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 March 31, 2000
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 May 10, 2000, 116,484,880 shares of the New Century Energies, Inc.'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 $3,953,205,615.
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 ........................................... 34
PART II - OTHER INFORMATION
Item 1. Legal Proceedings................................................. 47
Item 6. Exhibits and Reports on Form 8-K.................................. 47
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, 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/or 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
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
DSM.......................................................Demand Side Management
Dth....................................................................Dekatherm
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
GCA..........................................................Gas Cost Adjustment
ICA....................................................Incentive Cost Adjustment
IRS.....................................................Internal Revenue Service
Kwh................................................................kilowatt-hour
PSCo/SPS Merger........................business combination between PSCo and SPS
NCE or Company........................................New Century Energies, Inc.
NCE/NSP Merger..........................business combination between NCE and NSP
NCI..............................................New Century International, Inc.
NMPRC....................................New Mexico Public Regulation Commission
NOx...............................................................Nitrogen Oxide
NSP................................................Northern States Power Company
PSCo..........................................Public Service Company of Colorado
PSRI.......................................................PSR Investments, Inc.
PUHCA.....................Public Utility Holding Company Act of 1935, as amended
PUCT..........................................Public Utility Commission of Texas
QF...........................................................Qualifying Facility
SEC...........................................Securities and Exchange Commission
SO2...............................................................Sulfur Dioxide
SPS..........................................Southwestern Public Service Company
SFAS 71.....................Statement of Financial Accounting Standards No. 71 -
"Accounting for the Effects of Certain Types of Regulation"
SFAS 112...................Statement of Financial Accounting Standards No. 112 -
"Employers' Accounting for Postemployment Benefits"
Thunder Basin.........................................Thunder Basin Coal Company
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
March 31, December 31,
2000 1999
---- ----
Property, plant and equipment, at cost:
Electric .......................................... $7,605,066 $ 7,496,942
Gas................................................ 1,347,766 1,327,048
Steam and other.................................... 116,749 113,050
Common to all departments.......................... 475,831 464,059
Construction in progress........................... 360,305 400,439
------- -------
9,905,717 9,801,538
Less: accumulated depreciation .................... 3,619,950 3,540,516
--------- ---------
Total property, plant and equipment.............. 6,285,767 6,261,022
--------- ---------
Investments, at cost:
Investment in Yorkshire Power and other
unconsolidated subsidiaries (Note 3) ............ 413,094 391,754
Other.............................................. 86,300 89,404
------- ------
Total investments................................. 499,394 481,158
------- -------
Current assets:
Cash and temporary cash investments................ 48,483 83,763
Accounts receivable, less reserve for uncollectible
accounts ($4,494 at March 31, 2000; $4,601 at
December 31, 1999)................................ 346,816 371,116
Accrued unbilled revenues.......................... 158,216 266,537
Recoverable purchased gas and electric energy costs 35,797 46,863
Materials and supplies, at average cost............ 77,077 75,021
Fuel inventory, at average cost.................... 33,101 29,618
Gas in underground storage, at cost (LIFO)......... 28,087 63,656
Prepaid expenses................................... 72,359 74,905
Other.............................................. 9,543 15,659
------- ------
Total current assets.............................. 809,479 1,027,138
------- ---------
Deferred charges:
Regulatory assets (Note 1)......................... 328,094 337,965
Unamortized debt expense........................... 29,621 29,775
Other.............................................. 218,194 184,934
------- -------
Total deferred charges............................ 575,909 552,674
------- -------
$8,170,549 $8,321,992
========== ==========
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
March 31, December 31,
2000 1999
---- ----
Common stock.......................................... $1,934,314 $1,916,088
Retained earnings..................................... 857,225 819,553
Accumulated other comprehensive income (Note 1) ...... (6,483) (2,951)
------- ------
Total common equity............................... 2,785,056 2,732,690
PSCo and SPS obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
subordinated debentures of PSCo and SPS (Note 6).... 294,000 294,000
Long-term debt of subsidiaries........................ 2,313,511 2,374,121
--------- ---------
5,392,567 5,400,811
Noncurrent liabilities:
Employees' postretirement benefits other than
pensions ........................................ 59,614 57,596
Employees' postemployment benefits................. 32,847 32,823
------- ------
Total noncurrent liabilities...................... 92,461 90,419
------- ------
Current liabilities:
Notes payable and commercial paper................. 590,434 633,527
Long-term debt due within one year................. 171,154 136,218
Accounts payable................................... 337,596 471,757
Dividends payable.................................. 69,628 70,045
Recovered electric energy costs.................... 13,694 11,873
Customers' deposits................................ 31,344 30,810
Accrued taxes...................................... 124,586 88,617
Accrued interest................................... 42,722 61,701
Other.............................................. 128,940 152,535
------- -------
Total current liabilities......................... 1,510,098 1,657,083
--------- ---------
Deferred credits:
Customers' advances for construction............... 58,980 56,259
Unamortized investment tax credits................. 94,222 95,426
Accumulated deferred income taxes.................. 970,239 967,408
Other.............................................. 51,982 54,586
------- ------
Total deferred credits............................ 1,175,423 1,173,679
--------- ---------
Commitments and contingencies (Notes 4 and 5)......... --------- ---------
$8,170,549 $8,321,992
========== ==========
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
March 31,
2000 1999
---- ----
Operating revenues:
Electric........................................... $633,122 $594,531
Gas................................................ 284,035 305,135
Other.............................................. 21,513 15,029
------- ------
938,670 914,695
Operating expenses:
Fuel used in generation............................ 142,895 133,849
Purchased power.................................... 162,629 127,244
Cost of gas sold................................... 186,753 219,079
Other operating and maintenance expenses-regulated. 133,906 129,426
Other operating and maintenance expenses-nonregulated 23,250 20,683
Depreciation and amortization...................... 72,190 69,502
Taxes (other than income taxes) ................... 34,224 37,620
------- ------
755,847 737,403
Operating income...................................... 182,823 177,292
Other income and deductions:
Equity in earnings of Yorkshire Power and other
unconsolidated subsidiaries (Note 3) ............ 23,141 15,811
Miscellaneous income and deductions - net.......... (986) (3,542)
------- ------
22,155 12,269
Interest charges and preferred dividends of subsidiaries:
Interest on long-term debt......................... 43,535 41,410
Other interest..................................... 10,923 6,889
Allowance for borrowed funds used during construction (3,045) (2,916)
Dividends on PSCo and SPS obligated mandatorily
redeemable preferred securities of subsidiary
trusts holding solely subordinated debentures of
PSCo and SPS ..................................... 5,763 5,763
----- -------
57,176 51,146
Income before income taxes............................ 147,802 138,415
Income taxes.......................................... 42,474 37,115
------- ------
Net income............................................ $105,328 $101,300
======== ========
Weighted average common shares outstanding:
Basic.............................................. 116,108 114,681
Diluted............................................ 116,108 114,743
Basic and diluted earnings per share of common stock
outstanding $ 0.91 $ 0.88
====== ======
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 CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Three Months Ended
March 31,
2000 1999
---- ----
Operating activities:
Net income......................................... $105,328 $101,300
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................... 75,710 73,027
Amortization of investment tax credits........... (1,204) (1,275)
Deferred income taxes............................ 9,205 (3,428)
Equity in earnings of Yorkshire Power and other
unconsolidated subsidiaries, net .............. (23,141) (15,811)
Allowance for equity funds used during construction - (173)
Change in accounts receivable.................... 24,395 (4,622)
Change in inventories............................ 30,030 17,154
Change in other current assets................... 125,979 70,338
Change in accounts payable....................... (131,891) (29,525)
Change in other current liabilities.............. 765 46,037
Change in deferred amounts....................... (30,287) (17,440)
Change in noncurrent liabilities................. 2,042 (3,500)
Other............................................ 662 -
------- -------
Net cash provided by operating activities...... 187,593 232,082
Investing activities:
Construction expenditures.......................... (96,617) (116,753)
Allowance for equity funds used during construction - 173
Proceeds from disposition of property, plant and
equipment ....................................... 2,011 715
Purchase of other investments...................... (3,642) (3,740)
Sale of other investments.......................... 4,051 5,181
------- -------
Net cash used in investing activities.......... (94,197) (114,424)
Financing activities:
Proceeds from sale of common stock................. 10,990 8,789
Proceeds from sale of long-term debt............... 1,566 149,118
Redemption of long-term debt....................... (27,989) (65,212)
Short-term borrowings - net........................ (43,093) (115,494)
Dividends on common stock.......................... (70,150) (66,709)
------- -------
Net cash used in financing activities.......... (128,676) (89,508)
-------- -------
Net (decrease) increase in cash and temporary
cash investments ............................ (35,280) 28,150
Cash and temporary cash investments at beginning
of period ................................... 83,763 56,667
------ ------
Cash and temporary cash investments at end of
period ...................................... $48,483 $ 84,817
======= ========
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 SHAREHOLDERS' EQUITY
Three Months Ended March 31, 2000 and 1999
(Unaudited)
(Thousands of Dollars, Except Share Information)
<TABLE>
<CAPTION>
Accumulated
Paid Other
Common Stock, $1 par value in Retained Comprehensive
Shares Amount Capital Earnings Income Total
------ ------ ------- -------- ------ -----
<S> <C> <C> <C> <C> <C> <C>
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................ - - - 101,300 - 101,300
Foreign currency translation
adjustment............... - - - - (10,620) (10,620)
-------
Comprehensive income 90,680
Dividends declared on common
stock - - - (66,662) - (66,662)
Issuance of common stock 434,210 434 17,867 - - 18,301
Other:...................... - - - (299) - (299)
------- ------ ------- ------- ------- ------
Balance at March 31, 1999 114,924,982 $ 114,925 $1,769,762 $ 775,016 $(2,856) $2,656,847
=========== ========== ========== ========= ======= ==========
Balance at December 31, 1999 115,837,199 $ 115,837 $1,800,251 $ 819,553 $(2,951) $2,732,690
Comprehensive income (Note 1):
Net income................ - - - 105,328 - 105,328
Foreign currency translation
adjustment............... - - - - (3,532) (3,532)
------
Comprehensive income 101,796
Dividends declared on common
stock ..................... - - - (67,656) - (67,656)
Issuance of common stock 629,296 629 17,597 - - 18,226
------- ------- ------- ------- ------- ------
Balance at March 31, 2000 116,466,495 $ 116,466 $1,817,848 $ 857,225 $(6,483) $2,785,056
=========== ========== ========== ========= ======= ==========
</TABLE>
Authorized shares of common stock were 260 million at March 31, 2000 and 1999.
The accompanying notes to consolidated condensed financial
statements are an integral part of these financial
statements.
5
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
ASSETS
March 31, December 31,
2000 1999
---- ----
Property, plant and equipment, at cost:
Electric .......................................... $4,706,769 $4,629,092
Gas................................................ 1,310,031 1,289,995
Steam and other.................................... 68,378 68,109
Common to all departments.......................... 470,712 458,940
Construction in progress........................... 267,398 300,224
-------- --------
6,823,288 6,746,360
Less: accumulated depreciation .................... 2,432,531 2,373,824
--------- ---------
Total property, plant and equipment.............. 4,390,757 4,372,536
--------- ---------
Investments, at cost:
Note receivable from affiliate (Note 3)............ 192,620 192,620
Other.............................................. 12,405 12,679
------- --------
Total investments................................. 205,025 205,299
------- --------
Current assets:
Cash and temporary cash investments................ 19,566 51,731
Accounts receivable, less reserve for uncollectible
accounts ($2,567 at March 31, 2000; $2,533 at
December 31, 1999) .............................. 185,801 199,304
Accrued unbilled revenues ......................... 99,681 220,330
Recoverable purchased gas and electric energy costs 25,013 42,697
Materials and supplies, at average cost............ 51,855 53,984
Fuel inventory, at average cost.................... 30,809 27,326
Gas in underground storage, at cost (LIFO)......... 27,868 62,487
Current portion of deferred income taxes........... 5,030 3,532
Prepaid expenses and other......................... 13,762 42,760
------- --------
Total current assets.............................. 459,385 704,151
------- --------
Deferred charges:
Regulatory assets (Note 1)......................... 227,100 236,251
Unamortized debt expense .......................... 18,386 18,892
Other.............................................. 65,457 51,813
-------- --------
Total deferred charges............................ 310,943 306,956
-------- --------
$5,366,110 $5,588,942
========== ==========
The accompanying notes to consolidated condensed financial
statements are an integral part of these financial
statements.
