 and early 2000. A
significant portion of the remaining costs to be incurred consists of finalizing
remaining work on non mission-critical systems, testing, project management and
contingency planning.
Actual Remaining Estimated
Costs Actual Estimated Total
1998 Costs Costs to Project
and Prior 1999 be Incurred Costs
--------- ------ ----------- -------
(in millions)
Operating expenses.. $8.0 $2.4 $5.5 $15.9
Capital for automated
system components 0.7 0.6 1.4 2.7
IT replacement projects:
Operating...... 0.2 0.6 0.1 0.9
Capital........ 6.4 7.3 0.7 14.4
---- ---- ---- -----
Total........ $15.3 $10.9 $7.7 $33.9
===== ===== ==== =====
Yorkshire Power has also undertaken activities to address Y2K issues. The
estimated proportionate share of Yorkshire'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.
32
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
If correction or replacement of non-compliant systems is 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.
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.
6. Acquisitions and Divestitures (NCE)
Acquisition of Planergy
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.
Sale of Texas-Ohio Gas, Inc.
Effective July 1, 1999, the Company sold all of the outstanding common
stock of Texas-Ohio Gas, Inc., a gas marketing company, including all retail gas
marketing contracts serving customers in the northeast region of the U.S.
Certain operations were retained and transferred to e prime and its
subsidiaries. This sale is not expected to have a significant impact on the
Company's financial position, results of operations or cash flows.
7. 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
33
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
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.
8. 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 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):
<TABLE>
<CAPTION>
Eliminations/
Three months ended: Electric Gas All Unallocated Consolidated
June 30, 1999 Utility Utility International Other Amounts * Total
------------- ------- ------- ------------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
External customers $607,438 $144,131 $ - $49,265 $ - $ 800,834
Intersegment 107 1,699 - 33,352 (35,158) -
Segment profit 53,823 (362) (65) (1,221) (2,940) 49,235
June 30, 1998
Revenues:
External customers $642,483 $136,466 $ - $52,010 $ - $ 830,959
Intersegment 455 1,150 - 13,334 (14,939) -
Segment profit 69,042 (1,547) (5,959) 7,435 (12,378) 56,593
Six months ended:
June 30, 1999
Revenues:
External customers $1,201,584 $403,514 $ - $110,431 $ - $1,715,529
Intersegment 262 3,658 - 49,994 (53,914) -
Segment profit 118,128 17,103 18,075 3,378 (6,149) 150,535
June 30, 1998
Revenues:
External customers $1,227,107 $407,709 $ - $112,160 $ - $1,746,976
Intersegment 614 2,350 - 30,503 (33,467) -
Segment profit 130,273 23,617 (3,160) 14,069 (22,057) 142,742
</TABLE>
* Certain financing costs have been allocated to the operating segments in 1999.
PSCo:
PSCo has two reportable segments: electric utility and gas utility. During
1998, PSCo had three reportable segments: electric, gas and international. 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.
34
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
The gas utility segment consists primarily of the activities of PSCo's
regulated gas operations in Colorado. 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 International segment does not apply to PSCo in
1999 as effective March 31,1998, PSCo sold NCI to NC Enterprises (see Note 3.
Investment in Yorkshire Power).
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):
<TABLE>
<CAPTION>
Eliminations/
Three months ended: Electric Gas All Unallocated Consolidated
June 30, 1999 Utility Utility International Other Amounts * Total
------------- ------- ------- ------------- ----- --------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues from
external customers $373,690 $140,895 $ - $ 1,580 $ - $ 516,165
Segment profit 31,439 (441) - 3,822 - 34,820
June 30, 1998
Revenues from
external customers $369,940 $133,170 $ - $ 1,488 - $ 504,598
Segment profit 33,194 (1,649) - 5,145 (8,185) 28,505
Six months ended:
June 30, 1999
Revenues from
external customers $755,012 $395,066 $ - $ 4,957 - $1,155,035
Segment profit 73,391 16,781 - 10,587 - 100,759
June 30, 1998
Revenues from
external customers $745,386 $398,653 $ - $ 5,201 - $1,149,240
Segment profit 77,904 23,229 2,799 7,312 (16,771) 94,473
</TABLE>
* Certain financing costs have been allocated to the operating segments in 1999.
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
$224.1 million and $264.0 million for the three months ended June 30, 1999 and
1998, respectively. Revenues from external customers for this reportable segment
were $426.7 million and $463.7 million for the six months ended June 30, 1999
and 1998, respectively.
9. Management's Representations (NCE, PSCo and SPS)
In the opinion of the registrants, the accompanying unaudited consolidated
condensed financial statements for NCE, PSCo and SPS include all adjustments
necessary for the fair presentation of the financial position of the Company and
its subsidiaries at June 30,1999 and December 31, 1998 and the results of
operations for the three and six months ended June 30, 1999 and 1998 and cash
flows for the six months ended June 30, 1999 and 1998. The unaudited
consolidated condensed financial information and notes thereto should be read in
conjunction with the consolidated financial statements and notes included in the
combined 1998 Form 10-K for NCE, PSCo and SPS.
Because of seasonal and other factors, the results of operations for the
three and six months ended June 30, 1999 should not be taken as an indication of
earnings for all or any part of the balance of the year.
35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO NEW CENTURY ENERGIES, INC.:
We have reviewed the accompanying consolidated condensed balance sheet of New
Century Energies, Inc. (a Delaware corporation) and subsidiaries as of June
30,1999, and the related consolidated condensed statements of income and
shareholders' equity for the three and six-month periods ended June 30, 1999 and
1998 and the consolidated condensed statements of cash flows for the six-month
periods ended June 30, 1999 and 1998. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of New Century Energies, Inc. and
subsidiaries as of December 31, 1998, and the related consolidated statements of
income, shareholders' equity and cash flows for the year then ended (not
presented separately herein), and in our report dated February 23, 1999, we
expressed an unqualified opinion on these financial statements. In our opinion,
the information set forth in the accompanying consolidated condensed balance
sheet as of December 31, 1998, 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,
August 13, 1999
36
<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 June
30, 1999, and the related consolidated condensed statements of income for the
three and six-month periods ended June 30, 1999 and 1998 and the consolidated
condensed statements of cash flows for the six-month periods ended June 30, 1999
and 1998. 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, 1998, and the related consolidated
statements of income, shareholder's equity and cash flows for the year then
ended (not presented separately herein), and in our report dated February 23,
1999, we expressed an unqualified opinion on these financial statements. In our
opinion, the information set forth in the accompanying consolidated condensed
balance sheet as of December 31, 1998, 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,
August 13, 1999
37
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO SOUTHWESTERN PUBLIC SERVICE COMPANY:
We have reviewed the accompanying condensed balance sheet of Southwestern Public
Service Company (a New Mexico corporation) as of June 30, 1999, and the related
condensed statements of income for the three and six-month periods ended June
30, 1999 and 1998 and the condensed statements of cash flows for the six-month
periods ended June 30, 1999 and 1998. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Southwestern Public Service Company as of
December 31, 1998, and the related statements of income, shareholder's equity
and cash flows for the year then ended (not presented separately herein), and in
our report dated February 23, 1999, we expressed an unqualified opinion on these
statements. In our opinion, the information set forth in the accompanying
condensed balance sheet as of December 31, 1998, is fairly stated, in all
material respects, in relation to the balance sheet from which it has been
derived.
ARTHUR ANDERSEN LLP
Denver, Colorado,
August 13, 1999
38
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (NCE, PSCo and SPS)
NCE's Management's Discussion and Analysis of Financial Condition and Results of
Operations
Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30,
1998
NCE/NSP Merger
On March 24, 1999, the Company and NSP entered into an Agreement and Plan
of Merger providing for a strategic business combination of the companies.
Consummation of this "merger of equals" is subject to certain closing conditions
and the obtaining of applicable regulatory approvals, which are expected to take
from 12 to 18 months to complete from the date of the merger announcement. At
the special shareholder meetings on June 28, 1999, the shareholders of NCE and
NSP approved the Agreement and Plan of Merger. The name of the merged company
will be Xcel Energy Inc. The combined company is anticipated to be one of the
top 10 largest gas and electric energy companies in the U.S. Xcel Energy Inc.
and will serve approximately 3 million electricity customers and 1.5 million
natural gas customers in portions of twelve states. See Note 2. Proposed Merger
with Northern States Power Company in Item 1. FINANCIAL STATEMENTS.
Earnings
Earnings per share (basic and diluted) were $0.43 for the second quarter
of 1999 as compared to $0.50 per share (basic and diluted) for the second
quarter of 1998. The decrease in earnings was primarily attributed to lower
electric sales resulting from mild, wet weather throughout the Company's service
territory and lower operating earnings from Yorkshire Electricity. In addition,
the 1998 results included a $7.7 million benefit from the settlement of a 1985
FERC rate case. Electric customer growth was approximately 2.0% over the prior
year, with growth in natural gas customers of approximately 3.3%. Lower demand
for electricity as a result of the mild, wet weather reduced earnings
approximately $0.05 per share during the second quarter, compared to the same
period in the prior year.
Electric Operations
The following table details the change in electric operating revenues and
energy costs for the second quarter of 1999 as compared to the same period in
1998 (thousands of dollars).
Increase (Decrease)
-------------------
Electric operating revenues:
Retail............................................... $(20,604)
Wholesale............................................ (21,693)
Other (including unbilled revenues)................... 6,762
--------
Total revenues...................................... (35,535)
Fuel used in generation............................... (18,423)
Purchased power....................................... (6,605)
--------
Net decrease in electric margin..................... $(10,507)
========
The following table compares electric Kwh sales by major customer classes
for the second quarter of 1999 and 1998.
39
<PAGE>
Millions of Kwh Sales
---------------------
1999 1998 % Change *
---- ---- ----------
Residential................................ 2,244 2,215 1.3%
Commercial and Industrial.................. 6,676 6,686 -
Public Authority........................... 203 197 2.9
----- -----
Total Retail............................. 9,123 9,098 0.3
Wholesale.................................. 3,030 3,698 (18.0)
----- -----
Total...................................... 12,153 12,796 (5.0)
====== ======
Power marketing and trading................ 2,953 781 **
===== =====
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful.
Electric margin decreased in the second quarter of 1999, when compared to
the second quarter of 1998, due primarily to a 5.0% decrease in total sales
resulting from mild, wet weather during 1999, and a lower level of oil well
pumping in the SPS service territory, the benefit of a SPS FERC rate case
settlement during 1998 of approximately $7.7 million, and higher provisions for
estimated customer refunds in connection with PSCo's earnings sharing in excess
of 11% return on equity. These decreases were offset, in part, by continued
customer growth, primarily in the Colorado service territory.
The Company's regulated subsidiaries have cost adjustment mechanisms which
recognize the majority of the effects of changes in fuel used in generation and
purchased power costs and allow recovery of such costs on a timely basis. SPS's
revenues were reduced approximately $24.7 during the second quarter in
conjunction with the recovery of lower fuel costs (see Note 4. Regulatory
Matters in Item 1. FINANCIAL STATEMENTS). PSCo has an ICA, which allows for a
50%/50% sharing of certain fuel and energy cost increases and decreases among
customers and shareholders. PSCo recognized cost savings of approximately $2.2
million during the second quarter 1999, compared to the prior year.
Fuel used in generation expense decreased $18.4 million during the second
quarter of 1999, as compared to the same quarter in 1998, due primarily to
reduced generation and lower coal costs at SPS. This decrease in coal costs is
primarily due to negotiations with a new supplier in mid-1998 and lower
transportation costs.
Purchased power expense decreased $6.6 million during the second quarter of
1999, as compared to the same quarter in 1998, primarily due to a lower volume
of purchases.
Gas Operations
The following table details the change in gas revenues and gas purchased
for resale for the second quarter of 1999 as compared to the same period in 1998
(thousands of dollars).
Increase (Decrease)
-------------------
Revenues from gas sales (including unbilled revenues). $ 6,038
Gas purchased for resale.............................. 1,813
-------
Net increase in gas sales margin..................... 4,225
Transportation revenues............................... 713
-------
Increase in net gas margin........................... $ 4,938
=======
40
<PAGE>
The following table compares gas Dth deliveries by major customer classes
for the second quarter of 1999 and 1998.
Millions of Dth Deliveries
--------------------------
1999 1998 % Change *
---- ---- ----------
Residential................................ 19.1 18.6 2.9%
Commercial................................. 9.3 9.4 (0.7)
----- -----
Total sales.............................. 28.4 28.0 1.7
Transportation............................. 28.1 27.3 2.6
----- -----
Total.................................... 56.5 55.3 2.1
==== =====
Non-regulated gas marketing and trading.... 40.5 15.5 **
===== =====
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful
Gas sales margin increased during the second quarter of 1999, when compared
to the second quarter of 1998, primarily due to higher retail sales at PSCo
resulting from growth in the number of customers served. Although non-regulated
gas marketing sales and trading increased significantly, the margin on such
sales was comparable to the prior year.
Gas transportation revenues increased approximately $0.7 million during
the second quarter of 1999, when compared to the second quarter of 1998,
primarily due to higher deliveries at PSCo.
PSCo and Cheyenne have in place GCA mechanisms 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 second quarter of 1999, as compared to the second quarter
of 1998, had little impact on net income. However, the fluctuations in gas sales
impact the amount of gas the Company's gas utilities must purchase and,
therefore, along with the increases and decreases in the per-unit cost of gas,
affect total gas purchased for resale.
Other Operating Revenues and Equity in Earnings of Unconsolidated Subsidiaries
Other operating revenues decreased approximately $1.3 million due to lower
development fee revenues from non-regulated independent power projects offset,
in part, by an increase in revenue from energy management and consulting
services.
Equity earnings from Yorkshire Power increased over 1998 primarily due to
the recognition in 1998 of an impairment of an investment in a U.K.
telecommunications company. This impairment, in conjunction with the recognition
of a non-recurring positive tax adjustment at Yorkshire Power, reduced 1998
earnings approximately $16.6 million or 15 cents per share. Yorkshire Power's
operating earnings were lower in 1999 primarily due to lower gas and electric
sales resulting from mild weather, higher marketing costs to obtain new, and
retain existing customers, and increased maintenance expenses (see Note 3.
Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS).
Miscellaneous income and deductions-net decreased primarily due to delay
damage penalties incurred in development of certain independent power projects
by non-regulated subsidiaries. These projects are now operational or expected to
become operational during the third quarter of 1999.
Non-Fuel Operating Expenses and Other Income and Deductions
Other operating and maintenance expense-regulated decreased $2.0 million
from the continued deployment of cost saving-programs instituted as part of the
PSCo/SPS Merger. Other operating and maintenance
41
<PAGE>
expense-non-regulated increased $4.4 million primarily due to increased costs in
providing energy management and consulting services.
Depreciation and amortization expense increased $2.8 million primarily due
to higher depreciation expense from property additions.
Taxes other than income taxes increased approximately $4.4 million due to
higher utility property tax accruals resulting from an increase in plant
investment and higher valuation rates.
Income taxes declined $8.8 million during the second quarter of 1999, when
compared to the same quarter in 1998, primarily due to lower pre-tax income and
the recognition of additional Colorado state tax credits.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
Earnings
Earnings per share (basic and diluted) were $1.31 for the first six months
of 1999 as compared to $1.28 per share (basic and diluted) for the first six
months of 1998. The increase in earnings were primarily attributed to a higher
electric margin resulting from customer growth and an increased contribution
from the Company's investment in Yorkshire Power. This increase was partially
offset by a lower gas margins, resulting from mild weather during the first
quarter of 1999.
Electric Operations
The following table details the change in electric operating revenues and
energy costs for the first six months of 1999 as compared to the same period in
1998 (thousands of dollars).
Increase (Decrease)
-------------------
Electric operating revenues:
Retail............................................... $(21,522)
Wholesale............................................ (17,789)
Other (including unbilled revenues)................... 13,461
-------
Total revenues...................................... (25,850)
Fuel used in generation............................... (25,493)
Purchased power....................................... (13,083)
-------
Net increase in electric margin..................... $ 12,726
========
The following table compares electric Kwh sales by major customer classes
for the first six months of 1999 and 1998.
Millions of Kwh Sales
---------------------
1999 1998 % Change *
---- ---- ----------
Residential................................ 4,956 4,896 1.2%
Commercial and Industrial.................. 13,336 13,277 0.4
Public Authority........................... 384 378 1.8
----- -----
Total Retail............................. 18,676 18,551 0.7
Wholesale.................................. 5,787 6,434 (10.1)
----- -----
Total...................................... 24,463 24,985 (2.1)
====== ======
Power marketing and trading................ 4,434 1,603 **
===== =====
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful.
42
<PAGE>
Electric margin increased in the first six months of 1999, when compared
to the first six months of 1998, due to the positive impact of shared savings
under the ICA resulting from lower fuel and purchased energy costs
(approximately $5.2 million) and higher sales at PSCo resulting primarily from
growth in the number of customers served. This was offset, in part, by decreases
in both retail and wholesale sales at SPS, primarily due to mild weather,
reduced oil well pumping and the benefit of an SPS 1985 FERC rate case
settlement in 1998 which increased margin approximately $7.7 million. The
recovery of fuel costs at SPS, of approximately $37 million, reduced revenues
but had no effect on margin.
Fuel used in generation expense decreased $25.5 million during the first
six months of 1999, as compared to 1998, primarily due to reduced generation
levels at SPS and lower coal and gas costs at SPS. The lower coal costs are due
to a reduction in transportation costs, while the decrease in gas costs is
attributable to lower per-unit gas prices. Decreased gas costs were partially
offset by higher gas generation levels at PSCo and SPS, due to placing in
service a new gas generation unit.