6
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
CAPITAL AND LIABILITIES
March 31, December 31,
2000 1999
---- ----
Common stock.......................................... $1,414,835 $1,414,835
Retained earnings..................................... 367,118 346,050
-------- -------
Total common equity............................... 1,781,953 1,760,885
PSCo obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely
subordinated debentures of PSCo (Note 6) 194,000 194,000
Long-term debt........................................ 1,687,259 1,721,959
--------- ---------
3,663,212 3,676,844
Noncurrent liabilities:
Employees' postretirement benefits other than pensions 52,648 51,080
Employees' postemployment benefits................. 26,229 26,229
------- -------
Total noncurrent liabilities...................... 78,877 77,309
------ -------
Current liabilities:
Notes payable and commercial paper................. 232,393 356,192
Long-term debt due within one year................. 166,961 132,823
Accounts payable................................... 190,922 336,891
Dividends payable.................................. 47,691 44,575
Recovered electric energy costs.................... 13,694 11,873
Customers' deposits................................ 24,910 24,370
Accrued taxes...................................... 115,351 67,030
Accrued interest................................... 33,856 44,034
Other.............................................. 67,809 91,067
-------- --------
Total current liabilities......................... 893,587 1,108,855
-------- ---------
Deferred credits:
Customers' advances for construction............... 57,622 54,826
Unamortized investment tax credits ................ 88,162 89,286
Accumulated deferred income taxes.................. 557,781 555,829
Other.............................................. 26,869 25,993
-------- -------
Total deferred credits............................ 730,434 725,934
-------- -------
Commitments and contingencies (Notes 4 and 5).........
$5,366,110 $5,588,942
========== ==========
The accompanying notes to consolidated condensed financial
statements are an integral part of these financial
statements.
7
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Three Months Ended
March 31,
2000 1999
---- ----
Operating revenues:
Electric........................................... $406,095 $381,322
Gas................................................ 270,721 254,171
Other.............................................. 3,734 3,377
------- -------
680,550 638,870
Operating expenses:
Fuel used in generation............................ 56,202 51,865
Purchased power.................................... 133,156 114,226
Gas purchased for resale........................... 176,349 172,842
Other operating and maintenance expenses........... 97,666 94,511
Depreciation and amortization...................... 50,364 48,540
Taxes (other than income taxes) ................... 21,346 23,487
Income taxes ..................................... 35,797 29,214
------- -------
570,880 534,685
Operating income...................................... 109,670 104,185
Other income and deductions-net....................... (438) (1,566)
Interest charges:
Interest on long-term debt......................... 32,522 29,883
Other interest..................................... 6,146 5,220
Allowance for borrowed funds used during construction (1,995) (2,223)
Dividends on PSCo obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of PSCo .......... 3,800 3,800
----- -----
40,473 36,680
Net income............................................ $68,759 $65,939
======= =======
The accompanying notes to consolidated condensed financial
statements are an integral part of these financial
statements.
8
<PAGE>
PUBLIC SERVICE COMPANY OF COLORADO
AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Three Months Ended
March 31,
2000 1999
---- ----
Operating activities:
Net income......................................... $68,759 $65,939
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................... 52,384 50,507
Amortization of investment tax credits........... (1,124) (1,194)
Deferred income taxes............................ 3,586 251
Change in accounts receivable.................... 13,503 13,580
Change in inventories............................ 33,265 17,296
Change in other current assets................... 167,331 84,098
Change in accounts payable....................... (145,969) (45,137)
Change in other current liabilities.............. 17,246 37,111
Change in deferred amounts....................... (8,595) (9,683)
Change in noncurrent liabilities................. 1,590 (3,860)
------- -------
Net cash provided by operating activities...... 201,976 208,908
Investing activities:
Construction expenditures.......................... (68,493) (86,857)
Proceeds from disposition of property, plant and
equipment ....................................... 2,203 10,532
Purchase of other investments...................... (1,761) (321)
Sale of other investments.......................... 3,033 4,861
------- -------
Net cash used in investing activities.......... (65,018) (71,785)
Financing activities:
Proceeds from the sale of long-term debt........... - 47,909
Redemption of long-term debt....................... (749) (65,063)
Short-term borrowings - net........................ (123,799) (63,395)
Dividends on common stock.......................... (44,575) (46,461)
------- -------
Net cash used in financing activities.......... (169,123) (127,010)
-------- --------
Net (decrease) increase in cash and temporary
cash investments ............................ (32,165) 10,113
Cash and temporary cash investments at beginning
of period .................................... 51,731 19,926
------- ------
Cash and temporary cash investments at end
of period ................................... $ 19,566 $ 30,039
======== ========
The accompanying notes to consolidated condensed financial
statements are an integral part of these financial
statements.
9
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
ASSETS
March 31, December 31,
2000 1999
---- ----
Property, plant and equipment, at cost:
Electric........................................... $2,831,781 $2,802,077
Construction in progress........................... 87,737 95,477
------ -------
2,919,518 2,897,554
Less: accumulated depreciation..................... 1,142,606 1,123,739
--------- ---------
Total property, plant and equipment............... 1,776,912 1,773,815
--------- ---------
Investments, at cost:
Notes receivable from affiliate.................... 119,036 119,036
Other.............................................. 5,979 5,946
------- -------
Total investments................................. 125,015 124,982
------- -------
Current assets:
Cash and temporary cash investments................ 7,427 1,532
Accounts receivable, less reserve for uncollectible
accounts ($294 at March 31, 2000; $682 at December
31, 1999)......................................... 62,024 83,928
Accrued unbilled revenues.......................... 56,748 44,631
Recoverable electric energy cost................... 8,855 1,948
Materials and supplies, at average cost............ 21,518 18,035
Fuel inventory, at average cost.................... 2,293 2,292
Prepaid expenses and other......................... 4,185 4,324
------- -------
Total current assets.............................. 163,050 156,690
------- -------
Deferred charges:
Regulatory assets (Note 1)......................... 100,748 101,419
Prepaid pension asset.............................. 45,425 40,087
Unamortized debt expense........................... 9,641 9,605
Other.............................................. 15,844 12,778
------- -------
Total deferred charges............................ 171,658 163,889
------- -------
$2,236,635 $2,219,376
========== ==========
The accompanying notes to condensed financial statements are
an integral part of these financial statements.
10
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED BALANCE SHEETS
(Unaudited)
(Thousands of Dollars)
CAPITAL AND LIABILITIES
March 31, December 31,
2000 1999
---- ----
Common stock.......................................... $ 353,099 $ 353,099
Retained earnings..................................... 406,866 408,284
------- -------
Total common equity............................... 759,965 761,383
SPS obligated mandatorily redeemable preferred securities
of subsidiary trust holding solely subordinated
debentures of SPS (Note 6) .......................... 100,000 100,000
Long-term debt........................................ 578,908 605,875
------- -------
1,438,873 1,467,258
Noncurrent liabilities:
Employees' postretirement benefits other than
pensions ........................................ 6,309 6,086
Employees' postemployment benefits................. 4,963 4,940
------ -------
Total noncurrent liabilities...................... 11,272 11,026
------ -------
Current liabilities:
Notes payable and commercial paper................. 225,234 177,746
Accounts payable................................... 81,608 76,560
Dividends payable.................................. 19,680 20,963
Customers' deposits................................ 5,822 5,833
Accrued taxes...................................... 18,857 23,486
Accrued interest................................... 8,498 17,223
Other.............................................. 39,168 26,857
------- -------
Total current liabilities......................... 398,867 348,668
------- -------
Deferred credits:
Unamortized investment tax credits................. 4,905 4,969
Accumulated deferred income taxes.................. 377,280 376,245
Other.............................................. 5,438 11,210
------- -------
Total deferred credits............................ 387,623 392,424
------- -------
Commitments and contingencies (Notes 4 and 5)......... ---------- ----------
$2,236,635 $2,219,376
========== ==========
The accompanying notes to condensed financial statements are
an integral part of these financial statements.
11
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF INCOME
(Unaudited)
(Thousands of Dollars)
Three Months Ended
March 31,
2000 1999
---- ----
Operating revenues.................................... $216,232 $202,552
Operating expenses:
Fuel used in generation............................ 86,693 82,053
Purchased power.................................... 21,161 5,105
Other operating and maintenance expenses........... 35,861 33,804
Depreciation and amortization...................... 19,354 18,472
Taxes (other than income taxes).................... 12,082 13,384
Income taxes....................................... 10,930 14,365
------- -------
186,081 167,183
Operating income...................................... 30,151 35,369
Other income and deductions - net..................... 3,410 2,080
Interest charges:
Interest on long-term debt......................... 10,657 11,195
Other interest..................................... 3,731 1,589
Allowance for borrowed funds used during construction (1,046) (689)
Dividends on SPS obligated mandatorily redeemable
preferred securities of subsidiary trust holding
solely subordinated debentures of SPS 1,963 1,963
----- -----
15,305 14,058
------ ------
Net income............................................ $18,256 $23,391
======= =======
The accompanying notes to condensed financial statements are
an integral part of these financial statements.
12
<PAGE>
SOUTHWESTERN PUBLIC SERVICE COMPANY
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(Thousands of Dollars)
Three Months Ended
March 31,
2000 1999
---- ----
Operating activities:
Net income......................................... $18,256 $ 23,391
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.................... 20,352 19,611
Amortization of investment tax credits........... (63) (63)
Deferred income taxes............................ 3,803 (3,460)
Allowance for funds used during construction..... - (173)
Change in accounts receivable.................... 21,904 9,014
Change in inventories............................ (3,484) (278)
Change in other current assets................... (18,955) (14,072)
Change in accounts payable....................... 5,048 9,079
Change in other current liabilities.............. (2,590) 11,195
Change in deferred amounts....................... (15,135) (4,853)
Change in noncurrent liabilities................. 246 376
------- -------
Net cash provided by operating activities...... 29,382 49,767
Investing activities:
Construction expenditures.......................... (22,356) (27,170)
Allowance for equity funds used during construction - 173
Cost of disposition of property, plant and equipment (629) (1,029)
Purchase and sale of other investments............. (33) (54)
--- ----
Net cash used in investing activities.......... (23,018) (28,080)
Financing activities:
Proceeds from sale of long-term debt............... - 99,196
Redemption of long-term notes and bonds............ (27,000) -
Short-term borrowings - net........................ 47,488 (85,162)
Dividends on common stock.......................... (20,957) (20,007)
-------- -------
Net cash used in financing activities.......... (469) (5,973)
-------- -------
Net increase in cash and temporary cash
investments ................................. 5,895 15,714
Cash and temporary cash investments at beginning
of period ................................... 1,532 1,350
----- -----
Cash and temporary cash investments at end of period $ 7,427 $ 17,064
======= ========
The accompanying notes to condensed financial statements
are an integral part of these financial statements
13
<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 the 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 rate making process,
there will be a corresponding increase or decrease in revenues. Accounting under
SFAS 71 is appropriate as long as 1) rates are established by or subject to
approval by independent, third party regulators, 2) rates are designed to
recover an enterprise's cost-of-service and 3) 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. Management has concluded that
as of March 31, 2000, the requirements to apply SFAS 71 continue to be met since
its utility subsidiaries continue to be subject to cost-based rate regulation.
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" ("EITF 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. While
legislation has been enacted in Texas and New Mexico, there are several
unresolved issues that will significantly impact how and when deregulation
related to the generation portion of the business will be implemented by SPS. It
is expected that SPS will discontinue the application of SFAS 71 related to the
generation portion of the business when the provisions of EITF 97-4 have been
met, which may occur in 2000 and could be as early as the second quarter (see
Note 4. Regulatory Matters for further discussion).
In the event that a portion of a subsidiary's operations is no longer
subject to the provisions of SFAS 71, as a result of a change in regulation or
the effects of competition, the affected subsidary could be required to
write-off its regulatory assets, determine any impairment to other assets
resulting from deregulation and write-down any impaired assets to their
estimated fair value, which could have a material adverse effect on NCE's,
PSCo's and/or SPS financial position, results of operations or cash flows.