Purchased power expense decreased $13.1 million during the first six months
of 1999, as compared to 1998, primarily due to a lower volume of purchases. This
decrease at PSCo was partially offset by an increase in purchased power expense
at SPS resulting from an increase in quantity of power purchased and higher
capacity charges.
Gas Operations
The following table details the change in gas revenues and gas purchased
for resale for the first six months of 1999 as compared to the same period in
1998 (thousands of dollars).
Increase (Decrease)
-------------------
Revenues from gas sales (including unbilled revenues). $(1,482)
Gas purchased for resale.............................. 4,325
-------
Net decrease in gas sales margin..................... (5,807)
Transportation revenues............................... 2,006
-------
Decrease in net gas margin........................... $(3,801)
=======
The following table compares gas Dth deliveries by major customer classes
for the first six months of 1999 and 1998.
Millions of Dth Deliveries
--------------------------
1999 1998 % Change *
---- ---- ----------
Residential................................ 58.1 58.5 (0.8)%
Commercial................................. 27.4 28.7 (4.6)
----- -----
Total Sales.............................. 85.5 87.2 (2.0)
Transportation............................. 59.6 54.9 8.7
----- -----
Total.................................... 145.1 142.1 2.1
===== =====
Non-regulated gas marketing and trading ... 80.0 31.9 **
===== =====
* Percentages are calculated using unrounded amounts
** Percentage change is significant, but presentation of the amount is not
meaningful
Gas sales margin decreased during the first six months of 1999, when
compared to the first six months of 1998, primarily due to lower retail sales at
PSCo resulting from the effects of mild winter weather in 1999, despite a 3.3%
increase in customers.
43
<PAGE>
Gas transportation revenues increased approximately $2.0 million during
the first six months of 1999, when compared with the same period in 1998,
primarily due to higher deliveries at PSCo. The increase in transport deliveries
continues to be impacted by the shifting of various commercial customers to
transport customers.
Other Operating Revenues and Equity in Earnings of Unconsolidated Subsidiaries
Other operating revenues decreased approximately $6.1 million due to lower
revenues from diversified energy businesses, primarily engineering, design and
construction management and lower development fee income from non-regulated
independent power projects, offset in part by an increase in revenue from energy
management and consulting services.
Equity in earnings of Yorkshire Power and other unconsolidated
subsidiaries increased $16.8 million primarily due to higher earnings from
Yorkshire Power. NCI's equity in earnings of Yorkshire Power increased by
approximately $19 million for the first six months of 1999, when compared to the
same period in 1998, primarily due to Yorkshire Power's 1998 recognition of an
impairment of its investment in a U.K. telecommunications company offset, in
part, by an unrelated tax adjustment. The net effect of these items reduced 1998
earnings approximately $16.6 million. In addition, during 1998 Yorkshire Power
recognized a penalty, applicable to all U.K. regional electricity utilities,
designed to recognize the effects of the delay in implementation of full
competition (NCI's portion was approximately $4 million). Equity losses from
independent power projects reduced earnings during 1999.
Miscellaneous income and deductions-net decreased primarily due to delay
damage penalties incurred in development of certain independent power projects
by non-regulated subsidiaries.
Non-Fuel Operating Expenses and Other Income and Deductions
Other operating and maintenance expense-regulated decreased $2.2 million
from the continued deployment of cost saving-programs instituted as part of the
PSCo/SPS Merger. Other operating and maintenance expense-nonregulated increased
$7.0 million primarily due to increased operating cost due to the acquisition of
Planergy, effective April 1, 1998 and higher costs incurred in providing energy
management and consulting services.
Depreciation and amortization expense increased $9.9 million primarily due
to higher depreciation expense from property additions.
Taxes other than income taxes increased approximately $9.2 million due to
higher utility property tax accruals as a result of an increase in plant
investment and higher valuation rates.
Interest charges and preferred dividends of subsidiaries increased $2.5
million during 1999 as compared with the same period in 1998. The increase is
primarily attributable to higher average amounts of debt outstanding used to
finance capital expenditures. Additionally, in May 1998, PSCo issued $194
million of Trust Preferred Originated Preferred Securities. The proceeds were
used to redeem all of PSCo's outstanding preferred stock (totaling $181.8
million) in June 1998 (see Note 7. PSCo Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding Solely Subordinated Debentures
in Item 1. FINANCIAL STATEMENTS).
Income taxes declined $18.8 million during the first six months of 1999,
when compared to the same quarter in 1998, primarily due to lower pre-tax
income, the recognition of additional Colorado state tax credits and the
recognition of the favorable tax impact of certain prior year PSCo severance
costs that were previously recognized as non-deductible.
44
<PAGE>
Other Market Risks
NCE and its subsidiaries are exposed to market risks, including changes in
commodity prices, interest rates and currency exchange rates as fully disclosed
in the NCE, PSCo and SPS 1998 Annual Report on Form 10-K. NCE's regulated
subsidiaries have limited exposure to commodity price and interest rate risk due
to cost-based rate regulation. Exposure to currency exchange risk is related to
NCE's investment in Yorkshire Power (see Note 3. Investment in Yorkshire Power
in Item 1. FINANCIAL STATEMENTS). There have been no material changes in the
market risk exposures that affect the quantitative and qualitative disclosures
presented as of December 31, 1998 in the 1998 Annual Report on Form 10-K.
Commitments and Contingencies
Year 2000 Issue
The 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 correcting 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 and assessment phases for
information technology ("IT") systems were completed in 1998. As of June 30,
1999, all of the remediation and testing phases for all critical IT systems have
been completed. For non-IT systems, which exist primarily in the generation,
transmission and distribution areas of the business, the inventory, assessment,
remediation and testing phases have also been completed. NCE has achieved "Y2K
Ready" status for all mission-critical electrical generating and transmission
facilities. Readiness was accomplished by June 30, 1999, in accordance with the
guidelines established by the North American Electric Reliability Council
("NERC"). NCE is a participant in the NERC Y2K Program that has established
reporting criteria and milestone dates for electric utilities. The final step of
this program was the submittal of a letter to the president of NERC, certifying
that the company has met the NERC Y2K goal. NCE submitted its Y2K certification
letter, without exceptions, with its June 1999 NERC report.
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.
The Company currently expects to incur costs of approximately $19 million
of operating and capital expenditures 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 revised estimate reflects a $6
million reduction from previously estimated costs due primarily to finding fewer
Y2K related problems than originally estimated and lower contingency planning
costs. The Company expects to spend approximately $15 million in operating and
capital expenditures for the accelerated replacement of certain non-compliant IT
systems. The majority of these costs will be incurred by PSCo and SPS. A
significant portion of the costs incurred to address the
45
<PAGE>
Company's Y2K issues will represent the redeployment of existing information
technology resources. The table below details the actual costs incurred during
1998 and prior periods; the actual costs incurred through the six months ended
June 30, 1999; and the estimated costs to be incurred during the remainder of
1999 and early 2000. A significant portion of the remaining costs to be incurred
consists of finalizing remaining work on non mission-critical systems, testing,
project management and contingency planning.
Actual
Costs Actual Remaining Estimated
1998 Costs Estimated Costs Total Project
and Prior 1999 to be Incurred Costs
--------- ----- -------------- -----
Operating expenses $8.0 $2.4 $5.5 $15.9
Capital for automated
system components 0.7 0.6 1.4 2.7
IT replacement projects:
Operating...... 0.2 0.6 0.1 0.9
Capital........ 6.4 7.3 0.7 14.4
---- --- ---- -----
Total........ $15.3 $10.9 $7.7 $33.9
===== ===== ==== =====
Yorkshire Power has also undertaken activities to address Y2K issues. The
estimated proportionate share of Yorkshire'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 is 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.
Common Stock Dividend
The Board of Directors approved a $0.58 per share dividend payable to
shareholders of the Company for the second quarter of 1999 and $1.16 for the
year-to-date. The Company's common stock dividend level is dependent upon the
Company's financial position, results of operations, cash flows and other
factors, including the proposed merger with NSP. The Board of Directors of the
Company will continue to evaluate the common stock dividend on a quarterly
basis.
Liquidity and Capital Resources
Cash Flows - Six Months Ended June 30
1999 1998 Decrease
---- ---- --------
Net cash provided by operating
activities (in millions) ............ $314.6 $362.8 $(48.2)
Cash provided by operating activities decreased during the first six
months of 1999, when compared to the same period in 1998, primarily due to the
cash proceeds, received in 1998 by SPS and a non-regulated
46
<PAGE>
subsidiary, of approximately $67 million for the recovery of deferred costs and
income from the investment in a non-regulated energy development project. This
was offset, in part, by lower purchased gas and electric costs.
1999 1998 Increase
---- ---- --------
Net cash used in investing
activities (in millions) ........... $(295.7) $(270.8) $(24.9)
Cash used in investing activities increased during 1999, when compared to
1998, primarily due to an increase in construction expenditures.
1999 1998 Decrease
---- ---- --------
Net cash used in financing
activities (in millions) ............ $ (3.4) $(57.0) $ 53.6
Cash used in financing activities decreased during 1999, when compared to
1998, primarily due to an increase in short-term borrowings in 1999 and more
financing activities in 1998. PSCo issued $250 million of long-term debt in
April 1998 which was used to repay short-term and other debt. In May 1998, PSCo
issued $194 million of Trust Originated Preferred Securities the proceeds of
which were used to redeem all of PSCo's outstanding preferred stock (totaling
$181.8 million) on June 10, 1998 (see Note 7. Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding Soley Subordinated Debentures
in Item 1. FINANCIAL STATEMENTS).
Financing Activities
Long-Term Debt
During the first quarter of 1999, PSCo refinanced a portion of its
pollution control bonds in the amount of $48.75 million to take advantage of
lower interest rates. The interest rate on the new bonds is 5.1% compared to 5
7/8% on $21.5 million and 7 3/8% on $27.25 million. In addition, SPS issued $100
million of 6.2% unsecured senior notes due March 1, 2009. The proceeds were used
initially for the repayment of certain short-term debt, pending the retirement
of $90 million of the SPS 6 7/8% First Mortgage Bonds due December 1, 1999 and
for other general corporate purposes.
On June 29, 1999, PSCo filed a registration statement to issue up to $500
million of unsecured debt. On July 16, 1999, PSCo issued $200 million of
unsecured senior notes, at an interest rate of 6 7/8%, due July 15, 2009.
Proceeds were used for general corporate purposes including capital
expenditures, repayment of short-term debt and refunding of long-term debt on
maturity or otherwise.
Bank Lines of Credit and Compensating Bank Balances
During the second quarter of 1999, PSCo entered into a credit facility,
which provides for $300 million in committed lines of credit, replacing an
existing $150 million credit facility. The credit facility expires June 23,
2000.
During the first quarter of 1999, SPS extended its $200 million committed
line of credit until February 25, 2000.
Electric Utility Industry
Electric utilities have historically operated in a highly regulated
environment in which they have an obligation to provide electric service to
their customers in return for an exclusive franchise within their service
territory with an opportunity to earn a regulated rate of return. This
regulatory environment is changing. The generation sector has experienced
competition from nonutility power producers and the FERC is requiring utilities,
including the Company's subsidiaries, to provide wholesale transmission service
to others and may order electric utilities to enlarge their transmission systems
to facilitate transmission services without impairing
47
<PAGE>
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 study and evaluate utility
regulations with respect to competition. Deregulation legislation was passed in
Texas and New Mexico during the second quarter of 1999.
Texas
In June 1999, an electric utility restructuring act was passed in Texas,
which allows for retail competition, for most areas of the state, beginning
January 1, 2002. The legislation requires, among other things, a rate freeze for
all customers, effective September 1, 1999 until January 1, 2002; a rate
reduction for those residential and small commercial customers who choose not to
switch suppliers at the start of retail competition; the unbundling of business
activities, costs and rates relating to generation, transmission and
distribution and retail services; reductions in NOx and SO2 emissions and the
recovery of stranded costs. The PUCT can delay the date for retail competition
if a power region is unable to offer fair competition and reliable service
during pilot projects which begin for all utilities on June 1, 2001 for 5% of
the utility's combined load of all customer classes. Utilities, including SPS,
with no estimated stranded costs must direct any excess earnings during the
freeze period to improvements in transmission and distribution facilities, to
capital expenditures to improve air quality or to accelerate the amortization of
regulatory assets (subject to PUCT approval).
The legislation specifically addresses competition in the Texas Panhandle,
where SPS operates, recognizing that certain transmission constraints exist
within the region that requires full retail customer choice to develop on a more
structured schedule than the rest of the state. SPS must file a transition to
competition plan with the PUCT by December 1, 2000.
New Mexico
On April 8, 1999, New Mexico enacted the Electric Utility Restructuring
Act of 1999 which allows customer choice for residential, small commercial and
educational customers beginning January 1, 2001. All remaining customers will be
allowed customer choice on January 1, 2002. Customers of a municipal utility and
customers of a distribution cooperative utility will be afforded choice only if
the respective utility elects to participate. The legislation provides for
recovery of no less than 50% of stranded costs quantified by the NMPRC.
Transition costs must be approved by the NMPRC prior to being recovered through
a non-by-passable wires charge, which must be included in a transition plan
filing. All public electric utilities operating in New Mexico must file a
transition plan with the NMPRC by March 1, 2000.
Financial Reporting Considerations
The Emerging Issues Task Force reached a consensus in Issue No. 97-4,
"Deregulation of the Pricing of Electricity" ("97-4") indicating that when
deregulatory legislation is passed or when a rate order (whichever is necessary
to effect change in the jurisdiction) that contains sufficient detail for an
enterprise to reasonably determine how the transition plan will affect the
separable portion of its business whose pricing is being deregulated is issued,
the enterprise should stop applying SFAS 71 to that separable portion of its
business. The Company is evaluating the provisions of 97-4 related to the
recently enacted legislation and, at the time such provisions have been met, SPS
will no longer apply SFAS 71.
48
<PAGE>
Accounting Pronouncements Issued But Not Yet Effective
In June 1998, the FASB issued SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement requires companies to record
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. In July 1999, the FASB delayed the effective
date for one year, to fiscal years beginning after June 15, 2000. The Company is
currently evaluating the potential impact of this accounting standard and will
adopt the standard as required by January 1, 2001.
49
<PAGE>
PSCo's Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30,
1998
Earnings Available for Common Stock
Earnings were $34.8 million for the second quarter of 1999, as compared to
$28.5 million for the second quarter of 1998, primarily due to an increase in
electric margin resulting from strong customer growth of 2.6%.
Electric Operations
The following table details the change in electric operating revenues and
energy costs for the three months ended June 30, 1999, as compared to the same
period in 1998 (in thousands of dollars).
Increase (Decrease)
-------------------
Electric operating revenues:
Retail....................................... $ 997
Wholesale.................................... (7,652)
Other (including unbilled revenues).......... 10,405
-------
Total revenues.............................. 3,750
Fuel used in generation....................... 5,328
Purchased power............................... (11,911)
-------
Net increase in electric margin............. $10,333
=======
The following table compares electric Kwh sales by major customer classes
for the three months ended June 30, 1999 and 1998.
Millions of Kwh Sales
---------------------
1999 1998 % Change *
---- ---- ----------
Residential ..................... 1,567 1,501 4.4%
Commercial and Industrial ....... 3,799 3,721 2.1
Public Authority ................ 60 39 53.0
------ ------
Total Retail................... 5,426 5,261 3.1
Wholesale **..................... 1,045 1,409 (25.9)
------ ------
Total............................ 6,471 6,670 (3.0)
====== ======
* Percentages are calculated using unrounded amounts
** Excludes power trading activities
Electric margin increased in the second quarter of 1999, when compared to
the second quarter of 1998, primarily due to higher retail sales of 3.1%
resulting primarily from customer growth of approximately 2.6% and the positive
impact of shared savings under the ICA (approximately $2.2 million). The ICA is
a cost adjustment mechanism that allows for a 50%/50% sharing of certain fuel
and energy cost increases and decreases among customers and shareholders.
Provisions for estimated customer refunds in connection with the earnings
sharing in excess of 11% return on equity increased approximately $2.8 million
in 1999 (see Note 4. Regulatory Matters in Item 1.FINANCIAL STATEMENTS).
Fuel used in generation expense increased approximately $5.3 million
during the second quarter of 1999, as compared to the same quarter in 1998,
primarily due to increased generation levels at PSCo's power plants to serve
retail customers.
Purchased power expense decreased $11.9 million during the second quarter
of 1999, as compared to the same quarter in 1998, primarily due to a lower
volume of purchases.
50
<PAGE>
Gas Operations
The following table details the change in revenues from gas sales and gas
purchased for resale for the second quarter of 1999, as compared to the same
period in 1998 (in thousands of dollars).
Increase (Decrease)
-------------------
Revenues from gas sales (including unbilled revenues) $ 6,978
Gas purchased for resale........................ 3,663
-------
Net increase in gas sales margin.............. 3,315
Transportation revenues......................... 747
-------
Increase in net gas margin.................... $ 4,062
=======
The following table compares gas Dth deliveries by major customer classes
for the second quarter of 1999 and 1998.
Millions of Dth Deliveries
--------------------------
1999 1998 % Change *
---- ---- ----------
Residential................... 19.0 18.0 5.3%
Commercial.................... 8.8 8.9 (1.3)
------- --------
Total Sales................. 27.8 26.9 3.1
Transportation................ 23.6 22.8 3.7
------- --------
Total....................... 51.4 49.7 3.4
======= ========
* Percentages are calculated using unrounded amounts
Gas sales margin increased during the second quarter of 1999, when
compared to the second quarter of 1998, primarily due to a 3.1% increase in
retail gas sales resulting from customer growth of approximately 3.4%.