14
<PAGE>
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS - (Continued)
The following regulatory assets are reflected in the Company's
consolidated balance sheets (in thousands):
March 31, 2000 NCE PSCo SPS
------- ------- ------
Income taxes........................ $118,935 $ 55,879 $ 63,665
Nuclear decommissioning costs....... 61,405 61,405 -
Employees' postretirement benefits
other than pensions............... 52,326 49,598 2,728
Employees' postemployment benefits.. 23,343 23,018 -
Demand-side management costs........ 34,250 22,284 11,966
Unamortized debt reacquisition costs 31,620 13,760 17,329
Other............................... 6,215 1,156 5,060
------- ------- -------
Total............................. $328,094 $227,100 $100,748
======== ======== ========
December 31, 1999 NCE PSCo SPS
------- ------- ------
Income taxes........................ $123,241 $ 59,011 $64,829
Nuclear decommissioning costs....... 63,835 63,835 -
Employees' postretirement benefits
other than pensions............... 53,321 50,570 2,751
Employees' postemployment benefits.. 23,374 23,018 -
Demand-side management costs........ 35,614 24,211 11,403
Unamortized debt reacquisition costs 31,492 14,284 16,671
Other............................... 7,088 1,322 5,765
------- ------- -------
Total............................. $337,965 $236,251 $101,419
======== ======== ========
The regulatory assets of the Company's regulated subsidiaries that are
currently being recovered as of March 31, 2000 and December 31, 1999 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 1999 Annual Report on Form 10-K for a more
detailed discussion regarding recovery periods.
The Company and its subsidiaries adopted accrual accounting for
postemployment benefits under SFAS 112 in 1994. The costs of these benefits were
historically recorded on a pay-as-you go basis and, accordingly, PSCo and
Cheyenne recorded regulatory assets in anticipation of obtaining future rate
recovery of these costs. PSCo and Cheyenne subsequently requested rate recovery
of these costs on a jurisdictional basis before applicable federal and state
regulatory agencies. PSCo recovered its FERC jurisdictional portion of these
costs during 1996 to 1998 and Cheyenne received Wyoming Public Service
Commission approval to recover its portion of these costs. PSCo requested
approval to recover its Colorado retail gas jurisdictional portion ($8.9 million
balance at December 31, 1995) in a 1996 retail rate case and its retail electric
jurisdictional portion ($14.1 million balance at December 31, 1996) in the
electric department earnings test filing for 1997. In the 1996 rate case, the
CPUC allowed recovery of postemployment benefit costs on an accrual basis, but
denied PSCo's request to amortize the regulatory asset. PSCo appealed this
decision to the Denver District Court, arguing the CPUC's decision was not based
on substantial evidence, disregarded prior CPUC precedent allowing recovery of
the amortization of similar costs, and failed to state a valid rationale to
support a disallowance of these legitimate costs of service. In 1998, the CPUC
approved a settlement agreement in connection with the electric department
earnings test filing for 1997, which deferred the final determination of the
regulatory treatment of the electric jurisdictional costs pending the outcome of
PSCo's appeals on the gas rate case. On December 16, 1999, the Denver District
Court affirmed the decision by the CPUC in the gas rate case. The District Court
based its decision primarily on the absence of a provision in SFAS 112 allowing
for a transition obligation to be established and amortized. PSCo believes the
District Court fatally misconstrued the ratemaking significance of this fact. On
January 31, 2000, PSCo filed a Notice of Appeal with the Colorado Supreme Court
and expects a final decision on this matter during 2000. PSCo continues to
believe that it will ultimately be allowed to recover this regulatory asset. If
PSCo is unsuccessful in its appeal, all unrecoverable amounts totaling
approximately $23 million will be written off.
15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Property
Property, plant and equipment includes approximately $18.4 million and
$26.2 million, respectively, for costs associated with the engineering design of
the future Pawnee 2 generating station and certain water rights located in
southeastern Colorado, also obtained for a future generating station. PSCo is
earning a return on these investments based on its weighted average cost of debt
in accordance with a CPUC rate order.
Non-utility Subsidiaries and International Investments
The Company's non-utility subsidiaries are principally involved in
energy-related businesses including the following: engineering, design and
construction management, non-regulated energy services, including energy
marketing and trading, 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.
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 new subsidiaries of e prime.
This sale did not have a significant impact on the Company's financial position,
results of operations or cash flows.
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
earnings from its unconsolidated investments accounted for under the equity
method of accounting. All significant intercompany items and transactions have
been eliminated.
Risk Management
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 had no impact on the net income
of NCE, PSCo or SPS. For the three month period ended March 31, 2000 and 1999,
NCE recognized a net loss of $275,000 and $1,239,000, respectively, and PSCo
recognized a net loss of $124,000 and $183,000, 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
Comprehensive income (net income plus all other changes in net assets from
non-owner sources) and its components were reported in NCE's Consolidated
Condensed Statements of Shareholders' Equity for the three-month periods ended
March 31, 2000 and 1999. Other comprehensive income consists solely of foreign
currency translation adjustments related to the investment in Yorkshire Power.
For the three months ending March 31, 2000 and 1999, PSCo and SPS had no
comprehensive income items, therefore, comprehensive income equals net income.
16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Basic and Diluted Earnings Per Share
Basic earnings per share is based upon the weighted average common shares
outstanding during the periods presented. 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 periods presented. Employee stock options
are the Company's only common stock equivalents. The Company has no other
potentially dilutive securities.
The potentially dilutive securities included in the computation of diluted
earnings per share were approximately 300 shares and 62,000 shares for the three
months ended March 31, 2000 and 1999, respectively. These shares had no impact
on the Company's reported earnings per share information.
Approximately 2,230,000 common shares are issuable under stock option
grants as of March 31, 2000, 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 (264,042 in 2000 and 200,880 in 1999), valued at
the market price on the date of issuance (approximately $7 million in 2000 and
$8 million in 1999), were issued to savings plans 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.
The changes in current assets, current liabilities and deferred amounts
for the period prior to the sale of Texas-Ohio Gas, Inc. for 1999 are reflected
in operating activities on the NCE Consolidated Condensed Statement of Cash
Flows.
General
See Note 1. of the Notes to Consolidated Financial Statements in the NCE,
PSCo and SPS 1999 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 ("NSP") entered
into 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. NSP will be the surviving corporation in the 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.
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 March 31, 2000, 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.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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. Assuming the business combination is
accounted for as a pooling-of-interests, these costs will be expensed upon the
consummation of the NCE/NSP Merger. It is anticipated that the Company's utility
subsidiaries will recover a portion of these merger costs through future rates.
The shareholders of the Company and NSP approved the Agreement and Plan of
Merger in June 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 ("HSR").
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. The required authorizations from the state utility regulators in
Arizona, Colorado, Kansas, Minnesota, New Mexico, North Dakota, Oklahoma,
Wisconsin and Wyoming have been obtained with final written orders pending in
certain of these states. On April 18, 2000, the Company entered into a
stipulation with all major parties in Texas, which concludes that the merger is
in the public interest. Final approval in Texas is expected by the end of the
second quarter of 2000. In January 2000, the FERC issued its order granting
unconditional approval of the NCE/NSP Merger without requiring further hearings
(see Note 4. Regulatory Matters for further discussion of NCE/NSP Merger rate
proceedings). In February 2000, filings required under the PUHCA were made with
the SEC and as required under HSR. The waiting period under HSR expired March 1,
2000, effectively approving the NCE/NSP Merger. NCE and NSP also 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 be completed in mid-2000.
A merger integration team, consisting of executives from each company, was
formed and is overseeing merger-related activities and the future integration of
operations of NCE and NSP. The executive officers and organization of Xcel
Energy Inc. have been announced and merger integration plans have been prepared.
It is Management's intention that the combined company will 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 March 31, 2000 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 of the respective companies.
These summarized pro forma amounts do not include any of the estimated
cost savings expected to result from the NCE/NSP Merger. Such cost savings, net
of the costs incurred to achieve such savings and to complete the merger
transaction, are subject to regulatory review and approval. However, the pro
forma amounts for NCE and NSP include approximately $20 million and $28 million,
respectively, of deferred nonrecurring merger costs as of March 31, 2000, mainly
those directly attributable to the merger transaction. Assuming the business
combination is accounted for as a pooling-of-interests, these costs will be
expensed upon the consummation of the NCE/NSP Merger. The pro forma income
statement information amounts do not reflect any of these costs. The
18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
pro forma balance sheet information has been adjusted to reflect a write-off of
the deferred costs and a related reduction of retained earnings.
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 March 31, 2000
(in millions):
NSP NCE Adjustments Pro Forma
--- --- ----------- ---------
Property, plant &
equipment- net ....... $4,449 $6,286 $3,852 $ 14,587
Current assets.......... 1,156 810 - 1,966
Other assets............ 5,991 1,075 (3,900) 3,166
------ ------ ------ ------
Total assets.......... $11,596 $8,171 $ (48) $19,719
======= ====== ====== =======
Common equity........... $2,537 $2,785 $ (48) $5,274
Preferred securities.... 305 294 - 599
Long-term debt.......... 4,984 2,314 - 7,298
------ ------ ------ ------
Total capitalization.. 7,826 5,393 (48) 13,171
Current liabilities..... 2,059 1,510 - 3,569
Other liabilities....... 1,711 1,268 - 2,979
------ ------ ------ ------
Total equity and
liabilities ........ $11,596 $8,171 $ (48) $ 19,719
======= ====== ====== ========
The unaudited pro forma balance sheet information at March 31, 2000
reflects reporting adjustments to conform the presentation of nonregulated
property (in property, plant and equipment).
Unaudited Summarized Pro Forma Income Statement information for the three months
ended March 31 2000 and 1999 (in millions, except per share data):
2000 NSP NCE Adjustments Pro Forma
--- --- ----------- ---------
Revenues................ $ 793 $ 939 $ 366 $2,098
Operating income........ 84 183 102 369
Net income.............. 48 105 - 153
Earnings available for
common 47 105 - 152
Basic & diluted earnings
per share.......... $0.30 $0.91 - $0.45
1999
Revenues................ $ 743 $ 915 $ 86 $1,744
Operating income........ 88 177 41 306
Net income.............. 52 101 - 153
Earnings available for
common 51 101 - 152
Basic & diluted earnings
per share.......... $0.34 $0.88 - $0.46
The unaudited pro forma income statement information for the three months
ended March 31, 2000 and 1999 reflect reporting adjustments to conform the
presentation of nonregulated revenues and earnings from equity investments in
operating revenues.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Investment in Yorkshire Power (NCE)
Investment
Yorkshire Power is a joint venture equally owned by NCI, a subsidiary of NCE,
and AEP, which acquired indirectly all of the outstanding ordinary shares of
Yorkshire Electricity, a United Kingdom ("U.K.") regional electricity company.
NCI accounts for its investment in Yorkshire Power using the equity method.
NCI's equity in earnings of Yorkshire Power is 50%, the same as its ownership
share. Yorkshire Electricity's main business is the distribution and supply of
electricity and the supply of natural gas.
Summarized income statement information for the three months ended March
31, 2000 and 1999, respectively is presented below (in millions):
2000 1999
---- ----
Yorkshire Power:
Operating revenues....................... $ 662.5 $ 652.0
-------- --------
Operating income......................... 117.1 113.5
-------- --------
Net income............................... $ 48.3 $ 34.6
======== ========
NCI's equity in earnings of Yorkshire Power $ 24.2 $ 17.3
======= ========
Yorkshire Power changed its accounting for depreciation, effective January
1, 2000. NCI's equity in earnings for the three months ended March 31, 2000
include approximately $6.5 million (after-tax) related to this change.
Distribution and Supply Price Proposals
In December 1999, the Office of Gas and Electricity Markets ("Ofgem"), the
body appointed by the U.K. government to regulate the gas and electricity
industries in the U.K., published its final price proposals for regional
electricity distribution and supply businesses. The final proposals for
Yorkshire Power's distribution business provided for a 15% reduction in
Yorkshire Power's distribution revenues and a further 8% transfer of costs to
Yorkshire Power's electricity supply business. The final proposal for Yorkshire
Power's supply business provided for a supply price cap for domestic U.K.
consumers, which would apply for two years from April 2000 until March 2002 and
would not apply to small industrial and commercial customers, where the market
was sufficiently competitive. These supply proposals for Yorkshire Power
provided for a real price reduction of approximately 3.6% on the standard
domestic tariff and a nominal price freeze from April 2001 ending in March 2002.
On December 20, 1999, Yorkshire Power accepted these final proposals.
Yorkshire Power believes that the supply prices established in the competitive
market may require Yorkshire to charge supply prices for customers it wishes to
retain who are subject to supply price controls which are lower than the maximum
prices established by Ofgem. If Yorkshire Power charges such lower prices, the
result will be a further reduction in supply revenues beyond that mandated by
Ofgem.
In response to Ofgem's final proposals and the increasing competition in
the supply business, Yorkshire Power's management announced on January 18, 2000
the adoption of an aggressive program of reducing controllable costs.
Significant features of this program include reductions in capital expenditures,
staff reductions, outsourcing of certain functions and consolidations of
facilities. Yorkshire Power intends to aggressively pursue this cost reduction
program and is evaluating additional cost reduction measures to further mitigate
the impact of the future distribution and supply price reductions. Should
Yorkshire Power be unable to reduce costs or grow revenues to the extent
required to offset the effect of the price proposals, the Company's equity
earnings from its investment in Yorkshire Power will be reduced, possibly
significantly, in comparison to its current level of earnings. Additionally,
earnings continue to be impacted by the changes in the pricing and
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
purchase of bulk electric power and earnings during the first and fourth quarter
of 2000 are expected to exceed the second and third quarter earnings.
4. Regulatory Matters (NCE, PSCo and SPS)
Electric Utility Matters
PSCo Performance Based Regulatory Plan (PBRP)
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:
o 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;
o a Quality Service Plan ("QSP") which provides for refunds to customers
if PSCo does not achieve certain performance measures relating to
electric reliability, customer complaints and telephone response to
inquiries; and
o an ICA which provides for the sharing of energy costs and savings
relative to an annual target cost/delivered Kwh.
PSCo has recorded an estimated customer refund obligation under the
earnings test for the calendar years 1997 to 1999 and the first quarter of 2000.
In April of each year following the measurement period, PSCo files its proposed
rate adjustment under the PBRP. The CPUC conducts proceedings to review and
approve these rate adjustments annually. Since July 1998, PSCo has been
refunding amounts related to the sharing of earnings in excess of 11% return on
equity to customers. PSCo has recorded customer refund obligations for its
earnings test of approximately $15 million for 1997, $8 million for 1998, and an
estimate of $17 million for 1999. Final determinations of amounts to be refunded
for 1998 and 1999 have not been made.
In 1999, PSCo did not achieve all of the minimum service performance
measures under the QSP, due in part to circumstances associated with extreme
weather conditions. PSCo recorded an estimated refund obligation of
approximately $3.6 million in 1999. PSCo has filed its report for the year ended
1999 with the CPUC addressing the calculated amount of the refund. Final
approval by the CPUC is pending.
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.
Various provisions of their regulatory plan were extended and modified as
discussed in "NCE/NSP Merger Rate Filings".
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.
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
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
January 1995 through December 1997. For this same period, SPS had approximately
$21.4 million in under-recovered fuel costs associated with the Texas retail
jurisdiction. 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. Various parties in the proceedings are contesting the
settlement agreement, which includes the recovery of the Thunder Basin costs
discussed below. Hearings were held in October 1999. It is anticipated that a
decision will be issued during the second quarter of 2000.
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 to the Tenth Circuit Court of Appeals and, in January
1997, that Court found in favor of Thunder Basin and upheld the judgment. In
February 1997, SPS recorded the liability for the judgment including interest
and court costs. The amount of approximately $22.3 million was paid in April
1997.
During 1996 and 1997, SPS obtained conditional approval from the FERC to
collect portions of the Thunder Basin judgment from wholesale customers 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 under-collected 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. This rate reduction and fuel cost refund are primarily due to
lower coal transportation costs between SPS's coal supplier and the railroad
company that began in late 1998. 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.
New Mexico
The NMPRC regulations provide for a fuel and purchased power cost
adjustment clause and a fixed annual fuel factor for SPS's New Mexico retail
jurisdiction. SPS files monthly and annual reports of its fuel and purchased
power costs with the NMPRC, which include the current over/under fuel collection
calculation, plus interest. In addition, SPS revises its fixed fuel factor
annually to recover projected fuel and purchase power costs as well as any
over/under fuel cost balance for the current year. SPS is required to petition
for a change in the fixed fuel factor if the over/under recovery balance reaches
$5 million. New Mexico's over/under calculation, plus interest, is similar to
the Texas fixed fuel factor calculation.
SPS Rate Cases
Wholesale - FERC
On November 9, 1999, SPS filed with the FERC a transmission rate case to
increase electric transmission rates annually by approximately $1 million, with
an effective date of January 1, 2000. In April 2000, SPS, the
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
FERC and other parties reached a tenative unanimous settlement agreement in
principal. It is anticipated that the final settlement agreement will be issued
during the second quarter of 2000.
Cheyenne Rate Case
In August of 1999, Cheyenne filed a combined gas and electric rate case
with the WPSC requesting an increase in the annual combined electric and gas
base rates. This followed the expiration of the two-year moratorium on filing
rate cases agreed to in connection with the WPSC approval of the PSCo/SPS
Merger. Hearings were held in January 2000 and the WPSC approved annual electric
and gas base rate increases of $2.1 million and $1.2 million, respectively,
effective March 1, 2000, based on a 12% return on equity.
Restructuring Legislation (NCE and SPS)
SPS is an integrated electric utility and serves approximately 385,000
retail customers in portions of the states of Texas, New Mexico, Oklahoma and
Kansas. Over 97% of SPS' retail customers, sales and revenues are in Texas and
New Mexico. SPS serves wholesale customers within its service territory that
comprise approximately 30-35% of total electric revenues and Kwh sales.
Restructuring legislation has been enacted in Texas and New Mexico, as
summarized below. SPS has and continues to make filings with the PUCT and the
NMPRC, as required under each state's legislation, to address critical issues
related to SPS' transition plans for retail competition. SPS believes that
retail competition will be implemented in these states on or before January 1,
2002. Texas will institute a 5% pilot program beginning June 2001. State and
Federal regulators will be addressing a number of issues related to the
implementation of restructuring during 2000 and 2001. SPS is diligently working
to satisfy the conflicting legislative and regulatory requirements in developing
its transition plans. It is currently anticipated that the implementation
approach being developed in Texas, as discussed below, will satisfy the
legislative and regulatory requirements in New Mexico and will be consistent
with other state and Federal regulations.
Overview of New Mexico Legislation
On April 8, 1999, New Mexico enacted the Electric Utility Restructuring
Act of 1999, which provides for customer choice for residential, small
commercial and educational customers beginning January 1, 2001 and all remaining
retail customers beginning 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 for all utilities as 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 due to be filed on June 1, 2000. SPS must separate its
utility operations into at least two segments: 1) energy generation and
competitive services and 2) transmission and distribution utility services
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, in general, is prohibited from providing unregulated
services.
In January 2000, SPS petitioned and received approval from the NMPRC to
file its transition plan by June 1, 2000. Additionally, SPS requested that the
NMPRC postpone the beginning of customer choice for certain retail customers
until June 1, 2001 and postpone the completion of SPS corporate separation from
January 1, 2001 to January 1, 2002. The NMPRC considered these requests and
comments by other New Mexico utilities. On April 20, 2000, the NMPRC approved:
1) a one-year delay of customer choice for residential, small commercial and
educational customers to January 1, 2002 (the timing for implementing customer
choice for other retail customers has not been finalized) and 2) SPS' proposal
to delay corporate separation for one year. Final written orders related to
these matters are pending.
Overview of Texas Legislation
On June 18, 1999, an electric utility restructuring act ("SB-7") was
passed in Texas, which provides for the implementation of retail competition for
most areas of the state beginning January 1, 2002. The legislation
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
requires, among other things, a rate freeze for all customers, effective
September 1, 1999 until January 1, 2002, together with an annual earnings test
through 2001; a 6% 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 the 2001 pilot projects.
Overall, SB-7's objective is to introduce full retail competition into the
Texas electric utility industry. SB-7 requires each utility to unbundle its
business activities into three separate legal entities: 1) a power generation
company, 2) a regulated transmission and distribution company, and 3) a retail
electric provider. SB-7 limits the market share that a single generation
provider can control to 20% of the generating capacity within a power region.
The establishment of a qualified power region with multiple generation suppliers
is required under SB-7 in order to implement full retail competition. SB-7
specifically addresses competition in the Texas Panhandle, where SPS operates,
recognizing that certain transmission constraints exist within the region that
may 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 net stranded costs, must
return any excess earnings indicated in the annual earnings tests to customers
during the period January 1, 1999 through December 31, 2001 or alternatively may
direct any excess earnings 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).
Implementation Approach
SPS filed its business separation plan in Texas during the first quarter
of 2000 for the unbundling of business activities relating to power generation,
transmission and distribution and retail electric provider services. In summary,
SPS has committed to separate into distinct businesses and to operate in an
arm's length manner so that the transactions between affiliated entities and
regulated entities do not confer any unduly competitive advantages on NCE's
businesses as compared to non-affiliates. In April 2000, the PUCT approved SPS'
business separation plan. Overall, the plan provides for the separation of all
competitive energy services by September 1, 2000, including the establishment of
an NCE customer care company, which will provide customer services for all of
NCE's operating utilities and a formal code of conduct and compliance manual for
managing affiliate transactions. Prior to any legal separation and unbundling,
SPS will be required to address the provisions limiting or otherwise affecting
such activities contained in its first mortgage bond indenture. SPS plans to
arrange interim financing, as approved by the NMPRC, to enable open market
purchases and/or tender and/or monetary defeasance of all outstanding first
mortgage bonds. Subject to all required approvals and indebtedness restrictions,
it is anticipated that all generation-related and certain other assets and
liabilities will be transferred at net book value to newly-formed affiliates in
accordance with SPS' business separation plan (up to approximately 50% of SPS'
assets). It is expected that SPS and its affiliates will be capitalized
consistent with their respective business operations.
On April 18, 2000, SPS entered into a Stipulation with the staff of the
PUCT and other significant parties, which was filed with the PUCT, and among
other things, specifically addresses SPS implementation plans to meet the
requirements of the Texas deregulation legislation. In summary, the Stipulation
provides for the implementation of full retail customer choice by SPS in its
Texas service region, including the future divestiture of certain SPS generation
assets. Subject to certain market conditions, SPS has agreed to divest 1,750
megawatts, at a minimum, by January 1, 2002 and has specifically identified the
plants that it would sell in connection with additional divestitures required to
establish a qualified power region. For SPS to comply with this qualified power
region requirement and to implement full customer choice in Texas, a minimum of
2,843 megawatts and a maximum of 3,184 megawatts of existing power generation
assets or capacity must be sold to third party non-affiliates. SPS has committed
to complete these divestitures by January 1, 2006. These divestitures represent
approximately 64-71% of the generation capacity owned by SPS and its affiliates.
SPS expects some or all of these divestitures to be completed by the end of
2001. Assuming these divestitures are completed, approximately 1,281 to 1,608
megawatts of generation capacity in Texas and New Mexico would be retained by
the Company
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
through an affiliated power generation company. Management believes that these
divestitures are in response to the legal requirements of SB-7 and, that these
divestitures can occur consistent with the pooling-of-interests accounting
requirements. The Stipulation provides that if the SEC determines that the
divestitures would be a pooling violation, the divestitures would be scheduled
to meet the SEC's pooling-of-interests requirements.
The Stipulation also resolves certain issues related to the proposed
merger between NCE and NSP and concludes that such merger is in the public
interest. A PUCT meeting is scheduled to address this matter on May 18, 2000 and
a rate order approving the NCE/NSP Merger is expected during the second quarter
of 2000 (see Note 2. Proposed Merger with Northern States Power Company).
SPS has committed, upon closing of the NCE/NSP Merger, to transfer
functional control of its electric transmission system to the Midwest
Independent System Operator, Inc. ("MISO"), a regional transmission organization
that will operate the transmission systems of multiple owners in the central
United States.
SPS filed a rate case on March 31, 2000 to set the rates for the
transmission and distribution services, which are to be unbundled and
implemented on January 1, 2002. The Company requested recovery of all
jurisdictional costs associated with restructuring in Texas. Hearings and a
final rate order are not expected before 2001.
Financial Reporting Matters
SPS prepares its financial statements in accordance with SFAS 71 (see Note
1. Summary of Significant Accounting Policies). 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" ("EITF 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. Restructuring legislation has been enacted in Texas and New Mexico
and a settlement has been achieved with all intervenors in Texas. Absent final
approvals of the Stipulation and such transition plans by the PUCT and the
NMPRC, uncertainties continue to exist which preclude a reasonable determination
of the impacts of the deregulation of SPS' generation business and discontinuing
the application of SFAS 71 to that operation. SPS will discontinue the
application of SFAS 71 related to the generation portion of its business when
the provisions of EITF 97-4 have been met, which may be in 2000 and could be as
early as the second quarter. The accounting for the discontinuation of the
application of SFAS 71 could include the write-off of all generation-related
regulatory assets (approximately $20 million) and an impairment of other assets
resulting from deregulation.