Gas transportation revenues increased $0.7 million during the second
quarter of 1999, compared to the second quarter of 1998, primarily due to higher
deliveries. The increase in transport deliveries continues to be impacted by the
shifting of various commercial customers to transport customers.
PSCo has in place a GCA mechanism for natural gas sales, which recognizes
the majority of the effects of changes in the cost of gas purchased for resale
and adjusts revenues to reflect such changes in costs on a timely basis. As a
result, the changes in revenues associated with these mechanisms during the
second quarter of 1999, as compared to the second quarter of 1998, had little
impact on net income. However, the fluctuations in gas sales impacts the amount
of gas PSCo must purchase and, therefore, along with the increases and decreases
in the per-unit cost of gas, affect total gas purchased for resale.
Non-Fuel Operating Expenses and Other Income and Deductions
Depreciation and amortization increased $2.0 million during the second
quarter of 1999, as compared to the second quarter of 1998, primarily due to the
depreciation of property additions.
Taxes other than income taxes increased approximately $2.7 million during
the second quarter of 1999, as compared to the second quarter of 1998, primarily
due higher property tax accruals resulting from an increase in plant investment
and higher valuation rates.
Income taxes increased approximately $1.2 million during the second
quarter of 1999, as compared to the second quarter of 1998, primarily due to
higher pre-tax income, despite the recognition of additional Colorado state tax
credits.
51
<PAGE>
Other income and deductions decreased $1.1 million during the second
quarter of 1999, as compared to the second quarter of 1998, primarily due to
higher non-utility operating expenses attributed to affiliate billings and
customer rebates.
Interest charges and dividend requirements and redemption premium on
preferred stock increased approximately $1.7 million during the second quarter
of 1999, as compared to the second quarter of 1998. The increase is primarily
attributable to costs to finance capital expenditures, including higher interest
costs on short-term debt. Additionally, in May 1998, PSCo issued $194 million of
Trust Preferred Originated Preferred Securities. The proceeds were used to
redeem all of PSCo's outstanding preferred stock (totaling $181.8 million) in
June 1998 (see Note 7. Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Subordinated Debentures in Item 1. FINANCIAL
STATEMENTS).
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
Earnings Available for Common Stock
Earnings were $100.8 million for the first six months of 1999, as compared
to $94.5 million for the first six months of 1998. An increase in electric
margin resulting from strong customer growth of 2.6% was offset, in part, by a
lower gas margin, resulting from unseasonably warm weather in the first quarter
of 1999 and higher non-fuel operating expenses.
Electric Operations
The following table details the change in electric operating revenues and
energy costs for the six months ended June 30, 1999, as compared to the same
period in 1998 (in thousands of dollars).
Increase (Decrease)
-------------------
Electric operating revenues:
Retail....................................... $10,130
Wholesale.................................... (1,526)
Other (including unbilled revenues).......... 1,022
-------
Total revenues.............................. 9,626
Fuel used in generation....................... 6,564
Purchased power............................... (21,741)
-------
Net increase in electric margin............. $24,803
=======
The following table compares electric Kwh sales by major customer classes
for the six months ended June 30, 1999 and 1998.
Millions of Kwh Sales
---------------------
1999 1998 % Change *
---- ---- ----------
Residential ..................... 3,499 3,356 4.2%
Commercial and Industrial ....... 7,720 7,476 3.3
Public Authority ................ 108 87 24.7
------ ------
Total Retail................... 11,327 10,919 3.7
Wholesale **..................... 2,467 2,903 (15.0)
------ ------
Total............................ 13,794 13,822 (0.2)
====== ======
* Percentages are calculated using unrounded amounts
** Excludes power trading activities
52
<PAGE>
Electric margin increased during the first six months of 1999, when
compared to the same period in 1998, primarily due to higher retail sales of
3.7% resulting primarily from customer growth of approximately 2.6% and the
positive impact of shared savings under the ICA (approximately $5.2 million).
Provisions for estimated customer refunds in connection with the earnings
sharing in excess of 11% return on equity was $6.6 million in 1999 compared to
$5.6 million in 1998 (see Note 4. Regulatory Matters in Item 1. FINANCIAL
STATEMENTS).
Fuel used in generation expense increased approximately $6.6 million
during the first six months of 1999, as compared to the same period in 1998,
primarily due to increased generation levels at PSCo's power plants to serve
retail customers.
Purchased power expense decreased $21.7 million during the first six
months of 1999, as compared to the same period in 1998, primarily due to a
lower volume of purchases.
Gas Operations
The following table details the change in revenues from gas sales and gas
purchased for resale for the first six months of 1999, as compared to the same
period in 1998 (in thousands of dollars).
Increase (Decrease)
-------------------
Revenues from gas sales (including unbilled revenues) $(5,626)
Gas purchased for resale........................ 22
-------
Net decrease in gas sales margin.............. (5,648)
Transportation revenues......................... 2,039
-------
Decrease in net gas margin.................... $(3,609)
=======
The following table compares gas Dth deliveries by major customer classes
for the first six months of 1999 and 1998.
Millions of Dth Deliveries
--------------------------
1999 1998 % Change *
---- ---- ----------
Residential................... 56.8 56.9 - %
Commercial.................... 25.9 27.3 (5.1)
------- --------
Total Sales................. 82.7 84.2 (1.7)
Transportation................ 50.1 46.0 8.9
------- --------
Total....................... 132.8 130.2 2.1
======= ========
* Percentages are calculated using unrounded amounts
Gas sales margin decreased during the first six months of 1999, when
compared to the same period in 1998, primarily due to a 1.7% decrease in retail
gas sales, resulting from the milder winter weather, with temperatures
approximately 6.5% warmer than the prior year.
Gas transportation revenues increased $2.0 million during the first six
months of 1999, compared to the same period in 1998, primarily due to higher
deliveries. The increase in transport deliveries continues to be impacted by the
shifting of various commercial customers to transport customers.
PSCo has in place a GCA mechanism for natural gas sales, which recognizes
the majority of the effects of changes in the cost of gas purchased for resale
and adjusts revenues to reflect such changes in costs on a timely basis. As a
result, the changes in revenues associated with these mechanisms during the six
months ended June 30, 1999, as compared to the same period in 1998, had little
impact on net income. However, the fluctuations in
53
<PAGE>
gas sales impacts the amount of gas PSCo must purchase and, therefore, along
with the increases and decreases in the per-unit cost of gas, affect total gas
purchased for resale. The decrease in the quantity of gas purchased in 1999
lowered costs, but was offset by the recovery of costs previously deferred
through the GCA.
Non-Fuel Operating Expenses and Other Income and Deductions
Depreciation and amortization increased $7.7 million during the first six
months of 1999, as compared to the same period in 1998, primarily due to the
depreciation of property additions.
Taxes other than income taxes increased approximately $6.2 million during
the first six months of 1999, as compared to the same period in 1998, primarily
due higher property tax accruals resulting from an increase in plant investment
and higher valuation rates.
Income taxes decreased approximately $6.4 million during the first six
months of 1999, as compared to the same period in 1998, primarily due to lower
pre-tax income, the recognition of additional Colorado state tax credits and the
recognition of the favorable tax impact of deducting certain prior year
severance costs that were previously recognized as non-deductible.
Other income and deductions decreased $3.3 million during the first six
months of 1999, as compared to the first six months of 1998. On March 31, 1998,
NCI and its subsidiaries were transferred through the sale by PSCo of all the
outstanding common stock of NCI at net book value (approximately $292.6
million), to NC Enterprises, an intermediate holding company of NCE, and
received as consideration a promissory note from NC Enterprises (see Note 3.
Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS). The first six
months of 1999 include approximately $6.7 million of interest income on the
promissory note, excluding income taxes, compared to $5.1 million of interest
income in 1998 and the recognition of equity earnings associated with PSCo's
investment in Yorkshire Power of approximately $3.4 million in the first quarter
of 1998, prior to the sale. In addition, other non-utility income decreased $1.6
million.
Interest charges and dividend requirements and redemption premiums on
preferred stock increased approximately $3.9 million during the first six months
of 1999, as compared to the first six months of 1998. The increase is primarily
attributable to costs to finance capital expenditures, including higher interest
costs on long-term debt resulting from the April 1998 issuance of $250 million
of long-term debt. Additionally, in May 1998, PSCo issued $194 million of Trust
Preferred Originated Preferred Securities. The proceeds were used to redeem all
of PSCo's outstanding preferred stock (totaling $181.8 million) in June 1998
(see Note 7. Obligated Mandatorily Redeemable Preferred Securities of Subsidiary
Trusts Holding Solely Subordinated Debentures in Item 1. FINANCIAL STATEMENTS).
Commitments and Contingencies
See Note 5. Commitments and Contingencies in Item 1. FINANCIAL STATEMENTS.
Financing Activities
Discussion relating to PSCo's financing activities is covered under
"Financing Activities" in NCE's Management's Discussion and Analysis of
Financial Condition and Results of Operations.