Additionally, there may be other significant financial implications of
implementing SB-7 and electric restructuring in New Mexico. These implications
include, but are not limited to, the refinancing of securities, investments in
information technology, establishing an independent operation of the electric
transmission systems, implementing the procedures to govern affiliate
transactions, the pricing of unbundled energy services and the regulatory
recovery of incurred costs related to these issues. Based on current estimates
these incurred costs could be as much as $150 million.
The resolution of these matters may have a significant financial impact on
the financial position, results of operations and cash flows of SPS and NCE.
NCE/NSP Merger Rate Filings
The Company and its utility subsidiaries filed applications or submissions
with its state utility regulators, where required, and the FERC to obtain
approvals of the NCE/NSP Merger. In general, the filings propose the sharing of
cost savings among customers and shareholders. In January 2000, the FERC issued
its order granting unconditional approval of the NCE/NSP Merger without
requiring further hearings. All regulatory approvals
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
have been received in Wyoming, Kansas and Oklahoma. Following is a brief summary
of the merger rate proceedings in Colorado, Texas and New Mexico.
Colorado
On January 31, 2000, PSCo, the CPUC Staff, the OCC and substantially all
other parties to the proceeding filed a stipulation and agreement recommending
approval of the merger with the following major conditions:
o PSCo will reduce its retail electric rates by $11 million annually for
the two-year period from July 1, 2000 through June 30, 2002;
o PSCo will file a combined electric and gas rate case in early 2002
with new rates anticipated to be effective January 1, 2003;
o merger costs will be capped at $30 million and amortized for ratemaking
purposes over the period July 1, 2000 to December 31, 2003;
o the PBRP and the QSP currently in effect will continue through 2006 with
modifications to cap the electric department earnings at 10.5% return on
equity for 2002, no earnings sharing in 2003 since new base rates would
have recently been established, and an increase in potential refunds if
quality standards are not met, including a QSP for natural gas operations.
The CPUC held hearings on this matter and issued a final order approving the
NCE/NSP Merger on April 24, 2000.
Texas
On April 18, 2000, SPS entered into a Stipulation, as discussed previously
in "Restructuring Legislation", resolving certain issues related to the NCE/NSP
Merger and concluding that such proposed merger is in the public interest. The
major provisions of the regulatory plan not previously discussed include the
following:
o guaranteed merger savings credits of $400,000 per month and the
amortization of merger costs over the period from the effective date of
the merger through December 31, 2005;
o retention of the current fuel recovery mechanism to pass along fuel cost
savings to retail customers and;
o an agreement to comply with various new service quality and reliability
standards, covering service installations and upgrades, light
replacements, customer service call center and electric service
reliability.
A final order approving the NCE/NSP Merger, including the Stipulation, is
expected during the second quarter of 2000.
New Mexico
In January 2000, the NMPRC held hearings on the NCE/NSP Merger. The
application was not contested by staff or intervenors in the case. The examiner
requested that SPS draft a recommended decision. In summary, SPS proposed the
following regulatory plan for the period July 1, 2000 through December 31, 2004:
o guaranteed merger savings credits of $65,000 per month;
o an equal sharing of the net non-fuel operating and maintenance savings
among retail customers and shareholders;
o a 50% recovery of merger related transaction and transition costs;
o retention of the current fuel recovery mechanism to pass along fuel cost
savings to retail customers.
o SPS will not pass to customers any negative rate impacts of the NCE/NSP
Merger.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company estimates that SPS retail customers in New Mexico will receive
approximately $4.0 million of merger savings over the period ending December 31,
2004. On May 9, 2000, the NMPRC approved the NCE/NSP Merger.
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 Issue). 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 and recovery of prudently incurred Y2K costs 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). During 1997, PSCo filed a petition with the Denver District Court
appealing the CPUC's decision. On December 16, 1999, the Denver District Court
affirmed the CPUC disallowance of SFAS 112 costs and the imputation of merger
savings. PSCo filed a petition with the Colorado Supreme Court on January 31,
2000 to appeal the Denver District Court's decision. In the event that PSCo is
not successful in its appeal(s), including pursuing regulatory recovery, these
amounts related to SFAS 112 costs will be written off.
Planned Closure of the Leyden Underground Gas Storage Facility
On April 14, 2000, PSCo filed an application with the CPUC requesting
authority to shut down and abandon its Leyden Natural Gas Underground Storage
Facility located northwest of the City of Arvada, Colorado during 2001, after 40
years of operation. The application seeks approval of a formal decommissioning
plan. The plan outlines PSCo's proposal to plug and abandon the wells that are
currently being used to inject and withdraw gas from the mine and requests
approval of the costs to decommission and shut down the facility, which are
currently estimated at approximately $8.6 million. An application to recover
these costs and remaining plant investments from the ratepayers will be filed
with the CPUC in a separate future proceeding.
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. PSCo has not filed a plan to open its natural
gas supply business to competition and continues to evaluate its business
opportunities for doing so.
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, the storage of
natural gas 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
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and regulations related to air and water quality, hazardous materials and
hazardous waste compliance and remediation activities. Changes to environmental
regulations, interpretations or enforcement policies may impact the future
construction and operation of the Company's electric generation, transmission
and distribution systems and gas transportation, storage and distribution
systems.
Environmental Site Cleanup
PSCo has been or is currently involved with the cleanup of contamination
from certain hazardous substances at several sites. 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. 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.
Other Environmental Matters
PSCo has obtained all necessary approvals 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 levels
required under the Clean Air Act Amendments of 1990. The cost of these controls
will be recovered through rates from Colorado customers.
Hayden Steam Electric Generating Station
In 1996, PSCo and the other joint owners of Hayden Station reached an
agreement, enforceable by U.S. District Court through a Consent Decree,
resolving violations alleged in complaints filed by a conservation organization,
the Colorado Department of Public Health and Environment ("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). This equipment was installed and
became operational on Units 1 and 2 during 1998 and 1999 as scheduled and
required under the settlement. If the Hayden Station remains in compliance with
the settlement until early 2001, the Hayden owners may petition the U.S.
District Court to release jurisdiction over the Consent Decree.
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 the station violated the Clean
Air Act requirement related to opacity. 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. The parties, the EPA and the CDPHE
entered into mediation in an attempt to resolve all air quality matters related
to the facility. 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.
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,
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
PSRI'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. In March 2000, the IRS amended its original adjustment to also
disallow the interest deductions taken in tax years 1995 through 1997. The total
disallowance of interest expense deductions for the five years as proposed by
the IRS is approximately $175 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. PSRI has not recorded any
provision for income tax or interest expense related to this matter and has
continued to take deductions for interest expense related to policy loans on
it's income tax returns for subsequent years. Management believes that PSRI'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 NCE's or PSCo's financial position,
results of operations or cash flows.
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. 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, 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 (collectively, the
"Back-up Undertakings"). Considered together, the Back-up Undertakings
constitute a full and unconditional guarantee by PSCo of the trust obligations
under the preferred securities. The proceeds from the sale of the 7.60% Trust
Originated Preferred Securities were used to redeem all $181.8 million of PSCo's
outstanding preferred stock on June 10, 1998, and for general corporate
purposes.
In October 1996, Southwestern Public Service Capital I, a wholly-owned
trust of SPS, issued $100 million of its 7.85% Trust Preferred Securities,
Series A. The sole asset of the trust is $103 million principal amount of SPS's
7.85% Deferrable Interest Subordinated Debentures, Series A due September 1,
2036. The securities are redeemable at the option of SPS on and after October
21, 2001 at 100% of the principal amount plus accrued interest. In addition to
SPS's obligations under the Subordinated Debentures, SPS has agreed, pursuant to
a guarantee issued to the trust, the provisions of the trust agreement
establishing the trust and a related expense agreement to guarantee, on a
subordinated basis, payment of distributions on the preferred securities (but
not if the trust does not have sufficient funds to pay such distributions) and
to pay all of the expenses of the trust. Considered together, the Back-up
Undertakings constitute a full and unconditional guarantee by SPS of the trust
obligations under the preferred securities. The proceeds from the sale were used
to reduce short-term debt.
7. 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
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 states of Colorado and Wyoming. The international segment consists of
equity investments in foreign operations held by NCI. 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
March 31, 2000 Utility Utility International Other Amounts Total
------- ------- ------------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Revenues:
External customers $633,122 $275,157 $ - $30,391 $ - $938,670
Intersegment 56 2,770 - 12,466 - 15,292
Segment profit 55,970 24,323 22,084 6,970 (4,019) 105,328
March 31, 1999
Revenues:
External customers $594,531 $259,384 $ - $60,780 $ - $914,695
Intersegment 155 1,959 - 16,642 - 18,756
Segment profit 66,820 18,211 18,140 4,721 (6,592) 101,300
</TABLE>
PSCo:
PSCo has two reportable segments: electric utility and gas utility. The
electric utility segment consists primarily of the activities of PSCo's
regulated operations that provide wholesale and retail electric service in
Colorado. 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, a finance company that finances certain of
PSCo's current assets and a steam production segment serving the Denver area.
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):
Eliminations/
Three months ended: Electric Gas All Unallocated Consolidated
March 31, 2000 Utility Utility Other Amounts Total
------- ------- ----- ------- -----
Revenues from
external customers $406,095 $270,721 $3,734 $ - $680,550
Segment profit 40,470 24,075 4,214 - 68,759
March 31, 1999
Revenues from
external customers $381,322 $254,171 $3,377 $ - $638,870
Segment profit 44,466 17,989 6,865 (3,381) 65,939
SPS:
SPS operates in the regulated electric utility industry providing
wholesale and retail electric service in Texas, New Mexico, Kansas and Oklahoma.
Revenues from external customers for this reportable segment were $216.2 million
and $202.6 million for the three months ended March 31, 2000 and 1999,
respectively.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. 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 March 31, 2000 and December 31, 1999 and the results of
operations and cash flows for the three months ended March 31, 2000 and 1999.
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 1999 Annual Report on Form 10-K for NCE, PSCo and
SPS.
Because of seasonal and other factors, the results of operations for the
three months ended March 31, 2000 should not be taken as an indication of
earnings for all or part of the balance of the year.
31
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO NEW CENTURY ENERGIES, INC.:
We have reviewed the accompanying consolidated condensed balance sheet of New
Century Energies, Inc. (a Delaware corporation) and subsidiaries as of March 31,
2000, and the related consolidated condensed statements of income, shareholders'
equity and cash flows for the three-month periods ended March 31, 2000 and 1999.
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 accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet of New Century
Energies, Inc. and subsidiaries as of December 31, 1999, 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 15, 2000, 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, 1999, 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,
May 12, 2000.
32
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO PUBLIC SERVICE COMPANY OF COLORADO:
We have reviewed the accompanying consolidated condensed balance sheet of Public
Service Company of Colorado (a Colorado corporation) and subsidiaries as of
March 31, 2000, and the related consolidated condensed statements of income and
cash flows for the three-month periods ended March 31, 2000 and 1999. 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 accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the consolidated balance sheet and statement of
capitalization of Public Service Company of Colorado and subsidiaries as of
December 31, 1999, 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 15, 2000, 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, 1999, 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,
May 12, 2000.
33
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO SOUTHWESTERN PUBLIC SERVICE COMPANY:
We have reviewed the accompanying condensed balance sheet of Southwestern Public
Service Company (a New Mexico corporation) as of March 31, 2000, and the related
condensed statements of income and cash flows for the three-month periods ended
March 31, 2000 and 1999. 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 accounting principles generally accepted in the United States.
We have previously audited, in accordance with auditing standards generally
accepted in the United States, the balance sheet and statement of capitalization
of Southwestern Public Service Company as of December 31, 1999, 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 15,
2000, we expressed an unqualified opinion on these financial statements. In our
opinion, the information set forth in the accompanying condensed balance sheet
as of December 31, 1999, is fairly stated, in all material respects, in relation
to the balance sheet from which it has been derived.
ARTHUR ANDERSEN LLP
Denver, Colorado,
May 12, 2000.
34
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (NCE, PSCo and SPS)
NCE's Management's Discussion and Analysis of Financial Condition and Results of
Operations
Three Months Ended March 31, 2000 Compared to the Three Months Ended March 31,
1999
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. Assuming all remaining
regulatory approvals can be achieved in a timely manner, it is expected the
NCE/NSP Merger will be completed by mid-2000. 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.
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 $0.91 for the first quarter of
2000 as compared to $0.88 per share (basic and diluted) for the first quarter of
1999. Continued customer growth in Colorado and the favorable impact of a gas
rate increase effective in July 1999 contributed to the higher earnings in 2000.
Equity in earnings of Yorkshire Power increased slightly; however, Yorkshire
Power's future contribution to earnings is expected to decline due to the
distribution and supply price reductions that will be effective April 2000 as
well as the impacts of possible increased competition in its supply business. An
aggressive cost reduction program is expected to mitigate, to a certain degree,
these reductions.
Electric Operations
The following table details the change in electric operating revenues and
energy costs for the first quarter of 2000 as compared to the same period in
1999 (in thousands).
Increase (Decrease)
-------------------
Electric operating revenues:
Retail................................................ $ 1,822
Wholesale............................................. 32,877
Other (including unbilled revenues)................... 3,892
-------
Total revenues...................................... 38,591
Fuel used in generation............................... 9,046
Purchased power....................................... 35,385
-------
Net decrease in electric margin..................... $(5,840)
=======
The following table compares electric PSCo/SPS sales by major customer
classes for the first quarter of 2000 and 1999.
Millions of Kwh Sales
2000 1999 % Change *
---- ---- ----------
Residential................................ 2,753 2,711 1.5%
Commercial and industrial.................. 6,991 6,660 5.0
Public authority........................... 202 182 11.2
----- -----
Total retail............................. 9,946 9,553 4.1
Wholesale.................................. 3,817 2,756 38.5
----- -----
Total...................................... 13,763 12,309 11.8
====== ======
Power marketing and trading................ 6,630 1,481 **
===== =====
* Percentages are calculated using unrounded amounts.
** Percentage change is significant, but presentation of the amount is not
meaningful.
35
<PAGE>
Electric margin decreased $5.8 million in the first quarter of 2000, when
compared to the first quarter of 1999. The favorable impact of customer growth
of approximately 2.1% was offset by the negative effect of warmer winter
weather, particularly in the southern service territory, and the negative impact
of cost sharing under PSCo's ICA (approximately $5.2 million). While total sales
increased approximately 12%, the majority of this increase is due to lower Kwh
sales reported in 1999. During 1999, changes were made in the billing cycles of
various retail and wholesale customers in anticipation of implementing a new
customer information system which resulted in lower billed Kwh sales and higher
unbilled revenues. Unbilled revenues were lower for the first quarter of 2000,
when compared to the same period in 1999. Wholesale revenues increased due in
part to higher non-firm sales in 2000. Power marketing and trading activities
have increased, although revenues and purchased energy costs for these
activities are presented net for financial reporting purposes. Activities from
wholesale marketing and trading positively contributed to electric margin, but
the amount was not significant.
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 (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.
Fuel used in generation expense increased $9.0 million during the first
quarter of 2000, as compared to the same quarter in 1999, primarily due to
increased generation levels at PSCo and SPS and higher gas costs for generation
at PSCo's Fort St. Vrain generating station and various SPS plants.
Purchased power expense increased $35.4 million during the first quarter
of 2000, as compared to the same quarter in 1999, primarily due to increased
purchases resulting in part from an extended outage at one of PSCo's generating
stations and an increase at SPS in capacity costs of $6.5 million related to new
purchase power contracts.
Gas Operations
The following table details the change in gas revenues and gas purchased
for resale for the first quarter of 2000, as compared to the same period in 1999
(in thousands).
Increase (Decrease)
-------------------
Revenues from gas sales (including unbilled revenues). $(22,311)
Gas purchased for resale.............................. (32,326)
-------
Net increase in gas sales margin..................... 10,015
Transportation revenues............................... 1,211
-------
Increase in net gas margin........................... $ 11,226
========
The following table compares gas Dth deliveries by major customer classes
for the first quarter of 2000 and 1999.
Millions of Dth Deliveries
2000 1999 % Change *
---- ---- ----------
Residential................................ 38.1 39.0 (2.2)%
Commercial................................. 17.0 18.0 (5.7)
----- -----
Total sales.............................. 55.1 57.0 (3.3)
Transportation............................. 33.9 31.3 8.2
----- -----
Total.................................... 89.0 88.3 0.8
==== ==== ===
Non-regulated gas marketing and trading.... 79.1 39.5 **
===== =====
* Percentages are calculated using unrounded amounts.
** Percentage change is significant, but presentation of the amount is not
meaningful.
36
<PAGE>
Gas sales margin increased during the first quarter of 2000, when compared
to the first quarter of 1999, primarily due to higher retail sales at PSCo
resulting from customer growth of approximately 3.6% and higher gas rates
effective July 1, 1999, resulting from PSCo's 1998 rate case (approximately $5.8
million). Although non-regulated gas marketing and trading sales increased
significantly, the margin on such sales decreased slightly when compared to the
prior year.
Gas transportation revenues increased approximately $1.2 million during
the first quarter of 2000, when compared to the first quarter of 1999, primarily
due to higher deliveries at PSCo.
PSCo and Cheyenne have in place GCA mechanisms for natural gas sales,
which recognize the majority of the effects of changes in the cost of gas
purchased for resale and adjusts revenues to reflect such changes in cost on a
timely basis. As a result, the changes in revenues associated with these
mechanisms during the first quarter of 2000, as compared to the first quarter of
1999, 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 increased approximately $6.5 million primarily
due to an increase in revenue from engineering, design and construction
management and energy management and consulting services.
Equity earnings from Yorkshire Power increased $6.8 million over 1999
primarily due to a change in its accounting for depreciation, effective January
1, 2000. NCI's equity in earnings for the three months ended March 31, 2000
includes approximately $6.5 million (after-tax) related to this change (see Note
3. Investment in Yorkshire Power in Item 1. FINANCIAL STATEMENTS).
Non-Fuel Operating Expenses and Other Income and Deductions
Other operating and maintenance expense-regulated increased $4.5 million
primarily due to higher gas transmission costs related to the lease of a gas
pipeline to support customer growth in Colorado and higher electric transmission
costs purchased for resale incurred in connection with providing new wholesale
electric sales. These increased costs were offset, in part, by lower electric
and gas distribution maintenance expense. Other operating and maintenance
expense-non-regulated increased $2.6 million primarily due to increased costs in
providing engineering, design and construction management and energy management
and consulting services.
Taxes other than income taxes decreased approximately $3.4 million
primarily due to lower business and utility property tax accruals in Colorado.
Income taxes increased $5.4 million during the first quarter of 2000, when
compared to the same quarter in 1999, primarily due to higher pre-tax income in
the current period and the favorable impact of deducting certain prior year
severance costs in 1999.
Interest charges increased $6.0 million during the first quarter of 2000,
when compared to the same quarter in 1999, primarily due to costs to finance
capital expenditures, including higher interest costs on short-term debt. In
July 1999, PSCo issued $200 million of 6 7/8% Series A Senior Notes, due in July
2009.
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 1999 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
37
<PAGE>
changes in the market risk exposures that affect the quantitative and
qualitative disclosures presented as of December 31, 1999 in the 1999 Annual
Report on Form 10-K.
Commitments and Contingencies
Issues related to regulatory and environmental matters are discussed in
Notes 4 and 5 in Item 1. FINANCIAL STATEMENTS. These matters and the future
resolution thereof may impact the Company's future results of operations,
financial position or cash flows.
Common Stock Dividend
The Board of Directors approved a $0.58 per share dividend payable to
shareholders of the Company for the first quarter of 2000. 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 -Three Months Ended March 31
2000 1999 Decrease
---- ---- --------
Net cash provided by operating activities
(in millions) .......................... $187.6 $232.1 $(44.5)
Cash provided by operating activities decreased during the first three
months of 2000, when compared to the same period in 1999, primarily due to
higher recovery of deferred fuel costs in 1999.
2000 1999 Decrease
---- ---- --------
Net cash used in investing activities
(in millions) .......................... $ (94.2) $(114.4) $20.2
Cash used in investing activities decreased during 2000, when compared to
1999, primarily due to a decrease in the level of construction expenditures.
2000 1999 Decrease
---- ---- --------
Net cash used in financing activities
(in millions) .......................... $(128.7) $(89.5) $(39.2)
Cash used in financing activities decreased during 2000, when compared to
1999, primarily due to higher net proceeds from debt financing activities in
1999. During the first quarter of 1999, PSCo refinanced approximately $48.75
million to take advantage of lower interest rates and SPS issued $100 million of
senior notes used initially for the repayment of short-term debt.
Financing Activities
Long-Term Debt
During the first quarter of 2000, SPS repurchased in the open market $27
million of its First Mortgage Bonds.
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.
38
<PAGE>
SPS closed a Credit Agreement on February 25, 2000. The commitment under
the Credit Agreement is $300 million and terminates on February 23, 2001.
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 expand their transmission systems
to facilitate transmission services without impairing reliability. State
regulatory authorities are in the process of changing utility regulations in
response to federal and state statutory changes and evolving markets, including
consideration of providing open access to retail customers. All of the Company's
jurisdictions continue to study and evaluate utility regulations with respect to
competition. Restructuring legislation was passed in Texas and New Mexico during
1999, which is discussed below.
Restructuring Legislation (NCE and SPS)
SPS is an integrated electric utility and serves approximately 385,000
retail customers in portions of the states of Texas, New Mexico, Oklahoma and
Kansas. Over 97% of SPS' retail customers, sales and revenues are in Texas and
New Mexico. SPS serves wholesale customers within its service territory that
comprise approximately 30-35% of total electric revenues and Kwh sales.
Restructuring legislation has been enacted in Texas and New Mexico, as
summarized below. SPS has and continues to make filings with the PUCT and the
NMPRC, as required under each state's legislation, to address critical issues
related to SPS' transition plans for retail competition. SPS believes that
retail competition will be implemented in these states on or before January 1,
2002. Texas will institute a 5% pilot program beginning June 2001. State and
Federal regulators will be addressing a number of issues related to the
implementation of restructuring during 2000 and 2001. SPS is diligently working
to satisfy the conflicting legislative and regulatory requirements in developing
its transition plans. It is currently anticipated that the implementation
approach being developed in Texas, as discussed below, will satisfy the
legislative and regulatory requirements in New Mexico and will be consistent
with other state and Federal regulations.
Overview of New Mexico Legislation
On April 8, 1999, New Mexico enacted the Electric Utility Restructuring
Act of 1999, which provides for customer choice for residential, small
commercial and educational customers beginning January 1, 2001 and all remaining
retail customers beginning 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 for all utilities as 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 due to be filed on June 1, 2000. SPS must separate its
utility operations into at least two segments: 1) energy generation and
competitive services and 2) transmission and distribution utility services
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, in general, is prohibited from providing unregulated
services.
In January 2000, SPS petitioned and received approval from the NMPRC to
file its transition plan by June 1, 2000. Additionally, SPS requested that the
NMPRC postpone the beginning of customer choice for certain retail customers
until June 1, 2001 and postpone the completion of SPS corporate separation from
January 1, 2001 to January 1, 2002. The NMPRC considered these requests and
comments by other New Mexico utilities. On April 20, 2000, the NMPRC approved:
1) a one-year delay of customer choice for residential, small commercial and
educational customers to January 1, 2002 (the timing for implementing customer
choice for other
39
<PAGE>
retail customers has not been finalized) and 2) SPS' proposal to delay corporate
separation for one year. Final written orders related to these matters are
pending.
Overview of Texas Legislation
On June 18, 1999, an electric utility restructuring act ("SB-7") was
passed in Texas, which provides for the implementation of 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, together with an annual earnings test through 2001; a 6%
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 the 2001 pilot projects.
Overall, SB-7's objective is to introduce full retail competition into the
Texas electric utility industry. SB-7 requires each utility to unbundle its
business activities into three separate legal entities: 1) a power generation
company, 2) a regulated transmission and distribution company, and 3) a retail
electric provider. SB-7 limits the market share that a single generation
provider can control to 20% of the generating capacity within a power region.
The establishment of a qualified power region with multiple generation suppliers
is required under SB-7 in order to implement full retail competition. SB-7
specifically addresses competition in the Texas Panhandle, where SPS operates,
recognizing that certain transmission constraints exist within the region that
may 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 net stranded costs, must
return any excess earnings indicated in the annual earnings tests to customers
during the period January 1, 1999 through December 31, 2001 or alternatively may
direct any excess earnings 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).