54
<PAGE>
SPS's Management's Discussion and Analysis of Financial Condition and Results of
Operations
Three Months Ended June 30, 1999 Compared to the Three Months Ended June 30,
1998
Earnings Available for Common Stock
Earnings available for common stock were $22.8 million during the second
quarter of 1999 compared to $36.9 million for the same quarter in 1998. Earnings
decreased primarily due to the effects of lower sales resulting from mild
weather during 1999 and the impact of a FERC rate case settlement recognized in
1998.
Operating Revenues
Electric Operations
Substantially all of SPS's operating revenues result from the sale of
electric energy. The principal factors impacting revenues are the amount and
price of energy sold. The following table details the change in electric
operating revenues and energy costs for the three months ended June 30, 1999, as
compared to the same period in 1998 (thousands of dollars).
Increase (Decrease)
-------------------
Electric operating revenues:
Retail.............................. $(22,337)
Wholesale........................... (13,551)
Other (including unbilled revenues). (4,004)
--------
Total revenues.................... (39,892)
Fuel used in generation.............. (23,750)
Purchased power...................... 4,325
-------
Net decrease in electric margin... $(20,467)
========
The following table compares electric Kwh sales by major customer classes
for the three months ended June 30, 1999 and 1998.
Millions of Kwh Sales
---------------------
1999 1998 % Change*
------- ---- ---------
Residential ............ 629 667 (5.7)%
Commercial ............ 690 712 (3.1)
Industrial ............ 2,033 2,098 (3.1)
Public Authority ....... 141 156 (9.6)
----- -----
Total Retail.......... 3,493 3,633 (3.9)
Wholesale............... 1,986 2,289 (13.2)
----- -----
Total................... 5,479 5,922 (7.5)
===== =====
* Percentages are calculated using unrounded amounts.
Electric operating revenues decreased $39.9 million or 15.1% during the
second quarter in 1999, when compared to the same period in 1998, primarily due
to lower retail and wholesale revenues (total Kwh sales decreased 7.5%), lower
revenues related to the recovery of fuel costs (totaling approximately $24.7
million) and a $7.7 million settlement for a 1985 FERC rate case settlement
recorded in 1998. The decrease in Kwh sales resulted from the mild wet weather
in the second quarter of 1999, which reduced loads for air conditioning and
irrigation and a lower level of oil well pumping sales.
Fuel used in generation expense decreased $23.8 million or 19.5% during
the second quarter of 1999, when compared to the same period in 1998, primarily
due to an 8.5% decrease in generation levels required to serve retail and
wholesale customers and lower coal costs for the quarter. The decrease in coal
costs is primarily
55
<PAGE>
due to negotiations with a new supplier in mid-1998 and lower transportation
costs. The cost of natural gas used in generation decreased $3.9 million during
the second quarter of 1999 primarily due to lower generation.
Purchased power increased $4.3 million during the second quarter of 1999,
when compared to the same period in 1998, due to an increase in wholesale
purchases and capacity costs. SPS generates substantially all of its power for
sale to its firm retail and wholesale customers and sells non-firm energy as the
market demands. Similarly, SPS will purchase low-cost non-firm energy when
available and as needed to meet customer requirements.
SPS has fuel cost adjustment mechanisms which recognize the majority of
the effects of changes in fuel used in generation and purchased power costs and
allow recovery of such costs on a timely basis. As a result, the changes in
revenues associated with these mechanisms during the second quarter of 1999,
when compared to the second quarter of 1998, had little impact on net income.
(See discussion on "SPS Electric Cost Adjustment Mechanisms" Note 4. Regulatory
Matters - in Item 1. FINANCIAL STATEMENTS).
Non-Fuel Operating Expenses
Other operating and maintenance expenses decreased $1.2 million during the
second quarter of 1999, as compared to the same period in 1998, primarily due to
lower administrative and general expenses and other reductions resulting from
the continued deployment of cost saving programs instituted as part of the
PSCo/SPS Merger offset, in part, by higher maintenance costs.
Taxes other than income taxes increased $1.2 million during the second
quarter of 1999, as compared to the same period in 1998, primarily due to higher
property and franchise taxes.
Income taxes decreased $8.2 million during the second quarter of 1999, as
compared to the same period in 1998, primarily due to the effect of lower
pre-tax income. The effective income tax rates for both the second quarter of
1999 and 1998 were 37.1%.
Interest Charges
Interest charges increased $1.4 million during the second quarter of 1999,
as compared to the same period in 1998, primarily due to higher long-term debt
costs, resulting from the issuance of $100 million of new debt in March 1999
offset, in part, by a decrease in the allowance for funds used during
construction of approximately $0.9 million resulting from lower construction
activities. The proceeds from the long-term debt issuance were initially for the
repayment of certain short-term debt, pending the retirement of $90 million in
bonds due December 1, 1999, thus lowering other interest expense ($1.6 million).
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998
Earnings Available for Common Stock
Earnings available for common stock were $46.2 million during the six
months ended June 30, 1999 compared to $55.1 million for the same period in
1998. Earnings decreased primarily due to the lower earnings recognized during
the second quarter of 1999 which resulted from the effects of mild weather in
1999 and a FERC rate case settlement in 1998.
56
<PAGE>
Operating Revenues
Electric Operations
Substantially all of SPS's operating revenues result from the sale of
electric energy. The principal factors impacting revenues are the amount and
price of energy sold. The following table details the change in electric
operating revenues and energy costs for the six months ended June 30,1999, as
compared to the same period in 1998 (thousands of dollars).
Increase (Decrease)
-------------------
Electric operating revenues:
Retail.............................. $(33,212)
Wholesale........................... (15,936)
Other (including unbilled revenues). 12,076
-------
Total revenues.................... (37,072)
Fuel used in generation.............. (31,987)
Purchased power...................... 6,789
-------
Net decrease in electric margin... $(11,874)
========
The following table compares electric Kwh sales by major customer classes
for the six months ended June 30, 1999 and 1998.
Millions of Kwh Sales
---------------------
1999 1998 % Change*
------ ----- ---------
Residential ............ 1,346 1,431 (5.9)%
Commercial ............ 1,359 1,375 (1.2)
Industrial ............ 3,938 4,112 (4.2)
Public Authority ....... 274 289 (5.2)
----- -----
Total Retail.......... 6,917 7,207 (4.0)
Wholesale............... 3,319 3,532 (6.0)
----- -----
Total................... 10,236 10,739 (4.7)
====== ======
* Percentages are calculated using unrounded amounts.
Electric operating revenues decreased $37.1 million or 8.0% during the six
months ended June 30, 1999, when compared to the same period in 1998, primarily
due to lower retail and wholesale revenues resulting from a decrease in Kwh
sales (4.7%) and lower revenues related to the recovery of fuel costs (totaling
approximately $37 million) and the $7.7 million settlement for a 1985 FERC rate
case settlement recorded in 1998. The decrease in Kwh sales was primarily the
result of the mild wet weather, which occurred in the second quarter of 1999 and
a decrease in oil well pumping sales. Additionally a portion of the decrease in
Kwh sales resulted from a change in the billing cycle of various customers,
which is offset by the higher level of unbilled revenues.
Fuel used in generation expense decreased $32.0 million or 15.1% during
the six months ended June 30, 1999, when compared to the same period in 1998,
primarily due to lower coal and gas costs for the current period and a 3.8%
decrease in generation levels required to serve retail and wholesale customers.
The decrease in coal costs is primarily due to negotiations with a new supplier
in mid-1998 and lower transportation costs. Cost of natural gas used in
generation decreased $2.7 million during the six months ended June 30, 1999
primarily due to lower gas prices offset, in part, by increased costs related to
higher generation at Cunningham Station during the current period.
Purchased power increased $6.8 million during the six months ended June
30, 1999, when compared to the same period in 1998, due to an increase in
wholesale purchases and capacity costs. SPS generates substantially all of its
power for sale to its firm retail and wholesale customers and sells non-firm
energy as the
57
<PAGE>
market demands. Similarly, SPS will purchase low-cost non-firm energy when
available and as needed to meet customer requirements.
SPS has fuel cost adjustment mechanisms which recognize the majority of
the effects of changes in fuel used in generation and purchased power costs and
allow recovery of such costs on a timely basis. As a result, the changes in
revenues associated with these mechanisms during the six months ended June 30,
1999, when compared to the six months ended June 30, 1998, had little impact on
net income. (See discussion on "SPS Electric Cost Adjustment Mechanisms" Note 4.
Regulatory Matters - in Item 1. FINANCIAL STATEMENTS).
Non-Fuel Operating Expenses
Other operating and maintenance expenses decreased $1.8 million during the
six months ended June 30, 1999, when compared to the same period in 1998,
primarily due to lower general and administrative expenses, and the continued
deployment of cost saving programs instituted as part of the PSCo/SPS Merger.
These decreases were offset, in part, by higher maintenance costs.
Taxes other than income taxes increased $2.5 million during the six months
ended June 30, 1999, as compared to the same period in 1998, primarily due to
higher property and franchise taxes.
Income taxes decreased $5.1 million during the six months ended June 30,
1999, as compared to the same period in 1998, primarily due to the effect of
lower pre-tax income. The effective income tax rates for the six months ended
June 30, 1999 and 1998 were 37.6% and 37.4%, respectively.
Other Income and Deductions - Net
Other income and deductions-net increased $1.1 million during the six
months ended June 30, 1999, as compared to the same period in 1998, primarily
due to the absence of PSCo/SPS Merger and business integration expenses in 1999
($1.2 million expensed in 1998).
Interest Charges
Interest charges increased $1.1 million during the six months ended June
30, 1999, as compared to the same period in 1998, primarily due to higher
long-term debt costs, resulting from the issuance of $100 million in new debt in
March of 1999 and a decrease in the allowance for funds used during construction
of approximately $2.0 million resulting from lower construction activities. The
new debt issuance was used in part to pay down short-term borrowing, thus
lowering other interest expense ($2.6 million).
Commitments and Contingencies
See Note 5. Commitments and Contingencies in Item 1. FINANCIAL STATEMENTS.
Financing Activities
Discussion relating to SPS's financing activities is covered under
"Financing Activities" in NCE's Management's Discussion and Analysis of
Financial Condition and Results of Operations.
58
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Part 1. See Note 5. Commitments and Contingencies in Item 1, Part 1.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The 1998 Annual Meeting of Shareholders of the Company was held on May 11,
1999.
Three matters were voted upon at the above meeting: 1) the election of four
class II directors; 2) the appointment of Arthur Andersen LLP as the
Company's independent public accountants for the 1999 calendar year; 3) a
shareholder proposal to provide for the elimination of a classified Board
of Directors.
With respect to the election of directors, the votes were as follows:
Giles M. Forbess 97,960,186 shares for 2,481,044 shares withheld
Bill D. Helton 97,924,242 shares for 2,516,988 shares withheld
Albert F. Moreno 97,368,363 shares for 3,072,867 shares withheld
J. Michael Powers 97,951,525 shares for 2,489,705 shares withheld
With respect to the appointment of Arthur Andersen LLP as the Company's
independent public accountants, the vote was: 98,249,664 shares for;
1,428,762 shares against; 798,463 shares abstain. The proposal passed.
With respect to the shareholder proposal regarding the elimination of a
classified Board of Directors, the vote was : 39,734,874 shares for;
44,214,791 shares against; 3,094,394 shares abstain. The proposal did not
pass.
There were zero broker non-votes with respect to the election of directors
and the appointment of Arthur Andersen LLP. Broker non-votes had no effect
on the outcome of the shareholder proposal.
(b) A special meeting of the shareholders of the Company was held on June 28,
1999.
One matter was voted upon at the above special meeting: to approve the
Agreement and Plan of Merger, dated March 24, 1999, by and between the
Company and NSP.
With respect to the approval of the Agreement and Plan of Merger, the vote
was: 89,813,018 shares for; 5,089,763 shares against; 1,297,284 shares
abstain. The proposal passed.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed
Charges for PSCo is set forth at page 63 herein.
12(b) Computation of Ratio of Consolidated Earnings to Consolidated Fixed
Charges for SPS is set forth at page 64 herein.
15(a) Letter from Arthur Andersen LLP regarding unaudited interim
information is set forth at page 65 herein for NCE.
15(b) Letter from Arthur Andersen LLP regarding unaudited interim
information is set forth at page 66 herein for PSCo.
15(c) Letter from Arthur Andersen LLP regarding unaudited interim
information is set forth at page 67 herein for SPS.
59
<PAGE>
27(a) Financial Data Schedule for NCE as of June 30, 1999.
27(b) Financial Data Schedule for PSCo as of June 30, 1999.
27(c) Financial Data Schedule for SPS as of June 30, 1999.
(c) Reports on Form 8-K
The following reports on Form 8-K were filed since the beginning of the second
quarter of 1999.
- - A combined report on Form 8-K dated June 28, 1999, was filed separately by
NCE, PSCo and SPS on June 28, 1999. The items reported were Item 5. Other
Events: Special shareholder meetings were held on June 28, 1999, which approved
the NCE/NSP Merger; and Item 7. Financial Statements and Exhibits: Press release
filed as Exhibit 99 providing additional information about the merger to form
Xcel Energy Inc.
- - A report on Form 8-K dated July 13, 1999, was filed by PSCo on July 22, 1999.
The items reported were Item 5. Other Events: Documents related to the issuance
of $200,000,000 aggregate principal amount of Series A Senior Notes and Item 7.
Financial Statements and Exhibits.
60
<PAGE>
NEW CENTURY ENERGIES, INC.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, New Century Energies, Inc. has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized on the
16th day of August, 1999.
NEW CENTURY ENERGIES, INC.
By /s/ R. C. Kelly
---------------------------------
R. C. Kelly
Executive Vice President and
Chief Financial Officer
PUBLIC SERVICE COMPANY OF COLORADO
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Public Service Company of Colorado has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized
on the 16th day of August, 1999.
PUBLIC SERVICE COMPANY OF COLORADO
By /s/Brian P. Jackson
---------------------------------
Brian P. Jackson
Senior Vice President, Finance and
Administrative Services,
Chief Financial Officer and
Treasurer
SOUTHWESTERN PUBLIC SERVICE COMPANY
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Southwestern Public Service Company has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized
on the 16th day of August, 1999.
SOUTHWESTERN PUBLIC SERVICE COMPANY
By /s/Brian P. Jackson
---------------------------------
Brian P. Jackson
Senior Vice President, Finance and
Administrative Services,
Chief Financial Officer and
Treasurer
61
<PAGE>
EXHIBIT INDEX
2(a)1* NCE/NSP Agreement and Plan of Merger dated March 24, 1999 (Form 8-K,
March 24, 1999, Exhibit 2.1).
3(a)1* NCE Restated Articles of Incorporation dated December 8, 1995 (Form S-4,
Exhibit 3(a)).
3(a)2* PSCo Amended and Restated Articles of Incorporation dated July 10, 1998
(Form 10-K, December 31, 1998, Exhibit 3(a)1).
3(a)3* SPS Amended and Restated Articles of Incorporation dated September 30,
1997 (Form 10-K, December 31, 1997, Exhibit 3(a)2).
3(b)1* NCE Restated By-laws dated December 15,1998 (Form 10-K, December
31, 1998, Exhibit 3(b)1).
3(b)2* PSCo By-laws dated November 20, 1997 (Form 10-K, December 31, 1997,
Exhibit 3(b)1).
3(b)3* SPS By-laws dated September 29, 1997 (Form 10-K, December 31, 1997,
Exhibit 3(b)2).
12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed
Charges for PSCo is set forth at page 63 herein.
12(b) Computation of Ratio of Consolidated Earnings to Consolidated Fixed
Charges for SPS is set forth at page 64 herein.
15(a) Letter from Arthur Andersen LLP regarding unaudited interim information is
set forth at page 65 herein for NCE.
15(b) Letter from Arthur Andersen LLP regarding unaudited interim information is
set forth at page 66 herein for PSCo.
15(c) Letter from Arthur Andersen LLP regarding unaudited interim information is
set forth at page 67 herein for SPS.
27(a) Financial Data Schedule for NCE as of June 30, 1999.
27(b) Financial Data Schedule for PSCo as of June 30, 1999.
27(c) Financial Data Schedule for SPS as of June 30, 1999.
* Previously filed as indicated and incorporated herein by reference.
62
<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)
Six Months Ended
June 30,
1999 1998
---- ----
(Thousands of Dollars, except ratios)
Fixed charges:
Interest on long-term debt................... $ 57,627 $ 57,271
Interest on borrowings against corporate-owned
life insurance contracts.................. 28,268 24,605
Other interest............................... 11,961 10,152
Amortization of debt discount and expense less
premium .................................. 2,166 1,995
Interest component of rental expense......... 4,591 4,139
Dividends on PSCo obligated mandatorily
redeemable preferred securities........... 7,600 2,111
------ ------
Total...................................... $112,213 $100,273
======== ========
Earnings (before fixed charges and taxes on income):
Net income................................... $100,759 $ 99,805
Fixed charges as above....................... 112,212 100,273
Provisions for Federal and state taxes on income,
net of investment tax credit amortization.... 43,982 50,368
------ ------
Total...................................... $256,953 $250,446
======== ========
Ratio of earnings to fixed charges.............. 2.29 2.50
====== ======
63
<PAGE>
EXHIBIT 12(b)
SOUTHWESTERN PUBLIC SERVICE COMPANY
AND SUBSIDIARIES
COMPUTATION OF RATIO OF CONSOLIDATED EARNINGS
TO CONSOLIDATED FIXED CHARGES
(not covered by Report of Independent Public Accountants)
Six Months Ended
June 30,
1999 1998
---- ----
(Thousands of Dollars, except ratios)
Fixed charges:
Interest on long-term debt................... $23,714 $ 21,980
Other interest............................... 2,549 5,112
Amortization of debt discount and expense less
premium 1,121 1,121
Interest component of rental expense......... 382 404
Dividends on SPS obligated mandatorily redeemable
preferred securities...................... 3,925 3,925
------ ------
Total...................................... $31,691 $ 32,542
======= ========
Earnings (before fixed charges and taxes on income):
Net income................................... $ 46,226 $ 55,056
Fixed charges as above....................... 31,691 32,542
Provisions for Federal and state taxes on income,
net of investment tax credit amortization.... 27,848 32,954
------ ------
Total...................................... $105,765 $120,552
======== ========
Ratio of earnings to fixed charges.............. 3.34 3.70
==== ====
64
<PAGE>
EXHIBIT 15(a)
August 13, 1999
New Century Energies, Inc.:
We are aware that New Century Energies, Inc. has incorporated by reference
in its Registration Statement (Form S-8, File No. 333-28639) pertaining to the
Omnibus Incentive Plan; its Registration Statement (Form S-3, File No.