Implementation Approach
SPS filed its business separation plan in Texas during the first quarter
of 2000 for the unbundling of business activities relating to power generation,
transmission and distribution and retail electric provider services. In summary,
SPS has committed to separate into distinct businesses and to operate in an
arm's length manner so that the transactions between affiliated entities and
regulated entities do not confer any unduly competitive advantages on NCE's
businesses as compared to non-affiliates. In April 2000, the PUCT approved SPS'
business separation plan. Overall, the plan provides for the separation of all
competitive energy services by September 1, 2000, including the establishment of
an NCE customer care company, which will provide customer services for all of
NCE's operating utilities and a formal code of conduct and compliance manual for
managing affiliate transactions. Prior to any legal separation and unbundling,
SPS will be required to address the provisions limiting or otherwise affecting
such activities contained in its first mortgage bond indenture. SPS plans to
arrange interim financing, as approved by the NMPRC, to enable open market
purchases and/or tender and/or monetary defeasance of all outstanding first
mortgage bonds. Subject to all required approvals and indebtedness restrictions,
it is anticipated that all generation-related and certain other assets and
liabilities will be transferred at net book value to newly-formed affiliates in
accordance with SPS' business separation plan (up to approximately 50% of SPS'
assets). It is expected that SPS and its affiliates will be capitalized
consistent with their respective business operations.
On April 18, 2000, SPS entered into a Stipulation with the staff of the
PUCT and other significant parties, which was filed with the PUCT, and among
other things, specifically addresses SPS implementation plans to meet the
requirements of the Texas deregulation legislation. In summary, the Stipulation
provides for the implementation of full retail customer choice by SPS in its
Texas service region, including the future divestiture of certain SPS generation
assets. Subject to certain market conditions, SPS has agreed to divest 1,750
megawatts, at a minimum, by January 1, 2002 and has specifically identified the
plants that it would sell in connection with
40
<PAGE>
additional divestitures required to establish a qualified power region. For SPS
to comply with this qualified power region requirement and to implement full
customer choice in Texas, a minimum of 2,843 megawatts and a maximum of 3,184
megawatts of existing power generation assets or capacity must be sold to third
party non-affiliates. SPS has committed to complete these divestitures by
January 1, 2006. These divestitures represent approximately 64-71% of the
generation capacity owned by SPS and its affiliates. SPS expects some or all of
these divestitures to be completed by the end of 2001. Assuming these
divestitures are completed, approximately 1,281 to 1,608 megawatts of generation
capacity in Texas and New Mexico would be retained by the Company through an
affiliated power generation company. Management believes that these divestitures
are in response to the legal requirements of SB-7 and, that these divestitures
can occur consistent with the pooling-of-interests accounting requirements. The
Stipulation provides that if the SEC determines that the divestitures would be a
pooling violation, the divestitures would be scheduled to meet the SEC's
pooling-of-interests requirements.
The Stipulation also resolves certain issues related to the proposed merger
between NCE and NSP and concludes that such merger is in the public interest. A
PUCT meeting is scheduled to address this matter on May 18, 2000 and a rate
order approving the NCE/NSP Merger is expected during the second quarter of 2000
(see Note 2. Proposed Merger with Northern States Power Company).
SPS has committed, upon closing of the NCE/NSP Merger, to transfer
functional control of its electric transmission system to the Midwest
Independent System Operator, Inc. ("MISO"), a regional transmission organization
that will operate the transmission systems of multiple owners in the central
United States.
SPS filed a rate case on March 31, 2000 to set the rates for the
transmission and distribution services, which are to be unbundled and
implemented on January 1, 2002. The Company requested recovery of all
jurisdictional costs associated with restructuring in Texas. Hearings and a
final rate order are not expected before 2001.
Financial Reporting Matters
SPS prepares its financial statements in accordance with SFAS 71 (see Note
1. Summary of Significant Accounting Policies). 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" ("EITF 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. Restructuring legislation has been enacted in Texas and New Mexico
and a settlement has been achieved with all intervenors in Texas. Absent final
approvals of the Stipulation and such transition plans by the PUCT and the
NMPRC, uncertainties continue to exist which preclude a reasonable determination
of the impacts of the deregulation of SPS' generation business and discontinuing
the application of SFAS 71 to that operation. SPS will discontinue the
application of SFAS 71 related to the generation portion of its business when
the provisions of EITF 97-4 have been met, which may be in 2000 and could be as
early as the second quarter. The accounting for the discontinuation of the
application of SFAS 71 could include the write-off of all generation-related
regulatory assets (approximately $20 million) and an impairment of other assets
resulting from deregulation.
Additionally, there may be other significant financial implications of
implementing SB-7 and electric restructuring in New Mexico. These implications
include, but are not limited to, the refinancing of securities, investments in
information technology, establishing an independent operation of the electric
transmission systems, implementing the procedures to govern affiliate
transactions, the pricing of unbundled energy services and the regulatory
recovery of incurred costs related to these issues. Based on current estimates
these incurred costs could be as much as $150 million.
The resolution of these matters may have a significant financial impact on
the financial position, results of operations and cash flows of SPS and NCE.
41
<PAGE>
PSCo's Management's Discussion and Analysis of Financial Condition and Results
of Operations
Three Months Ended March 31, 2000 Compared to the Three Months Ended March 31,
1999
Earnings Available for Common Stock
Earnings were $68.8 million for the first quarter of 2000, as compared to
$65.9 million for the first quarter of 1999, primarily due to higher earnings
from the gas utility business resulting from customer growth and higher rates
effective July 1, 1999.
Electric Operations
The following table details the change in electric operating revenues and
energy costs for the three months ended March 31, 2000, as compared to the same
period in 1999 (in thousands).
Increase
--------
Electric operating revenues:
Retail....................................... $ 2,140
Wholesale.................................... 16,112
Other (including unbilled revenues).......... 6,521
-------
Total revenues.............................. 24,773
Fuel used in generation....................... 4,337
Purchased power............................... 18,930
-------
Net increase in electric margin............. $ 1,506
=======
The following table compares electric Kwh sales by major customer classes
for the three months ended March 31, 2000 and 1999.
Millions of Kwh Sales
2000 1999 % Change *
---- ---- ----------
Residential ..................... 1,946 1,932 0.7%
Commercial and Industrial ....... 3,961 3,922 1.0
Public Authority ................ 63 48 30.3
------ ------
Total Retail................... 5,970 5,902 1.2
Wholesale ....................... 2,088 1,852 12.7
------ ------
Total............................ 8,058 7,754 3.9
====== ======
Power Marketing and Trading...... 6,630 403 10.7
====== ======
* Percentages are calculated using unrounded amounts
Electric margin increased in the first quarter of 2000, when compared to
the first quarter of 1999, primarily due to higher retail sales of 1.2%
resulting primarily from customer growth of approximately 2.6%. The higher
margin was offset, in part, by the negative impact of cost sharing under the ICA
(approximately $5.2 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 sharing of earnings in excess of 11% return on equity were
approximately $2.5 million and $3.8 million in the first quarter of 2000 and
1999, respectively (see Note 4. Regulatory Matters in Item 1. FINANCIAL
STATEMENTS). Power marketing and trading activities have increased although
revenues and purchased energy costs for these activities are presented net for
financial reporting purposes. Activities from wholesale marketing positively
contributed to electric margin, but the amount was not significant.
Fuel used in generation expense increased approximately $4.3 million
during the first quarter of 2000, as compared to the same quarter in 1999,
primarily due to higher generation and higher gas costs for generation at Fort
St. Vrain.
42
<PAGE>
Purchased power expense increased $18.9 million during the first quarter
of 2000, as compared to the same quarter in 1999, primarily due to increased
purchases resulting in part from an extended outage at one of PSCo's generating
stations.
Gas Operations
The following table details the change in revenues from gas sales and gas
purchased for resale for the first quarter of 2000, as compared to the same
period in 1999 (in thousands).
Increase
--------
Revenues from gas sales (including unbilled
revenues of $6.4 million) .................... $14,860
Gas purchased for resale........................ 3,507
------
Net increase in gas sales margin.............. 11,353
Transportation revenues......................... 1,690
------
Increase in net gas margin.................... $13,043
=======
The following table compares gas Dth deliveries by major customer classes
for the first quarter of 2000 and 1999.
Millions of Dth Deliveries
2000 1999 % Change *
---- ---- ----------
Residential................... 37.1 37.9 (2.1)%
Commercial.................... 16.2 17.1 (5.6)
------- --------
Total sales................. 53.3 55.0 (3.2)
Transportation................ 28.8 26.5 8.5
------- --------
Total....................... 82.1 81.5 0.6
======= ========
* Percentages are calculated using unrounded amounts
Gas sales margin increased during the first quarter of 2000, when compared
to the first quarter of 1999, primarily due to higher base gas rates effective
July 1, 1999, resulting from PSCo's 1998 gas rate case which provided an
additional $5.8 million in revenues and the favorable impacts of customer growth
of 3.6% and higher sales resulting from winter weather during the first quarter
of 2000 as it was approximately 6% colder than the first quarter of 1999.
Gas transportation revenues increased $1.7 million during the first
quarter of 2000, compared to the first quarter of 1999, primarily due to higher
deliveries and higher transportation rates effective July 1, 1999. The growth in
the transport business continues to be impacted by the shifting of various
commercial customers to transport customers and additional capacity on a leased
gas pipeline.
PSCo has in place a GCA mechanism for natural gas sales, which recognizes
the majority of the effects of changes in the cost of gas purchased for resale
and adjusts revenues to reflect such changes in costs on a timely basis. As a
result, the changes in revenues associated with these mechanisms during the
first quarter of 2000, as compared to the first quarter of 1999, 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
Other operating and maintenance expenses increased approximately $3.2
million primarily due to higher gas transmission costs related to the lease of a
gas pipeline to support customer growth and higher steam generation operation
costs. These costs were offset, in part, by lower electric and gas distribution
maintenance expense.
43
<PAGE>
Taxes other than income taxes decreased approximately $2.1 million during
the first quarter of 2000, as compared to the first quarter of 1999, primarily
due to lower business and utility property taxes in Colorado.
Income taxes increased approximately $6.6 million during the first quarter
of 2000, as compared to the first quarter of 1999, due to higher pretax income
in the current period and the favorable impact of deducting certain prior year
severance costs in 1999.
Interest charges increased approximately $3.8 million during the first
quarter of 2000, as compared to the first quarter of 1999. The increase is
primarily attributable to costs to finance capital expenditures, including
higher interest costs on short-term debt. In July 1999, PSCo issued $200 million
of 6 7/8% Series A Senior Notes, due in July 2009.
Commitments and Contingencies
See Note 4. Regulatory Matters and 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.
44
<PAGE>
SPS's Management's Discussion and Analysis of Financial Condition and Results of
Operations
Three Months Ended March 31, 2000 Compared to the Three Months Ended March 31,
1999
Earnings Available for Common Stock
Earnings available for common stock were $18.3 million during the first
quarter of 2000 compared to $23.4 million for the same quarter in 1999. Earnings
decreased primarily due to higher utility operations and minimal customer and
sales growth, due in part to the unfavorable impact of mild winter weather.
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 first quarter of 2000, as compared
to the same period in 1999 (in thousands).
Increase (Decrease)
-------------------
Electric operating revenues:
Retail.............................. $ (547)
Wholesale........................... 11,358
Other (including unbilled revenues). 2,869
-------
Total revenues.................... 13,680
Fuel used in generation.............. 4,640
Purchased power...................... 16,056
-------
Net decrease in electric margin... $(7,016)
=======
The following table compares electric Kwh sales by major customer classes
for the first quarter of 2000 and 1999.
Millions of Kwh Sales
2000 1999 % Change*
---- ---- ---------
Residential ............ 746 717 4.1%
Commercial and Industrial 2,865 2,574 11.3
Public Authority ....... 140 133 5.6
----- -----
Total Retail.......... 3,751 3,424 9.6
Wholesale............... 1,729 1,333 29.7
----- -----
Total................... 5,480 4,757 15.2
===== =====
* Percentages are calculated using unrounded amounts.
Electric operating revenues increased $13.7 million or 6.8% during the
first quarter in 2000, when compared to the same period in 1999. While total
sales increased approximately 15%, the majority of this increase is due to lower
Kwh sales reported in 1999. During 1999, changes were made in the billing cycles
of various retail and wholesale customers in anticipation of implementing a new
customer information system which resulted in lower billed Kwh sales and higher
unbilled revenues. Unbilled revenues were lower for the first quarter of 2000,
when compared to the same period in 1999. Weather throughout SPS' service
territory was over 20% warmer than normal and approximately 5% warmer than the
prior year, contributing to the overall decrease in electric margin.
Fuel used in generation expense increased $4.6 million or 5.7% during the
first quarter of 2000, when compared to the same period in 1999, primarily due
to a 5% increase in generation levels required to serve retail customers and by
significantly higher gas costs as a result of increased gas prices and slightly
higher coal costs.
45
<PAGE>
Purchased power increased $16.1 million during the first quarter of 2000,
when compared to the same period in 1999, due to an increase in capacity costs
of $6.5 million related to new purchase power contracts and an increase in
wholesale purchases. SPS generates the majority 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 first quarter of 2000, when
compared to the first quarter of 1999, 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 increased $2.1 million or 6.1%
during the first quarter of 2000, as compared to the same period in 1999,
primarily due to higher costs associated with restructuring activities in Texas
and New Mexico as well as increases in customer expenses and transmission
operations.
Income taxes decreased $3.4 million during the first quarter of 2000, as
compared to the same period in 1999, primarily due to the effect of lower
pre-tax income. The effective income tax rates for the quarter ended March 31,
2000 and 1999 were 37.5% and 38.1%, respectively.
Interest Charges
Interest charges increased $1.2 million or 8.9% during the first quarter of
2000, as compared to the same period in 1999. The increase is primarily
attributable to costs to finance capital expenditures, including higher interest
costs on short-term debt.
Commitments and Contingencies
See Note 4. Regulatory Matters and Note 5. Commitments and Contingencies in
Item 1. FINANCIAL STATEMENTS.
Restructuring Legislation and Financing Activities
Discussion relating to the changing regulatory environment, including
restructuring legislation and SPS financing activities is covered under
"Electric Utility Industry" and "Financing Activities" in NCE's Management's
Discussion and Analysis of Financial Condition and Results of Operations.
46
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Part 1. See Note 4. Regulatory Matters and Note 5. Commitments and
Contingencies in Item 1, Part 1.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
12(a) Computation of Ratio of Consolidated Earnings to Consolidated Fixed
Charges for PSCo is set forth at page 50 herein.
12(b) Computation of Ratio of Consolidated Earnings to Consolidated Fixed
Charges for SPS is set forth at page 51 herein.
15(a) Letter from Arthur Andersen LLP regarding unaudited interim
information is set forth at page 52 herein for NCE.
15(b) Letter from Arthur Andersen LLP regarding unaudited interim
information is set forth at page 53 herein for PSCo.
15(c) Letter from Arthur Andersen LLP regarding unaudited interim
information is set forth at page 54 herein for SPS.
27(a) Financial Data Schedule for NCE as of March 31, 2000.
27(b) Financial Data Schedule for PSCo as of March 31, 2000.
27(c) Financial Data Schedule for SPS as of March 31, 2000.
(b) Reports on Form 8-K
The following report on Form 8-K was filed since the beginning of the first
quarter of 2000.
- - A combined report on Form 8-K dated April 18, 2000, was separately filed by
NCE and SPS on April 19, 2000. The items reported were Item 5. Other Events:
Stipulation agreement executed which addresses SPS implementation plans to meet
the requirements of the Texas restructuring legislation and resolves certain
issues related to the NCE/NSP Merger.
47
<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
12th day of May, 2000.
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 12th day of May, 2000.
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 12th day of May, 2000.
SOUTHWESTERN PUBLIC SERVICE COMPANY
By /s/Brian P. Jackson
---------------------------------
Brian P. Jackson
Senior Vice President, Finance and
Administrative Services,
Chief Financial Officer and
Treasurer
48
<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 50 herein.
12(b) Computation of Ratio of Consolidated Earnings to Consolidated Fixed
Charges for SPS is set forth at page 51 herein.
15(a) Letter from Arthur Andersen LLP regarding unaudited interim information
is set forth at page 52 herein for NCE.
15(b) Letter from Arthur Andersen LLP regarding unaudited interim information
is set forth at page 53 herein for PSCo.
15(c) Letter from Arthur Andersen LLP regarding unaudited interim information
is set forth at page 54 herein for SPS.
27(a) Financial Data Schedule for NCE as of March 31, 2000.
27(b) Financial Data Schedule for PSCo as of March 31, 2000.
27(c) Financial Data Schedule for SPS as of March 31, 2000.
* Previously filed as indicated and incorporated herein by reference.
49
<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)
Three Months Ended
March 31,
2000 1999
---- ----
(Thousands of Dollars, except ratios)
Fixed charges:
Interest on long-term debt................... $ 31,295 $ 28,800
Interest on borrowings against corporate-owned
life insurance contracts.................. 15,354 13,704
Other interest............................... 6,146 5,220
Amortization of debt discount and expense less
premium .................................. 1,227 1,083
Interest component of rental expense......... 2,751 2,339
Dividends on PSCo obligated mandatorily
redeemable preferred securities............ 3,800 3,800
------ ------
Total...................................... $ 60,573 $ 54,946
======== ========
Earnings (before fixed charges and taxes on income):
Net income................................... $ 68,759 $ 65,939
Fixed charges as above....................... 60,573 54,946
Provisions for Federal and state taxes on
income, net of investment tax credit
amortization............................... 35,797 29,214
------- ------
Total...................................... $165,129 $150,099
======== ========
Ratio of earnings to fixed charges.............. 2.73 2.73
====== ======
50
<PAGE>
EXHIBIT 12(b)
SOUTHWESTERN PUBLIC SERVICE COMPANY
COMPUTATION OF RATIO OF EARNINGS
TO FIXED CHARGES
(not covered by Report of Independent Public Accountants)
Three Months Ended
March 31,
2000 1999
---- ----
(Thousands of Dollars, except ratios)
Fixed charges:
Interest on long-term debt................... $ 10,147 $10,643
Other interest............................... 3,731 1,590
Amortization of debt discount and expense less
premium 510 552
Interest component of rental expense......... 183 191
Dividends on SPS obligated mandatorily
redeemable preferred securities............ 1,963 1,963
------ ------
Total...................................... $16,534 $14,939
======= =======
Earnings (before fixed charges and taxes on income):
Net income................................... $18,256 $23,391
Fixed charges as above....................... 16,534 14,939
Provisions for Federal and state taxes on income,
net of investment tax credit amortization.... 10,930 14,365
------ ------
Total...................................... $45,720 $52,695
======= =======
Ratio of earnings to fixed charges.............. 2.77 3.53
====== ======
51
<PAGE>
EXHIBIT 15(a)
May 12, 2000
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 (Forms 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 March 31, 2000, which includes our report dated May
12, 2000, 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
52
<PAGE>
EXHIBIT 15(b)
May 12, 2000
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 March 31, 2000,
which includes our report dated May 12, 2000, 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
53
<PAGE>
EXHIBIT 15(c)
May 12, 2000
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 March 31, 2000, which
includes our report dated May 12, 2000, 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
54
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NEW CENTURY
ENERGIES, INC. CONSOLIDATED CONDENSED BALANCE SHEET AS OF MARCH 31, 2000 AND
CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND CASH FLOWS FOR THE THREE MONTHS
ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001004858
<NAME> New Century Energies, Inc.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 6,285,767
<OTHER-PROPERTY-AND-INVEST> 499,394
<TOTAL-CURRENT-ASSETS> 809,479
<TOTAL-DEFERRED-CHARGES> 575,909
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 8,170,549
<COMMON> 116,466
<CAPITAL-SURPLUS-PAID-IN> 1,817,848
<RETAINED-EARNINGS> 857,225
<TOTAL-COMMON-STOCKHOLDERS-EQ> 2,785,056
294,000
0
<LONG-TERM-DEBT-NET> 2,259,864
<SHORT-TERM-NOTES> 132,825
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 457,609
<LONG-TERM-DEBT-CURRENT-PORT> 168,868
0
<CAPITAL-LEASE-OBLIGATIONS> 53,647
<LEASES-CURRENT> 2,286
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,016,394
<TOT-CAPITALIZATION-AND-LIAB> 8,170,549
<GROSS-OPERATING-REVENUE> 938,670
<INCOME-TAX-EXPENSE> 42,474
<OTHER-OPERATING-EXPENSES> 755,847
<TOTAL-OPERATING-EXPENSES> 755,847
<OPERATING-INCOME-LOSS> 182,823
<OTHER-INCOME-NET> 22,155
<INCOME-BEFORE-INTEREST-EXPEN> 204,978
<TOTAL-INTEREST-EXPENSE> 57,176
<NET-INCOME> 105,328
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 67,656
<TOTAL-INTEREST-ON-BONDS> 43,535
<CASH-FLOW-OPERATIONS> 187,593
<EPS-BASIC> 0.91
<EPS-DILUTED> 0.91
</TABLE>
<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 MARCH 31, 2000 AND CONSOLIDATED CONDENSED STATEMENTS OF INCOME AND
CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2000 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 4,390,757
<OTHER-PROPERTY-AND-INVEST> 205,025
<TOTAL-CURRENT-ASSETS> 459,385
<TOTAL-DEFERRED-CHARGES> 310,943
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 5,366,110
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 1,414,835
<RETAINED-EARNINGS> 367,118
<TOTAL-COMMON-STOCKHOLDERS-EQ> 1,781,953
194,000
0
<LONG-TERM-DEBT-NET> 1,633,612
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 232,393
<LONG-TERM-DEBT-CURRENT-PORT> 164,706
0
<CAPITAL-LEASE-OBLIGATIONS> 53,647
<LEASES-CURRENT> 2,255
<OTHER-ITEMS-CAPITAL-AND-LIAB> 1,303,544
<TOT-CAPITALIZATION-AND-LIAB> 5,366,110
<GROSS-OPERATING-REVENUE> 680,550
<INCOME-TAX-EXPENSE> 35,797
<OTHER-OPERATING-EXPENSES> 535,083
<TOTAL-OPERATING-EXPENSES> 570,880
<OPERATING-INCOME-LOSS> 109,670
<OTHER-INCOME-NET> (438)
<INCOME-BEFORE-INTEREST-EXPEN> 109,232
<TOTAL-INTEREST-EXPENSE> 40,473
<NET-INCOME> 68,759
0
<EARNINGS-AVAILABLE-FOR-COMM> 68,759
<COMMON-STOCK-DIVIDENDS> 47,691
<TOTAL-INTEREST-ON-BONDS> 32,522
<CASH-FLOW-OPERATIONS> 204,015
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SOUTHWESTERN
PUBLIC SERVICE COMPANY CONDENSED BALANCE SHEET AS OF MARCH 31, 2000 AND
CONDENSED STATEMENTS OF INCOME AND CASH FLOWS FOR THE THREE MONTHS ENDED MARCH
31, 2000 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,776,912
<OTHER-PROPERTY-AND-INVEST> 125,015
<TOTAL-CURRENT-ASSETS> 163,050
<TOTAL-DEFERRED-CHARGES> 171,658
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,236,635
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 353,099
<RETAINED-EARNINGS> 406,866
<TOTAL-COMMON-STOCKHOLDERS-EQ> 759,965
100,000
0
<LONG-TERM-DEBT-NET> 578,908
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 225,234
<LONG-TERM-DEBT-CURRENT-PORT> 0
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 572,528
<TOT-CAPITALIZATION-AND-LIAB> 2,236,635
<GROSS-OPERATING-REVENUE> 216,232
<INCOME-TAX-EXPENSE> 10,930
<OTHER-OPERATING-EXPENSES> 175,151
<TOTAL-OPERATING-EXPENSES> 186,081
<OPERATING-INCOME-LOSS> 30,151
<OTHER-INCOME-NET> 3,410
<INCOME-BEFORE-INTEREST-EXPEN> 33,561
<TOTAL-INTEREST-EXPENSE> 15,305
<NET-INCOME> 18,256
0
<EARNINGS-AVAILABLE-FOR-COMM> 18,256
<COMMON-STOCK-DIVIDENDS> 19,674
<TOTAL-INTEREST-ON-BONDS> 10,657
<CASH-FLOW-OPERATIONS> 29,382
<EPS-BASIC> 0.00
<EPS-DILUTED> 0.00
</TABLE>