333-28637) pertaining to the Dividend Reinvestment and Cash Payment Plan; its
Registration Statements (Form S-3, File Nos. 333-40361 and 333-64067) pertaining
to the registration of NCE Common Stock and its Registration Statement (Form
S-8, File No. 333-58117) pertaining to the NCE Employee Investment Plan and NCE
Employees' Savings and Stock Ownership Plan its Form 10-Q for the quarter ended
June 30, 1999, which includes our report dated August 13, 1999, 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
65
<PAGE>
EXHIBIT 15(b)
August 13, 1999
Public Service Company of Colorado:
We are aware that Public Service Company of Colorado has incorporated by
reference in its Registration Statement (Form S-3, File No. 33-62233) pertaining
to the Automatic Dividend Reinvestment and Common Stock Purchase Plan; its
Registration Statement (Form S-3, File No. 33-37431) as amended on December 4,
1990, pertaining to the shelf registration of Public Service Company of
Colorado's First Mortgage Bonds; its Registration Statement (Form S-8, File No.
33-55432) pertaining to the Omnibus Incentive Plan; its Registration Statement
(Form S-3, File No. 33-51167) pertaining to the shelf registration of Public
Service Company of Colorado's First Collateral Trust Bonds; its Registration
Statement (Form S-3, File No. 33-54877) pertaining to the shelf registration of
Public Service Company of Colorado's First Collateral Trust Bonds and Cumulative
Preferred Stock and its Registration Statement (Form S-3, File No. 333-81791)
pertaining to the shelf registration of Public Service Company of Colorado's
Senior Debt Securities its Form 10-Q for the quarter ended June 30, 1999, which
includes our report dated August 13, 1999, 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
66
<PAGE>
EXHIBIT 15(c)
August 13, 1999
Southwestern Public Service Company:
We are aware that Southwestern Public Service Company has incorporated by
reference in its Registration Statement (Form S-3, File No. 333-05199)
pertaining to Southwestern Public Service Company's Preferred Stock and Debt
Securities; its Registration Statement (Form S-8, File No. 33-27452) pertaining
to Southwestern Public Service Company's 1989 Stock Incentive Plan and its
Registration Statement (Form S-8, File No. 33-57869) pertaining to Southwestern
Public Service Company's Employee Investment Plan and Non-Qualified Salary
Deferral Plan its Form 10-Q for the quarter ended June 30, 1999, which includes
our report dated August 13, 1999, covering the unaudited condensed financial
statements contained therein. Pursuant to Regulation C of the Securities Act of
1933, that report is not considered a part of the registration statement
prepared or certified by our Firm or a report prepared or certified by our Firm
within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
ARTHUR ANDERSEN
67
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NEW CENTURY
ENERGIES, INC. CONSOLIDATED CONDENSED BALANCE SHEET AS OF JUNE 30, 1999 AND
CONSOLIDATED CONDENSED STATMENTS OF INCOME AND CASH FLOWS FOR THE SIX MONTHS
ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATMENTS.
</LEGEND>
<CIK> 0001004858
<NAME> New Century Energies, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 6,034,650
<OTHER-PROPERTY-AND-INVEST> 417,899
<TOTAL-CURRENT-ASSETS> 713,531
<TOTAL-DEFERRED-CHARGES> 588,650
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 7,754,730
<COMMON> 115,242
<CAPITAL-SURPLUS-PAID-IN> 1,781,188
<RETAINED-EARNINGS> 757,481
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,644,501
294,000
0
<LONG-TERM-DEBT-NET> 2,091,758
<SHORT-TERM-NOTES> 33,875
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 510,222
<LONG-TERM-DEBT-CURRENT-PORT> 306,776
0
<CAPITAL-LEASE-OBLIGATIONS> 34,971
<LEASES-CURRENT> 2,196
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,836,431
<TOT-CAPITALIZATION-AND-LIAB> 7,754,730
<GROSS-OPERATING-REVENUE> 1,715,529
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<OTHER-OPERATING-EXPENSES> 1,408,117
<TOTAL-OPERATING-EXPENSES> 1,408,117
<OPERATING-INCOME-LOSS> 307,412
<OTHER-INCOME-NET> 6,873
<INCOME-BEFORE-INTEREST-EXPEN> 314,285
<TOTAL-INTEREST-EXPENSE> 105,601
<NET-INCOME> 150,535
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 133,517
<TOTAL-INTEREST-ON-BONDS> 85,352
<CASH-FLOW-OPERATIONS> 314,639
<EPS-BASIC> 1.31
<EPS-DILUTED> 1.31
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<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 JUNE 30, 1999 AND CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND
CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000081018
<NAME> Public Service Company of Colorado
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,168,787
<OTHER-PROPERTY-AND-INVEST> 215,403
<TOTAL-CURRENT-ASSETS> 423,860
<TOTAL-DEFERRED-CHARGES> 353,921
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 5,161,971
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 1,302,119
<RETAINED-EARNINGS> 334,883
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,637,002
194,000
0
<LONG-TERM-DEBT-NET> 1,417,602
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 460,025
<LONG-TERM-DEBT-CURRENT-PORT> 215,451
0
<CAPITAL-LEASE-OBLIGATIONS> 34,962
<LEASES-CURRENT> 2,081
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,200,848
<TOT-CAPITALIZATION-AND-LIAB> 5,161,971
<GROSS-OPERATING-REVENUE> 1,155,035
<INCOME-TAX-EXPENSE> 43,982
<OTHER-OPERATING-EXPENSES> 934,491
<TOTAL-OPERATING-EXPENSES> 978,473
<OPERATING-INCOME-LOSS> 176,562
<OTHER-INCOME-NET> (735)
<INCOME-BEFORE-INTEREST-EXPEN> 175,827
<TOTAL-INTEREST-EXPENSE> 75,068
<NET-INCOME> 100,759
0
<EARNINGS-AVAILABLE-FOR-COMM> 100,759
<COMMON-STOCK-DIVIDENDS> 91,089
<TOTAL-INTEREST-ON-BONDS> 59,791
<CASH-FLOW-OPERATIONS> 276,799
<EPS-BASIC> 0.000
<EPS-DILUTED> 0.000
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHWESTERN
PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEET AS OF JUNE 30, 1999 AND CONDENSED
STATEMENTS OF INCOME AND CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000092521
<NAME> Southwestern Public Service Company
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1999
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,755,500
<OTHER-PROPERTY-AND-INVEST> 124,736
<TOTAL-CURRENT-ASSETS> 140,753
<TOTAL-DEFERRED-CHARGES> 170,787
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,191,776
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 348,402
<RETAINED-EARNINGS> 393,676
<TOTAL-COMMON-STOCKHOLDERS-EQ> 742,078
100,000
0
<LONG-TERM-DEBT-NET> 630,531
<SHORT-TERM-NOTES> 9,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 49,697
<LONG-TERM-DEBT-CURRENT-PORT> 90,113
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 570,357
<TOT-CAPITALIZATION-AND-LIAB> 2,191,776
<GROSS-OPERATING-REVENUE> 426,666
<INCOME-TAX-EXPENSE> 27,848
<OTHER-OPERATING-EXPENSES> 326,977
<TOTAL-OPERATING-EXPENSES> 354,825
<OPERATING-INCOME-LOSS> 71,841
<OTHER-INCOME-NET> 4,460
<INCOME-BEFORE-INTEREST-EXPEN> 76,301
<TOTAL-INTEREST-EXPENSE> 30,075
<NET-INCOME> 46,226
0
<EARNINGS-AVAILABLE-FOR-COMM> 46,226
<COMMON-STOCK-DIVIDENDS> 42,368
<TOTAL-INTEREST-ON-BONDS> 24,834
<CASH-FLOW-OPERATIONS> 44,477
<EPS-BASIC> 0.000
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</TABLE>
